Money

The 2020 Recovery.

Andy
Written by Andy

The economy is the movement of money. Economic activity occurs when money changes hands. Money needs to move to advance the economy.

The 2020 Recovery.
By Andrew J. Chalkley (Andy).
2020-05-20

The economy is the movement of money. Economic activity occurs when money changes hands. Money needs to move to advance the economy. There needs to be more transactions. The magnitude of the economy is the sum of all the transactions. This also equals the sum of all the money that has changed hands. This sum is called the ‘Gross Domestic Product”. It follows that the annual economy is volume of money in society and the number of times that this money changes hands. We are dependent on the volume of money and the regularity of its movement. Like your bowels, if it does not move, we have a constipated economy. As a whisper to the economists from an engineer, in the limit, irrespective of the volume of money, if it does not move, there is no economy. So we either need more money or more movement. ‘Size matters’, but so does ‘movement’! In Australia, there is already $85000 [1][2] of money for each person, but the bulk of this is sitting idle in well-off people’s bank accounts. The working person is lucky to have $1000 in a bank account, and that may disappear in debt repayments by the end of the week. This means that a small portion of the population has significantly more than $85000 in bank accounts and it sits idle for years upon years. They are hoarding the vital ‘medium of exchange’.

The working person spends their money by the end of each week. Their money has a high velocity (52). The economists deem it to be a formula — Gross Domestic Product equals Money Supply times Velocity. To enhance the economy, we either need more money, or, we need more movement. The money that exists needs to change hands a little more often. When there is $85000 of money per person in the nation, we do not need more money — we need more movement. Traditionally, more money is brought into the economy. The methods that work include increased government spending, giving extra money to those that might spend it quickly, and encouraging banks to lend. Methods that don’t work include giving money to well-off people. This includes the ‘Quantitative Easing’ of the Fed in 2008 where money finished in the hands of ‘rich pricks’. 2008 ‘Quantitative Easing’ in Australia worked because $1000 was given to working people and other money was given for school building projects. That is why ‘free’ money is currently given to those not working in the hope that they will spend it immediately. This ‘free money’ is sometimes called “helicopter money” — it ‘drops from the sky’. This ‘free money’ should have a non-binding condition that it is spent within one month. Increased spending on roads and bridges is also effective as it puts money in pockets. It boosts the purchase of everyday goods and services — often called: “The Real Economy”. The term distinguishes it from the investment gaming of the well-off. The “The Real Economy” is an important term lost on economists as it is the portion of the economy that puts food on working people’s tables rather than assets in people’s ‘portfolios’. The traditional method of increasing the Money Supply is to lower interest rates. Unfortunately, it does not work very well, so they lower it further and it still does not work.

Unfortunately, the ‘Covid lockdown’ took the easy path of closing small and medium business whilst corporations mostly continued as usual (with some exceptions including the airline industry who probably guessed that they would be given ‘free money’.). The SMEs, which form a major employment sector, have been badly bruised and many are damaged in an unrecoverable manner. My experience is that the SME owner’s have lost the will to battle the hostile SME environment. As employers, they have been too often treated as exploiters.

Small and medium business (SME) get their money from a different source to big business (corporations). Corporations sell their ownership in the form of shares (which are unrecoverable). SMEs rely on credit from banks. A cooperative set of ‘Commercial Banks’ is crucial to a successful modern economy. Yet, ‘Basel Three’ instructions to banks have ‘tightened up’ on lending to business. So they lend profusely for housing which inflates house prices whilst throttling small time business people and stifling SME expansion. SMEs are also punished by a tax system that demands a share of profit. This makes it difficult to plough money back into business expansion. They also cannot claim money spent on assets as a tax deduction until well into the future under draconian depreciation rules. Small Business also acts as an unpaid tax collector for employees under a grey cloud of threatened prosecution. Their other threatening cloud is a slurry of tough employment laws that have no complementary laws to ensure that employees do ‘a fair days work’. It is also the responsibility of employers to pay employees when they are not working. Employers have become the punching bag. I sometimes say to people: “If you won lotto, would you buy a factory and employ people?” The answer is always of the style: “No way. Too much hassle.” Thus we need to clear the employers of this threatening environment and treat them with the respect due as the providers of employment. We cannot have good work conditions until there are more employers than employees. Employers would then have to be on their best behavior to retain good employees. Onerous employment laws such as ‘unfair dismissal’ must go. As I say: “Nobody sacks a good employee.” Depreciation should be flexible. Greater time should be allowed for tax payments in line with the excessive time it takes government to pay its bills. Business should receive mentors not government ‘stand-over’ merchants. And a balance should occur so that business can compete against multinationals that transfer profit overseas and use other tax minimization not available to SMEs. Whist we are at it, we can remove the corporate’s power-base — the lobbyist. A lobbyist with an expenses pocket has more power than all the voters combined. We cannot pretend to have a democracy when both major parties support the ‘debt banking system’, support every war advertised by Reuters, absolve big pharma from legal action, and allow lobbyists to alter trade and tax policies in favour of corporations. We might also remove the taxation privileges for the well off. Investors do not pay tax on the appreciation of assets purchased for gain until sold. Yet, they get a tax subsidy for interest paid. When they do eventually pay tax on their windfall unearned income, they get a 50% tax deduction under a fake tax called ‘Capital Gains Tax’ — which is no tax at all, but a disguised tax windfall to the well off. Their dealings in the housing market deprives the young of house ownership because they can outbid the young because they get a tax windfall unavailable to the young. We cannot claim to be an affluent nation if the young cannot afford houses. It is not acceptable for people to own more than one house. Houses are for making homes, not for commercial gain for the well-off. Unearned Income should be taxed at twice the rate of physically earned income. Negative gearing is not acceptable because it is a slight against the young, as is the ownership of four bedroom houses occupied by two people.

