## 21 Apr 2013

### Total Global Debt and Money Supply : Twice as much debt as there is money

A week or two back, I raised the question of how it was possible that total debt within the Eurozone (i.e public sector debt and private sector debt combined) could be 2.5 times higher than the total Eurozone money supply. Specifically, the debt at the end of 2011 was €23.78 trillion, whereas the money supply measured by M3 was only €9.76 trillion.

Does this  2.5:1 ratio of total debt to money supply apply outside the Eurozone? Well, to find out, I have compiled data for the 39 countries in the BIS Private Sector Debt database and then added in the numbers for Public Sector (which I got from a very nice World Debt Clock website done by the Economist) to get total debt.

I then used the data on money supply provided by a remarkable site called Trading Economics where you can get money supply data by clicking on each country's link. Money supply numbers are not always standard, but most of the time you can get either M2 or M3. I had to multiply the numbers by the USD exchange rate to get the money supply in dollars.

So, here is the result.

I have ranked the 39 countries in terms of the Money Supply. China comes top with a money supply of \$15.72 trillion, followed by the Eurozone (\$15.2 trillion), the USA (\$10.44 trillion), Japan (\$10.40 trillion) and the UK (\$3.19 trillion). Note that some of  the Eurozone countries are effectively in the table twice (Germany, France etc) because the BIS figures include a 40th number for all the Eurozone countries, but the totals and the bottom exclude the Eurozone figures.

Total Private sector debt is \$89.27 trillion and Total Public Sector debt is \$47.62 trillion, making a total debt level of \$139.89 trillion.

Adding together the money supplies of all the countries together produces a total of \$68.34 trillion. That is exactly half the level of debt.

In other words, even if every last cent was added together, we could still only pay off half the debt. In other words, the 2.5:1 ratio of debt to money supply that I noted for the Eurozone is a pretty typical case.

The last column gives the ratio of debt to money supply for each country. For some reason, Scandinavian countries like Norway, Sweden and Denmark all have very high ratios of well over 4:1. But the USA is also up there with a debt to money supply ratio of 3.5:1.

There are only five countries that actually have a money supply large enough to cover their debt (coloured in green in the table). Apparently Mexico is one of them, but this seems extremely odd - maybe an error in there somewhere.

The other four are China, Hong Kong, Saudia Arabia and Luxembourg. That seems to make sense. But even if you combine all their money supply surplusses, you still only get about \$18.5 trillion. So, even they are totally unable to help pay off the mountain of debt that the world has amassed.

I find these figures quite incredible. They demonstrate quite clearly that those who have been lending the money that we owe can't possibly have had the money they lent. The whole thing is a complete con.

What's the solution? Well, it seems to me that everyone should agree that we actually effetively need to temporarilly double the world's money supply and use that money to pay back this fictitious debt.  The only place that this can be done is by using the Central Banks to create new debt free money and using that new money to pay off the debt.

Seems like a sensible plan to me.

1. Seems by this simple analysis you haven't saved much or taken care of your own retirement. So lets level the field for the responsible and irresponsible by screwing the responsible ?

2. Not sure I follow. Are you claiming that (for example) the €11 trillion owed by governments in the Eurozone countries includes the previsions for paying future pensions? If so, then I think you've got it wrong. In the Eurozone, there really are nealy €25 trillion in debts, and only about €9 trillion to pay the debt off with. Can you explain how this could possibly be made to work?

3. Thanks Simon. Have copied this link to my restricted platform on societal transitions (www.societaltransitionsnl.ning.com) in the groep Finance&Monetary Systems. August 1st 2013 we started a mutual credit clearing system for self-employed and small companies in and around Rotterdam (NL). Just to try to make a difference. www.rotter-dam.nl (for the time being just in dutch, sorry). Harry te Riele

4. I Have been researching this myself. I was using strickly USD but soon realized that you need to use the global economy, because, idiotic people abound and they introduced the chinese purchasing of US bonds. To make it simple this is far better what you did.

