Resilient Open Questions in a New Environment
Understanding What Money Became; What Characterizes Money From Other Contracts Remains Unchanged
We have to focus our attention on sampling and the stability of sampling required for monetary exchange ratios, the trust resulting from guarantees backing both sampling and clearing. These aspects of money, when they work together, create the social contract that links all users of money, a social contract without which money would vanish. See Figure 8.1.
The definition of “extended money” described in previous chapters does not address the question of price sampling, as was already recognized by Hayek and Von Mises when they remarked that extended money is not a physical measurement. In order to flow freely, money must fulfil its role as a measurement tool and, it follows, if this role cannot be fulfilled, then parties to a transaction will not use it, and we will move outside the monetary realm to find them back in a barter exchange system. A new exchange basis therefore needs to be found to create trust in the stability of the measurement. This is an open issue, about which Robert A. Mundell had some ideas (conference at Pierre Mendes France Conference Centre in the Paris Ministry of Finance, Les Entretiens du Trésor, 2011). Mundell advocates the creation of anew currency in addition to the IMF's SDR system.
FIGURE 8.1 Monetary structure
How do we create guarantees that money does in fact exist and that it is indeed exchangeable? This question has two aspects. One is purely legal. Acting pursuant to a G20 decision, existing regulatory agencies have already pursued the goal of requiring most financial instruments to trade on regulated markets under appropriate worldwide coordination. Existing self-regulatory private markets have strengthened this process by allowing safe international trading of financial instruments without concentrating systemic risk in fewer markets and with fewer market players who are themselves subject to more prudential constraints. Central banks and regulatory agencies are raising this issue to no avail since they have no political power. In the meantime, regulatory agencies are trying to put the toothpaste of excess money back into the tube by issuing definitions and implementing new regulations or are trying to extend the tube's capacity to accommodate money. They define what a payment is, and what a clearing house is to provide, on a market-to-market basis and an instrument-by-instrument basis instead of establishing a general concept that market players and judges can follow up on. They will still have to decide what the consequences are, and to whom, of trading not listed on regulated marketplace financial instruments. Although they are doing their job, these regulatory agencies are beating around the bush by failing to deal with some very basic issues.
The first issue as to whether some monetary instruments should be redeemable, as currencies were in the past, and how that should be carried out, still needs to be raised. As does the question of what the nature of the guarantee should be and who should provide such a guarantee. On the contrary, what are being dealt with are the processes for unwinding – that is, how should the IMF organize a default when that becomes necessary, or, in essence, how can the funeral of dead institutions be organized without harming counterparties. The goal is achievable with lesser leverage of market participants and rules to allocate losses between bigger ones. However, it will result in a monetary contraction by virtue of the default of either particular financial instruments or the entire monetary system, with resultant, unknown social consequences. It is not the duty of these agencies, but rather that of the systemic risk surveillance oversight boards. These boards, however, cannot act legitimately since the issue of political leadership is at stake.
The second aspect of the issue of guarantees is what type of guarantee should be provided to holders after the instant of default to organize a resolution, and how should that guarantee be operated in order to be credible and to satisfy the expectation that the currency as a trading price is stable both during trading before the default, and after the market resumes operations. This question also raises the issue of the appropriate firewall mechanisms necessary for each market category if liquidity is disappearing or price variation too ample to be sustainable and how such a buffer should operate, whether automatically or by activation.
What kind of monetary instruments should be liquid, guaranteed in all circumstances like bank notes (meaning repayable on demand)? Which ones should be liquid because they are traded on financial markets, and not because of their maturity date, and in such a market, what should be the nature of the guarantee provided to participants, by whom, and to what extent? Where to set the boundaries is a key question.
The new understanding of money flows and the accumulation of recorded assets and liabilities that the extension of money aggregates will bring will, like any breakthrough, pose new questions. If we better understand flows and accumulation, logic demands that we find links between flows and standing open balances. In other words, we will have to expand our knowledge of processing and the reality of currency rotation.
This will open up an enormous field of discussion as to how to analyse the reasonable limits of aggregates and how to analyse the moving links between them. It will also open up the matter of a coherent taxation system and even the need to dismantle the tax systems that have developed over years and which no longer make sense.
Finally, it will raise the issue of why the new G20 meeting forum did not achieve what was expected of it as soon as the peak in the liquidity crisis was over – that is, an idea of how to create a process to approach all these matters, and what kind of conclusions can be expected.