Money supply in TOP Tax system

TOP Tax system suggests that total money supply (real money and debt money/loan money) to be necessary for circulation in banks should be at the minimum level of 100% and at maximum level 110% of the value of GDP of the country. Out of this total money supply in the economic system, 99.7% of the money will be in dematerialised (non physical) form in the accounts of citizens, Governments and companies. Only small portion of money, equalling just 0.3% of the total money in the economic system, will be in physical form i.e. currency notes or coins. All high valued paper currency notes will be demonetised.   

A brief description of Money Supply in present economic system and the TOP Tax system

Money Supply in present economic system: - Money is classified as different categories like M, M1, and M2 and so on. The money in the banking system can be expanded over the initial reserve money due to expansionary monetary policy. The velocity of cyclic rotation of money in the economic system is erratic and not stable because of the extra added weight the loaned money carries in the form of interest burden. Here money is having both exchange value and storage value. The money’s volume is increasing by virtue of its stationary position in the form of demand deposits, savings deposits, bonds etc.  The carcinogenic growth of loaned money causes inflation. Here the high growth rate and inflation are inseparable Siamese twins. There is sizable physical money which helps tax evasion in generating black money. For example in India, there is an estimated physical currency of 10,72,020 crores with the public out of total money supply of 77,25,560 excluding fake currency in the country (As at 2012 - June 29 ). This physical currency is about 13.8% of the total money supply in the economic system. The unaccounted GDP, carried through unreported/hidden/shadow accounts with active support from physical currency, is assumed to be almost equal to the officially recorded GDP. The unaccounted cycles of 10 % physical currency are almost equal to the cycles of the remaining 90 % of the total money supply in the economic system. The non physical money, which has to honour the taxes, tax laws, accounting, auditing and tax returns, is having less velocity. The physical money, with its natural free flowing tendency, is choosing the smooth domain where it can escape from taxes, tax laws, accounting, auditing and tax returns to get greater velocity in its cycles. That means the total money in the economic system has two extremely different velocities - one for the physical money and the other for the non physical money. The exact volume of real money and loaned money cannot be known at any specific time instantly. The real money and loaned money are mingled together beyond recognition. So the exact values of the total money supply, the velocity and cycles of the money and GDP may not be available. The money supply and GDP values, that are being furnished, are believed to be off the mark.  The exact results of measures, taken by the Governments and Central banks from time to time to check inflation or to infuse fiscal stimulus packages to control recession, can be observed only after long time. The medicines and therapy, that are used to nurse the health of an economy, are basically trial and error methods.

Money Supply in the TOP Tax system

The functioning of banking system in TOP Tax system is totally different from present bank system. There will be only two types of money, namely real money and loaned money, in the TOP Tax system. The real money and loan money will be total money supply in the banking system. The value of the real money will be equal to 52.63% (minimum level) of total money supply in the economic system if reserve ratio is 10%. The remaining 47.37% of the money supply can be generated through loans. The real money would be at minimum level of 52.63 % and can increase beyond that. The total loaned money given by banks would be at the maximum level of 47.37% of total mondy supply (or 90% of total money supply) and can decrease below that. An increase in the real money beyond 52.63% means a decrease in the loaned money from 47.37%. The physical currency constitutes just 0.3% of the total money in the economic system. The remaining 99.7 % of total money supply will be in non-physical form in the banking system. There will be no interest rates on demand deposits, time deposits, bonds etc. The prime lending rates on loans given by banks will be just 2 to 4 % only. The loans will be given upon mortgage of movable and immovable properties and shares or on personal incomes. There will be no loans on deposited checks and demand drafts or other instruments of money. Here the money will have only exchange value and it will not have storage value. Money will be purely utilised as medium in exchange of goods, commodities, shares, physical and intellectual works. There will be absolutely no incomes on stocks of money. An individual will have to spend exactly what he earned, saved, inherited, donated or gifted. The cycles and velocity of the total money in the system will be even and constant.

TOP Tax system’s Main Savings Account MSA will have five folders for money, shares/stocks, bonds, derivatives, movable property, immovable property and family. The Sub Savings Account will have only one folder for money. The Corporate Account Number will have seven folders for money, movable property, immovable property, securities, raw materials and other inputs, man power, manufactured products. The first folder of all these three accounts will be used for storage and usage of money for personal or business or industrial purpose. For detailed usage of these accounts please see page number 15 to 22.

 In TOP Tax system there will be zero interest rates on time deposits, demand deposits, Government bonds etc. The prime lending rates will be just 2% per annum on loans up to 10 lakhs and 4% per annum on loans above 10 lakhs.                                                                                          

Top Tax system suggests the Cash reserve Ratio CRR permanently at 10%.

