When I published my first document on long-term national development https://jratkevics.blogspot.com/2025/11/attistibas-redzejums.html , I received several questions and suggestions that nothing would happen, because there would be a huge debt crisis in the World, everything would collapse, etc. and I would not solve anything. Such a scenario is serious enough to warrant closer examination. I outline several possible approaches to addressing this issue. I outline them below. I do not claim to be an expert or to possess the ultimate truth. This is a conceptual proposal for discussion. As usual at this stage, this is not a marketing document.
Contents
On national debt and the monetary system (with additions 06.04.)
1. Current situation: the debt crisis in numbers
1.3. France as the epicenter of the European debt crisis
1.4. ECB holdings of Latvian government debt
2. Why a debt crisis is possible (*a debt crisis is not yet the collapse of the eurozone)
2.2. Structural inability to reduce the deficit
2.3. Projected time horizon of the crisis
3. Current attempts and their shortcomings
4. Why is the risk very high for most countries
4.1. Mathematical impossibility
4.4. Comparison of national prospects
4.5. Where is the problem anyway
5. Deflationary Currencies: From Gold to Digital Standard
5.1. The evolution of money: from barter to fiat
5.2. Why was gold abandoned and what is inflationary money
5.3. Digital Deflationary Standard: The Benefits of Gold Without Gold
5.4. Transition mechanism and mitigation of deficiencies
6. Can the technological revolution save the inflationary fiat system?
6.3. Jevons' paradox for governments
6.4. AI deflation would be combated
6.5. Labor market pressures increase the deficit
6.6. The fundamental problem remains
6.7. How does my system work for a big productivity boost
9. Why two currencies instead of one
10.1. PayLats — circulating money
10.2. SaveLats— preservation of value
10.4. Countercyclical conversion fees
10.4.4. Protection against manipulation
10.5. Some parallels with Islamic banks
11.1. Primary and secondary form
11.3. Demurrage and physical money
11.4. Why storage in a sock is not a problem
12.1. Basic principle: issuance only against fair value
12.2. Initial phase: 1:1 with euro
12.4. Supply reduction mechanisms
13.1. Tripartite fee architecture
13.2. Dynamic charge as an automatic stabilizer
14.1. The Central Bank as an Infrastructure Operator
15.1. State bankruptcy scenario
15.2. Government Overspending—A Fundamental Difference from Inflationary Fiat
15.3. Immediate market signals, not delayed disasters
15.4. Fallback option for Europe 36
16. How the system prevents the accumulation of problems
16.1. No "money printing" option
16.2. Gradual adjustments, not catastrophic crises
16.3. Fiscal discipline as a system characteristic
16.4. Countercyclical Mechanism
17.1. Phase 1: State Development Bank Project
18. Comparison with inflationary fiat system
18.3. AI, AGI, and Productivity Deflation
19. Impact on the economy, investments and demography
1. Macroeconomic impact – growth stabilization
2.2. The role of the Development Bank
2.3. Foreign investment profile
2.4. Concerns about declining investment and their refutation
3. Impact on tax discipline and the shadow economy
4.1. Economic security as a demographic factor
5. Reducing unproductive investments and asset bubbles
5.1. Quality of capital allocation
5.2. Limiting real estate bubbles
5.4. Change in long-term capital structure
5.5. Impact on budget transparency, democracy, corruption
5.6. Linking with the digitalization of financial documents envisaged in my master plan, smart regulatory acts
6. Long-term scenario (20–30 years)
20. Advantages of programmable money
21. Possible alternative offers
21.2. Solutions to the global debt crisis that they could offer
21.3. What would they say about my model?
22. Libra (Diem) Failure: Causes and Lessons for the PayLats/SaveLats System
22.2.1. Threat to monetary sovereignty
22.2.3. The problem of political trust
22.2.4. Too fast, too ambitious
22.3. Libra's structural errors
22.4. How PayLats/SaveLats are fundamentally different
22.4.2. The State Separated, But Not Bypassed
22.4.3. Two-tier architecture prevents systemic risk
22.4.4. No risk of reserve fire sale
22.4.5. Monetary discipline is a design feature
22.5. Would a Libra-type project be possible in 2026?
25. Possible questions and answers
II. Regulation and legal basis
VII. Monetary System as Service (MSS)
Appendix A: Deflationary Currencies: From Gold to Digital Standard
Appendix B. How money is currently issued
84 get to this point historically?
The ability of banks to produce money is almost unlimited
1. Current situation: the debt crisis in numbers
1.1. Global debt level
The global stock of public debt reached $111 trillion in 2025, or 94.7% of global GDP. The International Monetary Fund (IMF) predicts that public debt will exceed 100% of GDP by 2029, the highest level since the end of World War II in 1948. In an adverse scenario (with a 5% probability), debt could reach 124% of GDP as early as 2029.
Global debt rose by $12 trillion in the first three quarters of 2024 alone, reaching a record high of $323 trillion (including the private sector). About 80% of the global economy is in countries where public debt is both higher than before the pandemic and growing faster.
1.2. Critical states
| Country | Debt/GDP (2025) | Absolute debt | Trend |
|---|---|---|---|
| Japan | 230% | $9.8 trillion. | Extremely high, but approximately 90% is held domestically (primarily by pension funds) |
| USA | 124% | $38.3 trillion. | Growing rapidly, with an annual increase of approximately $1.8 trillion |
| Italy | 137% | $3.5 trillion. | Stabilizing, but very high |
| France | 113% | $3.9 trillion. | Growing rapidly; deficit 5.8% of GDP |
| United Kingdom | ~100% | $4.1 trillion. | Growing |
| China | 84% | $18.7 trillion. | Rapid growth (almost all internal) |
| Greece | 147% | — | Decreases from 210% (2020) |
The five largest debtor countries—the United States, China, Japan, the United Kingdom, and France—together account for two-thirds of all global public debt ($74.8 trillion).
1.3. France as the epicenter of the European sovereign debt crisis
France is a striking example of how an inflationary fiat system can lead to political and economic paralysis:
The budget deficit reached 5.8% of GDP (2024) — almost twice the EU's 3% target and the largest in the entire EU.
Debt rose to 113.9% of GDP (€3,345 billion) — the third highest in the EU after Greece and Italy.
Fitch downgraded France's credit rating to A+ (the lowest in history), predicting debt to rise to 121% of GDP in 2027 "without a clear stabilization horizon."
Five prime ministers in less than two years — each ousted while trying to push through an austerity budget.
France's borrowing costs are approaching Italy's levels - an unprecedented signal to markets.
Analysts at the Official Monetary and Financial Institutions Forum (OMFIF) warn that a French crisis could make Greece's problems a "minor stumble" compared to France's. France is the eurozone's second-largest economy after Germany - its crisis would be systemic.
1.4. ECB holdings of Latvian government debt
The Eurosystem (ECB and national central banks) has purchased a significant share of Latvian government bonds through the Public Sector Purchase Programme (PSPP) and the Pandemic Emergency Purchase Programme (PEPP). The Eurosystem capital key of the Bank of Latvia is approximately 0.5–0.6%, which determines the distribution of purchases.
The total debt of the Latvian government was around €19 billion in the third quarter of 2025 and is projected to reach €20.5 billion or 49% of GDP by the end of 2025. The Eurosystem's holdings of Latvian government bonds reached around €4-5 billion or 28-33% of total debt at their peak (in 2022). After the start of quantitative tightening (QT) in 2023, holdings have decreased to around €3-4 billion or 16-21% of total debt.
These data reveal a structural problem: the ECB is both the setter of Latvia’s monetary policy and one of the government’s largest creditors. Moreover, Latvia is a small country with a limited bond supply—the ECB’s purchases quickly reached the 33% issuer limit, effectively limiting further monetary stimulus. This is another argument in favor of additional monetary instruments that are independent of ECB decisions.
New borrowing is already exceeding 3% interest rates, even though Latvia has been able to borrow at almost 0% for about seven years. Debt servicing costs are rising even without additional borrowing — simply by refinancing existing debt at higher rates.
2. Why a debt crisis is possible (*a debt crisis does not necessarily imply a collapse of the eurozone)
2.1. Maturity Wall
Most of the current debt was issued during the low-interest rate era (2015-2021), when central banks held rates close to zero. This debt now needs to be refinanced at significantly higher rates:
45% of OECD countries' sovereign debt needs to be refinanced by 2027.
About $9 trillion of this debt was issued before 2021 at an average rate of under 2%. Now, the refinancing will take place at 3.5-4.5%.
Interest payments already exceed the average defense spending in OECD countries (3.3% of GDP).
US debt service costs reached $1,216 billion (17% of federal spending).
The OECD warns that simply refinancing fixed-rate debt will increase interest payments by an additional 0.5% of GDP by 2027.
2.2. Structural inability to reduce the deficit
The IMF finds that most countries need "substantial fiscal consolidation" to stabilize their debt-to-GDP ratios at current levels. However, several structural factors make this nearly impossible:
Demographic pressure. Aging societies demand increasing spending on pensions and healthcare. These expenditures are politically untouchable.
Increased defense spending. NATO member states agreed to increase defense spending to 5% of GDP by 2035. Most will finance this with additional debt.
Political impossibility. The example of France proves that even moderate austerity measures lead to mass protests and the fall of the government.
High tax rates. Many European countries are already close to their tax ceilings. The IMF says new tax incentives would "effectively drive out the individuals and businesses that drive productivity."
2.3. Projected time horizon of the crisis
It is impossible to determine the exact date of the crisis, but several indicators converge on the period 2027–2032:
| Indicator | Critical threshold | Estimated time |
|---|---|---|
| Global debt/GDP | >100% (post-war level) | 2029 (IMF forecast) |
| OECD refinancing wall | 45% must be refinanced | Until 2027 |
| US interest payments | The largest budget item | ~2028–2030 |
| France's debt/GDP | >121% without stabilization | 2027. (Fitch) |
| France's deficit >3% of GDP | EU target unattainable | "Unlikely until 2029" (Fitch) |
| Adverse scenario (IMF) | Debt 117–124% of GDP | 2027–2029 |
IMF Fiscal Affairs Department Director Vitor Gaspar warns: "Global public debt is projected to be >100% of GDP by 2029. The risk distribution is skewed towards faster debt accumulation. Policymakers need to act now."
3. Current attempts and their shortcomings
3.1. Fiscal consolidation
Theory: Cut spending and/or increase taxes to reduce the deficit.
Reality: The French example demonstrates that democratic systems are generally incapable of implementing significant fiscal consolidation. Five prime ministers have been overthrown to push through austerity budgets. The IMF recommends a consolidation of 1.1% of GDP by 2026 — but even that target seems politically unattainable.
For example, it happened in Argentina, but that's an exception.
The underlying problem: An inflationary system has allowed governments to accumulate debt for decades without apparent consequences. The scale of the problem now exceeds what can be addressed through gradual consolidation.
Historical evidence: Historical evidence from Greece, Latvia, and Estonia shows that austerity alone is ineffective, although better than bankruptcy. In Greece, ten years of fiscal consolidation reduced GDP by 25%, while the debt-to-GDP ratio rose from 126% to 206%. In Latvia, internal devaluation in 2009–2012 achieved macroeconomic stabilization, but at the cost of 200,000+ emigrants being irretrievably lost. In Estonia, austerity without reforms led to a 14.7% decline in GDP and a slow recovery.
The Triple Combination: Countries that have successfully reduced debt have always combined three elements: (1) fiscal discipline, (2) structural reforms, and (3) growth mechanisms. Ireland combined austerity with aggressive foreign investment. Singapore combined fiscal discipline with massive investment in human capital and sovereign monetary instruments. Switzerland combined a debt brake with cantonal competition and an active central bank monetary policy. Without the second and third elements, austerity is a deflationary spiral: less spending → less demand → less tax revenue → higher deficit.
Germany’s turn in 2025: In March 2025, even Germany — Europe’s champion of austerity — acknowledged this reality by amending its constitution and creating a €500 billion infrastructure fund. In 2026, Germany’s budget deficit will reach 4.75% of GDP — the highest since 1975. It is a frank admission that pure austerity does not work, even in the richest EU economy.
3.2. Quantitative Easing (QE)
Theory: The central bank buys government bonds, lowers rates, allows the government to refinance debt cheaply.
Reality: QE is an exhausted policy tool. The ECB's balance sheet reached €7 trillion. Now quantitative easing is underway - central banks are selling bonds back to the market. The OECD warns that the withdrawal of central banks from the market will increase volatility.
The basic problem: QE doesn't solve the debt problem - it masks it. The debt still exists, only the interest payments are artificially reduced. When QE ends, reality returns with vengeance.
3.3. Economic growth
Theory: If GDP grows faster than debt, the debt/GDP ratio decreases.
Reality: The IMF predicts that advanced economies will grow by only ~1.5%. This is not enough to "grow out" of debt, which is growing by 2.8 percentage points per year. The demographic crisis limits growth potential in the long term.
The fundamental problem: The OECD finds that much of the corporate debt was used for "financial operations such as refinancing and shareholder payments" rather than for productive investment. "Growth" in an inflationary system often simply means more money, not real productivity gains.
3.4. Financial repression
Theory: Keep interest rates below inflation, which gradually "melts" the debt in real terms.
Reality: This is the most subtle, but also the most controversial strategy — a hidden tax on savers, retirees, the middle class. More than 3.4 billion people live in countries where net interest payments on public debt exceed spending on education or health.
The basic problem: Financial repression only works with moderate inflation. But a system that requires repression also creates pressure for higher inflation, creating a downward spiral.
4. Why is the risk very high for most countries?
All solutions share a common feature: they attempt to address debt with the same tools that created it.
4.1. Mathematical impossibility
The US federal budget adds $1.8 trillion to the debt stock every year.
France's deficit is 5.5-5.8% of GDP — the IMF predicts that without additional measures it will remain around 6% in the medium term.
Interest costs are growing faster than any possible pace of consolidation.
4.2. Demographic trap
Ageing societies create a double whammy: fewer taxpayers and more spenders. Analysis by the Official Monetary and Financial Institutions Forum (OMFIF) shows that "in the context of the demographic crisis, debt can only be addressed by accelerating labor productivity growth, a solution that effectively rules out raising taxes."
4.3. Political traps
The democratic system in an inflationary fiat environment contains an internal contradiction:
Voters expect growing government services.
Politicians who offer austerity are being replaced.
The central bank can "relieve" the pressure through issuance, masking the problem.
The problem builds up until it becomes a crisis too big to handle.
This cycle is not an occasional error—it is a design feature of the system. As long as there is the option to "print" money, the political system will always use that option in most countries.
4.4. Comparison of national prospects
| Rising debt + weak currency | Part of developing countries | Critical | |||
|---|---|---|---|---|---|
| Category | Examples | Prospects | |||
| Low debt + resources | Kuwait, Saudi Arabia, Norway | Good | |||
| Low debt + discipline | Estonia, Switzerland, Singapore | Good if you maintain discipline | |||
| Low-medium debt + demographic erosion (with better growth) | Portugal | Medium; very sensitive to shocks | |||
| Low-medium debt + demographic erosion + external monetary anchor | Latvia, Lithuania, Croatia, Slovakia | Uncertain; risk worsens over the long term | |||
| High debt + reserve currency | USA, Japan | You can postpone the crisis longer, but not avoid it | |||
| High debt + political instability | France, Italy | Bad | |||
| High debt + demographic crisis | Japan, Germany, Italy | Very bad in the long term | |||
| Rising debt + weak currency | Many developing countries | Critical | |||
Possible scenarios and probabilities
When a crisis becomes “mathematically inevitable”
The simplified debt dynamics are:
Δ(d/GDP) ≈ (r − g)·d − primary surplus
Where:
d = debt to GDP
r = effective interest rate
g = nominal GDP growth
primary surplus = budget without interest payments
A crisis becomes almost inevitable when the following occurs simultaneously:
r long term > g (not 1 year, but 5–10),
debt is already high (large d),
primary surplus is politically unsustainable (social/defense spending, election cycles),
the market starts to demand a risk premium → r even higher (self-reinforcing spiral).
That is why the ECB highlights fiscal sustainability risks as a structural vulnerability in its reports.
Example of calculation for Latvia (2025 and closer reality)
1. Debt (d) 44.8% of GDP (2025 Q3), d = 0.448
2. Interest rate (r) 10-year government bond yield ≈ 3.49% (Q4 2025), r ≈ 0.035
(the real effective rate may be even slightly lower, but this is a good market indicator)
3. GDP growth (g)
Real growth: ~1.0% (2025)
Inflation: ~3.6% (2025)
nominal increase: g ≈ 1.0% + 3.6% = 4.6% → 0.046
4. Budget balance (primary)
Overall deficit: -3.1% of GDP (2025)
Interest payments: ~1.2% of GDP
primary deficit: = -3.1% + 1.2% = -1.9% → -0.019
Applying the formula
Δ(d/GDP) ≈ (r − g)·d − primary surplus
Calculation
1. r − g
0.035 − 0.046 = -0.011
2. (r − g) d
-0.011 × 0.448 = -0.0049
3. Overall effect
Δ(d/GDP) = -0.0049 − ( -0.019) = -0.0049 + 0.019 = +0.0141
Result (based on real data)
Debt grows by ~1.4% of GDP per year
Interpretation
1. The system is still holding up
r < g → mechanically the debt could fall
Latvia is still “on the right side”
2. But in reality – debt GROWS
since the primary deficit (-1.9%) is greater than the “benefit” of r < g this is the critical point:
The problem for Latvia is NOT in percentages — the problem is in politics (deficit)
3. Trajectory (already visible in the data)
debt:
~45% → ~49% → ~55% in the coming years, this matches the calculation perfectly
What does this model say about Latvia - Latvia is already in debt growth mode
but:
not yet in crisis
but at a sliding risk
Where is the “tipping point” for Latvia?
If this happens:
g falls (recession or stagnation, shock, e.g. oil crisis due to hostilities in the Persian Gulf)
r increases (ECB + market risk)
deficit remains ~3–4%
then (r − g) becomes positive AND the deficit remains = double effect → rapid spiral
Conclusion - the crisis is not yet inevitable for Latvia, but the trajectory is already wrong. Due to the political deficit, we are slowly moving towards the problem.
Dangerous Mode: Actually, Starting as Early as 2027
At the same time, we see:
deficit 4.3% of GDP,
debt above 50% and heading towards 54.5%,
interest costs 1.6% of GDP,
The Ministry of Finance directly indicates that exceeding the 50% threshold already signals growing fiscal pressure.
Latvia enters dangerous mode in 2027, even if not yet in full market panic.
“A crisis is becoming mathematically almost inevitable”
This happens if another shock is added from 2027:
stagnation or recession,
higher borrowing profitability,
an increase in defense or social spending without offsetting revenues.
Example with stress:
2026: r = 4.5%, nominal g = 2.0%, d = 49.9%, primary deficit = 2.0%
then Δd ≈ +3.25 pp per year
2027: r = 5.0%, nominal g = 1.5%, d ≈ 53%, primary deficit = 2.7%
then Δd ≈ +4.56 pp per year.
Under such stress, debt would approach about 58% of GDP in just a couple of years, and then the 60% mark would become very close.
