Adaptation of the '69 proposals

Significance of critical damping and time lags

The designers and owners of most systems prefer their property to be stable when in operation.  A clothes washing machine should preferably not jump around, even when washing rather difficult loads, nor should a car when being driven along a bumpy side road.  Instead, the designer designs most items for high stability.  One concept of stability would be to rate it according to the rapidity with which any disturbance dies away.  If, for an illustrative simple example, one had a fairly heavy ball able to move vertically on a length of elastic.  Then, when moving up and down on the elastic and operating in air, the movement would last for a long time as it would continually pass through and overshoot when reaching its equilibrium position.  It would therefore count as unstable (although not to the extent of starting to oscillate of its own accord).  If, on the other hand, the ball and elastic were operating in cold treacle and if the elastic were very flexible, the overshoot would have been eliminated but the movement from an initial displacement would still last for a long time, because the treacle would prevent the ball from moving at even a moderate speed towards its equilibrium position.  So again the system would count as unstable.  If, however, the ball and elastic were operating in say a thin oil, and if for the present illustration one could vary say the temperature and so the viscosity of the oil, one could arrange for the system to be such that the drag from the oil just eliminated the overshoot.  That would be the situation where the drag from the oil just brought the speed of the ball to zero as it reached its equilibrium position.  Analysis shows that such a system recovers from its disturbance in the shortest possible time.  The system therefore has its greatest possible stability.  And if the system were an economy, it would recover from a recession in the shortest possible time.

With the ball on the elastic the oil provides damping.  When the damping is at the critical value which just prevents overshoot, the damping is called "critical damping".  Analysis is mostly straightforward for a so-called one degree of freedom system such as the ball on elastic - called "one degree of freedom" because one quantity, the height of the ball, completely determines the geometry of a given system.  Now the economy as treated in the '69 letter has two degrees of freedom, the level of prices and the amount of goods and services available for sale.  The system can still have critical damping, when there is just no overshoot.  Critical damping is then still found to give the greatest possible stability and critical damping is the optimum as targetted with the present control.  However, whereas with one degree of freedom it is found that in total there are two modes of response and the two modes automatically become identical with each other at critical damping, with the two degrees of freedom of the economy it is found that there are three modes of response and then it is found also that for our purpose a special condition has to be satisfied between the constants of the control. The special condition has to be satisfied for the condition to be attainable where all three modes of response are identical with each other, and where simultaneously the total damping is critical, and where the stability is the greatest possible.  It is that special condition, together with the more ordinary critical total damping requirement, which has principally determined the values for the optimised control as quoted above.

Now given an economy and a control with critical total damping as just discussed, it is possible to vary the intensity of all the actions of the control and still maintain critical total damping, provided the various conditions just discussed are kept satisfied.  The stronger the control actions are made, by increasing the values of the coefficients, the more rapid will be the recovery from say recession, and the closer will be the control that is exerted by the control on the economy.  However, that rapidity and close control will be subject to there not being other limitations brought into effect by the high strength of the control.  The values that have been suggested above have therefore been based on reasonably the largest values which seemed to the writer to be reasonably likely to be attainable without difficult side effects, but the situation would need to be monitored:  a single set of numerical calculations made by hand by the writer prior to the '69 letter showed that with small time lags an initial disturbance was brought to zero to perfection without overshoot in 16 weeks.  In the calculation prices and stocks were taken to be measured twice each week and the subsequent change to the money in circulation was taken to be made with a time lag of half a week.  The result of the calculation seemed to the writer to be highly satisfactory, although greater time lags probably needed to be possible, but were not tried.  The most difficult time lag seems likely to be in the spending of the free issue of money. On the "Home Page" it was suggested that the money would be issued to a Rota of people who would be likely to spend most of the money as an extra within say 2 weeks. That could be consistent with an average time lag of under 1 week.  Now with a strong control and a short recovery time the time lags need to be correspondingly short - the time lag would need to be kept less than some small proportion of the recovery time.  In general, therefore, the strengths used in the control and the time lags achieved by the operators of the control need to be kept in balance.  In the present situation and with the limited evidence available it is suggested that the optimum strengths proposed above and the Rota proposed on the Home Page should both be accepted and put into operation, until experience has been gained, until the real time lags have been monitored, and preferably until the total situation has been tested in a modern computer simulation.  A close watch needs to be kept on time lags and encouragement given to keep them small, but certainly the start of the free money issue based on the above principles should not be delayed while computer simulations are attempted.

A summary of the derivation of the optimum control is linked below: "To optimise the control".

Anticipation of the effects of the control - and public dialogue

In any such control system the players in the economy may be expected to endeavour to anticipate the control.  For the present control that has the effect of increasing the speed of action and the stability of the control, and to some extent offsets the effects of the time lags just discussed.  The staff guiding the control would maintain a public dialogue and would give full explanations of plans and progress.

