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This article was contributed by Dr Shann Turnbull, Principle of the International Institute for Self-Governance

Neither current Blockchain money nor official money is fit for the purpose of defining economic value or for sustaining life on earth. Both are too complicated. We have standards for weights and measures but the International Accounting Standards Board has no standard unit of value!

Technology now allows: (a) money to be simplified to be only a medium of exchange, (b) economic value to be automatically defined by the ability of humanity to sustain life on earth without consuming non renewable energy resources, and (c) a medium of exchange to be created on a decentralized basis with a negative interest rate so it is no longer a store of value or source of inequality and exploitation. Real assets that sustain life and well-being would provide a superior way to store value.

The concept of economic value is a social construct created by humans. There is no official money that can be defined by any one or more specified goods or services. Money has become disconnected from reality. Astoundingly, disconnected money is used to price real assets for their supposedly “efficient” allocation. But how can this belief in market efficiency make any sense if money cannot be defined by anything real? Is this belief a religion and/or are we insane?

Even if the value of money was defined by a basket of commodities, why should efficiency be the paramount criteria for asset allocations? Efficiency becomes meaningless if humans cannot sustain their wellbeing on the planet. There are many more important criteria for allocating resources such as surviving pollution, extinction of flora and fauna and climate change.

Modern societies are crucially dependent upon energy. Energy can provide the essentials of life like clean air, water, food, clothing and shelter. Sustaining life in any region of the planet becomes dependent upon the ability of each region becoming dependent upon access to benign renewable energy. A sustainable global population depends upon the capacity of each region to service humanity from only benign renewable sources.

The Internet of Things (IoT) allows an index of sustainability to be automatically determined from the efficiency of investment providing benign renewable energy from local sources and the dependency of the host bioregion on using such energy. Data on the efficiency of consuming the production of renewable energy from the installed capacity is already collected . Data is also available on the reliance of each region on renewable energy. The most efficient and dependent regions would obtain the highest index of sustainability.

As renewable energy technology has a life of from twenty to hundred years, a five-year rolling average of its efficient and dependable use would change only slowly and in a predictable way even if major breakthroughs in technology arose. This makes the sustainability index an ideal anchor for defining the value of a medium of exchange. The most sustainable regions would obtain the most value for trading with others.

The stability of the index would exceed any current official or current crypto currencies and so it would promote investment. Official currencies are subject to unpredictable, unknowable, complex political and economic variables. Official currencies are subject to official manipulation or offhand remarks by political leaders as well as unofficial manipulation by bankers, hedge funds and speculators.

It would make compelling commercial sense for trade or investment contracts to use the sustainability index of value, rather any official or crypto-currency to minimize uncertainty. Such contracts could be created by anyone anywhere. Financial innovators could then use credit-insurance to allow such contracts to become publicly traded. The cost of the insurance could be attached to the contract to create privately issued cost carrying money. This type of “negative interest” money emerged in Europe and the US during the Great Depression .

At that time it was issued as paper money that typically was only valid for one week. To maintain its validity users had to affix a stamp to the script each week purchased from the issuer. A stamp of two percent of the face value of the scrip meant the after 52 weeks the issuer had collected 104% of the face value. This allowed the issuer to redeem the money with a 4% profit. Digital money and the Internet now make this type of money practical again. Even without a Great Depression it is now circulating again in Germany . It circulates much quicker than official money because it has the human attribute of “use it or lose it”. For this reason I refer to it as “ecological” money in my writings.

Additional details are in my conference paper. My paper answers in the affirmative the question in its title: “Is a stable financial system possible?” It concludes that sustainable indexed ecological money would:

1. Establish a medium of exchange with a stable predicable value;
2. Recognize only indirectly, over the longer-term, changes in production, consumption or technology;
3. Avoid manipulation by speculators;
4. Reduce the cost of the financial system;
5. Eliminate a financial crisis in one region spreading to another;
6. Eliminate financial instability within each region;
7. Eliminate inflation created by excessive money creation;
8. Create incentives for investment in benign renewable energy and storage systems;
9. Reduce and/or eliminate the need for carbon taxing or trading;
10. Encourages the location and size of the population in each region to become sustainable in perpetuity.

