International Business Machines Corp is considering adopting the underlying technology behind bitcoin, known as the "blockchain," to create a digital cash and payment system for major currencies, according to a person familiar with the matter.

The objective is to allow people to transfer cash or make payments instantaneously using this technology without a bank or clearing party involved, saving on transaction costs, the person said. The transactions would be in an open ledger of a specific country's currency such as the dollar or euro, said the source, who declined to be identified because of a lack of authorization to discuss the project in public.

The blockchain - a ledger, or list, of all of a digital currency's transactions - is viewed as bitcoin's main technological innovation, allowing users to make payments anonymously, instantly, and without government regulation.

Rather than stored on a separate server and controlled by an individual, company, or bank, the ledger is open and accessible to all participants in the bitcoin network.

The proposed digital currency system would work in a similar way.

"When somebody wants to transact in the system, instead of you trying to acquire a bitcoin, you simply say, here are some U.S. dollars," the source said. "It's sort of a bitcoin but without the bitcoin."

IBM is one of a number of tech companies looking to expand the use of the blockchain technology beyond bitcoin, the digital currency launched six years ago that has spurred a following among investors and tech enthusiasts.

The company has been in informal discussions about a blockchain-tied cash system with a number of central banks, including the U.S. Federal Reserve, the source said. If central banks approve the concept, IBM will build the secure and scalable infrastructure for the project.

IBM media relations office did not respond to Reuters emails about this story and the Fed declined to comment.

However, there are signs that central banks are already thinking about the innovations that could arise through digital currency systems. The Bank of England, in a report in September 2014, described the blockchain's open ledger as a "significant innovation" that could transform the financial system more generally.

Instead of having ledgers maintained by banks that act as a record of an individual's transactions, this kind of open ledger would be viewable by everyone using the system, and would use an agreed-upon process for entering transactions into the system.

The project is still in the early stages and constantly evolving, the source said. It is also unclear how concerns about money-laundering and criminal activities that have hamstrung bitcoin.

Unlike bitcoin, where the network is decentralized and there is no overseer, the proposed digital currency system would be controlled by central banks, the source said.

"These coins will be part of the money supply," the source said. "It's the same money, just not a dollar bill with a serial number on it, but a token that sits on this blockchain."

According to the plans, the digital currency could be linked to a person's bank account, possibly using a wallet software that would integrate that account with the proposed digital currency ledger.

"We are at a tipping point right now. It's making a lot more sense for some type of digital cash in the system, that not only saves our government money, but also is a lot more convenient and secure for individuals to use," the source said.

Demand and Quantity demanded

This term refers to the collective want of consumers as a whole in the context of a certain good. It is closely related to the term Quantity demanded, which means the amount of the good that consumers are willing and able to purchase when the good in question is at a certain price. The Quantity demanded is a singular point on the demand curve while the entire curve is referred to as demand since demand refers to the relationship between the price of a good when compared to the people that are willing and able to purchase it. If a consumer does not have the money or is not willing and able to purchase a good he is not considered in the Quantity demanded. In the case of Bitcoin, when a single Bitcoin was at about 1200USD each a few years ago, there were less people that were willing and able to buy it during this period in time when compared to the current price of 225 USD each as of August 26,2015. This is because a lower price allows more people to purchase a certain good, thus the Quantity demanded and Price are inversely proportional. Other factors aside from price can alter this curve namely, Number of buyers, Income, Prices of related goods, Consumer preferences, Advertisements, and Expectations. The numbers of buyers refer to the amount of people that actively want to purchase a good, in a sense if price determines the “able” part of willing and able then the number of buyers determines the “willing” part of the statement. The second factor that affects the Quantity demanded is income and inside this term there are two terms, the first is “Normal Goods” and the second is “Inferior Goods”. Normal Goods refer to goods that are bought more when incomes go up; these goods are usually premium products such as high-quality appliances. On the other hand, Inferior goods are goods that are bought more when incomes go down; these goods are usually substitutes for the premium products that are Normal Goods, for example poorly made appliances are Inferior Goods. Currently, Bitcoin does not classify as either because it is a form of currency just like the US Dollar or the Philippine Peso, there are benefits to using either currency. The third factor, Prices of related goods refers to how the prices of substitute goods and complementary goods affect the demand curve of the good in question. A substitute to Bitcoin is the US Dollar or any other currency and oftentimes currencies determine the value of other currencies. Since complementary goods refer to goods that are used with other goods and Bitcoin is a currency there are no easy goods that classify as complementary. The fourth factor is consumer preference; if less people preferred to buy Bitcoin then the demand for it would go down because there are less people that want it. Fifth on the list are advertisements. When an advertisement has a positive impact on consumers there are more buyers and if it has an unfavorable effect the opposite occurs. The final factor that affects demand are expectations which means that if consumers believe that Bitcoin prices will go down due to a certain silky marketplace (Silk road) going down, the demand for Bitcoin will go down as well.

Supply and Quantity Supplied

  Supply is the term that refers to the collective ability of suppliers to supply a specific good. Quantity Supplied is the amount of a good that suppliers are willing and able to supply. Unlike other currencies, Bitcoin’s supply comes from the blockchain which is a series of calculations that are solved by several different computers referred to as Bitcoin miners. These miners are awarded a small portion of a Bitcoin every time a “block’ in the blockchain is solved by the miners. These calculations secure the daily transactions of existing Bitcoins from one person to another; this way Bitcoin protects itself by making it incredibly difficult to create a coin since to mint a Bitcoin a portion of the blockchain must be solved. The Law of supply states that when the Price goes up, the Quantity supplied will also go up since people want to make profit there will be more people that will find ways to supply the good in question. When the prices falls the Quantity supplied will also fall since it will be difficult to make more profit. Unlike the law of demand which is inverse, Price and Quantity supplied exhibits a direct relationship. The supply curve which is composed of various points of Quantity supplied against Price can move along its curve when Price goes up or down, however there are factors that cause the curve to move entirely. These factors are, Number of sellers, Technology, Other related goods, Resource Costs, Expectations, and subsidies. The Number of sellers will cause the Supply curve to move to the right since there are more suppliers of the good. If more people mine Bitcoins then there will be more Bitcoins in the market. When the opposite happens and there are less Bitcoin miners then the supply of Bitcoin will go down and the supply curve moves to the left. The second factor Technology means that supply will increase if Technological advances allow more goods to be produced easily. Since it is currently impossible to forge a Bitcoin this factor does not apply to Bitcoin. The third factor is other related goods, it is important to note that this factor only applies when the price of a substitute good changes. The supply curve of the good in question shifts right if the substitute goods have a lower amount of supply compared to the good or when complementary goods are frequently purchased; If the good increases its price then it is likely that substitute goods will be chosen over the good thus the supply curve shifts left. The fourth factor is resource cost and this causes the supply curve to shift right if it is easier to produce a good and to shift left if it becomes more difficult. In the case of Bitcoin, if it costs more to set up a Bitcoin Mining Machine than the worth of the Bitcoin made then it shifts left due to the loss incurred by the Bitcoin Miner. The fifth factor are expectations, the supply curve will shift right if a seller believes that his good will sell well in the future. For example if a person about to set up a Bitcoin Mining farm believes that the amount of Bitcoin demanded will go up in the next year then he will increase his supply of Bitcoin produced. The final factor that can affect the supply curve are Subsidies and Taxes, Goods will shift right if governments subsidize or give money to suppliers to supply a good and will shift left if governments tax or require a larger cut from a supplier’s profit.

Market Equilibrium

This term is often interchangeable with “Market Clearing Price”, both terms refer to a situation wherein the Quantity supplied is equal to the Quantity demanded. Therefore the Market Clearing Price is when all units of a good are purchased by consumers. Reaching this point is determined by how quickly prices adjust. In the case of currencies such as Bitcoin, reaching these points will be difficult since their prices change due to a multitude of factors. The opposite, Market Disequilibrium is a state of either a Shortage or a Surplus. If there are more people that demand Bitcoin than there are that sell Bitcoin the price of Bitcoin will go up since there are more people that need Bitcoins than there are that sell Bitcoins therefore the sellers will increase the prices until there are less people that are willing and able to buy Bitcoins in order to fix this shortage. If the opposite occurs and there are more people selling Bitcoins than there are that want to buy Bitcoins then sellers must lower their prices so that more people are inclined to purchase their Bitcoins. For a while Bitcoin had stabilized at around 300USD however in recent months it has dropped to 225 each.

Elasticity

  Elasticity refers to how the Quantity demanded or Quantity supplied responds to changes in price. A good is considered elastic in the frame of demand if its Quantity demanded changes drastically changes to a change in its price and inelastic if it does not exhibit a drastic change to in its Quantity demanded to changes in Price. In the frame of supply, a good is considered elastic if its Quantity supplied changes drastically to its Price and inelastic if the opposite happens. Bitcoin is considered Elastic since it has many close substitutes as it is a currency, therefore consumers of Bitcoin can choose to use fiat currency as opposed to Bitcoin. It has demonstrated its Elasticity in the year 2013 when 1 Bitcoin was 266USD on April 11 of that year and rose to 1250USD during November later that year. This dramatic change in price shows that Bitcoin is indeed very elastic. Since then Bitcoin has been steadily declining due to its dying popularity and government crackdowns on marketplaces that used Bitcoin due to its anonymous transacting system.

It was a bluebird day in Midtown Manhattan on May 6th, 2010. At 2.40pm in the afternoon, I can imagine that most Wall Street traders were almost ready to start packing up and heading home for the day, or at least had grabbed another coffee to get them through the afternoon slump. Then something happened that woke them the hell up.

At 2.42pm, the Dow Jones started dropping. It dropped 600 points in five long, terrifying, and confusing minutes. For five minutes, everyone panicked. By 2.47pm, the Dow had dove rapidly to an almost 1,000-point loss on the day – the second largest point swing in Dow Jones history – until someone literally pulled the plug on the market and trading stopped.

When trading opened again a few minutes later at 3.07pm, the market had regained most of that 600-point drop.

What happened?

This was the 2010 Flash Crash. In order to understand the Flash Crash, the first thing I needed to understand was just how outdated my idea of the stock market actually was; I pictured Wall Street, v.1 – lots of white guys in suits shouting BUY and SELL and cursing on the phone to other brokers all around the world. These days, and for the last twenty years or so, over 70% of all stock market trades are run by super computers who trade tens of thousands of stocks in milliseconds – we’ve gotten rid of sluggish human beings completely. I needed to picture a gigantic room full of computers making a high-pitched whine instead.

During that five-minute period, the stock market – and in turn, the economy – lost billions of real $$ money. No one knew what had actually happened. The SEC tasked an unlucky committee to immediately figure it out. That report, which took five months to research and compile, came to the conclusion that it was one bad computer algorithm that sent the market into a spiral. More importantly, however, that report documented:

The joint report “portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral,” and detailed how a large mutual fund firm selling an unusually large number of E-Mini S&P 500 contracts first exhausted available buyers, and then how high-frequency traders started aggressively selling, accelerating the effect of the mutual fund’s selling and contributing to the sharp price declines that day.

