27 Apr 2013

The need for debt free money creation in the UK, USA and the Eurozone

I have recently worked out that the amount of cumulated public and private sector debt is massively higher than the total money supply, making it physically impossible to pay off the debt. It doesn't matter how much austerity is imposed, it simply cannot work as a way to cure the debt problem.

I have convinced myself that there is really only one way out. It involves forcing central banks to create enough debt-free money to make up difference. To back up my argument, here are some more figures.

I took public and private sector debt for the the UK, the USA and the Eurozone to obtain  numbers for total debt levels in each area.  I have also included available numbers for the Money Supply (M0 in the UK and USA, M1 and M2  in the UK, USA and Eurozone, M3 in the UK and the Eurozone, and M4 in the UK (which is the only country that appears to use it).

I then provide the ratio of debt to money supply, using the M4 in the UK, M2 in the USA and M3 in the Eurozone. It's not my fault that the central banks can't come up with a standard way to measure the money supply. The resulting debt to money supply ratios are 2.13:1 in the UK, 3.55 in the USA, and 2.51 in the Eurozone. Impressive.

I also show how much money is missing in each region. It's £2.37 trillion  in the UK, $26.6 trillion in the USA and €14.7 trillion for the Eurozone. The Eurozone figure is a somewhat higher than the figure that I had been using recently, simply because I used the most recent figures for Public Sector Debt, which just increased yet again.

Unless I'm seriously mistaken, these numbers represent the amounts of debt-free money that the three central banks must create and inject into each economy if there is to be any hope of people being able to pay off the debt in the system.

If you divide by population size, you discover that the Bank of England should create £37,861 for every man, woman and child in the UK. And of course I don't think that that money should be given to the banks. It should be provided to the government who should spend it directly into the economy.

In the USA, the Treasury (or the Federal Reserve) would need to create $84,369 for every US citizen. Again, it should be spent directly into the economy - not handed to the bankers.

Finally, in the Eurozone, the European Central Bank should create €44,258 for every Eurozone citizen. I've already argued the the simplest and fairest way to do this would be to provide each Eurozone government with an amount that directly depends on the population size.

It goes without saying that injecting that much new debt-free money into the UK, US and Eurozone economies would have incredibly beneficial effect. For example, the money could be used to develop renewable energy systems, build reasonably priced housing, renew the transport infrastructure, increase spending on health, education, research.... It could be used to provide decent pensions for our aging populations and those with handicaps. It could be used to provide aid to developing countries. You name it.

Of course, the bankers will complain that this will produce massive inflation. No problem. All the Central Banks have to do is impose a variable rate Financial Transaction Tax to mop up any excess money in the system. It could use that money to directly pay off government debt.  If there is any sign of inflation, just increase the FTT rate.

Sure, you might end up with an FTT rate of 2-3%. That's no big deal. It's only what the credit card companies charge when you pay in a foreign currency.

And within a relatively short period of time, the bulk of the money supply will be in the hands of the people where it can be used to get the economy going again, rather that in the hands of banks and people with accounts in tax havens.

Oh, and by the way. While this massive injection of debt free money would fix the problem temporarilly, the only way to make the solution permanent is to make it a criminal offense for anyone other that Central Banks to create money. And specifically, all money creation has to be Interest Free.

In other words we need to prevent Bankers charging interest on money that they create out of thin air. I believe that it is this ridiculous system that got us into this mess in the first place. The reason is really quite simple. If you allow a commercial bank to create money by making loans, and then allow that bank to charge interest at say 5%, the amount of debt simply has to increase beyond the amount of money in the system. And if the debts are not paid off (which is pretty much what has been happening recently), the amount of debt will be twice the amount of money in the system after a little more than 14 years. It's called compound interest. And ultimately, it is the cause of all the world's economic problems.

Commercial banks have demonstrated that they cannot be trusted to create money sensibly. It is time to completely rewrite the system.

1 comment:

  1. Hi, I believe that government deposits and bank capital is not calculated in monetary aggregates M1-M4. Could that explain where the gap between debt and money comes from?