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Edition 01: 09 May, 2013.




Summaries of monetary reform papers by L.F. Manning published at


The referenced papers :


00. Summary of papers published.

01. Financial system mechanics explained for the first time. “The Ripple Starts Here.” 

02. How to create stable financial systems in four complementary steps.

03. How to introduce an e-money financed virtual minimum wage system in New Zealand.

04. How to introduce a guaranteed minimum income in New Zealand.

05. The interest-bearing debt system and its economic impacts.

06. The Savings Myth.

07. The DNA of the debt-based economy.

08. Manifesto of the debt-based economy.

09. Unified text of the manifesto of the debt-based economy.

10. Using a foreign transactions surcharge (FTS) to manage the exchange rate.

11. The Manning plan for permanent debt reduction in the national economy.

12. Comments on the (Jaromir Benes and Michael Kumhof) Chicago Plan Revisited Paper.

13. Missing links between growth, saving, deposits and GDP.

14. Capital is debt.

15. Measuring Nothing on the Road to Nowhere.

16. Debt bubbles cannot be popped : Business cycles are policy inventions.




By Lowell Manning,

Sustento Institute,


New Zealand.


29th April, 2013.





EXECUTIVE SUMMARY.                                                                                                                           


BACKGROUND OF CPRII.                                                                                                        







(b) MUCH BETTER CONTROL OF CREDIT CYCLES.                                         

(c) REDUCTION IN PRIVATE DEBT.                                                                                     

(d) ELIMINATION OF BANK RUNS.                                                                                     


(f) THERE IS NO LIQUIDITY TRAP ......                                                 





This paper is a response to the IMF Working Paper WP/12/202 “The Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof (BK), and more particularly to the revised draft of that paper released on 12th February 2013 (CPRII).


The CPRII paper models the Chicago Plan (CP) proposals. The CP proposals date from the 1930’s and grew out of concern that the current debt-based financial system is inherently unstable. That view has been reinforced by the instability leading up to the recent debt crisis and, more recently, large scale Quantitative Easing and Eurozone debt problems. The CP has always been supported by many of the world’s leading economists. Many of its main provisions have formed the basis of monetary reform movements for almost a century.


CPRII uses Dynamic Stochastic General Equilibrium (DSGE) modelling to study six main claims made for the Chicago Plan:


(a)  Reduction of government debt and the interest burden it creates.

(b)  Much better control of credit cycles

(c)  Reduction in private debt

(d)  Elimination of bank runs

(e)  A long term [relative] increase in [GDP] output of 10%

(f)  There is no liquidity trap, so that “steady state inflation” can drop to zero.


BK find strong support for all six of the claims they make for CPRII.


This paper shows that many of the claims are unfounded because the CP itself is insufficiently robust to work properly as it is presented and modelled. It would work if it were slightly revised along the lines of the Manning plan for permanent debt reduction in the national economy available at website It is likely that a more robust form of the CP would demonstrate outcomes vastly superior to those obtained by BK in their modelling.


The present structure of the CP retains the functional elements of the existing financial system except that Savings and Loan debt replaces Bank debt. Apart from government spending, it leaves the private financial institutions in full control of money allocation and credit. The large financial institutions and business are the primary beneficiaries from the CP as it presented. The asymmetrical imbalances in debt, income and wealth aggregation remain unresolved.


The “People’s” money advocated by CPRII needs to be made available and used by the people, for the people, rather than by the banks for the banks. Otherwise the Chicago Plan reforms cannot be a sufficient response to financial system failure.



Unless otherwise indicated, all page references in this paper are to CPRII.


The BK paper has received a lot of attention around the world. Much of it has been favourable. CPRII gives the history of the CP at p. 28-29. The plan originated with Frederick Soddy in 1926. Professor Frank Knight (University of Chicago) picked up the ideas in 1927 and the first version of the CP was presented to US President Roosevelt in 1933. Many prominent economists supported the plan, including Henry Simons, Irving Fisher and Milton Friedman. Those signing the original plan later became known as “The Chicago School” of economics. There were many versions of the plan but it has never been adopted into law despite continued support from Fisher, Friedman, Robertson, Tobin, Werner and Zarlenga among many others past and present.


The key feature of the CP “was to call for the separation of the monetary and credit functions of the banking system, first by ensuring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new credit can only take place through earnings that have been retained in the form of government issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposit money, ex nihilo, by financial institutions”. [p. 4]  


For the productive economy this is tantamount to a verbal restatement of the basic tenet of orthodox economics, seen in almost every economics text published prior to 1980, that Savings=Investment where investment is defined as new productive capital investment. 


