This is another failed attempt to write the book

Please forgive any inconvenience caused.

The way forward has proved to be the creation of a course in the subject.

The scripts for that are far superior

Please go to this link for that.

This replaces the previous drafts. It was added on 16th May 2015

When completed, it is intended for publication as an academic paper or book.

An overview giving a lot of details and many powerful concepts in under 3,500 words

By Edward C D Ingram
Edn 7 (draft 1b)

This treatise represents a fundamental shift in thinking of enormous proportions. The benefits expected may be as much as 2% p.a. saved / added to the world’s economic output for generations to come. This is why people need to see it from more than one viewpoint. Common sense is one, academic theory is one, the commercial and business benefits are one, the social-political urgency of dealing with these issues is one, and the problems of implementation smoothly, and reducing net problems of adjustment (eliminating imbalances) in the process, is a critical one.

The utmost confidence in the proposals that are made needs to be generated. This is why writing such a blockbuster of a treatise has taken about a decade to put together. It is also why the acknowledgements run to a few pages. Hundreds of people have made contributions and no doubt hundreds more have been overlooked in the acknowledgements.

For a more detailed abstract, readers are advised to move on to the section entitled BACKGROUND AND SCOPE.

It is suggested that readers skip this section. It has been (will be) placed here before the CONTENTS as an easy-to-find reference page. Please just use it as a reminder when a reminder of what has already been written is needed.

The reason for this is that there are new concepts that are necessary to explain and define what is being said. These will be found in the texts, not here.

I will create a url for this intil final drafting


To be extended sometime, no hurry.
Table of Contents so far

Table of Contents








After identifying three major problem areas in which imbalances are generated by the financial / economic framework, the bulk of the paper is devoted to explaining the alternative frameworks which the writer has to offer, in detail. The research and development process has greatly benefited from his long experience as a financial adviser and investment manager, which informed him clearly about what markets need and how they are unable to obtain what they need. His engineering knowledge of the behaviour and management of complex systems, learned in his student days, was also useful. His life-time habit of asking more questions than anyone else at seminars, and as a student, provided him with a greater understanding of the entire subject of broad (macro-) economics and finance than most others ever seem to achieve. That learning process continues even today through daily online discussions. Some gaps remain but not enough to throw doubt upon the analysis of the source of the problems.

People everywhere are seeking a new economic framework. If we eliminate the major part of recessions and slowdowns, that may save more than 1% p.a. of world, and/or national, economic output. If we create a business-friendly environment with better financing facilities, greater confidence in economic stability and personal financial security, cheaper costs, and lower capital requirements, then this may bring the total improvement in economic output to a sustainable 2% p.a. better than now, major unexpected events excepted. The 2% p.a. figure may be a little on the high side, but not if we are viewing this from the year 2000 onwards, escaping the financial crises since then. The total increase in world output might by now have been 32% greater.

Readers may well be able to add refinements and other suggested remedies but the analysis of where the major problems are to be found is generally accepted by most readers. It is as follows:

The source of the major and continuously problematic imbalances faced by the world's economies comes from not having the freedom of pricing, including costing and values, to adjust so as to balance supply with demand and to keep thing in balance. This includes the value of savings and debts, and debt servicing costs. It includes interest rates (the price of credit), and the price of currencies. When this freedom is denied by the financial framework, imbalances are created across entire economies.  There are three major areas of concern as follows:

The writer started looking for a better and safer way of arranging housing finance with new contracts in 1974. He proposed a link between repayments and average earnings. 


This would take out the major cause of arrears and liberate lenders to manage their own rates of interest. Surpluses and shortages of funds to lend would end.

That same model is now in operation on a limited scale in Turkey (reference given). But a much better and model based upon a new and comprehensive mathematics of lending has now been created. This is included in this treatise.

A review committee expressed concern that the fund-raising potential of this new lending and savings model was too powerful to sit alongside government and commercial fund raising methods. It could overwhelm them. It was decided to modify both of those savings and debt structures as well, creating a harmonious set of savings and lending models which could compete with each other on level terms. They could also compete for funds, on level terms, with other investment media, such as property and equities. This simplifies the entire savings (which includes investing), and borrowing, sector. In choosing an investment, the only major question to ask is about the risk to wealth from volatility and the rate of return from the investment in relation to its ability to keep pace with rising incomes.

The new lending model is capable of competing with equity capital as a means of fund raising for direct use in businesses; and it can compete with the already tested idea of equity sharing for housing finance. It can be used as a safe means to offer zero deposit house purchase by contracting to treat the initial repayments as if they were rental in the event of a default. The new model can be added as an option to rescue lenders and borrowers when interest rates are raised fast, which answers a major dilemma currently facing policy-makers. The government version can be used to stabilise government debt costs during deflation, to protect savings by linking them to average earnings in inflationary or any other conditions, and to open up huge markets for them with financial institutions. The link to National Average Earnings will remove the main risk premium, thus reducing costs to the minimum. Currently, central banks can take advantage of these two new debt structures to escape from the low interest rate dilemma which they are currently unable to come to terms with.

