3 Jan 2016

Could the Swiss end money creation for profit by private banks?

One of the most encouraging bits of news at the start of this new year is the announcement that the Swiss movement for monetary reform (Vollgeld Initative Schweiz) a sister organization to the UK's Positive Money and a member of the International Movement for Monetary Reform,  has succeeded in getting the 100,000 signatures needed to force a debate on the subject in the Swiss Parliament.

My heartfelt admiration goes to the people at Vollgeld Initiative - great work! I only wish that the French equivalent (Monnaie Honnête) which I set up back in 2013 had got as far. I've had difficulty getting the number of members over 50! Oh well....

Here's a mail that I just got from Emma Dawnay, which gives some of the key information about this breakthrough.

Dear Friends of the Swiss Sovereign Money Initiative,

On 24th December the Federal Council of Switzerland has formally announced that the Swiss Sovereign Money Initiative has achieved the necessary number of signatures for a referendum. This announcement can be seen here in German, French and Italian.

Press reactions
Daily Telegraph (UK)
RT (Russia)
(see the German newsletter for coverage in German)
Les Echos (France)
The process for bringing a Swiss people's initiative (an initiative) to referendum

Step 1) (After more than 100,000 valid signatures have been collected and validated). The Initiative will be discussed in the Executive - the Swiss Federal Council. They have up to a maximum of one year for this. After this they have to send a recommendation (to accept or reject the initiative with explanations) to the Legislative - the parliament.

Step 2) The Initiative is submitted to both houses of parliament. They have up to two and a half years to consider the Initiative, then they must make a recommendation (to accept or reject the Initiative, with explanations).

Step 3) The national referendum will normally take place about 10 months after parliament has made their recommendations. A booklet is sent to each eligible voter together with the ballot slips about a month before the vote. This booklet contains the proposed new text for the constitution (as written on the forms for collecting the signatures), an explanation of the Initiative written by the people bringing the Initiative, and the recommendations from the Federal  Council and both houses of parliament.

However, the Federal Council or parliament may make an alternative proposal, in which case the process is even longer! The reason for this is that initiatives in their original form are often viewed as rather extreme by mainstream politics. Therefore the Federal Council and parliament can work together to make an alternative proposal which is usually a "watered down" version of original which they hope that people will choose rather than the original (usually more extreme) version. In this case both the Federal Council and the Parliament have more time to make this alternative proposal and their recommendations.

In conclusion, it's not possible to say when the Swiss Sovereign Money Initiative will come to a referendum. The shortest time an initiative took to be voted on in a referendum was 13 months after the beginning of collecting signatures, and the longest time took 6 years.

Criteria necessary for a People's Initiative to win at referendum
In the simple case (without an alternative proposal) an initiative will be enacted if it has the majority of the votes cast AND if - when the results are calculated for each canton - the majority of cantons are in favour of the initiative (the very small cantons counting only as half). In the case with an alternative proposal, people are allowed to vote for both the alternative and the original (a "double yes"), as well as being allowed to vote for one and against the other or against both. If only the alternative version satisfies the criteria above, this will be enacted, likewise for the original proposal. There is a further question on the ballot paper to choose between the alternative and original proposals should both happen to satisfy the criteria.

The campaign is starting soon!
We won't be sitting around drinking tea waiting for the initiative to get to the referendum stage! We're planning a campaign-day in March to set out our plans, get people's ideas, and to get people organised to start campaigning. We're looking forward to the start of the campaign and will publicise the date as soon as possible. All donations towards this campaign will be gratefully received! Click for PayPal. 

Wishing you all the best for 2016 on behalf of the campaign team at MoMo,

Emma Dawnay
 Go for it Switzerland!! The race is on with Iceland to see who can get there first!

2 Jan 2016

Scott Smith : A Presidential Candidate who has some good ideas!

My thanks to Barry D for pointing me towards Scott Smith's website. Scott Smith is an independent candidate for the 2016 US presidential elections who has adopted some really innovative ideas.

For example, he is proposing to scrap the 70,000 pages of US tax code, and replace income tax completely by a simple financial transaction tax. He doesn't call it an FTT - instead it's an FST (financial settlements tax), but effectively very similar in its mode of action.

Here's how he presents the idea in his book "A Nobody for Everybody"

"By primarilly taxing income, we have selected far too narrow a category of economic transactions to tap. Our personal income totals almost $15 trillion, while the federal budget is $3.9 trillion per year. Trying to extract $3.9 trillion from $15 trillion results in heavy taxes and a deficit."

[...] If we were to tap a much broader segment of our economy such as financial settlements, we could greatly reduce the burden on any single taxpayer ..."

"Settlements made through banks and non-banks (such as credit unions) totltaed $4,456 trillion in the year 2013. That is nearly 300 times the amount of our collective income. Clearly we are taxing the wrong thing!"

"Dividing the governments 2015 budget of $3.9 trillion by $4,456 trillion yields 0.0875% - the percentage that must be evaporated from each financial settlement in order to balance the budget. We will round that number up to 0.1%, a mere tenth of one percent.

"The Financial Settlements Tax is an astounding tool. At the low rate of 0.1% the FST would eliminate the need for personal and corporate federal income taxes, Social Security taxes, Medicare taxes, unemployment taxes, estate and gift taxes - even excise and custum taxes - all of which cause much pain and yet fall hundreds of billions of dollars short of balancing the budget".
Great Scott!! The man's a genius!

Well, of course I would say that - because it is essentially exactly what I have been saying for over 5 years - since my first foray into the world of economics with my paper "A Flat Rate Financial Transaction Tax to replace all taxes?" published in October 2010. It was also the theme of my last TEDx talk last year (in French) called "Vers un monde (pratiquement) sans taxes").

I don't know whether Scott Smith has read any of my stuff. But frankly, if he can promote the basic ideas, I'm happy. But, if he does read this, he might make use of the more recent figures that I have provided. For example, the Bank for International Settlement's final figures for payment, clearing and settlement systems  in 2014 have just been published.

I suspect that the €4,456 trillion figure for 2013 used by Scott Smith is not actually the right one. On page 34 of his book he says that :
"Table 11 in the Committee on Payment and Settlement Systems report... shows that settlements through the Clearing House Interbank Payment System (CHIPS), Fedwire, checks, ACH and on-us payments totalled $1,429 trillion in 2013."
Here's the actual table from the reports.

It's not easy to work out totals, and if you read the notes at the bottom of the table, you can see that even the Federal Reserve doesn't seem to be sure.

Scott Smith also uses some other tables.
"Table 21 in the Red Book shows that the value of contracts and transactions cleared at the National Securities Clearing Corporation, the Fixed Income Clearing Corporation, the Government Securities Division, and the Mortgage-Backed Securities Division totalled $2,517 trillion in 2013."
However, close inspection of page 439 of the full pdf file shows that the figures for the two parts of the FICC have been double counted.

The correct number for 2013 would be $1,147 trillion, and the new number for 2014 is $1,329 trillion.

Likewise, I would also question Scott's statement that :
"Table 26 in the Red Book shows transactions cleared at the Depository Trust Company and the Federal reserve totaled $418 trillion in 2013".
Again, the figures don't quite match when you look at the Table itself.
I get $401.6 trillion for 2013 and $400.8 trillion in 2014.  But, well what's a few tens of trillions between friends.

