So how could this problem be solved while still making the benefactors of the system rich? Well, there was a time that I thought it could not be solved without a slow reintroduction of precious metals back into our monetary system, thus allowing the money supply to expand without introducing new debt. But that would not help the banks or the government besides preventing collapse. And even a reintroduction of gold and silver may not solve anything without a corresponding overhaul of the rest of the monetary system considering the incompatibility of precious metals and debt based money. So I didn’t see a viable solution until I saw a recent story on several mainstream media sights that would fit the mold of past monetary transitions.
Below is the story; There's An Electronic Currency That Could Save The Economy — And It's Not Bitcoin, in its entirety by Danny Vinik originally published in the Business Insider:
The United States has been marred in slow economic growth and a weak recovery for years now. Unemployment remains high. This is despite extraordinary efforts by the Federal Reserve to stimulate the economy. This drawn out period of low inflation and high unemployment has gotten more and more people talking about a "new normal" of mediocre growth.
Economists have been looking for ways to give central banks more power to combat recessions and prevent these long, drawn out recoveries. Larry Summers laid out this major impending economic challenge in his recent speech at the IMF. Normally, when a recession hits, central banks cut interest rates to incentivize firms to invest and to spur economic growth. But when interest rates hit zero, those banks lose one of their most important tools to combat recessions. This is called the zero lower bound.
Hitting the zero-lower bound means that interest rates cannot reach their natural equilibrium where desired investment equals desired savings. Instead, even at zero, interest rates are too high, leading to too much saving and a lack of demand. Thus we get the slow recovery.
Until recently, we hadn't hit that bound. But since the Great Recession, we've been stuck up against it and the Fed has been forced to use unconventional policy tools instead. What Summers warned of is that this may become the new normal. When the next recession hits, interest rates are likely to be barely above zero. The Fed will cut them and we'll find ourselves up against the zero lower bound yet again and face yet another slow recovery.
So what's the answer?
University of Michigan economist Miles Kimball has developed a theoretical solution to this problem in the form of a new electronic currency that would allow the Fed to bring nominal rates below zero to combat recessions. He's been presenting his plan to different economists and central bankers around the world. Kimball has also written repeatedly about it and was recently interviewed by Wonkblog's Dylan Matthews.
"If you have a bad recession, then firms are afraid to invest," he told Business Insider. "You have to give people a pretty good deal to make them willing to invest and that good deal means that the borrowers actually have to be paid to tend the money for the savers."
But paper currency makes this impossible.
"You have this tradition that as it is now is enshrined in law in various ways that the government is going to guarantee to all savers that they will get [at least] a zero interest," Kimball said.
If the Fed lowered rates below zero in our current financial system, savers would simply withdraw their money from the bank and sit on it instead of letting it incur negative returns. The paper currency itself — because it's something that can be physically withdrawn from the financial system — prevents rates from going negative.
This is where Kimball's idea for an electronic currency comes in. However, unlike Bitcoin, which prides itself on its decentralization and anonymity, Kimball's digital currency would be centralized and widely used. He would effectively set up two different types of currencies: dollars and e-dollars. Right now, your $100 bill is equal to the $100 in the bank. If you're bank account has a 5% interest rate, you earn $5 of interest in a year and that $100 bill is still worth $100. But what would happen if that interest were -5%? Then you would lose $5 over the course of the year. Knowing this, you would rationally withdraw the $100 ahead of time and keep it out of the bank. This is where the separate currencies come in.
"You have to do something a little bit more to get the negative rate on the paper currency," Kimball said. "You have to have the $100 bill be worth $95 a year later in order to have a -5% interest rate. The idea is to arrange things so let’s say $100 in the bank equals $100 in paper currency now, but in a year, $95 in the bank is equal to $100 in paper currency. You have an exchange rate between them."
"After a year, I could take $95 out of the bank and get a $100 bill or if I wanted to put a $100 bill into the bank, they would credit my account with $95."
