Introduction
The global financial crisis gives the feeling to look onto the unbridled capitalism. It forces to spend time and to think more about the causal relationships of market failures. It leads inevitably to the global monetary system and let assume that this monetary system and therewith this kind of capitalism cannot be sustainable. The conclusion is that the world requires new and holistic ideas of improvement and changes. One utopian idea to improve and to change our monetary system is described in the essay
This monetary model is abbreviating named ANNA. It is
the consideration of monetary systems from a different point of view in
approach to the parable of the workers in the vineyard2). It is the
concept of a global system and therewith addressed to the world society as a
question of an ethical vision of economy. It is the vision that economy has to
act for the life as an absolute and unalterable value.
It is a challenge of the world society to enable an
agreement by settling a monetary system which will be a statement for life and
justice.
The first essay of ANNA explained the vision of
ethical and philosophical aspects, as also the principle functionality of the
monetary model. It is a rather general description and requires obviously more
detailed explanations. This second essay wants to look more in detail to the
functionality and application of ANNA.
The main property of ANNA is superneutrality which is
the agreement of a never changing value which represents the unit of the world
and the interdependence of economies.
The first chapter of this second essay describes
properties which are arising from the superneutrality. The second chapter deals
with the fact that such a system will only find limited acceptance. It
describes the introduction of an incomplete currency area and gives a short
preview of the effect of reconciliation.
We have to realize that the world economy is an
extremely large and complex system with countless transactions and a huge
number of participants. It is impossible to describe this system adequately and
makes it difficult to predict how a new way of thinking influences the system.
Therefore is this essay an invitation to take up the subject and to verify the
statements.
1) ANNA – properties of superneutrality
ANNA is a currency exchange rate regime
ANNA is a mathematical description of the relationship
between currencies. It is a simple ratio equation. The counter represents the
value. The divider represents the amount of all money of all currencies, named
as world money supply.
 |
Figure 1) mathematical description of the world monetary system by ANNA |
As this equation characterize a relationship and not
the currencies themselves, price formation is not effected and all exchange
rates are shown as possible. It can be assumed that the equation is applicable.
The idea of ANNA connects all currencies in one equation
together. This means that all exchange rates are determined mathematically and are
consistent to each other. In that way the introduction of a fixed exchange rate
regime will be allowed. By enshrining currencies to the never changing value of
ANNA and the usage of money supply and exchange rates as variables, the
exchange rate determination should be able to follow the market flexible and
always conclusive.
If the idea of the monetary system will find support, the implementation of it will move between 3 phases of development, introduction and consolidation
Phase of development:
It is a scan of the system for feasibility by
observing the foreign exchange markets, where the monetary system of ANNA is
not involved yet. At the same time it will be the preparation of the
infrastructure for the associated countries and the responsible institutes.
Responsiveness, flexibility and accuracy of exchange rates must be reviewed.
Rounding errors require perhaps thoughts about a change in the counter to get a
number ³ åx world money supply. Tthe introduction in the
associated countries must be well prepared, too.
Phase of introduction
It must be expected that only a small group of
countries will participate in the system of ANNA, in a so called incomplete
currency area. The exchange rates and the share onto ANNA should be settled for
the associated currencies in a system of complementary currencies with
different properties. The main task of the intermediary working complementary
currencies is debt control. By that heavily indebted developing countries and
their main creditors will probably pay attention first. The introduction of the
incomplete currency area will be the subject of the second chapter.
Phase of consolidation
It is not evident that the causes of the financial
crisis could be resolved. We must therefore assume that the crisis will return.
Each return will increase the costs and operative expenses. This is the
previous experience we made with the existing system of unbridled capitalism.
Even large economies could run into the problem not being able to grow out of
their debts. If the incomplete currency area proves to be a stabilizing system,
other economies will go into the system, even large economies in distress. The
system in perfection will be achieved, if all currencies participate onto ANNA.
