Taking the debt out of money creation

If, as expected, this method of financing new assets proves successful then governments may be needed to stop the runaway creation of money for zero interest loans. Governments may need to put a cap on how much money is created this way and to determine which areas of the economy should be encouraged with such loans. This is what governments now try to do through diverting taxes to particular areas of the economy or through schemes such as emissions trading. A move to create money through investment in productive assets will mean less need for these other ways of encouraging investment.

Will it stabilise the value of money?

If it is done on a grand scale this method will stabilise the money supply because zero interest loans to create new assets will become the preferred method of funding the creation of new productive assets and hence the preferred method of increasing the money supply. Purchasing existing assets will still be funded by credit money but asset bubbles are less likely to occur. Let us take the example of housing. If some new houses were financed through zero interest loans, where the loan had to be repaid immediately the house was sold, then it becomes less likely that people will pay inflated prices for existing houses because it will be cheaper to build a new house.

The price of money for loans (interest) will act as prices are meant to act - as a signal to the market to produce more money. If the price rises, governments can encourage money and asset production by guaranteeing the money created for zero interest loans for worthy community projects that have little economic benefit but large social benefit.

A major impact is that it will become less attractive for money traders to speculate in money values because the price of money will stabilise and traders will know that the government can easily turn on and off the creation of zero interest loans. Governments will be able to defend their currencies and stabilise value as they have a method of increasing supply if demand for money increases or decreases.

Doesn't this require massive changes to the financial system?

It requires NO changes - only the creation and monitoring of zero interest loans. Everything else can remain the same.

Where does a government start to encourage zero interest loans?

Any area where a government feels there is a need for investment can use this approach. Perhaps the most pressing example is the need for investment in ways to reduce greenhouse gas concentrations.

But won't everyone want zero interest loans?

The right to have a zero interest loan is of value. The simplest form of rationing is to allocate the right equally to anyone who wants to apply and to allow the right to a loan to be tradeable. The other form of rationing is to require a higher proportion zero interest deposit before the loan is given or to increase the amount of money to be returned to the bank for the loan.

Are there any examples of this approach?