I also note that Scott Smith decided not to include the stuff in table 18 that gives the total value of executed trades. Here it is for good measure, but you can see that firstly, there are loads of values taht are "nav" - not available, and that secondly, the values of trading on the New York Stock Exchange and the Nasdaq are peanuts compared with the rest - a mere $33.7 trillion in 2014

So, here is my version of the trading figures based on the BIS's figures.

I make the total over $3,618 trillion in 2014, up 6.8% on 2013.

But Scott, if you are reading this, please remember that the BIS figures are hugely underestimated. There are massive parts of the US economy that don't get a mention. Sure, BIS state that they only report "selected payment systems", but there is really no excuse for such laziness. For example, it would appear that  the people at BIS have never heard of the Chicago Mercantile Exchange Group. That's extremely odd  when you can read on CME Group's webpage that it "is the world's leading and most diverse derivatives marketplace, handling 3 billion contracts worth approximately $1 quadrillion annually (on average)." Add that $1 quadrillion in to $3,618 trillion listed by BIS and we easily exceed the $4,456 trillion you mention.

Oh, and they apparently don't know about the Options Clearing Corporation either. Funny that, given that they are (I quote) "the world's largest equity derivatives clearing organization". And I just went on their website to get the latest data for the transactions cleared in 2015. Here it is:

OK. The total is down from the peak in 2011, when they handeled over 4.6 billion transactions. But the 4,210,542,258 transactions that OCC handled in 2015 presumably has some value associated with it. Has anyone got a clue how much?

We can learn a bit more from the OCC site. For example, I was able to learn that the breakdown was as follows
  • 3,727,919,066 Equity contracts 
  • 415,718,205  Index/Other contracts
  • 66,904,987 Futures contracts
And by requesting the montlhy volume reports you can find information about the precise numbers of Calls, Puts, Cleared Contracts and Cleared Contracts for Equity, Index/Other Options and ETF Options, as shown in this table that shows the figures for the last four years. Things have been ticking along very nicely with over 4 billion cleared contracts every year.

But the really interesting figure is the value for premiums - over $1.2 trillion again this year. Can anyone say what was the actual value of the 4 billion plus transactions that generated all these premiums? I have the impression that premiums are a tiny fraction of the nominal values - maybe less than 0.1%. In which case, taxing the OCC's massive volumes at the 0.1% proposed by Scott Smith, could generate trillions more of revenue.

The really good news is that, at last, a real politician has started asking the right questions. Maybe 2016 will be the year when our elected representatives will finally start thinking about some alternatives to the current totally ridiculous system.

Actually, I could also mention that Scott Smith has some other interesting suggestions in his program. For example, he doesn't see the Financial Settlement Tax as a way to finance the government. Instead, he would allow the government to create its own money, that would be used to finance public sector spending - much like the QE for citizens ideas that are being promoted by groups like Positive Money and by Adair Turner. The FST would simply serve to remove the excess money from the economy. It's very close to my proposal that Central Banks should have two levers - one to inject money directly into the economy, the other to remove any excess.

One final point to hammer home is that Scott Smith is no looney left-winger. His background was in Wall Street finance. In the 1990s, he was an early pioneer in structured finance, developing the model for conduit financing. And in the past decade, he has helped co-found four enterprises : C Squared, FinaTech, Blue Cheeter and Fathym. And when you think about it, his suggestions seem to make perfect sense for everyone.

1 Jan 2016

SwapClear : $533 trillion in transactions in 2015

Happy new year! Let's hope that the momentum for financial reform builds further in 2016.

To help focus our thoughts a bit, I would like just to report the latest figures from one of my favorite companies - LCH.Clearnet - who very kindly provide very detailed figures on all the trading that they handle at the end of every day on their website. And since they also provide Year to Date figures, it means that on the first of January, I can extract the complete data set for 2014. Here it is, with a breakdown of the percentage of trading for each of the currencies handled by LCH.Clearnet.
The total comes to nearly $533 trillion, which sounds like a very large number. And it is. But it's actually 17% less than the total of around  $641 trillion in 2014 (see my post from the 1st January 2014). It turns out the currencies that have been traded most have changed a lot since 2014. For example, trading in dollars has increased 34%, whereas Euro denominated trading is down 39%. And for some reason, trading in Singapore Dollars went up 85%. Don't ask me why.

LCH.Clearnet is also very happy to provide details about exactly what sorts of trading was involved. Here's the breakdown.

The biggest component is composed of Forward Rate Agreements (FRAs) at over $194 trillion, followed by Interest Rate Saps (IRS) at nearly $173 trillion, and Overnight Indexed Swaps (OIS) at $148 trillion.

Some of my readers will know that I'm very keen to see the European Central Bank applying an Financial Transacttion Tax on all Euro-denominated trading - whereever it occurs in the world. This would include LCH.Clearnet Ltd. So, here's the detailed breakdown for Euro trading.

As you can see, even if the incredible frenzy for Euro denominated trading seen in 2014 has calmed down (at the time, virtually 50% of all the trading was in Euros), the trading in 2015 still amounted to over €174 trillion. Tax that at 0.1% and you might raise over €100 billion in a single year. 

12 Dec 2015

We could pay the $100 billion needed to fight climate change with a global financial transaction tax of just 0.0001%

We've just got the news about the agreement in Paris during the COP 21 meeting. OK, there has definitely been some progress, but as George Monbiot puts it "By comparison to what it could have been, it’s a miracle. By comparison to what it should have been, it’s a disaster."

Fixing climate change is going to require a great deal of investment in renewable energy, conservation measures etc.  But even the $100 billion that was supposed to be provided by the richer countries to help the third world has caused an enormous amount of wrangling.

But the solutions were already there. According to the French Financial Minister Michel Sapin last Wednesday, the 10 European Countries that have been pushing to introduce financial transaction taxes are hoping to raise between 10 and 15 billion euros a year.  He said "We want this 10 to 15 billion to go to developing countries, in particular to fight the effects of climate warming".

If just 10 countries hope to raise that much, the obvious question is what could be raised if everyone joined in?  Even the figures for financial transactions reported in the BIS annual figures exceeded $11 quadrillion in 2014, and those figures are clearly hopelessly far off the mark since they fail to include a number of major players like LCH Clearnet Ltd and the Options Clearing Corporation.

But let's just take the conservative $11 quadrillion figure given by BIS. That's $11,000,000,000,000,000.  The $100 billion that the nations at the COP 21 meeting in Paris is 100,000 times smaller. And that means that you could finance the whole budget for climate change with a global financial tax of just 0.0001%.

And further more, the rich countries are only talking about $100 billion between now and 2020. An FTT of 0.0001% could raise the same sum every year!

Why, for Christ's sake, was this solution not even mentioned in Paris??? It would have been the perfect occasion for everyone to agree on a simple way to fix things. But now, we will be back to George Osborne and the City doing absolutely everything in their power to block the introduction of an FTT. They even plan to attack the plans of the 10 European countries who would like to use an FTT to help fight climate change. Osborne said "We can challenge this financial tax in the European court if this implicates other states including the United Kingdom".

Frankly, there are times where I am ashamed to be British. This is one of them.

6 Dec 2015

More on Adair Turner's proposals and the taboo of overt money creation by governments

Since publishing his excellent book "Between Debt and the Devil: Money, Credit and Fixing Global Finance", Adair Turner has been very busy. He gave a conference at the World Bank on the 4th of November that you can watch online here. And there is another interesting conference that you can watch that took place at the Oxford Martin School on the 24th of November.

In both talks, he makes a strong argument for the idea that states and central banks can and should directly produce money debt free, and inject that money into the economy. And he also asks the question of why that simple idea, proposed by such economists as Milton Friedman in papers in 1948 and 1960 has remained taboo.