A complete currency area allows the implementation of single global currency.
But the phase of consolidation is not a subject of this essay.
ANNA is valuation of currencies
The already existing exchange rates are called
conventional exchange rates. These are available for trading on the foreign
exchange markets. The term exchange rate in this essay has a different meaning
and is defined as the share of one unit of one currency onto ANNA.
The share onto ANNA can be considered as a kind of
valuation of currencies.
In the phase of development the share will be reactive
determined by conventional exchange rates and money supply of central banks. These
numbers already exist.
In the phase of introduction and consolidation, the
share of associated currencies onto ANNA must be fixed. At the time when the
phase of introduction and consolidation start, the latest reactive determined
values of the phase of development will be fixed. The adaptability of the
individual currencies will remain due to the variables of monetary supply and
exchange rates. Monetary policies of associated countries will be still
possible by money supply. The fixation of the share onto ANNA causes no
disadvantages, but will be necessary to enable the effect of reconciliation. It
is an effect of balancing which occurs on transaction between currencies.
The fixation of share requires the approval of the
participating countries. It can be considered as an international agreement
which declares individual economies as constants and it will be manifested by
the equations of exchange rate determination changing from the equation in
figure 1) to equation in figure 2).
 |
| Figure 2) valuation of currencies |
ANNA is money transformation
The conclusive exchange rates, the introduction of
share onto ANNA and the introduction of liabilities ål and
receivables år in the
equation of exchange rate determination in figure 2)
allow money exchange by transformation from one currency into the other. This impedes
the creation of foreign currency reserves and additional money supply resulting
from the exchange.
ANNA is total interaction between currencies
Money supply åx,
foreign receivables år
and foreign liabilities ål
are the variables which are influencing the exchange rates. Figure 3 shows how
the variables influence the exchange rates. The increase of åx and år
leads to an increase of the exchange rates, while the increase of ål leads to a decrease of exchange rates. The decrease
of åx
and år
leads to an decrease of the exchange rates, while the decrease of ål leads to an increase of exchange rates
It is impossible to predict exactly the behaviour of
the exchange rates, because markets continue with myriads of transactions and
many of them are linked together in series of interactions. But it can be
estimated, that the transactions and series of interactions constrain to some
kind of balancing effects, named as effect of reconciliation. For example it
must be assumed that deficit spending leads somewhere on debtors side to an
increase of liabilities ål
or/and further money supply åx
and therewith to a decrease of the exchange rates. It is a task of the phase of
development to get a better understanding of the interactions onto the exchange
rates and their influences onto economies.
 |
Figure 3) influence of transactions onto exchange rates |
ANNA is valorisation of interest free money
Money supply and credits are chained together by
fractional reserve banking. The exponential growth of money supply is caused by
the exponential growth of receivables and liabilities, considered as the
accumulation of all credits in an economy. The exponential growth of debts on
the other hand is caused by interest and interest compound.
Money supply influences the exchange rates in the
monetary system of ANNA. The exponential growth of money supply for
conventional interest based money leads to an inverse exponential decrease of
the exchange rates, as shown in figure 4).
But the relation between the applied currencies keeps
the same, as long as the growth of money supply for all currencies keeps the
same. Applied currencies are currencies which will be also used for visible
trading.
Interest free money, as described by Silvio Gesell 2),
has no or low interest rates. The Money supply won´t increase exponential. In
dependence of economically demands and due to the demurrage fee, money supply
will only have small variations around a stable line, as shown in figure 7). If
it will get possible to operate with an interest free currency independent and
unlinked to conventional currency, the exchange rate of the interest free
currency will keep also more or less stable, as shown in figure 4).
This could turn around the appreciation of the
interest based and interest free currencies. Because in a long term
consideration an interest based currency will lose and an interest free
currency will keep its purchasing power. The spread in the exchange rate
between interest based and interest free currencies is important for debt control.
