Debt Paradigm Shift
If the global debt contagion that we are seeing now is to be addressed effectively we need to completely rethink the economic models that we have been using for centuries. The existing economic models do not seem to be working for a number of reasons all of which need to be addressed simultaneously – to revive the global financial system.
I think that the nature of money has to be fundamentally changed – from the existing definition to a factor that will ensure that economic resources are optimally utilised i.e. money should be redefined as the thing that ensures optimal use of resources – by meeting the basic needs of the people.
For this to happen we will need to abandon the debt driven economic model that has driven so many of the poorer countries to their knees while making the affluent more so. Further Governments need to focus on reducing its footprint on the economy by reducing the effects of crowding out and give the private sector a greater role to play in employing factors of production effectively.
However, the Government does need to play a more active and crucial role in ensuring that scarce economic resources are utilised to meet the requirements of the people by regulating the manner in which resources are apportioned to different sectors of the economy to ensure optimal economic growth.
New role for banks
From this it follows that the role of banks and insurance companies will fundamentally change as they will not be able to sell conventional products as interest rate system too would have to be abolished with the elimination of debt. However financial institutions will still play a key role as the agents of the Central Bank to ensure that money supply is controlled so as to keep inflation in check.
So what will be the role played by banks? They will act as facilitators by analysing business processes and verifying economic value added and making advances of money on an interest free basis to those who require financing both companies and individuals. This will be according to the overall framework of the Government that will ensure that economic resources are being optimally utilised by meeting the needs of the people.
Then the question could be asked – how will the bank survive without any interest being charged? They will alternatively charge front end arrangers fees for financing businesses and individuals money requirements.
Insurance companies up to now have been organised and calculated Ponzi schemes – but for their future success they need to be able to effectively manage risks and spread risks in a way that benefits the economy as a whole. So the policy holder will now have a duel role as a customer and shareholder and benefit from the profits generated by the company in the years where he has not claimed any money he should be provided with a share of profits of the company and have a direct interest in the assets of the company. This unifying and goal congruence of different stakeholder perspectives will make insurance companies less vulnerable and more stable to meet global natural disasters such as El Nino or regional wars.
Similarly retirement funds too should be operated as insurance companies where the investor also becomes a shareholder and have a direct interest in the assets of the company. Making his retirement funds more liquid and also make stakeholder goals congruent.
Bridging the Government deficit
The Government will also levy a regulators fee on finance and regulation of the economy as this will form a major part of the income that will used to meet Government expenditure needs.
The taxation models will also need to be drastically changed by introducing taxes for excessive and wasteful consumption rather than penalising tax payers for earning more income. The taxation model should also encourage saving and investment while discouraging conspicuous consumption.
Also the taxation system will be increasingly reliant on indirect taxes as income taxes will gradually be abolished.
The necessity for government to borrow should be limited to projects/ activities that increase the economic value addition of the country as a whole or reduce wastage of economic resources. The net value added to the economy should be accurately assessed before the project is undertaken.
Government should ensure that prices of essentials such as food, clothing and housing are provided as a lower rate to the people by introducing the right supply side policies (and money supply policies). Also health and education services needs to be provided in a manner that ensures that overall macro economic goals of the economy can be met in the long term i.e. sacrifice short term consumption needs by investing in future infrastructure and development requirements.
New savings and investment companies
A question arises regarding what happens to individual savings? these need to be channelled to large venture capital firms that will invest monies in strictly regulated portfolio of businesses and industries as well as government projects – so as to ensure minimal losses and maximum recurring income in the form of profits and dividends and the income generated will be shared with the individual saver. Here too the the saver will have two roles as shareholder as well as deposit holder.
The New Money
The only really effective way to control inflation in the new economy will be to introduce money with intrinsic value such as gold or silver (or other material). This should be implemented by the New Economies in the long run by slowly abolishing the circulation of paper money.
