Why we need wealth bonds

May 21 2014 07:34
*Edward Ingram
I HAVE written 29 weekly columns so far on this entire subject of how to create a safer economy.

Maybe it is time to explain the principles that I have used. I have also drafted a book for which I am seeking a publisher. It will be called Breakfast in the Mountains.

And another book will be made up out of these columns to save readers finding all the essays and reading repetitions needed to remind them of previous columns.

I chose the title because it is written for the lay reader, not for economists who mostly speak in their own language, leaving the rest of us wondering what they are really trying to say.

One of the key components that an economy must have if it is ever going to be stable is a safe place to put money. Readers may like to re-visit my column on wealth bonds.

If there is no safe place for our money (our liquid wealth), if there is no way to lend it safely so that it is safe from inflation and interest rates, there is also no safe way to borrow.

In short, there is a gaping hole in the economic structure. There is no safe lending and savings structure or contract. Why not? It costs no wealth to borrow wealth and to repay the same wealth. It can easily be done.

A wealth bond is a bond, a way for a government (for example), to borrow money. To them it is a debt that has to be repaid with interest. To buyers, investors, pension funds and other funds it is an investment, somewhere safe to put our pension monies and savings.

There is no cheaper way to borrow money than to guarantee to repay the wealth that has been borrowed.

If that capital/wealth which the government has borrowed is index-linked to rise with national average incomes, since their revenues are coming from taxing our incomes, there is no strain on their finances (or our taxes to repay the debt) if incomes rise at 15% pa or fall at 5% pa. 

The incomes and the value of the debt owed to investors always moves in tandem. In essence, when they link the capital value that they have borrowed (the value of our investments in their bonds) to national average incomes, they are collecting our incomes and giving back to us the income that they have borrowed from us when they repay.

It would be the same if they took a slice of everyone’s income and paid it out as pensions to those in retirement. Those pensions would keep pace with other incomes.

Wealth bonds will be used as investments by pension funds, and to create annuities that keep pace with incomes. They will be included in managed funds of all kinds to reduce the risk that people take when their funds invest in property or equities.

The value of a new issue of wealth bonds today will be much the same as it will be next year. There will be no need for a government to wait for the right time to issue/sell more government bonds. Everything will run smoothly.

No bubbles with wealth bonds

Wealth bonds can also be used by the private sector as a way of financing housing and commerce. It is the cheapest way. Lenders will be told not to lend more wealth when interest rates are low. That just inflates loans and house prices and the whole game falls apart when interest rates rise again.

So this way, property prices will rise as incomes rise and their value will not bubble, or explode upwards and then collapse. We will all feel safer if there is a safe place for our wealth and a safe way to borrow and a safe value for our homes.

A wealth bond will provide a benchmark for the risk free rate of return. Without a risk-free investment financial institutions are unable to calibrate their risk and no amount of reserves will make them safe from a loss of wealth as market conditions, like interest and inflation rates, jump around.

Wealth bonds will take away all of that risk. All of this means cheaper financial services and a stable financial sector. It means we can plan our lives and our businesses. We can take more risk because now there is no risk if we want to play it safe.

Now we will know how much risk we are taking and what that risk is – it is the risk of not finding the customers we thought there would be. Things that we did to put ourselves at risk - only that.

Here is an index to all past essays.

 - 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.” 

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edward ingram  |  money  |  investments



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