Is Quantitative Easing the solution?

There's a very interesting piece by Simon Jenkins in today's Guardian called "Mervin King has turned our leaders into zombie puppets". He says

"It must be the biggest confidence trick of all time. It is a cheat, a scam, a fiddle, a bankers' ramp, a revenge of big money against an ungrateful world. It is called quantitative easing, and nobody has a clue what it means. According to the Bank of England, the past four years have seen £325bn pumped into the British economy to kickstart growth, with another £50bn now on the way. This enormous sum does not exist and never has. It is not "printed" money or funny money. It is no money. The one silver bullet on which the coalition relies to pull Britain out of recession is a fiction."

It's clear that QE as it is currently used is having no beneficial effect. But I wonder whether actually, Quantitative Easing could really provide a solution.

The mechanism is a bit opaque, but my understanding is that the Bank of England effectively buys back gilts from the commercial banks, replacing those assets on the banks books by freely usable "cash". This is supposed to get the banks lending, which of course it doesn't.

But maybe there is a way to use Quantitative Easing that gets us out of the current mess.

In some previous presentations (for example "Solving the Debt Crisis"), I have argued that Central Banks could lend money to governments via "publicly owned credit institutions" - a possibility that is left open by paragraph 2 of article 123 of the Lisbon treaty.

However, it's likely that such moves will be blocked by the vested interests who control politicians such as Cameron and Osborne.

QE could however provide a way round this. Currently the Bank of England has already generated £375 billion in QE, and they have just announced a further £50. But suppose that they went just a bit further and generated enough money to cover the entire £1200 billion currently owed by the UK government. They could buy up all the gilts, on which the government currently has to pay interest (£48 billion in 2011) and replace the whole lot with freshly minted Bank of England "money". The critical feature is that the banks cannot ask for interest payments on this - thus getting the government off the hook.

The really neat feature of this is that now it be abundently clear that the we don't need commercial banks to generate the money supply. It can be done directly by the Central bank, with no interest attached. Once this has been done, it could be relatively simple to say to the banks that we don't need them to create money at all. Fractional Reserve Banking by commercial banks could be completely outlawed and the government could start generating the money supply directly via the Bank of England.

Could it work? Well, I can't see why not. So, while I have previously argued against Quantitative Easing, it would now seem that it may provide the ultimate way to cancel off government debt entirely. And since the Bank of England paid the money, the government doesn't even owe the bank anything. Brilliant!

Basically, by inventing the Quantitative Easy mechanism, originally intended to help provide piles of cheap money for commercial banks, it may be that the Banking sector has just committed collective suicide. This could end up being very entertaining!

Where does the money that banks create go?

Hopefully, you are all aware of the fact that commercial banks have a virtual monopoly on the creation of new money. I've tried to work out precisely how much money gets pumped into the economy by banks - it's not simple. Intriguingly, Labour MP Michael Meacher has recently blogged the "the Big 5 lend £7 trillions a year heavily geared towards high-risk speculation hedged by the safe profitability of property mortgages".  I've contacted him to ask where the 7 trillion number comes from, but not heard back from him yet.

It would be great to have the details about where all that money goes. One very interesting report, mentioned by Aditya Chakrabortty in the Guardian, is one called "The Madness of Barclays" that was produced by the Centre for Research on Socio-Cultural Change at the University of Manchester. There's a powerpoint presentation that you can download here.

There are some very revealing numbers in that report. In particular, the study shows that of the £230 billion that Barclays lent to UK customers in 2011, only 2.7% went to Manufacturing. Nearly half was lending for home loans.  Between 2007 and 2011, lending to Finance increased 31.2%, lending on property increased 59.1%, Home loans increased 56.4%. Other areas (manufacturing, construction, energy and water, wholesale and retail and other business) dropped by 26.5%.

What a brilliant demonstration that banks simply cannot be relied on to do anything useful for the economy with their money creation monopoly. Imagine how much better things would be if the money creation was not used to buy property that already exists, but for building new social housing so that people can live in decent conditions.

But there is more. We learn that Barclays has a total level of exposure of nearly £1.8 trillion - that's more than the entire UK GDP (£1.5 trillion). Just imagine what would happen if default rates suddenly soared for some reason. That is an enormous amount of risk, risk that is currently almost entirely taken on by the taxpayer, who would no doubt have to bail out Barclays if things went wrong.

Finally, there are details of where Barclay's income comes from.  36.9% is interest charges.  You don't have to be a rocket scientist to make profits if you have the right to create money out of thin air and charge interest on loans. I doubt that you really need any particular skill to "make" money that way. A further 26.1% of earnings comes from fees and commissions - like charging 2-3% on credit card payments in a foreign currency. That's pretty demanding stuff too.  There's another 23.2% from "trading" - doing things like racheting up and down the foreign exchange markets to milk money from the system. Only 7.0% comes from "Investment". Frankly, that's pretty pathetic.

In other words, nearly all of Barclays earnings come from extracting value from the economy. Hardly anything reveals any real contribution to the system.

As I say - money creation is too important to be left to commercial banks. Money creation should be done under public control and in the interests of citizens. 

Lobbying by the City : £92.8 million in 2011

I suppose it could be worse. Compared to the financial lobbyists in the USA, the total of £92.8 million spent by the financial sector last year on lobbying for their interests may seem like chicken feed. But today's report by the Bureau of Investigative Journalism which got a good writeup in the Guardian finally puts some numbers on the fire power of the City.

My congratulations to Nick Mathiason, Melanie Newman and Maeve McClenaghan who have spent the last four months compiling the data, and detailing the 129 organisations that are currently involved in some form of lobbying for the financial sector. You can now download a spreadsheet document with the list of contributions that they identified.

As I say, it could be worse. The amount of money that the City could potentially allocate to buying politicians could be way higher. And while the budgets of groups like Positive Money are so small, it is clear that this is going to be a tough fight to get the alternative positions an equal hearing.

The encouraging thing is that the financial lobbyists really don't have a leg to stand on. I would just love to hear one of these lobbying groups explain to the rest of us why it makes sense to give the banking sector the right to create money out of thin air, lend it to governments, and then charge interest on the loans. Go on, I defy you. Explain it!

And while you are explaining that one, come up with another argument why a financial transaction tax is "a bad idea" (to quote David Cameron), and yet banks charge credit card users 2-3% on every transaction made in a foreign currency for multiplying two numbers together.

Charles Ferguson : Inside Job - the Book

You must read Charles Ferguson's superb new book "Inside Job" that came out on the 21st of May. I've just finished reading it, and it should be on everyone's reading list.

I've already raved about Charles Ferguson's superb 2010 documentary "Inside Job" on the causes of the 2008 crash. It won the Oscar for the best documentary in 2011, and when he received the Oscar he said:

"Three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail. And that's wrong".

By the beginning of 2012, it was still the case that there has not been a single criminal prosecution of a senior financial executive related to the finanacial crisis. That's why Charles Ferguson wrote an entire book of 370 pages that details the crimes the were committed, and tries to understand why nothing has been done. It tries to understand why many of the people in Obama's administration are people who were directly implicated in the crisis.

The book makes for very sobering reading. There is clearly something very wrong with the world in which we live.

In the last chapter, Charles Ferguson asks "What should be done?". His list includes

• Bring the financial sector under control
• Control the impact of money on politics
• Reform the tax system
• Greatly strengthen antitrust policy and the regulation of corporate governance

and he adds one of his pet themes - the need to create a truly universally accessible, high-speed broadband internet infrastructure.

He specifically mentions the need to impose a financial transaction tax (hooray!) but he doesn't mention the need to take the power to create the money supply away from commercial banks and to give it to elected governments who should create money only for projects that are in the interests of citizens. Oh well, perhaps he might find the 14 minutes needed to check out my video on "Some Radical Proposals for Monetary Reform"!

