NGO Another Way (Stichting Bakens
Verzet), 1018 AM
SELF-FINANCING,
ECOLOGICAL, SUSTAINABLE, LOCAL INTEGRATED DEVELOPMENT PROJECTS FOR THE WORLD’S
POOR.
|
FREE E-COURSE FOR DIPLOMA IN INTEGRATED DEVELOPMENT |
|||||
Edition 01 : 06 August 2011.
Edition 02 : 21 September,
2011.
Edition 04 : 09 February,
2013.
(VERSION EN FRANÇAIS PAS DISPONIBLE)
NEW Capital is debt.
NEW Comments on the IMF (Benes and Kumhof) paper “The
Chicago Plan Revisited”.
DNA of the debt-based economy.
General summary of all papers published.(Revised edition).
How to create stable financial systems in four
complementary steps. (Revised edition).
How to introduce an e-money financed virtual minimum wage
system in New Zealand. (Revised edition) .
How
to introduce a guaranteed minimum income in New Zealand. (Revised edition).
Interest-bearing debt system and its economic impacts.
(Revised edition).
Manifesto of 95 principles of the debt-based economy.
The Manning plan for permanent debt reduction in the national economy.
Missing links between growth, saving, deposits and
GDP.
Savings Myth. (Revised edition).
Unified text of the manifesto of the debt-based economy.
Using a foreign transactions surcharge (FTS) to manage the
exchange rate.
(The
following items have not been revised. They show the historic development of
the work. )
Financial system mechanics explained for the first time. “The Ripple
Starts Here.”
Short summary of the paper The Ripple Starts Here.
Financial system mechanics: Power-point presentation.
THE DNA OF THE DEBT BASED
ECONOMY
THE Disputation on the Power
and Efficacy of the Indulgences of the Debt-BASED FINANCIAL SYSTEM.
By
Out of love and concern for the truth, and with the object of eliciting
it, the following heads are offered for public discussion under the presidency
of the Authors. They request that whoever cannot be present personally to
debate the matters orally will do so in absence in writing.
EMAIL: manning@kapiti.co.nz
JULY
31, 2011: 19B
THE
DNA OF THE DEBT-BASED ECONOMY.
The following
three-dimensional diagram represents the DNA of the debt-based economy. It is
tilted forward from the top to make its features easily understandable.
The diagram is made
up of two mirrored helical strands of financial DNA. The blue strand represents
the total accumulated GDP output for a given period while the red strand
represents the total outstanding productive investment principal. The vertical
axis of the helices represents time. The diagram shows a random period of four
years.
On the blue helix,
Vy bases of production output My are added over the time
span needed to make one full turn of the blue helix (usually a year). On the
red helix, Vy bases of national saving Sy (net new
productive investment) are added over the time span needed to make one full
turn of the red helix (usually a year). For ease of consultation, the bases of
production output My and the bases of national saving Sy are
shown only for year three. The drawing shows nineteen of them, as this is the
approximate speed of circulation Vy of productive deposits My
in
The helices
replicate by extension. The blue helix showing GDP “dies off” at the end of
each period. The helices grow exponentially by the transfer of National Saving
Sy from the blue helix to the red one over each notional production
cycle.
For each of the
bases the national saving Sy is returned to the next production
cycle on the blue helix in the form of net new capital investment Sy
(Saving = Investment) as shown. Individual bases can vary in size (up or down)
reflecting the state of the economy.
The annual length
or growth ring Lz of the blue helix shows the GDP as it
accumulates during that year. The
nominal, usually annual, GDP growth in the blue DNA is the change in length Lz
of the DNA spiral over the period z compared with the corresponding length L z-1
over the previous period. In the diagram, the length (and therefore the
diameter) of the GDP spiral is shown to be increasing exponentially from year
to year.
The annual increase
in the length of the growth ring Lz of the red helix shows the
annual increase in outstanding
investment principal S which also equals the nominal GDP growth for that year. The
total length of the red helix at any time is the sum of all outstanding
investment principal. It equals the
current (annual) GDP at any time.
At the end of each
(annual) period z (and only then) the value of output represented by length Lz
of the blue helix (the GDP for that year) equals the value represented by the
whole of the red helix (its total length representing the sum of all
outstanding investment principal).
The plan diameter
of the helices typically expands exponentially. The helices vary together with
the state of the economy. In the case of recessions they show up as changes in
the annual rate of increase of the
helix diameters, and therefore the length of the spiral loops. In the case of
depressions they would show up as an actual
annual decrease in the helix diameters.
Click here to view drawing showing the
DNA of the debt-based economy.
