Prof. Joseph Huber:Creating a Stable Monetary System. The Case for Sovereign Money Conference
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Prof. Joseph Huber:Creating a Stable Monetary System. The Case for Sovereign Money Conference Prof. Joseph Huber:Creating a Stable Monetary System. The Case for Sovereign Money Conference Presentation Transcript

  • Creating a Stable Monetary System. The Case for Sovereign Money Conference The Future of Money University of Economics and Business Athens, 24 Jan 2013Prof Dr Joseph HuberChair ofEconomic Sociology, EmMartin Luther UniversityHalle an der Saale
  • Financial Crises AboundCurrent banking and debt crises are no single events, but latest links ina continued chain.From 1970 to 2007 many crises happened on migratory hot spots aroundthe world, intensifiying in number and gravity: 145 banking crises 208 currency crises 72 sovereign debt crises______________________________________________ 425 systemic financial crisesin addition now also including the subprime crisis, the US-EU bankingcrisis, and the PIIGS sovereign debt crisis. Further such mess upcoming.Sources: Laeven/Valencia 2008, Reinhart/Rogoff 2009, Lietaer et al 2012 49–52. Bundeszentralefür Politische Bildung: Kennedy 2011, 96.
  • The misjudged factor – the monetary systemAmong the many factors held responsible, one is poorly understood andhas so far been misjudged – the monetary system.The monetary system as it stands today is a system of unrestrainedcredit creation by the banks on a fractional basis of central-bankreserves, called fractional reserve banking.The financial causes of the crises have a common monetary cause:excessive credit creation within the system of fractional reserve banking. The financial system is plagued by malfunctions. It is the monetary system that is at the root of the problems.Unrestrained credit creation within the system of fractional reservebanking inevitably feeds speculative bubbles, asset and consumer priceinflation, financial-investment income at the expense of earned income,and results in over-indebtedness, particularly of governments and thebanks themselves, with ensuing crises and loss of money and assets alike.
  • Money Governs Finance, Finance Governs the Economy o l→ o ntr C y of a rc h Real Economy H ier Financial→ System Monetary System←H ierar ch y of R e s tr i ction s←
  • Uno-Actu-Identity of Credit Creation and Money Creation (demand deposits) by ledger entry 2 Bank Balance SheetCustomer Assets Liabilities Debit Credit 10.000 10.000 - 10.000+ 10.000 Claim on Liability Interest-bearing Credit asliquid customer towards debt to the bank bankmoney from credit customer (means of payment) creation = claim on cash Banks create credit (non-cash money) when they - make out loans and overdrafts
  • Fractional Reserve Bankingi.e. Multiple Credit Creationon a Fractional Basis of ReservesIn order to create 100 units of demand deposits, the banking sector needsfractional coverage in central-bank money of about 2,5% - composed of• 1,4% cash (coin and banknotes) for the ATMs• 0,1% liquid reserves for settlement of daily clearings• 1,0% obligatory minimum reserve (of no use at all)Put as banks money multiplier: Bank money, i.e. demand deposits createdby the banking sector = 900 times liquid reserves = 73 times cashTodays money supply M1 (currency in circulation) consists of80–95 % bank money on current account (demand deposits) 5–20 % sovereign money (state money in the form of coin, banknotes, and liquid central-bank reserves) – though not even this put into circulation by sovereign supply initiative, but by banking demand pull for fractionally re-financing themselves).
