Study indicates Robots could replace 80% of Jobs

Posted on April 16, 2014 by Colin Lewis

Blogger Reference Link http://www.p2pfoundation.net/Transfinancial_Economics 

In a few decades, twenty or thirty years — or sooner – robots and their associated technology will be as ubiquitous as mobile phones are today, at least that is the prediction of Bill Gates; and we would be hard-pressed to find a roboticist, automation expert or economist who could present a strong case against this. The Robotics Revolution promises a host of benefits that are compelling (especially in health care) and imaginative, but it may also come at a significant price.


The Pareto Principle of Prediction
We find ourselves faced with an intractable paradox: On the one hand technology advances increase productivity and wellbeing, and on the other hand it often reinforces inequalities.
A new study due to be published in the forthcoming Oxford Handbook of Skills and Training by Stuart Elliot visiting analyst at the Organisation for Economic Co-operation and Development (OECD), who incidentally is on leave from the Board on Testing and Assessment of the National Research Council, indicates that technology could replace ‘workers for 80 percent of current jobs.’
In his study Elliot relies on advances in speech, reasoning capabilities and movement capabilities to illustrate how robots and technology can replace jobs. I am in agreement with the general thoughts of the study, although I believe speech recognition is now far more advanced than Elliot states. This element alone will lead to a reduction in many jobs, such as translation over the next five years.
Elliot is not the first to claim that robotics and technology will have such a profound impact on employment or inequality. Michael Hammer, a former MIT professor and prime mover in the restructuring of the workplace in the 1990’s estimated that up to 80 percent of those engaged in middle management tasks were susceptible to elimination due to automation.
In the book Average is Over Professor Tyler Cowen also predicts a hollowed-out labor market, devoid of middle-skill, middle-wage jobs, where 80% or more of our citizens will be unable to prosper. They will become a permanent underclass, unable to improve their lot.
This ‘underclass’ may be happening sooner than Cowen predicted. While there are ‘short term’ adjustments in the employment numbers, the majority are in the low-paying sectors, 73% of ‘new’ jobs are in the bottom of the wage pyramid and temporary employment positions rather than permanent.
The US Bureau of Labor Statistics estimates that among the most rapidly growing occupational categories over the next ten years will be “healthcare support occupations” (nursing aides, orderlies, and attendants) and “food preparation and serving workers” – overwhelmingly low-wage jobs.
As recent as last month the FT reported that: “New technologies are transforming the structure of the US economy but creating only modest numbers of jobs, according to the biggest official survey of businesses, conducted only once every five years.”
In the book Race Against The Machine the authors state: “Digital technologies change rapidly, but organizations and skills aren’t keeping pace. As a result, millions of people are being left behind. Their incomes and jobs are being destroyed, leaving them worse off.”
Speaking at the World Economic Forum in Davos earlier this year, Google’s Eric Schmidt warned that the problem of new technologies substantially changing and replacing jobs will be “the defining one” for the next two or three decades.


Thinking machines
Increasingly, machines are providing not only the brawn but the brains, too, and that raises the question of where humans fit into this picture. Earlier this year, Jörg Asmussen State Secretary in the German Ministry of Labor and Social Affairs emphasized this trend when he said:

“Digitization, or the “second machine age” (as in the title of the best seller by Erik Brynjolfsson and Andrew McAffee), has only just begun. It is in the process of relieving and ultimately replacing first our physical and then our intellectual labor. This trend will be a threat to brainworkers such as accountants and stock-market traders. And check-out clerks at supermarkets will also soon be a thing of the past.”

Echoing this, Randall Parker, Professor of Economics at East Carolina University, recently wrote:

“Robots and other automated equipment have increased factory automation so much that factories are a dwindling source of all jobs. The next big target for automation has been and continues to be office work.”

