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Traktion

The Emperor’S New Clothes

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I posted about the Cobden Centre the other day, after stumbling over it while Googling about LPB. It seems that their new article is being linked to some higher profile blogs too now.

The original article about this is here: A Day Of Reckoning. It discusses changing the banking system to full reserve, likely using a model like LPB.

Recently, they posted a £1000 challenge: The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut.

Here is a Telegraph blog link from Daniel Hannan about it: http://blogs.telegraph.co.uk/news/danielhannan/100040348/how-to-abolish-the-national-debt-overnight/.

A couple of Tory MPs have also endorsed this: Douglas Carswell, Steven Baker.

I'll not quote the whole article, but follow the links if you're interested. It's interesting to see more people, in high places, starting to suggest that we need monetary reform. First we had Mervyn King throwing his weight behind LPB and now we're getting MPs openly discussing mechanisms for transition to such a system. I even read a passage from the House of Lords the other day discussing 100% reserve banking!

I wonder if the bankers are starting to sweat yet? I'm sure they would hate to lose their rental income from our money...

I offer a £1,000 reward for anyone who can tell me why this logically won’t work, practical politics, for now, being another matter.

What follows is an attempt to show you that this can be done.

Remember the story about the Emperor whose only concern was not the welfare of his people but the state of his clothes? Lacking a new outfit for his procession, he instructs the finest clothe-makers to propose designs. Step forward Slimus and Slick, promising that only clever people will be able to see their splendiferous garments; they will be invisible to anyone stupid. In exchange for gold coin – real money – they make something special for the King. The King, seeing nothing when presented with these designs made out of thin air, worries that he must be stupid because he pretended to the fraudsters that they were wonderful. Word goes round that only clever people can see the garments, so everyone cheers the naked King during his procession. It takes a small child, on top of his father’s shoulders, to exclaim: “the Emperor has got nothing on!” Everyone falls silent. Then, one by one, they start muttering, “the Emperor is naked!”

I am going to tell you that our Emperor – the government – has no clothes and is indeed naked with respect to our money. The sooner we realise this the better. Then we can make real progress and prevent the imminent misery. Indeed, the realisation of its nakedness should reveal that we have a unique moment in history to do something very special: to make banking secure, pay off the national debt, and even enable a 28.5% income-tax cut.

...

(More here: The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut)

So, can it be done? Is it a good idea? Maybe someone here can win the £1000, if there are holes in it. It seems a fair few high profile economists have suggested this before, particularly in the 1930s, so it would be interesting to discuss here and on the site above.

P.S. Whether it can or can't be done without causing chaos, doesn't take away from the perceived benefits of moving to 100% reserve banking. Of course, any discussion about full reserve, LPB, would need to be framed with a 'how do we get from here to there' title. I am reading Kotlikoff's book on LPB, which has a section about the transition, so I may learn something there.

Edited by Traktion

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I offer a £1,000 reward for anyone who can tell me why this logically won’t work, practical politics, for now, being another matter.

:)

This is a fun idea, a bit like a gold standard squared.

Assuming it was ever implemented it would never last, not because of logical flaws but because of human nature.

The chap should ask himself the question: why did they go through this convoluted business of central banks in the first place.

The answer is: because governments want to be able to spend more than they have and they don't want to have to sell their bonds at market rate. Hence the need for a money creating banks to begin with.

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100% agree. I believe we will transition to this system over time because it is the ONLY path left. We will do it to avoid economic collapse. The fractional reserve system is no longer viable in the world we live in as the only base of the money supply.

Japan is gradually transitioning to this system as well, only it has been at it longer. When the Japanese crisis started in 1989 their national debt was about 45% of gdp. Same as the UK in 2008. But private debt in Japan was about 350% of gdp. Again about the same as the UK.

2 decades later the national debt in Japan is 200% of gdp, and private debt has declined to maybe 170% of gdp. So you see how they are moving it onto the sovereign balance sheet? And then they are effectively monetizing it with QE and near 0% interest rates.

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The poor stay poor, the rich get rich.

That's how it goes.

Everybody knows.

Everybody knows that you been faithful

Give or take a night or too.

Top quote RK. :)

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100% agree. I believe we will transition to this system over time because it is the ONLY path left. We will do it to avoid economic collapse. The fractional reserve system is no longer viable in the world we live in as the only base of the money supply.

Japan is gradually transitioning to this system as well, only it has been at it longer. When the Japanese crisis started in 1989 their national debt was about 45% of gdp. Same as the UK in 2008. But private debt in Japan was about 350% of gdp. Again about the same as the UK.

2 decades later the national debt in Japan is 200% of gdp, and private debt has declined to maybe 170% of gdp. So you see how they are moving it onto the sovereign balance sheet? And then they are effectively monetizing it with QE and near 0% interest rates.

Japan hasn't started moving away from FRB yet though, AFAIK.

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I posted about the Cobden Centre the other day, after stumbling over it while Googling about LPB. It seems that their new article is being linked to some higher profile blogs too now.

The original article about this is here: A Day Of Reckoning. It discusses changing the banking system to full reserve, likely using a model like LPB.

Recently, they posted a £1000 challenge: The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut.

Here is a Telegraph blog link from Daniel Hannan about it: http://blogs.telegraph.co.uk/news/danielhannan/100040348/how-to-abolish-the-national-debt-overnight/.

A couple of Tory MPs have also endorsed this: Douglas Carswell, Steven Baker.

