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.

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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.

4 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 Bézier 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 et.al. 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.

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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