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Edition 01 : 24 June, 2011.

Edition 08: 29 January, 2013.



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

00. Financial system mechanics explained for the first time. “Short summary of all papers published.” (Revised version)


The papers summarised are :

01. Financial system mechanics explained for the first time. “The Ripple Starts Here.” Full text. (Original version)

        Financial system mechanics “The Ripple Starts Here.” A short presentation.  (Original version)

Financial system mechanics “The Ripple Starts Here.” A Powerpoint presentation. (Original version)

02. The interest-bearing debt system and its economic impacts. (Revised version)

03. How to introduce an e-money financed virtual minimum wage system in New Zealand. (Revised version)

04. How to introduce a guaranteed minimum income in New Zealand. (Revised version)

05. How to create stable financial systems in four complementary steps. (Revised version)

06. The savings myth.

07. The DNA of the debt-based economy. (The summary for this paper is the unified text also published as document 9).

08. Manifesto of the debt-based economy. (No summary applicable.)

09. Unified text of the manifesto of the debt-based economy.  (This is the also the summary for document 7).

10. The missing links between growth, saving, deposits and GDP.

11. Using a foreign transactions surcharge (FTS) to manage the exchange rate.

12. The Manning plan for permanent debt reduction in the national economy.


13. NEW Comments on the IMF (Benes and Kumhof) paper “The Chicago Plan Revisited”.  (Summary pending)


14. NEW Capital is debt. (Summary pending).


Summaries of the papers are presented in numerical order.


01. Summary of paper 1 : Financial system mechanics explained for the first time. “The Ripple Starts Here.”


(Note : this, the original form of the debt model, has been slightly modified in later papers to take some extra variables into account).


There has long been a substantial theoretical disconnect between financial and monetary policy and economic behaviour in the real world. Recent world events show how limited economists’ understanding of the mechanisms underlying the monetary policy has been and still is. The basic mechanisms at the heart of the “modern” financial system itself have never successfully been put into a logical framework that is robust enough to allow the underlying relationships to be quantified.


One effort to do so was provided by Irving Fisher in 1911 his well-known equation of exchange that takes the form:


MV = PQ (1)


or M= PQ/V (2)


Where: M = the amount of money in circulation,

V = the speed of circulation of that money; the number of times M is used over a given period T,

P = the price level of goods and services an economy produces during time T,

Q= the monetised quantity of goods and services an economy produces during time T.


The product PQ is what is known today as Gross Domestic Product or GDP. At first sight, the Fisher equation seems to be self-evident. People have to be able to produce and exchange goods and services. To the extent money is used to do this, the total produced must bear a relationship to the amount of money and the frequency with which it is used.


Verifying the Fisher equation of exchange, until now, has been difficult. A few people have tried to do it. The main difficulties have been to work out reliable estimates for the variables. Historically, only the price level P has been known within a reasonable margin of error.


The relationship presented here began with an attempt to address a psychological question. “Has peoples’ hoarding behaviour changed over time?” The question is crucial to understanding the Fisher relationship. For a given quantity of goods and services Q, does the price P change when the amount of money M changes, or does the speed of circulation of that money, V, change? Or do P and V both change?


The crude estimate of V in England for the period 1300-1900 made by the author of the paper is about 2.5. The number itself is not as important as the hint that it may have been reasonably constant throughout that time despite major inflation during the late Tudor period, the Napoleonic wars at the end of the eighteenth century, and a host of plagues, wars, famines and changes in society and technology. The idea that V may have been more or less constant over six centuries is radical because it runs contrary to some previous academic thinking. This paper shows the equivalent value for the Fisher V is still in the same general order today.


The speed of circulation, V, appears to have been reasonably constant because it essentially represents a hoarding function. At any given time, most money was “saved”. V may be more a structural than a dynamic component in the Fisher relationship. The immediate response to a change in the money supply M will be a change on the production side of the equation PQ. If the change in M is rapid, the response will be a change in prices P until production and demand adjust to compensate for the change in the money supply. That’s different from what happens with fresh produce in the supermarket after bad weather. In that case the money side of the equation remains unchanged and prices rise because production falls. That happens in the shops regularly and from season to season.


The speed of circulation on the other hand appears to require a change in people’s behaviour toward money, or changes in the way the financial system works.


The main points of the paper are :


01. Debt modelling can be used to provide insights into the mechanics of the traditional interest-bearing debt-based financial system.