Conclusion for Latvia:
2025-2026: Not yet a crisis, but the trajectory is bad.
2027: Entry into dangerous fiscal regime.
2028+: If there is no correction and weaker growth or more expensive refinancing emerges, then the crisis mechanism becomes self-reinforcing.
In one sentence: Latvia's tipping point according to the current public trajectory is 2027, but a real debt spiral becomes very possible in 2028–2029 if r becomes larger than g and the primary deficit is not broken.
My offer*:
removes the dependence on r (market interest)
forces the system into surplus
makes debt reduction structurally possible
*along with other reforms that are in the master plan
In one sentence:
If Latvia doesn't change anything → slow slide to 60%+
If there is shock → 70–90% and crisis
If discipline is introduced (my model) → debt repaid around 2038-2041.
When the trajectory is still “politically manageable”
It becomes manageable if at least one of the three "safety valves" is successful:
g remains high enough (productivity, investment, labor, migration)
r is kept lower (financial stability, trust, avoiding panic/fragmentation)
a sustained primary surplus (not an “austerity shock”, but a consistent surplus year after year)
The EU's new fiscal framework is built on exactly this: individual multi-year trajectories, based on a debt sustainability analysis (DSA), with the aim of achieving a controlled reduction in the debt ratio, rather than a sudden "cut".
Why is this very credible and has a strong basis?
Because the political side falters precisely where mathematics demands consistency:
demography and social spending are pushing for a deficit,
security spending is growing,
voters have a poor tolerance for prolonged consolidation,
and one external shock (recession, energy, war, financial stress) is enough for r−g to become unfavorable again.
The IMF's "Putting a Lid on Public Debt" directly warns that debt risks are strongly skewed towards the worst-case scenario and that it is necessary to "put a lid" on debt growth because underlying trajectories are fragile to shocks.
Possible scenarios:
1) “Pull through with tension” (crisis episodes, but the system still holds)
Probability: ~35%
Years: 2027–2032
Consequences: yield jumps in the periphery, ECB/IPA regime, budget “emergency fixes”, political polarization, investment brake.
2) “Large sovereign debt crisis” (controlled restructuring or de facto fiscal union)
Probability: ~20%
Years: 2028–2035.
Consequences: very unpleasant choices: either deeper fiscal centralization/total debt, or “soft restructuring” with losses for some holders; stress test of the banking system; fluctuations in capital flows.
1 + 2 together gives ~55%, i.e. a “crisis” (in some form) is more likely than not.
3) “Stabilization without much drama” (unpopular, but holds up)
Probability: ~25%
Years: 2026–2035.
Consequences: slow consolidation, modest growth, debt not falling rapidly, but no spiral is triggered.
4) “Fragmentation/parallel currencies” (the real systemic fracture)
Probability: ~20%
Years: 2030+
Consequences: capital controls, banking crisis, rewriting of treaties, deep geopolitical destabilization.
4.5. Where is the problem anyway?
Funds don't disappear — they are redistributed
Technological progress creates enormous value. But in a fiat system, this value is systematically diverted from those who create it (workers, engineers, consumers) to those who control the mechanism of money creation. The chain is as follows:
Technology reduces production costs. Goods should become cheaper — this is natural deflation, which would mean that everyone with the same salary can buy more. But the central bank interprets natural deflation as a threat and "fights" it by printing new euros/dollars to maintain the 2% inflation target. The newly created money does not enter the economy evenly, but through specific channels — first to banks and financial institutions (the so-called Cantillon effect). Banks and financial institutions use the new money to buy assets — stocks, real estate, bonds. Asset prices rise. Those who own assets get richer. Those who don't — salaried employees, young people, renters — see their salary buy less, because prices grow faster than wages.
The Cantillon Effect — a 300-year-old mechanism
Richard Cantillon described this mechanism in 1730 - if newly printed money is brought into the country through gold mines, the mine owners and their direct partners become richer first, and only over time, as the money "seeps" through the economy, do prices rise for others - but then they buy at higher prices with the same salary.
The modern version is the same, only instead of mines there is a central bank and commercial banks. The newly created money first goes to the big financial players — investment banks, hedge funds, big corporate borrowers. They buy assets before prices have risen. By the time the money finally reaches the salaried employee as a 3% annual wage increase — prices have already risen by 5–8%.
Specific numbers
Since 2000, US productivity per worker has increased by about 60%. Real median wages have increased by about 15-20% over the same period. Where did the 40+ percentage point difference go? It was absorbed into three channels.
First, corporate profits. Companies are collecting the fruits of productivity gains as profits, rather than passing them on as wage increases. Profit margins for S&P 500 companies are at historically high levels. This means that workers produce more but receive proportionately less.
Second, asset price inflation. The stock market has risen by about 400% since 2000. Real estate by 100-200%, depending on the region. This wealth is mostly held by the top 10% of income, who own about 90% of all stock market assets. The other 90% of people see their home prices rise, but their ability to buy one decreases.
Third, the profits of the financial sector. The financial sector in the United States in 1950 accounted for about 3% of GDP. Today, it's about 8%. That difference, 5% of the entire economy, is the money that the financial sector collects as an intermediary between those who create value and those who consume it. And most of that intermediary is the privilege of creating money that we've been talking about.
The mechanism in my system
My system, this redistribution mechanism does not exist. If technology makes goods cheaper, but the amount of money does not increase (because no one prints additional PayLats without collateral) - prices simply fall. Each PayLats holder automatically receives his share of technological progress through an increase in purchasing power. There is no central bank that "fights" deflation. There are no banks that create new money and direct it to asset markets. There is no Cantillon effect, because there is no newly created money flowing into the system through privileged channels.
In my paper, it can be formulated as follows: an inflationary fiat system is a mechanism for confiscating progress—it allows a narrow financial elite to appropriate the fruits of technological progress that everyone has created. A deflationary system is a mechanism for democratizing progress—it automatically distributes productivity gains to all money holders through increases in purchasing power.
In one sentence: People are not becoming poorer due to a lack of progress, but because the benefits of that progress are being captured by the monopoly of money creation.
5. Deflationary Currencies: From Gold to Digital Standard
This section provides a summary of the evolution of monetary systems from barter to modern fiat money and explains why a deflationary digital currency can restore the benefits of the gold standard without physical gold.
5.1. The evolution of money: from barter to fiat
Money emerged as a response to the fundamental problem of the barter system, the necessity of a double coincidence of needs. Societies spontaneously selected goods with certain characteristics: rare, divisible, durable, and widely accepted. Gold proved to be the most effective—chemically inert, physically durable, and with a high value for its weight.
The gold standard provided an essential feature: governments could not consume more than they had. If a country borrowed too much, gold flowed to other countries, interest rates rose, and the problem was automatically corrected. The system was not perfect, the supply of gold did not grow with the economy, and short-term deflationary pressures could be painful—but it structurally prevented the accumulation of debt.
5.2. Why was gold abandoned and what is inflationary money?
The gold standard was abandoned for three main reasons: (1) financing wars (including the Cold War) required more money than gold reserves could produce, (2) deflation became politically untenable during the Great Depression, and (3) the collapse of the Bretton Woods system in 1971 finally separated money from physical reality.
The result was inflationary fiat money, a system in which money is created ex nihilo through bank credit. Commercial banks create about 90% of the money supply by issuing credit. This system allows for unlimited money creation, leading to chronic inflation, asset bubbles, and debt accumulation.
The main problems of the inflationary fiat system: systemic reduction in the purchasing power of savings (5% inflation destroys 78% of the value in 30 years), exponential growth of debt, and the risk of a shadow banking system, where uncontrolled money creation multiplies systemic instability.
5.3. Digital Deflationary Standard: The Benefits of Gold Without Gold
The digital deflationary currency combines the structural discipline of the gold standard with the advantages of modern technology. Full reserve (100%) prevents money from being created out of thin air. Algorithmically determined deflation (3% per year in SaveLats) rewards savers automatically. Demurrage on PayLats stimulates circulation, eliminating the “hoarding trap” of classic deflation.
Unlike gold, the digital standard is infinitely divisible, instantly transferable, transparent in real time, and its supply is independent of geology or mining costs. The system automatically responds to economic conditions through CPI indexation and dynamic conversion fees.
5.4. Transitional mechanism and mitigation of deficiencies
The practical transition to my offer is gradual: initially parallel coexistence with the euro (1:1 exchange rate), disconnection only when the inflation threshold is exceeded (>4% per year). The two-layer architecture (PayLats + SaveLats – explained below) solves the deflationary paradox — one currency stimulates spending, the other rewards saving.
The historical shortcomings of a deflationary system (slowing growth, increasing debt burden, risk of liquidity trap) are mitigated by this system with a two-tier architecture, a demurrage (savings tax) mechanism, and CPI indexation. The deflation of the savings banknote is controlled and predictable, not chaotic as during the gold standard.
Note: A full expanded version of the section is available in Appendix A at the end of this document.
6. Can the technological revolution save the inflationary fiat system?
Advances in artificial intelligence, robotics, potentially artificial general intelligence (AGI), and other scientific advances raise hopes that unprecedented productivity gains could solve the debt crisis through rapidly growing GDP. This chapter analyzes why even the most optimistic technological scenario does not solve the structural problem of the fiat system.
6.1. Time incompatibility
The critical period for the debt crisis is 2027-2032. The impact of massive AI and robotics on the real economy (not just the capitalization of financial markets) will begin to manifest itself significantly in 2030-2040. Even if a full AGI (artificial general intelligence) were created tomorrow, its physical implementation in factories, healthcare, infrastructure and services would take at least 5-10 years. The refinancing wall does not disappear because someone announces a technological breakthrough.
6.2. Historical precedent
There have been at least four major productivity revolutions in human history—the industrial revolution, the electrification revolution, the computer revolution, and the internet revolution. Each one produced huge increase in productivity. None of them reduced national debt. On the contrary, after each productivity revolution, government debt increased:
US debt in 1950 (after the largest industrial boom in history): ~80% of GDP.
US debt in 2000 (after the computer revolution and internet boom): ~55% of GDP — but only thanks to post-WWII debt write-offs.
US debt in 2025 (after another technological revolution): 124% of GDP.
The pattern is clear: higher GDP = higher borrowing capacity = more political promises = higher debt. Technological progress makes the pie bigger, but the fiat system ensures that the government always eats more than the pie grows.
6.3. Jevons' paradox for governments
In 1865, William Stanley Jevons proved that more efficient use of coal does not reduce coal consumption—it increases it, by making coal-based activities cheaper and more attractive. The same principle applies to government spending in an inflationary fiat system: the more efficient the economy is, the more resources available for redistribution, the more politicians promise, the more spending. The central bank can always "help" by issuing more.
6.4. AI deflation would be combated
When robots and AI make goods and services significantly cheaper, the central bank interprets this as “deflation” — a threat that must be combated. Central banks start printing even more money to maintain the 2% inflation target. The productivity gains are neutralized by additional issuance. Citizens do not feel the fall in prices because the amount of money in circulation grows at least as fast as prices fall.
This mechanism is already visible. The technology sector is massively cutting costs, but consumer prices continue to rise because the money supply is growing faster than productivity.
6.5. Labor market pressures increase the deficit
Mass automation means massive job losses — millions of people no longer needed in the labor market. This puts enormous political pressure on universal basic income (UBI) and other social spending. It is not politically feasible in any democratic country to tell millions of people, “You are redundant, but we will not help you either.” The result is even higher government deficits and even faster debt accumulation.
6.6. The fundamental problem remains
The disease of the fiat system is not insufficient productivity. It is the ability to create money out of nothing. Even with infinite productivity, if the government can borrow and the central bank can monetize—they will do so in most countries (exceptions to this pattern only confirm the trend). The mechanism does not change from the technological level.
6.7. How does my system work for a big productivity boost?
In a deflationary system, productivity growth is not a problem but a function . More output with the same amount of money means that each unit of money buys more. In my system, the fruits of productivity are automatically distributed to all holders through an increase in purchasing power:
There is no central bank that "fights" deflation by printing money.
There is no government that can inflate spending just because GDP has grown.
The abundance created by robots becomes the wealth of the entire population, not just the profits of the companies that develop them.
MI + fiat = a richer, but equally indebted society. My proposal = a richer society where everyone automatically gets their share of progress through deflation.
7. Conclusions of Part I
The current global monetary system is heading towards a debt crisis that will affect most developed countries in the period 2027-2032. This crisis is not an unpredictable "black swan" - it is a mathematically very likely outcome of a system in which governments could finance deficits through money issuance, central banks mask fiscal irresponsibility, market signals are distorted, and the political system is unable to make unpopular but necessary decisions.
All the solutions currently proposed — fiscal consolidation, QE, growth, financial repression — are either politically impossible or address the symptoms, not the cause. Even unprecedented technological progress (AI, robotics, AGI) does not solve the problem, because the mechanism of the inflationary fiat system converts the fruits of productivity into additional debt and emissions, not into the well-being of the population. The old system has exhausted itself. A fundamentally different approach is needed.
PART II. Solution: a two-layer stable/deflationary cryptocurrency as a national payment infrastructure
8. Summary of my offer
Part I of this paper showed that an inflationary fiat system is likely to lead to a debt crisis that existing instruments are unable to prevent. Part II proposes an alternative — a two-layer stable/deflationary cryptocurrency system that eliminates the cause of debt crises, rather than trying to correct their consequences. For the sake of simplicity, I call the currency intended for daily payments PayLat (stable), and the currency intended for savings savelat (deflationary). Other names can be invented, but for the sake of simplicity, we will use these terms for now.
Basic principles of the system:
Algorithmically limited issuance - new money is created only by receiving another currency or precious metals in return, not through a central bank decision.
Full coverage — each issued PayLats/SaveLats is secured at the floor level with a real reserve of euros/other currencies or precious metals.
Two-layer architecture — PayLats for daily payments (stable, with demurrage incentive), SaveLats for long-term savings (deflationary).
Independent infrastructure – the payment system operates independently of the country's fiscal situation and the state of the banks.
The central bank as an operator — a self-financing, non-profit entity that maintains the infrastructure rather than sets monetary policy.
The government is just one of the users — the money does not belong to the government, but to the people who have purchased the specific number of PayLats/SaveLatsfor other currencies/precious metals. Just as individuals' deposits in a bank do not belong to the bank. Similarly, the government maintains a road network, but only a small part of the cars on the road belong to the government. Governments cannot create money, they can only collect money in taxes/fees, earn money or borrow money.
Any market participant can be an issuer against value – the government, central bank, or commercial banks do not have a monopoly.
The system is being launched as a project of the Latvian State Development Bank with an initial 1:1 peg to the euro, switching to a free-market rate when euro inflation exceeds the ~5% threshold. In the long term, the system serves as a backup option for both Latvia and, if necessary, Europe.
9. Why two currencies instead of one?
9.1. The deflation paradox
There is an unresolved paradox in the history of all monetary systems: deflation is good for savers but bad for the economy because people postpone spending. Inflation stimulates spending but destroys savings. No single currency system can solve both problems at the same time.
Bitcoin is deflationary — people save and don’t spend, the economy stagnates. No one wants to be the one who paid for pizza with future millions. And bitcoin is inconvenient for everyday payments. Inflationary Fiat money — people spend, but savings lose value. Savers suffer. Stablecoins are just a mirror of fiat — inherit all the same diseases. Central bank digital currency (CBDC), e.g. cryptoeuro, is a digital inflationary fiat with the same diseases plus government oversight.
9.2. Two-layer solution
The PayLats/SaveLats system resolves this paradox by incorporating into itself what is incompatible in a single currency system:
PayLats (turnover) — The demurrage mechanism creates pressure to spend. Money that is sitting around loses value. It stimulates economic activity without artificially low interest rates.
SaveLats(savings) — deflationary mechanism rewards saving. Purchasing power grows over time. It protects retirees, the middle class, and everyone who thinks about the future.
The flow between them is the lifeblood of a healthy economy. People naturally want to both spend and save. The system gives each of these impulses the appropriate tool, rather than forcing a choice.
No other monetary system—fiat, gold, Bitcoin, or CBDC—has solved this paradox. A single currency system always sacrifices one side for the other.
Something remotely like my system is in Singapore with the Singapore Dollar (SGD) for everyday use (the common currency), the Central Provident Fund (CPF) - mandatory savings, cannot be freely withdrawn. In Switzerland, the WIR franc operates alongside the Swiss franc.
In general, I call the system the Independent Full-Reserve Payment & Reserve Layer (IFRPRL).
9.3. Why not three or more
Two layers are the objectively necessary number — one for spending, one for savings, there is no third function for which other forms would be intended. The system design follows the principle of minimalism: the simplest solution that completely solves the problem.
The third level could be if we start introducing PayLats/SaveLats in different regions and scales. For example, one at the EU level, another at the global level. Otherwise, problems in one region may overly shake the credibility of the currency in another. Here the division is not by type, but purely geographical.
10. System architecture
10.1. PayLats - circulating money
PayLats is designed for everyday payments and economic circulation.
| Parameter | Value |
|---|---|
| Transaction fee | ~0.1% |
| Demurrage (demurrage fee) | 5–8% per year of the balance above the buffer |
| Buffer calculation | E.g. annual turnover × 1.25 |
| Purpose | Maximum economic activity |
| Emission | Only against another currency or precious metals (i.e. new PayLats or SaveLats are created only if they are purchased) |
| Initial rate against EUR | 1:1 |
The demurrage mechanism acts as an internal incentive for turnover. If a participant holds a PayLats balance above the normal turnover buffer, a fee is applied to the excess portion. This promotes rapid cash turnover and motivates the conversion of the surplus into SaveLats savings.
10.2. SaveLats— preservation of value
SaveLats is designed for long-term savings, pensions and reserves. Its deflationary nature ensures that purchasing power increases over time.
| Parameter | Value |
|---|---|
| Conversions (from PayLats and other currencies) and transaction fees | 2–3% (dynamic) |
| Demurrage | None |
| Emission | Only against other currencies or precious metals (i.e. new PayLats or SaveLats are created only if they are purchased). Algorithmically limited (the maximum amount of SaveLatsis algorithmically limited like Bitcoin) |
| Deflation mechanism | Limited supply + growing demand |
| Purpose | Preservation and growth of purchasing power |
Storage of reserves is decentralized in central bank vaults, including abroad, depositories, and commercial banks.
10.3. Double-layer dynamics
PayLats and SaveLats start at a 1:1 exchange rate, but later the exchange rates are determined by the free market. The value of SaveLats increases because the supply is limited, but the demand grows with economic growth. This creates a natural incentive — people spend PayLats and accumulate SaveLats, which is a fundamental behavior of a healthy economy, which the current inflationary system actively punishes.
10.4. Countercyclical conversion fees
10.4.1. Principles
Conversion fees are changed only in small increments to gently adjust the incentive between PayLats and SaveLats.
Commission changes are automatic, based on a public formula and indicators.
The system has strict ceilings and floors to prevent “cosmic” commissions and maintain predictable liquidity.
Emergency mode is allowed for one purpose only: to prevent a mass escape (panic run) that threatens the operation of the system.
10.4.2. Operational logic
In case of inflation/overheating: the commission structure gently encourages the transition to SaveLats (savings) and reduces the overheating of PayLats circulation.
