Jubilee Shares and the Amer­i­can Mon­e­tary Act

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Stephen Zarlenga of the Amer­i­can Mon­e­tary Insti­tute invited me to speak at the 2010 con­fer­ence in Chicago, which I did on the topic of “why a credit money sys­tem doesn’t have to crash, and why it always does”. My speech, the dis­cus­sion, the speeches of Michael Hud­son and Kaoru Yam­aguchi, and a panel dis­cus­sion, are linked at the end of this post. I rec­om­mend watch­ing them all if you can spare the time.

I was pleased to be invited, since this indi­cated a very open-minded approach by the AMI: they are cam­paign­ing to have the Amer­i­can Mon­e­tary Act passed to estab­lish a 100% reserve mon­e­tary sys­tem, which is a pro­posal that I have expressed ambiva­lence about in the past.

The pro­posal itself is func­tional: it would con­vert our cur­rent banks into insti­tu­tions like build­ing soci­eties, which when they lend money to a bor­rower, have to decre­ment an account they hold at a bank–so that no new money is cre­ated by the loan. In the AMI’s plan, banks would have accounts with the Fed­eral Gov­ern­ment (the Fed­eral Reserve, which is cur­rently pri­vately owned, would be incor­po­rated into the US Trea­sury), and could only lend what was in those accounts. Money cre­ation would then be exclu­sively the province of the Gov­ern­ment via deficit spend­ing.

I don’t oppose this plan, but I think it directs atten­tion at the wrong prob­lem: the issue to me is not how money is cre­ated, but how it is used. If it’s used to finance pro­duc­tive invest­ment, then gen­er­ally speak­ing all will be well; but if it’s used to finance spec­u­la­tion on asset prices, then it will lead to finan­cial crises (though not nec­es­sar­ily as severe as the one we’re expe­ri­enc­ing now).

My reform pro­pos­als are there­fore directed, not at how money is cre­ated, but at how it can be used. Briefly, I argue that banks are always going to want to cre­ate as much debt as they can (under what­ever sys­tem of money cre­ation we have). So if we’re going to stop the use of money for spec­u­la­tive pur­poses, our reforms have to affect the will­ing­ness of bor­row­ers to bor­row, rather than expend­ing energy on ulti­mately futile attempts to limit bank lend­ing directly.

Bankers espe­cially might not like this anal­ogy, but it’s apt: banks are effec­tively debt push­ers, and try­ing to con­trol bank lend­ing at the source is like try­ing to con­trol the spread of ille­gal drugs by directly con­trol­ling the drug push­ers. While ever there are drug users who want the drugs, then there’ll be a profit to be made by sell­ing drugs, and drug push­ers will always find ways around direct con­trols.

So if you want to stop the spread of drugs, it’s far more effective–if it’s at all possible–to reduce the desir­abil­ity of the drugs to end-users. This was the basis of the very suc­cess­ful “Kiss a non-smoker: enjoy the dif­fer­enceanti-smok­ing cam­paign run in my home state (New South Wales, Aus­tralia) in the 1980s.

We need some­thing like that in finance to counter the suc­cess­ful cam­paigns that bankers have run to give debt as “sexy” an image as tobacco com­pa­nies once gave cig­a­rettes, even though–in another apt analogy–it causes finan­cial can­cer: the uncon­trol­lable growth of debt is very much akin to the expo­nen­tial growth of a tumour that ulti­mately kills its host.

The metaphor is not per­fect of course, since a cer­tain min­i­mal level of debt is a good thing in a cap­i­tal­ist soci­ety. Pro­duc­tive debt both gives firms work­ing cap­i­tal, and finances the activ­i­ties of entre­pre­neurs who need pur­chas­ing power before they have goods to sell.

