A solution : Central Bank generated Basic Income balanced by a flat rate Financial Transaction Tax

I've been thinking more about how best to fix the system.

I've already argued that Central Banks could inject debt-free money directly into the economy via an Unconditional Basic Income for all citizens. I've also argued that Central Banks should have the ability to remove excess money from the system via a universal flat-rate transaction tax on all transactions that use their currency.

Take the example of the European Central Bank. In this case, the idea would be for the ECB to create electronic accounts for every citizen in the Eurozone, and then to add a fixed amount per month to the accounts of every man, woman and child. With 333 million citizens in the Eurozone, a budget of €1 trillion a year would allow everyone to receive around €200 a month - i.e. €800 for a family of four.

In parallel, the ECB would also be given the right to impose an FTT on all Euro-denominated electronic transactions, wherever they occur in the world. Similar mechanisms would apply for the Bank of England (in the case of Sterling transactions), the Federal Reserve (for transactions in US dollars, and so forth). The rate of the FTT would be continuously adjusted to remove the desired amount of money every month. With around €2 quadrillion in euro-demoninated transactions a year, an FTT of 0.05% would allow the ECB to remove €1 trillion a year.  Note that it would be trivial to continually adjust the rate month by month, day by day, or even hour by hour to ensure that money was removed at precisely the rate required.

Here's the new idea. I propose to fix things so that the Central Bank is required to set the FTT rate at whatever is required to completely balance the injection via the citizens' accounts.  Thus, if the ECB injects debt-free money at €1 trillion a year (i.e. around €200 per month per citizen), it would be required to set the FTT rate such that the same amount of money is removed every month.

The result would be that the system would be totally safe. There would be zero possibility of causing inflation, because the money supply would actually be unaffected.   This would effectively demolish the standard argument invoked by the banking lobby that money creation without debt could run the risk of generating inflation.

It would also totally demolish the other main argument that you hear - namely that allowing politicians to get their hands on the money creation process would be an invitation to corruption. It's true that if a central bank were to hand hundreds of billions of money directly to governments, it would be difficult to ensure that the politicians would not be tempted to buy votes, or pay the mafia.  That argument completely disappears if the Central Bank is used to push new debt free money directly into the economy via citizens. It would be extremely difficult, even impossible, to manipulate that system in favour of particular interest groups.

You might be asking yourself, what's the point of injecting €1 trillion into the economy every year if you immediately remove that money via a universal financial transaction tax? Well, think about it.  Although the FTT would be absolutely universal, and paid by absolutely everyone whenever they make a Euro-denominated financial transaction, the main people who would be paying the tax would not be the ordinary man in the street. When the €200 arrives on his or her account, they would pay 0.05% (i.e. 10 centimes) to the ECB. Likewise, when that money is spent (by drawing out cash, paying with a credit card or cheque, or by using a direct debit), they would pay another 10 cents - a total of 20 centimes.  In contrast, the high frequency traders who are shifiing $5.3 trillion around the foreign exchange markets every day would end up paying proportionately far more.

In other words, without rigging the system, it would naturally be those in the financial sector who have nothing better to do with their money than speculate that would end up paying the lion's share of the €1 trillion a year in FTT. But of course, the move would not make speculation illegal - just slightly less profitable.  The traders (and their computers) would simply have to add the extra costs into their algorithms. No big deal.

But the real beauty of the idea is that, although on the face of it, you might think that pushing €1 trillion a year of money into the economy at one end, and then removing the same amount at the other is neutral, it is not neutral at all.

The point is that while the money that is being removed at the top end will currently be almost entirely debt-based money - created by commercial banks out of thin air, and for which we are all forced to pay interest - the new money being injected via the Citizens' income will be debt free. 

Progressively, over a period of several years, the money in the system will gradually change from being debt to what I would call real or honest money.

We know that the Eurozone countries debt levels currently exceed €24.5 trillion (taking together household, business and public sector debt). You might think that the situation would only be fixed once €24.5 trillion of debt-free money has been injected. But this would be wrong. The fact is that a €100 note can be used to pay off hundred of thousands of euros worth of debt by using it over and over again.

So, I suspect that even a relatively modest €1 trillion a year of new money could actually allow debt to be reduced far more quickly. Remember that Mario Draghi (president of the ECB) created over €1 trillion in the space of a few months a couple of years ago, so there is actually no real problem here. He could do it. It wouldn't even break the terms of the Lisbon treaty.

Why don't we do this straightaway? The answer is simple. The financial lobbyists who defend the interests of the commericial banks and who want to keep their monopoly on money creation will do everything in their power to keep their gravy train on the rails for as long as possible. When the financial sector can suck over 3% of GDP out of the economy every year in the form of interest payments on public sector debt alone, they will not be at all happy with the idea that anyone could introduce a way to inject debt free money into the system.

But I can see no reason whatsoever for not introducing a system where Central Banks inject debt-free money into the economy as an unconditional basic income for all citizens and then remove the exact same amount of money by imposing a universal financial transaction tax.

Fixing the ratios so that the total money supply remains stable removes one of the few remaining objections that the financial lobbies could raise.

If you can think of any other problems, do let me know.

And if there is anyone out there who would like to defend money creation as interest-bearing debt by commercial banks, feel free to post your defense here. I'll be happy to read your arguments.