The Return of Collateralised Money
Martin Bartels
8 August 2021
The lifeblood of the modern world, money, remains a divisive subject and often evokes strong emotions. This is mainly because a good part of the effort in the course of a human life goes into acquiring and maintaining money. Terms such as "inflation" or "high taxes" frequently arouse fear, shame and perhaps even aggressive thoughts.
Impassioned debates about the true value of money are as old as money itself, going back perhaps 5,000 years.
Strong feelings are understandable, but they would be an obstacle to rational decisions when means of payment of a new stage of development are at the door. Nothing we need less than fuzzy emotions.
it would be in the interest of society to focus entirely on functionality and then decide how best to deal with the new possibilities.
What are the prerequisites for money to be functional?
The requirements for money hardly offer any starting points for controversial discussions:
Chart 1: Money: Functional requirements
Regardless of the physical or electronic manifestation, money is, first and foremost, about functioning in almost all aspects of life. The aforementioned criterion can overlap with other terms . It is important, however, to have a reference system to facilitate the assessment of imminent innovations.
The chart intentionally does not refer to the emotionally charged term "value". It is sufficient to rely on “purchasing power”, which users can acquire, store and transfer.
Money is tied to institutions
Money presupposes an institutional framework. Typically, this is a nation state (or several states together) that
• defines what means of payment are permissible,
• who (central banks and commercial banks) is entitled to issue, what kind, and which volume of money (physical or scriptural),
• sets rules for the operations of the money-issuing institutions,
• monitors the money-issuing institutions’ compliance with the rules and
• empowers a central institution to defend the stability of money in accordance with legal requirements.
The new cryptocurrencies that have emerged in recent years are neither issued by a state nor centralised. Their creation and transfer is not governed by rules that national states have stipulated, yet their rules fulfil the criteria of institutional frameworks. State courts can take corrective action in the case of the usual "accidents" in payment transactions (e.g. theft). States also levy taxes on profits generated by trading in cryptocurrencies.
There are libertarians who have a deep aversion to the institutional foundations of means of payment.
So far, no clear counter-model is discernible that would be suitable for a constructive debate about the pros and cons of a functional alternative. It is therefore still appropriate to accept the key role of legal frameworks and central banks.
Central banks follow their mandate to steer the stability of the currencies they issue. They acquire or dispose of certain assets (e.g. precious metals, deposits in other currencies, securities), they steer the money supply/key interest rates and they manage trust.
The sophisticated methodology available today to stabilise purchasing power of legal tender is the result of institutional learning curves during the 20th century, the course of which often had unintended dramatic implications. For example, the belief in the necessity to collateralise money with gold hindered economic growth as the expansion of the money supply became dependent on the production of mining companies. In crisis situations, central banks were compelled to sell their gold holdings. Afterwards, they found it difficult to provide capital to the productive sector of the economy to recover purchasing power for replenishing their gold stocks.
The final demise not only of the gold standard but of any kind of fixed link between the value of currency units and assets came with the "Nixon shock" on 15 August 1971.
End of the Bretton Woods system
Even in the hearts of some experts, the longing for a "brave old world with a gold standard" may occasionally flare up. The practical implications of such a project, however, are not the subject of this article. Nostalgia is an emotion, not a strategy.
The most impressive achievement is the art of central banks, developed through experimentation in the 20th century, to manage the trust of users of payment instruments. Trust is only an emotion, but the central bankers’ words, gestures and subtle changes of parameters can steer markets today such as the Oracle of Delphi or the Roman augurs did in the past. The efficacy of central bankers’ trust management is beyond doubt.
The development of this sophisticated art that initially rose from the upheavals of the World War I and the slow death struggle of the gold standard was described in detail and in a breath-taking manner by Liaquat Ahamed in his book "Lords of Finance: 1929, The Great Depression, and the Bankers who Broke the World".
The culmination of the art of trust management may have been the US Federal Reserve's successful effort to restore trust after the financial market crisis of 2007 and 2008. The meltdown did not occur.
