Submission to Commonwealth Commercialisation Institute

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

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

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.

Reputation and Context in Social Networks

Posted to http://gov2.net.au/blog/2009/07/27/online-engagement/#comments

Principle 14 – Reputation and Context.
The transmission and accessing of information is more than the transmission of data. It is a communication event. Communication or the transfer of information is a social activity which requires both parties to know the reputation and characteristics of the other party and the context of the communication to be explicit and understood.  When information is to be stored, the reputation and characteristics of those permitted to access it should be established and the reputation and characteristics of the person storing the data should be kept with the data and made accessible.

Reputation

Reputation is defined as The general estimation in which a person is held by the public. For Social Networks to work we must know the reputation of the other parties to any communication. Reputation is attached to individuals but it is separate from identity. Reputation consists of personal characteristics and of the performance of the person in past transactions.

Electronic Social Networks depend for their success on the ability of people to easily share information and ideas with others. The attractiveness of the networks comes from the ease with which people can join and leave groups, and from the ability to remain anonymous if desired. Unfortunately as they become more popular rogue elements take advantage of the openness and pollute the social environment. This pollution takes different forms. Some of these are:

• Bad manners – forums and blog comments can become very confrontational with some people seeming to delight in negative, often abusive comments, attacking others behind the shelter of anonymity.
• Stolen identities – celebrities are a favourite target for frivolous passing-off, but stolen identities can also take a more sinister form particularly amongst vulnerable groups such as those involving children or distressed people.
• Fake identities – these are especially concerning when people pretend to have qualifications or expertise that they do not possess.
• Slander and defamation – where, under the guise of anonymity, people slander or defame others.
• Misuse of the network – people use the network to promote products or services inappropriately.
• Multiple identities – Sometimes people have multiple identities in an attempt to gain an advantage.
• Ill-defined and unreliable information – Some people “spread” rumours, partial, false or incomplete information.

These problems can be addressed if we introduce the concept of responsibility with anonymity. That is, people can participate in some activities without publicly identifying themselves providing they first establish some level of identification with the system and they agree to abide by the rules of the network. The rules depend on the context of the interaction. The context also establish actions that will happen if rules are broken. Examples of possible actions are for the person to be excluded from further activity, an identity shown to an aggrieved party or revealed to the whole community, or it can be given to authorities for civil action to be taken. These actions impact on the reputation of the identity and are reflected in way reputation of the party is evaluated.

It is important in Social Networks for the concept of reputation to be captured and available. It is reputation not identity that is important for the functioning of networks. To that end, identification is unimportant as long as the measures of reputation are reliable and accurate. The level of reputation required for different transactions varies from reputation not mattering to high reputation (which includes authority) being mandatory.

Not all access and activities on social networks are subject to abuse and for those there is no reason for the access to be open and anonymous.

To achieve control, where it is required, we need simple ways for people to identify themselves to a level appropriate to the context of the communication. That level of identity could be displayed on the social network site so that people can see how trustworthy the person is – without revealing who they are – and how trustworthy is the information. The person need not reveal anything about themselves (not even their pseudonym) but there should be mechanisms to provide a visual indication of the trustworthiness of both the government officials and members of the public.

If we are going to permit the public to store information in government files, a person must first establish that their reputation is sufficient to allow the storage of the information. The most common case is where a personal data is stored about a person. The person providing the information must either be the person themselves or a person with sufficient reputation in the eyes of the person who is the subject of the information or a person of sufficient reputation as defined by the government. The reputation of the person storing the information, not the identity, should be kept with the data and made available to people accessing the information. For personal data only the person concerned, or those the person explicitly or implicitly approves, should be allowed to access persona data.

Context

Context is the circumstances in which a communication event occurs. 

There is no point in keeping information if it is never accessed or used. However, not all information should be available to all people at all times. Who should see information, at what time and for what
reason is determined by context. When it is decided that information is to be stored, the context of when and how it is to be released should also be established. This means that the characteristics (including reputation) of the person requesting access should be defined. Also the characteristics of any government official who can access or see the data should be defined.

