The Time Value of Money Tokens – An Idea Past its Use by Date

The idea that money tokens have a time value is deeply embedded in economic thinking and analysis. It has arisen because most money tokens are created with interest immediately payable. It is an idea that should be abandoned. When new money tokens are created the tokens should be interest free. Money tokens become interest bearing after they are exchanged for assets of value.

From wikipedia we have

The time value of money is the value of money figuring in a given amount of interest earned or inflation accrued over a given amount of time. The ultimate principle suggests that a certain amount of money today has different buying power than the same amount of money in the future. This notion exists both because there is an opportunity to earn interest on the money and because inflation will drive prices up, thus changing the “value” of the money. The time value of money is the central concept in finance theory.

In our current economic systems money tokens are deemed to have a value over time because they are created with an interest value attached. As a result central banks are forced to encourage inflation of the currency to compensate for putting an interest value on money tokens before the tokens are used.

The time value of money has arisen because money represents assets and assets have a value over time because they can generate income over time. It is the confusion between the properties of what money represents and money tokens themselves that has created the problem. Money does not have a value over time until it represents an asset. Hence interest on money reflects the world of commerce only if the money represents a real asset. What this means is that money, when it has been saved, can have interest attached. Money when it represents a given asset can have interest attached if the asset is used to generate income or if the asset increases in value over time. Until that time money should not have an interest attached.

For our accounting systems to better reflect economic reality we need to change our accounting practices to remove the time value of money on newly created money tokens. We can do this within the existing framework of commerce and we can do it incrementally with minor changes to current accounting and taxation practises.

New money tokens are created when an asset is monetized. The asset may be a physical asset such as a house or the asset may be the ability of an entity to repay. This happens when a government creates money tokens or a bank issues a loan. When money tokens are introduced into the system this way then there is no systematic problem with putting interest onto the money tokens because the tokens represent an asset that can repay the loan and pay the interest.

However new money tokens are also introduced into the system when interest is paid on unpaid interest or when new tokens are introduced into the system when a loan is backed by another loan. In these cases there are no productive assets to the pay the interest. This debt (new money tokens) created from interest on interest or loans on loans is the root of the current debt problem. Interest on interest can be eliminated by a simple change to the way we account for the repayment of debt.  Governments can reduce the need for loans on loans by ensuring there are enough money tokens in the system to support economic activity.

When a debt is repaid the current accounting approach is to pay any interest owing first and if there are any funds remaining to repay the capital. The accounting can be changed to pay capital first then pay interest when all the capital is repaid. Interest that has not yet been repaid does not represent a productive asset so it does not attract interest.

However investors will not invest or save money without interest on interest because of endemic inflation. Inflation reduces the value of money and because of inflation money tokens need to have a time value. Another way to eliminate this time value of money is to increase all loans and all unpaid interest with inflation.

It is difficult to change the existing money system to incorporate these new accounting practises. However, it is possible to change the system incrementally with individual loans and to use special purpose money for these loans. This special purpose money shall be called Coupons. The money can be used to build or purchase an asset that will produce a profit that can be used to both repay the investor and to pay interest on the Coupons. To keep Coupons within the existing laws Coupons can only be redeemed by paying for output from the asset that the Coupons back. For example, Coupons could be designated in litres of water, kwhs of energy, months of occupation. Alternatively we could designate Coupons in regular money but increase the number of Coupons not yet repaid by the previous period’s inflation rate. The two methods can be combined so that the number of Coupons is increased if the output value of the asset does not increase with inflation.

This approach makes a significant difference to the cost of purchasing an asset or of funding a new asset. If the loan is repaid in equal installments where interest is paid on interest the installment costs are:

R = (C x I) / (1-(1+I)^-N)

If the loan is repaid in equal installments where interest is not paid on interest the installment costs are

R = C x (1 + sqrt(1+2 x I x N)) / (2 x N )

R = periodic repayment amount, C = Capital to be repaid, I = interest, N is the installments
The symbols x is multiply, / divide, ^ to the power of, + add, – subtract.

