Risk Without Austerity


Excerpt from "A Systems Engineering Approach to Formal Monetary and Financial Stability Without the Vagaries of “Austerity” "

By Marc Gauvin and Sergio Dominguez PhD. Eng

Copyright © 2020
Reproduction expressly granted provided attribution is given and original link is provided.


The instability of the system as described above (A Systems Engineering Approach to Formal Monetary and Financial Stability Without the Vagaries of “Austerity) ultimately renders debt and liability/risk unmanageable over time. This in turn leads to last ditch dire measures in the form of extreme across-the-board contraction of economic activity and diversity in the real economy. Such “austerity”, leads to serious real world consequences, that in the light of the revelation of money’s misrepresentation are wholly unnecessary and therefore cruel and unusual, constituting a powerful legal imperative to correct said misrepresentation [10] [17] [18].

Moreover, this risk is mostly associated with arbitrary financial criteria without which, the “real” economy would only bear real world material and physical risk criteria, keeping in mind that typically purely financial assets represent two thirds of the total financial risk in the economy [8]. Finally, all financial risk is ultimately founded on the misrepresentation of money in that without it, financial mathematics as we know it would be impossible and so too would most of the “financial” economy without any harm to the economy.

However, in a scenario where as explained previously, money is defined logically as SOLELY the annotation of sums of value in terms of a common (arbitrary) unit attributed to each instance of transacting goods and services, by judicious management of the different permutations of transaction types that we illustrate below, we can illustrate how such severe “austerity” measures are not only not required, but ultimately increase risk over time towards total system failure.

Transaction Type and System Balance dynamics

As explained above in a Passive BIBO stable system, “currency" units arise as mere absolute annotations of value attributed to goods and services in transactions, where the positive and negative signs applied to account entries, serve only to determine the direction of value (goods and services) transacted between parties.

That is, all parties/agents are initiated in the system with zero balance and only by participating in one or other transaction of goods and services can any balance in the system be altered in either the positive or negative direction as the case may be.

To better understand this, consider the very first transaction in such a system for a population of two agents “U" and “I":

“I” provides a horse to “U” with a mutually agreed upon value of 100 units. Since I provides the horse, I’s account goes from zero to +100 and since U receives the horse U’s account goes from zero to -100. Units do not precede the transaction but arise out of the transaction. In such a system only U has received value corresponding to the exact same measure of value relinquished by I. Clearly, the total measure of value pending reciprocation i.e. “risk” recorded in the system at this point in time is 100 units or:

Total System Risk (System Balance) = the absolute value of the sum of either all positive or all negative balances in the system.

This “risk” represents “credit” for the estimated value pending future reciprocation of goods and services and NOT for currency units as tradable objects. That system risk, remains until U reciprocates in the future with some or other good or service of equivalent value, at which point all accounts including the System Balance return to zero.

In such a system, there are only four possible permutations of transaction types as follows:

A. Positive buys from negative (reduces system balance)

B. Negative or zero buys from positive or zero (increases system balance)

C. Negative or zero buys from negative (system balance unaffected)

D. Positive buys from positive or zero (system balance unaffected)

To understand how this is the case we can contemplate the following example of a community whereby positive and negative balances are generated as a function of transacting goods and services between agents: 


Fig. 1 Transaction Dynamics

All agents begin with a zero balance. Transaction 1 of value from Jim to Mary necessarily corresponds to type B (negative or zero buys from positive or zero), as a consequence the “System Balance” (total value pending reciprocation in the System) is the absolute value transacted (30 units). Transaction 2 is type D (Positive buys from positive or zero) from John to Jim while decreasing Jim’s positive balance by 10 units it increases John’s by that same amount such that the total sum of positive balances remains unchanged and equal to the sum of negative balances in the system (Mary’s -30) The third transaction is again type B (negative or zero buys from positive or zero) from John to Julie, adding 10 units to the sums of positive and negative balances in the system, thus increasing the System Balance (total absolute value pending reciprocation) to 40 units. The fourth transaction of value is of type C from Julie to Mary both with negative balances, as a consequence and similarly to Transaction 2 (type D) the absolute value of the sums of either positive or negative balances i.e. the System Balance remains unchanged. Finally, Transaction 5 being of type A (Positive buys from negative) from Mary to Jim reduces the System balance by 20 units.

