1.

Introduction

The Money system is failing citizens through deceit and ignorance, but the power still sits in the hands of those citizens.

What follows is a series of economic articles in simple form, that should enable any literate citizen to understand how the Money system works; how they are affected by the Money flow and how exploitation of ignorance of Money is an established business model. Rather than the confusing economic jargon and statistics spouted every day in the main stream media by economists, politicians and journalists, how the Money flows affects all citizens provides a much better understanding of economics.

 A long career in finance, technology and life has taught me that most people misunderstand how the Money and banking system works. Not just ordinary citizens, but this also applies to the main stream experts including bankers and regulators, who all demonstrate a collective ignorance. Conveniently that ignorance happens to benefit them, so perhaps there is some logic there. Citizens need to be able to make informed choices and understand when a situation is being misrepresented, as well as how it is weighted against them. With knowledge comes power and with power comes change. As you’ll see, change is required. If we, the citizens, want that knowledge and power then we need to ‘follow the money’ rather than rely on jargon.

The representations on the Money system that I have been taught or read over the years have saddened me, being either a deliberate misrepresentation, ignorant or wilfully designed to keep most citizens misinformed. Because of these misrepresentations many citizens in democratic countries unknowingly vote against their own interests. I include myself (in younger years) and my children in this statement. It’s remarkable how difficult it is to unlearn concepts that have been taught in schools and universities, or continually misrepresented in the public media. Inaccuracies become hard wired in. I’ve wanted for some time to write a description of how the Money system works without prejudice and in a simple, understandable form. This is my effort, in a series of articles called ‘Money for the Masses, Economics for Everyone’. I don’t expect everyone (or perhaps anyone) who has an opinion on the topics covered to agree with me, but the flow of misinformation is deep, so changing that misunderstanding will be a difficult task.

Topics to be covered in Money for the Masses include:

• What is Money?
• Where does Money come from?
• How does Money circulate and the importance of Citizens in that circulation
• is vital,
• How do banks work and how Too big to Fail banks are carried by citizens,
• Housing as a speculative asset, and other stores of value that citizens desire,
• What is Rent seeking and why is it detrimental,
• Australia’s trade and current account with the rest of the world. Why is the external account so important,
• What is productivity and why is productivity also so important
• The superannuation system, good for some but not so good for most
• Immigration, how does this effect the Money system?
• Foreign Investment and the Money Supply
• Interest rates and Money Creation
• Inflation, jargon that’s meant to sound meaningful, and how that affects Money
• GDP, the most quoted economic statistic, does it mean anything?
• And, how you, the citizens, hold the Money system on your shoulders and locked in place.
• Plus, much more to come

The format is to cover each topic in understandable language with as little jargon as possible. It’s not meant to be an academic analysis, rather an understandable explanation of how things work in the least words possible. Each topic contains easily interpretable rules that will allow the reader to better understand Money, its circulation, how the Money system is held together and explanations of other economic misconceptions.

Every day economic terms like GDP, inflation, economic growth, recession and unemployment are thrown around. What do they mean for most citizens? Citizens are primarily interested in how much Money they earn from their efforts or investments, and what that Money can buy to meet their needs and wants. Following the Money trail can answer the question of what economics means for citizens far better than misused economic jargon.

Each topic covered will generate simple rules from the discussion on how the Money system operates.  On occasion, detail and exceptions may be left out of the articles to keep the fundamentals simple and understandable.

Lastly for this introduction, Money is part of society’s necessary infrastructure. How that Money infrastructure operates should be totally transparent. It’s not. However, if you follow the Money, it’s possible for all citizens to work out who’s doing what to who, and even why.

2.

 What is Money?

If we’re going to follow the money, we need to understand what Money is. Money is used to buy or exchange goods, services, assets or investments. That’s what Money does, but not what money is. Money has evolved considerably over the centuries. Particularly in the digital age, Money has transformed from coins and notes into numbers on a computer screen showing an account balance.   There are still physical cash notes (fiat money), but that represents such a small part of the Money balance to be irrelevant for our purposes and is therefore excluded from this analysis. While it’s theoretically possible to withdraw all one’s funds in fiat money and hide it under one’s bed, that’s not practical in today’s world.

In the cash note world, i.e. fiat money, money can be described as a type of promise to pay citizens, through either the government of the day or the Central Bank. It’s not backed by any other store of value such as gold for instance. There is no guarantee as to the value of fiat money or what it can buy, just that the piece of paper or plastic with one Dollar on it is a Dollar.

A citizen could theoretically hold all their Money in the form of fiat money in their own safe without the need for a bank. Is that Money in a safe the same money as is held in a bank in a digital world? In short, no.

Note that in Australia the Central Bank is the Reserve Bank of Australia. In the interests of generality, the Reserve Bank will just be referred to as the Central Bank because there is nothing special about our Reserve Bank, which is basically a banker to the banks and the setter of short term interest rates.

In a digital world, all Money in a country is accounted for in banks as bits and bytes. The Money in each account is often referred to as cash as if it were equivalent to fiat money. It’s not. It represents a loan to a bank that is normally called a deposit. Except for those cash notes or fiat money that we are disregarding, all Money is held in private banks and the central bank. Banks, in the interests of reducing risks, are regulated by the government. This provides citizens who deposit Money with banks the confidence that they can have access to their Money to buy, invest or transfer at any time. However, a bank’s ability to pay is not fully guaranteed by the government, so a risk still exists. In Australia, only Money up to $250,000 deposited in a bank is supported by the government and that is still not a guarantee. It is a system where the government picks up principal losses after a period of resolution and is limited to a total system limit of $20Bn. This is a far cry from being able to rely on all Money being the unconditional IOU from the government that fiat money enjoys.

All depositors face a risk that a bank will fail and all or part of their money will disappear. Such a situation is playing out in the USA and Swiss banking system in 2023. But the system cannot work if deposits, also known as Money, is thought to be at risk by citizens. Governments and central banks will bail out the depositors in nearly all circumstances where a bank has liquidity or credit issues even though they are not legally required to do so. The system can’t function with Money failure of any significant size, as that undermines the function of Money. If equity investors in banks lose, it is considered acceptable because that is not Money failure, it’s equity or share failure. But deposits that represent Money must not fail. This brings us to our first Money rule. 

Rule 1. The Money that citizens hold in banks is a promise to pay from a private bank that is only surreptitiously and not directly supported by the government. Money is not supported by a direct government guarantee although the Money system operates as if it is.

What we have is an imprecise system, where Money is not managed through a rigid legislative support regime that can be accurately monitored. Under rigid regime, it would be hard for a government to argue that banks should not be paying significant guarantee fees for the benefit received from government support. Banks earn large profits and pay very little for strong implied government guarantees. The Money system allows banks to socialise losses ie have the taxpayer pick up the losses incurred through bad management and mistakes with little accountability on management. Many citizens and most bankers may believe that this system is acceptable, but an understanding of how the Money system works will surely give a variety of views that should challenge the status quo by demanding proper taxpayer compensation and accountability.

Central Bank Digital Currencies

To add a recent but important development, Central Bank Digital Currencies (CBDC) could potentially change how the Money systems work in a fundamental way. A CBDC held in a depositor’s account with the central bank and able to be held on a citizen’s personal digital device is government supported digital Money.  Assuming privacy issue are addressed such a development would be revolutionary.

A CBDC would fundamentally change how private banks operate and the power they have. An unrestricted CBDC would become the Money infrastructure with private banks having any implied guarantee removed but with barriers to entry reduced resulting in more competition.

 However, CBDCs are only just being developed and so are the rules surrounding their implementation. If vested interests have any say, then the rules around CBDCs will likely be restrictive enough to not significantly change the way private banks currently operate. Looking at our own central bank actions on CBDCs I’d say, at least from a Money perspective, the use of CBDCs is likely to be very restrictive and not change how the current Money system operates denying citizens better banking and banking products.

3.

Where does Money come from, aka Money creation?

Money is created by the government and private banks exclusively and is created and destroyed every day. It’s very important to get your head around how Money is created as it’s counterintuitive to conventional wisdom and generally misrepresented.

Banks

Let’s think of the Australian money system and its four major banks, with many smaller banks and the central bank, as being one big bank that we’ll call, ‘Megabank’. Megabank holds all the Money (deposits) and all the loan assets in Australia. Now imagine a single point in time and take a look at Megabank’s balance sheet. Megabank holds all the Money in Australia at that point in time, and the Assets (loans) must equal the Liabilities (deposits) plus capital or equity. How then does Megabank fund the next day’s loans?

Every time Megabank lends Money (an asset), it creates an equal deposit of Money (a liability). It is not the other way around, i.e., Megabank does not receive a Money deposit and then lend out that Money.  Megabank holds all the Money and loans in the country, and it cannot just receive a new deposit because the Money quite simply doesn’t exist. All Money deposits are matched by loans so there is no Money just lying around.  But Megabank can certainly lend Money (loan), which is then immediately deposited in Megabank to balance the books but also to increase the amount of Money in the system. The reciprocal also applies. When loans are repaid to Megabank, deposits decrease and Money is destroyed, so the books of Megabank always balance.

When a country has rising house prices and rising mortgage loan balances, Money is being created and the Money supply increases. This increasing of the Money supply allows many citizens to enjoy extra benefits. The simple point in this process is that the Money created to enjoy the good times is backed by a borrower’s housing debt, and that debt must be repaid either by a borrower’s Money earnings or by a version of pass the parcel. When a country uses this Money creation model we should ask the question, is the Money creation productive or sustainable, and which citizens are paying? Experience tells us that pass the debt parcel to create Money can be played for a very long time, but not forever.

In a democracy, a government can’t increasingly marginalise a large segment of citizens. Citizens must use more and more Money to pay for housing by sponsoring increased asset prices. At some future point, the cost will land in the hands of citizens with not enough future Money earnings to pay the required price. Sheer voter pressure forces either a revaluation of prices or a redistribution of wealth, imposed upon the government of the day. This asset-value-increase-Money-creation economy cannot be productive today, or equitable across generations for the future, but that’s where we are.

As each bank is governed by the same regulations and is indirectly supported by the government and central bank, it matters not in Money creation whether we have Megabank or hundreds of banks. The same process applies. Every bank creates Money when it lends Money and the Money created from loans borrowed must balance on the collective Megabank’s balance sheet.

Individual banks can have Money liquidity issues within Megabank. The basic bank business model is to borrow deposits short term at low interest rates and lend on longer terms at higher rates, resulting in profits or net interest margin. The basic bank business model allows depositors to suddenly either discover, or imagine, risks in a bank and withdraw their Money. When that Money is not replaced by other deposits, other bank lending or central bank lending, that bank has a mismatched balance sheet, and therefore a liquidity problem. The balance in the Money system has not changed and unless there are real credit losses that exceed a bank’s capital, a liquidity crisis does not add or subtract from the Money balance.

So where does the Money that was taken out by frightened depositors go?

In the past when there was no digital Money, only fiat money or cash, depositors could have a run on a bank and withdraw cash that they horde and do not deposit in another bank. In those past circumstances, a run on a bank is fatal because fiat money is extracted from the total banking system. The situation today is different.

