Transcript Money Supply and Creation of Deposits

On the Liquidation of Government Debt
under A Debt-Free Money System
- Modeling the American Monetary ActThe 6th Annual AMI
Monetary Reform Conference
At University Center
in Downtown Chicago
Sept. 30 – Oct. 3, 2010
Prof. Kaoru Yamaguchi, Ph.D.
Doshisha Business School
Doshisha University, Kyoto, Japan
E-mail: [email protected]
Background:
SD Macroeconomic
Modeling Series
2003 - 2008
SD Macroeconomic Modeling Series
① Principle of Accounting System Dynamics
- Modeling Corporate Financial Statements New York City, July 20-24, 2003
② Money Supply and Creation of Deposits
(SD modeling 1)
University of Oxford, England, July 25 - 29, 2004
③ Aggregate Demand Equilibria and Price Flexibility (SD modeling 2)
Boston, USA, July 17-21, 2005 -> Visit Prof. Jay Forrester (Sept. 14)
④ Integration of Real and Monetary Sector with Labor Market
(SD modeling 3)
Nijmegen, The Netherlands, July 23 - 27, 2006
⑤ Balance of Payments and Foreign Exchange Dynamics (SD modeling 4)
Boston, USA, July 29 – August 2, 2007
⑥ Open Macroeconomies as a Closed Economic System (SD modeling 5)
Athens, Greece, July 20 – July 24, 2008
National Model

A creation of a system dynamics
model of the United States economy
- a project as leading to a new
approach to economic science and a
fundamental understanding of the
way macroeconomic systems work.

Although his national economic
model remains unfinished, the most
noteworthy intermediate result is
that the model generates a 40- to 60
year economic cycle or “long wave
(or Kondratiev cycle)” that not only
explains the Grerat Depression of
the 1930s, but also shows that deep
economic slumps are a repetitive
feature of capitalist economies.
Sept. 14, 2005, MIT
Macroeconomic System Overview
Macroeconomic System Modeling Overview
Central Bank
Money Supply
Banks
Loan
Saving
Export
Wages & Dividens (Income)
Consumer
(Household)
Consumption
Gross
Domestic
Products
(GDP)
Production
Producer
(Firm)
Foreign
Sector
Labor & Capital
Import
Investment
(Housing)
National Wealth
(Capital
Accumulation)
Investment (PP&E)
Public Services
Investment (Public
Facilities)
Income Tax
Government
Population / Labor Force
Public Services
Corporate Tax
Engines of Dynamics
A Relation between Stock and Flow
Cash through
Operation
Cash through
Investment
Cash through
Finance
わかる！図解キャッシュフロー
久保豊子著、ダイアモンド社
２０００年、p. 111
Business Dynamics by John D. Sterman,
McGraw-Hill Companies, 2000, p.194
Principle of Accounting System Dynamics
Analytical
Methods
- Modeling Corporate Financial Statements Presented at the 21st International Conference of the
System Dynamics Society , New York, 2003
Assets
Liabilities
(Current Assets)
(Current Liabilites)
Cash
Accounts
P ayable
Double Entry Rule of Bookkeeping
as Debit and Credit
Debit
Accounts
Receivable
Credit
Accrued
Expenses
Current
P ort ion of
Debt
Assets
Decreased in Assets
Increase in Assets
Inventories
Income T axes
P ayable
P repaid Expenses
(Long-Term Debt)
-------------------------
Long-T erm
Debt
---------------------------------------------------------------------------------
Liabilities
Decrease in Liabilit ies
Increase in Liabilities
(Shareholders' Equity)
Ot her Assets
Shareholders' Equity
Capital Stock
Capital St ock
Decrease in Equit y
Increase in Equity
(Net Fixed Assets)
Book Value of
P P &E
Retained
Earnings
Retained Earnings
Cost s, Expenses
and Dividends
