1. finance
2. bank

HOW TO SAVE THE EURO
AND THE EUROPEAN UNION?
---------------------------Версию на русском – см. здесь
Translation into any language is possible here
Answer to the question:
“If member states leave the Economic and Monetary Union,
what is the best way for the economic process to be managed to provide
the soundest foundation for the future growth and prosperity of the
current membership?”
(from Russian)
Authors:
Evgeni DOVGEL,
Analyst with operational experience in spheres of analysis,
prognostication, improvement of production relations and
management systems – leading author,
Viktar TSIARESHCHANKA,
Republic of Belarus. Presidential candidate at the elections
of 2010 in the Republic of Belarus, Candidate of Economics,
associate professor in special subject “Economics”, MBA,
manager with operational experience in spheres of state and
economic management,
Victor SVETOV, B.Sc.C.K. MBPs.
President. Select Trading Solutions Inc. Toronto, Canada
Chairman & CEO. Royal Clark Enterprises Inc. Toronto, Canada.
Consultant
Mr. H.J. (Joe) Janthur, FICB, Ec.D.
Certified Economist Developer. President. Chairman of the
Federation of Export Clubs of Canada. Chairman of the Central
Ontario Export Club.
January 30, 2012
Summary of the work
Answer to the question:
“If member states leave the Economic and Monetary Union,
what is the best way for the economic process to be managed
to provide the soundest foundation for the future growth
and prosperity of the current membership?”,
nominated for
Wolfson Economics Prize
The authors give the survey of events which, in their opinion, justify the
conclusion: there is an economic situation which threatens with a collapse of the
Eurozone, which may have disastrous effects on the whole world financial
system. That is why the question in the title is so urgent for the EU countries and
the world
It is seen that credit and monetary systems of EU states feature internal
contradiction. The essence of the loan process of any money issuer is shown in
the following scheme:
Issue of credits into economy
by issuing bank
100 EUROS (US Dollars,
rubles…)
Return of credits to the issuing bank with
interests
100 EUROS (US dollars,
rubles…)
+ interests at refinancing rate
The contradiction of this scheme is obvious: each of the CENTERS OF
MONEY ISSUING recalls more money from circulation than issues money with
this credit act.
It requires faster rates of issue of its credits from any National bank,
otherwise there will be deficiency in money for return of credits with interests.
The time when monetary systems were developing at the expense of the
fact that the rate of issuing credits by them exceeded the rate of credit return has
already played out. The growth rate of credit debts in the whole world economy
increases faster than the increase of actual value of monetary aggregates in
circulation.
2
The authors represent 2 mathematical models of processes in the economy.
The analysis according to the models shows that such a situation is
developing when existing debts, making the base of the world financial system
and all its assets could not be returned and increase. If the system does not
eliminate this contradiction, so the downturn of financial system will give active
recession and rise to “boom” of hyperinflation, price increase and mass
discontent.
The analysis also shows that in monetary systems, the money of National
banks does not have proper provision in the course of real-time.
That is why inflation devalues currency money supply in different states
and the world economy.
That is why the European and world monetary systems need fundamental
innovation.
The analysis of the history of Euro showed that the way out of the crisis
should be a simple return to the state of the European Union, which was
convenient for everyone during the period from 01.01.1999 till 01.01.2002.
It is reasonable for the EU to transform Euro from the status of a unified
currency to the status of a common one without demolishing the institute of
Euro and the Eurozone and to provide the Eurozone countries with the right to
restore their monetary systems for simultaneous circulation of national
currencies in their territories.
Such monetary restructuring will be the most optimal for the EU members:
remaining the member of the Eurozone, each country will receive at its disposal
the instrument of state control and development of national economy – its
monetary system.
At the same time all the National banks should correct in their systems the
contradiction which everyday still accumulates in them the reason of getting
more aggravating credit crisis. National banks should pass on from creditissuing to investment-issuing financing of the economy.
Instead of emitting money by means of credits, National banks must
realize emission by means of purchasing highly liquid shares of highly effective
and promising commercial business projects. Governments must develop such
business-projects, give them to National banks and insure if necessary. (To
some extent, this idea was taken from the analysis of the well-known "economic
miracle" of Japan, and Israel's achievements in science and technology).
Meanwhile EACH BANKNOTE will be introduced into circulation by
100% provided with highly liquid assets, which will increase in value relative
to money and will bring bigger income to the issuer than in the process of credit
3
issuing. It will increase the assets of money issuers. Currencies of the EU
countries will be able to free from such illness as inflation. The volume of
stable, not subjected to inflation monetary aggregate will increase. Capitals of
commercial banks will start increasing as well.
The answers to all the questions of the Wolfson Economics Prize are also
given in the work. It is showed, that the transition from credit-issuing to
investment-issuing financing of economy will create conditions for stability in
the European banking system.
The optimality of the offered here reorganization of the European
monetary system should be emphasized from the point of view of its technical
maintenance. There will be no demand in any new banking organizations.
There are also some other measures recommended to the European Union
and its members: in the field of optimization of tax system, creation of
conditions of high management motivations and to the employees to the
development of means of production, increase of production output,
improvement of pension system . The concept of complex associated solutions
which solve economic problems, has been worked out in details by the authors,
it was approved and may be prepared for interested states according to their
initial data.
The authors express confidence that all these measures in complex with
other agreed means of the European Union and national governments of the EU
member states will allow Europe to stabilize Euro in short time and make its
common currency the main worldwide reserve currency. The situation for this in
the whole world is favorable.
The world is on the eve of a new crisis-free epoch of Homo sapiens. As a
scientific basis for this final statement we also present an original scientific theory of
socioeconomic systems of the leading author (annex-4).
