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Edition 01 : 06 August 2011.
Edition 02 : 21 September,
2011.
Edition 04 : 09 February,
2013.
(VERSION EN FRANÇAIS PAS DISPONIBLE)
Summaries of monetary reform
papers by L.F. Manning published at http://www.integrateddevelopment.org
NEW Capital is debt.
NEW Comments on the IMF (Benes and Kumhof) paper “The
Chicago Plan Revisited”.
DNA of the debt-based economy.
General summary of all papers published.(Revised edition).
How to create stable financial systems in four
complementary steps. (Revised edition).
How to introduce an e-money financed virtual minimum wage
system in New Zealand. (Revised edition) .
How
to introduce a guaranteed minimum income in New Zealand. (Revised edition).
Interest-bearing debt system and its economic impacts.
(Revised edition).
Manifesto of 95 principles of the debt-based economy.
The Manning plan for permanent debt reduction in the national economy.
Missing links between growth, saving, deposits and
GDP.
Savings Myth. (Revised edition).
Unified text of the manifesto of the debt-based
economy.
Using a foreign transactions surcharge (FTS) to manage the
exchange rate.
(The
following items have not been revised. They show the historic development of
the work. )
Financial system mechanics explained for the first time. “The Ripple
Starts Here.”
Short summary of the paper The Ripple Starts Here.
Financial system mechanics: Power-point presentation.
THE DNA OF THE DEBT BASED
ECONOMY
THE Disputation on the Power
and Efficacy of the Indulgences of the Debt-BASED FINANCIAL SYSTEM.
By
Out of love and concern for the truth, and with the object of eliciting
it, the following heads are offered for public discussion under the presidency of
the Authors. They request that whoever cannot be present personally to debate
the matters orally will do so in absence in writing.
EMAIL: manning@kapiti.co.nz
JULY
31, 2011: 19B
THE
DNA OF THE DEBT-BASED ECONOMY.
The following
three-dimensional diagram represents the DNA of the debt-based economy. It is tilted
forward from the top to make its features easily understandable.
The diagram is made
up of two mirrored helical strands of financial DNA. The blue strand represents
the total accumulated GDP output for a given period while the red strand
represents the total outstanding productive investment principal. The vertical
axis of the helices represents time. The diagram shows a random period of four
years.
On the blue helix,
Vy bases of production output My are added over the time
span needed to make one full turn of the blue helix (usually a year). On the
red helix, Vy bases of national saving Sy (net new
productive investment) are added over the time span needed to make one full
turn of the red helix (usually a year). For ease of consultation, the bases of
production output My and the bases of national saving Sy are
shown only for year three. The drawing shows nineteen of them, as this is the
approximate speed of circulation Vy of productive deposits My
in
The helices
replicate by extension. The blue helix showing GDP “dies off” at the end of
each period. The helices grow exponentially by the transfer of National Saving
Sy from the blue helix to the red one over each notional production
cycle.
For each of the
bases the national saving Sy is returned to the next production
cycle on the blue helix in the form of net new capital investment Sy
(Saving = Investment) as shown. Individual bases can vary in size (up or down)
reflecting the state of the economy.
The annual length
or growth ring Lz of the blue helix shows the GDP as it
accumulates during that year. The
nominal, usually annual, GDP growth in the blue DNA is the change in length Lz
of the DNA spiral over the period z compared with the corresponding length L z-1
over the previous period. In the diagram, the length (and therefore the
diameter) of the GDP spiral is shown to be increasing exponentially from year
to year.
The annual increase
in the length of the growth ring Lz of the red helix shows the
annual increase in outstanding investment
principal S which also equals the nominal GDP growth for that year. The total
length of the red helix at any time is the sum of all outstanding investment
principal. It equals the current
(annual) GDP at any time.
At the end of each
(annual) period z (and only then) the value of output represented by length Lz
of the blue helix (the GDP for that year) equals the value represented by the
whole of the red helix (its total length representing the sum of all
outstanding investment principal).
The plan diameter
of the helices typically expands exponentially. The helices vary together with
the state of the economy. In the case of recessions they show up as changes in
the annual rate of increase of the
helix diameters, and therefore the length of the spiral loops. In the case of
depressions they would show up as an actual
annual decrease in the helix diameters.