For the non-productive economy, the non-productive “investment sector”, it is a clear statement that credit for the purchase and exchange of existing capital goods must take place through the on-lending of deposits as a “savings and loan” (S&L) function. That on-lending creates secondary debt and increases the speed of circulation of the financial system monetary deposits. The S&L function is the opposite of funding the purchase and exchange of existing capital goods through the creation of new interest-bearing bank debt and its corresponding deposits that have become the norm over the past thirty years.  The differences between a financial system based on savings and loan and one based on increasing bank debt are explored in detail in a paper by the author Capital is debt  published at




The current system creates bank debt and maintains a low speed of circulation of the total financial system deposits. Bank debt is typically cheaper than secondary debt borrowed from non-bank institutions. In most industrialised countries there is a reasonably close relationship between domestic credit and total debt defined as domestic credit plus non-bank secondary credit but not between debt and capital investment. One exception is the US where its well-developed secondary debt market is thought to be around 40% of domestic credit whereas in countries like New Zealand it is thought to be closer to 10%. Instead, Figure 1 and Figure 2 show there is a 1:1 nominal relationship between Gross Domestic Product  (GDP) and the accumulated outstanding balance of capital investment including housing, in the New Zealand economy over the half-century from 1962 to 2012. That balance is the accumulated productive investment principal at cost as given in the National Accounts less the accumulated principal repayments. For a detailed analysis of this aspect see  Lowell Manning “The DNA of the debt-based economy” at and  


That balance is much less than the total debt.




The outstanding principal in Figure 1 has been calculated empirically. Figures 1 and 2 are based on adding the net annual capital formation in any year to the cumulative outstanding principal from the previous year and multiplying by 0.983. The calibration “works” because the depreciation (consumption of fixed capital “CFC”) shown in the national accounts is higher than the true loss of value. The distorted tax business depreciation figures included in today’s tax laws mask a large portion of the principal repayments. The GDP, Gross Capital Formation and Consumption of Fixed Capital used for the graphs are taken directly from the NZ National Accounts. It should be noted there are substantial differences between the latest published series downloaded from on 15 April 2013 and the data published in the various earlier official data. This contrasts sharply with the CPRII modelling under heading I [p. 44], where the depreciation rate rather than outstanding capital is used to assess capital accumulation.




Principal repayments are not “constant” over time as assumed, for simplicity, in the figures. There could, for example, be changes in tax depreciation rules (such as the recent removal of tax depreciation from residential housing investment in New Zealand) and in bank loan terms and repayment rates as well as in the principal repayment behaviour of borrowers. Better calibration would provide an R2 correlation much higher than 0.992. As would be expected, New Zealand’s nominal GDP grew faster than outstanding investment principal during the rapid monetary inflation in (March Years) 1987-88 and slowed relatively during the low inflationary expansion 2005-08 before collapsing dramatically during the recent 2010-2011 crash when new investment plummeted. Repayments do not stop just because nominal GDP growth stops!  Minor calibration adjustments to the years referred to would bring the R2 correlation to about 0.997.


Contrary to the modelling assumptions made by BK in CPRII there is no equilibrium in the investment sector whatever stochastic shocks are applied in the modelling process. Instead, economic performance (Figures 1 and 2) is specifically related to new capital investment including new investment in non-productive assets on a 1:1 basis whereas the money supply shown in Figures 3 and 4 is not.


FIGURE 3 : GDP AND (M3-0.05 GDP) FOR NEW ZEALAND 1996-2013.


FIGURE 4 : GDP v M3-0.05 GDP NEW ZEALAND 1995-2013.


While business investment decisions rely on generating enough extra income to pay interest and repay principal, debt servicing of non-productive investments like residential housing is more difficult. Borrowers must typically decrease their consumption or rely upon uncertain future income expectations. As long as the share of productivity gains in the productive economy paid as incomes to income earners (over and above what is needed by business to service its own productive capital investment) is less than their debt servicing costs, it is theoretically impossible to fund those costs out of the productive economy. The reason is simple: Saving within the economy is used up to purchase new capital investment (including new housing) as shown in Figures 1 and 2. Otherwise the economy cannot grow and the market cannot clear all the goods and services it produces. 


Figure 5 shows the basic dynamic flows in a simple economy.


Figure 5 is broadly similar to the structure proposed by CPRII. The money supply (top left) is increased using government-issued debt-free money as the productive capacity of the economy increases. Incomes equal to the value of new capital investment are saved and then on-loaned to entrepreneurs. Some Savings have traditionally been hoarded as shown at the upper right of Figure 5. When hoarding increases, not enough savings are being recycled to clear the market of capital and consumption goods and pay the non-productive debt servicing costs. Either more money must then be injected into the system, the Treasury credit in CPRII, or the S & L funds (The CPRII “Investment Trust” funds) have to be recycled faster. In addition, the existing debt base must, as a minimum, be maintained to avoid a collapse in existing asset prices. For that to happen, the secondary (Investment Trust) debt and Treasury credit must together be at least as large as the present debt base less transaction account balances and government capital assets. The aggregate interest paid on that debt is likely to be as much as it is now. The more interest there is the faster the money supply will have to grow to keep pace with the purchase and exchange of non-productive assets and provide for systemic inflation.




In figure 5 the investment in each cycle = new savings less new hoarding.


Figure 6 represents the existing debt-based financial system where savings are decoupled from the productive economic cycle by bank intermediation. As BK say in CPRII, bank lending depends only on the banks’ willingness to lend and the customers’ willingness to borrow. This is the concept of “endogenous” credit so widely discussed among economists today. Among the screeds of jargon and complex mathematical modelling, the simple truth remains that if savings can be recycled for profit as in Figure 5, they will be. If interest-bearing debt can be created for profit as in Figure 6, it will be. That is human nature.


