A Short Tract on Financial Stability

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"A financially stable economy would be safer for everyone and easier to manage. Economics is complicated but it does not have to be. In fact, a financially stable economy would be remarkably simple..." 

9th April - Sorry editing is still in progress. This message will be removed when it is all done. The current edition is significantly less readable than earlier editions due an attempt at making the introduction more precise. Precision needs explanations which are not well suited to an introduction.

LATEST EDIT - 7th April - a new INTRODUCTION. That has now been done. The previous update to the entire tract volume 1, this volume, was 6TH APRIL 2016 - LATE in the day - Sorry it used to say 6th March - my mistake.

I now have 37 comments, mostly on clarity issues, which have come in from a reader of an earlier edition which is what has mostly prompted the new revisions. I will be making some more edits accordingly. No fundamental disagreements were mentioned. In some cases it is a question of not being able to say everything at once. I other cases it was a lack of precision or clarity. 

This is the start of my draft book on the subject. It could become volume 1 in a short series. What do you think? The rest as mentioned in this edition would be volumes 2,3 etc. Please write to me at eingram@ingramsure.com

It explains how we can award ourselves financial stability and a financially safer and more peaceful life anywhere, in any nation where the ideas are adopted. They need taxation and regulatory changes for the new financial services (borrowing, savings, pensions, etc), which would be a good start. The competitiveness and the lower interest rates and lower risk would all work in favour of the new financial services.

With the help of readers today and for the next few days whilst this is published online, I am hoping to finish this short tract. It has all been drafted, even most of the subsequent volumes are already drafted.

To speed this process and see changes made as a result of your very own comments, please send your comments and feedback, and some details about yourself (optional), to me Edward Ingram at:


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It is the think tank which has been backing this work.
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A Short Tract on Financial Stability
By Edward C D Ingram

A financially stable economy would be safer for everyone and easier to manage. 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 new tract is expected to have an equally significant impact on macro-economic thinking. 



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 losses to savings and pensions, lost homes and destroyed families, poverty, extreme political movements, international trade wars and international economic friction, 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.

Since the days of Lord Keynes, universities and policy-makers around the world have all attempted to manage the rate of devaluation of money but that has only served to increase financial instability. This book starts with what Lord Keynes wrote,  but before reforming monetary policy, it shows how to remove the financial instabilities. Then, everything, even monetary policy, and even escaping from super-low interest rates that do so much damage, is simplified.

We can remove around 90% or more of all the financial instability mentioned above. Everyone can be protected from the kind of financial storms and the associated insecurity which we have come to expect. People’s savings and their homes should be safe from interest rate triggered turmoil; and the value of currencies can be safer and more predictable for traders. Borrowing for housing, businesses, and governments should be based on simple and financially stable/safe and so cheaper, contracts. Central banks should manage the supply of money directly and accurately instead of remotely and loosely. This will bring low and manageable inflation, an end to asset price bubbles and bursts, and it will end major recessions except in the most dire and unusual circumstances. In the distant future, when robots are the work slaves, and the people are served by them, a new order will be needed to provide finance for everyone. That is a 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. 









Additional chapters / volumes to be pruned of repetition and edited before being added.

To be continued -  this excerpt only covers Volume 1. It is a very short booklet but it is also powerful




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 non academics alike, the main intention of this series, and indeed even of this first volume, is to provide a clear and practical list, for all time, of soundly based financial stability concepts and guidelines. Once the list has been applied, this will create a simple, more effective, and significantly more financially stable economic framework. As a result - 

·        In future people will be able to make financial plans of every kind which work much closer to the way they were expected to work. Changing rates of inflation and interest rates will not have the destructive same impact.

·         In many  of the permitted new savings and lending contracts, the value saved, not the money saved / lent, will be the value repaid plus interest.

·        The cost of a home loan or a business loan will be fairly stable and affordable from month to month if the new contracts are permitted.

·        In many cases, the overall cost-to-value could be known and quoted in advance.

·       Property values will be relatively stable as loan sizes will cease to be strongly influenced by interest-linked inflation rates. This means that high interest rates at high inflation rates will not necessarily result in a smaller home loan, and vice versa for low rates of inflation and interest - they will not enlarge putting borrowers at risk and inflating the price of propertied - if the regulators and risk managers adopt the system.

·        'No deposit' house purchase will be available and all interest rates including that for government borrowing, will be cheaper because all of the risks will be less.

·        Bonds used as collateral security will have a safer, and guaranteed value, not money back with interest. The 'value' definition may be subject to some discussion as explained in the text, but is thought to be a good one with many practical marketing applications.

·        The price of the currency will be fairly stable and predictable except when a nation's exports are mostly in one or two commodities whose value can change dramatically. This requires a new market structure for currency exchanges, one which is consistent with modern systems management.

·        There will also be a significantly simpler and more effective macro-economic (monetary policy) management system because there will be fewer problems to address. There will also be a new market in credit for lending, and again, one which is consistent with modern systems management of an economy. Interest rates will be market rates, not managed rates and not near zero rates!

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, around 90% or more of this instability is probably avoidable. Implicitly, Keynes defined financial stability as a state in which, if money halved in value, a person might both earn twice as much and spend twice as much on the same things and thus be basically unaffected.

In fact we can arrange things such that 90% of all prices can readily adjust to conform with Keynes' above criteria. Some prices are slower to adjust and that makes the difference between 90% compliance and 100% compliance whereas currently there is (no way to calibrate this) but, say, below 30% compliance and a great deal of financial instability is the outcome of such a low figure.

Keynes first published his 'A tract on Monetary Reform', in 1923. He based his approach on the idea that economies are fundamentally unstable. What he meant was that prices do not adjust to offset the falling value of money. Some prices adjust better than others, and that is indeed the case because some price increases or decreases are not so easy to make. They are said to be 'sticky' but then they do catch up later. An example is the unwillingness of employers to increase costs by raising wages or to reduce wages when profits are falling. But these things do adjust later. And some prices are only adjusted once per annum. Some people get luckier than others and benefit. Others catch up later when other prices have already increased. At a steady rate of change there is no before others or after others. It is when the rate of adjustment needed changes that this happens. Then the first people to get the larger wage rise get an advantage.

What Keynes failed to do was to address the mainstream causes of that instability where for example, in a fixed interest investment bond any adjustment in the value of the capital to offset the falling value of money is forbidden by the contract itself. It is money back with interest, not value back with interest. It can be argued that some of the interest paid is an adjustment which can add value. That is not really how it works in practice. Interest is treated as income or a fee. There are several key examples of this kind of financial instability, where people are not left basically unaffected. All of these are the subject of this tract.

Instead, the instability, the unfairness, the way some people are favoured and others are not, was accepted as inevitable so Keynes blamed it firmly on inflation, which he called the falling value of money. 


When Keynes said that money falls in value he was referring to price increases. It is price rises which cause money to fall in value - when money can buy less that one might say money has less value. That is in principle, but there are other factors to consider as well which we will come to later. But Keynes is probably right to refer to the falling value of money as the base concept rather than inflation (prices rising), because there are too many price increases which need to be looked at and measured. No single list of price rises on its own can fully represent that falling value of money. And there is the question of "the price of what?" What if something which never existed before some new invention suddenly appears and now has a price?

