Currency (Theory) Crisis

Written by Carlos Bondone

About the international currency crisis we are living these days (like with all crises), it is convenient to make a good diagnosis considering the scientific knowledge available (assumed as the most precise knowledge) in order to act accordingly. Therefore, it is essential to set apart the areas involved, being those: the political area, the area of applied economy, and the area of (corroborated) economic-currency theory. It is evident that this last is the one that acts as scientific knowledge.

From the aforementioned it can be deduced that, before looking into the areas which are “responsible for/busy with” the solution of the problem (political and of applied economy), it is possible to reflect upon the quality of the scientific theories which they back their actions with. On that regard it is well known that all recognized scientists, researchers on currency theory have concluded their labor stating that there is not a satisfactory theory on this subject and that this was a pending matter in economics.

Certainly, this state of things was what led me to develop scientific theories aimed to contribute with a new course for the currency theory of economic time in particular and macroeconomics in general; theories to be found in the book "Theory of Economic Relativity - The Solution to Monetary [currency] Crises – A critique to current economic theories: Austrians, Keynesians and Quantitativists".

Because it is good to have a theory that may be applied, I will now simply refresh the basic postulates of the new theories that I have introduced in the book mentioned, and then I will apply them to the analysis of the current international currency crisis, while I will compare them with the theories in effect, with special attention to the approach on the diagnosis and treatment of the crisis both theories suggest.

Current currency theories:

As I highlight in the aforementioned book, all the theories at present share these basic postulates (and some others that we do not need for this analysis):

1) They make an essential distinction between barter economy and economy with money. From this derives two fundamental categories of (interpersonal) exchanges: direct (barter) and indirect (with money).

2) They treat currency theory from the theory of the money, which puts at the same level both economic entities: currency and money.

3) For the same reason in point 2, they treat like a same thing money and credit, when this one is used as currency.

4) They point to interest as the price of money, which follows from the same error of treating money and credit alike, when this one is used as currency.

5) They do not notice the substantial difference between regular and irregular credits (not to precise with which present economic good is going to be cancelled the debt that every credit originates, among other possible irregularities). A situation that led all the international financial legislation to confuse the economic entities for cash exchanges with those for credit (to consider as cash exchange or credit cancellations the delivery of irregular credits – PM and FM- used as currency). Something which I consider the cornerstone which obstructs the equitable distribution of wealth based on a context of reward for merit, and not for illegal appropriation of other people's wealth, situation which shoots to the heart of democracy, supported on freedom and private property (Capitalism).

Once again, I state in this website and in all my texts that all the currency theories in effect sustain these same postulates, the differences are nuances of meaning (except for Carl Menger, founder of the Austrian School), and for that reason they maintain unnecessary and/or mistaken concepts like: economic equilibrium (the need to equilibrate “currency” variables with “real” ones), etc., etc. If you wish to extend this point, I suggest you read more in this website or the complete theories.

(Currency) Theory of Economic Relativity:

Now, we will show every of the five abovementioned items with the outstanding theoretical aspects (shared by current currency theories), the currency theory sustained in which I call the “Theory of Economic Relativity (TER)”:

1) The separation between barter and money is not essential in economics, since both belong to a higher category which is the one of being both interpersonal cash exchanges, for this last is defined as the interpersonal exchange of present economic goods, as money is. Such separation is of fundamental importance for finance, but as a component of economy. The TER makes a distinction between cash (exchange of present economic goods: barter and money) and credit (exchange of present economic goods for future economic goods) as the essential entities to classify the interpersonal exchange.

2) From the very moment it is assumed that currency is “the means of exchange (interpersonal exchange) of common use”, we observe a broader scope for the currency theory, than that of money alone, since this last refers to a “present economic good of exchange of common use”, which does not give space for credit to be considered a currency entity - which would be a “future economic good of exchange of common use”.

3) The TER does not make the mistake of treating money and credit as equals when both are used as currency, or when credit is only used and is approached from the money theory.

4) The TER expresses clearly that interest is the price of economic time, which is the only economic good that materializes inevitably in another present economic good, because it does not have life on its own (an attribute that current currency theories, confusedly and inadvertently, try to assign to money). Later, when economic time is exchanged interpersonally, credit is configured. It clearly follows then that interest is the price of credit. Therefore, if credit is used as currency and prices are measured in relation to currency, we conclude that interest and price levels are the same entity (the reader will notice that this is not a minor thing, in regard to current theories).

