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Friday, November 09, 2012

The IMF Global Debt Repudiation Plan



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

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.

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.

 2:31PM BST 21 Oct 2012

55 comments:

  1. http://constitutionaltender.blogspot.com/2011/03/utah-governor-signs-gold-silver-legal.html

    Gold and silver coins legal in Utah, but not platinum.
    ....

    Back in the day, the historical ratio of gold to silver was something like 15 to 1. I read once that this had a mythological basis, based on the movements of the heavens, I believe.

    ....

    Ron Paul should have thought of this nifty idea to conjure away debt and get the bankers.

    ReplyDelete
    Replies
    1. I advocate alfalfa bales as the medium of exchange. They have only a certain lifetime, and the farmers would have to keep producing them.

      100 pound, 200 pound, 500 pound and 2,000 pound bales.

      Who is going to pick your pocket?

      Delete
    2. For an analanalysis of money as deordorized shit see the chapter Filthy Lucre, Normon O. Brown, Life Against Death


      Protestantism is seen as the point in “the psychic history of civilization” at which “the death instinct becomes master of the house.” (LD-232) There is considerably irony in the fact that the relationship between Protestantism and the rise of capitalism is generally viewed in positive terms,and Brown focuses on a Freudian analysis of money as a means of revealing the true nature of contemporary society and culture. Nowhere are Brown’s Marxist roots more obvious than in his analysis of money.
      My Marxist background had given me a healthy prejudice against money-making. Imagine my excitement when I discovered Sandor Ferenczi’s article called “The Ontogenesis of the Interest in Money”;with its immortal conclusion, “After what has been said money is seen to be nothing other than deodorized, dehydrated shit that made to shine.”
      (AM-179)Because money is universally regarded in economic theory as the epitome of rationality, Brown relentlessly pursues the Freudian implications of its archaic roots in magic and ritual. Psychoanalytic theory seems to offera more coherent explanation of the phenomenon of money than currenteconomic theories of exchange, which make no sense when applied toanthropological evidence of behavior in primitive societies. Starting withthe fact that the most notable feature of archaic money is the completeuselessness of the items chosen as the medium for storing and exchangingwealth, Brown makes the case that the explanation for money is to be foundin the ritualistic context in which it is used and that ultimately this contextmust be understood in terms of the domain of sacred power.

      Delete
  2. What this 'money'? Heap pile buffalo chips?

    Count coups before 25 years, get to paint woman's face.

    That worth something.


    Chief Plenty Coups

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  3. Why an' the hell with it now I see why I could never stand Vegas, sides you can't smell the sage there, the whole dang place is one big shined up deodorized turd I shoulda thoughta that and all the people just run around tradin', gamblin' stealin', loanin', rentin', even wearin' around their necks little golden deodorized turds, and thinkin' if they got a lot of 'em they is powerful like a bull even the women are for sale for a few bushels of wheat a woman's body with hair like seaweed and eyes like pearls and teeth like ivory and breasts and hips and legs like mountains rangin' and the soft mossy all for a few bushels of wheat, why look at those shiny lights flashin' hell I bet they'd even sell the stars there if they could, the night time stars, probably by the twinkle.

    Buck

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  4. .

    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.



    IMO, this is just another excuse similar to why business is sitting on over $3 trillion and not investing. The excuse for business is that there is too much uncertainty right now what with new regulations and the pending fiscal cliff.

    I say bushwa. Business is not investing because there is no increasing demand at present to justify it. Banks are not lending because QE provides them with free money and little risk.

    In addition, if they want to make even more money, the banks can still invest in derivatives which are still basically unregulated. And in an atmosphere of too big to fail where profits are privitized and risks are socialized, there is not even any risk there.

    Sweet deal. IMO, of course.

    .

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  5. This comment has been removed by the author.

    ReplyDelete
    Replies
    1. The CBO (Congressional Budget Office) hasn't been able to find any correlation between the top tax rate, and job creation.

      Delete
  6. Consumer Confidence took a nice little jump this month to 84.9.

    That's probably the best number since some time in 2008 (pre-crash.)

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  7. The chart above is an updated version of one that I’ve featured several times before on CD, and helps to graphically capture several important trends in the U.S. economy over the last ten years: real GDP and civilian employment. It generated more than 100 comments when I posted it about a year ago, so I thought it was time for an update. Here’s what the chart shows:

    1. Measured by real output (GDP), the U.S. economy has made a complete recovery from the 2007-2009 recession now that real output in Q3 of this year at $13.6 trillion (2005 dollars) was 2.2% (and $290 billion) higher than the $13.32 trillion of real GDP in Q4 2007 when the recession started (blue line in chart).

    2. While real output has completely recovered to 2.2% above its pre-recession levels, the current U.S. employment level of 142.4 million jobs in Q3 is still 3.84 million jobs (and 2.62%) below the 2007 peak of 146.27 million jobs (red line in chart), and that translates into the current “jobless recovery.”