In deflation/stagnation: the commission structure gently encourages the transition to PayLats, increasing circulation and reducing the dominance of accumulation.
10.4.3. Commission limits
Normal corridor: commissions can only change within a small range (e.g. ±0.2–0.5 percentage points around the base level) and no more often than once a month.
Emergency corridor: temporarily (e.g. up to 72 h) the commission can be increased only enough to stop a mass flight and restore stable operation; after that, it automatically returns to the normal corridor.
10.4.4. Protection against manipulation
Commission adjustments:
not politically discretionary;
are auditable and verifiable;
has predefined limits and a “max step” limit to avoid shock jumps.
10.4.5. Main benefit
This design:
reduces procyclicality,
reduces the risk of bubbles and overheating,
helps avoid deflationary “stuckness”,
preserves the reliability of SaveLats, as its value is not changed — only the conversion friction is changed within a strictly limited range.
10.5. Some parallels with Islamic banks
Why Islamic banks have lower turnover - one word: money multiplier
A conventional bank with 1 billion in capital can create 10-100 billion in credit money. An Islamic bank with 1 billion in capital can only lend that 1 billion — because it is not allowed to create money out of nothing. It can only lend what it has. The difference in turnover is not because Islamic banks are worse or less efficient — but because conventional banks can simply do it. They inflate their balance sheets with money that doesn't exist and then compare themselves to institutions that work with real money and say — "look how much bigger and more efficient we are."
It's like comparing a company that sells real goods to a company that sells promises of goods that haven't been produced yet. The latter will always have a higher "turnover" - until customers come for the goods and it turns out they're out of stock.
The second reason is the interest effect.
In the conventional system, interest acts as a turnover amplifier. The bank issues a loan of 100,000 at 5% — the borrower must repay 105,000. But that 5,000 does not exist — to pay it off, someone else must borrow. Each new loan creates the need for an even larger loan. It is a pyramid — turnover grows exponentially because the system structurally requires it. In an Islamic bank, this spiral does not exist — the profit share is divided from the actual profit, rather than being demanded regardless of the result.
The third reason — restrictions on speculation
Islamic finance prohibits not only riba (interest), but also gharar (excessive uncertainty/speculation) and maysir (gambling). This excludes a huge part of what makes up the turnover of conventional banks - derivatives, high-frequency trading, synthetic securities. In the conventional system, the notional value of derivatives exceeds $600 trillion - several times more than the entire real-world economy. Islamic banks do not participate in this, and therefore their turnover looks smaller. But this means that the turnover of Islamic banks reflects real economic activity, while the turnover of conventional banks reflects mainly speculative air trading.
Fourth reason - regulatory environment
Islamic banks operate within a global system designed for conventional banks. The regulation, the accounting standards, and the international settlement infrastructure are built around the interest and fractional reserve model. Islamic banks are forced to operate within a system that was not designed for them. It’s like running a marathon with weight vests on—the result is worse not because the runner is weaker, but because the conditions are unequal.
And yet — Islamic banks are growing faster
And that's why it's remarkable that despite all these structural flaws, the Islamic finance sector is growing at 10-15% a year - faster than the conventional one. People are choosing to move to a system that is fairer, even if it seems to offer less. This is exactly the "exit" mechanism we talked about earlier - when an alternative is available, people take it.
What does this mean for my system?
In my system, bank turnover would be lower than in the current fiat system — and rightly so. Lower turnover means that each transaction reflects real economic activity, not a speculative bubble. This is not a weakness of the system — it is a sign of the health of the system.
Analogously, if a person consumes 5,000 calories a day, but only needs 2,000, and he switches to 2,500, his "turnover" decreases, but his health improves. The current financial system is an obese economy - huge volume, huge activity, but most of it is toxic fat, not muscle.
On alcohol and tobacco bans
Yes, Islamic banks have haraam restrictions — they cannot finance alcohol, tobacco, gambling, pork production, arms sales, and pornography. My system has no such restrictions — PayLats is a neutral means of payment without moral filters. And this is the advantage of a universal system — it works in any culture and jurisdiction, regardless of religious or ethical beliefs.
But if a country wanted to impose such restrictions, my system would make it much easier than fiat—because every transaction is traceable. It’s a tool that can serve both secular and religious societies, depending on local decisions. The lower turnover of Islamic banks is not a sign of weakness—it’s a sign of honesty. And my system makes this honesty a structural inevitability, not a moral choice.
11. Physical money
11.1. Primary and secondary form
In the PayLats/SaveLats system, money exists primarily in digital form. Physical money (banknotes) is a secondary representation — a receipt for a locked digital asset. Active money exists either digitally or physically, but never at the same time. The total money supply is always precisely traceable, regardless of how much cash is in circulation.
Mechanism:
Withdrawing from an ATM → a certain amount of digital money is blocked in the user's account → a physical banknote is issued.
The banknote circulates as a bearer instrument; the system doesn't care who holds it.
When depositing back to the bank → the digital asset is unlocked and added to the depositor's account.
Physical money without a proper digital lock is worthless. Anyone can scan a QR code with their phone and immediately check whether the banknote has a real cover. Of course, you can make a copy of the banknote and try to pay several times, but printing with all the security features is expensive and can also be traced. Therefore, no point to cheat on a large scale.
11.2. SaveLats — digital only
SaveLats exists only in digital form. No physical form is required for saving — SaveLats is digital gold. Its value lies in its limited supply and real coverage, not in its physical form. SaveLats is backed by the currency for which it was purchased — if converted from EUR, the reserve is EUR; if converted from PayLats, the reserve is PayLats. The central bank's reserve is a basket of many currencies that reflects real demand from different economies.
11.3. Demurrage and physical cash
Demurrage works at the account level, not the banknote level. A physical banknote is an impersonal medium of exchange — it does not have an individual demurrage counter. The QR code on the banknote confirms only one thing: whether a corresponding locked digital asset exists for that banknote (whether it is not counterfeit or has already been deposited).
The application of demurrage is tied to the turnover of the depositor's account. Each account has a demurrage-free buffer — annual turnover multiplied by 1.25. All physical cash (blocked assets) is considered as savings. Thus:
A company with a turnover of 100,000 PayLats can hold up to 125,000 without demurrage — including physical withdrawals.
For an individual user with a low turnover, physically withdrawn money will quickly fill the buffer.
When depositing to a bank, the amount is added to the depositor's account - if it, together with the existing balance, exceeds the buffer, demurrage is applied to the excess.
11.4. Why keeping money under the mattress is not a problem
Theoretically, someone can hold physical PayLats under the mattress for years. But to return them to the system without demurrage, you need either a large turnover yourself, or a well-known entrepreneur with a large buffer. Compared to the total supply, these amounts will be insignificant, because:
Most transactions are digital (more convenient, faster, cheaper).
Holding physical money does not bring any interest or growth (unlike converting to SaveLats).
Physical storage of large volumes is inconvenient and unsafe.
The system does not prohibit anything — but natural economic motivation makes hoarding cash an unprofitable option.
12. Emission mechanism
12.1. Basic principle: issuance only against fair value
New money is issued only in exchange for another currency or precious metals (initially the euro). No participant – neither the central bank, nor the government, nor the private sector – can create value from nothing. Value can only move between participants. This principle automatically makes the formation of debt bubbles impossible.
12.2. Initial phase: 1:1 with the euro
Initially, the system operates as a fully collateralized stablecoin. Each issued PayLats or SaveLats is backed by real euros in reserve. This ensures minimal psychological barriers to user entry and institutional credibility from day one, fundamentally different from algorithmic stablecoins (Terra/Luna type), which collapsed due to lack of real backing.
12.3. Disconnection mechanism
The transition from a fixed 1:1 exchange rate to a free-market exchange rate is triggered when euro inflation exceeds a threshold of ~5% . This threshold is high enough that no one can claim political motivation, but low enough that the system disconnects before a full-blown crisis. 5% has already been exceeded in the history of the Eurozone (2022–2023).
After disconnection, the development bank guarantees the return of only the floor price - the risk for the user is only the difference between the purchase price and the floor. It is important to note that the floor price and the floor value are not the same. If a certain amount of euros is provided for PayLats, then euros will be returned, even though the value of the euro may fall very significantly.
The approximate formula for how the issue price of the PayLat (the price at which the central bank will issue PayLats against currency or precious metals) will be formed after the decoupling from the euro.
0) Notations (monthly step, t = 0,1,2,…)
Et= PayLat exchange rate in EUR for 1 PayLat (i.e. 1 PL = EtEUR) on the market.
St= Selling rate of savings banknote (EUR per 1 KL) on the market.
Ct= Latvian consumer price index (CPI or HICP) normalized (e.g., C0 = 100).
Xt= import cost index (e.g. energy+raw materials; also normalized, X0 = 100).
w ∈ [0, 1]= weight of “internal prices” versus “external costs”.
Pt= “targeted purchasing power” index for PayLat (our anchor).
g= desired target inflation rate per year (e.g. 2% ⇒ per month gm = (1+0,02)1/12 − 1).
ρ∈(0,1]= how fast PayLats approaches the target (0.2…0.5 is typical for “crawling” style).
Rt= market value of reserves (EUR).
Lt= PayLats liabilities (PayLats in circulation).
h= “haircut” for safety (e.g. 5% ⇒ h = 0, 05).
$CR_{t} = \frac{R_{t}}{(1 + h)\text{ }E_{t}\text{ }L_{t}}$= coverage ratio (full coverage requirement: CRt ≥ 1).
1) Targeted purchasing power index (anchor)
Let's define PayLat's “target price level” as a geometric combination:
$$P_{t} = 100 \cdot \left( \frac{C_{t}}{C_{0}} \right)^{w} \cdot \left( \frac{X_{t}}{X_{0}} \right)^{1 - w} $$
Intuition:
if internal prices rise, PayLats “should not” automatically fall along with it;
but imported costs (energy, raw materials) are a real pressure that cannot be ignored.
2) PayLat exchange rate determination law (EUR/PL)
2.1. “Preferred” exchange rate by purchasing power target
We want 1 PayLat to maintain a certain purchasing power. Define the “desired” exchange rate:
$$E_{t}^{\text{\textbackslash*}} = E_{0} \cdot \frac{P_{0}}{P_{t}} \cdot (1 + g_{m})^{t} $$
If Ptit goes up (prices rise), then Et\*it falls (1 PL gives less EUR) only as much as the target path allows , not "as the CPI says".
(1+gm)t puts a controlled, predictable target (e.g., 2% per year) into my system — the idea of price-level targeting.
2.2. Crawling update (so there are no shocks)
The real exchange rate does not jump immediately to Et\*, but slides:
$$E_{t} = \text{clip}_{\left\lbrack E_{t - 1}(1 - b),\text{ }E_{t - 1}(1 + b) \right\rbrack}\left( E_{t - 1} \cdot \exp\left( \rho \cdot \ln\frac{E_{t}^{\text{\textbackslash*}}}{E_{t - 1}} \right) \right) $$
b= max monthly movement (e.g., 1%…3%).
The "clip" puts a corridor so that speculators cannot "knock out" the rate.
This is exactly the principle of crawling/gradual adjustment (can be backward/forward looking).
3) Emissions (how many PayLats can be issued)
SIFRPR full reserve logic: PayLats are 100% covered by reserves (with haircut).
Maximum allowed amount:
$$L_{t}^{\max} = \frac{R_{t}}{(1 + h)\text{ }E_{t}} $$
If there is a goal to keep in circulation Lttarget(from the volume of payments, economic demand, etc.), then the actual emission:
$$\Delta L_{t} = \max\left( 0,\text{\:\,}\min\left( L_{t}^{\text{target}},\text{ }L_{t}^{\max} \right) - L_{t - 1} \right) $$
And can be defined Lttargetsimply, for example, as “transaction float”:
$$L_{t}^{\text{target}} = \alpha \cdot \frac{\text{Nominal\_Payments}_{t}}{\text{Velocity}} $$
( α= safety margin for payments, e.g. 0.15…0.30.)
There are three prices.
(1) Floor — minimum guaranteed value, which is 100% secured by reserves. May be increased if reserves are sufficient (with a higher issue price, the reserve also increases);
(2) Issue price — the entry price (the price at which PayLats can be purchased) set by the central bank, which gradually increases to the market price according to the formula above. The increase is slow to prevent strong fluctuations.
(3) Market price – a freely determined price that may exceed the issue price and the floor.
The system only guarantees a floor. The issue price serves as a stabilizing mechanism, while the market price reflects demand.
4) SaveLats (initially 1:1, later varies)
4.1. At the beginning
St = Et
4.2. Later (savings instrument with stability premium)
Premium depending on excess coverage and liquidity:
St = Et ⋅ (1+μ+λ⋅max(0,CRt−1))
μ= base premium (e.g. 0.5%…2%),
λ= how aggressively the excess coverage is rewarded (e.g., 0.5…1.5).
Interpretation: if you have excess reserves, a savings account may be more expensive than a payday loan, as it is a pure savings instrument with higher safety/liquidity.
5) How does it work exactly “when the EUR exchange rate starts to fall?”
The exchange rate does not react to the “euro falling” directly. The exchange rate reacts to its purchasing power anchor:
If the EUR falls globally, but Latvia Ctand the rest Xthave not yet been "broken out", then Ptit will not grow significantly ⇒ Et\*little changes ⇒ PayLats remain more stable.
If the EUR falls + import costs (energy) rise, Xtit grows ⇒ Ptgrows ⇒ the model allows for controlled correction (crawling), not panic.
Minimum “starting” set of parameters
w = 0, 7(domestic prices prevail)
g = 0, 02in the year
ρ = 0, 3
b = 0, 02(max 2% per month)
h = 0, 05
Savings banknote: μ = 0, 01,λ = 1, 0
The Central Bank initially sells both PayLats and SaveLats at a 1:1 exchange rate to the euro to make the system simple and understandable. After the transition period, the price of PayLats is no longer mechanically linked to the euro, but is calculated according to the Latvian domestic purchasing power index — this means that the bank regularly assesses the consumer price level and the dynamics of key import costs, and adjusts the creation price gradually (no more than a certain percentage per month) to maintain stable purchasing power. SaveLats, on the other hand, as a savings instrument, is sold at the same price as PayLats at the beginning, but its price may be significantly higher later, since the total volume is algorithmically limited.
The reference basket for determining the PayLat exchange rate is based on the HICP (Harmonized Index of Consumer Prices) published by the Latvian Central Bank, which is calculated every month according to a single EU methodology. This means that the index is internationally comparable, standardized and cannot be unilaterally “adjusted” due to the political goals of one country, since the calculation methodology, basket structure and quality adjustments are determined at the EU level. Thus, the PayLat reference point is not a political decision or subjective assessment, but an externally auditable and transparent statistical indicator that reflects the real dynamics of consumer prices in the economy.
12.4. Supply reduction mechanisms
The supply of SaveLats can be reduced only by two organic mechanisms, both of which require a real investment of resources:
Buybacks in other currencies — similar to stock buybacks. This is decided by the government as an instrument of fiscal policy.
Tax collection and holding in reserve - the government can choose not to put the collected SaveLats back into circulation, which reduces the supply and increases the value for other holders.
No one in the system can create value from nothing. Not a bank, not a government, not a private sector.
13. Conversion fee system
13.1. Tripartite fee architecture
Conversion fees operate in all directions of currency flows, not just domestic ones. The central bank profits from all currency conversions:
| Conversion direction | Base fee | Dynamic component |
|---|---|---|
| PayLats ↔︎ SaveLats | 2–3% | Depends on internal demand and turnover |
| EUR/USD/etc → PayLats or SaveLats | Entrance fee | Depends on the intensity of external capital inflows |
| PayLats or SaveLats → EUR/USD/etc | Exit fee | Depends on the rate of capital outflow |
13.2. Dynamic charge as an automatic stabilizer
All conversion fees are dynamic and depend on demand and turnover. Stabilization works in all directions:
If there is a massive internal conversion from PayLats to SaveLats (panic signal) - the fee automatically increases, slowing down the panic.
If there is a mass exit to the euro or other foreign currencies (capital outflow), the exit fee increases, slowing down capital flight.
If there is a large inflow of capital (speculative demand), the entry fee increases, preventing the formation of speculative bubbles.
If there are no obvious purposeless movements and conversions in one or some accounts. Counting from one account and back, conversions back and forth.
13.3. Example scenarios
| Scenario | Conversion rate | Fee |
|---|---|---|
| Normal situation | 5% of turnover | ~2.2% |
| Increased demand | 20% of turnover | ~5–6% |
| Panic scenario | 50% of turnover | ~14% |
The high fee acts as an automatic stabilizer in a panic scenario — it slows down mass conversion and gives the market time to calm down, without the need for central bank intervention.
A panic signal is defined as a sharp increase in total conversion volume. Commissions only increase for anomalous volumes above normal turnover. This approach functionally replaces capital controls with predictable, market-based friction.
14. Governance structure
14.1. Central Bank as Infrastructure Operator
The central bank in this system is reduced to the level of a technical operator, like the operator of an electricity grid or the internet. It does not decide on the quantity of money, does not set interest rates, does not conduct monetary policy. It ensures that the system works.
The Central Bank is a self-financing non-profit organization that earns money from:
Transaction fees (PayLats payments, SaveLatstransactions)
Conversion fees (PayLats ↔︎ SaveLats, as well as foreign currency conversions)
Demurrage charges (demurrage revenue)
The non-profit status eliminates the incentive to maximize fees. The central bank has a small technical reserve to ensure the operation of the system, but it is not intended for the implementation of monetary policy. The reserves of other currencies for which PayLats and SaveLats were purchased are not used for bank or government spending, are not invested or pledged.
The operation is regulated by law, which clearly states what is in the algorithm, what the bank's board can decide on, and where a parliamentary vote is required. The privacy and sanctions regime is analogous to banks.
14.2. Commercial banks
The role and limitations of the banking sector
In this system, two functions are fundamentally distinguished:
credit brokerage
money issue
Commercial banks:
attracts deposits,
issues loans,
performs financial intermediation in the economy.
However:
Commercial banks do not create new money.
New money (PayLats) can only be created:
through the central bank,
against real economic value.
This means:
credit ≠ money issue,
the bank lending cycle no longer automatically generates monetary expansion,
if banks have a demand for credit in PayLats, they can issue additional PayLats against other currencies or precious metals through the Central Bank.
Result:
the credit bubble mechanism is eliminated,
the financial sector becomes more stable,
monetary discipline becomes a feature of the system, not a political choice.
In my proposal, any market participant can create money for value. In the private sector, banks no longer have a monopoly.
14.3. Separation of powers
| Participant | Role | What not to do |
|---|---|---|
| Central Bank | Maintains infrastructure, collects fees | Issue money, set rates |
| Government | Fiscal policy | Print money without backing, manipulate the issue |
| Market | Determines the course, demand, supply | — |
| Users | Freely choose currency and layer | — |
The government is only one of the users. It is not the owner of the money. Like how the state maintains the roads, but the state owns only a portion of the cars that drive on them. This automatically imposes fiscal discipline without the need for Maastricht criteria. The decision to sell or buy SaveLats is a conscious democratic choice.
A fiscally imprudent government can go bankrupt, but the payment system is not affected much.
