Australian economist Steve Keen is discussing the choice of control levers for prevention of credit bubbles in his latest post. The American Monetary Institute, where he was invited to speak, is campaigning to reform banking on the basis of 100% reserve monetary system, in order to eliminate the banks’ power to create money. But then you’d have to give that power to someone, meaning back to politicians, and we know how well that worked wherever and whenever they had that power!!! At least with private bankers, the economy parties on and on for a few decades, then takes its debt deflation medicine once every 60 to 80 years or so, sans the hyperinflation.
Although I don’t endorse the system of Ponzi finance that rules our lives, I am not at all sure our current crop of politicians should be part of the solution. Neither is Steve, who went to the AMI with another proposal instead:
Apparently, the theme of kissing non-smokers was the focus of a very successful anti-smoking campaign in New South Wales, Australia, back in the 1980′s. The addictive and self-destructive qualities of debt-financed asset bubbles inspired Steve Keen to attempt a transplant of this particular prevention and immunization technique to the world of rampaging finance:
We need something like that in finance to counter the successful campaigns that bankers have run to give debt as “sexy” an image as tobacco companies once gave cigarettes, even though–in another apt analogy–it causes financial cancer: the uncontrollable growth of debt is very much akin to the exponential growth of a tumour that ultimately kills its host.
The metaphor is not perfect of course, since a certain minimal level of debt is a good thing in a capitalist society. Productive debt both gives firms working capital, and finances the activities of entrepreneurs who need purchasing power before they have goods to sell.
But debt that funds simply speculation on asset prices is very much akin to a cancer. And like the cigarettes that cause lung cancer, growing unproductive debt gives a “hit” that makes the borrower addicted to more debt: when debt is growing, the debtor and society in general feel better. It enables the borrower to make profits from speculating on asset prices, since the rising debt drives up asset prices; and the spending this capital gain allows spreads into the wider economy, creating a genuine but ultimately terminal boom. The boom can only continue if debt continues to grow faster than income, but at some point this guarantees that the debt-servicing costs will exceed society’s capacity to pay, and the cessation of debt growth causes a crisis like the one we are in now.
Steve’s proposals are quite interesting:
My two “kiss a non-debtor” proposals to make debt far less attractive to borrowers are:
1. To redefine shares so that, if purchased from a company directly, they last forever (as all shares do now), but once these shares are sold by the original owner, they last another 50 years before they expire; and
2. To limit the debt that can be secured against a property to ten times the annual rental of that property.
The objective in both cases is to make unproductive debt much less attractive to borrowers.
There is more in the article on Steve’s website (link above) including a link to QED, which apparently is a systems dynamics modelling software especially suited to modeling debit/credit financial flows. I can imagine quite a few good uses for that in a world full of dynamic Ponzi schemes which are simply begging to be exposed for the frauds that they are.
Talking of Ponzi schemes, a few months ago I was back in Boston for a reunion, and I had the opportunity to hear my old professor Simon Johnson deliver a lecture about the global financial crisis. I asked him at the end if the state of the economy that he had just described wasn’t functionally identical to a Ponzi scheme. He smiled and said that he would prefer the term unsustainable debt dynamics. After the lecture, I googled his name and those big words, and I came up with the following link:
This is not a call for immediate fiscal austerity; that is the path back to the 1930s. But no country can go on issuing your debt without consequence when the buyers declare, “Enough!” In the case of the U.K. and the U.S., the macro situation remains stable only as long as foreigners buy and hold our government debt. This is a major economic and national security risk.
Financial markets are telling us the euro zone is under threat, but the real message is much broader: Unsustainable debt dynamics can undermine us all.
It’s all there…debt that can’t be repaid except by a greater fool. I guess “unsustainable debt dynamics” must be Latin or Greek for the vernacular: Ponzi scheme.