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Edition 01: 10 May, 2013.
(VERSION EN FRANÇAIS PAS DISPONIBLE)
Summaries of monetary reform
papers by L.F. Manning published at http://www.integrateddevelopment.org
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.
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.
Analysis of The Positive Money Proposal – Plan for Monetary Reform,
The proposal was
posted at the www.positivemoney.org website on 06 April, 2013.
By L.F. Manning and
T.E.Manning
Stichting
Bakens Verzet,
Netherlands,
02
May, 2013.
Our comments follow the order
of presentation in the document analysed (“the PM proposal”).
01. Positive Money
(PM) tries to present its reform proposals in a more readable form than it has
previously managed to do. The proposals are still far from easy for most people
to understand. There are numerous intellectual leaps in the text that need to
be broken up into smaller steps. We think the diagrams and figures in the PM
proposal still need more work despite the effort that has already gone into
them.
02. This new text
does not alter our earlier critique of the proposal as a whole, namely that it
will not work as it is currently presented. Our earlier critique was dated 18
January 2012, forwarded to Positive Money on 21 January, 2012, and subsequently
further clarified in correspondence with the authors of the PM proposal. If we
had a bank, we would be falling over ourselves to support the proposal because
as it is presented it is a win-win for the banks and largely a lose-lose for
the economy and the public.
THE PM PROPOSAL IN BRIEF.
03. Points 1-3 (p.
4) of the PM proposal : The repayments to Bank of England (BOE) are
automatically re-circulated to maintain the money supply. We think this relates
to both the Conversion Liability for transaction accounts AND existing bank
debt placed in the investment pool but it is not clearly stated this is so. See
our point 15 below for more detail on this. If the conversion liability extends
to “pre-reform loans” shown on Figure 2 of their document PM need to make this
very clear. Despite PM’s best efforts we still think the depiction of the
proposal is far from clear.
04. Point 4 of the
PM proposal : Demand deposits = transaction accounts PLUS deposits that deposit
holders choose not to invest in investment accounts. The accounts transferred
to the central bank, those are Transaction accounts, Operational accounts and
investment pool, and the Central Government account shown in Figure 2, are
operated through the commercial banks like trust accounts are operated by
lawyers. The existing commercial bank reserve accounts at the central bank are
absorbed at the changeover into the various elements for the BoE balance sheet shown in Figure 2 but we do not
think the text explains this well.
Commercial banks’ existing time (non-transaction account)
deposits are already bank liabilities transferred to the investment pool. The difference
is that existing “savings accounts” available on call would disappear because
the customer must choose to leave that money in a transaction account or put
it in an investment account. At the
changeover call accounts would presumably first be put into the transaction
accounts and the customers notified so they can decide whether to hold their
funds in their transaction accounts or authorise their investment through their
bank’s investment pool. The PM proposals do not say this clearly.
For legal purposes
anyway, deposit holders presently own the use of the funds in their current
accounts. We say they have the use of the money, the right to which is being
paid for by the original borrower under his debt contract with the bank. In the
present system [e.g.
05. Point 5 of the
PM proposal : The whole issue of the transition stage for Investment Accounts
is extremely vague. First, non-transaction account balances have to be
identified as we have said in our point 04 above. Then bank depositors will
have to be asked at the switchover how they want to distribute their investment
deposits into different risk categories. Then the banks somehow need to
categorise their existing sectoral risk. Then they need to find a way to bridge
the inevitable imbalances that will arise. Our own proposals in The Manning plan for permanent
debt reduction in the national economy (TMP) should
probably also say something about that, but
the PITA structure in TMP is an
independent government supported body whereas the PM Investment Pool is not. In
PITA, secondary debt is carefully managed instead of being an unconstrained
banking “free-for-all”.
PM point 5 refers
to “demand deposit liabilities”, not to investment accounts. The term
“conversion” is not defined there. Readers could infer that it refers to the
conversion of just the debt supporting demand deposits and that that is what “would be repaid as the banks’ assets mature.”
But that is not the case. As we understand it all existing bank debt has to be
converted over the 20 year transition period.
There seems to be
some confusion in the PM proposal between the status of the “migrant” deposit
holder and that of the original debtor. The banks’ liabilities to the original
borrower would be retired “as the [bank’s] assets mature.” That process reduces
the deposit base. In the existing system the effect of that reduction in
deposits is masked by the creation of new bank debt and new deposits. Banks´
assets at present represent rights created under the original loan agreements.