Private debt is fundamental to capitalism. Without primary and/or secondary private debt there can be no private productive investment, no privately created GDP and very little exchange of privately owned capital goods. Only the government would be able to invest in capital goods by first injecting money to pay for their production and then taxing that same money out of circulation afterward when required. In that hypothetical case, hoarding could be constrained within the bounds of the circulating money supply, initially the 5% or so of GDP of figures 3 and 4. In New Zealand, M1 is about 10% of GDP (5% productive transaction deposits and 5% investment sector transaction deposits. CPRII uses 20% [p. 58] which seems very high. In that hypothetical case, the economy would then approximate the cash based economies of yesteryear except they would be using fiat money instead of specie.  However, that would be “statism” not capitalism. This paper does not discuss the relative merits of different forms of economic organisation.




Four of the major claims made by Irving Fisher in 1936 in support of the original Chicago Plan proposal were:


(a)  Reduction of government debt and the interest burden it creates.

(b)  Much better control of credit cycles.

(c)  Reduction in private debt.

(d)  Elimination of bank runs.


BK claim there are two further advantages:


(e)   A long term increase in output of 10%.

(f)   There is no liquidity trap, so that “steady state inflation” can drop to zero.


The claimed advantages are described at some length at pages 5-12 of CPRII.


The six claimed advantages are now considered in turn.






The details in the CPRII proposal are conclusive. The proposal can reduce or eliminate government debt and its associated interest burden.


However, using CPRII to produce that outcome is unnecessary.


A nation’s authority to eliminate government debt by exercising its sovereign right to seigniorage on the creation of the nation’s money supply already exists, as it has always done. 


Most governments have always had the constitutional right to issue money, as, for example, set out in the Constitution of the United States. In this day and age that right includes, by extension, the right to issue electronic money. Monetary reformers like those mentioned at the top of p. 4 of this paper and various Social Credit movements have been pleading with them without success to use that right for almost a hundred years. Only the "money power" of vested financial sector interests has prevented governments the world over from implementing the "public" money proposal. They have done this by promoting debt funding of government as in Section 104 of the Maastricht Treaty, by privatising central bank functions as in the US 1913 Federal Reserve Act, and by blocking efforts such as those in the recent National Emergency Employment Defense (NEED) Act in the US to re-establish the wider money issuing power of government.


Replacing government debt with “public” money is simple. As government debt matures it is replaced by an equal amount of debt-free interest-free deposits created as journal entries in the Treasury accounts. The financial institution holding the government paper cancels the debt by writing off both the debt (the institution’s asset) and the credit (the cash deposit payment it receives) reducing both sides of its balance sheet by the same amount but leaving its net worth intact. Since the transaction affects rights under the original debt contract, the relevant existing original bank deposits remain in the banking system “magically” backed by public equity instead of private interest-bearing bank debt.


Where banks previously held the government debt they will have lost the bank spread on the debt that has been retired, but the spread is very small in most major economies today. On 16/4/2013, US Treasury 2/5 yr was 0.23%/0.70% , Japan 2/5 yr 0.13%/0.26%, Germany 2/5yr 0.03%0.34%, and China 2/5yr  2.99%/3.15%. 


There are practical ways to deal with the banks’ loss of bond income should the need arise, such as by using controls on some deposit interest rates. In other cases (especially the US) where government debt has been raised in non-bank (S & L) debt markets, the debt is physically repaid, increasing the circulating money supply.  Any inflation risk would need to be monitored and surplus money taxed out from the deposit base or sterilised by other means.


There is no valid reason to embed “public” money within a complex proposal such as the CP. Making “public” money dependent on reforms like the CP raises suspicion that the proposals serve primarily to preserve the present dominance of private financial institutions.




CPRII claims (p. 5) that the CP largely eliminates “sudden changes in the willingness of banks to extend credit  [that] not only lead to credit booms or busts, but also to an instant excess or shortage of money, and therefore of nominal aggregate demand.”


BK write correctly that in the present system with each new loan made “[T]he aggregate money supply has therefore increased” whereas under  CPRIIlending banks, now referred to as investment trusts, would no longer be able to generate their own funding in the act of lending” (p. 6).


The solution provided in CPRII is thus two-fold. First, have the government create the money supply (the quantity of money). Secondly, allow investment trusts (that will include private banks) to provide the quantity of credit (secondary debt) the economy needs to function. The credit comes either as Treasury credit  (CPRII p. 79 Figure 1) from the government or by on-lending private deposits placed in investment trusts (CPRII p. 6 top). In this scenario the banks sit as intermediaries on the fringes of the system, clipping the ticket, risk free, on nearly every financial transaction that takes place in the economy. This represents a “free lunch” for the banks. Even were such a proposal acceptable to the public at large, it would still be founded on two monumental assumptions. The first is that the demand for money is independent of the demand for credit. The second is that the demand for credit is limited because it is provided through investment trusts that transfer physical deposits from lenders to borrowers instead of by banks creating new credit through the act of lending. Neither assumption bears scrutiny.


There is a direct link in New Zealand between bank debt and the monetary deposit aggregate M3. For New Zealand this is the Reserve Bank of New Zealand’s table C3 (current). Other countries may use a different aggregate, but the link between money and debt will still apply. 


M3  =  DC + NFCA + Residual                                                                                   (1)


Where M3 is the aggregate deposit base, DC is Domestic Credit, NFCA is the Net Foreign Currency Assets of the M3 institutions and the Reserve Bank, and Residual is the net worth of the M3 institutions. In New Zealand’s case NFCA is negative because of its offshore borrowing, while the Residual is always negative in the equation (1) format. Equation (1) is simply a restatement of the basic accounting equation stated from the banks’ point of view:


Assets                   = Liabilities + Net worth.

