Category Archives: Prescriptions

LowImpact.org, working toward a new economy and a new society

We need to change direction urgently, by building a new kind of economy and society, and there are 4 ways that we can do this:
1. By changing the way we live – https://www.lowimpact.org/topics-2/
2. By changing the way we spend our money –
https://www.noncorporate.org/
3. By changing the exchange medium – https://www.lowimpact.org/why-join-ne…
4. By federating and growing the non-extractive economy

Watch the video

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Liquidity and Monetization-a monograph

By Thomas H. Greco, Jr. Revised, May 20, 2019

Liquidity

Quite simply, liquidity is the ability to pay.

We are all accustomed to paying for purchases with legal tender money. We do that in one of several ways, either by handing over paper notes or coins, by using a debit card that debits our bank or credit union account, or by using a credit card by which a bank temporarily advances the amount we need to make the purchase. In every case, it is bank-created money that is being rendered.

Banks are supposed to provide liquidity by monetizing the value-added by local enterprises. They do this by making loans to finance working capital and business expansions and development. But banking has become increasingly centralized as local banks have been taken over by large bank holding companies that have less concern for local economies and favor lower risk loans made to large corporations and government entities that are remote from the local community. Thus, money is lavished on central governments that use much of it to make war and build weapons far in excess of what is needed to provide security, and to enable the continual expansion of mega-corporations that reduce market competition and concentrate wealth in ever fewer hands.

But there are still some locally owned and managed banks. You can find some by going to Move Your Money project. Still, that is only an easy first step. Even those banks must invest much of their resources in government bills and bonds and large corporate securities in order to survive in a milieu of manipulated markets and a regulatory environment that tilts in that direction. Further, since banks create money by making loans at interest, the entire system forces continual growth of debt, artificial scarcity of money, and environmental destruction.

What must ultimately happen is described in my book, The End of Money and the Future of Civilization. A proven approach is the organization of local credit clearing exchanges that enable businesses themselves to cooperate in collectively monetizing their own value-added, without the burden of interest and without the growth imperative. This is already happening at both the grassroots and commercial levels, but more optimal exchange designs need to be implemented and the entire process needs to be scaled up by networking trade exchanges together.

Monetization

Quite simply, monetization is the process by which value claims are converted into liquid or spendable form, i.e., to a device we commonly call “money.”

Def. 1. Monetization is the process of converting the value of an illiquid asset to a liquid form, i.e., a form that can be used as a payment medium (money).

Def. 2. Monetization is the process of creating money on the basis of some foundation value.

Example: A bank or other entity can create credit instruments, like notes, “deposits,” or account balances on the basis of an asset upon which it has a claim. For example, when a bank makes a loan against a business’ inventories it creates money which can then be spent into circulation by the borrower. That money then circulates through the economy and presumably becomes available to consumers to purchase the inventory upon which that money was created. In a sense, that money is a virtual representation of the value of goods (or services) that are available for purchase in the market.

However, banks also often monetize the value of real estate or other assets that are not on the market. A bank’s mortgage claim against a property allows the bank to create an amount of money that is some portion of the presumed market value of that property. Monetization of such assets can cause general price inflation.

A peculiar and destructive aspect of the present money system is the monetization of debts, particularly the debts of the central government. The monetization of existing debts puts more money into the economy without putting more goods and services into the economy. This is a major cause of price inflation. When economists speak of debt monetization, they are referring to the process by which central banks add to the money supply by purchasing government bonds. In the United States, for example, when the Federal Reserve Banks wish to expand the amount of money in circulation, the Federal Open Market Committee (FOMC) will buy U.S. government bonds on the open market.

In brief, the process is as follows:
The FOMC purchases government bonds on the open market. It pays for them by issuing a check to the seller. This check is drawn against no funds. In other words, the Fed creates the money needed to pay for the bonds simply by making an entry on its books. But this is not the end of the monetization process. This new, so-called, high powered money enters the banking system when the bond seller deposits the funds in a bank. This provides the commercial banks with new reserves upon which the banks can expand their own lending, thus creating even more money. If the bank then buys a government bond, then still more government debt is monetized. This is a primary cause of price inflation.