Balance Sheet as a System of Stocks
Revenues
Creation of Money: Gold Standard
Commercial Banks
Central Bank
Required
Reserves
<Deposits in>
Currency
Outstanding
Gold (Central
Bank)
<Gold deposited>
Gold Certificates
Reserves by
Banks
Required
Reserve Ratio
<Reserves
Deposits>
Reserves
Deposits
<Adjusting
Reserves>
Reserves
(Central Bank)
Excess
Reserve Ratio
Excess
Reserves
Adjusting
Reserves
Vault Cash
(Banks)
Non-Financial Sector (Producer & Household)
Reserves
(Banks)
Net Deposits
Reserves
Adjustment Time
<Cashing>
<Gold
Certificates>
Currency Ratio
Vault Cash Rate
Deposits
out
Deposits
(Banks)
Deposits in
Loan
Cash Inflow
<Borrowing>
Currency
in
Circulation
Depositing
(Public)
Deposits
(Public)
Borrowing
Loan Adjustment Time
Cashing
Cashing Time
Adjusted
Deposits
Equity (Public)
<Gold
Certificates>
Gold (Public)
Gold
deposited
Amount of
Gold Deposits
Deposit Time
<Depositing
(Public)>
Lending
Debts (Public)
Creation of Money: Gold Standard
Money Supply
1
1
1
750
2
1
1
2
3
3
1
2
3
2
3
Monetary Base of Gold = 200
3
2
3
Required Reserve Ratio
10% -> 4% at t=8
2
3
2
500
3
250
4
3
4
5
4
5
6
8
4
5
4
4
5
4
5
4
5
5
Money Multiplier: 4 -> 5
Money Supply: 800 -> 1,000
5
0
2
1
0
2
4
10 12 14 16
Time (Year)
1
1
"Money Supply (Base)" : Current
2
2
"Money Supply (Data)" : Current
3
3
3
Money Supply : Current
4
4
4
Monetary Base : Current
5
5
"High-Powered Money" : Current
18
20
22
1
1
2
3
2
3
4
24
3
4
5
5
Currency Outstanding
240
Gold Standard
1
0
180
500
6
Amount of Gold Deposits
0
Dollar
Dollar
1
2
1
1,000
6
4
120
6
2
6
3
2
2
1
6
3
1
2
3
6
2
3
4
5
0
0
RR Ratio Change
24
RR Ratio Change Time
0.8
2
1
3
3
C Ratio Change
1
3
Money Multiplier Control
-0.2
6
6
60
0.9
1
2
Deposit Time
-0.1
1
0
24
C Ratio Change Time
5
4
5
4
4
4
2
1
0
2
4
6
8
10 12 14
Time (Year)
5
5
5
5
16
18
4
20
22
Monetary Base : Current
1
1
1
1
1
Currency Outstanding : Current
2
2
2
2
Currency in Circulation : Current
3
3
3
3
"Vault Cash (Banks)" : Current
4
4
4
4
"Reserves (Central Bank)" : Current
5
5
5
5
Cash outside Central Bank : Current
6
6
6
6
24
Creation of Money: Gold Standard
Money Supply
1
800
1
Monetary Base of Gold = 200
2
3
2
3
2
Required Reserve Ratio
10% -> 100% at t=8
3
400
1
5
1
200
4
3
4
5
4
5
4
2
3
4
5
1
3
2
5
4
2
1
3
5
4
2
1
3
4
5
1
2
3
4
5
0
2
1
0
2
4
6
8
10 12 14
Time (Year)
1
"Money Supply (Base)" : Current
2
"Money Supply (Data)" : Current
3
3
3
Money Supply : Current
4
4
Monetary Base : Current
5
"High-Powered Money" : Current
16
18
20
1
22
1
2
1
2
3
4
2
3
4
5
Money Multiplier: 4 -> 1
Money Supply: 800 -> 200
24
3
4
5
Currency Outstanding
5
5
240
4
Gold Standard
0
Amount of Gold Deposits
0
6
6
1
2
1
6
3
80
500
Dollar
Dollar
600
3
2
1
1
5
4
5
5
1
5
2
3
3
2
6
-80
6
2
4
3
4
1
1
1
5
6
3
2
5
6
4
2
3
4
6
2
Deposit Time
-240
4
Money Multiplier Control
-400
-0.1
0.9
0
RR Ratio Change
-0.2
RR Ratio Change Time
0.8
C Ratio Change
24
0
24
C Ratio Change Time
0
2
4
6
8
10 12 14
Time (Year)
16
18
20
22
Monetary Base : Current
1
1
1
1
1
Currency Outstanding : Current
2
2
2
2
Currency in Circulation : Current
3
3
3
3
"Vault Cash (Banks)" : Current
4
4
4
4
"Reserves (Central Bank)" : Current
5
5
5
5
Cash outside Central Bank : Current
6
6
6
6
24
Macroeconomic
System Design
- American Monetary Act -
Macroeconomic System of Money as Debt
- Money out of Nothing (Thin Air) What is Money ?
Money Supply
=
Currency Outstanding
(Cash: Bank Notes and Coins)
+
Bank Deposits (Credits)
Who can create Money?
