The Trust Bubble Explodes

Tue, 26 May 2009 16:05:04 EST

Trust is the name of the game, mistrust is the code followed. Today digital currency is the fuel of financial system, and it extracts value from the paper currency (backed bynothing) in circulation. But on the contrary it deems to have the power topurchase anything based on its value derived from the trust in the economy ofthe nation it belongs to (demand of currency in international market: moreeconomic strength, more demand, and more value).

The Economic Strength of the nation? Is only a matter of perception, as proved many time in the history. In present times the economic strength stands over a bubble of debt in theeconomy. The bubble expands with the ever growing debt, with a fraction of realwealth to back. The ultimate result.... the Bubbles are there to burst, leadingto benefit of the few, and disaster for millions. Case in point: sub-primemortgage crises in America.

Since the time Lehman brothers declared bankruptcy, a plethora of articles with analysis of the entire fiasco, its causes and impacts has been published but probably none (atleast I cannot find one) has really disclosed or talked about the real rootcause of the entire disaster. When I look at the entire scene, the questionthat pops in my mind is how a debt of $11 trillion in 'mortgages', alone, isloaned out when there is only $1.3 Trillion of printed notes available? Inaddition to this Credit card debts, other types of public and private loansmounting to a total of around $50 Trillion, only in American economy? (TotalU.S. mortgage debt outstanding was $10.7 trillion at the end of the thirdquarter 2006. Source: http://www.freeratesearch.com/en/newsroom/mortgage_statistics/)

Out of Thin Air

A common man, uninformedof this jugglery, would eventually ask that how on earth can this ever bepossible. The answer is simple but seems like a joke, a nasty one indeed. TheBanks creates money out of thin air when they have to loan out to someone? Magic?No! The process they use is called fractional reserve banking and the effect iscalled Money Multiplier in economics.

"The study of money, above all other fields ineconomics, is one in which complexity is used to disguise truth or to evadetruth, not to reveal it (p15). The process by which banks create money is sosimple that the mind is repelled."

John KennethGalbraith, Money: Whence it came, where it went - 1975, p29.

This is the most core of the banking business and all thecentral bank policies are directly or indirectly related with it. PaperCurrency is printed in the quantity, desired by Central Bank, is multiplied asit passes through Fractional Reserve Systems of Conventional banks. The CBimposes a Cash Reserve Requirement i.e. CRR is 7 ~ 10% on commercial banks(even Islamic banks) which determines the amount to be loaned out. A CRR of 20%means that a bank can lend 80 rupees if it has a deposit of Rs. 100. The bankin fact transfer this amount to the borrowers bank account, i.e. the same bank(or any other bank) receives it, again make it a part of the deposits (of thebanking system) ready to be loaned again. The cycle continues and the money printedor minted by central bank is multiplied many times in the form of loans and thecommercial bank expects it back with interest. Check the chart above or for moredetails please visit: www.en.wikipedia.org,www.lewrockwell.com)

No surprise the amountof debt (increasing every year) is more or less the same as the amount of timeand demand deposit (demand deposits are saving and current accounts, and timedeposits are long term deposits which are not withdrawn at least for one year) duringthe same period. Thus money is created continuously as debt in the economy.Today in US economy, only 3% is real money and the remaining is just ...Numbers!!! Same is the case with UK. In Pakistan the cash in circulation is Rs.982 Billion, which is around 21% of the total Money supply (Rs. 4,672 Billion) and21.6% of total domestic credit (Rs. 4,531 Billion). These statistics has been taken from www.sbp.org.pk.

Murray N. Rothbard states in his article “TheCase for a 100 Percent Gold Dollar” (http://mises.org/story/1829#_ftn19)

In my view, issuing promises to pay on demand inexcess of the amount of goods on hand is simply fraud, and should be soconsidered by the legal system. For this means that a bank issues “fake”warehouse receipts—warehouse receipts, for example, for ounces of gold that donot actually exist in the vaults. This is legalized counterfeiting; this is thecreation of money without the necessity for production, to compete forresources against those who have produced. In short, I believe thatfractional-reserve banking is disastrous both for the morality and for thefundamental bases and institutions of the market economy.

