Governments around the world are faced with the problem of stimulating their economies. The most popular approach is to borrow money or use reserves of cash, give people the money and hope that they spend it. The British have decided to print more money and for the government to buy assets.
There is another way. The government can take advantage of the crisis to reform the money market and at the same time, reduce the deficit, reduce the cost of energy, and reduce the levels of greenhouse gases in the atmosphere. All this can be achieved by changing the way we increase the money supply. While this article suggests a way of spending the increase in money, its main purpose is to describe a better way to expand the money supply by investing money rather than just spending it.
First some background to how we currently expand the money supply and an alternative to the existing method. You can read another description on ABC Perspective http://www.abc.net.au/rn/perspective/stories/2008/2448111.htm.
Money is a government promise to pay the bearer an amount shown on the currency. A loan is a promise by an entity to repay money that is given to the receiver of the money. The people who loan us money want us to repay it and before they give it to us they seek assurance that it will be repaid. Therefore loans are secured against assets such as gold, money, buildings, future wages or other loans. In a growing economy we need to increase the amount of money available, so we create some loans with the promise that the issuer of the currency will repay the loan. This is the way we increase the money supply. The issuer of the currency allows some institutions to issue loans without there being any tangible asset against which to back the loan.
Money is not the same as a loan yet the way we have built our financial system money and loans have become the same because we allow some loans to be created without there being an asset backing the loan – only a promise by the government to honour the money. When we allow loans to be created that are only backed by the promise of the controller of the currency, it is almost inevitable we will spiral into a system where too many loans, and with it too much money, is created.
When this happens the system adjusts itself by decreasing the value of money – inflation – or by loans defaulting. When loans start to default on a large scale, both money and loans are removed from the system and we end up with fewer assets against which to loan. The inevitable result of this is a recession or depression, further accelerating the rate at which loans default.
The way we currently expand the money supply involves internal positive feedback mechanisms and it is these which cause our money market to be structurally unstable. In other words, when money supply increases it tends to keep increasing and when money supply decreases it tends to keep decreasing and the price of money has little effect on the rate of increase or decrease.
What is needed is to change the way that the money supply is expanded so that we can stabilise the system and remove the positive feedback mechanisms. What is proposed is that we build productive assets first, then create the money backed by these new assets. This contrasts with the current system under which we produce the money first, followed by the asset.
Is this reversal feasible? Yes, if we create special purpose money that can only be invested in creating productive assets and which can only become interest-bearing regular money after the asset has been produced. The creation of this special purpose money does not require the issuing of loans, and because it results in the establishment of a productive asset the inflationary pressures are controlled.
The first step is to select a class of productive assets to create. The next is to issue the special purpose money to those who agree to invest it in that class. The class of assets needs to be something society wants and that is guaranteed to return more money than is invested. For example, assets that reduce greenhouse gas levels in the atmosphere are something that society wants. Furthermore, if we remove finance charges such as interest and repayments, greenhouse gas reducing technologies will return good profits or more money than we invest.
Here is how it can be implemented.
We create a supply of special purpose money that has zero interest and that must be spent on ways to reduce greenhouse gas levels in the atmosphere. Let us call this money Energy Rewards. Energy Rewards money pays no interest.
We create a market place where suppliers are invited to offer goods and services that reduce the level of greenhouse gas emissions in the atmosphere. This market place will have goods such as house insulation, solar hot water heaters, solar panels, smart metering systems, investments in renewable energy plants, investments in ways to fix carbon, and so on. Any supplier can offer their goods and services provided they can show how the sale of their products will reduce greenhouse gas emissions. Buyers in this market place can use regular money or they can use Energy Rewards. When they pay with Energy Rewards the supplier receiving Rewards converts it to unrestricted money when the product purchased is delivered to the buyer.
Because we invest Energy Rewards in a market place it is likely that Rewards holders will seek ways to invest for the greatest profit. That is, the allocation will be efficient. Who is issued with Energy Rewards is a political decision as it is a wealth allocation issue not an economic issue. If too many Energy Rewards are issued, the Rewards themselves will reduce in value but because their expenditure still produces a productive asset they isolate the regular currency from inflation.
To summarise we can change the way we expand the money supply by creating assets first, then money. This removes the present, unhealthy positive feedback mechanisms from the money market thus helping to prevent over-expansion and over-contraction of the money supply.
The government can stimulate the economy by spending money through special purpose markets. The idea of using special purpose, internally regulated markets to implement particular policy objectives is one that I have promoted for several years through On Line Opinion.
“Contingent loans to reduce taxation and reduce greenhouse gas emissions” http://www.onlineopinion.com.au/view.asp?article=8477 shows how to give extra resources to the less well off without increasing taxation.
“The credit crunch and how to solve it” http://www.onlineopinion.com.au/view.asp?article=7973 has another description of creating assets then creating money.
“A new way to fund health” http://www.onlineopinion.com.au/view.asp?article=6741 describes how to distribute money for health through a market.
“Reward the frugal and charge the profligate” http://www.onlineopinion.com.au/view.asp?article=7085 describes a way to encourage people to consume less and to turn our society from one based on consumption to one based on sustainability.
“A different approach to funding transport” infrastructure http://www.onlineopinion.com.au/view.asp?article=3625 has some early ideas on funding public transport
All these articles are variations on the same idea; using internally regulated market places as a way to spend community money. In devising these schemes a central issue was always one of obtaining the money to fund the buyers in the market places. It turns out that the funding can be provided by using these market places as a way to expand the money supply without the government going into debt.
While it seems counter-intuitive that we can get something for nothing, that is the magic of investment. When we invest we expect to get back more than we put in. This approach can be used by the community as well as individuals. If the government starts to think like an investor and uses the appropriate tools, they can stimulate the economy, so that as a community we all become investors and increase our collective wealth. It’s a much healthier approach than becoming borrowers and mortgaging our future.
The global financial crisis gives Australia an opportunity to change the way we spend public monies at the same time as delivering the Australian government the political capital to change the system to achieve their election promises of fiscal responsibility and reduction in greenhouse gas emissions. My advice to the Federal Government is to decide to do something about climate change and to issue $30 billion in Energy Rewards to the population each year for the next 10 years. The result will be zero emissions, no government debt, a booming economy based on low cost clean energy, with zero inflation and a stable money market.