A Great Reset to save democracy: rebooting the financial system

by Dec 21, 2020Thinking outside the bottle0 comments

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Paulo Pinto

Alti Wine Exchange founding member

Dear reader,

For the past few weeks, we have been debating the idea of Great Reset put forward by the World Economic Forum. It is evident that big structural changes are needed, but we have a different view on how.

For a while, I have been writing here about the proposed idea of a Central Bank of Social Security. That was the name I gave for our own Great Reset in internal conversations.

Moving on to practical terms, our idea of a Great Reset through a reboot of the financial system has to do with the very history of Alti Wine Exchange.

In 2018, a group of friends with a long history in finance, in shock with negative interest rates, started to work on a project with real assets. At the time we were just a group of people puzzled with the financial concept of negative interest rates, looking for something to mitigate the risk in the financial markets, and so decided to create an alternative exchange to offer fine and rare wines as a real asset for investment.

Everyone involved believed at some point this would end badly because of how easy central banks were — and are — creating money, even if no one then could imagine something in the shape of the covid-19 pandemic coming.

We started to learn as much as we could about fine and rare wine. We dedicated our time to meetings with attorneys, countless meetings with wine experts, who talk about wine as if it is impressionist paintings.  We met wine producers who treat their business as though it is an art, others as though the winemaking process is a science, and with others who are just passionate about their wine. From this culmination of in-depth research, the Alti Wine Exchange was launched.

Our observations of the wider scenario have been leading us to rethink not only what we do as investors, but how we should look forward as a society. And that is where the Great Reset comes in.

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A matter of debt. Big debt.

To the “man in the street”, the rationale of central banking and monetary systems is a remote subject, and he is ignorant of the fact that his salary or income along with his savings depend on the loans of the banking system and the guarantee of the Central Bank. Because of that, he is totally alien to the fact that money only exists because there is debt, and if there was no debt there would not be money.

Politicians know that politics depends on money, so no wonder that Modern Monetary Theory (MMT) and promising “free everything” is being very useful to the political system in times of Covid. But it looks like the latest stage of our monetary era, because in practical terms it is not much different from the policies that brought misery to countries like Venezuela or Zimbabwe.

With central banks centrally planning the money supply and interest rates, we see the rise of an environment that concentrates power and benefits at the politically connected while impoverishing everyone else.

If we want greater freedom and self-determination and higher living standards, we need a new monetary system. The crucial question is therefore how we shape this new system for the benefit of all our fellow human beings – and not just a few of those, knowing now that the scarcity of money is not and should not be the paramount problem.

We agree that MMT (The New Monetary theory) is creative, and maybe a good proof of concept, but it would pave the way for unlimited government with almost unlimited money, and this would corrupt our democracy. There is a need for a great reset, but not based on current rules or assumptions.

Obviously, a new money system is not in the interest of the current status quo and will not be met without resistance.

What do we propose?

What we propose is a fundamental change, because we would have to change completely the financial system that makes up the structure of our society. Let’s ask the questions that everybody has.

  1. Do we want to eliminate excess level of inequality?

  2. Do we want to offer same level of opportunity?

  3. Do we want to give basic income guarantee?

  4. Do we want a fairer tax system?

  5. Do we want to eliminate the Social Security problem?

The above is not exhaustive, but it’s a good start, and certainly reflects the concerns of many people (excluding covid-19, that has been put on top of the list and is a distraction from the other problems).

Abolishing the present system is the best solution to its problems, and our thesis – I remind you – is the creation of a Central Bank of Social Security (CBSS) to replace national central banks. Thus, a great reset of the financial system to save democracy.

So why is the CBSS better?

We said on our last post: it guarantees the money for Social Security and the minimum guaranteed income for people, instead of guaranteeing the banking system and those with money. With the performance of these two functions, the dignity of human beings is guaranteed, and so is the social contract.

This is a system that offers protection of life and freedom of choice, but also responsibility to take care of everything else by yourself.

The goal of such Central Bank is to replace as much as possible debt by equity in order to put the necessary inflows of liquidity in the market and the system.

The CBSS would have two main responsibilities. The first one, to guarantee a minimum basic income. The second, to manage Pension and Social Security. It could guarantee the futures responsibilities of pensions and social security because money created would be only for that purpose.

A Central Bank of Social Security could issue debt and capital and use the proceeds to invest in equities investments with a value that rises and falls with the market, which would be hold in individual Social Security Investment accounts.

The Bank of England, the European Central Bank and the US Federal Reserve already own assets in excess of 30 percent of their countries’ GDPs – and it’s done only to the benefit of banks and governments –, so there is no reason why they could not invest those assets on behalf of their citizens.

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The question that everybody is probably asking in this case is: what about inflation?

We have enough data to calculate the amount of money which must be in circulation to make possible a given national income.

We believe the new paradigm proposed can better maintain price stability by managing the money supply, not with the intention of creating new debt, but with the intention to create new capital to the benefit of social security and pension funds with the minimum guaranteed income.

