Misrepresents what I say a bit, but they do have my picture next to JFK!

The IMF: sovereign currency, no longer the monopoly of the banks

Eliminate the public debt of the United States at once, and do the same with Great Britain, Italy, Germany, Japan, Greece. At the same time revive the ‘ economy, stabilize prices and oust the bankers. In a clean and painless, and faster than what you can imagine. With a magic wand? No. With a simple law, but able to replace the current system, in which to create money out of nothing are private banks. We only need a measure requiring the banks to hold a financial reserve real, 100%. To propose two economists at the International Monetary Fund, Jaromir Bene and Michael Kumhof. You, the bank, you want to make money on the loan of money? First you have to prove it really that much money. Too easy to have it by the central bank (which the factory from scratch) and then “extort” families, businesses and entire states, imposing exorbitant interest.

The study of two economists, “The Chicago Plan Revisited,” with “a revolutionary and” scandalous “‘Maria Grazia Bruzzone,” La Stampa “, emphasizes the global resonance of the dossier, that bursts like a bomb on the world capitalist system now jammed. The global debt came the exorbitant sum of 200 trillion, that is 200 trillion dollars, while the world GDP is less than 70 trillion. Translated: the world debt is 300% of gross domestic product of the entire planet. “And to hold this huge mountain of debt – which continues to grow – there are more advanced economies and developing countries,” says the Bruzzone, stressing that “the heart of the problem and the cross” is the highest “power” Japan, Europe and the United States. Hence the sortie “heretical” by Bene and Kumhof: simply write off the debt, it disappears.Sparked the debate was the last IMF report, which points the finger on austerity policies aimed at reducing thepublic debt . Policies that “could lead to recession in the economies ‘, since’ cuts and tax increases depress the ‘economy ‘.

Not only. The IMF would be really worried the crisis that is ravaging the ‘ Europe threatens to be worse than the 2008 financial. The surprise is that even the IMF now thinks that “austerity can be used to justify the privatization of public services,” with consequences “potentially disastrous”. But if the problem is the debt – public, but now “privatized” by finance – you can not delete? Solution already ventilated by the Bank of England, which holds 25% of the British sovereign debt: the Bank of England may reset it by clicking on the computer. Advantages: “You will pay much less interest, it would free up cash and you could make less harsh austerity.” The debate rages on many media, starting from the same “Financial Times”. thread which breaks now the revolutionary proposal of the two IMF economists targati: cancel the debt.

“The Chicago Plan Revisited,” writes Maria Grazia Bruzzone, raises and explores the “Chicago Plan” original, drawn up in the middle of the Great Depression of the ’30s by two other economists, Irving Fisher, Henry Simons of the University of Chicago, the cradle of liberalism . Cancel 100% of the debt? “The trick is to replace our system, where money is created by private banks – for 95-97% of the supply of money – money created by the state. It would mean return to the historical norm, before the English King Charles II put in private hands control of the money available, “back in 1666. It would mean a frontal assault on the “fractional reserve” banking, accused of seigniorage on the issue of currency speculation: if lenders are instead forced to hold 100% of its reserves to guarantee deposits and loans, “pardon the exorbitant privilege of create money out of nothing. ” As a result: “The nation regained control over the availability of money,” and also “reduces the pernicious cycles of expansion and contraction of credit.”

The authors of the first “Plan of Chicago” had thought that the cycles of expansion and contraction of credit lead to an unhealthy concentration of wealth: “They had seen in the early thirties creditors seize farmers effectively bankrupt, grab their lands or comprarsele for a piece of bread. ” Today, the authors of the new edition of this plan argue that the “trauma” of the credit cycle that expands and contracts – caused by private money creation – is a historical fact that is already outlined with Jubilees Debt ancient Mesopotamia, as well as in ancient Greece and even Rome. Sovereign control (the state or the Pope) on currency, recalls Bruzzone, Britain remained so throughout the Middle Ages, until 1666, when it began the era of the cycles of expansion and contraction. With the “bank privatization” of money, add the “Telegraph”, “opened the way for the agricultural revolution, and after the industrial revolution and the biggest leap Economic ever seen “- but it is not the case of” quibbling, “quips the newspaper.