In the US manufacturing sector there was a solid increase in sales of 8 percent between 2007 and 2012 but with significant falling employment, the industry shed 2.1m jobs and its payroll dropped $20 billion.
Approximately one out of 25 workers in Japan is a robot, this is in part due to a growing elderly population and declining birthrates, which mean a shrinking workforce, but it is also a fact that global business seeks to drive productivity, efficiency, and effectiveness to new heights with robotics.
This time is different, or maybe not


In his seminal book, The Enlightened Economy, Joel Mokyr argued that: “in Britain the high quality of workmanship available to support innovation, local and imported, helped create the Industrial Revolution.” Dig a little further and Mokyr refers to: “the top 3 to 5 percent of the labor force in terms of skills: engineers, mechanics, millwrights, chemists, clock and instrument makers, skilled carpenters and metal workers, wheelwrights, and similar workmen.”
It was a small minority of the working population that had the skills to help advance the Industrial Revolution, others had to learn new skills to adapt to the technology changes. This time is no different. Just as each revolution sets a higher potential level of productivity each revolution requires a new set of skills to overcome the resistance of the old paradigm, which is deeply embedded in the minds and the practices.
Despite the job losses in the US manufacturing sector factories are increasingly employing more skilled engineers to tend complex equipment and at higher wages, Annual payroll per employee in the manufacturing sector rose from $45,818 in 2007 to $52,686 in 2012.


It’s time to act
Robotic hardware, Artificial Intelligence, automated software and connected networks are only going to get more powerful and capable in the future, and have even bigger impact on jobs, skills and the economy.
The message for all of us can be summed up in a quote from Abraham Lincoln’s second address to Congress.
“As our case is new, so we must think anew, and act anew.”
In his paper Elliot raises a very good question: “Even if alternative jobs are available, how will the displaced workers acquire the necessary skills for the new tasks?” This should be a wake up call. All of us must give serious consideration to our future and learn the skills that will give us the best chance of working WITH the machines. I’ll repeat Lincoln’s statement, since that’s the big takeaway. “As our case is new, so we must think anew, and ACT anew.” These are exciting and challenging times…




The above comes from a Blog that is worth examining. Something about it is presented below

About

Robots are becoming an integrated part of daily life. My name is Colin Lewis, a Behavioral Economist and Data Scientist who provides research and advisory services in automation, robotics and artificial intelligence.  

I believe the Robotic Revolution will come within the next few decades and be more transformative than the Industrial Revolution. This blog reviews the changing area of robotics and its impact on our personal and professional life — Technology is meaningless without people.
Whilst there are concerns about technology and automation displacing many from the workplace I have an optimism for the future and believe the attempt to better the world for all humanity is hidden somewhere within the automated robotic economy.
It would be easy to underestimate the degree to which the robot economy is going to make a difference. Fast-paced and disruptive innovation is becoming increasingly institutionalized and ubiquitous — fundamentally changing the way we work, play and communicate. By tracking trends impacted by automation in social, technological, economic, environmental and political arenas I hope to be able to provide a greater understanding of how to take advantage of new technologies to improve our lives. I will do this by researching the impact of behavior, economics and culture on the future whilst exploring the interactions between technology and society… in that respect, this blog is not about describing the world, it’s about exploring ideas.
Robotenomics.com content has featured in the Financial Times, Harvard Business Review, Bloomberg, O’Reilly Media, Inc Magazine, Business Insider and others. If you wish to know more about my work helping corporations, financial institutions, universities and government to take advantage of data science and the robot economy, send me an email — colin (@) robotenomics.com
Charles Darwin wrote, “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”
Personal motto: Apophenia – making connections where none previously existed (overcoming the human tendency of seeing patterns where none actually exist).

World Currency

From Wikipedia, the free encyclopedia

Blogger Ref Link http://www.p2pfoundation.net/Transfinancial_Economics
   

The euro and US Dollar are by far the most used currencies in terms of global reserves.

In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency that is transacted internationally, with no set borders.