Click here to view
a drawing showing
the DNA of the debt-based economy.
Click
here to see a visual form of the debt model.
A UNIFIED TEXT OF THE
MANIFESTO OF THE DEBT-BASED ECONOMY.
This document presents unified texts of the 95 principles included in the
Manifesto of the Debt-Based Economy. They are organised in a logical order of
sequence under the various subject headings. The revised Fisher equation
showing the debt Model is described in the Appendix.
Debt.
For practical
purposes, debt-based financial systems in modern industrialised countries are
cashless. In industrialised (and most other) countries, privately owned banks
create new debt and charge their clients for doing so. In the
debt-based system the debt is created before its corresponding money deposit.
Except for residual
cash transactions, in a debt-based financial system there is a unit (dollar) of
debt for every unit (dollar) of “money”. For every unit (dollar) “saved” by one
person there is a unit (dollar) of debt owed by another.
Debt can only be
used once. Once debt is used it must eventually be repaid with interest. Unless
it is written off by bank failure, existing debt can be repaid only by reducing
the banking system deposits or net worth.
Debt growth.
The debt based
financial system is dynamic and independent of orthodox economic equilibrium
theory. Orthodox economics offers no mechanism to achieve
elimination of unsustainable debt growth. As the ratio of unearned income to
GDP increases, the ability of the productive economy to fund the pool of
unearned income decreases.
Net after-tax
interest paid by banks on their clients’ deposits forms an exponentially
increasing pool of non-productive unearned interest income that is never repaid
and is a structural part of the debt-based financial system. The interest rate
on deposits must be eliminated if the exponential growth of the pool of
non-productive unearned income is to be stopped. Unless the deposit interest
rate is zero, Domestic Credit, unearned deposit income and nominal GDP must all
grow exponentially because, in the debt based financial system, they are all a
function of the deposit interest rate.
In the absence of
realised capital gains it is impossible to maintain exponential debt expansion
greater than GDP expansion over an extended period because the added debt
servicing costs will always leave the productive sector insolvent. The debt
supporting the exponentially increasing pool of non-productive unearned income
leads to an ongoing transfer of real wealth from the productive sector to the
non-productive investment sector.
Credit bubbles, recessions and depressions result from the failure of
the banking sector to properly align demand for credit with the productive
capacity of the economy. Credit expansion in the banking system above what the
debt system requires means there is a bubble in the economy while credit
expansion below what the debt system requires means there is a recession or
depression in the economy. A credit bubble or economic contraction is
neutralised when credit expansion has been adjusted so that it just satisfies
what the debt system requires taking into account the full productive capacity
of the economy.
There is no “money”
multiplier in the debt based financial system other than the (slightly) variable speed of circulation of
the transaction deposits actually used to generate productive economic output.
Exponential debt growth can be eliminated by progressive credit
monetisation of the existing debt and by permanently reducing the OCR (Official
Cash Rate) towards zero, at which point systemic inflation caused by interest
paid on deposits would be removed from the financial system.
Inflation.
Systemic inflation
and exponential debt growth are caused by interest paid on bank deposits.
Interest paid by banks on their clients’ deposits forms an exponentially
increasing pool of non-productive unearned income that is a structural part of
the debt- based financial system and cannot be repaid.
In a debt-based
economy where interest is paid on deposits, systemic inflation is half the
interest rate paid on deposits provided adjusted wage rates rise in line with
that systemic inflation plus productivity growth and there are no changes to
indirect taxes. Systemic inflation arising from deposit interest automatically
reduces towards zero as deposit interest rates reduce towards zero. However, in
the absence of quantity controls on the issue of new debt, low interest rates
can lead to unproductive “bubble” lending, thereby increasing price inflation.
In an economy based
on interest bearing debt, almost all price is inflation. Aggregate consumer
prices inflate with the deposit interest rate so that deposit interest on
existing productive investment can be paid into the unearned income pool
without disrupting the productive economy. Increasing interest rates to manage
inflation increases the flow of deposits from the productive sector to the
investment sector by increasing the unearned income pool. It is no longer possible to combat inflation
by substantially increasing interest rates (or to stimulate growth by reducing
them) because modest increases in interest rates are now enough to drive the
economy into recession.
