INFORMAL BOOK


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

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Edition 4a April 29th 2014
INFORMAL BOOK
Please note that part 1 of this booklet is to be discussed and fully illustrated by the author, Edward Ingram, in a workshop for the Financial Services Industry and Financial Advisers seeking ways to help their clients in London on 12th May, at 11 Cavendish Square London, a block away from Regent Street and Oxford Street, 7 pm - 9 pm then networking over drinks till 10 pm. Click here for details.

THIS BOOK is deliberately informal in order to get some of the principles of good macro-economic design across as simply and quickly as possible.

Reading a working paper on one of the most famous ideas for reshaping the economic structure from the IMF I quote:

"We take it as self-evident that if these claims can be veriļ¬ed, the Chicago Plan (see my alternative in the Mark II economic model for money supply management herein) would indeed represent a highly desirable policy. Profound thinkers like Fisher, and many of his most illustrious peers, based their insights on historical experience and common sense, and were hardly deterred by the fact that they might not have had complete economic models"

Looking at that paper it may well be that the Model II economy described herein would work better and can be introduced immediately without causing any disruption, unlike the Chicago Model whioh needs 100% reserve ratios at the banks.

Economists sometimes ask for all kinds of citations and mathematical analysis in order to test anything new.

However, the writer thinks that only a limited amount of that is needed in this book.

The reasons are:
Some ideas are so radically new that there are very few citations to choose from, as was the case with Adman Smith’s book ‘Wealth of Nations’ for example.

This also being the case in this book, it is better to evaluate whether the ideas are bringing together something that has been overlooked by classical theorists, something of vital importance, something that we know we should be doing but which we are not doing.

If that something can be shown to be creating a problem for the stability of people’s financial planning and for the stability of spending patterns or for the stability of aggregate demand (total spendable income) in the economy, then it is very easy to show that all kinds of other problems are generated by that one thing.

There is no need to show that putting that one thing right will create an avalanche of benefits. But if economists want to try to estimate the benefits numerically in some way they are welcome to do so.

ABSTRACT

The objective of these ideas is to create an economy with significantly fewer problem-generating parts to it.

Economic model mark I
The first idea is that there is no way to lend wealth and to have that wealth assuredly protected and handed back with interest. The way we are doing things implicitly says that money is wealth and that interest added to money increases wealth or transfers it to the lender. We all know that this is untrue but all of our regulations and most of our thinking is based around this framework.

As a part of this observation, the idea that wealth preservation means preserving purchasing power is shown to be wrong. This might explain why instruments like index-linked debt have not solved the problems that they were supposed to solve.

Economic model mark II
The second idea is that control systems that want to manage the speed or direction of something should be tight, not loose. For if not, the car, the economy, or other machine will not be able to follow a reasonably steady course, no matter who is in charge. So we will look at the way in which aggregate demand in the economy is managed (very loosely through the interest rate instrument – which may be an abuse of interest rates as they are a price – a responder, not a driver, by nature), and see if we can find a tighter, and more precise way of doing this. A suggestion is made but that part is not complete.

Economic model mark III
The third idea is that one price can only create a balance between the supply and demand for one pair of variables. We are discussing the price of currencies. The price of a currency is supposed to create a balance of trade. If the price is right, exports and imports will balance. This should not include balancing exports and imports of capital. Is there some other way? A suggestion is made but that part is not complete.


CONTENTS
Mark I - What is wealth? (Not what you think) - Lending Wealth to each other - Government Borrowing - Who else would buy Wealth Bonds - And who else? - A Useful Benchmark - All in it together - Commerce can also issue Wealth Bonds
Mark II - The other problem with -  the Banking Sector - Managing the Money Supply - How to create the new money - Rate of creation of new money
Mark III - Currency Instability - There is an alternative if we want to use it.


The Scene:
A breakfast table with a dozen or so people sitting and having breakfast. I was invited to join them. None of them claimed to have any financial background, so told them “I am pleased”. I need to practice what I have to say on such people as you because if we cannot bring you along with us we will fail in our mission.

