On the Liquidation of Government Debtunder A Debt-Free Money System

- Modeling the American Monetary Act-

Prof. Kaoru Yamaguchi, Ph.D.Doshisha Business School

Doshisha University, Kyoto, Japan

E-mail: kaoyamag@mail.doshisha.ac.jp

The 6th Annual AMIMonetary Reform Conference

At University Center in Downtown Chicago

Sept. 30 – Oct. 3, 2010

Background:

SD MacroeconomicModeling 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 Modeling Overview

Consumer(Household)

Producer (Firm)

Banks

Central Bank

Government

ForeignSector

National Wealth(Capital

Accumulation)

GrossDomesticProducts(GDP)

Labor & Capital

Wages & Dividens (Income)

Saving Loan

Investment (PP&E)

Investment(Housing)

Investment (PublicFacilities)

Income Tax Corporate Tax

Consumption

Public ServicesPublic Services

Money Supply

Export

Import

Production

Population / Labor Force

Macroeconomic System Overview

Engines of DynamicsA Relation between Stock and Flow

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

Cash throughOperation

Cash throughInvestment

Cash through Finance

Principle of Accounting System Dynamics- Modeling Corporate Financial Statements -

Presented at the 21st International Conference of the System Dynamics Society , New York, 2003

Cash

AccountsReceivable

Inventories

Book Value ofPP&E

AccountsPayable

AccruedExpenses

Long-TermDebt

Capital Stock

(Current Assets) (Current Liabilites)

Shareholders' Equity

Prepaid Expenses

(Net Fixed Assets)

CurrentPortion of

Debt

RetainedEarnings

Income TaxesPayable

(Long-Term Debt)

Assets Liabilities

Other Assets

-------------------------

Balance Sheet as a System of Stocks

Liabilities

Assets

Capital Stock

Retained EarningsRevenues

Debit Credit

---------------------------------------------------------------------------------

Increase in Assets Decreased in Assets

Decrease in Liabilities

Decrease in Equity

Increase in Liabilities

Increase in Equity

Costs, Expensesand Dividends

(Shareholders' Equity)

Double Entry Rule of Bookkeepingas Debit and Credit

AnalyticalMethods

Creation of Money: Gold Standard

Gold (CentralBank)

CurrencyOutstanding

Currencyin

CirculationDeposits(Public)

Deposits(Banks)

Vault Cash(Banks)

Reserves(Central Bank)

Loan

Debts (Public)

Gold Certificates

Gold (Public)

RequiredReserve Ratio

Loan Adjustment Time

Depositing(Public)

<Depositing(Public)>

Central Bank Commercial Banks

Non-Financial Sector (Producer & Household)

Deposit Time

Currency Ratio

Borrowing

Cash Inflow

<GoldCertificates>

Lending

Reserves byBanks

<Borrowing>

Deposits in

Reserves(Banks)

ReservesDeposits

RequiredReserves<Deposits in>

ReservesAdjustment Time

Cashing

Cashing Time

AdjustedDeposits

<Cashing> Depositsout

ExcessReserves

ExcessReserve Ratio

Vault Cash Rate

Net Deposits

AdjustingReserves

<AdjustingReserves>

Equity (Public)

Golddeposited

Amount ofGold Deposits

<Gold deposited>

<GoldCertificates>

<ReservesDeposits>

Creation of Money: Gold Standard

Money Suppl y1,000

750

500

250

05

5 5 5 5 5 5 54 4 4 4 4 4 4 43

3

3

3

33 3 3 3

2

2

2

22

22 2 2

1

1 1

1

1 1 1 1 1

0 2 4 6 8 10 12 14 16 18 20 22 24Time (Year)

Doll

ar

"Money Suppl y (Base)" : Current 1 1 1 1

"Money Suppl y (Data)" : Current 2 2 2 2

Money Suppl y : Current 3 3 3 3 3 3

Monetary Base : Current 4 4 4 4 4

"Hi gh- Powered Money" : Current 5 5 5 5Currency Outstandi ng

240

180

120

60

0

6

6

6 6 6 6 6

5

55

5 5 5 5

4

4

4 44

4 4

3

3

33

3 3 3

2

22

2 2 2 2 2

1

1 1 1 1 1 1 1

0 2 4 6 8 10 12 14 16 18 20 22 24Time (Year)

Doll

ar

Monetary Base : Current 1 1 1 1 1Currency Outstandi ng : Current 2 2 2 2Currency i n Ci rcul at i on : Current 3 3 3 3"Vaul t Cash (Banks) " : Current 4 4 4 4"Reserves (Central Bank) " : Current 5 5 5 5Cash outsi de Central Bank : Current 6 6 6 6

Gold Standard

Money Multiplier Control

C Ratio Change-0.2 0.8

RR Ratio Change-0.1 0.9

RR Ratio Change Time0 24

C Ratio Change Time0 24

Amount of Gold Deposits0 500

Deposit Time0 6

Required Reserve Ratio10% -> 4% at t=8

Money Multiplier: 4 -> 5Money Supply: 800 -> 1,000

Monetary Base of Gold = 200

Creation of Money: Gold Standard

Gold Standard

Money Multiplier Control

C Ratio Change-0.2 0.8

RR Ratio Change-0.1 0.9

RR Ratio Change Time0 24

C Ratio Change Time0 24

Amount of Gold Deposits0 500

Deposit Time0 6

Required Reserve Ratio10% -> 100% at t=8

Money Multiplier: 4 -> 1Money Supply: 800 -> 200

Money Suppl y800

600

400

200

05

55

55 5 5 54 4 4 4 4 4 4 4 43

3

3

3

3 3 3 3 3

2

2

2

2

22 2 2 2

1

1 1

11

1 1 1 1

0 2 4 6 8 10 12 14 16 18 20 22 24Time (Year)

