Money as debt. A case for monetary reform.

If you have the time, check out this video (it's 47 min long!). The beginning may be a bit boring, because it is something that you may know already. But it gets more interesting as the video progresses. You may get lost as some point, as it happened to me, so I had to rewind. I started watching this thinking it would be just another nutty conspiracy theory, but it's not that. It is a proposal for a complete overhaul of the world's monetary system. I have been trying to find some fatal flaw in the logic but could not find any. It seems to make sense. 
The video is from 2006, before the big collapse of the banking system.


... Seen it? Well, while not everything is completely accurate (according to the author, simplifications were made in the interest of understandability). It is sad that those inaccuracies have given critics fuel to brand this work as a conspiracy theory. More information about those criticisms, and their response by the author, can be found in www.moneyasdebt.com.


At the heart of the problem lies the fractional reserve system, which we have all come to accept as the way things are, and need to be. There was a detailed proposal for a full reserve system following the Great Depression. Called A Program For Monetary Reform, it was widely supported by most economists. 
The Austrian School of Economics advocate a full reserve system. The views of this school within the economics profession have been considered heterodox for some time now, but many of its theories have been subsequently adopted by mainstream economics.


At any rate, the silence on this topic is strange in the face of recent systemic failures of the banking system. Public awareness of a possibility of a huge monetary reform is necessary and this debate needs to be had. 

What's a free market anyway?

In 1819, a new law was passed in the British Parliament. It was the Cotton Factories Regulation Act, and stipulated that employment of children under the age of nine was banned and that children aged between ten and sixteen had a limit of twelve working hours per day. There was great controversy, as opponents argued that the government was meddling with the free market. After all, if children needed to work and their parents were ok with it, why was the government interfering? It went against the free market principles.
When current restrictions on what can be sold and bought were introduced, the same principle of free market was invoked by opponents. There was a time when it was legal to manufacture and sell medicines with no supervision. It was perfectly legal to buy votes or government jobs.
In fact, our free markets are nothing but. Even in the sanctuary of free trading, the Stock Exchange, you can't just show up with some shares and start selling them. Before a company can be legally traded in the stock exchange, they must comply with strict rules and audits for a number of years. And then only registered brokers can buy or sell them.
A free market is then a market with rules and restrictions that we're just used to comply with. They have been put there, one after the other, in order to curb the natural excesses of markets left to their own devices.

Don't get me wrong. Adam Smith's invisible hand is an efficient mechanism to allocate resources and set prices. It works - up to a point. It is like a force of nature that we can use to the advantage of society as a whole. But it needs to be tamed and controlled, lest it wreaks havoc. Regulation should be a Goldilocks kind of thing: not too much, not too little. It has to be sensible and smart.
You need to understand its power and its dangers, like steam power. There is nothing sacred about it.

Inequality and meritocracy

I have prepared a couple of graphs comparing several rich countries inequality levels and the effects on meritocracy. Inequality is measured by the Gini coefficient (1= total inequality, 0=total equality).
The first graph shows how the redistributive effect of taxes always lower the levels of inequality, but in some countries the effect is much larger than in others.The effect is most pronounced in Germany and Italy, and small in the United States.

 Meritocracy is measured by how strong is the correlation between the income of your parents and your own income later in life. The stronger the correlation in a society, the less meritocratic it is. It means that the poverty trap is more difficult to escape, whereas the rich kids will probably stay rich in adulthood.
The second graph shows a strong correlation between inequality and meritocracy, as can hardly surprise anyone.
There are a few odd things, however. Canada manages to achieve much more social mobility than Spain with very similar levels of inequality. This is possibly due to their exceptional education system as evidenced in their high scores on PISA. France's relatively low levels of social mobility has probably other factors, such as a significant exclusion zones in the banlieues. The three countries with less social mobility (Italy, UK and USA) are also those with higher inequality of income after redistribution of taxes. As for the USA, the data show that the American dream is alive and well - if you live in Norway.