For me, the reason that the idea has been taboo is simple. The financial system is run by bankers and their associates who profit enormously from a system where they have an effective monopoly on money creation. They try to convince us that allowing governments to create money would immediately lead to Zimbabwe style hyperinflation. But this argument is total bogus.

No, the real reason is simple, and is evident when you look at two simple facts that I have repeatedly stressed here on my blog. And if Lord Turner was ever to read this, I would love to know what he makes of them.

The first is the fact that, ever since the creation of the Bank of England in 1694, the UK's taxpayers have been paying an average of 4% of GDP every year to the banking system in the form of interest payments on public sector debt alone. You don't have to take my word for it. Just look at the graph on a website called www.ukpublicspending.co.uk. 

The average cost has been 4%, but there were times when the amount was more than double that figure- for example between 1814 and 1824, and between 1922 and 1933. For 2015 the figure will be 2.9%, but thanks to the fact that Cameron and Osborne have managed to add an extra £625 billion in debt in just 5 years, the value will be 3.17% next year, even if interest rates stay low.

When you realize that the (a) the banks that lent the UK government the money can just create the money out of thin air, and (b) that there was never anything to stop the government producing their own money debt free, you realize just how absurb the whole thing has been.

The second important fact is the realization that while European Governments have borrowed no less than €7.8 trillion in the last 20 years, a whopping €6.7 trillion of that - namely 86% - was used only to pay the interest payments on public sector debt.  Imagine that. Essentially ALL the excessive borrowing of our governments has been used to keep the bankers happy.

So, Adair, do tell me. What do you think is the reason for the taboo concerning overt money creation by governments? Would you agree that the number one reason, without the slightest doubt, is that the vested interests will do everything in their power to keep that particular gravy train on the rails. It has been that way in the UK since 1694. But it now high time that we put an end to what I believe should be denounced as the most lucrative racket ever devised.

I thank you wholelheartedly for finally telling everyone, including the World Bank and the Oxford Martin School that there simply are no reasons for not changing the system. The sooner the better.

Christian Felber : Change Everything - Creating an Economy for the Common Good

My thanks to my cousin Chris for pointing me to an interview on the Renegades website with Christian Felber, an Austrian alternative economist and university lecturer. He co-founded the NGO Attac Austria and initiated a movement callled "Economy for the Common Good".

I was very intrigued, and immediately rushed  to get a copy of Christian's book "Change Everything - Creating an Economy for the Common Good" which is actually the English Translation (published in June 2015) of a book originally published in German in 2012 under the title "Die Gemeinwohl-Okonomie. Aktualisierte und erweiterte Neuausgabe"

I've just finished reading it and I was very impressed. As Eric Maskin notes in the forewood, "Christian Felder thinks big. Not content with marginal change, he proposes a thorough overhaul of our capitalist system. In his world, companies still earn profits. But they are driven not be revenues and costs, but by their Common Good balance sheet, which evaluates them on how cooperative they are with other companies, whether their products and services satisfy human needs, and how humane their working conditions are. A company is awarded Common Good points accordingly, and its score is published, so that customers know whom they are dealing with. A good score also entitles the company to favourable government treatment: lower taxes, better borrowing terms and more public contracts. "`

Could this actually work? I think it could. One of the first striking points that Felber makes is that in many countries, the constitution specifically puts "the Common Good" as the central justification for everything.  And yet, businesses act as if the only criterion is financial profit.

Felber proposes that all businesses could be encouraged to generate a "Common Good Balance Sheet" that gives positive and negative points according to the way they function. Here is a simplified version of a recent iteration of the proposal that shows how you can score points for "good" behaviour, and lose a lot for "bad" ones.

The book demonstrates that while this may seem revolutionary, there are actually a large number of actors in the economy that already work in this sort of way. He gives a whole list of examples of cooperatives across the world that have been very successful, including perhaps the most famous one - Mondragon in Spain, that has an annual turnover of €15 billion.  He also points out that Non-profit Organisations (NPOs) currently employ around 31 million people, of whom 20 million are paid employees.  In the USA, the non-profit secotr contributed an estimated $887 billion to the economy in 2012, comprising 5.4% of the country's GDP, and accounts for 9.2% of all wages and salaries.

Is it so ridiculous to imagine that such structures, clearly aimed at the "common good" rather than maximising profits, could become the norm in the future?

Felber's proposals would not require banning companies that are only aimed at maximising profits for their shareholders. But, with suitably constructed rules, such companies would simply lose out in the longer term. I was indeed very much convinced that his proposals could really "Change Everything"!

Dear Mr. Draghi - let's have €60 billion a month of Unconditional Basic Income for the Eurozone's citizens

On Thursday 3rd December 2015, Mario Draghi, the president of the European Central Bank announced that they would be extending the bank's Asset Purchase Program. I quote:
"as regards non-standard monetary policy measures, we decided to extend the asset purchase programme (APP). The monthly purchases of €60 billion under the APP are now intended to run until the end of March 2017, or beyond, if necessary"
The other interesting announcement was that they are now prepared to finance directly regional and local governments. Again, I quote:
"we decided to include, in the public sector purchase programme, euro-denominated marketable debt instruments issued by regional and local governments located in the euro area in the list of assets that are eligible for regular purchases by the respective national central banks."
Yes, that's right. While the ECB is not allowed to finance national governments directly because of the infamous Article 123 of the Lisbon Treaty, paragraph 2 of that article states that those rules don't apply to "publicly owned credit institutions". Here are  the relevant texts:

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.
So, there you are! The ECB has decided that regional and local governments can be included.

This is actually very good news. As far as I can see, it should now be perfectly possible for regional governments to emit a form of bond that they could sell to that nice Mr Draghi and get real Euros in return.

So, how about the following scheme? We know that the ECB is going to create €60 billion every month until at least March 2017. Given that the Eurozone's population in 2015 is 338,335,120, that means just over €177 for every man, woman and child in the Eurozone every month (and  a total of €2660 each between January 2016 and March 2017).

Every region in the Eurozone should set up a citizen's bank for all the citizens living in the region. Every month, they could create bonds with a value of €177 times the population of the region.  They would sell those bonds to the ECB, and use the money to make direct payments of debt-free money to the Citizens in their region.

For example, I live in the Midi-Pyrénées Region of France, which has a population of just under 3 million. So, every month, the Midi-Pyrénées Citizens bank could emit €532 million of bonds, that would be sold to the ECB. The bonds would say that the Region promises to pay the sum with interest at 0.0% after a period that would be as long as possible. How about on the 1st January 2116, for example?

If every Regional government in the Eurozone did the same thing, the €60 billion that Draghi is creating would go somewhere useful - namely into peoples bank accounts, rather than fueling yet more asset inflation.

People would no doubt use some of the €60 billion to simply pay off debts, which would actually mean that there would be no inflationary effect at all. But even the remaining money would mainly get spent into the economy, by allowing people to buy things like food, clothes, as well as paying for vital things like the rent. They proportion that would end up fueling inflation would be negliable. Note the huge difference with the current situation, where Draghi's €60 billion a month goes essentially to the fuel speculation in the financial markets.

Importantly, for the citizens receiving the money, it would be effectively debt free - they would not have to pay the money back - ever! We would at last be starting the switch from a money system in which roughly 97% of the money in circulation is in the form of interest bearing debt, to one where an increasing proportion will be "real" money that would never need to be paid back - at least not until 2116!