What is your mission? Who are you?

I am what you might call a Financial Engineer. I look at the economy as an engineer and what I see is an economic machine that is designed to crash and to be unstable anyway even if it does not crash.

Now this is not good for you guys, is it?

Murmurs of assent. So where shall we begin?

The Ingram Economic Model MARK 1

What is Wealth? (Not what you think).
It begins with the fact that there is no safe place to put your savings. There is no way to preserve the wealth that you have earned. That is where much of the instability in the financial affairs of a nation originates.

Most people talk about keeping their money. I talk about keeping wealth. Money is a form of wealth, yes, but when we come to measure its value we have to talk about how much wealth it represents.

Most economists and others say that preserving purchasing power is preserving wealth that has been saved. I strongly disagree.

Murmurs of assent.

If your pension fund kept pace with prices it would not be keeping pace with incomes.

The purchasing power of 100 years ago is not going to provide any useful sum. For example, if your grandpa had been exceedingly wealthy he might have set up a trust fund to be invested in a prices index-linked bonds if there had been any available.

If he had placed 20 national average incomes worth of money into that trust fund, (that is half an average person's lifetime's income), by now there would only be one national average income left. That is because incomes rise faster than prices. I have assumed an average difference of 3% p.a. over that period. That trust fund would not provide the kind of income or purchasing power that your grandpa had expected you to inherit.

Here is another way to look at it.
If a government was to take some income from all of you good people sitting around this table and gave a proportion of it to that man over there as his pension then his pension would keep pace with the average income of all of you others around this table.

At present there is no way to index-link a fund to national average incomes. At present there is nowhere safe for your savings – your wealth interruption.

Lending Wealth to each other
The Pastor wants to know what savings are…
Well Pastor let’s say that you have no savings so you want to borrow some money from your friend over there. I did not get their names so let’s call his friend Barry.

We will not count the money he lends you. We will count the wealth he lends you. That is the amount of income or maybe we will count the amount of national average incomes that he lends you. Either way it is still money.

The difference is that in principle, it costs you, Pastor, no wealth to look after that wealth and to repay it in a way that suits both of you. You can make an agreement.

The agreement will say that the amount of wealth that has been lent to you is what you will repay plus some interest. So Barry will get back more wealth than he lent, which is why he agreed to lend it.

But Barry wants his money back. So he will not ask you to pay more suddenly and less suddenly. This is what happens with the kind of mortgages on offer nowadays when interest rates change. Or today, if you are borrowing and lending at a fixed rate of interest they may ask you Pastor to repay the money plus some interest at a fixed rate. But if incomes rise fast enough Barry will get back less wealth, less of your income, than what he lent to you. Also he will be aware of that risk and he will charge you extra interest because of that. That does not really suit either of you very well. Neither of you will be very secure. 

The contract does not specify how much wealth will be repaid or how and when. And if average incomes start falling as can happen, Pastor, you will be in serious trouble trying to repay that loan. You will pay a lot of your wealth. Your payments will not fall but your income will fall. 

But there is one problem with a straight wealth repayment model. It is natural to assume that as average incomes rise, so will the payments, and at the same rate, until the whole loan (wealth) has been repaid.

Pastor, there is no way to guarantee that your income will keep pace with the national average and so enable you to pay an increasing sum of money every year in that way. You cannot keep on paying the same amount of wealth every year in that way even if your income does rise as fast as the national average every year. It is too much.

And Barry here is not interested in what your income does. He wants his wealth to keep pace with the incomes of those other people around this table – the national average is what he is wanting to keep pace with.

So in case your income does come under strain, or rather to prevent that from happening, he will ask you to pay more at first and less later. Every year the amount of wealth that you have to repay will fall by 4%. That is by around 12% after 3 years; and every year thereafter that amount will fall. You may want more money to pay school fees or provide benefits for a growing family. Because the cost of repaying that wealth is falling towards 11% of average incomes at the end of 25 years and having started at 30% of your income, you will have more to spend on other things as time passes.