14.4. Monetary sovereignty and information security
SWIFT is a system managed outside the jurisdiction of Latvia, and its management decisions do not always reflect Latvia's interests. Practice shows that agreements on the use of the system can be made behind Latvia's back — both at the level of sanctions application and information exchange. A national payment infrastructure based on PayLats ensures that:
transaction data on Latvian economic agents remains under Latvian jurisdiction,
decisions on access and restrictions are made at the national level,
the risk of information leakage to third parties is reduced.
This does not mean isolation from the international financial system - the PayLats system can ensure compatibility with SWIFT and SEPA through controlled gateways, while maintaining sovereignty over internal transactions.
15. Crisis resilience
Basic principle
This monetary system is not designed to prevent economic or financial crises.
Its purpose is to ensure that crises:
does not cause a monetary collapse,
does not paralyze the payment system,
does not cause uncontrolled loss of value.
The system is based on the principle that stability is achieved not through active intervention, but through structural constraints and automatic mechanisms.
15.1. State bankruptcy scenario
In the current system, when a country goes bankrupt, the entire financial system collapses. In the PayLats/SaveLats system, a country's bankruptcy only affects the country, not the payment system and savings:
| Aspect | Current system | PayLats/SaveLats |
|---|---|---|
| Payment system | Paralyzed | Continues to operate |
| Savings | Loses value (hyperinflation) | Untouched |
| Daily payments | Difficult or impossible | Normal operation |
| Private sector | Being caught in a crisis | Continues to operate in areas where the state is not directly involved |
| Regeneration | New currency, social chaos | The government is cutting services |
15.2. Government Overspending—A Fundamental Difference from Inflationary Fiat
In an inflationary fiat system, government overspending has systemic consequences: the central bank monetizes the deficit (in fact, inflation is a hidden tax on all money holders), inflation eats up savings, the currency devalues. In a PayLats/SaveLats system, government overspending is structurally limited and does not affect the system.
The government can only spend it through two channels:
Taxes - the government collects existing PayLats/SaveLats and spends (or accumulates). The total amount of money in circulation does not change - it is simply distributed.
Borrowing - the government borrows existing PayLats/SavingLats from the market. Again, the quantity of money does not change - it moves from the lender to the government and back into the economy through spending. There is no inflation mechanism.
Even a fiscally imprudent government can only misallocate existing resources, but it cannot create inflation, devalue the currency, or crash the payment system. The worst-case scenario is an inefficient economy, not a systemic collapse. And even this inefficiency is limited, because the market will simply stop lending to the government at a reasonable price when the risk becomes too high.
This is a fundamental difference from a fiat system, where a fiscally imprudent government can destroy an entire nation's savings through hyperinflation. In a PayLats/SaveLats system, a fiscally imprudent government can only damage public services, while the private economy and citizens' savings remain largely untouched, except in cases directly related to the state.
15.3. Immediate market signals, not delayed disasters
In the current system, market signals are delayed and distorted. Greece was able to borrow at almost German rates for years before the market finally "noticed" the problem. ECB interventions currently continue to mask France's real fiscal situation.
In the PayLats/SaveLats system, since the amount of money in circulation is algorithmically limited, any fiscal problem manifests itself immediately and proportionally — if the government borrows too much, interest rates rise because the amount of money available in the market is fixed. The signal is immediate, but the correction is gradual, because the amount of money itself does not change. It is not possible to "accumulate" a problem for years through hidden monetization, only to have it burst in one fell swoop.
15.4. Additionally
1. Fully covered issue
Money is issued only against real value (currencies, precious metals or other assets).
The system does not have:
fractional reserve mechanism,
credit multiplication without collateral,
monetary expansion without adequate collateral.
This excludes the classic crisis mechanisms:
bank runs,
the collapse of credit bubbles,
systemic insolvency.
2. Price floor (Floor Mechanism)
PayLats units have a guaranteed minimum redemption price (80–90% of the issue price).
This mechanism ensures that:
in the event of a mass exodus, the fall in value is limited,
there is no uncontrolled price spiral,
User trust is maintained even under stressful conditions.
It should be noted here that there are a price floor and a value floor. The currencies in the PayLat reserve can significantly depreciate. The price floor is guaranteed, not the value floor.
The floor does not eliminate oscillations but limits their amplitude and prevents destabilization of the system.
3. Automatic pressure absorption
In the event of a mass conversion or capital flight, the system absorbs pressure through:
dynamic commissions,
a decrease in the monetary volume,
adjustment of reserve ratios.
This means that:
the collapse in prices is replaced by an increase in costs (commissions),
the system maintains its operability even with significant flow changes,
no need for an external bailout is created.
On the other hand, a massive inflow of capital, e.g. a massive purchase of PayLats by a participant, will simply cause market participants to issue additional PayLats as needed against collateral.
4. Payment system continuity
The payment infrastructure is structurally separated from credit institutions.
This ensures that:
commercial bank problems do not affect payment execution,
the payment system continues to function even during times of financial stress,
paralysis of the payment system due to a credit crisis is not possible.
5. Operational and systemic risk
The system clearly distinguishes between two types of risk:
operational risk (IT disruptions, access problems),
systemic risk (loss of coverage, monetary instability).
IT or infrastructure disruptions do not affect:
the existence of reserves,
coverage of the issue,
unit value.
This ensures that even in the event of a technical failure, the monetary stability of the system is not threatened. Data processing centers are duplicated multiple times in different countries and continents. The failure of a few nodes does not destroy the system.
6. Mass exodus scenario
The system is designed to withstand significant capital outflows (>50% in a short period of time) without collapse.
In this scenario:
users can exit with a defined value floor,
commissions are increasing and cushioning the pressure,
the monetary volume decreases, but the system continues to function,
a new state of equilibrium is reached.
The system does not seek to prevent exit but ensures that it does not lead to destabilization.
7. Impact of global crises
Even in the event of global financial or liquidity crises, the system still holds because:
the issue is fully covered,
there is no debt multiplication,
no monetary “rescue” is needed,
the price floor limits the fall.
The system does not require a stable external environment to maintain internal stability.
8. Transparency of reserves
Reserves are verifiable and auditable. Anyone can check the status of reserves at any given time.
This ensures:
maintaining trust even in times of crisis,
allowing users to verify coverage,
protection against unfounded rumors or a shock of confidence.
9. Post-crisis adaptation
After a crisis, the system does not necessarily return to its original state, but:
move to a new equilibrium,
adjusts the monetary volume to real demand,
restores activity through market mechanisms (issue for value).
This adaptation is an intended feature of the system, not a bug.
10. Main conclusion
The system does not eliminate crises, but fundamentally changes their nature:
from uncontrollable collapse → to manageable adaptation,
from insolvency → to monetary contraction,
from system paralysis → to continuous operation.
This ensures high crisis resilience both locally and internationally.
15.4. Fallback option for Europe
The system serves as a Plan B in case the inflationary fiat system collapses. This "fallback" framing is politically important - no one can object to preparing for a crisis. The argument is not "we want to replace the euro", but "we want to have Plan B".
The question is what to do with old debts? Old debts remain in the old currency and are paid off slowly.
16. How the system prevents the accumulation of problems
16.1. No "money printing" option
In an inflationary system, the government can always "relieve" the pressure through the central bank - QE, interest rate cuts, outright monetization. This allows huge debts to be accumulated for decades without any obvious consequences. When the consequences appear, they are catastrophic.
In the PayLats/SaveLats system, this option does not exist. Money is created only in exchange for real value. The government can only spend what it collects in taxes or borrows on the market at the market price. There is no "buffer" to mask irresponsible fiscal policy.
16.2. Gradual adjustments, not catastrophic crises
In an inflationary system, problems accumulate to a critical mass, then explode in one fell swoop. In the PayLats/SaveLats system, adjustments are continuous and gradual:
| Situation | Fiat system | PayLats/SaveLats |
|---|---|---|
| The government is overspending. | CB monetizes; problem hidden for 5–15 years | Market rates are rising; correction imminent |
| Imbalances are accumulating. | Market ignores (CB guarantee); explodes suddenly | The market adjusts gradually every day |
| Crisis moment | Systemic collapse, ATMs not working | The government is losing, but the system is working |
| Regeneration | New currency, bail-out, years | The government is learning; the system is not changing |
16.3. Fiscal discipline as a system characteristic
Fiscal discipline does not depend on the goodwill of politicians, international rules (which many do not follow), or distorted market discipline. It is a feature of the system's design:
The government cannot "print" money - every expenditure requires real revenue.
Demurrage on the PayLats side stimulates economic activity without artificially low interest rates.
SaveLats deflation rewards savers, not punishes them.
Building reserves in good times is economically rational (the value of the SaveLats increases), not politically disadvantageous.
16.4. Countercyclical mechanism
In the current system, governments spend in good times and cut back in bad times, which exacerbates economic cycles. In the PayLats/SaveLats system, the natural incentive is the opposite:
In good times: Tax revenue exceeds expenses → the surplus is converted to SaveLats reserves (the value increases due to deflation) → the government "save".
In bad times: Government sells SaveLats reserves → obtains PayLats to cover expenses → no need to borrow or print.
This mechanism is countercyclical by design, not by the goodwill of policymakers.
16.5. Competitive advantages
Hayek's dream, but better
Friedrich Hayek argued in his 1976 book "The Denationalisation of Money" that privately issued competing currencies would discipline governments because people would simply abandon poorly managed money.
"Exit" as a discipline mechanism
Albert Hirschman formulated the famous "Exit, Voice, and Loyalty" framework in 1970. Currently, citizens only have "voice" (voting in elections) and "loyalty" (accepting the existing system) to influence monetary policy. The "exit" option is practically non-existent - you can't just abandon the euro or dollar in everyday transactions. Cryptocurrencies theoretically offer an "exit", but they are not suitable for everyday payments and lack institutional legitimacy.
My system gives citizens a real, practical, legal "exit" option. And the very existence of this option would change the behavior of governments - even if most people stay in the fiat system, the very possibility of leaving disciplines. Just as in a free market a company cannot sell a poor-quality product because customers will go to a competitor - the government cannot issue fiat money excessively because people will switch to PayLats.
Competition dynamics in practice
Let's imagine a scenario. The Latvian government (or the ECB) makes a decision that creates inflationary pressure — for example, massive borrowing or quantitative easing. In a fiat system, citizens have no choice — they suffer. In my system, this is what would happen: people observe that their euro purchasing power is falling, but the purchasing power of PayLats is stable (because it is backed by reserves). A rational reaction — to convert savings to SaveLats, to transfer daily transactions to PayLats. Money "flees" from fiat to my system. The government sees this and understands — if it continues to print, it will lose control of the monetary system completely. This is a stronger discipline than any election.
17. Implementation Guide
17.1. Phase 1: State Development Bank Project
The system is being launched as a single-bank payment instrument/cryptocurrency, based on the Latvian Development Bank (ALTUM transformation or separation - the exact institutional format is being determined in the course of work).
Legal format: digital payment instrument of one bank. Like how banks can issue loyalty points and internal settlement instruments, a development bank issues PayLats/SaveLats as a digital instrument to its clients without ECB permission.
Overall, it can also be launched as a private project. In this case, the private party will earn from transaction and conversion fees.
17.2. Phase 2: National scale
Once the system has proven its viability and the user base has reached a critical mass, the de facto instrument becomes money. In this phase, official state-level support is sought.
17.3. Phase 3: European level
External catalyst — debt crisis affecting several eurozone member states. A system that has already been proven in practice has a huge advantage over theoretical proposals. PayLats/SaveLats can become official fiat money at the national or European level.
17.4. Future
In the future, this model can be exported as a federated model to countries with unstable financial systems. The system code is open, the regulation is known, everyone can take, modify, and adopt. If necessary, Latvian commercial banks will be able to provide a payment system in developing countries as a service.
My offer of a 70-language education program ( https://jratkevics.blogspot.com/2026/01/par-izglitibas-reformu.html ). Developing countries will grow rapidly for ~75 years (https://jratkevics.blogspot.com/2025/11/attistibas-redzejums.html ). There is room to grow, because the market in developed countries is divided.
18. Comparison with inflationary fiat system
18.1. Impact on provisions
| Indicator | Inflationary fiat (2% inflation) | SaveLats (2–3% deflation) |
|---|---|---|
| Bread 2025 | 1.00 EUR | 1.00 SaveLats |
| Bread 2035 | 1.22 EUR | 0.78 SaveLats |
| Bread 2045 | 1.49 EUR | 0.61 SaveLats |
| Pensioner with 1000 units | Can buy 820 loaves (2035) | Can buy 1280 bread (2035) |
18.2. Debt dynamics
| Aspect | Inflationary fiat system | PayLats/SaveLats |
|---|---|---|
| Winners | Borrowers | Accumulators |
| Losers | Accumulators | Irresponsible borrowers |
| Debt bubbles | Systemic problem | Impossible (money quantity fixed) |
| Fiscal discipline | Voluntary (often overlooked) | Automatic (system design) |
| Impact of government bankruptcy | Systemic collapse | Only affects public services and the related private sector |
18.3. AI, AGI, and Productivity Deflation
The era of AI and automation is changing the foundations of monetary stability. Productivity gains alone do not guarantee debt sustainability.
Scenario A – stable productivity growth of 5–10% per year. A deflationary savings layer allows the productivity dividend to be maintained without bubbles.
Scenario B – a sharp transition shock. The dual-track monetary architecture in this case preserves the continuity of payments and significantly reduces the risk of bank runs.
19. Impact on the economy, investments and demography
1. Macroeconomic impact – growth stabilization
Dual-track monetary architecture is not primarily designed as an aggressive growth accelerator, but as a mechanism for systemic stability.
In the existing model:
there is a high risk of cyclical crises;
monetary policy is centralized and slow to adjust;
fiscal policy often becomes pro-cyclical.
In the new model:
systemic risks are converted into operational risks;
an internal cushioning layer is created;
capital outflows in times of crisis are limited by structural mechanisms.
Projected impact on GDP:
| Period | Additional average GDP growth per year | Main effect |
|---|---|---|
| 5 years | +0.3–0.7% | Stability effect |
| 10 years | +0.5–0.8% | Increase in investment confidence |
| 20 years | +0.5–1.0% | Structural shifts in the economy |
The most important effect is not to increase linear growth, but to reduce the depth of crises. If the traditional system produces -5% to -10% declines in crises, the parallel system allows:
reduce the decline to -1% to -3%;
maintain zero or small growth in certain scenarios.
This results in significantly higher cumulative GDP in the long run.
2. Impact on investments
2.1. Changing risk perception
Investors’ value:
political risk;
currency risk;
systemic banking risk;
regulatory risk.
If the parallel system:
is transparent,
with a clear reserve mechanism,
with automatic crisis protocols,
with a publicly auditable balance sheet,
then Latvia gains a reputation as:
a country with a reserve mechanism,
a country with a structural airbag,
a country with high financial flexibility.
2.2. The role of the Development Bank
If the system is implemented through the Development Bank model, it is possible to:
reduce the cost of capital for strategic sectors;
provide long-term funding for STEM, defense, technology, and language education projects;
create targeted capital allocation.
This is especially important for a small country where the depth of the capital market is limited.
2.3. Foreign investment profile
Expected change in investor structure:
less speculative capital,
more long-term strategic investments,
a higher proportion of the technology and education sectors.
The parallel layer becomes a signal of confidence that the country is thinking long-term, not cyclically.
2.4. Concerns about declining investment and their refutation
Deflationary systems are often criticized for the fact that as the value of money increases, people will not spend money and investments will stop. But practice shows that a large part of investments is not exactly investments, but an attempt to preserve the value of funds in deflationary assets. For example, in real estate. This causes a significant increase in prices with minimal growth (the rise in real estate prices, however, stimulates the construction of new real estate). The more daring invests in shares. All this together creates bubbles. By giving people a stable savings currency (SaveLats), we do not address the need to invest “somewhere”. Consequently, investments will be concentrated in productivity and the real economy, not in real estate and financial instruments.
3. Impact on tax discipline and the shadow economy
If the system:
is digital,
with full transaction transparency,
with integration into the tax administration,
then:
shadow cash turnover is decreasing;
VAT carousels are decreasing;
the efficiency of tax collection improves.
Even a 2–3% reduction in the shadow economy in Latvia means:
hundreds of millions in additional budget revenue per year,
less pressure to raise tax rates.
4. Impact on demography
4.1. Economic security as a demographic factor
The main enemy of demography is not just low income, but:
instability,
fear of the future,
recurrence of crises,
unavailability of housing,
emigration security strategy.
If:
reduced depth of crises,
a long-term investment environment has been created,
structural stability ensured,
then:
economic emigration is decreasing;
the likelihood of remigration increases;
the fertility stability factor is increasing (not necessarily an explosion, but stabilization).
A small historical digression
What happened to the supply of land and housing (1950s–1970s)?
Mass construction (without speculation)
Post-war politics:
huge public and private investment in housing,
simple building codes,
standardized projects,
fast issuance of permits.
Purpose: not an investment asset, but a living space.
Examples:
USA: Levittown
West Germany: massive social and private construction
Scandinavia: functionalist districts
Land was not a financial asset
Holding land without construction was not profitable,
property taxes and maintenance costs forced them to build or sell,
The home loan was:
conservative,
with a large down payment,
without speculative leverage.
Result:
no price spiral,
Housing followed wages, not credit.
Why it collapsed after the 1970s
Here we see that currency regime + regulation worked together.
Fiat + credit explosion
gold standard abolished (1971),
cheap credit,
financial innovations,
Home becomes an asset, not a shelter.
Regulation began to restrict supply
strict zoning requirements,
NIMBY (not in my backyard) policy,
long reconciliations,
environmental regulations without compensation mechanisms.
Supply became inelastic → prices exploded.
Comparison in a table (simple)
| Factor | 1950–1970 | Today |
|---|---|---|
| Share of wages in GDP | High | Lower |
| The role of credit in housing | Limited | Dominant |
| Land speculation | Low | High |
| Building permits | Fast | Slow |
| House as an asset | No | Yes |
| Value of savings | More stable | Eroded |
Main conclusion
The “single-income family” model of the 1950s–1970s arose not because taxes were simply low, but because labor income was not eaten up by inflation, housing was not financed, and supply was elastic. A hard currency restores this mechanism, but without land, housing, and tax reform, it alone will not do it.
The gold standard was not abolished because the economy was bad, but because countries (especially the US) were no longer able to finance their political (e.g., giant social programs) and military ambitions within the framework of the gold discipline.
Note: The USSR had a gold standard only formally (it was impossible to get gold for rubles). 1961 monetary reform - 10 old rubles = 1 new ruble. Officially called a “denomination”, but prices and wages were also recalculated → formally did not affect purchasing power. However, the ratio to foreign currencies changed → hidden devaluation. The exchange rate was artificial. Officially: ~0.6 rubles per 1 USD (completely unrealistic). Real (on the black market): 1970s–80s: 3–10 rubles per USD. Prices could formally remain unchanged for 10 years, but in fact the availability of goods remained less and less with the black market and “blat”. The Cold War ended the USSR completely.
What exactly “broke” in the 1960s
State spending has become structurally higher than taxes
In the case of the USA:
Vietnam War,
Cold War armament,
“Great Society” social programs.