For some strange reason, the book is not being sold by Amazon in the USA. But you can buy a copy via independent sellers, or via Amazon.co.uk where there is also a Kindle version. Could it be that the corporations that control the economy have been able to block Amazon marketing it? Stranger things can happen.

US Congress investigation into Fractional Reserve Banking

My thanks to Jake for sending me the news that Congressman Ron Paul (ex. Republican candidate) and Chairman of the Domestic Montary Policy and Technology Subcommittee will be holding a hearing on the 28th June to examine fractional reserve banking.

It could be interesting to hear.

I would just love to hear a banker explaining why it's better to get commercial banks to create money to lend the the US government, who then ends up paying $8.5 trillion in interest charges since 1988 (i.e more than half the entire US government debt), rather than just allowing the treasury to print its own money debt free like Abraham Lincoln and the Colonists.

NOTE ADDED Sunday 1st July

There's a Youtube version that you can find here.
I've not watched it yet (it's 75 minutes in length), but it's been seen by over 5000 people so far, with 323 likes. And as one commentator points out, with a leverage ratio of 10:1 that would make 3230....

Monetary Reform Propositions - in French

For those of you who find it more amusing to hear me talking in French, I've just posted a French version of my Youtube presentation on monetary reform. It's called "Des Propositions pour une Réforme Radicale du Système Monétaire".

I'm increasingly convinced that this sort of proposition should be the ultimate aim of reform. Yes, we can try and fix the immediate problem by (a) forcing central banks to lend governments the money they need to get out of debt and/or (b) setting up citizens banks that exploit the insane fractional reserve lending mechanism to get out of debt.

But these solutions are just short term. There can be no doubt in my mind that money creation by commercial banks is impossible to justify. Sure, the bankers will be fighting like crazy to keep their gravy train on the rails, but I defy anyone reading this to explain why it is more "reasonable" to allow commercial banks to create the money needed to allow the economy to function, rather than giving that function to governments.

I think that my proposal to use an automatically varying Financial Transaction Tax to remove the excess money from the system completely demolishes the standard argument used by people like Angela Merkel that claims that if governments were able to create the money supply there would be runaway inflation.

In any case, that argument is clearly completely phoney. To work, you would have to believe that somehow if you let commercial banks do the money creation for profit, they will somehow be able to magically find just the right level for the money supply. As if they have any motivation to find the "optimal value". Even the most religious believer in the invisible hand of the markets would have a very tough time trying to get anyone to buy such obvious twaddle. Banks create money if they think that it will allow them to make a profit. End of discussion.

No. The bankers will have to admit it. The only reason why the system has been rigged in the way it has been is that it allows them to rake in trillions in interest charges for lending us money THAT THEY DON'T EVEN HAVE TO LEND. It's completely indefensible, and only exists because the whole mechanism has been hidden from public view.

But the people are beginning to wake up. And when the 99% realize that it doesn't have to be that way, there should be no way to stop reform.

Oh, by the way, here's the French version.

Feedback on "Some Radical Proposals for Monetary Reform"

I've been having some interesting exchanges by email following the publication of my latest Youtube offering last weekend - "Some Radical Proposals for Monetary Reform"

Since the correspondance was private, I won't say who the people involved were. I'll just say that they are people whose opinions count a great deal for me.

Rather than keep them secret, I thought it would be interesting to put the exchanges here on my blog. Obviously, I would encourage any of you to chip in with your own ideas.

So, here goes with a couple of exchanges that I found particularly stimulating. The comments are in blue italics - my reactions in normal font.

First Exchange

I guess the main difference I have is that I don't think all money should come into the system from the top down through politicians.  I'd have most money still come through banks as loans, and be extinguished when they got paid off. The loans should even be at interest.  But the banks should be publicly owned, and the interest should be returned to the people.

[To] be fair to the commercial bank system, I would say that if we take away their monopoly on money creation, I would personally be happy to give them a monopoly on lending for interest.

Otherwise things get complicated. For me, it is enough to allow public money creation to finance projects (and jobs) that everyone wants - providing schools, hospitals, public transport, low-cost social housing etc etc. I wouldn't want any of that money going to fund individuals to buy their own houses etc. If you did, they it would be an invitation to corruption. The first thing that would happen is that you would have corrupt officials using the centrally generated funds to lend to their friends and clients.

The only other reason I can imagine for wanting to create money for lending with  interest  would be if that you think that we might not be able to create enough money by spending directly into the economy to keep the money supply optimal. For example, if the algorithm said that the FTT level should be 0%, then I suppose there might be an argument for having a source of additional money creation (I certainly wouldn't want to argue for a negative FTT!).

But, at least for a European like me, I simply can't believe that you could run out of things to spend public money on usefully. For example, if the money supply still wasn't large enough, you could just provide free public transport for everyone - even in rural communities. That would require a lot of money creation - and yet it would definitely pay off by allowing the economy to keep expanding - and not just in the cities.

So, do you really think that we need any additional sources of money creation?

Second Exchange

If you give interest-free loans to people, what incentive do they have to pay them back, or not take out outrageously large loans and just keep rolling them over? 

That's precisely my reason for not using public created money to make loans. For me, all that new money should be spent into the economy by paying people/companies to do things that people .

It doesn't have to be public sector work. For example, you want to build a new hospital - the government calls for offers. The company with the best proposition gets the deal.

Same as happens now, actually. Except that the government doesn't borrow  the money from the banks. It just creates it, debt free, and doesn't have to pay the money back.

A computerized FFT algorithm sounds a bit scary to me. We have those now, and they're not working out so well.

Well, in the end, the actually implementation of the tax is going to be a computer program - it's the software that the banks use for doing the transfer of funds from one place to another.

But the automatic changes in the FTT rate doesn't actually have to be done by a program if you don't want. But, it shouldn't be dangerous. We would be talking about tiny variations - going from 0.3% to 0.31% (for example)

Are you talking about 0% price inflation or money supply inflation?

I would like to see 0% PRICE inflation. We're told that we need inflation, but that is so that the system can pay off the interest charges to the bank.

On the other hand, I would love to see a really big increase in the money supply to get people back to work.

Third Exchange

A financial transactions tax could certainly be used to reduce aggregate demand. 

I'm glad you agree! I seriously think that it would be difficult to come up with a simpler more painless way to remove the excess. 

However, as with all transactions taxes, they work to reduce the number and size of transactions, particularly as they get larger. 

Is that a problem? Given that visible transactions in the US are runningat around $3000 trillion a year there's probably a great deal of that which is totally pointless and could be removed with no detrimental effect whatsoever.

Even if all the $2.3 trillion in US tax revenues was abolished and replaced by government created money (debt free), the increase in the money supply would be at most  $2.3 trillion.  But, unless there was inflation there would be no need to remove that money with the FTT. And, even in the worst case scenario (in which all the money creation was too much) you would still only need an FTT of 0.08% of $3000 trillion to balance things.

The fact is though that given the amount of unemployment, and the number of factories that are way under full capacity, it seems highly probable that you could pump a lot of debt free public money into the system without producing inflation at all.

And in this case, I have no idea where those 'curves cross' to limit real govt. spending, though it would surely be a moving target?

Well, this is my point. The point where real government speading exceeds the optimal value for money supply could be a very long way away. Governments borrow trillions to pay for wars in Iran/Afghanistan. That's new money going into the system. Here, the amount of money would be
similar or less... and yet it would go to things that the citizens want/need, rather that the arms industry (for example).

My bet is that the US could probably create 10 times more money than the current US budget and still not produce any serious inflation - because supply (production of goods and services) would go up at the same time as demand (government contracts for public works - schools, hospitals, low-cost social housing, transport etc etc).