The authors are ready to present their development, which has fundamental
scientific novelty, in the form of complex reports by the authors with visual
demonstration of economical models.
Evgeni Dovgel
30.01.2011
4
Contents
1. Introduction
2. Reasons and economic mechanisms of the world debt crisis
About developed computer mathematical models
The essence of reason behind inflation of modern money
Mechanism of money inflation and price increase
Conclusion
3. Answer to Mr. Wolfson’s question: “If member states leave the Economic and
Monetary Union, what is the best way for the economic process to be
managed to provide the soundest foundation for the future growth and
prosperity of the current membership?” and proposed ways for the Eurozone
states out of the debt crisis.
4. Answers to other questions posed in Wolfson Prize’s terms:
5. Source list
6. Attachments:
1) Computer mathematical model 1.
Model of credit and monetary processes in economy –
Excel file: model-1.xls.
2) Computer mathematical model 2.
Optimization of variants of credit and investment business plan –
Excel file: model-2.xls
3. Diagrams:
Fig. 1.1. Dynamics national monetary mass of the country where the authors
of the present paper live (as an example), files – r-1.jpg (pdf),
Fig. 1.2. The same national monetary mass (see Fig. 1.1.) per capita in US
Dollars at the official exchange rate, files – r-2.jpg (pdf),
Fig. 1.3. The same national monetary mass (see Fig. 1.1.) per capita in US
Dollars taking into account inflation of Dollar (in Dollars of 1990),
files – r-3 (pdf).jpg,
Fig. 2. Amount of grams of gold in 100 US Dollars at New-York Stock
Exchange, files – r-4.jpg (pdf).
4) Theory of Socio-Economic Formations (fundamental principles, new view –
theoretical substantiation of the current Submission) ),
files – theory.docx (pdf).
5
1. Introduction
The 489 billion euros in three-year loans allotted in 2011 by the European
Central Bank (hereinafter referred to as – ECB) to the Eurozone banks as well as
the financial and fiscal austerity measures adopted for restraining the growth of
national debts in the member states have slightly diminished the problem of
liquidity deficit in the financial system of the European Union for the time being.
After another session of the Governing Council for the rates on 12.01.2012, the
head of ECB Mario Draghi even declared about the first indications of economic
stabilization in the Eurozone11.
However maintaining the liquidity of banks with the help of loans is a
method, which is no longer trusted among the analysts. Europe is facing
mounting problems with providing pension payments to its aging population,
problems of environment, migrants, social minority groups, etc.
And just a day after M. Draghi’s moderately optimistic statement the
rating agency Standard & Poor's announced the downgrading of the sovereign
credit ratings of nine out of 17 countries of the Euro zone. The ratings of Italy,
Spain, Portugal and Cyprus were lowered two notches; the ratings of France,
Austria, Malta, Slovakia and Slovenia -- lowered one notch.
On Monday January 16, 2012 Standard & Poor's also cut one notch from
the credit rating of the European Financial Stability Facility (EFSF) –
organization, which is financed by member states of the European Union, and
was created by 27 member countries of the EU on 9 May 2010 with the purpose
to fight the European debt crisis.
On 18 January the World Bank downgraded the forecast of the global
economic growth in the Eurozone countries and warned against the danger of
collapse of the whole world economy.
On 24 January the International Monetary Fund also warned that the
Eurozone debt crisis is aggravating and may negatively impact the growth of the
world economy. The IMF called Europe to immediate actions for restoration of
confidence in markets.
On 27 January the Fitch international rating agency decreased long-term
credit ratings of five states of the Eurozone with further negative forecast and
suggested that the Eurozone states could not support the status of Euro as a
world reserve currency.2
Creditors actively transfer their deposits from accounts in different banks
of the EU states and invest them into deposits of the ECB.
All this shows that the economic situation in the Eurozone threatens with a
collapse of the zone of Euro, which may have disastrous effects on the whole
world financial system. Therefore, Mr. Wolfson’s question, given in the title of
the present paper, is getting more and more urgent both for the European Union
countries and for the whole planet.
6
To answer this question it is necessary to examine the reasons of the crisis.
2. Reasons and economic mechanisms of the world debt crisis
The essence of a crisis in any system is the accumulation in this system of
the results of a certain contradiction up to the level after which the system starts
to collapse.
Credit and monetary systems of modern states with market economy,
including the EU, feature internal contradiction: National banks of these states,
as well as the ECB, the Federal Reserve System of the USA (hereinafter referred
to as – FRS) and to a certain extent the International Monetary Fund within the
limits of its system (SDR - special drawing rights) issue CREDITS like ancient
money lenders. After a certain period borrowers have to return THESE
CREDITS with INTEREST.
The essence of the credit process of any bank - money issuer is shown in
the following scheme:
Granting of loans by bank - the Return of loans to bank – the money issuer
money issuer into the economy with interest
100 EUROS (US Dollars,
100 EUROS (US Dollars, rubles…)
rubles…)
+ interest at refinancing rate
The contradiction of this scheme is obvious: each MONEY ISSUING
AUTHORITY as a result of each CREDIT act removes from circulation more
money than what it issues with this credit act into circulation.
Let us recall a school problem about a swimming pool, which is being
filled with water through one pipe, and drained through two pipes. In this case
one of the draining pipes (for return of the loan to the bank) passes exactly the
same flow as the pipe which fills the swimming pool (issuing of loans into
economy), and the second pipe (return of interest) passes a portion of the flow of
the pipe which fills the swimming pool. And likely everyone at school knew that
such a swimming pool would become empty in the end.
