My reply to George Soros: A New World Architecture

Hi All,

George Soros published an article entitled A New World Architecture. Seldom … very seldom, am I speechless. But this article was the best I’ve ever read on the issue of global rule of law. Why I haven’t known more about this guy before now is beyond me. But here is my reply to his article.

Mr. Soros, thank you for this great article. I was pleasantly surprised by many of your insights.

“Twenty years after the fall of the Berlin Wall and the collapse of communism, the world is facing another stark choice between two fundamentally different forms of organization: international capitalism and state capitalism. The former, represented by the United States, has broken down, and the latter, represented by China, is on the rise. Following the path of least resistance will lead to the gradual disintegration of the international financial system. A new multilateral system based on sounder principles must be invented.”

We have a winner.

“While international cooperation on regulatory reform is difficult to achieve on a piecemeal basis, it may be attainable in a grand bargain that rearranges the entire financial order. A new Bretton Woods conference, like the one that established the post-WWII international financial architecture, is needed to establish new international rules, including treatment of financial institutions that are too big to fail and the role of capital controls. It would also have to reconstitute the International Monetary Fund to reflect better the prevailing pecking order among states and to revise its methods of operation.

In addition, a new Bretton Woods would have to reform the currency system. The post-war order, which made the US more equal than others, produced dangerous imbalances. The dollar no longer enjoys the trust and confidence that it once did, yet no other currency can take its place.

The US ought not to shy away from wider use of IMF Special Drawing Rights. Because SDRs are denominated in several national currencies, no single currency would enjoy an unfair advantage.”

The difficulty here seems to be that usg does not want to lose its reserve currency status; something that would have devastating consequences for the United States short term. I think some kind of apparatus in the SDRs or some additional agreement would be needed to moderate this adjustment. This might remove resistance to accepting broader use of SDRs and accelerate the acceptance of SDRs as a basis for a true currency in the near future.

“The range of currencies included in the SDRs would have to be widened, and some of the newly added currencies, including the renminbi, may not be fully convertible. This would, however, allow the international community to press China to abandon its exchange-rate peg to the dollar and would be the best way to reduce international imbalances. And the dollar could still remain the preferred reserve currency, provided it is prudently managed.”

There is much gnashing of teeth in the academic literature right now about how to internationalize the Renminbi. I like this pragmatic approach since, whatever the solution, this would advance it.

“One great advantage of SDRs is that they permit the international creation of money, which is particularly useful at times like the present. The money could be directed to where it is most needed, unlike what is happening currently. A mechanism that allows rich countries that don’t need additional reserves to transfer their allocations to those that do is readily available, using the IMF’s gold reserves.

Reorganizing the world order will need to extend beyond the financial system and involve the United Nations, especially membership of the Security Council. That process needs to be initiated by the US, but China and other developing countries ought to participate as equals. They are reluctant members of the Bretton Woods institutions, which are dominated by countries that are no longer dominant. The rising powers must be present at the creation of this new system in order to ensure that they will be active supporters.”

This is another point that has needed emphasis and gotten little. However, I do not believe we have time to dabble with the UN. Something more comprehensive and ambitious needs to be put together right now, publicly and transparently, that invites all the world to participate. A real, serious, fundamental law, among other precepts, is desperately needed.

“The system cannot survive in its present form, and the US has more to lose by not being in the forefront of reforming it. ”

It is the logical choice and it is the only country that could pull this off.

“The US is still in a position to lead the world, but, without far-sighted leadership, its relative position is likely to continue to erode. It can no longer impose its will on others, as George W. Bush’s administration sought to do, but it could lead a cooperative effort to involve both the developed and the developing world, thereby reestablishing American leadership in an acceptable form.

The alternative is frightening, because a declining superpower losing both political and economic dominance but still preserving military supremacy is a dangerous mix. We used to be reassured by the generalization that democratic countries seek peace. After the Bush presidency, that rule no longer holds, if it ever did.

In fact, democracy is in deep trouble in America. The financial crisis has inflicted hardship on a population that does not like to face harsh reality.”


“President Barack Obama has deployed the“confidence multiplier” and claims to have contained the recession. But if there is a “double dip” recession, Americans will become susceptible to all kinds of fear mongering and populist demagogy. If Obama fails, the next administration will be sorely tempted to create some diversion from troubles at home – at great peril to the world.

Obama has the right vision. He believes in international cooperation, rather than the might-is-right philosophy of the Bush-Cheney era. The emergence of the G-20 as the primary forum of international cooperation and the peer-review process agreed in Pittsburgh are steps in the right direction.

What is lacking, however, is a general recognition that the system is broken and needs to be reinvented. ”

I am speechless … and encouraged. Someone realizes this. Yes, a completely new system is required now. And I do not think it resembles anything we’ve seen in history. I have blogged on various proposals at; things such as Binary Economics, Zero-Zero Banking (a Fractional Reserve Alternative) and productivity-based remuneration. But regardless of what is decided, that discussion absolutely must begin now, publicly and globally. There is no time left.

“After all, the financial system did not collapse altogether, and the Obama administration made a conscious decision to revive banks with hidden subsidies rather than to recapitalize them on a compulsory basis. Those institutions that survived will hold a stronger market position than ever, and they will resist a systematic overhaul. ”


“Obama is preoccupied by many pressing problems, and reinventing the international financial system is unlikely to receive his full attention.

China’s leadership needs to be even more far-sighted than Obama is. China is replacing the American consumer as the motor of the world economy. Since it is a smaller motor, the world economy will grow slower, but China’s influence will rise very fast.

For the time being, the Chinese public is willing to subordinate its individual freedom to political stability and economic advancement. But that may not continue indefinitely – and the rest of the world will never subordinate its freedom to the prosperity of the Chinese state.

As China becomes a world leader, it must transform itself into a more open society that the rest of the world is willing to accept as a world leader. Military power relations being what they are, China has no alternative to peaceful, harmonious development. Indeed, the future of the world depends on it.”

I’m not as sold on the PRC experiencing a durable economic climb and am more concerned about how it might oppose global rule of law, or otherwise frustrate it.

– kk


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