FRONT COVER
A Short
Tract on Financial Stability
By Edward C
D Ingram
A financially stable economy
would be much safer for everyone. Economics is complicated but it does not have
to be. In fact, a financially stable economy would be remarkably simple.
This book takes a
science-based approach to the reforms needed, using long accepted norms and
principles, and two key observations made by one of the world’s most
influential economists, Lord J M Keynes, in his landmark paper 'A Tract on
Monetary Reform', published in 1923. This book is expected to have a
significant impact on macro-economic thinking.
REVIEWS - more are promised
Andrew
Pampallis, Retired Head of Banking at the University of Johannesburg wrote, “When people realize what you have
done all hell will break loose.”
Alan Gray,
Editor-in-Chief, NewsBlaze, writes, “The Macro-economic Design group’s
elegant solution is so simple that it has eluded the big economic thinkers of
our time, because everyone was looking for a complex solution to a complex
problem.”
Professor Evelyn
Chiloane-Tsoka from the University of South Africa, says “These ideas will become prescribed
reading at universities.”
Dr
Rabi N. Mishra, Economist, and a Chief General Manager, Reserve Bank of India
writes: “This book will inspire rethinking on the perimeters of
economic thought and theory, and their practical use in policy making. A
‘should-read’ for budding researchers in Financial Economics to expand its
horizon.”
Dr. Azam Ali ex Senior Economist Bank of Pakistan writes, “Dear Edward, I am following your
endeavours of rewriting the economic framework with great interest and am on
the same page with you on almost all the issues you raise from time to time.”
The damage done to the world's political and social welfare by
the financial instability of nations is immeasurable, even if it takes place in
slow motion. It results in large losses to savings and pensions, lost homes and
destroyed families, poverty, extreme political movements, international trade
wars, cross-border economic frictions, high unemployment in large cycles,
massive social discontent, and even civil wars. Because of the magnitude of the
damage, the political fall-out makes good governments vulnerable to extreme
opposition movements which can make matters even worse.
Since
the days of Lord Keynes, universities and policy-makers around the world all
aim to manage the rate of devaluation of money but that
has only served to increase financial instability. This book explains why that
is so and how to address the real problems.
It
explains how we can remove around 95% of all the financial instability
mentioned above. Everyone should be protected from the kind of financial storms
and the associated insecurity which we have come expect. People’s savings and
their homes should be safe from interest rate turmoil; and the value of
currencies should be safer and more predictable for traders. Borrowing for
housing, businesses, and governments should be based on financially stable contracts. Central banks should
manage the supply of money directly and accurately instead of remotely and
loosely. This will bring stabilty to the rate of inflation, an end to asset
price bubbles and bursts, and except in the most dire circumstances, it will
end major recessions. In the distant future, when robots are the work slaves,
and the people are free, a new order will be needed to provide finance for
everyone. That is another exciting story which may be unfolding right now.
This
is the short version of the full academic book to be entitled, ‘A Tract on
Financial Stability’. It is named after Lord Keynes’ ‘A Tract on Monetary
Reform’ because it starts from the same place but takes the other route forward: first create financial stability, then reform
monetary policy.
RELATED
WEBSITE
DEDICATION
TO ALL OUR FUTURES
Contents
PREFACE
This book is written as simply as possible for all interested people.
Besides offering an interesting and
motivational read for people in government and government departments, for
academics, and for non academics alike, the main intention is to provide a
clear and practical list of financial stability concepts and guidelines which
are soundly based for all time. Once the list has been applied, this can lead
on to the creation of a simple, more effective, and stable, framework and
management system (and monetary policy) for the economies of all nations. Hopefully,
should significant financial instability recur this list will explain why it
has happened.
This book should be treated, not as a
finished academic book, full of tried and tested solutions, but as a reference
book which provides those basic guidelines. As in Einstein's case, he provided
his theory but he was unable to provide the tested proofs. But when tested, his
theory was well grounded and it proved to be sound. It is expected that much
the same will happen with this book because the ideas look to be soundly based
but most are untested.
Certainly, the writer is aware, and
has been told, that after reading this book, people will never look at
economics in the same way again.
A number of principles, customary
choices and guidelines, which appear in text books and financial regulations
are demonstrably wrong. They conflict with other long-established principles
which have been ignored or set aside. Possibly, this was because economies were
not working in financially stable ways and people were only addressing the symptoms,
not the origins of the problem. The result has been layer upon layer of
complexity added to the macro-economic framework and management system. It is
concluded that financial planning and macro-economic management should be
fairly simple.
Explaining how things should be done
is the easy part. The complicated part is explaining why many alternative ideas
have been tried and failed; why text books and practices have strayed off
course. At least some of the most senior people in economic policy today have
admitted that their remedies are not working well and that there are things
which they do not yet understand. There is room for hope.
Most people are aware of the fall-out
when things go horribly wrong, the intensely complex discussions heard in the media,
and the lost businesses and other plans, and the political fall-out. This book
cannot be complete without demonstrating where all that complexity comes from
and why it may be surprisingly easy to remove it.
IMPLEMENTATION
However, when it comes to implementing the necessary changes to achieve
greater financial stability the task is not simple. Economies cannot be stopped,
changed, and started again in good working order like a clock on the
wall. They are
living organisations. Great care needs to be taken when making changes. A panel
of experts and maybe many published papers will be needed in each nation in
advance. These may throw up unexpected costs and complications during the
transformation process.
Some aspects have international effects, particularly in the matter of
currency reforms. An international panel of experts may be very useful, so that the best
choices can be made, and misinterpretations of the reform plans do not lead to flights of
capital during the change-over, and other unwanted consequences.
To minimise the chances of disruption, before each change is made, and
not all at once, a period has to be set aside for educating the entire
community so that everyone knows what to do and what the expected
costs and benefits of making the change will be. This was done when VAT was
first introduced. Thought must be given to what can be done to help those who may be hit
too hard in the process of change. For many people, reading this some of this book may be a
good place to start.
INTRODUCTION
SECTION 1 - PRICES AND CURRENCIES
DEFINING
FINANCIAL STABILITY
In his 'A Tract on Monetary Reform', 1923, John
Maynard Keynes (now Lord Keynes, deceased), saw financial instability in the
face of the changing value of money as inevitable. But in fact,
most of this instability is avoidable. Implicitly, Keynes defined financial stability as a state in which,
if money halved in value, a man might both earn twice as much and spend twice
as much on the same things, and thus be basically unaffected.
WHAT THIS MEANS
If set free, (they are not all free),
all prices are able to adjust, and they would do so naturally. All prices, costs, values, and
earnings,(earnings are a price because there is price for hiring skills), can be
classified as prices; and if a state of financial stability were to be
achieved, then all such prices should either be able to adjust, or to be adjusted, to offset the falling value of money. Explaining
why this can and should happen, why market forces will normally make it happen,
comes later. It largely goes back to what Adam Smith, often referred to as the
father of economics, wrote about how and why prices can adjust without help. But modern economists, including Lord Keynes,
have rejected this idea, believing that this does not work. They got that
wrong. They wrongly assumed that prices are free to adjust and then they said
that the economy is financially unstable, which it is, and they began adding
layer upon layer of interventions and regulations leading to enormous
complexity. The instability remained. In many ways it got worse. They were
dealing with the symptoms, not the sources of the problem.
THEME
In accordance with Adam Smith's
writing, we should expect prices to adjust to
changing supply and demand and they do. We should also expect prices to adjust
to the
falling value of money. But they do not. They cannot. We
deliberately prevent that from happening. For example:
FIXED INTEREST
When a borrower signs a fixed interest contract with a
lender, the contract specifies that the money will be repaid with interest. Why
does it not say that the value will
be repaid with interest? That way there would not be unwanted confusion. There
would not be unexpected winners and losers. There would be financial stability.
The contract would adjust the capital value of the debt so as to offset the falling value of money. People,
governments, and businesses, would repay and receive what was intended. They would all be basically
unaffected by the falling value of money. A lot of uncertainty and confusion
would end, eliminating a host of complex and damaging knock-on effects around
the rest of the economy which complicate everything. This has recently tempted
the authorities in the USA and elsewhere to intervene and buy them up with
printed (free to them) money. This has removed some quantity of that source of
instability, but as with all interventions there are knock-on effects. There
are complications. Any intervention adds complexity and breeds new winners and
losers. We need to remove the source of the problem, not just address the
symptoms.
Before we look for answers, we need a
reasonably accurate and very practical definition of how fast money does fall
in value. It is not in the text books. If anything, economists have tried and
got it wrong. They mostly say that keeping pace with prices inflation preserves
the value of money. It does not. It preserves purchasing power which is not the
same thing. We will examine that very soon - below.
HOUSING
FINANCE
The cost of housing finance, those
monthly repayments, does not adjust as money falls in value either. In fact the
cost of monthly repayments leaps up and down, taking the value of properties up
and down like a yoyo. It has a different agenda. This causes confusion and
financial instability in key areas of the economy. The knock-on effects are
widespread, damaging many plans and families and businesses, leading to more
interventions and more complexity; these interventions include the provision of
subsidies and low interest rates, and other ideas. The overall result of
ignoring the source problem is that of turning what should have been simple
decisions into complex and confusing onesfor the majority of people almost
everywhere as well as causing significant damage to the entire economy. One
economist known to the writer says that in some nations one third of all economic
activity is dependent upon the property sector and its finances. When there is
trouble there, there is trouble everywhere.
Readers will be shown that there is a
better way to arrange these finances, a financially stable way in which the value to be repaid every year is defined
and managed by the contract, keeping everything under control. That includes
the cost of monthly repayments and the price of property. The yoyo disappears
and property values become relatively stable.