In order for the world credit and monetary environment to work without
the accumulation of problems which lead to crises it is necessary that fullweight money continue to somehow appear in the economy in greater quantity,
than is issued into the economy by means of loans by the entire complex of
issuing banks.
7
At time, when gold and silver were used as money, this condition was met
although not without problems: the amount of real money (gold and silver as
precious metals) in the world economy kept increasing all the time without
inflation:
Firstly, because gold and silver have inherent value, their extraction is
associated with certain expenditures;
Secondly, because gold and silver were constantly mined in nature and
involved into sphere of exchange as money;
Thirdly, because the increase in the amount of gold and silver (hereinafter
referred to as precious metals) in circulation always objectively fell behind the
growth rates of the world production, the increase in the volume of goods on
markets and the demand of the world economy for money as a medium of
exchange.
Therefore, in the previous centuries, due to the constant inflow of fullvalue money (precious metals) into the economy from outside the boundaries of
the credit and monetary sphere, the contradiction between the issuance of loans
into the economy and the necessity to return these loans with interest was to
a certain extent self-resolved by means of the market self-regulators.
If there was not enough money in the economy for resolving the indicated
contradiction, the market prices for money - precious metals increased relative to
the goods, which thereby stimulated more active mining of precious metals with
all possible means.
But gold and other precious metals have left the sphere of money
circulation a long time ago for objective reasons (which are commonly known
for specialists and are not described here). Nowadays money is issued into
economy only by the national banks of states, as well as ECB and FRS (all of
them hereinafter referred to as National banks). And they issue symbolic money
(electronic, paper), sometimes without the proper provision of their obligations
before people and establishments who exchange their values, goods and labor for
such money.
The National bank of any country with market economy, by issuing its
symbolic money into the economy through loans, as a result of each completed
credit act withdraws from the economy more money, than what it has issued by
means of the same credit act.
The scheme of credit emissions always requires from any National bank
faster rates of issuance of its loans, otherwise the economy it finances will in
short time have an obvious deficiency in money due to the return of loans with
interest.
For a certain period of time, the credit and monetary systems which did not
have proper provision of their liabilities, were growing and even flourishing due
to the fact that the rate of the new loans they kept issuing significantly exceeded
the rate of the loans return. But this opportunity has already exhausted itself
everywhere. Therefore, the growth rate of loan debts in the entire world
8
economy is already increasing faster than the increase of the actual value of the
monetary mass in circulation.
This leads to the situation when the existing debts, which comprise the
basis of the world financial system and the whole mass of its assets, cannot be
objectively returned. This has already lead to partial write-offs of debts,
toughening of the budget discipline, increase of taxes and retirement age for
population, reduction of incomes and number of government employees,
reduction of subsidies for banks, bonuses for bankers, etc. But this is not enough.
To overcome the crisis it is necessary to ensure the growth in production
volumes and number of working places. Otherwise the number of overdue debts
will start to actively increase. When this becomes a morally habitual event, there
will start a mass non-payment not just of loan interest, but also of the principal.
And taking into consideration that this will cause the world economy to
fall into an active recession, the downturn of financial system will give rise to a
“boom” of hyperinflation, price growth and mass discontent as a ground for
social-and- proletarian and military-and-police revolutions.
About developed computer mathematical models
In the course of preparation of the present work the authors developed,
tested and applied the computer mathematical model of credit and monetary
processes in the economy (attachment 1).
Analysis of dynamics of the credit and monetary processes in the economy
clearly shows that modern states with market economy, and correspondingly the
entire planet, is experiencing an increase in the deficit of the volume of the
monetary mass which makes it impossible to return all loans to the National
banks in their full amount.
It should be noted that borrowers from the National banks are, as a rule,
commercial banks which build on this their own interest rate business.
Meanwhile their activity provokes multiplication of deposits and interest
liabilities on loans without the increase of the amount of real money in the
economy. The multiplication increase of deposits and interest by commercial
banks (see attachment 1, part III. “The multiplication increase of deposits and
interests by commercial banks”) also requires the growth of monetary mass in
the economy.
At the same time, due to market competition of manufacturers in the
economy, there manifests a well known law of constant decrease of specific
profit on capital which is invested into the expansion of production.
With each next cycle of loan issuance, the abilities of borrowers decrease.
It is not coincidental that a fundamentally different scheme of financing of the
development of public production was found a long time ago and is being used
ever more actively in the world – without the use of loans, but by means of
9
creation of joint-stock companies which attract investments in exchange for their
shares. Using this scheme of financing they have neither interest debt on loans
nor the loan debt itself owed to the banks.
The authors also developed a second mathematical model “Comparison of
variants of credit and investment business plan” (see attachment 2).
Comparison of the different variants of credit and investment business
plans for the same business projects shows that financial expenditures per
product unit of joint-stock companies, which attract significant financial
resources into resource-demanding production, at times prove to be two or three
times lower than those of the competitors, who resort to loans for their
production development.
And that is why banks receive fewer and fewer production business
projects, which are able to earn profit on loan schemes of financing.
On the other hand, the National banks’ use of non-credit channels for
issuance into circulation of the nominal money, which get no proper provision of
liabilities of the issuers, does not solve the problem, but only causes growth of
unsecured monetary mass in the country, inflation and non-convertibility of
money of such issuers into other currencies.
Inflation of the national currency leads to price increases for goods in the
country, demonetization of the national economy with national currency which
has financial problems, the need for increased export of goods and national
resources, ineffective for the country, with dollarization of such national
economy.
