New Money means New Finance

From Wikipedia

Finance is a field that deals with the study of investments. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainty and risk. Finance can also be defined as the science of money management. Finance aims to price assets based on their risk level and their expected rate of return. Finance can be broken into three different sub-categories: public finance, corporate finance and personal finance.

From Investopedia

Finance describes the management, creation and study of money, banking, credit, investments, assets and liabilities that make up financial systems, as well as the study of those financial instruments. Some people prefer to divide finance into three distinct categories: public finance, corporate finance and personal finance. Additionally, the study of behavioural finance aims to learn about the more “human” side of a science considered by most to be highly mathematical.

Finance is the study of Money created as Debt. Interest on Debt Gives Investors a return on Money.


If we change the system to providing a return on Discounted Product or Services, then the tools and techniques of Debt Finance no longer apply as Money has no time value.


I have argued elsewhere “The time value of money tokens an idea past its use by date. ” It means we can remove the time value of money tokens by removing interest from newly created money tokens.

In particular, it means the value of repayments with equal repayments over N periods is:

R = C x (1 + sqrt(1+2 x D x N)) / (2 x N )

R = periodic repayment amount, C = Capital to be repaid, D = discount (or fixed interest), N = installments.

With debt, the repayments are:

R = (C x I) / (1-(1+I)^^N)

In the formula, the symbol x means multiply, / means to divide and ^^ means exponentiation.

The return on investment using Discounted Product or Services or Rewards has no exponential term. Rewards mean money has no time value. Rewards make Finance simple. Rewards replace money markets and the markets in derivates with simple fixed return markets based on the risk of producing products or services.

Fair and Equitable Money Creation

The IOU is the building block of our financial system. Money is an IOU that the government sells to us so we can pay our taxes. Because we can be confident the government will allow us to use their money to pay taxes, government IOUs become a general purpose currency.

When we want to issue an IOU using government money, we take out a loan with a bank as debt. Banks are licensed to sell us government IOUs. Banks charge us interest on the IOUs to cover the cost of them buying IOUs from the government or other banks plus a commission to the bank to cover their risk and to pay for their operations.

Banks issuing government IOUs outsources the creation of government money to a third party. The interest charged needs to cover the cost of us defaulting on our IOUs. When we repay IOUs, we first pay the accumulated interest creating compound interest.

Instead of using government money for our IOUs we can bypass the banks and sell IOUs directly. We can agree to repay the IOU with goods and services we produce. To cover the risk of the IOU buyer, we can give them a discount on the goods and services they receive. Discounts do not compound. To cover the cost of inflation we increase the value of the IOUs outstanding by inflation.

The buyer of the IOU gets the interest equivalent paid to the banks and the government and has inflation protection. The IOU seller has the same costs. The IOU buyer has little risk if they need the goods and services and if there are many other sales. Accounting treats IOUs as long-term unsecured liabilities and assets, and they appear on the Balance Sheet.

For the total system, it removes the cost of interest and the cost of inflation and increases the productivity of capital.

Governments can do this themselves and can spend money into existence instead of issue debt.

Local and State Governments can do this by selling their IOUs for their services and taxes.

Doing this saves their respective communities the cost of interest and the cost of inflation.

To see how to do this in a fair and equitable way to raise funds to build water infrastructure see the description of Water Rewards. 

Water Rewards for ICON Water

Every community needs infrastructure. Governments have traditionally supplied most of it as it tends to be a natural monopoly. The provision of roads, ports, electricity, water, land, law enforcement, the judiciary, social services, health, communications, finance, defence and education, are all areas where governments have and continue to have a significant role.

The economic experiments over the past forty years of governments selling off public assets and relinquishing control to private interests have lead to increased inefficiency and rising costs.

The most inefficient industry in the world today is the finance sector. The finance industry profits in most countries are now higher than the profits from supplying goods and services. With modern technologies, we can reduce the size of the banking and finance sector to one tenth its current size. The funds saved will go to the productive economy.

This post describes how the loans system works. It shows the costs associated with borrowing money to build a water supply system for a community by calculating the funding costs for building a dam with a conventional loan.

It then describes an alternative way a community can fund the construction of a dam without using the banking sector. It compares the cost of non-bank funding and calculates the savings. It then describes Water Rewards, a practical way to implement the alternative method and distribute the savings across the whole community.