1. Privately-Owned
Central Bank
issues Money (Notes)
2. Credit Creation by
Commercial Banks
(A Fractional
Reserve System)
Monetary Control
by (and for)
the Elite Bankers
Money as Debt System
- Transactions of the Central Bank Central Bank
Gold Certificates
<Open Market Purchase
(Public Sale)>
<Discount Lending
(Central Bank)>
Gold
<Gold deposited>
Notes Withdrown
Currency
Outstanding
Notes Newly Issued
<Required Reserves>
Discount Loan
(Central Bank)
Open Market Sale
(Public Purchase)
Discount Lending
(Central Bank)
Amount of
Discount Lending
Reserves by
Banks
Open Market
Public Sales Rate
Lending Time
<Adjusting
Reserves>
Lending Period
Open Market Purchase
<Cashing>
Government
Securities
(Central Bank)
Reserves
(Central Bank)
Open Market Sale
Open Market Sale
(Banks Purchase)
Open Market
Purchase
(Public Sale)
<Government
Securities
(Public)>
Open Market
Purchase
Operation
Open Market
Purchase Time
Open Market
Purchase
(Banks Sale)
<Government
Securities
(Banks)>
Open Market
Sale Operation
Open Market
Sale Time
<Open Market Purchase
(Banks Sale)>
Expert Ideas for
Macroeconomic System Design
608 pages, 4th ed. 2002
724 pages, 2002
A New Macroeconomic System Design
Money as Debt System
- Money out of Nothing -
A Debt-Free Money System
- the American Monetary Act -
1.
Privately-Owned
Central Bank
issues Money (Notes)
1.
Government Issues Money
(Nationalization of
the Central Bank)
2.
Credit Creation by
Commercial Banks
(A Fractional
Reserve System)
2.
100% Fractional Reserve
（Abolishment of
the Credit Creation）
3. Monetary Control
by (and for)
the Elite Bankers
3. Monetary Growth
for the Economic Growth
and Public Welfare
Macroeconomic System of Debt-Free Money
- Transactions of Government -
Leverage
Point
Seigniorage
Macroeconomic System of Debt-Free Money
- Transactions of the Public Money Administration -
The Issue We are Facing
• Repeated Financial Crises
(in September 2008)
• Government has no money!
Why can’t they borrow or tax?
• Run-away Debt Crises
(in Japan, USA, Greece, etc.)
Debt Crisis in Japan！
About $56,000.00
per
each Japanese
Nixon Shock 1971
No Convertibility
between US dollar
and Gold
2009
of annual gross domestic product.
Debt Crisis in OECD！
190 %
Japan
Italy
110 %
Canada
USA
France
Germany
U.K.
File:Public debt percent GDP world map.PNG
From Wikipedia, the free encyclopedia
In 2009
Japan
189 %
Belgium
98 % Austria
69 %
Spain
53 %
Italy
115 %
France
78 % U.K.
68 %
USA
53 %
Greece
113 %
Portugal
77 % Norway
61 %
Poland
47 %
Singapore
113 %
Canada
75 % Brazil
60 %
Finland
44 %
Iceland
108 %
Germany
72 % India
58 %
Denmark
42 %
Solutions under
the current Macroeconomic
System
of Money as Debt
Mostly Equilibria in the Real Sector
Government Debt is Build
in the System of Money as Debt
Built-in Debt
For Growing Economy
Liquidation of Government Debt
under the System of Money as Debt
Built-in Debt
For Growing Economy
Liquidation of Government Debt
By
Primary Balance Ratio of 91%
(9% Spending Cut) at t=6
Liquidation of Debt is Costly !
Current Macroeconomic System is Dead-End !
Recession
Solutions under
the Macroeconomic System
of Debt-free Money
Liquidation of Government Debt and Debt-GDP Ratios
Liquidation of Government Debt
Under
A Debt-Free Money System
Higher Economic Growth by Debt Liquidation
Higher Economic Growth
Comparison of Prices and Inflation Rates
No Inflation is triggered
by the Liquidation of Debt
Criticism of Debt-Free Money System:
Inflation !!!
Can we trust the Government ?
No: Political business cycle proves it.
Then
Can we trust privately-owned Central Bank ?
No: History of economic crises proves it.
So, what can be trusted?
Gov’t Policies based on SD models
No Inflation under GDP Gap
GDP gap by changing
the Exponent of Capital
0.4 -> 0.43
New Issues of of money
by the amount of 23
for 10 years
from t=6
Inflation by Mismanaging Money Supply
In Equilibrium
increase spending
by 10 for 3 years
starting at t=10
Political Business Cycle
Business Cycles by Mismanaging Money Supply
Increase in
spending
by 10 for
3 years
starting at
t=10
Political Business Cycle
Build-in Feedback Mechanism
for Preventing Inflation (Deflation)
Inflation Rate >
|8 %|
Step down of the Head of
Public Money
Administration
Independence of Political Power Abuse
Conclusion
Economic
Growth
Debt-free Money
Money
Money as Debt
Government
Debt
From a viewpoint of
system design,
macroeonomic system of
debt-free money
is worth being
implemented
to avoid government debt,
financial crisis
and environmental
destruction
Thank you for your attention !
Macroeconomic Dynamics
- Accounting System Dynamics ApproachOn-going Draft (v.2, 350 pages)
and SD Simulation Models
are available
at Session A, 5PM, Oct. 2.