To some extent in certain cases the National bank can slightly increase the
monetary mass in its state by purchasing gold, other precious metals and nonmonetary treasure assets into the reserves of National banks. But such actions of
the National bank are, firstly, non rational as they deaden significant public
values inside bank reserves, and secondly, they are obviously not enough in
comparison with the mass of issued credits and the deficiency in full-weight
money in the economy to make it possible to return these credits to the issuers.
Moreover, as our modeling clearly shows, even the growth rate of the
credit monetary mass in circulation, which is constantly insufficient for the
ability to return all borrowed from banks loans, still significantly exceeds, and
has been exceeding for a long time, the growth rates of commodity production in
the modern world economy (1-2% per year). This leads to inflation, the
depreciation of the whole mass of such money in circulation.
As an example and actual illustration of the above-stated arguments we
enclose a diagram which is based on the actual monetary statistics (as of
01.01.2012) for the country where the authors of the present paper reside.
Growth of the volume of the national money in the Republic of Belarus
over the last 20 years: Fig. 1.1.
10
The same amount of the national money in circulation but converted to the
US Dollar gives, in principle, the same diagram but of a completely different
type: Fig. 1.2.
And if we take into consideration the inflation of the Dollar, relative to
some other comparison, for example to gold, energy resources, food supply and
so on, then the line representing the volume of the national money in the
economy of the given country falls on the diagram completely to the axis,
showing that the country has the fact of demonetization of national economy
with national money.
Fig..1.3.
It should be emphasized that all the above-mentioned problems appear as
worldwide tendencies for all countries with market economy.
According to our estimation, for the period since 2000 the amount of
Dollars and Euros in the world doubled. But the credit and monetary model in all
countries with market economy eventually comes to deficiency of money in
circulation making it impossible for the debtors to return all loans and pay
interest. It is possible to receive visual evidence both for decrease of value of US
Dollar, and for decrease of value of any other modern currency.
11
Fig. 1.4. Number of grams of gold in 100 US Dollars at New-York Stock
Exchange.
All together this makes up a natural complex mechanism for the modern
world credit, financial and economical crisis, which started in the 90s of the last
century in the USA and spread all over the world economy.
An unthinkable sum of liabilities has been accumulated in the world
finances, which, according to our estimation, already exceeds the annual volume
of the gross domestic product of the world.
Debts in economy of each country grow faster than the increase of
monetary mass in circulation, thus economy of any of such countries is
inevitably going, and consequently and inevitably reaches intermittently the
deficiency of money in circulation for the possibility to return credits with
payment of interests.
The Government debt of the USA, for example, already exceeds the GDP
of the whole nation and again approached the limit which is approved by the
congress at the amount of 15.194 trillion Dollars3.
It is physically impossible to return ALL THE CREDITS AND
INTERESTS in such system of monetary-and-credit relations because of the
deficiency of money for these purposes both in the economy of separate states
and in the world economy. It is no coincidence that Ben Bernanke – the
Chairman of the Federal Reserve System of the USA and the Director of the
White House’s National Economic Council – got the nickname “Helicopter Ben”
for the idea that sometimes, in conditions of crisis, “throwing money from a
helicopter” may be a necessity.
As soon as banks of any country start to feel danger of non-return of
money to them, the rate of issuing loans slows down, and the requirements to the
debtors become more active. And the deficiency of money in the economy of
this country starts to be perceived sharply.
“Reduction of money offering in economy is the reason for most
economic crises”. (M. Friedman, an American economist, leader of
monetarism, Nobel Memorial Prize in 1976).
The deficiency of money in the economy of a country gives rise to
problems with sales of goods. This in turn leads to decrease of production
12
volumes and decrease of tax payments. And at the same time the demands of the
budget begin to grow (it is necessary to render support to manufacturers and
needy population groups) which obliges the states to issue additional volumes of
unsubstantiated money in the form of loans to the Government. The issue of
empty irrevocable credit emissions leads to depreciation of money in the
economy, as a measure of value, depreciates the national monetary mass in the
country and results in price increases. The increase in prices causes a further
decline in consumer demand and promotes consumers saving mode, which
exacerbates the problem of sales and leads to a further reduction in production
volume.
Arising inflation distorts reports of enterprises and national statistics of the
country in favour of governments.
The essence of reasons behind inflation of modern money
Below is a schematic diagram of dynamic balance of monetary system of
any National bank
Table 1. Schematic diagram of dynamic balance of monetary system of a
National bank of any state (figures are conventional)
Assets (for example)
1. Loans to commercial banks for 1
year at refinancing rate
Liabilities (for example)
5000 Credit emission
5000
2. Loans to governments at refinancing
rate for financing of budget deficit for
2-3 years
400 Credit emission
400
3. Preferential loans to certain
enterprises and population groups
(through authorized banks, for example
for 3-5 years)
300
300
4. Preferential loans to certain
population groups (for example for 10,
20, 30 and 40 years at the rate of 1%)
200 Credit emission
200
100 Emission by purchasing of
currency
100
50 Emission by purchasing of
assets
50
5. Foreign currency in the reserves of
the National bank
Credit emission
6. Gold and other valuable assets in the
reserves of the National bank
TOTAL-balance
6050
13
TOTAL-balance
6050
From the point of view of figures and mathematics the balance of this, as
well as any other National bank, always looks fully balanced: as many loans are
issued, so many liabilities arise for their return to the National bank plus interest.
But none of the loans, as a rule, will be returned earlier than the
established term:
for position 1 – a year;
for position 2 – 2-3 years, it is possible that the terms will have to be
prolonged, and also possible that the debt will be completely written off;
for position 3 – 3-5 years and the debt may not be returned by everyone;
for position 4 – debts for a period of up to 40 years will be partially written
off against benefits, the remaining balances may fully depreciate as a result of
inflation.
for position 5 – currency of the reserve is usually placed for certain periods
into deposits of some reliable banks and not all the time can be used efficiently.
