PART 2 LIST OF PRINCIPLES

This  page is currently being edited 
Latest edit was done on
23rd December 2016

INTRODUCTION

A money based economy needs enough money in circulation to allow it to function.

It is not possible to know how much money is needed at any one time because money is needed in varying amounts for:

• Transactions (buying and selling of goods and services including human skills and labour). This is money with immediate-access in the form of electronic deposits, (eg at the bank), notes, and coins.
• Savings and loans
• Currency market liquidity
• Market liquidity generally

FACTORS AFFECTING THE VALUE OF MONEY

1. Because of these variations, in order for there to be enough money in circulation for transaction purposes, (spending), there has to be a slight excess of money in circulation causing it to devalue over time.
2. In the shorter term the velocity of circulation (the rate of spending) also varies and this varies the prices paid for everything and thus changes the value of money, mostly downwards. It is downwards because as prices rise the value of money (what money can be exchanged for) falls.
3. It is easier to raise prices than to lower prices. It is easier to create more money than to have the economy slow down as money regains its lost value. Any such previous value cannot be determined anyway. It is better that spending is not held up for the lack of transaction money.

IT IS THEREFORE ASSUMED THAT

The design of the economy has to be able to live with this.

THE BASICS

THE VALUE OF MONEY CANNOT BE EXACTLY MEASURED. The value of anything is that which it can be exchanged for. Money can be exchanged for almost anything, including all assets on the market, all savings and loans, all people for hire, and all goods and services and other currencies.

At any one time the value of each of these is determined by negotiation between the parties involved.

There is no way to establish the overall level of all such prices and values. The best that can be done is to nominate an approximation.

The dynamics of the value of money, meaning the way in which all of these prices vary, is distorted by the current financial framework. The course looks into this and points to remedies. As each distortion gets removed, so the related prices become able to adjust appropriately to the market forces which push those related prices into adjusting for the falling value of money. As the rate of change of every such price tends to merge we get closer to being able to nominate an index of prices which fairly reflects the falling value of money. In theory, and in a perfect world where all prices adjust every minute of every day, any price would do. We do not have that perfection but we can get close enough to find practical uses for any chosen index.

THE VALUE OF MONEY CANNOT BE FIXED. The quantity of money affects its value. The quantity needed is never precisely known. A growing economy needs a growing quantity of money. There is no way to fix the quantity or the value of money.

THE THEOREMS AND GUIDELINES

FRAMEWORK THEOREMS

#1 FRAMEWORK OBJECTIVE

We begin with this statement from John Maynard Keynes when, in his 'A Tract on Monetary Reform,' Macmillan 1926, he wrote:

"If, by a change in the established standard of value [of money], a man received and owned twice as much money as he did before in payment for all rights and for all efforts, and if he also paid out twice as much money for all acquisitions and for all satisfactions, he would be wholly unaffected [by the falling value of money]"

This is exactly what we want to see. We want all prices, costs, values, and earnings related to this statement to adjust so that people are wholly unaffected by the changing value of money. Their savings should be safe, their costs should increase at a rate which is similar to their earnings, and their asset values should do likewise.

The exception would be how everything would change had money not changed in value. Those changes would carry on as before. There are plenty of those without having to cope with anything else.

An analogy would be that of placing everyone and everything onto an elevator. As long as everyone on the elevator is dealing with everyone else on the same elevator, the speed (the rate of devaluation of money) is irrelevant. Everything adjusts because everything is on the same platform. Shortages still raise prices and vice versa. The level of spending can still be managed by monetary policy in one form or another or by taxation.

It is just that the level of spending affects the speed of the elevator.

It is just that not all prices adjust at the same time - some prices are loosely attached to the elevator's speed.They can get left behind, only to catch up later.

#2. FREE PRICING

As Adam Smith, widely regarded as the founder of economics explained, starting with his 'Wealth of Nations', first published in 1776, in a free market, most prices are able to adjust in such a way as to balance, or rebalance, the level of supply with the level of demand. 

#3. PRICE ADJUSTMENTS

This can be used to enable all prices to self-adjust under market forces, provided we make that free market pricing possible and mandatory or in the best interests of every person and entity.

What happens to things which are cheap? The price rises as people buy more. That applies as much to earnings (the cost of hiring people and paying rentals etc) as it does to prices, costs, and values.

This is an over-simplification because all prices do not adjust at the same time. But it lays down two of the guidelines from Keynes and Adam Smith (and previously by David Hume), which have been adopted in this course. 

#4. DEFINITION OF PRICE in the Keynesian sense.

For simplicity let us call each of the variables, (costs, prices, values, interest, and earnings), a form of price. In each case these are things which have to be paid for and anything which has to be paid for and which is cheaper than before may rise in price, cost, or value. This includes interest rates - read on. So in that sense they are all prices. Interest rates are known as the price of credit. The faster that money devalues, the higher the rate of interest should be.

In future all of the above will be referred to as prices.