Got that? After a year of a -5% interest rate, $100 dollars are equal to $95 e-dollars. This ensures that paper currency also faces a negative interest rate as well and eliminates the incentive for savers to hoard dollar bills if the Fed implements a negative rate. Presto! The zero lower bound is solved.
The benefits of this policy go even further though: We can say goodbye to inflation as well.
"Once you take away the zero lower bound, there isn't a really strong reason to have 2% inflation at this point," Kimball said. "The major central banks around the world have 2% inflation and Ben Bernanke explained very clearly why that is. It's to steer away from the zero lower bound."
He's right. Back in March, Ryan Avent asked Bernanke why not have a zero percent inflation target. Bernanke answered, "[I] f you have zero inflation, you’re very close to the deflation zone and nominal interest rates will be so low that it would be very difficult to respond fully to recessions."
But if nominal interest rates are allowed to go below zero, then the Fed has ample room to respond to recessions even if rates start out low. This is another major benefit from eliminating the zero lower bound.
What Kimball, whose blog is titled Confessions of a Supply Side Liberal, is most excited about is moving beyond the demand shortfall the economy currently faces to the supply side issues that hold back long-term growth.
"If you care at all about the future of this country, one of the things you need to realize is we need to solve the demand side so we can get back to the supply side issues that are really the tricky thing for the long run," he said. "The way to solve the demand side issues that is the most consistent with not messing up our supply side is monetary policy and making it so we can have negative interest rates."
At the moment, e-dollars are still only a theoretical concept, but Kimball is hopeful that they could be put into action in the near future. He believes that if a government bought in, it could be using an electronic currency in three years and reap the benefits of it soon after.
"This is going to happen some day," he concluded. "Let me tell you why. There are a lot of countries in the world and some country is going to do this and it's going to be a whole lot easier for other countries to do it once some country has stepped out."
Talk about a patch! There are plenty of problems with this article such as how they don’t indicate why borrowers will not borrow to invest, but we know it is because there is already too much debt. They also use the word invest in place of what should be the word borrow. Insert borrow for invest and the story above will make more sense. The cause of the slowing or stopping of borrowing to invest is not some strange physiological new normal; it’s a rational realization that the nation as a whole, in all sectors, already has borrowed enough. But this solution makes perfect sense for central planners in the Fed, member banks, and the government. So much so that I think it is going to be put in place in the not so distant future, although that’s just an educated guess.
The reasons start with the fact that this plan maintains the unbreakable covenant of changing monetary systems, the powers that be, the government and the banks get stronger. After a number of years eventually paper dollars would lose so much valve they would go extinct.
The list of ways this helps the government is long. First, since eventually the old paper dollar would go extinct and all commerce would be electronic, it would be easy for the government to track money thus easier to tax. This would certainly please tax and spend liberals who try and vilify anyone who attempts to avoid taxes, even though that is what this nation was founded on.
Another benefit of being able to track the new e-dollars is black market transactions in dollars would disappear. This would delight right of center. Without cash, illegal drug trade would have a major barrier. An even a bigger feather to the right is that it would be more difficult for people to hide secondary income thus take advantage of entitlements while working “under the table”. Illegal immigrates would also have a much more difficult time living in the US, talk about a plus for the conservatives. The government also wouldn’t need to spend money to create new bills and coinage.
Finally the biggest pro is the governmental debt will be priced in the “old” dollars, meaning the burden of the national debt would decrease by as much as the Fed decides to set the negative exchange rate annually.
So we’ve pleased both sides of the isle, now on to the banks.
The benefit to the banks is quite clear, not only are you forced to keep your savings with them to speculate with and collect their standard fees on, but they also will be able to charge you interest for the privilege.
Some of the concerns that run a distant third, those of the people of the United States COULD also be addressed. I emphasize COULD because they will only help a certain portion of the population and only if the powers in the government and banks feel as if they need more popular support for the E dollar. As with the government debt, the new system COULD allow ALL old debt to be priced in the old dollars thus lessening the burden on anyone holding previous debts, and with a large portion of the population with underwater home mortgages and huge student loans I’m sure the relief would be welcome.