To take account of such things it is necessary to discuss a rate of money falling in value, not the value of money. And it is necessary to say that when money falls in value all price will be higher than they would otherwise be. But then, what about prices which adjust slowly because people are reluctant to alter those prices? Economists call them sticky prices - but they catch up eventually.

Clearly, there is no absolute definition available. But by having a definition, having a guideline, we can make a whole lot more progress than if we either have none or we have the wrong one altogether, which is how things are now.

Money falls in value when all prices become higher than they otherwise would have been if money had not fallen in value. And then the reader says, 'Which comes first? The rise in prices or the falling value of money? Which causes which? This is the preface, not the tract. Please have patience, we will come to that.

Keynes chose the prices index as published to measure inflation. That choice is open to challenge because it is based upon a selected list of prices which are prone to being reduced if, for example, the efficiency of suppliers improves,. Whilst there is no simple and accurate measure, using that measure to offset the falling value of money is certainly not the correct one as readers will see.

Keynes also showed how the rate of inflation, thus defined, might be managed and how government borrowing and spending might help an economy out of recession. His teachings remain the basis of modern economics to this day.

In this tract we do what Keynes failed to do - we identify the causes of the inflation-linked instability which Keynes was concerned about, and show how to eliminate most of this. We show that many prices are currently forced either not to adjust or to adjust in a most improper way.
A great deal of this is caused by using financial contracts and other methods which do not adjust values and prices for the falling value of money, or which do not allow that to happen. It is easy to change those things. Readers will see how making those changes can be done. The loss of instability adds significant value to the replacement financial contracts. Then, using new and financially stable contracts for savings and lending and new ways to deal with currency pricing so that trade prices across currencies are more dependable, we get to have a significantly more financially stable financial framework on all fronts. What then remains is to create a simpler, and a more effective management system for the economy.     

If any of these changes are made, we can be entering a new and more financially stable era.
If and when all of these things have been done there will be cost reductions and other benefits for everyone. Financial life will be safer and more predictable.  The new arrangements will leave people significantly more 'basically unaffected' by the falling value of money. The financial plans which people make will be straightforward without the need to add provisions for many of the usual instabilities to be found in the economic system such as fast-rising costs when interest rates rise, unreliable currency prices, and interest rates which are not enough to protect the value of savings.
When any complex system is basically stable, and in this case, when the basic framework is financially stable and self adjusting, it is much easier and less complicated to manage it. For example, it will be shown that it becomes easy to avoid a recession without any need for government borrowing and spending except perhaps, in the most extreme and unusual circumstances.

The current economic framework is highly dependent upon a robust, and even a growing, borrowing sector. This dependence upon a high level of borrowing is not a dependence on a continued high level of borrowing which is wanted by everyone at all times. When the new management system is adopted, that will change. There will be less need to borrow to keep the economy on track.

Whereas most of the money which is lent today disappears when it is repaid, or the equivalent amount of it vanishes as if it had never existed, when money is printed it is permanently there unless in some accidental or other way, it is destroyed. The reason why some of the money which is lent just vanishes when repaid is simply because it only existed when it was needed to be let. It was created because there was not enough printed money around to be lent. The point has been reached where over 90% of all money in circulation is lent money of this kind.

The problem with the temporary form of money is that it has to be renewed if there is to be enough total money in circulation for people to pay one another without having to wait to be paid.

And that temporary money is normally replaced by encouraging people to borrow more. You cannot force them to do that. The system is unstable. The amount of money needed at any one time can change quite fast and this method of creating the quantity needed is, to say the least, imprecise an unreliable. It encourages central bans who are allowed t set the minimum level at which money may be lent, to reduce interest rates all the time - if in doubt, reduce them.

A more precise method of managing the stock of money will prevent the usual booms caused by excessive borrowing, and the busts which follow when interest rates are raised and all that money must be repaid at a higher cost than originally thought.

Printed money will play a stabilising role by reducing the level of dependence on temporary loan-created money. It will provide the permanent liquidity (money) which people need to avoid having to borrow all the time just so that there is enough money (liquidity) in circulation.

And there is a highly effective way to distribute printed money which apparently economists have not thought of. In this tract it has been called the 'VAT Punch'. Readers will get to that. It is better to read it rather than have an explanation of everything in an introduction.

In other words, the main monetary policy (management) ideas offered by Keynes and still favoured by most governments today, will be replaced with these simpler and more powerful methods. The liquidity shortage troubles created by the currently favoured way of creating new money can be avoided simply by providing enough additional spending power and liquidity (new money) directly to the people. This has been suggested before, firstly by Keynes himself, who suggested burying money in bottles for people to dig up, and later by Nobel Laureate, Professor Milton Friedman who called it 'helicopter money.' Now it is being suggested by the Positive Money group and is being debated in the UK's House of Commons, and by Jeremy Corbyn, leader of the opposition Labour Party. But where all of these plans fall down is because no management system, no stimulus to boost spending, can work well in an unstable financial framework.  Everything then becomes unstable. And when interest rates and inflation rates have been driven down as far as they have been, those countries are not in a fit state to try that. This is because of what this tract calls, and later describes, as the Low Inflation Trap. Japan has been there for around two decades.

Furthermore, the solutions so far offered by those above-named people and organisations are not sufficiently refined. This tract explains where the defects lie.

The new management system will not cause increased inflation; at least not noticeably beyond the level which we normally find and expect. Even if it did, then because of the newly stable financial  framework, one of the essential refinements needed to create reliable financial plan, pensions, and savings, and all costs, and everything except perhaps sticky prices, would quickly adjust, leaving people basically unaffected. In practice, it would probably provide a much better managed, less variable, and more predictable, AND low level of inflation.

Two major mistakes have been made by traditional economists and by Lord Keynes.

Keynes' big mistake was in not addressing the inbuilt and man-made instabilities first.  It is as if Adam Smith, often referred to as the father of economics, had never spoken. Right at the start of his tract Keynes wrote of the instability created by the use of fixed interest bonds, explaining the uneven distribution of wealth caused by inflation acting upon them. When inflation is high those bonds lose their value and borrowers get free help in making their repayments as their incomes rise but their costs do not. borrowers win, investors and lenders lose. There is a cost added to the interest rate of such bonds to try to allow for that. But often it does not work. The exact cost cannot be predicted.

If governments were to abandon the use of such bonds and replaced them with what we call Wealth (protection) bonds whose capital gets adjusted to compensate for the falling value of money, they might be able to reduce VAT by between 4% and 6% or they might reduce basic income tax rates by even more. And they would boost confidence which would add to economic output through more and safer investing. The calculation is given later.
It is the failure of either Keynes or his successors / followers to deal with the various sources of these problems which has led the world's economies into a huge network of complex provisions and interventions. Each and every one of these interventions, aimed at offsetting some unwanted problem, for example, adds to the instability and uncertainty problems even as they reduce some of them. For every person or organisation that benefits from an intervention there are also some losers created. It is just a redistribution of wealth. 
The second mistake made is the measuring rod which people use, including Lord Keynes himself, for offsetting the falling value of money. Prices inflation is about retaining purchasing power. It is the wrong measure. No science can develop fully if the measurements made are not correct. That is a golden rule in science.
Between these two mistakes, there is a lot of confusion in the entire subject of economics at the macro- (big economy) level and in the management of economies.
Adding to the confusion are all the interventions and policy-changes which are made, all of which are trying to deal with the fall-out coming from an unsafe and financially unstable economy. As just explained, each and every intervention produces a new set of winners and losers. It moves wealth from one place to another. Interventions cannot create wealth out of nothing. 
People wonder what the policy-makers will do next and how they can place themselves so as to avoid losing out. Or they try to position themselves to win from it - at the expense of the losers. In the meantime, the fundamental problems which gave rise to the frantic need for interventions remain firmly in place continuing to do their destructive work and keeping the economies of nations unbalanced. 

