#14 A few lingering questions

From: http://www.monetary.org/intro-to-monetary-reform/faqs

Is there any chance the green US Money act could eliminate the federal income tax?

It “could,” and though that’s not likely in the near future, it is the direction it goes in. Thanks to the immense savings our government will experience through control over its money system, taxation should decline substantially for middle and lower income groups. In addition the green US Money act should directly lead to substantial reductions in interest rates, because as the US pays off its national debt in money rather than rolling it over, those receiving those payments will be looking for places to loan and invest those funds. Interest rates should drop substantially.

Won’t you be breaking the sanctity of contracts when you convert the existing bank credit already in circulation, into U.S. Money? 

No. First of all a contract requires understanding of the terms by all parties to it, and that certainly did not exist. But more likely it will be viewed as very acceptable by the banks, considering the security it confers on banking, especially when the alternative is going broke. There would be no reason to extend the legal tender privilege (acceptance for taxes) to the credits of any disagreeing banks.

How would the green US Money act affect our position with China?

The green US Money act would have a number of positive effects on Chinese – American Trade. Particularly it would encourage the Chinese to use more of their dollar earnings to really trade with us rather than just sell to us, and then invest their earnings in US bonds as at present.

What about other countries, and international systems such as the IMF (International Monetary Fund) and the BIS (Bank for International Settlements)? 

We’d expect other countries to follow quickly in our footsteps to each obtain the advantages of issuing their own national monies. The United Nations is already putting forward suggestions that member states shift now to nationally created, debt free; interest free moneys. They are way ahead of the US Congress just now.

A much reformed IMF, already organized under United Nations Article 57; #3, will see a greatly expanded role for the SDR and more responsibility for international accounts clearing as well as real assistance to member states, rather than acting as a destructive collection agent for the big banks. The role and importance of the BIS should be rapidly reduced, and perhaps eliminated.

# 13 If banks are no longer allowed to create money, where will banks get enough money to make loans and fill clients' needs for money under the Green US Money plan?

The Green US Money plan converts through an accounting procedure, the existing credit the banks have created through loans (about $6 to 7 trillion, roughly the existing “money” supply) into US money, no longer bank credit. That process will indebt the banks to the government for the amount converted over and above their capital. At present when bank loans are repaid to the banks by their customers, those credits/debts go out of circulation/out of existence and the credit money supply contracts as loans are repaid, until they make new loans. But under the American Monetary Act, since it’s now money, those monies will not go out of circulation the way the credits did. They are repaid to the government in satisfaction of the debt the banks incurred in converting them from credit to money. That goes into a pool which can be used by Congress or it can even be re-lent to the banks at an adjusted interest rate. Note: this action de-leverages the banks, but does not reduce the money supply.

Probably the most important source of funds for bank lending will be the continuing government expenditures, over and above tax receipts, such as social security and other payments by government on the items in the Green US Money plan. Also the engineers tell us that $2.2 trillion is now necessary to make our infrastructure safe over the next 5 years. That’s $440 billion new money per year. Also the health care and education provisions, and grants to states in can be introduced as new money. ALL these will eventually be deposited into various types of bank accounts where provisions of the plan will allow this money to be lent or invested. The banks will be lending and placing this money that has been deposited with them; not lending credit they create, masquerading as money.

Instead of being rolled over as at present, new US monies will be paid to the bondholders as they become due. Those people/institutions will be looking for places to invest that money. One place would be in bank stock, which is a source of lending funds for banks. Of the $5 to 7 trillion in US bonds and notes privately held, about 3.5 trillion is due within 1 to 5 years; .72 trillion is due in 5 to 10 years; .35 trillion is due in 10 to 20 years. All these amounts will represent newly created US money and will eventually find their way to becoming new lend-able or investable  bank deposits and even investments in banks.

(Editor’s note: this monetary reform plan essentially takes the Banking industry out as the key player in the economy.  It also wipes out the Government Bond industry.  This is the reason Congress will never approve it.  It may only come about after, and as a reaction to, a financial catastrophe such as a default on the debt.  The Fire Department will not show up until there is a five alarm fire!)