Malaise
Today there is no small propensity towards monetary malaise. Fears over the stability of assets prices rise when the money supply is allowed to expand, seemingly without limits, and without a plausible connection to the real economy.
The words "helicopter money", "printing press" and the euphemism "quantitative easing" awaken doubts and fears.
Even greater may be the fear of the unknown that may loom if one speaks out against the modern management of trust. There seem to be no alternatives.
At this point it should be emphasised that the concern here is only a growing and hardly explicit uneasiness, because these can be the drivers of new developments. We are not asking whether or not the instruments of central banks are actually reaching their limits.
Clearly there is a growing willingness to consider options that can protect purchasing power from the feared ‘next tempest’.
Technology generates new options
The development of cryptocurrencies that are not dependent on central banks was a first reaction after the financial crisis of 2007/2008. Limiting the number of electronic "coins" issued over the years was and is seen by many as a protection against too much expansion of the money supply, i.e. against inflation.
The arguments are quite similar to those for the protective qualities of precious metals.
Some central banks are working on the introduction of Central Bank Digital Money (“CBDC”) which allows transactions between market participants very quickly and without counterparty default risk. Even after technical perfection is achieved, this will be a subset of normal money that is not collateralised.
There are possibilities to hold a precious metal account with a trustee. There are savings plans and pension plans for this. Balances can be transferred to other precious metal accounts or converted into legal tender at any time.
These accounts serve to store purchasing power. However, this approach does not quite meet the practical requirements for the execution of transactions and the “universal acceptance” mentioned in the chart above.
Stablecoins are blockchain-based units whose price is backed by and firmly pegged to generally recognised assets. If these underlying assets are one or more official currencies, the transfer of a coin economically means the transfer of a currency unit. They do not yet meet the "general acceptance" criterion because only a minority of citizens are technically equipped to receive such coins. Their transfer is possible without the possibility of intervention by central banks or states. Therefore, central banks may feel challenged by stablecoins.
Collateralised money
What we are proposing appears to be a dramatic change. In fact, it is only an acceleration of standard technical processes.
Before we make a major purchase; buying a house for example, we typically sell other assets. These can be securities or a property. Until savings are used for a transaction, we have effectively collateralised purchasing power with assets of our choice. Then we convert these assets into money in order to be able to make a payment of money.
It wouldn't occur to us to do something like that to pay for a yoghurt in a supermarket. For this, the assets in which we have invested for savings seem too bulky. But in fact it is possible to put each asset into a uniform pool and electronically divide and make it available as small as is practically necessary. It makes no technical difference whether a pool consists of stocks, a cryptocurrency, a set of Fabergé eggs or a building plot on Mars. Machines do not start sweating when you ask them to do very small units!
The only precondition is that the assets are permissible and that the owner's broker can provide the exact corresponding amount of legal tender for them in seconds at a fair price after an immediate transaction. The flow of money is triggered via an app on the owner’s electronic device and then goes into the creditor's POS system.
The radical reduction in the time it takes the broker to convert stored purchasing power into legal tender is, from an economic point of view, identical to the collateralisation of money. The remaining time window of perhaps four seconds for the completion of the process does not change this.
An efficient broker can offset transactions within proprietary portfolios or buy and sell in the market at minimal transaction cost. The broker can do this with any asset which is liquid enough to ensure real time settlement.
The broker’s client can decide according to personal preferences which goals (s)he follows with investments (= storage of purchasing power), e.g. avoiding volatility, the inverse correlation with inflation risks or ethical principles. The client can personally steer the portfolio or follow an algorithmically controlled investment procedure.
Here, new asset classes that have been traded at stable prices in the past, but which were previously out of reach for retail clients, may also come into play via qualified brokers: electricity contracts (a cornerstone of our civilisation) and CO2 emission certificates (sovereign risk).
Prudently used autonomy is protection. Mistakes are the results of personal choices.
Chart 2: Collateralised money
Outlook
Money backed by collateral disappeared when it reached practical boundaries.
