[Book Review] Modernising Money | Positive Money

Positive Money launched their book Modernising Money at the conference with the same name, which took place on January 26. The book is on sale from now on, I have had the opportunity to read and review an early copy of the book.

Modernising Money (MM)’s core thesis is that the financial crisis is actually a monetary crisis. MM endeavors to explain why this is so, and proposes monetary reform. MM is written by Ben Dyson and Andrew Jackson, founder and head of Research of the NGO Positive Money, the UK organisation who campaigns “…to raise awareness of the connections between our current monetary and banking system and some of the biggest social, economic and environmental challenges that we face today.” The book is inspired by the book Creating New Money (2000).

MM was much needed because it draws attention to the extreme differences between the historical reality of money and the textbook story which is taught to high schoolers as well as students of economics. In 2011, anthropologist David Graeber also pointed to this difference in his brilliant book Debt: The First 5.000 Years. Furthermore, MM raises awareness of ‘money myths’, namely that 1. the way most people perceive banks is way different from how banks actually operate, and; 2. how the textbook theory of money creation by means of the fractional reserve is incomplete. Furthermore, MM points to the tendency of economists to leave the money system out of their analyses, is if it is ‘neutral’ and has no effect on the economy Money is not natural, it is not neutral – it is a (political) choice. This point is also raised by Graeber and later by Ruskoff in his book Monopoly Moneys. In other words, the current model of money is a powerful default.

Many people think of a bank as a pure intermediary, taking in money from one person and loaning out that same money to another person, while in actuality banks create a new amount of money each time a loan is made, something that MM calls the privilege where society ‘rents’ the money supply from banks. The accounting principle by mean which banks create new loans (and money) is based on fractional reserve banking, the principle which is in most economics textbooks. However, MM points out that this theory of so-called ‘high-powered’ central bank money, the fractional reserve banking practice and the money multiplier is incomplete. It seems to suggest that the central bank is neatly in control of the money supply, where it is not according to the endogenous money theory, which leaves more room for commercial banks in creating money.

MM continues by explaining the adverse effects of deposit insurance as the government insures money deposited at commercial banks up to a certain amount. Furthermore, MM mentions the moral hazard that results, as this insurance has an effect on both the people who deposit money as well as the banks. MM states that the government support for banks in the financial crisis has lead to a ‘bank subsidy’ of 300 billion pound in the UK alone (2012, p. 150). As the book progresses the authors link the money system to democracy, as the (pre)allocation of money accounts for power differences. On a more practical level, MM explains that banks have an unevenly distributed power to shape the future direction of the economy via their privilege of creating loans and allocating this new money to businesses (or not).

MM also proposes actual monetary reform, where it wants to:

  • Create a stable money supply based on the needs of the economy
  • Reduce the burden of personal, household and government debt
  • Encourage investment in the real (non-financial) economy
  • Re-align risk and reward
  • Provide a structure of banking that allows banks to fail

In short, the authors of MM propose to end the privilege granted to commercial banks where they create money through deposits. In the reformed system, the central bank creates the money supply, and commercial banks offer both Transaction and Investment accounts. This would allow banks to fail, as the Transaction Account information is held at the central bank and investors would deliberately allocate money in Investment Accounts for investing. In other words, making payments can no longer be endangered by investments gone wrong.

What I like about MM is how it has a good professional tone, where it both does not make things too simple and also refrains from raging against ‘those evil banks’. With over 300 pages, the book has limited space for tackling such a hard subject, but it is also quite broad because it goes into related things like housing, mortgages and speculation. A point of improvement would be to stick to money. MM is quite similar to the content of the book that inspired it, Creating New Money as well as the book Where Does Money Come From?, which is not surprising given that Andrew Jackson co-authored both books.

A point of discussion remains the content and direction of monetary reform. The authors propose a system which is more centralized than the current system, with the central bank in control and a special Money Committee given the task of managing the money supply. This further centralization is debatable, given that this centralization would not necessarily bring the best democratic results. In this light it is worth looking at how the digital currency Bitcoin actually distributes the creation and management of the ‘money’ supply via its user community. We already have seen the success of Kickstarter – why not actually ‘Kickstart’ the creation and allocation of money according to the will and wisdom of the crowd?

