Joe Firestone: Another Danger of the TPP: It Sacrifices Monetary Sovereignity

By Joe Firestone, Ph.D., Managing Director, CEO of the Knowledge Management Consortium International (KMCI), and Director of KMCI’s CKIM Certificate program. He taught political science as the graduate and undergraduate level and blogs regularly at Corrente, Firedoglake and New Economic Perspectives. Originally published at New Economic Perspectives

Right now the US fulfills the three essential conditions for monetary sovereignty: 1) it issues its own non-convertible currency, 2) which it allows to float on international currency markets; and 3) it owes no debts in any currency other than dollars. Because it is monetarily sovereign, and can always meet its obligations the US can never be forced into insolvency.

It can become insolvent due to Congressional decisions such as failing to raise or repeal the debt ceiling, or Executive decisions such as failing to use its platinum coin minting authority to fill the public purse and then pay its bills once it has reached the debt ceiling. But again, it cannot be forced into solvency by external financial or economic factors that are beyond the control of the Federal Government (including the Congress).

Monetary sovereignty is of tremendous value to us. As long as the United States retains it, then for example, we can never become Greece, or for that matter, Weimar Germany, since the latter’s hyperinflation was in large part caused by the fact that it owed its war reparation debts in goldmarks, or in currencies convertible to gold, and could not repay them in its own non-convertible currency, the Mark, which it could freely issue.

It also means, that the US has greater policy space for deficit spending and debt issuance than nations that have given up their currency, have fixed exchange rates, and owe debts in foreign currencies whose price in international markets it cannot control. Given all the current problems of the US, that may require deficit spending to solve, giving up monetary sovereignty is a monumentally risky thing to do, and exhibits the casual and foolish thoughtlessness of the President proposing it and the Congress seriously considering the Trans- Pacific Partnership (TPP) Agreement.

Passing the TPP would compromise the monetary sovereignty of the United States and subject us to the influence of currency markets on the prices we may have to pay for foreign currency under a plausible scenario allowed by the Agreement. Specifically, I don’t see anything in the TPP investment chapter requiring that damages be awarded by the Investor State Dispute Settlement (ISDS) tribunals in the sovereign currency of nations incurring damage awards for lost profits, but only that they be awarded in a “freely usable currency” as specified by the IMF. So, complainants in these tribunals could ask for and win damages payable in foreign currencies, rather than US dollars, which the US would then owe in that foreign currency.

So, it flows from these considerations that passing the TPP would create the conditions for ending US monetary sovereignty for the first time since the international gold window was closed in 1971. The seriousness of this compromise of monetary sovereignty would depend upon the frequency and magnitude of judgments against the United States Government. So, how bad can it get?

No one knows. But we do know that “ . . . the TPP would empower another 25,000 foreign corporations to use the investor state tribunals, against the United States . . . an expansion many times the US’s current level of exposure.

We also know that Ecuador is currently facing a judgment against it awarded to Occidental Petroleum in the amount of $2.3 Billion for Ecuador’s lawful termination of a contract for drilling rights. For Educador, a judgment of that size is comparable to one of $340 Billion against the United States, denominated in a foreign currency it cannot issue. (The Dollar is Ecuador’s unit of account and official currency right now, but, of course, it is a currency Ecuador cannot issue.)

If you think this possibility is far-fetched, consider that ISDS actions are a business for multinational corporations experiencing rapidly accelerating and perhaps exponential growth. They and the ISDS Courts, staffed by lawyers who play the roles of judges for those Courts one day, and representatives of the potential plaintiffs in these Courts the next, have little incentive not to expand this line of business to the maximum the traffic can bear. Here’s what Elizabeth Warren thinks about this issue:

ISDS advocates point out that, so far, this process hasn’t harmed the United States. And our negotiators, who refuse to share the text of the TPP publicly, assure us that it will include a bigger, better version of ISDS that will protect our ability to regulate in the public interest. But with the number of ISDS cases exploding and more and more multinational corporations headquartered abroad, it is only a matter of time before such a challenge does serious damage here. Replacing the U.S. legal system with a complex and unnecessary alternative — on the assumption that nothing could possibly go wrong — seems like a really bad idea.

