Finance needs common sense, not cleverness

10 December 2020

The world’s financial markets are afflicted by a deep irrationality that imperils their very existence. On the surface, finance looks logical enough with its numbers, charts, mathematics, forecasts, ‘modelling’ and so on. And the people involved are often exceptionally intelligent. But this only masks the fact that the system itself has been working on underlying assumptions that are either contradictory — such as that you can ‘deregulate’ finance when finance consists of rules — narrow minded or absurd.

In the wake of the coronavirus crisis world finance and money is set to undergo cataclysmic changes that are being described by Christine Lagarde, president of the European Central Bank, as 'a new Bretton Woods' (referring to the meeting in 1944 among powerful nations which led to the current framework for the global monetary and exchange rate system).

We operate in what is called a debt-based money system, in which almost all of the money created has an interest rate on it. Cash is only a tiny proportion of the total; banks create about 95 per cent of what is in circulation. As finance analyst John Titus points out, that debt-based monetary system is disintegrating — a pattern that has repeated for thousands of years because interest costs compound too quickly and eventually become unpayable (hence the admonition against usury). The short-term response by the US Federal Reserve was to pump $US3 trillion into the system but it did not help. A third went to billionaires and only $US200 billion went to ordinary people (in Australia, by contrast, the stimulus was widely distributed).

Titus says: 'The system is fundamentally dysfunctional; we need to abandon the debt-based monetary system. That, however, is not going to happen. A rational person would abandon a game of musical chairs and move from a debt-based monetary system to a system of actual money.' What is needed is sound judgement and good sense — not cleverness — but little is in evidence.

The next step in the game of musical chairs is likely to be the creation of Central Bank Digital Currencies (CBDCs), whereby the central bank issues digital money, possibly without an interest rate on it, either to financial institutions or to individuals. CBDCs are being assessed by the Reserve Bank in Australia and China has already trialled it. America is looking at it, but little things like the Constitution might get in the way.

On the surface, CBDCs are potentially an

ECONOMICS

Finance needs common sense, not cleverness

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