How can we owe twice as much as there is money in the system?

My last blog provided clear numbers that demonstrate that the total amount of public sector and private sector debt is twice the amount of money in the system. In other words, it is physically impossible to pay off the debt in the system. It doesn't matter how much austerity you impose. You could abolish all public sector jobs, abolish pensions, end state education, end state health systems, completely eliminate any remains of a welfare state, and there still wouldn't be enough money to pay off all that debt.

How on earth did we get here?

How is it possible to owe more money than there is in the system?

Well, let's think about it a bit.

Let's imagine that there was a day when the money supply was created in one day. Someone waves a wand, and the banks have the $68.3 trillion that is currently in the system. They then start lending the money into the economy. They lend the money to individuals to buy houses and that money gets used to pay the builders to build houses. They lend the money to businesses who invest in new plant and distribution networks. They lend the money to governments who use the money to build schools, hospitals, transport systems etc etc. All the money that goes to individuals, businesses and governments gets into the economy. All is happiness and light.

On day one, the  size of the money supply (lets call it M3 for the sake of argument) is exactly equal to the amount of debt that individuals, businesses and governemnts have taken on. No problem with that. After all, when some people have money that they are not actually using, it is normal that they lend that money to those that need it. And the banks are just trying to do their job of making sure that the money goes to the places where it is needed, right?

Yes, but there is a slight problem. The banks that lend the money into the system feel that they should be able to charge interest for making the loans.  Thus, while there is $68.3 trillion in the system on day one, after one year, the amount of debt is no longer equal to $68.3 trillion. It is equal to $68.3 trillion plus the interest. Let's assume that the banks are charging 5% interest per year - very reasonable compared with the rates charged by credit card companies, or payday loan outfits. After one year, the amount of debt has now increased to $71.7 trillion.

With compound interest at 5% per annum, it is not difficult to see that after a 14 years and 11 weeks,  the total amount of debt in the system will have more than doubled.

So, hopefully you can now see how it is possible that with €68.3 trillion of money creation, you only need to wait a bit, and the amount debt will be double that amount. And it's not going to stop. Assuming 5% interest, we can safely conclude that in another 14 years or so, the amount of debt will have doubled again.

Of course, the banks won't let that happen - if that continued, there soon would be four times as much debt as money in the system. Then 8 times, then 16 times.

Fortunately, the banks are there to help. They will be happy to create yet more money (read debt) to keep the system going. I think we can confidently predict that by 2027, the money supply will have doubled to $136 trillion. But the amount of debt will have reached twice that - namely, $272 trillion.

I'm pretty confident about that because when I looked at how the ratio of debt to money supply in the Eurozone has changed over the last decade or so, I was intrigued to see that the 2.5:1 ratio has stayed constant.  Here are the actual figures.

Remarkable, eh? For some reason, the commercial banking system manages to create enough new debt each year to keep the system at the same ratio of debt to money, despite the effects of compound interest. I guess that there must be some very bright people running the show.

The net result of this is exactly what we currently have. A situation in which we collectively owe twice as much money to the banking system than there is money in the entire system.

So what needs to be done?

Actually, lots of things. But one would be to make money creation with debt associated a criminal offense. In a sense it is the worst form of usuary. Lending money with a high interest rate is bad enough. But lending money that you don't have and charging a high interest rate can not be described as anything other than a criminal racket - at least as bad as Madoff's famous Ponzi scheme.

And that's precisely what commercial banks are currently allowed to do.

But Bernie Madoff only ripped off his clients for $50 billion. The current banking system has allowed us to be ripped off to the tune of $68.3 trillion.

We need 100% reserve banking. And we need it now....

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

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

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

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

So, here is the result.

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

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

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

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

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

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

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

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

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

Seems like a sensible plan to me. 

US taxpayers have handed 3.7% of US GDP to the financial sector in interest payments since 1988

Just in case you thought that the 3% of GDP that Eurozone governments hand over to the Financial Sector in interest payments on Public Sector Debt, and the 3.2% of GDP paid by UK taxpayers is unusual, here are the numbers for the USA.

I'd already commented on the fact that the total amount of taxpayers money handed over in interest payments was a staggering €8.58 trillion since 1988 - i.e. well over half of the entire national budget deficit. But here, I wanted to know how the figures for the percentage of GDP compare.

As you can see, the average value is 3.67% over the period. There are actually signs that the greed of the markets has dropped a bit recently because it has indeed dropped from a peak of 4.82% in 1991 to only 2.38% last year. But the $360 billion of taxpayers money handed over in 2012 is still one hell of a lot to pay. Especially when you realize that (a) the US Treasury could have generated the money free of charge, and that (b) the Banks who have been lending "money" to the Government can create the money they lend out of thin air.

