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Why the world needs a stable financial platform

Feb 06 2018 06:00
Edward Ingram

SINCE publishing my last four Fin24 essays, I have been very busy rewriting documents which are a part of an online university course in macro-economic design and management.

  • At least two universities in Zimbabwe are putting their expert staff on this course. The idea is use the information gained to create the world’s leading courses in economics and banking.
  • If the proposals are adopted, by a conservative estimate 1% or more may be added to long-term national economic output.

Here are some extracts:

THE MAJOR PROBLEM OF OUR TIME

The major problem of our time is what to do about the extensive damage which is caused by relatively low levels of inflation. We need a stable financial platform.

KEYNES’ CONCEPT

What J M Keynes pointed out in the first chapter of his ‘A tract on Monetary Reform,’ 1923, Macmillan, was that if all prices and all earnings were to rise at the same rate, people would be wholly unaffected. They would have to pay more for everything, but they would have more income with which to pay. The two things would cancel each other out.

THE ‘KFPP’ FLOATING PLATFORM

It would be as if the entire economy had been placed on a floating prices platform as in Figure 1 below. It is called Keynes’ Floating Prices Platform, or KFPP:

Figure 1 – the KFPP Platform. Artist: Tanya Malan

In this sense, prices are anything you can buy or pay for. That includes wages – the cost of hiring people, regular payments on loans, and assets of every kind. In this sense they are all prices to pay. If they were all to rise together, they would all cancel. As prices rise, incomes/earnings rise. Things cost more but there is more money with which to pay. In a perfect world, people would be wholly unaffected.

Clearly, there is another real economic part of those prices which does not cancel. On top of the platform, Figure 1 above, that real part of prices decides what is expensive and what is affordable in the usual ways. On the platform, business carries on as usual as if money had not changed in value.

THE MISSING PART OF ECONOMICS AND BANKING

…This is the missing part of economics which until now, has not been written or taught. Its absence explains why economists keep trying, but failing, to solve their problems. There are too many instabilities to manage.

INFLATION MOP

In this KFPP scenario, inflation has one important effect. It is self-cancelling. As the platform rises, and as all prices increase, more money is needed. People need more money with which to pay the higher prices. Any cessation of money creation will soon halt the inflation process.

SIGNIFICANT BENEFITS

…If the 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, even currency prices, would become simpler and more trustworthy. 

Pension funds would be on the KFPP platform. Pensions would rise as if retirees were still working. Pension funds and reserves held against possible emergencies would be on the platform. Liabilities/future claims against insurance companies and banks tend to rise as people spend and borrow more out of rising income. Mortgage costs would not leap up and down but fall steadily throughout the repayment term.

Source: Edward C D Ingram Spreadsheets.'% of income' means '% of a National Average Earnings or Multiple Thereof'.

Property values would be more stable. A lot of costs and huge amounts of social and economic damage would be eliminated almost entirely.

The good news is that KFPP can be created. We just need to do it. More on that next time.

OTHER NEWS

CREATING A STIMULUS – This part of the course is where much of the world is beginning to get it right:

…It can be shown that there are ways to create and distribute new money in the form of a spending stimulus across all sectors. ‘Borrow and spend’ is not the only option. KFPP will absorb any surplus.

In South Africa, some people in high places are taking interest. My friend Redge Nkosi is handing out a similar message. See my Fin24 essay ‘S A should play its get out of jail card,’  

edward ingram  |  macro-economics  |  opinion
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