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03.31.2009 0

Helicopter Money to the Rescue

  • On: 04/10/2009 10:27:24
  • In: Monetary Policy
  • By Robert Romano and Isaac MacMillen

    Eminent economist Milton Friedman once envisioned “helicopter money” as currency dropped out of a helicopter to increase a community’s money supply. Friedman stated that the effect would be nothing other than inflationary.

    Now, it looks like the G-20 may actually give it a try.

    While meeting with world leaders at the G-20 last week, President Obama pledged that the U.S. would give a $100 billion line of credit to the International Monetary Fund (IMF). Officially, the IMF is the globalist organization that helps developing countries by providing loans. Unofficially, it props up dictatorships and failing economic systems by providing funds that are never repaid.

    Early on in March, Treasury Secretary Timothy Geithner proposed an increase of $500 billion to the IMF, bringing its total budget to $750 billion.

    Less than two weeks later, China upped the ante by proposing an IMF-backed international reserve currency other than the dollar. Chinese central bank head Zhou Xiaochuan stated that a “super-sovereign” reserve currency should be put into use by the IMF, in order to “reduce the fluctuation of prices of assets denominated in national currencies and related risks.”

    Mr. Xiaochuan made specific reference to IMF Special Drawing Rights (SDR’s)—the IMF’s reserve asset, “a potential claim on the freely usable currencies of IMF members” according to the agency’s website—as being a potential international reserve currency. He said, “The SDR has the features and potential to act as a super-sovereign reserve currency.”

    In short, Mr. Xiaochuan proposed throwing the dollar under the bus.

    When asked about China’s proposal at a meeting of the Council on Foreign Relations, Mr. Geithner, admitting he had not read the proposal, said he understood it as a plan “designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that.” This caused the dollar to immediately drop 1.3 percent. Which, in turn, caused Mr. Geithner to quickly backtrack and state that the U.S. dollar should keep its place as the world’s reserve currency. And that, in turn, allowed the dollar to recover 1.1 percent, all within less than half an hour.

    The G-20 did ultimately mandate the IMF to make a new general allocation of SDR’s of $250 billion. The assets are to be “injected” in the world economy ostensibly to increase liquidity. According to IMF Director Dominique Strauss-Kahn, “you will see that it’s the beginning of increasing the role of the IMF, not only as a lender of last resort, not only as a forecaster, not only as an advisor in economic policy and its old traditional role, but also in providing liquidity to the world, which is the role finally and in the end, of a financial institution like ours.” He sounds pretty optimistic—which isn’t all that difficult when one realizes that he is pawning off the bill on the American taxpayers.

    Based on both Mr. Xiaochuan and Mr. Strauss-Kahn’s comments on the matter, it would appear that they have a decidedly different view than the U.S. Treasury Secretary over what the G-20 actually agreed to. According to Mr. Geithner, the new role for SDR’s should be “rather evolutionary, building on the current architecture, rather than moving us to global monetary union.” So which is it?

    Will the SDR’s be used as a reserve currency, as Mr. Xiaochuan envisioned, or not? According to the IMF’s website, the SDR’s were, indeed, created in 1969 as a reserve asset: “the international community decided to create a new international reserve asset under the auspices of the IMF” for “supporting the expansion of world trade and financial development that was taking place.” After the collapse of the Bretton Woods system, however, “the SDR has only limited use as a reserve asset.”

    Therefore, to “increase the use of the IMF’s special drawing rights” (using Mr. Geithner’s words) can only expand its role as an international reserve currency. Perhaps Mr. Geithner had not read Mr. Xiachuan’s proposal, but surely even he must have known what the SDR’s are.

    Indeed, Mr. Geithner is no stranger to the IMF. In fact, his infamous tax problems came from his stint as IMF’s Policy Department and Review Department director. During his years in President Clinton’s treasury department and the IMF, he supported billions of dollars in “rescue packages” to foreign countries—including overseeing the IMF’s biggest bailout ever at that time.

    Earlier this week, European Central Bank executive board member Juergen Stark criticized the monetary expansion by the IMF, calling it inflationary, “That is pure money creation. That is helicopter money for the globe.”

    Already, Mexico last week said it would be seeking a $47 billion credit line from the IMF. One can almost hear Friedman’s helicopters whittling ominously on the distant horizon.

    Despite the talk of an “independent” IMF “reserve currency,” President Barack Obama must approach Congress for the $100 billion—America’s “share” in the $500 billion for the IMF. Since it’s a line of credit, it will not appear as added to the deficit as tabulated. But it will still require a vote, and is likely to raise the specter that Congress in essence would be voting to endorse the idea of replacing the dollar as the world’s reserve currency.

    The idea behind the $100 billion “gift” to the IMF is to expand the “world bailout fund,” increasing the amount of cash the IMF has available to loan, thus enabling it to expand its influence. At the G-20, China also pledged to give $40 billion towards the $500 billion. Countries in Eastern Europe are said to top the list of eligible recipients.

    Nonetheless, Republicans and some conservative Democrats may be uneasy about bolstering an international institution that wants to expand the use of its quasi-currency as a reserve asset for foreign countries. If the IMF SDR’s become exchangeable versus the dollar, there could conceivably be catastrophic run on the dollar as it is supplanted. All those dollars would come home in their own fleet of money helicopters. The ensuing inflation would be unimaginable. And the toll upon the American people unthinkable.

    The bottom line is clear—even if it escapes the “citizens of the world” in the Obama Administration: America must look to its own interests and reanalyze its position in the global economy before sending one single cent of this money overseas in such a careless manner. If Congress can’t even keep track of the dollars it has distributed inside the federal government, why should it be allowed to give hundreds of billions to an outside international agency with no accountability whatsoever?

    Unless the members of Congress can convince the American people that propping up the IMF and destabilizing the dollar are essential to America’s own economic well-being, it should adamantly oppose any effort by President Obama and Secretary Geithner to appropriate another $100 billion to the international agency. If the dynamic deficit duo continue their obsession of tossing money out of helicopters worldwide, they will really just be planting the seeds of unbridled inflation.

    Robert Romano is the Senior Editor of ALG News Bureau. Isaac MacMillen is a Contributing Editor of ALG News Bureau.

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