Methinks it's time to change the system. The idea that it can be normal to hand over 3-4% of GDP in interest charges to the Financial Sector simply cannot be defended.

French Public Sector Debt and Interest Payments - The Full Story

I had seen graphs showing how France's public sector debt would have looked if the Government hadn't had to pay interest  - see for example the graph from Bernard Leitaer's book "Money and Sustainability". But, frustratingly, the graphs always started in 1978, and I was told that it was difficult or impossible to get the figures from before then.

However, after a long series of exchanges with people at the INSEE, I have been able to put together the full story for the period from 1970 to the present day. Intially, I was told that the INSEE didn't have the numbers, but after a bit of pressuring from my part, the complete set of numbers can now be revealed to the world! Here they are.

You can see that Public Sector Debt has increased from €25 billion in 1970 to €1833 billion at the end of 2012. This corresponds to an increase as a percentage of GDP from around 20% in 1970 to over 90% at the end of 2012. Interestingly, this percentage actually dropped down to about 11-12% from 1973 to 1977, essentially because the economy was still expanding (as shown by the increase in GDP).

But then, the cost of the interest payments starts to really kick in. In 1973, when Pompidou and Giscard passed their famous law that prevented the Government borrowing from the Banque de France, interest payments on public sector debt were a mere 0.57% of GDP. But then, those interest payments cost more and more each year, reaching a peak of 3.73% of GDP in 1996. Since that time, that percentage has dropped off a bit - totalling 2.72% of GDP at the end of 2011 (I'm waiting for the official figures for 2012, which is why the figure in red is just an estimate).


The graph below shows the increase in Public Sector debt for the period 1970 to 2012 as a percentage of GDP (see the red curve). But I thought it might be amusing to look at two other possible scenarios. The purple curve shows how  debt level would have changed if the government has not paid the interest payments every year. As you can see, although the level would have increased a bit recently to about 30% (essentially because of the financial crisis in 2008-9 and the cost of bailing out banks), for nearly all the forty year period, the level of public sector debt would have stayed well below 20%, dropping to lows of 11% in 2001 and around 13% in 2006-7.

But there's another curve - the one in blue. This is what would have happened if, instead of paying interest payments to the banking sector, the same amount of money had been used to pay off the public debt. As you can see, if the government had done that, the entire public debt would have been written off in 1987. And since that time, the government would have been running a surplus. It could have cut taxes, increased investment in energy, transport, housing or whatever.

For me, these curves demonstrate the complete folly of a system in which goverments are forced to borrow money from the commercial banks and then pay interest. And, don't forget, the commercial banks that lend the government don't actually have the money they lend. They just create it out of thin air. It is complete madness.

I think you can compare what we have been doing over the last forty years with a young couple who start their married life together in 1970. Let's suppose that between the two of them they have been earning around €100,000 a year. If they had been sensible, they might have bought a house and regurlarly paid off the debt so that after 25 years, the house was theirs. The would have kept their accounts in order, they would have never let their credit card bills accumulate,  and at the end of forty years, they would be able to look forward to a happy retirement.

The system that we have been running is the equivalent of saying to the couple - go out and buy a house using a credit card. But don't bother paying of the loan. Just keep allowing the level of debt to accumulate. As long as you don't let your level of personal debt exceed 60% of your annual income (i.e. €60,000) everything is fine.

Well, yes, it is fine. It's fine for the bankers who lend the couple the money to pay for the house that they never actually own. They will continue paying more and more to the banks. It is a fantastic scheme for the lenders. But it is a total disaster for the young couple. And it is also a complete disaster for our elected governments.

Surely, the time has come for a change in system. Governments should simply not be allowed to get in debt to commercial banks. And only the central banks should have the ability to create new money.

Why the EU's FTT proposals need to be changed

I'm a big fan of Financial Transaction Taxes, but I have to admit that the current versions that are being implemented by 11 EU countries are far from optimal.

There is a report on Bloomberg by Tax lawyer Maud Poncelet which shows how the implementation in France is incredibly complicated. There are many situations where the tax doesn't apply, making it a minefield. It sounds like a fantastic deal for anyone who earns their money by proposing ways to get round the tax.

Another problem is that there is a serious risk that the traders will relocate - despite attempts to come up with ways of forcing people trading in French shares outside the FTT zone. This risk is made particularly evident when you look a this table that I found in the CityUK's "International Key Facts" document.

As you can see, in a whole range of areas, financial activity in the two key Eurozone countries - France and Germany - is completely dwarfed by activity in the US and UK. For example, foreign exchange turnover is nearly 11 times higher and Interest rate swaps nearly 8 times higher. Moving transactions out of the Eurozone would be very simple.

