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Can we confidently create ways of investing for the long-term?

A fifth big question for the session I’m running at SIBOS, focused upon Long Finance, is whether there is any way to create a system that allows all of us to confidently invest for the long-term?

In case you missed the other four were:

Creating a system for long-term investing – 1,000 years plus – is a tough call as everything in the commercial system today is geared to the short-term and making a buck. We short sell stocks, we focus upon quarterly results, we deliver a daily return, and we keep our eye on net present value.

It’s all about cost-benefits and short-term return on investment.

How could we ever build a system that ignored interest and profit, and allowed us to invest in things that give returns in 100 years or 1,000 or 10,000?

Well it has been done before.

Do we honestly believe that the Egyptian Pyramids or the many Cathedrals of Europe would exist today if the builders of these monoliths focused upon short-term returns?

Admittedly, property and buildings is about our only long-term view. We take out twenty-five year plus mortgages and see that as a lifetime.

But then we also take out pensions for our end of life years, and invest in those instruments for decades too.

And maybe we take out burial insurance, which is the essence of how life assurance began in the burial societies of Ancient Rome.

So we do have a long-term view in some things.

Except that many of us cashed in our pensions to invest in those second homes that became a profit-generating vehicle through buy-to-lets and rampaging house price gains during the subprime years.

So even our long-term assets became short-term trades under the financial regime of securitised lending and collateralised debt.

Even if that proved to be a false illusion, as it turns out.

So, how can we can we confidently create ways of investing for the long-term?

Well there’s a man I met a while ago who knows.

His name is Bernard Lietaer.

For those who know him, they’ll know that Bernard is bit of a zealot when it comes to alternative currencies that focus upon community investing, rather than commercial investing.

But the idea has never really taken off.

Why?

Because it’s complicated and even though Bernard can point to hundreds of examples of community currencies, a global currency for investing in our planet for the long-term remains elusive.

He did actually create this currency a few years ago.

It’s called the Terra.

The Terra, or Trade Reference Currency (TRC), is based upon a basket of the 9-12 most important commodities, based upon their importance in worldwide trade. For example, 100 Terra would be the equivalent of 1 barrel of oil, 10 bushels of wheat, 20kg of copper, a tenth of an ounce of gold and so on. Any goods or services could be included or added over time, as they rise in importance, such that there is a continual holding of value in global trade and services.

In other words it would have the stability of a gold standard, but with a basket of commodities instead of just one single commodity, which makes it even more stable and is inflation-resistant by definition.

This idea also has history, as it was first presented in an article in the French newspaper "Le Fédériste" on 1 January 1933. The idea back then was to establish "L'Europa – monnaie de la paix" or “Europe’s Money of peace", based upon a basket of commodities.

Good ideas never disappear, but the question still remains: how would it work?

Here’s Bernard’s proposal:

“Technically, the Terra is an inventory receipt used as a supra-national trading currency … It is different from previous commodity-backed proposals by having the storage costs of the basket paid by the bearer of the currency, making it a ‘demurrage charged’ currency (the opposite of interest), a device that insures its circulation as a trading tool. The Terra would also be an inflation-resistant currency, ideal to be able to compare results and contributions independently of the vagaries of the values of national moneys. Last but not least, the demurrage feature would realign financial interests with longer-term concerns, eliminating the conflict between financial priorities and long-term priorities including environmental concerns.”

In other words if you try to keep or hoard Terra, you get punished for it. This encourages you to invest Terra in long-term projects, and build Pyramids and Cathedrals.

“In ancient Egypt, when you stored grain, you would receive a token, which was exchangeable and became a type of currency. If you returned a year later with 10 tokens, you would only get nine tokens worth of grain, because rats and spoilage would have reduced the quantities, and because the guards at the storage facility had to be paid. So that amounted to a demurrage charge.

“Egypt was the breadbasket for the ancient world, the gift of the Nile. Why? Because instead of keeping value in money, everybody invested in productive assets that would last forever – things like land improvements and irrigation systems.

“Proof that the monetary system had something to do with this wealth is that it all ended abruptly as soon as the Romans replaced the Egyptian 'grain standard' currency with their own money system, with positive interest rates …

“In Europe during the Middle Ages – the 10th to 13th centuries – local currencies were issued by local lords, and then periodically recalled and reissued with a tax collected in the process. Again, this was a form of demurrage that made money undesirable as a store of value. The result was the blossoming of culture and widespread well-being, corresponding exactly to the time period when these local currencies were used.

“Practically all the cathedrals were built during this time period. If you think about what is required as investment for a small town to build a cathedral, it's extraordinary …

“Besides the obvious symbolic and religious roles – which I don't want to belittle – one should remember that cathedrals had an important economic function; they attracted pilgrims, who, from a business perspective, played a similar role to tourists today. These cathedrals were built to last forever and create a long-term cash flow for the community. This was a way of creating abundance for you and your descendants for 13 generations! The proof is that it still works today; in Chartres, for instance, the bulk of the city's businesses still live from the tourists who visit the cathedral 800 years after it was finished!

“When the introduction of gunpowder technology enabled the kings to centralize power in the early 14th century, the first thing they did was to monopolize the money system. What happened? No more cathedrals were built.”

So there’s the rub: building a currency based upon being punished if you keep it.

Not easy to see this working in practice while you have the conflicting system of interest-bearing currencies also in operation.

