29 Mar 2015

19 economists call for QE for citizens in the Financial Times

I'm delighted to hear that I am not the only person who thinks that Mario Draghi could use  €60 billion a month of money creation more intelligently. Back in January I wrote to him to propose that he should simply give every man, woman and child in the Eurozone €186 a month as a sort of Unconditional Basic Income. Far better than throwing the money at the financial sector and praying...

Thanks in part to lobbying from Positive Money, a group of 19 economists signed a letter in the Financial Times on March the 26th asking for exactly the same thing - except that they are only proposing €175. Great minds think alike ;-)

Screenshot 2015-03-27 12.40.00

The letter is signed by the following 19 notable names.  

Victoria Chick, University College London
Frances Coppola, Associate Editor, Piera
Nigel Dodd, London School of Economics
Jean Gadrey, University of Lille
David Graeber, London School of Economics
Constantin Gurdgiev, Trinity College Dublin
Joseph Huber, Martin Luther University of Halle-Wittenberg
Steve Keen, Kingston University
Christian Marazzi, University of Applied Sciences and Arts of Southern Switzerland
Bill Mitchell, University of Newcastle
Ann Pettifor, Prime Economics
Helge Peukert, University of Erfurt
Lord Skidelsky, Emeritus Professor, Warwick University
Guy Standing, School of Oriental and African Studies, University of London
Kees Van Der Pijl, University of Sussex
Johann Walter, Westfälische Hochschule, Gelsenkirchen Bocholt Recklinghausen, University of Applied Sciences
John Weeks, School of Oriental and African Studies, University of London
Richard Werner, University of Southampton
Simon Wren-Lewis,University of Oxford

Let me add my own.

Simon Thorpe, CerCo (Brain and Cognition Research Centre), Toulouse, France

If you want to join the list, just add a comment.

11 Mar 2015

David Graeber's "Debt : The First 5,000 Years"

I have finally found the time to read David Graeber's excellent and epic book on the history of Debt. You can download the book as a pdf file.

One of the major points he makes is to demonstrate that the story that money was invented as a way to simplify barter - an idea present in the vast majority of textbooks on economy - is a total myth. For thousands of years, humans societies functioned using bookkeeping systems  that kept a log of who owed what to whom. Money, in the sense that we currently use the term, only came into being with the appearance of the first coins in about 600 BC. There was a second period with very little money from around 600AD till about 1450AD, when banking in its current format appeared. During that period, nearly all business was done using systems based on various forms of IOUs, including tally sticks.

I wonder what David Graeber would think of the sort of IOU based system that I have been proposing with OWE'M. It seems to me that it may indeed be possible to come up with a new form of IOU based economy for the third millenium.  Could it be that we are on the verge of a new form of civilisation, where the power of the money makers can be handed to individual citizens?

9 Mar 2015

Saving the world - by fixing the economic system - the full pdf

Now that my blog has had over 167,000 visits, it's possible that some of you might like to have the entire contents of my blog as a fully clickable pdf file. Thanks to BlogBooker, I have been able to generate a Word file document that have edited to remove (a large number of) typos, and generally clean up. Using Word for Windows (but not Word for Mac :-( ), you can generate a pdf file with all the different posts indexed.

You can download the result here, and since I have used Bit.ly to shorten the Dropbox link, I will even be able to find out how many people have downloaded it, and (roughly) where you live - well, which country you live in.

But be warned. My blog now runs to over 300,000 words. It takes up over 600 pages of single spaced A4 text, using a font size of 10 (!). And it will use up 31 Mbytes of disk space! Even I'm impressed, and I wrote it all!

One nice thing that I noted when reading rapidly through the whole thing is that there is hardly a word that I would now reject - even though my ideas have evolved enormously over the 4 and a half years that have elapsed since I started this blog in October 2010.

28 Feb 2015

Fixing the Economic System - a new Youtube presentation

Last Tuesday, I gave a lunchtime seminar at the prestigious Toulouse School of Economics.  I'd already invited myself to give a talk there back in March 2012, but on that occasion only four people turned up to hear me present my ideas on replacing the current tax system by a Flat Rate Universal Financial Transaction Tax.

This time, the turn out was much better, and there were about 20 people present. This was the title and abstract for my talk:

“Can a cognitive neuroscientist and amateur economist say anything of interest to real economists?”

Since the summer of 2010, I have become increasingly interested (some would say obsessed) with the economy. I have devoted thousands of hours to reading up on the subject, I’ve posted 480 pieces on my blog, which has had over 165,000 visits, produced 24 Youtube videos, given a TEDx talk on Tax reform, set up an association called “Monnaie Honnête” which is a member of the International Movement for Monetary Reform, and created an online exchange system called “OWE’M’ that allows credit creation by Citizens using an IOU based system. But, so far, I have had very little opportunity to get feedback from real economists. This talk could be the chance for the economists to prove to me that I have been talking garbage. Alternatively, there might be some useful ideas in there somewhere…. who knows? As a firm believer in the power of biological evolution, my personal belief is that the best strategy is to generate lots of variations, and let natural selection do the rest. I would claim that I have been generating lots of options, and that some of those ideas may be of interest.

You may well be wondering how things went. Well, not badly, I think. I was prettty pleased with what I had prepared. Indeed I had put a lot of effort into getting my key ideas into the talk, since I realized that it was fairly unlikely that I would get another chance in the near future.

I've now had time to generate a Youtube presentation of the same talk and so you will be able to find out what I said - if you have 60 minutes to spare.

Here's a link to the Youtube site

As you can see, I decided not to use the same title as I used at the Toulouse School of Economics seminar - I called it simply "Fixing the Economic System", although in fact the content is just about identical.  Do feel free to make comments, either here, or on the Youtube site.

21 Feb 2015

US taxpayers have now paid $9.6 trillion in interest payments on Government debt since 1988

Back in June 2012, I had a post showing that US taxpayers had paid $8.5 trillion in interest payments on goverenment debt since 1988.

I thought it might be amusing to update the figures, using the official US Treasury information that you can find here. I've included the numbers on the US public sector debt too - you can easily download the official numbers for years before 2000, for 2000-2014, and for the latest figures to the nearest cent.

Here are the results.

 As you can see, government debt has continued to soar, and has reached  $18.1 trillion at the end of january 2015. But the remarkable fact is that $9.6 trillion of that (roughly 53%) is entirely due to the interest payments on that debt since 1988 - the US treasury site doesn't provide number before then.

In fiscal year 2014, the total interest payments totalled $431 billion - a number that is second only to the peak value of $454 billion achieved in 2011.

I've also calculated the effective interest rate. That number has effectively been dropping virtually continuously since a peak of 8.43% in 1989, and now stands at 2.42%.

Does that mean that US taxpayers are getting a good deal?

NO WAY! Yes, the markets are charging a lower rate than before, but they don't have to charge much when the Debt level is so high. $430 trillion is still 2.43% of the US GDP for 2014 (it was $17.7 trillion). That fits with the general rule of thumb that Banks will typically adjust their interest rates to try and suck money out of taxpayers' pockets at an optimal rate of not more than about 3% of GDP. If they tried siphoning off more money, taxpayers might notice what was going on.