However, with inflation investors suffer real losses if repayments are equal over the period of the loan. If a loan has an equal repayment amount each year then the real cost in the last year of a repayment is much less than the real cost of the first year’s repayment.

Investors will be attracted to inflation adjusted repayments because the total return in present day money can be made the same or better with Coupons.

A 50 year loan $100 at 5% with 3% inflation gives a present day value total return of $145 while a 50 year Coupon at 5% with capital and interest adjusted for inflation gives a present day value total return of $172. That is the investor is better off over the 50 years with Coupons. However, the repayments in unadjusted figures are 5.48% for loans and 3.45% for Coupons. This means the borrower who uses Coupons can borrow about 60% more for the same initial repayments.

A 20 year loan $100 at 8% with 3% inflation gives a present day value total return of $156 while a 20 year Coupon at 5% with inflation gives a present day value total return of $152. That is the investor gets about the same present value return with Coupons or Loan. However, the Coupons borrower can borrow about 35% more for the same initial repayments because the initial repayments are 10.19% for loans and 7.62% for Coupons.

Removing the time value on money tokens will change investor behaviour. Investors become patient investors and will look for long term investments that give an inflation adjusted return. This will change behaviour because current loans repayments favour a rapid return of Capital and short term investments.

Borrowers who have long term assets whose value increases with inflation either through increased prices or decreased costs will look to finance their assets with Coupons because they can borrow more for the same value periodic repayments.

Public Infrastructure funded through Loans and repaid with taxes or monopoly user charges will replace their loan commitments with Coupons.

Banks will start to change their loans to Money Coupons where interest is not paid on interest to better match the investments they make in productive assets.

It is expected that the approach will rapidly move through the financial system and the effect will be to remove the cost of inflation and to reduce the cost of long term capital. In effect the productivity of Capital is increased. If enough funds are invested with Coupons it is highly likely that general inflation will be eliminated.

Reducing the Cost to Transfer Assets over Time

The standard method of transferring an asset from one party to another is to use an intermediary to perform the transaction.  The most common method to transfer large value assets over time is for the intermediary to provide credit as a money loan.  Loan Coupons is an alternative to transfer and asset from one party to another where the borrower provides the credit directly.

 

The difference between regular loans and Loan Coupons is that regular loans create money to facilitate the transaction.  When we create regular money there is a charge put on the money tokens. With Loan Coupons the Coupon is a form of money and has no charge on the money tokens.  Charges on money tokens take the form of interest on interest.  With Loan Coupons there is no interest on interest. This reduces the cost to transfer an asset.

With regular money the value of money depreciates over time due to inflation.  With Coupons the number of Coupons outstanding increases with inflation.  This means inflation does not disadvantage the provider of credit.

Coupon rules can be adjusted for particular asset transfers.  This is illustrated later in this paper with a description of Water Coupons issued by a Water Authority to build new assets to deliver water supply to a community.  In the example the Water Coupons can be used to provide a discount to low consumers of water.  The Water Coupons are used to create more water supply.  This then leads to a price mechanism for water in a price regulated environment.

Cost Savings

The calculation of the cost of transferring assets over time is complicated as there are many factors influencing the calculations.

Many economists deny that reducing the cost to transfer assets matters because if the borrower pays more then the lender receives more and hence what one party gains the other loses. This means any change to the method is a zero sum game and the overall effect on the economy is cancelled out. This is incorrect.  If the total amount transferred is less with one method than with another method then the cost savings can be given to either the lender or borrower or to both. These cost savings are real and reduce the cost to transfer or build assets.

Inflation makes a difference to the cost because the value of the money transferred is reduced the later it is transferred. This is a cost to the provider of credit. The length of time, the interest rate, taxation, and transfer fees all change the calculations.