If this is established at the time of storing data it means that if a person can prove they possess the appropriate characteristics access can be automated and there is no need to involve a government
official. The same access mechanism can equally apply for the public and for government officials.

In many circumstances a government official may be granted access to information that is not available to the general public. In those circumstances the public can ask the appropriate government official to access the information and the official may be able to provide an answer to a specific question without revealing any sensitive details. An example of this could be a researcher wishing to access information
that is of a personal nature but not needing to know the identity of the persons involved.

Social Networks and Identification

Electronic Social Networks are a modern phenomena. They depend for their success on the ability of people to easily share information and ideas with others. Their attractiveness comes from the ease with which people can join and leave groups, and from the ability to remain anonymous if desired. Unfortunately as they become more popular rogue elements invariably try to take advantage of the openness and pollute the social environment. This pollution takes different forms. Some of these are:

• Bad manners – forums and blog comments can become very confrontational with some people seeming to delight in negative, often abusive comments, attacking others behind the shelter of anonymity.
• Stolen identities – celebrities seem to be a favourite target for frivolous passing-off, but stolen identities can also take a more sinister form particularly amongst vulnerable groups such as those involving children or distressed people.
• Fake identities – these are especially concerning when people pretend to have qualifications or expertise that they do not possess.
• Slander and defamation – where, under the guise of anonymity, people slander or defame others.
• Misuse of the network – people use the network to promote products or services inappropriately.
• Multiple identities – Sometimes people have multiple identities in an attempt to gain an advantage.
• Clues to reputation – We always make choices on what to read and with everyone potentially contributing we need mechanisms so that we can focus on those we think are likely to be worthwhile reading.

These problems can be addressed if we introduce the concept of responsibility with anonymity. That is, people can participate in some activities without publicly identifying themselves providing they first establish some level of identification with the system and they agree to abide by the rules of the network. If they break the rules then they can be excluded. Their identity may be shown to any aggrieved party or revealed to the whole community, or it can be given to authorities for civil action to be taken.

Not all access and activities on social networks are subject to abuse and for those there is no reason for the access to be open and anonymous.

To achieve control where it is required we need simple ways for people to identify themselves to a level appropriate to the task or content of the site. That level of identity would then be displayed on the social network site so that people can still see how trustworthy the person is – without revealing who they are. The person need not reveal anything about themselves including a pseudonym.

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A Banking Product for Investment in Renewable Energy

Two ways of increasing investment in greenhouse gas (ghg) reducing technologies and practices are:

1. Raise the price of energy from fossil fuels and so encourage investment in non polluting production of energy.

2. Decrease the capital cost of investing in ways to reduce greenhouse gases.

Of the two, the second will be the most effective, the fastest acting and the most certain. This is because it is comparatively easy to estimate how much investment is required to reduce emissions.  And because we can easily reduce capital costs by removing interest payments and only requiring repayment of capital when the investments earn money.

Let us form a slightly different banking enterprise — one that takes deposits and give loans, but which only gives loans to those people making deposits.  Moreover, let’s make the size of the loan dependent on the size of the deposit and stipulate that the deposit must remain with the bank until the loan is repaid. There is no interest paid on deposits or on loans.

This form of banking fits easily with Islamic Principles.

 

The loan the person is allowed to receive is up to the fractional reserve permitted for the bank. If the fraction is 10% then a $1000 deposit allows for a loan of $9000. The loan incurs no interest and the repayments come from the money earned from the investment. Where possible, for every $1 earned 50% is repaid and 50% is kept by the borrower. The loan repayments continue until the loan is repaid.

The loan however, can only be invested with approved investment opportunities that reduce the level of ghg concentration in the atmosphere. This could be investments in building solar energy plants, insulation in a house, investment in a windmill to generate energy or installing a geothermal heat pump. 

These investments will earn a return to the borrower or save the borrower money. When money is earned or saved then the borrower will get a return and also pass on 50% to the bank.

Investments that save energy and hence money – such as insulation – may be repaid on an installment basis. An estimate will be made of the energy savings and from this the energy cost can be calculated. The borrower will agree to repay the loan at regular rates based on keeping 50% of the savings and returning the other 50%.