Problem:
You can't spend it endlessly with gold ,
A deficit means an outflow of gold.
The US printed dollars faster than it hoarded gold
In the Bretton Woods system:
dollar = gold ($35/ounce),
other currencies = dollar.
When dollars became more abundant than gold, foreign countries began to demand gold in exchange; the system became arithmetically impossible. France (de Gaulle) openly converted dollars into gold.
The Decisive Moment: The “Nixon Shock” of 1971
The US had a choice:
Reduce spending (war, welfare state)
Raise taxes
Devalue the dollar
Close the golden window
Political reality:
and 2) = political suicide,
3) = reputational damage,
chose 4).
It was a deliberate political decision, not an economic crash.
Why other countries obeyed (and couldn't resist)
The US was already the center of the system
Reserve currency
Military defense network
Trade infrastructure
If:
you leave a dollar,
you leave the system.
Alternatives were not ready.
Europe and Japan chose stability, not discipline
Exports to the US were critically important,
A collapse of the dollar would be a shock.
Therefore:
better “controlled inflation”,
than a global deflationary shock.
What was “gained” from the abolition of the gold standard
Honestly — a lot:
Countries gained:
the ability to finance wars without taxes (more precisely, using inflation as a hidden savings tax),
social programs without immediate payment,
crisis amortization through printing.
The financial sector increased:
credit expansion,
lever,
asset bubbles.
This regime was particularly favorable to the political elite, as the fiscal and monetary system allowed for a long-term maintenance of high levels of prosperity without immediate disciplinary pressure. As a result, the ability to make politically difficult but necessary decisions gradually diminished, especially regarding fiscal responsibility, security issues, and the constraints of economic reality. The effect was reinforced by the collapse of the USSR and the loss of a geopolitical adversary, which reduced external disciplinary pressure on Western political systems. As the global economic balance changes and the relative decline of the economic dominance of the US and the EU, as well as increasing competition from other regions, this problem of inertia becomes increasingly visible - political systems are often unable to adapt quickly enough to new circumstances.
What society “gained” (slowly but irreversibly)
Erosion of savings,
Home financing,
The need for two salaries in the family,
The imposition of consumer culture,
Debt as a norm of life.
It didn't happen immediately, so there was no resistance (the "boiled frog" effect).
Why didn't even capable and disciplined countries (e.g., Switzerland or Singapore) return to the gold standard?
Because:
one country with gold = capital magnet,
constant pressure on the currency,
deflation,
export suffering,
political pressure from partners.
Hard currency alone is inconvenient for a world living on debt.
Main conclusion
The gold standard was not abolished because it didn't work, but because it worked too well—it limited the ability of countries to spend, wage war, and buy political peace at the expense of the future.
Why is this issue relevant again now?
Because:
debts have reached their limits,
printing creates inflation, not growth,
trust in fiat systems is falling,
“gold standard 2.0” (crypto) is technologically possible.
4.2. Highly skilled migration
Connecting monetary reform with (see my previous articles):
economic reform strategy (https://jratkevics.blogspot.com/2025/11/attistibas-redzejums.html),
education reform (https://jratkevics.blogspot.com/2026/01/par-izglitibas-reformu.html),
Latvia can become:
niche intellectual center,
multilingual technology hub,
exporter of financial and linguistic competence.
This:
attracts highly qualified specialists,
increases the quality of human capital,
creates a multiplier effect on GDP.
5. Reducing unproductive investments and asset bubbles
5.1. Quality of capital allocation
In existing monetary systems, periods of low interest rates often result in:
excessive lending in real estate;
asset price inflation without corresponding productivity gains;
speculative capital that seeks short-term price increases rather than expansion of production.
As a result:
capital is frozen in non-productive assets;
price signals are distorted;
Systemic financial risk is increasing.
Dual-track monetary architecture with an internal stabilization mechanism:
limits excessive credit cyclicality;
makes capital issuance structurally linked to real economic activity;
reduces the possibility of asset price “inflation” that is not based on productivity.
In a deflationary environment, a bank or investor will more often choose to finance a project against a portion of future profits rather than a fixed interest rate. This reduces the risk of bankruptcy because if the business fails, there is no need to pay a fixed interest rate that would drive the company to its grave.
5.2. Limiting real estate bubbles
Real estate bubbles have three major negative effects:
the inaccessibility of housing for young families;
excessive household debt burden;
vulnerability of the banking system.
If the system:
credit expansion is amortized,
capital is not massively diverted to speculative demand for real estate,
investment priority is shifted to productive sectors (STEM, technology, exports),
then:
housing price increases are becoming more moderate and linked to income dynamics;
the risk of price bubbles forming is reduced;
housing becomes more structurally accessible.
5.3. Change in long-term capital structure
Reducing the share of unproductive investments:
a larger share of capital goes into exporting sectors;
productivity per employee is growing;
the economy's dependence on asset price cycles is decreasing.
As a result:
the economy becomes less speculative;
more based on real value added;
more resilient to external financial shocks.
5.4. Impact on budget transparency, democracy, corruption
What is currently opaque
In the current system, government finances are opaque on several key levels. The budget is published once a year, but actual execution varies — and the full report appears with a 6-12 month lag. In between, the government can borrow, reorganize spending, and manipulate classifications, and no one sees it in real time. The structure of the public debt is formally public but practically incomprehensible — different issues, different maturities, different rates, guarantees for state-owned enterprises, public-private partnership commitments that often don’t appear in the budget at all. Central bank operations are semi-confidential — as part of quantitative easing, the central bank buys trillions of assets, but detailed information about what exactly and for how much — is often published with delay or incompleteness.
In a fiat system, the government can hide its true spending behind complicated accounting. For example, if the government wants to finance a project but doesn't want to show it in the budget, it can use a state-owned enterprise, a public-private partnership, or a guarantee mechanism. Formally, only a guarantee appears in the budget, but in reality, the state is making billions of dollars in commitments. This happens everywhere, from Latvia to France, from Greece to the United States.
The case of Greece is the most convincing. Greece entered the eurozone in 2001 using a currency swap scheme developed by Goldman Sachs that allowed it to hide billions of euros in national debt from Eurostat statistics. This was only discovered in 2009 — eight years later. For eight years, the European Union made decisions based on falsified data on the member state’s finances. And no one could verify it in real time.
How does my system change this?
In my system, government finances become transparent not because the law requires it (laws can be changed and circumvented), but because the architecture requires it.
If the government wants to spend PayLats, it must first obtain them. Either through taxes and borrowing on the open market (which are visible), or by issuing new ones against collateral (which are verifiable). There is no third option. The government cannot "hide" the expenditure behind a complex financial scheme, because every PayLat it spends is traceable to its issuance. A citizen may ask - the government spent 500 million PayLats today on infrastructure, where did they come from? The answer is always verifiable: they were collected as taxes (from specific transactions) or issued against collateral (specific gold or currency that is visible in the register).
The government debt becomes fully transparent. When the government borrows, it borrows real, existing PayLats from real lenders. It is not possible to "print" money to cover the debt. It is not possible to hide liabilities off the balance sheet. The total government debt is a public figure that can be checked at any second.
Practical examples
A member of parliament or a journalist can check at any time: how many PayLats the government has issued this month, against what collateral, and where they have been spent. There is no need for an audit by the State Audit Office, which takes months — the data is public and real-time.
If a minister promises "this project costs 50 million" - anyone can verify whether 50 or 75 were actually spent. It is impossible to "overspend" unnoticed. If the government tries to make a questionable deal - for example, award a contract to a related party at an inflated price - the deal is visible. It is impossible to hide behind "trade secrets" or "classified information", because the money itself is public.
Corruption is becoming exponentially harder. Corruption currently works because money flows are opaque briberies can be disguised as consulting contracts, overpaid purchase prices, fictitious services. In my system, every PayLat the government receives and spends is traceable. This doesn’t mean corruption becomes impossible—but it does become riskier because the evidence is public and unchangeable.
Democratic effect
Democracy theoretically means that citizens control the government. But real control requires information. If citizens have no information about how the government spends their money, democracy is formal, not real. In my system, citizens have full, real-time information about government finances. It's the same as how the Internet democratized access to information—my system democratizes access to finance.
Imagine Latvia before the Saeima elections — not party promises and statements about the economy, but a publicly available, verifiable data flow: how much the government collected, how much it spent, to whom, when, and for what. There would be less rhetoric and more numbers in the election debates.
Current situation: billions disappearing in EU fund projects
The EPPO (European Public Prosecutor's Office) had 3,602 active cases at the end of 2025, with estimated losses of €67.3 billion — an increase from 2,666 cases and €24.8 billion the previous year. This is more than twice the GDP of Latvia.
In the EU Pandemic Recovery Fund (RRF) alone, the EPPO had 512 active cases, involving almost 2,000 suspects and estimated losses of €5 billion. And this is a fund that was created only five years ago.
OLAF recommended the recovery of more than €870 million in misused EU funds in 2024. Over the past three years, OLAF investigations have led to the recovery of €4.5 billion.
And these are just the cases that have been discovered. Both the Commission and the Member States have resisted calls to be more transparent about who receives EU funds. Member States have even refused to use the Commission's "blacklist" to prevent known fraudsters from accessing funds, citing "administrative burden". How many have not yet been discovered - no one knows.
Why the current system can't fix this
The problem is structural, not operational. OLAF has 420 staff across the EU. They cannot physically check millions of transactions across 27 Member States. A single case can take years to investigate – an investigation into a Hungarian corruption ring uncovered a web of bribery and other illegal activities affecting 30 billion forints (€75 million) of EU funds linked to 112 projects between 2015 and 2022. The fraud went on for seven years before it was discovered. In Slovakia, farmers paid bribes to officials to access EU agricultural funds – around €10 million in bribes between 2015 and 2020, involving 39 projects.
The fraud schemes are always the same: fictitious subcontractors, inflated costs, conflicts of interest in procurement, falsified documents. All this is possible because the flow of money from Brussels to the final beneficiary passes through many opaque layers — Commission → Member State government → ministry → agency → municipality → company → subcontractor. At each stage, manipulation is possible, and at each stage, OLAF can only verify retrospectively, after the fact, based on documents that can be falsified.
In theory, there is currently nothing to prevent the ECB/central bank operations from being published in real time. But in practice, this does not happen for several reasons:
Reasons for institutional resistance:
central banks deliberately maintain information asymmetry—it is their power base. Prior information about operations gives market advantages to insiders,
real-time transparency would make visible the actual distribution of monetary policy between countries (how much of Latvian vs. German bonds the ECB buys) — this is politically inconvenient,
commercial banks object because real-time data would reveal their positions and sources of profit.
Systemic cause:
The current system is built in such a way that information is fragmented - different registers, delays, aggregated data. Transparency would require a system overhaul, not just "opening up data."
How does my system solve this?
If EU funds were disbursed in PayLats, every unit would be traceable from the moment of issuance to final use. Not after an audit, not after a complaint, not after an OLAF investigation — but in real time, automatically, publicly.
The Commission issues PayLats against collateral and transfers them to a Member State for a specific project. This transaction is recorded, public, immutable. The Member State ministry transfers them to the agency – again recorded. The agency pays the company – recorded. The company pays the subcontractor – recorded. At every stage, anyone, from a Brussels official to a local journalist, can see where the money is, how much, and to whom it was paid.
Fictitious subcontractor? It is visible that he has no other deals - suspicious. Inflated costs? Comparable to similar projects in real time - not after five years in an audit. Bribes? It is visible that money went from the project account to a person who has no connection to the project. Conflict of interest? It is visible that the owner of the winning tender is the same person who signed the procurement documents.
RailBaltica is a perfect example. Billions of euros, unclear results, and no one can accurately trace the flow of money from EU funds to the final executor. In the PayLats system, every transaction is in a public ledger — from the moment the EU funding comes into every subcontractor payment. Not an audit after the fact, but real-time traceability.
The savings are huge.
The EU currently spends billions on fraud detection (OLAF, EPPO, European Court of Auditors, national bodies), and even then, only finds a fraction of the fraud. In my system, most of this fraud would be prevented before it happens — rather than detected afterwards. Preventive controls are exponentially cheaper than retrospective investigations.
Moreover, the very fact that the system is transparent deters potential fraudsters. It's like the effect of video cameras in a store - most thefts don't happen because the thief gets caught, but because he knows he'll get caught.
5.5. Linking with the digitalization of financial documents envisaged in my master plan, smart regulatory enactments
The current situation - a chaos of information silos
Currently, state management systems are fragmented. Payments go through banks that are private and whose data is confidential. Invoices exist in paper or PDF format, which can be forged. Regulatory acts are static documents that come into force on a certain date, but no one automatically controls their implementation. Tax returns are submitted periodically and retrospectively — the SRS learns about the transaction months after it occurred. Procurements are published, but their actual implementation (whether they really paid what they promised, to whom they promised) is opaque.
The result is huge "gray zones" where corruption and tax evasion thrive. In Latvia, the shadow economy is about 25% of GDP. In the EU as a whole, the tax gap is about 800 billion euros per year. This is not because there are no laws - it is because the architecture of the systems allows laws to be circumvented.
In my system, everything is one connected layer
If PayLats is a programmable currency with a public transaction ledger, it naturally connects to other digital systems, creating an integrated ecosystem.
E-invoicing
Currently, an e-invoice is a PDF or structured XML file that is sent from the seller to the buyer. But e-invoice and payment are two separate systems — you can issue an invoice for one amount, but pay another. You can issue an invoice for a fictitious service. You can issue an invoice and never pay.
In my system, an e-invoice and a PayLats payment can be the same object. The invoice is issued in the system, and the payment is linked directly to this invoice. It is not possible to pay an amount that does not match the invoice. It is not possible to issue an invoice that does not have a corresponding transaction. Each invoice is verifiable — who issued it, to whom, for what, when, and whether it was paid. The SRS sees this in real time, not after the quarterly declaration.
Fictitious invoicing schemes, currently one of the main mechanisms for VAT fraud, are becoming much more sophisticated. If company A issues an invoice to company B for "consulting services" — but the transaction register does not show any corresponding economic activity (no employee salaries, no premises rental, no other expenses) — this is an automatically detectable anomaly.
E-financial documents
Accounting, balance sheets, profit and loss statements — these are all retrospective documents that the company prepares periodically and that the auditor checks after the fact. In my system, the company's financial situation is visible in real time — how many PayLats are coming in, how many are going out, what the balance is. There is no need for an annual report — the data is live. Auditing turns from a periodic check into constant monitoring.
This means that creditworthiness assessment is also changing fundamentally. Currently, in order to issue a loan, a bank requires a company to submit financial statements that can be months old and potentially distorted. In my system, the bank (or rather, any investor, since the banking monopoly has been broken) can see the company's real-time cash flow. Credit decisions become more accurate and fair.
Smart regulation
The law is no longer just a text that people read and interpret, but also a code that executes automatically.
Example — VAT rate. Currently, VAT is calculated from the invoice, declared periodically, and the SRS checks it with a delay. In my system, VAT can be automatically withheld at the time of the transaction — programmable money "knows" that 21% of this transaction should be directed to the state account. No declaration, no delay, no possibility of evasion. The efficiency of VAT collection is approaching 100%, compared to the current approximately 60–70% in Latvia.
Another example — public procurement. The Saeima (parliament of Latvia) adopts a budget that provides 50 million for road repairs. Currently, this amount is transferred to the ministry. Ministry announces the procurement, the winner receives the money, and whether he really repaired the road for 50 million or diverted 30 million to a subcontractor who is the minister's cousin — the State Audit Office finds out after two years during an audit. In my system, 50 million PayLats are "marked" (programmed) as road repairs. They can only be spent on certain categories (construction materials, wages, equipment). If someone tries to redirect them to an account that is not related to road repairs — the transaction is rejected or marked as an anomaly.
Also — social benefits. Childbirth benefit 500 PayLats, which are programmed to be spent on children's goods, medicine and education. It is impossible to spend them on alcohol or gambling. This is not a "prohibitive" mechanism against a person — it is a concern for the state's money to reach its goal.
Administrative acts
Building permits, licenses, certificates — these are all separate documents with their own systems now. In my system, they can be linked to PayLats transactions. For example, a company cannot receive PayLats payment for construction work if it does not have a valid building permit in the system. A license is not a piece of paper that can be forged — it is a digital object that is either active or inactive.
This makes the "envelope economy" much more complicated. Currently, a builder can tell a client “Pay 5,000 excluding VAT in an envelope, or 6,050 with an invoice". In my system, every PayLats transaction is recorded. There is no "envelope" - there is only a system transaction, which is or is not.
Preventing corruption — not through human will, but through architecture
The combination of all these elements creates a system in which corruption is not prevented by good intentions or strict penalties, but by technical complexity. Bribery - if a civil servant's account receives PayLats from a company participating in a procurement he supervises, it is publicly visible. No whistleblower is needed - the system itself is the whistleblower. Conflict of interest - if a company belonging to a politician's family member receives government orders, it is automatically detected through the register of related parties and transaction flow. Money laundering - if a person's PayLats income does not match their declared economic activity, the anomaly is visible in real time. Tax optimization through transfer pricing - if a Latvian branch of an international company sells services to its parent company in Ireland at an unrealistically low price, the transaction is visible and comparable to market prices.
Political argument
Corruption in Latvia is a constant public pain. Every year, Latvia is among the worst EU countries in the Transparency International index. People feel that the system is unfair, but they feel powerless. The argument for my system is that we do not promise to "fight corruption" (all politicians promise this in every election). We offer a system in which corruption is technically very complex. It is not political will - it is an engineering problem, and we solve it as an engineering problem.
Integrated ecosystem
When you put it all together — PayLats as a payment layer, e-invoices as a transaction layer, smart regulations as a rule layer, and a public registry as a transparency layer — something fundamentally new emerges. Not a "better currency" and not a "better e-government," but an integrated state governance infrastructure where money, laws, and documents are one connected layer that operates automatically, transparently, and verifiably.
Privacy issues for individuals
A system that is too transparent allows the government to track private spending in too much detail. My system does not address this issue because it adapts to the regulations of a particular country. If necessary, it can be made very anonymous or very transparent. The system operator remains an independent institution that provides data to the government only in accordance with the law.
6. Long-term scenario (20–30 years)
If the system is working:
Latvia is gaining a structural financial reserve layer.
Economic continuity is maintained during crises.
Investors perceive the country as a safe platform.
Demographic decline is stabilizing.
Greater budget transparency, less corruption.
As a result:
GDP per capita is approaching the level of the Nordic countries,
the economy is becoming less cyclical,
20. Advantages of programmable money
Automatic demurrage - the code automatically calculates from the balance above the buffer, no bank involvement required.
Dynamic conversion fees - the algorithm responds to demand/flow in all currency directions, preventing panic automatically.
Full transparency - everyone can see the country's balance sheet and verify the emission. No hidden printing.
Programmable taxes - automatic withholding of VAT and PIT at the transaction level.
Verification of physical money - a QR code on a banknote allows anyone to verify the existence of the cover in real time.
Coupon functionality in case of crisis - the ability to programmatically limit purchases by categories and individuals.
20.1. Continuity of payments in crises and in the event of physical infrastructure disruptions
1. Basic principle: a system without “ATM addiction”
During a traditional financial crisis, society's first reaction is:
cash withdrawal,
lines at ATMs,
physical liquidity depletion.
