A Blog by Kevin Cox

Reducing the Cost of Public Infrastructure

Kevin Cox — Sat, 31 Dec 2011 23:42:52 +0000

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.pdfThis 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, needed to support community infrastructure, can be reduced

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.

A Better Way to Control the Money Supply

Kevin Cox — Mon, 12 Dec 2011 20:29:19 +0000

The ancient Sumerians understood that compound interest caused debt to rise to an unsustainable level. They solved the problem by periodic debt jubilees where some debt was forgiven. Today we have better ways to reduce debt than by the forgiveness of loans.

It would be prudent for the Australian Government to halt the rise in debt to European levels by replacing some existing Government compound interest loans with non compounding loans. One place to start is with State Governments. A non inflationary approach is for the Reserve Bank to buy some interest bearing State Government debt and replace it with interest free loans. Instead of the Reserve Bank being restricted to manipulating interest rates to keep the currency stable they could also buy some loans and replace them with interest free loans. The effect would be a reduction in State Government Costs and a stimulus to the economy as the money freed up looks for another home. The Reserve Bank could experiment by increasing interest rates while at the same replacing some State Government Loans with interest free loans. This would enable them to better tune the economy no matter what the interest rates or what was happening in the rest of the world.

TheConversation Article

Kevin Cox — Mon, 21 Nov 2011 17:06:57 +0000

TheConversation article “Want to end the GFC – put debt to good use”

Rent and Buy

Kevin Cox — Wed, 14 Sep 2011 01:05:05 +0000

When purchasing a dwelling buyers typically obtain a bank loan then purchase the dwelling with the loan funds. The borrower repays the loan in instalments while having full possession of the dwelling. When a bank creates a loan the money created has interest attached to it. As repayments are made the interest is paid first then anything remaining is paid off the capital. This approach causes the cost to buyers to be higher than necessary and to be loosely related to the rental value of the dwelling.

An alternative approach to loans is Rent and Buy. With rent and buy the buyer pays off the capital in instalments, much like the repayments of a loan, and at the same time, accumulates a rent debt. After the capital is repaid the rental debt is paid and only then is the asset transferred to the buyer.

With bank loans the amount the buyer will pay is related more to the interest rate and the difference between interest payments and repayments – both of which are difficult to estimate. When the rent and buy approach is adopted, the financial cost of buying a dwelling is directly related to its rental value which is a stable, known value. The buyer will always pay less with rent and buy compared to a traditional loan regardless of whether the loan is supplied by a bank or directly via the seller. Most purchases of dwellings are financed through loans because there are few alternatives for most people.

However, there are investors and potential investors who have cash – such as superannuation funds or landlords who own properties – who will be attracted to this system because they are in the business of investing funds to get a secure inflation resistant future return. By using the rent and buy approach such investors will get a higher return than through simple purchase and rent. This is because many of the costs of rental are shifted to the buyer. With a normal rental approach the owner of the property is responsible for the maintenance and running costs of the asset. With a normal rental the owner of the property is responsible for the maintenance and running costs of the asset. Under rent and buy the buyer becomes responsible for these costs. This means that the saver gets a higher return on their investment because they do not have to cover many of the costs that landlords normally incur.

Outline of Rent and Buy

Let us assume a person has a dwelling they wish to sell and the person has no mortgages or encumbrances on the dwelling. They find a buyer who is willing to pay their price and to pay a rent on the equity still outstanding. The title to the property is transferred to a trusted custodian who will ensure that both parties will honour the agreement. Title is only transferred to the buyer when all rent and capital is repaid. During the sale the buyer and the seller have shared equity in the dwelling. The buyer lives in the property and is responsible for all running costs, insurances and maintenance. If either buyer or seller spends money on the property they can ask a third party to rule on the impact on rental value of the dwelling. If it has increased the value, the increase is added to the equity of the party that spent the money. In addition, if the rental value of the property does increase, the rent paid on the remaining unpaid equity also increases.

At anytime either buyer or seller can sell their part of the agreement. The rules are that if a buyer is living in the dwelling then they can only sell to another buyer who will live in the dwelling.

Buyers can choose to vacate the dwelling and cease to make repayments. In this case all the rent owed to the seller is added to the seller’s equity. The equity of the exiting buyer remains with the dwelling and the buyer now becomes a seller. If a buyer cannot meet the repayments then the seller has the right to find another buyer and to force the previous buyer to vacate the dwelling. However, while-ever the buyer can meet their repayments, they cannot be forced to sell.