Inflation or Devaluation

The rate of increaseof these numbers is in fact real inflation, or more appropriately devaluationas the increase reduces its value. Let’s say if these numbers multiply by anamount of 10% in one year, then the inflation would be around 10%. In otherwords there is 10% more money in the economy to buy the same amount of goods. Thiswill eventually increase the prices in case the production has decreased? Yesof course if the production in the economy has also grown by an amount of 10%then supply (production) and demand (purchasing capacity) will be synchronizedand there won’t be any inflation. However this seldom happens, the rate ofincrease of money supply (of course numbers) is always faster in theconventional economic system and thus supersedes the rate of increase inproduction hence inflation (devaluation) is mostly observed.

Conventional economictheories suggest that some inflation (say around 4 ~ 5% is desirable), as itencourages people to purchase more in fear of increase of prices in near future,thus increasing demand which further encourages the production. However whenthe interest rates (of course absolutely illegitimate in Islam) are low, thebanks go crazy and starts to lend to almost every one. A common man perceivesthat its profit that’s driving them crazy, but there is more to it, the entirebanking machinery allows each other to generate numbers (having purchasing power)with an exponential rate. The loan of one bank is the deposit of another, butplease, the deposit in the banks are considered as liabilities, in order toconvert them to assets the deposits must be loaned out again, and when they areloaned they again become deposits of some third bank. The cycle continues; and wesee a continuous increase in the money supply and of course an equal increasein the prices of the commodities we purchase. More money for the same amount ofproducts! In other words devaluation of monetary unit.

Bankrupt: A Loser like in theMusical chair game

When this mindless (ormind full) multiplication of money supply is increased, please note that thedebt with in the society also increases with the same pace. Increase in debtincreases the money supply in form of numbers (97% of America’s Money supply).Now as all the debt has to be paid back with interest (of course) then how onearth every one can pay back their debt ‘withinterest’ as the total money supply in the economy is (more or less) equalto the amount of debt produced? ... Mathematically it’s impossible. The onlyway is to look back at the system for more debt to cover this gap! (And thatsalso needed to be paid back with interest). The result is constant inflation asmoney supply in always created as debt to fill the gap. … A never ending ‘vicious’spiral!

Bankruptcy is inherentfeature of the system. Somebody at some point in time will get bankrupt,despite any unforeseen circumstances, as there isn't enough money ever to payback the interest with the principle amount.

Credit cards,mortgages, car loans, personal loans, etc, when advertised in TV or printmedia, claim to bring the ultimate prosperity and happiness to its users. Ifyou are a user of these services then ask yourself, do you ever become 'happyever after' or satisfied to the extent shown in TV commercials? I am suremajority will say no. The fear is there, as the threat of bankruptcy is real.Check out the charts showing the bankruptcy trends in America.

The Central Bank comes to theRescue

When the threatbecomes substantial, the central bank wakes up due to the havoc caused by themerciless, uncontrolled expansion of the money supply, raising the prices outof the reach of the ordinary man. Now the state bank drops another bombshell onalready aggravated and indebted citizens, by increasing the interest rates. Thisdiscourages people to restrain them self from the banks as cost of purchasingdebt (I repeat, illegitimate in Islam) has gone up. Now lesser money isgenerated and as lesser debt is generated, the inflation is reduced; the centralbank celebrates.

"I believe that bankinginstitutions are more dangerous to our liberties than standing armies. Alreadythey have raised up a money aristocracy that has set the government atdefiance. The issuing power should be taken from the banks, and restored to thepeople to whom it properly belongs."

Thomas Jefferson, 3rd US President.

But as we have alreadydiscussed that debt is actually the money supply and the bank payments againstdebt (principle + interest), are greater than the amount available in theeconomy and requires more debt to generate to pay back the interest onprinciple amount. Now due to tighter monetary policy (high interest rates)lesser new money or debt is created, thus the gap between what is required (principle+ interest) and what is available, widens! Now somebody has to loose, like inthe musical chair game, and he is no other then ordinary citizen. And as the vacuumor gap widens, the number of bankruptcy goes skywards. In Urdu we call it "Asmanse Gere, Khajoor main atke" (society escaping from one problem by gettingstuck into another).

