Fiscal Responsibility and Public Finances (6th in the series)
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?
How can we create a system where government is required to be fiscally responsible? Futures-backed currency, introduced in the first of this series of blog posts, is a type of currency that can attribute and direct responsibility back to the currency issuer. By basing this currency on a blockchain infrastructure the transactions, pools of money and volume of currency is readily available for analysis and scrutiny.
The fundamental aspect of this new currency system is that it creates a competition between currencies. Several types are described in the paper, all technically asset-backed with the first two being the common concepts that people think of when discussing asset-backed currencies. The first, is the worst, inventory-backed currency with a representative value related to stored goods such as gold, oil or readily available commodities. This type of currency comes with fees for security and storage and is only good for the speculative increase in value during the demand shock that precipitates the need to store the commodity in the first place. The second type of currency, is slightly better; share-backed currency with a value related to the speculative value of factories and companies. This type of currency will issue dividends in a similar fashion to an interest rate. Ownership, or holding this type of currency, is placing trust in the management of the company and the value and dividend are related to speculation, expansion and risk. This does nothing to create a measure of natural growth that can be used as a global interest rate. The third and most interesting is futures-backed currency. A currency issued by companies that is backed by the future output of the factories. Legally guaranteed, with corresponding penalties and market frameworks ensuring fairness. The discount depth approximates a linear relationship to the distance into the future when the delivery is promised. This discount is the natural interest rate, the time value of money, that will hopefully improve and decentralize the management of interest rates. This natural interest is derived from many currencies that each have their own interest rate. The collection and aggregation of these currencies can de-risk them and create a stable unit of value. This is covered in more detail in previous blog posts and the full-length paper.
A fourth currency is briefly mentioned in the paper. This is a new type of national currency. If structured similarly to the futures-backed currency, a country can issue a tax-backed currency. The concept is to issue tranches of currency with a specific year attached to the money. The target year would be analogous to the delivery year for a future-backed currency but in this case the year is when the currency must be used to pay for taxes. A government would be held to more rigorous standards of fiscal responsibility. Since the currency would have to compete with other types of money in circulation any excess of issues by the government would devalue the buying power. In an economy where savers and consumer would have a choice of currency the competition would ensure that government manages it finances more responsibly.
Effectively the government would be paying for healthcare, infrastructure and defense using issues of their own currency. The market would determine the value since the government would only be able to specify the year that the money would be collected as tax. The value to the public would be in redeeming it when they need to pay income tax or pay for other direct government services.
Four types of currencies all being traded on a daily basis. How would you buy a coffee? This may sound complicated because it is an explanation of the mechanics behind the scenes. As mentioned before, the aggregation of currencies would be done to de-risk and stabilize the currencies. One or two massive aggregations may end up as the dominant standards of value. These would be similar to mutual funds that are composed of hundreds of other stocks that fluctuate and change in value and are managed by a bank or financial institution. The mechanics of the market would exist to fairly value all the currencies available. Consumers, savers, corporations and governments would be free to choose which ones they would hold their savings in and which ones they would use to set their prices.
The government should regulate the marketplace but allow the market to create value. This should include creating the value of money itself. Interest rates and the size of the money supply should be natural so that government debt is not manipulated and reduced through inflation. The government should be fiscally responsible with the taxes it collects. By issuing a futures-backed currency on a blockchain, responsibility can be accounted for in a public ledger rather than hidden in inflation. A dysfunctional government that cannot balance its own books and manage its own debt would have a reduced capacity to damage the economy.
Stay tuned for additional examples of how this theory can help.
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Read more about the future of money: Full article.
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.