(DC + NFCA)  = M3            + Residual                                                                      (2)


The Residual is positive in the equation (2) format.


In New Zealand, the deposit base is volatile because of net offshore borrowing [NFCA negative] by the New Zealand banking system. That borrowing stood at NZ$ 41.6 billion (February 2013). If the New Zealand banks repaid their foreign debt using their New Zealand currency reserves, domestic deposits would increase by up to NZ$ 41.6 billion or 16%. That would change the graphs in Figures 3 and 4 but not the (more or less) lineal relationship. 


At a national level, debtor countries like New Zealand have long lived beyond their means. In that respect, NZ$ 41.6 billion, the present net level of foreign debt held by the New Zealand banks, is the tip of the proverbial iceberg. In New Zealand, the accumulated current account deficits nearly equal GDP as shown in Figure 7.


It is possible to use the Net International Investment Position (NIIP) in this work. NIIP includes capital flows as well as current flows. Using NIIP changes the numbers a little but not the principles being discussed.


Figure 7 also shows the debt (domestic credit) as % GDP in New Zealand for the period 1978-2012.


Most of the accumulated current account deficit, (NZ$ 194.3 billion–NZ$ 41.6 billion or NZ$ 152.7b. of it), shows up as direct foreign ownership of New Zealand assets and resources. The deposits corresponding to the direct foreign ownership have been returned to New Zealand as inward capital flows. The remaining NZ$ 41.6 billion represents indirect foreign ownership. All the NZ$ 194.3 billion is included in the NZ Domestic Credit figures while NZ$ 152.7b is included in the domestic deposit figures.




The latest debt figures from Reserve Bank of New Zealand (downloaded 20/4/2013) have been used for the period 1988-2012 but it should be noted that some figures vary more than 5% from previous series published by the bank.


The demand for money is therefore not independent of the demand for credit. This is because the need for foreign exchange funding and the accumulation of residual by the financial system must be added to the accumulation of productive capital investment. In CPRII, when those sums are added to the unrestrained growth of secondary (investment trust) debt discussed at pages 15-17 of this paper below, it becomes evident debt cycles can still occur.


From 1978 to 2012 the slopes of the Debt/GDP and Accumulated Current Account (ACA)/GDP curves for New Zealand were about the same. Both the total debt and foreign ownership increased at roughly the same rate. The debt/GDP ratio increased by 97% of GDP while the ACA/GDP ratio increased by 85% of GDP. 


Much of the additional debt in New Zealand is therefore attributable to the country’s persistent over-consumption of imported goods and services and its failure to rebalance its current account. This is a direct result of the removal of the US$ gold peg on August 15, 1971 and subsequent deregulation of the banking sector. The excess deposits created by that additional debt are a direct cause of asset inflation in debtor countries like New Zealand. Effective exchange rate policy is needed to manage both the asset inflation and the level of foreign ownership.


Without the NZ$ 194.3 billion accumulated current account deficit, New Zealand’s total debt would apparently be just NZ 126.2 billion, being Domestic Credit $320.5 billion less current account deficit of NZ$ 194.3 billion. Figures 1 and 2 show that, in the present system, NZ$ 126 billion is far too little to sustain a NZ$ 200 billion economy which would need about NZ$ 200 billion (GDP) + 5% GDP for the productive transaction accounts + NZ$ 28.5 billion (bank residuals) or nearly NZ$ 240 billion. In that case, deposits would be NZ$ 210 billion, just a little more than GDP instead of 1.4 x GDP as shown in Figures 3 and 4. Moreover, the economy would be owned domestically instead of a large part of it being owned by foreigners. New trade agreements like the proposed Trans Pacific Partnership Agreement (TPPA) are likely to worsen these structural imbalances unless strong provisions are put in place to protect the current account.


CPRII (p. 57-58) claims to take at least some of the US international investment position into account. The US net international investment position at the end of 2012 seems to have been about US$ -4.42 trillion (source:


The sum used in CPRII appears to include “at least a conservative estimate of the liabilities of the shadow banking system...” (p58 – top). That suggests that US$ 4.4 trillion, about 30% of GDP, needs to added to the liabilities side of CPRII Figures 1-3 (p. 79-81) while about 30% of GDP needs to be added to the debt side to satisfy equation (1). In other words the diagrams given in CPRII are about 30% of GDP too low. The author assessed the error at about 25% in a previous detailed critique of the original paper which can be found in Comments on the IMF (Benes and Kumhof) paper “The Chicago Plan Revisited” at webiste That critique was circulated to BK on 30th August 2012. The claim at p.14 that “Nobody has so far challenged our economic model or the model simulations” is therefore factually incorrect.


Leaving aside the many other assumptions made in the CPRII model calibration and the use of DSGE modelling for a macroeconomic exercise like this, this error alone could be large enough to affect the model simulation. This assumes the DSGE simulation itself (pages 32 to 60) were valid. Even then it would still be subject to error theory where potential error in each variable accumulates through the whole model simulation. No sensitivity analysis is provided in the CPRII text so the impacts of changes in even a few of the main variables are not available, rendering the simulation results suspect.


The extra debt is mostly private debt and BK do not appear to consider the impact of that private debt redemption on currency exchange rates, the current account and trade.