The programme - the fastest possible recovery from recession of any method and the greatest possible subsequent growth rate.  The secret of rapid growth
 
The initial nominal objective would not be to obtain say a constant average price level or a specified inflation, as the recession has already caused substantial price reductions.  For example, the FT in early December '08 reports average price reductions for cars to be about 25 to 30%.  With such a capitalised and streamlined industry such price reductions could be considered sufficient to cause the collapse of even the global car industry - in a short time.  After the collapse of a single global industry much worse possibilities could occur.  The staff guiding the control would at first therefore aim to achieve suitable increases in prices, monitoring the changes across the economy, in order to return most organisations to profitability as soon as possible.

Now the greatest financial and political load from the recession as it affects the government and taxpayers is currently, April '09, predicted to be from the reduction in tax receipts and the increase in benefits, with both effects as caused by unemployment and short time working during the recession and also during an assumed slow recovery from the recession.  Commentators consider that the load may be greater than successive governments can bear.  The load would decrease rapidly if there were a faster cure for the recession and faster growth after the recession.  Fast recovery and fast growth are therefore highly desirable.  There is a secret to fast growth.

The control discussed above based on the '69 letter adds money into circulation and arranges for it to be spent as an extra mostly within 2 weeks, with the proportional amount of money added per week being one times the proportional amount by which the average price is below its nominal target.  Also prices will be monitored very frequently, as will be discussed below.  If, therefore, the people in the economy maintain the average price level just slightly below the nominal target, say by 0.2%, then the control would expand the working level of the money supply by 0.2% per week, or by approaching 10% per year.  Similarly, if inventory were maintained 0.8% above nominal target there would be another increase of 10% per year.  So, with prices 0.2% low, continually, and inventory 0.8% high, the working money supply would be increased by 20% continually per year. Moreover, GDP must then also increase by something like 20% per year as most of the extra money in the economy is actually spent as an extra within 2 weeks of it's issue and that extra money must then remain active in order to produce a replacement for further sale.  Such a result will only happen if the economy is capable of producing the extra production and of doing so at the required price.  If, however, the economy does do so, then the greater production will almost always bring its own economies (current Far Eastern growth is the partial exception that proves the rule).  Consequently, the staff of the control maintaining the dialogue with members of the economy would explain these arguments and produce a tension encouraging all people and organisations to expand production - in volume and in type - in the knowledge that, as an average over the whole economy, the whole of their production would be purchased, without limit, provided prices are continually maintained very slightly below nominal target and inventory slightly above nominal target.  Recovery from the recession and growth after the recession would therefore become relatively fast, and also the fastest possible.  This route is followed as soon as highly unprofitable prices have broadly recovered to a profitable level as mentioned above.

Additional provision of credit today; a second stimulus

In order to cure the present shortage of bank credit the writer proposes that the government provides cash (newly printed money) by the side of smaller amounts of credit provided by an ordinary commercial bank.  The commercial bank would administer the lending of the total amount of the money.  There would be an agreed fixed proportion (the same for all the loans in any one contract) between the bank's contribution and the government's contribution, and the bank would take a fixed higher proportion of the net income as management fees.  The government could have such an arrangement with each of several banks.  The resulting effect could be a major contribution to the cure of the recession. It could directly assist industry.  It could also assist the financing of car purchases.  It would be controlled and monitored as part of the main control based on the '69 letter, and it would be given the same priority as the free money issue.  As the loans would give a two-way movement of money the arrangement would be ideal for dealing with any required negative increases in the money in circulation.  For the more usual situation requiring positive increases in the money in circulation the staff guiding the control would decide at any time on the most appropriate balance between the free money issue to the Rota of people and the loan issue made in conjunction with one or more banks.

The arrangement could be particularly valuable where the borrower has say an important position in production, but the recession has lowered his credit rating - as the printed money component of the loan need not carry interest.  The arrangement would very gradually be withdrawn after the recovery from the recession.

Bankruptcy of banks
 
Currently when a bank reaches the condition of bankruptcy the balance of factors is likely to be the exact opposite of the balance for any other bankruptcy - as the ordinary routine business of the bank would be highly profitable and the bankruptcy would only have been brought about by its excessively high leverage working on the progressive deterioration of its excessive toxic assets.  Consequently the central government would rule that all of its debt would be restructured to ordinary voting shares at the current market price and the bankruptcy avoided.  In this way mountains of debt would be eliminated, the rescued bank would become much stronger because of the removal of excessive leverage, and the costs to the government would be nothing.   The resulting great increase in the strength of the bank would be expected to cause an increase in the share price, despite the dilution, so that the previous creditors would benefit from the restructuring.  The payments system of the rescued bank would be required to be maintained for at least a minimum period after the rescue, either directly within the new structure or by sale to another operator. 