Back to our logic. We increase the Money Supply or we increase movement. To increase movement, we free up the employers, we decrease taxes that discourage the movement of money, we encourage spending, and we discourage people from hoarding the circulating medium. This is on the basis of ‘money must move’. The circulating medium should never become stagnant — it must move. There is already unpopular legislation quietly slipped through parliament after the problems of 2008 that will enable banks to confiscate their depositor’s money in the event of a financial meltdown. If the customers are to lose their money, we might as well make the bank customers spend a little of it rather than have it confiscated. There must be a monthly tax on ‘Idle Money’ in bank accounts. ‘Idle Money’ could be defined as the minimum monthly balance less monthly transaction volume. ‘Idle money’ would be taxed at a rate of 1% per month. This is not outrageous as it is not so different from an interest rate in the order of 12% per annum. Money above the average of $85000 will be taxed at a higher rate. Money was invented to enable transactions, not to be hoarded. In the limit, as all money becomes hoarded, the economy tends towards zero. The economics student will recognize an error in the textbook definition of money. Money was never invented to be hoarded. That great economics book called the ‘Koran’ states: “If you hoard the means of exchange, when you die, it shall be heated and burned into your forehead”. The Koran also has strict rules on ‘riba’, which we translate as ‘usury’ or ‘interest’.

Let us consider taxation. Taxation must not impede movement but must resist hoarding, discourage money ‘schemes’, and tax unearned income. A priority taxation change would be the immediate cessation of Payroll Tax. The explanation is obvious but less recognized is that it exempts ‘Unearned Income’ of the ‘well off’.

Land was created by god (or nature) for all living things to share. Man drew lines on it and money lenders turned ownership into an asset to be financially exploited. The banks exploit new home owners by inflating house prices. God did not sell us the land. Land is the key to living and and prices rise to the limits of affordability under our ‘debt banking system’. Land should have ‘Land Tax’. Implementation is unpopular but should be mitigated against a great drop in Income Tax. Hong Kong, Singapore, and to a certain extent, Australia were developed under a ‘Land Tax’ environment. It ensures that land is acquired for useful purposes and not for speculation. People only use land if they have some useful purpose for it. Speculation in land is an anathema to efficient society.

Please tax me when I die rather than when I live. Give me ‘Death Tax’, ‘Inheritance Tax’, and a tiny ‘Wealth Tax’, but cripple me not with ‘Income Tax’. We have already dispensed with the illogical ‘Payroll Tax’. ‘Sales Tax’ variously masquerading as ‘GST’ or ‘VAT’ is also a counterproductive tax as it taxes when money is doing its duty of enabling transactions. It must be replaced by an insignificant ‘Transactions Tax’ one hundred times smaller than GST. A ‘Transaction Tax’ of 0.1% on all transactions shall be sufficient, if not excessive, when applied to ALL transactions including those of the ‘well off’ as their money sloshes around untaxed. I tell it as a story: “If I buy a can of gold paint to paint my work van, I pay tax. If I buy a block of gold, I pay no tax. If I buy shares in a gold mine, I pay no tax.” Only one of those vehicles enables productive work enhancing the economy — the one that is inappropriately taxed at 10%. A ‘Transaction Tax’ of 0.1% shall be paid on all the money that sloshes around in the false economy of the ‘investors’, and more than that, the ‘Income Tax’ on unearned income shall increase. This alone will make this document unpopular.

We have forgotten superannuation which has all the hallmarks as a slush fund for corporations. Almost the entire portfolio is invested in share market of corporations. None is directed to the backbone of the nation, the SMEs. As the foreign controlled commercial banks are unwilling to treat local business in a favourable manner, the government shall step in and provide credit. This is the system that has propelled China from backwards to forwards in my lifetime. A evening’s read of the Bank of China website, conveniently in English, shows how this government entity provides credit to all levels of entrepreneurial activity at all levels of society. China has created a network of ‘public banks’ providing cheap credit at all levels of entrepreneurial activity. This might be actioned by takeover or support of an existing small banking network with branches nationwide with the government underwriting their business lending. This Chinese ‘public bank’ system, replicating Australia’s original Commonwealth Bank of 1911, and similar in Germany before WW2, will be the main reason the propaganda machine is hyping hate and war with China.