But debt that funds sim­ply spec­u­la­tion on asset prices is very much akin to a can­cer. And like the cig­a­rettes that cause lung can­cer, grow­ing unpro­duc­tive debt gives a “hit” that makes the bor­rower addicted to more debt: when debt is grow­ing,  the debtor and soci­ety in gen­eral feel bet­ter. It enables the bor­rower to make prof­its from spec­u­lat­ing on asset prices, since the ris­ing debt dri­ves up asset prices; and the spend­ing this cap­i­tal gain allows spreads into the wider econ­omy, cre­at­ing a gen­uine but ulti­mately ter­mi­nal boom. The boom can only con­tinue if debt con­tin­ues to grow faster than income, but at some point this guar­an­tees that the debt-ser­vic­ing costs will exceed society’s capac­ity to pay, and the ces­sa­tion of debt growth causes a cri­sis like the one we are in now.

My two “kiss a non-debtor” pro­pos­als to make debt far less attrac­tive to bor­row­ers are:

  1. To rede­fine shares so that, if pur­chased from a com­pany directly, they last for­ever (as all shares do now), but once these shares are sold by the orig­i­nal owner, they last another 50 years before they expire; and
  2. To limit the debt that can be secured against a prop­erty to ten times the annual rental of that prop­erty.

The objec­tive in both cases is to make unpro­duc­tive debt  much less attrac­tive to bor­row­ers.

99% of all trad­ing on the stock mar­ket involves spec­u­la­tors sell­ing pre-exist­ing shares to other spec­u­la­tors. This trad­ing adds zip to the pro­duc­tive capac­ity of soci­ety, while pro­mot­ing bub­bles in stock prices because lever­age dri­ves up  prices, encour­ag­ing more lever­age, lead­ing to a crash when price to earn­ings ratios reach lev­els even the Greater Fool regards as ridicu­lous. Then shares crash, but the debt that drove them up remains.

If instead shares on the sec­ondary mar­ket lasted only 50 years, then even the Greater Fool couldn’t be enticed to buy them with bor­rowed money–since their ter­mi­nal value would be zero. Instead a buyer would only pur­chase a share in order to secure a flow of div­i­dends for 50 years (or less). One of the two great sources of ris­ing unpro­duc­tive debt would be elim­i­nated.

I have to thank one of the par­tic­i­pants at the AMI con­fer­ence for inspir­ing a name for this pro­posal: Jubilee Shares, after the Bib­li­cal prac­tice of abol­ish­ing debt every 50 years. There’s a twist to my pro­posal of course: it wouldn’t be a lia­bil­ity that was abol­ished but an asset, but the intent is to stop the lia­bil­ity of debt ever ris­ing to the level where it would be a prob­lem. So I sug­gest call­ing shares that last for­ever Jubilee Shares, while those that are on the sec­ondary mar­ket are just ordi­nary shares that expire after 50 years.

Jubilee shares could be intro­duced very eas­ily, if the polit­i­cal will existed–something that is still years away in prac­tice. All exist­ing shares could be grand­fa­thered on one date, so that they were all Jubilee shares; but as soon as they were sold, they’d become ordi­nary shares with an expiry date of 50 years from the date of first sale.

The prop­erty pro­posal is some­what dif­fer­ent, and related to the “pro­duc­tive debt vs unpro­duc­tive debt” dis­tinc­tion I made ear­lier. Obvi­ously some debt is needed to pur­chase a house, since the cost of build­ing a new house far exceeds the aver­age wage. But debt past a cer­tain level dri­ves not house con­struc­tion, but house price bub­bles: as soon as house prices start to rise because banks offer more lever­age to home buy­ers, a pos­i­tive feed­back loop devel­ops between house prices and lever­age, and we end up where Aus­tralia is  now, and where Amer­ica was before the Sub­prime Bub­ble burst: with house prices out of reach of ordi­nary wage earn­ers, and lever­age at ridicu­lous lev­els so that 95 per­cent or more of the pur­chase price rep­re­sents debt rather than owner equity.

