Interest Free Investment Loans

Have you ever wondered why Local Governments borrow money from commercial banks at relatively high interest rates to fund risk free community infrastructure rather than borrowing money directly from the Central Bank at much lower rates?  Have you wondered why electricity from renewable power plants with zero fuel costs is more expensive than power from power plants that burn expensive fuel?  Have you puzzled why large cumbersome companies are able to purchase new but smaller more efficient companies? Has it worried you that we can always seem to fund freeways but rarely build new public transport infrastructure? Have you wondered why your rates keep going up even though your local services get reduced?  These and many other seemingly unrelated funding problems all arise because of the way we find money to develop new community infrastructure. The underlying reason for these anomolies is that we fund new innovations and new assets with expensive equity finance from savings while we fund the purchase of existing infrastructure through inexpensive loans. If we made it inexpensive to fund the building of new community assets our economic system would become more efficient and our cost of living would drop.
In a previous presentation ( described how a community can create interest free credit for trading purposes. The Community creates interest free loans backed by money deposits which pay interest. The system works by keeping all the interest free loans within a closed system and by the sponsoring bank or banks earning income from tranasactions. The money itself is tradeable using any other form of money.

Similarly a community can create interest free equity loans to build new community infrastructure. This works by creating another set of interest free accounts but in this case the initial backing deposit does not earn interest.  The sponsoring bank earns income from transactions and the community gains a benefit from their investment with dividends instead of interest. Some of the dividends are used to automatically repay the equity investment loans.  If a community cannot find a bank to meet its needs then the community can start its own bank with its own deposits.

The first step in creating community interest free equity loans is to deposit money into the system so that it is interest free.   The bank now distributes interest free credit backed by the interest free deposits.


The money is distributed as interest free loans to a broad section of the population.  The loans must be invested so that the member ends up with ownership of the investment, gets a return on the investment, and repays the loan from those returns. A community, through a political process, decides where it wants money invested. For the sake of illustration let us assume it wishes to invest in renewable energy plants that will produce clean energy.

To do this the community decides how much money it needs to invest to develop enough renewable energy to supply all of the needs of the community.  It then distributes the investment money in ways to encourage the use of renewable energy. For example interest free equity loans to finance for renewable energy plants could be given to those who consume the least amount of energy produced by fossil fuels. The consumption of mains electricity per person in the person’s main residence is a good surrogate measure for fossil fuel usage and we give more loans to those who consume less household electricity.

Equity loans are invested to build new renewable energy infrastructure. The investments are sold through an electronic market place described elsewhere under the name of Energy Rewards.


Interest free equity loans with repayments over the life of the asset will make all investments in renewable energy profitable at today’s energy prices.  Investors will also agree to purchase energy from renewable energy plants and they will pay with interest free credit.  


The Renewable Energy Companies will accumulate profits and will distribute the profits as interest free dividends to members. Part of the dividends will be used to automatically repay the member’s loans.


A member who accumulates interest free money can exchange the money for interest bearing money with another member. 


All investments in renewable energy systems are profitable if we remove interest charges and all such investments generate more interest free money than is invested. 

The approach can be used for any community investment where interest bearing money has not supplied the level of investment the community desires.  
The approach is a variation on what are called income contingent loans of which the Australian Higher Education Contribution Scheme or HECS is an example.  Other income contingent loans can be used for any other community investment including public transport, provision of water and sewerage, medical facilities, education facilities, and housing.

Unleashing Creative Forces for a sustainable future

This article was written as a response to the doom and gloom of Henry Thornton. Henry called for comments.

I sent the following.

The human species is smart enough and resourceful enough to overcome most environmental problems including the husbanding of the earth’s finite resources. To do this we need to adjust our financial system to unleash our creative intelligence to make the best use of the planet’s resources. Unfortunately our current economic system fails to accommodate non financial goals and is tuned to optimise financial wealth through the rapid consumption of finite resources. Optimising financial wealth is a restricted sterile goal. Fortunately the financial system can be easily changed to accommodate non financial goals such as sustainable resource management, the preservation of species, or the cultural enrichment of humanity.

The existing financial system puts ownership of the new sources of wealth creation in the hands of those who already have wealth. This is achieved by credit ONLY being available to those who can monetize some form of asset. This leads to a concentration of wealth in the hands of the few. This inevitably leads to conflicts because the wealthy receive an unfair advantage in wealth creation.  Unfortunately the wealthy also become even wealthier by encouraging consumption and rapid exploitation of existing assets and resources over which they have control. There is no incentive to reduce consumption and there is every incentive to exploit resources as rapidly as possible.

