prof. joseph huber:creating a stable monetary system. the case for sovereign money conference
TRANSCRIPT
Prof Dr Joseph Huber
Chair of Economic Sociology, Em
Martin Luther UniversityHalle an der Saale
Creating a Stable Monetary System.
The Case for Sovereign Money
Conference The Future of MoneyUniversity of Economics and Business
Athens, 24 Jan 2013
Current banking and debt crises are no single events, but latest links in a continued chain.
From 1970 to 2007 many crises happened on migratory hot spots around the world, intensifiying in number and gravity:
145 banking crises
208 currency crises
72 sovereign debt crises ______________________________________________
425 systemic financial crises
in addition now also including the subprime crisis, the US-EU bankingcrisis, and the PIIGS sovereign debt crisis. Further such mess upcoming.
Sources: Laeven/Valencia 2008, Reinhart/Rogoff 2009, Lietaer et al 2012 49–52. Bundeszentrale für Politische Bildung: http://www.bpb.de/wissen/DP0D1P. Kennedy 2011, 96.
Financial Crises Abound
Among the many factors held responsible, one is poorly understood and has so far been misjudged – the monetary system.
The monetary system as it stands today is a system of unrestrained credit creation by the banks on a fractional basis of central-bank reserves, called fractional reserve banking.
The financial causes of the crises have a common monetary cause: excessive credit creation within the system of fractional reserve banking.
Unrestrained credit creation within the system of fractional reserve banking inevitably feeds speculative bubbles, asset and consumer price inflation, financial-investment income at the expense of earned income, and results in over-indebtedness, particularly of governments and the banks themselves, with ensuing crises and loss of money and assets alike.
The misjudged factor – the monetary system
The financial system is plagued by malfunctions. It is the monetary system that is at the root of the problems.
Real Economy
Financial System
Monetary System
Money Governs Finance, Finance Governs the Economy
H
ierarchy o
f Contro
l
Hierarchy of Restrictions
Bank Balance SheetCustomer Assets Liabilities Debit
Credit
10.000 10.000 - 10.000+ 10.000
Claim on Liability Interest-bearing Credit as liquid
customer towards debt to the bankbank money
from credit customer (means of payment)
creation= claim on cash
Banks create credit (non-cash money) when they- make out loans and overdrafts- purchase assets such as bonds, stocks, real estate, …
Accounting record: Bank Credit/Securities/Tangibles Account to Customer Current Account
Uno-Actu-Identity of Credit Creation and Money Creation
(demand deposits) by ledger entry2
In order to create 100 units of demand deposits, the banking sector needs fractional 'coverage' in central-bank money of about 2,5% - composed of
• 1,4% cash (coin and banknotes) for the ATMs• 0,1% liquid reserves for settlement of daily clearings• 1,0% obligatory minimum reserve (of no use at all)
Put as banks' money multiplier: Bank money, i.e. demand deposits created
by the banking sector = 900 times liquid reserves= 73 times cash
Today's money supply M1 (currency in circulation) consists of
80–95 % bank money on current account (demand deposits)
5–20 % sovereign money (state money in the form of coin, banknotes, and liquid central-bank reserves) – though not even this put
into circulation by sovereign supply initiative, but by banking demand pull for fractionally re-financing themselves).
Fractional Reserve Banking
i.e. Multiple Credit Creation on a Fractional Basis of Reserves
Data: Swiss National Bank, Historical Time Series, No.1, Feb 2007, 1.3, 2.3
M1 Bank Money (demand deposits) vs Cash
Customer A 20 kCustomer B 30 k
15 k Customer OCustomer C 25 k
30 k Customer P30 k Customer Q
Bank X itself 15 k10 k Bank Y itself
90 k 85 k
= 5 k Bank Y
Bank X
Cashless transactions by (1) clearing of customer accounts and (2) settlement of bank accounts in reserves
Settlement in inter-bank credit/debit or central bank reserves
Clearing
1) Market volume = preparedness to go into debt = potential of demand for securities and credit (loans)
2) Expansion/Contraction of credit in step throughout the
banking sector, domestic and international (thus ensuring near-balance of in- and outflows within the system) 3) Size of banks. For large banks it is much easier to extend their balance sheet than for smaller banks4) Obligatory minimum reserves5) Capital adequacy according to Basel rules (assets-to-equity-
ratio or loan-to-equity-ratio)6) Liquidity rules (liquid and near-liquid assets must be equal to
or bigger than overnight liabilities)
Short-Term Restrictions to Credit Creation out of Thin Air
In the longer term there are no restrictions. By crediting/debiting, buying/selling, paying out/taking in relative simultaneously, banks mutually create all of the required assets and equity they need.
after H.Seiffert, Geldschöpfung, Nauen 2012, 78-97.
