Deleveraging? What Deleveraging? We need to fix the system...

In my open letter to Mario Draghi, president of the ECB, I mentioned a remarkable report that was published last September called "Deleveraging? What deleveraging?"

It was published by the International Center for Monetary and Banking Studies in Geneva and the Centre for Economic Policy Research in London - both highly respectable authorities - following a conference that was attended by about 70 experts.






The main point of the report is to argue that, since the global financial crisis in 2008-9, although there have been attempts by governments to reduce their debt levels, overall debt has continued to soar. This is obvious from the first graph shown in the report.

It shows that total world debt had reached nearly 215% of total GDP, with absolutely no sign whatsoever that things were improving at all.

They follow up this sobering graph with other graphs showing the breakdown of where the debt is, with separate plots for the developed and emerging markets.

Debt in the developed markets is still increasing, and is currently around $190 trillion. In contrast, for emerging markets, the total is increasing rapidly, with over $45 trillion of debt in 2013.

If you want gory details, they provide a table with the Debt to GDP ratios as a percentage for individual countries and regions. As you can see, no-one seems to be able to avoid the debt trap. NOt even the Chinese, whose debt levels total 217% of GDP, not including the Banking sector.

Table 2.2 provides an even more detailed breakdown for developed countries.

You can see how all those numbers are calculated. Total debt is equal to Domestic plus External debt. But it is also equal to the sum of Financial (d), Public (f), Household (h) and Non-financial company (i.e. business) debt (i).

To make the figures clearer, I took that table and compiled my own table and ranked the countries by total debt.

Clearly, Ireland is in a particularly bad way - everyone seems to be heavily in debt. But a lot of that is due to Financial Sector debt. The Netherlands is also seriously compromised by its Banking sector, as is the UK. For some reason, Germany gets away well, despite having a very large banking sector, with major players like Deutch Bank.

There's also some detailed analysis of debt structure in the US, illustrated in the following graph. You can see that if there has been a slight decrease in overall debt to the current value of 362% of GDP, that decrease is essentially due to decreased leverage in the financial sector, with a slight decrease in household debt. But that has been offset to a large extend by the increase in GSE debt - Government Sponsored Enterprises. I guess that is tax payer bailouts for things like Automobile manufacturers.

And finally, there's a specific analysis of debt levels in the Eurozone. It doesn't have the detailed breakdown provided for the

The latest value - 385% of GDP -  has indeed involved a slight drop compared with 2012. But it's hardly anything to really reassure anyone.

For me, the conclusions from this are clear. You can try austerity as a way to decrease government debt. But that will do nothing to fix the overall problem - namely, the fact that there is simply far too much debt in the system.

As I pointed out some time ago, in a global economy in which there is twice as much debt as there is money, there is really no way that you can hope to get out of the mess. You can't pay off debt by borrowing more. Any idiot should know that.

And yet, none of the "experts" at the Conference that generated this report seemed to have any real proposals about how to stop this insane debt explosion.

It seems to me that there are only a very limited range of options. Some people think that we could fix things by just cancelling debt. European governments could just tell the banks to get stuffed. And that may happen, especially if the forthcoming elections in Greece go the way people expect them to go.

But there is a much better way. A way that will fix the system for good. It involves replacing the current insane debt-based money creation process where essentially all the money in the system is created out of thin air by commercial banks when they make loans.

What we need is for our Central Banks to create the money debt free. It's what Positive Money have been arguing for with their Sovereign Money Creation proposal. But it could also be done by simple creating money at the level of Central Banks and putting the money directly into citizens' bank accounts.

That's essentially what would happen if we introduced an Unconditional Basic Income, financed by a minute Financial Transaction Tax. Within a few years, the mountain of debt revealed by this report could be paid off with debt-free money. 

Is anyone listening??