Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

A Tract on Monetary Reform: The Credit Free Economy


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.


- Do you feel that your ideology pushed you to make decisions that you wish you had not made?

- Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to -- to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact.

- You found a flaw in the reality...(!!!???)

- Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

- In other words, you found that your view of the world, your ideology, was not right, it was not working?

- That is -- precisely. No, that's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

In Context.


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 enterprise deserves to receive credit and will be kept alive and which one will not and deserves to die.


This text is not meant to go into every detail of our system. Its purpose is to start a discussion and create some interest in an alternate system.


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.

In Context.


History:

Long-term yields were steadily going down since 1981 we concluded that should that trend continue we would reach what is known as a Keynes' Liquidity Trap, which is what we have now. Because of the Japanese crash of 1993 the Federal Reserve System has studied extensively the phenomenon and has not reached any satisfactory solution.

Long-Term Chart of Long-Term Yields

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 richer and the poorer. It is easy to understand:

The poorer 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 richer: 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.

Context.


Contrary to the prevalent ideologies income/wealth distribution does matter it is in fact the main driver of growth or lack of and there is a high monetary value of consumption and contrary to what think the supply side economists, in a liquidity trap supply doesn't create demand.

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 reProbably 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.

In Context.


At some point the whole economy will crumble. This would have already taken place if the governments didn't do whatever they could to keep alive the capital market and the strongest corporations. But whatever is done it will not prevent that at sometime in the future even those will go down the drain.

Causes:


That formidable increase in income/wealth disparity is mainly due to the very existence of credit. That is due to the fact that credit discriminate for the rich against the poor.The very poor doesn't get any credit, the poor get some with a very high interest rate while the rich get a massive amount at a very low interest rate. (the bank get it at almost 0% interest now.)While the poorer use that credit to consume, which just postpone and increase their problem, the richer use that credit to buy productive assets and increase their wealth.

Solution:

We must get rid of credit and increase consumption, that is put money in the poor'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 stay 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 but owned by the monetary institute. Of course these mangers would be remunerated as a function of the way they help reach the goals of society at large: maximization of transactions, full employment and fulfiling the basic needs of all.


The purpose being to adjust the direction to which the invisble hand leads us. Instead of leading us to the Liquidity Trap it will lead us to a maximisation of transactions and employement:


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.

In Context

It is extremly naive to assume that the sum total of the activities of individual whose purpose is to maximise their revenues would be directed to best of society. Not only that but this system pretends to itself that the outcome will be optimal.

I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.

It is hence the duty of society to make sure that by pursueing his best interest each of the economic agents help the society to reach its goals: income distribution in order to maximize demand and transactions, reach a zero involuntary unemployment rate, and insure that all of its members can at least survive. It is not its purpose to do what ever it can to increas the powers of its most lucky or gifted members. The survival of the fittest is the rule among the animal specie but as far as I know the human race is not another animal specie.

The idea that this economy is natural is beyond my comprehension. As far as I know no animal use an economy. The economy is a human concept and as any human activity it can, and now must be improved.

Our purpose is hence to direct that invisible hand toward the goals of society at large.

It is not our purpose to eliminate 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 to become cut throat 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.

In Context.


Description:

We will not socialize the means of production but parallel to private enterprise there would be a system of socialized production. They 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 aggregate demand (consumption) and investment.

Implementation:

In order to distribute our currency to the people 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 potential participants will be reached 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 will be implemented.

Registration is anonymous and will prevent any use for discrimination, which would diminish the amount of potentiel 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 destitutes, the poor, the jobless and theose 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.

Minimum Wage:

It is the duty of society to protect its members it is hence its duty to provide a minimum revenue to its members. This way no business will have the obligation to pay that minimum wage and salaries will be the product of market forces with the result of vastly diminishing unemployment.

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.

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 will 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 will 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.
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.

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 will preserve 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. However statist and conservative will strongly disapprove. but given the necessity they will adapt.

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 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 establish order in the functionning of the society.

On the long run it is expected that it will provide a better, more cooperative, prosperous and peaceful 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.


We see several reason for adopting that system.

What are these?

First we have no other choices.

What are the others?

They are irrelevant given the first one.


Revolution or Evolution:

The implementation of that system will be progressive and non violent. It 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. That increment will profit primarily to its participants and will trickle down to the credit based economy.

Facebook Event: The Market Crash: Be Prepared.

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 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)


Disclosure: No Positions