With these two changes made for bond
structures and for housing and commercial finance, basic and simple financial
plans for the majority of people on planet earth can start to work. It really
is not very complicated.
MEASURING THE FALLING VALUE OF MONEY
Here is the next big mistake in text
books. People everywhere are taught that a savings account has to rise as fast as prices inflation in
order to keep itspurchasing power.
That is correct. But it is not what they mean. The
rate of prices’ inflation is not necessarily the rate at whichaccounts have to rise in order to offset thefalling value of money. That is something else altogether.
Even if money never rose or fell in value, rising
efficiency or other things, are likely to reduce or change the level of prices in the
prices index. In that case, in order to maintain the value of an account, e.g. for a savings or a loan account,
most of the time the interest rate needed to do that would have
to be greater
than the rate needed to maintain its purchasing power, i.e.
greater than the
rate of inflation of prices. Maybe one day it will be the other way around,
but whichever way things go, the two measures are not the same.
GOLDEN RULE
When it comes to finding solutions, if you don’t use the right measuring rod you cannot develop the
science. It is this more correct measuring rod which has been suggested herein to
solve the above two problems.
How did it happen that everyone uses
the wrong measuring rod - why do they adjust everything for prices inflation?
It may have been the tradition in those days, but it is clear from reading his
book that this mistake was made by Lord Keynes in his tract on monetary reform in 1923. The
mistake has also been made by his followers, and for that matter, by everyone else ever since.It was a
simple mistake. When Keynes wrote about money halving in value he forgot to say
that this takes time and that the price of goods and services are changing
during that period for many other reasons. Prices need to adjust to all kinds
of market forces.
The correct statement to make is:
"When money falls in value
prices will rise to be correspondingly higher than they would otherwise have been." Not that when the value
of money halves, prices should double.
Prices will rise to offset or to
neutralise the reduced value of money. The problem is that, as just pointed
out, we prevent this from happening in every form of finance that there is.
Many people were very impressed by
Keynes' book and his subsequent books. His assumptions and ideas have formed
the basis of much of university courses in economics since those times. But he
was addressing the wrong problem. Reforming monetary policy comes after
creation of a stable financial framework, not before doing that. A simpler
mechanism, a faster and more precise mechanism, a more balanced mechanism, can
be used for that once the financial framework is stable. We will come to that.
To test what top academics are being
taught, the writer had the opportunity to talk to the head of a famous business
school. Sure enough, when asked if there was an index which measured the
falling value of money the prices index was quoted. When the mistake was
pointed out, it was admitted by the professor. Yet today, whenever the media
talks of adjusting for inflation they talk of adjusting for prices inflation.
They present the wrong figures. And these wrong figures are sometimes used in
decision making.[1]
IN SUMMARY
In summary, a savings account which rises as fast
as inflation does not maintain its value. It maintainsits purchasing
power. Here is a made-up story to illustrate how 95% of the value of a fund can
be lost by making that mistake.
GRANDPA'S
MONEY
Grandpa was wealthy. He set aside 20
National Average Earnings, 20 NAE, into a fund for the benefit of his heirs in
100 years' time. It was something like half a lifetime's income for an average
person. The interest earned was not re-invested, but was given to his children
and their offspring in the meantime. Because the capital growth was tied to (we say index-linked to) prices
inflation and because prices rose 3% p.a. more
slowly than NAE over that 100 years, the fund ended with a value of just 1
NAE. Instead of inheriting a
substantial sum to be used as a deposit for a home or an investment, each of
his twenty great grand children inherited a small share of one year's national
average earnings: one twentieth of 1 NAE.
What happened to the other 19 NAE?
People
were borrowing that 20 NAE, and were investing it in assets which rose at about
the same pace as NAE, places where rising efficiency was slow or not happening
at all. That is, 3% p.a. faster. When it was time to repay the capital, between
all of them over that 100 years, they only had to repay 1 NAE. The income which
they earned from rents and dividends more or less paid the interest at first.
But over time, as the value of their investments rose faster than prices
inflation, so their income from rentals and dividends also rose faster. The
basket of goods and services which economists use to measure inflation does not
include NAE, or property values, or other investments all of which are somewhat
more likely to keep pace with the falling value of money. Some investors used
the extra (faster rising) income to pay off their debt. Collectively, (between
them), they borrowed 20 NAE and repaid 1 NAE in capital plus interest and got
some extra unearned income as well. They gained 19 NAE plus some extra income
from investing that gift of cheap money.
IMPROVING OUR
LOT
Once
we start to use something much closer to the right measuring rod for the rate
of devaluation of money, it becomes possible to devise a whole range of
significantly better and more financially stable models / contracts for all
kinds of finance. The measuring rod chosen does not have to be precisely right
- it does not have to exactly offset the falling value of money from moment to
moment or even from year to year. That is not possible: there are too many
unknowns; but using NAE in the contract as the measuring rod to use for the
capital adjustment needed to offset the falling value of money is better than
nothing. It is better than using the prices' inflation index or, as in the case
of fixed interest bonds, not compensating for the falling value of money at
all. There is a cost for too much sophistication (detailed accuracy). It is
called complexity. The idea is to reduce the total amount of uncertainty and
financial instability, not to eliminate it no matter at what cost. We need to
find a measure which is simple and practical - easily usable, and easy to
understand. That way, it becomes easy to sell financially safe ways of doing
things which save costs and make people basically unaffected by the falling
value of money - or something so close to that that they no longer worry.
USES
AND BENEFITS
·
We can remove this much financial instability from all
kinds of lending, savings, and borrowing contracts, reducing costs and capital
employed by lenders and ensuring that the problem of balancing their books and
their cash flows, incoming and outgoing, becomes much easier for them.
·
The greater stability of property values will mean
lower deposits are needed. The reduced risk of arrears and defaults as
repayments levels come under control will also reduce interest and other costs.
It will enable more to be lent.
·
The removal of financial instability from the greater
part of the economy will reduce unemployment worries, increase confidence, and
boost borrowing to invest, boosting the whole economy.
·
When people are not confused they invest more. Such
statements in this tract are typical of what the writer has not proved but
which comply with what he has observed. Hopefully it will be confirmed or
perhaps it has been confirmed already in some academic paper.
Proof
readers can help here if they have a citation for any of the above. At one time
or another the writer has seen such papers or he knows that they exist, but
finding them is a problem.
AN IMMEDIATE
APPLICATION
It
is the instability currently inbuilt into these parts of the economy which is
preventing central banks from restoring interest rates to their proper level. Every
price, cost and value mentioned above in the property and bond sectors responds
far too fast to interest rate changes. Some, like property values and bond
values even go off in the opposite direction to what is needed for financial
stability, falling instead of rising as the economy recovers. If these
financial instabilities are first removed from savings and loans, from bond and
property values, and from the cost of monthly repayments, then restoring
normality to interest rates will be much easier and much faster. It will be
simple.
ANOTHER
MISTAKE
In
today's real world economic model,[2]
it is the privilege of central banks to set how low interest rates can go. The
model which gives them this privilege is wrong to do so. Interest rates are a
price and all prices need to be free to adjust if we are really serious about
gaining financial stability.
But
for now let us look at the problem which central banks have created and which
they are now facing in some of the world's largest economies as the result of
reducing interest rates much too far. Some central banks are still reducing
interest rates even into negative figures! That makes the recovery more
difficult.
Here
is an illustration of how difficult it is for central banks to raise interest
rates when all of that financial instability, (with too rapid pricing and
costing responses, and sometimes in the wrong direction), remains in place as
it is today:
INSERT
INSERT
What
goes in the wrong direction? The Federal Reserve Bank (the American central
bank) has waited for National Average Earnings to start to rise so as to make
space for interest rates to rise. But when they raise interest rates alongside
rising earnings raising the price of credit alongside everything else for
financial stability, property and bond values both fall creating instability.
This is going in the wrong direction for financial stability. Remember the
criterion for achieving financial stability? When NAE rises, everything else is
supposed to rise together, at least for a time, at least until NAE stops rising
for some very good reason, which is something that we will deal with much later
in this tract. If that kind of financial harmony cannot happen because the
financial contracts for bonds and housing finance, for example, prevent this
from happening, then people will be basically affected. There will be and there
actually is, real financial instability across most of the economy.
The
wording at the top of this chart is saying that the American Central Bank's
Committee on Monetary Policy, or Federal Open Market Committee, (monetary
policy basically means setting interest rates in this case), is having to raise
interest rates very slowly. They wish to avoid a hasty retreat, lowering rates
again sharply, as has happened to these other central banks (see the coloured
lines). When those other central banks raised interest rates too fast they created
far too much financial instability - more than the economy could cope with.
Then these other central banks hastily reduced interest rates again, as shown.
It was not the central banks which created the most instability, (by managing
interest rates), it is the way the financial contracts have been written and
applied. Remember what has been written above on bonds and housing finance for
example. They are both creating
financial instability in abundance.
LOW INFLATION
TRAP
The
financial instability built into these economies was simply too much. The
responses of prices and asset values was much too fast. Later, it will be
explained that the lower interest rates go, the greater this instability
becomes. So those central banks which are still reducing interest rates are not
moving forward. The writer calls it the 'LOW INFLATION TRAP' because the main
part of the trap, but not the only part, is caused by the low rate of inflation
combined with the financial instability in the cost of monthly repayments. The
time taken for borrowers with leaping home loan repayment costs to adjust their
earnings to these higher costs gets longer and longer. When the cost of
repayments jumps up by 10% - 25% in response to a 1% to 2% rise in interest
rates, the lower the rate of inflation of earnings, of NAE, the longer it takes
for borrowers' earnings to rise by the same (up to 25%) percentage so that they
can spend normally again. At zero NAE this takes forever.