Difficulty in writing this treatise arose from many quarters, because among other requirements, there was a need to fit it all into the theory of macro-economics. And it seems complicated because a change in one part of an economy affects all of the other parts. It is true, and economists understand that. All of these difficulties create jolts and unexpected developments that can change the behaviour of the people, adding further complications.
What differentiates this paper from what economists normally write, is that it identifies those parts of the economy which are mis-behaving, causing behaviour changes, and so removes problems from all over the economy at a single stroke, or three strokes to be closer to the truth.

This is done by suggesting changes that comply with the basic laws of pricing. If one has faith in the classical basis of economics in respect of prices adjusting under market forces to create balances rather than imbalances, there is no real need to create all kinds of predictive models to test whether or not there will be an overall benefit from making changes that remove non-compliance. The difficulty arises in the management of the transition to the new order.

Another difficulty arose for economists because traditionally, it has been taught that preserving purchasing power would preserve wealth; and that the real interest rate is the thing to manage. Both of these viewpoints have to be challenged if we are to move forward on a clear an academic and practical basis.

It was this new understanding which led to the acceptance of the new savings and debt structures outlined above. The way to attract funds for lending which is repaid from earnings, is to offer savers who want their pension earnings and their savings for retirement, to keep pace with earnings as earnings lent become earnings repaid. This paper explains how that works. Subject to finding a balance between supply and demand for credit at a positive market rate of interest above (National) Average Earnings Growth, AEG% p.a., these arrangements will make savings for lending very attractive. Of course, there is no guarantee that such a balance will fully protect the value of investment savings. That is, at least, not until one has studied the way that this has been seemingly accidentally achieved in the past, only to find that there is a solid market force behind it making it happen, but along with a great deal of unpredictability over the short and medium term because of the problems with imbalances. In other words, the past variance in the rate of return can be seen to be largely the outcome of the failures of the current economic framework as seen in this treatise. It is a failure of the system to allow cost and price adjustment in ways that avoid the automated creation of imbalances and general crises and instability all over the world's economies. Hopefully, readers will come to agree about this analysis by the end of this paper, and probably quite early on.

Another problem, perhaps not yet fully resolved, largely because lenders are not well versed in economics and they have had many traumatic experiences in the past over this issue, is that lenders fear a loss of control over their cash flows. Many a lender has gone out of business on account of this. But it is now clear that if arrears are under control, so that prices (interest rates) could adjust to balance the books, that issue would cease to be the problem that it has always been in the past.
In principle, it is a matter of writing contracts which specify that the wealth that is lent must be returned with the going rate of interest, all in good time and without creating a crisis of arrears in the process. This kind of contract means that the amount which it is safe to lend does not vary a great deal as economic rates of inflation change. This means that the value of properties will become more stable, more related to the rising level of National Average Earnings, (NAE), than they have been in the past. Property values will become compliant with the basic law of pricing, rising in proportion to the rate of increase in NAE plus or minus the usual special factors that always affect particular properties and areas.

Until now, a reduced nominal rate of interest has been the signal for lenders to lend more. The result of that is, in a word, disaster.

Some restraints on how much volume can be lent were lifted when lenders accepted the invention of mortgage backed securities. Unfortunately, these remove the link between the customer and the supplier (the lender), which the writer finds is a very doubtful change in the social order. This innovation also led to the sub-prime crisis. If these new issues are to be resolved, some serious thinking needs to be completed. That subject is not covered in this treatise. In fact, the need for it may be out-dated by this treatise. Lender’s capital reserve requirements will fall, and none will be too big to fail. That comes out of the reduced lending risk, and the power of the new Money Supply Authority about to be discussed in section #2.

Interest rates are clearly involved as a destabilising factor. It seemed necessary to look at the unnatural behaviour of interest rates. They should not be varying much over time if the economy is a properly balanced. This led to an investigation into what was disturbing them, and what might be done to settle them down. It was clear that, because the supply side of credit is not under direct and firm control, with a specific limit in line with the needs of the economy, that is why the interest rate cannot find a balance. Instead, the basic interest rate is manipulated by central banks to deter excessive borrowing and thus to limit the supply of credit. It does not work well. People are not easily deterred from planned borrowing, and responses are delayed. It is not helped by the way that borrowing costs exaggerate their response to interest rate changes, rising and falling around tenfold faster than anything else, in disregard to basic pricing principles. Interest rates are unable to perform their proper pricing role, and the human responses from this kind of thing causes multiple additional problems. The result is alternating excess and shortage of credit. This creates too much spending, followed by re-adjustment / recession. In short, it creates massive credit cycles. Colloquially, this is sometimes referred to as 'boom and bust'.
It was decided to look for a solution through the management of aggregate credit. This would allow interest rates to stabilise and it would remove major credit cycles.