Such a period iscalled recession and when this period starts creating havoc as unemploymentrates soars, prices declines due to reducing purchasing power etc, the centralbanks comes again to rescue and do its best by reducing the interest rates.This again makes the banks go crazy, again, to add more to the money supply andof course to their Profit. And guess what, the poverty is never reduced in factincreases in real terms (reduces in nominal terms though!), either due to highinflation or lack of employment in either forms of monetary policies. MichaelRowbotham observes:

"This(monetary management) a government does by lowering or raising interest rates.This alternately encourages or discourages borrowing, thereby speeding up orslowing down the creation of money and the growth of the economy.... The factthat, by this method, people and businesses with outstanding debts can besuddenly hit with huge extra charges on their debts, simply as a managementdevice to deter other borrowers, is an injustice quite lost in the almostreligious conviction surrounding this ideology…

…Thismethod of controlling banks, inflation and money supply certainly works; itworks in the way that a sledge-hammer works at carving up a roast chicken. Aneconomy dependent upon borrowing to supply money, strapped to a financialsystem in which both debt and the money supply are logically bound to escalate,is punished for the borrowing it has been forced to undertake. Many pastborrowers are rendered bankrupt; homes are repossessed, businesses are ruinedand millions are thrown out of work as the economy sinks into recession. Untilinflation and overheating are no longer deemed to be a danger, borrowing isdiscouraged and the economy becomes a stagnating sea of human misery. Ofcourse, no sooner has this been done, than the problem is lack of demand, so wemust reduce interest rates and wait for the consumer confidence and thepositive investment climate to return. The business cycle begins all over again- There could be no greater admission of the utter and total inadequacy ofmodern economics to understand and regulate the financial system than throughthis wholesale entrapment and subsequent bludgeoning of the entire economy. Itis a policy which courts illegality, as well as breaching morality, in thecavalier way in which the financial contract of debt is effectively rewrittenat will, via the power of levying infinitely variable interest charges."

Like bankruptcy,poverty is another inherent feature of the conventional debt, interest and FRBbased economic system. Considering an economy such as of UK where 97% ofall the money supply is in the form of debt created as numbers or book entriesby fractional reserve banking system. Disposable income of individuals in sucheconomies is draining out in payments of credit card bills, car loans,mortgages etc. There monetary savings are being gradually reduced and threat ofbankruptcy has rendered these disintegrating savings increasingly sacred(http://www.creditaction.org.uk/assets/PDF/stats/2008/october.pdf). Similar thecase in United States or other developed countries with similar economicscenario.

It’s a common banking practice nowadays that whenever aperson asks for some debt, the bank in return asks him to pledge his realwealth / savings so that bank investment can be secured in case the creditorgets bankrupt. Thus pledging further disables the creditor to extract a portionof his savings to help the poor of the society. So if the citizens of sucheconomies would have been Muslims it would increasingly become psychologicallyand financially difficult to pay Zakat or any other form of charity to thepoor.

In an interest / debt driving economies, the lendinginstitutions ask for more (principle plus interest) then they actually give.Financial vulnerability of an individual or any business gives them an excuseto charge more markup. Thus, the banks gradually suck up the money supply andultimately increase the amount of economic disparity. Little surprise when wesay “Richs are getting richer and poorare getting poorer” in today’s debt reddened so called developed countries…

Root Cause of All Evil

Looking back at thesubprime mortgage crisis in America, there are a lots of reasons being citedsuch ‘as boom and burst in the housing market’, speculations, High-riskmortgage loans and lending practices, Securitization practices, Inaccuratecredit ratings, Government and central bank policies, Financial institutiondebt levels or leverage etc … but I think they are only the symptoms of theunderline causes which are as follows:

Fear and Lust: Fear of bankruptcy and consumption beyond themeans, are the two motivating factors that derived the behavior of theborrowers. But looking closely we realize that this has also been a byproductof the system which first created the debt and then through media, “psychologicallyconditions” its user to become indebted, for the sake of their ownprofitability. (Watch the movie: Zeitgeist-Addendum) This led us to theultimate reason which is:

The bank’s ability to control the money supply: For the sake oftheir own benefit, they create money supply out of thin air, this leads to exploitationand mass bankruptcy (some of their own gets sacked as well), and implementationof solutions which creates more problems than are solved, like monetarypolicies of central banks. All of this brings them unprecedented power to control,manipulate or enslave nearly everything, including governments, central banks,corporations, or even entire nations.

"Allow me to issue andcontrol the money of the nation, I care not who writes the law"

Mayer Amschel Rothschild, in1828

"Banking was conceivedin iniquity and was born in sin. The Bankers own the Earth. Take it away fromthem, but leave them the power to create deposits, and with the flick of thepen they will create enough deposits to buy it back again. However, take itaway from them, and all the great fortunes like mine will disappear, and theyought to disappear, for this would be a happier and better world to live in.But if you wish to remain the slaves of Bankers and pay the cost of your ownslavery, let them continue to create deposits."

Sir Josiah Stamp, Presidentof the Bank of England in the 1920's,

The second richest man inBritain

The Question of Islamic Banking

IB cannotbe called totally legitimate, but it can be said that the evil effects of thebanking system have been significantly curtailed though not eliminated. Thenumber (money supply) generation in IB is supposedly balanced with the realasset creation, speculation or gambling is totally prohibited and of coursebusiness which are illegitimate like vulgar TV channel, wine or cigarettefactory, casinos etc are also not financed by Islamic Banks (ideally speaking).Furthermore, Islamic banking is completely asset backed and talks about profitand loss sharing.

However certainmodes of Islamic finance are criticized and there is difference of opinion amongscholar. Like the markup charged is benchmarked to KIBOR and Islamic banks arebound to follow the policies of the state bank etc.

However thebiggest challenge for Islamic Banking would be to free itself from thefractional reserve system of conventional banking. Since state bank of Pakistanhas clearly defined cash reserve requirement (CRR = 11%, source: www.sbp.org.pk/bsrvd/2008/c8.htm) for Islamic banks, thus hasforced Islamic banks to follow the foot print conventional banks. Many ScholarsIncluding Omar Chapra, has tried to develop a frame work however theseframeworks remains theoretical till date. Even Mr. Taqi Usmani, has criticizedFRB to full lengths in his book “Historical Judgment on Riba” however a veryclear framework is not presented there as well. Professor Dr. Muhammad Anwar departmentof Economics of International Islamic University Malaysia states his verdict onFractional reserve model as follows.

Supportersof Islamic banking in the ranks of fuqaha, economists, bankers, and othersmainly focused on the interest-based transactions as deals between banks andtheir clients. This outlook, perhaps inadvertently, led to the negligenceof the larger issue of the legitimacy of the banking system itself. The bankingsystem representing the institutional arrangements for collecting deposits andmaking advances in a fractional reserve system is in violation of the explicitQur'anic verdict that forbids devouring of peoples' money in the followingwords "O' believers, do not eat your properties among yourselves throughfalse means" (Nisaa, 4: 29) ….

Suppose all the moneycreated by the banks is translated into real growth so that there is noinflation and no reduction in the real value of deposits. Then do thecommercial banks have any advantage? Yes, because they being the creditorsstill become owners of the deposits created through this process. Therefore, inflation or no inflation the commercial banks would enjoyundue advantage thanks to the money expansion multiplier process. Thegovernment enjoys similar advantage when money supply is increased by thecentral banks as it acquires ownership of the peoples' property in exchange tothe tune of the money so created. The difference being the central banksdirectly create money while the commercial banks create money indirectlythrough the deposits.

