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Edition 02: 18 November, 2010
Edition 04 : 08 August, 2011
(VERSION
EN FRANÇAIS PAS DISPONIBLE)
Information on
monetary reform :
Summaries of monetary reform
papers by L.F. Manning published at http://www.integrateddevelopment.org
00. General summary of all papers published.
01. Financial system mechanics explained for the first time. “The Ripple
Starts Here.”
02. How to create stable financial systems in four
complementary steps.
03. How to introduce an e-money financed virtual minimum
wage system in New Zealand.
04. How to introduce a
guaranteed minimum income in New Zealand.
05. The interest-bearing debt system and its economic
impacts.
07. The DNA of the debt-based economy.
08. Manifesto of 95 principles of the debt-based economy.
09. Unified text of the manifesto of the debt-based
economy.
THE
INTEREST-BEARING DEBT SYSTEM AND ITS ECONOMIC IMPACTS (Paper 1).
By
Sustento
Institute
We are
almost blind when the metrics on which action is based are ill-designed or when
they are not well understood 01 .
01 Stiglitz et al 2009 p9.
Key Words: accumulated current account deficit, CPI, current
account deficit, debt, debt model, debt growth, deposit interest, domestic
credit, exponential debt growth, Fisher equation, inflation, national accounts,
revised Fisher Equation, structural debt growth, systemic debt growth, systemic
inflation, unearned income,
ACKNOWLEDGEMENTS.
The
author gratefully acknowledges the support and advice of John Walley and Les Rudd and the New Zealand
Manufacturers and Exporters Association (MEA). Thanks to Raf Manji and the
Sustento Institute for their encouragement and advice and to Terry
Manning and the NGO Bakensverzet whose editing and constructive critique have
been crucial as the paper has evolved over time.
CONTENTS:
EXECUTIVE
SUMMARY.
01. INTRODUCTION
02. The
DEBT PROBLEM
03. The
simple economy
04. The
unsustainable economy
05. The
unsustainable economy with foreign debt
06. The
debt model
07. Systemic
Inflation AND INFLATION POLICY
08. THE
DEBT EXPLOSION AND FINANCIAL STABILITY
09. CULTURE
AND INSTITUTIONS
10. CONCLUSIONS
11. BIBLIOGRAPHY
APPENDIX :
MODIFIED FISHER application NEW ZEALAND 1978-2010
EXECUTIVE SUMMARY.
This paper shows how debt evolves in the interest-bearing
debt-based financial system and why debt growth is exponential. It analyses the fundamental mechanisms of
debt growth and provides a sound theoretical base to support the analysis. The
theoretical foundation is a revised form of the Fisher Equation of Exchange
that, for the first time, takes the structural effects of interest bearing debt
on the financial system into account.
Some earlier work [such as Snyder, (1940);
Danks/Social Credit (1955); Friedman, (1962)]
may at a superficial first glance appear to have some common grounds
with the analyses set out in this paper. This is not so. The only common ground
of this paper with the cited works is that it supports a quantitative approach
to the supply of money and credit in the economy. With some exceptions, mostly relating to war
and economic crises, the world’s money supply has always been based on the
quantity of money rather than the price of money.
The change to a price-based monetary system
accelerated after US President Nixon abandoned the
This paper shows how the price of money paid as
interest on deposits in the banking system produces a pool of unearned income
that causes self-reinforcing exponential debt growth.
The price-based financial system has not
prevented economic growth around the world, but that growth has come at
incalculable human and environmental cost. It has led to economic, political
and environmental instability and a widening gap between rich countries and
poor countries as well as between rich and poor within countries.
The figures given in the paper are preliminary.
They suggest that price-based debt expansion in developed economies is
gradually becoming unstable. In
The immediate effects of crises like the current
one in New Zealand are large-scale loss of “savings “ (Mv in the debt
model) and equity, reduced incomes and
purchasing power in the productive economy
with associated job losses, growing income inequality and a declining
quality of life.
The paper shows that the current price-based
financial system based on interest bearing debt is self-destructive. It will
destroy the global economy unless it is changed. The world must return to a
financial system based on quantitative principles that remove or at least
reduce to a minimum the growth of unearned income that is causing the unsustainable
debt growth.
01: INTRODUCTION.
Recent financial crises around the world,
beginning in the
In recent decades, thousands of learned papers
and articles have been written about the phenomenon of rapidly expanding debt
but little work has been done on debt growth from a structural or systemic
point of view. Credit expansion has long been seen as a function of the demand
for new credit moderated predominantly by its price, the risk perception of the
borrower by the lender, the reserves financial institutions have to hold to
manage their lending risks and, in some cases, deposit withdrawals.
There is now overwhelming evidence to suggest
the existing debt management system is dysfunctional. The best efforts of the
world’s monetary authorities have failed to prevent excessive debt growth. Debt
levels have continued to expand much faster than measured nominal economic
output despite periods of turmoil in the world economy, high or low interest
rates, widespread changes in financial regulation and even bank bailouts. This
suggests a more fundamental cause of debt growth exists outside the present
financial architecture that has either been taken for granted or overlooked by
existing economic theory and practice.
This paper will explore the underlying causes of
rapid debt growth and what can be done to prevent excessive debt growth in the
future. Later papers will examine other initiatives that might then be taken to
improve
Section 2 of the paper proposes that debt growth
in modern debt-based economies is predominantly caused by the generation of
unearned income in the form of interest paid on bank deposits 03. Modern developed countries operate on a
debt-based financial system whereby nearly all deposits arise from borrowing debt
at interest through the banking system.
The paper shows how unearned income arising from the payment of interest
on deposits causes exponential debt expansion 04.
02 Arguably Northern Rock in the
03 Earned income is the income generated from
the production of goods and services that form part of the Gross Domestic
Product (GDP). Unearned income is income arising from the payment of interest on
bank deposits that is unproductive and does not add to GDP.
04 The decision whether to save or invest
unearned income depends on the real interest rate (the difference between the
interest rate paid and inflation) and the perceived risk weighted financial
returns available in the investment sector. If real interest rates are very
low, as in
To test the unearned income hypothesis, Section
3 models a simple economy. Figure
Section 4 examines the economic transformation
that occurs when deposit interest is introduced into the simple economy model
shown in Figure 1. In Figure 2, deposit
interest in the form of unearned income introduces inflation into the model and
also stimulates debt growth, thereby proving the basic hypothesis linking
deposit interest to debt growth.
Equations are provided to show the debt growth is exponential. The
analysis of Figure 2 shows that debt expansion and inflation are both readily
quantifiable, and it demonstrates why, in practice, almost all price is
inflation 05. Figure 2 shows
how the pool of unearned income arises incrementally from payment of interest
on bank deposits but, in aggregate, remains outside it. The increment of
unearned income from each production cycle is permanently transferred to the
investment sector while the debt giving rise to it remains a burden on the
productive sector.
Section 5 describes what happens when a country
such as
Having proven the main thesis about debt growth,
theoretical support for it is offered in Section 6 by introducing a new debt
model that has been derived from Irving Fisher’s well-known Equation of
Exchange that dates back to 1912 (Fisher,1912, Manning 2009). The revised
Fisher Equation supersedes the original Fisher Equation of Exchange because it
takes into account the growth of an independent investment sector based on
unearned deposit income 06. Mcd*Vcd mirrors MV in Fisher’s original
equation which didn’t take into account the effect of interest-bearing debt.
The paper shows how debt interest is compounded exponentially.
05 The simple economy of Figure 1 has very
little if any inflation while in the economy shown in Figure 2 inflation
in the productive economy is linked directly to the deposit interest
rate. Figure 3 shows how total inflation
has accelerated as developed economies have become more and more dependent on
interest-bearing debt. This paper proposes that nearly all the inflation shown
in Figure 3 arises from unearned deposit interest so that in practice all price
arises from inflation.
06 Quite the opposite of previous work (such
as Snyder 1940) whose early support for monetarism was based on empirical
statistical analysis.
In the following Section 7, an entirely new
concept of systemic inflation is
discussed in some detail. In the debt
model Systemic inflation is Mcd * I*K caused by the interest rate I% paid on
deposit interest. The study shows there is no mechanism within the existing
debt-based financial system to directly manage inflation and that orthodox
interest rate policy works through the debt servicing requirements of the
investment sector. It establishes two primary concepts:
-Individually it is possible to save debt-free
money but in aggregate, it appears difficult if not impossible to save earned
income generated from debt.
Conceptually, from Figures 2 and 4, saving in the debt system reduces
the money available for consumption, resulting in either a fall in prices or a
fall in consumption. In practice consumption usually falls much faster than
prices because incomes are “sticky” 07. Earned savings 08 therefore tend to produce a loss of
consumption capacity from the productive economy unless they are replaced by
net non-income capital borrowing and consumer debt 09, Mv in the revised Fisher Equation of
Exchange.
- Inflation in the existing debt system is
systemic and unavoidable. Orthodox
interest rate policy only briefly suppresses systemic inflation at great
economic cost to the real productive economy and the wider community.
Recent
financial crises around the world, beginning in the
In
recent decades, thousands of learned papers and articles have been written about
the phenomenon of rapidly expanding debt but little work has been done on debt
growth from a structural or systemic point of view. Credit expansion has long
been seen as a function of the demand for new credit moderated predominantly by
its price and the reserves financial institutions have to hold to manage
lending risks and deposit withdrawals.
