New Zealand with its highest interest in the OECD has yet to feel the full impact of the subprime credit crunch.
Morality
The financial system lauded and promoted by the architects of financial economics is not only justified by unrealistic articles of faith but is unacceptably immoral. The system is not only subject to collapse but is unduly exploitive, socially disruptive and even evil.
There can be no justification for the interest component forcing up the cost of servicing a house mortgage to as much as 40% of household income – with both partners working. The effects upon family life have been and remain devastating. The impact is greatest upon the young who require a home in which to raise a family. The requirement to pay interest to the order of 19% per annum on credit cards and other forms of consumer debt also raises very serious moral questions.
Barack Obama in seeking the Democratic Party nomination for United States President has proposed that a cap of 30% be placed on consumer debt. American home owners are at present borrowing at rates as high as 300% interest from loan sharks in a vain attempt to prevent foreclosure. The loan sharks are howling in protest at the proposed interference with free market forces. Often, there is bank connivance in all of this.
Investment
Investment is central to the advancement of any civilization. In real terms investment cannot proceed unless a proportion of the consumer goods produced are set aside and made available to sustain those creating assets. Money provides the means of separation and the required placement of the consumer goods.
The real assets of any civilization fall into two major categories – social and commercial. Social assets are constructed to meet a need whilst the commercial in response to the call of profit (Adam Smith’s “invisible hand”). A family home provides example of a social asset with a factory the core example of a commercial asset. With land, a park is a social asset whilst the farm a commercial. The military assets required for defense offer perhaps the extreme example of a social asset. No nation could tolerate its military making its services available to the highest bidder on the international market in accord with the free market article of faith. Schools, hospitals, roads and the infrastructure generally are all components of a nation’s social assets.
The profit motive need have no place in the funding of social assets whilst retained and even encouraged in the commercial. Social assets should be funded in ways different to the commercial and providing the means of doing this must be central to monetary reform.
Investment & Debt Management
Three means of funding investment are available with economists advocating one, tolerating a second and ridiculing the third because of it being incompatible with their articles of faith. It is the third that must now be utilized if civilization as we know it is not to founder.
The possible funding sources are:
Savings
Taxation
Social credit that can be made available only as the consequence of monetary reform.
Savings have always been the major source of funding for productive investment and should continue to be the main means of providing the real capital needed to facilitate the production of consumer goods. The individual ownership of factory, shop or farm is critical to the satisfactory operation of the private enterprise system of production. However, savings alone have never provided sufficient capital to maintain industrial viability. This fact has always been and continues to be fervently denied by economists because it contradicts the most fundamental and important economic article of faith that income equals price. In fact, such is true only when goods are sold at auction but erroneous when the mark-up system of prices applies – as it does at retail. Income generated equals costs paid and no retailer can survive by selling at cost.
In New Zealand today, savings are no longer sufficient to fund required investment. As a nation we are spending as much as 14% more than we are earning by way of income. A dangerously high proportion of goods are purchased through commitment to household debt. Credit card debt at some 19% interest provides one means with leveraged household mortgages another. In effect, there has been grossly excessive over compensation for the natural deficiency of income – the receipt of which is the only way in which the consumer is given debt-free access to goods.
New Zealand banks have borrowed overseas to fund the massive increase in household debt. This has not been difficult with the highest interest rates in the world on offer and when the world’s money markets are glutted with American dollars looking for investment opportunity. An artificially high exchange rate that reduces the profits from exporting is a further consequence of government endorsement of monetarist high interest doctrine.
Taxation as a source of investment monies is an option with Kiwi Saver a current example. In effect, the scheme entrenches an immoral and dangerously unstable economic and monetary system. The philosophy seems to be simply to exploit what has evolved – rather than morality and viability. We have yet to hear in detail how much has been lost by investing in subprime mortgage securities or the shares in investment banks. With a properly managed financial system, sourcing investment monies through taxation forcing savings technique is unnecessary.
Social Credit as the only moral and sustainable means of funding social investment. The backing for credit advanced would be the nation’s production of consumer goods. The policy cannot be made to work unless a government agency accepts full responsibility for the creation and cancellation of the national currency. The methodology has precedence in the way fractional reserve commercial banks funded 19th century industrialization. Particularly in America, the increased mining of gold allowed extension of credit to appropriately fund industrialization whilst maintaining prudent bank ratios.
Any commercial bank will advance credit only in response to the profit motive. Social credit should be advanced only in response to perceived need in ways divorced from the profit motive and thus restricted to the construction of social assets. The amount of new money created should be carefully monitored with seeding required only to the extent that income does indeed equal fair price. Most of the money will come from recycling the money made available from the repayment of loans. In this latter regard, the economic effect is very similar to that applying if savings were utilized. Take housing as an example.
Let us say that social credit provides the funding of a mortgage on a family home. No interest would be charged with an administration fee and insurance charge sufficient to cover risk all that is required. A charge of 3% on any outstanding balance should be more than adequate. The rate at which a mortgage need be repaid could regulate the demand for mortgage money.
In economic terms it can be assumed that there is value out there somewhere equal to the production costs that when paid generate income and that the sum of retail prices is something more. As a mortgage is repaid from household income claim to goods is transferred to the lender – say a monetary authority. When on lending the money received by way of mortgage on a house to be built – the said money is paid to the builder to pay for his purchases with the rest dispersed as income to himself and his workers. The matching value of goods is consumed and the particular social asset created in exactly the same way applying if the source of the money had been savings. The technique can and should be extended to fund the construction of all social assets to include those that are the responsibility of local authorities. Household loans could also be included so that young couples need not use fictional “free credit” and the card – all at excessive interest to set up house.
The monetary reform proposals outlined will result in a much fairer and morally sustainable redistribution of income. The threat of monetary and economic crisis can be virtually eliminated as can the present cost inflation (entrenched by high interest). There will be a major reduction in interest as a cost and source of income.
The use of social credit can expedite economic adaptation and adjustment. As an example, as much because the supply of fossil fuels must be replaced by bio fuel that in New Zealand must be sourced from trees on land unsuitable for food production. There is a growing public to give greater attention to the environment. This call can best be met by appropriate social investment – the meeting of need has to be given priority.
There can be no question that once a reformed monetary system is in place there will be a dramatic fall in interest income. Many of the retired will face a drop in income. In effect, they would no longer look to a younger generation of mortgaged home owners to supplement their incomes. However, profits paid on the shares of companies involved with producing and servicing the real economy will still be available as dividends. Those promoting monetary reform must stress that all are entitled to a fair income with anything additional the reward for making a worthwhile and morally acceptable contribution to the good of society generally.