This hap­pens under our cur­rent sys­tem because the amount extended to a bor­rower is allegedly based on his/her income. Dur­ing a period of eco­nomic tran­quil­ity that occurs after a seri­ous eco­nomic cri­sis has occurred and is finally over–like the 1950s after the Great Depres­sion and the Sec­ond World War–banks set a respon­si­ble level for lever­age, like the require­ment that bor­row­ers pro­vide 30% of the pur­chase price, so that the loan to val­u­a­tion ratio was lim­ited to 70%. But as eco­nomic tran­quil­ity con­tin­ues, banks, which make money by extend­ing debt, find that an easy way to extend more debt is to relax their lend­ing stan­dards, and push the loan to val­u­a­tion ratio (LVR) to say 75%.

Bor­row­ers are happy to let this hap­pen, for two rea­sons: bor­row­ers with lower income who take on higher debt can trump other buy­ers with higher incomes but lower debt in bid­ding on a house they desire; and the increase in debt dri­ves up the price of houses on sale, mak­ing the sell­ers richer and lead­ing all cur­rent buy­ers to believe that their notional wealth has also risen.

Ulti­mately, you get the run­away process that we saw in the USA, where lever­age rises to 95%, 99%, and even beyond–to the ridicu­lous level of 120% as it did with Liar Loans at the peak of the Sub­prime frenzy. Then it all ends in tears when prices have been dri­ven so high that new bor­row­ers can no longer be enticed into the market–since the cost of ser­vic­ing that debt can’t be met out of their incomes–and as exist­ing bor­row­ers are sent bank­rupt by impos­si­ble repay­ment sched­ules. The hous­ing mar­ket is then flooded by dis­tressed sales, and the bub­ble bursts. The high house prices col­lapse, but as with shares, the debt used to pur­chase them remains.

If we instead based the level of debt on the income-gen­er­at­ing capac­ity of the prop­erty being pur­chased, rather than on the income of the buyer, then we would forge a link between asset prices and incomes that is cur­rently eas­ily punc­tured by ris­ing debt. It would still be possible–indeed necessary–to buy a prop­erty for more than ten times its annual rental. But then the excess of the price over the loan would be gen­uinely the sav­ings of the buyer, and an increase in the price of a house would mean a fall in lever­age, rather than an increase in lever­age as now. There would be a neg­a­tive feed­back loop between house prices and lever­age. That hope­fully would stop house price bub­bles devel­op­ing in the first place, and take dwellings out of the realm of spec­u­la­tion back into the realm of hous­ing, where they belong.

The AMI Conference

I was impressed that AMI wanted me to be a keynote speaker at its con­fer­ence, know­ing that I (while not a critic) was not an enthu­si­as­tic sup­porter of their plan. Their inter­est was in my analy­sis of how pri­vate money is actu­ally cre­ated, since they have been crit­ics of “frac­tional reserve bank­ing” (FRB), which I have argued doesn’t actu­ally exist. As an expla­na­tion of how debt-based money is cre­ated, FRB asserts that “deposits cre­ate loans”, whereas the empir­i­cal data estab­lishes that “loans cre­ate deposits”.

My talk is linked below, as are the talks by Michael Hudson–who was one of the hand­ful of econ­o­mists who saw the cri­sis com­ing and warned of it publicly–and Pro­fes­sor Kaoru Yam­aguchi, who heads the Sys­tem Dynam­ics Group of the Doshisha Busi­ness School at Doshisha Uni­ver­sity in Kyoto Japan.

I recorded my pre­sen­ta­tion using the screen cap­ture pro­gram BB Flash­back, while I videod Kaoru’s and Michael’s pre­sen­ta­tions. I’ll let the pre­sen­ta­tions speak for them­selves, but I will make a few quick com­ments about QED (the pro­gram I used to demon­strate my mod­els) and the sys­tems dynam­ics model pre­sented by Pro­fes­sor Yam­aguchi (for some rea­son, my pod­cast plu­gin isn’t work­ing, so the videos are shown as links that will open and run in another win­dow. My apolo­gies for that; if I get the time–and some tec­ni­cal advice!–I’ll fix this up later).