Figure 1
The above illustration shows reducing wealth (rather than reducing cost as a ’% of income’ as labelled) being repaid. It starts as 30% of the borrower’s income, but every borrower’s income rises or falls at various rates. This is not shown. The data shown is based on average incomes, or wealth, and Barry needs repayments to keep pace with that. So a borrower’s income that does not keep pace with the average will feel a bit more strain. On the other hand, it is assumed that no working person in steady employment will fall behind the average by more than 4% p.a. all the time. But if they do so in the early years before the cost has reduced much, then they may well have to move home. That is much the same as it would be if mortgage interest rates and repayment costs were fixed and national average incomes were rising at 4% p.a. A few below average people would not be able to cope. The difference is that with this method of repayment incomes can be rising or falling or standing still. The result is the same. The cost to wealth is the same. It still falls every year for the borrower. There is no gamble for either the Pastor or for Barry. The 21% of income line represents an estimated rental cost, rental rising with average incomes, and so the ‘% of income’ needed to pay rental does not fall.

Barry can lend you 3.5 years’ income to buy your home in this way and it will be paid off after 25 years.

Would you both be happy with that arrangement?

My friends all seemed to be impressed.

So what about the way that lenders tend to lend more wealth when interest rates are low, and they lend less wealth when interest rates are high? Try borrowing more wealth / money when interest rates are low. Then interest rates rise. 

Then you find that you have difficulty in meeting the new higher payments. The cost to your wealth is rising. More of your income is needed than was expected. House prices tumble and you are looking at eviction with nowhere to hide – no money left over, maybe even a debt.


Other people cannot even afford to buy your house now. Everyone is buying cheaper homes. Some can buy your house but they were expecting to buy a more expensive one. All house prices are falling.

If the lenders cease this bad practice of lending more just because interest rates are low (or less because they are high) then house prices will tend to rise at the same rate as average incomes – they will be dependable. Lenders will be able to ask for lower deposits.

The way things are now, with property prices uncertain and with all of these affordability risks, lenders are having to ask you for a large deposit and to have big reserves of money themselves in case even that deposit is not enough when everything falls apart and they are left owning your home. That money, those reserves, could be doing something more useful.

Another problem with reserves is that maybe that money was doing something useful, but if it is needed, it gets taken away. So one problem is solved here, another is created there. What we really need is a safer system that reduces the need for reserves.

Not so long ago, many lenders would lend 100% of the value of a home. They would see that the borrowers would go and use a credit card to furnish their home at huge rates of interest because there would be no security with a credit card loan. The lender has no home to sell. There is no security. Only a long drawn out debt recovery process through the courts, if it is worth the trouble.

Mortgage lenders would offer a cheaper interest rate loan, and an additional sum (more than a 100% mortgage) because they know that most people buy a home to live in and it is their home. They will honour the repayments because they want to keep their home. That kind of lending is cheaper than credit cards. It is less risky. And maybe the risk can be insured.

So what shall we talk about next?

Government borrowing is next.

Suppose that the government borrows money in the same way that Barry lent it, but this time it may be a pension fund lending to the government. The government issues (sells) Wealth Bonds.

To the buyer this is an investment that protects wealth. To the government it is a loan which they have to repay with interest. The capital debt (the value of the bond) is index-linked to national average incomes. As average incomes rise so does the money value of the bond. For the pension fund it is an investment of little or no risk to speak of, and it preserves wealth. It keeps pace with average incomes.

The government’s income comes from taking a part of people’s income, so a debt, a bond that rises in value at about the same pace as the government’s income is very affordable. Even if average incomes are falling, the government escapes from that fixed interest trap where the cost remains the same and the government's income is falling. This is a major problem in Europe just now.
If the interest that they have to pay is around 1% p.a. or maybe less because the bond investment is so secure it is very cheap borrowing, as it should be for a government. There is no cheaper way to borrow than to guarantee the wealth of the lender.

