Modern economies are inefficient, where inefficient means they use more money than needed to produce the same amount of goods and services. It doesn’t have to be this way.
The main reason for the inefficiency is the creation of unnecessary new money to transfer existing assets and the resulting accumulation of money in over-priced assets that slows the investment in productive assets. Today, most assets are transferred by organisations and individuals borrowing money, especially from banks, and using the money to buy ownership of the assets. Debt is paid back from the profit generated by the assets. The profits pay the interest borrowed. Using bank loans requires paying two lots of profits, and the organisations and people who receive the two profits have an advantage over others who can’t; hence, they accumulate funds that remain unused and slow the movement of money, increasing inflation, and these losses reduce the efficiency of the economy.
In past eras, mutual societies did not create new money but used “old money” from deposits from members. Privatizing money creation with fractional banking has solved some liquidity problems, leading to unnecessary but very profitable financial businesses. This, in turn, has led to the dominance of new money by shareholder banks and other financial institutions using derivatives to supply the money to make the trades. When we use a derivative of money — like a loan, the assumption is that the money itself earns money, and these earnings are an extra cost of investing, reducing the profitability of investments.
There are various ways to solve the problem. One is the approach of the Swedish branch of Positive Money, which is found in this report.
Another approach is the mutual credit approach, where traders trust each other and credit balances go up and down as required.
The following approach is a variation on mutual credit that eliminates the need to issue money to transfer existing assets by incrementally transferring assets without monetising them. The approach also uses a direct sharing of profits according to the effort required by buyers and owners.
The savings to be made come from:
- Eliminating the need for debt and interest payments
- Reducing the accumulation of unused capital in overpriced assets and unnecessary derivatives means we need less money to transfer assets.
- The inclusion of most of the population by allowing them to participate in the productive economy.
- Making profits by reducing costs through reduced effort and resources and increased profits from the economies of scale.
The approach facilitates groups of people and organisations to work together to eliminate the need for debt to transfer assets. It reduces the cost of transferring assets where the savings are distributed as higher returns for sellers and lower costs for buyers. The increased productivity of finance goes to all in society, not just those who have accumulated capital. The division of productivity benefits is decided democratically at the local level.
Permanent Housing Markets (PHM) as an example.
A description of how any group of homeowners can set up a PHM can be found here.
A Permanent Housing Market is a group of houses where all houses are for sale all the time. The occupiers have agreed to pay the minimum of a percentage of the house value or 25% of their income to purchase the property. The arrangement is agreed upon by the existing local group with guidelines from the state. The occupiers also agree to continue to pay the minimum after they have purchased the house. The excess they pay becomes an investment in any dwelling in the group or another group.
Occupiers receive 50% of their occupation payments as shares in their property. Shares in their property do not earn income as the occupiers benefit from using the house. The other 50% of the payments go into new investments and to give a return on investment to investors.
When a person no longer lives in a property in the PHM, their shares become an investment. Investors receive a return of new shares created at a 6% annual rate when occupiers pay for the occupation or new investment comes into the PHM. The value of the shares is adjusted by the CPI each year.
If an occupier pays $120, then $60 is equity in the property, and the other $60 is for new shares and the administration of the group.
Investors must sell at least 6% of their shares yearly to occupiers. Each day, the value of shares is adjusted for inflation.
Occupiers can request extra funds or supply them to improve and maintain their property. The properties are periodically revalued to reflect the property's market value.
Scenarios
The following compares the outcomes for banks, bank shareholders, community banks, sellers, savers, real estate, occupiers of low-productivity regular debt and high-productivity PHMs. The scenarios are:
Alternative to a Reverse Mortgage
An elderly property owner wants to invest $100,000 in energy reduction and renewable energy technologies. Their property is valued at one million, and they can get a reverse mortgage up to $200,000. They have a disposable income of $60,000 and struggle to maintain the property and pay for insurance. Energy reduction and generation technologies will save $6,000 annually in the foreseeable future.
A reverse mortgage of $100,000 will mean that after ten years, the bank will be owed about $215,000, and it is unlikely the property owner can increase the mortgage for any other purpose. There will also be set-up fees and extra insurance. For these reasons and the extra risk of a devalued property, the owner is unlikely to take the chance as the beneficiaries will be the bank shareholders.
However, a PHM member is highly likely to “sell part of their equity” to other PHM investors as they already pay 25% of their income for home maintenance and insurance. It will make no difference to their monthly payments. The investment will maintain and potentially increase the home's value for PHM investors and future occupiers. The PHM will be responsible for installing and maintaining the new investments, whereas with the reverse mortgage, that is the owner’s responsibility.
The losers will be the bank's shareholders, who will lose about $100,000 in a potential wealth transfer from the property owner.
With PHM, the community gains because the investment benefits the community, and the owner still participates in the investment economy. With regular bank loans, the beneficiaries of the investment are the bank shareholders who have gained from renting community money and expecting the house occupier to do the work of investing to give a return.
A home buyer with an existing mortgage
A member with a mortgage of 6% with $300,000 left to pay over the next ten years can change from paying $40,760 a year to paying PHM $30,215 and save $100,000 over the ten years. The difference comes because no new money is created, so there is no need to pay it back, and the asset value stays in the PHM. Hence, the $30,215 gives a return to the investor and pays for the operation of the PHM. None of it goes as rent on the use of money.