Critics of the SEC’s report were many, and included much deserved criticism around how, despite the fact that the SEC employed the highest-tech IT museum in their research, which included five PCs, a Bloomberg, a printer, a fax, and three TVs – it still took nearly five months to analyze the Flash Crash. Specifically:

A better measure of the inadequacy of the current mélange of IT antiquities is that the SEC/CFTC report on the May 6 crash was released on September 30, 2010. Taking nearly five months to analyze the wildest ever five minutes of market data is unacceptable. CFTC Chair Gensler specifically blamed the delay on the “enormous” effort to collect and analyze data. What an enormous mess it is.

So: What does it mean when our machines make a split-second mistake that costs us real billions, but takes humans months to understand what actually happened?

PRICES in the euro zone are falling. Figures released on January 7th showed that consumer prices in the year to December fell by 0.2%, marking the return of deflation for the first time since 2009. Weak demand, driven by austerity, debt and a lack of economic growth is dragging down prices. The falling oil price is making things cheaper, too. One might think falling prices would be something to celebrate. But concerns about deflation traps and downward spirals abound. The European Central Bank may launch a programme of quantitative easing this month to fend off the threat. Why do economists so dread falling prices?

One common explanation is that in anticipation of falling prices, consumers delay purchases, causing them to fall still further. This argument is a simplification; it can be made with equal power in reverse to argue that inflation will inevitably run upwards as consumers bring purchases forward to avoid being stung later. But the argument hints at the right problem: deflation’s effect on interest rates. Generally speaking, the interest rate reflects the price of consumption today relative to consumption tomorrow. When interest rates are high, savings are worth more tomorrow, and vice-versa. The return in money terms (the rate advertised by banks) is called the “nominal” interest rate. But inflation also matters. Subtracting expected inflation from the nominal rate produces the real interest rate­—the expected return after inflation—which is what people respond to in most models of the economy.

Low inflation or deflation constrains this crucial variable. The nominal interest rate cannot fall below zero, because that would mean reducing savers’ bank balances every month, and would prompt them to withdraw their deposits from banks and stash cash under the bed. Together with inflation, this puts a floor on the real interest rate too. If inflation is low and real rates can’t fall far enough to boost demand and perk up prices, demand will weaken still further. This is the dreaded deflation trap. There are other problems, too. Lower-than-expected inflation increases the real burden of debts. Lenders benefit, but because they are more likely to save than borrowers, demand is sapped overall. Deflation also increases rigidity in the labour market. Workers are resistant to wage cuts in cash terms, but inflation lets firms cut real wages by freezing pay in nominal terms. Deflation, by contrast, makes this problem worse.

To avoid the trap, central banks can resort to unconventional policies such as quantitative easing, although there is debate over their fairness and efficacy. In the long run, some economists think inflation targets should be higher. That would give more room for real interest rates to fall when economies are hit by negative shocks. But in a few decades, the problem may disappear: in a cashless economy it is impossible to stash money under the bed. That would allow nominal interest rates to go negative, as everyone’s bank balance could simply be reduced simultaneously. But that might be easier said than done.

Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions is delicate, and an economy can quickly swing from one situation to the other.

Inflation is caused when goods and services are in high demand, creating a drop in availability. Consumers are willing to pay more for the items they want, causing manufacturers and service providers to charge more. Supplies can decrease for many reasons: A natural disaster can wipe out a food crop or a housing boom can exhaust building supplies, among other situations.

Deflation occurs when too many goods are available or when there is not enough money circulating to purchase those goods. For instance, if a particular type of car becomes highly popular, other manufacturers start to make a similar vehicle to compete. Soon, car companies have more of that vehicle style than they can sell, so they must drop the price to sell the cars. Companies that find themselves stuck with too much inventory must cut costs somewhere, which often leads to layoffs. Unemployed individuals do not have enough money available to purchase expensive items, which continues the trend.

When credit providers detect a decrease in prices, they often reduce the amount of credit they offer. This creates a credit crunch where consumers cannot access loans to purchase big-ticket items, leaving companies with overstocked inventory and leading to further deflation. Deflation can lead to an economic recession or depression, and the central banks usually work to stop deflation as soon as it starts.

Demand pull inflation usually occurs when there is an increase in aggregate monetary demand caused by an increase in one or more of the components of aggregate demand (AD), but where aggregate supply (AS) is slow to adjust.

The commonest causes are demand shocks, such as:

    Earnings rising above factor productivity.

    Cheaper credit, following a reduction in interest rates.

    Excessive public sector borrowing.

    A housing boom creating equity withdrawal and a positive wealth effect.

    Changes in the savings ratio.

The savings ratio

The savings ratio indicates the percentage of disposable income which is saved, rather than spent. Sudden changes in the savings ratio are an indicator of future changes in spending and AD, and can be a prelude to inflation or deflation.

A rise in the savings ratio indicates a decline in consumer confidence, whereas a fall in the savings ratio indicates a rise in confidence and spending, which can trigger an increase in the price level.

Cost-push inflation
Cost-push inflation occurs when an economy experiences a negative cost shock.

An increase in costs causes the aggregate supply curve to shift upward and to the left, resulting in a rise in the price level, and a contraction of aggregate demand.

The commonest causes are:

    Oil price shocks, caused by wars or decisions by OPEC to restrict output.

    Increases in farm prices or general food prices, following a series of poor harvests.

    Rapidly rising wage costs.

    A fall in the exchange rate, which increases the price of all imports.

    Imported cost push inflation as a result of inflation in other parts of the world.

A  fall in the exchange rate

A reduction in the exchange rate will mean that more Sterling is required to purchase a given quantity of imports; in other words, the price of imports will rise. After a time-lag, this will feed its way into retail prices.  For example, a motor vehicle imported from Germany for €50,000 would cost £25,000 at an exchange rate of £1 - €2. If Sterling falls in value, to £1 = €1.90, then the Sterling price would rise to £26,316.

Given that approximately 35% of the CPI basket of consumer goods and services are imports, the effect of a fall in the exchange rate is to raise the CPI. In addition, imported raw materials are also more expensive so costs of production will rise for those firms that source their inputs from abroad. Therefore, while a low exchange rate may be beneficial for exports, it has as a potentially inflationary effect on costs and prices.

Research by the Bank of England has identified two phases through which a change in the exchange rate 'passes through' the economy.

    In phase one, a change in the exchange rate affects import prices fairy quickly.
    In phase two, changes in import prices work their way into retail prices. Phase two may take much longer, even up to 3 years to complete.

Causes of deflation

Deflation tends to occur when the economy’s capacity, as indicated by the position of the AS curve,  grows at a faster rate than AD. Firms have to cut prices in order to stimulate sales and get rid of stocks.

Deflation can be triggered by an increase in supply. As business and consumer confidence in the economy declines, AD falls, resulting in recession.

It is a pattern that has caused real damage, because over-optimistic forecasts delay measures that are needed to boost growth, and thus impede full economic recovery. Forecasters need to come to terms with what has gone wrong; fortunately, as the post-crisis experience lengthens, some of the missing pieces are coming into clear focus. I have identified five.

First, the capacity for fiscal intervention -- at least among developed economies -- has been underutilized. As former United States Deputy Secretary of the Treasury Frank Newman argued in a recent book, Freedom from National Debt, a country's capacity for fiscal intervention is better assessed by examining its aggregate balance sheet than by the traditional method of comparing its debt (a liability) to its GDP (a flow).

Reliance on the traditional method has resulted in missed opportunities, particularly given that productive public-sector investment can more than pay for itself. Investments in infrastructure, education, and technology help drive long-term growth. They increase competitiveness, facilitate innovation, and boost private-sector returns, generating growth and employment. It does not take a lot of growth to offset even substantial investment -- especially given current low borrowing costs.

Research by the International Monetary Fund has indicated that these fiscal multipliers -- the second factor overlooked by forecasters -- vary with underlying economic conditions. In economies with excess capacity (including human capital) and a high degree of structural flexibility, the multipliers are greater than once thought.

In the U.S., for instance, structural flexibility contributed to economic recovery and helped the country adapt to long-term technological changes and global market forces. In Europe, by contrast, structural change faces resistance. Fiscal stimulus in Europe may still be justified, but structural rigidity will lower its impact on long-term growth. Europe's fiscal interventions would be easier to justify if they were accompanied by microeconomic reforms targeted at increasing flexibility.

A third piece of the forecast puzzle is the disparity between the behavior of financial markets and that of the real economy. Judged only by asset prices, one would have to conclude that growth is booming. Obviously, it is not.

A major contributor to this divergence has been ultra-loose monetary policy, which, by flooding financial markets with liquidity, was supposed to boost growth. But it remains unclear whether elevated asset prices are supporting aggregate demand or mainly shifting the distribution of wealth. It is equally unclear what will happen to asset prices when monetary assistance is withdrawn.

A fourth factor is the quality of government. In recent years, there has been no shortage of examples of governments abusing their powers to favor the ruling elite, their supporters, and a variety of special interests, with detrimental effects on regulation, public investment, the delivery of services, and growth. It is critically important that public services, public investment, and public policy are well managed. Countries that attract and motivate skilled public managers outperform their peers.

Finally, and most important, the magnitude and duration of the drop in aggregate demand has been greater than expected, partly because employment and median incomes have been lagging behind growth. This phenomenon preceded the crisis, and high levels of household debt have exacerbated its impact in the aftermath. The stagnation of incomes in the bottom 75 percent of the distribution presents an especially large challenge, because it depresses consumption, undermines social cohesion (and thus political stability and effectiveness), and decreases intergenerational mobility -- especially where public education is poor.

Sometimes change occurs at a pace that outstrips the capacity of individuals and systems to respond. This appears to be one of those times. Labor markets have been knocked out of equilibrium as new technology and shifting global supply chains have caused demand in the labor market to change faster than supply can adjust.

This is not a permanent condition, but the transition will be long and complex. The same forces that are dramatically increasing the world economy's productive potential are largely responsible for the adverse trends in income distribution. Digital technology and capital have eliminated middle-income jobs or moved them offshore, generating an excess supply of labor that has contributed to income stagnation precisely in that range.

A more muscular response will require an awareness of the nature of the challenge and a willingness to meet it by investing heavily in key areas -- particularly education, health care, and infrastructure. It must be recognized that this is a difficult moment and countries must mobilize their resources to help their people with the transition.

That will mean redistributing income and ensuring access to essential basic services. If countering inequality and promoting intergenerational opportunity introduces some marginal inefficiencies and blunts some incentives, it is more than worth the price. Public provision of critical basic services like education or health care may never be as efficient as private-sector alternatives; but where efficiency entails exclusion and inequality of opportunity, public provision is not a mistake.

One hopes that a growing awareness of the significance of these and other factors will have a positive effect on policy agendas in the coming year.

If historical norms are anything to go by, then something is definitely off-kilter with oil and gold markets. Historically, it has taken about 15 barrels of crude oil to buy an ounce of gold. Today that ratio is more like 22:1, due to oil prices touching five-year lows on Monday, while gold, in contrast, has stayed stubbornly high and, perversely, managed to fly in the face of just about everything else by staging an $18/oz rally on Monday.

There are many analysts that believe the greater risk to gold prices is to the downside than to the upside. Barclays’ Suki Cooper is one of them and reiterated the downside view on Monday in a research note. Cooper belongs to the camp of those believing a rise in US interest rates will happen sooner, rather than later, despite the Federal Reserve continuing to make no such indication in its policy statements to date. But a rise in interest rates is likely to serve only to strengthen the dollar further.

