Guillaume's blog | Thoughts on the future of money

Money system as architecture and other insightful metaphors

In April 2008, Jean-François Noubel gave a talk on the Future of Money in Paris. If you understand French, are not familiar with money and want to sit and relax and learn about it, I highly recommend watching this video. I hope this will be eye-opening for you.

For non-French speakers and those already familiar with money, I want to share some of my notes as I think J-F Noubel found excellent metaphors to explain complex concepts:

Money is an invisible architecture. An architecture is something human designed that defines the rules on how the components of a system relate to accomplish the system’s purpose. Inevitably in software development, the architecture of the system influences how software developers contribute to the system, leading them to good and poor division of work and determining speed of development, maintenance and execution. A monetary system is very similar to a software architecture in the sense that a monetary system is fundamentally an information system, which relate to establishing value and tracking exchanges, with very precise rules defined and refined over time by humans. It is invisible because we’ve got so familiar with it that it’s like air we breathe.
Our current monetary system is like the Monopoly game: there are only losers. Just like the game of Monopoly and many natural phenomenon, our monetary system obeys the Pareto law of self-aggregation: 20% of the population own 80% of the wealth, 250 individuals own 60% of the World’s wealth. This is because money attracts money: the more you have it, the easier it is to make more. Just like in Monopoly the winner takes it all, and as a result cannot play with the other players who lost, so he lost as well. Just like we could change the rules of Monopoly to make it impossible for a winner to take it all, we could change the rules of our monetary system to make sure distribution of wealth is more equal.
Money is like water, and the money system is like an irrigation system in a garden. You don’t want your water to end up in one spot, but distribute it equitably in the way that maximizes the fruits, beauty, diversity and long-term health of your garden. This metaphor is particularly relevant as “currency” comes from current, so etymologically money is the thing that flows between us.
Money influences our culture (society) just like water influences our culture (garden). Our current monetary system forces us into competition and extreme optimization of processes making our overall society less resilient to shocks. No only do we depend more than ever on each other, but as we optimize we end up in a monoculture. It’s like having one giant field of genetically modified corn, instead of a lot of small fields, each with a different variety. Not optimized, but much more resilient to a pandemic.

Here is a link I found where some of these metaphors are also discussed.

The Ascent of Money

The Ascent of Money is an upcoming book by Scottish financial historian Niall Ferguson. It is also an upcoming PBS documentary in January.

It’s good to see more writers and producers bringing public awareness to what money is and how it influences unnoticeably yet heavily relationships between humans. I can’t wait to see how far it goes in unveiling the mechanisms of money, its power, and how “We the people” can take back ownership of it as it was originally intended to be by founding fathers such as Jefferson.

In the following interview, Niall introduces his book. He talks about the origin of money 4,000 years ago in Mesopotamia, John Law, the British bond market, the use of money as instrument of power and invisible taxation by the rulers/government, and the current crisis.

Chris Cook on asset-based finance to the rescue of the housing crisis

Chris Cook of OpenCapital.net put together a very insightful presentation on how to stop the real estate crisis by switching from our secured debt-based housing financing to a new form of equity-based housing partnerships. If I understood his comment correctly, his point is that 70% of our money is secured on assets and this is the big problem right now (we can deal with the unsecured debt later used in our economy, which could be replaced by a community currency).

His solution, as I understood is, is to break the vicious circle of owners/developers having to sell properties at fire sale prices because they can’t pay back their debt. It consists in:

placing the house(s) in a pool
renting them at a low price to occupier(s), based on a highly-reputable rental index
having them managed by a manager paid as a % of the rentals

Then the magic happens as follows:

New investors interested in steady highly predictable revenues (ex. pension funds) buy shares in the pool
the proceeds are used to pay bank distressed owners/developers, who can pay back distressed banks
occupiers can pay more than their rent and automatically become investors
as they become occupier-investors, they have incentive to invest sweat equity in maintaining homes
they may end up paying their own rent from the rental they get as shareholders, thus breaking the slavery of debt

This equity model is different from a corporation since there is no debt/leverage that would maximize temporarily the management fees by increasing and underestimated risk, which ends up in bankruptcy when default happens. It is similar to a Royalty Trust used for oil production.