Appendix 1
For those readers that are interested Appendix 1 shows that in the 1980s, the USA government was paying the equivalent of 9% on income tax for every GDP of borrowing. This was because they used fixed interest bonds of uncertain future value and paid a high fixed rate of interest for doing that in a high inflation environment. As inflation fell, the costs did not fall until the bonds matured and were replaced with cheaper ones. A similar situation now prevails in Europe. It is falling incomes / deflation that is causing the problem. lenders are making fortunes at government and tax payers' expense at a time that they can least afford that.

Remember, government debt costs are paid by tax payers. That is all of us around this table. We want stability and reasonable costs for that.

The pension funds that buy these bonds using their clients’ money (those that are saving for retirement) have to provide a way for those savings placed in their care, to keep pace with national average incomes, in order to provide a pension that is relevant to average incomes at the time of retirement. By buying (investing in) wealth bonds the pension managers have almost no administration costs, no big worries, and they can deliver a pension about the size that people expect to get. Wealth earned is preserved and not take from or given to others.

What it means is that if you are able to save 10 national average incomes during your working life, you can expect to get back half a national average income for the 20 years that you expect to live in retirement. The maths is a simple matter. Divide the amount of saved income by the number of years you expect to live.

Half that (5 national average incomes saved) can pay for half the time (10 years) or can pay half as much income (0.25 national average income) for the same time (20 years).  

At present, with no wealth protecting guarantees available to pension funds or investors, no one can give a good estimate of how much income you may be able to retire on.

If some clients want to do better they can go for a pension fund that takes risks by investing in property and equities or anything else. But most people want more security and less risk as they get older.

Or they may invest in mortgage bonds of the same kind, like the arrangement in which Barry was lending to the Pastor. The interest rate would be higher and the risk almost the same.

As the hundreds or thousands of mortgages start to be repaid, new bonds and new mortgages can be set up, so the investor’s money will stay invested. If one investor drops out and asks for the money back, (maybe to get a pension), others can take over.

Because people find it hard to save so much for their retirement, the remaining burden falls on the state and the families of retired parents. People accept compulsory savings through taxation more easily than they save a high proportion of their income for retirement.

However, pension funds increase people's options.

Who else would buy these Wealth Bonds?

When you retire you expect an income that can keep pace with everyone else. So the government can issue Wealth Bonds that not only pay interest but also repay some of the capital every year.

To fund that outgoing cash flow they can issue new Wealth Bonds. There is always a market for safe investments. The government will not have to time the sales of their Wealth Bonds as they tend to do now with fixed rate bonds. Currently, as conditions change with investors’ expectations of inflation rates constantly on the move and interest rates changing too, everyone is guessing what a fixed interest bond may be worth. So the timing is done when people think the risks are lower. Sales of government fixed interest bonds follow a stop-splutter-go pattern.

And who else?

There are managed funds of all kinds. Unit trusts for example. Managed funds look after money and try to make it grow in value. The amount of uncertainty / volatility that they experience can be too much for older people – who are the ones that have the most money to invest and to protect. By including some wealth bonds in the mix of their investments they can reduce that risk to wealth. The fund will not rise and fall so fast. 

If 100% is invested in wealth bonds, you get an index-link to National Average Incomes. Management costs are almost zero. Sales costs very low and follow-up after-sales costs almost zero. There is nothing to worry about except when to sell your investment, what to do with the money and what it will buy. At least, while it remains invested, it is keeping pace with incomes and probably moving ahead of prices inflation like other investments tend to do.

A Useful Benchmark

Interestingly, almost every alternative asset (investment except fixed interest bonds etc) you can think of may be expected to rise in value at the same rate as average incomes because it is incomes that create spending (demand). Here I am talking of assets like property and equities, whereas prices of every-day goods and services like computers and food – those things that are used to monitor average prices - may not rise as fast. 

Whatever the difference, there is always a reason. Prices of things that get produced faster and more cheaply will not rise as fast, but we know why. Some properties will rise faster than others, but there is a reason for that; and some share prices will rise faster or fall faster than others. Again there is a reason.

