Friday, October 25, 2019

While They Were Fighting . . .

This just goes to show how the ongoing political warfare in the US has sucked all the oxygen out of the room. The IMF has a new Managing Director and I didn't even notice it until just recently. Below is the statement by new IMF Director Kristalina Georgieva.


"Ms. Kristalina Georgieva issued the following statement today after the Executive Board of the International Monetary Fund (IMF) selected her as the IMF’s next Managing Director—the 12th since the Fund’s inception in 1944—for a five-year term, starting on October 1:
“I am deeply honored to have been selected as Managing Director of the IMF and grateful for the trust that the Fund’s global membership and the Executive Board have placed in me. I want to pay tribute to my predecessor, Christine Lagarde, a great leader and a dear friend, whose vision and tireless work have contributed so much to the continued success of the Fund.
“The IMF is a unique institution with a great history and a world-class staff. I come as a firm believer in its mandate to help ensure the stability of the global economic and financial system through international cooperation. Indeed, in my view, the Fund’s role has never been more important.
“It is a huge responsibility to be at the helm of the IMF at a time when global economic growth continues to disappoint, trade tensions persist, and debt is at historically high levels. As I noted in my statement to the Executive Board, our immediate priority is to help countries minimize the risk of crises and be ready to cope with downturns. Yet, we should not lose sight of our long-term objective – to support sound monetary, fiscal and structural policies to build stronger economies and improve people’s lives. This means also dealing with issues like inequalities, climate risks and rapid technological change.
“For our readiness to act, safeguarding the Fund’s financial strength is essential, and so are enhancing its surveillance and capacity development efforts. Working with my team, my goal is to further strengthen the Fund by making it even more forward-looking and attentive to the needs of our members.
“I look forward to working with all our 189-member countries, the Executive Board and staff, and with all our partners in the years ahead.”

My added comments: My first take looking at the background and statements from the new IMF Director is that it does not seem like things will change too much at the IMF from the Chrisitine Lagarde days. For now there is nothing coming out of the IMF that suggests major monetary system change is imminent.

Saturday, October 19, 2019

"Digital Currencies" Innovation - Is Anything Significant Really Happening?

This blog has covered this topic extensively over the years and has monitored events related the potential for so called "digital currencies" (either privately issued or issued by central banks) to make some kind of significant impact on the current monetary system. 

Now Bloomberg has published this article "Fed Drags Feet as Digital Money Challenges Central Banks" that implies that the IMF is concerned that central banks are falling behind the innovation curve and that "it is just a matter of time before we see massive disruption" according to Tobias Adrian of the IMF. 

Readers here know that we have been reporting for some time that the reality is that there is no indication that any kind of significant new "digital money" innovation that could shake up the existing monetary system is on the near term horizon. Instead, we have steadfastly reported that any changes we do see are more likely to be very gradual and incremental over long periods of time unless some kind of new major financial crisis disrupts the present monetary system.

The first thing to note here is that the money we have now issued by the Fed and other central banks is already "digital money" for the most part. So the term "digital currency" being used to imply something new and innovative is arriving can be misleading. Usually, it is actually the ledger system used to record and track the transactions of the money that is really being talked about which is where things like "blockchain" enter the picture. But even there, there is no indication at this time that central banks are ready to suddenly plunge into using a blockchain ledger system on any kind of major scale. Honestly, what we see is a lot of use of buzz words and some hype, but not very much actual innovation or major changes so far to our present system. 

However, I encourage readers not to just take my word for this analysis. I have often mentioned that I do get input from leading experts on these kinds of issues and that my analysis is mostly based on the credible information I get from these sources. 

Robert Bell (CEO of KlickEx), is one example of these kinds of high credibility sources. Robert does not have to speculate on these kinds of issues because he lives it every day and is one of the leading experts in the world on payment systems and the related technologies used to operate them. Robert has worked with many central banks and met with institutions like the IMF and BIS to discuss these kinds of issues over the years. He was kind to do an interview for this blog and has provided very valuable input here over the years based on his real world experiences. When Robert tells me what is really going on around the world, I simply know that I can trust his analysis to be accurate and up to date.

I showed the Bloomberg article linked above to Robert and he was kind to reply with his thoughts on it as a kind of update on things for readers here. Robert was in Washington DC at the time attending the IMF and World Bank fall meetings.

Here is what he said in his email reply in regards to anything significant happening any time soon related to "digital money"

"As far as real systemic change... There's nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. 

The central banks will implement real time slowly, and banks will reduce cross border prices slowly. 

Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that's all. 

Open Banking, is speeding things up a bit, but not much."    ---- Robert Bell (KlickEx)

My added comments: Readers sometimes wonder how I am able to offer analysis on these issues with my having no personal background in banking or macro economics. The answer is simple. I get input from highly credible sources who are experts in their field like Robert Bell. Usually, their input and insights are right on target. I see that borne out over time over and over again. 

Many times they prefer I do not directly attribute quotes in their names which I honor. In that case, I try my best to summarize the information for readers without attributing it to any specific expert. But I do want to clearly credit them for helping to greatly improve the analysis offered here and the reason why we have been able to correctly predict that despite constant articles that some kind of major change is about to happen to disrupt the current US dollar based monetary system; the reality has been slow and gradual change as we have been reporting here for some time.

If I do hear anything to change that analysis, I will certainly let readers know. However, it is more likely that if something does quickly arise to disrupt the present system, none of us will really know much ahead of time as Jim Rickards has said for many years. There are always potential risks to the current system and we have documented many of them here, but those running the system are not looking to make sudden major changes. They prefer stability and for any changes to be gradual over time. The US Fed in particular, moves very slowly and cautiously.

Wednesday, October 16, 2019

BIS Paper on the Impact of Central Bank Stimulus Policies

The Bank for International Settlements publishes many research reports and also posts articles on its web site by central bankers from around the world. In this case, the BIS has posted a paper written by Phillip Lowe (Reserve Bank of Australia) and Jacqueline Loh (Monetary Authority of Singapore). Looking back over the last ten years they discuss the impact of central bank stimulus programs on the financial markets. 

Below is the first part of the Executive Summary from this paper. I added some bolding in spots for additional emphasis. You can find the full text of the paper here.


Executive summary

"Central banks expanded their balance sheets on an unprecedented scale in response to the global financial crisis (GFC) and its aftermath. To address financial market dislocations and the limitations of interest rate policy as rates approached their effective lower bound, many central banks introduced special lending programmes, often followed by large-scale asset purchase programmes.

The scale of these programmes has naturally given rise to concerns about their impact on market functioning, prompting central banks to take steps to mitigate potential adverse consequences. This report prepared by a Markets Committee (MC) study group reviews the accumulated experiences and associated policy implications. It examines how the design and execution of balance sheet expansion affected market functioning, in particular, the ability of market participants to adjust positions efficiently, and whether asset prices have promptly and reliably responded to information.

The report adds to the literature by providing a systematic cross-country perspective on the effects on market functioning and related policy options. It draws on a central bank survey, analysis conducted by the study group, and a review of the available academic and policy literature. The report complements a parallel CGFS study, which reviews more broadly the effectiveness of, and lessons from, central banks’ use of unconventional policy tools.

The study group found that central bank balance sheet expansion, especially in early phases, had predominantly positive effects on market functioning. In particular, during periods of heightened illiquidity, emergency lending programmes helped ease severe funding market strains, while purchases of bonds with outsized risk premia tended to improve their underlying liquidity. Negative effects sometimes arose, but rarely tightened financial conditions materially, in part because of mitigating actions taken by policymakers. While adverse effects have often been transitory, they can have an enduring impact when policies are in place for a prolonged period.

Negative effects on market functioning have tended to be associated with elevated asset scarcity, in particular when central bank purchases or securities holdings were particularly large in relation to issuance or outstanding amounts. Scarcity at times has led to deterioration in bond liquidity metrics and increased repo specialness, although these effects were often short-lived. Declines in market making and reduced investor participation were reported in some markets, in particular where policies were in place for an extended period of time. Hence, the consequences for market functioning may not be fully evident until balance sheets normalise.

The expansion of central bank balance sheets produced sharp increases in bank reserves, contributing to a significant decline in interbank reserves trading activity. However, activity in wholesale money markets has remained robust, and central banks have kept a sufficient degree of control over short-term interest rates. 

The report documents that central banks were able to avert or attenuate side effects from balance sheet expansion on market functioning by adopting a range of mitigation strategies. These strategies were often embedded in the design of the programmes themselves, such as purchase protocols to exclude securities temporarily in high demand or to cap central bank ownership shares of individual bonds. Transparency and clear communication limited asymmetric information and supported predictability, while maintaining margins of flexibility to allow central banks to adjust the pace, timing or volume of purchases in response to changes in prevailing market conditions. Finally, central banks adopted measures to alleviate scarcity effects, such as securities lending programmes.