Notice that of the four types of transactions, only type B increases the net system balance or level of unreciprocated value or measured risk in the system while in all other transaction types, no risk whatsoever is added to the system. [14]

Understanding the above in a system so defined to be Passive (stable) by virtue of money being defined as ONLY a mere record of value in terms of a common arbitrary unit (e.g. $, €, ¥, , etc.), avoids any need to ever paralyse or exclude any agents from the system, because as long as overextended agents are capable of generating and trading new goods and services, ALL can continue to operate with unlimited C, D and A type transactions, not only without ever increasing risk in the system but reducing risk progressively over time with any number of type A transactions as required.

When money is formally defined as solely a record of value and used accordingly, the money system is made Passive and therefore stable, only useful as a (stable) reference of value, required for representing divisions of value of otherwise indivisible goods and services. By virtue of money acting as a stable record/measure of economic activity, it cannot precede transactions and therefore cannot serve as leverage over economic activity. Thus, money only serves to inform control of economic activity without in any way imposing limiting imperatives exogenous to real world activity.

Moreover of the four transaction type permutations, type A transactions (positive buys from negative) serve to defuse risk in the system by reducing the total value at risk of non reciprocation and since there is no incentive to accumulate balances, there exists no bias towards type D transactions (positive buys from positive). As a Passive stable system, the money system no longer can systemically destabilise (corrupt) the behaviour of its components, including individual agents i.e. you and I.Finally, although transitioning to a Passive money system from current practises, will no doubt evolve the nature of agent roles and even system topology, immediate uptake requires no penalisation nor sacrifice to any agent or entity in the system nor any cost or loss. The reason this is certain, is because the change is at the conceptual rather than the mechanical level. That is, once the conceptual change is assumed and requirements for Passivity satisfied, the same principles illustrated above will apply no matter what the initial starting balances are.


[1] BoE Quarterly Bulletin 2014 Q1 Money in the modern economy: an introduction By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.(1)
[2] BoE Quarterly Bulletin 2014 Q1 Money creation in the modern economy By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.(1)

[3] Money: Commodity or Measure Not Both (www.bibocurrency.com) 21/4/2014 rev. April 2015, Aug. 2015, rev. June 2016, rev. May 2017, rev. June 2018 M. Gauvin.
[4] von Bertalanffy, L. 1968. General System Theory: Foundations, Development, Applications. Revised ed. New York, NY, USA: George Braziller, Inc.
[5] //cnx.org/contents/nVZ6PKeG@4/BIBO-Stability-of-Discrete-Time-Systems">https://cnx.org/contents/nVZ6PKeG@4/BIBO-Stability-of-Discrete-Time-Systems
[6] http://dictionary.sensagent.com/Passivity%20(engineering)/en-en/
[7] Gunter Stein “Respect the Unstable” IEEE Control Systems Magazine ( Volume: 23, Issue: 4, Aug. 2003)

[8] A WORLD AWASH IN MONEY Capital trends through 2020 Bain and Company. 2012 fig. 1.1. page 7.
[9] Narayana R. Kocherlakota, The Technological Role of Fiat Money* Research Department Federal Reserve Bank of Minneapolis.
[10] A proposal for harmonising current disparate (scientific and legal) definitions of money towards greater decidability in the provision of Justice according to universal principles of contract law Jorge Meira Costa and Marc Gauvin, 2015

[11] Formal Stability Analysis of Common Lending Practice, 2009 M. Gauvin, S. Dominguez
[12] Stable Currency Unit Theorem (www.bibocurrency.com) 2011, M. Gauvin, S. Dominguez
[13] The Beast of Compounding You Might Not Have Noticed (www.bibocurrency.com), Jan 10th 2020, M. Gauvin

[14] Austerity Fallacy (www.bibocurrency.com) 05/2015 rev. 7/2015, rev. 10/6/2018, M. Gauvin
[15] Passive BIBO Currency Distinguishing Claims www.bibocurrency.com Passive BIBO Currency Project 2013Marc Gauvin, Sergio Dominguez.

[16] Formal Passive BIBO Currency Specification www.bibocurrency.com, Passive BIBO Currency Project 2011-2019

[17] Legal Curriculum (https://www.moneytransparency.com/legal-principles)
[18] MSTA Resolution (https://www.moneytransparency.com/msta-resolutions) January-April 2020.

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