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Bankvergunning Mijlpaal voor Bitcoin?

Bitcoin wisseldienst krijgt bankstatus, stelt een recent bericht op nu.nl. Volgens ICT-jurist Arnoud Engelfriet is dit iets te kort door de bocht, want de status van wisseldienst Bitcoin Central heeft betrekking op payment service providers (PSP), wat betekent dat je betalingen mag faciliteren, maar bijvoorbeeld geen leningen mag verstrekken (en dus geen nieuw geld mag creeren). Maakt dit de PSP status minder waardevol? Bitcoin gaat bewust anders om met Bitcoin-creatie; deze worden niet als schuld gemaakt, maar geverifieerd, oftewel `ge-mined`. De traditionele functie van geldcreatie door banken is bij Bitcoin dus reeds vervuld. Echter, zoals ik eerder van de Belastingdienst heb vernomen, zouden Bitcoins ‘vermogensbestanddelen’ zijn. Terecht trekt Engelfriet de stelling van de Belastingdienst door naar ‘virtuele goederen’:

En ja, dat geldt dan ook voor virtuele goederen in online spellen zoals Second Life of World of Warcraft. Hoe de Belastingdienst hier een controle op uit zou willen voeren, weet ik niet: zouden ze je kunnen verplichten in te loggen op je account en te laten zien wat je hebt en wat dat waard is?

Toen ik mijn eerste blog plaatste over hoe de Belastingdienst Bitcoin ziet, leidde dit op  o.a. Facebook tot discussie, omdat dit inderdaad zou leiden het het waarderen van ‘goederen’ in bijv. WoW. Dit zou ook betekenen dat de overheid dit ‘eigendom’ moet beschermen, zoals met diefstal van goederen het geval is. Een punt in mijn scriptie is dat het niet handig is om te spreken over ‘virtuele’ goederen, omdat deze ‘goederen’ geen goederen zijn maar informatie. Informatie wat in het geval van WoW geen eigendom is van de gebruiker, zoals expliciet in de EULA staat. WoW, de code, de interface, de servers, zijn intellectueel eigendom van Blizzard (zie ook: Lastowka in Virtual Justice, 2010). Belangrijk verschil is dat Bitcoin geen EULA of TOS heeft; de code is open source, ‘as-is’.

Verder vraagt Engelfriet zich af of Bitcoin zo mainstream zal worden als PayPal en creditcards. Ondanks dat PayPal eind jaren ‘90 werd voorzien als een soort Bitcoin; zowel betaalsysteem als valuta. Echter, het actuele PayPal en creditcards zijn betaalmethoden, een systeem van overdracht van bank-geld. Bitcoin is zowel betaalmethode als een nieuw type geld; het is zowel het token (‘munt’) als het systeem waarmee de overdracht gefaciliteerd wordt. Deze innovatie maakt Bitcoin zo interessant, omdat de ‘munt’ niet als schuld wordt gemaakt. Bitcoin heeft eigenschappen die zowel lijken op commodities, zoals goud, alsook op bank-schuld-geld; Bitcoins worden gewaardeerd in euro’s, maar het is ook mogeijk om producten te kopen met Bitcoins. Bitcoins hebben een prijs, maar zijn ook een prijs. Bitcoin is evengoed een virtueel goed als een virtuele munt, maar eigenlijk geen van beide; het is een nieuwe categorie. Wordt Bitcoin groter? Vast. Mainstream? Lastig, maar denkend aan de ontwikkelingen van mobiel Internet; voor 2008 en de iPhone had nog vrijwel niemand een smartphone. Nu is mobiel een van de belangrijkste trends en worden er dagelijks een half miljoen Android apparaten geactiveerd. Op dit moment is Bitcoin bijv. al nuttig voor mensen die in het buitenland werken en geld naar familie thuis willen sturen, dit ivm de lage of zelfs ontbrekende transactiekosten bij Bitcoin. Om dezelfde reden is Bitcoin ook zeer geschikt voor micro-transacties met hoge volumes, zoals bijv. online (mobile) content, bijv. games.