The CPRII model calibration for the real economy uses US data “for the period 1990-2006 where available ..... to compute averages ”(p. 55). But for the calibration for balance sheet data “we use a calibration based on the final years preceding the crisis” (p. 55). It is hard to see how such an approach can have either validity or reliability even if the analysis were really just a “before” and “after” comparison.


A wider objection to the CPRII analysis and simulation is that control of the money supply (the deposit base) does not limit the supply of credit as CPRII claims.


Whether or not a citizens’ dividend is used to convert existing bank debt into credit is immaterial to the broad outcome of the reform. Investment trusts would still be needed to channel savings deposits to borrowers. They also provide a pathway to redistribute a citizens’ income so that existing bank debt can retired. In the absence of a citizens’ dividend or an on-going citizens’ income, the investment trusts will still function as S & L institutions to provide secondary lending in the non-bank debt market as shown in Figure 5 of this paper.


The total debt (less government debt that has been retired) remains much the same as it is under the current system except that interest-bearing bank debt is replaced by interest bearing secondary non-bank lending.


Figure 2 and equation (1) clearly show that the debt base in the reformed system must be at least a little more than GDP less the outstanding principal on government investment even when the money supply is created debt-free. Otherwise there could be no capital markets and no capitalism because there would be no way to fund capital investment (see Figures 5 and 6). 


The prudential policy used for modelling CPRII [p. 52-53] is different to that used for the existing system [p. 45] so changes in the model results are unsurprising.


The model calibration in CPRII based on 80% GDP is therefore unsatisfactory.


In practice, whether the lending is done through investment trusts or through other forms of savings and loan institutions there will still be interest-bearing debt. That total debt could quickly become greater than it is now because CPRII puts no restrictions on non-bank S & L lending through investment trusts. The same funds can be on-loaned more than once.


The choice to fund government spending using interest-bearing bank debt is a matter of convention. Article 104 of the 1992 Maastricht Treaty setting up the Eurozone constrains the direct supply of central bank debt funding to governments. That constraint is not a constitutional necessity and it doesn’t apply to the supply of money by individual sovereign governments, especially were it, for example, in the form of electronic cash or large denomination coins.


When existing bank debt is repaid from existing deposits as it matures, or where Investment Trust debt is repaid where a citizens’ dividend is used, the corresponding deposits are removed from the banking system. In the absence of new money injections, rolling over the new secondary debt needed to fund a capitalist economy would require the speed of circulation of the remaining investment deposits to increase and eventually approach infinity. If the deposit base were to fall dramatically, the entire economy would collapse due to massive deflation in the investment sector. On the other hand, without an independent public monetary authority to properly manage the new credit injection, there is no way to constrain the growth of secondary debt. Instead, there would be a cascade of secondary debt from multiple on-lending of the deposit base. Once an investment trust accepts a deposit, it must on-lend the deposit at a profit. It must pay interest to its investors and charge a higher interest rate to borrowers, otherwise it would quickly become insolvent. In the present system lending, and therefore the deposit base, is nominally constrained by banking ratios and rules like the Basel accords.  The constraint occurs because it is usually cheaper to borrow from a bank than it is to borrow on the secondary debt market.


The post reform secondary debt is not all shown on the CPRII balance sheets (Figures 1-3 p. 79-81) because it involves a physical and sequential transfer of deposits from lender to borrower.


If the economy is to grow under CPRII, there must be a continuous injection of new non-debt credit into the economy through large-scale government spending programs and/or by replacing the initial citizens dividend with an on-going citizens’ income. Otherwise there would not be enough deposits to meet the needs of both the productive economy and the investment sector. CPRII does not provide for any of this.


There is therefore no evidence that CPRII will limit the demand for credit and no evidence that credit cycles will be better controlled notwithstanding asymmetric prudential policy.




The CPRII text does not prove there will be a reduction in private debt; only that there will be a reduction in bank debt. So, in CPRII Figure 1 (p. 80) there is 80% of GDP in investment loans backed by Treasury Credit and bank equity, exactly the same as there is at present. The foregoing discussion shows it is theoretically impossible to support a capitalist economy using a debt of 80% of GDP. That means that at least some of the deposits must be on-loaned through savings and loan institutions.


Under the CP proposal “private credit is now only extended  [by the government] to capital investment funds” (p. 47). Since 80% of GDP is insufficient to support the productive economy either the government will have to lend more, or capital investment will also have to be funded from secondary debt.


CPRII refers to this on page 48 where there appear to be two kinds of trusts: Treasury funded investment trusts to fund capital investment and privately funded trusts initially established to “smooth” the retirement of bank debt when a citizens’ dividend is used to enable bank debt to be repaid. The aggregate surplus citizens’ dividends have to be on-lent to net debtors as part of the transition process. To prevent those deposits from being spent and adding to productive sector transaction account money, the surplus deposits “could then be converted into the equity shares or non-monetary debt instruments of the investment trusts envisaged by Simons”.[p. 48]   However, the surplus deposits can only become liquid as the secondary debt is repaid.


Note that the Manning plan for permanent debt reduction in the national economy available a also requires the surplus citizens’ income deposits to be sterilised during a transition phase.


In practice, almost all the system deposits will be either borrowed from the Treasury  (capital investment) or on-loaned at least once by private investment trusts.


