Sat Mar 21st, 2009 at 06:36:44 AM EST
An answer to this question has turned into a Diary....
So you think the ultimate pain of a total crash is unavoidable? That we're not just looking at a lost decade of stagnation?
That table shows (and it is only dollar denominated debt) the cosmic scale - 150 trillion dollars - in which interest-bearing credit (aka money) was created by banks and and re-based on non-Bank/Investor capital - the "off-balance sheet items" to which the table refers.
I think that a complete crash may be avoidable, but at:
(a) huge geo-political cost to debtor nations; and
(b) huge financial cost to creditor nations, as the dollar (assuming that this continued to be the reserve currency) is "reset".
I think even though a "New Settlement" between debtor nations and creditor nations is possible then a long depression is still unavoidable. This is because even were sufficient capital to be redeployed in the banking system then the more "prudent" regime we are now seeing will mean that the previous "Peak" level of credit (and hence asset prices) will never be seen again.
The point is that the problem is not the system's ability to create credit. The problem is the shortage of "creditworthy" individuals, who have seen wealth inexorably transferred (the Anglo Disease) to the richest.
So I see two things as necessary.
Firstly, a predistribution of Capital and the unearned income that goes with it, rather than redistribution through taxes on earned income.
I advocate as a mechanism systemic fiscal reform. By this I mean a transition from taxes on people to taxes on the privileges of "private" ownership of Commons, and of limitation of liability.
Secondly, a change in the nature of credit by making it "open-ended". ie un-dated (essentially it then becomes quasi-Equity).
This would remove the unsustainable repayment obligation of dated debt. There would be a payment for the use of this open credit, firstly to cover system costs, and secondly to cover defaults, because some people would not even be able, or maybe willing, to pay this use cost.
The payment would be made by both sellers and buyers on credit terms, since both use the system and both benefit from Society's guarantee.
Open-ended credit through "redeemable" obligations is not difficult. That is what Bank notes are already. The difference is that the open-ended electronic obligations I have in mind would not be redeemable with another piece of paper backed by income taxes.Instead, it would be redeemable in land rental value (nationally) and energy value (internationally), and the backing for such issue by Treasuries would of course be the very taxes on the privileges of private use of land and energy Commons we would achieve through fiscal reform.
In terms of a new settlement we currently see initiatives to capitalise the International Monetary Fund so it can issue "Special Drawing Rights" denominated in dollars.
These are of course intended for Quantitative Easing - of the Rich - and will disappear down the cosmic monetary Black Hole starkly illustrated in the table. The whole point of QE is to bail out the rich. Monetary measures are useless, as I am sure those in power must know, but why not make out like bandits while you can?
Until the twin issues of capital distribution (creditworthiness of the many), and the basis of the money we use are addressed there can be no long term solution.
My proposal would be for the IMF facility to be funded in dollars, but denominated in Units of energy (Energy Dollars?) through the creation of Units redeemable in a fixed amount of energy. This fund would then be used for a global Green New Deal, allowing the US to repay its massive energy debt to the rest of the world through redeploying its military industrial complex into global (and local) investment in renewable energy and energy efficiency. A networked International Energy Clearing Union would be the means through which such an "Energy Dollar" would circulate and be invested.