What if the world ran on new classes of digital currency that are inflation resistant, create price stability, discourage bubbles and deflationary spirals? What if they could protect citizen’s savings without reducing liquidity when they save rather than spend?
This blog series examines issues and possibilities in the changing banking and monetary systems. Rapid change could occur in the near future due to the ongoing digital transformation. What are the possible outcomes? Which future will happen? How are you prepared?
Futures-backed currency, introduced in a previous article, is a type of currency that eliminates the artificial components of inflation.
The natural and useful components of inflation are the price increases that occur due to increasing scarcity of non-renewable resources or a rapid increase in demand due to fashion. This is a useful message to the market that motivates consumers to look for alternative less-expensive products. At the same time the increase in price attracts other manufactures to research and invent substitute products to compete with the higher cost products. This kind of inflation is healthy and moves a market towards a sustainable equilibrium.
The unhealthy kind of inflation is when monetary policy and fractional banking increase the amount of money available and the price of all products increases. This muddies and confuses the clear signals of price increases due to rarity. Bad inflation is due to the unnatural increasing availability of money.
The slowly changing value of money makes some products more difficult to price. Unemployment and pension payments are politically difficult to increase. Wages and salaries increase but do these keep up with inflation? Is it becoming harder and harder to pay bills as the price of food and utilities increases faster than a paycheck? Pricing in a product catalog or menu can be costly and difficult to update without confusing or aggravating customers. Long term contracts and loans are even more difficult to price as the value of money changes over the length of the contract. Add to this the savings of retired people who are on a fixed income. Without an interest rate or investment return rate that can keep up with inflation these savings will diminish in purchasing power. This type of inflation does not help the market reach equilibrium it just creates an imbalance between industries that can change their prices quickly and those industries that are slower or have a harder time increasing prices.
The financial literacy of most people is enough to create basic budgets. Educating them to deal with inflation in a timely and accurate way would not be feasible. Being able to negotiate long term contracts and prices in a currency that can maintain a stable value would even the playing field for many businesses and consumers. This is what futures-backed currencies can do. With futures-backed currency, punitive forms of inflation are eliminated and economic growth becomes a natural industry-specific attribute, while changes to the size of the money supply become an automatic stabilizer.
Stay tuned for examples of how this theory could create natural interest rates.
This blog series will be a forum to discuss different concepts and areas where these theories can be applied. Subscribe to stay informed.
Read more about the future of money:
The SAP Canada Ideation Centre’s mission is to help Canadian leaders of business, academia, government and non-government organizations develop a deeper understanding of the digital forces driving the economy today. Ideation Centre members strive to bring forward made-in-Canada fact-based arguments that challenge decision makers to think about the potential of organizational shifts that were not possible in the past. The Ideation Centre is fueled by thought leaders from the Industry Value Engineering team at SAP Canada. This diverse team of industry and value advisors helps organizations of all sizes and industries take advantage of technological innovations to create incremental economic value by adopting new business models and optimizing business processes, from the back office to the boardroom, farm to storefront, mine to operating room, etc.
Over his decades-long career in the high tech industry, James Zdralek has concentrated on usability, user research and design thinking while building a reputation as a visionary innovator. Merging his expertise in product design, human behavior, and economics, and through his focus on improving accounting tools, James envisions ideas that can drive tectonic shifts in financial and monetary systems. He holds a bachelor’s degree in Industrial Design, a masters in Psychology, and a diploma in Professional Accounting.