Today, private bank debt is unequally distributed in the population at large, so only a relatively small proportion of it (it’s about one third in New Zealand) will be directly retired as a result of the proposed one-off citizens’ dividend payment.


Investment Trusts cannot afford to pay interest on deposits unless they on-lend them. The only possible conclusion is that there will be relatively little reduction in private debt and that it is likely that private debt could increase through the cascading effect of deposit recycling. Without a worthwhile incentive to save, investment sector deposits could leak into consumption, causing rapid inflation in the real economy.




This claim might seem at first sight to be valid in so far as the deposit base is fully secured against reserves, but it is not necessarily so. There will probably be bank runs just as there are now because the financial system will be no more stable than it is now. There is nothing in the proposal that suggests there will be less risk-taking by financial institutions. If the capital investment trusts borrow Treasury credit  (CPRII Figures 1 -3 p. 79-81) and private investment trusts on-lend much of the deposit base, lending institutions would still collapse if defaults on those loans were to exceed their (reduced) equity. If a financial institution collapses, or even looks like doing so, depositors are still likely to withdraw their deposits. All that happens is that the institution’s assets (reserves) and liabilities (deposits) decrease by the same amount, rapidly shrinking the institution’s balance sheet. However, that safety net applies only to the current holders of the deposit base. It does not apply to the investors who have on-loaned deposits through the investment trusts. They will still lose that part of their on-loaned deposits that cannot be recovered from the realisation of their loan security, just as they do now. The aggregate deposits remain the same but the investment trusts can be easily bankrupted with all the same outcomes as at present. Many lending institutions could be more vulnerable than they are under the present system because, according to BK Figures 1 and 3, their equity has been drastically reduced while the aggregate debt base including secondary debt has not.


The statement at CPRII p. 49 that there is a large increase in the business sector (manufacturers) balance sheets appears to be based on the assumption that because manufacturers form one group of economic agents in the modelling all business debt will be retired using a “manufacturers dividend” similar to that proposed for households. 


Such a proposal is morally and legally unsupportable The statement [p. 49] that Manufacturers’ “principal is instantaneously repaid through the citizens dividend” is manifestly unjust because, in the US alone, it would represent a US$ 3 trillion gift to business shareholders in addition to their own citizens’ dividend. Instead, the citizens’ dividend should include the manufacturers’ debt, so the manufacturers borrow from the private investment trusts like most other private individuals.


Under CPRII, while Manufacturers will no longer be carrying bank debt in aggregate, most will still be carrying a similar amount of private debt because the Manufacturers’ dividend will be asymmetrically distributed just as private debt is.


The “riskless debt” assumption made in the text is also incorrect as is the claim that the “steady state level of this borrowing is however zero”. Business lending is always risky, and, as already discussed, business debt must at least equal to GDP whether or not the money supply itself is debt free. There might conceivably be some useful reason to consider negative real interest rates for Treasury credit supplied to investment trusts for new business capital [p. 51]. However, if that is done for business, the same benefit should also apply to households, using, for example an on-going citizens’ income payment. Otherwise, a negative real interest rate would represent yet another handout to business shareholders.


The CPRII proposal as it is presented does not eliminate bank runs because banks can still fail and investors’ claims on the banks’ deposits can still exceed the banks’ deposit base if the ratio of secondary lending to deposits exceeds 1. That applies whoever legally “owns” the deposits and despite the strenuous efforts to take account of loan losses in the model parameters. Perhaps, the only way to avoid the moral hazard implicit in the proposal is to carefully manage secondary lending as proposed in Available in the Manning plan for permanent debt reduction in the national economy at which incorporates a variable business citizens income for each full time equivalent employee but it is not a lump sum payment as in CPRII. It would probably also be subject to regulatory wage requirements.




The preceding discussions (Figures 1 and 2 above) show that when investment capital and resources are readily available it is a simple matter to dramatically improve relative economic outcomes far in excess of the 10% claimed by BK (actually 8% on CPRII Figure 5 p. 83). By far the main benefit in the CPRII proposal is the direct funding of investment capital to business in the form of low interest Treasury credit. Careful allocation of that credit will enable large increases in output over a short time frame. That is one major reason China has done so well in recent decades. 


A US$ 500 billion net injection of productive capital into the US real economy will increase US output by around 3.5%. CPRII is not necessary to enable that to occur. 


The 10% long-term output increase over 12 years is far too conservative.


The intent of the model simulation is to compare economic outcomes before and after the CPRII changes are introduced. Such a comparison is bound to be artificial because the format of the model forces an outcome consistent with the modelling assumptions and calibration. The simulation results shown in CPRII Figures 4 to 7 (p. 82-85) in all likelihood overestimate the performance of the current system and underestimate the economic benefits of the plan.


The model simulation claims an increase of output of 10%  but, on the basis of error theory, such numbers are meaningless. Based on 100 variables each with 10% error it is likely to have a 95% confidence limit of  +/-  1000% or more. There are, however, far more than 100 variables in the model.


With a confidence limit of 95% one might be confident a numerical value of 1000 has a 95% probability of being between -9000 and + 11000....but that would hardly be appropriate for meaningful analysis. Error theory applies both to the model equations (p. 32-55) and to the calibration (p.55-61). The equations and numbers also assume the DSGE modelling technique is applicable to this kind of macroeconomic analysis. Even when the same errors apply to each individual term used in modelling the existing system and the CP, they will not accumulate symmetrically in the results if the equations, or even the weighted use of the same equations underpinning the modelling are different, as is often the case.