The dual-track monetary architecture prevents this mechanism structurally:
PayLats and SaveLats are digital instruments.
The funds are not “removed from the system” — they continue to exist in the same digital environment.
In case of panic, there is no need to physically move the value.
This significantly reduces the risk of a bank run.
2. Operation even in the event of infrastructure disruptions
The system is designed with multi-layer connectivity.
2.1. Standard mode
Internet connection (mobile / optical).
API access to banks, government systems, and companies.
2.2. Alternative connection channels
In crisis situations (energy shock, communication breakdown, local occupation, etc.):
Satellite communications (e.g. Starlink or equivalent).
Independent mobile nodes with autonomous power supply.
LoRa/mesh type networks for local P2P synchronization.
Local node synchronization with deferred global update.
Settlements can take place:
company ↔︎ company,
company ↔︎ person,
person ↔︎ person, even without real-time access to a central infrastructure, with later synchronization.
3. Geographical distribution of servers and nodes
The basis of system resilience is:
Multi-node architecture.
Data duplication across multiple jurisdictions.
A consensus mechanism that prevents single point control.
Destruction of some servers or even data centers:
does not suspend payments globally,
does not delete account balances,
does not make the system unrecoverable.
This prevents the systemic effect of a single infrastructure failure.
4. P2P payments without an intermediary
In crisis situations, it is especially important:
direct person-to-person transfer of value,
without having to wait for bank opening hours,
without physical money.
Digital identification + cryptographic signing allows:
transfer funds directly between devices,
confirm the transaction even in limited connectivity mode.
This makes economic circulation less dependent on central banking, energy or communications infrastructure.
5. Energy sustainability
System nodes can operate:
on generators,
on batteries,
with solar panels,
in mobile units.
The payment system in such a model becomes similar to an internet protocol rather than a traditional central banking system.
6. Social stability in crises
In crises, the mechanism of societal destabilization is often:
unavailability of banks,
cash shortage,
freezing of wages and invoices.
If the payment system:
continues to work digitally,
maintains access to funds,
does not require queues at ATMs,
then:
panic is decreasing,
social tension is lower,
political destabilization is decreasing.
7. Main conclusion
The dual-track monetary architecture is not just a financial instrument. It is critical infrastructure for economic continuity.
Unlike traditional systems:
it does not depend on the logistics of physical cash,
it does not have one central “off switch”,
It is also capable of operating in conditions of partial infrastructure damage.
In the event of a crisis, the system does not stop — it degrades gradually, but retains functionality.
8. Protection against forced confiscation and robbery
A digital, cryptographically protected payment system fundamentally changes the mechanisms of value appropriation in crisis or occupation situations.
Unlike:
cash,
gold,
physical assets,
digital means:
are not physically located,
cannot be moved without access keys,
cannot be used without authentication in the system.
Even if:
the device is stolen,
physical territory is taken over,
An attempt is being made to force users to surrender access, without system-level identification and authorization tools it is impossible to use.
Important aspects:
Accounts are not anonymous freely transferable “coins” but are tied to authenticated users.
Transaction validation occurs at the network level.
Illegally obtained access data can be blocked and restored.
Result:
Mass robbery becomes technically complex.
Control of physical territory does not mean control of digital assets.
Savings cannot be confiscated by simple physical force.
Mutual settlements between people work even under conditions of occupation.
This significantly increases the economic resilience of society in emergency situations.
21. Possible alternative offers
21.1. Within the EU
21.1.1. “Reformed euro + fiscal discipline” model
Argument against my offer:
There is no need for a parallel currency.
The problem is not in the system, but in political discipline.
The solution is to strengthen budgetary rules at EU level.
Alternative offer:
Stricter rules of the Stability Pact.
Automatic budget deficit limits.
Shows ceiling mechanisms with sanctions.
EU fiscal surveillance with real penalty instruments.
Mandatory structural surplus for countries with growth.
This would be an “internal correction”, not a parallel architecture. This is the simplest and most realistic at the slogan level. There is no indication that the execution will be significantly better than it is now.
21.1.2. EU fiscal federation
The opposite direction – not discipline, but deeper integration.
Argument against my offer:
The debt crisis arises from an incomplete monetary union.
We need a full fiscal union.
Offer:
Joint EU Finance Minister.
Common EU debt instruments (Eurobonds 2.0).
EU taxes (digital, carbon, financial transactions).
Automatic fiscal stabilizers between countries.
A single EU unemployment insurance fund.
This approach says: “not a parallel layer, but deeper centralization.” The European federalists support this. The Latvian government’s Unity and Progressives might also like it.
21.1.3. Digital euro as a crisis tool
Argument against my offer:
There is no need for SaveLats. The digital euro can fulfill that function.
Offer:
ECB digital euro with:
programmable functions
crisis distribution mechanisms
direct payments to citizens
Central Bank Direct Account for Citizens
Automatic monetary stabilizers
This would be a centralized alternative to my decentralized system. I would say this is more of a variant of option 1 with automated discipline.
21.1.4. Free Market Monetary Model
If my competitor were a libertarian market fundamentalist, he might say:
We allow free currency competition.
We are not creating a parallel layer of the state.
Legalize:
stable cryptocurrencies
private payment systems
gold or commodity-backed tokens
His solution: Let the market decide whose money survives. Overall, I have no major objections, as I said, I am for a World in which public, private, fiat, inflationary and deflationary currencies compete freely. My proposal is very similar, only in an institutional framework. Within the EU, even less realistic than my proposal.
21.1.5. Debt restructuring doctrine
A more radical competitor might say:
A debt crisis is inevitable.
There is no need to build a parallel system.
Controlled restructuring mechanisms must be established.
Offer:
An “EU Bankruptcy Protocol” has been prepared in advance.
National debt restructuring mechanism.
Joint liability of bondholders.
Capital control mechanisms during a crisis.
Temporary payment freeze.
That would be a "controlled explosion" approach. I highly doubt that anything like that will even be talked about, because politicians will be very afraid of such an information leak.
21.2. Possible solutions to the global debt crisis
21.2.1. Financial repression 2.0
Artificially low interest rates
Buying bonds
Regulations that force banks to hold government debt
Tolerating inflation at 3–4%
This is the most common path historically.
21.2.2. Moderate inflation model
We assume 4–5% inflation for 10 years
Debt “melts”
Real interest rates are negative
This is a politically simpler path than a parallel architecture.
Fundamental risk: Even if debt temporarily decreases in real terms, the inflationary environment does not change the basic incentives of the system - governments can still borrow relatively “cheaply” in real terms. Most likely, in such circumstances, debt reduction is not used to strengthen fiscal discipline, but as an opportunity to take on new debt. As a result, the debt problem is not solved but postponed to the next cycle.
21.2.3. Productivity shock
Optimistic approach:
Massive investments in AI, energy, automation
Rapid GDP growth
Debt-to-GDP ratio declines through growth
Fundamental risk: Historically, periods of high productivity growth have often been accompanied by even more rapid credit expansion. As growth and fiscal space increase, governments and the private sector have an incentive to borrow even more, based on optimism about future income. This means that the debt-to-GDP ratio may improve temporarily, but the absolute level of debt continues to rise, creating another cycle of instability.
21.2.4. Global debt reset mechanism
Theoretically:
A new Bretton Woods-style agreement
Increasing the role of the SDR
Partial global debt conversion
21.3 What would they say about my model?
Most likely attacks:
Fragments the financial system.
Can cause panic.
Political manipulation of conversion commissions.
May become a target of sanctions.
If it gets big – conflict with the ECB.
Where is my advantage?
Reserve layer before the crisis
A system that works even in the event of a collapse
Monetary redundancy
Decentralized infrastructure
Social stability mechanism
Competitors would mostly offer:
Fix the existing system
Centralize more
Shifting risk to the future
Inflate debt
I offer a structural alternative. Similar to 21.1.4. only in an institutional framework.
22. Libra (Diem) Failure: Causes and Lessons for the PayLats/SaveLats System
22.1. What was Libra?
In 2016, Facebook (later Meta) announced the creation of a global digital currency, Libra. The idea was:
global digital currency;
based on a basket of reserves (USD, EUR, JPY, etc.);
managed in the form of an association;
designed for billions of users across Facebook, WhatsApp and Messenger.
Libra was not a cryptocurrency in the sense of Bitcoin. It was a fully secured reserve system — effectively a global private stablecoin with the ambition of becoming a parallel financial infrastructure.
The project was later renamed Diem and completely closed in 2022.
22.2 Why Libra Failed
22.2.1. Threat to monetary sovereignty
Libra started as:
global unit of account,
with the potential to replace national currencies,
without any state mandate.
Regulators understood one thing: if 2-3 billion people switch to Libra, central banks will lose the monetary transmission mechanism.
States could not allow:
interest rate policy becomes ineffective;
capital flows are getting beyond their control;
the tax base is shifting to private infrastructure.
Libra's mistake: it immediately positioned itself as a global alternative to national currencies.
22.2.2. Fear of systemic risk
The regulators' reasoning was simple:
If a massive Libra conversion occurs during a crisis, reserve managers would be forced to sell government bonds. This could destabilize financial markets. No matter how mathematically high the risk was, it was politically unacceptable.
Libra became:
potential "shadow central bank";
with a turnover of trillions;
without a traditional supervisory structure.
22.2.3. The problem of political trust
Libra was a Facebook project.
Facebook's reputation in 2019 was:
data scandals,
Cambridge Analytica,
political manipulation.
Countries were not ready to entrust a global monetary infrastructure to a company with such a reputation.
22.2.4. Too fast, too ambitious
Libra:
was immediately global,
immediately there was a multi-currency basket,
was immediately a competitor to central banks.
It didn't pilot in one small jurisdiction. It tried to become a global standard in the first step.
22.3. Libra's structural errors
Private operator without a public mandate.
Concentration of reserves in a single legal structure.
A direct challenge to monetary sovereignty.
There was no two-tier architecture — just a stablecoin model.
There was no built-in federation of regulators.
Libra became a geopolitical actor before it had infrastructure. That was a major mistake.
22.4. How PayLats/SaveLats are fundamentally different
22.4.1. No global start
PayLats/SaveLats:
starts as a development bank instrument;
operates within a single jurisdiction;
is positioned as a backup option, not a replacement.
This does not threaten monetary sovereignty on day one.
22.4.2. The State is Separated, but Not Bypassed
Libra tried to bypass countries.
PayLats/SaveLats:
the state cannot print,
but the state is part of the ecosystem,
the government is a user, not an owner.
This creates fiscal discipline, but not a political challenge.
22.4.3. Two-tier architecture prevents systemic risk
Libra was a simple stablecoin.
PayLats/SaveLats:
separates the payment layer from the savings layer;
uses dynamic conversion fees as a shock absorber;
automatically increases friction in case of panic.
Thus, there is no need for ad hoc capital controls.
22.4.4. No risk of reserve fire sale
In the case of Libra, a mass redemption would mean:
forced sale of assets.
In the case of PayLats/SaveLats:
the issue takes place only against the reserve already received;
conversion fees cushion mass movements;
The system is not leveraged.
Pay/SaveLat is full reserve. There is no lending against reserve.
22.4.5. Monetary discipline is a design feature
Libra was a mirror of fiat in digital form.
PayLats/SaveLats:
algorithmically limited emission;
no monetary policy discretion;
there is no interest manipulation.
This means that the system does not become a parallel central bank.
22.5. Would a Libra-type project be possible in 2026?
Yes — but only in three cases:
With a banking license and full supervision.
As a CBDC (state-controlled).
As a national pilot with gradual scaling.
A global private reserve currency without a national mandate is still practically impossible. However, a federated system of national nodes with a common protocol is possible.
This is exactly the direction the world is heading:
CBDC projects,
regulation of stablecoins (MiCA, US bills),
Payment Infrastructure Federation.
22.6. Main lesson
Libra collapsed not for technical reasons, but politically. It became a geopolitical actor before it became infrastructure.
PayLats/SaveLats strategic advantage:
starts locally,
maintains federated supervision,
do not attack the euro,
does not claim global dominance on day one,
but technically capable of growing up to it.
The difference is not in technology. The difference is in the order of implementation. In general, I am for a World where many currencies exist in parallel: inflationary, deflationary, national, private, regional, etc., freely competing with each other for users.
23. Conclusions
Part I of this paper showed that the current inflationary fiat system is mathematically very likely to lead to a debt crisis in the period 2027–2032 (if no more active action is taken by governments). None of the existing instruments—fiscal consolidation, QE, growth, financial repression—can prevent this outcome, because they address the symptoms, not the cause.
Part II offers a fundamentally different approach. PayLats/SaveLats system:
Eliminate the cause - creating money from nothing is no longer possible.
Provides immediate market signals - problems cannot accumulate to burst into one fell swoop.
Separates the payment infrastructure from the political layer - the state bankrupts the payment system.
Limits the consequences of government overspending - a fiscally imprudent government can only ruin public services, but cannot destroy the savings of its citizens.
Rewards savers, not punishes them — SaveLats deflation automatically protects purchasing power.
The countercyclical mechanism is created by design — not by the goodwill of policymakers.
Solves the deflation paradox — a two-tier architecture allows you to simultaneously incentivize spending and reward saving.
Physical money is secure and verifiable — a banknote without a digital backing is worthless.
Capital accumulation in unproductive assets is already a dominant feature of the global economy – the savings bank offers a better solution.
Latvia, as a small, technologically advanced member of the European Union, is an ideal incubator for testing and developing this system — small enough for the risk to be manageable, but real enough for the results to be significant and convincing.
The time to act is now—before the crisis arrives. A system that has been proven in practice will have a huge advantage over theoretical proposals when the current system faces its consequences. This system will not make crises impossible—it will make them manageable and non-systemic.
Notes
At this stage, I deliberately do not delve into the details, the technological side, etc. This can be implemented in the subsequent stages of project development. Approximate scheme:
I won't give detailed budget calculations, as they will depend greatly on the scale, but very roughly the pilot project could cost around 3 million.
| Component | Amount |
|---|---|
| IT | 0.8 – 1.2M |
| Security | 0.2 – 0.4M |
| Legal | 0.2 – 0.5M |
| Team | 0.8 – 1.2M |
| Others | 0.1 – 0.3M |
The system will most likely not be a pure blockchain, but a hybrid, as it will be necessary to ensure a large volume of transactions.
25. Possible questions and answers
I. Basics
Q: What are PayLats and SaveLats?
PayLats is a digital payment instrument for everyday payments. It is denominated in euro, 100% backed by a euro reserve, and convertible to euro at any time. PayLats features a demurrage mechanism — a gentle fee for prolonged idleness of funds, which encourages money to either be spent or transferred to savings.
SaveLats is a savings instrument. SaveLats is available to everyone, not just those who can afford an investment advisor.
Q: What is FRPRL?
Independent Full-Reserve Payment & Reserve Layer (FRPRL) is the entire system architecture: a full-reserve payment and reserve layer that operates independently of the fractional reserve system of commercial banks. The FRPRL includes PayLats (everyday), SaveLats (savings), CPI-indexed issuance, and a dynamic conversion mechanism. The FRPRL is designed as an exportable platform — Monetary System as a Service (MSS). It is not money in the classical sense — at least initially it does not claim to be money. It is a payment and savings instrument that operates alongside the euro, just as the WIR franc has operated alongside the Swiss franc in Switzerland for 90 years. Legal basis: EU E-money Directive and PSD2. Functionally — similar to Revolut or Wise, only with built-in stability mechanisms (demurrage + deflation).
Q: But the state will have so little control?
Yes, and given historical experience, that's good. The FRPRL denationalizes money, but within an institutional framework. The state does not determine how much money is worth (it is determined by the CPI), does not determine who can use it (it is available to everyone), and cannot confiscate or freeze it en masse (100% of the reserve belongs to the user). The state's role is one of supervision, not control — it provides AML/KYC, system auditing, and the legal framework.
History shows that the more the state controls money, the greater the evils that citizens are exposed to. In Parex Bank, the state controlled the process — people lost their savings. In Cyprus, the state controlled the process — deposits were confiscated. In Argentina, the state controls the currency — 100%+ inflation. The FRPRL distinguishes state algorithmic regulation (CPI indexation, automatic deflation, 100% reserve) from political regulation (one minister decides that “today we change the exchange rate”). Hayek’s principle of money denationalization, but with the guarantee of the stability of EU regulation.
Q: Why is this needed if there is already a euro?
The euro is a great currency for international payments and stability. But the euro does not provide two specific services: 1) a mechanism that encourages capital activation (idle money is unproductive); 2) a savings instrument available to everyone. PayLats/SaveLats complements the euro, not replaces it. Just as Revolut complements a bank account, not replaces it.
II. Regulation and legal basis
Q: Would the ECB allow this? Isn't it a parallel currency?
PayLats is not a parallel currency (at least not initially). It is an e-money instrument that operates within the framework of the EU E-Money Directive (2009/110/EC) and the Payment Services Directive (PSD2). PayLats is denominated in euro, 100% backed by euro and convertible into euro. The legal status is the same as Revolut, Wise or any licensed e-money issuer. For example. The Swiss WIR franc has been in operation since 1934 — 90 years. 60,000 companies use it on a daily basis. The Swiss National Bank not only allows it, but has recognized its countercyclical effect.
Q: Why is the Libra comparison wrong?
Libra was a global private currency that planned to replace national currencies in small countries and bypass the monetary policy of central banks. PayLats is a single-country (but not prohibited from using outside of it) additional payment instrument that reinforces the euro, not bypasses it. The difference is like between “Uber replaces all taxis in the world” and “The city of Riga introduces a better bus route”.
III. Demurrage and deflation
Q: Does demurrage punish people for holding money?
No. Demurrage only applies to the amount above the turnover buffer (~1.25× monthly expenses). A pensioner with an 800€ pension and 500€ in the account does not pay demurrage. Demurrage only starts when the account has significantly more than what is needed for daily expenses. And even then — the solution is simple: transfer the excess to SaveLats.
Q: But people will simply bypass demurrage by transferring everything to SaveLats?
That is exactly what the system is designed for. It is not a “bypass” — it is the desired outcome. Demurrage and deflation are two sides of the same system, where each mechanism addresses the criticisms of the other:
Demurrage pushes excess money from daily circulation into SaveLats → money is either spent (economic speed) or saved (SaveLats). Both results are positive. At the same time, deflation in SaveLats compensates for demurrage, giving people a tool with increased purchasing power. Without demurrage — deflation could spread more widely. Without deflation — demurrage would only be a punishment. Together - an elegant cycle.
Q: Deflation is poison! Japan for 30 years!
A classic category mistake. In Japan, deflation affects the entire money supply — wages, prices, credit, everything. SaveLats deflation only affects savings instruments. Daily settlements are made in PayLats, which is designed for maximum stability.
Gold has been deflating since the beginning of humanity. Fixed-rate bonds are deflating against inflation. No economy collapses because people don't use gold for everyday purchases. SaveLats is the same. And no one offers loans to SaveLats — loans are issued in euros.
PayLats and savings notes can be issued by anyone for their value, thus deflationary shocks are excluded, because if a PayLats deficit occurs, anyone will be able to issue it through the Central Bank in the required amount.
