A Blog by Kevin Cox

Fixing the GFC while reducing ghg

Kevin Cox — Sat, 31 Oct 2009 19:50:47 +0000

I have just listened to the last Soros lecture and he makes many good points http://www.ft.com/indepth/soros-lectures .

Soros has long argued that stable equilibrium as a model does not reflect reality and he continues to make a lot of money because policy makers act as though it does.

I have also listened to a talk by Tim Jackson and read his book – Prosperity without Growth. http://www.earthscan.co.uk/?tabid=92763

Jackson says to solve the GFC we must invest in ways to reduce the growth in consumption of finite resources while still growing the economy. He says that the current economic system is one where growth comes from consuming more finite resources and that this is unsustainable. Soros says that the global financial system is unsustainable as it has what he calls reflexive feedback in the way we invest in existing assets. What he means by reflexive is positive feedback.

There is a single solution to both these problems and it does not require any change in the existing economic system – only an addition.

The addition is to provide zero interest loans for greenhouse gas reduction investment or other investments that reverse consumption of finite resources.

This will not change the existing economic system – only favour investments in a particular area of the economy. It solves Soros reflexive problem because the loans increase the amount of productive assets rather than push up the price of existing assets. Our current system is one where it is financially cheaper to borrow money to buy existing assets than it is to build a new asset. Reverse this (with some – not all) assets – particularly where we have asset bubbles – and we would find the reflexive forces diminish and financial markets stabilise so making the stable equilibrium hypothesis better reflect reality.

I would most appreciate any comments on the following slide show. It takes 8 minutes and it shows a financially responsible way to give zero interest loans without causing excessive loans to be created and ensuring that most of the loans get repaid. It can also be constructed to be equitable and reduce the influence of vested interests (those who already possess wealth) while at the same time fairly compensating those (like the fossil fuel burners) whose asset values are destroyed.

http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability

It is practical, can be quickly implemented and can be constructed so that the whole of society shares in the increase in wealth from the new investments. This should make it politically saleable.

Zero Interest with Zero Emissions

Kevin Cox — Mon, 26 Oct 2009 02:07:01 +0000

A slidecast of this presentation is available at http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability

Approximate text

This talk was first presented at the green new deal event put on by the green institute http://greeninstitute.org.au/gnd

It came after an talk by Tim Jackson who presented his book Prosperity without growth.

In the talk I discuss one mechanism to implement Prosperity Without Growth.

The key to sustainability is energy sustainability. We cannot have prosperity without adequate energy and so the starting point for sustainability must be energy. If we can have abundant cheap sustainable energy we can address other issues but if we do not have energy we will not be able to achieve overall sustainability. To achieve cheap sustainable energy we must replace or substantially modify the way we generate most of our energy and that will require investment. This talk addresses how to obtain the money to invest.

First let us look at the costs of energy by various means. This diagram shows the proportion of costs to produce a kwh hour of energy using the economic system we have in place today. The green represents the cost of repayment, the red the cost of interest and the blue the running costs. The red and the green financial (or money) costs dominate the cost equation for all ways ways of generating energy.

This slide shows the actual costs in cents per kwh. Clearly unless we address the interest and repayment costs it is going to be difficult with today’s economics to get the amount of investment needed to produce enough energy.

In this slide we see the estimated costs in 2020 to produce a kwh of energy. Again the dominant costs are interests and repayments. If we do not reduce the costs of interest and repayments to make renewable energy economically competitive we must increase the cost of fossil fuel by increasing the operating costs of burning fossil fuel. We can do this by putting a price on the emissions of carbon in some way.

This slide shows how much do we need to increase the price of fossil energy to make renewables price competitive. Even for very efficient methods such as large scale geothermal or wind energy we will need to double the price of energy to make renewables price competitive. This will impose unacceptable burdens and it is highly unlikely that we can get all countries in the world to agree to such price increases.

