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IMF’s epic plan to conjure away debt and dethrone bankers

Saturday, November 24, 2012 20:30

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(Before It's News)

How
to eliminate the public debt…

IMF’s epic plan to conjure away debt
and dethrone bankers

Posted
21 October 2012 -
02:43 PM

http://www.telegraph…ne-bankers.html

So there is a magic wand after all. A revolutionary paper by the International
Monetary Fund claims that one could eliminate the net public debt of the US at
a stroke, and by implication do the same for Britain, Germany, Italy, or Japan.

Posted Image

One could slash private debt by 100pc of GDP, boost growth, stabilize prices,
and dethrone bankers all at the same time. It could be done cleanly and
painlessly, by legislative command, far more quickly than anybody imagined.
The conjuring trick is to replace our system of private bank-created money –
roughly 97pc of the money supply — with state-created money. We return to the
historical norm, before Charles II placed control of the money supply in
private hands with the English Free Coinage Act of 1666.

Specifically, it means an assault on “fractional reserve banking”. If
lenders are forced to put up 100pc reserve backing for deposits, they lose the
exorbitant privilege of creating money out of thin air.
The nation regains sovereign control over the money supply. There are no more
banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do
the rest. That at least is the argument.
Some readers may already have seen the IMF study, by Jaromir Benes and Michael
Kumhof, which came out in August and has begun to acquire a cult following
around the world.

Entitled “The Chicago Plan Revisited”, it revives the scheme first
put forward by professors Henry Simons and Irving Fisher in 1936 during the
ferment of creative thinking in the late Depression. Irving Fisher
thought credit cycles led to an unhealthy concentration of wealth. He saw it
with his own eyes in the early 1930s as creditors foreclosed on destitute
farmers, seizing their land or buying it for a pittance at the bottom of the
cycle.

The farmers found a way of defending themselves in the end. They muscled
together at “one dollar auctions”, buying each other’s property back
for almost nothing. Any carpet-bagger who tried to bid higher was beaten to a
pulp.

Benes and Kumhof argue that credit-cycle trauma – caused by private money
creation – dates deep into history and lies at the root of debt jubilees in the
ancient religions of Mesopotian and the Middle East.

Harvest cycles led to systemic defaults thousands of years ago, with forfeiture
of collateral, and concentration of wealth in the hands of lenders. These
episodes were not just caused by weather, as long thought. They were amplified
by the effects of credit.
The Athenian leader Solon implemented the first known Chicago Plan/New Deal in
599 BC to relieve farmers in hock to oligarchs enjoying private coinage. He
cancelled debts, restituted lands seized by creditors, set floor-prices for
commodities (much like Franklin Roosevelt), and consciously flooded the money
supply with state-issued “debt-free” coinage.

The Romans sent a delegation to study Solon’s reforms 150 years later and
copied the ideas, setting up their own fiat money system under Lex Aternia in
454 BC.

It is a myth – innocently propagated by the great Adam Smith – that money
developed as a commodity-based or gold-linked means of exchange. Gold was
always highly valued, but that is another story. Metal-lovers often conflate
the two issues.
Anthropological studies show that social fiat currencies began with the dawn of
time. The Spartans banned gold coins, replacing them with iron disks of little
intrinsic value. The early Romans used bronze tablets. Their worth was entirely
determined by law – a doctrine made explicit by Aristotle in his Ethics – like
the dollar, the euro, or sterling today.

Some argue that Rome began to lose its solidarity spirit when it allowed an
oligarchy to develop a private silver-based coinage during the Punic Wars.
Money slipped control of the Senate. You could call it Rome’s shadow banking
system. Evidence suggests that it became a machine for elite wealth
accumulation.

Unchallenged sovereign or Papal control over currencies persisted through the
Middle Ages until England broke the mould in 1666. Benes and Kumhof say this
was the start of the boom-bust era.