One outcome has been a level of complexity and confusion with which the policy makers are now unable to cope. Another outcome of the financial instabilities hard-wired into the financial framework, is the failure of central banks to be able to raise interest rates as far and as fast as they would wish. They should not be managing interest rates anyway. They only need do that because of the financial instabilities mentioned above. We will come to that low inflation trap and show that the way forward and open the door of the trap by creating more financially stable savings and loans. And maybe dealing with the currency price instability which also gets in the way.

In fact, the use of interest rates as an instrument of policy is something which Adam Smith specifically warned against in no uncertain terms. See how far below their proper value they are today. 


Adam Smith, is widely regarded as the 'Father of economics' since his time in the 1700's. He is famous largely because he explained how prices adjust to market forces to create a balance between supply and demand. This ensures that all of the nation's resources are properly used and not too much is wasted. 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 the main text. Here is the outcome:

Figure 1 - UK Base rates over the past 25 years have steadily fallen

This graph is from the Bank of England showing how they have moved (lowered) the base rate, (the lowest allowable lending rate) in the past 25 years.

The Bank of England also offers this next graph saying that in 5,000 years interest rates have never been this low:

Figure 2 - In 5000 years of interest rates - they have never been this low before.

Everyone knows it is wrong. The damage done is ongoing and significant. We will look at that.

Readers are also offered a reasoned (suggested) explanation for why this mistake of lowering interest rates towards zero and now in some cases, below zero, has been made. The suggestion is that it was based upon a wish to avoid an economic slowdown which occurs periodically and naturally and which should have been allowed to run its course. We will come to that when we look at three cycles that affect spending and prices.

As already stated, it is understandable that interest rates got managed, because to allow interest rates to rise and fall naturally at any pace when there is so much financial instability associated with interest rate adjustments, makes it irresponsible not to do something. The answer of course, is to remove those man-made instabilities so that interest rates can play their part. The only way that interest rates would then fall to anywhere near zero would be if huge amounts of money was deliberately created and injected into the economy, after which there would be hyper-inflation.
Once policy-makers decide to replace unstable contracts and methods with financially stable ones, the low rates of interest which central banks and other policy makers are battling to abolish today, the low inflation trap, can be removed. 

Until then, with the financial instabilities built into our savings and loans, our bonds and our housing and business loan repayment costs, it is extremely difficult to do that. Many nations have tried and failed. Japan has tried for around two decades. Readers will get to understand this. It should really be called the Low Inflation Trap. It has not happened to those nations with higher rates of inflation. Even Canada narrowly managed to escape. A test on Canada's data showed why. A low inflation trap is caused by a combination of low inflation of earnings and the super-sensitivity of loan repayment costs, asset values, savings, loans, bonds, and currencies all of which have over-sensitivities which should be and which can be removed. Removing even some of these would open the trap door enough for a escape.
On the management side, central banks currently have more than enough to think about. The economy is indeed highly unstable. Whatever they do there are good and bad outcomes to consider. There is no way to address everything.
As already mentioned, in designing anything that moves, like a passenger jet or an economy, it is best to get the framework right first so that the plane more or less flies by itself without creating its own instability problems. Then design the control instruments. The instruments will be much simpler than the instruments and thought processes needed to manage an unstable aircraft / economy. The pilot training will be simpler too.

Once done, it would need considerable willful and ongoing determination on the part of the managers / policy makers / pilot, to create a major problem like what we have now and at other times in the past. The future does not have to repeat the past. We can learn. We can make permanent designed-in improvements.

If any improvements are later undone, this tract is a reference book which can be used to identify the problem. On the other hand:

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 on well known text book principles, but they are mostly 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.
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 tract explains where all that complexity comes from and why it may be surprisingly easy to remove it. Basically, when you cause a problem anywhere in such a complicated organisation, dozens of  knock-on effects follow on from that, each of which are causes for considerable concern. But if you know what it is that is being done wrong, then when that is corrected, all of those dozens of complicated problems just vanish as if by magic. But it is not magic. It is to be expected. 
There is a fictitious 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. Indeed all doctors and many sociologists are taught this same thing. It is the standard way to deal with problems in any complex system.

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 the people in the bus. They are easily confused with the source problem. New legislation gets passed (a knock-on effect), and subsidies are granted (a knock-on effect). Tax levels rise (a knock-on effect). More regulations are added (a knock-on effect). Each knock-on effect has a price and it generates more costs and more knock-on effects.

A list of those knock-on effects will be given to readers when it seems to be helpful so that this is easy to understand.

Furthermore it is not difficult to see what is not right in the world's economies. When someone has poked a finger in your eye you do not need a magnifying glass to tell you what is wrong. Here is a fairy tale made up to illustrate the point:
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 and commercial finance got springs forcing them to leap around instead of just following along behind; and the price of currencies found that international capital and interest rates were 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 in the witches’ coven that day. It was great entertainment.

Add to that chaotic scenario the fact that, when trying to understand and improve things, economists are using the wrong measuring glass through which to observe what is going on. Among other things, a more accurate and more reliable measuring rod with which to offset the falling value of money is needed in order to create effective remedies. For example, when adjusting the capital value of fixed interest bonds so as to offset the falling value of money, we need that measuring rod. Prices have to rise. Bonds have to add money to their capital account to replace the lost value when money falls in value. For example, if money were to halve in value, (fall by 50%), bonds would have to double in price (rise by 100% - not by 50%) to offset the falling value of money. Please note that the percentage rise in prices which is needed is not the same as the percentage fall in the value of money. This is why we say one has to change to offset the other. It is easier than to say that when the value of money falls by 10% prices have to rise by 11.1111%

It may be worth repeating that if your measurements are wrong you cannot develop the science. The sad story is that there have been many failed attempts to reform housing finance and savings accounts, both based upon using the wrong inflation (of selected prices) measuring rod; and there are countless misleading published statistics about real interest rates and real costs based upon making that same wrong adjustment. Adjusting for prices inflation is a way to retain the purchasing power of a fund. It is not the same as retaining purchasing power. Adding real interest is a way to increase purchasing power. That is not the same thing as increasing (adding) value. A positive real rate of interest does not necessarily add a cost-to-value of borrowing. It does not even help to balance the supply of credit with the demand for it as will be explained later in this tract. A positive real rate of interest will not necessarily slow the rate of inflation. In this tract readers will find an illustration about Grandpa's fund. Over a period of a century it lost 95% of its value by keeping its purchasing power. And borrowers made fortunes by borrowing at a positive real rate of interest!

The figures for real rates of interest and 'real value' are right but the applications are often not correct. It depends why you are using that measure. Real value is not retained value. It is retained purchasing power.