But on average, if incomes rise 1% faster than before, then the price of everything might be expected to rise by 1% more per annum than before because there is 1% more spending going on. If not, there is a reason for that. There may be a recession. So by making this comparison with the rate at which average incomes are rising, we know how to learn about market forces and what they can do.

All in it together
But what If prices grow faster than incomes or if incomes start falling as in Europe? Well, if we have invested in Wealth Bonds, or if we have borrowed from Wealth Bonds, this way we are all ‘in it together’. If those people over there around this table, those who are working are having a hard time, with incomes falling or not keeping pace with prices, so are the retired ones, and the borrowers are not being hit harder. Mortgage costs would be falling quite fast. If incomes fall 2% the mortgage cost that I illustrated earlier would fall by 6% at year's end.

Appendix 2 shows some illustrations.

Importantly, the proportion of national spending going to mortgage repayments or government repayments or other borrowing repayments will not alter much compared with if there was not a recession or austerity. This is important because we do not want some people's income, some companies' profits, and some jobs to be greatly affected. Better that all sectors are hit about the same amount. Recovery will be faster and the pains pf adjustment will be less. There is a saying a recession is about 'creative distruction' because it takes away the jobs of those that are not creating enough or are inefficient. But if some sectors are hot harder than others, and if business costs are leaping up with a raise in the interest rate, we are losing good enterprises as well. We do not want that. Some of the very best new enterprises with incredibly good ideas can go under in that process as well. But when all that changes and everyone, and all Wealth Bond investments are doing better, EVERYONE is doing better. We are all in it together.

Commerce can also issue Wealth Bonds

Commercial borrowing / lending can also use similar ideas to enable businesses to finance their projects without having to worry that interest rates will suddenly rise. Maybe property prices will also be stable. Maybe with everyone so confident in their investments and their borrowing costs, the economy will no longer behave unpredictably and they can plan ahead for more years.

With so many people happy about their savings more will be willing to take a risk and set up or expand a business. With less to worry about in the cost of borrowing more people will be willing to borrow to expand their business. With the economy more stable and more manageable, businesses will be willing to plan further ahead and maybe borrow more. 

With property values more stable they may be able to borrow more - smaller deposits.

My audience was impressed. They seemed to agree with everything.

The Pastor was ready to leave, but I asked him if he would like to hear more. He remained. I promised to be very fast.

The Ingram Economic Model MARK II


The other problem with the banking sector - managing the money supply

I told the Pastor that we have a problem with banks. They can create more deposits and more spending any time they can find a willing borrower.

When interest rates are low, to boost the economy, plenty of borrowers can be found. The problem comes after the amount of additional spending created in this way outstrips the capacity of the economy to supply that demand.

Then we get imports to fill the gap. If this continues the excess money goes into investments and then asset prices start to inflate in value – property and equities and government bonds – everything that money can buy as a store of value rises in value. If it still continues then money goes to other countries and reduces their interest rates and causes other problems around the world.

Why should the banks lend less? They make profits by lending and the more the merrier – until everything falls apart.

The central bank eventually raises interest rates to slow lending. But people are too busy thinking that asset values will go up forever and they take no real notice. They have plans that would come to a halt if they did not borrow as planned. The central bank has no way to know how much or when to raise interest rates. They guess. They talk. They try persuasion. There is nothing precise about this process.

If your car’s steering was managed in such a way, (we engineers call that a loose control system), your car would soon go over the cliff, just like the economy may do, because once the passengers in the economy get scared, everything stops. Spending drops, savings rates increase (people save instead of spending) and loans get repaid as fast as possible; and that creates unemployment. What was affordable becomes unaffordable (savings are more important), what was worth taking a chance on becomes too risky. The more this happens the more jobs are lost.

Economists have started a branch of economics called behavioural economics, trying to guess how things may develop and make forecasts and help with planning interventions. But any intervention makes Bill over here better off whilst Jane over there pays a price. This disturbance later unwinds. It is costly and unfair.