There are already reports of how the introduction of the FTT is leading to a drop in activity in Italy and France. I have little doubt that we will see a repeat of the oft-repeated story about how the introduction of a tax in Sweden led to everyone moving their operations to London. But, frankly, I suspect that you would see this sort of phenonomenon irrespective of what tax level is used. The traders in the City are so opposed to any possiblity of having to pay to do their transactions that they would probably have a strong motivation to deliberately reduce activity in the FTT zone, simply to back up their claim that any sort of tax is incompatible with economic activity.

But I seriously believe that my latest propositions provide a real alternative. Rather than trying to devise complex schemes to try and force people outside the FTT zone to contribute, I think that the solution is for the European Central Bank to impose a flat rate Financial Transaction Tax on absolutely ALL Euro-denominated electronic transactions - No exceptions. The tax should be paid by everyone, wherever they are in the world. And that includes individual citizens like me who would see a small tax on their bank statements.

By doing it this way, you could completely block any incentive to disguise transactions by calling them something else, or to devise complex schemes to get round payments. I have no doubt that if you leave any potential loopholes, the multinationals will find a way to exploit them.

But suppose that we apply the tax to absolutely all Euro denominated transactions. What way round that could their be?  Yes, you could potentially walk around with suitcases full of Euros. But frankly, that would be extremely risky, and not worth the effort to avoid paying 0.1% or whatever the rate is.

What is the next stage? Well, we really need some complete numbers on the volume of transactions that involve each different currency. In my youtube presentation, I showed the figures the indicate that roughly 20% of foreign exchange involves Euros. Given that the current volume is almost certainly getting on for $6 trillion a day ($1.5 quadrillion a year), this means that there is around $300 trillion in Euro trading that would be easy to tax.

Likewise, it would appear that around 40% of Interest Rate Swaps involve Euros, as you can see from this graph, conveniently provided by LCH.Clearnet on their SwapClear website.

Amazingly,  LCH.Clearnet's website also provides updated data everyday about exactly how much they have handled, with a breakdown by each currency. In my presentation, I gave numbers for the 12th of April. Here's the chart for yesterday (16th April).

There you have it. $3.54 trillion in Interest Rate Swaps in a single day. $171.8 trillion since the start of the year. But the really interest thing is that they also tell us that preciely €1,195,492,098,262 of those were denominated in Euros - making a total for the year so far of over €69 trillion.

Now, let's see. If the ECB was to impose a 0.1% tax on all those Euro-denominated transactions, we are well on the way to reaping €250 billion a year. Very useful for getting the Eurozone out of debt. And that's just interest rate swaps. Imagine what the revenue would be if the other €2000 trillion of Eurozone transactions was taxed at the same rate.

It would be really useful if we could compile numbers not only for the levels of financial transactions in different countries (something that can be done with the numbers from the BIS report, and from the ECB for countries in Europe), but also for the value of transactions in each different currency.

If anyone has any ideas how to get hold of such numbers, please let me know. 

Ending the Eurozone Debt Crisis - My talk in Montbrun-Bocage

Last night I was invited to talk at a meeting in a place called Montbrun-Bocage, a delightful village about one hour's drive to the south of Toulouse. The theme was 'La "démocratie" est-elle soluble dans la crise? (ou l'inverse?)', and we watched a couple of films about the situation in Greece. It was all very moving. I had the distinct feeling that the Greeks are going through what may happen to all of us if we don't manage to fix the financial system.

It was actually the first time I had spoken about my proposals for economic reform in public (apart from the time when I invited myself to the Toulouse School of Economics to give a talk - but on that occasion, only 4 people turned up - it had been programmed at the same time as the Finance Seminar!).

But on this occasion, there were not far off 100 people there, and they were actually interested in the subject! Wonderful! My thanks to the organisers for the invitation, and all the volunteers who provided a meal for everyone. I had a great time.

I shared the stage for the evening debate with Professor François Morin, an economist from the University of Toulouse. François has published a number of books on the nature of the economy including "Un monde sans Wallstreet", and "Le nouveau mur d'argent: Essai sur la finance globalisée", so it was very nice to find out what he thought about my proposals.

My talk tried to bring together a number of the themes that I have been thinking about recently, and in particular the idea that we could fix the Eurozone crisis for good by making a number of specific reforms.  Firstly, it is essential that the European Central Bank takes on the public sector debt in the Eurozone. By doing this, it would immediately save Eurozone taxpayers hundreds of billions in interest payments every year.  But, it order to pay off those debts, the ECB could impose a financial transaction tax on all Euro-denominated transactions - wherever they occur. Finally, the revenue generated by the tax should be redistributed among the different Eurozone countries according to population.