An Overview of Water Rewards versus Debt

Taking out a loan versus discounts

Let us assume a dam costs $400M to build, the interest rate on loans is 5%, and the loans are repaid over 100 years life of the dam. If the loan is repaid in equal instalments each year, the total cost of interest is $1,615M or four times the cost of the dam.

Instead of a loan, the water authority can sell IOUs that would be used, in the future, to pay for water at a discount. If the discount was 5% for each year the IOUs were held, then if the IOUs were used equally over the 100 years, the discounts would be $1000M. IOUs are 61% the cost of a loan. To be the same cost the discount offered to customers could be 8% per year.

The price of water is set to control demand to match the available supply so the extra profit can go to those who purchase IOUs. The water authority can ensure that its customers are the ones able to invest in IOUs.

Comparing Customer Investments

Customers can invest in bank annuities and deposits, or they can invest in the water authority IOUs. Investing in a bank deposit means that if the bank lends at 5% is likely to return a compound interest rate of 3% to the investor in a bank deposit. If customers invest in IOUs, they will receive a flat 10% discount. Customers pay tax on the 3%, and they pay no tax on the IOU discount. Because the price of water increases with inflation, so the IOUs can rise in value to match inflation. The return on IOUs is at least three times the return on deposits.

Customers could invest in fixed-term annuities. A typical 15-year annuity from a bank provides $8,377 fixed per year for each $100,000. 10% IOUs provide an inflation-adjusted annuity of $11,667 for 15 years. The bank annuity earns an extra $25,655 while the IOUs provide $75,000.

The only difference in the two approaches is in the organisation of funding. There is no change to the pricing or operations of the water authority.

Distributing IOUs to customers

IOUs are an attractive investment and should be made available to the consumers of water. However, water is a public resource, and those who consume less should get more IOUs as the users of water get a benefit from the use. We can distribute IOUs and call them Water Rewards.

Instead of distributing Water Rewards directly the water authority distributes the right to buy Water Rewards. The number of Rights each customer receives could be inversely related to their consumption in the previous year. To purchase Water Rewards a person must have a Right to Buy. As the Water Rewards are an attractive investment the Right to Buy has a value. It means those who do not have the funds to purchase Rewards can sell the Rights. Alternatively, they can borrow money at a lower rate than the discount and convert their Rights to Rewards. The loan can be paid off using the money to pay their Water Invoices.

A holder of Water Rewards can sell them at any time at slightly less than their face value to anyone who wishes to pay for their water with Rewards.

To see how a customer would get and buy Water Rewards try this mockup of a Water Rewards app.

What is the benefit to the Water Authority

With debt Water Authorities do not set the price of water. Because water supply is a monopoly there is a pricing regulator that reviews prices and sets them periodically. The Water Authority cannot set prices to control demand. In times of shortage of supply, they resort to water restrictions that are costly to administer and do not help public relations. With Water Rewards there is no need for a pricing regulator because the windfall profits can go back to the consumer.

Water Authorities normally have to get permission from their owners to raise extra revenue. Raising money by issuing Rights is simpler and requires less negotiation and administration.

The Customers of the Water Authority get a financial benefit when the price increases and this makes for a close customer relationship. This relationship can reduce operating costs through finding leaks, cheaper meter reading and funding of local water reuse.

Withholding Rights and taking back Rewards is a low-cost enforcement measure for customers who abuse the system.

The Water Authority controls how many Rights are issued and adjusts the number to meet capital needs. If the Authority issues too many then they can, as a last resort, increase the price of water so that the service continues to pay for itself.

The owner of the Water Authority does not have to raise funds from banks and does not go into debt. The Water Authority does not have to pay interest, and this improves the cash flow of the authority. The Water Authority can issue as many Water Rewards as its cash flow can support. The funds make it easier to bring improvements and more efficiencies to the system. If the Water Authority does not use the funds for water, the Community can use them for other Capital works.


Making Decisions by Consensus

Any sustainable group of interacting agents have to make decisions on how to work together to achieve the best outcome for the group. Human groups use a variety of strategies including markets, representative governance, or assigning authority to some members as ways to work together.

