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New money
1. The document contrasts different systems for creating and allocating money: debt-based money created by commercial banks through lending (the current system), finite cryptocurrencies like Bitcoin, and Positive Money where new money is created by a central authority and granted rather than lent into existence. 2. Under Positive Money, an expert committee would track GDP and recommend how much new money is needed to match economic growth, which would be created by the central bank and allocated by government for purposes like reducing taxes or debt. 3. Commercial banks would still exist but could no longer create new money through lending, addressing issues like bubbles and ensuring benefits of money creation accrue to society rather than banks.
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New money
- 1. New Money Debt moneyvs Bitcoin vs Positive Money Vladimir Dzhuvinov • @dzhuvinov • #OpenFest2015
- 2. Where Does MoneyCome From? 73% of people have no idea about how money is created Survey: http://c2id.co/3
- 3. Game of Money €$¥ Financialcrisis is coming
- 4. The Rules ofthe Game ● People trade with one another using Money ● Money == Medium of Exchange ● People must borrow every unit of exchange
- 5. The Central BankCommercial Banks Economy Creates initial money and lends it to the commercial banks Offer credit and deposits to the economy, facilitate payments Alice Bob Claire Offer credit and deposits to the economy, facilitate payments
- 6. Role 1: ChooseCentral Banker Ben Mario Ivan Job: Set interest on seed money, try to keep inflation at 2%
- 7. Role 2: Bossof Private Bank Dick Bernie Ceco Job: Multiply debt, cash huge profits, get bailed out if your bank becomes insolvent
- 8. Role 3: TheEconomy Job: Take on debt, then pay it back with interest Alice Bob Claire
- 9. Let's Start theGame!
- 10. The Central BankCommercial Banks Economy The Central Bank creates $100 and lends them with 5% interest to the Commercial Banks $100Initial moneyTotals: $0Bank deposits $0Debt to banks
- 11. The Central BankCommercial Banks Economy The Commercial Banks now have $100 available for lending owes: $105, has: $100owed: $105 $100Initial moneyTotals: $0Bank deposits $0Debt to banks
- 12. The Central BankCommercial Banks Economy Alice borrows $100 with 10% interest to buy a house from Bob owes: $105, owed: $110 owes: $110, has $100owed: $105 $100Initial moneyTotals: $0Bank deposits $110Debt to banks
- 13. The Central BankCommercial Banks Economy Bob deposits his earned $100 with the bank owed: $105 owes: $105, owed: $110, has: $100 owes: $110, owed: $100 $100Initial moneyTotals: $100Bank deposits $110Debt to banks
- 14. The Central BankCommercial Banks Economy The Commercial Banks now again have $100 available for lending → Claire borrows $100 with 10% interest to buy another house from Bob owed: $105 owes: $205, owed: $220 owes: $220, owed: $100, has $100 $100Initial moneyTotals: $100Bank deposits $220Debt to banks
- 15. The Central BankCommercial Banks Economy Again Bob deposits his earned $100 with the bank owed: $105 owes: $205, owed: $220, has $100 owes: $220, owed: $200 $100Initial moneyTotals: $200Bank deposits $220Debt to banks
- 16. Let's Pause theGame and Analyse What has Happened!
- 17. $100Initial moneyTotals: $200Bankdeposits $220Debt to banks Deposits (Bob) $200 Debt (Alice+Claire) $220 Balance $ -20 ● The $20 owed to the Banks don't exist in the Economy ● No matter how Alice, Bob and Claire trade among themselves, they can never repay the $20 ● Unless they borrow again new units of exchange from the Bank (sinking deeper into debt), or somebody goes bankrupt Economy
- 18. Fast Forward to2015 ● $120 trillion gap between debt and available money / deposits ● To repay existing debt the world Economy must borrow another $120 trillion ● Is this sustainable? $79 trillion $199 trillion money / deposits debt Source: McKinsey http://c2id.co/5 ? (2014)
- 19. $120 trillion = $120000 000 000 000 000
- 20. And You Think Gameof Thrones is Cruel? :-)
- 21. This is thesystem effect when we need to borrow the units of exchange (at an interest)
- 22. Just How Ridiculousis Having To Borrow Units of Exchange
- 23. The Two LoopEconomy Daily turnover: Financial economy vs Real economy, source: http://c2id.co/c Real economy Financial Markets: ● Stock trading ● Foreign exchange ● Derivatives ● High-speed algorithmic trading ● Insurance ● Etc.
- 24. Enter Bitcoin ● Theunits of exchange are “mined” by searching for SHA collisions ● Miners seek profit from the discovery of a new Bitcoin
- 25. Estimated electricity spenton Bitcoin mining: 2000 to 40000 Giga Watts / hour source: http://c2id.co/9
- 26. Bitcoin Has aSystem Limitation ● The supply of Bitcoin is finite (limited by its algorithm) ● No mechanism to adjust the supply of Bitcoin according to the volume of traded goods and services ● Why is this important?
- 27. Price Stability The totalamount of money in circulation should track the total value of traded goods and services in the economy (GDP) Too much money → Rising prices → Inflation Not enough money → Falling prices → Deflation
- 28. Enter Positive Money Moneyas Debt Units of exchange: Borrowed at an interest Bitcoin Units of exchange: Finite commodity Positive Money Units of exchange: Granted (to match GDP)
- 29. Positive Money ● Nota new concept ● New money is granted, not borrowed at an interest! ● Create only as much as needed to reflect GDP growth. This prevents bubbles in the economy. ● Simple, transparent and democratic process The “Bible” on Positive Money See http://c2id.co/a
- 30. Expert Committee GovernmentEconomy Tracks GDP and recommends how much new money the economy needs Determines how the newly created money is allocated (spent) The Central Bank provides the newly created to the government Central Bank Commercial Banks Administer current and investment accounts
- 31. Creation & Allocationof Positive Money Step 1: Create New money ● Measure GDP growth ● Central bank creates amount to match projected GDP increase ● Example: – 82 billion BGN GDP in 2015 – 2% growth – new 1.64 billion BGN required Step 2: Allocate Created Money ● People / parliament / gov decide on how to distribute the newly created money ● Possible uses: 1. Reduce taxes 2. Increase gov spending 3. Reduce gov debt 4. Citizen bonus :-)
- 32. … or givethe new money to BB so we can have more motorways
- 33. Commercial Banks StillExist Under Positive Money ● There are transactional and investment accounts, but they are strictly separate ● Commercial banks cannot create new money by issuing debt / credit
- 34. Benefits of PositiveMoney Money creation tracks GDP to minimise bubbles in the economy Benefit of newly created money accrues to the state, not banks Newly created money can be spent directly, e.g. to reduce taxes Newly created money no longer owed to banks Simplified banking regulations Failed banks can be safely wound down Gradual reduction of government and private debt Greater financial stability through reduced leverage State deposit insurance no longer required
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- 38. Lessons 1.Money is amedium of exchange 2.The units of exchange must be provided for free to the economy, in amounts that reflect its growth 3.Whoever controls the creation and allocation of new units of exchange has real power 4.That power better benefit the people, not the 1%
- 39. Thank You! Q+A? Download thispresentation: http://c2id.co/b