VITAL UPDATE!!!!!! IMF plan to dethrone bankers and wipe out debt!!!!
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IMF's
epic plan to conjure away debt and dethrone bankers
IMF's
epic plan to conjure away debt and dethrone bankers
So there is a magic wand after all. A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan.
2:31PM BST 21 Oct 2012
One
could slash private debt by 100pc of GDP, boost growth, stabilize prices, and
dethrone bankers all at the same time. It could be done cleanly and painlessly,
by legislative command, far more quickly than anybody imagined.
The
conjuring trick is to replace our system of private bank-created money --
roughly 97pc of the money supply -- with state-created money. We return to the
historical norm, before Charles II placed control of the money supply in private
hands with the English Free Coinage Act of 1666.
Specifically,
it means an assault on "fractional reserve banking". If lenders are forced to
put up 100pc reserve backing for deposits, they lose the exorbitant privilege of
creating money out of thin air.
The
nation regains sovereign control over the money supply. There are no more banks
runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the
rest. That at least is the argument.
Some
readers may already have seen the IMF study, by Jaromir Benes and Michael
Kumhof, which came out in August and has begun to acquire a cult following
around the world.
Entitled
"The
Chicago Plan Revisited", it revives the scheme first put forward by
professors Henry Simons and Irving Fisher in 1936 during the ferment of creative
thinking in the late Depression.
Irving
Fisher thought credit cycles led to an unhealthy concentration of wealth. He saw
it with his own eyes in the early 1930s as creditors foreclosed on destitute
farmers, seizing their land or buying it for a pittance at the bottom of the
cycle.
The
farmers found a way of defending themselves in the end. They muscled together at
"one dollar auctions", buying each other's property back for almost nothing. Any
carpet-bagger who tried to bid higher was beaten to a pulp.
Benes
and Kumhof argue that credit-cycle trauma - caused by private money creation -
dates deep into history and lies at the root of debt jubilees in the ancient
religions of Mesopotian and the Middle East.
Harvest
cycles led to systemic defaults thousands of years ago, with forfeiture of
collateral, and concentration of wealth in the hands of lenders. These episodes
were not just caused by weather, as long thought. They were amplified by the
effects of credit.
The
Athenian leader Solon implemented the first known Chicago Plan/New Deal in 599
BC to relieve farmers in hock to oligarchs enjoying private coinage. He
cancelled debts, restituted lands seized by creditors, set floor-prices for
commodities (much like Franklin Roosevelt), and consciously flooded the money
supply with state-issued "debt-free" coinage.
The
Romans sent a delegation to study Solon's reforms 150 years later and copied the
ideas, setting up their own fiat money system under Lex Aternia in 454 BC.
It
is a myth - innocently propagated by the great Adam Smith - that money developed
as a commodity-based or gold-linked means of exchange. Gold was always highly
valued, but that is another story. Metal-lovers often conflate the two
issues.
Anthropological
studies show that social fiat currencies began with the dawn of time. The
Spartans banned gold coins, replacing them with iron disks of little intrinsic
value. The early Romans used bronze tablets. Their worth was entirely determined
by law - a doctrine made explicit by Aristotle in his Ethics - like the dollar,
the euro, or sterling today.
Some
argue that Rome began to lose its solidarity spirit when it allowed an oligarchy
to develop a private silver-based coinage during the Punic Wars. Money slipped
control of the Senate. You could call it Rome's shadow banking system. Evidence
suggests that it became a machine for elite wealth accumulation.
Unchallenged
sovereign or Papal control over currencies persisted through the Middle Ages
until England broke the mould in 1666. Benes and Kumhof say this was the start
of the boom-bust era.
One
might equally say that this opened the way to England's agricultural revolution
in the early 18th Century, the industrial revolution soon after, and the
greatest economic and technological leap ever seen. But let us not
quibble.
The
original authors of the Chicago Plan were responding to the Great Depression.
They believed it was possible to prevent the social havoc caused by wild swings
from boom to bust, and to do so without crimping economic dynamism.
The
benign side-effect of their proposals would be a switch from national debt to
national surplus, as if by magic. "Because under the Chicago Plan banks have to
borrow reserves from the treasury to fully back liabilities, the government
acquires a very large asset vis-à-vis banks. Our analysis finds that the
government is left with a much lower, in fact negative, net debt burden."
The
IMF paper says total liabilities of the US financial system - including shadow
banking - are about 200pc of GDP. The new reserve rule would create a windfall.
This would be used for a "potentially a very large, buy-back of private debt",
perhaps 100pc of GDP.
While
Washington would issue much more fiat money, this would not be redeemable. It
would be an equity of the commonwealth, not debt.
The
key of the Chicago Plan was to separate the "monetary and credit functions" of
the banking system. "The quantity of money and the quantity of credit would
become completely independent of each other."
Private
lenders would no longer be able to create new deposits "ex nihilo". New bank
credit would have to be financed by retained earnings.
