Financial system

What to do with this fraudulent system?

Critics agree that this system cannot function forever. The tax burden cannot be increased to 100%. Nor can public and private debts be increased indefinitely. If there is nothing to pay back the old debts, there will be no new ones.

There are various theories of a new financial system, without "interest slavery". The general opinion is that the current system cannot be repaired. It must be destroyed completely or collapse on its own. There are proposals to speed up the collapse of the financial system in order to build a new, but fair system on its ruins. I strongly dislike such proposals - reform by catastrophe.

Let's not forget that there is no more efficient system yet. It provides record low cost, record speed and convenience of money transactions. The financial system has come a long way in its evolutionary development. At the dawn of capitalism it was usurious credit that made the industrial revolution possible. And today, without credit, the functioning and development of capitalist production is impossible without credit. So let us try to imagine how the existing usurious financial system can be reformed in such a way that greater social justice is ensured - without losing efficiency.

Optimal inequality

Almost everyone agrees that income-levelling is not favorable to economic growth. This is one of the main reasons for the bankruptcy of the socialist countries.

There is now a widespread (or imposed?) belief that tax cuts for the wealthy will stimulate the economy. The fact that the current inequality in developed countries slows down the economy is unknown to the vast majority of the population, although there are publications that reveal this topic. In Ray Dalio's terminology, the central bank loses its ability to stimulate the economy due to high levels of debt.

This is confirmed by the study by Andrew Berg from the IMF "Equality and Efficiency". (File is automatically downloaded to the downloads folder.)

A look at historical examples of the beginning of a large credit-debt cycle, shows that low level of inequality ensures stable and rapid economic growth. So, artificially maintaining a certain optimal level of inequality, it is possible to achieve stable and rapid wealth growth for everyone!

How to determine the optimal level of inequality? We have 2 ideas:
1) Gradually increase the taxation of the rich, while the welfare of the poorest grows. Even if the general welfare starts to fall. If, as the taxation of the rich increases, the well-being of the poorest begins to fall, then we are on the path to equalization and the taxation of the rich should be relaxed.
2) Gradually increase the taxation of the rich, but only to the maximum of the general welfare. Despite the fact that further tax increases could improve the welfare of the poorest.

The first option will be attractive to those who stand up for justice. The second option would be preferable, since we face enormous challenges in managing the climate and reducing "geographical disparities."

We do not forget that in today's political realities, it will not be possible to carry out any optimization of inequality.

Economy without financial crises?

To control money circulation and the economy, the central bank has two instruments - the money emission and the key interest rate. In addition, we will give the central bank the right to regulate taxes - tax rates, as well as turning points for progressive taxes. Specifications (list) of taxes are determined by legislators, and tax regulation will be considered a technical problem - just like the regulation of emissions and the key interest rate. We will call this body, which has three tools for managing the extended central bank (xCB).

The hypothesis is that, having three management tools, an expanded Central Bank will be able to ensure the functioning of the economy without financial crises (e.g., in accordance with the second criterion of "optimal inequality"). Additionally, greater social justice and rapid economic development will be achieved.

All this may be true for the economy of a state isolated from the world economy. Real states compete with each other in tax and trade wars. In addition, all states are dictated by the interests of large investors, international corporations and banks. Therefore, the optimization of inequality in a single country is practically impossible - investors can simply transfer their capital, and capitalists can begin to close enterprises and transfer production to other countries.

However, the very idea that (at least in principle) it is possible to get rid of financial crises (and wars and revolutions associated with them) may encourage people to look for ways to create the suitable conditions for it. “Suitable conditions” may include, for example, the creation of a single currency for several countries, the exchange of tax data between states, trade agreements, etc. May be, at the end of this path, some world government, a world central bank and a world digital currency would created...

This path involves the redistribution of wealth and power in favor of the population. This is possible only if the population of the planet is united by some common ideology that describes the path to an attractive “bright future”, the picture of which will also include a description of a more equitable and efficient financial system. An extended central bank, controlling financial policy, could be part of this picture.

Financial System Resilience

This means that the Central Bank, having three management tools (the key interest rate, the emission of money and tax rates), is able to maintain the stability of the economy when external influences change, considered as perturbing "variables". Disturbing external influences include various natural disasters, epidemics, demographic and climate changes, scientific and technological progress and related changes in the labor market, various cyclical and pseudo-cyclical phenomena - scientific, technical, industrial, seasonal and other cycles, up to solar activity cycles.

Disturbing external influences also include local taxes, which the xCB does not regulate, as well as international agreements that limit the arbitrariness of the xCB.

From the results of Ray Dalio's study, it follows that in the early stages of a large credit-debt cycle, the economies of different countries demonstrate greater resilience. According to his terminology, there is “a lot of stimulus fluid in the central bank's bottle for the economy” in the early stages of the new cycle. According to our hypothesis, the extended Central Bank is able (having three management tools) to provide an infinite prolongation of the specific conditions of the beginning of a large cycle.

Issuing money without "interest bondage"

According to the conventional wisdom, the state (government) cannot be trusted to print money, as too much money will inevitably be created, leading to inflation or hyperinflation. If the state needs money, it can borrow it. Money can be given by those who have it, that is, the rich. Then this money will need to be returned, but with interest. New debts or tax revenues can be used to do this. The rich pay little to no taxes, so the poor (or descendants of the poor) will have to pay the debts.