Here is the complete presentation:

Equity Shares – A Solution to the Credit Crash

View SlideShare presentation or Upload your own. (tags: credit> capital><peak)

Community Capitalism: increasing your wealth with community currencies

The idea that our money system is wrong is becoming more visible every day, but creating money systems designed for grassroots adoption (without government involvement) is quite a challenge.

At the unMoney convergence event last spring, Michael Linton, a pioneer of alternative community currencies, gave a presentation of a money system that I found very convincing (Part 1, Part 2, Part 3, Part 4).

The basic premise is that an alternative money system designed for grassroots adoption should not require long, philosophical explanations, but should simply make economic sense for all participants.

Michael identifies three kinds of participants:

businesses
non-profits
people like you and me

The system works as follows:

businesses issues promises in their “own currency”, i.e. in the goods/services their business provides. Could be movie tickets for a movie theater or bread coupons for a baker. They issue them to the non-profits of their choice, for instance a church or school or hospital. Note that this does not cost them anything as long as they don’t issue more than their business can deliver. For practical purposes these promises are issued in the same unit as the legal tender currency, say the US dollar.
non-profits take theses local currency notes and sell them to people like you and me for real cash, which they can use to pay for their operating expenses. Again, here, people like you can me buy them from the non-profits of their choice.
people like you and me work for hard cash at businesses and volunteer/work at non-profits. We earn both real cash and local currency notes. Local currency notes can be spent at local businesses who accept them according to their policy. For instance a restaurant might accept to be paid 50% in real cash and 50% in local currency, while a grocery store might accept to be paid 90% in real cash and 10% in local currency. This will depends essentially on how much real cash they need to support expenses that can’t be covered with local currency.

As the quantity of local currency increases, both in terms of absolute quantity issued and velocity, the benefits for each participants is that real wealth is created (better education, better service for old people, better roads, better health, etc.) but unlike real cash, it cannot be extracted from one community and spent in another one. In other words, the wealth of neighbors is captive and no one but the neighbors capitalize on it.

So, wealth increases, but it’s also shared:

businesses get more revenue in local currency that they can use to hire more people they pay in local currency, buy from other businesses in local currency, etc.
people like you and me get more real wealth via the non-profits and get more money in terms of things that are truly valued: local businesses and local free services.

My comment

This model follows some of my own ideas that promises from businesses are probably a better backing mechanism to a local currency then thin air or hours of people like you and me, or a commodity, especially if these promises are in their own currency, i.e. what they produce. I think borrowing in your own currency is a privilege everyone should have (not just the US government) to the extent that they can deliver on their promises.

This model is a sort of Scrip 2.0, which is great since it builds on an existing well established practice of using coupons issued by merchants to non-profit for fundraising (with the major disctinction that in Michael’s model case, there is no impact on the profit margin of the business: $1 of local currency is $1 of real cash vs. $1 of local currency is issued at say $0.9 real cash and sold at face value – $1 – to you and me in the case of scrip).

I think one issue might be that the distinction between businesses and non-profit is pretty vague in the current description I’ve watched (but I’ve probably missed some content). An improvement in that direction would simply be to say that may not discriminate who they provide their services/goods, in particular on the basis of who gave and who didn’t buy local currency from them. I think a local “shaming” or abuse reporting system might be enough for a local currency.

I think it’s important that the notes issued carry the brand of the business who issued it (either in paper or electronically). This would prevent businesses to print too much local currency which may ruin the system via inflation, which is essentially paper wealth or fictitious wealth):

Businesses could easily be forbidden to use local currency they’ve issued for paying other businesses or their employees: business would have to recycle money they’ve issued and got back via the non-profits.
People/Non-profits would quickly notice if the business has a hard time redeeming the local currency they’ve issued. Again here a local shaming/reputation system would put pressure on the business to limit their issuance.

