European Government Debt and Interest Payments for 2013

A couple of hours ago, Eurostat released the figures for European Public Sector Debt and Interest Payments for 2013. You can find them all at their website here. Once you get there, all you have to do to download the information is to follow these instructions
  • Select "Economy and Finance" then "Government Statistics" then "Government Deficit and Debt (gov_dd)"
  • Click on the little Excel file next to gov_dd_edpt1
  • Then you can chose what you want for the SECTOR via the little (+) sign (eg. General government (S13))
  • Next, you use the little (+) next to INDIC_NA to choose (eg. "Government Consolidated Gross Debt (GD), and/or "Interest" (D41))
  • Then use the (+) next to UNIT to choose (eg. Millions of Euros, Millions of Currency Units or %GDP)
  •  Click "UPDATE"
  • You can then download the data via an icon at the top.
Fear not - I've done it all for you, and compiled the data into this table. I provide figures for Government Gross Debt, Interest Payments in 2013, and cumulated interest payments for the period from 1995 through 2013. There are a few countries where the numbers for those cumulated interest payments are incomplete - they are the ones shown in red.

The headline news is that Eurozone Debt has now topped €9 trillion, while the Debt levels for all 28 EU countries is €11.39 trillion.  Both numbers are up 3.1% on 2012.

It's been another bonanza year for those who are holding on to all that debt. They have pocketed another €365 billion in interest payments (€279 billion if you just include the Eurozone).  This brings total interest payments for the period from 1995-2013 (the period for which Eurostat provides numbers) to €6.24 trillion. Anyone out there wondering why our governments are so heavily in debt?  Over 57% of Eurozone debt is entirely explained by those interest payments.

The details for individual countries are also interesting.  France's debt levels have increased by 4.6% from 2012 to reach €1925.3 billion. Italy is up 4.0% to €2069.2 billion. The UK's debt levels are up 3.0% to £1475 billion. But the record goes to Slovenia - up an impressive 31.8% to reach €25.3 billion.

A few countries actually managed to get their debt levels down a bit. Germany's debt dropped by 0.6% but is still a very impressive €2147 billion. The Czech Republic actually got its debt down by 7.6%.

But overall, interest payments are still costing European taxpayers 2.8% of total GDP. That's an awful lot of money to pay to banks who don't even have the money that they lend to governments. As the Bank of England stated clearly a few weeks ago, Banks just invent the money they lend out of thin air. And as I recently pointed out, they don't even need to have any capital to back up their loans when they make loans to Governments that are rated between AAA and AA-. That's because the risk-weighting of such loans is 0% (as defined by the Basel banking rules). They can literally create infinite amounts of public sector debt and just sit back and let the interest payments roll in.

What a wonderful system.....


Message to François Hollande : How to save over €50 billion in taxpayers money per year

Following the catastrophic results for the governing socialist party in last weekend's French municiple elections, François Hollande (the French president) has nominated someone from the  right-wing of his party as Prime Minisiter - Manuel Valls.

Valls is keen on balancing the budget using austerity - he said so clearly when he was a presidential candidate in the primaries in 2011 - so I think that we can look forward to €50 billion in cuts to the French goverment's budget in the next couple of years.

So, where could those cuts be made? Education? Research? Health? Transport? Housing? Energy?

I have a better suggestion. How about not paying the interest on public sector debt? That amounted to €52.2 billion in 2012. And the total from 1995-2012 came to €825.9 billlion. The numbers for 2013 will be coming out in the next couple of weeks, so I will be able to update the numbers again.

What I already know is that total government debt increased by a further 4.5% in the year to the end of 2013, to reach a total of €1925.3 billion. That's now 93.5% of French GDP - up from 90.6% at the end of 2012.

Even though the markets are being "kind" to the French government by only asking for interest at 2.25% on long-term loans, the fact is that any payment to the banking system is a total rip off. When Banks buy government bonds they create the "money" used to buy those bonds out of thin air. And, as I showed last week, they don't even have to have any capital to back them up, because according to the Basel regulations, lending to AAA or AA rated governments is zero rated for risk. It doesn't count.

This raises an interesting option. Suppose there was a friendly bank that was prepared to make loans to the French government at 0% interest over 100 years. Couldn't the French government then use those loans to pay off its debt - thus avoiding over €50 billion a year in pointless payments?

If a bank has bought French government debt with non-existant money, it follows that if the French goverment were to pay off that debt with equally non-existant money, the bank would be forced to write-off the debt. As you hopefully realize - money can be created when banks make loans, but it can also be destroyed when those loans are paid off.

But there's a problem. The fact is that most government debt is not held by banks. As soon as a bank buys government bonds (using money that it didn't have), it then sells those bonds onto things like pension funds, insurance companies, and overseas investors.

In fact, it's not easy to find out exactly who holds all that debt. But, in 2011, Reuters published a list of the 50 main holders of French debt, although it should be noted that this list doesn't include institutions such as Central Banks, which are not required to reveal their holdings. You can see that most of the players are indeed insurance companies, pension funds and other non banks.

So, the problem is that if a friendly bank provided 0% loans to the French government who then bought back the €1925.3 billion of debt, this would flood the markets with new money, and that could be very destabilising.

But it seems to me that there is a way out. Commercial Banks could be forced to buy back those bonds with existing money (not by creating yet more new credit). After that, the  French Government could buy back those bonds on condition that those Banks agree to write off the debt completely.

The net result of that would be to decrease the assets of the commercial banks - by transfering those assets to a non-profit making "friendly" bank who would charge 0% interest.  This would, at a stroke, reduce the need for tax-payers to foot the bill for interest payments, saving the government over €50 billion a year.

It's not as if French Banks are short of assets. Have a look at this list of the 50 largest banks in the world. BNP Parisbas had $2.474 trillion in assets at the end of 2013 - putting it at number 3. Another French bank - Crédit Agricole - comes in at number 4 with €2.431 trillion. Société Générale has $1.651 trillion. I don't think it would be a bad thing if those asset levels were reduced a bit. Especially since those banks don't have enough capital reserves to justify those assets.

Of course, the insurance companies and pension funds will scream that we have just cut off their easy zero risk income stream. Tough. They might have to start using their money to make real investments in the economy, instead of creaming off 3% of GDP every year for doing nothing. 

I think that this might work. Comments, please?


Videos from Positive Money's Conference

For those of you who weren't at Positive Money's Conference on the 1st of March, I can thoroughly recommend watching Ben Dyson's superb 30 minute talk on Sovereign Money Creation. You can find the video here.

Positive Money's blog on the Conference also has a shorter video of Ben answering questions from the floor.

Amusingly, 2 minutes into that video, you can see yours truly asking Ben a couple of questions. Firstly, I noted that Central Bank lending to governments was in principle banned by the Maastricht and Lisbon treaty. To that, Ben answered that while lending was banned, the treaty says nothing about GIVING freshly created money to governmnents. Nice one Ben!

I also asked him whether he thought that direct payments by central banks into citizen's bank accounts might also work. While he agreed that it was an option, he thought that spending money directly on activities such as house building would probably be even more efficient as a way of getting money into the economy.

No problem with that. I'm personally in favour of doing both. As long as we all agree that the key is debt-free money creation, there are plenty of options to be explored.


Euroclear - €572.8 trillion in transactions in 2013

EuroClear  released a press release on he 28th February 2014 that gives some more impressive numbers about the scale of financial transactions. 
"Turnover, the value of securities transactions settled, was a record EUR 572.8 trillion, a 5.8% increase over prior year. "
Their main site also boasta that "Every 6 days we settle  transactions equivalent to the GDP of the EU". Impressive.

Other information in the press release includes the following statement.
"The number of netted transactions settled in the Euroclear group grew by 7.1% to a record 170.4 million"
The majority of this was probably done in continental Europe, but the report also says that
"Fund orders routed through Euroclear UK and Ireland’s EMX Message System increased by 19.5% to a record 49 million messages in this period."
So, that presumably means that about 24% of the total was handled in the UK. That means that I can add an extra €137.5 trillion to the UK total of £1840 trillion that I calculated last week.  That's about £113 trillion, bringing the UK total to £1952 trillion.

