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Edition 01: 17 November, 2010.

Edition 02 : 08 August, 2011.

Edition 03 : Revised edition 07 September, 2011.

Edition 05 : 09 February, 2013.




Summaries of monetary reform papers by L.F. Manning published at


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. 





By Lowell Manning:   Date 01 SEPTEMBER 2011 :  (REVISED) VERSION 4.


Sustento Institute, Christchurch.


"The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers..... The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government's greatest creative opportunity. …….The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. …….. Money will cease to be the master and become the servant of humanity."


[US President Abraham Lincoln, Senate document 23, Page 91, 1865.]


“Financial markets have worked hard to create a system that enforces their views: with free and open capital markets, a small country can be flooded with funds one moment, only to be charged high interest rates - or cut off completely - soon thereafter. In such circumstances, small countries seemingly have no choice: financial markets' diktat on austerity, lest they be punished by withdrawal of financing”.


[Joseph E. Stiglitz “Taming Finance in an Age of Austerity” Published by Project Syndicate, Monday July 12, 2010]


Key Words:  current account deficit, debt, debt model, debt growth, deposit interest, domestic debt, domestic credit, equity in society, exponential debt growth, Financial Transactions Surcharge, Financial Transactions Tax, Fisher equation, foreign debt, FTS, FTT, inflation, local currency systems, local economies, revised Fisher Equation, savings, structural debt growth, systemic debt growth, systemic inflation, unearned income.




The author gratefully acknowledges the support of Raf Manji and the Sustento Institute  for  their encouragement and advice; and to Terry Manning and the NGO Stichting Bakens Verzet (“Another Way”) whose editing and constructive critique have been crucial as the paper has evolved over time.




01. EXECUTIVE SUMMARY.                                               


02. THE ECONOMIC DILEMMA.                                                                


03. THE VIRTUAL MINIMUM WAGE PLAN A.                                                   


04. PLAN A DETAILS.                                                                                                              




06. CONCLUSION.                                                                                           


07. APPENDIX 1 :THEORETICAL BACKGROUND.                                 




09. BIBLIOGRAPHY.                         





The main dilemma faced by today’s economic policy makers is that the price-based financial system they have been using has run out of room to manoeuvre. It is no longer possible either to substantially increase interest rates to combat inflation or to reduce them to stimulate “economic growth”.


This paper offers a practical plan to resolve the world’s problem of exponential debt growth and to control inflation.  The plan is based on a revision of the well-known Fisher Equation of exchange enabling it to take account of interest-bearing debt. It is designed to ensure that no substantial income group in the community is worse off than it is now.


The plan focuses on a substantial virtual increase in the minimum wage to stimulate demand among low-income earners and enable them to repay credit card and other high-interest consumer debt.  The plan does not directly increase the minimum wage.


The virtual wage increase is merely a delivery mechanism to distribute low-income support by the injection of E-notes or electronic currency into the banking system. The electronic currency will be created debt-free by the Central Bank. Firms will be granted a percentage of that low-income support for their participation in the plan and to provide them with additional capital for future investment. In this paper a figure of 20% has been used arbitrarily for the capital grant made available this way to firms.


The virtual increase in the minimum wage will continue step by step indefinitely. The additional consumer demand created by the virtual minimum wage increases will encourage economic growth in the usual way until full employment has been reached.  Once full employment has been reached the economic stimulus might have to be slowed to avoid demand-pull inflation unless it is sterilised through savings programs, such as, in New Zealand, by making Kiwisaver compulsory.


The modest debt-free injection of purchasing power using E-notes will increase the demand for labour, providing strong economic growth. The labour supply will be provided from existing spare economic capacity. Prices should not change because increases in production costs tend to be avoided. The plan is expansive because firms can increase their production in the normal way subject to human and physical resource limitations and consumption demand.


A supplementary reserve ratio will need to be introduced to the banking system over and above the existing Basel III risk-based capital adequacy requirements. It will need to be large enough to sterilise the new e-note deposits in the banking system, and also to support progressive lowering of the OCR (Official Cash Rate).   The banking system will apply quantity controls on debt and money instead of using price controls through interest rates as it does now.  As the OCR is reduced towards zero percent, the existing systemic inflation in the economy caused by the payment of unearned income in the form of interest on bank deposits will in turn drop towards zero.


Since the plan is, or can be made, practically inflation free it will not measurably increase the cost of exports.  The plan does, however, propose to introduce a variable Foreign Transfer Surcharge or FTS starting at 10%. This would allow the New Zealand dollar exchange rate to be safely lowered, the current account to be brought back into balance and the nation’s foreign debt to be repaid over time.


On the basis of the preliminary debt model calculations for New Zealand (Manning, 2009) a significant credit crunch developed through the March year 2009-2010.  The productive sector transaction deposits My  in the debt model appear to have fallen below what is needed to maintain the productive economy, largely because most incomes have not been keeping up with inflation, reducing purchasing power. In the debt system this can only be corrected by increasing the total amount of transaction deposits, that is, (Dt – see appendix 2, equation 2), or by injecting E-notes (electronic cash) into the economy 01.  In the absence of a significant economic stimulus New Zealand’s economy risks entering a “deflationary” spiral masked by business collapse and the contraction of government spending.


Until now, prices P in the revised Fisher equation (Manning, 2009) have been maintained at the expense of output Q, as firms have sought to maintain or improve profits by cost cutting and shedding labour. Some firms may soon have to begin reducing prices P to maintain output Q at functional levels and still clear their market 02. 


The plan offers a practical and stable route toward on-going debt reduction with a very low level of inflation in the economy.


The stabilisation and ongoing reduction in the nation’s total debt is a fundamental objective of the plan. The improved equity and better living standards from higher incomes are an integral part of the economic transformation the plan will produce.


01  Foreign ownership Dca in the model referred to and GDP have been tracking together in New Zealand for the past 30 years showing that all of New Zealand’s nominal economic growth during that period has been borrowed on the current account. The foreign ownership created that way affects the control of the economy and the country’s productive assets. Over the past 30 years New Zealand’s economy has been progressively “sold” to foreigners because New Zealand has, as a nation, been living beyond its means

02  The change in the speed of circulation Vy of the circulating transaction deposits My in the revised Fisher equation referred to is primarily structural. Vy tends to decline as the structures of the payments systems changes. Except for secondary effects related to changes in interest rates, circulating transaction deposits My must expand in the debt system if the economy is to grow. 





The body of work supporting this paper confirms that a revised Fisher Equation of Exchange 03 and the Fisher Theory of Interest  (Fisher 1930) are sufficient to explain why debt is expanding exponentially throughout the world and why orthodox economics has failed to prevent unsustainable debt growth resulting in boom and bust economic cycles interspersed with downturns and recessions. The main difference between the revised Fisher Equation presented, which incorporates the impact of interest-bearing bank debt, and orthodox economics is that while the revised Fisher Equation is based on managing the quantity of debt, orthodox economics is focused on the price of debt. 


Both approaches eventually require the quantity of debt to be regulated. The revised Fisher Equation shows that when the price of debt, expressed as the average interest rate paid on bank deposits, is used as a regulator, an exponentially growing pool of unearned income is created. That pool of unearned income has to be funded by inflation in the productive sector because unearned income, by definition, produces nothing itself. As long as that pool of unearned income was relatively small compared with economic output expressed as Gross Domestic Product GDP the interest cost could be funded from increased productivity and economic growth.  The result was an ongoing shift in wealth from the productive sector to the investment sector, but as long as that shift was corrected through socially acceptable income redistribution, the system remained relatively stable. 04 As the world economy has become ever more reliant on interest-bearing debt instead of cash transactions the impact of unearned income on debt levels has increased exponentially.


Exponential “growth” curves are inexorable.  What started as a relatively small effect has rapidly become unsustainable throughout the world.  In New Zealand, between 1990 and 2010, the pool of unearned income (Ms in the revised Fisher equation) grew from about 30% of GDP to 75% of GDP.  As the ratio of unearned income Ms to GDP increases, the ability of the economy to fund the unearned income decreases. The background papers cited in the appendices confirm the obvious: when inflation is measured by a rise in prices, the sum of all those price rises over time must account for nearly all current prices. 


Since the deposit interest on the pool of unearned income Ms is funded by inflation and all price in the productive economy is also inflation, the transaction deposits My funding the productive economy must increase at least in proportion to the debt funding the pool of unearned income Ms. If My is increasing more slowly than Ms the productive economy must be deflating provided the speed of circulation Vy of My  is more or less constant .