There
is now overwhelming evidence to suggest the existing debt management system is
dysfunctional. The best efforts of the world’s monetary authorities have failed
to prevent excessive debt growth. Debt levels have continued to expand much
faster than measured economic output despite periods of turmoil in the world
economy, high or low interest rates, widespread changes in financial regulation
and even bank bailouts. This suggests a more fundamental cause of debt growth
exists outside the present financial architecture that has either been taken
for granted or overlooked by existing economic theory and practice.
Section
8 sets out the historical debt growth in
Section
9 contains a brief review of the way culture and institutions have contributed
to the lack of awareness of the issues addressed in this paper.
The
overall conclusions from the paper are that unearned income in the form of
deposit interest is the direct cause of the problem of excessive debt, and that
consequently, debt growth and its accompanying systemic inflation can only be
managed effectively by greatly reducing and preferably removing the payment of
interest on bank deposits.
Section 8 sets out the historical debt growth in
Section 9 contains a brief review of the way culture
and institutions have contributed to the lack of awareness of the issues
addressed in this paper. Historically,
The overall conclusions from the paper are that
unearned income in the form of deposit interest is the direct cause of the
problem of excessive debt, and that consequently, debt growth and its
accompanying systemic inflation can only be managed effectively by greatly reducing
and preferably removing the payment of interest on bank deposits. In the
absence of multilateral agreements 12 to reduce or eliminate deposit
interest, unilateral action is feasible 13 but it requires carefully
constructed financial instruments to manage cross border capital flows 14.
07 “Sticky” is the term used in economics to
describe resistance to downward pressure on variables like incomes and prices.
For example, wages are “sticky” because it is very difficult in many countries
to lower them once they have been increased.
08 Not to be confused with savings arising
from UNEARNED income referred to above.
09 As happened in the United States where
until recently consumption was maintained by growing household and consumer
debt until consumers became debt-saturated and could no longer meet their
debt-servicing obligations as discussed briefly at p15 of this paper.
10 See Figure 11. The incentive to invest is
(Mcd+Mv)*I*K/GDP(d) – Inflation% where I is the interest rate on deposits and K
is (1-tax rate on interest). When I =0 there would be little incentive to
invest other than human nature. Man has always “saved for a rainy day” and that
would continue. When I is close to zero there will be little or no inflation so
savings will maintain their value.
11 There was arguably a housing bubble but
that arose directly from the mechanics of the debt system as described in this
paper and not from speculative debt (see paper section 6 and Mv in the debt
model)
12 For example, through the Bank for International
Settlements, the International Monetary Fund and the World Bank.
13 As will be shown in Papers 2,3 and 4 of
this series.
14 The situation is different for different
countries.
02. THE DEBT
PROBLEM.
The interest-bearing debt financial system in
use all over the world today evolved from the fear King William III of England had
in 1694 for the wrath of his subjects were he to increase their taxes to pay
for his wars in Europe. Afraid of a
political backlash and bereft of the will to responsibly address his financial
difficulties, King William borrowed from a group of wealthy citizens. In doing
so, he put off the day of reckoning by pledging future taxes in perpetuity to
fund his debt. Future taxes had to be pledged because previous experience had
taught lenders the Crown was not fully creditworthy 15. The lending arrangements
were written into law in the Tonnage Act of 1694. By that means “modern”
banking was born in the form of the Bank of England. Since then, debt expansion
has gradually accelerated, more recently aided by increased automation within
the banking sector and on-going financial deregulation. The point has now also been reached where the
role cash transactions play in generating measured economic activity has all
but been eliminated in the developed western economies. That has happened
despite the fact that cash, being debt free and interest free, provides a
continuous and costless means of exchange as long as it is in circulation.
Instead, cash has progressively been replaced by expensive interest-bearing
debt created for profit by the commercial banking system 16. In most developed countries, cash makes
up 3% or less of the broad money supply,
and much of that circulates outside the productive economy 17.
Unlike the famous greenbacks printed and spent into circulation by the
15 The previous King, James II defaulted on his
debt ruining many of those who had lent him money.
16 The elimination of cash is quite recent. The
preliminary figures in Appendix 1 suggest that in
17 In the “black” unmeasured economy for
example such as drugs, gambling and other illicit activities. In
18 The central bank/treasury makes a profit
from selling notes and coins that cost much less than their face value to
produce.
Many trillions of dollars of interest-bearing
debt are now being added to the world’s economies every year. It is now widely
acknowledged such rapid debt growth is unsustainable because debt costs are
absorbing a disproportionate and growing share of earned incomes. The existing monetary authorities have proved
incapable of managing debt growth short of financial collapses such as the one
that occurred during the recent worldwide crisis that began in 2007. Logically, if the present financial system is
unable to cope with excessive debt growth, there must be some other mechanism
at work that does not fall within existing economic theory.
This paper proposes the alternative view that
debt growth in modern economies is predominantly caused by unearned income in
the form of interest paid on bank deposits 19. The paper shows that whenever interest is
paid on deposits a corresponding debt is created somewhere in the productive economy. That makes the debt giving rise to
deposit interest a structural part of the productive economy. The interest has
to be paid by the productive economy and must be included in prices. The only ways to keep prices stable when
interest is being paid on deposits are to increase productivity or to reduce
disposable incomes 20.
In the debt system the debt is created before
its corresponding money deposit 21. Since unearned deposit income
cannot come out of thin air it must arise from new debt. Without new debt there
can be no new money. Paying unearned income in the form of deposit interest
demands that new debt be created within the productive economy to fund it.
Otherwise deposits in the productive economy would keep falling 22
as they are transferred from the productive sector to the investment sector or
paper economy. In the debt system there isn’t
enough money in the productive economy to pay depositors interest on their
deposits, unless it is first created into existence to pay to them. As long as
unearned income deposits continue to increase, so must their corresponding debt
be carried as a permanent burden in the productive economy. That generation of
new debt in the productive economy has been growing beneath the modern economic
radar screen for many decades. If this new view of debt growth can be proved to
be correct, either a way must be found to slow or stop paying interest on
deposits or the world’s debt-based economies must face imminent financial collapse
as the debt servicing demands become unsustainable in the productive economy.
In practice the collapse has already begun in
the
Some readers may at first sight see some
similarity between parts of this paper and earlier proposals 23 supporting
the inflationary issue of interest-free credit. This analysis, especially
section 4 of this paper clearly demonstrates that is not the case.
19 Deposits and debt go together but they are
not the same. For every dollar of debt there is a dollar deposit somewhere.
First someone signs a loan (debt) agreement with the bank. When the loan is
drawn down (activated), a corresponding deposit is entered into the borrowers
account. The debt (loan) and the deposit are numerically equal but the debt is
an asset in the bank’s books and the corresponding deposit is a liability in
the bank’s books. Deposit interest usually, though not always, makes up a large
part of the interest borrowers pay on their loans. Loan interest = Deposit
interest + the bank margin or spread.
20 Raising interest rates to manage inflation
causes a reduction in consumption capacity (Manning 2009)
21 The loan agreement with the bank always
precedes the deposit appearing in the borrowers account.
22 This would produce a deflationary spiral in
the productive economy because there would be less money circulating there to
produce the same amount of goods and services.
23 Such as C.H. Douglas’ ideas on
social credit
03. THE SIMPLE ECONOMY.
The
first step in revealing how the present debt system works is to show how a
simple debt economy can function without large-scale
debt expansion and without deposit interest 24. It’s close to the
way economies used to work when they were based on cash rather than debt.
The simple dynamic debt economy is shown in Figure 1. Figure 1 satisfies the international System of National Accounts (SNA) in use worldwide except that it assumes for simplicity that a country has a balanced international trade account and that business inventories are stable.
The
first step in revealing how the present debt system works is to show how a
simple debt economy can function without large-scale
debt expansion and without deposit interest. It’s close to the way economies
used to work when they were based on cash rather than debt.
The
simple dynamic debt economy is shown in Figure 1. Figure 1 satisfies the
international System of National Accounts (SNA) in use worldwide except that it
assumes for simplicity that a country has a balanced international trade
account and that business inventories are stable.
Click here to see FIGURE 1 :THE SIMPLE DYNAMIC PRODUCTION CYCLE.
Conceptually,
there is no residual debt after any individual production cycle, and no
residual deposits. Each cycle in Figure 1 is self-clearing and the debt is self
–cancelling 25. Nor can there
be any aggregate earned savings 26. If there were, the cycle
would not be self-clearing. Inventories would change and/or prices P would
change and/or output q would change. In
sum, what is produced is sold, including new capital goods. Figure 1 allows
for the circulating debt Mcd to change over time and for prices P and output q
to also change according to the institutional rules in place for the time
being, productivity growth and population changes. As described below, the
simple model in Figure 1 does not need to make specific provision for a
“market” in existing capital goods or for their progressive depreciation over
time. In practice, the basic production cycle doesn’t literally “pulse” as
shown in Figure 1. Instead there is an ongoing stream of production and
consumption, a corresponding quantum of debt Mcd continuously in circulation
and an equivalent quantum of deposits always in bank accounts.
24 The simple model economy assumes that no
interest is paid to depositors on the account balances.
