ECONOMIC BLUEPRINT FOR THE FUTURE
A BOOM reader recently asked BOOM to describe “the perfect economy”. That is a very tall order and BOOM will take up the challenge in this week’s editorial. However, such a task is fraught with risk. It is too easy to overlook some critical element. Despite that risk, BOOM will outline an Economic Blueprint for the Future. Read on ….
A BALANCE OF MONEY CREATION
The first element which a “perfect economy” should have (in BOOM’s humble opinion) is an equal balance between credit money (created by banks when they make a loan) and sovereign money (created by governments that are answerable to the people through a democratic process). At present, the balance of money creation in most economies is 97:3 — that means that 97% of fresh new money is created by banks when they make a bank loan to a borrower (there must always be a borrower) and 3% is created when a government creates fresh new banknotes and coins. That money then circulates in the real economy and is destroyed when the bank loan is eventually paid off. The notes and coins are destroyed when they are taken out of circulation on a regular basis by the central bank.
To create the 50:50 balance in the digital age, there needs to be a system of “digital cash” and BOOM has designed such a system involving cooperation between the banking sector, the central bank and the federal government. BOOM has called it Quantitative Boosting and explained it in the BOOM editorial on 15th December 2019.
A BALANCED BANKING SYSTEM
WITH GLASS STEAGALL SEPARATION
Another element which a “perfect economy” should have is a range of commercial (retail) bank ownership models. Commercial banking licenses should be granted to shareholder owned banks, community owned “mutual” banks and State owned banks. The mix would have to be given careful thought and regulation. But this aim is worthwhile as most economies are now much too reliant on shareholder owned banks. Such banks seek always to grow the money supply with little constraint in order to make more profit. The result is over “financialization” of an economy (too much private debt). The credit money creation function should be more evenly spread across these three ownership models in BOOM’s assessment.
BOOM would also like to see a form of Glass Steagall Act whereby commercial banks and investment banks would be separated in ownership and function.
CENTRAL BANKS OWNED BY THE STATE
In BOOM’s “perfect economy”, all central banks would be wholly government owned. This would make them answerable to the people through the democratic process of oversight by elected representatives. Many central banks are currently privately owned, principally by their client banks and this model is fraught with long term risk and lack of objectivity.
Central banks are necessary to moderate and manage the commercial banking system, especially for overnight reconciliations and to be the government’s banker. However, BOOM would like to see Monetary Policy controlled by a separate institutional entity. This separation would mean that the monetary policy settings would not be so sensitive to pressure from the commercial banking sector. It’s “separateness” or “independence” would then only have to be defined vis a vis its relationship to the government.
WISE BANKERS AND WISE POLITICIANS
For the “perfect” economy to remain “perfect”, we would need to have wise, incorruptible, prudent politicians and wise, incorruptible, prudent bankers. That may be the tallest order of all. There would also be a need for wise, incorruptible, prudent regulators of the banking system — another tall order.
REGULATED FREE MARKETS
Well regulated free markets for all assets and currencies would need to be established.
NO CURRENCY DOMINANCE
Currently, the US Dollar is dominant — it is about 62% of the global currency reserves held at the world’s central banks, available to settle international trade and capital transactions. The Euro is next at 20% and all other currencies are less than 6%. The Japanese Yen held in reserve amounts to about 5.6%, the British Pound is about 4.5%, the Australian Dollar, Canadian dollar and the Chinese Yuan are all around 2%. So, from this information, we can quickly see that the US Dollar is truly dominant and more easily accessed to settle trade and capital movements. The myth of “Chinese money expansion” is just that — a myth.
Local currencies that could operate in well defined geographical regions within national borders would be tolerated as they would give monetary policy flexibility to national governments inside their nation’s borders.
AN ECONOMICS KNOWLEDGE REVOLUTION
There would need to be an economics knowledge revolution. At present, there is an almost total dominance of such knowledge by the dogmas of conventional, mainstream economics. That knowledge dominance is maintained and rigidly controlled by the self appointed “best” university departments in economics. This is a very restrictive definition of economic behavior, relying strictly upon currency values (and no others) as the unit of account.
There are many other broad measures of economic progress that could be used as well as using GDP figures, expressed in currency values. For example, here are just a few
Bhutan GNH Index
Disability-adjusted life year Index
Green National Product
Genuine Progress Indicator
Green Gross Domestic Product
Gross National Happiness Index
Gross National Well-being Index
Happy Planet Index
Human Development Index
Index of Sustainable Economic Welfare
Progressive Utilization Theory Index
Legatum Prosperity Index
Leisure Satisfaction Index
OECD Better Life Index
World Happiness Report
World Values Survey
BALANCE IN MONEY SUPPLY, DEMOGRAPHICS, PRODUCTIVITY, ENERGY USE
Ideally, a “perfect economy” would be in balance in regard to demographics, energy use, money supply and productivity. In other words, it would be a non growth economy. The population would not increase — births would equal deaths. Energy use would not increase over time. The supply of fresh new money would be equal to the destruction of old money. Such an economy could not become “over financialized”. The financial sector would be relatively static over time. And productivity would neither increase or decrease, being sufficient to provide all the goods and services necessary to sustain the economy indefinitely.
NO FINANCIAL CRIME
NO FINANCIAL FRAUD
Finally, for a “perfect economy” to exist, there would have to be an absence of financial crime and fraud. Currently, we see such behavior erupt in almost all financial institutions and in almost all financial transactional settings. Banks, central banks, regulatory bodies, bureaucracies and governments all seem particularly prone to such aberrant behavior.
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.
EMAIL: gerry [@] boomfinanceandeconomics.com
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
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
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.“
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).”
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