An individual’s first folder of Main Savings account contains his/her entire money got from earnings, savings, donations, inheritance and loans taken if any. This money is called liquid money. That means liquid money is both real money and loan money. The first folder also contains a subfolder called debt folder. This debt folder contains all aggregate loans taken by an individual from banks upon mortgage of his/her movable and immovable assets as recorded in the second, the third and the fourth folders of his/her Main Savings Account. The loan money is called Debt money. Similarly the borrowings of money (loans) for industries run by corporate companies or public companies will be recorded and maintained in the sub folder called Debt money folder of Corporate Account Numbers (CANs) of those companies. The total loans/advances given by all Banks (recorded as Debt money in Dept money folders of MSAs and CANs) should not be more than 47.37% (if CRR = 10%) of the total money supply/liquid money (money which includes both real money and loan money) in all MSAs, SSAs, CANs and Banks’ own capital money.   The total money (liquid money) recorded in MSAs, SSAs and CANs belonging to people, banks, companies, institutions, organisations and Government is the total money supply in the economic System. The debt money/loan money recorded in the debt folders of MSAs, SSAs and CANs is loan money in the banking system. The total liquid money minus the debt money is equal to total real money. The exact figures of total money supply, real money, loan money and variations in demand for loan money in the economic system can be obtained at any specific time.                                             

             The money folder of Bank’s Account will have its capital money and profits. It is called capital money/fixed money. It is called as fixed money because it cannot be given as loan as real money. The bank’s capital money will be used to pay salaries and towards other operating costs of that bank. All the loans given by it will be recorded in another sub folder called loan money folder. Its numerical figures should be in red colour. Every time the bank gives loans, the Bank’s capital money/fixed money should not be changed. But the given loan money will be added to the Bank’s loan money account in loan money folder. Correspondingly the loan amount will be added to the liquid money account of MSA or SSA or CAN, who has taken that loan, and at the same time the loan amount will be recorded in the Debt money folder of the same MSA or SSA or CAN. When a loan is repaid, the principle amount of that loan will go in to the loan money account of that Bank account and loan amount in red colour decreases by the repaid loan amount. But the interest amount of that loan should be credited to the Bank’s capital money/fixed money. Similarly whenever a loan is repaid through any MSA or CAN the paid amount will be decreased from both the liquid money account and debt money account of the same MSA or CAN. Please note that when Bank(X) gives loans, its capital money/fixed money would not change but increases when interest on loans paid to it, and decreases when Bank(X)’s salaries and other operating costs are paid. Bank’s salaries and other running/operating costs should be paid from the capital money/fixed money of the Bank’s Account.  So the capital money/fixed money minus the initial capital are Banks profits. If the capital money/fixed money in the bank’s money folder are less than the Bank’s initial capital investment that means the bank incurred losses.                                                   

                  The TOP Tax system suggests CRR (Cash Reserve Ratio) to be around 10%. The total loans/advances given by a Bank(X), recorded in the loan money folder of Bank’s Account , should not be more than 47.37% (if CRR = 10%) of the total money stored in all MSAs, SSAs, CANs operated by all its branches, and Bank(X)’s own capital investment/liquid money and profits (if any). The total money/liquid money in all MSAs, SSAs and CANs invariably includes the real money and loaned money generated by the Banks. But the Bank’s capital money/fixed money is purely real money. This total money will keep changing continuously. So the average total money of all accounts for one year of all branches of that particular Bank(X) should be taken in to account while giving loans. This ever changing average total will be automatically available every day by computer software system itself.  At the same time the total loaned money/advances of all the branches of Bank(X) should not exceed nine times the value of that particular Bank(X)’s Capital money/fixed money. At no time the Bank(X)’s loan money/advances in the loan money folder should exceed nine times the bank(X)’s capital money/fixed money, and more than 47.37% of the total money (0r 90% of real money) in all MSAs, SSAs and CANs (operated by it) and its own capital money/fixed money. The total loans/advances (recorded in red colour in loan money folders) given by all banks throughout the country should be equal to all Debt money/loan money taken by individuals and companies recorded in Debt money folders of MSAs and CANs.  The possible cash reserve ratios and corresponding loan ratios to total money are as follows. If CRR = 5%, then loan ratio = 48.71%. If CRR = 6%, then loan ratio = 48.45%. If CRR = 7%, then loan ratio = 48.19%. If CRR = 8%, then the loan ratio = 47.92%. If CRR = 9%, then loan ratio = 47.64%. The maximum loan/credit that can be lent as loan by banks on the real money 100 will be 90 and the total money in circulation will be 190. It will be called as liquid money. In other words when CRR = 10%, then the total credit that can be generated, lent and added to the real money will be up to 90% of real money. It is the self money supply of banking system suggested by the TOP Tax system.

