18. A Recipe for a More Stable Economy
Last updated
Last updated
Hopefully this book has now made it clear what features of our current system lead to economic instability. We are now in a position to design a new system to reduce such evils as positive feedback, Ponzi dynamics, pseudo-investments, excess unemployment and crazy stock prices.
In Chapter 3 we showed how Ponzi dynamics are built into many forms of savings. Given this fact, the first ingredient of a stable economy is to discourage lending and borrowing that is of no benefit to the economy as a whole. This will require a radical undoing of the way modern economies have embraced these practices in recent decades. In order to get this idea accepted, it is helpful to appreciate that so many of these arrangements are just very recent inventions. They should be seen as an experiment that has failed. The “radical” idea of curtailing them should be seen as no more and no less than reverting to how things have mostly worked since antiquity. Let’s consider these unnecessary activities in turn:
This very modern experiment of encouraging widespread use of credit cards to purchase so many goods hampers productive investment. The advantages of this practice are outweighed by the disadvantages and so should be reduced to a minimum. Borrowing to consume should go back to being seen as a last resort when something has gone wrong. The precise mechanism for reducing the popularity of this form of borrowing is perhaps debatable. One step would be to eliminate credit cards for private use altogether. If someone really wants to borrow money then they can visit their bank manager in person to explain their predicament. If the manager agrees then a good old-fashioned loan can go ahead.
Chapter 16 showed how widespread private mortgages simply cannot occur in any reasonable way. We need to move toward a model much closer to, or equivalent to, nationalised land ownership with renting being the predominant mechanism of putting a roof over your head. Any land-related taxes must also be designed so as to eliminate or control the (rich get richer effect).
Chapter 15 showed how the entire concept of attempting to build up a fund during your working life that you can live off in your old age is a modern experiment that is being revealed as a dismal failure at the time of writing. Pensions need to work on the basis of “working people now support retired people now”. There is no need for any “savings” to be involved.
Given that the financial sector currently makes most of its profits on the back of these kinds of unproductive borrowing/lending, the size of the sector without them will be far smaller. Any transition to such a system will involve a lot of bankers having to retrain or start up their own non-finance-related companies.
We need to reform the monetary system, something more akin to full reserve banking. New, debt-free money will need to be printed for this purpose – without the convoluted mechanism of purchasing bonds.
Whatever the monetary system, it is essential that money not be created for non-productive purposes. In particular, money must not be created for purchasing any of the following:
land/residential property
shares and other financial instruments traded in the secondary markets
commodities
Anyone that wants to invest in these items must do so with pre-existing money.
Chapter 12 showed exactly how the popularity of short-term share ownership inevitably leads to wildly fluctuating share prices in a way that does nothing but harm to the economy. Mechanisms to discourage this practice must be introduced. We suggest a tax on share transactions which start high when the shares have been held for a very short time and then diminishes to zero as the duration of ownership increases.
Whatever system is used, its effectiveness should be measured by listening to the “water-cooler conversations”. If people are discussing earning from long-term dividends then all is well. If people are still discussing making money from short-term share price changes then not enough is being done.
Chapter 11 showed how countries are analogous to super-large companies that do not need to borrow externally in order to invest. This rule only applies to countries of a reasonable size.
Making the transition from our current economic system to the one prescribed would be a major and complex undertaking to put it mildly. Inevitably there will be winners and losers. The details of how to make the transition in the most equitable and least painful way would perhaps take up a large book or even several large books on their own. You wouldn’t expect that fixing the world economy was going to be easy, would you?
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