What if the world ran on new classes of digital currency that are inflation resistant, create price stability, discourage bubbles and deflationary spirals? What if they could protect citizen’s savings without reducing liquidity when they save rather than spend?
This blog series examines issues and possibilities in the changing banking and monetary systems. Rapid change could occur in the near future due to the ongoing digital transformation. What are the possible outcomes? Which future will happen? How are you prepared?
Futures-backed currency, introduced in the first post of this blog series, is a type of currency that creates a natural per-industry interest rate that eliminates the artificial components of inflation.
In this hypothetical futures-backed currency economy, the higher interest that is offered to those people willing to tolerate more risk is directly supplied by the industries that must pay those high returns. This is a self-limiting function of a futures-backed currency economy that helps prevent bubbles. Today when a bank aggregates deposits and offers loans the interest applied is within a marginal range. Interest charges for loans are doled out in a narrow range only reflecting a portion of the individual risk. Typically, banks advertise an interest rate and then try hard to make sure the borrower fits the profile. Would it be better if the banks identified the interest rate the borrower should be paying based entirely on that customer’s risk, without consideration of the central bank or even commercial banks objectives?
The bond market is better. It is company specific but rarely tied to a specific product unless the bond is for a vertically focused company. Established companies attend to this market for credit but the effect of central bank controlled interest rates and inflation change the value of the bonds more than the true demand for that company’s products. A company with cash reserves whose product demands are declining will still have a viable credit rating and bonds will be accepted by the market. With the result that all boats float higher depending on the application of interest rates by the central banks. These are not accurate market signals.
Today banks aggregate deposits and package this money into loans at standard interest rates. These interest rates are available to all industries with only some fractional differences. Banks mask the direct signals from the market, telling companies to either accelerate or decelerate production based on a top down interest rate primarily driven by the central bank.
In a futures-backed currency economy, a bank would aggregate the futures offered by companies at individual interest rates the market will tolerate based on the demand for those products backing the offerings. These futures can be aggregated into stable average rates of interest that would be offered to the savers who need to hold deposits in banks. This reverses the application of interest from top down to bottom up. The aggregation dilutes the risk for the people holding deposits while applying direct unfiltered rates of interest to be paid by the industries seeking credit. The rates of return of these futures would vary by the natural inflationary and deflationary pressures of changing demand and availability of the products. Feeding direct market signals to production. What is eliminated is the false inflationary pressures of national monetary policy and the general application of interest rate motivations to all industries whether they are in a glut or a shortage.
Stay tuned for examples of how this theory dampens the deflationary spiral effects of hording.
This blog series will be a forum to discuss different concepts and areas where these theories can be applied. Subscribe to stay informed.
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The SAP Canada Ideation Centre’s mission is to help Canadian leaders of business, academia, government and non-government organizations develop a deeper understanding of the digital forces driving the economy today. Ideation Centre members strive to bring forward made-in-Canada fact-based arguments that challenge decision makers to think about the potential of organizational shifts that were not possible in the past. The Ideation Centre is fueled by thought leaders from the Industry Value Engineering team at SAP Canada. This diverse team of industry and value advisors helps organizations of all sizes and industries take advantage of technological innovations to create incremental economic value by adopting new business models and optimizing business processes, from the back office to the boardroom, farm to storefront, mine to operating room, etc.
Over his decades-long career in the high tech industry, James Zdralek has concentrated on usability, user research and design thinking while building a reputation as a visionary innovator. Merging his expertise in product design, human behavior, and economics, and through his focus on improving accounting tools, James envisions ideas that can drive tectonic shifts in financial and monetary systems. He holds a bachelor’s degree in Industrial Design, a masters in Psychology, and a diploma in Professional Accounting.