5. Hi, I'm glad you approve. I must admit that it seems like a pretty basic bit of information which completely demolishes any argument that we can get out of the current mess by austerity. Essentially, I see only two options : (1) Debt write off, or (2) creation of enough debt free money to cancel off the debt.

Best wishes

Simon

6. write off all debt - public, private and commercial. create new interest-free money based on the value of all assets, and modulate the supply as new asstes are created and old ones are depreciated.

yes, we will need to re-nationalise all our public utilitiesand bring all armed forces back home (in case the chinese or germans try to invade, wnating their money back.)

all of the paper/ digital economy is fake. as long as we all decide to, we could create a real economy that works without central control and where everybody is provided for. the world is very wealthy but when only a few people have the lion's share of it it means billions go without, and that ain't right.

more ideas on policies here: www.freebritain.org

peace & love & unity

7. I'm not sure that it's necessary to write off all debt. For example, someone who had lent their own money to someone else could reasonably hope to get it back sometime. On the other hand, writing off debt that was created by lending money that is created out of thin air by commercial banks would be a very good thing. So, maybe there is an inbetween option that would be optimal....

8. Would it make a difference if you looked at M3 or M4 instead of M2? The money supply using M2 in the United States is 10.8 trillion, but the money supply by the M4 measure is 17.4 trillion. It seems plausible that, if you hunted out the M4 Money Supply for all the countries listed, you may find there is enough money to pay all the debts, after all.

Source: http://preview.tinyurl.com/ptu8yof

9. Hi,

All the available figures for M0, M1, M2, and M3 are here
http://simonthorpesideas.blogspot.fr/2013/04/just-how-much-money-is-there.html

It doesn't make the problem go away....

Simon

10. Wait, what if my debt is owed to somebody that owes me a debt? Won't that debt cancel itself out, at least in part? Can some of this debt be canceled in the same way?

And if a lot of people owe me debt, what do I have on my books? Cash or surplus? Can we count surplus in the same way that we count debt? If so, then surplus seems to missing from this picture...

11. This is a consequence of interest. Interest is money owed to financial institutions, but this money was never issued. Only principal is issued.
In fact, the difference between total debt and money available in the world is the lender's profit made through interest.
To understand this, think of a simple economy with two people (alice and bob) and a bank. The bank lends each \$5, they trade with each-other and Alice ends up with \$7 while Bob has \$3. The bank asks for the money back after a year, but now requires \$6 dollars from each. Society is in debt for \$2 and can never pay it back. Alice has \$1 profit, but Bob is poor now.

We can't get rid of this problem with the current system. We would need to live in a world without money to fix this.

12. Have you looked into the venus project? http://www.thevenusproject.com/

13. Hi,
Great blog. I think increase in Debt is always acceptable as long as the growth rate is steady. Credit growth will do increases in capital requirements.
Thanks for this post.

14. Hi Simon,

excellent blog. i am researching the same subjects than you, and complete books like modernizing money, where the money comes from, etc. To clear things up, i almost totally agree with Andrew Jackson positivemoney.org.

but for the purpose of this article, there are some issues i do not think you are taking into consideration, and are clearing houses.

BankA owes BankB 150 debt units, and BankB owes BankA 140 debt units. The total amount of debt in the system is 290 debt units, and lest suppose that the total amount of "money" (M0/M1/M2/M3) is just 200 units. But at the end of the day, the clearing system only needs to transfer 10 units of _real_ money (reserves) from BankA to BankB to clear the debt between two banks.

So to help trying to figure out how the "machine" works, me must consider that we do not need the exact same number of "money" (M0/M1/M2/M3) than debt to be able to cancel it. Its a little bit tricky. I dont remember where i got the number, but 30% of money transfer in USA is trough clearing houses.

In terms of debt, debt by itself is not negative. What is negative is that your production system is not aligned with debt.I mean, that the goods production structure is not able to grow to repay past debts.