THE DNA OF THE DEBT BASED ECONOMY
THE Disputation on the Power and Efficacy of
the Indulgences of the Debt-BASED FINANCIAL SYSTEM.
Ninety-five basic
principles of the debt-based monetary system grouped under subject headings
listed in alphabetical order.
BANKS.
1. “The interest banks charge their clients
to provide goods and services (the bank spread) is part of productive economic
activity and does not cause inflation.”
2. “In a debt-based system, when the bank
spread and costs are constant, the larger the total debt of a nation the larger
the turnover of the banks and the more profit they make.”
3. “Public credit and money issue enables domestic
banking systems to operate in high growth, low risk, low interest, low
inflation economies while retaining good profit margins.”
4. “Deposit
interest paid by banks to their clients is not specifically beneficial to the
banks but is the fundamental source of systemic inflation in the debt-based
financial system. ”
Unified
text:
In a debt-based
system, the interest banks charge their clients to provide goods and services
(the bank spread) is part of productive economic activity and does not cause
inflation. When the bank spread and costs are constant, the larger the total
debt of a nation the larger the turnover of the banks and the more profit they
make.
Deposit interest paid by banks to their
clients is not specifically beneficial to the banks but is the fundamental
source of systemic inflation in the debt-based financial system. Public credit
and money issue enables domestic banking systems to operate in high growth, low
risk, low interest, low inflation economies while retaining their existing
profit margins.
BUSINESS CYCLES.
5. “A recession provides for inflation but
not economic growth, while a depression provides for neither economic growth
nor inflation”.
6. “A recession occurs when the change in
the total debt (both public and private) over time is less than what is needed
to service the financial system costs made up of the net unearned interest that
has to be paid on all bank deposits plus any new current account deficit plus
any increase in the productive debt used to generate new economic output”.
7. “A depression is a deep recession which
also fails to provide for inflation”.
Unified
text:
A recession provides
for inflation but not economic growth, while a depression provides for neither
economic growth nor inflation. A recession occurs when the change (increase) in
the total debt (both public and private) over time is less than what is needed
to service the financial system costs made up of the net unearned interest that
has to be paid on all bank deposits plus any new current account deficit plus
any increase in the productive debt used to generate new economic output. A
depression is a deep recession that also fails to provide for inflation.
CAPITAL FORMATION.
8. “Capital formation in a debt-based
economy takes place in accordance with the basic tenet of orthodox economics
that National Saving equals Productive Investment”.
9. “Capital formation arises from the
redistribution of employee income and gross operating surpluses of businesses
to purchase the capital goods created by the productive economy.”
10. “Production must always, but only just,
lead consumption to provide the incomes that enable consumption to take place.”
Unified
text:
Capital formation
in a debt-based economy takes place in accordance with the basic tenet of
orthodox economics that National Saving equals Productive Investment. It arises
from the redistribution of employee income and gross operating surpluses of
businesses to purchase the capital goods created by the productive economy.
Production must always, but only just, lead consumption to provide the incomes
that enable consumption to take place.
CONSUMPTION AND HOUSING.
11. “Assuming incomes are
constant and there are no productivity gains or realisation of capital gains
through asset inflation, homeowners must reduce their domestic consumption by
an amount equal to the principal and interest payments they make on their non-productive
capital assets.”
12. “Export of surplus
consumption goods and services to avoid structural unemployment and recession
decreases foreign ownership of the domestic economy, but does not directly
improve domestic wellbeing in the exporting country.”
13. “The process of production and consumption
in the productive economy is self-cancelling wherever it takes place and
however its phases of production and consumption are shared amongst nations.”
14. “Most residential housing is economically
unproductive once it has been built, though its construction is part of the
productive economy.”
15. “Residential housing that does not
generate income is incompatible with a financial system based on
interest-bearing debt.”
16. “Inclusion of a housing provision in a
tax-free guaranteed minimum income (GMI)
system allows close matching of the GMI to existing government income transfer
structures in many industrialised countries”.
Unified
text:
Most residential
housing is economically unproductive once it has been built, thought its
construction is part of the productive economy. Residential housing that does
not generate income is incompatible with a financial system based on
interest-bearing debt.
Assuming incomes are constant and there are no productivity gains or
realisation of capital gains through asset inflation, homeowners must reduce
their domestic consumption by an amount equal to the principal and interest
payments they make on their non-productive capital assets. The reduction can be
(partly) offset through capital gains. Realised values from the
exchange of existing assets must in that case increase by an amount sufficient
to cover both the interest and principal repayments. The reduction in domestic
consumption must otherwise be matched by the export of the
resulting surplus consumption goods and services if structural unemployment and
recession are to be avoided
The process of production and consumption in
the productive economy is self-cancelling wherever it takes place and however
its phases of production and consumption are shared amongst nations. Export of surplus consumption goods and services to avoid structural
unemployment and recession decreases foreign ownership of the domestic economy.
