Imagine that the Bank of England were to create a free bank account for everyone. Overnight, it would be far better placed to regulate the money supply in the public interest. Moreover, to stay in business, commercial banks would have to seriously raise their game. In times of trouble, such as the current pandemic, the Bank of England could lift all boats at once by crediting your account directly – instead of printing sterling to lend to commercial banks, as it does now, in the hope that they would then lend to your employer, in the hope that your employer would then invest the money, rather than buy back more of their own shares. And, if the Bank of England felt that it had to rein in the total supply of money, to avert inflation, it would be able to do so easily: just offer to pay you, say, £5 for every £100 in your account that you do not spend within the next 12 months.
Imagine further that the Bank of England, in a bid to promote trust via transparency, were to base its digital sterling ledger on a distributed ledger digital architecture that allowed everyone, in real time, a glimpse at how much money was sloshing around in its system.
Now imagine that the Bank of England were to lend its expertise to local authorities around the country to revive their regional economies by creating local digital currencies for the purpose of keeping within their communities as much of the surpluses produced locally as possible. These currencies would be backed by their capacity to pay local taxes and their free-floating exchange rate with sterling would be determined automatically by a transparent formula taking into account the balance of payments between the regions.
Imagine, also, that the Bank of England were to come to an agreement with the central banks of other major economies, reflecting a New Bretton Woods-type of international agreement that allows for global trade imbalances and climate change to cancel each other out. This unlikely feat could be accomplished in three steps:
First, central banks agree to create a digital accounting unit, let’s call it the Kosmos or Ks, in which all international trade and cross-border money transfers are denominated (with a free-floating exchange rate between national currencies and Ks).
Secondly, they also agree to charge symmetric levies upon net exporters of goods and money (a trade-imbalance levy and a surge levy – see below) that help stabilise world trade and global money flows.
Thirdly, the proceeds from these levies fund climate change mitigation projects, especially in the global South.
For example, if the US-German trade is grossly imbalanced, both Germany and the United States are charged the trade-imbalance levy: a certain number of Ks are withheld from the German central bank in proportion to Germany’s trade surplus with the United States, and another number of Ks is withheld from the United States in proportion to America’s trade deficit with Germany. By taxing symmetrically trade deficits and surpluses, powerful market incentives help diminish global trade imbalances.
The second levy proposed here is charged to speculative capital flows into and then out of developing economies; capital movements that cause large bubbles to inflate, distorting economic activity, before bursting with hideous effects on the local economy. This surge levy is proportionate to the acceleration of capital flows into, or out, of every country.
Thus, the world will have agreed to strong incentives to limit trade and money transfer imbalances by levying penalties which, on the one hand, balance the current and the capital accounts of major economies while, on the other, help fund green investments, renewable energy grids, transport systems and organic agriculture in the parts of the planet most needed.
If these gains are so easy to attain, what stops us? Simple. These innovations would wreck the capacity of financiers to usurp the gigantic rents they currently extract from our societies. As always, our problem is political, not technical.
Yanis Varoufakis is a member of Greek parliament and leader of the MeRA25 party
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