And remember that Banks can lend the US government non-existant money and still charge interest. It's a truly amazing arrangement that is a fantastic deal - for the Banks who have the monopoly on money creation.

As I have pointed out, since the US government's credit rating is AAA (according to the rating agency Fitch), the Basel Banking regulations mean that such loans have a 0% risk weighting.  And that means that Banks don't even have to have any capital at all to make loans. They can create infinite quantities of "money" to lend to the US government, who will then happily pay out $430 billion in interest using tax payers money.

Remember, that there is no reason why the US government could not create the nation's money supply itself. 

If anyone can explain why this insane system is allowed to continue, do let me know.

15 Feb 2015

Global Debt is now 2.5 times the total Money Supply - the system is clearly unworkable

In april 2013, I published a post in which I compared the total amount of debt in the world economy with the total money supply. That post, called "Total Global Debt and Money Supply : Twice as much debt as there is money" is by far my most popular post, and has been visited well over 6000 times. The numbers I provided gave serious cause for concern, because I calculated that while there was $137 trillion in debt, there was only $68 trillion of money. So, even if you took every single cent there was in existence, you would never be able to pay off all the debt.

Following the two recent reports showing that, since the financial crisis in 2007-8, debt levels had soared even more, I thought it would be interesting to recalculate the total about of money relative to debt. Earlier today, I published a post on the remarkly detailed report from the McKinsey Global Institute that showed that Global debt has now reached a staggering $199 trillion.

What about the Global Money supply? To find out, I have extracted all the numbers provided by a remarkable website called Trading Economics. There you can find tables with Money supply figures corresponding to M0, M1, M2 and M3  for most countries. Unfortunately, the tables are not complete because quite a few countries don't report M3. For example, the Federal Reserve in the US decided not to bother reporting M3 in 2006. But I simply took the largest value for each country, and multiplied the number by the current US dollar exchange rate to calculate each country's money supply in dollars.

The complete dataset is shown in the following table.

Compared with the numbers that I gave back in 2013, there have been a number of marked changes. For example, the Chinese money supply has soared from $15.7 trillion to $20.2 trillion. The other big players, namely the Eurozone Area, the USA and Japan have stayed fairly stable, but the UK's money supply has increased from $3.19 trillion to over $3.6 trillion.

But the bottom line is that the total money supply for the entire planet now stands at about $78.8 trillion, up from the previous number that I quoted back in april 2013 ($68.3 trillion). The problem is that while this has increased, that increase is completely swamped by the increase in debt.

We are now in the situation where we collectively have $199 trillion of debt, and only $78.8 trillion to pay it off. There is therefore 2.5 times more debt than money!

You surely don't need to be a rocket scientist to see that this situation is completely untenable. Anyone telling us that we can get out of this debt trap by simply being frugal and paying our taxes like good citizens clearly hasn't got a clue.

How on earth did we get into this situation?

For me, the answer is pretty simple. Commercial banks create money when then make loans to individuals, businesses and governments. But when they do this, they create enough money to make the loan, but don't create the money that will be needed to pay the interest. Thus, if a bank creates $1 trillion in loans with interest at 2% and waits for 20 years, the total amount of debt  in the system will have increased to nearly $1.5 trillion. This is what has been happening for centuries, but the effects of that compound interest have now become totally out of control.

It is clearly time for us to change the system. All money should be created interest free. Full stop.

Soaring Global Debt Levels - time for a complete rethink of the system

My thanks to the McKinsey Global Institute for a truly remarkable 123-page report called "Debt and (not much) Deleveraging" that came out on the 5th of Febuary. It hammers home a point that was made last year in another report called "Deleveraging? What Deleveraging?" that I mentioned last month. Both reports demonstrate clearly that there is not even a glimmer of light at the end of the tunnel. Debt is going through the roof. When are economists going to admit that the current is unworkable?

The McKinsey Institute is stuffed full of detailed information showing how the debt crisis is just getting worse and worse. Here are some of the most striking findings.

First, here is a graph showing how total global debt has now soared to $199 trillion, up $57 trillion from 2007, and has now reached 286% of GDP.

Clearly, I'm going to have to update my claim in April 2013 that global debt is about twice the total money supply. That calculation was based on a value for total debt of $138 trillion. The debt levels are actually nearly 50% higher than that, meaning that it is even more impossible to pay off the debt than I had thought.

The next graph shows that the total debt to GDP ratio has increased almost everywhere since 2007, with some countries like Ireland showing an incredible increase of over 170%.
Then we have a detailed breakdown of where the debt is located, with separate numbers for Government, Corporate, Household and Financial Sector debt. The countries are ranked in terms of overall Debt-to-GDP ratio.

This makes particularly sobering reading,  but is full of interesting information.
There's another graph showing that, overall, it is governments that have been picking up the tab.

In contrast, you can see from the following graph that the Financial sector has been getting its debt levels down substantially - especially in the USA. Good for them, I suppose.

What can we conclude from this? Well, it looks to me that there is absolutely no reason to believe that things have improved since the crisis. Those responsible for the crisis - namely the banks, have been getting out of the hole that they created. But the overall picture is worse than ever. And above all, it is our governments who have been taken on debt. And that means that taxpayers like you and me are even worse off that ever.

Doesn't all this mean that what we really need is a complete change in the model? We have to completely rethink the way money works. We need a money system that isn't built on debt.

26 Jan 2015

A plan for Greece - and the rest of us!

The Greek people have just voted overwhelmingly to reject austerity. They handed power to Alexis Tsipras, the charismatic 40-year-old former communist who leads the umbrella coalition of assorted leftists known as Syriza. They now have hope.

What they now need is some clear solutions to their problems. I'm not sure that Tsipras has all the answers. So, here are my suggestions.

1) Set up a Greek Citizens' Bank. The bank would get its capital from Greek citizens who would inject enough capital into the bank to get it off the ground and allow it to meet international banking regulations such as the Basel III regulations. Citizens would have to realize that they would not get their money back, but I believe that they would see why it would be in their interest.

2) Offer special Greek Government Citizens bonds that pay 0% interest and have the longest duration permissible under standard banking regulations. This is at least 10 years, but could perhaps be extended to 20, 50, 100 or even a 1000 years.

3) Everytime the new Greek government needs to pay the "investors" who had bought the conventional Greek government bonds, it would emit the equivalent value in Citizens bonds that would be bought by the Greek Citizens' Bank. There would be no effective limit to the amount of "money" that could be generated in this way, but since the money would only be used to pay off debt, it could not be accused of being inflationary.

4) When the Bond markets ask for their money back with interest, they should only be paid interest at the rate paid by the Germans - not the extortionate usury rates that Greece was forced to pay at the height of the crisis. As the graph below from the ECB shows, Greece was paying roughly the same rates as Germany from its entry to the Euro in 2001 until 2008, but then ended up paying 29.24% to Germany's 1.85% in Feburary 2012 - that's 15.8 times more.  For me, those excessive interest payments are totally unjustifiable. It is now clear that this totally unjust difference was entirely due to the failure of the ECB and the European Union to treat the Greek people fairly. Indeed, those extortionate interest rates account for much of the increase in Greek Public Sector debt which, thanks to Troika imposed austerity, soared from 105% of GDP in 2008, to 175% of GDP today.