“As soon as someone negotiates a 100,000-dollar mortgage, money is created and begins circulating in the economy. But then the bank expects the recipient of the loan to pay back a total of 200,000 dollars in repayment and interest over the next 20 years. But the bank does not create the second 100,000 dollars. The receiver of the loan must get hold of that money—the interest—one way or another, and this forces him or her to compete with others. It’s simple: Some people must lose money or go bankrupt in order to put others in the position to pay off their loans.

“At the same time, this collection of interest results in a concentration of wealth: Those who have money ‘automatically’ get richer.

As Bernard puts it: “My conclusion is that greed and the competitive drive are not inherent human qualities. They are continuously stimulated by the kind of money we use. There is more than enough food and work for everyone. There is merely a scarcity of money.”

So, it’s the system that causes the issue of short-termism, and how can you have a short and long term system working in parallel?

Well the two systems can be made to work together, and this has already been proven in Japan.

Japan has an aging population, as most of us know. If you don’t, then here’s the stats from the Ministry of Internal Affairs and Communications:

“Japan, among the world's most rapidly aging countries, has a record proportion of elderly people, accounting for 21.5 percent of the total, according to a government report. The number of people aged 65 or older totalled 27.4 million as of Sept. 15, up 0.7 percentage point from 26.5 million a year earlier. There were 7.13 million people aged 80 or older, the first time the figure has topped 7 million. Sustainability of the pension system remains a primary concern in Japan, where about 30 million people receive benefits. Population in the country may decline by 25 percent to 95.2 million by 2050 from 127.8 million in 2005, according to a health ministry forecast.”

So what are they doing about it?

They are building a dual-currency system, where real money can buy you healthcare or you can get it by having your family work for you.

The system is called ‘fureai kippu’, and allows kids to bank time to support their parents and grandparents.

The beauty of it is that you get 1 credit for 1 hour of care, with the intention being that you invest the time caring for elderly people local to your area in exchange for others caring for your elderly relations who may live far away.

For example, I invest an hour in shopping for old Mr. Kawasaki in the Chiyoda district of Tokyo and, as a result, young Miyu in Sapporo mows my Gran’s lawn for an hour.

Most important of all is that by encouraging familial ties to give care, the standard of care is far better than it would be for just some hired hand.  This is because Miyu treats my Gran with a reverence recognised in my treatment of Mr. Kawasaki, as we consider these people should expect to be treated exactly as I would treat my Gran or Miyu would treat hers.

So, there is a way to get dual systems to work and, it seems to me, these are when the cost of providing something long-term is just too great, so you find an alternative way of doing it.

The building of infrastructure and things that are too prohibitively expensive in the short-term, such as caring for the elderly, in other words.

That’s how Long Finance could work if governments wanted to make it happen.

 

Buy the Finanser's book

 

Download the Terra White Paper by Takashi Kiuchi Chairman of the Future 500 and former CEO of Mitsubishi Electric America

Find out more about Bernard Lietaer, who will be heavily involved in next week's SIBOS meetings.

Bernard Lietaer is an international expert in the design and implementation of currency systems. He has studied and worked in the field of money for more than thirty years in an unusually broad range of capacities including as a central banker, a fund manager, a university professor, and a consultant.  

Of particular note, in the context of the above, is that Bernard co-designed and implemented the convergence mechanism to the single European currency system (the euro) and served as president of the Electronic Payment System at the National Bank of Belgium (the Belgian Central Bank). 

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • I am not an expert in money or currency systems per se, but it seems to me that currency is fundamentally a measurement unit, a (temporary, centralized) store of value facilitating trade. Putting aside the legal aspects of what is or isn’t permitted in terms of currency (legal tender) – technology is emerging that would allow a much more complex, distributed system of bilateral and multilateral accounting, moving the optimal system away from centralized currencies. (Heretofore, they were the least bad solution, with their failings more than offset by the advantages of having a common unit of account.)
    The interesting question I think is how society makes this transition when the technology is ready (soon) given our deeply ingrained – to the point of being intuitive – sense of what money is. ie How does society overcome the need to quantify any unit of account as an equivalence of dollars or euros, etc.? Think of the transition from imperial to metric measures, only 10 (100?) times harder. Not saying it can’t be done, in fact in the fullness of time, certainly in the long now, I fail to see how it isn’t inevitable. But the transition is not obvious and I think will take one or two generations and/or a remarkable economic dislocation or failure of the incumbent system to emerge.

  • Dan Newman

    This is a fantastic post, Chris. Thanks.
    Money with a demurrage charge has the effect of introducing a negative discount rate. This, in turn, makes all sorts of long-term investments (such as reducing CO2) very attractive.
    Regarding Bernard’s comment that “Some people must lose money or go bankrupt in order to put others in the position to pay off their loans,” this represents an ancient idea of what money is that we’ve moved beyond. Once upon a time, wealth meant only plunder and the concept of money being intrinsically ‘evil’ took hold. The ancient Greeks felt that way, and the French still do! In fact, money plays many roles – a measurement unit, as Sean points out, a store of value, and a medium of exchange.
    Today, money supply grows through banking and wealth is not a zero-sum game. Indeed, banks are unique in our society in that they have the right (and indeed the purpose) of ‘creating’ money, which is why they should be carefully regulated.