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A New Dawn for Iran

by ChrisCook Wed Oct 8th, 2008 at 10:55:52 AM EST

Well, I'm off to Iran on Friday, to make a presentation at a major oil conference in Teheran in relation to the concept of a "PetroTrust". The idea is to enable a new form of "asset-based" financing based upon the "unitisation" of energy, initially in carbon form, through both a new "enterprise model" or legal and financial framework, and a new, simple, generation of financial products within the framework.

My paper and presentation should be available on my site

Open Capital

early next week, for those interested in such things.

By way of preparation I wrote an article which will be published in two Iranian newspapers on Saturday, I understand, and "Asia Times" have been kind enough to publish it today, despite the fact it directly addresses Iran

A New Dawn for Iran

After the conference I have quite a few meetings already lined up, including ministers, leading parliamentarians, financial services practitioners, and - perhaps the one I most looking forward to, believe it or not, a meeting with clerics in the Holy City of Qom, to discuss the values underpinning financial markets and products.

Interesting times, indeed....

Beyond Peak Credit - a New Dawn for Iran?

I have been working for some seven years, with a background in global financial services at the highest level, to assist Iran in developing a coherent financial system fit for the 21st Century.

Throughout this sometimes painful process I have made clear that the Western "market economy" is fundamentally unsustainable and that its collapse would occur sooner rather than later. Unfortunately, those decision-makers in Iran who received my advice took the mistaken - but conventional - view that the Western "Twin Peaks" financial market model based upon "Debt" (credit created as money by credit institutions) and "Equity" (in Corporations) was both sustainable and even desirable.

But, as I have been saying throughout, both privately and in articles published globally, this model never was sustainable. Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth's resources - particularly carbon-based energy.

The Problem - "Peak Credit"

The dollar-based global financial system is continuing a slow, and irreversible, collapse from the point - I call it "Peak Credit" - in August 2007 when the unsustainable US property price "bubble" finally burst.

The problem is not one of liquidity - ie the absence of money - Central Banks can print as much of that as necessary. The problem is a terminal shortage of capital or Equity in the global banking system - a solvency problem. The US government was previously able to resolve such a problem - as they did in the 1930's - by deploying unused domestic resources.

The US has brought forward, through its catastrophic waste of resources in Iraq, its "Suez Moment". This is the realisation forced upon Britain by the US in 1956 that economic realities require an End to Empire. The US cannot resolve the insolvency of the Dollar-based global financial system without the assistance of their international creditors, and this requires a new global settlement - a "Bretton Woods II".

It is ironic that Iran has been protected from being infected by the "Anglo Disease" by the very sanctions which were aimed at damaging her.

What is the Alternative?

We must recognise the distinction between "Money" and "Money's Worth" and ensure that the financial system reflects this.

Over 70% of Dollars created are in fact based upon the value of land use - and came into existence as loans secured by a legal claim or "mortgage" over land. Most of the rest of the Dollars are based upon the value of carbon-based energy (ie oil) much of which originated in Iran.

Firstly, in relation to energy, I advocate the replacement of the literally worthless (because "deficit-based") Dollar created by the US Federal Reserve Bank with an "asset-based" "Energy Dollar" or "Carbon Dollar" value unit based upon the intrinsic energy value of carbon-based fuels.

This currency would be created by "Unitising" energy as "Units" redeemable against energy within the "PetroTrust" framework I am presenting in Teheran at the important International Oil Refining Conference on 11th/12th October. Such Units would then circulate globally, subject to mutual guarantees, within the framework of an "International Clearing Union" similar to that proposed by the great economist John Maynard Keynes at the first Bretton Woods conference in 1944.

Secondly, in relation to the value of land I propose a new "Co-ownership" framework for direct investment - "Unitisation" - in a new type of "Real Estate Investment Trust" ("REIT"). This would replace the conventional financing of land and buildings through secured "mortgage" lending which invariably gives rise to bubbles in land prices.

Such "Capital Partnerships" between Investor and User of Investment are in fact already emerging in the UK and will be immediately recognised by anyone who is familiar with the revenue and production sharing agreements which have been at the heart of Iranian and Middle Eastern commerce for literally thousands of years.

A National Equity?

The alternative to an unsustainable "Deficit-based" system can only be "Asset-based": new forms of "Equity" -beyond the "Corporation" - to replace unsustainable secured Debt. Existing national accounting - based upon a "National Debt" - is fundamentally flawed but is unquestioned, and until recently, unquestionable.

I believe that Iran could be the first to evolve a "National Equity" to replace much of her - conventional "National Debt".

The means to do so is simply to use new alternatives to the legal form Iranians - like everyone else - regard as a fixed constant - the "Limited Company" or Corporation. Once it is realised that alternatives to the Corporation are not only possible, but are emerging because they actually work better, then everything else will fall into place.

I am pointing out that Iran does not need to sell ownership and control of her natural resources to multinationals when she can simply "Unitise" and "sell forward" part of her production to investors, receiving interest-free finance in return.

