10 Jan 2012

The UK solution - part 2

In my earlier post this morning, I described my proposal for saving the UK taxpayer tens of billions in interest payments every year. It's pretty simple.
  1. The Bank of England lends £1,164 billion to the Royal Bank of Scotland (84% owned by the taxpayer) at 0.01% interest
  2. RBS lends £1,164 billion to the UK government at 0.02% interest
  3. The UK government immediately pays off the entire national debt to the banks
The result : Instead of paying 2.29% interest every year to banks, UK tax payers would only need to pay 0.02% to the Bank of England - over 100 times less than they are currently paying. That would provide at least £31 billion in resources to the government. Enough to keep quite a few public services running.

The only problem is that the plan would cut off one of the City's main sources of revenue, and they will fight like wildcats to protect their interests. They will be using their control of the media and British Politicians to try and explain that the current system is so much better. It makes perfect sense. After all, the scheme has allowed the banks to take £443.6 billion from UK taxpayers between 1995 and 2010 - 2.59% of the UK's GDP. And all that by lending money that they didn't have, and without taking any risks whatever. You bet they will try and block such a move.

I count on the 99% of British citizens who are not being muzzled by the City and its defenders to stand up for their rights and force a change in the system. That's a very clear message to those camping outside St Pauls for example.

But I didn't mention one other part of the mechanism. The government would presumably need to pay back the £1,164 billion (with a little bit of interest). How best to do this?

Well, one thing that you don't want to do is leave the debt unpaid. Instead, I propose that the entire sum could be paid of progressively over say 10 years. That would require about £120 billion a year - or £10 billion a month.  How could this be paid?

Well, there's a very nice solution, as those who know my ideas can probably guess. It would involve imposing a variable rate Financial Transaction tax that would generate exactly the right amount of revenue per month to make the repayments. With visible financial transactions in the UK running at around £1000 trillion a year, you would actually only need a tax of about 0.012% to generate the required level of revenue. Is that too much to ask?

But there is an even easier way to apply an FTT. How about simply applying an FTT to the foreign exchange deals that go through the UK. According to the Bank of England's report, "net average daily turnover during April 2010 in the UK foreign exchange market was $1,854 billion per day". Assuming roughly 250 trading days per year, this implies that the UK is responsible for something like £285 trillion in foreign exchange trading per year (some 37% of the global total, according to the BIS report).

To generate the required £120 billion a year would require an FTT on foreign exchange of just 0.042%. OK, as soon as you put such a tax in place, you can imagine that the amount of exchange could drop. But, with my proposal for an automatically varying FTT, the rate would be increased enough to provide the £10 billion a month needed to pay back the loan. It's no more complicated for the banks than having exchange rates that vary every second. They can handle that, so I see no reason why they couldn't handle a variable FTT on foreign exchange too.

Is this unreasonable? Well, given that UK banks currently charge virtually all their customers a Financial Transaction Tax of  between 2.75% and 2.99% on every single credit card payment made with a foreign currency, there is one hell of a lot of room to increase the FTT rate before the government would match the amount taken by the banks for doing something that they do for free. Specifically, foreign exchange would have to drop by a factor of 70 before the FTT reached the levels imposed by the banks on their customers.

I would very much like to hear what our friends in the City of London would have to say to defend the current system. Indeed, I defy any of you to explain why the current arrangement is in the interests of UK tax-payers. Go on, just try.

But there is one last point that I find particularly amusing. I said that "the government would presumably need to pay back the £1,164 billion". The "presumably" is significant. In fact, since the Bank of England didn't actually have the £1,164 billion that it lent to RBS, there actually isn't any particular reason why it should need to be paid off. Now isn't that interesting! As soon as the banks are no longer screaming to get their hands on the interest payments, the Government can actually use the Central Bank to provide the money it needs. Now that's revolutionary.

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