Today, Depositors must put the digital Money into other banks which creates, for those banks, an excess of Money but not in Megabank or the system where the total amount of Money remains the same. The excess Money could be lent to the bank with liquidity problems within Megabank, but that is unlikely to occur and therefore the Money ends up at the central bank. So the central bank has the Money, and unless it lends that money to the individual liquidity-challenged bank to give it back liquidity, that bank has a liquidity crisis, or a lack of money, that will cause it to cease to exist. Banking is a finely balanced, bitchy business where size does count.

As we’ve seen in the aftermath of the 2008 financial crisis as well as more recently, in a crisis large banks do not help smaller banks with liquidity problems. They just devour them. It would not be difficult or uncommercial for large banks to assist smaller banks in remaining solvent even in the face of credit losses. But the alternative of devouring the assets of a bank with liquidity problems enhances the larger banks’ ‘too big to fail’ status by adding to their balance sheet for very little cost. A big win for little effort.

Why don’t other non-bank institutions create Money when they lend? A non-bank cannot take deposits, is not in the banking system and is not supported by the central bank. A non-bank can borrow money from out of the banking system and lend that money, which immediately finds its way back into the banking system. A non-bank acts as an intermediary but does not itself create Money. Rather it facilitates the banking system to create more Money.

Rule 2: In the banking system, loans come before deposits (not the reverse) to create Money. The private bank lending and borrowing process creates Money in the form of digital deposits in a bank. This is true for any loan from any bank whether loan purposes are productive or not. Liquidity crisis in banking always enhance large bank too big to fail status.

Governments and Central Banks

Government Money creation is often referred to as printing money, a reference back to the days when government printing presses churned out fiat money. Devices for backing fiat currency were used to reduce printing, such as the gold standard, where gold was used to back fiat money. The value of a country’s money was backed by the value of gold owned by that country.

When a government runs a deficit caused by excessive expenditure, that deficit is funded by the issuance of debt, usually in the form of bonds. If a bank (including the central bank) buys these bonds, the Money creation process continues as the funds to buy the bonds ends up in the banking system through government expenditure into the economy.

As a point of contrast if a superannuation fund buys bonds directly from the government, Money is not created. The superfund withdraws money from the banking system and provides it to the government, which puts the money back into the banking system through expenditure. Is it surprising that in the guise of needing high quality liquid assets, banks are required to buy government bonds so that the money supply is increased?

Central banks can also create Money by digitally printing and calling it things like ‘Quantitative Easing’, or in Australia’s case, a ‘Term Funding Facility’. How this works is no mystery. The central bank simply loans funds to Megabank by digitally bringing Money into existence and crediting it to the bank’s account at the central bank. The central bank’s books balance, as it created an asset (loan to Megabank) and a liability (digital Money). Megabank’s books balance as well, and it now has Money it can lend.  Megabank does not create additional Money as the lending only creates Money that replaces the Money from the central bank that has been lent. At this point, it must be noted that the central bank may want their loans repaid, which reverses the Money creation process unless it is replaced by another Money creation mechanism. The ultimate question is who pays when loans are repaid, and Money is destroyed?

A government in a democracy is simply the representation of its citizens, and by extension central banks are owned by those citizens. Governments (citizens) have powers to create Money by running budget deficits and borrowing. This, at least, is publicly reported, and governments can be held accountable to their citizens for mismanagement of Money creation. On the other hand, so called independent central banks have substantial Money creating powers but are rarely held to account, rarely report in detail, and rarely explain their actions to the citizens. Central banks can and do create too little or too much Money and certainly misdirect where it should be spent with little accountability. Money creation powers of the central bank are at least as powerful as the interest rate setting power, a fact that citizens should be cognisant of in 2023.

Rule 3: Governments have substantial Money creation powers and use that power to stimulate the economy but are at least held accountable by citizen voters. Central banks also have money creation powers but are rarely held accountable and are publicly opaque on why and what actions are taken. This gives central banks significant Money creation power.

4.

How money circulates and the importance of Citizens

All money is held in Megabank as described under the previous topics. Leaving aside Australia’s account with the rest of the world for now, Australian Money is a closed system where all transactions between parties must balance, and Money stays in the Australian banking system. The balance is only changed by the creation and destruction of Money, described in previous topics, by Megabank lending and governments borrowing.

Simply, if a citizen uses Money to purchase goods, services or assets the Money stays in the system and remains on deposit under a different depositor name. In a perfect world, the new depositor would then spend that money on different goods and services and the cycle continues, creating beneficial economic activity. As an example, if a citizen buys a good from a business that uses those funds to pay for the raw materials, labour, manufacture, and research & development then this generates productive economic activity without increasing the Money balance but increasing the Money value.

The speed of circulation of money in the system adds greatly to economic activity to the benefit of all, even as the Money balance does not change but the value of Money does.

Money can also be used to pay for goods, services and assets where it is transferred to parties that don’t continue the cycle of Money circulation through economic activity. This happens in two types of circumstances. Firstly, where an economy has a high concentration of the suppliers of goods and services, enabling rent seeking and a lack of competition, and a concentration of the owners of those suppliers. Secondly, where Money is used to buy an asset as a store of value (eg gold, houses and many others) and the seller continues the cycle of buying stores of value rather than goods and services. In both these situations the speed of circulation of Money is slowed or stopped, and this strangles economic activity. Sound familiar?

With these simple explanations of money circulation, Rule 4:

Rule 4: The majority of citizens, small business or businesses in competitive sectors that sell goods and services for Money that continually circulates are critically important and highly beneficial to sustainable economic activity and the value of Money. Whilst those citizens and businesses that slow down Money circulation by speculating on assets are detrimental to economic activity.

Now we exponentially increase the Money circulation with Money creation through debt.   As we described previously, citizens create Money by borrowing from Megabank that then creates the balancing Money deposit. This process adds to the Money balance and at the same time the rule on Money circulation applies. But the difference from our Money circulation description is that the addition of the loan used to create Money must be repaid.  The Money to repay the loan exists as deposits on Megabank’s balance sheet in any number of bank accounts. By the process of the borrower selling its services or goods for Money, he or she can repay the loan which reduces the Money balance. Megabank lends the Money based on the probability of receipt of Money by the borrower from selling goods and services.

However, where the circulation of Money is hindered by a concentration of businesses and citizens that slow down money circulation as previously described, then the ability for the borrower to earn Money to repay the loan is diminished. In these circumstances the only way the loan can be repaid is to create more Money and new larger loans, in an ever-increasing loan cycle. The only way that Megabank would continue to lend under these circumstances is if the assets used to support the loans continue to increase in value, or at the very least not decrease in value.  By increasing the Money balance through lending then there is always sufficient Money for borrowers to repay loans either by earning or selling.

The problem with this process is that all uncontrolled positive feedback loops have a limit and will eventually break, as they need to run faster and faster to deliver more and more Money.  More citizens must be drawn into the borrowing process and loan balances must get larger and larger until some citizens are left holding the parcel because they have no ability to earn the Money required to repay the loans. In the real world this process is a continual cycle of creating too much Money followed by loan losses and asset value decreases, a process that has been occurring for millennia.  However, the build-up to the end of cycle can last a long time as it’s perpetuated by Megabank, the government and other vested interests.  While this cycle is not unusual it’s also not something that should be allowed to occur in a way that threatens the stability of the Money system, as defaulting loans destroy Money and have significant negative consequences.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Adding debt arcs up the risk, Rule 5 is

Rule 5: Debt that creates Money is not necessarily a bad thing in circumstances where the repayment of the loan is based on earning Money from positive economic activity. If it is not productive debt and is based on rising asset prices, a positive feedback loop of ever-increasing Money creation is triggered that can have drastic negative consequences for the Money balance and its value when the cycle eventually ends.

5.

The taxation system and why Money circulation is vital.

The topic of taxation and the Money system is very controversial, with many misconceptions. Why citizens need to pay ‘their’ Money to the government is a noteworthy topic.

The topic is about the fundamentals of taxation and not the merits of any individual tax or tax rate. Some base questions arise on the topic, e.g. What is tax? What comes first, government spending Money or the government collecting tax Money to pay for the spending? And who actually owns the Money?

Now that we understand what Money is, Money creation and Money circulation, we are equipped to discuss Money as it relates to taxation. Tax is simply a levy that a government imposes on citizens. Citizens pay that levy to the government in the form of Money.

Our assumption is that all citizens agree that governments provide necessary services and infrastructure. Governments need Money to pay citizens for those services and infrastructure and repay debt. Whilst we may argue all day about what government services are necessary, there is no argument that some services are necessary.

Governments for millennia created Money by printing or borrowing. In a digital money world it’s easier and faster to create Money. Creating Money by printing even when digital devalues existing money. It’s possible even responsibly for a government to digitally print Money to pay for its provision of services and that citizens pay by having the value of their Money decreased. However, that’s not the method chosen by governments of all persuasions to pay for services. Taxes or levies are the order of the day.

The government may represent the citizens, but the government can’t control the expenditure and ownership of all Money. The government needs the citizens to have control of their equitable portion of all Money created. This means we have a Money system where the citizens control most of the Money, which the government then taxes to pay for services the government must provide.

The government actually holds very little Money via deposits with Megabank. The government is a conduit through which some of the Money in the economy is collected and distributed. The exception would be if the government held Money in a fund such as a sovereign wealth fund or temporarily in the central bank.

 If a government is running a deficit, it creates Money as previously described and spends that money in the economy, i.e. on citizens. At this point the government has increased the Money balance to fund its deficit spending before taxation. The taxation to repay debt destroys Money and that reduces the economic activity that was previously increased by the government spending and creating Money. The cycle repeats year on year, resulting in the government never having a significant positive Money balance, as Money is either used to repay debt or spent in the economy on citizens.

Government’s income is taxation, so the way a government can reduce debt is through taxation, redistributing Money from citizens to the government. If a government does not tax enough Money to cover debt repayment and is committed to deficit spending, the debt will continue to rise, increasing the Money supply but decreasing its value. The government only needs to increase tax by the amount of Money it created by increasing debt, no more and no less. Therefore, the tax imposed is the government receiving Money back that the government created and distributed to citizens, thus giving with one hand and taking with the other.

In the real world, politics determine that the debt resulting from Money creation may stay outstanding for a very long time, as deciding who and when to tax to repay debt can be unpalatable for politicians and the uniformed citizens.

So conventional wisdom that states that a government taxes and collects Money to spend is incorrect and is the actual reverse of how the system works. Although it can feel like a very complex system, taxation is best viewed simply as citizens repaying Money to the government that was created by the government through printing or borrowing and spent in the economy. This simple explanation also supports a progressive taxation system where the rich don’t just pay more Money in tax but also at increased rates of taxation.

Conventional thinking on tax is wrong, which leads us to Rule 6:

Rule 6: Governments create Money by borrowing, then distribute the Money by spending, and then tax to repay the debt. Not the reverse, where the Money balance is taxed and then those tax receipts spent in the economy. Taxation that repays debt destroys Money created by the government.

We’ve all heard politicians and citizens refer to ‘our money’ or ‘their money’ when referring to their money balance in Megabank or their earnings. But is it theirs? It’s certainly an interesting question when discussing taxation where the common belief is that governments take ‘your’ money through taxation.