A New Dawn

The resources of Iran in terms of energy, whether carbon-based or the energy of her immensely talented and young population, are phenomenal. I believe that it is possible for the Iranian people - with wise leadership, which is not lacking - to harness these energies and to "self organise" within agreed frameworks to meet the global challenges we face.

It goes without saying that Iran cannot address these challenges alone. But I believe that the simple, but radical partnership mechanisms now emerging will not only allow Iran to transcend sterile arguments and competition, but to do so in a way that integrates her eternal values with an optimal economic model which will cure the "Anglo Disease".

Finally, to those in Iran who advocate reform, I have this advice: the last thing Iran needs is to reform itself to achieve a "Western" financial market model which has demonstrably failed. Indeed, Iran is fortunate that circumstances have prevented her from going down this road.

Instead, I believe that Iran should examine - from first principles - how a market economy might operate collaboratively to develop Iran's productive economy, rather than being operated as a casino for the benefit of financiers at the expense of the productive economy.

I look forward to working with my Iranian friends to achieve an economy fit for the 21st Century

And a hat tip to Jerome, whose "Anglo Disease" receives an honourable mention....

One correction/ amplification occurs to me. When I say that a "Carbon Dollar" can replace the US Dollar, I mean replace it as the global reserve currency.

The US Dollar would retreat to the US through a basis upon US land rental values, and would therefore be most acceptable in exchange - or "fungible" - only in the US.

Such a US dollar would come about through a "Debt/Equity swap" on a grand scale, but.... "not Equity as we know it, Jim......"

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 8th, 2008 at 11:18:55 AM EST
I thought that in order for a carbon dollar to work to combat climate change, the scarcity would need to increase at a steady, annual rate and thus limit supply? The carbon dollar would become increasingly valuable, but eventually it would near cease to be.
by Magnifico on Wed Oct 8th, 2008 at 01:25:15 PM EST
[ Parent ]
The carbon dollars you refer to are the quite bonkers idea of attempting to monetise - by government "fiat" - the carbon value of CO2, which of course has zero intrinsic value.

It was of course the people who currently monetise our present IOU's - which are equally valueless - who are so enthusiastically behind these "deficit-based" carbon trading and emissions trading schemes.

My proposal essentially reverses the polarity from "deficit-based" to "asset-based" Units. I aim to do so through monetising the energy value of carbon, since the Units created will be redeemable for energy - which actually has intrinsic value.

Such "Carbon Dollars" will, IMHO, be readily accepted in exchange for value - which is of course what money should be all about.

I like to use a metaphor to illustrate the comparison between an "energy-based" carbon Dollar, and a CO2-based Unit - heard at a traders' conference a few years ago:

"If you want to keep a donkey healthy, you don't regulate what comes out of it: you regulate what goes in"

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 8th, 2008 at 01:54:30 PM EST
[ Parent ]
So if I understand you correctly then, this is a commodity based currency? So instead of the gold standard or silver standard, there is the "coal standard"?

The amount of energy carbon-based fossil fuels doesn't decrease as alternatives are introduced, so their value holds. I do not see how this then, would reduce the incentives to not use carbon-based energy or find ways to reduce carbon gases released by converting the fuel into energy.

I am again likely missing your point, but doesn't this make environmentally hazardous carbon-based fuels — like oil sands — even more valuable? I could see how this would be appealing to an oil-rich nation like Iran.

I'm not seeing how it does anything to help prevent the release of carbon gases into the atmosphere. Maybe it is because the more energy potential a person has secured, then the richer he or she is?

 guess I don't understand completely. Sorry to be so thick.

by Magnifico on Wed Oct 8th, 2008 at 02:15:44 PM EST
[ Parent ]

But I admit that the "carbon dollar" label is a slight misnomer, for the purposes of a presentation in Iran. This is because that presentation will relate to Units redeemable in (say) gasoline, and to call it an energy dollar would be too confusing at this point.

In fact, where this leads is to what may better be described as an "Energy Dollar" consisting of a fixed amount or "Value Unit" - it doesn't matter what that is - of energy.

A Unit of (say) 10 Kilo Watt Hours or equivalent is as good as any.

The point is that it will be possible to price other forms of fuel or energy by reference to this Value Unit.

So as carbon fuel become more scarce and expensive, it will increase in price in terms of (say) the number of Energy Dollars per barrel.

The policy framework I envisage - a new "Global Settlement" - would apply a "Carbon levy" to all carbon-based energy transactions and thereby create an "Energy Pool" - a fund of (say) US dollars on US transactions, but denominated in Energy Dollars at the Energy Dollar/ US Dollar exchange rate.

So, imagine we make a carbon levy which raises $100m initially in the US.

At an initial energy price of $1.00 for a Unit of 10 Kilo Watt Hours, that means the resulting fund or Pool may be "Unitised" initially into 100 million Energy Units. As the US dollar gets more expensive over time against energy, so the number of Units new US dollar investments will buy in the Pool will decline.

Let's try an example:

A "Pool-Manager-formerly-known-as-Investment-Banker" appraises a plan for a 1 Mega Watt wind turbine - decides it stacks up in that location - and decides to fund it by investing $2m of Pool funds.

The Wind Turbine is built and then has a liability to the Pool not in $US, but in Units.