  • M1 Bank Money (demand deposits) vs Cash Data: Swiss National Bank, Historical Time Series, No.1, Feb 2007, 1.3, 2.3
  • Cashless transactions by (1) clearing of customer accounts and (2) settlement of bank accounts in reserves Customer A 20 k Customer B 30 k 15 k Customer O Customer C 25 k 30 k Customer P 30 k Customer Q Bank X itself 15 k 10 k Bank Y itself 90 k 85 k Clearing Bank ∆ =5k Bank X Y Settlement in inter- bank credit/debit or central bank reserves
  • Short-Term Restrictions to Credit Creation out of Thin Air1) Market volume = preparedness to go into debt = potential of demand for securities and credit (loans)2) Expansion/Contraction of credit in step throughout the banking sector, domestic and international (thus ensuring near-balance of in- and outflows within the system)3) Size of banks. For large banks it is much easier to extend their balance sheet than for smaller banks4) Obligatory minimum reserves5) Capital adequacy according to Basel rules (assets-to-equity-ratio or loan-to-equity-ratio)6) Liquidity rules (liquid and near-liquid assets must be equal to or bigger than overnight liabilities) after H.Seiffert, Geldschöpfung, Nauen 2012, 78-97.In the longer term there are no restrictions. By crediting/debiting,buying/selling, paying out/taking in relative simultaneously, banksmutually create all of the required assets and equity they need.
  • Split Circulation of Money 1. Interbank 2. Customer circulation circulation (nonbank) of of reserves (on account) bank money (on account) Central Bank Banks Customers Cash Cash - private Haushalte Issue Exchange Monetary and - companies, organis. Financial Institutions - public households3. Cash (coin, notes) as a residual sub-quantity of the money in circulation, exchanged out of account, or back onto account .
  • Banks money creation is out of control, the money supply wildly overshooting.M1/GDP (Marshallian K) European Monetary UnionIncrease 1995–2010 Data:
  • Banks money creation is out of control, the money supply wildly overshooting.Marshallian K Germany (M1/GDP) 1950–2010 Data:
  • The Monetary Cause of Financial Causes of the current crises:Overshooting Money Supply from Fractional Reserve Banking,i.e. Multiple Credit Creation on a Fractional Basis of ReservesEuropean Monetary Union 1995–2008 M1 189 % ∆~6/8 ~3/4 GDP nominal (price-inflated) 51 % ∆~1/8 GDP real (price-deflated) 23 % ~1/8United States increase last ten years M2 (broad liquid money) 80 % ∆~ 2/5 GDP nominal (price-inflated) 45 % ∆~ 2/5 GDP real (price-deflated) 16 % ~ 1/5Sources:;; Data: Bundesbank, MonthlyBulletins, tables II.2.
  • Excessive Credit Creation, i.e. money-printing by the banks,results in Inflation and Asset Inflation.There are two main channels through which an expansion of banks balance sheets,i.e. expansion of the money supply, contributes to credit bubbles, financial assetbubbles, and over-indebtedness of actors involved, including market exuberanceand asset price inflation.- bank credit (additional creation of money) for direct leverage of financial-market investment in stocks, real estate, derivates, foreign exchange, private equity (e.g. hostile leveraged buy-outs most of which are credit-funded)- bank credit (additional creation of money) for funding public debt, i.e. buying sovereign bonds by paying with newly created demand deposits. The volume of sovereign bonds and bills is nothing but just another bubble, in fact the biggest bubble of all.
  • Expansion ofbank money FAZ 10.5.11, 9as leverage forpaper investmentin financial assets Taken from The Economist
  • MFIs going in debt (ever higher leverage)
  • Accumulation of sovereign debt in industrially advanced countries Japan 1950-2009 (Bln Yen)USA 1940-2010 (Bln US-Dollar)
  • Government Debt = Interest-Bearing Assets (Gov Bonds & Bills)Who profits from government debt, as long as governments areable to pay?Banks 50 – 60 %Funds and Insurance Companies(in UK and elsewhere also pension funds) 30 – 35 %Private Households(Italy, Japan more than elsewhere) 7 – 16 % Ownership of Public Debt in Europe 12% Banks domestic and foreign Funds, Insurance 33% 55% Private Households Source: ECB, Monthly Bulletins, Table 6.2.1
  • Shift in Income Distribution – to the Benefit of Financial Income at the Expense of Earned Income Any current income (taxes, labour, interest and payback of pricipal) has to be paid out of current proceeds from GDP – or additional debt. If interest-bearing monetary and financial assets grow dispropor-tionately higher than GDP, this will lead to a disproportionately growing share of income from financial investment, or interestrespectively, and correspondingly involve a declining share of earned income.
