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With Iran’s full accession to the Shanghai Cooperation Organization (SCO) complete, Tehran now needs to wrangle big trade deals with its new regional friends to offset US sanctions against its beleaguered economy.
“Today, we will launch procedures to admit Iran as a full member of the SCO (Shanghai Cooperation Organization),” Chinese President Xi Jinping announced on Friday, putting to rest the rampant speculation that Iran will officially accede to Asia’s most coveted security organization.
Iranian President Ebrahim Raisi is in Dushanbe, Tajikistan with a high level diplomatic and economic delegation to attend the annual two-day SCO summit. The visit, marking Raisi’s first foreign trip, is already a dazzling success for the new head of state. The Islamic Republic had, until today, only enjoyed SCO observer status (since 2005), and had undergone two previous failed attempts to gain full membership.
The announcement of Iran’s accession to the SCO comes as little surprise to experts who predicted that Tehran’s comprehensive strategic partnership agreement with China last March and its subsequent announcement of a similar agreement with Moscow, would pave the way for Iran’s upgraded SCO status. Recent developments in Afghanistan have only confirmed for Beijing and Moscow – the organization’s main stakeholders – the value of Iran within the regional security organization.
Founded in 2001, the SCO brings together regional powers, such as Russia and China, along with India, Kyrgyzstan, Kazakhstan, Pakistan, Tajikistan, and Uzbekistan. The organization represents a geographical region of 60 million square kilometers (23 million square miles) and a population of over 3 billion.
Economy of the SCO
During its first 20 years, the SCO was largely viewed as a political and security grouping of countries that sought to cooperate against “terrorism, separatism, and extremism.” However, it has recently also sought to bolster economic cooperation among members and is expected to further develop these ambitions in the coming years.
In 2018, at the Qingdao summit in China, the SCO adopted an agreement consisting of 17 documents, which included action plans for economic cooperation between the SCO member states and the need “to examine the prospects of expanding the use of national currency in trade and investment.”
The SCO’s eight member states, four observer states, and six dialogue partners boast a total economic volume of close to $20 trillion and a total foreign trade volume of $6.6 trillion, 100 times larger than the values of 20 years ago.
For Iran and its ailing, US-sanctioned economy, joining the SCO provides access to significantly larger markets and the world’s fastest-growing international corridors. It also further consolidates Tehran’s unofficial alliance with major powers Moscow and Beijing against the West on issues such as Iran’s nuclear program.
Iran’s trade with SCO members
According to the latest data announced by Iran’s Customs Administration (IRICA), the value of trade between Iran and the members of the SCO (including observer states) reached $28 billion during the last Iranian calendar year (ending 21 March, 2021). That makes China Iran’s single largest trade partner with a trade value of $18.9 billion, almost two thirds of Iran’s total trade with SCO members.
Despite being one of the pivotal members of the organization, Russia ranks fourth in terms of trade volume with Iran, after India ($3.4b) and Afghanistan ($2.3b), recording only $1.6 billion in total trade with the Islamic Republic. According to the Iranian data, Pakistan stands fifth in terms of trade value with Iran within the bloc, while the remaining six countries have a combined trade value of just $569 million.
Considering Iran’s total trade volume of $73.89 billion during the last Iranian (1339) calendar year – $11.2 billion lower than the previous year – Tehran’s trade with the SCO countries has already approached nearly 38 percent of its total trade, 26 percent of which was with China alone.
Iran’s other top trade partners are Iraq, UAE, and Turkey respectively, followed by Afghanistan in the same period.
While Iran’s accession to full membership status in the SCO can theoretically boost the country’s trade with other member states, there are significant obstacles which are unlikely to allow Tehran to reap an economic windfall, at least in the short run.
Among Iran’s most difficult obstacles is a series of US-led sanctions against the country’s financial and transportation institutions, in addition to being blacklisted by the Financial Action Task Force (FATF), a global intergovernmental organization tasked with devising standards on combating money laundering and ‘terrorism financing.’ Given the exposure of most countries to US markets and financial networks, and due to the risk of heavy penalties or loss of access to US and European markets, major companies are reluctant to do business with Iran.