So what happens when you stop doing wrong things in several different parts of an economy? You guessed right...in the words of Professor Leon Brummer at the University of Pretoria, "This simplifies everything." He was commenting on the new ideas in savings and lending and the use of a better measuring rod. An alternative title, suggested for this whole tract by Graham Hollick, retired CEO of a part of an internationally famous financial conglomerate, Old Mutual, was 'Simplifying the Economic Model'. [1]

[1] When economists talk about an economic model they usually mean some simplified mathematical model for some part of an economy. They then test that model to see how it behaves. In this case we are talking about the entire economy as being the model. When the unwanted knots are taken out, its behaviour is simplified.


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 preparation. Their deliberations may throw up previously unexpected costs and complications which will occur 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 and other unwanted consequences during the change-over period.

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 changes 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.

In the meantime, reading this book can provide all readers with useful insights into the way things work and the hazards that anyone with a financial plan for retirement, house purchase, business, or government, may experience in the current financial and management framework.


Chapter 1 - An introduction to some of the basics


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, around 90% or more of this instability is avoidable. Implicitly, Keynes defined financial stability as a state in which, if money halved in value, a person might both earn twice as much and spend twice as much on the same things and thus be basically unaffected.

That is a clear but somewhat simplified statement which has led to a significant mistake in selecting the traditionally used  measuring rod for the rate of devaluation of money. The measuring rod suggested by Keynes himself was prices inflation. We will return to that subject later because it has had some unfortunate consequences.

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, all prices should double.

Leaving this seemingly small mistake aside what does the statement mean in practice? It means that all prices, costs, values, and earnings, can be classified as prices and that all of them need to adjust to the falling value of money if we are to get to a state of financial stability.

And this is correct. All of them are prices, paid by some person or entity. They should all be free to adjust in price. That way, people could be basically unaffected by the falling value of money. 

Earnings are a combination of the price paid for hiring people and the price paid for rentals and other forms of revenue which come from investments. These are all costs, a price to be paid by some entity, organisation, or person. Values are  the price paid by a willing buyer to a willing seller for something like property, shares, paintings, and services etc. Costs are a price paid in repaying a loan, buying things, paying rentals and dividends which, like incomes, may form a part of other people's earnings. Incomes are a price paid by employers, or they can be a price paid by anyone hiring people. So as stated, all prices, costs, values, and earnings are prices in one form or another. Anything which anyone pays for has a price.

As explained below, and as most people already know, all prices adjust to changes in supply and demand if they are free to do so. But they must also be allowed to adjust to the falling value of money because money falls in value when all of these prices are rising. As earnings rise, the level of demand rises. By definition, 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 as well as adjusting for everything else. Then people would be basically unaffected by the falling value of money.  

The problem is that this is not how things have been arranged. For example:


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; effects which means that other adjustments must be made to people's financial plans, adjustments which complicate everything. 

This has recently tempted the authorities in the USA and elsewhere to intervene and buy up these bonds with printed (free to them) money. This has removed some of that source of financial 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 problems, 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 at all. Think of it this way:

If money never changed in value those prices would still be falling due to rising efficiency. That is, unless efficiency was not rising or maybe because the price of raw materials was rising as the world had run short resources. Either way, keeping pace with prices inflation is not the rate at which interest should add to a savings or a loan account in order to offset / neutralise the falling value of money or to preserve value. In the event of money not changing in value you would not preserve the value of anything by reducing its price so as to keep its purchasing power.

In Chapter 6 (volume 2 maybe) there is a short made-up story to illustrate how using that wrong measuring rod a fund might lose 95% if its value.

In this tract we will mostly use something called National Average Earnings, NAE, to measure how fast money is falling in value. It is not an exact measurement but it is close enough for our purposes. It is something which people everywhere can relate to. "Does my pension and do my savings keep pace with the earnings of most people?" It is easy to write contracts based upon this concept. If NAE had been the correct measure then the faster NAE was rising, the faster money should be falling in value. We will discuss the merits and demerits of using NAE in chapter 6. But for now think of it this way: the basic thought is that for money to fall in value all prices would have risen to a level which is that much higher than they would otherwise have reached. They may be rising or falling but they will rise faster and fall less quickly than they would have done otherwise.

What causes all prices to rise in that kind of way? It is spending by everyone. Where does spending come from? It comes from the earnings and savings and borrowing and so forth of everyone. And in the end, all spending, savings, and borrowing, comes from what all of the people earn. Higher earnings eventually lead to higher spending and higher spending leads to higher prices, higher than they would otherwise have been. And that means that in the end, money falls in value as NAE rises.

Even without completely closing that argument, (we will look at it again in chapter 6 / volume 2), this still begs the question of which comes first. The rise in our earnings or the rise in what we pay for our goods and services. As already pointed out, earnings are a price like everything else. Someone or some entity pays what others earn.

Going back now to that question: which comes first, price rises or earnings increases? And how is it that both of them can rise together? What we know for certain is that if earnings and all other prices were to double, twice as much money would be needed. Without that additional money all prices would not be able to double. In answer to that question, it doesn't matter which comes first, as long as both of them rise in a similar way. As long as all of them rise to be the same amount higher than they would otherwise be if there had not been twice as much money.

This brings us to asking what market forces would push all prices higher by the same amount. We will come to that in chapter 2.

And all of this raises the question of why more money is being created all the time and that brings us to how economies are managed - it is called monetary policy.

That discussion also begins in chapter 2 with an explanation. But chapter 2 does not explain exactly how to design the framework needed to provide a more accurate way of managing money creation and monetary policy. That, and how to redesign the entore economic framework so that it works smoothly and in the right way without any obstructions, comes later. That forms the bulk of the tract.


So far we have mentioned that fixed interest bonds are not financially stable parts of our economies. They generate winners and losers. Now let us look at the cost of housing finance. Those monthly repayments, do not adjust to offset the falling value of money either. It is the same problem as for fixed interest bonds. Capital gets repaid with interest under the contact, not value and interest.

All of the interest, including the part of the interest which must be added to the loan accounts and needed to adjust the accounts for the falling value of money, is treated as a fee for borrowing the money. It has to be paid right away. It is as if money never fell in value. We know what happens in fact: the cost of monthly repayments leaps up and down. This is how the mathematics of making those assumptions works.

Consequently, taking the value of properties up and down like a yo-yo, depending upon how much people can afford to borrow as interest rates change. The agenda is different. This causes confusion and financial instability in a key area 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. It disrupts the property developers and prevents them from offering more permanent employment. It reduces their output. Fewer homes get built. 

The overall result of ignoring the source problem is that of turning what should have been simple decisions into complex and confusing ones for the majority of people almost everywhere, as well as causing significant damage to the entire economy.

One building (property sector) economist known to the writer, Timothy Hosking, says that up to one third of all economic output in an economy is dependent upon safe and well managed financial contracts for the property sector. When that sector is damaged by those contracts which we use now, it directly damages one third of the entire economy and its employees. That then affects the entire economy. Recessions can start right there in that sector.

Timothy is writing a few papers on the damage caused to society by such kinds of things. He is hoping to pinpoint the level at which that, and other kinds of damage from other sources, will reach a socially critical level resulting in a social breakdown / political revolution.

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 yo-yo effect disappears and property values become relatively stable.