5) The Greek people should insist that instead of pumping €60 billion a month into the financial markets for the forseeable future, Mario Draghi and the ECB should simply provide the same amount of money directly to the 330 Million Eurozone citizens in the form of an Unconditional Basic Income. This would mean 182€ for every man, woman and child in the Eurozone, an amount that for a family of four would be nearly 25% more than the current minimum wage in Greece (€585.78).

6) Greece should insist that the ECB introduces a universal transaction tax on all Euro-denominated financial transactions - wherever they occur in the world. The revenue generated by the tax should be divided between the 17 Eurozone countries according to population size. Half the money should be given to each country's government, and the other half provided directly to Citizens in the form of an Unconditional Basic Income.  Given that much of the trading in places like the City of London are in Euros, this would provide substantial sums. As an example, London-based LCH.Clearnet processed €238,447,455,975,386 in Euro-denominated products in 2014. A tax of 0.1% on that could generate up to €200 billion in revenue - and that is just one of the players.

7) The Greek government should create accounts in N-Euros for each Greek citizen. These electronic accounts, which cannot go negative, could be used to pay taxes and other payments. Citizens could choose to receive a variable percentage of any salaries or benefits in N-Euros rather than standard Euros. This would allow the government to pay its workers and provide social security payments, without the need to borrow "money" from the financial markets and from the ECB and IMF. For more information about the N-Euro solution, see my previous posts from September 2012 and October 2012 as well as my Youtube presentation on the subject.

8) In parallel, the Greek government should set up a Citizens' Credit system, along the lines of the OWE'M system that I set up last year using the publicly available Cyclos 4 banking system. It's a system that needs no actual money at all to run. Users can simply pay for goods and services by sending the equivalent of an IOU in Euros. If the person providing the goods and services is prepared trust the other person, then the entire economy can potentially operate without the need for any Bank generated money at all. Conventional Euros would just be the measuring stick.

And, once those demands have been met, we will be able to apply the same principles to all the countries in the Eurozone and beyond.

Hey, 2015 might turn out to be a good year after all! Thank you Greece!

24 Jan 2015

Another Open Letter to Mario Draghi, president of the European Central Bank

Dear Sir,

Last thursday, you announced that the ECB will create €1.1 trillion and use the money to try and breath some life into the moribund Eurozone economy.

It's clear that being the president of the ECB gives you phenomenal power - power that you had already used back in December 2011 and Februay 2012 when you also created over €1 trillion that you provided to the Banking sector in the hope that it would have a positive effect. I presume that, given the current situation, we can all agree that your previous injection of €1 trillion didn't really fix the problem.

I have many questions for you.

The most important one asks whether your proposal is really the best way to use €1.1 trillion of money creation.

The Eurozone has 330 million inhabitants. That means that you could have used the same amount of ECB money to put 3300€ into the pockets of every man, woman and child in the Eurozone.  That's 15,200 euros for a family of four. Just imagine how much stimulus to the Eurozone's economy would be provided by giving households a direct cash injection of that amount! And the amount of debt reduction that you could have allowed.

I imagine that you will say that putting that much money in peoples' pockets would produce Zimbabwe style hyperinflation, although as I presume you know perfectly well, when people pay off their debts to banks, the "money" just disappears. It could not cause inflation, and will have the effect of reducing the amount of assets held by the banks. That is good news for everyone - including the Banks.

But lets assume that you are being told what to do by the Germans who remain obsessed with the need to avoid a repeat of the Weimer republic. And it's true that pumping €1 trillion in one step could be a bit risky.

So, why not do it gradually. You have specifically said that you will be injecting €60 billion every month until at least September 2016. Divided by 330 million, that is 182€ per person per month - 728€ for a family of four. That is significantly more that the current minimum wage in several Eurozone countries, as you can see from the following table that I compiled using publicly available data.
Just imagine. With the same amount of money that you are propopsing to create every month, you could provide a guaranteed basic income for a family of four that was above the wages paid in austerity-crippled counties like Greece, Portugal and Spain.

Are you still sure that your way is the best way to use all that money?? Where are the arguments showing that your method would be better than directly putting money in peoples' pockets?

OK. So you don't like the idea of giving citizens money directly. So let's look in more detail at what you propose to do.

At least some of the €60 billion you will be pumping into the economy is supposed to be used to buy up bonds on the secondary market. I suppose that is not completely useless. It would mean that you should be able to stop interest rates on public sector debt going through the roof like they did in January 2012 when the Greek government ended up having to pay 25.91%. They would have done as well paying for everything with a credit card.

But the fact is that the real problem is that Eurozone governments are all massively in debt. At the  end of 2013, public sector debt in the Eurozone was over €9 trillion. And the interest payments on that debt totalled €278 billion - a massive drain on public resources because these interest payments have to be paid with tax-payers money. Indeed, if you add up those interest payments for the 18 years from 1995 to 2013, the total reaches a colossal €5.16 trillion - over 57% of all public sector debt.

From this, it follows that allowing governments to pay less interest on public sector debt would indeed be a good thing. But, if I understand correctly, your proposal to pump €60 billion of newly minted ECB money into the financial markets isn't restricted to buying up bonds. I believe that you have set things up so that you can buy just about anything that the financial sector wants to get rid of. A bank that had a whole pile of not very good assets, could potentially swap them for some real ECB money. Does that make sense?

Who gets to decide what to spend the €60 billion on? And with what criteria?

Personally, I would recommend the following simple and clear proposition. The €60 billion should ONLY be used for buying bonds of the different Eurozone countries. We don't want your money going to buy up any old rubbish - however much the Banks would like to get rid of it.

Secondly, I propose that you should buy up bonds for each country simply on the basis of population size. Germany  has roughly 25% of the population of the Eurozone. So 25% of the €60 billion should be used for buying German bonds, 19.6% for French bonds and so on. This was a suggestion that I originally made in a Youtube video calle "How Eurozone countries could fix the global economic crisis" published in August 2012, and which has been seen by over 600 people.

Anything else would mean that you would be able to use the bond buying process to put pressure on governments to implement austerity - either they comply with your directives, or you don't buy their bonds. I suspect that many Eurozone citizens are prepared to put up with more intereference from the Troika in their governments' decisions. No doubt we will see just how strong this resentment is when the Greeks vote this weekend.

19 Jan 2015

UK Green Party goes for an Unconditional Basic Income!

Now, here is some good news.

On the BBC's Andrew Marr program yesterday morning, the leader of the UK Green Party, Nathalie Bennett, announced that the party would include the introduction of an Unconditional Citizen's Income in its manifesto. Well done! You can see the interview on Youtube here, and the interesting bit starts after 4:30m.

The party is also famous for including reform of the money creation process in its program, using ideas very similar to the ones proposed by Positive Money.

I understand that the proposals for a Basic Income are similar to those proposed by organisations like the Citizen's Income Trust and Basic Income UK. According to an earlier report in the Guardian , both organisations argue "that the scheme would actually cost less than our means-tested benefits system. It would be paid for by the withdrawal of income-contingent benefits and lowering the threshold at which people people in work start to pay income tax. Some supporters also call for a land value tax. This would mean every citizen could benefit from a basic income of £7,000 (more for pensioners, and those with severe disabilities)."