It does not directly improve domestic wellbeing in the exporting country.
Inclusion of a
housing provision in a tax-free guaranteed minimum income (GMI) system allows
close matching of the GMI to existing government income transfer structures in
many industrialised countries.
CURRENT ACCOUNT.
17. “Current account transactions are exchange
transactions, not production transactions.”
18. “To avoid bankruptcy of the world economy
in the long run, each nation must maintain, in aggregate, a zero accumulated
current account.”
19. “An accumulated national current account
deficit reduces national savings and increases the domestic debt of the debtor
country, its domestic inflation and foreign ownership of its economy.”
20. “There is no such thing as foreign debt;
there is only foreign ownership by foreign creditors of part of a debtor’s
nation’s economy either as physical ownership or ownership of commercial
paper.”
21. "At any point of time, the current
account deficit in heavily indebted debtor countries is typically just a little
more than:
a) the accumulated
current account deficit of the debtor country, multiplied by the average bond
rate in the debtor country, minus
b) the trade
balance of the debtor country for the period, plus
c) the net repatriated
profits of foreign-owned banks operating in the debtor country over the same period."
22. “The debtor status and accumulated current
account deficit of a debtor country can only be reduced without affecting its
domestic economy if its exchange rate is managed so its current account becomes
positive enough to reverse the foreign ownership of its productive assets.”
23. “Exporting domestic production
(“export-led recovery”) is an unsatisfactory method for reducing an accumulated
current account deficit unless the accumulated deficit is small and the
exchange rate is free to fluctuate independently of domestic interest rates.”
24. “The logical outcome of the existing debt
system in creditor countries is zero deposit interest and stable or falling
asset prices (as in
25. “In the absence of effective management of
capital flows and the exchange rate, the logical outcome of the existing debt
system in heavily indebted debtor countries is national bankruptcy because
debtor countries are condemned to paying high interest rates to avoid capital
flight.”
26. “A tax-neutral
variable Foreign Transaction Surcharge (FTS) applied to all outward exchange transactions allows the
progressive reduction in foreign ownership of the domestic economy (the
so-called foreign debt) by
enabling the exchange rate to fall towards a stable base level, increasing the
value of exports and decreasing the quantity of imports, and providing a more
even playing field for local manufacturers and producers.”
27. “A positive balance on external trade
swaps domestic growth in the exporting country for foreign assets in the debtor
country and
is a positive growth factor for the exporting country’s business interests.”
28. “Foreign ownership of a debtor nation’s
economy drains its domestic economic growth through outgoing current account
payments of interest on commercial paper and dividends and profits arising from
the physical foreign ownership of its assets.”
Unified
text:
Current account transactions are exchange
transactions, not production transactions. To avoid bankruptcy of the
world economy in the long run, each nation must maintain, in aggregate, a zero
accumulated current account.
There is no such
thing as foreign debt; there is only foreign ownership by foreign creditors of
part of a debtor’s nation’s economy either as physical ownership or ownership
of commercial paper. An accumulated national current account deficit reduces
national savings and increases the domestic debt of the debtor country, its domestic
inflation and foreign ownership of its economy. Foreign ownership of a debtor
nation’s economy drains its domestic economic growth through outgoing current
account payments of interest on commercial paper and dividends and profits
arising from the physical foreign ownership of its assets.
The debtor status
of debtor countries can only be managed without affecting their domestic
economies if their exchange rates are reduced so their current accounts become
positive enough to reverse the foreign ownership of their assets. In the
absence of effective management of capital flows and the exchange rate, the
logical outcome of the existing debt system in heavily indebted debtor
countries is national bankruptcy because debtor countries are condemned to
paying high interest rates to avoid capital flight.
Exporting domestic
production (“export-led recovery”) is an unsatisfactory method for reducing an
accumulated current account deficit unless the accumulated deficit is small and
the exchange rate is free to fluctuate independently of domestic interest
rates.
At any point of
time, the current account deficit in heavily indebted debtor countries is
typically just a little more than:
a) the accumulated
current account deficit of the debtor country, multiplied by the average bond
rate in the debtor country, minus
b) the trade
balance of the debtor country for the period, plus
c) the net
repatriated profits of foreign-owned banks operating in the debtor country over the same period.