As experience with expiring lending programmes and shrinking balance sheets has been more limited, conclusions regarding the impact on market functioning are more tentative. However, preliminary evidence suggests that steps can be taken to mitigate any negative side effects from the expiry of lending programmes (such as bank fragility), and cutbacks in securities holdings (such as diminished trading and inventory capacity among securities dealers), including by adhering to the general principles of gradualism and predictability."

Added note: The Financial Times published this article quoting the BIS as saying that the central bank stimulus programs have produced "negative side effects". The FT titled their article:

The introductory paragraph to the FT article says that "the unprecedented growth in central banks' balance sheets since the financial crisis has had a negative impact on the way in which financial markets function, according to a new report from the Bank for International Settlements."

Saturday, October 12, 2019

News Note: Federal Reserve to Scrub the System with SOAP

At the end of September the Federal Reserve started new operations with Repos in response to an apparent liquidity shortage. At that time, these operations were described as "temporary" and we ran this news note about it here.

Dr. Judy Shelton has tracked the progression of this situation on her Twitter feed by noting new announcements about the extension of this policy further and further. As these new operations expanded and the time frame was extended, people began describing this as a new QE (Quantitative Easing) policy emerging from the Fed. It seems that Fed Chairman Jerome Powell did not like that kind of talk so he made it clear that in no way should we view these new operations as a new QE program. Jim Rickards posted this on his Twitter feed indicating that despite his protest to the contrary, the Fed is engaging in QE in his view. 

Now we have this latest article by Jeff Cox appearing on CNBC to describe how this new Fed policy to "expand its balance sheet" will work. Since the Fed does not want anyone calling this new policy QE, the article quotes George Selgin of the Cato Institute as coining a new term for it. He is calling this new policy "Supplementary Organic Asset Purchases" or SOAP for short. So please keep in mind, the Fed is absolutely not implementing QE, but will instead be using "SOAP" to clean things up in the messy overnight lending markets. Below is an excerpt from the CNBC article. 


"Ultimately, what the operation is called will matter less than how it is executed and communicated.

“In some sense it doesn’t matter why they’re doing it or what they call it. What matters is that they are creating base money and expanding their balance sheet, and those repercussions aren’t going to depend on what they call it,” George Selgin, senior fellow and director of Cato’s Center for Monetary and Financial Alternatives, said in an interview.

“There is an important issue of public perception here,” he continued. “I suppose calling it QE would give people the impression that the Fed is fighting a recession again, or thinks it is fighting a recession again, and trying to create a positive stimulus for the economy. Neither of these things is true. Their concern is trying to avoid the cash shortages that are causing rates to rise above their target.”

. . . . 

"Selgin, in fact, coined his own term for what is ahead: “Supplementary Organic Asset Purchases,” or SOAP. Fed officials have stressed the “organic” nature of balance sheet growth as opposed to QE."

. . . .

“The Fed is learning that it’s not so easy as they thought to keep the banking system as a whole flush with reserves,” Selgin said. “We may end up seeing SOAP 1, SOAP 2 or SOAP 3.”

Friday, October 11, 2019

News Note Update on Political Turmoil

Just a brief note on this as so far nothing has really changed much from the previous news note posted here on this as far as I know. Markets are still basically ignoring the situation and are not providing any kind of signal that anything significant that could impact markets or the financial system is taking place.

I have had some email exchanges with Jim Rickards to get some of this thinking on the situation and he has provided some brief comments that I am not at liberty to post here. 

However, Jim did let me know for anyone who wants to follow his analysis on this situation, he has one article written about it on his subscriber newsletter. Here is how Jim put it:

"I just wrote a 5,000 word article on impeachment for my newsletter Strategic Intelligence. You can refer readers to this link: New subscribers get access of the archives, which includes the October 2019 edition with the impeachment article."

Since that article is for his subscribers, it would inappropriate to comment on it other than to say that I feel sure he will continue to monitor this ongoing situation and will have ongoing analysis of it as things unfold over time.

The reason we have to keep an eye on this is because of the potential for something significant to arise unexpectedly very quickly that could rattle markets and even impact overall system stability. We do try to watch for that here as best we can. I can say that Jim made it very clear that he views this as a serious situation to monitor and that he will not be surprised if some significant events do eventually arise from it in the coming months ahead. So that just further confirms we do need to follow it on some level knowing the kind of sources Jim has available to him. 

I wish I could offer some kind of sage advice as to how to deal with anything that might arise from this, but it is virtually impossible to predict what kind of market reaction might happen or if the market will react at all. But since we already know the Fed is using unusual procedures to continue to insure liquidity is available, we need to keep an eye out for anything that might add any stress to the system.

