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Complementary currencies and deflationary crisis
Complementary
currencies are alternative currencies to the legal tender. Except from foreign
reference currencies which sometimes rule out national currencies in some very
small countries or suffering emergency economies, complementary currencies are
distinguished from the legal tender by different behaviour. Countless
approaches are possible to design market exchange by alternative monetary
systems but most of them can be roughly subdivided into
1)
interest free
money (Freigeld)
2)
local exchange
time systems (LETS)
3)
barter trade
(electronic market places)
Our current
monetary system of the legal tender is interest based and interest compound is
the most powerful mean to collect money, the so called mass gravity behaviour
of interest based money. In a long term consideration led the concentration of
money capital to an accelerated concentration of productive capital. Due to
this, business cycles have shifted more and more from local to global
dimensions and local business cycles disappearing slowly.1)
Complementary
currencies are a contrary scheme and mainly used on bounded markets or by
delimited social groups or communities. It can be seen as a mean to support
local business cycles. But the globalization detracts most of the business and
leads subsequently to strong reduction of capabilities for transactions in
local business cycles. It is more convenient for market participants to use the
legal tender and makes it doubtful that in times of non-crisis globalization
can be inverted by the mean of these complementary currencies. The capitalized
world of west Europe and North America smile
at citizen initiatives which run or try to implement these alternative monetary
systems. However, the ignorant capitalized world goes wrong as usual.
In times of
deflationary crisis complementary currencies are the best mean to relieve the
distress. If expectation of gains decline, legal money will be hoarded or
attempts to escape into offshore financial places. Money gets narrow in
business cycles, business activities decline, supply increases and prices
decreases, what we call deflation. Most approaches of complementary currencies
are designed to enable transactions which would not take place by the use of
legal tender and almost all of these approaches are not focused on the earning
of money by money. As consequence, in times of narrow money complementary
currencies can replace parts of the legal tender and speculative transactions will
be kept out of the business cycle. The more deflationary crisis will destroy
business the more complementary currencies come up and will be appreciated.
Complementary
currencies can be seen as emergency monetary systems
But
globalization and global business cycles have destroyed great parts of local
production and local barter will get more and more ineffective. This endangers
also the efficiency of emergency money. We must assume that examples such as
Woergl or stamped scripts cannot be repeated in the same way. We might have to
think bigger.
The greatest
hindrance to think bigger is that the exchange rates of complementary
currencies are mostly linked to the legal tender and money creation will be
done by the exchange from the legal tender into complementary currencies. If
alternative money is not linked society must create a second price formation
for the exchange and tends to give up acceptance into this money. As
consequence, complementary currencies keep in strong dependence of the legal
tender or a current global reference currency and must follow the price
formation of the conventional monetary system. It restricts the potentialities
of complementary currencies to be only a reactive system and does not allow the
prevention of deflationary crisis in advance.
In a long term
consideration we must assume that the current global monetary system based on
credit creation and interest rates tends to be increasingly unstable1).
Complementary currencies in a more global scale which will stabilize business
cycles, which do not need a second price formation and which can be used
independent from the legal tender are possible and can be designed by the approach
of monetary superneutralisation2).
The principle of monetary superneutralisation
Money plays an
important role in our daily life. To accept money as payment is an accomplishment
of the society which renders division of labour feasible and is therewith
absolutely essential for modern life. Among others is it a medium of exchange
and allows for the setting of prices and the comparison of values of different
goods. It also allows the comparison of currencies by exchange rates.
Superneutralisation
means that the money supply growth in the real economy has no effect on the
activities of the production of goods. While the prices changes, does not
change the productivity in response to supply and demand. The orthodox
economics insists on the neutrality of money, but likes to conceal the variable
velocity of circulation in their quantity equations. The statement of these
equations can be hardly overbid in meaninglessness. It completely contradicts our
individual experiences completely, that money should have no impact on our
daily decisions.
Let's change
the perspective from the side of money capital to the side of real life, of the
side of productivity, services and the production of goods. The main target is
to balance demand and supply, to keep our life human. It can be seen as the
main target of economy respectively the main target of homo reciprocan. Life is
the irrevocably value to act. Values which results from our productivity and
production of goods are relative and variable values, because they are
transient. Life as an absolute value is discrete and eternal. To be or not to
be, nothing is in between.
