Online Opinion Article

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.

Getting started 

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.

Submission to ghg enquiry

http://www.legassembly.act.gov.au/downloads/terms-of-reference/TORgreenhouse.pdf

http://www.legassembly.act.gov.au/committees/index1.asp?committee=112&inquiry=753&category=13

Submission to the ACT Government Standing Committee on Climate Change, Environment and Water

Inquiry into ACT Greenhouse Gas Reduction Targets

From : Kevin Cox

Zero net emissions by 2020.

It is recommended that the ACT Legislative Assembly set a target of zero net emissions by ACT residents by 2020. It is recommended that the funding required to achieve these targets be obtained by asking to Federal Government to increase the money supply required by the Territory to fund its anticipated regular growth though the system called Energy Rewards outlined in this submission. 
The problem of green house gas emissions can be resolved by investing enough money.  If we invest enough in ways to reduce green house gases we can bring emissions down to whatever level we wish and we can start to remove green house gases from the atmosphere. The maximum investment needed to make Australia Carbon Neutral is $30 billion invested each year in electricity generation for 10 years. This scenario is if all energy used in Australia was achieved through generating electricity. Investing this amount of money in existing renewable methods of electricity generation such as geothermal and solar thermal will give Australia zero net emissions within ten years. This means Canberra needs to invest a maximum of $600M each year for ten years to achieve zero emissions.
This submission outlines a process that will achieve the goal of zero net emissions. The investments will be paid for from the profits from the production of energy and from savings on energy reductions. There will be NO increase in the debt of the ACT government or the Federal government. There is NO reliance on overseas capital. The price of energy is likely to drop significantly and the system will bring stability to Australian money markets.
How do we get money into investments in greenhouse gas reducing technologies?
We could encourage investment by putting a price on carbon. That increases the price of pollution which should ultimately make investing in renewables more attractive. This may or it may not work. The evidence so far is that it is difficult to implement and that, at best, it may achieve its objectives slowly. So called market based solutions where we put a price on carbon are problematic because markets will not stabilise if any of price, supply or demand are fixed. In the case emissions permits trading supply is predetermined because of the cap. The internal dynamics of markets will fail to bring price stability and so prices will become unpredictable and are not reliable enough to be used for investment decisions. To encourage an investment of $30 billion a year through price increases in polluting energy would require a very large increase in the price of energy.
A simpler way to achieve the level of investment required is to give zero-interest loans to people who will invest in ways of reducing ghg emissions.  The money will be paid back over time from the profits on the investments. That is the loans are only loans from the point of view of government bookkeeping. For the individual recipient of the loans they are like grants. This means that we reduce the cost of finance to zero, thus removing one of the major stumbling blocks for any kind of infrastructure investment.  It’s also a move that immediately makes almost all renewable energy projects and ghg emission reduction projects financially viable. For bookkeeping purposes the loans will be paid back from taxes collected on the investments.
Investing does not cost money in the long term if you get back more money than you put in. In fact the whole idea of investing is to make us wealthier than before. The issue is not whether we can do it and afford it but what is the most efficient way to do it so that we reduce ghg emissions for the least amount of money.
 
We need to address the following issues:
  • From where do we get the money?
  • Who gets the money?
  • How do we ensure it is spent on ways to reduce emissions?
  • How do we get the best value for money?
It turns out that it matters little where the money comes from. It could come from selling permits, putting a tax on carbon, putting a surcharge on all energy or it could come from printing special purpose money. 
Printing special purpose money is the method recommended because it can supply the required large amounts of money without distorting the economy. Rather it will help stabilise the financial system by creating money without creating debt.  If we print the money for zero-interest loans secure in the knowledge that the the funds can only be used to invest in infrastructure and tangible goods, we will finally have found a way to equate the creation of money with productive assets and we’ll be one step closer to solving the current financial crisis. We can prove it does not matter how much special purpose money is created because if we print too much the special purpose money it becomes inflated not the general currency. This means we can adjust the amount of special purpose money printed to achieve our zero emission target in the required time frame.
Who gets the money also does not matter with respect to the objective of reducing ghg, so long as we know that it will be invested in ways to reduce ghg emissions. A politically acceptable solution would be to compensate the people who are disadvantaged by the introduction of the scheme or by the existing distribution of wealth in the community. The first of these would be the owners of power stations and the owners of coal mines. Other groups are those with few assets and those who use the least energy now and hence are contributing less to the problem. Any or all could be eligible to receive the special purpose money.
The last two points – ensuring that the money is spent on ways to reduce emissions and getting the best value for money – are covered by the one mechanism. We create a highly internally regulated and controlled electronic market place where people can only buy goods and services that are investments in ways to reduce greenhouse gas emissions. Think of an online service not too dissimilar to Amazon online stores.  If this is the only place where people can spend their zero interest loans this will ensure that the money is spent on appropriate goods and services. Because it is a competitive market place and given the availability of modern tools such as buyer feedback forums and ratings, we can expect vendors to compete to deliver the best value for money.  And because the funds are being invested, buyers can anticipate a return on the money.
Unregulated market places have proven less than satisfactory in delivering social objectives. Regulation has proven difficult to implement and is often counter productive in terms of social goals it is meant to address. The reason is that “external regulation” is difficult but if we build social objectives and regulation into the fabric of the market then we know we can achieve our objectives. The reason is that if anyone uses the system they automatically obey the regulations. That is enforcement is automatic. If people abuse the system we simply do not let them participate rather than try to invent new regulations.
 
