An economy requires a supply of money and this money needs to move. Money alone cannot create an economy, the money needs to move. The economy needs money and it needs circulation. Money must change hands for economic activity to occur.

The greater the movement the greater the economy. The movement of money is the economy. When money moves, economic activity occurs. The economy is actually measured as the volume of money tokens in the society and the number of times that it changes hands each year. Economic activity is curtailed by either a lack of money tokens or a lack of movement.

• When the volume of money tokens is reduced the volume of economic activity falls. Businesses fail and taxation falls.
• If the number of transactions completed by money falls, the economic activity falls. As money ceases to move, businesses fail, unemployment rises and taxation falls.

If the volume of money remains constant but the money ceases to move, the economy shrinks. Usually, it is the ‘volume of money tokens’ that falls. The velocity of money tends to fall slowly. It is much more common for the volume to fall than for the velocity to fall. Unfortunately for Italy, its money is stagnant. It barely moves. It rarely moves. Never forget that when money stops moving, the economic output falls. This is a graph of the economic activity in Italy. This graph shows a significant decline after 2008.

This next graph shows the volume of Cash Currency notes circulating in Italy. The figures are averaged from the total Cash Currency for Europe by population. This cash currency is created by the European Central Bank. There is nothing unusual here. The Cash Currency rose gently through recent troubled times.

This next graph shows the Money Supply for Italy. The Money Supply ceased its steady increase. The green portion of this graph is the credit that is created by banks when they lend money. This is the numbers listed in bank accounts. This money is entirely virtual. It did not originate from the European Central Bank. The green section is the sum of the citizen’s bank accounts.

Banks create most of the Money Supply in the form of monetized credit. Banks do not create cash currency folding notes, but they do create numbers in bank accounts. This virtual credit becomes the lifeblood of the economy. The volume of transactions that occur by manipulating bank balances dramatically exceeds the volume of cash transactions. When the banks cut back on lending, the volume of monetized credit falls. The banks continue to collect repayments which destroys monetized credit whilst cutting back on the creation of fresh monetized credit. As the banks cut lending, the money supply diminishes in sympathy.

Here is a graph of the lending by banks:

Here is a graph of the dramatic cutback in lending by banks. This graph shows the annual change in lending. The fluctuation in lending is a disaster for an economy. Business is hampered both by a reduction in Circulating Money and a lack of availability of bank credit:

When an Italian borrows money to buy a villa, the bank writes one million euro in the sellers account with a plus sign and writes one million euro in the purchaser’s account with a minus sign. The result is that new money and new debt are created in equal quantities. The debt magnifies with interest to become unpayable:

The Italian debt is unpayable for two clear reasons. There is more debt than money and any repayment would destroy the vital circulating medium.

The Italy has a velocity of 1.2. This means that, on average, money in Italy changes hands only once each ten months. Money on average sits idle for ten months before it has a few moments of excitement. This is a gross misuse of money.

Most money in Italy sits idle in banks for many years. Some money will change hands more frequently. Some money may sit idle in bank accounts for years on end. I shall create a cut-off and state that any money that changes hands within one month is considered to be circulating and any money that sits idle for times in excess of one month is considered to be hoarded. We discover that 10% of the money in Italy is circulating and 90% is hoarded.

In the above diagram, the light blue 10% is circulating in the real economy which feeds, clothes, and houses the Italians. The grey 90% is hoarded and sits idle for extended periods of time. The grey 90% effectively represents the ‘minimum monthly balance’ in all the bank accounts in the nation. It tends to be held by those with ‘more money than they can spend’. This has some interesting consequences for our monetary system.

Most taxation is taken from money when it changes hands. Sales Tax is taken when money changes hands. Income Tax is taken from the result of a series of transactions. Almost all tax is taken from the light blue Circulating Money. Almost no tax is taken from Hoarded Money.

People that hoard money do not need to borrow money. They already have ‘more money than they can spend’. Money is borrowed by people that lack money. They pay interest and repayments to those with hoards. Loan repayments are also taken from Circulating Money.