Borrowers
enter a new world with much higher borrowing costs and there is little earnings
growth with which to cope with that. Even if most borrowers have used fixed
interest rates, new borrowers will have to pay much more in monthly payments,
and property values will consequently fall a long way. To get back to normality
the writer estimates that the cost of monthly repayments in these nations may
have to increase by over 50% - or more if interest rates keep falling. Then
there are the falling bond values and many knock-on effects on all kinds of
things including the value of the currency, a slowing economic growth rate and
maybe a falling stock market.
HARM DONE BY
CHEAP MONEY
The
currently low interest rates in many of the advanced economies are at a level
at which people with the position and power to do so can borrow too cheaply for
the good of the economy and they can easily make a profit at the expense of
everyone else. At least, that is, while interest rates remain low. Interest
rates are at a level which does not maintain the value of the funds being lent.
That is really low. That means that borrowed money is cheap money. It is like
what borrowers did in the 'Grandpa' story. Big borrowers can make a fortune.
They can even take over ownership of good companies by borrowing cheaply in this
way and then use the profits made by those companies, which they then own, to
pay off the debt they incurred when buying the companies.
"Here
Sir, please take ownership my company - it is a free gift made at the expense
of savings and pension funds which are
lending their money to everyone very cheaply (because they have to - interest
rates have been managed by central banks and they are now far too low). You
don't need to earn money to pay off your
debt - the company profits to which you will be entitled as the new owner will
do that for you".
The
fact that the new owner does not know anything about how to run that business
is not a consideration. In fact the new owner has the power to direct the
management of the company and may easily convince him/herself that he/she is
expert enough to do so. "After all - look how much money I have been
making already compared to what these 'ignorant' (or less well off) people are
earning!"
KNOCK-ON
EFFECTS ON THE CURRENCY PRICE
In
the meantime there are knock-on effects on the exchange rate - currencies with
low interest rates are undervalued by low interest rates. That means that a
nation may feel the need to raise interest rates to protect the value of its
currency and to limit the rise in prices of imported goods and services.
Raising interest rates has knock-on effects on the national economy. The
knock-on effects are many as already mentioned, and they can be horrendous in
some circumstances. It is always painful for some.
Yes,
economics as currently practiced is very scary and it is complicated! So many
basic free pricing rules have been broken.
CURRENCY
PRICING ERROR
This
currency price effect when interest rates change is the consequence of yet
another text book error. This should not be the case. We will come to that
later and show how to disentangle those international (external) interest rate
and capital forces from having an effect upon the value and interest rates of
local currencies. Currencies are not free to adjust to the balance of trade and
the falling value of money. They should be adjusting to both.
Currencies
should fall to offset the falling value of money and they should also help to
ensure a balance of trade - the same or similar value then being imported as is
exported. There is a third force which is in play and it should not be there on
the same playing field.
Every
economy has its own best rates of interest. Those interest rates have nothing
much to do with the interest rates in other nations. But because of the way
things are arranged, they are not given that privilege - interest rates are not
as independent of other nations as they should be, or need to be for the health
of the businesses and business plans which drive a nation's economy. It is not
good for a struggling economy to be forced to raise interest rates because of
what another nation did with their own interest rates; but it happens.
We
will come to that in chapter xxx.
As
stated, this is another case of following wrong principles laid down in text
books. Plus managing interest rates in order to offset this currency problem is
preventing interest rates from adjusting correctly anyway. Two wrongs, a wrong
currency pricing model, and a wrong interest rate pricing model, do not make a
right! More on that later.
INTRODUCTION
SECTION 2 - THE MEASURING ROD AND UNIT OF VALUE
MANAGING THE
DEMAND IN THE ECONOMY
Once
all of the above has been done, allowing financial stability to take hold,
allowing all prices their freedom to adjust as Adam Smith wanted, we will find that
there are better ways and better instruments which can be used to manage the
level of demand on, and the amount of money needed by, the entire economy.
There are ways to do that without losing control. There are ways that do not
overshoot and undershoot the level of demand, and which are fair to everyone.
They would act fast and with precision, giving every spender an immediate boost, and they are highly effective. We
will come to the details of that in chapter xxx when we discuss money, how it
is valued, how its value changes and why, and we will look at its two main
forms and their separate roles.
There
is temporary money created by banks and there is printed and permanent money
created by central banks. Central banks are not ordinary banks. They do not
lend to people, only to other banks.
The
need to create more printed money to stabilise the economy will be news to many
academics because most people think that the printed form of money is dangerous
whereas the opposite is the case, especially when the financial framework is
right so that people are basically unaffected by the changing value of money.
Then it becomes very sweet indeed like a gift from heaven. Everyone gets some
free printed money! The economy booms...but not too much, and they get enough
new money to keep everything moving. Too little money - people have to wait to
be paid. Too much and prices all have to adjust and there may be an unwanted
increase on imports and an unwanted too high rate of inflation. But there is
enough margin for error in the quantity of money needed to be created to cause
any major problem. There is no real need to worry, provided that the rules of
the process are clearly understood and enforced. No one can control a
government, so it is up to them. If they want financial stability they can have
it. The exception usually comes in time of war when suddenly governments need
more money than they can obtain through taxation. At least if the rest of the
economy is financially stable, it will right itself more quickly than the
enemy's economy, helping to win the war. This is one reason not to have one
world currency - as a part of the national defence strategy. And there are
other good reasons. And it is a very good reason for creating a financially
stable and therefore a very strong and resilient economy.
UNMANAGEABLE
THINGS
No
matter what is done to improve the management of demand in an economy, the
aggregate (total) demand (level of spending) in the economy of a nation will
always vary. This will always be so. And this will affect the value of money no
matter how hard we try to stabilise it.
When
spending levels rise the value of money falls. And the other way around (vice
versa). People are free to save more, import more, borrow more, or do less of
all of these things whenever they wish. For this reason, the earnings which
they have will not translate into 100% spending into the national economy. When savings rise and spending on imports
rise and borrowing levels fall, spending in the national economy will slow
down. At other times, some or all of these things will reverse and spending
will increase. The level of spending will rise and fall, over time. It will
undulate. That will never stop. For this reason using NAE as our measuring rod
only measures the likely rate of devaluation of money over time, not from month
to month. These undulations will alter that rate of devaluation of money as
they occur compared to the changing level of NAE - people's earnings. There may
also be some other thing coming into play which the writer is not aware of, but
NAE is most likely to be a good approximation to the measuring rod for the rate
at which money is falling in value which is needed. On average, over time, it
should be about right. Here is something for academics to test. The theory
looks sound and it is better than nothing.
And
it should be noted that the managers of the economy must stand aside and not
intervene to try to prevent these undulations from taking place. They
self-correct and they are only undulations - at least most of the time. It is
possible for an economy to get into a downwards spiral in certain circumstance,
but it is easy to rescue it - to prevent that - if the new economic and
financially stable and well managed model has been created. We will discuss this
in more detail later.
FOR
THE REMOVAL OF DOUBT
Without
earnings there is no spending. Only if people were to constantly save and never
either spend nor lend their savings, or if they were to export and never spend
their export earnings, would all earnings not be spent over the longer term. If
earnings did not all get spent eventually there would be some hidden place,
maybe on the moon, where a mountain of unspent money was forever accumulating.
No such hidden treasure has been found. Not even on earth.
If
there is any small such pile of money lying around idle and always growing it
is there in people's pockets as cash, or in their deposit accounts, where it
can provide safety and savings which can be spent quickly. As the value of
money falls, this idle, 'parked' part of the money stock, will be rising in
quantity over time. Otherwise all money, or almost all of it, will eventually
be spent.
THE NAE
BENCHMARK
It
is these observations, that NAE will be steadier than spending and that it will
be close to the long-run average level of spending (a theory for academics to
prove or disprove at their leisure), which has helped to persuade the writer to
use NAE as a main benchmark. Anything which rises in price at a different rate
from NAE must do so for a reason.
BETTER VISION
- MORE UNDERSTANDING
Having
this NAE benchmark or reference point, enables us to ask this question,
"Why is such and such a price rising or falling at a pace which is
different from the rate of growth of NAE? Is it something seasonal about spending
in that sector, or in the case of a person's property, is it the location of
this particular property, or are people now saving more and spending less,
etc." If we understand the forces at work and how to measure their
effects, we can get to understand much better what is going on around us and we
get to see why. This is something that the writer did very early on, even
starting in the late 1960's and certainly by the mid 1970's. It gave him a lead
over other fund managers at that time. See the background story.
If
you know which are problems and which are not, if you understand the forces at
work, you are becoming a good observer and a good scientist. Science starts
with clear observations. You will be able to see what needs to be corrected.
UNIT OF VALUE
There
are other good and very practical reasons for adopting NAE both as a unit of
value, as was the case in the 'Grandpa story', and as a benchmark. For example,
if we calculate wealth in units of NAE, as was the case in the 'Grandpa'
illustration, we are getting close to using the correct metric, the correct
measuring rod, for something (the unit of NAE) which does not lose value over
time. It only wobbles a bit. You invest 1 NAE and if it grows as fast as NAE
you always have 1 NAE. You have offset the expected average rate of the falling
value of money.
Counting
the NAE invested by Grandpa made his story of savings and borrowing easy to
follow. It makes for a clearly understood contract whereby the value lent keeps
its number of NAE. The money in people's savings and loan accounts rises by
contract between the parties, at the same pace as NAE rises. It is stated in
black and white - on paper, in an agreement for both lender and borrower to
sign.
It
can also happen, somewhat less precisely, but naturally, provided that interest
rates are free to adjust. Market forces
will ensure that - but with more wobbles.