Who could oppose debt-free money creation by governments?

In my latest video called "Some Radical Proposals for Monetary Reform", I argued that it would be perfectly possible to replace money creation (with interest) by commercial banks by debt-free money creation by governments for projects that receive overwhelming support from the public.

Who could object?

You might think that this is such an outrageously left-wing proposition, that of course, all right-wing voters would have to be opposed. But is that really the case?

Remember that what I am proposing includes the following:

• Abolition of income tax
• Abolition of business taxes (eg. corporation tax)
• Abolition of sales taxes (eg. VAT)
• Abolition of employment charges (national insurance, pensions contributions, health care charges)

These taxes would not be necessary because the government would pay for all the usual activities normally covered by tax income with direct money creation. Only the variable rate Financial Transaction Tax would be needed to remove excess money in the system.  I note that a few additional taxes could be retained because they are good for people - taxes on alchohol, tobacco, petrol etc.

Surely, this is as close to an extremely right-wing platform. Even the Tea-Party fanatics should love it.

But there's another point. If you are a business leader, and you want to make maximum profit, then you want your salary costs and other costs at a minimum.  Note that the elimination of income tax and employment charges already means that you can pay people less. But in addition, if the public money creation mechanism can be used to provide many of the vital services that your employees need, then this would again reduce the amount that you would have to pay. For example, imagine how useful it would be if

• your employees could get to work using efficient, cost-effective, and potentially free public transport
• the shift to public transport means that your employees can get to work without getting stuck in traffic jams
• your employees could get reasonably priced or even free child care for children from 6 months old
• a shift to publicly provided childcare services means that there is little risk of employees failing to come in because of problems with nannies and so on. 

Surely, every company director should find such a move extremely beneficial. It's services that they do not have to provide, and that would make the country that implemented such a system far more competitive. Sure, there are some companies that provide bus transport for their workers, and on-site child care facilities. But it must surely be more intelligent to have those facilities provided directly for all the public - thus liberating companies to do what they are supposed to do, namely, making a profit and providing good jobs for people.

So, if all the general public approve, and it's massively in the interests of business, who could possibly  object?

The answer is simple. It's the financial system that currently is milking the entire economy for all it is worth. It's the "blood sucking vampire squids" than control everything, including politicians who are paid to protect their interests, and the media.

These ideas have to be discussed openly. I cannot believe that the bankers can give good reasons for keeping the system as it is.

A proposition for François Hollande's Government: La Banque des Français

François Hollande's Socialist Party won a massive victory in the French elections yesterday, and he now has control of all the important components of French political life -  the Senate, the National Assembly and the Presidency, as well as nearly all the Regional Assemblies, and many of the major Cities.

We opened a bottle of champagne last night. But it wasn't because I think that François Hollande has the solutions. However, he does at least appear to have the will to do something. In the speech that opened his campagne for the presidency on the 21st January he said this:

"My real opponent has no name, no face, no party, will never stand for election,  will never be elected, and yet governs. That opponent is the world of finance".

Quite.

But how can Hollande's government take on "the blood sucking vampire squids" and win?

In my Youtube presentation yesterday ("Some Radical Proposals for Monetary Reform") I argued for a world in which money creation by commercial banks was banned, where all money creation had to be done by elected governments and only for projects that are directly approved by the vast majority of citizens, and where an automatically adjusted Financial Transaction Tax is used to mop up any excess money  in the money supply to make inflation a thing of the past. 

While I am convinced that this model can work, it's not something that you can get overnight. So what can Hollande do today? 

Here's a suggestion. It's based on my other proposals for "Solving the Debt Crisis" and creating a citizens' "Debt Annihilation" machine.  

The French government could create a new bank - let's call it "La Banque des Français". The bank would have the role of creating money debt free for financing all those projects that are supported by the vast majority of French citizens. 

How would that be possible? Well, as you hopefully know, commercial banks have a licence to create money. Take the latest proposals from the UK government. They will allow banks to have a leverage ratio of just 3% - consistent with the minimum requirements proposed by Basel III. That means that banks are allowed to generate loans that can exceed their Tier I capital by a ratio of up to 33:1.

So, suppose that the "Banque des Français" is created with initial capital of €30 billion. It would then be allowed to create out of thin air €1000 billion. That money could be lent to the French government for any public spending that received the full approbation of French citizens and could then be spent into the economy. 

Since the entire revenue of the French government  was only €817 billion in 2010, this money would be enough to abolish income tax, abolish corporation tax, abolish VAT, abolish national insurance and medical charges and yet still maintain all the current programs. And there would money left over to pay off a part of the national debt, and even invest in some new investment programs.  

The boost to the French economy that would be produced by eliminating all these taxes would be truly incredible. Employment would soar, because companies could employ people with much lower wages since their employees would not have to pay income tax and VAT, and the various charges will have disappeared. And the absence of corporation tax would mean that multinationals would be queuing up to move their headquaters to France so that they could legally repatriate trillions of profits currently stashed away in taxhavens.  Manufacturers would relocate production in France, because it would be cheaper to produce goods in France than elsewhere.

Of course, the French Government would have to agree to reimburse the Banque des Français. But suppose that the Banque des Français agrees to loan the money for a period of 1000 years with 0.0% interest? Is there any reason why the Banque des Français could not set its own terms? 

And finally, the government should set up a variable rate Financial Transaction Tax that would remove any excess money in the economy and prevent any possiblity of inflation (see my proposal yesterday). At the same time, the FTT would have the effect of making speculation far less interesting. As a result the other banks might well start using their very considerable financial resources to invest in productive industry instead of indulging in totally wasteful speculation.

If Hollande's government takes up these ideas, I will be opening not just one bottle of champagne, but several. 

Some Radical Proposals for Monetary Reform : Revised version

I've just posted a new version of the presentation that I put on Youtube yesterday. The original version was doing pretty well - 111 views and 11 likes in 24 hours.

However, I had sent the link to Bill Still who very kindly came back with a mail to say that while he liked what I was proposing, he couldn't recommend it as it was because it contained a fair number of factual errors and inconsistencies. In fact, he sent me a detailed list of 15 different points!

So, I've done a new version that takes into account Bill's points and which I think works even better. A big thankyou to Bill for helping me improve the presentation. The original version has been removed - together with the 8 comments that has been added... sorry about that.

I'm really quite excited about this.  I think that I may just have hit on a way to combine debt free money creation by goverments with my fetish subject - namely, variable rate Financial Transaction Tax that makes real sense.

Unless I've missed something, the resulting system would have a number of really interesting features.

- The government would be able to fund all projects that receive overwhelming support from the population - I propose a minimum threshold of 90% to be sure that only the most clear cases get funded

- Any possibility of the money creation leading to inflation would be eradicated by having an automatically varying Financial Transaction Tax that would remove any excess money in the system. The optimal level of money supply could be determined by a fully independent commission, but that commission would not have the power to block public expenditure. It would only be able to change the FTT rate up or down to eliminate inflation or deflation.

- Under the current arrangement, governments are effectively required to balance tax income and expenditure. If they don't, they either have to borrow from commercial banks, and end up paying massive interest charges, or they borrow from citizens with savings schemes. But if they chose the latter option, this removes money from the economy and leads a slump - precisely what has happened in Japan where the government is massively in debt to its own citizens.

- With my new proposition, there is no need for governments to borrow. Indeed they don't even need to have taxes - they just create the money to finance the activities that their citizens want. Taxes are only needed to remove excess money from the system in order to prevent inflation. And, interestingly, the money taken out of the system by the FTT doesn't even go to the government! It is just taken out to the system. The system is thus total stable - even if there is a lot of public spending.