Relative or
variable values mean that the corresponding prices are negotiatable, An
absolute value cannot be negotiated.
As a unit of
account refers our current money to these relative or variable values and
thus is money in his assessment related to this relativity. It interacts with the
reality and is therefore probably not a neutral medium.
Can we charge the
absolute value of our life with money? The answer is subjected to ethical and
philosophical questions and more related to our belief and faith than rational
reasons. If it will get common agreement, money will be creates that reflects
the absolute value of life. It is simple a never changing amount of money,
simplest one monetary unit is one world.
Conclusion:
Superneutralisation does not arise from the interaction of money and the real
world, it will be created by definition.
This
superneutralisation can be implemented as a complementary currency, described in
the essay “model of a neutralised currency and exchange system for central
banks” 2). In practical use would it be a global reference currency
and exchange rate system for central banks. The name of this global reference
currency is ANNA. Like other proposals of global reference currencies is it not
based on a leading national currency and therefore independent from the
interests of the country which own the leading national currency. This
superneutralised global reference currency will stabilize the global monetary
system and the global trading due to the effect of reconciliation. It balances
trading imbalances and could be used at least as a tool to reduce or even avoid
inequitable exploitation for the 99% of world citizens which will be
underprivileged by the current system. It is a system of crossrating against
the superneutralised global reference currency which leads to a very accurate
and direct correlation between all national currencies. ANNA is an exchange
rate regime which allows flexible exchange rates to fulfil the requirements of
each participating national economies. The speculative up and downs through the
deregulated financial markets will be better absorbed and becalmed. Speculative
trading based on the spread of exchange rates disappear. The introduction of
superneutralisation will improve our monetary system in its best sense to lead
its function back to the social accomplishment as a medium of exchange. Money
will get neutral.
Attempts to
generate profits, which we still experience on the financial markets, which
also led to the current crisis, attempts like
leveraging and multiple lending money creation to earn money by increasing
the money supply, will be punished in a superneutralised monetary system by a reactive
change in exchange rates. In a long term consideration the financial markets
would have to say goodbye to this way of business and would have to learn to make
profits in a real economy in a much more modest way. Markets of the real
economy follow other laws than the financial markets, where growth cannot by reached
by multiple money creation.
Conclusion: The
superneutralisation of our monetary system would change the focus from a
abstract and virtual world of financial markets to the economy of reality of
goods and services for a human world.
Speculative
attacks against the Euro zone, as we experience at this time, could be avoided
in a superneutralised monetary system. It would make no sense. But we must be
aware that all ideas which stabilize economic and social life will limit profit
expectations. It seems that the society and therefore also the markets choose
these earning expectations against a stable system. So it is implausible that ideas which could
stabilise the economy, will establishing themselves, also not the idea to
superneutralise our monetary system.
Financial
markets and the current money capital are not limited in growth. The real world
will show those limits very well. Sooner or later we will face the need to
recognize these limits. Therefore it makes sense to think about a change in our
economical thinking, even if the realisation remains unrealistic. More and more
we perceive that our money system will be immanent for this change.
Superneutralisation is the mean to transfer the knowledge gained from the
development of regional complementary currencies onto national and
international levels, to pave the way for monetary systems, serving the needs
of humans in a better quality.
The essay
„model of a protected currency area for developing countries” 3)
shows that it is not necessary to implement superneutralisation on a global
level. It can also be transferred to a national level, but gives much stronger
advantages to common currency areas. Indeed, superneutralisation would be a
tailor-made solution for the common currency area of the Euro zone and the
current Euro crisis.
Superneutralisation of the EURO
The equations
are quite simple to set the global monetary system into superneutralisation.