QED is a new pro­gram for build­ing dynamic sim­u­la­tions that has been tai­lor-made to model finan­cial dynam­ics, using the tab­u­lar method I have devel­oped, where each col­umn in the “God­ley Table” is a sys­tem state (nor­mally a bank account), and each row spec­i­fies flows between sys­tem states. The dynam­ics of each state are derived sim­ply by “adding up” the columns.  My tab­u­lar approach has been aug­mented by the program’s devel­oper with two addi­tional fea­tures: a “For­rester Dia­gram” that is sim­i­lar to other sys­tems dynam­ics tools derived from the work of Jay For­rester (Ven­sim,  Simulink, Vis­sim, Stella, Ithink, Sci­cos and the like), and a “Phillips Dia­gram” that ren­ders a sys­tems dynam­ics model using the “hydraulic” metaphor that Bill Phillips devel­oped back in the 1950s.

As a brand new pro­gram, QED can’t as yet com­pete with the range of fea­tures offered by Ven­sim, Simulink and Vis­sim. But it has some advan­tages over these estab­lished pro­grams too:

  • The tab­u­lar inter­face makes it much eas­ier to model finan­cial flows, which nec­es­sar­ily appear in mul­ti­ple loca­tions: a debit from one account appears as a credit to another, and as I note in my pre­sen­ta­tion, the trans­fer if often also recorded in a third loca­tion. These trans­fers can be mod­elled using the flow­chart metaphor of stan­dard sys­tems engi­neer­ing pro­grams, but doing so is a very tedious process;
  • QED auto­mat­i­cally gen­er­ates the flow­chart ren­di­tions of a model from the tab­u­lar rep­re­sen­ta­tion, and vice versa;
  • QED sim­u­lates the dynam­ics on the flow­chart ren­di­tions them­selves, as well as in graphs. Espe­cially with the Phillips Dia­gram ver­sion, this makes it an excel­lent expo­si­tional tool; and
  • It’s free–or rather by arrange­ment with the program’s devel­oper, I have the right to dis­trib­ute the cur­rent ver­sion for free. The files I used in the talk are linked below the fol­low­ing videos. You can down­load the pro­gram itself from the QED tab on this site.

Professor Kaoru Yamaguchi & System Dynamics

As reg­u­lar read­ers would appre­ci­ate, I regard sys­tem dynam­ics as the core approach that should be used to develop an empir­i­cally based eco­nom­ics. There are a hand­ful of econ­o­mists work­ing in sys­tem dynam­ics–Mike Radz­icki in Worces­ter Poly­tech­nic, Dave Wheat at the Uni­ver­sity of Bergen, Trond Andresen at the Nor­we­gian Uni­ver­sity of Sci­ence and Tech­nol­ogy, to men­tion the ones I know best.  Until this con­fer­ence I wasn’t aware of Pro­fes­sor Kaoru Yamaguchi’s work, so I was pleas­antly stunned to see that he has devel­oped the most com­pre­hen­sive sys­tem dynam­ics mod­els of the econ­omy I’ve yet seen, and the only one that I am aware of–apart from my own–that is explic­itly mon­e­tary.

His model, which he explains in the pre­sen­ta­tion below, is far more com­plex and thor­ough than mine, but uses a “money mul­ti­plier” as the basis of its money cre­ation mech­a­nism. We are now exchang­ing research, and Kaoru is very inter­ested in pro­duc­ing a ver­sion of his model in which the money sup­ply is endoge­nous.

