2 Jul 2015

Who gets the interest on UK public sector debt? Answer : the Financial Sector

The nice man at the UK Debt management Office kindly pointed me to the historical data concerning the ownership of UK gilts. The dataset is really very interesting, and provides a breakdown of where ownership lies that goes back to 1987, and provides detailed numbers every quarter.

I've regrouped the more recent part of the dataset in the following table, which provides the detailed numbers for the period from the end of 2008 through to the end of 2014.  I chose that period because at the end of 2008,  the Bank of England had no Gilt holdings at all.

You can see that at the end of 2014, the UK government had emitted over £1617 billion in Gilts. £403.0 billion of this (24.9%) of this is held by the Bank of England and corresponds to Quantitative Easing.  In a sense, I think that this doesn't count, because the UK government effectively owes itself this money. The remaining £1214 billion can be split up as follows:
  • Insurance Companies and Pension Funds : 38.6% (£468.4 billion)
  • Other Foreign (not including Foreign Central Banks) : 27.5% (£333.4 billion)
  • Other Financial Institutions : 13.2% ( £159.7 billion)
  • Monetary Financial Institutions : 13.0% (£157.9 billion) 
  • Foreign Central Banks : 5.5% (£66.2 billion)
  • Households : 2.1% (£24.9 billion)
  • Private Non-Financial Companies : 0.16%  (£1.9 billion)
  • Local Government : 0.09%  £1.1 billion)
  • Public Corporations : 0.04% (£0.5 billion) 
A first point is that the amount held by households, non-financial companies, local government and public corporations is trivial - around 2%. Gilts are clearly not being used significantly by anyone outside the financial sector - unless the "Other Foreign" label includes a substantial proportion of individuals, but I doubt it.

Clearly, the 18 Banks that have the status of GEMM (Gilt-edged Market Makers) sell the vast majority of the UK Debt that they buy every month towards other people in the financial sector - not to individuals.

I have also generated a graph showing how gilt ownership has changed over the entire 1987-2014 period covered by the dataset. Here's what it looks like.

This graph is particularly illuminating. You see that the massive purchasing of gilts on the secondary markets by the Bank of England that started at the beginning of 2009 has had almost no effect whatever on the overall structure. Every single actor has increased the amount of gilts held during this period. The worst case appears to be the Monetary Financial Institutions themselves (i.e. Banks). They actually increased the amount of gilts they were holding from £25.7 billion at the end of 2008, to £157.9 billion at the end of 2014. So much for the idea that Quantitative Easing was going to increase the amount of money in circulation in the economy. The Financial Sector has hung on to its pile of gilts, encouraged by a chancellor (George Osborne) who has turned the gilt printing process into overdrive, especially in the last couple of years.

It is difficult to make sense of this. But it looks like the UK government has been paying for its austerity program by running the printing presses. And, as I showed in yesterday's post that asked "Where did the UK government borrow £625 billion in just five years", ALL those gilts are initially purchased by a cartel of 18 banks - the so-called GEMMs - who are in a position to rig the market for their own benefit.

I also wonder to what extent this massive increase in the quantity of gilts that have been produced is not masking a massive increase in the money supply - directed clearly at the financial sector. I suspect that everyone can see that the Bank of England's decision to purchase over £400 billion in gilts can be seen as an attempt to pump newly created money into the financial system - although many people (including myself and 19 prominent economists) have argued that the same money would be far more useful if injected directly into peoples' pockets - QE for the people.

But, until I have been convinced that the 18 Banks that have the exclusive right to purchase gilts have not been buying those gilts with money that they create out of thin air, I will continue to believe that the whole system is very likely to be a big scam. A scam that allows Banks to create money buying bonds, and either sitting back and letting UK taxpayers pay them interest, or flogging those bonds on to other parasites in the financial sector. It's a scam that appears to be in operation since the creation of the Bank of England in 1694, and has cost UK taxpayers an average of 4.4% of GDP every year since then.

You might say that selling £468.3 billion in gilts to the Pension Funds and Insurance Companies, and allowing them to cash in on 36.8% of the roughly £49 billion that UK taxpayers pay in interest charges every year is a way to help out poor deserving pensioners in their twilight years. But if UK taxpayers wanted their money to go to pay pensions, they could simply increase the state pension - that way everyone would benefit.

Instead, the billions held by Pension funds are wasted. That money should be used for investment in business, energy, transport, housing - not as a risk free ticket for milking taxpayers.

1 Jul 2015

Where did the UK government borrow £625 billion in just five years?

I've been trying to understand how the UK government managed to increase Public Sector Debt from around £975 billion at the end of 2009 to over £1600 billion at the end of 2014. That's an increase of over £625 billion in just five years - around £10,000 for every man, woman and child in the country.

Last Friday, I wrote to the UK Debt Management Office, the authority responsible for borrowing money on behalf of the UK government, asking for details of how the money was raised, and specifically where the money comes from.

I was very pleased to get a detailed reply from the DMO's press officer on Monday morning. Full marks for a prompt reply. Here's what I learned in response to my four main questions.

UK Government borrowing

From the Eurostat database, I understand that between the end of 2009 and the end of 2014, UK public sector debt increased from roughly £ 975 billion to over £1600 billion

Question 1 : Can you confirm that the £625 billion of government borrowing over the last 5 years was all handled by the UK’s Debt Management Office?


1.       The primary source of data on government borrowing and the public finances is published by the Office for National Statistics (ONS) in the monthly “Public Sector Finances” A link to the most recent edition is below. Annex PSA4 provides a time-series of UK public sector net debt (£1,500.2 billion in May 2015).

http://ons.gov.uk/ons/rel/psa/public-sector-finances/may-2015/stb-psf-may-2015.html

2.       The UK DMO is an Executive Agency of HM Treasury responsible for government debt and cash management. It borrows from the financial markets via of sales of marketable sterling securities primarily gilts, (UK Government bonds with maturities out to beyond 50-years) and Treasury bills (short term money market instruments with initial maturities of one-, three and six months). Other parts of government, in particular National Savings and Investments (NS&I), borrow via sales of non-marketable securities, primarily from the public


3.       The table below shows gross gilt sales in cash terms by the DMO for the previous five financial years and those currently planned for 2015-16



4.       The table below shows end financial year stocks and the net contribution to financing from sales of Treasury bills for the previous five financial years and those currently planned for 2015-16



On your website you give a list of 28 primary participants that are involved in purchasing UK government gilts and bonds.

Question 2 : Can you confirm that these 28 players are the only ones that currently are involved in purchasing treasury bonds?

5.       The 28 financial institutions you list are Treasury bill primary partcipants - financial institutions that have agreed, subject to their own due diligence, to bid at Treasury bill tenders on behalf of investors. These firms also provide secondary market dealing levels for Treasury bills. These are the only institutions who can currently bid directly at the DMO’s weekly Treasury bill tenders.

6.       A separate page on our website, lists those 21 financial institutions (18 wholesale and 3 retail) who are recognised by the DMO as Gilt-edged Market Makers (GEMMs). These are the only institutions who can currently bid directly at the DMO’s gilt auctions.  The DMO also sells gilts via syndication. Only wholesale GEMMs can apply to become Lead Managers on gilt syndications. We appoint four Lead Managers on each transaction and bids from investors and the other wholesale GEMMs (who act as Co-lead Managers on such transactions) must be submitted via the Lead Managers.

7.       In both of the above cases, once a primary participant or a GEMM has bought securities from the DMO they can sell them to third parties of their choice in the secondary markets. We do not have access to information on such transactions.


