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How to create a stable financial platform

Feb 13 2018 06:00
Edward Ingram

(iStock)

IN MY previous essay, I wrote about the Keynes' Floating Prices (KFPP) Platform – the idea being that if all core prices rise together in harmony, including incomes, people would be wholly unaffected by the falling value of money. 

But there is another part of prices – the real economic part. This determines what costs more and what costs less in accordance with supply and demand. This activity takes place on top of the platform, undisturbed by the falling value of money (core price changes).


 Artist: Tanya Malan

I wrote:

SIGNIFICANT BENEFITS

If this KFPP platform could be created, there would be a huge benefit to people’s confidence. Everything in life regarding money, like savings, investing and borrowing, would become simpler and more trustworthy.

But the current reality is that this does not happen. Why not?


Figure 2 – The distorted KFPP Platform which we use today.

Artist: Shirese Malan

TOP RIGHT

Mortgage repayment costs leap around throwing entire family finances in the air, ruining families, and taking their homes. This also messes up the construction sector and ruins many a bank. Commercial loans cost a lot more than necessary and are also more risky than necessary. Collateral security is unsafe, and investments in property are unsafe in some cases. Banks are put at risk. Investments are put at risk.

New mortgage repayment contracts which repay units of wealth, starting at a high level, and falling every year to avoid ‘payment fatigue’ and large volumes of arrears, can transform the housing finance and construction sector, and stabilise property values. See Figure 2 in PART ONE.

BOTTOM RIGHT - WEALTH BONDS

The other side of lending is savings and investments, pensions and retirement plans. These slither all over the place. Currently, the maturity value of a fixed interest bond stands still. Imagine that. Watch the platform rise as the bond maturity price and interest payable are anchored. They stay behind. But here is one remedy which can help:

Wealth bonds, with interest payments and capital linked to National Average Earnings, NAE. These can be issued by governments in place of the usual fixed interest bonds/treasuries. This would lock those investments and related borrowing costs onto the platform.  

Then savings, pension funds and reserves investing in these index-linked bonds will be locked onto the KFPP platform. A pension fund which attracted 10 NAE in contributions over the years could invest in these and have 10 NAE to offer to retirees. That might last 20 years at 0.5 NAE p.a., paying out a retirement income as if the retiree was still working and getting salary increases. Lifetime annuity calculations, and the resulting offerings, can be done on the same basis.

MORE SAVINGS TO THE ECONOMY

Besides removing confusion and related risk costs, governments may pay 1% interest on wealth bonds – only. That is, enough interest to cover institutional administration costs on pension funds, annuities, and insurance reserves. This would create a significant saving to the cost of servicing national debt because huge amounts of risk to investors would have been eliminated. It is cheaper to lend a risk-free asset than a fixed interest bond of uncertain value. Maturity values could be long as well as short as needed to match market needs. No problem.

In addition, very expensive distortions to monetary policy (the need to limit the damage done by fixed interest bonds) would vanish. This is one of the issues we see every time monetary policies are discussed. Currently wealth bonds could probably be offered in exchange for fixed interest bonds, and at a premium, cutting national debt.

TOP LEFT

Currency price changes destroy many an importing or exporting business and many businesses which have invested enormous amounts of capital in foreign direct investments.

One price cannot balance two markets – trade and investment. Bearing in mind that an estimated half of all world prices have a currency price content, the cost savings of separating the two markets will dwarf the cost of not doing so.

The practicalities and costs of bringing trade prices onto the KFPP platform is one of the things which will be discussed with participants during my university course.

NOW READ:

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edward ingram  |  macro-economics  |  opinion
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