They are all ideas that I have previously mentioned here. But this was the first time that I had brought them all together, and I tried to update the figures to use the latest data.

The discussions with François and the members of the audience were very stimulating. I was pleased to hear that François agreed with the sorts of numbers I had been using. And I didn't hear of any real problems with what I propose - except for the fact that we should expect to get massive resistance from the financial sector. Not surprising, since the proposals will effectively kill the goose that has been laying golden eggs for the financial sector for 60 years at least - allowing the banking sector to siphon off 3% of GDP from taxpayers every year in the form of totally unjustifiable interest payments.

Still, I'd like to think that this could be the start of something big. I really do think that with the European Elections coming up in 2014, the time could be right to get political parties to take on board some of these radical proposals.

Anyway, I've just uploaded a Youtube version of the talk which last about 32 minutes. It's called "How to eliminate Eurozone Public Sector Debt without austerity". I hope you like it.

There's also a version in French for those of you who want to know how bad my French accent is. You can find it on my other blog under the title "Ma nouvelle présentation Youtube : Comment éliminer la dette publique de l'Eurozone sans austérité".

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

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

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

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

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

They are - for the banks.

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

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


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

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

Where did the Maastricht Criteria come from?

At 4 o'clock this morning, the penny dropped. Or maybe I should say that the $1 trillion dollar coin dropped.

First, a quick reminder of the criteria on Government budgets imposed by the Maastrict Treaty:

Government budgetary position: Member States are to avoid situations of excessive government deficits, that is their ratio of planned or actual government deficit to gross domestic product should be no more than 3 %, and their ratio of (general) government debt to GDP should be no more than 60 %, unless the excess over the reference value is only exceptional or temporary or the ratios have declined substantially and continuously;

Now, have a look at thes table showing how much different countries within the EU pay in interest charges on government debt as a percentage of GDP.  In particular, have a look at the percentage of GDP paid in interest for the Eurozone countries.

Notice anything interesting?

Do you think that it is just a coincidence that the percentage of GDP used to pay interest on government debt (i.e. 3%)  just happens to match the percentage of GDP that governments are allowed to have as a budget deficit under the Maastrict rules (i.e. 3%)?

Now look at the graph for the Percentage of UK GDP that has been going to pay the interest on the UK national debt since 1955 that I posted yesterday. That also just happens to average about 3% over the 6 decades. Coincidence??

Imagine a meeting of bankers back in the early seventies. The bankers from the UK are showing a graph that shows how they have been succesfully creaming off 3% of GDP from UK taxpayers for decades. And they say to their colleagues from other countries - "You can do this too!".

"Here's what you need to do. First, you have to impose rules that stop governments borrowing from their Central Banks. Make up some story about how this is really important to guarantee the stability of the money supply. If you sound sufficiently knowledgeable, and you speak using incomprehensible  language, you will be able to convince the politicians. They will assume that you know best.

Then, you arrange things so that when the governments borrow money from the commercial banks, they end up paying interest charges that are not so high that people object, but which maximise bank profits.

So, let's see. What would be the amount of government debt and the level of interest charges that would maximise the revenue for the banks?

Well, suppose that the government's debt level was about 60% of GDP, and that we can charge about 5% in interest per year. That would mean that we could extract a maximum of 3% of GDP from the economy every year.

Brilliant! Now, all you have to do is to get the politicians to agree to a pact where they try to keep the debt level at 60% and we will be able to arrange things so that we get 3% of GDP in interest, and you are guaranteed maximum profits for as long as you can keep the scheme going.

Of course, we all know that we don't have the money we lend the governments - we just create it out of thin air. But the public don't know that. And if we can keep our scheme secret, then we are all rich."

Wind forward forty years. And you will see that to keep the interest payments at the optimal level (3% of GDP) when government debt levels exceed the magic 60% level, it may well be necessary to offer to lend governments money at below 5%. Hey, you can even get down to 1.54% (which is the current rate for Germany). But as long as Germany has over €2 trillion in government debt, you will still be able to milk them for 2.5% of their GDP per year. OK, it's not quite 3%, but it's not bad.

Magically, every time that governments go to the markets to borrow yet more money, they almost always get the money they need - at a rate which miraculously allows the banks to extract roughly 3% of GDP in interest. 

Is this scenario fantasy? Maybe. But, seriously, I don't think so.

I believe that the whole Maastrict treaty and in particular the rules that prevent Central Banks lending to governments, and the 60% value for government debt, and the 3% value for permissible budget deficits can be explained if you see them as being designed to allow the commercial banks to cream off the maximum amount of taxpayers money.