All these costs except the cost of interest on interest and inflation are linear.  Coupons eliminate the cost of interest on interest and compensate for inflation.  This means the difference between Loan Coupons and Bank Loans can be estimated by calculating the difference in cost with zero inflation.  This is a non linear function but for a 30 year loan at 5% the extra cost is estimated at up to 70% of the original amount when tax and transfer fees are included. The following graph estimates the increase in costs caused by interest on interest.

These extra costs are masked to the borrower because inflation reduces the value of money and so moves the costs of the transfer from the borrower to the lender.  Inflation however, is a real cost and compensating for it does remove it.  To get the full cost reduction of removing interest on interest inflation needs to be zero.

Formula for Loan and Coupon Calculations

Another way of explaining the difference between Loans and Coupons is to look at the value of an investment.  With traditional Loans

P = Initial Value (1+Interest Rate) ^ Time

With Loan Coupons

P = Initial Value (1 + Interest Rate * Time)

Loan Coupons simplify the calculation of returns and better reflect the reality of investment.  Most assets do not get more valuable over time simply because of the passing of time. Compounding of interest means that the asset class of money gets more valuable over time.  The system effect caused by the widespread use of compounding interest is for the asset class of money to get less valuable through endemic inflation.

Water Coupons and Water Rewards

Water Coupons and Rewards can take many forms.  For illustration purposes the following rules are used for Coupons to transfer water infrastructure assets.

Water Coupons are created by a Water Authority to fund new water infrastructure or to pay out existing loans.  Water Coupons are redeemed by using them to pay invoices for water consumed.  Water Coupons are measured in litres of water. The Water Authority is under no obligation to redeem Coupons for money – only for water.  Water Coupons increase in amount for every day they are unused.  For simplicity and comparison purposes the amount of the Coupons to be repaid could be increased by the anticipated inflation rate over the time the Coupons are to be redeemed.

Water Rewards is a voluntary system where registered consumers are given Water Coupons depending on how little water they consume.  They typically sell the Coupons to investors or to high consumers of water.  They provide an incentive for consumers to reduce their consumption of water. They can be sold to high consumers of water.  As there is a limited supply of water this provides a pricing tool for a Water Authority to reduce water consumption in times of limited supply.

Comparison of Coupons and Loans

From the point of view of lenders and the Water Authority, Coupons appear like loans – with different rules of repayment.  One difference is that Coupons are sold directly to investors with existing funds including banks.  Another difference could be the linking of Coupon value to the value of the Asset Output.

In the attached spreadsheet (obtainable from the author on request) a comparison is made between an investor depositing money in a bank account and purchasing Coupons.  The investor receives a return of 4.5% and the Authority is charged 6% by the bank.  This provides the investor with an IRR of 3.67% after taxes.  With Coupons an investor can obtain an IRR of 3.7% if the Coupon rate is 3.5% and is adjusted yearly for inflation of 3% per year. The length of the loan is 30 years and the repayments or redemptions are carried out yearly.

Using this scenario the Water Authority could borrow 18% more money for the same rate of repayments. The investor gets approximately the same IRR on funds after tax and fees are removed.

Alternatively, the Authority could give a 5% flat return adjusted for price increases. That is, if the Authority was able to increase the price of water then the return would be adjusted by the same amount minus the cost of tax and transfer fees.  If the price of water increased by 5% then the Coupon amount owed would increase by 4.5%. This approach gives the investor an inflation adjusted investment of 5%.  Using this approach the Authority could borrow about 25% more funds for the same price adjusted rate of redemptions. This would also lower the risk to the Authority as the return to investors would be tied to the Authority income.

The Market in Coupons

There are three markets in Coupons.  The first is where the Authority issues Coupons. It is expected that the terms of Coupons will vary to take into account market rates for funds. The second market is where Coupon holders can sell their Coupons to other investors. The third market is where Coupons are sold to consumers to pay their water invoices. The system operator will run all markets for the Water Authority.

The Role of the Operator of a Coupons System.