First step – determination of word money supply
1)
World money
supply is the sum of all national money supplies
Money supply is the main item in a superneutralised monetary system. It is the legal tender, official and valid money as mean of payment in a country or currency area
Appendix
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Figure 1)
equations for superneutralisation - step one – determination of World Money
Supply WMS
|
Money supply is the main item in a superneutralised monetary system. It is the legal tender, official and valid money as mean of payment in a country or currency area
It means the
money itself but not any other kind of assets which must be exchanged to be
money. We can assume that central banks are able to determine and to supply the
right values or at least to estimate money supply quite well, also as part of fractional
reserve banking. Important is the highest value, usually is it M3. It is not
necessary to have exact values of world money supply, the important characteristic
is that the exchange of all money in one moment into the superneutralised
reference currency ANNA must be less or equal 1 [ANNA] – ever. Less than 1 is
allowed and means that the calculated WMS can be higher than the real one. This
is
- helpful to compensate errors in the determination
- allows a security shift to influence the response time of exchange rates from fast and reactive to slow and active
Second step – fixation of the share
2)
The share of a
currency is national money supply divided by world money supply - The fixation
of the currency is a picture of the situation in the moment of participation - a
settlement of society – like to accept money as a mean of payment or ANNA as a
equivalent to the total of world money supply
The calculation
of step one and two are only one time necessary. It is the step into
superneutralisation.
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Figure 2)
equations for superneutralisation - step two and three – fixation of share and
determination of exchange rates
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Third step – independent determination of exchange rates
2)
The exchange
rate is the share of the currency divided by the money supply in the own
currency unit - In this equation the calculation of exchange rate will become
independent from the figures of other currencies. The national money supply mx
is the flexible item in this equations and allows to keep the exchange rates
flexibles. Also foreign liabilities and receivables will be seen as part of the
money supply and added or subtracted from national money supply mx. The exchange rates ex in this
system are always correct, it means that there is no spread in the exchange of
currencies, is it possible to transform foreign money into the national
currency instead to keep them as foreign currency reserves at the central banks
in case of receivables or to issue treasury bonds in case of liabilities.
If we consider
NMSx as the money supply of a currency area like the EURO, then NMS
could be seen as the sum of all complementary currencies in this area. In the
case of Europe are complementary currencies the former national currencies like
DM, France, Lira etc. but also new national inventions of currencies with
different functionalities for example like LINA’s and TINA’s 3).
The
transformation to a superneutralised European currency area would be similar to
transformation of the global monetary system into a superneutralised system.
Only the total world money supply must be substituted by the money supply of all
Euro States €MR. We can assume that the European central banks knows the amount
of the European money supply quite well 4).
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| Figure 3) equations for the superneutralisation of the EURO zone |
Sense of this
exercise is it to re-establish national currencies N€NA’s in the common
currency area of the EURO zone. Domestic trading would be done in the new
national currencies N€NA’s and foreign trading would be kept in EURO. In this
sense a superneutralised European currency incorporates the advantages of a common
currency with the advantages of national currencies. The problems with inner
European trading imbalances could be minimized due to the flexible exchange
rates of this system.
The concept of
a superneutralised EURO differs from the concept of a protected currency area
for developing countries so far that an additional complementary currency for
the foreign trading FENA3) would be not used. The EURO as a strong
currency would still be traded on the FOREX. Due to this, the EURO is not
really superneutralised, but the method will be used to re-establish the new
national currencies.
Consideration of inner European trading imbalances
At the start
exchange rates between Euro and the new European national currencies N€NA’s are
1:1. The different measures for growth and employment and the imbalance of
trading would lead to a different growth of the money supply between N€NA's.
Imbalance of trading should then be considered by additional parameters in the
divider of the equation to determine the exchange rates. One important
assumption is that foreign N€NA's of the inter European trading will be
exchanged and not longer kept as foreign liabilities and receivables in stock
of the national central bank. The equation for the determination of the inner
European exchange rates exN€NA would get the additional parameters:
- Addition of money lent from other countries, exchanged into the target currency foreign liabilites
- Subtraction of money lent to other countries, exchanged into the target currency = foreign receivables
It would lead
to the following effects
- Additional money supply => decrease of exchange rate
- Deficit in foreign trading => decrease of exchange rate
- Surplus in foreign trading => increase of exchange rate
- and vice versa
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Figure 4)
consideration of inner European trading imbalances
|
Trading
imbalances will be considered and compensated by exchange rates e€ between the
national currencies of the European Union. The problem of trading imbalances
between the inner European countries would disappear and every country could follow
the own economical demands without the race of wages to the bottom. The race of
wages to bottom transliterated into political discussion is named improvement
of competitiveness.