I have not been able to find any information on your site concerning which of the 28 primary dealers are the most active. In France, the Agence France Tresor (effectively the equivalent of the DMO) doesn’t provide full details, but they do give a ranked list of the most active players at the end of each year. For example, this is list for AFT primary dealers in 2014
  • 1 BNP Paribas
  • 2 Société Générale
  • 3 Crédit Agricole
  • 4 Barclays
  • 5 HSBC
  • 6 Natixis
  • 7 Nomura
  • 8 Morgan Stanley
  • 9 Royal Bank of Scotland
  • 10 Crédit Suisse
Question 3 : Can you provide the equivalent information for the primary players working with the DMO?
8.       The DMO does not publish information on the individual performance of GEMMs.

My understanding is that although the 28 primary dealers working with the DMO are the ones that buy the bonds, they will typically sell the bonds on to other actors, including pension funds and insurance companies. Again, the AFT doesn’t provide very detailed information about who is currently holding French Government debt. However,  they do provide a breakdown  here that shows
  • 64.3% are held by "Non-resident investors"
  • 19.7% by French Insurance Companies
  • 9.8% by French Credit Institutions
  • 1.8% by French UCITS 'Undertakings for Collective Investments"
  • 4.4% by "Other” French

Question 4: Can the DMO provide equivalent information about the holders of UK government debt?
9.       Data on the sectoral breakdown of gilt holdings is collected and published (with a three month lag) by the ONS. We publish their data on our website. Please see the link below
http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/gilt-holdings-data-historical.xls&page=publications/quarterly


I have a number of comments on these replies.

First, it looks like the short term treasury bills can be safely ignored, because they provide very little net funding. It's clearly the bonds (i.e. Gilts  in the UK) that are the real way for borrowing money.

Second, I now have a complete list of the 18 GEMMs that are the only agencies permitted to purchase UK goverments gilts. Note that they are all Commercial Banks

  • Barclays Bank plc
  • BNP Paribas (London Branch)
  • Citigroup Global Markets Limited
  • Credit Suisse Securities
  • Deutsche Bank AG (London Branch)
  • Goldman Sachs International Bank
  • HSBC Bank PLC
  • JP Morgan Securities PLC
  • Lloyds Bank plc
  • Merrill Lynch International
  • Morgan Stanley & Co. International plc
  • Nomura International plc
  • Royal Bank of Canada Europe Limited
  • Royal Bank of Scotland
  • Santander Global Banking & Markets UK
  • Scotiabank Europe plc
  • Societe Generale Corporate & Investment Banking
  • UBS Limited
Importantly, noone else can by gilts. If you want to buy gilts you would have to go via these 18 banks, or buy them on the secondary markets.

Third, it looks as if there is no way to find out which of these Banks actually provided the £625 billion because "The DMO does not publish information on the individual performance of GEMMs."

Fourth, the European Primary Dealers Handbook provides some further details about how the gilt sales take place. Specifically it states that in the case of the UK DMO "the maximum permitted allocation for any single bidding institution is currently set at 25% of the nominal amount on offer".  This presumably means that it would theoretically be possible for just 4 banks to buy up the total amount on offer at a particular auction.

Finally, I wonder whether the UK DMO can distinguish between purchases made directly on behalf of a third party (such as pension funds and insurance companies), and purchases made by a Bank that are only transferred at a later date? I think that this distinction is very important because when a Bank that has GEMM status buys gilts using money provided by a third party such as a pension fund or insurance company, there is no question of money creation. In contrast, if a Bank that has GEMM status purchases gilts for its own use, it could potentially involve money creation, because (as the Bank of England reported last year) Banks effectively create money when they make loans. It is therefore conceivable that gilt purchases by GEMMs could involve an effective expansion of the money supply by commercial banks.

I also suspect this entire system would be easy to rig by the 18 banks.  The European Primary Dealers Handbook says "GEMMs are the only institutions eligible to submit a competitive bid directly to the DMO. This means that all other market participants wishing to bid at a gilt auction must route their order through a GEMM which, while not permitted to charge for this service, may use the information content of that bid to its own benefit".

I may be naive, but this suggests that the 18 banks could inform each other of all the prices being proposed, and decide to make bids themselves that are just better. That way they can potentially pick up the entire stock themselves. But of course, since the UK DMO provides no information about who actually buys the gilts, such rigging would be invisible.

I've asked the nice man at the UK DMO some additional questions concerning these issues, and will let my readers know what he replies. Stay tuned......

30 Jun 2015

Greece - one of only two European countries to decrease public sector debt between 2011 and 2014. Give them a break!

I've just had another look at the levels of Public Sector Debt in the European Union - figures that I reported in full back in April.

This time, I've compiled a table of the change over the four year period from the end of 2011 to the end of 2014. Here are the results (measured in billions of Euros).

Greece decreased its debt by nearly 11%. The only other country to decrease debt was Norway with -7%. Every other country increased the amount of debt. The UK incresed debt by nearly 30%. France by 16.2%. I note that France just reveled that they had borrowed another €51.6 billion in Q1 2015.

The hypocrisy is breathtaking. Any politician involved in ganging up on the Greek people should be ashamed of themselves. The Greeks should be getting a medal for sound government, not treated like shit.

28 Jun 2015

Where do Banks get the money they lend to our governments?

In my last post, I noted that European Governments have borrowed around €7.8 trillion over the last 20 years, and that in three of those years they have borrowed €1 trillion or more in a single year.

So, here's the €64 billion question. Where did that money come from?

All the European governments have some sort of Debt Management Office (DMO) whose job is to borrow  money. They do this by working with a set of "Primary Dealers" - essentially Commerical Banks. You can find the list of these primary dealers on the European Union's Economy and Finance Committee website.

There is also an organisation called the AFME (Association for Financial Markets in Europe) which produces a 307 page document called the "European Primary Dealers Handbook", that gives details of how this borrowing process is handled in 16 of the main European Countries. They also compile  a table with the list of current Primary Dealers for these countries.

I've rearranged the table so you can see which are the most important Primary Dealers