02. The economy can be represented by a debt model derived from the Fisher equation of exchange (Mv=PQ) .


03. The general form of the debt model is: PQ = (Md-(Ms+Mv))Vp+ MoVo +EoVeo (17)


Where :


PQ is the GDP,

Md is the total debt,

Ms is the debt representing unearned income on deposits,

Mv is the debt borrowed for speculative investment rather than production,

Vp is the speed of circulation of Mp (Md-Ms),

Mo is the circulating currency contributing to output,

Vo is the speed of circulation of Mo,

Eo is circulating electronic debt-free currency,

Veo is the speed of circulation of Eo (and must be equal to Vcd).


This general revision of the original Fisher equation of exchange allows the model to apply to countries that are not yet cash-free, and countries where debt-free electronic cash or E-Notes are introduced to replace bank debt.


04. A recession occurs when the change in total debt over time is less than what is needed to service the financial system costs, being the unearned interest that has to be paid to the investment sector Ms plus inflation, plus speculative investment Mv. In a recession the growth of Md-(Ms+Mv) (that is the growth of the productive sector debt Mp) falls below what is needed to provide for all the inflation in the economy in addition to (Ms+Mv). A depression occurs when the growth of the productive sector debt Mp falls below what is needed to provide for all the increase in the investment sector Ms in addition to Mv.


05. When interest rates fall, the rate of increase of the total debt Md tends to rise because borrowing becomes more affordable. In that case, in the revised Fisher equation, both the productive sector debt Mp and the growth of nominal GDP, (PQ) are likely to rise.


06. The speed of circulation Vp of the productive debt Mp in the revised Fisher equation is 1.


07. Once the bubble variable Mv is eliminated, nominal GDP growth is immediately available by solving the modified Fisher equation of exchange over any desired time span.


08. The investment sector debt Ms, in the revised forms of the Fisher equation (9),(17), is generated solely by deposit interest (unearned income) on the total debt Md.


09. A new measure of the debt system liquidity, the circulating debt Mcd, is provided as a sensitive indicator of the financial health of the domestic economy.


10. The debt model introduces the concept of “systemic” inflation as a structural component of the debt system that increases when interest rates rise and is a major component of CPI inflation.


11. The level of domestic earned savings in New Zealand has been largely determined by the current account deficit.


12. Western world economies have become almost entirely dependent on “good” debt management. Unfortunately, there has been no effective debt management for decades. That is why economic policy has failed to prevent the boom and bust cycles in the modern economy. The paper demonstrates why that has happened and how such cycles can be avoided in future.



02. Summary of paper 2 : The interest-bearing debt system and its economic impacts.


The paper shows how exponential debt expansion in the financial system used worldwide is caused by interest paid as unearned income on bank deposits. It describes analytically for the first time the fundamental transfer mechanism whereby the financial system “pumps” deposits from the production cycle into the investment sector or paper economy. This process leads to endemic systemic inflation in both the productive and the investment sectors. In the current economic system inflation is unavoidable except in the presence of substantial current account surpluses.


Neither the System of National Accounts (SNA) nor orthodox economic theory provides a direct mechanism to manage systemic inflation. Instead, orthodox inflation policy works through the investment sector. Higher interest rates increase systemic inflation while at the same time increasing deposit interest and reducing purchasing power. The inflation transmission mechanism persistently damages the profitability in the productive economy as inflation is temporarily slowed by lower consumption, lower producer margins and higher unemployment. This is but one reason why using an Official Cash Rate (OCR) to control inflation within our present system is fundamentally flawed.


While some, mostly debt-free, individuals may succeed in hoarding financial reserves, the existing debt system does not appear to allow for any aggregate earned savings. As a result, earned savings have to be offset by net borrowing of new capital, consumer or other non-productive debt from outside the production cycle.


Speculative global financial flows make current account imbalances worse and cause instability by “chasing” large deficit, high yield currencies. This process creates a self-reinforcing cycle of overvalued currencies, high interest rates, and financial crashes especially where central banks rigidly apply very low inflation targets.


Excessive debt growth has now reached the point where the global financial system is imploding because the productive economy can no longer satisfy the profit expectations of the investment sector.


The pool of unearned income in the investment sector does not usually mix with the production cycle because there is a net financial incentive for unearned interest deposits to remain in the investment sector.