According to the young economists of the IMF, is just a myth – disclosed “innocently” by Adam Smith – that the money has been developed as a medium of exchange based on gold, or related to it. Just as it is a myth, the study points out the IMF, what you learn from books: that is the Fed, the U.S. central bank, to control the creation of the dollar. “In fact, money is created by private banks to 95-97% through loans.” Private banks, in fact, do not lend as owners of cash deposits, the process is exactly the opposite. “Every time a bank makes a loan, the computer writes the loan (plus interest) and the corresponding liability in its balance sheet. But the money that pays the bank has a small part. If it does borrow from another bank, or by the central bank. And the central bank, in turn, creates out of nothing that lends the money to the bank. ”

In the current system, in fact, the bank is not required to have its own reserves – except for a tiny fraction of what it provides. Under a system of “fractional reserve”, each money created out of nothing is a debt equivalent: “Which produces an exponential increase in the debt, to the point that the system collapses on itself.” The economists of the IMF hours overturn the situation. The key is the clear distinction between the amount of money and the amount of credit between money creation and lending. If you impose banks to lend only numbers covered by actual reserves, loans would be fully funded from reserves or profits accrued. At that point, the banks can no longer create new money out of thin air. Generate profits through loans – without actually having a cash reserve – is “an extraordinary and exclusive privilege, denied to other business.”

“The banks – says Maria Grazia Bruzzone – would become what he mistakenly believed to be, pure intermediaries who have to get out their funds to be able to make loans.” In this way, the U.S. Federal Reserve “is approprierebbe for the first time the control over the availability of money, making it easier to manage inflation.” In fact, it is observed that the central bank would be nationalized, becoming a branch of the Treasury, and now the Fed is still owned by private banks. “Nationalizing” the Fed, the huge national debt would turn into a surplus, and the private banks’ should borrow reserves to offset possible liabilities. ” Already wanted to do John Fitzgerald Kennedy, who began to print – at no cost – “dollars of the Treasury,” against those “private” by the Fed, but the challenge of JFK died tragically, as we know, under the blows of the killer of Dallas , quickly stored from “amnesia” of powerful debunking.

Sovereign coin, issued directly by the government, the state would no longer be “liable”, but it would become a “creditor”, able to buy private debt, which would also be easily deleted. After decades, back on the field the ghost of Kennedy. In short: even the economists of the IMF hours espouse the theory of Warren Mosler, who are fighting for their monetary sovereignty as a trump card to go out – once and for all – from financial slavery subjecting entire populations, crushed by the crisis , the hegemonic power of a very small elite of “rentiers”, while the ‘ economic reality – with services cut and the credit granted in dribs and drabs – simply go to hell. And ‘the cardinal assumption of Modern Money Theory supported in Italy by Paul Barnard: if to emit “money created out of nothing” is the state, instead of banks, collapsing the blackmail of austerity that impoverishes all, immeasurably enriching only parasites of finance . With currency sovereign government can create jobs at low cost. That is, welfare, income and hope for millions of people, with a guaranteed recovery of consumption. Pure oxygen ‘s economy . Not surprisingly, adds Bruzzone, if already the original “Chicago Plan”, as approved by committees of the U.S. Congress, never became law, despite the fact that they were caldeggiarlo well 235 academic economists, including Milton Friedman and English liberal James Tobin, the father of the “Tobin tax”. In practice, “the plan died because of the strong resistance of the banking sector.” These are the same banks, the journalist adds the “Print”, which today recalcitrano ahead to reserve requirements a bit ‘higher (but still of the order of 4-6%) required by the Basel III rules, however, insufficient to do deterrent in the event of a newcrisis . Banks: “The same who spend billions on lobbying and campaign contributions to presidential candidates. And in front of the new “Chicago Plan” threaten havoc and that “it would mean changing the nature of western capitalism. ‘” That may be true, admits Bruzzone: “Maybe but it would be a better capitalism. And less risky. ”

40 Responses

  1. What’s everyone’s opinion on full reserve banking. Is it the same as the traditional idea of a bank loaning out other people’s deposits?

      1. @WARREN MOSLER,

        “doesn’t constrain lending with floating fx policy.”

        OK, but wouldn’t the elimination of all the leverage entailed in lending today tend to slow down loan origination? So…. instead of 10% reserve requirement, banks would 100%?

      2. @Ed Rombach,

        How would it do that without causing systemic collapse?

        If the central bank doesn’t accommodate the reserve demands then you are back to a system trying to control quantity.

        And that means the price has to move.

        Loans are not made on the spot. It’s a lengthy sales process.

