When a business makes a profit, it charges more for its service than it costs to produce. The business increases the amount of money it has but takes it from its customers. The profit does not increase the money supply. It redistributes existing money.
The Money supply increases when the owner of the currency increases it. In most economies, the task of creating extra money is given to the banks, who provide loans to people and businesses that give them back more money than they create. The banks increase the money supply by debiting the borrower's loan account and supplying the money to the borrower by crediting a regular bank account. When the borrower repays the loan, the money repaid goes away. The bank gets paid a fee with existing money to operate the system. The bank costs include those loans that do not get repaid.
The system is designed to give all new money to bank customers who can repay it. This means it only goes to people or businesses that possess old money or assets that can be sold for money. New money is equivalent to making an instant profit or surplus, which means that people and businesses who have money inevitably receive most of the new money and use it to profit by transferring existing money from one party to the borrower.
It means we create more money than we need, most of which goes to the rich. Having more money than we need and giving most of it to those who already have money has inevitable outcomes. First, money becomes a commodity, and the wealthiest use it to acquire assets created by the Economy of goods and services. For example, less than 5% of the shares sold in the Australian stock market create new assets, and today, less than 20% of home loans are used to build new houses.
When a bank creates new money through loans, the cost is the cost of interest. This is an actual cost to the Economy. If a bank uses existing money to give loans to buy old assets, that is a savings to the Economy. Savings from doing the same thing for less money is a productivity improvement. The government can work with the Reserve Bank to give them the power to reduce or eliminate the amount of new money to buy existing assets if they don't already have it.
However, the government can immediately discuss with the Reserve Bank stopping the double payment of interest and fees on all loans. Today, bank loans lend new money, and the Reserve Bank allows them to claim that the banks earn a capital gain on the money. They don't deserve any such gain, and it should be stopped. There should be no return on capital from a bank loan with new money.
This simple change will increase the rate of loan repayments without increasing the amount of debt and money. Individuals, businesses, and other government bodies can help the government by requesting banks stop this pernicious practice.
This is an opportunity for the government and the Reserve Bank to break stagflation and increase the productivity of the Australian Economy by using cheaper new money to boost investment in public infrastructure. Predictable Economics shows how to do it, including accelerating the shift to renewables and reducing taxation. The benefits come from speeding up loan repayment. The slow repayment of loans is money lost to the Economy from profitable investments.
