Tuesday, August 26, 2008

10 indications we now need a Global Central Bank

Capital mobility is now global. With more inter-connectedness among nations, it is now increasingly imperative that each individual nation's monetary policies be coordinated to ensure smooth economic results system-wide. We can already see a variety of indications that we now need a Global Central Bank.

1. With global capital mobility, if one country hikes its interest rate to contain domestic inflation, it can attract more capital from overseas, nullifying the hike. Similarly, if the country cuts rates to spur investment, capital might leave the economy for better rates elsewhere.

2. An aggressive money supply policy in one country can spill over excess liquidity into the global system, spreading inflation globally.

3. One country’s active currency management policies artificially inflates/devalues free floating currencies.

4. Because of points 1, 2, and 3, one Central Banker’s monetary policies to cure domestic unemployment might be rendered ineffective.

5. Financial crisis that start in one country can easily spread to other economies.

6. That’s because the same toxic financial security can now have multiple listings in different markets.

7. They can be placed in multiple markets, or owned, by multi-national banks looking for arbitrage opportunities created globally by, among other things, uncoordinated Central Bank policies.

8. Conversely, a domestic bank can itself own multinationally-issued investments.

9. There’s been an explosion in cross-border money laundering.

10. Multinational corporations now also cross-lend funds borrowed elsewhere among subsidiaries located in different jurisdictions.

Now if we only knew how one unified Global Central Bank can be made possible....

Update 1: Here is a link to an on-line discussion on this idea, c/o EconomicsUK. Agree or disagree, identify more issues, or suggest how we operationalize it - add your views to this discussion.

Update 2: This post continued here.

Update 3: Is this the beginning of the end of nation-states

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