The losers in this would be those who were prudent and didn’t take on large debts but since there are far more debtors then savers, politically the plan would still be a winner. I have to admit before learning the truth about our system I racked up my fair share of debt and a little piece of me would be relieved.
Though I think the Government would allow all debt to be priced in the old dollars the only debt that must be would be the government debt. It would certainly be fairer to price all old debt in the old dollars, but I would not be surprised if the banks were able to use their substantial influence to swap old debts into the gradually more valuable E Dollar. This is historically what has taken place when there have been failed currencies, and even though the debt agreements may have been made in those currencies the banks attempted, they were often successful in demanding payment in gold. Even the most powerful such as President Thomas Jefferson was subject to such a debt payment.
As was shown the Government and banks have no problem not only giving the citizens the short end of the stick in such monetary changes, but actions tantamount to theft are commonplace. An unfair arrangement surrounding the E Dollar would not be surprising.
The other interesting thing that came out of the above story was the reference to bitcoin, and more importantly how the US government reacted to the Crypto Currency recently.
When competing currencies to the dollar arise the governmental response has always been the same. The threat is violently destroyed. An example is the Liberty Dollar. The Liberty Dollar was a silver backed currency that the founder, a Mr. Bernard von NotHaus, began to circulate to allow users an alternative to the dollar. Ironically using the same medium to back the currency that was the original definition of the US dollar, a fixed weight of silver.
This silver was stored in a central location while the paper currency circulated and could be redeemed at any time for the physical metal. The owners of this silver were not the originators of the currency but those who were using it as an alternative to the dollar.
Von NotHaus was arrested by the FBI, tried and on March 18, 2011, was pronounced guilty of "making, possessing, and selling his own currency". Take note that he was not charged with fraud but making and selling his own currency. The silver backing the notes was seized and is still held by the government to this day. There was no due process for the rightful owners of the silver, not Von NauHaus, but the holders of the Liberty dollar certificates.
One of issues held by the government was the use of the name “dollar”, as if this word held special meaning. The simple solution would have been to have the creators simply change the name, not throw the originator in prison, and steel property. No this was done to set an example to those who would challenge the dollars homogony. The point is any true threat to the dollar would be crushed in short order.
Now this next part is pure speculation, but why would bitcoin, something that is touted by many as a direct competitor and even destroyer of the dollar be allowed to survive? In addition, during the hearings held in congress on bitcoin, there were many positive things said. According to the headline of a Bloomberg story “U.S. Agencies to Say Bitcoins Offer Legitimate Benefits” or the Wall Street Journal “Authorities See Worth of Bitcoin”. It was referred to in the hearings as digital currency, and a car dealership in California even called it legal tender in the media. This struck me as very strange considering I knew of the treatment of other “competing currencies”
This cordial treatment of bitcoin is confusing. I came to the conclusion that maybe the US government felt that they could control bitcoin. They could have easily noticed the possible threat of bitcoin early on and decided to obtain as many as possible. Bitcoins come into existence through a system of electronically “mining” them, by which computers solve math problems and in exchange gain the currency similar to real world gold or silver mining. The mining of bitcoins is how the first owners come to possess them. They have to be initially distributed somehow. Well the US government has pretty much more computing capacity than anyone so they could have obtained them through mining. They could have also bought a significant amount at under a dollar, where the price was for a significant time. This in addition to the governments seizure of a huge number of bitcoin after the shutdown of the Silkroad, a black-market using bitcoin in drug and other illicit trade, could allow the US government to hold 70, 80 or 90% of the bitcoin market and no one would be the wiser because of the claimed anonymity of bitcoin.
