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. bb says:


    You have made a number of good points. To help you a bit more

    – Do not confuse EBIT with leverage. Best to look at un-levered returns (EBIT / ROCE).
    – Stock turn has declined and this has affected ROCE. But the collapse in margins speaks volumes about price versus cost.
    – In your paper I would highly recommend you look at ofshore developers and their profit margins. They to increased inventory, and their margins expanded, and their ROCE boomed. Why so different for Australia?

    Lennar in the US saw profits triple between 2001-2005. ROCE +30%.

    More importantly, the US, IRE, Spain all had a supply response to their bubble. See below.




    Yet Australia has not had such a response.

    The key question for your paper is

    “If Australia has a housing bubble, why it is so different to everyone else”?

  2. bb says:


    If you go back to the earlier posts, my reference to the ABS census data was to show there was not necesarity an over supply.

    Now you have had chance to see my logic, and data, do you agree?

  3. PETER_W says:


    High prices ~ land bubbles reduce demand

    Notice the reduction in sales as a percentage of all sales in the <$300K and the $300 – $500K dwellings price points


    Composition of sales from period to period is distorted from over represented FHBS 2008 toward upgraders & investors (with subsidised interest rates) 2010

    Skews the median 'sale price'

    To keep this ponzi alive long term the state governments will need to subsidise FHBS by transfering all the new land development taxes back to the FHBS…. IMHO

  4. bb says:

    Does anyone have a good link to real wages growth in Australia from 1970?

  5. DrBob127 says:

    No you don’t bb,

    you can’t change your tune halfway through having been out-argued. In my original post when I told you to wake up and have a look around I said

    “the idea of a housing shortage has long since been debunked on this forum.”

    and in your reply

    “Re: housing shortage. You can beleive whatever you want to beleive….I always rely on the data.”

    we were always talking about the strengths of the “there is a housing SHORTAGE” argument

    NOW that your data has been shown not to support your argument you turn around and claim that isn’t what you were arguing all along.

    I have come across enough slippery characters in my time to be able to recognize the smell of bu11$h17 when I smell it.

    FWIW, you seem to love your data points and numbers but don’t have the imagination to be able to see other peoples point of view.

    Therefore I suggest that you are an accountant or similar.

  6. Philip says:


    Thanks for the links.

    Apart from the construction industry data, other metrics are similar to that of the U.S., perhaps even more extreme, thus not so different. Given the supposed importance of construction data, I am surprised that no one has graphed data from across multiple countries to attempt some sort of comparison.

    Has anyone bothered to contact the industry in some manner to ask questions about profitability? Has anyone come across some sort of in-depth research about this matter?

  7. bb says:


    I am happy to discuss whether we have a shortage. Before we do that, I would like to know whether you acknowledge there is no oversupply.

    I think my earlier posts on rents obviously outline my views.

    Exactly how have you out-argued me?

  8. bb says:


    “FWIW, you seem to love your data points and numbers but don’t have the imagination to be able to see other peoples point of view.”

    Happy to listen to another point of view if it is supported by data rather than rhetoric.

  9. DrBob127 says:

    so you ARE an accountant

  10. bb says:


    Happy to help. I hope you post your paper on this forum when completed. I would very much like to read it.

    I have not seen any industry data on this matter. It could be a coup for your analysis. Google is a great tool to access public accounts.

  11. bb says:


    I have studied Finance, Accounting, economics and mathematics. By career has largely been in research.

    Can you answer my question. To be fair, I have answer many of yours.

  12. bb says:


    I re-phrase my question

    “do you beleive the market WAS NOT oversupplied in 2006 based on the data I have provided”

  13. PETER_W says:


    Do you agree with this major bank economist?

    St George chief economist Justin Smirk in an interview Friday said that with banks lending and consumers borrowing plateauing, house prices may remain essentially flat for the next decade.

    ”That’s because affordability is pushing up against its limits already, so it can’t go up,” he said.

    ”You can’t see any reason for house prices to accelerate massively. Affordability will keep a lid on it.”

    Barring a catastrophic shock to the Australian economy, the structural shortage of affordable housing means prices can’t come down, either, Mr Smirk said.

    ”What I think you might find is that in the next decade, real house prices actually might not match the inflation rate,” Mr Smirk said.

    If Justin is right, we will slowly see 30 – 40% of the buy side ‘investors’ move over to become 30 – 40% of the sell side.

    NG only works if prices rise 4 – 5% p.a. to recoup the accumulated cash losses!

  14. bb says:


    This statement is only correct if the distribution of home ownership remains static. If it does, the statement is correct.

    I fear this will not be the case

    I fear without government intervention the cost of production will continues to increase. This will increase house prices. The new buyers will be the existing wealthy. The middle class will slowly get priced out and our country will continue down the path of the “haves” and “have nots”.

