There are (unconscious?) Hayekians everywhere....
Gulf takes wrong currency path
By Chris Cook
The end-of-year meeting of the Gulf Cooperation Council (GCC) in Muscat apparently saw another step along the road to the creation of a GCC currency designed along the lines of the euro.
It is surprising, to say the least, that the GCC is not taking a cool step back and reviewing the project from first principles in the light of the continuing global crash, which is about to enter its next phase of a wave of defaults in the world of commercial property and private equity.
The answer can only be that the GCC - composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - perceives that there is no alternative.
A lucky reader of the Financial Times recently won 10,000 pounds (US$14,500) for identifying what a panel of judges agreed would be the "Next Big Thing" in financial products. This, the judges realized perhaps five years after the IT world recognized the model, is "peer-to-peer" - such as www.zopa.com - which directly connects borrowers with lenders, and investors with investments.
In this model, the provider ceases to be a middleman, or credit intermediary, and becomes a pure service provider. The fact is that in the Internet age there is no need for credit intermediaries, whether private banks or central banks.
Indeed, Hong Kong managed quite well without a central bank (or lender of last resort) at all, with bank credit creation under the stern control of a monetary authority.
The 21st century alternative to the central banking model first implemented by John Law in France in 1719 will be a peer-to-peer "Gulf Clearing Union".
To reach this destination, we must take a swift detour via Switzerland.
Few have ever heard of it, but most Swiss businesses are members of the Wirtschaftsring-Genossenschaft or WIR. Since 1934, small and medium-sized businesses in Switzerland have routinely extended each other credit - for many years interest-free - and settled this credit in goods and services, rather than in Swiss francs. So transactions are not settled conventionally in Swiss francs created as interest-bearing credit by Swiss banks, or as non interest-bearing Swiss francs minted by the Swiss central bank. In fact, no Swiss francs change hands at all: transactions take place by reference to the Swiss franc as a value unit.
The pragmatic Swiss are not prepared to rely purely on trust in the ability or willingness of their members to settle debit balances. WIR members are obliged to give security over their property by way of collateral. In other words, the WIR is a monetary system that is "property-backed". It is but a short step from the WIR to a Gulf Clearing Union.
The GCC members produce between them some 16 million barrels of per day, and possess some 45% of known oil reserves. In addition, members, particularly Qatar, also have immense reserves of natural gas.
The key innovation that will enable a Gulf Clearing Union is the simple expedient of creating - within a suitable legal framework - a "petro" unit redeemable in a constant amount of energy value, let's say the energy released by burning 100ml (measured at 20 Centigrade) of n-octane.
Such a definition of an energy value unit provides a straightforward benchmark for both domestic and international buyers of oil, gas, petroleum products, and even electricity, to use petros - as well as, or instead of, US dollars - in for purchases of GCC production.
Gulf business-to-business transactions would take place on credit terms within a GCC state-sponsored mutual guarantee framework. No interest as such would be paid, but a provision would be made by both sellers and buyers into a "pool". Service providers formerly known as banks would no longer put capital at risk by creating credit based on it, but would act as service providers in return for a fee, managing the system, setting guarantee limits, and handling defaults.
Settlement of credit would take place in petros, in goods or services by reference to the petro, or in dollars or other currency acceptable to the seller.
GCC use of carbon-based energy is staggeringly profligate and increasing rapidly. Introduction of the petro offers a way in which energy prices may be raised to global levels, and suitable distributions made in the form of a "petro dividend" to consumers and businesses, who would then be incentivized to cut back on carbon-based energy use since this would literally save them money.
Moreover, part of the energy pool could be invested in renewable energy and energy-saving technology: thereby monetizing value which will cost nothing to redeem in the future.
In this way, a new economic route for GCC countries to transition to a post-carbon economy becomes possible.
The GCC members are essentially able to make the rest of the world an offer it cannot refuse and can lead the way to a new global settlement, by a transition to an international clearing union configured around the petro as a global reserve currency and value unit.
The US could then be invited to repay its energy to the rest of the world and to do so by turning swords to ploughshares. That is to say, the huge US capacity in human and other resources currently wasted in staggeringly profligate military expenditure could be turned to the peaceful, but profitable, purpose of creating new generations of energy-saving technology and renewable energy production.
The GCC members should remember what they have either forgotten or never understood: that oil is not priced in dollars; dollars are priced in oil. And they should act accordingly to create a Gulf clearing union.
Chris Cook is a former director of the International Petroleum Exhange and is now a strategic market consultant, entrepreneur and commentator.
(Copyright 2009 Chris Cook.)