The biggest Bank scam of them all - Banks lending inexistant money to governments and charging interest

Now that the Bank of England has openly admitted that Commercial Banks create money out of thin air when they make loans - they lend money that they don't have - I thought it would be worth pointing out clearly what this means in the case of soveriegn debt.

You have probably heard the story that Commercial Banks are supposed to have a certain amount of capital to back up their loans. You often hear that Banks can only generate about 10 times as much in loans as they have deposits.

Well, this is quite clearly wrong.

Take a look at the 192 page document published by the Bank for International Settlements on "Minimum Capital Requirments".

Starting on page 19  you can find the details of how Credit Risk is calculated.

First we learn that there are two different systems in use.
"The Committee permits banks a choice between two broad methodologies for
calculating their capital requirements for credit risk. One alternative, the Standardised
Approach, will be to measure credit risk in a standardised manner, supported by external credit assessments
The other alternative, the Internal Ratings-based Approach, which is subject to the
explicit approval of the bank’s supervisor, would allow banks to use their internal rating
systems for credit risk."
Then we get to hear how how the standardised approach works. Here's a table showing how the risk weighting works for lending to governments.

Yes, you have read that correctly. When a Government has a rating between AAA and AA-, the risk weighting is 0%. Here is a map of Standard & Poors credit ratings for European Countries (you can find similar graphs for Fitch's and Moody's.

So, if you are in countries like the UK, France, Germany, Belgium, the Netherlands, Switzerland, Austria, Norway, Sweden, Finland and Denmark, commercial banks can create unlimited amounts of "money" to make their loans - WITH NO CAPITAL REQUIREMENTS AT ALL.

And then, those Banks can sit back and collect the interest on that loan made with non existent money. Those interest payments have cost a fortune - as you can see in the table I compiled last year.

Even when the Banks create money to lend to countries that are rock-solid like Germany, they still get to rake in a fortune in interest. German taxpayers have handed over €1,174 billion since 1995. Italian taxpayers have handed over €1,433 billion. French taxpayers have handed over €835 billion. And so on.

Isn't this the most incredible racket you have ever heard of? By comparison, Mafia mobsters going round local shops and demanding money for "protection" is nothing.

Here we have the Banks lending unlimited amounts of inexistant money to governments with ZERO risk, and "earning" interest. And of course, if any government was to complain, they would soon pay for it by discovering that all of a sudden, their interest payments went up from a couple of percent, to 27% (like it did for Greece in 2012). As I say, the Mafia are small fry compared with this.

This has to stop. It cannot be justified.


UK financial transactions in 2013 : At least £1840 trillion

It's the time of year when I like to have a look at how financial transactions were doing in 2013. Many of the key players are quite keen to boast about just how much activity they are handling.

For example, CLS group has a report saying that it handled an average of  $4.99 trillion a day in 2013. up from $4.89 trillion a day in 2012. With roughly 250 trading days in a year, that would total $1250 trillion.

As I reported yesterday, NYSE Liffe (which does something like 99% of its trading through its London Office) has reported handling €474 trillion in 2013.

LCH.Clearnet Ltd has a graph on its web site showing  monthly notional volumes for its SwapClear trading arm.

By clicking on the histograms for each month I found that the total for 2013 added up to an impressive $507.8 trillion. Interestingly, the numbers for the start of 2014 are looking particularly strong, with $61.6 trillion in january and $49.8 trillion in February.
LCH.Clearnet Ltd's Fixed Income's website reports the "key fact" that it handles €11.8 trillion repo trades per month based on nomimal values. Over 12 months that would suggest that it  handled €141.6 trillion in 2013.

The CHAPS Co Website has the following graph showing monthly volumes and values.

And you can read that "The total value transmitted in CHAPS in 2013 was £70.1 trillion, an average of £277 billion daily."

The BACS system, which is used to process many direct debit and account transfers in the UK published a bulletin in January 2014 intitled "Record breaking year for BACS" in which it said that " Direct Debit continued to grow, topping 3.5 billion across the course of the year, with a total value of £1.1 trillion. With Bacs Direct Credit payments, that made for a combined 5.7 billion items processed in 2013, worth almost £4.2 trillion."

Adding in the numbers, together with some other figures that I have for things like London Stock Exchange and the London Metal Exchange and older figures for other payment systems from the BIS, I get the following table showing at least £1843 trillion in UK-based transactions for 2013. This compares with the figure of £1760 trillion that I generated two years ago. Clearly the financial markets have not been too seriously hit by the recession.

The table also compares the amount of transactions with the total tax revenues for the UK government - namely £564 billion (nicely plotted in a very recent pie chart on the Guardian's web site). The ratio between transactions and tax (over 3260:1) suggests that you could actually get rid of every UK tax and replace the whole lot with a single flat-rate FTT on all financial transactions of 0.031%. Those who follow my blog will know that I have pushing this possibility since october 2010.

But even the £1843 trillion number must be an underestimate. For example, I have no idea how much trading is being done by Barclay's Bar-X  platform. And LCH.ClearNet Ltd has a number of other business streams for which I have not been able to find numbers, in addition to SwapClear and Fixed Income. Specifically:
If anyone knows how to find the value of the transactions in these areas, do let me know.

Note added 15th April 2014 : I've just found a website where Barclays says that their Bar-X platform handles $50 billion a day. With roughly 250 tradings days a year, that means that we can add in an additional £7.5 trillion at least. But I found another site that says  that the Barclays system handles up to 1000 trades a second. I suspect that the £7.5 trillion may be conservative.


NYSE Liffe Europe : €474 trillion in 2013 - up 27.6%

I've just had a look at the transaction figures for NYSE Liffe. They really are very open about them - you can download all the details on their Monthly Statistics page. So I did. And here are the results for the period 2006-2013.

Activity peaked at over €500 trillion in 2010 but then dropped back to €372 trillion in 2012 - well it was a global financial crisis after all.

But I'm sure you'll all be relieved to hear that things have picked up nicely in 2013, with a total of €474 trillion. That's an impressive increase of 27.6% on 2012. Well done!

There are some other interesting things to extract from the data. Firstly, since the €474 trillion was achieved with 113 million transactions, that means that an average transaction was worth an impressive €4.19 million.

But there another interesing gem here. It's the Premium Turnover which was €46.3 billion in 2013. That's 0.01% of the total transaction value.

Now, if you remember, last week I showed you the total Premium value for 2013 for that other major global player - the Options Clearing Corporation. I got a value of $1.2 trillion in Premiums. But when I asked the nice guy at OCC what total volume that corresponded to, he unfortunately stopped corresponding with me.

But, if we take the Premium value for NYSE Liffe (namely 0.01%), this presumably means that we can multiply up the $1.2 trillion number by 10,000 to get the true value of financial transactions handled by OCC. And the result is.... $12 quadrillion. Gulp.

Just think. If the US government was to tax those transactions at a rate of 0.025% they could abolish every other tax in existence, because all the other taxes raise less than $3 trillion a year.

Even the Tea-Party should love that one.

Financial transactions in Australia up 5.3% to 135 trillion Australian Dollars

My thanks to Susy for pointing me to the latest Australian Financial Markets Report for 2013. You can download their nice  glossy report or you can download all the data in an Excel file here. It's very nicely done, and allowed me to generate the following table very easily.

As you can see, total financial transactions were up 5.3% to reach an impressive 135 trillion Australian Dollars. That's a 37.3% increase since 2008-9. Nearly two thirds of the total (64.5%) involves Debt Markets, with 32.3% involving the Currency Markets. A mere 3% involves Equities.

That total number of $135 trillion is 89 times Australian GDP (currently 1.521 trillion). Even more impressively, it's 346 times higher that the amount raised by all the existing taxes in Australia (390.1 billion in 2011-12).