For this stability and normalcy to play out, a few important changes need to happen in the financial system and redefine money:

  • Commercial banks will need to work on 100% reserves.

This means they will take from savers and lend to borrowers. This is necessary to eliminate boom bust cycles, because banks will not be able to create new money.

  • New money needed is brought by monthly universal income money flows.

The issue of basic income is a trend that we are seeing around the world, as we are seeing existing benefits systems that are taking the shape of basic income. The issue of this trend is money that can only come from more debt and more taxes. Governments, although sympathetic with the advantages, face budget issues in view of already huge government debts.

Our proposal eliminates the issue of money, and because of that, solves many immediate problems.

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What is meant to be solved with this?

We are not trying to solve any particular crisis: we are just addressing the result of observations.

Yuval Noah Harari speaks about a massive unworking class, devoid of any economic, or political value, who contribute nothing to society, defined as “useless class”. This is a huge problem for social cohesion that will need to be addressed with basic income. But we see other problems like moral hazard, economic growth, crony capitalism and social security.

Social security was poorly designed because it did not adequately anticipate future rates of inflation or life expectancy. Only the CBSS can solve the unpredictability of both factors: because life expectancy will not matter, and the rate of inflation will not be a problem.

Transitioning to the new CBSS would require moving all assets from current central bank and social security funds into it. It would impose also a different tax system, because a great percentage of our taxes is now related to pensions and social security – therefore simplifying a system that is now way too complicated.

Now imagine this system in which the CBSS works independently from government and offers you protection of life and freedom of choice. The service for protection of life includes, minimum guaranteed income, social security with medical (protection against illness) care and pension.

The freedom of choice is because you take care of everything else by yourself. It’s your choice if you work or not: basic income will accumulate to any other income.

The government cannot change the services provided by CBSS and it is this institution that guarantees the “citizens’ contract”.

This will allow government budget not to be under strain because of social security. It will allow companies not to have to contribute to social security, only individuals contribute to their private retirement account, at a rate of 12% (tax deductible) to add to their minimum guaranteed income – and therefore they should be kept independent. The result of this should be higher returns on a self-funding account, paying retirement benefits when subscriber decides to retire (no limit of age).

Basic income can be used as savings in the pension program of anyone employed and paying for social security. Salary depends on type of work or profession. When a worker retires, his investment no longer accumulates, but commences disbursal. At death, the plan vests to Social Security.


What could the future under the CBSS look like?

The role of governments is to be an innovative facilitator of education and private enterprise who should cover everything that is in demand, not with the intention to create barriers.

No need for minimum wage regulation since basic income is guaranteed, and so unskilled work is a result of the choice of people, and not an imposition of the market.

Crime and vandalism should hardly exist, because the minimum guaranteed income should provide a dignified standard of living, and politics should be elevated to a new level: to a more professional managerial role, less people stirred.

CBSS could make equity ownership universal, which should have an effect on productivity and a profound understanding of risk. Personal Social Security accounts would transform what is now a government IOU into personal property that the worker would own in their own name.

Ownership and access to assets’ wealth should be the privilege of all those working, and even the “useless class’” should be able to have an account if they could save money from the minimum income.

With this responsibility taken away from government, it should concentrate in promoting innovation and a higher level of productivity by its citizens, while reducing the density of regulation, which is today a proven drag on growth. Governments should compete in between them on free trade and taxes.

CBSS would be effectively a national central bank with the monopoly on the creation of money, but would not stipulate interest rates — which would be stipulated by the market and by financial institutions working under 100% reserves. Even governments will have to submit to market rates not manipulated when in need of money.

To guarantee fairness in public duty, the CBSS could finance, interest-free, governments up until 60% debt to GDP. Above this ratio, they would need to borrow from privately-owned banks assuming public debt at market rates. This is the way to control political spending.

Why we can move ahead with such proposal

With this system, citizens respect each other’s different views, with much less emotion because the social contract is guaranteed, because people become responsible for themselves – and therefore more realistic in their assessments –, and certainly happier and freer, because their own interest is respected.

The government becomes a service provider, and no longer the current authority using the power of subsidies and arbitrary public policies over their subjects, benefiting the ones that voted in them. The relationship becomes a customer-provider relationship fulfilled by contract. Government becomes a business idea to the benefit of all.

***

Now it’s time to raise a glass. We remind readers this is a wine blog, so it’s normal to drink wine and to celebrate when we finish something. Our Great Reset is now finished, and we will try not to come back to it.

Those who have liked the idea can spread the concept, promote the debate and save democracy. For those who don’t care about debt under the current monetary regime, and are only interested in fine and rare wine, a hint I can give: look at age-worthy options for investment as the Moscatel Kingsman 1919 or our newly launched Chadwick 2010, a must-have in any wine portfolio. Find out more about them here.

 

 

 


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