10 Jan 2012

Eureka 2 : The UK solution

At 4 o'clock this morning, I woke up with an idea already fully formed in my head. It was a solution for the UK's debt problem, that, if you think about it, seems blindingly obvious. I'd presumably been dreaming about it. It felt a bit like Paul McCartney waking up with the tune to "Yesterday" fully formed in his head. Interesting phenonomon.... but I digress. So, what is the idea?

Well, if you have been following the story so far, you know that the number one problem in the Eurozone is that governments are forced to pay ridiculous amounts of money in interest on their sovereign debt, because of the refusal of the ECB to lend them money directly. Mario Draghi, the head of the ECB, and previously the European Director of Goldman Sachs, will only lend money to his friends in the banking sector, claiming that he can't lend to governments because of the Lisbon treaty. But as Michel Rocard and Pierre Larrouturou noted, and I as had already pointed out, paragraph 2 of article 123 of the treaty specifically says that Central Banks can lend to "publicly owned credit institutions". So, for example, the Caisse des Dépôts in France could use the next bank handout organised by Mario Draghi on the 29th February to borrow the 1.59 trillion euros needed to wipe out the entire French government's debts to the banks. Instead of paying 3.41% interest to the banks (54.25 billion euros per year, or 2.81% of French GDP), they would pay just 1%, thus saving around €38 billion of interest payments per year for the French tax-payers.

But the solution in the UK is 1000 times simpler - and would be an even better deal for taxpayers.  The official value for the  UK's national debt in 2010 was £1,164 billion, 79.9% of GDP. In 2010, the government paid £49 billion in interest payments on this debt - 2.9% of GDP. The latest figures for long term interest rates show that, despite the massive cuts, and the Government's valiant attempts to appease the markets and maintain its triple A status, it was still paying 2.29% interest to the banks, meaning that they will still be paying £31 billion. The entire cuts program is supposed to be justified by this reduction in interest payments. We are told that we should be eternally grateful for the government's sound economic policy, because it allows them to avoid the excessive interest charges that get charged on government debt in the Eurozone.

This entire story is a total sham. The Bank of England could perfectly well print the £1,164 billion needed to pay off the entire national debt, lend it at 0.01% to a "publicly-owned credit institution" as permitted by paragraph 2 of article 123, who could lend it to the government at 0.02%, who could immediately pay off the outstanding debt. Why 0.01%? Well, it turns out that this is the rate used by the US Federal Reserve for  secretly lending $1200 billion to the US banks - so clearly, these sort of numbers for central bank lending are perfectly okay.

Which "publicly owned credit institution"? Well, the Royal Bank of Scotland is 84% owned by the UK taxpayer. That should do. But if they refuse to play ball, and insist on a mark-up of more that 100% when they hand on the money to the government, it may be necessary to invent a new one. That should not require too much skill on the part of Osborne and Co.

The operation would do two main things. First, it would mean that the UK taxpayer would only need to pay interest charges at 0.02% instead of the 2.29% that it currently pays the banks. That would cost just £233 million, down from the 2010 value of £49 billion - over 100 times less.

Secondly, it would mean that the banks that lent the money to finance the UK's national debt would get their £1,164 billion back. They should be super happy right? After all, they keep complaining that they don't have any money to lend to businesses, that they need £75 billion in quantitative easing from the Bank of England (in addition to the £200 billion they were handed out in 2009-2010).

Wrong. The banks, and their collaborators in the government will never propose such a solution, despite the fact that it seems to be blindingly obvious. Why on earth not?  There are two reasons.

Firstly, the banks know perfectly well that if the debts are paid off, they won't actually get the money. The vast majority of the money that the banks have been lending is money that they didn't actually have to lend. It is money that was created out of thin air by the magic of fractional reserve banking. When that sort of debt is paid off, it simply disappears in a puff of smoke. Of course the banks don't want that sort of money back.

But secondly, if they allowed the government to pay off its debts, it would kill the goose that has been laying the golden eggs for decades.  The goose that allowed the banking sector to siphon off £444.6 billion from the UK economy for the period between 1995 and 2010 (2.59% of UK GDP). The goose that is supposed to provide them with another £31 billion this year. After all, they've got their bonuses to pay.

And of course, no-one has ever questioned this God-given right of banks to rip everyone off. Why not? Well, I suppose that it could just be because I am the first person to ever think about the possibility of the Bank of England providing the money directly to the Government to pay off its debts. But I seriously doubt it. It's essentially exactly what the people running the Positive Money site have been saying for ages - money creation is for central banks only - not for commercial banks.