- Perhaps the most amazing thing is that public money can be injected to take up the slack in the economy. Thus, if there are large numbers of unemployed, or if there are factories that are not being fully used, the public can vote to provide jobs and orders with government money to get out of a recession.  No more boom and bust. The so-called business cycle that we are supposed to believe is an inevitable feature of all economies would no longer exist.

I hesitate to say it, but this could just be a recipe for a Utopian society.

I look forward to hearing your comments. And don't forget to click on "Like" and send it to your friends if you approve!

A Radical Proposal for Monetary Reform : My latest Youtube presentation

Here's my latest opus.

It actually brings together two of my favorite ideas. First the need to use debt-free central bank lending to create the money supply instead of allowing commercial banks to create money and charge us interest. That's an idea that is shared by an increasing number of authors, including Ellen Brown, Bill Still, James Robertson, and the Positive Money Network. It's also been pushed by many others across history - including Thomas Jefferson, Andrew Jackson, Abraham Lincoln, Thomas Edison, JRR Tolkein etc...

One new idea is that I propose that central bank money creation should be spent into the economy for ANY project that recieves the support of overwhelming majority. I honestly think that the criterion for deciding whether to enact money creation could require at least 90% of the population to allow it to take place. Only the 1% would oppose most of the projects that involve public finance.

The other  really new bit is my suggestion of combining money creation for public works with an automatically regulated Financial Transaction Tax. Seen from this persepective, the FTT is not like an ordinary tax since in fact, the money doesn't even go to the government. It is simple withdrawn from the system to keep the money supply stable. It's by far the easiest and simplest way to remove excess money out of the system - painless, cheap to implement, extremely rapid, completely fair, and very difficult to avoid.

I find the idea very appealing. By having a balanced system in which the government creates as much money as is needed to allow the economy to grow naturally, and mopping up any excess by using the FTT mechanism to remove the excess, it seems that we could potentially reach a sort of utopian situation that would be radically different from the world we live in today.

In this new world, there would be money that could be used to pay ALL people to do something useful. Living off state subsidies would be a thing of the past.

But perhaps the most important point is that the automatic FTT mechanism shoots a hole in the standard argument which says that allowing governments to create money without interest would lead to rampant inflation. My mechanism makes this physically impossible.

If there is anyone who can explain why we should be paying trillions of euros and dollars in interest payments to banks for creating our money, then do let us know what the arguments are. I'm definitely prepared to take you on.

Here's the video. I hope you like it. If you do, don't hesitate to click on "Like" and send it to your friends.

Note added on Sunday 17th June : I've removed the original video and added a new revised version. Please see this link.

How to eliminate all UK government debt in 5 easy stages

A couple of weeks ago I made the rather cheeky suggestion that we could eliminate all government debt in 10 easy stages by turning the commercial banks insane fractional reserve banking system back on itself. It would be hoisting the banks by their own petard.

I had a few people pointing out that I was maybe confusing deposits with capital. I had argued that if you deposited 1000 euros in an account, the bank can create out of thin air 11.5 times that amount and use it to make loans. I argued that this ratio should fit the Basel III requirements of keeping the assets to loan ratio at 8%.

I must admit that I was skating on thin ice - I don't really know how the system works. But, things have now been made much clearer thanks to the UK government's decision to water down the propositions made by the Vickers report from the Independent Commission on Banking. Sir John Vickers had proposed that the leverage ratio of lending to Tier I capital should be 4%. But the City's lobbyists managed to get the government to reduce this to 3% - see the government's whitepaper published last thursday. Wonderful! Imagine that! - the City managed to get the government to implement the strict minimum capital requirements imposed by Basel III. Who would have believed it possible?

Anyway, the governments decision to cave in to pressure from the City means that UK banks will be allowed to use leverage ratios of up to 33:1. Note this only works for true capital. The 8% number in Basel III includes other risk-weighted assets such as loans (which is what I had used for my previous proposition).

So all that has given me the opportunity to devise an even simpler scheme for getting the UK government completely out of debt in just 5 easy stages. Instead of just depositing money in the bank, all the sums are used to increase the banks capital. Enjoy!

Ingredients

1 cooperative bank
10 cooperative individuals (volunteers please)
£30,000 capital investment to start (I'm happy to put up the money)
A network of taxhavens so that the flow of money cannot be controlled (conveniently, they are already in place)

The sequence of events is shown in the following table.

Step 1. 
Player A (me) invests £30,000 in the bank's capital (column A)
The Bank uses the fractional reserve banking mechanism to create 33 times that sum which it lends to Player B (Column B).
The bank's total capital of £30,000 (Column C) is 3% of the £1,000,000 of Total Loans (Column D)  - thus fulfulling the UK government's leverage requirements of 33:1 (Column E).
Step 2.
Player B gives the £1,000,000 to player C who invests the money in the bank (thus increasing the banks total capital to £1,030,000).
The Bank generates £33,333,333 and lends it to player D.
Step 3.
Player D gives the £33,333,333 to player E who invests the money in the bank (thus increasing the banks total capital to £34,363,333)
The Bank generates £1,111,111,111 and lends it to player F.
Step 4.
Player F  gives the £1,111,111,111 to player G who who invests the money in the bank (thus increasing the banks total capital to £1,145,444,444)
The Bank generates £37,037,037,037 and lends it to player H.
Step 5.
Player H gives the £37,037,037,037 to player I who who invests the money in the bank (thus increasing the banks total capital to £38,182,511,481).

The bank generates  €1,234,567,901,235 and lends it to the UK government which agrees to repay the entire amount after 1000 years with 0.0% interest.

The government uses the money to pay off the entire national debt of roughly £1,180 billion.
It also reimburses player B (£1,000,000) player D (£33,333,333), Player F (£1,111,111,111) and player I (£37,037,037,037).

There's still £15,615,419,753 to spend on something useful - you know, public services or whatever.

Actually, if I could scrape together another €1000 to make my initial capital investment €31,000, the fractional reserve banking trick could generate an extra £41.1 billion (which is what you get when you multiply £1000 by 33 and a third five times in a row. Now that would be a very useful sum. Isn't Fractional Reserve Banking wonderful??

Yours truly will stay a shareholder in the bank, together with players C, E, G and I. No need to give us all knighthoods - we were just doing our duty.

Can anyone see why this would not work?
Admittedly, it's completely ridiculous. But there again, fractional reserve banking by commercial banks is completely ridiculous.

And do you really think that the banks don't do this sort of thing all the time anyway? Why do you think the UK has its web of taxhavens in the Channel Islands and the Caymans? And why do you think that any suggestion that we might actually monitor the transactions that go on by implementing a Financial Transaction Tax gets the immediate response from David Cameron that "It would be a very bad idea". He's right - it would be a very bad idea - for his chums that use the Fractional Reserve Banking Scam to "make" piles of money.

The only difference beween what the banks normally do, and what I am suggesting is that, in this case, the bank simply decides to use the money they can generate to do something useful. It would make a nice change.

US Interest Payments since 1988 : $8.5 trillion

Now here's an interesting bit of information for those of you who think that, just possibly, it might be more sensible for governments to create their own money debt free, instead of borrowing from commercial banks who charge interest.

I had already added up the numbers for the 27 EU countries and found that Europe's taxpayers paid €5.6 trillion in interest charges to the banks since 1995.

I've found the equivalent figures for the US on the Treasury's website. Here they are (updated November 2012 with the complete numbers for fiscal year 2012):

If you take the numbers since 1995 (so that you can compare directly with the EU) you can find that the total interest payments were $6.6 trillion - it looks like Americans have been ripped off just like the Europeans have been.