            The total capital money/fixed money of all banks in the country should be at least one ninth of the total loan money recorded in the debt money folders of all MSAs, SSAs, CANs, and one ninth of the total loan money recorded in red colour in loan money folders of all Banks. As the bank’s profits increases, the capital increases. The bank’s profits will be known every day, every hour and every minute even to a layman. The maximum profit a Bank(X) with all its branches can achieve in a financial year = (the average annual simple interest 3 % x 9 times of its capital money) + registration charges – Operating cost. That means, profit = (27% of its capital money) + registration charges – operating cost. The minimum profit a Bank(X) with all its branches can achieve in a financial year = (simple interest 3 % X 0 .9 times of its own capital money when no real money is available in all MSAs, SSAs and CANs operated by it) + registration charges – Bank’s operating cost. So the profits depend upon the total money available in all MSAs, SSAs, CANs, the bank operates, and Bank’s own capital money. This is the self regulating system of money supply in the economy. The Bank’s cash reserves, to be lent as loans, decreases if real money in all MSAs, SSAs and CANs operated by it decreases. There will be slight variation in total money supply in the banking system at the end of every day. When loans are repaid to the banks the total money supply decreases and money supply increases when loans are given by banks. That means when loans are repaid the money will get out of the money supply and loans are given the money rejoins the money supply. Total Money supply will get adjusted itself in the banking system to the needs of changing demand for loans without depending on the external regulators. There will be no need for Central Bank to borrow money from commercial banks to drain out excessive money in the banking system. Banks will not borrow from Central Bank and vice versa. There will be no repo and reverse repo rates in TOP Tax system. In TOP Tax system loan money will never be metamorphose into real money, unlike present system’s money which is transmuting into real money over period of time. Here loan money is always loan money and real money is always real money.

If total real money in all MSAs, SSAs and CANs = P, CRR = 10%, annual average simple interest = 3%, operating cost of banks = Y and total registration charges of all immovable and movable properties = X, then the total profits per annum got by all Banks in the country = [(P-P/10) X 3/100] + X –Y. That means total profits = 27P/1000 + X – Y. That implies profits = (0.027% of P) + X - Y. In simpler terms the profits for all commercial banks in a country is equal to total loan money x 3/100. These maximum profits will have to be shared by all Bank operators in the country. Each Bank operator’s profit will depend up on the real money available in all MSAs, SSAs and CANs it operates. So, the Bank operators will vie with one another for more accounts by providing prompt and quality services to its customers. Real money means total liquid money minus total loan money/debt money given by banks. For example at reserve ratio of 10%, for each 100 of real money owned by people, Government, banks and companies, there will be loan money of 90 at the maximum. That total money supply can reach the maximum of 190 depending upon the demand for loan money. The real money percentage will be at the minimum of 52.63% of total money supply and loan money percentage can reach up to 47. 37% of total money supply (or 90% of real money if reserve ration 10%) if there is enough demand for loan money. The bank profits will depend upon this percentage of loan money which may vary slightly from time to time.  Please see page number 38 to 41 for possible operating cost of the Banks and their profits. Bank’s capital investment cannot be withdrawn from the bank unless it is exceeded one ninth values of its total loans given.  In other words, only the extra money, which means profits, over the initial capital investment, can be withdrawn from the Bank by its promoters. TOP Tax system ensures that money supply does not get stagnated in the financial system as excess reserves because of these following factors. The first one is the Profit Tax which constantly pumps money back in to the financial system. The second one is the limited paper currency which totally removes black money, a stronghold of stagnated and hibernated money in recession periods. The third factor is low interest rates and faster sanctioning of loans because all components of money and wealth are recorded, stored, maintained and used in the same MSAs and CANs.