The deficit terrorists among us worry needlessly all the time about the bond vigilantes driving bond interest rates beyond what is fiscally sustainable for the United States, and use this argument to call for crippling deficit reduction and austerity, even though they must know by now that the result is economic stagnation and growing inequality. But they are strangely silent about what the TPP’s attack on US monetary sovereignty, making us subject to market-determined prices of foreign currencies, would do to fiscal sustainability, and equally silent about the issue of whether the compromising of our monetary sovereignty is fiscally responsible or not. It looks like they don’t care about fiscal responsibility and fiscal sustainability when it comes to a choice between these things and the possible frustration of the “expectations of profits” of multinational corporations.

Which brings us back to our erstwhile Representatives and Senators in Washington. How they can even consider Fast Track Authority for the President without extensively considering and debating the sovereignty-infringing aspects of the TPP is beyond me. Its potential infringement on Monetary Sovereignty is only one of these. There are many others, as well. And it is hard to understand how people who swear fealty to the United States can justify their apparent complete lack of concern for these issues when they make trade agreements.

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37 comments

  1. participant-observer-observed

    No one knows. But we do know that “ . . . the TPP would empower another 25,000 foreign corporations to use the investor state tribunals, against the United States . . . an expansion many times the US’s current level of exposure.

    And any one can become a foreign corporation faster than you can say “king of the whopper!”

    But leaving aside currency vulnerabilities, i would like to see someone in the econ press (Yves madame?) take on Obama’s “the progressives are just plain wrong” edict and simply show us the data, exactly when did the American public see any cost of living increase over the past 35 years and since Nafta was passed in particular? What is the EVIDENCE for why anyone in the public should think there will be an iota of benefit from TPP/TIPPS/TISA?

    Isn’t this just a case of having cannibalized the host (US labor) to a rotten stump that has no life left to regenerate itself, Dimon & friends have no choice but to look to feast on foreigners for the stock buy-back charade they want for their “engine of growth”?

    1. Joe Firestone (LetsGetitDone)

      There is no benefit it can possible have that would compensate for its giveaway of the consent of the governed, national sovereignty, and monetary sovereignty!

  2. Steve H.

    Oskar Morgenstern: ” … the Examinor was intelligent enough to quickly quieten Godel and say “Oh God let’s not go into this” and broke off the examination at this point, greatly to our relief.”

    ‘Creative destruction’ takes on a whole new meaning when ‘creative’ means ‘make it up as you go along.’

    It’s an odd world when diplomacy becomes ‘threatening to open a failed business in your state.’ Can we release an IPO based on the successful failure of a future business?

    1. human

      In a form, it is already a successful business model, equity extraction. The ability to seek suit for loss of expected profits would become another guaranteed wealth transference mechanism.

      1. John

        Sue for loss of future profits
        What the _____ is that????

        How about all of us sue for loss of future wages.

        NO to this trade “agreement” (simple majority needed to pass)
        Which is really a treaty (2/3s majority needed to pass)

        1. susan the other

          This point illustrates the only salvation for capitalism. It is to forego “productivity” in favor of what is productive. And what is productive is a substantial wage to everyone, enough to afford the things that should otherwise be free – in a Marxist world. So that’s the tradeoff we are avoiding. Well, not “we” but our investor/idiot class.

        2. Joe Firestone (LetsGetitDone)

          What a good idea! Congress should definitely defeat Fast Track and then rewrite the TPP to eliminate ISDS and provide for Employee State Dispute Settlement (ESDS) tribunals with three judge panels comprised of labor lawyers who work for unions when not serving as judges. We could even allow such panels to elevate workers’ expectations of future wages overturn health, safety, environmental and climate change legislation when it interferes with lost wages.

          This experiment would allow us to see how many congresspeople would sign on to that and how quickly the whole idea could be spoofed on SNL and our various late night comedians.

  3. Clifford Johnson

    I don’t find the TPP’s threat of damage awards against the US in foreign currencies anything other than fair. If all men are created equal, isn’t it a corollary that all nations have inherently equal forms of credit?