Why Credit Money Fails

Video (opens in a sep­a­rate win­dow)

Audio record­ing

Steve Keen’s Debt­watch Pod­cast


Audio record­ing of the dis­cus­sion

Steve Keen’s Debt­watch Pod­cast


Pow­er­point pre­sen­ta­tion

QED and model sim­u­la­tion files (right-click and choose “Save As”)

QED (expand zip file and click on QED.EXE to run the pro­gram)

Free Bank­ing with only inter­est pay­ments (this and the other sim­u­la­tion files below are also included in the zip file above–their file names begin with the num­bers 1 to 4 respec­tively)

Free Bank­ing with con­stant num­ber of notes

Free Bank­ing with loan repay­ment

Min­sky model of debt defla­tion

Panel Discussion

Steve Keen’s Debt­watch Pod­cast


Michael Hud­son

Talk (opens in a sep­a­rate win­dow)


Kaoru Yam­aguchi: A sys­tems dynam­ics model of the econ­omy

Kaoru’s files includ­ing Ven­sim sim­u­la­tion viewer (right-click and choose “Save As”

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • DrBob127

    I have just read this to catch up on it Jack:

    Sounds like a whole lot of unsa­vory types. Bankers with guns and bombs.

  • DrBob127

    What else do you know?

  • Jack Spax

    Dr Bob 127

    Its the story of asso­ci­a­tions, Medich is linked to mur­der­ers and was owed money by Mc Gurk. Medich is also a prop­erty spec­u­la­tor. He employs Gra­ham Richard­son as a lob­by­ist.

    Medich was also involved with a prop­erty devel­op­ment out at Bad­gerys creek, one of the part­ners was a fam­ily com­pany owned by Joe Tripodi’s wife There was a series of arti­cles by a SMH jour­nal­ist, Mcclymont is the sur­name, that alluded to the links and in fact a par­li­men­tary inves­ti­ga­tion took place.

    The story goes that the fam­ily com­pany paid 3 mil­lion for a por­tion of the farm prop­er­ties, pre­sum­baly Medich owned some oth­ers, Kris­tine Keneally approved the devel­op­ment, Joe’s wife’s com­pany assets then have an asset value of 300 mil­lion.

    ICAC Joe is a slip­pery fel­low and too clever, he always seems to be about 2 or 3 degrees of con­tact away from some­thing fishy. He had links to the Wol­lon­gong coun­cil sex for devel­op­ment approvals, the orange­gate affair with Liv­er­pool coun­cil and he hap­pens to count Medich as a fam­ily friend.

    Look­ing for­ward to see what John Hat­ton does when he gets back in Par­li­ment.

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  • DrBob127


    More news under­min­ing your increas­ing rents the­ory..

    Ten­ants spared rent­ing hikes

    how do you like them data?


    Pre­tax profit of the entire min­ing indus­try is roughly equal to the inter­est cost on net for­eign debt.

    Not sure how the banks are going to con­vince for­eign cred­i­tors to lend even more whole­sale fund­ing.

    Credit growth will become con­strained to sav­ings growth i.e. neg­li­ga­ble.

  • cyrusp

    Philip @ 244: re rental price index:

    The two graphs linked below pro­vide the rental data you are after.

    It looks like rents have tracked the CPI pretty closely — and it gives cre­dence to “The Econ­o­mist” magazine’s call that houses are 61% over­priced based on rental yield.



  • DrBob127

    good work cyrusp,

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  • Uriah

    Hi Steve,

    First off, I totally agree with your endoge­nous money growth model. It is easy to see that there is a pos­i­tive feed­back loop, once you get over the assump­tion that M0/M1 changes M3, and not the other way around.

    At present finance sug­gests that the intrin­sic value of a com­pany is equal to the present value of future cash flows. While we do adjust for prob­a­bil­i­ties, and do all sorts of dif­fer­ent mod­el­ling, this is the under­ly­ing idea, in account­ing equity is the resid­ual inter­est after debt, and even in eco­nom­ics we would sug­gest that value must be owned by some­one. As such, if the value of a com­pa­nies assets, does not decrease, the value of a com­pa­nies lia­bil­i­ties and equity must not decrease either. There­fore, under the Jubilee pro­posal, when some shares of equity become value less, either the remain­ing shares would become more valu­able, or more likely, the com­pany would sim­ply raise more equity to the value of that which is expir­ing.

    There­fore the net effect of the Jubilee pro­posal would not be a change at all. Though, it could increase their costs since they would have to reg­u­larly re-raise equity finance, though you might find that they would engi­neer ways around this, such as attach­ing con­vert­ing options to it, per­haps rights to re-buy at a small price, or sim­i­lar.