  • Decline of Earned Income, Growing Share of Financial Income
  • Increase of Financial Income to the Detriment of Earned IncomeEconomist 21 Jan 2012, 47
  • The Case for Monetary Reform. Transition from banks money surrogate (demand deposits) to plain sovereign currencyThe financial causes of the crises have a common monetarycause: excessive credit = money creation. Financial markets cannotwork properly on the basis of a malfunctioning monetary system.For sorting out banking and financial markets, one has to come togrips with the money system.Measures of banking and financial reform can hardly be successfulunless based upon a reform of the underlying money system. → see again figure
  • Money Governs Finance, Finance Governs the Economy o l→ o ntr C y of a rc h Real Economy H ier Financial→ System Monetary System←H ierar ch y of R e s tr i ction s←
  • The Case for Monetary Reform – Goals→ Obtaining full control of the money supply (M-to-GDP ratio)→ Control of inflation and asset inflation (asset/debt-to-GDP ratios)Hence,→ reintroduce plain sovereign currency in order to→ reestablish the monetary prerogative as a sovereign right of constitutional importance, comparable to the state monopolies on legislation, public administration, jurisdiction, taxation, and the use of force)
  • The Case for Monetary Reform. Transition from banks money surrogate (demand deposits) to plain sovereign currencySovereign money = chartal or state money.E.g., coin (issued by the treasury) and banknotes (issued by thecentral bank) are sovereign money.Demand deposits are private bank money.A money reform today does with digital money on account the samethat was done with private banknotes in the 19th century, whenprivate banknotes were phased out in favour of the state or central-bank monopoly on banknotes such as it exists today.
  • Key Components of a Sovereign Money Reform1. Restoring monetary sovereignty, and sovereign money respectively: ensuring the full state prerogative of → determining the currency of the realm (unit of account) → creating the currency (= money in circulation = legal tender), including coin, banknotes, as well as digital currency (e-money) on account and on mobile storage media → obtaining full seigniorage from the issuance of money.2. Independent Monetary Authority: Conferring responsibility for the entire stock of money to an independent monetary authority (in Europe the central banks, the ECB resp., under public law)3. No more bank money: Putting an end to the creation of bank money (demand deposits) which is credited into current accounts on a basis of fractional reserves4. Full seigniorage to the benefit of the public purse by spending new money into circulation through public expenditure (genuine seigniorage), or by loaning it to banks (interest-borne seigniorage).
  • Main Measures to be Taken for a Transition to Plain Sovereign Money  Extension of the monopoly on coins and banknotes to money on account and on mobile devices. From a set date on, the central bank has the exclusive right to create and put into circulation the entire stock of money (currency, legal tender). Amendment of Art.128 TFEU, Art.16 ECB/ESCB Statutes.  Taking customers current accounts off the banks balance sheet, thus putting an end to banks ability to create demand deposits. This is no nationalisation of banks and credit. Banks continue to be free market enterprises. The reform is just about renationalising the money. Overnight liabilities to customers are redeclared to be liabilities to the central bank, getting out of the books to the extent that outstanding old customer loans are repaid and the money passed on to the central bank – where it is formally extinguished and replaced with newly issued plain money.
  • Main Measures to be Taken for a Transition to Plain Sovereign Currency  Revision of Art. 123 (1) TFEU (Prohibition for ECB/NCBks to directly contribute to funding government budgets). Central Banks shall be - not just lender of last resort for the banks, but also for the state - not just re-active issuer of least reserves in re-financing the banks, but pro-active issuer of first instance, in fact the sole issuer of money - acting not just as the bank of banks, but again as the bank of the state. Central banks will thus be upgraded in formal status, becoming de facto what they are already supposed to be de jure, i.e. an independent monetary state authority (in a sense analogous to the judiciary) with full control of the money supply – a function they now cannot fulfill because under fractional reserve banking the banks have largely usurped the state prerogatives of money creation and seigniorage.