This slide shows us how much it costs to save 1kg of CO2. The negative amount for coal shows the cost of saving 1 kg of CO2 through energy conservation. Clearly energy conservation is today the cheapest way to reduce CO2.

The message from the previous graphs is that if we could reduce the cost of finance we would make sustainable energy profitable and hence people would invest.

To see how we can reduce the cost of finance let us examine how finance works today, then propose an alternative and show what is needed to make it work.

Let us first look at how a coal producer with and existing energy plant finances the building of a new coal plant. He goes to the bank and requests a loan. The bank decides to give him the loan and creates the money to give to Fred. It is important to realise that the request for the money comes first and then the bank creates money which the government promises to honour. The bank does not take money on deposit and give it Fred. The bank creates new money that it is going to give to Fred if he promises to pay the money back at some time in the future. To make sure Fred pays back the money the bank requires a mortgage on Fred’s existing assets. That is Fred promises to give his existing power plant to the bank if he does not pay back the loan. Fred takes the money and builds the power plant. He promises to also pay interest and typically that might be 7% interest and repaid within a period of time. The new plant either succeeds or it fails. If it succeeds the loan is paid back and the bank destroys the same amount of money it previously created. If the plant fails then the bank is obliged to seize the old power plant sell it and use the money to pay back the loan and destroy the money.

The purpose of the existing process is ensure that creating money through loans and the destroying it when it is repaid will limit the total amount of money in the system and hence reduce the risk of inflation.

Let us know look at the case of someone who wishes to build a new asset but does not have any existing asset. Fred wants to build a solar thermal plant. Currently he has no asset and so he cannot go to the bank to get a loan as he has nothing to mortgage. Instead he goes to an investor. The Investor has saved some money and gives it to Fred. The investor expects a high rate of return on his money – typically a minimum of 20%. Fred builds his power plant and in order to receive a high rate of return he must charge a high price for his output. The new plant succeeds or it doesn’t. In one case Fred and Investor have an asset that will continue to generate money for them. In the other case they lose their money or part thereof. The important point is that no money was created or destroyed in this process.

Using equity investment rather than loan investment means that the cost of finance is high because an investor can simply leave the money in the bank with near zero risk and still get a return of interest. There is also a shortage of money for equity investment because it must come from savings or from people prepared to risk other assets to create a loan to then invest. If there is a shortage then the price rises.

Let us now look at another scenario. In this case we are going to give zero interest loans and require repayments from the earnings. Fred wants to build a Solar Thermal Power Plant. He goes to the bank that creates the money and gives it to him. The government guarantees the money so the bank need not charge any interest because it does not have to pay interest on money to cover the loan because the government is guaranteeing the money. Fred now builds the power plant, trades and either the plant succeeds or fails. If it succeeds it makes a profit and the profit is used to repay the loan. If it does not succeed then loan is not repaid and Fred loses any deposit he may have made. The money supply has also increased.

The risk to the government (or really to the community) is that if too many loans fail it will increase the money supply to such an extent that it causes inflation.

To make zero interest loans work we have to ensure compliance and we have to make sure we do not create too much money. We first ensure compliance by the government deciding how much money to create and the areas of investment where the money will be invested. That is, the government limits the overall risk.

A key question is to whom to give the right to take out zero interest loans. It could keep the right to itself – which it does in times of war – or it could give it to people who already have assets or it could give it to the population. Giving it to the whole population on an equal basis is fair and democratic and is likely to be a politically acceptable solution. Let us assume that this is done. Each person in the population gets a relatively small amount of rights to take up a zero interest loan. People can trade their rights if they are risk averse and do not want to invest themselves.

Loans are made with a 10% deposit that is paid back when the loan is repaid. When the loan is given then there is an agreement on how the money will be repaid from the earnings on the investment.

Finally if the bank, plant owner or investor breaks the rules of investment then they are banned from further participation and they have to repay all outstanding loans.

Low cost finance will lead to low cost renewable energy. It is estimated that we can get to zero emissions by 2020 with $1,500 of loans available per person per year.

