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LAST week I was writing about the idea that the whole economy would be more stable and easier to manage if all money was created and held in the custody of a central authority, called the Money Supply Authority (MSA).
A few questions have been raised by this idea.
Firstly, how will it affect the banks? Secondly, what happens if too much money gets created?
The way things are now, banks have a hard time managing the way that the lending environment changes.
The reason is that they are allowed to lend as much as they like without ever having to look around to find out where they can find the money to lend. They just create more money and lend it.
The result is that interest rates are not reflecting the level of demand (they are probably quite low), and it is very easy for the banks to create more money and spending than the economy can cope with. When that happens, it leads to a situation in which their borrowers eventually find that they are over-borrowed - not just some, but most of them, and then they stop wanting to borrow.
This happens when the central bank steps in and raises the interest rates. And that scares the borrowers, who all run for cover and start repaying their debts as fast as they can as inflated property and bond values crash. These bubble bursts (property price drops), however mild, mean that the banks do not have enough security to cope with defaulting borrowers.
Then the regulators step in and tell them that they must lend less as a percentage of the collateral (property value), and they must increase their capital and reserves so as to safeguard the deposits and the bank itself. It doesn’t help the borrowers.
In days past banks would lend up to 100% of the value of a property and maybe more. Today, many of them are struggling to see their way to lend more than 70% of the value of a house.
When everyone starts to pay down their debts as fast as they can, they can no longer spend on things that create jobs, or keep the people their spending was directed at in the jobs that they already have. Unemployment rises, and the number of home owners and business borrowers who start to default rises.
The banks are in trouble, and the economy may go into a recession.
If the banks are not really impressed with this kind of scenario, then they need to stop lending too much.
But how will they compete with each other if they are not supposed to lend as much as they can? The game is not sensible.
Interest rate guessing game
And how does the central bank know when to raise interest rates or to lower them? They don’t know. They guess. And often they guess wrong. In fact, they probably have no way to guess right.
So what should be done? Readers of last week’s essay will know. As stated above, we have to create a Money Supply Authority (MSA). There is no other obvious way to ensure that the right amount of money is out there in the economy.
The thing that keeps the economy going is spending. When you spend, you spend your deposit money or if you don’t have that money, then you borrow someone else’s deposit money and spend that.
Unless there is enough of this money around, people will have to wait to get their hands on some money before they can spend it. Jobs will be lost, and interest rates will be high as people compete to get hold of some money to borrow.
But what if the MSA creates too much money?
Then I must refer the readers to some earlier essays on the structure of debts and the concept of pure inflation. This link takes you to an index of past essays.
Currently, the way debt repayment schedules are arranged is all wrong. The amount that can be lent is constantly changing (which also creates property price bubbles and crashes), whereas it ought to rise steadily as incomes rise. Not faster and not slower - not by much, anyway.
If all of those new debt structures are put in place, then if incomes are rising 1% faster everything else in the economy has a good chance of being affected by rising in value or rising in cost by 1% pa more than they would have done otherwise.
There will be some lags, but there will not be huge increases in the cost of borrowing, as happens now: see the early essays on mortgage structures.
So if there is too much money in the economy, and there is too much demand, it will force employers to look for ways of meeting that demand, and they will compete for labour. Incomes will rise, and then what?
Everything else will rise. The result will be that the excess money in the system will be mopped up in higher incomes and higher costs and higher everything. No harm done, except some small damage during the adjustment period, damage that may be so little that it is hard to measure.
I still have not said anything much about who would own the deposits because around 95% of all money as of now is borrowed money which - in theory at least - just vanishes when it is repaid.
See you next week.
- Fin24
* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”
A few questions have been raised by this idea.
Firstly, how will it affect the banks? Secondly, what happens if too much money gets created?
The way things are now, banks have a hard time managing the way that the lending environment changes.
The reason is that they are allowed to lend as much as they like without ever having to look around to find out where they can find the money to lend. They just create more money and lend it.
The result is that interest rates are not reflecting the level of demand (they are probably quite low), and it is very easy for the banks to create more money and spending than the economy can cope with. When that happens, it leads to a situation in which their borrowers eventually find that they are over-borrowed - not just some, but most of them, and then they stop wanting to borrow.
This happens when the central bank steps in and raises the interest rates. And that scares the borrowers, who all run for cover and start repaying their debts as fast as they can as inflated property and bond values crash. These bubble bursts (property price drops), however mild, mean that the banks do not have enough security to cope with defaulting borrowers.
Then the regulators step in and tell them that they must lend less as a percentage of the collateral (property value), and they must increase their capital and reserves so as to safeguard the deposits and the bank itself. It doesn’t help the borrowers.
In days past banks would lend up to 100% of the value of a property and maybe more. Today, many of them are struggling to see their way to lend more than 70% of the value of a house.
When everyone starts to pay down their debts as fast as they can, they can no longer spend on things that create jobs, or keep the people their spending was directed at in the jobs that they already have. Unemployment rises, and the number of home owners and business borrowers who start to default rises.
The banks are in trouble, and the economy may go into a recession.
If the banks are not really impressed with this kind of scenario, then they need to stop lending too much.
But how will they compete with each other if they are not supposed to lend as much as they can? The game is not sensible.
Interest rate guessing game
And how does the central bank know when to raise interest rates or to lower them? They don’t know. They guess. And often they guess wrong. In fact, they probably have no way to guess right.
So what should be done? Readers of last week’s essay will know. As stated above, we have to create a Money Supply Authority (MSA). There is no other obvious way to ensure that the right amount of money is out there in the economy.
The thing that keeps the economy going is spending. When you spend, you spend your deposit money or if you don’t have that money, then you borrow someone else’s deposit money and spend that.
Unless there is enough of this money around, people will have to wait to get their hands on some money before they can spend it. Jobs will be lost, and interest rates will be high as people compete to get hold of some money to borrow.
But what if the MSA creates too much money?
Then I must refer the readers to some earlier essays on the structure of debts and the concept of pure inflation. This link takes you to an index of past essays.
Currently, the way debt repayment schedules are arranged is all wrong. The amount that can be lent is constantly changing (which also creates property price bubbles and crashes), whereas it ought to rise steadily as incomes rise. Not faster and not slower - not by much, anyway.
If all of those new debt structures are put in place, then if incomes are rising 1% faster everything else in the economy has a good chance of being affected by rising in value or rising in cost by 1% pa more than they would have done otherwise.
There will be some lags, but there will not be huge increases in the cost of borrowing, as happens now: see the early essays on mortgage structures.
So if there is too much money in the economy, and there is too much demand, it will force employers to look for ways of meeting that demand, and they will compete for labour. Incomes will rise, and then what?
Everything else will rise. The result will be that the excess money in the system will be mopped up in higher incomes and higher costs and higher everything. No harm done, except some small damage during the adjustment period, damage that may be so little that it is hard to measure.
I still have not said anything much about who would own the deposits because around 95% of all money as of now is borrowed money which - in theory at least - just vanishes when it is repaid.
See you next week.
- Fin24
* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”