Doll

ar

"Money Suppl y (Base)" : Current 1 1 1 1

"Money Suppl y (Data)" : Current 2 2 2 2

Money Suppl y : Current 3 3 3 3 3 3

Monetary Base : Current 4 4 4 4 4

"Hi gh- Powered Money" : Current 5 5 5 5 Currency Outstandi ng240

80

-80

-240

-400

66

6

6 6 6 655

5

5 5 5 54

4

4

44 4 4

3

33

3 3 3 32

2 2

22 2 2 2

1

1 1 1 1 1 1 1

0 2 4 6 8 10 12 14 16 18 20 22 24Time (Year)

Doll

ar

Monetary Base : Current 1 1 1 1 1Currency Outstandi ng : Current 2 2 2 2Currency i n Ci rcul at i on : Current 3 3 3 3"Vaul t Cash (Banks) " : Current 4 4 4 4"Reserves (Central Bank) " : Current 5 5 5 5Cash outsi de Central Bank : Current 6 6 6 6

Monetary Base of Gold = 200

Macroeconomic System Design

- American Monetary Act -

1. Privately-Owned Central Bankissues Money (Notes)

2. Credit Creation by Commercial Banks (A Fractional

Reserve System)

Monetary Control by (and for) the Elite Bankers

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?

Money as Debt System- Transactions of the Central Bank -

Gold

CurrencyOutstanding

Reserves(Central Bank)

Notes Newly Issued

Central Bank

Reserves byBanks

<Required Reserves>

<Cashing>

Gold Certificates

GovernmentSecurities

(Central Bank)Open Market Purchase

Open MarketPurchase Time

Open MarketPurchaseOperation

<GovernmentSecurities(Public)>

Open Market Sale

Open MarketSale Time

Open MarketSale Operation

Open Market Sale(Public Purchase)

Notes Withdrown

Open MarketPurchase

(Public Sale)

Open MarketPurchase

(Banks Sale)

<GovernmentSecurities(Banks)>

<Open Market Purchase(Public Sale)>

Open MarketPublic Sales Rate

Discount Loan(Central Bank)

Discount Lending(Central Bank)Amount of

Discount Lending

Lending TimeLending Period

<Discount Lending(Central Bank)>

<Gold deposited>

<AdjustingReserves>

<Open Market Purchase(Banks Sale)>

Open Market Sale(Banks Purchase)

Expert Ideas forMacroeconomic System Design

608 pages, 4th ed. 2002 724 pages, 2002

A New Macroeconomic System Design

A Debt-Free Money System- the American Monetary Act -

1. Government Issues Money(Nationalization of the Central Bank)

2. 100% Fractional Reserve（ Abolishment of the Credit Creation）

3. Monetary Growthfor the Economic Growth and Public Welfare

Money as Debt System- Money out of Nothing -

1. Privately-Owned Central Bankissues Money (Notes)

2. Credit Creation byCommercial Banks (A Fractional

Reserve System)

3. Monetary Control by (and for) the Elite Bankers

Macroeconomic System of Debt-Free Money- Transactions of Government -

Seigniorage

LeveragePoint

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 $56,000.00per

each Japanese

Nixon Shock 1971No Convertibilitybetween US dollar

and Gold2009

of annual gross domestic product. of annual gross domestic product.

Debt Crisis in OECD！

Japan

Italy

USAFrance Germany

Canada

U.K.

110 %

190 %

File:Public debt percent GDP world map.PNGFrom Wikipedia, the free encyclopedia

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 %

In 2009

Solutions underthe current Macroeconomic

Systemof Money as Debt

Mostly Equilibria in the Real Sector

Government Debt is Build in the System of Money as Debt

Built-in DebtFor Growing Economy

Liquidation of Government Debt under the System of Money as Debt

Liquidation of Government DebtBy

Primary Balance Ratio of 91%(9% Spending Cut) at t=6

Built-in DebtFor Growing Economy

Liquidation of Debt is Costly !

Recession

Current Macroeconomic System is Dead-End !

Solutions underthe Macroeconomic System

of Debt-free Money

Liquidation of Government Debt and Debt-GDP Ratios

Liquidation of Government DebtUnder

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 changingthe Exponent of Capital

0.4 -> 0.43

New Issues of of money by the amount of 23

for 10 yearsfrom t=6

Inflation by Mismanaging Money Supply

In Equilibrium increase spendingby 10 for 3 yearsstarting at t=10

Political Business Cycle

Business Cycles by Mismanaging Money Supply

Increase in spendingby 10 for

3 yearsstarting at

t=10

Political Business Cycle

Build-in Feedback Mechanism for Preventing Inflation (Deflation)

Independence of Political Power Abuse

Inflation Rate >|8 %|

Step down of the Head ofPublic MoneyAdministration

Conclusion

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

EconomicGrowth

Money

GovernmentDebt

Money as Debt

Debt-free Money

Thank you for your attention !

Macroeconomic DynamicsMacroeconomic Dynamics- Accounting System Dynamics Approach-- Accounting System Dynamics Approach-

On-going Draft (v.2, 350 pages) and SD Simulation Models

are available　

at Session A, 5PM, Oct. 2.