In beide gevallen kunnen gebruikers wel de rust gebruiken dat ze weer van de ontvangen Bitcoins af kunnen komen, om de angst weg te nemen te blijven zitten met ‘waardeloze` BTC tokens. Hier is de (nieuws)waarde van de PSP-status van Bitcoin Central m.i. het grootst; deze marktplaats verlaagd de barriere tot handelen in Bitcoins en biedt bescherming tegen eventueel verlies of diefstal van de Bitcoins, zoals in het verleden is gebeurd. Dit verlaagd het risico van het kopen, verkopen en bewaren van BTC. Dit in combinatie met ontwikkelingen zoals een Bitcoin creditcard maken dat adoptie mogelijk kan versnellen. Adoptie van Bitcoin zou weleens sneller kunnen gaan dan je nu denkt, mede omdat nog niet volledig helder is waar Bitcoin goed voor is. The street finds its use for things.

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View a #Google Datacenter via #Streetview

Yes, Internet is a bit like magic sometimes. But, data must stay somewhere. Where? Well, here (at least some of it);

Photo series: http://www.google.com/about/datacenters/gallery/#/all

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Monopoly Moneys by D.M. @Rushkoff

In case you are interested in ‘the economics game’, the intersection of new media, markets  the money system and emerging phenomena like Bitcoin, I highly recommend the PhD-thesis Monopoly Moneys [PDF alert] by media theorist Rushkoff, now it is available as a PDF.

bron: http://www.tylertxdirectory.com/wp-content/uploads/2010/01/monkeys-playing-monopoly.jpg

I read a hardcopy when I was writing my thesis about Bitcoin and used this text as one of my sources.

 

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OUYA Android-based Videogame Console

Android is ontwikkeld als open standaard voor mobiele apparaten, maar er is niets wat maakt dat Android niet op ‘vaste’ apparaten draait. Zo is er een Android HDMI-dongle om een tv ‘connected/smart’ te maken, een emulator om Android apps op Windows te draaien, en nu dus ook een Android game console; OUYA:

Ik ben benieuwd wat de ‘hackability’ precies betekent, verder kan deze console een interessante positie innemen tussen de tv-consoles van Nintendo/MS/Sony, die toch een stukje duurder zijn en volgens de OUYA video als platform een stukje minder toegankelijk voor independent game devs.

Console kost 99 euro en als de OUYA naast de dedicated game functies ook ongeveer dezelfde functionaliteiten biedt als een ‘gewone’ Android stick dan is het nietzo gek dat dit één van de grotere Kickstarter successen is.

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Electricity-Backed Currency

Currency (money) as a derivative of another currency, namely (sustainable) energy, #interesting but actually also a very old idea:

“Apparently Buckminster Fuller was first in 1969 to recommend, in his book Operating Manual for Spaceship Earth, that a global currency be based on energy; he called it the “Kilowatt Dollar“. http://www.roperld.com/science/CurrencySystems.htm

 

DeKo: An Electricity-Backed Currency Proposal

“Currencies play an important role in facilitating trade and economic growth. Shifts in currency values may lead to economic dislocations deleterious to trade and growth. Most currencies are issued by government central banks. These central banks hold assets in the form of government debt and gold against the currency they issue.

Alternatives to traditional debt and gold assets may make sense for central banks to hold as a supplement or substitute. One alternative asset for a central bank to hold consists of electricity delivering assets. Electricity delivering assets don’t need to be physical assets such as fuel or power plants, but rather may be claims in the form of standardized Power Purchase Agreements for the delivery of electricity from power producers.

Electricity delivering assets can hold their economic value more effectively than gold or debt due to price stability and resistance to devaluation from over-issuance. The DeKo-backed currency concept advocates a portfolio of diversified electricity delivering assets that offers more social benefits than gold and retains monetary value better than government debt.”

 

“from “The Place of a Local Currency in a World Economy” by Robert Swann, 1981

1. I want to focus on the institution of money and the opportunity that now presents itself to develop a better system than our present system. We need a monetary system which will by its nature promote and enhance the small scale institutions, small businesses, cooperatives, small communities, and local towns, while at the same time being sensitive to the unique ecologies of regions. Obviously, the system we have now, and which is failing, does not do so.