Contents

 [hide] 

• 1 Historical and current world currencies
  • 1.1 Spanish dollar (17th – 19th centuries)
  • 1.2 Gold Standard (19th – 20th centuries)
  • 1.3 Pound sterling
  • 1.4 U.S. dollar
  • 1.5 Euro
  • 1.6 Chinese renminbi
  • 1.7 Recent proposals (21st Century)
    • 1.7.1 Governmental
• 2 Single world currency
• 3 Difficulties
  • 3.1 Limited additional benefit with extra cost
  • 3.2 Economically incompatible nations
  • 3.3 Wealth redistribution
  • 3.4 Usury
• 4 See also
• 5 References
• 6 External links

Historical and current world currencies[edit]

Spanish dollar (17th – 19th centuries)[edit]

In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the Spanish territories in the Americas westwards to Asia and eastwards to Europe forming the first worldwide currency.^[1][2] Spain's political supremacy on the world stage, the importance of Spanish commercial routes across the Atlantic and the Pacific, and the coin's quality and purity of silver helped it become internationally accepted for over two centuries. It was legal tender in Spain's Pacific territories of the Philippines, Micronesia, Guam and the Caroline Islands and later in China and other Southeast Asian countries until the mid-19th century. In the Americas it was legal tender in all of South and Central America (except Brazil) as well as in the US and Canada until the mid-19th century. In Europe the Spanish dollar was legal tender in the Iberian Peninsula, in most of Italy including: Milan, the Kingdom of Naples, Sicily, Sardinia, the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the Austrian Habsburg territories.

Gold Standard (19th – 20th centuries)[edit]

Main article: Gold Standard

Prior to and during most of the 19th century, international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the meter both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.

Pound sterling[edit]

Before 1944, the world reference currency was the United Kingdom's pound sterling. The transition between pound sterling and United States dollar and its impact for central banks was described recently.^[3]

U.S. dollar[edit]

Worldwide use of the euro and the US$

  United States

  External adopters of the US dollar

  Currencies pegged to the US dollar

  Currencies pegged to the US dollar w/ narrow band

  Eurozone

  External adopters of the euro

  Currencies pegged to the euro

  Currencies pegged to the euro w/ narrow band

The Belarusian ruble is pegged to the euro, Russian ruble and U.S. dollar in a currency basket.

In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar as a global currency.
Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, most currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, and it has remained the de facto world currency.
Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, the Japanese yen became increasingly used as an international currency,^{[citation needed]} but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has increasingly competed with the United States dollar in international finance.
Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255).
Many of the world's currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency (see dollarization) in favor of the United States dollar. The U.S. dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in euros (see Reserve Currency).

Euro[edit]

The euro inherited its status as a major reserve currency from the German mark (DM) and its contribution to official reserves has increased as banks seek to diversify their reserves and trade in the eurozone expands.^[4]
As with the dollar, some of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Bulgarian lev, plus several west African currencies like the Cape Verdean escudo and the CFA franc. Other European countries, while not being EU members, have adopted the euro due to currency unions with member states, or by unilaterally superseding their own currencies: Andorra, Monaco, Kosovo, Montenegro, San Marino, and Vatican City.
As of December 2006^[update], the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at the time (today equivalent to circa US$968 billion).^[5]

Chinese renminbi[edit]

As a result of the rapid internationalization of the renminbi,^[6][7] it is currently the world's 8th most widely traded currency.^[8]

Recent proposals (21st Century)[edit]

Governmental[edit]

On 16 March 2009, in connection with the April 2009 G20 summit, the Kremlin called for a supranational reserve currency as part of a reform of the global financial system. In a document containing proposals for the G20 meeting, it suggested that the International Monetary Fund (IMF) (or an Ad Hoc Working Group of G20) should be instructed to carry out specific studies to review the following options:

• Enlargement (diversification) of the list of currencies used as reserve ones, based on agreed measures to promote the development of major regional financial centers. In this context, we should consider possible establishment of specific regional mechanisms which would contribute to reducing volatility of exchange rates of such reserve currencies.
• Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community."^[9][10]

On 24 March 2009, Zhou Xiaochuan, President of the People's Bank of China, called for "creative reform of the existing international monetary system towards an international reserve currency," believing it would "significantly reduce the risks of a future crisis and enhance crisis management capability."^[11] Zhou suggested that the IMF's special drawing rights (a currency basket comprising dollars, euros, yen, and sterling) could serve as a super-sovereign reserve currency, not easily influenced by the policies of individual countries. US President Obama, however, rejected the suggestion stating that "the dollar is extraordinarily strong right now."^[12] At the G8 summit in July 2009, the Russian president expressed Russia's desire for a new supranational reserve currency by showing off a coin minted with the words "unity in diversity". The coin, an example of a future world currency, emphasized his call for creating a mix of regional currencies as a way to address the global financial crisis.^[13]
On 30 March 2009, at the Second South America-Arab League Summit in Qatar, Venezuelan President Hugo Chavez proposed the creation of a petro-currency. It would be backed by the huge oil reserves of the oil producing countries.^[14]

Single world currency[edit]

An alternative definition of a world or global currency refers to a hypothetical single global currency or supercurrency, as the proposed terra or the DEY (acronym for Dollar Euro Yen),^[15] produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organizations) involved in the transaction. No such official currency currently exists.
Advocates, notably Keynes,^[16] of a global currency often argue^[16] that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many^[16] argue that a single global currency would make conducting international business more efficient and would encourage foreign direct investment (FDI).
There are many different variations of the idea, including a possibility that it would be administered by a global central bank that would define its own monetary standard or that it would be on the gold standard.^[17] Supporters often point to the euro as an example of a supranational currency successfully^{[dubious – discuss]} implemented by a union of nations with disparate languages, cultures, and economies. Alternatively, digital gold currency can be viewed as an example of how global currency can be implemented without achieving national government consensus.
A limited alternative would be a world reserve currency issued by the International Monetary Fund, as an evolution of the existing special drawing rights and used as reserve assets by all national and regional central banks. On 26 March 2009, a UN panel of expert economists called for a new global currency reserve scheme to replace the current US dollar-based system. The panel's report pointed out that the "greatly expanded SDR (special drawing rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity."^[18]
In addition to the idea of a single world currency, some evidence suggests the world may evolve multiple global currencies that exchange on a singular market system. The rise of digital global currencies owned by privately held companies or groups such as Ven^[19] suggest that multiple global currencies may offer wider formats for trade as they gain strength and wider acceptance.

Difficulties[edit]

Limited additional benefit with extra cost[edit]

Some economists argue that a single world currency is unnecessary, because the U.S. dollar is providing many of the benefits of a world currency while avoiding some of the costs.^[20] If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.

Economically incompatible nations[edit]

In the present world, nations are not able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created. A world currency might even undermine national sovereignty of smaller states.

Wealth redistribution[edit]

The interest rate set by the central bank indirectly determines the interest rate customers must pay on their bank loans. This interest rate affects the rate of interest among individuals, investments, and countries. Lending to the poor involves more risk than lending to the rich. As a result of the larger differences in wealth in different areas of the world, a central bank's ability to set interest rate to make the area prosper will be increasingly compromised, since it places wealthiest regions in conflict with the poorest regions in debt.