The operator of a Coupons system provides marketplaces for Coupons.  The operator takes no financial risk and is only an intermediary between a buyer and seller of Coupons. Transaction fees when Coupons are exchanged are used to pay for the market where the size of the fee is related to the size of the transaction and has been initially estimated at 5% of the redemption transactions.

Accounting for Coupons

When an Authority creates a Coupon it appears on the balance sheet as a long term liability expressed in kilolitres of water.  Each year the Coupon is not used the liability increases by some amount and the long term liability of the Authority increases.  This increase in liability could show on the P&L as accrued interest or it could be a revaluation of asset which would show on the P&L at the time the Coupon interest is redeemed.  The treatment will depend on the Tax Office.  For investors Coupon interest is not realised until the Coupon is redeemed.  This again could be considered either as income at the time it is accrued or as income at the time it is redeemed.  This will depend on the Tax Office interpretation.

Water Coupons as an Investment Vehicle

Investors in Water Coupons will hold an investment that is likely to preserve its value because the price of water is likely to increase with inflation and increasing demand. The Coupon conditions can be set so that the value of the Coupons is guaranteed to rise with inflation. The market in Coupons and the use of Coupons to pay for water consumption means the Coupon Market will be liquid but have price stability with a known return.  Using the same system and providing a mechanism for the transfer of Coupons between systems increases the depth of the market and increases market stability.

Water Rewards

Individuals volunteer to receive Water Rewards.  Rewards are not a right but are a Reward for low per head consumption.  This means if any individual cheats the system they can be banned from receiving Rewards.  Individuals attach themselves to a water meter and the amount of water per head passing through the meter is used to calculate the Rewards.  The Water Authority sets the amount of the Reward and the rules associated with operating the system.

Water Rewards helps an Authority overcome the conflict implied in the need to charge more for water the less that is consumed.  It does not make sense to consumers to pay more for water in times of high rainfall because they are using less water.  It makes sense to consumers to pay more for water in times of drought but charging everyone more for a common resource is seen as inequitable.

Issuing Water Coupons, equivalent to the amount used for depreciation and maintenance of the water infrastructure, and giving the Coupons to those who consume less water is a way of restricting demand in a fair manner.  It means the price of water can be increased in times of drought – if the increase is returned to the community through Water Coupons. Such a system should pass the scrutiny of Pricing Regulators.

System Effects

Viewed as a self contained system Water Coupons and Rewards provide a means of fairly allocating a common resource of water. Funds supplied by Coupons are only used for increasing and maintenance of supply,  and are not diverted to other uses.  Rewards entitle those who do not use the common resource to receive some compensation from those who do. The system provides incentives for the Authorities to use funds wisely and for consumers to conserve the common resource.

Financing and Development of Water Coupons and Rewards

The cost of developing and running a Water Coupons System will be paid by the organisation operating Water Coupons. This could be the Water Authority or another party.

The system will be developed in stages but should be fully operational within six months of a decision being made to deploy.

The initial tasks are:

• Appoint an organisation to build the Coupon system.
• Establish the legal and regulatory framework
• Establish the taxation rules for Coupons and Rewards
• Establish the accounting rules to be applied
• Define the operations of Coupons and Rewards and implement computer systems
• Run a trial with the issuing and sale of a relatively small number of Coupons
• Run a trial with the issuing of a small number of Rewards

Summary on Water Coupons

Water Coupons and Rewards provide a mechanism for Water Authorities to fund Water Infrastructure in a less costly manner than existing money loans.  The risk of default of an Authority is reduced and the Authority will make higher profits.

Water Rewards helps reduce the conflict in the supply and costing of water.

The system requires no significant change or cost to the existing operation of the Water Authority systems and can be introduced incrementally with no disruption to the supply or payment of water.

Emergent Properties

Coupons can be used in any situation where credit is extended to a buyer. By removing interest on interest and by adjusting credit for inflation means that the tokens used for credit have no value in and of themselves.  This removes the “time value of money” but does not remove the time value of credit.