Similar improvements can be made to business finance or any other kind of finance.

With these changes made, basic and simple financial plans for the majority of people on planet earth can start to work. It really is not very complicated.

We will return to look more closely at these proposed new contracts in a later chapter. In the meantime there are some big issues to be considered.


Chapter 2 - Some of the bigger issues


In theory, there should be a market force which ensures that all prices will adjust not only to all of the usual forces of supply and demand but also to any change in the value of money.  This happens. 

The easy way to explain it is to suppose that some price has already adjusted and a competing product or service has not yet adjusted. It will be under-priced because all other competing prices will by then be more expensive. Being in limited supply the consequent increase in demand will create a shortage of this product or service. The price will join the others and increase as a consequence. People will continue to buy the same amounts of everything after these price adjustments as before they have taken place.  Otherwise they will have spare money to spend and that raises the question of what they would spend that spare money on. Whatever that was, its price would rise forcing some people to spend less on that. We must conclude that if all people still want to buy the same things as before then all prices will adjust.

If it is finance, then the interest rate will rise and the cost of borrowing will rise for otherwise the cost of borrowing as an activity will become cheaper than it was before and compared to other things which people can spend their earnings on. Again the increased demand for cheaper borrowing should result in an increase in the rate of interest. That looks right except for a few things which are currently getting in the way and distorting interest rates:

Interest rates are managed and are not free to adjust. They are not likely to be adjusted by exactly the right amount. This will, by definition, create financial instability. Here are just some of the financial instability issues created by that:

·        More value than expected will be transferred by interest rates if they are set too high and less value will be transferred than expected if they are set too low.

·        The demand for credit will be lower or higher than it might otherwise be. This is a part of the reason for managing interest rates, (to boost borrowing and spending in a slowing economy), but it is the wrong way to manage the economy as readers will realise later in the book.

·        The quantity of credit which can be created is quite strongly linked to the demand for it (demand for borrowing) rather than being linked to the national economy's need for more. More credit is too easily created. It leads to an excessive level of demand in the economy, inflating asset values which later crash down or subside. This is financial instability. There are plenty of knock-on effects. And we have not finished yet.

·        There are other forces at work as well such as those coming from the foreign exchange market. Enough said. This is all wrong and it is a major problem which comes under the heading of how the demand and the level of liquidity (quantity of money) in an  economy should be managed and it is an outcome created by a structural problem in the currency pricing market.


For money to fall in value there has to be more spending taking place and there has to be a greater amount of money in circulation to accommodate all of the price increases. For example, at twice the prices, economies need twice as much money. We will take a close look at that and why the value of money can never be stable very shortly, below.

If we can ensure that all prices are made free to adjust, because at present they certainly are not, the main remaining problem would be the time taken for those adjustments, like wage rises, and other price increases, to take place. There would be winners and losers during the adjustment process, which is something we are trying to eliminate from the design of the financial / economic framework. Hence we cannot eliminate 100% of the adjustment (financial instability) problem. To do that all prices and earnings would have to adjust every millisecond or less. However, removing over 90% of current financial instability by enabling all of the key pricing adjustments to adjust, is probably achievable. Apart from that slight problem of delayed adjustments, people should be able to make financial plans that are not destroyed, or spoilled, in any material way by the falling value of money. Most of that kind of financial instability, (the failure to be able to adjust capital values, prices, and costs), does not have to happen. It is a man-made problem created by the design of our financial contracts, conventions, regulations, market structures, and taxes.


Why does money fall in value? And how fast does that happen?

The faster that people spend on the same goods and services, the higher prices and earnings will increase. All prices which are free to do so will increase by that much more than they otherwise would have increased (or decreased). When all prices have thus been affected, money has fallen (or risen) in value.

What allows this to happen? Why does money mostly fall in value?

It is allowed by having more than enough money in circulation.

Why would we want to allow that?

If there is not enough money in circulation people have to wait for the money to reach them so that it can be spent. The economy waits and it slows. If there is too much money, people spend it faster. Managing and creating the exact amount of money needed to keep the value of money fixed cannot be done. For one thing, when more people are working more money is needed and vice versa.

It is expected that there will be a little too much rather than too little money in circulation if the management system is working properly, so as to prevent needless slowdowns or to prevent or to remove any kind of recession. Besides the number of people working and their varying moods about spending and saving, there are other things which free people make decisions about when it comes to their rate of spending, and so the value of money, in the home economy. Here are three of those:


There is a natural 'credit cycle' which happens when enough people have borrowed to their upper limits, increasing the overall level of spending and inflation in the economy in the process of borrowing and spending. Then they slow their spending to repay their debts.

Creating a stimulus at this time will not solve the problem. It will result in more borrowing and a bigger slowdown later. Clearly, limiting the excessive level of borrowing  by limiting the supply of credit created, is a good idea. This comes under the heading of good management when we get to that issue. We will need to understand how all forms of credit are created or can be created which may be different to how credit is created right now...

It is possible that this is why central banks have reduced interest rates as far as they have fallen today. It could have been an attempt to put an end to this slow-down part of this credit cycle or some other natural cycle like the two below.


There are cycles when people want to save more and spend less. When spending levels change, prices, including earnings, change, and the value of money is affected. We cannot control the value of money in this sense. And we cannot necessarily prevent a slowdown when people save more and spend less. It is their choice. But if we do add more spending in such a case, then when people do start to save less, there will be a surge in spending and money will fall in value. People's earnings wil rise. It is not so easy to get them to fall. Once risen, more money is needed to prevent a slowdown.


There are also cycles of greater spending on imports and then reduced spending on imports. This also has an impact on the home economy and its prices, its earnings, and its rate of inflation / devaluation of money. Similarly, rising income from exports and falling income from exports alters spending levels in the home economy.

All of these things change the level of prices and the rate of devaluation or revaluation of money. It can go either way, up or down, but mostly money falls in value.

In the meantime what we now know, is that the rate of spending and the level of prices and the changing rate of the devaluation or revaluation of money can never be stable.

Why have too much money in circulation rather than too little? As already explained, when there is too little money, (economists say too little liquidity), people have to wait for money. It is sometimes called a 'liquidity crisis' if the shortage is large enough. The time spent waiting for money slows down people's spending plans. A slowing economy can gather momentum, (the slowdown can gather speed), if it is a big enough slowdown. The lost spending leads to unemployment and less spending. Less spending leads to more unemployment and less spending, and so forth. It is a vicious circle.


There is an amusing brain teaser going the rounds about a hotelier and his business friends. It illustrates the point about the need for 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 a simple matter 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 so 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. Everyone got paid. 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 lent or given to it. 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. It might just as well have been money first borrowed by the hotelier and then repaid later when the hotelier himself was paid. Upon repayment, the money would still have disappeared. We will come to that later because that is the basis of the majority of lending in this world, in the current financial framework. Unless a loan comes from some existing money which was printed, the money for lending has to be created. When that kind of borrowed money is repaid, it disappears, leaving a shortage of liquidity.

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! But it does raise the question of whether or not we have enough printed money in the worlds economies.


In short, when it comes to having enough printed money available, that raises a key issue in what kind of money an economy needs to keep it working smoothly. There are two kinds of money:

·        Printed money which is permanent unless it is somehow destroyed in a fire etc, and
·        Created-for-lending money which vanishes when it gets repaid..