  15. DrBob127 says:

    Perhaps tomorrow, beancounter

  16. bb says:

    Dr Bob,

    I have to go now. I was hoping you could see that the market was roughly in balance in 2006. If that is the case, my follow on points are

    1. From 2000-2006, the population increased by an average of 250k per annum
    2. From 2006, the population increased by an average of 414k per annum
    3. Yet the average annual approvals from 2000-2006 was 187k
    4. And the average annual approvals from 2006-2010 was 155k



    Since 2006 (when the market was NOT over supplied), population growth has accelerated, while dwelling supply has decelerated.

    On top of that, rents are up +40%.


  17. Philip says:


    It is difficult to tell from population and private dwelling figures if an under or over supply occurred in recent times. This would require that an average occupancy rate (AOR) be established as a baseline. An AOR is near impossible to determine in itself (is it 5 or 3 or 2?). Perhaps one could be determined during times when supply equates to demand, but then it is difficult to determine when this occurred.

    2000-2006: 250,000 people / 187,000 approvals = 1.3 AOR
    2006-2010: 414,000 people / 155,000 approvals = 2.7 AOR

    (This assumes there is no lag between approvals and finish time, not exact). I don’t think these figures show an under-supply.

    Is the 40% rents figure real or nominal? If it is real it may provide a better measure for an under-supply than the other figures you’ve cited.

  18. bb says:


    Between 2005-2010 average rents have increased by 8% per annum in NSW & VIC. This is nominal. Real rents therefore closer to 5.0-5.5%.

    See my ealier link on AOR. ABS forecasts this to decline from 2.56 to 2.25 by 2036.

    Depending on your assumptions on population growth, this means marginal AOR is around 1.5-1.7.

    Note, Approvals is not new supply. It can also include upgrades to existing stock.

    I estimates 20k of the approvals relates to existing stock.

  19. Philip says:


    Are there rent figures for Australia rather than individual states, like the ABS house price index?

  20. brett123 says:

    Interesting how the argument seems to have turned (over the life of this blog) from one of predictions of 40% decreases in house prices to now one of perhaps very low growth over the next few years.

    And it’s now a year or so after the the first home owners grant was reduced – yet still no collapse.

    Is anyone game to put up their hand and say they are predicting 20% plus house price decreases in the next couple of years? Or do we all agree that is now very unlikely?

  21. Pingback: Money of, by, for the Corporations or Money of, by, for the People? | Dailycensored.com

  22. Philip says:

    I’ve found these set of population and dwelling figures on Bubblepedia:

    Overbuilding by Location

    Dwellings and Population over time

    It would be interesting to see the U.S. AOR over the last decade or so. The U.S. AOR would have to be substantially below that of Australia’s (1.6 for 1986-2008) if there was a construction boom in the U.S. but not in Australia. This would provide some proof if there is housing over-, under- or on-par construction.

    Why so many empty houses?

  23. ned says:

    @191 bb

    “See my ealier link on AOR. ABS forecasts this to decline from 2.56 to 2.25 by 2036.”

    Yeah, well maybe it’ll go to 1. Would we be in a bubble then??

  24. ak says:

    brett123 (and of course bb)

    I am willing to make a conditional prediction that we may see a “20% plus” house price decrease in Australia provided that certain conditions are met:

    1. Any kind of currency/trade war between China and the US may trigger this as the terms of trade will instantly deteriorate,

    2. A 30-40% depreciation of AUD against USD combined with rising oil prices (for example due to another war in the Middle East) leading to higher interest rates (inflation targeting) may trigger this,

    3. A certain combination of internal political factors in Australia such as increasing instability (the activities of Tony A.), a reduction in immigration combined with higher unemployment, “paying back the public debt” or similar misguided macroeconomic policy may trigger a collapse,

    4. A 20% decrease over the next few years is still possible on its own if a significant number of investors decide to sell their properties due to miserable capital gains and there is no active policy of propping up the market.

    However if Chartalist (or similar) policies are in place and unemployment is low we may not see any reduction in nominal prices. Even in the current political framework the government may still pull a few tricks, knowing that the wealth (or rather illusion of wealth) of 60% of the society depends on the elevated level of house prices.

    Australia is not different and whatever happened elsewhere may also happen here.

  25. Philip says:

    I’ve graphed U.S. housing stock and population from 1965 – 2009.

    In 1997 (when the bubble started) the average occupancy rate (AOR) was 2.32 and in 2006 (when the bubble burst) the AOR was 2.30 – barely changed.

    From 1997-2006, the number of dwellings increased by 8.99% and the population increased by 8.37%, which explains why the AOR didn’t change.

    Given these figures, I wonder what the basis of the argument for over-construction is in the U.S.?

    Could it be instead that: (1) young people are staying for longer with their parents, (2) adults are moving in together to save on rent and costs & (3) with high unemployment, people can’t afford to purchase housing at previous rates? Instead of the construction market correcting after apparent over-construction, could it be that the above factors have resulted in a slump in construction from previously normal (equilibrium) rates?


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