Foreign ownership
of a part of a debtor economy causes asset inflation there because there are
more domestic deposits available to fund the exchange of assets remaining in
domestic ownership.
The supply of new electronic cash (not debt) to businesses to fund
virtual increases in minimum wages does not necessarily cause immediate increases
in prices because the E-Note injections are not part of production costs and
some of the extra wages will be used for private debt retirement.
Banks.
In a debt-based
system, the interest banks charge their clients to provide goods and services
(the bank spread) is part of productive economic activity and does not cause
inflation. When the bank spread and costs are constant, the larger the total
debt of a nation the larger the turnover of the banks and the more profit they
make.
Deposit interest paid by banks to their
clients is not specifically beneficial to the banks but is the fundamental
source of systemic inflation in the debt-based financial system. Public credit
and money issue enables domestic banking systems to operate in high growth, low
risk, low interest, low inflation economies while retaining their existing
profit margins.
Gross domestic product (GDP).
The nominal
increase in GDP over any period equals the increase in National Saving, which is
the gross capital formation less principal repayments over the same period.
Productivity growth
is inherently deflationary. It usually affects prices rather than GDP and
declines as an economy becomes more service-based. Except by utilising existing
idle productive capacity, the only way to increase GDP is through new
productive investment through the supply of new transaction deposits to make
use of spare labour and resources in the economy or to increase the skills of
and re-employ existing resources, and by the relationship between the
production of capital goods and goods and services for consumption
Interest rate
reductions stimulate an economic recovery only when the capital gains from the
exchange of existing capital assets produce enough new debt to satisfy the
systemic debt requirements of the financial system.
In a cash-free debt
based economy with zero interest rates on deposits the increase in GDP equals
the speed of circulation of debt in the productive sector times
(a) the change in
domestic credit, less
(b) the current
account deficit, plus
(c) a correction
for any imbalance between the change in domestic credit and what the debt
system requires taking into account the full productive capacity of the economy
Business cycles.
A recession
provides for inflation but not economic growth, while a depression provides for
neither economic growth nor inflation. A recession occurs when the change
(increase) in the total debt (both public and private) over time is less than
what is needed to service the financial system costs made up of the net
unearned interest that has to be paid on all bank deposits plus any new current
account deficit plus any increase in the productive debt used to generate new
economic output. A depression is a deep recession that also fails to provide
for inflation.
Income distribution.
Apart from
utilisation of existing unused productive capacity, the additional production
from new capital assets is the ONLY way to increase earned purchasing power in a
debt-based economy.
The SHAPE of an economy, which is the basket
of goods and services produced in relation to incomes and consumption patterns,
is largely determined by its income distribution. Poor income distribution suppresses
demand for domestically produced goods and services. Since the employed workforce is already producing goods and services, the
SHAPE of the economy must change to improve economic efficiency and promote domestic production.
Socially mandated income
redistribution is necessary to distribute productivity increases throughout the
economy and improve real wages and purchasing power. The application of a
single flat financial transactions tax to all withdrawals from bank accounts
changes the shape of the economy by redistributing income.
Taxation.
Skewed tax systems
benefit a relatively small section of society at the expense of everyone else
because they impair economic performance and economic growth potential by
systemically transferring purchasing power from the productive sector to the
unproductive sector through increased debt and debt servicing.
A uniform wealth tax on all net wealth from all sources is
redistributive because it (gradually) reverses the accumulation of net wealth
inherent in the presently dominant debt-based financial system. A single Financial
Transactions Tax (FTT) automatically
collected on withdrawals from bank deposits can help correct the tax skew
inherent in existing taxation systems that substantially exempt the investment
sector from paying its “fair share” of tax.
Consumption (with housing).
Most residential
housing is economically unproductive once it has been built, thought its
construction is part of the productive economy. Residential housing that does
not generate income is incompatible with a financial system based on
interest-bearing debt.
