6. Upgrading the System

The debate on ‘trilemmas’ goes back to Milton Friedman’s monetary trilemma, and has been further advanced by Dani Rodrik. It postulates that countries face a trade-off between the objectives of exchange rate stability, free capital mobility and independent monetary policy. This trilemma differs from the ‘indispensable triad’ described here. In fact, the ‘indispensable triad’ makes it possible to overcome the monetary trilemma. See Brunnhuber (2019) and Obstfeld (2015).

See Randall Wray (2015) and Kelton (2020).

The concept of strategic triangulation was first introduced in the field of migration policy by the European Stability Initiative. See https://​www.​esiweb.​org/​

Besides reduced use of cash and an increased demand for liquidity to finance additional projects, retail CBDCs and their intermediaries have been prompted by Facebook’s Diem initiative to use their own money. On the one hand, fintechs like Grab, Ant, Alipay, Mercator and Gojek already represent a 2.5 trillion USD market (2021), with 20% of their revenue coming from payments and product distribution. Core banking, on the other hand, represents a three trillion USD market globally (2021), with traditional credit facilities only representing about 5% of their revenue.

For experts in the field, digital ‘stablecoins’ risk pro-cyclically enhancing the economic cycle, rather than counterbalancing it, as they are linked to existing currencies. The monetary mechanism described in this book works in the opposite direction, i.e. anti-inflationary and anti-cyclical. See Li and Whinston (2020).

Standard economic theory claims that monopolies generally lead to higher price levels and lower-quality output, and so are less efficient. This is true of any monopoly, including monetary monopolies. Establishing a dual-currency system will thus create more regulated competition between two systems, which will ultimately lower prices and increase the overall system’s quality and efficiency.

See Randall Wray (2015) and Kelton (2020).

The update of the Chinese Silk Road Initiative; see: https://​thepeoplesmap.​net/​project-database/​. The initiative involves over 165 countries and has so far invested over 850 billion USD. Historically, China has always invested about 1% of its GDP abroad. It has now become the largest creditor in the world, larger than the World Bank, IMF and Paris Club. Most contracts are bilateral agreements and follow the ‘Angola model’, where goods and services imported to and exported from one country are transferred from one Chinese state bank (e.g. Chinese Development Bank) to another (e.g. Export–Import Bank of China). From a Chinese perspective, the entire procedure has zero net effect on its balance sheet. In short, China is going on a global shopping spree at a large scale and on a long timeline. See Gelpern et al. (2021).

In numbers, 4/5 of the banks involved are state banks, over 80% of the contracts remain hidden and there is little published information on the geographic breakdowns. The contracts involve joint ventures, equity funds, FDIs, SPVs and trading loans, mostly running offshore and off-sheet. About two-thirds of the contracts are nominated in USD; about 10–15% in renminbi. Central banks mainly use CBCSAs to finance the initiative. Half of the contracts are collateralised through resource-based loans. The published contracts do not involve any Paris clause, where the debtor could seek debt relief, face-value reductions, which allow long-term restructuring only, or cross-default clauses, which involve immediate repayments. See Horn et al. (2019) and Desjardins (2018).

There is a third historical example that demonstrates a similar mechanism: Britain and its Commonwealth in the (pre-)colonial era from 1765 to 1938. Britain was able to drain a total of ten trillion sterling over that period from India alone, based on a highly complex and opaque trading system of purchasing and taxation using council bills issued by the British Crown. See Patnaik and Patnaik (2016) and Chakrabarti and Patnaik (2019). We can do better by having the central banks involved in creating a better, greener and fairer future.

See Horn et al. (2019).

To be more precise, the limitations of such an augmented and risk-adapted monetary policy are determined by four factors: human resources (unemployment and enrolment rate); the availability of natural resources (land, rare materials, energy); external debts in foreign currency; and the monetary channels in which the liquidity is processed. Currently, the additional money supply is driving growth of the API and stock market, but we could do better: using different monetary channels, reducing US dollar dominance, tapping into more efficient land, energy and material use and mobilising millions of under- and unemployed people would create space for an augmented and risk-adjusted monetary policy of this sort.

The crash of the cryptocurrency market in May 2022 destroyed about two trillion USD within a couple of days, also affecting the real economy and people who had never traded in digital coins. There were two major reasons for this. (1) Cryptocurrencies had become part of investors’ and pension funds’ portfolios through the shadow banking system. (2) Stablecoins are linked to conventional currencies as a reserve. When the investors wanted to exit their digital coin investments, the crypto-miners had to provide conventional currency instead, which affected the face value of the currency used as a reserve.

In fact, free market economies generate four significant market failures: (1) a tendency towards monopolies; (2) social and ecological externalities; (3) asymmetric information; and (4) exploitation of public common goods. We have to add a fifth failure: governmental externalities. This encompasses everything from state failures to corruption, to bad political decisions, to mere ignorance and denial. All five failures are addressed by the monetary mechanism described here.

The largest and most regularly updated database on corporate willingness to pay and preparedness to invest in a green marketplace is available through the Force for Good/Capital as a Force for Good initiative: see https://www.forcegood.org/

From a central bank and regulator perspective, there are three major ways that unregulated private digital coins might influence price stability. (1) They can be used in the real economy for payments; (2) they modify the use of cash, the velocity of money circulating in an economy and measures of overall money aggregates; (3) they affect the quantity of money. However, whether operating as a public good (CBDCs) or a private cryptocurrency, they cause a network effect that triggers additional monopoly yields. It is a political decision whether these yields should favour the public good or private interests.

