The Future of Money and Banking
Central Bank Digital Currency and Beyond
19 Final Panel Discussion
The following critique is meant in the most constructive manner, and in light of the existential environmental crisis that has finally made it into the public consciousness. I hope it will be received with open minds. Professor Keen and Michael Kumhoff state that, from their own experience, economists are not known for a willingness to be shown incorrect and change their understandings. Who is, after all? That has certainly been my experience with the economists I have debated.
Nor is there any evidence that economists understand that their erroneous concepts about money make them into tools of class warfare and a very significant contributing cause of the extinction crisis now facing this planet.
Unfortunately, many money reformers also entertain provably erroneous concepts about money, usually for “intuitive” or ideological reasons.
I have been very concerned about the degradation of the planetary environment for over half a century. It was 1993 when I first learned that money is created as principal debt to a bank. I have been studying the subject of money from the environmentalist point of view ever since.
I made my international hit movie Money as Debt (2006) at the urging and with the help of Bill Abram, a Canadian sovereign money reformer, and Dick Distelhorst, a senior member of the American Monetary Institute, both now deceased. Money as Debt received immediate worldwide promotion by Elizabeth Kucinich, an international sovereign money reformer and wife of former Congress member and long-shot Democrat Presidential hopeful, Dennis Kucinich.
Shortly after making Money as Debt, I became the everything-media assistant to Connie Fogal, the leader of Canada’s sovereign money reform party.
The root of the problem, not the solution
The conclusion I have come to from studying money is that a sustainable survival economy, one that is capable of both growth and shrinkage without ill effects, can never be created from our money system as it is, a system that depends entirely on constant exponential growth to avoid mathematically inevitable mass default.
I have also concluded that the concept of money as any single uniform quantity made valuable by its own scarcity, such as gold or a sovereign money monopoly, is the root of the problem, not the solution. Naturally, that is not what fans of either gold money or sovereign money want to hear. The paradox is that I totally agree with sovereign money reformers that government has the right to spend “sovereign money” into existence. The actual reason why that is so is the clue to the paradigm-changing solution I propose.
Too much debt
There seems to be general agreement among panel members that system instability is caused by “too much debt”. But this term is a very inadequate basis on which to formulate a solution. It does nothing to illuminate either the structure or genesis of “too much debt”.
I hope to make both perfectly clear. It’s all simple logic following upon the one simple fact I explained to millions worldwide in my movie Money as Debt, and which has since been verified by three central banks: almost all money is someone’s principal debt to a bank to be repaid according to a timetable. That’s it – all you need to know. The rest is simple logic and grade school arithmetic.
Paradox of thrift
Steve Keen starts off by noting that people tend to hoard the money they have when debt levels get too high. The perceived risk of a downturn causes an actual downturn in spending and money creation, which reduces GDP and employment. The situation then escalates into a default crisis. Keynes made the same observation with his “paradox of thrift” as have many others before him.
Professor Keen then proposes that the remedy is to reduce debt levels, without distinguishing between which debt levels – money creation debt or the lending of existing money. There’s a world of difference.
Upon revisiting the history of the “paradox of thrift”, I found that previous analysts all specified savings as the culprit – just as I do. Savings, previously known as “hoarding” is an inherent part of money as any single quantity made valuable by its own scarcity. Savings are an integral part of banking as currently practiced and actively encouraged by bankers. Thus, the banking system itself makes debt-money unavailable to the borrowers indebted to it.
The one simple fact we must keep in mind is that my savings are someone else’s principal debt to a bank that I am withholding from them. Savings interrupt the full circle required to enable repayment. Savings turn the system into a mathematical game of musical chairs whenever the ratio of savings to chequing is increasing. However, in this version of the game, the number of debtors grows much faster than the number of chairs, as more and more bank credit money is saved and replaced or lent an additional time as loanable funds.
Eventually the music must stop. This happens when either bank credit creation slows down, reducing the inflow stock of new bank credit, or reduced velocity fails to allow us to, in the aggregate, borrow from Peter to pay Paul and vice versa to avoid default.
The cause that initiates the default crisis can be anything. It has nothing to do with the extent of the resulting damage. The extent of the resulting defaults depends on how much impossible principal debt must be eliminated to get back to a level that velocity can sustain. By the Crash of 2008, in the USA, the total principal debt to banks (M2) had reached an unprecedented high relative to money available (M1).
Economists and a Pile of Nuts
Savings contribute to creating the “grow-or-collapse imperative” that prevents us from ever creating a sustainable economy. And yet in most minds, and as mis-taught in economics, savings are believed to be the foundation of the system as if they were a squirrel’s store of nuts, actual wealth. But, in reality, savings are someone else’s principal debt of non-existent nuts. There’s a big difference.
Economists and a Pile of Nuts, cartoon, 2 minutes 17 seconds
I repeat. Savings are not just “money” put aside. Savings are someone else’s principal debt to a bank that is NOT available to them to be earned and repaid unless the savings are spent.
