The Future of Money and Banking
Central Bank Digital Currency and Beyond
van der Linden Slides
I have a great deal of respect for someone who can get government to listen. Clearly it takes dedication and effort.
Unfortunately, when it comes to the “safe haven savings” that Martin refers to, my analysis shows that it is savings themselves that are the root cause of the problem – because savings are someone else’s principal debt to a bank that is NOT available to be earned and extinguished.
Savings are therefore “impossible” principal debt, the built-in source of INSTABILITY in the system, not the bedrock that conventional economics imagines. This is explained in just over 2 minutes in this cartoon: “Economists and a Pile of Nuts”.
If making savings safer increased the tendency to save, the result would be to worsen the root cause of system instability. Please read my comments on Steve Keen’s talk for the explanation.
Central Bank “Money” is a Balance Sheet Entry
Martin concludes by recommending that central bank money be made an “asset class” without ever explaining what central bank money is now. Currently, central bank money is national taxpayer debt on which only the interest is paid. Central banks just create new reserves to buy this interest-bearing debt. Therefore, central bank money is currently an income-generating asset of the central bank that the central bank creates with a few keystrokes, some of which will get printed as physical notes, some will remain as reserves. From the point of view of the national taxpayer it is an interest-only loan, a perpetual liability.
How does one imagine turning a perpetual liability of the national taxpayer into an “asset class” for the “general public” (a.k.a. the national taxpayer)? It’s still being studied, apparently.
Here is my understanding. Gold and silver are pure “assets” when first dug out of the ground for one reason and one reason alone – other people will trade another asset, like a house, or consumable goods like food, or labour to acquire them (demand).
The central bank and government have only two ways to make central bank or government money into an “asset”:
1. redeem it for gold, silver or something else tangible that is in demand;
2. make it the medium of payment required to pay national taxes, in which case it is being redeemed for national government services. In this case, the asset is everything the national government supplies to its citizens which may range from universal education, health insurance and old age pensions to brutal police state repression and an overgrown military-industrial complex. Obviously, the verdict of “asset” versus “evil waste of money” is subjective to each taxpayer, but the demand is assured by law, both the legal tender status of cash and the required payment as tax.
Redemption for precious metals was abandoned as no longer feasible decades ago, and choice #2 is the current situation. Government is a service provider and can logically spend as many credits for these services as it will require back in taxes and fees from taxpayers. This guaranteed demand is the actual source of the national government’s “monetary sovereignty”. Note, that to preserve the value of these credits in a no-growth stability test, every money unit spent must be taxed back at the same rate at which it is being spent to keep the total stable. Therefore, sovereign money on a balanced budget is also money as debt on a schedule to be repaid, just like bank credit.
The Pointless Quest for “Debt-free” Positive Money
The quest for a “debt-free” or “positive” sovereign money is both unnecessary and futile. Our complex economic system runs on credit and necessarily so. Credit for what? is the question. What is the best source?
An unencumbered gold coin, about as positive and debt-free a form of money there is, only needs to be lent ONCE into circulation to become “money as principal debt of a gold coin” until it is paid back. The gold coin has become “money as a debt-of-itself ” as surely as bank credit is. Whatever form a “positive money” might take, once it is lent, it is money as someone’s principal DEBT of that “positive money” .
The gold coin itself has been spent and is now a liability of the borrower to repay it on time. The gold coin could be acquired and lent multiple additional times while still being owed to the first lender. If the borrower’s promise to pay the gold coin is also accepted as money, the money has doubled. The promise to repay could also be lent concurrently multiple times.
So, what difference would it make if all money were gold coins (or CBDCs) initially spent into circulation as a truly “positive” and “debt-free” asset?
1. If too many gold coins and promises to repay gold coins enter the money circulation relative to the real things needing to be bought, the value of gold will decline. This will rob savers of purchasing power they had previously earned, an injustice. If too few gold coins and promises to repay gold coins enter the money circulation relative to the real things needing to be bought, the value of gold will rise, causing borrowers to pay back more in real purchasing power than was received, also an injustice.
It is the concept of money as a single quantity made valuable by its own scarcity that gives rise to the inflation and deflation of any such currency, be it cowrie shells, gold coins, fiat cash or Bitcoin. The only ones well served by this scarcity concept of money are those who gamble on the money itself and, among those, for every winner there has to be a loser.
2. If all of the gold coins end up in the same state of being owed to multiple lenders concurrently, the money system becomes unstable in the same way that I describe in detail in my comments on Steve Keen’s presentation. https://conference2019.positivapengar.se/steve-keen/.
It doesn’t matter what the ‘scarcity model’ money starts out as. Lent ONCE, it becomes money as debt. Lent multiple times concurrently, as banking is designed to do, it is the cause of system instability and mathematically inevitable defaults, which is an injustice to those who lose their homes and businesses. That includes the banks that fail as well. It’s the design of the system, the sole reliance on the scarcity model of money, combined with savings and re-lending that creates the inescapable arithmetic problems.
