Our economy is slowly dying. No one is proposing a solution because no one has the slightest idea of why it is happening. However an objective observation of the phenomenon can help us understand the phenomenon and provide us with an innovative solution. Of course we can't solve the problem with the tools that brought us there in the first place and we need a new ideology.
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A Tract on Monetary Reform
Our
economy is slowly dying, it is kept alive artificially. No one is
proposing a solution because no one
has the slightest idea of why it is happening and many have vested
interest in the present system. However
an objective observation of the phenomenon can help us understand it
and provide us with an innovative solution. Of course we
can't solve the problem with the tools that brought us there in the
first place and we need a new ideology.
That
artificial life means more and more government economic intervention,
and will mean a centralized socialist economy in which the Federal
Reserve System or some government body will decide what enterprises
deserve to receive credit and will be kept alive and which ones will
not and
deserve to die.
The
composition of this book has
been for the author a long struggle of escape, and so must the reading
of it be for most readers if the author's assault upon them is to be
successful,-- a struggle of escape from habitual modes of thought and
expression. The ideas which are here expressed so laboriously are
extremely simple and should be obvious. The difficulty lies, not in the
new ideas, but in escaping from the old ones, which ramify, for those
brought up as most of us have been, into every corner of our minds.
History:
Long-term
yields were steadily going
down since 1981 when we concluded that should that trend continue, we
would reach what is known as a Liquidity Trap, which is what we have now. The Federal Reserve has
studied the Japanese crash of 1993 extensively but has
not reached any satisfactory solution.
That
fall in long-term interest rates
(Later coined the Greenspan Conundrum or Bernanke saving glut) is in
fact due to a vast increase in the income/wealth gap between the rich
and the poor. It is easy to understand:
The poor have
a high marginal propensity
to consume, (almost equal to 1) as any incremental dollar they earn
they use to buy food, shelters, thing they need for their day to day
life.
The rich have
a high marginal propensity
to save (almost equal to 1) as any incremental dollar
they earn they save as they already earn more than enough to cover
their expensive lifestyle.
As
the income gap increases relatively more and more money is devoted to
investment and less and less money is devoted to consumption. That
consumption contributing to the profits and hence to the return on
investments it is easy to understand why these rates would go down.
The income gap between the rich and
the rest of the US population has
become so wide, and is growing so fast, that it might eventually
threaten the stability of democratic capitalism itself.
- The Christian Science Monitor
Contrary
to the prevalent ideology, income/wealth distribution does matter, and
there is a high monetary value of
consumption.
Consequence:
As
that income gap becomes so wide that it becomes unsustainable, the
marginal return on investment comes down to a level that does not cover
the interest rate risk for the weakest of the businesses and more and
more businesses must close and go bankrupt. This increases
the income gap. The number of businesses that can be financed is now
below what existed before the crisis and will continue to go down at a
even faster rate:
Can the right monetary and fiscal
policy keep the US out of a recession?
Probably not. Global forces can now
override most anything that monetary and fiscal policy can do.
Long-term real interest rates have significantly more impact on the core
of economic activity than the individual actions of nations. Central
banks have increasingly lost their capacity to influence the longer end
of the market. Two to three decades, ago central banks were dominant
throughout the maturity schedule. Thus, the more important question is
the direction of long-term real interest rates.
- Alan Greenspan
At
some point the whole economy will crumble. This would have already
taken place if the governments hadn't done whatever they could to keep
alive the strongest corporations. But whatever is done will not
prevent this sometime in the future.
Causes:
That
increase in income/wealth disparity is due to the very existence
of credit. That is due to the fact that credit discriminates for the rich and against the poor.
The
very poor don't get any credit, or the poor get some with a very
high interest rate while the rich get a massive amount at a very low
interest rate. (the banks get it at almost 0% interest now.)
While
the poor use that credit to consume and postpone and
increase their problems, the rich use that credit to buy productive
assets and increase their wealth.
Solution:
We
must get rid of credit and increase consumption, that is the money in
the poor person's pocket.
To
that purpose we must change the way money is emitted. Instead of
making cheap credit to the banks which make credit to their wealthiest
customers with the hope that it will trickle down, we must distribute
that money without interest rate; that is, give it) equally to the
people. This way we will restore demand and eliminate some of the
unfairness of the system.