    Article/Chart

    ReplyDelete
    Replies
    1. So, the Banksters, and the Vulture Capitalists (read: Bain) are doing fine, but those folks that used to work in those auto parts factories, etal, are still in deep trouble.

      My recommendation, put a couple of million to work building, and constructing 3,000 Ethanol Refineries.

      Delete
    2. .

      Not able to pull up your chart.

      There were a couple guys on CNBC yesterday predicting that a good investment would be a bet on infrastructure spending going forward. No mention of ethanol refineries.


      .

      Delete
    3. Those guys are right. Ethanol refineries are horrible investments. I've said that since the first one got built.

      Delete
  8. .

    Watched a few minutes of Boehner's news conference talking about the fiscal cliff. From the little I saw it doesn't seem that an awful lot has changed. If the fiscal cliff is averted, I still believe it will be a last minute, small ball, kick it a little farther down the road, compromise to give themselves more time. Probably nothing done until early January after we have gone over the fiscal cliff and everyone has made their point.

    However, both Boehner and Obama are talking compromise. Hopefully, I'm wrong.

    .

    ReplyDelete
    Replies
    1. I don't think it matters much, Q. Obama's saying what he has to say, and Boehner's saying what he has to say. I don't think anyone really expects anything to get done until after Jan 1.

      At that point, all the Grover Norquist "no tax increase" pledges are moot, and they can get busy making a deal.

      Delete

  9. Petraeus resigns as CIA director

    Published November 09, 2012

    FoxNews.com

    CIA Director David Petraeus on Friday submitted his letter of resignation to President Obama.

    The move was announced in a statement by Director of National Intelligence James Clapper.

    foxnews

    ReplyDelete
  10. COMPANIES PLAN MASSIVE LAYOFFS AS OBAMACARE BECOMES REALITY...

    Utah company fires 100, blames Obama...

    CEO reads prayer to staff, announces layoffs... OLIVER STONE: 'I find Obama scary'...

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  11. So, Petraeus couldn't keep it in his pants or was it Benghazi?

    Most likely both.

    ReplyDelete
    Replies
    1. .

      Why over Benghazi?

      The CIA was the outfit that got the 30 Americans out. There was no one else there to help.

      .

      Delete
    2. Well quirk, I haven't been obsessing over the details but from dumb ass citizen q pov the CIA is in it up to their eyeballs!

      Delete
  12. One opinion of many I have read is that he is getting screwed by some guy named Ben Ghazi.

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  13. Maybe the administration was telling him to keep the lid tight on Benghazi or they would expose his affair. If he had one. And he said fuck you, and exposed his own affair and resigned.

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  14. Somebody outed him because he is going to testify! They are trying to blunt his testimony by demeaning his character. That’s what happens when you lie with dogs, you will get up with flees!

    texgal on November 9, 2012 at 3:20 PM


    A a worthy opinion.

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    Replies
    1. .

      Right, Bob, they had one of Michelle's girlfriends seduce him.

      Sheesh.

      .

      Delete
  15. Clear path for appointing Bill Ayers the head of the CIA.

    GCM on November 9, 2012 at 3:27 PM

    Skip over Van Jones? No way man.

    slickwillie2001 on November 9, 2012 at 3:31 PM



    heh

    ReplyDelete
  16. Clinton to Step Down 'Days' After Inauguration...

    HOLDER EYES EXIT...

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  17. Update: Fox News reports that Petraeus will not testify before the House committee next week. This raises a very unpleasant smell. Why can't the committee subpoena him? He was a witness to what happened.

    Read more: http://www.americanthinker.com/blog/2012/11/david_petreaus_resigns_from_cia.html#ixzz2BlNTrCYH

    Indeed, this does seem to stink to high heaven, though there are people who think it doesn't matter at all, that nobody cares, and it will all blow over, and that the dead are just a bump in the road.

    ReplyDelete
  18. Didn't even qualify as a "bump," boobie. It's not like they were Marines, or something.

    ReplyDelete
    Replies
    1. .

      Right.

      As far as rank, an ambassador is about the rank of a three star general.

      The rest of the people, mere US citizens. Who gives a shit?

      .

      Delete
    2. Or, a Marine PFC (Private First Class.)

      Delete
    3. Actually, I need to clarify that. I Care what happens to Marine PFCs.

      I've never, at any time in my life, given a shit what happened to a General (1, 2, 3, or 4 Star,) or what befell an "Ambassador."

      I, also, haven't lost much sleep over Private Security/CIA types.

      Delete
    4. .

      Right, as noted in your comment yesterday, "...nobody "really" cares about Benghazi."

      We live in different worlds Ruf. It's beyond my ken how someone's priorities include getting his rocks off over an ethanol plant but doesn't "really" care about American citizens being attacked and killed by some third world dicks.

      Those CIA/security types you are so cavalier ab out were doing their jobs trying to secure weapons, trying to clean up the mess left behind by your hero's courageous war in Libya.

      .