25 Interest on any production debt is included
in both the income (production) and consumption sides of Figure 1 and so is
self cancelling, but increases in interest (bank spread) will lead to cost
inflation and vice versa.
26 For each individual who has “earned
savings” others must carry a corresponding amount of consumer debt.
It does
not matter how many transactions there are in a production chain, or when they
take place 27. Each transaction follows the cycle shown in Figure
1.
The
production cycle shown in Figure 1 uses the circulating debt Mcd to produce
capital goods as well as goods and services for consumption. The capital goods
make up the “Gross Fixed Capital Formation” shown in SNA Table 1.1 on the lower
right in Figure 1. Figure 1 assumes the producer of a capital good sells it to
other existing deposit holders for the time being, so its purchase price comes
out of employee incomes and the gross operating surplus. The banking system
intermediates among deposit holders to enable such exchanges of capital goods
to take place. The borrower repays loan
principal by transferring future income to the lender. The lender can then
consume the repayment or re-lend its purchasing capacity to others who wish,
for the time being to consume more than they earn. Such arrangements are a matter of agreement
between the parties and will usually include the payment of interest. Such
payments are like borrowing from a non-bank finance company. They involve a
transfer of wealth (future income) from the borrower to the lender but they do
not affect the total amount of bank deposits.
There is no inconsistency between the interest-free system of Figure 1
and the idea that willingness to delay consumption is “worth” an interest
premium.
In the
absence of interest on deposits, the system is in balance and there is no
inflation.
A
capital good would typically be put to good productive use to generate
additional income in subsequent production cycles. The productive debt Mcd,
incomes, the gross operating surplus and q would all rise to accommodate the
real growth from new capital goods so repayments could be made from the
economic expansion. That’s why, as shown in Figure 3, there was no inflation in
27 Danks (1955) pp. 12-15
28 In
some countries, investment banking became widespread, pooling cash and deposits
to fund capital investments such as rail, shipping and other industrial
expansion.
Sales
and transfers of capital goods means the banking system is left with debtors
and creditors in like amount at the end of the production cycle when Mcd is
conceptually cancelled. That
distributive effect leaves some players in the economy with net deposits and
some with net debts, and that, as will be shown below, is where the problems
with systemic debt expansion begin as soon as interest is paid on system
deposits.
In an
interest-free environment, the chains of transactions needed to make productive
investments in infrastructure, whether public or private, are the same as those
shown in Figure 1. Investment in
infrastructure made by a government or other public body is traditionally
funded from taxation. If there are sufficient labour and material resources
available, it could also be funded using new producer circulating debt Mcd
within the context of Figure 1. In that
case repayments are typically met in the form of (sometimes extra) taxes and
levies. Since in Figure 1 the cost of such goods and services are stable, they
are known. Private contractors bid against each other for public work. They do
this on the basis of technique, method, and organisation. Contrary to what some
authors might seek to suggest (Danks 1955), there is no conflict in such cases
between private enterprise and an interest-free economy. 29
The
story is a little different for unproductive
capital goods such as residential housing where the capital expenditure does
not increase production beyond the construction phase. Aside from increasing their work efficiency
or working longer hours, most homebuyers have to pay for their home from their
future earnings because they lack a new independent income stream to pay for
the capital good. This greatly accentuates the distributive effect already
referred to because residential homebuyers become heavily indebted to other
players in the economy 30. Until about 200 years ago housing formed
only a small part of economic activity. Since then, and particularly during the
twentieth century, housing expectations in modern economies have risen sharply
to the point where, in
Despite
the various issues around capital goods, the simple economy works very well,
especially where appropriate income redistribution is used to ensure a socially
acceptable level of housing is affordable to all.
People
all over the world owned property, borrowed and loaned money and successfully
conducted all manner of economic transactions long before interest was
routinely paid on bank deposits (Danks, 1955) 32. Payment of interest on bank deposits relates
to the structure of the debt system itself, not to interest-bearing contractual
obligations between consenting parties where one party chooses to defer
consumption and another chooses to buy the use of that party’s consumption
capacity 33 . Reducing or
removing interest on deposits would reduce or eliminate inflation, leading to
stable rents and prices 34.
Moreover, the paper shows that the incentive to invest (described in
section 8) may soon turn negative, an investment situation WORSE than would be
the case with zero interest in deposits.
29 Danks (1955) pp 48-51.
30 The quantum of residual
debt is readily quantifiable but outside the scope of this paper,
31 Source: Statistics New Zealand Household
Economic Survey (income) June 2009
32 Danks (1955) pp 57-58
33 As discussed later in the paper, the system
presently requires banks to compete for deposits but that competition would
still be possible in the absence of
deposit interest.
34 Investment resource allocation would still
be based on cost-benefit analyses exactly as happens now, but with the benefit
that finance charges would play a smaller part in “efficient” allocation. In
addition, other instruments such as variable reserve ratios are available to central banks to restrain demand for bank
lending.
04. THE UNSTABLE ECONOMY.
Having
isolated the broad fundamental problem of debt and shown how a very low- debt
simple economy can function (without inflation), the next step is to explore
how the present system using deposit interest is structured and what causes
exponential debt growth.
The
only difference between the stable simple economy shown in Figure 1 and the
unstable economy shown in Figure 2 is the introduction of interest on all bank
deposits arising from debt 35 . If Figure 2 demonstrates
conclusively how debt expands exponentially when interest is paid on deposits,
then it necessarily follows that the cause of unsustainable debt growth lies in
the payment of deposit interest.
The introduction of
deposit interest I% 36 produces systemic changes throughout the
economy. In Figure 2, to enable all production to be consumed, producers must
first borrow (and then pay out in the
form of incomes) the deposit interest through the production phase of the
production cycle and then recover it by way of increases in their prices during
the consumption phase. Incomes are assumed to keep pace with inflation.
Otherwise the production cycle cannot clear itself.
When
each production cycle is cleared there is residual debt and corresponding
residual deposits as shown toward the bottom left of Figure 2. Those deposits take on a life of their own
because they are reinforced by every subsequent production cycle but exist
outside it. The pool of deposit interest plays no further part in production.
Instead, it makes up what is usually called the investment sector or paper
economy that includes the non-trade sector and derivatives market. Deposit
interest acts as a debt pump, pumping more and more deposits into the
investment sector Ms while leaving the corresponding debt in the productive
sector. The investment sector is what creates the inflationary “market” in
existing assets. The debt Ms supporting
the investment sector is un-repayable because it supports unproductive unearned
deposit interest that resides outside the productive sector.
It does
not matter how many transactions there are in a production chain, or when they
take place 37. Each transaction follows the cycle shown in Figure 2.
There is no inconsistency between the deposit interest based system of Figure 2
and the idea that willingness to delay consumption is “worth” an interest
premium.
Figure
2 does not directly specify who in the economy has the deposits and who has the
corresponding debt at the end of the production cycle (lower centre of Figure 2). However, net deposit holders emerge from the
redistribution of debt arising from the purchase of capital goods as already
discussed in relation to the simple economy in Figure 1. The production cycle
itself remains a zero-sum game but in Figure 2 the cycle is constantly being
loaded with the extra debt needed to pay the deposit interest (unearned income)
on the investment sector Ms. In addition, when interest-bearing debt is used as
in Figure 2 the consequential transfer of wealth that takes place is
accelerated in comparison with the stable economy of Figure 1 (Danks, 1955) 38.
35 The analysis in this paper uses the average
funding (deposit interest) rate counted over all of the domestic credit. The
average funding rate for
36 Net deposit interest after tax is I*K where
K is (I – tax rate on gross deposit interest)
37 Danks (1955) op cit pp. 12-15
38 Danks (1955) op cit p12.
It
should be stressed that ownership of productive infrastructure is irrelevant
from a national macro-economic point of view. Who owns what depends on
political choice. In the case of publicly owned productive infrastructure, the
benefits of the investment are distributed directly amongst the population.
They may for example take the form of shorter travelling times for all
(tunnel), improved education facilities (school), or improved public health (a
sports centre). Where infrastructure is privately owned, the temptation to
charge users for services may be greater and the resulting profits may
accumulate in the hands of a few.
The
investment sector funded by the accumulated interest paid on bank deposits
produces nothing itself. It is paid for
through inflation of the productive sector.
Neither
the SNA (System of National Accounts) nor Figure 2 provides any direct
mechanism to enable increases in interest rates to reduce inflation. Interest
rate policy works through borrowers (such as home mortgage holders), the
holders of the Ms debt that supports the accumulated deposit interest on bank
deposits. Raising interest rates typically increases their interest payments on
mortgage and other debt, and thereby reduces their purchasing power. Raising
interest rates to “manage” inflation, as is commonly done under orthodox
economic policy, transfers even more consumption capacity from the productive
economy to unearned income for deposit holders in the investment sector 39.