Please contact me if you are interested in more information or would like to implement zero interest loans.

Patent Protection of Genes Unnecessary

Kevin Cox — Fri, 02 Oct 2009 19:28:03 +0000

In a recent LateLine discussion Jim Greenwood, president and CEO of the Biotechnology Industry Organisation put out a challenge to Australians to come up with a better way of financing research and development in gene research than the approach using patents. The following is a better way.

Patents are used to increase the cost of the commercial products arising from gene research and development. This increase in cost is used to pay the interest and repay loans created to fund the investment research.

The other way of funding gene research and development is to give R&D institutions interest free loans to conduct the research and development and to repay the loans from any profits that might arise from products created from the R&D. That is, instead of increasing the cost of the final product to pay for the investment we reduce the financial cost of the investment and repay the zero interest loans from the profits. This will result in an explosion of research and development in this and other related technologies.

To see more on this idea visit this article on how to fund investment in ways to reduce greenhouse gas emissions. Another article that discusses the details of one way to implement and share the benefits from this approach can be found at this article on the democratisation of government spending. There are many other variations on the same idea at http://cscoxk.wordpress.com on ways to fund investment in public infrastructure but the central idea is the same.

The idea is an old one and was used by the British Colonies in America to fund the development of the USA once the USA broke away from Britain. It was used by the Japanese to fund their post war expansion. It appeared to start in the Renaissance Italian States but they, and other states that followed, tended to use it to fund wars and so the approach fell into disrepute. Perhaps the other reason the ideas have not become the dominant method of organising finances is that the current system concentrates wealth with a few and they tend to work to hold on to their economic advantage.

The same ideas are at the heart of the work of the Kelso Institute. Download the two books The Capitalist Manifesto and The New Capitalists.

Creative Finance to build the Cotter Dam

Kevin Cox — Wed, 09 Sep 2009 21:02:45 +0000

ACT Residents are being asked to pay extra money for water to pay to build the Cotter Dam. The following is a financing arrangement that will build the dam, cost the government and Actew nothing, cost the Federal government nothing, give the residents of Canberra ownership and ongoing income from the dam and be very attractive to the banks.

Each resident served by the dam can be given the right to take out a zero interest loan with special conditions from any bank that wishes to offer the loans. The special conditions on the loan are that the money from the loan must purchase debentures from Actew. The money from the loans does not earn any interest. The loans must be paid back from income from the debentures which will come from higher water prices. Because the banks do not give interest on the money and because the loans must be spent purchasing Actew debentures the risk of the loans not being paid back is low and so banks do not have to take out any loans themselves to cover the assets nor do they have to keep a fraction of the loan value as liquid reserves because there will be no claim on the loan. If a person sells their debenture they must immediately repay their loan in full.

Banks can charge appropriate transaction fees. Actew gets money to build the dam. There is no cost to the government and residents end up owning the dam and once the loan is repaid residents will keep the income from the debentures.

Published as a Letter to the Editor CT 9/9/9

Reforming Election Funding

Kevin Cox — Thu, 27 Aug 2009 07:21:55 +0000

The following appeared as a letter to the editor of the CT on August 27th.

Bede Harris in his article “Our democratic system fails us” CT August 26th makes two good suggestions on how to reform the system. Another reform can be made in the allocations of public funds and political donations to candidates. Currently we give election money to people after the elections, not before, and we link the money they receive to the number of votes. This system is guaranteed to preserve the status quo and makes it very difficult for new parties, and people with different views to become elected. One way to reform the system is to give candidates money before the elections and for voters to allocate the money to candidates. Here is one easy to implement inexpensive approach that could also reform political donations.

Let us have a pre election electronic fund allocation election.

Twelve months before the real elections we have a fund allocation day where voters specify the proportion of money they wish to go to the different candidates. The money is distributed the day candidates on the ballot are announced. The system would be built and paid for from non political sponsorship in the same way we sponsor sporting events and the extra funds raised will supplement the public amount available. This would also provide a “non political” way for organisations to support the democratic process and remove the need for unedifying “fund raising dinners” and political donations that are a blight on our democracy.