03  Detailed in Appendices 1 and  2.

04  In practice, in many Western Countries like the US and New Zealand, not enough has been done to fairly redistribute unearned income. This has led to growing income inequality and accompanying social problems.


In many countries the transaction deposits funding the productive economy grow a little faster than the debt funding the pool of unearned income Ms because the former includes new My deposits needed to fund endogenous growth. The relationship between the productive deposits My and the pool of unearned income Ms  is a good indicator of a nation’s economic health. That relationship can become distorted when excess “debt bubbles” build up in the productive economy from time to time, producing the now familiar boom and bust cycles. 


Excess bubble debt is produced by failure by the banking sector to properly align demand for credit with the productive capacity of the economy. It arises in New Zealand because the regulatory debt price signals provided by the Official Cash Rate (OCR) typically respond to the issue of excess new debt by the private for-profit banking system instead of regulating it in a timely manner.


In the present debt-based financial system, the productive economy has to replace the deposits it loses to the unearned income investment sector My. While the unearned income deposits migrate to the investment sector, the corresponding debt backing Ms remains in the productive sector. To replace the deposits lost as unearned income the productive economy must borrow a new amount at least equal to what has been alienated from it as well as enough to fund the next tranche of deposit interest 05.


During booms there is excess debt in the productive system that affects both the rate of increase of the pool of unearned income Ms and the bubble dent Db shown in the debt model. By and large, Ms has followed My so closely in the debt model arising from the revised Fisher Equation because virtually all the nominal GDP growth in New Zealand over the past 30 years has been funded by offshore borrowing as demonstrated in “The Interest-Bearing Debt System and its Economic Impacts” (Manning, 2010).


In March 2011 the total domestic debt in New Zealand was just under NZ$ 311 billion with the circulating transaction deposits My and accumulated unearned income Ms each making up roughly NZ$ 10.6 billion and NZ$ 1117 billion of that respectively 06. At an average deposit interest of 3.6% and tax on interest of 25%, there would be 1.8% of systemic inflation as shown by the debt model of the revised Fisher Equation.. This means that (NZ$ 226.9 billion * 3.6% * (100%-25%) where (M3 – repos) is NZ$ 226.9 billion,   or NZ$ 6.1 billion,  gets added to the pool of unearned income Ms and a total of at least NZ$ 12.2 billion/18, or NZ$ 0.68 billion, (where 18 is the speed of circulation Vy added to transaction sector deposits My ) must be added to the productive sector deposits My to keep the debt system afloat 07.  If less than the required new debt is added to My, the debt system will not “float”. Economic growth other than what could be derived from productivity increases in that case becomes impossible. Productivity increases have been very small in New Zealand in recent years, perhaps less than 1% per year on average 08. Productivity increases mask inflation because they allow more goods and services to be offered without increasing production input costs. NZ$ 3.5 billion nominal GDP growth  (1.8% of New Zealand’s GDP) is needed to satisfy the systemic inflation requirements based on the New Zealand March 2011 GDP figure of NZ$ 197.4 billion 09.  Systemic inflation has usually been above 2% in New Zealand because its central bank has operated with a high interest rate policy to enable the country to fund (find investors for) its foreign debt.


05  This simple concept lies at the core of the world economic debate. Try it with counters. Start with 10 counters representing unearned income deposits and 10 representing deposits in the productive economy. The total debt is 20 counters. Suppose the unearned income for the period starts at 1 counter. Shifting 1 from the productive economy to unearned income leaves 11 in unearned income and only 9 in the productive economy, so the productive economy must borrow 2 more counters to keep up … and so on for each productive period or cycle. The total debt increases by 2 counters each period or cycle, not 1. If just 1 extra counter were borrowed, the deposits funding the productive economy would remain at 9 while the counters needed to pay the deposit interest would increase as the total of those deposits grows. Over time this will lead to deflation in the productive economy unless the deposit interest rate falls towards zero.

06  The preliminary debt model calibration shows the change in Ms exceeding the change in (My * 18) in each of the  March years 2009, 2010, and 2011, indicating a serious credit crunch, that can only be undone by increasing My by direct injection (E-notes or electronic cash) into the productive sector. It is otherwise numerically difficult to “grow” out of such a productive sector deficit because of the high demand placed on the economy by debt servicing.

07  As in footnote 5 the amount added to My has to replace the systemic inflation passed to the investment sector Ms plus add a roughly equal amount to pay for the systemic inflation on the GDP.

08  It is difficult to achieve large productivity increases in service based economies like those of New Zealand and the United States, where services typically make up nearly 80% of economic activity. To do so, some services would need to be suppressed in favour of agricultural and industrial output. One measure (GDP/hours worked) can be found in the “NZ Economic Chart Pack :Key NZ Macro-economic & Financial Market Graphs published by the NZ Department of Statistics and the NZ Treasury. Moreover, the quality of growth has often been poor. In many countries most recent GDP growth has been in financial services with evident disastrous consequences.

09 Further details are provided in Appendix 2 to this paper.


From the March 2009 year through the March 2011 year there is little evidence of real expansion of New Zealand’s economy. The banking system in New Zealand has not been  lending enough for expansion to take place. Within the current price-based financial architecture there was not enough demand in New Zealand from creditworthy customers for new debt to satisfy the systemic inflation requirements, let alone to cover much, if any, economic growth. This is quite different from other recent downturns and recessions where interest rates at their current levels would have been sufficient to get the economy back on its feet again. Now, late 2010, the New Zealand economy can only be stimulated by reducing the OCR (Official Cash Rate) substantially below its current level. The New Zealand Reserve Bank’s response mid-year was to increase the OCR instead of reducing it.


The dilemma faced by economic policy makers is that the price-based financial system has run out of manoeuvring room. It is no longer possible either to substantially increase interest rates to combat inflation or for that matter to reduce them to stimulate “growth”. In New Zealand, a 1% increase in interest rates would now reduce GDP by almost 1% in addition to adding pressure on the current account. Modest increases in interest rates are enough to drive the economy into recession. The interest rates then have to be cut to lower and lower levels to stimulate economic “recovery” until the OCR approaches zero as has happened in Japan and as is happening in the United States. During 2010, each 1% extra deposit interest in New Zealand generated about 0.5% of systemic inflation. Deposit interest rates above 6% would have systemically breached any 3% inflation threshold.  Assuming a bank spread ( which is the difference between the interest rate banks charge on their loans and the interest rate they pay their depositors) of 2.5%, the maximum loan interest (claims) rate the banks could charge their clients for loans in New Zealand was about 8.5%. Anything above 8.5% would force an extension of the upper inflation target of 3%.  In New Zealand there was little recorded growth for the year ending March 2011 (despite the official GDP figures) and systemic inflation is still running at about 1.8% on an annual basis before taking the GST increase of 2.5% in October 2010 into account. Meaningful stimulation of the New Zealand economy would at this point require a fall in the OCR from 2.5% to below 2% 10.


10  The OCR in New Zealand was 2.5%  in August 2011.  Its reduction to 1.5%, if fully reflected in interest rates charged by banks to their clients, would increase growth by 1%.





This is an almost non-inflationary proposal to stimulate economic growth without the need for radical change to the existing financial architecture.  The key to the proposal is to increase consumer purchasing power by increasing the circulating deposits (arising as an increase in electronic cash ME in the debt model shown in the Appendices) without significantly increasing prices and without causing any growth in the pool of unearned income Ms.


a). Increase the minimum wage to a VIRTUAL LEVEL of $20/hour, but leave youth rates for those below 18 years of age at a lower level but above $12.5/hour. The wage increase is virtual because the increase is paid through employers but funded by a central bank cash injection into the economy. Employers must pass the cash injection on to their employees. The higher virtual wage is an instrument to deliver the cash injection of purchasing power to those parts of the economy where it is most needed. The proposed increase would potentially add about NZ$ 5 billion annually to disposable purchasing power and 2.7% to GDP. The increase in GDP would be “real” growth stimulated by greater purchasing power at more or less constant prices.


b). Supply new electronic cash (not debt) to businesses to fund the virtual increase in the minimum wage, so there is no significant increase in price. The new electronic cash deposits would circulate at the same speed as deposits arising from debt. The first cash injection needed would be about NZ$ 5 billion/Vy = 5/18 or NZ$ 0,28 billion where Vy is the speed of circulation of the productive transaction deposits  My in the debt model. Since this amount helps cover the deposit interest transferred to Ms , it must be repeated for very production cycle leaving residual incomes available for  consumption and investment. It cannot be inflationary unless the total aggregate amount exceeds the aggregate increase in Ms.