The former head of Iran’s Trade Promotion Organization (TPO), Mohammad-Reza Modudi, was quoted by local media earlier this week as saying that many countries, including Iran’s neighbors such as Iraq, “are not willing to do business with Iran out of fear of being sanctioned by American banks or the US Treasury.”
He added that despite Iran’s good production capability, exporting many of the Iranian-made products will not be easy. “We [Iran] have not prepared the needed capacity for these products to be competitive in international markets,” Modudi explained.
Compounding Iran’s lack of focus on the economic benefits of the SCO, is the fact that other Iranian officials view the SCO through a purely political and security lens. Hossein Malaek, Iran’s former ambassador to China, believes that Tehran’s membership in the SCO “has nothing to do with economic issues.”
In an interview with ILNA news agency last month, Malaek was quoted as saying that “Iran’s presence in the Shanghai Agreement will not have any economic aspect, and this cooperation only has security aspects,” and emphasized that “no economic agreement will be signed between Iran and the SCO.”
The political and security benefits of becoming a member state of the Shanghai Cooperation Organization might outweigh other benefits for Iran in the short run. However, if Tehran helps secure the SCO’s energy needs by increasing oil and gas output to its new partners, and facilitates much-needed land access to other markets in West Asia and Europe in the long term, Iran’s economy stands to benefit substantially from its new eastward alignment.
The system of barter and trade drummed up trust amongst neighbors. I own a plow, my neighbor a lawnmower. We make an agreement, I take care of the snow in late Fall and Winters. My neighbor will take care of my grass in Springs and Summers. This requires follow through on both ends. And when followed through, we now can trust each other to take care of these tasks.
Barter and trade between community folk will stimulate the opportunity to develop trust amongst neighbors. Bonds to be built. Connect with what we are made of as evidenced through ancestry, geography, genealogy, history, archeology, agriculture, methods of communication – our barter and trade system has the potential to greatly limit the need for fiat-instruments within the community.
Trust earned through trade.
Imagine you are in command of the state, defined as an institution that possesses a territorial monopoly of ultimate decision making in every case of conflict, including conflicts involving the state and its agents itself, and, by implication, the right to tax, i.e., to unilaterally determine the price that your subjects must pay you to perform the task of ultimate decision making.
To act under these constraints — or rather, lack of constraints — is what constitutes politics and political action, and it should be clear from the outset that politics, then, by its very nature, always means mischief. Not from your point of view, of course, but mischief from the point of view of those subject to your rule as ultimate judge. Predictably, you will use your position to enrich yourself at other people’s expense.
More specifically, we can predict in particular what your attitude and policy vis-à-vis money and banking will be.
Assume that you rule over a territory that has developed beyond the stage of a primitive barter economy and where a common medium of exchange, i.e., a money, is in use. First off, it is easy to see why you would be particularly interested in money and monetary affairs. As state ruler, you can in principle confiscate whatever you want and provide yourself with an unearned income. But rather than confiscating various producer or consumer goods, you will naturally prefer to confiscate money. Because money, as the most easily and widely saleable and acceptable good of all, allows you the greatest freedom to spend your income as you like, on the greatest variety of goods. First and foremost, then, the taxes you impose on society will be money taxes, whether on property or income. You will want to maximize your money-tax revenues.
In this attempt, however, you will quickly encounter some rather intractable difficulties. Eventually, your attempts to further increase your tax income will encounter resistance in that higher tax rates will not lead to higher but to lower tax revenue. Your income — your spending money — declines, because producers, burdened with increasingly higher tax rates, simply produce less.
In this situation, you only have one other option to further increase or at least maintain your current level of spending: by borrowing such funds. And for that you must go to banks — and hence your special interest also in banks and the banking industry. If you borrow money from banks, these banks will automatically take an active interest in your future well-being. They will want you to stay in business, i.e., they want the state to go on in its exploitation business. And since banks tend to be major players in society, such support is certainly beneficial to you. On the other hand, as a negative, if you borrow money from banks you are not only expected to pay your loan back, but to pay interest on top.
The question, then, that arises for you as the ruler is, How can I free myself of these two constraints, i.e., of tax-resistance in the form of falling tax revenue and of the need to borrow from and pay interest to banks?
