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Financial Rehab Part 2 Chapter 2

Financial Rehab Part 2 Chapter 3

Financial Rehab Part Two.

Financial Rehabilitation continued.

How the nature of the currency determines the nature of the economy.

By David Somers.©2013

Traditional Industrial Ecologist.

Financial rehab part one endeavoured to list the weaknesses in the current system. This is produced very limited engagement from the people who read it and they said yes that's very good but clearly the impulse to say. “Here's the problem let's see what we can do about it, you could try this.” Clearly didn't happen, hence the necessity to write down the changes needed, to make the system more robust, and see if that sparks some debate. People are always enthusiastic when it comes to playing the Devil’s Advocate. The reason for this is that it is so much easier to reference concepts to where you sit and therefore stand, than to get up and move your mind to look at things from a different perspective.

The main points raised in part one are as follows:

The difference between lifeforms and deathforms illustrates that juristic persons are easily manipulated and can be driven or operated by anyone qualified or not. The logical response is to place power only in the hands of lifeforms and relegate deathforms to the status of machinery. The primary reason for this suggestion is that there is no sanction that is credible for juristic persons, they cannot be sent to jail in the same way as a lifeform can.

The second point is that regulation or oversight needs to be done in real time, recent history shows that organisations make a mess of things, then an enquiry is held, and those involved swear to make changes so that what happened can never happen again. This again produces no sanction against malicious behaviour and reduces any incentive for the deathforms, i.e. juristic persons, to behave in an ethical fashion.

This naturally brings us on the markets and how they operate, with computers that can do umpteen calculations per second and are therefore much faster than living decision-makers, the balance has been tipped in favour of the machines (deathforms), this has resulted in high-frequency trading becoming the main participants in markets. This totally undermines any connection between Lifeforms and the value of what is traded in the market.

As such the proportion of wealth controlled by deathforms has risen to dominate markets. This means that if the trend continues lifeforms become increasingly irrelevant to the function of markets. Tangible assets should therefore only be owned by lifeforms, and the ownership by deathforms should be restricted to intangible assets. These intangible assets such as derivatives, as they are not part of the tangible universe need to be treated as a bet rather than an investment.

This is my turn to play Devils Advocate !

The main cause of the current financial crisis, is the understanding of ownership. This is allows claims on an asset to be multiplied by re-hypothecation many times over. The result of this is the degradation of the concept of ownership from something straight forward and simple into a labyrinth of claims on the asset. These multiple claims shatter the legal title to the asset and transfer power to anyone with enough legal muscle, to extort money from the hapless person who thought the asset belonged to them.

Clearly the ownership of an asset needs to be a simple concept that is understandable by most people, such as if you own something then you own it. This last sentence already raises the question what to do with intangible assets that have no material form. In most obvious intangible asset is what we call intellectual property. Intellectual property has been the subject of serious abuse.

If you take a patented idea as our starting point. A patent is granted by the state to an individual or company to allow them the time to develop an idea and recoup the research and development costs rather than having someone copy it without contributing to its development them and thereby disenfranchising the original inventor.

Unfortunately this noble objective has been constantly subverted since the dawn of patents. From a business point of view a patent can be a threat to the status quo. The cost of retooling a factory to make an improved product is quite prohibitive and the existing players in this market will obviously try and protect their position by preventing the development of the new invention. The most common form of approach to this is called “Buy and Bury”. This involves doing a deal with the patent holder so that they sell their interest in the idea thus giving control to the status quo, who will then proceed to not develop it. This saves the status quo the cost of retooling, and loss of potential sales because of the new invention’s superiority.

So inadvertently the patent has shot itself in the foot by offering the route of assured non-development. From the point of view of society, this creates an environment of stagnation and regress. It is also interesting to note that patents have been granted to companies of things that already exist such as seeds.

The idea that you can patent something that has already been invented, caused a bit of a stir at the time. However with enough legal and lobbying muscle the change was made. We are now reaping the benefits of genetically modified crops which have destroyed the livelihoods of millions of small farmers around the globe. To these farmers their work is the difference between life and death and tens of thousands around the world have responded by taking their own lives.