Programmers are now transcending those practical boundaries. It is likely that in the future, much faster distributed ledger technologies will replace the now reliably functioning POS systems. This does not change the fact that collateralised money is set to return before that system change.
We are on the threshold of the introduction of collateralised money. There are no daunting impediments facing the software that is needed for their implementation. Legislators do not need to take action.
This new money will again be inextricably linked to the real economy, more closely than gold ever was. It will allow citizens to mitigate their economic risk. There will not be any compulsion to use it, but the possibilities are plausible and reassuring.
To set the stage
Lao Tzu’s words sum up a dramatic contemporary scenario: While in some parts of the world people are increasingly affected by water scarcity, others face the growing threat of too much water due to extremely heavy rainfall and rising sea levels.
While the poem captures the ambivalence of water perfectly, the words "soft and weak" also seem to describe the way modern civilisations have responded to it. Their foggy perception and sluggish action is just as dangerous as the threats themselves.
Why Water?
The focus of this essay is to use the prominent example of water to help identify concrete approaches for dealing rationally with the issue of climate change. Climate change affects us in many ways, including the expansion of deserts, forest fires, the salinisation of soils, landslides, extreme weather events, agricultural crop losses, loss of biodiversity, spread of disease and human and wildlife migration.
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Scientists and engineers have laid the foundations for our prosperity. And only these elites can show us the way to overcome the harmful externalities of these very engines of our wealth. This article supports the thesis that we are technologically and organisationally in a position to successfully meet these challenges, step by step.
One obstacle to the mobilisation of existing resources lies in the fact that the general public has only a vague understanding of the issue. They do not realise that, unless we make controlled sacrifices, nature will impose uncontrollable sacrifices on us.
We urgently need to overcome the human tendency to trivialise and understand with our minds and hearts what will happen if we do not listen to the guidance of our scientists and engineers. However, while these experts hold the keys to the right strategies, they are only trained to communicate with other scientists. This leads to a situation of misunderstanding and therefore a lack of adequate action.
Blurred perception of facts
Every day, we are all exposed to an overdose of reports about minor and major disasters in all forms of media. We more or less defend ourselves against this by ignoring some news, i.e. reducing the strain on our nerves by filtering information. It is human nature to rely on the mostly correct assumption that unpleasant developments will eventually end and change for the better. In the case of climate change, however, looking away and hoping things resolve themselves doesn’t appear to be a winning strategy.
A wealth of scientific analyses on climate change is available to everyone, but these are mostly comprehensible only for other scientists.
We should openly acknowledge that most people in the northern hemisphere have a sense of empathy for people "in the south" who are plagued by overpowering rains, flooded lowlands, islands disappearing into the water, eroding coastlines or droughts. However, the geographical distance and lack of awareness of the frequency of such disasters dilute solidarity. Collective psychological repression can set in quickly.
Most people in the northern hemisphere do not consider an increase in average temperatures of a few degrees to be alarming. Many even express relief that the winter is often milder than in the past. Loud protests by campaigners are experienced and understood by most citizens as a disturbance or perhaps exaggerated fearmongering.
At the level of policy, scientifically informed decision-makers attend international conferences on climate change, where they negotiate with other decision-makers on action plans that have no teeth but are presented as hard-won progress. And they are increasingly supporting “green” sectors of the economy. However, they are often reluctant to share the full extent of their knowledge about the problem because they do not want to jeopardise their recognition by “rocking the boat”.
The factual impact level is decisive for citizens
There is controversy about the interplay of causes of climate warming (industrial emissions, volcanic activity, ocean currents, etc.). We don't want to debate that here. What is more relevant are the changes in global average temperatures and their trends, as determined by scientific methods.