An economic debt model based on a revision of the Fisher Equation of Exchange provides analytical support for the analysis given in this paper.


The theory and model described in the paper allow, in principle, ready quantification of debt expansion, systemic inflation, growth and the incentive to invest.


Exponential expansion of debt and prices can be slowed or stopped by reducing or removing deposit interest from the financial system. This could be done on a multilateral basis but is more likely to be implemented unilaterally as proposed in other papers of this series.


Cultural and institutional “capture” of economic debate may explain why the causes of debt growth and inflation have not been closely examined before now.


03. Summary of paper 3 : How to introduce an e-money financed virtual minimum wage system in New Zealand.


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 is 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. Debt is progressively replaced by electronic cash circulating in the economy at the same speed as existing bank debt. [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 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 programme 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.


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 foreign debt retirement. 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.


04. Summary of paper 4 : How to introduce a guaranteed minimum income in New Zealand.


The paper sets out the underlying economic problems relating to the exponential growth of debt and offers a plan based on a Guaranteed Minimum Income (GMI) 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. Interest rates now have to be reduced close to zero to stimulate the economy.


The plan introduces a Guaranteed Minimum Income for each legal resident as of right, thereby eliminating the need for social welfare programs and releasing potential productive capacity presently locked into welfare dependency and poverty.


The basic details of the proposal are shown in Tables 1 and 2 of the paper. The GMI will free a large pool of productive capacity that is barely used now. That capacity arises because all welfare-induced constraints on productive activity will be removed. Everyone will be able to contribute to the economy and be rewarded like everyone else for doing so. The GMI has been set to match existing social transfer incomes. The plan is sufficiently accurate as a first approximation, though the numbers may need minor adjustment or updating here and there depending on the political policy perspective adopted by those implementing it. The GMI proposal shown in the plan is unique as it is the only one to incorporate a universal housing allowance without which it is not possible to generate a simple GMI that matches the existing transfer system. Failure to match existing transfer payments would be politically unacceptable as system implementation would create winners and losers and funding would become very difficult to manage. Table 3 shows that the proposed GMI follows the existing transfer system very closely.


The GMI is funded by a combination of redirecting most existing transfer payments to the GMI, a 1% wealth tax on all net capital assets, an annual electronic cash injection of NZ$ 4.32 billion and rearrangement of existing taxation. The plan shows that one socially acceptable solution is to have a flat-tax of 41.5% on all earned income, bearing in mind that neither the GMI itself nor the housing allowance is taxed.


The tax rate taken over both the untaxed GMI and earned income will be less than what it is now for the majority of income earners including almost everyone in the low to middle income bands.


Appendix 3 examines 15 specific household incomes. The results are summarised in Table 4 which shows how net GMI incomes relate to existing net incomes. It proves the proposed tax rate of 41.5% (with GMI payments and housing allowances tax-free) and a 1% wealth tax together give “appropriate” GMI outcomes when compared with the existing earned income structure. More work will be needed to fine-tune the proposal. For example, Table 4 first considers the case where there is just one income earner per household. Income sharing among adults reduces the positive “difference” figures shown in the column “Diff1” in Table 4 because shared incomes reduce the income tax paid by the household compared with the amount presently paid by a single earner. The result with a 1/3 and 2/3 income split is shown in column “Diff2” of Table 4.


Overall GMI outcomes for most families will be close to or better than what they are now under the current system. The particular GMI solution selected for this paper deliberately weights those net final outcomes in favour of families with children and lower incomes to offset the rapid increase in income inequality that has occurred in New Zealand over the past 30 years. The weighting finally chosen for implementation will be a matter for political debate. To retain relative income inequality the wealth tax would need to be slightly reduced and the income tax slightly increased. More than one tax rate instead of the proposed single flat tax could be adopted. However, there is no doubt that the GMI coupled with a wealth tax and a flat tax on earned income produces a very simple, fair and well-balanced progressive tax system.


A Foreign Transactions Surcharge (FTS) is proposed as part of Plan B. The FTS serves two main purposes. The first is to avoid any risk of capital flight arising from implementation of the GMI. 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 foreign 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 foreign debt retirement. The proposed 10% initial level for the FTS is 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, though it would be technically feasible to apply more than one rate.



05. Summary of paper 5 : How to create stable financial systems in four complementary steps.


This paper discusses the causes of the rapid exponential growth of interest-bearing debt in the world’s developed economies, and what pathways might be available to reduce debt growth to sustainable levels.


