Evolve or Perish — The Need for Paradigm Change - FFC Media
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Evolve or Perish — The Need for Paradigm Change

We concern ourselves with various economic and political crises in the world today, but we hardly stop to consider that they are artificially created. The cause of these crises has to do with egregious contradictions between our financial systems and production industries. These contradictions can be eliminated through the use of blockchain technologies to model our social, economic, and political processes. Blockchain‐evangelist Dmitry Kosten provides an analysis of the situation in world finance and Russia.

J. M. Keynes is dead. Keynesianism must come to its inevitable demise.

We are convinced that the Keynesian model of stimulating the economy by issuing money is a disastrous, unprofitable, and a strategically debilitating option for Russia. The application of the Western model of economic growth cannot bring about the results that the Russian leadership expects and civil society craves.

In 1966, Alan Greenspan wrote about welfare state advocates’ opposition to a gold standard “in any form” after the Great Depression. “If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world”. This prompted their realization that “the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes.”

If you get rid of Mr. Greenspan’s “academic jargon,” it becomes obvious that an economy in which finances exist separately from production is structurally programmed to default. The Federal Reserve issues unsecured money that is required for the work of the manufacturing sector of the economy ex nihilo, out of nothing. Manufacturers are forced to obey the rules of the game, and these rules are based on the concept of the time value of money.

In such a system, a default occurs with 100% probability. Moreover, the default model of the Keynesian economy does not depend on the efficiency of the economy.

Let’s take a simple example. At the beginning of the conditional “reporting year,” the production sector requests and receives a loan of $1 billion from the conditional Federal Reserve at interest. Money is used to offset production activities, and at the end of the year, a production economy full of goods, is ready to pay its debt with interest.

However, regardless of its production efficiency, in monetary terms, the economy has in stock only what it received at the beginning of the year — $ 1 billion. Where does it get the money to pay off the loan interest? The Federal Reserve does not accept goods.

Production does not issue notes (or expand and contract currency volume), so the “shortfall” is transferred to the next year, and this is repeated until the “interest on interest” turns the entire economy into a 100% debt obligation. It takes a few decades. Internal and external factors may delay or speed up the date of default, but they do not affect the inevitability of the process and its outcome.

When John Keynes was asked: «What will happen to your model of the economy in the long run?” he replied with the famous phrase: «In the long run, we will all be dead.”

According to the Keynes model, the growth rate of debt obligations constantly exceeds the rate of economic growth, and the growth of the amount of money in the system is a multiple of the growth of the quantity of goods. For example, now the volume of global debt obligations in relation to global GDP is about 300%. That is, money is released three times (!) more than goods. However, that’s just the tip of the iceberg because the size of the market for financial derivatives exceeds the size of world GDP 15 – 20 times.

The world’s financial systems retain their power thanks to politicians and military conflicts.

The global financial system is deeply separated from the production system, and the economic model is built so that the gap will only increase. It is obvious that the world economic system is gradually losing touch with reality. The separation of the financial system from the realities of production explains the artificial swelling of military and economic cataclysms.

The beneficiaries of today’s economic system are trying to keep the link between the economy and production through military and political forces. However, the laws of mathematics have not been obliterated — the connection will still break. And today, these beneficiaries pose a threat to the whole world, as many of them possess weapons of mass destruction.

The model proposed by Keynes is disappearing before our very eyes and will inevitably cease to exist one way or another. The way out of this situation is to use “honest money” emitted by economic entities for settlements among themselves. The idea of​“honest money” seemed like something out of the ordinary until the invention of cryptocurrency.

A new financial system should be based on blockchain technologies.

The radical innovation of blockchain technologies is that with the help of cryptocurrency, any economic entity can control the value of its product.

Cryptocurrency is a unique substrate that combines contract and money into a singular whole. The novelty of this design is not to be taken for granted and the the “magazine format” makes it cogent and accessible, avoiding confusion with regard to the technical details. The reader can independently find our publications on other platforms, where questions about cryptocurrency and the problems that it solves are analyzed in more detail.

The thesis, for which a more detailed account is provided, can be summed up thus: with the advent of blockchain technology, the function of the Central Bank must change. It should not issue currency, but manage aggregate risk.

Blockchain: Victory is Ours

At the beginning of the article we stated that the Keynesian model of stimulating the economy is destructive, unprofitable, and is not a strategically viable option for Russia. Here are some reasons why.

Development based only on stimulation through the issuing of currency is detrimental because it destroys the moral fabric of society and embezzles from its members’ history. A purely monetary approach utilizes humanitarian values, deconstructs the tradition and is inherently destructive. The approach lacks any creative principle apart from generating profit for the beneficiaries of the system.

The imposed economic model is not a profitable one for Russia because Russia does not have the mechanisms for exporting the effects of currency generation to other countries. In the west, the development of the economy through note issue occurs in such a way that the main effect of inflation falls on foreign holders of financial capital, and the effect of economic growth is maintained within the country. Russia has no such opportunity. In the Russian version, economic development through note issue is manifested in the “inflation taxation” of its own economy.

One reason the Keynesian model is not a strategically viable option for Russia is simply because it requires military expansion in order to push its currency volume on other countries.  Russia, however, does not need to expand. It would sooner benefit from increased capital investment and development within its own territories, which lag behind the those of more developed countries.

Today in Russia, various economic policies are financed, but many of their goals go unfulfilled. The money does not go where intended. Cryptocurrency can serve as a major financial asset that would finance many government programs. Blockchain technologies put at the disposal of the state instruments of targeted financing that cannot be stolen, misappropriated, or misused by any criminal means. However, yes, this will require a technological overhaul and rehabilitation of government structures.

In the USSR, calculations were carried out exclusively in non‐cash order. In the 80s, when they allowed the opening of cooperatives and made it possible to cash out, this became the fatal wound that would finally crush the economy of the Soviet Union. Constructing a financial asset that combines contract and value into a coherent whole creates opportunities for unprecedented efficiency in managing cash flows.  

The Russian classical school of economics postulates a much more complete and diverse view of the economy and man, especially when compared to the Keynesian theory of economic growth prevailing in the west.

It is obvious to us that the use of Western monetary controls puts Russia in a debilitating position. Russia needs its own, strategically asymmetric approach. Only then can Russia reach the fullness of its economic potential. Copying old Western methods that are in the process of dying out puts Russia in a position to lose, and the imposition of such approaches can be compared to acts of subversion.

The author of the text is Dmitry Kosten. Vice‐President of RAKIB, head of the blockchain‐development working group in the field of insurance of the expert council of the IPI Laboratory.

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