c). Supply a corresponding injection to businesses to facilitate business growth, to be paid to businesses weekly together with the planned virtual wage increase. This supplementary support for businesses has been arbitrarily set at 20% of the virtual wage injection, that is 20% of NZ$ 5 billion, or NZ $ 1 billion/year.


d). The planned increase in the virtual minimum wage income is largely expansive. It does not increase systemic inflation because the E-note injection is not interest-bearing debt. While it stimulates new productive activity by improving business confidence the net injection will not be large enough to produce significant demand-pull inflation. The circulating transaction deposits My in the debt model shown in the appendices does not change because the new funds are injected in the form of electronic cash. The proposed E-note injection will notionally support additional “real” GDP growth of up to 2.6%. However, some of the deposits arising from the cash injection will be used to reduce mortgage, credit card and other consumer debt.  As set out  the plan details, E-note injection at about the proposed level can be continued indefinitely.


e). Use taxation revenue (about NZ$ 2 billion) from the up to 2.6% increase in GDP  to index social welfare and superannuation payments to the higher VIRTUAL average wage.  The virtual average wage will rise by $2/hour to $25/ hour. This is based on June 09 NZIS income survey figures, which have not changed significantly over the past year and represents a virtual wage increase of about 8%.  In New Zealand, 8% of total social transfers of about $22b  (as provided in the New Zealand Budget, 2010) is NZ$ 1.8 billion. The indexation is therefore tax neutral after allowing for administration costs of NZ$ 0.1 billion.

f). In New Zealand, the government could choose to adjust the “working for family” and some other income support payments 11.  On the other hand, leaving the allowances in place, or even extending them would help to ensure that as wide a portion of income earners as possible benefits from the Plan.


g). Seek trade union agreement to keep real wage increases close to the inflation rate 12.  Such inflation-led wage increases will apply to all workers in the usual manner, including those receiving the virtual wage increase. Under the agreement the E-note injections would be continued indefinitely as long as the rate of injection remains close to or within the permanent growth capacity of the economy.


h). Progressively extend the virtual wage increases. Many people will use some or all of their extra income to reduce debt. The program could therefore be continued until much, if not most, existing household debt is retired. Increasing the virtual minimum wage from $20/hour to $23/hour will add another $5 billion a year to lower incomes to enable the process to continue. Such extensions should be possible because normal wage increases will progressively reduce the size of the original injection as normal wages rise towards the virtual minimum wage of NZ$ 20/hour. A third similar tranche, raising the virtual minimum wage from $23/hour to $25/hour would follow the second, and so on. 


i). The new cash deposits in the banking system could provide the base for increases in bank lending. Supplementary reserve ratios will need to be introduced into the banking system, over and above existing Basel III-based capital adequacy criteria, so that bank lending can be managed by quantitative means rather than by price. This will need to be done during the first year of execution of the plan.  The banking system will progressively change the nature of its activities from credit creation toward savings and loan intermediation.


j). To reduce systemic inflation, progressively reduce the overnight cash rate (OCR) based on measured macroeconomic outcomes towards zero %.  This may require the introduction of a Foreign Transactions Surcharge (FTS) to manage capital flows, as set out in the plan details below.


11  In New Zealand the main contributors to this are the Family Tax Credit scheme, which provides NZ$2.2 billion (2010) annually, and the In-Work tax credit scheme, which provides NZ$0.6 billion (2010) a year.

12  People with real wage rates above $20/hour less inflation would initially get a pro-rata increase in their virtual minimum wage to a level above the $20/hour virtual rate. If inflation were 3% and someone was on a wage of NZ$19.70/hour, their wage would increase by 3% to NZ$20.30/hour.



a). Increasing the VIRTUAL minimum wage.


One primary reason the New Zealand economy has not been growing very quickly is that wages have not kept up with inflation in real terms and the benefits of modest productivity increases have accumulated to the business gross operating surplus instead of being passed on to employees.  New Zealand has gradually declined from a high wage economy toward a low wage one. New Zealand’s working population needs a non-inflationary income catch-up to bring working conditions more into line with those now available in Australia.  This plan will increase virtual minimum wages by up to 8% for each E-note injection of NZ$ 5 billion.


The increased virtual wage will stimulate increased production and reduce unemployment. In the absence of full employment there will be little or no inflationary pressure. The plan can be continued over time by increasing workforce participation through greater innovation and productivity. It is also an axiom of capitalism that people tend to work harder if they know they are being rewarded for doing so.


Some workers will use their extra income to reduce debt, especially high-interest consumer and credit card debt, smoothing the initial positive impact of the programme.  This is a composite part of the plan designed to reduce the country’s total debt over time.


Some regulatory provision may be needed to prevent employers seeking to reduce wages, through the loss of jobs by workplace attrition and subsequent replacement of workers at lower wages, or by failure to negotiate or pass on the normal real wage increases agreed by wage bargaining from time to time.  Actions of this type by employers would tend to keep their prices stable, but would lead to higher injections of credit into the economy as discussed in point b) below, eventually putting the plan at risk.  As discussed in point c) below, businesses will be well rewarded under the plan and would be expected to support normal wage levels and normal wage increases as well.


b). Injection of electronic cash.


The Central Bank does not need new legislative authority to make an injection of electronic cash into the economy. The money in the proposed plan will be used to increase virtual wages. It is not a subsidy to business, though business will be rewarded for its participation in the scheme and to stimulate business development.  The plan is a non-inflationary way to increase wage-earners’ purchasing power. It is made possible  through the greater understanding of the operating mechanisms of the existing interest-based debt system provided by the debt model discussed in detail in the appendices to this paper.


Each business will have to demonstrate the number of qualifying employees it has who earn below the proposed initial virtual wage threshold of $20/hour.  That should be apparent from existing PAYE (Pay As You Earn) tax data. The amount needed to bring wage earners’ pay up to $20/hour will be deposited weekly into the firm’s business operating accounts in a manner similar to ordinary government transfer payments together with the corresponding incentive payment to be made available to businesses. Firms will have to provide records (as part of their normal PAYE returns) to show that all the money they receive has been used for its intended purpose. They will continue to pay workers at their usual (pre-existing) rates of pay together with any pay increases from time to time negotiated with the unions in the normal way as wage inflation increments arising from increases in the cost of living and increases in productivity.


Since it is likely that a substantial part of the E-Notes injection will be used to reduce existing consumer and credit card debt it is probable that the initial programme can be continued over time and expanded beyond the virtual wage of $20/hour.


Normal wage increases will progressively erode the amount of the initial E-Note injection providing an automatic “sunset” clause to the plan should a political decision be made to discontinue it.  To maintain the effects of the initial E-Note injection, the virtual minimum wage will need to be increased in tranches as set out below under point h) of the plan or simply increased incrementally each year.


c). Business participation.


In many countries, the business gross operating surplus is 50% or more of the purchase price of goods and services. It is therefore usually beneficial for firms to expand production capacity as demand rises.  There will be a reward for business participation in the plan. The reward will take the form of a capital grant. Businesses will be required to show how they use the capital grant provided to them to increase productive capacity. All businesses employing wage and salary workers will be eligible, not just those employing workers below the proposed virtual minimum wage.  The proposed level of 20% of the planned initial E-Note injection of NZ$ 5 billion/year would provide an annual capital injection to business of about NZ$ 700 for each FTE (Full Time Equivalent) worker, or in round terms, about NZ$ 14 per worker per week.  This would, in principle, continue as long as the plan is operative and for as long as individual firms continue to invest in increased production capacity.


d). Inflation.


Since the E-Note injection is not part of production costs firms can continue to produce the same output as they do now for the same price.  The E-Note injection will increase wage-earners’ consumption capacity, stimulating further new production at nominally constant prices. It does this by reducing the drain of incomes to the unproductive investment sector leaving more of the earned incomes (both compensation of employees and gross operating surplus) for consumption and investment. The need to increase consumption capacity in the short term arises from the exponentially growing transfer of deposits from the productive sector My to the investment sector Ms. Increase in unearned income Ms will continue as long as interest continues to be paid on deposits.  Increasing debt levels require an ever-higher proportion of incomes to cover interest payments for debt servicing. The debt model presented in Appendix 2 shows there will be a deficit in effective consumer demand in the economy whenever wage-earners’ net incomes fail to fully compensate for increased debt servicing costs and inflation.  This is especially the case when the OCR is used to increase interest rates in an effort to manage inflation, producing unemployment and a contraction in consumption and, over time, a contraction of economic output.