Following the same logic that allowed seeds to be patented. Mr Dyson’s vacuum cleaner could be bought, a screw made of a different metal replacing an original screw. This would allow the vacuum cleaner to be patented by someone else. Common sense would say this is wrong.

By any civilised standard, this behaviour is unacceptable and morally reprehensible. Yet within the current framework of legislation this behaviour has been encouraged due to the failure to enforce regulations that already exist.

This example illustrates moral hazard, and I have included it to make the point that how we conduct our affairs, especially in business and law is a moral imperative necessary to maintain trust and confidence in the system. To justify actions for short term gains and political expediency undermines trust and confidence and is therefore unacceptable. Therefore reparations to restore trust must always be paid in full, plus costs incurred. In the legal profession, what is the point of having a judge constrained by politically motivated mandatory sentencing rules, so that a judge cannot use his or her judgement to show that justice is seen to be done ?

I advocate the use of Barter Currency as an economic balancing mechanism in the economy. Barter currency needs to embody moral fortitude so that trust is maintained, creating confidence in the system. My minimum moral standard is to behave in a Discerning, Ethical and Streamlined manner in both ethos and operation of Barter Currency.

One of the functions of a currency is to provide a measure so that different things can be valued using the same measure. This gives us Cost, Value and Price to the items we may wish to purchase or sell. Cost represents the resources necessary to produce any given item. Worth is the intrinsic value of the product in terms of its ingredients. Price is a function of the market that exists to distribute the produce.

So taking the example of the car, the Cost of the car represents the necessary resources to manufacture it. The Value of the car descends over time to its scrap value, depending on use and age. The price represents the demand within the market. We have established three different prices for the same item. All of these prices are valid, and this discrepancy creates the arbitrage necessary in order for a profit to be made from the sale and use of the car.

Without the profit, the economic model that we are used to would cease to exist. In many ways over time this simple model has been abused so that now there is much manipulation and subsidy by the main players that the market system in its pure form has ceased to exist, if it ever truly did. The prime reason for this is centralisation of money creation which greatly distorts the natural order and pricing.
This degeneration of the system into what has now been called a Cleptocracy of crony capitalism has made the economy dysfunctional in its purpose of providing a living now and in the future for its participants.

In order to restart a simple economy in order that capital can be accumulated by members of society, the structural dysfunction must be addressed as a beginning. The first item on the agenda is to remove the central creation of currency. The next item is the nature of the currency to be used. in order to protect the environment and ensure a sustainable economic system.

The only practical choice is to copy nature and use energy transactions as the basis for a currency. The nature of such a currency, would allow an industrial economy to flourish as nature does, in harmony with life by creating a robust, healthy and diverse industrial ecosystem, within a thriving natural ecosystem.
We are familiar with the kilowatt-hour as a unit of measurement in the industrialised world, using the kilowatt-hour as a unit of currency, we can achieve change that is familiar and therefore less like change that is too radical.

I will now briefly detail the parallels that are evident between the current system of Fiat currency and that of a Barter currency based on the kilowatt-hour.

The first point to note is that a Barter currency and a Fiat currency are not mutually exclusive they can function alongside each other quite happily and members of society can choose which currency is most suitable for the task in hand. One of the most striking observations when talking about currency is the complete ignorance and lack of understanding about what makes them tick.

Perception of value is in reality only perceived by the mind of an individual, as all individuals are different, their assessment of value is different too. If a person has wealth of £1000 and another person as wealth a £1 million, if an item is priced at £500 then it's price is different for each person. To the first person it represents 50% of his fortune to the second person it represents 0.05% of their fortune, i.e. In relative terms, one thousand times less.

The effect of price, relative to purchasing power is particularly apparent when considering the essentials such as food. In poorer parts of the world, the cost of food can be over 50% of wages, which leaves little left for the rest of the necessities. In the developed world, minimum wages are topped up by social security payments, thereby providing a subsidy to multinational companies ( e.g. Starbucks et al ) at considerable cost to the taxpayer, and creating a less than level playing field, financially favouring foreign based companies over resident companies. The employees have the dubious delight of being on the “Social” and in “Work” simultaneously.