Financing a Nation’s Health Bills

Kevin Cox — Sat, 22 Aug 2009 22:47:57 +0000

Another approach to funding health is to realise that most medical costs do NOT require insurance. That is, we can predict pretty well how much we need on average for the “regular” items. These are things like dental work, regular “check ups”, pre-natal, birth and post natal, injections, minor accidents, treatment for diseases such as diabeties etc.

Major accidents, major unexpected health issues like a heart attack (even that possibility can be estimated), where people do not have the resources for immediate treatment can be covered by treating people when the emergency happens, as we do now, and paying the bills through non recourse loans.

Given this view then insurance becomes unnecessary if people have the resources to cover the predictable.

So instead of health insurance or medicare let us have “medisave” where we give everyone an amount of money each year that they can only spend on health. The money earns interest and can accumulate – but it can only be used for health related matters.

We pay for emergencies when they occur by “automatically” giving people non recourse loans that we repay from the health money we get in the future. We can vary the amount of money each person gets if they have chronic illnesses ( or if they have an emergency). We write off the loans if they die.

Money in a person’s account can be passed on as a normal asset.

We pay for capital works through giving every person in the country the right to zero interest loans that can only be invested in health infrastructure – buildings, machines, etc.. These loans will be paid back from the earnings on the infrastructure. The electorate chooses where they will invest their loans.

This brings choice, frugality, “insurance”, and markets to the provision of health care and can be easily organised as the only change is the flow of monies not the actual physical systems.

To move to the system is easy. We transfer all the “reserves” of health insurance companies to medisave accounts. Insurance companies are now the “banks” where we keep our health money and through which we arrange our zero interest loans. Each year the government transfers from taxes an amount of money to each person’s medisave account depending on their medical condition.

The Democratisation of Government Spending

Kevin Cox — Fri, 21 Aug 2009 17:17:24 +0000

One of the major issues facing governments, for which they get a great deal of criticism, is the spending of government funds on community infrastructure. The free marketers say that leave money with people instead of taxing and let the market decide the provision of goods and services. Socialists tend to agree with this provided those without money are given money, to allow them to participate in the market, or more commonly given goods and services.

Both ideas have merit but both are flawed. The flaw is that citizens, by and large, have little say in the goods and services that are built. They may have choice in what is made available but they have little influence on what services are provided. While-ever the government takes on the details of that role they get bogged down in the minutiae of deciding and administering systems that provide these services. Also systems built this way become extremely difficult to change when new technologies appear and it often takes generations to take advantage of new efficient technologies.

The particular problem of changing technologies we have at the moment is the building of a new sustainable energy infrastructure for Australia. The difficulty is that existing technologies will have to be phased out with associated costs and also new costly infrastructure will have to built and yet we do not know the most efficient ones to develop and so investment is risky.

This problem can be overcome by the democratisation of funding a new energy infrastructure and of sharing the risk of failure of particular technologies throughout the whole community. Democratising infrastructure funding will cost the government nothing and it will spread the risks throughout the community and also spread the gains from the winners throughout the community.

A Way to get to Zero Net Emissions

The government shall decide on an amount of money to be invested by the community. This will be based on how quickly we want to get to zero emissions. Let us say this is $30 billion per year for the next ten years.

Each year the Australian Government will distribute to each individual in Australia the right to obtain a zero interest loan for $1500. Anyone taking up the loan has to agree to invest the loan amount so that the investment will result in a reduction of green house gas concentration in the atmosphere. If a person does not want to take up the loan then they can sell the right to someone who will take out the loan.

The banks will administer the loans but the loans will not appear on the banks balance sheets. What this means is that government takes responsibility for the money created for the loan but does not take responsibility for the loan.

The banks will ask the borrower for a zero interest deposit of 10% of the loan – to satisfy their fractional reserve obligations.

