Wednesday, December 24, 2003

Debtor Nations - Financial System - Prosperity

Strong views from one of the modern world's greatest economists, and I don't say this lightly. We need many more economists of Paul's stature and understanding of the world's real systemic problems and solutions. He takes up where Gustav Cassel and John M. Keynes left off. We all need look at this type of understanding - time is running out - fast!

Debtor nations need a financial system that allows
them to work their way to prosperity

Paul Davidson

The global economy is at a crossroads. We can try to muddle through with the existing defective international financial system, while hoping that minor tinkering will quarantine the devastating depressionary forces experienced by developing nations and avoid contagion spilling over to developed nations. Or we can produce a new financial architecture that not only protects all nations from
experiencing the devastation of currency crises but also eliminates the persistent global depressionary pressures of the current system and therefore makes possible the potential of global full employment.

All prudent nations (except the United States) desire a surplus of exports over imports to obtain a net positive financial savings position on their internationally earned income. This surplus is added to the nation's foreign reserves. Since the global economy is on a dollar standard, additions to a nation's foreign reserves are held primarily in the form of US treasuries.

The effect of all nations attempting to accumulate foreign reserves is to create persistent high rates of unemployment, and liquidity problems for the global economy - and this is true whether the global economy is on either a fixed or a flexible exchange rate system. In essence, when any nation runs persistent export surpluses to accumulate foreign reserves, it is playing a game of Old Maid and passing the Black Queen of unemployment and indebtedness to its trading partners. ...Continued

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