INTRODUCTION
SECTION 3 - MONEY CREATION AND MANAGING THE
ECONOMY
WHAT COMES
FIRST - PRICE RISES OR EARNINGS RISES?
The
concept is that spending drives prices and it comes from earnings. Earnings are
also a price, so how can all of these prices increase all of the time? It
happens. Which comes first and how and why does this happen?Where does all of
the extra money come from? If every price doubles including what people are
paid, the economy will need twice as much money as before this happened.
FAULTS IN THE
MONEY CREATION AND MANAGEMENT MODEL
The
answer to that comes down to understanding the total amount of borrowing and
the total amount of money which is created as a consequence. We live in an
economic model,[3]
or structure, in which money is very easily created when people want to borrow
money.
A
LOOSE SYSTEM
Today,
and for decades past, most money creation, and maybe around 95% of all money creation has been done by banks acting as
lenders. The system is unsafe and unstable. It is not precise like the speed
control or the steering control system on a vehicle. It is what is called a
loose control system. In fact it is a very loose control system. If applied to
a motor vehicle, the speed would not be under good control and / or the motor
vehicle would not be able to steer a steady course. Not even nearly. The driver
would not know either when the car would start to change course or how fast
that would happen. Such systems are not in line with the theory of good (tight)
management systems. They overshoot and undershoot their intended target and
sometimes by a very long way. This on its own is enough to explain why
economies boom making everyone exuberant, and then they crash making most
people miserable or even panic, even in some cases destroyed financially. The
level of demand is very loosely managed. Too loosely managed.
HOW
IT WORKS
Suppose
a lender has too little in deposits to be able to lend new money. What then?
After signing the lending / borrowing contract, new money is created. It is
simply 'printed' (added electronically) into a newly created account in the
name of the borrower and given to the borrower to spend. In days gone by it
would have been written into a ledger. After being spent it has to be repaid
with interest. In the meantime when that money is spent, the recipients of the
money do not know whether it is original, printed money, or temporary money
lent to the borrower. They may not even know that he/she borrowed the money.
There is no difference between the two kinds of money, money created by
printing it, and money created by lending it. As far as people can tell when
using it, there is absolutely no difference. The money is just created by the
lender and it looks the same as all other money. But if it is not repaid it
leaves a hole in the lender's accounts. Again that is no different. Lenders are
allowed to create up to ten times the amount of money that they hold as deposits,
or some other such multiple depending on the particular nation. This multiple,
this ratio, this ratio of ten to one or some other number, whatever the number,
is called the 'reserve ratio'. It is set by the central bank.
If
the money is repaid then the account is closed and the money used to repay that
debt vanishes. It no longer exists. It may not be the exact same money but
nevertheless that quantity of money gets destroyed. What happens is that the
borrower provides goods and services and gets paid by the people and is then
able to repay the loan. Which kind of money and where it came from makes no
difference. As the loan reduces that amount of money gets deleted from the
records. As far as the quantity of money in circulation is concerned, everything
goes back to how it was before the loan was granted. This is temporary money -
it can disappear. Some people call it 'fiat' money. 'Fiat' implies that it
depends upon people trusting it, yet it is not something which has any value in
its own right. All money is like that, it all depends upon people trusting that
they can use it as a medium of exchange for goods and services; but for lack of
any other definitive term, they use the term 'fiat' to describe temporary money
of this particular kind.
If
enough of it disappears, there will not be enough money around and that creates
what is called a 'liquidity crisis'. Oil is a liquid. Money is like oil - it
oils the economy so that people can pay one another using money instead of
something else which would be much more difficult to do. The big advantage of
money is that it can be exchanged for so many things - almost anything in fact.
Nothing else compares to having money when a person goes to buy something. But
when there is not enough money, it can be a problem. When that happens there is
a shortage of liquidity - a shortage of money.
This
money creation method is new information for most readers as well as a number
of text books, but not all. It is well understood by the top economists and
bankers. Most people believe that interest rates have to rise when there is a
shortage of money, just like the price of goods in the shops. If that were true
then the system would not be such a loosely managed one. The stock of money for
the whole nation would be a tightly controlled, and interest rates would find
their own level. We need tight control over the quantity of money and we need
to set interest rates free to perform their proper role of balancing the supply
of money made available for lending, with the demand for it. The question is
how to manage the supply as tightly as possible. Enough is needed to keep the
economy moving, and what there is needs to be bid for by those people who have
a good use for it. Then savings will be safe, and the economy's resources of
capital will be used properly to the advantage of the entire nation, not to the
advantage of some lucky rick guy who can borrow cheaply and even destroy a good
company by taking it over.
The
interest payable is a fee. It does not become new money. It is paid from
existing money from the borrower's account to the lenders account like any
other fee.
THE
QUESTION WAS - WHICH COMES FIRST - PRICES OR EARNINGS INCREASES?
When
enough new money is created and then spent in this loosely managed way, it
raises the total level of spending and the total amount of money stock in
circulation so that people can pay one another for the services and goods
provided. It provides liquidity. As soon as too much demand
(lending/spending/money) is created, this raises the price of everything,
including NAE, (the cost of hiring people). This raised level of NAE increases
borrowing demand (with more income, people can now borrow more than they could
borrow previously), and this increases lending and spending, which increases
the money stock and prices (both) including NAE. This becomes a continuously
rising loop of prices rises, more borrowing, more new money creation, inflation
of earnings, NAE, and more new money creation. The whole process creates new
money and increases the total stock of money so that people have enough money
to spend and with which to pay one another at the resulting higher prices. This
is fine as long as the process never reverses. It is one way to get an economy
in a recession fully employed. But it is a very loose control system. It is
also a way to get it over-employed, which means that there may be 110 jobs for
every 100 people. The result is imports and a rapidly falling currency value
along with rising inflation. It does not create extra output fast enough to
prevent all this from happening.[4]
The
process only stops rising if interest rates are raised, and people start to
repay their debts faster than new loans are created. When they repay these
debts the temporary 'fiat' money disappears because the whole process in the
lender's accounts has reversed. But prices do not necessarily fall. More money is still needed. The money
disappears as if it had never been created. The accounts are closed as the
loans get repaid. It is as if the new money and the new account had never
existed. Without having enough money the economy will slow down. It will slow
down anyway because people are spending less and in some cases a whole lot more
of what they are spending is going into repaying their debts - the higher cost
of those monthly repayments.
Lending
new money is only one way to create money. The other way is to print it. That
kind of money never disappears unless it is accidentally or deliberately
destroyed or lost. We will come to that later because it is important to
stabilising the whole economy. It helps to prevent a liquidity crisis. But
printing money may not be enough on its own as will be explained in chapter xxx
where a new way of managing the demand and the money stock in economies is
explained.
THE HOTELIER
There
is a story going the rounds which illustrates the point about liquidity very
crudely but very nicely. It is intended to be a riddle - a confusing story
without a clear explanation. But when you think about it in the right way it is
quite clear to understand what is going on.
Mr A, the
hotel owner, owed Mr B $20. Mr B owed Mr C $20. Mr C owed Mr
D $20...you get the picture... Finally,
Mr G owed Mr A,the hotelier, $20. Full
circle. There was not enough money in the system and no one got paid. Then Mr N
booked a room at the hotel and Mr A got a $20 deposit. Mr A used the deposit to
pay Mr B, who paid Mr C, who paid Mr D...and finally, Mr G paid Mr A. Then Mr N cancelled his booking and withdrew the $20 deposit.
This was fine until someone in the group
again owed someone else in the group some
money. But this group did not have any money
unless it was let or given to them. The lesson
is that without enough money in circulation you get this kind of 'liquidity
crisis'.
The economy slows down while everyone waits to be paid. The $20, in effect lent
to the system by Mr N, disappeared when it was repaid to Mr N. If there had
been enough printed money permanently available to this group,
the problem would not have arisen. Let's not go into the imaginary reason why this particular group had no
money!
Clearly,
temporary (lent / fiat) money can be a problem if its quantity reduces because
it will be needed to keep the economy going at the higher prices now being paid
for everything. Without enough money in circulation people will have to wait to
be paid. The speed of everything will slow down and jobs will be lost. On the
other hand if too much new money is created in this way then inflation can
spiral upwards.
As
already explained, this liquidity shortage is only one of the ways that
economies are forced to slow down. The other is simply the slower rate of spending
as people save more and borrow less. They probably spend more money paying
their debts because interest rates have driven repayment costs very high. The
lost confidence also has a significant effect on the level of spending.
BACK
TO THE LOOSE CONTROL SYSTEM
In
more detail, interest rates are being used to encourage and discourage
borrowing. The result is that momentum builds up as people want to borrow in
order to do as others have done and climb on the bandwagon of rapidly rising
property prices and so forth. 'Going with the herd', as economists say. The
banks are in a competition to lend more money so they do. Then when interest
rates filter through to much higher monthly repayments, and start to 'yoyo the
price of property downwards' and as bonds crash in value at the same time, the
'herd' panics and we get headed for a recession. People are now scared of their
suddenly much more costly loans and they spend money paying them down and
saving money in case they are made redundant. Even if the loans were fixed
interest and fixed cost, new loans will be at higher cost. People will think
again before borrowing. The economy slows and jobs are lost. The stock of money
declines. Government revenues fall and more people apply for state hand-outs.
The government's budget of income and expenditure goes wrong. Governments have
less in revenues and more expenditure because they have to provide help for the
needy.
The
problem is that the management system cannot directly manage the aggregate
(total) level of borrowing, the aggregate level of spending, or the amount of
money circulating in the economy.
As
stated, this is what an engineer would call a loose system, like having a
steering wheel that responds eventually but you are not quite sure when or how
fast it will change the direction of the vehicle.
