Currency (theory) crisis [continuation I]

Written by Carlos A. Bondone

Here go these paragraphs, in line with the previous ones, for that the governments decided “to take control over the financial system” , making the “brave decision of taking it away from the market’s hands” , because it is “evident” that the market did not know how to behave appropriately under the given circumstances. A way to proceed which is in harmony with the theories that the current monetary systems of State’s monopoly maintain in relation to that money is a “social” issue. Inconsistent theory in function that it is extensible to any economic good that is massively exchanged (bread).

Taken measures
With England taking the lead, the measures aimed to three aspects with a same goal: the State takes care of the financial crisis. Let’s see the measures and the position of our theory (TER):

  • To capitalize to the banks with State funds.
  • To guarantee the banking deposits with State funds.
  • To provide liquidity to the financial system (and the non-financial) with State funds.

The reader will notice that the end of each sentence reads in italics: with State funds. And this has been written this way to emphasize the central idea that drove the governments: the State takes charge of the Irregular Financial System (IFS). Put in a mathematical expression, we can well present this equation:

with State funds = IFS

This equation is the one that demonstrated, by means of accounting, the TER to us. Let’s see some of its conclusions, which suit in this case:

* Within Irregular Financial Systems (irregular credit as currency), the “financial” sector never creates or expands the credit (currency). On the contrary, it is the borrower of credit from the market.

* Within IFS the independence of the Central bank from the political power is impossible, and in regular monetary systems its existence is unnecessary. Because of this, the TER expresses that a system of common irregular currencies (Euro) demands common economic policies, like the ones adopted in front of the inability of the European Central bank to bear the crisis.

* The simple emission of paper money and bank balances is no more than papers in a drawer. These papers become (irregular) credit when somebody delivers present economic goods in exchange for them, that is to say, when they enter the exchange circuit. It is the market who bestows the entity of credit and currency to them.

* Credit is a superior stage in the economic development of mankind that crumbles when it acquires the form of irregular credit, especially when it carries out the condition of currency.

* Within IFS, the market interest rate (i) and the general level of prices (p) are a same entity, put in simple maths it would be i ≡ p. On the other hand, by axiom, saving is always different from investment (S ≠ I). These are central concepts of the TER (unlike the other theories) which operate as primitive terms of science and show us that the only function of Central Banks is to avoid the banking run, since the declaimed practice to alternatively control i and/or p in search for balancing S and I, lacks of any theoretical entity.

* The TER tells us that two types of interpersonal exchanges exist: cash and credit. The exchanges labeled as cash in IFS, are credit. The only cash exchanges are barter and the ones carried out with money. Then, while the legal order assigns the category of cash to the interpersonal exchange made with currency in an IFS, the world will live in permanent economic and legal confusion, like it is the supposition that it is the Financial System the one that grants credit. I repeat this synthesis because I consider it a simple form to show the reason for the theoretical-political deviation in monetary crises

We can observe with clarity that the causality sequence is completely different from the way the theories in effect present it, since the IFS, configured by the State - being its appendix the Central Bank and its “commercial representatives”, the banks- is the borrower of credit from the market. It is totally unfortunate the phrase that states that the Central Bank is the moneylender of last instance. On the contrary, it is the borrower of first instance. For that reason, it is counter-natural that the bankrupt-State (IFS) tries to take more and cheaper credit. But the status of counter-natural is inherent to dictatorships, a situation that today the “sovereign-indebted” imposes to its “creditor subjects” (any similarity with today’s reality is no coincidence). The State message “I take charge of the financial crisis” is marketing for political needs, but it is of intellectual honesty to exculpate the politicians in these circumstances.

In other words, the credit plays a central role in the economic development - accepted by all the theories-, then, everything that implies to defile it will be detrimental, as it is to attempt against its ultimate element: trust. At the moment we are witnessing the major terrorist attack to Capitalism (greater to 11/9). Not only is the credit discredited (the inevitable conclusion of all IFS), but there is action taken in joint internationally aimed to disqualifying it still more.

The TER denounces the IFS for being a sort of anti-capitalist infiltration within a capitalist system.

To reformulate the theory before the system
Regarding that there is an international summit ahead “to adjust through greater control and coordination the international financial system”, I believe that it is quite timely to denounce, in political language - Mr. Bill Clinton-, that:

It is not the market, neither the banks, nor the politicians, nor the lack of regulations,

Aside of what Hayek already said, with his characteristic intellectual honesty, that “there was no satisfactory monetary theory” (a void that I consider that the TER fills), I believe that just by remembering what occurred in the last 15 months, it is easy to notice the preceding affirmation: from a state of extreme liquidity never seen in the world, we arrived in 30 days to a state of extreme non-liquidity. Accordingly, i should have raised, but we have witnessed, amazingly and simultaneously, a greater request of credit from the IFS-bankrupt-State, and a lower i (!!!???). This sort of inverted law of gravity is in tune with the monetary theories in force that in economic terms I called the <>Paradox of interest. This implies putting into action the inverted laws of supply and demand.

