(By Karl Denninger) You know, if you've been following my writing for any length of time, that I've been advocating a "One Dollar of Capital" standard for banking.
I have also asserted that unbacked credit emission is, economically and mathematically, identical to counterfeiting of the currency.
That's a strong allegation, and one that goes against what you've been told throughout your life -- that banks take in deposits (your earned money) and then they loan that out. That this powers economic growth. And that we need the banks' involvement in this process in order to have economic prosperity.
But these assertions that you have had your head filled with are identical to those that a drug pusher who tells you that he can make you feel good -- just take one toke right here sir!
What he neglected to tell you was that the drug you are about to ingest is highly addictive, expensive, and will rot the teeth right out of your head while turning you into a mental zombie!
So imagine my surprise when the banksters to top all banksters, the IMF itself, issued a research paper that took a look at an old plan floated during The Depression that came to be known as "The Chicago Plan." It was touted at the time as ending the risk of bank runs, dramatically reducing public debt (a huge problem now), dramatically reducing private debt (also a huge problem), curtailing the boom-and-bust cycle and allowing steady-state inflation to be zero without impairing monetary policy.
That, my friends, is One Dollar of Capital plus a few more features. And academically, they validated its assertions.
But that's not the bombshell. That is found here:
In a financial system with little or no reserve backing for deposits, and with government-issued cash having a very small role relative to bank deposits, the creation of a nation's broad monetary aggregates depends almost entirely on banks' willingness to supply deposits. Because additional bank deposits can only be created through additional bank loans, sudden changes in the willingness of banks to extend credit must therefore not only lead to credit booms or busts, but also to an instant excess or shortage of money, and therefore of nominal aggregate demand. By contrast, under the Chicago Plan the quantity of money and the quantity of credit would become completely independent of each other. This would enable policy to control these two aggregates independently and therefore more effectively. Money growth could be controlled directly via a money growth rule. The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business. Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend. Having to obtain outside funding rather than being able to create it themselves would much reduce the ability of banks to cause business cycles due to potentially capricious changes in their attitude towards credit risk.
Read that however many times you need to until it sinks in folks, because this is what I and a few others have been saying now for a long time -- and our ideas are not only not really new, they're also factually correct.
The "extraordinarily privilege" referenced above, were you or I to engage in it, would be called what it is -- counterfeiting. "Generating their own funding, deposits", is exactly that -- creating money out of "thin air" though the unbacked emissions of credit. It is exactly identical in form and effect to you running off $100 bills on your office copier. And for every other entity other than a bank, it is a felony.
But it is Congress that has this power according to our Constitution. A commercial institution that operates for profit should never have the right to literally steal from you at its whim, but that is exactly what unbacked credit creation empowers a bank with -- the ability to take everything you have by debasing your purchasing power to the point that you are forced to hock, or even sell and abandon, any asset you possess.
This is what has happened to your standard of living. It is the strangulation of our economy, on purpose and for profit, that these institutions have imposed on us. Our political class has been bought by these jackals and turned into their minions, instead of the other way around where we empower politicians and they derive their power from the freely-given consent of the governed.
It is time to change this ladies and gentlemen.
You may have doubted that my analysis was correct when it comes to how the monetary and banking system works today, and whether One Dollar of Capital was workable and would address these issues along with being beneficial to the economy as a whole.
The paper cited here is 71 pages and will take you a bit of time to read and noodle over. But if you do, if you become awake and aware of exactly what has been taken from you, by whom, and why, perhaps you will rise and demand that it stop, backing that demand with your political power, your vote, your protest and your actions in the economy.
We do not have to put up with this outrageous activity by private firms; we have the right, and the power, to put a stop to it under the United States Constitution, and stop it we must if our economy is to clear and improve.