They are not directly linked to the migrated deposits in current (or
transaction) accounts.
Under the PM
proposal the existing deposit base will tend to shrink quickly as existing bank
debt is retired, collapsing the investment sector. Therefore the PM proposal
must fail unless either the speed of circulation of the remaining deposits
accelerates or the retired deposits are somehow replaced by new debt-free money
as PM suggests elsewhere in their document. Replacement done through
government spending as indicated in PM Objective 6, which in any case is
subject to the agreement of the Monetary Creation Committee (MCC), would
effectively mean nationalising the economy since ALL existing bank debt would
have to be converted. Furthermore, there is MORE debt around than deposits! How
does PM propose to deal with a situation such as the one in
06. Point 6 of the PM
proposal: Again, there seems to be confusion between the “migrant” deposit
holder and the original debtor.
Following on from
our point 05 above, the system of “repayments” is poorly described in the PM
proposal. There does not seem to be any mechanism whereby repayments under
existing debt contracts could be “automatically re-circulated”. Under the PM
proposals new deposits required to maintain the deposit base pass into
transaction accounts through public spending and through BoE lending to
commercial banks for productive investment.
The question is how the need to re-circulate
non-productive investment debt is to be matched with available resources in the
productive sector. Who would
allocate the vast amounts of new debt-free money that will be needed to
replenish the non-productive investment market ? To whom would it be allocated
and how?
07. Point 9.2 on
page 5 of the PM proposal : “Lending money…” should read “creating and then
lending money.” This new lending goes only into the productive sector. We
assume PM means the MCC will create the money, not the BoE as written.
PM’S
SIX OBJECTIVES.
08. PM objective 1:
This objective seems to assume the government itself would not increase the
amount of money in the economy in the absence of productivity increases. But it
must do so during the transition
period mustn’t it? The inference in the text is that the only way the
government can fund a budget deficit outside of the MCC is by borrowing on the
secondary debt market through the investment pool.
What is to stop the
government or corporations, or anyone else for that matter, from borrowing
offshore? Then there would be new domestic non-bank debt and money deposits
injected through the foreign exchange interface, wouldn’t there? Wouldn’t this
affect the exchange rate and (eventually) interest rates? What kind of
processes does PM have in mind to deal with this, since they do not seem to be
mentioned anywhere in the PM proposal ?
In our own work,
the underlying cause of the overall increase in the amount of the money supply
is due to the exponential increase in the total of unearned interest paid on
deposits. The amount of debt created, repaid and reissued is a symptom of the
underlying mechanism, not its cause. The devil is not the increase of the
amount of money in the economy per se. It is the siphoning off of purchasing
power and wealth to the non-productive (investment) sector that skews the
productive income and wealth distribution, forcing the productive economy to
inflate.
09. PM objective
3.1: For “New lending would not create
new money” read “New lending by
private banks would not involve their creating new money”.
10. PM objective
5.1: Bank failure would not affect transaction deposits circulating for GDP
(“the payments system”) but a bank’s clients who are “creditors” would
presumably have to write off losses in investment accounts for the amount the
bank is unable to cover. Those losses have to be physically distributed from
within the bank’s investment pool. How is that to be physically managed?
If a bank is shaky,
investors will tend to transfer their deposits from the investment pool to the
safety of the transactions accounts as soon as possible. Wouldn’t that be inflationary if it were
widespread? What would MCC do to ensure there is enough money in the investment
pool to stop the investment sector crashing? Wouldn’t interest rates skyrocket
in the investment sector?
11. PM objective
6.1: This states that because new money is spent into circulation by the
government to replace bank debt repayments, the private sector can pay down its
debt without sparking a recession. That’s OK, but needs to be expanded. If
there is to be unlimited counter-cyclical government spending to replace the
loss of deposits under the PM proposals how can MCC really be in charge of the
money supply?
As discussed above
in our point 05 above the investment pool will have to be replenished through
public spending. Most of the new funds
spent into circulation by the government go first through the productive sector
and then migrate to the investment sector. The question then is whether
those extra funds would further inflate the private investment sector when the
value of public assets grows as a proportion of total assets. Wouldn’t they
simply inflate the remaining private assets? Does the government have to have a
continuous privatisation program? How would the wider public view such a
program?
