Der gleiche Aufsatz in englischer Sprache:
Stop the crisis!
by Jost Trier
Here posted September 2009
Version dated 6.12.2009
by Jost Trier
Here posted September 2009
Version dated 6.12.2009
This paper assumes that nothing new will be achieved by talking things up or ever greater national debt. We will have missed the final opportunity of emerging from the crisis in a reasonable condition if we continue to ignore the fact that our economic structure, based on a market economy and which to date has been so successful, is now unstable due to inappropriate money creation methods. Contrary to the widely held belief, there is a "panacea" that will revive the economy by way of organisational measures alone, and without inflation.
Why has everything ground to a halt?
We live in a wonderful time of worldwide economic collaboration that not only brings us but also the most remote developing countries economic, technological and medical advancement. Suddenly, within a few weeks, dark clouds have gathered over future prospects. Banks the world over realise that the credits they believed they held in the form of bonds and other securities cannot be realised and are therefore worthless. Why has everything ground to a halt? All real resources remain unchanged, water and oil are still flowing, and there is no natural cause for the world's economy to grind to a halt. Why, therefore, does a civilisation that appeared to be highly developed and full of vitality suddenly fall apart?
The question sounds familiar. We posed it at the sight of overgrown temples in South America. Following the exclusion of all suggestions such as war and natural disasters, the only remaining explanation of the sudden end of a high culture maintained that priests called for the country to be abandoned (probably based on a constellation of the stars), and the people duly followed their request.
There are, of course, no such priests in in our time, but there is an institution that is excluded from public criticism in a similar way and which expresses itself in a similarly cautious and Sibylline manner – the world's central banks. Governments throughout the world have transferred the provision of their countries with money to the respective central banks. After moving ever further away from the gold currency alone, the greatest risk for currencies was devaluation. Accordingly, central banks were given the mandate to keep the monetary value stable. Unfortunately, they were not given the mandate to ideally supply the real economy with money. Due to their sole right to generate money in the form of banknotes and coins or by paying bounty, as done in Germany in 1948, and not only to lend the money, they have de facto acquired the obligation supply money. This obligation is also largely acknowledged by the central banks. Ultimately, an allegedly stable currency loses its purpose in a collapsed real economy. The argument put forward that monetary value needs to be kept stable completely misses the point at the start of a recession in the real economy. If the economy is dampened, or even stifled, by the lack of money this is, in any case, a failure by the central banks. The supply of money must be organised such that as far as possible it provides stability in respect of real economic activity, irrespective of whether elation or depression characterises the economic mood. The system of money creation must, therefore, have an anti-cyclic effect, i.e. it must counter the real economic consequences caused by the poor future prospects, and under no circumstances reinforce these poor prospects. The corresponding same applies if elation about the economy threatens to overwhelm the real economic potential of the currency area.
The following paragraphs show that the current money creation system has a pro-cyclical effect, i.e., this system further reinforces a depression once it has occurred and therefore draws the real economy into a downward spiral. Today, the cause of setting the downward spiral in motion is of secondary importance. Crucial is merely accepting that the current system is unstable.
How do central banks generate money?
Central banks have long-since abandoned the gold backing of money, and rightly so because the beneficial development in the real economy over the past decades would have been unthinkable by way of gold backing. The gold volume cannot be increased as quickly as the real economic wealth. To nevertheless keep general prices at a reasonably stable level, central banks do not give money away but merely lend it. This means that for every euro (or any other currency unit) there is a hole (debt). The generation of money in the current system is always a "pair production" (physics terminology) of money and hole (debt). In the case of non-cash transactions, the hole is located at the commercial bank. It supplies the economy with cash by granting credit from nothing. It does this in the belief that the money will be used sensibly, and ultimately earns good income from the interest. Such money created by the commercial banks accounts for the largest part of the current money. In the case of cash transactions, the hole is located at the central bank, which is only associated indirectly with the economy by way of the commercial banks. This system was successful for decades, although normal citizens do not know that their money was only lent.
What is happening at the moment?
However, this system has suddenly failed, and a lack of trust has been dominant from about September 2008. There is a lack of trust between banks and ultimately investors. They are asking themselves, if there is a real value behind the security for which they are to pay their hard-earned money ("their" in the sense of the authority to dispose) or a real economic potential that guarantees repayment and interest. Or is the security merely covered by the claims against poor people after changing hands several times and after as many repackaging measures? Or will this claim chain end up in a never-ending and worthless cycle, or even in a snowball system? At present, the banks need months to address these questions. Small investors are therefore faced with a hopeless situation! In doubt, investors prefer to leave their money in the bank, or when they mistrust their bank, draw it out and keep it under the mattress.