At
the same time we must ensure that the supply stays sufficient and
create some money uniquely dedicated to investment: the same way we
will distribute money for consumption, we will emit money to people that
will be dedicated to investments. Those investments would be chosen
freely by the people. Of
course they would be remunerated as a function of the way they help
reach the goals of society at large: maximization of transactions, full
employment and fulfillment the basic needs of all.
The
purpose being to adjust the direction to which the invisible hand
leads us. Instead of leading us to the Liquidity Trap it will lead us
to a maximization of transactions and employment:
But the annual revenue of every
society is always precisely equal to the exchangeable value of the
whole annual produce of its industry, or rather is precisely the same
thing with that exchangeable value. As every individual, therefore,
endeavours as much as he can both to employ his capital in the support
of domestic industry, and so to direct that industry that its produce
may be of the greatest value; every individual necessarily labours to
render the annual revenue of the society as great as he can. He
generally, indeed, neither intends to promote the public interest, nor
knows how much he is promoting it. By preferring the support of
domestic to that of foreign industry, he intends only his own security;
and by directing that industry in such a manner as its produce may be
of the greatest value, he intends only his own gain, and he is in this,
as in many other cases,
led by an invisible hand to promote an end which was no part of his
intention. Nor is it always the worse for the society that it was no
part of it. By pursuing his own interest he frequently promotes that of
the society more effectually than when he really intends to promote it.
I have never known much good done by those who affected to trade for
the public good. It is an affectation, indeed, not very common among
merchants, and very few words need be employed in dissuading them from
it.
- Adam Smith, "Wealth of Nations"
Private
Enterprise:
Our system
would
even profit them by providing them demand without which they would have
to be liquidated or be nationalized.
Competition:
By diminishing
the power of vested interests if not eliminating them altogether we
will increase the competition while preventing it from becoming
cutthroat and hence create the conditions of a really free and
cooperative market:
People
of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices. It is impossible indeed
to prevent such meetings, by any law which either could be executed, or
would be consistent with liberty and justice. But though the law cannot
hinder people of the same trade from sometimes assembling together, it
ought to do nothing to facilitate such assemblies; much less to render
them necessary.
- Adam Smith, "Wealth of Nations"
Description:
That does not
mean that we would socialize the means of production but parallel to
private enterprise there would be a system of socialized production
which would compete with one another.
At the same
time
it is not our purpose to eliminate the use of credit based currencies
but to establish another system parallel to the existing one.
This way our
system would not destroy the prevalent economy but increase both
consumption and investment.
Implementation:
In order to
distribute our currency we will need to make it electronic. Our
monetary institute will be a database to which could connect any type
of electronic means of payment: cellular phones, internet, dedicated
means of
payment...
In order to be
effective such a system would need a sufficient number of participants.
To that order we implement a system
of registration of serial numbers
of €55 (five euro) notes: that right to participate
constitutes what is
called
in games theory a cheap talk. We will start to implement our system
when the number of participants will be reaches a critical number,
sufficient to render the
system effective.
Registering
does
not constitutes an obligation to participate but a right to do so at
anytime in the future when the system be implemented.
Registration is
anonymous and will prevent any use for discrimination, which would
diminish the amount of potential transactions and hence diminish the
efficiency of the system.
This right is so cheap it would be in the interest of anyone to
register, However we expect that first the destitute, the poor, the
jobless and those overburdened with debt will first register. That
alone can be sufficient to reach our critical number.
Once launched
that economy will not be able to accept any more participants.
Debt:
Assets under the custody of our system will not be accessible in order
to recover debt passed, present or future.
We won't enforce any credit contract with interest. If however we
discovered that it was made in disguise we would exclude both the
lender and the borrower.
Foreign Exchange:
As any transaction between our currency and any credit based currency
can be used to introduce credit in our system any transaction between
our currency and a credit based currency will be considered as giving
or receiving credit, which is in contradiction with our membership
agreement.
Finance:
Once we get a
sufficient numbers of potential participants and given the dangers
faced by private enterprise (survival, violence...) it is expected that
the owners of capital will eager to finance our infrastructure.
