8 BUSINESS FINANCE

COMMISSION OF ENQUIRY

World-wide

A new structure for financial stability

Proposed Agenda 2013

Drafted in Collaboration with

Graham D Hollick FCIS FIBSA CeMAP and others

By The Proposer And Chief Researcher

Edward C D Ingram

DISCUSSION TOPIC D

AND SUMMARY A-D

1.1. Similar funding should be made available to businesses. There are similar advantages. 

1.2. One advantage of index-linked debt is that a business does not need to be making a profit to get a tax subsidy on its indexed borrowings. 

1.3. And such tax relief as is given on the true interest (cost) element can be given to lenders for passing on in the form of a net-of-tax, reduced interest rate. (Recommended). 

1.4. The taxation playing field is more level, and less subsidised, but more can be borrowed, (better collateral security and lower deposits lower cash outflows). 

1.5. Early cash outflows can be made much lower and easier to manage during a start-up, or a business expansion period, by use of the indexation and use of ‘true interest only’ funding in the initial period (or even a true interest roll-up). 

1.6. For this reason, in some cases, more can be lent per unit of current income. Details will be looked at and discussed. 

1.7. It may be seen (we will see what people think), that the ‘roll-up of interest’ effect of indexation or the roll-up of the whole interest, can be less risky than the current lending model alternative where repayments can start high, and where balance sheets and budgets become difficult to manage. This would be further helped by the expected greater stability in the overall economy which makes profit forecasts more reliable, and by the expected greater stability in the value of collateral. 

1.8. The removal of tax on AEG% interest, which currently distorts demand to an extent, and which is largely funded by taxing AEG% interest on savings and bonds, (another distortion which will cease), is likely to impact on interest rates by reducing them somewhat. 

1.9. Another point is that, as currently operated, tax relief is not provided by the use of a net-of-tax interest rate. It is only available on the gross interest when a company is making a profit, which is a destabilising arrangement when a company fails to make a profit. 

SUMMARY OF 

SECTIONS A - D ABOVE 

1) The feared ‘wealth effect’ will be muted, the business cycle will be smaller, the domestic economy will become easier to manage, ongoing growth more easily sustained. Wealth will be safer, budgets safer, arrears rates will occur mostly from redundancy and from the usual hazards, rather than from monetary policy raising interest rates. The latter will slow or increase borrowing more uniformly than at present across all borrowing sectors with significantly less ‘tilt’. 

2) Aggregate spending patterns will be safeguarded even if inflation takes hold, and / or as well as when interest rates have to rise to rein in inflation. 

3) Normally spending patterns get altered: 

i. As the nominal interest rate rises, spending is diverted out of the economy into faster debt repayments which are not re-cycled easily as borrowing demand has by then slowed. 

ii. The balance of the economy tilts more than it slows, and it tilts most in the housing sector. A balanced economic intervention to aggregate demand is always preferred because changing spending patterns always produces an imbalance in economic activity which reverses later. 

iii. It is costly to unbalance spending. That was well illustrated by the oil price correction in the 1980s. As the price of oil tumbled to $11 per barrel the oil producers cut back on their spending. Economists (not Edward) were surprised to see a slowdown which their mathematical models failed to predict. 

4) It seems to be best to be wary of mathematical models. First, look at human behaviour and you will predict what will happen. Then maybe you will know what mathematical model to construct. Experience has proved this to be right time after time as described in Edward’s related draft books, MACRO-ECONOMIC DESIGN 200 and 201. Many times Edward’s forecasts, based on this approach, proved better than mainstream forecasts in the 1970s – 1990s. This enabled his clients’ investments to grow almost constantly despite a 25% peak in the inflation rate and a 75% dip in the stock market’s 30 share index in the early years. FIG at right: log scale 15% p.a. tax paid growth. 

Markets were not efficient because too often the economic models and forecasts were wrong. 

5) It is thought that when people are assured that their wealth and their costs are under control, economies grow because people want to buy more goods and services. Then, if there is nothing to stop them from doing this, unemployment will fall and economic growth will be achieved, except or until, people borrow too much and have to cut back. This is one thing to watch.

ALL READERS AND COLLABORATORS

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eingram@ingramsure.com

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