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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.
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%.
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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.
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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.
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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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