One might equally say that this opened the way to England’s agricultural
revolution in the early 18th Century, the industrial revolution soon after, and
the greatest economic and technological leap ever seen. But let us not quibble.
The original authors of the Chicago Plan were responding to the Great
Depression. They believed it was possible to prevent the social havoc caused by
wild swings from boom to bust, and to do so without crimping economic dynamism.

The benign side-effect of their proposals would be a switch from national debt
to national surplus, as if by magic. “Because under the Chicago Plan banks
have to borrow reserves from the treasury to fully back liabilities, the
government acquires a very large asset vis-à-vis banks. Our analysis finds that
the government is left with a much lower, in fact negative, net debt
burden.”
The IMF paper says total liabilities of the US financial system – including
shadow banking – are about 200pc of GDP. The new reserve rule would create a
windfall. This would be used for a “potentially a very large, buy-back of
private debt”, perhaps 100pc of GDP.

While Washington would issue much more fiat money, this would not be
redeemable. It would be an equity of the commonwealth, not debt.

The key of the Chicago Plan was to separate the “monetary and credit
functions” of the banking system. “The quantity of money and the
quantity of credit would become completely independent of each other.”
Private lenders would no longer be able to create new deposits “ex
nihilo”. New bank credit would have to be financed by retained earnings.

“The control of credit growth would become much more straightforward
because banks would no longer be able, as they are today, to generate their own
funding, deposits, in the act of lending, an extraordinary privilege that is
not enjoyed by any other type of business,” says the IMF paper.

“Rather, banks would become what many erroneously believe them to be
today, pure intermediaries that depend on obtaining outside funding before
being able to lend.”

The US Federal Reserve would take real control over the money supply for the
first time, making it easier to manage inflation. It was precisely for this
reason that Milton Friedman called for 100pc reserve backing in 1967. Even the
great free marketeer implicitly favoured a clamp-down on private money.

The switch would engender a 10pc boost to long-arm economic output. “None
of these benefits come at the expense of diminishing the core useful functions
of a private financial system.”

Simons and Fisher were flying blind in the 1930s. They lacked the modern
instruments needed to crunch the numbers, so the IMF team has now done it for
them — using the `DSGE’ stochastic model now de rigueur in high economics,
loved and hated in equal measure.

The finding is startling. Simons and Fisher understated their claims. It is
perhaps possible to confront the banking plutocracy head without endangering
the economy.

Benes and Kumhof make large claims. They leave me baffled, to be honest.
Readers who want the technical details can make their own judgement by studying
the text here.

The IMF duo have supporters. Professor Richard Werner from Southampton
University – who coined the term quantitative easing (QE) in the 1990s –
testified to Britain’s Vickers Commission that a switch to state-money would
have major welfare gains. He was backed by the campaign group Positive Money
and the New Economics Foundation.

The theory also has strong critics. Tim Congdon from International Monetary
Research says banks are in a sense already being forced to increase reserves by
EU rules, Basel III rules, and gold-plated variants in the UK. The effect has
been to choke lending to the private sector.

He argues that is the chief reason why the world economy remains stuck in
near-slump, and why central banks are having to cushion the shock with QE.

“If you enacted this plan, it would devastate bank profits and cause a
massive deflationary disaster. There would have to do `QE squared’ to offset
it,” he said.

The result would be a huge shift in bank balance sheets from private lending to
government securities. This happened during World War Two, but that was the
anomalous cost of defeating Fascism.

To do this on a permanent basis in peace-time would be to change in the nature
of western capitalism. “People wouldn’t be able to get money from banks.
There would be huge damage to the efficiency of the economy,” he said.

Arguably, it would smother freedom and enthrone a Leviathan state. It might be
even more irksome in the long run than rule by bankers.

Personally, I am a long way from reaching an conclusion in this extraordinary
debate. Let it run, and let us all fight until we flush out the arguments.

One thing is sure. The City of London will have great trouble earning its keep
if any variant of the Chicago Plan ever gains wide support.

Pretty sure if this
were to happen Iraqi currency would increase in value. Iraq has a GDP similar
to Greece but a currency way way way worse than it.