12. PM objective
6.2: This is poorly worded. Yes, the proposal eliminates most bank debt.
However, in any form of capitalist
economy, Savings and Loan style secondary debt must replace most bank debt.
The basic accounting equation
still applies
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,
Residual is the net worth of
the M3 institutions.
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
All that happens is that some
of the terms are expressed differently from a system point of view:
Assets =
Liabilities + Net worth.
MCC funding + Residual debt +
NFCA =
Deposits + Residual (2)
Where:
MCC funding is the debt-free
BoE credit for most deposits and
Residual debt is the remaining
bank debt + investment account lending + MCC lending for government and private
productive capital.
NFCA is the Net Foreign
Currency Assets of the M3 institutions and the Reserve Bank.
The residual (net worth) is
always expressed as a negative quantity because it is not part of the money
supply.
The question then is “how is
the NFCA to be funded”? How is it to be managed if it is to be funded from debt-free money?
PM
INTRODUCTION.
13. PM Introduction - Page
7: (
14. PM introduction - Page
8 Top
“The setting of interest rates by
the central bank is generally ineffective at controlling inflation”. That
is also true up to a point. However, in our work reducing interest rates
reduces inflation provided new lending is properly managed.
PART
1 : REFORMS FROM AN INDIVIDUAL’S PERSPECTIVE.
15. PM heading “Transaction
Accounts” Page 9 Bullet 4, on overdrafts.
Reference is made
to overdrafts but it is not clear where the overdraft “money” would come from.
By definition an overdraft in the present system is a commitment by the bank to
create new money on demand. Are commercial banks to have a corresponding “line
of credit” from MCC? If so, how is that
line of credit to be allocated among banks? What determines the interest rate
for it? Wouldn’t that mean the transaction accounts are not fully debt-free?
Both the loan
“assets” and the deposit “liabilities” are the bank’s legal property because they
represent the dual outcomes of the loan agreement whereby the bank agrees to
create both the debt and the deposit.
Banks continue to
“own” the money they have created. Borrowers and subsequent depositors just
have the right to use it. The original borrower pays the price for the right to
use the money as part of the original loan agreement. The money owned by the
banks is tangible property, whereas the right to use it is temporary intangible
property for which an on-going interest fee is paid.
The property of the
banks relates to the parties´ obligations under the loan agreement. Deposit
holders to whom the money created with the debt have migrated have nothing to
do with the original loan agreement. The banks have no immediate right to or
property in those migrated deposits at all because the deposit holder at any
time has the intangible right to the use of the money. The banks’ rights relate
instead to the original debtor and the original deposit under the loan
agreement.
16. PM page 10. All
financial activity except for government spending is to be controlled by banks,
same as now, but with no effective limits on either debt or interest rates. The
only differences are that government bank debt can be repaid (but we don’t need
the PM proposal to do that) and that transaction account balances are
debt-free. Everything else would be debt as usual ..... including funding
current account balances.
17. PM page 11-
Investment Accounts would not hold money:
“An Investment Account would never actually hold any money.” This is
because the money would immediately be transferred to the bank’s “Investment
Pool”, at which point “the money would
belong to the bank, rather than the Investment Account holder, and the bank
would record the Investment Account as a liability to the customer, and the
Investment Pool account as its asset.”
PM claims that when
the money is transferred into a bank’s investment pool, it “would belong to the bank, rather than the
account holder”. In our view that is true only up to a point. Legally the
bank owns the money but the depositor, for the time being, owns the use of the
money, much as expressed in our point 15 above. Under the PM proposals the
investor hands the use of the money over to the bank under the investment
prospectus, not the ownership of the money itself. Interestingly, in respect of
the debt-free money issued under the PM proposal, we would say the “The People”
own the money. It is public money made available for beneficial use in the
economy at large. The MCC can add to that pool of money or reduce it at will
according to the needs of the economy. Clearly the issuer, “the public”, owns
it. We think the process described in the proposal defines the ownership of money once and for all.
