Twilight of the Dollar
The market reaction to Robert Fisk's recent article concerning high level meetings aimed at replacing the dollar as global reserve currency was such that the market, at least, believed it. In the morality and ethics free market zone, it has long been appreciated that the dollar's position is unsustainable. As and when a successor emerges, the market will assimilate it seamlessly, without missing a beat.
But if there is one thing that Fisk's article achieved it was to open up once again a subject which appeared to have been settled, and that is the role and function of a global reserve currency. Indeed, the debate is raging as to the nature of money itself, where 100 economists will probably give you 100 different definitions.
As a Bear of Little Economic Brain but with market experience approaching 25 years, I prefer to deal with the practical, rather than the theoretical. I observe that the transaction currency is relatively unimportant, because the foreign exchange market allows an alternative currency to be used in a microsecond. What matters is, for a consumer, the capability to make future payments in the transaction currency; and for a producer, where and in what currency and asset class the proceeds of sale may be invested.
The dollar fulfills two roles: firstly, it is a unit of measure, or pricing reference - a 'value standard'; secondly, it is a store of value, or unit of currency – a unit redeemable for value. These dollar IOUs are backed, not by value such as gold, silver, or even salt (hence the word 'salary') but rather by US taxes, and the faith of the world in the US government.
The problem is that US taxes aren't what they used to be. The sheer scale of the US fiscal deficit, and the world's pessimism that anything can be done about it, have made the subject of a successor to the dollar of urgent practical importance in the global corridors of power.
After the Dollar
There are plenty of suggestions for a dollar replacement. Some advocate the Euro or Renmimbi as a global reserve currency, but those who understand the subject appreciate that where money is created and issued as debt, then to become the provider of the global reserve currency involves becoming a debtor to the rest of the world. This is unsustainable in the long run, as the US has found out, the hard way.
Most proposals follow Keynes' suggestion at Bretton Woods of a global issuing authority – such as the IMF – which would issue a new IOU credit object he called a Bancor, which would serve both as a unit of measure, and as a currency Unit store of value which is globally acceptable in exchange .
Fisk suggests that current high level discussions envisage backing for such a currency with a combination of gold, and a basket of conventional currencies. The monetary expert Bernard Lietaer's proposal is for a 'Terra' backed by a basket of commodities. There are many proponents of gold as a backing for currency and a return to a 'Gold Standard', and there are many other ingenious, but less credible proposals.
I propose an entirely different approach, and that is to distinguish between the value standard we use, and the currencies we exchange by reference to the standard.
Firstly, a fixed amount of energy – for instance the energy value of a litre of gasoline, or its equivalent in Kilo Watt Hours - would be intuitively obvious as a pricing reference. Most people could relate to that, and whether the Unit is called a petro; electro, or an energy dollar is irrelevant.
Secondly, there is the need for nationally and globally acceptable units of currency as a store of value. A unit redeemable in land rental value could perhaps be a nationally acceptable currency, but for international acceptance or 'fungibility' the obvious candidates are electricity, which is pure energy, and carbon-based fuels, such as natural gas, gasoline, kerosene, heating oil and fuel oil.
For the period of transition to an economy based upon renewable energy, I propose that energy producers should issue Units redeemable in payment for such carbon-based fuels, and perhaps the most globally acceptable of these will be units redeemable in payment for natural gas, and for gasoline.
Units redeemable in payment for electricity supplied would have a fixed price by reference to the global energy standard. Carbon-based currencies would probably have a fairly clear and stable price expressed in energy value. To be quite clear, these units would not actually be a petro or energy dollar, but would have a price denominated in petros or energy dollars.....
So firstly, we should price dollars, euros, and renmimbi in energy rather than energy in dollars, euros and renmimbi; and secondly, we should unitise energy through the simple expedient of allowing producers to issue units which they will accept in payment for energy they supply – within a suitable legal framework of trust, or energy clearing union.
The outcomes from recent negotiations in Bangkok are not hopeful for agreement on climate change in Copenhagen. The ongoing guerilla warfare between developed and developing nations in relation to who should take the pain is reminiscent of two cripples fighting over a crutch.
What everyone is missing is that the savings in energy consumption, and hence carbon emissions, are available to be made not just by consuming nations but also – massively - by energy producing nations. Anyone who wishes to see the effects of gasoline at 10 cents US per litre may go to Tehran, where even the crows are leaving because the air quality is so bad. Nigeria flares sufficient natural gas in a year to power Brazil. Virtually all energy producing states waste energy on a cosmic scale, and the implicit or explicit subsidy runs to trillions of dollars or equivalent, without even thinking about the effect on the environment.
Unitising and valuing energy correctly will solve the problem. Energy producers could gradually ramp up carbon fuel prices to global market levels and avoid bloody revolution by distributing Units redeemable in energy to their populations instead. Now consumers have a different calculation – they can use energy profligately, as usual, and pay by redeeming their units, or they can exchange their valuable units for accommodation, food, or maybe the Taiwanese flat screen satellite TV they've seen next door.
In this way, rather than trying to transition to renewables by attributing value politically and administratively to intrinsically worthless CO2 we base a transitional currency upon the intrinsic energy value of carbon.
Energy consuming nations, for their part, would gradually raise carbon fuel prices through a carbon levy, to maybe $10 per gallon of gasoline or equivalent, and they too would compensate consumers with units redeemable in energy. Part of the levy would fund a Carbon Pool, which would be used to invest directly - through interest-free 'energy loans' - in renewable energy (Mega Watts), and in energy savings (Nega Watts). Such a Carbon Pool would soon be the source of an energy dividend to all.
The beauty about funding renewable energy and energy savings by unitising them is that value is received now for a Unit which costs nothing to redeem in the future. It's not Rocket Science.
Finally, from Copenhagen, to Tehran.
It was a subject of much amusement last October in Tehran that the financial sanctions applied to Iran had the perverse effect of insulating them from the financial meltdown then unfolding. Another perverse effect of US sanctions in relation to IT and communications is that they have held back the Iranian population from the access to the outside world which most observers consider would be in everyone's interests.
As for the currently suggested sanctions on gasoline, these would enable the Iranian government to reduce gasoline consumption -which they urgently wish to do – and would increase the profits to be made by those with privileged access to and control over gasoline supplies. Of course, the Great Satan and their European cohorts would get the blame: playing the Nationalist card plays well politically in most countries, and Iran is no exception.
As a policy, sanctions generally are pretty dumb, and gasoline sanctions for Iran are extremely dumb, and President Obama is not dumb.
The smart policy would be to assist Iran in making the transition from an industrial economy to a knowledge economy, and from a carbon-based economy to an economy based upon renewable energy. The key to the former is the pervasive spread of convergent broadcasting and internet, and to the latter it is to unitise energy and make valuable what is currently wasted on a catastrophic scale.
But note here that while renewable energy and energy savings are financially viable in energy terms, the same cannot be said for nuclear energy through the complete life-cycle, including mining and extracting the uranium, disposing of the waste, and safely decommissioning. Iran is currently learning the economic facts of nuclear energy the hard way. The world should help them do so, in full compliance with global agreements on non-proliferation.
(Originally published by Asia Times Online asiatimes.com and is published with their permission.)