    The article too readily glosses over the extant loss of sovereignty in allowing US currency to be issued only by and through private banking interests, as decreed by a largely financially captured government. A telling incidental to this de facto loss of people power (i.e. of the preempted consent of the governed) is the fact that the public has for decades been misinformed by the government (the Treasury and GAO) of the financial benefit to the government that would automatically accrue by issuing $1 United States coins in lieu of $1 Federal Reserve banknotes. The face value reduction in the public debt is not counted in the Treasury-mentored GAO estimates, although the interest relief based on that unstated reduction is purportedly counted–and that interest relief itself is grossly understated. (See my recent correspondence with the GAO here. )
    That said, I do find unconscionable loss of local sovereignty in the reported and rumoured myopically pro-corporate transactional rules that the ISDS Courts are to enforce. That judgments may issue in non-US currencies isn’t the fundamental problem with the TPP. On the contrary, on the international stage, that element would seem per se to be entirely equitable, if not essential.

    1. MRW

      PART 1
      Dr. Clifford Johnson, as your GAO correspondence indicates you are, Yves Smith may ding me, or ban me, for being heavy-handed, rude, vulgar, an ad hominem in my reply to you, but my patience is tried.

      You wrote:

      The article too readily glosses over the extant loss of sovereignty in allowing US currency to be issued only by and through private banking interests, as decreed by a largely financially captured government.

      What fucking planet are you on? Are you incapable of using search engines and retaining the information from one site to the other to get at the truth?

      US currency is NOT “issued only by and through private banking interests.”
      You are grossly misinformed. In fact, you’re dead wrong.

      Only an agent of the US Treasury can issue US currency— the Bureau of Printing and Engraving–and that includes physical cash, coin, and the vast majority of US “currency” (called ‘net financial assets’): US treasury securities.

      In the United States of America, physical paper dollars are ONLY printed by the Bureau of Printing and Engraving. The Federal Reserve orders them from the Bureau of Printing and Engraving depending on the desire of the public for physical cash, which the 12 district Federal Reserve banks report annually in late August to the Federal Reserve Board of Governors (a government body) that they need.

      The Federal Reserve now pays $0.09 for each $100 fancy-dancey colored bill, and $0.07 for each mono-colored bill, independent of denomination. These Federal Reserve note purchases, however, are liabilities on the Federal Reserve’s balance sheet. . . collateralized by the assets of the Federal Reserve Banks. That’s why there’s an actual limit on the amount of physical cash that can be manufactured annually; I forget the number, it’s around $400 billion (something like $396 billion, or something). Definitely under $500 billion, the amount of treasury securities (cash) traded daily on the open market globally.

      In the United States of America, physical coins are ONLY minted by the Bureau of Printing and Engraving. The 12 Federal Reserve district banks must pay the face value of these coins. These are assets on each of the 12 Federal Reserve’s balance sheets and each institution’s account balance is adjusted accordingly.

      These 12 district banks don’t get them for free, contrary to your convoluted and incorrect arguments to the GAO, which you seem to have derived from the equally convoluted and incorrect “The Creature from Jekyll Island,” written by a man too old to recognize that we are no longer on the gold standard either domestically or internationally.

      That was Reagan’s problem as well; the fourth item on his 1980 list of campaign promises was to return our currency to a metal peg, the gold standard.

      1. MRW

        Correction. Coinage is produced by the United States Mint, not the Bureau of Printing and Engraving.

      2. Clifford Johnson

        Thank you for your passionate interest in my posting. However, you needn’t call me Dr. Johnson. I only use that appellation where it might gain me appropriate leverage, as in correspondence with the GAO, preparatory to a potential litigation.

        For your information, the FED banks alone issue Federal Reserve notes/digital reserves–which is what I was perhaps too loosely referring to in saying that “US currency is issued only by and through private banking interests.” The fact that the US BEP actually prints the notes at cost on demand for the privately-owned banks is monetarily immaterial. Your stressing this merely serves to underscore the successfully deceptive nature of bank notes emblazoned on each side with dominant “UNITED STATES” captions.
        There are such things as notes issued by the United States. The quantity is limited to $300 million, and they cannot be used as a reserve currency, per 31 U.S.C. § 5115(b):
        “The amount of United States currency notes outstanding (1) may not be more than $300,000,000; and (2) may not be held or used for a reserve.”
        Is this the source of your $400 billion or some such misrecollection?

