Readers here know that we try to feature any serious proposals for monetary system reform that we find. We do get input from a number of economists who discuss these kinds of proposals regularly. Recently, I was advised of a new proposal called the Earth Reserve Assurance Framework (ERA).
Earth Reserve Assurance is conceived by economist Joseph Potvin. In a section entitled 'design research' he provides the following background:
"This functional summary of the ERA Framework is part of dissertation research towards a Doctorate in Business Administration (DBA), Project Management, Université du Québec. Some elements of the design originated years earlier during graduate research at Systems Design Engineering, University of Waterloo, and also at that time, in contract research to The World Bank for the Global Environment Facility. Along the way several economists have provided constructive feedback and suggestions. Computational methods have been implemented on free/libre/open source terms with assistance from current and recent university students as well as senior technical personnel based in commercial firms."
----------------------------------------------------------------------------------------------------------------------Below is the abstract summary for this proposal with a link to the full paper describing the concept in detail. I note that it is referred to as a pre-submission draft, version 0.5. So he's looking for feedback. After that are a few added comments from me.
Abstract
"Earth Reserve Assurance (ERA) is a framework for the determination of monetary value and quantity in a multi-currency system with no central reference unit of account. It resolves distortions and complications of earlier proposals that would anchor money to physical commodities, by shifting the commodity reserve concept back one stage in the value chain, so that the Earth itself is the warehouse. The "Earth Reserve" consists of incrementally-assured factors that secure future economic Rent for 200 years. The capacity to produce primary commodities is verified with measures of ongoing change to ecological integrity and resource availability.
ERA Operations Nodes, which are operated by central banks and independent providers of commercial tokens, would issue, buy and sell ERA Derivatives. These are specialized financial instruments grounded in tangible projects that add to the Earth Reserve. A project investor registers a plan to enhance ecosystem integrity or resource availability, and commits to standard reporting requirements. Upon completion. a Certified ERA Derivatives Auditor conducts the biophysical analysis to assess actual outcomes, and to estimate the first 75-year Aggregate Intrinsic Value (AIV) of the 200 year assurance of measurable 'common pool' attributes of the Earth Reserve. The Project Investor generating the improvements is entitled to the 75-year AIV, to be redeemed immediately or retained for sale in the market. New money is issued only when owners of ERA Derivatives redeem them for participating currencies. Every Currency has a price. But since the ERA Framework has no central reference currency, the price of each currency can only be expressed relative to other currencies. A currency becomes more expensive or cheaper relative to others depending on whether the Earth Reserve is relatively weakened or strengthened within each respective currency zone.
By design, the system is oriented so that a currency unit becomes more expensive when the Earth Reserve is undermined within its currency zone. The effect is to create a dynamic force in global trade that results in profits and jobs migrating towards currency zones that improve the Earth Reserve relatively more than other currency zones, regardless of their initial states. Each ERA Operations Node is always prepared to clear free market supply and demand for its currency through routine, passive operations. The ERA Framework is a minimal set of specifications, agreements and software components for a multi-currency tabular standard of value that accommodates diverse conceptual, institutional and political forces."
"Earth Reserve Assurance (ERA) is a framework for the determination of monetary value and quantity in a multi-currency system with no central reference unit of account. It resolves distortions and complications of earlier proposals that would anchor money to physical commodities, by shifting the commodity reserve concept back one stage in the value chain, so that the Earth itself is the warehouse. The "Earth Reserve" consists of incrementally-assured factors that secure future economic Rent for 200 years. The capacity to produce primary commodities is verified with measures of ongoing change to ecological integrity and resource availability.