As you can see, there are some Primary Dealers that are particularly omnipresent. Barclays is used by all 16 countries. Deutsche Bank and HSBC are used by 15 whereas Société Générale is used by 14 countries. BNP Paribas, Citigroup and the Royal Bank of Scotland are each used by 13 countries, whereas Crédit Agricole, Goldman Sachs, J.P Morgan and Noomura are used by 12. And so on.
The table also shows that the number of Primary Dealers varies quite a lot from country to country, from a minimum of 8 in the case of Sweden, to a maximum of 37 in the case of Germany (although Germany says that it doesn't have a true Primary Dealers list.
The rules used by each country are not fixed, but it a number of cases, it is explicitly stated that only Primary Dealers (i.e. Commecial Banks) are permitted to buy government bonds. For example, Austria says "Only Primary Dealers have the right to participate in the Auction Procedure." The German documents stipulate that " Only members of the “Bund Issues Auction Group” may par ticipate in the auctions directly". The Irish documents say  " In order  to par ticipate in Irish Government bond issues, institutions  must be recognised by the NTMA as Primary Dealers." For Slovakia, "Only PDs who have  a valid primary dealer Contract with the ARDAL are authorized to submit  bids  in auctions."
I suspect that even in countries where such rules are not explicitly written, it is nevertheless the case that only Primary Dealers that have the opportunity to purchase government bonds. I have started to ask that specific question to each country's Debt Management Office to check on this.
OK So now we know that Governments will sell their bonds to a selected group of Banks, the next question concerns where the Banks get the money that they use to purchase the bonds.
Of course, we are supposed to believe that these Banks are simply acting as intermediaries for their clients, who could be pension funds and insurance companies for example. We are supposed to believe that those investors give the banks their money, and then those banks use their status as primary dealers to buy up government bonds.
But, as the Bank of England stated clearly last year, when Commercial Banks make loans, they typically don't use money that has been already been deposited with them by savers - they actually create the money.
So, here's my fundamental question.
What percentage of the €7.8 trillion used by primary dealers such as Barclays, Deutche Bank, HSBC, Société Générale etc to buy government bonds was money that existed before the bonds were purchased? And what percentage was simply created out of thin air?
I suspect that it may be very difficult to know the truth, because the entire system is cloaked in mystery. The Debt Management Offices in different countries do not provide precise details about which Primary Dealers actually made the purchases. At best, they may provide a ranked list of the most active Primary Dealers, such as this one provided by the Agence France Trésor.
1 BNP Paribas
2 Société Générale 
3 Crédit Agricole 
4 Barclays 
5 HSBC
6 Natixis 
7 Nomura
8 Morgan Stanley 
9 Royal Bank of Scotland 
10 Crédit Suisse 
The Austrian Tresury also publishes such lists - here's the latest one for 2014, together with the rankings for 2013
1. Société Générale (4.)
2. Barclays (2.) 
3. HSBC France (1.) 
4. Nomura (8.) 
5. Goldman Sachs (6.)
6. Deutsche Bank (5.)
7. UniCredit Bank (9.)
8. Commerzbank (3.)
9. Natixis (11.)  
10. Citigroup (10.) 
I also found rankings for Primary Dealers for the Netherlands here:
1. Commerzbank 
2. ING Bank 
3. HSBC France 
4. Société Générale 
5. Citigroup 
But don't you think that we absolutely need to know the truth for all our governments? And not just rankings, but actual detailed listings of the purchases made by every one of these banks? And we need to know if those Banks used prexisting money, or money they created themselves.
It seems to me perfectly possible that the vast majority of the €7.8 trillion used to buy European Government Bonds in the last 20 years, was simply created out of thin air by commercial Banks. I'm happy to be proved wrong, but until I am, I think that we have to consider this possiblity seriously.
And if that is the case, then I think that every one of us should be denouncing what is effectively a total scam. We have collectively paid over €6.66 trillion in interest charges for borrowing money from Bankers who quite probably didn't have the money that they lent our governments.  It also means that by creating money this way, the Money Supply will have increased by up to €7.8 trillion by the operation of Commercial Banks - an incredibly dangerous and irresponsible scenario. Surely, no responsible Central Bank could allow that to happen?
As I suggested to Alexis Tsipras on my blog,  I think that the Greek government could say that they would be happy to repay any loans (plus the interest) to anyone who could prove that they used preexisting money to buy Greek Government Bonds.  Here is the list of Greece's Primary Dealers (they are all Banks):
  • Alpha Bank (Athens)
  • Banca IMI (Milan)
  • Bank of America  Merrill Lynch (London)
  • Barclays (London)
  • BNP Paribas (London)
  • Citigroup (Athens)
  • Crédit  Suisse (London)
  • Deutsche Bank (Frankfurt)
  • EFG Eurobank-Ergasias (Athens)
  • Goldman Sachs (London)
  • HSBC (Athens)
  • ING (Amsterdam)
  • J.P. Morgan (London)
  • Morgan  Stanley (London)
  • National Bank of Greece (Athens)
  • Nomura  (London)
  • Piraeus Bank (Athens)
  • Royal Bank of Scotland (London)
  • Société Générale (Paris)
  • UBS (London)
  • Unicredit (Milan)
We just have to ask them what was the origin of the money they used to purchase Greek Bonds. If it turns out that they made their bond purchases using money that they created out of thin air, it would dramatically change the nature of the claim on the Greek people.
Finally, let me just note that if you think about the £625 billion that Osborne and Cameron have borrowed over the last 5 years, exactly the same question needs to be asked. Where did that money come from?

European Public Sector Borrowing : €7.8 trillion over 20 years - 86% was used to pay interest charges

A couple of months ago I compiled the full figures for European Public Sector Debt using the latest Eurostat figures. The total at the end of 2014 came to over €12 trillion.

Here's another way of presenting the same figures that makes another vital point. I have simply added up the amount of public sector debt for all the countries in the Eurostat database year by year since for the last 20 years.

In this way it is easy to see how much the debt increased every year, both in millions of Euros, but also as a percentage. As you can see, the amounts borrowed each year are impressive, averaging around €400 billion, but with three years starding out because debt increased by €1 trillion a year  or more in 2009, 2010 and 2011.

The total amount of additional debt taken on over that 20 year period adds up to a very impressive €7.8 trillion

In my next post, I will be asking where did this €7.8 trillion come from. But for the time being, let me point out another interesting fact that you can see in the table. In the right hand column, I have added up the interest payments for all the countries in the database. I have already noted that total interest payments total €6.66 trillion over that 20 year period. That means that 86% of the money borrowed by European Governments over the last 20 years was used to pay interest charges.

The other striking fact is that the amount of interest paid every year is incredibly constant. The average is €333 billion, but the range is remarkably small - with a minimum of €294 billion in 2004, and a maximum of €388 billion in 2012.

Now isn't that intriguing? Even when total debt soars by 167%, the markets magically adjust things so that taxpayers pay a roughly constast amount every year.  I'm reminded of the fact that a good parasite will always try to get just the right amount of nutrients from its host - as much as possible without the ill effects being too noticeable.

22 Jun 2015

Crunch time for Greece - can the Bankers keep their gravy train on the rails?

Today will no doubt be critical for Greece, but also for everyone in Europe.

At risk is the entire system based on the idea that Governments are forced by article 123 of the Lisbon Treaty to borrow money from Commercial Banks.

That system has led to a situation where Europe's governments now owe over €12 trillion, a sum that meant that last year, European Taxpayers paid out €354 billion in interest payments in 2014 alone - over €6.66 trillion since 1995. The country with the largest amout of debt - Germany, with over €2107 billion of public sector debt.

Who lent our governments the €12 trillion? Was it an army of grannies via their pension funds?

No. In France at least, we know that the only players that get to purchase French government bonds (OATs or  "Obligations Assimilables du Trésor") are Banks. Here is the list of the 19 "primary dealers" who work with the Agence France Tresor, which handles France's public sector debt. They are all Banks.

  • BARCLAYS BANK PLC
  • BNP PARIBAS
  • CREDIT AGRICOLE-CIB
  • CITIGROUP
  • COMMERZBANK
  • CREDIT SUISSE
  • DEUTSCHE BANK
  • GOLDMAN SACHS
  • HSBC
  • JP MORGAN CHASE BANK
  • BANK OF AMERICA - MERRILL LYNCH
  • MORGAN STANLEY
  • NATIXIS
  • NOMURA
  • ROYAL BANK OF SCOTLAND
  • SCOTIABANK EUROPE
  • SOCIÉTÉ GÉNÉRALE
  • UBS
Agence France Tresor publishes a list of the most active dealers. Here's the latest one for 2014. Again, only Banks make the list.
1 BNP Paribas
2 Société Générale
3 Crédit Agricole
4 Barclays
5 HSBC
6 Natixis
7 Nomura
8 Morgan Stanley
9 JP Morgan
10 Royal Bank of Scotland
Do the banks that buy the bonds keep them? No. Because they can sell them on to other players including Pension Funds and Insurance Companies. The latest figures for France show that
  • 64.3% are held by "Non-resident investors"
  • 19.7% by French Insurance Companies
  • 9.8% by French Credit Institutions 
  • 1.8% by French UCITS 'Undertakings for Collective Investments"
  • 4.4% by "Other" French
I don't know precisely who buys and who holds the debt of other European Countries, but there is every reason to think to that a similar mechanism operates everywhere - Commercial Banks buy up Government Bonds and then sell them on to other players.