I thought that they could then use this market share to crush the market and claim “see bitcoin doesn’t work”. But this left a big hole in my thought process. What then, what if bitcoin survived and after the government used its bitcoin to crush the market, bitcoin rebounded and started competing with the dollar again. Government agencies officially classed bitcoin as a money service similar to money gram or Paypal, not a currency which is how it is being used. The FBI claimed that the Liberty Dollar was illegal because it was a currency. Bitcoin is clearly a currency but instead of classing it as a currency and thus having to shut it down under the same laws that brought down the Liberty Dollar, the government went out of its way to class it as a money service. Why would it not be crushed swiftly like the liberty dollar?
The answer came to me while reading about the E dollar and listening to an interview of one of the developers of bitcoin, Gavin Andresen by Chris Martenson. Mr. Andresen was questioned as to how other crypto currencies, which have popped up by the dozens, would compete against bitcoin. He indicated that bitcoin’s design and source code could not be improved upon enough to overcome bitcoin’s “first kid on the block” advantage. He said this with one caveat, if a government created a crypto currency similar bitcoin, supported by tax collection and legal tender laws it would have clear advantages over bitcoin, and take back market share.
This and reading the story on the E dollar made a possibility clear. The government could easily crush bitcoin price with their market share, say it is illegal, and make a few examples sending people to prison, seizing assets ect, all in the name of protecting the American people for any number of reasons. At the same time they could say, as in the congressional testimony, that bitcoin had many benefits but was too dangerous without oversight. But with the introduction of a US crypto currency, the E Dollar, all of those benefits would be realized without the risk because of additional regulation and safeguards. Point being, they may be allowing bitcoin to soften people up to the idea of a purely electronic currency, and that is why it is being handled with kid gloves.
The hypothesis on bitcoin may be reaching, but something certainly feels off with how the government has handled bitcoin. The E dollar is a real possibility though, and if you’re still not convinced, consider how you think an everyday business man living in 1926 would have responded if told the US Government would take all of the citizens’ gold coins in 1933 under the harsh penalty of 10 years in prison? How about if you told someone living in 1961 that ten years later the dollar would not be backed by gold and would, in fact, be backed by nothing. Still skeptical of the possibility of the E dollar; of a bank taking a little from your account each month, and paper dollars going away? Well half of that was just introduced in May 2014 when a central bank just as large as the FED, the European Central Bank, the issuer of the Euro, just introduced negative interest rates, and from the responses on CNBC it is a great move. Cash transactions in Europe are also illegal over 1000 Euro. I don’t think the American people will even bat an eye at the E dollar.
So if this new E dollar system addresses main issue with the current economic environment, namely too much debt, which under the current system cannot be solved, why should it be resisted? Well first, the E dollar would still be a debt based dollar and future generations, our children and grandchildren, would end up in the same place we are today in twenty, fifty or one hundred years. Second and most importantly it is still rooted in fraud just like the goldsmith loaning what isn’t his to loan. Fraud should not be addressed by finding a patch to allow it to continue, you stop it. Granted rash decisions have no place while we are in such a precarious position, bold yes; rash no.
The E Dollar could be used as a bridging tool to maintain a functioning economy while transitioning to a more sound monetary system, but any such attempt should be treated with skepticism and monitored closely.
There is another challenge when shifting to the E-Dollar, will the international community accept being paid back in the “old” dollars that would decrease in value. Other nations are certainly relatively more powerful compared to the last major monetary shift when the US decided they would not redeem dollars for gold, and are probably developing their own plan for how to deal with the inevitable failure of the current monetary system. Unlike shutting the gold window in 1971, the rest of the world may not just “go along”. Dealing with interest rates and the bond market would also pose significant challenges.
The E dollar may never come to fruition, but one thing is for certain the current monetary system is unsustainable, and will be overhauled as it was in 1913, 1933, 1945, and 1971. Based on stresses now being observed in our economy this overhaul could be in the relatively near future, and due to larger imbalances will be more profound. To be best prepared for and even prosper in this new economic system it would be invaluable to understand the forces that made it necessary and that the powers that develop it DO NOT have your best interest at heart.