This approach of giving the wealthy access to credit for new investments because they already control wealth, has lead to perverse outcomes. It means there is an incentive for more credit to be created than is needed for economic activity. When credit is created the receiver of credit gets the value of the funds plus the value of future earnings made possible through the use of credit. That is the credit is worth more than the face value of the money created when credit is given. This increase in value is shared between the owners of existing assets and the financial institutions who are allowed to create credit. This increase in value is unearned and so there are extraordinary pressures for excess credit to be created. This inevitably leads to the cycle of booms and busts with which we are familiar.
Because new credit is created with interest attached there is an imperative to exploit resources as rapidly as possible. If the interest rate on new credit is 7% then the financial return of immediate exploitation, that often only realises half the total value, is financially better than taking 10 years and obtaining the full value from the resource.  This is dramatically illustrated in the case of renewable energy where the capital costs are high but the total value obtained over the life of the investment is much greater than the total value obtained from an investment that burns fossil fuel.  We persist in burning fossil fuel because of the way we do our accounting of financial returns – not because the total real value of energy returned over the life of the investment is higher. The assumption made by those using discounted cash flow analysis to evaluate the value of investment is that financial earnings can be reinvested at the same rate.  While this may be true it ignores the fact that we do not get the greatest total return from our investments.
Another more subtle but equally damaging outcome is that basing credit upon the ownership of existing assets stifles innovation. The Innovator’s Dilemma by Christensen describes why existing market leaders find it difficult to innovate.  It is difficult – not because they cannot do it – but because of the financial imperatives of attempting to get the greatest financial return from investments rather than producing products and services of greatest value to customers. The resistance of Telstra to upgrade its investment in copper transmission wires is a recent example. Telstra has been able to put fibre to the home for the past fifteen years. It has resisted because it makes more financially in the short term from not innovating than it will make in the long term from innovation. If Telstra took the long term view then Australia would have had a National Broadband Network for the past decade and Telstra would now be a stronger more profitable company.
So what is the solution?
It is remarkably simple. We create interest free credit and we give it to the population in inverse proportion to their consumption of a finite resource.  We require the credit to be invested in ways to extend the life of the resource or to find other ways of satisfying the need that is satisfied by the use of the resource. For example, instead of emissions trading as a method of encouraging investment in Renewables we give people Rewards the less mains energy they consume and require them to invest their Rewards in a market place of Renewable investments.
What will be the outcomes of such a system?
Individuals will reduce their consumption of Energy to earn more Rewards.  The Rewards will fund the investment in Renewables and because it is equity investment there will be no interest cost on the investment funds. Because the return of capital can be over a long time frame almost all current Renewable forms of energy are immediately profitable.  This will mean that we will rapidly replace most fossil burning plants with Renewable Energy Plants without an increase in Energy price.
Those that consume the least tend to be less wealthy. This will mean that the distribution of credit will be to those who do not possess wealth and so will spread new wealth throughout the community. Instead of the rich having an advantage over new asset creation the less well off will have an advantage.
Because there is no imperative to get a quick return, the use of Rewards funds will tend towards investments that give the greatest value over the investment’s life. This is called encouraging sustainability.
Because an investment of Rewards is a lost opportunity cost rather than a loss of something a person already possesses then there will be a propensity for people to invest in innovation that has a greater future return.
Because the government can control how much money is introduced into the system by changing the amount of free credit the Reserve Bank can stop using interest rates to manipulate the money supply. Instead it can use interest rates to determine how much money to introduce into the system. This will turn the money market into a classic text book money market where interest rates are set by the market as the method of moderating demand.  This in turn will stop inflation and remove the business cycle.
Because Australia can take control of its own capital requirements there will be less need to import capital for equity investment. This will reduce our interest burden and reverse our terms of trade.

Because the approach can be used where-ever there is a market failure or an asset bubble the government has a method to adjust the economy. It can issuing interest free credit broadly throughout the community to address specific market failures.

It should be noted that this approach is well known and is called contingency loans.  The best known contingency loan is the Higher Education Contribution Scheme or HECS. This has worked well for the past few decades.

What is the outlook for humanity?

