BIBO – A Standard for Stable Currencies

I believe it was more or less a year ago that Michel Bauwens pointed me to the International Currency System Engineering Group, ICSEG (http://www.icseg.org/) which was running a discussion list about the architecture of monetary systems.

I joined the list and the discussions were of great interest. There has now been a conclusion. Just recently, a dedicated web page was put up with the currently available documents, including a proposed standard that would ensure stability of any currency.

With several p2p currencies on the drawing board, it would seem important to take a look at what may be the fatal flaw of the bank money we are using universally today, with a view of how to avoid those same pitfalls when discussing currency alternatives. The proposed standard could be used in any kind of currency, whether issued by governments, banks or of private/collective origin.

BIBO – Bounded-Input-Bounded-Output is an engineering term. In Control Systems Theory it signifies that any system, to be stable, must respond to a bounded input with a bounded output.

Bank money is not BIBO compliant, it is argued on http://bibocurrency.org/

From a rigorous control system theory stability analysis of the current world de facto standard currency system we identify a root instability in the form of the growth component of Debt associated with the money creation process. We thus establish the inherent instability of Common Lending Practices (application of interest). Then we further chart the logical consequences of said root instability as it affects the economy as a whole and we identify how it provokes a systematic divergence between debt and value attributed to wealth in past cycles with the minimum value required in current and future cycles as those incorporate past unpaid debt. i.e. systematic compounding of debt. We also identify how the only means available within the current system design for staving off inflation is through the continued contribution of collateral wealth as guaranty for the creation of new principal debt money commensurate with past debt growth. Finally, we illustrate how compounding debt inevitably leads to a point where the inability to provide new wealth to guaranty new money to keep up with past debt growth becomes chronic at which point either runaway inflation or a definitive collapse of the system inevitably ensues.

walkthrough

Financial System walkthrough

1. Wealth is generated by ingenuity, human effort and resources made available through past investment of units of currency.

2. Through the process of asset evaluation, a fixed amount of existing wealth is attributed a fixed collateral value in the form of a sum of units of currency.

3. The fixed collateral sum is used as the basis for the creation of new currency in the form of a second fixed value i.e. the principal sum of loans issued into circulation through current account entries. Since both the collateral and principal loan sums are fixed, they maintain a constant ratio to the wealth pledged.

4. Current account units are distributed back to wealth producers through purchasing transactions or may be saved or stored (at a compounding interest rate) or used to cancel debt thus reducing the total amount of money in circulation.

5. Total debt due is the principal sum entered as a negative number in a loan account to which interest is added such that the debt grows as a function of time.

6. Because the total debt created always exceeds the amount of money available to satisfy it, the system produces a minimum residual debt that must be refinanced in subsequent cycles thus compounding it.

There are three documents available at the bibocurrency site:

Formal Stability Analysis of common lending practices

Passive BIBO Currency Rationale

Draft Passive BIBO Currency Specification

Documents may be updated with time, so to get the latest version, check at the source:

http://bibocurrency.org/

103 Comments BIBO – A Standard for Stable Currencies

  1. AvatarMarc

    Ardeshir,

    Have you asked yourself why we expressly modeled the growth without any payments of Principal?

    We all know that by paying the principal and interest the debt is eliminated. But that does not mean that the initial loan proposition is stable. Why? Because and as stated in our paper “If for whatever reason either principal or interest is not paid, then the debt will grow towards (not to) infinity”.

    For this last statement to be true the stability analysis must consider the case we model. In other words we need to establish formally the underlying instability in the extreme case (no principal payments) to be able to PROVE make the statement:

    “If for whatever reason either principal or interest is not paid, then the debt will grow towards (not to) infinity”.

    Marc

  2. AvatarMarc

    Ardeshir wrote:

    I have asked Marc to produce just THREE professors of Control Systems Engineering who would unanimously agree with him that in the formula Yk = P(1+kr1), when the input, k, is limited in duration (as it always is in the REAL world), the output, Yk MUST be unbounded. (By “limited” I mean, of course, “always comes to an end”.)

    MG: We have already given ample rebuttals to this inane statement of Ardeshir.

    AM: “Marc has not been able to produce them, which seems to indicate that professors of Control Systems Engineering would NOT agree with him.”

    First of all I produced Sergio and Sergio produced several citations of the world’s foremost experts in the field to completely put to rest Ardeshir’s absurd statement:

    AM: “Because the term of the interest debt function is finite, then the output is bounded and therefore the it is not unstable.”

    In any event, the proposal is completely fallacious as Roberto pointed out, the number of references or not says nothing about the truth of the statement.

    But the content of the references that we gave tells and Ardeshir’s total inability to respond to them, tells volumes about Ardeshir’s sincerity and integrity.

    When you are in a ditch and want to get out, stop digging!!!

    Marc

  3. AvatarMarc

    Dear Roberto,

    It is good to see that we haven’t committed any errors because otherwise I am sure you would have pointed them out by now šŸ˜‰

    Neither have you proven that our model is insufficient to draw the conclusions we do. Your comment basically reduces to the assumption that we have not explored sufficiently the real model, but that remains to be proven to be the case.

    Basically you have proposed only two things that you suspect could come to bear on the question of stability. These are foreclosure and write offs. However, both of these are handled either directly or implicitly in our paper as follows:

    A) The first is the question of foreclosure. Foreclosure is what we refer to as failure in our model, this is one of the two outcomes we predict. Foreclosure on the aggregate level means total system collapse. Foreclosure cannot ever be considered as negative feedback as it represents simply the cessation of the underlying growth and once the function ceases there is nothing to feedback to.

    B) The second is the question of debt write offs. Here the banks assume the loss themselves against their limited capital guaranty. Granted no current account entries are erased at the time of the write off, but the compensatory effect is necessarily very limited and by no means approaches any level that would significantly impact the underlying debt dynamics and certainly not of other loans. Also, technically it does not imply the debt is erased. The write off is just an internal bank accounting mechanism to handle the imminent loss of asset. This is why it is a marginal measure compared to foreclosure which, as stated above does not compensate the instability but rather just stops the function. In reality, if write offs were to be used to any significant level, then the system would collapse because the banks would go broke, very quickly.
    Finally, write offs at the aggregate system level don’t make much sense and essentially mean that the system has failed.

    Therefore, neither of your suggested mechanisms can effectively act to compensate the identified instability to alter the conclusion we arrived at. I presume that you read the reasoning that follows the greater system diagram that concludes that there can only be two possible outcomes given the identified underlying instability of the loan models that is not in dispute:

    1: Either the system stops or collapses or
    2: It produces exponential output

    Can you think of any other existing compensatory mechanisms other than Foreclosure and Write offs? I certainly cannot except for the obvious one of killing the root instability that again is not in dispute?

    Also for the record, I don’t agree that my question regarding an arbitrary limit to the term of a growth function affecting its instability is at all ambiguous. The term either is relevant or it is not. We have given ample mathematical proof that it isn’t relevant.

    Best wishes,

    Marc

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