Sovereign Money Critique

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Fuzzy Thinking: Why Positive Money (UK), the American Monetary Institute (AMI), the Chicago Plan, Modern Monetary Theory (MMT) and all “sovereign money” movements are misguided

by Paul Grignon

I claim the so-called “sovereign money” monetary reform movements are all misguided. That is because they mistake the root of the problem for the remedy. They do this because of habitual educational and ideological blinders which result in a stubborn refusal to think through the logical repercussions of lending in a limited “money supply”, regardless of its source. Instead, like the professional economists whose abysmal track record bespeaks a fundamental incompetence, they resort to a magical fallacy I call “fuzzible money” that allows them to avoid calling into question the assumptions that form the foundations for their presumably well-meaning but provably futile reform proposals.

Recently I had the experience of debating by email, the author of “Debunking Economics”, prominent economist and endogenous money theorist, Professor Steve Keen and Mr. Joe Bongiovanni, the designated spokesperson for the American Monetary Institute (AMI). Both agreed to refute my claims in the context of defending AMI’s proposals.

Theories are proven by trying to refute them

The scientific method is to postulate a theorem and then make every honest attempt to prove the theorem wrong. If it can’t be refuted, it stands as the “scientific truth” until it can be disproved or improved upon. It was in this spirit of scientific proof that I invited a veritable who’s who of the alternative economics and money reform intelligentsia, most of them well known, to refute any of the information, assumptions, logic and/or arithmetic in the 5-page thesis that is currently on the home page of my website at

That list included the aforementioned Professor Keen and Joe Bongiovanni, Ben Dyson and Graham Hodgson of Positive Money in the UK, Elizabeth Kucinich, Govert Schuller and founder, Stephen Zarlenga of the American Monetary Institute (AMI), Ellen Brown of Public Banking, and a variety of other well known activists and authors on the subject of economic and monetary reform – Bernard Lietaer, Thomas Greco, Hazel Henderson, Catherine Austin Fitts, and David Korten among them.

Only Bongiovanni and Keen engaged me. The rest remained silent. Graham Hodgson dropped out after telling me how woefully wrong and misguided I am. Bongiovanni repeatedly misinterpreted my words to the extent that he more than once “corrected” me by repeating what I had already said, as if I had said the opposite. Keen claimed he could easily prove my error but never did.

For two weeks, Keen and Bongiovanni obstructed my every effort at communication. Keen repeatedly demanded I prove my case with double-entry bookkeeping, which I did three times over, only to have my proofs completely ignored and demanded again as if for the first time. I was shocked.

In the end, both men got creative at insulting me but neither of them could refute my grade school arithmetic and simple, to my mind irrefutable, logic. Here are Professor Keen’s parting words, a clear admission that he did not refute my theorem.

Keen: “when I have some spare time I’ll take on your misconceptions in a genuine mathematical critique of your silly arithmetic… the only question for me is whether I can be bothered wasting the time to prove you wrong. At the moment, the answer to that question is no. When it’s yes, I’ll write a blog post on the topic. Until then I can’t be bothered reading any more emails from you.”

Here is Keen from his article published in Forbes magazine of April 2015.

Keen: “Despite its massive empirical failure, mainstream economists have a methodology that they don’t want to abandon… and any criticism is dismissed rather than considered seriously.”

I first challenged Professor Keen to scientifically refute my theorem in 2009. I have been challenging the entire 13,500 strong World Economics Association (WEA) to refute my theorem since 2010. The WEA published my paper on the subject in 2013, but now I have apparently been banned from commenting on the WEA blog on any topic.  A recent search of Keen’s blog and the Internet didn’t bring up any attempt at refutation by anyone.

As for AMI’s representative, he never stopped misinterpreting everything I wrote. Communication was impossible. He left the debate apparently very satisfied with himself.

Bongiovanni: “I do think I know more about ‘money systems’ than you do, and your Grig-constructed scare-mongering doesn’t stick with me. I see it for what it is…… un-educated and mis-informed, illogical jibberish.” (sic)

Fundamental error

The useful and enlightening part of the whole exercise is that, in the process, the fundamental error in Keen’s and Bongiovanni’s thinking, seemingly shared by all in their profession and the field of money reform, was clearly revealed in their own words.