39 The quantum can be estimated from equations
1-3. On an annual basis it is roughly the change in the deposit interest rate x
K x (the domestic credit (Ddc). At
the moment in
Figures
1 and 2 provide an alternative insight into the real productive economy. The
orthodox view is that people and firms borrow to invest on the basis their
financial return will exceed their costs including interest. Their net profit
after tax is often put in the bank and the holders of those banked profits then
expect to be paid interest on it. Figure 2 shows such deposits (or other earned
“savings”) by their nature force others in the economy into new debt to replace
the savings in the economy if production and consumption levels in the economy
are to be maintained. Figure 2 also shows that any deposit interest paid on
those “savings” deposits increases Mcd and inflationary pressure in the
productive economy. This is discussed further in section 7 of this paper where
it is proposed that traditional “savings” as set out in the System of national
Accounts (SNA) represent the difference between increases in consumer debt plus
new bank debt for the purchase of capital goods on the one hand and principal
repayments relating to previously purchased capital goods on the other. As
shown in section 6 of this paper, those “savings” are represented by Mv in the
revised Fisher Equation of Exchange. When interest rates are increased to
manage inflation the higher deposit interest is not (immediately, anyway) compensated in wages and
other incomes. In effect, producers and income earners are forced to gift to
investors “savings” they do not have.
Click here to view FIGURE 2 :THE UNSTABLE PRODUCTION CYCLE.
In Figure
2 the reduction of consumers’ purchasing power forces prices P down. The
large-scale collateral damage from the loss of consumers’ purchasing power is
that production q in Figure 2 falls in turn, leading to unemployment and
recession.
Deposit
interest prevents the efficient functioning of the economy unless the
interest is fully compensated in
employee incomes and the gross operating surplus. Orthodox economic policy
typically fails to match incomes to inflation because of arbitrary limits
placed upon measured CPI (Consumer Price Index) inflation. Such mismatches
create the boom and bust features so typical of modern business cycles as
interest rates change. They also accentuate the drift of wealth away from wage
and salary earners towards the holders of deposit interest.
The key
to understanding Figure 2 is that only that part of the domestic debt that is
not already committed as Ms to fund the unearned income pool or to Mv as “savings” is available as Mcd for
use in the productive economy.
Debt
can only be used once. If the debt Ms is used to support the pool
of unearned deposit income it cannot also be used to fund the production cycle
unless the corresponding Ms deposits are directly re-invested in new production
or productive capital goods.
In
aggregate, re-investment of deposits arising from the debt Ms into the
production cycle is not common, in part because there is a financial incentive
(discussed later) for them to remain in the investment sector, and in part
because saving is instinctive. People have always saved. Instead, holders of
unearned income deposits tend to find the investment “game” more profitable,
trying to increase their share of those deposits by trading among each other in
existing capital goods such as equities, property and financial derivatives.
Figure 2 shows that the investment sector debt creates an exponential expansion
of unearned income Ms given by the expressions (based on annual figures) 40
Ms1
= Ms0*(I+I1*K1)+11*(M1cd*V1cd+M1v)*K1
where Ms0 = 0 (1)
Ms2
= Ms1*(1+I2*K2)
+ I2*M2cd*V2cd+M2v)*
Msn
= Ms(n-1)*(1+InKn)+In*Mncd*Vncd+Mnv)*Kn
(3)
Where
Msn is the investment debt
held as assets by the banks to fund deposit interest
I1 ….. In is the average deposit interest through each of
the years 1 …. n
M1cd
….. Mncd is the average
circulating debt through each of the years 1 ….. n
V1cd
……Vncd is the number of production cycles during each of the years 1
…….n
K1……..Kn
is the proportion of deposit interest remaining after deduction of tax T1….Tn during each of the years 1 ……..n
M1v
…Mnv is the average of debt representing “savings” through each of
years 1 …n
Equations
(1) to (3) are derived directly from Figure 2. They create an exponential
series, and the only difference between Figure 1 and Figure 2 is the
introduction of deposit interest. The thesis that deposit interest is the cause
of unsustainable debt growth is proven. Since the investment sector debt Ms is
funded directly by the productive sector by price inflation, if Ms is exponential,
both the accumulated price inflation and the circulating debt Mcd in the
productive sector must also be exponential.
Figure
3 shows the dramatic impact of inflation in
Click
here to view FIGURE 3 :THE VISUAL
CHALLENGE CPI (CONSUMER PRICE INDEX)
ENGLAND 1300-2000.
40 Equations (1)-(3) include the
effect of net debt Mv directly borrowed for investment, which is introduced in
section 6 of this paper.
41 Such as the removal of the US$
gold peg in 1971, “globalisation” and its accompanying freeing up of capital
flows, the introduction of Basel I risk-based capital requirements and the
repeal of the Glass-Steagall Act in the United States.
42 By comparison, in New Zealand
in 1893 (a crisis year – RBNZ (2009b)) production was estimated to be about
In
Figure 2 shows how exponential growth in prices is a
structural part of the debt-based financial system. Figure 3 suggests this has been a twentieth
century phenomenon.
The price index increased from
Figures 1, 2 and 3 suggest inflation is predominantly
caused by the interest rate on deposits.
In that case, an obvious way to achieve a stable economy is to remove interest
on deposits to return the financial system closer to what is shown in Figure 1 45. Low inflation cannot be maintained in an
economy when it must increase as a function of the deposit interest I and often
faster 46.
44 In New Zealand the Consumer Price Index
(CPI) increased by 583% between March 1978 and March 2010, while during the
same period domestic credit increased by roughly 3000%. [source RBNZ table
hc3].
45 Together with stabilising the current account
and progressively retiring foreign debt.
46 Annual inflation in Figure 2 is a function
of Mcd*I, but Mcd can be increased by any injection of debt, such as mortgage
or consumer debt, from outside the production system which increases Mcd
instead of I.
Reducing or removing interest on deposits would have
no impact on bank lending decisions, nor, with appropriate policy instruments
in place would it lead to excessive demand for new debt. Lending decisions
relate primarily to the creditworthiness of borrowers. Bad lending decisions, like those in the
On-going
efforts by central banks to control Consumer Price Index (CPI) inflation have
done little to halt inevitable rises in prices within the existing
interest-bearing debt-based financial system. They have superficially succeeded
up to a point only at incalculable cost to human lives, wellbeing and
development over the past century or more while at the same time transferring
nearly all the increased wealth to the minority of people and institutions
holding large deposits in the banking system. While the quality of life of some
of the world’s people has improved during that time the improvements are patchy
and fewer than they might otherwise have been. Exponential debt growth appears
to have reached the point where the productive economy can no longer satisfy
the profit expectations of the investment sector despite excessive and
unsustainable exploitation of the world’s labour force and natural
resources.
The
unearned investment sector debt Ms shown in Figure 2 gives rise to the
cumulative unearned interest income on the deposits in the banking system. Consumer prices are also locked into
exponential expansion though normally at a lower rate than Ms itself.
Consumer
prices inflate with the deposit interest rate I*K to pay the deposit interest
on the existing Mcd into the unearned income pool Ms. Ms also increases by the
amount of new debt that has to be added each production cycle to pay the
deposit interest on Ms itself as well as on Mv “savings” borrowed directly to
fund the purchase of new productive assets and consumer goods. 47
Figure
2 provides for numeric inflation equal to I*K*Mcd to fund the interest on the
productive sector Mcd. Ms must be less than or equal to Mcd. Otherwise the
interest difference has to be drawn from Mcd itself which means producers are
paying some of the costs directly from their incomes. To keep paying all the
interest on Ms, Mcd must increase at least in line with Ms as in Figure 10 of
this paper. Those holding Mv debt backing deposits arising for example, through
the use of credit cards and new mortgages that are used to buy capital and
consumption goods that have already been produced also have to find some way to
fund the interest on Mv. The Mv injections allow wage and income earners to
consume beyond their financial means 48 but they are offset by
“savings”. Some leakage of Ms deposits
back into Mcd or leakage of Mcd deposits out of Mcd (as earned savings, for example) is also
possible. Any such net flows will destabilise the production cycle as
previously discussed.
Since
nearly all price is inflation the value of assets and goods and services would
become far more stable and predictable if interest on deposits, and hence
inflation were to be reduced or phased out.
Interest destroys value. The present system not only guarantees unsustainable
exponential debt growth, it also guarantees an exponentially increasing
transfer of wealth from borrowers to bank deposit holders. This worsens the
already critical problem of inequitable income distribution typical of much of
the developed world, especially
47 Mv is described at section 6 of this paper.
48 The “keeping up with the Jones’s” syndrome
is encouraged through advertising and social pressure. The concepts of systemic inflation developed here
are very close to the “one-for-one” link between interest and inflation
predicted by Irving Fisher in his famous “ The Theory of Interest”,
05. The unsustainable economy with
foreign debt.
Recent
decades have seen vast changes in trade and capital flows giving rise to “free
trade”, globalisation and financial deregulation. The collapse of the sub-prime
mortgage market in the
Large-scale
foreign debt is a relatively new phenomenon in modern economies 49.
Until 1971 most of the developed world’s economies operated most of the time on
a gold standard using fixed exchange rates (albeit for a time indirectly
through what was known as the US$ gold peg)
US
President Nixon was forced to abandon the
49 Though national bankruptcies were far from
unknown in earlier times. For example the French Court of King Phillip IV was
bankrupted in the early 14h century having borrowed heavily for a
failed crusade to the holy land. Other
instances were King Phillip II of
50 In times of crisis some countries were
forced off the gold standard. This occurred during WWI when
51 The
Bretton Woods conference was where the WWII allies agreed on the
framework for the post WWII financial architecture, including he World Bank and
the International Monetary Fund.