- Uniqueness: The most important fact is that a warming of 1.5%, 2% or even more is highly unusual in geological terms. If we are looking for a comparable global warming of this magnitude, we have to go back to the Pliocene: "Paleocene-Eocene Thermal Maximum". This period was 5.3 to 1.8 million years before our era. The causes back then were different and the temperature rise did not occur at the same speed as today. A comparison with the more imaginable “Medieval Warm Period” in the years from 750 to 1350 CE may appear plausible at first sight. However, this consideration cannot reassure us, because the temperatures were lower than today, and it was not a global phenomenon.
- Causality: Increasing global warming is causing glaciers and polar ice sheets to melt. At the same time, the increased temperatures in the oceans are causing the mass of water to expand. The combination of both factors has an impact on islands and the coastlines of the continents. These include the rising of sea levels and temporary or long lasting floods inland. The number of extreme rainfall events inland with destructive power has increased significantly in recent decades, with regional differences. East Asia is most affected. An additional knock-on effect results from the release of the greenhouse gas methane, much of which has been previously locked up in frozen land and is now being released as it thaws.
- Dimension: The Intergovernmental Panel on Climate Change (“IPCC”) has concluded that there has been a 1% increase of average temperatures since preindustrial times until 2017. The IPCC projects another 0.5% increase over the next 20 years. This assumes what is not certain, namely that greenhouse gas emissions will be reduced immediately, quickly and on a large scale. However, the latest "sclerosponge thermometry" research results suggest that the rise in average temperature is 0.5°C higher than the IPCC consensus. This means that by the end of this decade, almost 20 years earlier than expected, global warming could already be 2°C above pre-industrial levels. . In the following, however, we continue to refer to the lower IPCC estimates. According to IPCC calculations, it is to be expected that water levels will rise between 0.65 and 1.1 metres by the year 2100. Other models project between 1 and 3 metres by the year 2100. Not all coastal areas will be exposed in the same way. Ocean currents, tidal range and the topography of the coastal areas will make major differences. Through simulations, readers are given a vivid idea of how water will change our living conditions. It is important to note that the northern hemisphere does not enjoy a privilege, meaning that torrential rain, flooding and storm surges are increasing and will continue to do so there too. It should be noted that sea level rises of up to 30 metres are not unusual in geological history.
- Other causes:
There have been dramatic rises in sea levels in history that were linked to the melting of ice at the end of an ice age, i.e. not to the CO2 content of the atmosphere. At the end of the last ice age, around 10,000 years ago, there was a rise of up to 120 metres, albeit through a slower process than the change caused by climate gases today. The result was a significant retreat of coastlines.
Instantaneous interruption or reversal of a climatic process?
Changes to the climate are not new in human history, and certain events have triggered reductions in temperature. A striking example of a break in climatic developments is the eruption of an Icelandic volcano in the year 536 CE, whose dust made the atmosphere in the northern hemisphere so opaque to sunlight over a period of more than 20 years that temperatures fell drastically ("Little Ice Age").
Recently, it has been hypothesised that ice ages were triggered by asteroids.
It may be tempting to pin our hopes on the possibility of such events helping us to mitigate climate change, but while we cannot rule them out, events of this kind are rare and unpredictable, we must not include them in projections. It would be absurd to hope for random external causes that could interrupt or stop the progress of global warming. While hope is a human propensity, it is not suitable for contingency planning.
Our real bottleneck
What is preventing us from taking appropriate action to minimise and reverse the rise in average temperatures?
Citizen perception of the nature and dimension of the threat is inevitably blurred, because the daily reports from the media are mostly unstructured and not comprehensible to non-scientists. The reports do not allow us to recognise the essentials.
Citizens need an overview that is communicated in an honest, understandable and clearly structured way. Only when citizens have realised the nature and scale of the problem will decision-makers have the courage to take action with determination. In essence, it is about legitimising protection strategies that are considered unpopular today.
Given that citizens do not have access to graspable knowledge, we have a transformation problem. And this can be overcome if science presents the overall scenario from a certain distance. Figuratively speaking: It is not about describing every pixel point of an image, but about showing the image as a whole. The holistic representation deviates from the usual approach of scientists, because each of them is professionally held to focus on "pixel points" in their respective area of specialisation. This is the only way science makes progress, but that's not what is needed here.