#5. THE OPTIMUM USE OF RESOURCES THEOREM

This is another theorem which is well known but it has been left to Mr Ingram to give it a name:

If anything is over-priced, too much of something is created. That leads to waste.

If anything is under-priced, too little is produced. Time and resources are wasted waiting for a supply or looking for alternatives.

THEOREM: Any wrong pricing wastes national resources.

So we can see now that there is a problem when prices do not adjust properly to the falling value of money.

It wastes national resources.

EXAMPLES OF OVER-PRICING

• The cost of hiring people leads to unemployment,
• The cost of credit leads to too little borrowing and not enough production in that sector like housing
• The cost of monthly repayments has the same result,
• The cost of imports or the cost of exported goods and services leads to them not being bought in the quantities which people desire and could otherwise afford.

EXAMPLES OF UNDER-PRICING

• When people are under-paid, people with skills may seek employment elsewhere or not at all. A shortage of skills leading to too few goods and services being provided wates human capital (resources) among the potential customers.
• When the cost of credit is too low this leads to host of wasted resources as companies buy their own shares instead of doing something productive with their capital.For example, they buy up competitors and reduce competition - a safe investment but not a productive one. They store money rather than investing it and they buy assets whose prices become inflated...
• The cost of monthly repayments can be too low. This raises the demand and results in inflated property prices. Property prices become unstable and vulnerable. This slows many decisions.
• The cost of imports can be too low hurting local businesses and diverting exporters to produce more for other nations and less for their own. Shortages can develop in the home market. This can reverse and the whole effort can then create redundancies.

These are just a few of the effects of wrong pricing.

What we do know is that there are market forces waiting to be used to ensure that this wrong pricing does not happen. And that there are structures in the design of the economic framework which get in the way of those market forces. The list is short but utterly incredible in magnitude reaching into every family and every business and making financial life difficult and risky. See PART 1 of module 1 on the Home page.

#6. COMPLEX SYSTEMS THEOREM

The complex systems theorem is a name Mr. Ingram has given to another well known fact:

In any dynamically complex system, if any one part of it is not working in the way it should, (say wrong pricing), then there are knock-on effects which affect other parts of the system. These then become problems as well and they in turn have further knock-on effects on other parts of the system. If you remove the original source problem then all of the other problems vanish as if they had never existed.

We already know that any wrong price changes, (like over-sensitive changes to loan repayment costs and property values and bond values), or any failure to change (like bond maturity prices), in a financial contract as money falls in value, re-distributes wealth. These things cause financial, social, and political, damage. This, in turn, causes confusion and a motive for a national intervention which can be unforeseen in its content, and its effects. 

These are all knock-on effects which result from the initial mis-pricing problem. A further knock-on effect comes from the resulting government interventions aimed at managing the damage.

Interventions have costs.They take resources from here and place them there. They re-distribute wealth. The unknowable timing and extent and type of intervention to be made adds further confusion. 

Confusion delays decisions which wastes resources. When people are confused they do not invest or spend. The economy slows, wasting national resources.

CONCLUSION

If we stop the kind of pricing instability about which Keynes wrote, then everything simplifies and the entire economy becomes easier to manage.

All prices will adjust to maximise the use of national resources including the employment (hiring) of people.

Reminder: This is an over-simplification but it is a thought framework which we can use. Variations can be identified and explained.

MANAGEMENT THEOREMS

BASICS

If we stop the kind of pricing instability about which Keynes wrote, then everything simplifies and the entire economy becomes easier to manage. A whole lot of distractions disappear. Confidence rises and people can plan better and keep their wealth.

• They won't be forced to buy inflated assets including homes and bonds and pension funds which are invested in such things will not be confused and sent off-target.
• All prices will adjust to maximise the use of national resources including the employment (hiring) of people. 
• Costs will fall everywhere because risks are removed, and misaligned prices which re-distribute wealth cease to be misaligned, and confidence rises for good solid reasons.

All of the related social and financial problems will go away. They will no longer need to be variables in need of the attention of monetary policy or management. No instruments will be needed for those.

Bond price and property price and costs as well as currency values will not be in need of interventions or special instruments of management. Re-thinking that statement, there can be a case for having some instrument or some regulation to prevent the value of a trading currency from experiencing short term volatility. But the general level of the currency value should not need any instrument of management. The balance of trade should be enough.

A properly designed and managed economy needs one independent instrument to manage each variable. If the system is well designed there should be no unwanted side-effects from using that instrument.

When you steer your car there should not be any resulting change in speed. Each instrument needs to address a specific problem without those kinds of side effects.

When a pilot turns his aircraft there are effects on the speed which can give rise to a loss of height. But there is a way to offset that with the use of the throttle. There are enough instruments to manage the flight. This is what we need to see in the management of the world's economies.

The first theorem takes this as its theme - see item #7 below.

