So there is a magic wand after all. A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan...

...Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

why is this coming out of the IMF?

Originally posted by magma
reply to post by ChaoticOrder

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So the reality is it could never work unless asset values were inflated to cover the shortfalls in losses in the absorbtion.

Smells like sever hyperinflation to me.

Imagine the bad debt contingency

The IMF held 90.5 million ounces (2,814.1 metric tons) of gold at designated depositories at mid-August 2012. The IMF’s total gold holdings are valued on its balance sheet at SDR 3.2 billion (about $4.8 billion) on the basis of historical cost. As of August 17, 2012, the IMF's holdings amounted to $146.1 billion at current market prices.

The IMF acquired its current gold holdings prior to the Second Amendment through four main types of transactions.
First, when the IMF was founded in 1944 it was decided that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represents the largest source of the IMF's gold.
Second, all payments of charges (interest on member countries' use of IMF credit) were normally made in gold.
Third, a member wishing to acquire the currency of another member could do so by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970–71.
And finally, member countries could use gold to repay the IMF for credit previously extended.

September 18, 2009, the IMF Executive Board approved gold sales strictly limited to 403.3 metric tons, representing one eighth of the Fund's total holdings of gold at that time.

Upon the announcement of the transition, due to the full buy-back of household debt by
the government, all households become unconstrained. We model previously distinct
households as identical post-transition by setting the population share parameter to
ωt = 1 from the transition period onwards. The new overall budget constraint correctly
reflects the inherited assets and liabilities of both household groups. In the transition
period households only pay the net interest charges on past debts incurred by constrained
households to the banking sector. The principal is instantaneously cancelled against
banks’ new borrowing from the treasury, after part of the latter has been transferred to
the above-mentioned restricted private accounts and then applied to loan repayments.
From that moment onwards the household sector has zero net bank debt30, while their
financial assets consist of government bonds and deposits, the latter now being 100%
reserve backed.

The critical feature of this model is that the economy’s money
supply is created by banks, through debt, rather than being created debt-free by the
government.
Our analytical and simulation results fully validate Fisher’s (1936) claims. The Chicago
Plan could significantly reduce business cycle volatility caused by rapid changes in banks’
attitudes towards credit risk, it would eliminate bank runs, and it would lead to an
instantaneous and large reduction in the levels of both government and private debt. It
would accomplish the latter by making government-issued money, which represents equity
in the commonwealth rather than debt, the central liquid asset of the economy, while
banks concentrate on their strength, the extension of credit to investment projects that
require monitoring and risk management expertise. We find that the advantages of the

Chicago Plan go even beyond those claimed by Fisher. One additional advantage is large
steady state output gains due to the removal or reduction of multiple distortions,
including interest rate risk spreads, distortionary taxes, and costly monitoring of
macroeconomically unnecessary credit risks. Another advantage is the ability to drive
steady state inflation to zero in an environment where liquidity traps do not exist, and
where monetarism becomes feasible and desirable because the government does in fact
control broad monetary aggregates. This ability to generate and live with zero steady
state inflation is an important result, because it answers the somewhat confused claim of
opponents of an exclusive government monopoly on money issuance, namely that such a
monetary system would be highly inflationary.