20 Nov 2011

(Yet another) solution to the debt problem

I know. It's getting tedious. Here I am proposing yet another possible way of getting out of the current debt quagmire. So, what's the recipe today, Jim?

Well, I've been thinking about two facts. One is that Banks charge all of us a 2% commission every time we pay for something in a foreign currency with a credit card. The second fact is that banks themselves are doing $4 trillion a day in foreign currency exchanges for free.

On the first point, note that if you are lucky enough to live in a Eurozone country, you can buy anything you like in 17 different countries within having to pay this 2%  financial transaction tax. For example, I can buy books, CDs, DVDs and so on from amazon sites in France, Germany, Italy, and Spain with no fee. However, buying the same stuff from Amazon UK, or from Amazon US would involve me handing over 2% extra to the banks. Likewise, if you live in the USA, you can access a very large number of suppliers on the web, and so you can probably avoid the bank surcharges. But if you live in the UK, tough. You get clobbered for 2% for anything purchased from outside the UK, and for everything you buy when on holiday in continental Europe. Sounds like a good reason for joining the euro to me.

I must confess that the fact that the Banks have the nerve to charge anything for multiplying the value in one currency by the current exchange rate is mind-boggling. That literally is all they have to do. It's a single floating point multiplication. My Mac can do several billion such operations per second. How could they possibly justify this "commission". I defy any banker to give me a decent explanation.

So, what's my proposal? I propose that governments should pass a law saying that the banks have to pay 2% of the value of any foreign exchange operation they do as a financial transaction tax, in exactly the same way that the banks charge us. Specifically, I would suggest that governments align the rate on whatever bank was using the highest commission value - on the assumption that banks know what is a fair and reasonable fee for converting a number in one currency to another.

It seems to me that there are two things that could happen. One is that the banks continue slapping the 2% commission on every credit card transaction that involves a change of currency. In that case, here are the amounts of revenue that would be generated for different countries on the basis of the BIS data from its triennial report.
As you can see, in the UK, there are 1,853 billion dollars a day of foreign exchange transactions. Assume 250 trading days a year, makes 463 trillion dollars. So, if you applied the same perfectly reasonable 2% charge to that as the banks charge me for multiplying two numbers together and saving the result, and you would get an annual income for the UK government of 9.268 trillion dollars. That's around 5.86 trillion pounds (don't worry, I won't charge anything for performing that convertion). You would wipe out national debt in a few months. You could abolish taxation etc etc.

In France, where foreign exchange is slightly less hectic, you could still make 758 billion in revenue - 561 billion euros. Nearly enough to abolish taxation there too.

But of course, there is the second option. Maybe the banks might decide to scrap the 2% commission that they charge the rest of us.

Actually, either of the two options is OK with me.


  1. OK with me too. Not tedious at all. The sooner the wimps in power realize these proposals are perfectly applicable the sooner people cease to suffer this worldwide state of terror.

  2. Aha! Yes, it would be pretty amazing if governments did slap a 2.99% tax on the financial sector's foreign exchange. It may not be very likely, but it sure would be amusing to see them trying to explain why they think it's ok for them!