"The
control of credit growth would become much more straightforward because banks
would no longer be able, as they are today, to generate their own funding,
deposits, in the act of lending, an extraordinary privilege that is not enjoyed
by any other type of business," says the IMF paper.
"Rather,
banks would become what many erroneously believe them to be today, pure
intermediaries that depend on obtaining outside funding before being able to
lend."
The US Federal
Reserve would take real control over the money supply for the first time, making
it easier to manage inflation. It was precisely for this reason that Milton
Friedman called for 100pc reserve backing in 1967. Even the great free marketeer
implicitly favoured a clamp-down on private money.
The
switch would engender a 10pc boost to long-arm economic output. "None of these
benefits come at the expense of diminishing the core useful functions of a
private financial system."
Simons
and Fisher were flying blind in the 1930s. They lacked the modern instruments
needed to crunch the numbers, so the IMF team has now done it for them -- using
the `DSGE' stochastic model now de rigueur in high economics, loved and hated in
equal measure.
The
finding is startling. Simons and Fisher understated their claims. It is perhaps
possible to confront the banking plutocracy head without endangering the
economy.
Benes
and Kumhof make large claims. They leave me baffled, to be honest. Readers who
want the technical details can make their own judgement by studying the
text here.
The
IMF duo have supporters. Professor Richard Werner from Southampton University -
who coined the term quantitative easing (QE) in the 1990s -- testified to
Britain's Vickers Commission that a switch to state-money would have major
welfare gains. He was backed by the campaign group Positive Money and the New
Economics Foundation.
The
theory also has strong critics. Tim Congdon from International Monetary Research
says banks are in a sense already being forced to increase reserves by EU rules,
Basel III rules, and gold-plated variants in the UK. The effect has been to
choke lending to the private sector.
He
argues that is the chief reason why the world economy remains stuck in
near-slump, and why central banks are having to cushion the shock with QE.
"If
you enacted this plan, it would devastate bank profits and cause a massive
deflationary disaster. There would have to do `QE squared' to offset it," he
said.
The
result would be a huge shift in bank balance sheets from private lending to
government securities. This happened during World War Two, but that was the
anomalous cost of defeating Fascism.
To
do this on a permanent basis in peace-time would be to change in the nature of
western capitalism. "People wouldn't be able to get money from banks. There
would be huge damage to the efficiency of the economy," he said.
Arguably,
it would smother freedom and enthrone a Leviathan state. It might be even more
irksome in the long run than rule by bankers.
Personally,
I am a long way from reaching an conclusion in this extraordinary debate. Let it
run, and let us all fight until we flush out the arguments.
One
thing is sure. The City of London will have great trouble earning its keep if
any variant of the Chicago Plan ever gains wide support.
2:31PM BST 21 Oct 2012
62 Comments
One
could slash private debt by 100pc of GDP, boost growth, stabilize prices, and
dethrone bankers all at the same time. It could be done cleanly and painlessly,
by legislative command, far more quickly than anybody imagined.
The
conjuring trick is to replace our system of private bank-created money --
roughly 97pc of the money supply -- with state-created money. We return to the
historical norm, before Charles II placed control of the money supply in private
hands with the English Free Coinage Act of 1666.
Specifically,
it means an assault on "fractional reserve banking". If lenders are forced to
put up 100pc reserve backing for deposits, they lose the exorbitant privilege of
creating money out of thin air.
The
nation regains sovereign control over the money supply. There are no more banks
runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the
rest. That at least is the argument.
Some
readers may already have seen the IMF study, by Jaromir Benes and Michael
Kumhof, which came out in August and has begun to acquire a cult following
around the world.
Entitled
"The
Chicago Plan Revisited", it revives the scheme first put forward by
professors Henry Simons and Irving Fisher in 1936 during the ferment of creative
thinking in the late Depression.
Irving
Fisher thought credit cycles led to an unhealthy concentration of wealth. He saw
it with his own eyes in the early 1930s as creditors foreclosed on destitute
farmers, seizing their land or buying it for a pittance at the bottom of the
cycle.
The
farmers found a way of defending themselves in the end. They muscled together at
"one dollar auctions", buying each other's property back for almost nothing. Any
carpet-bagger who tried to bid higher was beaten to a pulp.
Benes
and Kumhof argue that credit-cycle trauma - caused by private money creation -
dates deep into history and lies at the root of debt jubilees in the ancient
religions of Mesopotian and the Middle East.
Harvest
cycles led to systemic defaults thousands of years ago, with forfeiture of
collateral, and concentration of wealth in the hands of lenders. These episodes
were not just caused by weather, as long thought. They were amplified by the
effects of credit.
The
Athenian leader Solon implemented the first known Chicago Plan/New Deal in 599
BC to relieve farmers in hock to oligarchs enjoying private coinage. He
cancelled debts, restituted lands seized by creditors, set floor-prices for
commodities (much like Franklin Roosevelt), and consciously flooded the money
supply with state-issued "debt-free" coinage.
The
Romans sent a delegation to study Solon's reforms 150 years later and copied the
ideas, setting up their own fiat money system under Lex Aternia in 454 BC.