Conversely, the gold bugs would have us believe that, while the short-term prospects for gold prices point to weakness, the US’s inability to tackle its deficit and debt, and the implications for the broader economy, should support gold prices. The gold bugs keep talking about gold being the great store or preserver of wealth. But anyone that bought gold in the January 21, 1980 peak of $850/oz never made a profit, if allowing for inflation. They may have gotten close to achieving a profit if they had sold at the peak of August 2011, when gold prices rose briefly above $1,950/oz, but to really make a profit, allowing for inflation, they would have had to sell for about $2,200/oz.

Given the strength of the dollar, which has pushed most dollar-denominated commodities’ prices lower, including crude oil, gold ought to be under some downward pressure, but a looming Greek general election — the outcome of which is not entirely clear — has triggered a renaissance for the “Greece has no future in the eurozone” theory. Greece is roiling from a period of unprecedented austerity and one of the political forces in the country — the far-left Syriza Party — is campaigning on a promise of cancelling, renegotiating, or reneging on Greece’s sovereign debt, which could potentially give rise to a eurozone sovereign debt crisis that will make the previous one seem like a relative walk in the park.

Gold usually has an inverse relationship to the dollar, especially when it comes to the euro/dollar exchange rate. The previous eurozone sovereign debt crisis weakened the euro against the dollar. Yet, on several occasions, gold prices went up when the dollar rose against the euro, because gold was seen as a safe haven from the euro. The same thing pushed gold prices higher on Monday.

To prove history right on the oil/gold ratio, the logical conclusion might be that something has to give: either crude oil prices have to rise, or gold prices have to fall, or a bit of both, to restore the historical 15:1 ratio. So far, gold seems to be finding solid support at the $1,200/oz level, while crude oil, basis front-month NYMEX, dipped below $50/barrel on Monday, and only just about managed to settle above the $50 mark. All the talk seems to be of crude remaining under downward pressure.

Has the world changed in the last couple of months to the point that the old 15:1 ratio is no longer relevant? Perhaps only an historian will be able to answer that in a couple of decades’ time. But consider this: Russia is exporting more crude than at any time since before the collapse of the Soviet Union — desperate for petrodollars — even though in doing so, it is contributing to lower crude oil prices and adding to its enormous economic woes caused by sanctions from the EU and the US. Additionally, the US is becoming less reliant on crude oil imports, probably the main reason why OPEC chose not to cut production at its last meeting, in the hope of pushing oil prices lower in an attempt to render as many US shale plays as possible uneconomic, so that OPEC members can ultimately reap the long-term rewards.

It was not so long ago that President George W. Bush told us that the US was addicted to oil, leading to a widely held view that the US would forever be dependent on imports for most of its energy needs. From that perspective, the world does seem to have changed. The US may still be addicted to oil, but it is, at least, producing more of its own vice.

Periods of sustained low oil prices, result in widespread, sustainable economic growth; at least, they have in the past. So if we are in for a sustained period of low oil prices and history repeats itself, then maybe the widespread economic growth that the low oil prices generate will put the necessary pressures on gold and oil prices to restore the historical 15:1 ratio.

My Top 10 Ways To Make Money Online

1. Sell On Ebay

During my pre-teen and early teenage years I went from playing with Transformers, GI-Joe and LEGO, to playing Nintendo, Sega and Gameboy. Eventually I added the card game Magic: The Gathering to the mix at about 16 years of age. All of these things were passions for me at various stages of growing up, but one thing remained consistent throughout each stage; I traded and sold toys and games I no longer wanted to make extra cash.

In Brisbane where I live, before the Internet there was a newspaper called the Trading Post that was published every two weeks. It was an aftermarket for pretty much everything. Whenever I grew tired of a game or a toy I’d sell it via the Trading Post, usually in an effort to make enough money to buy the new toy or game I had in my sights.

Eventually the Internet came along and the Trading Post no longer commanded the secondhand market like it once did (though it did successfully transition online). It quickly became clear that eBay was the winner when it came to secondhand commerce online. As a result my first experience making any money from the Internet was selling old games, toys and electronics on eBay.

EBay is still I believe the best way to gain experience making money from the Internet for two reasons –

    You are pretty much guaranteed to make some kind of sale and thus experience a transaction
    EBay has the traffic, so you don’t have to worry about marketing your product beyond creating a good listing, the eye-balls are already there

These two reasons make eBay a great first stop because you will learn how to list something for sale online, how to take money (possibly your first experience with PayPal) and about the importance of things like titles and copywriting, if you spend the time to study how to make your eBay listings convert better.

The best thing about eBay – the abundant traffic – is also the worst thing. Barriers to entry are low on eBay, meaning competition is fierce. When competition is fierce, profit margin is slim. Unless you can find some form of competitive advantage through your supply chain, how you create listings, or you have a means to increase volume, you’re not going retire rich thanks to eBay.

I spent quite a bit of time studying eBay, both as a business model and as a means to capture new customers because of how much buying traffic is there. There is no doubt that eBay is a fantastic website that represents a huge potential to make money, but in my case I wasn’t keen to build my business there, it didn’t match enough of my criteria.

However eBay is a fantastic way to make quick money, even just as a way to turn your old items into cash to start a new online venture. If you’re brand new to Internet marketing and you don’t know your PayPal’s from your Clickbanks, or your PPC from your SEO, eBay is definitely a great place to learn some basics.

2. Sell products in forums, bulletin boards, classifieds and other community type sites

The card game Magic: The Gathering was a big part of my life from the end of highschool to the beginning of university. Although initially I was just a casual player and then tournament player, I quickly became a card trader and really enjoyed the wheeling and dealing. Although my interest in playing the game wained, most of my early projects online were connected with the game.

Before having my own website, I spent time reading websites, newsgroups, bulletin boards and forums about the game, and eventually started trading online. Back before search engines were any good most of my time was spent in particular Magic newsgroups, some that talked strategy, and some that were focused specifically on trading and/or buying and selling cards.

I managed to make spare change selling my cards through these sites. The main reason I could make any money was because I would win cards in tournaments, hence I had a supply source that would result in a good profit margin. Of course this wasn’t sustainable unless I kept placing well in tournaments, nor was it really scalable unless I started buying in cards from other sources.

I stopped using this method once I started my own card game site (more on this below), however I still believe niche collectables, particularly in a market that you really love, is a fantastic starting point to gain experience making money online. Like eBay you can make money selling secondhand items in community sites if you can find a way to source product at cost or below. It’s not a model that has much margin so again the challenge is to scale if you want to make significant profit.

3. Sell products from your own website

My first successful website was about the card game Magic: The Gathering. At first the site was just a hobby with articles written by me and a few friends. Eventually as traffic grew I began making some money with the site.

Since I was already a card trader it made sense that my Magic site have a Magic card store. At first I stocked the website with my own cards, and eventually added retail “sealed” (unopened packs of cards) by buying product at wholesale from a company in Sydney.

It was a very simple card shop made up of text listings of the cards I had for sale, the quantity available and the cost per card or per pack. I maintained the inventory myself from my room, sorting and listing cards online by hand using plain text. I didn’t use any software and most of the payments I received back then was via check or money order in the mail. Some kids would even send money and even coins (!) in the mail to pay for their purchase.

My business did well enough, although the manual labor was intense. Maintaining inventory lists, packing cards into envelopes and daily trips to the post office was not always the most fun way to spend my time, though I did enjoy having my own little business while in university.

Unfortunately my store was hit by credit card fraud when I foolishly sold a significant amount of product to an unknown person in Thailand. This experience was enough for me to decide that I had had enough of running a Magic shop and it was time to move on. You can read about the credit card fraud experience here – Yaro Starak Timeline – Part 2
Selling Products Online Is A Big Opportunity

My first three experiences of making money from the Internet all involve some kind of physical product. Online commerce obviously represents a huge opportunity to make money online, and having your own product or a passion for a product that you can source can lead to big profits.

You can sell product from your own website store, via community sites and classifieds (like Craigslist) and of course eBay and collectively make good money. The challenge, like with any business, is defining what is your competitive advantage and can you come up with a model that meets your needs. For me selling physical product was a great proving ground, but I eventually learned that profiting from information was a preferable model if I wanted to meet my aforementioned business goals.

I’ll leave it in your hands to decide whether physical commerce is the way to go for your situation.

4. Sponsorship advertising on a content site

Once my card game site was successful I began researching how to make money from it. I sold cards initially because I already knew there was a market for that and I had the cards, but I was also aware that if I had an audience I could charge sponsors money to advertise to them.

Thus began my love affair with banner advertising.

Although challenging at times to find sponsors, I was quickly able to bring in several hundred dollars per month in advertising revenue by directly approaching online companies who I considered good targets for my readership. I emailed them and asked if they would like to pay a monthly fee to place a banner on my site. Most said no, but some said yes and eventually I had a couple of loyal sponsors.

Banner income would prove very reliable over time as long as I continued to do whatever I did to maintain and build a readership. This has continued today, where several sponsors pay a fee to advertise their products and services to you, the reader of this website.

Banner advertising, when set up using a system like I presently use, can be very hands off – in fact for me it’s entirely passive – assuming there is an audience that the sponsors benefit from advertising to. It’s difficult to make loads and loads of money just from banners unless you have significant traffic, but it is easy enough to make some money from it and once you do, it generally proves very reliable unless you stop updating your website.

I’d recommend this method to you if you have some kind of content based site or a community site that attracts enough traffic to make it worthwhile for sponsors. The best thing about banners is that they don’t have to replace any other income method you use, you can use this income stream in tandem with others.

5. Sell services you provide personally

At one stage early in my career when my online income wasn’t consistent, I was part of a business grant program run by the Australian government designed to assist entrepreneurs with money to pay for life’s necessities so you can focus on growing your business. The idea is that when your business is successful you will eventually hire people and pay taxes, thus the government reaps a return on the investment.

The grant ran for 12 months and I was under the assumption (incorrectly) that I had to show consistent income growth in order to maintain my qualification for the program. My income at the time always suffered a downturn around Christmas/Summer in Australia. To combat this problem I decided to teach English face-to-face with people in Brisbane to hopefully boost my reportable income.

To advertise my tutoring service I marketed using posters offline and eventually set up a website and marketed on classified sites as well. I charged $15 an hour and eventually had a few Korean clients. This idea eventually ballooned into a full on English school with a real world premises that I managed for eight months before closing down. It turned out to be an experiment that taught me I much preferred online business to bricks and mortar.

My English tutoring days were short lived, but that doesn’t mean selling some kind of service that you personally deliver isn’t still a viable option. The Internet is a fantastic place to market your services for free. Similar to what I talked about in the first three points, you can use online community sites, classified, forums and your own website to market your service.

The downside with this model is that you are still trading hours for dollars, which is a violation of my holy trinity concept. It’s not necessarily the worst option – and many people enjoy the life of a high-paid consultant very much – but it does have the inherent limitation that a service is not replicable unless you personally do it yourself or hire people to do it for you, both activities that take time and/or resources.

If you are good at something and enjoy helping/teaching/working on other people’s projects, selling what you do online is worth considering.

6. Sell services provided by other people

My next big success after my card game site was an online proofreading business. For this business I wanted to focus on selling something that did not require either my own labor or sourcing some kind of physical product.

The business began in very simple fashion. I created the website personally myself and advertised two services – English proofreading and language translation services. I knew how to find contract proofreaders and also had access to an online database of language translators. When a job came through I’d organize a quote, slap on a margin for myself and then return the quote to the client.