Bongiovanni: “…it is not possible to re-lend ‘principal’,… Principal ceases to exist upon spending, and fungible ‘monies’ circulate in national economies... Therefore “recursive principal re-lending” is a mere figment of the Paul Grignon imagination… What is true is that savings enable EQUIVALENT lending…” (emphasis mine)

“Equivalent lending” is precisely what I had been referring to from the outset of the debate.  I sent them my article The Confusion about Savings  as well as several alternate logical proofs explaining the “equivalent lending” process in detail. But, here, Bongiovanni acts as if he is correcting me when he finally concedes the point I was making all along.

“Equivalent lending” is “principal re-lending”

“Principal re-lending” is mathematically identical to “equivalent lending” and is the more useful and truthful concept because it also includes non-bank lenders in the model. Those who have become recently infatuated with ”endogenous money” forget that most of this money, some of it in existence for 20 even 30 years, will, in the interim, be saved and lent several times as “loanable funds”, sometimes in succession and sometimes simultaneously.

The Proof
Only grade school arithmetic is required to follow this proof.

1. Borrower B1 creates $100,000 as a 20-year mortgage.
2. During that 20 years $50,000 of it is deposited permanently in other people’s term deposit savings.
3. Term deposits are NOT current liabilities of the bank. No one can spend or transfer this money.
4. Therefore, the bank can replace the $50,000 with new “equivalent” lending to Borrower B2.
5. Available money is only cash and the current liabilities of banks not term deposits.

The result of “equivalent lending” by the bank as Joe correctly conceives of it, is an excess of principal debt over the money available to pay it, as follows.

Total debt = (B1 $100,00 + B2 $50,000 ) = $150,000   Total money available to pay it = $100,000

The result of “principal re-lending” as I prefer to conceive of it, is the same. There is no difference and never could be.

Total debt = (B1 $100,00 + B2 $50,000 ) = $150,000  Total money available to pay it = $100,000

Money is created as debt and re-lent as “loanable funds”

If a non-bank lender, be it an institution, business or individual lends the balance of their bank account to a borrower directly, without the bank being the intermediary, then the concept of “loanable funds” is completely accurate. No new money was created in the process of making the loan.

Therefore, in our example, the saver of the $50,000 could just as easily be a non-bank lender who then lent the $50,000 to Borrower 2 directly.

Non-bank lenders can and do lend money they own outright. Strangely, it took the whole first week of debate to get Keen and Bongiovanni to comprehend the idea that non-banks are not just conduits for on-lending new bank credit. The money they lend can be their own free and clear.

The result of non-bank lending of the $50,000 of loanable funds is that $50,000 of new principal debt has been created but no money was added to the available money supply to pay it. It also follows that, if the non-bank lender and its successors lend this bank credit money indefinitely, then the bank credit money needed to extinguish the debt that created it will be indefinitely unavailable, except as another loan.

Bank term depositors are essentially non-bank lenders as well. If the saver of the $50,000 chooses to lend via the bank as an intermediary, $50,000 is subtracted from available money and $50,000 of new debt-money is created in its place. The NET result is that $50,000 of new principal debt was created but no money was added to the available money supply to pay it – exactly the same.

However one chooses to conceive of it, the arithmetic clearly shows that the $50,000 of savings result in a $50,000 shortage of money with which to extinguish the $50,000 of principal debt that created it.  Finally, Keen and Bongiovanni were forced to concede the obvious – there would be a real principal shortage of $50,000 IF the savers never spent their $50,000 of savings.

Keen: “As someone who does this for a living, I can tell you that the only one of your questions that matters–and that is also absurd–is the second: what if the term deposit saver doesn’t spend the term deposit? Then of course the economy would collapse.”


Keen was repeatedly presented with Page 2 of my thesis, the chart of M1 (checking and cash) and M2 (M1 plus term deposit savings), evidence provided by the Federal Reserve itself, which shows that, in the aggregate, savers don’t spend their savings, and the economy does periodically collapse as a result of new debt-money going into savings and never, in the aggregate, being spent. I even tracked the correlation in detail below the timeline.

