This page is for economists and lenders.

It is copied from a LinkedIn Discussion started by David G Clark, who wants to become the next President of the United States. Links given below.

David asked me for some help with his campaign and Dennis raised the objection that the banks may resist the proposed changes in their lending model.

Here is my reply in four comments.


  • Dennis, David


    There is something more important than the motives of bankers.

    There is the self-protection of voters and of the economy itself.

    Hence I have now published something for David or failing that, for the public and business and governments of the world.

  • Edward Ingram
    I have several ideas for book titles and contents, depending upon the title.

    A new idea for a title, specifically aimed at economists, is this:


    What is it that is so obvious?

    First look at the way that mortgage finance is done today, and for that matter, add in government and business finance, taxation and savings.

    This states (I may not have settled upon a single precise wording yet - so subject to amendments as necessary):

    The architecture of the economy, (in this case the way that finance is arranged), shall be such that any rate of change in the level of aggregate demand (for which measure we may test the idea of using National Average Earnings Growth (AEG% p.a. for short), shall impart upon [the rate of interest] a pressure towards matching that change in the rate of AEG% p.a. one on one.

    AND by altering the words in [ ] ONLY:

    The architecture of the economy, (in this case the way that finance is arranged), shall be such that any rate of change in the level of aggregate demand (for which measure we may test the idea of using National Average Earnings Growth (AEG% p.a. for short), shall impart upon [the cost of debt repayments] a pressure towards matching that change in the rate of AEG% p.a. one on one.

    NOTE only the words inside the [ ] have changed.

    We can continue writing this same paragraph as often as it takes to cover all examples of prices, costs, and values. [NOTE - THE IMPACT OF INTERNATIONAL TRADE AND CURRENCY PRICING MAY BE TREATED AS A SPECAL CASE]

    This first principle is an extention of what every economist has been taught. Namely, that when the level of demand rises by 'x%' the level pf prices, costs, and values in the economy will be raised by 'x%' compared to what it otherwise would have been.

    THE IMPLICATIONS OF THIS PRINCIPLE, or maybe the principle itself because we are talking about principles of design, is that the financial architecture within the economy, (the design used for the calculation and imposition of costs, prices, and values), should not vary this one-on-one response automatically or in any other fashion.

    For if it does that, then the cost, prices, or value imposed will disturb the balance betweeen the supply and the demand.

    If such a disturbance shall take place we know from the properties of complex systems that all kinds of complications in the system, (many unwanted symptoms), will be created.


    Now think about it.

    My new design for finance removes all of the observed distortions if we use National Average Earnings (NAE) and Average Earnings Growth (AEG) as our measuring rods for aggregate demand.
  • Edward Ingram
    Please digest all that just a little (without being too careful about definitions of aggregate demand - we can look at that later) before moving on to this new comment, which will expand upon the above.


    Please remember how we currently calculate monthly mortgage costs and how government calculates its debt servicing costs, and businesses likewise.

    All of these break the rule.

    All of these create horrible or potentially horrible outcomes:

    In housing finance the Fed is unable to raise interest rates for fear of the consequences in that sector.

    In government finance the Fed is unable to raise interest rates for fear of the consequences for holders of government bonds.

    I first became interested in this subject in the early 1970s when UK building societies were repossessing the homes of people that were perfectly able to repay the mortgages that they had been given. But the architecture of that finance made the then current level of monthly mortgage payments impossible to afford. It was a temporary situation and it was a highly disruptive sistuation, just like the one that the Fed is now concerned not to repeat.

    You will readily agree, I think, that some people lost their homes, not because of sub-prime, but because interest rates rose and repayment costs leapt up (potentially by 50%) after the Fed raised rates by 4.25%. You will agree that this interest rate increase, if it had been maintained, would have crashed property values, destroyed the lending industry in that sector, and that this can still happen if the Fed repeats this trick. [ Sub-prime is a side-issue - a hugley important one in the context of regulations, but still a side issue that can be resolved going forward. ]

    You may agree that if full employment returns, USA NAE will start to rise if borrowing at low interest rates continues until the demand in the economy exceeds the supply. As incomes rise, more can be borrowed and more money is created to supply the demand (which should not happen of course, but that is how things work).

    So the USA among others is in Ingram's Low Inflation Trap.

    It does not happen in nations whose inflation rate is higher because the escape velocity is much closer to where they are already. That is to say, that incomes rise fast enough for an interest rate rise of a similar amount to be just a temporary problem. A year later, incomes catch up and everything rebalances.

    But it is still a bad thing.

  • Edward Ingram

    Protecting the economy and the people and the voters is the priority.

    Increasing competition among lenders is a priority.

    If we remove the above distortions, reserve ratios can fall. This was pointed out to me (I already knew it) by the spokesperson for a central bank, and has since been repeated by many others.

    This will intensify competition among lenders.

    Lenders need reserves (invested in Wealth Bonds) to float their reserves so that they increase in value alongside AEG. Demand for loans rises with AEG. Wealth Bonds rise with AEG.

    For that matter, rentals and property values will also rise with AEG, as will turnover and profits and dividends. AEG is one factor and a very important factor in the generation of demand in an economy. Ultimately, (do you think?), all spending comes from income.

    AEG is a benchmark. Many things do not rise one-on-one with NAE, or at the AEG rate, but in every case there is a reason for that. Finding that reason is very helpful to the study of macro-economic behaviour and the study of macro-economic design.

    As far as I can tell, I am the first person to systematically embark upon such studies .

    If we can iron out most of those deviations, for example, those that are sourced from currency pricing and international investment, and if we can smooth out the rate of creation of money, allowing the price of money (the interest rate) to conform with the first principle of Macro-economic Design by finding its own level, then we will have a calmer economy. Something more sustainable.


    At least the banks / lenders will no longer be vulnerable like they are now. One economist, dwelling on how big the reserves should be in the banking sector, stated that "The waves are bigger than the ship". You can never have enough reserves to cope with the instabilities built into the system.

    But we can change the system.
This discussion is to be found at LinkedIn in

The Economist (official group for The Economist newspaper)"

at LinkedIn and the Discussion is entitled 

It's amazing that we have created $18 TRILLION of national debt but can not find anyone who is responsible for it. Amazing.

How Scary are the Bond Markets - by Robert Shiller - read my comment on this esssay. 18th comment

The Maths of Lending - written by Edward

The low inflation trap - and how to escape - written by Edward

Where are Interest Rates headed? - written by Edward

Long Term Investment Returns - Based on Wikipedia - Written by Edward

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