Usury[edit]

Usury – the accumulation of interest on loan principal – is prohibited by the texts of some major religions. In Christianity and Judaism, adherents are forbidden to charge interest to other adherents or to the poor (Leviticus 25:35–38; Deuteronomy 23:19). Islam forbids usury, known in Arabic as riba.^[21]
Some religious adherents who oppose the paying of interest are currently able to use banking facilities in their countries which regulate interest. An example of this is the Islamic banking system, which is characterized by a nation's central bank setting interest rates for most other transactions.^{[citation needed]}

See also[edit]

• Dollar hegemony
• List of currencies
• List of circulating currencies
• Monetary hegemony
• Special drawing rights (SDRs)
• Wocu
• World currency unit

References[edit]

1. Jump up ^ Ray Woodcock (1 May 2009). Globalization from Genesis to Geneva: A Confluence of Humanity. Trafford Publishing. pp. 104–105. ISBN 978-1-4251-8853-5. Retrieved 13 August 2013. 
2. Jump up ^ Thomas J. Osborne (29 November 2012). Pacific Eldorado: A History of Greater California. John Wiley & Sons. p. 31. ISBN 978-1-118-29217-4. Retrieved 13 August 2013. 
3. Jump up ^ "The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the US Dollar ?", Catherine R. Schenk, Canadian Network for Economic History conference,10/2009
4. Jump up ^ Lim, Ewe-Ghee (June 2006). "The Euro’s Challenge to the Dollar". In San Jose, Armida. Statistics Department. IMF Working Paper (Technical report) (International Monetary Fund). Retrieved 9 February 2013. 
5. Jump up ^ FT.com / MARKETS / Currencies – Euro notes cash in to overtake dollar
6. Jump up ^ Wagner, Wieland (26 January 2011). "China Plans Path to Economic Hegemony". Der Spiegel. 
7. Jump up ^ Frankel, Jeffrey (10 October 2011). "The rise of the renminbi as international currency: Historical precedents". Voxeu.org. 
8. Jump up ^ "RMB now 8th most traded currency in the world". Society for Worldwide Interbank Financial Telecommunication. Retrieved 10 October 2013. 
9. Jump up ^ Russian Proposals to the London Summit (April 2009). Kremlin website. 16 March 2009. Retrieved 25 March 2009.
10. Jump up ^ At G20, Kremlin to Pitch New Currency. Moscow Times. 17 March 2009. Retrieved 25 March 2009.
11. Jump up ^ China presses G20 reform plans. BBC News, 24 March 2009. Retrieved 25 March 2009.
12. Jump up ^ Obama rejects China's call for new global currency. AFP, 25 March 2009. Retrieved 25 March 2009.
13. Jump up ^ Pronina, Lyubov (10 July 2009). "Medvedev Shows Off Sample Coin of New ‘World Currency’ at G-8". Bloomberg. Retrieved 18 November 2010. 
14. Jump up ^ Chavez to seek Arab backing for `petro-currency'
15. Jump up ^ "There's a New 'Dey' Coming!"
16. ^ Jump up to: ^{a b c} "related sites". Singleglobalcurrency.org. Retrieved 18 November 2010. 
17. Jump up ^ A Single Global Currency
18. Jump up ^ UN panel touts new global currency reserve system. AFP, 26 March 2009. Retrieved 27 March 2009.
19. Jump up ^ "The dollar alternatives – Ven (4) – FORTUNE". CNN. 21 July 2010. Retrieved 18 November 2010. 
20. Jump up ^ [1]^{[dead link]}
21. Jump up ^ "The facts about usury : Why Islam is against lending money at interest". Mustaqim.co.uk. Retrieved 18 November 2010. 

External links[edit]

• Global Imbalances and Developing Countries: Remedies for a Failing International Financial System, Jan Joost Teunissen and Age Akkerman (eds.), 2007, downloadable pdf book
• Single Global Currency Association.
• A Single Global Currency? Sure, why not. But, only if it's Gold and Silver Bullion!.
• Illustrated map "Money of the states of the world"
• World Currency site.
• Money.cnn.com

• Towards a world currency: world monetary standard and world monetary institution

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Retrieved from "http://en.wikipedia.org/w/index.php?title=World_currency&oldid=604113982"

Categories:

• Foreign exchange market
• Economic integration
• Economic globalization
• International finance
• Monetary hegemony
• World government

Martin Wolf Proposes the Death of Banking

Posted by Frances Coppola on Apr 25th 2014,   
Blog Ref Link http://www.p2pfoundation.net/Transfinancial_Economics   

The distinguished economic journalist Martin Wolf has suggested (£) that banks should be stripped of their ability to create money when they lend. Endorsing “100% reserve banking” as outlined by, among others, the IMF, Lawrence Kotlikoff and Positive Money UK, he calls for all money to be created by the state and banks to be reduced to pure intermediaries. He explains how this would work thus:
First, the state, not banks, would create all transactions money, just as it creates cash today. Customers would own the money in transaction accounts, and would pay the banks a fee for managing them.
Second, banks could offer investment accounts, which would provide loans. But they could only loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are. Holdings in such accounts could not be reassigned as a means of payment. Holders of investment accounts would be vulnerable to losses. Regulators might impose equity requirements and other prudential rules against such accounts.
Third, the central bank would create new money as needed to promote non-inflationary growth. Decisions on money creation would, as now, be taken by a committee independent of government.
Finally, the new money would be injected into the economy in four possible ways: to finance government spending, in place of taxes or borrowing; to make direct payments to citizens; to redeem outstanding debts, public or private; or to make new loans through banks or other intermediaries. All such mechanisms could (and should) be made as transparent as one might wish.
 The three proposals Wolf cites are actually very different from each other. The IMF’s paper “Chicago Plan Revisited” is a strict 100% reserve banking proposal, in which all deposits, irrespective of the risk appetite of the depositor, are backed by central bank reserves. It is accompanied by a full debt jubilee plan to eliminate household debt, leaving banks to lend only for business investment.
I’ve previously written a detailed critique of the IMF’s paper. To summarise, though, the paper does not give sufficient consideration to the implications for commercial banking. There are four principal problems:
·         banks would have to clear all lending decisions with the central bank in advance in order to obtain funding: lending decisions would therefore in reality be made by government (the IMF’s paper regards the central bank as part of government) .
·         banks would have to borrow from the central bank to fund lending – they could not borrow from each other, even though they would have large amounts of idle money lying around on their balance sheets earning nothing.
·         banks would have to pay fees to the central bank for the reserves required to back deposits, even though deposits are a cost for them (the IMF in effect proposes permanently negative interest on REQUIRED reserves).
·         margins on what little lending remained after the debt jubilee would be painfully low, because the paper assumes that businesses would alternatively be able to obtain finance in the capital markets at similar rates to the yield on government bonds.
This cannot in any way be considered a profitable business model.  In my critique I concluded that this proposal would mean the death of commercial banking:
As far as I can see, in this model it is virtually impossible for private banks to be profitable. In which case they would soon cease to exist, and government would be forced to create state banking facilities to replace them. The question is, why did the authors stop short of recommending full nationalisation of the banking system, since that is the only way the model could work in the longer term? The authors think that private banks funding long-term investment projects is a Good Thing, but they offer no explanation for this belief. Could it be that they have retained private banks in their model because recommending a move to a wholly state-owned system would not be taken seriously by most economists and politicians?
But such a strict 100% reserve banking approach is not actually what Wolf is suggesting, despite his comment that the IMF researchers' approach “could work well”. His idea is much closer to the other two proposals, both of which I have also written about.
Kotlikoff envisages a disintermediated banking system in which banks “market” various types of funds but do not themselves do credit intermediation or maturity transformation. Depositors who want no risk would place their money in money funds fully backed by safe assets (government debt): they would have guaranteed safety but very little return on their investment. Depositors wanting higher returns would have a range of funds to choose from representing varying amounts of risk: capital allocation (lending) would be done by the funds in accordance with their portfolio management strategies. The US banking system is already well down the disintermediation road anyway, so to an American customer base it would make complete sense for banks simply to market funds rather than compete with them.
But there is a problem. The functions that distinguish “banks” from other financial institutions are credit intermediation (deposit-taking and lending) and maturity transformation (borrowing short, lending long). Once banks no longer do either of these, they cannot be regarded as banks. They are simply shops. Once again, we are faced with the death of commercial banking.