I'll not quote the whole article, but follow the links if you're interested. It's interesting to see more people, in high places, starting to suggest that we need monetary reform. First we had Mervyn King throwing his weight behind LPB and now we're getting MPs openly discussing mechanisms for transition to such a system. I even read a passage from the House of Lords the other day discussing 100% reserve banking!

I wonder if the bankers are starting to sweat yet? I'm sure they would hate to lose their rental income from our money...

(More here: The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut)

So, can it be done? Is it a good idea? Maybe someone here can win the £1000, if there are holes in it. It seems a fair few high profile economists have suggested this before, particularly in the 1930s, so it would be interesting to discuss here and on the site above.

P.S. Whether it can or can't be done without causing chaos, doesn't take away from the perceived benefits of moving to 100% reserve banking. Of course, any discussion about full reserve, LPB, would need to be framed with a 'how do we get from here to there' title. I am reading Kotlikoff's book on LPB, which has a section about the transition, so I may learn something there.

Of course it's all very neat, but I suspect only fixes things at a point in time and doesn't carry forward, equally perhaps it doesn't recognise the international aspects of banking....... as an example to do this on a UK basis you would ahve to recognise that some borrowing is actually not held in UK institutional balance sheets, equally you'd need to be pretty sure the level of savings balances enabled sufficient capacity for loan demand, and finally you'd need a mechanic to allow for periods where we currently are where borrowing generally grows more sharply than money supply... allowing for a system which limits growth through limitign borrowing would I suspect never be allowed through, equally alowing a system which somehow didn't allow for recesionary period borrowing growth would aslo struggle.

But it does neatly sum the point that where we are isn't the only way forward and rubs home the issues with the system we currently have.

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Guest sillybear2

That guy is clueless, how does holding tons of notes in a vault help anyone? Bank credit can be converted into legal tender at will when it's demanded, that's why the narrow money supply figures lag M3.

"As you are not a creditor of the bank anymore, the banking system will only have its assets and its capital, i.e. no liabilities. This means that there never again could be a bank run."

Err... if they're not lending money out then they're not a bank anymore, they're a glorified storage service (of tons and tons of paper notes), but given that he previously said "Require all banks to lend real savings" that means there's still capacity for a run, if those notes are not in the vault anymore then there could be a time when the bank has nothing but IOU's in its safe. :rolleyes:

"No national debt means no interest costs"

No national debt means the money supply would crater, it's logically impossible to pay it off, as soon as you try it would create a deflationary deathspiral. The public debt is never meant to be payed off, it has been inflated away for the past 300 years, the idea is to keep it pretty well fixed in nominal terms then let it shrink as a percentage of GDP as time goes on. I'm not saying that's good or morally right but that's how our system works.

Also he talks as if "cash money" is somehow superior to "thin air money", all money is now the latter, backed by nothing by promises and faith, whether those promises take the form of a peice of paper or computer record is immaterial. The issuance of money that has a face value in excess of its inherent value has always been a scam by government, it's called seigniorage.

Edited by sillybear2

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Of course it's all very neat, but I suspect only fixes things at a point in time and doesn't carry forward, equally perhaps it doesn't recognise the international aspects of banking....... as an example to do this on a UK basis you would ahve to recognise that some borrowing is actually not held in UK institutional balance sheets, equally you'd need to be pretty sure the level of savings balances enabled sufficient capacity for loan demand, and finally you'd need a mechanic to allow for periods where we currently are where borrowing generally grows more sharply than money supply... allowing for a system which limits growth through limitign borrowing would I suspect never be allowed through, equally alowing a system which somehow didn't allow for recesionary period borrowing growth would aslo struggle.

But it does neatly sum the point that where we are isn't the only way forward and rubs home the issues with the system we currently have.

Agreed on both of your primary points there - it does sound like a one off action and I don't think it takes into account bonds sold to those outside of the UK.

However, on the broader argument for full reserve banking, I'd argue that constricting borrowing, to prevent credit booms is a positive effect of where we would be with a full reserve banking system. Instead of chasing credit fuelled bubbles (big booms/busts), a more long term approach would have to be sought. This doesn't even consider the reallocation of risk to only those who offer their money up for borrowing.

Also, bear in mind that if a LPB model with everything being mutual funds was used, the central bank could buy/sell shares in mutuals funds as the economy requires, to keep prices stable. Essentially, the central bank would be like any other buyer, but they could add/remove money to/from the system to keep within a specified target range; it could dribble liquidity in or sponge some out in this way, at any time. Some would argue that this wouldn't be necessary, but having the option there provides a complete solution.

I was also wondering what is the point of governments borrowing/spending when they can regulate the money supply without doing so. Maybe this is where the chartalist argument comes in, but with the central bank managing the supply of fiat, with the government having to tax/spend accordingly, within the boundaries this presents - to cut its cloth accordingly. In the end if bonds are being sold abroad, with more money being injected into a country's economy, surely that is just as inflationary (nationally) as printing it - both are coming from an external source and surely it matters little (unless it aids trade with them) whether this is from another country or from thin air **. If we are just trying to regulate the money supply, does the government need to issue bonds at all? *

* EDIT: In fact, isn't this what the US is essentially doing anyway now, as borrowing so much from China has created a huge imbalance? Why should the money supply of one country need to dove tail with that of another? Is this even desirable?

** Other than that it will have to be paid back at some point, shrinking the money supply, triggering deflation.

Edited by Traktion

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  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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