             Every year, additional real money equalling 52.63% of the value of the growth in the GDP minus the value of the growth (if any) in the exports when compared to last year, should be added to the Government account (out of thin air) at the time budget presentation to check deflation and recession. That means there will be fresh real money originated from Government’s account added to the money supply every year. If there is no growth rate there will be no fresh real money and if there is negative growth rate the reserve ratio will have to be increased. This scenario will never happen in TOP Tax system unless there is unforeseeable calamities like massive earthquakes, third world war etc. In TOP Tax system there will be only two regulators – Cash Reserve ratio and TOP Tax, to maintain smooth functioning of economic system. The major portion (50%) of this added money should be allocated towards pensions to senior citizens who have no or paltry incomes. The remaining portion shall be allocated to welfare schemes, health care services, and education and infrastructure sectors. Once this real money is added and merged in the circulating money, loan money up to the maximum of 47.37% of the value of the growth in the GDP minus the value of the growth (if any), will also be generated through loans as debt money/loan money by the banks and added to the circulating money in the finance system. The banks’ profits will increase through interests on this additional loan money every year. TOP Tax system suggests that total liquid money (real money and debt money/loan money) to be necessary for circulation in banks should be at the minimum level 100% and at maximum level 110% of the value of GDP of the country. GDP is classified into two types. One type is consumed within one year and non re-saleable. The other type of commodities will be converted into re-saleable assets like movable and immovable properties and carried in to next financial year.  The money supply, equalling 110% of the value of GDP, will meet the need for exchange of total GDP produced in a year in addition to the already existing movable and immovable properties, shares, gold, and ornaments which are accumulate over the years. Assuming that each commodity/service is changed hands at an average of three times in the consumer, retailer, dealer and manufacture chain, the cycles of the total money supply in the circulation will have an average of four to five cycles per year.

The revenues from 4 % TOP Tax on all money transfers from one account to another account will go to State and Centre’s combined account (SACCA) in each state. 3O % out of these revenues will go in to Central Government’s account. These flows will be continuous and unabated as long as bank operations continue during the day. In the present system all banks have one common weekly holiday apart from national holidays. But in TOP Tax system while half of the bank branches will have one weekly holiday, say Sunday, the other half of the banks will have another weekly holiday, say, Wednesday, The incoming tax revenues will get transferred from SACCA’ s and Central Government’s account to various ministries’ accounts  of States and Centre according to percentage allocation made in the budget. As said earlier             every year, additional real money equalling 52.63% of the value of the growth in the GDP minus the value of the growth (if any) in the exports when compared to last year, should be added to the Central Government’s  account (out of thin air) at the time of budget presentation. There will be also revenues from sale of natural resources like minerals, ores, air waves, etc, in addition to revenues from PSUs and other assets. Apart from these revenues the Central Government or States can borrow loans from banks upon mortgage of Government assets. The TOP Tax system suggests that this statutory liquidity ratio can be at the maximum of 24%. The Government spending will be equal or less to its total revenues and there will be no fiscal or revenues deficits.  From these accounts the funds will be transferred to various departments, sections, institutions and from there the funds travel up to village level and finally reach people in the form of welfare schemes like, education, healthcare, sanitation, monthly rations, pensions, infrastructure facilities and all other services. The incoming revenues and outgoing expenditure will be fully transparent as clear as crystal. This way the TOP Tax system will make the budget preparation of any country to be easy, simple and time saving exercise.

  Foreign currency exchange- when people need foreign currency for tours, education and imports or FDI goes out, the money will be decreased from his/her MSA or CAN in case of companies, or FDI and the same amount will be increased in Government or Central bank account and its foreign currency will be decreased from the same account. When people (who works there) or companies (which exports ) or FDI bring foreign currency, the foreign currency in Government or Central bank’s account increases with decrease in money in its account while the money in those accounts (who bring money) increases.

         The total money (liquid money), Debt Money/loaned money, shares/stocks, movable properties, and immovable properties of individuals or industries will be stored, recorded, maintained and transformed in the same accounts of MSAs and CANs. The movable and immovable properties can be mortgaged and transformed in to liquid money for personal, business or industry purpose. Since all the money, debts, shares and assets are recorded, linked and covalently bonded together under different folders in the same Main Savings Account in the case of individuals and in the corporate account numbers in the case of companies; the process of loan sanction will be faster and smother. There will be no defaults on loans and nonperforming assets called NPAs. Once the loans are repaid the assets will be released from mortgage instantly. The total real money and Debt money/loan money, the real assets and mortgaged assets of an individual or a company can be easily distinguishable.  In the present system money, shares, movable and immovable properties are recorded and maintained by different institutions, departments and agencies. Loan money/advances are maintained in separate accounts. So the real money and loaned money/credit money are mingled together beyond recognition and not easily distinguishable by cursory study of the accounts. The present system’s multiple generation of money supply through loans on loans is actually dwarfing the real money and causing uncontrolled inflation and accumulation of money in a few pockets.    Read full article from.....

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Posted by VIJAYA KRUSHNA VARMA