Thursday, December 30, 2021

Why should we have listened better to Robert Triffin?

I wrote the following to my friends of the Fondad Group: 

Dear friends,

I would like to add this speech to my previous message:

“Why should we have listened better to
Robert Triffin?”

Speech by Jan Joost Teunissen at conference,
“The economic and financial crisis of 2008-09”, Louvain-la-Neuve, 7-8 May 2009

There are various reasons why we should have listened better to Robert Triffin’s suggestions of how to fundamentally reform and improve the functioning of the international monetary system. He made those suggestions for the first time in 1957, in his Europe and the Money Muddle, and continued making them until a year before his death in 1993, when he withdrew from all public economic activities. I will discuss two major reasons, the first concerned with the world economic and political system, and the second with the role of economists.

A more stable system plagued less by crises

The first and main reason why we should have listened better to Robert Triffin’s suggestions for reform and improvement of the international monetary system is that the world would have been more stable and would have been plagued less by crises. Those crises have proven to be very harmful for businesses and citizens.

In 1985, three years after the world debt crisis broke out in Latin America, and led to what Latin Americans have called ‘the lost decade’, Triffin once again advocated fundamental reform of the international monetary system, just like he had done energetically during the sixties and seventies. He did so in a report that he prepared for a US Congressional Summit on Exchange Rates and the Dollar. He said, and I quote, “We should resume negotiations for a
fundamental reform of the world monetary system - or non-system - that is anchored primarily on a national, paper reserve currency, that is, the dollar.”
In the view of Triffin, a key element of such fundamental reform would be to anchor the system on a t
ruly international reserve asset held with the IMF, and not on the dollar or any other national currency used as a reserve currency. Triffin mentioned three major arguments why fundamental reform of the system was needed.
First, and I quote his 1985 paper prepared for the US Congressional Summit, “because of its fantastic
inflationary proclivities, leading to world reserve increases eight times as large over a brief span of fifteen years as over all previous years and centuries since Adam and Eve.”
Second, “because of its
skewed investment pattern of world reserves, making the poorer and less capitalized countries of the Third World the main reserve lenders, and the richer and more capitalized industrial countries the main reserve borrowers of the system.” In another paper Triffin said the same in stronger words. I quote from his September 1988 acceptance speech of the Seidman Award, “the richest, most developed, and most heavily capitalized country in the world should not import, but export, capital, in order to increase productive investment in poorer, less developed, and less capitalized countries. I have long argued that our international monetary system is at the root of this absurdity.”
And third, “because of its
crisis-prone propensities reflected in the amplitude of the present world debt problem.” ...

TO READ FURTHER, see the attached.

Sunday, December 26, 2021

Trichet was wrong about a "new, dramatic global crisis". What Are the Lessons and the Questions?

Four years ago I published a post on this blog saying that former ECB president Jean-Claude Trichet was warning about the danger of "a new, more serious crisis than the one we have been facing over the last ten years." Since it has turned out that he was wrong, what lessons can we draw, what questions can we raise, and what answers can we give?

"At the global level, considering the level of total indebtedness as a proportion of the world's consolidated GDP as a good indicator of vulnerability, we are more vulnerable to a global financial crisis today than in 2008," said Trichet four years ago in an interview with the Swiss journal Le Temps.

At the time, November 2017, I sent the interview with Trichet to a Fondad Group of forty international experts on the global financial system (FG40) asking them for a more in-depth analysis of the problem than given by Trichet, and their view on how to improve the global financial system and prevent the emergence of a new, dramatic global crisis.

Robert Aliber
Robert Aliber, famous expert and author of the classical The New International Money Game, was the first one to react, in a sarcastic way: "How many memoirs are there on the continent [Europe] of central bankers who were in power at the time of the crisis [in 2007-2008]..." 

Christian Ghymers commented a few hours later: "As you know, we share Trichet's view and see also the next big(gest) crisis around the corner - and this time without rooms for manœuvre - except if the SDR could be effectively mobilized and transformed rapidly along the lines we try to push with Triffin Foundation (RTI) and our publications and interventions, in particular at the G20 Ministerial last year (see my PowerPoints attached) and in other joined short publications."

Christian Ghymers
Christian Ghymers and I are both on the Board of the Triffin Foundation (RTI). We got to know each other in the 1980s when Christian worked with Robert Triffin and I, because of my research into the root causes of the global debt problem, went to visit Triffin in Louvain-la-Neuve and had long conversations with him in 1984 - see "The International Monetary Crunch: Crisis or Scandal?", Alternatives, July 1987. 

Andrew Sheng

Andrew Sheng, former central banker (he was Deputy Chief Executive, Hong Kong Monetary Authority) and author of, among other books, Shadow Banking in China, was the third of the Fondad Group of 40 experts to react immediately. He said, "Congratulations, Christian, for spelling out the pros and cons of moving to the SDR system. The issue has always been political, with the incumbent resisting any ideas for change unless there is crisis." 

Lessons and Questions

Four years have passed since Jean-Claude Trichet sent his alarming prediction to the world. As it turned out, he was wrong: there was no "dramatic new world crisis" coming. (Or is such a crisis still imminent, and will it come sooner than we hope and think?)

The following (provocative) questions emerge to me:

1. Should we no longer take (too) seriously the dramatic warnings of thinkers predicting global financial catastrophe?

2. Is the global financial system more resilient than its critics (including me) want us to believe?

3. Is a reform of the global financial system (including advocated by me) not necessary anymore?

4. So is there no need for endless debates about how to improve the global financial system?

5. Can we be confident that the international financial authorities will take the necessary steps to properly manage the next global financial crisis? (Manage, yes, prevent, no.)

6. Discussions about replacing the US dollar with the SDR (as promoted by RTI on whose board I serve) are of marginal importance?

7. Should we instead focus on existing and possibly new procedures to best manage an impending global financial crisis?

8. Should we not waste our precious time in endless and pointless discussions about things that could go wrong, but rather focus on what is going well and what could go better?

9. Should we be pragmatic, phlegmatic and level-headed, rather than idealistic, nervous and high-flying?

10. Should we look to the future more from the bright side of the street?!

I'm going to ask my friends from the Fondad Group of 40 experts what they think about these questions and what answers they have.