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Fractional Reserve Banking As Economic Parasitism a Scientific, Mathematical, & Historical Expose,´ Critique, and Manifesto

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Fractional Reserve Banking As Economic Parasitism a Scientific, Mathematical, & Historical Expose,´ Critique, and Manifesto Fractional Reserve Banking as Economic Parasitism A Scientific, Mathematical, & Historical Expose,´ Critique, and Manifesto Vladimir Z. Nuri [email protected] Abstract as in the way money system mechanics is intricately woven into major plotlines of complex and influential This paper looks at the history of money and its mod- popular fiction works such as Rand's Atlas Shrugged ern form from a scientific and mathematical point of [52] or Stephenson's Cryptonomicon [61]. Extrapo- view. The approach here is to emphasize simplicity. lated, it even becomes a \social energy system" theme A straightforward model and algebraic formula for a in more futuristic or outlandish forms such as emerg- large economy analogous to the ideal gas law of ther- ing from the popular science fiction movie The Ma- modynamics is proposed. It may be something like a trix. new F = ma rule of the emerging econophysics field. Possibly the full leverage of focused worldwide sci- Some implications of the equation are outlined, de- entific inquiry and attention has yet to be applied rived, and proved. The phenomena of counterfeiting, to economics. Some evidence that the science is inflation and deflation are analyzed for interrelations. still in its infancy are that new fields of \economic Analogies of the economy to an ecosystem or energy physics" or \econophysics," \computational finance,” system are advanced. The fundamental legitimacy also dubbed \phynance," have been proposed only of \expansion of the money supply" in particular is recently. [4, 19, 18] Physicists are applying statisti- re-examined and challenged. From the hypotheses cal and computational modelling techniques to come a major (admittedly radical) conclusion is that the up with creative, ad hoc, or highly realistic theories modern international \fractional reserve banking sys- of money flow in e.g. large economies or stock mar- tem" is actually equivalent to legalized economic par- kets. [20] Despite the overused clich´e,objective scien- asitism by private bankers. This is the case because, tific commentators sensitive to these kinds of shifts contrary to conventional wisdom, the proceeds of in- and trends could easily identify all the signs of an flation are not actually spendable by the state. Also apparent Kuhnian \paradigm shift" [38] in progress. possible are forms of \economic warfare" based on So the blaring headlines read, \Physicists try to the principles. Alternative systems are proposed to break economists' monopoly on financial theory" [4] remediate this catastrophic flaw. and \Physicists attempt to scale the ivory towers of finance.” [19] 1 introduction One major factor in the shift is increased compu- tational power due to the so-far-uninterrupted real- \An invasion of armies can be resisted, but ization of Moore's law over about four decades at the not an idea whose time has come." close of the 20th century, i.e. exponential growth (in |Victor Hugo gates per chip or many other similar measurements). This awesome and accessible power has elevated the The dynamics of money is an extremely complicated computer to the status of a new scientific instrument, subject. It's a foremost preoccupation of humans, roughly analogous to the invention of the microscope 1 or telescope, which has rapidly transformed conven- As usual with a paradigm shift, the perspective tional scientific perspectives on laws of both nature flip-flops. How can the economy possibly not be and societies. thought of as an ecosystem? In Farmer's work, dif- Complexity is the buzzword across multiple disci- ferent traders' strategies are fluctuating adaptations plines, even as previously segregrated disciplines are analogous to evolutionary niches occupied by various married [12, 66] (e.g. in the case here, physics, fi- organisms. The Lotka-Volterra equations originally nance, biology, thermodynamics, etc.). It is likely key introduced to explain oscillations in populations with insights have not yet been totally realized, remaining predator-prey relationships map readily into describ- potential lying undeveloped. For example, virtually ing capital (money) gains associated with the com- all economic theory of the 20th century was devel- petitive speculative strategies utilized by inter- and oped largely without extensive computational exper- independent traders. iments, modelling, simulations, and empirical analy- The analysis presented here will be heavily depen- sis, so central to the new style of inquiry via the pre- dent in places on the economy-as-ecosystem concept miere, even transcendental instrument(s) of science| and mostly take it as unequivocally justified and vir- the computer and the algorithm. [13, 5] tually proven, even though it is not a common per- The new breed of econophysicists are very open- spective among mainstream economists, and the un- minded in their metaphors, borrowing seemingly