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Written by Carlos Bondone
What I express in the book "Theory of Economic Relativity” (TER) is textually the following:
“Paradox of interest: theories that sustain the need to increase the price of a good to make it scarcer. The “paradox” is the result of pretending to solve the economic problem of shortage promoting greater shortage, i.e. trying to put out a fire with fuel. We call it the “interest” paradox, because the most common practical expression is raising interest rates.”
Here I will talk at further length on the implications of what I call the Paradox of Interest, in order to leave an evidence of the inconsistency of the currency theories which support the current financial order.
Currency prices
We know that currency is the economic good of reference for measurement, something achieved by the statistical use of currency prices (general level of prices, end-consumer prices, wholesaler prices, inflation, etc.). This structure is used (among other uses) as a tool to “make currency policy”.
Interest
We know (because of the TER) that interest is the price of economic time. Economic time when exchanged interpersonally configures credit. This leads us to conclude that interest is the price of credit. Following the TER, interest is the price of credit, not the price of money – as it is alternatively and confusingly interpreted. This is a clear and overwhelming evidence derived from the error of making similar money and credit.
Currency in form of Credit
Derived from the previous passages, when currency acquires the form of credit, and being interest the price of credit, it follows that:
In financial systems that use credit as currency, the currency prices and the interest rate are the same entity. Thus, the interest of the credit used as currency is the one employed in the statistics which study currency price levels. This tells us, as it is corroborated in the already mentioned book, that it is totally and absolutely incoherent to pretend to compare price levels and interest rate, as if they were different entities.
Paradox of Interest
Due to the fact that current theories (Austrians, Keynesians and Quantitativists) treat currency from the theory of money (present economic good), without realizing that what in fact is being used is credit (currently irregular) as currency, it happens that mistaken statistical studies are done (statistics developed or interpreted from wrong theories give the wrong results, like Friedman’s currency-prices causality, because of making no distinction between money and credit).
Therefore, when currency price levels are discussed, it is from the point of view that money is used as currency, without realizing that credit is used instead. It is evident that if it is noticed that currency has the form of credit, both entities (currency prices and interest rate) are just only one. Then, it is absurd to compare price level and interest rate as if they were separate entities, which derives in “making currency policy” aimed to make them “converge” (it is not feasible to make only one entity converge).
Then, current theories cannot explain the real phenomena which I came to call the paradox of interest, because the “techniques” of “currency policy” follow like this:
To emit until the price levels (inflation) become present, until they reach the number which might be “liked” by the “currency policy” dictated by an entitled authority. Once surpassed the threshold determined by the currency genius, it is convenient to take away excedents of currency, something which is accomplished by borrowing the “remnant” through the expedient of interest. Note: if by the expression dictated, you thought dictator, you will not have misinterpreted this text.
All this finance-institutional order (supported by current theories) leads us to the paradox of interest: solving the economic problem of the abundance of currency by increasing its price (it is like the law of gravity, but reversed). This puts us in any other territory, but that of economy and its basic law of supply and demand: more abundance, less price.
In the TER this paradox does not exist because the theory is aware that currencies are represented by credits, and we know that the price of this last (interest) raises when the debtor becomes less trustable, a situation which happens due to the level of debt that the debtor’s patrimonial, financial and economic situation can bear. In the TER, the paradox of interest does not exist.
Currency systems with Irregular Credits (IC)
I want to highlight the following aspects which, in spite of not covering the whole development derived of comparing the TER with the current theories, serve as interesting and proper illustration to the purpose:
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There is no such thing as zero interest, much less a negative interest. To admit any of these possibilities is to say that the economic time has stopped being economic, that we live in paradise. At a glance it is not noticeable that the irregular financial systems (PM and FM) operate with credit as currency, because it seems that the interest does not exist or its rate is zero (what is known as currency seignoriage). But to admit this would be like saying that economic time does not exist, that man lives in paradise, thus, that time is being paid with an improper appropriation of present economic goods, or a “redistribution of present wealth”, being the ones to lose those unaware of this situation and the ones to benefit those who make profit from that credit at no cost (“for them”). When the situation begins to manifest in the majority of the people, “inflation” appears, which is the human way to “see” this appropriation. Eventually, it is reached the phase of making explicit the cost of economic time and the circle of paying an interest rate begins (the process of currency contraction).
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Appropriation of someone else’s wealth. The current irregular currency systems generate the appropriation of someone else’s wealth, in a direct way through PM and an indirect way through FM.
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The chain of irregular credits. The history of economy has lots of examples, and it will keep on having them, on the social disbalances that it represents the explosive cocktail of the irregular credit chain of financial systems which combines PM and FM.
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Cancelation of irregular credit. It is evident, to the TER, that the decision to make regular the irregular credit (to turn it to present economic goods) is always subjected to the criteria of the currency genius, who, at the same time, acts subjected to the orders of the government, which at the same time acts subjected to its interests (connivance bank-politics). All this comes to confirm that, in irregular currency systems, not only is it impossible the independence of the central bank from the political power, but from the financial system in general. As a proof of this simple thought, it is enough to have in mind the impositions of the government to the currency authorities, and of these to the financial system, when currency crises come. But it is not necessary to use the case of a currency crisis to demonstrate the improper appropriation of wealth (which is allowed by the monetary theories in which legal institutions are based on); financial crises only make evident the situation to the “ignorant”, because without its occurrence the situation is only noticed by a few people (“rational expectations analysts”).
The essential characteristic of the current currency systems is that they operate with the dangerous chain of irregular credits. These last combine paper money (PM)—whose central characteristic of irregularity is that they do not specify their final materialization (the quantity and quality of the present economic good in which they will be cancelled)— with fiduciary media (FM) from the banking system, which are “payable” in the aforementioned PM, which turns them as well into irregular credits.
To sum up, the current financial systems are backed by the current currency theories, which permit the use of currency in the form of irregular credit (PM), boosting its irregularity through the banking system (FM).
Last, the TER clearly uncovers the wrong concept which states that through PM and/or FM cash operations are made (cash = interpersonal exchange of present economic goods) or that credit-debts are canceled (given that this is in fact a novation of debt).
carlosbondone@gmail.com
October 2006.
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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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