      Delete
    5. They were gung-ho, lifer, adrenalin-junkie types, Q. They signed up "looking for" the risk.

      Such people have just never (not since adulthood, anyway) registered very highly on my giveashit-o-meter.

      The Ambassador was a highly-paid, super-intelligent guy that went out of his way to put himself in that dangerous situation.

      I'm just not all that interested. And, very few other people are, either, as far as I can see.

      Delete
    6. .

      How the hell do you know what was motivating those people? In fact, you don't. And that's just the CIA.

      There were a minimum of seven other diplomatic specialists with the ambassador in the compound (some report up to 24). As for the ambassador, where did you come up with this "he went out of his way to put himself in that dangerous situation." He was meeting with the Turkish ambassador just before the attack.

      Sounds like both he and the CIA were doing the jobs they were hired for.

      As for your impression that few other people are interested, try reading something other than Clean Technica and BLS reports.

      .

      Delete
    7. Well, if you're referring to "Redstate," or Hot Air, or whatnot . . . . . . eh, I don' think so.

      Why aren't you all upset over the Soldiers, and Marines that have been killed guarding the poppy fields in Afghanistan SINCE Sept. 11?

      It's like "Fast and Furious," Q. Just politickin'.

      Delete
    8. And, yes Q, I DO know what was motivating those people. I've known many of them.

      Delete
    9. .

      Why aren't you all upset over the Soldiers, and Marines that have been killed guarding the poppy fields in Afghanistan SINCE Sept. 11?

      Are you nutz?

      I was against Iraq since before Day 1, while you were still Republican and defending GWB and his WOT. I was for Afghanistan when the mission remained defeating the Taliban and getting OBL. I switched positions when they accomplished the first and let OBL out of Afghanistan. What was that, in the first year?

      As to what's motivating these people as you put it, how can I argue with you. The concept of IMO is foreign to you. If you are not intested in Benghazi, then nobody is "really" interested in Benghazi. If you have known a few of 'these people' then it only stands to reason you know what is motivating them all.

      .

      Delete
  19. One would expect Hillary to resign if she plans on running for POTUS next go round.

    ReplyDelete
  20. .

    You've got to love it.

    It's been announced Elizabeth Warren will sit on the Senate Banking Committee.

    I have to admit in today's interview on CNBC, Jamie Dimon put a good face on it.

    .

    ReplyDelete
  21. What next? Politics, as per usual.

    Peter Orszag, former O&M director, now Citigroup vice chairman of corporate and investment banking, via Yves 'Orszag’s Bloomberg piece is simply putrid' Smith

    I'm not quite as colorful as Yves Smith, but Orszag is on my hold/sell-soon list.

    ...........

    Speaking on CNN, former CIA operative Bob Baer noted that while resignations from extramarital affairs are not unheard of at the agency, they are almost never the announced reason for giving up the post.

    "I think there's a big story behind it," Baer said.

    Depneds on what one means by big.

    I like Petraeus. I admired his "navigation." I still think he's one of the good guys. Damn the Middle East.

    ReplyDelete
    Replies
    1. Don't worry, Doris. Harry Reid has Obama's back on Social Security. He's ready to play the "bad cop" to Obama's "good cop." He's made it very clear, on many occasions, that he'll allow only the most minor of changes to SS.

      Delete
    2. Petraeus was just another asshole general.

      Delete
    3. Admittedly, a little slicker (and, brighter) than most.

      Delete
  22. God damn the Middle East. Sure did.

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  23. Just in passing, ever wonder why all miracles were technologically appropriate to the era?

    Would it not to have been more impressive if Moses comes down from the mountain with an iPad or Jesus instead of walking on water came out hauling ass on a jet ski?

    I mean if you are going to make a miracle, can’t we have one with innovation and a little more “wow”factor?

    ReplyDelete
    Replies
    1. :)

      What a Brilliant damned question, Deuce!

      What an absolutely, brilliant damned question.

      Delete
    2. .

      You got to admit coming back from the dead is hard to top.


      (Of course, I'm talking in the physical sense, not the in the Bill Clinton sense.)


      .

      Delete
    3. I'll believe it when I shake his 2,000 year old hand.

      Delete
  24. This comment has been removed by the author.

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  25. What a question.

    Because it is a kind of metaphor, and to be effective the terms have to be familiar in some way to the people addressed.

    A jet ski might make great sense today.

    Or, perhaps, Rufus got up and walked on his Budweiser lake calming his wild desires instead of drinking it like a southern hog.

    That would be a true miracle.

    ReplyDelete
  26. Officials Ask Military to Take Over Power Restoration on Long Island...

    NYC rations gasoline; expected to last weeks...

    Man waits 30 hours for gas...

    Liquor drought...

    Prison For Displaced Victims?

    Power Loss Tests Limits...

    11 days after Sandy...

    'Ready to snap'...

    Nightmare in shelters...

    This a like your medicare with be when the government gets going good with it. FEMA closed its office due to the weather.

    ReplyDelete