Commercial banks also create money when they make loans to individuals or businesses, but these loans are usually secured by the pledge of some collateral assets—a car, a house, or some other valuable asset owned by the borrower. Thus, the banks monetize the value of that collateral, i.e., they transform the value of collateral assets into spendable form, i.e., money. As borrowers repay their bank loans, the portion of the money payment that is applied to the loan principal is extinguished. Thus money is created when banks make “loans,” and money is extinguished when loan principal is repaid.

Monetization of value outside of banks

In non-bank exchange mechanisms, such as local currencies and mutual credit systems, the participants, apart from any bank involvement, empower themselves to monetize their own labor, skills, and inventories. They can also monetize the value of their physical assets. Established enterprises have plenty of assets that can be monetized. These include working capital (inventories of merchandise or raw materials and accounts receivable), as well as fixed capital (plant and equipment like buildings and machinery). Working capital turns over in the market in the short term, while fixed capital produces marketable goods and services over a longer time period.

A fundamental question that arises is, “which assets are appropriate for monetization and which are not?” Or, perhaps a better question is, how can each type of asset be monetized so as to provide the necessary liquidity for consumption while not adversely affecting the value of the currency or the general level of market prices?

It is better to issue a community currency by monetizing the value of existing inventories and service capabilities than it is to monetize the value of fixed assets because a loan on the former is self-liquidating. A self-liquidating loan is “a type of short- or intermediate-term credit that is repaid with money generated by the assets it is used to purchase. The repayment schedule and maturity of a self-liquidating loan are designed to coincide with the timing of the assets’ income generation. These loans are intended to finance purchases that will quickly and reliably generate cash,” [i] or in the case of a credit clearing exchange, the credit that was advanced will generate sales sufficient to offset it.

Credit Money vs. Commodity Money

If only commodities are used as money, then there will always be a limited supply of money and it must circulate ever faster to mediate a growing number of desired transactions. But credit money is unlimited in supply. It can safely expand in relation to the amount of goods and services that are available to be exchanged. When lines of credit are based on historical and prospective sales, then there need never be any shortage of exchange media (credit).

We need to stop thinking of money as a THING. In a credit clearing exchange, the quantity theory of money does not hold. I show this in Chapter 12 of The End of Money and the Future of Civilization, pp. 132-133. As the example illustrates, the amount of outstanding credit (the “money” supply) can even go to zero at times. It matters not, since lines of credit are prearranged and can be drawn upon as needed to make new purchases, thus new credit money is created in the process.

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[i] A self-liquidating loan is a form of short- or intermediate-term credit that is repaid with money generated by the assets it is used to purchase. The repayment schedule and maturity of a self-liquidating loan are timed to coincide with when the assets are expected to produce income. These loans are intended to finance purchases that will quickly and reliably generate cash. http://www.investopedia.com/terms/s/self-liquidating-loan.asp.

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This monograph can be found on this site here.
The PDF file can be downloaded here.
The PDF file en Espanol can be downloaded here.

Greece and the Global Debt Crisis

Greece and the Global Debt Crisis
Thomas H. Greco, Jr.

ABSTRACT

The Greek debt crisis is emblematic of a more general, decades-long pattern of economic exploitation and reactionary politics that threatens not only the European Union but the stability of the global financial infrastructure and Western democratic civilization. The situation calls for a different form of globalization, not one that is dominated by transnational banks and corporations, but one that is built upon local self-determination and self-reliance, and based on local and domestic control of money, credit, and finance. Greece (and other debtor countries) can recover a measure of sovereignty and rebuild its economy by combining “debt triage” with public and private actions for creating domestic liquidity.

            In the summer of 1977, I first ventured abroad from North America on a journey to explore ancient civilizations, cultures, and religions, and to experience contemporary life in Egypt, Israel, and Greece. During my six-week odyssey, I was able to visit the Pyramids, amble over the Holy Land, and visit the temple ruins of Athens and Delphi.

At one point while in Cairo I came upon a scene that greatly troubled me. There was a small burro hitched to an enormous cart that was laden to the hilt with onions. I felt nauseous as I watched the poor animal lying on its side being flogged by a man in a vain effort to rouse it to the task of moving what seemed to be an impossible load. As a stranger in a strange land, I felt helpless to intervene and quickly moved away. I often wonder what might have been the ultimate outcome, but in my imagination I see the man with the whip standing over the lifeless body of that animal lying in the street, and weeping in worry and frustration.