What did the Banks use to buy the €12 trillion Government Debt? Well, it seems clear that they simply create the "money" out of thin air, as stated very clearly last year by the Bank of England. But amazingly, the Basel Banking Regulations state that lending to Soveriegn Governments that have a rating of AAA to AA- has a risk weighing of 0%, meaning that no capital is required. Here is the list:



It is clear from this that, at least in the case of AAA to AA- rated governments, Commercial Banks can literally generate infinite amounts of government debt. All they need to do is find Politicians that are sufficiently ignorant that they don't know where the Banks get their "money" from to buy the bonds.  Either ignorant, or quite possibly complicit.

This is what is at stake today. Can the Bankers, led my Mario Draghi - president of the European Central Bank, but previously managing director for Goldman Sachs International from 2002 to 2005 - keep the gravy train on the rails.  Doing that will require massive distortion of the truth by the media. So far, at least, that strategy seems to be working.

21 Jun 2015

A proposal for Banking reform - Force Banks to say what proportion of loans involves pre-existing money, and what proportion is newly created

Here's a proposal for Banking reform that I believe could fix many of the problems that are built into the current system.

The vast majority of people believe that when they  go to a Bank for a loan, the Bank will lend them money that had previously been deposited by savers. People believe that when savers get one rate of interest (say 2%), and borrowers pay another rate of interest (say 5%), the difference in interest rates is how Banks make their money. This sounds fine, because the Bank is simply paying itself for providing a service - acting as the middleman between savers and borrowers.

However, I hope that you all know that this story is a complete myth. As explained by the Bank of England in an article in their Quarterly Review  last year called "Money in the Modern Economy : An Introduction",, Commercial Banks effectively create money when they make loans. I quote:

“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…”

They also confirmed Positive Money's claim that 97% of the money in circulation in the UK economy has been created as interest bearing debt by those Commercial Banks.

Effectively, Commercial Banks have a licence to create new money. Now there are some economists who will accept this fact, but they will claim that the total amount of new money being created by Commercial Banks can be controlled by Central Banks. But this too is a myth.  Again, it is the Bank of England who made the point clearly (page 2 of another document published in their Quarterly Bullentinentitled "Money Creation in the Modern Economy").  I quote :

"“…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.”

So, here is my suggestion.

When Banks make loans, they should be legally obliged to state what proportion of the money they are lending comes from preexisting deposits, and what proportion involves the creation of "new money". While this would certainly require some additional accounting for the Banks, it would actually make things far easier to understand for the Bank's clients.

Imagine - you go to the Bank to get a mortage for £500,000. On the loan agreement it would be written clearly that (say) £100,000 corresponded to preexisting savings deposits that were being loaned out, whereas the remaining £400,000 was being created by the bank.

The same would be true for governments when they go to the markets to borrow. As I have been arguing recently, the fact that the risk weighting on lending to sovereign governments with credit ratings between AAA and AA- is set by the Basel Banking Regulations at 0% means that, particularly in this case, Banks are likely to create all the money needed to make the loan. 

At the end of each financial year, the Bank would be able to compile a clear statement of precisely which types of loans involved recycling preexisting money, and which ones involved creation of new money. This would greatly clarify where the banks have been using their money creation licence. For example, are they using newly created money to lend to businesses? Or to provide loans for mortgages? Or for consumer credit? Or for lending to governments? It would all be very informative.

By forcing the Banks to be honest about the nature of the money they are lending, I believe that the nature of the current Banking system will at last become obvious to everyone. And once taxpayers realize that they have been paying interest to Banks that have lent money that they didn't actually have, I suspect that people may decide that there might just be a more sensible way to set up the system.

17 Jun 2015

A message for Alexis Tsipras - Tell your creditors that Greece will only pay back loans made with "real" money

The Shylocks at the IMF, the ECB and the European Commision want their pound of flesh. They are saying that the Greek goverment has to cave in to their demands, or else.

I think it is time to make a few basic facts clear. Between 2013 and 2014, the Greek government cut public sector debt by 0.7% - from €319 billion to €317 billion. Over the same period, Cameron and Osborne increased UK public sector debt by 14.6%, from €1794 billion  to €2055 billion.  Which Government is being the most irresponsible?

In April 2015, Greece was forced to pay 12% interest on its public sector debt. The Germans only paid 0.56% on their debt - currently the largest in the European Union -  no less than €2180 billion at the end of 2014. Amazingly, Luxembourg is only paying 0.06% interest on its public sector debt. Why the difference?

I'll tell you why. It's because governments are forced to borrow money from the commercial banking system, and that banking system has the power to blackmail governments who don't do what they are told.

But the really shocking fact that Alexis Tsipras should bring out into the open, is the fact that the Commercial Banks who lend money to governments don't actually need to have any money to make those loans. They have a licence to create infinite amounts of "money" that they can lend to governments. If the government in question plays ball, then they get a AAA  or a AA- rating from the ratings agencies. (Fitch, Moody's and Standard and Poors).  And if they have a nice high rating like that, the Banks can literally create as much "money"  to make loans as they like - because the wonderful Basel Banking Regulations stipulates that lending money to such governments has a risk-weighting of 0%. They therefore need no capital at all - and can create infinite amounts of debt. 

In contrast, when the ratings agencies decide to give countries like  Greece a rating of CCC, those loans made with fictitious money created out of thin air suddenly have a risk-weighting of 150% - meaning that for every €1 billion  in loans, the Banks have to hold capital reserves of something like €150 million. Since they don't have that level of capital, a country like Greece will no longer be able to borrow at all.

How can this insane system be broken?

Here's what I think Alexis Tsipras, the Greek Premier, should say to his creditors. He should say that Greece will pay off any loans made with money that  existed before. Thus, if a Bank that could prove that made a loan using money that it already had (because, for example, it used money deposited with them by savers), the Greek government would be happy to pay back the loan in full, including the interest.   In contrast, if it turns out the the Banks were unable to prove that they used pre-existing money, and that they had made a loan using money that they had simply created of thin air, the Greek government  could reasonably argue that there is no reason why they should have that "money" paid back at all. And they certainly shouldn't be allowed to claim 12% interest for lending their fictitious money. 

If the Greek government were to do this, they would force the Banks to admit that most of the time, they don't actually  have the money they use to make  loans. This could completely undermine the elaborate con trick that Banks have been using for centuries to extort money from taxpayers. Remeber that of the €12 trillion currently owed by European Union's 28 governments, over €6.6 trillion (55.1%) is entirely due to the interest payments made to the Banking sector since 1995. Our governments have not being spending too much on public services, pensions, education and so forth. They have been paying too much money to Banks for making loans with non-existent money!

Going back, you can trace the origins of this scam at least as far back as the creation of the Bank of England in 1694. Since that time, UK taxpayers have been paying an average of 4.4% of GDP every year in the form of interest charges on public sector debt - interest payments made to Bankers who didn't even have the money they lent - they just created the "money" out of thin air! Since the signing of the Maastrict and Lisbon treaties, this same model has now been extended to every single country in Europe.

So, go for it Alexis! Tell your creditors  that Greece will happily pay back all loans made with "real" money - money that actually existed before the loan was made.  For example, they would pay back money that had been deposited by savers with a Bank. In contrast, any loans made with "money" that didn't exist before is simply fraud. It should not be repaid, and nor should there be any interest to pay.

Could it be that the current Greek crisis could finally take the lid of what must surely be the biggest racket ever?

31 May 2015

Science and the Unconditional Basic Income

When I'm not writing my blog, my day-job is as the Director of the Brain and Cognition Research Center (CerCo) in Toulouse, France. It's a lab with about 85 people, many of whom are keen young scientists working for a Masters, a PhD thesis or as a postdoc. Many of them are highly motivated, very dedicated to science, and hoping that at some point, they may able to make a living from doing science.

The problem is that, tragically, there are simply not enough jobs to go round. Many will be forced to give up science at some point.