Loans versus Rent and Buy for the buyer

The problem for buyers is illustrated in this graph and in the spreadsheet “Loans versus rent and buy” which is available on request.

Rent and Buy compared to a Bank Loan

Here the effect of small variations in the repayment rate shows a dramatic difference in the cost of buying a dwelling of value $100K.

Rent and buy costs change linearly if the rental prices are increased linearly whereas loan costs do not vary linearly with repayment rates and interest costs. This means buyers purchasing with rent and buy can make better choices when purchasing a dwelling because they will know the final cost of the dwelling.

Rent and Buy for Investors

The Spreadsheet, available on request, titled “Renting with rent and buy” has the following assumptions.

The rental rate is related to the actual rental value of a property.
The tax rate is 30% and is only paid on rent.
All the funds received by the seller are either deposited or are reinvested in similar projects.
The rental rate is 5% of the capital value.
The landlord costs are 2% of the capital value and are paid by the buyer when using rent and buy.
The time period is 65 years.

Under these circumstances rent and buy is always better for the investor than renting if the repayment rate is greater then the real rental cost.

With rent and buy running costs are covered by the buyer not the investor and tax is deferred until the capital is repaid.

Rent and buy means investors prefer a rapid repayment of capital because they can re-invest their rental payments and start to compound their investments.

Rent and Buy for Investors

Rent and Buy Advantages

Both buyers and investors are financially better off with rent and buy than with the alternatives of loans for buyers and owning a whole property and renting for investors.

Both buyers and investors can sell their agreements to others without having to sell the dwelling. This makes the agreements a liquid investment for both buyers and sellers. This in turn makes the market in dwellings accessible to more people. The dwelling market is currently funded almost exclusively through loans and dwellings are relatively illiquid.

Agreements can be amalgamated or split. This means that the approach can be used by large investors or by small investors.

The cost to purchase a dwelling is related directly to its rental value and is predictable.

Both buyers and investors are protected from inflation.

Rent and Buy Innovation

Rent and buy combines several components each of which already exist independently. The innovation is to bring all these together into a single system. One component is that loans are not used to facilitate transfer of ownership. Rather ownership is transferred incrementally through a shared equity arrangement. The shared equity arrangement means that the value to both buyers and sellers is related directly to the earning potential of the asset or its rental value. Another component is that the shared equity is structured so that the shared equity parts can each be purchased and sold independently of the dwelling and of the other parties to the transaction.

Implementation details cover:

The ability of the buyer to make repayments will be monitored closely and continuously.
There will be systems to keep track of the running costs of the dwelling so that buyers are fully informed of the total costs.
All calculations of rental liabilities and returns on investments are performed by the system.
All payments and transfers of money are recorded and stored by the system.
Both buyers and sellers will have a record of their reliability and actions with previous sales.
There are procedures and rules to handle property improvements and inflation of assets

In effect, the Rent and Buy agreement is a combination of a rental agreement and a mortgage agreement. The Rent and Buy system will charge an administration fee of 0.2% of the capital value paid each year.

Financing Renewable Energy

Kevin Cox — Mon, 22 Aug 2011 23:32:15 +0000

We can finance renewable energy with traditional loans or we can finance renewable energy by envesting.

The following calculations assume an energy price of 6 cents at the renewable energy plant gate and a running cost of 1 cent per kwh for the renewable energy plant.

Using an Interest Rate of 7%, a payback time of 20 years and traditional loans means renewable energy plants have to be built for less than a capital cost of 51 cents per kwh for the loan to be repaid. Any capital cost higher than 51 cents and loans cannot be repaid. When calculating the economic viability of renewable energy we use discounted cash flow calculations which is the same as finance through traditional loans.Using envesting funding and assuming all the repayments are reenvested in renewable energy plants a capital cost of 51 cents per kwh pays back the loan and the rent on money within 20 years. It then leaves long term investors with an envestment that returns 15% inflation adjusted per year for any years of operation beyond 20 years.

Using envesting finance, a payback time of 20 years, a long term return on envestment of 7% renewable energy can be profitable up to 65 cents capital cost per kwh. If we extend the payback period to 30 years the renewable energy can cost up to 142 cents and still be profitable.

We know we can build large scale solar thermal energy plants for capital cost of 46 cents per kwh and we know they will have a working life of greater than 20 years. This is equivalent to a long term return of 20% where the pay back time is 20 years and where the envestment pays 20% beyond the 20 years.