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# 7 MANAGEMENT THEOREM No 1

There is a well known theorem in control systems management about how many independent control / management instruments are needed to properly gain control over a system. The theorem states that one instrument is needed for each variable being managed / controlled. This is why a motor vehicle has a steering wheel as well as an accelerator. It would not be easy to drive if the steering wheel had to manage both speed and direction.

As explained in the course, other than taxation, there are two instruments of monetary policy which are available:

THE TWO INSTRUMENTS

The two instruments are the creation enough:

• Debt-free money
• Debt-based money.

Having removed the pricing problem by a redesign of all contracts which distort and all markets which malfunction (interest and currency markets), as explained in this course, all of the knock-on social and political effects and other effects, disappear as if they had never existed.

TWO TARGETS
There are then only two management targets remaining.

Creation of the right amount of money to:

#A Creating the right amount of money

1. Avoid too much devaluation of money by creating too much
2. Avoid a scarcity of transaction money in circulation sometimes called a liquidity shortage by creating too little.

#B Doing this with the right proportions of each kind of money to avoid unbalancing the spending levels in the economy.

#8 DESIGN THE CONTROL SYSTEM TO BE TIGHT

When the creation of debt-based money is left to the commercial banks and the instrument of management is to adjust interest rates this does not provide any tight control. It is what is called a loose instrument.

To achieve the right rate of creation of new money there is the problem of knowing how much new money is needed. This is an unknown so one option is to just create new money at a steady rate. Then allow prices to adjust and the value of money to fall at a rate which undulates as spending rates vary.

A tighter level of control can be achieved if all new money is created by the State.It can be a single body authorised by the state to have that role, say the central bank, or a Money Supply Authority, (MSA). The latter can be a department of the central bank.

OPERATIONAL ISSUES

There are choices about how to deliver the new money because different delivery mechanisms have different effects on different sectors of the economy. 

#8 Instruments need to be applied:

1. in the right amounts
2. in the right places and 
3. at the right times.

CHOICES HAVE TO BE MADE
There are choices to be made depending upon the state of aggregate spending.

1. This can undulate relatively harmlessly as people make their own decisions,
2. It can spiral down if  the downwards part passes a critical threshold.

In the first scenario of undulations it would be a mistake to try manage those undulations.
People have a right to choose how much to save, to borrow, or to import when they want to spend. The amount of spending in the domestic economy is determined by, and is, the aggregate of these choices.

# 9 There is an effect which can be called over-control when natural changes which are a part of the steady state system become targets.

If it was a car which was being driven and the bumps in the road or gusts of wind disturbed the direction being taken, but on average these cancelled out, then to respond to each of these would result in a wrong direction being taken when the countervailing next bump in the road or wind gust took its turn. It can be a matter of judgement depending upon the strength and duration of these gusts and bumps.

The essential point is that of staying on the road without creating a zig-zag motion by over-reacting.

In the second scenario when the gust results in excessive spending the outcome will be a greater level of inflation of all prices and money will devalue faster. There is no need to think that this was caused by having too fast a rate of creation of money if it is just a gust.

But if the gust is in the other direction and jobs are lost and confidence falls this can lead to a downwards spiral in spending and employment, wasting national resources and creating social and political problems.

In this  scenario we need to examine the policy options.

Before moving on to that I see that I wrote this:

THE PEOPLE'S FREEDOM THEOREM

Money falls in value when spending out-paces supply. Too much money chasing too few goods and services.

This happens from time to time as people spend down savings, import less, and when they borrow more. The combination can come together re-enforcing each other to a greater or lesser extent. 

THEOREM: People are entitled to make those free choices about when to spend and how much they wish to spend or to borrow and spend.

These choices create undulations in aggregate (total) spending.

                                                                                                                                         

After an undulation has reached a peak all free prices will  be higher. 

When all free prices have adjusted higher, the same economy, with all higher prices, will need more money in circulation to keep it going.

For otherwise the supplies will be there and the demand will be there, but the money will not be there. People will be unable to pay each other on time. Some will borrow while waiting to be paid, adding to costs. The economy will slow even if there is no other reason than a lack of money in circulation with which people can pay one another.

They can also get angry about not being paid. The blame is placed on their customers, but their customers have the same problem. Misplaced anger does not help relationships. Damage gets caused. There are these and other knock-on effects.

This is why it can be argued that continuous creation of ne money is a part of creating a stable and optimally productive economy.

POLITICS V MACRO-ECONOMIC DESIGN AND MANAGEMENT
Should we use the words 'optimally productive'? Is that a social and political target? We can enable it with an optimal design. It is up to the politicians and their voters to choose whether this is what they want.

The following repeats what is written above. I will need to decide whether it adds anything to our understanding.

UPPER BAND TARGET

There must be enough stock of money in circulation BUT not too much as this will cause excessive devaluation of money.