Because there is no longer a charge on money tokens investors and borrowers can take a long term view of investments and there will no longer be the imperative for an organisation to repay credit at the first opportunity.  This environment favours patient capital.

Because the uncertainties of interest rates and inflation are removed from investment decisions it becomes easier to calculate returns on investments which in turn will lead to better investments.

Because money tokens need no longer have a value any government can issue money tokens with zero interest to build new assets that will increase the wealth of citizens.  All new public infrastructure could be financed with zero interest Coupons. This reduces the need for governments to tax citizens to build public infrastructure.  However, the government may choose to issue interest bearing Coupons for infrastructure purposes and use the returns from the investments to reduce the need for general taxation.

The widespread use of Coupons is likely to lead to a reduction or even elimination of monetary inflation. The reason is that few people will take out regular loans preferring to use lower cost Coupons.  Eliminating or reducing inflation reduces the cost of transferring assets.  Inflation occurs if there is too much money chasing too few goods.  If too much money is created then it will have to be spent creating new goods of new value using Coupons because value is created by building assets – not by leaving money in accounts collecting interest.

Reducing the Cost of Credit by Reducing Uncertainty

The most common method of supplying credit reduces credit risk by moving the cost of credit to a cost of money tokens. While this may appear to reduce risk, it increases risk because it moves the credit cost from the real cost of credit to an artificial cost of money tokens.  Because there is no true value in creating money tokens participants in the system tend to create too many money tokens because money tokens cost nothing to produce and yet they are given a value.  If money tokens are given a value when created it inevitably leads to distortions in the money supply, to unstable capital markets, to a high risk of investment and to financial gambling through such mechanisms as high speed trading.

One solution to the problem is to change the accounting rules associated with repayment of credit to remove the time value of money.  This will take away the incentive for participants to create too many tokens and will enable both lenders and borrowers to concentrate on using credit to add value. It leads to a stable price of capital and to increased certainty of investment returns.

To illustrate consider the following scenario where capital is required to fund the construction of a dam to increase the average amount of water available for sale.  Let us assume that the cost of credit is 7% per annum.  Let us assume that the dam costs $100M and that it will increase the average amount of water available for sale by 10 gigalitres per year for the next 20 years.  Each gigalitre, at current prices, can be sold at $2,000,000 per gigalitre or, on average, there is $20M per year increase in sales due to the construction of the dam.  Unfortunately, while there is an average of 10 gigalitres extra water there may be no extra water available for 10 years at which time there will be 20 gigalitres extra water for the next 10 years.  Accounting methods that include the time value of money means that at the end of 20 years the water authority would have paid back $100M together with another $100M in interest yet still owe the capital providers $144 M. The cost of credit through the use of money tokens over the 20 years has been $244M.

If we remove the time value of money then after 20 years the water authority would have paid back the $100M, paid $91M in rent and have paid off the capital providers. The total cost of credit would be $91M.

If however all the increase in water supply occurred in the first 10 years then the current method of cost accounting, including the time value of money, means that after 20 years the total cost of credit would have been $27M.  If the new accounting rules were used the total cost of credit would be $21M.

The following graph illustrates the cost of credit where the time at which repayments starts is varied.
In all scenarios the risk of not getting the money back is exactly the same yet the cost of credit that includes the time value of money is a non linear function.  With the revised rules the cost of credit is a linear function and depends, as it should, on how long it takes for the money to be repaid.  Using credit through extra money tokens means it is very difficult to estimate the value of an investment because the measure of value is a non linear function depending on the rate at which credit is repaid.

While ever money is created through the fractional reserve banking system then the issuing of credit by increasing the money supply will always suffer from these distortions.

The macro economic effect of the extra cost of credit manifests itself as endemic inflation.

Socially this has resulted in modern societies where a high proportion of the GDP is consumed by the financial sector.  It is estimated that this cost burden can be reduced by an order of magnitude by changing the accounting rules on repayment of credit to remove the time value of money.

