Before
relativity, time was considered to be a separate entity to space.
Relativity made clear that they belong to the same entity, and they
are related by energy. The same way, credit belongs to the essential
function of money as medium of exchange, and they are related by the
socially assigned reputation of the lender.
I
will make early my heretic statement: FRACTIONAL RESERVE BANKING,
AND THE CREATION OF MONEY OUT OF THE NOTHING IS THE MOST BRILLIANT
FINANCIAL INVENTION OF OUR ERA.
Sure,
combined with interest, it has evolved to the tumor of the debt
monster bubble of today. At speaking about debt, we tend to put it at
the negative corner. We are so terrified, that at speaking about
debt, we prefer to stay at the safe land where there is not actually
debt, because there is a collateral or a monetary asset, like in
mutual credit. But we should not kill the patient to heal the cancer.
Unless we are able to propose something more advanced than fractional
reserve banking, and not something more primitive, we will not
succeed.
What
is credit
One
of the essential functions of money is Medium of Exchange. It is more
related as a way of issuing it, compared to other means like
commodity, acknowledgment and fiat.
As
a medium of exchange, money is supposed to solve the “double
coincidence of wants” problem in a given market. Somebody
puts some tickets into circulation in that market, tickets accepted
by everybody as a measure of value, decoupling the problem of the
“double coincidence of wants” (of products to be exchanged) into
a simple coincidence of wants of a product against the number of
tickets representing a value.
Credit
is also supposed to solve the “double coincidence of wants”
problem in a given market, but in the time dimension. Somebody needs
some money now to buy something that he wants now, and no later, but
he will get the money only later when he makes another future
transaction, a transaction that cannot be done now (he wants to
attend and pay a course in spring. To earn his income, he runs an
hotel, but customers only will come later in summer).
Credit
is needed to be able to increase temporarily and locally the monetary
mass with money there where it is needed. The money will arrive later
(this is what solvency means) but the chain of transactions has not
brought it there jet. However, the money is needed now to generate a
new transaction demanded by the economy.
Money
solves the “double coincidence of wants” creating a chain of
transactions where the money flows. This circuit has a huge essential
synchronization problem we tend not to be aware of, now that
we are used to large commercial surfaces where we have products from
all over the world, all seasons and all obsolescences. It has been
the fractional reserve banking, by creating money out of the nothing,
to take care of the synchronization.
In
old times, the saturday market at the village square took care of
space and time coincidence. The “bakers money” was issued in the
morning and redeemed in the afternoon.
Without
the possibility of this type of credit the economy gets stuck. We all
know, without credit most SME's would not survive. SME's are
responsible for the largest part of the economy. By nature, SME's
arrive at cashflow problems. Every sale only randomly adjusts to the
planned cycle from offer to delivery to payment. For large
corporations with huge number operations this becomes a moderated
noise. SME's, with few sales in relation to total sales (like in the
Bangla-Pesa example), need to ride the random shaking of incomes and
payments in their balance sheet. The credit financial tool provides
this flexibility to smooth the peaks with credit, with out of the
nothing money.
Money
out of the nothing
Physics analogy comes for help again. Quantum
mechanics allows a particle to appear there where or when it is not
supposed to be, across an energy (time or space) barrier. So to say,
out of the nothing. The condition is that only for a very short
period until all conservation laws are fulfilled.
Credit is a kind of monetary tunnel effect. The
equivalent monetary mass conservation law is the famous equation of
exchange:
M x V = P x Q
It means that, in order to create credit money
out of the nothing, it has to be guaranteed that it is given back.
Each credit contributes to the average monetary mass at a pace where
other credits are returned, so that the level remains stable.
The solution proposed by the International
Movement for Monetary Reform,
with positivemoney.org
as the lead, of a 100% backed credit is not satisfactory for modern
economy.
You cannot state that 97% of the monetary mass is
banks issued debt money, and then minimize the amount of the need for
credit. Taking the example of Spain, the total debt is around 3
billion. Out of it, 1 billion may be mortgages. Mortgages, as Paul
Grignon explains (Mortgages in the Credit
Coin System, Paul Grignon, 2012)
can be solved by an exchange of commodity
currencies of long and short cycles (long lasting goods against
perishable goods). State budget, equivalent to the sovereign money
issuing, is around 0,5 billion. There is a remaining 1,5 billion need
in credit. Family savings are around 2 billion, but most of it is
investment and what remains available for liquid credit, as
positivemoney.org
proposes is hardly 0,5 billion.
Still,
we have an additional need of 1 billion, essential for the economy,
to be crated out of the nothing.
“In
the future, the increasingly significant role of peer-to-peer finance
in debt markets is likely to further reduce the importance of bank
lending to business”
We have to get rid of the “horror vacui” and
moral rejection of money created out of the nothing as credit.
An additional analysis to be maid is on what kind
of money credit out of the nothing can be made. Some short not
elaborated statements:
- Credit out of the nothing does not make sense on commodity money. Commodity money is already a self issued credit by the producers expressed through a Ricardian contract commitment. Only the producer has the power.
- Credit out of the nothing makes sense in fiat money, the one to manage the commons budget, and agreed socially. The monetary governance body can socially agree on a mechanism to authorize the credit. In a post-Transition scenario (Rob Hopkins, The Transition Handbook: From Oil Dependency to Local Resilience), at an economy where subsidiarity is a strong factor due to transport (energy cost and local generation), fiat money will be related to local, public services. In this scenario, the risk of the debt tumor explosion is mitigated.
- Interest can be left out. It plays no role any more, in the times where the limit of resources has been reached.
Solvency analysis is a human activity
The very good news is that the solvency analysis
of the borrower, to authorize a credit, is made by humans, cannot be
automated. The extremely good news is that the monopoly of the
solvency analysis can be taken from the banks, once we use the
block-chain to register the transactions in contract based
crypto-currencies (on ethereum financial infrastructure, doug
project, etc.), with no fixed monetary mass.
Every day, hundreds of thousands of local branch
bank agents, authorize, in the name of the bank, with hierarchically
established criteria and tools, and after analyzing the borrowers
solvency, a credit, not necessarily linked to a collateral, but to
the credibility and chances of a future income flow shown by the
user, which is what solvency means.
This is a human activity that cannot be
automated.
Far from a blind monstruous money machinery, our
monetary system consists in a layer of mechanic transactions, with a
myriad of spots of human interventions gearing the necessary tunnel
effect of issuing temporary money.
The sovereign fiat money governance can foresee a
vast variety of money lending
reputation assignment mechanisms
to nominate its own credit agents, thus giving ample opportunity to
make customized designs of local fiat. Banks have seniority grades.
LETS give a certain amount of credit to all members by default, a
short circuit to nominating agents. In SoNantes
(FR), credit lines can be authorized by the currency administrators.
The project Eurocat
(ES) nominates specialists after a selection process. Reputation
as moneylender
could be gained from the scratch by any
citizen, starting with a LET level capacity, by a good record of
successful credit authorizations.
Summary
The monetary system dominated by banks consists
of:
- Having a monopoly of keeping the transaction records
- Analyzing the solvency to issue money to give credits
- Profiting from interest
Once we have the transaction ledger in our hands
on the blockchain, the monetary reform creativity has to concentrate
in the gearing/governance of money issuing as credit.
Last remark
The sovereign money needed for the State Budget
could be created the same way, as a credit authorized by the people
to the State.