The solution? Force the Central banks to take over all government debt and charge 0% interest.

The cost of public sector borrowing in the UK

Just in case you weren't already convinced about how stupid the current system is, take a look at a report called "Government borrowing, debt and debt interest payments : historical statistics and forecasts" that was published on the 13th March by the Economics Policy and Statistics Section of the Houses of Parliament.

I'd already found one graph showing how UK taxpayers had been handing over 3.5% of GDP to the banks in the form of interest payments on government debt for most of the 60s and 70s - see my piece called "How long has this been going on?"

But in this short document, you not only get a more up to date graph, they also give you all the numbers. Here's the graph, which is actually a bit different from the previous version, but it still shows how the UK taxpayer has been saddled with massive interest payments for borrowing all of my life.

And here's the table with the real numbers (the document actually provides some numbers as far back as 1946-7.

It's already impressive, and you can see that the % of GDP that is wasted on paying the banking sector interest for creating money out of thin air and then lending it to the government is currently 3.1% and is set to increase to 3.5% in the next few years. But, as you can see from the footnote, "borrowing and debt figures exclude effect of financial sector interventions".

The Guardian has a complete set of data, including the financial interventions, that shows that while the level of debt is 73.5% of GDP if you exclude financial interventions, it increases to 137.6% of GDP if you include them. So we can increase the full debt level to something like £2066 billion.

Now here's a £64 billion question. Did the government borrow the money for the bank bailout? If so, how much is being paid in interest? If not, and the Bank of England provided £1 trillion of funding interest free to bail out the banks, why the hell can't it provide the same sum to bail out the UK government?

By the way, I'm desperately trying to get an equivalent set of figures for other countries including France. Unfortunately, numbers on the % of GDP used to pay the interest on government debt are mysteriously missing from the datasets at the INSEE - I've asked them to provide the numbers, but only figures from 1995 seem to be available. Oh well....

EUREKA! How to solve the debt crisis - again.....

It's 5am, but I have to get this one on my blog.

First point.  As Deborah Orr reported in the Guardian last friday, there are now serious economists who are proposing that "Quantitive Easing should be used to write off government debt". Here's what she said:

Professor Michael Woodford of Columbia University says governments shouldn't create money and give it to the banks as quantitative easing. He's coming round to the idea that leaving the banks in control of wealth creation was what got us into this mess. QE is meant to keep borrowing costs down and make it easier for banks to lend. But since banks are also being required to rebuild their balance sheets, that isn't happening. Woodford says QE should be used instead to "eliminate government debt on the bloated balance sheet of central banks". Quite right: central banks should write off their debt instead of paying the interest via "austerity". The first politician to take up this idea and make it work is going to be very popular indeed.

Note that she linked to another report in the Daily Telegraph on Michael Woodford's proposal called "Helicopter QE will never be reversed".

The idea that Central Banks are already taking on public debt by Quantitative Easy is clearly demonstrated by the graph I showed in my blog called "Light and the end of the tunnel?". It showed that since 2006, the ECB's balance sheet increased from 13% of GDP to something like 33%, the Bank of England roughly quadrupled from 7% to 27% of GDP. And the Fed went from 6.5% to around 20%.

If we can acccept the idea that Central Banks can take over government debt, and then charge 0% interest, then we know that this would immediately save the €370.8 billion in interest payments that were made by European Governments in 2011 and the $360 billion paid by the US Government in fiscal year 2012.

Of course, we will have the standard objection that this is printing money, and that it will lead to hyperinflation - Zimbabwe, Weimar Republic etc etc etc.

So, to solve that one, the Central Banks should directly apply a financial transaction tax on transactions involving their currency. They could start with the $4 trillion a day in foreign exchange reported by the BIS Triennial Report for April 2010. They are presumably currently compiling the figures for April 2013, so we will see how the Foreign Exchange markets have evolved since then. But given that CLS Group alone is reporting $5.17 trillion a day for March 2013, it clearly hasn't dropped. With 250 trading days a year, this would add up to virtually $1.3 quadrillion per year - and that's just CLS Group. The total  is likely to be a lot higher when all the actors are included. For example, yesterday I discovered that ICAP Plc that I hadn't even heard of handled over $29 trillion in foreign exchange in 2012. There are plenty of others like Barclays who never report numbers at all.

Now, consider the breakdown between the different currencies that I reported last october. 42.4% of the transactions (around $540 trillion) involved dollars, and 19.5% involved Euros. That would be about $250 trillion in Euros traded per year.