I think Michael’s model is very exciting and I am planning to talk about it with people in my neighborhood. Feel free to comment here on the pitfalls/improvements you see. What I’d like to do as a next step is a more detailed analysis of the model with hard numbers.

Government-sponsored shopping coupons in Taiwan

An interesting government action is being discussed in Taiwan. Instead of handing out regular money that may most likely be saved and not spent, the government would be issuing time limited coupons that would be only used for buying consumables.

I think it makes a lot of sense. It goes along the line of separating our currency between an investment currency whose goal is to keep its value over time, and a medium of exchange currency whose goal is to flow as fast as possible b/c of its well-known expiration time.

In case of very bad recession, this is no unlikely to happen in western economies, as they fail to boost internal demand by pumping legal tender into banks who are refusing to lend. It may make particular sense if the products/services that can be bought with these coupons are scarce (ex. oil in the U.S.).

From AFP (hat tip reader Razzz):

Everyone in Taiwan will be given more than 100 US dollars in shopping vouchers in a government bid to boost the economy amid the global credit crisis, the prime minister announced Tuesday.

Under the scheme, the island’s 23 million people regardless of age or wealth will be given 3,600 Taiwan dollars (109 US)…those people who donated their coupons would be able to file for tax deductions.

It is expected to be implemented as early as January in time for the Lunar New Year holidays which will begin on January 26.
“The programme is aimed at boosting the economy … and is expected to contribute to a 0.64 percent increase in 2009 GDP,” Liu said.

Taiwan’s gross domestic product growth is projected at 5.08 percent for 2009 according to government figures, after an estimated 4.30 percent for 2008.

However, analysts and businessmen were more sceptical.

“I can’t see that the programme will have much impact on the GDP. If people can’t make their ends meet, they won’t be encouraged to spend more just by getting the vouchers,” said Johnny Lee, an analyst at President Securities…

The vouchers, which will expire in December 2009, can be used at registered retail stores, supermarkets and restaurants, officials said.

The scheme, proposed by the island’s top economics planning body, the Council for Economic Planning and Development, is based on a similar initiative launched by Japan in 1999…

October exports, the engine of the economy, fell 8.3 percent from a year earlier, largely on falling demand for electronic and precision products amid the global economic slump.

The figures, together with an updated IMF forecast, prompted Taiwan’s central bank to further lower interest rates by 25 basis points last week — the fourth cut in just over a month.

The International Monetary Fund earlier this month predicted that advanced economies — major export markets of Taiwan — would shrink next year under pressure from the global credit squeeze, forcing a new round of European interest rate cuts.

The government lowered its economic growth forecast for 2008 to 4.30 percent from 4.78 percent, but an increasing number of economists and analysts regard the revision as too optimistic given the current economic turmoil.

The Future of Money conference

Jean-François Noubel is organizing the conference The Future of Money on November 26th from 7pm to 10pm in Mexico City.

Our conventional monetary system will not last long. This prediction is shared by almost every economist today: debt-based and interest-based money is an unstable system that is condemned to die from intrinsic congenital imbalance (for instance the market cannot follow the speed of interest-based debt to pay back). No one knows precisely when the big collapse is to be expected, but everyone agrees it will happen sooner than later. The current world wide monetary crisis, as well as the effects of monetary concentration, are one of those historic social alerts announcing the big crunch.

What no one anticipates is that money is about to follow the same path the media followed during the past years; from controlled ownership of media with one-way top down broadcast systems, to peer-to-peer, participatory, open publishing. Millions of free currencies will soon circulate on the Net and through our cell phones. They will not be controlled by states or central banks, they will be issued and used by millions of marketplaces willing to free themselves from conventional debt-based, interest-based money (85% to 95% of money circulating today). Everyone will use these free currencies simply because they will be ubiquitous, easy to integrate into current media technologies, and because most people and organizations are undermonetized.