# 12 How can a bank lend money if they have to keep 100% reserves?

The 100% reserve provision applies only to checking accounts. 

This question results from economists classifying our AMA as a “100% reserve” plan, as the Chicago Plan was known. But our plan fundamentally reforms the private credit system, replacing it with a government money system. The accounting rules are changed.

Banks will be encouraged to continue their loan activities by lending money that has been deposited with them in savings and time deposit accounts; or lending their capital that has been invested with them. It is in the checking account departments that the banks presently create money when they make loans in a fractional reserve system. This will be stopped by new bank accounting rules. 

Making loans from savings account is a different matter, because real money, not credit will have been transfered into such accounts, and loaning that out does not create new money or give the bank any seigniorage, that belongs to our society. Some money loaned out of a savings type account might later get redeposited into another savings account and again be reloaned, but it’s the same money, not any newly created money, and will reflect that way on the bank’s books.

Various types of accounts will have differing requirements: e.g. matching time deposits to loan durations, lessening the “borrowing short term and lending long term” problem. Money market and mutual fund type accounts can be very flexible. The principle applied will be to encourage good intermediation of money between clients who want a return on their money and those willing to pay for using it; but will prohibit money creation. Checking accounts will become a warehousing service, for which fees are charged.

#10 So, what happens if we do nothing? The US may default on the debt. It's not pretty.

http://www.nbcnews.com/business/economy/whats-worst-could-happen-7-debt-default-doomsday-scenarios-f8C11366851

Here are seven of the most immediate and severe side-effects if the US defaults.

1. Depression and unemployment - Financial shockwaves, beginning at the Treasury and Federal Reserve, would make their way through banks and eventually blow a hole through the Main Street economy. Just as in the 2008 financial crisis, businesses would quit hiring amid the uncertainty. The unemployment rate would rise from its current 7.3 percent.

As an illustration, the jobless rate was 5.0 percent in December 2007, about where it had been for the previous 30 months, according to the Labor Department. By the time the Great Recession ended, it was at 9.5 percent, and peaked at 10.0 percent in October 2009.

A slew of other events would slam the economy: A drop in stock market prices, hurting many Americans’ 401(k) investments; the seizing up of bank lending; and the U.S. losing standing in the international marketplace. With U.S. economic growth still below 3 percent, it wouldn't take that much to send the nation into a financial tailspin.

2. Dollar down, prices and rates up - Among the biggest impacts could be mass selling of the U.S. dollar, an event that would threaten the greenback's standing as the world's reserve currency.  That would pound consumers' buying power by boosting prices for everything from groceries to clothing to the gas we pump into our cars.

"In the event of an actual default, Treasury yields and other borrowing costs would probably rise and remain higher," warned Julian Jessop, Capital's chief global economist.  So homeowners and prospective homeowners would have to say goodbye to the low mortgage rates they have enjoyed while the Federal Reserve has kept its foot on the economy’s gas pedal.

"All the money you're gonna have is under your pillow, and it probably won't be worth as much as it is today," Kyle Bass of Hayman Capital Management told CNBC's Squawk on the Street. “But I don't think we're going to get to that apoplectic point in the U.S."

3. Down go your investments - Stocks have had a rough week, with the S&P 500 and Dow industrials off about 2 percent each and the Nasdaq down nearly 4 percent. That raises worries for many Americans whose nest-eggs are held in company 401(k)s and other retirement accounts.

During the last financial crisis in 2008, major U.S. equity indexes tumbled, with the S&P 500 Index losing 37 percent for the year, which translated into big losses for many 401(k) retirement plan assets, according to the Employee Benefit Research Institute.

Just how individual 401(k) participants were affected by the downturn largely depended on the mix of assets in their funds. For example, investors with a high percentage of their 401(k) in stocks (versus bonds or cash) took a bigger hit than those with more balanced funds.

While many analysts have been trumpeting the market's refusal to panic over the prospect of a default, that relatively sanguine reaction likely would change.  Estimates among Wall Street analysts are the market would drop between 10 percent and 20 percent — with the upper end at what Wall Street defines as a bear market.