I could try to analyze all the possible scenarios that could emerge, but I think that would be wasted energy at this point in time. In my view, everything so far is just political maneuvering to try and gain some kind of perceived advantage heading into the 2020 elections. If we see actual criminal indictments issued against high profile officials (former or current), then we need to take notice that things have probably moved beyond just the political positioning phase.

Hopefully, nothing significantly negative emerges to create havoc in markets or the banking system in general. Most sources seem to suggest that by the end of this year we may know better if that is a possibility.

Added note 10-15-2019: CNBC runs this article which is more confirmation that markets are completely ignoring the current political food fight. Stock market, dollar and gold are all ignoring it. If this changes, we'll try to note that here.

Wednesday, October 9, 2019

Bloomberg: Facebook Libra Payments Partners Waver on Cryptocurrency

This recent article in Bloomberg seems to confirm something we speculated on here. We said that it seemed like that the Project Libra currency proposed by Facebook  had managed to get the attention of potential regulators and that our guess was that whatever needed to be done to prevent this project from becoming any kind of serious threat to the present system would likely be done. Below is a key part of the Bloomberg article linked above which tends to confirm this analysis.


"Four payments companies that have joined Facebook Inc. as founding members of the Libra Association are wavering over whether to officially sign on to the cryptocurrency project, according to people familiar with the matter.
Executives at the payments companies believe Facebook oversold the extent to which regulators were comfortable with the project and are concerned about the perception the social network hasn’t behaved responsibly in other areas -- such as how it has handled user data and privacy, the people said."
. . . . 
"Even as Facebook has publicly drawn fire, the Libra organization’s members have worked in the background to hash out details of a chartering document to formally establish the non-profit so that the group’s work to stand up the payments system can move forward.
The work has proven contentious due to continued uncertainty about the regulatory implications of the project, according to two of the people."
Please click here to read the full article in Bloomberg

Added notes: This story is getting a lot of interest in various news outlets. Below are a few other article links on it. Further below, is a link to a letter signed by two US Congressmen to the Federal Reserve that may be of interest as well. A thank you to Dr. Judy Shelton for posting the link to this letter on her Twitter feed.

Ariticle links: 

Bi Partisan Letter to the Federal Reserve from two US Congressmen

Selected quotes from the letter linked just above:

"We are concerned that the primacy of the US Dollar could be in long term jeopardy from wide adoption of digital fiat currencies"

. . . . 

"The Facebook/Libra proposal, if implemented, could remove important aspects of financial governance outside of US jurisdiction."

The letter goes on to ask the Federal Reserve if it is exploring the development of a "US dollar digital currency". The letter is signed by Republican Congressman French Hill of Arkansas and Democratic Congressman Bill Foster of Illinois. It's rare when people on opposite sides of the political aisle agree on anything these days, but clearly these two agree on this.

Wednesday, October 2, 2019

Q&A with Joseph Potvin on His Earth Reserve Assurance Framework Proposal - Part I

Earlier we introduced readers to a new proposal for monetary system reform (Earth Reserve Assurance or ERA) authored by economist Joseph Potvin. Joseph is part of a group of economists from whom I seek input occasionally about what might be done to try and improve our present monetary system in the future. Since that is the one of main premises for this blog, naturally I follow their discussions with keen interest. In the past I have featured various proposals from this group here and included those on our page of ideas for monetary system reform.

Joseph kindly agreed to take time from a very busy schedule to do an in depth Q&A interview on his new proposal and how he got started on this project which now covers many years of research and work. The interview will be presented two parts. The first part below introduces you to the author and provides the historical background for his interest in this project. Part II delves into the proposal in detail. I will add a few brief concluding comments at the end of Part II. 


Q: What prompted you to work on the Earth Reserve Assurance (ERA) proposal?

A: I'll have to explain this trajectory in a few steps:

1) I first put together the Earth Reserve monetary concept in 2006 while working as a senior economist at Canada's Treasury Board Secretariat. I could sense that the monetary and financial system based on market sentiment alone would go 'poof' at some point, and when it did, there had better be something else designed, researched and capable of prompt implementation. Few others seemed concerned, so on my own time I researched and wrote what I figured may be the essentials of a workable system. Several earlier influences are summarized below, but by mid-2007 I had completed a 30-page design summary entitled "GREEN Money, RED Tax" (GREEN is "Global Resource and Ecosystem Exchange Norm"; and RED is for "Resource and Ecosystem Degradation"). I started sharing this around. However I was reframing so many premises of economics 101 that few others could make sense of my starting points.