It is not too difficult to see what the ultimate solution to your problem is.
You can reach the desired independence of taxpayers and tax payments and of banks, if only you establish yourself first as a territorial monopolist of the production of money. On your territory, only you are permitted to produce money. But that is not sufficient. Because as long as money is a regular good that must be expensively produced, there is nothing in it for you except expenses. More importantly, then, you must use your monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly quality money such as gold or silver, you must see to it that worthless pieces of paper that can be produced at practically zero cost will become money. (Normally, no one would accept worthless pieces of paper as payment for anything. Pieces of paper are acceptable as payment only insofar as they are titles to something else, i.e., property titles. In other words then, you must replace pieces of paper that were titles to money with pieces of paper that are titles to nothing.)
Under competitive conditions, i.e., if everyone were free to produce money, a money that can be produced at almost zero cost would be produced up to a quantity where marginal revenue equals marginal cost, and because marginal cost is zero the marginal revenue, i.e., the purchasing power of this money, would be zero as well. Hence, the necessity to monopolize the production of paper money, so as to restrict its supply, in order to avoid hyperinflationary conditions and the disappearance of money from the market altogether (and a flight into “real values”) — and the more so the cheaper the money commodity.
In a way, you have thus accomplished what all alchemists and their sponsors wanted to achieve: you have produced something valuable (money with purchasing power) out of something practically worthless. What an achievement. It costs you practically nothing and you can turn around and buy yourself something really valuable, such as a house or a Mercedes; and you can achieve these wonders not just for yourself but also for your friends and acquaintances, of which you discover that you have all of a sudden far more than you used to have (including many economists, who explain why your monopoly is really good for everyone).
What are the effects? First and foremost, more paper money does not in the slightest affect the quantity or quality of all other, nonmonetary goods. There exist just as many other goods around as before. This immediately refutes the notion — apparently held by most if not all mainstream economists — that “more” money can somehow increase “social wealth.” To believe this, as everyone proposing a so-called easy-money policy as an efficient and “socially responsible” way out of economic troubles apparently does, is to believe in magic: that stones — or rather paper — can be turned into bread.
Rather, what the additional money you printed will affect is twofold. On the one hand, money prices will be higher than they would otherwise be, and the purchasing power per unit of money will be lower. In a word, the result will be inflation. More importantly, however, all the while the greater amount of money does not increase (or decrease) the total amount of presently existing social wealth (the total quantity of all goods in society), it redistributes the existing wealth in favor of you and your friends and acquaintances, i.e., those who get your money first. You and your friends are relatively enriched (own a larger part of the total social wealth) at the expense of impoverishing others (who as a result own less).
The problem, for you and your friends, with this institutional setup is not that it doesn’t work. It works perfectly, always to your own (and your friends’) advantage and always at the expense of others. All you have to do is to avoid hyperinflation. For in that case people would avoid using money and flee into real values, thus robbing you of your magic wand. The problem with your paper-money monopoly, if there is one at all, is only that this fact will be immediately noticed also by others and recognized as the big, criminal rip-off that it indeed is.
But this problem can be overcome, too, if, in addition to monopolizing the production of money, you also set yourself up as a banker and enter the banking business with the establishment of a central bank.
Because you can create paper money out of thin air, you can also create credit out of thin air. In fact, because you can create credit out of nothing (without any savings on your part), you can offer loans at cheaper rates than anyone else, even at an interest rate as low as zero (or even at a negative rate). With this ability, not only is your former dependency on banks and the banking industry eliminated; you can, moreover, make banks dependent on you, and you can forge a permanent alliance and complicity between banks and state. You don’t even have to become involved in the business of investing the credit yourself. That task, and the risk involved in it, you can safely leave to commercial banks. What you, your central bank, need to do is only this: You create credit out of thin air and then loan this money, at below-market interest rates, to commercial banks. Instead of you paying interest to banks, banks now pay interest to you. And the banks in turn loan out your newly created easy credit to their business friends at somewhat higher but still submarket interest rates (to earn from the interest differential). In addition, to make the banks especially keen on working with you, you may permit the banks to create a certain amount of their own new credit (of checkbook money) in addition and on top of the credit that you have created (fractional-reserve banking).