ASSUMPTIONS
We have assumed that

1. Enough money is needed

2. People have the right to spend what they want to spend when they want to spend it on what they want to spend it

3. This will create rising and falling levels of spending

4. This will lead to an undulating rate of devaluation of money if new money is supplied to avoid a shortage of money (a liquidity problem).

LOWER TARGET BAND

This is the infamous downwards spiral into recession or worse. Something to avoid.

When all of the above levels of spending go into reverse and spending slows, money can rise in value as prices fall.

There is then a risk that jobs will be lost and spending will reduce further. This can lead to more job losses, leading to less spending, leading to a loss of confidence, leading to more savings and less spending, leading to more unemployment...

RESULTING TARGET BAND

There is an upper and a lower target - a band of safety above which too much money will be created and below which not enough will be created.

To maintain the level of demand, known as aggregate spending, new money needs to be created at a steady rate.

When, despite this, the level of spending drops there is believed to be some tolerance, some delay, before redundancies set in as manufacturing companies build unsold stock. If that is the case due to say, stock-building to offset lower sales, or due to a reluctance to fire redundant staff, then some temporary slowing can be tolerated.

However,if that tipping point is reached after which a downwards spiral may develop, we will need to look for a way to stimulate spending without unbalancing the overall spending references and resulting spending patterns and the resulting deployment of human and capital resources which prevailed beforehand.

With that in mind a stimulus can be created by accelerating the rate of creation of new debt-free money and deploying it in a way which boosts spending and maintains confidence in the state of the economy. That is the VAT reduction stimulus discussed in Module xxx.

That does not stimulate the borrowing sector. To maintain the balance the ratio of debt-free money creation and debt-based money creation needs to be managed. Maybe the same ratio shoul continue. Maybe borrowing sector would need a greater stimulus than the other sectors, or a lesser stimulus. We have to leave that to future economists and observations.

#10 RESTORE THE BALANCE OF SPENDING
When creating a stimulus, aim to restore the balance of spending  - the spending patterns of preferences already established.

This is where editing on the 24th December 2016 ends.
I did not mention the moral and economic hazards of allowing governments to get involved.

FIRST MANAGEMENT TARGET
This is the best theory available at the moment.
The idea was first fut forward by Martin Friedman, a Nobel Laureate for reasons of his own. We have simply followed the logic.

By a policy of continuous creation of new money and new demand, people's preferences in spending and saving and importing can be honoured without getting into a downwards spiral of severe recession or depression.

The thought is that if money creation stops the undulations will look like a horizontal wave with risk of a recession.

I the money creation is fast enough those dips will be horizontal with money not changing in value whilst the recoveries will lead to faster spending and a falling value of money.

Without a time machine to peer into the future there is no simple way of knowing if this will work...

Central banks are constantly experimenting and maybe this should be the first idea to test.

THEN:
This is the first target - continuous money creation within the acceptable band. Not too much and not too little. This leaves the rate of devaluation of money to undulate and absorb the variations caused by people's spending choices.

This changing rate of devaluation of money is needed to preserve people's freedom of choice. It is difficult to see how that can be avoided anyway.

This means that the economy needs all prices to adjust as best they can. No prices change every minute of every day. This is not an efficient process but it is better that the obstructions to pricing adjustments should be removed so that the right adjustments can take place.

SECOND TARGET - maintaining the balance of spending

The second target is also related to people's freedom of choice but there is another efficiency aspect to this in not wasting national resources.

THEOREM

When an intervention is needed to meet the above targets, resources will be wasted if the result is to stimulate different parts of the economy differently. This will waste national resources. To minimise that, a balanced stimulus must be provided.

This is never fully achievable but it is a the second target.

The target here is to respect and maintain the balance of spending.

The term 'respect' comes down to respecting the choices made by people and entities.

Consumers buy what they wish to have provided.

Providers need to have a continuity of demand from buyers. This maintains the best use of their available human and capital resources. Nothing is left idle or unused - in a perfect model.

CONCLUSION"

When new money is created the balance of spending in the economy should not be forced to change by stimulating spending unevenly - more in some sectors and less than before elsewhere, or more in some sectors and the same elsewhere leading to distorted inflation of prices and unbalanced consequences including losses, flowing from that.

TWO INSTRUMENTS ARE NEEDED TO MANAGE TWO TARGETS.

The two instruments readily available if we make it so, are:

1.      The creation of debt-based money and

2.      The creation of debt-free money.

Both instruments should be precisely used and so they should come under the management of the central bank or the Money Supply Authority (MSA), which can be a part of the central bank.

There are two targets -

1. Enough money creation without an excess leading to a high level of inflation

2. Retaining the balance of spending. This is breaks down into two parts:

A.      It is matter of judgement how much of each instrument should be used

B.      Different modes of delivery can affect that judgement as there will be different amounts of stimulus to spending involved.

Remember that central banks will not manage interest rates. They will manage the stock of both kinds of money. The amount of credit in circulation will be sourced from available savings and deposits plus the amount of credit on offer from the central bank or MSA.