  • (USA)
  • Advantages of Plain Sovereign MoneyA transition from bank money to sovereign money involves a minimum of institutional change . It leaves moststructures intact and banking practices unchanged. It keeps the advantages of the present system, such as e.g. • sufficient and flexible money supply (only a partial reality today) • affordability of credit • maturity transformation • easy money transfer (payment systems) both domestically and internationally • full convertibility of the currencyIn addition it comes with five more important advantages
  • Advantages of Plain Sovereign Money1. Money-on-account cannot disappear and is thus safe. In a banking crisis, the payment system is no longer at stake. In so far, government and society arent susceptible to banking blackmail any more.2. Money supply under effective control. No more inflationary bank-money supply. Monetary inflation close to zero possible.3. No more procyclical overshooting, or undershooting, of money supply. More steady flow of money and capital. Business and financial cycles more moderate. No more additional money fuel for speculative leverage.4. Full regular seigniorage to the benefit of the public purse (annualy about 1–4 % of total public households, depending on country and growth). Banks margin extra profit and privileges from credit creation abolished.5. One-off transition seigniorage. Allows for a 50–100 % redemption of public debt within two to four years (dependending on country).
  • Regular Annual Seigniorage as an Addition to the Stock of MoneyBillion SFr BIP M1 Seigniorage approx. Total public ∆ M1 as a % ofBillion € (memo) ∆ M1 at expenditur total public ∆ BIP 1-2-3 % e expenditureGreece 215 96 1.0 – 1.9 – 2.9 108 1.0 – 1.8 – 2.7 %EU-17 9.347 4.786 48 – 96 – 144 4.652 1.0 – 2.1 – 3.1 %Germany 2.477 1.383 14 – 28 – 42 1.164 1.2 – 2.4 – 3.6 %Austria 301 141 1.4 – 2.8 – 4.2 153 1.0 – 1.8 – 2.7 %Switzerl. 568 463 4.6 – 9.3 – 13.9 189,2 2.4 – 4.9 – 7.4 %Figures available for 2011. Quellen: European Central Bank, Monthly Bulletin, Tables 2.3.1+2 ( -Deutsche Bundesbank, Monatsberichte, Tabellen II.1+2 ( - Österreichische Nationalbank,Statistik und Meldeservice, http://www. - SchweizerischeNationalbank, Statistische Monatshefte, Tab. A2, B2. -
  • One-off Transition Seigniorage EU-17, Gr, D, A, CH Billion € A1 A2 A3 A B Billion SFr Customer Interbank Reserves M Stocks Total A/B Demand Demand Bks with to be Public Debt Deposits Deposits CentralBk replaced 2009 EU17 3.744 312 369 4.425 7.120 62 % Ger 1.014 129 112 1.255 1.767 71 % A 111 22 35 168 191 88 % CH 336 116 45 497 209 238 % 2010 EU17 3.912 359 317 4.588 7.796 59 % Ger 1.109 135 146 1.390 2.056 68 % A 112 19 39 170 206 83 % CH 386 123 38 547 209 262 % 2011 Gree 75 ~8 ~12* 95 280 34 % EU17 3.943 390 637* 4.970 8.219 61 % Ger 1.170 115 121 1.406 2.088 67 %* Untypical effect through QE. Sources: Europäische Zentralbank, Monthly Bulletins, Tab. 2.3.2 (SightDepos), 2.5.1 (Interbk Deposits), 6.2.1(Public Debt). - Deutsche Bundesbank, Monatsberichte, Tab. II.2+3 (Sichteinl), IV.3 (Interbk-Sichteinl), III.2 (Reserven EU+D), IX.1(Staatsschulden). – Österreichische Nationalbank, Statistiken, Daten & Analysen, Tab. 1.1.2 (Reserven), 7.24.1 (Staatsschuld), 3.3.1–3(Zwischenbankforderungen) - AK Österreich, Wirtschafts- und Sozialstatistisches Taschenbuch 2011, Tab. Geschäftsstruktur der inländischenKreditinstitute (Zwischenbank-forderungen). - Schweizerische Nationalbank, Statistische Monatshefte, Tab. A1.17, A2, B2. - SNB, Die Banken inder Schweiz 2010, Tab. 18 Passiven. - Statistik Schweiz/Bundesamt für Statistik, http://www. bfs.admin. ch/bfs/portal/de/ index. EidgenössischeFinanzverwaltung, Finanzstatistik der Schweiz 2010, 3. - Eurostat Statistical Books, Government Finance Statistics, 2012
  • Advantages of Plain Sovereign MoneyUnder given circumstances there is no smooth way out of the presentbanking and sovereign debt crisis of the old-industrial world.Under prevailing conditions, overcoming the crisis unavoidably includes- creditor write-downs (haircuts) to an important extent- inflation and/or negative interest (real interest rate below inflation rate)- austerity regimes (strangling the economies, increasing unemployment and impoverishment ).A transition to plain sovereign money, by contrast, would actually make fora smooth ending of the banking and debt crisis – neither requiring austerityregimes, nor inflation or negative interest, nor creditor haircuts.It is difficult to understand why those in charge do not embrace thisopportunity.