What are the consequences of this monetary policy? To a large extent they are the same as with an easy money policy: First, an easy credit policy is also inflationary. More money is brought into circulation and prices will be higher, and the purchasing power of money lower, than would have been the case otherwise. Second, the credit expansion too has no effect on the quantity or quality of all goods currently in existence. It neither increases nor decreases their amount. More money is just this: more paper. It does not and cannot increase social wealth by one iota. Third, easy credit also engenders a systematic redistribution of social wealth in favor of you, the central bank, and the commercial banks within your cartel. You receive an interest return on money that you have created at practically zero cost out of thin air (instead of on money costly saved out of an existing income), and so do the banks, who earn additional interest on your costless money loans. Both you and your banker friends thereby appropriate an “unearned income.” You and the banks are enriched at the expense of all “real” money savers (who receive a lower interest return than they otherwise would, i.e., without the injection of your and the banks’ cheap credit into the credit market).
On the other hand, there also exists a fundamental difference between an easy, print-and-spend money policy and an easy, print-and-loan credit policy.
First off, an easy credit policy alters the production structure — what is produced and by whom — in a highly significant way.
You, the chief of the central bank, can create credit out of thin air. You do not have to first save money out of your money income, i.e., cut your own expenses, and thus abstain from buying certain nonmoney goods (as every normal person must, if he extends credit to someone). You only have to turn on the printing press and can thus undercut any interest rate demanded of borrowers by savers elsewhere in the market. Granting credit does not involve any sacrifice on your part (which is why this institution is so “nice”). If things then go well, you will be paid a positive-interest return on your paper investment, and if they don’t go well — well, as the monopoly producer of money, you can always make up losses more easily than anyone else: by covering your losses with even more printed paper.
Without costs and no genuine, personal risk of losses, then, you can grant credit essentially indiscriminately, to everyone and for any purpose, without concern for the creditworthiness of the debtor or the soundness of his business plan. Because of your “easy” credit, certain people (in particular investment bankers) who otherwise would not be deemed sufficiently creditworthy, and certain projects (in particular of banks and their main clients) that would not be considered profitable but wasteful or too risky instead do get credit and do get funded.
Essentially, the same applies to the commercial banks within your banking cartel. Because of their special relationship to you, as the first recipients of your costless low-interest paper-money credit, the banks, too, can offer loans to prospective lenders at interest rates below market interest rates — and if things go well for them they go well; and if they don’t, they can rely on you, as the monopolistic producer of money, to bail them out in the same way as you bail yourself out of any financial trouble: by more paper money. Accordingly, the banks too will be less discriminating in the selection of their clients and their business plans and more prone to funding the “wrong” people and the “wrong” projects.
And there is a second significant difference between a print-and-spend and a print-and-loan policy and this difference explains why the income and wealth redistribution in your and your banker friends’ favor that is set in motion by easy credit takes the specific form of a temporal — boom-bust — cycle, i.e., of an initial phase of seeming general prosperity (of expected increases in future incomes and wealth) followed by a phase of widespread impoverishment (when the prosperity of the boom period is revealed as a widespread illusion).
This boom-bust feature is the logical — and physically necessary — consequence of credit created out of thin air, of credit unbacked by savings, of fiduciary credit (or however else you may call it) and of the fact that every investment takes time and only shows later on, at some time in the future, whether it is successful or not.
The reason for the business cycle is as elementary as it is fundamental. Robinson Crusoe can give a loan of fish (which he has not consumed) to Friday. Friday can convert these savings into a fishing net (he can eat the fish while constructing the net), and with the help of the net, then, Friday, in principle, is capable of repaying his loan to Robinson, plus interest, and still earn a profit of additional fish for himself. But this is physically impossible if Robinson’s loan is only a paper note, denominated in fish, but unbacked by real-fish savings, i.e., if Robinson has no fish because he has consumed them all.
Then, and necessarily so, Friday must fail in his investment endeavor. In a simple barter economy, of course, this becomes immediately apparent. Friday will not accept Robinson’s paper credit in the first place (but only real, commodity credit), and because of this, the boom-bust cycle will not get started. But in a complex monetary economy, the fact that credit was created out of thin air is not noticeable: every credit note looks like any other, and because of this the notes are accepted by the takers of credit.
