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”

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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.