There are many ways to arrange credit to remove the time value of money.  In the case of a water authority it can be done through investors pre-paying for the supply of future water. While ever the pre payment is not used then the investor is given an increased amount of water to be supplied after all the pre paid water is supplied.  Investors can be protected from inflation by increasing the amount of water they get if the price of water drops below the rate of inflation.

A water authority can easily estimate whether any capital should be expended because it knows how much it is going to pay for the capital.  An investor knows exactly how much their return on investment will be and can make rational decisions without having to guess the rate at which funds will be returned.

Using this approach takes the financial guesswork out of investing and lets investors concentrate on the likelihood of the investment giving a real return in value.

Proposed Submission to Privacy Amendment Bill 2012

Submission to the Inquiry into the Privacy Amendment (Enhancing Privacy Protection) Bill 2012

The Privacy Amendment Bill 2012 is written within the constraints of the existing practices for collection and use of personal data.  The writers of the legislation have tried to be technology neutral.  Unfortunately it is difficult to devise policy rules without making assumptions on the technology used to operate the system. This is evident in the explanatory memorandum and in the volume of legislation to protect privacy in the reporting of credit history.  Most of the changes to legislation are required because of the technology currently used to implement the reporting of credit history.

Privacy issues arise when personal data is stored and shared between organisations and persons. In particular two technologies influence how the system operates and hence the legislation is not technology neutral.  These technologies are:

1. For some purposes it is assumed that the most efficient way to share data is to collect copies of data from disparate groups and store them in large databases. Examples are files kept by credit bureaus, and files kept by the Tax Office.
2. Often it is impractical to create a single data base of data but the data still needs to be shared.  It is assumed that the most efficient method of sharing is to give each individual a unique identifier to be used across the different databases.  An example is the current ehealth initiative and attempts by the government to introduce a common govID.

In today’s connected world with rapid communications and powerful computers there is a more efficient technology to share and combine data. This can thought of as “just in time sharing”.  Data is not shared or collated until there is a need to do so.  This can be achieved by providing a means for an individual’s data to be shared at the time it is needed – and not before.  The two technologies described in 1 and 2 above combine ALL data even though it may never need to be combined.

A “just in time” technology can be implemented easily and simply by providing a mechanism for an individual to access their own data at the time it is stored and informing the individual when  personal data is accessed by a third party.

To make it possible for a “just in time” technology to operate effectively the legislation can include two extra ideas.

1. Whenever personal data is stored by an organisation that follows the National Privacy Principles (NPP) the individual must be informed and given access to the data stored.
2. Whenever stored personal data is accessed by a party other than the NPP the individual must be informed that the access has occurred, by whom,  and what data has been accessed.

Informed means that the person has the right to know and can access the information if they so desire.  It does not mean they are notified immediately.

These additions do not conflict with the proposed amendments.  Those cases where a person is not permitted to be told what information is stored are already covered by the legislation and those sections can override 1 and 2.

These additions reinforce existing privacy principles on right of access and make it more likely that errors in data storage will be detected.

There is no need to change existing systems and the rules need only apply to new systems and to changes to existing systems.

Implementation is inexpensive and can be made “automatic” and implemented for a very low cost. Implementation is inexpensive because the NPP has obtained permission from the person before the data is stored and so is in contact with them.  The NPP uses the same communications channel to tell the person how to access the stored data.  When a third party accesses the data the NPP uses the same communications channel to tell the person that their data has been accessed.

The additions will be shown to dramatically reduce the cost of compliance. It will dramatically reduce the cost of operating information systems holding personal data whether data is collected in databases, or data is federated using common identifiers, or whether “just in time” collation of data occurs or whether some unthought of innovation occurs.

It is likely that there will be a wholesale conversion of existing systems to use the new technology because it results in very efficient, very private systems.  This happens because compliance of most of the privacy principles are automatically achieved if “just in time” technology is used.