The exponential growth of debts is also called the
helix of debt or the trap of debts.
Credits are important for money circulation and cannot
be impeded. But it would be the simplest way to interrupt the helix of debt, if
interest and interest compound will be avoided. An Interest free currency
fulfils this requirement, especially if it will be traded in the environment of
the monetary system of ANNA which ensures independent exchange rates. The
spread of exchange rates, as shown in figure 4) is probably the most important
effect of reconciliation. The whole world is involved in the game with
receivables and liabilities. It can be named debt crises. Nobody knows where it
leads to. It is perhaps helpful to take attention of this effect of reconciliation.
The inverse exponential decrease of the exchange rates
for interest based money could be seen as a mathematical expression of
inflation. But it must be assumed, too, that the real inflation is probably
lower due to deflationary effects of capital concentration. Capital
concentration is an effect of interest and interest compound which leads to
increasing change of liquidity into speculative investments. These speculative
investments can be seen as a special kind of hoarding money which will reduce
demands in visible trading by decreasing purchasing power of people with low
income which are the majority. This influences the price formation for daily
life goods and leads therewith to the deviation between the calculated and real
inflation rates.
 |
Figure 4) timeline of relative exchange rates for interest based and interest free currencies |
Interest and interest compound can be seen as the most
significant systemic cause for the unbridled capitalism. For all those who
share this opinion is interest free money the most effective tool to
domesticate capitalism. But interest free currencies will keep an appendix of
the existing system, as long as their exchange rates belong to interest based
currencies. It is a feature of the monetary system of ANNA which allows the
independent development of interest free money in a global scale and
demonstrates therewith new options to solve the problems of the debt crisis.
ANNA allows the creation of
independent interest free currencies
2) Incomplete currency area
It cannot be expected that all currencies worldwide
will join the currency and exchange system of ANNA. Nevertheless, to join ANNA
is also possible for a small number of countries, even if they are not
geographically connected. In this case is it an incomplete currency area and
the mathematical description of ANNA must be adapted. Counter and divider have
to be variable for every imaginable situation where countries will join or
leave the common currency area of ANNA. The change of mathematical description
has to respect that superneutrality keeps conclusive.
 |
| Figure 5) share of the incomplete currency area onto ANNA |
The not changing value of the share onto ANNA and the
fixed exchange rates are important properties to guarantee stability and
independence also for an incomplete currency area. This can be used to develop
economies more independent. More independence means more protection against
speculative offenses of the financial markets and exploitation caused by the
dictation of debts. It leads to more justice for debtors. The most affected
Debtors are heavily indebted poor countries. As already mentioned, in the
earliest step ANNA could perhaps find attention in these developing
countries.
Inside and outside trading
Inside trading means the trading between countries
which are associated in the currency area. Outside trading means the trading
between associated and non associated countries. ANNA allows the construction
of a new monetary system, where inside currencies are forced to superneutrality
and outside currencies are considered as one common currency and trading
imbalances will be compensated by self-balancing of exchange rates. The process
of development and equilibration will be improved by using complementary
currencies4).
The currency area of ANNA enables the complete transformation into an alternative monetary system with complementary currencies
The main target of an alternative monetary system with
complementary currencies and their interaction is sustainability in the best
way of its meaning for economical, ecological and social common life. A system
of complementary currencies will be preliminary characterized in the following:
ANNA5) ensures
superneutrality. It is the essential property for sustainability in the monetary
system. Other functions are exchange rate determination and transformation of
inside currencies.
LINA5) is an applied
currency. It is only inside valid. Its creation is based on credits. It should
be used with circulation protection as low or free of interest inside national
currencies and can lead in advance to a single global currency. LINA is an
important tool for debt control and wants to be an alternative to already
existing national currencies.
TINA5) is time money
for the store of values. It is only inside valid and its creation is based on
work. It must be exchanged into LINA to be applied as currency. TINA’s task is
the initiation of income by (voluntary) work to support the transition phase.