The paper builds on the theory and debt model presented in paper 1 of this series. That theory is based on a revised form of the Fisher Equation of Exchange that takes the presence and cost of interest paid as unearned income on bank deposits into account.


Section 3 of the paper offers four options, labelled Option (A) through Option (D). The options are in ascending order of the degree of transformation of the existing financial architecture they provide.


Option (A) leaves the existing banking system as it is, but maintains a very low Official Cash Rate (OCR) and introduces a supplementary reserve ratio over and above the normal risk weighted capital adequacy ratios to manage debt expansion in the domestic economy. Since New Zealand is, unlike Japan, carrying a large foreign debt, a managed exchange rate mechanism is proposed. To achieve that, an automatically collected, variable, tax-neutral foreign transactions surcharge (FTS) is introduced at the foreign exchange interface. The FTS is designed to draw the current account into balance and supply surplus funds to gradually repay foreign debt. The FTS would be charged on all outward currency transfers.


Option (B) is similar to option (A) but allows the Central Bank to provide funding for some government expenditure that would otherwise be supplied at interest by the private banking system. The funding foreseen is a mixture of debt and electronic cash (E-notes). The Central Bank funding is sterilised using the supplementary reserve ratio from Option (A) so funding injections by the Central Bank have no inflationary impact. The Central Bank funding, once spent, increases the deposits in the banking system as is the case with existing private bank funding, broadly maintaining the banks’ lending capacity and margins. The debt growth exponential is reduced, but that reduction is partly offset from the banks’ point of view, by a very low rate of inflation.


Option (C) takes Option (B) a step further by issuing all debt and money through the Central Bank. Option (C) is the one recommended by United States President Lincoln in the quote at the beginning of the paper. The end-point of the process is that the banking system reserves gradually increase to 100%, and the private banking system becomes a savings and loan institution without the right to issue debt. The banks’ lending margins, policies and lending criteria remain essentially unchanged.


Option (D) provides for an integrated, measured and taxed local currency system that can be used in conjunction with any of Options (A) through (C) to further promote measured local economic participation that would otherwise be unlikely to take place, and also to further widen the equitable tax base,


Section 4 of the paper discusses equity in society. It shows how the existing financial and taxation systems have skewed the income structure of industrialised economies. It argues the only way to correct the skew is to change the SHAPE of the economy. A single universal financial transactions tax (FTT) is proposed as an option to do that. The FTT would be deducted on all transfers out of bank accounts, and in New Zealand, tax neutrality would be obtained with a FTT tax level of about 19%. FTT is a layered tax, encouraging local production and consumption of goods and services. Simple goods with a short production chain would become relatively cheaper than more complex products.


Section 5 reviews the impacts of the various proposals on the public sector. While Options (B) and (C) potentially offer more leverage for greater economic participation of the public sector, the proposals can also be presented in “a public sector neutral” form. The degree of influence of the proposals on the public sector is subject to political evaluation and is beyond the scope of the paper. Despite that, even the modest application offered in Section 6 produces dramatic downstream benefits for governments’ accounts, especially in relation to public debt levels and the sharply reduced cost of funding that debt.


Section 6 uses the economic debt model to produce a fully worked out comparison for the New Zealand economy between Option (B) and the present economic system. Just one of a theoretically infinite number of combinations is tested. The underlying test assumptions are modest in the context of the wider possibilities, but Figures 2 to 7 show an impressive economic transformation over a seven-year period. Within the context of a similar nominal GDP there is a vast increase in largely inflation-free growth while at the same the foreign and domestic debt levels are brought under tight control, allowing public debt to be eliminated over the medium term.


The proposals in the paper provide a clear practical and practicable pathway to sustainable debt, very low inflation and high real productive economic growth. The economy can be safely reshaped to offer more equity in society and to function much more efficiently than it does under the current financial system.


06 : Summary of paper 6 : The savings myth.


The main conclusion from this paper is that the nature of saving in a debt-based economy is very poorly understood. That lack of understanding has produced academic literature and policy frameworks, including the international System of National Accounts (SNA) itself, that have been catastrophic for modern economies.


At the most basic level, the international system of national accounts (SNA) presently used to measure all the world’s economic success is shown to be incorrect in at least five ways, which are set out in the following comments (a) to (e).