Progressive
deregulation of capital flows, the growth of unearned income from interest on
deposits (Ms) and the introduction of ever more complicated derivative trading
instruments have long since destroyed the principle of automatic exchange rate
adjustments based on real cash flows.
Many debtor countries including
Figure
4 is the same as Figure 2 except that it makes provision for current account
deficits. It clearly demonstrates how
“carrying” the current account deficit through the productive economy as set
out in the System of National Accounts increases inflation throughout the
productive economy as well as increasing the pool of unearned deposit income
that makes up the investment sector.
Click here to view FIGURE 4: THE EFFECT OF CURRENT ACCOUNT IMBALANCES.
The balance
on external goods and services is shown in Table 1.1 of the SNA as a (foreign)
debt arising outside the production cycle shown in Figure 2 52. The trade deficit for any period forms part
of the nation’s accumulated current account. Theoretically, with a floating
exchange rate and open capital markets there should not be any surpluses or
deficits in the current account. Persistent current account deficits should
produce a lower exchange rate, automatically correcting the inwards and
outwards flows of goods and services. In practice a single monetary policy
instrument such as the Official Cash Rate (OCR), as it is used in countries
like
Current
account deficits result from aggregate withdrawals from the accounts of
importers and parties repatriating profits or otherwise transferring funds
offshore. Transfer of funds abroad should result in a corresponding sum of bank
deposits in offshore beneficiary accounts 54. Those offshore
deposits are used to buy investments that are recorded in the debtor country’s
financial (capital) account
52 The trade deficit is subtracted from the
consumption side in SNA Table 1 so the trade account results in “saving” when
it is in surplus and “dis-saving” when it is in deficit. The deficit is, for
those countries whose currency is not a reserve currency, necessarily met by
borrowing on the current account accompanied by compensating inward capital
flows.
53 There is now a considerable body of
research on this but the statement is obvious from high school mathematics. You
can solve for y with one variable x in
y=(f)x , but not in y= (f)x+(f)z
54 Any good primary economics textbook should
set out the process.
55 For the
56 NIIP NZ$ 176.6b–derivatives NZ$
2.0b–managed funds NZ$ 3.7b–overseas shares held by NZ residents NZ$ 10.6b
Within
the SNA international accounting system, a current account surplus is
shown as “Saving”
In the
SNA National income and outlay account the current account balance is shown as
part of the nation’s cash flow but it is, apparently, except for goods and
services, kept outside of the
production system. In practice, current account shortfalls seem to result from
deficit balances relating to productive activities and the foreign borrowing is
needed to meet profit and interest payments on the offshore debt and deficits
from current transactions 61. To allow for this, the circulating
debt Mcd shown for
In
the debt financing system the speed of circulation Vcd must be at least 1.00.
Otherwise not all of the productive debt Mcd would be being used productively
and borrowers would be bearing unnecessary financial losses.
Click here to view FIGURE 5: CIRCULATING DEBT Mcd NEW ZEALAND 1978-2010* (Mv=0).
Click here to view FIGURE 6: SPEED OF CIRCULATION Vcd OF CIRCULATING DEBT Mcd 1978-3010* (Mv=0).
57 The SNA National income and
outlay account shows a current account surplus, “investment income from the
rest of the world, net” on the income side and the residual “Saving” on the
“use of income” side.
58 As shown in the National Accounts; National
income and outlay account, Table 1.2
59 Shown on the right hand side of Figure 1 as
“exports less imports”
60 The SNA National income and outlay account
is suspect not just over the issue of saving but also because it incorporates
an imaginary number “consumption of fixed capital” to allow for depreciation
that has nothing to do directly with cash flows in the productive economy.
“Consumption of fixed capital” belongs only to assessments of net capital stock.
The appropriate figure to use for income/outlay purposes is “principal
repayments on capital goods”.
61 Statistics NZ Balance of Payments and
International Investment Position March 2009 Table 10
62 In line with the common saying that countries
with current account surpluses export inflation while those with current
account deficits import inflation.
63 Though in practice there is an on-going
transfer through the cycle rather than a lump sum at the end.
06. THE DEBT
MODEL.
Theoretical
support for the role deposit interest plays in modern debt-based economies is
now available. It is derived from a new debt model of the economy that has been
developed in recent years. The debt
model has been constructed by amending the well-known equation of exchange
first put forward by Irving Fisher in 1912 which states:
MV=PQ (4)
Where
M=the
money supply in circulation\
V=the
speed of circulation of money M
P =the
price level
Q=the
total economic output.
The National
Accounts (SNA) and Figures 1, 2 and 4 are fully consistent with the revised
Fisher equation of exchange given below.
The revision takes account of the introduction of interest-bearing debt
and deposit interest into the financial system. The first version of the debt
model was published in the paper:
Manning, L “The Ripple Starts Here: 1694-2009 : Finishing the
Past”, presented at the 50th
Conference of the New Zealand Association of Economists (NZAE),
The
basic equations are:
Md= (Ddc+Dca-R) = Mp +Ms+Mv = Mcd +Dca + Ms+ Mv (5)
subtracting Dca from both sides of equation 1
produces:
Ddc = Mcd+R +Ms+Mv (6)
And from the original Fisher Equation (MV=PQ)
McdVcd = PQ(d) (7)
where:
Md =
total debt comprising domestic credit Ddc (including in New Zealand only)
Kiwibank loans and advances
+Accumulated Current Account deficit Dca less Reserve Bank Capital Reserves R
Ddc =
Domestic Credit 65 + (in
Dca =
accumulated current account debt,
R =
central bank capital reserves 66 ,
Ms =
debt held by productive sector to fund the unearned income on the total debt,
Vcd
= speed of circulation of circulating debt Mcd physically used for domestic
production,
Mcd
= circulating debt physically used for domestic production = (
Mp =
(Dca+Mcd) = total productive debt not being Ms or Mv
P
= prices,
Q(d)
= quantity of national product (GNP) produced by debt Mcd – (In
Mv
= provision for lending to cover “savings” that is not part of the productive
economy.
The
model is a much more refined form of monetarism that began economic
liberalisation in the 1960’s (Friedman 1962).
While it is based on the volume of debt, it is unrelated to volume based
reform proposals like Social Credit adequately discussed in New Zealand (Danks,
1955) that have never had a viable
theoretical basis to support them.
64 The ripple starts here.
1694-2009 : Finishing the Past. . The Ripple Starts Here. The model
has since been slightly revised – in particular, for the practical model Dca
has been omitted from both sides of the revised Fisher equation.
65 Reserve Bank of
66 In this preliminary work the RBNZ “capital
reserve” has been used but further research is needed to determine which
reserves (if any) should best be
incorporated in the model.
The
premise in both the debt model and Figure 1 is that the circulating debt Mcd =
Prices P x output q where q is the quantum of domestic output produced by Mcd
over a single cycle. Taken over a whole
year, the SNA definition of Gross Domestic Product produced by debt (GDP(d)) is
given in the debt model by the expression Mcd * Vcd, where Vcd is the number
of times the debt Mcd is used during the
year 67.
The SNA
therefore reflects an expression of the original Fisher Equation of Exchange68. The only difference between them is that the
money supply M in the Fisher equation of exchange included hoarded cash,
whereas in the debt system shown in Figure 1 for practical purposes there is
now very little cash contributing to measured GDP. In Figure 1 Mcd cannot include hoarding
beyond the term of the production cycle because all bank debt is zeroed at the
end of the cycle 69.
In the
debt system, debt-based GDP is a direct function of the circulating debt for
production Mcd used to produce it. As shown in Figures 2 and 4, Mcd is influenced
by the accumulated pool of unearned deposit income Ms, by changes in the
accumulated current account deficit Dca. and by the directly borrowed
investment pool Mv. The crucial role
debt was to play in generating economic output may not have been obvious at the
time the SNA was developed during the late 1940’s and early 1950’s but it
should have been recognised in the period since then, especially given the
turmoil produced by the various financial crises over the years.
Aside
from offering theoretical support for the main thesis of this paper, the
revised Fisher equation of exchange also provides other insights into the way
the modern debt-based economy functions. One of these, of interest to New
Zealand’s recent economic performance, relates to the impact of banks
increasing their reserves by increasing the bank spread, which is the
difference between the lending (or claims) rate they charge their clients and
the interest they pay on their customers’ deposits (their funding rate).
Were the banks to set aside some of their income for reserves instead of feeding it into the income stream in wages and profits the effect would be similar to the case for aggregate earned savings 70. In both cases, deposits arising from the circulating debt Mcd are withdrawn from the production cycle. While earned savings, could they in the aggregate occur, would be transferred from the productive sector to the investment sector Mv, bank reserves are withdrawn from circulation altogether and do not form part of the productive money supply. Less income would then remain available to consume the productive output. In the short term, in Figures (1,2,4), the market would not be able to clear and either prices P would tend to fall or output q would tend to fall as inventories rise, creating deflation and unemployment. More typically P and q would both fall. The only other possibility is that consumers seek to replace the shortfall by borrowing more from the bank to maintain their levels of consumption.