It would relatively easy for the ECB to tax those transactions at whatever rate it liked. And each Central bank could choose its own value. Let's suppose that that the ECB chooses 1% and that the revenue generated was €1 trillion a year. It could then use that trillion a year to pay off each Eurozone government's debt without that government having to do anything. No need to impose austerity measures etc. The ECB would get its "money" back without having to go and tell the Greeks, the Spanish, the Portuguese or the French to impose budget cuts.

Back in august, I generated a table that showed how each Eurozone country's debt could be paid off progressively with €1 trillion a year of ECB money using a totally fair system in which the money is distributed according to the population of each country. Here it is again.

Germany would have cancelled its debt to the ECB in 8.5 years, France in 8.7 years and so forth. Even Ireland would be out of debt in 12.5 years.

After the country's debt to the ECB has been paid off, they would actually get their share of the revenue in cash that could be spent into the local economy. That should satisfy those Germans who refuse to allow the ECB to favour countries that have not managed their economies well. Indeed Estonia would start getting direct cash injections after just a couple of months. That's fair enough, because their government has a very low debt level.

And, interestingly, Germany, whose debt level at over $2 trillion is the highest of all the Eurozone countries would have to wait.

Of course, this particularly scenario assumes €1 trillion a year of ECB revenue. But depending on what sorts of transactions are included, the numbers could easily be at lot higher. After all, I estimate that, even within the Eurozone, transactions are running at over €2 quadrillion a year. In fact, the tax level can be set at whatever number is needed to keep the money supply at an appropriate level. Increase the number to €2 trillion a year (i.e. a 0.1% tax on all Eurozone transactions), and the process would take half as long.

So, yes. I'm proposing that we push the Quantative Easing lever to the maximum needed for the Central Bank to take on ALL government debt by buying on the secondary markets - something that they are already doing. This would "cost" the ECB something like €8.2 trillion plus the additional government debt added in 2012. It would cost the Bank of England something like £1.7 trillion.

But any risk that this injection of "money" could result in inflation can be avoided by using an FTT on all transactions involving a particular currency. And since there is no limit on the size of the FTT, it is a totally safe mechanism. If the banks flood the economy with money when they get their QE, the excess could easily be mopped up.

One important point to note is that the proceeds of the FTT on Foreign Exchange dealings are not recovered locally, but rather by the Central Bank whose money is being used. Thus, it is not a problem that 37% of Foreign Exchange is done in the City of London. The Bank of England would get revenue that corresponds to the 6.4% that involved sterling, the ECB would get revenue corresponding to the 19.5% that involved Euros, and so on. And a country whose currency was being attacked by the speculators would actually get more revenue as a result! Beautiful!

Does anyone see problems with this??

ICAP Plc : $179.5 trillion in 2012

I read today that ICAP Plc (IAP) says "EU Trasaction Tax would hurt economies, raise costs". They said that "The tax may increase the annual interest cost as much as 8.5 billion Euros ($11 billion) for Germany, Italy and France in the first year of implementation".

Sounds terrible.

But who or what is ICAP? Well, I had never heard of them, but apparently they are the world's largest inter-bank broker.  I had a quick look on their website and discovered that you can download their monthly volumes here. Very convenient. Here is the summary for what ICAP Plc did last year. All the numbers are daily averages in billions of dollars.

I thank ICAP for providing the number of trading days per month, which allowed me to calculate total transactions over the whole of 2012. Here are the numbers.

So, there you have it. That's another $179.5 trillion to add to the list of activities that can be taxed. 0.1% of that makes a very useful $179 billion. Sure, the interest costs may increase by $11 billion, but just applying the FTT to IPAC's activity alone would raise 16 times as much. Add in the quadrillions handled by Eurex, LCHClearnet, OCC, CLS, TARGET2, EURO1 and so on, and something tells me that the taxpayer may just get a good deal from such a move.

I note that IPAC is nowhere to be seen in the BIS dataset on financial transactions. Nor will you find it in the ECB's data.

Any other firms like IPAC who would like to try and argue that FTTs are a bad idea?
Warning : every time you come out in the open, you risk having me looking at your data.

The real reason why the City is opposed to Financial Transaction Taxes

Since 11 european countries decided to introduce financial transaction taxes, I've seen large numbers of attempts by bloggers and media people to demonstrate that FTTs are a bad idea. We are told that the man in the street would end up paying the bill. Pensions would all but disappear. And it will be a disaster for anyone doing business.

Frankly, the idea that a tax of 0.1% on each transaction could seriously affect real business is laughable. But of course, they have to try it.

The reason for trying that argument stems from the fact that the real reason for blocking the introduction of financial transactions is that it would mean that the 1% who own the vast majority of the worlds resources would have to start being up front about what they do with their money.