 

In the case of an all electric vehicle powered with renewable energy the individual receiving the loan it is suggested the loan be repaid over a period of 10 years.

Once the loan is repaid then the original deposit is available for withdrawal.

The banking organization charges a transaction fee for loans made to the client and for transaction fees to merchants being paid. It is estimated that initially this will be of the order of 5% of money through the system. This is much less than the current system of charging interest on new money every day as well as loan fees and other transaction fees. The bank does not need to receive interest on the loan because it pays no interest on deposits.

 

If the bank lends $1billion dollars then the transaction fees will be $50M.  

What are the differences between this system and other banking products?

The first difference is that no interest is paid. However, the main difference is that the expenditure of the money and the return of the money are controlled. Money must be spent on new productive assets that reduce the level of ghg concentrations in the atmosphere and cannot be spent on consumption (things that do not earn or save money) or things that already exist such as an existing company.

This does not stop existing banks lending to purchase existing assets but it makes it difficult for them to compete against banks targeting investment in new productive assets (such as new banks specialising in investment in renewable energy).

 

This form of banking can be used for any productive purposes. It will NOT cause inflation provided the bank only loans for revenue-generating or revenue-saving purposes. The reason is that the money generated can be used to purchase the goods or services produced by the investments. General inflation occurs when there is not enough goods or services available for purchase.

The bank takes NO RISK because it keeps the deposit if the loan is not repaid and the loan is simply written off. All the risk is on the part of the borrower. This means any organisation with a license can run such a bank if it gets a license. This means community groups can run their own banks if they only use this banking product.

It is important that this banking product NOT be used to purchase already productive assets such as existing factories. The reason is that because it is so easy to borrow money the price of existing assets will rise too rapidly and there will be asset inflation. Existing assets should be purchased with existing money through the same loan process. As there are more existing assets sold than new assets created this will make little difference to the existing banking business which can continue as it does.

Controlling Loan Expenditure and Return of Money

For this banking product to work there has to be tight control over the expenditure of loan money and there have to be guaranteed ways for the money to be returned. This is done through simple contracts and by the bank giving the money under instruction from the borrower to suppliers. This means there is a tight integration between the loans and the supplier systems. 

The contract with the borrower is that the money is only available for expenditure through suppliers who have contracts with the bank. Suppliers must give the loan holder complete online access to their accounting records to verify suppliers expenditures.

The contract with the suppliers is that the money must be spent on new renewable energy infrastructure and must not be spent on purchasing existing goods and services. They must estimate the amount of ghg  emissions the investment will save and work with the borrower to monitor and report on the amount of ghg actually saved.

 

If borrowers are found to purchase goods and services that do not reduce the level of ghg in the atmosphere then they will not be permitted to borrow from the bank again and must repay their loan within three years.

If suppliers are found to sell goods and services where their estimates of ghg saved are significantly less than their claims, then they will not be permitted to accept new borrowings through the bank.

To stop loans being used to create “extra” money for the same investment if a borrower sells the asset they have purchased with their loan they must immediately pay off the loan.

Statistics and Control

Compliance is achieved by making the investments transparent and accountable. To that end all loans will be monitored in real time by the borrower.  In particular the total amount of ghg saved and the cost per saving will be visible to all to see. These figures will be published and be made available to prospective borrowers to help them choose their purchases.

People without existing assets

Some people do not have any money they can risk in order to get access to these loans. For those people the government could consider providing funds as the deposit for the loan. Of course the government may decide to issue all stimulus packages this way and allow individuals to sell their loan deposits to whomever wants them.

Bank System Components

The bank system will need

 

• An identification system to enforce compliance
• A website to sell goods
• A website to give loans
• Specialised websites for different suppliers
• Specialised systems for analysing supplier accounting records

An example of a specialised website is the website for investment in companies. Loans may be used to purchase equity or bonds in companies or organizations that build or produce systems that reduce ghg emissions. A typical example would be a solar thermal power station. The funds could be used to build parts, or to put together other parts of the system.  The funds cannot be used to purchase existing operating plants.

Incremental Development

Not all systems will be available when the system is launched and there will be limited suppliers.  While the contracts will be in place not all components – such as monitoring accounting records – will be initially present.

