Time, interest, prices and currency

Conference: 2nd International Congress "The Austrian School of Economy in the XXI century”, August 2008, Rosario, Argentina.
Author: Carlos Alberto Bondone.
Thematic area: Economy.

ECONOMIC TIME

The Theory of Economic Relativity (TER) highlights the very special characteristic of the economic time: it is the only economic good that does not have a life of its own, but always materializes, inevitably, in another economic good. It does not make sense in economics to talk about an hour or a day if it is not in relation to a temporary economic need, and this need only makes sense in function of an economic good that satisfies it; we talk about a kilogram of bread to satisfy the hunger of one day.

The characteristic of indirect materialization of the economic time is exclusive of itself, but the economic theory of the 20th century assigned it to money, being this the central reason why the TER considers that great part of the theoretical development of this period has been unfortunate for science.

Not being aware of the “indirect materialization” characteristic of economic time can bring within devastating consequences for individual freedom.

It is important to emphasize that the TER is valid for Robinson Crusoe as much as for society. Therefore, the fallacy of composition (what is valid for the individual is not for the group and/or vice versa) is an unfortunate category here.

As easy as it is to detect the illegal appropriation of an economic good that is represented by its single existence (bread, cereal, etc.), it is not as easy when we talk about the appropriation of the economic time of others. This can be explained by two situations:

  1. Not to notice the TER. This circumstance makes it easy for the deceit, as it makes believe that to steal economic time is not a crime since it does not have an existence on its own. It would be something like: what I do not see, I do not believe.
  2. The development of economic theories that did not notice the TER. A situation that puts science as the main responsible for the financial totalitarianism that derives in irregular currency systems, like the ones in effect.

Being now aware of the TER, we cleared the first obstacle and we are left only with the second: to retake the economic theory from the point it went astray. And this point was no other than to ignore the foundations or primitive terms of the science, which we will briefly refer to.

INTEREST
In accordance to the TER, the deductive reasoning indicates us this sequence: man assigns subjective value to the economic goods, and the exchange of them (whether inter and/or intra-personal) generates the prices.

Thus, the TER tells us that the interest is the price of economic time, a concept very different from the one supported by the theories of the 20th century, which defined interest as the price of money. Here the fallacy of composition is not applicable either, since no interpersonal exchange is necessary to give existence to the interest; the single existence of a human being and the passage of time operate like necessary and sufficient conditions for the occurrence of the intrapersonal exchange.

When the economic time is exchanged between different economic agents, credit is generated, which originates by giving a present economic good in exchange for a future one. What is being paid for the time interval between the origin and the end of the credit is the interest, and this is that simple because the only difference between cash exchanges (where no interest is generated) and those on credit (where interest is indeed generated) is the economic time that passed. It is deduced that, being the interest the price of economic time and being the credit economic time, the credit has the interest for its price.

The pure theoretician, knowledgeable of the primitive terms of economic science, a previous stage to the academic arena, will realize the enormous importance of the deductive chain immersed in the TER. It is not a trivial matter since it has to do with the foundations of economics as a science and touches the pillars of much of the theory sustained in other definitions: money, currency, interest, prices, exchanges, cycles, equilibrium, etc.

PRICES
The TER states that the price is the exchange of amounts between different economic goods, definition that moves us away again from the fallacy of composition, noticing that Robinson Crusoe uses prices for he chooses some economic goods instead of others, in each and different points in time and space. From this observation arises the concept of intrapersonal price as the price that an economic agent generates in time and in addition to it, the concept of interpersonal price that is the price that interpersonal exchanges generate. For our purposes, it is only due to mention that the monetary price is the price expressed in currency.

It is accepted the use of statistics as a tool to measure the economic variables that the theory defines. As a result, concepts like the general level of prices appear which allow us to put together data with the aim of measuring the variations that occur to the currency prices of a set of economic goods, and the interest rate of the market that also arises from the same statistical methodology. Both entities share the significant and relevant quality of being currency measures, that is to say, of being expressed in the currency of the market in which the study takes places.

Up to here, we are talking about two different economic entities: interest and currency prices, and that about these two being different is necessary to emphasize it because there we must center the observation to the 20th century theories.

CURRENCY
The TER places currency as the economic good that satisfies liquidity; a concept which is completely in tune with the theories that observe the origin of currency as a stage that surpasses the state of barter.