The former means that the money, i.e. the money paid into the banks in bank notes, again disappears in the respective hole (pair destruction). The latter also means withdrawal of the money from the economy, in addition to the debit of the commercial bank, which is still required to pay back the money, including interest, to the central bank. In both cases the disappearance of the money is catastrophic for the real economy because the real economy can only manufacture or render services to the extent that money is available to its customers, and is spent. Bartering deals are the only alternative, which merely allows for a minimal lifestyle. However, the situation deteriorates even further. If the real economy collapses due to the lack of money, the collapse is not only proportionate to the money supply. The collapse is all the more destructive because companies go bust if they can only render some of their services permanently. Functional chains via politics, social affairs and insurance, which have been set in train due to the lack of money, fan the flames. The remaining money therefore loses its value because the value of money today does not consist of gold reserves in central banks, but moreover in the fact that one can purchase something desirable for it, which is no longer put on the market because the production capacities have failed due to the lack of money. Commercial banks see the coming catastrophe and are trying to reduce their debts by collecting the money they lent, and are only granting new loans, if at all, at high interest rates.
Therefore there is unpaired (credit-free) money in the world and the greater, the greater the number of companies going bust the greater the slide of the real economy and therefore our standard of living. The unpaired money at least saves us from bartering deals alone, but at a very low economic level with unforeseeable political consequences. In any case the further destruction of paired money means there will be neither any money left for our luxuries nor for the environment or promoting third world development. This will have fatal consequences for a large part of the world's inhabitants.
What needs to be done now?
Today almost all the production potentials are still in place. There is still a lot of money to spend in the world but the banks see the future merely as a single black hole and in the case of lending any money fear total losses. Accordingly, they impose high interest rates irrespective of however low interest rates may be set by the central banks. What needs to be done in this situation?
Flooding commercial banks with money will be ineffective as long as the banks consider future prospects to be bleak because they are worried about investing in companies becoming insolvent and being saddled with bad debts. As in 1948 in the German currency reform, money must be fed into the economy at the bottom level, i.e. by giving it to consumers as the only ones who would be pleased to receive it. However, this money must not come from the taxpayer who cannot be responsible for the failure of the central banks. Taxpayers can only increase money supply by way of paired money, i.e. by simultaneously creating debt. Unpaired (credit-free) money creation is the very thing required to maintain the real economy.
Is that inflation?
Isn't the generation of so much unpaired (credit-free) money inflation? Inflation is understood to mean the price increase that occurs because of excessively strong demand for a limited offer. At present we are facing the opposite situation. The offer is huge and the economic potential behind it far greater, but the offer is not coupled with demand due to the potential buyers lacking the necessary money. If the suggested payment of money per head were to revive economic activity, there will be considerably more unpaired money in the world than is the case today. In the current system of money generation, such money does not return to the central banks, and is therefore withdrawn from control by the central banks. Money supply need not, therefore, be increased because the paired money generation by the commercial banks is to be cut by way of more stringent laws. In any case the central banks lost their influence on money supply in the end, and that would have a destabilising effect. After all they are the only institutions that are at all in a position to keep the overall economy on course, which always threatens to run out of control in one direction or the other.
Today the central banks do not siphon off surplus money by refusing to supply the commercial banks with cash, but moreover do so by charging higher interest rates to commercial banks for new cash. Such an interest policy has a low-level effect on the financial world. We are clearly experiencing this in that the well-meaning low-interest policy of the central banks cannot at all avoid the high interest rates of the commercial banks and therefore the thwarting effect on the real economy. In the event of an overheating economy, the central banks would hardly have a chance to restrict the money supply by way of increasing interest rates. The fact that the influence is so low may be attributable to the strong increase of non-cash payment transactions over the past few years, and the fact that payments are effected at almost the speed of light. In any case, more unpaired money exacerbates this situation. This now raises the question of how to stabilise the real economy in the following way:
How can central banks be given greater access to the money supply?
Central banks must be rendered capable of ideally steering economy through exogenous and endogenous risks. Exogenous risks are understood to mean a paucity of raw materials, wars, climate and the environment, while endogenous risks are the human psychoses that cannot be avoided in banks, politics or in the freedom of collective bargaining.
