the plan for the future
March 27, 2009 - May 7, 2009
Seizing control over banks and central banks
It is not realistic to expect that the current banking system will make the reforms needed (see also: Bloomberg - Berkshire’s Munger says ‘venal’ banks may evade needed reform). Banks have also bribed politicians into relaxing regulation which resulted in the banks having an enormous influence over politics and society (see also: 321gold.com - America: 'Sold Out' for $5.2 Billion). Therefore it is better ot liquidate the old monetary system and replace it by a new monetary system with new banks.
Before issuing the new currency, the government should take control over all banks and operate them, so payments can proceed. Only the deposits in the old banks should be guaranteed to a certain maximum, so people will not panic and take their money from the banks. The government should control the banks during the transition period, until the new financial system has become operational.
After taking control of the banks and the central bank, the government has the following options:
- declaring all government bail outs illegal and returning the troubled assets to the banks and returning the funds to the treasury;
- declaring all central bank bail outs illegal and returning the troubled assets to the banks and returning the funds to the central bank.
The central bank should remain under government control. Any government debt under management of the central bank can revert to the government, effectively diminishing government debt. If all affairs are settled, the banks should be returned to market conditions. Most old banks probably will get liquidated but banks that are in good condition can be converted to the new natural money system.
Issuing the new currency
A government can issue a new natural money currency that will become legal tender within the country. The old currencies should continue to exist, but must not remain legal tender. People will be free to convert their old usury currency into the new natural money currency. In this way a country can shield itself from the financial system that is in a process of disintegration while not breaking existing agreements that are made in the old currencies such as the Euro or the US Dollar.
First only payments for goods, services, taxes and salaries will be done in the new natural money currency. The new natural money currency will be used in the real economy. The financial system will still operate using the old currencies. In this way those two systems are separated and therefore the instability of the financial system will affect the real economy to a far lesser degree. When the financial system is separated from the real economy, the real economy may grow even while the financial system is in collapse.
It remains to be seen whether or not states and municipalities should issue their own currencies. If they come into existence, those currencies should only be used for payments within the state or the municipality issuing the currency. The local currencies and state currencies should float against all other currencies. However, there will be little trade in those currencies and people will therefore be inclined to spend those currencies (see also: Bernard Litaer - A strategy for a convertible currency). Local currencies have the following advantages:
- They promote local trade and therefore generate employment in the local community. This will create social cohesion which will counterbalance the disintegration of the local communities.
- Local production will replace centralised production which makes the economy more energy efficient because less transport is needed.
- Local currencies will generate tax income for the local governments.
- Local currencies give local communities more possibilities to handle their own affairs while the size of the central government is reduced.
It remains to be seen whether or not banknotes and coins should still be issued. Ending the use of banknotes and coins will have the following advantages:
- Using banknotes and coins with natural money is cumbersome because they have a limited validity.
- Banknotes and coins have to be produced and replaced. The cost associated with issuing them can now be avoided.
- Banknotes are used by criminals for their transactions. Therefore, ending the use of banknotes and coins will obstruct criminal transactions.
- There is no reason for keeping banknotes at home, because there is a holding tax on money.
- There is no incentive for using banknotes to avoid taxes, because sales tax, income tax and taxes on profits should be reduced and abolished if possible.
Create new banks
Banks that will work under the new natural money system should come into existence. Those new banks must be legal entities that should not have any meaningful positions in the old currencies. Those banks should work under the natural money laws. In this way those banks are shielded from the old financial system. As the old currencies such as the Euro and the US Dollar will still be in existence, they should float against the new currencies.
Banks will have to comply to the following rules:
- Banks may not invest for their own profit and risk money that has been entrusted to them. They may only lend money without charging interest.
- People can hold their money in the bank in the form of a current account, on which the government tax is levied. They will hold the money needed in the short term in this type of account.
- People can hold money in the bank in the form of deposits or savings accounts. The bank lends this money without charging interest. Holding such deposits or savings accounts can be attractive because in this way the money tax is avoided and the value of the money is not eroded by inflation. It is likely that depositors pay a fee to the bank for intermediation costs. Banks may offer different types of savings accounts. The most restrictive accounts do have the lowest fees and offer the highest degree of tax avoidance.
- Bank are prohibited to charge interest on money lent. This is essential to eliminate the risk from the financial system because banks may be tempted by interest to take on risky loans.