When a citizen holds fiat money or cash notes then I’m willing to concede that it is ‘their’ money. They own it. But as soon as Money is deposited in Megabank, who owns it? As we have previously discussed, Money in a bank is not the depositor’s Money. It’s a loan to a bank and that bank, within rules, does whatever it likes with that Money. As all Money is held in banks, then arguably all Money is actually owned by Megabank and not depositors.

However, that’s not the end of the story. Megabank is regulated by the government regulator APRA, and they have extraordinary powers if a bank does not have sufficient capital or liquid assets to back its risk. In addition, the government owned central bank provides considerable liquidity support through buying Megabank assets or borrowing Megabank Money in order keep the Money flow going in the right directions in the banking system. It’s not an unsupported argument that in a beneficial sense all Money is owned or controlled by the citizens collectively, through the government via the central bank.

So why is who owns the Money so important? We’ve discussed that citizens support the Money system through Megabank, by taking out loans and lending deposits. The system would not work if only say the top 1% of citizens (1%ers) provided support to the Money system. All citizens beneficially own all Money. It follows that all citizens should have a say in the Money created by Megabank and governments through debt, how its distributed and how and when it is repaid. Citizens elect governments that determine taxation policy which should be equitable, as all citizens equitably contribute to supporting the Money system. Equity should determine that those who benefit from Money creation should pay higher taxes than those that create increased beneficial economic activity by circulating most of their Money.

Most of the Money created and spent in the economy gravitates to a small minority of citizens (1%ers) through asset ownership concentration and Rent Seeking that is described in future chapters. The irony in this process is that when Money is spent on social services for most citizens ultimately gravitates to the 1%ers that generally are opposed to such government expenditure.

The taxation and Money system put in place by successive governments ensures that there is always an inequitable distribution of Money and taxation. That is not equitable Taxation policy. So to Rule 7:

Rule 7: As all citizens essentially own all Money, they should determine taxation policy and that system should be equitable. If a taxpayer is paying a significant percentage of their income in tax, the system is working for them by continually creating Money that gravitates to their benefit. This benefit continues through increased spending of any new Money created in an inequitable distribution.

6.

How do banks work and how Too Big to Fail banks are carried by citizens

If we keep the explanation to the basics, it’s not difficult to understand how banks work in a digital age. It’s not a mystery like aspects of quantum physics, and banks are not run by groups of high functioning geniuses. However, I have heard the President of the USA, Prime Ministers, leaders of old-world companies and new-world companies make public statements where they clearly have no idea how banks work.

Banks operate completely differently from other businesses or companies. Banks have a highly geared balance sheet. What is meant by that? As previously discussed, Megabank earns Money income by lending Money (asset) and borrowing Money from deposits (liabilities). The difference between the interest cost of the deposits and the interest received on the loans is income, generally referred to as the net interest margin. The bank also receives money through the issue of shares (capital). Capital takes any losses before deposits. So if a bank loses money through overspending or losses on the loans that it has made, its equity capital is supposed to protect the depositors against loss.

All simple enough, except that Megabank is highly geared, as in the amount of capital is small relative to the size of its assets and liabilities. Let’s keep it simple. Megabank has a ratio of total assets to equity capital of around 15 to 1. That is Megabank has on average, $1 of capital to protect from losses for every $15 of loans. This ratio demonstrates the sensitive nature of Megabank’s balance sheet. A low capital ratio also enhances the ability to easily ramp up lending and therefore Money creation by not having to raise very much capital as Megabank grows. But the downside is that only a small percentage of loans need to go bad before Megabank is in big trouble, with the risk of destroying depositors Money.

The high gearing of Megabank’s balance sheet is not the biggest systemic issue, even if that could be described as high risk. The higher the gearing ratio, the less capital Megabank needs to raise to increase lending, and the less protection that is provided to depositors and the government that supports those depositors. Share capital is allocated against loans, not just to directly protect depositors against loss but to temper bankers against having lending spiral out of control and making far too much Money that the economy can’t manage to repay from future productive income. Simply, very highly geared bank balance sheets that grow excessive lending, with little capital constraints, create too much Money and are an economic threat in themselves as they drive up asset prices and turn low-risk loans into high-risk loans.

These Money creation risks are so important that it would not be an unreasonable assumption to think that the nature of Megabank’s balance sheet should be totally transparent, which it is not. But before discussing transparency, let’s discuss bank liquidity, an equally important matter.

When Megabank lends Money (assets), it lends for different periods of time. For home loans there are terms of 25 years or more. On the other side of its balance sheet (liabilities) Megabank does not exactly match the duration of its borrowing in the form of deposits. In fact, Megabank has a large portion of its Money deposits as short term that can be withdrawn by Depositors on little to no notice. If Megabank were to have a large withdrawal of Money, it would need to sell assets or loans quickly, otherwise it would have insufficient Money and therefore a liquidity crisis even if it has sustained no actual losses. Actually, in our assumed single bank world, Megabank can’t have a liquidity crisis as it holds all the Money, and any withdrawal of Money must be matched by a deposit. However it could certainly happen to one of the divisions of Megabank in the real world.

Normally a liquidity crisis precedes a debt loss crisis, but in our digital world it can happen very quickly. This was demonstrated recently in 2023, when middle ranking US banks went down in a matter of days. What started as a liquidity crisis rapidly evolved into a debt loss crisis. Liquidity risk is addressed by regulators or central banks, requiring banks to hold a stock of liquid securities like government bonds or AAA mortgage-backed securities.  These can be easily sold or placed with the central bank to provide a bank with money that is not available from other sources. The US in 2023 clearly showed that this is not a fool-proof system.

So to Rule 8:

Rule 8: Banks operate differently from other businesses; they are highly leveraged with only a thin layer of capital to support losses and constrain lending, thereby ensuring that the Money creation system sits on shaky foundations. Banks also carry liquidity risk from depositors withdrawing Money quickly and on mass that the bank can’t meet and can’t fund within the banking system

How do banks have the ability to create Money? Its been described in previous chapters that banks create Money when they lend. This process is simple and fast in a digital banking world and it is a responsibility that banks have that lies at the foundations of economies. Yet is rarely discussed.

Prior to the digital world, if a bank loaned a citizen money in the form of cash notes from its safe, no Money is created as that process was just a reassignment of those cash notes. However, at some past point a bank cheque was invented. If a bank issued a borrower with a bank cheque and that borrower used the bank cheque to purchase a house where the bank cheque was deposited in a bank by the seller, then Money was created. In a digital world, the bank cheque is obsolete with Money creation being instantaneous and on all loans no matter what form or purpose.

No other institution or corporation can create Money by borrowing. They can borrow and create IOUs, loan securities or bonds but not fungible Money like Megabank creates when it borrows. Loans to Megabank in the form of deposits is Money because its fungible across all banks and citizens down to the cent, allowing it to be used in all Money transactions. An absolute necessity for any economy.

Banks are central to the Money-making process, are unique from other institutions or organisations, and need to be transparent and fully accountable to citizens.

Let’s get a little more complex on how much loss protection for depositors, in the form of capital, Megabank must hold as stipulated by the regulator APRA’s, rules. The large banks within our Megabank do not have hard rules from APRA on the amount of equity capital that must be held to protect depositors against loss of their Money. Rather, under international standards that APRA generally adhere to, the large parts of Megabank can use what is known as the Internal Risk Based methodology. Under this methodology each large bank creates its own methodology to calculate the risk on its balance sheet (loans, derivatives, operations etc) and uses that risk calculation so that capital is determined and allocated on a risk adjusted basis. There are parameters set by regulators but each bank under the Internal Risk Based method has a different calculation and algorithms. Sound sensible? That is very much an open question. There are both difficulties and unintended consequences.

The first thought that should come to mind is that to compare banks, or indeed inform all stakeholders of the risk calculation and capital adequacy, the Internal Risk Based methodologies should be fully transparent. I have analysed the international standards for banks, and those standards effectively agree that transparency is required. I have also read the disclosures of Megabank and all its parts, plus the disclosures of many large international banks and the results were less than satisfying. In all cases where Internal Risk Based methodologies are used there is not sufficient disclosure of the algorithms and assumptions under the calculations made to understand the risk and how the calculations were made. This non-disclosure of capital calculations is very important for all citizens.

Banks are valued on the basis that the higher the sustainable return on equity, the more valuable the shares. Therefore, it should be no surprise that the large parts of Megabank that use Internal Risk Based methodologies have smaller capital requirements than smaller banks that don’t have the same rights and must therefore use fixed capital allocations set by the regulator and international standards that unsurprisingly require higher capital requirements. Consequently Megabank’s large divisions have a lower cost of capital and a competitive edge over its smaller rivals that significantly distorts the origination of loans in Megabank’s favour. We allow Megabank to self-regulate to gain market advantage without proper disclosure.

There is even more to this inequitable banking tale, and that is the doctrine of ‘Too Big to Fail’. Too Big to Fail is where an organisation, usually a bank or insurance company, is so large that the economy simply cannot withstand that organisation failing and so must be rescued by regulators and government if it has a debt or liquidity crisis. It is also referred to as ‘socialising losses and privatising the gains’.

This was highlighted in the financial crisis of 2008 and 2009, and even with the talk and regulatory changes in the intervening 15 years, not only has nothing changed, if anything Too Big to Fail is even more entrenched in western economies the world over. This was recently demonstrated in Switzerland with Credit Suisse.

 The market and all citizens are fully aware of the Too Big to Fail, even if not by name, as they gravitate more and more to larger banks, especially when things look troublesome. Too Big to Fail banks have a huge advantage over their competition but only because of the support from citizens buying into the doctrine.

Megabank’s large divisions market advantage is diabolical, leading to Rule 9:

Rule 9:  Megabank’s large divisions operates without proper disclosure and is granted special capital status by the regulator that gives it competitive advantages and too much Money creation powers. These large banks also enjoy special status of Too Big To Fail where management can excessively reward themselves but rely on the citizens to bail them out if they overreach in lending and Money creation.

Before leaving the topic of banks, I need to point out another unintended consequence of the established doctrine of Too Big to Fail. My use of Megabank to describe the banking system as one bank is not just for dramatic effect. On a day-to-day basis, banks and the central bank act as a single treasury department, so that not just the whole Money system balances, but that each bank’s balance sheet does not have an excess of Money, or more importantly, a deficit of Money. All banks normally work together effectively to keep the system working and Money flows happening, where and when required.

However, when things get tough, the vultures become apparent. Too Big to Fail banks now understand that because of their status, when there are liquidity issues with a bank in their system, deposits in the system will gravitate either to Too Big to Fail banks and not their smaller competitors, or randomly distributed across all banks. In these cases, it is not in the interests of Too Big to Fail banks to recirculate those increased deposits. Recirculating would assist the bank where the run is occurring by depositors, and by keeping Money liquidity flowing through bank lending to a liquidity-challenged bank, it would probably survive. Rather it’s in the interests of large banks to do nothing voluntarily and wait for the smaller bank to collapse. In those circumstances, due both to their privileged position and the fact that they have the Money, Too Big to Fail banks can buy the assets of the failed bank at a discount, and likely with government support. These so called ‘bank rescues’ continue to embed the concept of Too Big to Fail and concentrates the banking system into fewer and fewer hands that stifles competition.