And in an article in the New Statesman last summer, which talked about the Citizen's Income Trust, suggested that the  "annual spend on benefits should be distributed equally among all citizens, regardless of their income or employment status. Under their proposals, 0-24 year olds would receive £56.25 per week, 25-64 year olds would receive £71 per week and those 65 and over would receive £142.70 per week.

Analysing figures from the 2012-13 financial year, the cost of such a scheme is projected at around £276bn per year – just £1bn more than the annual welfare budget that year –making the implementation of a citizen’s income close to revenue and cost neutral.
Disability and housing benefits would remain intact, but the scheme would replace all other benefits including child benefits, income support and jobseeker’s allowance, national insurance and state pensions. Included in the current annual spend figures is £8bn in Department of Work and Pensions (DWP) administration and £2bn in HMRC tax credit administration and write-offs."

There had been earlier reports that the UK's Green Party were thinking about this. For instance, a report on buzzfeed said that "the exact level of the income has not been set, pending manifesto costing, but a Green party source said it would likely be higher than existing social security payments. Jobseeker’s Allowance is currently £72.40 a week for adults, or £3,765 a year."

This  is all very encouraging. I just wish that the Green Parties in France could be so inspired.

11 Jan 2015

Charlie Hebdo - What now?

It is one thing to say that we want to defend the 17 principles of the Declaration of the Rights of Man, principles that can be summarized in the three basic ideas of Liberty, Equality and Fraternity. But we have a real problem. Hundreds, even thousands, of young French men and women have been convinced that they should join the Jihadist terrorists - that they should devote their lives to destroying the model of society that lies at the heart of the western society.

What can we do?

While I will never defend the outrageous and inhuman behavior that led to the carnage this week in Paris, I have to admit that there is a problem. The principles of justice and equality that are at the heart of the French Nation, and which, in principle, we in the west should all share, are so clearly so far from the reality in which we all live, it is no wonder that a few Islamists can find perfectly good arguments that prove that western society is not the model that we should be aiming for.

When 85 individuals have the same wealth as half the population of the planet, is it surprising that you can convince people that our society is fundamentally unjust?

When 0.01% of the US population has the wealth of the bottom 2/3 of American society, can we honestly say that we have got it right? 

When our entire monetary system is based on the principle that Bankers are allowed to lend money that they do not have, and charge us interest to rent us  their money, can it be surprising that Islamic models that regard usuary as a heinous sin could be attractive to disenfranchised youth?

When the simple fact of being born a Muslim of immigrant parents means that your chances of getting a job and being able to play a useful role in society are slashed, can we really be surprised that so many such people are attracted by the Jihadist extremists?

So, what do we do?  How can we reduce the attraction of jihadist extremism?

Do we answer the problem by increasing the number of police so that there are 25-30 people working full-time to control the activity of every potential terrrorist? With thousands of people in France that already need to be monitored, we could end up with half the population forced to devote their lives to preventing the desparate members of our society resorting to terror to get their own back?

I say no. The only real solution is to  change our society. We need to change things to show that our model is the best one there is. That we have the solutions. To put it mildly, there is clearly some room for improvement....

I believe that if there is one thing that would change things more than anything else, it is the introduction of an Unconditional Basic Income for all. Yes, if every man, woman and child had, by right, enough to live decently, then many of the recriminations that can justifiably be projected at our society, would collapse.

As I have argued elsewhere, a tiny sum paid to people in third world countries in Africa and elsewhere could transform our world. 

For a fraction of the cost required to set up the police state that would be required to maintain law and order, we could have a fair and just society. A society that would implement the basic principles that were already there in 1789. Principles that were taken even further when Thomas Paine proposed the idea of a Citizen's Income in his document "Agrarian Justice" in 1795-6.

Isn't it time for people to take this idea seriously?

Liberté, Egalité, Fraternité

In december 2013, I was made a French citizen, in an official ceremony that moved me. There were hundreds of us, from all parts of the world, who were given the honour of French citizenship.

One of the reasons that I am proud to be French (I have kept my British nationality too) lies in the truly remarkable set of principles that were written in stone in 1789 in the Declaration of the Rights of Man and of the Citzen - principles  that are the cornerstone of the French Nation. During the ceremony, we were all given a document which listed the 17 articles of the declaration. For me, there is not a single word in those 17 articles that are not absolutely vital even today.

The original texts are here. But here is a translation into English:

  1. Men are born and remain free and equal in rights. Social distinctions may be founded only upon the general good.
  2. The aim of all political association is the preservation of the natural and imprescriptible rights of man. These rights are liberty, property, security, and resistance to oppression.
  3. The principle of all sovereignty resides essentially in the nation. No body nor individual may exercise any authority which does not proceed directly from the nation.
  4. Liberty consists in the freedom to do everything which injures no one else; hence the exercise of the natural rights of each man has no limits except those which assure to the other members of the society the enjoyment of the same rights. These limits can only be determined by law.
  5. Law can only prohibit such actions as are hurtful to society. Nothing may be prevented which is not forbidden by law, and no one may be forced to do anything not provided for by law.
  6. Law is the expression of the general will. Every citizen has a right to participate personally, or through his representative, in its foundation. It must be the same for all, whether it protects or punishes. All citizens, being equal in the eyes of the law, are equally eligible to all dignities and to all public positions and occupations, according to their abilities, and without distinction except that of their virtues and talents.
  7. No person shall be accused, arrested, or imprisoned except in the cases and according to the forms prescribed by law. Any one soliciting, transmitting, executing, or causing to be executed, any arbitrary order, shall be punished. But any citizen summoned or arrested in virtue of the law shall submit without delay, as resistance constitutes an offense.
  8. The law shall provide for such punishments only as are strictly and obviously necessary, and no one shall suffer punishment except it be legally inflicted in virtue of a law passed and promulgated before the commission of the offense.
  9. As all persons are held innocent until they shall have been declared guilty, if arrest shall be deemed indispensable, all harshness not essential to the securing of the prisoner's person shall be severely repressed by law.
  10. No one shall be disquieted on account of his opinions, including his religious views, provided their manifestation does not disturb the public order established by law.
  11. The free communication of ideas and opinions is one of the most precious of the rights of man. Every citizen may, accordingly, speak, write, and print with freedom, but shall be responsible for such abuses of this freedom as shall be defined by law.
  12. The security of the rights of man and of the citizen requires public military forces. These forces are, therefore, established for the good of all and not for the personal advantage of those to whom they shall be entrusted.
  13. A general tax is indispensable for the maintenance of the public force and for the expenses of administration; it ought to be equally apportioned among all citizens according to their means.
  14. All the citizens have a right to decide, either personally or by their representatives, as to the necessity of the public contribution; to grant this freely; to know to what uses it is put; and to fix the proportion, the mode of assessment and of collection and the duration of the taxes.
  15. Society has the right to require of every public agent an account of his administration.
  16. A society in which the observance of the law is not assured, nor the separation of powers defined, has no constitution at all.
  17. Property being an inviolable and sacred right, no one can be deprived of it, unless demanded by public necessity, legally constituted, explicitly demands it, and under the condition of a just and prior indemnity.
I'm proud to be a citizen of the country that established this list. Is there one word in that Declaration that any reasonable person could contest?