        I’m glad you brought up the convention whereby notes are issued by the Fed banks as face-value liabilities. This is another deceptive practice–a hold-over from the days when the Fed banks were required to back their notes with gold. Those days are long gone. The liabilities continue simply as accounting artifices–artifices which in my opinion should be replaced by common or garden balance sheet accounting. I would create a line of non-distributable equity to replace the fake liability. The only true liability they represent are undertakings to maintain the currency, which in practice reduces to little more than the recirculation and replacement of worn out notes.

        As for your dismissive comments re my submissions to the GAO, I suggest that you parse them more carefully. For example, do you contend that, even in the present era of excess reserves, it is frivolous for me to affirm that the retirement of $1 bills is decoupled from the sale of Treasuries? Is this the sort of point you insist that I am unthinkingly parroting from (dare I say Dr.) Jekyll Island? My guess is that you haven’t considered the question deeply enough, but if you have, please explain in detail.

        1. MRW

          it is frivolous for me to affirm that the retirement of $1 bills is decoupled from the sale of Treasuries?

          I don’t understand what you are saying.

    2. MRW

      PART 2
      In fact, Dr. Johnson, since you have a doctorate and I assume that means you can add, the Daily Treasury Statements show that the USA has created $719 TRILLION in both marketable and non-marketable treasury securities to run US government and the citizens’ business between 1998 and the present.

      It has redeemed $701 TRILLION.

      The vast majority of the $719 trillion issued (without you knowing a damn thing about them) are “Government Account Series,” the US federal government creating ‘cash’ to pay for itself. (Add up the amounts from September 30th, the end of each fiscal year. TABLE III-A.)

      The remainder is $18 trillion, the current “National Debt.” To the penny. Which is in your bank account, and the bank accounts of everyone who holds US dollars nationwide and globally. Which you propose to threaten.

      The USA creates its own currency. That is what Joe Firestone is addressing and which seems to have sailed over your head.

    3. Joe Firestone (LetsGetitDone)

      Well, I don’t see what’s fair about it since the multinationals suing under the TPP would be losing “expected profits” denominated in dollars. Since that would be the case, I think it only fair that the awards must be required to be in USD as well. Also I don’t see why you seem to think that the answer to the question: “If all men are created equal, isn’t it a corollary that all nations have inherently equal forms of credit?” is “yes.”

  4. Steven Greenberg

    @Clifford Johnson,

    I know this won’t change your mind a bit, but it would be amusing to see your read who the Fed thinks owns the Fed.

    I have quoted what the Fed thinks on my blog
    Who owns the Federal Reserve?

    If you don’t want to visit my blog, you can see Who Owns The Fed? on the Fed’s web site.

    Who you going to believe, your own preconceived notions, or what that lying Fed tells you?

    1. Clifford Johnson

      It isn’t a matter of “belief” as to who owns the Fed banks. It is a perfectly clear cut matter of law. Confusion arises because (1) the Fed Board is usually constured as an independent government agency; and (2) references to “the Fed” and the “Federal Reserve” and the “Federal Reserve System,” by lumping together the Board and the 12 Fed banks (and sometimes the member banks) are too vague to be unambiguous. Thus, the claims/explanations you refer me to are so broad (they talk of the Federal Reserve generally) as to technically validate and unhelpfully obfuscate their blanket repudiations of private ownership/control.
      For recent legal guidance see See Fox News Network, LLC v. Bd. of Governors of the Fed. Reserve Sys, 601 F.3d 158, 160 (2nd cir. 2010):
      “[S]ome records at the Federal Reserve Banks — those kept at the Federal Reserve Banks under certain conditions for ‘administrative reasons’ — are records of the Board; these [only] must be searched [in response to a FOIA request.]… In any event, it seems clear from the statutory scheme that enacted the Federal Reserve System that the lending activities of the Federal Reserve Banks do not take place ‘on behalf of’ or under the ‘delegated authority’ of the Board. The Board itself has no power to make a loan to any bank, and does not authorize each loan made by the Federal Reserve Banks. The power to make loans is explicitly granted by statute only to the Federal Reserve Banks themselves. 12 U.S.C. § 347b(a). In that way, ‘Congress divided the powers of the Federal Reserve System between the Board, which is a federal agency, and the [Federal Reserve Banks], which were established as regional banks.’ [Citation.]”
      Most importantly, the privately owned banks actually issue the nation’s paper money/digital reserves.

