Federal Economic Analysis Team
The Federal Economic Analysis Team (FEAT) has been founded on 2015.02.19 as a team of independent economic analysts reporting to the Bank of the Federated Micronations (BOFM) and the Governments of the members of the Federation. They also have the task to publish short economic analysis articles on this webpage.
4C - Corona, Climate and Crypto Crises - 2021.02.21
The "Freegold" transition expected six years ago has not taken place, in spite of the inflationary pressure of the low-interest central banks policies which continue unabated. Or maybe it has, in an unexpected way, if one looks at the value explosion of a number of Crypto currencies, like Bitcoin or Ether.
Currently, the cumulated value of Bitcoin has already reached one tenth of that of Gold. That multiplication in value over two to three orders in magnitude is more than what used to be expected for a Freegold transition, and it is not yet over. Bitcoin might become the store-of-value within a Freegold / Freigeld system, while other digital currencies, private ones as well as central bank issued, will be used for daily payments. A Central Bank Digital Currency (CBDC) might even be implemented in a way to enable the central bank to reduce its numeric value in a controlled way over time, similar to Freigeld.
But at the same time, it has become clear that other factors come into play, too. The climate crisis has reached a visibility and speed which was not expected 6 years ago. Investments into climate related assets have grown in value, while classical industries like car manufacturing have lost much value.
The conflict between those two trends is obvious - Bitcoin is a high power consumer and will become unacceptable in the near term as long as its appreciation trend continues. Its power consumption is obviously directly proportional to its value as long as mining is done via massive computing power. Thus, an appreciation of another factor of about 10 is basically infeasable and will lead to a reaction by governments.
The Corona crisis might become the fuse which brings this to an explosion, by creating a number of inflationary and economic shocks - people losing their jobs and income because of lockdowns, rising private and public debt, rising tensions between those countries which were able to protect their citizens and economies and those which were and are hit fully by the crisis. An additional factor is that it is highly probable that the pandemic not only started in China, a country which was able to contain it after a first crisis, but that it was caused by irresponsible research in a state-owned laboratory, in combination with a lab accident. The logical consequence of this responsibility which is denied by the Chinese government are massive trade conflicts and boycotts, and possibly even war.
The FM government is advised to protect against this confluence of crises by investing accordingly. Research must be done urgently on less power-hungry crypto technologies. Continued investments in climate oriented areas are a must, ideally in combination with real estate. Finally, the consequences of the Corona crisis have to be regarded.
Update - 2021.06.01
FEAT is proud to state that the FM government has followed its investment recommendations to an extend which was not to be expected, and with excellent success, protecting FM assets. Even state governments, like Capricornia, have followed its advice.
At the same time the Corona lab accident thesis has moved from being a right wing fringe theory to an acceptable, if not yet proven thesis, as reported in the Guardian . This will create issues in the relationship of many countries with the PRC government (not recognized by the FM), but also in regards to trust in experts and media. FM experts have been warning since spring 2020 that to discard this thesis as "fringe" would be irrational, and even dangerous as it might be a boon to the populists, if prove true.
"The mechanics of cause and effect is statistical propability", as William Golding states in his novel "Free Fall" (p.1). The statistical propability of a virus appearing by chance in exactly the one of the about 50 Chinese cities larger than 1 million or 18 over 5 million (Wuhan being the 8th largest, with 8.5 million) which has a BSL 4 virus lab , the highest security class, is low enough to make it probable there is a correlation. In addition, the reticence of the Chinese Government to allow free access to the WHO team, and the propaganda onslaught it tried to feed the world, speak for themselves.
The consequences of this, both in regards to international relations and to trust in science and media, are difficult to predict, but the risks are high.
Freegold and Freigeld - 2015.02.19
The current economic situation has been described by the Federal State Department reports, without an answer towards the inflation/deflation question. In our opinion, the widespread occurrence of ZIRP and NIRP, together with the discussion regarding paper money is pointing towards an interesting solution and theory. To understand this, please reference first the ideas of Silvio Gesell on Wikipedia and FOFOA in a good summary interview .
Silvio Gesell speaks of "Freigeld", money completely controlled by the state, loosing or gaining value as needed in regards to the economic situation. This Freigeld does not have the ability to function as a store of value. Negative interest rates during a recession are part of a Freigeld system, as well as paper money which does loose value over time, even without classical inflation.