Retail stocks and inventories
 
The use of the phrases and words "retail stocks" and "inventories" requires interpretation:

The 1969 analysis was for the maintenance of a stabilised situation.  Consequently the variations from complete constancy were small.  Also, computer stock control would not have been general practice.  When, therefore, say a small decrease occurred in purchasing, and before the highly stabilised and fast reaction national control had corrected the purchasing, the purchasing decrease would have caused a small increase in the stocks for sale in at least a modest proportion of shops.  Consequently the level of the retail stocks for sale would have been a good parameter.  In today's situation, however, the parameter needs to be broadened to include inventories earlier in the supply chain, short time working at the manufacturers, and - a different requirement - the situation in "services".  In services the inventories equivalent are in a sense negative, in the sense of spaces in order books.  All these effects introduce uncertainties.  Fortunately, however, the greatest uncertainties in the interpretation of the monitoring are early in the treatment of the recession.  At that stage the main requirement is for a substantial increase in purchasing, rather than for great accuracy.  The accuracy will more readily be homed-in on later in the treatment.

The actual carrying out of the monitoring is discussed in the next section, immediately below.

Monitoring of prices and inventory

Initially a frequency of monitoring of once per week is probably suitable, increasing later to several times per week.  Co-operation would be requested from all commercial organisations operating computer inventory control.  Each organisation would send by email to the control's computer a daily print-out for each branch, showing prices, inventory and inventory relative to judged optimum, the corresponding changes, the typical throughput, and a multiplication product related to change and throughput, all for each item.  The multiplication product quantity would be in order to avoid difficulties from small differences of large quantities.  These arrangements would allow changes in average price level and total inventory to be produced automatically each day.  The commercial organisations would not disagree with control staff making spot checks, and would be rewarded by public reference to the co-operating organisations.  The resulting data would be crude, but, given some data cleansing and correction, it would be adequate for the initial operations and would form a good base for the final system.  A start on the money issue could be made using even cruder data, in order to get moving rapidly.  So far the present crisis has repeatedly become worse when things were thought to be better.  Action is therefore suggested on a much more rapid time scale than appears to be planned at present. 

Imports and exports - and a third stimulus
 
With the system as advocated in the present discussion the extra purchasing may buy more imports than home produced products.  That is a fortunate situation because, in 2008 and, so far, early 2009, we have involuntarily caused a drop in our imports, to the extent of causing problems for our trading partners.   Consequently we need to be broad-minded and accept that some of the effect of our stimulus will be helping to re-establish those imports and so assisting our partners.                  
 
In the long term it seems to the writer that we should pay our way in the world with a properly balanced trade, that is, no deficit, when services are included.  However our trading partners may prefer us to spread the transition to a balanced trade over a period of say another two to three years.  During the transition period, in order gradually to achieve a full balance we should reduce our government borrowing and we should also avoid the situation where low Bank Rates cause inappropriate borrowing on mortgages.  Once a specific target profile of a reducing trade deficit has been agreed with our trading partners any remaining difficulty in achieving the deficit profile could if appropropriate be met by carefully asking our partners if they could please pursue the same or equivalent cures for their recession as we were using, and then, after full discussion, it may be found necessary to lower our exchange rates.  Should that be the situation, then, after continued discussion with our partners, we would apply a third stimulus by using our newly printed money to buy the currencies of those countries that are exporting too much to us, with our issue subject to the controls based on the '69 letter.  There should be no problem concerning protectionism as we would be trying to move towards a balance of trade, rather than gain unfair advantage by increasing already excessive exports.

The effects of the increase in imports could be beneficial to the workings of our own stimulus: in return for our taking more of their exports our trading partners would buy more exports from us and such purchases could reach parts of our economy which would otherwise be more out-of-reach to our own stimulus.  However, the situation would need to be monitored rather carefully to check that the return trade does in fact occur.  Also, there would be a considerable time lag, which would need to be taken into account by the staff running the system.
 
At present, January 22nd, 2009, the sterling exchange rate could be considered embarrassing for the opposite reason to that discussed above.  It is now maybe unnecessarily low for encouraging exports and could contribute disproportionately to inflation.  In order to raise the exchange rate to more optimum levels that could be considered reasonably consistent with balanced external trade, the policies advocated in the present discussion should be pursued actively in order to cure the recession, especially those aspects which would lead to strong domestic production and strong exports.  Encouragement should then also be given to keep prices slightly low, but still allowing positive sales margins, and stocks slightly high, in order that the main control can justifiably increase the money in circulation and expand production to the highest healthy level possible.  The resulting healthy production and good export performance should then be able to dispel the causes of the excessively low exchange rate - if it is excessively low.
 