    Even assum­ing they weren’t able to do any of the above, the price of remain­ing shares would jump up on that date, and you’d likely have just as much, if not more spec­u­la­tion than before. While some peo­ple might sug­gest that this will increase volatil­ity, dri­ving the required return up and dri­ving prices down, this move­ment would be pre­dictable, and as such it would not drive the required return up, it would merely cre­ate another type of finan­cial instru­ment.

    Addi­tion­ally, given equity is a favourable form of debt, and at least the cost of equity would rise, we’d likely see the debt to equity ratio of these com­pa­nies rise as well, mean­ing com­pa­nies either hold less equity, or take on more debt.

    As the Jubilee pro­posal stands, I do not see this as chang­ing the finan­cial land­scape much, if at all.

    With the other pro­posal, you already state that there is a pos­i­tive feed­back loop, and that this pro­posal would require the accep­tance of that idea, then why wouldn’t the esti­mates of the income gen­er­at­ing capac­ity of the prop­erty take this growth into account? As such, the finan­cial mod­ellers would be incen­tivised to find ways of pre­dict­ing higher income from the prop­erty. This is not too far off of what hap­pens today, but they’re pre­dict­ing the prob­a­bil­ity of default (espe­cially on aggre­gate), and the loss from that default (based on the assumed “income gen­er­at­ing capac­ity”).

    There­fore, this pro­posal does change how the sys­tem works, but it does not change the out­come, and is exposed to all the same prob­lems, only via other mech­a­nisms.

    You could cre­ate a Basil 2 type pro­posal, where the mod­els they are allowed to use are reg­u­lated, how­ever with the RBA (or Fed’s) reliance and close­ness with the finance sec­tor, you’d likely have a sim­i­lar pro­posal as Basel 2, where small banks are lim­ited to a set of mod­els, where as big banks are assumed to be capa­ble and respon­si­ble enough to gen­er­ate their own mod­els, which essen­tially (even with required approval by the RBA), give them carte blanche.

    Given some mech­a­nism could be setup, to limit them to a set of “good” mod­els, this would then drive the amount of debt down, and in turn the price of houses down. I just don’t see any prac­ti­cal way of doing this.

    Lastly, the above 2 pro­pos­als are both exposed to the “prob­lem” that we are not an island (okay, we are, but not in this sense). There are other cap­i­tal mar­kets, which would either need to be equally restricted, or the over­seas financ­ing would need to be restricted and the exchange sys­tem would need to be restricted. Else, all of these pro­pos­als could be cir­cum­vented through rais­ing this finance in other cap­i­tal mar­kets.

    I believe that a pri­vate 100% reserve mon­e­tary sys­tem, sim­i­lar to the AMI pro­posal, AND other com­pet­ing fractional/no reserve mon­e­tary sys­tems, would be a bet­ter idea. Sim­i­lar to dif­fer­ent mon­e­tary sys­tems between coun­tries, we could run dif­fer­ent mon­e­tary sys­tems within a coun­try, though this would require gov­ern­ment to relin­quish a lot of con­trol (as far as I can see), and as such might be polit­i­cally unten­able.

    What are your thoughts on hav­ing a mon­e­tary sys­tem which is formed of com­pet­ing mon­e­tary sys­tems, which have a float­ing exchange between them. Like hav­ing a 100% Reserve Dol­lar and a Frac­tional Reserve Dol­lar, with a float­ing exchange rate between both, oper­at­ing in the same sys­tem.



  • Uriah

    Okay, this new com­ment sys­tem is a touch con­fus­ing, and I didn’t think many peo­ple had responses, though it seems heaps of peo­ple have. So, sorry if this has already been said.

    It would be good to have the com­ments go the other way, newest on the bot­tom, and per­haps have a com­ment rat­ing sys­tem, such that some com­ments can be hidden/require a click through.

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