COMPLEXITY
AND KNOCK-ON EFFECTS
When
deciding what to do about interest rates, when and by how much they should be
raised or lowered, we hear people saying that economics is more of an art than
a science. The subject of what interest rates will be made to do next gets
debated endlessly in the media. This is because there are so many knock-on
effects when rates are changed. The most obvious ones happen when rates are
raised:
·
The cost of borrowing leaps upwards
·
The value of bonds and property falls
·
The things upon which people were spending changes
·
Jobs are fewer as loans get repaid.
·
People save more and spend less
·
The value of the currency rises
·
People spend more on imports; and exported goods and
services cost more
·
There are fewer jobs in exports
·
People's business plans get put on hold
·
There is less liquidity in the system
·
Confidence falls
·
People lose their homes
·
Lenders get into difficulties and some of them need to
be rescued or allowed to fail. There is a danger of a 'run on the banks' which
would destroy the banks and huge amounts of people's savings.
END
OF ROUND ONE
ROUND
TWO
·
In the worst case scenario, governments rescue banks
to protect people's savings and to prevent a collapse of the financial system.
·
Government borrowing goes skywards as they try to
rescue people, provide unemployment benefits, and subsidise their borrowing.
·
People who borrowed too much get help. Those who were
sensible and did not enter the casino get no help. They pay higher taxes as
does everyone else.
·
Economic recovery is difficult - paying more taxes is
bad for growth. More government borrowing to avoid more taxation is getting too
expensive.
·
No one wants to see more money printed - they say it
is inflationary. But it might provide a solution...and remember, prices adjust
- it's just a question of how they adjust and when and why. It will take a lot
of printed money to create a real problem if prices are made free to adjust.
The printed money will be permanent - it will not disappear when needed after
prices of all kinds, including the price of hiring people (NAE) have risen.
ROUND
THREE
·
There is a review of the whole system. In future
people have to pay larger deposits on homes that they want to buy to protect
the banks, when they have to repossess a home or other property. This is in
case property values fall as repossessions rise. This is not to protect the
borrowers. 'Buyer beware' is the cry - not 'lender beware and ensure that
borrowers can afford the repayments and are not harmed'.
·
Confidence is at a low level, people do not want to
borrow and they do not want to invest in a new business or to expand the one
they have.
·
The government tries printing some money to buy up
those crashed bond assets and so to protect their owners from further losses
and they use this free money to buy mortgages which cannot be repaid so as to
protect the lenders from further losses. They print new money to pay for this
and so as to add more to the stock of money so that people can pay one another.
At least they got that part right.
·
People say this is bad - too much money is being
created and that will be a disaster. They do not understand that more printed
money is needed to reduce dependence upon the other kind of temporary money.
·
Confidence is so low that people still do not want to
borrow or to spend.
·
The text books say that to get the economy moving more
people have to spend, create jobs, and increase government revenues and reduce
unemployment claims. The text books say that the way to do that is to lower
interest rates so that more people can afford to borrow. But everyone knows
that interest rates will one day rise again. They have had enough of that...And
readers know that the lower interest rates go the harder it is to raise them
again. Remember the LOW INFLATION TRAP. Now there are some nations indulging in
negative interest rates. The Bank of England is contemplating up to around -5%.
How big do they want the low inflation trap to be? This time it is more a
question of how high the cost of loans will have to climb when interest rates
resume normal levels. But who can guarantee that earnings will start rising?
That depends upon people having confidence - in who? In what? And why? In
everything actually.
·
People are not borrowing enough and nothing on the
table as presented to them by policy makers, including negative rates of
interest, can give them the confidence needed to change that. They know about
all the financial instability.
ROUND FOUR
·
The resulting loss of savings and pensions causes
problems later on when people are unable to afford their old age. They become
dependent upon their families for support and upon government hand-outs.
This
is four generations of knock-on effects, each one spawning the next.
Now
people rightly say that managing economies is more of an art than a science.
There are things which the policy makers do not understand. They do not have
precise control over the things which matter.
It all comes
down to the system breaking all the basic rules.
ANOTHER
BROKEN RULE
The
problem is that interest rates are a price. Interest is the price of credit.
Managing interest rates is the wrong way to manage the level of demand (overall
spending) in the economy. But the text books all say that is the way things are
done. That does not mean it is right.
WHAT ADAM
SMITH WROTE
Adam
Smith, widely regarded as the 'Father of economics' since his time in the
1700's, explained how prices adjust to market forces to create a balance
between supply and demand. He famously said that to manage prices would be to
take on a responsibility which no man could carry out competently. His exact
words were:
“The
statesman who should attempt to direct private people in what manner they ought
to employ their capitals would not only load himself with a most unnecessary
attention, but assume an authority which could safely be trusted, not only to
no single person, but to no council or senate whatever, and which would nowhere
be so dangerous as in the hands of a man who had folly and presumption enough
to fancy himself fit to exercise it.” Adam Smith, Wealth of Nations, Book IV, Chapter II
paragraph 10.
Directing
prices is a way to direct the overall population of people in what way they
should employ their capital and their earnings. Directing prices (in this case
interest rates), which should find their own level, is wrong. Adam Smith was
right. But to enable this to happen a whole lot of things need to change. We
will come to that in chapter xxx.
THE ROLE OF
FREE PRICES
As
Adam Smith pointed out, free prices constantly adjust in a way that tends to
balance supplies with demands.
When
there is a wrong price there is either too much of something or too little. It
wastes national resources, either creating things which are not wanted or are
not affordable so that they are not sold, or forcing people to wait before
delivery can be achieved. Time is wasted either way, making unwanted things or
waiting for things. And those prices which are wrongly set due to human
interventions have a nasty habit of correcting themselves quite fast and in
ways which cause a lot of damage. They can even lock an economy into a low
confidence, low growth era. Wrong prices always create financial instability.
For
example, we know that the cost of monthly payments can rise much too fast or
fall much too far. As a result we sometimes see lots of unsold houses with too
few buyers, and at other times there are simply not enough houses for sale to
meet the demand.
THE RIGHT WAY
What
the managers should be doing is to directly manage money creation (of both
kinds) and find a way to allow interest rates to balance the supply of credit
which they have created with the demand for it. There needs to be a market in
credit and a supplier of credit. In this way, the right amount of spending will
be able to absorb the whole national output and those who have a good use for
borrowed money will be able to afford it whereas those who were going to waste
the money or to get a free ride off other people's savings will not be able to
afford to borrow. The interest rates will not be so low. The national resources
of capital will be properly utilised, just as Adam Smith said. This is why
prices must be able to adjust. It is not the only reason - distorted prices in
the way that we as people distort them also create financial stability so that
people are basically affected by the
falling value of money.
THERE
ARE LIMITS
Even
so, as already explained, the authorities cannot control how much people save,
want to borrow, or how much they want to import or export. It is not possible
to control everything. As these
undulations in spending take place the value of money will vary and prices of
everything will have to adjust. When prices change, the value of money, the
amount which is needed for an exchange of money for goods or services, will
change. This is one reason why the value of money can never be fixed.
The
best that can be done is to get control over the total stock of money in
circulation and when there is not enough money to borrow because savings are
being spent, some temporary credit (fiat) money can be created to fill the gap
in the meantime. But the quantity of it has to be under good management. There
have to be guidelines and boundaries.
WHAT OTHERS
ARE SAYING
A
number of movements have developed using the same or similar themes. In the
case of the Chicago Plan, first put forward in the 1930's, it is been suggested
that lenders must only be allowed to lend the money which is deposited with
them. There will be no reserve ratio, not ten to one multiple.
Others
want to try to fix the value of money, but that is not possible. Besides, there
is no accurate measure which could be used as a benchmark for that. Maybe NAE
could be tried, but how do you manage the level of NAE? Can that be fixed? You
cannot fix the quantity of money needed for liquidity because the size of the
working and spending population changes and how fast they are spending always
varies.
The
best we can do is to allow all prices to adjust so that people are basically
unaffected by the changing value of money.
It
is commonly believed by economists that some inflation of NAE and of prices is
healthy for an economy because people are reluctant to take wage cuts or to
make price cuts; and if prices were always falling then cash would be a good
investment. Economists think that too much cash lying idle in that way and not
being spent slows demand. Their case is not proved because new money can always
be created / printed.[5]
But in an economic model where inflation rates are negative, it is believed
that this limits how far interest rates can be lowered to boost borrowing. They
cannot go far below zero.
That
said, it is worth reminding readers that managing interest rates is wrong. In
order to boost demand all that is needed is to create more money and spread it
around so as to boost spending on all fronts at the same time. It has an
immediate impact, something very similar has been tried and it worked: Japan
reduced VAT and the UK reduced VAT. In both cases people had more money to
spend. It was done for a limited period and the effects were immediate. When
VAT was restored to a higher value the effect was also immediate. The rule was
that the money borrowed to reduce VAT had to be repaid. Why? Why not print it?
It
boosts almost all sectors at the same time. It is very easy to do and we will
come to how that can work in more detail later.
There
is no need to use Keynes' most commonly quoted 'monetary reform' method. This
entails either reducing interest rates or having the government borrow money
and spend it. Keynes also suggested printing money, but hardly anyone seriously
considers that option because the economy is so financially unstable that they
are afraid of inflation as a result of that process. They have not thought it
through. Keynes once said that governments must do whatever it takes to get an
economy which is in recession into a more healthy state. He even suggested
printing money and burying it so that people could be employed digging it up.
Others have suggested dropping it by helicopter. Both of these ideas can work
but...