I’m not defending badly managed banks that get themselves into liquidity and credit loss problems. But circumstances, recently in 2023 in the USA and Switzerland, demonstrate that rescuing depositors and borrowers in failing banks results in big costs to citizens and big gains to Too Big to Fail banks. That’s not to criticize the assistance provided to depositors and borrowers, but if citizens are paying directly and indirectly through Too Big to Fail, then a more equitable solution is needed so that these costs are paid for by the beneficiaries, i.e. Too Big to Fail Banks and their management.

Rule 10: The banking Too Big to Fail doctrine is being further entrenched as bank failures occur with large banks and their management benefiting. Without proper Money compensation from Too Big to Fail banks to the citizens, via the government, banking becomes increasingly less competitive and more reliant on citizens to support the banking business models at insufficient cost to those banks and inequitable excess returns to management.

7.

Housing as a speculative asset, and other perceived stores of value.

There is some good news on housing. Housing is, by definition, a productive and necessary asset when not used for speculation.

Even without Australia having a formal human rights bill, housing is a basic human right that democratic governments should provide the means, at a reasonable cost, to enable all citizens to obtain. Proper comfortable housing allows citizens to be productive and provides a productive learning environment for adults and children alike, fostering an equitable society. Housing improves the value of Money and increases the amount of Money by being productive. But that’s through what it does, and not what it is.  Again, for the purposes of simplicity think of housing as for both residential and commercial, as the same simple rules apply.

It does however seem that humans have an ingrained desire to turn productive assets (or anything really) into speculative assets, in the endless unnecessary pursuit of increased wealth at the expense of others. The great Australian dream is no longer a dream for a decent house for the family. It’s a dream to use housing as a wealth creation vehicle to steal from future generations. Many commentators will try to argue that the issues are all about a lack of supply or too much demand, and while these factors do have an effect, the availability of loans for housing is undoubtedly the major determinant of house prices.

 Conventional wisdom is that houses are a good investment as they are solid bricks and mortar. My reply to that wisdom is that houses are full of air, and if you’re paying a lot for the air then you could have a big problem. It’s not just affordability for younger generations, it’s also a productivity issue and a misallocation of capital issue. Just as importantly, it’s a Money issue.

We’ve learnt previously how loans from banks create Money, and that Money circulates in the economy. As a home loan is both the largest and longest-term loan that a citizen can take out, it is therefore a primary driver of Money creation. It would make a lot of sense for governments and all citizens to be very concerned about the size and terms of home loans, as these loans are fundamental to how much Money is created and on what terms. While Megabank is regulated, which borrowers qualify for a home loan and on what conditions is effectively outsourced to Megabank. Meaning that the system effectively  outsources Money creation to Megabank. The central bank sets short term interest rates, a very important function, but there are many other aspects of loaning Money and its resultant Money creation for which Megabank is responsible, with little or no oversight.

 It’s hard to come up with any other economic function that governments, in their various economic philosophies, delegate to the ‘market’ on the basis that the ‘market’ will ensure the best outcome for most citizens. At a time when affordability levels of housing to buy, or even to rent, are at such levels to be out of reach for younger generations plus a large portion of older citizens, it seems certain that the ‘market’ approach for Money creation does not work. Governments have failed in their delivery of the basic human right of housing at a reasonable cost to a large portion of its citizens.

I am not writing this article to solve the current housing affordability crisis, but to point out to citizens and society how the home loan market is critical to Money creation, and how the economy functions. Governments must take responsibility for the Money creation that sits on Megabank’s balance sheet and not leave it solely to private banks. More can be done. Transparent fixed capital requirements for Megabank, based on known borrower risk parameters is a must. Capital can be adjusted for current economic circumstances by regulation and legislation and not left to Megabank. Taxation benefits or hand-out subsidies on housing and loans should be equalised for all types of borrowers and not just a certain class of borrower. The government should co-ordinate with central banks on fiscal and monetary policy to achieve the goal of providing affordable housing for all, but also so that housing remains only a productive asset and not a speculative asset that creates excess Money for no good purpose.

Tenancy rights is also an area where there needs to be more focus and understanding. Obviously housing is a productive asset, whether you are an owner or a tenant. Whilst owners may venture into housing as a speculative asset, tenants do not. Leaving aside government landlord subsidies, tenants  provide the Money that supports the owner with income or loan servicing. Owners may provide Money in the form of equity to support housing, but the majority of Money required for buying and maintaining a rented house originates from tenant’s earnings. On this explanation, it’s easily argued that tenants are more valuable than owner investors in a productive housing market where housing is not speculative. The Australian perception that tenants are somehow second-class citizens without aspirations is wrong and is continually espoused incorrectly by housing speculators and those behind them.

As tenants are of great value to the economy, tenant rights in Australia are  weighted far too much towards owner landlords and encourage speculation. Tenant rights do not reflect the value of tenants. Increasing tenant rights, particularly on tenure and eviction rights, is not only equitable but creates a more productive environment for tenants and society. Increasing tenant rights may suppress housing speculation and therefore the Money creation machine, but would indirectly increase the value of Money, and the creation of Money through productive pursuits.

Only the voice of citizens will change housing policy, and that leads to Rule 11:

Rule 11. Housing loans are the largest creator of Money in the economy. Housing is productive until its value becomes speculative and then it becomes unproductive and distorts how the economy functions, leading to productive housing unaffordability and low economic growth. Citizens need to have a bigger say in how home loans are provided and the Money that creates. Tenants are more valuable than owners for the housing market and consequently, should have more equitable tenant’s rights.

While housing is in a class of its own when priced for speculation, let us touch on other speculative assets to demonstrate both the similarities and differences to speculative housing. We’ll keep it short and simple.

Gold is probably the oldest store of value on earth chosen by humans. Why is it a store of wealth? It is somewhat rare but has little productive use. It’s shiny, does not corrode, is malleable and so is great for jewellery. But most gold is simply held as gold and not jewellery. My opinion is. Gold is a store of value because it is. It is the same with diamonds. Diamond reserves are abundant, but it’s a very controlled market, creating the illusion of scarcity. However, citizens have decided that this metal, gold, and this compressed carbon, diamonds, are stores of value well above their productive value.

Do gold and diamonds represent a risk to the economy and Money, as speculative housing does? Whilst it’s possible to borrow from a bank against gold and diamonds, leading directly to the creation of money, that debt market is relatively small, as is the total size of the gold and diamond markets compared to housing. So we can conclude that these stores of value and a number of others do not represent a great risk to the economy and the Money creation system from devaluations.

Gold, diamonds, and any other accepted stores of value brings us to crypto currency. That is, Bitcoin type crypto and not asset backed stable coins. Although crypto is a recent phenomenon, it’s hard not to simply compare it with other, much older, stores of value that have limited productive use and are just chosen to be stores of value. It is certain that crypto can be borrowed against, and in a convoluted way it can add to the Money supply, but crypto markets are not big enough to have any great economic effect, even if they all crashed to zero as some commentators keep predicting. The vast majority of crypto as a store of value is held in two coins, i.e. Bitcoin and Ethereum, so if you’re speculating,  beware.

Nevertheless, it’s also not unreasonable to predict that in a digital world crypto, or at least some crypto, will continue to be chosen in the long term as a store of value, even if the theoretical value is close to zero. Its digitally shiny and it has been chosen

Alternative stores of value that is not Money leads us to Rule 12:

Rule 12: There are alternatives to money as a store of value e.g. gold, diamonds and crypto, that are not housing. These established value stores are entrenched in the way the economy operates, even crypto. These alternative stores of value, whilst important, do not have the size to be a risk to the Money system, but as an individual, let the buyer beware

8.

What is Rent seeking and why is it bad?

Rent seeking is not a difficult concept and can be understood by all citizens but it can be difficult to explain simply.

 A definition from Investopedia is “Rent seeking (or rent-seeking) is an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity”. That definition doesn’t seem to cut it for me as a full explanation. So let’s expand the definition.

When a party can control an asset that for society or the economy provides necessary goods or services, and then uses that privileged position to extract ‘rent’ for the use of that asset more than the Money it could charge in a competitive environment, it is referred to as Rent seeking. Great if you are the seeker, but not so great if you’re a citizen spending limited Money.

As an example, where you have a situation in a country where there is a limited supply of a commodity to produce energy, and that supply is controlled by a single party or group that can charge Money more than the value of the commodity in a competitive environment due to the necessity for energy for homes and businesses, that is Rent seeking.

Rent seeking involves extracting extra Money from citizens for goods or services that could be used by those citizens on other necessities or productive pursuits. Rent seekers channel that extra Money charged to citizens into unproductive purposes. That’s because other productive investments do not meet the criteria for risk and return that Rent seeking activities enjoy.

Rent seeking is not limited to just critical infrastructure (e.g. energy) but can occur in all areas of critical infrastructure. Food markets, health, housing, transport, banking, communication, and education are all areas that are ripe for Rent seeking when the right circumstances either arise, are granted by governments or inaction by governments.

Australia is rife with Rent seeking opportunities. The two supermarket giants, the four major banks that form most of Megabank, the few property developers that hold most of the development approved land, the toll road operator, and the natural gas cartel, to name just a few. In many of these situations it’s argued that there are restrictions by regulation on charges, or that excess charging through Rent seeking is necessary to encourage investment. This is rubbish and not supported with substantiated evidence, or what is observed by Money flowing to the Rent seekers from excessive pricing. Let me stress, Rent seeker arguments justifying their position have been adopted by governments and the media and used to brainwash citizens into believing the totally unjustifiable with very negative consequences as we’ll see.

Now that we know what Rent seeking is and that it pervades the Australian economy, why is Rent seeking so bad?

As is our theme, just follow the Money. Money held and then circulated by citizens on goods and services adds considerably to economic activity. If those goods and services are provided in an efficient and cost competitive way, the Money circulation is maintained to improve economic activity. However, if Money is paid for goods and services in a non-efficient manner, then Money circulation decreases, reducing optimum economic activity. Citizens have less funds to circulate and Rent seekers retain Money for further Rent seeking and not productive activities, because that’s the Rent seeking business model.

Contrary to Rent seeker claims that reducing their pricing power will reduce investment, Rent seeking only encourages investment into more Rent seeking activities, because that is the benchmark for risk and return. Rent seeking creates a positive feedback loop with the negative consequences of stifling the flow and circulation of Money.

Reducing or even eliminating Rent seeking activities from an economy is an easy win for a government, as most citizens benefit from a reduction in Rent seeking. So why is it such a problem to fix? Governments being captive to Rent seekers through donations and ignorance, and citizens simply being so misinformed for so long that Rent seekers are believed, even lauded, when defending their activities by misrepresenting the benefits and leaving out the costs, are several reasons that Rent seekers rule.

Try not to laugh, economists refer to the proceeds of Rent seeking as “Savings”. No wonder ordinary citizens are confused.