Salirse del euro es difícil, pero no imposible

A estas alturas pocos economistas creen que el euro sea bueno para nadie. Desde luego, no para España. Pero existe la opinión generalizada de que el euro es irreversible. Que salirse es imposible.
Bobadas. Claro que es difícil, pero de imposible, nada.
La historia reciente está trufada de uniones monetarias que se han disuelto. Un ejemplo es Irlanda y el Reino Unido (disuelta en 1979). O Rusia y los estados de la antigua Unión Soviética (de 1991 a 1993).
A primera vista, la cosa parece fácil: Vd. cobra 50.000 euros al año. A partir de mañana, cobra 50.000 nuevas pesetas. Las tiendas pasan sus precios a nuevas pesetas. El Banco de España devalúa la nueva peseta un 20%, volvemos a ser competitivos, los turistas acuden en masa y comienza la recuperación.
¿Y qué pasa con su hipoteca de 100.000 euros? Si se queda en euros se vuelve muy cara y no la va a poder pagar... Bueno la hipoteca también pasa a ser de 100.000 nuevas pesetas. ¿Y esos ahorillos de 40.000 euros?
Pues también pasan a ser de 40.000 nuevas pesetas. Pero aquí viene el problema. Vd, que sabe que eso va a pasar, retira del banco los 40.000 euros y los deposita en un banco alemán, con lo que ganará un 20% de la noche a la mañana. Buen negocio. El problema es que tendríamos un pánico bancario, en el mejor estilo de Mary Poppins. Para evitarlo tendríamos un corralito.
Pero es peor. Si el banco que le concedió a Vd la hipoteca es holandés, Vd le estará pagando en nuevas pesetas, devaluadas, mientras que el banco debe a sus depositantes lo mismo que antes - en euros. El banco puede quebrar fácilmente.
La mera sospecha de que esto pueda pasar ha provocado ya una fuga de capitales desde los países del sur al norte de unos 350.000 millones de euros. La situación puede ser peor si las sospechas ganan fuerza.
Y luego están los contratos entre empresas españolas y alemanas, por ejemplo. Su empresa le debe a una empresa alemana un millón de euros por unas mercancías. De repente, su deuda pasa a ser de 1.200.000 nuevas pesetas, sin que sus ingresos aumenten. Cuando se hacen contratos en una moneda extranjera, las empresas se aseguran contra el riesgo de devaluación contratando un seguro de cambio, pero claro, en este caso no se hizo (y ya es tarde).
Es evidente que debe hacerse por sorpresa. Las transacciones bancarias quedarían suspendidas por unas horas, mientras se procede a la devaluación. Se extreman los controles fronterizos para evitar la fuga de billetes físicos. Los billetes en poder de los bancos son estampados con una marca de forma que sólo sean válidos en España, mientras se procede a la impresión de nuevos billetes. Esto no soluciona el problema de nuestro pobre banco holandés, ni sus 200.000 euros extra de deuda a la compañía alemana. Pero para esos problemas hay un poco más de tiempo. Ahora mismo hay mucha gente pensando soluciones de este tipo. Pero por supuesto que se puede hacer.

Flying over Kabul

I wake up and the cabin is dark. Everybody seems to be sleeping. I am flying back to London from Sydney after calling on Bangkok. I look at the screen and I can see that we are roughly above the border between Pakistan and Afghanistan. I look out of the window. There is a full moon and no clouds. Below I can see the barren, mountainous terrain bathed in an eerie, silvery, slanting moonlight. There is no sign of life. We are flying over an alien planet. I am hypnotized. I glance at the screen, and the flight path suggests we are going to fly over Kabul.

Sure enough, the mountains give way to an endless plain. The first scattered signs of human habitation begin to show. A few dim lights here, and what seems to be a dirt road there.

After a while, here is Kabul itself. It looks deceptively peaceful in the night. I shudder as I see what looks like a brightly lit military compound. TV news video clips of death spring to my mind instantly. Down there is where it all happened. A minute later, I am overflying the outskirts of the city: an expanse of a million minute dim lights from the houses where ordinary Afghans live, die, kill.

A few minutes go by. Kabul is gone like a dream. Now the terrible, bleak, snow-capped mountains of this unforgiving country fill the view.

I look around me. Passengers sleeping or trying to or watching a movie. Down the aisle, two flight assistants are killing time chatting the night away. I think I will try and get some sleep myself.

Our place in the Universe

In the beginning, the Earth was the centre of the world, and Man was the supreme being. It's been downhill ever since. First, the earth was demoted to the third planet from the Sun. After that, the Sun was found to be just one of many thousands of stars. Then, it was found out that there were not thousands, but in fact at least one hundred billion stars. After that astronomers discovered that all those stars were in just one galaxy, the Milky way, but that there were many other galaxies. The estimate now is that there are at least one hundred billion galaxies. And that's just the observable universe. There are more stars than grains of sand in all the beaches and deserts of the Earth.