But the figures go back to 1988, which means that we get the grand total of $8.58 trillion dollars. Impressive.  That's a very substantial proportion of the entire US government debt ($15.77 trillion at the latest count).

That's why the US government is so badly in debt.

Perhaps US citizens should just ask for their money back? But in the meantime, can anyone provide a reason for keeping the current insane system going?

Thomas Edison said it very well in the New York Times on December 6th 1921

"If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way. It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people."

Paul Krugman : End this Depression Now!

And here's another book that I've just read - it's Paul Krugman's book that just came out called "End this Depression Now!" The Nobel prize-winning author argues strongly for the idea that governments can end the current depression by a massive increase in public spending. Some of the most amazing parts of the book are where he shows that the current "Austerian" view, in which cutting back on budgets is supposed to stimulate the economy is simply illogical. It's as if there are armies of economists arguing for something that they must know can't be true. And the result is that they give support to people like David Cameron and George Osborne who have an almost religious belief that cutting back on government expenditure is going to magically kick-start the economy.

So, I found his argumentation very convincing. But, there was one thing completely lacking from the entire book. Why is he not arguing that an increase in government spending doesn't have to involve an increase in government borrowing and hence debt? Anyone who has read books like "The Web of Debt" or "No more National Debt", or watched "The Money Masters" or "The Secret of Oz" will know that governments do not have to borrow money from the commercial banks and end up paying trillions in interest charges. Why on earth isn't he pushing for the ideas promoted by Ellen Brown, Bill Stills, James Robertson and the Positive Money movement? 

Could it be that the establishment economists (those who, like Paul Krugman, are established professors at Princeton University and elsewhere) know something that we don't? Is there something wrong with the argument that we should be taking the right to create money with interest from commercial banks and making all money creation interest free and under the control of elected governments? If so, would they please tell us what the problem is?

Or could it be that the establishment economists dare not expose the scandal because they are, to some extent, part of the system? I hope not.

But the other thing that was lacking from Paul Krugman's book is a discussion of the possibility that the current Euro crisis and other worrying developments could actually be part of a deliberate policy by the money masters. With the things I've been reading recently, which argue quite strongly that many of the depressions that have occured over the last two centuries were probably deliberately manufactured, it seems to me that the reason why no economists can provide a convincing explanation of why they believe that massive austerity can boost the economy, is that they are involved in producing a smoke screen to hide something altogether more sinister.

Whatever the explanation, I find it very strange that someone like Paul Krugman who is so clearly arguing for the right sort of solution seems to have missed the vital fact that makes the "austerian" view totally untenable. The public can have both - they can get their governments out of debt AND give the massive boost to the economy needed to end the depression. But it involves taking on the banking cartel that has rigged the system.

Warren Mosler : Seven Deadly Innocent Frauds of Economic Policy

Here's another fascinating read. Warren Mosler published a book called "Seven Deadly Innocent Frauds of Economic Policy" in 2009 (updated in 2010). You can download it as a pdf file by clicking here.  Mosler explains tha the term “innocent fraud” was introduced by Professor John Kenneth Galbraith in his last book, The Economics of Innocent Fraud, which he wrote at the age of ninety-four in 2004, just two years before he died. Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians.

Here are the 7 frauds, with a brief description of how Warren Mosler deals with them.

• Deadly Innocent Fraud #1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
  Fact: Federal government spending is in no case operationally constrained by revenues, meaning
  that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects. 
• Deadly Innocent Fraud #2: With government deficits, we are leaving our debt burden to our children.
  Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.
• Deadly Innocent Fraud #3: Federal Government budget deficits take away savings.
  Fact: Federal Government budget deficits ADD to savings.
• Deadly Innocent Fraud #4: Social Security is broken.
  Fact: Federal Government Checks Don’t Bounce.
• Deadly Innocent Fraud #5: The trade deficit is an unsustainable imbalance that takes away jobs and output.
  Facts: Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.
• Deadly Innocent Fraud #6:
  We need savings to provide the funds for investment.
  Fact: Investment adds to savings.
• Deadly Innocent Fraud #7:
  It’s a bad thing that higher deficits today mean higher taxes tomorrow.
  Fact:
  I agree - the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

It's just the sort of out-of-the-box thinking that I really like. I do have one problem though - and indeed, I've had a lengthy exchange with Warren about this. It seems to me that the claims that he makes would definitely be true if, as more and more people are proposing, governments reclaimed the right to create the money supply and banned the fractional reserve banking system that allows commercial banks (and the Fed) to create money with interest attached. Warren appears to think that there is no real problem with the current arrangement, and I must admit that I wasn't convinced on that point.

But, there's no doubt about it, this is very interesting stuff.

Bill Still's "No More National Debt"

I've just finished reading Bill Still's book published in 2011 called "No More National Debt". It's available as a Kindle document which can be read on Macs and iPads too. The content overlaps with some of the material in his excellent documentary "The Secret of Oz", but there are many new things that get discussed and make the whole thing well worth reading. I was particularly interested to hear about earlier attempts to obtain monetary reform.

For example, chapter 26 talks about the Program for Monetary Reform - a document produced by the following group of economists in July 1939.

• Paul H. Douglas (University of Chicago)
• Irving Fisher (Yale)
• Frank D. Graham (Princeton)
• Earl J. Hamilton (Duke)
• Willford I. King (New York University)
• Charles R. Whittlesay (Princeton)

The document which you can download here is stuffed full of very sensible ideas, including the need to ban fractional reserve banking.

But it turns out that proposal to ban fractional reserve banking dates from even further back. It was Frederick Soddy, an "amateur" economist  who was a Nobel-prize winning Chemist at the University of Oxford, who can apparently take the credit. Soddy wrote four books between 1921 and 1934 in which he proposed a number of radical ideas, and you can download his 1934 book "The Role of Money" here. At the time, he was dimissed a crank, but several of his ideas are now almost orthodox:

• The abandonment of the gold standard
• Letting interntational exchange rates float
• Using the quantity of money to counter cyclical trends
• Establishing a consumer price index to monitor the quantity of money

His last major idea - banning fractional reserve banking - still hasn't been implemented, but I really hope that he will one day be proved to have been correct. I rather like the idea that an eccentric non-economist from Oxford might be able to propose some wacky ideas that end up getting taken up many years later. Who knows, maybe my proposal to use a variable rate FTT to keep the total money supply automatically at the  "correct" level may be someday be seen as the solution!

It also turns out the J.R.R. Tolkein, the author of the Lord of the Rings Trilogy, was also interested in monetary reform, and said 

"There should only be one source of money: one fountainhead from which flows the nation's blood to vitalise commerce and industry, ensure economic equity and justice and safeguard the welfare of the people... In other words, it has always been and has always been our contention that the prerogative of creating and issuing the money of the nation should be restored to the State."

It doesn't take much of a leap of imagination to suppose that when the Dark Lord Sauron had enslaved the people of Middle Earth with his rings of power, those golden rings, "forged in the fires of Mount Doom could be symbolic of central banks and their power to convince entire nations to borrow their money into existence".

At the end of Bill Still's book, he gives an overview of a number of places where interesting new ideas are being considered. For example, there is an excellent organisation called Monetative in Germany that is working along the same lines as the Positive Money group in the UK.

Debt free money creation by governments - and controlling the money supply

Over the past couple of months, I have become convinced that we should all be striving to reform the monetary system. Money creation by commercial banks should be banned. There is no reason why governments should pay interest to commercial banks for borrowing money that the banks simply create out of thin air. Instead, governments should be doing the money creation themselves with no interest attached via regulated central banks.