This does not change the fundamental fact of reality that nothing can be produced out of nothing and that investment projects undertaken without any real funding whatsoever (by savings) must fail, but it explains why a boom — an increased level of investment accompanied by the expectation of higher future income and wealth — can get started (Friday does accept the note instead of immediately refusing it). And it explains why it then takes a while until the physical reality reasserts itself and reveals such expectations as illusory.
But what’s a little crisis to you? Even if your path to riches is through repeated crises, brought about by your paper-money regime and central-bank policies, from your point of view — from the viewpoint as the head of state and chief of the central bank — this form of print-and-loan wealth redistribution in your own and your banker friends’ favor, while less immediate than that achieved with a simple print-and-spend policy, is still much preferable, because it is far more difficult to see through and recognize for what it is. Rather than coming across as a plain fraud and parasite, in pursuing an easy-credit policy you can even pretend that you are engaged in the selfless task of “investing in the future” (rather than spending on present frivolities) and “healing” economic crises (rather than causing them).
What a world we live in!
[Originally published Oct 13, 2011.]
It seems pretty obvious that there’s a giant economic slump on the way that’s going to sweep away millions of small and medium-sized businesses around the world, so that Amazon can step in to continue to try to take over the entire global economy.
I attended a wonderful online presentation on Friday, attended by around 80 key people working in the field of monetary reform, that showed how we can counter this trend, and keep small businesses alive.
There’s going to be a huge scarcity of money in communities for small businesses, and banks aren’t interested in lending to them – too much admin and risk, not enough profit.
I’ve blogged about mutual credit here many times, as a way to allow small businesses to trade with each other without requiring money. Now research has been carried out that looks at data from transactions totalling millions of euros between thousands of small businesses, and that provides the evidence that we’ve been looking for. It shows that businesses can reduce the need for cash by 25% by using mutual credit, and by another 25% by using something called continuous clearing. I’ll explain that now.
Imagine that at the end of the month, a circular trading loop of 10 businesses each owe £5000 to the next business in the loop. In normal business practice, 10 invoices are waiting to be paid, but none of the businesses knows the full story, and so they don’t realise that if they did see the whole picture, all those debts could be cleared without making any payments. Imagine that there’s a recession, and none of them has any spare cash. Some of them might arrange overdrafts so that they can pay – or worse, take out an expensive loan; or worse still, all the businesses might do the same thing. Then there’s interest to pay to the bank or the loan company, as well as the usual bank charges. ‘Trade credit clubs’ provide the solution to this problem. No-one needs an overdraft or a loan, no-one owes anybody anything, cashflow problems are eased, the banks don’t get any interest, and with a bit of luck, a few payday loan companies go out of business.
Businesses are already familiar with trade credit, and it’s much more common and more useful to small businesses than bank loans when it comes to providing ongoing liquidity. Most business-to-business invoices include payment terms of 30, and sometimes up to 90 days. This is quite risky for small businesses – but coming together in a trade credit club can reduce that risk drastically. Imagine a small club of three businesses (there could be a hundred businesses in a club, but for simplicity’s sake, let’s say there are just three). Business A buys something from business B for £10; Business B buys something from business C for £15; and business C buys something from business A for £5. But – instead of actually making those payments, they send the invoice details to a convener (or any trusted third party) to be ‘continuously cleared’, (which is is exactly what happens between banks).
So in this case, the convener can see that business A owes £10 and is due £5, so overall, owes £5 to the club; business B owes £15 and is due £10, so owes the club £5; and business C owes £5 and is due £15, so overall, is owed £10 from the club. The convener ‘clears’ those invoices and works out how each business’s balance changes, and then (maybe at the end of the month, or any time period agreed by the club members), instructs business A and business B to pay £5 each to business C, and everyone is square. So in this simple case, instead of three transactions totalling £30, there are just two transactions totalling £10. But, the interesting thing is that if there had been hundreds of transactions totalling hundreds of thousands of pounds, it might still have ended up with just a few payments of around £10 in total to bring everyone back to zero. This system drastically reduces the number of payments required, as well as the amount of cash that each business needs to enable all their transactions. It helps massively with cashflow and drastically reduces admin and bank charges.