A positive balance
on external trade swaps domestic growth in the exporting country for foreign
assets in the debtor country and is a positive growth factor for the exporting country’s business
interests. The logical outcome of the existing debt system in creditor
countries is zero deposit interest and stable or falling asset prices (as in
A tax-neutral variable
Foreign Transaction Surcharge (FTS) applied to all outward exchange transactions allows the progressive reduction in foreign ownership of the domestic
economy (the so-called foreign debt) by enabling the exchange rate to fall towards a
stable base level, increasing the value
of exports and decreasing the quantity of imports, and providing a more even
playing field for local manufacturers and producers.
DEBT.
29. “ For practical purposes, debt-based
financial systems in modern industrialised countries are cashless.”
30. “In industrialised (and most other)
countries, privately-owned banks create new debt and charge their clients for
doing so”.
31. “ Except for residual cash transactions,
in a debt-based financial system there is a unit (dollar) of debt for every
unit (dollar) of “money”.”
32. “In the debt-based system the debt is
created before its corresponding money deposit.”
33. “In a debt-based financial system, for
every unit (dollar) “saved” by one person there is a unit (dollar) of debt owed
by another.”
34. “Debt can only be used once.”
35. “Once debt is used it must eventually be
repaid with interest”.
36. “Unless it is written off by bank failure,
existing debt can be repaid only by reducing the banking system deposits or net
worth”.
Unified text:
For practical
purposes, debt-based financial systems in modern industrialised countries are
cashless. In industrialised (and most other) countries, privately owned banks
create new debt and charge their clients for doing so. In the
debt-based system the debt is created before its corresponding money deposit.
Except for residual
cash transactions, in a debt-based financial system there is a unit (dollar) of
debt for every unit (dollar) of “money”. For every unit (dollar) “saved” by one
person there is a unit (dollar) of debt owed by another.
Debt can only be
used once. Once debt is used it must eventually be repaid with interest. Unless
it is written off by bank failure, existing debt can be repaid only by reducing
the banking system deposits or net worth.
DEBT GROWTH.
37. “Net after-tax interest paid by banks on
their clients’ deposits forms an exponentially increasing pool of
non-productive unearned income which is never repaid and is a structural part
of the debt-based financial system”.
38. “The exponential growth of the pool of
non-productive unearned income can only be stopped by eliminating the interest
rate on deposits.
39. “Unless the deposit interest rate is zero,
Domestic Credit, unearned deposit income and nominal GDP must all grow
exponentially because, in the debt based financial system they are all a
function of the deposit interest rate.”
40. “The debt supporting the exponentially
increasing pool of non-productive unearned income leads to an ongoing transfer
of real wealth from the productive sector to the non-productive investment
sector.
41. “Credit expansion in the banking system
above what the debt system requires means there is a bubble in the economy
while credit expansion below what the debt system requires means there is a
recession or depression in the economy.”
42. “Credit bubbles,
recessions and depressions result from the failure of the banking sector to
properly align demand for credit with the productive capacity of the economy.”
43. “A credit bubble or economic contraction
is neutralised when credit expansion has been adjusted so that it just
satisfies what the debt system requires taking into account the full productive
capacity of the economy.”
44. “Repayment of existing debt for
non-productive investments such as residential housing depends on realised
capital gains from the exchange of existing assets increasing by an amount
sufficient to make both the interest and principal repayments on those
non-productive investments.”
45. “The debt based financial system is
dynamic and independent of orthodox economic equilibrium theory”.
46. “There is no “money” multiplier in the
debt based financial system other than the
(slightly) variable speed of circulation of the transaction deposits
actually used to generate economic output.
47. “Exponential debt
growth can be eliminated by progressive credit monetisation of the existing debt
and by permanently reducing the OCR (Official Cash Rate) towards zero, at which
point systemic inflation caused by interest paid on deposits would be removed
from the financial system. ”
48. “ In the absence of realised capital gains
it is impossible to maintain exponential debt expansion greater than GDP
expansion over an extended period because the added debt servicing costs will
always leave the productive sector insolvent.”
49. “Orthodox economics offers
no mechanism to achieve elimination of unsustainable debt growth.”
50. “As the ratio of unearned
income to GDP increases, the ability of the productive economy to fund the pool
of unearned income decreases.”
Unified
text:
The debt based
financial system is dynamic and independent of orthodox economic equilibrium
theory. Orthodox economics offers no mechanism to achieve
elimination of unsustainable debt growth. As the ratio of unearned income to
GDP increases, the ability of the productive economy to fund the pool of
unearned income decreases.