It follows that Australia could potential eliminate all the existing taxes with a Financial Transaction Tax of under 0.3% if it was applied to all financial transactions - a number close to the one I was suggesting back in 2012.

It also reassures me to learn that the potential for using an FTT is still clearly there. Go for it Australia!

How the Banks are extorting money from the UK's Students and Taxpayers

When I was young and went to study at Oxford University,  my tuition fees were paid for by the local education authority (West Sussex in the UK), and I got a grant that while not huge, meant that I could get by doing a bit of work in the summer vacations. I remember that my parents (who were reasonably well off) had to contribute £50 a year to my grant. I left university with NO debts whatsoever.

How things have changed. When my first son Jonathan went to study at York University in 2001, fees were £1000 a year. When my second son Kieran went to study at Warwick University in 2006, the fees has tripled to £3000 year. Fortunately, we don't have a third son who wants to go to University in the UK now - because fees tripled yet again in 2013 to £9000.

We managed to cover the fees for our two sons ourselves so they were both able to leave university debt free too (it's useful to have parents that are pretty rich in this life).

But for the vast majority of students who want to study in the UK now, they will end up after a 3 year course with something like £53,000 of debt. 

Where did the money come from to make those loans? Well, the student loan scheme is currently run by the Government, which currently lends something like £10 billion a year to the next generation of students. Those students are then supposed to pay back the money (with interest at inflation + 2%) once they start earning £22000 a year.

However, there are reports in today's newspapers saying that the whole scheme is falling completely to pieces. Ex-students are simply unable to pay off their debts, and the default rate has sky-rocketted. An editorial in today's Guardian says this:
"New official forecasts suggest that the write-off costs have reached 45% of the £10bn in student loans paid out each year – a figure perilously close to the 48.6% (some say 47%) at which the arithmetic moves from ominous into fatal. At this point, the tripling of tuition fees will fail to produce any more money than would have accrued had the figure been left at the £3,000 where the coalition found it in 2010."
There is a Report published by the House of Commons library in January 2014 that includes the following graph of the growth in publicly held student debt. It reached £46.6 billion at the end of the 2012-13 year.

Earlier reports had already revealed that more than £5 billion is currently owed by people who can't be traced, and that total student debt is expected to increase to £200 billion by 2042.

The insanity of the current system is made even more obvious when you realise that the government doesn't actually have the £10 billion a year that it is lending to students to go to university. In the end, that money has come from money creation by commercial banks. As the Bank of England admitted last week (and as the Guardian courageously revealed on Tuesday), commercial banks create money out of thin air when they make loans. And there is no better place to make loans that to triple A rated governments. Banks are supposed to keep their risk-weighted assets at around 10% of their capital reserves. But as the Basel II and III regulations specify, lending to AAA rated governements has a Risk-Weighting of 0%. That means that if a commercial bank can find a government to take on debt, they can create as much money as they like - even with no capital to back it up. (Incidentally, that's part of the reason why Banks can have thousands of times more assets than they have capital - lending to governements doesn't count).

So, to find the £10 billion a year, the government can go to the commercial banking system, who will generate as much money as the government wants - with no risk attached (for the banks!) - and they can then charge tax payers what ever they can get in interest (currently 2.37%). That's for lending the government money that the banks don't actually have in their possesion.

The government then lends the £10 billion to students. But then, when the students can't afford to pay the money back, they default. And the tax-payer picks up the tab. Not the banks who created the money (read debt) to make those loans.

This has to be the biggest scam out there. Tax payers and students take all the risk, but the banking system walks away with 2.34% for abusing its ability to create money.

How about the Bank of England directly financing student tuition fees with sovereign money creation as proposed by Positive Money? Now that would be a real investment for the nation's future. Far more intelligent than throwing £375 billion of QE at the banking sector and praying.

At the Positive Money conference at the beginning of March, it was notable that the average age of the 400 or more people there was 50-ish. There were surprisingly few students there. Where were you all?

Come on you students! Start protesting!! Don't just sit there loading yourselves up with debt provided by banks who create "money" out of thin air to allow you to study at university and then force you to work effectively as their slaves for the rest of your lives. Do something about it now!


World Federation of Exchanges - over $2 quadrillion of derivatives in 2013

I was beginning to get worried that the Financial Markets were slowing down, and that soon there wouldn't be much left to tax with a Financial Transactions Tax. Fear not!

The World Federation of Exchanges just published a report saying that Exchage Traded Derivatives Trading Volumes recovered in 2013. Specifically, in 2013, 22 billion derivative contracts (12 billion futures and 10 billion options) were traded on exchanges worldwide – a 685 million increase above derivatives contracts traded in 2012. Sounds like there is still plenty of trading going on.

Actually, although the WFE says that their full report won't appear till May, I had a sneak preview by downloading the detailed data files from their site which provides an Annual Query Tool. This provides not just the numbers of contracts traded, but also their values in millions of US dollars. Here's what I found, by adding up all the separate files.
As you can see, the total is up 17.5% on 2012, to an impressive $2010 trillion. And that's despite the fact that the 2013 figures for some important players like the Chicago Board Options Exchange (which did over $35 trillion in 2012) are currently NA - not available. The Chicago Mercantile Exchange Group, which is the biggest of them all, is up 14%. But NYSE Euronext is up 33% and the Korea Exchange increased by 42% in a year. Impressive.
To get a clearer picture of where all this activity is concentrated, I have extracted the individual numbers for the three biggest players in the next table.

You can see that between them, those three players handled an impressive $1153 trillion in Interest Rate Futures alone. Perhaps some of the people who are involved in this frantic trading would like to explain to the rest of us what benefit society gets from this? Otherwise, I would say that imposing a modest 0.1% FTT on that would be a very sensible thing to do.


Financial transactions in the US - some new figures

A year ago, I posted a blog about how the US financial system processes at least $15 trillion a day - based on a report from the New York Federal Reserve which used numbers obtained during 2010.

How are those figures holding up today?

Well, it would appear that there was a substantial drop in the total volume of money going through the system between 2011 and 2012 - at least for some of the key players.

For example, the Chicago Mercantile Exchange's financial report for 2012 said that there had been a 15% drop from the $1.086 quadrillion that it handled in 2011 to a mere $806 trillion in 2012. Still at 0.1%, a financial transaction tax could still raise a handy sum if applied to all of that.

One other interesting outfit is the Options Clearing Corporation (OCC). In 2013, they handled well over 4 billion contracts in Equity, Index and ETF Options. I wrote to them to ask them what this corresponded to in terms of dollars, and a very nice man at OCC immediately replied to say that these contacts had a total premium value of $1.3 trillion - and that I could find the details on their website here.

So, of course, I did. And here is what I found.

As you can see, premiums dropped back from $1.36 trillion in 2012 to a mere $1.2 trillion in 2013. Looks like times are rough for OCC too.

But here's the 64 quadrillion dollar question. If the premiums on the trades were $1.2 trillion, what were the actual values that were being traded? This is something that you can't find on OCC's site. But my understanding is that when people buy an option on a share, the premium they pay might be a small percentage of the actual value - maybe 1% or less. Anyone like to suggest what the actual value of transactions handled by OCC could be?

Another clue comes from a comparison with Euroclear PLC. On page 9 of their 2012 Annual Report you can find the following graph showing that their Turnover, or the value of securities transactions settled, was €541.6 trillion in 2012, a 7% decrease compared with 2011.

But that turnover was based on a mere 159 million netted transactions, implying that the average value of each transaction was a very impressive €3.4 billion each (!). If the 4 billion transactions handled by OCC were worth the same sort of amounts, OCC could be clearing as much as $16 quadrillion a year. Now that would be worth taxing with a 0.1% FTT. Hey, even a 0.001% FTT would be well worth it - I make that $160 billion a year.

Victory! The Bank of England admits that commerical banks create money out of thin air!