Could this really work? I think so.

The main problem would be the possiblity that there could be some restrictions on what sort of debt instruments the ECB is prepared to buy up. However,  I doubt that such restrictions actually exist. I bet that currently, the ECB is probably happy to buy up any old rubbish that the commercial banks can find lying around. The whole point of the operation is to boost the markets, so I see absolutely no reason why a bond generated by a Regional authority could not be accepted. And as for the idea of a 0.0% interest rate, can I remind you that the ECB just decided to have a negative interest rate on deposits with the bank. I quote Mario Draghi again:
"as regards the key ECB interest rates, we decided to lower the interest rate on the deposit facility by 10 basis points to -0.30%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.05% and 0.30% respectively.
Given that negative interest rates are apparently ok, we might even say that the Regional bonds could have a negative interest rate such that, on the 1st of January 2116, there would be nothing left to pay!

So, there you have it. A perfectly plausible way for Mario Draghi to use the €60 billion of newly minted ECB money that he is able to create every month in an intelligent way. QE for People is quite doable right now. What are we waiting for? 

29 Nov 2015

Adair Turner's (unconvincing) criticisms of the Chicago Plan

Yesterday, I gave a massive thumbs up to Adair Turner's new book "Between Debt and the Devil: Money, Credit and Fixing Global Finance". But I did say that I found his arguments against banning money creation by commercial banks unconvincing. So, to be fair, I thought it would be worth looking at those arguments in detail. That way, you can make your own mind up.

Adair Turner starts with a very reasonable presentation of 100% Reserve Banking - The Chicago Plan.
"Henry Simons was one of the founding fathers of the Chicago school of economics, a strong believer in the virtues of capitalism and competition and of sound money with low inflation. But in 1933 he joined other economists in proposing to President Roosevelt "the Chicago plan" which would require all banks to operate with 100% reserves.

Under this plan, banks woudl hold money deposits for customers and make payments between accounts, but they would have no other economic function. All deposits in commercial banks would be matched by deposits at the central bank; the money supply would equal the monetary base; the "banking multiplier" through which banks create private money in addition to fiat money would be abolished. Debt contracts would still exist, but they would function outside the banking system, and lending would require the actual transfer of deposit money from the saver to the borrower. The ability of banks to create credit and money by simultaneously crediting and debiting a borrower's loan and deposit account would be eliminated.

In such a system, banks would no longer create new purchasing power. The question therefore arose, how (if at all) would an increase in nominal GDP be achieved? The answer proposed was through money creation by government fiat, with governments running each year small fiscal deficits funded not by bond issues but by the creation of pure fiat money.

Such fiat money creation was the only possible answer. But several of Chicago plan supporters believed it was also positively desirable. Irving Fisher believed that such an arrangement returned to the public authorities, and thus to the people in general, the economic benefit of new purchasing power creation, which under the fractional reserve system has been quite wrongly granted to private banks. He also saw a positive benefit in the fact that the government would be able to run small fiscal deficits without incurring debt interest expense. Milton Friedman supported the same position in a 1948 article, arguing that money-financed fiscal deficits were the best way to stimulate economies in deflationary times, and that appropriate targets could ensure that the size of the unfunded deficits was compatible with a desirable slow expansion of nominal GDP.

Viewing the disaster of 1929-1933, economists who were strongly committed both to free markets and sound money thus supported the radical combination of 100% reserve banks and money-financed deficits. The 2007-2008 crisis has illustrated yet again what harm private credit and money creation can wreak. So is it time to return to the radicalism of Irving Fisher, Henry Simons and the early Milton Friedman?

A recent IMF paper by Michale Kumhof and Jaromir Benes argues that we should, and sets out a detailed transition plan to achieve not only a 100% reserve system for the future but also a radical reduction in today's high level of private leverage. A thoughtful book by Andrew Jackson and Ben Dyson, Modernising Money. Why our Monetary System is Broken and How It Can Be Fixed, argue the same case."
It's looking extremely promising. So it's odd that Adair Turner then raises three reasons for caution and concludes that he is "therefore unconvinced that it is desirable or feasible to go all the way to 100% reserve banking".

Let's have a look to see whether his demolition job of the Chicago plan is convincing.
"The first and most fundamental is there may be some positive benefits to private rather than public creation of purchasing power [....] it could still be true that not only debt contracts but also banks can play a useful role in mobilizing capital investment that would not otherwise occur. " [my italics]
For me, this simply is not a strong argument. Commercial banks could perfectly well extend credit to businesses by simply accepting an IOU from that business. They don't need to create "real" money to do this. The fundamental problem with the current system is that when you or I, or a business, or our government goes to a bank and asks for a loan, there is absolutely no way to know whether the money the bank lends existed before, or whether it was just created out of thin air. For me, that is what needs to change.
"Second, we must be certainly be clear that 100% reserve banking will not be sufficient to solve the problem of excessive private credit creation. A modern economy needs some private debt contracts both to support the mobilization of capital investment and to lubricate the exchange of existing real estate between and within generations."
Again this is not a strong argument. There is absolutely no problem with people (and banks) making loans to other people with money that already exists. Nor is there a problem for someone to accept an IOU from someone who doesn't currently have any money - that is the basis of the OWE'M system that I have been proposing, and allows credit to be created by individuals.  The problem with the current system is that the difference between "real" money, and banks extending credit by accepting an IOU has been deliberately obscured. Banks are allowed to pretend that they are lending "real" pre-existing money, when in fact they are lending thin air.
"Third, the problems of transition from today's highly leveraged economies are significant. The plan outlined by Kumhof and Benes seeks not only to create 100% reserve banks but also to put right the problems of past excessive debt creation by writing off substantially all existing mortgage debt. Under this scheme the government would replace the mortgage debts currently sitting on bank balance with newly created money reserves. But this huge benefit to one group of citizens cannot be achieved without some offsetting loss to others: in economics there are rarely free lunches, at least on this scale."
Sorry, Adair. This is also extremely weak. There are countless ways that we could change the system without plumping for the precise proposal made by Kumhof and Benes. Here's one that I have been proposing. Use the €60 billion a month currently being created by Mario Draghi at the European Central Bank to pump up the financial markets to credit the accounts of the 330 million Eurozone citizens with €186 of debt-free money per month. Those citizens could use the money to pay off their debts, or spend the money into the economy. What's the problem with that??

So, there you have it. Do those three "reservations" really justify the persistence of a system that grants private bankers the right to lend money that they don't have, and charge interest on those loans? Not in my book.

When you consider that UK taxpayers have been paying an average of 4% of GDP every year since the creation of the Bank of England in 1694 in the form of interest payments on public sector debt, and that those payments have gone to bankers that didn't even have the money that they lent to the government, the arguments for maintaining the status quo have to be more solid.

It is not enough to say that "there may be some positive benefits of private [credit] creation", that "100% reserve banking will not be sufficient to solve the problem" and that there will be "problems of transition".

But Adair Turner's final comments on the Chicago plan make it clear that he himself thinks that the debate is still going. I quote:
"I am therefore unconvinced that it is desirable or feasible to go all the way to 100% reserve banking. But the reforms we do implement should reflect the underlying principles and insights that have motivated Chicago Plan supporters". 
And he makes it clear that he understands the fundamental difference between money and other aspects of the market economy.
"Money is different from other commodities, goods and services, and neither the economic nor the political arguments in favor of free markets apply to money. Entrepreneurs should be free to innovate iPads and new restaurant formats and new car designs, and myriad goods and services we cannot yet imagine, both because that will deliver economic benefits and because the freedom to innovate is in and of itself desirable. But creating credit and money is different...