Assuming incomes are constant and there are no productivity gains or
realisation of capital gains through asset inflation, homeowners must reduce
their domestic consumption by an amount equal to the principal and interest
payments they make on their non-productive capital assets. The reduction can be
(partly) offset through capital gains. Realised values from the
exchange of existing assets must in that case increase by an amount sufficient
to cover both the interest and principal repayments. The reduction in domestic
consumption must otherwise be matched by the export of the
resulting surplus consumption goods and services if structural unemployment and
recession are to be avoided
The process of production and consumption in
the productive economy is self-cancelling wherever it takes place and however
its phases of production and consumption are shared amongst nations. Export of surplus consumption goods and services to avoid structural
unemployment and recession decreases foreign ownership of the domestic economy.
It does not directly improve domestic wellbeing in the exporting country.
Inclusion of a
housing provision in a tax-free guaranteed minimum income (GMI) system allows close matching of the GMI
to existing government income transfer structures in many industrialised
countries
Capital formation.
Capital formation
in a debt-based economy takes place in accordance with the basic tenet of
orthodox economics that National Saving equals Productive Investment. It arises
from the redistribution of employee income and gross operating surpluses of
businesses to purchase the capital goods created by the productive economy.
Production must always, but only just, lead consumption to provide the incomes
that enable consumption to take place.
Saving.
In the modern
world, faster depreciation has swapped longer-term productive investment to
boost existing stock and existing property prices. Saving for productive investment and real GDP
growth as measured using the international System of National Accounts cannot
be restored to modern developed economies unless the protocols around
depreciation are altered, bank lending polices and regulations reviewed and the
serious distortions in the System of National Accounts (SNA) records themselves
are corrected.
In a debt-based
financial system and in the absence of a debt bubble it is impossible to
increase National Saving (and therefore GDP) without increasing production
loans and new productive investment. In the absence of asset inflation, any
attempt to withdraw any part of deposits for non-productive investment purposes
(“savings”) reduces purchasing power in the productive economy or leaves capital
goods unsold, leading to increases in inventory, and subsequent unemployment
and recession. Unproductive savings and pension schemes such as Kiwisaver in
Investment.
The investment
sector represented by the accumulated net after tax interest paid on bank
deposits produces nothing itself and is paid for through inflation in the
productive sector. Increased depreciation allowances speed up principal
repayments and reduce national saving and productive investment. Increased
repayment of debt, including household debt, reduces national saving and
reduces net new productive Investment.
The accumulated net outstanding principal invested in productive capital
goods is equal to the net accumulated national saving because in a competitive
market economy the long-run economic profit of business tends toward zero as
profit falls toward the opportunity cost of capital. Productive investment
represents the redistribution of production incomes to clear the capital goods
market in the productive sector.
Economies in
recession must be stimulated by direct investment in new production because the
lead-time before the benefits of increased productivity from infrastructure
investment exceed the infrastructure costs is usually too long to be effective.
System of national accounts.
The
use of depreciation for measuring economic success has been catastrophic for
the world economy.
When the current account
balance is included as income in the national income and outlay account of the
SNA an entry of equal value entitled “purchase of capital assets on the current
account” should be included on the other, “use of income”, side of the national
income and outlay account.
The National income
and outlay account of the SNA needs to be restructured and the National capital
account consequentially adjusted to reflect orthodox economic theory as
follows:
Use of income side:
= Final consumption C
+ Purchase abroad of non-productive
capital investment goods (=CA)
+ Saving for productive investment S
Income side:
= GDP
+ Current account balance (CA)
less the balance on external
goods and services
less repayments of principal
on outstanding productive investment.
Current account.
Current account transactions are exchange
transactions, not production transactions. To avoid bankruptcy of the
world economy in the long run, each nation must maintain, in aggregate, a zero
accumulated current account.
There is no such
thing as foreign debt; there is only foreign ownership by foreign creditors of
part of a debtor’s nation’s economy either as physical ownership or ownership
of commercial paper. An accumulated national current account deficit reduces
national savings and increases the domestic debt of the debtor country, its
domestic inflation and foreign ownership of its economy. Foreign ownership of a
debtor nation’s economy drains its domestic economic growth through outgoing
current account payments of interest on commercial paper and dividends and
profits arising from the physical foreign ownership of its assets.