ERA Operations Nodes, which are operated by central banks and independent providers of commercial tokens, would issue, buy and sell ERA Derivatives. These are specialized financial instruments grounded in tangible projects that add to the Earth Reserve. A project investor registers a plan to enhance ecosystem integrity or resource availability, and commits to standard reporting requirements. Upon completion. a Certified ERA Derivatives Auditor conducts the biophysical analysis to assess actual outcomes, and to estimate the first 75-year Aggregate Intrinsic Value (AIV) of the 200 year assurance of measurable 'common pool' attributes of the Earth Reserve. The Project Investor generating the improvements is entitled to the 75-year AIV, to be redeemed immediately or retained for sale in the market. New money is issued only when owners of ERA Derivatives redeem them for participating currencies. Every Currency has a price. But since the ERA Framework has no central reference currency, the price of each currency can only be expressed relative to other currencies. A currency becomes more expensive or cheaper relative to others depending on whether the Earth Reserve is relatively weakened or strengthened within each respective currency zone.
By design, the system is oriented so that a currency unit becomes more expensive when the Earth Reserve is undermined within its currency zone. The effect is to create a dynamic force in global trade that results in profits and jobs migrating towards currency zones that improve the Earth Reserve relatively more than other currency zones, regardless of their initial states. Each ERA Operations Node is always prepared to clear free market supply and demand for its currency through routine, passive operations. The ERA Framework is a minimal set of specifications, agreements and software components for a multi-currency tabular standard of value that accommodates diverse conceptual, institutional and political forces."
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My added comments: This may seem to be a somewhat complex proposal, but perhaps this is only because the author reframes so many initial assumptions. Nobody else, as far as I know, would use measurable project outcomes as the primary monetary anchor. And nobody else sets valuation benchmarks as long as an entire human lifespan into the future (75 years). His paper explains these unusual design choices. In an email exchange with Joseph I offered an analogy for how I think this concept might work to help me try to understand the basic idea. Below is our email exchange on this:
my email to Joseph Potvin:
This may be off base, but the Earth Reserve Assurance calculation is something I can kind of relate to working in the oil and gas industry. The company I work for does producing well acquisitions every year. In our industry, the NPV calculation done (usually by reservoir engineers) is the "baseline" for valuing the present and future net worth or the assets. They use standard financial and industry values to try and project what price we should pay for the assets today assuming certain future projections over many years into the future. In the case of our company, we won't purchase an asset unless we believe it will yield at least a 10% return to our investors who fund our efforts.
This current net worth used to come up with a price to offer to buy the assets will of course move up and down all the time as the variables used in the calculation change (market price of the products, new information about potential underground reserves, etc)
So this ERA concept kind of reminds me of this idea, but expanded to be applied to any resource or project that might be deemed worth valuing over a future projected time frame using some kind of agreed upon standards to calculate the initial "floor price". As time unfolds the value of the derivative would move up or down depending upon any changes the variables used to calculate it as more information becomes available and also based on actual market participants willingness to buy and sell at an agreed upon price.
email reply from Joseph (including a few edits he provided later):
"Larry, your analogy is exactly right. So much so, that I have adapted your description to add as one of the FAQ answers, as follows:
Re-pricing of ERA Derivatives functions is like asset re-valuation in the oil and gas industry. For example, a company that acquires petroleum or gas wells will have its reservoir engineers calculate the NPV as the "baseline" for valuing the present and future net worth of the assets. They would use standard financial and industry parameters in an attempt to project the price that the company should pay for the assets today, and usually those projections on the expected life span of the reservoir is several decades into the future. For instance, I worked on construction of the Norman Wells expansion project in 1983. That field began producing oil in 1939, and currently yields about 10,000 barrels per day. Both industry and government analysts frequently re-evaluate what the remaining reservoir is 'worth' as an asset, and what each well is worth. That remaining part is exactly what ERA is focused on: What's left in (or expanded in) the Earth's Reserves for the production of primary commodities? But then here's the reframing part. Rather than express the reserve in terms of currencies, ERA expresses currencies in terms of reserves. My article explains a way to do this.