It is also a time account to support social systems in the field of culture,
education, health and pension
FENA5) is money for
the foreign exchange market and only valid for outside trading. Its creation is
based on exchange. It is interest based and requires the function of a central
bank. FENA keeps the attributes of conventional money that foreign markets can
maintain their behaviour. It ensures trading between inside and outside
economies and enables the trading of foreign assets and foreign liabilities. It
represents the foreign markets on the incomplete currency area and the
incomplete currency area on the foreign exchange markets.
 |
| Figure 6) system of complementary currencies for an incomplete currency area |
LINA => interest free money for the everyday business
Due to the behaviour of inversion6), ANNA
can only be used as a medium of currency exchange and monetary stabilization,
but not as money for visible trading. The everyday use of money must be done by
already existing national currencies or even better by a circumspect movement
into better performing alternative currencies.
Especially free money3) is a suitable
instrument to empower exploited countries to self-determined and independent
development. Interest free money must be used with a demurrage fee. The
demurrage fee keeps money in circulation. The absence of interest and interest
compound interrupts the exponential growth of money supply and therewith also
interrupts the helix of debt increase. Money supply changes into a more or less
horizontal line - as shown in figure 7). The absence of interest also prevent
from the automatism of reallocation in direction to the concentrated capital.
A currency based on interest free money will be
abbreviating named LINA which means the plural of national interest free inside
currencies.
 |
| Figure 7) interest free money on the monetary time beam shows no exponential growth |
Due to the demurrage fee, LINA loses the attribute to
be a store of value. This leads to a different understanding of money. The
appreciation of ground, goods and work increases, the appreciation of money on
itself decreases. The saving of money loses on importance while the circulation
speed of money increases. The focus of properties changes from virtual money to
the reality. This could be seen as a paradigm shift in the utilization of
economy.
The administration of money remains at the bank
system. Money supply will be done by credits like now and price accruement
behaves in the same way like now. This are all mechanism like already existing
for conventional currencies.
Implementation shock
The transitional phase, as indicated in figure 7), is the change to alternative monetary systems. It will probably lead to reaction of rich money owners, indicated as implementation shock. To attenuate the shock need slow circumspect migration of LINA by microcredits and wages for public services. LINA should slowly dislodge conventional national currencies. To support the incomplete currency area in the phase of implementation shock it requires probably additional money supply based on work.
TINA => money for the store of values
Economy, all human assets and
human civilisation are based on work. It is the important value for all
societies. Work is based on force and time. Therefore force as indicator of
human time consumption and the time itself can be taken as valuation for the
effort of work and used as savings of this effort – it is the principle idea of
time money. Spending (voluntary) time for cultural and social works can be
waged by time savings. This time savings are receivables to the community to
pay back the borrowed force and time in form of also cultural and social
welfare. It is a kind of money and can be used as a basic account system to
create or improve national pension fund, public health care systems or promotion
of cultural life.
A currency based on time money
will be abbreviating named TINA. TINA means the plural of national inside time
currencies.
 |
| Figure 8) time money is support of transition |
Money supply of TINA will be done
by work. Especially heavily indebted developing countries which are not able to
spend further credit based money for the growth of demand can use it to support
national income. TINA should not be used as applied currencies. But it is
necessary to permit the exchange into LINA to utilize TINA for deficit
spending. This is important for the transitional phase to attenuate the
implementation shock. TINA and the effect of reconciliation will help economies
to recover from the implementation shock.
In a long term view is TINA an allocation of welfare,
because it will change into an accounting system for cultural life, pensions
and health insurance.
The share of TINA onto the whole system must be
carefully influenced by wages, exchange rates and exchange fees between time
money and LINA, restrictions in propagation, in ownership respectively transfer
of ownership and limitation of savings in time money. If an approximately
equalization of (voluntary) work valuation between inside economies is reached,
national TINA’s can be transformed into one global welfare currency.