Like in a
protected currency area national economies have to trade with the new national
currencies, inner European and global trading must be done by the exchange of
prices from national currencies into EURO. Only the EURO appears on the FOREX
markets and treasury bonds will be traded on the global markets also only in
EURO.
To reach the
balance of trading is the main challenge to keep Europe
political and economical common in the near future. And the above described
measure would be that tool to reach this target. The EURO can still be
considered as one of the most stable currencies on the global markets. We can
assume that the economies and infrastructures in all European states are quite
sophisticated and public debts in all European countries are moderate in
relation to the global situation. So it is not very reasonable for actors on
the global financial markets to speculate against the common European currency
as one of the main factors which keep financial markets stable. The usual
measures would let disappear the European Dept crisis, as
- to take over treasure bonds by the European central bank
- common treasure bonds
- lowering to negative interest rates for money which will be saved at the central bank
- economical politics of demand
The
superneutralisation of the EURO currency area would not only let help to
disappear the crisis, it additional would stabilize the European economies
itself, due to the consideration of trading imbalances in the EURO zone. It
would lead to benefits for European countries which are still not participating
onto the common EURO to rethink their position and to move into the common
currency area. If countries like Switzerland ,
Lichtenstein and UK
The
consideration of trading balances is part of the effect of reconciliation based
on monetary superneutralisation. Another part of this reconciliation is the
possibility to install low interest national currencies LINA’s. It is a measure
for heavily indebted poor countries and would in fact not be necessary for the
sophisticated economies of Europe . But due to
the prolonged speculations against the European countries in the south it will
come closer to be an option. These low interest monetary systems could start to
compete with the current interest based monetary system and allows to solve the
problems of public debt crisis in a more reasonable and sustainable way, also
for sophisticated economies like in Europe.
Effect of reconciliation and dept crisis
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Figure 5)
effect of reconciliation on the monetary time beam
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The installation
of a low interest national currency means the reconciliation between the
exchange rates of debtor and creditor currencies.
The exchange
rate of the interest based currency decreases in correlation to the exponential
growth of money supply of this currency caused by the interest compound –
purple red curve in figure 5. While the money supply and therewith the exchange
rate of the interest free money keep more or less constant due to the absents
of interest compound – blue curve in figure 5. A heavily indebted poor country
which will run into insolvency and changes into a interest free national
currency has only to wait for the decreasing exchange rate of the creditors
currency.
Nevertheless -
the Debtor still has to repay the liabilities, but only in the absolute value
of the superneutralised global reference currency and the creditor get back the
outstanding receivables, but only in absolute value of the superneutralised
global reference currency. It is more than fair for the creditor and debtor -
it is the reconciliation. It interrupts the helix of increasing receivables and
debts and this helix of debts is probably the main issue or main cause for
financial crisis, like the current debt crisis.
It is the most
reasonable tool to solve the problems of public debts
It is the
unique solution to break out of the economical circulation and coercion of
growth and ruination.
Compatibleness of low interest and interest free money in a superneutralised currency area
superneutrality
is the never changing value of money. It is the superneutrality of the
superordinated complementary currency. It is a different theory to the quantity
theory respectively neutrality of conventional money!
Superneutralisation
is related to money and not to prices of visible commodities. The price of
commodities are still related to conventional money and not affected by
superneutralisation.
Creation of
conventional money is not affected. Money supply and monetary policy remain in
responsibility of the national central banks. Money supply and interest rates
of Central bank are not restricted by superneutralisation. The interest based
legal tender behaves in a superneutralised environment not different to the
current situation.
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| Figure 6) the non-neutrality of interest based money |
Exchange rates
of interest based national currencies decrease in correlation to the
exponential growth of money supply caused by interest compound
If we assume
that money is not neutral exchange rates related to the prices of a basket of
commodities would decrease slower. The gap will be caused by the disturbed
effectiveness of demand due to the concentration of money. The theory of
Freigeld would have described it at hoarding of money. Nowadays we will name it
speculative trading on the financial markets. Does this effect lead to a
distortion in the price building?