When purchasing power is increased modestly, the miracle happens as employees spend at least some of their new income on consumption. Since prices remain very nearly the same, the increased purchasing power induces added production using existing unused resources available within the economy. The initial stimulus provided does not need to be large. In practice it is a lot less than what has been used in countries such as the United States but it is not a “rescue” or “bailout”.  It is simply a measure to “oil the wheels” of the economy by offsetting some of the structural drift of wealth to the investment sector. It needs to be just enough to get the productive economy moving and to keep it moving. Too much stimulus would cause demand-pull inflation. Provision of a limited accompanying capital injection to businesses is designed to offset any risk of inflation by increasing productivity. The model for debt-based economies set out in appendices 1 and 2 of this paper enables the amount of the stimulus needed to be estimated and adjusted at any point in time.


Normal wage increases and new growth would initially continue producing systemic inflation in New Zealand at an annual rate of under 3%.  This percentage does not take the increase of GST from 12.5% to 15% in 2010 into account.  Lowering the OCR as discussed in section 2 will reduce systemic inflation from a level below 1.8% down to as little as one quarter or one half percent. 


e). Indexation of transfer payments including Superannuation.


Indexation of transfer payments on a tax-neutral basis does not change the figures referred to under points a) to c) above.  The higher virtual minimum wage level results in higher employee incomes. A substantial portion of that wage increase is transferred back to the government through taxation.  The government then redistributes that tax, leaving the global increase in purchasing power intact, but further improving its spread amongst the population. Some existing transfer payments should fall as the rate of employment increases with economic expansion. People on other benefits should become more motivated to seek work because the higher minimum virtual wage allows them to escape the poverty trap 13. This plan assumes such budget “savings” would be used to increase the transfer payments to the people still needing them. Whether the government of the day chooses to increase the present level of social welfare transfers and, if not, what it does with the resulting ‘savings” becomes a matter for public policy debate.


f). Other forms of income support.


As lower income levels rise, the need for supplementary income support through programs such as the New Zealand “Working for Families” package should be reduced.  The very need for supplementary income support initiatives has always been a clear signal that many lower incomes in New Zealand are insufficient to ensure an adequate standard of living.  As the implementation of the plan progresses, what is done with income support packages becomes a political issue for the government of the day 14.  This paper arbitrarily assumes the existing provisions will remain in place, and that the thresholds will be amended as required to maintain fairness.


13  The term “poverty trap” refers here to situations arising under the existing New Zealand welfare system where working for a low wage leaves workers little or no better off than they were on welfare.

14  In New Zealand the main contributors to income support are the Family Tax Credit (NZ$ 2.2 billion in 2010) and the In-Work tax credit (NZ$ 0.6 billion in 2010).


g). Wage restraint.


The trade union movement is expected to be strongly attracted to the plan because it will improve the purchasing power of many of its members.  A unique feature of the plan is that it provides a systemic bottom up approach to reducing income disparity rather than a top down approach.  The plan is neutral on taxation rates, which are considered to be a political matter.


The plan does not remove systemic inflation from the economy though it will reduce it over time through the reduction in the OCR. As in the past, wages may increase to reflect price changes induced by inflation as well as to allow employees to enjoy a share of increased productivity.  Such wage increases will also apply to those benefiting from increases in the virtual minimum wage. They are included in systemic inflation.  The whole economy will continue to inflate by an amount equal to the systemic inflation, which is expected to be about 1.8% in New Zealand in 2010/2011  before taking the 2.5% GST increase into account. This is because systemic inflation is related to circulating production deposits My and the deposit interest rate in accordance with the Model set out in the appendices.


It would be advisable to keep annual wage increases to less than 2.5%, that is, up to 1.8% for inflation (reducing as inflation falls) and 0.7% for productivity gains.


An agreement with the unions would be helpful because there will be some pressure to increase incomes above the median wage to restore skill differentials in the labour market. Skilled employees should not be worse off under this plan than they would have been without it. Upward pressure among middle incomes could be dealt with by making the tax system more progressive by adjust adjusting tax thresholds to maintain income differentiation. 15


15  One way to do this would be to replace existing taxation with  a single automatically collected Financial Transactions Tax  (FTT) . The FTT would be deducted whenever transfers are made out of any deposit account except a savings account in the name of the same depositor.  That would raise “consumption” taxes by about 80% and allow all other taxes except excise/social taxes to be abolished. FTTs are strongly progressive because they would apply to all transactions, not just those in the productive economy. Assuming total transactions of 1.8 x GDP, to raise, say, $65 billion would require an FTT of around 19%, not much higher than the new GST of 15%.


h).  Plan extension.


There is enough spare capacity in New Zealand’s economy to absorb the proposed annual NZ $5 billion per year injection. This will result in about 8% additional growth over the three year period. Each annual injection is automatically reduced over time because ordinary wage increases apply to wage rates under the virtual minimum wage as well as to those above it.  Some employees will use their extra income to reduce debt, which is positive because it will reduce the total debt in the financial system and tend to reduce systemic inflation.  Debt reduction favours transition from a debt-based economy to a credit (electronic cash) based economy, but it also tends to offset the initial benefit of introducing cash injections in the first place. The potential growth arising from the cash injections is diminished by any net ‘saving” that takes place through debt reduction.  Subject to point i) below, it is safe to continue modest cash injections and increase the minimum virtual wage indefinitely.


Most New Zealanders on low incomes struggle to make ends meet now. The bulk of the first cash injections will probably go into new consumption as they are intended to do rather than into debt reduction. This will change as further cash injections make debt reduction more feasible.


Economists and political leaders throughout the world are calling for an end to exponential debt growth.  This plan does that by progressive credit monetisation of the existing debt as well as by permanently reducing the OCR (Official Cash Rate) towards zero, at which point systemic inflation would be removed from the financial system.


i). The banking system.


This plan will progressively and significantly increase cash deposits in the banking system.  The difference between cash deposits and deposits arising from debt is that cash deposits reduce the banks’ risk-based capital requirements thereby increasing their lending capacity.  Nobody can default on a cash deposit because it can’t be liquidated. Cash deposits remain somewhere in the banking system unless they are used to repay debt.  That makes a credit (electronic cash) based financial system inherently more stable than the existing debt-based system.


Bank deposits will continue to increase, but at a slower rate than during recent decades. The increased deposits will result from population expansion and from residual systemic inflation. They will tend to be offset by increased productivity derived from increases in employees’ purchasing power. The growth of debt in the economy will reduce towards zero as the OCR is progressively reduced towards zero, eventually eliminating most, if not all, exponential debt growth.


One main element of past exponential debt growth has been the use of the price mechanism to “manage” it. This has turned out to be a perverse system. The debt model set out in the appendices shows how raising interest rates increases systemic inflation instead of reducing it.  During downturns and recessions the systemic inflation is still there. Higher systemic inflation is, however, masked by falling purchasing power caused by higher debt financing costs, and falling production with aggregate discounting of goods and services by producers leading to a reduction of their gross operating surpluses. The systemic inflation is not visible in consumer prices and therefore tends to go unnoticed and unmeasured.


Since cash deposits increase banks’ nominal lending capacity this paper proposes using variable supplementary bank reserve ratios to limit bank lending. This is to avoid risk of added inflation caused by increases in circulating productive transactions deposits My over and above what is needed to maintain real GDP growth within the resource constraints of the economy. 


There is nothing new about reserve ratios for bank lending. Most countries still have them in some form even though they have usually played a minor role in economic management in recent years. How the supplementary deposit ratio to be incorporated in the plan is framed is outside the scope of this paper. Its purpose is to slow down the exponential growth of bank lending as new debt is replaced by electronic cash injections so that systemic inflation can be reduced and eliminated altogether over time. 


Over the longer term, household debt can be first stabilized and then gradually reduced. The banks will be gradually transformed into savings and loan institutions. This process will reduce systemic banking risk while at the same time maintaining banks’ profit margins.


The main change under the plan will be the elimination of unsustainable exponential debt growth. This is what the world wants to happen. Unlike this plan, orthodox economics offers no mechanism to achieve it.


j). Reducing the OCR.


