Other Central Banks issuing money at zero interest forces the Reserve Bank to drop interest rates.  Japan’s rates have been near zero for over a decade. The USA and EuroZone are now zero or negative and it is likely others will follow. The Reserve Bank can no longer depend on changing interest rates to control the money supply.

This is an opportunity for the Bank to rethink its money control mechanism.  This is fortunate because the current method is expensive and leaves Australia vulnerable to other economies.  This leads to fluctuating currency values and stagflation.

The reason this happens is because loans are interlinked.  Changing the cost of a new loan influences the cost of old loans.  This means loans have the risks from a changing money market.  This is on top of the risk of the loan itself.  The mechanisms we put in place to mitigate these money market risks are expensive.  If we could remove the money market risk we would have less expensive loans.

Promise Theory and an approach to money creation

Promise Theory predicts that a strong coupling between loans leads to inefficiencies; if there are a large number of loans.  Here is an outline of Promise Theory from Burgess the author of the theory. https://youtu.be/VTR8GCP4n_M

Promise Theory says we will reduce the cost of loans if we can make each loan independent of other loans.  We can do this by removing the effect of inflation and the cost of interest on interest. Here is a short video that outlines the idea.  https://youtu.be/6L-X90qBP0g

Here is another video that describes how governments can build infrastructure with prepaid taxes. https://youtu.be/pFCyRWR1z_A

How the Reserve Bank can Control the Money Supply

The Reserve Bank can Control the Money Supply by controlling expenditure on some infrastructure.  The Reserve Bank can fine-tune the economy by directing infrastructure expenditure.  The infrastructure expenditure is to areas of the economy showing signs of inflation.

The Reserve Bank asks the government to direct expenditure towards problem areas.   For housing this could be towards releasing new land or high density infrastructure.  Also towards public housing Rent and Buy projects. https://youtu.be/pI–p4dc4vQ

A discount rate of 6% with inflation adjustments will attract super fund investments. The Reserve Bank may not need to create any new money. However it may wish to as a way of funding its operations and providing a dividend to the government.

It is likely that there will be a high demand for fixed discount inflation adjusted loans. Instead of dropping the price of the loans the government issues rights to all citizens. Citizens can then sell the rights if they do not wish to invest. This gives everyone a share in the creation of community credit.

How to deploy the approach.

The Reserve Bank can deploy the approach in small steps.  It can observe and measure the effects and adjust it.  It leaves all existing systems in place and does not change its official approach. It can still keep an inflation target.  It can still change official interest rates.  It can be business as usual until the new approach proves itself.

These ideas need a different approach to building the supporting IT infrastructure.  It needs an inexpensive method of coordinating autonomous agents.  This needs a scalable identity system.  This can happen using ideas supported by Promise Theory. http://www.welcomer.me/welcomer/blog/2016/3/17/build

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