2) I could understand why my own reformulation of money would be inaccessible to other economists. Also it was obvious to me why a global community of eminent economists and investors would not be looking to some mid-level government staff economist or project consultant to rewrite the fundamentals of the domain. What I did have difficulty understanding is why a proposal as obvious and reasonable as Ben Graham's Commodity Reserve monetary system in the 1930s and 40s failed to make any headway either, despite his pinnacle role as the "Dean of Wall Street", and all the supportive contributions from luminaries across the spectrum from Hayek to Kaldor and Tinbergen. Even with the highest level of international and multi-generational persistence, no global multi-currency commodity standard has emerged to anchor the value and quantity of money. In the 1950s Milton Friedman provided the most comprehensive discussion of reasons for its non-adoption. So again, on my own time, I took every criticism of the commodity reserve that I could find, and treated it like "a bug report". In the pragmatic approach to systems development that I had learned from my previous decade and a half working closely with software developers, I set about to try to fix every reported design bug in Graham's commodity reserve monetary proposal. And that's how I came around to the idea of shifting the commodity reserve concept back one stage in the value chain, so that Earth itself would be the warehouse. This paper got noticed by Dr. George Athanassakos, Professor of Finance and the Ben Graham Chair in Value Investing at Ivey Business School, Western University. He invited me to be a keynote speaker at the Second Annual Symposium on Value Investing in Greece, part of the 16th Annual Conference of the Multinational Finance Society. Given the venue, my paper "Beyond Ben Graham's Currency Proposal: Retrospect and Evolution" focused entirely on the economics of Graham's commodity reserve concept and the reasons it has never been adopted. But I included an annex entitled "Brainstorming an Earth­ Reserve Currency Standard". ("Earth Reserve" was a more appropriate name than "GREEN Money".) Perhaps because I was a non-academic economist at an academic conference, the Chair of the Multinational Finance Society wrote me afterwards to inform me that my paper would not even be sent to reviewers for inclusion in the conference proceedings. In light the global monetary and financial collapse of 2007-2009, I found that to be most interesting. Fortunately, Dr. Athanassakos was more accommodating, hosting the paper on the Institute's site at Western University. Later a prominent full professor of economics at one of the top American universities told me not to be surprised. That senior academic also had unconventional economic design papers rejected outright by publishers. 

3) That was all about a decade ago. Really though, to answer what prompted me to come up with the Earth Reserve proposal, permit me to reach back three decades. Each summer throughout the early 1980s I worked on ships, dredges, helicopters and barges in offshore oilfield construction in the Mackenzie River and Beaufort Sea to finance my undergraduate degree in economics at McGill ('83), and my masters degree in economic geography at Cambridge ('86). As a student of economics I noticed that the stricter the penalties associated with environmental protection rules in those ecologically sensitive regions, the lower was the social incentive for on-site personnel to report incidents. I didn't sense a flaw in the people who kept things quiet; I felt there was an underlying flaw in the design of the incentive structure. So I got to thinking about what would align micro-level decisions with the macro-level objectives of protecting the ecosystems that we're in.   

4) In 1989, when I was 30, I wrote an analysis for a small science-based think-tank, about the economic effects in the US national accounts of the Valdez oil spill. I roughly demonstrated that the net effect of the disaster was an ADDITIONAL $1B in US GDP growth, because of all the new wages and profits generated by the clean-up activites and impact studies. What I realized, by logical corollary, was that diminishing the UV-filtering capability of the stratospheric ozone layer would increase sales of hats, sunglasses, sunscreen, and oncology treatments. Similarly, diminishing the depth, fertility and natural irrigation of agricultural topsoil would increase sales of fertilizer and the development of industrial irrigation projects. I wondered what proportion of economic 'growth' was actually based on recreating, fixing or substituting commercially-produced goods, services and infrastructures,  for various non-market primary commodities, functions and configurations that are freely supplied by the Earth but which we are dismantling or undermining? My mind got to reflecting on how economics might be reframed so that accounting for economic production would be net of Earth deconstruction.