The initial products will be simple as with the website used to offer loans and where suppliers will offer their goods and services.

Funding the Software Infrastructure

The software infrastructure can be funded through the bank. That is, one of the investment projects offered via the bank will be to fund development of the system that  runs the bank. 

 

A Relationship Model of Identity

Identification is a critical component of Web 2.0. Electronic communication between parties cannot take place unless both parties can be certain of the identity of the other party.

The current model of identification on the Internet is identification by data. We identify people by what we call them, whether it is a given name or an identifier like an id number. 

However, in real life we are not identified by name but the relationships we have both with other people, organisations, or things within our nvironment. Our identities are us and our relationships with other objects – not our labels. Another way of describing it is that we are identified by our presence in space and time.

Edentiti is an approach that models real life in the electronic world. Edentiti allows us to create an electronic presence. It is a presence not a name and we call it an edentiti. It has relationships of differing types with other electronic presences on the Web.

In real life we have many identities and we take on different roles for different circumstances. We have an identity for our relationship with our family and friends, when we represent an organisation or when we want to identify ourselves. Whenever we want to interact with others in real life we “announce” our identity by our presence in some form or other. Edentiti gives us a way to announce our presence in electronic space and announce the role we are taking be it family member, or policeman, or teacher, or financial advisor, or member of a P&C.

Each edentiti has a one to one mapping with an identity in “the real world”. The real world identity has control over the online edentiti.

The edentiti we have first implemented is an edentiti to help us identify ourselves so that organisations in Australia can comply with the Australian anti-money laundering/ Counter Terrorism Finance legislation (AML/CTF). We have called this edentiti GreenID.

The AML/CTF legislation was written with the model of identification by name in the mind of the framers of the legislation. The legislation is written so that it says an organisation can  electronically identify a person if the organisation can show that person being identified has two existing relationships with independent organisations who know us by name and address and another organisation who knows us by name and date of birth. If an organisation can show that they have established these name based relationships then the organisation has “safe harbour”. Safe harbour means that the organisation cannot be sued for a misidentification resulting in disclosing suspicious transactions to the Austrac authority.

greenID works within these rules.

How does the greenID edentiti verify whose presence it represents? It does this by verifying that it has electronic relationships with organisations or people. It asserts that there is a record in the tax office about the identity it represents. It proves it by asking the tax office electronically – I have a tax file number of x, a name of y, and a date of birth z. Do you have a record of me? The tax office, like all organisations in Australia is required by the privacy principles to say yes or no for no cost – except in some very exceptional circumstances.

greenID gives the real person the ability to ask these questions and to securely record the result of the question. The data used to obtain this verification is discarded and only the verified relationship stored. 

As individuals we keep control of our own edentiti by establishing ways we can prove we are the real person the edentiti represents. We do this by leaving biometrics with our edentiti that identifies us. This could be passwords, secret questions, voice prints, iris scans, pictures of ourselves, phone numbers from which we call, computers from which we communicate. When we return to use our edentiti we establish who we are to the edentiti and we then ask the edentiti to do things for us.

This model allows us create many edentities for different purposes. We may have our scholastic record edentiti. This asks all the organisations with whom we have studied to verify that we have a particular qualification. Once we establish the link with an organisation then our edentiti can ask for a copy of the record to be delivered securely to say an employer.

We might establish our health edentiti. Our health edentiti keeps track of the all health relationships we have and where we can find information about our health. It does not keep any health records but it keeps where health records are kept and keeps the authority for our edentiti to access those records and deliver them to others when requested.

We might establish a guardian edentiti who watches over our other edentities and sees if anything unexpected happens.

Any sort of electronic presence we want for any purpose can be established.

For this model to be deployed for Government 2.0 the government only has to enforce existing laws that allow an individual to ask any organisation that might hold records about them a simple yes or no question. Do you hold any information about me?

This model can be implemented tomorrow for a very low cost. Instead of the government spending a reported $400M establishing and deploying a health id card all the government has to do to allow an individual to consolidate their health records and supply them on demand in a medical emergency is to enforce its own regulations.