Today using envesting finance we can profitably build as much renewable energy as we want without increasing the price of energy.

Why is there a difference between the two funding methods? The difference comes because with envesting we assume that the repayments are used to build more renewable energy plants while with traditional loans we assume that the repayments go to pay off the loan. With envesting compounding works to build more profits while with traditional calculations compounding works to increase the cost of finance. This happens because envesting we use zero cost money while with traditional loans we pay an unnecessary fee for the right to use money as a measure of value.

The following graph shows the long term rent on money for envesting versus the payback time for a capital cost per kwh of 68 cents. Note the linear nature of the graph and the effect length of time has on the final rate of return. This means pension funds could envest heavily in renewable energy plants so they can meet their future financial obligations to their members. Money envested 30 years ago will give an ongoing 15% per annum adjusted for inflation with renewable energy built for a capital cost of 68 cents per kwh.

A Simple Way to Stabilise the Monetary System

Kevin Cox — Thu, 11 Aug 2011 19:18:45 +0000

The reason that the economic system is unstable is that we have a monetary system where we pay interest on interest – or we allow interest to compound. If we remove interest on interest we will stop the instability of the system. The simplest way to achieve this is to create loans where capital is paid first, then interest and there is no interest on outstanding interest. This immediately prevents compounding and with it instability.If a loan of $100K attracts an interest of 10% then we have a interest payment of 10K a year. If repayments is 10K then the loan can never be paid off with an interest first loan because we have to pay interest on the interest. However, this is clearly unfair because the lender has received the 10K which they can reinvest to get more interest and so the lender is “double dipping”. They continue to get the interest on their original 10K and they get the interest on the repayment of capital.

Alternatively if the interest accumulates as a credit to be paid after the loan is repaid and the interest does not itself attract interest then as long as some of the capital can be paid off each year then the system will stabilise.

Perhaps the simplest way to understand it is to stop calling interest on money interest and to call it rent on money. If rent is used to purchase another place then rent can be charged on the new place but there is no justification for charging rent on rent if the rent is not reinvested.

The other way to understand the problem is to note that by changing the interest rate from say 5% to 10% does not result in a doubling of interest paid but several times more interest. The amount paid is not linear even though the cost increase appeared to be linear. The result of this is that for the transfer of capital goods the amount paid tends to be much much greater than expected. This in turn results in the devaluation of the currency or inflation which occurs when we pay more for goods. Simply changing the way we account for loan repayments will bring certainty to the cost of capital goods and with it little or no inflation of the goods or services being transferred.

We will use the name envesting instead of investing to distinguish between investments where where capital is returned first and rent is not paid on rent and the case where interest is paid first and interest accumulates on interest.

Creating Cash

Kevin Cox — Fri, 24 Jun 2011 19:05:05 +0000

Many of our economic problems come from the way we create electronic cash. Not bank notes or coins but electronic cash that gets deposited in bank accounts. All electronic cash is created by banks either national, reserve, state, or private. All electronic cash is created as loans.

We would think it strange if the government charged us interest on notes and coins yet we do not think it strange that banks charge us interest when they create electronic cash. The reason we do not think it strange is that we cannot distinguish between money created for loans that have asset backing and money created as loans but which also increases the money supply. This happens because there is no way to distinguish which loans increase the money supply and which loans do not.

One solution to this problem is to deliberately create electronic cash so that there is plenty of money available for banks to use when they make loans. In other words when banks make regular loans they do not have create any extra money .

A fair and equitable way to create electronic cash is to create it and distributed it widely throughout the community for specific investment purposes.

For example, we could create electronic cash that must be used to build new renewable energy plants. If interest free electronic cash was invested in renewable energy plants then we would find that energy from such a plant was cheaper than energy from fossil fuels.

If we gave the electronic cash as a loan then we would find that the loans would be repaid from the profits from selling the energy.

We can create electronic cash for many other reasons. The issues are how much to create and what to do with it when it is created. We can regulate the amount of cash we create by observing the interest rates on existing money. If interest rates increase then we need to create more cash. If interest rates decrease then we create less cash.

We can guarantee the electronic cash will be used for productive purposes if we distribute it widely and we allocate it to people who will invest it in something of value to them. The people most likely to do this are those who have little of value as they will wish to increase their wealth by investing it wisely.