If it is does get used, the National bank will be left without this reserve which
will shake faith in its currency.
for position 6 – аssets may be used (sold) but also not very fast, and in this
case the National bank will also lose this reserve.
As we can see the system of each National bank-money issuer is arranged
in such a way that its liabilities – money does not have the proper provision in
the course of real-time.
The major factor, underlining the modern monetary and debt crisis, is
imbalance (unsubstantiated in its material-and-energy essence, with regard for
the time factor) of assets and liabilities in National banks - issuers of money, and
correspondingly – in financed by them economy.
That is why the value of any currency fluctuates as a sliver in ocean waves,
and which is influenced by many factors: current and wind, waves and tides,
shores and rocks, rubbish, slime, algae, passing ships and even birds or fish can
peck, push it…
Instead of controlling their balance and provision of their national
currency, the issuers of money (states, FRS, ECB) try to control external
circumstances, i.e. environment, currency market, up to requirements to other
states (as for example, requirements of the USA to China), in order not to change
the rate of their currency!
To support confidence in their money National banks have to draw out of
social circulation and accumulate in their reserves – in principle “deaden” –
significant public values, those which have the highest liquidity in the society.
But as the reserves of any National bank comprise just a small part from
the total sum of nominal money issued by them into circulation, so all the
National bank-issuers of such money will not be able to objectively bear full
responsibility for their liabilities in relation to the value of their currencies. Thus
14
there occurs constant inflation of currencies. In crisis situations there always
appear defaults and exchange devaluations.
Inflation and exchange devaluation of all countries depreciate the value of
the world mass of money in relation to goods, and the deficiency of money in the
economy naturally becomes apparent everywhere from time to time.
Because of the decrease of value of the money mass in the economy in
relation to value of goods, accounts receivable and account payable of
enterprises increases, commercial banks start to delay payments, some of them
become bankrupt. Population, defending itself from inflation and concerned
about devaluation of the national money, buys up foreign currency, and fearing
the non-return of currency by banks, starts to keep it in household capital. All
these aggravate the problems of world crisis…
One of the important components of the world debt and monetary-financial
crisis is the crisis in the Eurozone.
Mechanism of money inflation and price increase
Sociological research shows that in each country people are mostly
annoyed because of price escalation. This is one of the most important reasons of
social revolutions in countries and social instability in the world. That is why it
is important here to express our attitude towards this problem.
Nowadays the prices in the world and in each country increase mostly
because the universally recognized standards of money depreciate and
correspondingly all national money, compared with them at convertible rates,
depreciate as well as a measure of prices for goods in the country.
The necessary volume of money in the economy of each country as means
of circulation and instrument of payment is determined according to the
economic law of commodity-money balance in the market, the law can be
expressed by Irving Fisher’s formula:
GxP = MxV,
where:
G – amount of goods at the market of the country;
P – price level of these goods in the country;
M – stock of money in circulation (monetary aggregate);
V – the velocity of circulation of money in the economy.
Let’s evaluate from this equation the formula of price level:
P=
MxV
G
15
It is seen from this simple formula that if the amount of nominal, not
having own value money in circulation (M) grows faster than the increase of
volume of goods in the market so the value of such money decreases, i.e. prices
for goods increase. And this increase extremely upsets population which has
already had experience of such past significant personal losses.
Escaping from depreciation of the national money people and
organizations recover money from storing places, withdraw from bank accounts
and start to buy goods for future use. As a result, the rate of circulation of money
in the economy (V) sharply increases, and the amount of goods in the market
offered for this money (G) sharply decreases.
I.e. in such situation all the three terms of the equation (P, V, G) work only
for price increase. And that is why prices grow in grave (cubic) dependence from
the excessive, issuance of money into circulation without providing them with
goods in the country.
Conclusion
The world has reached a deadlock with such monetary system. It requires
fundamental improvement.
“The problems that exist in the world today cannot be solved by the level
of thinking that created them”.
Albert Einstein, one of the authorities of contemporary physics
To solve problems of the European Union member states, which largely
suffer from the debt crisis (such as Greece, Italy, Spain, Portugal, Cyprus) by
means of new loans means to force the illness deeper and deeper into the
organism of the European Union and thus to just complicate its perspectives for
recovery. Crisis will aggravate and become sharper.
“Insanity: doing the same thing over and over
again and expecting different results.”
Albert Einstein
Having revealed the reasons and mechanisms of the crisis, it is possible to
achieve a speedy correction of the crisis situation, activation of the national
economy of any country, and at the level of organizations – the improvement of
work of enterprises.
16
3. Answer to Mr. Wolfson’s question: “If member states leave the
Economic and Monetary Union, what is the best way for the economic
process to be managed to provide the soundest foundation for the
future growth and prosperity of the current membership?” and
proposed ways out of the debt crisis for the Eurozone states.
“If we take into consideration all the mistakes and defects,
so after the crisis Europe will emerge much stronger than it used to be”.
Angela Merkel, the Chancellor of Germany, 15.01.20124
This question arises naturally. We propose the following answer to it:
The European Union should provide to the EU member states such
solutions, which would be more ECONOMICALLY, SOCIALLY and
POLITICALLY advantageous to follow than any other independent
solutions of these states.
In our opinion such solutions, execution of which will be economically,
socially and politically more advantageous than any other solution both for each
of states of the Eurozone and for the whole European Union should consider the
following:
Approaches to transition.
