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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267 Responses to Jubilee Shares and the American Monetary Act

  1. DrBob127 says:

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

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

  2. DrBob127 says:

    What else do you know?

  3. Jack Spax says:

    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.

  4. Pingback: AMI Talks in FLV format | Economics for People

  5. DrBob127 says:


    More news undermining your increasing rents theory..

    Tenants spared renting hikes

    how do you like them data?

  6. PETER_W says:

    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.

  7. cyrusp says:

    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.



  8. DrBob127 says:

    good work cyrusp,

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  13. Uriah says:

    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.



  14. Uriah says:

    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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