This new paradigm is likely to turn the current monetary system into a completely obsolete system. The next one will offer marketplaces the capacity to maximize their trade potential with the ever right amount of monetary mass at their disposal.

Hat tip to @JCCapelli

Sustainable Money

I listened during my commute today to an interview of Jay Hanson of dieoff.org and warsocialism.com, in which he talks about the inherent limits to our economic growth, sure nuclear holocaust if we stay the current course and societal changes that may save us.

I know some of you may discard the above as scaremongering socialist progaganda, but Jay actually describes himself as a succesful computer engineer who loved capitalism, but got to realize its inherent limits and decided to study the problem in details and try to come up with a practical solution.

I took a lot of notes, but the first basic idea is that capitalism, and in particular our money system, is incompatible with a sustainable society. The money we use, fiat money, is by definition infinite, but it is a claim/promise on resources that are finite, so sooner or later we hit a wall: our money claims a smaller stake over the available resources and we get poorer. The U.S. founding fathers used economic growth as a tool to solve problem, but today, our economical growth IS the problem, so we can’t find a solution for it via economic growth. “We’re stuck”.

The second basic idea is that we compete to accumulate much more money (as claim on resources) than we really need because as social animals, we desperatly seek status. It’s not the $500M we want, it’s the largest sailboat in the world. We won’t be able to change the fact that humans want status and would kill for it, but we can possibly change the kind of status we strive for itself, through cultural evolution.

A development on his conclusion is that we need two kinds of money:

One that is essentially a rationing on remaining resources. In his ideal society, 5% of the population would work 2 years in their life to produce all the food, housing, healthcare and clothing, which would be allocated in equal ways to each person in the population, would expire and would not be exchangeable.
One that is the status money. Since most of our time could be spent playing, studying, creating art, etc. we could be rewarded for it via the status we would earn from it.

The similarity of this second money to the Whuffie concept is quite stricking. In many ways, the Web is where we spend more and more of our time creating digital artifacts. The resources there are close to infinite. If we could build a way of measuring our status there, we would have something similar to what Jay proposes.

Greg Weldon on CKNW Money Talks

Greg Weldon of WeldonOnline shared his views on CKNW yesterday at 9AM. If you have never subscribed to his money monitor, metal monitor or ETF monitor, I strongly recommend you give it a try via the free trial. Greg is one of the few independent financial analysts I respect. He correctly predicted this crisis long before our government officials, central bankers and financial media got out of their denial. He provides extremely specific short-term and long-term analysis.

Here is a quick summary:

We are not out of the woods. The stock market has lower to go even though we may see bear market rallies in the order of 20/25% with the U.S. election “acting as a catalyst of hope”. What we are experiencing is a reversal of a 40-year credit expansion. The U.S. consumer is howing increasing sign of stress: more unemployed, longer unemployment, much more partially unemployed. There is no sign for a major wealth reflation on the horizon.
What to do from a personal investment standpoint: Be much more personally involved. The old investment models like the buy and hold mentally don’t apply anymore. Be more flexible, diversified and have a nimble investment approach. Be involved in all asset classes, globally and be much more specific. Long in some assets and short in others at the same time.
So far the massive efforts of central banks haven’t been very successful, so we don’t know if this situation will end up into hyperinflation or ugly deflation. There is still a lot of fire power held by central banks, so we can expect a much bigger effort in terms of monetary policy (see upcoming G20 meeting mid-November).
At some point, if/as more and more bail-outs are provided, the credit-worthiness of the U.S. could be questionned.

Using ATM to send cash – no bank account or card required, only a cell phone.

If you haven’t read this at bankwatch or banktech yet:

Privier’s New ATM Service Requires No Card, Account

The service is a cash-to-cash service targeted at the unbanked population. After registering a mobile phone online as well as other personal information, a user can go to an ATM, deposit cash, enter a mobile phone number, and receive in return a 10-digit withdrawal code that he can send to someone else.