(a) The “saving” recorded as a residual in the National income and outlay account, for example, is a myth. This explains the title of this paper. Orthodox economic theory requires saving to equal investment where investment relates to new productive investment, not “investment” including existing assets.   


New productive investment is the gross fixed capital formation recorded in the national accounts. That investment is notionally funded from productive sector incomes. The net investment is the gross fixed capital formation less the principal repayments that are made on existing capital goods.  So the net productive Saving according to economic theory must be that new capital formation less the repayments made out of the gross operating surplus. That is the Saving figure that must appear in the National income and outlay account. Once that is done, one of the most basic equations in orthodox economics is satisfied:


S  =  DI – C , being [Productive Saving S = Disposable Income DI less Consumption C].     (14)


One can save neither more nor less than what one earns less what one spends. In aggregate that saving MUST be invested in new capital goods so as to clear the market of all its production. It is astounding that for sixty years since the SNA was introduced the world has worked with a system of national accounts that is so obviously faulty. Conceptually, those who purchase capital goods have an accumulated debt to employees and businesses, not to the banking system.  When employees and businesses accumulate non-productive ‘‘savings” an equivalent amount of bank debt must be created to replace those “savings”.


 (b) The current account surplus or deficit must be reflected on both sides of the  National income and outlay account. The current account is simply a means of settling foreign exchange transactions. All that happens is that the mix of consumption goods and capital goods in the productive economy changes. 


The creditor country swaps surplus consumption goods for an equal amount of capital goods while the debtor country swaps some of its capital goods for surplus consumption goods and to pay for other remittances abroad on the current account. In this process the debtor country initially creates new debt to pay for the extra consumption and ends up with an equal sum of deposits received from the sale of its capital goods to balance the foreign exchange transactions. When the banks’ net foreign currency assets are negative they have “borrowed” foreign currency to settle their foreign exchange requirements. In that case, foreign ownership of the domestic economy that would otherwise be manifested in the sale of domestic assets and corresponding increase in domestic deposits, has been replaced by foreign currency “debt” in the form of bonds and commercial paper. It is a liability that leaves the domestic economy especially vulnerable to the expectations of foreign lenders.


 (c) The SNA has persisted in using depreciation (consumption of fixed capital) instead of principal repayments in the National income and outlay account.  It is hard to believe the economics fraternity at large did not know depreciation has little to do with the cash flow that describes incomes and outlay. Depreciation is not a cash flow. It might be relevant to estimating wealth but has nothing to do with income or expenditure despite its being used in business profit and loss accounts. 


The use of depreciation for measuring economic success has been catastrophic for the world economy. As depreciation rates have been raised, short term profit, and as a result equity values and capital gains, have increased at the cost of lower  productive Saving and Investment. 


This paper is thought to be the first to identify the link between business profit-seeking and declining world economic performance through the depreciation mechanism. Higher depreciation allowances mean higher principal repayments and higher repayments mean less saving, lower net investment and lower measured GDP growth.


A second major influence on repayments is population mobility. As people move around much more than they used to the average life of household mortgages has decreased. Typical table mortgages have much smaller principal repayments at the start of a long-term mortgage than they have later in the life of the mortgage. The mortgage repayment rate underpins most of the “average” repayment of 1.23 times depreciation used in this paper.


(d) By convention, the SNA counts increases in inventory (stocks of consumption goods) in the Gross Domestic Product (GDP). That is understandable if the increases result from population growth or inflation. Otherwise, they represent a market failure and a loss to the economy. Consumption prices have been too high to clear the market of all the available production. That means future sales must be discounted to clear the increase in inventory, and that, in turn, gives it a low or even zero economic value.


For the purposes of the calculations included in this paper the increase in inventory has been arbitrarily set at zero and the gross operating surplus reduced by the same amount. That also reduces the National Disposable Income (DI).


(e) The “balance on external goods and services” in the gross domestic product and expenditure account of the SNA must be deducted from the gross operating surplus when calculating National disposable income (NDI). This is to enable the full current account offset in (b) above to be recorded on both sides of the account. The National Accounts set out in the appendices of the UN protocols therefore need to be systematically reviewed and corrected.


Figure 7 shows that the use of revisions (a) to (e) in section 8 for the National income and outlay account yield a NDI for New Zealand that more or less matches the existing DI produced by the national accounts until 2005. Figure 7 is preliminary because it is calibrated against the depreciation figures recorded in the existing SNA accounts.