In small groups, such as families, decisions tend to be by consensus. Larger groups find agreement challenging and so we invent strategies to overcome the inevitable disagreements. The simplest approach is to abandon consensus and to use centralised enforcement. Unfortunately, the cost of centralised decision making with enforcement increases exponentially with the number of members in a group.

One way to reduce costs is to form subgroups and get agreement between the subgroups. The subgroups are stable and in turn, we can develop a consensus between the subgroups.  With this approach, costs increase linearly with the number of members. One method is to create subgroups around each entity. An organisation of many entities is one such group. A tribe is another. Individuals have subgroups with whom they interact for given purposes. In general, any entity interacts with many other entities and each purpose becomes a subgroup.

Entities do not have to be people or organisations. An entity can be a loan and we can create very large systems with loans where all the parties both borrowers and lenders to the same loan form a subgroup.

The Internet provides us with a new set of tools to reduce the cost of consensus because we can create many more subgroups for all types of entities and handle the interactions between them efficiently. It enables the group of entities with which an individual interact for a purpose, to be a subgroup. This grouping of interacting objects is often called a swarm and the behaviour called swarm intelligence. With the Internet, we can create many subgroups and control them so that leakage of data outside the subgroups is minimal. For human systems, this leads to enhanced privacy and freedom from surveillance.

An issue with consensus groups is what happens when a person or entity will not agree or breaks the consensus. Consensus on enforcement is low-cost with small groups.  Peer group pressure is an example.  When someone does not conform, they are left out of the group but can join another group.  When a merchant’s prices become too high, you leave the group of their customers and join another merchant’s group. The more variety, the more alternatives, the greater the chances of consensus.

This post outlines some examples of how the Internet enhances agreement by having entity based groups for different purposes.

  • Where is it?
  • What is my address?
  • Who am I?
  • What price should I charge?
  • How can I find a place to live?

Where is it?

Here the objective is to discover the physical location of an object.

At some point in time let us assume that all objects know where they are and they know the distance from every connected object. When an object moves, the object that moved is the only one that has to recalculate its position.

To answer the question, “Where is it?” the swarm including the object, knows where they are at all times if they know the distance to connected objects. The algorithm to calculate positions is the only thing that needs to know the position of each object and it only needs to know while it is calculating. It asks each object, in turn, where they are, does its calculations and reports back any change in position to each object. The algorithm does not remember the position of any object. Objects never know the location of other objects unless the others wish them to know.

To find the distance between objects each object keeps a record of previous measures of distance and can use those records to check and calibrate current measures of distance.

If an object wants to exclude another from its group it can do so by refusing to tell the other where it is.

The difference between this and current methods of location is that an object is the only one who knows where it is at all time. Its location is a private attribute that it provides to the known algorithm.  It only provides its location to others who it approves and only via known algorithms.  If a group member goes against the wishes of an object and provides the location without permission then, the object stops communicating with the offending member and tells others of its concerns.

What is my address?

A common utility is the directory problem.  You wish to make a connection with someone, but you do not know where they are. The traditional solution is to have a centralised directory where you put your address, and people ask the directory.  The distributed solution is for you and those with whom you wish to communicate only to know your address.  That is, you have a directory of your own.  Someone outside your group knows who you are but does not know how to connect to you. They ask their connections do they know your address. If they do not know then they can ask their connections and so on.  You can set up rules on whether you wish to connect by being asked and you only connect to those who agree.  Social networking sites use this approach. The difference in a distributed system is that there is no need to have a social networking site.  The algorithm is the social network.

Who am I?

The objective is for your electronic identity to remain consistent. It means when two parties reconnect they are confident they know each other. At some point in time let us assume that all objects know their identities and they know how to identify themselves to other objects to which they are connected. Let the location be part of a measure of trust in the identity of the other party. If there is a change in trust, such as a person is now in a different physical location, then the swarm can ask all connected parties to recalculate their measure of trust and see if they are prepared to continue to accept the identity of the changed party.

What price should we charge?

The traditional way of setting prices is through demand markets. When demand is high, the price goes up. When demand is low, the price goes down. Setting prices this way works well when there are one-off sales. It is expensive when the sales are commodities and buyers make repeat purchases. If fails when there are monopoly buyers or sellers.