The outlook is positive.  There is a way to husband finite resources while at the same time growing the economy.  The method is to release creative forces by encouraging investment in new asset creation for other society goals by removing the cost of interest on some credit.
Will it happen?
It is inevitable because it will optimise long term financial wealth.

Interest Free Credit Accounts

Have you ever wondered why banks push credit cards at every opportunity?  Have you ever wondered how they can give you interest free credit if you pay your credit card each month? Have you ever wondered why banks tolerate such a high degree of defaults on loans?  The answer is that credit card debt is very very profitable even with high default rates. Those of us who pay our credit card debts on time pay for these excess profits and pay for the bad debts of others. We can change the system.

Banks make money from merchant transaction fees, credit card interest fees, and account management fees.  Any of these fees on their own would give the banks a handsome profit.  Credit card interest fees are so high because banks push credit cards onto people who will never repay.

Any community can get rid of most of the fees and charges for credit by requesting the banks set up a system to stop credit card loan defaults, to reduce the cost of merchant fees and to remove the need for account keeping fees.  It can do this by getting a bank or banks to create a system of interest free credit for its citizens for the exchange of goods and services. This can be done within the existing banking regulations and in a way that banks will still make a profit. If existing banks are not prepared to offer the community interest free credit then the community should create its own bank and use its own savings to establish interest free credit for its citizens.
Let us assume a community needs a billion dollars of money in circulation for day to day commerce. If the community deposits one billion dollars in a bank then the bank is permitted to create another billion dollars and lend it out. Typically banks lend the new money out for more interest than the interest they pay on the original deposit. The margin between the interest rates enables the bank to cover bad loans and operating costs.
However, the bank can make a profit from interest free loans if it can be assured that the money it creates from the loans does not move from the bank. That is the loan money remain on deposit somewhere within the bank. This money is then risk free and there is no need to collect interest to cover defaulting loans.  The bank can still profit from transaction fees on the movement of money.
One way to do this is for the bank to issue a credit card with restrictions on the use of the credit. The credit can only be used for goods and services with other members who also have credit accounts with the bank. Any money paid from an interest free credit account must be deposited in another interest free credit account.
The system only works if members continue to use their credit account. To ensure this happens a member, on opening an account, agrees to continue to pay the supplier from the same credit account. If they stop paying the supplier through the credit account they agree to repay the credit. This would be enforced by the suppliers who would welcome such a restriction. If the system becomes widespread and is used by most suppliers then it becomes very difficult for a person to stop using their credit account for most payments.
With this system some members of the community will accumulate more money than they can use and others will run out of credit. Also some members will wish to purchase goods and services from people who do not have interest free accounts.
These problems can be overcome by members being able to sell interest free money and receiving in return interest bearing money.

With modern technology such a system is easy and cheap to build. Compliance is enforced by the bank because it controls where the money is transferred. Any community can institute a regime of interest free money. Such a system will remove interest on credit card balances and remove overdraft fees for businesses.

This approach is the same as Local Exchange Trading Systems but implemented with existing currencies.

The bank or other institution that sets up a system will profit from the transaction fees which can be set at a level to cover the interest cost plus a reasonable profit on the original deposit.

Letter to Lindsay tanner

Dear Minister,

There is a way to finance infrastructure without incurring government debt.  There is an equitable method of gradually distributing wealth more evenly throughout society and there is a way to reduce the level of green house gas emissions without causing an increase in energy prices.

The following is a long story but then the problems being addressed are difficult and seemingly complex so please bear with me.

My background is as a designer and developer of Information Systems and as a modeller of complex systems.  I started my career many years ago building computer models of the Tasmanian Power System.  Over the years I have continued to build and study computer systems that modelled complex behaviour that arises when many simple components interact in simple ways with other components.  That is, rather than modelling the emergent behaviour of a complex system we model the simple behaviour of components and their interactions and we observe the resulting emergent properties of the total system as a way of checking if the computer model reflects reality. This is a very simple but powerful method of analysing and modelling systems. With the rise in computer power this has become feasible for large scale systems and is the basis for most successful real world models such as weather systems, structural analysis, electricity grids etc.

I am the founder and chief technical officer of an electronic identification company called Edentiti which provides inexpensive electronic identification services.  It is a scalable system capable of identifying everyone in the world in a simple private way. It achieves this by dividing the identification into small components by giving each person the electronic tools to identify themselves.  It works and thousands of people each month are identifying themselves. Our most important customers are the banks.