Now, when I contemplate Greece’s current predicament, that image comes to mind. I see Greece as that beaten and dying animal, overburdened with debt that is beyond its capacity to service, and being flogged by its creditors in a vain attempt to get it to pay up. In my mind’s eye I see a future in which the dead carcass of Greece is being carved up and distributed amongst the creditor institutions. In actuality, Greece will survive, but under new (foreign) management, as she is forced to sell off her assets at fire-sale prices.

In the eyes of the Germans and other creditors, represented by the so-called “troika” institutions (the European Commission, the European Central Bank, and the International Monetary Fund), the Greek people are lazy freeloaders who have been living “high on the hog” at their expense, and who now balk at repaying what they borrowed.

But there is another side to the story that paints a different picture, and even if there is a bit of truth in that characterization, what is there to be gained by creditors insisting upon their “pound of flesh”? As civilization has advanced, debtor prisons have been eliminated and bankruptcy laws have been instituted to protect people and companies from creditors who insist upon collecting more than debtors, for whatever reason, are able to pay. Why can’t nations be afforded the same considerations?

First of all, it was not the Greek people who did the borrowing, it was a series of Greek governments that were either corrupted, coerced, or seduced into taking on a series of debts that were increasingly burdensome. Greece was lured into the debt trap from which it seems impossible to escape. Ellen Brown has summarized in her article, The Greek Coup: Liquidity as a Weapon of Coercion, some of the many moves that were made to ensnare the Greek government, and by extension, the Greek people.  … more.

To read my prescriptions and the full article, click here. The article is excerpted from the book, Rebuilding after Collapse: Political Structures for Creative Response to the Ecological Crisis, edited by John Culp. –t.h.g.

Why Central Banks?

I have long argued that the interest-based, debt-money, central banking regime is both dysfunctional and destructive, and advocated for the decentralization of control over credit and the creation of exchange alternatives that use privately issued currencies and direct clearing of accounts among buyers and sellers.

There is a considerable body of literature that makes the case for free money and free banking, most of which has been ignored. These ideas have been overwhelmed by the economic and financial orthodoxy which stands in support of the political status quo which centralizes power and concentrates wealth.

For governments, central banks serve as “lenders of last resort,” enabling deficit spending through their purchase of government bonds and manipulation of interest rates, while for the banking cartel, government serves as “borrower of last resort,” sustaining their privilege of lending money into circulation and charging interest on it. Whenever this unsustainable system threatens to implode (as it did in the crisis of 2008), the government steps in to take bad (private) debts off the bankers’ hands and place them on the shoulders of the citizens (“bail-outs”). When the next bubble reaches its climax, we will likely see another round of “quantitative easing,” but when that proves to be inadequate, we will likely see some combination of inflation and outright asset confiscation known as “bail-ins” (partial seizure of bank balances).

In his recent review, Leonidas Zelmanovitz, highlights the main points in Vera Smith’s book, The Rationale of Central Banking and the Free Banking Alternative, which was published in 1936. Paraphrasing Smith, Zelmanovitz concludes that [Keynsian policies are] “not necessary to solve the problems they are purported to solve; most likely, they are part of the cause of the problem. Furthermore, there is an alternative, and that alternative is free banking,.” and, ” You can have good money without central banking and central banking does not guarantee good money.” You can read the entire review on the EconLib website.

Another classic source on free banking is Henry Meulen‘s, Free Banking (London: Macmillan, 1934). Free download available here. I will provide some excerpts from that source in a future post.


Local Currencies—what works; what doesn’t?

Local Currencies—what works; what doesn’t?
By Thomas H. Greco, Jr.

Community  currencies, and mutual credit clearing exchanges are key elements in the emergence of a new economic paradigm. These approaches to enabling the exchange of value are not entirely new, they have a long and varied history, but their enormous potential and possibilities have become widely recognized only within the past three or four decades. This is largely the result of increasing disillusionment with conventional money and banking systems, the emergence of Bitcoin and other non-governmental, non-bank currencies, and the growing interest in decentralized, peer-to-peer approaches in all realms of human activity.

The latest wave of exchange alternatives has seen the emergence over the past few decades of scores of commercial trade or “barter” exchanges, and hundreds, if not thousands of local currencies. The scores of commercial trade exchanges that have  been operating in many countries around the world for the past four or five decades enable moneyless trading among their business members, and collectively “clear” tens of billions of dollars’ worth of trades annually. Their success provides the strongest proof of the viability of decentralized, non-governmental, non-bank, moneyless exchange options.[i]

On the other hand, the plethora of local and community currencies that have popped-up all over the world have not been so encouraging. The avowed purpose of local currencies has generally been to keep money circulating locally instead of “leaking out” of the community. It is hoped that by keeping exchange media circulating within the local community, the vitality of the local economy will be enhanced and local businesses will be better able to compete with large global corporations and merchandising chains.

