The central banks of the leading Western nations are flooding the global economy with money. This is most evident in the fact that after 2007-2009 financial crisis, the US Federal Reserve, the Bank of England, the European Central Bank (ECB), and other central banks began pursuing policies known as quantitative easing (QE). They began buying up debt securities (including many of low quality), pumping additional hundreds of billions of dollars, euros, pounds sterling and other currencies into circulation each year.
The central banks simultaneously adopted a policy of continuously reducing interest rates on active and passive transactions. As a result, interest rates on deposits at the central banks of Sweden, Denmark, Switzerland, Japan, and also the European Central Bank have plunged into negative territory. Money has become not only plentiful, but almost free.
The paradox is that this monetary expansion by the West’s leading central banks has not led to the expansion of the real economy, but has instead begun to run it into the ground. There are several reasons for this. First of all, an increasing proportion of what is being churned out by the money printing presses is making its way into the financial markets and being used for speculation, because the real sector cannot offer such quick, impressive profits. Second, the notes produced by the printing presses bear less and less resemblance to traditional money. No longer can money be used to measure either the value or price of goods and services. The price of oil is a conspicuous example of this. The fact is that oil prices are now being measured with a tool that we only call money out of habit. It is actually a tool for speculation, manipulation, and the redistribution of wealth in favor of the owners of money – the ones who control the printing presses. It is safe to say that we are now witnessing the death of money.
The producers in the real sector of the economy are being made painfully aware of all of this. Companies involved in manufacturing, agriculture, construction, and transportation are unable to make long-term investments, enter into long-term contracts, or commit themselves to promising research and development work. They cannot even engage in normal commerce. Working capital is in short supply (all the money is tied up in the speculators’ financial games), and even when it is available, it now entails risks associated with sharp fluctuations in exchange rates, the inflationary depreciation of money, and the ups and downs of commodity prices. Modern commodity producers are in the same position our ancestors were in thousands of years ago when no universal medium of exchange like money existed.
Naturally, commodity producers are trying to adapt to this era of the death of money – devising new economic relationships. These new relationships go by various names: alternative, non-traditional, non-cash, swaps, barters...
Alternative forms of economic relations may exist on several levels:
- local (trades within a single city, region, or community);
- national (trades within a single country);
- international (trades between actors belonging to different national jurisdictions).
The development of alternative economic relationships is being met with very active resistance by the owners of the money. This is no surprise, since all alternative economic relationships undermine the monopoly held by the central banks on issuing currency and the monopoly held by private banks on issuing non-cash money (from deposit accounts). Under different pretexts, the central banks and governments of various countries are waging a fierce battle against this kind of “creativity” on the part of economic agents. Incidentally, this explains the fact that many of these alternative economic relationships can be found within the “shadow” economy.
The entire spectrum of alternative economic relationships can be divided into three main groups.
1. Transactions involving nothing but the simple exchange of products and without the use of money in any form. Barter is the classic example of such a transaction. In addition to classic forms of bartering, “multi-product” bartering is gaining popularity – a deal in which dozens, hundreds, or thousands of economic agents can play a role.
2. Transactions paid for in part through the exchange of products. These are designed to minimize the use of official money. As a rule, a broad category of international transactions (“countertrade”) usually include some use of currency. Countertrade includes a monetary payment for goods or services exchanged between two countries, but the primary goal is to try to balance the value of those exchanges. The mechanisms used to carry out the transactions can be quite varied. For example, the export revenues earned by suppliers from country A can be stockpiled in their bank accounts, and then spent to import goods from country B. In this example it might be possible to sidestep the use of hard currencies (the US dollar, euro, or British pound sterling), instead basing the transaction on the currencies of the countries involved in the countertrade.
Even if the countertrade does not incorporate commitments such as using export revenues in a bank account to pay for imports, the principle of balance is still important for the countries involved, because it allows them to control the equilibrium of the balance sheets for their trade and payments, which is important for maintaining the stability of the exchange rate of their national currency.
Some of the most widely recognized forms of countertrade are: compensation on a commercial basis; counter purchases; compensation based on industrial cooperation agreements; the repurchase of used products; transactions involving raw materials furnished by the customer (tolling), etc. The most complex of these forms is compensation based on industrial cooperation agreements. In reality this is not merely a swap of products, but a deal to exchange investments for a product. As a rule, this type of deal includes another lender who provides loan capital to the investor.
Various mechanisms for handling clearing arrangements should also be noted here, making it possible to take into account the mutual financial claims and liabilities of each party in an economic relationship. Usually a bank acts as the clearing center. In a clearing arrangement, the balance of financial claims vs. liabilities is periodically registered. The balance can be settled (repaid) in a predetermined currency (the clearing currency). It is possible to extend financing to a participant in a clearing arrangement, if that entity finds itself in the red. A negative balance can also be repaid by supplying goods. The deliberate destruction of currency clearing agreements began in the 1970s, because those were lowering the demand for the products of the US Federal Reserve. Today we are once again seeing growing interest in currency clearing agreements, as an alternative to Washington’s dictate of the dollar.
3. Barter transactions, based on alternative forms of money. One way to survive in the modern world, in which the US dollar is forcibly imposed upon all the actors in economic relationships, lies in the creation of alternative forms of money that could truly fulfill their economic functions (primarily as a measure of value and a medium of exchange). In various countries around the world, large quantities of local forms of money are now being used within individual cities and regions. Of course, this local money is not entirely replacing the official money, but in some cases the local population’s need for official money can be reduced by half or even more. This local money, whether in the form of a paper currency or a computer entry, encourages the exchange of products of labor that are manufactured within a circumscribed area. Barter money particularly stands out amidst the wide variety of alternative money.
Many experts acknowledge that given the growing global instability, the subject of alternative (non-traditional) approaches to trade and settlements is becoming increasingly pertinent.