A few years ago I started thinking about ways of getting rid of the need to have water restrictions for urban water supplies.  The solution I came up with was to build a system where each individual received a payment that was inversely related to the amount of water they consumed.  That is if you consumed less water you received a cash payment.  The money for the payments would come from charging people who consumed more, by putting a higher cost per litre the more a person consumed. While this will reduce consumption it only becomes highly effective if there is a condition put on the money people receive. The condition is to require people to invest their money (let us call them Water Rewards) in ways to increase the supply of water either by investments in water saving and more effective use of water or in ways to increase the supply by recycling, ponds, dams, desalination etc.

If you set this system in place within a few years it will soon remove the need for urban water restrictions. If applied to the Murray Darling River system it will return water to the lower lakes.

The same idea can be applied to Energy.  We charge consumers more per kwh the more energy they consume and we give the extra money (Energy Rewards) to those who consume less energy. Importantly we require Energy Rewards to be invested in ways to reduce the level of greenhouse gas.

The amount of energy consumed per person is approximated by the household mains consumption of energy.

This system will work and the amount of money needed to get Australia to net zero emissions of greenhouse gases is at most  $50K per person. Spread over ten years this is $5K per person per year.  

The only trouble with this approach is that it causes the average price of energy to increase and we need to convince the owners of power systems to set in place a system that will replace much of their existing capital works.

The global financial crisis has pointed a way to get the money for Energy Rewards and in the process fix the financial system.

Financial crises are caused by the way we create money.  In modern economies new money is created by loaning it into existence.  That is, a bank loans you some money and it creates the money it loans at the same time as the loan. When you pay off the loan the equivalent amount of money is removed from the system. Banks, however, do not just create loans willy nilly but only create loans if you have an asset that can be seized if your loan is not repaid.

All this works well but there is a minor quirk in the system that is hard to spot.  However its effect is to cause the emergent properties we call recessions, depressions or now global financial crises.

The minor quirk is that when we create money tokens we immediately attach an interest component to the money.  That is, the money is worth slightly more than its face value.  This is OK if the money was only created by monetizing an asset because this is the same as attaching interest to existing tokens and that will not cause any problems.  Unfortunately not all money that is created is backed by savings.  By various means people have found ways to create money and with it interest obligations without the money representing savings.  The most obvious is when we get asset inflation where the asset used as collateral for the loan is worth less than the face value of the token.  However, most is created where we get loans created on top of loans.

This small increase in the value of the money tokens over and above the value of the tokens can be shown to cause wealth to be inevitably transferred from the poor to the wealthy and for far too much money to be created because the person who creates the money gets a small extra amount of value for no effort. Today with the ability of computer systems to create money through derivatives and other financial products this small advantage of putting interest onto money simply by creating the money has compounded and we now have loans (and with it money) far in excess of the amount needed for commerce.  It has become a monster that has compounded out of control and the current methods of “fixing” the system by making even more unproductive loans only makes the problem worse.

The financial system can be fixed by creating money tokens without interest attached.  We can attach interest later by monetising assets but there is no good reason to attach interest at the time money is created. That is, the people who create money do not get a small profit from creating the money and so there is less incentive to create financial instruments to take advantage of the quirk.

The next question is how best to create money because we need to create it somehow.  It turns out that creating interest free money using the current financial system and distributing is as Water Rewards,  Energy Rewards, Transport Rewards,  Health Rewards, Education Rewards etc.  will do the trick because these Rewards MUST be invested to create new productive assets.  Once this better method of creating money gets going it will turn out that it becomes less profitable for people to create loans on top of loans and less profitable to encourage asset bubbles.

Again it turns out that if we create Rewards then we do not have to be exact in the number we create for the system to work and remain stable.  If – for example – we decide we need to create $5,000 per person or $11 billion per year for Australia for investment in renewable energy it will NOT cause inflation in the general economy.  It doesn’t cause inflation because Energy Rewards – which are tradeable – will simply drop in value and will absorb the inflationary effect and if we create too many Rewards for the economy to handle – people will horde them and not use them until it becomes profitable to invest them.

This approach can be implemented through the commercial banks to their advantage. All that is needed is a bank and group of people with a large amount of cash that they wish to invest and that will get the attention of the bank. The bank and the people with the cash will all profit from the system and will be able to get others who join to profit as well. The government has a large amount of cash on deposit with various banks.  It could use a small amount this cash and work with one or all the major banks to implement the following scheme.