According to what we consider money, its also a little bit tricky :-). In our monetary system, a bank deposit is "money" because you can pay taxes with it, but in reality is not money, is credit-money. Money should represent a commodity that clears 100% the debt from the society when a deal finish. If Bob buys a table to Peter, and the purchase is 1 gold coin, after this purchase, the debt is clear in the system, because not only Bob doesnt owe anything to Peter, but because gold was not issued as debt in the system ;-). In fiat systems, dollars are issued as debt. But in a reformed system, like Andrew Jackson propose in the book, state issued money is also "debt" money, even if is free of interest, and this is something i discovered recently. This kind of money (that is ten times better than our system), at the end, is something related to goverment trust that will maintain the base money aligned to price levels. With gold, miners provides base money according to GDP growth and goods price levels, but in a state money sytem (that i repeat, i support it), the goverment can provide accordit to this variables ... or not, like we are seeing in Venezuela, where inflation since 1999-2012 skyrocketed to 1.200% because of base money printing.

I mean, at the end, this free-debt-issued-money is also a "debt" money, because

1. part of the money you get, has to return to state, central bank or treasury department that issued it. Is debt :-).

2. citizens are forced to accept and trust this money in terms of inflation.

I know that this thread is old, but i wanted to share my ideas with you :-)

regards!

15. i have been wondering about another thing. typically when a business goes bankrupt, the assets are sold to pay off the creditors. If a bank is insolvent and goes bankrupt does the sale of the assets goes to pay off the depositors. What happens, though, when a bank receives aid from the FED. They now have the money to pay back the depositors and keep the house in the event of a foreclosure. Another words, they get a house for free.

16. Many people will contest that banks are simply loaning deposits. So i did a little research: “In the real world banks extend credit, creating deposits in the
process, and look for the reserves later” (Moore (1979, p. 539)—quoting
Fed economist)

“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)
http://www.bostonfed.org/economic/conf/conf1/conf1i.pdf

"the
difference of m2-m1 leads the cycle by even more than m2 with the lead
being about three quarters" kydland and prescott Pg 14
https://minneapolisfed.org/research/prescott/papers/prescott-et91.pdf

“Banks
lend by simultaneously creating a loan asset and a deposit liability on
their balance sheet. That is why it is called credit “creation” –
credit is created literally out of thin air (or with the stroke of a
keyboard).”
Paul Sheard, Chief Global Economic & Head of Global Economics and Research, Standard and Poors

There
is no evidence that either the monetary base or M1 leads the [credit]
cycle, although some economists still believe this monetary myth. Both
the monetary base and M1 series are generally procyclical and, if
anything, the monetary base lags the [credit] cycle slightly.
Nobel prize winners Finn Kydland and Ed Prescott , Federal Reserve bank of Minneapolis (1990)
http://www.minneapolisfed.org/research/qr/qr1421.pdf

Under
the present system banks do not have to wait for depositors to appear
and make funds available before they can on-lend, or intermediate, those
funds. Rather, they create their own funds, deposits, in the act of
lending. This fact can be veriïŹed in the description of the money
creation system in many central bank statements, and it is obvious to
anybody who has ever lent money and created the resulting book entries.
IMF Working Paper Chicago Plan Revisited, p9
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

The key function of banks is money creation, not intermediation.
Michael Kumhof, Deputy Division Chief, Modeling Unit, Research Department, International Monetary Fund
http://vimeo.com/64807284

17. EXCEPT with an honest const'l money eg silver, the INTEREST gets paid by mining more silver.

IE, the PROBLEM is the UNCONST'L privilege of private bank issuance of fiat from thin air at zero cost, issued AS debt PLUS interest.

THIS "ECONOMY" maybe called capitalism EXCEPT there hasn't been free market enterprise since the RR's bought themselves the illegtal monopoly cartel AKA the Interstate Commerce Commission, and thus the drooling banksters who owned the RRs to begin with, got theirs in the FED. And hence EVERY big biz in the land has regulatory captured the govt to its own heinous ends.

Not one dead president, and Hamilton as well, that appears upon our fiat currency EVER contemplated an unbacked paper money as anything but the disaster their contemporary history proves it always was/is.

INFLATION was the sole cause of the FRENCH TERROR.

I say let THEM eat 1.6BILLION rounds of .40 caliber JHPs !!!!!!!!!!

Gangster banksters rule the world by fraud, force and abuse.

