Multi-Bilateral Exchange Rate System

Multi-Bilateral Exchange Rate System as One of 6 Principles of Global Economic Order Under the Maxims Democracy and Market Economy

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Multi-bilaterales Wechselkurssystem

Table of Contents

  1. Overview
  2. Preliminary Remarks
  3. The Multi-Bilateral Exchange Rate System

Overview

regionaleordnung01In view of the threatening extent of the devastations caused by the neoliberal economic doctrine, the turning towards compatible economic principles becomes almost existential. But only when these principles are combined to form a model of sustainable regional and global economic order, can the urgently needed economic policy measures be derived.

All 6 global principles are summarized in the article Principles of Global Economic Order in the form of questions. The supplementary 17 regional principles are listed in the article Prinzipien regionaler Wirtschaftsordnung, also as questions.

In the context given here, the term »regional« refers to largely homogeneous entities, currently primarily nation states and supranational political and economic areas (unions), that meet all the requirements for political sovereignty and economic autonomy and are therefore in a position to form a viable foundation for the prosperous coalescence of the world. Hereafter, these entities are mostly referred to as economic areas.

The European Union (EU) and, in particular, the euro zone existing within the EU, can serve as a cautionary example here. Both are supranational entities that have emerged from the political and economic self-interest of powerful players, and whose inhomogeneity and centralism have since unfolded great destructive potential (as a supplement see the article Demokratie und europäische Integration).

Preliminary Remarks

In the course of the historical economic development in Europe and the USA democracy and market economy have emerged as useful and reliable Maximes of Economic Order. Both maxims have, however, been distorted by the neoliberal indoctrination since the 1990s to such an extent that the »natural principles« inherent in them are hardly perceived by the citizens any more. It is therefore essential to return to these principles and to combine them into a model of a sustainable regional and global economic order. See also the article Market and Market Economy.

In contrast to the centralistic structures produced by modern Neoliberalism, the model presented here is based on decentralized structures, or, better still: on subsidiary structures. Only if the citizens in as many countries as possible are recognizing democracy and market economy in their interaction again as convincing maxims, can a culture of political co-determination and economic self-determination return to society, politics and the economy and work towards social and ecological justice. Embedded in subsidiary structures, the citizens bear full responsibility for their actions and well-being, so that they are always brought to shape the conditions in their immediate environment in exchange with each other and at the same time create the preconditions and the foundation for global exchange.

Social and ecological justice, by the way, arise from a multitude of economic mechanisms: For example, the terms Efficiency and Productivity as well as specialization, which are wrongly defined in the neoliberal context, are redefined in the sense of social justice and ecological sustainability and are no longer subject to the arbitrariness of »liberalized« (unregulated) markets, but to economic policy control. The market thus regains the freedom it deserves, which enables it under meaningful and uniform framework conditions, rules and standards to allocate economic resources efficiently and equitably like no other mechanism.

Thus, the price is able to perform its original function again as the central information medium and control element of market transactions of individual economic players, because under the conditions of social and ecological justice and productivity it reflects all internal and external costs. By allowing the players to be guided by truthful prices resulting from the interplay of supply and demand, economic resources move – as if steered by an »invisible hand« – to where they provide the greatest benefit to individuals and, at the same time, to society as a whole. As a supplement see the article Economic Pricing.

Subsidiary structures ensure that prosperity and welfare are no longer at the mercy of the imponderables of a worldwide production quantity achieved under oligarchic rule and high capital concentration, but result automatically from the domestic production structure. The production structure alone is decisive for local and regional economic diversity and consequently for the level of employment, the performance-related equal distribution in society and the preservation of natural resources.

Unlike domestic competition, international competition can not, by its very nature, be granted the freedoms of regulated domestic markets. It must rather be based on bilateral trade agreements given the completely different traditions, standards and resources in the world. In these agreements the exchange rate must be set as the crucial trading link, supplemented by autonomous tariffs and trade quotas to balance out the differences and to grant trade profits to both sides. The primary objective of these agreements must be to ensure that imported products with their characteristics and prices are integrated into domestic competition in the most stimulating but harmless way possible.