This must be done in such a way that the base, or reference rate of interest, in the market for credit, is determined by the levels of supply and demand.

Additional interest will be added by intermediaries who take risks in lending to end users.

SUMMARY:

There must be a free market in credit which will set that rate - the price of credit - the base interest rate. This rate will vary as the rate of devaluation of money changes for otherwise it will be too expensive or it will be too cheap, wasting resources. If it is too cheap demand will rise and the price (the base rate of interest) will rise.

This is a principle to follow when designing the framework of the economy so that it can optimise the use of capital resources. The design challenge is how to do that.

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NEW KNOWLEDGE - This is explained in PART 1 of the webinars

A lot of people do not know this.

There are two forms of money creation.

A.      Debt-free money

B.      Debt-based money

Both kinds look exactly the same when they enter circulations and are used by the population.

But there is a crucial difference in the dynamics produced by each.

THE HOTELIER'S LIQUIDITY CRISIS

There is an amusing brain teaser going the rounds about a hotelier and his business friends. It illustrates the point about the need for liquidity very crudely but very nicely. And it illustrates the weakness of too much reliance on debt-based money. It is intended to be a riddle - a confusing story without a clear explanation. But when you think about it in the right way it is a simple matter to understand what is going on.

Mr A, the hotel owner, owed Mr B $20.

Mr B owed Mr C $20.

Mr C owed Mr D $20...you get the picture...

Finally, Mr G owed Mr A, the hotelier, $20. Full circle.

THE EXPLANATION

At first there was not enough money in the system and so no one got paid.

Then Mr N booked a room at the hotel and Mr A got a $20 deposit. Mr A used the deposit to pay Mr B, who paid Mr C, who paid Mr D...and finally, Mr G paid Mr A. Then Mr N cancelled his booking and withdrew the $20 deposit.

This was fine until someone in the group again owed someone else in the group some money.

But this group did not have any money unless it was lent or given to it.

The lesson is that without enough money in circulation you get this kind of 'liquidity crisis'. The economy slows down while everyone is waiting to be paid.

DEBT-BASED MONEY

The $20, was in effect lent to the system by Mr N. It disappeared from circulation when it was repaid to Mr N. It might just as well have been money borrowed by the hotelier first and then repaid later when the hotelier was paid. This is what happens when new money is created and lent into the economy as DEBT-BASED money.

If there had been enough DEBT-FREE money like notes and coins for example, or money which is electronically 'printed' it would have been permanently available to this (closed) group.

The 'hotelier problem', the liquidity crisis, would not have arisen. Let's not go into the imaginary reason why this particular group had no money!

#14 KEY POINTS

What really matters is:

That there is enough money in circulation which is not somehow tied up, or parked somewhere, and not circulating.

That there is a way to create and distribute both kinds of money in the right proportions to keep the balance of spending unaffected as these two kinds of new money are created and distributed.

A KNOWLEDGE GAP TO BE FILLED

The intention is clear. The principle is clear. What is not yet clear is how to determine these different amounts of each kind of new money. There must be a doctorate in the making here.

THE EFFECTS ARE DIFFERENT FOR EACH KIND AND EACH METHOD OF MONEY CREATION.

INTRODUCTION

The world has been unlucky to find that until recently only around 3% of money in circulation was notes and coins or some other form of debt-free money. That was before central banks went on a spree of printing new money. They call that Quantitative Easing.

Then the method of distribution of debt-free money came into focus as a major issue.

No attempt was made to balance the spending in the economy.

In any case, because all prices were unable to adjust properly, had the stimulus effect worked properly, interest rates would have needed to rise and all interest-rate sensitive asset prices and related costs would have gone haywire. This is the central problem currently faced by the central banks and other policy-makers.

·         Bond values will crash

·         Borrowing costs will rise ten or more times too fast for financial stability

·         Property values will crash

·         There will be currency effects all over the world, leading to disruption of business plans and budgets all over the world.

OVER-RELIANCE ON DEBT-BASED MONEY

When an economy becomes over-dependent upon debt-based money, if not enough borrowing is done or maintained, having been done and having boosted spending and all free prices, the stock of money in circulation needed by the economy cannot be sustained.

This is one reason why the right mixture of both kinds of money creation is needed. When there is an over-reliance on debt-based money, the management mechanism deprives people of the right, in aggregate, to determine how much they wish to borrow. Borrow too little and the stock of money falls below the needs of the economy.

#14. THE STIMULUS EFFECTS OF EACH KIND OF MONEY CREATION MAY BE DIFFERENT BOTH IN MAGNITUDE AND IN BALANCE.

KNOWLEDGE GAP

There is not enough data on this to say what the effect of each may have in practice.

DELIVERY OF DEBT-BASED MONEY

Lending debt-based money into the economy has a very rapid effect on the borrowing sector, but little immediate effect elsewhere. There is a delayed effect, 'a hang-over', a kind of 'trickle-down effect'.
NOTE: The words TRICKLE DOWN usually refer to something else related to tax breaks for the rich having spending benefits which trickle down to the rest. Guess who thought that was a good idea...

