Building a new monetary, financial and energetic framework through an international negotiation

Pierre Calame’s speech at the conference « The Financial Crisis, the US Economy, and International Security in the New Administration », New York, 14th November 2008.

by Pierre Calame

I am not American, so allow me to put the questions we discuss in an international perspective. The coming G20 summit will focus on the financial regulation and bond supervision; but there is a risk that it addresses only the symptoms, not the causes of the current situation. If world’s leaders don’t look closely at structural changes to be done, the summit will be of limited interest.

Stabilizing the banking system, as mentioned by James, is but a first step, necessary but not sufficient. You mentioned the recovery of the U.S. economy; I would like to focus on the global economy. To do that, let us go back to the root of the problem and grasp what is really at stake here. It will give us, I hope, the guidelines to cast a new monetary, financial, and energetic global system.

As for the structural causes of the current crisis, I would like to make eight observations, each of them being well-known; nevertheless, putting them together and looking at their consequences might open new perspectives.

The first one concerns the slow but steady decline of the U.S. in the global economy. The U.S. made up half of the world GNP at the moment of the first Bretton Woods conference; today it’s roughly a quarter. This means that a more multilateral system is not a choice; it simply reflects reality. The new system should rely on the relations between major regions of the world, and this will represent a major change in the current world order.

My second observation: since the 1970s, there has been a growing trend to « financialize » the economy. What do I mean by « financialization »? Let me define it by two main characteristics: creation of a unified financial market, with a continuous flow of transactions that pay no regard to national frontiers nor physical distance, and a gradual power shift within the market economy from non-financial firms to international finance. We have to trace back the causes of this change and look closely at its consequences, if we want to respond properly.

Which leads me to my third observation: financialization took off in 1971 when Richard Nixon decided to suspend the gold convertibility of the dollar. This had three major consequences. First, dealing with foreign exchange risks became a major concern for non-financial international firms, and these firms developed strategies in order to minimize the risks and exploit the possibilities. Second, currency trading grew very rapidly and represents today 97 percent of all financial flows, which has nothing to do with real creation of wealth. And third, the role played by the dollar in global financialization allowed the U.S. economy to escape from macroeconomic discipline.

The next observation concerns the oil shock of 1973. It proved that oil plays a central role in the monetary and financial change. First, the TOE, the ton of oil equivalent, become at that time a full-fledged currency, a medium of exchange, and a standard of value. Second, the oil shock created a large surplus of petrodollars and gave a new impetus to financialization.

My fifth observation is about demography: the aging of rich societies led to the accumulation of savings, and the storage of value function of the currency, of money, has acquired a new meaning. The $15 trillion managed by the pension funds is the third most important driving force of financialization.

My sixth observation concerns the technical systems that led to the progressive merger of money and finance. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) was created in 1973; combined with parceling long-term risks, it has contributed to the merger of money and finance. In this way, finance has transformed interpersonal relationships and concrete forms of risk sharing into myriads of anonymous transactions.

It was also in the 1970s that shareholders begun to take revenge on firms, asking for more and more shareholder value. This made short-term financial results increasingly important in defining business strategy. If family businesses are doing as well as they do, it is because they still focus on the long-term interest and try to foster solidarity between top management and the rest of the staff.

At last my eighth observation, made already by Joseph Stiglitz: the financial system has become an end in itself. It has developed techniques and compensation schemes which only benefit itself. In the U.S. between the 70s and today, the profits of the financial sector passed from 15 to 30 percent of the total amount of profit.

« Shareholders should have the right to vote only once they have owned their stocks for a certain period of time."

These observations define the scope of the new framework that has to be invented and put in place. As we see, that framework must encompass money, finance and energy. It should give priority to long- term thinking, and it has to focus on true-wealth creators instead of financial institutions.

Where do these considerations lead us? I would like to make following suggestions. First, we need a global agreement, a new Bretton- Woods to address three interconnected issues: monetary systems, financial regulation, and energy regulation. My point is that we cannot treat them separately.

Second, we need to do this with a multilateral approach in mind, at the level of world’s major regions. The main candidates for the buil- ding blocks of the new international system are America, Europe, East Asia, that is China and surrounding countries, and probably South Asia, that is India and surrounding countries.

Third, we need stable exchange rates between the four regions, monitored by an international organization, probably by the IMF, and regularly revised. And we need an internal monetary union within each region.

Fourth, we need new regulation mechanisms. I will not comment on that, because all of the other participants talked about it.

Fifth, we need to stabilize the cost of energy and of basic commodities through the creation of global stocks that should become a means of payment between multinational companies.

Sixth, we need to create negotiable energy quotas as a full-fledged currency. It makes no sense to use the same money, the same currency, to pay for human labor and for non-renewable sources energy. Money will therefore play at least two roles: it will help us moving toward sustainable development and curb climate change, and it will stimulate the demand on human labor without raising the demand on non-renewable energy.

Seventh, we need to review the economic and financial systems in order to create incentives for long-term thinking and responsible behavior. It is not, or at least not only, a matter of personal ethics and individual responsibility; it is also a matter of measures like suppressing schemes of financial reward based on the number of transactions, banning stock options or granting voting rights to shareholders only once they have owned stocks for a certain period of time. When you think of it, you don’t give the U.S. passport to a tourist that just arrived in the country; and yet it is exactly what we do in economic life. As soon as you buy a stock, you can participate in decision making. It’s an enormous incentive for speculation and a premium for the raiders.

And eight: We need to invent a new function for money: money as storage of a reserve of assets that will be used in the future. The principle seems clear: such a currency should measure the conditions for future prosperity of the world; having a share of that specific asset is the only legitimate way a generation can claim a part of future prosperity when it gets old. The real gold of tomorrow is the natural, human, immaterial and material capital of the planet. The practical means to have it, to move in that direction, have yet to be invented; but if we would spend half the energy we spend for the so-called innovative finance and accounting, we would certainly find solutions. When there is true commitment, there is always a way out.

Let me add a last point: we need a large diversity of currencies. Global trade can go along with communities of different scales and different natures, organizing their own internal exchanges, as it happens with complementary currencies. Our world is and has to be a world of both increased universality and increased diversity.

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