Net after-tax
interest paid by banks on their clients’ deposits forms an exponentially
increasing pool of non-productive unearned interest income that is never repaid
and is a structural part of the debt-based financial system. The interest rate
on deposits must be eliminated if the exponential growth of the pool of
non-productive unearned income is to be stopped. Unless the deposit interest
rate is zero, Domestic Credit, unearned deposit income and nominal GDP must all
grow exponentially because, in the debt based financial system, they are all a
function of the deposit interest rate.
In the absence of
realised capital gains it is impossible to maintain exponential debt expansion
greater than GDP expansion over an extended period because the added debt
servicing costs will always leave the productive sector insolvent. The debt
supporting the exponentially increasing pool of non-productive unearned income
leads to an ongoing transfer of real wealth from the productive sector to the
non-productive investment sector.
Credit bubbles, recessions and depressions result from the failure of
the banking sector to properly align demand for credit with the productive
capacity of the economy. Credit expansion in the banking system above what the
debt system requires means there is a bubble in the economy while credit
expansion below what the debt system requires means there is a recession or
depression in the economy. A credit bubble or economic contraction is
neutralised when credit expansion has been adjusted so that it just satisfies
what the debt system requires taking into account the full productive capacity
of the economy.
There is no “money”
multiplier in the debt based financial system other than the (slightly) variable speed of circulation of
the transaction deposits actually used to generate productive economic output.
Exponential debt growth can be eliminated by progressive credit
monetisation of the existing debt and by permanently reducing the OCR (Official
Cash Rate) towards zero, at which point systemic inflation caused by interest
paid on deposits would be removed from the financial system.
E-NOTES (ELECTRONIC CASH).
51. “E-notes (electronic cash) perform exactly
the same role as existing bank debt.”
52. “Existing privately issued
interest-bearing government debt can be progressively retired as it matures and
replaced with publicly issued interest-free debt or E-notes spent into
circulation by the Government.”
53. “Zero or low interest credit and money issue
enables economic growth to be tied to the productive economy instead of being
inflated by deposit interest. ”
Unified
text:
Existing privately
issued interest-bearing government debt can be progressively retired as it
matures and replaced with publicly issued interest-free debt or E-notes spent
into circulation by the Government. E-notes (electronic cash) perform exactly
the same role as existing bank debt.
Zero or low interest credit and money issue
enables economic growth to be tied to the productive economy instead of being
inflated by deposit interest.
GROSS
DOMESTIC PRODUCT (GDP).
54. “Economic growth is determined by the supply
of new transaction deposits to make use of spare labour and resources in the
economy or to increase the skills of and re-employ existing resources, and by
the relationship between the production of capital goods and goods and services
for consumption”.
55. “In a cash-free debt based economy with
zero interest rates on deposits the increase in GDP equals the speed of
circulation of debt in the productive sector times
(a) the change in
domestic credit, less
(b) the current
account deficit, plus
(c) a correction
for any imbalance between the change in domestic credit and what the debt
system requires taking into account the full productive capacity of the
economy”.
56. “Except by utilising existing idle
productive capacity, the only way to increase GDP is through new productive
investment.”
57. “The nominal increase in GDP over any
period equals the increase in National Saving, which is the gross capital
formation less principal repayments over the same period.”
58. “Productivity
growth is inherently deflationary, usually affects prices rather than GDP and
declines as an economy becomes more service-based.”
59. “Interest rate reductions stimulate an
economic recovery only when the capital gains from the exchange of existing
capital assets produce enough new debt to satisfy the systemic debt
requirements of the financial system.”
Unified
text:
The nominal
increase in GDP over any period equals the increase in National Saving, which
is the gross capital formation less principal repayments over the same period.
Productivity growth
is inherently deflationary. It usually affects prices rather than GDP and
declines as an economy becomes more service-based. Except by utilising existing
idle productive capacity, the only way to increase GDP is through new
productive investment through the supply of new transaction deposits to make
use of spare labour and resources in the economy or to increase the skills of
and re-employ existing resources, and by the relationship between the
production of capital goods and goods and services for consumption
Interest rate
reductions stimulate an economic recovery only when the capital gains from the
exchange of existing capital assets produces enough new debt to satisfy the
systemic debt requirements of the financial system.
In a cash-free debt
based economy with zero interest rates on deposits the increase in GDP equals
the speed of circulation of debt in the productive sector times
(a) the change in
domestic credit, less
(b) the current
account deficit, plus
(c) a correction
for any imbalance between the change in domestic credit and what the debt
system requires taking into account the full productive capacity of the economy
INCOME DISTRIBUTION.