3. Cash (coin, notes) as a residual sub-quantity of the money in circulation, exchanged out of account, or back onto account .
Central Bank Customers - private Haushalte - companies, organis. - public households
Banks
Monetary and Financial Institutions
Split Circulation of Money
1. Interbank circulation
ofreserves (on account)
2. Customer circulation (nonbank) of bank money (on account)
CashIssue
CashExchange
Data: http://epp.eurostat.ec.europa.eu/portal/page/portal/national_accounts/data/database
M1/GDP (Marshallian 'K') European Monetary Union Increase 1995–2010
Banks' money creation is out of control, the money supply wildly overshooting.
Banks' money creation is out of control, the money supply wildly overshooting.
Data: http://www.bundesbank.de/statistik/statistik_wirtschaftsdaten_tabellen.php#wirtschaftsentwicklung
Marshallian 'K' Germany (M1/GDP) 1950–2010
European Monetary Union 1995–2008
M1 189 % ~6/8 ~3/4
GDP nominal (price-inflated) 51 % ~1/8
GDP real (price-deflated) 23 % ~1/8
United States increase last ten years
M2 (broad liquid money) 80 % ~ 2/5
GDP nominal (price-inflated) 45 % ~ 2/5
GDP real (price-deflated) 16 % ~ 1/5
The Monetary Cause of Financial Causes
of the current crises:
Overshooting Money Supply from Fractional Reserve Banking,
i.e. Multiple Credit Creation on a Fractional Basis of Reserves
Sources: www.federalreserve.gov/releases/h6/hist; www.bundesbank.de/statistik/zeitreihen; Data: http:// epp.eurostat.ec.europa.eu/portal/page/portal/national_accounts/data/database: Bundesbank, Monthly Bulletins, tables II.2.
There are two main channels through which an expansion of banks' balance sheets,
i.e. expansion of the money supply, contributes to credit bubbles, financial asset
bubbles, and over-indebtedness of actors involved, including market 'exuberance'
and asset price inflation.
- bank credit (additional creation of money) for direct leverage of financial-market
investment in stocks, real estate, derivates, foreign exchange, private equity (e.g.
hostile leveraged buy-outs most of which are credit-funded)
- bank credit (additional creation of money) for funding public debt, i.e.
buying sovereign bonds by paying with newly created demand deposits.
The volume of sovereign bonds and bills is nothing but just another bubble, in
fact the biggest bubble of all.
Excessive Credit Creation, i.e. money-printing by the banks,
results in Inflation and Asset Inflation.
Expansion of bank money
as leverage forpaper investmentin financial assets
FAZ 10.5.11, 9
Taken from The Economist
MFIs going in debt (ever higher leverage)
Accumulation of sovereign debt in industrially advanced countries
USA 1940-2010 (Bln US-Dollar)
Japan 1950-2009 (Bln Yen)
Who profits from government debt, as long as governments are able to pay?
Banks 50 – 60 %
Funds and Insurance Companies(in UK and elsewhere also pension funds) 30 – 35 %
Private Households(Italy, Japan more than elsewhere) 7 – 16 %
Government Debt = Interest-Bearing Assets (Gov Bonds & Bills)
55%33%
12%
Ownership of Public Debt in Europe
Banks domestic and foreign
Funds, Insurance
Private Households
Source: ECB, Monthly Bulletins, Table 6.2.1
Any current income (taxes, labour, interest and payback of pricipal)
has to be paid out of current proceeds from GDP – or additional
debt.
If interest-bearing monetary and financial assets grow dispropor-
tionately higher than GDP, this will lead to a disproportionately
growingshare of income from financial investment, or interest
respectively, and correspondingly involve a declining share of
earned income.