4. Social Security payments halt - The current projection for the government to run out of money to pay its daily bills is Oct. 17. Economists believe, though, that the Treasury would have enough money on hand to pay its $12 billion Social Security payment due that day, as well as another one on Oct. 25. That may not be the case come Nov. 1, though, when there's a $25 billion payment due, meaning that checks may not get issued past that date.  Nov. 15 stands as a larger date overall when the Treasury won't be able to make a $30 billion debt payment.

"We strongly suspect the current impasse over spending and the debt ceiling will have been resolved well before then," Capital Economics said in a report. "There is also a chance if the shutdown was still in effect at that point then the Treasury, perhaps with the Federal Reserve's help, would be able to avoid a default somehow. But in a worst case scenario, this is the date to watch."

5. Banking operations freeze up - One chilling data point: American banks own $1.85 trillion in various government-backed debt, Bove calculated.  The effect, then, of a default on that debt would be devastating. "If the Treasury and related securities were in default, one does not know what they would be worth," Bove said. "Assume a Latin American valuation of 10 to 20 cents on the dollar and an estimated $1.28 trillion in U.S. banking equity would be wiped out."

The potential result?  "It is my strong belief that a true default by the United States Treasury would wipe out bank equity," he said. "All bank lending to the private sector in the United States would stop, immediately. Existing loans would not be rolled over. Immediate repayment would be demanded."

6. Money market funds break - The $2.7 trillion money market industry operates on a basic premise: Millions of American depositors won't lose money. That agreement broke briefly, with one fund, during the 2008 financial crisis, to destructive effect on investor confidence. It could happen again in the event of a default. A recent Federal Reserve study said the damage during the crisis eventually could have involved 28 funds that would have "broken the buck." Bove said a default would hit "virtually every money market fund in the country."

"At present, (money market funds) that do not actually earn enough money to pay back 100 cents on the dollar are subsidized by the fund management company," Bove said. "A Treasury default would make this virtually impossible and millions of Americans would lose billions of dollars."

7. Global markets walloped - Some of our biggest trading partners are equally rattled by the prospect of the U.S. defaulting on its debt. The International Monetary Fund this week warned that a default would push the U.S. economy back into recession and cause “major disruptions” for global markets.

Meanwhile, China and Japan — the largest foreign holders of U.S. Treasury debt — have stepped up calls for quick action. China and Japan held $1.28 trillion and $1.14 trillion in U.S. Treasury securities, respectively, as of July 2013, according to U.S. government data. A fall in U.S. government bond prices would deplete the value of their reserves.

Saber-rattling by China and other foreign investors aside, there is little actual chance the governments who own America’s debt would actually sell it. To do so would cause a panic that would make their investments worthless — the diplomatic equivalent of cutting off their nose to spite their face. That said, investors might see a dip in the value of their international funds.

—By CNBC's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.

# 9 Will green US Money create runaway inflation?

(Editor’s note:  the short, simple answer)

No. When new money is used to create real wealth, such as goods and services and the $2.2 trillion worth of public infrastructure building and repair the engineers tell us is needed over the next 5 years, there need not be inflation because real things of real value are being created at the same time as the money, and the existence of those real values for living, keeps prices down.

If it goes into warfare or bubbles (real estate/Wall Street/etc.) it would create inflationary bubbles with no real production of goods and services. That is the history of banker control over money creation. Government tends to direct resources more into areas of concern for the whole nation, such as infrastructure, health care, education, etc.

Also the system eliminates ‘fractional reserve banking’ which has been one of the main causes of inflation. And remember new money must be introduced into circulation as the population and economy grow or is improved, or we’d have deflation.

(Editor’s note:  the long, complicated answer – 

I got a big headache trying to read this - good luck! I think the basic point is that there will be a legal limit on how much US Money can be issued in a given year.  The limit will by defined by the state of the economy in terms of GDP, Consumer Price Index, etc.)