Adjustment:
This system
will
allow us to adjust precisely both demand and supply, the purpose of
economic policy. Instead of monetary policy whose purpose is to
increase investments we would increase the amount of money distributed
for that purpose, which will have a more direct and precise impact.
Instead of fiscal policy whose purpose is to increase consumption we
would increase the amount of money distributed for that purpose, which
will have a more direct and precise impact.
It comes from
this that the system will have both short-term and and long-term
stability it will also deliver a quick solution to our urgent problem:
But
this long
run
is a misleading guide to current affairs. In the long run we are all
dead. Economists set themselves too easy, too useless a task if in
tempestuous seasons they can only tell us that when the storm is past
the ocean is flat again.
In Context.
Inflation:
Although
keeping
a constant level of price will not be the main goal of our emission
institute, that being the maximization of the volume of transaction, it
is expected that our capacity to balance supply and demand will allow
us to provide the desirable level of inflation.
Taxes:
Most of our
taxes
are meant to correct the dysfunctions of this economy. The amount of
taxes and hence the size of government will be greatly diminished.
Because the income gap will be greatly diminished there wouldn't be a
necessity for progressive income tax and we could replace these taxes
by emitting money to the governments. By eliminating taxes we will
eliminate a large chunk of bureaucracy.
I come
next to a criterion of Agenda which is particularly relevant to
what it is urgent and desirable to do in the near future. We must aim
at separating those services which are technically social from those
which are technically individual. The most important Agenda of the
State relate not to those activities which private individuals are
already fulfilling, but to those functions which fall outside the
sphere of the individual, to those decisions which are made by no one
if the State does not make them. The important thing for government is
not to do things which individuals are doing already, and to do them a
little better or a little worse; but to do those things which at
present are not done at all.
In Context.
Conclusion:
Freedom:
Because
participation in our system is free and even does not preclude
participation in the credit based economy it will not impose the rule
of the majority therefore preserving freedom to its highest extend.
There can be no
freedom for people whose only purpose in life is survival. By making
maximisation of revenues less of a life and death preoccupation there
will be more freedom to chose what do do with our lives and increase
our education, which lately has become inequal and production oriented
destroying slowly what constitute a civilization.
Credit score
is an excuse to collect a vast amount of private data that endangers
our individual freedom.
Freedom is
better
exercized when the people, and not an exclusive cast, gets the freedom
to
chose what is produced and how.
Security:
The pervasive
increase in theft and violent crimes, including "terrorism", finds its
roots in the fight for survival which makes us behaving like animals.
Psychology:
By increasing
the
leverage of the workers we will unleash their creativity and productive
capacity by increasing their importance and decreasing the contempt for
them in the society.
Politics:
That system
being
fairer it will satisfy the most radicals among the liberals and by
preserving freedom and diminishing the role of government it will
satisfy the most radicals of the libertarians.
Political,
Social, and Military Consequences:
Providing that
alternate economy is specially important and urgent as we all know what
are the consequences of a systemic faliure of the economy: xenophobia,
racism, antisemitism, anti islamism, all sorts of discriminations,
social and political disruptions,
military
adventurism as we have already experienced as a consequence of Black
Thursday and the Great Depression that followed, which caused the start
of the raise to power of Hitler and Nazism.
It is therefore
of the uttermost importance that we implement an alternative to the
Deep Depression.
The
Future:
Our economy
being
based on a free market, although it is mathematically sound and
plausible no one can precisely foresee what it will look like . However
it is expected that it will restore fast the level of economic
transaction that was necessary to support the economy and estbalish
order in the functionning of the society.
On the long run
it is expected that it will provide a better more cooperative and
prosperous society.
Its success
depends on the psychological adaptation of people which is now
impossible to foresee.
Probability:
Its success
will
depend mostly on our animal spirit:
Even
apart from
the instability due to speculation, there is the instability due to the
characteristic of human nature that a large proportion of our positive
activities depend on spontaneous optimism rather than on a mathematical
expectation, whether moral or hedonistic or economic. Most, probably,
of our decisions to do something positive, the full consequences of
which will be drawn out over many days to come, can only be taken as a
result of animal spirits -- of a spontaneous urge to action rather than
inaction, and not as the outcome of a weighted average of quantitative
benefits multiplied by quantitative probabilities. Enterprise only
pretends to itself to be mainly actuated by the statements in its own
prospectus, however candid and sincere. Only a little more than an
expedition to the South Pole, is it based on an exact calculation of
benefits to come. Thus if the animal spirits are dimmed and the
spontaneous optimism falters, leaving us to depend on nothing but a
mathematical expectation, enterprise will fade and die;-- though fears
of loss may have a basis no more reasonable than hopes of profit had
before.