The chart very clearly shows that normally, about 3/4 of all the “money” in existence, cash and bank credit, on which borrowers are making interest and principal payments, is locked away in term deposits AT ALL TIMES.

It makes no difference if one saver spends his savings as another puts his away. It’s all fungible. Any dollar can pay off a debt of a dollar. But, equally true is that every dollar is created as, and continues to be attached to the debt that created it until extinguished by a principal payment. There is no “money” – only debts.

Bank credit is like a yo-yo spun out into circulation, and then reeled back in according to the repayment schedule. This is a fact that AMI’s Joe Bongiovanni emphatically denies (see quote above) and Professor Keen overlooks entirely, in direct and illogical contradiction of his own “endogenous money” teachings.

How is it even possible for M2 to be 4 times M1?

Looked at accurately, the evidence plainly shows a huge shortage of available money (M1) relative to total principal debt (M2) because, on average, M2 = 4 M1.

In fact, how is it even possible for M2 to be 4 times M1? If savings have been replaced with “equivalent lending” which all starts as M1, where did it all go? The only possible mathematical answer is that the same created M1 principal has been earned, saved as a term deposit and re-lent (replaced) 3 times over.


Why don’t economists see this chart the same way I do? The answer is both simple and deeply mysterious. Some switch is thrown in their heads that magically transforms scheduled debts-to-banks into “fungible monies” merely by the act of being spent.

Bongiovanni: “Principal ceases to exist upon spending, and fungible ‘monies’ circulate in national economies…”

This leads to the conventional misconception of M2 as the “total money supply”.

Economists all seem to conceive of M2 as a squirrel conceives of a pile of nuts. It is all assets, with M1 (cash and checking) being that portion of the pile of nuts actively traded among the squirrels.

In reality, M2 is a mountain of endogenous money – scheduled debts-of-itself to banks, most of which (M2 minus M1) is perpetually unavailable to the borrowers that created it. This makes the payment of current debt-to-banks entirely dependent on the rate of creation of new debt-to-banks.

“Black Hole” Growth Imperative

Any slowdown in the creation of new debt-to-banks, for any reason, will cause mathematically inevitable defaults due to the actual shortage of available principal. Thus is created a mathematically-driven imperative for perpetual growth of debt-to-banks that is inherent to the structure of the banking system itself.

By design, the banking system is a mathematical trap, a black hole of increasing indebtedness from which there is no escape. “Economics” is the smokescreen of confused thinking, arcane terms, needless complexity and outright nonsense that prevents this mathematical trap from being discerned by the public and politicians.

“Complexity is often a device for claiming sophistication, or for evading simple truths.” John Kenneth Galbraith, economist and author, The Sydney Morning Herald, 1982

Fallacy of composition

Keen: “But this is extrapolating what can happen with one borrower–we’ve all known misers–to an entire economy. That’s a fallacy of composition. A single saver might never spend: then his heirs (or the state) get the money and spend it.”

I began and ended with empirical evidence about the macroeconomic aggregate provided by the Federal Reserve’s chart of M2 and M1.  At no point did I scale up from individual microeconomic behaviour. Therefore the possibility of a “fallacy of composition” on my part doesn’t even exist.

Keen, on the other hand, commits a blatant fallacy of composition. He posits that the individual saver always eventually spends his savings one way or another. He then extrapolates that idea to the unjustified and illogical macro level conclusion – that all created principal will eventually be available to the borrowers that need it to extinguish their debts. He presents this fallacious argument in direct contradiction of the empirical macroeconomic evidence I put in front of him.

The Magical Fallacy:  “Fuzzible Money”

The chart of M2 and M1, interpreted correctly, shows that every dollar available as a means of payment in M1 (cash plus the current liabilities of banks) is simultaneously owed to at least four lenders: the bank that created it and 3 savers  (M2 minus M1 – the deferred liabilities of banks to term depositors). These figures do not include the debts owed to private lenders, which are both unknown and unknowable.

According to Keen there is “no systemic problem for the money system or the economy”.

