Every human idea is a product of imagination and thinking, be it, the idea of a nation state, democracy, economy, financial markets, or a religion for that matter. As these ideas evolve, we then conceive processes and procedures to keep the idea going and growing. But all these ideas that we conceive, do come with a shelf life. So over time they do need to be reinvented and reimagined. That’s more or less, the natural evolutionary process also. We learn from trial & error, and so does nature.
One could rightly argue that the intrinsic value of money over time is zero. Before money, we had a barter system, which didn’t work well. So we had to came up with an idea that worked better. And the history that we know so far, tell us that around 600 BC King Alyattes in Lydia—now part of modern day Turkey, came up with the first coin ever minted featuring a roaring lion. From there, around 1661 AD coins evolved into notes. Then nation states started printing their own currencies. And as the clout of these nation states grew, so did the value of their money. That’s more or less, the journey of money in nutshell.
To understand the intrinsic value of money, let’s imagine that we all had a $ 1 dollar bill in 1980, now accounting for the pricing inflation in the calendar year 2020, the average price will now be around 214% higher than 1980. Therefore, the real value of that $ 1 dollar bill has decreased significantly over 40-years timeline. But if you owned an ounce of Gold in 1980 then, in 2020 you will be in-the-money.
Looking back at the journey of the modern day economy. I believe, we can all agree that, it is probably time for us to revisit and relook, the overall design and architecture of the global economic system. And to do that, what’s required is a bit of imagination. But when you are in realm of ideas, you should know that, all ideas will eventually fail, so therefore continuity through constant evolution is the only way to keep a system going. This is how the nature works. So with that in mind, I am now of the opinion that, instead of using GDP as a benchmark metrics to measure overall economic activity, let us try to use gross output (GO) – which is a metrics that measures total economic activity in the production of new goods & services in a financial year. In other words, the total sum of sales by producing enterprises (their annual turnover) in an accounting period (a year), before subtracting the value of intermediate goods used up in production.
Now if you are wondering, what does that mean ? Here is a bit of context. So according to the Bureau of Economic Analysis estimates, for the financial year 2019, the gross output in the United States was around $38 trillion ( estimated ) compared to $21.4 trillion in GDP.
So what’s the big idea here, or is there one, you may ask ? Well! The Federal reserve system could annually adjust money supply matching the gross output ( GO ) on a 1:1 basis. Therefore, the money supply annually will match the annual GO. Unused money could be rolled over.
Also as a provisioning, the central banks could be allowed to create up to 25% of the annual GO in additional money, in case of a crisis especially in a pandemic or a very severe natural disaster, or a financial crisis for that matter. This could be managed through a national crisis fund — fully supervised and managed by the central banks. Insurance companies underwriting pandemic risk and income protection insurance cover could also have access to this pool for a fee, under a reinsurance model for example.
The central banks from the around the world could pledge up to 5% of that additional money annually to the IMF, to enable IMF to support countries in times of Crisis. And IMF could issue global reserve “ SDR “ as a global trade payment settlement system. So the central banks in emerging countries won’t need to hold USD, Euros or any other currency as a reserve.
IMF could create annual allocation of its special drawing rights (SDR) to countries in proportion to their trade and external payment requirements. Paid for by the central banks using their national currency. The value of the SDR to specific national currencies could be determined by the market forces and underlying economics, to create pricing transparency. And in this case, the central banks will not determine the value of the currency they issue but the market.
To fund any global pandemic or support emerging countries during a crisis, IMF could issue Global Relief FUNDs, which will be bought by the central banks. The nomination and election of the head of the IMF will be done by the governors of the central banks of specific countries.
Also one of the key factor or factors under pinning the support and the value of the national currencies could be the average productivity ratio of individuals along with overall quality of life of average citizens in that country measured as a sum of general well-being ( both physical & mental ), the environment etc. The higher the annual productivity of individuals along with general well-being etc, the higher the value of their national currency. And this could be scientifically determined every year.
The overall inflation gauge of a specific economy could be linked to the average annual cost of living and not the price of products and services.
These ideas shouldn’t cause large scale disruption in the overall functioning of the economy as well as the financial markets. The economy as well as the markets should be able to readjust and recalibrate efficiently to the new reality. And the question for me at least, is not , whether this is the right upgrade that the economy needs going forward. That can always be discussed and debated, but I think we can all agree, it is time for us to reimagine the existing architecture and the overall design of the economy. And it is in that hope, that I have decided to write this post.