LEVEL IV: Saving and Money Lending

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QUESTION N: If money can only be issued for soon-to-be-redeemed promises, how are long-term investments funded?

No OPTION 1: From everyone’s own savings

While using one’s own savings is a perfectly suitable way to finance long-term investments, it is hardly sufficient to finance all investments in a given economy.

No OPTION 2: Through other currencies which allow money to be issued for long-term investments

By falling back on other currencies, MONEY 2.0 would effectively depend on traditional bank money. For a currency system aiming to replace traditional bank money, this is not an option.

Yes OPTION 3: With the money already issued in MONEY 2.0

Unlike the traditional money system, where the actual costs of money-holding are hidden in inflation and taxes, MONEY 2.0 features cost transparency. Since promises can default, money-holding incurs costs – the costs, however, are not borne collectively, but by the money-holders. To avoid the costs of money-holding, those with money have little option but to lend out their savings to other participants. This not only leads to low borrowing costs – the available money also makes it easier for market participants to render the services they promised.

 
QUESTION O: Who organizes money-lending?

No OPTION 1: The currency administration

In MONEY 2.0, the administration’s sole task is to ensure the currency remains secure and stable. Since a functioning currency administration is in everyone’s interest, the participants fund the central office collectively. Equally, the participants bear all administrative risks which could lead to an unstable currency.

Lending out existing money, on the other hand, is a private, profit-oriented business, much like selling goods and services. Since the profits from money-lending only benefit the individual money-lenders, the lenders must also bear the risk of payment defaults individually. To ensure that other participants don’t have to share the credit risks, the currency administration is barred from money-lending.

Yes OPTION 2: Private money-lenders and independent savings banks operating separately from the currency administration

The only way to ensure that participants won’t have to pay for defaults and credit bubbles collectively is to keep currency administration and money-lending completely separate.

Credit losses must be borne by the individual lenders (since they lend out money for profit, they can also be expected to bear the risk). Other participants are not affected by defaults – since the circulating money remains backed by promises, defaults are not a stability issue.

 
QUESTION P: How is money-lending implemented in practice?

Yes OPTION 1: The market participants lend their money to other participants directly

To lend money directly, the lender needs to know the credit receiver well enough to assess the default risk. Besides lending to friends and acquaintances, contact can also be established via a money market or by an investment bank (typically for a fee) – in those cases, trust has to be built up by providing additional information on the borrowers.

A number of online money markets (auxmoney.com, lendingclub.com, zopa.com, prosper.com) already operate with traditional currencies today and could easily handle alternative currencies as well. More information on peer-to-peer lending can be found on Wikipedia: http://en.wikipedia.org/wiki/Peer-to-peer_lending

Since the money-lenders are the only ones profiting from the transaction, they alone also carry the default risk.

Yes OPTION 2: The credit business is left to professional service providers

Potential lenders deposit their money at a savings bank, which uses the deposits to grant loans. The savings bank pays a flat fee to the money-lenders in the form of a guaranteed interest rate (which may or may not be higher than the balance fee levied by the currency administration). The savings bank makes higher profits than it would if it just brokered the loans, but it also carries the risk of defaulting borrowers. The risk of the savings bank defaulting is borne by the depositor (who can, however, choose the savings bank and isn’t liable for defaulting institutions where he didn’t make a deposit).

In contrast to lending money directly, the savings bank can redeploy the deposited money via term transformation – if needed, lenders can therefore withdraw their money short-term (at least as long as not everyone wants this at the same time).

 
QUESTION Q: How can participants be prevented from faking transactions and simulating the provision of services?

No OPTION 1: Through continuous monitoring

Apart from the fact that extensive monitoring would be unpleasant for everyone and hardly boost the popularity of MONEY 2.0, supervisory measures are simply expensive. Administration costs would therefore explode, resulting in considerably higher fees and an alternative currency that is no longer competitive.

Yes OPTION 2: By rendering simulated transactions financially unattractive

Simulated transactions are unattractive once the associated costs are higher than the legitimate alternative which they are supposed to bypass. Money issuers who are unable to perform the services they promised, for example, should take out long-term loans to fulfill their obligations and, if necessary, pay interest on them.

Hence, simulated transactions can be prevented most easily by levying transaction fees: At a rate of 1% per transaction, for instance, transferring the same amount to a different account every three months would amount to 4% p.a. The effectiveness of transaction fees therefore depends on the interest rates that other market participants charge for loans.

GOALS:

– To create an alternative money system in which all market participants can issue money under a collective brand, and which doesn’t require a higher authority for implementation.

– To limit money creation with each participant’s ability to render equivalent service in the near future.

– To establish a central administration which monitors the rules and, if necessary, enforces them by law.

– To see to it that currency administration and money-lending are separate entities.

– To ensure that the alternative system is used instead of the current money system, therefore REPLACING it.

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