5) The TER warns us about the appropriations of other people's wealth that take place when currency in form of irregular credits is used (IC), which I call the “dangerous chain of irregular credits”, formed by the combination of PM (paper currency) and FM (fiduciary media), a banking system with fractional reserves. It is a key subject, since it is what measures the social tensions derived from the enormous cost that population must undergo because of the uncollectibility (that the current theories call or measure “technically” using the term “inflation”) of the irregular credits in form of PM and FM.

Difference in diagnoses:

In order not to extend the article much, I only remark the following:

The “prescriptions” derived from current currency theories are:

a) To inject liquidity via the central banks (read: to increase irregular credits) in order to avoid the recession, financial crack, etc. Until thirty days ago, all the news headlines were stating something like: never in the history of mankind had there been as much liquidity as today. It is evident that the theory fails.

b) If alternative a) does not work, the interest rate should be lowered. It is evident, though, that with alternative a) the interest rate is being lowered already, an aspect that points out two fundamental errors: to misunderstand that interest rate is the price (the one of currency in this case, no less) of an economic good (fatal theoretical error of cause and effect); or to intend to establish an international generalized price control (since the price of currency is the one used as unit of measurement for all economic goods).

c) To urgently tune the central banks in the same wavelength in order to solve the crisis leads to listen to ideas like the following: that the U.S. grant credit to other central banks while the US is the main debtor worldwide (dollar stock plus “official” debt); to pray for China not to give up the dollars or the “official” debt represented by the American titles, this is not to understand that Chinese economy (and others) has been growing as a result of the credit that the Chinese have been granting U.S. (via the dollars in reserve, plus the purchase of the “official” debt), a credit (economic time) that the Chinese people are enduring (as well as all the holders of dollars in the world). In other words, with this simple example I attempt to display the simple current situation, which does not differ from the problem of a creditor in front of a debtor “suspected as uncollectible” but who is a great client at the same time, shared like this and also as a debtor with other suppliers of present economic goods. In short, from wherever we may observe it, the current currency theories lead us to the recipe of adding more firewood to the fire: to solve the problem of maintaining the international debtors (not only the dollar) “suspected as uncollectible”, giving them more credit. And about the expressions that try to put the situation as if it were a “liquidity” problem, and not of “insolvency”, will be describe in the following paragraphs.

The utopia of "fundamentals":

Another commentary that arises from present the currency theories (and macroeconomic ones derived from them) is that we should not be alarmed by the currency crisis as long as the “fundamentals” are well. In other words, as long as the “real economy” works well (measured by a pile of indexes that Popper, the “Lamarckian genius”, put in hands of the central banks), we should not worry too much.

It is evident that credit is not considered a real entity in economy; we only notice it when it becomes uncollectible. Then I invite you to think that credit is an economic good of fundamental importance for economic growth, and that the fact that human beings have discovered that it can act as currency does not allow them to use it as a tool to plunder the population (by means of credit irregularity), less to those peoples who in a context of freedom and full respect of private property offer their effort (their economic time) to satisfy their fellow (what in economy is called “market demand”).

To summarize, the “fundamental” par excellence is credit, the economic time exchanged between human beings, which when used as currency can give excellent results when is regular, and catastrophic ones when it is irregular, what derives in a “Capitalism sick of authoritarianism and inequality in rewarding merits". The current currency theories, that defend the irregular credits as currency, did not come to save Capitalism.

TO SUM UP:

With one ounce of gold, interpersonal exchanges a 1,000 ounces of gold worth can be generated within a currency system with regular credit, with no need to make use of the irregular credit to achieve “full employment”. This last is an untenable concept which violates Say’s Law, axiom and primitive term in economics, which in my words I express like this: the economic goods are economic goods or not; there is no economic good that is not an economic good (an “unemployed” economic good does not exist); this is a concept which Mises (also Austrian) stated before I did, perhaps with other words but with the same meaning.

Buenos Aires, August 2007
info@carlosbondone.com  

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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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