60. “Poor income distribution suppresses
demand for domestically produced goods and services.”
61. “The SHAPE
of an economy, which is the basket
of goods and services produced in relation to incomes and consumption patterns,
is largely determined by its income distribution.
62. “Since
the employed workforce is already producing goods and services, the SHAPE
of the economy must change to improve economic efficiency and promote domestic
production.”
63. “Socially mandated income redistribution
is necessary to distribute productivity increases throughout the economy and
improve real wages and purchasing power”.
64. “The application of a single flat
financial transactions tax to all withdrawals from bank accounts changes the
shape of the economy by redistributing income.”
65. “Apart from utilisation of existing unused
productive capacity, the additional production from new capital assets is the
ONLY way to increase earned purchasing power in a debt-based economy.”
Unified text.
Apart from
utilisation of existing unused productive capacity, the additional production
from new capital assets is the ONLY way to increase earned purchasing power in
a debt-based economy.
The SHAPE of an economy, which is the basket
of goods and services produced in relation to incomes and consumption patterns,
is largely determined by its income distribution. Poor income distribution
suppresses demand for domestically produced goods and services. Since the employed workforce is already
producing goods and services, the SHAPE of the economy must change to
improve economic efficiency and promote
domestic production.
Socially mandated
income redistribution is necessary to distribute productivity increases
throughout the economy and improve real wages and purchasing power. The
application of a single flat financial transactions tax to all withdrawals from
bank accounts changes the shape of the economy by redistributing income.
INFLATION.
66. “In an economy based on interest bearing
debt, almost all price is inflation.”
67. “Systemic inflation and exponential debt growth
are caused by interest paid on bank deposits.”
68. “Systemic inflation arising from deposit
interest automatically reduces towards zero as deposit interest rates reduce
towards zero.”
69. “In a debt-based economy where interest is
paid on deposits, systemic inflation is half the interest rate paid on deposits
provided “adjusted” wage rates rise in line with that systemic inflation plus
productivity growth and there are no changes to indirect taxes.”
70. “Interest paid by banks on their clients’ deposits
forms an exponentially increasing pool of non-productive unearned income that
is a structural part of the debt-based financial system and cannot be repaid.
71. “Aggregate consumer prices inflate with
the deposit interest rate so that deposit interest on existing productive
investment can be paid into the unearned income pool without disrupting the
productive economy.”
72. “Foreign ownership of a part of a debtor
economy causes asset inflation there because there are more domestic deposits
available to fund the exchange of assets remaining in domestic ownership.”
73. “In the absence of quantity controls on
the issue of new debt, low interest rates can lead to unproductive “bubble”
lending, thereby increasing price inflation.”
74. “Increasing interest rates to manage
inflation increases the flow of deposits from the productive sector to the
investment sector by increasing the unearned income pool.”
75. “It is no longer possible to combat inflation
by substantially increasing interest rates (or to stimulate growth by reducing
them) because modest increases in interest rates are now enough to drive the
economy into recession.”
76. “The supply of new
electronic cash (not debt) to businesses to fund virtual increases in minimum
wages does not necessarily cause immediate increases in prices because the
E-Note injections are not part of production costs and some of the extra wages
will be used for private debt retirement.”
Unified text:
Systemic inflation and
exponential debt growth are caused by interest paid on bank deposits. Interest
paid by banks on their clients’ deposits forms an exponentially increasing pool
of non-productive unearned income that is a structural part of the debt- based
financial system and cannot be repaid.
In a debt-based
economy where interest is paid on deposits, systemic inflation is half the
interest rate paid on deposits provided adjusted wage rates rise in line with
that systemic inflation plus productivity growth and there are no changes to
indirect taxes. Systemic inflation arising from deposit interest automatically
reduces towards zero as deposit interest rates reduce towards zero. However, in
the absence of quantity controls on the issue of new debt, low interest rates can
lead to unproductive “bubble” lending, thereby increasing price inflation.
In an economy based
on interest bearing debt, almost all price is inflation. Aggregate consumer
prices inflate with the deposit interest rate so that deposit interest on
existing productive investment can be paid into the unearned income pool
without disrupting the productive economy. Increasing interest rates to manage
inflation increases the flow of deposits from the productive sector to the
investment sector by increasing the unearned income pool. It is no longer possible to combat inflation
by substantially increasing interest rates (or to stimulate growth by reducing
them) because modest increases in interest rates are now enough to drive the
economy into recession.
Foreign ownership
of a part of a debtor economy causes asset inflation there because there are
more domestic deposits available to fund the exchange of assets remaining in
domestic ownership.
