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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 afternoon session: 14:30-18:00.
Summarized by Nevit Turk, APE Economics correspondent.


In the morning session the concern of the central bank and banking community with "digital currencies" was reviewed including the indecision as to whether these represent an advantage or threat to their modes of operation. The one-sized fits all financialized monetary policy is failing because there is an obvious bias towards supporting the interests of a small faction of asset holders while the majority of the constituency faces increasing challenges to their wellbeing. Indeed, Mervyn King, the former governor of the Bank of England stated that QE had favoured the financial services industry.

Bitcoin

Creation Bitcoin.org was registered on 18 August 2008. On 31 October 2008, a paper by Satoshi Nakamoto entitled, "Bitcoin: A Peer-to-Peer Electronic Cash System" was posted on a mailing list. The identify of Nakamoto is unknown but this person implemented and posted the bitcoin software as open-source code in January 2009. The bitcoin network operations on 3 January 2009 when Nakamoto mined the starting block of the chain, known as the genesis block. Embedded in this block was the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" which referred to a headline in The Times referring to the instability caused by fractional-reserve banking. The nature and content of this cryptic message has suggested to some that the origins of this system lie in the UK but point directly to the cause of instability and unjust nature of "solutions". This was before the ruinous nature and bias of quantiative easing was evident to the national constituency.
In 1997, the first act of Gordon Brown was to make the Bank of England "independent". Rhetoric aside his main reason was to avoid the political cost of government being blamed for the effects of high interest rates as had happened to the Conservative government under Thatcher when close to a million people lost their homes as a result of repossession. This was a bad decision. By making the Bank independent, monetary policy was effectively removed from public discourse and political party mandates. The independence gave the financial services sector a stronger and relatively unencumbered hand in determining monetary policy. The coordination with other central banks within the IMF Bretton Woods Framework effectvely removed monetary policy from the grasp of most governments except the USA. So when it came to a financial crisis, largely created by criminal fraud and inability of the Central Bank to control excesses of financialization, there was no effective public choice in the matter of applying quantitative easing as a "temporary solution". This has operated in the favour of asset holders and to the general detriment of the supply side productive economy stability impacting wages and therefore derived demand.

Exchange quantities and purchasing power

Between 1971, effectively, and 2020, central banks have not concerned themselves with the trade-off between the quantities of money and its purchasing power for those employed in the supply side productive sector. This is made possible by the admission that monetary policy is not fundamentally concerned with circulating funds but is more concerned with the rise in non-circulating funds tied up in assets. So when monetary policy decisions are announced the language is exceptionally carefully crafted to give the impression that money volumes relate to the money in people wages and pockets, or even company investments. But, in reality an Orwellian double-think needs to be applied to decode the utterences to confirm, based on the evidence of policy outomes, that they are in reality talking about funds that will not be circulating because they are destined to be locked up in speculative assets. The risks for asset holders remain low as long as the central banks keep pumping money into the system. This is worse that the old Soviet system where government doled out funds to industries that had produced output. Under QE government are doling our cheap money to a rich clique for not producing anything. On the other hand, the majority of the constituency faces the instability referred to by Nakomoto in 2009.

The Bitcoin solution combines an independence from central banks and stepping off the ever increasing money issuance machine to a system where the number of units of the medium of exchange has an eventual fixed upper limit. In the case of Bitcoin this is fixed at 21,000,0000 Bitcoins (rounding up from a slightly lower number).
Money volumes and inflation

One of the enduring fallacies promoted by monetarists is that monetary policy is designed to control inflation to protect the public from rises in the cost of living. They therefore make a connection between monetary policy instruments and an ability to control supply side inflation where supply side is wages, inputs and unit output prices.

The monetary policy instrument applied have been interest rates and money supply.

Milton Friedman was never able to explain how money volumes cause inflation his "explanation" was that it happens in the long run. This, of course, is not an explanation of the mechanics. The main cause of inflation is the inadequate response of companies to rising input prices. Companies that adjust their processes can accommodate rising input prices and maintain stable output prices as a result of increased productivity and thereby gain market share.

Inflation is caused by the rises of input prices of such inputs as petroleum prices, rises in land, real estate prices and rent and interest rates on money. This is paradoxical because monetarists state that inflation is caused by too much money or demand and therefore their response it to raise the level of interest rates (inflation in price of money) and reduce demand which causes operational costs of companies to rise which also affects cash flow and ability to invest in higher productivity options.

In the 1970s and early 1980s the international price of petroleum rose several times causing a very significant and general rise in input costs to many economies. This created a significant challenge and for several years companies could not adjust their production to accommodate this rise in costs by reducing reliance on petroleum derived products or by substituting them. Neither monetarism or Keynesianism had any solution to the resulting slumpflation or the combination of high inflation and rising unemployment. This is because there are no provisions in Keynesianism or monetarism for the role of technology because the seminal work on this topic was undertaken in the 1950s and 1960s and was of no interest to policy makers because they did not grasp the significance to policy.

Starting in 1975 the development of two new policy approaches was initiated. On ended up as "Supply Side Economics" which has little connection to the supply side and was a marginal taxation scheme. The other was the Real Incomes Approach, now known as RIO-Real Incomes Objective. This approach is wholly supply side placing decisions on resource asssignments for increased productivity in the hands of companies and workforces and making use of incentives to encourage a growth in sustainable real incomes.

Supply Side Economics was an experiment under the Reagan Administration and ended up as "Trickle Down Economics" and which failed. The Real Incomes Approach is a coherent theory and has a range of policy instruments but it has never been applied.
This does not mean we will "run out of bitcoins" but rather Bitcoin purchasing power will not depreciate like fiat currencies but will appreciate in value as reflected in its exchange rate with any fiat currency. The recent trends in the price of Bitcoin expressed in other currencies illustrates this point. The dangers of fiat currencies and the benefits of a fixed currency base has been very well explained in a detailed histotical analysis by Saifedean Ammous in his book "The Bitcoin Standard".

