Tag: deflation

Charging interest on money was at one time illegal.  The concept of “interest” was legitimized by the argument that lenders needed to be compensated for the risk that they assumed.  As such, currency is married to risk and not necessarily actual productivity.

Whoops.

Risk can never be negative because it is a measure of volatility where zero is the lowest possible value.  There is such thing as good volatility (winning the lottery) or bad volatility (my 401K) or zero volatility, but volatility can never be negative; hence the term “Breaking the Buck” which is considered a failure of the monetary system.  Interest rates respond causing inflation or deflation relative to other currencies, causing more volatility, thereby inducing more risk, etc.

Who wants to be a numéraire?

The dollar is a “numéraire” – the standard by which value is compared.  Recently there has been a strong call for a global currency to change the numéraire to something else.  Ideally, the numéraire should be able to manage negative interest rates to keep volatility pegged to real productivity and not speculative emotions.  This would keep the system from crashing in a whirlpool of volatility that incessantly feeds on itself.

So what are the practical implications?

With a positive interest rate, I am penalized for borrowing currency since I need to pay the risk premium to a lender while I produce something with the currency.  On the other hand, I am rewarded for lending currency because someone pays me the risk premium to borrow it.

With a negative interest rate, I am rewarded for borrowing currency (because the lender is deeply penalized for not lending it) so that I can produce something with the currency.  Then I am penalized for not lending (or spending) the currency that I made from the thing that I produced.

Enter Social Media:

The whole idea of risk as the justification for interest does not make much sense any more.  In fact, during periods of deep inflation or deflation, currency becomes divorced from actual productivity and people hold some other store of value instead.

People are flooding to social media because information, knowledge, and innovation are behaving like currency.  Social currencies are perfectly suited to accommodate negative interest rates.  For example: if information were a currency, I would be rewarded for giving it away and penalized for hording it.  If knowledge were a currency, I would be rewarded for sharing it with others and penalized for withholding it when it is needed.  If innovation were a currency, I would be rewarded for crowd sourcing and penalized for patenting.  Does this sound familiar?

The Next Economic Paradigm

Conversation and relationship are two of many denominations of the new global currency called the ‘rallod’ which is allowed to float against the dollar. Continual development of social media tools, systems, economics and aggregation will facilitate the exchange of social currencies by increasingly enabling the ability to store, form, access, and exchange them.  Social networks and communities of practice will allocate social currencies as factors of production: social capital, creative capital, and intellectual capital – for the production and dissemination of innovation.

The Next Numéraire; human productivity

Let countries compete in the economy where net human productivity is the standard by which all value is compared.  With the constraint on land, labor, and capital, this is the game we all need to play now.