If all the depositors turnto banks to withdraw their deposits then would they be able to receive backtheir deposits? Surely not because of the fractional reserve system that grewout of the dishonest practices of the early goldsmiths with whom people used tokeep their trusts. Therefore the Allah's orders like "Allah commands youto render back your trusts to those to whom thy are due" (Nisaa, 4: 58)and "do not misappropriate knowingly things entrusted to you"(Anfaal, 8: 27) can never be complied in the presence of the fractional reservesystem. Moreover, due to expansion of money supply by the banks, theresulting inflation means that real value of the deposits falls. Thismeans that the deposits withdrawn from the banks have diminished value. This amounts to a clear violation of not only the above commands but alsoof those commands that require to "give not short measure or weight"(Hud, 11: 84) and "give full measure and full weight" (Hud, 11: 85).

Accrual of the seignorage to the commercial banks bydevaluing the money holdings of people through inflation necessarily favorsconcentration of real wealth into few hands, an outcome contrary to theQur'anic command that wealth "does not make a circuit among thewealthy among you" (al-Hashar, 59: 7). The tendency of concentrationof wealth into few hands is due to the seignorage that would happen even if theloans were issued at a zero rate of interest. Therefore, credit system imposesa larger problem compared to the practice of interest.

(http://www.globalwebpost.com/farooqm/study_res/i_econ_fin/anwar_islamicity.doc)

Financings constituted 49.7% of the total assets and stoodat Rs. 88.3 billion in September 2007 as compared to Rs.78.8 billion at the endof June 2007, showing an increase of 12%. However total cash in hand withIslamic banks was 16.3 Billion in Sep 07 which is 9% of the total assets.Whereas the total deposits were 124.4 Billion in Sep 07 (http://www.sbp.org.pk/ibd/Bulletin/2007/Jul-Sep-Bulletin.pdf ).The most interesting part is that the 70% of the business of Islamic banks isthrough Murabaha (working capital finance) and Ijarah (Rental Lease), while 26%is via Diminishing Musharaka (Alternate to Mortgages). The interesting thing isthat there isn’t much profit and loss sharing in these modes. And since from customer’spoint of view all these modes are liabilities and there is a possibility of customergetting bankrupt due to any unforeseen circumstances.

Furthermore when these financings operate under fractionalreserve framework they contribute to further creation of money supply in theeconomy, out of thin air. As all Islamic banks are privately operated, thereability of creating money out of thin air, reminds me of Thomas Jefferson’sstatement "I believe that bankinginstitutions are more dangerous to our liberties than standing armies. Alreadythey have raised up a money aristocracy that has set the government atdefiance. The issuing power should be taken from the banks, and restored to thepeople to whom it properly belongs."

Thiswill only happen, if Islamic banks get profit to top their priority list andget blind folded from the potential havoc they would bring to the society, ifthey keep stick to the same model of fractional reserve nature for the sake ofmonetary returns, if they don't take the pain to improve on all the inherentdiscrepancies, then my views will coincide with that of Thomas Jefferson incontext of ground realities of Islamic Banking (although in theory the major emphasisis on Musharakah and Mudarabah). The current trends if extrapolated to paintthe future status of Islamic banking industry, what we see is a subsidiary ofconventional banks curtailing some of the conventional banking problems, notall.

Despiteall this I personally believe that there are a few people in the industry whoare genuinely interested in taken the economy toward the Islamic essentials.For example the team headed by Mufti Taqi Usmani are no doubt applause-able anddeserves due support. There supervision to certain banks makes them in any casea better alternate incase of dire need of any financial services. However Iwould still emphasize that by remaining under the framework fractional reservebanking the path ultimate objectives remains blur. My opinion and proposedalternative would be to design and develop a system completely free presentframework, which I shall Inshallah try to demonstrate in my limited capacity.

Floating on ‘Thin Air’

Another important dimension which must also be taken intoaccount while extending the Islamic banking framework to international levels, isthe floating exchange system. Through this system the value of a currency isconsidered flexible and weighted against other currencies such as dollar.