FENA => money for foreign exchange markets
To keep the protection of superneutralisation
effective, all inside currencies are only valid inside the currency area. This
belongs to currencies like LINA and TINA, but also to remaining or slowly
transforming standard national currencies. By this the trading from and into
outside foreign markets and the access to the global financial markets must be
done with a further complementary currency. This currency will be used for the
money exchange between inside and foreign currencies and is abbreviating named
FENA.
FENA represents inside currencies as one single global currency
on the foreign exchange
markets.
From the perspectives of the global financial markets, FENA represents the imperfect currency area. FENA is the valid currency for the global financial markets. They are not used to handle complementary currencies like LINA or TINA. FENA has to behave like each foreign standard currency with interest rates, monetary policy by a central bank and options for trading its own treasury bonds. The global financial markets can maintain their behaviour.
FENA represents the basket of outside currencies
on the inside currency
area.
FENA is not valid as inside used currency. From the perspectives of the inside currency area, FENA represents the share of the global financial markets onto ANNA, as long as the share Sin of the incomplete currency area onto ANNA keeps a minority of the world money supply.
FENA represents inside currencies as one single global currency
on the foreign exchange
markets.
From the perspectives of the global financial markets, FENA represents the imperfect currency area. FENA is the valid currency for the global financial markets. They are not used to handle complementary currencies like LINA’s or TINA’s. FENA has to behave like each foreign standard currency with interest rates, monetary policy by a central bank and options for trading its own treasury bonds. The global financial markets can maintain their behaviour.
FENA represents the basket of outside currencies
on the inside currency area.
FENA is not valid as inside used currency. From the perspectives of the inside currency area represents FENA the share of the global financial markets onto ANNA, as long as the share Sin of the incomplete currency area onto ANNA keeps a minority of the world money supply.
 |
Figure 9) exchange rate determination of FENA |
FENA is a complementary currency with the task of
exchanging and saving money.
The responsible institutions of the world community
must try to establish an exchange rate regime for FENA as described in figure
9).
The exchange rate of FENA will be determined as the
share of basket of all outside currencies onto ANNA. Conventional exchange
rates of outside currencies and FENA will be reactive determined by trading on
the global financial markets. Therewith the exchange rates of the single
outside currencies SOC keeps volatile.
FENA can only be created by money exchange into
savings and loans from both sides. Inside currencies will be transformed into
FENA, outside foreign currencies will be exchanged into FENA and hold as reserves
at the central bank. Inside traded savings and loans have no influence onto the
share onto money supply uout. Outside traded savings årin and loans ålin will influence the share onto money
supply uout, because foreign currency reserves are receivables which
increase the share of the incomplete currency area on world money supply.
Treasury bond issues are liabilities which decrease the share on world money
supply.
Scale of debt control
The more the share Sin increases the less
are the global financial markets able to ignore the incomplete currency area.
This enables associated heavily indebted poor countries to exchange their
liabilities from foreign currencies into FENA. This will support a better
self-determined control of debts.
The share SinK for the incomplete
currency area onto ANNA could perhaps change to negative values, if only a few
and very heavily indebted poor countries will participate to the incomplete
currency area, because SinK is influenced by the loans ålin. The closer the share SinK comes to zero the
more intervention from the responsible institutes is necessary. It will start
with import taxes and will lead to a debt moratorium with the abatement of
debts.
 |
| Figure 10) levels of intervention to control public debts |
3) Effect of reconciliation
The incomplete currency area can work like a complete
currency area, if FENA is implemented and used to represent the basket of all
outside currencies. It embeds the foreign exchange markets in the incomplete
currency area and allows the application of superneutrality. Therewith only
money supply åx,
foreign receivables år
and foreign liabilities ål
will influence the exchange rates, indicated in figure 3).