      1. Yves Smith Post author

        Lordie. The member banks own only non-voting preferred stock. They have NO governance rights. They do not vote on directors, have the right to vote on key matters (proxies) or have the right to obtain financial information.

        The Fed is a public/private entity with deficient oversight and accountability.

        The OCC is just as cronyistic as the Fed, merely by virtue of cognitive capture and the power of the revolving door.

        Going on about the Fed in an uniformed manner simply hurts your credibility.

      2. MRW

        It isn’t a matter of “belief” as to who owns the Fed banks

        Oh jeezuss. More G. Edward Griffin horseshit you haven’t verified, Dr. Johnson.

        In 1913, the public would not allow federally nationalized district regional Federal Reserve banks. They were terrified of socialism.

        So the federal government in response to citizen fear devised a plan whereby the district Federal Reserve banks were owned by the banks in their district. The local banks had to invest in the district Federal Reserve Bank at 6% of their available capital. In return they got an annual 6% dividend based on their original capitalization, no matter how the individual bank subsequently increased in value.

        In 2010, for example, total dividends paid to all banks within the Federal Reserve system was 1.56%. Check the Annual Report. I mention 2010 because that’s the first Federal Reserve Annual Report I accessed in my folder.

        The shares are preferred shares. No voting rights except for the three business men who are part of their district Federal Reserve Bank board of directors.

        Do your g.d. homework.

        1. Yves Smith Post author

          Thank you! I find it hard to maintain a veneer of politeness with readers who peddle Fed conspiracy theories. There are plenty of sound criticisms to be made. Batshit talk like this lets the Fed dismiss all reformers as hysterics.

    2. Vatch

      Regardless of who owns the Fed, the risk free dividends that they pay are quite nice for the banks which own stock in the Fed. From the Fed’s web site referenced above:

      The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

      I’ve said it before: I would be delighted if I could get a mere 4% on my savings. 6% is completely legal highway robbery! That’a a pretty nice subsidy, yet the banks still needed to be bailed out a few years ago.

      1. Yves Smith Post author

        The 6% is on the par value and that was set a long time ago. It’s not at all like getting 6% on money you just put in the bank.

  5. Paul Booth

    All men are not created equal, Some ( gangs) of men are more equal than other smaller groups of men (gangs). Nations do not have equal forms of credit. If this were so then the value of ones labor globally would be equal. This is clearly not. Hence it is not possible for nations to have equal forms of credit. This TTP is clearly a no solution for growth only a mechanism for the elite to feast on whats left of dead the carcus we call the global economy.

    1. Clifford Johnson

      At law (US and international), all men are created equal. And this discussion singularly concerns law.

  6. Steven Greenberg

    In my blog post It’s Time For America and Americans to Face the Facts, I argue that the US will eventually have to adjust to its rightful place in the world, and that place is not at the top. I never conceived of the possibility that this adjustment could come in the most painful way possible and with one fell swoop of signing a “trade” agreement.

    1. jrs

      Yes and I find it hard to muster up sympathy for the empire and it’s reserve currency of death and plunder as well. And yes the loss of more local control (city laws, state laws etc.) is a worrying part! In addition some of these local laws were arrived at far more democratically (even direct initiatives) than any federal laws were.