...first
create a financially stable economic framework and then devise the monetary
instruments needed to keep the economy moving. When people are no longer afraid
of a little inflation, when we have financial stability and prices can freely
adjust so that people are basically unaffected by the falling value of money,
(slight falling, and not too fast), they will 'press the button' and they will
change the whole system.
One
school of thought which looks to be moving in the right direction is the
Positive Money Group, sponsored in the UK parliament by Steve Baker MP who is
currently on the Treasury Select Committee. He needs to read this book because
those ideas which are very similar, have some loose ends which can undermine
the effectiveness of their solution. It will work much better if the economic
framework is financially stable and the influence of currency issues does not
undermine some of the management control efforts. And they have not considered
the moral hazard or the unbalancing effect on spending and employment of giving
the money which their system creates to governments to spend. That gets us into
election cycles where money gets created to help to win the next election, and
it means that time is taken for the spending they to 'trickle down' to everyone
else. The trickle down idea is that those who spend the money and so give it to
others who then spend it on others who then spend it on others...It takes a
long time to reach everyone. If you want a garden to grow you water all of it.
Governments are not known for buying hairdos by the million, or cars, or
ice-cream, or nights out, or holidays abroad, buying new clothes, or setting up
a thousands of small enterprises...When more money or more liquidity is needed
every spender needs to get that free money. When everyone spends, they spend
money so as to keep people producing the goods and services which everyone
wants others to provide. All jobs get support. As already stated, the method
has been tried and it works brilliantly. When VAT is reduced people get extra spending
money - it is the money that is left over in their bank or cash reserves at the
end of the month. The only problem was that the money provided to reduce VAT
was borrowed money. It was not printed. Then the process was reversed and an
equally fast slowdown was the result. When an economy needs more money to keep
going it needs more money. It has to be created, and not by borrowing and
providing temporary fiat money.
THE REMEDY
If
all of the financial contracts for savings / lending and debts are able to
adjust the capital values to offset the falling value of money, and if the
currency can do the same without interference from other sources, then everyone
can be basically unaffected if a little extra money is created and spent to
keep the economy moving. No one's mortgage costs will leap up or down. Bonds
will have a stable value. The currency value will be fairly dependable,
national interest rates will be what they should be and all financial assets
will be employed to best use. In terms of borrowing, people with little
productive use for money will not borrow. It will cost too much. All prices
including the cost of hiring people will rise over time to feed demand and the
additional liquidity needed will be created, and any extra money in excess of
what is needed will be absorbed and people will be basically unaffected. When
more money is needed, it can be created. We will go over that in detail in
chapter xxx.
THE BIG
PICTURE
To
have financial uncertainty like we have now in all our savings and loans, our
pension funds, our savings, our mortgages, our business loans, our government's
debt costs, is bad enough, but there are two more areas of concern which affect
everyone:
1. Currency pricing: currency
prices are much too unstable for businesses and people alike - they are not
free to adjust to balance trade and offset the falling value of money (both), and
2. The management system for the whole economy: currently
this does not follow well understood rules which are essential for the success
and stability of the entire economy. It cannot perform properly because it is
based upon the wrong foundations.
THIS IS THE
BOOK
First
we need to get the pricing mechanisms right for lending and borrowing as well
as for currency pricing. These are essential parts of the foundations upon
which everything else is built. Then we need to chose the management system,
its instruments and its targets. If the foundations are right, everyone will be
basically unaffected by the falling value of money. That means that to prevent
a recession, more money can be created and given to everyone to spend as they
wish. It is really that simple.
THE CURRENT
STATE OF AFFAIRS
One of the main things which
disorganisation and confusion through the creation of imbalances causes is
uncertainty. What to do? Where to invest? Everyone gets stressed. No one feels
confident in making a plan.
Here we are at the beginning of March
2016, with some central banks lowering interest rates into negative territory
and others planning to raise interest rates. They have inflated asset values which
are too high to trust and they have created borrowing costs which are too low
to trust. There is too much debt and not enough productive activity. Pensions
and savings are melting or are at risk. The central banks do not know what to
do and neither does anyone else. No one can make a financial plan which will
definitely do what they hope it will do. The whole system is just too entangled
and too complicated. The outcome is nicely recorded by this article published
online by Business Insider on 3rd March 2016:
It's been a volatile start to 2016 for the markets and the only thing we seem to know for sure is that no one knows anything.
In a note to clients, UBS' Julian Emanuel highlighted the following the chart which shows the increase in the number of stories on Bloomberg that contain the word "uncertain."
Whether its currency moves out of China or the Federal Reserve's next interest rate decision, the overriding narrative in the market has been the certainty of uncertainty about what happens next.
Emanuel writes that, "the media have fed the uncertainty beast vigorously," leaving with views like those expressed by Horseman Capital's Russell Clark, who wrote in a recent letter to investors, "The future for me is now more uncertain than at any time I can remember."
The graph shows the number of
stories containing the word 'uncertain'each month.
ABOUT THE REST OF THIS BOOK
Firstly readers are invited
to read about the
background, the story of how the researches came to be done and all the major things
which steered the researches along the way. That makes interesting reading and helps readers to
understand that many issues have been raised by others and addressed in a
proper and approved way in finding the solutions.
Next there is a chapter about the investigative
methods used to determine where the problems lie and how all of the major ones
could have been discovered by almost anyone.
Then there is the need to dissect interest rates so
that readers can know what part of the interest rate transfers value from
borrowers to lenders. The term 'True Interest' has had to be invented to make the
mathematicsof management simple and to make the understanding of the composition of interest
rates clear.
From there finding solutions that create financial
stability is a short step and a range of financially stable contracts for
borrowing / lending / savings are described and explained.The basic
mathematics has been done by the writer and somewhat assisted by W J Waghorn, a
mathematician in London, UK.
Next we move on to currency stability and
management systems to complete the whole section on solutions.
All of this leaves some nagging doubts in the minds of
people who think about things deep down at the fundamental level. That is something which the
writer loves to do and so there is a section on that - on how money is valued,
and a fairy tale story called 'Money Island' which helps readers to see how everything could have
developed into a financially stable and well managed economy. It takes place in a fictitious island economy
where each problem was discovered one at a time. Each one is addressed in the same way as
it has been addressed in this book. The storyworks particularly well when it comes to
addressing and explaining the need for solving the currency stability issue.
Finally there are the acknowledgements which run to
several pages and again tell some of the story of who helped out with which
pertinent questions and who helped in other ways, including some who made positive suggestions which
steered the writer's presentations into clearer territory. Gilberto was
particularly helpful in that way.
WRITER'S BACKGROUND
This
section has been left till here because it is now easier for readers to
understand the difficulties which were confronted in completing the process of
writing and editing this tract.
It is intended to assist readers in
understanding the process through which the discoveries were made, and so to
give them greater confidence in the findings and suggestions made.
It is a copy of the same part to be included in the
longer book for academics to be called 'A Tract on Financial Stability'.
I, Edward C D Ingram,[6]
the author of this book, have been asked to write in the third person as if
someone else had been writing the script after consultations with me. That may
appeal to academics and to a large extent I have done that until now - until
this section. And incidentally many consultations have taken place with many
academics as well as with practitioners. I hope I have published what they have
agreed is correct and not let any of them down in that respect.
However, when it comes to writing this section, it is very personal and
no one should be expected to know enough to be able to write it on my behalf.
My feeling in general is that writing in the third person, when in fact it was
I who wrote it all, is a bordering on the dishonest. That said, I have complied
with academic preferences in the rest of the book.
In the longer book which at the time of
writing is still in draft mode, I chose to
refer to one named 'Arthur' as a fictional character who would be basically
unaffected by the devaluation of money if financial stability was achieved.
---------------------------------
For those who are curious - I decided to refer to Keynes'
basically unaffected man as Arthur. I do
not know why I chose that name but I
happen to be a fan of the story, 'A hitchhikers' guide to the
galaxy' in which Arthur Dent gets to see an entirely different view of the
order of things. Secondly, my father's first name, though seldom used, was Arthur. He had a strong influence on me
because he saw clearly what many others failed to see, especially in economics.
He was also very impatient with anyone who could not think or speak clearly. This meant that I had to be very careful in
what I said if I was to avoid my father'sfury. When it came
to investing, my father did as Warren
Buffet does - as far as I am aware, he never sold
his investments. He did very well. I had a great respect for my father's common sense approach, and also by the way, for my mother. She told me a few times, after noting my incessant hunt for new
ideas and suggested ways to improve things, that genius is 1% inspiration and
99% perspiration. So I learned not to
expect worthwhile results to come easily. Easy things are easily done and
almost anyone can do them. I learned that difficult problems are left to those who persist and who do not get
put off by the complexity or difficulties in the way.
This has encouraged me to spend decades trying to
prove my point. Like my father, I have studiously kept to
scientific and established principles, and I have appointed review
committees and had hundreds of consultations with others in the field so as to
make sure that I 'got it right' to
the best of my ability. Despite
this, Imust admit
to finding an almost constant stream of new observations that need to be addressed
in full detail. Some of the minor ones still remain to be addressed to this day. The most obvious gaps have been indicated in this
tract. I have made
it a challenge to readers to do further
researches, suggesting that they should help by adding their own expertise and so refining the subject and if they can, testing the postulates made.
THE LONG ROAD TO FREEDOM FOR ECONOMIES
It took more than 27 years to identify
the issues and to write this tract.[7]
When I was first invited to
take on a mortgage in 1967 I was quite horrified
to be told that no one could tell me how much the monthly payments might cost in the following years.
Instinctively I felt that there was
something wrong. I was used to science and its absolute
certainties. In this tract I have proved that my instinct was right.
