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Hot Money & Developmental Economics

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In Why is Gini Different? we briefly mentioned that all successful economies on Earth today followed the same general principles of economic development during their early growth phases. These principles are not the neoliberal dogma that dominates our dysfunctional and inequitable global economy today. They are "developmental economic principles", which is why the Gini ecosystem is nurtured like a developing economy, unlike any other cryptocurrency today. In this article we explain exactly what "developmental economics" means.

Hot Money is a Plague on Developing Economies

In economics, "hot money" is a phrase often used to describe excessive and socioeconomically destructive cross-currency speculation and capital flows. Hot money causes rapidly inflating credit, asset and currency bubbles, which inevitably pop with violent socioeconomic consequences. This reality was most famously exemplified by the massively destructive Latin American Debt Crisis in the 1980s and the Asian Contagion in 1997. However, similar hot money-induced crises have occurred in many other countries since then, including Brazil, Mexico, Indonesia, Chile, Russia, among other countries that have been forced (primarily by the U.S. and U.K.) to replace hundreds of years of developmental economic wisdom with short-sighted neoliberal dogma.

Economic Stability Mechanisms Are Essential to Every Developing Economy. All successful developing economies have been vigorously protected from hot money during their nascent years. The successful protection from hot money has historically been achieved in countries like the U.S., U.K., Germany, Japan, Canada, China (among others) via the centralized human implementation of specific economic policies, e.g., rational capital, currency and trade stability mechanisms. To accomplish the same outcome in the Gini ecosystem without the corruptive influence of centralized human control, Gini's Ecosystem Stability Mechanism and the architectural design of the Gini Decentralized Exchange provide decentralized and automated mechanisms to protect the Gini ecosystem from hot money.

The Stabilizing Effect of Real Commerce

The USD is backed by faith in the U.S. Government. In contrast, cryptocurrencies are backed by faith in algorithms. Thus, they’re both backed by “faith”, but politicians are much easier to corrupt than algorithms. Algorithms don't lie to you to get elected and then change their mind to placate wealthy donors and sellout your economy to giant cannibalistic corporate predators. Thus, we have rational reasons to have much more confidence in a well-designed cryptocurrency than any fiat currency controlled by politicians and governments.

Commercial Exchange Imposes Discipline on Currency Exchange Rates. The fundamental reason the USD’s value (and the value of most fiat currencies) is not as volatile as Bitcoin and other cryptocurrencies today is because the USD is frequently used as an actual medium of exchange in real-world commerce. ("Medium of exchange" is one of the three primary functions of every currency.1) The process of frequent commercial exchange effectively imposes discipline on the price action in the USD currency market.2

Currency Exchange Rates in a Stable Economy Are Driven by Supply & Demand of Real Goods/Services. Currency exchange rates in a stable economy (i.e., unmolested by hot money and monetary policy manipulation) are driven by supply and demand for real goods and services, which determines the demand for the currency in which those goods/services are denominated. Thus, without the distortions caused by monetary inflation and hot money, the price levels and corresponding currency exchange rates within any healthy economy would simply be a function of the aggregate demand for all the goods and services within all the markets within the economy.

Exchange Rate Stability Comes Primarily from Consumer Price Sensitivity. The price of any product/service in any real economy is constrained by the supply and demand of the underlying product/service. Additionally, when people buy real products/services with USD (for example), they are extremely sensitive to any significant change in the USD-based price of those products/services. This consumer price-sensitivity prevents producers and merchants from randomly jacking up prices. It also prevents currency speculators from jacking up currency exchange rates. Why? Because no speculator or foreign currency buyer will pay a higher price for a currency without a preceding increase in the demand and price of goods within the economy to justify a higher exchange rate. At Gini, we call this the "Exchange-Value Stabilization Effect of Real Commerce".

Monetary-Driven Price Inflation vs. Demand-Driven Price Inflation. Before we continue, let's clarify an important point: In the paragraph above, we're talking specifically about natural demand-driven price inflation, not artificial money supply-driven price inflation, which drives up prices because it violates the Law of Money-Value Creation. Monetary inflation debases a currency, which reduces demand for the currency in currency markets and drives exchange rates down. This distinction is important to avoid confusing natural and sustainable demand-driven price inflation with artificial and unsustainable monetary-driven price inflation. Natural price inflation is a byproduct of increased real economic growth. In contrast, artificial monetary-driven price inflation causes economic stagnation by destroying wealth and purchasing power, discouraging savings, triggering rapid hot money outflows, among other cascading problems throughout an economy.

Confirming the Relationship Between Price Sensitivity and Currency Stability. The simplest way to confirm this principle is to watch any customer’s behavior when you try to dramatically change the price of any product/service for no apparent reason. Real customers simply won’t enter such a volatile market to purchase anything that really matters in their daily lives, which means those markets will be ignored by everybody except speculative traders. Producers and merchants know this; so, they preemptively self-regulate the price of their products/services to keep their price volatility as low as possible because they know that’s the only way to make sure their customers will keep coming back. Thus, their prices are disciplined by the natural supply and demand of real-world commerce. Every functional market works this way, but . . .