There are too many modelling issues to discuss in detail in this paper. Just a few are mentioned below to give some idea of their scope.


The BK analysis assumes everyone will respond the same way under the different financial regimes though no evidence is offered for that assumption. There could just as likely be dramatic changes in public perception and confidence were the financial system to become more trustworthy, transparent and accountable.


The model parameters are all based on an equilibrium “optimization” over time spread over all agents in each category. For example,  (p. 43) “All manufacturers have the same initial stocks of deposits, loans and net worth” and “all manufacturers make identical choices in equilibrium”. Even if there were any equilibrium there is no reason to suppose such model boundary conditions exist now or would ever apply symmetrically across different financial systems. The entire modern economy is based on asymmetry gained through corporatisation, globalisation, and institutional preferential treatment. An economy satisfying egalitarian model assumptions would quite likely be more efficient and productive than the present multinational oligopoly protected by a plethora of perks and patents.


Superficially egalitarian model assumptions cannot properly be applied to an intensely asymmetrical economy. Notwithstanding that, the CPRII analysis seems to be weighted in favour of the existing system and against the CPRII reform proposals that could be used to reverse some of the existing financial system asymmetry. The modelling bias may be intentional: taking a very conservative approach may help mask some of the other issues relating to the model methodology even though in doing so it underestimates the economic benefits of the proposal. BK could justifiably argue that if the CPRII proposal “works” under the model parameters they have applied in their paper it would work much better if more appropriate reform parameters were used.


It is easy to increase economic output when all aggregate business debt has been forgiven and when a low defined steady state interest rate is conveniently built into the model variables (CPRII p. 51) and only directly affects decisions on physical investment. “The government subsidizes investment trusts to equalise the average funding costs of the government and of the lowest-risk private corporations.” [p. 52] 


As already noted, this by itself should translate into very high output gains. 


Undoubtedly, the giant multinationals would be perceived as the lowest risk private corporations.


Overall, the assumptions made for key variables are ideological, not practical.


There is no reason to suppose growth needs to be artificially restrained at 2% or inflation at 3% or default for investment loans at 1.5%. The distribution of net worth is managed so that manufacturers’ (corporations, banks) do not reach the point where debt financing becomes unnecessary (CPRII p. 40). Everyone is perfectly rational. There is no relative flow of net worth among different groups. Business mortgage property debt and residential property debt are given the same risk weighting (0.5) even though business risk is 100% and residential property 35% (p. 56). The same goes for keeping the labour share of income fixed... and so on.  


Nor is there any logic in assuming a steady rate of consumption between constrained and unconstrained households of 4:1 (CPRII p. 55). The implication is that the relative household income distribution and expenditure patterns will not change under the proposals. If the population at large does not benefit from the changes there would, from the public perspective, be little point in making them. This is especially important when considering the existing lopsided wealth and income distributions.  


CPRII will continue the concentration of private wealth and income into fewer and fewer hands because it does little, if anything, to reduce either the debt servicing burden placed on the public at large or improve wealth and income distribution.


There is an acknowledged moral judgement in this statement. BK can justifiably argue that the CP was never intended to benefit the public at large but to stablilise the financial system. But what would be the point in stabilising the system so the existing tiny financial and business elite (the 1% of the “occupy” movement) can become tinier and even more elite? Without a moral dimension promoting broad public and environmental benefit, CPRII becomes just another proposal to further consolidate the power of financial institutions.




This claim is partly true.


The relative proportion of transaction (non-interest-bearing) deposits to total deposits may vary over time depending on the demand for debt and the interest rates expected by the investor, which is the investment trust, in the secondary debt market. The interest rate will be determined by the supply of new money. In CPRII this is done using a “nominal money growth rule that controls the broad money supply and thereby inflation”[CPRII p. 10].


The CPRII modelling uses a Friedman nominal money growth rule formula (CPRII equation 31, and p.61 top). That only controls inflation in the productive sector if just the right amount of new money is allocated to the productive transaction accounts used to generate the economic output. However, measured inflation is not just about the amount of new money, but where it goes. In the CPRII proposal it seems to be directed into new production, which is good. However, as shown in Figures 3 and 4 of this paper, setting money growth equal to the growth rate of output is insufficient in a debt-based system, whether that debt is bank debt or secondary S& L debt. BK also use a “conventional forecast based interest rate rule” (CPRII equation 20) to model the policy inflation rate (price stability) in the present system. The target inflation is expressed in terms of the change in government debt and a “steady state nominal interest rate”.


Neither of the above formulae represents the real economy because neither of them enables the basic accounting formula equation (2) (p. 10) in this paper to be satisfied.


Assets              = Liabilities + Net worth.

(DC + NFCA)   = M3  + Residual                                                                                               (2)


Equation (2) can easily be expressed for the post CPRII reform as in equation (3):


Assets                                                                                             = Liabilities + Net worth.

Treasury credit + Residual debt + NFCA =  Deposits           + Residual                              (3)




-Treasury credit is the debt-free central bank credit,

-Residual debt is the sum of [remaining bank debt during the reform transition period + any central bank lending to banks or investment trusts for government and private productive capital investment]. The Residual (the banking sector’s net worth) is expressed in equations (2) and (3) as a positive quantity because it is not part of the money supply. 