If PM’s claim were
true the bank would not acting purely as an “intermediary” as PM states at
point 3, bottom of page 5 and point 2 on p 29 of the PM proposal would it? PM
can’t have it both ways....... In our opinion, the investment account holder
would remain the beneficial owner of the use of the funds. The amount invested
should stay on his books as an asset. PM refers to this as a “record”. In
effect, the investor sub-lets the use of the deposit in return for the interest
the investor receives from the bank.
The bank does not
(or should not) own the use of the money even though it has possession of it
for a short time. The bank charges for its services with a fee or by
negotiating extra interest for itself with the borrower. The bank invests the
funds for its client on its client’s behalf. PM repeatedly state in the PM
proposal at p. 12 “ the commercial banks
would actually only be administering these accounts on their customers’ behalf”.
This means the use of the money remains at the risk of the client. It must
therefore remain the (intangible) property of the client. Sharing of eventual
losses mitigates risks as stated the PM proposal on p. 12. From an accounting
point of view the bank, if it includes these investor loans on its balance
sheet, has the loan from the investor as a liability and the investor’s deposit
in the investment pool as its asset. Interest and bank costs due or charged to
the various parties would be accounted for separately as they are now.
We think the bank’s
Investment Accounts should be a trust account, just like a lawyer’s trust
account, and that the bank’s Investment Pool with the Bank of England should
also be a trust account, just like a lawyer’s trust account.
Page 11 of the PM
proposal : Investment accounts would be risk-bearing. Presumably losses are split
according to risk category as in the Manning plan (TMP), but the PM
document doesn’t say how the losses will be split. Loss split is crucially
important because it has a large impact on bank lending behaviour, on investor
decisions and on interest rates.
PART
2: COMMERCIAL BANK’S PERSPECTIVE.
18. The PM proposal
p.12 : Existing bank debt is repaid as it matures. That removes deposits from
the banking system. Once all existing investment debts were repaid the only
deposits in the system would be transaction account deposits. To roll
investment debts over would require the speed of circulation of the remaining
investment deposits to eventually approach infinity. The text only says that
new money will be granted to the government to spend into circulation or
supplied as loans to banks to pay for new productive assets , though that’s not
clear either. Elsewhere in its text PM says the BoE money grants to the
government are automatic so as to offset the loss of deposits. One of the most
obvious ways to deal with this is to use a basic income to inject new deposits
into the system. However, that is not as straightforward as may appear because
once the deposit base has been rebuilt the basic income payments would need to
be drastically reduced to match the planned growth in the investment sector,
taking the speed of circulation of the deposits into account.
19. The PM proposal
p.13 : “The money in this [investment
pool] account would be owned by the bank and the account would be recorded as
an asset of the bank”. We have discussed this under our point 17.
20. The PM proposal
p.13 : The Customer Funds Account. Trust accounts would not normally appear on
banks’ balance sheets. If they did, they would appear under the same title for
the same amount on both sides of the banks’ books as we have discussed above.
The same applies to trust funds held by the Bank of England for its client
banks (Investment Pool) and for transaction accounts. Since the customer
investment accounts and bank loans are on the balance sheet as shown in Figure
21. The PM proposal
p.14 : loans, bottom page: “By placing
money into an Investment Account the customer will have transferred ownership
of their money to the banks.” This
is like saying: on renting my house to a tenant I transfer ownership of it to
the tenant! We do not believe the PM
claim is true whatever the accounting convention used. PM even confirms our
view itself when it writes at the top of p.15 of its proposal : “ the act of making loans would merely
transfer pre-existing money from one Transaction Account to another Transaction
Account (via a bank’s Investment Pool)” The rights in the use of the money
are transferred, not ownership of the money. Money arising from bank debt is
owned by the bank and money issued debt free through MCC is owned by “the
People”.
22. The PM proposal
p.15 –top: PM writes “the quantity of
money in circulation” would not increase. We say that the quantity of debt
increases in excess of deposits if the first round of investment account funds
were to be recycled to make more secondary debt loans. That would increase the
speed of circulation of deposits. A higher speed of circulation would have
exactly the same effect as increasing the quantity of money.
PM claims : “While the quantity of Investment Accounts
would have increased, these would be illiquid and non-transferable and so could
not be considered money”. This is contradictory because such deposits are
part of M3 and therefore considered money now. They are obviously part of
equation (2) above so they are money. Why wouldn’t investment funds continue to
be considered part of the total money supply? The interest and principal
repayments on secondary (investment) debt are money when they are paid into
transaction accounts, so how and why would they suddenly become “non-money ”
when they are transferred out of the transaction accounts?
