The January sales effect

Apr 02 2014 11:21
*Edward Ingram
LAST week I explained how banks create more than 90% of all of the money that exists.

This model for money creation is unpopular in some quarters because it gives privileges to the banking sector. They say it can enrich some at the expense of everyone else.

More importantly, as Professor Steve Keen points out, this model can lead to runaway borrowing in the private sector to such an extent that when the consequent recession comes, it may become a depression that lasts for years (1929, 2008, Japan in the 1990s) as interest rates have to be raised and people desperately try to pay down their loans.

This takes spending out of the economy - and that takes jobs out of the economy.

In short, this model for money creation is either not well managed or not manageable. In fact, it is not manageable because it depends on what is called the interest rate instrument to call it to heel.

This is what an engineer would call a loose control system. It is certainly not a direct way of managing credit. In short, the level of borrowing and spending (demand) in the economy is under very loose control.

Interest rates are not doing a good job of deterring people and businesses from borrowing too much. This can lead to a recession or even a depression, among other things.

Those other things include the effect on the currency, the rand in our case. Everything gets muddled.

We face a few issues:
•    Can new money be created in a precisely controlled fashion?
•    Can we change to a new money creation model in which deposits can only be lent once?
•    Can we ensure that when new money is created, it gets to all sectors of the economy at the same time and in the same proportions as current spending is being done? This would ensure that old jobs are not destroyed and replaced with temporary new ones, which is what tends to happen now.

If we can achieve all of these things then control over the total (aggregate) demand in the economy will be tight, precise, immediate, and well balanced. The chance of over-borrowing by any sector leading to a years-long recession/depression will be almost eliminated.

I see two options:
1. Raise the reserve ratio of the lenders until they are no longer able to lend money more than once.
2. Create a money supply authority (MSA) which has sole custody of all deposits.

I prefer option 2 because it is simple. The MSA would ensure that deposits could only be lent once.

The banks would become agents seeking borrowers to whom these deposits could be lent. They would still be lending the amount of money that the economy needs, but they would not lend a lot more and then a lot less.

Their loans would be better protected by a safer economic model with stable growth and safer profit and risk levels for their customers.

Creating new money

The MSA would monitor the demand for loans and if the growth rate of the economy was slowing and interest rates were rising as people competed to borrow scarce money, the MSA would print more money.

The 'January sales' effect

All new money would be given to the people and institutions - including government departments - through a reduction in sales taxes and through a subsidy given to all payments upon which no sales taxes were applied: for example, savings and pension contributions, and medical aid.

All would get a (say) 5% subsidy. Who would pay? The MSA would print the money and give it to those providing these subsidies, including the tax collector, to balance their books.

Where would the new money end up? In the banks of all spenders as a surplus after they had spent their normal monthly quota.

This would give a balanced stimulus and it would be immediate. There will be a ‘January sales’ effect while the process lasted.

Already tried

Recently the UK tried this – they reduced VAT by 2% to give a stimulus. Economists we taken by surprise – it worked much better than expected. Then the UK reversed this because it was costing the government too much in borrowing. They raised VAT by 4%, and the effect was a rapid slowdown.

So it can work. It creates a stimulus without the Keynesian borrowing. Just print the money; everyone gets their share. What is wrong with that?

No debt problem for future generations, just a very healthy economy.

Other questions

How would this be implemented and how would the banks be affected? What if too much money was printed? See you next week.

 - Fin24

* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”

edward ingram  |  money  |  investment



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