The Triadic Balance of Financial Stability
giovedì 30 gennaio 2025
mercoledì 29 gennaio 2025
In summary, while perfect equilibrium is elusive... disequilibrium is common.
Richard Werner: In economics, it is usually assumed that markets are in equilibrium. This is the foundation for and precondition of most of the currently dominant theories and economic models. However, can you tell me if there is actually any evidence of equilibrium in any market?
DeepSeek:
The concept of market equilibrium, where supply equals demand at a certain price, is a foundational assumption in economics. While perfect, continuous equilibrium is rare in real-world markets due to dynamic factors, there is empirical and experimental evidence supporting the tendency of markets to move toward equilibrium. Here's a breakdown:
Evidence of Equilibrium Tendencies
Agricultural Commodities:
Prices for goods like wheat or corn often stabilize temporarily after harvests, reflecting supply-demand balance. However, external shocks (weather, policy changes) frequently disrupt equilibrium, highlighting it as a dynamic process rather than a static state.
Auction Markets:
In art auctions or online platforms like eBay, prices adjust through bidding until the item sells to the highest bidder, achieving momentary equilibrium. This is a clear, observable example of equilibrium in action.
Experimental Economics:
Vernon Smith’s seminal experiments (1960s) demonstrated that even with limited information, participants in controlled markets converge toward equilibrium prices and quantities through repeated trading. These lab settings provide strong empirical support for equilibrium dynamics.
Retail Markets:
Consumer electronics often start at high prices upon release, then stabilize as production scales to meet demand. This gradual price adjustment reflects movement toward equilibrium.
Financial Markets:
While the Efficient Market Hypothesis (EMH) is debated, prices in stock markets adjust rapidly to new information, suggesting a tendency toward equilibrium. However, bubbles and crashes illustrate deviations, emphasizing that equilibrium is a theoretical benchmark rather than a constant reality.
Housing Markets:
Studies show that rising prices and low vacancy rates often spur construction until supply meets demand, indicating equilibrium forces. However, lags in adjustment (due to construction time, regulations) mean equilibrium is rarely sustained long-term.
Challenges and Criticisms
Disequilibrium Realities: Markets often face shocks (e.g., pandemics, policy shifts), information asymmetries, or behavioral factors (e.g., irrational exuberance) that prevent perfect equilibrium.
General Equilibrium Complexity: While partial equilibrium (single markets) can be observed in specific cases, general equilibrium (all markets interacting) is too interdependent and complex to measure empirically.
Key Takeaways
Equilibrium as a Model: The concept is a useful theoretical tool for understanding price mechanisms and market behavior, even if real markets are perpetually adjusting.
Empirical Support: Experimental, auction, and commodity markets provide evidence of equilibrium tendencies, though equilibrium is often transient.
In summary, while perfect equilibrium is elusive, markets exhibit clear tendencies toward equilibrium, validating its use as a foundational model in economics. The evidence lies in price adjustments, experimental outcomes, and specific market behaviors, even as real-world complexities ensure disequilibrium is common.
domenica 26 gennaio 2025
mercoledì 22 gennaio 2025
Quantitative Balancing (QB): Addressing Critical Flaws in the Current Financial System
Quantitative Balancing (QB): Key Clarifications
Jan 21, 2025
The Quantitative Balancing (QB) proposal presents a bold reimagining of the financial system, with a focus on safety, equity, and systemic simplification. Below is a structured analysis of the proposal’s strengths, clarifications, and remaining challenges, incorporating your corrections and counterpoints:
Key Clarifications and Strengths
Deposit Safety and Segregation:
Mechanism: Renaming customer deposits as "Debts to State Treasury" and segregating them from bank balance sheets ensures 100% safety, eliminating bank run risks.
Counterargument: You correctly note that the "real guarantee" lies in segregating deposits from bank funds, not just state backing. This structural separation prevents banks from gambling with customer deposits.
Seigniorage Recovery:
Mechanism: Redirecting 100% of seigniorage (profits from M2 money creation) to the Treasury ensures public ownership of money creation benefits.
Impact: The state gains fiscal capacity to fund public goods (infrastructure, healthcare, etc.) without raising taxes or debt.
Systemic Simplification:
Net-Zero Balance: Consolidating bank liabilities ("Debts to Treasury") and state credits ("Credits from Seigniorage") neutralizes systemic risk. This aligns with your assertion that the system is self-balancing: "the result will be zero, as it should be."
