16 Jun 2012

How to eliminate all UK government debt in 5 easy stages

A couple of weeks ago I made the rather cheeky suggestion that we could eliminate all government debt in 10 easy stages by turning the commercial banks insane fractional reserve banking system back on itself. It would be hoisting the banks by their own petard.

I had a few people pointing out that I was maybe confusing deposits with capital. I had argued that if you deposited 1000 euros in an account, the bank can create out of thin air 11.5 times that amount and use it to make loans. I argued that this ratio should fit the Basel III requirements of keeping the assets to loan ratio at 8%.

I must admit that I was skating on thin ice - I don't really know how the system works. But, things have now been made much clearer thanks to the UK government's decision to water down the propositions made by the Vickers report from the Independent Commission on Banking. Sir John Vickers had proposed that the leverage ratio of lending to Tier I capital should be 4%. But the City's lobbyists managed to get the government to reduce this to 3% - see the government's whitepaper published last thursday. Wonderful! Imagine that! - the City managed to get the government to implement the strict minimum capital requirements imposed by Basel III. Who would have believed it possible?

Anyway, the governments decision to cave in to pressure from the City means that UK banks will be allowed to use leverage ratios of up to 33:1. Note this only works for true capital. The 8% number in Basel III includes other risk-weighted assets such as loans (which is what I had used for my previous proposition).

So all that has given me the opportunity to devise an even simpler scheme for getting the UK government completely out of debt in just 5 easy stages. Instead of just depositing money in the bank, all the sums are used to increase the banks capital. Enjoy!


1 cooperative bank
10 cooperative individuals (volunteers please)
£30,000 capital investment to start (I'm happy to put up the money)
A network of taxhavens so that the flow of money cannot be controlled (conveniently, they are already in place)

The sequence of events is shown in the following table.

Step 1. 
Player A (me) invests £30,000 in the bank's capital (column A)
The Bank uses the fractional reserve banking mechanism to create 33 times that sum which it lends to Player B (Column B).
The bank's total capital of £30,000 (Column C) is 3% of the £1,000,000 of Total Loans (Column D)  - thus fulfulling the UK government's leverage requirements of 33:1 (Column E).
Step 2.
Player B gives the £1,000,000 to player C who invests the money in the bank (thus increasing the banks total capital to £1,030,000).
The Bank generates £33,333,333 and lends it to player D.
Step 3.
Player D gives the £33,333,333 to player E who invests the money in the bank (thus increasing the banks total capital to £34,363,333)
The Bank generates £1,111,111,111 and lends it to player F.
Step 4.
Player F  gives the £1,111,111,111 to player G who who invests the money in the bank (thus increasing the banks total capital to £1,145,444,444)
The Bank generates £37,037,037,037 and lends it to player H.
Step 5.
Player H gives the £37,037,037,037 to player I who who invests the money in the bank (thus increasing the banks total capital to £38,182,511,481).

The bank generates  €1,234,567,901,235 and lends it to the UK government which agrees to repay the entire amount after 1000 years with 0.0% interest.

The government uses the money to pay off the entire national debt of roughly £1,180 billion.
It also reimburses player B (£1,000,000) player D (£33,333,333), Player F (£1,111,111,111) and player I (£37,037,037,037).

There's still £15,615,419,753 to spend on something useful - you know, public services or whatever.

Actually, if I could scrape together another €1000 to make my initial capital investment €31,000, the fractional reserve banking trick could generate an extra £41.1 billion (which is what you get when you multiply £1000 by 33 and a third five times in a row. Now that would be a very useful sum. Isn't Fractional Reserve Banking wonderful??

Yours truly will stay a shareholder in the bank, together with players C, E, G and I. No need to give us all knighthoods - we were just doing our duty.

Can anyone see why this would not work?
Admittedly, it's completely ridiculous. But there again, fractional reserve banking by commercial banks is completely ridiculous.