Written by Dr Shann Turnbull who has developed his ideas from three earlier postings in 2013, 2015 and 2017

More discussion on money and the concept of value can be found at The Eternal Coin 

Published: Thursday, 08 March 2018 15:42

The Global Green Finance Index (GGFI) provided by Finance Watch and Z/Yen aims to promote the uptake of green finance in the world’s financial centres. The GGFI is based on a perception survey of the depth and quality of green finance offerings in different financial centres.

This blog post looks at how perception can complement historical data in measuring and promoting change and how this thinking has been applied to the GGFI.

Perception and measurement

Perception is a natural part of observation and measurement. In finance, a large number of indices and benchmarks rely on the opinions or perceptions of people in a market, such as the Baltic Exchange, or the potash and coal markets, where benchmark prices are set by polling market participants on their price expectations.

Indices that are based on historical transactions also embed some element of perception: benchmarks such as the Dow Jones or DAX 30 are calculated by multiplying the number of shares outstanding by their closing prices. But the closing price of a share is only the value as perceived by the last two people who traded it. Other people may have different views, and large stake sales or takeovers are almost never executed at the previous day’s closing price.

The story is similar outside of the financial sector. Someone trying to identify the world’s biggest shipping port, for example, might look for empirical data on capacity such as the number of container (TEU) movements, the physical area covered by the port, or the number of berths. But empirical measurements still involve perception and judgements. Should we count transhipments as well as imports and exports? Does port area include only land, or also water? How do you account for differently sized berths?

Selecting which metrics to use is itself an act of judgement, incorporating a subjective view about which data is reliable and relevant to answer the question. If the decision-maker has a particular view on how the size of ports ought to be measured, their choice of metrics is likely to reflect that outlook.

Measuring green financial centres

For any index provider, choosing whether to use historical data or informed judgements about the future will depend on the audience and objectives. A house price index based on last year’s historic transactions could give very different readings from one based on informed judgements of next year’s prices; an official from the land registry and a land speculator would probably choose different metrics.

In green finance, activity levels are small compared with the overall market but are growing quickly. A balance of historical and forward-looking metrics should, therefore be more useful than either approach on its own.
Historical data on green finance assets is beginning to emerge but remains patchy. For example, there is no official data on the proportion of green bonds listed on each exchange; data often comes with a long time-lag (in markets that can double in a year); and rules for labelling and reporting ‘green’ assets vary widely between countries. There are many other gaps beside these.

There are also definitional problems. If a green bond is issued by a French company, underwritten by American banks and listed on exchanges in Luxembourg and London, which financial centre should the bond be attributed to? How meaningful is that attribution, given the global nature of many financial institutions and the aim of encouraging green finance uptake across the board?

The alternative to historical data is to use informed judgements about the future, but this approach also has its complexities. As Professor Michael Mainelli from Z/Yen explains: “an informed judgement index needs to find ways of ‘normalising’ a diversity of short-term adjustments, for example a lack of known underlying trades at a point in time, or diverse product sources and destinations, using arithmetic approaches, statistical approaches, panels, ‘model’ contracts, or weightings.”

Our approach in the GGFI

Our approach with green financial centres is to use perceptions as the core data and minimise subjective judgements elsewhere. The GGFI thus gathers informed judgements about the depth and quality of the green finance offerings in the financial centres that respondents know – typically around 5 per person – and then applies “factor assessment” to complete the data set.

Factor assessment is a statistical technique to analyse survey responses against a large set of quantitative data and look for correlations. These are then used to predict the ratings for unrated centres using the correlations that already exist in the survey data.

The technique is used in medicine and industry and has predictive accuracy above 90%. Using it here allows us to bridge the gap between available historical data and forward-looking survey data.