Furthermore, savings are used to create more principal debt to a bank, just as if they were “loanable funds”. Savings in the form of the money market mutual funds sold by banks are existing bank credit actually lent a second time as loanable funds. From the borrowers’ point of view there is not a whit of difference in the arithmetic between money made unavailable and replaced by a new bank “loan” or existing money actually lent.
M2 = 4 x M1 means what?
Correctly interpreting the chart of M1 (cash and chequing) and M2 (M1 plus savings) in the USA, the logical conclusion is that, in normal conditions, every dollar created as M1 has been saved by a depositor and replaced by a bank 3 times over. Expressed another way, every dollar potentially available to be earned by borrowers is owed concurrently to the bank that created it, and to three different depositors for whom banks are acting as if they were intermediaries in the loanable funds model.
How do I come to this conclusion? It is because, according to the Fed’s own statistics, M2, which is total principal debt to banks, is normally reported to be about 4 times M1, the money possibly available to be earned to pay it. That is all one needs to know.
In the prosperous early Nineties, the M2 to M1 ratio dropped to 3:1 as savings were spent. At the Crash of 2008 the M2 to M1 ratio hit an unprecedented 5.26:1 due to increased corporate savings and income inequality.
Every time since 1981 that the M2 to M1 ratio has increased a few years in a row, a default crisis resulted. This can all be observed directly from the Fed’s routinely published statistics.
It’s the lending itself
Throughout this panel discussion, I note that everyone, including Professor Keen, slips into the habitual assumption that there is such a thing as “money” in our current system. I have had someone argue with me that “principal ceases to exist upon spending and fungible monies circulate in the national economy”. Logically, if “principal ceases to exist upon spending”, the borrower doesn’t need to pay it back after spending it. This is clearly not the case. And yet, nearly everyone unconsciously slides into thinking of money as a child thinks of a coin.
Once we fix with certainty in our minds that money is created as someone’s principal debt to a bank, it follows by simple logic that it remains someone’s principal debt to that bank until it is paid back. And furthermore, that would not change if money were cowrie shells, gold coins, sovereign fiat or some imaginary “debt-free” CBDC actually being lent. It’s the lending itself that turns any form of money into principal debt until it is paid back.
Therefore, the idea of “positive money” is absolutely pointless in an economy that must of necessity run on debt, “pre-financing” as Professor Huber called it. The real question should be debt of what to whom?
Even if the government simply created money and spent it so-called “debt-free”, in a stable sustainable situation, it would all have to be taxed back at the same rate as it was spent in order to preserve its value. Thus, so called “positive money” is an illusion. In reality, it is a tax credit, a debt-on-a-schedule of repayment just like bank credit – but interest-free. That’s good for the taxpayers, but those who financially depend on the interest on government debt would lose their source of income.
Debt-money is like a yo-yo
A remarkably appropriate way to picture lending is that money (in any form), once it is lent, is like a yo-yo spun out into circulation. It spins while the payments are mostly interest and then accelerates as an increasing proportion of principal payments returning to its lender.
All is well as long as the yo-yo can return unburdened by any other debts. Savings and re-lending grab the yo-yo and prevent its return, while burdening it with additional “principal debt of a yo-yo” obligations. That means that the only way to get a yo-yo back is to grab someone else’s yo-yo, which puts them in the same predicament. In the aggregate, it puts everyone, the entire society, in the predicament of relying on the next round of yo-yos to be sufficiently large and on time to make up for the past yo-yos come due but not available.
The ratchet effect
Every increase in the debt level must be maintained via the “ratchet effect” to prevent mathematically certain default. This locks in the growth of the “money supply” which, in reality, is the “principal debt to banks supply”. There is no escape from this accelerating mathematical treadmill except default, and no way to sustain it without uninterrupted exponential growth of principal debt to banks.
Money is …
With the exception of coin, and bank credit created to buy equities, real estate or precious metals, there exists only commercial bank credit which is “evidence of someone’s principal debt” to a commercial bank, as well as cash and reserves which are “evidence of someone’s principal debt” to a central bank.
Note that in all three cases, when money is being created on one side of the bank balance sheet, the other side is created in one way or another by the productivity of the people. It is the only way it can be.
This is easily understood if one pictures arriving at the mall with a million dollars and all the stores are empty. This is the fallacy of “helicopter money”. Money’s value will always adjust to match the real value of things in demand – and the value of things in demand will always be determined by the actual supply. Therefore, money should be created by demand in order to create supply to satisfy demand.
Ulf asked “For what purpose do we create money? And how can we create money in a better way that supports the real economy?”
How about directly from the productivity of the people? In my analysis, one of the the biggest obstacles to finding a real solution is the belief that only the national government has “monetary sovereignty”- even a “sacred duty”- to provide the nation’s money supply. This is a limiting ideological belief based on centuries of conditioning. It is not an indisputable fact.
Individual monetary sovereignty
My argument is that the right to issue money, monetary sovereignty, actually belongs to any and every entity with assured demand for what it supplies. Demand creates credit creates money. I repeat, any and every producer of anything in demand, from individuals to international corporations and any level of government that can levy taxes, has monetary sovereignty. That also means that only producers, service providers and governments have the right to spend credit into circulation as money.