67 The debt model (equations 5-7) excludes the
residual economic contribution to GDP arising from cash transactions. The
contribution of cash transactions in industrialised countries is now very
small. See appendix 1 for preliminary assessment of the historical figures for the
68 The Fisher equation has been very widely
discussed in relation to the economic difficulties arising from the sub-prime mortgage
defaults in the
69 As previously noted, in practice there is a
continuous flow of production and consumption so deposits arising from Mcd are
always present, but they are being used in the production cycle, not hoarded.
70 Earned savings, could they occur in
aggregate, would be the portion of total productive (earned) income hoarded by consumers for
later use, for example as a deposit on a future home purchase, superannuation
funds (including funded government superannuation schemes), and worker/employer
savings schemes like Kiwisaver in New Zealand.
Widespread
borrowing for consumption purposes does not alter the principle that in the
basic economic cycle described in Figures (1,2,4) “Earned Saving” must equal
net borrowing, Mv, after principal repayments to purchase new capital goods
plus Consumer Debt. This principle is at odds with orthodox views about saving.
71 72
Banks
seek to increase their reserves when they foresee future losses from bad debt
arising during economic downturns. They then need higher reserves because
losses are drawn from the banks’ net worth that includes their reserves 73. The increases in reserves can be funded from
retained profit or by increasing the bank spread. They could also generate new
capital through the issue of shares, bonds, or debentures. Recent figures for
TABLE 1: RECENT CHANGES IN BANK SPREAD IN
|
YEAR |
2005 |
2006 |
2007 |
2008 |
2009 |
2009 |
2009 |
2009 |
2010 |
|
|
MAR |
MAR |
MAR |
MAR |
MAR |
JUN |
SEP |
DEC |
MAR |
|
%spread |
2.37 |
2.10 |
2.04 |
1.67 |
2.85 |
2.99 |
2.85 |
2.76 |
2.55 |
|
claims |
7.51 |
8.14 |
8.36 |
9.01 |
6.96 |
6.52 |
6.39 |
6.22 |
6.16 |
|
deposit |
5.14 |
6.04 |
6.24 |
7.34 |
4.11 |
3.53 |
3.54 |
3.54 |
3.60 |
Source RBNZ Table hc10
Mainly
to increase their reserves, the banks operating in
71 Though “Savings” equals “investment “ still
applies to the current account
72 For example, “Economics Principles and Policy”
William J Baumol and Alan S Blinder, 4th Edition Harcourt Brace
Jovanovich, 1988
73 Paying losses from deposits is illegal and
traditionally happens only when banks fail. That is why some western countries,
including
74 Bank reserves do not form part of the
“money” supply. Arguably March 2008 represented a low point in the banks’
historical spread, but the economic impact of the withdrawal of bank reserves
from earned incomes was nevertheless very real.
07. SYSTEMIC
INFLATION AND INFLATION POLICY.
In this paper and
in the debt model the price inflation I/Vcd% shown in Figures 2 and 4 has
been labelled systemic inflation. The quantum of systemic inflation Mcd*I/Vcd
is what gives rise to the investment sector. Figure 7 shows systemic inflation
calculated from the debt model. Systemic inflation is a new economic concept.
Click here to view FIGURE 7: SYSTEMIC
INFLATION NEW ZEALAND 1988-2010. 75
(Source: Appendix
1. Note: Figure 7 does not attempt to
include adjustment for taxation on Ms deposits that would substantially
increase Mcd and hence systemic inflation, particularly in later years.
Preliminary calculations with 25% tax on deposit interest lifts systemic
inflation by roughly 2%.)
Eliminating
systemic inflation by removing deposit interest would resolve
In New
Zealand, the sharp reductions in interest rates from the end of 2008 reduced
the inflationary impact of systemic inflation at the same time banks began
increasing their margins and “shutting up shop” by making lending more
difficult. The banks’ actions drew money out of the economy at the same time
the government was trying to stimulate it.
Better policy coordination would have reduced the depth and length of
the recent recession.
Aggregate
increases in inventory are also a sensitive indicator of declining purchasing
power in the economy. They mean consumers lack the disposable income needed to
consume all the current production. That lack of income can arise in part from
efforts to hoard “earned” savings 78. It can also be caused by reductions in
employees’ incomes that result from increases in interest rates applied under
orthodox monetary policy settings to manage inflation. Consumers’ disposable
incomes will fall unless the interest rate increases are fully compensated in
employee incomes 79. There is a reduction in consumption with
accompanying unemployment until either inventory is returned to normal levels
or consumption demand expands.
75 A recent article in The Guardian/UK
newspaper 27/4/10 by Dean Baker refers to suggestions within US President
Obama’s Council of Economic Advisors that the “CPI overstates the true rate of
inflation”. While Figure 7 is a
preliminary first approximation only it does not appear to support the Council of Economic Advisors’ thinking.
76 People would still “save”, given the
chance, even with zero deposit interest, as long as there is little or no inflation.
People saved for thousands of years before the debt system was in use because,
like some other species, HUMANS ARE HOARDERS. Protecting themselves against
hard times is instinctive.
77
78 That will be made a lot worse by current
suggestions in
79 As already described, disposable incomes are
reduced by the extra interest claimed by the investment sector as a result of
the higher interest rates.
While a
full discussion of savings lies outside the scope of this paper, government
efforts in New Zealand to increase savings for investment purposes, as, for
example in the 2010/2011 budget speech of 20th May 2010 are
problematic. Trying to draw savings from the productive debt Mcd in a wholly
debt based financial system prevents the
productive economy from expanding properly because it reduces both consumption
capacity and the gross operating surplus in the economy as a whole. Such saving
would make sense only if it were re-directed immediately as part of Mcd into
new productive investment, thereby offering significant productivity gains to
the economy. This paper shows such investment would then need to be accompanied
by increased incomes to enable that new production to be consumed. Exactly the opposite is happening. Savings
are being withdrawn from consumption and mostly invested in the investment
sector offshore. Conceptually they
form Mv in the revised Fisher equation. This gives
This
paper reduces the savings debate to a single simple proposition:
In
aggregate it is possible to save debt-free money but it is not possible to save
debt 81 unless that debt
exists as speculative investment Mv outside the productive economy. The debt model shows at Figure 7 how
“savings” in
There
does not appear to be any financial mechanism available in the current
financial system, as it is detailed in this paper, to bring about long term
inflation stability other than by very low
(or zero) deposit interest rates. Low deposit interest rates will, in
turn, probably require quite drastic action to prevent capital flight and bring
the current account into balance, such as by the application of an appropriate
surcharge on
There
are no existing monetary policy instruments available to adequately address the
systemic nature of inflation in the productive economy.
A
separate paper is needed to further “flesh out” the impact of taxation on
unearned income deposits. While the New Zealand banks supply a tax deduction
certificate for each account they hold, that aggregate information may need to
be collated from the banks themselves, and then some assessment made of how
that tax is adjusted within individual tax returns; a complex task beyond the
scope of this paper. That necessarily means Figures 5-7, Figure 10 and Appendix
1 are provisional and indicative. The additional research is needed because the
debt model application is dependent on the numerical value of the accumulated
deposit interest Ms. The taxation of deposit interest significantly affects the
net Ms value 82 and hence the values for the circulating productive debt Mcd and its
corresponding speed of circulation Vcd.
80 There might be some repatriation of
dividends on the investment but, in
81 As discussed at footnote
82 Using the gross pre-tax value of Ms, as in
Manning (2009), distorts the numerical model application.
08. THE DEBT
EXPLOSION AND FINANCIAL STABILITY.
There
are two primary pools of debt affecting the
The
second debt pool is the country’s Domestic Credit, Ddc, the broad base of debt
supplied at interest by the
Figure
8 shows that for all practical purposes, all of
Click here to view FIGURE 8: INCREASE
IN GDP v INCREASE IN ACCUMULATED CURRENT ACCOUNT NEW ZEALAND 1978-2010.
Figure
9 shows the debt explosion in
Click here to view FIGURE 9: THE DEBT EXPLOSION IN NEW ZEALAND 1978-2010.
The process set out
in Figures 2 and 4 does not seem to have been described anywhere before, but,
as Figure 9 clearly shows, debt expansion in New Zealand has actually taken
place, as it must, in accordance with the revised Fisher Equation of Exchange
and the debt model presented in 2009 86.
83 Further development of the debt model might
eventually suggest corrections to Md, but Md = Ddc +Dca-R gives a reasonable
first approximation of the status of total debt in the
84 The NZ$ 35 billion is an arbitrary amount
added for visual effect.
85 A better exponential fit is obtained by
shortening the time series so it leaves out the very high interest rate period
from 1980 to 1992.
86 Manning 2009.
87 Measured as the accumulated current account
deficit + domestic credit + Kiwi bank loans and advances less Reserve Bank capital
reserves
88 Issued by the Bank for International
Settlements (BIS) in
The mechanics of
fractional reserve banking are widely known and described in many good primary
economics textbooks 89. The
process was that central banks 90 purchase securities, mainly bonds, usually from commercial banks.
The banks “sell” a loan to the central bank that then “pays” for the loan by
writing deposits into their reserve accounts at the central bank (RBNZ 2008b).
Because the central banks, from an accounting point of view, have borrowed from
the commercial banks, the central banks pay interest (called the coupon rate)
to the commercial banks on the deposits the central bank has itself created for
them.