FloatingExchange Rates: Currency exchange rate which isdetermined by freemarket forces, rather thanbeing fixed by a government. (http://www.investorwords.com/2016/floating_exchange_rate.html) Take a look at this simplified model: if demand for a currency is low,its value will decrease, thus making imported goods more expensive and thusstimulating demand for local goods and services. This in turn will generatemore jobs, and hence an auto-correction would occur in the market. A floatingexchange rate is constantly changing. (http://www.investopedia.com/articles/03/020603.asp)

Before this, let’s talk on Paper currency first. Papercurrency is a hoax (pay orders, bonds, cheques and other receipts included) anddigital currency (debt / credit cards) are even bigger hoax, as it was supposedto be hedged to gold (or any other real asset) but it’s not. The reason papercurrency superseded gold and silver was that it could be produced effortlesslyand multiplied many times over in form of debt by passing it through the FRBsystem. The digital currency in form of credit and debit cards has eveneliminated minor repercussions which paper currency had, like printing anddistribution, as now it’s even easier to generate and multiply it in digitalform, thanks to the latest information technology.

Paper currency is a pivotal element of Debt / Interest basedeconomic environment which enables world powers to accomplish their agenda ofEconomic domination and slavery (for details of this agenda read the book byConfession of an Economic Hitman by John Perkins who worked at organizationssupporting IMF and World bank), as it allows the banks to control, issue anddevalue the money supply.

Devaluation of currency is practiced to keep countries underthe economic slavery of international agencies like World Bank and IMF. Youmust have noticed the devaluation of Rupee in the past and more significantlyin recent times. The World Bank occasionally pushes Pakistani government todevalue the currency or through design political turmoil (see video zeitgeistaddendum, part 2 for interview of John Perkins) accomplish this, simply becauseit increases the amount of debt in dollars and the interest on that debt(previously to pay back 1 dollar, we had to earn Rs. 60, now we have to earnRs. 80) as a result Pakistan has to pay more out of its savings for an evenlonger period of time to pay back the debt and accumulated interest rate, andif things are more precisely executed by the agents of the agencies then thecountry go to the verge of bankruptcy. Now in return of the debt, the countryis asked to hand over its natural resources at a fraction of a cost in the nameof privatization.

The ultimate delima with the paper currency (and floatingexchange rate) is that the real goods produced in a country are valued as perthe exchange rate of the country in international market. Now if the value ofPak rupee is decreased then the value of the real good such cotton or wheat isalso reduced in the international market. With a 50% decrease in value of Rupeeas compare to euro (for example), twice the amount of cotton will be sold toanyone having the same of euro in his pocket. How on earth, the intrinsic valueof real good is reduced with the reduction is fictitious value of worthlesspieces of papers? To justify this injustice, citizens are told that this willenhance the trade of the country as the price of our products are reduced inthe international market as Rupee is now 26% weaker then dollar. Now if that’sthe case then, if the currency loses say 99% of its value against dollar, thenthe real goods will be sold in the international market for almost free! Nowplease thinks from the buyers point of view, wouldn’t they always want thecurrency of a country, rich with natural resources, to lose its value to theextent possible? Why wouldn’t they and it is already happening with all thecountry in debt, thanks the world-bank and IMF.

“THE GREAT ESCAPE”, THE DESIGN

Following are the factors which must be perused in thefollowing sequence after studying the prevailing challenges in the conventionaleconomic models and threats from its stakeholders.

Mode of Interest Free transactions, ofcourse
Unit of Exchange Based on real wealth, totallyasset based. Deterrent to devaluation via floating exchange rate. For detailsplease read “The Case for a 100 Percent Gold Dollar” by MurrayN. Rothbard (http://mises.org/story/1829)
A monetary unit
Effective mechanisms for uplifting the poor viaeducation and financial support, Reduction and elimination of economicdisparity
Mode of financing for contingencies(Takaful)
Need driven, rather than want driven
Continuous circulation of wealth, in every nookand corner of the society

Of course the entire society cannot be converted on to the systemprobably in one go. The change will take many years, probably decades. In orderto make it an inherent part of the society, the change must also be brought on social,political ground and most importantly at spiritual levels (social andindividual). Every facet of his change will have a different sub-strategy andalso grand one including all smaller ones, which can be designed by the respectiveexperts of every field. However everyone has a right to contribute and so do I.Thus in context of this article, I present here an idea which may lead us intothe direction of cumulative well being of the society. The idea is to start themodel, as a business, just like the Gold Smiths started all the scam, but wewill do it for the welfare with utmost honesty. Now think about reversing theprocess the Gold Smiths started. Following are some of the starting steps whichwill at least establish the model.