And do you really think that the banks don't do this sort of thing all the time anyway? Why do you think the UK has its web of taxhavens in the Channel Islands and the Caymans? And why do you think that any suggestion that we might actually monitor the transactions that go on by implementing a Financial Transaction Tax gets the immediate response from David Cameron that "It would be a very bad idea". He's right - it would be a very bad idea - for his chums that use the Fractional Reserve Banking Scam to "make" piles of money.

The only difference beween what the banks normally do, and what I am suggesting is that, in this case, the bank simply decides to use the money they can generate to do something useful. It would make a nice change.


  1. Its good to be here, very nice post, the content is amazing, keep posting friend it will be very helpful for everyone, Thanks for sharing. I really liked it.

    Thanks And Regards

    free debt management

  2. The real or inflation adjusted rate of interest we pay on the debt is zero, so I don’t see any urgency to pay it off. But if we did decide to pay it off or substantially reduce it, that is very easily done: just have the Bank of England print money and buy back the debt. In fact the BoE has being doing that big time in the guise of QE.

    QE shows no sign of causing inflation so far, but if it did, that’s easily dealt with by raising taxes. That could be a political problem because there’d be certain to be winners and losers, and the losers would kick up a fuss. But there is no strictly economic difficulty in paying down the debt. More details here:


  3. Yes, it is easily done. As you say, the Central Banks have not only being doing QE, they've been buying government debt on the secondary markets (as a way of getting round the restrictions of the Lisbon Treaty). So, just buy up the entire public sector debt - start charging governments 0% interest (instead of allowing them to be held hostage by the markets), and use a Central Bank imposed FTT to pay off the debt progressively - as I suggested in my latest Youtube video.

    Why is it important to do this (even if the interest payments for some countries are below the rate of inflation)? Because it will put an end to the biggest scam ever - 3% of GDP being handed over to the Financial Sector every year for doing nothing. Or specifically, lending money that they create out of thin air, and charging governments (i.e. taxpayers) interest on those "loans".

  4. How can you buy your own debt with money you don't have? QE is not the same as printing money. And you can't say (without being wrong), that the banks are 'doing nothing' for their cut. There has to be a mechanism to distribute money into the economy and that is what the banking sector does the money, regardless of where they get it from or even if they create it out of nothing.

    The Bank Of England does not have a branch on any high street so the Government can print all the money it likes but unless the country detaches itself from legal restraints imposed by the EU and unless it owns and controls the entire banking sector then it will always be tied to commercial markets and banks.

    Therefore theGovernment has no means of lending or giving away the money it prints other than by getting the public to fill wheelbarrows full of notes at regional warehouses in lieu, of getting paid wages and/or benefits via direct debit, cheque or any means which does not involve cash.

    You seem to have forgotten why banks and building societies exist! It's for the same reason shops exist. So that we don't have to source everything we ever use by making it ourselves or bartering with someone who makes it. By your reasoning, manufacturers are 'doing nothing' for the profit they make producing and distributing stuff to retailers and retailers are 'doing nothing' for the profit margin they make distributing stuff to consumers. All of this crap is produced out of thin air (or base metal). It only has a perceived value when it ends up in the hands of the person wishing to use it. The same is true of demand and supply of money.

  5. Craig,

    Please, please read Positive Money's proposals on how to create money debt free without letting the process be controlled either by commercial banks, or by politicians.

    This particular piece is more to demonstrate just how insane the current system is. And if you think that central banks and governments have any control over how much money commercial banks create, can you explain how it is that when you take the 50 largest banks in the world, the average asset to capital ratio is 320 to 1. http://simonthorpesideas.blogspot.fr/2013/04/the-50-biggests-banks-64-trillion-in.html

    There is currently no control whatsover. And Barclays can create money that it lends to the Qataris who then use the money to buys shares in..... Barclays. Yes banks can and do create money for their own purposes, with no restrictions.

  6. My evolving project may be of relevance, and interest