This approach would address many problems. It would give us cheaper clean energy and it would stop recessions and depressions in any country that adopts the approach. It could allocate resources to areas of the economy where resources need to be allocated – like education and food production and public transport and health services.

The advantage of this approach is that it can all be done within the existing monetary and regulatory framework. Public banks can create electronic cash as interest free loans and can distribute it throughout the community. Private banks can do the same provided the State guarantees the interest free loans.

Submission to the Climate Committee

Kevin Cox — Sat, 07 May 2011 20:34:10 +0000

Dear members of the MPCCC,

It is important that the funds collected from an increase in the price of energy be invested in ways to reduce the level of greenhouse gases. It is important that those who cannot afford to pay the increase be compensated in some way. An energy discount scheme achieves both objectives.

In the same way that the price per litre of water increases the more a household consumes so the price per kwh of mains energy could increase. That is, a price on carbon is put on energy to high consumers of mains electricity generated from fossil fuel. The money collected from the increase can be given to those people living in households where the kwh per person is low as discount coupons on energy. The discount coupons must be invested in approved ways to reduce greenhouse gas levels. The key point is invest not spend. For example the discount coupons must be used to build new renewable energy plants not purchase renewable energy.

Almost all renewable energy projects and energy saving investments will return more money than is invested. The people receiving the discounts will tend to invest in those that are the most profitable or economically efficient. People who do not wish to invest directly can sell their coupons to those who are willing to invest.

With modern technology a system to administer this scheme would cost less than 1% of the funds invested. While the committee is deliberating it could be trialled immediately on a small scale in a single suburb or in a sizeable country town.

Biota Restaurant Review

Kevin Cox — Sat, 30 Apr 2011 08:44:52 +0000

Performance Art in Bowral

We were looking for some entertainment over the Easter Long Weekend. The movies on offer did not appeal. We had been to the Canberra Folk Festival. Then we heard about Biota in Bowral and so off we went for lunch.It fulfilled all our expectations and more. It was performance art at its best.

Arriving during daylight hours allowed us to spend some time shopping in Bowral and to inspect the Biota kitchen garden. The fresh bread smells of Bowral and the goodies in the garden made us eager to get involved in the main performance. The interior of the restaurant with its open space, interesting art works, and open kitchen was a perfect setting. As we were amongst the first diners chef had time to greet us before going back to his plating stage. The staff at work were visible for the whole performance and for those people in the far flung reaches of the restaurant the staff appeared on closed circuit TV.

We were given a pre-teaser (amuse bouche) of pomegranate seeds with a eucalyptus based foam served in a beaker followed with Biot s own sourdough bread with cultured butter. These were the first of many culinary surprises that would make the next two hours great fun and good entertainment.

All the dish descriptions looked interesting so we used the time honoured method of closing our eyes and pointing. We would have been pleased no matter what we picked. As it was each dish was not what was expected and as the meal progressed we tried to guess how each dish would appear. There was always a twist to the listed ingredients and a few other amuse bouche in each dish. A few of these follow and we leave it up to you to discover those we missed.

We had expected the strips of mackerel to be grilled but they were warmed in pan. The surprise were what appeared to be tiny lotus buds but were long red baby radishes.

The strips of duck marinated in juniper syrup were served with some form of roasted cereals. I had expected something like a natural muesli and am still puzzling over the type of cereal. The surprise was the perfectly soft cooked egg supporting the duck pieces.

The finger had pointed to pig s jowl. We had imagined roasted pork with crackling. The dish was decadently rich with a high percentage of pork fat but where was the crackling? We found out when we tasted the rich sauce covering the dish. The best of the crackling had been ground and used in the sauce. The surprise was the leek cooked with amaranth.

The lamb rump was perfectly cooked with an olive caramel sauce. What appeared to be pepper over the accompanying vegetables was garlic ash and the surprise was crispy prosciutto.

We expected a cake covered in a sauce when we ordered Green Tea Cake and Coconut Milk. We did not expect a mound of chocolate earth with green moss covered with an early morning frost.

The fruit salad with ice cream was a potpourri of fresh and preserved ingredients. The surprises were the small pieces of cucumber and the gelatinised chia seeds which we thought, before asking, were melon and some form of sago.

We were allowed to take pictures for our scrap book and you can see them here. http://ahfongcox.wordpress.com/2011/04/24/performance-art-in-bowral-biota-restaurants/

Next time we will book into the next door motel and attend the evening performance. This will allow us to have that extra glass of wine to round out the event.

