As might be expected since the London G20 chose to go out of the private
finance crisis by an unlimited increase of public debts, the world financial
crisis is slipping in a crisis of public finances. Due to increasing inventive
twisted ways to borrow without saying so, markets do not believe Governments
will be able to restore their balance and are betting that something will
collapse.
First, they are forecasting, countries will fall, as we have already seen
with Iceland, Ireland and Greece. Then, the Euro itself will disappear,
because it cannot exist without sustainable fiscal solidarity between
countries sharing the same currency. Then it will be the turn of the world
financial system, if we continue to issue money in such unlimited way, well
beyond the actual production of wealth.
To prevent this, it will not be enough to prevent speculation: it reveals a
deep-seated tendency that cannot be reversed by the mere prohibition of bets
on its evolution. We must go further and restore healthy financing of
countries.
For that purpose, the Executive Officer of the International Monetary Fund
has just issued a very sound proposal, which may lead to the best or the
worst, depending on how it is carried out.
He has indeed asked that the institution he leads be given a mandate of
supervision of the international financial system, with the right to
intervene in budgetary affairs of nations, to avoid that countries continue to
get into debt without control, promising in exchange to give the countries
whose fiscal behavior become reasonable short-term lines of credit in
addition to those already given to them, in an almost unlimited way, by
financial markets and central banks. He even suggested supplying countries
in difficulty with “a reserve asset issued globally similar but
different in important aspects, to the Special Drawing Rights (SDRs).”
In all logic, the implementation of this proposal would lead to the
transformation of the IMF into a planetary central bank ensuring the
liquidity of all the international financial system with a single global
currency. This idea is similar to that of Bancor which Keynes had proposed
at the time of the creation of the IMF in 1944 and the Americans had then
refused, to avoid questioning the supremacy of the dollar and not be
compelled to discipline.
Today, the United States could accept it, not to impose upon itself some
discipline, but to finance its deficits by resources other than loans from
sovereign wealth funds. Everyone would then agree to urge the IMF to grant
such new credits, though without giving the FMI the legal and political
means for effective control of budget deficits.
In this case, the proposal of Dominique Strauss Kahn would amount to operate
a new printing of money, issuing one more currency, which would supplement
the range of imaginary funding of unlimited deficits, taking the world in a
horrendous slipping. Who will then have the courage to stop in such a wrong
path?