A solution to the crisis #2 The monetary and financial system

Publié le 08/12/2015

It’s December 2030 and my 15 year-old daughter has asked me to talk to her classmates about a world that no longer exists. How can I explain the disorder, incoherence and failures of those times?

The year 2015 was complicated. In France the notion of the “curse of the 15s”, had begun to gain credence; the idea that the early years of each century usher in great change: the death of Louis XIV in 1715; the Battle of Waterloo in 1815; World War I in 1915; and in 2015… the COP21? *

This phenomenon could also be seen as the culmination of previous cycles: the French Revolution in 1789, the Industrial Revolution in 1889, and the triumph of Liberalism in 1989.

Feature by Aymeric Jung, sustainable finance specialist and organic farming enthusiast. 

2. The Monetary and Financial System

How did the world you live in today come into existence? The first thing that happened, as I explained before the break, was that ecological rupture occurred in the food system as a result of collective intelligence.

We finally understood the need to prioritise preserving the environment and its resources, recognising the value of good quality, locally sourced goods as the basis of all social and economic resilience. But this change couldn’t take place without also changing people’s ways of thinking within of our former economic system, and in particular, within the financial system.

Abstract notions

If I tell you about “variable interest rates”, “public debt”, “unbalanced social accounts” or a “stock exchange”, “listings” and “speculation”, they sound quite implausible today. These complex concepts were already considered abstract and without substance back then, so my task of explaining them today is particularly difficult!

The common forms of economic exchange that exist today in 2030 – local currencies, the basic income, ethical investment, impact measurement, support for the real economy, alignment of investor objectives with company objectives for the creation of universal value, the fair distribution of wealth generated between return on capital and future development – were all still either very marginal or not taken seriously at all in 2015.

Paradoxically, financial stocks, including property securities (shares and bonds) were at that time considered more speculative forms of monetary exchange than investments in the real economy!

So lets put aside the current forms of exchange to explain the situation before 2020, when public accounts had become definitively unbalanced, spiralling out of control after the speculative bubbles of 2008 and 2015, ultimately leading to states zeroing all of their debts.

A frantic race for profit

Ethical, or Impact Investing – the pooling of capital and expertise to undertake projects aimed at social and environmental improvement – accounted for only 0.1% of global financial assets managed by institutions (such as investment funds, banks or large insurance groups).

A slightly larger proportion of financial assets – 10% – represented what is known as socially responsible investment (SRI) and investment meeting environmental, social and governance criteria (ESG). SRI & ESG criteria aimed to differentiate these investments from investment policies that supported activities considered harmful, for example the arms industry or the production of chemical pollutants.

90% of investments at the time therefore supported – directly or indirectly – companies whose priority was maximizing short-term financial gain. In the pursuit of constantly increasing profit margins, companies competed with one another in a race to produce new products manufactured at the lowest possible cost.

As was the case with agriculture, the pursuit of quantitative growth, coupled with the reduction of costs led to the prediction of increased future profits, causing companies’ share prices to rise. The word ‘share’ is misleading, however, as investors’ intentions were not to share. They intended to resell their ‘shares’ to other buyers at a higher price than they had paid, each hoping that the inevitable price drop would happen later and to someone else. Later could be as little as a few seconds or milliseconds down the line.

Let me guess. You don’t understand anything? Well, that’s not surprising. Our actions were senseless at the time. You’re lost? Then you’re beginning to understand how we felt in the years between 2005 and 2020.

Only computers and trading algorithms found an internal logic to the financial system, their programmers’ common sense having vanished entirely. Even the leaders of the financial market institutions found them unintelligible (as was seen in the parliamentary investigations that followed the 2008 crisis).

Making speculation pointless

By focusing on the liberalisation of the financial mechanisms already in place, complexity was added to a system that was already dysfunctional. Stock market crises were becoming more frequent and more turbulent (1987, 1994, 2001, 2008, 2015) eventually leading to the collapse of the public debt (2020) that was deemed impossible to repay. Pablo Servigne and Raphël Stevens had predicted this in their book Comment tout peut s’effondrer (How Everything Can Collapse).

To summarise, investment as it is practiced today under the name of Patient (or long-term) Capital, barely existed. Inspired by the book Slow Money (Woody Tasch) and the think tank Capital Institute (John Fullerton), the aim of Patient Capital is to provide capital to companies and receive a percentage of revenues in return, within pre-established minimum and maximum return limits. The capital is reimbursed with an additional fixed-risk premium, with a repayment rate that can be increased or slowed down depending on how the company develops its business rather than upon speculation of its potential value.

Today you are educated in these ethical principles based on long-term collective vision, but at that time this was not standard practice. We had to replace the speculative use of capital with an approach that is beneficial to all. Attempts to introduce ethical criteria into the banking sector were rapidly abandoned as the bankers cunningly sidestepped them.

Instead of banning financial speculation, we succeeded in making it pointless. For example in order to avoid too much volatility in the prices of agricultural raw materials – judged inacceptable by many people after the 2007 crisis in agricultural prices – regions achieved food sovereignty by giving priority to local systems of food production and by significantly reducing the consumption of animal products. As a result the world grain trade collapsed.

It no longer made sense to fix prices on the financial markets, prices that were determined by a small handful of large producers and buyers, but imposed upon everyone. Similarly, the development of the shared economy and participatory financing (crowdfunding) signalled a change in approach, contributing to the destabilisation of the old banks.

From a purely financial point of view, short and medium-term exchange was rendered pointless. Partnership relations were established between investors and companies, but without this leading to quick ‘turnaround’ resales, the basis of past speculation. Today, profits are reinvested in companies, with the companies themselves invested in humanity. It was the opposite case until the collapse of 2015-2020.

After 2008 people began talking about rentier and speculative finance, which privatised gains and socialised the losses, with banks dedicating only “17% of their resources to the local economy, compared with over 41% to multinationals, 19 % to the old financial markets, 10% to financing states and 13% to refinancing operations between banks. ” Gaëtan Mortier also spoke of ethical finance as a ” big misunderstanding”.

Local currency and the basic income

Regarding currency, the innovations were not only technological as is often thought, but also societal. Currency was hoarded in illusory bank accounts, already dematerialised and without any real substance, yet during the twentieth century devaluations and unfavourable exchange rates regularly led to significant losses. Thanks to a few pioneering spirits in the early twenty-first century, the fundamental role of currency as a medium of exchange, and not as a reserve of value, was finally recognised in 2020.

This led to the introduction of local currencies, enabling everyone to identify their needs and desires, both individual and collective. With local currencies it is now possible to have truly local policies, bypassing the complex tax systems that were frequently challenged and generally poorly implemented. At last, immense collective social progress was made when the basic minimum income was introduced.

Too controversial to be established within the previous financial system, the basic minimum income was welcomed with open arms when the suggestion was made for it to function with local currency. This helped to reconcile, as you now well know, immediate priorities with long term needs, while circumventing state social transfer systems or the pay-as-you-go pension system that was regularly amended between 1995 and 2020, until it collapsed completely.

The other collapse that I want to talk about after the break is the collapse of the old concept of centralised cities that were already congested with vehicles and waste long before the 2000s. This crisis among others was resolved as a result of the changes in the financial system that I have just described. Without it, we would have experienced a revolutionary period without historical precedent.

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