In that respect we must be aware that central banks usually are not subject to direct government controls, but that they are creations of the governments. Even those central banks that apparently were only created by way of legitimisation by the commercial banks have the tolerance of government to thank for their legal position, and could be shut down, replaced or modified by legislation. Governments have at their disposal far more money than that flowing through the central banks today. The following procedure therefore presents itself:
Of course the desire to avoid inflation means that on average over a period of decades the inflow and outflow of money would need to be concurrent at the central banks. By contrast to today, the financial world would not dampen the real economy or even – as is currently the case – stifle it. Moreover it could neutrally accompany the further development of the real economy. The central bank can, following consultation with the countries and depending on the overall economic demand, amend the taxes or the salaries paid to the countries – both of these, of course, in normal times only very moderately. In other respects, the old instruments of amending the base lending rate can (initially) be retained. However, the central bank cannot avoid the creeping inflation of previous years (approx. 2% per year), even if it is in control of the flow of taxpayer's money. To do this it would need to set limits in respect of the freedom of collective bargaining. However, this is not an urgent problem at present.
One need not necessarily hope for international agreement for this programme, although this would be desirable. The success of the domestic economic activity in a currency area would immediately give rise to imitation in the other currency areas, and international trade would therefore start moving again.
The current climate bodes well for such reorganisation. Financial ministries would be relieved of an uncertain future by expecting the same revenue for 2009 and 2010 as that in 2007 or 2008. Central banks would welcome a considerable increase in competence and significance. Their present, rather modest mandate of maintaining a stable monetary value would be replaced by ideally adjusting money generation in line with development in the real economy. The problem of national debt could ultimately be tackled. In times of high tax revenues the central banks could slowly (to keep prices low) buy and destroy government bonds, since both economic and private debts, which are nonsensical in terms of real economy, dampen the economy and create social differences in society. By doing this, the central banks may experience a conflict of interest with the commercial banks, which they would however need to endure. In any case they should no longer see their position only as the first bank among many.
Why has everything ground to a halt?
We live in a wonderful time of worldwide economic collaboration that not only brings us but also the most remote developing countries economic, technological and medical advancement. Suddenly, within a few weeks, dark clouds have gathered over future prospects. Banks the world over realise that the credits they believed they held in the form of bonds and other securities cannot be realised and are therefore worthless. Why has everything ground to a halt? All real resources remain unchanged, water and oil are still flowing, and there is no natural cause for the world's economy to grind to a halt. Why, therefore, does a civilisation that appeared to be highly developed and full of vitality suddenly fall apart?
The question sounds familiar. We posed it at the sight of overgrown temples in South America. Following the exclusion of all suggestions such as war and natural disasters, the only remaining explanation of the sudden end of a high culture maintained that priests called for the country to be abandoned (probably based on a constellation of the stars), and the people duly followed their request.
There are, of course, no such priests in in our time, but there is an institution that is excluded from public criticism in a similar way and which expresses itself in a similarly cautious and Sibylline manner – the world's central banks. Governments throughout the world have transferred the provision of their countries with money to the respective central banks. After moving ever further away from the gold currency alone, the greatest risk for currencies was devaluation. Accordingly, central banks were given the mandate to keep the monetary value stable. Unfortunately, they were not given the mandate to ideally supply the real economy with money. Due to their sole right to generate money in the form of banknotes and coins or by paying bounty, as done in Germany in 1948, and not only to lend the money, they have de facto acquired the obligation supply money. This obligation is also largely acknowledged by the central banks. Ultimately, an allegedly stable currency loses its purpose in a collapsed real economy. The argument put forward that monetary value needs to be kept stable completely misses the point at the start of a recession in the real economy. If the economy is dampened, or even stifled, by the lack of money this is, in any case, a failure by the central banks. The supply of money must be organised such that as far as possible it provides stability in respect of real economic activity, irrespective of whether elation or depression characterises the economic mood. The system of money creation must, therefore, have an anti-cyclic effect, i.e. it must counter the real economic consequences caused by the poor future prospects, and under no circumstances reinforce these poor prospects. The corresponding same applies if elation about the economy threatens to overwhelm the real economic potential of the currency area.
The following paragraphs show that the current money creation system has a pro-cyclical effect, i.e., this system further reinforces a depression once it has occurred and therefore draws the real economy into a downward spiral. Today, the cause of setting the downward spiral in motion is of secondary importance. Crucial is merely accepting that the current system is unstable.