The loan will be paid back from returns on the investments.

The fees that banks will charge, how much of the deposit is returned to the borrower, how much is paid back in total is up to each individual bank.

The borrower must agree to invest the money in a market place of investments that will reduce ghg concentrations. This will be an electronic market place and both sellers and buyers must agree to report the provable amount of ghg saved as the result of the investment. The amount of ghg saved may be used to give more rights to zero interest loans in following years.

The government will monitor the success or otherwise of the investments and of ghg emissions saved or removed from the atmosphere.

The outcomes

The 30 billion will act as a stimulus to the economy but it will be spent in productive ways. The government does not have to take out loans as citizens take out the loans. That is, citizens take on the risks and rewards of investments.

Renewable energy is immediately profitable. If we take away interest and repayments then even solar cells are worth investing in. People however, will invest their money where they will get both the greatest return on investment and the greatest reductions in ghg so they get more interest free loans.

If buyers abuse the system they will be forbidden to participate.

If sellers abuse the system they will be forbidden to participate.

There will other secondary benefits to the system. The main one will be that the country will not have to borrow money to build its own infrastructure. This will in turn start to stabilise the money system because it will increase the money supply without increasing the amount of loans. This in turn will reduce inflation and will stabilise the currency because speculators will not bother with Australian currency because they know the government can increase the money supply if not enough money comes in from overseas and decrease the number of zero interest loans if too much money comes in.

The political outcome will be approval for any government that implements such a system. They will have “solved” the ghg emissions problem for no cost to the government, no extra taxes, and made everyone in Australia a little richer. This is the magic of investment. You get back more than you put in – if the investment is sound.

The National Broadband Network

The method can be applied to any community infrastructure including the NBN. That is, everyone in Australia who wants a loan can get one provided they agree to spend their loan investing in broadband and they agree to sign up to broadband when it goes by their home. That is, the government can supply the NBN to the Australian community for NO COST to the government.

Who loses

The only losers are the financial industry speculators. Banks win because they can give risk free loans. The community wins because it gets richer. The government wins because it can still control spending but without having to supply the money through loans or taxes.

Submission to Commonwealth Commercialisation Institute

Kevin Cox — Thu, 20 Aug 2009 19:43:03 +0000

Money for innovation is very expensive as you have to pay for it with equity. In my experience it is a minimum of 10 times as expensive as a loan to purchase an existing asset. This, of course, is the opposite to what we want if we want to foster innovation. The reason that money is expensive is that innovation of its nature is risky (but not 10 times as risky). This means that people who invest in risky ventures should get a high return – unless we could get the whole community to share in the risk.

I am currently approaching the banks and other parts of the government with proposals where the whole community can both share the risks and share in the rewards. The name of the proposal is “Zero Interest Loans for XXXXXXX’ where XXXXXXX could be innovation, renewable energy, hospitals, water resources, urban transport, ports, universities, schools, or any way we have of constructing and developing new assets.

The idea is to give everyone in the country the right to take out a zero interest loan for XXXXXXX purposes. The total amount of the zero interest loan would be determined by the government as would XXXXXXXX. People who took up the loans would pay them back from the income from the investment if the investment made a profit. People who did not want to invest could sell their right to investment. There are a variety of ways the loans and spending of loans can be structured. The approach “costs” the government nothing and the risk is shared through the whole population. You can read more at http://cscoxk.wordpress.com and at http://stableproductivemoney.wordpress.com/

Taking the Interest out of Loans

Kevin Cox — Thu, 20 Aug 2009 19:36:42 +0000

The world is experiencing a Global Financial Crisis. It is called a Financial Crisis because it started as a problem with the financial system and has spread to the “real” economy. We can see the symptoms and effect of the crisis but there is little confidence that after we come through the problem it will not happen again. In this article we look at the problem from the fundamentals of money and propose a solution that may stop the same problem reoccurring.

Money has two basic functions. The first is as a measure of value for the exchange of goods and services. The second is as a store of value.