In
Context.
Men
and nations
behave wisely once they have exhausted all other alternatives.
We
see several
reason for adopting that system.
What
are these?
First
we have no
other choices.
What
are the
others?
These
are
irrelevant given the first one.
Revolution
or
Evolution:
Being progressive
and non violent that system is a necessary evolution if we want to
prevent the extinction of the homo economicus. It is not
meant to replace the present system but to provide a large increment of
investment and consumption.
Our
Registration System is available at: http://post-crash.com
Discussion:
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Event: The
Market Crash: Be Prepared.
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Page: The Post Crash Economy.
Is
the
fulfilment of these ideas a
visionary hope?
Have they insufficient roots in the motives which govern the evolution
of political society? Are the interests which they will thwart stronger
and more obvious than those which they will serve?
I do
not attempt an answer in this place. It would
need a volume of a different character from this one to indicate even
in outline the practical measures in which they might be gradually
clothed. But if the ideas are correct -- an hypothesis on which the
author himself must necessarily base what he writes -- it would be a
mistake, I predict, to dispute their potency over a period of time.
At the
present moment people are unusually expectant of a more
fundamental diagnosis; more particularly ready to receive it; eager to
try it out, if it should be even plausible. But apart from this
contemporary mood, the ideas of economists and political philosophers,
both when they are right and when they are wrong, are more powerful
than is commonly understood. Indeed the world is ruled by little else.
Practical
men, who believe themselves to be quite exempt from any
intellectual influences, are usually the slaves of some defunct
economist. Madmen in authority, who hear voices in the air, are
distilling their frenzy from some academic scribbler of a few years
back.
I am
sure that the power of vested interests is vastly exaggerated
compared with the gradual encroachment of ideas. Not, indeed,
immediately, but after a certain interval; for in the field of economic
and political philosophy there are not many who are influenced by new
theories after they are twenty-five or thirty years of age, so that the
ideas which civil servants and politicians and even agitators apply to
current events are not likely to be the newest. But, soon or late, it
is ideas, not vested interests, which are dangerous for good or evil.
In
Context.
Money
is too Dear (by Téléphone):
Take a child
make him a king
Cover him with gold and diamonds
Hide away while you wait
You won't wait too long
The vultures turn around the child
Dough has sharp teeth
And the hyenas will devour him
The kid will become a banker
Or the kid will be washed up
I say, money (also silver), too dear,
too big
Life doesn't have a price
have a price (x2)
Take your best friend,
Make him a foe
I buy you and I sell you
Wallowing in the coma
of common mortals
Buddy, you're like a rat,
you are common it's deadly.
The vultures turn around always
Shout No to slavery
And buy them
new cages
Install beaches
Where start the wrath,
the wrath
I say, money, too dear,
too big
Life doesn't not have a price
have a price (x2)
One account blocked,
The other overdraft.
Now, bank!
The vultures turn around us now.
You have some, you don't have any
You don't have really a choice
A brick wall in front of you
It is time,
spend yourself,
spend yourself
I say, money (also silver), too dear,
too big
Life doesn't have a price
have a price (x2)
Authors Website: blog.cantona.me
Authors Bio:
I have an engineer diploma from Ecole Centrale de Lyon (France) and a MBA from Boston University. Since 1986 till 1994 I have worked as a broker dealer on the French Domestic Fixed interest market.
Since the spring of 1994 I have worked on the fact that the secular downward trend in long-term yield would, at some point, bring a market crash.
I have resolved the famous Greenspan Conundrum as I discovered that long-term yields decrease with the increase of income/wealth gap. Hence income distribution is an important factor of macro economic development.
I have developed a model of the yield curve that describe long-term yields as options on shorter term yields.
My conclusion was that when a "inverted' yield curve, as it would necessary be, would return to its fair value it will trigger a market crash which under the circumstances of a 0% short-term interest would be of major consequences.