The Long Now of Finance

From the Financial Services Club's Blog
Feb 4, 2010

In the last of three reports on the Long Now of Finance (Part One and Part Two), the last part of the day focused upon new ways of banking and supporting 10,000 year thinking, with Bernard Lietaer opening the session with a dialogue around using demurrage to encourage this.

Demurrage is a hard thing to grapple with, as it gets into discussions about fiat currencies and usury which are far beyond the ken of a mere blog on banking ... or it is today anyway. If you want to know the ins and outs of all that stuff then go checkout a book like: “The Creature from Jekyll Island : A Second Look at the Federal Reserve” (ooh, that’s fun!), but the gist of the conversation goes something like this.

You plant a tree as an investment in the future.

When is it best to chop down the tree, and what is the tree’s value in a hundred years (remember the story about New College, Oxford from yesterday)?

Let’s say that you have $100 today, and you can invest that $100 in planting a tree which, in one hundred years, will retail at $1,000 based upon today’s pricing. So you now think the tree is worth that to you in a hundred years.

No.

In a hundred years, using interest based analysis of net present value and assuming you get a positive interest rate of 5% per year, then the tree is worth about $7.60 in a hundred years, based upon the deferred costs of your investment.

In other words, you are losing 5% per year by having your money tied up in an illiquid asset because you could have been earning 5% interest on that cash by putting it into other more liquid assets with faster, shorter-term returns.

This means you are punished for investing in long-term assets and incentivised to invest in short-term earning vehicles.

It is the nature of usury, interest and today’s financial market offerings.

But it doesn’t have to be.

According to Bernard, if you use demurrage, you can turn this on its head.

What is demurrage?

Normally, it is talking about a fee related to shipping costs but, in this context, it is the carrying cost of money. Here’s one definitive view from answers.com:

Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold.

Now it’s not a well known field or term, but it is focused upon making it worthless to keep your cash in short-term things and incentivises to invest in long-term things by exchanging your cash for something else of value, such as a basket of commodities.

So here’s Bernard’s idea.

You take your money and swap it for a Terra.

Terra is a complementary currency designed for long-term investing, and 100 Terra = 1 barrel of oil + 10 bushels of wheat + 20 kg of copper + 1/10 oz of gold + 1000 carbon emission units and so on.

The fact is that here, you are investing in commodities that have lifelong values, so you lose nothing but gain.

This is why, when we see a ‘flight to safety’, it’s always oil, gold and commodities that fly through the roof in value. Meanwhile, the storage cost of your basket of commodities is passed to the issuer of the Terra currency who pay a demurrage fee.

The result is that you have a currency exchange that is: inflation proof by definition; automatically convertible without new international treaty; and provides a pure medium of exchange and planning currency, rather than a store of value.

Returning to our tree example therefore, the 100-year old tree is now worth $168,903.82 in a hundred years time, rather than $7.60, based upon the payment of a demurrage fee of 5% per annum.

In other words, it works the opposite way to the usury based system and encourages long-term investing.

It is also complementary to the commercial world of investing, and Bernard totally believes in this proposition. I’ve known Bernard for over a decade, and he knows his stuff. After all, he’s worked and invested alongside George Soros and was formerly a Belgium Central Banker who came up with the idea of the euro, or the ECU as it was back then. He knows his stuff.

But ...

... after a decade, his idea still has not got all the buy-in it should have.

This is because people’s behaviours won’t change unless they have to, and because the thing he’s talking about above is darned complex.

That’s why fund manager Edward Bonham Carter said: “if you ask people to think about the world in thirty years, they won’t because it’s not in our nature to do that.”

Professor Sir Roderick Floud cast doubt on Bernard’s contentions too, stating that we over-estimate the extent of market volatility and underestimate the benefits.

The debate raged on, and will do so a long time into the future. The Long Now of the Financial Future that is.

The learning for me is that there is a way to evolve and morph capitalism for the future to protect us from the crashes of the past and to invest in a sustainable, long-term protection for the planet. However, it’s just so complex and difficult that most politicians, regulators, bankers and investors don’t understand it, won’t invest in it, can’t see that far ahead anyway and need a good kicking if anyone wants them to focus upon it, e.g. force them to do it.

I guess that’s why Edward Bonham Carter’s comment that: “there are a lot of clever people out there. The challenge is to get them working on the problems before the dumb people get there”, got the biggest laugh of the session.

For more on Bernard’s projects and thinking, go to www.terratrc.com and www.lietaer.com.

For more on the Long Now, go to www.longnow.org.

For more on Long Finance, go to www.longfinance.net.

There are also a number of excellent white papers available for free download here including: “The Road to Long Finance: A Systems View of the Credit Scrunch”:

In their discussion paper, Michael Mainelli and Bob Giffords have laid out a provocative analysis of the global financial crisis in an attempt to widen the debate. The authors have worked hard to raise some new arguments, dismiss some old ones and change the priorities for others. They point out the dangers of an over-zealous regulatory reaction and of trampling over competition in the name of emergency measures, and they argue that a healthy system must be more diverse. Their key point is the importance of competition in open markets to prevent "too big to fail is too big to regulate", and they encourage more radical investigation of Long Finance.