What the TER does not share is the following:

  1. To present as a relevance of first order in the economic theory the categories of direct (barter) and indirect (with currency) exchange.
  2. To identify the theory of money and currency as two similar categories of doubtful similarity (i.e.: everything that acts as money is money, therefore the possibility, for the consumer’s taste, to choose between M1, M2, M3, etc.).
  3. To consider the interest as the price of money and/or currency, a concept that works as the reason to be of all the financial legislation in effect, that legitimizes state interventionism in search of economic equilibriums that do not exist. This situation is easy to notice when the presidents of the central banks express something like: “it is not known which the real level of the interest rate of equilibrium is (nor of the exchange rate of equilibrium), and perhaps they will never known, or are of difficult measurement”, a statement that works as a factual recognition of the TER.

For the TER the following concepts are central, in dissidence with the previously mentioned:

  1. The relevant categories are credit and cash exchanges. Cash includes direct exchange (barter) and indirect exchange made with money (present economic good used as currency: gold, silver, cattle, tea, cereal, etc.), and credit involves future economic goods. All interpersonal exchange that is not cash is credit, a different entity to money.
  2. The currency can acquire the form of money as well as of credit; therefore it is a superior category to money. This aspect has an enormous relevance which went unnoticed in its total dimension by the theories in force, and this is the reason why no concrete and determining frontier has been set, but a vague and doubtful one instead, to the point of treating, by switching carelessly, the theory of money and of currency as if they were the same economic entity (instead of the term “monetary substitutes” with a lot of effort we would accept the one “money substitutes”). The most dangerous thing of such attitude is not the existence of the gray zone, as much as it is not to give the issue itself the relevance it has (not everything that acts as money is money).
  3. The TER brings clarity in regard to the fact that the interest is the price of economic time, not of money. The common use of currency for credit operations worked as the true currency veil, by considering that the interest is the price of currency. But such consideration is like saying that currency is the price of bread because we always express its price in currency, and this way we arrive at the absurdity that the currency is the price of all the economic goods. From here to the unfortunate quantitative theory - among others - there is only one step apart. It is hard to believe that such a simple argument is so important, and not having noticed it has brought so much confusion to the economic theory, like the development of theories that tell us to alter the level of the interest rate of a currency market, to adapt it to the general level of prices of a real market.

Being aware that the credit can be currency, the TER introduces another essential classification for the economic theory: the distinction between regular credit from the irregular one. Here is enough with mentioning that the irregular credit is characterized for not defining the quality and amount of the present economic good in which it will be cancelled, making the future more uncertain.

Then, if we take a bank note out of our pocket, we notice that it is no more than an irregular credit, since we gave a present economic good in exchange for it, and the note is not. While we believe we have made a cash exchange (legitimized by the scientific error), in fact we have made a credit exchange. But we also know that this credit (irregular currency) we will be able to exchange it for a present economic good by simply performing the inverse operation to that which had deposited the credit in our pocket. Obviously, the amount and quality of the economic good in which we will collect the credit we have granted will be conditioned by circumstances very far from our will.

The operations made with irregular currency are considered cash exchanges by empire of law, but this last finds scientific foundation in the economic theories that treat money and currency as equals, and therefore money and credit. In other words, science has its part in the matter, and here resides the enormous importance of daring to deepen the critical study of the TER.

DERIVATIONS OF THE TER
From the preceding summary we can deduce immediately a small list of theories developed in the 20th century that lose force or must be reformulated in merit of the greater level of generality and simplicity of the TER:

  1. Economic Equilibrium: based on the existence of two worlds, a real and a currency one, instead of just only one monetary. In the mathematical models such circumstance is acknowledged by the use of p (general level of prices) as a variable for “turning” the currency prices to real ones, as well as the variations of p itself to compare it with i (currency rate of interest). The TER states that the concept of equilibrium vanishes with the single consideration that there are no elements to balance because p and i are the same entity. We believe we are not mistaken if we say that the detour in the theory occurs in the precise moment Wicksell unfolds the concept of interest rate in real and currency, working as the trigger of the theories developed in the 20th century, object of questioning in the TER. On the subject of equilibrium, it is only due to add that in the TER S ≠ I by axiom.
  2. Currency transmission mechanism: it makes reference to all the theoretical development done in order to orient the currency policy of the central banks with the aim of dealing with the concept of economic equilibrium. Being variables i and p the same economic entity, it is evident that all the scaffolding of the developed models works as the Quixote’s spear and armor, that is to say: equipment to fight against a nonexistent reality, the two worlds.
  3. Currency policy: continuing with the line of reasoning of the two preceding points, any currency policy is an unfortunate attempt to correct the illegal appropriation of wealth that the irregular currency systems cause. It is easy to conclude the reason for the periodic switches, through the currency authorities, to control i and p, depending on what the markets are showing: if a greater or smaller deflection from the parameters that his “Majesty” has defined as the best ones for the occasion. The TER says that the manipulation of i, at the same time p, becomes an enormous tool to appropriate other people's wealth, for that reason the career in finances is so profitable, apart from that of the State, which knows how to read when it is the best moment to bet on the raises and falls of i or p. Within the topic of currency policy is where it appears what the TER calls the Paradox of Interest: the paradox is to generate economic theory that leads to shortage and of interest is due to the fact that the most common practical manifestation of the paradox occurs within the currency policy to regulate i as p “escapes” (when p increases we raise i and when we lower i, p escapes from us). We could say that the paradox of interest has been the central degree of dissatisfaction about the theory in effect, which ignited the appearance of the TER. Just as the leaks in the theoretics of the objective value (when it was not able to explain the scarcity of a diamond) was an incentive for the appearance of the theory of subjective value; I consider that the paradox of interest motorized the TER, with its definition of the economic time as its fundamental stone, the place of honor that the economic theory had assigned erroneously to money and currency. We could well say that the paradox of interest was present in some way in: Gibson’s Paradox, Patinkin’s dichotomy of prices, the concept of neutral money, negative interest rate, Mises’ regression theorem, the unnecessary Gresham’s Law (still with the observation of Hayek), the liquidity trap, Locke’s problem, etc. In summary, with the TER, all the macroeconomics is put under critic, as it could not be otherwise with such a reframing of the currency theory.
  4. Rational expectations: it is the unfortunate name that was given to the task of appropriating other people's economic time, by means of the described transmission mechanism. An activity legitimized by the 20th century theories that goes against the essential principle of economic well-being sustained in freedom, private property and equality of opportunities.
  5. Currency reserves: in accordance to the TER, they are no more than State assets which manipulation, in hands of “currency experts”, is legitimized in the irregular financial systems, with support in the theories of the 20th century. By the TER, the reserves of the central banks are simple State assets (illegally appropriated from its people), therefore are seizable and respond for the liabilities of the State.
  6. Central banks: it is deduced by the TER that the only reason to be of such entities is the appropriation of other people's economic time (wealth). We can reiterate the principle: “in an irregular currency system the independence of the Central Bank from the political power is impossible, and in a regular currency system its existence is unnecessary” . The concepts of exchange rate and balance of payments are a derivative of the irregular currency systems, unnecessarily institutionalized, also, by means of the central banks.
  7. Currency economic cycles: with this concept it is intended to explain the behavior of the macroeconomic variables in function of currency policies. It is well known that the Austrian School has contributed with the best theory on the subject, we consider that the TER continues its map course (apart from being a continuation of Menger), for reasons such as: 
    • More precise and simple, and this is since the very definition of the TER itself, that places the economic time at the center of the science, which let us give precision to the other primitive terms of economics (currency, money, exchange, cash, - regular and irregular- credit, prices, interest, cycles, equilibrium, etc.).
    • More general, being aware that the theory of cycles happens to be part of the explanation for the appropriation of other people's wealth, which has to do with all the economic categories, mainly with the fair distribution of wealth, in accordance with the function prices carried out in Hayek’s imputation theory, derived from Menger’s order of economic goods.
    • Freebanking: the TER emphasizes that the discussion of free banking is of second order, aware that the main issue is to define the commission of the irregular credit as the legal frame of the economic time.
    • Price control: although we know that in the Austrian School the free determination of prices is central, in accordance with the spontaneous order of the marketplace, the greater precision of the primitive terms that the TER incorporates denounces the irregular currency systems as being the most sophisticated and generalized control mechanism of prices, since to control and/or to intervene in i is to control and/or intervene in p.