3. Being inelastic, the supply of gold coins cannot expand as bank credit does to prevent defaults due to impossible principal debt. In proposals for a return to a sovereign fiat money monopoly that I am familiar with, the supply of fiat money required by the economy is assumed to be determined by GDP, not impossible principal debt, which isn’t recognized.
It is the elasticity of bank credit that allows the can to be kicked down the road as long as the total principal debt to banks keeps increasing. The result to be expected of an inelastic supply would be much higher interest rates as distressed borrowers get extorted by those who own the limited supply of gold, and a much higher ongoing rate of default and/or much more frequent small crashes as more and more impossible principal debt is created by savings and re-lending. The end result would be to accelerate the transfer of real wealth to the gold owners, the already wealthy.
If the money supply were a sovereign fiat monopoly, as many propose, the need to forever expand the money supply to prevent defaults due to impossible principal debt would continue regardless of GDP. This course leads to perpetual devaluation of the real purchasing power of money holders, in other words “savers”. Failure to so would result in mathematically inevitable defaults of “borrowers”. It is all in how the system is designed.
Change the Design
According to my analysis, the true ‘safe haven” for savings are Producer Credits, collateralized short-term claims on current production, redeemable only in the goods and services of the issuer and thus REMOVED from the problematic mathematics of payback in ‘scarcity model’ money.
I repeat the word “collateralized”. Producer Credits are contracts – the holder has pre-ownership of the Producer’s production and, in the event of default, a claim on the equity of the Producer. The Producer is thus borrowing directly from their own customers to fund production.
I also repeat that this credit is “short-term” as in a year’s duration or less. Unlike bank credit, money isn’t created by vulnerable individuals facing a 30-year payback period during which anything could happen. Producer Credit is the promise of a Producer, most often a large and enduring corporation. The Producer is affirming that it intends to stay in business in the immediate future by delivering the goods and services it promises in the immediate future. Producers are the most VALID source of credit in a society. Demand creates credit creates money.
When Producer Credits are bought as savings with conventional money, the conventional money is spent back into active circulation, solving the mathematical design problem with savings in the current system. Producer Credits are themselves an alternate form of money that may be traded or spent.
With todays’ technology, a Producer Credit system could be scalable from an individual producer like a local farmer to a behemoth like Amazon. Commercial circulations could be local or global, all created voluntarily in the same manner as social media networks. With a convenient and trustworthy global exchange network in place, a credit for a local business with assured demand and proof of performance could be reliable money anywhere in the world.
All customer reward points, like Air Miles and Canadian Tire Money, are “Producer Credits”, already legal and well understood by consumers. What is required is to expand the use of Producer Credits and integrate the Producer Credit system into conventional banking as the appropriate vehicle for savings initially, and ultimately, as a complementary medium of exchange with its own very different rules. This page describing how mortgages would work in a Producer Credit system is the best illustration of how different this would be: http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution7mortgages.htm
In the Producer Credit “alternate universe” I describe in great detail at my website moneyasdebt.net, the need for credit rating agencies is eliminated. Only 2 simple common sense regulations are required to ensure honest behaviour by all parties. Honest broker is the role I propose that banks take on. http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution8.htm
I am not alone in making this recommendation. A 2011 report published by the City of London proposed that credits payable only in the goods and services of the issuer be the new future of money and that such a system be integrated within the regulated banking system. The authors estimate that 20% of world trade in real goods and services is currently being done with mutual credit systems.
The following is the 2011 report mentioned above:
Capacity Trade and Credit: Emerging Architectures for Commerce and Money
“Reciprocal trade is made possible on a multilateral basis by allowing counterparties to defer ‘payment’ for goods and services through a mutual credit system – i.e. a form of money – that is redeemable only in other goods and services and not in sovereign currency. Such money might be referred to as ‘common tender’ – a means of exchange that is widely accepted without legal coercion. Mutual credit brings participants back to the multilateral network to redeem their common tender since it is typically not redeemable for cash.”
“Multilateral reciprocal trade using common tender is not new, but information technology is transforming its ease, familiarity and potential to develop at scale.”
“Capacity exchanges which create alternative credit and reduce reliance on conventional credit could be very attractive in today’s business environment, and countercyclical to sovereign currency credit cycles.”
“Some interesting propositions for multilateral reciprocal trade using newer forms of common tender have also been more widely publicized.”
Mine was been published in 2011 as a 2 1/2 hour animated movie
The link below is to my 6-minute animation explaining why Producer Credits are the next conceptual step beyond mutual credit and necessary to ensure full-circle reciprocity across the entire system.
Credits – 3 Kinds (6:01)
Bank credit, mutual credit and producer credit are distinctly different. This short cartoon explains.
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