This is truly an event worth celebrating. The Bank of England has just published two articles in its Quarterly Bulletin that lay bare the truth of how the money system works. There's one called "Money in the modern economy: an introduction" which was written by Michael McLeay, Amar Radia and Ryland Thomas of the Bank's Monetary Analysis Directorate.

Try this for starters:
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves…  When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created…”
You can actually watch Ryland Thomas from the Bank of England, the author of the article, in a video on Youtube say the following (at 0m50s):
"Broad money... includes all the bank deposits of households and companies. And one of the key points of the article is that banks create additional broad money whenever they make a loan.  Now while this is nothing new, it is sometimes overlooked as the main way in which money is created. And it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact loans create deposits - not the other way round. "
Here's the bit where he reveals all:

The other paper, also by the same three authors is called "Money creation in the modern economy".
There you can find the following statements:
"Whenever a bank mades a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money.
 The reality of how money is created today differs from the description found in some economics textbooks:
  • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits
 Later on in the article you can read:
"Broad money is made up of bank deposits - which are essentially IOUs from commercial banks and companies - and currency - mostly IOUs crom the central banks. Of the two tyupes of broad money, bank deposits make up the vast majority  - 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themsleves."
 And how about this?
"Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. "
 Not bad eh? Anyone out there still doubting that commercial banks can create money out of thin air?

They also make it very clear how money can be destroyed.
"Just as taking out a new loan creates new money, the repayment of bank loans destroys money.  For example, suppose a consumer has spent money in the supermarket throughout the month using a credit card. Each purchase made using the credit card will have increased the outstanding loans on the consumer's balance sheet and the deposits on the supermarket's balance sheet... If the consumer were then to pay their credit card bill in full at the end of the month, its banks bank woudl reduce the amount of deposits in the consumer's account by the value of the credit card bill, thus destroying all of the newly created money."
The Bank of England also lays to rest another long standing myth - that Central Banks can control the money supply by the so-called Money Multiplier mechanism.

“…the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them…It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England.”

All this is really a remarkably victory for the people at Positive Money - and they are rightly claiming some credit for progress in this area. When they started out in 2010 arguing that the vast majority of the money in the economy is created out of thin air by commercial banks, many people ignored them, saying that it couldn't possibly work that way. But they published the book "Where does Money come from?" which has now become a standard text at some universities.

And now, the Bank of England has essentially said that, yes, they were right.

Congratulations Positive Money!


Positive Money's Annual Conference

I had an excellent day yesterday at Positive Money's annual Supporters conference here in London. It was very well organised, with around 400 participants. There were about 40 people from outside the UK, with strong contingents from  Denmark, Sweden and  Portugal, but also representatives from France (there were 3 of us), Germany, Luxemburg, Switzerland, Croatia, Spain, Iceland, Greece and the USA.

Ben Dyson gave a very convincing presentation of Positive Money's proposal for Sovereign Money Creation. He compared the £375 billion of Quantitative Easing that the Bank of England has injected into the  financial markets with what could have happened if newly created money had been injected directly into the economy. The fact is that there has been almost no serious analysis of where the £375 billion went. But it would appear that one of the main effects has been to produce a 20% increase in the stock market. Has that done anything except make some rich people even richer? When money gets used to inflate bubbles, does this do anything to help the real economy?  He provided some figures suggesting that every £1 of quantitative easing leads to just 8 pence of extra spending in the economy - in other words almost nothing.

He then compared that pathetic effect with what would have happened if the Bank of England had simply allowed money to be spent directly into the economy. Independent figures (from the Confederation of British Industry I think) suggest that every £1 of spending into the real economy results in about £2.80 of extra spending. Those figures suggest that Sovereign Money Creation is 35 times more effective than quantitative easing - which is effectively equivalent to throwing money at bankers and praying.

The argument is devastating. Can Mervyn King please explain why he agreed to waste £375 billion - more that half the entire UK government spending for an entire year - in this futile way? And can the banks prove that a substantial proportion of that £375 billion wasn't used to pay the £60 billion in bonuses that the City has handed out since the financial crisis?

At the end of the meeting, I was even more convinced that the number priority should be to introduce debt-free money creation somewhere in the world. It almost doesn't matter where. I talked with a guy from Iceland which might be a good place to start, because the Icelandic people have already shown that they are prepared to stand up to the banks.

But it could almost be done at any level. Obviously, my current preference would be to convince the ECB to inject new debt free money directly into eurozone citizens' accounts. But it could also be done at the national level using a sort of N-Euro system. Or it could be done at the regional, or even local levels. 

Ben Dyson and Positive Money's position is sensible. While we all agree that the aim should be to remove the ability of commercial banks to create new money, there is a strategic question of how to achieve this. It may  well be better to first demonstrate that debt-free money creation and direct injection into the economy is doable. In this way, you can leave the banks with their money creation licence until it has been demonstrated that there is an alternative.


Malcolm Torry : Money for Everyone - Why we need a citizen's income

I've just finished reading Malcolm Torry's 2013 book intitled "Money for Everyone - Why we need a citizen's income". I can thoroughly recommend it.

Here's what the book says about the author. "Dr Malcolm Torry is Vicar of Holy Trinity, Greenwich Penisula, in the Church of England Parish of East Greenwich. He is Director of the Citizen's Income Trust, and was a visiting research fellow  at the London School of Economics and Political Science from May 2011 to April 2012".

He clearly didn't waste his time at the LSE. The book is very well documented, with over 700 references, and makes a totally convincing case for introducing an unconditional Citizen's Income. 

I was fascinated to learn that they have had such an unconditional Citizen's income since 1982 in Alaska using a fund that was set up using money obtained from selling oil drilling rights. It's not quite perfect, since the amount paid to each citizen varies depending on the amount money earned by the investments. But, as you can from the official figures for the past 30 years, the best year was in  2008 when the vast majority of Alaska's 680,000 inhabitants received over $2000 each - no questions asked.  The effect seems to have been very beneficial. As Torry notes, "Alaska is the only state in the US in which inequality has decreased during the past twenty years. Whereas in 1980, Alaska's net income inquality was the highest in the United States, now it is the lowest".

He also describes the details of a pilot study run  in Namibia between 2007 and 2009 in which each of the 1000 inhabitants of two villages was given a Citizen's Income of about $12 a month. The results looked amazingly good - with across the board improvements in health, education, crime rate and other measures.  Particularly impressive was the finding that "average income rose a staggering 200 per cent in the lowest quintile, excluding the Citizen's income, because people could now purchase the means of making an income, and they did."

I was pleased to see that Malcolm Torry mentions the possibility of using a Financial Transaction Tax to finance the Citizen's Income. But it looks like he might not have thought about combining the Citizen's income with a change in the way that money is created and introduced into the economy - the sorts of reforms proposed by Positive Money in the UK and Monnaie Honnête in France.

I'm more and more convinced that a combination of the two ideas - debt free money creation by a central publicly accountable authority and injection into the economy via a Citizen's income - provides a truly effective way to fix many of the problems we face.

You can find a neat poster that presents the main arguments for a Citizen's Income here.


Why we should give free money to everyone

My thanks to my sister Caroline for pointing me to this excellent article about the basic income idea, written by Rutger Bregman.

A shortened version of the article was published in the Washington Post - here's the link.

Highly recommended. It's amazing how few people have heard about this excellent idea.

For me, it is quite simply the best way to put debt-free money into the economy. An independent central bank authority would simply decide how much debt-free money can be injected into the economy. It would do it by directly injecting money into citizen's accounts. And at the same time, that authority should remove the same quantity of debt-based money from the system using a flat-rate universal Financial Transaction Tax on all electronic transactions involving the currency in question. No risk of corrupting politicians. No possibility of using the mechanism for personal enrichment.


TARGET2 transactions for 2013 : Down 22%?

I've been tracking the level of financial transactions in Europe for some time. One useful place to look is on the European Central Bank's website where you can find all the figures for the TARGET2 and EURO1/STEP2 systems month by month. Target2 stands for Trans-European Automated Real-time Gross settlement Express Transfer system, and you can see a five minute video about it here.