As already mentioned, it is impossible to predict
exactly the behaviour of the exchange rates, because markets continue with
myriads of transactions and many of them are linked together in series of
interactions. But it can be assumed that the transactions and series of
interactions constrain to some kind of balancing effects, named as effect of
reconciliation. The following is a brief overview of the presumed effects.
Exchange rate fluctuations:
Foreign exchange markets are extremely volatile and
conventional exchange rates swings sharp and frequently. The conventional
exchange rates between FENA and the single outside currencies will keep
volatile. But the exchange rate of the basket of all outside currencies to ANNA
will slow down due to balancing effect of the basket and the inertia of money
supply. The exchange rates of inside currencies will remain constant in
dependence of money supply åx,
foreign receivables år
and foreign liabilities ål.
Trading imbalances
It can be presumed, that the monetary system of ANNA
behaves compensative. It means that trading deficits lead to decreasing
exchange rates, while trading surplus lead to increasing exchange rates, because
on one side of the trading will increase the foreign receivables år and on the other side the liabilities ål.
Flight of capital
Especially with the implementation of LINA must be
expected that the flight of capital will dramatically increase. It can be
presumed, that the system of ANNA will behave compensative, because the flight
of capital leads to monetary restraint and influences money supply. It probably
increases the exchange rates of the affected currencies.
Trap of debts
Credits and fractional reserve banking are the tools
for money supply. The helix of debts keeps uninfluenced as long as all
currencies have comparable money supply due to interest rates. It can be
assumed that the helix of public debts will interrupt for countries which
change from conventional currencies to LINA. The debts still have to be repaid,
but rising costs of interest and interest compound will be eliminated by the
spread of the exchange rates between LINA and conventional currencies – as
indicated in figure 4).
 |
Figure 11) – summary |
Like every idea for the regulation of financial
markets also ANNA will move parts of the profit expectations from individual
money owners back to the society. This is contrary to the philosophy of
financial markets. All current political efforts indicate that the markets are
able to impede successfully any kind of regulation and loss of profit
expectations. If still small and smallest changes are not accepted, a solution
like ANNA must keep for sure a vision. Nevertheless the understanding and
behaviour of the financial markets distribute the global income more and more
to the rich, which leads unavoidable to injustice for the others. Parts of the
world must suffer, especially poor developing countries. Also natural resources
will be unreasonable exploited. In a long term view injustice and ecocide
cannot be sustainable. It will cause reactions of suffering peoples, societies
and environment. Violence is the usual answer, but not the solution. It
requires more intelligent ideas. This essay wants to initiate a further
position in the discussion of better solutions for a better world.
Appendix
version 04. september 2010
Download this essay:
- goto: model of a neutralised currency and exchange system for central banks – essay part I introduction
- Similarities
to the parable “workers in the vineyard”
new testament Mt 20, 1-16
- Interest
free money, also named free-money
a theory of Silvio Gesell (*1862 +1930)
introduction in English:
Margrit Kennedy: Interest and Inflation Free Money
(Published by Seva International; ISBN 0-9643025-0-0;) or
http://userpage.fu-berlin.de/~roehrigw/kennedy/english/chap1.htm
- complementary
currency (CC) is a currency which is meant to be used as complement to a
national currency… see
http://en.wikipedia.org/wiki/Complementary_currency or
http://en.wikipedia.org/wiki/Bernard_Lietaer
- The names of the proposed complementary currencies are taken arbitrary
.. NA = National Apportionment
or NAtional currency
AN.. =
All Nations
LI.. =
Low Interest money
TI.. =
TIme money
FE.. =
money for Foreign Exchange
- Quotation
from the essay “model of a neutralised currency and exchange system for central banks - part 1 - introduction”:
“…Coming from the whole going to the particular needs division. Division is not practicable for normal use. Having a non changing value does not allow free pricing, because prices must be able to change. So ANNA cannot be used like normal money!…”
Acknowledgment
Many thanks for proofreading to Annalena
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