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What crisis?

4 de junio de 2012

Seville, June 4, 2012.

About the nonexistent crisis: towards a simple and robust solution.

Mass media are talking all day long about the crisis, so there is no space left in our brain for optimism  only for perpetual fear. In fact this has been the classic weapon for people’s domination for centuries. For instance, the Church understood this tool well when they warned us about Hell. The only difference we may notice at this moment is that pulpits have been replaced by mass media, but the outcome is fairly identical.

So what’s going on? Why do we have to beg China, India or Brasil for euros, when it is a fact that  Europe alone has the ability and the right to “make” euros? How is it even possible that 500 billion euros are lent to banks in just one day, while just 10 billion euros mean a complete collapse of the Spanish medical and education system? As a senior electrical engineer, experience often tells you that most of the time intuition is far more useful than just mathematical calculations. In this case I perceive many issues that simply do not match each other and sound like a perfect swindle.

In this sense, several months ago I studied the intrinsic nature of money and the classic conflict between its usefulness as mean of change and as wealth storage. Just considering our economy as a simple control volume, my perception is that huge amounts of money are created, but this capital does not circulate as in fact blood does in a living body. Instead it is stored or taken out from the system, making more and more difficult the simple exchange of good and services. Moreover since there is not a proper tax system for large corporations and speculators, none of that money is able to return to the State and be distributed by public expenditure. Just making a comparison to a hydraulic system, it could be a big tank with multiple holes in the bottom: the more the water level rises, the greater flow through the holes. Today’s liberal economists would say that water level should be reduced. Instead I would prefer to block the holes. This is exactly what I would like to describe in this document.

On the other hand, when I listen to experts saying that Spanish banks have to give back let’s say a quantity “X” to foreign banks, because this is simply the owed debt to be returned, I wonder whether that lent wealth is real or not. Because due to the multiplying effect of the fractional reserve in banks, it is fairly feasible and probable that this debt is at least 5 to10 times larger than the money that a good German citizen saved in a German bank a few years ago. It is also incomprehensible that Germany indeed has a fairly damaged or even bankrupt banking system, but at the same time they do not have any problem to “fill the holes”.

Exactly one year ago I attended an electrical conference in Frankfurt (my real job). What captured my attention was not the immaculate and clean aspect of the streets. Not even the incredible number of conference hostesses without any visible sign of stress. What amazed me was that the European Central Bank was sitting just in front of a much taller skyscraper and that building hosted the central premises of the Commerzbank. That made me think about the views from Mr. Trichet’s office (ECB’s president by that time). In fact it could be true that the owner or president of the second largest German bank would see him from above everyday. I guess that was not an accidental symbol: it was a symbol of power by German bankers for sure.

Excuse me for the dissertation, but I think that symbols are very important and should not be neglected. Focusing in our topic again, what I will try to explain is that Germany makes “the” money. They simply control the inlet and outlet of the control volume by adjusting the manufacture of money. At the same time the successive Basel’s treatments put stricter capital requirements on banks and make them more dependant to external capital flows. On the other hand Germany drives firmly the money making and that is more or less enough to control other European States.

In this sense it is widely spread by some mass media that return to national currencies, such as the Spanish peseta, would ease the end of the crisis because output flows could be avoided, the amount of money could be increased and competitiveness could be improved by devaluation. However I find this solution too radical and ineffective. In the same way industrial facilities are not replaced entirely by new ones, but most of the times just expanded or upgraded, my proposal presents a coexistence of solutions.

Indeed the State should be able to make money in order to facilitate trading, but at the same time it should avoid its capture by banks, since they simply would store or move the money out of the control volume. Moreover it could not be just a new currency since the euro is the only legal tender in the eurozone. What I propose is far simpler: creation of public bonds at 0% rate interest and non-refundable before 5 or 10 years since their delivery. The most important, they should be accepted to pay indirect taxes. Then the State instead of just reducing wages to public workers or simply investment budgets, could decrease those amounts in euros but give the reduction in bonds. Since inflation would reduce the value in euros of such bonds and since they can be used to pay indirect taxes, they could be used as an equivalent currency but just as a mean of exchange, thus increasing commerce and demand. Strictly speaking it would not be a currency, but in fact a sort of money. But the most important fact is that those bonds would return to the State in the process of paying indirect taxes, so it is likely that no bonds should be paid by the end of their lives (5 to 10 years). Nevertheless this simple system should solve a simple problem: banks could use these bonds to increase their capital and request real euros to the ECB.

The most straightforward solution to this problem could be traceability of those bonds. Except for real notes, euros and any other currency lacks of this feature. Instead of using bonds simulating notes, a central IT system with unique identifications for all bonds could be created. Every single person or company would pay and accept specific bonds when buying or selling any good or service, returning part of those bonds to the State as indirect tax. Perhaps it looks like science fiction, but it could be as simple as using ID cards instead of credit cards in shops.

This system would show several benefits:

  • Money flow and hence commerce would be reestablished allowing the economy to grow again, both in euros as well as in bonds.

  • The State could optimize the amount of bonds in circulation. Moreover it would be a known and public amount, so citizens could always know where money is.

  • We would have avoided that banks stored or threw out money from the system.

  • It would further  complicate any form of tax evasion (if not make it impossible).

  • National commerce and manufacturing would be promoted.

  • Since just indirect taxes could be paid with these bonds, it would not be worthy their storage and thus demand would increase. Moreover, a reduced tax rate could be used for bonds increasing the likelihood to use them.

Nevertheless, the main problem of such beautiful, simple and robust system would be precisely today’s economic system: this is an incredible weapon against speculators, so they would fight to “win the war”. I do not have the solution to this matter: this is just a very good rifle, but it is nothing without valiant people and strategy.

Before the end, a few technical details: I propose that any bond would have an ID made of 128 bits (thus 340000000000000000000000000000000000000 single identifications) and a monetary value of 3 cents of euro (not divisible). Moreover those bonds could be named “duros”, which had been the name of “5 Spanish peseta” coins for decades.

José María Romero Gordon.
Electrical Engineer
romerogordon@gmail.com

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2 comentarios
  1. Jose, Thanks. A brilliant idea. I’ve shared the piece. It addresses a problem I’ve been dealing with in trade between asymmetrical markets (where one marketplace has a great advantage over the other). I think I see the duro as a sort of ballast for the ship of state. The idea of having something worth the same overtime allows the holder to decide to take more “on board” or “off load” as conditions dhange. Adjustments get made on current conditions rather than on speculation. I need to think about this much more. It’s a fascinating concept. Our NGO is concerned developing trade networks as a mechanism for re-balancing (adjusting) flows of goods and services between developed and developing markets. I need to think more about how 0% bonds would work across state borders. Any thoughts on that? Oh, and thank Ima Vp for posting on Living Bridges. This may be the best idea I’ve seen yet.

    Visit our website to get a better picture of what we are doing. The there now is a placeholder, but gives a sense of our approach. The new website is scheduled to be ready in a month or so.

    Thanks,

    David Lawrence Hawthorne
    Trade&Transport Research Institute

    • Dear David,

      Thank you very much for your positive comments. I read your website and found it very interesting. It seems that we begin to talk not only on monetary revenues but real benefits for Society.

      However, could you explain me a little deeper your ideas? What I tried to express is that we should trade services and goods, not money, as well as money should not be controlled by banks but States. Maybe some kind of modification is more useful for your goals.

      We keep in touch.

      Regards.

      /Jose.

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