April 8, 2016
Valentin Katasonov, Russian Economic Society
Economist, professor of Moscow State Institute of International Relations, researcher of shadow global financial system
Translated by Kristina Kharlova
Central banks of the leading Western countries are flooding the global economy with money. This manifests itself primarily in the fact that the U.S. Federal reserve, the Bank of England, the European Central Bank (ECB) and other central banks after the financial crisis of 2007-2009 begun to implement programs of the so-called quantitative easing (QE). They started buying debt securities (including lower quality), dumping new hundreds of billions of dollars, euros, pounds and other currencies into circulation every year. At the same time the central banks instituted a policy of consecutive decrease in interest rates on passive and active operations. As a result deposit rates of the central banks of Sweden, Denmark, Switzerland, Japan, and the ECB have become negative. Not only the money became plentiful, but also almost free.
The paradox is that such monetary expansion of leading Western central banks did not lead to the development of the real economy, but began to drive it to a standstill. There are several reasons. First, most of the product of the printing presses goes straight into the financial markets and inflames the speculative rage. The money doesn’t go into the real sector, where it will not receive such high and quick profits. Secondly, the production of printing presses loses more and more features of money. Today, money can no longer measure neither the cost nor the price of goods and services. A striking example – oil prices, which may change several times during the year. The issue is that oil prices are now measured with the help of a tool that we call money only by inertia. Actually money is a banal tool of speculation, manipulation and redistribution of wealth in favor of the owners of money — those who control the printing presses. It is no exaggeration to say that today we are witnessing the death of money.
Those who are engaged in production in the real sector of economy can feel it on their own skin. Companies in industrial production, agriculture, construction, transport can not make long-term investments, enter into long-term contracts, engage in perspective research and development. They can’t even trade as usual. There is a lack of working capital (all the money went to financial markets, where speculators are having all the fun), and even if they have any, there are different risks associated with sharp exchange rate fluctuations, inflationary devaluation of money, the ups and downs of commodity prices. Modern producers find themselves in a situation in which our ancestors were thousands of years ago, when there was no such universal means of exchange, as money.
Naturally, producers are trying to adapt to the era of the death of money. Building new economic relations. These new relationships have different names: alternative, non-traditional, non-monetary, barter … The totality of alternative economic relations can be summarized in three main categories:
– pure barter, which does not involve the use of money in any form;
– partial barter, which is designed to minimize the use of official money;
– barter based on the use of alternative money, that is money that does not have official status.
Alternative forms of economic relations can have several levels:
– local (exchanges within a single city, district, settlement);
– national (exchanges within the same country);
– international (exchanges between parties belonging to different national jurisdictions).
The development of alternative economic relations meets a lot of resistance from the masters of money. This is not surprising, because any alternative economic relations undermine the monopoly of central banks on issuing cash and monopoly of private banks on the issue of non-cash (deposit) money. Under various pretexts the central banks and governments have been fighting this kind of “creativity”. This, incidentally, explains the fact that a considerable part of alternative economic relations is in the “shadow” sector of the economy.
1. Pure barter transactions. The classic form of such transactions is barter. In addition to classic barter, “multi-product” barter is becoming increasingly popular -a scheme that may involve tens, hundreds and thousands of businesses.
2. Partial barter transactions. They are designed to minimize the use of official money. As a rule, the elements of the use of currency are present in a wide class of international transactions (“counter trade”). Counter trade involves monetary payment for supply of goods and services from two countries, but it is subject to the principle of value balance of supplies. The operative technique can be very different. For example, export revenues of suppliers from country “A” can accumulate on their bank accounts and then be spent on imports from country B. In this case it is possible to avoid the use of hard currencies (US dollar, Euro, British pound), relying on national currencies of counter trade parties.
Even if the counter trade does not take into account such obligations as the use of export proceeds on bank account for payment of imports, still the principle of balance is important for the member countries because it allows them to monitor the stability of their trade and payment balances, which is important for maintaining the stability of the exchange rate of the national currency.
Here are just some of the most popular forms of counter trade: compensatory transaction on a commercial basis; counter purchases; compensation transactions based on agreements about production cooperation; purchase of used products; operations with goods made on commission (tolling) and etc. The most complex of these forms are compensation transactions based on agreements on production cooperation. In fact it is not just a barter operation, but a transaction for the exchange of investment of goods. Generally, in this scheme there is still a lender that provides credit to the investor.
Here it is necessary to describe settlement mechanisms that allow to account for mutual monetary demands and obligations of participants of economic relations. Most often the functions of a settlement center are performed by a bank. Clearing [settlement] system provides for the periodic accounting of the balance of monetary claims and obligations. The balance can be covered (paid off) with a predetermined currency (clearing currency). If a party of the exchange transaction has a negative balance, it may receive a credit. Also one can repay the negative balance with commercial deliveries.
After WWII, when the world had a currency famine, a major role in the development of international trade played the bilateral and multilateral currency exchanges. In the 1970-ies, when the Bretton Woods monetary system was dismantled, the Fed printing press lost the “golden brakes” (the coverage of the issue of USD by gold reserves was removed). From this time began the purposeful destruction of currency clearing agreements because they reduced the demand for the product of the U.S. Federal Reserve (USD) many times. Today, the interest in monetary exchanges as an alternative to the dollar dictate of Washington is increasing again.
3. Barter transactions based on alternative money. One of the ways to survive in the modern world where the US dollar is actively imposed on all the participants of economic relations (erroneously called money), is creation of alternative money. That is the kind of money that would really perform its economic functions (primarily a measure of value and means of exchange). In different countries at the level of individual cities and regions a substantial amount of local money is emerging. Of course, local money does not supplant the official money, but in some cases the demand of local population for the official money may decreased several times. Local money, having the form of paper money or computer entries, fuel the exchange of products of labor produced within the district. Among the large variety of alternative money it is worth to highlight barter money.
Many experts agree that in the context of growing instability in the world the subject of alternative (non-traditional) methods of trading and settlement becomes more urgent.