Global rather than national

If the present proposals were adopted globally rather than nationally the effect would seem likely to be a large speeding up of the total recovery.  The home government first interested in applying the method may therefore wish to encourage other countries to do so also.  However, even though the global approach would be a large advantage, it does not seem essential, so that the home government would best work by example and take action and apply the method, rather than using up time on mere discussion.

An example in the car market

In the discussion above comment is made on the large discounts current on cars, in the region of 25 to 30 %.  Now it is to be noticed that with such large current price reductions, the average price increase for cars when the market recovers will be about 40%.  If, then, such an increase occurred when the global market were applying the present type of stimulus in a synchronised manner, then the 40% increase could occur within a few weeks of the start of the money issue when subsequent evidence showed favourable stirrings of the economy.  Consequently, as soon as people realised the favourable stirrings are real, they would start buying cars again in order to do so before the prices rise 40%.  That could give a sudden dramatic change to the pattern of car purchases and to the total situation.  And that effect could hold even though the printed money issue of the main part of the present discussion goes, not primarily to potential car purchasers, but to the people who will spend the money within about 2 weeks, as an extra.  So there could be a considerable incentive to achieve global action.  Even just Europe in a joint action would probably give quite a large effect.
 
An example of a straight monetary issue

If the staff running the presently proposed system decided on the basis of the factors and techniques discussed above that the initial rate of issue, following their preliminary trials, needed to be about £1bn per lunar month of 20 working days, they could previously have created a Rota of say 2 million people in the UK and could aim to issue money to each person on the Rota once during the 20 days.  That would become an issue of £500 to each of 100,000 people on each day.  Fresh evidence would come in from the monitors every day so that the daily issue would vary from day to day.  However, the issue per person would stay constant in the cycle through the Rota at the amount decided at the beginning of that cycle.  Consequently the number of people receiving each day would vary and the time to work through the Rota would vary accordingly.
 
In order to broaden the stimulus on the market ....and give greater fairness
 
From the above discussion it may be noticed that the stimulus from the Rota issue would tend to be confined in the first instance to only a part of the market.  There are several effects which will spread the benefit to the rest of the economy, but these would all take time.  Now the second and third stimuli discussed above will help, but the cure for the recession would be made more rapid if the initial effects from the first stimulus were made broader.  Two methods are suggested.  The first would be to make the Rota as large as possible, putting emphasis in the public dialogue mentioned above on the interest of the situation and on the desirability of the recipients making their purchases both as an extra and within a short time such as 2 weeks. The work involved in an issue to a large Rota of people need not be excessive. If people specify their bank branch or Post Office branch the money would be sent out in bulk with lists of the recipients accordingly, and with merely a notification to each person when their position in the Rota has been activated. The second method is to offer people the choice of a chance, but not a certainty, of receiving a larger amount of money. For example, people could be offered a chance of more than the straight amount by a factor of 2, 5, 10, 30, or 100. If, then, the staff running the system chose the straight amount to be say the £500 as discussed above, and someone chose a factor of 30, then that person would have a 1 in 30 chance of receiving £15,000. Overall that could cause say one car to be purchased for every say 50 white goods that would have been purchased otherwise, within that part of the free issue system.
 
In 1969 the amounts of money issued would have been small, so that considerations of fairness would scarcely have arisen.  Today, however, fairness needs to be considered.  The first month of operation needs to be as discussed above for simplicity, but during that time consideration should be given to the practicality of improving the fairness.  The broadening of the number of people on the Rota as just discussed would help.  It may then perhaps be possible to have two or three different bands within the Rota, with larger monetary issues to the more appropriate people.  If the numbers were suitable one junction between the bands could be at the wealth level where income tax payment is just zero.  The higher band or bands would be particularly suited to the one in 30 or one in 100 probability type of issue just discussed.

Management remuneration
 
The government would make an advisory recommendation that the shareholders of each public company should decide on management remuneration.  In particular the shareholders should appoint a jury, chosen as for legal jurors from standard juror lists, for each Annual Meeting.  The jury would be asked to decide and report in an advisory capacity to the shareholders at the Annual Meeting on the jury's opinion of the appropriateness of the proposed current remuneration of management, both with respect to the proposed bonuses for the previous twelve months and with respect to the proposed basic salaries for the following twelve months.
 
If profits and remuneration at banks persist at high levels untypical of the rest of the economy, the government would investigate whether its bank licensing system is producing monopolies.
 
Also, consultancies using private internal knowledge of firms would not be allowed to be co-owned with organisations either dealing in shares or advising on dealing in shares.

If excessive profits and remuneration still persisted at banks, the required backing of legal tender for bank credit would be increased and the free issue to the Rota would be correspondingly increased.