Solving Rent seeking leads to Rule 13:

Rule 13: Rent seeking is not capitalism. It is socialism for the wealthy. Rent seeking removes Money from citizens and invests that Money in more Rent seeking. Rent seeking destroys the value of Money and concentrates the access to Money in fewer and fewer business owners.

Trickledown Effect

The Trickledown Effect is dogma originated in the 1980’s as a basic tenant of neo-liberalism and justification for Rent seeking. Trickledown begins with concentrating Money into the top ‘1%ers’, rather than an equitable distribution across citizens. The dogma is that Trickledown is good because the 1%ers will spend or invest that Money in economic activity, creating a Trickledown of the Money to the benefit of the remaining 99% of citizens. Great marketing, but nothing is further from the truth. There is absolutely no evidence that Trickledown exists or is an economic benefit. There never was any evidence, and there never will be. But if citizens hear a suggestion often enough, it can find a fake truth in society. The reality of Trickledown is the opposite.

Rent seeking causes a Trickle-up effect that is alive and kicking and all around us. Citizens paying too much for goods and services transfers Money up the pyramid, not down. Rent seeking through Trickle-up enables Money to be more and more concentrated in the hands of a few 1%ers to the detriment of the remaining 99% of citizens.

In theory Rent seeking and the trickle up would result in most Money ending up in the hands of just one person with all other citizens effectively wage slaves. Practically that’s impossible due to said Rent seeker needing services and protection that would also keep increasing in price through associated Rent seeking. However, an organisation could congregate most Money in a controlled population for a very long time. The CCP in China and oligarchs in Russia would be obvious examples today but history has many examples. However, all societies tend to Rent seeking being dominant and its only democracy or revolution that has the ability to reset Rent seekers..

9.

What is Productivity and why is Productivity also so important to Money?

Increasing productivity is the antithesis of Rent seeking.

A simple definition of productivity could be, “the resources used relative to the goods and services produced”. Increasing productivity is using less resources to produce more. Whilst the definition of “resources” is important, let’s leave that aside as we discuss productivity as it relates to Money.

Productivity is the key to a civil and stable society. Incentivising and increasing productivity is what has developed higher standards of living and less conflicts over the centuries. Historically, political regimes that allow and focus on productivity increases tend to improve the lives of its citizens. Unsurprisingly, democracies are where most productivity gains originate. Centrally controlled economies can innovate productivity gains, but history demonstrates that central control is not the most efficient way to stimulate productivity innovation in the long term.

Productivity gains do not of themselves create Money but they do increase the value of Money. Citizens can do more with the same amount of Money by paying less than previously for the same good or service. However, to borrow Money to create productivity gains, or to roll them out to citizens, creates Money that is used for productive purposes and therefore can be repaid from productivity gains and not from speculative asset inflation.

Money can also be created by selling the productivity technology offshore. Productivity gains allow Money to be circulated more quickly and widely. Whilst Money can also congregate to the owners of the technology that improves productivity, as opposed to Rent seeking, that Money is the cost paid by citizens for improving their lives and the value of their Money. By deduction, the Money cost can’t be higher than the benefit or it would be Rent seeking.

Productivity is key to all positive economic progress and increasing the value of Money. However, improvements need to be managed so as not to turn them into negatives. For instance, technology allows for productivity gains that cause a need for less labour. That has a negative effect if a citizen loses their job.  On the other hand, other opportunities must arise because no Money has been destroyed and the value of Money has increased and can be circulated more widely. Money is available to be invested in other productive pursuits that demand labour, thereby replacing lost jobs.

In Australia the suggestion that we have skill shortages is trotted out every day. In a country where the biggest exports are from the low labour-intensive mining and gas sectors, it’s hard to even imagine how a well-educated Australia could have skill shortages for jobs that are only required to service the internal population and are not export related. Australia does not have a skill shortage that can only be solved by importing people, we have a labour strategy management problem and a productivity problem. This situation is hardly surprising in a society dominated by Rent seeking. Immigration is not a solution to internal skill shortages, as immigration used for this purpose is also a form of Rent seeking through driving down fair wages for labour, i.e. dividing the available Money between more people to the benefit of the 1%ers.

Productivity is not about the immediate economic effect but needs to account for sustainability and environmental effects in the long term. Productivity gains that give a short-term sugar hit at a large cost for remediation in the future, are not gains but intergenerational wealth transfers.

It’s hard to understand the anti-eco brigade whose argument seems to be that if something’s working today then it’s ok to make it someone else’s problem to fix, when it all goes wrong, in the future. Not good planet management but a basis of conservatism.

Productivity is not just about computer systems or AI that replace human jobs. Health advances that allow people to live and work longer in productive capacities, increase productivity and the value of Money. Apparently Australia has an ageing population problem, based on historical analysis, which takes no account of productivity gains. It also does not account for increased productivity of individual workers as they age and live longer. Australia does not have an ageing problem; it has an ageing productivity benefit that must be managed and utilised. The productive aging worker must be a focus for government policy.

Unfortunately, ageism and ignoring productive aged workers is a thing, not only because of ignorance but mostly because it supports the false arguments for higher immigration and Rent seeking.

In Australia we do create some productivity gains of our own, but mostly we import productivity gains from offshore in the form of goods and services. Whilst this has been good for citizens while we can pay for the imports, it has also created the precarious debt situation that Australia has with the rest of the world. Selling rocks and gas to the world to balance our Money is fine while it lasts, but it is more likely that this strategy is severely limited and unsustainable. These commodities may very well allow other countries to create productivity gains that are lasting, but none of the value of producing those gains will accrue to Australia.

To repeat, our citizen’s modern lifestyles have been enabled by the productivity gains that have been developed over the thousands of years since homo sapiens could stand on two feet. All citizens and countries stand on the shoulders of giant inventors. There are buyers and sellers of productivity gains. For a country, you really want to be on the seller side of that line because that’s where the Money is. Australia needs to create productivity gains that it can sell as its Plan B.

So to Productivity Rule 14

Rule 14: Productivity gains are what improves all citizens lifestyles, improves the value of Money and gives choices to citizens. Australia needs to be a seller of productivity gains, not a buyer.

10.

Australia’s trade and current account with the rest of the world. Why is the external account so important?

The external account is Australia’s balance sheet with the rest of the world, simply how much Money the rest of the world owes Australia and how much Money Australia owes the rest of the world. The external account is critical to both the supply of Money and its value, and probably not understood by most citizens.

The external current account is not just the trading account that records what Money is exchanged for goods and services., it also takes account of capital transactions. Capital transactions are Money transfers that can be summarised as borrowing from, and investing in, the rest of the world including interest and dividends.

Transactions with the rest of the world influence all aspects of Money. If a country had zero transactions with the rest of the world, making its Money system totally enclosed, then the government would be able to always control where and how Money was used and who benefitted. Of course, and as history has shown, fully internalised economies do not lead to a good economic outcome for citizens. Citizens need to share in productivity and technology gains in the rest of the world through imports or investment. A country also needs to be able to export its goods and services to the rest of the world to earn Money to pay for imports and technology that lifts the standard of living for its citizens.

There is no avoiding a current account if a country trades in the global market. In theory, with a floating currency, if a country like Australia has a cumulative current account deficit (owes money to the rest of the world) the currency should reduce in value, making imports more expensive in local currency terms and exports more valuable. In theory this currency adjustment is meant as a stabiliser that encourages a country to spend less on imports and export more to achieve a zero balance with the rest of the world, ie neither a net borrower nor lender. Whilst there is some balancing effect of currency adjustments, this piece of neo-liberal theory has not worked in practice. The reasons that it does not work are complex but two fundamental reasons are that capital flows (and not just trade flows) effect Money values. Many countries play under different rules and don’t report balances correctly, or deliberately manipulate their Money’s relative value and interest rates to their advantage. Although neo-liberal theory says that trading countries must operate under the same set of trade and currency rules, that just does not happen in practice resulting in a distortion of global debt and investment balances, and thereby Money values.

While theoretically Australia should have a close to zero balance, Australia’s account with the rest of the world is, in round numbers, a net $900BN (foreign debt less overseas investment). In the last few years Australia has reduced its net position by having a strong positive trading account and current account. This positive position has been almost exclusively because of increased revenues from iron ore, gas and coal on the trading account. Australia exports very little added value goods and services compared to its imports and is on very shaky ground by relying on the commodities listed as its main source of income, especially when the biggest buyer is China.

If this positive current account continues and significantly pays down Australia’s negative Money balance, then the market’s historical value of Australian Money would be broadly correct. However, there must be significant doubt that a surplus on current account will continue for much longer. Lastly, currency speculation does play a role in setting and perhaps distorting the value of a country’s Money, but speculation is unlikely to be a significant cause in setting the value of Australia’s Money in international markets in the medium and long term.

What is the effect of Australia’s current account on the value and amount of Money? If Australia has a current account deficit, as had occurred for most of the last 40years, then to pay for that it either uses internal $As or, it borrows to meet the deficit. As Australia has a net deficit of $900BN it means that we borrowed to fill the deficit gap, thereby keeping the Money system stable and balanced without greatly effecting the currency value. If Australia was forced to fund the cumulative account deficit through using its own Money supply, then this would reduce the volume and value of that Money relative to other currencies. Remember the Money supply is all in Megabank.

When Money is needed to meet the cumulative current account deficit by paying the obligations into an offshore banking system from Megabank, there is a hole in the Money supply and Megabank also needs to reduce loan balances. Megabank could only fill that hole by borrowing offshore, reducing lending or government borrowing and spending. Reducing lending would reduce the amount of Money available and certainly reduce Australian citizen’s standard of living. The government could also fill Megabank’s Money hole by borrowing offshore and injecting that Money into Megabank through spending.

In fact, when Australia does again run current account deficits and borrows Money from the rest of the world to fund these deficits, the current account deficit would have no detrimental effect on the Money supply, and citizens are no better or worse off. If Australia has a current account surplus as it has in the last few years, the reverse has been occurring. The surplus has generated Money that has been used to decrease the size of the net external account deficit by about $160BN since 2019 with little effect on the actual Money supply. But it did and does demonstrate that Australia is able to generate Money to repay foreign debt.

So in an era of high commodity prices and volumes, Australia reduced its external net liabilities without increasing or decreasing the Money supply. This has been achieved by generating an external surplus and using that surplus to reduce external liabilities.

It all appears as a nothing burger for most citizens’ Money balances and value, but at that I’d disagree. There are no countries with Australia’s population and position in the world that could enjoy the benefit of global lenders that Australia does. That’s not about mining or gas companies, it’s about Australian democracy, and citizens who obey the rule of law, support Megabank and the mortgage market, and are mostly educated and hard workers. It’s because Australian citizens can be relied upon and if they have to repay debt they will ensure it happens. It’s not about the largely internationally owned companies that sell rocks and gas mainly to China. International lenders rely on Australian citizens to give them comfort of being repaid, but to maintain that largess Australia needs a plan B.

External account Rule 15:

Rule 15: For 40 years Australian’s lifestyles have been funded firstly by the rest of the world lending us Money ($1Trn+), and then, the rest of the world (mainly China) buying our rocks and gas at extraordinary prices and extraordinary volumes. The ability to borrow when required from the rest of the world rests on the giant shoulders of Australian citizens.