2. From a legal viewpoint, money is nothing more (or less) than a claim. But from a technological viewpoint, money is a tool. Like any other tool it can be shaped to perform in different ways. Just as both a scythe and a combine are tools for cutting wheat, so money may be designed to perform in different ways with different objectives. In the same way that we are presently designing and creating more appropriate hardware for small scale needs, so we must create an appropriate tool for exchange.” http://neweconomicsinstitute.org/content/kilowatt-hour-notes-and-other-mediums-exchange

 

Kilowatt Cards

“Kilowatt Cards are gift cards that pay for 10 kilowatt-hours of electricity (including taxes and fees) to benefit any consumer electricity account when redeemedthough this web site. The electric utility does not accept Kilowatt Cards – we do – and then send cash payment to the company at the rate it normally charges retail customers for electricity.

Because these gift cards may be redeemed by anyone to pay for electricity, they can also be used to barter for other things, anything, worldwide. Kilowatt Cards are issued by a non-profit corporation founded to demonstrate the idea that financial liabilites denoted in kilowatt-hours constitue a new asset class having stable value, and to provide fixed-value paper to those who want it.” http://www.kilowattcards.com/template/index.cfm

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Bitcoin Foundation gelanceerd

bitcoin foundation

“Freeing People to Transact on Their Own Terms. Bitcoin Foundation standardizes, protects and promotes the use of Bitcoin cryptographic money for the benefit of users worldwide.”

 

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Graph: Distribution of Top 96 Bitcoin Address Volume

It is common knowledge that many Internet phenomena such as weblogs and Twitter and other complex systems, are scale-free networks exhibiting a power law distribution. For a while I was wondering whether Bitcoin would also exhibit such a long tailed distribution, the famous graph popularized by Wired Magazine’s Chris Anderson in his book The Long Tail:

A recent post by Jon Matonis alerted me to some data on ‘Bitcoin’s Richest’, i.e. the amount of BTC owned by the top 96 addresses, of which I made this graph:

Top 96 Bitcoin Address Volume (BTC)

Source: snort987 and github

I do not want to draw too many conclusions based on so little data, but what might be interesting is the following. The fact that wealth under the contemporary money system is distributed according to a power law is known for long. In other words, this is the story of the rich getting richer, the 99%, etcetera. An issue of debate is always 1. why this is the case and; 2. whether this is a kind of social injustice. A common argument concerning the how-and-why of the contemporary spread of wealth is that some people are just more entrepreneurial, hard-working, or just plain smart, compared to others.

Theory based on data from new media applied to the money system might paint another story, yielding the insight that the resulting distributions are in part, and at least more than is commonly assumed, attributable to feedback factors in a system that are beyond individual control. Examples are preferential attachment (being earlier is better) and this combined with growth and selection bias results in the formation of hubs (see for example this paper by Laszlo et al. on scale-free networks [PDF alert]). In addition, recommendation mechanisms familiar from platforms like Amazon and Twitter provide more positive feedback loops, which has the effect of what is popularly described as ‘the rich getting richer’.

If we look specifically at Bitcoin’s distribution, the power law is also directly related to the distribution of ‘old’ money. Why? This is due to the protocol of the Bitcoin network that determines how Bitcoins are created (‘mined’). What do you need to get Bitcoins? A lot of hardware and electricity, which in most cases must be paid for with ‘old’ money. Bitcoin does not operate in a vacuum, so those who command more old money are structurally better situated to mine Bitcoins.

Notes

  • Top outlier address has a volume of 438825 BTC, with a market value of almost 3 million dollar
  • These are the top 96 addresses, not wallets. Wallets can consist of multiple addresses
  • Multiple wallets can belong to one identity
  • Many address volumes are rounded;
  • 21/96 addresses have a volume of 10.000 BTC

Further research

  • retrieve information on more than 96 addresses (if you know how, please let me know..)
  • combine addresses into wallets, this would yield a more informative metric concerning the distribution of BTC than adresses

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#projectx Haren op Twitter: explosie van tweets

The distribution of tweets about #projectx #haren, visualized by @boeschoten

Source: TweetOnderzoek.nl

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How the Internet will (one day) transform government (@cshirky)

“co-operation without coordination”

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