Fisher and Simons were therefore convinced that to apply to banking the same free market principles which apply to goods and services markets was to make a category error. They were right. Credit markets raise issues of vital general public interest: free market approaches to them are simply not valid."
 Hear, hear!

28 Nov 2015

Adair Turner - "Between Debt and the Devil: Money, Credit and Fixing Global Finance"

I've been a bit quiet of late. But of course, there has been plenty going on in the world - not least the massacre of 130 innocent people by a bunch of totally deranged and brain-washed fanatics in Paris. I'm not really a very religious person. But there are times I wished I was. I would love to be able to believe that Allah, or whoever their God is, will make their souls suffer in Hell for eternity in punishment for what they did. Unfortunately, I suspect that the suicide bombers are no more, could never again feel any guilt for their actions. It is the families of the victims who will be suffering now, along with any right minded human on the planet.

But, I digress. Let me talk about something much more encouraging. It's the book by Lord Adair Turner, the ex-head of the UK's Financial Services Authority that came out last month - "Between Debt and the Devil: Money, Credit and Fixing Global Finance".

There are some recent reviews in papers such as the Guardian, the Independent, and the Financial Times, and has been well received by Positive Money (not surprisingly when you read what he says!).

For someone so very well placed, Adair Turner is amazingly lucid about the real causes of the recent financial crisis that hit the world. I lost count of the number of places where he made it abundantly clear where he thought  the blame should be laid. I quote:
"the most important causes of the 2007-2008 crisis and most-crisis recession [..] lay in the specific nature of debt contracts, and in the ability of banks and shadow banks to create credit and money"
"The dangers of excessive and harmful debt creation are inherent to the nature of debt contracts. But they are hugely magnified by the existence of banks...."
"... banks do not intermediate existing money, but create credit, money and purchasing power which did not previously exist... [...] the vast majority of bank lending in advanced economies does not support new business investment but instead funds either increased consumption or the purchase of already existing assets, in particular real estate and the urban land on which it sits."
"...unless tightly constrained by public policy, banks make economies unstable".
"...banks left to themselves will produce too much of the wrong sort of debt."
 "Banks, unless constrained by policy, have an infinite capacity to create credit, money and purchasing power; so do shadow banking systems..."
"Banks and shadow banking systems left to themselves are bound to create too much of the wrong sort of debt and leave economies facing severe debt overhangs".
"The amount of credit created and its allocation is too important to be left to bankers: nor can it be left to free markets in securitized credit".
"Left to themselves, banks inevitably choose higher leverage than is good for society as a whole".
"... even banks that never fail and never need to be rescued with public money can cause economic harm if, along with the other banks in the system, they create excessive quantities of debt";
"Unless deliberately constrained, banks and shadow banking systems can create private credit, money, and purchasing power in limitless amounts".
".. we cannot leave either the quantity of credit created or its allocation among different uses entirely to free market forces".
"We cannot therefore avoid the need to intervene to offset the inefficiency and instability that free financial markets will invariably generate".
 "At the core of financial instability in modern economies [...] lies the interaction between the infinite capacity of banks to create new credit, money and purchasing power, and the scarce supply of irreproducible urban land. Self-reinforcing credit and asset price cycles of boom and bust are the inevitable result'.
 He is scathing in his opinions on effects of innovations in the financial sector.
"The summary scorecard on three decades of financial innovations is therefore simple: whatever their theoretical advantages, their actual impact was a disaster".
He is also scathing about the failures of modern economics, noting that "modern macroeconomics largely ignored the operation of the financial system and in particular the role of banks." As he points out, "You cannot see a crisis coming if you have theories and models that assume that the crisis is impossible".
"Modern macroeconomics focussed little attention on the role of banks. But when economists and financial theorists did describe banks, they usually made a dangerously simplistic assumption - that banks take deposits from households to lend money to businesses and entrepreneurs, allocating capital resources between alternative investment projects. In fact [..] most bank lending in modern economies [...] is unrelated to business investment but instead funds a competition among households for the ownership of already existing real estate".
Turner "rejects the pre-crisis orthodoxy that global financial integration is limitlessly beneficial and argues that some fragmentation of the international financial system is a good thing".

 He also makes it clear that there are solutions.
"We need to reject the idea that the quantity and allocation of private credit can be left to free market forces".
"Several economists who lived through the boom of 1920s America and the subsequent Great Depression, such as Irving Fisher and Henry Simons [..] believed that "fractional reserve banks," which [...] can create credit and money, were so inherently dangerous that they should be abolished. Milton Friedman made the same case in 1948".
"In 1948 Milton Friedman argued that such fiat money creation, financing small puhblic deficits with government created money, would be a better and more certain way to achieve stability and low inflation than relying on private bank credit and money creation".
"In the depth of the Great Depression several eminent economists presented a truly radical plan - the Chicago Plan - to President Roosevelt". That plan said nothing about punishing bankers, limiting their bonuses, ensuring good risk control, or fixing misaligned incentives. Instead it proposed abolishing fractional reserve banking".
Turner repeatedly points out that even in times of weak growth:
"there is always one more option left. That option is 'fiat" money creation, using central bank-printed either to finance increased public deficits or to write off existing public debt".
"Friedman was right: governments and central banks together can always overcome deficient nominal demand by printing and spending money. That is just as well, since without the option of money finance there may be no good way out of our debt overhang predicament".
"...once we admit that money finance is possible, there is no technical limit to how much fiat money can be created and how much nominal demand produced.."
"...there is not reason the use of monetary finance cannot be appropriately constrained within precisely the same discipline of central bank independence. Central bank committees that today vote to approve interest rate movements or quantitative easing operations could also be given the power to approve or disapprove either a Bernanke-style helicopter money drop or one-off government debt write-off."
"Faced with ta debt overhang and a deficient nominal demand, we must be willing to use the money finance option".
"...central banks cannot focus solely on low and stable inflation nor financial regulation only on the solvency and liquidity of individual institutions. Public policy needs quite explicitly to manage the quantity and to influence the allocation of credit allocation: it cannot rely on free markets in credit to produce optimal socia results."
"...we must constrain the overall quantity of credit and lean against the free market's potentially harmful bias toward the "speculative" finance of existing assets". 
I also note that he thinks that "policies such as financial transaction taxes might make economies more efficient".

He also takes quite seriously the possibility of some form of QE for the people. For example,  he notes that:
"A government could, for instance, pay $1,000 to all citizens by electronic transfer to their commercial banks deposit accounts".
"Printing money in its modern electronic form is thus without doubt a technically possible alternative to either pure fiscal or pure monetary policy".
"..it works through putting new spending power directly into the hands of a broad swath of households and businesss, rather than working through the indirect transmission mechanism of higher asset prices and induced private credit expansion. It does not rely on regenerating potentially harmful private credit growth, nor does it commit us to maintaining ultralow interest rates for a sustained period of time".
In sum, a remarkable book, from someone very well placed within the world of international banking and finance. Well worth reading.

OK, he goes short of fully backing the 100% reserve banking model. But frankly his arguments are not convincing. I get the impression that he is just trying to walk a delicate tight-rope - if he went for an all-out "let's abolish banks" position, he might lose some of the key players that he is trying to convince.

