Why the World Needs a Stable Financial Platform
by Edward Ingram
Economist; Founder, Ingram School of Economics
Editor’s Note: The author is currently rewriting documents which are a part of an online university course in macro-economic design and management. At least two universities in Zimbabwe are putting their expert staff on this course. The idea is to use the information gained to create the world’s leading courses in economics and banking. If these proposals are adopted, by a conservative estimate, 1% or more may be added to long-term national economic output. This overview paper, excerpted from the author’s www.fin24.com, column features the following pertinent extracts of his concepts:– JP.
THE MAJOR PROBLEM OF OUR TIME
The major problem of our time is what to do about the extensive damage which is caused by relatively low levels of inflation. We need a stable financial platform.
What J M Keynes pointed out in the first chapter of his ‘A Tract on Monetary Reform,’ 1923, Macmillan, was that if all prices and all earnings were to rise at the same rate, people would be wholly unaffected. They would have to pay more for everything, but they would have more income with which to pay. The two things would cancel each other out.
THE ‘KFPP’ FLOATING PLATFORM
It would be as if the entire economy had been placed on a floating prices platform as in Figure 1 below. It is called Keynes’ Floating Prices Platform, or KFPP:
Figure 1 – the KFPP Platform. Artist: Tanya Malan
In this sense, prices are anything you can buy or pay for. That includes wages – the cost of hiring people, regular payments on loans, and assets of every kind. In this sense they are all prices to pay. If they were all to rise together, they would all cancel. As prices rise, incomes/earnings rise. Things cost more but there is more money with which to pay. In a perfect world, people would be wholly unaffected.
Clearly, there is another real economic part of those prices which does not cancel. On top of the platform, Figure 1 above, the real part of prices decides what is expensive and what is affordable in the usual ways. On the platform, business carries on as usual as if money had not changed in value.
THE MISSING PART OF ECONOMICS AND BANKING
…This is the missing part of economics which until now, has not been written or taught. Its absence explains why economists keep trying, but failing, to solve their problems. There are too many instabilities to manage.
In this KFPP scenario, inflation has one important effect. It is self-cancelling. As the platform rises, and as all prices increase, more money is needed. People need more money with which to pay the higher prices. Any cessation of money creation will soon halt the inflation process.
If the KFPP platform could be created there would be a huge benefit to people’s confidence. Everything in life regarding money, like savings, investing, and borrowing, even currency prices, would become simpler and more trustworthy.
Pension funds would be on the KFPP platform. Pensions would rise as if retirees were still working. Pension funds and reserves held against possible emergencies would be on the platform. Liabilities/future claims against insurance companies and banks tend to rise as people spend and borrow more out of rising income. Mortgage costs would not leap up and down, but fall steadily throughout the repayment term. See Figure 2.
Figure 2 – How paying back packets of value, or NAE, can stabilize mortgage finance. Source: Edward C D Ingram Spreadsheets. [New illustration copy attached.
Property values would be more stable. A lot of costs and huge amounts of social and economic damage would be eliminated almost entirely.
The good news is that KFPP can be created. We just need to do it...
Part II: How to Create a Stable Financial Platform:
[Author’s Note: In the section above, I wrote about the Keynes' Floating Prices (KFPP) Platform – the idea being that if all core prices rise together in harmony, including incomes, people would be wholly unaffected by the falling value of money.
there is another part of prices – the real economic part. This determines what
costs more and what costs less in accordance with supply and demand. This
activity takes place on top of the platform, undisturbed by the falling
value of money
- core price changes. –EI.]
Artist: Tanya Malan
If this KFPP platform could be created, there would be a huge benefit to people’s confidence. Everything in life regarding money, like savings, investing and borrowing, would become simpler and more trustworthy.
But the current reality is that this does not happen. Why not?
Figure 3 – The current state of economies – [That is if you can delete the Figure 2 words in the picture]
Artist: Shirese Malan
Mortgage repayment costs leap around throwing entire family finances in the air, ruining families, and taking their homes. This also messes up the construction sector and ruins many a bank. Commercial loans cost a lot more than necessary and are also more risky than necessary. Collateral security is unsafe, and investments in property are unsafe in some cases. Banks are put at risk. Investments are put at risk.
New mortgage repayment contracts which repay units of wealth, starting at a high level, and falling every year to avoid ‘payment fatigue’ and large volumes of arrears, can transform the housing finance and construction sector, and stabilise property values. See Figure 2 in the first section of this paper.
BOTTOM RIGHT - WEALTH BONDS
The other side of lending is savings and investments, pensions and retirement plans. These slither all over the place. Currently, the maturity value of a fixed interest bond stands still. Imagine that. Watch the platform rise as the bond maturity price and interest payable are anchored. They stay behind. But here is one remedy which can help:
Wealth Bonds. With interest payments and capital linked to National Average Earnings, NAE. These can be issued by governments in place of the usual fixed interest bonds/treasuries. This would lock those investments and related borrowing costs onto the platform. See the left had side corner of Figure 2.
Then savings, pension funds and reserves, investing in these index-linked bonds, will be locked onto the KFPP platform. A pension fund which attracted 10 NAE in contributions over the years could invest in these and have 10 NAE to offer to retirees. That might last 20 years at 0.5 NAE p.a., paying out a retirement income as if the retiree was still working and getting salary increases. With a few tweeks, lifetime annuity calculations, and the resulting offerings, can be done on the same basis.
MORE SAVINGS TO THE ECONOMY
Besides removing confusion and related risk costs, governments may pay 1% interest on Wealth Bonds – only. That is, enough interest to cover institutional administration costs on pension funds, annuities, and insurance reserves. This would create a significant saving to the cost of servicing national debt because huge amounts of risk to investors would have been eliminated. It is cheaper to lend a risk-free asset than a fixed interest bond of uncertain value. Maturity values could be long as well as short as needed to match market needs. No problem.
In addition, very expensive distortions to monetary policy (the need to limit the damage done by fixed interest bonds) would vanish. This is one of the issues we see every time monetary policies are discussed. Currently, Wealth Bonds could probably be offered in exchange for fixed interest bonds, and at a premium, cutting national debt.
Currency price changes destroy many an importing or exporting business and many businesses which have invested enormous amounts of capital in foreign direct investments.
One price cannot balance two markets – trade and investment. Bearing in mind that an estimated half of all world prices have a currency price content, the cost savings of separating the two markets will dwarf the cost of not doing so.
[Author’s Note: The practicalities and costs of bringing trade prices onto the KFPP platform is one of the things which will be discussed with participants during my university course.]
Edward C.D. Ingram is the Founder of the Ingram School of Economics, a school which is growing in influence. He is also provider of the world's first ever certified course in macro-economic design and management. He can be contacted via Skype at edwarding2.
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