There is something wrong and it runs deep. But at that time I had no choice and
accepted the contract in the hope that, as I was told, interest rates, then around 8%, had never been higher
and would be unlikely to go higher or to worry me. Interest rates then proceeded to rise to 15% over the next few
years, and that was net of tax relief.
The new ideas began to flow in 1974 when
I had started a new business in offering
to help people to arrange mortgages and to assist them with their investments.
For most such established businesses the environment was very tough. For me, as
a new entrant with fixed overheads, it looked like a disaster. But my business
survived. I became very angry with lenders for the
way in which they manipulated the cost of mortgage finance so that it
completely ignored what I considered by then
to be obvious common sense: keep the repayment costs affordable and collect
value every year from borrowers even if it meant steadily increasing the
repayments. That way interest rates could rise to preserve value and to avoid
cash inflow shortages for lenders.
The higher and market-related interest rates would attract
more deposits and they would preserve existing ones. I
pointed out that tax on deposit interest used to preserve the value of deposits would need to be removed. And tax relief on the same would not be
needed. Net tax revenues would rise. As interest rates
rose, lenders were jacking up the cost of monthly payments far faster than
incomes were rising and many of my clients were big losers. When clients gave up and cancelled their
contracts my own business
income came under pressure. At the same time, my own mortgage costs continued to rise. What ultimately saved the
business was my investment
management service. I had the sense to
move my clients' investment
portfolios to cash and so I side-stepped
the 75% drop in the UK stock market. From
the start, I was determined to expose my clients to investments when it seemed
more probable than not that they would be able to make a profit.
The graph below was published as a part of
the company brochure 11 years after commencing.
This sample investment portfolio was independently monitored by the
media from day one using records provided by insurance companies through whose managed fundsI was
investing. After around 4-5 years the Financial Times
interviewed me and I became famous. Lots of press cuttings followed. My sample portfolio made a profit every year for the two decades
during which I was in charge.
Contrary to what academics were then teaching: that markets are efficient and
it is impossible to out-perform I regularly did out-perform. This regularly made headlines in both
the national and the local media.
I had asked enough questions and had
observed enough by then to understand how prices got
distorted and therefore what was likely
to happen next. I carried a
model of the economy in my head. But nothing was ever certain. The main surprise I got, because much of the data that I wanted was not available, was that I was almost always right. It
was probably because I worked almost till midnight on a daily basis and I
became much faster than mainstream at understanding what was going on at the
fundamental level. Often, questions that I wanted
answers to in telephone discussions with Roger
Nightingale, a city stockbroker's economist, came up a day or two later in radio and television discussions
but without my name being
mentioned. I was able to move my clients’ investments in and
out of markets faster than the big institutions, even if they had the mandate
to do so, which mostly they did not. This was because I was not managing billions. My funds were not big enough to
move the markets, and unlike most of the institutional managers I had no mandate to beat an
index or to stay invested. As stated
earlier and as reported in one newspaper article, my aim
was to protect my clients and to make
a profit. If in doubt, I invested their money in cash deposit
managed funds.
To cut a long story short, I wrote an
outline of how lenders should manage their loan portfolios, published an
outline, and impressed a lot of people.
Both Mrs Thatcher and Ted Heath, then in the shadow cabinet, wrote to me
asking to be kept informed.
The cabinet did not respond. A Cambridge
economist was asked to say which of the proffered solutions to the crisis in
housing finance provided the best hope. A
letter of mine had already been published in the Guardian outlining what needed
to be done. My idea was
nominated, but I was not named. I formed a review committee called the Housing
from Income committee. The Editor of the Building Societies Gazette, Eric
Holmes, was also impressed. He was visibly furious that I had not been given
credit for the ideas. The upshot was one of the most influential and lengthy
series of articles ever published by that magazine, commencing in October 1974.
A number of the ideas, but not all, were
adopted by the industry, as confirmed by Steve Short in this
letter:
It
was not until the 1990's that the key idea was put to the test in Turkey.[8]
The outline which my team had given was aimed specifically at addressing a
situation of high inflation, and the same
conditions were present in Turkey at that time.
Inflation had long since subsided in the UK.
Nevertheless I was not satisfied and
wrote accordingly, a letter which was published in The Times on 11th
April 1975, asking for funding to finish the work. No funding came. I knew
instinctively that the ideas contained in that original series could be
modified so as to create a model for mortgage finance which would be better
adjusted to all rates of inflation. After retiring in the early 1990's due to
new regulations which forced me out of business, I took a rest and after a few
years I managed to solve the outstanding problem mathematically. A new
committee of experts was formed which included the most senior people in the
land outside of government, in my new home of Zimbabwe; and some also from the
region. There was one mathematician, W J Waghorn, from the UK. His computations
and all of the mathematics are included in the main book
for academics and practitioners, possibly in volume 2 of two or three volumes
planned. Again, the review team were impressed.
The implications of this more advanced
solution were profound. The review team were nervous about their professional
standing. They wanted an explanation - why did the solution to one problem
solve so many other problems? It seemed to be too good to be true, and so they
were unprepared to endorse the ideas because ‘there had to be some snag.’
But there was no snag. I had simply
applied some well known and basic laws of economics which no one else had
applied. I had gone to the source of the instability problem, removed the
problem, and all the knock-on effects disappeared like magic.
They also said that this new mortgage
model was so powerful that it would dominate the lending and savings market,
making it hard even for the government to compete. What was I going to do about
government and business finance? I came back with an answer a couple of weeks
later: adopt the same basic principles, adapted for fixed interest bonds. Let
the value of the capital rise to counter the falling value of money. I exempted
that part of the capital adjustment from taxation and removed the rules imposed
upon lenders who were not supposed to roll up (defer the collection of) any part of the interest.
At that time we were not talking about
the falling value of money nor fixed interest bonds. We were talking of
matching the level of payments to the rising or falling level of National
Average Earnings, NAE, so that everyone was not embarrassed by the changing
cost of finance and so that savings would be protected, with the interest rate risk largely
removed.
In the end, I asked the review committee
to say which of them could find any fault in the theory. No one spoke up. That
is when they endorsed the ideas. But it was a long way from being written up
and published as the way forward. The actuary from South Africa, Newton Mugabe,
was so impressed that I cannot repeat his (clearly over-excited) exact words. What he said came down to saying that it heralded a
new era for the whole financial
world. Unfortunately, he is reportedly now deceased. Newton, if that is an
exaggeration please let me know!
The main reason why I failed to write it
all up in a convincing way was the complexity of the subject, including the
difficulty of explaining how so many knock-on effects just disappeared. How was
I going to explain that? Readers can now see how I have managed to do that. It is explained in the next chapter immediately after
this. It took me until a year or two back, around 2013 to explain it.
The failure to establish a link between
the value of money and the rate of change of National Average Earnings, NAE,
also left a gap in the theory which I have only managed to close to my own
satisfaction in 2015. And for this reason, although there were many admirers of
the theory and its profound effects on the entire economy, until then, there
remained this nagging gap. I was not
happy. My readers would be skeptics.
By 2008 I had reported to the local
university in a lecture, which their lecturers and students loved, that there
were also other faults in modern economic theory, which I wanted to address.
There is a poor quality short video with extracts, published on YouTube here.[9] It explains how unstable and how inevitable the boom and bust
cycle was and it explained that monetary policy should manage the stock of
money, not the rate of interest.
One of the questioners asked if I had
assumed a closed economy in my presentation. I had to admit that I had. This
was embarrassing and made me determined to check that out as well. Now I have
found a way to isolate an economy from international contamination of unwanted
kinds. Problem solved. It is good to have embarrassing questions and to have
oversights pointed out. There have been a few such occasions. Embarrassing but enormously helpful.
In short, the idea that interest rates are an instrument of monetary
policy was clearly a mistake. Not my mistake
this time, but that of almost everyone else. And
the way in which currencies were priced was also making trouble. I asked myself
if there was a common theme - something which explained why everything was
going wrong in economies. I found it - it was mis-pricing. When a price is not
right it creates an imbalance. Almost all of the world's troubles seemed be
imbalances, hence they must originate from mis-pricing. Managed interest rates
cannot adjust on their own because they are managed. And currency prices cannot
adjust on their own. They get disturbed by international capital.
Since making that observation I have
been able to knit everything together. It was a huge amount of work, and this
book is the outcome. There remain many points of detail to examine, not the
least of which is the validity and application of NAE to mortgage finance where
people's earnings tend to rise faster than average when they are young and they may rise at a slower
than average rate later. There is the nagging issue caused by the top 1% rportedly having earnings which are rising
faster than everyone else, opening up a gap between average and median earnings
increases. And then there is the issue of the definition of NAE as a benchmark
which relates to the changing value of money. Is there a better benchmark? Are two
benchmarks needed, one for mortgages and another for the rate of devaluation of
money? These are questions which are to
be addressed in Volume 2 of the main tract. The imperfections in real economies which this highlights
will limit the extent to which all of the Arthurs can remain basically
unaffected. But even an improvement of a ‘barometric measurement’ for financial
stability from say, 35% currently to say, 90%, is a great step forward for
mankind.
I think that, when it comes to practical
applications of the NAE benchmark, which must address the marketability of any
new financial products which incorporate it, the answer to that question is
that NAE has significant attractions. As a benchmark for the falling value of
money it has many practical and marketable applications.
The value of money does change
differently from the inverse rate of change in NAE: the rate of devaluation of
money undulates compared to that index. However, on average, the value of money
ends up being driven by what people spend and how fast they spend. Over the
long term, what they spend is driven by what they earn. An NAE benchmark
averages out the variations in the speed of spending, and the quantity of
spending, which devalues / revalues money. And
on the practical side NAE provides a conceptually easily handled unit of value
for savers, lenders, and borrowers and it makes the mathematics of lending very
simple. Using any index with that adjustment idea in mind will
transform the lending and savings industry. Using a conceptually easy unit /
index is necessary to achieve practical outcomes.
