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Seigniorage: how to make billions on money emissions.

What business is the most profitable in the world? Oil? IT technologies? Guns, human organs or drugs trafficing? Nope, the real big whales that make up the majority of the world’s capital are those who produce the most high-profit goods — money.

The revenue from money emission is called gross seigniorage. The gross seigniorage combines brassage (the revenue for the mint) and the pure seigniorage (the revenue that the state has as the natural monopolist).

Seigniorage is the difference between producing and supporting the distribution of currency units (paper, electronic, and other) and their denomination.

Technically, seigniorage is what the government earns when it buys securities with fixed income. For instance, the price of making a 100-dollar banknote is just 10 cents. The Central Bank issues it and buys an obligation with 100 USD with an annual income of 1%, it receives a seigniorage — 90 cents per year. As you see, this is just money made out of nothing!

In fact, there is nothing bad about seigniorage, but only on the following conditions:

1) Seigniorage is only acceptable if the currency’s purchasing power does not fall over time.

2) A part of seigniorage (at least brassage) is spent on supporting the currency’s purchasing power.

The growth of the number of money units comes along with the similar growth of reserves

These conditions can be called the principles of “fair seigniorage”. If these conditions are not preserved, then the seigniorage is equal to stealing money from people and making a financial bubble.

How the USA makes billions from nothing?

The world’s main currency — USD, — makes a huge impact on the economies of most of the countries. Almost all national currencies of the world are tied to the USD rate, the majority of international money operations is processed in USD. With all that in mind, it is logical to see the USA as the leader of the world economy, but the real ruler of it all is the US Federal Reserve System, a private company that issues the American national currency and controls all the financial processes in the country.

Let’s not get down to the history of how this unlimited power ended up in the hands of the Fed business owners, let’s stick to the fact that the US government fully depends and is well-tied to this financial monster. For all money emission, the government pays Fed with debt securities, and this debt continues growing from 1913, the moment the Fed was created.

In modern civilization, the money emission evolution went in several stages:

1. Emission of money made of precious metals, when money was worth exactly as much as was worth the precious metal spent on it. Then this exclusive prerogative was in the hands of the country’s leaders, and their well-being depended directly on the amount of gold and silver in the country.

2. Money emission tied to gold reserves. The government could issue only the amount of money that was equal to the gold reserve in the treasury.

3. The emission of fiat money that is not backed up by any physical assets and is only supported by the guarantees from the government.

The system of fiat money has been there for several decades and is a quite wobbly construction; if you also add an independent issuer — the Fed, — then it is not hard to imagine how shaky is the ground that the world’s financial system is based on. Since the US government guarantees the dollar paying capacity, and at the same time it has no right to print dollars or at least control the process.

So it turns out that the Fed operates the printing machine at its free will and can start it not only at the government’s demand, but at any moment, and print as many dollars as it wants. Does the Fed use this power? This question will most likely stay unanswered forever. But the fact that in the US, 88% of the capital is in the hands of 10% of the population is much more impressive than any audit report.

Let’s get back to seigniorage. From the US example, we can see how all the principles of the “fair seigniorage” are broken:

1) The Fed is practically increasing the money mass and always getting the seigniorage.

2) The dollar’s purchasing power is falling every year.

3) The reserves are always reducing compared to the money supply.

As a result, the citizens have to pay the inflation tax — this is what an inconsistent price growth is called when we pay for the goods much more than their actual value. This is the payment for the capital collected by a small number of crazy people who don’t even spend it. Their useless money is just weighing the economy down like a tombstone.

The pace of the money supply growth in the USA during the past years has been shown in the chart. The money supply M2 has grown to 20,98 trillion USD in September from 20,79 trillion in August 2021.

Money supply M2 in the USA over the past 10 years in billions of dollars

The numbers of the US foreign debt are also quite frightening. It has grown to 22595448 million USD in the second quarter of 2021 from 21764799 million USD in the first quarter of 2021.

The US foreign debt over the past 10 years in millions of dollars

The payment system created by the Fed is destroying the very idea of fiat money since the issuer does not prove worthy of the trust it was granted with and does not guarantee anything. The fiat payment system has been living till today just under its own momentum, because people are used to it, they don’t want to get to the source of the problem, afraid to lose what they have. But it was the same when people switched from coins made of precious metals to paper banknotes backed by gold reserve — it was a forced measure, painful, but necessary. Now we are coming to the end of fiat money and slowly moving towards digital money.

When it comes to digital money, we often hear a question: how can we trust it, if it doesn’t really exist? It comes from the people who have been using paper instead of money for more than fifty years, and for the past thirty years — e-money, without asking such questions.

If we compare fiat and digital money systems, the first one has a lot more opportunities for fraud and deception of average working people, while the second one completely eliminated it. We don’t know how much money the Fed, or any Central bank, prints. What we see is prices going up all the time. Inflation devalues our income, and it comes from the fact that the country’s money supply is always growing — the print is on, and its owners creat capital for themselves. They don’t care about prices going up, since the average money users are the ones who pay for the inflation.

Switching to a decentralized digital currency can solve all the problems of the money system, but only if the emission algorithm is open and transparent for all the users.

This hypothetical meta-currency can algorithmically solve problems of creating non-inflationary money that we dwelled on in the previous article by the Reserveum Group — Why does a cheeseburger become more expensive?

Will the government support the idea of creating digital decentralized money?

It may with time, but at first, implementing such digital currency will most likely face strong resistance and pressure from the government regulatory bodies, such as SEC and others.

Why? The reason is simple: a decentralized digital currency with a fair seigniorage mechanism is an instrument that can, for the first time in history, create a transparent financial system and solve the problem of inflation that Central banks use to gain unlimited access to national currencies.

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