      3. @Ed Rombach, But Neil, the question is whether the reserve demands would themselves be affected under the 100% reserve system than under the 10% reserve system. Suppose a bank is right at their required amount: deposits = 10 x total reserves. If the bank wants to expand lending by $10 million it needs to acquire $1 million in additional reserves. If the interest rate is, for example, 2%, then it will cost them $20 thousand to acquire those reserves. So that’s the cost of expanding. If the reserve ratio is instead 100%, but the Fed is still holding interest at 2%, they will have to acquire $10 million in additional reserves, at a cost of $200 thousand. So wouldn’t those higher costs inhibit lending.

        Yes, to hit its target interest rate and preserve a smoothly functioning payments system, the Fed would have to accommodate the demand for additional reserves. But the the same interest rate plus a higher reserve requirement means that the cost of each additional dollar of loan-created deposit balances is ten times higher than before. Wouldn’t this really put a damper on things?

      4. when you make the next loan you ‘automatically’ ‘acquire’ the needed reserves as it’s ‘already’ an overdraft/loan/negative balance at the CB

      5. “. If the bank wants to expand lending by $10 million it needs to acquire $1 million in additional reserve”

        No it doesn’t.

        If a bank wants to expand lending by $10 million, then the first thing it does is work out what *price* it thinks it needs to charge on those loans given the aggregate funding costs *and then it gets the sales in*.

        The success of the sales process then informs the funding process which proceeds to obtain the necessary funding in the market place. Loans are then advanced based on the funding raises that will be profitable to the bank. If the funding market is tight then some of the marginal loans will simply not be approved.

        There is still a required amount of circulation in the economy – and it is lending that is providing that circulation in a mainstream analysis. Therefore the reserves have to be in the system to match the required circulation or you will get an economic contraction and the price has to be at a particular level to allow that to happen.

        So what will happen is that with a 100% reserve system the price will have to be different to 10% reserves or 0% reserves. That way the aggregate funding costs will be the same for a given level of aggregate circulation regardless of the level of reserves a bank is required to hold.

        So I’d suggest the total price of expansion funding would be precisely the same as the total price of expansion funding now – just spread over a larger amount of reserves.

        The actual ‘active ingredient’ in the full reserve proposals I’ve seen have nothing to do with reserves. Essentially the plan requires increased government spending to inject the reserves and essentially a ZIRP (because there is then no ‘lender of last resort’ function).

        So the ‘price’ of reserves is adjusted by injecting or removing quantity via spending and taxation.

      6. @Ed Rombach, So, Neil, your prediction is that if the policy rate stands at, for example, .5% and the system goes to 100% reserves from 10% reserves, then the Fed would lower the policy rate to .05% to keep funding costs the same? So the Fed would be trying to target some overall level of circulation?

      7. Dan,

        I don’t think it is necessarily that linear. But essentially the overall cost of funding has to stay the same as now if you want the same level of circulation – regardless of how you do the bookkeeping.

      8. @WARREN MOSLER,

        “a reserve requirement itself at the point of loan/deposit origination *is* a loan from the cb”

        And if the requirement is that you must ‘clear’ that loan (ie return to a positive balance), then the cb has to ensure there is enough reserves in circulation to meet that requirement?

        Or the cb has to use the nuclear option and refuse to clear?

    1. @Joe,

      No it isn’t. Banks *always* create deposits when they make loans. You can’t make that go away with a set of rules that deny the reality of the system.

      Banks will always sell to a price and fund afterwards. Selling a loan doesn’t happen in an instant. There is a process to go through, and that process informs the funding systems to make sure there is always the funding there to cover the loans expected to be made.

      And what that means that banks with a better sales system and economies of scale will be able to steal funding from banks with a poorer sales system.

      The only question then is whether the central bank operates a release valve in response to this or not. If it doesn’t then the system will slowly end up systemically short of reserves, interest rates will be forced upwards and eventually a bank will fail due to lack of cash flow (liquidity). So I see a slow consolidation of banks towards the larger operations.

      If the central bank does operate a release valve then it is injecting reserves in response to loan demand pretty much exactly as it does now.

      The operational function of ‘full reserve’ proposals has little to do with the full reserve bit and lots to do with the central bank innovations they have to put in place to support it.

      The main one being that the central bank funds the Treasury and the Treasury ‘spends’ money into circulation – via Tax cuts or government spending.

      Stick a Job Guarantee on ‘Full Reserve’ and its MMT. The difference is that MMT shows you have exactly the same effect with ‘fractional reserve’. One system is ‘in specie’ the other is ‘insured’.