I was recently in Florida for the Annual meeting of the Visual Sciences Society. There were roughly 1800 scientists there. Again, the vast majority were young and enthusiastic scientists. Again, it was clear that only a fraction were going to make it in research and end up with one of the rare academic positions.  Indeed, I was one of the panel in a discussion group organised for young doctoral and postdoc scientists, where the idea was to try and give some tips about how to get funding. Together with the other members of the panel, I did my best to not sound too depressing - knowing full well that many of the young enthusiatic faces in front of us were going to be forced to give up science at some point.

That got me thinking. And I realised that here was a perfect illustration of why we really need an Unconditional Basic Income. The fact is that science is, or at least should be, great fun! Many very talented people would happily do the science for free - if only they could simply have enough money to feed and clothe themselves and be able to afford to pay for somewhere to live.

So, just imagine what would happen if, instead of fighting each other to be one of the tiny fraction of keen young scientists that manage to get a job, people were all given an Unconditional Basic Income of a few hundred euros (or pounds or dollars) a month. That would mean that young scientists would be in a position to devote a considerable time each week to doing what they enjoy - in this case science. If they wanted to have more revenue to cover for extras, like travel, restaurants, concerts etc, they could take on some additional work doing things like working in bars and restaurants, correcting exam papers, or any number of a range of gruelling jobs - in other words, the sort of things that people would not do spontaneously.

Even teaching students can be enjoyable and rewarding, and it is quite possible that quite a few young scientists (and even older ones!) would be happy to do some teaching spontaneously. In my case, I do around 20 hours of teaching at the Masters level every year with no payment - simply because I think it is important. It's also a great way to get good students.

So, imagine that - a world where everyone is guaranteed an Unconditional Basic Income that was sufficent for a basic living. It would free people up to spend time on things that they want to do without having to be paid for that work. Huge amounts of human activity which currently can only be done if the government can the money to pay for it would get done for free. Currently, those jobs can only be done by raising enough money in tax to pay people to do the work. What a stupid waste of resources!

Scientific research is just one of the areas that could be done without tax based funding, but it's a particularly clear illustration. Imagine the social progress and technological advances that would be possible if we could only free people to do the things that they love doing.

To be clear, science would advance vastly more quickly if the armies of doctoral students and postdocs who are currently scrabbling around trying to get the few paid jobs were given the chance to be able to do what they would want do anyway. There's a particuarly obvious example in the case of computing, where a substantial proportion of the software that is currently in use has been written and developed by dedicated open-source developers - in their free time, and with no financial motivation. It's a system that has been proved to work already.

But science and technology isn't the end of the story. Music, Dance, Theatre and Literature would also all be massively enhanced if we could just free people from the chore of having to try and pay the bills by fighting to get one of a diminishing number of paid jobs.

In the end, I believe that paid work should be restricted to just those tasks that no-one would want to do spontaneously. I doubt that anyone would spontaneously like to spend 8 hours a day cleaning out sewers, collecting garbage, constructing roads and buildings, or doing dangerous jobs like fighting organised crime and terrorism. In the sort of society built around an Unconditional Basic Income, those jobs would suddenly become very highly paid. And you could also find that people would be able to chose to do them just part time - a few days a week, or a few weeks every year. Rather than spending 40 hours a week, 46 weeks a year doing a poorly paid job and having to wait to be retired to start doing the things we really want to do, we could all spend most of our time doing what we want to do, and just doing a few weeks a year of some unpleasant, but vital and hence highly paid work.

It may sound hopelessly utopic to imagine that everyone could essentially do what they enjoy doing most, and that the few necessary jobs that don't get done spontaneously would be paid very well. But, actually, I think it could happen.  And I can't help thinking that this is really the world I would like my descendants to live in.

25 May 2015

A solution for Greece - a government backed "Bitcoin" pegged to the Euro

The Greek government is looking increasingly threatened by the Shylocks at the IMF and the ECB who want their pound of flesh, and are prepared to do what it takes to break the spirit of the Greek people who voted massively against the system. Default looks increasingly likely.

How can the Greek government manage to find the money to pay its civil servants and pensioners, if they have to find billions of euros to pay the loan sharks?

Well, here's an option. While Bitcoin is not exactly my idea of the perfect money system (it was a great deal for those who gave themselves the right to create them in the first place), what it has done is show that it is perfectly possible to create a totally independent monetary system that can actually work, without the complicity of the banking sector.

I've previously argued that one solution for hardpressed governments like the one in Greece (but also in Spain, Portugal and France) would be to introduce a parallel electronic money system - possibly called the N-Euro - partly because it would stand for National or New Euro, but also because I'm a Neuroscientist! See also my Youtube presentation on the subject.
 
Setting up such a system could be a bit tricky and complex. So, why not do it with a Bitcoin equivalent. There are now at least 740 different Cryptocurrencies currently in existence,
although only 10 have market capitisations of over $10 million. To the best of my knowledge, none of these systems has government backing.

Perhaps it is the right time for the Greek Government to change this?

My proposal is that the Greek Govenment could decide to pay some percentage of civil servant pay as well as state pensions and welfare in the form of a bitcoin equivalent - perhaps called the N-Euro. Those N-Euros would be valid for paying taxes in Greece (but not elsewhere), which would immediately give the currency a true value, a value exactly equivalent to the conventional Euro system.

The percentage of payments made in N-Euros could be anything - from 5% up. Interestingly, once the system is up and running, people would become more and more happy with the idea of using N-Euros, and businesses would be confident that they can use the currency to pay their taxes and would therefore be able to accept payments using the new currency. At that point, the percentage of the Greek public sector finance that used the N-Euro could be progressively increased, almost without limit.

There are actually a large number of advantages of this approach. One is that the N-Euros would be a true monetary system that does not depend on debt. In this way it would totally different from conventional currencies like the £ and the €. In such cases, up to 97% of the currency in circulation has been created by commercial banks as interest-bearing debt. In my opinion, this is a truly stupid system, that gives enormous power to the banks who get to decide where any new money goes (often to fuel house price bubbles and other asset bubbles). It also guarantees that at least 90% of the population will spend their lives paying interest to the money creators and their allies.

The Greek people and its government could thus be the first to break this system by inventing a truly debt-free money system. And, since the system could be entirely independent from the banks, there is no way that the vested interests could stop them.

Furthermore, since the newly created money would only be used to pay public sector workers to do vital jobs or provide the elderly with pensions, noone could seriously question that this newly created money was being used for important things - a huge difference compared with the situation where only commercial banks get to decide the priorities.

Note that there is a subtle difference between this current proposal and my earlier propositions concerning the N-Euro. Previously, I had proposed that individuals would choose what percentage of their pay (or pension or benefits) should be paid in N-Euros. Here, the percentage would be decided by the government. Given the critical situation, and the real possibility that the IMF and ECB could actually force the Greek government to lay off massive numbers of public sector workers and cut pensions even further, I suspect that few in Greece would object to getting 5%, 10% or even 20% of their income paid in the alternative electronic N-Euro.

Go for it Greece! And, once you have shown that we don't need bank created debt-based Euros, I hope that the system would spread to other countries like Spain and France.

24 May 2015

Let's compare an FTT with existing taxes

As more and more people are talking about the utility of introducing a modest Financial Transaction Tax, there have been more and more "studies" claiming to show that even a 0.1% tax would make the economy ground to a standstill.

Tim Worstall (with whom I've sparred on a number of occasions), has  published  a whole string of opinion pieces on the Forbes website arguing why the sky will fall in if ever there was an FTT- here and here and here, for example.

In February 2014 the City of London produced a report claiming that introducing an FTT in Germany would decrease GDP by 5.8%, and Italy it would produce a decrease of 13.0%.

Well, for me these so-called studies are clearly not providing a balanced case. Sure, any tax will have negative consequences for some sectors, so there is no big scoop in pointing out that there will be costs.