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Figure 7)
effect of money supply on price creation
|
We can assume
that all interest based currencies must growth in a similar way
The exchange
rates to the superneutralised superordinated complementary currency decreases but
the relation between the exchange rate of the national currencies itself keeps
more or less the same. Foreign trading is not affected, neither nor the
domestic trading.
Also the
different growth of currencies caused by trading imbalances will be considered
in the equation for exchange rates ex. Trading surpluses strengthen
the exchange rate, trading deficit weaken the exchange rates and imbalances
will be balanced. That it the advantage of a superneutralised currency area to
consider the different economical situation of all involved countries.
The situation
changes if the first country will change into a low interest national currency.
Money creation of low interest money not
effected by interest compound. Due to this, low interest money is closer to
neutrality (see red curve in figure 7). In a long term consideration prices of
foreign goods based on interest based money could decrease faster (see purple
red curve in figure 7) due to the increasing exchange rate ex of the
low money creation of low interest currency.
Does it affect
the trading balance between economies? The answer does maybe not convince,
because it will keep a theoretical approach which cannot be validated!
But it can be
assumed, that in a long term consideration the price formation in foreign
trading will follow the exchange rates as it is doing currently. Also if the
exchange rates ex are related to the curve which indicates neutral
money (see blue curve in figure 7). In the worst case it will be compensated by
the consideration of trading imbalances in the equation for the calculation of
the exchange rates ex.
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Figure 8) implementation
shock and monetary time beam of a low interest national currency
|
Another effect
will endanger national economies much more, which will change to low interest
currencies. An implementation shock will appear. It is the flight of Money
capital and money owners will try to by up all available real assets. It
appears in deflationary crisis too, also without the implementation of a low interest
currency.
For the
implementation of low interest currencies are measures helpful to ease the
shock, which are described in the essay “model of a protected currency area for
developing countries” 3), like:
- To protect the properties of lower social classes – especially real estates
- And to introduce a national time account to reduce the gap cause by capital flight
Two effects
will oppose to the implementation shock, because the effect of reconciliation
increases exchange rate ex
- when capital leaves the country
- and the neutrality of low
interest money - the so called bad money.
It keeps local demand high and will strengthen local business cycles.
To strengthen
local barter is the claim of community currencies. But as long as they are only
in particular use, as long as they are not the legal tender and will compete
with the legal tender, as long they will miss the claim.
It can be
assumed that the aspects of reconciliation and the neutrality of low interest
money will lead to a fast recovery of economies, which will change to these low
interest currencies.
Summary
Our current money is not neutral. It influences the
decisions of our daily life strongly. Many people suffer by the success of homo
economicus, who is able and willing to destroy the existence of humans and
whole nations, if it is beneficial for himself. Means, money is everything but
not neutral.
I repeat myself
if I predicate that it would be very useful to have a look onto our current
monetary system, which is not perfect It can be improved and it should be
improved to come closer to a monetary system which works neutral and benefits
our life.
Appendix
- essay
with the title “financial crisis explained by the theory of Freigeld“
available at
http://www.slideshare.net/SehrGlobal/model-of-a-neutralised-currency-and-exchange-system-for-central-banks
- availability
of the essay “model of a neutralised currency and exchange system for
central banks - part I introduction “ at
http://www.slideshare.net/SehrGlobal/model-of-a-neutralised-currency-and-exchange-system-for-central-banks
- availability
of the essay “model of a protected currency area for developing countries -
part II application“ athttp://www.slideshare.net/SehrGlobal/model-of-a-protected-currency-area-for-developing-countries
- money
supply of the EURO zone - see http://sdw.ecb.europa.eu/browse.do?node=2120793
- reference
list of figures
- figure 1) – equations for
superneutralisation – step one – determination of world money supply
- figure 2) – equations for
superneutralisation – step two and three – fixation of share and
determination of exchange rates
- figure 3) equations for the
superneutralisation of the Euro zone
- figure 4) consideration of
inner European trading imbalances
- figure 5) effect of
reconciliation on the monetary time beam
- figure 6) the non-neutrality
of interest based money
- figure 7) effect of money
supply on price creation
- figure 8) implementation shock
and monetary time beam of a low interest national currency