      But an argument that people in the U.S. are too rich isn’t going to be used all the time by a bunch of egalitarian humanitarians whose hearts are in the right place. And in fact egalitarians may use it but they seem to have little power. That argument WILL however be picked up for those arguing for the squillionaires, and the greater and greater loss of wealth by the American workers that seems mostly to be gained by the squillionares, will be presented as somehow globally fair, even though the whole globe is just exploited. That’s who really have the wherewithall to make use of that argument. They’ll hype the injustice of national inequality to argue for their even more extreme inequality and they’ll spin it as if they’re arguing with the saints.

      1. Demeter

        Let us consider that the worst possible thing happens, the TPP is the law of the land, and Corporation is King.

        How is the Corporation going to overcome the natural stubbornness of Man?

        Is it going to call out its army to subdue the populace? Is the US Government, uneducated by the events of Waco, Oklahoma City, Jefferson, Missouri, going to enforce law against its own people to satisfy a Corporation? Is the Rule of Law going to be a One-Way street?

        Somehow, despite the Couch Potato mentality of American wastrels, I don’t think this will happen. If nothing else, the post-menopausal women of America will not tolerate it, nor their grandchildren.

    1. Joe Firestone (LetsGetitDone)

      Steve, I’ve read the posts you’ve linked to and think they’re all very helpful in helping people to understand that various issues posed here. Thanks for the links.

  7. Chauncey Gardiner

    Thank you for this article, Joe Firestone. Seems that the TPP agreement has largely evaporated from the front pages of our famously free press and evening corporate television news over the past couple days. Even PBS appears seems to have done so after commentator Mark Shields last week likened the Administration’s tactics to the template used to railroad TARP through Congress in 2008 despite the broad and deep opposition of the American people.

    Hopefully the proponents of a surrender and ceding of our national sovereignty, including monetary sovereignty, to large transnational corporations have retreated back into the shadows on this matter, where they will remain. Although I somehow doubt it.

    1. Joe Firestone (LetsGetitDone)

      Thanks, Chauncey. I keep waiting for the TPP issues to provoke enough protest for the MSM to decide that they can no longer afford to refuse to cover the TPP substance and process. Their TPP reporting is another media disgrace!

  8. susan the other

    This brings me back to Greenspan’s letter to Congress in which he pleads that they not mess with sovereign monetary controls. Greenspan knows the value of sovereign currency. Even though the benefits of that sovereignty have so far only gone to Greenspan’s own investor class. Still, it could be an extreme hardship on the whole population of the US before we passed any enlightened legislation to make fiscal priorities override trade priorities. Since the supra-sovereign new world of global trade seeks to disregard any national fiscal issues, the TPP is death to our well-being. Can anybody say “Greece”?

    1. susan the other

      The antidote to this imbalance is a global fiscal dedication which redistributes ill-gotten mercantile gains made against national interests. Something that makes the “deficit terrorists” a lethal threat that should be annihilated. Yesterday.

    2. Chauncey Gardiner

      Thank you for an excellent comment, STO. I am equally concerned about the TISA (Trade in Services Agreement) being secretly negotiated in Geneva and the TTIP (Transatlantic Trade & Investment Partnership), which is also being negotiated in secret.

      I fear that they are trying to restrict our ability to regulate their speculative activities and to obligate us for their potential losses from their financial speculations in derivatives, junk bonds, synthetic CDOs, etc. by locking us into these highly secretive international agreements. These agreements are not about “trade”, but about locking in the primacy of the TBTFs and large transnational corporations over the people of the nation-states.

      Greece, indeed.

    3. Joe Firestone (LetsGetitDone)

      Exactly! I can say “Greece” if they can get awards in foreign currencies. What can we say about this. Congress is considering disloyal”‘evil.” See Bill Black’s post at NC and NEP today.

  9. Synoia

    Joe

    When foreign corporations enjoy more privileges than domestic corporations, the ability to force host government guarantees of profits, the domestic corporation become obsolete.

    All companies will want to be foreign corporations in all jurisdictions. The shareholders will demand their divides be thus protected, and the executives will oblige (for a small insignificant bonus increase).

    1. Joe Firestone (LetsGetitDone)

      I think you’re right, Synoia, but it’s not just whether a corporation is a foreign corporation in law that counts. It also has to have deep enough pockets to carry off an extended suit against the US government.

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