The introduction into the financial system of electronic cash credit injections and supplementary reserve ratios allows the OCR (Official Cash rate) to be gradually reduced, and systemic inflation to be removed from the financial system.  The financial system becomes based on the quantity of debt (and E-notes) rather than its price.  The persistent problem of exponential debt growth will be solved. Over time, interest-bearing debt can be removed entirely from the financial system.


From a systemic point of view, the decline in the OCR can be carefully managed to allow the New Zealand dollar exchange rate to adapt gradually over time. 


The plan does not, of itself, resolve either the current account deficits of debtor nations or the current account surpluses of creditor nations.  It does, however, provide a platform from which the exchange rate and current account can be effectively dealt with using other options such as the Foreign Transactions Surcharge (FTS) discussed briefly in Section 5 below.


The plan has been conceived to avoid significant additional costs for exporters. Except for tourism, most producers of New Zealand’s export income already earn more than the proposed virtual minimum wage. The plan proposal does not, in any case, significantly increase prices.  Exporters will benefit from the capital injections to business included in the plan.  Reducing the OCR could initially affect offshore borrowing rates. However, the OCR was lower in New Zealand in 2009 than it was in 2010, and the country coped adequately with the corresponding exchange rates then.


From the structural macroeconomic point of view debtor countries clearly need to get their current account deficits under control.  One mechanism to do this is by applying a variable Foreign Transactions Surcharge (FTS) whereby a currency exchange surcharge is automatically collected whenever domestic currency is converted into foreign currency.  It would have no effect on export prices, but it would increase effective import prices. The proposal would be made tax neutral by reducing domestic taxation by the amount of the surcharge collected.





It is advisable to introduce a Foreign Transaction Surcharge (FTS) as soon as possible to protect against the export of assets (financial leakage) offshore and progressively repay the nation’s foreign debt.


An FTS would be simple to administer 16. It has very rarely been used in the past 17. Introducing a financial instrument such as the FTS is essential in the medium term if offshore borrowing and related interest costs, which are among the main causes of exponential inflation in New Zealand, are to be reduced.  Orthodox monetary policy efforts to manage the exchange rate and current account using the Official Cash Rate (OCR) have failed, in part because financial deregulation has facilitated unrestricted speculative capital flows 18.  Some economists may object that a unilateral FTS will not work because banks and traders can evade the surcharge by “bundling” transactions and reporting, say, only a single daily settlement sum, or else trading in New Zealand dollars offshore.  Such objections, even where they apply to internet or international card transactions, are a regulatory matter rather than one of policy or principle. Modern technology makes reporting and processing of individual transactions possible both in New Zealand or, where relevant, by offshore correspondents and affiliates. There does not appear to be any reason why requirements of this type cannot be backed by a legally enforceable regulatory framework 19.


A broader issue is whether a foreign transactions surcharge would contravene international financial agreements. There are provisions in the relevant international World Trade Organisation (WTO) protocols for countries to protect their balance of payments. The GATT legal text, Article XI clause 1 appears to specifically permit non-discriminatory taxes to be applied. Provision of funding is a service that falls under the GATS protocols.


The so-called policy “trilemma” referred to in paper 1(cited in Appendix 2) is important to any debate on the FTS. Obstfeld (1998) put it this way:  In most of the world's economies, the exchange rate is a key instrument, target, or indicator for monetary policy. An open capital market, however, deprives a country's government of the ability simultaneously to target its exchange rate and to use monetary policy in pursuit of other economic objectives20.


16  The “beauty” of FTS is that it applies to outward capital flows, not inward capital flows. Moreover, FTS is not a “restriction” on capital flows , it is a universal tax on all outward transactions.

17  It was used successfully in Tonga in the 1980’s, but repealed when it had done its job. However, the Tongan FTS was neither variable nor tax neutral.  Source: personal discussion with a former Tongan Minister of Finance.

18  As discussed briefly at page 12 of the paper “The Interest-Bearing Debt System and its Economic Impacts”.

19  Setting the parameters for that regulatory framework falls beyond the scope of this paper.

20  See also Rosenberg, Bill “Financial Crises, Trilemmas, and a Time to Rethink”, Foreign Control Watchdog, 120, (2009).


If the current account is to be managed, some form of exchange management will be required. To restructure the financial architecture as proposed in this paper, a tool such as the FTS will have to be inserted at the currency exchange interface.  Failure to do so could condemn the world to economic ruin. It is now widely, if not yet universally, acknowledged the current economic system is deeply flawed as suggested or implied in recent articles from the Bank for International Settlements, the World Bank, and leading economists like Joesph Stiglitz 21 and Paul Krugman.


The exchange management instrument(s) would apply to all outward exchange transactions, not just outward capital flows.


The proposed FTS is not a tariff or trade barrier of any kind. Nor is it a restriction on capital flows as such.  It can be adjusted as net foreign debt is repaid. It is a universal, physically neutral surcharge on all outgoing exchange transactions. The FTS would be variable. It goes no further than the specified objective of balancing the current account and progressively repaying the accumulated net foreign debt. This proposal mirrors the historical position that existed prior to the removal of the US$ gold peg in 1971 22. It is also very similar to the position advocated by J.M Keynes and the British delegation at Bretton Woods in 1944 23.


Financial receipts from the surcharge would be used to offset a corresponding amount of domestic taxation (for example by reducing GST), to make the surcharge tax-neutral apart from any receipts put towards foreign debt reduction. Its intent is to correct the current account, which is part of the balance of payments as defined in the legal WTO, GATT, GATS texts, by removing the existing subsidy enjoyed by those engaging in foreign currency transactions at the expense of those who do not. Those using foreign currency in New Zealand will, for the first time in decades, pay the actual price for doing so. The subsidy of heavy foreign exchange “users” paid by foreign exchange “savers” may be indirect, but it is very real and very large. New Zealand’s large current account deficits and heavy foreign debt burden mean its interest rate structure is considerably higher than that in other comparable countries with an AAA international debt rating. This keeps both domestic debt servicing and the exchange rate well above what they need to be, seriously affecting the country’s economic performance.


The proposal for an FTS also deserves mention in the context of ongoing negotiations for a TPPA (Trans-Pacific Partnership (Free Trade) Agreement) presently being negotiated among eight Pacific Rim countries 24 though other countries could yet join the negotiations. Kelsey and others (2010) discuss the proposed TPPA in detail.  Any TPPA chapter on services would be well advised to maintain a reservation in respect of the GATS provisions allowing protection of a nation’s balance of payments. Such provisions have recently been used by at least one large country to exercise control over speculative capital flows 25 and it would be unfortunate if the ability to maintain sovereign control over the national economy were negotiated away as part of a Free Trade Agreement. An FTS could also perhaps be conceived as a “Border Tax Adjustment” (BTA) that matches the cost of capital flows to the true national cost of current account deficits. Such a concept is not too dissimilar from the BTA proposed in the US Cantrill-Collins Carbon Limits and Energy for America;s Renewal (CLEAR) Act.  CLEAR would require carbon emission permits to be presented at the border whenever products imported to the US are produced using a higher carbon intensity than the corresponding domestically produced product 26.  The main difference is that under the FTS, the Border Tax Adjustment is made at the time of exit instead of  at the time of entry.


21  For example the Report of  the United Nations (UN) Commission of Experts on Reforms of the International Monetary and Financial System, 2009, chaired by Joseph Stiglitz:  (the “Stiglitz report”)

22  Under the gold standard, capital flows appear to have been unrestricted, but they were not the dominant feature in financial flows they have become in recent decades and current account  imbalances were reflected in changes in gold reserves.

23  The famous Bretton Woods meeting was where the basis for the post World War II financial architecture was agreed among the allied powers. The British position was effectively vetoed by the United States that sought (and obtained) the broadest possible global role for the United States dollar as the world’s reserve currency.

24  Chile, Peru, United States, Vietnam, Singapore, Brunei, Australia, New Zealand.

25  For example, Brazil presently has unilaterally applied a 2% “Tobin” tax to manage speculative capital flows.

26  The author of this paper is not aware of any remission policy in cases where the PPMs (Process and Production Methods) is MORE carbon efficient than the  corresponding US domestic product.


The overall saving to the wider New Zealand economy from the introduction of an FTS is likely to be more than the annual current account deficit itself  27. In addition to the obvious reduction in interest costs and the amount of foreign ownership of domestic capital assets there are consequential “downstream” benefits to the economy of a country like New Zealand using an FTS to properly manage its current account:


A foreign transactions surcharge would cause the exchange rate to fall towards a stable base level, allowing exports to increase and imports to decrease, providing a more even playing field for local manufacturers and producers 28.  At the moment they face a severe economic disadvantage through the hidden costs represented in the status quo.