What we need to do is to stop this money creating process at the level where the economy has enough spending. A constant amount of deposits to spend and / or to be lent for others to spend will be OK. But eventually the economy will grow and then it may be better to create a bit more money, some more deposits, to be spent or lent and spent.

When people spend money it is usually the deposits and cash that they spend. Maybe some savings, but those are also deposits. At some point they get lent and spent and they get repaid.

So we need a Money Supply Authority (MSA) whose mandate is to ensure that there is this right amount of money (deposits) around to oil the wheels of the economy but not so much that the national output cannot cope. Not so much that it inflates asset prices or brings in too many imports or leads to an export of capital as investors seek a higher rate of return from elsewhere, which also causes problems of imbalances elsewhere.

If we fail to create some more money, more deposits, there is not going to be enough money around and then some people will have to wait before they can pay their bills. They may start borrowing. Interest rates may start rising as everyone needs to borrow a bit more. But a bit more is not available.

How to create the new money
The MSA will need to create some more money.
They will do that. The money will be used to cut taxes on spending. In Europe, VAT may be reduced. Elsewhere, sales taxes can be reduced. But because the new money has been created electronically by adding money to a government account, the government will not need to borrow any money to pay for this tax cut of say, 5%, while it lasts. Maybe it will last for a month or two. Maybe less for longer. Maybe less but permanently like a steady drip. It depends whether the economy needs a boost. A shorter larger amount will boost spending as people rush to buy 'whilst stocks last' so to speak.

People paying a regular savings plan or a pension contribution, all will get a discount, say 5%, paid for by the new money.

The new money will pay for all this whereas under what is called a Keynesian Stimulus, the money has to be borrowed. And that creates more problems for tax payers and government budgets.

With this new method, there will be a rush to buy while stocks last. And the money left over in people’s bank accounts after normal monthly spending will be their share of the new money that has been created. The total amount left over in people’s bank accounts, unless they spend that too, will be the same as the total amount of new money that has been created.

Deposit accounts will increase, overdrafts will reduce, and more money will be out there for spending and for borrowing to spend.

This is a harmless way to get an economy moving if it has slowed down. It is not borrowed money and it does not have to be repaid in future taxes.

Rate of creation of new money

If there is a fraction too much money created, then there will be lots of new production needed and employers will compete for labour, so incomes will rise. Then everything will rise in cost and in price including the new mortgage contracts based on repaying the wealth that I spoke about earlier – Barry’s wealth for example. Those debt payments (including government and commercial debt) will cost a bit more than otherwise because incomes have risen and payments are linked to average incomes.  The surplus money will be mopped up in higher incomes, mortgage and other costs like the cost of labour and then higher prices; and excess spending will end without tumbling people out of jobs – at least not much. Normal spending choices will resume or continue without any great interruption – or not much because mortgage costs and other costs did not leap upwards as interest rates rose to keep pace which is what would happen now where variable interest rates are used.

As for using variable rates of interest, the new mortgage theory allows for that to continue and given the right framework where lenders do not over-lend, the amount of wealth repaid will still decline year by year but at a variable rate not at a fixed rate as described above. But that payment will still be more if all incomes are higher. [Move this paragraph]

The result then, of having created too much money, or too much demand, will be rising incomes and rising everything else and the result will be that the additional money gets mopped up in higher prices of labour and asset values and everything will tend to keep pace. The limitation is that if things get out of hand, a lot too much spending is created, some wage rises and some price rises etc. happen before others, as always, and the operation will not by quite as smooth or as fair as one had hoped.


The Ingram Economic Model MARK III

Currency Instability

I asked the Pastor for a couple more minutes. I wanted to tell him about currency prices.

As you know Pastor, one price is available to create a balance between the supply and demand for something.

In this case it is the price of the currency, what it is worth to a trader of goods and services compared to other currencies.