  • Creating a Fair and Stable Monetary System. The Case for Sovereign Money Conference The Future of Money University of Economics and Business Athens, 24 Jan 2013Prof Dr Joseph HuberChair ofEconomic Sociology, EmMartin Luther UniversityHalle an der Saale
  • Euro Sovereign Debt Crisis. What should have been done (1) Keep to the law: No Bail-out (Art.125 TFEU) Value adjustment of sovereign debt (in fact debt haircut) by markets. Accept insolvency of affected states. Systemically relevant creditor banks (some of the 90 out of 8.300 banks in the EU) which were possibly threatened by bankruptcy could have been stabilised through bail-in and government partici- pation in banks equity (= partial nationalisation). Insolvent govern- ments could have obtained necessary means from other euromember countries (≠ bail-out). In the federal structure of the U.S. there are no bail-outs. Insolvent States or municipalities cannot claim solidarity from outside. External help, though, may come from stimulus plans and recuperation aid.
  • Euro Sovereign Debt Crisis. What should have been done (2) Insolvent debtors face a difficult period of time anyway. Imposedausterity to the single-side befenit of creditors causes sharply shrinking economies and purchasing power, increasing unemployment and impoverishment, and is certainly the worst option of all. A sovereign debt crisis is not to be equated with a currency crisis. Possible insolvency of some nation-states would not have resulted in a an existential crisis of the euro. Public insolvencies in the U.S. never aroused concern about the U.S. dollar. Probably transitional devaluation of the euro of about 20–35 % for about one to three years. Not too tremendous a problem. The euro crisis is a pressure pretext to be bailed out.
  • Leaving the euro. An option worth considering?Pro Return to former national currency would result in a low valuation (devaluation respectively) of the new national currency. This creates a strong advantage of international cost competitiveness. If the return to a national currency is combined with an imposed reduction, or even cancellation of all claims and debts in euro, this would result in a relief of total national debt, i.e. getting things straight for a new beginning … though, of course, at the expense of domestic and foreign creditors, which is where trouble comes in …
  • Leaving the euro. An option worth considering?Contra If not combined with reduction or cancellation of national debt, a return to the national currency would actually worsen the burden of foreign debt. If combined with imposed debt relief, this causes massive damage to/problems for domestic creditors and investors. Lack of financial resources. Creditdrought and investment restraint. As a result, shrinking economy in spite of debtrelief, and maybe political unrest. Long-winded legal disputes over contract violations. Massive flight from the new currency. Another drain on foreign reserves. Due to lack of foreign reserves imports would stay below what is required. Remaining imports would trigger (imported) inflation. Equally, internationally active firms would face difficulty in meeting theirobligations. Thus many firms threatened in their existence. Incoming foreign direct investment would be low, or fail to materialise at all. Foreign credit would be obtained under unfavourable conditions only, and come with exchange-rate risk and new dependency on foreign creditors.All things considered … leaving does not really look like a good bargain.
  • Creating a Stable Monetary System. The Case for Sovereign Money Conference The Future of Money University of Economics and Business Athens, 24 Jan 2013Prof Dr Joseph HuberChair ofEconomic Sociology, EmMartin Luther UniversityHalle an der Saale