al- derlying research agenda is clearly only beginning. most indiscriminately (leaving them open to one of Nevertheless, building on it, an important additional the major but predictable criticisms). A particular theme proposed and explored here is that of economic new meme receiving heavy attention and advance- parasitism. ment is the metaphor of the economy as an ecosystem. Along these lines, another paradigm shift is go- Such a view seems obvious in retrospect of various re- ing on in the field of parasitology. Researchers are search delineating the parallels, but it was unfamiliar, only recently beginning to appreciate the full implica- novel, and even somewhat radical when first exhaus- tions of parasites in and on ecosystems, via similarly tively and definitively proposed by e.g. Rothschild in boundary-crossing interdisciplinary scientific collab- the seminal and foresightful book Bionomics: Econ- orations, all forcing a serious re-evaluation of the omy as Ecosystem. [55] It was not clear initially if \big picture." [70] In fact the study of biology is in the idea was just another shallow fad not so much many ways the study of parasites; by one estimate, on with scientific merit but to be mostly appropriated planet earth parasites outnumber `freeliving' species by those seeking to justify ulterior political or social four to one! agendas. [7] New realizations are manifesting around the ubiq- However, subsequent quantitative research, now a uitous and crucial role(s) that parasites play in full decade after Rothschild's manifesto, has pushed ecosystems. In many ecosystems parasites are far the metaphor into reality and significantly strength- from inconsequential, insignificant, or innocuous ened the case for its validity and correctness. As stowaways, but in actuality, despite their relative a Wall Street Journal reviewer wrote, used as the physical and scientific invisibility, drive entire ecosys- front-cover blurb for the book, \Revolutionary. a tems. Parasites have been a domininant force, and fascinating and highly creative alternative to the way maybe even the dominant force in the evolution of conventional economics views the world." The early life! [70] So. given their forefront role, what is the tour de force analysis by Farmer, \Market force, ecol- presumable link to economics? ogy, and evolution" [20] invokes and reapplies the The third major theme pursued here in natural important Lotka-Volterra differential equations orig- conjunction with bionomics and parasitism is a large inally proposed for modelling population dynamics scale economy seen as an energy system. While again to a stock market system (see Farmer's work for an this concept may seem obvious, the full understand- excellent survey of the economy-as-ecosystem meme ing stemming from this perspective appears not yet thread in the scientific literature). available. There is a strong parallel between eco- 2 nomics equations and e.g. thermodynamics or elec- receipt money This is also called \fully backed tronics formulas that does not seem to have been commodity money" in [50]. A goldsmith or explored systematically by researchers so far. More- banker issues paper receipts or certificates al- over, if the economy is an energy system, then vari- ways redeemable for an exact quantity of pre- ous laws governing it can be analyzed and regulated cious metal and the receipts may be traded in- based on solid engineering principles, and the mys- dependently. tery of economic dynamics should be minimized in e.g. the same way engineers understand the construc- fractional money Money that is backed by a com- tion of buildings based on applying Newton's law. modity only at a fraction of the face value. Also So far econophysicists have tended to focus on called \fractionally backed commodity money" the dynamics of markets. However it is possibly in- in [50]. Also called \bank money" or \book evitable that they will soon arrive at a reconsidera- credit" in [17]. For purposes here, the exact frac- tion of the classic questions of economics, one of the tion is considered to be fixed in perpetuity. chief ones being the question of the optimal policy for fiat money Money that is declared \legal tender" expansion or contraction of the money supply. Hope- by a government with no commodity backing. fully new scientific light can be shed on this age-old Or for purposes here, arbitrary manipulation question and definitive rather than speculative an- rather than fixed commitment to any fraction swers are within reach. This paper has been written of backing. with that main goal in mind. paper money For purposes here, money made out 2 brief history of money of paper. Depending on backing it could be ei- ther receipt, fractional, or fiat money. Many au- adult: Our government borrows money ev- thors use it as a synonym for fractional or fiat ery year. money to contrast it with commodity money. child: Where does the money come from? electronic money For purposes here, money as re- How can we always be in debt and not duced to an abstract accounting process in- have to pay it off? volving `blips,' no longer requiring a physical adult: We're in debt to ourselves.
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