Under a national public bank, the government can lend to business as it then receives significant tax from the fresh entity which allows for a margin of failure of other ventures. I lend $100000 to ten new businesses and one fails, whilst I have collected thousands in various taxes and avoided paying welfare to unemployed persons. Private banks have no such incentive to lend to business. Local credit for local business could also work through local councils as could some form of crowd funding where local people could contribute credit to local business. Without available credit, SMEs cannot operate.

Next, we turn to the source of money. I often ask: “Who has the authority to create the money of the nation?” In a look of puzzled amusement at such a silly question, they cautiously answer with the obvious: “The Government”. To their puzzled looks, I say: “Why then would the government be in debt?” The answer is that money is borrowed into existence rather than created as a ‘free entity’ by a sovereign nation. Money comes flying out of a print machine at no cost or it is created by ledger entries. We inherited this system from the British as adjusted by a few wars.

The government does not pay using ‘cash currency’ — it borrows with accompanying debt. Unfortunately, the debt magnifies whilst the money created does not. Due to a quirk of history, we now have significantly more debt than money. [3] The lesson of the twentieth century is that we can live with ‘unpayable debt’ — if we avoid repaying the debt. The international banks will always ‘bail out’ a country at the last moment because a failure to do so would collapse their banking system. The IMF will ‘invent’ more money and write it in a book. The solution is for the nation to create all or part of the money of the nation. Governments do not pay in cash folding notes, they pay in virtual credit in bank accounts. Banking is simply sophisticated accounting where money is a fictitious concept. The concept of money tokens as a facilitator of exchange may be man’s greatest invention. In our modern world, the bulk of it is virtual. If the banks collapse overnight, the money vanishes. The easiest solution is to create a national investment bank, commonly called a “Public Bank”. Our new ‘Public Bank’ would have many purposes but its primary task, as with Napoleon, would be the funding ‘Public Works’ and providing credit for industries that can provide desperately needed jobs. In Australia, the ‘Clean Energy Finance Corporation’ (CEFC), could rapidly be converted into an emergency national investment bank. The Citizens Party and Katter’s Australian Party, among significant others, and even Liberal and Labor politicians, are pushing this policy. Your support for the cause would go a long way to put this policy on Parliament’s agenda before it resumes for a trial sitting in May. Please visit the websites of these parties and amplify their message.

The immediate paths to economic recovery include reduced taxation aggression towards SMEs, credit for small business, a re-evaluation of support for business versus support for employees, an emergency national investment bank, a reduction in taxes that stiffle movement, a minor Transaction Tax, a small bank account tax, and an increase in Land Tax, to match a reduction in Income Tax.. And on another matter, pharmaceutical companies should be liable for damage caused by their products including vaccines.

[1] Money Supply divided by population. “Money Supply M3 in Australia increased to 2231.55 AUD Billion in March from 2169.11 AUD Billion in February of 2020.” Trading Economics website. “The current population of Australia is 25,456,943 as of Sunday, May 10, 2020, based on Worldometer elaboration of the latest United Nations data.” Worldometer website. 2169.11 billion divided by 25,456,943 = $85207.
[2] M0, considered to be cash currency and coins, has had a serious jump since January telling us that there was a ‘run on the banks’, kept quiet from the populous. “Money Supply M0 in Australia increased to 137.19 AUD Billion in March from 116.19 AUD Billion in February of 2020.” Trading Economics. The calculations for Cash Currency per person gives: 137.19 AUD Billion divided by 25,456,943 equals $5,389. This alone should be enough of a Money Supply per person provide people did not hoard it. Please note that Reserve Bank created cash currency is only 6.32% of the M3 Money Supply.
[3] Australia’s government debt is listed as $A701.4 Billion. This does not include state debt. (Source: Australian Government Data as listed at: https://commodity.com/debt-clock/australia/. “Households Debt in Australia decreased to 119.50 percent of GDP in the fourth quarter of 2019” Trading Economics. GDP of Australia A$2,107,731,355,291 as listed at: https://commodity.com/debt-clock/australia/. Thus, household debt is 119.50% times A$2,107,731,355,291 which equals $A2518738969572. Total debt in Australia equals $A2518738969572 plus $A701.4 Billion equals $A3,220,138,969,572 ($A3,200 billion). The ratio of debt to money thus equals $A3,220,138,969,572.745 divided by 2231.55 AUD Billion equals 1.443. Australia has more debt than money.


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