This is a classic case of meddling in order to benefit the few to the cost of the many. To draw a parallel from history, in America there was an expression “A One Horse Town”. Where economic activity in a town was dominated by one employer and so a large percentage of livelihoods were dependent on the one employer. Other towns would then court the one employer and eventually the “One Horse” or OH, would move on leaving a collapsed economy behind. Today this is done on a slightly grander scale in what could be described as One Horse countries. But the principle and results are exactly the same.

What is required for the basis of a sustainable economy is to enable each town or area to be self-sufficient so that the essentials are provided whether or not there is employment in a larger industry, is that it has a broader geographical base. The basics are what I term the “Bread And Butter Economy” or BABE for short, which is essentially food, clothing, water, shelter, labour and energy. If these basics are generated at a local level then the jam economy of the larger employers can be accessed according to benefit of the surrounding area rather than creating pools of desperate people who will undercut each other’s bid in a race to the bottom in order to entice an employer to set up shop in their town.

A bread-and-butter economy requires space in which to grow those resources as well as the urban environment where people have shelter, industry and community. Most boundaries are drawn for political reasons and as such do not embrace the parameters required for a self-sufficient economy. Self-sufficiency requires the land can be managed in a sustainable fashion. Boundaries for self-sufficiency are geographical rather than political. This then avoids the bizarre practice of having a boundary in the middle of the river. Geographical boundaries are essentially the natural formation of a River Basin, with the peaks of the surrounding hills defining the perimeter. For coastal areas it is simple enough to extend the geographical boundary along the sea floor for some miles to look after the fish stocks which are a vital source of food for the population, which can still be defined by the sub-surface topography.

The creation of such a network of geographical boundaries also does not require any political consideration, the process does not require any debate, purely the decision by the inhabitants of the area to take it on board. As for what such an area could be called, I suggest you call it a leaf. This is because if you view a “River Basin” from above, an area of land, the river and its tributaries, they appear similar to veins on a leaf. A LEAF can mean Local Ecological Area Foundation. That's because that's what it is, the land is the foundation on which the habitat grows. Because the leaf boundaries cross existing political boundaries, the political element will need to co-operate rather than compete in order to create a healthy, diverse habitat and economy.

Energy in its rawest form is solar radiation, and in round figures we get one kilowatt-hour per square metre at sea level during the hours of daylight. This is a substantial amount of energy, and well in excess of what we use to maintain a lifestyle in the developed world. There is no shortage of energy, the shortage arises in our ability to utilise it. To give you an idea of how much energy this is, a metre is about one large step, make a square of that size and imagine a one kilowatt electric fire in the middle. If you consider a tennis court is circa 261 m² then you must imagine 261 one kilowatt electric fires. Put another way, this is enough energy to propel three, two litre Diesel family cars at eighty mph along a motorway.

Most people think of collecting solar radiation by using solar panels, either for generating electricity or heating hot water. For the reader interested in alternative methods of generating electricity for circa £0.02 per Kilowatt Hour my patent application for a Differential Density Momentum Generator can be viewed at the intellectual property office website, publication number GB 2493233 or follow this link.

A local currency based on the kilowatt-hour would be ideal for financing energy harvesting projects such as this. The mechanism would be to forward sell the energy production, to raise the money to build the machine in the first place. This is very similar to mining companies forward selling their production to raise money to construct the mine.

The advantage of creating credit denominated in what you produce is that the risk of default is not raised because of the fluctuations in price of a commodity over time when measured in a Fiat currency. It also provides a home and income for people who wish to save in an energy-based currency.

This form of saving is very similar to a Treasury bond in that interest is paid on capital that the capital is repaid at the end of the term of the bond. So a 1000 Kwh, 10 year, 5% Energy Bond would provide the Saver with an income of 50Kwhs per annum and the capital of 1000Kwhs being redeemed in the tenth year. At this point is worth considering the misnomer of the term Saver. A saver is in actual fact a lender, because they lend their money to the issuer of the bond exchange for the payment of interest.