I've just calculated the totals for each country in 2013 which I have put in the following table.

As you can see, the overall totals are down around 22% on 2012 - a mere €493 trillion. Euro 1 transactions were also down about 16% at around €49 trillion, to make a total of €542 trillion.

What's going on? Do you think that the traders have started calming down?  After all, 2013 was the year when some European countries started to introduce a small Financial Transaction Tax on some sorts of trading. Perhaps it is starting to have an impact?

I rather doubt it. The fact is that while 23 of the 27 EU countries use TARGET2, one country in particular does not - namely, my dear compatriots in the UK. And the UK is the world leader in off the record book transactions - so called OTC (Over the Counter) trading. They are also very keen to provide their customers with a way to trade that avoids anyone seeing what it going on.

I bet you that the real amount trading hasn't dropped at all. It's just going through the City of London's deliberately opaque settlement systems. Systems like the one handled by LCH ClearNet Ltd which handled  £862 trillion in 2008 but strangely has not reported any numbers to the BIS at all since 2010.


A solution : Central Bank generated Basic Income balanced by a flat rate Financial Transaction Tax

I've been thinking more about how best to fix the system.

I've already argued that Central Banks could inject debt-free money directly into the economy via an Unconditional Basic Income for all citizens. I've also argued that Central Banks should have the ability to remove excess money from the system via a universal flat-rate transaction tax on all transactions that use their currency.

Take the example of the European Central Bank. In this case, the idea would be for the ECB to create electronic accounts for every citizen in the Eurozone, and then to add a fixed amount per month to the accounts of every man, woman and child. With 333 million citizens in the Eurozone, a budget of €1 trillion a year would allow everyone to receive around €200 a month - i.e. €800 for a family of four.

In parallel, the ECB would also be given the right to impose an FTT on all Euro-denominated electronic transactions, wherever they occur in the world. Similar mechanisms would apply for the Bank of England (in the case of Sterling transactions), the Federal Reserve (for transactions in US dollars, and so forth). The rate of the FTT would be continuously adjusted to remove the desired amount of money every month. With around €2 quadrillion in euro-demoninated transactions a year, an FTT of 0.05% would allow the ECB to remove €1 trillion a year.  Note that it would be trivial to continually adjust the rate month by month, day by day, or even hour by hour to ensure that money was removed at precisely the rate required.

Here's the new idea. I propose to fix things so that the Central Bank is required to set the FTT rate at whatever is required to completely balance the injection via the citizens' accounts.  Thus, if the ECB injects debt-free money at €1 trillion a year (i.e. around €200 per month per citizen), it would be required to set the FTT rate such that the same amount of money is removed every month.

The result would be that the system would be totally safe. There would be zero possibility of causing inflation, because the money supply would actually be unaffected.   This would effectively demolish the standard argument invoked by the banking lobby that money creation without debt could run the risk of generating inflation.

It would also totally demolish the other main argument that you hear - namely that allowing politicians to get their hands on the money creation process would be an invitation to corruption. It's true that if a central bank were to hand hundreds of billions of money directly to governments, it would be difficult to ensure that the politicians would not be tempted to buy votes, or pay the mafia.  That argument completely disappears if the Central Bank is used to push new debt free money directly into the economy via citizens. It would be extremely difficult, even impossible, to manipulate that system in favour of particular interest groups.

You might be asking yourself, what's the point of injecting €1 trillion into the economy every year if you immediately remove that money via a universal financial transaction tax? Well, think about it.  Although the FTT would be absolutely universal, and paid by absolutely everyone whenever they make a Euro-denominated financial transaction, the main people who would be paying the tax would not be the ordinary man in the street. When the €200 arrives on his or her account, they would pay 0.05% (i.e. 10 centimes) to the ECB. Likewise, when that money is spent (by drawing out cash, paying with a credit card or cheque, or by using a direct debit), they would pay another 10 cents - a total of 20 centimes.  In contrast, the high frequency traders who are shifiing $5.3 trillion around the foreign exchange markets every day would end up paying proportionately far more.

In other words, without rigging the system, it would naturally be those in the financial sector who have nothing better to do with their money than speculate that would end up paying the lion's share of the €1 trillion a year in FTT. But of course, the move would not make speculation illegal - just slightly less profitable.  The traders (and their computers) would simply have to add the extra costs into their algorithms. No big deal.

But the real beauty of the idea is that, although on the face of it, you might think that pushing €1 trillion a year of money into the economy at one end, and then removing the same amount at the other is neutral, it is not neutral at all.

The point is that while the money that is being removed at the top end will currently be almost entirely debt-based money - created by commercial banks out of thin air, and for which we are all forced to pay interest - the new money being injected via the Citizens' income will be debt free. 

Progressively, over a period of several years, the money in the system will gradually change from being debt to what I would call real or honest money.

We know that the Eurozone countries debt levels currently exceed €24.5 trillion (taking together household, business and public sector debt). You might think that the situation would only be fixed once €24.5 trillion of debt-free money has been injected. But this would be wrong. The fact is that a €100 note can be used to pay off hundred of thousands of euros worth of debt by using it over and over again.

So, I suspect that even a relatively modest €1 trillion a year of new money could actually allow debt to be reduced far more quickly. Remember that Mario Draghi (president of the ECB) created over €1 trillion in the space of a few months a couple of years ago, so there is actually no real problem here. He could do it. It wouldn't even break the terms of the Lisbon treaty.

Why don't we do this straightaway? The answer is simple. The financial lobbyists who defend the interests of the commericial banks and who want to keep their monopoly on money creation will do everything in their power to keep their gravy train on the rails for as long as possible. When the financial sector can suck over 3% of GDP out of the economy every year in the form of interest payments on public sector debt alone, they will not be at all happy with the idea that anyone could introduce a way to inject debt free money into the system.

But I can see no reason whatsoever for not introducing a system where Central Banks inject debt-free money into the economy as an unconditional basic income for all citizens and then remove the exact same amount of money by imposing a universal financial transaction tax.

Fixing the ratios so that the total money supply remains stable removes one of the few remaining objections that the financial lobbies could raise.

If you can think of any other problems, do let me know.

And if there is anyone out there who would like to defend money creation as interest-bearing debt by commercial banks, feel free to post your defense here. I'll be happy to read your arguments.


Fixing the system with a basic citizen's income

I've been very quiet for the last month. Sorry about that.

Let me take the opportunity to wish us all the very best for 2014.  We will certainly need to work hard if we are to fix the mess that we are in.

However, I'm actually pretty optimistic. I really think that there are ways to improve the way the system works, and to break the stranglehold of debt that is crippling all of us - individuals, businesses and governments - except of course for the tiny minority who have been profiting from the insane monetary system that we have inherited.

To recap on the essential point, the fundamental reason why we are in such a mess is that the money that we all need to live and do business is created out of thin air by commercial banks when they make loans. They then charge us all interest for effectively renting this money. But because the commercial banks don't create the money to pay that interest, the whole system is doomed to accumulate more and more debt as time goes on. And the so called growth in GDP that is starting to appear in countries like the UK is nothing more than an increase in debt.

The truth is that in the Eurozone (for example), the level of debt  had reached 24.5 trillion euros at the end of 2012 - a value that is 2.5 times the total amount of money in the system (as measured by M3). There is no way that austerity can fix this. Nor can we get out of debt by borrowing yet more.

So, how can we get out of this mess?

What we need is a way to inject debt-free money into the system to allow the debt to be progressively written off.

The Positive Money movement in the UK has been arguing strongly for the idea that central banks such as the Bank of England should be given the responsability of creating the nation's money supply. And they propose that that money should be provided directly to the government who could then use it in a variety of ways. For example, they could spend the money into the economy in the form of infrastructure projects (transport, education, health, energy etc). Or they could reduce taxes. Or they could pay of public sector debt. Or they could provide money directly to citizens in the form of  a basic income payment.