However, this may not be the whole
story. Some undulations may be trends – an apparently endless trend towards the
most well paid getting increasingly more income than the average may need to be
addressed. Both Professor Thomas Picketty and Professor Batra and
his follower Mr Apekshit, have explained that this trend can slow
the entire economy, and ultimately, if it ends with all the work being done by robots,
then reduction ad absurdum, there will not be anyone with an income to buy the
robots. Maybe taxation will intervene. Readers are welcome to elaborate on
this. It is an interesting and challenging
issue.
Now, in this first volume, I am trying
to write out the logic of what I know as if it had all been obvious from the
start. Mathematics is logic written in shorthand. Writing this tract feels like
a mathematical exercise. One already thinks
that he knows the answers as a result of years of drafting and
discussions, but it is a tortuous struggle to write a convincing and easy-to-follow logical proof. That
drafting process always throws up a lot of minor but critically important
issues which were not previously seen and which then have to be included. I
hope it all makes sense.
FINDING SOLUTIONS
Chapter 1 - Analysis, skills, and methods used
·
The writer spent six decades observing the evolving economic
theories of the last century as well as acknowledging the working of free
market prices as laid down by Adam Smith, who is often referred to as the
'father, or the founder, of economics'. Adam Smith laid down one of the main principles
which has been adopted in this book: that of pricing behaviour: how prices
adjust to keep supply and demand in approximate balance.
Today there are huge imbalances
around the world and this principle has been trampled upon by bonds, housing
finance, by other forms of finance, by currency pricing mechanisms and by
central banks who manage interest rates. There is a very clear cause and effect:
get the price wrong, or the pricing mechanism wrong, and you cannot achieve a
balance or a near balance.
As Keynes, observed in his 'A tract
on Monetary Reform', when prices are left to adjust, they don't. Economies do
uncomfortable things. He concluded that some intervention is necessary. But all
interventions create their own problems. They reward some and punish others, as
happens for example when interest rates are managed. What he overlooked was
that prices are not free to adjust to
the falling value of money and that this
is why everything goes haywire. The problem is that no one has questioned this
analysis. Keynes even cited fixed interest bonds as an example of that but
he did nothing about it. And that is where the writer and Keynes part company.
If you don't build the foundations right you cannot get the management (Keynes'
monetary policy reform) right either.
·
The writer also spent time acquiring the skills of a practicing
investment manager and a practicing financial adviser.
·
He observed the behaviour of economies and policy-making from
his own viewpoint as a past student of systems stability engineering. He learned
how to design electrical management systems to ensure that machines do what
their designers expect them to do, both efficiently and fast, without
overshooting the target and with tight control, using the right management
inputs in the right places at the right time and in the right amounts. Not too
much and not too little. The same principles apply in macro-economics - in the
management of the 'big' (macro) economy.
When looking at the macro-economic
money-management system, also referred to as monetary policy, (when given the
right instruments of policy), it was amazing. The instruments were wrong and so
were the targets. Nothing has yet changed, except that new untried experiments
are in progress confusing everyone.
Finally, if you don’t know what the
problem is you won’t find the solution. When it came to solving all of these
problems, the writer applied his earlier training as an investigative engineer and as a
systems management / control engineer to determine what is going wrong. This method is
extremely powerful as explained below.
INVESTIGATIVE METHOD
Like doctors and social workers, investigative
engineers are taught the same thing:
If any one thing is not going ‘by the book’ in a complex system, a
generation of ‘children’ knock-on effects is born along with their ‘grand
children’ knock-on effects, and even their ‘great grand children’, each
generation spawning the next. Everything gets complicated very fast.
The more sources of financial
instability which are created in this way, the more the knock-on effects
entangle with one another. Everything gets exponentially more complicated, like
a rocket launch. At first it rises slowly but as more fuel is added and burnt,
it can even reach orbital speed.
There is a story of the bus full of experts in
everything from space shuttles to biology, including medicine, and economics.
All of the
passengers were sick, were jolted around, and they had backache and headaches.
Some were dizzy. None enjoyed the journey. All kinds of treatments were
prescribed by the medics. Others provided interventionist theories about how to
redesign the bus so as to smooth the ride. Then the driver got out and saw that
the wheels were square instead of round. As soon as new wheels were fitted all
of the symptoms vanished. The
experts on board were shocked. Why had they not thought of this?
The first task
of an investigator is not to administer medicines or to intervene or to
redesign everything, but to find out what it is that is not 'going by the book.'The writer was told to adopt this approach when
investigating a high level of rejected products coming off a production line.
It worked.
Every reform which goes 'by the book' removes dozens of knock-on
effects which are sometimes major and highly destructive symptoms like high
rates of home repossessions, unstable currencies, banks which
are too big to fail, and high levels of unemployment. To the casual observer, and to
politicians, these
symptoms, are like
the sickness of people in the bus. Theyare easily confused with the source
problem. New legislation gets passed (a knock-on effect), and subsidies are
granted.
After identifying which is the source problem, what is not
being done by the book, the main challenge is deciding on the reforms needed; and
then when, and how, to implement them.
In our case, among other things, this means finding
out what is not adjusting smoothly to the falling value of money. And finding
out why.
Besides having unstable financial
contracts, there
are fundamental problems with the currency pricing mechanism; and with the
management of the economy, called monetary policy.
Currently the management instruments, and the targets
laid down for monetary policy, do not conform to modern systems-management
principles. These principles work: they are tested every time passengers travel
safely in a plane, and also when railways run efficiently, and when motor
vehicles do what they are expected to do. And these principles are also tested
when things go wrong and the reason for that is found to be that the principles
were not correctly applied or even not applied at all. The consequences are not
nice. Readers will see why failing to apply those easily understood principles
to currency pricing and to monetary policy causes a lot of problems. It is
basically common sense. But finding the better alternative and convincing
everyone is not easy. You have to drill down and find all of the expected
benefits, all the main problems during transition, and the consequences during
and after that transition period.
ART OR
SCIENCE
In economics, as in any other complex system, and as
in the bus story, nothing can remove more problems at a single stroke than
finding and removing the source of the problem. Having found that there
are at least fivemain
inbuilt sources of instability, creating five families of knock-on
effects, and not having the right management instruments, readers can easily see why economics
is regarded as more of an art than a science.
To identify what is, and what is nota core price
adjustment, or even the right instrument, it is not necessary to have some sophisticated
measuring rod to see how prices should be adjusting to the rate of devaluation
of money, any more than it is necessary to use a magnifying glass to see that
someone's fingers are poking you in the eye. The truth is reasonably well
explained in this short fairy tale:
Think of prices as
a flock of sheep. The prices said to the leader, "You lead, we will
follow". The leader led, injecting a small amount of demand and some
liquidity (new money) into the economy. Basically, that is all it was required to do. The
prices tried to adjust. But the wicked witch said, "No you don't" and
cast her spells. The outcome was that the price of bonds was frozen, unable to
adjust to anything. The price of monthly payments for housing finance got
springs forcing them to leap around instead of just following along behind; and
the price of currencies found that international capital was pushing them off
course. What should have been a peaceful scenario of hill climbing over a
pretty countryside of gentle hills and valleys became chaotic, full of arguments about which
prices should do what, each one getting in the way of others and some getting
pushed around on different sides by other prices. The farmers had no idea what
to do to keep order. They simply did not have enough instruments; and the
instrument which they mostly chose to use was the interest rate price which was
supposed to be following like the rest of the herd. They shoved that price
around instead of just leading the herd and allowing all prices to follow along
behind. Each price disturbance affected some other prices. The knock-on effects
as each price bumped into others and shifted their courses, all intermingled
and chaos ensued. There were celebrations that day in the witches’ coven.
Add to that chaotic scenario the fact that, when trying to understand
and improve
things,
economists are using the wrong measuring rod.
WE CAN
YES WE CAN - change things for the better. We can so easily eliminate
dozens of knock-on effects which complicate everything. We can create a whole
lot of financial stability if we want to.
[1]For
example: A discounted cash flow (DCF) is a valuation method used to estimate
the attractiveness of an investment opportunity. The
analysis uses future free cash flow projections and discounts them to arrive at
a present value estimate, which is used to evaluate the potential for
investment. If the value arrived at through DCF analysis is higher than the
current cost of the investment, the opportunity may be a good one.
[2]Most economists refer to an economic model as
being a simplified mathematical model used to test a theory. In this case the
economic model being referred to is the current structure and mechanisms of the
entire real economy. There is no word for that or it would have been used.
[3]When an economists talks of an economic model,
it is usually assumed that this is a mathematical representation of some
particular part of the economy designed to test some postulate. It can also, as
in this case, be used to mean the entire economy as it is currently constructed
or as it might otherwise be constructed.
[4]Leigh Harkness has published some very
convincing papers on this relationship on his website. http://www.buoyanteconomies.com/
[5]There are two ways to 'print' money. One is
cash and coins. The other is by electronically adding a higher number to an
account. This is permitted if it is done by an authorised entity such as a
central bank, for example, the Bank of England, the Bank of Japan, the Reserve
Bank of South Africa, and the Federal Reserve Bank of America, to name just
four. Every nation or currency has a central bank.
[6]If the reader Google-searches the name 'Edward
Ingram' there are thousands of them. Hence I use my full name so as to assist
that search process.
[7] A reference to Nelson Mandela’s 27 year ‘Long Road to Freedom.’
[8]Isil Erol and Kanak
Patel, ‘Housing Policy and Mortgage Finance in Turkey during the Late 1990s
Inflationary Period.’