Nor does he address the question of why we ended up with the current system, and largely ignores the fact that the system will be difficult to reform because of the enormous vested interests that will fight to keep the bankers' gravy train on the rails. But at least he has come very clean about the major problems inherent to the current unregulated financial system. And he makes a strong case for the idea that we should be taking very seriously the option of allowing central banks and governments to do some money creation of their own.

18 Oct 2015

Australian Financial Transactions - the true picture. And how to get rid of nearly all taxes with a simple Financial Transaction Tax

Last week I compiled figures from the Bank for International Settlements for Financial Transactions which supposedly provide a reasonably complete view of financial activity in 23 countries. According to BIS, the total for Australia was just over 69 trillion Australian Dollars (AUD).

Well, it turns out that the true number is virtually twice that. The Australian Financial Markets Report (AFMR) provides a much more detailed analysis than BIS, and you can find all the details on their site. You can download the info as a detailed 68 page report as a pdf file, or as an excel sheet.

Here are the main numbers.

For 2014-2015, the total was AUD 135.2 trillion - up 7.2% on the previous year, and 95% larger than the number provided by BIS.  But, looking at the two sets of data, I can see little sign of a real overlap. BIS provides numbers for credit transfers, direct debits, card payments and cheques that don't get mentioned in the AFMR. One number that BIS mentions that could overlap is the figure for RITS (the Reserve Bank Information and Transfer System), but there is no obvious corrsesponding figure. Likewise,  BIS gives a 10 trillion dollar figure for Austraclear, but again there is no easy correspondance.

As I consequence I propose to put everything in the same table, where you can see all the numbers.

So, while I may be double counting some numbers, I would like to suggest that maybe the total figure of over 204 trillion dollars may actually be quite realistic.

Can I also congraulate the Australians for producing such a comprehensive report.  In it, you can get a wealth of details about the breakdown of where financial trading occurs. And in the pdf file, they  also include reports about the role of particular players. For example, you can learn that one of my favourite companies - LCH.Clearnet Ltd - whose figures have been largely "nav" for years in the BIS data set is big in Australia. I quote:
"SwapClear continues to lead the cleared market in interest rate swaps (IRSs) denominated in Asia-Pacific currencies and clears over 80% of the cleared market in AUD IRSs. Of the entire AUD interest rate derivative (IRD) market (i.e. cleared and non-cleared),SwapClear clears 65% of this total".
I dream of a day when every country is obliged to be as thorough as the Australians in providing full details of what goes on. And of course, do I need to stress the fact that I pointed out last year, that Australian Financial Transactions dwarf total revenue from Taxation? Here are the official numbers from the Australian Bureau of Statistics :

Note that the figures are in millions of dollars, not billions as for the transaction data.  A simple calculation shows that the Australian government could replace their entire tax system with a universal transaction tax of 0.21%.  And the following table shows what would be needed to replace each of the main sources of tax revenue by a simple and painless automatic transaction tax on all transactions, assuming that my figure of over $204 trillion is realisitic.
Would Australian citizens vote for a government that promised to abolish all Income tax by replacing it with a 0.12% tax on transactions? Or replacing Taxes on provision of goods and services (sales taxes) by a 0.05% FTT? Or replacing property taxes with a 0.02% FTT? Or scrapping employer payroll taxes with a 0.01% FTT?

Unless they are insane, surely they would have to vote for this.

Go for it Australia! (and thanks to my friend Susy in Australia for her support over the years).

11 Oct 2015

Anniversary : 5 years of Simon Thorpe's ideas on the economy

My very first blog entry dates from 5 years ago when I created the "Simon Thorpe's Ideas on the Economy" website. It was Sunday the 10th of October 2010.

I've generated one hell of a lot of stuff in the intervening 5 years. To be exact, there are some 533 posts, which have had over 216,000 visits. You can download a reasonably complete pdf file with my contributions that runs to over 600 pages.

One nice point is that while my ideas have evolved enormously in the last five years, I get the impression that I really haven't said too much that I would reject today. This is actually particularly impressive given that when I first started getting interested (obsessed!) by the economy in the summer of 2010, I hadn't really got a clue. I have really had to learn just about everything myself by reading over one hundred books and countless articles and posts on the web.

I can remember believing that if we are in debt, it must be because someone - the Saudis? or the Chinese? must have lent us money. Little did I know that actually, all money is debt - created by commercial banks.

I'm particularly happy to see that my very first propostion - the proposal that essentially all the existing taxes could be replaced by a simple, universal tax on financial transactions - is still just as viable as ever. The original document dating from October 2010 can still be downloaded from the Hal Archive site here, and there is not much in it that I think was wrong.

Indeed, my current proposals essentially combine that very same mechanism of taxing the $11 quadrillion in financial transactions at some modest level (probably well below 0.1%), and simply reinjecting the same money back into the economy by direct, debt free basic income payments to citizens.  The amount needed to allow the economy to function well will depend on the country. In the Eurozone, a few hundred euros per person per month would already be very effective. But in third world countries like subsaharan Africa, you could probably get an equally robust effect for a fraction of the amount of money - maybe just a few dollars per person per month.

Adair Turner and Mario Draghi : Could it be time for Peoples' QE?

As you may be aware, I am convinced that Central Banks should stop creating money and injecting it into the financial markets. Instead, they should be injecting the money directly into the economy, preferably by putting the money directly into the pockets of citizens in the form of a debt free Unconditional Basic Income.

I think that it makes perfect sense. The European Central Bank is currently printing €60 billion a month, and intends to keep going for another year at least. But this money has been going to the financial markets in the hope that somehow the money will encourage the banks to start lending again. But even if they did start lending, this would only increase further the ludicrous amounts of debt that are currently clogging up the global economy - over $200 trillion, according to a recent report by the McKinsey group.

Imagine what could happen if, instead of giving the €60 billion to the financial markets and praying, the ECB simply gave the same amount of money to the Eurozone's 330 million citizens as direct, unconditional payments. Everyone could be given roughly 182 euros a month. That's 724 euros for a family of four - more than the minimum wage in 6 Eurozone countries, including Greece.

Apart from the obvious, and direct, boost to the Eurozone economy, it would also give Central Banks a far more efficient way to control the amount of money in circulation. I simply cannot understand how anyone like Mario Draghi (president of the ECB) or Mark Carney (governor of the Bank of England) can seriously argue that controlling the base interest rates at which commercial banks can borrow from the central bank is enough. We have had near zero interest rates for years, but the Eurozone is still in the doldrums. More is needed.

For a long time, I have assumed that the fact that both Draghi and Carney are ex-Goldman Sachs bankers ("the blood sucking vampire squid") meant that there was zero chance that they might call into question the commercial banks' monopoly on money creation.

But, to my joy, it turns out that serious people in banking are beginning to admit that we may really need something better.

Firstly, on the 7th of September, I attended a meeting called "Making Money Work: can innovations in monetary policy promote long-term prosperity?” that was organized by Positive Money in London in which Lord Adair Turner, the ex director of the now defunct Financial Services Authority was talking about the idea that governments, or rather central banks, should be allowed to create money themselves. He shared the platform with Steve Keen, one of my favourite economists (!) and a journalist from the Financial Times. At the end of the presentation, questions came from such notables as Richard Murphy, the founder of the excellent web site "Tax Research UK", and apparently quite close to the new Labour leader Jeremy Corbyn, and  Nathalie Bennet, leader of the UK Green Party (whose election manifesto included both the idea of introducing a Financial Transaction Tax and an Unconditional Income).