So what’s the problem for Australia?

The problem is that while the extraordinary exporting of rocks and gas continues, or lenders line up to fill any deficit or Money gap, there is no problem. But if that reverses and Australia again generates current account deficits, then the debt to the rest of the world starts to increase again. In circumstances where the rest of the world not only refuses to lend to fill the Money gap but wants the existing debt to be repaid, it becomes a problem.

Imagine for a moment the effect on Australia if say $500BN of the Money supply was removed. Imagine the effect on the value of the currency, by having to sell A$500BN in international markets. Debt access and repayment of the deficit could be said to be low risk, but the result would be extremely negative, and that needs to be addressed and recognised in government policy.

In the absence of a Plan B for Australia when the current deficit funding scheme ends, it does appear that Australia sits in a very precarious position relative to its Money balance. There is an absolute necessity for Australia to sell something to the rest of the world to fund what it buys from the rest of the world, or some resource or product that it can show will be sold so it can borrow.  Iron ore, coal and gas may be doing a great service to funding the deficit but for how much longer?

Rule 16: Australia needs a new “something” to sell to get Money to pay for things we buy offshore, a Plan B. Australia needs to create goods and services that produce productivity gains that it can sell as its “something”, otherwise the risks of future decreases in living standards are great.

 11.

The superannuation system, good for some but not so good for most

Having lived through the creation, amendments and growth of Australia’s superannuation system, this is my take on what super is supposed to be, what it is and, perhaps what it could be.

Ignore the continual, biased rantings of the Master Blaster on the benefits of superannuation. He was the main designer of the system and so is a little on the biased side. Although publicly a strident supporter of increasing current super contributions, privately Keating does appear to admit many of the shortcomings, although he takes no responsibility for them.

Super was sold as a mechanism to plan for a citizen worker’s retirement, paid for by the employer and therefore not a burden on the taxpayer. Superannuation was to create a pool of funds for workers that would enable a reasonable lifestyle in retirement. The government added tax advantages on super contributions and low tax rates on earnings as part of the bargain.

Before we analyse how that’s worked out for citizens, I need to state categorically that super does not create extra Money. Super is an allocation of existing Money into funds that are managed by the superannuant or third parties but is not new Money. Super simply earmarks a portion of Money that is earned by citizens out of the Money balance for future spending by that citizen under specified circumstances. In theory, super seems a worthwhile initiative with benefits across the board, but there are unintended consequences, and from a ‘use of Money’ perspective, it does not appear to have been thought through.

Super is more of a handcuff than a golden handshake on retirement for most citizens.  It’s a system that is set-up on the thesis that individuals can’t manage their own Money or savings, and that the government can’t provide for a citizen worker’s retirement in an efficient manner. It’s very patronising and downright insulting from a nanny state, as well as biased against groups of citizens. Taking money out of what a citizen worker earns and putting that in the hands of third parties that charge exorbitant fees to make investment decisions with that Money would seem to me to be entirely against the interests of citizen workers. This compulsory superannuation is administered and managed under set rules that do not take account of an individual’s circumstances. It is self-evident that many citizens would choose to have Money allocated from earnings as savings and managed by a Money manager, but why is it compulsory and not equitable across sections of the population?

The most contentious aspect of super is the tax concessions that considerably favour high income earners. Although there have now been limitations introduced, historically tax breaks for high income earners and the rich had reached the obscene. The total tax breaks for superannuation now approach the level spent on the aged pension. Is this the most efficient way of managing retirement incomes when the system only allocates Money and doesn’t actually create it? Especially when it allocates more Money to higher income earners through reducing the tax contributions of those citizens.

The super system is biased against women because of unequal income and those that perform home duties for a large part of their lives. Self-employed and innovative start-up founders can also be largely disadvantaged by the super system. Superannuation is not equitable, and one size cannot fit all.

 Whether you are for or against, the fact is that superannuation exists and that the pool of Money allocated is very large ($3.5Trillion at stated market value). Surely that pool is a very good thing for the Australian economy?

We are the envy of the world in fund management circles. However, the super pool contributions are not extra Money, but an allocation of Money that already existed. Whether it’s good or bad must at least be debateable. Note that the $3.5Tn quoted not only the Money contribution by citizens and investments, but also includes mark to market valuations (e.g. Property and shares). The debate should focus not on the number of contributions and the current value, but whether the return to citizens on the Money contributed to super by citizens would be greater if we did not have our current superannuation system.

If we assume that there was no superannuation or another plan like it, then citizen would receive more Money during their working lives, rather than having to contribute to a managed fund. We can be confident that given the choice, more Money would circulate more quickly, creating more economic activity not just in spending but also in nuanced investments. More tax would be collected, a lot more.

Surely superannuation has benefits in lessening the tax burden on future generations, as citizens retire and are able to drawdown super? This is a complex and multi-layered question.

On a simple analysis, if Australia has an aging population, then in the future it could be deduced that fewer workers would be supporting more retirees with a pension. That is mathematically and historically correct, but fails to take account of citizens being healthier, living longer and therefore working longer. It also does not take account of the benefits today. Greater Money circulation and innovative investments incurred by individuals lessens the future burden of pensions on the fewer citizens per pensioner. Greater taxes are collected through a citizen’s life, adding to services and reducing debt while increasing Money value today.

The key to understanding the cost of superannuation, rather than the superficial (intended) benefits, is to recognise that superannuation does not create Money, but allocates existing Money. When allocating existing Money into managed funds, the benefits can only be assessed based on comparisons with what would happen to that Money if there was no superannuation system as it exists today. Let us speculate on a simple alternative system that creates Money and is far more equitable.

 Australia could create a superannuation system that did create Money, through allocating Money from the central bank to an individual’s pension fund account with the central bank.  The Money would be created by the government issuing bonds to the central bank and depositing that Money, perhaps with a Central Bank Digital Currency (CBDC), into each citizen’s pension account created with the central bank. At this point the central bank has a balanced book of an asset, a Money loan to the government via a bond issue, balanced with a liability, being the CBDC Money in a citizen’s pension account. As the pension was drawn and added to the government, the central bank would need to ensure the system maintained its balance.

The government would raise extra Money through increased taxes on the additional Money circulated in the economy that would have been channelled to managed super funds, plus the government’s tax subsidy savings from super contributions. The additional Money would now be circulated through the economy, generating increased Money value and ultimately more supply for the generation of Money from productive debt. The question that comes to mind is whether the extra tax collections from the additional Money in circulation would be enough to meet the governments obligation to repay the central bank over a citizen’s life? I’m not sure that the system needs to exactly balance but I can say with certainty that the system described is more efficient, productive, and equitable than the current superannuation system that favours the rich and the Rent seekers.

The pension system described herein would be designed so that pension accounts were more equitable across all citizens than the current complex and biased superannuation system but would still provide a known amount of Money to contribute to a citizen’s retirement. There is no need to create sovereign wealth funds or other mechanisms to provide for repayment of bonds.

The Australian economy is the wealth fund, if we strive to reduce Rent seeking and create productive technology that can be used internally and exported as goods and services. Removing superannuation subsidies and using that Money to incentivise productive uses, as well as enabling more Money to be used on productive purposes by removing Rent seeking, would provide the economic ability to pay for the pension plan.

Sadly, however, we are most unlikely to find out if alternative solutions are better, unless of course there is an economic disaster causing regime change. Debating alternatives though, can only lead to better outcomes.

Rule 17: Superannuation

Rule 17: Superannuation does not create new Money; it only allocates existing Money for future distribution. Superannuation is inequitable, favours the rich and is biased against various cohorts of citizens. While there may be benefits to the existing superannuation system, there are better ways of structuring to make it much more equitable across all citizens and generations.

12.

Immigration, and how does this change the Money system?

Let’s break down immigration into steps to understand how it effects the Money supply. Immigration is a reference to voluntary economic immigration, not refugee immigration that is humane and a necessary cost to society. While the topic can be divisive because of possible racist overtones, my analysis is a simple economic one of how the Money supply is affected by immigration.

Importing people into Australia does not of itself create Money or increase the value of Money. As an importer of many consumer goods and services, and in the absence of immigrants exporting goods and services, immigration must increase the number of imports, therefore decreasing the Money supply and  the value of Money. Australian exports of commodities are not increased by immigration, but imports of necessary goods and services are. So on the face of it, immigration is a negative to the external account.

Importing people also increases the need for local services including health, education, policing, housing and other infrastructure. Immigrants putting pressure on these services have no effect on the Money supply but does have the effect of devaluing the Money supply. Stretching services without increasing the Money supply either decreases the services able to be supplied or increases the cost of that service. Money buys less service at a higher price, even if that Money is paid by the government. Less service for the same or more Money undermines the living standards of existing citizens. On a local level immigration is also a negative.

What if the immigrant brought in their own Money? Bringing in foreign currency and converting that to Australian dollars does increase the Money supply and or the value of Money. In fact, if Australia was to import 1 million people by selling citizenship for $1Million paid to the government, known as the ‘million million’ plan, then we could eliminate our foreign debt. Nice thought, but probably fanciful.

On the normal immigration program the question must be asked whether the amount of Money brought in by immigrants meets the internal and external costs to existing Australian citizens created by that immigration. Whilst individual migrants may bring in and spend more Money than the costs generated, this is certainly not the case across the immigrant population. So, Money brought in by immigrants is not enough to create a positive for immigration by being a net add to the Money supply.

Is any aspect of immigration positive for the Money supply?

Let’s look at some of the possible positives. Immigrants with genuine skills that add to productivity, especially productive goods and services that can be sold offshore, are of huge benefit to Australia, enabling the country to earn more Money. Contributing to increasing the Money supply and its value through productive exports is something Australia desperately needs. In addition, if immigrants provide jobs that allow Australian residents to create productive goods and services to be sold offshore, then by extension those immigrants have contributed to the growth of Money supply and its value.

Sadly, as the vast majority of Australia’s foreign income is from commodities and those export activities receive little contribution from Australia’s immigration program, it cannot be concluded that immigrants add much value to Australia’s Money creation and value through exports.

 There is suggestion espoused every day in Australia by media and politicians that Australia has a skilled worker shortage. Deeper analysis reveals a totally different situation. As relatively few immigrants are providing skills into the commodity export sector, then why do we need immigrants providing internal goods and services? It seems absurd that an educated society cannot provide its own goods and services requirements. The truth of the matter is that there is a shortage of wage slaves in certain areas.

 We also need immigrant workers to provide for the needs of more immigrants, again an absurd situation. For the government and media to state that Australia has a skill or labour shortage in providing internal services is actually stating that Australia has a significant productivity problem, caused by a lack of innovation and too many unsustainable businesses chasing wage slaves.

However, immigrants do add to Australia’s Money creation by buying houses and taking out mortgages. The great Australian dream must also be the great immigrant dream in the never-ending story of rising Australian housing and land prices. This is a benefit, isn’t it?

Sellers of new and old housing benefit greatly from immigration, as does the whole economy, due to the creation of new Money distributed throughout the economy. However, in the land of the Rent seeker, most of that Money ends up with the 1%ers.