The Game Plane, Brief

Think about a commodity trade model like NCEL in Pakistan,DMCC in Dubai or E-Dinar in Malaysia (check out http://www.dmcc.ae/,http://www.ncel.com.pk/ and http://www.e-dinar.com),with some modification. Think about a commodity exchange company which allowsinvestors to open an account with an amount as low as Rs. 10,000/- (and noupper limits) however this amount will be stored in the forms of commodities,such as gold, silver, diamonds, or a variety of things. This will eventuallyfree investment from the waste caused by devaluation or inflation. Futurebuying will be restricted and depositors will be allowed to take physicalpossession when they require.

There will also be a salary account in which depositors canput their monthly salary, in form of Gold (or other commodities), and use it toshop for grocery and other stuff, "via debt cardsystem" and keep their savings or disposable income in commoditiessuch as gold. For that, Super stores like Naheed Superstore, Aga's super market(to start with) for example will have their commodity accounts as well, so thatelectronic trading among them is seamlessly possible. These accounts will belike foreign currency accounts, as the prices of commodities fluctuate (butincrease substantially in long run due to monetary inflation). By keeping theirsavings or disposable income in gold/silver or a mix of different commodities, willsave the customers from loses caused by devaluation or inflation of themonetary unit.

The profit to the company will come from service charges andlong term investments and trading in commodities such as gold whose annualprice increase is averaging around 70% during last 5 years at least.

Short term Qurd-e-Hasana (interest free loan) in the form ofcommodities will be given to the ultra poor (after proper screening). Forexample 10 gm of gold or monetary equivalent (monetary unit will be naturally preferreddue to general acceptance) will be credited to them to finance specially theworking capital and the time of maturity will be short i.e. 1 week or 1 month.After maturity the borrower will have to return the commodity credited to himin the same amount (10 gm of gold in this case) or its monetary equivalent. Dueto short term nature of the loan, the increase in price of commodity in monetaryterms will be nominal (some time lesser as price decrease some time as well)thus its return won’t be a burden or probably a blessing in case of decrease. Thesecustomers will be invited to open up a commodity account (like current accounts)with whatever amount they can save. They will be told and they will eventuallyexperience (Inshallah) that through saving in form of commodities such as gold,inflation will become an alien concept. These savings will be investments inthe company and can be used in trading real assets. However they will beallowed to withdraw their savings whenever when in need.

Rationale of 3D Commodity Exchange

This proposed model is only an extension of the commodityexchange model, in fact micro finance, and electronic commerce (Debit Card) hasbeen merged in to the commodity model. If all three of these have done wondersin their respective areas, then there isn't slightest of doubt in my mind thatthere combination model won’t do miracles specially when executed in the lightof principles of Islamic Shariah.

The company also profits (though in monetary terms) from itsinvestment in gold as in monetary terms it increases about 70% annually. Thereis always an impact of demand and supply on the gold and silver prices, howeverthis fluctuation is always moving around the theoretical price (see chart). Theformula to calculate the theoretical prices of gold or any other commodity issimple. By tracking the inflation of monetary unit (particularly dollar) andinflation in gold (annual production) predicts the theoretical price of gold.And guess what, the real price of gold always keeps on coming back to theoreticallypredicted value. The shift from theoretical can also be predicted by keeping aneye on the global economic and political events. Generally gold price increaseswhen dollar devalues, if global events tend to devalue the dollar, investorsprefer shifting to gold and other commodities like oil, increasing the demand thusraising the prices.

