Open Science Repository Economics

doi: 10.7392/OpenScienceRepository.Economics.2012.05041923

A global price unit separated from currency units as a condition for the world economic stabilization

Francisco Oliveira

São Paulo, Brazil

Summary

This paper argues that separating the price unit from currency units is essential for achieving global economic stabilization. It expands on an earlier article titled A global price unit independent from currency units proposed as a solution for the world economy. The text explains how balancing supply and demand hinges on sound decisions to invest or disinvest, and how economic agents depend on signals from the price system to make those decisions. It further shows why current economies disrupt the informational role of the price system, preventing markets from reaching supply-demand balance and, consequently, economic stabilization. This is a theory that requires further investigation and experimental testing.

Keywords: economics, economic crisis, monetary reform, price theory, price system.

Core argument

This paper puts forward the hypothesis that economic stability requires a price unit that is independent of currency units, on the premise that such a unit prevents misleading signals from the price system—signals that distort decisions to invest or disinvest.

Underlying theory

Economic stability is almost entirely a matter of balanced supply and demand. When the two are out of balance, excess supply produces unsold goods and then debt, while insufficient supply—given budget constraints—produces excess supply of other goods and then debt. Widespread debt erodes confidence, brings economic instability, and can even lead to recession or depression.

Balancing supply and demand calls for sound decisions to invest or disinvest, because such decisions raise or lower output and thereby align supply with demand.

Economic agents make sound investment or disinvestment decisions on the basis of price variation. Price variation is the central informational signal that tells agents whether—and by how much—to invest or disinvest.

When price variation is not genuine—that is, not caused by relative shifts in supply or demand—the price system loses its key informational role in guiding investment or disinvestment decisions. This is exactly what happens in today's economies, producing unsound investment and disinvestment decisions across the global economy.

Because increases and decreases in the amount of money in circulation (in any form) change prices, monetary manipulation in today's economies generates unreal price variation. For instance, when the supply of a given product rises, its relative real price falls because there is more of it relative to other goods. Yet although money is simply another product, used to facilitate trade, an increase in its supply pushes up the prices of other goods.

The proposal: a separate price unit independent of currency units

To prevent this effect of monetary manipulation on prices (unreal price variation), we need to assign a variable “price” to money so that this price adjusts when the money supply changes, rather than letting other goods' prices vary unrealistically. Without a variable price of its own, money manipulation will produce unreal price variation in other goods. (Interest rates do not serve as the desired variable price of money, since they concern only lending and borrowing and do not apply to money's main function as a product that facilitates trade.)

Because a variable price on money is impossible when prices are expressed on the same scale as money (currencies), we must separate the scale used to express prices from the currency scales. In other words, we need a price unit that is independent of currency units.

Separating the price unit from currency units can be achieved by creating an abstract price unit and/or scale for expressing all prices, together with variable conversion rates that link this independent unit to any currency. An independent price unit can be tied to all currencies through respective variable conversion rates, much as prices in one foreign currency can be linked to all other currencies through variable exchange rates.

If a currency's supply rises or falls, the market will adjust that currency's conversion rate instead of changing the prices of other goods, thereby preventing unreal price variation. If the supply of a given product rises or falls, the market will adjust that product's relative price, reflecting genuine price variation.

Because the new price system preserves genuine price variation and blocks unreal price variation—and because price variation is the key informational signal that tells economic agents whether and how much to invest or disinvest—the economy will produce sound investment and disinvestment decisions. With sound decisions, output rises or falls in line with demand, creating the desired balance of supply and demand. Balanced supply and demand is synonymous with long-term economic stability, and our main goal is thus achieved.

In short, global economic stabilization requires creating an abstract price unit, separate from currency units, to express all prices, along with variable conversion rates that link that abstract unit to every currency.

Cite this paper

APA

Oliveira, F. (2012). A global price unit separated from currency units as a condition for the world economic stabilization. Open Science Repository Economics, Online(open-access), e05041923. doi:10.7392/OpenScienceRepository.Economics.2012.05041923

MLA

Oliveira, Francisco. “A Global Price Unit Separated from Currency Units as a Condition for the World Economic Stabilization.” Open Science Repository Economics Online.open-access (2012): e05041923. Web. 2 Sept. 2012.

Chicago

Oliveira, Francisco. “A Global Price Unit Separated from Currency Units as a Condition for the World Economic Stabilization.” Open Science Repository Economics Online, no. open-access: e05041923. http://www.open-science-repository.com/a-global-price-unit-separated-from-currency-units-as-condition-for-the-world-economic-stabilization.html.

Harvard

Oliveira, F., 2012. A global price unit separated from currency units as a condition for the world economic stabilization. Open Science Repository Economics, Online(open-access), p.e05041923. Available at: http://www.open-science-repository.com/a-global-price-unit-separated-from-currency-units-as-condition-for-the-world-economic-stabilization.html.

Science

1. F. Oliveira, A global price unit separated from currency units as a condition for the world economic stabilization, Open Science Repository Economics Online, e05041923 (2012).

Nature

1. Oliveira, F. A global price unit separated from currency units as a condition for the world economic stabilization. Open Science Repository Economics Online, e05041923 (2012).

doi

Research registered in the DOI resolution system as:  10.7392/OpenScienceRepository.Economics.2012.05041923

This work is licensed under a Creative Commons Attribution 3.0 Unported License.