The supply of new electronic cash (not debt) to businesses to fund virtual
increases in minimum wages does not necessarily cause immediate increases in
prices because the E-Note injections are not part of production costs and some
of the extra wages will be used for private debt retirement.
INVESTMENT.
77. “Increased depreciation allowances speed
up principal repayments and reduce national saving and productive investment”
78. “Increased repayment of debt, including
household debt, reduces national saving and reduces net new productive
Investment.”
79. “Productive investment
represents the redistribution of production incomes to clear the capital goods
market in the productive sector. ”
80. “The accumulated net
outstanding principal invested in productive capital goods is equal to the net
accumulated national saving because in a competitive market economy the long-run
economic profit of business tends toward zero as profit falls toward the
opportunity cost of capital”.
81. “The investment sector represented by the net
after tax accumulated interest paid on bank deposits produces nothing itself
and is paid for through inflation in the productive sector.”
82. “Economies in recession must be stimulated
by direct investment in new production because the lead-time before the
benefits of increased productivity from infrastructure investment exceed the
infrastructure costs is usually too long to be effective.”
Unified text.
The investment
sector represented by the accumulated net after tax interest paid on bank
deposits produces nothing itself and is paid for through inflation in the
productive sector. Increased depreciation allowances speed up principal
repayments and reduce national saving and productive investment. Increased
repayment of debt, including household debt, reduces national saving and
reduces net new productive Investment.
The accumulated net outstanding principal invested in productive capital
goods is equal to the net accumulated national saving because in a competitive
market economy the long-run economic profit of business tends toward zero as
profit falls toward the opportunity cost of capital. Productive investment
represents the redistribution of production incomes to clear the capital goods
market in the productive sector.
Economies in
recession must be stimulated by direct investment in new production because the
lead-time before the benefits of increased productivity from infrastructure
investment exceed the infrastructure costs is usually too long to be effective.
LOCAL MONEY SYSTEMS.
83. “Local money systems are co-operatively
owned interest free, self-cancelling monetary systems in which there is no
systemic debt because the debt incurred during the production phase is
cancelled when the product or service is sold.”
84. “Local money systems, organised nationwide
and taxed in formal currency, promote local domestic production, increase
economic efficiency and reduce financial leakage from local economies.”
Unified text.
Local money systems
are co-operatively owned interest-free, self-cancelling monetary systems in
which there is no systemic debt because the debt incurred during the production
phase is cancelled when the product or service is sold. They can be organised
nationwide and taxed in formal currency, promote domestic production, increase
economic efficiency and reduce financial leakage from local economies.
SAVING.
85. “In a debt-based financial system and in
the absence of a debt bubble it is impossible to increase National Saving (and
therefore GDP) without increasing production loans and new productive
investment.”
86. “In the modern world, faster depreciation
has swapped longer-term productive
investment to boost
existing stock and existing property prices.”
87. “In the absence of asset inflation, any
attempt to withdraw any part of deposits for non-productive investment purposes
(“savings”) reduces purchasing power in the productive economy or leaves capital
goods unsold, leading to increases in inventory, and subsequent unemployment
and recession.”
88. “Saving for productive investment and real GDP
growth as measured using the international System of National Accounts cannot
be restored to modern developed economies unless the protocols around
depreciation are altered, bank lending polices and regulations reviewed and the
serious distortions in the System of National Accounts (SNA) records themselves
are corrected.”
89. “ Unproductive savings and pension schemes
such as Kiwisaver in
Unified
text.
In the modern
world, faster depreciation has swapped longer-term productive investment to
boost existing stock and existing property prices. Saving for productive investment and real GDP
growth as measured using the international System of National Accounts cannot
be restored to modern developed economies unless the protocols around
depreciation are altered, bank lending polices and regulations reviewed and the
serious distortions in the System of National Accounts (SNA) records themselves
are corrected.
In a debt-based
financial system and in the absence of a debt bubble it is impossible to
increase National Saving (and therefore GDP) without increasing production
loans and new productive investment. In the absence of asset inflation, any
attempt to withdraw any part of deposits for non-productive investment purposes
(“savings”) reduces purchasing power in the productive economy or leaves
capital goods unsold, leading to increases in inventory, and subsequent
unemployment and recession. Unproductive savings and pension schemes such as
Kiwisaver in
SYSTEM
OF NATIONAL ACCOUNTS (SNA).
90. “The use of
depreciation for measuring economic success has been catastrophic for the world
economy.”
91. “When the current account balance is
included as income in the national income and outlay account of the SNA an
entry of equal value entitled “purchase of capital assets on the current
account” should be included on the other, “use of income”, side of the national
income and outlay account.”