Adair Turner has a new book out called "Between Debt and the Devil - Money, Credit, and Fixing Global Finance" which I have just ordered. The Positive Money website has a discussion of what he says, and it is clear that while he is not yet convinced that we can abolish the ability of commercial banks to create money, he seems clear that direct money creation by central banks and governments is perfectly defendable. For example, he says:
“[C]ompared with a pure monetary stimulus [such as QE], [helicopter money] works through putting new spending power directly into the hands of a broad swath of households and businesses, rather than working through the indirect transmission mechanism of higher asset prices and induced private credit expansion. It does not rely on regenerating potentially harmful private credit growth nor does it commit us to maintaining ultralow interest rates for a sustained period of time.”
“Ideally, the major advanced economies should have implemented Bernanke-style helicopter money drops in the immediate aftermath of the 2007-2008 crisis. If we had done so, the recession would not have been so deep, and we would now be further advanced in escaping the debt overhang.”
Hear, hear!

But Adair Turner isn't the only important figure who has been talking seriously about allowing governments and central banks to create money. Even Mario Draghi has been talking about the possibility!

Again, I thank Positive Money for pointing this out.  In the European Parliament, Draghi was asked about Helicopter Money and QE for citizens, to which he replies:
“For hundreds of years central banks have injected money in the economy through either banks and/or markets. That is what we know, and so we will certainly consider these ideas that are being discussed; they are being discussed everywhere and the ECB is part of these discussions in academic fora and in other circumstances.
We should also not underestimate the legal aspects that would apply to the euro area and to the ECB, so one should ask the question whether this helicopter money is consistent with the Treaties and so on.
I saying this not as a way to prejudge decision-making one way or another, but the gravity of the challenges right now basically would demand that we use all available instruments within our common knowledge, and that is what we know now.”
Could it be that Draghi is reaching a point where he thinks that the main obstacles are legal? If so, can I respectfully remind him that while  Paragraph 1 of Article 123 of the Lisbon Treaty prohibits Central Banks lending directly to governments, Paragraph 2 of the same article says that this restriction does not apply to "publicly owned credit institutions"?

In other words, there is absolutely no legal reason why the following could not be done.
  1. Each Eurozone Government should set up a publicly owned credit institution. Let's call it the "National Citizens Bank"
  2. Each National Citizens Bank would open accounts for all the Citizens in each country, which could be linked to each citizen's normal bank - much as you can link a paypal account to a conventional bank account.
  3. The European Central Bank should divide the €60 billion a month that it currently injects into the financial markets, and instead provide the funds to each National Citizens Bank, with an amount that depends simply on the population of each Eurozone Country.
  4. The National Citizens Bank would then credit each account with roughly €182 every month which can then be spent directly into the economy, or used to pay off debt. 
As people pay of debt, this actually decreases the total amout of money in circulation, so in fact, it may well be that the net increase in money would be substantially less than the €60 billion provided by the ECB. If so, then the monthly payments could well be increased.

And, if ever there were signs of the economy overheating and inflation starting to kick in, I trust you all know that I have another solution for that. Simply get the ECB to impose a very modest tax on the €2 quadrillion or more in Euro-denominted transactions taking place within the Eurozone. That way, the amout of Citizens' QE could be increased well beyond €60 billion a month, with no risk.

Finally, with a little extra effort, it would be perfectly possible for Central Bankers to impose the tax on transactions within their own jurisdictions for the other currencies. Thus, Mark Carney could impose the ECB's FTT rate on the huge volume of euro-denominated transactions occuring in the UK (for example, the €238 trillion in euro-denominted trades performed by one company, LCH.Clearnet Ltd in 2014).

To summarize - if the only reason for not doing QE for People is legal, then sorry that excuse is now clearly no longer a problem. It's just political will that is lacking.

BIS Transaction Figures from 2006 to 2014 - Data for the US, the UK, China, Brazil, Mexico, Japan, Canada, Australia and Sweden

To complete my coverage  of financial transactions in the 23 countries covered by the Bank for International Settlement's annual Statistics on Payment, Clearing and Settlement Systems here are the numbers for some of the other key players.

First, I provide the numbers for the US, which total $3.27 quadrillion for 2014 - the highest value since 2008. But, of course, this number is way below the true value which would have to include such major players as the Options Clearing Corporation which processed over 4 billion transactions in 2014, and the Chicago Mecantile Exchange which handles a further "3 billion contracts, worth approximately $1 quadrillion annually (on average)". Since I have no way of knowing what is the value of the transactions handled by OCC, the true total for the US is frankly anyone's guess.

Next, let's look at the numbers for the UK.

I suppose that the good news is that for the first time, BIS has decided to add extra entries for some additional players, including the London Metal Exchange (LME) and CME (Chicago Mercantile Exchange) Clearing Europe Ltd.  They have even provided a number of LCH.Clearnet Ltd - £63 trillion. But this is presumably just the number for trading in sterling, because if you look at my own analysis of LCH.Clearnet Ltd in 2014, I got a total of $614 trillion. of which 17% (£66.5 trillion) was denominated in sterling. Why not include the other 83%? They also don't include anything about CLS which I believe is mainly based in the UK, and which BIS itself says was involved in over $1.28 quadrillion in foreign exchange.

For the first time, I thought it would be interesting to include the full BIS figures for some other countries. There are some that I haven't analysed in detail (Mexico, Korea, Russia, Hong Kong, South Africa,  Turkey, Saudi Arabia and Singapour), but you can get a rough overview (measured in US dollars) elsewhere and the details can be found in the original BIS data sheets.

For certain countries  I have therefore provided numbers since 2006 so that you can see how the figures are changing.

The increases are particularly striking in the case of China,  where transactions have increased from 734 trillion yuan in 2006 to a whopping 4.46 quadrillion in 2014.

Another country that has been expanding a lot is Brazil, where transactions have increased from 293 trillion real in 2006 to nearly 1.1 quadrillion last year. Such information is really significant because there are rumours that Brazil is thinking of reintroducing a tax on transactions. They had one from 1993 until 2007, but it was killed off after presssure from financial sector lobbies. Apparently they  considered that the tax was too difficult to avoid (!). In any case, it is very encouraging that the Brazilian authorities were able to provide the BIS with some of the most detailed figures, with 24 different platforms listed in full.

Interestingly, Mexico turns about to be another increasingly big player with transactions increassing from under 1.2 quadrillion Pesos in 2006 to over 1.8 quadrillion in 2014.
 Other countries are more stable, but have also shown steady increases in transactions. For example, Japan has increased its financial transactions from 60 quadrillion yen in 2006 to nearly 71 quadrillion in 2014

Canada has gone up from under $133 trillion in 2006 to nearly $208 trillion in 2014.

Australia has increased from under $51 trillion in 2006 to over $69 trillion in 2014. But I can't help noting that the Australia authorities have been particularly slow in providing numbers for the Australian Stock Exchange. Apparently the numbers have been "nav" since 2006. One wonders why the BIS even bother including entries for such "selected" exchanges.
 Sometimes though, transactions can actually go down. Thus the same period actually saw transactions in Sweden drop a bit from nearly 307 trillion SEK in 2006 to around 244 trillion last year.

But, in general, financial transactions across the 23 countries for which the BIS has been compiling data have been increasing steadily, as you can see from the table I posted last week.

It is now over five years that I have been campaigning in favour of the idea that it would be a very smart move to impose a simple automatic transaction tax on all electronic financial transactions. For me, these figures, boring though they are, demonstrate that such a scheme is perfectly doable. All that is lacking is political will.