These are all perfectly valid ways of getting debt free money into the system. But of course, you can imagine that the commercial banks and their lobbyists will complain that giving politicians "free" money would be opening the door to corruption. What would stop the politicians using the money to buy votes etc.

The more I think about it, the more I am convinced that there is an even simpler method. I think that the Central Banks should short-circuit the politicians and put the debt free money directly into the economy via direct payments to citizens. It's an idea I originally mentioned back in August of 2013.

How might this work?

Well, imagine that the European Central Bank decided that it was prepared to put an extra trillion euros of debt-free money into the economy every year for at least a decade. Creating a trillion euros is actually no problem for a central bank - after all, Mario Draghi did precisely that when in December 2011 and February 2012 he created money that was provided to hundreds of commercial banks in the hope that this money might encourage the banks to create yet more money.

With a population of 333 million, the ECB could provide €3000 per year for every man woman and child in the Eurozon. That would be €250 per month for each citizen, and €1000 for a family of four.

The idea is that this money would be provided in an unconditional way - irrespective of whether or not the citizen was looking for work, and indeed of whether the citizen was actually in need.  It's the idea that been promoted by the European Citizens' Initiative for an Unconditional Basic Income, which organized a petition to force a debate in the European Parliament. They needed 1 million signatures, but missed the target because when the petition closed on the 14th of January 2014 at which point there were just over 285,000 signatures. I signed the petition, and I have also signed a new petition that is being organized using the AVAAZ site.

Why is an unconditional basic income such a good idea? There are a number of reasons but, in particular, it could radically change the current situation where people receiving benefits are often criticized for sponging off the system. If everyone received the same amount, this source of conflict would cease overnight - because everyone would be treated fairly.

Having an unconditional payment would greatly simplify administration costs because it would no longer be necessary to employ large numbers of people to check that claiments were really entitled to the benefit payments. 

An unconditional basic income would also mean that people to easily do the large number of useful activities that are currently difficult to finance by paid work. For example, child care and looking after the elderly are all vital activities that currently cost a great deal to finance. But many people would probably be happy to do it themselves if they could simply afford to do it - but they are literally obliged to work full time just to keep income levels at the minimum levels needed for survival. 

It would also free people to make their own choices about how they use their time. Some people might want to invest far more in voluntary and charitable work. It could allow school leavers to go into higher education without necessarilly running up massive levels of debt. It would also allow people to spend time developing cultural and artistic projects, as well as spending time developing their own projects for starting up businesses.

You might argue that providing an unconditional basic income would remove the incentive to work. In fact it would be quite the opposite, since any additional paid work would go directly in the citizen's pocket. Ideally, there would be no loss of benefits at all, meaning that the classic poverty trap in which people are actively encouraged to stay at home because they would lose their means-tested benefits if they find work would be eliminated.

Importantly, it would make the work market far more flexible. Currently, if you want to get enough money to survive by working, you almost have to work full-time. Any less than full-time, and you will probably not get enough income to pay the bills. In contrast, in a system with a unconditional basic income, people would be able to adapt the amount of paid work the do to fit their own requirements. If they can survive on just the basic income, then they would have the option of doing zero hours of paid work - thus allowing to devote all their energy to doing unpaid work such as child care, looking after elderly parents or voluntary work. But if they want additional income, they could do 5 hours, 10 hours, 20 hours or work full-time as required.

Imagine how things would be for employers. Currently, an employer is effectively obliged to pay a salary that is enough to provide a living wage irrespective of their family conditions. Thus an employer is obliged to pay the same to a single person with no children to someone who is the family breadwinner - it would be "unfair" to do otherwise. But imagine what would happen if a single person was getting €250 a month of basic income, and a father with three children was getting €1250. It would mean that the employer could provide a standard salary that was better adapted (and lower!) than would currently apply. In other words, the basic income payments would effectively act as a boost for business because they could provide a living wage at lower cost.

The change in the relationship between employees and their employers would have other highly beneficial effects. If the basic income meant that citizens actually have a real choice because they could (by being very frugal) survive without paid work, it would mean that the most menial and ungratifying jobs that are currently poorly paid would start to be paid at a better rate that reflected the real value of the work. People would choose to collect dustbins or clean sewers not because they are the only jobs around, but because they are sufficiently well paid to be attractive.

Another enormous advantage of an unconditional basic income is that it would reduce the pressure on housing in the places where work is easiest to find. Currently, many people are forced to move to cities because it it difficult to find jobs in more rural areas. The result is that housing, transport and other facilities in the cities are over-stretched. With a basic revenue, people could more easily live in the rural areas that are currently disadvantaged. And with the increase in the number of people who can work via the internet, this would make perfect sense.

This rebalancing would certainly apply to different regions within a given country. For example, in France, the basic income would have the effect of reducing the strain on the major population centres, because people could have the option of moving to places with low population densities and low demand. Two families with three children each could easily share one of the many inexpensive properties in the more remote parts of France without needing highly paid jobs.

But imagine what would happen if the ECB financed Citizens Income was the same throughout the entire Eurozone. This would mean that there would be a clear incentive for people to live in the parts of the eurozone where the cost of living is lowest. There are currently 8 European Countries that are currently obliged to join the Eurozone as soon as the convergence criteria have been met. These include Bulgaria and Romania, two countries which have been in the news recently because of fears that there could be a mass exodus of their populations to other EU countries following their change of status on the 1st of January 2014.  But if the citizens of such countries were assured of getting the same basic income payments from the ECB, irrespective of their country of residence, it is clear that they would be much less keen to delocalise, given that it would be much cheaper for them to live at home.

I hope that this list of advantages will have gone someway to convincing you that the idea of an unconditional basic income is a truly interesting idea that deserves close attention. But less me stress that while there are many people who are starting to realize that the idea is interesting, I'm actually proposing something additional.

My argument is that the first place to introduce such a system could be via direct payments made by Central Banks to citizens using truly debt-free money. The Central Bank would need to create individual accounts for all Citizens - this would be little more than a vast Excel Spreadsheet with 333 million entries in the case of the Eurozone. Providing a citizens' income would simply involve adding a fixed amount to each account every month. Each citizen would be able to link their ECB account to their normal bank account so that they could use the money.

Of course, you could argue that if Central Banks started injecting money directly into the economy in this way, there could be a risk of inflation. But this too would be easy to avoid by simultaneously giving the Central Bank the power to remove excess money from the system by imposing a simple flat rate financial transaction tax on all electronically mediated transactions in the relevant currency.

Financial transactions in the Eurozone are currently at least €1.6 quadrillion a year. And those numbers don't even include the massive quantities of Euro denominated transactions occuring outside the Eurozone. For example, around one third of the $5.3 trillion in Foreign Exchange that takes place every day involves euros - that's something like €350 trillion a year - 40% of which involves trading based in the UK. Taxing those transactions at just 0.1% could easily remove  €1 trillion a year from the system - plenty enough to remove any real risk of inflation caused by injecting €1 trillion of debt-free money into the economy every year.

But it is important to realize that the money injection at the level of individual citizens does not even need to balanced by removal at the top end. The fact is that we actually need something like €14 trillion of new debt-free money if we are to fix the debt crisis. So there is clearly plenty of scope for increasing the amount of debt free money in the system before causing problems.

In summary, I believe strongly that debt-free money injection via an unconditional basic income paid to citizens directly by the central bank may be the simplest way to fix the system for good.

Comments very welcome.


Gabriel Zucman : The hidden wealth of nations

I've just finished reading a book by Gabriel Zucman called "La richesse cachée des nations : Enquête sur le paradis fiscaux" ("The hidden wealth of nations : an inquiry into tax havens"). Gabriel Zucman is a young assistant professor at the London School of Economics and a visiting scholar at Berkeley.

He has done a remarkable job at trying to get some hard numbers about the amount of wealth that is hidden in tax havens using previously untapped data.

Here are his basic conclusions that are given on page 45 of his book.