Central
banks gift the “high powered” deposits they put into the commercial banks’
reserve accounts and pay interest in perpetuity on those gifts 91.
From
the public perspective it is very hard to conceive of a less fortunate way for
governments through their central banks, some of which are not even publicly
owned, to increase the base money supply. The “risk-weighted” capital method
now in use may be even worse than the
reserve method because there is no direct mechanism for central banks to
rapidly expand lending when there is a credit squeeze (such as, for example,
from 2007-2010) other than by the injection of new central bank funding or
government treasury debt.
The
reserves created by the banking system from the banks’ sales of bonds to their
central banks were like cash. They are what the banking system used to
exponentially expand lending in the manner set out in the textbooks so that
banks could continue lending and pay interest on the deposits held in their
clients’ deposit accounts.
89 See for example Blaumol W.J & Blinder
A.S. “Economics Principles and Policy”, Harcourt Brace
Jovanovich, fourth edition Chapters 13 & 14
90 Central banks are bankers’ banks that are
responsible for implementing government monetary policy and maintaining the
stability of the financial system. Some central banks like those of
91 The central banks retain the power to sell
their bonds, that is require repayment from the banks, but that is rarely done
to any large extent because it would cause a big drop in bank lending capacity.
Treasury T-bills (bonds with less than 1 year term) and the Official Cash Rate
(OCR) are typically used to adjust lending capacity.
In the
investment sector every loan made by commercial banks to facilitate the
purchase an existing capital good such as property, shares or securities
requires deposit interest to be paid. Each of those loans produces its own
corresponding residual Ms debt and exponentially increases the pool of
un-repayable 92 unearned deposit interest as shown at the bottom of
Figures 2 and 4. Annually, the pool of deposit interest on the accrued residual
debt Ms increases on itself at the rate of the deposit interest rate I*K as
shown in Figures 2 and 4. It is “pumped” into the deposit interest pool from
the production cycle 93 along with the interest on Mcd and Mv. Whenever Mcd is less than Ms, as has been the
case in
The
size of the non-productive investment sectors Ms and Mv, especially when
“off-book” derivative transactions are included, relative to the amount of
circulating debt Mcd together with the net worth the banks have accumulated to
cover any debt defaults, has increased the instability of the present debt
system.
Domestic
banks must expand Mcd to support the deposit interest burden on the domestically
accrued debt. If the banks do not lend enough to do so they would be unable to
pay all the deposit interest due on their customers’ deposits unless Mcd itself
is reduced assuming Vcd is structurally stable. The effect is clearly shown in
Figure 10 94.
The
present fractional reserve mechanism of debt expansion is haphazard because it
is not properly based on the true demand for debt from within the financial
system as shown in Figures 2 and 4 and in the debt model referred to in this
paper. Instead, present debt creation is dictated by monetary policy that
produces discontinuities in the available supply of new debt. Despite the best
efforts of the monetary authorities, those discontinuities inevitably lead to
mismatches in the production cycle and associated expansions and recessions
characterised by boom and bust cycles.
Lending
must continuously and smoothly satisfy the mechanical systemic demands of the
financial system rather than the whims of monetary policy. This paper
provides
a basis for more accurate assessment of the amount of new debt needed for the
smooth running of the economy without the distortions created by orthodox
monetary policy.
Financial
system stability also depends upon unearned income deposits arising from
deposit interest remaining in the investment sector or paper economy as it is
often called 95. For this to happen the expected financial return
from keeping the deposits in the investment sector must exceed the perceived
benefit arising from any corresponding investment in production or
consumption. The numerical incentive for
deposits to remain locked into the investment sector is the extra annual amount
(Mv+Mcd+(Mcd-Ms)*K)*I added to the investment sector deposits, because they
inflate the investment sector by that amount raising prices there relative to
the productive economy.
92 The debt Ms supporting the accumulated
deposit interest
is
unrepayable because the holders of the deposits are not the same as those who
hold the debt. Provided the bank does not fail, Ms always remains in the system
whatever happens, even when debtors default on their loans.
93 Some degree of quantification of price
effects within the investment sector appears to be theoretically possible using
the debt model and deserves further research.
94 See Figure 9 and bottom p29 for reason why
the Ms and Mcd exponentials have diverged from their respective Ms and Mcd
curves especially over the past decade or so.
95 The only other place it can go is into the
productive economy, increasing incomes and gross operating surplus thereby
increasing measured inflation. There is little doubt such transfers do occur
both ways.
During
the periods when the circulating debt Mcd expanded faster than the accumulated
deposit interest Ms there was a relative improvement in the incentive to
invest, creating booms and then busts as investment expectations surged ahead
of economic growth. As Figure 10 shows, that is no longer the case in
Click here to view
: FIGURE 10 UNEARNED INCOME Ms AND CIRCULATING DEBT Mcd
NEW ZEALAND 1978-2010.
A
likely outcome should deposit interest I or the incentive to invest approach
zero would be an increase in finance company lending and greater investment in
equities and other productive activity. The “incentive to invest” as shown in
Figure 11 is an entirely new economic concept.
Click here to view
: FIGURE 11 INCENTIVE FOR DEPOSITS ARISING FROM DEBT TO REMAIN
IN THE INVESTMENT SECTOR NEW ZEALAND
1988-2010*.
* Note: Figure 11 includes assumed taxation
rates on Ms of 40% from 1978-1986 and 25% from 1987-2010
09. CULTURE AND
INSTITUTIONS.
The
financial debt mechanisms described in this paper could have been observed and
understood at any time since the Bank of England was established in 1694. They
could have become more obvious as debt growth and accompanying monetary
expansion accelerated over the past century.
One reason the mechanics of the debt system have not come to light until
now could be the asymmetrical exercise of power in the world economy through
dominance of its national and international financial institutions by vested
interests.
The French
economist Perroux (1966) first introduced the concept of dominant revenue. He traced the evolution of economic
domination from the landowners (aristocracy) of the middle ages through
mercantilism (merchants) of the colonial period to industrial capitalism
(industrial corporations) from the industrial revolution until post world war
II, and more recently to finance (banking and financial institutions). Strange (1996) has reinforced the notion of
power as “the capacity to conceive, legitimise, implement and control rules for
individual and collective action” even when there is large-scale opposition to
those rules. Other writers like Palley, (2009) suggest what some of the
“problems inherent in the neo-liberal
Finance
as the “dominant revenue” 96 is maintained through an unbroken chain
of authority reaching down from the Bank for International Settlements (BIS)
through international financial organizations like the International Monetary
Fund (IMF) and the World Bank, to Central Banks like the US Federal Reserve and
its member organisations, and some universities like the University of Chicago
who have continued to support existing orthodox economic theory after it became
apparent the present system had become dysfunctional. In the United States
especially, the lack of effective constitutional restraints on campaign
spending, advertising and lobbying have effectively rendered democratic
institutions like the US Congress and the US Executive branch captive to the
centres of power, especially that of finance. The financial collapse that began
in the
Some of
the debt “contagion” that has swept the world in recent years probably would
have been avoided had the world adopted the principle of balanced trading
accounts proposed by John Maynard Keynes representing the UK delegation at the
Bretton Woods conference in 1944 98.
That
96 Exemplified in recent times by the huge
bonus payments made by the dominant
97 Northern Rock in
98 The conference at Bretton Woods New
Hampshire in 1944 established the basic outline of the international financial
system that was to be established after WWII.
The
mechanisms described in this paper are still forcing the vast
Inflationary
consumer borrowing in the US and elsewhere, using residential property as security,
allowed excess consumption to continue until the point was reached where
consumers could no longer fund their debt. This happened in part because under
the Basle accords that regulate bank investment risk residential property
carries a much lower risk weighting than business lending (RBNZ, 2009c). Those
factors combined with the growing concentration of wealth in
Weakening
finance as the dominant revenue is also inherent in the necessary changes in
the world’s financial structure implied in this paper. This could, in turn,
lead to the third great economic revolution the world has seen, being one based
on human and natural capital in its broadest sense. The third revolution, just
beginning, will recognise and accept the environmental constraints of human
activity and ethical limits to human population expansion, valuing the quality
of life rather than, or at least as well as, the quantity of material wealth 101.
An
exclusive right for a publicly-owned authority to issue new debt (and money)
would mean that private banks could no longer create new debt. New debt (and
e-money) spent into circulation would still finish up in deposits with the
private banking system. These earned deposits could then be used by
deposit-holders and/or on their authorisation by the banks on terms, including
the rates of interest, they see fit. The banks would be acting as savings and
loan institutions. Should deposit-holders not spend their money, they are in
fact limiting their own consumption by saving. One (instinctive) purpose for
doing this is to create a reserve for times of need. Saving for a specific
purpose is another. If they lend their deposits with or without interest to
another party, they allow a matching increase in the level of consumption of
the other party. Where interest is charged, the borrower must pay both the
capital and interest back. The borrower does this as agreed either by
increasing his productivity or, if required, in turn reducing his level of
future consumption. The choices made by the two parties are entirely
subjective. They are not subject to
regulation.
The
bankers’ “spread” which covers the banks’ costs and profit as well as
occasional changes in their provision for bad debts need not change at all. As
prices stabilise, the rate of increase
of their volume of business should, however, decrease. The values of land ,
housing and rents, superannuation schemes, savings banks deposits, life
insurances, hire-purchase items would stabilise. Consumers’ confidence would
increase with their sense of economic security.
