The monetary policy is a key element to reduce the poverty and achieving wellbeing

I want to dedicate this reflection to the politician leaders of the countries affected by the scarcity of financial resources.


The lack of money is one of the main causes that impede the wellbeing of many nations.

First of all we must ask which the cause of the lack of money is.

The answer is not complex.

The lack of money has its origin in two facts: a) The misconception about the limitations of the national governments to manage its monetary policy in sovereign form and, b) The scarcity of dollars, which is the fiat currency employed for the international transactions.

It is necessary to say that in the last years the world has accepted a new international currency for the international transactions, the Euro, but this operates in a reduced magnitude. Also we must underline that recently has appeared an economic trend that intend establish a new currency or setting the Chinese currency, the Yuan, like a third international mean of payment. The financial crisis in the Euro zone and the downgrade of the U.S. debt made by Standard and Poor too few weeks ago has contributed to strengthen that trend.

I will explain following, the two mentioned causes:

a) Misconception on the governments limitations

The issue of money in the different countries of the world obeys to a series of economic rules and international duties. Those rules were established in the Post War with the creation of the International Monetary Fund, IMF.

The first rule is that the amount of national money that circulates in an economy must be in relation with the amount of the international reserves of each country. In turn, the parity of the national money regarding the U.S. dollar is the measure that establishes the total amount of national money that should circulates; in other words, is the parity regarding the U.S. dollar the fact that determines the monetary liquidity in the majority of the world countries; this rule act as a limitation that impedes to the national governments of the different countries to increase the monetary liquidity over the limit guaranteed by their international reserves. For example, if you have $ 10,000,000 in your international reserves and the parity regarding the U.S. dollar is 1 per dollar your national liquidity should be also 10,000,000 units of your national currency. If your parity regarding the dollar is 2 per dollar, then your national liquidity should be a maximum of 20,000,000 unities of your national money. This limitation in the capacity of national currency issuing is one of the principal causes of the developing nation’s dependence and indebtedness. The reason is very simple: because when the public spending surpasses the limit of the government capacity to issue money, the governments require loans to the international agencies or the private banking system. This is one of the mechanisms that have caused the developing nations debt.

One first step to resolve the problem of poverty is that the politician leaders of the developing countries realize that their countries have two sovereign capacities: a) to establish in sovereign form and without limitations the parity of their national currencies regarding the U.S. dollar and b) to issue, also in sovereign form and without limitations, the amount of national currencies that their economies require.

You do not need to request loans in dollars or Euros for financing activities in your national (local) currency. You need to request a loan in international means of payments (dollars or Euros) only if you do not have the amount of those currencies and you need to acquire goods or services in the international market. But, for financing activities in your national (local) currency, you can issue the amount of money that you need in sovereign form, and, of course, with the due balance. None foreign government neither none international agency can impede to a country to issue the national money that need for their internal economic activities; so that the issuing of national money is a sovereign decision of each country, do not limited by the amount of their international reserves, like commonly the people think, even like many politicians leaders think.

b. The scarcity of U.S. dollars

One of the most important obstacles for the development is the scarcity or lack of international means of payment (U.S. dollars or Euros).

You can issue in sovereign form the national currency of your country, but you cannot issue the currencies of other countries. Therefore, you cannot issue U.S. dollars neither Euros. Only the U.S. government can issue dollars and the European Union Bank to issue Euros.

Like the U.S. dollar is the most important currency of international interchange, the United States has the dominium of the international economy, because its government is the unique that has the sovereign capacity for issuing U.S. dollars. This is the main cause of the United States economic supremacy.

There are other key facts that contribute to the U.S. economic supremacy: a) that moreover of the gold, the U.S. dollar is the currency employed by the central banks of the world countries to keep their international reserves, b) that the most part of the international loans and debts are denominated in U.S. dollars, c) that the U.S. do not has external debt but internal debt, because the formal concept of external debt is the debt acquired in international means of payments, in other words, in U.S. dollars. Like the U.S. debt is denominated in its own currency, the U.S. dollars, this mean that the U.S. government does not has external debt but internal debt. This fact gives to the U.S. government the capacity of managing its financial situation with absolute liberty and independence.

The rest of the world countries do not have that liberty, independence and autonomy. The reason is very simple: because they depend of the amount of U.S. dollars that obtain and keep as a consequence of their economic transactions; they cannot issue U.S. dollars, in change, the United States can issuing all the amount of U.S. dollars that need.