Introduction of the FTS could allow the removal of all remaining tariffs and subsidies in the New Zealand economy, making it one of the very few tariff-free nations in the world.  The FTS would tend to make imported goods more expensive and locally produced goods relatively cheaper, stimulating the domestic economy. The cost of the existing foreign ownership of domestic capital assets remains a substantial drag on the NZ economy.  The FTS would block currency speculation because it would be set at a higher level than any conceivable short-term gain from present speculative capital flows: although such flows would not be physically impeded. At the same time, long-term capital investment would not be measurably affected.


The FTS can also be seen as a correction designed to offset the unmanaged volatility in New Zealand’s exchange rate since the New Zealand dollar currency float in 1985.  In New Zealand in March 2008 the Trade Weighted Index (TWI 5) that reflects the country’s exchange rates against the currencies of its five major trading partners stood at 71.6. A year later in March 2009 it was 53.8, a fall of 25%. As of mid June 2010 it was back up to 67.7. 30 An FTS starting, say at 10%, would, on the basis of current total payments to the rest of the world of NZ$ 77 billion 31, yield roughly NZ$ 6 billion in surcharge income 31.


27  Each 1% in interest rate alone represents nearly NZ$ 3.1 billion per year on domestic credit of around NZ$ 310 billion, as at March 2011. Estimating the actual economic effect of FTS is outside the scope of this paper, but, according to the System of National Accounts, every dollar off the current account deficit is a national “saving” before taking into account other benefits.

28  Rose (2009) notes that exchange rates have relatively little influence on imports, but it is likely that the FTS would act more directly on the import sector because it is visible as it is drawn directly from bank accounts.

29  Source: Reserve Bank of New Zealand statistical series B1. The series base is 100 back in 1979 when exchange rates were still fixed.

30  New Zealand National Accounts for the year ended March 2009.

31  The outward payments could fall from their present level and inward receipts would probably increase.


That would be enough to reduce GST to 10% from 15% and begin foreign debt repayment 32. A higher level of FTS might be needed during a transitional period to reduce any initial tendency toward capital flight and to manage the Keynesian “transfer problem” 33. The level of the FTS would be adjusted by the government in agreement with the central bank as and when required. An initial 10% FTS would lead to an adjustment in the prevailing Trade Weighted Index (TWI). This adjustment would, however, be lower than the sharp short term New Zealand dollar exchange rate variations which have occurred in recent years.


There would be a substantial reduction in interest payments as the current account is brought under control, the reduction of foreign ownership begun and inflation reduced to very low levels. Rose (2009) notes: “Effectively the market is pricing country and/or currency risk into national interest rates”. On the other hand, the New Zealand dollar “value” of foreign ownership expressed in New Zealand currency would rise. Bertram (2009) notes that “In the worst case, where no rolling over of offshore funding was possible at all, the banks would be obliged to raise New Zealand dollar funding to pay down their foreign-currency debt”.  That “debt” is represented by the commercial banks’ foreign currency borrowing in lieu of the physically selling domestic assts to satisfy the the exchange settlement mechanism.


That would produce a sharp fall in the exchange rate. The FTS is a very powerful economic tool because of its indirect redistributive impact within the domestic economy 34.  Its introduction would also prevent a reversal of the so-called “carry trade” 35 once domestic interest rates have been reduced to low levels.


32  This could be done through some form of tender process.  The worked indicative example for Option (B) at Table 1 in Section 6 in the paper 02. How to create stable financial systems in four complementary steps is conservative and includes only very modest repayments from the FTS receipts.

33  The Keynesian transfer problem implies the current account should go far enough into surplus to meet all transitional foreign investment claims, though that might be optimistic in the short term.

34  On the other hand, debtor countries may be better off “biting the bullet” and dealing with their foreign debt sooner rather than later. Since the volume of exports cannot be rapidly increased, the FTS must rely on changing the relationship between the NZ$ value of exports and imports.

35  The carry trade is the practice of transferring deposits from countries where deposit interest is low to countries where deposit interest is high(er).


The share of the New Zealand current account deficit represented by interest and profit on foreign, mainly Australian, bank investment has increased from 33% in 1997 to 69% in 2008. Nearly all New Zealand’s current account deficits in recent years have been funded by capital inflows from the foreign owned banks. Bertram (2009) notes that :


New Zealand’s current account deficit basically reflects the servicing requirements on its overseas debt.”


That those annual servicing requirements should be more or less equal to New Zealand’s entire nominal GDP increase is frightening. The “national credit card” of foreign ownership is fast becoming unsustainable.   


Banks would quickly unwind their dependency on foreign debt when the funding rate falls below what they are paying offshore.  Transitional arrangements may be needed to favour the replacement of foreign funding with domestic funding.


Some academic literature supports the need for some form of foreign exchange management to correct the balance of payments and the current account. “Pegged” exchange rates have been widely used by major countries, including Japan and China. The use of the United States dollar as the world’s “reserve” currency comes into the same general category. The FTS, on the other hand, maintains a full currency float, but manages outward financial flows.


Preston (2009) argues that the levels of the New Zealand current account and foreign debt are substantially due to (over)reliance by the New Zealand banking system on external borrowing. When times are good and offshore funding is plentiful the Trade Weighted Index (TWI) rises and offshore interest rates fall. When times are bad and offshore funding is harder to obtain, the TWI falls and offshore interest rates rise. To deal with such instability Preston (2009) proposes (page 13) an alternative monetary policy framework that would extend existing monetary policy beyond its present emphasis on inflation measured by the Consumer Price Index (CPI) to take into account “trends in domestic expenditure, trends in asset prices, maintaining a sustainable trend in the balance of payment, an exchange rate which is moving broadly in line with economic fundamentals”. To achieve this Preston proposes Mandatory Deposit Ratios (MDR) for foreign currency deposits to help manage private sector credit expansion. 


The FTS outlined above is much broader in scope than Preston’s MDR because it would operate on two levels. At the domestic level, supplementary deposit ratios (see page 14 of this paper) will be applied to manage domestic lending.  At the exchange rate interface, the FTS would be used to manage external flows. The proposals in this paper are designed to enable very low domestic deposit rates tending towards zero to be sustained. Preston on the other hand tries to address the large-scale offshore borrowing by the banking sector. A primary difference between the FTS proposed and Preston’s MDR is that while Preston’s MDR is an instrument of monetary policy, the FTS is a domestic fiscal policy.





The paper sets out the underlying economic problems relating to the exponential growth of debt and offers a detailed plan to deal with them. The private interest-bearing debt-based financial system generates systemic exponentially increasing transfers of wealth from the productive sector of the economy to the investment sector.  The transfers take the form of net interest paid on bank deposits. The deposit interest has to be funded from the productive economy. This causes an inflationary expansion in the debt levels the productive economy has to service.  Over the past few decades, the orthodox economic approach to that inflationary expansion has been to increase the price of debt by raising interest rates. Not only is that approach shown to be counterproductive but debt levels in developed economies are now so high that small increases in interest rates are enough to force them into recession. The consequence it that interest rates now have to be reduced close to zero to stimulate the economy.


The proposed plan resolves the exponential debt problem. It is limited in its scope to reducing debt in the economy and stimulating sustainable growth.


The plan introduces the concept of a virtual minimum wage. In New Zealand, the virtual minimum wage would initially be set at NZ$ 20/hour.  The difference between an employee’s existing wage level and NZ$ 20/hour will be funded by an interest-free injection by the publicly owned Central Bank of electronic cash, or E-notes, into the economy. The proposed starting amount is NZ$ 3.6 billion/year. Firms will separately be given a capital grant of 20% of NZ$ 3.6 billion to increase their productive investment. The initial E-Notes injection is nominally sufficient to increase purchasing power by about 2.6% of GDP/ year, well within the growth capacity of the New Zealand economy. The added purchasing power is designed to stimulate local production.  The act of producing extra goods and services provides ongoing consumption capacity to continue consuming them as they are produced.