The problem with the first function is that there are many measures of value (such as different currencies) and the measures keep changing because of inflation or in rare instances, deflation.

When it comes to money as a store of value, the issue is equally murky. Credit money is created through loans and is a representation of the value of something else. That is, the abstraction has no value but the thing it represents has a value. So when credit money is described as a store of value what we really mean is that what it represents is of value. “Fiat” or printed money does not represent anything and is used to facilitate trade rather than act as a store of value. Credit money and fiat money are indistinguishable because once they are in circulation no one can tell the difference.

So, despite the fact that we have a money system where, when we take out a loan from a bank we increase the money supply and despite the fact that we can simply print something and say it is money, money itself continues to have value because people will pay interest to gain use of it. And interest in and of itself is not an issue, while ever there is an asset backing money because interest can be viewed as rent of the asset that backs the money.

So what is the problem with money?

The first issue is that we have world wide targeted inflation. Allowing the value of money to change over time is not a sensible idea. It makes it very difficult for people to measure the value of things. Imagine how difficult it would be if the meaning of a metre changed on a weekly basis! This week it is the length of a rod that is kept in France and next week it is the length of a rod kept in Berlin. The week after we cut a bit off the rod in France and that is now a meter. It sounds absurd but this is exactly what happens with money. The measure of value changes minute by minute with random fluctuations.

The second problem is that the world has too much money to act as a store of value. There is more money issued than there are assets to back it and there is much more money issued than is needed for trade. When the sum of money in existence becomes too great the system corrects itself by the money being destroyed or through changing the value of money through inflation. If there is not enough money, the result is deflation, whereby the value of money becomes greater causing trade and industry to contract because there is no longer enough money go keep commerce operating.

This waxing and waning of the amount of money creates the so-called business cycle of economies, complete with the occasional recession and a few crises.

How can we both have too much money yet not enough and why do we have such widely varying and changing meanings of value?

The problem arises because of a quirk in the way we create credit money. Most money in existence is credit money and it is created when a bank gives a loan against an existing or future asset. To do this the bank uses some money that is already on deposit and then creates the remainder (and majority) of the money required by issuing extra money to the value of the loan. This in itself will not cause a problem because when the loan is repaid, the bank destroys the amount of money it created. If the loan is not repaid the bank is required to make up the difference from its reserves. (If the loan is not repaid then the bank is also entitled to seize the assets against which the loan was made and sell those assets to make up the money not repaid.)

This process seems reasonable and sensible except that banks can issue loans that are backed by money itself and this creates more credit money. Also banks are free to use another currency as the asset backing to create money in different currencies. What this means is that we increase the amount of money without requiring an underlying asset to earn enough money to pay the interest on the loan.

Because it is so easy to create extra credit backed by credit most transfers of money are now speculative transfers where money moves to try to take advantage of differing values of different currencies and money moves to take advantage of different interest rates. In and of itself this is useful, but when the main trade is trade in the measure of value then that trade comes to dominate the “real economy” of trade in other goods and services.

What is the solution?

There are many solutions to the problem. One way is to attempt to regulate banks and restrict how they create loans and hence create money. Unfortunately this has not worked very well to date and to improve the regulations requires the agreement of all countries.

A different solution is to create money that we are assured will be used to create an asset that will back the money created. There are various ways to do this. One simple way is for banks to issue zero interest loans that may only be used for the creation of new assets. Banks would be repaid – potentially more than was originally loaned – over the life of the asset providing the asset earns enough money. Such an approach would gradually remove the need to create extra credit money by having enough money already in existence to act as a store of value and to be used for trade.

Will banks do it?

Under existing banking regulations banks may not be allowed to do this because there may be no asset backing the loan when it is first issued. However, if it is highly likely that the money would create a productive asset or an asset that is of value to the general public, then the banking regulator could allow it. So, will the banks be interested? Banks are only likely to support such an approach if they are guaranteed not to have to make up the money from any failed loans from their own reserves. A simple way is that the money created for zero interest loans used for the creation of new assets is backed by the government. We have this already with the recent bank guarantee of deposits which is far more onerous as the government is guaranteeing the money created for all loans created by banks and not just money created for new assets.