Global Financial Assets in 2013 : €78.0 trillion
  • "Onshore" Financial Assets : €67.2 trillion (92%)
  • "Offshore" Financial Assets : €5.8 trillion (8%)
Of the €5.8 trillion in tax havens
  • 30% (€1.8 trillion) are in Switzerland
  • 70% (€4.0 trillion) are in other tax havens (Singapour, Caymans....)
The €5.8 trillion figure is substantially smaller than another figure that was proposed in 2012 by James Henry who estimated the value at somewhere between $21 and $32 trillion - see his article entitled "The Price of Offshore Revisited".

Zucman's figure is probably safer because he obtained it by adding together all the bonds, stocks and shares and subtracting the amount that can be localised using the standard methods. The gap is the amount that he considers must be hidden in tax-havens.

He makes full use of the detailed information which is provided by the Swiss authorities, who provide a detailed breakdown of the €1.8 trillion managed by Swiss banks. Here is the breakdown from page 39 of the book:
  • Europe (€1 trillion)
    • Germany (€200 billion)
    • France (€180 billion)
    • Italy (€120 billion)
    • UK (€110 billion)
    • Spain €80 billion)
    • Greece (€60 billion)
    • Belgium (€60 billion)
    • Portugal (€30 billlion)
    • Others (€160 billion)
  • Gulf states (€160 billion)
  • Asia (€170 billion)
  • South America (€170 billion)
  • Africa (€120 billion)
  • North America (€90 billion)
  • Russia (€50 billion)
 The €1.8 trillion held on Swiss accounts can be broken down as follows in terms of where it is invested:
  • Investment Funds based in Luxembourg (€600 billion)
  • Investment Funds based in Ireland (€150 billion)
  • International Stocks (eg. US etc) (€400 billion)
  • International Bonds (German etc) (€450 billion)
  • Others (term deposits etc) (€200 billion)
Based on these figures, Zucman estimates that the loss of tax revenue per year is around €130 billion. He gets this from the €5.8 trillion figure for all taxhavens, subtracts the 20% (€1.1 trillion) that is declared, and then estimates that the three main types of evasion would amount to the following :
  • Tax fraud resulting from failure to declare revenues from dividends and interest payments : €80 billion
  • Fraud resulting from failure to pay inheritence taxes : €45 billion
  • Fraud resulting from failure to pay wealth taxes : €5 billion
In the case of France, he estimates that the losses in tax revenue are about €17 billion a year.

It's an impressive piece of detective work. He then proposes some concrete proposals for fixing the system. The first step would be to create a complete global registry of all financial holdings. Such registries exist already at the national level with organisations like the Depository Trust Corporation in the USA. The problem is that there is nothing equivalent at the international level. Once this registry is in place, Zucman proposes that taxes could be imposed at the global level and then redistributed.

It could work. But it will need a lot of coercion and lobbying to get the taxhavens to give in.

Those who have been following my blog since the beginning will perhaps know that I have another way out. The solution could be to abolish all the conventional taxes such as income taxes, taxes on company profits, inheritance taxes and wealth taxes of all sorts.Those taxes could in principle be replaced by a single variable rate financial transaction tax on all electronically mediated transactions. With at least $9 quadrillion in transactions per year at the global level, there is plenty of scope there. With such a system, the idea of a tax haven would no longer have any sense. 

It might be easier to move to a pure transaction tax based system that to try and fix the current loophole ridden system. I'd be interested to know what Gabriel Zucman would think about such a suggestion.


Byron Dale : A true pioneer in the fight for monetary reform

I've been reading up on the economy for just over three years now. But I'm still just beginning to discover the long list of people who have been trying to get the system fixed. Byron Dale is one of those people. He's the key person behind the WealthMoney website, and is the author of the book "Modern Money Secrets". He also wrote "Tales from the Treasury", which tells the story of how he asked the US Treasury to explain how money is created in the US.  As you can read on the Wealth Money website, the answer was remarkably revealing:
"The Treasury answered, “The actual creation of money always involves an extension of credit by private commercial banks.”  John B. Hendrickson Specialist in Price Economics Congressional Research Service and Library of Congress stated: “Money is created when loans are issued and debts incurred; money is extinguished when loans are repaid.”  Anyone who has ever borrowed from a bank knows that when interest is added to your loan your debt has grown but your money supply has not.
When he  wrote back to ask “If all money is created as interest-bearing loans how is the money created to pay the interest on the loans?”the Treasury answered: “The money that one borrower uses to pay interest on a loan has been created somewhere else in the economy by another loan.”

Together with Gregory K. Soderberg, Byron Dale sued the Federal Reserve Bank in Minneapolis in a small claims court.
"When they filed their claim they were told that they could not file the claim because the Federal Reserve Bank of Minneapolis was part of the government and one can’t sue the government. They told the clerk, “We understand that one can’t sue the government but we believe the Federal Reserve Bank of Minneapolis is a private bank. However, we don’t want to argue with you. If you will be kind enough to file the case, if we’re wrong and they send it back saying it can’t be filed, we will come back and pick up our papers. If we’re right, they will file the case and set a hearing date.” They were right. A date was set. A Federal Reserve attorney showed up and testified that the Federal Reserve banks are privately owned banks."
Byron Dale proposes something that is somewhat different to the standard view that we simple need to replace the current debt-based money system by debt free money. He argues that an optimal way to get debt free money into the system is to use newly created money to directly pay for building the transport infrastructure that is essential for the economy. He does this because this is something that is a constitutional responsability of the US government.

It's pretty close to my own suggestion that debt free money should be spent into the economy by the government for projects that receive the approval of 90% of the population since building and maintaining the road system is just one of the many activities that everyone would support.

Great stuff! If you want to see Byron Dale in action, I can thoroughly recommend his lecture at last year's Public Banking Institut Conference that you can watch on Youtube. He's down to earth, very funny, touching, and has spent 30 years fighting the system. He's been in jail four times for his beliefs.

We need more people like him.


A solution for France's debt crisis

France has just been downgraded to AA status by Standard and Poors and François Hollande is now France's most unpopular president ever according to a BVA poll. The French government has been trying to avoid cutting back on Public spending, attempting to fix the public debt crisis by increases in taxation. But clearly this is not working - and the French public are getting increasingly desperate.

But, as I hope you realise, any attempt to fix the debt crisis by austerity CANNOT WORK. There is 2.5 times more debt in the Eurozone than money to pay off the debt. The belief that you can pay off this debt by borrowing more money from the commercial banks is clearly ridiculous. Even a 10 year old can understand that.

We need to try something radically different.

Here's my proposal, which mixes a number of ideas that I have been working on for the last couple of years.

1. The French government should introduce a parallel money system that could be called an N-Euro for National Euro.

2. It would open an N-Euro account for every French Citizen, and every French business. It would be a purely electronic system, with no N-Euro notes and coins, and could use publicly available software systems such as Cyclos.

3. The critical point is that citizens and businesses would have the option of using N-Euros to pay tax bills. It is this ability to pay taxes that would instantaneously give the N-Euros real value.

4. Citizens and business being paid money by the state (public sector workers, pensioners, companies doing work for the government...) would be able to choose to receive a proportion of their payments in N-Euros, rather than conventional Euros.  The proportion of the payments in N-Euros would be decided by the person receiving the funds, and it would be entirely optional. Thus, if someone only wanted Euros, they would fix the ratio at 0% N-Euros to 100% standard Euros. But it would be clear to everyone that accepting N-Euros means that the French government would not need to borrow money from the markets, and it would not need to pay interest. Thus, many people would probably be happy to accept debt-free N-Euros rather than conventional Euros.

5. There would be no direct way to convert N-Euros into Euros. However, someone who had an excess of N-Euros on their account would be able to sell them to another person who had a tax bill to pay. Thus, if I had a "Taxe d'habitation" bill of €1000 to pay, I would be able to buy 1000 N-euros from someone who had a surplus, and use that to pay my tax bill.

