Re-Engineering the Economic Processes
This paper has been included in the publication
“Ideas towards a new international financial architecture?”
Perhaps the least-coherent aspect of Keynes’s ‘habitual modes of thought and expression’ in macro-economics is the all-pervasive and ill-considered use of the expression ‘money’. This paper starts from first macro-economic principles, and uses process re-engineering techniques in an attempt to define a more coherent paradigm for the concepts currently ‘enclosed’ by that expression. This paper argues that there are two radically-distinct concepts currently ‘enclosed’ by the single expression ‘money’ – wealth and currency- , and that, if we wish to facilitate integrity of thought and expression, we must reserve two radically-distinct expressions for those two radically-distinct concepts, and we must consider those two radically-distinct concepts in isolation before considering policy options (potentially to try to link them). Finally, this paper argues that the central banking system already in effect acts as implicit guarantor for every Non-Equity Owed-Wealth liability of every financial institution and state (‘money’ and non-‘money’ without distinction), and that that role should be made explicit. The central banking system (including the global and state banks and regulators from the IMF downwards) should act as borrower/lender of first/default recourse for banks and states (i.e. rather than borrower/lender of last recourse as currently). This would eliminate (the need for) lower-level inter-bank Owed-Wealth, and would eliminate bank liquidity as a macro-economic factor. In order to moderate the risk implicit in such a facility (i.e. the risk currently already carried by the central banking system), the central banking system should itself commission all valuation and auditing standards and processes conservatively on behalf of creditors (rather than allowing politicians, bankers, corporate executives, and financial professionals free reign in their own self-serving interests). Again, in doing so, they should follow the precautionary principle in regulating financial innovation. Indeed, the vast majority of financial innovation (including the securitisation of Owed-Wealth such as with GB Gilts, US Treasuries, and other state, commercial and mortgage-backed securities) should be outlawed in favour of simple inflation-linked current-accounting.
Tim Knight, Principle Consultant of T J Knight and Associates Limited (Consulting Process Engineers).