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Liquidity: A layman’s perspective

by Graham Barnes

15th February 2009

1. Background and Objectives
The aim of the Liquidity Network is to address the Irish national liquidity problem – the slow down in economic activity triggered by the credit crunch.  Currently virtually all economic activity is powered by debt based credit – individuals and businesses borrow in order to finance their activities. Using the credit released by these loans they employ or do business with other individuals/ businesses who in turn do business with *their* suppliers and so on. There is thus a multiplier effect whereby the initial credit fuels transactions worth many times more than the value of the initial loan.  When the ‘seed’ credit from banks dries up, as in the current crisis, the multiplier effect which normally helps to create liquidity efficiently acts in the reverse way and removes liquidity quickly.

FEASTA’s Liquidity Network aims to address this problem by creating an alternative ‘liquidity stream’ which is not based on debt.

Bartering has existed since before so called ‘fiat’ money (money created ‘out of nothing’ , normally by a nation state, printing it or giving banks quotas to create loans against) was widespread and doesn’t need anyone to go into debt to get things done. But bartering per se relies on an exchange of goods or services between two.

Barter networks take this a step further by keeping tabs on the exchange of goods and services within a network using some sort of barter ‘unit’. But typically these networks seize up after a time with some enthusiasts building up lots of credit and others ‘owing’ but having no real incentive to earn.

Many other innovative ‘social credit’ projects have been created to address the systemic problems of barter networks and have thrived to a greater or lesser extent, especially during recessions. They all work with pseudo-currency ‘units’ (FEASTA’s is called the Quid) or notional ‘hours-worth’ of labour.

The FEASTA plan is novel in a number of ways (as will be described later), but these innovations might be only of academic interest were it not for the planned scale of the Network.
Networks of this sort always face a critical mass problem. Typically they would grow slowly and organically outwards from a core group usually based in one locality. While there are few participants there are only a few alternative ways to spend your ‘units’ and a smaller market to earn them from, so growth can be slow.

FEASTA believe the seriousness of the current Irish crisis is such that there is no time for the Liquidity Network to grow organically in this way if it is to have the impact desired. The reasons for this assessment are not repeated here (but see e.g. ).

FEASTA therefore plans as follows:

  1. to give away a ‘float’ of Quids to new participants in the network in order to kick start economic activity within the network.
  2. to reward the more active members of the network by issuing them with more Quids the quicker they use their existing Quids; and to penalise inactive members by removing Quids from their accounts (demurrage).
  3. to develop partnerships with private and public sector institutions and companies that can help to deliver and manage large numbers of Quid accounts quickly.

2. Giving away Quids

The idea that you can give away Quids to get the Network flowing is somewhat counter-intuitive (at least to a non-economist). But it turns out that it doesn’t matter if a minority of Quid accounts just use their float and never try to earn any Quids themselves. If they spend their Quids, another member of the Network will have earned them and will go on to spend them, circulating the Quids and creating the multiplier effect referred to earlier.

If everyone ‘use and sit’ like this of course, then there is a problem – similar to the barter problem with winners and losers. The challenge for the Network is to generate quickly an extensive range of Quid-accepting products and services. And the strategy for this is a combination of:

  1. starting with a large number of accounts rather than starting small and growing organically
  2. creating some ‘no-brainer’ ways of spending Quids (e.g. paying your tax bill with them) to create Quid-confidence
  3. prioritising the operational side of the network by partnering with organisations who have infrastructure to manage the Quid accounts (Network-Partners). The Network doesn’t have time to develop these systems from scratch.
  4. developing and sharing ‘meta information’ about Quid-usage options via directories and member marketing support

3. Quid Velocity

A key objective of the Network is to keep the Quids circulating quickly. It is this ‘velocity’ of circulation that gives us the multiplier effect that eases the liquidity.

It is therefore vital to reward quick spenders and penalise Quid-sitters.

The exact algorithms for this are important in one way but irrelevant in another.

To an economist the ways in which Quids are added into circulation or withdrawn from inactive accounts determines the ‘Quid-supply’ (analogous to M3 money supply) at any one time. This in turn determines the real value of a Quid and whether there is Quid-inflation or not.

There is no direct link between the Quid and the euro – they can not be cashed in or (officially) converted to normal currency. But there is nevertheless need for stability – Quid-accepters dont want to have to keep repricing their services every week. And if for example taxes were indeed payable in Quid then public sector partners would insist on stability.

So it is important to have confidence that the Quid-M3 control algorithms can prevent Quid-inflation and to be able to demonstrate that to the satisfaction of Network-Partners.

To the Quid-user in the street there is also a confidence issue though there is perhaps more time to develop this confidence. The fact that unused Quids devalue over time anyway is helpful because there is a built-in ‘use it or lose it’ factor irrespective of any underlying Quid inflation. So just as the workings of the internal combustion engine are largely irrelevant to most car drivers, what goes on under the Network bonnet is likely to be of limited interest to the average Quid-user.

But there is a third audience – FEASTA itself. An open question is the extent to which FEASTA needs confidence in this area in order to deliver compelling propositions to the outside world.

4. Network Partners

FEASTA needs Network Partners to deliver liquidity in time to have any impact on the crisis.

This forced marriage however may create tensions that wreck the project.

Many FEASTA members will see the institutions and organisations that are potential Network Partners as being those to blame for causing or at least allowing the crisis. Their greed and introspective arrogance are seen as deep-seated. As Naomi Klein has pointed out capitalists will sell you anything even anti-capitalist T-shirts.

While at an intellectual level FEASTA realises that it has to give away ideas in order for them to succeed there may remain a concern that potential Network Partners may take what is useful from the Liquidity Network project, for as long as it is useful, and that it will ultimately evolve into a quite different animal.

We can rationalise this by saying that we have no choice. At an organisational level this is largely true but FEASTA projects are driven by (mostly) unpaid volunteers. If the contrast between the mindsets of FEASTA (sustainability, co-operation, open-source) and Network Partners (profit, competition, intellectual property) becomes too sharp, volunteer effort may dry up.

This dimension must be borne in mind when developing Network Partner relationships, gravitating to the least-worst contacts/ organisations and accepting that trying to retain a degree of FEASTA-influence in the project (or securing that influence on behalf of the Quid-users) is a valid aim, no matter how difficult that is.

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