The government would deposit the cash in the bank or would use an existing deposit within a bank. This money would remain on deposit with the bank and nothing would change with respect to the government receiving interest on the cash.  However, the bank would be asked to create the same amount of money – backed by the deposit using its fractional reserve rights – and lend it out as Energy Rewards to the population.  Theoretically (and practically) the bank can create nine times the amount of the deposit if the fractional reserve limit is 10%.  Normally it creates loans of nine times and lends the money out at interest. To balance its books it gets in deposits matching this amount of money and pays interest on the money. However, the bank can lend the money it creates at whatever interest rate it desires.  It will not go broke if some of this money is lent out at zero interest as long as it pays no interest on the money it creates while-ever the money is on deposit with it.   If the money moves out of a banks interest free deposit account to another bank then provided the money is secured against some cash (the deposit the government has put into the bank) the bank can balance its books by getting further loans or deposits.  In effect the bank lends the money the government has on deposit and does not create extra money with the loan while at the same time leveraging the money to create more money through loans.

However in return for the backing of the money on deposit, which only gets taken if the loans are not repaid, the government asks the bank to put restrictions on the money that is loaned.

It is suggested that the government initially requires the loans to be given as interest free Energy Rewards.  Energy Rewards must be invested through an electronic market place – much like Amazon – but where investments in ways to reduce green house gases are sold. The suppliers of investments have to specify the expected return on investment, the expected reduction in green house gases per dollar spent, and how the return will be given to the lender and how the reduction in green house gases will be measured once the investment is made.  If the conditions of the loan are not met then the seller is banned from the electronic market place.

The loans will be repaid over the life of the investment which is typically 40 years or more for most renewable energy or energy savings systems. With a long repayment period and zero interest almost all existing renewable energy and energy saving investments will be profitable at today’s energy prices.

Because Energy Rewards have value over and above their face value Energy Rewards themselves will be tradable and the distribution of Energy Rewards can be used as a way to change behaviour.  Energy Rewards will be distributed up to a maximum value of $10,000 per year to anyone in Australia who wants them. However the maximum amount that a person can receive is inversely related to the amount of household mains electricity used per person. This calculation is done so that on average every person can receive $5000 in Rewards per year.

Our company – along with many others – know how to economically build and operate such a system as it is a variation on our existing identification system which in turn is built on the same principles as well known systems like Google, EBay and Amazon. The system will be built for no cost to the government and will be paid for from part of the transaction fees collected by banks.

The banks will make a handsome profit from Energy Rewards through transaction fees rather than through the difference in interest payments. It is expected that fees of 2 or 3 percent will be collected by the banks.

Energy Rewards will be as, or more, profitable for the banks as lending out the money and collecting an interest differential. This is because the banks will take no risk on the money lent as Energy Rewards.

While the system is complex to describe, to the citizen getting Energy Rewards it will appear simple.  They will sign up online, agree to let their electricity meter readings be sent to the bank and specify who is living permanently in their house on the day their meter reading is taken.  They will receive Energy Rewards in their account and they will select an investment from a list or decide to sell for cash to a buyer.  They will then sit back and collect a return on their investment.

For the government it is virtually risk free and it is politically an easy sell.  The government will act as a facilitator and rule setter not as an operator. The banks will be the contact with the people and will take on the reputation risk associated with giving loans. The government will get the kudos by giving out investment money to the population in a fair and equitable manner. The cost to the government will be for regulation and overseeing the system but that can be achieved through APRA for very little extra cost.

It will show the government is serious about climate change and it will not cause energy prices to rise.

Are there any losers?  There are no losers because the system generates more income than it costs to build and it has been designed to distribute this extra income widely throughout the community.  Even the coal miners and oil companies will win because they will be forced to find other markets for their products. There are many avenues that will be open to them ranging from plastics to building materials all of which will fetch higher prices than burning these complex hydrocarbons.

While the above describes how to tackle Climate Change the same approach can be used to address other areas of market failure.  In particular the problem of homeless people, of funding medical services and of funding the National Broadband Network. 

The government is already using the Rewards approach for the last twenty years with its HECS contingent loans so this approach is not new. What is different today is the ability to easily administer and operate such systems.

Kevin Cox
22 Yirawala St
ACT 2913