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New Money Debt money vs Bitcoin vs Positive Money Vladimir Dzhuvinov • @dzhuvinov • #OpenFest2015
Where Does Money Come From? 73% of people have no idea about how money is created Survey: http://c2id.co/3
Game of Money €$¥ Financial crisis is coming
The Rules of the Game ● ● ● People trade with one another using Money Money == Medium of Exchange People must borrow every unit of exchange
The Central Bank Commercial Banks Creates initial money and lends it to the commercial banks Economy Offer credit and deposits to the economy, facilitate payments Alice Bob Claire
Role 1: Choose Central Banker Ben Mario Ivan Job: Set interest on seed money, try to keep inflation at 2%
Role 2: Boss of Private Bank Dick Bernie Ceco Job: Multiply debt, cash huge profits, get bailed out if your bank becomes insolvent
Role 3: The Economy Alice Bob Claire Job: Take on debt, then pay it back with interest
Let's Start the Game!
The Central Bank Commercial Banks Economy The Central Bank creates $100 and lends them with 5% interest to the Commercial Banks Totals: Initial money $100 Bank deposits $0 Debt to banks $0
The Central Bank owed: $105 Commercial Banks Economy owes: $105, has: $100 The Commercial Banks now have $100 available for lending Totals: Initial money $100 Bank deposits $0 Debt to banks $0
The Central Bank owed: $105 Commercial Banks Economy owes: $105, owed: $110 owes: $110, has $100 Alice borrows $100 with 10% interest to buy a house from Bob Totals: Initial money $100 Bank deposits $0 Debt to banks $110
The Central Bank owed: $105 Commercial Banks Economy owes: $105, owed: $110, has: $100 owes: $110, owed: $100 Bob deposits his earned $100 with the bank Totals: Initial money $100 Bank deposits $100 Debt to banks $110
The Central Bank Commercial Banks owed: $105 owes: $205, owed: $220 Economy owes: $220, owed: $100, has $100 The Commercial Banks now again have $100 available for lending → Claire borrows $100 with 10% interest to buy another house from Bob Totals: Initial money $100 Bank deposits $100 Debt to banks $220
The Central Bank Commercial Banks Economy owed: $105 owes: $205, owed: $220, has $100 owes: $220, owed: $200 Again Bob deposits his earned $100 with the bank Totals: Initial money $100 Bank deposits $200 Debt to banks $220
Let's Pause the Game and Analyse What has Happened!
● Economy ● Deposits (Bob) $200 ● Debt (Alice+Claire) $220 Balance $ -20 Totals: Initial money $100 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 Bank deposits $200 Debt to banks $220
Fast Forward to 2015 ● ? $199 trillion ● $79 trillion ● money / deposits (2014) $120 trillion gap between debt and available money / deposits To repay existing debt the world Economy must borrow another $120 trillion Is this sustainable? debt Source: McKinsey http://c2id.co/5
$120 trillion = $120 000 000 000 000 000
And You Think Game of Thrones is Cruel? :-)
This is the system effect when we need to borrow the units of exchange (at an interest)
Just How Ridiculous is Having To Borrow Units of Exchange
The Two Loop Economy Financial Markets: ● Stock trading ● Foreign exchange ● Derivatives ● High-speed algorithmic trading ● Insurance ● Etc. Real economy Daily turnover: Financial economy vs Real economy, source: http://c2id.co/c
Enter Bitcoin ● ● The units of exchange are “mined” by searching for SHA collisions Miners seek profit from the discovery of a new Bitcoin
Estimated electricity spent on Bitcoin mining: 2000 to 40000 Giga Watts / hour source: http://c2id.co/9
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?
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
Enter Positive Money Money as Debt Bitcoin Positive Money Units of exchange: Units of exchange: Borrowed at an interest Finite commodity Units of exchange: Granted (to match GDP)
Positive Money ● ● ● ● The “Bible” on Positive Money See http://c2id.co/a 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
Expert Committee Tracks GDP and recommends how much new money the economy needs Government Economy Determines how the newly created money is allocated (spent) Central Bank Commercial Banks The Central Bank provides the newly created to the government Administer current and investment accounts
Creation & Allocation of Positive Money Step 1: Create New money ● ● ● Measure GDP growth Step 2: Allocate Created Money ● Central bank creates amount to match projected GDP increase Example: – 82 billion BGN GDP in 2015 – 2% growth – new 1.64 billion BGN required ● 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 :-)
… or give the new money to BB so we can have more motorways
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
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
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%
Thank You! Download this presentation: http://c2id.co/b Q+A?