How do central banks generate money?
Central banks have long-since abandoned the gold backing of money, and rightly so because the beneficial development in the real economy over the past decades would have been unthinkable by way of gold backing. The gold volume cannot be increased as quickly as the real economic wealth. To nevertheless keep general prices at a reasonably stable level, central banks do not give money away but merely lend it. This means that for every euro (or any other currency unit) there is a hole (debt). The generation of money in the current system is always a "pair production" (physics terminology) of money and hole (debt). In the case of non-cash transactions, the hole is located at the commercial bank. It supplies the economy with cash by granting credit from nothing. It does this in the belief that the money will be used sensibly, and ultimately earns good income from the interest. Such money created by the commercial banks accounts for the largest part of the current money. In the case of cash transactions, the hole is located at the central bank, which is only associated indirectly with the economy by way of the commercial banks. This system was successful for decades, although normal citizens do not know that their money was only lent.
What is happening at the moment?
However, this system has suddenly failed, and a lack of trust has been dominant from about September 2008. There is a lack of trust between banks and ultimately investors. They are asking themselves, if there is a real value behind the security for which they are to pay their hard-earned money ("their" in the sense of the authority to dispose) or a real economic potential that guarantees repayment and interest. Or is the security merely covered by the claims against poor people after changing hands several times and after as many repackaging measures? Or will this claim chain end up in a never-ending and worthless cycle, or even in a snowball system? At present, the banks need months to address these questions. Small investors are therefore faced with a hopeless situation! In doubt, investors prefer to leave their money in the bank, or when they mistrust their bank, draw it out and keep it under the mattress.
The former means that the money, i.e. the money paid into the banks in bank notes, again disappears in the respective hole (pair destruction). The latter also means withdrawal of the money from the economy, in addition to the debit of the commercial bank, which is still required to pay back the money, including interest, to the central bank. In both cases the disappearance of the money is catastrophic for the real economy because the real economy can only manufacture or render services to the extent that money is available to its customers, and is spent. Bartering deals are the only alternative, which merely allows for a minimal lifestyle. However, the situation deteriorates even further. If the real economy collapses due to the lack of money, the collapse is not only proportionate to the money supply. The collapse is all the more destructive because companies go bust if they can only render some of their services permanently. Functional chains via politics, social affairs and insurance, which have been set in train due to the lack of money, fan the flames. The remaining money therefore loses its value because the value of money today does not consist of gold reserves in central banks, but moreover in the fact that one can purchase something desirable for it, which is no longer put on the market because the production capacities have failed due to the lack of money. Commercial banks see the coming catastrophe and are trying to reduce their debts by collecting the money they lent, and are only granting new loans, if at all, at high interest rates.
- The collapse of the real economy due to the lacking money in the current system of money generation therefore takes more money out of the economy and in the process drags the real economy further down. This endless chain of causes and consequences must be interrupted, and it can be interrupted by changing the money generation, for which the central banks are responsible.
- The goal of all action taken by the central banks must consist of maintaining the real economy. All interim goals must be subordinated to that goal. Maintaining the monetary value may not be an end in itself, and will only be worthwhile and have limits by way of appropriate adjustment in line with the development in the real economy.
Therefore there is unpaired (credit-free) money in the world and the greater, the greater the number of companies going bust the greater the slide of the real economy and therefore our standard of living. The unpaired money at least saves us from bartering deals alone, but at a very low economic level with unforeseeable political consequences. In any case the further destruction of paired money means there will be neither any money left for our luxuries nor for the environment or promoting third world development. This will have fatal consequences for a large part of the world's inhabitants.
What needs to be done now?
Today almost all the production potentials are still in place. There is still a lot of money to spend in the world but the banks see the future merely as a single black hole and in the case of lending any money fear total losses. Accordingly, they impose high interest rates irrespective of however low interest rates may be set by the central banks. What needs to be done in this situation?
Flooding commercial banks with money will be ineffective as long as the banks consider future prospects to be bleak because they are worried about investing in companies becoming insolvent and being saddled with bad debts. As in 1948 in the German currency reform, money must be fed into the economy at the bottom level, i.e. by giving it to consumers as the only ones who would be pleased to receive it. However, this money must not come from the taxpayer who cannot be responsible for the failure of the central banks. Taxpayers can only increase money supply by way of paired money, i.e. by simultaneously creating debt. Unpaired (credit-free) money creation is the very thing required to maintain the real economy.