Re-pricing of ERA Derivatives functions is like asset re-valuation in the oil and gas industry. For example, a company that acquires petroleum or gas wells will have its reservoir engineers calculate the NPV as the "baseline" for valuing the present and future net worth of the assets. They would use standard financial and industry parameters in an attempt to project the price that the company should pay for the assets today, and usually those projections on the expected life span of the reservoir is several decades into the future. For instance, I worked on construction of the Norman Wells expansion project in 1983. That field began producing oil in 1939, and currently yields about 10,000 barrels per day. Both industry and government analysts frequently re-evaluate what the remaining reservoir is 'worth' as an asset, and what each well is worth. That remaining part is exactly what ERA is focused on: What's left in (or expanded in) the Earth's Reserves for the production of primary commodities? But then here's the reframing part. Rather than express the reserve in terms of currencies, ERA expresses currencies in terms of reserves. My article explains a way to do this.
Let me add that I'm well aware that knowledge and capabilities change through time. Assessment and negotiation relating to the purchase of wells also takes time, and the company's offer price to buy them can move up or down as variables used in the calculation change (market price of the products, new information about potential underground reserves, etc.) Different analysts and investors will have different views of any particular asset. As time unfolds, the value of an already-issued ERA Derivative can move up or down depending upon changes to the variables used in the standard calculations, as more information or new information becomes available. It makes sense for a party to buy an ERA Derivative above the current AIV if they expect that official value to rise.
Both the bank's Aggregate Intrinsic Value (AIV) and the investor's Declared Market Price of ERA Derivatives function like that. However the ERA Framework's scope is generalized to the availability of any measurable primary resource and measurable ecological characteristic relevant to primary commodity production. It's not about total value measured, rather it's the gradient that matters: What real enhancement does a particular project actually deliver, over how many decades? "
Both the bank's Aggregate Intrinsic Value (AIV) and the investor's Declared Market Price of ERA Derivatives function like that. However the ERA Framework's scope is generalized to the availability of any measurable primary resource and measurable ecological characteristic relevant to primary commodity production. It's not about total value measured, rather it's the gradient that matters: What real enhancement does a particular project actually deliver, over how many decades? "
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The Earth Reserve Derivatives in this proposal would function like other derivative futures contracts and would trade on market exchanges. The example analogy I provided above is a simplified example. The Earth Reserve Assurance proposes a general approach involving arms-length professionals similar to Certified Investments and Derivatives Auditors measuring registered projects not for their past economic return on investment, but their long-term future economic Rent. But the basic concept appears to be similar, as Joseph confirmed in his email reply above.
In our email exchange, Joseph also confirmed that his proposal is designed to be one that attempts to use market incentives rather than government edict. Here is his email reply to my question on that point:
my question:
"My take is that you do not want to impose this system by government edict, but rather hope to entice people to participate based on their natural human desire to make money..."
Joseph's reply:
"Yes, I have turned that into an FAQ entry ...
Q. Evidently, you do not want to impose this system by government edict. Are you anticipating that the ERA Derivative would use natural market forces to persuade individuals and decision-makers within entities engaged in business activity to think more broadly about all the long term impacts of what they are doing and not just pure financial returns.
A: The ERA Derivative system is designed to harness natural market forces so that those individuals and decision-makers within entities, communities and jurisdictions engaged in commerce and trade, who most effectively internalize the long term ecological and resource effects of what they are doing, will thereby optimize their financial returns."
In addition to to these email comments, Joseph kindly agreed to do a Q&A type interview to explain more about his passion for the Earth Reserve Assurance Framework and how he thinks it can improve the present monetary system. You can find Part I of the interview here.
Concluding Comments:
Here we have an innovative new proposal that seeks to reform the present system, but not by offering a new currency of any kind. Instead it outlines a way for any and all central bank and various alternate currencies to address the perennial problem of value which they all have in common.
Perhaps his key phrase above is: "Rather than express the reserve in terms of currencies, ERA expresses currencies in terms of reserves." We will add this article to our page of ideas for monetary system reform and watch for future developments related to this over time.
Here we have an innovative new proposal that seeks to reform the present system, but not by offering a new currency of any kind. Instead it outlines a way for any and all central bank and various alternate currencies to address the perennial problem of value which they all have in common.
Perhaps his key phrase above is: "Rather than express the reserve in terms of currencies, ERA expresses currencies in terms of reserves." We will add this article to our page of ideas for monetary system reform and watch for future developments related to this over time.
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