The Federal Economic Analysis Team (FEAT) has been founded on 2015.02.19 as a team of independent economic analysts reporting to the Bank of the Federated Micronations (BOFM) and the Governments of the members of the Federation. They also have the task to publish short economic analysis articles on this webpage.

Freegold and Freigeld - 2015.02.19

The current economic situation has been described by the Federal State Department reports, without an answer towards the inflation/deflation question. In our opinion, the widespread occurrence of ZIRP and NIRP, together with the discussion regarding paper money is pointing towards an interesting solution and theory. To understand this, please reference first the ideas of Silvio Gesell on Wikipedia and FOFOA in a good summary interview .

Silvio Gesell speaks of "Freigeld", money completely controlled by the state, loosing or gaining value as needed in regards to the economic situation. This Freigeld does not have the ability to function as a store of value. Negative interest rates during a recession are part of a Freigeld system, as well as paper money which does loose value over time, even without classical inflation.

The idea failed 100 years ago, but today, we have quite a different situation. Money has become digitized to a great measure, and in some countries full digitisation is on its way. We have a worldwide debt crisis, with most major countries in lockstep, and at the same time, a savings crisis, with the ageing population saving money to survive the failure of pension systems caused by the expected demographic breakdown.

This makes Freigeld both attractive and implementable to the world's governments and central banks. We think it is possible that
  • central banks expect the debt crisis cannot be resolved any more by conventional means
  • governments understand they need to regain control over the monetary flows of international companies
  • as a consequence, plans might be prepared to move to a system resembling the Freigeld concept during the next major breakdown.
A Freigeld system is not to be mixed up with an inflationary system. Inflation is controlled by the expectation of future price behaviour and the consumer reaction to this, and therefore as difficult to control as a bike with reverse steering. With Freigeld as we understand it, the loss or gain of the numeric value of money is controlled directly, and independently of inflation. An account or a bill might loose or win a certain percentage per month in nominal value.

The major indicator of any potential application of Gesell's ideas in the current crisis is the Negative Interest Rate Policy implemented by central banks on the borders of the Euro area - Switzerland, Denmark and Sweden. A de-facto NIRP exists in those countries where even long running bonds have negative interest, like in Germany. It is expected that this phenomenon will extend to other countries.

This is of course no fully implemented Freigeld system. As is well understood, money today is created to an overwhelmingly large part by commercial banks through credit. A system switch will be possible when the mechanisms are in place to take full control of those by the central banks when a worldwide systemic event occurs.

We understand the Bank for International Settlement (BIS) to be thought leader of the central banks of the world. The BIS has shown to have a good understanding of the current debt situation, and may lead the introduction of new concepts which will give the central banks additional powers.

Which steps would have to be implemented to introduce a Freigeld system either regionally or worldwide? We believe they are the following:
  • Money creation moved from the commercial banks to the central banks
  • Commercial banks taken under temporary state control and relaunched under the new system
  • Nominal reduction of all savings accounts at a defined rate per annum
  • Paper money given a limited validity (e.g. 1 year), with a non 1:1 exchange rate for the exchange of old bills.
  • Possibly, introduction of regional bills with a defined exchange rate towards a benchmark unit.
  • Full worldwide visibility of all non-cash transactions and ownerships, with clear identification of natural persons as owners
  • Nominal reduction of the value of government bonds at the same rate as the savings accounts
We believe these measures could be implemented within a regional community, like the EU, but the efficiency of these measures would be higher if implemented on a worldwide basis.

Of course, people have to save, eg for their pension or for larger purchases. Freigeld is designed to discourage saving, therefore another outlet would be required. Real Estate would be the obvious candidate, but a Real Estate bubble and high rents / purchasing costs would destroy any economic system. Gesell suggests to socialize all land, and to use the rents paid by the former owners for its continued usage to finance state tasks like family support. We believe there are other ways to solve this issue, e.g. high land sale and and ownership taxes. Progressive income taxes both for large companies and large land owners would help to avoid further wealth concentration.

What is needed as store-of-value is an easily tradeable but not vital object. While art or collectibles might play a limited role, we believe physical Gold to be able to take on that role, better than anything else due to its historic tradition. That is what FOFOA expects will happen.

There are two possibilities for this scenario to happen. One is a top-down approach, initiated by the central banks and governments. This can only happen during a great crisis exceeding the 2008 crisis. The other one is a bottom-up approach, where certain measures are taken by local governments and central banks, like negative interest rates, limitation of cash transactions or introduction of transparent ownership registers, which in their sum lead to a system change. The tipping point may be the "Freegold" transition, where the current paper gold trading system breaks down due to inavailability of a sufficiently high amount of physical gold to cover a withdrawal from the system.

We advise the Governments of the FM Member States to prepare for such a transition. This is a low-cost insurance policy both against inflation and against a NIRP/Freigeld/Freegold transition. On the other hand, it is advisable to carefully move away from the current Gold coverage of the Common Wallaroo, and to look for an electronic money solution related to Bitcoin, but without the rigid and decreasing money creation scheme of that currency.