Debt reduction occurs as people receiving the stimulatory payments use some of them to repay existing consumer debt and mortgages 36. Debt is progressively replaced by electronic cash circulating in the economy at the same speed as existing bank debt.  The paper shows the debt reduction process can probably continue indefinitely. The proposed cash injections become self-limiting as normal wage increases reduce the difference between ordinary wages and the virtual minimum wage. The plan can then be extended by increasing the virtual minimum wage first from NZ$ 20/hour to NZ$ 23/hour and then to NZ$ 25/hour.  Each of those extra increases has approximately the same effect as the original increase to NZ$ 20/hour; being about 2.6% of GDP.   The program can be continued in stages, and  progressively broadened until most debt in the economy has been retired and  the  economy is permanently working at full capacity.


36  Injections by the Japanese Government failed to adequately stimulate the Japanese economy in part because of the debt substitution that took place. Instead of stimulating consumption some private debt was replaced with public debt.


The plan is accompanied by at least two monetary instruments. The first is the introduction of a supplementary deposit ratio into the banking system and the second is the introduction of a foreign transactions surcharge to manage the current account and retire foreign debt.


The supplementary deposit ratio is applied in addition to the Basel III risk based capital requirements under which the banking system operates at present.  The supplementary deposit ratio enables the effect of the E-note injection to be sterilised (offset) so that new bank lending is correspondingly reduced.  This eliminates the possibility of inflation being caused by an oversupply of new interest-bearing bank debt as the Official Cash Rate (OCR) is reduced towards zero.  Lowering the OCR will progressively remove systemic inflation from the economy.


The Foreign Transactions Surcharge (FTS) serves two main purposes. The first is to limit any capital flight as the OCR is reduced. The second is to provide a powerful ongoing instrument to regulate the exchange rate and progressively repay the nation’s foreign debt.  The FTS is a variable tax on all outward transfers of NZ currency. It would start at about 10% and be automatically collected through the banking system. The income received would be used to reduce domestic taxes, such as GST, and to begin reducing foreign ownership.  The proposed 10% initial level for the FTS is much lower than the recent percentage variations in the NZ$ exchange rate. The proposed FTS rate would apply to ALL exchange transactions including speculative financial transactions.  It appears to come within the context of existing international protocols such as GATT and the WTO that allow for protecting a nation’s balance of payments. It is important that this position be reserved in any TPPA  (Trans-Pacific Partnership Agreement) the country decides to enter into.





The first paper of this series “The Interest-Bearing Debt System and its Economic Impacts” 37 looked at the fundamental cause of exponential debt growth and proposed several key concepts:


(a)   The fundamental debt problem is that the economy has institutionalised the payment to deposit holders of unearned income.

(b)   That unearned income takes the form of interest paid on bank deposits.

(c)    Interest paid on bank deposits creates systemic inflation and exponential increase of the debt burden.

(d)  Culture and institutional “capture” of the debt debate has made rational discussion of the debt problem difficult.

(e)   Sustainable debt levels cannot be achieved without removing most if not all new deposit interest.

(f)    Quantitative analysis can be provided using a new debt model of the economy based on a revised form of the Fisher Equation of Exchange.


The paper “The Interest-Bearing Debt System and its Economic Impacts” showed that the debt system in New Zealand has become unstable because the debt servicing demands are now outstripping the ability of the economy to fund them from nominal GDP growth.


The productive economy is progressively becoming paralysed. The exponentially growing pool of unearned deposit income is funded by inflation of the productive economy. The unearned income investment sector is becoming so large that servicing the nation’s total debt requires inflation close to the deposit interest rate 38. The present situation has probably never arisen before, not even during the depression of the 1930’s.  New Zealand faces a “deflationary” spiral without deflation in that the productive economy has begun to collapse despite the absence of price reductions.


Orthodox economic instruments such as the use of interest rates to manage inflation mask systemic inflation at the cost of economic growth as shown in Figures 2 and 4 of Appendix 2.  The inflation cost is still there and it is still being paid, but it is being paid in the form of lost production and unemployment instead of showing up in prices.


Appendix 2 provides detailed evidence of the current position for New Zealand. It is likely many other world economies are at or approaching the same position as New Zealand, especially those with a history of high real interest rates.


The world’s financial system is approaching a state of collapse and cannot be repaired using orthodox economic theory.  Orthodox economics has failed to reveal the fundamental mechanisms at the root of the debt problem or to offer any practical long-term solution to address it.


37   L.F.Manning, for Sustento Institute, Christchurch, September 2010.  “The Interest-Bearing Debt System and its Economic Impacts” .

38   Some of the inflation is masked by the current account deficit and offshore borrowing.





The theoretical basis for this paper is the debt model shown below which is the same as the one described in  “The Ripple Starts here….”39 and the first paper of this series “The Interest-Bearing Debt System and its Economic Impacts” cited above. The debt model is based on the Fisher Equation of Exchange amended as follows:


While the debt model is based on the volume of debt, it is unrelated to earlier volume-based reform proposals like those of Social Credit that failed to offer a viable theoretical basis to support them.


The premise in the debt model is that the circulating deposits and cash My = Prices P * output q where q is the quantum of domestic output produced by My over a single cycle. Taken over a whole year, the SNA definition of Gross Domestic Product GDP is given in the debt model by mathematically integrating the expression Pq* Vy, where Vy is the number of times the circulating deposits and cash My are used during the year 40.


The SNA should reflect an expression of the original Fisher Equation of Exchange as shown in Figure 2 41.  The only difference is that the money supply M in the Fisher equation of exchange included hoarded cash, whereas in the debt system shown in Figure 2 for practical purposes there is now very little cash contributing to measured GDP. 


In circulating cash and deposits My cannot include hoarding of debt beyond the term of the production cycle because all the productive bank debt giving rise to My is conceptually repaid at the end of the cycle 42.


39.  “The Ripple Starts here….”

40. The contribution of cash transactions in industrialised countries is now  (very) small.

41. The Fisher equation has been very widely discussed in relation to the economic difficulties arising from the sub-prime mortgage defaults in the US 2007-2009. 

42. As previously noted, in practice there is a continuous flow of production and consumption so the deposits and cash My are always present, but they are being used in the production cycle, not hoarded.


At any point in time there are five broad blocks of deposits in the domestic financial system.


They are:


Mt  The transaction deposits representing the productive debt My - M0y  so:


My =  Mt + M0y                                                                                     (1)


Mca The accumulated domestic deposits representing the sale of assets to pay for the accumulated current account deficit. 


M0y The cash in circulation included in Mv and used to contribute to productive output.


Ms The net after tax accumulated deposits arising from unearned deposit income on the total domestic banking system deposits M3 (excluding repos) 43.


 (M0-M0y)  Cash hoarded by the public and not used to generate measured GDP.


In this paper the total of these deposits, that is, Mt + Mca + M0y + Ms , is provisionally assumed to be the M3 (excluding repos) monetary aggregate published by most central banks monthly less the amount of cash in circulation M0 except for the part M0y that is included in My.  In this paper M0y is assumed to have the same speed of circulation as My.  In industrialised countries, the contribution of cash transactions to the measured output of goods and services (GDP) has been declining in recent decades and their contribution to the GDP has been provisionally calibrated for the purposes of this paper 44. 


In this paper, the total debt in the domestic financial system is assumed to be the Domestic Credit, DC debt aggregate published by most central banks monthly.


At any point in time there are four broad blocks of domestic debt in the domestic financial system. Three of them together add up to DC such that:


DC   = Dt  + Dca 45  + Ds                                                                                                (2)




Dt    The productive debt supporting the transaction deposits Mt.


Dca      The whole of the debt created in the domestic banking system to satisfy the accumulated current account deficit 46.


Ds      The residual debt to balance equation (2)  


43. Repos refer to inter-institutional lending 

44. More accurate assessment of the cash contribution to GDP over time requires further detailed study.

45. 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.

46. 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.


The fourth block of debt is :


Db,  the virtual “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 as discussed further below in relation to Figure 5.


There is also a fifth block of debt Is that is, conceptually, not bank debt .

Is, the total debt accumulated by investors arising from Saving Sy = S/Vy.


The investor pays the investment Iy =I/Vy = Sy = S/Vy  to the producer and the money is used to retire the outstanding part of My relating to the investment in question. Conceptually the investor borrows the purchase price from employee incomes and the business operating surplus. Except for households buying new homes, the investor then becomes a producer, and the interest on investment Iy is included as a production cost in the subsequent production cycle loans My.


The predicament of new homeowners is quite different. They cannot service their debt because they cannot, conceptually earn more than they were before they bought their new home, because the home itself is nearly always unproductive. There is no new income stream from their housing investment. If economic demand is to be maintained, homeowners must, in aggregate, rely upon increasing house prices and refinancing of their properties, creating an aggregate “pass the baton” systemic increase in debt.  