Emergent Properties of User Managed Access to Personal Information

Paper shown at European Identity and Cloud Conference 2012

EmergentPropertiesofUserManagedAccesstoPersonalInformation

A Stable Money Supply

Positive feedback tends to cause system instability, divergence from equilibrium, oscillation and often exponential growth. (Wikipedia).

Modern monetary systems are unstable. To address the problem any positive feedback components should be examined and if possible eliminated or alternatives made available.

In monetary systems two widely used accounting rules create positive feedback. The first is the payment of interest on interest and the second is the creation of interest bearing loans backed by money.  Both of these are accounting conventions and both can be less widely used if instability becomes an issue for any community.

Any widespread inflation of goods, services or assets is a sign of instability.  There is no safe level of inflation.

One of reasons for inflation is debt paying interest on interest that swamps interest on money backed by tangible assets. There is little justification for having interest bearing money in the system that swamps interest paid on tangible assets.

Interest on Interest

When interest is paid on interest the equation is I = I + f(I).  This is a positive feedback term and to remove it we can to set up loans so that interest accumulates but there is no interest paid on interest.  This can be achieved by ensuring that when loans are repaid the capital amount reduces, interest accumulates but there is no interest paid on accumulated interest.

Creation of Loans backed by Money

When a loan is made money is created.  Normally loans are only created if they are backed by assets.  If a loan is made and it is backed by money then the equation is M = M + f(M). This is positive feedback.  In an expanding economy it is necessary to increase the money supply through loans and so creating money backed by money is not necessarily a problem.  However there are social implications as it means that the increase in the money supply is given to the people who already have money.

An alternative is to create loans without interest and to ensure the loans are used to create new assets to back the new money.  The most obvious way to do this is with loans of benefit to a broad area of the community, as in student loans, or with infrastructure that everyone can use, such as water supply or energy supply. A good way to give the loans is to the citizens who pay for water and pay for energy.

Reducing the Cost of Public Infrastructure

The following submission is a response to the invitation from Minister Barr for Canberrans to give their ideas on the upcoming budget for 2012.  http://www.treasury.act.gov.au/budgetconsultation/2012-13%20Budget%20Consultation.pdf This submission is not one on suggestions on spending money but a suggestion on reducing the cost of funding capital works and community infrastructure. By reducing the cost of funding  more can be built with the same taxing base or taxes.Like almost all governments the ACT government is failing to use community credit to benefit the community.  Governments have been persuaded by private interests supported by a flawed economic theory and accounting practises to privatise community credit instead of using it to fund community infrastructure.

It wasn’t always like this.  In 1911 Sir Denison Miller was appointed as the first governor of the Commonwealth Bank.  Within a few years the Commonwealth Bank was the largest deposit taking Bank in Australia.  During Miller’s time the CBA funded the First World War and community infrastructure such as roads and ports without going into debt.  At the time the CBA did not have the authority to issue currency but it did have the backing of the Commonwealth Government. It achieved these remarkable economic achievements without borrowing but used the credit worthiness of the people to fund community projects including the First World War.  After the death of Miller control of Australian Credit was returned to London and Miller’s bold experiment stopped.

Most Governments have been persuaded to give the people’s credit to private interests but there have been some notable exceptions. The post-war reconstruction of Germany and Japan were built on government credit.  China’s economic rise has been achieved through government credit. The USA rose from the great depression through their government funding the Second World War. The Tiger economies of Korea, Taiwan, Hong Kong and Singapore have achieved success through government funding of community infrastructure to benefit exporters.

The allocation of credit through the creation of new money is an old idea generating interest in the USA and Europe.  Ron Paul, a candidate in the Republican presidential nomination, advocates the State taking back responsibility for money creation from the Federal Reserve. The British New Economic Foundation http://www.neweconomics.org/projects/monetary-reform outlines many strategies for communities to take control of their own credit.  This article outlines possible ways for the ACT community to achieve the same goals.