Nowadays Euro is a convenient and habitual currency for more than 320
million of Europeans.
Euro was introduced to world financial markets as an accounting currency
in 1999, and on 1 January 2002 banknotes and coins were introduced into cash
circulation.
Before transition to Euro during the period from 1979 till 1998, a common
European currency successfully operated in the European economy (European
currency unit – ECU), which was used only in cashless payments. ECU was:
valid measure standard;
accounting unit for the whole European monetary union (hereinafter
referred to as – EMU) as well as for economic and financial activity and
accounting in the Community;
reserve cost asset;
it was used for provision of currency reserves and was the object of
interest payment;
instrument of payment in operations among central banks of EMU
member states.
Meanwhile the states had the possibility to issue ECU in the form of coins,
bonds and loans for private sector.
A consideration of evidence from relevant historical examples
17
(e.g. the end of various currency pegs and previous monetary unions).
It was rational to such extent that member states, which had established the
EMU, decided even to reject their national credit and monetary systems and
replace national currencies with common currency of the European Union.
On 1 January 1999 the member states of the European Economic and the
Monetary Union introduced a common currency – Euro, initially for cashless
payments. Since that moment exchange rates of national currencies of member
states were strictly fixed against Euro, and Euro became independent, competent
monetary money. At that stage Euro and national currencies operated
simultaneously and with equal rights.
Since 01.01.2002 banknotes and coins of Euro have been introduced into
circulation, which gradually replaced banknotes and coins in national monetary
units. The period of simultaneous circulation of these currencies continued till
the end of February.
Everything was just perfect till 01.03.2002, when cash and cashless Euro
completely replaced national currencies of twelve countries of the EU. Since that
moment problems started to accumulate in the system of the EU.
Two countries – Great Britain and Denmark – did not enter the “zone of
Euro” as its first members. And they have not entered to this day. It is no
coincidence that nowadays they have significantly less problems in their state
finances than the majority of the Eurozone countries.
But does it really mean that the European Union or any of the Eurozone
countries now has to reject Euro in order to correct the previous mistake? We
believe that this is not necessarily.
Euro introduced so many positive moments into the European social
relations that it would be an even more irrational mistake for any of the
Eurozone states to reject all those good things, which are associated with the
circulation of Euro on its territory – which turned out to be convenient and
became habitual for its population.
We believe that the way out of the crisis for the Eurozone, in its
essence, should simply be a return to the state of the European Union,
which was recently the most rational for all of its members.
I.e. for the Eurozone countries it is reasonable to return to that state of
social relations which during the period from 01.01.1999 till 01.01.2002 was
convenient for everyone. In other words, it is reasonable for the European Union
to transform Euro from the status of unified to the status of common currency
of the European Union. And to provide the Eurozone countries with the right, if
they wish, to restore their monetary systems for simultaneous circulation of
national currencies on their territories.
In order to introduce Euro into circulation on the territory of the countries,
all member states of the monetary union had to meet strict requirements, fixed in
Maastricht Treaty. Certain requirements should be presented also to the
18
countries which desire to use the right for restoration of their monetary systems,
remaining at the same time member states of the Eurozone and the European
Union.
Euro replaced ECU in ration 1:1 and this replacement turned out to be
absolutely smooth for accounting and analytical operations in the economy. This
rational experience should be also considered in solutions of the European Union
for overcoming the problem of debt crisis in the Eurozone.
The essence of our suggestion is, without destroying the institute of Euro,
to organize a simultaneous circulation of Euro with national currencies of the
Eurozone countries with certain innovations.
We believe that each member state of the European Union should be
granted the right to restore its national monetary system, remaining at the same
time a full member of the European economic and monetary union, when the
following 4 simple conditions are satisfied:
1) the currency of the European Union is identified as a common currency
of the European Union with the right of free circulation on the territory
of the given member of the EU and the Eurozone as the second equal
right currency;
2) a national currency is initially introduced only into cashless payments,
but on the expiry of a certain period, which is determined by the
European Union, it may be introduced also into cash payments;
3) the initial exchange rate of the national currency on the date of its
introduction into circulation is legally determined to be 1:1 to the
exchange rate of Euro;
4) national currency is freely convertible into Euro (and vice versa) by the
National bank of this country.
The optimum monetary reconfiguration.
Such monetary restructuring will be the most optimal. As during this
process, while remaining the member of the Eurozone, each country will again
receive at its disposal a very important instrument of state control and
development of national economy – its credit and monetary system.
Terms and approaches to restoration of a national monetary system in
states may be different. It will not disturb anyone. If some countries don’t want
to use their national currency they may use just Euro.
But at the same time each member state of the European Union and the
whole European Union should understand and correct in their credit and
monetary systems the system error which still every day, every hour and every
minute accumulates the reason for an aggravating debt crisis. Notably: they
should not allow imbalance (non-provision in resource-and-energy matter with
account for the time factor) of assets and liabilities in the National banks money issuers, and correspondingly – in financed by them economy.
19
For this reason the ECB and National banks of member states of the
European Union should transition from the credit-monetary to the investmentmonetary financing of the economy by means of the common European (for
ECB) and the national money (for National banks).
Let us explain this with the help of a schematic representation of the
balance of monetary system using the data from the earlier presented in this
work Table 1.