The major change is not to GDP or to DI but to prospective policy options for the future. This paper reveals New Zealand’s official domestic economic measurements may be seriously out of line with economic reality. The changes proposed in this paper may contribute to correcting those measurements.  


The existing fixation on non-productive saving in New Zealand and elsewhere provides ample proof of the lack of understanding amongst economists about the nature of saving in a debt-based system. In most countries except Japan, the monetary aggregate (M3-repos) – (M1-M0) that approximately represents the total unearned income (Ms+Dca+Db) in the debt model is less than, (and, on the face of it, should be less than) the GDP. Figures 4 and 5 show that the decline in Saving for productive investment in New Zealand is structural. Productive investment has, according to the trend line, decreased from about 12% of GDP in 1962 to about 4% of GDP in 2010.


On the face of it, GDP cannot increase faster than the Saving rate, so improving economic performance means increasing transaction deposits (My in the debt model) by simultaneously increasing incomes and production.


The decline in Saving in the present financial system is due to the increase in depreciation rates, moderated by changing population mobility. While some of that can be attributed to changing technology and rapid obsolescence, the main contributor has been the self-interest embodied in business focus on short-term profit and the accompanying permissive regulatory framework that has made high depreciation rates (and short product durability) possible.


Aggregate economic performance cannot be improved without changing the underlying business and banking philosophy in favour of longer-term national growth objectives. 


The comments on the New Zealand Savings Working Group (SWG) report in Appendix 2 illustrate very well how business self-interest presently takes priority over the national interest. The “Saving” promoted by SWG and included in the existing SNA format is economic suicide because, as shown in Figure 6, it adds nothing to the economy while directly adding to asset inflation, consumer debt, higher inventories, wage stagnation, increased unemployment and recession.


In the absence of business leadership, the New Zealand government will have to play the primary regulatory role in adopting a sensible savings and growth plan for New Zealand.


07 : Summary of paper 7. The DNA of the debt-based economy. (The summary is the unified text under document 9.)




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.


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.




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.




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.


Gross domestic product (GDP).


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 produce 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


Business cycles.


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.


Income distribution.


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.




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.


Consumption (with housing).


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 employment 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


Capital formation.


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.




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 New Zealand directly lead to recession and/or deflation.




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.


System of national accounts.


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.


Current account.


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 Japan).


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.



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.


Local money systems.


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.


08. Manifesto of the debt-based economy. (No summary applicable.)


09. Unified text of the manifesto of the debt-based economy.  (This is the summary for document 7 above).


10. Summary of paper 10 : The missing links between growth, savings, deposits, and GDP.


The paper closes the theoretical loop established in the series of earlier papers. The primary determinants of macroeconomic outcomes are:


*    The interest paid on bank deposits.

*    The accumulated current account balance.

*    The allocation of productive resources.

*    Private debt creation for profit..


The interest paid on deposits is the cause of systemic cost-push inflation. Deposits returned to a debtor country through asset sales to foreigners arising from an accumulated current account deficit are a cause of demand-pull asset inflation.


Increased productivity necessary for per capita economic growth requires new productive investment.  Overemphasis on new non-productive capital investment such as housing distorts the productive sector because homeowners can only service their debt through higher incomes and higher productivity.


The confusion surrounding the orthodox “deposit” based debt expansion of bank “reserves” and the existing “capital” based debt expansion is historical.  The banking system changed from being “reserve” based to being “capital based” when the Basel I accord became operative in 1992.  In practice the “reserve” system was also capital based except that the capital requirement was limited to a fraction of the banks’ transaction account deposits.  Government debt did not directly cause “fractional reserve” debt expansion, but it did then, as now, introduce new deposits into the banking system thereby expanding the banks’ balance sheets.


The dominant features of the debt-based interest-bearing financial system are interest paid on deposits and the accumulated current account balance (or net international investment position, NIIP).  Interest on deposits creates systemic cost-push inflation in the productive sector, while an accumulated current account deficit  (or NIIP) creates demand-pull inflation in the non-productive investment sector caused by  deposits arising from the sale of debtor country domestic assets to foreigners. Those accumulated current account deposits also create a deposit interest feed back loop that adds to systemic inflation.


The paper shows the entire modern monetary system is founded on inflation, and that there is a systemic relationship between GDP and the monetary aggregate (M3-repos). The rate of change of the exponential growth curves [(M3-repos) – the dynamic production deposits My]/GDP has been linear in New Zealand for more than 30 years. The variables involved in that relationship are quantifiable.