I do not have time within my five minutes to explore the ramifications of this model. Suffice it say that it will stop identity theft, make Government 2.0 easy and cheap to implement, do it all in a privacy friendly way and do it without any legislation, new regulations or new government bodies.

A strategy for investment in innovation

The government’s response to the Global Financial Crisis has resulted in a vigorous debate regarding appropriate levels of government debt and whether debt is a burden on future generations. This paper proposes a way for the government to stimulate the economy through funding innovation and investment in areas that historically have had difficulty attracting private investment funds. The proposal outlines how to achieve this without the government going into debt.

I have spent many years raising small amounts of money for investment in innovation. Here are my observations on why public investment is important and why private investment for innovation is difficult to obtain.

The aim of innovation investment is the production of the same goods or services at a lower cost, or the introduction of new goods and services that did not previously exist. Innovation drives wealth accumulation. Some people call it productivity. I prefer to call it innovation because productivity improvement is a subset of innovation that does not include the creation of new goods and services. Innovation/productivity also drives wealth destruction when processes that were once profitable become obsolete.

If you have an innovative idea it is difficult to convince a bank or superannuation fund to invest in that idea. In fact you will be hard pressed to find any fund manager willing to invest in an idea. This is because they do not care whether an idea is innovative or not, nor are they interested in how much money an idea will potentially earn. Their main concern is whether at some time in the future their money will be returned along with some interest. This means that most finance institutions require you to first have assets that can be “mortgaged” against the loans.

The response will generally be the same amongst all bankers, including the merchant bankers who are supposed to be in the business of lending for innovation. A merchant banker’s main incentives (or payments) come from making the deal, not from profits earned by the investment, so they tend to favour the tried and true and look for the least risky option.

You would think that successful companies would be the main drivers for investment in innovation but they are constrained by “The Innovator’s Dilemma” so well described by Claytton Christensen in his book of the same name.

So who are the people who fund innovation? When it comes to individuals, the main funding sources are the rich who have become wealthy through their own innovation. Yet even this group tends to only risk small amounts of money as they try to preserve what they have. Unfortunately in Australia there are relatively few people within this group as most wealthy people achieve their wealth through property investments, inheritance, or by taking advantage of public and private monopolies. 

For small companies who are yet to be profitable there is another source of funding – the government through its R&D tax credit scheme. However, funding innovation this way will not raise the large amounts of money needed to introduce new technologies that will address problems such as climate change, secure water supplies, build broadband networks, create efficient public transport networks, invest in education etc. The initial funds needed to address these problems will not come from Australian private companies or individuals. Funds will come once innovative approaches have been proven to work and are profitable with low risk but the funds to get innovative processes to this stage are difficult to obtain.

An alternative way

Funding innovation is risky and it does not always work. This is something that risk-averse governments are well aware of and it is the reason why governments so often put all their investment “eggs” into one basket, or favour existing players.

 

One solution to the problem is to fund the innovation in such a way that the entire community bears the risk. For example, use public money but give that money to the population (or at least to a large number of people) and require them to invest in ways of producing goods and services that address particular problems. This brings the market place – which is a good conduit for allocating resources – to investment in innovation.

This paper proposes that we invest public money by giving the funds to the population and requiring them to invest in the infrastructure to provide goods and services through an investment market place. The risk of failed innovation is thus spread. The funds can be raised by taxes, surcharges or even by increasing the money supply via the issuing of funds. Some people will make good investment decisions while others will back duds but they will all invest because that is all they can do with the money. People are not risking their existing wealth so they will not feel quite so bad if they lose their funds because in a sense they never had it – and they can always eliminate their risk by selling their investment money at a discount to someone who is prepared to take the risk.

Although special investment money is given to the population as a whole it is expected that brokers (fund managers) will do the investing.