And there is a way for banks to cover their risks. They create loans but only if the borrower deposits a sum of money at zero interest that reverts to the bank if the loan defaults. The other way is to build systems that make it highly probable that the money will create a new productive asset. It is the ability of modern information systems to ensure this occurs that makes this approach viable.

Will depositors deposit money at zero interest to get a loan at zero interest?

They will provided the deposit is much smaller than the loan given and depending on how much they have to return to the bank and over what time period.

Should governments be involved?

If governments are going to guarantee the money created for the zero interest loans then they must be involved. Banks can still issue zero interest loans without the guarantee provided they are confident most loans will be repaid and if the system works as expected and the default rate on loans is small. However, in the first instance it is expected that governments will use the approach so that they can direct investment – via zero interest loans – to areas of the economy where new investment is needed but cannot compete for funds used to purchase existing assets.

For example the Australian government could guaranteed the money created for zero interest loans for investments in new assets that would reduce the level of greenhouse gas concentrations in the atmosphere. If the government did this then the cost to the government would be a permanent increase in the money supply equal to the value of the new assets created. Provided the value of the new assets created was in total greater than the money invested then there would be no net loss to the economy.

If, as expected, this method of financing new assets proves successful then governments may be needed to stop the runaway creation of money for zero interest loans. Governments may need to put a cap on how much money is created this way and to determine which areas of the economy should be encouraged with such loans. This is what governments now try to do through diverting taxes to particular areas of the economy or through schemes such as emissions trading. A move to create money through investment in productive assets will mean less need for these other ways of encouraging investment.

Will it stabilise the value of money?

If it is done on a grand scale this method will stabilise the money supply because zero interest loans to create new assets will become the preferred method of funding the creation of new productive assets and hence the preferred method of increasing the money supply. Purchasing existing assets will still be funded by credit money but asset bubbles are less likely to occur. Let us take the example of housing. If some new houses were financed through zero interest loans, where the loan had to be repaid immediately the house was sold then it becomes less likely that people will pay inflated prices for existing houses because it will be cheaper to build a new house and live in it for some period of time.

The price of money for loans (interest) will act as prices are meant to act – as a signal to the market to produce more money. If the price rises governments can encourage money and asset production by guaranteeing the money created for zero interest loans for worthy community projects that have little economic benefit but large social benefit.

A major impact is that it will become less attractive for money traders to speculate in money values because the price of money will stabilise and traders will know that the government can easily turn on and off the creation of zero interest loans. Governments will be able to defend their currencies and stabilise value as they have a method of increasing supply if demand increases or decreases.

Doesn’t this require massive changes to the financial system?

It requires NO changes – only the creation and monitoring of zero interest interest loans. Everything else can remain the same.

Where does a government start to encourage zero interest loans?

Any area where a government feels there is a need for investment can use this approach. Perhaps the most pressing example is the need for investment in ways to reduce greenhouse gas concentrations.

But won’t everyone want zero interest loans?

The right to have a zero interest loan is of value. The simplest form of rationing is to allocate the right equally to anyone who wants to apply and to allow the right to a loan to be tradeable. The other form of rationing is to require a higher proportion zero interest deposit before the loan is given or to increase the amount of money to be returned to the bank for the loan.

Are there any examples of this approach?

Contingent loans, such as Australia’s HECS, is an example of this approach. The book “Government Managing Risk” by Chapman describes the theory behind this concept.

The whole movement of micro loans is based around the same concept of giving loans to people without assets so they can build more assets.

We can increase the money supply through the concept of Rewards or through the giving away common stock in companies building community assets like the National Broadband Network which will have the same effect of increasing the money supply by the creation of assets.

