How to Pay for a Global Climate Deal
Continued from previous page
In 1969, after a string of liquidity crises, the world’s major governments agreed to create SDRs to increase global liquidity. Nobel laureate and former World Bank chief economist Joseph Stiglitz explains that SDRs as "a kind of global money ... which countries agree to accept and exchange for dollars or other hard currencies." If countries are provided SDRs to add to the gold and foreign currency in their national reserves, money can be put to use for other purposes instead of sitting idle -- for things like combating global warming.
Several years ago, Stiglitz proposed that SDRs or a new "global greenback" along similar lines be used to supplement other reserve currencies. They would be issued for investment in developing countries and for "global public goods" like environmental projects, health initiatives, and humanitarian assistance. They would have the added benefit of checking global deflation and would help countries with trade deficits avoid ruinous devaluations and runs on their currencies.
Until the current economic crisis, such ideas received little public attention -- indeed, few except international economists even knew SDRs existed. But since the beginning of 2009, discussion of paper gold has exploded. George Soros has called for "trillions of dollars" in SDRs to be issued. And now British Prime Minister Gordon Brown has campaigned for countries to agree to a new allocation of SDRs at the G-20 meeting that starts on April 2, and the U.S. seems to be warming to the idea.
These world leaders are well aware of the threat of global warming and the cost of fighting it -- roughly half a trillion dollars a year, according to the British government’s Stern Review on the Economics of Climate Change. That amounts to about 1 percent of global GDP for the next three to four decades. So far, however, none of these leaders has publicly discussed using paper gold to help pay for climate protection.
Green Paper Gold Can Finance Climate Protection
In the same way that economic stimulus measures around the world have pumped new funds into the green measures, global leaders can deploy "paper gold" to finance climate protection. It would surely qualify as a "global public good," as Stiglitz put it, and at the same time provide a needed economic stimulus.
The creation of paper gold is the international equivalent of increasing a nation’s money supply. It is what economists call "quantitative easing," and paper gold does it on an international scale. Former IMF chief economist Simon Johnson explains the current G-20 proposal:
The principle behind it is that everyone would get bonus dollars. The objective is to create a windfall of cash.
As in a stimulus measure applied to a national economy (for example, America’s Recovery and Reinvestment Act of 2009), if the windfall of cash is used to generate economic activity, then the value created by the new activity is what pays for the initial spending over time. The global recession has put millions of people and productive resources out of service. If they could be mobilized effectively, these vast unused productive capacities might well be sufficient by themselves to rebuild the global economy on a low-carbon basis before it is too late.
Some experts warn that paper gold will cause inflation, but we are in the midst of a historic crisis of deflation, in which the IMF, the U.S., and the great majority of economists are calling for economic stimulus to counter deflation. Issuing paper gold is precisely such an economic stimulus, providing at the global level what national stimulus plans provide at the level of an individual country.