The idea failed 100 years ago, but today, we have quite a different situation. Money has become digitized to a great measure, and in some countries full digitisation is on its way. We have a worldwide debt crisis, with most major countries in lockstep, and at the same time, a savings crisis, with the ageing population saving money to survive the failure of pension systems caused by the expected demographic breakdown.
This makes Freigeld both attractive and implementable to the world's governments and central banks. We think it is possible that
- central banks expect the debt crisis cannot be resolved any more by conventional means
- governments understand they need to regain control over the monetary flows of international companies
- as a consequence, plans might be prepared to move to a system resembling the Freigeld concept during the next major breakdown.
A Freigeld system is not to be mixed up with an inflationary system. Inflation is controlled by the expectation of future price behaviour and the consumer reaction to this, and therefore as difficult to control as a bike with reverse steering. With Freigeld as we understand it, the loss or gain of the numeric value of money is controlled directly, and independently of inflation. An account or a bill might loose or win a certain percentage per month in nominal value.
The major indicator of any potential application of Gesell's ideas in the current crisis is the Negative Interest Rate Policy implemented by central banks on the borders of the Euro area - Switzerland, Denmark and Sweden. A de-facto NIRP exists in those countries where even long running bonds have negative interest, like in Germany. It is expected that this phenomenon will extend to other countries.
This is of course no fully implemented Freigeld system. As is well understood, money today is created to an overwhelmingly large part by commercial banks through credit. A system switch will be possible when the mechanisms are in place to take full control of those by the central banks when a worldwide systemic event occurs.
We understand the Bank for International Settlement (BIS) to be thought leader of the central banks of the world. The BIS has shown to have a good understanding of the current debt situation, and may lead the introduction of new concepts which will give the central banks additional powers.
Which steps would have to be implemented to introduce a Freigeld system either regionally or worldwide? We believe they are the following:
- Money creation moved from the commercial banks to the central banks
- Commercial banks taken under temporary state control and relaunched under the new system
- Nominal reduction of all savings accounts at a defined rate per annum
- Paper money given a limited validity (e.g. 1 year), with a non 1:1 exchange rate for the exchange of old bills.
- Possibly, introduction of regional bills with a defined exchange rate towards a benchmark unit.
- Full worldwide visibility of all non-cash transactions and ownerships, with clear identification of natural persons as owners
- Nominal reduction of the value of government bonds at the same rate as the savings accounts
We believe these measures could be implemented within a regional community, like the EU, but the efficiency of these measures would be higher if implemented on a worldwide basis.
Of course, people have to save, eg for their pension or for larger purchases. Freigeld is designed to discourage saving, therefore another outlet would be required. Real Estate would be the obvious candidate, but a Real Estate bubble and high rents / purchasing costs would destroy any economic system. Gesell suggests to socialize all land, and to use the rents paid by the former owners for its continued usage to finance state tasks like family support. We believe there are other ways to solve this issue, e.g. high land sale and and ownership taxes. Progressive income taxes both for large companies and large land owners would help to avoid further wealth concentration.
What is needed as store-of-value is an easily tradeable but not vital object. While art or collectibles might play a limited role, we believe physical Gold to be able to take on that role, better than anything else due to its historic tradition. That is what FOFOA expects will happen.
There are two possibilities for this scenario to happen. One is a top-down approach, initiated by the central banks and governments. This can only happen during a great crisis exceeding the 2008 crisis. The other one is a bottom-up approach, where certain measures are taken by local governments and central banks, like negative interest rates, limitation of cash transactions or introduction of transparent ownership registers, which in their sum lead to a system change. The tipping point may be the "Freegold" transition, where the current paper gold trading system breaks down due to inavailability of a sufficiently high amount of physical gold to cover a withdrawal from the system.
We advise the Governments of the FM Member States to prepare for such a transition. This is a low-cost insurance policy both against inflation and against a NIRP/Freigeld/Freegold transition. On the other hand, it is advisable to carefully move away from the current Gold coverage of the Common Wallaroo, and to look for an electronic money solution related to Bitcoin, but without the rigid and decreasing money creation scheme of that currency.