But there is a simple argument. If you agree that governments need to use taxation to raise revenue to pay for public services, then you need to look at what the effects of those taxes are. What behaviour does a particular tax discourage? What behavours does each tax encourage.

Recently, I gave the percentage of UK revenue coming from different taxes. So let's take them each in turn and ask what they each encourage and discourage.
  1. Income Tax -  £163.2 billion or 31.8%
    1. Discourages people from working hard
    2. Encourages people to find ways of avoiding it by using tax-havens and other tax-optimisation mechanisms
  2.  VAT -  £111.2 billion or 21.6%
    1. Discourages people from buying goods and services - hence putting a severe brake on the economy
    2. Encourages people to find ways of avoiding it by failing to declare payments and using a range of scams to reclaim VAT even when the payments were not made 
  3. National Insurance Contributions  - £109.2 billion or 21.3%
    • Discourages employers from taking on staff
    • Encourages employers to pay people illegally, or employ illegal immigrants instead of residents.
  4. Corporation Tax -  £42.3 billion or 8.2%
    • Discourages companies from making a profit
    • Encourages companies to declare their profits elsewhere, thus depriving the UK of tax revenue (eg. Amazon, Starbucks, Google etc).
  5. Fuel Duties -  £27.2 billion or 5.3%
    • Discourages people from burning petroleum products
    • Encourages ecologically responsible behavior
  6. Stamp Duty Land Tax  -  £10.7 billion or 2.1%
    • Discourages people from buying property thus reducing the mobility of the population
    • Encourages people to rent rather than buy property 
  7. Wines, Beer, Spirit & Cider Duties - £10.5 billion  or 2.0%
    • Discourages people from drinking too much, reducing the cost to the health system
    • Encourages people drink responsibly
  8. Tobacco Duties   -  £9.6 billion or 1.9% 
    • Discourages people smoking, thus reducing costs for health care
    • Encourages people to look after their health
  9. Capital Gains Tax   -  £5.8 billion or 1.1%
    • Discourages people from declaring profits and reducing flexibility in the economy
    • Encourages people to find ways of avoiding using tax optimisation systems involving tax havens, trusts etc.
  10. Inheritance Tax - £3.8 billion or 0.7% 
    • Discourages people from dying (!)
    • Encourages people to find ways of avoiding the tax using tax havens and other schemes
All the other taxes together only generate  £20 billion of revenue for the government (3.9%).

I think this list makes it clear that of the 10 main sources of tax revenue, the vast majority are simply destructive, since they discourage "good" behaviour, and encourage "bad" ones. The only exceptions are fuel duties, taxes on alcohol and tobacco.

There are two taxes that are currently not used at all, and that I believe any intelligent politician should take very seriously.

The first is the idea of taxing financial transactions. At the sorts of low levels that I believe would be sufficient (well under 1%), such taxes would have almost no impact on the behaviour of the vast majority of people and businesses. We are all perfectly used to paying an extra 3% for using credit cards (even if it's the merchants that have to pay up), so there is no way that 0.1% is going to make a difference. And the vast majority of business transactions would go through exactly as they do now. Only those who make their money via speculation would even notice.

The cost of implementation (one line of code in the software handling the transactions) would be nothing compared to the cost of collecting income tax, VAT, national insurance contributions, and corporation tax. And since it would be essentially impossible to avoid (without breaking the law), there would be no problems with evasion.

Yes, the financial markets would be encouraged to reduce the number of steps involved in any transaction, because anyone using a system where a whole series of intermediaries each takes a tiny sliver would be beaten by one where the transaction was made in one step. But that would surely increase the efficiency of the financial service industry, not the contrary.

Some people will perhaps try to argue that we really do need zillions of transactions to get the right price for financial products. But what percentage of the $10.7 trillion in FX trading that CLS boasts about having handled on one day last year (17 December) was actually necesssary to find the "correct" relative prices of each currency? Why not accept the fact that all that pushing and shoving back and forwards is just done because it allows people with very large amounts of money to move around to siphon money out of the system? We  have just seen that the big banks have just been fined billions for rigging the FX markets? A 0.1% FTT on those transactions would immediately end such criminal behaviour, with no need for any regulation.

The second missing element is a land tax, levied on the basis of the land surface owned by a person or business. Clearly, such a tax would discourage people and businesses from hogging land, and encourage large land owners to sell off they land. This is surely a good idea if we want a more equal society.

P.S. Note added Monday 25th May. For those who are interested, there is a fascinating and stimulating set of exchanges between me and Tim Worstall, probably one of the world's most prolific critics of FTTs. Some of it is in the commentary on this post. But there's a lot of other exchanges in response to Tim's piece on Forbes called "Memo to Elizabeth Warren: This is how you tax banks, not the Financial Transaction Tax".

23 May 2015

UK Financial Sector - why so secretive?

I've been trying to put some hard numbers on the scale of Financial Transactions in the UK, and my latest estimate puts the number at over £2 quadrillion for 2014. But it's hard work finding the information. One of the reasons is that for some reason, the UK Financial Sector doesn't seem to want to live in the same world as everyone else.

For example, there is a thing called the World Federation of Exchanges, which is "the trade association of 64 publicly regulated stock, futures and options exchanges." In fact, their web site includes information about no less than 192 different structures. 110 are full members of the WFE and there are a further 67  described as "Affiliates and Correspondants". There are just a handfull that are described as "Non Members". They include the two exchanges in the US (ELX and One Chicago), a few in various countries like Argentina (Rofex ), India (MCS-SX "India's New Stock Exchange", and the United Stock Echange of India) Iran (Teheran Stock Exchange) and Japan (Tokyo Commontity Exchange and the Tokyo Grain Exchange). Otherwise, for Europe, there are just two exchanges that are not part of the system : The Warsaw Stock Exchange, and the London Stock Exchange.

Why does the London Stock Exchange not want to be either a member, or even affiliated to the World Federation of Exchanges? Why has it also decided not to be included in the FESE (the Federation of European Securities Exchanges)? And why does it not provide any figures to the Bank for International Settlements - BIS - which has been recording "nav" (Not Available) since 2005, a year when the total value of executed securities trades was £5.2 trillion?

I've already complained about the fact that major players like LCH.Clearnet Ltd have avoided providing open information to BIS since 2009, and that level of secrecy is seen for several other players like Barclays, whose Bar-X trading platform appears to be invisible to anyone who is not a paid up member of the platform.

So, what's the explanation? 

My guess is that secrecy is one of the great strengths of the UK Financial Services industry. There have been numerous cases in recent history where it has been clear that the UK offers clients a wide range of options for hiding their financial transactions via a bewildering array of offshore sites. It's clearly a very lucrative proposition for many. But I think that this also explains why the City of London is so committed to blocking any attempt to introduce anything requiring transparency, including the option of a tax on financial transactions. Indeed, now that Cameron and Osborne are back in power for another 5 years with an absolute majority in Parliament, they are probably breathing a sigh of relief. They will now be able to count on the UK government to block any such propositions. It doesn't matter that taxing transactions make incredibly good sense for just about everyone. Keeping things hidden is clearly even more important.


14 May 2015

UK Financial Transactions in 2014 - at least £2 quadrillion

I've been suggesting to both David Cameron and the future leaders of the UK Labour party that they should seriously consider replacing much if not all of the current tax system with a simple tax on all financial transactions. I've argued that the level of such transactions is currently running at about £2 quadrillion a year in the UK - roughly 4000 times total tax revenue.

There's a bit of guesswork there, because no-one (except me!) seems to think that it is useful to add all the numbers up.