Other Cryptocurrencies Are NOT Designed to Create Functional Markets. This is because there’s nothing to impose discipline upon their exchange rates. Specifically, their exchange rates are not confined by the Exchange-Value Stabilization Effect of Real Commerce nor are they protected from hot money volatility with any ecosystem stability mechanisms. Thus, the volatility of Bitcoin and all other cryptocurrencies will continue to remain high. But the volatility is what prevents people from feeling confident enough to use those cryptocurrencies in real-world commerce in the first place. They have a chicken-and-egg problem.

The Chicken-and-Egg Problem of “Complementary Demand”. In economics, we use the phrase “complementary demand” to describe the chicken-and-egg problem that all emerging markets face when they attempt to transition from an agrarian society to an industrialized society. For example, an automobile industry cannot emerge without complementary parts industries emerging simultaneously to supply all the parts to the auto industry (steel, tires, glass, etc.). And without significant foreign exchange reserves, emerging countries cannot import their parts from other countries; thus, they face a chicken-and-egg problem, which can prevent their nascent economies from ever getting off the ground.

Cryptocurrencies & Emerging Markets Face the Same Chicken-and-Egg Problem. On the surface, this “complementary demand” concept might seem totally irrelevant to cryptocurrencies, but it’s actually the exact same problem that all cryptocurrencies are suffering from today: Cryptocurrencies are missing their real-world product-complement (i.e., an emergent currency-product pairing) because their volatility prevents widespread adoption in real-world commerce. This is simultaneously a byproduct of their lack of ecosystem stability mechanisms and an amplifier of their volatility, which again prevents them from being widely adopted in real-world commerce.

Currency-Product Pairs. The concept of a "currency-product pair" should not be confused with backing cryptocurrencies with gold, a basket of currencies or any other commodity. In addition to all the political, banking and logistical problems with gold, recall the USD’s exchange rate is relatively stable even without a commodity backing. Thus, this “currency-product pair" is more akin to the principle of a quantum superposition.

However, in this case, the relative value of a currency and the utility value of its complementary product/service in commercial transactions must collapse into a single object of value frequently enough within a market to squeeze the currency exchange rate into a more stable, narrow range. (Recall, this dynamic is reinforced by consumers who are extremely price-sensitive to a currency's product-complement.) In other words, a currency cannot manifest a stable, confined price range without being frequently attached to products/services in the real world. Until then, the price/exchange rate/relative value of the currency will violently float up and down like a helium balloon in a windstorm.

Gini Economic Development

How Do Emerging Markets Overcome the “Complementary Demand” Problem? Contrary to puritanical neoliberal/libertarian dogma, all economically successful countries have grown into strong, stable economies by proactively protecting their nascent currencies and industries from hot money and other destructive economic forces. This includes all major economies on Earth today, including the U.S., U.K., Japan, South Korea, China, Germany, Singapore, Chile, France, Canada. . . . Why is this important? Because we should perceive the Gini ecosystem as a “nascent economy” and approach its development in exactly the same way that every successful emerging country has approached their economic development throughout human history.

Embedding Gini Into Real-World Commerce. For all the reasons above, Gini has built the nonprofit Gini Store and several other ecommerce innovations (to be announced soon). All of Gini's ecommerce systems are specifically designed to complement Gini's Ecosystem Stability Mechanism and Value Streams System to build a cooperative, wealth-sharing ecosystem, which will maximize the exchange rate stability of the Gini currency in ways that no other cryptocurrency can achieve today. The nonprofit Gini Store and complementary systems are based on much more sustainable and equitable principles than any for-profit ecommerce platform today. (See Collapse of the Human Labor Force and Weaponized Wealth Concentration Destroys Economies if you're not sure why this is important.) This is another example of how Gini's philosophy of Economic Humanism powers our technical and economic development.

Emerging Market Community Governance. Successful economic development requires foresight; deep technical skills; organizational discipline; knowledge of developmental economic principles; a truly consensus-driven, decentralized Community Governance System; and the resolve to ignore pressures from special interest groups, aggressive investors and speculators that seek to exploit Gini simply to get rich quick. Puritanical neoliberals/libertarians reject the principles of developmental economics because they incorrectly equate “free market” with “no restrictions”. They think the Law of the Jungle works. It should be clear by now that their ideology ignores the history of every successful economy on Earth throughout human history.

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1. See Why Does Humanity Need Cryptocurrencies? for a more detailed exploration of the primary functions of every currency, why gold is extremely vulnerable to political and bank manipulation, among other fundamental currency and cryptocurrency principles.

2. However, it's important to remember that price action discipline creates the illusion of value stability if politicians debase the currency and destroy its purchasing power with monetary policy manipulation. That's essentially what is happening with the USD, JPY and other fiat currencies that are sliding into the Fiat Currency Graveyard today due to increasing monetary inflation. A relatively stable exchange rate can be artificially propped up for a while by manipulating a money supply, but as the currency continues to lose its value, the exchange rate will become increasingly volatile as the purchasing power of the currency evaporates and demand for the currency collapses.

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