Yannis Varoufakis Suggestion for Bretton Wood's Replacement

A paper written for Guancha for publication in China

Yannis Varoufakis has been talking with other economists about the need to replace the Bretton Woods institutions that were designed to facilitate the Outlaw US Empire’s global hegemony. Oddly, this paper isn’t at his website, but perhaps its merely tardy in being posted since what follows was published on May 30. It might be termed an op/ed since he titles it: “I propose that China take the lead in creating a ‘new Bretton Woods system.’” In a chat he had with Dr. Hudson last month, he outlined his proposal and has further refined it in his essay. It’s really rather simple in its construction and is familiar to many because the original proposal was made in 1944 and hasn’t been memory-holed. Yanis brings other political happenings into his discussion because it’s almost impossible to exempt them. The big question: Will the Chinese read his proposal and take it seriously?

Donald Trump has done something so that no sane person can indulge in the illusion that global business can go on as usual. But even if we are outraged by Trump's shocking actions, decisions, and rhetoric, we should welcome that.

The global economy will either rebalance or collapse, and this time it may be even worse than the 2008 financial crisis. The only question worth exploring, then, is: who can take action to help correct the imbalances that undermine the interests of developing countries, while at the same time curbing the shadow of fascism that has spread in Western economies?

We know that the EU is no longer in a position to join the fray and contribute to the rebalancing of the world. The reasons for this can be traced back to the design flaws of its common currency, the euro, and its subsequent refusal to take the opportunity to promote the federalization of fiscal and investment decisions when the euro crisis erupted. As a result, the EU is now mired in a long period of economic stagnation and political fragmentation.

We are also clear that the United States is not willing to help the world rebalance. While US Treasury Secretary Scott Bessent has been talking about rebalancing trade and capital flows, the Trump administration he runs has only wanted to achieve its paradoxical goal: to depress the value of the dollar while attracting more capital to the United States. This contradiction can only be resolved by large-scale coercive means, and the United States has neither the ability nor the discipline to enforce it.

So who is left? The answer is: China. In April 2009, at the G20 summit in London, in order to coordinate global monetary policy and curb the worsening and spread of the North Atlantic financial crisis, the Chinese delegation supported a review of the Bretton Woods Conference in 1944 and the resumption of the International Clearing Union (ICU) proposal proposed by John Maynard Keynes.

Unfortunately, just as the United States rejected Keynes's proposal in 1944, the United States ignored China's proposal in 2009. The next 16 years have been a painful one: global imbalances have risen and are now spreading out of control.

What can China do given the EU's inability and the United States' indifference to addressing growing global imbalances? My answer is to create a new Bretton Woods system without the United States or the European Union, and to admit other countries when the advantages of the new system become apparent.

Don't get me wrong, I'm not suggesting that China repeat the old Bretton Woods system of the 50s and 60s of the 20th century and become another global hegemon. Instead, I advocate that China should work with the BRICS and other partners to forge a truly new multilateral system, which Keynes envisioned in 1944 when Roosevelt rejected it in favor of American hegemony.

Before I go into how the new Bretton Woods system works, let me first respond to some questions that may come from the West. Some would argue that China cannot be a pillar of the international trading system because it imposes capital controls. But have they forgotten that both the old Bretton Woods system and Keynes's proposal for the Union for International Settlements were based on capital controls.

It will also be questioned that for a country to be at the heart of a large international trade and monetary system, it must maintain a trade deficit so that other countries can have a trade surplus with it. Have they forgotten that the old Bretton Woods system was designed to maintain America's trade surplus? Clearly, these objections reflect more of the biases of the opponents than serious economic analysis.

Now let's talk about how the new Bretton Woods system works, so that it can become a truly multilateral, non-hegemonic and mutually beneficial system. In order to prevent growing imbalances in the market-driven trading system, Keynes advocated replacing the "adjustment process is mandatory for debtor countries and voluntary for creditor countries" and adopting a mechanism that adjusts symmetrically to both debtor and creditor countries. Here's what such a system might look like.

Participating countries retain their own currencies and central banks. All trade and capital flows between countries are settled by a common digital unit of account, which we might as well call "cosmos" [coin]. The central bank of each country maintains a cosmic [coin] denominated reserve account in a common institution.

The agency is based on a transparent digital distributed ledger and issues Coin according to an algorithm that adjusts the total supply of Coin in a pre-agreed manner based on global trade volumes, while incorporating a countercyclical adjustment mechanism to increase the supply of Cosmic Coin in times of a general global economic slowdown.

The foreign exchange market is operating as usual, and the exchange rate between the coin and various currencies will fluctuate like the IMF's Special Drawing Rights, such as the US dollar, the euro, the Japanese yen, etc. The difference is that under the new Bretton Woods system, all payments between participating countries have to go through the Cosmocoin account opened by their respective central banks.

So far, none of the proposals have addressed the imbalances within the system, such as large trade deficits and surpluses. However, this new institutional design enables two key interventions that not only limit imbalances, but also unlock the enormous potential for mutually beneficial development. I call these two interventions "The Levy" and "The Charge". Here's what they are and how they work:

Levy: A trade imbalance tax is levied annually in proportion to the current account deficit or surplus of the Cosmocoin account held by central banks and deposited in the Common Development Fund (CDF), which is managed by multilateral institutions.

Fees: Private financial institutions pay "peak" fees to mutual funds in proportion to capital outflows, just as ride-hailing companies give customers a price increase during rush hour.

The rationale for "taxation" is to incentivize the governments of surplus countries to increase domestic consumption and investment, while systematically reducing the international purchasing power of deficit countries. The foreign exchange market will take this into account, adjusting the exchange rate more quickly to account for current account imbalances and offsetting much of the capital flows that currently support long-term trade imbalances.

As for "fees", it automatically penalizes speculative capital inflows or outflows but does not hand over discretion to bureaucrats and does not require rigid capital controls.

In this way, through this new Bretton Woods system common fund, participating countries will have access to an additional global sovereign wealth fund without any capital subscriptions. Achieve two goals in one fell swoop: balance global trade and provide new financing for a just green transition on a global scale.

There is no doubt that this is doable. China has the technology, especially expertise in highly complex digital payment systems. The rest of the world also urgently needs a trading system that can bring stability and mutual benefit, rather than imbalance and exploitation.

We also have institutional experience in the system of international settlements. For example, the ECB's Target2 account taxes the balance of payments deficit within the eurozone. What the world lacks is a political process that brings all these elements together.

Wouldn't it be a wonderful irony if Donald Trump's shock therapy, which claims to balance the world economy, instead prompted China and the rest of the world to work together to build the multilateral system proposed by Keynes in 1944, shattering the illusion of 80 years of American domination of the world? [My Emphasis]

Does it sound too simple to be true or to properly function? Do such things require complexity? IMO, his “levy” and “charge” need further explanation perhaps through a flow chart graphic. Indeed, perhaps a graphic presentation of the idea would help explain it all to the many for whom the entire issue of trade balances is a muddle. Perhaps a GIF of it in action would be even better. Yanis doesn’t explain how this new system would curb “the shadow of fascism that has spread in Western economies.” IMO, that’s a political problem. Perhaps Yanis sees the new system breaking the Euro zone which would eliminate the central Nazi factor growing in Brussels. In the chat with Dr. Hudson, the issue of already existing debt is brought up and that a new system would require a clean slate at its outset which is an issue Yanis didn’t tackle. I suggest referring to the linked chat for the discussion of that issue. Something certainly must be done. Having a new payments system is okay but doesn’t address the larger problem of what’s essentially illegal use of the trading system to support hegemony and many other abuses and illegalities that enrage the world.

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