One way for consensus pricing is to agree on a base price for all production. Prices can increase to some maximum but rather than all the growth in income going to producers some goes to those who restrain their consumption. The increase could be in the form of Rewards for non-consumption. The base price, the Rewards and rules of operation use consensus to come to an agreement on prices.

How can I find a place to live?

In our society, we agree that it is desirable for most people to have a permanent place to live. We know that people like to have space in which they are comfortable, safe and private. We have developed ways to achieve this. The most common way in industrialised societies is through home ownership.

Some people are unable to obtain a home of their own through the usual channels. Consensus Homes establishes a way for members of a group to each have all the rights of homeownership to a dwelling.  They obtain the rights by consensus of the group. Each person wishing to participate negotiates with others in the group and decides to live in a particular dwelling. They live with or without others look after it and agree to buy the mortgage over the property through regular payments.  The person builds equity in the mortgage that they can transfer as a deposit for a traditional home purchase or to another dwelling within this or another group.  Enforcement comes by people who fail to pay regular payments having to leave the dwelling.

Don’t Blame the Bankers

Bankers and the Financial Sector get blamed for our economic ills. They are not to blame. They do a good job of trying to control the complicated financial system we have inherited. They cannot change the system on their own, but they can work with us to change it into a simpler more efficient system.

The money system

We use money tokens to transfer value by exchanging money tokens for goods and services. We can create money tokens with an IOU. The IOU means we agree to repay the money at some time in the future. Anyone can issue IOUs. What we call money is a Government IOU. Governments create money, or a government IOU, by promising that they will accept the money tokens they create and sell to us so we can pay our taxes. Because most people trust the government and most pay taxes they will accept the government’s IOUs; the government money becomes a currency. That is, we can use government IOUs (money) to transfer the value of anything.

Banks make IOUs for us using government money. We call this debt. Government money is fungible. It means our IOUs created as debt have the same value as a government’s IOU.

Why the current money system is expensive to operate

The current loans system is convenient, but it causes excessive costs. When a bank gives us a loan as a debt, the loan is our IOU. Unfortunately, our IOU is not the same value as a government IOU because it has a greater risk of not being repaid. The financial system, governments and banks have created a complicated system to account for the difference in value between our IOU and a government IOU.

To cope, we do the following.

  • We give money tokens a time value using compound interest on money.
  • We have invented the idea of capital which is the surplus money left over when we repay our loans.
  • We create capital as money tokens with value.
  • Because money tokens have a value, we can create capital markets as a way to distribute capital.
  • Banks can create government IOUs for us but only if we have an asset or some form of income as collateral.
  • We regulate banks to ensure they do not create too much money.
  • Central Banks have a policy of targetted inflation to reduce the value of all money tokens when too many are created.
  • We create insurance policies to compensate investors for bad loans.
  • As well as insurance we invent other derivates of money to recover the cost of bad loans.

All these mechanisms are expensive to operate and all involve actual costs incurred by the financial system.

A lower-cost way to make loans

We can remove the need for most of these artefacts by repaying the loan with goods and services rather than with government money. By giving goods and services of greater value than the money created for the loan means investors get a return without impacting the value of government money. If the borrower cannot repay the loss is localised and does not affect government money. If government money inflates so that it decreases in value, we can give more goods and services and so compensate lenders without impacting government money.

Doing this on an individual loan means the loan is isolated from the government money system. Using these rules we save the interest on debt, and we save the cost of inflation for any loan. We can provide insurance by working with others with similar loans to provide more goods and services to cover unpaid loans. We remove the need for most financial derivatives.

On short term loans, the cost savings are small. On long-term loans, the cost of loans more than halves. We can use the approach for any loan both present and future, and we can do it without impacting the existing system. However, because the loans have lower costs we can expect many loans to move to repayments in goods and services instead of repayments in money.

Doing this replaces money markets as the way to set the price of capital indirectly with the cost of debt. Instead, the risk associated with the reason for the loan establishes the cost of capital directly for each loan. These prices can set the price for conventional debt loans. It means we do not need a money market to set prices. Removing the need for money markets to set the price of capital saves costs.

By reducing the need for capital markets, we reduce the impact of changes in government interest rates.  Systems, where changes to one component affect all parts, are brittle.  Removing this dependency will make economies more resilient and adaptable.

