local money liquidity saving

content/posts/local-money-liquidity-saving.md

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+---
+title: "Local Money and Liquidity Saving"
+date: 2021-05-29
+draft: false
+---
+
+# Local Money Systems
+
+As you may know, I'm quite enchanted with the idea of local money systems
+- moneys designed to facilitate local economic organization and trade.
+There's a nice overview in Bernard Lietar's [Creating Wealth]. 
+I think they're the best application of blockchain tech and the best hope for 
+a sustainable civilization. 
+
+I expect that progress in blockchain tech
+and tokenomic primitives (like bonding curves) will revolutionize the field of [Optimum Currency Areas] and paint a path towards a more
+sustainable theory of international monetary economics grounded in self-sufficient local economies.
+
+This is a short note on some types of local money
+and their most promising economic function for businesses: liquidity saving.
+
+## Types of Local Money
+
+The simplest local money is *custodial*. You give $100 to some trusted local
+organization, and they give you 100 LOCAL in return. You can spend the LOCAL in the
+community, or you can cash it back it in, but say for only 95 cents on the
+dollar. The idea is to keep the money circulating in the community. The money is
+backed by custodial reserves (dollars at the trusted org). Examples include
+[BerkShares].
+
+Another kind of local money is *mutual credit*. You join a cooperative of
+businesses that accept payments for goods and services in LOCAL on par with $.
+You take out a loan of 100 LOCAL (ie. 100 LOCAL are created and issued to you!), 
+but you must commit to accept say 500 LOCAL (on par with $)
+in the future as payment for your goods or services. The money is backed by the mutual committment 
+to accept it (on par with $) for goods and services. The best example of this is
+the [WIR Bank] in Switzerland, which started during the Great Depression, and
+is the longest running and largest local money system in the world. But see also
+[Grassroots Economics], [Sardex], and the many [LETS]. 
+
+Similar to *mutual credit* are time banks, but instead of pricing LOCAL in $,
+it's priced in time. 
+
+Another kind of local money is invoice, trade credit, or *obligation clearing*. You join a cooperative of 
+businesses that do business with eachother. You owe money to some of your
+suppliers, who owe money to some of their suppliers, who owe money to you.
+Any closed loop of obligations like this (a "cycle") can be *netted* out, reducing the
+overall amount anyone has to pay. While this doesn't feel so much like money in
+an account, it does reduce the amount of money you would otherwise need to settle your payments,
+functioning effectively as a kind of medium of exchange.
+Examples include the [TCT system in Slovenia][Liquidity Saving Mechanism]
+
+Similar to invoice clearing are *clearing houses*. Instead of only netting out the
+cycles and leaving the remaining obligations in place between businesses, 
+a clearing house serves as a central counterparty to net *everyone* against everyone
+else. Businesses with deficits pay the clearing house, and those with surpluses
+collect from it. Examples include many of the world's central banks (which act
+as clearing houses for their commercial banks), as well as [CHIPS], [LCH], etc.
+
+There are a number of other kinds of local money, but these seem to be the most popular.
+Notably, many custodial and time bank systems have ceased their operations due
+to overhead costs. This is perhaps not surprising, as these systems seem to lack
+a kind of scalability. That said, there seems to be renewed vigor and potential 
+among mutual credit and credit clearing systems, which do appear much more
+scalable.
+
+## Liquidity Saving Mechanisms
+
+Earlier this year, a paper was published by Tomaz Fleischman et al. on 
+[Liquidity Saving Mechanisms]. The paper seemed to so illuminate the field of local money systems
+that a review was written called [Someone Just Turned the
+Lights on]. The paper analyzed data from two real world local money systems:
+a national trade credit clearing system in Slovenia, and a mutual credit system
+in Sardinia. The paper contains some incredible visualizations of the cyclic structures within the 
+larger obligation graph, and how obligation clearing improves the liquidity
+profile of firms.
+
+Fleischman's paper highlighted the major beneficial impact these systems have had
+on their respective economies, specifically in terms of the liquidity
+saved (ie. payment obligations reduced) by participating businesses. Hence the term, liquidity
+saving mechanisms. But it also showed through simulations how much more could be
+saved by combining the two mechanisms - namely, the combination of invoice clearing
+and mutual credit could save businesses up to 50% (!) of their liquidity needs!
+That's huge.
+
+As it turns out, liquidity savings mechanisms are a reasonably well studied
+concept in economics, though primarily in the context of financial institutions. Banks regularly
+use liquidity savings mechanisms (especially clearing houses) to reduce the need
+for payments to be settled with $, just by netting out participants
+against eachother. Banks do this every single day in clearing houses like CHIPS
+and the Federal Reserve itself, saving themselves on the order of trillions of
+dollars of liquidity per year. We need only to make these tools available to
+the general public. This is the promise of local money.
+
+[Creating Wealth]: https://newsociety.com/products/9780865716674
+[Optimum Currency Areas]: https://en.wikipedia.org/wiki/Optimum_currency_area
+[BerkShares]: https://www.berkshares.org/
+[WIR Bank]: https://en.wikipedia.org/wiki/WIR_Bank
+[Sardex]: https://monneta.org/en/sardex/
+[LETS]: https://en.wikipedia.org/wiki/Local_exchange_trading_system
+[Grassroots Economics]: https://www.grassrootseconomics.org/
+[Liquidity Saving Mechanisms]: https://www.mdpi.com/1911-8074/13/12/295
+[CHIPS]: https://www.theclearinghouse.org/payment-systems/chips
+[LCH]: https://www.lch.com/
+[Someone Just Turned the Lights On]: https://mutualcredit.services/2021/02/18/someone-just-turned-the-lights-on/