Loath as I am to become involved in this cozy discussion, sorry Fickle P but your posts make highly questionable statements.
Example: Loans backed by existing assets are at least 1/10th the cost of equity backed by future assets.
This basically makes no sense. Banks have their own rules on lending which have been hammered out over eons so they are well aware of the costs of lending against secured as opposed to unsecured assets (future assets would count as unsecured). In any case, they are constrained by the BASEL II accords.
If you are talking about zero interest loans then tax most certainly does enter into it. Actually zero interest loans use to be quite common - a business would frequently lend to money to its owneer or a director on very easy terms. Also use to happen between companies here and their parent company overseas as a way to repatriate profits. Also use to happen the other way around where the loan was disquised equity. You want to open a big can of worms. Forget it.
Then there is the problem of their being no real reason for doing this in the Aus economy. Investment in R&D for example, would not change at all because of any of these suggestsion. R&D spending reflects the structure of the economy.. but that's another big can or worms..

Kevin's version of the money supply is not entirely correct.

Money is essentially an asset (store of wealth) that is universally recognised and easily exchanged, and as such acts as the lubricant in the gears of commerce.

Banks do not create money, but the banking system system does.

Banks cannot lend out more money than they have deposited, and in fact are required by law to retain a certian percentage (k%) in liquid assets.

How money is created in simplistic terms is that with an intial deposit of say $100 dollars, the bank can then lend out say $95 (k=5) to Mr X who then purchases something from Mr Y who then deposits it in another bank, who lends out $90.25 etc.

This effectively creates 100/k times the amount of loans. On this basis banking law in most countries regulates k as one of the means of controlling the supply of money, as too much money chasing too few assets reduces the value of money and causes inflation and a loss of confidence in the currency. On the other side of the coin, too little money causes interest rates to increase (the cost of borrowing) and puts the skids on commerce.

Given the above, the rest of the article bears little resemblence to reality.

In fact, the banks giving interest free loans is pure fantasy.

Pericles,

I am not saying that all investment and all loans are going to be zero interest loans. I distinguish between loans that are backed by existing assets and loans that are backed by future assets. Most loans even for most new assets will still use the current system. The proposal is a way for some new assets to be funded in a more efficient manner and where risk is shared throughout the community. The system scales because individuals, as they do today, will group the money from the zero interest loans and hire people to do the investing. These are relatively easy systems to implement with modern technologies.

Today ALL loans must be backed by real assets. The interest rates on loans is determined by the quality of the assets backing the loan. This is a very good system for mobilising funds from existing assets and I have no quarrel with it.

What I am trying to change is the cost of funds for the construction of some new assets. Today loans are not given on the basis of the risk associated with the new asset but on the risk associated with existing assets. To get people to finance new assets that are only backed by new assets you normally get investment via equity. In real life today - for those of us who do it - the cost to the current "owner" of the future asset is a minimum 10 times the cost of getting a loan against an existing asset (which is why we mortgage our houses rather than get equity). The reason for the great disparity is NOT the risk of the new asset but that there are few people and institutions permitted to invest in equity in new assets. (Investing in the share market is investing in old assets). However new assets ARE riskier and I am suggesting a mechanism where the risk of failure of some of the new assets is shared by the whole community.

Curmudgeon, I will stop being cosy. You misunderstand and then inevitably misrepresent what I am saying.

I am beginning to understand a little more of your reasoning, Fickle Pickle, but it is still somewhat muddled.

Possibly, you are underestimating the multi-dimensional nature of the problems you are trying to tackle.

>>The interest rates on loans is determined by the quality of the assets backing the loan.<<

Time and quantity also have a major impact. It is also instructive that "quality" was the major variable in the collapse of the US mortgage market. No amount of flexibility in the interest rate could compensate for the fact that many individuals had over-borrowed against over-valued assets.

>>Today loans are not given on the basis of the risk associated with the new asset but on the risk associated with existing assets.<<

Logically, the risk of an unknowable (in value terms) future asset is far higher.

I find it difficult to understand how the risk-value of money can be zero, when the project carries a higher-than-normal risk itself. It is not only counter-intuitive, it is completely illogical.

Investors, even (especially?) if they are governments, need to discern a value received, in exchange for the value applied.

Your proposed process also appears to come with its own overheads.

>>individuals... will group the money from the zero interest loans and hire people to do the investing.<<

This seems to indicate that as well as the estimated project costs, simply acquiring the investment costs money, sourced from the interest-free pool.

If you then add the management tasks associated with keeping an eye on the project's success (in order, ultimately, to derive value from your investment), there seems at first glance to be an inordinate amount of wastage in the system.

Ultimately, any commercial enterprise relies upon end-users who surrender some of their own earnings in exchange for value. The ultimate test of your project has nothing to do with interest rates of the lack of them, but on the viability of the investment itself.

If the project itself is viable, the means of investment in it - be it equity, convertible loan, maxing-out the credit card or micro-finance at no interest - is irrelevant.

Pericles,

The only difference between the current system and my proposal is that there is a new loan product with the following characteristics.

There is a limit on the total amount of zero interest loans issued
There is no interest on the loans
The loans are repaid from earnings on investments
The loans must be invested creating a new productive asset for a particular purpose

The critical point is the latter. Will the investments over their lifetime produce more value than it costs to create the assets.

This is the same point you make in your last sentence and with which I completely agree.

From the total system point of view it does not matter whether the loans are repaid or not or how much interest is charged. Interest and loans determine ownership not value.

For renewable energy we know that on existing prices most forms of renewable energy generation including solar thermal, geothermal, wind and solar voltaics will return more value than is invested. We do not invest because of interest charges on the capital and because we have to pay back the money before they start to generate income.

The same is true for most investments in ways to save energy including insulation, double glazing, heat pumps rather than direct heating of air.

I know how to build the loans system so that it will achieve its purpose and not be compromised through non compliance. I know that the cost of building and operating the system will be much less than the current cost of distributing loans. I know this because we have built, constructed and are selling a technically similar system you can see at http://www.greenid.com.au

Have a look at the first few chapters of our upcoming book to see the background to the ideas. Zero interest loans will be Chapter 6 and were invented in response to previous discussions we have had.

http://cscoxk.wordpress.com/2008/06/08/a-solution-to-the-tragedy-of-the-commons-chapter-1/

I'm still not sure that I follow your logic, Fickle Pickle.

What, for example, is the common ground between interest-free loans and an online identity system?

>>I know how to build the loans system so that it will achieve its purpose and not be compromised through non compliance... because we have built, constructed and are selling a technically similar system<<

In any event, building a system is not the key issue.

You mention that your zero-interest system will "not be compromised through non compliance"

How does it handle the inability of a project to repay the investment?

I looked for assistance in deciphering your code by reading a little of your "Rewards" effort. Unfortunately, it contained too many contradictions for it to be of any use.

"Rewards could be funded by a small increase in the price of all water. Anyone who meets the goals would then have the extra cost of water reimbursed through the Rewards. Those who use more than their allocation or who don’t support the goal will end up paying slightly more for their water,"

How is this different from a simple "user pays" system? Apart from the imposition of a limit, that is.

And let's be honest. Fundamentally, it is simply another form of taxation. Of which you earlier disapprove:

>>One of the most common economic means of regulating a public good is through the imposition of taxes or levies. Examples include emission and effluent charges and user fees for waste disposal. However, such approaches tend to be viewed negatively and are open to criticisms as mere money-raising exercises."

I'm not sure how to resolve the confusion, since it doesn't seem to have any connection either, with interest-free loans.

What am I missing here?