Keen: “Your deficit for B1 occurs because he has only loans in and money out–in other words he borrows, spends, and then doesn’t receive any income. And it’s only B1 who has a deficit–not the entire economy where Assets (Loans) equals Liabilities (Deposits). So only B1 is in trouble because he’s borrowed too much money and had no income.”

The Professor apparently expects the borrower to earn this income from Bongiovanni’s pool of “fungible monies” that “circulate in national economies”. That pool must be on some other chart – an imaginary one. There is no pool of “fungible monies” in the real chart. Savings are only “fungible monies” if they are spent. Otherwise they are impossible principal debt – BY DESIGN.

It is precisely because bank Assets (Loans) equal Liabilities (Deposits) that the “missing” $50,000 that borrower B1 earns from M1 must be someone else’s $50,000 scheduled DEBT-to-a-BANK. That means it is already owed to a bank and maybe several “loanable funds” lenders simultaneously. If Borrower B1 obtains his $50,000, which I have always assumed he is capable of doing, each of the other borrowers will be $50,000 short on their repayments. The potential total default at M2 = 4M1 is $150,000. The potential total default at M2 = 5M1 is $200,000. Recursive re-lending (replacing) of the same money multiplies the potential defaults.

The real chart, interpreted accurately and truthfully, and in accordance with the facts and assumptions that both Keen and Bongiovanni conceded were correct, shows a mountain of impossible principal debt, caused by the very design of banking.

In the real world, impossible principal debt is in dynamic equilibrium with the default rate which clears the impossible debt through foreclosures, bankruptcies, bank and business failures.

Savings create the “Grow or Collapse Imperative”

To repeat, because money in savings is unavailable as a means of payment, the rate of payment of current debt to banks becomes entirely dependent on the rate of creation of new debt to banks.  Any time the rate of new debt creation slows down, for any reason, people lose their homes, their jobs and their businesses by mathematical certainty – not by any fault of their own.

To claim that somehow the sub-prime crisis toppled the entire system of reliable lenders and borrowers is to see the causation backwards. The unprecedented degree of the 2008 Crash was foreordained by the unprecedented ratio of M2 = 5.26 M1. This mathematically-caused 4.26-fold shortage of available principal for repayment naturally took down the weakest “sub-prime” borrowers first. However, the extent of the damage was the result of the huge increase in recursive re-lending of debt-created principal, the logical result of increasing income inequality and huge corporate “cash balances”.

In simple terms, millions of vulnerable people lost their homes because other people re-lent the money that the borrowers created and needed to earn to pay off their debts. Once you have two or more principal debts of the same money, there is no escape except default. The only way to avoid mathematically-induced default is to maintain or increase the flow of new bank credit.

On page 2,  I track the correlation between the proportion of new debt-to-banks that went into savings and the resulting mathematically inevitable defaults. I provide logical arguments in defense of my theorem that make sense of the empirical evidence, providing both close correlation and a clear and simple explanation of causation.

Keen and Bongiovanni have, by their own admission, failed to refute my theorem. They rest their entire argument that they don’t need to refute my theorem on their belief in a pool of “fungible monies” that I have demonstrated is imaginary.

“Fiat Money Reformers” mistake the root of the problem for the remedy

As demonstrated on page 1 of my thesis, so-called “debt-free” fiat money would quickly be converted back to money-as-debt by the banking system, even in the impossible event of a total debt jubilee and complete equality in initial money distribution, income and savings rate. In the demonstration, each successive year, 5% of the money supply goes into savings – perpetual lending. After 20 years 100% of the money supply is a debt-of-itself. After less than 60 years all the formerly “debt-free” fiat money will be owed to 3 lenders simultaneously. The theoretically endless growth of impossible principal debt is limited by the real world default rate.

Making the “money supply” a government-controlled monopoly mistakes the root problem for the solution. The root problem is the single limited money supply itself. Recursive re-lending of fiat money would make the new system just as mathematically dependent on perpetual growth of the money supply as the current bank credit system, for exactly the same reasons. Thus such reform would ultimately be futile or worse.

The new system would lose the “free-market elasticity” that results from allowing the banks and the borrowers to create the money supply in response to real world demand for credit. Instead, government bureaucrats and ivory tower theorists would make these decisions according to their stated goal of restraining money creation according to GDP.