The fact that
investment funds are “illiquid” and/or tied up for a period of time does not
remove them from the broader economy any more than is the case today. Since
they are mostly tied up in the non-productive investment sector they do not
contribute to GDP. But that is a separate issue altogether.
We think Figures 2
and 3 of the PM proposal are wrong and that both sides in the Bank of
PART
3 CENTRAL BANK’S PERSPECTIVE.
23. The PM proposal p. 16-
top:
(a) Confirms MCC lends to
banks only for injection into the “real” economy ;
(b) Confirms MCC has little
control over how new money is to be used; and
(c) Interest rates are solely
determined by the market.
If that is so how
does MCC know/decide how much to charge the banks for on-lending to private
clients for productivity purposes? Money publicly spent into circulation would
be interest-free. There is therefore no need for an “inflation target” of 2% if
the financial system is stable. Conceptually, the inflation target can be zero
as long as the interest rates paid on investment account deposits provide some
“incentive to save”.
At present the PM
proposal must fail. If deposits build up in the transactions accounts there
will be runaway inflation in the productive economy and if most deposits
migrate to investment accounts, as must happen for the productive economy to be
stable, they must be on-lent come what may or the commercial banks will fail. The on-lending in the investment sector
MUST cascade to keep the deposits out of the transaction accounts. This
MUST lead to hyperinflation in the investment sector. The PM proposal will only
work when there are systemic checks and balances in place as in as in the Manning plan (TMP).
24. The PM proposal
p. 17 : How does MCC decide the amount of new lending needed in order
(a) to avoid a
credit crunch in the real productive economy? and
(b) to stop money
grants from MCC spent into the economy by
the government from increasing the levels of private debt?
Obviously most of the
money grants must pass through the transactions accounts and then into customer
investment accounts. Once they are in the investment accounts they MUST be
on-loaned by the banks at interest, otherwise the banks would immediately go
bust. Contrary to PM’s claims, most new money injection would promptly lead to
unconstrained interest-bearing private secondary debt growth.
25. The PM proposal
p.18 - Spending money into circulation.
PM’s Point A: If
MCC controls the amount of money created, how does it decide how much the
government gets and how much goes to private investment? How does the
government physically manage the distribution process?
PM’s point B: This
is confused and contradictory. MCC cannot both apolitically control the money
supply and be directed in its decision by tax policy. Moreover changes in taxes
change the distribution of purchasing power in the economy, not the money
supply. PM’s point seems to be that budget
deficits affect the money supply
because new money would be needed to balance the budget. However MCC is
supposed to be fully independent. If that is so the government has to adjust
its policy within the framework of the new money MCC allocates to it, not the
other way around. Allocation? How? Who decides?
PM’s point C:
Citizens payments. Universal income is a way of equitably re-distributing funds. In principle, new money going into
the system this way over and above the needs of the productive economy must be
sterilised to avoid inflation there. One way to do that would be to tax out the
excess for example, by using wealth and/or carbon taxes. This means there would
have to be close links between MCC and the government that the structure of the
PM proposal fails to provide.
PM’s point D: The
paragraph on paying down national debt is incorrect. When a bond is repaid the
government debt (the bank’s asset) and the government deposit (the bank’s
corresponding liability) are both cancelled when the central bank transfers the
new money it has created to the bank in repayment. The original government
deposit remains however in circulation where is has been since the original
loan money was spent . There is no new money changing hands! All that happens
is that the bank loses the seigniorage (interest) previously paid to it by the
government.
26. The PM proposal
p. 19: Lending money into circulation.
PM writes: “the Money Creation Committee would also be
tasked with ensuring that businesses in the real (non-financial) economy have
an adequate access to credit.” and “the
MCC may decide in its monthly meetings to lend some newly created money to
banks”. This is confusing. MP has carefully stressed the MCC does not
decide how new money is spent! There is supposed to be separation between
deciding how much new money there is
(MCC), and how it is spent (Government, Banks). So the MCC would need to
assess needs for the economy as a whole. Most money spent by government other
than the taxation flows finishes up in private sector deposits anyway.