That is well and good, but it misses the main point of what ails our communities, and our world. It is the very nature of the dominant political money system that is problematic. So, localization is not the end in itself, but the necessary means to an end, which is personal re-empowerment and freedom; community resilience, sustainability, and self-determination; and the revitalization of democratic governance. Community currencies and exchange systems provide an essential tool kit for achieving those goals but they need to be designed in such a way as to make people less dependent upon political money and banks. So long as we remain harnessed to the dominant money and banking regime, there will be little chance of significant improvement in the human condition, in fact, the trend has been exactly opposite. ….  Read the full article or download the full PDF.

The Post–Daniel Ellsberg and the Pentagon Papers

Yesterday, I had occasion to watch Stephen Spielberg’s latest film, The Post, which tells the story of Daniel Ellsberg, who in 1971 leaked the top secret government documents that came to be known as the “Pentagon Papers.” The film does a fine job of portraying an episode in history that everyone needs to know about and understand. These leaked documents, which Ellsberg hoped would help end the Vietnam war, formed the basis for a series of articles that were published by the New York Times and the Washington Post. A major point that the film brings out is the fact the Vietnam war was perpetuated over several administrations because no President wanted to admit that the war was unwinnable (not to mention, unjust). As a consequence, the lives of tens of thousands of American servicemen and untold numbers of Vietnamese, Laotians, and Cambodians were sacrificed for no good reason.

Here is an NPR interview with Ellsberg originally broadcast Dec. 4, 2017:
https://www.npr.org/player/embed/568310782/568340893

I’m pretty sure that no mainstream media outlet today would likely be willing to do what the Times and the Post did back then, and I wonder how long it will be before the independent internet channels are also taken over or censored out of existence.

Greater government openness and transparency are essential to ending the war economy and the culture of war, but that will not occur until we the people empower ourselves enough to force politicians to bring it about. We need a strategy that can effect a power shift toward popular control, and I believe the most promising approach for achieving that is to decentralize control of credit-based exchange media. Private and community currencies, and credit clearing networks can circumvent political currencies and bank-created debt money. We’re running out of wiggle room so we had better not waste any time in deploying them.

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Addendum:
And while we’re on the subject of the Vietnam war, here’s a pertinent documentary that tells about another important aspect of the anti-war movement.

“In the 1960’s an anti-war movement emerged that altered the course of history. This sir-no-sirmovement didn’t take place on college campuses, but in barracks and on aircraft carriers. It flourished in army stockades, navy brigs and in the dingy towns that surround military bases. It penetrated elite military colleges like West Point. And it spread throughout the battlefields of Vietnam. It was a movement no one expected, least of all those in it. Hundreds went to prison and thousands into exile. And by 1971 it had, in the words of one colonel, infested the entire armed services. Yet today few people know about the GI movement against the war in Vietnam.” http://sirnosir.com/

 

Disruptive Technologies are Making Money Obsolete

Broadly speaking, technology is the organization of knowledge, people, and things to accomplish specific practical objectives. It includes processes, practices, techniques and systems as well as things. So what are the disruptive technologies in money and finance? Or is that even the right question to be asking? Is it Bitcoin, Ethereum, and other so-called crypto-currencies? Is it the blockchain, “smart contracts,” “big data,” algorithms?

To find out, watch this 15 minute video, which was extracted and adapted from a longer recording of the presentation, I  made to the International Institute of Advanced Islamic Studies, in Kuala Lumpur, Malaysia, on October 10, 2016. It describes how communities and businesses can escape the debt trap and become more resilient and self-reliant? New independent approaches to payment and reciprocal exchange are being deployed which are making conventional money obsolete.

Links to this video:
YouTube link: https://youtu.be/ty7APADAa8g
Vimeo link: https://vimeo.com/245661935

Many thanks to Ken Richings for doing the hard work of editing and preparing the video for publication.

The full Malaysia presentation titled, A World Without Money and Interest: A pathway toward social justice and economic equity, can be found here.