The exploding value of Bitcoin as an asset means the "price" of each bitcoin is rising to multiples of its original quote. However, the exchange items like pennies are "sats" (short for satoshis) which are one hundred millionth of a Bitcoin. So 0.0005 of a Bitcoin is 50,000 sats which at today's Bitcoin price in dollars is equivalent to $10 (approximately).

The Bitcoin's distributed and non-centralised system is secured through the secure blockchain protocol of immutable real time adjusted record keeping which is able to confirm existence of Bitcoins used in transactions which can be executed within split seconds and incurring very low transactional costs.

Of course, Bitcoin is not the only way to arrest growth in the number of currency units. The Real Income Approach or, RIO-Real Incomes Objective, is a non-digital basis for achieving similar results see, "RIO and Bitcoin". Here the focus turns to productivity that results in lower unit costs and unit prices so results in an enhancement in the value of the currency which might start out as a fiat currency. By limiting money injection the same scarcity effect can result in a rise in the purchasing power of the currency. However, here the driver is not assets but rises in productivity arising from learning and innovation. RIO policies combine policy instruments that provide incentive based on compensation bonuses linked to the contribution of companies to real incomes.

The productivity gap

Monetary policy drives funds into assets and depresses investment in processes in the onshore (national) economy, that could introduce gains in the form of higher productivity. Indeed, the weakening of fiat currencies and resulting depression has been intensified by QE-induced falling real wages and increasing income disparity. As a result, under Covid-19, the majority of the national constituency is unable to purchase bare sessentials without additional help. Since most people are in the same situation it is therefore necessary for government to provide necessary assistance. QE's destruction of savings and the ideological agenda, aiming to reduce the role of the state, imposing "austerity" using the excuse of paying down debt, has undermined the wellbeing of the whole national constituency except for a very small faction. This emerging economic paraticism, intensified by monetary policy, has hollowed out the supply side economy and population's resilience.

This problem is not addressed by Bitcoin because, as can be observed, what was originally considered to be an ideal transaction medium for buying and selling goods and services has become an asset resulting in a withdrawal of Bitcoin from circulation just as in the case of QE funds. This is why Bitcoin has become just another speculative asset amongst many. The performance of gold against Bitcoin indicates Bitcoin has become a preferred asset but this rising asset portfolio investment only reflects the decline in the value of fiat currencies or rather a falling confidence in monetary policy.

The significant problem for policy makers and monetarists, and even Bitcoin buffs, is that they do not really know where funds have ended up or who owns them or the assets that have withdrawn money and bitcoin from circulation. The government and financial regulatory authorities also have no reliable data.

Moving out of depression with tag and traced money

REX or Real Exchange is a form of a Bitcoin but where the ledger traces location of funds in the sense of tracing ownership and use of funds. Rather than use a block chain, REX uses an Accumulog first identified in 1985 within an internal development initiative on advanced IT applications within the European Commission's innovative Information Technology Telecommunications Task Force (ITTTF). The oversight logic is based on Locational-State Theory developed under the same initiative.

The additional and exciting aspect of REX is that it is intended to drive a productivity wave making use of a range of short term incremental fast pay-back innovations identified through applied decision analysis (See, "A constitutional economic policy - Part 7, Designing a sustainable future - Step 1"). This is quite the reverse of Keynesian "public works" and "infrastructural investments" designed to generate employment but in reality providing no effective payback in terms in innate rises in productivity and sustainable real incomes. Such investments, like QE, simply kick the structural problems of the economy down the road.

REX will be supported by a range of policy instruments from the Real Incomes School that provide positive incentives for companies to take up free REX funds (no banks are involved) on the basis of an obligation to use them to raise productivity, lower unit costs and unit prices and to raise employee wages so as to deliver a package that raises the real incomes of wage earners and the coporate owners and shareholders.

Note from the Editor


We note that The Economist newspaper of 5th-11th December 2020 has an article entitled, "Free exchange; The disintermediation dilemma" which gives their take on Central Bank Digital Currencies (CBDCs).
The degree to which this is achieved can result in the companies paying a reduced proportion or even not having to pay any REX funds back. This is made possible by the RIO approach to investment involving Time Adjusted Return Impact (TARI) estimates of the proximity of investment package components to practical applicability. There is here an emphasis on very low outlay and high return TARI packages. The details of this are under development and being posted on the RIO website where the specific mechanisms are posted as they become available.

It is well worth noting that this system is a results-based reward system linked to productivity which moves the economy away from the Soviet style centralization under QE which represents a cash cow scheme for political parties and their benefactors, financial service industry executives. Under this emerging approach developed by RIO, resources assignment rests fully in the hands of corporate managment, but, policy contains policy instruments that provide a strong incentive for them to implement genuine changes that deliver better productivity and price setting in a way that benefits all.

One of the most exciting impacts is that funds are unlikely to end up in speculative assets because the value of the currency is either stable or rising even without any savings. Interest rates where applicable within the REX segments of the economy would be determined by savers and their preferences in supporting causes or hard investments according to the degree to which they wish to facilitate the activities concerned.

The more interesting dimension to this revolutionary approach to the economy is that there exists a real time oversight in extreme detail of the REX segment of the economy the issues of corporate privacy are not an issue because the incentive policy instruments are stacked to ensure compensation for innovation is high and the applicable business rules make REX-operated companies progressively more competitive than those chosing to remain in the increasingly financialized but failing economy.