BIS Transactions in 2014 - Data for 5 Eurozone Countries

The Bank for International Settlement's annual Statistics on Payment, Clearing and Settlement Systems provides detailed information for only 5 of the Eurozone countries. Here are the detailed figures. Figures in red are copied from the year before because currently unavailable.
The total value of transactions for France, Germany, Belgium, Italy and the Netherlands comes to €1.66 quadrillion - down nearly €400 trillion since a peak of well over €2 quadrillion in 2013. What happened? Should we conclude that financial transactions in the Eurozone are really down by 20%?

Well, no. If you look at the details, you will see that virtually all the change can be explained by a single change. The entry for "total value of executed securities trades" for Eurex in Germany (which you can find on page 137 of the 593 page pdf file) shows a drop from €535,148.33 billion in 2013 to €92,528.16 in 2014. I honestly have great difficulty in believing that this trading has just evaporated. I think it is far more likely that the transactions have moved to some other trading platform that is not included  in the 23 countries detailed in the BIS report. For example, it would be enough for the trading to be registered in Luxembourg (a country not included in the BIS report) for the transactions to become invisible.

I will stick with my conservative estimate that financial transactions in the Eurozone are well over €2 quadrillion a year.

As I have been saying for years, it is clear that we need full transparency on financial transactions. All movements of money should be clearly visible. And if the BIS is to be a serious organisation, it should not be allowed to only report transactions on "selected" platforms.

5 Oct 2015

BIS Transactions in 2014 - Country by country breakdown

In my last post, I listed the 50 biggest players in the $11 quadrillion of financial transactions listed in the latest version of the Bank for International Settlement's annual Statistics on Payment, Clearing and Settlement Systems.

In this post, I have broken down the figures according to country, and I have provided the figures for all years since 2006.

As you can see, the number one country is the US, with nearly $3.2 quadrillion in transactions - the highest total ever, with the exception of the bumper year of 2007 when US transactions exceeded $3.4 quadrillion.

Next comes CLS - which isn't even a country -  with nearly $1.3 quadrillion.

Germany is next on the list. But for some reason, it's transactions dropped a lot from a very impressive $1.46 quadrillion in 2013 to less than $900 trillion in 2014 (hence the blue colour). I'll try and analyse what happened in a later post.

The UK comes in at number 5, but here again, the figures simply cannot be serious.  When you can see that transactions in the UK exceeded $2 quadrillion in 2008, the current total of just under $800 trillion is obviously wrong and easily explained in part by the fact that LCH.Clearnet Ltd, which did $641 trillion in 2014, is mysteriously invisible to people at BIS. They similarly seem unable to find anything about transactions on the London Stock Exchange - also "nav" for several years, despite publishing data on the web. Oh well.....

Then we have the EU, whose large scale transfer system such as TARGET2 handle very large number - in the case the BIS figures didn't have the numbers for 2014, which is why I used the figures for 2013.

The new kid on the block at number 6 is China. Their transactions have quadrupled from a mere $134 trillion in 2006 to $727 trillion in 2014.

Other impressive numbers are provided for Belgium which, despite it's relatively small size, managed to handle $565 trillion last year. It's a shame that BIS don't report figures for Belgium's neighbour Luxembourg. I bet that with outfits like Clearstream operating from Luxembourg, the numbers are probably mouth-watering - at least for anyone interested in introducing a Financial Transaction Tax. According to Clearstream's website, "For 2014, Clearstream processed 43.65 million international transactions, an increase of 6% compared to 2013." Unfortunately, I haven't been able to find the value of those transactions. If anyone knows, do send me a message.

It's interesting to note that two of the countries that you might have thought would be very active in financial markets, namely Switzerland and Singapore, are actually quite modest, clocking up a mere $45.9 trillion and $15.5 trillion respectively. I suppose that could be because the BIS's policy of only reporting "selected" players may mask much of the activity in such countries.

I suspect that there is probably only one way to find out. Politicians should decide that ALL financial transactions should be reported - wherever they occur. Is it really too much to ask? 

2 Oct 2015

BIS Financial Transactions for 2014 - over $11 quadrillion

Note added Saturday 3rd October: Revised and corrected version.

On the 30th of September, the Bank for International Settlements published their preliminary figures concerning the Statistics on payment, clearing and settlement systems for 23 countries. You can download the data as a 593 page pdf file or alternatively, as two separate excel files.  One of the excel files gives comparative tables for the 23 countries in US dollars, which makes it easier to add the numbers together. The other one provides the detailed information country by country, but using the local currency of each country in turn.

Using the comparative tables, I have extracted all the data concerning financial transactions to produce an enormous excel sheet containing all the different numbers. This involves extracting the numbers from Table 8 (Payment transactions by non-banks), Table TRS3 (Trades executed on selected exchanges and trading systems: value of transactions), Table PS3 (Payments processed by selected interbank funds transfer systems : value of transactions), Table CCP3 (Transactions cleared by selected central counterparties and clearing houses, and Table CSD3 (Transactions processed by selected central securities depositories). All the figures are given in billions of US dollars.

The complete table includes over 230 different entries, and is frankly rather boring to read. But in the following table, I have presented just the 50 biggest entries for 2014, together with the corresponding data since 2006 when available.  There are a few numbers in red. This refers to data that is not yet available ('nav') and in that case, I used the number for the previous year. The Total values at the end include all the numbers I could find.

The value for total transactions in 2014 comes to over $11 quadrillion.

The number is down by about $300 trillion on 2013, but $11 quadrillion is still a very large number. And, with a minute transaction tax of (say) 0.1% would raise trillions in tax revenue that could be injected into peoples pockets in the form of a debt-free Basic Income (for example). But I digress.

For me, the really interesting thing is to see who the biggest players are.

I'm delighted to see that BIS is now providing information about the transactions handled by the multinational entity CLS - the world leader in Foreign Exchange. It is worth extracting the relevant numbers directly from the BIS document. Here they are:

In 2014, CLS handled over 204 million transactions, with an average value of over $6.2 million. That means  a total of $1.278 quadillion (yes, the numbers are in US billions, except for CLS, where they decided to use trillions of US dollars as the measure.

Number 2 on the list is the GSD - Government Securities Division  of the DTCC (Depository Trust and Clearing Corporation) based in the US which also handled over $1 quadrillion in 2014.
It is followed closely by another US based system - Fedwire, which handled $884 trillion.

Number 4 on the list is the European Union's TARGET system. The BIS didn't have the numbers in their report despite the fact that the numbers are provided month by month on the European Central Bank's website. It seems reasonable to suppose that the number will be close to the value in 2013.

And so it goes on.

But, while the $11 quadrillion figure is impressive, it is seriously underestimated. For example, my favourite London based outfit, LCH Clearnet Ltd, which I reported had handled over $641 trillion in 2014, doesn't even get a look in. It has been "nav" since 2009. And what about the Options Clearing Corporation, which handled over 4 billion transactions last year, generating $1300 billion in premiums. They might easily be handling several quadrillion every year in transactions. But it too is  nowhere to be seen in the BIS report.

I suppose that BIS do say that they are only reporting "selected" exchanges and trading systems, "selected" interbank funds transfer systems, "selected" central counterparties and clearing houses, and "selected" central securities depositories. Isn't it about time that someone, somewhere started compiling ALL the data on financial transactions?

If the full details were known, it would be even clearer that taxing those transactions would be a very intelligent alternative to the counterproductive and inefficient taxes that we currently use.