Let me explain:

The first recipients of the new money spend it on others. They then spend it on others, who then spend it on others, who...etc.

If you want to water your garden you water all of it together. You do not just water a part of it hoping the water will trickle down to the rest. 

A LIMITATION

With debt-based money it is not possible to deliver a balanced stimulus across all spending sectors. To prevent a disturbance to the balance of spending there is merit in maintaining the current level as far as is possible. But this idea is not enough. Spending preferences will change. How should policy change to accommodate that? 

It will be interesting to see what you people in the audience think. Doctoral papers? Go ahead. Let's see. Just remember to mention this as the source of your inspiration.

IN SUMMARY: When spending appetites change from one sector to another it is not going to be possible to keep both kinds of stimulus in perfect balance.

DELIVERY OF DEBT-FREE MONEY

'Dropping' debt-free money into the economy in a 'helicopter drop' kind of way is an idea which is currently being discussed in research papers around the world.

There are technical problems because the means of delivery is not clear. Cash on the street  or cash added to bank accounts - neither will be balanced or fair.

IMBALANCE

Providing funding which can be used to subsidise sales taxes like VAT would provide a better balance, but there is no clear way in which the sectors depending upon debt-based borrowed money would benefit to the same extent as other sectors.

This is why both kinds of money creation instruments (and some new thinking) are needed.

 The result of reducing tax on sales would be an incentive to buy and people would have money left over if they did not buy more.

Tax exempt spending, like savings, debt repayments, and charitable donations, could get a proportionate subsidy to improve the balance of the stimulus.

THE CONFIDENCE MULTIPLIER

The immediate amount of additional spending created in this way may depend largely on how confident people are. With the new financial framework in place the level of confidence in their future finances might be at a level of 95% on a scale where total confusion and lack of confidence gives a 0% rating.

Currently that rating in many of the world's economies looks to be around (guess) 25% to 45%.

The main contributors to lost confidence are interest rate instability, and interest rate sensitivities across the board, including currency pricing sensitivity. We will come to that currency issue later.

The more confidence there is the more money is used for transactions and the less of it is saved or made idle. When confidence is high and people spend on each other's production, money changes hands faster and for longer.

EVERYONE GETS A SHARE

Using the new debt-free money to reduce sales taxes like VAT, will stimulate more spending by most people and entities. Every entity spends money and every entity will have money left over at the end of the month because the prices will be lower. The total amount of money left over at month's end will be the same as the amount of new debt-free money created to reduce prices. Most sectors will benefit.

DIFFERENCE BETWEEN A STIMULUS AND A STEADY RATE

If this is done on a continuous basis (at a steady rate with VAT always being lower and a given permanent subsidy on other spending), there will be little difference between a 'helicopter drop' and this method.

One difference in favour of this method will be that the shadow, or informal economy, will be boosted as well as the banked part of the economy. With the 'helicopter drop'  the money has to be dropped only into the banked sector. The new money gets added to people's (and all entities') bank accounts.

If there has been a slowdown in overall spending and unemployment has risen or is rising, then the sales cut-price method will offer an immediate stimulus. That is...

...IF it is offered for a limited period, and stated to be for a limited period. This may provide a rush of new spending and get the aggregate level of spending back on track. "Buy while stocks last".

Editing is continuing from here.

Central banks and policy-makers continue to experiment to find out what works best.

BEST CHANCE OF AVOIDING A RECESSION

Finally, it should be noted that if there is good control over the money stock and interest rates are finding their own level and all prices are adjusting for any fall in the value of money, confidence levels will be sustained at a relatively high level. This will help to reduce the multiplier effect of a slowdown leading into a recession. There will be less tendency to save the new money created or to use it to pay down debts at a greatly enhanced rate. As confidence grows in the management system and in the financial stability of the economy, the level of confidence can be expected to remain high and rising for some time to come.

#11 MORAL HAZARD IN METHOD OF DELIVERY

WOULDN'T GOVERNMENTS PREFER TO HAVE THE MONEY TO SPEND?

Probably they would.

·         They would gain control over the creation of new money and

·         They would use that instead of taxation and

·         They would boost the economy just before elections and

·         They would corruptly favour the big businesses that funded their election campaigns.

It is for these kinds of reasons that central banks are mandated to take their own actions when needed to boost spending. They are at least in theory, independent of governments.

#15. MONETARY POLICY TARGETS

This should be entitled 'wrong targets'.

Every other target such as targeting prices inflation is a wrong target. The two targets we have selected can be managed by the two instruments we, (the central banks), have at our (their)  disposal.

See above.

SUMMARY

Remember, prices adjust to make optimum use of the human and capital resources available.

Remember, when all prices rise in response to a general increase in the level of spending, money falls in value and more of it is needed to avoid the hotelier effect - a shortage of liquidity (money).

