At the end of October I travelled to Baku, the capital of Azerbaijan located on the western shore of the Caspian Sea. I went there to speak at the XV Verona Eurasian Economic Forum held on the 27 and 28 October 2022. I found a few things about this experience quite remarkable. For one thing, Azerbaijan was never on my bucket list of places to visit, so I was very pleasantly surprised with what I saw there – so much so that I put together an impromptu video postcard you’ll find below in this post.

The conference itself was superb, both in terms of the program and in terms of the caliber of its participants, among them the former Italian Prime Minister Romano Prodi, Russia’s Integrations and Macroeconomics Minister Sergey Glazyev and many high-level executives from central banks, commercial banks, industry, research institutions and media. Participants came from Russia, France, Germany, India, China, United States, Turkey, Azerbaijan as well as many other Eurasian nations. As far as I know, I was the only participant from Croatia.

The content of the conference focused on the area’s economic development, banking and finance, evolution of the currency and payment systems, cryptocurrencies and crowdfunding; about infrastructure and social development, food production, and a very intelligent discussion about the role of technology in society. Quality of the deliberations was actually quite impressive. This wasn’t about possibilities of development in some distant future, but discussions about real solutions: elements of a new and improved operating system for society that are actually being developed and implemented even as you read these lines.

There was no talk about ideology, about east-west divisions, about war or geopolitics. In fact, one speaker, an American who has been critical about the US foreign policy told me that the organizers explicitly asked him to refrain from criticizing the United States in his speech.

Eurasian optimism

But the most important impression I got from the conference was a real sense of optimism about the future. It wasn’t explicitly stated – nobody was selling the agenda or expounding about the great expectations. But the underlying sense of optimism was quite obvious to me because it stands in such stark contrast to the pessimism that has now engulfed much of the western world.

In all, Eurasian integration seems like the real deal; a genuine shift in the march of history. It should be a very hopeful change for mankind and I was encouraged to see that so many westerners were there in attendance. Hopefully, in this way we can continue to cultivate relationships to this emerging world instead of burning bridges.

My own address to the conference was scheduled on the second day during the session on financing and payment models and I thought I’d speak about the considerable but perhaps not so well understood pitfalls of the modern monetary system. These pitfalls MUST be taken into account in development of alternative systems. The transcript of my remarks follows below the video:

My remarks to the conference

“A society’s monetary system is the most important factor determining the society’s nature and growth; money is at the very heart of society’s operating system.

Today the western world is experiencing a profound economic, social and political crisis. We could attribute this crisis to a number of causes: too much debt, supply chain issues, energy crisis, inflation, and also a seemingly insatiable appetite for war. But most of these problems are only symptoms of a structural crisis that stems from a fatal flaw in today’s monetary system based on fractional reserve banking.

Fractional reserve banking means that the amount of credit banks can provide to the economy is many times greater than the loss absorbing capital they have. Economies based on fractional reserve credit creation can only be stable as long as they grow; otherwise, they inevitably fall into recessions or depressions with rising bankruptcies and high unemployment.

The flaws of fractional reserve banking have been obvious in the past centuries as they have frequently led to bank failures. Central banking has made banks more resilient and less vulnerable to failure. However, it did not change the nature of the system nor its tendency to generate frequent crises.

Today’s central banking draws roots from the Bank of England. When the British parliament passed The Bank of England Act, it gave the Bank of England monopoly on issuing Britain’s money. That was in 1833; over the remaining 67 years of the 19th century, Britain spent 32 years in recessions, depressions, bankruptcy or financial collapse, including a 22-year long depression from 1873 to 1896.

Misery at home went hand in hand with building up of a vast empire abroad. In fact, there is a strong cause-and-effect relationship between the money system and a society’s appetite for war. US Congressman Ron Paul said that it is no accident that a century of total war coincided with the century of central banking.

In June of 2014, a group of American researchers published an article in the American Journal of Public Health. They found that since the end of World War 2, the United States launched more than 80% of all military conflicts in the world. This fact does require an explanation. Do the American people enjoy going to war? That is certainly not true: for decades now, the American people have strongly tended to vote for anti-war candidates. Even George W. Bush campaigned in 2000 promising a humble foreign policy and an end to nation-building.