And I was proud yesterday, to have been among the 120,000 people in Toulouse who marched together to say "Je suis Charlie".  I have posted a video that I took from the very centre of the Place Jean Jaurés - I was truly moved to be part of such a collective demonstration of support for the very principles of our society.

Today, we expect to see more than a million people marching in Paris in defense of our basic shared principles. And the fact that so many heads of state will be there as well gives me a real sense that people have realized that there are some basic principles that we have to defend. Those principles are in the foundations of the French Nation.

Deleveraging? What Deleveraging? We need to fix the system...

In my open letter to Mario Draghi, president of the ECB, I mentioned a remarkable report that was published last September called "Deleveraging? What deleveraging?"

It was published by the International Center for Monetary and Banking Studies in Geneva and the Centre for Economic Policy Research in London - both highly respectable authorities - following a conference that was attended by about 70 experts.

The main point of the report is to argue that, since the global financial crisis in 2008-9, although there have been attempts by governments to reduce their debt levels, overall debt has continued to soar. This is obvious from the first graph shown in the report.

It shows that total world debt had reached nearly 215% of total GDP, with absolutely no sign whatsoever that things were improving at all.

They follow up this sobering graph with other graphs showing the breakdown of where the debt is, with separate plots for the developed and emerging markets.

Debt in the developed markets is still increasing, and is currently around $190 trillion. In contrast, for emerging markets, the total is increasing rapidly, with over $45 trillion of debt in 2013.

If you want gory details, they provide a table with the Debt to GDP ratios as a percentage for individual countries and regions. As you can see, no-one seems to be able to avoid the debt trap. NOt even the Chinese, whose debt levels total 217% of GDP, not including the Banking sector.

Table 2.2 provides an even more detailed breakdown for developed countries.

You can see how all those numbers are calculated. Total debt is equal to Domestic plus External debt. But it is also equal to the sum of Financial (d), Public (f), Household (h) and Non-financial company (i.e. business) debt (i).

To make the figures clearer, I took that table and compiled my own table and ranked the countries by total debt.
Clearly, Ireland is in a particularly bad way - everyone seems to be heavily in debt. But a lot of that is due to Financial Sector debt. The Netherlands is also seriously compromised by its Banking sector, as is the UK. For some reason, Germany gets away well, despite having a very large banking sector, with major players like Deutch Bank.

There's also some detailed analysis of debt structure in the US, illustrated in the following graph. You can see that if there has been a slight decrease in overall debt to the current value of 362% of GDP, that decrease is essentially due to decreased leverage in the financial sector, with a slight decrease in household debt. But that has been offset to a large extend by the increase in GSE debt - Government Sponsored Enterprises. I guess that is tax payer bailouts for things like Automobile manufacturers.

And finally, there's a specific analysis of debt levels in the Eurozone. It doesn't have the detailed breakdown provided for the

The latest value - 385% of GDP -  has indeed involved a slight drop compared with 2012. But it's hardly anything to really reassure anyone.

For me, the conclusions from this are clear. You can try austerity as a way to decrease government debt. But that will do nothing to fix the overall problem - namely, the fact that there is simply far too much debt in the system.

As I pointed out some time ago, in a global economy in which there is twice as much debt as there is money, there is really no way that you can hope to get out of the mess. You can't pay off debt by borrowing more. Any idiot should know that.

And yet, none of the "experts" at the Conference that generated this report seemed to have any real proposals about how to stop this insane debt explosion.

It seems to me that there are only a very limited range of options. Some people think that we could fix things by just cancelling debt. European governments could just tell the banks to get stuffed. And that may happen, especially if the forthcoming elections in Greece go the way people expect them to go.

But there is a much better way. A way that will fix the system for good. It involves replacing the current insane debt-based money creation process where essentially all the money in the system is created out of thin air by commercial banks when they make loans.

What we need is for our Central Banks to create the money debt free. It's what Positive Money have been arguing for with their Sovereign Money Creation proposal. But it could also be done by simple creating money at the level of Central Banks and putting the money directly into citizens' bank accounts.

That's essentially what would happen if we introduced an Unconditional Basic Income, financed by a minute Financial Transaction Tax. Within a few years, the mountain of debt revealed by this report could be paid off with debt-free money. 

Is anyone listening??

An open letter to Mario Draghi - President of the European Central Bank

Dear Sir,

Inflation in the Eurozone is now negative - specifically -0.2% in December.  About the only thing that the European Central Bank is formally required to do is keep inflation at around the so-called optimal value of 2%. So, clearly, you are not doing a very good job.

I won't go into the question of why 2% is the "perfect" number. I'll just note that in a system where 97% of money is created as debt by commercial banks when they make loans, you probabably need inflation in order to pay the interest. But there can be no doubt that you will currently be under a lot of pressure to start pumping money into the economy to try and get the Eurozone economy working again.

Unfortunately, as you know perfectly well, the conventional method, which involves throwing huge amounts of money at commercial banks and praying, doesn't work. You tried that within a few weeks of taking office back in 2011 when you threw 1 trillion euros of very cheap money at hundreds of banks at December 2011 and February 2012. You provided 3-year loans at 1% interest, and of course, the banks will now have to pay the money back.

So, I suppose that you could throw another trillion at them, and do a bit more praying. Their lobbyists will certainly be pushing for that.

But the simple fact is that nobody wants more debt. Citizens don't want more debt. Businesses don't want more debt. Governments don't want more debt. And even Banks don't want more debt. As the 16th Geneva Report on the World Economy pointed out last september "the world has not yet begun to deleverage its crisis-linked borrowing. Global debt-to-GDP is breaking new highs in ways that hinder recovery in mature economies and threaten new crisis in emerging nations – especially China."

What we all need is some real debt free money. And that is where you could do something truly useful. As the head of a central bank, you should have the power to create the Eurozone's money. And you should do that money creation without creating simultaneously another mountain of debt.

How could you do that? 

Well, here's my proposal. The ECB should simply inject money directly into peoples' pockets. 

This could be done by creating ECB accounts for all Eurozone citizens via the Central Banks in each country. It would be essentially a huge excel sheet with 330 million entries - one for each Eurozone citizen. Citizens would be able to connect their ECB account to their normal bank accounts - just like you can currently connect a Paypal account to your bank account.

And then, when money needs injecting into the economy, you would just have to type "Add X euros" on the keyboard of the ECB's computer and bingo - there is X*330 million extra euros in the economy. As simple as that. No need for Quantitative Easing - which is effectively throwing money at Bankers and praying. No need to give money to governments (which you are not allowed to do because of the Lisbon treaty). But I don't think that there is anything that would stop you just putting new money into the economy this way - except of course massive resistance from the Banking sector.

Why would the Banks be so opposed? The reason is that, unlike the current money creation system, in which as much as  97% of the money in circulation is created by commercial banks as debt, this ECB generated money would be debt free, with no interest to pay.