At the initial $ per Unit price this is 2m Units of 10 Kilo Watt Hours or 20,000 Mega Watt Hours of future production.

This investment is then repaid over the (say) 20 year design life of the turbine at a rate of 1,000 Mega Watt Hours per year.

If the turbine operates at a "load factor" of only 30% (ie 30% of the time) it produces 2,628 Mega Watt Hours (or 262,800 Units) in a year.

If a proportional share of production is paid to the "Operating Member" - then the balance will stay with the developer or land owner or community - in whatever proportions are agreed.

Unlike a Carbon Tax, where all the taxpayer sees is a "cost", in this model he gets in return for the levy (which is therefore a compulsory investment) "Units" in return.

These may then be redeemed for renewable energy consumed; against repayment of Pool investments used to achieve energy savings (so-called "Nega Watts"); or he may just sell them off at the market price.

The Energy Dollar market price is not some arbitrary politically determined price, like that of CO2, or come to that, Central Bank interest rates, but is a reflection of the intrinsic value of energy, whatever that is.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 8th, 2008 at 03:30:09 PM EST
[ Parent ]
I wrote to Chris with some questions and am posting his answers here:

marco: 2628 MWH is 30% of 8760 MWH.  But where did that latter figure come from?  Does it somehow come from it being a 1 Mega Watt wind turbine?

ChrisCook: One Unit is 10 Kilo Watt Hours: therefore  100 Units = 1 Mega Watt Hour

In other words, it should have occurred to me that there are 8760 hours in a year.

marco: Also, the 1000 MWH (i.e. 1,000,000 Units) per year gets paid to the "Operating Member" -- that is, the entity that built the wind turbine -- is that correct?

ChrisCook: No. This 1m Units per year of production goes to the Pool in repayment of what is essentially a "Loan" repayable in Energy Units rather than dollars.

The entitlement to the output is split proportionally between:

(a) the Developer/Operator - maybe 10 to 20% of output;

(b) the Land Owner - (who probably is the "Community"), and certainly needs the Community's permission;

(c) the Investor - ie the Pool

(d) the Community

The "Community" is a broad term. It could have the skills to be the Developer.

marco: I imagine the "Pool-Manager-formerly-known-as-Investment-Banker" would get a cut as well, right?

ChrisCook: Yes, He will be part of  the Developer/Operator consortium.

marco: Which would leave 1628 MWH, minus the Pool-Manager-formerly-known-as-Investment-Banker's share, to the developer/land owner/community who owns the turbine.

These may then be redeemed for renewable energy consumed; against repayment of Pool investments used to achieve energy savings (so-called "Nega Watts"); or he may just sell them off at the market price.

Could you explain what the first two mean in practice?

ChrisCook: Units are essentially "tickets" or IOU's redeemable by the Community ownd turbine against electricity production at the retail price. So, yes they would be used to "pay for" renewable energy.  When you get billed by your power supplier, you pay in both dollars, and in tickets. The power supplier (an intermediary) then pays a renewables producer with them.

It doesn't matter what source your electricity actually came from.

The key point is that using this mechanism, renewables and energy savings are literally "self funding".

Truth unfolds in time through a communal process.
by marco on Thu Oct 9th, 2008 at 04:21:26 AM EST
[ Parent ]
Judging from the rhetoric coming from the U.S., Iran is going to need to find a way to reconcile its need to develop nuclear power with America's fear of Iran having nuclear anything.

Until that happens, Iran's economy is under thread of being Iraqed. The U.S. is having a solvency problem, but America isn't short on bombs, missiles, or worse. One of the calming arguments against attacking Iran was such an attack would start a worldwide financial collapse. Well, the collapse is happening and taking with it one of the arguments against militarily attempting to stop Iran's nuclear program.

So, therefore, I think Iran may be in a good position to devise a new financial market -- likely one that is Islamic in principles that forbids usury, for example -- but until Iran makes its peace with the West, any economic system devise is in danger of being obliterated by warmongers both domestic and foreign.

by Magnifico on Wed Oct 8th, 2008 at 01:22:35 PM EST
Until that happens, Iran's economy is under thread of being Iraqed. The U.S. is having a solvency problem, but America isn't short on bombs, missiles, or worse.

My conviction that this will not happen is the reason why I refer to the "Suez Moment" in my article.

I think that the true "Suez Moment" was around August of last year the US was politely told - probably on one of Paulson's trips to China - that an attack on Iran would undermine China's confidence in the dollar....

The rest has been posturing, with the US "surge" being allowed to succeed, in no small part because Al Sadr went off to pursue his religious studies in Qom, Iran.

The possible exception was the weird matter of the B52 flying around armed with nuclear tipped cruise missiles, and the even more weird fact that we got to read about it....

Was this indeed pure incompetence, or a

Dr Strangelove Moment

nipped in the bud by officers who wanted nothing whatever to do with starting World War 2.5 .......?

While the article is found in the tin foil hat end of the media spectrum, the official "incompetence" explanation does not hold water for me, because in that case no-one in the military would have had any interest in the public ever hearing about it.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 8th, 2008 at 01:42:56 PM EST
[ Parent ]

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