Let us focus the goal of regulating green money injection into the existing economy in such a way as to provide simultaneously for deficit reduction and for job growth while maintaining stable prices, or at least keeping the inflation rate to within a small positive tolerance, which we denote Itol.  In this regard Fisher’s Money Exchange Equation is at the basis of the argument.  The macroeconomic equation (based on index numbers) states that

MV = PQ

where M is the aggregate money supply, V is monetary velocity (number of times each dollar is spent each year, on the average), P is the consumer price index relative to some “base” year, and Q is the real output of the economy (in base year prices) which is called “real GDP.”   The left hand side is the total amount of money spent by buyers over the year, and the right hand side is the total amount of money received by sellers over the year.  Since the amount spent and received is the same for each transaction, the totals must be the same as well.  So this is neither a theorem nor an empirical finding, it is more akin to an axiom.  Frequently Y = PQ is referred to as the nominal output in current year prices, or GDP.  Hence GDP = P*(real GDP).  Taking natural logarithms one gets

ln M + ln V = ln P + ln Q

Then taking time derivatives this becomes

M˙ / M V˙ /V  P˙ / P  Q˙ /Q

where the dot denotes differentiation with respect to time (i.e. rate of change).  It is customary to multiply each of these ratios by 100 to put everything in percentage rate of change units.  Hence we define m = 100M˙ /M , v = 100V˙ /V , p = 100P˙ / P , and x = 100^Q˙ /Q where we prefer to use x for the percentage rate of growth in the real output, then we can solve for p to obtain

p = m + v – x

If we then require that p < Itol, that implies that

m < x – v + Itol

This is what we call the Inflation Tolerance Inequality.  Recently, the Itol value used by the Federal Reserve Board has been about 2 (percent), but one could set it to various levels to see what the impact on the unemployment rate is.  Stable prices would correspond to setting Itol to 0, a zero tolerance policy.  Recent values for x and v have been 2.395 and -4.573 percent, so with Itol = 2 the limit on money supply growth (in percentage terms) would be 2.395 – (-4.573) + 2 or 9.5%, or with a zero tolerance policy, 7.5%.  Notice how the negative rate of change in the monetary velocity (we refer to the monetary velocity of M2, explained below) increases the rate at which money can be pumped into the economy without causing inflation.

#8 How does all this government created US money improve the economy?

In addition to greatly reducing and eventually eliminating the national debt, the proponents of the US Money creation system argue that it will improve the economy by:

1. Investing a great deal of the new US money in repairing the country’s infrastructure. They estimate this will create 7 million jobs.
2. Funding basic research and development in many technology areas.
3. Increasing the Small Business Administration’s budget and encourage low interest lending to start ups and small business.
4. Providing the individual states with federal grants with which to improve local health and education efforts.
5. Preventing teachers, firemen, health workers and police from getting laid off at the local level because of lack of funding.
6. Helping execute unfunded federal mandates and shoring up state pensions which are now in jeopardy. 
7. Providing a tax-free dividend for every citizen which they estimate to be about $10,000 to every man woman and child. That's $40,000 for a family of four.
8. Reducing income taxes for individuals and corporations.  More and more of the government’s budget will be funded by US Money and over the long run reduce the reliance on taxes and eliminate the need to borrow.

These claims are apparently backed up by some fairly sophisticated research by the International Monetary Fund and other renowned economists.

1.      Yamaguchi, Kaoru (2010). “On the liquidation of government debt under a debt-free money system: Modeling the American Monetary Act.” In Proceedings of the 28th International

Conference of the System Dynamics Society, Seoul, Korea. The System Dynamics Society

2.      Yamaguchi, Kaoru (2011). “Workings of a public money system of open macroeconomies: Modeling the American Monetary Act completed.” In Proceedings of the 29th International Conference of the System Dynamics Society, Washington, D.C.. The System Dynamics Society.

3.      https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

4.       Bramhall, Stuart Jeanne The IMF Proposal to Strip Banks of Their Power (January 9th 2013)

(Next post:  Will all this money creation lead to runaway inflation?)

#7 How to slay the DEBT MONSTER

GREEN MONEY CAN AVERT A NATIONAL DEBT DEFAULT

As an illustration, let us consider a hypothetical scenario for bringing green money (paper and electronic) into the equation in a gradual way.  This risk averse approach is to insure that there are no unintended effects that cannot be handled by simple adjustments.  An example quarterly adjustment plan based on the proposed Greenback Renewal Act is shown in Table 1.  If enacted this year, these quarters could start this year, or Jan 1 2013 latest.