5) That paper got me hired onto the core drafting team of Canada's Green Plan, to initiate steps towards the extension of Canada's national accounts to resources and ecosystems, and to design fiscal instruments to incentivize resource conservation and ecosystem protection. Immediately I could see that our Department of Finance, notwithstanding bright and keen individuals there, was constrained to a very narrow fiscal policy menu. Meanwhile at this time I was also invited by the Director of the World Bank's Environment Division to assist on value-for-money methodology when analyzing debt-for-nature swap transactions. And all this led to my being asked to coordinate an initiative for the Minister of Environment on integrated economic-ecological/resource indicators for decision-making. I was able to bring systems ecologist C.S. Holling and economist Herman Daly into that work. Two additional assignments followed as an economist under contract to inter-jurisdictional councils of deputy ministers, one of which led to my 50-page report: "Institutional Options to Apply Ecosystemic Research in Policy".

6) Once those projects were delivered, I felt an internal need to bring far more formal scientific rigor to my work, so I enrolled in a doctoral program in Systems Design Engineering at University of Waterloo. Some elements of my early practical explorations in that direction caught the attention of the Administrator of the new Global Environment Facility, who contracted me to prepare a technical approach, resulting in a report: "Classification and Appraisal Criteria for Conservation Investments: A Proposed General Framework". This was core to my doctoral dissertation, and it's where the detailed design for the Earth Reserve monetary system (aka GREEN Money) started. But the university administration told me that I could not receive consulting fees for my dissertation research. They did not agree with my perspective that this was no different than a research grant or a co-op assignment. I had a young family to support, but my research towards the systems design engineering of a ecologically-sound monetary system fit none of the categories of the research granting bodies.  (Was it economics? Engineering? Or environmental studies?) They left me no option but to leave. Which I did, and carried on my career as an international applied economist working under project-based contracts in multiple countries through various firms and independently. Much more occurred in the following 20 years to shape my design of Earth Reserve Assurance. I'm most pleased to say that it now has a suitable informatics platform for deployment, currently in alpha testing. But my comments above cover its origins.

Q&A with Joseph Potvin on His Earth Reserve Assurance Framework Proposal - Part II

This is Part II of the interview with Joseph Potvin on his proposed Earth Reserve Assurance Framework. Part I of the interview was presented here.


Q: How would you describe the Earth Reserve Assurance Framework in a summarized way?

A: Here are the essentials:

1- ERA Derivatives would be specialized financial instruments produced only by central banks and issuers of commercial tokens.  These would be allocated to project investors only after the completion of registered projects that are independently validated as assuring measurable contributions to long-term ecosystem integrity and resource availability.

2- New money is issued only when owners of ERA Derivatives redeem them for any of the participating currencies.

3- Like anything else in a market, currency has a price. The price of any currency is expressed in terms of other currencies. For example, the price of a Euro today will be some amount in US dollars today. That price may be different tomorrow. In the ERA Framework there is no central reference currency. Instead it provides a system for expressing the value of each currency relative to any other currency. It would replace the current mysterious movements of exchange rates (which the general public is at a loss to figure out) with a clear framework in which a currency becomes more expensive or cheaper depending on whether ecosystem integrity and resource availability are worsening or improving within each currency zone. The price of each currency obtains a perfectly clear cause and effect, one that can also be explained in a straightforward logical way, and investigated by anyone.

    - A currency becomes more expensive as ecosystem integrity and resource availability are undermined in areas where it is used.

    - A currency becomes more affordable as ecosystem integrity and resource availability are further enhanced in areas where it is used.

The effect of this is to create a dynamic force in global trade that is the opposite to what occurs presently.

    Profits and jobs will migrate towards regions that improve ecosystem integrity and resource availability.

    - Declining ecosystem integrity and resource availability in a region will reduce profits and jobs.

Q: How do you think the ERA might impact the present monetary system if it were widely adopted by central banks around the world?

A: The global monetary system would be reframed from its current state as a mesh of aloof currencies, into a coherent cybernetic mechanism for transferring worth, intact, within and amongst communities, at any given time, and through time. This transition can be accomplished without requiring any change in the currently emergent character of day-to-day commerce or finance, and without any dependence on advocacy.

It is designed to be relatively straightforward to implement, even though the design is new and therefore many operational and systemic effects remain to be considered, modelled and refined.

Individuals and organizations would just continue to use the currencies they prefer, as well as to buy and sell in markets as they prefer. There would be no disruptive moment. And yet, the directionality of incentives relating to the Earth's ecosystems and primary resources would be reversed.

