Category Archives: monetary theory

Eurocat: Interest-free money to finance Catalan small businesses

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This event took place on 04th April 2014 at PIMEC, Barcelona with the aim to present Euro-cat, a new complementary currency which will start working in June all over Catalonia (Spain).

The first speaker who appears after welcome greetings was Ernest Maragall, Vice president of the Fundació Catalunya Europa, who gave the presentation titled “Money and bank: cause or effect of the crisis?”. He started by mentioning that the productivity growth in the US in the last 20 years doesn’t correspond to the median family income, showing that employees in Spain are less paid than European average in terms of the compensation and in the US the percentage of top 10%’s income has increase from 35% to 50% between 1982 to 2007.  He argued that the concentration of the wealth created the bubble and therefore the crisis, criticising the cowardness, spider web effect and the lack of regulation.  He also presented that Germany improved its commercial balance while Spain worsened it after euro was introduced and finished by underlying the importance of regulations and institutions.

The second speaker was Marcel Coderch i Collell, former vice president of the CMT and an Eurocat promoter, who told about “What is money? Where does it come from?”. He started by quoting the phrase of Mayer Amschel Rothschild, founder of the Rotschild family: “Let me issue and control a nation’s money and I care not who writes the laws” and that of Henry Ford: “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning,” implying the currenet system’s unfairness. His presentation was based on the two books: “Where does money come from?” and “Modern Money Theory,” said that the Bank of England has just published two reports, i.e.: “Money in the modern economy: an introduction” and “Money creation in the modern economy” in which it admitted that most money is created as debt, accentuating also the fact that the commercial banks decide which projects will be financed and criticising the current trend to insist on slashing government debts.

Then followed Jordi Griera Roig, co-founder of the Instituto de la Moneda Social (Social Currency Institute) and president of the Fundación INEVAL, which showed the words of Joan Casals (1925-1998), co-founder of PIMEC and former president of Ecoval, as he foresaw that the fiscal separation between the North and South of Europe would churn out unbearable tensions into the Euro due to the diference in productivity, just as what has happened.  He also told that neither the European Central Bank nor the Bank of England has the goal to make monetary policies serve to reduce unemployment while the Federal Reserve in the US does have it as main goal and therefore US has decreased the unemployment while Europe has increased it.

After the pause came Bernard Lietaer, global expert on social and complementary currencies based in Brussels (Belgium), who gave his lecture titled “Economic Crisis and Regional Initiatives”. He started by summarising the contents of his book “The Future of Money” and addressed the current four challenges of “Aging wave“, “IT revolution“, “Climate change and destruction of biodiversity” and “monetary unstability.” He highlighted the importance to balance between the efficiency and resilience (diversity) in the ecosystem, applying this idea also to the monetary system, proving that the financial system is structurally unstable with the excessive number of crises which have taken place in the last few decades in the world.  He presented the case of WIRBank (the Switzerland) which works to balance small businesses (trades in WIR increase when the Swiss Franc economy stagnates and vice versa) and finished by comparing the patriarchal societies of competitive economy with the single currency with matrifocal socieities of cooperative economy with parallel currencies.

And finally, the new Catalan currency Euro-Cat was presented by Susana Martín Belmonte, author of the book “Nada está perdido(Nothing is lost)” and an Euro-cat promoter, and Fèlix Simon Paraiso, president of the Plataforma Vegueria Penedès and an Euro-cat promoter. Each business which enters the system will have a credit line and the balance increases and decreases as it sells and buys.  Individuals are also welcome to join the system and will change euro into Euro-cat to spend it at local businesses.  The fundamental difference between loans in euro and credit lines in Euro-cat is that the former ones need to be repaid in euro while the credit line can be settled by offering equivalent goods and/or services.  Although Euro-cat will work all over Catalonia, eight territorial networks will be set up to strengthen regional economic activities.  Founding members are accepted up to 04th May and then a work will be done to reach the consensus on the definition among these participants about different aspects before the official launching, plannedfor June.

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Open Money Manifesto

There are some concepts on which our societies are based today, such as democracy, human rights and freedom. Suppressors of these values run the risk of being condemned by the international community while NGOs and other advocates are likely to receive supports all over the world.

The Open Money Manifesto is a good application of what the modern world has achieved so far onto the economic realm. It begins with some quotations from The Universal Declaration of Human Rights, adopted in 1948 at United Nations, raising questions about the authenticity of our current monetary system.

  • Not democratically managed: money is a tool everybody needs, but currently it’s managed by private banks as they decide who can make loans = start projects.
  • Costly: lenders of money are obliged to pay the compound interest on top of the principal while profits go into only pockets of a few hands.
  • Hoardable: bearers of money can withdraw their money as long as they like, stagnating its circulation and bothering those who are really in need for it.
  • Unfair: the very existence of compound interest increases wealthy people’s asset at the sacrifice of the vast majority of the poor(see Kennedy for details)
  • Unsustainable: our current monetary system is destined to go bankrupt sooner or later because it requires an exponential growth forever(see ibid.).

In short, our monetary system is undemocratic and does not take human rights or freedom into account.

It is important for us to remember that the monetary system is not a natural law but a convention which was and still can be arranged for human needs. Therefore we should revise it if we want out means of exchange to serve for our values…

What’s demurrage, alias negative interest?

