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New money

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Debt money vs Bitcoin vs Positive money
#openfest2015

Published in: Economy & Finance
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New money

  1. 1. New Money Debt money vs Bitcoin vs Positive Money Vladimir Dzhuvinov • @dzhuvinov • #OpenFest2015
  2. 2. Where Does Money Come From? 73% of people have no idea about how money is created Survey: http://c2id.co/3
  3. 3. Game of Money €$¥ Financial crisis is coming
  4. 4. The Rules of the Game ● People trade with one another using Money ● Money == Medium of Exchange ● People must borrow every unit of exchange
  5. 5. The Central Bank Commercial 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. 6. Role 1: Choose Central Banker Ben Mario Ivan Job: Set interest on seed money, try to keep inflation at 2%
  7. 7. Role 2: Boss of Private Bank Dick Bernie Ceco Job: Multiply debt, cash huge profits, get bailed out if your bank becomes insolvent
  8. 8. Role 3: The Economy Job: Take on debt, then pay it back with interest Alice Bob Claire
  9. 9. Let's Start the Game!
  10. 10. The Central Bank Commercial 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. 11. The Central Bank Commercial Banks Economy The Commercial Banks now have $100 available for lending owes: $105, has: $100owed: $105 $100Initial moneyTotals: $0Bank deposits $0Debt to banks
  12. 12. The Central Bank Commercial 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. 13. The Central Bank Commercial 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. 14. The Central Bank Commercial 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. 15. The Central Bank Commercial 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. 16. Let's Pause the Game and Analyse What has Happened!
  17. 17. $100Initial moneyTotals: $200Bank deposits $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. 18. Fast Forward to 2015 ● $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. 19. $120 trillion = $120 000 000 000 000 000
  20. 20. And You Think Game of Thrones is Cruel? :-)
  21. 21. This is the system effect when we need to borrow the units of exchange (at an interest)
  22. 22. Just How Ridiculous is Having To Borrow Units of Exchange
  23. 23. The Two Loop Economy 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. 24. Enter Bitcoin ● The units of exchange are “mined” by searching for SHA collisions ● Miners seek profit from the discovery of a new Bitcoin
  25. 25. Estimated electricity spent on Bitcoin mining: 2000 to 40000 Giga Watts / hour source: http://c2id.co/9
  26. 26. Bitcoin Has a System 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. 27. Price Stability The total amount 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. 28. Enter Positive Money Money as Debt Units of exchange: Borrowed at an interest Bitcoin Units of exchange: Finite commodity Positive Money Units of exchange: Granted (to match GDP)
  29. 29. Positive Money ● Not a 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. 30. Expert Committee Government Economy 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. 31. Creation & Allocation of 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. 32. … or give the new money to BB so we can have more motorways
  33. 33. Commercial Banks Still Exist 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. 34. Benefits of Positive Money 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
  35. 35. Good News
  36. 36. Good News
  37. 37. Good News
  38. 38. Lessons 1.Money is a medium 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. 39. Thank You! Q+A? Download this presentation: http://c2id.co/b

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