The separation into regional and global order thus results quite naturally from the principle difference between domestic and foreign trade. Besides, this explains why there can be no superordinate, all-dominant, self-regulating and self-stabilizing world economic order in a desirably diverse and democratic world. For more details see the article Future-Proof Foreign Trade.

Among politically sovereign and economically autonomous nation-states and economic areas, the global order is reduced to agreements of norms of conduct, especially regarding norms of international trade and cooperation. By applying these norms, economic subsidiarity can be extended beyond national borders and find its perfection at the global level in the form of projects of global interest and scale.

With domestic and cross-border subsidiarity the doctrinal practice of transferring economic powers from lower to higher levels (especially nonstate) is overcome, of which neoliberal protagonists claim it would bring about »more appropriate« and »more efficient« decisions. Along with overcoming this practice, the justification is removed for a World Trade Organization, which is entrusted by its current 164 member states as the guardian of the Grail of global cut-throat competition based on dumping prices in lead currency (i.e. US dollar or euro). This is an unprecedented event in economic history, especially because the condition for membership is the (voluntary) renunciation of national economic autonomy.

It should be noted that the demarcation of the specific functions of the various economic levels, i.e. the subsidiary structure of autonomous nation-states and economic areas both domestically and beyond their borders, is absolutely crucial for the future viability of economically autonomous entities and for the global economy as a whole:

Functioning regionality is a prerequisite for sustainable globality. Globality is the complement of functional regionality.

In what follows, is the plea for the multi-bilateral exchange rate system as one of 6 principles of global economic order:

3. The Multi-Bilateral Exchange Rate System

exchange rate system concept on the gearwheels, 3D renderingUnder the conditions described above, bilaterally agreed fixed exchange rates form the monetary basis of international trade in goods and services (tangible and intangible products). These exchange rates are the link and operational basis for bilateral trade channels between autonomous economic areas. For comparative relative price advantages to be effective in both directions of trade, exchange rates must reflect the average price differential between the trade products of two economic areas.

Bilateral exchange rates are calculated by having two trading partners compile a common list of all products to be potentially traded in both directions or even only in one direction. Both partners then add their domestic prices of the products to the product list in a separate column and calculate their average price for all products. Products that are only manufactured by one partner and can therefore potentially only be traded in one direction must be entered by the other partner in the corresponding column of the list with a realistic estimated price.

The relative price advantages of all products in the common list can then be determined: A relative advantage exists for those products whose prices in relation to the average price (product price divided by average price) are lower than the equally determined relative prices of comparable products on the part of the trading partner – both sides calculated in domestic currency. In short: those products have a relative advantage whose relative prices are lower than those of the trading, whereas products whose relative prices are higher than those of the trading partner have a relative disadvantage.

The nominal exchange rate, i.e. the exchange ratio of the currencies, results directly from the two average prices determined. Applying the exchange rate, each trading partner can finally calculate its potential absolute trading profits by converting the absolute price of each product to be imported into its own currency and subtracting the converted price from the price of its own product.

The calculated average price differential reflected in the exchange rate is – in economic terms – the only determinant in the system of bilateral fixed exchange rates. Because prices change continuously, exchange rates have to be recalculated as described with all trading partners on a semi-annual, annual or case-by-case basis, depending on technological and economic dynamics.

Bilaterally calculated fixed exchange rates are, as said, the link and the operational base for the bilateral trade channels between autonomous economic areas. In combination with calculated import duties and trade quotas, they protect the existential synchronicity of the developments of productivity and wages as well as of prices and purchasing power from distorting influences, and thus ensure the functioning of economic cycles – quite in contrast to the distorsions caused by the neoliberal system of free exchange rates.

In addition, in the case of fixed exchange rates, central banks are in a position to pursue an interest rate and money supply policy tailored to domestic needs regardless of the conditions in foreign economic areas. Since the foreign trade equilibrium (balance of payments and trade) can also be regulated and controlled independently, it protects economic areas from excessive external indebtedness and the associated economic imbalances and dependencies. The regulation of the foreign trade equilibrium includes the regulation of the convertibility of the domestic currency for the purpose of cross-border passenger journeys and tourism.

In addition I recommend the articles Comparative Advantage – Upgraded, Future-Proof Foreign Trade and also Currency War and Exchange Rate.

Click here for the German-language version: Multi-bilaterales Wechselkurssystem.

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