Shift in Income Distribution – to the Benefit of Financial Income
at the Expense of Earned Income
Decline of Earned Income, Growing Share of Financial Income
Economist 21 Jan 2012, 47
Increase of Financial Income to the Detriment of Earned Income
The financial causes of the crises have a common monetary
cause: excessive credit = money creation. Financial markets cannot
work properly on the basis of a malfunctioning monetary system.
For sorting out banking and financial markets, one has to come to
grips with the money system.
Measures of banking and financial reform can hardly be successful
unless based upon a reform of the underlying money system.
see again figure
The Case for Monetary Reform.Transition from banks' money surrogate (demand deposits) to
plain sovereign currency
Real Economy
Financial System
Monetary System
Money Governs Finance, Finance Governs the Economy
H
ierarchy o
f Contro
l
Hierarchy of Restrictions
Obtaining full control of the money supply (M-to-GDP ratio)
Control of inflation and asset inflation (asset/debt-to-GDP
ratios)
Hence,
reintroduce plain sovereign currency in order to
reestablish the monetary prerogative as a sovereign right of
constitutional importance, comparable to the state
monopolies on legislation, public administration, jurisdiction,
taxation, and
the use of force)
The Case for Monetary Reform – Goals
Sovereign money = chartal or state money.
E.g., coin (issued by the treasury) and banknotes (issued by the
central bank) are sovereign money.
Demand deposits are private bank money.
A money reform today does with digital money on account the same
that was done with private banknotes in the 19th century, when
private banknotes were phased out in favour of the state or central-
bank monopoly on banknotes such as it exists today.
The Case for Monetary Reform.Transition from banks' money surrogate (demand deposits) to
plain sovereign currency
1. Restoring monetary sovereignty, and sovereign money respectively: ensuring the full state prerogative of
determining the currency of the realm (unit of account) creating the currency (= money in circulation = legal tender), including coin, banknotes, as well as digital currency (e-
money) on account and on mobile storage media obtaining full seigniorage from the issuance of money.
2. Independent Monetary Authority: Conferring responsibility for the
entire stock of money to an independent monetary authority (in Europe the central banks, the ECB resp., under public law)
3. No more bank money: Putting an end to the creation of bank money (demand deposits) which is credited into current accounts on a
basis of fractional reserves
4. Full seigniorage to the benefit of the public purseby spending new money into circulation through public
expenditure (genuine seigniorage), or by loaning it to banks (interest-borne seigniorage).
Key Components of a Sovereign Money Reform
Extension of the monopoly on coins and banknotes to money on account and on mobile devices. From a set date on, the central bank has the exclusive right to create and put into
circulation the entire stock of money (currency, legal tender). Amendment of Art.128 TFEU, Art.16 ECB/ESCB Statutes.
Taking customers' current accounts off the banks' balance sheet, thus putting an end to banks' ability to create demand deposits.
This is no nationalisation of banks and credit. Banks continue to be free market enterprises. The reform is just about renationalising the money.
Overnight liabilities to customers are redeclared to be liabilities to the central bank, getting out of the books to the extent that
outstanding old customer loans are repaid and the money passed on to the central bank – where it is formally extinguished and replaced with
newly issued plain money.
Main Measures to be Taken for a Transition to Plain Sovereign Money
Revision of Art. 123 (1) TFEU (Prohibition for ECB/NCBks to
directly contribute to funding government budgets). Central Banks shall be
- not just lender of last resort for the banks, but also for the state
- not just re-active issuer of least reserves in re-financing the banks,
but pro-active issuer of first instance, in fact the sole issuer of money
- acting not just as the bank of banks, but again as the bank of the state.
Central banks will thus be upgraded in formal status, becoming de facto
what they are already supposed to be de jure, i.e. an independent
monetary state authority (in a sense analogous to the judiciary) with
full control of the money supply – a function they now cannot fulfill
because under fractional reserve banking the banks have largely
usurped the state prerogatives of money creation and seigniorage.
Main Measures to be Taken for a Transition to Plain Sovereign Currency
www.monetative.de
www.vollgeld.ch
www.positivemoney.org.uk
www.monetary.org (USA)
www.positivemoney.org.nz
www.sensiblemoney.ie
www.monetaproprieta.it
A transition from bank money to sovereign money
involves a minimum of institutional change . It leaves most
structures intact and banking practices unchanged.