The paper is based on a debt model of the debt-based economy that shows that world debt cannot be managed without removing unearned income from the system caused by the payment of interest on bank deposits and by balancing each nation’s current account.


11. Summary of paper 11 : Using a foreign transactions surcharge (FTS) to manage the exchange rate.


Actual and notional foreign ownership of the New Zealand economy through it its accumulated current account deficits have reached frightening proportions.


The point has been reached where New Zealand must fix its overvalued exchange rate without further delay or rapidly devolve toward third world status.


The accumulated current account deficit (or net foreign investment position) can only be reduced and eventually eliminated by reversing unnecessary foreign ownership of the domestic economy. The Foreign Transactions Surcharge (FTS) proposed in this paper does not exclude productive foreign investment.


Some countries have tried to address the problem by printing money and inflating the domestic economy. Claims that domestic inflation reduces export prices and increases import prices appear to be false because inflation does not necessarily reduce import demand. Domestic production costs and incomes increase together as long as the inflation is passed on in the domestic economy, leaving import volumes much the same as they were before. Inflation may superficially alter the exchange rate but it does not alter the underlying current account deficits that (in countries like New Zealand) produce the high and volatile exchange rates in the first place. The inflation increases both the domestic money price of exports and dollars available to pay for imports at higher domestic prices. That’s why printing money does not solve the foreign exchange issue in practice.


A Foreign Transactions Surcharge (FTS) produces the necessary foreign exchange adjustment because it directly changes the balance between imports and domestic production, effectively stimulating the domestic economy. 


The long-term goal of any fiscally responsible government should be to eliminate the current account deficit that is a serious drag on both the New Zealand economy and the wealth of its citizens.


The Foreign Transactions Surcharge (FTS) is a serious practical policy to achieve that goal.


12. Summary of paper 12 : The Manning plan for permanent debt reduction in the national economy.




1. This plan offers a very low risk way to resolve the world debt crisis without sudden or radical change to the world financial system. It brings together a number of ideas such as Universal Basic Income (UBI), Debt Jubilee Income (DJI), and Quantitative Easing (Monetary Dialysis) that are already receiving some attention but cause concern to some policy makers when they are considered in isolation. The plan can be implemented quickly and unilaterally.


2. The plan is based on specific forms of UBI and DJI structured to avoid inflation. The plan avoids most inflation because it can easily be adjusted so that incomes match the physical and human resources available to the economy.


3. The Manning Plan sets out implementation details for New Zealand. Each New Zealand legal resident will receive about $100/week in a special Basic Income Account, and each business will receive about $100/week in a special Debt Jubilee Income account for each Full Time Equivalent employee employed by that business who is paid wages and salaries under the PAYE (Pay as You Earn) tax system.


4. The total Universal Basic Income payments are initially about NZ $23 billion/year and the total Debt Jubilee Income payments are initially about NZ$7 billion/year.  The money to make the payments will be created debt-free and interest-free by the Reserve Bank and administered by a New Zealand Debt Management Authority (NZDMA).


5. The payments made to indebted persons and businesses will be used to retire their bank debt.  The payments made to non-indebted persons and businesses will be invested in a New Zealand Public Development Fund (NZPDF) that will pay tax-free interest on the deposits at around 2.3%/year, a figure comparable to the existing  average deposit interest rate after taking into account reduced inflation and taxation. The NZDPF money will be used to fund new productive development both public and private. NZPDF acts as a publicly owned Savings and Loan institution for the purposes of new productive investment.


6. About NZ$ 15 billion of bank debt will be retired during the first year, leaving new deposits of about NZ$15 billion, roughly similar to the present financial system.


7. Bank deposit holders will be able to invest in a Public Investment Trust Account (PITA) that will act as a publicly-owned Savings and Loan institution to manage the on-lending of deposits to fund the exchange of existing assets and to provide personal loans (including student loans and credit cards).


8. Bank balance sheets will still grow, but there will be little bank debt. Instead, secondary lending will be 100% backed by monetary deposits. Banks will be paid a spread of around 1.7%/year for their services, comparable to what they get now after taking into account that their lending becomes largely risk free. Normal debt repayment is guaranteed through the Universal Basic Income and Debt Jubilee Income accounts


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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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