As we have already defined that Islamic economic system mustcontain interest free modes of financing, prohibited from creating money out ofthin air (FRB), must be free from the impacts of inflation (through electronicbarter), etc

These features are embedded into the proposed system. ThroughCombining the Commodity Model, with electronic trade at consumer level (debitcards), further extending it to working capital financing to ordinarybusinesses and business giants expanding and taking it to the poorest of poorthrough micro finance all under the guidance of Islamic Shariah of course,.This can start the process of bringing the public to real Islamic model, freepeople from debt, free them from inflation, however though this is just astart. The benefits will only be reaped by those who get them self associatedwith the system, however the entire society will benefit only if the entirefinancial sector adopts this model.

This system will promote welfare in the society directly andindirectly. Short term loans with Qard-e-Hasana will directly uplift the poorand help them to stand on their feet. in the long run the poverty reductionwill increase the purchasing power of the masses thus demand for essentialswill increase, this demand might increase the prices of commodities in monetaryterms but the customers dependent on this system will remain protected as theirsavings are kept in the form of commodities them self! Furthermore thisincreased demand will encourage the producers to produce more of the essentialsthen luxuries.

Educational programs for the customers (of micro finance) inthe form of seminars, etc will be designed to educate them spend their incomesin the most efficient ways, they will be educated to focus on essential itemsand restrain them self from going after luxuries. This education willeventually increase the demand of essentials, affecting its monetary price. Furthermore,the company will have to keep its borrowers under proper monitoring so thattheir borrowings remains constructively utilized there benefits and they remainin a credit worthy state. Grameen Bank ways of operational management of microfinance can be used to improve the efficiency of the system (check outwww.grameen-info.org)

This model will remain profitable for the business in ‘Real Terms’(real growth = nominal growth - monetary inflation). As already explained, theprofit will come from long term investment and trading in commodities, whichwill be sold as soon as a deal with reasonable profit is established the market(buy in bulk, sell in chunks). Furthermore this system has inherent feature ofraising demand of commodities which eventually increase the prices in monetaryterms. But the effected are those who didn't invest their savings in this systembut for those who have! So through word of mouth a massive demand of thissystem will be created as no one wants to get hurt by inflation, this will alsoreduce the marketing cost.

All the investors will be encouraged to contribute to thecharity fund, they will be educated through newsletters, seminars etc thatdoing so it their religious responsibility, Quran and Ahadith has put ampleemphasis on it, they will be told that real benefit to the poor can only bedelivered when they will be pulled out of the grip of monetary inflation, educationand employment generation. Now since this 3D commodity exchange model isindulged in doing so, thus this will be the best way to help poor i.e. to helpthis model grow. This charity fund will be effectively utilized to helpcustomers of micro and regular finance in case of any unforeseen emergency. Furthermorethe model of Takaful can also be integrated into the system to profitably helpthe customers in case of emergencies.

Some Final Thoughts

You might have already noticed that this system is also dependenton the paper currency for external transactions. However endogenous exchangeswill be made without the need of any paper at all. I cannot claim that it’s theultimate way out, nobody can, and however I hope that this model will allowpeople to think about new possibilities and new ways which may ultimately free humanityfrom the destructions of current usurious, monstrous, cancerous, economicmodel.

The proposed model isn’t a nonprofit NGO. It’s a profitablebusiness at the same time, as profit is a necessary requirement for any systemssurvival and growth; however that should not be the real purpose, if it is, thenfrom Jim Collins point of view such a business is short lived i.e. dies with ina generation. However if it’s developed around certain core purpose and visionbased on timeless principles and universal values, it is destined to last tillthe time its foundations remain intact and it continues to practically achievethe vision. Like in our case, it is “The establishment of Islamic economic andsocial system, first within its boundaries then extending it gradually to everynooks and corner of the society”, if this vision remains intact and if everystakeholder remains adhered to it with utmost conviction, honesty anddetermination, then it won’t be surprising to see such an organization (orsomething similar) might bring about the noble changes in the society itintends to achieve.

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