SOMETHING RADICAL IN MONEY
Are you ready for a radical thought? How about sovereign money being granted by means of a regular lottery run by the Treasury Department?
The money would be in the form of a smart token with conditions attached — either printed or electronic. It would be time limited (it must be spent within a fixed time period), volume controlled (obviously) and interest rate controlled (paying below or above the central bank key rate, depending upon circumstances). The volume of money supplied this way could be CPI inflation targeted and asset price inflation targeted. The time period could be varied depending upon circumstances such as prevailing inflation rates and GDP growth. The usage could be limited in scope in regard to how it could be spent. For example, it may be limited for use only at supermarkets, clothing stores, furniture stores and energy retailers. Those retailers could then return it to the Treasury in return for official sovereign currency (cash) or a tax deduction to compensate them for the goods provided.
The government would have complete control over this special form of electronic cash. It could be called Key Cash or Cash by Lot (or perhaps BOOM Cash?). This form of money could expand the government’s fiscal policy options dramatically. It would not replace credit creation money (commercial bank loans, dependent upon sufficient borrowers), it would complement it. Eventually, over time, it could be issued in quantities as high as 50% of new money supply. Every citizen above the age of 18 years could be recipients (excluding those with criminal convictions).
This method of new money creation could be used as ballast against the new money supply being created as bank loans by the commercial banks. It would increase the velocity of money, boosting GDP (transaction numbers). This would help in situations where CPI inflation was falling or negative and GDP growth was stagnant.
If a lottery method was not popular with the citizenry, it could be distributed widely on a per capita basis to the whole population spread around as required.
BOOM thinks that governments will soon need to consider such ideas because dis-inflation (falling inflation) and deflation (negative inflation) are becoming more persistent. BOOM has other ideas to boost GDP transactions and the velocity of money.
THE WORGL EXPERIMENT
The Cash by Lot (or BOOM Cash) idea sounds radical but it is not.
Australia issued sovereign currency straight into citizen bank accounts in early 2009. As the global financial crisis hit hard all over the planet and major banks failed in the USA, the Australian government issued A$ 12.7 billion in cash bonuses directly into citizen bank accounts comprising $950 for every Australian taxpayer who earned less than $80,000 during the 2007-8 financial year. The taxpayers were encouraged to spend it.
This was not sovereign money, however, as the Cash by Lot money would be. It was paid for via an expansion of the budget deficit — so it was covered by government bond issuance. This means that it was money taken from investors for that purpose. By definition, that money was not new money. It was money that was already in existence and just circulated back to the Treasury via a government bond issuance.
The cash boost to citizens worked very well. Australia avoided a recession during the global financial crisis of 2008/2009 and during its recessionary aftermath in most nations from 2009 – 2016.
In 1932, during a similar bur worse situation in the midst of the Great Depression, the small town of Wörgl in Austria conducted an experiment in currency issuance. They issued their own local currency (in paper form). The experiment was based on the thinking of Silvio Gesell, an early 20th-century economist, and was designed to stimulate the local economy. The new currency helped put the population back to work, and inspired many other communities to follow its example, until the experiment was abruptly terminated by Austria’s Central Bank in 1933.
Michael Unterguggenberger was the mayor of Wörgl in 1932 when the Great Depression hit and devastated this small town in Austria, a short distance East of Innsbruk. In 1932, there were 500 unemployed people in the town with 200 poverty stricken families. The mayor was familiar with Silvio Gesell‘s work and decided to put it to the test.
He had a long list of projects. He wanted to re-pave the streets and rebuild the water supply system. Many people were willing and able to do all of those things, but he had only 40,000 Austrian schillings in the bank. He kept the money on deposit with a local savings bank as a guarantee and then issued Wörgl’s own 40,000 schilling’s worth of local paper currency to pay for all the local projects. The local currency was time restricted so everyone who was paid with it spent it very quickly. This caused a surge in the velocity of transactions. Some citizens even decided to pay their taxes early.
Wörgl was the first town in Austria which effectively managed to redress the extreme levels of unemployment. They re-paved the streets and rebuilt the water system. New houses were built as well as a ski jump and a bridge. It became known as the “miracle of Wörgl.”
Silvio Gesell’s ideas about how to use money more effectively were adopted in Switzerland in 1932 by a group of Swiss businessmen who used his ideas to found the WIR Bank (WIR).
THE WIR BANK IN SWITZERLAND
The WIR Bank, formerly called the Swiss Economic Circle, or WIR, is an independent complementary currency system founded in 1934 in Switzerland. The name WIR comes from the German Wirtschaftsring-Genossenschaft — the first three letters are WIR. The WIR bank was formed to only serve businesses in hospitality, construction, manufacturing, retail and professional services. WIR issues and manages a private currency, called the WIR Franc, which is used in combination with the Swiss Franc to generate dual-currency transactions.
The WIR Franc is an electronic currency and so there is no paper money. The aim is to increase sales, cash flow and profits for any qualified commercial participant. The WIR Bank issues credit in WIR Francs to its members and those credit lines are secured by borrowers’ assets as collateral. This ensures that the currency is asset-backed. When two members enter into a transaction with both Swiss Francs and WIR Francs it reduces the amount of cash needed by the buyer but the seller does not discount its product or service.
The WIR alternative currency started with only sixteen members, today it has grown to include 62,000. It is still in operation today. Here is the Homepage: https://www.wir.ch/
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
EMAIL: gerry [@]
HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans”
“In the first instance, the process of money creation requires a willing borrower.”
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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