To see how this can be done, using the example of funding the National Broadband Network,  visit

 

http://stableproductivemoney.wordpress.com/2009/06/12/submission-to-national-broadband-network-greenfields/ 

If we use this approach it is unnecessary to create public debt to get Australia through the GFC and beyond. Debt is about who owns things. It is not about wealth creation. If we have public debt what does that mean? We owe money to other members of the public, be it in Australia or elsewhere. Debt is a zero sum game while growing the economy is a non zero sum game. We have let the mechanics of debt (or who gets ownership of the results of investment) cloud our view of what is important for wealth creation – innovation. What we need to concentrate on are the mechanics of encouraging innovation or new wealth creation through investment markets where there are many people investing for particular purposes and where the wealth is then widely distributed.

That is what the current system is supposed to do and it has worked well for some. What is proposed is an innovation in how we, the community, invest public monies for the public good and where debt is not the mechanism used to fund innovation.

Financing the National Broadband Network

The cost of last-mile access infrastructure is a major hurdle for broadband network suppliers around the world. Ideally the investment would be supported through the margin on the services provided over the network. However, in practice the capital cost of establishing the network must frequently be written down before the services can become price competitive.
TransACT is an example of the latter – writing down of the capital investment. I was one of the original investors in TransACT and for the service to be price competitive the value of my original shares had to been written down to near zero. TransACT has since become a viable operation, but only because the capital cost of the infrastructure has been largely removed. The reason that the capital costs were so high was because TransACT only supplies a percentage of the total high-speed communication services used within its network “footprint”. If all dwellings in the area that required broadband used TransACT the capital burden per dwelling would decrease and the write-down of my investment would have been less.
With the National Broadband Network (NBN) the capital cost of building the network may be higher than the wholesale charges can reasonably support. That is, to cover the capital cost of the Network either the investors are going to write down much of the value of their investment or the wholesale prices will have to be so high that the takeup rate will be low, which in turn will increase the price of services – fuelling a vicious cycle of failure. As in many areas, there is difficulty in funding vital infrastructure projects that benefit an entire community. It is not easy to measure the flow-on benefits of a widely-used service and even if it were possible, individuals tend to be unwilling to pay for them.
To solve this problem and to ensure the system achieves wide takeup, the wholesale price of broadband will have to be kept competitive with the cost of the existing copper network.
One way to achieve this is for the Government to fully fund the NBN. This would result in the building of the network plus an asset that the government could eventually sell. Governments however have little appetite for such ventures as they are invariably difficult to administer. What tends to happen instead is that governments form a quango to achieve an objective. While these bodies have proven successful in some instances, it is a strategy that is unlikely to succeed for the NBN. Australia has already been down that path with the Postmast-General’s Department, Telecom and ultimately Telstra. In the long run it was a strategy that proved ineffective in keeping up with developments.
An alternative approach is to seek private investment and to match those funds with money provided by the government. This will reduce the capital cost to investors to a level that allows a commercial return whilst still ensuring that broadband pricing remains competitive. The main problem with this approach is that it is unfair in that it delivers a publicly-funded subsidy to private investors who are a minority of the community (often they are not even members of the community), and it is difficult to control the level of the subsidy.
There is a third way that will keep the price of broadband low and which avoids the issue of subsidies to private investors. It involves the government giving part ownership of the NBN to the entire participating population: (existing broadband users and others willing to commit to using the service when it becomes available in their area). Government money is provided on condition that the funds are spent building fibre to the home (FTTH) infrastructure or equivalent. In other words, the individuals receiving the money use the funds to buy equity in a company such as Telstra, Optus, TransACT or any other NBN-approved organisation. These organisations in turn are required to use the invested money to build the FTTH or equivalent infrastructure.
The price of a broadband connection should ideally be fixed and uniform throughout Australia. Australia could be divided into geographic zones and companies can purchase rights to those zones through a competitive bidding process. The NBN would fix the wholesale price of broadband connection. Bidders would have some limit on the amount of investment they can receive from the FTTH investing public – perhaps related to the number of people in the zone and the size of the zone. When bidding for a zone the companies would be allowed to make negative as well as positive bids. That is, for an area that is difficult to service the bidders might require additional funds from the NBN rather than giving the NBN funds. If the NBN sets the wholesale price at the right level, funding received from bids for the easy-to-service areas will finance the subsidy required for expensive areas.