Perceptions can change behaviour

There is also a practical reason to focus on perceptions: the way people think is a big factor in changing behaviour.
Before organisations such as Carbon Tracker began talking about stranded assets – the idea that assets such as oil or gas reserves may become worthless if climate change policies prevent them from being used commercially – many professional investors did not consider the financial risk of owning such assets. But now that perceptions about the role of fossil fuels and climate change have evolved, investment portfolios are changing too. Well-known fossil dis-investors such as New York City and the Norwegian sovereign wealth fund have been joined by more than 800 pension funds, cities, universities, foundations, churches and other organisations in exiting fossil fuel investments.

People’s perception can thus be a powerful force for change and knowing what those perceptions are is the first step.

The comparison between perception and historical data can also be useful. Measures of “green intensity”, which compare green finance with overall financial activity levels, show how far there is to go before financial centres can be said to support a sustainable economy. Historical data shows a green intensity of 2% or less in some asset classes. This stands in stark contrast to the perception that penetration rates for green finance are 30% or more, as revealed by the GGFI survey, even allowing for the time-lag.

Such a difference can illuminate people’s thinking. Whether it reflects optimism or complacency, or something else completely, it will enrich the feedback for policymakers as they develop sustainable finance policies.

The GGFI joins a growing list of initiatives that aim to encourage financing for a sustainable economy, including: UNEP FI’s Positive Impact Initiative; UNEP’s Financial Centres For Sustainability Initiative; the Climate KIC, I4CE and PwC Benchmark of the greenness of financial centres; and UN PRI’s Sustainable Stock Exchanges Initiative.

The GGFI will provide a valuable catalyst and complement to these initiatives.

Greg Ford is a Senior Adviser at Finance Watch

Published: Tuesday, 06 March 2018 09:33

This is the second scenario for the Brexit process: The core argument put forward by the government is for “managed divergence” as the basis of the post-Brexit relationship with the EU27.

So far, the EU27 have stated consistently that there can be no cherry picking with the single market and customs union.  Either we are in or we are out. The Italians have recently stated that the Canada +++ model sounds like the single market without the obligations. Yet this is what the government wants. The basic argument is that there will be some areas where we wish to be fully aligned, some where we wish to diverge and a middle where we can have regulatory equivalence and mutual recognition.

Boris Johnson has suggested that the EU GDPR, updating the data protection frameworks, which comes into force in May 2018 is one area where we may wish to diverge. David Davis has said that new areas such as Artificial Intelligence which will need new frameworks is an area where we may wish to go alone. 

I find it interesting that both Ministers have chosen Technology areas. The challenge is whether the UK market is large enough to support what are global sectors through UK standardisation. Vodafone grew to global status off the back of European cooperation on 2nd generation mobile standards. The Post Office (now BT) developed the System X capability in the late 1970s. It has proven remarkably reliable but achieved little International foothold, and is now gone.

As I argued in the earlier scenario, some sort of fudge will undoubtedly be made so that both sides can claim some sort of victory. My question about this proposition is what are its implications not on day 1, but over the next decade.

The first thing to say is that organisations working in the UK and EU27 will have to comply with GDPR for business within the EU27. This means, potentially, 2 sets of IT infrastructure, raising costs. The question is to what benefit?

Now, let us consider an example in FINTECH. For the purposes of this example consider the following:

  1. The UK Fully aligns with Financial Services
  2. The UK achieves regulatory equivalence with GDPR and mutual recognition
  3. The UK establishes its own regime for AI.

The first thing to say is that the second point means that if the EU27 modify GDPR then the UK risks losing equivalence unless it follows suit. For the purposes of long-term investment, this creates ongoing uncertainty for any City Firm. Regulatory equivalence is recognised as a step towards integration and its use for managing divergence remains largely untested.

Now consider a UK Fintech start up that wishes to use AI and blockchain on large volumes of Financial data.

We could find ourselves in a position where the regulatory framework for blockchain could be different within the EU27 and the UK. This could mean that the AI algorithms may need to be distinct to handle UK data and EU27 data according to different regimes.