Over the years I heavily refined this business. I brought on an assistant, simplified the services, cemented a pricing model and learned what methods of marketing brought in the best type of client. The end result was a full time income for me and barely a few hours of work to maintain it.

This was the first time I found a business that met all my major criteria – except one – I really wasn’t that passionate about the industry. Initially I enjoyed being the entrepreneur, the thrill of making money and automating the business as much as I could, but after a few years my passion wained. I eventually sold the business, earning a nice payday in the process, making this one of my most personally gratifying projects.

Selling a service is a real option for making money online. The challenge is sourcing good people to do the work, learning what specific offer to make to the market, how to differentiate yourself so you earn good margins, how to market what you offer and how to automate the entire process so it becomes a passive income stream.

7. Paid reviews

For a brief period on my blog I invited people to submit their product, service or website for a paid review. This means they pay a fee (for my site it was $250) and I would write an article about whatever they submitted. I would not accept just anything for review, I had to see an angle that made for relevant content for my audience. Nor was a paid review a promise that I would write positively about the subject – I would highlight both good and bad points.

Initially I didn’t mind writing paid reviews as the income was pretty good in terms of how long it would take and how much I earned. I could make as much as $250 an hour, which was great at first, but as my motivation focused more on freedom and less on money, even this became a poor incentive. Plus I never did like that I was told what to write about rather than choosing subjects I enjoyed.

The challenge for you, if this method is relevant to your growth stage, is to create a website where you can command a price for paid reviews that makes it worth your time. Until your traffic is significant, charging more than $50 for a review is not realistic, so you need to build your website asset first.

8. Affiliate marketing

As my blog audience grew I began to test a method of making money I was very interested in – affiliate marketing. My first test proved positive, though initially I was disappointed that of my readership of 500 or so people (at the time), I could only sell one or two products, making $20 commission each. It wasn’t retirement money, but it was a start.

Affiliate income has gone on to become my second highest source of income in recent years, thanks in part to the increase in my audience reach. By combining my blog and email newsletter I can reach thousands of people with just one piece of content. By testing different products and recommending things I personally use myself, I’ve been able to earn as much as $50,000 in commissions selling just one product.

Affiliate marketing is possibly the single best way to make a living online because it is so hands off, can be automated easily enough and can deliver some incredible profit margins. It’s especially good when you can use affiliate marketing to recommend things in areas you are personally interested in – for example you can make money simply writing a review of a book you really wanted to read anyway and you get paid for doing what you love.

The challenge for you is figuring out what market(s) to enter, building an audience and maintaining relationships with your readers so they trust what you tell them. If you know something that other people want to know and you are prepared to share that information, you could be looking at a fairly lucrative affiliate opportunity.

9. Sell your own information products

The single most profitable income stream I have ever developed is selling my own information products. If you are a long time follower of my work you know I have created courses on how to make money with blogs and membership sites. I also have several reports, an ebook and new products on the way.

The profit margins on information products is significant, especially as you can earn money for content you created years ago. Technology makes selling information online relatively easy to automate, once you get through the learning curve. If you focus on areas you are passionate about you can build expertise and leverage that trust and credibility to make sales of your products. Best of all, all of this can happen while you sleep, once you have built the machine to do it for you.

I personally enjoy teaching, so creating my products like Blog Mastermind though hard work, was an enjoyable process. Once the course was created I continued to sell it year after year to people new to the industry who want to learn how to make money with blogs.

Like with affiliate marketing, your potential to succeed selling information products rests on your ability to identify market needs, tap into audiences looking for this information and then give them what they want. There are plenty of subtleties and things to learn about, but thankfully there is plenty of guidance out there too. Digging into the archives of this blog you are reading now and downloading my free reports – The Blog Profits Blueprint and Membership Site Masterplan are fantastic starting points if you want more help.

10. High end private coaching

I’ll end this article with something I only recently did – offer high end coaching to a select group of clients who had to apply to work with me. My program cost between $5,000 and $10,000 and I turned away more people than I accepted. This was deliberate as I knew working one-on-one with people is not something I can do with many people or I will use up all my time. However I was keen to help certain people who were in the right position so I could learn more about the challenges they face.

Private coaching, like consulting, is another situation where you trade time for dollars, but in terms of your hourly pay rate it is hard to find a higher paying “job”. Of course you don’t have to start off charging thousands of dollars. Depending on your expertise and what kind of outcome you help people achieve, will determine how much you can charge. Offering coaching for $100 per session is not out of reach for most people, and that’s not a bad starting rate if you are looking to build up your experience through helping others closely.

Again the Internet is by far the easiest and most affordable tool to attract coaching clients. In many cases you can add private coaching to many of the other methods I listed above, including selling info products you create, affiliate products, sponsorship banners and physical products.

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If Bitcoin became global currency, it would necessarily limit what bankers and govt could do. It would be much, much more difficult for govt to finance wars, continually expand welfare roles (as opposed to focusing on those who are in most need), subsidize various industries, etc. Bankers would also have more incentive to limit it's lending.

However, overall there isn't any reason to believe that there wouldn't be similar investment vehicles, savings edifices, deposit insurance, etc.

In addition, as someone else mentioned, a fixed currency creates a situation where productivity and population growth (slowly) increases the value of each bitcoin. This encourages savings over debt.

Many disagree about the impact on business, productivity, growth, innovation, etc between an (moderate) inflationary/deflationary environment. But that's a slightly different and deeper conversation. Briefly, many believe that a deflationary environment would not just slow, but actually reverse spending, growth, and investment ("Deflationary death spiral"). They tend to believe that inflation is necessary to encourage spending and growth. Others (myself included) believe that an inflationary environment tends to encourage over-consumption, spending and borrowing over savings - thus leading to more/bad debt and contribute to instable boom/bust economic crashes. Similarly, these believe a deflationary environment would not stifle growth, but would slow it to a stable, more sustainable rate.

Satoshi Nakamoto, the person who created the digital currency Bitcoin, is our person of the year. 

Don't laugh.

Although to this day no one knows who Satoshi Nakamoto is (or are — for the latest theories check out Chart Girl's running chart) Bitcoin evangelists make the case that his true identity doesn't matter: what he's created is changing the world.

It's an assertion you hear a lot in the arts world too: you should know the man (or men, or woman — there's nothing to suggest Satoshi couldn't be one) by their works, not their biography.

This is a convincing argument.

Bitcoin wasn't the first digital currency (think World of Warcraft), and, as we've documented, wasn't the last.

But Satoshi managed to come up with something that is simply more farsighted and bulletproof than anything else, combining the best features of existing digital coins while adding his own perfections.

In particular, he addressed one of the biggest problems in online transactions: fraud. In the real world, it's the job of a centralized authority to prevent that from happening. But Satoshi figured out a workaround by cutting out that middleman: just make all transactions public, and have the entire community confirm a transaction is legit. "We have proposed a system for electronic transactions without relying on trust," Satoshi wrote in his 2008 spec paper laying out the currency — a line which, it now seems, will echo through generations.

Perhaps his most brilliant idea was making sure you couldn't hack the ability to create excess Bitcoins. Bitcoins are "mined" by computers unscrambling blocks of "hashes" or complex strings of numbers and letters. Satoshi's solution was to continuously increase the difficulty of unscrambling the hashes as more Bitcoins were created. As he wrote, "To compensate for increasing hardware speed ... the proof-of-work difficulty [the unscrambling] is determined by a moving average targeting an average number of blocks per hour. If they're generated too fast, the difficulty increases."

Even the folks behind hashcash, an early digital currency which Satoshi admits he was inspired by, had to admit Bitcoin was "an extremely clever innovation and invention," and "a first."

But why is Bitcoin such a big deal? Bank of America analyst David Woo's recent note best boiled down Bitcoin's three main uses: as a store of value, like gold; as a way to buy stuff online, and as a means for remitting money. And in most instances it's cheaper, easier, and more secure to do all these things with Bitcoin. The first two have been occurring since Bitcoin's birth, and the advent of the last one is imminent. In absolute dollar terms, Bitcoin has already surpassed Western Union for transaction volume, and is nipping at the heels of PayPal.

Of course this is all entirely subjective, and even Bitcoin's most passionate evangelists don't rule out that some technological or regulatory catastrophe could cause its value to plunge to zero.

When we decided to name Satoshi "Person of the Year," we considered who and what else has changed society in the past 12 months. We respect the actual choice made by Time — Pope Francis has a clear set of goals, is hyper aware of the issues of the day, and really lives his religion.

Obviously, though, we have a business bias. We were not about to give the title to Paul Volcker, whose rule, while extremely meaningful, does not possess the same kind of worldwide reach as Bitcoin. Ben Bernanke could have gotten it (and possibly the Nobel Peace Prize) every year since 2009, but consecutive years of basically doing the same great stuff rules him out for 2013. Carl Icahn made an extremely impressive case for putting the fear of god into companies, but he is not quite a household name.

Neither, of course, is Satoshi. But what were you talking more about over cranberry and stuffing a few weeks ago: Carl Icahn's Tweets? Or regrets about having not gotten in on Bitcoin sooner?

One final use of Bitcoin that is often under-discussed: its use as a solution for the "unbanked," or people without access to financial instruments. As with everything Bitcoin, this may seem far-fetched at first blush. How could people who may lack access to the Internet use Bitcoin? But investors have made the case that these communities would use their cell phones — which are widespread in the developing world — as the primary medium through which these people would interact with the currency. Possessing the ability to securely send and receive funds from your pocket is a big deal for someone without access to a bank account.

If that takes hold, Bitcoin could even begin nibbling at inequality — something Pope Francis could respect. 

How to Get Rich in 3 (Really Difficult) Steps

Step 1: Ignore Your Mother

Parents around the world typically encourage their kids to get educated so they can get a "good job," and perhaps become a doctor or lawyer, although neither tends to be a path to significant wealth. High-paying professions provide an excellent income stream, but two insidious forces undermine the professional's ability to create significant wealth: tax and spending.

Tax

It is difficult to become wealthy on the basis of a salary alone. Since income is taxed at the highest possible rate, you're left with not much more than 50 cents on the dollar.

Spending

The other problem with having a high income is that it creates a wealth effect that triggers spending. Thomas J. Stanley, the famous author of the research-driven classic The Millionaire Next Door, points out that some professionals--in particular lawyers--spend a large portion of their income to give the impression that they are successful, in part because they do not enjoy much social status from their job. In other words, when you earn $500,000 a year, you buy a Range Rover or send your kids to a fancy private school at least in part because you want people to think you are rich.

Step 2: Start Something

Most wealth in America is created through owning a business. Recently, Mass Mutual looked at the proportion of business owners that make up a number of wealth cohorts. They found that 17 percent of people with between $100,000 and $500,000 to invest were business owners.

Keep in mind there are about 8 million employer-based companies in the United States, meaning the incidence rate of business ownership (the natural rate at which you find business owners in the general population) is about 3 percent. Said another way, if you grabbed 100 people walking down the street, on average three of them would be business owners. On the other hand, if you took a random sample of 100 people with investable assets of between $100,000 and $500,000, 17 of them would be business owners, meaning you're more than five times more likely to find a business owner in the $100,000 to $500,000 wealth segment than you are to find an employee.

The trend becomes more pronounced the higher up the wealth ladder you go. If you look at wealthy investors with between $500,000 and $1,000,000 in investable assets, you'll see that the proportion of business owners in the segment goes up dramatically--to 27 percent.