This week the International Consortium of Investigative Journalists revealed that they have received  around 2.5 million documents concerning the use of tax havens. And some of the juicy bits of information contained in those documents has started to filter out via newspapers including the Guardian and Le Monde. Both papers have run a whole series of pieces in the last few days. For example, the Guardian revealed that "More than 175,000 UK companies have offshore directors" and pointed a finger at the country whose links with the offshore tax havens is perhaps the most obvious - namely, the UK.

I can also thoroughly recommend the ICIJ's own website which has a whole section on the The Global Offshore Money Maze. It includes a very entertaining interactive feature that explains how you can use Offshore Tax Havens to "Stash your Cash" - I just saw a piece about the feature on the M6 channel's TV news bulletin here in France. There's also a nice three minute video giving a quick course in Tax Havens called "Tax Havens 101".

One of the things I learned from the video is that "half of all global trade passes through offshore tax havens, and roughly 1/3 of the world's wealth resides there". And the reason for that is not only that this allows you to avoid paying taxes, but it also means that it is almost impossible to know what you have been doing.

That's the real reason for the war on FTTs that has been declared in the last few months. The people who object to FTTs are almost certainly associated with activities that they would prefer to keep secret.

The scale of Eurozone debt and the money supply

I've been trying to understand the scale of debt in the Eurozone and its relation to the money supply and come across something that doesn't seem to make sense.

I was happy to find a set of numbers on the Banque de France website that gives the size of Eurozone M3 for every month since 1970. Impressive! It's even right up to date, because you can even find a value for Feburary 2013. You can find the full figures here, but I've plotted them in the following graph.

As you can see, the increase has been spectacular, increasing 30-fold. It actually peaked at €9,805 billion at the end of December 2012, and has dropped back a bit to €9,761 billion in the following two months.

The other thing that I have been doing is combining the figures for Eurozone Private Debt from the recently published BIS dataset with the ECB figures for Government debt. The BIS Private sector debt distinghishes between borrowing by "Households and NPISHs (Non-profit institutions serving households)" and "Non-financial corporations" (which I take to mean businesses). Here's the graph for the period from the beginning of 1999 to the end of 2011.

The puzzling thing is that if you add the three components together, you get a total level of debt within the Eurozone at the end of 2011 of €23,784 billion (nearly €24 trillion).  And the problem is that number is 2.5 larger than the M3 Money supply at the same  point in time (€9,538 billion).  In other words, there is a lot more debt in the Eurozone than there is money.

It is at this point that I realize that maybe my economics skills are lacking. I suppose that it is possible that the difference is due to money that is owed to actors outside the Eurozone. Maybe we owe over €14 trillion to the Chinese, or the Saudis? Or to Goldman Sachs?

If someone can clear this up for me, please leave a comment. Answers on a postcard please....

Target2 and Euro1 : €692 trillion in transactions in 2012

Governments are finding it very hard to make ends meet. They are told that austerity is the only solution - either they cut spending, or they raise taxes. Both options will cut growth.

But are all taxes equally bad for the economy? I've been arguing that low rates of taxes on Financial Transactions would be a very straightforward and easy to implement solution, and indeed there are 11 EU countries who are implementing some such scheme.

We are told that such schemes are unlikely to be effective, because the transactions will move elsewhere. Well, how about simply imposing a transaction tax on the large-value payment systems that are a central part of the European Union? Specifically, what about simply charging a transaction fee for using the TARGET2 system (TRans-European Automated Real-time Gross Settlement Express Transfer System)?

The European Central Bank provides detailed information on its website about the value of transactions handled by the system. I have just downloaded all the data since 2009, and compiled a table where you can see just how much has been processed by the system, as well as by a second privately operated system called EURO 1.  Here are the results.

As you can see, total transactions for the TARGET and EURO 1 systems totalled over €692 trillion in 2012.  The vast majority of that (91%) involves the TARGET system, which has handled about 3.5% more in 2012 than in the previous year.

There's also a breakdown by country, and you can see that 30.8% was handled in Germany, followed by 17.4% in France and 16.6% in Italy. Nearly all the transactions involve the 17 Eurozone countries.

Currently, the Eurosystem charges users with one of two parallel schemes:

• Recurring fixed charges and a fixed transaction fee
  • Monthly fixed charge: €100.00
  • Single transaction price: €0.80
• Recurring fixed charge and a variable transaction fee based on number of transactions
  • Monthly fixed charge: €1,250.00
  • Variable transaction price: volume-based between €0.60 and €0.125

Making charges this way obviously gives a big advantage to the largest users. But how about having a single flat rate tax on all transactions that simply depended on the value transfered (i.e. a financial transaction tax)? For example, how about applying the same 0.1% fee on for share trading transactions that is being introduced into 11 european countries?

