Liquidity or Liquidation
by: Sam Vaknin, Ph.D.
Large parts of the world today suffer
from a severe liquidity crisis. The famed globalization
of the capital markets seems to confine itself, ever
more, to the richer parts, the more liquid exchanges,
the more affluent geopolitical neighbourhoods. The
fad of "emerging economies" has all but
died out. Try telling the Macedonians about global
capital markets: last year, the whole world invested
8 million USD in their poor country. Breadwinners
earn 300 DM a month on average. Officially, in excess
of one third of the workforce is unemployed. Small
wonder that people do not pay their bills, employers
do not pay salaries, the banking system has a marked
tendency to crash every now and then and the average
real default rate is 50%.
Illiquidity erodes the trust between
the economic players. Such trust is a precondition
to the existence of a thriving, modern economy. We
all postpone the gratification of our desires: we
save now and consume later, for instance or we sell
goods or services and get paid a month later. Such
postponement of gratification is at the heart of
the economic machine of the new age. It cannot be
achieved, however, if the players do not trust each
other to fulfil their promises (to pay, for example).
Alternatively, the state can instate an efficient
court system, aided by active law enforcement agencies.
Keeping promises can be imposed to counter the natural
tendency to ignore them.
The countries in transition lack both:
liquidity necessary to keep one's monetary word
and the legal system to force him to do so if he
reneges. Small wonder that solutions are actively
being sought by all involved: the business community,
the state, the courts and even by consumers.
In this article, we will describe a
few of the global trends. The trends are global,
the reaction is world-wide because the problem is
global. Bouncing checks have become a household reality
in places as rich as Israel, for instance. The mounting
crisis in Southeast Asia foreshadows bankruptcies
and delinquencies on a chilling scale.
The simplest method is to revert to
a cash economy. Payments are accepted only in cash.
This, naturally, slows the velocity of money-like
products and diminishes their preponderance, obstructing
the expansion of economic activity. An even more
malignant variant is the barter economy. Goods and
services are swapped on a no-cash basis. It is money
that generates new value added (by facilitating the
introduction of new technology, to mention but one
function). In the absence of money, the economy stagnates,
degenerates and, finally, collapses because of massive
mismatches of supply and demand aggregates and of
the types of goods and services on offer and demanded.
Still, this system has the advantages of keeping
the economic patient alive even following a massive
liquidity haemorrhage. In the absence of barter economy,
the economy might have ground to a complete halt
and deteriorated to subsistence agriculture. But
barter is like chemotherapy: it is good for a limited
period of time and the side effects are, at times,
worse than the disease.
In many countries (Georgia, to mention
one) defaults are prevented by demanding prepayment
for projected consumption. Let us take the consumption
of electricity as an example: many heavy users and
numerous households do not pay their bills at all.
To disconnect the electricity is an effective punitive
measure but it costs the electricity company a lot
of money. The solution? Programmable Electronic Meters.
The consumers buys a smart card (very similar to
phone-cards). The card allows the buyer to use a
certain amount of prepaid electricity and is rechargeable.
The consumer pays in advance, electricity is not
wasted, the electricity company is happy, the tariffs
go down for all the users. Prepayment does have a
contracting effect on the demand and usage of electricity
- but this is welcome. It just means that people
use electricity more efficiently.
A totally different tack is the verification
approach. The person making the payment carries with
him a card which confirms that he is creditworthy
and will honour his obligations. Otherwise, the card
also serves as an insurance policy: an entity, not
connected to the transaction, guarantees the payment
for a fee. This entity is financially viable and
strong enough to be fully trusted by the recipient
of the payment.
This market in credit guarantees is
more developed in the USA (where credit cards have
overtaken cash and personal checks as a mode of payment)
than in Western Europe. But even in Europe there
are credit card equivalents which are very widespread:
the Eurocheck card, for instance, is really a credit
card, though it usually comes with physical checks
and guarantees only a limited amount. One must differentiate
the functions of a debit card (with direct and immediate
billing of a bank account following a transaction)
from those of a credit card. The latter allows for
the billing of the account to take place in a given
day during the month following the month in which
the transaction was effected or converts the payment
into a series of instalments (within the credit limits
of the cardholder as approved by his bank). But in
both cases, the guarantee is there and is the most
predominant feature of the system. Such cards seem
like a perfect solution but they are not: the commissions
charged by the card issuers are outrageous. Between
2 and 10 percent of the payment made go to the pockets
of the card issuers. Cards get stolen, forged, lost,
abused by their owners, expire. But with the advent
of new technologies all these problems should be
solved. Electronic POS (point of sale) cash registers,
connected through networks of communication, check
the card and verify its data: is it valid, is it
presented by the lawful owner, was it stolen or lost,
is the purchase within the limits of the approved
credit and so on. Then, the billing proceeds automatically.
Such devices will virtually eliminate fraud. The
credit card companies will guarantee the payments
which will be subject to residual crime.
Another fast developing solution is
the smart card. These are cards similar to phone
cards and they can be charged with money in the bank
or through automatic teller machines. These cards
(in wide use in Belgium, Austria, Germany and many
other countries) contain an amount of money which
is deducted from the cardholders account. The account
is billed for every recharge. The card is the electronic
(and smart) equivalent of cash and it can be read
(=debited) by special teller machines in numerous
businesses. When payment is made, the money stored
in the card is reduced and the recipient of the payment
stores the payment on magnetic media for later delivery
to his bank (and crediting of his account).
A more primitive version exists in
many countries in Eastern Europe: depositors receive
checks exactly corresponding to the amount of money
deposited in their account. These checks are as safe
as the banks that issued them because they are fully
convertible to cash. They are, really, paper "smart
cards".
Credit cards and (more cheaply) smart
cards are a way to restore confidence to a shattered,
illiquid economy. Macedonia should consider them
both seriously and encourage them through the appropriate
legislation and assistance of the state. For Macedonia,
the choice is to be liquid or, God forbid, to economically
self-liquidate.
About The Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and "After
the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org
and the editor of mental health and Central East Europe categories in
The Open Directory, Suite101 and searcheurope.com. Until recently, he
served as the Economic Advisor to the Government of Macedonia.
His web site: http://samvak.tripod.com
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