Clearly, there two kinds of borrowed money. There is money borrowed from pre-existing (printed) money, and there is money which has been specifically created for lending. Here we are talking of that latter kind of money. When it gets repaid it is as if it had never existed.

Yes, this kind of borrowed money disappears when it has been repaid, leaving the group with no liquidity, just like in the hotelier story. An economy needs the right proportions of each kind of money.

We will get to that in the final chapters of this tract. It comes under the heading of management of an economy and keeping it well balanced.


Keynes' first mistake was in not addressing the financial instabilities which he knew existed. If all prices are able to adjust to the falling value of money as well as to other things, we get financial stability. People will be basically unaffected by the changing value of money. We cannot avoid credit cycles, savings cycles, importing cycles and exporting cycles, but we can reduce their combined amplitude (their size) by limiting the total amount of borrowing plus printed money (both) made available to an economy.

Explaining why market forces will normally make the necessary pricing adjustments happen largely goes back to what Adam Smith wrote in the 1700's about how and why free prices can adjust without any help. The writer has also given his own explanation above: if all prices did not adjust people would spend more on the cheaper things and less of the rest. That is, until all prices finally did adjust. Adam Smith also wrote that prices adjust so that people can afford most of what they want and they get the level of supplies which they can afford to pay for. Smith showed that this means that the resources of a nation are steered towards that end: helping people to get as much of what they want, or they need, as possible without wasting production by producing too much.

As this book progresses, we will look at each example of man-made interference with pricing and what would happen if those prices were free to adjust and how that can be arranged. Then readers will see that Adam Smith was right.



Unfortunately, modern economists, including Lord Keynes, have rejected this idea, believing that this does not always work. It does work. They got that wrong. They did not see that mankind is interfering with prices, and is preventing them from adjusting to the falling value of money. They have assumed that all prices were always free to adjust except in a state controlled economy which is where they see huge surplussed of some things and long queues of people wanting to buy other things. It is called price fixing.

But prices can also be fixed by the contracts we use as in fixed interest and housing finance. They can be distorted by having one price and one market for two different forms of activity as in the currency markets. We will come to that. They can be disrupted by having central banks managing interest rates instead of having a market place where interest rates can be determined by supply and demand for credit.

One example which Keynes himself cited is fixed interest bonds and fixed interest loans. The capital is repaid with interest. That is the contract. Why not have a different contract in which the value is repaid with interest? Keynes did not address this or any of the above pricing problems and that was his big mistake.

The same applies to all forms of lending and borrowing: in housing finance, in government finance, and in business / commercial finance. They are all financially unsafe and unstable for this exact same reason.

Keynes and his followers all wrongly assumed that prices are free to adjust and then they said that the economy is financially unstable, which of course it is. This is the starting point for teaching at universities around the world. They are all saying that economies are unstable and that interventions are needed. To deal with this inbuilt financial instability, or rather with its consequences, they began adding layer upon layer of interventions and regulations, many of them not needed, leading to enormous complexity - and plenty of jobs for economists needed to explain what will happen next, even if they can work that out!

The instability remains to this day. In many ways it has got worse. This is largely because each intervention and some regulations have their own unwanted consequences. They are dealing with the symptoms, not the sources of the problems. Problems? There are at least two other structural problem areas besides the structure of various lending agreements, as already mentioned:
  • One is the currency risk and
  • The other is interest rate management 
In both cases, the required market structures have not been created. It is a lot cheaper to address the problem than to intervene to correct the consequences.
Interest rates are a price - they need to adjust, not be adjusted. Any adjustment to interest rates is an intervention creating un-planned for winners and losers. This is essentially what we are trying to avoid. Each instability of this kind which is created makes matters more complicated. There are not enough interventions to deal with them all at the same time.

NOTE - maybe these next paragraphs can be deleted. they are repeating what has been said. Readers can help by giving feedback.

Currently we have record low rates of interest in many economies. Remember, interest rates are not supposed to be managed. These low interest rates may have been a doomed attempt at preventing the usual slowdown caused by a credit cycle. The credit cycle was extra large in the early 2000's because low interest rates in the early years of the century had allowed far too much borrowing. The increased borrowing kept the spending level steady.

Of course, all of that excess debt needed to be repaid. Lowering interest rates all the time prevents the credit cycle from cycling. If that is the process, then the repayment part of the cycle where more people are repaying than are borrowing never happens. Not until interest rates reach zero anyway. Then you cannot reduce interest rates any more and then you finally do get the slowdown. That is, unless the central bank finds some way to take interest rates below zero - which some are now trying to do. 

Economists call this the 'zero bound' (boundary).

You have a choice: you can continue to support inflated borrowing by constantly reducing interest rates until they reach zero, or as far below zero as you can take them. Or you can stop doing that and wait for the recovery.

But this assumes that interest rates can and should be managed, which is wrong. Any managed price will be a distorted price, not a market price. It will create financial instability. In this case it created excessive borrowing and inflated asset values which are financially unsafe and unstable. Now no one feels safe.


As mentioned earlier, a recession is something different from a small credit cycle. It can be a self-perpetuating slowdown, a vicious circle of reduced spending, reduce earnings, and reduced tax revenues, (reduced government earnings), leading to reduced employment and reduced spending. Then, with the increased unemployment and the reduced spending, the cycle starts over again. It can happen if the boom in borrowing is large enough and if nothing is then done to turn things around, to make sure that at the end of the credit cycle, people can, and do, spend more.

To do that, to want to spend and borrow more, people need confidence. They need to see that recovery is happening. A bit of chicken and egg - which comes first? Policymakers try to make people believe in recovery to restart the recovery circle of more spending, more employment, and more spending. They make speeches. They may lower taxes or lower interest rates or get government to start spending out of borrowed money.


The wrong way to do that is to increase the level of borrowing and spending by governments, or to manage (lower) the rate of interest, which is a price that should be left to self-adjust. It is wrong for government to borrow to spend more because loans have to be repaid and government spending must reduce to do that unless, hopefully, government revenues have improved due to the higher level of employment. That is a fine calculation which can go wrong. Government may already be borrowing more than planned in order to pay for the assistance given to the unemployed and the larger distressed and sickly population. Stress makes people sick.

And it is wrong to meddle with interest rates. 


The right way to revive the level of spending is to give everyone some money to spend in return for continuing to spend. That includes government departments and every spender. A slower spending economy needs less liquidity, less money. A recovering economy needs more money, more liquidity. If there was already enough money, then creating this extra money will create some small additional inflation. That means that the value of money will fall faster than it was going to. But maybe liquidity levels were going to reduce or were already reducing at the end of the credit cycle as the loans were being repaid. More spending and more liquidity will be needed. Providing that additional money, maybe it should be printed money to increase permanent liquidity, will boost spending and create the needed additional liquidity as well. That may not even be inflationary. Providing that boost to spending and liquidity will solve the problem. 

Either way, if a little too much spending and too much money is created, all prices will adjust if they are free to do so. So providing everyone with some free money is the solution.

First, create financial stability so that all prices can adjust, then create more money, more liquidity, and get everyone to spend it. Don't just throw it at them as most economists suggest. Read on...