 

In the event of another downturn, maintaining alignment in these regimes would add a layer of complexity for the users. For the suppliers, the costs of maintaining multiple systems could be problematic.
Now look beyond Financial Services into say manufacturing. If the UK diverges from the EU regimes unlike in Finance, then the AI, blockchain and GDPR impacts may be different.

For companies trying to build platforms across multiple sectors, it is hard to see what the benefit of this additional complexity could be.

So, for me, the principle problem with the UK’s preferred solution is that it does not end the uncertainty post the transition period, but actually bakes it permanently into the new relationship.

There is a salutary lesson from 1973, the year the UK joined the EEC, as it then was: The first Arpanet node outside the USA, the predecessor of the Internet, came to the UK shortly after we joined. It was held up in Customs by VAT as we couldn’t get an agreement what an Arpanet node was for tax purposes.

So, here’s the challenge for 2018 on this scenario. Business wants certainty to support investment during the transition and beyond. If the EU27 refuses to budge on managed divergence, what should the UK do? If the UK does achieve concessions, how do you build a capacity to evolve over time that limits the uncertainty I have described above?

If you are a UK-based FINTECH company looking to raise funding this year, how do you protect yourself against the multiple uncertainties both in the short term and the long-term?

I think that I can safely predict that if this scenario comes to pass, the big winners will be the lawyers, unless they are replaced by AI. That’s a story for another day.

Published: Monday, 29 January 2018 11:07

Whenever the topic of fraud in the financial sector is discussed, the conversation soon moves on to Ethics. There is usually the subtext that by enforcing ethical behaviour, all backed up with effective teaching of the topic in school, colleges and business schools, fraud will be minimised. It’s not that simple. Ethics is not an absolute and singular notion, however, it is taught as if it is well-defined, usually as some variant of Judeo-Christian morality. That naïve stance does not bear close scrutiny.

In her book Systems for Survival, Canadian economist Jane Jacobs proposed a very interesting model for the ideal community, based loosely on her reading of Plato’s Republic. By looking at how humanity deals with its needs, she divided us up into two groups, each with radically differing value systems; she calls them ‘moral syndromes’. One ‘produces and trades’: this is the ‘commercial’ syndrome and includes the occupations that produce and supply our physical needs. The other ‘scavenges and takes’: this is the ‘guardian’ syndrome composed of individuals who maintain the cohesion and coherence of society. In order to trade effectively commerce needs the guardians both to ward off predators, and to set down and enforce standards of probity. The costs of this service are paid for out of the profits of commerce. The trick is getting the balance right.

Jacobs’s book describes a series of conversations between various characters as they compare and contrast the syndromes. They concluded that each syndrome has a code of ethics, which is not only distinct from the other, but also they are often mutually incompatible, as can be seen in the table below. A society is healthy when members from the two syndromes co-exist in relative harmony. However, Jacobs warns us that “you can’t mix up such contradictory moral syndromes without opening up moral abysses and producing all kinds of functional messes”. She states her “Law of Intractable Systemic Corruption”. Any compromise to the ethical standards of a particular syndrome, for example by employing the ethics of the other, will corrupt the former syndrome’s integrity. The expediency needed to function in such a world of distorted values will convert some virtues into vices, or at the very least individuals become morally inconsistent.

Jacob’s book is full of examples. The transfer of titles and property from father to son is perfectly acceptable in aristocratic societies, but in commercial groups this is considered nepotism. The Mafia was originally formed to protect a Sicilian community from exploitation by its political elite. Only when they moved in on trade to fund their operating costs did their guardian attitudes trigger the Cosa Nostra’s mutation into “a monstrous moral hybrid”. Then their definition of trade began to involve intimidation and bribery. By the same token, whenever economic planning is subsumed by political guardians, as in socialism, the claimed material support of the masses always degenerates into cronyism.