When non-productive investment assets are traded there is typically a capital gain because of asset inflation on investment (Dca + Ms + the property component of Is).  The new purchaser pays more for the asset because of asset inflation, allowing the seller to retire the outstanding mortgage debt on the property.


By definition in this paper :


My  * Vy = GDP

Ms = Ds


The cash contribution to GDP = M0y * Vy.  Therefore :


DC  = (GDP)/Vy  - M0y + Ms + Dca +  Db                                                      (3)


Ms =Ds = (DC – Dca ) – GDP/Vy + M0y  - Db                                                (4)


GDP = Vy *(DC - (Ms +Dca +Db ) + M0y  )                                                    (5)


My  = GDP/Vy  = DC - (Ms  +Dca  + Db) + M0y                                                (6)


Where the terms are as defined above.


Equations (3 ) to (6) are all forms of the debt model developed in previous papers 47.


47. Links are provided in the conclusion to this paper.


Ms is the same format as Ms in the earlier forms of the model. It has been freshly calibrated. Unlike the previous forms of the model equations (3) to (6) are general and include the contribution made to the economy by cash transactions.


In equation (4), all the terms except GDP/Vy = My and Db are known or can be estimated with reasonable accuracy. For the purposes of equations (1)  and (6) My can be approximated using trend-lines because it is small compared with Ms. Db is unknown but can be approximated through the calibration as in Figure 5. The calculations in equations (5) and (6) involve the subtraction of large numbers to get relatively small numbers, which leaves them sensitive to modelling and data error.


If Ms , calculated as “the accumulated deposits arising from unearned deposit income on the total domestic banking system deposits M3(excluding repos) ”agrees more or less with that calculated in equation (4), bearing in mind the value of Mb , the proposition that debt growth is determined by deposit interest will be proven. The model will require further calibration as further data becomes available.  Despite that, it is self-evident Db will be positive during periods of rapid expansion, particularly as bubbles form, and will become negative during periods of rapid contraction, particularly as bubbles collapse. The classic case of this in New Zealand is shown in Figure 5. Financial contraction continued following the 1987 share market crash long after the asset bubble was gone.


The dependence of the gross domestic product (GDP) on the Domestic Credit DC and the interest rate on bank deposits in the modern cash-free economy from which Ms is calculated has profound implications for economics.


In the light of the worldwide financial chaos of 2007-2009 the indicative debt model shown in Figure 1 provides a powerful argument in support of public control of a nation’s financial system.




The vertical axis in Figure 1 applies to the Domestic Credit for New Zealand only. The other curves are purely to demonstrate the debt model structure. The present system shown in Figure 1 leaves the world economy at the mercy of private banking institutions working for private profit by allowing irresponsible increases and contractions (Db in equation (2)) of the Domestic Credit and its associated bubble formation. The problem is systemic because the existing financial system requires exponential growth (Figure 2), that allows the accumulated current account debt Dca to expand. In the case of New Zealand, the expansion of foreign ownership caused by the accumulated current account deficit largely defines the deposit interest rate and systemic inflation.


It isn’t possible to have a simpler model of the economy than equation (5):


My =Nominal GDP/Vy equals domestic credit DC less (unearned net deposit income Ms + the accumulated current account Dca + the cash contribution to GDP  M0y  plus a correction for bubble activity Db (+/-))


Domestic Credit DC, Unearned Income Ms and nominal GDP must all grow exponentially because they are all a function of the deposit interest rate. The exponentials of the curves in equations (3) to (5) will be different with respect to each other and because of large variations in the deposit rate over time. In New Zealand, Domestic Credit has grown exponentially by an average of about 9% per year since 1993 while nominal GDP has increased by about 5.25% annually as shown in Figure 2. Figure 2 shows both the 2005-2009 bubble and the 2010-2011 bust clearly. The difference between the two curves is mainly the result of domestic debt needed to fund the accumulated current account deficit that, in New Zealand, is  roughly 90% of GDP.

Click here to view FIGURE 2 :  EXPONENTIAL DEBT AND GDP NEW ZEALAND, 1993-2011.


It is theoretically impossible to maintain exponential debt expansion faster than GDP expansion over an extended period because the added debt servicing costs will always leave the productive sector insolvent.


To avoid national bankruptcy, each nation must maintain, in aggregate, a zero accumulated current account deficit.


A first approximation for the speed of circulation Vy of productive debt plus cash transactions My is given in Figure 3. Vy varies with the change in the payments systems. Minor secondary shorter-term cyclical variability also occurs through changes in the average time taken to pay bills. When times are tough people take longer to pay their bills, and each change of a day in the time taken to pay them can alter Vy by perhaps 0.25%. The process is usually reversed in better times. Otherwise Vy reached a constant value of about 18.7 in 2006 and Vy will remain more or less constant unless the payment systems change 48.


48. Vy is estimated at the moment so the present figures are indicative. Once further research accurately refines the present estimates, Vy will be sufficiently accurate for predictive purposes.


Click here to view FIGURE 3 : SPEED OF CIRCULATION Vy NEW ZEALAND 1978-2011.


Note that in Figure 3, no correction has been applied to Vy for secondary increases in payment time during recessions or decreases in payment time during economic boom periods. The maximum correction in Vy appears to be in the order of +/- 0.3 or up to 1.5%. The series shown is less stable from 1978 to 1989. This is possibly due to distinctly different growth exponentials 1978-1989 arising from the very high interest rates that were typical during those years.


As shown in Figure 4, My in New Zealand was about NZ$ 10 b or  just 5% of GDP. 




The methodology used to calculate Vy in Figure 4 is as follows. The GDP in New Zealand in March 2010 was made up of about 45% compensation to employees, 42.7% gross operating surplus and 12.3% indirect taxes such as GST (VAT).  That distribution varies over time and is influenced by political decisions.  For example, in 2005 in New Zealand the proportion was 42%, 45%, 13% respectively, but small variations do not have too much effect on My.


Businesses pay suppliers monthly, and indirect payments are usually made on a monthly basis too, so their speed of circulation is about 12 on average. Most workers get paid fortnightly (though some get paid weekly and some monthly) so an average speed of circulation of 26 has been assumed for that.


When the above figures are weighted the weighted average speed of circulation is (12 * (42.7+12.3)+45 x 26)/100  = 18.3.


A similar estimate of payment trends and a separate Vy calculation was made for each of the other years, and a polynomial best fit curve was drawn as in Figure 4. 


My was then obtained by dividing the official GDP figure by the speed of circulation taken off the best fit trend curve.  This gives the data series shown in Figure 5 and used  when applying the debt model.  


The methodology is easily replicable using better information about payment trends and is applicable to any country.


Figure 4 shows the preliminary estimate for estimated production debt and cash My in New Zealand between 1990 and 2011. The reason the exponential for My in Figure 4 (5.72%) and GDP in Figure 2 (5.27%) are different is that the speed of circulation Vy has also been changing from year to year (as a second order polynomial). Vy has been changing because income payment patterns have changed over time as shown in Figure 3, especially as a greater proportion of people have been paid fortnightly instead of weekly. The productive debt My is obtained by dividing the actual gross domestic product (GDP) by the estimated value of Vy. The curve of My clearly shows the expansions and contractions in New Zealand’s economy over the past two decades. The loss of productive liquidity in the March 2010 year is the stand-out event over the past 20 years.


Figure 5 shows an indicative comparison between the residual debt Ds for New Zealand calculated from equation (2) and plotted against the model Ms calculated as the accumulated after tax deposit interest on M3 (excluding repos). The curve for Ms is a first approximation because assumptions have been made on the average tax deducted from the gross payments of unearned income (M3 (excluding repos x the average interest paid on deposits).  The tax is the average tax paid by each income-earner on his or her total income. It is not the marginal tax rate 49.  The losses from the 1987 share market crash in New Zealand were very large. Figure 4 suggests a figure as high as 10% of Domestic Credit.


Once the tax rates on Ms have been accurately calibrated, the size of any debt bubble Db  can be immediately calculated. Measures can then be taken to eliminate the bubble without risking any economic downturn.


Click here to view FIGURE 5 : BUBBLE DEBT Db AND Ms NEW ZEALAND 1978-2011.


49. In theory, the average tax rates could be quite accurately determined from income tax returns.





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Unknown authors, (ca. 2000) “Alternative monetary policy instruments”. 



More information on monetary reform :


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. 


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"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, London 1958, page 228.


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