It's a problem that I have been trying to tackle for some time. My very first estimates were based on the data provided by the Bank for International Settlements, which documented total transactions in the UK of  £1152 trillion for 2008. I immediately noticed that there were going to be problems, because from 2010, BIS failed to include figures for one of the UKs biggest players - LCH.Clearnet Ltd - which had handled nearly £863 trillion  of transactions in 2008, but had disappeared off the map by 2010 (and has remained invisible to BIS ever since).

Since then, I have been trying to compile my own numbers, using sources that I found on the web. I thus published an estimate of £1760 trillion a year back in feburary 2012,  and in March 2014, I argued that the number was probably at least £1840 trillion.

So, what's the story today? Can I justify the £2 quadrillion figure?

Well, one of the big players in the foreign exchange markets in CLS. Their 2014 annual report, which you can download here, boasts on page 13 that :
"Throughout 2014, we settled a record average daily value of USD 5.1 trillion, up over 2% from 2013. On 17 December, we surpassed both our value and volume recordds, settling USD 10.7 trillion on ticket volumes of 2.1 million"
Assuming 250 trading days a year, thats already a handy $1275 trillion - around  £800 trillion. The problem is that CLS is a "global" organisation, working in many different countries, but nevertheless with a big presence in the City of London. Indeed, the BIS's triennial report based on data obtained for the month of April 2013 concluded that "The vast majority of global FX trading in 2013 has occurred via the intermediation ofdealers’ sales desks in five jurisdictions: the United Kingdom (41%), the United States (19%), Singapore (5.7%), Japan (5.6%) and Hong Kong SAR (4.1%)."

I note that the $5.1 trillion a day reported by CLS in 2014 is almost as large as the $5.3 trillion total reported in the BIS report.

I had already calculated that LCH.Clearnet Ltd's SwapClear system had handled a total of over $640 trillion in various types of Swaps in 2014. That's  over £400 trillion. The LCH.Clearnet site is remarkably detailed, and so it is possible to split that activity as shown in the following tabale. 

37% of the $640 trillion was in Overnight Indexed Swaps (OIS), 33% in Forward Rate Agreements (FRA), and just over 28% in Interest Rate Swaps (IRS), with very minor contributions from Basis and Zeroes (whatever they are).

LCH.Clearnet is also a big player in Fixed Income, and there's a graph you can download here  that breaks down volumes since 1999 for LCH.Clearnet Ltd and LCH.Clearnet SA. I believe that one handles transactions in Euros, and the other in Pounds. The total for 2014 was €146,716 billion - €81,560 billion for LCH.Clearnet Ltd, and €65,156 billion for LCH.Clearnet SA. That adds in a further £117 trillion.
LCH.Clearnet Ltd is also a player in the Foreign Exchange Markets - like CLS. I downloaded a table from their website  that reports monthly volumes over the past two years. This allowed me to calculate that the total for 2014 was a mere  $907,337,943,833.12 - not even a trillion.  Totally dwarfed by CLS who manage the same amount every couple of hours.

After that, we need to add in numbers for players like CHAPS, which (according to their main webpage) handled £68 trillion. They note that "CHAPS turns over the annual UK GDP every 6 working days". They also note that "CHAPS represents 0.5% of UK total payment volumes but 92% of total  sterling payment values (excluding internalised flows within Payment Service Providers)". That's interesting, because it implies that if £68 trillion is just 0.5% of total UK payment volumes, and that therefore the real total is 200 times that much - namely £13.6 quadrillion. Surely, some mistake?

We can add in the figures for the London Stock Exchange, another major player that BIS has not bothered to include in their figures. I downloaded their monthly figures for LSEG electronic order book trading for December 2014 that provides the following table, from which I calculated that the total value for all the different elements was £67.5 trillion. Interestingly, actual share trading only makes up for just over £1 trillion of that.
Some other numbers can be found in the BIS annual reports. However, those don't get published until about September, so I will use the figures for 2013. These include numbers for transacations processed by CREST (£279.75 trillion), ICE Clear Europe (£84.36 trillion).

I have found accurate figures for other payment systems used in the UK on the CHAPS website  where you can download a document with an Annual summary of Payment Systems. Here is an edited version of a table from that document, showing the figures for BACS, CHAPS, Faster Payments and Cheques.

The last big player that I want to mention is an entity that used to be called NYSE Liffe. In 2013 I calculated that they had handled €474 trillion in transactions, roughly £380 trillion.  At the time, they produced wonderfully detailed reports at the end of every trading day, and a very clear summary at the end of each year. Unfortunately, NYSE LIFFE has now disappeared - it has been swallowed up by ICE (Intercontinental Exchange), and since that time you can no longer download the NYSE Liffe annual factbooks.

I've been trying to compile detailed numbers for ICE Europe from their website, but it's proving tricky. You have to download data for each individual day, and there is no "Year to End" column that keeps a running tally. However,  I did manage to download set of figures concerning various types of Credit Products and found that ICE Clear Europe -CDS had handled a total of €2,566,278,963,677 worth of transactions denominated in euros,  together with an additional $118 009 232 426 in dollars.

Fortunately, the World Federation of Exchanges provides some detailed information on their website, and I was able to compile the following numbers for ICE Futures Europe for 2014.

The WFE also provides a number for transactions done by the London Metal Exchange (14.13 trillion dollars).

So, in this final table I provide a summary of what I currently have available. When the values are provided in Euros or Dollars I have converted the numbers into sterling using current rates.

The total comes to over £2400 trillion. Even if we decide that around half of the £800 trillion in foreign exchange handeled by CLS may be done outside the UK,  that still leaves a very healthy £2 quadrillion in transactions. I suppose that some of the activity listed under ICE may turn out to be occuring somewhere else, but it will be virtually impossible to know for sure, unless someone other than me takes the task of compiling realistic figures for the UK seriously.

In the end, as I have argued repeatedly, it looks very likely that the value of UK Financial Transactions really is around 4000 times larger than total UK tax revenue. And that means that an intelligent and responsible government could effectively replace the existing tax system with a minuscule Financial Transaction Tax of around 0.025%.

12 May 2015

An open letter to the future leaders of the UK Labour Party


Dear colleagues, 

The catastrophic results of last weeks General Election will no doubt cause a great deal of soul-searching in the Labour party. There will be some who will argue that the solution should be to move the party towards the centre ground – following the tactics of the Blair government. There will be others who will argue for a more radical left-wing approach. 

For my part, I sincerely believe that the problem with Labour's 2015 Election Campaign is that there were few truly radical proposals in it. Sure, Ed Miliband tried hard to convince voters that the NHS was safer in Labour hands, and there were a few proposals like the abolition of non-dom tax status and the mansion tax. But in many ways, this really only seemed like a somewhat toned down version of Tory austerity. 

Many would-be Labour voters probably ended up voting for the UK Green Party, who managed to attract 1,156,149 votes – despite only being rewarded with one seat.  The fact is thatthe Green Party's manifesto contained a far more imaginative set of proposalsthan Labour's. And yet was there anything in the Green Party's proposals that was fundamentally at odds with Socialist principles?

For me, there are three very major proposals in the Green Party's program that could and should be seriously considered by Labour. Indeed, for me they are so sensible that I have argued that David Cameron'sgovernment should also take them seriously. They are:
  1. Replacing much of the existing tax system with a very modest tax on Financial Transactions in the UK
  2. Replacing much of the existing Welfare and Benefits system by an Unconditional Basic Income that would be paid to all Citizens from birth to death
  3. Replacing the current system in which the Nation's money supply is created by private banks as interest-bearing debt
Let's look at taxation first. For some reason, UK politicians, including Labour, appear not to grasp the fact that taxing all electronic financial transactions would be a simple and fair way to raise revenue. It is difficult to obtain definitive numbers because of the deliberate opacity surrounding the activity of much of the UK's financial services industry, but it is almost certain that the total volume of UK financialtransactions is at least £2 quadrillion a year – that's £2,000,000,000,000,000. For example, in 2014 the London-based clearing company LCH Clearnet Ltd  handled some $642 trillion worth oftransactions. Amazingly, since 2010, LCH Clearnet's numbers have not even beenincluded in the Bank for International Settlements figures – they areapparently "nav" (not available). Likewise, the BIS figures do not mention other major players like Barclays, whose Bar-X clearing system does not provide public figures.