No. I think the main reason is that nearly all the media is controlled by financial groups that are determined to keep the money machine running as long as they can. And the UK's politicians also seem to have been completely muzzled. Some of them may simply consider that the City is perfectly entitled to cream off 2.5% of GDP in interest charges every year. I suspect that Cameron and Osborne may be sufficiently blinkered to believe it. But what about Ed Balls? What about Vince  Cable? Why on earth have they said nothing? Maybe Murdoch's media empire has enough compromising phone calls that he can trot out to blackmail them all.

But he can't blackmail 99% of the population. It is time for citizens to break this insane system. We need to cut out the middle man in the City and force Central Banks to provide Governments with the money they need to write off debts to the commercial banking sector.


  1. Excellent. As to the answer why don't politicians implement these measures or why haven't they up to now - it's because they're at the same time private citizens with quite a lot of money to spend. This money, which they've made sure they get by passing the corresponding pay and pension rises, is then invested on 'the markets' - those nasty things everybody hates at the moment as it's what has the economy by the short and curlies. So, as you rightly mention, here is another golden goose but at the individual level. It is by now perfectly clear why certain individuals become politicians and if they can themselves benefit from buying up national debt on top of the perks they get from the job, why on earth should they rush to 'solve' the situation? 

    Je propose:

    That no one in public office should be allowed to trade on the markets, in the same way as it is illegal for persons with inside knowledge to benefit from said information.

    You get the idea ...

  2. Thanks Michael. Yes, I would go for that. But I have another suggestion for why the UKs politicians are totally incapable of making any sensible suggestions. Could it be that Murdoch's evil empire has so many skeletons in cupboards that they can bring out as soon as anyone dares to raise a finger to attack the corporations and the markets, that noone can speak up.

    I think we are going to have to do this ourselves.

  3. at least 2 American presidents have been assassinated whilst trying to take public control of the creation of money.  When somebody on a motorbike draws alongside your car and you hear a magnetic sort of clunk - you'll know you are onto something (briefly!).

  4. You're right. I should start keeping my eyes open for passing motocyclists ;-).



  5. Can i ask why you are comparing Eurozone countries to the UK?   we are currency sovereign
    you do have the part about they could pay the national debt off right now just by printing it though...  but why would you the pension funds etc need gilts (even at the silly yields currently) its not just banks who use gilts you know

  6. andycfc

    I compare the Eurozone countries and the UK because the central banks are separate. In the Eurozone (where I live), we have the privilege of having Mario Draghi, the ex-European Director of Goldman Sachs as the head of the ECB. I seriously think that there is almost no hope of him allowing the gravy train of commercial bank lending to be derailed.

    In the UK, things might just be different. The Bank of England really could just print all the money needed to pay off the national debt, and as I have repeatedly argued, paying off debts to banks is not inflationary - unlike Mervyn King's preferred strategy of Quantitative Easing. And Mervyn King actually does occasionally say quite sensible things - like "Of all the many ways of organising banking, the worst is the one we have today" http://www.economist.com/node/17363435?story_id=17363435

    So, I'm pushing the UK to break the money creation monopoly held by private banks because it is a very clear alternative to the massive austerity currently imposed by Osborne and Cameron. But, yes, the banks are going to fight like crazy to keep the Golden Goose laying...

  7. thanks for the reply Simon, intresting stuff. curious about the positive money stuff but i should declare here and now that im MMT then you can see where im coming from
    This means i dont agree that the BoE are independant from the government...they might make some show of being so but they aint (merv has to write a letter to his boss when inflation isnt on target... if they were truly independant why would he have to?)
    I dont agree QE is inflationary, its an asset swap not money printing,  the inflation we have is a mix of cost-push inflation (ie energy costs,.... mostly oil!) and self imposed VAT increase...  thats come out and hey presto its dropped funny that...       demand-pull inflation is non existant and that also applies with the banks, banks are not reserve constrained with their lending, they lend on whether you are credit worthy and they can make profit... reserves are at most an afterthought (Canada for instance doesnt even have a reserve requirement) there is no real demand for loans as ppl are deleveraging so M4 is shrinking not expanding whatever the BoE does.... QE isnt doing what they want us to think ie increase lending, its done exactly what it was supposed to and support banks balance sheets... the money mutiplier is a myth (hard one to get your head round i expect considering thats the orthodox view but its wrong when you realise how they do work now)

    Yes you are absolutely spot on we could pay the national debt off right now but why on earth would you want to?    you could nationalise the banks if it comes to it (something im not anti i may add...and a few of my peers in MMT would like to see)

    anyhow keeping fighting the fight against the austerity rubbish in the UK

  8. I had to check - MMT for Modern Monetary Theory - right?  (http://www.washingtonpost.com/business/modern-monetary-theory-is-an-unconventional-take-on-economic-strategy/2012/02/15/gIQAR8uPMR_story.html )

    If so, then I certainly agree that governments should not be running surpluses. The variable FFT proposal, in which the rate of the FTT is automatically adjusted so that every month, the government's revenue is exactly matched by income is able to do precisely this.

