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

Why the debt is not a problem for the United States? An answer in 150 words (II)

The debt is not a problem for the United States, because the United States is the owner and issuer of the international currency for the commercial and financial transactions, and, moreover, the currency in which the central banks of the world maintains their international reserves.


But, the essence of the issue is that while for the rest of the countries their financial international commitments are external debts, for the United States their financial international commitments are internal debt, because it is a debt in its own currency. The difference between external debt and internal debt is that the former is denominated in international means of payment (U.S. $), while the second is denominated in national currency of each country.

The fact that its debt is considered internal debt and not external debt is the big advantage of the United States, because the U.S. has sovereign capacity to issue U.S. dollars, without limitations.

The debt is not a problem for the U.S.

The United States of America has issued trillions of dollars in bills, coin and bonds because its national currency, the dollar, is the international currency of interchange. Those instruments (bills, coins and bonds) are simple debt. This is something normal because of the size of the international transactions. However, there are critics that condemn this policy and assure that the debt is something negative for the United States and the rest of the world. The individual people and private institutions that assure this do not say the truth. The most of them have particular interests on the theme. They want to diminish the dollar strength as international mean of interchange to favour other currencies like the Euro and/or the Chinese currency.

The emission of money, in cash or in bonds by the United States, is for the United States internal debt and not foreign debt. It is completely different the effects of the internal debt from the foreign debt. The last constitute a factor of weakness for the economy of the countries because the foreign debt must be paid with international means of payment, it mean, with dollars of the United States of America, and not ever the countries have the sufficient amount of dollars. But for the United States of America the situation is different, because the US can issue the amount of dollars that requires its internal economy and the international economy.

1. Value and support of the national currencies

Since the Agreements of Breton Woods, in the post war, the value and support of the national currencies of the different countries of the world was established in base to the dollar of the United States of America. In those years, in Breton Woods, the countries agreed: a) the creation of the International Monetary Fund, b) that the international reserves of the nations must be kept in dollars c) That the dollar would be the international currency of interchange, and d) that the emission of national currencies should maintain a relation with their reserves in dollars. For example, if you set that your national currency is worth in two (2) units per dollar, this mean that each national currency in circulation should be supported by a reserve of 0.50 dollars, but not ever the nations carry out this rule. In all the cases, the set of the parity regarding the dollar is an act of sovereignty of each government; this means that they can issue more or less amount of national currencies.

I don’t believe in public fiscal deficit; the governments have sovereign capacity to issue national money; which is the support? The people faith, nothing more; none currency has an own value, per se. The currencies of all the countries are simple papers without intrinsic value that are accepted by the people to make transactions in the market and the governments have the power to issue those papers. In the past, the currencies had an intrinsic value, because they were made of gold or silver. But with the apparition of the bills of paper the situation changed. At the beginning the bills had a support in gold but along the time this support was eliminated and now its support is only its credibility, its acceptance.

The currencies cannot be supported in gold for a simple reason: all the gold that exists in the world is not enough to support the big amount of money that circulates in the world.

The debt of the United States instead of to be a factor of weakness of its economy and the world economy, is a factor that reveals the strength of the US economy. The financial crises are caused by the owners of private fortunes to obtain personal benefits. They do the crisis and the governments pay the bailouts. That is the true truth.