The arguments come from a variety of sources. Firstly, I was greatly influenced by reading Ellen Brown's superb book "The Web of Debt", originally written in 2007. But I subsequently read the book by Joseph Huber and James Robertson called "Creating New Money : A monetary reform for the information age", which came out in 2000. And now, I've been reading Bill Still's book "No more national debt" (2010), which follows on from his excellent documentaries "The Money Masters" (1996) and "The Secret of Oz" (2010).

I believe that it would be difficult for any rational person to read these books and come away still believing that the current system can be justified. The idea that governments should borrow money from commercial banks who create the money out of thin air and then charge us interest is simply absurd. It has to be more sensible for governments to create the money needed to allow the economy to function themselves, free of interest. It's been done many times in the past - by the Romans, by the American colonists before the revolution, by Abraham Lincoln, and by the Island of Guernsay to name but a few. And it can clearly work very well.

So, what possible arguments could be raised to defend the current system? The main argument that we hear is that money creation cannot be left in the hands of politicians - they would just print unreasonable amounts to buy votes, and the result would be runaway inflation. Of course, we are supposed to believe that money creation is done much more reasonably when it is left in the hands of commercial bankers. I would just love to hear the bankers trying to convince us that their way of creating money is better.

I certainly agree that there have to be strict controls over the creation of money, even when it is done by public authorities such as central banks. So what sort of controls could we have?

Well, firstly, I think that it would help a lot if any money creation would need the full approval of the people, via their elected representatives, or even via a referendum. Thus, if the overwhelming majority of the public think that creating fresh money to build new hospitals and schools is a good idea, then so be it. The government would be authorized to generated the precise amount of money needed for the project to go ahead, and of course there should be very strict control over the use of the funds to make sure that the money is used appropriately and without waste. This is clearly a very important point.

Similar mechanisms could be used to fund any work that was in the public interest, and which was approved by the population as a whole. Thus, I am certain that paying for police and fire services, and other important public activities such as libraries would receive massive support. And one could add to this list by providing direct public funding for sports facilities, theatre, music and the arts.

This list of activities that would receive approval of the vast majority of citizens could end up getting rather long. And in the end, if direct money creation by the government was used for this, the amount of money being created could start getting excessive, with the result that there would be a risk of running into inflation - the main problem raised by those who argue that governments should not be allowed to create money directly.

Actually, I think that this point might not be reached for quite a long time. In most countries, a substantial proportion of the population is unemployed - the figures have reached 25% in Spain, for example.  And these people are often being propped up by receiving government funds such as unemployment benefit for effectively doing nothing. Wouldn't it be much better for those people to be paid to do something productive by giving them jobs directly financed by public funds? They could be doing useful things like caring for the elderly and infirm, looking after preschool children to allow parents to go out to work, repairing the public infrastructure, building roads and other transport systems, insulating houses etc. etc. The list of useful things that could be done in the public interest is very long.

As long as the money used for paying for this sort of work is increasing the overall wealth of the population, this sort of productive activity is unlikely to create inflation.

But, let's suppose that by monitoring prices, we find that the economy is overheating and that there is too much money creation going on. What do we do then? Well, it's simple. The government would need to have a mechanism in place that automatically takes money out of the system if there is too much. And how can it do that? By taxation. Indeed, it can be argued that the main function of taxation is to ensure that the supply of money in the economy is kept under control.

Note that seen from this perspective, taxation is not being used to pay for public services at all. We don't need to balance the government's books by ensuring that tax revenue matches government expenditure. It's actually fine for governments to create their own money to pay for public services, as long as the money supply is only increasing enough to allow the economy to function optimally.

Now, what sort of tax would provide a simple way of keeping the rate of money creation in the economy under control? Well, those of you who have been following my proposals will know that I think that a flat rate financial transaction tax (FTT) would be a particularly good method. Indeed, I have argued that one of its advantages is that the rate of the tax can be continuously varied so that the amount of revenue can be maintained at the desired level. Those changes can be made every day, or even every hour if needed. It's simply a question of changing the number in the computers that handle electronic transactions - exactly as the dollar-euro exchange rate is varied continuously.

So, let's just change the phrasing a bit. Instead of saying that the FTT rate is adjusted continuously so that government tax revenue matches government expenditure (the so-called Golden Rule), the new version will say that the FTT rate is adjusted continuously so that the total money supply in the economy is set at the optimal value. If an independent Monetary Policy Committee (or the equivalent) considers that the money supply should increase by 2% in the next year, the government would be able to spend as much newly created interest free money as is needed to cover all the projects that are approved by the great majority of the population, and then the FTT would be continuously varied to ensure that overall, the money supply increases by exactly the 2% proposed by the monetary committee.

In this way, the whole system is balanced. Money creation can only be used for projects that are worth doing and in the public interest - unlike the current system where money creation is entirely decided by what maximises profits for banks. And the amount of money in the economy cannot increase beyond the level set by an independent Monetary Policy Committee who would be totally separate from the politicians. There would be no possibility of excessive inflation, and the whole system would be very simple to run.  Indeed, you might not even need a Monetary Policy Committee. It might be enough to implement an algorithm that automatically changed the FTT rate to ensure that the money supply was fixed at the optimal level. There would no doubt be serious debates about what that optimal level should be - but once decided, it would be simple to use the FTT mechanism to keep the money supply at the desired level.

What do you all think? Could this be the solution for an optimally designed social system? Comments please!

The Secret of Oz : An even more amazing film

Yesterday, I blogged about Bill Still's amazing documentary from 1996 called "The Money Masters" which has been seen by more than 523,000 people. I feel embarrassed to admit that it took me so long to find it.  Afterwards, I discovered his 2010 documentary called "The Secret of Oz". It's an updated version of the Money Masters, that points out the origins of L. Frank Baum's book the "Wizard of Oz", which was also the theme used in Ellen Brown's book "The Web of Debt".

The new documentary has also been seen over half a million times - nearly 200,000 times for the original version, that Bill Still's uploaded in october 2010, and over 314,000 times for a revised version uploaded in january 2011. I am in awe. Bill Still, the journalist who was behind both films is truly outstanding. His analysis of the causes of misery in the world is quite devastating, and his solutions are so simple.

Here's the brief synopsis:

"The world economy is doomed to spiral downwards until we do 2 things: outlaw government borrowing; 2. outlaw fractional reserve lending. Banks should only be allowed to lend out money they actually have and nations do not have to run up a "National Debt". Remember: It's not what backs the money, it's who controls its quantity."

Bill Still's speech to the Sovereignty.org.uk group at the end of the film is truly inspirational. Here's a bit of what he says.

"Mr Obama has stimulated the US economy with about 2 trillion dollars, but here's the problem. He's borrowed the money. So, he's borrowed the money, mostly from the big banks, with interest attached. And then what has he done? He's simply turned around and then given this money, GIVEN IT, back to the banks. Supposedly to lend to us.

What kind of a system is this?! It's insane. You couldn't design a worse possible system.

Banks must stop lending money they do not have. This, as we all know, is called the fractional reserve lending system. It allows banks not to lend out twice as much money, not three times as much money, but ten to twelve times as much money - if they follow the rules!

And, as we know, with the results of the 2008 debacle, here at least in the United States, the big banks were leveraged 50 and 52 to one, Freddie and Fannie were leveraged 72 to one,  Goldman Sachs was leveraged 333 to one, and then six months ago Mr Obama gets on TV and says "You know, I think that we should just eliminate the reserve requirement altogether". So 333 to one is not enough - only infinity will do.

If you or I did this, we would be charged with fraud and/or counterfeiting."

Please watch this film. I cannot believe that an intelligent person can watch it without having their view of the world transformed.  And it doesn't hurt that the film also includes some other of my favorite people - like Ellen Brown and James Robertson!