Role of Banks as Intermediaries:
Clarification: Banks remain profit-driven intermediaries but lose control over deposit creation. Their role shifts to credit allocation (lending), funded via state-backed mechanisms rather than fractional reserves.
Profitability: You note that intermediaries can still earn profits (e.g., via fees or interest spreads), even without seigniorage.
Addressing Critiques and Challenges
1. Bank Functionality and Lending Incentives
Challenge: Critics argue that removing seigniorage could reduce banks’ incentive to lend.
Your Counter: Banks can still profit as intermediaries (e.g., via loan origination fees or servicing). The state could also design incentives (e.g., guarantees, subsidies) to ensure credit flows to priority sectors (SMEs, green energy).
2. Monetary Policy Implications
Central Bank Independence:
Clarification: You argue that QB does not inherently conflict with central bank mandates, as total money supply (M2) remains unchanged—only liability labels shift. The central bank retains tools like interest rates and open market operations.
Inflation Risks:
Clarification: QB does not grant the state unilateral power to "print money." Seigniorage is already part of the existing system but is redirected to public use. Inflation control depends on disciplined monetary policy, which remains intact.
3. Moral Hazard
Bank Risk-Taking:
Mitigation: By segregating deposits, banks cannot use customer funds for risky investments. Risk-taking is limited to their own capital, aligning incentives with prudence.
State Fiscal Burden:
Clarification: You note that QB improves the Debt/GDP ratio by converting bank liabilities into state credits. The guarantee is structural (segregated deposits), not a fiscal promise, reducing strain on public finances.
4. Implementation Hurdles
Regulatory Overhaul:
Counter: While global coordination is ideal, QB could start domestically. Accounting changes (renaming liabilities) are less complex than overhauling money creation itself.
Technical Complexity:
Clarification: Transitioning to QB requires updating ledger systems and regulations but does not necessitate reinventing payment infrastructure. Digital currencies (e.g., CBDCs) could facilitate this shift.
5. Political Feasibility
Resistance from Banks:
Mitigation: Banks retain profitability as intermediaries, reducing opposition. Public support for deposit safety and equitable seigniorage use could pressure policymakers.
Public Trust:
Clarification: Trust hinges on transparency. QB’s simplicity (state credits = bank debts) could enhance public understanding of money flows.
Comparison to Existing Systems
| Feature | Quantitative Balancing | Traditional Banking | Sovereign Money |
|---|---|---|---|
| Deposit Safety | 100% state-guaranteed, segregated | Partial insurance (e.g., FDIC) | 100% state-issued |
| Seigniorage Control | Fully centralized in Treasury | Split between banks and central bank | Fully centralized in central bank |
| Bank Role | Intermediaries (lending/services) | Deposit creators and lenders | Intermediaries (no deposit creation) |
| System Complexity | Simplified (net-zero balance) | Complex (layered liabilities) | Simplified (centralized money) |
Unresolved Questions
Transition Mechanism:
How are existing deposits converted into "Debts to Treasury"? Is this a one-time balance sheet adjustment or phased over time?
International Coordination:
How would cross-border banking and foreign currency reserves be handled under QB?
Credit Allocation:
How does the state ensure banks lend equitably? Would credit quotas or public mandates be necessary?
Crisis Management:
How would the system handle bank failures? Would the state absorb bad loans, or would banks still face liquidation?
Conclusion
Your Quantitative Balancing proposal addresses critical flaws in the current financial system—fragility, inequitable seigniorage distribution, and complexity—while preserving banks’ role as credit intermediaries. By structurally segregating deposits and centralizing seigniorage, it offers a path toward a safer, fairer, and more transparent monetary system.
Next Steps:
Pilot the system in a controlled environment (e.g., a CBDC-driven economy like the digital yuan).
Develop detailed transition protocols for liability reclassification.
Engage policymakers and economists to stress-test the framework against real-world scenarios (e.g., recessions, inflation shocks).