Table 2. Schematic diagram of dynamic balance of the monetary system of
conventional National bank taking into account suggested innovations:
Assets (for example)
1. Loans to commercial banks
for 1 year at refinancing rate
2. Loans to governments at refinancing
rate for financing of budget deficit for
2-3 years
Liabilities (for example)
5000 Credit emission
5000
400 Credit emission
400
3. Preferential loans to certain
enterprises and preferential population
groups (through authorized banks, for
example for 3-5 years)
300
300
4. Preferential loans to certain
population groups (for example for 10,
20, 30 and 40 years at the rate of 1%)
200 Credit emission
200
100 Emission by purchasing of
currency
100
5. Foreign currency in reserves of the
National bank
6. Gold and other valuable assets in
reserves of the National bank
7. Highly liquid and insured shares
of highly effective and promising
commercial business projects
TOTAL-balance
Credit emission
50 Emission by purchasing of assets
50
500 Investment emissions of
monetary funds into effective
business projects in the sphere
of energy sector, high
technologies and other
production sectors.
500
6550
TOTAL-balance
6550
We will explain this scheme and later will answer all questions of the
contest for Wolfson prize.
The fundamental essence of innovations lies in paragraph 7. Instead of the
emission of money by means of loans, in this case the emission should be
arranged by means of purchasing of highly liquid (in necessary cases also
insured) shares of highly effective and promising commercial business projects.
20
Meanwhile EACH INVESTMENT-EMISSION MONETARY UNIT will
be introduced into circulation as 100% provided with highly liquid assets. And
with such assets (we will repeat: highly liquid and insured shares of highly
effective and promising commercial business projects) which will increase in
value relative to money and will bring to the issuer bigger income than in the
process of loan issuance. It will increase the assets of money issuers. As a result
of this, the volume of stable, not subjected to inflation monetary mass will
increase (as in Japan). It will have positive potential influence upon international
banking system. Capitals of commercial banks will start increasing as well. As a
result of this the rates of credits in commercial banks will also start decreasing.
4. Answers to other questions according to the terms of Wolfson
Economics Prize:
Implications for international contracts denominated in Euro.
Implications for sovereign debt, private savings, and domestic mortgages.
1. It would be possible to arrange calculations on earlier concluded
international contracts in Euros, including state debts, in common currency of
the EU, i.e. in Euros, unless otherwise specified in free agreement of parties of
these contracts.
2. Investment emissions of the ECB and National banks of the Eurozone
into highly liquid and insured shares of highly effective and promising
commercial business projects will allow to create additional and new working
places, will decrease the cost price of goods of the financed productions (in
comparison with credit financing), will increase their competitiveness at external
EU markets, will increase incomes of business owner and workers. Internal
mortgages will receive additional sources and other positive preconditions for
their return to banks.
3.It would be a free choice of enterprises and business owners whether to
sell their shares to the ECB or the National bank of the state (via the system of
authorized banks), or to get credits in commercial banks.
But if we apply our program mathematical model 2 “Optimization of
variants of credit and investment business plan” (Attachment 2 to the present
work), it will become apparent that the credit way of development in any serious
variant of business plan will be knowingly not competitive. As for investment
scheme of financing they will not have to return credits to banks and pay
interests. That is the fundamental difference! This measure will significantly
decrease cost price of their products and correspondingly will increase their
competitiveness in relation to price factors. Credit schemes of development will
fall to share of small enterprises.
Commercial banks will be able to receive in the ECB and in National
banks not credits at refinancing rate, but emissive investments for development
of their investment capital – by means of selling their shares to the ECB or
21
National bank. And also – not to credit but invest into the most significant
production projects.
4. Under investment schemes of financing business projects will sharply
increase their stability, competitiveness and profitability (in comparison with
credit schemes of financing, see model 2). Meanwhile not only taxes, but also
significant profit will go to states as investors of business projects.
5. Profit from investment emissions will become an importance source for
reinforcement of budgets. It will give the possibility for the European Union and
its member states to improve and reduce taxes without losses for the budget
which will also positively influence the economy of the countries and of the EU.
• The effects on the stability of the banking system.
• The effects on the stability of the banking system.
6. By offering to the market highly liquid shares for that or other currency
(depending on demand and reasonability) amount of goods at the market will
increase, and simultaneously, by selling shares, certain sums of corresponding
currency units will be withdrawn from circulation. Thereby, in case of demand,
the exchange rate of this currency unit will be increased (controlled and within
reasonable limits).
Development of share market is a perfect solution for member states and
the EU to increase commodity mass at the market, as well as to withdraw notprovided money from circulation by selling (privatization) of state assets. And
not only shares of enterprises, but also a certain right to land, water bodies,
forests and so on may become commodities with civilized responsibility of
buyers for their further condition and with reasonable assessed tax.
By means of sale of highly liquid shares to the ECB, each National bank
will be always able in case of demand to withdraw certain sums of their money
from foreign exchange market and by means of this to consolidate it by means of
control and reasonability – to increase market exchange rate of its currency
depending on demand. But not with the help of a mechanical sale of its shares,
but with the development of IPO for each object (i.e. special projects for share
placement at the market of the country and abroad), and also with interest in
legality of consumer’s sources of income.
• The link between exit from EMU and sovereign debt restructuring.
Payments of national debt also may be paid off with the help of shares or
national currencies in case of agreement of creditors.
7. The more actively INVESTMENT EMISSIONS in economically
grounded and insured business project are arranged, and the fewer new
CREDIT EMISSIONS, the faster financial system in states and in the European
Union will be stabilized.
• The effects on the stability of the banking system.
22
Transition from credit-issuing to investment-issuing financing of economy,
when each currency unit will come into circulation with 100% provision with
reliable liquid assets, will create conditions for stability in the European banking
system. Exchange devaluations are excluded in this system, Euro and national
currencies of the EU countries will be shortly able to free from such illness of
currencies as inflation. It guarantees reliable protection of savings of population.
