We must disconnect legal tender currency from real economy

Work, natural resources and energy, are the original factors of production.

Real economy is the whole of the activities producing goods and services to satisfy needs. Production is the result of the transformation of natural resources through productive forces: work, means and knowledge.

Even so, since energy on its own can’t change natural resources in products and/or in production means without human activity, work is the fundamental factor of production and, therefore, of real economy.

Work produces surplus, which is equal to the difference between the trade value of goods and services, i.e. prices, and work market value, i.e. salaries, including all provisions.

The whole financial and economic system is based on surplus deriving from real economy.

Surplus, after tax, is partly addressed to productive investments (new production means) and partly saved and/or invested in financial activities.

Salary, after tax, is partly consumed and partly saved and/or invested in financial activities.

Savings are therefore equal to surplus plus salaries minus investments.

All these economic factors are represented by money and credits in money: goods and produced services are exchanged with money, even salaries, taxes and new production means are exchanged with money. Also, savings are represented by money as stock of value.

Money and credit are factors of the financial economy. Except for rare occasions (for example, barter of work and/or production means for goods and/or produced services), with money and credit one buys raw materials, semi finished goods, components, production means and receives work and knowledge performances. Therefore, in the current world economic system, with currency finance moves economy.

Money and credit are represented by legal tender currencies.

Nowadays legal tender currency is issued by states or central banks or issuing banks. This currency has no real value but gains value only owing to law.

It’s three hundred years it’s been like this, since they constituted the first issuing banks, which are acknowledged the power to issue currency not representing goods or other existing real values.

Since then, legal tender currency is just a debit undertaken by the issuer towards the bearers. It’s trust money, a sort of fake bank draft with no term. With a particular feature. Although it’s completely devoid of value, creditors have the obligation to accept legal tender currencies.

The first legal tender currencies were issued to lend money to the states and fund wars. During time, since the states’ debts are always increasing, the amount of legal tender currency keeps increasing.

Commercial Banks receive this legal tender currency as deposit and grant loans. And, since the currency granted by a bank is subsequently deposited in the same or in another bank, the bank system manages to multiply the value of the legal tender currency issued by the states or central banks.

Only three per cent the monetary mass enters real economy. The rest is employed in loans to the states, in exchanges between different currencies and to purchase holdings.

The enormous offer of currency has caused the overrating of stocks; their price is enormously higher than their real value.

All this outstanding monetary mass, which has reached today a nominal value of more than fifty times the world’s yearly production and is even higher than the value of all the goods existing on the planet, arises from legal tender currency devoid of any real value.

The more the state’s debts increase, the more legal tender currency increases, the more the price of stocks increases and the difference between nominal value of the legal tender currency and the value of goods and real services produced each year increases.

The most important effect of this monetary expansion is that the loans employed outside real economy don’t produce surplus. The profits rising from public loans or from exchanges of currency and stock aren’t real wealth but just apparent numerary wealth. Unfortunately, this is what controls the world: economy, politics, information and culture, therefore consciences.

There is another phenomenon joining this context, also this one started about three hundred years ago to fund a rebellion, it’s the pyramidal loan, allowing covering financial profits by contracting new debts. It’s a fraud where the profits of who invests and/or loans money for first are covered by last one to loan and/or invest.

Until 2000, banks and speculative bodies covered yields taking money from savers. Then, the savings, also owing to the strong losses suffered by the savers, weren’t enough and the speculators were forced to issue new money granting new loans and inundating the market of new liquidity.

Obviously, not even this currency issued and loaned to cover interests and yield on previous loans produces any surplus, indeed it reduces purchase power (devaluation), therefore the real value of all the outstanding currency at a higher rate than the increase of the nominal value of the monetary mass.

Now we are almost at the climax. It’s not the case of a cyclical crisis but of a systematic crisis of the financial system and consequently of the whole economic system.

The conditions and times of this crisis can be represented through mathematic equation that can be expressed introducing a simple point: the more public debt and stock values increase compared to the surplus produced by real economy, the more the system crisis deepens.

And the crisis becomes definite and systemic when the difference between the currency purchase power loss and the monetary mass nominal value increase is higher than the surplus rising from real economy. The economic crisis from that point becomes unsolvable, if not by disconnecting legal tender currency from real economy.

All of this process takes place according to the following axioms.

1) Productive work produces an amount of surplus equal to the difference between product market value (prices) and labor market value (salaries): PV = P – S (surplus = prices– salaries).

2) Surplus PV, after-tax T, is partly addressed towards consumption C, partly towards productive investments I and partly towards savings R.

3) Salary S, after-tax T, is partly addressed towards consumption C and savings R.

4) Therefore the savings R are equal to surplus PV plus salary S minus taxes T minus consumption C minus investments I (R = PV + S – T - C – I).

5) Legal tender currency M is the good representing the value of all the elements in real economy.

6) Since the current economic system the value of the monetary mass MM should be equal to the comprehensive value P of the products available on the market, the part SM of monetary mass MM overcoming this limit causes a value loss, i.e. a depreciation D, of currency M and the system enters a crisis.

7) The part of monetary mass SM overcoming P produces financial yields RF.

8) Until financial yields RF are covered by savings R, the value loss D is lower than the increase of monetary mass SM causing cyclical crisis.

9) When savings R can’t cover financial yields RF, new currency NM is issued to cover RF causing a value loss D of currency M for a higher amount than NM worsening the crisis.

10) When the difference between value loss D and new currency NM overcomes surplus PV, an economic systemic irreversible crisis begins.

11) It’s not possible anymore to go back to starting conditions and even if it was the same already happened process would develop again.

12) The only solution is to disconnect conventional currency from real economy and pass from legal tender currency, which should represent goods, to a currency representing the value of the work necessary to produce the goods and services exchangeable with that currency: the work currency.

Saturday, September the 6^th 2008.