It would therefore be helpful to redefine the relationship between lender and lendee, in simple understandable terminology, Owner and Ownee. First of all it is worth defining the difference between cash and credit. In our example above the 5% paid on the energy Bond would be paid in cash. The cash in a barter currency based on the kilowatt-hour is available now as opposed to promised at the end of the life of the bond. So for example the 50 kWh paid annually could be used to reduce the electricity bill. This is because being cash the electricity has been generated and can be collected via the National Grid. It might not be exactly the same kilowatt-hour that was generated and credited but the kilowatt-hour is a fungible measurable item and therefore interchangeable with other kilowatt-hours.

So in our in our Barter currency cash is something that's been produced and credit is something that is yet to be produced, this also leads to the destruction of cash as and when the kilowatt hour is actually used. As an example if you use electricity to create synthetic diesel from the carbon dioxide and water in the atmosphere this will require circa 22 kWh of electricity. The resulting litre of diesel will contain only 10.69 kwh of energy to be retrieved when it is burnt, so the loss of 11.31 kWh is due to the processing and manufacture energy expenditure. When the diesel is burnt the remaining kilowatt hours are destroyed.

This means that there is an inbuilt mechanism of currency destruction. This is useful in that the supply of tangible capital, is tied to the production and storage and use of tangible assets. These assets are therefore the wealth of the Bread and Butter Economy (BABE) in the Local Ecological Area Foundation (LEAF).

The difference between the IOU of the principal of the energy Bond and the cash of the interest paid allows the money supply to be expanded by the issuance of bonds and contracted by their redemption.
So far, this is a quite familiar model. However if we introduce the three principal natural parameters of being discerning, ethical and streamlined (DES) to our harmonious actions, the model is clumsy and becomes complex rapidly.

Let us see if we can make it simpler and more attractive by combining interest and principal into our currency. This makes it worth holding as a store of growing value, as well as a medium of exchange.
Conventional cash used to be a promissory note, promising to pay the bearer on demand a certain amount of Gold in exchange for the note. These Banknotes also had a serial number so that the number of notes printed was quantifiable. Modern banknotes promise to pay the bearer what they are already in possession of, a piece of paper with writing on it. Modern banknotes still have serial numbers, but most of the money in circulation is electronic, so nobody knows how much there is in total. This is sloppy in the extreme.

Back in 2001 after the War on Terror started, the government brought in money laundering regulations that meant that any money over £2500 was to be recorded. I was working in a casino at this time. There were also large amounts of money being lost through fraud at banks. There was I staring at the obvious solution to both problems, a Roulette table.

A Roulette table can comfortably process some five hundred individual bets per spin, and on a busy game will have a spin every minute or so. These bets are owned by different players, and the only record of the transaction is where the chips are placed on the layout of the table. Each player has a different colour of chip, and the value of each colour chip is determined by a marker at top of the table. The result is that the croupier knows who placed the chip, and therefore who and how much to pay, when they win, because ownership is determined by the colour of the chip. Coloured chips are not stolen by other players, because their ownership is known.

The change of ownership of the chips is determined by their position. If the chips are on the players side of the layout, they belong to the player. If the chips are on the layout they are in play, ownership to be decided by which number the ball lands in. When the ball has dropped in the winning number, a change of ownership happens, The winning bets are remain in position and the property of the player. The losing bets are taken by the Croupier and are now owned by the house. The winnings are paid by the house and pushed by the Croupier to the players side of the layout and are now owned by the player.

Casinos prefer to use chips rather than cash because they are much more efficient way to process money for the game than using cash.

The obvious solution was to impart the qualities of coloured casino chips to cash.
So this “Clever Cash” as I called it would have a serial number, the account number of the owner and because of requirements of the money laundering regulations, also the history of who previously owned the cash. When this cash was spent in shop, the shop would be the new owner etc. Any suspicious transactions could be traced thus forcing the criminals back to using “Dumb Money” like Gold and Silver coins and Illegal drugs etc.

I thought that I was on to winner with “Clever Cash” because it was a simple and effective. I duly went to see the people at De La Rue who make banknotes as well as contacting the usual suspects. To make this short story, even shorter, Guess what? Not interested.

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Financial Rehab Part 2 Chapter 2

Financial Rehab Part 2 Chapter 3