The third proposal, from Positive Money UK, is actually the closest to Wolf’s ideas. Though there are differences. Rather than backing deposits with central bank reserves as Wolf suggests, Positive Money UK simply cut out the middleman. They propose that transaction accounts should be on the books of the central bank. Commercial banks would only hold risk-bearing investment accounts, from which they could lend. It’s a neat idea, and unlike the other two proposals – both of which completely ignore the crucial role of banks in facilitating payments - it does recognise that transaction accounts and interest-bearing time or sight deposits serve very different purposes. Both Wolf and Positive Money UK envisage banks charging customers fees for payments and account management. This does, of course, mean the end of “free while in credit” banking.
But once again, there is a problem. Banks are not fund managers. People who want to put money at risk for a return don’t generally put it in banks: they invest it in funds or manage their own portfolio. People put money in banks for two reasons:
·         because they want safety AND a return
·         because they need liquidity (including access to payments systems)
Wolf recognises the second of these, but not the first. I fear that the “investment accounts” he and Positive Money UK envisage would disappear like the morning mist once the deposit insurance that time and sight deposit accounts currently enjoy is removed. Positive Money UK's proposal therefore probably means the end of commercial banking, unless they could find other sources of funding. In Wolf's world, commercial banks could survive for a while as pure deposit-takers, but as mobile money platforms reduced their fees to undercut the banks now forced to charge transaction fees, and quasi-banks offered supposedly safe liquid depositary services for a better return than the banks now unable to pay interest on safe deposits, they would eventually wither and die.
But it is perhaps more likely that commercial banks would find ways of lending without relying on customer deposits for funding. Since heavy reliance on wholesale funding is now penalised by regulators, asset-backed securities issuance seems the most obvious choice: Santander UK already funds quite a bit of its lending with covered bonds. But there is another possibility too – and that is a vast increase in the amount of equity that banks hold. Equity is funding: if banks are prevented from using debt to fund lending, they are forced to use equity. Weirdly, we might find banks choosing to adopt Admati& Hellwig’s proposal for much larger equity cushions, just so they can lend at all. After all, as Northern Rock discovered, relying on asset-backed securities issuance for funding has a very big problem: asset-backed securities are by nature illiquid and there is no guarantee that anyone will buy them anyway. At least shareholders’ funds are money you already have, rather than money you hope to receive. Though - returning to my definition of banks' distinguishing functions as being credit intermediation and maturity transformation - if banks only lend shareholders' funds, can they really be said to be banks at all?
This brings me to the heart of Wolf’s proposal. Wolf thinks banks should only be able to lend money they already have, not money they hope to receive: in the absence of loanable deposits, this tends to force banks down the equity funding route because of the inherent illiquidity of other forms of stable funding. But as I explained in my critique of the IMF paper, money creation through bank lending is an inevitable consequence of double entry accounting, and preventing it is by no means as simple as Wolf suggests. Completely eliminating fractional reserve lending means removing banks’ responsibility for lending decisions. Yet again, we face the death of commercial banking.
But my bigger concern is this. Wolf’s idea amounts to replacing a demand-driven money supply creation mechanism with central planning of the money supply by a committee.  Central banks’ record on producing accurate forecasts of the economy is dismal, and their response to economic indicators is at times highly questionable. Put bluntly, they get it wrong – very wrong, at times: consider the ECB raising interest rates into an oil price shock in 2011. Is the entire lifeblood of the economy to be dependent on the whims of such as these?
Some people suggest an algorithm-driven mechanism whereby the money supply automatically adjusts in response to economic indicators such as NGDP or money velocity. This is a neat idea, but it suffers from the problem of accuracy and timeliness of information. GDP is a flawed measure which is subject to constant revision. So is inflation. So is money velocity. And all of them are lagging indicators. How can the future money supply needs of the economy be accurately estimated using these?
Personally I would prefer the money supply to respond to demand rather than be decided by a committee, or an algorithm for that matter.  I don’t in theory have a problem with removing the link between bank lending and money creation: bank lending is by nature pro-cyclical, so the money supply does tend to expand when it really should contract and vice versa. But until someone can identify a better indicator of demand for money, bank lending – or perhaps better, lending activity in the financial system as a whole, including non-bank lending – is the best we have and certainly a lot better than the MPC. The system we have is undoubtedly flawed, but Wolf’s alternative is a whole lot worse.
Related reading:
The shoebox swindle – Coppola Comment
The shoebox shortage – Coppola Comment
The nature of money – Coppola Comment
Do we really care who creates money? – Coppola Comment
The negative carry universe – FT Alphaville
Image: Comely Bank cemetery, Edinburgh
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“Strip private banks of their power to create money”: Financial Times’ Martin Wolf endorses Positive Money’s proposals for reform