Under this scenario the money invested in shares may give the public investors who received FTTH dollars a lower return than might be expected given the notional value of the shares. That is, if $x of money is given to a person who signs up for broadband then the shares they purchase may only be worth a fraction of $x on the open market.
However, those signing up for broadband will end up owning part of the NBN infrastructure through the companies appointed to build it in each region. The people who sign up are the ones who ultimately pay for the network through their cost of the services they receive. (It is similar to mobile phone operators who give away phones if people sign up for a service plan). People can either keep their shares or sell them. The price of the shares will establish the subsidy being given to build the network. Given that the network will last for a long time and the wholesale supplier will continue to receive an income, the returns on the infrastructure (either through lower prices or through profits) will sooner or later cover the total cost of the money received.
Many companies will compete for investment funds but they will only be eligible for the funds if they agree to supply broadband to all the dwellings (and businesses) in a particular geographic area. This brings more competition into the system. Companies would bid for geographic areas. Money collected from these sales would be returned to the NBN and used to subsidise geographic areas where the bidders require extra money because of difficulties or high costs in supplying FTTH (or its equivalent) within that zone. Companies purchasing a geographic area will also be required to agree to provide everyone in their area with FTTH within a reasonable time when requested.
The money given to the community will create an asset that in the long term returns more money than is invested. This means the money need not be borrowed by the government or collected as taxes but simply supplied as funds. This is an alternative way to increase the supply of money instead of the government selling bonds. It allows the government to reduce the amount of bonds it sells so that the money supply does not expand too rapidly. It is non-inflationary because the money is spent on a productive asset and the increase in the money supply can be reduced by the government cutting back on bonds or by increasing the fractional reserve requirements of Authorised Deposit Institutions.
The effect of giving people money to purchase shares in companies that supply infrastructure and of obtaining commitments to use broadband when it becomes available will be to increase demand for the service which in turn will reduce the cost.
It will not be necessary for people to be initially connected to get the funds. Anyone who asks for funds will receive them and the amount will be the same for each person (including children). The reason for requiring people to apply for funds is to prevent individuals from receiving more than one issue of funds and to build a committed user base for the service. People are free to decide that they do not want to use the NBN, but if they apply and receive funds they will be obliged to use broadband for communication purposes as soon as the network becomes available in their area.
The approach will be politically acceptable to the electorate. If a person does not want to participate there is no compulsion for them to do so. If everyone in Australia has the same opportunity to receive the same amount, the subsidy remains equitable.
It is likely that private companies will be formed to supply a particular geographic area. It is also possible that Telstra may sell its infrastructure to those companies which succeed in winning an area. A secondary advantage will be that the funds will act as an immediate stimulus to the economy because many people will not wish to hold shares for the long term and will instead choose to sell their funds or shares as soon as they have received them.
To protect the integrity of the system there would be a requirement that the money invested through the companies MUST be spent on new infrastructure and not on operating the system. In addition, companies would be required to give individuals shares in return for the money – not bonds or other forms of non equity.
The system would be relatively simple to implement as the government only has to provide the rules, the funds and ensure that private companies deliver and deploy the system according to the rules. The total system – including distribution of money, share investments and accounting for the sales of the shares – requires information systems and services that could be readily supplied by private companies. These private organisations could also be eligible to receive investment funds from participants providing they give shares in their companies in return.
In summary the “third way” of funding broadband FTTH could be financed without the government going into debt. Existing infrastructure would be utilised where practical. The system will apply to greenfields and brownfields. Every dwelling that wanted broadband would receive retail services based on the same wholesale costs. The system would have competitive tensions through the market in infrastructure funds and the bidding for geographic areas . This will ensure the most efficient use of funds and the ownership of the resulting assets from the use of the funds would be distributed equitably throughout the community.

amasset – a new economic tool for managing the economy

Amasset is a new word to describe the investing of newly printed money to produce community assets for a specific community purpose. The purpose may be supplying a community with water, reducing greenhouse gas concentration in the atmosphere, building an urban transport system, supplying a community with a sewerage system, or any other form of infrastructure spending that benefits a whole community. The money is to given to many individuals who may already be contributing to solving the community issue. The money must be invested by individuals on the community purpose but it must also directly benefit individuals. 

