GM and MG: The Connection

GM AND MG: THE CONNECTION
Frans C. Verhagen, M.Div., M.I.A., Ph.D., sustainability sociologist
Earth and Peace Education Associates International (EPE)
Www.globapepe.org ; www.fcvnyc.blogspot.com ; gaia1@rcn.com;
718 275 3932 (voice and fax); 917 617 6217 (cell))
Tuesday, December 09, 2008

During these days that the GM is trying to survive with the assistance of government loans, its connection with the reverse of its acronym, i.e. MG is hardly considered, though it is of great importance for its survival and revival of the US and world economy.

MG, like M1, M2, and M3 are abbreviations that indicate different categorizations in the supply of money. MG stands for the global money supply (MG-money global) and is a fundamental part of the international monetary system which is an essential, though heavily underestimated part of the global economy. What then is the connection of GM with MG?

GM’s slide into near disappearance has many domestic and international causes. Among the former are the lack of strategic planning, a short-term profitability horizon, legacy costs, etc. Among the latter are the competition with better foreign cars, insufficient international collaboration in research and development, etc. and …MG.

Starting in the 1970s the US followed a debt policy that played havoc with the international monetary system by excessively increasing the global money supply which led to an oversupply of credit which led to overinvestment, overheated economies in the surplus countries and the busting of those economic bubbles. This excessive credit creation which was a main consequence of the unbalanced balance of payments (BOP) was made possible by having the US dollar function as the major international reserve currency. Though John Maynard Keynes had proposed an excellent solution for a sound balance of payments system at Bretton Woods at the waning months of World War II in 1944, US Treasury Dexter White prevailed in having the US dollar become the accounting unit and the dominant reserve currency of the new system. As long as the dollar was pegged to the gold standard, the US was unable to import far more than it exported because those payments could not be supported by the gold in Fort Dix. By closing the gold window in August 1971, President Nixon made the international monetary system and its BOP very unstable. It was already somewhat unstable before that date because of problems with the expansion of credit in an ever larger global trading system.

Part of the present recession and probably depression in the next couple of months is the international community’s degradation of the international monetary system. The US has trillions of dollars on the debit side of its current account (CA) balance, while China has almost one trillion dollars in US dollar reserves on its credit or surplus side of its CA balance, most of which are invested in US treasury bills. The global economic system would crash if either the US suddenly stopped functioning as the world’s credit creation institution by drastically reducing its imports or if China were to decide to suddenly withdraw its US T bills which action would throw its own export-oriented economy into a tailspin. Thus, the enormous gap between deficit and surplus countries keeps the global economic system unbalanced, volatile, fragile, and unsustainable. It is also being made further unsustainable, fragile, etc on account of its wealth and income distribution because, as presently structured, it enriches the few, impoverishes the many and endangers the planet.

What is to be done with GM and MG? One major approach that is good for GM and a healthy, i.e. equitable global money supply is to increase aggregate purchasing power in both the global North and South by starting to increase the minimum wage, particularly in industrializing developing countries. Chapter 9 in Richard Duncan’s The Dollar Crisis: Causes, Consequences and Cures shows in detail how such innovation could be brought into existence. Another major approach would be the creation of a global central bank that would not only reduce the enormous debts and surpluses by bringing them into balance, but would also include accounting of carbon emissions in a new BOP mechanism which would transfer funds of high income, high carbon debtor countries in the North to low income and carbon creditor countries in the South. Part of such system is emerging in the IMF and its Special Drawing Rights facility, but it has to be expanded to reflect the accounting of carbon emissions during this ever deepening climate crisis. I have called such system the Terra International Monetary Union or TIMU system where Terra—Latin for Earth—becomes the new international accounting unit and major reserve currency replacing the US Dollar. TIMU can be phased in somewhat similar ways as the European Monetary Union was phased in or other similar efforts such as the Chiang Mai Initiative in Asian countries. Notwithstanding the many obstacles and constraints that the TIMU system were to encounter on the global level humanity is at a crossroads in the next decade where transformation has to take place during this period of the Great Transition and Generation Transition in order for people and planet to survive and thrive. GM and other industries in the US and abroad would be able to be assisted financially within the bounds of an ethical, efficient and balanced international monetary system, where the global money supply (MG) would be controlled by global central bank which would replace the IMF and, particularly, its weighted decision making system that is biased in favor of the countries in the North, particularly the US, and biased against countries in the global South.