THE TER AND LIQUIDITY
A simple way to present the TER is in terms of liquidity (the human necessity to surpass barter), for it uncovers the present theories in that they leave in hands of the State the provision of the economic good currency which the subjects will count on to surpass that state of necessity. In other words, the kingdoms of the past rationed foods and weapons to defend and/or to extend their power (inside or outside its borders), and those of today ration currency for the same purpose. The recipe of the sovereign is to provide more or less food and/or currency, in accordance to whether the food and/or the currency are an inferior good or not; if he mistakes the dose he will lose power, given the existence of the irregular monetary systems.

THE TER AND FREEDOM
It is not difficult to derive from the TER that the irregular monetary systems constitute an ideal structure for the validity of totalitarianism. This not only becomes clear with the precedent statements, but it allows us to explain naturally the cause, origin and destination of the “sovereign investment funds”, a phenomenon that can only be observed with surprise under the lens of the present theories. And it is here where we ratify the characteristic of the currency reserves of being simple state assets, since to the unsuitable goals of the currency institutions of preserving the value of the currency and avoiding unemployment, one adds up: to do business with other people's assets.

The magnitude of the businesses that the administration of the so called “currency reserves” allow any other type of state interventionism to be less effect, while at the same time puts at serious risk the foundations of the West because they configure an enormous concentration of wealth in hands of a few, increasing risks and generating greater social inequality. The TER indicates the suitable theoretical way out of the economic totalitarianism that the irregular currency systems impose; an authoritarianism that takes it to such a point in which the State is the one in charge of defining the level of growth of the economy, its expansion or contraction.

But, the greater denunciation that the TER makes is the degree of economic inequality the irregular currency systems generate; inequality that until not so long ago was detectable within the borders of a nation, but today has been extended to the world in general. A few decades ago we talked about poor people in a country; today we speak of poor countries. The TER shows us with total clarity that the irregular currency is more detrimental than the worst fiscal policy, for its magnitude as much as for its way operating in the shadows (the true currency veil), with the aggravate that its consequences are now of worldwide reach. The TER shows to us with total clarity that the economic rise and fall of the nations occurs in relation to the degree of use they make of the appropriation of other people's wealth by means of obtaining irregular credits concealed under the name of money. If we wished to corroborate it, we will surely find a very close correlation between the growth of a country that expands its economy hand in hand with the expansion of its irregular currency around the world, that is to say: when its credit is being extended. As well we will be able to corroborate the inverse situation by the time of its cancellation, manifested with the return of the irregular currency to the country of origin, once the country would join the claims of the conationals – any similarity with the present crisis, is not chance –. But all this occurs with any company that sees an increment in its activity because of having more credit. This simple comparison corroborates the TER, for it circumscribes the matter to the field of finances, and not to the one of greater relevance in the economic theory. Here the fallacy of composition has its reason to be in the confusion, immersed in the theories of the 20th century, of who plays the role of moneylender and who of the borrower.

The TER states that the phenomenon of the “sovereign wealth funds” is no more than an attempt to prevent the credit granted– by the people of one country to the people of another country (both administered by its States) – from becoming uncollectible. But this situation is not different from what happens within a country, since it is not the financial system that grants credit, but on the contrary, it is the one who receives it, and like with all credit, one day it will have to be cancelled. The sovereign arrogance found in the currency theory that sustains the irregular financial systems, a weapon more powerful than taxes; the TER came to denounce it.

INTERNATIONAL CURRENCY CRISIS
If we needed a testing field of the TER, there is nothing better than to see the present. The badly called mortgage crisis in the USA, for the TER, is a simple financial crisis. The creditors (Sovereign Investment funds, etc.) are collecting the credit they granted to the USA (they exchange the credit that their reserves in dollars represent for stock in companies and banks). On the other hand, the North American State (through the FED), not aware of its situation of bankruptcy, tries absurdly to get more credit and, what is worse, for a lower price.

Just like in every financial crisis, the creditors will have to admit the losses, and the debtor will have to overcome a creditors’ meeting call, typical consequences of the uncontrolled financial crises that end up altering the patrimonial (solvency) and economic (results) situation of debtors as much as of creditors.

It must be made clear that to put the responsibility of the present crisis in the freedom of the markets, the prices of commodities, the Sovereign Investment funds, results from diagnosing with theories of the 20th century, not with the TER.

Buenos Aires, June 2008.
info@carlosbondone.com 

NOTE: the corroboration of the TER has been done by the use of accounting.

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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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