It keeps the advantages of the present system, such as e.g.
• sufficient and flexible money supply (only a partial reality today)
• affordability of credit
• maturity transformation
• easy money transfer (payment systems) both domestically
and internationally
• full convertibility of the currency
In addition it comes with five more important advantages
Advantages of Plain Sovereign Money
1. Money-on-account cannot disappear and is thus safe. In a banking crisis, the payment system is no longer at stake. In so far, government and society aren't susceptible to banking blackmail any more.
2. Money supply under effective control. No more inflationary bank-money supply. Monetary inflation close to zero possible.
3. No more procyclical overshooting, or undershooting, of money supply. More steady flow of money and capital. Business and financial cycles more moderate. No more additional 'money fuel' for speculative leverage.
4. Full regular seigniorage to the benefit of the public purse (annualy about 1–4 % of total public households, depending on country and growth). Banks' margin extra profit and privileges from credit creation abolished.
5. One-off transition seigniorage. Allows for a 50–100 % redemption of public debt within two to four years (dependending on country).
Advantages of Plain Sovereign Money
Regular Annual Seigniorage as an Addition to the Stock of Money
Billion SFr
Billion €
BIP
(memo)
M1 Seigniorage approx.
M1 at
BIP 1-2-3 %
Total public
expenditure
M1 as a % of total
public expenditure
Greece 215 96 1.0 – 1.9 – 2.9 108 1.0 – 1.8 – 2.7 %
EU-17 9.347 4.786 48 – 96 – 144 4.652 1.0 – 2.1 – 3.1 %
Germany 2.477 1.383 14 – 28 – 42 1.164 1.2 – 2.4 – 3.6 %
Austria 301 141 1.4 – 2.8 – 4.2 153 1.0 – 1.8 – 2.7 %
Switzerl. 568 463 4.6 – 9.3 – 13.9 189,2 2.4 – 4.9 – 7.4 %
Figures available for 2011. Quellen: European Central Bank, Monthly Bulletin, Tables 2.3.1+2 (www.ecb.int). -Deutsche Bundesbank, Monatsberichte, Tabellen II.1+2 (www.bundesbank.de). - Österreichische Nationalbank, Statistik und Meldeservice, http://www. oenb.at/de/stat_melders/statistik_und_melderservice.jsp - Schweizerische Nationalbank, Statistische Monatshefte, Tab. A2, B2. - http://www.bankofgreece.gr/Pages/en/Statistics/monetary/ nxi.aspx
Billion €Billion SFr
A1CustomerDemandDeposits
A2InterbankDemand Deposits
A3ReservesBks with
CentralBk
AM Stocks
to be replaced
BTotal
Public Debt A/B
2009 EU17GerACH
3.7441.014
111336
312129
22116
369112
3545
4.4251.255
168497
7.1201.767
191209
62 %71 %88 %
238 %
2010 EU17GerACH
3.9121.109
112386
359135
19123
317146
3938
4.5881.390
170547
7.7962.056
206209
59 %68 %83 %
262 %
2011 Gree EU17
Ger
753.9431.170
~8390115
~12*637*
121
954.9701.406
2808.2192.088
34 %61 %67 %
* Untypical effect through QE. Sources: Europäische Zentralbank, Monthly Bulletins, Tab. 2.3.2 (SightDepos), 2.5.1 (Interbk Deposits), 6.2.1 (Public Debt). - Deutsche Bundesbank, Monatsberichte, Tab. II.2+3 (Sichteinl), IV.3 (Interbk-Sichteinl), III.2 (Reserven EU+D), IX.1 (Staatsschulden). – Österreichische Nationalbank, Statistiken, Daten & Analysen, Tab. 1.1.2 (Reserven), 7.24.1 (Staatsschuld), 3.3.1–3 (Zwischenbankforderungen) - AK Österreich, Wirtschafts- und Sozialstatistisches Taschenbuch 2011, Tab. Geschäftsstruktur der inländischen Kreditinstitute (Zwischenbank-forderungen). - Schweizerische Nationalbank, Statistische Monatshefte, Tab. A1.17, A2, B2. - SNB, Die Banken in der Schweiz 2010, Tab. 18 Passiven. - Statistik Schweiz/Bundesamt für Statistik, http://www. bfs.admin. ch/bfs/portal/de/ index. Eidgenössische Finanzverwaltung, Finanzstatistik der Schweiz 2010, 3. - Eurostat Statistical Books, Government Finance Statistics, 2012
One-off Transition Seigniorage EU-17, Gr, D, A, CH
Under given circumstances there is no smooth way out of the present banking and sovereign debt crisis of the old-industrial world.