The practicalities of changing IOU repayments to goods and services

When individual loans operate independently, we can still get economies of scale and spreading of risk if we have a knowledge of other loans for each entity both as a lender and a borrower. It works well if we have a secure, reliable distributed system with autonomous linked entities. We call such systems complex adaptive systems where entities synchronise their activities by communicating with other entities through a distributed network structure.

An area of need is the removal of public debt. We can do this by communities self-funding infrastructure. Here is an outline of how to do this.

Here is a proposal for a Water Authority to replace all its debt with promises to repay with goods and services.

Here is a proposal to a public housing authority to provide affordable housing to all who need it.

Markets Good – Capital Markets Bad

Markets in goods and services work well to stabilise prices and get the best return for both buyers and sellers. On the other hand, many capital markets are dysfunctional and unstable and in turn, destabilise other markets.

Share market prices follow a random walk. Foreign exchange markets transfer the yearly value of GDP every few days. The total daily turnover of financial markets is about the same as a year’s GDP. The total cost of the financial sector may well exceed the cost of all other goods and services.

The financial markets are meant to serve the markets in goods and services. Instead, they randomly influence the markets in goods and services as traders gamble in a zero-sum worldwide casino where the casino always wins and takes a percentage.

There is a solution to the problem that can be implemented incrementally without dislocating the existing system. We can evolve the system to become more efficient by removing most of the cost of financial markets.

Instead of using capital that earns money by making more money let us use capital that makes money by producing more goods and services. We do this by removing the ability of some capital to make money when it is unused. For example, instead of interest on debt replace it with more goods and services purchased with the same amount of money.

We do not have to change all or even most financial markets with this approach. We can start with any debt and replace it with credit between buyers and sellers. The ones that are easy are infrastructure in natural monopolies where the community has funded the infrastructure with debt. Examples are water, energy distribution networks, ports, roads, broadband services, money, commercial law enforcement, and public transport. We set prices by consensus.  An agreement is possible if users replace debt with pre-payments of goods and services as users get a return on their capital and the use of the infrastructure.

The prices set for capital in these areas will set the price of money in other financial markets. Many other markets will likely follow and also fix the price of money for their markets.

In any area that adopts this approach, we incentivise users of capital by rewarding them when they increase operating profits without increasing prices.

This method will keep the best characteristics of markets and the best of capitalism.

Politically it has advantages. It is more inclusive and gives more people more money paid for from the reduced cost of operating financial markets. It means a more efficient operation of other markets in goods and services which in turn lowers prices. It provides more people more returns from capital and reduces the need for transfer payments and taxes. Finally, it allows local communities to take control of their community finances.


Sustainable Investing in Community Infrastructure

Sustainable investing is where the community served by the infrastructure self-fund the infrastructure they use. All pay the same for using the infrastructure, but those who use less are allowed to invest more in the infrastructure. Investors get a return of say 8% fixed per annum inflation adjusted in the form of discounts on payments for the use of the infrastructure.

The following example shows how, using this approach, we can create as much renewable energy as we need through Energy Rewards.

Let us assume a community of 50,000 wishes to

  • Invest $100M in renewable energy plant that delivers 150M kilowatt hours per year. (typical wind or solar farm numbers)
  • The plant costs $4M per year to operate.
  • The price per kWh is 0.08 cents adjusted yearly for inflation.
  • The discount is 8% per annum fixed.
  • The plant has an operational life of 30 years.

Let the capital owing increase with inflation and assume the investors get their money back plus discounts over 30 years.

The operator of the plant will get a $666K profit each year. At the end of 30 years, the community owns a renewable energy plant that continues to operate, and the profit can be used for other community infrastructure.  The community can increase the price per kWh and adjust the discount rate to fund other pressing infrastructure. The price is set by community needs, not by a market in energy.

The same renewable energy plant could be financed with 6% external debt, but the outcomes for the community would be different.

Energy Rewards for this scenario works as follows. Each member of the community on average gets the right to invest $2000. Let us assume each person consumes an average of 4000 kWh per year. For each kWh above the average 50 cents is taken from the right to invest. For each kWh below the average 50 cents is added.

If a member of the community does not have $2000 to buy the Rewards, they can sell some of their rights to someone who does and use the money to buy their remaining Energy Rewards allocation. The rights are attractive to those in the community  with savings to invest as they have the backing of the community and give a high fixed inflation-adjusted return.