What! No interest to pay! That is why we can expect massive resistance from the Bankers and the politicians that they control. After all, the Banks have been used to charging interest for lending fictitious money to individuals, businesses and governments since the creation of the Bank of England in 1694. For info, since that time, UK taxpayers have paid an average of 4.4% of GDP as interest payments on public sector debt alone. And 57.1% of all Public sector debt in the Eurozone (€5.2 trillion of the €9 trillion at the end of 2013) is entirely explained by the interest payments made on government debt since 1995 - as your own figures show.

Interestingly, this fact that commercial banks simply create our money supply out of thin air when they make loans, was stated with mindblowing clarity in a video last year by Bernard Maris, the French Economist massacred this week in the offices of Charlie Hebdo. His loss is absolutely tragic, but at least the number of people who have watched this important video has increased by 250% in the last few days.....

So, we can certainly expect massive resistance from the Bankers. They will fight like wild-cats to keep their gravy train on the rails. And, since you were previously vice chairman and managing director of Goldman Sachs International (2002-5), it's just possible that you may be more interested in protecting the interests of your friends in the Banking sector than helping European Citizens. Please, please, prove me wrong.

The fact is that there is no justification for allowing the money creation process to be the exclusive priviledge of commercial banks. Indeed, even economists at the IMF demonstrated that taking money creation away from commercial banks and tranferring that responsibility to central banks makes perfect sense. Specifically, they proved all four of Irving Fisher's claims for such a system when he proposed the so-called Chicago plan in the 1930s, namely (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.

Somehow the Banking Lobbies apparently managed to get politicians (and economists) to forget about that one - just possibly because that's how they make nearly all their money. Perhaps you can explain to us what would be so terrible with such a proposition?

Oh, and if anyone wants to claim that this will produce Zimbabwe style hyperinflation, can I suggest that you could introduce an ECB regulated flat-rate Financial Transaction Tax on all Euro-denominated trading - wherever they occur in the world. Last year, LCH Clearnet Ltd, based in London, did €238,447,455,975,386 in Euro-denominated trades. A 0.01% tax on that lot would remove €24 billion from the system. Indeed, if needed, you could use the revenue generated by such a tax to directly finance an Unconditional Basic Income for all Eurozone citizens.

Imagine. With just two simple levers - one that pumps debt-free money into Eurozone citizens pockets, and one that sucks money out of the system in the form of a simple transaction tax - you would be able to do your job properly.

8 Jan 2015

Bernard Maris - A hero

The islamist lunatics that caused the massacre at Charlie Hebdo took the life of Bernard Maris - one of my true heros.

Bernard was one of the very few economists that I have heard who spoke the truth. I very much hope that all his regular contributions to his "Oncle Bernard" column in Charlie Hebdo (he was one of the share-holders in the magazine) will be published in full. I heard him virtually every week on France Inter where his weekly debates with a Dominique Sceu, a journalist at the Echos newspaper were alwas fascinating.

Perhaps one good thing that may come of yesterdays carnage is the fact that since yesterday afternoon, hundreds of people have watched the Youtube clip that I posted last year where Bernard explains the truth about how money is created out of thin air by commercial banks when they make loans. At 4pm yesterday, there had been 7825 people who had looked at it. 12 hours later, the number has jumped to 9219 and rising.

See my earlier post on this for a full translation into English.

Je suis Charlie

When I heard about the carnage in the Charlie Hebdo offices in Paris yesterday, I felt physically sick. It was an act of war against everything I believe in - the right to free speech, the right to riducule the stupid and the ignorant.

Last night, in an attempt to show my solidarity with the heros at Charlie Hebdo, I stuck these images on the windows of our car. I hope that when I go to work today, many of my compatriots (I'm Franco-British) will do similar acts of solidarity.
Mohamed overwhelmed by the Integristes : "It's tough being loved by cretins"
Love : Stronger than Hate

1 Jan 2015

Options Clearing Corporation - Figures for 2014

Following up from my latest post on the amount of trading going on at LCHClearnet, here's the latest info concerning that other key player - the Options Clearing Corporation. I just went and got the latest up to date figures from their website.

I've note been able to get direct numbers for the value of the transactions that they handle, but here are the figures for the numbers of trades, and the amount of premiums that they generated in 2014. I include the figures for 2013 and 2012 for comparison (see my previous posting for more detail).

The number of cleared contracts has increased by about 3.7% since 2013, and led to total premiums of $1.21 trillion. It would appear that contracts typically generate premiums of $140 for ETF options, $220 for equity options, and around $800 for Index options, although the precise amount appears to vary from exchange to exchange.

However, I don't know if there is any way to determine what the total value of the contracts is.  If anyone knows how to estimate that number, please leave a comment.

I have also taken the opportunity to look at the history of OCC, because they provide historical tables about the numbers of different types of trades that they have handled every year since they were created in 1973.
You can see that acivity exploded in the period from 2002 to 2008. There was a slight falter after that, but total transactions peaked at over 4.6 billion in 2011. Since then, activity dropped a bit but is on its way back up again. The vast majority of the trading in in equity (89%), with non-equity trades accounting for just 10%, and futures around 1.5%.

Message to any politician who wants to be elected. Just tax these transactions at some trivial level - say 0.1%. You would make yourself very popular....

My hope for 2015 - Let's start taxing all trading in Euros - wherever they occur in the world.

Here's my number one wish for 2015. I hope and pray that someone out there will realise that there is a very simple thing that we can do that would go a long way towards resolving our problems. Central Banks, and in particular the European Central Bank, should introduce a flat rate Financial Transaction Tax on all transactions denominated in their currency - wherever they occur in the world.

The ease with which this could be done is made blindingly obvious if you just take a look at the clearing volumes reports on LCH.Clearnet's website. I love these people because they very kindly provide a day by day listing of all trading, with details for each of 16 different currencies.

I just extracted the latest information, which includes all the trading done in 2014.
You can see that LCHClearnet processed a total of nearly $642 trillion in 2014. But the really impressive fact is that nearly 50% of those trades were carried out in Euros - €238,447,455,975,386 to be precise.

LCHClearnet also very obligingly tells us precisely what those trades involved. Here is the breakdown. 
You can see that nearly 47% of those trades involved Overnight Indexed Swaps, with 33% in Forward Rate Agreements, and 19.5% of Interest Rate Swaps. 

So, if the ECB wanted to, it could easily slap a 0.1% transaction tax on all Euro-denominated transactions. And LCHClearnet would have handed over up to €248 billion for its operations in 2014 And that's just one company - a company whose trading activity hasn't even been included in the Bank for International Settlement's annual report since 2009. I've already complained bitterly about that for years. Clearly, the BIS just needs to have someone with internet access and they could do this themselves.

The LCHClearnet website provides plenty of other interesting information. For example, here is their barchart of the volume of trades by month.
Just point your mouse at each column and you get the actual value.The best month was june, where LCHClearnet handled an impressive $69 trillion in a single month.

They also have a chart with the number of trades per month.
So, from those two sets of numbers, I was able to generate the following set of data that shows they handled ovef 2.5 million trades in a year, and that the average trade has a value of around $250 million.
Clearly, it's not the average pensioner who is going to be moving $250 million around with every click of a button.