Under prevailing conditions, overcoming the crisis unavoidably includes - creditor write-downs (haircuts) to an important extent - inflation and/or negative interest (real interest rate below inflation rate)- austerity regimes (strangling the economies, increasing unemployment and impoverishment ).
A transition to plain sovereign money, by contrast, would actually make for a smooth ending of the banking and debt crisis – neither requiring austerity regimes, nor inflation or negative interest, nor creditor haircuts.
It is difficult to understand why those in charge do not embrace this opportunity.
Advantages of Plain Sovereign Money
Prof Dr Joseph Huber
Chair of Economic Sociology, Em
Martin Luther UniversityHalle an der Saale
Creating a Fair and Stable Monetary System.
The Case for Sovereign Money
Conference The Future of MoneyUniversity of Economics and Business
Athens, 24 Jan 2013
Keep to the law: No Bail-out (Art.125 TFEU)
Value adjustment of sovereign debt (in fact debt haircut) by markets. Accept insolvency of affected states.
Systemically relevant creditor banks (some of the 90 out of 8.300 banks in the EU) which were possibly threatened by bankruptcy could have been stabilised through bail-in and government partici-pation in banks' equity (= partial nationalisation). Insolvent govern-ments could have obtained necessary means from other euro
member countries (≠ bail-out).
In the federal structure of the U.S. there are no bail-outs. Insolvent States or municipalities cannot claim 'solidarity' from outside.
External help, though, may come from stimulus plans and recuperation aid.
Euro Sovereign Debt Crisis. What should have been done (1)
Insolvent debtors face a difficult period of time anyway. Imposed austerity to the single-side befenit of creditors causes sharply shrinking economies and purchasing power, increasing unemployment and impoverishment, and is certainly the worst option of all.
A sovereign debt crisis is not to be equated with a currency crisis. Possible insolvency of some nation-states would not have resulted in a an existential crisis of the euro. Public insolvencies in the U.S. never aroused concern about the U.S. dollar.
Probably transitional devaluation of the euro of about 20–35 % for about one to three years. Not too tremendous a problem. The 'euro crisis' is a pressure pretext to be bailed out.
Euro Sovereign Debt Crisis. What should have been done (2)
Pro
Return to former national currency would result in a low valuation (devaluation respectively) of the new national currency. This creates a strong advantage of international cost competitiveness.
If the return to a national currency is combined with an imposed reduction, or even cancellation of all claims and debts in euro, this would result in a relief of total national debt, i.e. getting things straight for a new beginning
… though, of course, at the expense of domestic and foreign creditors, which
is where trouble comes in …
Leaving the euro. An option worth considering?
Contra
If not combined with reduction or cancellation of national debt, a return to the national currency would actually worsen the burden of foreign debt.
If combined with imposed debt relief, this causes massive damage to/problems for domestic creditors and investors. Lack of financial resources. Credit drought and investment restraint. As a result, shrinking economy in spite of
debt relief, and maybe political unrest.
Long-winded legal disputes over contract violations.
Massive flight from the new currency. Another drain on foreign reserves.
Due to lack of foreign reserves imports would stay below what is required. Remaining imports would trigger (imported) inflation.
Equally, internationally active firms would face difficulty in meeting their obligations. Thus many firms threatened in their existence.
Incoming foreign direct investment would be low, or fail to materialise at all.
Foreign credit would be obtained under unfavourable conditions only, and come with exchange-rate risk and new dependency on foreign creditors.
All things considered … leaving does not really look like a good bargain.
Leaving the euro. An option worth considering?
Prof Dr Joseph Huber
Chair of Economic Sociology, Em
Martin Luther UniversityHalle an der Saale
Creating a Stable Monetary System.
The Case for Sovereign Money
Conference The Future of MoneyUniversity of Economics and Business
Athens, 24 Jan 2013