When in response, too much money gets created, prices all rise and more money is needed to allow the same economy to function fully. So the excess money gets mopped up in higher prices. As Keynes wrote, people will be wholly unaffected. Well not quite. Some prices can be very slow to respond and no prices adjust every minute of every day. The first to get wage rises will benefit most, for example.

The same applies to targeting the price of the currency. No prices should be targeted by the management (monetary policy for example). Reducing any price by throwing money at it does not increase the quantity of oil, properties, or other such limited supplies on the timescale needed to do so, it at all possible.

More likely it will raise those prices through heightened demand and unchanged supply. Wealth gets re-distributed.

You can only target two variables with two instruments.

FOREIGN EXCHANGE / CURRENCY MARKETS

#18. The value of a currency is the amount of foreign currency it can be exchanged for.

In the Money Island story the balance of trade was kept in good order until a man with a lot of capital dumped it onto the foreign exchange market. There was a shortage of money on the other side of the transaction. The value of the two currencies instantly changed. One rose  and the other fell right away. It had nothing to do with trade. Lots of businesses were confused about their prices and profits.

This is how foreign exchange markets are run today.  That needs to be changed.

#19. There are two ways to address imbalances like that, caused by market operations like that.

INTERVENTIONS

a)      The intervention method currently used needs and diverts resources from elsewhere.

b)      Optimum use of a nation's resources ceases to occur.

c)      Confusion about when and by how much the intervention will be, adds to a loss of confidence.

d)      The resources in question needed for the intervention can become exhausted.

e)      The management cannot know and does not know what the exchange rate should be.

f)       If cannot be right for trade as well as being right for capital transactions

FREE MARKETS

The other way is to allow market forces to dictate prices:

·         One market for trade currency exchanges and

·         Another market for capital currency exchanges.

With two free markets there are two main objections to deal with:

a. ARBITRAGE

People will try to buy in the cheaper market and sell in the more expensive market. The process is called arbitrage. If arbitrage operations are conducted on a large scale the two market prices will converge. There will no longer be separate prices in each market.

Careful thought needs to be given to the regulations and enforcement methods used to preserve both markets as separately priced entities.

1.      Thought needs to be given to avoid delaying transactions even if some illegal transactions leak through on account of this.

2.      Thought needs to be given to levelling the playing field by slowing the clearing price mechanism to a pace where everyone can get their fair price. Giving ultra-fast computer users an advantage is not providing free competition. It is akin to grating a monopoly.

Micro-second markets operations and huge gearing in the volume of transactions should be disallowed.

PAST EXPERIENCE

South Africa tried the dual currency market system and gave up using it. What went wrong? Some papers may need to be written on this. What this macro-economic design is all about is the operations of free markets. The South African market was not a free market. It was a limited market. The purpose of the two South African markets was to limit the amount of transactions taking capital out of South Africa during the sanctions era. This is not a model to learn from. In general free markets optimise the use of capital and human resources.

COST VERSUS BENEFITS

Studies done later in this course suggest there are many other potential benefits. One is that monetary policy will not need to target and exchange rate. Another is that the home economy will be able to have its own stock of money (as managed) and its own appropriate domestic rates of interest. What goes on at home stays at home. What goes on elsewhere stays there.

The exceptions are:

Another damaged economy will affect exports

Domestic entities will have to compete (in free competition leading to best use of human and capital resources) for capital and credit with foreigners. That is, unless the politicians limit those opportunities.

#21. SEPARATION OF POWERS

The role of designing the financial framework and management system is to prevent an economy from 'going off the rails' from structural causes which have nothing to do with the government in power. These can and do remove governments from power.

If the design and management guidelines given herein in this course are not observed, there is always a financial and a social (political) cost to that. That is what the guidelines are there for.

A government's role is to collect taxes and spend taxes, and to pass laws to deal with social issues.

#22. BASIC INCOME AND A ZERO ECONOMY

Basic income is a proposed political intervention to re-distribute earnings on a national scale.

As machinery, automation, and robots increasingly do the work, people will become less work-orientated and will pass time in other ways.

The problem to address in this case is that of having any buyers for teh output of the economy. No buyers means no economy.

The idea of having a basic income for everyone whether they work or not can solve this problem. The ramifications and the way  and pace of implementation are currently hot topics.

#23. IMPLEMENTATION

There are a large number of reforms to be made, but given time, they can all be made. Some can be made gradually as experiments, and some may be needed sooner rather than later, but in total, these reforms may take many years to complete.

One thing is certain, economies are not like a clock on the wall. They cannot be taken down, repaired, and put back again. For each reform which is intended to be made on a larger scale than just a limited experiment, it will be wise to have the idea discussed by the whole international community with research papers published to throw up any unsuspected problems.

Before implementation, people will be needed to educate the whole community. They need to understand what needs to be done, by which institutions and by people in general, what the benefits will be, and when it will all be done. A similar exercise was carried out when VAT was first introduced. Course attendees may be key people in the reform process.

