January 26, 2010
Reforming the money systems
Worldwide the extant money systems are bank debt fiat systems ---the money is generated by debits and credits made by commercial banks (currency notes are a relatively small portion of our money). Unrestricted creation of this fiat money can lead to uncontrollable inflation. Hence, a monetary authority is required to police the money creation by commercial banks. While this money is not linked to the not-so-useful gold, like bullion money the bank debt fiat money too is scarce. The function of the bank debt money as a “store of value” combined with the positive interest rates, encourages hoarding of this money. This scarcity adversely affects the “medium of exchange” function of money—say ten entities may not be able to exchange goods and services amongst themselves if they lack money.
Considering that India’s population may peak soon, a few decades later the dependency ratio (the ratio of number of individual aged between 15 years and 64 years, to the number of individuals aged below 15 years or above 64 years) may spike. When Bismarck instituted a retirement age of 65 years in 19th century Germany, the average life expectancy in Germany was 48 years. We have to do away with a fixed retirement age, or may be push it to say 100 years as promises of a leisurely retirement are unlikely to be kept if retirement occours too early. Also, some of our money needs to be anchored with a future need of ours. This alone can make retirement planning meaningful—what use is the conventional money if inflation renders it insufficient to buy anything a few decades later. At an interest rate of 3% p.a., 10gm of gold invested in 1 AD would now equal the weight of the earth! So, we need to accept that high interest rates are not sustainable without accompanying general inflation, unless the money is anchored in a future need that is fulfilled by increased capacity generation. The solution could be to incentivize capacity generation by offering positive interest rates, and to encourage the role of money as a medium of exchange by charging negative interest rates once the capacity is generated. The negative interest rate would also correspond to depletion in the residual life of the capacity generated. The demurrage charge on currencies (negative interest rate) implemented by Gesell was formally endorsed even by Keynes.
The new complementary currency would be issued by the power regulator solely in electronic form. This currency would be issued with a birth-year to respective power companies that are building new power generation capacities. The birth-year corresponds to the year of completion of the power project. Until the birth-year, the power company would pay an interest of 3% to the power regulator. The power company can use the EINR (energy rupees, a unit of which corresponds to 1 KWhr) to buy cement, steel,... These companies in turn can use the EINR to buy electricity for their own needs, and even pay salaries to their employees partly in EINR. Every power company, will by law be required to honour EINR from its birth year, and can voluntarily accept EINR prior to the birth year. Existing power plants, as well as future power plants (beginning their respective birth-years) may buy coal, oil or other raw materials using EINR. Every year after the birth-year, the EINR balance would be reduced daily at a rate of 3% p.a. even if it is not utilized. This is because power generated goes waste if not utilized. Also, the power plant does have a finite life. The power regulator will issue EINR to the power plants based on their available capacities and their maturing liability in that year. This currency system, rewards early completion of the power projects and also rewards a power plant with a longer life. As this complementary currency is backed by energy, it is not inflationary.
Though machines are becoming increasingly more efficient, our appetite for energy is only increasing. In general people like to optimize two variables: time and comfort. Also, the more ordered forms of energy like lasers require a lot of energy as the ratio of input energy to output useful energy is very high. So, there is likely to be a sustained demand for energy in the future. Someone planning for a retirement could lend EINR to the power regulator/power companies for new power projects until retirement—as long as there are new power projects interest will be earned. EINR (with different birth-years as well as EINR post-their birth-year) would be traded on exchanges.
Many of the payments could be made partly in EINR and partly in INR. Different countries may float different energy currencies. And for countries connected by land it may be possible to settle the trade surpluses in terms of energy currencies—there may not exist parity between the energy currencies as the quality of supervision by the power regulators may differ in different countries.
What about taxation? Currently “time dollars” are exempt from tax by the US IRS. Initially, as an incentivization the EINR could be exempt from taxation, but later it would have to be taxed like the existing money.
NOTE: I recommend “The Future of Money : Creating new wealth, work and a wiser world” by Bernard Lietaer and “The Bottomless Well: The twilight of fuel, the virtue of waste, and why we will never run out of energy” by Peter W. Huber & Mark P. Mills, as essential reading. While the proposal suggested here is original, the rationale for it is largely drawn from these books.
Posted by amgodbole at 12:24 PM
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