It’s now a clear-cut fact that today’s positive-interest-based monetary system is a huge hurdle against our sustainable lifestyle as well as our economic activities. Silvio Gesell(1862-1930), a German-Argentinean merchant and economist, is a remarkable figure who suggested how to reform this paradigm on his masterpiece “The Natural Economic Order.

He starts his argument with the fact that money is at a privileged position in comparison with other goods. In general commodities are depreciated as the time passes by and you can’t sell yesterday’s newspaper or one-year-old apples while you can hoard your money as long as you like without suffering from any loss at all(in case of no inflation: note that Germany adopted the gold standard when he wrote that book), which allows bearers of notes to charge the compound interest on lending them to somebody in need. The more money you have the more profit you can earn by this financing, enabling the superrich to live solely on such income while most of the poor are asked to contribute to them.

So what was Gesell’s idea?: “To abolish the privilege of money.” People prefer money to goods on storing economic value because money remains the same, so he came up with charging bearers of paper notes a certain amount of “demurrage fee” regularly to prevent them from hoarding(for instance, to put the stamp of one-hundredth of the face value each month: to be depicted more next time).

This will give a fundamental shift to the financial system as it’s quite helpful for borrowers: lenders see their act as a means rather to get rid of suffering from the monetary loss triggered by the demurrage fee than to increase their asset and even negative-interest loans will be possible when the demurrage fee is high enough: In case the fee is 1% per month = roughly 11.4% per year, it’s better to lend US$1000 to receive only US$950 next year than hoarding it at home and losing more than US$100. The negative interest rate will give more chances to those businesses which haven’t been financed so far due to their low profitability, more people will have access to credits = more freedom to run the business they want and consequently our economy will be more democratically managed.

Although Gesell died in 1930 without witnessing any case at all where his theory is applied, the subsequent history proves that he was right. Next time I’ll deal with a historical success.

Interest rate and long-term projects

The current compound interest is liable not only for what I depicted in the last article but also for pouring money arbitrarily into short-term projects while those with a longer time span find it quite difficult to be sufficiently financed. Stefan Brunnhuber, another German who has been tacking this issue, gives a clear picture on all about it on his book “Wie wir wirtschaften werden”(to be published in English as “Our Future Economy”).

Let’s say that you have two projects to choose from: which project would you invest to?

a) a €10 pine tree which will grow to €100 in 10 years

b) a €10 oak tree which will grow to €1000 in 100 years

The interest rate plays an essential role on your choice although most of you aren’t aware of it: the positive interest rate is synonym of the depreciation of future assets because what will be bigger in the future is smaller in the past. Provided that the interest rate is fixed at 5% per year your € 1000 in 2006 is equivalent to €1628.89(1000×1.05^10) in 2016, but this means that your € 1000 in 2016 is reduced to only €613.91(1000/1.05^10) in 2006. From this viewpoint the pine tree is worth now € 61.39 while the oak tree is only worth € 7.60(1000/1.05^100) and everybody is therefore inclined to plant a pine tree while nobody is interested in oak.

This explains why entrepreneurs rush into China to set up new factories because profits are expected to be brought soon. Long-term projects such as reforestation and education are unlikely to call the attention of the business world because they aren’t profitable in this framework.

But this paradigm will see a fundamental shift as the interest rate changes: future assets can be appreciated instead of being depreciated in case there should be a negative interest rate. The pine tree will be worth €162.89 instead of € 61.39 and the oak tree €131,501.26 instead of € 7.60 with 5% of negative interest rate. This will favor long-term projects or those which will churn out profit constantly, enabling more projects to be financed.

But how can we make a negative interest rate possible? Next time I’d like to deal with this issue.

Is our monetary system sustainable?

Nowadays more and more people are concerned about the sustainability issue but it’s quite odd to find that very few attempts have been ever made to apply this concept for the monetary realm. Everybody is quite aware of how devastating the monetary crisis is for any national economy as we’ve witnessed several cases all over the world(Asia in 1997, Russia in 1998, Argentina in 2002…), but it’s quite hard for me to imagine financial analysts debating over how to build up a sustainable monetary system.

Margrit Kennedy, a German architect, is one of few persons in the world who have ever tried to give an answer to this question. She found out that the current monetary system is unfavorable for eco-friendly buildings she was making and she began studying the monetary aspect of our economic system to conclude that it has several structural faults. Here are her key findings from her masterpiece “Inflation and Interest-free Money.

1. Exponential growth

The current monetary system, equipped with the compound interest, obliges our economy to grow forever and even more than before. This phenomenon is uncommon in the natural world, however, for instance human beings stop their physical growth when they become adults, and the economic exponential curve is destined to eat up all the natural and/or human resources before going bankrupt just like the cancer accelerates its growth to end up with killing the whole body.

2.Interest repayment is a big burden for any project

We pay interest not only when we repay our debt but also when we pay for any goods and/or service. Part of your bus fare is spent to repay the bus company’s debt with interest, and Kennedy estimates that the percentage of interest on what we pay amount to about one fourth on average. It’s quite important to notice that this interest makes some eco-friendly projects “unprofitable.”

3.Unfair redistribution of wealth by way of interest

But the most important point of the interest in relation to the economic democratization is that this transfers the wealth from the poor to the rich: Obviously those without money need to borrow it when they need to buy something big(like house or car) and they have to repay the interest in addition to the principal while wealthy ones can make use of this circumstance to enrich themselves even more. Kennedy shows that more than 80% of the population loses money with this system while only a fistful of superrich can earn from this system, raising a question whether a monetary system with such a feature is allowed from the viewpoint of social justice.