As I mentioned yesterday, the £2 quadrillion figure isnearly 4000 times higher than the revenue generated by all the taxes collectedby Her Majesties Customs and Excise - £513.6 billion in 2014-15, implying that the government could scrap all the current tax system, and replace the lot with a universal financial transaction tax of just 0.0257%. The idea that everyone would pay – not just the traders in the City.  Thus, if someone gets paid a salary (or a pension) of £2000, roughly 51p would be transferred to the treasury. And if they spent £1800 of that salary in credit card payments, gas and electricity bills, rent or whatever, they would lose a further 46p. So, while the amount paid by such an ordinary citizen would be negligible (less than £1), the amount that would be handed over by the high-frequency traders responsible for doing the $5.3 in foreign exchange trading would be very considerable.  But that's only fair. 

There is no reason to defend the current system based largely on VAT – value-added tax – that for some reason totally ignores Financial Transaction. A cynic would say that it is normal that the Financial Sector shouldn't pay VAT, because all that frantic trading doesn't actually add any value to the economy. But that is precisely why a radical reform of taxation would make so much sense.

Let me just point out one other huge advantage of using an FTT to raise the needed revenue instead of the current system. Currently, some 83% of all UK tax revenue comes from just four taxes, namely, Income Tax, VAT, National Insurance Contributions and Corporation Tax. All four are notoriously open to "tax optimisation" or evasion. Non-doms can declare their income abroad, and thus deprive the state of much needed income, even when they fully benefit from living in the UK. Scandals involving VAT claims are also rife, and have led to billions being paid out in unjustified "refunds". National Insurance Contributions can be avoided by paying workers under the counter. And, of course, the ability of multinationals like Starbucks, Amazon and Google to avoid paying their share of Corporation Tax has been a major scandal for years. All such abuses would end with a switch to an FTT based system. 

Finally, it is worth remembering that the cost of implementing an FTT would be tiny compared with the cost of the current tax system. Now that the vast majority of payments are made electronically, it is literally just a question of adding a single line of code to the software that handles the transactions to allow the treasury to recover the funds. And changing the rate when needed would be no more complicated than allowing for fluctuation in the exchange rate.

Let us now look at the second major reform. This is the proposal that we should effectively scrap most of the current welfare and benefits system, and replace it by the introduction of an Unconditional Basic Income that would be paid to all Citizens, from birth to death. We are already used to the idea of a Universal Child Benefit paid for every child under 16. And we are also used to the idea that all people over a certain age should be entitled to a basic State Pension. The idea would be that everyone should also receive a basic income throughout life. Some people find the idea of paying people money for doing nothing objectionable, but it actually makes very good sense. 


1.   It would eliminate at a stroke the need for food-banks and pay-day loans – two of the most appalling demonstrations of social injustice in the UK.


2.   It would mean that people who would like to be involved in unpaid but vital work such as looking after elderly or disabled members of their family, being involved in associations and charity and the like, would be able to do that without having to wait to be retired.


3.   It would be a massive boost to UK industry since it would be effectively a subsidy for UK business. Since families would already have a basic income, the amount needed to provide a living wage would be less. Cars and other manufactured goods could be produced for less in the UK than elsewhere. That has to be good for business.


4.   It would allow the UK labour market to be far more flexible. Many on the right have been arguing that zero-hour contracts are in a sense good for business, because it reduces costs. Introducing an Unconditional Basic Income would have the same effect. With a basic cushion to cover basic expenses, people would be happy to sign up for a job where they only have to go in to work when there is an actual demand. The rest of the time, they would be free to be involved in other useful yet unpaid activities .


5.   It would provide a solution to the challenge posed by waves of immigrants prepared to accept work at abnormally low wages. If the Basic Income was only provided to bona fide UK Citizens, or at least people who had been resident for a minimum period, this would make it much harder for clandestine immigrants to undercut residents.


6.   It would provide a permanent solution to a fundamental problem that many politicians are yet to come to terms with – the fact that paid employment is getting more and more scarce. It is already perfectly possible to eliminate cashiers in supermarkets. Before long, we will no doubt have driverless cars – and jobs as taxi, bus and lorry drivers will also become scarcer. Even highly skilled jobs like analysing X-ray images for tumours can already be replaced by computers. This trend is bound to continue.  We have to accept that fact and admit that there will not be enough paid work to allow everyone to earn enough to live decently. But, on the other hand, it is clear that there is no shortage of wealth.

Let us now turn to the third fundamental reform – the need to completely change the nature of money. The parliamentary debate in November2014 on "Money Creation and Society" demonstrated that there is a vital need for open public debate.  But the arguments are now clear. 

We currently have a system in which 97% of the money in circulation has been created by privately owned commercial Banks. Those banks effectively have a monopoly on money creation – a monopoly that they have enjoyed since the creation of the Bank of England in 1694. That ability to effectively lend out non-existent money and charge interest is the real reason why our entire system is biased towards making the rich even richer and the poor even poorer.

It is already outrageous that a Bank can lend money that it doesn't have, and dupe borrowers into believing that they are being lent money that has been deposited by someone else. But the insanity of the system becomes even more apparent when you consider the situation where Commercial Banks lend the UK government money that they don't have. In the five years that Osborne and Cameron have been in power, public sector debt has increased a staggering£625 billion, from roughly £975 billion at the end of 2009 to over £1600 at theend of 2014. That's roughly £10 000 of extra debt for every man, woman and child in the UK. And this, at a time when the UK government has been claiming that they have been handling the economy wisely. 

No, they have been running bills and putting it all on the slate for the coming generations. Who benefits from this? It is the Banks who create the "money" that they lend.  The historical record shows that interest payments on public sector debthas averaged 4.4% of GDP since the creation of the Bank of England in 1694. Servicingthis debt has robbed UK taxpayers of  £654billion of hard earned cash since 1995, and over £49 billion in just 2014alone

This insanity has to stop. The problem is that the City and the Bankers have the government in their claws. Osborne and Cameron know that if ever they were to challenge the status quo and threaten to kill the goose that has been laying golden eggs for the Bankers and their friends, then they could be squeezed hard by an increase in interest rates. With UK public sector debt at over £1600 billion, it is clear that any increase in the interest rates would totally cripple the government. 

How can this situation be changed? While it would be nice to simply pass an act of parliament making it illegal for Banks to lend money they don't have, there will certainly be massive resistance to such a move. I suspect that the simplest strategy would be to introduce the first two measures – namely a tax on financial transactions, and a Basic Unconditional Income for all  citizens and use them to provide  a form of Quantitative Easing for the People. The Unconditional Basic Income would be true debt free money – it doesn't have to be paid back, and there would be no interest to pay. Thus, progressively it would be possible to use the mechanism to allow the economy to recover from the massive amounts of debt that are currently crippling it. 

Some would argue that injecting debt free money directly into citizens' pockets could result in inflation. There's a simple solution. If the amount of money in circulation starts to increase too much, the Financial Transaction Tax could be used to remove any excess. With those two levers in place, the Bank of England would be able to adjust the amount of money in circulation, and at the same time gradually phase out our dependence on debt based money produced by Commercial Banks. 

So, there you have it. Three very radical suggestions that could easily be part of a future Labour program. 

Interestingly, those three proposals were already in themanifesto of the UK Green Party. Why not team up with them? Combine your ideas, and you would be able to provide a very real alternative to another 5 years of Tory austerity.