Conclusions

- The governments can manage its monetary policy in sovereign form; this mean that they than can establish the parity of their currencies and the amount of monetary liquidity according to their internal economies needs, and without limitations regarding their international reserves.

- It is not necessary to request external loans for financing internal commitments, for example, the construction of one highway, school, hospital, etc; they must be financed with national (local) currencies.

- The external debt (in international means of payment) must be acquired only for financing external activities, for example, for acquiring goods or services in the international market, and only if the country does not have those resources.

- The external debt is one of the most obstacles for the countries development; therefore, the countries must make its most effort for avoiding acquiring new debts.

- The managing of the monetary policy is a key element to overcome the poverty.

- These ideas represents a different conception on the traditional monetary policy and are a complement of the basic concepts exposed in the essay entitled Money is only metal and paper without intrinsic value, philosophy of money, available in http://pablorafaelgonzalez.blogspot.com

Economic crisis 2011: the solution is to realize that the economy operates in a new scale and not reducing the public spending

The measures of austerity adopted by the industrial countries might cause a global recession at short and mid term.


If the United States reduces its public spending and some countries of the European Union do the same, in too few months the world might fall in a great depression. It is important to remember which were the main causes of the Great Depression of 1929; among them, the reduction of the public spending and the diminishment of the workers capacity of purchase.

Is the economy in a similar scenario?

There are similarities, among them the followings: a) the pressure that exerts orthodox economic sectors to impulse reductions in the public spending in the industrial nations, b) crisis in the stock markets worldwide, c) reduction and/or insignificant increase of the consumption in the United States, d) growing unemployment in the industrial countries, e) the attack against the U.S. dollar made by S&P that has provoked doubts about its strength like international currency, f) financial crisis in nations like Greece, Spain, Ireland, Italy and Portugal; these countries are reducing its public spending, provoking more recession, g) expressions of social conflict in the mentioned countries and now in unexpected countries like England (recent riots) and Israel (serious protests against the economic system), h) the possible rupture of the Economic Union unity, caused by the privileges of nations like Germany and France and the disadvantages of the other members of the Union.

The solution for the crisis that the orthodox economic sectors has found is to reduce the public spending, this mean more unemployment and less consumption; then, the solution is worse that the illness. Many countries, among them Greece, have been obligated by the International Monetary Fund and the European Union to reduce its public spending. A similar situation occurred in the 90s years in Latin America, and like a consequence of that policy, in 9 countries of the region the leftists sectors won the government, among them, in the biggest economies like Argentina, Brazil and Venezuela and also in small economies like Bolivia, Ecuador, Uruguay, Honduras, Nicaragua, Dominica and, in Mexico, almost the leftist sectors obtained the victory in the past elections. All those leftists’ governments in Latin America are a consequence of the policies of austerity imposed by the International Monetary Fund in the 90s.

The economic crisis is caused, moreover, by the economic prejudices, because many people, even politicians and economists, believe in wrong concepts like the balanced budget, the false idea that the amount of money determines the inflation, the false idea on organic and inorganic money; all them are simply concepts that impulse the poverty and the unemployment.

The solution

The solution is to think the contrary; to realize that the economy operates in a new scale and to work in that sense.

How?

Simply: issuing more money, in cash and in bonds and increasing the public spending regarding the new scale of the economy.

The politicians and economists should realize that there is a new economic scale in the world caused by many factors, among them, the quick population growth, which demand new resources and the globalization process of the 90s years. The world economy is now more integrated, the population grows and, also the needs grow. That is the new economic scale that must be understood.

Which are the limitations to reach the new scale?

The limitation is the availability of natural resources, because man can not create them; you can not make water, petroleum, etc. (1) but, on the contrary, man can issue money to satisfy the economic needs.

Money is only a simple mean of interchange; money is only metal and paper without intrinsic value (2) and the human beings must employ money in its exact sense: like mean of payment, not more. It does not exist none cause to limit the issue of money claiming reasons of austerity; money is a mean, like a hammer, like a car, like any other good, and must be used to satisfy the economic and social needs of the population and not to cause damage to the population.

The public spending is the unique force that cans impulse the global economic recovery.

The new economic and monetary scale will promote the consumption and, in consequence, the employment and prosperity. That was the formula used by the most important economist of the 20th century, John Maynard Keynes, to solve the consequences of the Big Depression in the 40s years.

(1) Running Out: How Global Shortages Change the Economic Paradigm. Algora Publishing, New York, 2008.

(2) Money is only metal and paper without intrinsic value http://pablorafaelgonzalez.blogspot.com