If that is what the price of a currency is to do then people can get on with their international trade with relative confidence, knowing that the price of their respective currencies is about right. It will rise and fall a bit but it will not leap around.

They want to know approximately what they will get paid for their exports and what their imports will cost.

But what if some foreign government or other investor comes along and wants to invest in our economy, adding to the amount of deposits? And we do not have a great many additional goods and services to offer when those deposits get spent or lent.

We do not want their extra deposits. We already have enough.

And we do not want our currency to rise in price when they buy our currency just to invest and not to import our goods and services.

An alternative is there if we want to use it.

We can give the foreigners some of our unlent deposits. Remember, the MSA always has some unlent deposits waiting for a borrower, for if not then they need to create some more.

This time it is an interest free deposit given to the foreigner as if they were local people who had saved and wanted to invest local money. .

The foreigner has a bank account at his bank in his country, (Japan. USA, UK, or any other). As I said, our MSA provides some of our unlent deposits to this foreigner. In return the foreigner’s foreign bank transfers the ownership of the same deposit money value that the foreigner previously owned, to the ownership of our MSA. But that foreign bank can still lend those deposits.

Our MSA does not need interest on those deposits. No interest was lost by offering unlent deposits to the foreigner. But maybe there is something to think about here because there can be differential rates of inflation to offset. The foreign economy might have a higher rate of inflation and the MSA would want to preserve wealth. Similarly the foreign investor may want that deposit to keep its value. So interest rates on deposits may be a good idea.

This way, no money crosses from one currency, from one nation, to another. And there is no impact on the value of our respective currencies.

However, our MSA is exposed to a currency risk on the value of the deposits that it now owns in the other country. That other currency may fall (or rise) in value.

But if this arrangement is going on all over the world, every investor in every nation can invest in any nation when desired. And every MSA is exposed to a currency risk on its foreign deposits.

Then there will be a ‘ring’ of MSAs all holding ownership in foreign deposits and all exposed to currency risks. Some currencies will rise in value and some will fall. Some nations will have a trading surplus and others a deficit. On average it is a zero sum game.

The world's MSAs will find a way to manage that circle of currency risk at little cost.

So now we have control over our own money supply and traders all over the world can get down to business because the price of currencies is not leaping around. And new money is not coming in and out affecting our interest rates which will have been set locally, at a rate that optimises the use of our own money supply for the benefit of our own economy.

We will not import interest rate problems from other countries because we will not be importing their capital unless that is for trading purposes. Will that be a problem? We have to think about how trade surpluses and deficits may be ‘priced’ into balance.

Aside from that issue, our interest rates will follow wealth preservation rules, because if our interest rates are lower than needed to preserve wealth, then people can borrow and invest in properties etc that will preserve wealth (in general / average terms, by rising in value as people’s incomes increase), and add in a rental income as well.

That is what interest rates are supposed to do - to create a balance and to prevent money being too cheap. To make sure that money is borrowed for doing something really useful and productive.
If borrowing money costs enough, it will not be borrowed for unproductive purposes, what is sometimes called ‘rent seeking’ or without some constructive purpose.

So we do not want to import low interest rates from elsewhere. We do not want their investment money to do that.

But if they want to come here and invest, we can let them do so.
My Pastor friend wanted to buy the book – you are writing one aren’t you?

END of the main book.

Appendices click HERE

For more information, please buy the next book in this series. Or look at the websites upon which it will be based.

Start here:
http://macro-economic-design.blogspot.com

This will contain a lot of data and some citations to back up what you have just read.


The new mortgage model has passed all of the tests based upon past data and a whole lot more besides that. All of the new products outlined herein appear to be more competitive and to need fewer reserves than their current day equivalents. Lower risks lead to reduced costs. It has been assumed that the money markets will be efficient and that a raised rate of return on wealth will provide more cash inflow to a lender and a lower demand for lending. Lenders have a considerable buffer provided by the rate of repayments of wealth on a monthly basis as an average mortgage gets repaid fully in (typically) 7 years as people buy and sell properties.

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