PROVIDING PRACTICAL SOLUTIONS

IN AN IMPERFECT WORLD

GUARANTEES AND OFFSETTING THE RATE OF DEVALUATION OF MONEY

#24. There is always a cost to giving a guarantee.

#25. People like guarantees in their financial contracts. Many are happy to pay the cost.

#26. People can be very attracted to a contract which offers to preserve the value of their savings / investments. The market will permit such innovations.

#27. Those innovations will have some disturbing effect on market prices if they are used on any significant scale. This will mean that some re-distribution of wealth and some reduction in the efficiency of markets will be experienced. But people will be happier because their confidence levels may be higher than otherwise. This will offset the disadvantages.

#28. It is not possible to create any measure for the exact rate at which money is falling in value. This means that there will be a further disturbance to the smooth allocation of resources when the above kind of guarantee is given. The offset rate will not be accurate. In fact the actual offset rate cannot be measured. The cost lies in the difference between the guaranteed offset rate and the real offset rate.

This cannot be measured either.

PROOF (moved from earlier)

FIRST SOME OBSERVATIONS

#16. The value of money is found by negotiation between the buyers and the sellers.

#17. The value of anything is what it can be exchanged for. If potatoes can be exchanged for carrots then the value of potatoes lies in the number of carrots they can be exchanged for.

If money can be exchanged for gold then the value of gold lies in the amount of money it can be exchanged for and the value of money is the amount of gold it can be exchanged for. Same thing.

It is not possible to fix the value of gold, or potatoes, or carrots, or money. The supply levels and the demand levels are constantly changing.

DEFINING THE VALUE OF MONEY

The definition of the value of money is the total quantity of all goods and services and assets for which the quantity of money can be exchanged in the nation concerned.  This cannot be measured.

The rate of change of the price of all of those goods and services and assets will be affected by whatever changes are made to the financial framework.

For example, a fixed interest bond does not change its maturity value and the cost and value of it cannot adjust like other prices.

SLOWLY GETTING BETTER

This will act as a drag on the overall rate of change of prices until a better kind of bond contract becomes the norm.

The more prices which are set free in that kind of way, the more all price adjustments will harmonise with each other. Whatever price or basket of prices may be selected to represent the rate of offset will then gradually become more accurate as more and more degrees of pricing freedom are created.

Then the damage done by any inaccuracy will reduce to a minimal level.

It needs to be understood that here we are not referring to price changes which would occur even if the value of money had not changed.

They can also affect the value of money.

FINDING A BEST COMPROMISE OFFSET RATE

This is what we will be looking into next. We are thinking about how to write those lending and savings contracts.

There are more principles and guidelines involved.

Here are some of them:

a)      A contract has to be simple and intuitively give confidence to the users

b)      This makes it marketable.

c)       A marketable contract is highly competitive

d)      A safer contract has more value than another one. In principle it ought to be more marketable.

e)      The more marketable a debt contract is the cheaper it is to raise money.

f)       The better an investment (savings) contract is aligned to the user's liabilities the more marketable it is and the cheaper it will be for borrowers. There are cost savings for investors (lenders).

g)      There has to be an advantage in management of cash flows unless the other advantages outweigh this. The amount of reserves needed by lenders of capital will that way be reduced.

h)      The level of regular repayments needs to be well aligned to the affordability of the majority of borrowers.

i)        It is not possible to construct lending contracts which are ideal for each and every borrower.

j)        When using an offset index for the purpose of retaining the value of the capital debt, the index used should do a reasonably good job. But any index is probably better than none.

With these points in mind the course providers will concentrate on the use of an index of National Average Earnings, NAE, and its rate of growth, Average Earnings Growth, AEG% p.a.

It has advantages in terms of almost all of the points listed above when it is used in the contracts to be outlined.

HOMEWORK

Homework is to read the following pages on the main website and to prepare your questions:

Not ready yet

SUMMARY

KEY POINTS

1.      Management, which includes monetary policy and taxation / fiscal policy and interventions have a much simpler task once the financial framework has been organised with free pricing and enough competition.

2.      Monetary policy has two targets and two instruments:

3.      Provide enough money and a little more without creating too much inflation. That is not a defined amount in this course. Experiments will be done by policy-makers.

4.      Keep spending patterns in balance

5.      Do not give the new money to governments to spend

6.      Create two markets for currency prices

7.      Accept that money has no specifically measured value

8.      Accept that there is no specifically accurate rate of change in the value of money with which to offset the amount of capital in savings and lending contracts.

9.      But as every degree of freedom of pricing is increased, the more prices will harmonise in their rate of increase. Then the selection of almost any index such as NAE for use as the offset will become increasingly practical and value without ever becoming exact or perfect. This is to be discussed later in the course. 

      Homework submissions on that subject given by the most experienced attendees will be of significant interest to all.