This approach overcomes issues with the existing market-based approach.

Energy Rewards

  • Encourages people to consume less.
  • Encourages the operator to do more with less as the price is fixed.
  • Provides price stability
  • It makes long-term investments equal in profitability to short-term investments.
  • Is fair because it gives a benefit to those who consume less of the community resource.
  • Is fair because it allows all members of the community to invest.
  • The investment has liquidity.
  • The community benefits from the returns on the investment.
  • The community has control over the asset.
  • It removes community debt.

A market-based approach

  • Encourages more consumption.
  • Encourages the operator to increase prices as the easiest way to increase profits.
  • Encourages short-term exploitive investments.
  • Increased regulatory costs to control exploitation.
  • Those who consume more get more benefit from the community resource.
  • It favours those who already have assets and can get credit.
  • Normally excludes the community from investing.
  • It creates external debt.

Rewards for any Community Infrastructure

The approach can self-fund any community infrastructure requiring capital investment including health, public transport, traffic violations, communications, water, fuel, and education.

Buying and Selling a house using debt versus Rent and Buy Mortgages

Today we typically transfer the value of assets, like a house, over time with the use of debt. The following is a simplified sequence of steps taken to sell a dwelling.

A buyer finds a house to purchase. They go to a bank, and the bank gives them a loan. The bank does not take money from existing accounts but creates new money and provides this as a loan to the buyer. The buyer then buys the dwelling with the money. The buyer repays the bank the money over time and also pays interest on the money. The seller of the dwelling has some money which we will assume they deposit in the same bank. The seller earns interest on the money they leave in the account. It will be less interest than the bank charges. The seller’s money depreciates with inflation.

For the sake of simplicity, we will assume the buyer borrows $100 and repays the money in one amount after 30 years, and we will assume the seller leaves their money in the bank for 30 years. We will assume an interest rate of 5% for the bank, an interest rate of 3% for the seller and an inflation rate of 2%.

The amount of money transferred from the buyer to the bank is $432.
The money transferred from the bank to the seller is $242. The value of the money the seller receives after accounting for inflation is $134.

The total cost of using bank debt is $432-$134 = $298. This cost is born by both the seller and the buyer. To transfer an asset of value $100 has cost three times the value of the asset.

If instead of using bank debt to transfer the funds, the buyer paid the seller directly without using bank debt, then the seller would receive all the money the buyer paid.

The reason we use bank debt is that the banks guarantee the money gets paid. To replace bank debt and save three times the value of the money transferred we need to have a way that ensures the transfer of value.

Rent and Buy Mortgages ensures the transfer of value and links sellers with savers to finance the exchange. This means the seller gets their money immediately.  By adjusting payments and interest rates, the buyer and the saver share the savings. Some savings can pay for insurance, lawyers, real estate agents and accountants who are needed to make the exchange.  These costs will be lower than the current system because the money used for these payments is cheaper than debt money.

How to reduce household, business and government debt

The world has a debt bubble that is causing economic stagnation and a maldistribution of wealth. It is widely acknowledged that we need to reduce the amount of debt.

Debt is created when we lend money and receive more money back than we lend. Credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.

Debt could be created by an organisation selling money they create. This is selling IOUs. Thus any entity can sell IOUs, and people will accept the IOUs if they are confident they will get a return on the IOUs by receiving back goods or services of greater value than the money they paid.

Governments can print money because we have confidence that governments will tax us and will accept their own money.  If they gave us a discount on taxes when we used the money we purchased we would happily buy their money.

Other organisations can issue money and we will buy it from them if we have the confidence they will deliver goods or services in the future.  If they give us back goods and services of greater value than our purchase price then our purchases become an investment.  This is better called negative credit rather than debt.

If we do this we can eliminate money debt and replace it with negative credit for future goods or services. Each time we replace money debt with negative credit, it removes the cost of interest on money and the cost of inflation. It does not eliminate the value of negative credit which is the return on investment.

We can do this one debt at a time without disrupting the economy. The cost of moving to negative credit is more than covered by the removal of the cost of interest and the cost of inflation.

Australian Priority Investment Approach to Welfare

The Australian Priority Investment Approach to Welfare invests in people who can find and hold a job. It will first target groups in society who have a high propensity to rely on welfare payments throughout their whole life.