Q: Do workers subsidize those who hold SaveLats?
The other way around. In the current system, inflation taxes all savings — 2–3% per year. The rich flee to real estate, stocks, gold. The poor lose. In the PayLats/SaveLats system, everyone has access to a deflationary tool — not just those who can afford an investment advisor. That's democratization, not subsidization.
IV. Technical issues
Q: Where will the billions for the reserve come from?
Nobody asks for billions on the first day. The system starts with a pilot project — 10,000 users, average balance €500 = €5 million in reserve. In the first year, maybe €50 million. After 5 years, maybe €500 million. Growth is organic. The reserve comes from the user himself — when Peter deposits €1,000, that €1,000 is booked in the reserve. Money doesn't just appear out of thin air.
Q: 14% conversion fee in a crisis — that's a bail-in!
No, it's the opposite. In Parex bank people lost money — 0% back for weeks. In Cyprus people were forced to lose part of their deposits irretrievably. PayLats: 100% always available. Dynamic commission (0.5%—14%) is a speed control, not a confiscation. If you wait a week — the commission is 0.5%. 14% is a theoretical maximum that acts as a deterrent — that's why it will never be reached.
Q: How does CPI-indexed issuance work?
Under normal circumstances: 1 PayLats = 1 EUR. When euro inflation exceeds the threshold, indexation is triggered: new issue price = previous × (1 + monthly HICP change). Existing holders automatically benefit because their PayLats are now worth more in euro terms.
SaveLats: CPI indexation. In a crisis scenario (25% inflation), SaveLats maintains purchasing power.
The reserve math works: new buyers pay a higher euro price, which covers the increase in value for existing holders. Demurrage and conversion fees create an additional buffer. A stress test with 4 scenarios (up to 40% inflation) confirms that the reserve always exceeds the liabilities.
Q: What about physical money?
Physical money is a secondary element in later stages, not the core of the system. Primarily, the FRPRL is a digital system. If and when physical money is introduced: it is linked to a digital account (for AML), each banknote is traceable via a serial number. This is better than euro cash, which is completely anonymous.
V. GDP and economic effects
Q: +1.5% GDP from a payment instrument? Where is the evidence?
The model is conservative: in normal years, PayLats adds +0.5% (from capital redistribution, demurrage rate and reduced commissions). The main value is stability in crises: when others lose -5%, Latvia with PayLats loses -1% or continues to grow. On average over a 20-year cycle with 2–3 crises, this gives ~+1.5% per year — from avoided losses, not from “turbo”.
Empirical data: Stodder and Lietaer (2016) published a study on the WIR franc: WIR turnover increases in recessions and decreases in booms – a counter-cyclical effect that stabilizes the Swiss SME sector. 90 years of data.
Q: No CBDC uses demurrage or deflation. Does the author know something that the ECB doesn’t?
The goal of CBDC is to digitize the existing system (conservative). The goal of FRPRL is to change the behavior of money (innovative). They solve different problems. Moreover, the ECB itself has published studies on a possible demurrage function of the digital euro (“tiered remuneration” - negative interest rate above a threshold). They are discussing it academically, but politically they do not want to be the first. Latvia can be the first. Just like Estonia was the first with e-residency.
VI. Monetary System as a Service (MSS)
Q: What is MSS and why can Latvia offer it?
MSS (Monetary System as a Service) is a FRPRL as an exportable platform for unstable countries. ~3.5 billion people live in countries with unstable currencies. Their current options: 1) dollarization (lose monetary sovereignty), 2) IMF programs (lose monetary and fiscal independence), 3) crypto chaos (lose control), 4) status quo (lose everything).
FRPRL is the fifth option: a licensed, customized, federated, CPI-indexed payment system that preserves national sovereignty but gives citizens purchasing power protection. No dollarization. No crypto. No IMF (although it could operate in parallel). There is a technological service with local control.
Latvia can offer this because: 1) it must have a tested system (pilot, the first in Latvia), 2) an EU regulatory framework, 3) a 70-language education model that provides Latvia with personnel in the language of any client.
Q: What is the synergy of the three pillars?
The FRPRL is part of a larger sovereign infrastructure export strategy with three pillars:
1) FRPRL — monetary stability. Without stable money, nothing works.
2) The 70-language model — diplomatic cadres, cultural bridges, localization. Without language, you cannot sell, trust, or manage.
3) Security – physical infrastructure protection. Without security, a system can be destroyed overnight.
Each pillar makes the others possible. Without 70 languages, FRPRL is not marketable. Without security, the system can be physically destroyed. Without FRPRL, languages and security are just a low-margin consulting business. Together, they form a unique package that no one else in the world currently offers.
Q: Which markets are the target markets?
Tier 1 — Acute need + high growth: Nigeria, Pakistan, Egypt, Bangladesh, Ethiopia. ~1.35 billion people in 2050. Currencies collapsed or collapsing. First customers.
Tier 2 — High growth: Vietnam, Indonesia, Philippines, Turkey, Mexico. ~830M. Better infrastructure, but historical instability. Indonesia will be the 4th largest economy in 2050 (PwC).
Tier 3 — Extreme instability: Argentina, Venezuela, Lebanon, Zimbabwe, Sudan. ~200M. Hyperinflation already today. Need MSS urgently.
Tier 4 — Strategic partners: India, Brazil, DR Congo, Tanzania. ~2.25 billion 2050. India and Brazil are too big to be “clients” — they are partners (UPI, PIX). DR Congo and Tanzania — greenfield.
Total: ~3.5 billion today, ~4.6 billion in 2050. Almost half the world. Latvia's 70 languages model covers all of these countries.
Q: What is the revenue model?
License fee + % of demurrage + conversion fees + maintenance + training. If in 10 countries with an average of 50M users (500M total), even 0.1% commission on transactions generates hundreds of millions of EUR per year. The example of India's UPI: 13 billion transactions per month shows the scale that digital payment systems can achieve.
VII. Next steps
Q: There's no pilot project. There's no regulator. There's nothing.
Everything starts small. That's how it always works. Bitcoin started with a 9-page white paper from an anonymous author. WIR started with a cooperative of 16 entrepreneurs during a crisis. Estonian e-residency started with a concept without precedent. M-Pesa started with a single operator in Kenya.
Specific next steps:
1. Regulatory consultation (Bank of Latvia, FCMC). 2. Academic review (SSE Riga, University of Latvia). 3. Technical prototype with 100 users. 4. Pilot project with 1,000–10,000 users. 5. Gradual scaling. Each step includes a point of departure if the results are not sufficient.
Q: Why would commercial banks tolerate a system that reduces their revenue?
Commercial banks won’t agree. This isn’t an argument against the system — it’s an argument for it. Uber never got the taxis’ approval. Netflix didn’t get Blockbuster’s blessing. Disruptive innovations don’t come with competitors’ permission. SIFRPR works alongside commercial banks, not replaces them — mortgages, corporate loans, and most money stays in banks.
Q: Why is public revenue better than private?
Currently, Latvian residents pay 200–400 million euros in commissions to commercial banks annually. Most of it flows to Sweden and Scandinavia. FRPRL demurrage revenue (much smaller) remains in Latvia and ensures the operation of the system. Full transparency in real time — every cent is visible. Try to find out how much Swedbank earns from Latvia.
Appendix A: Deflationary Currencies: From Gold to Digital Standard
Introduction
Discussions about deflationary currencies usually provoke instinctive resistance: deflation is perceived as something dangerous, economically paralyzing and socially destructive. However, historically, humanity has lived for a very long time precisely under the conditions of deflationary or quasi-deflationary monetary systems. In this section, I explain step by step:
why did money come into existence in the first place;
why the gold standard prevailed for a long time;
why did you refuse it?
what exactly is inflationary money and what are its structural problems;
how can the benefits of the gold standard be restored without physical gold;
why cryptocurrency is a tool here, not a goal;
what a practical transition would look like;
What are the disadvantages of a deflationary currency and how can they be mitigated?
5.1. How money came into being
5.1.1 Barter and its problems
Initially, people exchanged goods directly – grain for livestock, tools for services. This system had a fundamental problem: the double coincidence of needs. If I have grain and need shoes, but the shoemaker doesn’t need grain, the transaction doesn’t take place.
5.1.2. Money as an intermediary
Money emerged as a universal medium of exchange. Societies spontaneously chose things that had the following properties:
they were rare;
easily divisible;
did not deteriorate;
widely accepted.
At different times it was salt, shells, silver, but gold turned out to be the most effective.
5.2. Why gold became the basis of money
5.2.1. Natural properties of gold
Gold:
is very rare;
wears out slowly;
easy to check;
does not depend on the state's promise.
Important: Gold did not become money because someone "designated it." It became money because people trusted it.
5.2.2. Gold standard
The gold standard means:
each monetary unit is tied to a certain amount of gold;
A country cannot issue more money than it has in gold reserves.
Result:
in the long term, prices tend to fall (deflation);
money retains value;
savings are not destroyed by inflation.
In the 19th century and early 20th century, it ensured very rapid industrial development.
5.3. Why the gold standard was abandoned
5.3.1. War financing (including the Cold War and the arms race)
The biggest reason was wars. War is extremely expensive, and the gold standard:
does not allow for a rapid increase in the money supply;
does not allow financing of the deficit without coverage.
Countries began:
stop the gold exchange;
print more banknotes;
to promise that "after the war everything will return".
Usually did not return.
5.3.2. The Great Depression
In the 1930s, deflation was thought to be the main cause of the depression. In reality, the problem was:
collapse of the banking system;
credit collapse;
politically incorrect decisions.
I.e. structural problems. However, the gold standard was declared the culprit.
5.3.3. The victory of inflationary money
Inflationary fiat money means:
Fiat money, which has value because the government says it has value. It is not backed by gold or any other physical asset. In 1971, the US completely abandoned gold backing. Since then, the entire world has been living in an inflationary fiat system.
5.4. Structural problems of the inflationary system
5.4.1. Chronic inflation
In the Fiat system:
the amount of money almost always increases;
inflation becomes the norm;
savings are slowly being destroyed.
5.4.2. Debt explosion
Inflation makes debt politically acceptable:
the state can borrow;
debt is shrinking in real terms;
future generations pay the price.
5.4.3. Dominance of the financial sector
Creating money through credit leads to:
asset price bubbles;
inequalities;
"shadow banking" systems.
5.5. Deflationary currency: what exactly is it?
A deflationary currency is a currency that:
the total supply is fixed or very tightly constrained;
value increases in the long term;
an increase in purchasing power replaces inflation.
Important: Deflation in itself is not bad. We see it all the time in technology – computers are getting cheaper and better.
5.6 How to restore the gold standard without gold
5.6.1. The problem with physical gold
Physical gold has disadvantages:
it is difficult to move;
it is difficult to audit on a global scale.
5.6.2. Digital deficit
Cryptocurrency (such as Bitcoin) introduces a new concept:
Digital deficit – a mathematically guaranteed rarity.
Even if you know nothing about cryptography, the gist is simple:
the total number of units is known in advance;
no one can arbitrarily increase it;
the system cannot be controlled by a single government.
This property functionally replaces gold.
5.7. Cryptocurrency without technical details
Cryptocurrency is not:
action;
company;
bank.
It is:
public accounting;
shared between many computers;
without central control.
For the user:
no need to know how it works internally;
just as you don't need to know how TCP/IP works to use the Internet.
5.8. Credit in a deflationary system
The most common argument against deflation is: “no one will borrow.” This is only partially true in the traditional interest-based lending model.
In a deflationary system:
interest rates naturally approach zero;
loans are based on:
profit sharing;
interest on income;
participation in the project outcome.
This reduces:
speculative lending;
real estate bubbles;
"printing money" through bank balance sheets.
5.9. Why a country's competitiveness may fall without adjustments
In a deflationary environment without contract flexibility:
wages are becoming too high in real terms;
exports lose competitiveness;
companies are starting to relocate production.
With automatic adjustments at the contract level:
costs adapt to productivity;
no internal devaluation is necessary;
the level of social tension is lower.
6. Two-tier currency system
6.1 Why one currency can't do everything
Historically, one money served two contradictory functions:
means of payment;
a tool for storing value.
In the Fiat system, these functions conflict:
to stimulate the economy, money must be devalued;
To maintain value, money must be made scarce.
The solution is to divide the functions.
6.2. Payment currency
The payment currency must be:
fast;
flexible;
deliberately inflationary.
Its task:
ensure turnover;
encourage spending;
to absorb shocks.
6.3. Savings currency
The currency of the savings must be:
deflationary;
with a fixed offer;
politically uncontrollable.
Its task:
preserve value;
serve as a long-term measure;
discipline fiscal policy.
7. Inflation adjustments as a cornerstone of the system
7.1 Why contract automation is a must
Without corrections:
deflation destroys the labor market;
inflation destroys savings;
the state is forced to constantly intervene.
With corrections:
the system becomes self-regulating;
political tension decreases;
the risk of populism decreases.
7.2. Where adjustments should be made first
Public sector salaries
Public procurement
Long-term lease agreements
Energy contracts
Credit agreements
8. Transition risk and why it is manageable
8.1. Why a sudden transition is unacceptable
A rapid transition would result in:
debt deflation spiral;
bank insolvency;
social shock.
8.2. Phase-in schedule
1-3 years: legal basis and normalization of corrections
3–7 years: parallel currency use
7–15 years: predominance of savings in deflationary currency
9. The most common myths
14.1. “Deflation kills the economy”
No. It only kills systems of excessive debt.
10.2. “Cryptocurrency is not real money”
Money is always a social contract. A mathematically limited supply is a stronger promise than a political one.
11.3. “The state will lose control”
On the contrary, the country will gain discipline.
12. Why the fiat system INITIALLY worked
12.1. Fiat as a technological accelerator
It is important to understand: fiat money was not a mistake in its original form. It was a solution for a specific historical moment.
mid-century:
the world needed to rebuild its infrastructure;
capital was physically destroyed;
productivity increased rapidly;
societies were young and demographically growing.
Under these circumstances:
credit accelerates growth;
inflation masks errors;
the debt is manageable.
The Fiat system acted here as a lubricant, not as a structural support.
12.2 When fiat turned into addiction
The problem started when:
growth slowed down;
societies are aging;
the political system became accustomed to deficits;
the financial sector became dominant.
Fiat has gone from being a tool to a necessity, without which the system no longer functions. In general, countries with large reserves of minerals (Saudi Arabia, Norway) or high discipline (Singapore, Switzerland) also operate quite successfully with inflationary currencies. For them, the implementation of my system would reduce flexibility. But these are rare exceptions.
In Latvia, in the early 1990s, with the SDR peg (a basket of currencies until the introduction of the euro), the exchange rate was also very stable and the budget was not patched up by printing money. The 2008 crisis was fiscal, not monetary. The lats remained stable. 20–25% of all money in the economy was covered by reserves (M0 fully covered).
13. Shadow banking and why deflation is being suppressed
13.1. What is shadow banking?
Shadow banking is:
lending outside traditional banks;
repo markets;
structured products;
off-balance-sheet liabilities.
This system arose as a reaction to:
regulation;
capital requirements;
low interest environment.
13.2 Why deflation is an existential threat here
Deflation:
increases real debt;
makes leverage deadly;
causes forced liquidations.
Therefore, the financial system:
structurally resistant to deflation;
politically it is demonized;
it is monetarily oppressed.
14. Monetary transmission and why it is weak in small countries
14.1 What does the ECB actually control?
The ECB directly controls:
short-term interest;
liquidity in the banking system.
It does not control:
wage dynamics;
contract structure;
capital distribution.
14.2. Why is transmission weak in Latvia?
Reasons:
shallow capital market;
high dominance of foreign banks;
inflexible contracts (no automatic adjustments to inflation or deflation);
low financial autonomy.
Inflation adjustments amplify transmission.
15. Contract culture as the basis of the monetary system
15.1 Why automation is not populism
Automatic corrections:
reduces political arbitrariness;
increases predictability;
allows you to model risks.
Populism arises precisely where there is no automation.
15.2. Why they are not currently used
Legal inertia
Fear of precedent
Weak actuarial thinking
Political short-term thinking
16. Deflationary currency and public governance
16.1. Fiscal discipline
Deflationary hoard currency:
limits the deficit;
makes hidden inflation impossible;
forces you to prioritize expenses.
16.2. Pensions and long-term liabilities
Deflationary savings currency is:
ideal for retirement capital;
suitable for reserve funds;
stabilizes the intergenerational contract.
17. Where the model can break
17.1. If the transition is too rapid
Consequences:
banking crisis;
debt deflation;
social shock.
17.2. If contracts are not arranged
Consequences:
loss of competitiveness;
mass unemployment;
political resistance.
17.3. If the state tries to manipulate
Consequences:
loss of trust;
capital outflow;
system collapse.
18. Conclusion
Deflationary currency is not an ideology. It is:
reaction to the limits of the fiat system;
an attempt to restore the value of time in money;
a tool for long-term thinking.
Main conclusion:
If money becomes a measure again, not a political instrument, society becomes more stable, not poorer. A deflationary currency is not an end in itself. It is a tool to:
restore confidence in money;
reduce debt dominance;
reorient the economy towards productivity, not credit.
The main conclusion: If the country fixes the contracts first, a deflationary currency becomes not dangerous, but natural.
A deflationary currency is not a return to the past. It is:
an attempt to restore confidence in money;
reduce debt dependency;
give people long-term stability.
Prolonged crises cannot be solved by printing or not printing money. Prolonged crises are a sign of systemic problems. Short-term shocks at the family, business and national levels must be balanced with savings made in good years.
E.g. USA 1) USA WAS ORIGINALLY A MULTI-CURRENCY COUNTRY (this is often forgotten)
In the 18th and early 19th centuries, the United States was not a “one dollar” country in the sense we understand it today.
In actual circulation were:
gold and silver coins (bimetallism),
foreign currencies (especially the Spanish dollar),
state bank notes,
private bank notes,
bills of exchange, IOUs, local units of account.
In fact, it was a multi-currency ecosystem. And it worked, but with high “friction.”
2) PROBLEM #1 — TRANSACTION CHAOS, not a “bad idea”
The problem with the multi-currency US was not inflation or deflation, but:
each banknote had a different risk,
each bank has a different reputation,
rates varied from city to city,
counterfeits were widespread,
information traveled slowly.
Therefore:
traders paid a “risk discount”,
a uniform price practically did not exist in the country,
the credit was fragmented.
This is NOT an argument against the multi-currency model as such - it is an argument against an uncoordinated multi-currency environment without technology.
3) PROBLEM #2 - CIVIL WAR (the turning point)
The Civil War (1861–1865) was a turning point.
The US government needed to:
quickly finance the war,
to issue debt,
to collect taxes,
to force acceptance throughout the territory.
Solution:
Greenbacks (federally issued fiat money),
Legal Tender Act - Federal money became the legal tender.
Multi-currency voluntariness was incompatible with financing the war.
4) PROBLEM #3 — FEDERAL GOVERNMENT vs. STATES
After the war, the United States chose:
centralize monetary power
reduce the influence of state banks
make the federal government a “money center”
National Banking Acts (1863–1864):
introduced the federal banking system,
imposed a tax on state bank notes (10%),
practically destroyed the circulation of private banknotes.