So, lets do it. Let's have a modest 0.1% tax on all those Euro transactions - collected by which ever central bank is in control (in this case the Bank of England, because we are talking about a trading center based in the London), and transfered to the European Central Bank. The ECB could then (a) distribute the money among the governments of the 17 Eurozone countries simply on the basis of population size, or (b) provide money directly to Eurozone citizens. Or it could do both. I would say that a 50/50 split between governments and citizens would work very nicely thank you.

Note that while LCHClearnet handled just over 2.5 million transactions in 2014, this is peanuts compared with my favourite Clearing centre - the Options Clearing Corporation. They handled over 4.1 billion contracts in 2013 - resulting in 287 million actual transactions - over 100 times more  LCHClearnet. Unfortunately, I have no way of knowing either the total value of those trades. Nor do I have any way of knowing what proportion of those trades are in Euros.

But, if the ECB were to do what I propose, we could find out pretty fast.

What are we waiting for? Oh, I remember. Mario Draghi, the president of the ECB was previously the vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002–2005). Maybe, just maybe, he might not be too interested in doing what would be good for citizens in the Eurozone. Prove me wrong - please!

30 Dec 2014

How to introduce an Unconditional Basic Income

Regular readers of my blog are hopefully well aware that I am a big fan of the idea of having an Unconditional Basic Income for all citizens. And I have proposed that it would be a very good idea to finance it using a tiny Universal Financial Transaction Tax on all electronically mediated transactions in a given currency, wherever they occur in the world. I estimate that with at least €2 quadrillion in euro denominated transactions occuring per year, the European Central Bank could impose a 0.1% tax that could raise enough to pay every man, woman and child in the Eurozone a basic income of 6000 euros a year (500€ a month).

Of course, the standard response is to say that as soon as you introduce even a tiny 0.1% charge,  virtually all trading will cease, and there will be nothing left to tax. I think that this argument is totally spurious. After all, virtually all banks will charge you a 2.75% or even 2.99% international charge for using your credit card in another currency - 30 times the amount I am talking about. That fee is on top of the 3-4% paid by the merchant, and is effectively a charge for multiplying the amount paid in a foreign currency by the current exchange rate. It's outrageous, especially since we know that the banks and traders do over $5 trillion in foreign exchange PER DAY without paying anything. But those 2.75% charges don't  stop me from using my card in the UK or the USA when travelling to pay for restaurants, hotels and the like.

Nevertheless, just to prove that we don't even need to finance the Unconditional Basic Income with the Financial Transaction Tax, let me just mention another neat idea for how you could introduce such a system in a country like France.

Let's have a look at where French Government spending goes, based on an official report on public spending that came out in 2013. On page 16 you can find the following pie chart.

I won't bother insisting on the outrageous interest payments (4.7% of all government spending), except to point out that these are interest payments made on loans to the government that can be created out of thin air by banks that, thanks to the wonderful Basel Banking Regulations, can be made with no capital whatsover. Enough said.

You can see that 23.6% of spending goes on Salary costs for public sector employees like myself (I work for the CNRS), but an even more impressive 45.7% goes on social benefits (unemployment, health care, housing benefits etc etc).

Now, over 6 million people in France are employed in the public sector - that's about 23% of all employed people. There are 66 million people in France. Of these, 12 million are under 15 and can't work, and 11 million are over 65 and presumably retired. Of the remaining 43 million, 30 million are active, but only 24.3 million are actually in work - the other 5.7 million are looking for work, and presumably living largely on benefits. Finally, there are 13 million people of working age (15-64 years old) but inactive. They are probably also receiving a substantial amount in the form of state benefits.

So, suppose that the French government decided to give every citizen an Unconditional Basic Revenue of say 500€ a month. The first thing that they could then do is subtract that from the Minimum State Pension (Minimum Veillesse) currently 800€ per month for a single person, and 1242€ for a couple. That would mean those entitlements would drop to 300€ ans 242€ respectively, without changing anything.

Secondly, the government could subtract the UBI value from any unemployment benefits. These vary depending on previous income,  but the amount is  currently 1029€ per month for someone who had been earning 1700€ a month, and 857€ per month for someone who had been on the minimum wage of 1050€ a month. Again, all this could be done with no cost to the government, and no change for the citizen.

Third, the government could eliminate completely the current system of child allowances (allocations familiales) - currently 165,72€ a month per child (except that, strangely, the first child doesn't count), an amount that is increased by 64,67€ a month for children over 14. Currently, these amounts are not taxed, but it would be much simpler (and fairer) if each child received a fixed amount - say 500€ but possibly less - but that the amount was included in taxable income such that high earning households would effetively receive much less.

There are no doubt other benefits that could be included and reduced with the introduction of the Unconditional Basic Income. The simplification of the system would already be a big advantage for citizens who currently have to navigate an extremely complex system. It would also mean that the administration costs could be seriously reduced.

But here is where in gets interesting. What about those 6 million public sector workers? I see no reason why I could not simply have my salary reduced by €500 - after all, it doesn't matter to me whether I am being paid by the CNRS or via the UBI. Do the same thing for all public sector workers and you will have just reduced the government's salary bill by a substantial amount. Remember that 23.6% of all public sector spending goes on salaries. And since many public sector employees are on relatively low pay, this could make a huge difference.

At the same time, the government could reduce the statutory minium wage by €500. It's currently 1445€ for a 35 hour week. This means that private sector companies would actually be able to pay their workers less - potentially only 945€ for a 35 hour week. This would directly increase the competitivity of French Industry, but reducing its costs. I presume that private sector employers would rapidly take advantage of the system to reduce their salary costs.

But it would also mean that workers would be able to work far more flexibly - something that woudl be good for both employeres and employees. For example, a family of four with a guaranteed income of 2000€ a month would be able to chose if and when to work. If they can manage without paid employement at all, then that's fine. If one of the parents wants to work for 10 hours, 20 hours, 40 hours or more to earn enough to pay for that Flat Screen TV, a new sofa, replace the car, or pay for the family vacation, then that's fine too.

We could scrap fixed working practises. But we could also scrap the idea of a fixed retirement age. People could effectively retire earlier if they want, and decide to devote all their time to voluntary work, or looking after their children and/or elderly relatives, thus reducing the pressure on massively overstretched resources.

And yes, if people decided that they would prefer to move their families to remote rural areas, a grow their own vegetables, that's fine too. It would directly reduce the pressure on the overloaded services in our cities. 

Yes, it would mean that the 13 million people who currently are of working age but not active, would get a guaranteed income. But in many respects they already are no doubt already receiving a lot of support. The difference with the Unconditional Basic Income is that no-one would feel that they are a sponger, living off the system.

Just to make things perfectly clear, let me just say that with 66 million people in France, it would cost just under €400 billion a year to give everyone a guaranteed Unconditional Basic Income of €500 a month.  That compares with a total government budget of €1151 billion in 2011. Is it not concievable that transfering 36% of that budget to a UBI would make a lot of sense?

It really does seem to me that this sort of reform can, and should, be implemented very rapidly. It makes very good sense for everyone. And yes, I really wouldn't object to having my CNRS salary cut! And after that, if we decide to finance the €400 billion with a tiny financial transaction tax instead of using VAT, Income Tax and Taxes on Business, then I think we will have made a lot of progress. Just a quick reminder - according to the BIS, transactions in France were €260 trillion in 2013. The €400 billion needed to finance a €500 a month UBI could therefore be paid for with an FTT of just 0.15%. François Hollande - are you listening?