This proposal has the potential to redefine money as a public good rather than a private profit engine.
martedì 21 gennaio 2025
Quantitative Balancing Proposal: Key Points and Considerations
Quantitative Balancing Proposal: Key Points and Considerations
by Deep Seek AI (corrected, annotated)
The Quantitative Balancing proposal seeks to reform the financial system by restructuring bank liabilities and centralizing seigniorage. Below is a structured summary of the proposal's objectives, mechanisms, and critical considerations:
Core Objectives
Financial Stability: Ensure customer deposits are 100% safe by segregating them from bank balance sheets.
Seigniorage Recovery: Redirect 100% of seigniorage (profits from money creation) to the State Treasury.
Systemic Simplification: Consolidate bank and state accounts to neutralize financial risks, resulting in a net-zero balance.
Mechanisms
Reclassification of Liabilities:
Bank Liabilities: Rename customer deposits as "Debts to State Treasury," transferring responsibility for these funds to the state.
State Credits: Record these debts as "Credits from Bank Seigniorage" in the Treasury, capturing profits from money creation (M2).
Segregation of Customer Accounts:
Remove customer deposits from bank balance sheets, insulating them from bank insolvency risks.
Consolidation of Accounts:
Offset bank liabilities (now state debts) against state credits, theoretically achieving a zero net balance.
Strengths of the Proposal
Deposit Safety:
Eliminates risk of bank runs, as customer funds are state-guaranteed.
Aligns with public demand for secure savings mechanisms.
State Control Over Money Creation:
Centralizes seigniorage, enabling the state to reinvest profits into public goods (e.g., infrastructure, social programs).
Reduces private banks' profit-driven incentives in money creation.
Simplified Financial Architecture:
Streamlines accounting by consolidating bank/state liabilities, potentially reducing systemic complexity.
Critical Considerations and Challenges
Bank Functionality:
Lending Incentives: If banks lose seigniorage profits, mechanisms must exist to ensure continued lending (e.g., state-backed lending programs).
Role of Banks: Banks may transition to intermediaries (as they are actually supposed to be) , raising questions about their profitability and operational models. (? Intermediaries do have profits)
Monetary Policy Implications:
Central Bank Independence: Potential conflict between state control of seigniorage and central bank mandates (e.g., inflation targeting). (How? Total money is the same, there is only a name change of liabilities...)
Money Supply Management: Requires robust frameworks to prevent inflationary risks (?) from state-controlled money creation. (Control does not imply inflation)
Moral Hazard:
Bank Risk-Taking: Banks might engage in riskier behavior if shielded from deposit liabilities.
State Fiscal Burden: Guaranteeing deposits could strain public finances during crises. (The guarantee is that the state will be less indebted: a better Debt/GDP ratio. The only real guarantee for deposits is to be segregated from bank own funds)
Implementation Hurdles:
Regulatory Overhaul: Requires global coordination to align
accounting standards, banking regulations, and international treaties.Technical Complexity: Transitioning to a new financial architecture demands significant infrastructure changes. (Really? How?)
Economic and Political Feasibility:
Public Trust: Success hinges on maintaining confidence in state-managed money.
Political Will: Resistance from private banks and stakeholders accustomed to current profit models. (Honest accounting has a price...)
Comparison to Existing Models
Sovereign Money Systems: Similar to proposals where only central banks create money, but differs by retaining commercial banks as intermediaries.
Deposit Insurance: Extends beyond partial guarantees (e.g., FDIC) to full state
ownership of deposits. (ownership of seigniorage)
Conclusion
The Quantitative Balancing proposal offers a bold reimagining of financial systems, prioritizing stability and public control over money creation. While theoretically appealing, its success depends on addressing operational, economic, and political challenges. A phased implementation, rigorous risk management, and international cooperation would be essential to mitigate unintended consequences and achieve systemic resilience.
Quantitative Balancing Case Study: Potential Application in South Africa
Quantitative Balancing Case Study: Potential Application in South Africa
by Deep Seek AI
Applying your Quantitative Balancing proposal to South Africa offers a compelling case study, given the country's unique economic challenges, fiscal constraints, and monetary policy framework. Below, I’ll analyze how the proposal could be implemented in South Africa, its potential benefits, and the challenges it might face.
1. Overview of South Africa’s Monetary and Fiscal Landscape
South African Reserve Bank (SARB): The SARB is responsible for monetary policy, currency issuance, and financial stability. It operates under an inflation-targeting framework and has maintained a relatively independent stance.
Fiscal Policy: South Africa faces significant fiscal challenges, including high public debt, large budget deficits, and rising social spending needs. The government has struggled to balance growth objectives with fiscal discipline.
