11 Apr 2013

The UK Banking Model for siphoning off 3% of GDP per year

Earlier today I claimed that the Maastrict Criteria (National Debt limited to 60% of GDP, coupled with a Budget deficit limited to 3% of GDP) could be thought of as a way of optimising the amount of money that can be siphoned out of the economy by commercial banks. Assuming interest rates of roughly 5%, and a law preventing Central Banks lending to governments, these numbers mean that Commercial Banks can legally siphon 3% of GDP in interest charges every year.

To back up the hypothesis that the whole scheme was inspired by what I could call the "UK banking model", here is a graph of the figures that I extracted from the House of Commons report for the percentage of GDP handed over to banks in the form of interest payments on government debt since 1955.

I worked out what the average number was. It's 3.1%. A remarkably close match to the budget limit of 3.0% of GDP imposed by Maastricht.

In other words, governments are allowed to run deficits - but only enough to ensure that they can pay their dues to the commercial banks. It makes sense. Maastricht could have said that governments should aim to reduce the national debt to 0% of GDP, and aim to keep the budget deficit at 0% too. But no, we are almost encouraged to think that 60% and 3% are actually some sort of optimum.

They are - for the banks.

I also added up the numbers for the percentage of UK GDP siphoned off over the full period from 1955 to 2011. It comes to 180% of GDP.

That means that had the UK been using a sensible system in which either (a) the government runs a balanced budget, or (b) borrows any money it needs from the Central Bank at 0% interest, the UK could potentially have been massively more prosperous that it is.

Of course, you might argue that paying 3% of GDP to commercial banks every year is OK if those banks put that money back into the economy.

But my guess is that the vast majority of that money has been transfered to offshore tax havens, where it would appear that about 1/3 of the world's wealth has been stashed.


  1. Je croix que vous avez fait un faux pas, mon brave. (What do you reckon to my France spelling and grammer?)

    You seem to assume that all national debt is held by commercial banks. Actually only a fairly small proportion is. It’s 2% in the US and 10% in the UK according to this source:


  2. Hi Ralph,

    Bravo for the French! And thanks for the link to the graphs... very interesting.

    so only 10% of UK government debt is held directly by banks. But who is
    behind the 24% of other non-residents? Is it obscure outfits in the
    Cayman's? Also, are insurance and pension funds not indirectly part of
    the financial system (29%)? And who is "other" (10%)?

    And when we get to the Eurozone
    (which is what I'm currently concerned with) who is behind the 83% of
    non-resident held debt in Ireland.

    In the end, I presume we
    all agree that virtually all the money that is lent to governments
    actually originates with loans made by commercial banks - right? And so, even if the
    money gets to the government via a complex route, it was the commercial
    banks that provided the way that allows governments to get massively
    into debt.

  3. Interesting, as ever. Simon.

    The size of the British national debt is not a number I have at my finger-tips, but I'd be surprised if it was anything like as low as 60% of GDP. But maybe it's different in the Eurozone.
    From here: http://en.wikipedia.org/wiki/United_Kingdom_national_debt, it appears to be about 89% of GDP i.e. ~£1,347 billion & the annual cost of servicing the public debt amounts to around £43bn, or roughly 3% of GDP. So your 3.1% is remarkably accurate.

    (that 89% still sounds too low to me though ... must do some checking)

    I happened to be re-reading part of "Where Does Money Come From" (NEF - 2nd edition) today, and was reminded that it said that the BoE was still allowed to lend the government money until comparatively recently, via the quaintly named Ways and Means committee, apparently only for very short term loans, i.e. overnight. I need to re-re-read, but I think it said that although this would have stopped when the treaty of Maastricht came into effect in 1993, the Ways and Means committee budget was only frozen in 1997, and ways of paying it off would be looked into. hmmm.

    More information here:


    Not sure if that helps really. Interesting that the BoE was financing these "overdrafts" by money-market operations, i.e. presumably it was selling gilts, so not exactly printing money, but financing debt with more debt?

    Anyway, if it was Maastricht that put an end to the BoE lending to government, then does that put into question slightly Ellen Brown's article I posted the link to recently. Although that was about Canada, it would have applied to all BIS (or rather Basel Committee) members, and the BoE is certainly a member.

    (Some interesting history of the BIS here: http://www.bis.org/publ/bisp02a.pdf Astonishingly, the BIS was carrying out its business including trading in gold during World War 2. The book WDMCF notes that the BIS grew out of the post WW1 Reparations Committee under our old friend J.P.Morgan. The PDF linked does seem to confirm a link with reparations activities. hmm....).

    Be all that as it may, the more one looks, the more it seems that the way that financing public debt "under the UK model" is designed first and foremost to benefit the banking community, or shall we say the financial community. Are they our servants, or is it the other way around?

    In the end, I presume we
    all agree that virtually all the money that is lent to governments
    actually originates with loans made by commercial banks - right? And so, even if the
    money gets to the government via a complex route, it was the commercial
    banks that provided the way that allows governments to get massively
    into debt.

    On a slightly different tack, WDMCF points out that a lot of the capital that banks are steadily building up to boost their capital adequacy ratios ultimately comes from deposits that other banks have created, hence the failure of capital adequacy rules to control bank lending, and hence the Ponzi nature of much of the banking world.

    This article in the Guardian puts UK debt into a historical perspective:


  4. The banking sector looking after its own again, I fear:

    It suggested tougher capital and liquidity standards, coupled with the need to make provisions against future losses, adding: "The crisis has shown that corrective policies enacted after the risks materialise may be too late to contain damage to financial stability."

    Well, QE should have given them all the liquidity they need, and forcing them to increase their capital ratios at this point means they are going to be even less likely to lend to the real economy.

    So the recession, and corresponding austerity, is likely to continue.
    The banks aren't part of the solution, they are part of the problem.
    In fact they very largely are the problem.

  5. Hi Simon,
    Here are some not very closely related points in no particular order.
    1. I’m not an expert on Maastricht, but I don’t think it in any way encouraged a debt / GDP ratio of 60%. It said 60% was about the maximum acceptable, I’d guess.
    2. Re having no debt at all, I agree that’s a good idea. Milton Friedman and Warren Mosler advocated that. Plus I ran thru the various arguments for government borrowing and criticised / demolished them here:
    3. The real or inflation adjusted rate of interest paid by the UK, US, Germany, Japan and various other countries on their debt is actually zero, near enough. I.e. their rates of inflation are roughly equal to the apparent rate of interest they pay. Thus it's debatable as to whether interest on national debt is any sort of real burden or drain on the public purse.
    4. A government COULD run up debt which amounted to far more than the total amount of money created by commercial banks. All it would need to do would be to borrow a relatively small amount, spend that back into the economy and give the lender some government bonds, and then repeat the trick over and over.
    However I find it difficult to get my head around how much of that sort of trick it carries out, and in contrast, how much of its own money (i.e. central bank money) it borrows. Warren Mosler seems to claim that governments borrow ONLY central bank money. See sentence in red, top right here:
    But I suspect Mosler is wrong there. As I said above, I don’t see why government cannot borrow commercial bank created money.