92. “The National income and outlay account of
the SNA needs to be restructured and the National capital account consequentially
adjusted to reflect orthodox economic theory as follows:
Use of income side:
= Final consumption C
+ Purchase abroad of non-productive
capital investment goods (=CA)
+ Saving for productive investment S
Income side:
= GDP
+ Current account balance (CA)
less the balance on external
goods and services
less repayments of principal
on outstanding productive investment.”
Unified
text:
The
use of depreciation for measuring economic success has been catastrophic for the
world economy.
When the current account
balance is included as income in the national income and outlay account of the
SNA an entry of equal value entitled “purchase of capital assets on the current
account” should be included on the other, “use of income”, side of the national
income and outlay account.
The National income
and outlay account of the SNA needs to be restructured and the National capital
account consequentially adjusted to reflect orthodox economic theory as
follows:
Use of income side:
= Final consumption C
+ Purchase abroad of non-productive
capital investment goods (=CA)
+ Saving for productive investment S
Income side:
= GDP
+ Current account balance (CA)
less the balance on external
goods and services
less repayments of principal
on outstanding productive investment.
TAXATION.
93. “Skewed tax systems benefit a relatively
small section of society at the expense of everyone else because they impair
economic performance and economic growth potential by systemically transferring
purchasing power from the productive sector to the unproductive sector through
increased debt and debt servicing.”
94. “A single Financial Transactions Tax (FTT)
automatically collected on withdrawals from bank deposits can help correct the
tax skew inherent in existing taxation systems that substantially exempt the
investment sector from paying its “fair share” of tax.”
95. “A uniform wealth tax on
all net wealth from all sources is redistributive because it (gradually)
reverses the accumulation of net wealth inherent in the presently dominant
debt-based financial system.”
Unified
text:
Skewed tax systems
benefit a relatively small section of society at the expense of everyone else
because they impair economic performance and economic growth potential by
systemically transferring purchasing power from the productive sector to the
unproductive sector through increased debt and debt servicing.
A uniform wealth tax on all net wealth from all sources is
redistributive because it (gradually) reverses the accumulation of net wealth
inherent in the presently dominant debt-based financial system. A single Financial
Transactions Tax (FTT) automatically
collected on withdrawals from bank deposits can help correct the tax skew
inherent in existing taxation systems that substantially exempt the investment
sector from paying its “fair share” of tax.
Appendix : The Debt Model based on a revision of the Fisher Equation.
Click here to see a visual form of the debt model.
The debt-based economy can be
expressed as a simple variation of the original Fisher Equation of Exchange:
GDP (Total economic output measured
as gross domestic product PQ, being the quantity Q of goods and services
produced times their price level P) = Vy ( the speed of circulation
of My) times My (the transaction deposits actually used
to generate PQ)
in the form:
GDP = Vy *(DC
- (Ms +Dca +Db ) + M0y )
Where My
= GDP/Vy = DC - (Ms +Dca + Db) + M0y and:
My = The
deposits actually used to generate productive output and My = Mt + M0y where Mt
is the transaction deposits representing
productive debt Dt,
and M0y = The residual cash
in circulation included in My that is used to contribute to
productive output,
Dca = The whole of the debt created in the
domestic banking system to satisfy the accumulated current account deficit 1.
Ms =
The net after tax accumulated deposits arising from unearned deposit income on
the total domestic banking system deposits M3 (excluding repos) 2.
DC = Domestic Credit,
Ds = the residual needed to satisfy the
equation DC = Dt + Dca3 + Ds and the debt Dt is numerically equal to the
Db =
The “bubble” debt, the excess credit
expansion or contraction in the banking system such that Ds - Db = the debt supporting the accumulated deposit interest Ms
defined above. Db can be
positive or negative”.
The debt model can be expressed and
used in its differential form to quantify macroeconomic outcomes over any
chosen time period.
1. This is greater than the monetary deposits Mca
because the banking system may have sold commercial paper to borrow foreign
currency to satisfy the foreign exchange settlement requirements.
2. Repos refer to inter-institutional lending
3. Arguably the accumulated sum of capital transfers
could be included here, in which case the net international investment position
(NIIP) would be used instead of the accumulated current account. The decision
affects the size of the “residual” Db.
"Money is not the key that opens the gates of the market but the
bolt that bars them."
Gesell, Silvio, The Natural Economic Order, revised English edition,
Peter Owen,
This work is
licensed under a Creative Commons
Attribution-Non-commercial Share-Alike 3.0 Licence.