There is a constant downward pressure on Circulating Money. Almost all taxation is taken from Circulating Money. Almost all interest and loan repayments are taken from Circulating Money. People that operate in the Circulating Money section are used to passing money through their hands. Businesses make income by creating money transactions. People with Hoarded Money tend to be very competitive in increasing their hoards. There is a constant tendency for velocity to fall even in the steady state situation. The hoarders are very good at modifying the tax system to ensure that their hoards are not touched.

Something interesting happens when the banks cut back on lending. The volume of fresh monetized credit falls whilst the rate of collection of repayments continues. The volume of monetized credit falls taking the Money Supply with it. The Money Supply falls or fails to increase. One expects the economy to go into a recession, but something strange happens. The fall in the Money Supply occurs mainly in the Circulating Money whilst the Hoarded Money remains hoarded. The effect is a fall in the velocity. There can be a magnified fall in the Circulating Money. This fall in Circulating Money can be both in volume and percentage. It is possible for the GDP to fall by a larger percentage than the fall in the Money Supply.

Reverse logic does not apply. A fall in the Money Supply causes a fall in the Circulating Money which causes a fall in the economic activity. There is a temptation to think that the reverse will repair the damage. This is not the case. Freshly released money may rapidly move into the hands of the hoarders. Hoarders are skilled at sniffing out fresh money to add to their hoards. Businesses are the agents that operate in the real economy. They need to be coaxed into greater turnover. However, after a recession, many will have been burnt and many will have closed. It takes time for a damaged business sector to crank up production.

I have just played a trick on you. You went along with my thinking that a rise in the Money Supply is needed to raise the economy. An increase in velocity will give the same result. A doubling of the number of times money changes hands will double the economic output. To do this it is necessary to reduce the level of hoarding. To get a fall in the Hoarded Money it is necessary to make slight adjustments to the tax system. There are a few suitable taxes:

• Demurrage Tax
• General Transaction Tax
• Land Tax
• Wealth Tax
• Inheritance Tax
• Death Tax

My calculations are that a 1.1% fall in Hoarded Money will cause a 10% increase in the economy. [1]

A tax of 1.1% on Hoarded Money is easily accomplished by a monthly Demurrage Tax on ‘minimum monthly balance’ of just under 0.1%. This equates to less than €1 in €1000. If a Demurrage Tax of 0.1% was taken from the minimum monthly balance of all bank accounts, the economy would increase by 10% annually.

Credit card fees are of the order of €20 in €1000. Credit card interest is taken at €200 in €1000. Sales Tax is taken at €100 in €1000. Income Tax is taken at €300 in €1000.

Another minimalist tax is an all-encompassing General Transaction Tax of 0.1%. This tax would apply to every money transaction without exception. This tax would bring money in from the massive volume of financial transactions which currently escape the tax net.

The next stage is to reduce the economy-damaging taxes which include Sales Tax and Income Tax. These taxes remove money when money is most productive.

This rearrangement of taxation would also stabilise the tax revenue. In an economic slump, the taxation falls in sympathy with the reduction in economic transactions. Where tax is taken from other than transactions, the revenue will be less volatile.

This taxation needs to be spent back into circulation in a manner to ensure that it becomes Circulating Money.

To encourage businesses to expand, it is necessary to make the tax system business friendly. To that end, the damaging depreciation rules need to be relaxed. The nature of depreciation is that no tax deduction is allowed on expenses that increase the production capacity of a business. This forces small business to the money lenders to expand and forces companies to sell their ownership to obtain funds to expand. A similar problem exists with the trading stock of businesses. Trading stock is an expense that is not deductable until the stock has been sold. Businesses are discouraged from expanding by a tax regime that punishes expanding businesses.

Here is a table that shows the various components of taxation and their relative percentages. You can see that property tax is exceedingly low. Also, notice that the total is increasing as a percentage of national turnover. A greater percentage of money is being pulled out of Circulating Money.

43% of GDP pulled out of Circulating Money is not good for an economy. These IMF people are intent on pulling as much out of the economy as tax as possible. What a way to destroy an economy. Tightening the tax regime will damage the economy further.