      But if ‘full reserve’ is what is required to ‘sneak in’ Central Bank Treasury funding, then let’s go for it.

      1. as a point of logic the ‘release valve’ is ‘shut off’ by fixing the exchange rate.

        with floating fx reserves are best thought of as never constrained. with fixed fx, continuously constrained.

      2. @Neil Wilson,

        “The main one being that the central bank funds the Treasury and the Treasury ‘spends’ money into circulation – via Tax cuts or government spending.”

        How does the central bank fund the Treasury? By clearing the checks that Treasury spends?

      3. @Ed Rombach,

        The only thing that stops any of us spending as much as we like is that some bank somewhere refuses the payment eventually.

        However if you own the bank it would be really difficult for the bank manager to refuse payment on your accounts without your express permission that he was allowed to do so.

      4. “might work until the next audit…”

        That assumes an auditor you don’t control as well.

        If you control the central bank, then your cheques don’t bounce – unless you ask them to be bounced.

  2. two doubt for Warren Mosler or other experts :

    1) an Italian TV said that Basel III new high reserve to 6% (+50%) for 2013 will be “not” follow by US Banks, so EU banks are asking also for them this benefint.. it’s true ?

    2) on SeekingAlpha I read the Basel III move Gold form Tier3 (50% of assets cout like reserve) to Tier1 (100%).. in practice will introduce an Hidden New Gold Standard with bullish effect on Gold,
    but I don’t understand if this is true.. what do you think ?


    1. Basel hasn’t interested me that much. What they usually wind up doing is something that alters the price of credit a tad, and not much more of interest to me.

      and even if they allow gold at market value it won’t change much, best I can tell, as gold can already be leveraged by most anyone.

  3. Warren, can you please share your take on the new Argentina debt drama? I thought they floated their currency. Do they still have debt in dollars? Why are they even subject to the jurisdiction of US courts on this issue?

    Maybe that last question is better directed to a different site, but I’m curious about your opinions on the others.

    1. @Brian, If one wants to be part of the international community, one has to play be the rules, whether one floats, fixed pegs, crawling pegs, etc. And Argentines have been hoarding US Dollars despite tax liabilities. It’s not so simple.

      1. @WARREN MOSLER,

        no, it doesn’t float freely as evidenced by a black market where the dollar is 25% more expensive than the official rate of exchange, as I’ve mentioned too many times before

  4. Dear Warren Mosler,

    and it is a masterpiece, a piece of art in the history of macroeconomic thought!

    It was launched by an advertisement in the Corriere della Sera, a brief video here:

    Cheers from Italy!

  5. They worry about debt, but much of the debt is sovereign debt, which is the asset of the private sector. When I was a homeowner, I had a mortgage that was typically 4-6x my annual income, and that was never a problem. Even 300% for households and businesses alone should not be a problem, but that 300% includes a lot of debt of monetarily sovereign governments that is a benefit to the world, not a problem at all, to anyone.

    And now, if I understand this article (which is very much in doubt), the IMF is coming out against austerity??? This is a complete turnaround for them, is it not? A watershed event?

  6. After reading, re-reading this article a couple times, here’s the points I think I came away with

    1) Global debt is 3x global gdp and growing, leading to disastrous austerity measures such massive cuts in govt spending and privatizing public services which is bad.

    2) Suggests eliminating the banks power of creating money from nothing via cb, instead let them provide loans from profits.

    3) Eliminate the sovereign debts governments owe themselves, free’s up govts to spend more and reduces interest payments.

    4) By nationalizing the fed and making it part of the treasury, the govts liabilities to the fed now becomes a govt surplus and takes it out of the hands of private bankers.

    5) Money should be issued directly by the govt, without the need to create a central bank debt.

    6) The govt could use the money it creates to buy private debt, which could be written off.

    7) Public debt, once privatized by bankers, becomes private debt that can’t be written off, big problem.

    8) Govts should not be subjected to private banks for the privilege of creating money, when it’s the govt that grants that authority of money in the first place

    9) Govts should be free of debt constraints to private bankers when creating money to put into circulation to ensure the welfare of citizens , and healthy and consistent consumption

    10) Current govt debts and those looking to reduce those debts only serve to empower and enrich private bankers who force harsh austerity measures on citizens while the economic elite enjoy riches unabound.

    11) Warren Moslers a genius and Italy loves him….:-)

    It all read pretty good to me. Any thoughts?

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