    Central banks do indeed pretend to be independent, and governments pretend that they have no influence, but you're right that this is something that could easily be changed.

    You say that QE is not inflationary, because the banks trade assets. But what sorts of assets? Are they assets that the BoE can use? What is to stop the banks trading in a whole pile of junk in return for cash? If it's not taking real usable resources out of the economy, then I would say that it very definitely is inflationary.

    Couldn't it just be that QE is designed to artificially boost banks balance sheets so that they can then go off and create 10 times as much debt. That's certainly what Obama said when someone asked why he didn't inject money directly into the economy - he said that the banks would use the money to generate (create) even more.

    As for why it would be a good idea to pay off the entire national debt, the reason is simple. First, tax payers would be paying the BoE the 0.5% rate offered to the banks, rather than the market rate. Osborne can certainly crow that the UKs lending rate is now 1.47% - the lowest in the EU http://www.ecb.int/stats/money/long/html/index.en.html But it's still three times higher than the BoE offers banks. That's billions of tax payers money that is wasted every year. But second, getting the government out of the stranglehold of the financial sector would mean that they could no longer blackmail the government - "Do what we say otherwise we will increase your interest rates".

  9. Yes thats it, the WaPo got a lot wrong so the article is a slightly double edged sword for us, on the one hand its amazing publicity especially from a very conservative newspaper but it did slightly misrepresent some things but hey nothing is perfect,   this one article has in fairness brought us into the mainstream, FT Alphaville have done a few good articles on the back of it this week... personally i would recommend http://www.neweconomicperspectives.org/ or http://moslereconomics.com/ for a better picture
    there is a large following in the UK as well, look through DT & guardian economics/politics articles and look at the comments section]

    Now to your FFT proposal tell me as we are running a current account deficit how on earth can you balance the budget without running a deficit as that would completely destroy the UK private sector? think you need to look at Wynne Godleys sector balances... they are very illuminating (if you do include the CAD then apologies havent read it through yet)

    in respect of central bank independence Reserve accounting uses the standard accounting identities, but the
    meaning of “liability” is not “debt.” The husband-wife analogy for
    Central Bank-Treasury accounting relationships is apt. Since a husband
    and wife are responsible for each others debts, neither can be indebted
    to the other. That is to say, reserve accounting is a fiction that does
    not represent real relationships, such as exist between a creditor and
    debtor in the horizontal system.(horizontal would be the bank/private sector transactions)

    now liability is important when you consider QE and the consequences
    its an asset swap because what is happening is they are swapping government liabilities...  cash a non interest bearing liability and a gilt an interest bearing one and in fact you are correct when you say its boosting banks balance sheets which is what it is designed to do

    What is happening is that they are boosting their reserves and orthodox economics would tell you that with the money multiplier that should increase M4 (what obama suggested) but that is shrinking...so what is happening here is that it shows what ppl perceive about the banking system is actually incorrect,   they do NOT lend on the basis of their reserves, they will lend when someone is credit worthy, they can make a profit, they are actually capital constrained and reserves are only used to settle overnight transactions and satisfy reserve requirements (as i mentioned canadian banks dont even use the pretence they have no reserve requirements)

    now this from the Fed themselves http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf
    "Changes in reserves are unrelated to changes in lending, and open market
    operations do not have a direct impact on lending. We conclude that the
    textbook treatment of money in the transmission mechanism can be
    you can see by that its NOT going to increase the banks created supply so it cant be thats inflationary as loans are demand led... there is little demand
    if you go back to the WaPo article you will see that Jamie Gilbraith mentions that all those reserves are doing is sitting around doing nothing ..   

    sorry bit long, and i will get onto yr last paragraph but currently have my 4 year old asking me if i want me hair blue...which is kinda off putting when you are trying to explain the QE mechanism! ;)

  10. ah see you comment on the guardian... see comments there by my friends payguy and Neil Wilson

  11. hold on dont tell me disqus lost my reply to this...noooooo it was long!!

  12. ok going to take this a point at a time as my novel was lost grrr

    yes thats MMT... was a good article by the WaPo got loads of things wrong but on the whole positive (and kicked other articles off to name a few NY Times & FT) which considering its a very conservative/orthodox newspaper is a bit stunning... we are all over the blogosphere

    for the real MMT http://moslereconomics.com/ & http://www.neweconomicperspectives.org/