In any case, having a little inflation is normal. It is the result of having a little more money than needed so it helps to avoid any silent, unexpected, liquidity shortage and a future slowdown. It is also easier to negotiate wage increases than wage decreases, so rising prices is easier to manage than falling prices. The same goes for prices in the shops. This is why money is always likely to be falling in value.


If money is rising in value and prices in the shops are falling, then holding cash might be seen as a risk free investment. People may delay spending while prices are falling or they may avoid the risk of lending or investing their savings by just holding cash. It is argued that it is better that such money held in cash should be limited by having some inflation so that people lend it to or invest it, whereas if prices are falling, when there is deflation, and cash (money) is rising in value, holdings of cash will increase. The case that this is bad for the economy has not been proved. If there is too much cash and too little money on offer for lending and investing, then more money or more credit can be created.

THE VAT PUNCH SOLUTION - What all the economists are missing

The way to push spending forward in the event that increased spending and more liquidity is needed is remarkably simple. All accounts today are recorded electronically. It is easy to alter the figures. More (free) money is created (printed / added electronically) to an account at the VAT revenue office, up to the amount needed to allow that office to reduce the level of VAT by say, 5%, for say, the next three months. VAT is a form of sales tax. It is a tax on spending. Policy makers would state a short time in advance, that VAT will be reduced by say 5% for the following three month period. People will have more money to spend because that 5% will be left over in their pockets or in their bank accounts after they have spent normally. It won't be in the national VAT office because they would have spent it on the subsidy. People will spend more while prices are lower. That is what people do. That is what happened in the UK when VAT was reduced temporarily. The boost to the economy was greater than economists (except the writer) expected. The people also have the extra money to encourage them to spend more. There are charities and other things which do not pay VAT. They can also be given a subsidy on all revenues in return for reducing their take from donors and subscribers for monthly or other regular payments by the same 5%. Or they can simply pay a 5% rebate.

The outcome: more spending while stocks last - as in January sales. With more printed money there is more permanent liquidity. This money will not disappear when it is needed by the faster moving economy. Now the liquidity slowdown, or other slowdown, has ended, and the higher level of spending has enough liquidity to be able to continue.


People did not have to borrow to get things moving again. They did not have to slow their spending to repay their loans afterwards. They did not borrow to increase the level of spending. They did not need to borrow to increase liquidity. Neither did the government have to borrow so as to spend people back into work. There were no loans to repay afterwards. There was none of that to slow things down again. Borrowed money has a habit of disappearing when it is repaid, leading to another liquidity crisis. That is, unless more borrowing is encouraged and made possible to solve that problem.


Today, over 90% of all money is temporary money which has been borrowed and which disappears when it is repaid. It should never have reached that 90% level. It creates a liquidity shortage too easily. Combating that with more borrowing from reduced interest rates just takes the 90% figure higher. The whole economy starts to busy itself with big loans and big projects which people did not necessarily want. And they become slaves to their debts.

Now that, using the above method, we have got people spending their free money, confidence is high. If the additional liquidity creates any additional inflation it will barely be noticed. It takes a lot of money-creation to do that. And if money devalues a little faster on account of there being that much more of it, say around 2.5% more new money printed, if all prices are set free to adjust, then people will be largely unaffected. Then there will also be the right amount of liquidity to cope with the 2.5% higher prices of everything. It may not even create nay of the extra 2.5% inflation.

Here is a crudely based estimate on that:

The total new money created will be around 5% of National Earnings, for three months, so about 1.25% of national earnings (GDP) for a year. The total stock of money in an economy may well be 50% of GDP. It can be higher and it can be lower. Based upon a money stock of 50% of GDP, this 1.25% of GDP added yo that stock will add 2.5% to the 50% of GDP stock of money available for all spending transactions. To take some crude figures: inflation of the stock of money normally runs at say, up to 4% p.a. for a constant population with spending and savings, imports and exports, and so forth being stable, and all ratios like the proportion of people working, being constant. Average Earnings would rise by a similar amount: 4% p.a. The stock of money will need to rise at the same 4% p.a. rate and money will devalue at a similar rate. There are plenty of unknowns here!

But if all of those average out, and the slowdown was caused by a 2.5% shortfall of liquidity then there will be no additional inflation caused. The important point to remember is that no one really knows what is going on. So if prices can all adjust nicely, then no one even needs to know exactly what is going on. If money is falling in value too fast for comfort, they reduce the rate of creation of money or they remove some - they create less free credit money and they can print less money. It can even be destroyed by the central banks 'un-printing' (removing) some electronically. If there is a slowdown beyond what is caused by a natural cycle, they will do the opposite. But then, how will they know which is which? How will anyone actually know what is causing a slowdown?


Professor Milton Friedman suggested that money creation should be done at a steady rate and everything else should be left alone. His problem was in knowing how that may be done most effectively, but he was probably exactly right. The cycles will cycle of their own accord, and there will always be some new money coming along to prevent an unstoppable slowdown into recession. In fact it is currently not possible to ensure that new money of both kinds is constantly created at a steady percentage rate of increase,  but we can change that as readers will see later. That is when we change the system to managing the stock of money directly rather than managing the rate of interest and allowing the banks to create as much new money for lending as they can find borrowers to led to. That system is not tightly managed, nor can it ever be.


What about people getting free money? Is that harmful or unfair? Some may get more than others, so that may be a little unfair. The important thing is that the money spent by people on the goods and services which they normally want, keeps the supplies of those things coming and that keeps employment of the producers ongoing - at least until people decide that they want to buy something else.

This way, there is no interference caused by creating more money. Whoever gets free money gets free goods and services from the rest of the people. But since everyone gets some free money they are all giving a similar value in goods or services to the rest of the population for free. They get for free and they give for free. Everyone benefits. Their jobs are safe. More or less, what they get for free they give for free.

MONEY ISLAND - an illustrative story

Imagine an island which had no money. Then some fell from the sky. Money can be exchanged for almost anything. After a while the islanders will learn how much money others are willing to exchange their goods and services for. It would take time. Some people would offer too much and run out of money and others would offer too little and not get what they wanted. There would be just the right amount of money with which to run the economy - at first. But that would have had the effect of speeding up all of the trade and creating much more economic output, more goods and services and more profits would be made. Then there really would be a shortage of liquidity, of money.

This scenario is a part of a story created by the writer. It is called Money Island. In the story there were characters with names and details of their negotiations. It has been suggested that this be made into a film because the story continues, and at times it can be funny. And there can be bad people exploiting others until they get stopped...it would be a useful education for film-goers. And they would remember what they learned.

For example, new money gets created allowing the island's economy to grow again. It was created by a certain Mr Forger. Mr Forger became very wealthy. He got found out....The elders were grateful in a way, but they stepped in and nationalised the process.

Later they found that borrowing money could enable big projects to be funded like houses and roads and other expensive things, including solar energy systems. There were not enough savings available to meet the demand. So the government decided to lend some money which it did not have. The result was a bit of inflation but eventually the proportion of this credit money as a proportion of the whole stock of money settled down, and as the proportion stabilised; so did inflation. The proportion of temporary credit money never reached the 90%+ figure that some economies in the real world have today. Thereafter these proportions of printed, (permanent) money and credit from government created loans (temporary money) were managed so as to keep spending in all of the economic sectors in approximate balance. It worked out that the proportion of credit money needed varied between 30% of the total money stock and 60%. NOTE: This is a pure guess - it will be interesting to see what economists reading this script will come up with as the right figures.