Finally, I note that Bill Still was running for president as a candidate for the Libertarian Party! Here's what he has pledged to do  if elected:

I announce my candidacy for the Libertarian Party nomination for President of the United States. Now here’s my promise to you; if elected as your President, I will take office on January 20, 2013 – interestingly, that occurs on my 65th birthday. I promise that on that day, I will do three things: 

1. I will put an end to government borrowing. No More National Debt! The United States will replace Federal Reserve Notes by re-issuing debt-free U.S. Notes, and gradually pay off the National Debt with them. 

2. I will put an end to the ability of commercial banks to control the Quantity of money in our system through what is essentially counterfeiting. This has been a massive fraud on the people of the United States. We, the people, will take back the money power from the big banks and return the American economy to monetary stability and prosperity. 

To ensure this system is enforced, I will appoint a Special Prosecutor experienced in matters of fraud to prosecute to the full extent of the law those who have abused our system in the past to serve as an example for the future. 

3. I will abolish the Internal Revenue System and the income tax – both personal and corporate – and implement a fair, simple and equitable consumption tax in accordance with the U.S. Constitution. This is how we funded our government for the first 100 years, and we can do it again.

Unfortunately, the Libertarian Party recently decided to nominate Gary Johnston as their candidate. A real shame.

Are there any European politicians offering us the same options?

The Money Masters : An amazing film

I've just watched all 3h30 of a documentary film made by Bill Still in 1996 called "The Money Masters". It's quite astonishing, with a remarkable history of the development of our monetary systems.

The conclusions are clear and match exactly those that are being proposed by more and more people today. Namely, we need to pay off government debt to the banking system using debt free money. We need to abolish fractional reserve banking. And (in the case of the US), the Federal Reserve needs to be abolished.

But along the way, the authors effectively accuse the international banking interests of deliberately creating depressions and even provoking wars. They also accuse the Fed of effectively stealing the gold from Fort Knox. It's strong stuff. But they provide documentary support for the accusations. And historically, the argumentation is strong.

In the end, their proposal is a Monetary Reform Act with the following plan:

The Two Step Plan to National Economic Reform and Recovery

Step 1: Directs the Treasury Department to issue U.S. Notes (like Lincoln’s Greenbacks; can also be in electronic deposit format) to pay off the National debt. Step 2: Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt. 

These two relatively simple steps, which Congress has the power to enact, would extinguish the national debt, without inflation or deflation, and end the unjust practice of private banks creating money as loans (i.e., fractional reserve banking). Paying off the national debt would wipe out the $400+ billion annual interest payments and thereby balance the budget. This Act would stabilize the economy and end the boom-bust economic cycles caused by fractional reserve banking.    

3h30 is a long documentary. But it's well worth the effort. There's a website if you want to know more.

US Consumer Debt and Interest Charges - $280 billion a year for the banks

I've been trying to get a clearer idea about just how much the banking sector manages to suck out of the economy by charging interest for lending money that they create out of thin air. For government debt, we know that the 27 European Countries collectively owe €10.42 trillion to the banks, and that the interest charges on these loans cost European Taxpayers €370.8 billion in 2011. But of course, those interest charges correspond to loans that were made before the current crisis kicked in, and it is quite likely that the total that will have to be paid in the future could be much higher.

But the banks don't just make their profits by lending the money to governments (at almost zero risk) and charging interest. They can also create money to lend to consumers and charge interest on that. Is there any way to know how much money they "make" using this wonderful scheme?

Well, I've just discovered that in the US, the Federal Reserve has an interesting webpage where you can find out about the amount of consumer debt and the interest rates that are being charged. The latest numbers, published on the 7th of June showed that total US  consumer debt has increased 3% in the last year to reach $2.55 trillion. Note that this doesn't include loans for house purchases. They also give numbers for the average interest rates charged for a 24 month personal loan (10.88% in Feburary 2012) and for Credit Card plans (13.04%).

They don't actually tell us precisely how much total interest was paid on the $2.55 trillion of outstanding debt, and it's true that 4-year loans for buying cars can be found at the bumper discount rate of just 5.07%, but if we take a typical value of around 11%, I think we can assume that the interest payments are probably running at something like $280 billion a year. That's a pretty good return for lending money when you didn't actually have the money to lend in the first place.

The website also allows you to download the historical data in the form of a graph. Here are the numbers since 1972.

As you can see, the interest rates on credit cards (orange line - figures available since 1995) and 24 month personal loans (red line) have always been at well over 10% and have often reached values of 15% and more. And at the same time the total amount of debt (green line, in millions of dollars) has been going through the roof.

It would be interesting to know where the hundreds of billions of dollars that get paid every year in interest payments end up.

Is there an alternative? Yes. It would involve removing the ability of commercial banks to create money for profit, and make money creation the sole responsability of central banks. In such a system, money creation would be done uniquely to fund actions that are in the public interest. It all makes perfectly good sense to me.

James Robertson on FTTs

Following my post on James Robertson's book "Future Money", I wrote to him to ask why he didn't mention the possibility of using a Financial Transaction Tax.

He emailed me and said that he would be happy for me to post his comments on my blog. So, here are his thoughts, together with my own comments.

 First, this is what James said.

Dear Simon,

Thank you very much for the interest and understanding you have shown in my book, and for what you say about it in your blog.

I will comment straightaway on the FTT (Robin Hood Tax).  I think it is a red herring.

(1) It would do nothing to reduce any of the many economic disadvantages, distortions and injustices that stem from allowing financial business corporations (banks) to create the public money supply as profit-making DEBT for themselves. (I dealt with some in my Chapter 3.)

Of less importance,

(2) It would be comparatively easy for the banks and any other businesses that have to pay the tax to shift its cost on to other parties (such as their customers), for example by recouping the costs from them in higher charges and interest rates.

(3) One can imagine too that people and businesses of every kind would find  ways to co-operate to change the frequency and size and pattern of their their making and receiving payments, in order to reduce the impact of the tax.

Oh well. Clearly James is an unbeliever! Here's how I reacted.

I'm happy to take your point that shifting money creation from commercial banks to public banks that can create money without debt is vital, and should even be priority number 1.

However, the fact is that the world economy is awash with trillions of dollars, pounds and euros that are being used in a very non-optimal way. That money will stay in the system causing enormous damage even if the money creation system is changed.

The FTT is actually a very easy to implement way of sponging up a lot of the excess money and moving it to more useful things.

Your proposal that alternatives such as land taxes could be enough to clean up the mess seems overly optimistic, and very difficult to apply universally. Who would get to decide what the tax rate should be for 1 acre in Mayfair, or 1 acre in the Scottish highlands? It sounds like a very hard task getting people to agree on this. It would be an invitation for lobbyists to try and get taxbreaks for their clients.

A flat rate FTT on the other hand would have no possibility of being selective - no tax breaks, no lobbyists etc. It would also be totally painless, and require no administration at all - no tax returns etc.

And FTTs have other serious advantages. For example, you can have the rate vary continuously to guarantee that the government revenue and expenditure are automatically matched. If the government was to use central bank money creation to reduce tax requirements, the FTT rate would drop automatically. Such dynamic control of the economy would be much harder to do with alternatives such as land taxes.

So, I'm still an FTT fan, despite your lack of enthusiasm!

James also had a comment on my other proposals for "Solving the Debt Crisis" and "Debt Annihilation"

On your radical propositions to get out of the debt crisis, my reaction is that your proposals are too complicated and not radical enough. They will invite objections by the "experts"; and they will not attract the commonsense people whose massive support is needed to get the necessary simple reform on to the public agenda.

Here's how I reacted

I quite agree that IF you can get a shift from the current system to public bank money creation then that would be fine. But, as I argue, the vested interests who control the system (Mario Draghi, Cameron, Osborne etc) will block all reform.

