The further a society drifts from the truth, the more it will hate those who speak it. ... In a time of deceit, telling the truth is a revolutionary act. George Orwell

Saturday, November 27, 2010

Definition of money and the time-symmetry


A few thoughts:

1) Gold Money = Past Work.

A money system that is 100% backed by tangible products such as gold or by some real consummer produce such as food, cars, seashells etc is the symbol or equivalent substitute of work done in the past. A found pot of Roman gold coins represents work done by some people 2000 years ago. To create a monetary system like that you first have to mine out and accumulate some gold, copper etc or make some products and then you can have a "money" backed by it. It is mildly deflationary (in a harmless way, probably) since the amount of goods and products generally accumulates faster than gold.

A monetary system based on the assets produced in the past is inherently stable for the same reason that the automation control systems based on the "feed-forward" principle (as opposed to "feed-back") have to be. That is because past products are inherently more solid that the promise of future products! (I was just about to write "because the Past is Immutable" but on the second thought decided not to).

It's downside (or perhaps an advantage?) is the fact that it is very difficult to generate new investment credit and lend money very quickly for large projects, other then through a slow process of accumulation of capital. In particular, it is very difficult for governments and large corporations to obtain large amounts of capital without direct taxation or outright confiscation of capital from productive business entities. Such activity cannot be easily concealed by authorities and if attempted, it would be declared illegal as well as incompatible with the democratic principles. This type of monetary system probably enforces honesty and encourages work-oriented culture (if backed by the effective legal system). This is probably the main reason why the gold backed monetary system was first subverted and finally abolished by most governments.

2) Debt Money = Future Work.

Money based exclusively on debt is the present equivalent substitute of a work promised, a work that will be done in the future. Other than this difference, the system works (initially) the same way as #1! It is typically mildly inflationary because it is always easier to borrow more and generate excessive debt. The system tends to generate more of the debt-backed money, than can be reasonably predicted to be covered by the productive work in the future. In addition to the inherently poor money issuance control, unpredictable disasters or business failures tend to undermine a balance tilting it towards inflation.

When the future comes and some debt proves to be defaulted, then the equivalent amount of debt-backed money must by law be destroyed. This 'must' NEVER happens! It's a Keynesian's fallacy, for example that a government is supposed to be counter-cyclical, restraining its spending during a boom. In theory it must be done but never gets done! At least, not when the big governments run by incompetent collectivists have their way! :)

Eventually, excessive unbacked phantom money keeps accumulating because nobody is destroying it! Nobody likes becoming the first one to burn their paper banknotes, admit that their bonds (held or issued) are worthless etc. In the event of mass defaults, business closures or just corporate downsizing, the debt-backed monetary system seems to give all players an incentive to maintain a fiction and pretend that the paper assets backed by the defunct debt still have some value. It encourages the players to cheat, and punishes honesty. This honesty disincentive is also compounded by massive leverage through banking lending multiplier (it's name is '33') and derrivatives (I think the system would probably still remain inherently unstable even without the multipliers and derrivatives).

The main advantage (or perhaps its main fault) is the fact that it is very easy to generate additional credit to finance some urgent projects or startups. It's main alure is probably the fact that the very large players such as governments and some very large corporations, may generate and use gigantic amounts of new credit/money without actually producing anything useful co-measurate with the amount of resources they are appropriating. They can do all that in plain view without breaking any law, and without breaking principles of democracy.

3) Present Time Money

Can Present Money be defined as the average of #1 and #2?  One can envisage a 50%-50% mixture (or similar ratio) of both forms of money-backing asset classes (hard assets from the past or gold,  plus debt counted as an asset), but it is not really equivalent to any product being produced in the present! The 50-50 money backing scheme has no relation to the current work being done in the present time! Such monetary systems have been used in the past and are called "fractional reserve gold backed currency". It is like standing on two boats with one foot in each.

I think, the nearest equivalent of a "money" system that reflects a work being done in the present time is barter - which in fact uses no money at all! Such a system did work in the past, but only in a very primeval economy. Could such a system have worked in an industrialized economy such as during the Industrial Revolution in the last 200 years? Absolutely not! Would such a system work in the future information based economy? Perhaps, I don't know but I would not exclude a possibility that it may work!  We have to get used to a habit of challenging the old "wisdoms" because the new ways of global information access make certain formerly impractical ideas possible, for example a direct democracy! I have a gut feeling that this could be the key point behind the future economic revival!

I think, that kind of systemic classification based on the symmetry patterns is always helpful in science, it may even have some predictive power.


gn said...

re barter: i wonder if it, for example, would be at least legally (in the usa) possible to refuse to trade your 'resource' (i.e. goods, labor) for money but instead ask to barter it for something (i.e. instead of 'i will sell you this [item] for 10 usd' it would be something like 'i will barter this [item] for 1/120 oz. of gold')?

re direct democracy: considering progress in means of communication (almost everyone has a cellphone) sounds completely doable: you vote not for people (senators, MPs) who will vote for or against laws, but vote for or against laws directly by, let's say, sending a text message

Stan (Heretic) said...

Absolutely, direct democracy is possible, also present encryption methods permit good security of the vote and verification down to a single vote.

Re: barter - there is somethign about "legal tender" law that may prevent traders from refusing the Wall Street "confetti", at least in the US. In the countries whose governments were doing similar things in the past as the US gov does now, where currencies collapsed (e.g. communist-ruled Poland), it always begun with the shortage of goods. Because people who produeced goods and services refused to accept rigged (too low) prices for those goods and getting paid with nearly worthless paper. Paper currencies always became worth less and less because power elites could never refrain from printing more and paying themselves as much as they liked, even though they knew well that it will lead to an inflation. It will lead to an inflation in the US for the same reason. Because people who are now in charge in the Western countries governmen and corporations are almost exactly the same kind of characters that used to rule Eastern Europe. The same characteristic features such as
(1) extreme groupism and gang-loyalty to each other, (2) very rigid social hierarchical structre, and (2) utter lack of skills (we used to call this "negative selection").

All we need now is another KOR(*) and another Kuron. Pardon - I think we now have one - Mr. J.A. :)

(* - unofficial opposition movement)