It
is a myth - innocently propagated by the great Adam Smith - that money developed
as a commodity-based or gold-linked means of exchange. Gold was always highly
valued, but that is another story. Metal-lovers often conflate the two
issues.
Anthropological
studies show that social fiat currencies began with the dawn of time. The
Spartans banned gold coins, replacing them with iron disks of little intrinsic
value. The early Romans used bronze tablets. Their worth was entirely determined
by law - a doctrine made explicit by Aristotle in his Ethics - like the dollar,
the euro, or sterling today.
Some
argue that Rome began to lose its solidarity spirit when it allowed an oligarchy
to develop a private silver-based coinage during the Punic Wars. Money slipped
control of the Senate. You could call it Rome's shadow banking system. Evidence
suggests that it became a machine for elite wealth accumulation.
Unchallenged
sovereign or Papal control over currencies persisted through the Middle Ages
until England broke the mould in 1666. Benes and Kumhof say this was the start
of the boom-bust era.
One
might equally say that this opened the way to England's agricultural revolution
in the early 18th Century, the industrial revolution soon after, and the
greatest economic and technological leap ever seen. But let us not
quibble.
The
original authors of the Chicago Plan were responding to the Great Depression.
They believed it was possible to prevent the social havoc caused by wild swings
from boom to bust, and to do so without crimping economic dynamism.
The
benign side-effect of their proposals would be a switch from national debt to
national surplus, as if by magic. "Because under the Chicago Plan banks have to
borrow reserves from the treasury to fully back liabilities, the government
acquires a very large asset vis-à-vis banks. Our analysis finds that the
government is left with a much lower, in fact negative, net debt burden."
The
IMF paper says total liabilities of the US financial system - including shadow
banking - are about 200pc of GDP. The new reserve rule would create a windfall.
This would be used for a "potentially a very large, buy-back of private debt",
perhaps 100pc of GDP.
While
Washington would issue much more fiat money, this would not be redeemable. It
would be an equity of the commonwealth, not debt.
The
key of the Chicago Plan was to separate the "monetary and credit functions" of
the banking system. "The quantity of money and the quantity of credit would
become completely independent of each other."
Private
lenders would no longer be able to create new deposits "ex nihilo". New bank
credit would have to be financed by retained earnings.
"The
control of credit growth would become much more straightforward because banks
would no longer be able, as they are today, to generate their own funding,
deposits, in the act of lending, an extraordinary privilege that is not enjoyed
by any other type of business," says the IMF paper.
"Rather,
banks would become what many erroneously believe them to be today, pure
intermediaries that depend on obtaining outside funding before being able to
lend."
The US Federal
Reserve would take real control over the money supply for the first time, making
it easier to manage inflation. It was precisely for this reason that Milton
Friedman called for 100pc reserve backing in 1967. Even the great free marketeer
implicitly favoured a clamp-down on private money.
The
switch would engender a 10pc boost to long-arm economic output. "None of these
benefits come at the expense of diminishing the core useful functions of a
private financial system."
Simons
and Fisher were flying blind in the 1930s. They lacked the modern instruments
needed to crunch the numbers, so the IMF team has now done it for them -- using
the `DSGE' stochastic model now de rigueur in high economics, loved and hated in
equal measure.
The
finding is startling. Simons and Fisher understated their claims. It is perhaps
possible to confront the banking plutocracy head without endangering the
economy.
Benes
and Kumhof make large claims. They leave me baffled, to be honest. Readers who
want the technical details can make their own judgement by studying the
text here.
The
IMF duo have supporters. Professor Richard Werner from Southampton University -
who coined the term quantitative easing (QE) in the 1990s -- testified to
Britain's Vickers Commission that a switch to state-money would have major
welfare gains. He was backed by the campaign group Positive Money and the New
Economics Foundation.
The
theory also has strong critics. Tim Congdon from International Monetary Research
says banks are in a sense already being forced to increase reserves by EU rules,
Basel III rules, and gold-plated variants in the UK. The effect has been to
choke lending to the private sector.
He
argues that is the chief reason why the world economy remains stuck in
near-slump, and why central banks are having to cushion the shock with QE.
"If
you enacted this plan, it would devastate bank profits and cause a massive
deflationary disaster. There would have to do `QE squared' to offset it," he
said.
The
result would be a huge shift in bank balance sheets from private lending to
government securities. This happened during World War Two, but that was the
anomalous cost of defeating Fascism.
To
do this on a permanent basis in peace-time would be to change in the nature of
western capitalism. "People wouldn't be able to get money from banks. There
would be huge damage to the efficiency of the economy," he said.
Arguably,
it would smother freedom and enthrone a Leviathan state. It might be even more
irksome in the long run than rule by bankers.
Personally,
I am a long way from reaching an conclusion in this extraordinary debate. Let it
run, and let us all fight until we flush out the arguments.
One
thing is sure. The City of London will have great trouble earning its keep if
any variant of the Chicago Plan ever gains wide support.