Written by Ben Dyson (Positive Money) on April 24, 2014.

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Positive Money’s proposals have just been advocated by Martin Wolf, the chief economics commentator at the Financial Times, in an article entitled “Strip private banks of their power to create money“:

“Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.”

Wolf highlights the fact that the ability of banks to create money requires governments and taxpayers to underwrite the banking system:

“Banking is therefore not a normal market activity, because it provides two linked public goods: money and the payments network. On one side of banks’ balance sheets lie risky assets; on the other lie liabilities the public thinks safe. This is why central banks act as lenders of last resort and governments provide deposit insurance and equity injections. It is also why banking is heavily regulated. Yet credit cycles are still hugely destabilising.”
“What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. … A maximum response would be to give the state a monopoly on money creation.“

The article then refers to Modernising Money, the book that we published in early 2013, and gives an overview of our proposals (summarised below):

• The state, not banks, would create all money. Customers would own the money in transaction accounts (which would never be put at risk), and would pay the banks a fee for providing payments services.
• Banks would also offer investment accounts, which fund loans. But banks could only lend money that was actively invested by customers. They would no longer be allowed to create new money out of thin air.
• The central bank would create new money as is necessary to promote non-inflationary growth.
• Decisions on how much money would be taken by a committee independent of government (much like the Monetary Policy Committee).
• Finally, new money would be injected into the economy via a) government spending, b) tax cuts, c) to make direct payments to citizens, d) to pay down existing debts – national or public, or e) to make new loans through banks or other lending firms (such as peer to peer business lenders).

Wolf highlights some of the benefits of this reform:

“The transition to a system in which money creation is separated from financial intermediation would be feasible, albeit complex. But it would bring huge advantages. It would be possible to increase the money supply without encouraging people to borrow to the hilt. It would end “too big to fail” in banking. It would also transfer seignorage – the benefits from creating money – to the public. In 2013, for example, sterling M1 (transactions money) was 80 per cent of gross domestic product. If the central bank decided this could grow at 5 per cent a year, the government could run a fiscal deficit of 4 per cent of GDP without borrowing or taxing. The right might decide to cut taxes, the left to raise spending. The choice would be political, as it should be.”

He points out only 10% of UK bank lending actually goes to businesses, meaning that restricting the level of bank lending doesn’t have to mean that businesses will suffer. (Speculative credit to property bubbles and financial markets could be restricted whilst preserving credit to businesses).
Wolf summarises by saying that:

“Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.”

Wolf concludes that the although this change won’t come about immediately, we should remember the possibility of making these changes, because “When the next crisis comes – and it surely will – we need to be ready.”
Naturally, we’ll be working to try to bring about this change before the current system causes another crisis.