The Bank is not required to create a loan, as the title to the property stays with the community. The savings come from not having to change the title and pay for new money creation.
A Landlord
A landlord has a property valued at $800,000 rented out at 1% of its value or $800 per week or $40,000 per year. If the landlord sells the property to a PHM, they can keep all the shares in the property and receive 6% of $800,000 or $48,000 a year in shares in other properties and have no costs associated with running the property or renting it out. The landlord becomes an investor and has to sell between 5 and 10% of the property to the occupant and other investors. Half the sale price is a return on capital, and half is income. Negative gearing arrangements would remain in place.
The savings and risk factors have gone, and the capital gains will remain. The investor can access all their money by selling shares to other investors and occupiers.
An Investor Looking For a Safe Return
Investors receive a 12% annuity for 20 years, and they can reinvest their money with other community funds if they wish. This is better than most superannuation funds and has the flexibility of a cash account with low transaction fees. It is much better than most bank savings accounts.
Annuities with a PHM last twice as long because the annuity is made of two parts. Part is the earnings on capital, and the other part is the sale of capital, whereas, with bank annuities, all the payments are a sale of capital.
The other advantage of PHM annuities is their liquidity. They can be sold anytime, and reinvestment is highly likely if desired.
A Renter with no Deposit and an Income of $40,000 a year.
Every occupier must pay at least 0.5% of the property value or 25% of their income yearly. With a $40,000 income, the minimum rent is $10,000, equivalent to a $200,000 capital value. The occupier will gain $5,000 in equity in the property each year that they can take for a deposit on their next property when they leave. There are currently few properties of value $200,000, but shared accommodations like boarding houses, shared houses, and student accommodation will be available.
Renters acquire no equity in the dwelling, whereas 50% of the occupier's payments become equity because the occupier is deemed part owner of the house. This improves the return of investors because half their payments are a return on capital and not income.
Advantages of a PHM
- A Permanent Housing Market is a minimum-cost way to transfer houses from one occupier to another.
- PHMs means everyone who joins with an income can afford to buy the house they are paying to occupy.
- Traditional bank loans need to create extra money as loans. With a PHM, there is no debt. There is an agreement to continue to pay to occupy a dwelling.
- The wealth of each occupier and investor is automatically adjusted for inflation and changes in the price of a home.
- There is no transfer of title when a new occupier comes into a home. Rather, the shares in the home are transferred as the occupier pays to live in the home.
- No financial transfer fees exist for an occupier to change to another dwelling.
- There can be multiple paying occupiers of a property.
- It keeps occupiers in the economy by transferring capital at each occupation payment. It increases the wealth of the community compared to debt, meaning the economy becomes more productive.
- There are still disparities in wealth, encouraging competition and extra effort, but the Matthew Effect and random events cause less disparity.
- Profits come from reducing costs rather than increasing sales, leading to a conservation ethic.
- It halves the cost of a house for occupier buyers with no initial capital.
- Investors receive an annuity of the same value as superannuation-allocated pensions but for twice as long.
The Business Model of Monopolies, Oligopolies and Monosophonies
The business model of oil companies, banks, big-tech, and service industries is to “own the customer” by offering products as a service. The more customers you own, the more profit you make, and the less competition and innovation.
A lower-cost model is for local communities to own the services. In a world of low-cost computing power and communications, large monolithic organisations controlled by a few are an anachronism. Localisation will replace them because operating in a connected world costs less. With instant, cheap and immediate information, it is cheaper to distribute and recycle money locally than to rent money in bulk.
Funding Climate Change
The Commonwealth Bank has estimated that Australians will have to spend three trillion dollars to convert its energy and transport systems to renewables. Australian residential and commercial buildings are estimated at 14 trillion dollars. At least a quarter is available as collateral for loans to supply the money. PHMs can supply the money as discussed in the “alternative to a reverse mortgage” above. We know renewables are cheaper than burning fossil fuels without a carbon tax; hence, the conversion will make Australia a wealthier and better place to live.
Recycled Money
Money serves as a token of promise for reciprocation. It holds value. However, trust in governments and private banks is reduced due to their inability to keep their promises because the financial system wastes money through unnecessary money creation.
Governments through the Reserve Bank boast they are doing a good job because they have a target inflation or devaluation of money. Inflation hurts people without wealth while rewarding people who own assets. Trusting institutions that advocate money inflation is problematic and leads to distrusting financial institutions.
We see the Reserve Bank increase interest rates that hurt mortgage holders and reward bank shareholders. We see governments adjust student loans for inflation that the government created. We see wealthy people boast that they work to minimise wealth redistribution. We see legislators vote on negative gearing from which they personally benefit. We see governments give electricity distributors and electricity transmission companies monopolies with guaranteed returns on the money we have already repaid. We watch governments pander to news organisations and big tech. We see trusted institutions like the ABC starved of funds because they do not serve the interests of those given power. We see revered organisations like the War Memorial become showcases for weapons that kill. The list goes on.
It does not have to be this way. We can recycle money for most asset exchanges and use money creation for those products and services we know will lose money but benefit us. Such things are art, music, story-telling, research and architecture that inspire.
Imagine a world where the power to decide how most money is spent is in the hands of local communities instead of a few remote individuals, often outside our nation. A world where everyone has a say in how the money is distributed for the things we all need to survive. This is the kind of world we should strive towards - one that is fair, democratic, and empowers us all.