While giving away restricted money to build productive assets is an approach that will create assets then create money the idea of giving away the right to zero interest loans is more likely to gain acceptance and will be easier to adopt because it can be introduced without government involvement by banks, such as NAB, who already provide micro-loans without the recipients of the loans having existing assets to back the loans.

Banks not the cause of the GFC but the solution

Kevin Cox — Wed, 12 Aug 2009 23:46:25 +0000

The banks are not the cause of the Global Financial Crisis but are the solution. They can now, if they choose, solve the problem as they have been given the tool to do so with the government guarantee of deposits. In fact banks have, through their diligence, prevented the crisis from being much worse than it could have been.

Banks are given the responsibility of creating credit money. They are permitted to give loans of up to 90% of money that is on deposit. They are also required to accept deposits and money from other banks. If loans they give are not repaid then banks have to “make up the money” from their own reserves or seize the assets against which the money was created and sell those assets. Banks have done this job very well and will continue to do so.

The difficulty is that banks prefer NOT to take on the risk of lending money against risky future assets because that is a very great responsibility and one bank that goes bust can bring all the others down. The reason is that most money is not loaned out with assets as a backing but with other money as the backing. The system has an inbuilt bias towards the creation of more and more credit money to cover the risk of loans. Unfortunately if enough loans backed by other loans default the whole system could collapse because money is created and backed by risky defaulting loans.

The solution to the problem is for the government to take on the responsibility of having enough money in the system so banks only lend money they have on deposit. Governments have inadvertently given the banks the way to do this with the government guarantee of bank deposits. What this means is that banks can now loan out money and if they lend too much and one of the banks falls over then the others will not go as well. This is what nearly happened when Lehman Brothers could not pay all its debts. There is no doubt that if one of the major banks went broke in Australia all the others would as well.

The banks now have the opportunity, through the loan system, to build up enough “non credit money” in the system so that they have little need to create credit money. How can we do this and where does money come from anyway? Non credit money comes from enterprises that produce more goods and services than it costs to produce. That is, the profit that is left over is extra money that can be lent. However, it is “expensive” money because it has been hard earned and people want to get a better return on the money than through just renting out existing assets. Money from savings from profitable enterprises then tends to be used to buy equity in new ventures that may or may not be profitable but if they are profitable will give a very high return. So money to build new assets costs a lot more to the asset builder than money to buy old assets because old assets are less risky and so banks will create credit money for those purposes but not for new assets.

Here is how the banks can build up non credit money but encouraging the building of more new assets.

Banks can give zero interest loans to anyone who says they will either purchase a new money saving asset or invest in a new money generating asset. The critical factor is that it must be a new asset that did not previously exist. So banks could give zero interest loans to anyone who promised to use it to buy an new asset – like a house – or build a new house – or put on an extension – or build a new factory – put up a solar array – put money into a solar thermal power plant. So that the banks get something for administering the loans then the banks could require a zero interest deposit for the loan which reverts to the bank when the loan is paid back. Banks risk is zero if the government guarantees that the bank does not have to make up the money if the loan defaults. This then spreads the risk of new asset building throughout the whole community.

The right to get such a loan is valuable so we encourage people to pay back loans because once they default on a loan then they will never get another one.

Everyone will want these loans – whether to build a house or to invest in a wind farm. As the government is the one guaranteeing the money – not the loan – the government has the right to determine where the money should be invested.

As a starting point it could give everyone in Australia the right to take out loans for $1500 each year provided the money is invested in ways to reduce greenhouse gases. This will immediately pump $30 billion into the economy to create new assets that will reduce emissions. But this is what emissions trading is meant to do? So giving everyone in Australia the right to a zero interest loan will not only stimulate the economy but it will cost the government nothing and it will reduce emissions. The government will be able to remove the need to guarantee all deposits and only guarantee deposits made from the money created for zero interest loans. The price of energy will drop because without interest on capital renewable energy is cheaper than burning fossil fuels from existing plants.

If people do not want to take up their zero interest loans they can sell their right to a zero interest loan to the highest bidder – and there will be plenty of those.