This is a first attempt at drawing a picture of how our crazy money system works.
I hope that it helps you to see how money moves through our economy and why we are condemned to fall forever deeper into debt unless we change the way that we use money.
Apologies for the quality of the sound – it’s my first foray into multi-media.
Views From The Boatshed 
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There’s a couple of flaws in your presentation: in the first phase, you refer to “financial gambling” (BAD!), even though some of this activity is investment in shares and is therefore investing in companies and providing those companies the finance with which to grow and contribute more to what you term “the productive economy”. In the second phase, you talk about “investment” in companies (GOOD!), but this time it’s being done by the banks (eh? are you serious?), rather than individuals or specialist investment vehicles, so somehow it has become good by virtue of being done by the banks. This is illogical and contradictory. The banks have enough trouble currently trying to decide which business they’re in (oh, and starving smaller companies of finance while they’re at it), without you expecting them to understand what makes a company worth investment.
Here’s another flaw: you think savings accounts only contribute to the “productive economy” by providing pensions that can be spent in the productive economy, investments (see above) and money to finance loans. Well, some of us save up for the big expenses (car, deposit on house), rather than enter into more personal debt than we are comfortable with. In your brave new economy, we wouldn’t be allowed to save up for big expenses: we’d be expected to have the millstone of debt round our necks, or else risk losing a percentage of our savings daily. So, like most politicians of the recent decades, you punish prudence and reward those who spend all of what they get.
And that’s just considering the case of individuals; what about companies who make provision for growth by setting cash aside for later investment in themselves? Would that pot be raided as well?
Ian, Thanks for taking the trouble to watch the video and challenge its content.
Your first point about investment in shares is correct for the initial sale of the share. Thereafter trade in shares does not provide companies with additional investment capital, it is merely the exchange between someone with money and someone with a share certificate. The exchange is of no value to the productive economy.
A key feature of the speculative trade in financial assets (what I call financial gambling) is having large quantities of money on hand to buy when the price is right, and accepting large quantities of money when the assets are cashed in at short notice. A negative interest rate of 25% per annum will add significant costs to these activities, pushing the financial industry towards longer term investment as a way of earning a crust.
The second part of the video describes an economy where banks can no longer live off the interest payable on money that they’ve created out of thin air, which is their current focus. Instead banks will have two options for earning money.
They will act as brokers of cashflow loans between people who have spare money for which they have no immediate purpose and those who have an immediate purpose but no ready cash – charging a fee for managing the process.
Banks will also act as investment brokers. They will identify investment opportunities and package them in such a way that they are attractive to customers who have spare money off which they want to earn an income. Banks may charge a fee for this service, or take a share of the dividends, or both.
Individuals will still be able to save for big ticket items. As well as losing a percentage of your banked money to the negative interest rate you will be receiving £1,000/month as your share of the recycled money. Some (or all) of this can be used to offset the negative interest, thereby maintaining a pot of money in your account. If you get enough money from other sources to pay for your living expenses, your £1,000/month will maintain a balance of c.£44,000 for ever. A couple can maintain a balance of £88,000, Add two kids and it goes up to c.£120,000.
Companies (and individuals) will be able to avoid the negative interest on set-aside funds by making short term (possibly rolling) cashflow loans to other businesses and, crucially, government. Almost all welfare spending will be eliminated by the £1,000/month, which will mean a corresponding reduction in taxation. Much of the rest of government spending can be done using these short term cashflow loans. All of the “stupid” taxes on productive activity (VAT, NICs, Corporation Tax, Income Tax, etc.) can be abolished. Taxation can then be used more intelligently (e.g. to discourage bad things and encourage good things).
It was beyond my skill as a storyteller to incorporate all of this detail into a 15 minute video so thank you for giving me the opportunity to cover these points.
Malcolm
That video was a truly phenomenal breath of fresh air. I’m definitely purchasing your book. Do you support Positive Money? I haven’t read the details of their proposal properly yet, but you advocate an interest-free financial system while, as far as I know, Positive Money condones interest bearing loans. Is that the only problem you would have with their proposal?
Yes, I’m a big fan of Positive Money. They’ve picked apart the workings of the banking system and appear to have solid proposals for its reform. The only flaw that I can see is that there will not be enough incentive for people to risk investing their spare money in the productive economy. My negative interest proposal addresses that problem while throwing up some other opportunities at the same time (e.g universal basic income).