It turned out that this could be achieved by appointing a government agency named the Money Supply Authority, (MSA), based at central banks. Their mandate would be to perform this function and to create a market for credit for lenders for access, at interest. This way the rate of interest and the volume of credit would become market-related and significantly more stable. People that do not have a creative and constructive use for the money would not want to pay that market rate of interest. The economy would have about the right amount of credit and spending which it needs to keep everything in balance and to utilise all of the available human and other resources. Any error would be on the high side. Risks would reduce and capital reserve requirements would fall.

The new debt structures would take care of any instabilities remaining or created by having an excess amount of credit. The prices and costs would rise as National Average Earnings rose. The value of savings and debts would rise likewise, as would all costs, rising by that amount more than they otherwise would rise – or falling less quickly. But there remains one problem in maintaining good control over the money supply for transactions and credit. This is the intrusions coming in from international investors. This can also move interest rates. So that has to be looked into as well. See Section #3.

The creation of the MSA means that if the economy is running low on credit, or money for transactions, new money in the form of deposits could be added. The condition which the writer insists on, is that the process involved must quickly create additional spending across the entire economy and in a balanced way - a bit like the helicopter idea.

It is essential that the new money is not given to the government to spend as this would not provide a balanced outcome and represents a considerable moral hazard, tempting governments. Governments do not spend money on millions of hair dos, nights out, ice cream or food. These sectors also need job preservation.

The new money created should be used to subsidise all spending, as and when it occurs, producing a 'January Sales' effect and ensuring that the new money will be spent right away. Any surplus money would be mopped up as wages and prices and savings and debts all re-priced using the new savings and debt structures already introduced as described and as just explained, above. The need for hesitation as in waiting for all of the data to come in and be analysed is not apparent. They can just guess as long as they guess reasonably well, and as long as they do not under-estimate what is needed.
There would be no debt to repay afterwards. The economy would move forward, and confidence would be at an all time high. No recessions would be in sight for decades to come - at least not from credit cycles.

The international money and trade markets would be a problem both for the Money Supply Authority (MSA), in altering the volume of credit through international investment procedures which are in current use, and thereby, also for interest rates.

It is clear that the price of the currency is unable to create a balance between imports and exports if it is also playing on another field at the same time - that of international bids for the nation’s investments, funded from external sources. One price can only manage one such field of activities. The currency price should create a balance of trade. An investigation into how to reduce or eliminate the disturbances coming from that other external playing field was also done.

Clearly there needs to be a way to protect the credit and money supply plans of the MSA from such unwanted disturbances. This involves the removal of that second playing field as an influence in the pricing of currencies but without closing it down. Foreigners also have a role to play in the national investment markets.

Success in finding a way forward here would end currency manipulation. The major benefit sought, that of allowing the best use of the world’s resources of human and financial capital, would be moved one huge step forward.

World trade now accounts for around one third of total world economic output. When businesses cannot say what prices will prevail the following year, much less in three or five years’ time, not even to within 10% as far as the currency factor is concerned, they simply cannot move forward with confidence. Everything is a gamble – a gamble involving billions of currency per annum, world-wide. The world is a massive gambling casino. And that is without the problems of sections #1 and #2 already added.

At the national level, the value of goods and services imported would become the value exported and credit supply would remain under control.

The outcome of these researches was an even more difficult treatise to write: in economics, everything affects everything else. It sounds complicated, but really it is not. The difficulty lies in seeing how to find, and then explain, the solutions without overlooking some viewpoint. Every attempt at re-writing seemed to create a new viewpoint which needed to be explained. Without exaggeration, that happened hundreds of times both in discussions and during re-writing. But now it has been done.
One doubt remained to be clarified – would making the changes end up by making economies even more disturbed than they already are? There is a very clear way to eliminate this concern:

The whole treatise is now written from that viewpoint.

It is necessary to show that the current economic framework of regulations, taxes, and accepted norms, is the major cause of the problems and why that is so. There has to be one or more fundamental principles which is/are being overlooked or over-ridden. This is fact. It is the truth. It is all about pricing, and the freedom of prices, costs, and values, to adjust and thereby to eliminate any long-term, or hugely surging, imbalances. Imbalances would exist, but they would not exist for long. Not much damage would be done.

When the financial framework is not compliant with the fundamental principles of pricing, there are a lot of problems to be found in all parts of the world's economies. Every mistake affects everything. When that framework is redesigned so as not to disobey these principles, dozens of currently unsolvable problems simply vanish. As stated, the basic problems are simple. The economy itself should also be simple.

It is the same with any complex system as engineers, doctors, and sociologists are all taught: first check to see if everything is being done by the book. If not, put that right, and dozens of other symptoms which you could have had to deal with, will vanish.

At universities all over the world, students are taught that economies are unstable. They are taught to address the symptoms. This treatise addresses the source of the problems.

It might be said that if the passengers in the economic bus are all sick and have headaches, do not treat the passengers. Just take off the square wheels and fit round ones. Problem solved.

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