Table 1.  Ramping up the Green Money Injection

QUARTER	Daily Green Money Injection	Quarterly Green Money injection
Q1	$1.25 billion per workday	$81.25 Billion
Q2	$2.5 billion	$162.5 Billion
Q3	$3.75 billion	$243.75 Billion
Q4	$5 billion	$325 Billion

If you total up the green money injections shown in Table 1, you get $652.50 Billion for the year.  That is not enough to cover the whole projected budget deficit, but it is about half of it.  And continuation of the increases in the same manner for another year will completely wipe out the federal budget deficit and keep the national debt on a steadily downward trend.  It also satisfies the Budget Control Act requirement for a deficit reduction plan reducing deficits by at least $2.3 Trillion over the next ten years.  In fact it would reduce deficits by the requisite amount well within three years, thus averting the horrible sequestration cuts that will otherwise occur.

There is another way that green money can be employed to bring down the debt in a more dramatic way.  And that is by buying up the Fed’s portfolio of US Bonds with green money. These bonds were purchased with money created out of nothing by the Fed, a power granted to them by Congress, and hence the debt owed to the Fed and the interest due on these bonds is nonsensical.  Congress could have issued the money directly without debt and without interest.  Thomas Edison put it this way:

“But here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%; whereas the currency, the honest sort provided by the Constitution, pays nobody but those who contribute in some useful way.  It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold.”  (New York Times, December 6, 1921)

So by buying bonds held by Federal Reserve Banks back with green money, Congress is basically “undoing” the error that was committed by letting the Fed create the money in its stead.  It would be stipulated that the Federal Reserve Bank Credit that was created for each bond purchase would be extinguished upon buyback by the Treasury Department, being replaced by the equal dollar amount in green money, so that the amount of monetary base (M0) would be unaffected by the repurchase of the bonds. 

This would amount to a transformation of M0 from Federal Reserve Credit into US Bank Deposits, which could be split up into four quarterly $412.5 billion repurchases, to be completed in one years’ time.  Of course, the Federal Reserve Note currency would be replaced with US Note currency as well, so that at the end of a year’s time, M0 would consist entirely of government issued money, no part of it being Fed created money.  This $1.65 trillion reduction in the national debt would constitute about 10% of the total national debt and would put the US well on the way towards the debt free status.  The credit rating of the nation would be restored, since it would be apparent that the country can make good on ALL of its debts in due time, once it realizes its power to create money at a responsible rate and exercises the will to do so.  In summary:

Debt Reduction Plan for a debt-free nation

1.     All US Bonds in possession for the Federal Reserve Banks (approximately $1.6 trillion) shall be replaced with US Money through the purchase of US Bonds held in the portfolios of the various Federal Reserve Banks;

2.    One fourth of the US bonds owned by the Fed (approximately $0.4 Billion) shall be replaced with US Money during each quarter of the first year following passage of this act.  Hence, all US Treasury bonds will be replaced with US Money at the end of the year following passage of this act, thus reducing the National Debt by approximately $1.6 trillion in the first year.

3.     Federal Reserve Notes shall be retired gradually as US Notes are issued into circulation in such a way that total currency held by the non-bank public will grow at a rate appropriate for the needs of commerce.  Federal Reserve Notes held by banks as vault cash will be replaced with US Notes during the first year following passage of this act.

4.     Upon passage of this act, the Federal Reserve Banks will cease and desist from further purchases of US Bonds.  Hence after the first year following the commencement of this act is completed, Federal Reserve Bank share of the national debt shall be, and shall remain, 0%.

5.     Non-Federal Reserve debt and interest on the debt shall be paid off with existing or new US Money as provided for in the annual budget.

6.     Loan repayments from foreign entities to the Federal Reserve, including those reported in Table 8 on page 131 of GAO-11-696 and those based on subsequent loans to foreign entities, being outside the purview of the mandates for the Federal Reserve System, including both principal and interest, shall be transferred to the US Treasury account on a daily basis as received from the foreign debtors.  The Federal Reserve shall cease and desist from future loans to foreign entities, except as approved by Congress.