PM also notes that
“new money comes into the economy not as
new spending, but as new money available only for businesses to borrow.” PM
should add to that : “for new production”. Otherwise the private sector could
just collect new money (subsidies) to increase profits, which would inflate
prices. Nor does PM say that money grants to the government can only be used
for new productive investment. We are not saying that the grants to government should necessarily be limited to new
productive investment but if that is not the case there would need to be some
predetermined rules around how it can be used for other purposes.
27. The PM proposal
page 19 - 3rd Paragraph: We do not see any reason why the government
should not seek to “pick winners”. Unrestrained private enterprise for profit
is not designed to and never works in the national or public interest, and we
are disturbed that the PM proposal would continue the status quo in respect of
the economy as a whole.
The government
answers to its electors for the choices it makes. In effect PM seem to agree with
this where it writes: “the Bank of
PART
FOUR : ACCOUNTING.
28. The PM proposal page 20
-The traditional method.
We think the
wording at the top is very clumsy. The existing bank deposits are transferred
from the commercial banks to the central bank. The central bank then has an asset
(the deposits it has received) and a liability (the corresponding “loan” from
the banks). The balance on both sides of the accounting equation falls as the
bank loans giving rise to the deposits are repaid. As previously agreed, the
government must spend an amount of new
money into circulation equal to the repayments being made. If it did not do so
there would be no transaction deposits left when the final existing loan is
repaid. Whether the government could physically spend so much remains to be determined.
This is so even though the Conversion Liability is repayable over a period of
20 years. The text on page 20 seems to refer to the transitional period in
respect of the commercial banks’ Investment Pools, but does not say so. Which
makes it confusing.
29. The PM proposal
page 20 – paragraphs 2 and 3: The Central Bank transactions account is or should be a trust account. There is no loan
either from the individual banks or from deposit holders. Funds are simply recorded
when they go in and when they go out, like a lawyer’s trust account. Individual
banks maintain the schedules on behalf of the Central Bank on the one hand and
their clients on the other, so the use of the funds remains individually owned
and “controlled” by the deposit holders.
We think the whole
matter of bonds and government debt is redundant as MCC has the sole power to
create money. The potential need for the bonds seems to arise because the roles
of the key agencies (MCC, government, central bank) are still confused despite PM
having made considerable effort to avoid that. The tables and figures give an
idea of outcomes but we do not think they properly define the relationships.
30. The PM proposal
page 23 – bottom: How does MCC decide
what “the productive capacity of the economy”
is? How can it make such a decision when the banks allocate the new money for
private production? There seems to be a fundamental contradiction between MCC
playing a management role here when, according to the text, the banks have full
control of resource allocation in the private sector.
31. The PM proposal
page 24 – Table. Would the productive capacity of the economy be the
outstanding principal on productive investments + the productive sector
transactions accounts as in Lowell Manning’s work at www.integrateddevelopment.org ?
PART
V : TRANSITION TO A REFORMED SYSTEM.
32. The PM proposal
page 25. The text claims “The
consequences of conversion of demand deposits into state issued currency would
allow a significant reduction in household debt and a gradual reduction in the
aggregate balance sheet of the banking sector”. We think this is
misleading.
PM shows a reduction in the balance sheet of the
banking sector only because the very large secondary debt base is not scaled
properly on the balance sheet (Figure 3).
PM
shows the post reform loans have indicatively the same size as the investment
accounts but that would be untrue in presence of a cascading effect resulting
from multiple on-lending of the deposit base.
According to PM’s
earlier text customers just have the “records” of the banks’ (potentially
multiple) on-lending of the investor account deposits. However PM shows both
the investment account and the bank loans on the household/firms balance sheet
in its Figure 3. The full amount of debt will still be there, and it could be
much larger than it is at present. So we think Figure 3 is more or less OK
(though lopsided) and PM’s text elsewhere is unclear.
At the same time
the banks will still be drawing a bank spread, which would potentially be at
least as large as before but for a much reduced risk, on the whole sum invested
through investment accounts. That sum may and probably will be larger than the
total deposits in the investment pool because there is nothing at all to
prevent multiple secondary on-lending of the same deposits. So there may be
little, if any, reduction in household debt unless basic income or equivalent
measures are carefully introduced. In short, we suggest the PM proposal fails in its major objectives.