27 Dec 2014

More exchanges with an "Expert" in Banking and Finance

I have already posted some of the comments on my blog and videos made by a very well placed representative of the international banking system during a fascinating email exchange that we had a few weeks ago - see "At last - a real expert in banking and finance reacts to my proposals!"

I did actually reply to all those criticisms. And my comments actually led to quite a debate. In this posting I'll just give a few examples of the debate.

For example, the first points the "expert" raised were these:

[Expert] " - Mr. Thorpe ignores that 100% of the money base is indeed already create by central banks. And that’s it.
[Expert]- ‘Money’ (which loosely speaking is = N times the monetary base) is indeed ‘created’ by financial intermediaries (not only commercial  banks as he said) but still (at least in normal times) the central bank controls (directly or indirectly) the money in circulation (typically by setting the interest rates.. actually one specific interest rate - the ‘repo’, or overnight - and trying to influence the long term ones)."

Clearly, the "expert" was trying to fob me off with the usual story that Central Banks control the amount of money in the economy using the "Multiplier Model", well known to economics students. Here's my first reply:

I think that it is fair to say that this is now a subject where there are plenty of well-educated economists who would disagree with you very strongly.
It states (for example):
" “Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves…  When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created…”
"Whenever a bank mades a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money.
 The reality of how money is created today differs from the description found in some economics textbooks:
· Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits
"Broad money is made up of bank deposits - which are essentially IOUs from commercial banks and companies - and currency - mostly IOUs from the central banks. Of the two types of broad money, bank deposits make up the vast majority  - 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themsleves."
"Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created."
 “…the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them…It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England.”
All very interesting, I hope you agree. In other words, you are presumably going to have to argue that the people at the Bank of England haven't a clue either – it's clearly not just me.
At this point, I suspect that our expert began to realize that maybe he was not up against the usual ill-informed member of the public for whom the "trust me, I'm an expert" gambit will almost certainly work.

My friend Niko Kriegeskorte, another "brain scientist" chipped in with with a few other comments, with which our expert was apparently happy to agree. 
[NK] Simon’s specific ideas  and X’s critcism (if we can look beyond ... sophistry and posturing) aside, i think the following points are well established:
·        private banks create money (in the form of deposits) when they make loans.
[Expert] Yes, this is correct.

[NK] · this is in contrast to the widely held misconception that each loan given uses money deposited by a bank’s other clients. however, it’s not controversial at all among experts on banking.

[Expert] Yes, this is correct. That’s why it’s called ‘FIAT’ money (the one created by central banks) and that’s why it’s called ‘money multiplier’. It’s not a secret, it’s well known.

[NK] ·   money created in the form of deposits accounts for the vast majority of the money supply (97% according to one estimate).

[Expert] Yes, this is correct although the exact % varies from country to country according to a large number of factors (which influence the multiplier)
Later on in the exchanges, Niko makes the following point
[NK] the larger issue is not the validity of Simon’s specific proposals (of which he has many), but whether a fundamental rethinking of the way our economy works, and in particular of the creation of money, is in order.

[Expert] Well, economics is a very open science. These days you can come up with whatever, really whatever. There are people working on behavioural economics, people working on neuronomics, people working on you-name-it. The point is that we all (as in other sciences) agreed about some basic methodological aspects. We do not use rats but models. We don’t make experiments (at least not in macroeconomics) but simulations.

If you want to challenge whether the money creation process (at least in the current form) is optimal or not (or it’s disaster), you’re welcome! However, as I already told you in a previous e-mail you have two options: 1) scream-what-ever-you-have-in-mind 2) play according to the rules of the game.

Go for option 2. Sit down, write a small model and think about the economy.
In this world money is created by a central bank and is then transmitted to the private sector.
Write down the most basic model of this economy.
Then think what you don’t like (banks making money out of this? ok).
Write down a mickey-mouse model of the economy in which banks do *not* create money. Here you can be creative, you can choose (as I told you) to let private agents to borrow from the central bank. Or you can eliminate the central bank from the economy. Or what-ever..
Finally, try to understand what you want to maximise in each economy. Is it welfare? In this case, what is the loss-function you want to minimise? Also, what are the trade-offs of the agents in the model? What kind of insurance mechanisms you assume against idiosyncratic shocks? Feel free, you can say nothing here (in which case you live in autarky). What are the optimality conditions? What kind of frictions do you want to put in the model? Do you assume flex-prices (in this case monetary policy is irrelevant)? Or maybe sticky-prices? Etc…

Once you have your 2 rats (the 2 economies), shock them (what ever the shock is… you can simulate a financial crisis… or a fiscal crisis… or a positive productivity shock… etc..) and see what happens in the model.

Again, we are here to listen to good ideas. We are here to learn from good models. We are here to listen to science.

However, we don’t talk to magicians or priests. We let them to the past millennium.
At this point, I came in with a recommendation for everyone to take a look at a very detailed state of the art economic simulation.
7 December 2014
Dear Everyone,

I  would strongly recommend reading the paper by Jaromir Benes and Michael Kumhof from the IMF called "The Chicago Plan Revisited". It critically examines the proposal made by several prominent economists in the 1930s, notably Irving Fisher, to end fractional reserve banking and move to a 100% reserve system in which banks can only lend money that they actually have.

You can download it here https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Here's the abstract

"At the height of the Great Depression a number of leading U.S. economist advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy."

I presume that few people would want to argue that they used a mickey-mouse model here. Their paper is 70 pages long, is stuffed full of equations and, at least to a naive Brain Scientist, looks serious. But I'm ooking forward to hear [our expert's] critique.

The text is full of interesting material. For example, when discussing the idea that central banks have can influence the amount of money creation by the commercial bank sector, the authors note that, "the
deposit multiplier of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money into the banking system that gets multiplied through bank lending... is simply, in the words of Kydland and Prescott (1990), a myth. And because of this, private banks are almost fully in control of the money creation process."

For info, Kydland and Prescott's paper was published here
Kydland, F. and Prescott, E. (1990),
Business Cycles: Real Facts and a Monetary Myth, Federal Reserve Bank of Minneapolis Quarterly Review, 14(2), 3-18

It has been cited over 1000 times. You can download it here

Best wishes

It was at this point that our Expert trashed the paper by the two IMF economists - see the exchange in my previous post (7 December). Amusingly, our expert suggested we read a paper called "Many roads lead to Rome - not all by the shortest path. Comments and reflections on The Chicago Plan Revisited" that supposedly refutes the Benes and Kumhoff study.  It's very amusing that this paper was written by Joseph Huber. For those who don't know,  Joseph Huber is a staunch opponent of the current money creation process, and one of the most prominent proponents of Sovereign Money Creation, having written a classic paper on the idea of "Plain Money" in 1999 and also coauthor (with James Robertson) of the book "Creating New Money - A monetary reform for the inormation age". 

If the best rebuttal of the Chicago plan is the one by Joseph Huber, then the "Experts" defending the status quo are really in a bad way!