The islanders never bothered to regulate what is called 'near money' or any other such thing because no one takes 'near money' into a shop. They always exchange near money for real money first. These near-money ideas have been invested in by economists who have some strange ideas which do not seem to work anyway. But it is there in the literature. Research reported on by the Cobden Centre shows that it is the stock of money which gives the best relationship with the rate of growth of spending in the economy, not any of those other measures. The writer was not surprised.


Then the islanders discovered another island. Those people in that other island had their own currency. They did not want that of the Money Island. But they did find out that they wanted to buy things from Money Island and Money Islanders wanted to buy from them. Each island had interesting things to offer. In each case the producers mostly wanted to be paid in their own national currency. So people started to exchange their currency. They accepted payment in the foreign currency and when they did not want to buy goods and services from that foreign Island using that foreign currency, they asked around to see if anyone else wanted to use their left over foreign currency.  The result was "Yes please" and a deal was done. Soon, a considerable amount of each Island's currency was constantly being exchanged for another amount of foreign currency. So many people from both islands started doing this that it developed into a formal currency exchange market with a market price at which people generally were willing to exchange currencies.

Everything worked fine until one day someone borrowed a capital sum worth more than a month's trading from that other island and then dumped it all onto the foreign exchange market, asking for Money Island currency in exchange for this huge sum of borrowed money. There was nowhere near enough money available. The price of the Money Island currency fell through the floor. There was a crisis. Imports now cost a huge amount more. The Island's elders convened a meeting to discuss this problem. We will get to the solution which they came up with in the later chapters. They will be creating a new currency exchange for capital leaving traders alone to set their own currency price.[2]


Going back to how to get an economy moving again after a slowdown or a recession, Keynes suggested burying money in bottles for people to dig up and spend. Milton Friedman, a Nobel Laureate, coined the phrase. 'helicopter money' like dropping money from the sky. It is the same idea. The Positive Money Group in London UK, want to have printed money but have not created the financial stability needed to cope with the resulting rise in interest rates, and the fall in the value of the currency, and they want the money to be given to government to spend. The problem with governments getting the money is that:

They will demand it at election times to buy favours from their supporters. It is the well known 'election cycle' where an economy booms before an election and then collapses afterwards.

Even if that does not happen, no government will spend the free money on nights out, beer, hairdo's, holidays, clothing, cars, buses, machinery, or food. Their spending will not support the jobs which supply what people need. They will create new jobs somewhere, building highways or other things, taking resources from other industries only to shut down when they have finished their spending. They say that the spending on these things will mean that the recipients employed to build those highways will be spending that new money on other things and that those other, new recipients, will spend it on yet more things provided by others, until after a long time, everyone will get some extra spending. It is called 'trickle down'. It is there in the text books. It takes a lot longer to get to everyone and it favours the few who get it first. If you want your whole garden to grow you water all of it, not some lucky plants which get too much water and then hoping that it will trickle down to the rest of the garden.


Clearly we have a lot of reforms to make. We must first create the conditions needed for financial stability, allowing all prices their freedom to adjust.  Then we can safely reform the management process. The end result should be a peaceful economy which more or less manages itself provided it is fed with enough money, and provided that the additional spending is done by the people for the people and not by a government, creating temporary jobs here and destroying other jobs there.

In the meantime, every form of intervention, subsidy, interest rate change, or currency intervention, creates new winners and losers. Each and every one costs money and they all add some financial instability, and a measure of uncertainty about what will change, when, and by how much. People ask "What intervention will they think up next? How will it affect me or my business? How can I plan for that?" People are greatly affected. Their uncertainty delays decisions and investments. It slows the economy. It adds to their costs as well as to that of their government whose tax revenues rise less quickly or may continue falling. It confuses. It benefits some and destroys others.


First we have to replace all of our savings and lending contracts with contracts which can or must adjust their capital values for the falling value of money. The adjustment, the rise in value, must be tax free. At present this is one of the things which is preventing a test of the system for housing finance, business finance, and bonds. The other is regulations. It does not have to be imposed. These alternative contracts have more sales appeal and they reduce costs. They are all more competitive. They old ones will be wiped out by the competition. It is recommended that financial institutions take steps to learn how this can be done. The full tract will assist them greatly.

Then there is the question of how much credit-money needs to be created, by whom, and lent to whom, and when... We will get to all these questions later in the final chapters.

In the meantime it is not just a question of having the right money-creating instruments and methods and a financially stable framework, it is also a matter of coping with international business. It is all well and good to show how a single economy can be made financially stable and well managed. It is another matter to deal with foreign trade and foreign currencies as well.

In that foreign trade sector we will find a whole additional set of issues to be dealt with. Some of these issues, if not properly dealt with, can have an unwelcome impact on the stock of money and on the interest rates of the Island's economy. They can certainly have a very destructive effect because today, like the average economy in the world, about half of all trade is done through the foreign exchange market. Any price instability there can upset the entire economy. There can also be currency price manipulation and trade wars. With the right two-market structure these problems can be eliminated.


We need to ensure that all prices of all goods and services, including those which are imported, can adjust to the falling value of money as well as to all of the normal things to which prices always adjust.

When that is done we can look to the problems linked to money creation and management of the economy. This will involve balancing the two kinds of money needed, and dealing with the potential problems caused by a shortage of liquidity and a shortage of money to borrow, or having too much money leading to higher than wanted inflation and excessive imports. We will look at how to manage such a simplified economic model so as to keep it moving without endless booms and busts and foreign exchange price crises.

We will continue to visit Money Island to see what problems they ran into and what they did to keep their economy running smoothly. They simply followed what they found in the established text books written by such people as Adam Smith and by engineers who know how to manage complex systems.

Will it happen?

Governments fall due to financial instability. Do they want that?

Or do they want to please their people?


So far we have been looking at the big picture. It is very big with lots of things to think about.

From here on we will go more slowly. We will cover the following issues:

1. On the already mentioned subjects more details and illustrations are to be provided.
There will be some repetition because it is necessary when restarting a subject.

2. Two currency markets, each with its own price and it will be explained why text-books which claim this will not work and/or break a principle, are clearly incorrect, and

3. A new market in credit and savings which is accessible by lenders and brokers who may be permitted to assess the credibility of borrowers and release funds at market rates.
No lender will be too big to fail. Any money, and deposits lost, will be replaced with some limited amount of printed money. There will be no run-on-the-banks. But when it comes to derivative trading which can have a domino effect as soon as one lender or institution fails, that does need some further regulation. Lenders must not speculate with other people's money, and traders must limit what they speculate with to the assets that they have available.

[1] When economists talk about an economic model they usually mean some simplified mathematical model for some part of an economy. They then test that model to see how it behaves. In this case we are talking about the entire economy as being the model. When the unwanted knots are taken out, its behaviour is simplified.
[2] People in South Africa will remember there being two markets - there was the commercial rand and the financial rand. The idea was to stem the tide of money exiting South Africa under the Apartheid regime. This was a blocked market. It did not work well. We are not talking about blocking markets. We are all about having free markets. 

Edward C D Ingram travels a lot
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