The future crisis in “the real” economy
Well, once unveiled the IFS’s characteristic of belonging to the State and the belief of “surpassed financial crisis”, the study of fiscal policies now begins to provide with a frame of demand sufficient enough to avoid recession, deflation, stagflation, and all other unnecessary term that may occur to us (unemployment).

A simple and easy warning: before making use of the contributors’ money to encourage demand, it would be proper to remember what we have concluded in the previous lines, the State is in bankrupt and it is still necessary to come out from this situation. In other words, it is necessary to tell the market (the people, ultimately) that apart from having to take charge of the IFS’s liabilities, now they are trying to push it to take charge of a greater effort to “reactivate the demand”. In another words, it was not understood that the party is over and they are trying to keep dancing!!?? … The market said: no more credit to the IFS-state, and not only does its demand for more credit at lower rates, but additionally tries to impose more fiscal effort to it… We do not have to be magicians to notice that the final liabilities will be paid with acquittal of debt (coarsely identified with the term inflation) and refinancing of the surplus of the total liabilities (the IFS). But once this had occurred, we will be only preparing the beginning of a new crisis of the financial system, supposedly capitalist.

New theory and “SHOCK”
It is very simple to leave this situation and in very fast form, we only must:

a) Change the current theories for the TER. An essential step in any diagnosis is to work with instruments derived from suitable theories. This will prevent the continuation of the talking at the classrooms of unsuitable concepts like “liquidity trap”, “neutrality of money (the mere mention of itself)”, “Gresham's Law”, “Balance of payments”, “exchange rates”, “unemployment”, “zero or negative interest”, “monetary cycles”, “45 degrees curve”, “Phillips’ curve”, “IS-LM curves”, “prices’ dichotomy”, “endogenous money”, “independent cost”, “real and monetary economy”, “equilibrium”, “Garrison’s graphs”, “Locke’s problem”, “quantitative theory”, “monetary transmission mechanism”, “Gibson’s paradox”, “monetary regression theorem”,… and the “paradox of interest” (introduced by the TER).

b) To implement a Regular Financial System (RFS) : once the TER is adopted, a regular monetary system will have to be implemented with a few and forceful measures, being aware of people’s will (the market), restoring reserves with State assets when necessary. In the new scenario, the presence of central banks will not be necessary, neither of State currencies, nor the intervention of the government in the international trade. This is: the interventionist and bureaucratic system of balance of payments, exchange rates, etc, will not exist… Once adopted RFS, the TRUST SHOCK will lead to a situation that, in less than one year, the world will be working with market in full force and Capitalism will be released of the suffocating totalitarianism of the IFS.

The possible scenarios are the following:

a) The TER is not implemented at an international scale and it is decided to go with greater fiscal interventionism (100% probable with the present theories). In this scenario, the world not only will notice that the “financial crisis has not finished”, but that we are at the beginning, unnecessarily, of a very painful period of an international creditors’ meeting call.

b) The country that implements the TER will take a great competitive advantage compared to the rest from the world that will continue with the IFS. It is easy to notice this if we admit that credit is the ultimate engine of growth and the country that adopts the TER will be the one with greater reputation and more attractive to entrepreneurs and/or risk investors (the label that best suits the businessmen who the free market generates and takes care of selecting spontaneously, without State’s perks, proper of the IFS).

Mankind will opt for Capitalism. The only thing that is necessary to notice is that it is incompatible with an IFS. If this is noticed by the means of the theory, the process will be less painful and more productive. If, however, we must continue with the trial and error scheme (past, 1929/30; 2007/…, and future) we know that an organism suffers a lot when undergoing repeated surgeries, that leave very deep consequences.

Finally, also derived from the TER, we cannot accept the idea that these financial crises are inherent to Capitalism because it means change, revolution, etc., unless we are alluding at Heraclitus philosophical principle: change if time, then, if time, change (inspirational source that allowed me to discover the TER).

Buenos Aires, October 2008.  


Translator Note: The distinction between money and currency is essential in this work. The author places the term "currency" as a more general categorization than that implied in "money". Thus, currency can acquire whether the form of money or of credit, and this last can be regular or irregular.

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