This is essentially an authorization delegation mechanism, and as such it reminds me of OAuth, which allows authorization delegation for APIs on the Web.

The main issue here is adoption: the service is only valuable if the receiving party can go to an ATM that supports the technique, so my understanding is that this will have a real value when it is deployed by a large ATM network operator, or when it is supported accross networks via a common protocol.

What would be the iPod of Financial Services?

7 years ago exactly today, Steve Jobs introduced the iPod, a 5GB HDD stylish music player.

Looking back, this was one of Apple boldest strategic moves and one of its most successful as well. It’s good to look back at the choices they made and wonder what the equivalent would be in the financial services world.

They identified a large non-speculative market with no market leader (music).
They laser-focused on a “quantum leap” value proposition: “your whole music library in your pocket” at a fraction of the TCO per song provided by other products.
They chose the best technology they could find to power this value proposition: thin HDD, fast-charge long-lasting battery, and fast uploading FireWire link.

What could be a comparable innovation in financial services and where could it come from? Here’s my take.

Large market: personal money management
Quantum value proposition: complete peace of mind
Technology: real-time access by the service provider to any financially-relevant information about you (expenses, assets, liabilities, goals, etc.) and automated creation of a sound and realistic plan.

I know some will strongly disagree with me, but my feeling is that just like the iPod didn’t come from an established music label/distributor, the iPod of financial services may not come from an established financial services provider (just like music labels/distributors, financial services providers are too busy these days to save their business models).

That does not mean it will come from a start-up either. The key will be to leverage an established trusted brand, and establishing a trusted brand requires much more than a top-notch team, VC money and unique technology and value proposition.

Looking at the consumer perspective, it seems to me that there is currently a stronger-than-average interest in trusting a single brand for a given problem, and leaving it to them to make the choices for you (and focusing on what you do best). Yes, Windows lets you decide where to put your application money, but for most computer non-geeks, less choice is more.

Financial Services are a bit like Windows these days. Many choices are offered but consumers feel they are left to decide what’s best for them in a world they don’t understand.

To come back to my comparison to the iPod, many consumers don’t want to have to know where to click, which audio file formats to use, which software to use, where to shop, etc. they just want to enjoy their music. I think a similar comparison could be made with money: most people don’t want to have to know where to invest, what to save, how big a loan they can afford, etc. They just want to know that whatever money they have they can enjoy the most today and tomorrow.

At a recent mobile conference (Mobile Web Wars), Michael Arrington said: “people are always willing to give away their privacy for value”. This is a thought that came back to my mind as I was recently reading Lending, with a Twist, an article describing one of Khosla‘s investments: On Deck Capital. On Deck essentially reduces the risk with loaning to small businesses by tracking their business on a daily basis, which is a much better measure than a credit score that is always lagging valuable creditworthiness information.

Reading about On Deck made me think that there was no similar financial service where consumers would voluntarily give their full past, present and future estimated financial picture to a third-party in exchange for true peace of mind. This could probably be done without even switching completely away from existing financial services providers, just as companies like Mint.com or Wesabe allow you to get a better understanding of your finances without swithing to Mint bank or Wesabe bank.

But to bring true piece of mind, such a service would have to go much further than giving recommendations and it would have to be backed by a highly trusted brand, with a value proposition backed by a wide portfolio of investments giving it preferred access to a wide variety of goods and services. This type of peace of mind used to be provided by large enough corporations to their employees, but it seems that such a responsibility is to heavy to bear for any a single industrial company, so it would have to be provided by some sort of conglomerate (companies have put in place strategies to focus on what they do best, but ironically that leaves most of us with less time to focus on what we do best). I don’t really have any name in mind, but Berkshire Hathaway may be the closest one I can think about.

Is this a crazy idea?