By JC Collins
Re-Posted from December 10, 2014. Material is more timely now than ever. There are growing calls for deeper monetary consolidation and the globalization of central banks under one global bank would serve this purpose. – JC
Disclaimer: The following material is written from the perspective of the global interests which are engineering the multilateral financial system and shifting the monetary frameworks away from the USD based system, and the imbalances that are inherent within that framework. In researching this material and structuring essays such as this one, it is challenging to coherently write from an opposing position, or even supporting position for that matter. The material is presented in a neutral manner and the reader can make self determinations based on their own prejudices and analytical abilities. Where I have expressed opposition should be obvious to the reader.
With the coming multilateral financial system the framework of global institutions such as the International Monetary Fund will have to be adjusted, which is what we are seeing with the now imminent implementation of Plan B for the 2010 IMF Quota and Governance Reforms. The reforms will restructure the institution to more accurately reflect the economic realities of the emerging economies, such as China.
As we discussed in the previous post, the shift towards the multilateral is in essence a shift away from the USD structured system. The current dollar based system has survived on a monetary policy framework which has focused on price stability and output growth, both of which affect financial stability through impacts on asset valuations, commodity prices, credit, leverage, and exchange rates.
The central banks of the world have followed inconsistent monetary policy frameworks with only marginal attempts at preventing domestic growth initiatives from having a negative spillover effect into other regions and countries. This spillover effect is most profound in the practice of cross border capital flows, which lead to many of the financial stability metrics listed above.
The imbalances in the USD balance of payment system and the monetary policy framework of central banks has been the main cause of economic imbalances between developed economies and emerging economies. For any multilateral financial system to work effectively these imbalances must be addressed and related frameworks adjusted.
The 2010 Quota and Governance Reforms address the needed adjustments to the International Monetary Fund but not for the broader framework of central banks.
Central bank mandates and monetary policy frameworks have been insufficient at addressing these broader imbalances. As such, the frameworks of the central banking system needs to be restructured around the same lines as the IMF Reforms.
The Bank for International Settlements has set the mandates and policy frameworks of the central banks since its inception. The BIS holds regular meetings with the governors of the banks but these meetings are also insufficient at developing alternative frameworks and creating the atmosphere of transparency which would be required to minimize the spillover effect of inconsistent policies.
The coordination between the central banks of the world is necessary in order for any adjustments and restructuring of mandates and framework policies to be effectively implemented. Within the BIS organization is a working group called the Committee on the Global Financial System, which is mandated with designing and implementing these adjustments and building transparency between the banks themselves, and between the banks and other global institutions, such as the IMF.
This committee is made of the more important central banks and the focus is on global liquidity, joint money and credit policies, and financial stability. The member banks are:
|Reserve Bank of Australia||Bank of Korea|
|National Bank of Belgium||Central Bank of Luxembourg|
|Central Bank of Brazil||Bank of Mexico|
|Bank of Canada||Netherlands Bank|
|People’s Bank of China||Monetary Authority of Singapore|
|European Central Bank||Bank of Spain|
|Bank of France||Sveriges Riksbank|
|Deutsche Bundesbank||Swiss National Bank|
|Hong Kong Monetary Authority||Bank of England|
|Reserve Bank of India||Board of Governors of the Federal Reserve System|
|Bank of Italy||Federal Reserve Bank of New York|
|Bank of Japan|
The astute reader will notice that Russia is not included in the list, which likely has a lot to do with the recent demonization of Russia in the western media and the attempts by Russia to be included into the broader multilateral reforms. We could potentially see a situation down the road where China turns its back on Russia and the BRICS alliance is fragmented, but at that point the multilateral financial system will be in play, which in such a case would suggest that China manipulated the BRICS development to its own advantage.
Some of the items that the committee will have to develop are a new set of mandates for financial stability, stress tests to measure effective changes on asset prices, economic activity, and how to prevent bubbles as opposed to only identifying them, or causing them.
Others items will consist of non-monetary tools which are both micro and macroprudential.
These adjustments to the monetary policy frameworks could potentially lead to periods where the central banks deviate from previous inflation targets, but that outcome is now considered acceptable over the continuation of financial instability. This statement alone signals the inevitable end of QE policies and ZIRP, or zero interest rate policies which have kept deflation at bay by promoting inflation. Interest rates will rise for the broader adjustments to be effective and the spillover effect will be minimized.
The move to the multilateral system requires the broader integration and coordination between central banks and institutions such as the IMF and BIS, with governments giving up more of their financial autonomy in regards to financial regulation. The alternative is a deepening and continuation of financial instability, which is now beginning to become more entrenched as deflation and a growing liquidity crisis.
The globalization of financial institutions is mandatory in order for the world to enact orderly sovereign debt restructuring. An important component of this debt restructuring is the exchange of foreign reserve accounts with SDR’s, or Special Drawing Rights of the IMF. This exchange will be completed through substitution accounts, which will allow for the creation of SDR liquidity, as currently SDR’s are only created through allocation, which is insufficient at meeting the global demands for liquidity.
SDR claims should be exchanged directly with the central banks for domestic currency.
For the full integration of SDR’s and central bank monetary policy frameworks to be successful, governments around the world will have to pass legislation which would amend the policies and mandates surrounding national treasuries, and how they interact with the national central banks.
These important adjustments to legislation will help prevent the potential of large foreign exchange losses as the USD balance of payments system completes the transition to the multilateral SDR based system.
Pending adjustments to national legislation to support the SDR, a system of credit lines could be developed which would be administered by both the IMF and BIS. But with the existing availability of the SDR, it is counter productive to not pass national legislation supporting framework policy adjustments.
The American Congress holding up legislation supporting the 2010 IMF Quota and Governance Reforms is one such situation where delays have been counter productive. As previously discussed, the reforms will be implemented whether through Plan A or Plan B, with the latter being extremely more destructive to American monetary policy frameworks.
The Committee on the Global Financial System continues to restructure the monetary policy frameworks of the worlds central banks and we await the implementation of Plan B for the IMF reforms. Things are progressing as planned and the world continues the shift into 2015 and closer to the full realization of the multilateral financial system. – JC
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