The contours of the hologram can be communicated in an understandable way using e.g. the key points mentioned above:
- uniqueness: there has never been a rise in atmospheric temperatures as fast as now
- causality: the most important trigger is industrial emissions
- dimension: a rise in atmospheric temperatures of 1.5 or 2° Celsius or more above pre-industrialisation levels will massively weaken our civilisations
- other causes: additional factors can further exacerbate the process
If the effect of a detail is not legible, the presentation of the measurement can be improved. In particular, the exponential impact of very small changes in average temperatures in the atmosphere goes very much against human intuition. We can compensate for this disadvantage in perspective: Instead of referring to changes in temperature in degrees Celsius, we should consistently communicate changes in basis points, i.e. in hundredths of a degree Celsius. For example, labelling a temperature rise as "32 basis points" would be correct and would make the difference easier to comprehend than "0.32 °C". This method is a common practice in the financial industry. There, too, this method of representation is helpful in raising awareness that a small change can have massive implications.
Comparing our planet with human bodies helps us to comprehend the effect of changes in temperature: If your body temperature rises by 1° Celsius, you have a fever and are not feeling well. If the temperature rises by 1.5 or even 2° Celsius, you are very ill and hardly able to work. It is similar with our planet: If it experiences increases in average temperatures of this magnitude, it shows the symptoms of a "serious illness". However, this "fever" does not go away after a few days.Truthful and comprehensible holographic description will work like a call to action as sensible citizens will refuse to accept the idea that their lives, that of their children or that of their grandchildren, will be exposed to significant and unparalleled danger.
Here is a simple example of a call to action: It is true that the onset of toothache does not necessarily trigger a reaction in us straight away. We are perhaps still hoping that it will go away on its own. But at some point we turn to the dentist for help. We may later find the dentist's bill stressful, but the relief of finding a solution to the problem outweighs this. It is necessary that we anticipate, that we sense the expected greater pain, in order to take the initiative.
Governments will only act vigorously when informed citizens demand it vigorously. There has been pressure from sections of the population for a long time, but its direction has always been vague and therefore not sufficiently effective.
And like a dentist, a government cannot act for free, but will send bills to taxpayers. The later the comprehensive strategy is implemented, the higher the bill.
Defensive and offensive measures
The necessary government action plans are not the subject of this article. It should only be mentioned that defensive measures are necessary first, e.g., improved meteorological warning systems, raising and strengthening of dams and dykes on the sea coast and rivers, preparation for the abandonment of non-defensible areas. In addition, measures are needed to halt the dangerous trend and then slowly reverse it. These essentially consist of avoiding emissions and removing greenhouse gases from the atmosphere.
Desperate measures?
The keyword for desperate actions is "geoengineering". This could imply approaches such as making either the atmosphere or our oceans absorb less sunlight or bind more CO2. While these approaches sound exciting, they are not fully developed and run the risk of causing irreversible damage. As such it is unlikely they will be used.
Sabotage of the communication of scientific work
There are two groups working against open and fair communication between science and the citizens.
Refuseniks who are not interested in facts work against this. They are used to believing their own feelings and those of their friends from social networks. There should be no discussion with them, because deviations from their assumptions act as fuel for them. Science will not lead them out of their dream worlds.
Then there are the sceptics, who may have expert knowledge but only select those parts of it for their thinking and communication that seem to support their rejection of action. This is a dangerous species, because “expert” sceptics can claim some credibility and can disrupt societal communication successfully. The only way to weaken these people is to persistently ask them for better and well-founded alternatives. Then they have to provide verifiable answers or quietly hoist the white flag.
Acknowledgements:
My heartfelt thanks go to Professor Reinhard Gast. As a practising geologist and experienced researcher, he has helped me to grasp the exponential impact of seemingly minimal changes in the temperature of our atmosphere, similar to our own bodies, and the uniqueness of the current situation.
Authorship disclosure:
Fully human generated