The issue with creating Money from mortgages from overpriced housing is that this sugar hit to the economy, in the absence of creating productive goods and services to be sold offshore, is just another form of Money ponzi. The more immigrants that arrive the more houses need to be sold, with house prices having to ramp up to create new Money to pay for the cost of new immigrants. This is another positive feedback Money loop that eventually has negative consequences because it is unsustainable.

Rule 18 Immigration:

Rule 18: Immigration reduces the Money supply and the value of Money unless it is specifically targeted at productive pursuits. Immigration is beneficial to the Money supply when it’s targeted at skilled immigrants that can produce goods and services that can be sold offshore. Money is created when immigrants borrow to buy houses, but in the absence of productive input ultimately this process only reduces the value of Australia’s Money and the lifestyle of its citizens.

13.

Foreign Investment and the Money System

Like immigration, Australian citizens are berated weekly by politicians and the media with the assertation of  the importance of foreign investment in Australia, as if the country and citizen’s lifestyles are totally dependent on ever increasing foreign investment. How true is this?

The answer is a mixed bag with certain types of foreign investment being a cost to the Australian Money supply, while others are beneficial. Let’s go through this in steps.

Let us define foreign investment as both an equity investment, and lending Money to Australia and Australian business. As we have previously discussed, foreign investment can increase the Money supply by injecting foreign money into Australia. So on the face of it, foreign investment is beneficial. The issue is not the extra Money, it is the terms and conditions that come with foreign Money. Foreign investment is not a one-sided story.

In the most basic case, an investor would bring both Money and technology that is partnered with Australian resources and labour, to produce productive goods and services that are sold both onshore and offshore. The Money is invested as equity where the return is paid by way of dividends. This form of investment would be highly beneficial to Australia and would increase the Money supply and its value. However, where that is not the case the benefits and cost may be very different.

At this juncture I’d like to state that Australia does not need offshore Money to fund any project or business. Australia borrows offshore to fund its cumulative current account deficit and this borrowing is mostly done by the government or Megabank. The Money required to build mines, gas trains, farms, buildings or factories is available within Australia as equity or debt. Debt as explained creates its own Money.

It is not Money that Australia is lacking, it is the technology to develop export orientated businesses that is missing.

Foreign investment is necessary to buy or licence technology that is owned offshore and is very important to Australia. Under no other circumstances is it necessary for Australia to need foreign investment for the capital to build almost anything. However, the view that foreign investment is a necessity has become a political weapon for Rent seekers (offshore and onshore), where Australian citizens are the losers and pay the price. There is no end of foreign Rent seekers that will invest when Australia or any other country is willing to give away or undercharge for its resources, and not because those investors have technology to sell.

There is no ‘sovereign risk’ in charging foreign investors for the resources they exploit, as there is no penalty to Australia in offshore investors charging for technology they own and bring to Australia. Howling about ‘sovereign risk’ is the rent seeker’s business model, and a distraction from the truth. Australia does not need them. Unfortunately Rent seekers are winning that media and political battle, to the detriment of Australian citizens.

If Australia has the technology or the knowledge to build productive mines, gas trains, farms and factories then importing foreign investment is not only unnecessary, but also negative for the Money supply and its value. It must be negative, as returns of and on that investment must be paid offshore to foreign investors rather than earned through the investment of Australian Money. So why is Australia as a country so tied up with excessive foreign investment structured in such detrimental ways to our citizens?

Australia needs foreign investment in the form of debt and equity to fund the aggregate current account deficit, but we must be careful not to make our current account worse due to the terms or nature of that investment. Every foreign investment needs careful consideration on whether it is needed, as well as the terms of payment. Neo-liberal dogma, political considerations on trade and plain ignorance get in the way and greatly distort the need and structure of the foreign investments. The world of foreign investment is owned by the Rent seekers.

Rule 19: Foreign Investments

Rule 19: Foreign Investment is beneficial when Australia is buying technology and selling resources at fair rates for contribution as this both increases the Money supply and its value. While Australia funds its aggregate current account deficit by foreign investment, Australia has the Money (debt and equity) to fund any project it could undertake. Every Foreign Investment needs careful consideration on the terms to ensure there are benefits to Australia’s Money supply and value.

Before leaving foreign investments we should have a brief word on foreign investment in Australian housing. There is no circumstance in which allowing foreign investors to purchase but not rent those houses is beneficial to Australia. This is not just about Money laundering. There are always Australian citizens that will purchase the houses sold to foreign buyers either to live in or rent. So foreign buyers can only drive up house prices by outbidding citizens and decreasing the local housing supply. Renting houses purchased by foreign investors does not make it beneficial but only lessens the cost.

While it is correct that foreign buyers of Australian housing increase the Money supply in the short term, it comes at great cost to citizens trying to buy houses for productive purposes by increasing house prices. It also reduces the Money supply when the house is sold, and capital returned offshore. While there are short term benefits, allowing foreign investment in Australian housing without a large tax is just dumb policy, smacking of desperation by policy makers and costing Australian citizens greatly in the long term. Foreign investors in Australian housing distorts the Money supply and is altogether unproductive.

14.

Inflation, jargon that’s meant to sound meaningful, and how fighting inflation affects Money.

Jargon drives the communications of many professions. It is used to make those professions appear important, or  to make simple concepts sound more complex, thereby ensuring that a profession is promoting itself as of higher value. Worse still, jargon is used to make some important concepts mean whatever anyone using them wants them to mean. Damn those statistics, and what did you they mean again?

Economics jargon is the worst of the worst. It’s meant to make economists appear clever, make economics appear as a highly skilled profession, and be so flagrant with the meaning and effect that the jargon can literally mean whatever the user or listener wants it to mean. Economics and economic concepts are very important to all citizens but using complex jargon is unnecessary and self-serving . Let’s follow the Money to understand inflation.

Inflation as understood by most citizens is the increase over time and expressed as a percentage, in the Money paid for the goods and services purchased by a citizen. However, that is not what inflation is to economists or central bankers. Inflation is a set of statistics on certain goods and services weighted in ways that are unfathomable to citizens but are meant to represent the increase in the Money paid by the average citizen for those goods and services. It does not reflect what the average citizen is faced with in making their Money go round.

Inflation is touted by central banks as the evil of all evils, but that’s only for ‘too much inflation or ‘zero’ inflation. ‘Some’ inflation is good and necessary. Confused? Let’s try and break this down.

Inflation as a ‘thing’ does not create Money, and we’ve covered those things that do create Money in a previous article. Those things can inspire inflation. Inflation is a means of redistributing Money across the economy but does not create Money.  Money creation can increase inflation by creating Money from private debt or government borrowing that does not result in productivity increases, leading to an increased pool of Money being used to pay for the same goods and services and leading to the cost of goods and services increasing without added value.

For an average citizen, when Money earnings increase at the same percentage rate as the increase in Money expended on living (inflation), he or she is probably better off no matter what the rate of inflation. That’s because earnings allocated to discretionary spending also rise at the same rate. The extra spending could be used, for example, to pay down debt therefore increasing a citizen’s wealth.

 As there is no such thing as a free lunch, the only way that wealth (spare Money) could increase for the average citizen is by Money being transferred from business owners, big and not so big, to those citizens. Again, we’ll refer to the business owners that have excessive control the supply of goods and services as the 1%ers. Now it becomes apparent why the 1%ers fight the payment of more Money as increased earnings to citizens, even when the increase matches cost of living increases. Because in those circumstances a wealth transfer occurs from the 1%ers to other citizens by increasing the Money available for discretionary spending. We’ll call this a ‘wage-price’ spiral, where wages lead prices in inflation.

Assume for the purposes of analysis that the economic system was equitable at a certain point in time. If there is a period of having to pay more Money for the same goods and services that is not matched by a citizen’s Money earnings being increased by the same amount, then there is a wealth transfer from citizens to the 1%ers. If Citizens need to pay more Money for goods and services with the same Money earnings, that is a negative. This is, a ‘price-wage’ spiral, where a wealth and Money transfer to the 1%ers can continue until many citizens do not have any discretionary Money and become wage slaves;  barely earning enough to survive and yet having full-time employment.

So why is our central bank so fearful of the wage-price inflationary spiral rather than a ‘price-wage’ inflationary spiral, when the government owned central bank is supposed to represent the interests of Australian citizens and not just the 1%ers?

Let us be balanced and take the side of the central bank for a clear case of a wage-price spiral inflation case that is detrimental. If the 1%ers are generating significant productive gains across the board and have incurred debt (created Money), a wage-price spiral may produce very negative results. If citizen’s Money earnings are increasing before and faster than prices, then there is a transfer of Money from productive business enterprises to citizens. Simply, productivity gains go to citizens and not to those that created the gains and Money through innovation and taking risk.

The Money transferred to citizens would be needed to repay the debt incurred to create the Money. Obviously, this type of Money transfer is best avoided as it could result in productive businesses going broke and certainly disincentivising further productive gains, causing all citizens to be  worse off. This is why central banks and economists get so heated up about inflation and the wage-price spiral.

Productivity gains and the Money and value it creates should be shared equitably and not be inequitably distributed between owners (1%ers) and labour (the rest of the citizens). There is no formula as to how this equitable distribution of Money should occur. It’s a constant battle in every circumstance as to what value has been contributed by whom.

It is the government’s role to create an unbiased infrastructure to at least allow an equitable negotiation on distributing the benefits of Productivity gains. It is not professional or even intelligent for the central bank to treat all inflation the same by increasing interest rates until inflation abates. The effects on citizen’s Money and wealth could be very detrimental depending on the causes of inflation.

Leaving aside Money created through productivity gains, what’s the situation when prices have risen through Rent seeking, and Money created from non-productive activities? Rent seekers want and encourage a price-wage spiral because they can only win in that situation, capturing an increasing share of new Money creation. In the reciprocal, Rent seekers are losers in a wage-price spiral, certainly not a bad thing. If Rent seekers have been pillaging a greater share of existing Money and new Money creation, and for whatever reason that Rent seeking reverses, there is a Money transfer to citizens through earnings increases more than cost increases. Citizens are better off.

In parallel, the Rent seeker business model suffers because their Money wealth decreases with no ability to make productivity gains to retrieve the lost wealth. There is then a transfer of money back to citizens that was misappropriated by Rent seekers and encourages more innovation for productivity gains.

Again we must ask the question, why does the central bank, in addressing the inflation (both price-wage and wage-price) issue have a one-solution-fits-all solution, being increased interest rates, when clearly there are very different circumstances with very different effects in how Money is distributed to citizens? For the central bank to increase interest rates to address inflation caused by a price-wage spiral mainly generated by Rent seekers, causing a loss of Money to many citizens who had nothing to do with creating the inflation appears nonsensical. It’s an act of economic destruction by discouraging productivity and decreasing the value of Money that hurts citizens to the benefit of only the 1%ers. That is just stupidity.

Why is ‘zero’ inflation bad but ‘some’ inflation good?