The paper explains that the ERA framework shares the goals of currency boards:  "a passive response to currency buy/sell demand; stable exchange rates; no discretionary powers to affect monetary policy (e.g. no interest rate manipulation); no issuance of credit (no lender-of-last resort function); and full (in the case, ‘Earth’) reserve backing".  The only one of those which differs is "stable exchange rates", which I think is unresolvable in practice when in fact everything is in flux. The point really is about what exchange rates would logically move in relation to?  The ERA Framework has exchange rates move in relation to measurable future capacity for primary commodity production in each currency zone. 

Q: Who would determine the criteria for evaluating projects to decide what long term value they offer to society?

A: You've used a concept that is not found in the ERA documentation: "long term value they offer to society".  That's so broad as to not be resolvable into anything that people can agree on or even measure.

The ERA Framework is grounded in practical factors such as topsoil volume, fertility and distribution, fresh water availability, quality and distribution, various ores for metal and minerals, species populations, genomic diversity and integrity, the extent and condition of local, regional and global habitats, essential biogeochemical cycles, and other indicators of the capacity to produce primary commodities. As controversial as each of those may be in their details, they are each resolvable into parameters that opposing 'schools of thought' can reach rough consensus about. The remaining uncertainty and/or disagreement will drive the competitive market in ERA Derivatives. Meanwhile, all the argumentation and negotiation about the differences of view are, in their substance, genuinely important arguments and negotiations to engage in. It is deliberate in the design of the ERA framework that the process of resolving disagreements strengthens rather than weakens the structure. That's making use of the way science functions.

The paper explains: "High quality data collections of these types are latent, sitting unused in academic, industry and government reports and databases, with no consistent feedback loops into action, and therefore no effective market demand for quality, consistency or availability. ... Development of a systematic global market for ERA Derivatives would build upon existing data sources, and would generate intense demand for data quality, standardization and transparency relating to local and global ecosystem integrity and resource availability. Valuation of ERA Derivatives would engage the methods and modelling knowledge of certified derivatives auditors, actuaries, ecosystem scientists, natural resources engineers, and real property evaluators."

Independent ERA Derivatives Auditors (ERA-DA) would coordinate the required biophysical analysis in order to assess actual outcomes. This is the same as "Certified Investments and Derivatives Auditors", and is also similar to the requirements of ‘performance based contracting’. 

Q: How difficult will it be to try and project variables that might impact the value of an ERA Derivative as much as 75 years into the future?

A: Most people don't realize how many things around us are already designed for that time scale. The paper briefly mentions that this is "typical of design expectations for major built infrastructure investments (bridges, tunnels, undersea cables, dams, pipelines, sewers, water supplies, railways and highways). This is also similar to existing copyright entitlement in most jurisdictions, for works from corporate entities."

To take a tangible example, I learned from a computer engineer some time ago that leading commercial jetliner manufacturers must ensure an aircraft's computing systems are durable and/or upgradable for at least 70 years. At first this may seem an excessively long time. And yet, there are many Twin Otters, Beavers, Hercules and DC-3s (about 2000) still flying routinely. Well, if that's an engineering specification for the computing systems, it's only natural to include assurance that there will be aviation fuel available to fly the same aircraft for the next 70 years.

The ERA Framework is concerned with that assurance of availability of natural productive assets, say in the context of “ISAE 3000 (Revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” of the International Auditing and Assurance Standards Board. The target issue has to do, I think, with "the existence of a physical condition"  in attestations.

Q:Are you concerned that special interests might try to influence the various index component factors used to evaluate the long term value of any given project?  

or alternatively

Are you concerned that anyone with a "political agenda" may try to influence the various components used to determine the long term value of any project?

A: Political agendas are absorbed into the ERA Framework in the tradition of 'system resilience'. Rather than being excluded, political agendas are provided specific mechanisms and parameters to fight over. For example, there will never be a fully agreed shape of the B├ęzier curve (Figure 5) used to set the Earth Reserve Index for each currency. Nor can there ever be a final "true" answer to the "best feasible and worst potential scenario levels for each factor". However the "rough consensus" approach borrowed from the Internet Engineering Task Force will be good enough.  Like the Internet, good enough really is good enough, and yet there's a common incentive amongst all stakeholders to pursue incremental improvements. 

The end of section 3 of the paper explains: "the ERA Derivative is designed as a market-tradable instrument that engages the motive force of human nature just as it is. The corporate person pursues profits with tolerable risk, and the natural person seeks to fulfill needs and wants promptly and affordably." Perhaps the paper could have also said: The political person advances their agenda.

The ERA Framework is not designed to achieve a stable monetary system or stable money. It is designed to achieve a resilient monetary system and resilient currencies. Both resilience and stability are desirable, but it is folly to seek stability at the expense of resilience, and wise to operate the other way around.