According to modern monetary theory (MMT), a sovereign state can and should issue money to cover government spending, and that a large balance of payments deficit does not pose a danger to the economy. The only objective limitation in the issuance of money is the available production capacity and labor resources. With this approach, there is no concept of "public debt" and the cost of its service. (There may be debts to other states, so it is more correct to assume that there is no “domestic” public debt.)

With an expanded central bank that regulates tax rates, there is no need to sell bonds to raise money. In case of an overproduction of money and the threat of inflation, it is possible to raise taxes and destroy part of the tax revenue.

It can be assumed that there is an optimal level of "Balance of Payments Deficit", which is mainly balanced by private sector savings. (Apart from the private sector, the balance of payments depends on the balance of foreign trade, which is ideally zero.)

"debt-free money" does not generate bank interest income. This money flows directly into the real economy, bypassing the commercial banks - through the expenditures of the government and the population. This reduces the indebtedness of citizens, i.e. the need for credit.

These measures should curb the unrestrained growth of income of the "money mafia" without disrupting the economy and banking system. In addition, the welfare of the population will increase.

Economic crises and speculations

Some people use their money and even borrow money to speculate in shares, currencies, real estate or commodities or derivatives of these resources. In recent years, the liberalisation of financial markets has led to a significant increase in speculation. Moreover, many transactions are carried out by computer programs. These transactions can never bring any economic benefit, as one person can only gain what another loses. Moreover, speculative transactions are the cause of instability in the financial markets and the main cause of economic crises.

Participants in these games prefer to be called financiers rather than speculators. But some participants in these games have made large sums of money, taking some of the funds out of the normal economy and thereby harming that economy and all of us. And this is where politics has completely failed, because it does not consider these speculations either from the point of view of "economic damage" or from the point of view of "unfair redistribution".

To curb the speculative boom, governments impose taxes that make most short-term speculative transactions meaningless. Taxes on other transactions fill the national treasury. Unfortunately, tax laws vary widely from country to country, which leaves room for fraud.

Bank tax. Germany, for example, levied a 0.2% tax on the total value of financial transactions since 2013.

Taxes on stock exchange transactions may also vary from country to country depending on the type of transaction. For example, in some countries, taxes on long-term investments may be lower than those on short-term investments. Foreign investors may be granted preferential treatment.

The Tobin Tax is a global tax on financial transactions proposed by economist James Tobin in 1972. The idea behind Tobin's tax was to charge a small percentage on every foreign exchange transaction in the currency market. It would be ideal if the UN could control and collect this tax. The Tobin Tax must be imposed on all trading platforms on the planet, otherwise speculators will simply take their business elsewhere. This is the main reason why all attempts to implement the Tobin Tax have failed.

Of course, these taxes alone cannot prevent financial crises. Since the 2008 crisis, a number of measures have been taken to regulate financial markets, but the results have been limited. Financial markets are globalised, and if individual countries try to impose restrictions, this can lead to losses. However, the main reason for the delay in the fight against speculation is the lack of motivation of the political elite and the indifference of the public to this problem.

The cost of banking in our days is very low, and the government could provide free banking services to the people, such as paying utility bills, paying taxes, receiving salaries, internet banking and other services. Such a Social Bank requires no equipment other than computer servers. All transactions are made cashless over the Internet, so there is no need for office space. Citizens can do without cash as payments in shops can be made using smartphones.

The introduction of Social Bankcan reduce the cost of most monetary transactions to society and reduce the influence of the 'financial mafia'.

Abolition of cash

During the transitional period, cash transactions can be carried out by existing commercial banks. This option requires the customer to have an account with a commercial bank and to pay that bank for the service. The service in the Social Bank is, of course, free of charge, and the cost to the state of maintaining it is microscopic. At the same time, the usurious income of the commercial banks will be much lower, since the overwhelming number of transactions will go through the Social Bank.

The abolition of cash makes it easier and cheaper for the government to manage monetary exchange. In addition, non-cash payments are more convenient for the population and cheaper for businesses. At present, the population in many Western countries does not trust the government, so the abolition of cash is perceived as a threat from the state and a means of suppressing opposition.

Lending

The main function of commercial banks is to provide credit to commercial enterprises as well as to the population. Of course, the state can issue targeted loans for strategic purposes, but the risk of lending to the population and to the current needs of enterprises should be borne by the commercial banks. Officials cannot be trusted to lend because of the risk of corruption. Commercial banks, on the other hand, are liable with their capital for mistakes in lending.

Over time, commercial banks may be prohibited from providing services other than lending. Each loan is issued to the client's account at the Social Bank and the loan is repaid through the same account. In this way, all transactions go through the Social Bank.

"Rotting" money

Silvio Gesell proposed the use of money, which loses its value over time in the same way that other goods lose their value - for example, iron rusts and potatoes rot. He called it free money (meaning free of usurious interest). Such money is used only as a measure of value and a medium of exchange, not as a means of accumulation - there is no reason to accumulate money that loses value. Therefore, money will be spent, which increases the velocity of money, which in turn accelerates the economy. To reduce the value of money, a special tax on liquidity - demurrage - was introduced. Geisel proposed to reduce the value of money by 0.1% each week, which amounted to an annual "decay" of 5.2%.

According to Geisel, this eliminates the possibility of obtaining "income without services" through speculation and usury. Without usury, the effect of compound interest and the effortless accumulation of large fortunes would be impossible.

The existence of a state "social bank" allows the daily collection of demurrage, for example 0.014% based on an annual "depreciation" of 5.2%.

In the presence of government-controlled inflation, demurrage can be eliminated. In this case, the function of "rotting" money is performed by inflation, as it always has been.

Continue: Tax Reform