In all cases, individuals, corporate producers and government service providers, the new credit spent would be logically justified by the monetary sovereignty of each individual citizen involved – all the individuals doing the producing, whether that be as a lone owner of a market garden selling directly to customers or as a faceless employee of Behemoth Worldwide.
Crowdfunding model of money
Of course, producers are also customers. Producers in this system would be borrowing from their customers via pre-sale of their output. Initially, what I call Producer Credits would be sold for conventional money to pay for production, as in the current practice of crowdfunding. Once developed as a full money system, all of a producer’s expenses could be paid in Producer Credits directly. All that is required to make any Producer Credit reliable as money worldwide is assured demand for the Producer’s output and a convenient global system of exchange that allows the Producer Credit to be traded to an actual customer at maturity.
Collateralized inflation-proofed savings
Customers would pre-purchase what they would buy anyway. Rather than put insecure bank credit away in savings possibly subject to bail-in, savers would put away their savings as collateralized credits for specific output from a specific supplier to be collected upon in the near future. Producer Credits would give a discount on prices proportional to the time the credit has existed. This discount could easily exceed bank interest on savings.
Producer Credits would also be valued in a new value unit that is immune to inflation/deflation, guaranteeing that savings would never lose nor gain real purchasing power.
Producer Credits would be designed to have a defined lifecycle of a year or less so that credit would never be based on the more risky distant future like a 30-year mortgage. Producer Credit money would always be anchored in current production, the economic reality that matters, and would always complete the debt repayment circle by design. The value of Producer Credits in the Producer’s real goods and services would increase up to a maximum at maturity, after which the credit would expire. This would gives the Producers some control over when their output would be purchased.
The value of any Producer’s Credits in the new unit would be defined by the prices the Producer charges and would be unaffected by the total amount of other monies and Producer Credits in existence. Ultimately, all Producers could be disciplined to keep their own Credits within the limits of real demand by an automated self-correcting market.
A parable of “pre-financing”
Imagine a village with one fishing boat, a great need for fish, and no money to pay for provisions or deckhands. How do we get the fish we all need?
Simple. The boat owner needs provisions and labour. In exchange, he trades fish credits, the real value of which will depend on the success of the fishing trip. The fish credits can be exchanged or spent like money.
When the boat returns, everyone holding fish credits gets their proportionate share of the fish. The price of the fish in money units is established by the size of the catch divided by the total fish credits spent, including the owner’s share. The creditors’ inputs were valued according to the money unit they all understand but is physically absent. Anyone who fails to redeem their fish credit within the time limit will find their fish has “expired”.
It is a full circle “pre-financing” system by design, which is what a sustainable, stable money system must be. However, it should be noted that once all credits have been redeemed, there is no money in circulation. Fortunately, every producer in the village can do the same as the fisherman, the result being the ongoing real time creation of all the purchasing power needed to clear the market of all goods and services in demand, all of it accomplished in the complete absence of any actual money.
Medieval market money
Moving from fishes to loaves, I recommend watching my cartoon:
The Essence of Money – 7 min:36 sec
This is how market money worked in medieval times, starring Anton the baker.
After I made this cartoon, an artisanal bakery, just like the one in the cartoon, was built across the street from our house. Its construction was paid for, in part, by selling credits redeemable for bread. For a decade now I have enjoyed both the fabulous bread and the delicious smell, thanks to the baker’s ingenious use of Producer Credits.
The obvious solution
The only economist I know who has studied my proposal, had this to say:
“…the obvious solution…” “Grignon’s proposal amounts to using modern technology to replace an ‘entrepreneur economy’ with a ‘co-operative economy’”
It is my fond hope that economists and money reformers will come to understand my analysis and understand why more than tinkering with the current system is required. A paradigm change is needed. Now.
Compatible and non-disruptive
Producer Credits are not proposed as a threat to or replacement of the current system. They are proposed to be an expansion of it – an entirely compatible and corrective addition to the current banking system that revolutionizes it non-disruptively. This report to the City of London invites the banking system to incorporate “capacity credits” into the money system.
My Producer Credit proposal is an expansion on the same idea. According to the report, about 20% of world trade in real goods and services is already conducted business-to-business in credits redeemable in the promised goods and/or services ONLY.
The original form of money
Producer Credits are the original form of money, pre-dating the invention of coins by thousands of years. Money was, in ancient times, a credit for grain stored at the local temple. Grain producers spent these credits and they circulated as money. Anyone else could issue credits against their own output using the designated grain as the common value unit.
Life, in all its forms, tends to multiply and consume until stopped by the environment. The current money system is, therefore, not the root cause of our drive for endless growth and consumption. However, it is the FOREMOST STRUCTURAL OBSTACLE to overcoming our addiction to growth and adapting to an already badly over-used world.
Our challenge is to be smarter than bacteria. I firmly believe that we must re-integrate truly productive sovereign money, Producer Credits, into the general circulation in order to be capable of adapting to a future where endless growth is no longer an option.
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