The theory in simple terms, is that ‘some’ inflation is warranted to encourage citizens to spend Money today on goods and services rather than wait say a year because the price would be greater in the future. Buying today rather than in a year is apparently a good thing. The central bank sets what the ‘some’ inflation rate is through its targeted inflation rate but does not explain why that ‘some’ is acceptable, or the effect of any inflation on the value of a citizens Money. The theory of why ‘some’ inflation is necessary is very flaky. Yet again, this theory takes no account of how inflation distributes Money between citizens and 1%ers that is driven by the particular type and causes of inflation.

Rule 20: Inflation does not create or destroy Money. It redistributes Money between sections of the economy. There is not just one form of inflation, there are a number. The distinction is critical to the effects of inflation. Price-wage spirals of inflation are never good for citizens. Wage-price spirals are good for citizens when inflation redistributes Money to citizens for productivity gains or where Money was misappropriated by Rent seekers

15.

GDP: the most quoted economic statistic. What does it mean to a citizen?

Gross Domestic Product (GDP) is the most quoted economic statistic by politicians and the media. GDP up as expected, we have strong growth, GDP less than expected and its weak growth, but GDP negative and, just like inflation, it’s the evil of all evils. Let us question the conventional wisdom of GDP.

What is the GDP statistic, what does it mean, and should it drive major economic decisions? How do changes in Money affect GDP?

The following is a summary of an academic definition of what the GDP statistic is:

GDP considers the total value of goods and services produced by various sectors of the economy, including agriculture, manufacturing, construction, services and government. It encompasses both private and public consumption, investment, government spending, and net exports (exports minus imports). GDP can be calculated using three different approaches: 1. Expenditure 2. Income 3. Production.

GDP is usually reported by the expenditure approach and in nominal terms, reflecting the current prices of goods and services.

GDP is a relevant statistic that is trying to measure how the economy is reportedly performing for the benefit or cost to citizens. Does GDP do the job that should be expected of the most quoted economic statistics? Government treasurers and politicians love to pat themselves on the back when announcing positive GDP numbers, but is this warranted?  I’d love to give a straight answer, but yes, no, maybe, is not straight. There are some important practical and Money factors that need to be accounted for.

GDP per head of population is more relevant than aggregate GDP, if the measure is meant to represent the benefits or cost to citizens and a country has an expansive immigration program.

We’ve covered the situations where immigration can be beneficial, as opposed to the cost of immigration in certain circumstances that can turn immigration into a negative for resident citizens. A certainty is where GDP growth per head of population is negative because nominal GDP is less than population growth,  therefore creating a cost to citizens. At the very least GDP per head should be a highly quoted statistic and not just aggregate nominal GDP.

Many readers may be familiar with the ‘broken window’ effect on GDP when GDP increases when a broken window is fixed. [JW16] Now let’s take that to the next level and call it the Ukrainian syndrome. When the war ends with Russia, the people of Ukraine will have a GDP bonanza as they slave away rebuilding many parts of their destroyed country. Destruction and the cost of losing useful productive assets is not accounted for in a country’s GDP. So the context of creating expenditure that added to GDP also needs to be accounted for.

Now let’s get to the interesting factors not accounted for in GDP. GDP takes no account of where the Money came from that was expended on the goods and services. Whether Money was borrowed for the expenditure and what the Money was borrowed for is not considered. The GDP economic measurement assumes that all borrowing is the same and is not differentiated from Money circulation. GDP is about the Money expenditure, and not about the quality of where the Money came from and its sustainability.

If GDP were to increase because factories or infrastructure were built that improved productivity and the quality of citizens lives, Money would then be created by borrowing from onshore or offshore to build those factories and infrastructure.  GDP would then rise, and the statistic would be a good measure of the economy and the benefits to citizens both immediately and sustainably. Money created for these purposes increases Money value and generates the ability to earn Money to repay the debt. Any government treasurer or politician would be entitled to boast about a rise in GDP in these circumstances. However, this is not the norm in Australia.

Alternatively, the dichotomy is if a country decimated its manufacturing sector but compensated for that by having policies that overtly boosted property prices, thereby creating Money that is spent on goods and services. As well as importing many people to boost demand, plus compensating for an aggregate current account deficit by borrowing offshore to fill the Money hole, then that country probably will have positive GDP growth for a very long time .  That country is Australia, and Australian treasurers and politicians were basking in the glory of a world record breaking run of positive GDP growth for a long time. Until COVID brought it to an end.

The problem Australia is currently facing is that no one in power wants to change the business model. They point to the positive GDP statistic to continually support the status quo. Even in the face of evidence that points to an unsustainable GDP and Money growth model with an ever-declining standard of living for citizens, especially younger generations, little is being done to move to a GDP growth model that is productive and sustainable.

Politicians can duck their responsibilities by pointing to that grand old economic statistic of GDP to say that growth is up and all is good, when there is clear evidence and statistics to show that it is not. Politicians can persist with the policy of unproductive Money growth and continue to boost the same policies with little effort. No wonder GDP is their go to economic statistic.

This is a serious issue exacerbated by relying incorrectly on an economic statistic, GDP, when few really understand what it means. Growing GDP by borrowing on unproductive asset values from offshore to fund the deficit may create Money to spend in the Australian economy but it is borrowing from the future. It’s reliant on productive future sales of goods and services that either repay debt or allows refinancing of that debt. Borrowing from the future is intergenerational lifestyle transfer from the future to today.

The alternative is that Australia bites the bullet and crunches GDP by crunching asset values and reducing the amount of Money, taking the lifestyle or wealth hit today. This will not be a policy decision willingly made. It will need to be forced upon Australian citizens at some point. In the meantime, GDP will reign supreme, and so to Rule 21:

Rule 21: GDP is the most quoted economic statistic, but it is fallible and does not take account of factors that can drastically change its meaning and disguise the Money effect on citizens. The reasons for changes in GDP and where the Money came from needs to be explained. At the very least GDP per head of population should be the headline statistic.

16.

How you, the citizens, hold the Money system on your shoulders and locked in place.

On our journey so far, we have reviewed 15 topics and have established 21 rules of ‘Money for the Masses’. By now you no doubt understand that I am no fan of mainstream economics and the interpretation given it by the media, politicians, economists and Rent seekers who all seek to enhance their personal positions through obfuscation, misrepresentation and just making things up to justify unjustifiable positions.

If you agree with my analysis and conclusions, that’s good. If you’ve learnt something, then I’ve done my job. If you disagree with me then that’s also good as you have been challenged by an alternate view to your own. Whichever it is, citizens need correct knowledge to confront politicians and the business 1%ers on their biased misrepresentations and make change. In a democracy the power does lay in the hands of the citizens, but they need to mobilise and act on it.

Australia in one aspect is the lucky country, with large inground resources that currently support a high standard of living for many; however, these bounties are actually turning into a curse for most citizens. Everywhere I turn there seems to be misinformation and damn lies that are designed to hoodwink citizens and therefore take advantage of those citizens to the benefit of a few.

Important economic concepts including Money, banking, housing, Rent seeking, immigration, superannuation, productivity, interest rates, the external account, foreign investment, inflation and GDP are used in the name of benefiting citizens but are actually designed to use them for the benefit of a few. In a democratic country there should be systems designed for an equitable distribution of the benefits of society that rewards for effort and contribution and looks after those that can’t contribute. Australia is certainly not an equitable society.

Starting with the banking system and the creation of Money, the power is in the hands of the citizens, or more correctly depositors of Money and borrowers of Money. The size of Megabank both in terms of loans on balance sheet and market value on the ASX is obscene and is only able to be achieved through the continual support of Australian citizens. Senior management of Megabank are paid indecent amounts of Money relative to the sustainable value that Megabank brings to the economy. Megabank is necessary infrastructure but is not export orientated or the creator of productive goods.

Megabank and its management are Rent seekers, having been enabled by government policy, regulation and weak regulators, and with the unknowing backing of Australian citizens. Citizens need to be properly informed and recompensed for the financial support provided indirectly to Megabank. At the very least, the Money creation machine that is Megabank needs to be much more diversified, with a level playing field for all divisions of Megabank so that both borrowers and depositors are rewarded as the valuable stakeholders they are. Policy and regulation can achieve this result.

Systems such as housing, superannuation and immigration are policy issues that are easily made more equitable by changes to government policy and actions. Changes start with citizens understanding how they are being used and knowing that changes benefitting most citizens and not a few must be on the political agenda.

Although Australia has had tax benefits for housing investors for decades that exceed whatever is available to owner occupiers, there is no economic argument that more housing has been built by providing extra tax benefits to investors, rather than tax benefits being equal for investors and owner occupiers. It’s a simple matter of following the Money from the tax paid by owner occupiers and renters into the pockets of housing investors. Yet it seems many owner occupiers and renters voted for the retention of negative gearing and capital gains tax reductions, and these are now untouchable policy issues.

 Superannuation and excess immigration are also very large issues and forces on the lives of citizens, and yet the cost to citizen’s Money and alternatives to current policy does not even make it on to any policy reform agenda. We need to wake up and stop being exploited!

Rent seeking is deplorable and is imbedded into the Australian economic system. Rent seekers are experts at arguing their case and have great political influence, no doubt because of the Money generated to government and political parties. The Rent seeker business model is using sleight of hand to build up Money benefits through employment or economic activity that will disappear without the Rent seeking. Not only are their arguments false but the disappearance of Rent seeking would accrue extra Money benefits to citizens.

By its very business model, Rent seeking ensures that citizens pay more Money for goods and services than they would in a properly competitive market. Thereby transferring Money from citizens to Rent Seekers in an inequitable division.

Governments can benefit citizens by significantly reducing Rent seeking through regulation or enforcing existing regulations. Pressure must be put on governments to act, and this can only start with citizens recognising when Rent seeking is happening, and how it costs citizens more of their hard-earned Money for goods and services than it should. In a rent seeking society Money continues to gravitate to the 1%ers. We must become aware, vocal and stop being exploited!

Australians have generally thought highly and respectfully of our central bank, the Reserve Bank of Australia, although recent 2023 interest rate rises and previous assurances that they would not happen have worn pretty thin with mortgagors. My view is a little different as I’d say our central bank is not fit for purpose; it is not independent, is biased against the average citizen and is riddled with economic dogma that stops it looking closely at facts and causes.

The central bank’s use of simple statistics like inflation, unemployment and GDP to make important decisions on how it should use its box of tools is simplistic and allows it to shoehorn a one-size-fits-all solution without thinking through their responsibilities or the effect on many citizens. The central bank denies that Rent seeking exists and the effect it has on citizens. If it did then its response to inflation and its causes may be very different from simply raising interest rates that punish victims.

The central bank’s charter needs a complete overhaul, with overseeing of the whole banking system included in that charter to ensure that citizens get value for their support of Megabank. Whatever targets are put in any new charter need to be properly defined.  Using simple expressions or statistics that can be manipulated and misconstrued does harm. We should need and should expect much better from our central bank and the rest of the banking system.

Australia’s financial system sits on the broad shoulders of the 99% of citizens, not the 1%ers. Citizens are exploited and Rent seekers rule. Citizens are certainly not rewarded for the value of their contributions and support given to the Money creation system. This needs to change. That leads us to Rule 22.

Rule 22: Wake up and stop being exploited! Citizens hold the power; they just need to use it. Get loud!

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