The strategic significance of resilience is expressed in a paper subtitled “Building Adaptive Capacity in a World of Transformations” by twenty-five systems scientists: "Resilience provides the capacity to absorb shocks while maintaining function. When change occurs, resilience provides the components for renewal and reorganisation. ... In a resilient system, change has the potential to create opportunity for development, novelty and innovation. ... The concept of resilience shifts policies from those that aspire to control change in systems assumed to be stable, to managing the capacity of social-ecological systems to cope with, adapt to, and shape change (Folke 2002: 4).” That describes what ERA is designed to accomplish. A decade ago in the midst of the financial crisis, the magazine Fast Company ran an article by Jamai Cascio that explained how the resilience and stability viewpoints yield very different approaches to management (Cascio 2009. Resilience in the Face of Crisis: Why the Future Will Be Flexible.

Q:  The vast majority of the public has lost a lot of trust in institutions, concluding that they are very corrupt and controlled by special interests. What are your thoughts on how this might impact public reception for the Earth Reserve Assurance Framework?

A: In his entry for the word "TRUST" Samuel Johnson in 1755 quotes John Locke as follows: "Most take things upon trust, and misemploy their assent by lazily enslaving their minds to the dictates of others."

The ERA Framework does not depend upon trust. I hope others will consider:

  • our genuine effort to explain exactly how it would work;
  • the arrangements designed as "constituting a multi-party contract amongst peers, with no central authority, organization or head office ... a self-provisioned and administered pluricentric multi-currency network amongst the signatories"; 
  • the AIV evaluations that would be done by independent auditors, and yet also be "open to revision based upon advances in conceptual understanding, measurement and modeling capabilities, as well as emergent reality through time";
  • respecting the autonomous choice of project investors to redeem the ERA Derivatives or to hold them for higher prices in the market;
  • the reliance on soley free/libre/open software components (written in 2013) 
  • the related transparent approach to security (written in 2003);
  • our sharing of this unfinished paper as "Version 0.x" to seek feedback and collaboration.

Nothing here suggests that anyone should 'Trust us; we're the experts'. The only request is:

Please seriously consider this. Please let us know of any weaknesses, so that those of us collaborating on it can design solutions. And as you, dear reader, happen to think this might be a reasonable general approach, and especially if you think of ways to improve and advance it, please try to arrange some time, effort or resources to assist and grow this community.

Q: How do you see the ERA system gaining widespread adoption over time in the years ahead?

A: A colleague has a simple but significant aphorism: "Just write some software that works". He's the lead technical designer for the not-for-profit Xalgorithms Foundation mentioned in the last sentence of the paper.

An 'Internet of Rules' for which Xalgorithms is designing specifications and components provides a workable general deployment platform for the ERA Framework (and diverse other automation functions, such as in trade facilitation).

The ERA Framework can begin with small experiments. If these tests produce the intended results, it can be expanded and refined. The ERA Framework, and free/libre/open source platform on which it would operate, are designed from the outset for full scalability from minor tests through to ubiquity.

There appears to be demand for a monetary system that works elegantly in the way the ERA Framework is intended to operate. We invite scrutiny. Every criticism of the Earth Reserve Assurance (ERA) Framework is interpreted as "a bug report", which participants in the design community therefore set about to try to fix. If we can make this thing really work, we'd have a truly market-based cybernetic mechanism with long-term resilience.
Concluding Comments: First a word of thanks to Joseph for taking time to answer these questions in depth so that readers can get an idea of how the Earth Reserve Assurance Framework is intended to function.

Readers of this blog know that I talked about the fact that many credible economists today are concerned that the financial and monetary system we have today is not sustainable over the long term. I have been fortunate to be included in some discussions where ideas on how to improve the current system are talked about. This Earth Reserve Assurance proposal is an example of the kind of things that are being explored. 

I am struck by this comment by Joseph in his reply to the first question of Part I of this interview about what prompted him to start working on this concept. He replied:

"I could sense that the monetary and financial system based on market sentiment alone would go 'poof' at some point, and when it did, there had better be something else designed, researched and capable of prompt implementation."

This is one of the key points we have tried to make here on this blog. There is concern about the intrinsic incoherence of the present system and many people believe that there needs to be "something else designed, researched, and capable of prompt implementation" when the current system fails. We have attempted to look for various ideas and proposals along those lines and have documented them on this page of the blog. We now add the Earth Reserve Assurance proposal to that list.

Note: Find Part I of this interview here