The Very Rich

Among investors with between $1,000,000 and $10,000,000 in investable assets, the proportion of business owners jumps to 52 percent. Sixty-seven percent of investors with $10,000,000 to $50,000,000 sloshing around in their bank account are business owners, and 86 percent of investors with $50 million dollars or more in investable assets are business owners.

Simply put, if you meet someone who is very rich, it's highly likely they are (or were) a business owner.

Step 3: Get Liquid

The next step is to focus on improving the value of your business so that you can sell it for a premium. Just being a successful entrepreneur is not usually enough to become rich. You have to find a way to turn the equity you have locked up in your business into liquid assets. When it comes to selling your business, the three most common options are:

    Acquisition: This is the headline-popping way some entrepreneurs choose to trade their shares for cash. When Facebook acquired WhatsApp for $19 billion, founders Brian Action and Jan Koum got very rich.
    Re-capitalization: A minority or majority "re-cap" occurs when you sell a stake in your company (often to a private equity firm) yet continue to run your business as both a manager and part owner with a chunk of your wealth in liquid assets outside of your business.
    Management Buyout: In an MBO, you invite your management team (or a family member) to buy you out over time, usually with a mixture of some cash from the profits of your business and debt that the managers take on.

There are other, less common ways to turn your equity into cash (e.g., an IPO) but the key is turning the illiquid wealth in your business into diversified liquid wealth. The best part about selling a business is that the wealth created is taxed at a very low rate compared to employment income, so you get to keep most of what you make.

You might argue it is better to keep all of your wealth tied up in your business as it grows, but that can be a risky proposition--just ask Lululemon's Chip Wilson or BlackBerry's cofounder Mike Lazaridis. If you keep your money locked up in your business, it also means you may not be able to enjoy the benefits of wealth. You can't use illiquid stock in a private company to buy an around-the-world plane ticket or a ski chalet in Aspen. You actually have to get liquid first.

There are many good reasons to build a business, and for you, wealth creation may not be as important as making an amazing product or leading a great team. But if money is what you're after, there is no better way to get rich than to start and sell a successful business.

Totalitarianism is not an inappropriate term, not simply because the financial realm holds such a great deal of wealth and power. The term was coined by the Italian Fascist dictator Benito Mussolini to praise the system he created where the ruling ideology dominated every aspect of citizens' lives. Not only did the fascist state ruthlessly and autocratically dominate the economy and politics, it also sought to transform social life and the culture of the nation to become a total way of life. While there is no pompous fascist figurehead, we can see the tremendous power of the financial sector as a form of disorganized or ad-hoc totalitarianism where financial power and modes of thinking increasingly stain the social fabric. And like the totalitarianisms of old, the "financialization" of life is ultimately directed by and benefits a tiny minority, at the expense of everyone else.

"Financialization" generally refers to two overlapping economic processes. First, it speaks to the way an increasing portion of a nation's wealth is bound up with or represented by the financial sector (generally referred to as the FIRE sector for Finance, Insurance and Real Estate), and, consequently, the tremendous influence of the financial sector over corporations, governments and individuals. American financial earnings represent around 8.4% of the national income, rendering the financial sector one of America's largest "industries." The wealthiest 10% of the population owns 88% of financial assets, which has helped contribute to the present situation where roughly 40% of the nation's wealth is controlled by the top 1%, and where the average net worth of the poorest 40% of Americans is almost negative $10,000 (roughly negative $15,000 if home equity is factored out). Financialization means the increased power of banks, hedge funds, private equity firms and other financial actors, and the increasing wealth and power of the top percentile of Americans.
 
But financialization also refers to the way financial goals, ideas and practices start to shape and influence economic actors outside and beyond the financial sector. So, for instance, increasingly corporations don't see themselves as producers of goods and services (let alone as employers or community members) but rather as vehicles for financial speculation. Thanks to the so-called "revolution in shareholder value" that saw "activist" financiers take control of corporate governance in the '90s and early 2000s, most publicly traded companies have oriented their operations not toward steady and reliable profit but toward quarter-to-quarter improvements in stock prices. This has basically meant that non-financial corporations (from major food producers to technology firms) have become obsessed with "performing" innovation and efficiency by firing workers, off-shoring and contracting-out aspects of their businesses, and engaging in risky accounting and financial practices. As corporate America becomes increasingly financialized, it becomes more and more obsessed with squeezing as much money as possible out of consumers and workers, and increasingly callous about things like ecological destruction, the consequences for community, and even the long-term welfare of the corporation itself.
 
Perhaps the most egregious example comes from Private Equity firms (like Mitt Romney's Bain Capital) which specialize in buying up "distressed" companies and ruthlessly cutting workers, wages, benefits and pensions and off-shoring, selling off or sub-contracting aspects of the corporate infrastructure. Once they've "drowned the kittens" (as formerly Canadian media mogul, turned-British-Lord, turned jailbird Conrad Black used to say of the cuts he'd implement when gobbling up a new newspaper), private equity firms sell the "streamlined" company for an immense profit. But even firms that are not yet in trouble are compelled, by shareholders, bondholders and banks, to embrace the austere mentality of financialization, which sees the world as a series of risks and opportunities to be leveraged for speculative gain.
 
Financialization, of course, also introduces unprecedented volatility and uncertainty into financial markets just as it stitches those markets more deeply into the fabric of everyday life. Financialization is also defined by the increasingly elaborate, chaotic and occult ways that a highly specialized subclass of financial wizards deconstructs investment assets to commodify exposure to differential levels of risk, then reassemble or "securitize" fragments of financial holdings. These and other financial assets (including things like speculative gambles on currency rates, government bonds and food prices, which can ruin whole economies) circulate in a transnational computerized empire of interconnected financial markets, where the majority of trades are automated and which is moving with such sickening velocity that it is a power unto itself.
 
But financialization means something even more profound than this. It is easy to get wrapped up in the horrifying economic dimensions of finance's power, but we also need to understand the political, the social and, importantly, the cultural aspects of this process. Financialization is not just something imposed on us all "from above" by smug investment bankers and ruthless private-equity fund managers. It's also something that relies on all of us to enact financial relations every day. And to change this situation, we need not only to unseat the financial oligarchs but to change those everyday relations as well.
 
As the example of Citigroup effectively drafting federal financial policy indicates, financialization is a political process, one largely characterized by the ugly and incestuous influence of the financial sector on all levels of government. By now, it is well known that the vast majority of high-level federal regulators, and, indeed, economic bureaucrats around the world, are former employees or consultants for the world's major banks and financial firms. The financial world is so occult and esoteric that (the financial elite claim) it is impossible for us mere mortals to understand, necessitating the revolving door between Goldman-Sachs and the US Treasury. We can add to this the fact that most nations on earth (and, increasingly, most states, provinces, cities and sometimes school boards, universities, hospitals and other "public" infrastructure), including the United States, are trillions of dollars in debt to the major global financial institutions, meaning that these banks have tremendous power over government policy. They use this influence to force governments to basically act more like financial corporations: cutting jobs, privatizing or charging for services, entering into increasingly risky forms of financial leverage.
 
If governments (large and small) fail to prove themselves to be good financial managers, they may find it difficult or impossible to borrow enough money to pay the bills. Already we are seeing many cities and towns declaring bankruptcy -- not for lack of economic productivity or profligate spending but because they simply cannot keep up with the interest payments on loans they have been forced to take out, largely because, 40 years into a neoliberal, free-market revolution, governments have cut taxes (especially corporate taxes) to such an extent they must borrow money that was once their (our) entitlement.
 
To this, we can add the vicious circle, where the financial sector mobilizes its power and influence to compel governments to loosen regulation and oversight of their world. That deregulation is precisely what led to the conditions where the sub-prime mortgage could mushroom out of control. Over the past 30 years, subsequent governments were compelled or convinced to weaken and water-down their oversight of the financial sector and mortgage markets. The rest is history, but it brings us to our next point, which is that financialization is also a social process. It is something that happens at the sociological level as well. So, for instance, since the Second World War home ownership has been seen as the single most important factor and indicator of middle-class belonging in the United States. In previous moments, governments have sought to help homeowners in a variety of ways, including the construction of public housing or the creation of semi-governmental companies that would essentially help mitigate banks' risk in lending to prospective homeowners. The first thing to note about this is that it essentially imagines a basic human need, shelter, as a market good. Indeed, not only are individuals encouraged to buy homes as a means of safety and security, they were, increasingly since the 1970s, encouraged to buy homes as investments, with both governments and financial institutions telling them that the price of homes would rise ever higher. More recently, houses came to be seen as sources of liquid cash and equity, meaning the Americans falling on hard times could easily borrow against the costs of their homes to pay for big expenses (a car, a university diploma, down-payments for one's children's homes, etc.). This is part and parcel of a broader shift that encourages us all to see ourselves as individual financial firms or miniature financiers.
 
With the rise of neoliberal "free"-market oriented economic policies based on the far-right assault on "big government," public services and public forms of security and insurance have been slashed, leaving individuals to fend for themselves in an increasingly globalized and austere market. The result has been stagnation and decline in average real wages (wages adjusted for inflation), the diminishing net-worth of most Americans, and the rise of increasingly precarious employment (temporary, part-time, contract-based, low-pay, service-oriented etc. -- especially for women). It has also resulted in the sense that we can rely on no one but ourselves, and that we are each responsible to manage risks in our own life through prudent "investments" and individualistic profit-seeking. A key and formative example is the transformation of retirement security from a public, shared good to a private, financialized responsibility, one aspect of the vast privatization of life's risks from society at large to the isolated individual. This financialized ideology has deeply saturated society, and not only in the realm of housing. For instance, education has ceased to be seen as a public good aimed at cultivating a new generation of responsible citizens. Instead, it is seen as an individual investment where students are expected to "leverage" tens of thousands of dollars in debt into a university degree that will allow them to compete on the job market for the right to pay off their debt (recent statistics indicate that some 11% of student loans are more than 90 days delinquent). Indeed, debt has now become the universal condition of the American post-middle class, and juggling credit-card debt, payday loans, bank debt, student loans, medical debt, and other obligations has made us all into grim financial virtuosos. Like the debt of governments, the debt of individuals is not a matter of overspending but an effect of the massive transfer of wealth from the public and workers into the coffers of the financial oligarchy. The resources exist to provide everyone a home, an education, medical care, safe neighborhoods, and decent, meaningful work -- the United States is, after all, the wealthiest nation to have ever existed. The problem is that the distribution of the wealth is tragically perverted, and much of it is dedicated to destructive ends, such as the military and the prison industries. Meanwhile, most of us rely on some form of coercive "debtfare" to pay the bills.
 
The social dimensions of finance include the way financial ideas and measurements increasingly infiltrate other spheres of life. For instance, recently, many governments have been experimenting with social impact bonds, which basically allow private corporations to take a crack at offering services once expected of governments. So a city or state government might give a group of investors the right to administer a program to help decrease the risk of recidivism in "at-risk" youth, with very clear metrics for success. If the private firms fail, they bear the cost; if they succeed, the government effectively pays them the costs, plus a hefty premium. While risky, investors are lured by the potential of a breathtaking return on investment, and governments are lured to a seemingly "risk free" way of offering social services. Social Impact Bonds are a perfect example of the way financial ideas and processes are becoming an answer to all of society's problems, even if, ironically, it is the financialized economy that is causing those problems in the first place (by, for instance, largely driving the patterns of urban poverty and racialized exclusion that cause youth to be "at risk" in the first place).
 