In our own planet, we were also demoted from being the very purpose of Creation to just another mammal, evolved quite recently from other similar species. We are a random product of the mindless vagaries of evolution. Evolution has no purpose, and although it has created complex species, those are extravagant outcomes of its machinery. The most successful species are by far bacteria. How more insignificant can you get?

And yet we are very special. It may be that the Earth is the only place in the Universe where there is life. We simply know nothing about how probable it is that a planet with similar conditions to that of the Earth should be alive. We just don't know. There is simply nothing that can be argued for or against this notion.

Even if there is life elsewhere, it is by no means certain that evolution will produce other creatures with the same capacities we have. If you think about it, life has been going on in this planet for at least 3 billion years. That's not an insignificant figure, since the universe started just 13 billion years ago. And only in the last few thousand years we started to unravel the mysteries of the world. If the life of the universe were to be shrunk to a single year, life on Earth started at the beginning of October, while human history would have started a few seconds before midnight. It's not as if we had discovered remains of extinct species that once had our level of intelligence. Chances are, they never existed.

We may share a large percentage with the genome with other apes, but we are more than that.

From current evidence, it seems as if we are indeed much more special than we have been led to believe, even if our existence is due to chance.

Our brains sere a very special lump of matter. Some people may think that our abilities with respect to art, music or speech is what sets us apart. For me, it is that we may be the only conscious systems to ponder about these questions in the whole universe. It is through our incredible brains that this Universe finally becomes conscious of itself.

If we are indeed alone in this vast universe (an awe-inspiring thought), it certainly feels as if the rest of the Universe exists only for the purpose of creating us. An illusion, no doubt, but a comforting one. This would certainly be a welcome change from the trend that has been demoting us from the throne of Creation to utter insignificance and would put us back at the centre of all that exists.

A borrower is a slave to the lender

No nos confundamos. La auténtica independencia política de un estado soberano solo se garantiza cuando no tiene deuda pública. O cuando tiene muy poca. ¿Cómo? ¿Que no puede ser? ¿Que un estado moderno tiene que tener deuda pública? Tonterías. Finlandia tiene una "deuda" de -59% del PIB. Sí, negativa. Suecia, del -25%. No solo eso. Ambos paises tiene superávit fiscal, o sea que cada año van mejor.

Los mercados que "atacan" a un país no son una maliciosa fuerza coordinada. Son miles de inversores que piensan que pueden perder su dinero si el país quiebra, por lo cual no quieren comprar sus bonos.Y esos bonos son necesarios para pagar otros bonos que vencen. Si la confianza en el país se erosiona, los inversores sólo comprarán bonos si se los dejan más baratos para compensarles del riesgo de perder su dinero.

No es que se pongan de acuerdo y digan: vamos a boicotear las emisiones de deuda de Grecia. Como el país necesita colocar sus bonos, nos va a tener que hacer una buena rebaja. No. Cada inversor va a su bola. Ahora bien, lo que hace un inversor depende en parte de lo que piense que van a hacer los demás. Si los inversores piensan que otros inversores no van a comprar, perciben un mayor riesgo y se produce una situación de profecía autocumplida, tan frecuente en estos casos como en los bank-runs. No es una buena situación para un país.

Un país con una deuda muy grande asusta a los inversores, pero solo si el país sigue gastando por encima de sus posibilidades. Incluso pueden aceptar que el país, aún con una deuda grande, se endeude cada año un poco más (esto es, tenga un déficit), siempre que la economía crezca (por ejemplo, Japón). Pero Grecia tiene una deuda gigante, cada año aumenta y además está en una recesión tremenda. ¿cómo se han metido en ese lío? Es una decisión política. En el caso de Grecia, no ha sido por salvar sus bancos. Los ciudadanos griegos han elegido unos políticos irresponsables, que les han metido en este agujero. Aquí, en el Reino Unido, el pueblo ha elegido un gobierno que les había dicho durante la campaña electoral que iban a hacer recortes duros, porque si no lo hacían, la solvencia del país peligraba.

Está muy bien decir que se puede emitir deuda europea, pero eso significa que los países que llevan mejor sus cuentas tendrán que trasvasar dinero a los que van mal. Los alemanes no van a querer, y ¿quién puede culparles?

Si un país no quiere estar en manos de los prestamistas, lo mejor que puede hacer es no pedir tanto dinero prestado.