Governments
in democratic countries are periodically elected on the basis of programmes
including their promises about how they will manage public institutions and
protect the public interest. If voters perceive a government has done its work
well, the government may be returned to office. If voters are unhappy, they may
vote another government in. Contrary to what some past authors may have
believed 103, properly functioning financial mechanisms are
themselves independent of the political orientations of the government
currently in power.
99 Funded in part from government borrowing
rather than taxation. Military materiel is largely produced domestically in the
100 http:/www.newamericancentury.org The semi-official military and foreign policy
of the
101 The first great revolution was the development of
agriculture and associated land and property rights and the second was the
Renaissance and the development of science that has brought the world, for
better or worse, to where it is today.
102 Danks
(1955) pp. 57-59
10. CONCLUSIONS.
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 papers 2,3 and 4 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.
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APPENDIX 1- MODIFIED
FISHER APPLICATION NEW ZEALAND 1978-2010 USING AGGREGATE FIGURES
|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
|
Year |
CA* |
DC* |
I%* |
GDP* |
Mo |
Vo |
PQd* |
%DC* |
Mstax |
Ms |
Mcd |
Vcd |
Mv |
|
1978 |
4.8 |
9 (est) |
8.7 |
15.4 |
0.404 |
30 |
3.3 |
45 |
40 |
2.7 |
1.5 |
2.20 |
4.6 |
|
1979 |
5.4 |
9.8 |
7.0 |
17.5 |
0.455 |
30 |
3.8 |
45 |
40 |
2.9 |
2.0 |
1.88 |
4.7 |
|
1980 |
5.9 |
11.2 |
8.0 |
20.4 |
0.491 |
30 |
5.7 |
45 |
40 |
3.1 |
3.4 |
1.68 |
4.5 |
|
1981 |
6.4 |
12.9 |
9.0 |
23.7 |
0.535 |
30 |
7.7 |
45 |
40 |
3.4 |
4.9 |
1.55 |
4.3 |
|
1982 |
7.1 |
15.9 |
9.0 |
28.8 |
0.593 |
30 |
11 |
45 |
40 |
3.7 |
8.0 |
1.38 |
4.0 |
|
1983 |
8.0 |
21.8 |
8.8 |
32.5 |
0.650 |
30 |
13.0 |
45 |
40 |
4,2 |
13.8 |
0.95 |
3.6 |
|
1984 |
9.4 |
25.4 |
10.1 |
36.3 |
0.652 |
30 |
16.7 |
45 |
40 |
4.8 |
15.4 |
1.08 |
4.9 |
|
1985 |
11.4 |
30.4 |
10.5 |
41.0 |
0.718 |
30 |
19.5 |
48 |
40 |
5.6 |
19.6 |
0.99 |
4.8 |
|
1986 |
14.0 |
40.0 |
14.3 |
47.3 |
0.831 |
30 |
22.4 |
51 |
40 |
7.2 |
26.7 |
0.84 |
5.8 |
|
1987 |
16.6 |
44.6 |
14.2 |
56.8 |
0.868 |
30 |
30.7 |
54 |
25 |
9.6 |
28.4 |
1.08 |
6.3 |
|
1988 |
19.0 |
50.1 |
12.3 |
63.8 |
0.861 |
30 |
38.0 |
57 |
25 |
12.1 |
29.9 |
1.27 |
7.8 |
|
1989 |
22.6 |
50.5 |
11.5 |
68.7 |
0.953 |
25 |
44.8 |
60 |
25 |
14.6 |
24.9 |
1.80 |
10.6 |
|
1990 |
25.6 |
54.3 |
10.8 |
72.7 |
1.075 |
20 |
51.2 |
63 |
25 |
17.3 |
25.4 |
2.02 |
11.3 |
|
1991 |
28.1 |
57.8 |
10.8 |
74.5 |
1.120 |
15 |
57.7 |
65 |
25 |
20.2 |
24.2 |
2.38 |
12.9 |
|
1992 |
32.7 |
64.1 |
8.4 |
74.3 |
1.024 |
13 |
61.0 |
68 |
25 |
22.8 |
25.2 |
2.42 |
15.6 |
|
1993 |
37.2 |
65.9 |
6.3 |
76.6 |
1.082 |
12 |
63.7 |
71 |
25 |
25.0 |
22.8 |
2.79 |
17.7 |
|
1994 |
42.6 |
74.2 |
5.4 |
82.8 |
1.219 |
11 |
69.5 |
74 |
25 |
27.1 |
27.7 |
2.51 |
19.0 |
|
1995 |
48.2 |
79.1 |
5.8 |
88.9 |
1.301 |
10 |
75.9 |
77 |
25 |
29.6 |
30.2 |
2.52 |
18.9 |
|
1996 |
54.0 |
88.5 |
7.2 |
94.6 |
1.399 |
9 |
82.0 |
80 |
25 |
33.2 |
34.1 |
2.40 |
20.7 |
|
1997 |
60.4 |
98.6 |
7.3 |
99.2 |
1.503 |
8 |
87.2 |
83 |
25 |
37.5 |
37.4 |
2.33 |
23.2 |
|
1998 |
66.2 |
107.9 |
6.5 |
102.9 |
1.547 |
7 |
92.0 |
85 |
25 |
41.7 |
39.6 |
2.32 |
26.6 |
|
1999 |
70.9 |
118.1 |
6.4 |
104.6 |
1.682 |
6 |
94.6 |
87 |
25 |
46.4 |
40.8 |
2.32 |
30.3 |
|
2000 |
77.1 |
129.9 |
4.4 |
110.9 |
1.830 |
5 |
101.8 |
88 |
25 |
50.0 |
47.4 |
2.15 |
32.0 |
|
2001 |
84.2 |
139.1 |
5.4 |
117.2 |
2.044 |
4.5 |
108.0 |
89 |
25 |
54.8 |
50.6 |
2.14 |
33.2 |
|
2002 |
91.0 |
154.3 |
4.7 |
125.9 |
2.237 |
4 |
116.9 |
90 |
25 |
59.5 |
60.0 |
1.95 |
34.3 |
|
2003 |
98.0 |
166.6 |
4.6 |
132.4 |
2.289 |
3.75 |
123.8 |
91 |
25 |
64.5 |
68.0 |
1.88 |
35.9 |
|
2004 |
105.1 |
181.1 |
4.4 |
141.7 |
2.483 |
3.5 |
133.1 |
92 |
25 |
69.8 |
73.3 |
1.82 |
38.3 |
|
2005 |
114.2 |
207.2 |
4.8 |
151.7 |
2.686 |
3 |
143.0 |
93 |
25 |
76.3 |
90.7 |
1.58 |
40.1 |
|
2006 |
125.1 |
221.8 |
5.7 |
160.3 |
2.811 |
2.75 |
151.8 |
94 |
25 |
84.9 |
94.5 |
1.61 |
42.7 |
|
2007 |
136.2 |
246.5 |
6.2 |
168.3 |
2.945 |
2.5 |
160.2 |
94.5 |
25 |
95.2 |
105.6 |
1.52 |
47.4 |
|
2008 |
148.7 |
270.6 |
7.0 |
181.3 |
3.038 |
2.25 |
173.7 |
95 |
25 |
108.2 |
112.8 |
1.54 |
52.7 |
|
2009 |
160.9 |
287.3 |
6.45 |
184.8 |
3.40 |
2 |
177.7 |
95.5 |
25 |
121.4 |
111.5 |
1.59 |
58.4 |
|
2010 |
166.4 |
294.2 |
3.52 |
186.1 |
3.52 |
0 |
179.1 |
96 |
25 |
128.9 |
110.4 |
1.69 |
60.6 |
* CA = accumulated current account deficit NZ$b
– sum current transfers; DC=Domestic
Credit NZ$b; I%= annual average deposit
interest rate; GDP = Official SNA GDP
NZ$b; PQd=Column 5- Column 6 x column 7
NZ$b; %DC = estimated proportion of DC funded at deposit interest rate;
Ms=Column3-RBNZ “capital reserves” + Kiwibank loans and advances,
NZ$b*Column4*Column 9 *(1-Column10) +
accumulated Ms column 11 from previous year. Mcd= Column3-RBNZ “capital
reserves” + Kiwibank loans and advances-column 11-col 14; Vcd=Col8/Col12; Mv=[[Col3-RBNZ “capital reserves”
+Kiwibank loans and advances – Col11 ] * (Col4- Col8*SNA inflation)]/100
More information on monetary reform :
Summaries of monetary reform papers
by L.F. Manning published at http://www.integrateddevelopment.org
00. General summary of all papers published.
01. Financial system mechanics explained for the first time. “The Ripple
Starts Here.”
02. How to create stable financial systems in four
complementary steps.
03. How to introduce an e-money financed virtual minimum
wage system in New Zealand.
04. How to introduce a
guaranteed minimum income in New Zealand.
05. The interest-bearing debt system and its economic
impacts.
07. The DNA of the debt-based economy.
08. Manifesto of 95 principles of the debt-based economy.
09. Unified text of the manifesto of the debt-based
economy.
Return to : Bakensverzet homepage.
"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,
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