The debtor status
of debtor countries can only be managed without affecting their domestic
economies if their exchange rates are reduced so their current accounts become
positive enough to reverse the foreign ownership of their assets. In the
absence of effective management of capital flows and the exchange rate, the
logical outcome of the existing debt system in heavily indebted debtor
countries is national bankruptcy because debtor countries are condemned to
paying high interest rates to avoid capital flight.
Exporting domestic
production (“export-led recovery”) is an unsatisfactory method for reducing an
accumulated current account deficit unless the accumulated deficit is small and
the exchange rate is free to fluctuate independently of domestic interest
rates.
At any point of
time, the current account deficit in heavily indebted debtor countries is
typically just a little more than:
a) the accumulated
current account deficit of the debtor country, multiplied by the average bond
rate in the debtor country, minus
b) the trade
balance of the debtor country for the period, plus
c) the net
repatriated profits of foreign-owned banks operating in the debtor country over the same period.
A positive balance
on external trade swaps domestic growth in the exporting country for foreign
assets in the debtor country and is a positive growth factor for the exporting country’s business
interests. The logical outcome of the existing debt system in creditor
countries is zero deposit interest and stable or falling asset prices (as in
A tax-neutral variable
Foreign Transaction Surcharge (FTS) applied to all outward exchange transactions allows the progressive reduction in foreign ownership of the domestic
economy (the so-called foreign debt) by enabling the exchange rate to fall towards a
stable base level, increasing the value
of exports and decreasing the quantity of imports, and providing a more even
playing field for local manufacturers and producers.
E-notes.
Existing privately
issued interest-bearing government debt can be progressively retired as it
matures and replaced with publicly issued interest-free debt or E-notes spent
into circulation by the Government. E-notes (electronic cash) perform exactly
the same role as existing bank debt.
Zero or low interest credit and money issue
enables economic growth to be tied to the productive economy instead of being
inflated by deposit interest.
Local money systems.
Local money systems
are co-operatively owned interest-free, self-cancelling monetary systems in
which there is no systemic debt because the debt incurred during the production
phase is cancelled when the product or service is sold. They can be organised
nationwide and taxed in formal currency, promote domestic production, increase
economic efficiency and reduce financial leakage from local economies.
Appendix : The Debt Model based on a revision of the Fisher Equation.
Click here to see a visual form of the debt model.
The debt-based economy can be
expressed as a simple variation of the original Fisher Equation of Exchange:
GDP (Total economic output measured
as gross domestic product PQ, being the quantity Q of goods and services
produced times their price level P) = Vy ( the speed of circulation
of My) times My (the transaction deposits actually used
to generate PQ)
in the
form:
GDP = Vy *(DC
- (Ms +Dca +Db ) + M0y )
Where My
= GDP/Vy = DC - (Ms +Dca + Db) + M0y and:
My = The
deposits actually used to generate productive output and My = Mt + M0y where Mt
is the transaction deposits representing
productive debt Dt,
and M0y = The residual cash
in circulation included in My that is used to contribute to
productive output,
Dca = The whole of the debt created in the
domestic banking system to satisfy the accumulated current account deficit 1.
Ms =
The net after tax accumulated deposits arising from unearned deposit income on
the total domestic banking system deposits M3 (excluding repos) 2.
DC = Domestic Credit,
Ds = the residual needed to satisfy the
equation DC = Dt + Dca3 + Ds and the debt Dt is numerically equal to the
Db =
The “bubble” debt, the excess credit
expansion or contraction in the banking system such that Ds - Db = the debt supporting the accumulated deposit interest Ms
defined above. Db can be
positive or negative”.
The debt model can be expressed and
used in its differential form to quantify macroeconomic outcomes over any
chosen time period.
1. This is greater than the monetary deposits Mca
because the banking system may have sold commercial paper to borrow foreign
currency to satisfy the foreign exchange settlement requirements.
2. Repos refer to inter-institutional lending
3. Arguably the accumulated sum of capital transfers
could be included here, in which case the net international investment position
(NIIP) would be used instead of the accumulated current account. The decision
affects the size of the “residual” Db.
"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,
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