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Review of content of workshop sessions entitled, "Towards Real Exchange", by SEEL-Systems Engineering Economics Lab, sponsored by Agence Presse Européenne (APE) 5th December, 2020.

Below we report on the morning session: 9:00-13:00.
A following article will cover the afternoon session 14:30-18:00.
Summarized by Nevit Turk, APE Economics correspondent.

The failure of the Central Banking systems were becoming evident before the advent of the Covid-19 pandemic. Therefore it is important to keep these performance metrics in focus before turning to the impacts of Covid-19 which have only magnified structural weaknesses precipitated by quantitative easing (QE).

The impact of QE

This "temporary solution" to the banking crisis resulting from the financial sectors levels of fraud and incompetence has now been in operation for more than a decade. This has transformed the financial sector irresponsibility into the political agenda attacking the supply side or real economy by:
  • Liquidating personal savings

  • Transferring most monetary expansion into assets such as land, real estate and own-purchased corporate shares

  • Depressed investment in productive activities

  • Exacerbated income disparity

  • Accelerated the fall in real wages

  • Raised poverty levels

  • Intensified government "austerity" and public service elimination agenda
By 2005 monetary authorities in most countries had lost track of the grey markets in derivatives and options and the weak due diligence procedures covering secondary and tertiary and subsequent transactions in these products meant originators only had to rate mixed bundles of differently yielding instruments, such as mortgages. However, since many such mortgages were at the limit of mortgagee ability to pay any rise in interest rates would cause house repossessions and derivative failures. Therefore the derivative creators decided to offload these "assets" quickly by using friendly rating agencies to rate them as AAA injecting hidden risk into this market. This was a major fraud because no due diligence was carried out either during mortgage aggregation into derivatives or in the rating process.
The inflation target ruse

An honest opinion of a leading US-based financial consultant is that the "central bank inflation target of 2%" is a cynical ruse to maintain pumping money into asset holdings of people in the financial sector and their larger clients.

The media misleads people, as do central banks, into focusing on the "cost of living" inflation when in fact those promoting this policy are focused on the value of their expanding and inflating asset holdings. These have risen as a direct result of very low interest QE funds being transferred directly into assets rather than productive investment.

The only reason monetary expansion slows down when inflation rises to 2% and interest rates are raised is to prevent a depreciation on the currency real value of their assets. A 2% inflation rate depresses real wages at the rate of around 20% each decade while the short turnaround in interest-based "demand depression" in the supply side markets ensures the maintenance of asset values held by a tiny faction.

This irresponsible policy places the interests of the financial sector community over those of the whole national constituency.

It is well past the time for governments and the public reject this misleading and fraudulent logic and to insist that central bank governors be asked to justify 2% inflation as a policy target in terms of constituent wellbeing and real incomes.

Therefore, in 2007, when the Federal Reserve raised interest rates large proportions of the yield base of derivatives failed to perform. By 2008 many derivatives were not performing as holders had expected and several failed. It should be stated that buyers were also guilty of not conducting adequate due diligence as part of their transactional procedures. Most banks were over-exposed to these types of "asset" and some banks failed while the rest pressured for a bail out by government and they got this in the form of QE as a "temporary measure". More than a decade later we are still under QE.

Against this background there is rising animosity and analyses appearing that raise serious doubts as to the efficacy of the central bank model. It has always been the case that using a single country's currency as an international reserve currency created an impossible monetary administration challenge on how to prevent national interests of the USA compromising the interests of other nations. This tension became visible when the USA refused to honour its promise to settle debt with gold and came off the gold standard in 1971. The world economy was expanding too rapidly for the USA to manage the reserve currency. As a result, since then the levels of action of the USA has transformed their foreign policy into one defending their role as dollar administrators. The State Department official web site more or less admits this single nation emphasis and the desire to push nations into a single policy framework. As a result of this uncomprehensive approach, there has been an unprecedented rise in the indirect and direct interference and abuse of other countries through the misuse of the IMF and World Bank as well as sanctions and military interventions in an attempt to keep countries within the dollar and agreed 1945 "Bretton Woods settlement" which was broken by the USA in 1971.

The biggest mistake made during the Bretton Woods "negotiations" was the failure of countries to accept John Maynard Keynes' BANCOR neutral currency system. Paradoxically the nearest thing to BANCOR is the cryptocurrency Bitcoin which appeared within a group of finance-savvy individuals from the information technology community. The rise in value of Bitcoin since then has now risen to levels that some institutional investors, in the wake of the QE and Covid-19 pandemic disasters, have begun to purchase Bitcoin, not as a means of exchange but as an asset like gold. On other hand the ease of transacting in Bitcoin and exceptionally low transactional fees provide a major added convenience over gold. Recently, Bitcoin has far outstripped the performance of gold as an asset. Several major financial industry executives and central bankers still do not understand Bitcoin because they only know and have built their fortunes on the basis of the one-size-fits-all system based on fiat currency financialization. However, they are becoming increasingly concerned and there have been many internal, off-the-record, meetings centred around the means to beat it or join it. Central banks worry at the potential loss of control because of Bitcoin's decentralized audited immutable real time record keeping system that lies out of the reach of government and central banks. With the rising uptake of Bitcoin by significant financial organizations, companies and individuals there is an evolving reality that there is no need for banks or, indeed, central banks when the eventual number of Bitcoins is fixed at 21 million.

The IMF under pressure from central banks and asset holders and those countries that benefit directly from US State Department positions and actions, has recently announced the need to reassess the role of the IMF and central banks by stating now is a "Bretton Woods moment" with cynical cross reference to John Maynard Keynes' ambitions while not referring to BANCOR. The financial world is, in reality, in turmoil, precipitated by a series of poor policy decisions by the USA on world trade, withdrawal from critical international agreements the application of sanctions and wholly unacceptable interference in the politics of the Middle East. Lastly Covid-19 has served to throw up the inconsistencies and true degree of the undermining of the supply side or real economy as a direct result of an over-sized financial services sector and financialization.

Against this background the next article will cover the afternoon session and describe the process of "Moving out of depression with tag and traced money".