- Aiming to kick-start the overall economy with taxpayer's money is only worthwhile if there is hope that the central banks will soon settle national debt with unpaired money.
- At present the world urgently needs unpaired (credit-free) money, and the central banks must provide it.
- The heavy indeptedness of public funds is, among others, also a result of only generating paired money.
Is that inflation?
Isn't the generation of so much unpaired (credit-free) money inflation? Inflation is understood to mean the price increase that occurs because of excessively strong demand for a limited offer. At present we are facing the opposite situation. The offer is huge and the economic potential behind it far greater, but the offer is not coupled with demand due to the potential buyers lacking the necessary money. If the suggested payment of money per head were to revive economic activity, there will be considerably more unpaired money in the world than is the case today. In the current system of money generation, such money does not return to the central banks, and is therefore withdrawn from control by the central banks. Money supply need not, therefore, be increased because the paired money generation by the commercial banks is to be cut by way of more stringent laws. In any case the central banks lost their influence on money supply in the end, and that would have a destabilising effect. After all they are the only institutions that are at all in a position to keep the overall economy on course, which always threatens to run out of control in one direction or the other.
Today the central banks do not siphon off surplus money by refusing to supply the commercial banks with cash, but moreover do so by charging higher interest rates to commercial banks for new cash. Such an interest policy has a low-level effect on the financial world. We are clearly experiencing this in that the well-meaning low-interest policy of the central banks cannot at all avoid the high interest rates of the commercial banks and therefore the thwarting effect on the real economy. In the event of an overheating economy, the central banks would hardly have a chance to restrict the money supply by way of increasing interest rates. The fact that the influence is so low may be attributable to the strong increase of non-cash payment transactions over the past few years, and the fact that payments are effected at almost the speed of light. In any case, more unpaired money exacerbates this situation. This now raises the question of how to stabilise the real economy in the following way:
How can central banks be given greater access to the money supply?
Central banks must be rendered capable of ideally steering economy through exogenous and endogenous risks. Exogenous risks are understood to mean a paucity of raw materials, wars, climate and the environment, while endogenous risks are the human psychoses that cannot be avoided in banks, politics or in the freedom of collective bargaining.
In that respect we must be aware that central banks usually are not subject to direct government controls, but that they are creations of the governments. Even those central banks that apparently were only created by way of legitimisation by the commercial banks have the tolerance of government to thank for their legal position, and could be shut down, replaced or modified by legislation. Governments have at their disposal far more money than that flowing through the central banks today. The following procedure therefore presents itself:
- Tax revenue should not go to the government but to the central bank, which pays every country in the currency area a fixed salary the amount of which has nothing to do with the revenue. It can do that because the central bank alone may generate or destroy money.
Of course the desire to avoid inflation means that on average over a period of decades the inflow and outflow of money would need to be concurrent at the central banks. By contrast to today, the financial world would not dampen the real economy or even – as is currently the case – stifle it. Moreover it could neutrally accompany the further development of the real economy. The central bank can, following consultation with the countries and depending on the overall economic demand, amend the taxes or the salaries paid to the countries – both of these, of course, in normal times only very moderately. In other respects, the old instruments of amending the base lending rate can (initially) be retained. However, the central bank cannot avoid the creeping inflation of previous years (approx. 2% per year), even if it is in control of the flow of taxpayer's money. To do this it would need to set limits in respect of the freedom of collective bargaining. However, this is not an urgent problem at present.
One need not necessarily hope for international agreement for this programme, although this would be desirable. The success of the domestic economic activity in a currency area would immediately give rise to imitation in the other currency areas, and international trade would therefore start moving again.
The current climate bodes well for such reorganisation. Financial ministries would be relieved of an uncertain future by expecting the same revenue for 2009 and 2010 as that in 2007 or 2008. Central banks would welcome a considerable increase in competence and significance. Their present, rather modest mandate of maintaining a stable monetary value would be replaced by ideally adjusting money generation in line with development in the real economy. The problem of national debt could ultimately be tackled. In times of high tax revenues the central banks could slowly (to keep prices low) buy and destroy government bonds, since both economic and private debts, which are nonsensical in terms of real economy, dampen the economy and create social differences in society. By doing this, the central banks may experience a conflict of interest with the commercial banks, which they would however need to endure. In any case they should no longer see their position only as the first bank among many.
- All measures taken by the central banks may only be geared towards development in the real economy. Money is not an end in itself, but a work of man solely aimed at maintaining the real economy.