- The bank may only charge intermediation costs to the saver and not to the borrower, since the bank may be enticed by high fees to take on risky loans. Those fees are a kind of interest. This is a very essential feature of natural money.
- There must be no money creating activity in the banking system. Therefore, any money in the current accounts may not be used for lending. Only money in savings accounts may be used for lending. Therefore people must accept that bank cannot lend money or savings may be locked if there is not enough money in savings accounts. This is essential to prevent economic booms and busts from occurring.
- The (local, state or national) government issuing the currency levies a tax on the money. It is advised to keep the tax rate between 0.5% and 1.0% a month, because this appears to be the optimal tax rate for natural money. The banks holding the money must levy the tax and send to proceeds to the government issuing the currency.
Bank accounts should accommodate multiple currencies because of the use of local and state currencies. At first, banks should only offer current accounts and possibly savings accounts. This makes it possible to open the new banks within a few months using simple and scalable web technology based on a strong database.
Account names must be easy to use and can be like alias.somebank.us. This has the following advantages:
- People can choose an account name that they can remember easily;
- The bank holding the account can be easily identified, which removes the need of central clearing systems or a search system for finding the right bank for a specified account;
- The country of the bank can be easily identified. International payments will become a lot easier.
Conversion of the financial system
Financial markets will at first still operate using old currencies like the Euro or the US Dollar. Existing debts will also remain in Euro or US Dollar. Governments should stop bailing out bankrupt companies and financial institutions and let the markets do their work. The old currencies still do have value as many debts still have some value. Because interest bearing currencies need a constant growing debt (see also: Natural Economic Order: Complete theory), debt levels have the tendency to rise.
After the introduction of the natural money currency, financial markets will slowly be converted into the new currency, but with the restrictions guiding the new financial system. Those restrictions are:
- A company must issue stock until debt on its balance sheet meets specific requirements. Bond holders must convert their holdings into common stock. A specific conversion law should make this possible. This conversion can be done at market prices for the bonds and the stocks using the old currency. The conversion law should include the elimination of all short interest on the specific stock before conversion, as bond holders may short the stock to get a favourable conversion rate.
- In the new financial system there must be no derivative products (also no futures and options). Derivatives are illegal in the new system. Because in the natural money economy there will be constant economic growth at maximum potential, the financial markets will be very stable, and therefore there is no need for derivative products. Because there exists no interest on money in the natural money economy, interest rate derivatives are also not needed.
- Shorting of stock should be prohibited. Shorting introduces an interest in bringing down companies. If people do not believe in a company, their only option should be not to own the stock.
People are still obliged to pay off their debts in the old currencies. They can use their natural money to buy up their debts in the old currencies. Because the natural money currency is legal tender in the real economy, there will be demand for the natural money currency, and therefore it will always be possible to convert the natural money currency into the old currency. Interest payments on those debts should be abolished. This will greatly improve the capacity of the lenders to repay their debts. When people are repaying their debts, this creates an upward pressure on the value of the old currency. When people are liquidating accounts in the old currency and buy the natural money currency, this creates a downward pressure on the value of the old currency. Governments should not interfere with this and let markets do their work. The old currency will have value because there is demand for it because debts must be repaid. However only the natural money currency is backed by the real economy.
Many international payments and debts are in Euro or US Dollar. The EU member states and the US are not engaged in most of those contracts. Therefore the EU members and the US are not in a position to abolish the Euro or the US Dollar. The EU and the US should discuss the management of the Euro and the US Dollar with their international trading partners and the major creditor nations such as China and Japan. The debtor nations should negotiate with the creditor nations what kind of goods, services and assets will be returned for the debts and the time frame in which this will be realised.
It is not in the interest of trading partners and creditor nations that they accumulate currencies that loose value over time. Countries like China and Japan should use their resources to improve their own wealth instead of subsidising the spending of the EU and the US. The current situation will end in tragedy for both parties as the production of the EU and the US will be outsourced while creditor nations will end up holding worthless currencies. In the natural money system, all countries will use their productive capacity to create their own wealth. With natural money it is very costly to hold foreign currencies for a longer period of time, because all currencies have a holding tax. This will prevent imbalances of payment from getting out of hand.
At some point in the future it becomes clear what the value of all debts is. When there is income or assets backing them up, debts should have some value. When this condition is realised, the financial system is stabilised and the remaining balances in the old currencies can be converted into the natural money currencies. The value of derivatives should be determined by the market using the old currencies. The government has no role in this. Derivatives can never be converted into the natural money currencies.