The west’s war addiction is related to an obscure and poorly understood economic phenomenon called the Deflationary Gap. American historian Carroll Quigley wrote that deflationary gap was, “the key to twentieth century economic crisis and one of the three central cores of the whole tragedy of the twentieth century.”

To understand the deflationary gap, let’s consider an economic system that produces a certain quantity of goods and services. The total of all the price tags attached to these goods and services represents the aggregate cost of producing them, plus profits. That money is income to those who receive it and represents this economy’s total purchasing power.

On the whole, aggregate costs, aggregate incomes and aggregate prices are all the same, because they represent the opposite sides of the same transactions. For the system to be in balance, aggregate prices should exactly absorb the system’s total purchasing power.

The problem arises because people normally prefer to save a part of their income which reduces the total purchasing power available in the system. This shortfall of purchasing power is the deflationary gap. But today’s monetary system makes it imperative for an economy to grow. If it doesn’t grow, it inevitably generates crises – it is what William Corbett called “starvation in the midst of abundance.” 

To ensure growth, governments are forced to intervene and restore sufficient purchasing power through government spending. The best way for governments to intervene is to invest in productive capital goods, since this will increase national wealth and standards of living. But in the West, this approach tends to provoke ideological opposition since it is regarded as socialism.

Instead, western nations seem to prefer the most dangerous method of bridging the deflationary gap: military spending, which can easily be justified on the grounds of national security and patriotism. Military spending enhances the wealth and political power of the military-industrial complex as well as its influence over a nation’s foreign policy.

We can clearly see this in the recent history of the United States: its military spending amounted to approximately 1% of the gross domestic product during the first 40 years of the last century (excluding World War I). After the Second World War this has increased by almost five times.

But my remarks here are not intended as a criticism of the United States. Any nation that adopts the modern fractional reserve monetary system is vulnerable. As I mentioned earlier, the evolution of this system can be traced back to the Bank of England. The bank was established in 1694 and over the following 120 years, England prosecuted fully 18 officially declared wars against her then rival power, France. Back in those days, the British hated France almost as much as they hate Russia today.

But hatred does not arise from the common man: its roots stem from the monetary system that has evolved for nearly five hundred years now. The purpose of my remarks here was to highlight the systemic flaw that has led human societies in the direction most people didn’t want.

Many of us in the west now recognize Eurasian integration as a new hope for humanity – a crossroads where we can choose a different path of development. We can replace hatred with love of mankind, war with constructive cooperation and mutual respect. The leadership of Russia and China inspire confidence that this future is now possible – but it will depend on all of us to make sure that we can shape it for the benefit of our children and their children. Thank you.”

Of course, a discussion of the Deflationary Gap and methods of bridging it can hardly fit into a 6-minute speech; you can find a less condensed summary in “Deflationary gap and the West’s war addiction.” The underlying problem is the monetary system, but military spending and war are also the result of decision making by powerful individuals and groups and are also partly based in ideology and culture.

But at the current crossroads, we would do well to do away with fiat money and fractional reserve credit creation altogether. Fractional reserve banking has been with us for only a few centuries and fiat money just over 100 years, and this should be relegated to history as a failed experiment. It has proven pathogenic in more than one way: it makes frequent and protracted economic and social crises inevitable; it favors military spending, foments wars, and poisons virtually all relationships in society, turning humanity into a radically perverted version of what it can and should be. Sold to us as the best way to organize society ever, it might well be among the worst. It is high time we earnestly explored alternatives.

History offers us many examples of advanced civilizations that enjoyed centuries of peace, prosperity and stability, which used alternative means of exchange, accounting and store of value. We can start by looking at those models to explore what works and what doesn’t. We should also look to modern technologies that make entirely new solutions possible – solutions that were not available to prior generations. Some of the discussions I heard in Baku last week suggested that an earnest search for such solutions is afoot, and it has mobilized a great deal of energy and top talent among the individuals and institutions in attendance. This inspires confidence that the challenges that lie ahead will be resolved, and we in the west should be paying attention.

Alex Krainer – @NakedHedgie is the creator of I-System Trend Following and publisher of daily TrendCompass reports, covering over 200 key financial and commodity markets for investors and traders – probably the best CTA daily newsletter on the market today. One month’s test drive is always free of charge – no strings attached!