The ACT government can change the course of ACT economic development for the better by taking control of community credit and using it for the benefit of the community. It requires imagination and courage but no legislative or banking changes. The remainder of this submission outlines how, over the years, the ACT government can reduce the cost of funding capital infrastructure by at least 50%. These savings can be used on new projects, or to get the budget back to surplus and/or to reduce taxes.

How to Generate Community Credit

The ACT Government has control of investments of over 3 Billion Dollars.  These funds can be leveraged without risk, through the banking system, for the government to generate loans to the community it supports.  An existing bank could be approached to work with the ACT Government.  If no bank can be found then Australia Post could be approached to act as banker to the ACT or if necessary the ACT could create its own bank.  That is, the ACT government could use an existing bank or create its own bank capitalised with the 3 Billion in existing ACT government investments.  The Bank does not loan the capital or put it at risk but uses it to satisfy the banking accounting regulations.  This book keeping exercise enables the government to create constructive community debt as outlined in the article titled “Want to end the GFC – put debt to good use”.

The ACT Government Bank, or a commercial bank, could issue loans, up the value of its capitalisation, to the ACT Government at whatever interest rate it wishes, provided the debt was used to develop the community within the ACT.  The loans are given to the ACT community and guaranteed by the community through the ACT government. This means there is no point in charging interest to cover loan default as the community itself is the party at risk.

The Bank could use new loans to buy back all existing government debt held with commercial banks and replace it with zero interest debt.  This will put 70M directly to the ACT government bottom line from interest savings.  The bank creates the money for the loans through the fractional reserve system.

Because of the reduction in interest payments the budget will be in surplus.

The Bank could issue every ACT resident, who wants it, with $5,000 in interest free credit. This can only be used with businesses who agree to accept the credit and leave the funds in the ACT bank at zero interest.  This would be implemented with an ACT Credit Card. Children’s credit would be added to their parent’s credit card. The Bank will collect merchant fees of 0.5% which will cover all the Bank’s operating expenses both for the credit card operation and interest free loans.  This will reduce the cost of doing business in the ACT. It is likely to result in a decrease in interest debt for ACT residents, rather than an increase in spending, as people move to pay off interest bearing credit cards.

The ACT government can reduce the cost of new housing in the ACT while still keeping land prices high by funding house mortgages for new dwellings using the scheme outlined in the article titled “A house for half the cost – here is how” .  The Bank could offer to buy out existing home owner mortgages with the new loans. This will reduce the time mortgage holders need to pay off their mortgages and would be a safe investment for the Bank.

The ACT Government could issue interest free investment Energy Rewards.  The Energy Rewards must be invested in ways to reduce the level of green house gases either through investments to save energy, take green house gases out of the atmosphere or produce emissions free energy.  This will enable the ACT government to move rapidly to meet its greenhouse gas targets.

The ACT Government, through the involvement of its citizens in similar schemes to Energy Rewards, can embark on improving the ACT environment by increased investment in schooling, health, public transport and new innovative industries.

Summary

In the same way that the cost of a house can be halved through reducing finance charges so the cost of ACT infrastructure can be halved.  This means the ACT can build twice the infrastructure for the same cost.  The system is self perpetuating because as old loans are paid off so new loans can be given.

As part of the scheme the ACT Government could produce a real time economic indicator website from data collected by the bank.  This will show the flow of money within the Bank and it will be available to all citizens so that everyone can see how the bank is performing.  This transparency will alert citizens to any problems that might arise by making the bank – and the government – accountable on a real time basis.  Instead of stock market reports the nightly news will show real-time indicators such as loans outstanding, private investments, bank profits, credit card debt and payments through the bank.

These benefits all become possible because of productivity improvements obtained by reducing finance costs through the elimination of interest on newly created money and the elimination of interest paid on interest.  It should be noted that interest is still paid on savings and that commercial banks can still operate in exactly the same way they do today.  The difference is that there is a competitive alternative on how community credit is used and the way assets are transferred between citizens.