As demonstrated in this article, the mathematical need to feed the system with increasing amounts of new bank credit/debt is caused by the level of savings, entirely independent of GDP growth or shrinkage. So the managers of the money supply would continue to be surprised that their GDP-based models for the ideal “money supply” don’t work as expected and people would continue to periodically lose their homes and businesses en masse due to a shortage of new money creation.

And so, I conclude that “sovereign money” reform movements, if successful, would be dangerous to my personal well-being.

That said, I do agree with them that governments have monetary sovereignty. But I contend this is not because they are governments with some special entitlement to monetary sovereignty. It is simply because governments can spend money to provide services and then demand payment for those services.  Reliable demand creates credit. Reliable credit creates money.

If the concept of monetary sovereignty is recognized as simply that “demand creates credit creates money”, then we have the potential for the true rebirth of money – no longer as a medium of exchange made valuable by its own scarcity, but as a true measure of real abundance, goods and services to be created, at all levels of “monetary sovereignty” from the national to state, city, business and even the individual.  At whatever level, demand can create credit and credit can create money.

But first, those whose ideological commitment is to one monopoly national currency, as well as those who would return to gold, silver or any concept of money as a limited supply of anything including Bitcoin  and copycat crypto-currencies, need to realize that the root  problem is the primitive and no longer necessary concept of money as a limited supply of anything made valuable by its own scarcity.

As a first baby step in this direction try thinking through for yourself the process on page 1  of my proof.   Let me know if you get a different result. Or tell me why this model doesn’t apply.

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10 thoughts on “Sovereign Money Critique

  1. Hi, when was this post written? I´m looking up information about soverign money, and this is one of very few hits that actually reject sovereign money as a good idea. If this is so downright wrong, why isn’t there more material with the same argument to find anywhere else? I’m not an economist, so a lot of this is total Greek to me, but I have the impression that you are an economist neither. I have browsed through a report made in Iceland on the request of the Prime Minister. It sounds like a good idea and the report and the arguments are made by highly respected scholars. They recommend that Iceland converts to a sovereign money system. Have you read that report? here is the link


  2. The simple answer is that all of the others AVOID thinking about what happens to money between creation and destruction. I have been challenging these people to think about this since 2007. The debate reported on in this critique is the one time I managed to get them to put up their counter arguments which I have critiqued as illogical above.

    I have read the Iceland document, the Chicago Plan Revisited and the transition proposals of The American Monetary Institute, Positive Money, and the Canadian Action Party for which I briefly worked. ALL of them ignore what I point out in my critique. I have refuted their arguments with simple logic and facts, quoting from their own words in many cases, to which they respond with silence, name-calling or, as Steve Keen did above, with a clear admission of failure and a stated determination to ignore. Another document that completely ignores both the saving and lending of earned money is the Bank of England’s “Money Creation in the Modern Economy” my Critique of which will be published here very soon.

    I am not opposed to monetary sovereignty. I am opposed to a single monopoly money supply.
    My website is all about “monetary sovereignty” in a much larger sense than these national money monopolists mean it.


  3. I think you are wrong, Paul, becasue the “system” we are talking about is a global system and it is that which the international monetary reform movement seeks to change because until a nation can be in control of their own money, which would be a the first step toward decentralization, we will never be able to decentralize further. Your argument sounds like “lefter than thou” rhetoric. Look around, we have no power over public policy. I think it irresponsible to further confuse people on this critically important issue. Our government will not be our government until it bans private capital (money) creation and and begins to issue sovereign money to fulfill its Constitutional mandate as expressed in its first sentence. To defend privately issued money for personal gain, which is usury, one might think you are paid by the banking system or hoping they will. If you really support monetary sovereignty you should really support it and help it come to fruition. You seem to want to sneer at government but it is those with the money power who control it. Government is just a tool and like the tool of money, can be used to build or destroy depending on who controls the money.


    1. You answer logic and evidence with your own simplistic ideology and than accuse me of being “lefter than thou.” Later on you accuse me of defending private greed for promoting individual monetary sovereignty and is presumably “righter than thou?” BUT … if you had actually read my proposal you would know it has NOTHING to do with usury. It is the money Issuer that PAYS interest and only in the form of discounted prices on its goods and services.

