A submission to the Inquiry into promoting economic dynamism, competition and business formation.
The Reserve Bank regulates the money supply by changing interest rates. This submission recommends it use a rotating fund of money or a “money flywheel.” A money flywheel uses negative feedback principles to adjust the money supply. The concept has historical roots in Australia, where it helped the nation emerge from World War I without debt. Money flywheels operate at zero cost and can regulate any business controlled by value to a community rather than price. The method creates a predictable and resilient economy better equipped to withstand external shocks.
Kevin Cox March 2023
A previous submission to this inquiry, “Implementing Values Based Capital”, outlined what happens when the movement of Capital is zero-cost. This submission visualises the approach to show how the Reserve Bank can reduce inflation without changing the interest rate on Capital. The Reserve Bank could start implementation immediately, potentially saving millions of Australians’ mortgage and rental stress.
Banks, including the Reserve Bank, create money by creating a loan. The borrowers pay interest on the loan, and to pay the interest, they have to invest it or lend it out to someone else who will make a profit and share some of the profit as interest. Changing the interest rate changes the willingness of borrowers to invest or borrow. It is complicated indirect regulation that may or may not work to reduce inflation and will have unintended consequences because of the many confounding factors.
A straightforward zero-cost method to regulate the money supply is for Banks and businesses to create rotating funds of money that spin like flywheels. To control the money supply, the flywheels change the rate at which Capital moves and is released into the economy rather than changing the interest rate. The Reserve Bank can still change interest rates but may never need to.
What is a Money Flywheel, and how does the Reserve Bank Change Money Movement?
The Reserve Bank creates money by creating loans and lending the money to banks. The repayment of loans creates a circle of money movement. The Bank adjusts the speed of money movement by changing the ratio of interest payment to Capital in the repayment. To change the amount of money in the system, the Reserve Bank acquires or sells Capital in the Banks by converting loans into equity or reserves to increase the money supply, selling equity, or tapping into the reserves to reduce the money supply. The Banks reconcile their interbank loans daily through the Reserve Bank, so large amounts of money are always in motion. It means the banks do not need to change their interest rates as their cost of funds has stayed the same. The flywheel money is a small percentage of the cash in the economy, but, like all good regulators, it leverages a small change to make a significant impact.
It should be noted that this was how Australia funded the first world war and the post-war reconstruction. Sir Denison Miller, the first governor of the Commonwealth Bank, started with a small flywheel of 30,000 pounds and spun it so Australia ended the war without debt and with the ability to create more money for more investment. After Miller’s death, Australia reverted to the current system. Australians suffered greatly during the depression years as the English Bankers wanted sterling debts repaid in full, leaving Australia without money to operate the economy.
The Reserve Bank can require Regular Banks to set up their own flywheels of Bank Capital. The system automatically adjusts the speed of money transfers between investors and consumers, as explained below. The Reserve Bank can require Regular Banks to remove interest on interest, on credit cards and home loans as outlined below.
The money in the economy should match the amount needed for investment and exchanging goods and services. The economy regulates itself through a feedback system like a thermostat controlling a room’s temperature or cruise control works on a motor car. The Reserve Bank sets the dial and interbank and business flywheels of money speed up or down, leaving a stable, predictable real economy with fixed interest rates.
Automatic Controls for Monopolies
A Self Regulating Efficient Monopoly outlines how a flywheel of money uses investor returns and the transfer of Capital from investors to consumers to regulate the income and set a fair price for monopoly services. The money flywheel of Capital costs nothing as it is a small change to payments book-keeping. It means we can use value to the community as the criteria for investment instead of choosing investments by calculating a discounted cash flow of cost and benefits. The monopoly sets the return on Capital and sets up a flywheel of Capital movement between investors and consumers to fix the price. If the price needs to go down, the flywheel slows down, and if the system needs more investment, the speed goes up.
All private or public businesses can use the same approach and set prices to best compete in the market.
The Reserve Bank can start with its loans, model what will happen, and gradually introduce the change. All Businesses and Banks don’t have to use the approach, but governments can insist that regulated businesses do. If they do, they will have lower profitable prices, so it is expected most will move.
The approach mobilises stationary Capital, particularly in fixed assets like housing and infrastructure, removing the need to import Capital and reducing government and private debt.
We can use the approach to phase out industries we no longer need or want, like burning fossil fuels. We can fund new industries with the Capital released by closing down old ones.
We can increase the amount of Capital available for investment by speeding up the rate of Capital Transfer with higher returns.
The government can set value-based criteria for regulated businesses that will influence the whole economy.
The economy becomes predictable and able to withstand external shocks.