Increasing Investment in Renewables through Energy Discounts

Kevin Cox — Tue, 19 Apr 2011 08:46:11 +0000

The government proposals to introduce a price on carbon are an attempt to encourage investments in renewables and as a way of discouraging energy use. It uses price as a control mechanism. The idea is to reduce consumption by increasing the price of energy from fossil fuels and hence encourage investment in renewables. This approach could theoretically reduce the level of green house gases.

There are difficulties with this approach and with other price mechanisms, such as emissions trading, because they are difficult to adjust and they tend to be inequitable. They can cause unnecessary hardship, which in turn requires some form of compensation. This in turn tends to reduce the effectiveness of the price increase. Price increases reduce the competitiveness of the community because of losses due to less energy consumption. Higher prices do not guarantee that the energy supply will increase. The reason is that the return on investment for energy supply is low compared to other investments – particularly investment in fossil fuel energy.

To overcome these difficulties with pricing it is recommended that the government introduce a discount system for people who consume less energy. The pricing mechanism that energy companies currently employ where the more energy consumed the less the price per kwh could be replaced with a scheme where the less energy consumed per person in a household the less per kwh is charged. Households with a low per head consumption of electricity receive a discount on their per kwh energy charges.

This approach automatically adjusts income received by power companies because the energy saved by the low consumers is sold to the high consumers for a higher price. The discounts are paid from the increase in price to high consumers. Such an approach will be seen by the community as fair and will not be seen as a form of tax grab by the government.

The approach can be made even more effective by requiring the discounts received to be invested in ways to increase the supply of renewable energy. Power companies could offer different investments, such as bonds to build a solar farm. Discounts could be used more directly to purchase solar energy systems or install insulation or double-glazing or other forms of reducing consumption of mains electricity. Discounts could be sold if people did not wish to purchase investments.

This approach of giving discounts when a person does some other restricted transaction is widely used in private markets. An example is the Coles and Woolworths petrol discount and other coupon systems.

Government soliciting interest free loans from banks and the interest free loans used to increase the size of the discounts can further leverage the system. The loans are repaid from the payment from the bonds or from energy savings or from sales of the increased energy obtained from direct investments.

Increasing the size of discounts with interest free loans

In Australia banks have to go to the international and local capital markets to raise loan funds for their reserves to satisfy the need for loans. When a bank makes a loan it creates credit and extra cash deposits but it needs a certain level of reserves. There are limits on how many loans a bank can create and this is determined by the reserve ratio of deposits to loans. That is, in total a fraction more deposits must be held than there are loans outstanding. So if a bank increases the money supply with a loan it must have a fraction of the amount of money it loans available as reserves.

These reserves could be obtained via interest free loans in the following way. This would be much cheaper for the banks than raising reserve amounts on the open market, where the bank has to pay interest, or if the banks increase reserves by raising equity.

If the government, or other institutions like super funds, have large cash deposits that are being held for long term purposes such as pensions and superannuation, then those cash deposits can still earn interest but can be used as security for the interest free loans. One or more banks are likely to take up the offer as they will obtain large cash deposits that they can use to leverage the creation of their regular loans. The banks give interest free loans equivalent to the cash deposits that are held in reserve. The loan funds are safe because they are secured against cash deposits and the loan funds will overtime be repaid from the returns on the investments created with the funds.

The citizens win because they get a stake in the energy infrastructure that will continue to earn income long after the loans are repaid. The government wins because it does not have to increase the price of energy as the loan funds can be used as discounts for the low consumers. The banks win because they get interest free reserves.

The citizens will see that the system is fair an equitable and will see this approach will ensure an adequate energy supply no matter what happens with the climate.

Summary of Energy Discounts

Instead of increasing the price of energy with a carbon tax the government can introduce a scheme of Energy Discounts for citizens who consume less energy. Energy Discounts must be invested in ways to increase the supply of renewable energy or to make better use of existing energy.

Making sure all investments go through a central market place of approved investments, and banning people who abuse the system from future allocations of Energy Discounts, will ensure wide-spread compliance.

The funds to pay for energy discounts come from charging high consumers of energy more per kwh and from issuing interest free loans.

The system can be set up with little or no legislation and it can be done on a Energy Company by Energy Company basis. Companies that encourage investment this way could get some form of compensation the more discounts they provide. Households have to join to receive discounts but households with a high per consumption of electricity have to pay more per kwh whether or not they join.