It was a political decision, not a technological necessity.
5) PROBLEM #4 - INDUSTRIALIZATION AND NATIONAL MARKETS
At the end of the 19th century, the USA became:
continental market,
by railways,
mass production,
uniform prices.
Single currency:
reduced transaction costs,
allowed the creation of national corporations,
facilitated capital mobility.
At this stage, the advantages of a single currency > the flexibility of multicurrency.
6) PROBLEM #5 — 20th century global hegemony
When did the US become a global superpower?
1913: Federal Reserve — central monetary policy,
1944: Bretton Woods — dollar as world currency,
after 1971: complete fiat + debt dominance.
Here is where the final fracture occurred:
The dollar became a tool with which the US exported deficits and power. The multi-currency model was no longer profitable here.
7) WHY THESE REASONS NO LONGER WORK TODAY
And here is my trump card.
What has changed:
digital payments (no chaos of banknotes),
real-time rates,
global information,
automated risk mechanisms,
programmable commissions (like in my model).
What required centralization in 1860 can be addressed by protocol in 2026.
8) Key takeaway
The US abandoned the multi-currency model not because it was wrong, but because at a particular historical moment, centralization provided a military, fiscal, and political advantage.
My offer:
does not finance war,
does not seek to monopolize,
does not impose,
lives alongside other currencies,
uses technology, not coercion.
The US abandoned the multi-currency model because in the 19th century, without a digital infrastructure, it created chaos and hindered the financing of war and industrialization. Today, these problems can be solved with technology, not monopoly.
Appendix B. How money is currently issued
First level: central bank (base money, M0)
The central bank creates what is called "base money" or the monetary base. It consists of two parts: physical cash (banknotes and coins) and the reserves of commercial banks at the central bank. This is the only money that exists in the "direct" sense - it is the central bank's obligation to its holder.
The central bank creates base money through several mechanisms. Traditionally, by buying government bonds in the open market (open market operations). Since 2008, through quantitative easing (QE), which is essentially the same mechanism on a huge scale: the central bank creates new dollars/euro digitally and buys financial assets from commercial banks for them. The Federal Reserve created about $4.8 trillion in this way in 2020-2021. The ECB created about €2.5 trillion in a similar period. These figures are historically unprecedented.
It is important to understand that the central bank creates this money out of thin air. There is no collateral, no gold, no physical asset behind it. There is only the "promise" of the central bank that this money will be accepted for payment of taxes and that it will maintain relative purchasing power. This promise depends entirely on the credibility of the institution, not on physical guarantees.
Second level: commercial banks (credit money, M1-M2)
This is the level that most people don't understand and that creates most of the money in circulation. Commercial banks create money through lending, using fractional reserve banking.
The mechanics are as follows: when a bank issues a loan, for example, a mortgage loan of 200,000 euros, it does not lend someone else's deposit. It literally creates a new 200,000 euro by including it in the borrower's account. An asset (loan - the borrower's debt to the bank) and a liability (deposit - the bank's debt to the borrower) appear on the bank's balance sheet. Money arises from an accounting entry. The Bank of England confirmed this directly and unambiguously in its 2014 educational document "Money Creation in the Modern Economy", rejecting the popular myth that banks lend deposits.
In the Eurosystem, credit money created by commercial banks accounts for about 90–95% of the total money supply. Central bank base money is only 5–10%. This means that most of the money in the modern economy is created by private, profit-making institutions, not the state. And this creation is procyclical — during booms, banks lend aggressively (creating more money, reinforcing the bubble), but during recessions they reduce lending (reducing the amount of money exactly when the economy needs it most).
The fractional reserve ratio theoretically limits this process — a bank is only allowed to lend a certain portion of its deposits. But in practice, this restriction has become almost meaningless. In March 2020, the US Federal Reserve abolished the minimum reserve requirement completely — reducing it to 0%. In the Eurosystem, the minimum reserve requirement is 1%. This means that a commercial bank can theoretically create up to €100 of credit money for every €1 of central bank reserves. In practice, this is limited by capital adequacy requirements (Basel III), but they are also much more flexible than the public thinks.
Third level: shadow banking system (financial instruments, M3+)
This is the least understood and potentially most dangerous level. Outside the traditional banking system, a vast ecosystem of "shadow banking" operates, creating money-like instruments without banking regulation.
This level includes several mechanisms. First, securitization - a bank issues mortgage loans, packages them into securities (mortgage-backed securities - MBS) and sells them to investors. The bank uses the money received to issue new loans. Theoretically, the same dollar can be "recycled" indefinitely, each time creating a new financial instrument. It was this mechanism that was at the heart of the 2008 financial crisis.
Second, the repo market (repurchase agreements) - financial institutions borrow in the short term, using securities as collateral, and these loans function as money in the financial system. The repo market volume is approximately 4-5 trillion dollars per day in the US alone.
Third, derivatives—futures, options, swaps—have a total notional value of over $600 trillion, about 6 times the world’s GDP. While notional value is not the same as actual risk exposure, these instruments create interdependencies that can cause cascading effects in the event of a systemic crisis.
Fourth, money market funds — which take money from investors and make short-term loans to companies. Investors see their investment as "almost money" — as safe as a bank deposit — but the fund has neither a banking license nor a deposit guarantee. In 2008, when the Reserve Primary Fund "broke the buck" (its share value fell below $1), a panic broke out that nearly destroyed the entire global short-term lending market.
How these three levels interact in crises
In normal times, the three levels work in harmony — the central bank provides the base, commercial banks "reinforce" it through lending, and the shadow banking system further expands the financial volume. But in times of crisis, the chain begins to unravel in the opposite direction.
Panic begins in the shadow banking system - investors try to withdraw money from funds and sell securities. But there are no buyers, because everyone is trying to sell at the same time. This creates a liquidity crisis in the shadow system. The crisis spills over to commercial banks - they hold shadow system securities on their balance sheets, and their decline in value reduces banks' capital. Banks stop lending and start demanding repayment of loans - credit money begins to disappear from the economy. The central bank is forced to intervene as a "lender of last resort" - printing trillions of new base money to replace the disappeared credit money and liquidity of the shadow system. In effect, the state takes over the losses of the private system.
That is exactly what happened in 2008-2009 and will happen again in 2020. In both cases, central banks were forced to create historically unprecedented amounts of base money to prevent the system from collapsing. And in both cases, the consequences of this money creation—inflation, asset bubbles, rising inequality—fell on society, not on the institutions that created the risk.
Why is my system fundamentally different?
In my architecture, none of these three levels exist in their traditional form.
First, there is no central bank issuance "out of thin air" - each PayLats is issued against real collateral. Second, there is no creation of fractional reserve credit money - because PayLats are fully collateralized, a bank cannot "multiply" it through lending. If a bank wants to lend PayLats, it must lend its own or someone else's issued PayLats, rather than creating new ones from an accounting entry. Third, the "money creation" of the shadow banking system becomes meaningless, because the collateral of PayLats is physically verifiable and cannot be "recycled" through securitization - the gold or currency in the collateral is either there or it is not.
As a result, my system compresses the three-level pyramid into one level: direct, secured issuance. Any market participant can issue new money through the Central Bank against collateral. There are no "amplifiers" that multiply money, and there are no "shadow" systems that create pseudo-liquidity. This makes the system fundamentally simpler, more transparent, and more resilient.
How did it get to this point historically?
Level 1: Beginning of partial reserves - goldsmiths, 1640s–1660s
London goldsmiths were craftsmen who made gold jewelry, and they also offered gold storage services in their safes. People brought in gold, received a receipt, and could pay for it at the market — no need to run around for gold every time. That's how the first banknotes were born.
The turning point came in 1640. King Charles I confiscated the private gold reserves stored in the Tower of London vaults, causing alarm about the safekeeping of valuables. People began to trust private goldsmiths more than the state—an irony that repeats itself throughout history.
Then the gold miners did something ingenious and questionable. They noticed that all depositors never came for their gold at the same time. If there were 1,000 gold coins in a safe, but only 50 came in and out each day — why not lend out the other 950 for interest? This process transformed the gold miners from passive gold keepers who charged a fee for their safekeeping to interest-paying and interest-earning banks. Thus the fractional reserve banking system was born.
But they didn't rest on their laurels. Soon the gold miners were issuing more receipts than they had gold. The gold miners used their role to create paper money with notes and bills above the level of deposits, thus introducing a fractional banking system. If you have 1,000 coins in your wallet, but you've issued receipts for 5,000 — you've created money out of nothing. Until everyone comes to ask for it back at the same time — no one notices.
Importantly, no one allowed them to do it. There was no law that said: "you can lend more than you have." There was also no law that forbade it. They just started doing it because it was profitable, and no one understood what was happening. When people understood and bank runs began, the solution was not to ban the practice - but to legalize it by creating a central bank as a safety net. These early financial crises led to the creation of central banks. The Swedish Riksbank was the world's first central bank, established in 1668. The Bank of England followed in 1694.
So the logic was this: private individuals started cheating → crises arose → the solution was not to stop cheating, but to institutionalize it by creating a central bank that guaranteed the system. This pattern repeats itself at each subsequent level.
Formalization of fractional reserves: 18th–19th centuries
When central banks were created, they formalized what the gold diggers were doing illegally. Commercial banks were given official permission to lend out more than they had deposited—provided they held a certain percentage of reserves. Initially, these reserves were significant—20% to 30% or more. But over time, they were consistently reduced.
The gold standard (formally in place from ~1870 to 1971) limited the system—banknotes were theoretically convertible into gold, which limited how much money the central bank could create. But commercial banks were already in full swing creating credit money above this limit. The crash of 1929 was precisely the failure of this system—a huge credit expansion created a stock market bubble, and when the bubble burst, a bank run ensued because banks had no reserves to pay depositors.
The answer to the 1929 crash was not to reduce the banks' ability to create money — but to increase government guarantees. In 1933, the FDIC (Federal Deposit Insurance Corporation) was created — the government now guaranteed deposits up to a certain amount. This completely eliminated the risk of a bank run for small depositors, which in turn allowed banks to behave even more aggressively. This is a classic example of moral hazard — insuring against consequences makes consequences more likely.
Level 2: Complete gold divestment - 1970-1999
From the Great Depression until the 1970s, the system was relatively stable because of strict regulation—the Glass-Steagall Act (1933) separated commercial banks from investment banks, Regulation Q limited the interest rates that banks could pay on deposits, and the gold standard (until 1971) constrained the central bank. This period is often called the "golden age" of the financial system—paradoxically, not because of the gold, but because of the regulation.
Then the dismantling began. In 1971, Nixon abolished the convertibility of the dollar into gold — now the central bank had no physical limit on money creation. In 1980-1982, the Depository Institutions Deregulation and Monetary Control Act and the Garn-St Germain Act repealed Regulation Q and allowed savings and loans to make high-risk investments. The result — the S&L crisis, which cost taxpayers ~160 billion dollars.
In 1999, the Gramm-Leach-Bliley Act eliminated the Glass-Steagall distinction between commercial banks and investment banks. Now the same institution can accept your deposits and speculate in derivatives. It was the last hurdle before the 2008 crash.
Level 3: Shadow Banking System – 1970s–Present
The modern shadow banking system originated in many ways in the government sector. Securitization was first carried out by government-sponsored institutions—the FHLB system (1932), Fannie Mae (1938), and Freddie Mac (1970) of the Federal Reserve Bank of New York. Initially, they simply sold government-backed mortgage-backed securities. But in the 1980s, the private sector took over the model and began securitizing anything —auto loans, credit card debt, student loans.
The commercial paper market became an increasingly popular method of borrowing outside the traditional banking system in the 1960s and 1970s. In the 1980s, banking regulators interpreted Glass-Steagall to allow bank holding companies to conduct these activities through their subsidiaries.
In the late 1980s, another element of the shadow banking empire was introduced: the Basel Accords. They lowered capital requirements for banks, freeing up capital for more speculative activities. Basel I paradoxically encouraged securitization, as it was more profitable for banks to convert loans into securities (with a lower risk weight) than to keep them on their balance sheets.
By early 2007, the total assets of asset-backed commercial paper programs, structured investment vehicles, auction-rate securities, and other instruments were about $2.2 trillion. Assets financed through overnight repos grew to $2.5 trillion. Assets held by hedge funds grew to about $1.8 trillion. Altogether, the shadow banking system surpassed the traditional banking system.
Summary: Escalation Logic
Each level emerged as a circumvention of the previous restrictions, and each was "legalized" after the crisis, rather than eliminated:
Gold miners started lending foreign gold → bank runs → solution: central bank (not ban). Commercial banks over-lent → 1929 crash → solution: deposit insurance (not restrictions). Commercial banks circumvented regulation → S&L crisis → solution: even less regulation (not more). Shadow banks created unsecured pseudo-liquidity → 2008 crash → solution: central bank prints trillions (not liquidate the shadow system).
In my system, this escalation is not possible because the foundation is different — each PayLats is secured, and the issuance is decentralized. There is no "guardian" to fool, because there is no monopoly on issuance. There are no fractional reserves to reduce. There is no balance sheet from which assets can be moved "into the shadows." The system is simply too transparent for this escalation logic to work.
Banks' ability to produce money is almost unlimited
How it works in practice
Imagine you're starting a bank today. You need some initial capital—let's say 10 million euros—to meet capital adequacy requirements. You get a license. And now the magic happens.
A person comes to you and asks for a mortgage loan of 200,000 euros. You don't go to your safe, take out 200,000 from there and give it to him. You simply open your computer and enter 200,000 into his account. This 200,000 did not exist a second ago. You just created it with the push of a button. The bank's balance sheet shows an asset (loan - the borrower's obligation to repay you) and a liability (deposit - your obligation to pay him). The balance sheet is in balance, everything looks correct. But the amount of money in the economy has just increased by 200,000.
The borrower transfers that 200,000 to the seller at another bank. That bank now sees a new deposit of 200,000. And that bank can issue a new loan, for example, 180,000. And a third bank — another 162,000. And so on. From your original 200,000, which was created from nothing, about 2 million new money is created in the system. This is called the money multiplier.
How much can you create?
Theoretically, it is limited by two mechanisms. First, the reserve requirement — what percentage of deposits a bank must keep at the central bank. But as we have already said — in the US it has been 0% since March 2020. In the Eurosystem — 1%. At a 1% reserve requirement, the theoretical multiplier is 100x. This means that for every "real" euro in the central bank's reserves, the system can create up to 100 euros of credit money.
Second, Basel capital requirements — a bank cannot exceed a certain leverage ratio. Basel III requires about 4.5% of Tier 1 capital to risk-weighted assets. But — and here’s the trick — not all assets are weighted equally. A government bond has a risk weight of 0%. A low-LTV (loan-to-value) mortgage has a risk weight of 35%. This means that a bank can hold a huge portfolio of government bonds without any capital requirement. In practice, a large bank with $50 billion in capital can control assets worth a trillion or more.
Who benefits from this system?
Here's the most cynical part. The bank creates money out of nothing and charges interest on it. Think about it - you literally type a number into a computer, and then charge 3-5% per year on that number for 30 years. On a $200,000 mortgage at 4% for 30 years, the borrower pays a total of about $344,000 - $144,000 of which is interest. For money that was created with the push of a button.
The global banking system made an estimated $1.2 trillion in net profits in 2024. Most of that profit is interest on the money the banks themselves created. There is no other industry in human history that has been allowed to create the product it sells out of nothing.
Why is this allowed?
The official argument is this: the economy needs credit to grow. If banks could only lend what they have deposited, the amount of credit would be too small and economic growth would be too slow. The fractional reserve system "inflates" the money supply to match the needs of the economy.
There is some truth to this argument—but it is a truth that is used to justify enormous privilege. Because the question is not “does the economy need more money”—the question is “who should have the right to create it and who benefits from it.” The answer right now is private, for-profit corporations whose shareholders benefit from the privilege of creating money, but whose risks are guaranteed by taxpayers (through deposit insurance and central bank bailouts).
How will this compare to my system?
In my system, no one can create money from nothing — not a bank, not a government, not a central bank. Each PayLat requires real collateral. If a bank wants to “lend” PayLats, it must lend PayLats that have been issued by someone else, not create new ones from an accounting record. The bank can still act as an intermediary—accept deposits of PayLats and lend them out—but it cannot multiply them. This is a fundamental difference: the bank goes from being a money creator to being a money intermediary.
The consequences of such a system
The entire system is built on debt. Every dollar, every euro is created as credit — with interest. But interest is not created with the loan. If there is 1,000 euros in the system, created as a loan at a 5% rate, then 1,050 must be returned after a year. But that 50 euros does not exist anywhere — it has not been created yet. The only way to pay interest is to create more debt. Each new debt requires even more interest, which requires even more debt. It is an exponential function, and exponential functions always end in collapse — the only question is when.
Global debt was about $87 trillion in 2000. $200 trillion in 2010. Over $315 trillion in 2024. It’s growing faster than GDP, which means the ratio of debt to the economy’s ability to service it is consistently getting worse. There is no scenario in which this ratio stabilizes as long as the system charges interest on money created out of nothing.
Why don't they "get it" — or rather, why don't they act?
First, the education system doesn't teach it. Even a 2014 Bank of England paper that openly admitted that banks create money out of thin air didn't spark any public debate — because it had no context in which to understand it.
Second, the people who understand it profit from it. Bank shareholders, financial sector workers, real estate investors — anyone who understands the mechanics of money creation is the beneficiary of the system. They have no incentive to change it. Those who suffer — the middle class with mortgages, low-wage earners whose purchasing power is eroding — usually don’t understand the mechanics that hurt them.
Third, the time horizon masks the problem. An exponential function looks linear for a long time. From 87 trillion to 200 — well, that's growth, but the system is already working. From 200 to 315 — well, growth, but for now, everything is fine. People reason inductively — "it hasn't collapsed yet, therefore it won't collapse." This is Taleb's black swan problem — a turkey that is fed for 1,000 days in a row concludes that it will always be fed, until Thanksgiving.
Fourth, every time the system is about to collapse, central banks “rescue” it by printing more money. In 2008, they bailed out with trillions. In 2020, they bailed out with even more trillions. Each bailout solves the immediate crisis but makes the next crisis bigger. People see the bailout and think, “the system is working, the crisis was solved.” They don’t see that the “solution” is exactly what accelerates the next collapse. It’s like drinking alcohol to cure a hangover—it helps right away, but it kills in the long run.
Fifth — and this is the most important — there is no alternative available. People may understand that the system is sick, but if there is no other system to switch to, understanding is worthless. You can’t abandon the dollar or the euro because you have nowhere to go. Bitcoin is an experiment, but it is not suitable for everyday economics. Gold is not a practical means of payment. That is why even smart people who fully understand the problem continue to work in the existing system — because there is no alternative.
I offer a fully functional alternative, not just a critique. There have been many who have written books on why the system is broken — Gesell, Hayek, Lietaers, even researchers at the Bank of England. But none of them have offered a system that simultaneously solves all three problems: where to save (SaveLats), how to pay (PayLats), and how to prevent manipulation (decentralized secured issuance). And it is better to launch it before a crisis, than during a crisis, when rational thinking is the last thing on people’s minds.
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