In most economies the money supply is increased by banks lending money without having any money on deposit. There are limits on how much money a bank can create this way. This is determined by the banks being required to keep an amount of money with the Reserve Bank. This process is hidden and confused because as soon as a bank creates extra money it appears in the borrower’s bank account. Also the reasons for giving a loan are the same whether the money already exists or whether it is newly created money. The reason this approach to creating money is seen to be a good idea is that the loan has to be repaid. This means that the borrower is likely to use the money to good advantage and will not risk other assets mortgaged against the loan. This approach works because some of the loans made will turn into new productive assets that will back the loans made with new money. Unfortunately it makes an economy vulnerable to booms and busts.

An amasset is another way of increasing the money supply without creating a loan. Instead of the banks creating new money, the government creates new money and gives it to people but with the requirement that the money will be invested to produce a new productive asset.

Examples of amassets

• An amasset to reduce greenhouse gas concentrations in the atmosphere would be to increase the money supply by some amount and distribute the increase in inverse proportion to the amount of mains electricity consumed by an individual at their place of residence. The money remains interest free until it is spent. The individual is free to invest the money with any supplier of goods or services who can prove that investing in their product or service reduces the level of greenhouse gases in the atmosphere.
• An amasset to supply a country with a communications network would be to fund company builders of infrastructure with newly printed zero interest money. The money is distributed to individuals in the community as shares in the companies. Individuals would receive shares in inverse proportion to the level of their home connection at some point in time.
• An amasset to build education infrastructure would be to supply individuals who are currently enrolled to study with funds that must be spent on infrastructure to supply educational services.

A country can decide on its priorities for building community infrastructure and each amasset targets a particular area of investment. The system works because individuals will try to spend their money to their best advantage. If an individual does not want to spend their funds they can sell them for whatever the market will give them. This gives the authorities a measure of how much money can be spent to good advantage within each amasset.

Other system advantages arising from amassets

The approach has other advantages and can be used to prevent asset bubbles, remove inflation from the general currency, redistribute wealth to the most needy, and reduce the likelihood of recessions and depressions. 

• Because the methods of increasing the money supply are heterogeneous this reduces the risk of asset bubbles. When an asset bubble appears an amasset can be used to defuse the bubble by supplying funds. For example, if a housing price bubble appears funds can be given to people who are willing to invest in a new dwelling. 
• The system is non inflationary because if too much money is issued for a particular amasset then those funds will inflate in value rather than the regular currency inflating in value.
• A criteria for distribution of funds for a particular problem – such as funding transport infrastructure – could be the level of assets possessed by individuals.  This increases the wealth of the poor while not affecting the wealth of the rich.
• Recessions and depressions should become a thing of the past because money for investment can always be made available. Periods where the banks are unwilling or unable to lend need not arise. Interest rates on money for investment will tell authorities when extra money is needed.
• There is a limit on the amount of money we need to invest in community infrastructure. For a given purpose we can make good estimates on the resources we need to allocate to resolve an issue. We can tell when a community purpose has been resolved and so we can evolve the economic development of society.

The underlying reason why amassets work

Market based economies are efficient ways to distribute resources to get the best value for money spent. Problems arise because the monetary system is too homogeneous. By making money (resources) easily transferrable we have introduced system instabilities as money rushes from one area to the another as opportunities arise. Restricting some money to specific areas stabilises the system and allows it to adjust slowly under our control. An amasset is a mini market economy and it distributes resources efficiently while meeting its reason for existence. Once its objective is achieved the amasset can be disbanded and removed. This brings diversity, adaptability and evolutionary development to economies.

Amassets introduce diversity into economic systems. Diversity is an important control mechanism for any complex adaptive system. An example that illustrates this comes from the behaviour of a colony of bees. Queen bees are promiscuous and mate with many males. This brings a small amount of genetic diversity in the behaviour of the queen bees offspring. This in turn leads to small behavourial changes in the way bees react to changes in temperature of the bee hive. Read a short summary at http://nationalzoo.si.edu/Animals/Invertebrates/News/bees.cfm. Amassets introduce diversity into an economy with similar stabilising effects on the whole economy.