I have two questions.
1. How do you respond to someone who brings up the “time value of money” concept? That when a govermment wants to slow overheated inflation, it raises interest rates. And that pound today is worth more than a pound 5 years from now.
2. In your video, you stated that the government has to “pay back” the money it “borrowed” interest-free. Why does the government need to borrow, though? Why can’t the bank simply issue the money to the government for it to be recycled back into the economy.
Also, what is the “spare money” referring to? You kind of lost me there.
Assuming that your questions relate to the latter part of the video (negative interest rate, etc.):
1. If general inflation became a problem the monetary authority (independent of government) could increase the negative interest rate (i.e. make it more negative) but maintain the universal basic cashfow payments at the same level. This would be a more direct way of reducing the amount of money in circulation than the current system in which there is no guarantee that a higher interest rate will encouraging people to save rather than borrow.
If the currency devalues over time (for whatever reason) the negative interest rate and the universal basic cashflow payments can be both be increased by the monetary authority.
2. The banks and the government are clients of the proposed money system, just the same as individuals or businesses. Banks cannot issue money, neither can government. So the only way for government to get money (apart from taxation) is to borrow it.
In the proposed system there will always be a large quantity of spare money.
“Spare money” is money for which there is no identified cashflow requirement. What individuals currently call “savings” and businesses call “reserves”. I call it “stagnant money”: it’s lying in bank accounts doing nothing useful.
The negative interest rate makes leaving this money in the bank unattractive. Lending at zero interest until such time that you have a use for the money is more attractive. Organisations with immediate cashflow demands but no spare money (e.g. government) will be able to borrow this money at zero interest from organisations that have lots of spare money but no immediate cashflow demands.
In regard to point 2, I think you diverge from the Positive Money proposal in a significant way, since they propose putting money into the Treasury’s account directly, debt-free.
I see no rationale for why a government should be considered a mere “client” of the money system.
My proposed system could work equally well if the Treasury was the monetary authority, but only if the Treasury was able to subordinate the desires of government to the requirements of the financial system.
Using a monetary authority to control the financial system independently of government protects the system (and the citizens as a whole) from the whim of any government that might pander to a certain sector of the economy or use financial manipulation to influence a vote.
The aim is to provide a reliable financial framework in which citizens and government are able to access the money that they need to provide the necessities of life, indefinitely.
Reblogged this on elspethc and commented:
This makes sense to me. At the same time, it is the first bit that makes sense – description of the current state of money. The second bit is also rational, I wish it could become real. I have wanted to see support for what Malcolm calls “Productive Economy” for a very long time.
Hi Malcolm Henry – do you have an email I can contact you on? I am writing a book on the topic of basic income and I wish to refer to your book ‘Our Money’ in that book, and so want to get your permission to do so – I have written a few paragraphs summarising your book in one of the chapters, and also want to include it in the recommended reading list at the end of the book – my email is nzrealise@gmail.com – thanks, Carolyn
Any views on these
Myth and Measurement:
The New Economics of the Minimum Wage
David Card & Alan B. Krueger
http://press.princeton.edu/titles/5632.html
Alan B. Krueger
The New Economics of the Minimum Wage
What Role for Human Capital Policies
https://krueger.princeton.edu/
fromTwitter @DerklinPolitics
I haven’t read either of these, but will add them to the (ever expanding) list.
Under your proposed system banks would not be able to loan money created out of thin air and charge interest. So, a person who wants to buy a car, for example, would go to a bank, the bank would find someone who is willing to give an interest-free loan to the buyer of the car and the bank would collect payments for the buyer and give to the lender and charge a fee for providing this service? What if the buyer doesn’t repay the loan? Would the bank lose out or would the person who issued the loan lose out?
A good question.
I’ve assumed that the risk inherent in this type lending would be borne by the banks, covered by the aggregate arrangement fees charged to borrowers, so ultimately the risk is paid for by the pool of borrowers.
It’s likely that all sorts of variations of risk management and transfer will emerge. Credit ratings will become even more valuable. Risk insurance will probably become more sophisticated.
I imagine that there will be a lot more peer-to-peer loans based solely on trust, backed-up by insurance that costs less than the negative interest payable.