-Deposits are the total deposits (M3) in the banking system,

-NFCA is the net foreign currency assets of the financial institutions. 


Secondary debt from the on-lending of deposits through the investment trusts is not fully included in equation (3) because it resides nominally outside the banking system even if the banks act as intermediaries. Despite that, the secondary debt is crucial when calculating economic outcomes because it is fundamental to the health of the investment sector. There are various ways to visualise the secondary debt as a proportion of Treasury credit or as a proportion of deposits while bearing in mind that secondary debt can be higher than either the deposits or the Treasury credit due to the cascading effect of multiple on-lending of the investor deposit base.


When the amount of secondary debt exceeds the deposits in the investment trusts the investment sector must inflate because interest-bearing trust deposits MUST be on-loaned if the trusts are to survive. That WILL create an exponential price spiral in the investment sector. That means that the CPRII proposal as it is presented will fail.


Neither equation (20) nor equation (21) in CPRII takes the above factors into account so they are unsuitable for modelling purposes. That is why Friedman monetarism failed and why inflation rate targeting and attempts to use a Taylor type rule have failed over recent decades.


Deposits other than transaction account deposits must circulate in the Investment trusts. If they do not do so there will be catastrophic inflation in the productive sector. As the interest paid on investment accounts falls toward zero there will be little incentive to save the money in them. Some of the money will migrate into transaction accounts where it will be  used for  consumption. The reformed CPRII system relies on a worthwhile “incentive to save” being offered to investors. That interest necessarily causes inflation in the productive sector. For more detail see the various papers by the author at That means there can be no steady-state inflation under CPRII. The inflation level will instead depend directly on the average interest rate the Investment Trusts pay to investors and that will depend upon how the investment sector as a whole is managed.


Since the injections of new Treasury credit are specifically directed toward productive investment they will stimulate monetised economic growth as long as there are unused or underused resources available within the economy. As previously noted, most of that new money injection must be hoarded or saved in the investment trusts. 


There is no risk of a liquidity trap if the Treasury credit creation is managed properly but there will not be zero steady state inflation.




CPRII is designed to position the banking sector so it can continue to dominate world banking and finance following the introduction of broad-based monetary reform. That reform is proposed in response to the now widely acknowledged failure of the current financial system based on interest bearing debt created ex-nihilo by private financial institutions.


BK openly acknowledge this in their paper at p. 20:


 The volume of credit would still be mostly controlled by private financial institutions, and the allocation of that credit would be completely controlled by them”. 


This is the opposite of the statement BK made in Part V A : Banks at p. 34  (top) in their earlier paper: “Under this [CP] funding scheme the government separately controls the aggregate volumes of credit and the money supply.” 


In CPRII the word “controls” has been changed to the word “influences”. 


The heart of the CPRII proposal is to separate the monetary and credit functions of the banking system. Bank-created credit (interest-bearing debt) will be replaced by government-issued money (debt-free Treasury credit). All other credit the economy needs will be generated either from investing retained profits or from on-lending the (non-bank created) deposit base. That on-lending will create interest-bearing secondary debt, which is ignored in the CPRII proposal [Figure 1 p. 79].


Cancelling government debt with government-issued money could improve government finances but a large pool of secondary debt will still be needed to fund the exchange of financial assets in the investment sector. Otherwise the investment sector will quickly collapse. In CPRII the prices for and quantity of that secondary debt are open-ended. Banks, acting as intermediaries for the pooling and allocation of that non-bank credit, will still charge their bank spread and other fees for their services. CPRII substitutes secondary debt for bank debt while at the same time reducing the banks’ risk and exposure to bad debt.  


Under CPRII the commercial banks retain their present domination and discretion over how funds in the private sector are invested. This power is now used first in the interests of their shareholders and then in the interest of their “friends” at the cost of small and private businesses and investors and the taxpaying public at large. 


Effective monetary reform requires that the volume, price and allocation of debt funding as well as money be managed for the public good rather than for private profit. This does not appear to be the real objective of the CPRII proposals.


The referenced papers :


00. Summary of papers published.

01. Financial system mechanics explained for the first time. “The Ripple Starts Here.” 

02. How to create stable financial systems in four complementary steps.

03. How to introduce an e-money financed virtual minimum wage system in New Zealand.

04. How to introduce a guaranteed minimum income in New Zealand.

05. The interest-bearing debt system and its economic impacts.

06. The Savings Myth.

07. The DNA of the debt-based economy.

08. Manifesto of the debt-based economy.

09. Unified text of the manifesto of the debt-based economy.

10. Using a foreign transactions surcharge (FTS) to manage the exchange rate.

11. The Manning plan for permanent debt reduction in the national economy.

12. Comments on the (Jaromir Benes and Michael Kumhof) Chicago Plan Revisited Paper.

13. Missing links between growth, saving, deposits and GDP.

14. Capital is debt.

15. Measuring Nothing on the Road to Nowhere.

16. Debt bubbles cannot be popped : Business cycles are policy inventions.

Return to : Bakens Verzet Homepage

"Money is not the key that opens the gates of the market but the bolt that bars them."

Gesell, Silvio, The Natural Economic Order, revised English edition, Peter Owen, London 1958, page 228.


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