Table: the two codes of ethics 

The Commercial Moral Syndrome

The Guardian Moral Syndrome

  • Shun force
  • Come to voluntary agreements
  • Be honest
  • Collaborate easily with strangers and aliens
  • Compete
  • Respect contracts
  • Use initiative and enterprise
  • Be open to inventiveness and novelty
  • Be efficient
  • Promote comfort and convenience
  • Dissent for the sake of the task
  • Invest for productive purposes
  • Be industrious
  • Be thrifty
  • Be optimistic
  • Shun trading
  • Exert prowess
  • Be obedient and disciplined
  • Adhere to tradition
  • Respect hierarchy
  • Be loyal
  • Take vengeance
  • Deceive for the sake of the task
  • Make rich use of leisure
  • Be ostentatious
  • Dispense largesse
  • Be exclusive
  • Show fortitude
  • Be fatalistic
  • Treasure honour

Source: Jane Jacobs, Systems for Survival, Appendix, Page 215

Commercial planning for guardian priorities, as in the Soviet Union, indeed all socialist states, leads to a collapse of commercial endeavour. Mikhail Gorbachev summed it up beautifully: “they pretend to work, and we pretend to pay them”. By the same token, the imposition of commercial measures will inevitably corrupt the guardian’s sense of honour. Placing key performance indicators on police officers will lead to them ‘fitting up’ innocents so they meet their targets, or letting guilty parties go free ‘for the greater good’.

Practicing guardianship under commercial precepts will lead to ethical dilemmas. Legal systems across the world see nothing wrong in ‘Plea Bargaining’. The accused plead guilty to a lesser charge to save the cost of an expensive trial. However, it ends up with innocents pleading guilty rather than risk both the lottery of a trial and the huge costs of legal fees to themselves. Paradoxically, convicted criminals are routinely set free after serving only a fraction of their sentence because the cost of jailing them has become prohibitive.

Paul Condon, head of the Metropolitan Police for most of the 1990s coined the phrase “noble cause corruption”. In other words officers believed they were justified in bending the rules to get a conviction of career criminals even though they had no proof. By the same token criminals were let off charges provided they ‘traded’ the names of other criminals, or were charged with lesser offences if they admitted to a string of offences (many of which they didn’t commit) just so that the police ‘clean-up’ rate would improve. Jacobs herself describes how officers from the New York Transport Police falsely arrested innocent African American and Hispanic men systematically, just so their productivity measures (arrests-per-working-hour) looked good. It all came to light when they booked an off-duty policeman.

‘Noble cause corruption’ is coursing through the veins of both HMRC and IRS. Virtuous with indignation, tax collectors are targeting the rich, and see nothing wrong in assuming High Net Worth Individual (HNWI) taxpayers are ‘guilty until proven innocent’ – they assume the rich are automatically guilty of not paying their ‘fair share’. Sending out arbitrary tax demands and then insisting that the target must pay up or go to jail, and that it’s the taxpayer’s problem to prove overcharging and claim back the excess. Imagine what would happen if this process is incentivized! What if the tax collectors receive a percentage of every extra dollar/pound/euro they pull in to treasury coffers. We would see Jacob’s ‘Law of Intractable Systemic Corruption’ in operation, and tax collectors would revert to the archetypal social pariahs known from biblical stories.

The stressing of commercial priorities contaminates guardianship, as when politics becomes a profession and politicians display no sense of pride and no sense of shame. “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators”.

Ogden Nash hit it on the head “professional people have no cares, whatever happens they get theirs”. The 2009 scandal of British MPs fraudulently receiving substantial expenses claims is a classic example – Jacqui Smith, the then Home Secretary no less (with the role of overseeing law and order in the U.K.), reclaimed amounts both small (the cost of hiring pornographic movies) and large (declaring her sister’s house in London as her second home, and thus chargeable).

When the normal practices of a group, whether a guardian or a trader, diverge from the ethics of its syndrome then virtue and vice become indistinguishable. The rules of the game lose all meaning. Most of the disgraced MPs saw nothing wrong with what they were doing, because they were operating within the letter of the law, but not the spirit – for example Sir Peter Viggers using taxpayers’ money to furnish a duck house on the family lake! Added to this there are numerous stories of MPs selling influence and access.