Additionally, at the end of the month, the club might decide that, within limits, they won’t even bother making cash payments at all. So in the example above, business A and business B will both have a balance in their account of -5 units, and business C will have a balance of +10 units – which means that this is now also a mutual credit system. If someone is up or down by a huge amount, there might be an agreement to make a cash payment to bring them back to within pre-agreed limits (i.e. the mutual credit debit or credit limits). So for a club of businesses that trade with each other a lot, this is a double whammy – continuous clearing and mutual credit together could mean that they have no bank charges, no cashflow problems, no overdraft requirements, and possibly no cash payments to make at all.
The continuous clearing aspect is much easier for businesses to understand because it’s just common sense really – especially in a time when there’s not much cash around. The mutual credit part is a beneficial add-on, but in time, if it works well, the club could treat the continuous clearing as a warm-up act for mutual credit – like having stabilisers on a bicycle when you’re learning to ride. They could take off the stabilisers and become a dedicated mutual credit club if they want to.
Here’s the paper. It’s quite heavy going, so here’s a summary:
There’s a pretty incredible addition to the trade credit story, and it’s that one country – Slovenia – has been operating what is in effect a giant, nation-wide trade credit club for over 30 years, with remarkable results. After independence in 1991 was immediately followed by a war against the Yugoslav army, and with inflation at more than 200%, the Slovenian economy wasn’t in good shape. To help protect Slovenian businesses, the government set up a system whereby businesses could send invoices for trades internal to Slovenia, to be cleared by the state payments agency. In the first year, the system resulted in a saving of cash payments by small businesses representing around 7.5% of the entire economy. Since then the proportion has fallen during good times, and grown again during slumps, which is to be expected. Slovenia has a small internal market; most of its firms are geared towards exports, and therefore can’t take part in national credit clearing. A bigger country with a larger internal market could achieve even more impressive results. This system helped Slovenia through the post-2008 slump without losing small businesses. Note that they don’t use mutual credit however – just continuous clearing.
In November 2020, Tomaž Fleischman of Slovenian software company Be Solutions, together with Paolo Dini of the LSE and Guiseppe Littera of Sardex, produced an academic paper investigating the benefits in terms of cash-saving for small business of a combination of continuous clearing (or obligation clearing as they call it) and mutual credit. They used Tetris software developed by Be Solutions to analyse almost 140,000 transactions totalling over 30 million euros between more than 3000 businesses. What they found was incredible – that continuous clearing alone can reduce the need for hard currency by 25%, but in combination with mutual credit, another 25% saving can be achieved. So these two mechanisms together can mean that 50% of the turnover of a typical small businesses can be conducted without the need for cash. This provides evidence to confirm one of our main assumptions about mutual credit (and credit clearing) – that it can keep small businesses alive during times of economic hardship, when money is scarce. Of course the continuous clearing doesn’t have to be carried out by the government – it can be provided at the local level, for example as part of a trade credit package offered by MCS.
Tomaž has since read the Credit Commons white paper, and is very interested in the possibility of global federation.
This research is quite a leap forward for what we’re trying to do with Mutual Credit Services. Any business network or local authority with vision should be able to see that they could help reduce the cash requirements of the small businesses in their network or local area by up to 50%! Hopefully we can help to set up Trade Credit Clubs around the UK and overseas (one of our team is talking to local authorities in the Czech Republic, and we’re in contact with groups on every continent).
While reading this book I was surprised and yet not surprised at the same time that this was so far the shortest chapter. Schwab makes the obvious conclusion that there is a chance the US dollar will no longer be the world reserve currency. He discounts new forms of currency like Bitcoin but towards the end mentions the Chinese renminbi (RMB) as a possible replacement. I’m not sure if this is a smoke screen for what appears to already be happening with some countries suggesting copying the Chinese model of doing Social Credit Scores and moving all commerce to a digital format. For years now Russia and China have been buying up physical gold and silver, paying almost double in some situations above spot price, and building vaults in their national banks to house it in. Could there be a digital currency backed by gold and silver in the future?…
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