These are fairly simple propositions, but I sincerely believe that they could fix France's financial crisis (and indeed, the problems of any government currently forced to accept the austerity "solution" proposed by ex-Goldman Sachs employees like Mario Draghi and Mark Carney who currently run the central banks).  The fact is that the government could inject virtually unlimited quantities of N-Euros into the economy. The amount would be simply limited by the degree to which the French population and businesses would be prepared to accept N-Euros instead of Euros. But logically, individuals and businesses that knew how much tax they would be paying in the future, should be perfectly happy to recieve debt-free N-Euros for at least that sum.

And for every N-Euro that the government can use as a substitute for conventional Euros, the borrowing requirement of the government would be directly reduced by the same amount.

Remember that the Euros that the government currently uses are borrowed from commercial banks, who charge us all interest for renting our money. The N-Euro proposal would end this insanity.

Also note that since the only place that N-Euros can exist is on a government run electronic money system there is no possibility of removing the N-Euros from the system by hoarding them. You can't take N-Euros out of your account and stick them under the mattress. And foreign speculators would not be able to take control of the system either.

François Hollande - are you listening? You said that your true adversary was the world of finance*. That statement was absolutely true. But, so far, you have done virtually nothing to remove their power. It's time to do something.

And as soon as you mention the idea of introducing the idea of a debt-free, interest-free N-Euro system, the squeals of protest from the markets and the banks will be loud. They will not appreciate the possibility that a government could find a way to avoid renting the money system from commercial bankers. It would mark the end of a centuries old scam that has brought misery to millions.  But it will be the proof that you have found the weak link in the system.  Go for it....

*"Je vais vous dire qui est mon adversaire... mon véritable adversaire. Il n'a pas de nom, pas de visage, pas de parti. Il ne présentera jamais sa candidature. Il ne sera donc pas élu. Et pourtant, il gouverne. Cet adversaire, c'est le monde du finance".

*"I will tell you who is my enemy ... my real enemy. He has no name, no face, no party. He will never be a candidate. He will thus never be elected, and yet he governs. This enemy is the world of finance. "


Steve Keen's "Debunking Economics : The Naked Emperor Dethroned?"

I finally got round to reading the Revised and Updated edition of Steve Keen's "Debunking Economics : The Naked Emperor Dethroned?"

It's powerful stuff. Steve Keen really does do a comprehensive demolition job on the standard neoclassical economic models that have dominated economic thinking and policy for decades - models that failed to predict the crash of 2008, and indeed still haven't come up with a realistic explanation of what happened.

The dominant neoclassical view claims that unregulated financial markets will naturally generate situations that optimise well-being. They are ideas that originated with Adam Smith's proposal that a society composed of individuals each acting out of self-interest leads to the highest possible level of welfare for society as a whole - the idea of the 'invisible hand'.

As Keen points out (p268), "The vision of a world so perfectly coordinated that no superior power is needed to direct it, and no individual power sufficient to corrupt it, has seduced the minds of many young students of economics". He should know - because  he was one when he started out as a student.

But he then goes on to say that  "what enabled [him] to break away from that delusional analysis was what Australians call "a good bullshit detector"."  And much of the book goes through virtually all the claims of neoclassical economic theory, demonstrating that his "bullshit" detector is fully operational.

What is particularly impressive is that in many cases, Keen doesn't even have to use his own arguments to demolish the theories - the proofs are often provided by neoclassical economists themselves. But the neoclassical authors who pointed out that the mathematical modeling at the heart of the theory does not hold up when moved into the real world tend to be brushed under the carpet.

Specifically, the first part of the book is called "Foundations : The logical flaws in the key concepts of conventional economics.  Here's the summary of its four chapters - already very devastating.
  • Chapter 3 ('The calculus of hedonism") reveals that economics has failed to derivc a coherent theory of consumer demand from its premise that people are no more that self-interested hedonists. As a result, economic theory can't justify a crucial and seemingly innocuous element of its analysis of markets - that demand for a product will fall smoothly as its price rises. Far from being innocuous, this failure cripples neoclassical theory, but neoclassical economists have both ignored this failure, and responded to it in ways that make a mockery of their claims to being scientific.   
  • Chapter 4 ("Size does matter") shows that the economic theory of 'the firm' is logically inconsistent. When the inconsistencies are removed, two of the central mantras of neoclassical economics - the 'price is set by supply and demand' and 'equating marginal cost and marginal revenue maximizes profits' are shown to be false. Economic theory also cannot distinguish between competitive firms and monopolies, despite its manifest preference for small competitive firms over large ones.
  • Chapter 5 ('The price of everything and the value of nothing') argues that the theory of supply is also flawed, because the conditions which are needed to make the theory work are unlikely to apply in practice. The concept of diminishing marginal returns, which is essential to the theory, is unlikely to apply in practice, 'supply curves' are likely to be flat, or even downward sloping, and the dynamic nature of actual economies means that the neoclassical rule for maximizing profit is even more incorrect than it was shown to be in the previous chapter. 
  • Chapter 6 ('To each according to his contribution") looks at the theory of the labor market. The theory essentially argues that wages in a market economy reflect workers' contributions to production. Flaws in the underlying theory imply that wages are not in fact based on merit, and that measures which economists argue would reduce unemployment may in fact increase it. 
The second part of the book is called "Complexities : Issues omitted from standard courses that should be part of an education in economics", and contains the following five chapters.
  • Chapter 7 ("The holy war over capital") shows that the theory of capital is logically inconsitent. Profit does not reflect capital's contribution to output, and changing the price of capital relative to labor may have 'perverse" impacts on demand for these 'fators of production.'
  • Chapter 8 ('There is madness in their method') examines methodology and finds that, contrary to what economists tell their students, assumptions do matter. What's more, the argument that they don't is actually a smokescreen for neoclassical economists - and especially journal editors, since they routinely reject papers that don't make the assumptions they insist upon. 
  • Chapter 9 ('Lets do the Time Warp again') discusses the validity of applying static (timeless) analysis to economics when the economy is clearly dynamic itself. The chapter argues that static economic analysis is invalid when applied to  a dynamic economy, so that economic policy derived from static economic reasoning is likely to harm rather than help an actual economy. 
  • Chapter 10 ('Why they didn't see it coming') tracks the development of macroeconomics into its current sorry state, and argues that what has been derided as 'Keynesian' macroeconomics was in fact a travesty of Keynes's views. It explains the otherwise bizarre face thtat the people who had the least inkling that a serious economic crisis was imminent in 2007 were the world's most respected economists, while only rebels and outsiders (like Keen) raised the alarm. 
  • Chapter 11 ('The price is not right') deals with the economic theory of asset market, known as the 'Efficient Markets Hypothesis'. It argues that the conditions needed to ensure what economists call market efficiency - which include that investors have identical, accurate expectations of the future, and equal access to unlimited credit - cannot possible apply in the real world. Finance markets cannot be efficient, and finance and debt do affect the real economy. 
  • Chapter 12 ('Misunderstanding the Great Depression and the Great Recession') returns to macroeconomics, and considers the dominant neoclassical explanation of the Great Depression - that it was all the fault of the Federal Reserve.
Keen also illustrates how much of the theory is totally without empirical support. It appears to be an entirely hollow edifice that simply does not stand up when subjected to serious scrutiny.

And yet it is orthodox neoclassical theory that is used by virtually all goverments to determine their policies - or rather lack of policies. Since any government intervention is by definition an interference in the perfect operation of the markets, it has to be banned. And the fact that no neoclassical economists were able to explain the 2008 crisis is still an embarrassment for the entire profession. 

I would be very interested to know if there are any neoclassical economists out there who have read the book and can still look at themselves in the mirror. There is a strong case to be made that their stupidity and refusal to question their own dogmatic beliefs is behind a lot of the problems that we face today.

Note added February 2014 : If you would like to hear Steve Keen talking - there's a BBC radio interview with him from June 2012 that you can find here.