      In my proposed utterly “global” system, monetary sovereignty belongs to whomever provides goods and/or services in demand. That obviously includes, as I have stated countless times, any level of government (all of them service providers) with the power to tax. So I fully support monetary sovereignty. It is you who fail to understand that it isn’t the solution if you limit it to one source … for purely mathematical reasons, which I have explained many different ways and no one has yet refuted. Like everyone else you changed the subject instead of proving me wrong. Worse still you accused me falsely based on your complete ignorance of my proposal.

      Lastly you claim that I “seem to want to sneer at government but it is those with the money power who control it. Government is just a tool and like the tool of money, can be used to build or destroy depending on who controls the money.”

      As I have demonstrated and you, with your ideological blinders firmly in place have chosen to ignore, the exact same problems would arise with sovereign money.


  4. Ideological blinders? You say “It is you who fail to understand that it isn’t the solution if you limit it to one source … ” I say no, it is the solution and 190 some nations issuing sovereign money is not a single source. That is my point. If you want to decentralize money creation we first need to end the current centralized global system which would require nation’s to claim their economic/monetary sovereignty while banning private capital creation for profit.(which IS usury) You call me simplistic and yet quote Galbraith on the fraudulent complexity of economics while you yourself are complicating things. IMV

    Also, creating/issuing money as debt is very different from lending that which was created/spent on the general welfare then being deposited in an investment/savings account. A sovereign money system will also put natural constraints on capital that is required to create a sustainable economy. You seem to imagine one can create a democratic monetary system without first winning a democracy.

    Money issued for the general welfare, putting money in people’s hands, would be invested very differently and would begin rebuilding local economies. I know lots of people who would be farmers, for instance, if they could afford it. I know people who work a part time job so they can farm part time. Others work shit jobs to pay their debts while dreaming of having their own small business or to pursue some art project or to take care of a loved one. What is missing is money in the real economy where people live due to the artificial scarcity of money created by the current privatized and centralized system that concentrates wealth and power while creating poverty.


  5. You seem to imagine one can create a democratic monetary system without first winning a democracy.

    I do. In fact, I believe that reclaiming our true monetary sovereignty (money is demand) is the only way to win real democracy. E.C Riegel wrote far more passionately than I of this back in the 1940’s. “Petitioning the government is like writing to Santa Claus”. I suggest reading some of Riegels’ writings for the most opposite view you can be exposed to. Then realize I am a moderate as I believe local governments should take the lead in issuing their own tax-debt money and set the example for private issuers.


  6. One of my favorite quotes is from E.C. Riegel “Political democracy can go no further in freeing man until it is itself emancipated by economic democracy whose sheathed sword is money.” Money, being a social power embodied in law, therefore is the rightful prerogative of self-government. So I am all for getting money down to the local level but to create the space to do that I think there will have to be a multi-national project to get it out of the hands of the globalists who destroyed those local economies in the first place. Local governments have been made dependent on the system.


  7. “Local governments have been made dependent on the system.”

    Local governments could spend credits against local taxes tomorrow. There is NOTHING stopping them except the lack of understanding of what money properly is. Whole Foods could do the same as could Toyota, as could your local farmers’ co-op.

    Waiting for some “multi-national effort” is truly “like writing to Santa Claus”.


  8. Not as understandable as you might think. I believe you have oversimplified by ignoring the micro side of things – lumping “savings” into one huge amorphous homogenous entity. “Wealth” is not created by the presence of money but exists as an inherent attribute of human ingenuity, talent and effort. Money will be created to access the fruits of those endeavors. The product of those human activities may take the form of dividends or interest – same thing. It represents the overall increase in wealth of human activity that in a well-conceived monetary system, will always be met with ample money to access it.


    1. “well-conceived monetary system”
      Apparently you didn’t follow the math and logic that proves it is not a well-conceived money system because, BY DESIGN, it creates MULTIPLE CONCURRENT PRINCIPAL DEBTS of the SAME MONEY.


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