My propositions are indeed a bit complicated, but I feel that we may need to use them to bring the insane money creation mechanism out in the open. So far, I'm not sure that more than a few % of the population have a clue what is going on. Until the 99% realize what it really going on, I think that there is little hope of the revolution occuring. That's why I am proposing these 'do-it-yourself' options which may allow the present system to be "hoist by its own petard' by a relatively small group of enlightened people working to change the system.

In other words, if we want reform this year, then we need to think of more radical options than simply hoping to educate people into voting for reform. We don't even have mainstream political parties that are proposing anything radical yet (perhaps because they are all being controlled by the vested interests?). What hope is there that a new government could come in and change things anytime soon?

Incidentally, if you are interested in James Robertson's ideas for moving money creation from commercial banks to central banks who would create the money debt free for governments, I can strongly recommend the book that he wrote with Joseph Huber in 2000. The book called "Creating New Money: A Monetary Reform for the Information Age" can be downloaded for free as a pdf by clicking here.  It's a very clear statement of the idea and how it could be implemented.

James Robertson : "Future Money - Breakdown or Breakthrough?"

I can thoroughly recommend James Robertson's latest book "Future Money - Breakdown or Breakthrough?" Robertson is a true veteran (born 1928!) and has been called "the grandfather of green economics", having written a series of books with titles like "Future Wealth (1990)", "Creating new Money : A monetary reform for the information age (2000)",  and "Monetary Reform : Making it happen (2004)". Several of his works can be downloaded for free from his website.

Robertson argues very cogently that the time has come for a Copernican revolution in human understanding of the money system works and how it ought to work. He demonstrates that we have been blinded into thinking that the current monetary system is somehow fixed and has to be the way it is. This is clearly wrong. Money should be thought of not as a aim in itself, but as a tool that can be designed to allow societies to operate optimally.

In particular, he argues that we need to reform national money systems. He believes that governments should be at the heart of the money system by deciding (a) how the money supply should be created, (b) what is taxed and not taxed, and (c) what public expenditure is spend on and not spent on. 

Concerning the money supply, he argues that the money creation should be transfered

• from commercial banks as a source of private profit for themselves
• to a public agency - the central bank - as a source of debt-free public revenue to be spend into circulation by the government for public purposes.

For taxation, he argues that we should

• take taxes off incomes, profits, value added and other financial rewards for useful work and enterprise
• put taxes on to value subtracted by people and organisations for private profit from common resources (such as land) and from the environment's capacity to absorb pollution and waste (such as carbon emissions); and
• reduce the present opportunities (through tax havens, etc) for rich people and businesses to avoid paying their dues to society.

I think the arguments are really solid, although I was surprised/disappointed to see that the option of using a financial transaction tax as a source of tax revenue doesn't get a mention. I think I will definitely write to him to see if he has any reasons for leaving that option out.

But for me, the central argument is the need to take money creation away from commercial banks - the same idea that has been getting increasing support from movements like Positive Money  in the UK and the Public Banking Initiative in the USA. Looking at James Robertson's publication list, it seems to be clear that he can take credit for being one of the first to push for such ideas.

The more I think about it, the more I am convinced that this is the single most important change that needs to be made. And from that point of view, I didn't get the impression that James Robertson could see an easy way to get there. Effectively, he appears to believe that it should  be enough just to try and educate people - to try and get that Copernican revolution underway. Once that revolution has occured, the reforms will follow naturally. Effectively, citizens need to understand that we do not have to be rotating around a fixed monetary system. Instead, we have the right and the duty to set up the system in a way that benefits all of humanity, and not just the interests of a greedy few.

However, for me, I am very worried that the lobbying power of the vested interests could well be overwhelming, and that we may have great difficulty in getting all governments to agree to change. The banking system has managed to get their people into many of the positions of power - Mario Draghi's appointment as head of the European Central Bank being the most obvious example. But the revolving doors between the White House and Wall Street mean that many of the people with power will be working not in the interests of citizens, but in the interests of their friends in the financial sector.

That is why I believe that our best bet may be the sort of do-it-yourself reforms that I have been proposing recently in my Youtube video on "Debt Annihilation" and my recent post on "How to cancel all government debt in 10 easy stages". I'm still waiting for someone to tell me why my cunning plans won't work.

Yes, Victoria, there really is a money monster!

Last week, I posted a piece about Victoria Grant, the 12 year old Canadian girl who's 6 minute talk had already been seen half a million times. Well, the number is now over 1.3 million if you include Youtube and Vimeo. It's gone completely viral.

Ellen Brown (of "The Web of Debt" fame) has a nice piece on the Common Dreams website that has a look at some of the attempts to quash Victoria's arguments.  Here's what she has to say:

"Basically, her message was that banks create money “out of thin air” and lend it to people and governments at interest.  If governments borrowed from their own banks, they could keep the interest and save a lot of money for the taxpayers.....

But critics said, “Not so fast.”  Victoria might be charming, but she was naïve.

One critic was William Watson, writing in the Canadian newspaper The National Post in an article titled “No, Victoria, There Is No Money Monster.”  Interestingly, he did not deny Victoria’s contention that “When you take out a mortgage, the bank creates the money by clicking on a key and generating ‘fake money out of thin air.’”  Watson acknowledged:

Well, yes, that’s true of any “fractional-reserve” banking system. Even before they were regulated, even before there was a Bank of Canada, banks understood they didn’t have to keep reserves equal to the total amount of money they’d lent out: They could count on most depositors most of the time not showing up to take out their money all at once. Which means, as any introduction to monetary economics will tell you, banks can indeed “create” money.

What he disputed was that the Canadian government’s monster debt was the result of paying high interest rates to banks.  Rather, he said:

We have a big public debt because, starting in the early 1970s and continuing for three full decades, our governments spent more on all sorts of things, including interest, than they collected in taxes. . . . The problem was the idea, still widely popular, from the Greek parliament to the streets of Montreal, that governments needn’t pay their bills.

That contention is countered, however, by the Canadian government’s own Auditor General (the nation's top accountant, who reviews the government’s books).  In 1993, the Auditor General noted in his annual report:

[The] cost of borrowing and its compounding effect have a significant impact on Canada's annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.

In other words, 91% of the debt consists of compounded interest charges.  Subtract those and the government would have a debt of only C$37 billion, very low and sustainable, just as it was before 1974. 

Mr. Watson’s final argument was that borrowing from the government’s own bank would be inflationary. He wrote:

Victoria’s solution is that instead of paying market rates the government should borrow directly from the Bank of Canada and pay only token rates of interest. Because the government owns the bank, the tax revenues it raises in order to pay that interest would then somehow be injected directly back into the economy. In other words, money literally printed to cover the government’s deficit would be put into circulation. But how is that not inflationary?

Let’s see.  The government can borrow money that ultimately comes from private banks, which admittedly create it out of thin air, and soak the taxpayers for a whopping interest bill; or it can borrow from its own bank, which also creates the money out of thin air, and avoid the interest.

Even a 12 year old can see how this argument is going to come out."

Point taken. Thanks Ellen.

It's interesting that the early 70s was also the time when the French government unilaterally decided to start borrowing money from commercial banks and running up huge interest charges instead of using the Banque de France to create the same money interest free. According to a number of authors, the change was made with the passing of the 1973 Loi du Finance, signed by the then French Président Georges Pompidou (who had previously worked for the Rothschild bank) and future Président Valérie Giscard D'Estaing. The law effectively made it illegal for the French government to borrow interest free from the Banque de France. You can read about the law here.

Is it just a coincidence that 1973-4 was the time when both the Canadian and French governments decided to start borrowing exclusively from commercial banks rather than using their own public banks to create the money needed by the economy interest free? How many other countries did the same thing?