“Seek value and need; today’s investment shall breed a future where worth exceeds greed.” — Quote generated by ChatGPT4.
A submission to the March 2023 Australian Federal Government inquiry on promoting economic dynamism, competition and business formation.
There is nothing special about the Financial System. It is just another industry that covers the raising and distribution of Capital for investment purposes through the monetisation of assets. Through monetisation, assets such as a worker’s ability to work, property ownership, or financial assets like bank deposits become available for investment. The investment itself is either buying or building other assets. A host of other industries impact these procedures, including insurance of assets and buying and selling assets like the real estate and share markets.
The industry affects all other sectors because there is no development without Capital. The size of the entire industry and related services makes it the largest sector of the economy. The Bureau of Statistics says Financial and Insurance Services” and “Rental, Hiring, and Real Estate Services” alone account for 21% of GDP. This industry produces Gross Fixed Capital Formation (GFCF) new Capital of 24% of GDP, resulting in a 3% or thereabouts increase in GDP.
Reducing the cost of new Capital formation will result in a significant increase in GDP productivity. If the price of Capital formation dropped by 10%, reducing the cost to about 2% of GDP would almost double the increase in GDP for the same cost — or a massive percentage increase in productivity.
The recent Productivity Commission report on increasing productivity had no mention of improvements in the Financial System as a way to increase productivity. Yet, a 10% per year drop in the cost of operating the financial system is achievable for several years. These improvements will mean more funds are available for government priorities, particularly in closing the gap between low-wealth to high-wealth citizens. Today every six months, the wealth of the top 10% of the population increases by the TOTAL wealth of the bottom 10%. Tomorrow the wealth of all percentiles can increase at the same amount meaning the bottom 10% may double their wealth in the first six months.
Increasing the Productivity of the Financial System
The simplest way to reduce the cost of the financial system is changing how loans are repaid to remove the cost of interest on interest. When a loan repayment is made, if the interest component is $X, and the payment is $Y, $ Y-$X/2 rather than $Y-$X becomes the drop in the amount owing. This small change will increase the country’s productivity by $X/2 as it removes unnecessary “unearned income” or interest on interest. It shares the increase in wealth between borrowers and lenders. Lenders still get their total return but not interest on repaid money.
Similarly, all regulated industries can share the profits between investors and consumers. Regulated industries tend to give investors a fixed percentage of the Capital Invested. The electricity transmission and distribution businesses offer about a 7% return on investment. The investor could get their 7% return as 3.5% in cash and 3.5% being a sale of Capital to consumers. Consumers can now sell their Capital, or it can continue to earn a return for the Consumer. This change will increase the productivity of the electricity industry by 3.5% and transfer wealth from investors to consumers.
The productivity of Capital doubles from the above because the rate at which Capital is invested typically doubles because it moves at least twice as fast as loan Capital. Money does not sit in immobile assets but is continually moving and being reinvested. Government and regulated industries can insist that Capital be invested, not given as cash. Consumers and investors can get cash by selling their increased Capital to other investors or using their shares to purchase goods and service the investments produce. Once government-regulated or controlled industries use the approach, all industries — including housing- will follow to remain competitive. The approach, for example, makes housing affordable.
A further improvement occurs because of the reduced need to create debt. All existing assets can become monetised and available for investment, which saves the cost of creating and destroying money and the cost of interest.
Please read Fair, Efficient, Sustainable, Wealth Sharing to see other benefits, especially the concept of resilient supply chains as a set of independent recursive links.
Critically for Australia, the existing financial resources in Australia will be sufficient and do not have to depend on finance from oil, coal or gas exports. We have more than enough existing stationary Capital readily available in this country. We don’t need other countries’ Capital and can rapidly reduce our debt.
Values-Based Capital
The Financial System described above delivers the most investment for a given amount of Capital. It is an optimal approach to investing. Making the most money is NOT the criterion for evaluating an investment, as we know that the most money is obtained for the least amount invested.
Economics becomes values-based. Does the investment reduce greenhouse gases? Will the investment reduce homelessness? Does investment increase the stability of the financial system? Will the investment “close the gap”? Does the expenditure increase security? Will the investment increase biodiversity? Will the investment reduce the consumption of non-renewable resources? Does it reduce surveillance and increase autonomy? Will the initiative make housing affordable?
Today investment decisions are based on the cost today is less than the discounted benefit tomorrow. Tomorrow’s investment decisions will be based on “is the cost today indexed for inflation” greater than the actual benefit tomorrow?
Values Based Investing knows the money invested today will give the greatest monetary value tomorrow. Values Based Investing also knows that if the investment is needed, the money is available. We will no longer hear the phrase, “where will the money come from”. Instead, it will be, “do we need to do this”.