Roy Child's "Big Business and the Rise of American Statism"
including an excellent explanation of what historical revisionism ACTUALLY is.

http://praxeology.net/RC-BRS.htm

Also see Louis Brandeis' "Other People's Money and How the Bankers Use It"

http://www.law.louisville.edu/library/collections/brandeis/node/191
BTW Bastiat's short book "The Law" is highly recommended and avail at mises.org for the searching.

18. Thanks. You may find http://m.youtube.com/watch?v=jQuEOUzA9P8 interesting.

19. It would be nice for nations to owe each other so they cancel out. However, that does not seem the case here. Guess those Martians are owed a good penny ;)

20. Here is an alternative source for figures in the USA.

21. I think the OP's reasoning is that retirements funds are backed by government bonds.

22. Hi, Unfortunately, the Euro zone has made less headway than other places in reducing this private-debt burden. Euro zone debt burden is very high as compared to other nations. Large supply of money is required to settle these debts.
Thanks for this post.

23. Why no mention of M4 money supply...

24. I agree with the need for more money supply.
If we do a rough - and irrealist - simulation by cutting as much it could probably be possible in state budget (I did it for France), it would require more than 30-40 years to pay back the debt. Sorry, I don't have this simulation here. That's anyway completely unbelievable because of well-kown politic issues.
About the debt, it is known that any penny you have at the bank is already not yours anymore : you only have the right to claim for this money one day or another, but not everybody at the same time of course !
The point is, if we double the money supply, it's like your money at the bank would have half its value. The idea is probably not a good one for anyone. Anyway, the only solution for states is to put that money in the economy - so a "rich" would be twice less rich - and to get back that money through taxes to pay back the debt to us, to every one having money at the bank even if you didn't "explicitely" bought bonds. As the taxes are not up to 100%, states have to put more because each year they also have something to pay for.

Let's say for Euro zone, without domestic debt (gov. are not up to pay for dosmetic debts) :
- Total average tax rate is 41%
- Debt is 17515 G€ (business + gov. debt)
- M3 = 9785 G€
So Euro zone would have to issue : 1/0.41 = 2.44 times the value of the debt due to "low" tax ratio.
The debt is already 1.79 times M3, so Euro zone has to issue :
Amount to issue = 1.79*2.44 ~ 4.36 times M3 !
So money would have 4.36 times less than its current value. So supplying money si good for the average guy but not for the richest... that's all the point why debt is crising. Until when ? I don't know !

25. Hi Remy,

I think that it should be clear that the current system is unworkable. But, now that people are realizing that when the Banking sector lends our governments "money" (and charge taxpayers interest), they don't actually have the money they lend - they just create it out of thin air - there is a solution. Central banks can provide "money" to pay off the debt. The banks would have to destroy their "assets" in return for the money. That would help them get their assets to capital ratio down, and reduce the total amount of debt in the system. But of course, it would also kill the goose that has been laying golden eggs for centuries. Expect enormous resistance from the banking sector to keep their gravy train on the the rails....

Simon

26. Does the debt net off? E.g. IOU £10, UOHim £10 and HeOMe £10?

27. Unforunately no. Because most of the time, it is IO bank £10, UO bank £10, and HeO Bank £10. That's because Commercial Banks are currently allowed to make loans with non-existent money - and then charge interest.

For a true mutual credit solution where things really do net out, you could take a look at my proposal for OWE'M - a system where literally you hardly need any "money" at all. See http://www.owem.net/

28. Perhaps most of the wealth in Mehico doesn't show up in the system......

29. that is why they like inflation. Alice's profit has lower spending worth, and they can keep the confusion nice and lively.
The bankers only want to steal from you, they actually don't care whether the system is doomed to failure, or unfair, or anything. This is nowadays a simple matter of fraud and threft.
Do you think Dick Fuld really cared about Lehman, or Mozillo about Countrywide? Only as much as it gave them street cred. It was really about the cash. Just small time crooks. We should treat them that way.

30. Could be! But actually, I think that the problem is that simply that one of the datasets that I used to compile the data was out by a factor of 1000 - they used millions instead of billions for example.

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