• The institutional implications.
The optimality of the offered here reorganization of the European
monetary system should be specially emphasized from the point of view of its
technical maintenance.
Nowadays Euro is controlled and administrated by the European Central
Bank (ECB) and by the European System of Central Banks (ESCB), which
consists of central banks of the EU member states regardless of the fact whether
they accepted Euro as a national currency. They have had recent experience of
work in ECU and Euro as common currencies and experience of simultaneous
circulation of Euro with national currencies. As we believe there will be no
demand in any new banking organizations. Central banks of the EU member
states are to receive just accentuated status of banks of double subordination.
They should be in charge for the execution of rules of emission and circulation
of Euro before the ECB; they should be responsible before the heads of national
states for the execution of rules of emission, circulation, stability of exchange
rate and free converting of national currencies.
At the same time governments of states should be responsible for
preparation and state insurance of investment business projects, which are
introduced for investment at the expense of investment emissions of central
banks (via their authorized banks).
Meanwhile it would be reasonable to strengthen departments of
economists-analysts for investments in authorized banks.
We believe that this very solution is the most optimal for the fastest
solution of the problem of debt crisis in the EU. Positive tendencies will appear
just after the realization by the European Union of the stated here suggestions.
Inaccurate actions or inaction of the EU, or not agreed with the EU actions
of the national governments in conditions of aggravating world monetary and
financial crisis may lead any state to significant deficit of state budget, collapse
of prices in the country, sale of key facilities of the national economy, growth of
unemployment and conflicts with the population, including for religious and
ethical reasons.
Besides innovational reorganization of the banking system we also
recommend to the European Union and to the member states the following:
To arrange purposeful optimization of tax systems at scientific level of
solutions, with regard to criterion of minimization of cost price of products and
assistance in increase of competitiveness of manufacturers. To use taxes as
23
method of activation of production and market redistribution of resources into
the spheres with the highest economic effect, with active growth of proceeds into
the state budget.
To create by means of taxes everywhere in each country, at each
enterprise and in all sectors of economy conditions of high self-supporting
motivations of management and workers for work and development of means of
production, increase of production output. It should be more profitable,
convenient and reliable for the population to purchase shares of enterprises,
achieve profit and further development, than to purchase and accumulate cash in
households.
To improve systems of pension security of workers in such a way, that
state pension of the worker must be mostly “earned” by individual capital of the
worker, which is accumulated in the system of stare insurance.
The concept of complex associated solutions which solve these questions, has
been worked out in details by the authors, it was approved in economical
experiments and may be prepared for interested states according to their initial data.
We express confidence that all these measures in complex with other
agreed means of the European Union and national governments of the EU
member states will allow Europe to stabilize Euro in short time and make its
common currency the main worldwide reserve currency. The situation for this in
the whole world is favorable!
It will make Europe socially consolidated leader of technological and
intellectual growth, an example, ideologist, investor and sponsor, who is able to
consolidate other countries of the world for solution of burning worldwide
problems.
We believe that there are unique conditions for this in the European Union.
The world is on the eve of a new crisis-free epoch of Homosapiens.
As a scientific basis for this final statement and for all our work provided for Wolfson
Economics Prize, we also present an original scientific work of the leading author –
“The theory of social and economic formations: fundamentals and new view” which in
order to present our proposals concisely is given in Attachment 4 to this paper.
P.S. We are ready to present our development, which has fundamental scientific
novelty, in the form of complex reports of authors with presentation of slides and
visual demonstration of computer economical models.
We need 2 hours for the report.
24
5. Source list
In this work the result of long-term scientific research and experience of
practical work of the authors in different spheres of economics, business,
analysis, prognostication, and state management was used.
Certain ideas were published earlier:
1) in Internet:
http://dovgel.com/, Evgeniy Dovgel. About new paradigms.
http://vikte.ru/, Viktar TSIARESHCHANKA, Problems of the country,
their reasons and solutions. Program of the presidential candidate at the
elections in 2010 in Republic of Belarus.
2) in the article “Crisis management? It is possible!” in Russian in newspaper
“Narodnaya Volya” of 29.07.2011, published in the Republic of Belarus.
Attachments:
1. Program mathematical model 1. Model of credit and monetary processes in
economy, file in Excel: model-1.xls
2. Program mathematical model 2. Optimization of variants of credit and
investment business plan, file in Excel: model-2.xls
Diagrams:
Fig. 1.1. Dynamics national monetary mass of the country where the authors
of the present paper live (as an example), files – r-1.jpg (pdf),
Fig. 1.2. The same national monetary mass (see Fig. 1.1.) per capita in US
Dollars at the official exchange rate, files – r-2.jpg (pdf),
Fig. 1.3. The same national monetary mass (see Fig. 1.1.) per capita in US
Dollars taking into account inflation of Dollar (in Dollars of 1990),
files – r-3 (pdf).jpg,
Fig. 2. Amount of grams of gold in 100 US Dollars at New-York Stock
Exchange, files – r-4.jpg (pdf).
4. Theory of social and economic formations (basics, new view)
References
1
N.Bokareva. Euro zone got off the ground, 13.01.2012,
http://www.bfm.ru/articles/2012/01/13/evrozona-sdvinulas-s-mertvoj-tochki.html
2
Davos lost immunity, 28.01.2012,
http://www.gazeta.ru/financial/2012/01/28/3977417.shtml
3
National dent of the USA reaches its limit. 13.01.2012,
http://vz.ru/news/2012/1/13/553133.html
4
Merkel: Economical power of Germany is not infinite.
http://mignews.com/news/economics/world/250112_172934_21004.html
25