One important attribute of such a system is that it is open to making adjustments to the value of the market place money. For example, we could decide that the special purpose money is converted at a different rate depending on how much reduction is achieved per dollar spent.  This will create a positive feedback system whereby the more ghg emissions we save, the more we invest and the more we save. 
The ACT government can put a proposal to the Federal Government for a zero interest grant of $600 million per year for ten years to be distributed as special money called Energy Rewards to ACT residents. Energy Rewards are guaranteed to be used to create infrastructure assets that will reduce greenhouse emissions. $600 million for the ACT is the equivalent of $30 billion for Australia. The money would be notionally repaid from taxes on the profits generated by the investments. An electronic market place will be built to regulate the market and to keep track of the expenditure money and of the taxes paid on the investments so that both governments can be assured that the money has been spent wisely. The approach is disciplined and cost effective, and it does not require the Federal Government to borrow any money to fund the project. Thus there is no increase in budget deficit. Arrangements will be made for the ACT Government loan to be notionally repaid from a percentage of the taxes collected on the infrastructure assets built from the loans.
30 billion per year for ten years is an approximate figure for the amount of money needed to reduce Australia’s emissions to zero. It is based on the capital cost of generating electricity. We know that there are more cost effective ways of reducing ghg emissions than generating zero carbon electricity so this is the maximum investment needed. The figure is arrived at by working out how much money is needed to get to an installed capacity of 186GW of electricity generation. 186GW of installed capacity will produce the total amount of all energy needed by Australia in the year 2020. The exact amount of money and energy needed will be adjusted in the light of experience and the measured net emissions but it is recommended that the scheme starts with the maximum required.
$30 billion introduced into the Australian community as Energy Rewards will not cause inflation of unrestricted currency. The reason is that the money only becomes unrestricted – that is it can earn interest – after it has been converted into a productive asset. Inflation occurs when there is too much money chasing too few assets. If money comes into existence and there is a productive asset backing it then the money will not cause inflation because there are assets that can be purchased with the money. Energy Rewards money can become inflated. That is, if there are not enough opportunities to invest Energy Rewards then the value of Energy Rewards will drop. This will encourage more suppliers to come into the market in investments in ways to reduce ghg emissions which is the objective of the exercise.
In the year 2008 the M3 money supply increased by $170 billion dollars. Introducing $30 billion for reducing emissions is not going to be enough new money and if the government decides to adopt this approach to creating new money other worthwhile community projects could be funded through this approach.

Letter to Editor on super fund investments

Mike Gilligan (CT mon 9th Super interests neglected) should not be too hard on super fund managers as they operate in unpredictable markets. No one can predict the future price of money, shares, and houses. You can predict that once a market starts to go up it will tend to continue to go up and when it starts to go down it will tend to continue to go down. How far up we cannot predict and how far down we cannot predict. Share prices are random in the short term and long term. The only reason we bother with share markets instead of “investing” at a casino is that over time the size of the total pool goes up while in the casino the house takes its cut and the total pool goes down.

The problem is caused by the internal operations of asset markets. Many (most) asset markets do not obey the laws of supply and demand with price acting as the control mechanism. Currently the government is injecting money into the market because banks are not lending and hence are not creating any money. The banks are not lending because they have too much debt. The problem is that to create money the mechanism we use is to create more debt (the government goes into deficit). Clearly this is not going to work because the more debt that is created the less money the banks are willing to create.
There is a way of creating money that does not create debt and it is called investing. The government is doing the right thing when it invests in infrastructure but it is doing the wrong thing when it goes into debt to fund the investment. One way of creating investment without creating debt is to give zero interest loans to people who will invest in productive enterprises where they agree to repay the money from the taxes on the profits of the investment.