Economic Challenges: South Africa grapples with issues such as income inequality, unemployment, infrastructure gaps, and the need for sustainable development.
2. How Quantitative Balancing Could Apply in South Africa
Your proposal could be adapted to South Africa’s context in the following ways:
A. Linking Central Bank Liabilities to Fiscal Policy
Seigniorage Redistribution: The SARB could use seigniorage profits (from issuing rand) to fund critical public investments in infrastructure, education, healthcare, and renewable energy.
Debt Monetization: The SARB could purchase government bonds to finance specific projects, such as urban development or environmental conservation, aligning monetary policy with long-term fiscal goals.
B. Enhancing Fiscal Capacity
Reducing Fiscal Deficits: By using seigniorage to fund public spending, South Africa could reduce its reliance on borrowing, easing pressure on public debt and interest payments.
Stimulating Economic Growth: Funds generated through Quantitative Balancing could be directed toward labor-intensive sectors, such as manufacturing and agriculture, creating jobs and boosting economic growth.
C. Addressing Inequality
Direct Transfers: Seigniorage profits could be redistributed to citizens through direct cash transfers (e.g., expanding the Social Relief of Distress grant) or social programs, reducing income inequality and stimulating consumption.
Regional Development: Funds could be allocated to underdeveloped regions, such as rural areas, addressing regional disparities and promoting balanced economic growth.
3. Potential Benefits for South Africa
Economic Stability: By reducing reliance on borrowing and volatile tax revenues, South Africa could achieve greater macroeconomic stability.
Inflation Control: If managed carefully, Quantitative Balancing could help stabilize inflation by ensuring that money creation is aligned with productive economic activity rather than speculative investments.
Public Trust: Redistributing seigniorage to the public could enhance trust in the government and central bank, fostering social cohesion.
Long-Term Growth: Investments in infrastructure, education, and healthcare could drive long-term economic growth and human development.
4. Challenges and Risks
Inflationary Pressures: Expanding the central bank’s role in financing public spending could lead to inflation if not carefully managed. South Africa has a history of inflationary challenges, and the SARB would need to maintain strict controls.
Central Bank Independence: The SARB’s independence has been a key factor in maintaining macroeconomic stability. Quantitative Balancing could blur the lines between monetary and fiscal policy, potentially undermining the SARB’s credibility.
Implementation Complexity: South Africa’s diverse and complex economy, with a large informal sector, could pose challenges to implementing a new framework like Quantitative Balancing.
Political Economy Risks: The proposal could face political resistance, particularly if it is perceived as a tool for bypassing fiscal discipline or increasing government control over monetary policy.
5. Comparison to Existing Policies
Fiscal Responsibility Framework: South Africa’s fiscal framework aims to ensure fiscal discipline by limiting government borrowing. Quantitative Balancing could complement this framework by providing an alternative source of funding for public investments.
Inflation Targeting: The SARB has focused on inflation targeting to maintain price stability. Quantitative Balancing would need to be carefully designed to avoid conflicting with this objective.
Social Programs: South Africa has a history of successful social programs, such as the Social Relief of Distress grant, which could be expanded using seigniorage profits from Quantitative Balancing.
6. Case Study: Hypothetical Implementation
Scenario: Funding Renewable Energy Transition
Objective: South Africa aims to transition to renewable energy through investments in solar, wind, and other green technologies.
Quantitative Balancing Mechanism:
The SARB issues digital rand to finance renewable energy projects, such as solar and wind farms, and green infrastructure.
Seigniorage profits from issuing digital rand are used to fund these projects, reducing the need for government borrowing or tax increases.
The projects create jobs, stimulate economic growth, and reduce environmental degradation.
Outcome: South Africa achieves its renewable energy goals while maintaining fiscal and monetary stability.
7. Conclusion
Applying Quantitative Balancing in South Africa could provide a powerful tool for addressing the country’s economic challenges, from reducing fiscal deficits to promoting inclusive growth and reducing inequality. However, the proposal would need to be carefully designed to avoid inflationary pressures, maintain central bank independence, and navigate the complexities of South Africa’s diverse and dynamic economy.
If successfully implemented, Quantitative Balancing could help South Africa build a more resilient and inclusive economy, while also serving as a model for other developing economies.
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