We can also look to the hyperbole that surrounds the idea of "financial literacy" for a good example of the sociology of financialization. In the wake of the 2008 financial crisis, the financial elites and governments, in an effort to deflect attention from their own epic failures, pointed to the exploited sub-prime borrowers as the authors of the toxicity that poisoned (and still poisons) the apparently innocent market. New funding was made available by both the public and the private sector for "financial literacy education," including classes at community centers and even at stores like Walmart, aimed at teaching poor individuals to be better financial subjects. Of course, these financial literacy courses are entirely oriented toward individualizing the financial crisis and admonishing individuals for not being good enough mini-financiers, rather than offering some literacy about the despicable economic and political power of the financial sector as a whole, let alone the fact that the debt, poverty and financial ruin of individuals is typically a function of systemic forces well beyond their control. While prudent personal bookkeeping and budgeting might, indeed, be a worthwhile goal, there are millions of Americans who work hard, pinch their pennies and do nothing wrong and still end up under a mountain of debt. In reality, these educational initiatives really produce a profound financial illiteracy because they distract us from the reality that the cause of our financial woes is a fundamental part of a vastly unequal and exploitative economic system.
 
We can add to this the way that financialized metaphors and processes have become the only way to interpret and imagine the vast and horrific consequences of the economy itself. For instance, we can point to the way the climate change debate is preoccupied with notions of creating a carbon "market," the way the AIDS crisis in sub-Saharan Africa is addressed as a future economic liability rather than an infuriating human tragedy, or the way defenders of public health care and education must justify these social goods as good government "investments" that reduce future costs and "risks."
 
So the social dimensions of financialization are all of those ways our sense of collective or public responsibility gets privatized, and the way we are all increasingly imagined to be lonely, isolated risk-takers, competing tooth and nail against one another in an austere and uncaring economy. This social dimension is reinforced and normalized by the cultural dimension of financialization or the way debt, austerity and speculation are "newly normalized." We can begin to see this in the news. Almost always, the business and economic dimensions of a disaster or a world event take precedence, with commentators worrying about the way hurricanes, terrorist attacks or military interventions in the Middle East will affect stock markets. And despite the fact that the majority of Americans own practically no financial assets at all (or if they do it is in the form of 401(k) or mutual fund plans over which they have little control), the financial and business news, including stock market information, is triumphantly broadcast in every newspaper and TV newscast. We have seen the birth of 24-hour financial television (like Bloomberg, which is named after the financier and media tycoon, who is also the mayor of the continent's largest city and the world's largest financial hub – financialization indeed), including obnoxious infotainment like Mad Money, which convinces us that the stock market is some sort of perfect meritocracy where even the little guy can get ahead. But we can also see a culture obsessed and preoccupied with finance emerging elsewhere. There is, for instance, a reality TV fad for shows about property speculation and "flipping," where the camera follows individuals as they "invest" in homes, hoping to turn a quick profit through renovation and resale. Indeed, this theme of quirky individuals "buying low and selling high" is the theme of plenty of other reality TV programming, from antique collectors to bounty hunters. This is not to mention odious financial celebrities the likes of Donald Trump or Warren Buffet, nor the dominance of the punditry circuit by financier-funded think-tank talking heads or financiers themselves. Nor is it to speak of the ways a society preoccupied by the lonely insomnia of largely immaterial debt gives rise to monstrous collective fantasies and obsessive and addictive patterns of gaming and gambling.
 
Meanwhile, authors and commentators find fertile metaphors in the financial world to help us understand other aspects of our lives. Relationship and self-help books advise us to approach our personal relationships and our goals and aspirations as if we are financiers, judiciously "investing" our time, affection and identity in profitable and lucrative relations and projects. In a world where the idea of a secure, lifelong job is a thing of the past, we are all encouraged to see ourselves not as workers but as financially-savvy self-branded freelancers, investing in a portfolio of skills and professional relationships, nimbly navigating between contracts and opportunities, always seeking the next advantageous opportunity and ruthlessly competing against one another through self-promotion and selfless dedication. Is it any wonder that, in a culture that is obsessed with individual competition and risk management, we see a growing hatred of the poor and de-privileged? To the extent we see society as a collection of self-seeking, financialized individuals, we blame individuals for their "failures" and relish opportunities to ascribe to them traits of laziness, avarice and profligacy. And in a society where we increasingly live isolated, competitive lives, we lose sight of public and shared issues, including the grave dangers posed by global warming and rising rates of poverty (which tend to lead to crime, violence, expensive and destructive forms of incarceration and disease).
 
We financialized subjects become increasingly unable to see or understand systemic forms of oppression and exploitation. If we are all equally free to compete on the market for employment and wealth, how can racism, sexism or ableism continue to exist except as the irrational prejudices of individuals? Rendered invisible, oppression and inequality, which remain a central part of the American economy and society, are reduced to personal problems. And should anyone dare bring them up, they elicit a viciousbacklash from those who do have racial and gender privilege, but who believe that women, people of color and others are milking the system for special rights or handouts. Needless to say, the financialized subject is the perfect candidate to support far-right political interests which will, ironically, further deregulate and empower the financial sector itself. So, too, does this day and age, characterized by an economy and society dominated by the extreme volatility of financial markets, lend itself to millennialism and religious fundamentalism that offer the illusion of stability, certainty and meaning based on individualizing moralism and the ever-deferred promise of redemption. Far from Marx's notion of religion as the "opiate of the masses," today's fundamentalisms are the crack cocaine of a frantic, paranoid society.
 
To this we can also add a few "cultural" facts: The vast majority of the "masters" of the financial realm are men who have embraced and champion a form of highly competitive and selfish masculinity, which they assume to be the biological norm. As financial ideas and processes spread throughout society, they carry with them the valorization of these supposedly masculine virtues, even encouraging corporatized women to embrace the barbarian spirit of accumulation. Meanwhile, government stimulus programs are largely aimed at male-dominated industries (construction, engineering and technology, manufacturing) while female-dominated professions (teaching, health care, childcare) are slashed. And women tend to bear the brunt of the unpaid labor that is required of family and friends as children, the disabled and the elderly can no longer rely on state-based assistance for care.  We can also note the way that a financialized society privileges those with initial capital to "invest" or with good credit ratings. In a nation where racialized people have been historically disadvantaged and have, on average, dramatically lower net worth and credit ratings than their white counterparts, the system tends to reinforce and re-entrench existing racialized inequalities. In a cut and thrust economy, where each of us must compete to find increasingly episodic work and endure periods of unemployment and underemployment (or work multiple jobs), those with mental illness, physical disabilities or reduced mobility are fundamentally disadvantaged.
 
So financialization is not just the economic supremacy of the financial sector, it is a process that works on the level of economics, politics, sociology and culture. We should not imagine that the political, the social and the cultural lives of finance are simply the bellwether of its economic power -- as we have seen, the financial realm, made up as it is of largely imagined and immaterial wealth, conscripts all of us to save, borrow and believe in the totalitarianism of finance. These different levels mutually reinforce one another, and, as a result, even in the wake of the most massive and disastrous financial crisis in living memory, the financial sector is stronger than ever, and the financialization of life continues to accelerate.
Overcoming the totalitarianism of finance, therefore, demands action on the economic, political, social and cultural level. On the economic level, it is important to understand that the financial sector is ultimately only one sector of an inherently exploitative capitalist economy. While at certain times in history the financial sector rises to a supreme position in capitalism, it is capitalism itself which is the problem, not simply its financial aspect. It is a system fundamentally based on transforming human cooperation into an unequal, individualist and competitive struggle of all against all. While other moments of capitalist history, such as post-war New Deal capitalism in the United States, were relatively tamer and gentler, they still relied on the exploitation of workers and the commodification of needs and wants characterized by poverty, inequality and oppression. Hence, attempts to simply better regulate finance will, at best, have only limited success. Even presuming that we could overcome the tremendous power of the financial sector's insiders and lobbyists in the halls of government, and even presuming we could mobilize a huge enough movement to demand political change, this would, at best, simply return capitalism to a previous stage. And while that might mean better living conditions for some individuals, it wouldn't solve the broader problems of competition and the power of the market over our lives.
 
So the answer to financialization, on an economic and political level, must be the rejection of capitalism in favor of some other economic system. Building such a new economy takes place on two levels. On the one hand, it takes the form of building new commons in our cities, neighborhoods and communities. Commons are sets of shared resources that are not commodified. They should include the necessities of life like food, water, shelter, health, education, security and transportation, although most of these are, today, privatized and market-driven. Commons are examples of grassroots democracy, administered by people for people. Community gardens, daycares, health-care clinics, after-school programs, neighborhood crime prevention and restorative justice initiatives, and community kitchens help us all and build an alternative, solidarity-based economy at the grassroots. They are also a transformation of our social and cultural relations that place us at the center of our lives and make us agents of change. Second, the political and economic transformation away from financialization requires we build and network these commons into a mass movement that can reclaim the productive capacity of our society and government. These rising commons can then reclaim the factories, stores, schools, hospitals and firms from the financial elite and put them to work for people as cooperatives, not for corporate profit. They can also transform government into a vehicle to support the commons, rather than for the support of the market.
 
Already, in the zones where financialization has laid waste to our lives and hopes and communities, the commons are rising to meet people's needs. Community gardening, new cooperatives and solidarity economies are emerging everywhere. The question of our age will be: Can financial totalitarianism kill these efforts in the cradle or co-opt them somehow into its own framework of value? Or will these commons succeed in making common cause and become the platform for us to reclaim our world? Already we are seeing a struggle over the meaning of the commons: will they simply be an alternative business model or an escape valve for a global capitalism in crisis? Or will they be the bedrock of a trulydifferent system?

The case to eliminate paper money!

Modern financial markets are behaviourally and structurally different to anything that was previously conceptualised.  It would have seemed impossible previously to assert that central banks would ever need to take interest rates below zero, but we exist at a time where that is possible and many argue necessary.  “Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some…” writes Rogoff, “But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency.”   With any paper money in circulation, and no deflation wiggle-room, it becomes close to impossible for bank rates to (in reality) breach zero.

Paper money also provides anonymity from the government.  Rogoff notes that, “Standard monetary theory (e.g., Kiyotaki and Wright 1989) suggests that an essential property of money is that neither buyer nor seller requires knowledge of its history, giving it a certain form of anonymity. (A slight caveat is that the identity of the buyer might be correlated with the probability of the currency being counterfeit, but until now this is a problem that governments have been able to contain.) There is nothing, however, in standard theories of money that requires transactions to be anonymous from tax- or law-enforcement authorities. And yet there is a significant body of evidence that a large percentage of currency in most countries, generally well over 50%, is used precisely to hide transactions.”  This is a huge amount of physical cash; around 7% of US GDP, 10% of Eurozone GDP and almost 18% of Japan’s GDP.  In the US alone, this underground economy creates a tax-gap of around $450 billion (the European figure, with a much harsher tax regime, would be considerably larger).

