Following the two recent reports showing that, since the financial crisis in 2007-8, debt levels had soared even more, I thought it would be interesting to recalculate the total about of money relative to debt. Earlier today, I published a post on the remarkly detailed report from the McKinsey Global Institute that showed that Global debt has now reached a staggering $199 trillion.
What about the Global Money supply? To find out, I have extracted all the numbers provided by a remarkable website called Trading Economics. There you can find tables with Money supply figures corresponding to M0, M1, M2 and M3 for most countries. Unfortunately, the tables are not complete because quite a few countries don't report M3. For example, the Federal Reserve in the US decided not to bother reporting M3 in 2006. But I simply took the largest value for each country, and multiplied the number by the current US dollar exchange rate to calculate each country's money supply in dollars.
The complete dataset is shown in the following table.
Compared with the numbers that I gave back in 2013, there have been a number of marked changes. For example, the Chinese money supply has soared from $15.7 trillion to $20.2 trillion. The other big players, namely the Eurozone Area, the USA and Japan have stayed fairly stable, but the UK's money supply has increased from $3.19 trillion to over $3.6 trillion.
But the bottom line is that the total money supply for the entire planet now stands at about $78.8 trillion, up from the previous number that I quoted back in april 2013 ($68.3 trillion). The problem is that while this has increased, that increase is completely swamped by the increase in debt.
We are now in the situation where we collectively have $199 trillion of debt, and only $78.8 trillion to pay it off. There is therefore 2.5 times more debt than money!
You surely don't need to be a rocket scientist to see that this situation is completely untenable. Anyone telling us that we can get out of this debt trap by simply being frugal and paying our taxes like good citizens clearly hasn't got a clue.
How on earth did we get into this situation?
For me, the answer is pretty simple. Commercial banks create money when then make loans to individuals, businesses and governments. But when they do this, they create enough money to make the loan, but don't create the money that will be needed to pay the interest. Thus, if a bank creates $1 trillion in loans with interest at 2% and waits for 20 years, the total amount of debt in the system will have increased to nearly $1.5 trillion. This is what has been happening for centuries, but the effects of that compound interest have now become totally out of control.
It is clearly time for us to change the system. All money should be created interest free. Full stop.
Simon, three technical questions:
ReplyDelete1. Isn’t the way the Federal Reserve has been doing QE by massively buying US bonds exactly the creation of sovereign, or debt-free money? A US bond inside the Federal Reserve is a worthless piece of paper that might as well be shredded. Technically, the government owns the Fed, and owes the Fed, so it owes to itself. So paid interest is
income to the owner (=govt.). Looking at the government’s balance sheet, this part could be deleted (forgiven) as a neutral operation. The US debt wouldn’t be $18 trillion but, let’s say $ 12 trillion (I have no idea)? Isn’t the money, once paid by the Fed for those bonds, although technically debt-based, then practically debt-free money in circulation? If so, isn’t this an example of good monetary policy? Can we explain the better recovery of the US than the EU by this? And how far can it go on?
2. A technical question: on a balance sheet of a central bank, money in circulation is a liability (on the passive side). Money in circulation is also debt paper, but interest free. When there is a lot of sovereign money in circulation, the central bank’s equity becomes
negative. Usually governments get worried when the central bank’s equity is negative, but shouldn’t we rethink this? Shouldn’t it be a purpose to make equities of central banks very, very negative? This is harmless, and it would replace lots of harmful interest-bearing debts. For the government, the ownership of the central bank would move from the left (assets) to the right (liabilities), but (partly) replace its debt and liberate lots of interest payments. Or we keep the bonds for cosmetic reasons, but make them infinite and interest free. It is the same situation, but then the central bank’s equity looks nicer. What would you propose?
Of course in the ECB case, it is shared ownership by multiple governments, but the principle is the same.
3. So technically, we could just abolish national debts, as far as other economic indicators (inflation, desired interest rates) allow us to. But not all public debts are bad. Shouldn’t we maintain a healthy level, in order to create some assets to, for instance, pension funds. In order not to expose them for 100% to stock markets? These bonds
express delayed obligations to the people (the word obligation is in our language even a synonym for debt paper). What is your comment to this?
The sanitation of the private sector debts is another important topic. Next time… (or one of the previous times in your blogs).
Douje, these are quite difficult ones.
ReplyDeleteIf the Fed was to buy only government bonds, and then shred them, then I would agree that would be useful. But my understanding is that the Fed's QE programs have also involved buying other assets too - which injects money into the markets and fuels asset bubbles, including the Dow Jones etc. Same thing with the ECB's proposals. My proposition would be that the ECB should simply give Eurozone governments the money to pay off debt, with the amounts fixed purely on the basis of population size. That way, there would be no need to talk about giving a gift to the Greek government, because all the Eurozone governments would be treated fairly.
On the second point, yes, if Central Banks just created sovereign money debt free, then noone would care precisely how much had been generated, as long as the amount of money in circulation was appropriate. That's what Central Banks should be for.
3. I see no justification for saying that pension funds should get taxpayers money in the form of interest payments. If the government wants to give pensioners money, then it should give them an Unconditional Basic Income. Private pension schemes run for profit should not be subsidised by the tax payer.
Thanks, and you're right in point 3.
ReplyDeleteSimon
ReplyDeleteJe pense que c'est pire car (à mon avis) il n'y a de monnaie que dans M1.
Voir démonstration sur https://postjorion.wordpress.com/2011/05/15/177-aunac/
Très simplement... M2 et M3 sont de l'épargne, c'est à dire des dettes . Lorsque X mets 100 en compte M2, le M1 initial est réduit de 100 , mais ces 100 sont prêtés et donc reviennent dans M1.
M2 et M3 sont des ensembles vides
Amicalement
Global debt and the possibility of paying that off... The notion of interest not being created when a loan (money) is created by a commercial bank - as interest compounds, how could that debt ever be repaid.. yet Steve keen indicates (using double entry system) that it supposedly can.... he posted about this on Forbes : "Principal and interest on debt myth"
ReplyDeletehttp://www.forbes.com/sites/stevekeen/2015/03/30/the-principal-and-interest-on-debt-myth-2/
This topic gets more confusing by the day. Do you have any comments on his article?
Hi Ruth,
ReplyDeleteThanks for the pointer to Steve Keen's post - certainly very interesting. I am prepared to admit that the usual "banks don't create the money to pay the interest - hence, we need to keep borrowing more, and hence we need inflation (at say 2%) built in to the system" may be simplistic.
But, I will write to Steve Keen and ask him whether he accepts that (a) total global debt really has reached $199 trillion, (b) whether he thinks that this value could really be 2.5 times larger than the total money supply, and (c) if he sees a way of resolving such a situation.
For me, it is clear that if the banks redistribute the money they receive in interest directly into the economy (by paying their staff ridiculous bonusses) buying Lear jets, Maseratis etc), then the system could be made to work. The bankers would be able to live extravagant lifestyles for lending us all their fictitious money, but well, we are pretty used to that.
However, the real problem is that many borrowers - especially governemnts - don't pay back either the interest or the principle. They borrow €10 billion over 10 years at 2%, pay nothing back and let the interest accumulate. At the end of the 10 years, they now owe €12.2 trillion. The bankers aren't spending the interest into the economy, they are just letting the debt pile up.
I suspect that if all loans had to be paid off with interest in installments and the money recycled, it might work. But that is not what happens in the real world.
Simon
Thanks Simon. I am sure that will be an interesting conversation, which perhaps you could report on here, in your blog.
ReplyDelete