In 2009 the wealthiest 10% of Australians had 40 times as much wealth as the bottom 10%. In 2019 it was 60 times, and every six months, the top 10% increased their wealth by the total wealth of the bottom 10%.
There is a systematic problem with wealth distribution, and it can be fixed with accounting changes. First, consider the payment of interest.
Lenders charge borrowers interest and ask them to pay interest on the money while they have it. When a repayment is made, the interest accrued goes to the lender, and the remainder is taken from the amount owing. If the interest accrued is Y and the repayment is X, then the amount owing is X minus Y. It means that interest is accrued on all of Y on the next payment.
An example is a loan of $500,000 and an interest rate of 4%. The yearly repayment over 20 years is about $38,000, $25,000 is the repayment of Capital, and $13,000 is the average interest repayment or Y.
But that is economically inefficient as the lender has received all of Y and can lend it again. More money than necessary is transferred to achieve the desired result. A solution would be to share the interest on Y by reducing the amount owing by subtracting Y divided by 2 from X. The change in amount owning changes from X-Y to X-Y/2 while the repayment amount stays the same.
When we do this, the average interest payment Y drops by a little less than half or a maximum of $6,500. (The value varies depending on whether interest is calculated yearly, monthly, daily, or each minute).
This change removes the payment of interest on interest or unnecessary income. Unnecessary income is the unnecessary transfer of money to achieve a desired result. Here the desired result is to repay the loan and charge interest on the money the borrower has not repaid.
The average Australian mortgage is $500,000 at 4% and over 20 years, giving the following results.
Removing interest on interest prevents interest compounding, removes the exponential growth term in loans, and provides methods to control the money supply automatically.
Society recognises that interest on interest is unearned and redistributes some of it by treating it as income and taxing it. By not creating unnecessary income, it is not taxed because it was never created. However, the financial system change will stop the ever-increasing wealth disparity and increase productivity by removing unnecessary interest.
Removing unnecessary interest will make housing affordable as it will drop the cost of owning a house and reduce the incentive for lenders to force up the price of houses and gain from inflation.
Unnecessary Company Money Transfers
Unnecessary income happens with companies. It takes the form of higher prices. It is easily fixed by eliminating the unnecessary income of profit on profit by selling shares to customers on each purchase. As with interest, the average transfer is 50% of the profit made on a sale at the time of a sale.
It is the reason for the increasing disparities in wealth in Australia and around the world, and it can be easily fixed. It does not reduce the income of the wealthy. It shifts their wealth from one form to another. It saves the community from paying for unnecessary income and hence increases the productivity of the financial system. The savings made go to those who now pay the unnecessary amount.
The change to loans can be made immediately, and it would reduce the average Australian mortgage payment by about 16% without changing bank profits. When we make productivity improvements, profits can remain the same, but the amount of money transferred reduces.
The accounting changes make the financial system more productive by minimizing the money transferred to achieve a given outcome. The emergent properties of an economy with this change are many and benign. Some of the changes are explored in medium articles at https://kevin-34708.medium.com/.