The minister’s announcement in parliament

Government call for expressions of interest

The proposal outlined here complements and assists this approach by providing ways for any Welfare Recipient to invest and accumulate wealth. If people accumulate capital and can turn it into an annuity, they have less need to access the welfare system. This proposal offers ways to assist individuals and families build their capital resources and use any capital resources they possess.

The money to pay for the accumulation of wealth and to operate it comes by removing the cost of interest and the cost of inflation. It is a flexible approach and accommodates individual circumstances. It starts small and is scalable.

Capital Accumulation for welfare recipients

In this proposal, capital accumulates in two ways. The first turns rent into a mortgage repayment.

Turning rent into mortgages provides a way for individuals and families to have tenancy rights over the place they live. It reduces housing stress and gives a home ownership foundation to personal finances. When a person gets older, the accumulated capital can return as an annuity. Removing interest from money and repaying the money over a longer time reduces the cost to accumulate wealth while giving a fair return to savers.

The second way to accumulate wealth rewards those who use fewer community resources such as water, energy, transport and other community infrastructure. The rewards are investment capital invested in developing more community infrastructure. Non-consumption is a form of savings and turning it into investment capital is a way to turn it into a future annuity income.

Funds for Investment

Removing interest and the effect of inflation on wealth accumulation provides the money at no extra cost to the government. What happens is that the use of community assets move to custodianship and control by individuals but remain owned by the community. It is leasehold rather than ownership in perpetuity.

Most investment funds will come from superannuation and other personal savings. As an alternative to putting money into banks to earn interest, funds are invested to pre-pay tax. The savers get a return on investment by getting a discount on any future taxes or fees paid to the government. The discount can apply to goods and service, income, or capital gains taxes. If a person cannot use the pre-payment, they can sell it on a secondary market. There is no money created, and the system can compensate for inflation. Doing this removes the cost of interest and the cost of inflation. Over a person’s lifetime, these are significant costs.

Members of the community receive the benefits from the investments and so are better able to pay their taxes and not require income support from taxes. Most superannuation savings are likely to remain in these pre-payment accounts until needed for a retirement or emergency annuity.

Funding Operations

Funds for operations come from transaction fees on transfers of value. A 1% charge on all transfers should pay the total cost to support individuals and for software services. It means there is no cost to the government to operate the system.

How quickly can it start and how much will it cost to trial

There is no need for legislation to start a trial. Funds to construct the system can come from sales of pre-payments within a month of a decision. The trial itself can commence within three months of a decision.

As with the Australian Priority Investment program, it is proposed to start with a trial of people at risk of becoming homeless or who are suffering financial stress because of the high cost of housing.

What are the benefits?

This approach will assist a person to own their home by the time they reach retirement. It will provide a place for superannuation contributions to be safe and to provide high annuity payments on retirement. The approach can be extended to all citizens and is likely to take people off the old age pension. We can expect the welfare bill to reduce every year as more pensioners use their house capital and the high annuity returns available from buying rewards. The government’s debt will drop, and there will no longer be the burden of ever increasing debt repayments.

Instead of welfare payments going directly into bank accounts, payments can go to Rewards accounts or Rent accounts. Money in any of these accounts increases in value over time. With the permission of the Reserve Bank, payments for goods and services can be made directly from these accounts. The government no longer needs to use interest bearing money and so can reduce its debt. Welfare recipients get a return while ever the money remains in their accounts. The savings to the community is the cost of interest and the cost of inflation on the amount of money.

How does it fit into the NZ model?

Building capital resources require the individual to have access to, control over, and understanding of their finances. These are all capabilities that people need to get the most from Investments in themselves. This proposal includes the software systems to help a person manage their finances. The accounting software will be an adaptation of the small business accounting software. Organisations like those identified in the Australian Priority Investment program will act as advisors with the software and help people to monitor their finances. The systems will be in place and available to help other “Investment in People” initiatives.


This proposal has no net cost to the government. It will assist the deployment of the Australian Priority Investment program. It has the potential to reduce welfare payments by increasing the capital available to welfare recipients. If trials are successful, it is scalable. It requires no legislation or funding to start. It requires the government to allow pre-payment of taxes with a discount. It requires the cooperation of a state government agency to institute a rewards program such as Water Rewards for consumers who use little water.