The case to keep paper money

As we sit here today (perhaps in large part due to the underground economy) the demand for paper currency is outstripping the potential for that paper currency to be replaced by electronic central bank reserves.  If we were to simply stop accepting paper money, the world’s central banks would have to absorb a large proportion of the difference, perhaps upto $70billion per year in the case of the USA.  Theoretically it is possible for a government to issue currency which could be de-facto anonymous (using platforms like Bitcoin) however the potential for said money to facilitate a tax-gap and underground economy would continue (a large price to pay for a non zero-bound interest rate world…).

Rogoff also comments that“…another important argument for maintaining the status quo is that eliminating a core symbol of the monetary regime could disrupt common social conventions for using money, possibly in unexpected ways. For example, it could lead to a precipitous decline in demand for debt and not just for fiat money.”  He continues, “…just because a similar equilibrium can obtain with or without a significant transactions role for money, it does not necessarily mean that private agents will focus on the same equilibrium as they would when there exists paper currency. Yes, the government can help coordinate expectations by insisting that taxes are paid in the electronic fiat currency, and that all state contracts be denominated in this currency. But it is important to acknowledge that there is a least an outside risk that if the government is too abrupt is abandoning a century-old social convention, it will destabilize inflation expectations, introduce a risk premium into bond pricing, and generally induce unexpected macroeconomic instabilities.”

From a geopolitical perspective also, we see the threat that by eliminating a domestic currency, the population may just shift to using another- again, this is not beyond the realms of reason, many failed states have adopted the USD as the de-facto currency when that national offering ceased to serve its purpose.

The risks of living without paper…

Alongside the obvious risk of electronic currency to cyber-attack and infrastructure failure, there is also the broad-line concern as to whether a full shift to electronic currency introduces in tracking and traceability which would violate our basic civil liberties.

Despite huge and on-going technological advances in electronic transactions technologies, it [paper currency] has remained surprisingly durable, even if its major uses seem to be buried in the world underground and illegal economy…. Nevertheless, given the role of paper currency (especially large-denomination notes) in facilitating tax evasion and illegal activity, and given the persistent and perhaps recurring problem of the zero bound on nominal interest rates, it is appropriate to consider the costs and benefits to a more proactive strategy for phasing out the use of paper currency.” writes Rogoff.   

The normalisation of innovation into a society (where said innovation becomes accepted as a norm) can happen gradually, or through shocks.

Mobile communications and the internet illustrate this clearly.  In western societies, the normalisation of these technologies was relatively slow – taking a couple of decades.  In other countries however, they became the norm from day one; for many developing nations, mobile telephony and the internet were inserted into culture as a shock by development groups as the first form of reliable telecommunications ever to be in-place, and so the allied and emergent concepts built on these (such as electronic money and so forth) are not only more prevalent, but highly normalised.

For a true replacement to emerge for paper currency, the step-change in innovation would have to be more than marginally better for some of the stakeholders (as current alternatives are) it would need to be a pivot that gives states, central banks, governments, businesses and consumers a real reason to make the switch.

For my mind, I feel the solution will be more abstract.  It would be hard to see (at least in the short or medium term in the western world) a situation where paper currency is truly abandoned- the socio-cultural momentum that would require is perhaps a generation or two away, and will almost certainly require a role-model country elsewhere in the world to show it works.

What we are seeing however is that technology has enabled transactions to occur in the middle-ground between barter and money.  Fundamentally money exists when the community using it agrees that it is an acceptable, secure and sustainable store of value.  Crypto-currencies and many other technologies  in the space are giving credible platforms on which the notion of money can exist.  The pace of technological development also means that these platforms move much more rapidly from the development world into the real world; where they can live or die in the markets.

In the future, we could have three layers of currency in our world.  A macro layer enabling central banks to trade with each other (perhaps using some modified form of the SDR), a sovereign layer enabling nations or country alliances (such as the EU) to have a core currency as their systemically important money-supply and a third layer; the civic layer- where the community itself creates currencies to facilitate trade between themselves with freedom from policy interference.

More so than any of this, we have to remember that money is a human invention, and a human technology.  As Ayn Rand said,  “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”

It's almost a truism to say that membership in the euro exacerbated the Greek crisis. The thinking goes like this: Because Greece doesn't have its own currency, it couldn't increase its competitiveness and boost growth through devaluation. Although devaluation is a valuable instrument, I think most countries and companies would benefit if the world, not just Europe, used a single currency.

Today's fragmented financial world is unfair. On the one hand, there's Denmark with such a glut of currency, local and foreign, that its central bank's key deposit rate is minus 0.75 percent and companies are considering overpaying their taxes because the Tax Ministry pays 1 percent interest on the excess. Then there's Greece, which has had to limit withdrawals from automated teller machines to 60 euros a day because of a severe cash crunch.

Consider the case of Apple, with an enormous cash pile that earns next to nothing. The company had about $160 billion in March 2014 and made $1.795 billion in interest and dividend income that year -- which is less than 1 percent, considering that the company's kept increasing the cash holding. And there are companies, even entire countries, that would kill to be financed at that rate -- but are forced to accept much higher ones, and not necessarily because they are unsafe borrowers, but because they are often dragged down by risk perceptions that have little to do with reality.

Before the 2008 financial crisis, financial globalization -- defined as international capital inflows -- was on the rise, partly because investors underestimated risk. After the mortgage crash, it became clear that rating agencies weren't much help to investors in making such estimates and that local and specialized knowledge was needed to make intelligent decisions. The European debt crisis only confirmed this. Cross-border investment fell off sharply:

Despite all the talk of globalization and its harmful effects, money doesn't wander the world looking for opportunities. Mainly, it stays at home. Even some of the recorded international flows are in fact domestic investment made through offshore havens for tax purposes. No wonder direct investment is the most stable component of cross-border capital movements: Companies and individuals investing in specific projects do their homework on a micro level, so they probably have the best information.

Generally, though, the fiscal regimes, political and macroeconomic risks of countries vary so much that mistakes happen, even when a foreign investor can afford detailed and knowledgeable analysis. The bond guru Michael Hasenstab's investment in Ukrainian bonds for Franklin Templeton is a case in point: The trade was thoroughly analyzed and Hasenstab traveled to Kiev last year to talk to officials and executives, but the country now wants him to accept a 40 percent haircut as part of its International Monetary Fund-led bailout.

To ensure that financial resources are distributed more evenly throughout the world, it would make sense to cut down country-specific risk. Taking monetary policy out of individual countries' hands would go a long way toward that goal. Currency risk would be eliminated -- the same monetary unit would be in use everywhere -- and there would be a uniform interest rate environment. The creditworthiness of specific borrowers would be investors' biggest area of concern. That's still a big unknown, and there would always be enough coups, revolutions, corruption, fraud and mismanagement to throw the best models off kilter. Yet there would be much less to worry about.

Now, the world's 140 or so currencies sometimes make cross-border flows dangerous. Switzerland and Denmark have both suffered from their commitment to their own currencies this year. The ability to devalue is nice, but it's illusory, to a large extent: It helps balance a budget, bring down debt levels and make exports more competitive, but it hits ordinary people with high inflation. Besides, according to a 2010 paper by Stephen Kamin, director of international finance at the Federal Reserve System,

    The crisis has also identified an area in which the standard array of central bank tools may have become inadequate in many countries: liquidity provision and the lender-of-last resort function. With the rise in the share of financial transactions undertaken in vehicle currencies such as dollars and euros, the ability to print domestic currency may no longer suffice to address a liquidity crisis. Accordingly, international arrangements for liquidity provision may become increasingly important in the future.

In short, by giving up the right to print their own money, governments stand to lose less and less. And they might even need the discipline imposed by an outside monetary policy aithority. A country dependent on a single natural resource -- say, oil -- is tempted to spend when the price of that resource is high; knowing that devaluation will be unavailable when it falls will make such a country accumulate windfall revenues in a rainy-day fund instead.

If the world used the same currency, the problems inadvertently caused by the euro wouldn't be replicated. German banks were too willing to lend to projects in the European periphery because they felt they could trust members of the same exclusive currency club and because the euro made investing in Europe almost frictionless, an advantage the rest of the world didn't have. The one world, one currency club would make friction disappear.

Of course, there would be the question of who should administer the global central bank. The U.S. would want to -- the dollar is as close to a global currency as we have -- but resistance from other global players would sink the project. This is where something like Bitcoin could come in handy: a decentralized system that works with little human intervention. "Mining" rules could be established to prevent anyone from cornering the market, but the system would self-regulate.

This is naive utopianism, of course. The obstacles to such a project are beyond estimation, as so is the technical complexity. But this pipe-dream is a reminder of how tough and complex the euro project is. Those who hasten to write it off as a failure don't show it enough respect. Sure, there have been setbacks, and some countries may prove unable to keep taking part, but its participants are accumulating data that may one day allow us to figure out how to bring the whole world closer together.

Mainstream economic thought states that a moderate amount of inflation is good for economic growth, and most of the world's central banks target an annualized inflation rate of 2 to 3%. When inflation gets out of hand, prices rise too quickly for incomes to adjust, which can potentially lead to an economic crisis known as hyperinflation where prices inflate quickly and exponentially. If the rate of inflation begins to decrease, it is known as disinflation. Deflation occurs when the change in prices turns negative.

During the Great Depression, economies around the world experienced crippling deflation as production ground to a halt and general prices levels declined 10% or more on an annualized basis. After the Great Recession of 2008, the United States barely avoided a deflationary spiral. Today, the economies of the Eurozone are combating deflation and the European Central Bank (ECB) has even taking the extraordinary measures of undergoing a round of quantitative easing.

Deflation: Causes and Effects

Changes in consumer prices are economic statistics compiled in most nations by comparing changes of a basket of diverse goods and products to an index. In the U.S. the Consumer Price Index (CPI) is the most commonly referenced index for evaluating inflation rates. When the change in prices in one period is lower than in the previous period, the CPI index has declined, indicating that the economy is experiencing deflation.

One might think that a general decrease in prices is a good thing, as it gives consumers greater purchasing power. To some degree, moderate drops in certain products, such as food or energy, do have some positive effect on consumer spending. A general, persistent fall in prices, however, can have severe negative effects on growth and economic stability.

Recessions and Deflation


Deflation typically occurs in and after periods of economic crisis. When an economy experiences a severe recession or a depression, economic output slows as demand for consumption and investment drop. This leads to an overall decline in asset prices as producers are forced to liquidate inventories that people no longer want to buy. Consumers and investors alike begin holding on to liquid money reserves to cushion against further financial loss. As more money is saved, less money is spent, further decreasing aggregate demand.

At this point, people's expectations about future inflation are lowered, and they begin to hoard money. Why would you spend a dollar today when the expectation is that it could buy effectively more stuff tomorrow? And why spend tomorrow when things may be even cheaper in a week's time?

Deflation's Vicious Cycle

As production slows down to accommodate the lower demand, companies reduce their workforce resulting in an increase in unemployment. These unemployed individuals may have a hard time finding new work during a recession and will eventually deplete their savings in order to make ends meet, eventually defaulting on various debt obligations such as mortgages, car loans, student loans and credit cards.

The accumulating bad debts ripple through the economy up to the financial sector that must write them off as losses. As banks' balance sheets become shakier, depositors seek to withdraw their funds as cash in case the bank fails. A bank run may ensue, whereby too many deposits are redeemed and the bank can no longer meet its own obligations. Financial institutions begin to collapse, removing much needed liquidity from the system and also reducing the supply of credit to those seeking new loans.