As well as identifying a list of positives, a digitally supported negative ‘banned list’ would guarantee that funds are only spent on goods and services that are healthy, fair and sustainable. This could be implemented as a multistage approach, beginning by excluding drugs, guns, child labour, land mines and human trafficking, with the algorithm later being adjusted to also exclude alcohol, cigarettes, etc. Each time, the smart contract would nudge consumer and investor habits towards the desired goals. Moreover, the additional liquidity would not only create windfall profits but multiple second-round effects, reinforcing the trajectory towards a more sustainable future each time the token is used (Samudrala & Yerchuru, 2021).

The QE mechanism in general allows liquidity to be generated independently of ratings on the capital markets, with private rating agencies determining the risk premium and credit conditions (Broby, 2021).

This relates to the current debate on the end of cash. To cut a long and complex story short, just one technological feature has to be implemented in order to guarantee the anonymity of cash. It involves a two-tier process at the bank cash machine. First, we insert our credit card to be identified. Then we insert a second card in another slot, which allows a certain amount of digital cash to be uploaded onto that second card. Once this second card is loaded, it acts like anonymous cash. If the owner loses this card, this digital money can be used by anybody, just like cash. See Prasad (2021).

According to the CIA World Factbook (2014), numerous countries and regions use a second currency to stabilise their economy: China, which since 2004 has officially used the yuan for international trade and the renminbi for domestic activities; Bhutan, which uses the ngultrum (BTN) and the Indian rupee (INR); Cyprus, which in the Greek Cypriot area uses the Cypriot pound (CYP) and in the Turkish Cypriot area uses the Turkish lira (TRL); Guatemala, which uses the quetzal (GTQ) and the US dollar (USD); Guernsey, which uses the British pound (GBP) and the Guernsey pound (GGP); Jersey, which uses the British pound (GBP) and the Jersey pound (JEP); Lesotho, which uses the loti (LSL) and the South African rand (ZAR); the Isle of Man, which uses the British pound (GBP) and the Manx pound (IMP); Namibia, which uses the Namibian dollar (NAD) and the South African rand (ZAR); Panama, which uses the balboa (PAB) and the US dollar (USD); and Tuvalu, which uses the Australian dollar (AUD) and the Tuvaluan dollar (TVD). Our argument is that if 10% of nation states use this hybrid form of financing with two currencies more or less effectively to stabilise their economy, we could do the same on a larger scale even better by introducing an official dual-currency system as described in this book.

The ECB forward guidance policy technically already reflects a convergence of fiscal and monetary policy to finance member states directly or indirectly. Quantitative easing can create ‘clean bills’ of this sort with no offset (i.e. no tax) if the money is properly spent. And this is happening already: up to 40% of the EGD comprises not credit facilities but non-refundable, conditional funds (‘clean bills’). See Kelton (2020).

Historically, hyperinflation has actually been fairly rare. The 56 temporary cases identified since 1945 have been due to war or failed state scenarios. From a financial perspective, weak public financial infrastructure, including reduced sources of tax revenue, public corruption and unclassified welfare, has been the major accelerator of hyperinflation. The mechanism described here prevents all that: it increases the sources of tax revenue, reduces public fraud and corruption and minimises disaster management costs. See Hanke and Krus (2013).

There are signs that this situation is now changing. At the time of going to press, there has been a rapid rise in inflation in many European countries due to the war in Ukraine and food/energy shortages. See also Chap. 8.

In addition, ageing populations in some advanced economies (where consumption outweighs savings) and further deglobalisation associated with a shortage of labour have, when taken together, the potential to increase the CPI.

Global debt relief and public debt cuts are indeed part of the short-term solutions. However, they provide only an intermediary and temporary solution, and do not address the fundamental underlying flaws of the monetary system itself. See https://​jubileedebt.​org.​uk/​press-release/​growing-debt-crisis-to-worsen-with-interest-rate-rises

At the time of writing (June 2022) we are witnessing imported food and energy price inflation globally. The war in Ukraine, the aftermath of the coronavirus pandemic, an ageing population in parts of the world and our overall dependency on fossil energy are the four major contributors. In Sect. 8.​3, we describe a monetary safeguard mechanism to better cope with inflation in the short term (the MIB). However, over the long term the dependency on fossil fuels is the largest inflator. A shift towards renewables will not only reduce the risk of any war over energy but will also lower the costs of almost all the products and services we use and provide millions of jobs for the next generation.

The banking system is not primarily an intermediary. Banks do not deposit money first and then lend it second. Rather, commercial banks create money. A deposit in a bank is a loan to the bank. 97% of the overall aggregate money supply is created by the commercial banking system itself. On this more realistic view, a credit line is a fictitious loan. As long as banks invest in productive goods and services, it is a form of productive lending. However, over two-thirds of lending currently goes to the FIRE sector, where the credit only finances asset ownership transactions, but does not produce any additional real goods or services. The purchasing power increases the API, which in consequence increases inequality. Only consumer credit might increase the CPI. Therefore, the decisive question is: where does the money go? We might say: money is what money does. This is one of the reasons why the regulatory efforts of BASEL IV will be largely ineffective, as this regulation essentially treats banks only as intermediaries. What is required is a form of regulation that steers the banking sector and bans unproductive FIRE investment. Commercial banks should still speculate, but they should do so using funds or money from the capital market. One case worth noting is the City of London: it is legally not part of the UK or the EU, its citizens have no right to vote and the Queen has no legal right to intervene. Accordingly, the City of London is an unregulated offshore island and the UK officially has no financial sector. Which simply means: ‘The emperor has no clothes.’ See Werner (2014).

An increase in the money supply does not necessarily translate into higher prices. In fact, empirically there is no correlation between base money (M0) and QE, and there is no empirical correlation between base money (M0) and the exchange rate of major convertible currencies. See for more details Marouani (2018).