33. The PM proposal
page 26 – Overnight switch: First paragraph. See points already made above
about the conversion liability and the difficulty of juggling risk levels and
deciding transition interest rates.
PM states: “the Bank of
The household and
firms’ transaction accounts shown in Figure 3 of the PM proposal would remain
as they were. They were already a credit of the account-holder with respect to
the commercial bank and now they are a credit of the account holder with the
Bank of England. There is no physical transfer of new currency to the deposit
holder. Instead there is a physical transfer of new currency from the Bank of
England to the commercial bank so that its deposit liabilities can be
extinguished.
The commercial bank
still enjoys the interest benefit from the original debt corresponding to the
original deposit, which still has to be repaid by the original borrower. However,
the principal repayments form part of the conversion process, passing from the
commercial banks to the Bank of England to reduce the banks’ debt, its
“commercial bank liability to bank of
34. The PM proposal
page 26 – 3rd paragraph: “If removing the demand liabilities from bank
balance sheets were the end of the process, then the UK banking sector in
aggregate would have lost around £1,041 bn. of liabilities.”
That’s not the end
of the process so there’s little point in the text. You can’t “lose”
liabilities. That’s why there is a corresponding conversion process as the
banks’ original borrowers repay their loans, including those giving rise to the
transaction account balances, while the banks use those repayments to retire
their liability to the Bank of England. It would be helpful if Figures 1-
As the Bank of
England receives the Conversion Liability repayments from the commercial banks
over a period of some 20 years, it reduces the banks’ Conversion liability to
it. Meanwhile the Bank of England “writes” a corresponding amount of new money
into its assets column (Figure 3 Bank of
35. The PM proposal
page 26 – 4th par: “Under
normal circumstances the Bank of England would be required to automatically
grant the money paid to it as a result of the repayment of the Conversion
Liability to the Treasury to be spent back into the economy.”
The extra money
that is put into the economy by MCC to expand production (both government and
private) has to be enough to maintain the existing deposit base plus new money
for new economic development unless
the speed of circulation through the investment accounts increases.
Once the conversion
is complete, as in Figure 3, repayment of loans advanced through the banks’
investment pools eventually accrue to the original depositor (the lender)
through the banks’ operating accounts and there is therefore no loss of
deposits from the financial system. Where deposits are on-loaned the investment
sector more than once, the speed of circulation of the money supply increases.
Spending money
`back into the economy` through the transition period in part mimics the
existing debt system where deposits are cancelled as debt is cancelled and new
debt and new deposits are created to replace them.
In the reformed
system deposits are not cancelled as investment account debt is repaid.
Instead, new secondary debts are likely to be created using the same deposits.
That will not be inflationary unless the total quantity of investment account
lending exceeds the size of the investment pool. However, there is nothing in the PM proposal
to prevent that happening.
36. The PM proposal
p. 28 – Deleveraging :
¨After the reform, loan repayments would not
reduce the money supply, because the act of repaying a loan would simply
involve transferring state-issued electronic currency from the borrower’s
Transaction Account to the bank’s Investment Pool.¨
This wording is
clumsy. Repayments of loans made via investment pools under the proposed PM
system pass from a borrower’s transaction account to the bank’s operational
account and from there to the original
lender’s transaction account. If the original lender chooses to re-invest the
money, it will pass via the original lender’s transaction account to the bank’s
investment pool for re-investment. This does not apply to the existing
debt-base which is described at the top of page 28.
37. The PM proposal p 28 –
Deleveraging – bottom:
¨The money supply would be maintained, although because the money would
be spent and not lent into circulation, debt would be lower.¨
This is
fundamentally incorrect, as described elsewhere in these notes. The deposit
base will increase as new money is spent into circulation through government
spending and MCC loans for productive investment. Most deposits will pass through investment
accounts into the investment pool. Since there is no restriction on the
cascading effect of deposit recycling, interest-bearing secondary debt will
almost certainly be higher than the total debt is now, not lower.
The authors can be contacted
at :
Stichting
Bakens Verzet (NGO Another Way)
Schoener
50,
1771
ED Wieringerwerf, Netherlands
Tel.
0031-227-604128
E-mail : bakensverzet@xs4all.nl
THE REFERENCED PAPERS
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.
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.
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"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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