Central banks often react by enacting a loose, or expansionary monetary policy. This includes lowering the interest rate target and pumping money into the economy through open market operations – buying treasury securities in the open market in return for newly created money. If these measures fail to stimulate demand and spur economic growth, central banks may undertake quantitative easing by purchasing more risky private assets in the open market. The central bank can also step in as lender of last resort if the financial sector is severely hindered by such events. (For more, see: How Unconventional Monetary Policy Works.)

Governments will also employ an expansionary fiscal policy by lowering taxes and increasing government spending. The problem with lowering taxes in a period of low prices and high unemployment, however, is that overall tax revenues will decrease, limiting the ability of government to operate at full capacity.

A little bit of inflation is good for economic growth – around 2-3% a year. But, when prices begin to fall after an economic downturn, deflation may set in causing an even deeper and more severe crisis.

As prices fall, production slows and inventories are liquidated. Demand drops and unemployment increases. People choose to hoard money rather than spend on consumption or investment because they expect prices to drop even more in the future. Defaults on debt increase and depositors withdraw cash en masse causing a financial meltdown defined by a lack of liquidity and credit. Central banks and governments react to stabilize the economy and incentivize demand through expansionary fiscal and monetary policy, including unconventional methods such as quantitative easing.

All in all, in a deflationary period is a very bad place for an economy to be.

    Saving is putting money aside bit by bit, to make a lump sum. You usually save for a particular goal, like having the money for a holiday, a deposit on a house, or any emergencies that might crop up. Often saving is taken to mean putting your money into cash products, like bank and building society deposit accounts, and that’s how we define saving in this guide.

    Investing is taking some of your money and with the aim of making it grow, by buying things that might increase in value, like stocks, property or shares in a fund.

Everybody tought to have a certain amount of cash savings to hand. The rule of thumb is to have three months’ essential outgoings (things like rent and food) in an instant access savings account. This is called an emergency fund.

The only time you shouldn’t save or invest is if there are other, more important things you need to do with your money. This includes:

    Getting your debts under control
    Making sure your family could cope financially if you died

Once you have your emergency fund, you should keep on saving. A good goal is to be putting aside at least 10% of your earnings each month (or as you can afford it if your earnings are variable).

Aim for 5% to begin with and build it up. You can save up for anything you want, for example to pay for a wedding or to have enough money to invest in something specific.

It’s important to set savings goals so you know what you’re aiming for – more on how to do this later.

As with savings, you need to know your goals to decide if you should invest. Specifically, you need to know which of your goals are short-term, and which are long-term.

    Short-term goals are things you plan to do within the next five years
    Medium-term goals are things you plan to do within the next 5-10 years
    Longer-term goals are ones where you’re won’t need the money for ten years or more

For your short-term goals, the rule is to save into cash deposits. The stock market may go up or down in the short term and if you invest for less than five years you might well make a loss.

For longer-term goals, it’s often best to invest because inflation can seriously affect the value of cash savings over the medium and long term. The stock market tends to do better than cash over time. The longer you can leave your money, the more chance you have of making a profit.

For the medium term, cash deposits may sometimes be the best answer, but it depends on how much inflation risk you are willing to take, and whether you need a certain sum on a certain date.

You can adjust the level of risks you take when you invest by spreading your money across different types of investments – called diversifying the risks.

If you’re approaching or over 30, you should have at least one long-term goal – retirement. Money you put aside for retirement should usually go into investments. Most people invest in a pension, but other investments can be suitable too.

Saving money is one of those tasks that's so much easier said than done — everyone knows it's smart to save money in the long run, but many of us still have difficulty doing it. There's more to saving than simply spending less money, although this alone can be challenging. Smart money-savers also need to consider how to spend the money they do have as well as how to maximize their income. Start with Step 1 below to learn how to set realistic goals, keep your spending in check, and get the greatest long-term benefit for your money.

1. Pay yourself first.The easiest way to save money rather than spending it is to make sure that that you never get a chance to spend the money in the first place. Arranging for a portion of each paycheck to be deposited directly into a savings account or a retirement account takes the stress and tedium out of the process of deciding how much money to save and how much to keep for yourself each month — basically, you save automatically and the money you keep each month is yours to spend as you please. Over time, depositing even a small portion of each paycheck into your savings can add up (especially when you take interest into account) so start as soon as you can for maximum benefit.

    To set up an automatic deposit, talk to the payroll staff at your job (or, if your employer uses one, your third-party payroll service). If you can provide account information for a savings account separate from your basic checking account, you should generally be able to set up a direct deposit scheme with no problems.
    If for some reason you can't set up an automatic deposit for each paycheck (like if you support yourself with freelance work or are paid mostly in cash), decide on a specific cash amount to manually deposit into a savings account each month and stick to this goal.

 2. Avoid accumulating new debt. Some debt is essentially unavoidable. For instance, only the very rich have enough money to buy a house in one lump sum payment, yet millions of people are able to buy houses by taking out loans and slowly paying them back. However, in general, when you can avoid going into debt, do so. Paying a sum of money up-front is always cheaper in the long run than paying off an equivalent loan while interest accumulates over time.

    If taking out a loan is unavoidable, try to make as big of down payment as possible. The more of the cost of the purchase you can cover up front, the quicker you'll pay off your loan and the less you'll spend on interest.
    While everyone's financial situation differs, most banks recommend that your debt payments should be about 10% of your pretax income, while anything under 20% is considered healthy. About 36% is seen as an "upper limit" for reasonable amounts of debt

 3. Set reasonable savings goals. It's a lot easier to save if you know you have something to save for. Set yourself savings goals that are within your reach to motivate yourself to make the tough financial decisions needed to save responsibly. For serious goals like buying a house or retiring, your goals may take years or decades to achieve. In these cases, it's important to monitor your progress on a regular basis. Only by stepping back and taking a look at the big picture can you get a sense for how far you've come and how far you have left to go.

    Big goals, like retirement, take a very long time to achieve. In the time needed to reach these goals, financial markets are likely to be different than they are today. You may need to spend some time researching the predicted future state of the market before setting your goal. For instance, if you're in your prime earning years, most financial commentators say that you'll need about 60-85% of your currently yearly income to maintain your current lifestyle each year you're retired

 4.stablish a time-frame for your goals. Giving yourself ambitious (but reasonable) time limits for achieving your goals can be a great motivational tool. For example, let's say that you set a goal of being on your way to owning a house two years from today. In this case, you'd need to investigate the average home cost in the area you'd like to live in and start saving for the down payment on your new house (as a general rule, down payments are often required to be no less than 20% of the purchase price of the house).[3]

    So, in our example, if houses in the area you're looking at are about $300,000 apiece, you'll need to come up with at least 300,000 × 20% = $60,000 in two years. Depending on how much you make, this may or may not be feasible.
    Setting time frames is especially important for essential short-term goals. For instance, if your car's transmission needs to be replaced, but you can't afford the new transmission, you'll want to save up the money for the replacement as quickly as possible to ensure you're not left without a way to get to work. An ambitious but reasonable time frame can help you achieve this goal.

 5.Keep a budget. It's easy to commit to ambitious savings goals, but if you don't have any way to keep track of your expenses, you'll find that it's difficult to achieve them. To keep your financial progress on-track, try budgeting out your income at the beginning of each month. Assigning a set portion of your income to all of your major expenses ahead of time can help ensure that you don't waste money, especially if you actually divide each paycheck according to your budget as soon as you get it.

    For instance, on an income of $3,000 per month, we might budget as follows:

                Housing/utilities: $1,000
                Student loans: $300
                Food: $500
                Internet: $70
                Gasoline: $150
                Savings: $500
                Misc.: $200
                Luxuries: $280

 6.Record your expenses. Keeping a tight budget is a must for anyone looking to save money, but if you don't keep track of your expenses, you may find that it's difficult to stick to your goals. Keeping a running tally of how much you've spent on various types of expenses each month can help you identify "problem" areas and adjust your spending habits to fit your budget. However, keeping track of your expenses can require a serious attention to detail. While everyone should keep track of major expenses like housing and debt repayment, the amount of attention you devote to minor expenses generally increases with the seriousness of your financial situations.

    It can be handy to keep a small notebook with you at all times. Get in the habit of recording every expense and saving your receipts (especially for major purchases). When you can, enter your expenses in a larger notebook or a spreadsheet program for your long-term records.
    Note that, today, there are many apps you can download to your phone that can help you keep track of your expenses (some of which are free).
    If you have serious spending problems, don't be afraid to save every single receipt. At the end of the month, divide your receipts into categories, then tally each up. You may be shocked how much money you spend on purchases that are far from essential.

7. Start saving as early as possible. Money that's squirreled away in savings accounts usually accumulates interest at a set percentage rate. The longer your money remains in the savings account, the more interest you accumulate. Thus, it's in your advantage to start saving as soon as you possibly can. Even if you're only able to contribute a tiny amount to your savings each month when you're in your twenties, do so. Relatively small amounts of cash left in interest-yielding accounts for long periods of time can eventually accumulate to several times their initial value.

    For example, let's say that, by working a low-paying job during your twenties, you eventually save up $10,000 and put this money into a high-yield account with a 4% annual interest rate. Over 5 years, this will earn you about $2,166.53. However, if you had put this money away one year earlier, you would have made about $500 more by the same point in time without any extra effort — a small but not insignificant bonus.

8.Consider contributing to a retirement account. During the years when you're young, energetic, and healthy, retirement can seem so far away that it's almost not worth even thinking about. By the time you're older and begin to lose steam, it can be all that you think about. Unless you're one of the lucky few who stand to inherit serious wealth, saving for retirement is something you'll need to think about once you establish a stable career — the sooner, the better. As noted above, though almost everyone's situation is different, it's wise to plan on having about 60-85% of your yearly income available to maintain your current standard of living for each year that you are retired.

    If you haven't already done so, talk to your employer about the possibility of contributing to a 401(k). These retirement accounts allow you to automatically deposit a set amount of each paycheck in the account, making saving easy. Additionally, the money you deposit into a 401(k) is often not subject to the same taxes as the rest of the money in your paycheck. Finally, many employers offer proportional matching programs with their 401(k) services, meaning that they'll match a certain percentage of each payment.
    As of 2014, the maximum amount of money you are allowed to place in a 401(k) per year is $17,500.

 9. Make stock market investments cautiously. If you've been saving responsibly and have a little extra money at your disposal, investing in the stock market can be a lucrative (but risky) opportunity to make extra money. Before investing in stocks, it's important to understand that any money you invest in the stock market can potentially be lost for good, especially if you don't know what you're doing, so don't use this as a method for long-term saving. Instead, treat the stock market as a chance to essentially make educated gambles with money you can stand to lose. In general, most people don't need to invest in the stock market at all to responsibly save for retirement.[5]

    For more information on making intelligent stock investment decisions, see How to Invest in the Stock Market.

 10. Don't get discouraged. When you're having trouble saving money, it's easy to lose your nerve. Your situation may seem hopeless — it may seem almost impossible to save up the money you need to meet your long-term goals. However, no matter how little you're starting with, it's always possible to begin saving money. The sooner you start, the sooner you can be on your way to financial security.

    If you're discouraged about your financial situation, consider talking to a financial counseling service. These agencies, which often operate for free or very cheap, exist to help you begin saving so that you can meet your financial goals. The National Foundation for Credit Counseling (NFCC), a non-profit organization, is a great place to start

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