Of course, the banks will no doubt scream that this is outrageous and that it will wreck the economy. But I would say that they are lucky that they don't have to pay the 2-3% fee that all the rest of us typically pay when we make a credit card payment in a foreign currency (the "foreign transaction fee").

The hundreds of billions of euros that could be generated by such a tax would go a long way to getting the Eurosystem back on its feet. The revenue could be divided between the 17 Eurozone countries depending simply on the population size of each country. And each country could use the revenue as it wishes - either to pay off government debt, restore public spending, or reduce taxes.

Seems reasonable to me.

The need for monetary reform in France

I'm currently in contact with a number of people in France who believe that we really need something like the UK's Positive Money movement to press the case for monetary form. We are trying to put together the arguments needed to convince the French public and government that there are indeed alternatives to the current diet of austerity.

I'm also preparing for a talk that I will be giving next week in a meeting in Montbrun, a small town in the Ariege.

So, to start the ball rolling, lets just have a look at how the French national debt has increased over the past 35 years.

Back in 1978, the debt level was a modest €72.8 billion. By the end of 2012, it had been multiplied 25-fold to reach €1833.8 billion. What was the main reason for this?

Well, the graph also shows the cumulated interest payments on government debt. As you can see, the total since 1978 has reached something like €1150 billion, i.e. around 64% of the total outstanding debt. Actually, the number could be €1400 billion, according to many authors, although I have not been able to find where that particular number comes from.

The important thing to realize is that the French government should not need to borrow money at all. If we had a sensible system, the French government would be able to obtain money free of interest from the Banque de France. Indeed, this was how things worked until 1973 when Pompidou and Giscard D'Estaign passed a law which effectively meant that the government would have to borrow from private banks (La loi du 3 janvier 1973). Could this have had anything to do with the fact that before becoming Président, Georges Pompidou had been the General Manager of the Rothschild bank?

Interestingly, the situation would have been a lot worse if the interest rates that the government had been paying had stayed at the levels that had been typical in the 80s and 90s. Here's one graph that I produced from Eurostat figures that goes back to 1993 and which shows that long-term interest rates reached a peak of 8.23% in January 1995.

For the effective interest rates going back to 1978, have a look at this graph that I got from a report published in April 2010 called "Rapport sur la situation des finances publiques" by Paul Champsaur and Jean-Philippe Cotis.

Here again, you can see that interest rates of between 7 and 8% were common throughout the 80s.

The important thing to realize is that when the commercial banks lend money to the French Government and then charge the French taxpayer interest on those loans (something that cost taxpayers €52.6 billion in 2011), they don't actually have the money they lend. They create the "money" out of thin air. This is because elected governments have handed the right to create (and destroy) the money supply to the commercial banks.  This is insane. Why should the French government borrow money from the banks and pay interest when money creation can be done with no interest by central banks?

Of course, the government isn't alone in having to borrow its money from the commercial banks. Businesses and households are also forced to borrow from those banks. And here again, the banks are happy to create the money out of thin air, and charge interest.

The latest BIS dataset provides the numbers for Private Sector debt, qnd distinguishes between Household debt and Non-financial Corporations (i.e. Business). Here's are the data since 1977 in graph form.

As you can see, the total has been skyrocketing, reaching €3.31 trillion at the end of the third quarter 2012. It's less easy to find out precisely how much the interest charges on that cost, but if we assume a figure of 5%, we can imagine that around €165 billion gets sucked out of the French economy every year in the form of interest payments.

And of course, we can add private sector debt to government debt to get a total of €5.13 trillion in debt, and a combined interest charge of something like €220 billion a year - about 8% of French GDP (which was €2.77 trillion in 2012).

Where do those interest charges go? Well, here's a graph that I got from the Agence France Trésor which shows that currently, about 64% of government debt is held by non-residents. In other words, the majority of those interest payments leave the country. Maybe they go to fill the $21 trillion in private accounts held in offshore tax havens?

It is very clear to me that, like the UK, France needs a radical reform of its monetary system. Implementing the ideas proposed by Positive Money in the UK could be especially difficult to achieve in France, because any moves by the French government may well be blocked by the ECB and its president, Mario Draghi. As the ex-European director of Goldman Sachs, it is unlikely that he will be very keen on killing the proverbial goose that has been laying golden eggs for the banking system for decades.

But the moral case for change is overwhelming. And if the ECB and the Bundesbank block changes, there are alternatives. I have previously argued that the insane fractional reserve money creation machine could be turned on itself to cancel out public debt -see this piece from last year. Another alternative would be to introduce a parallel debt-free public money - the N-Euro.

Nevertheless, it is clear that the first step has to be to get the problem out in the open. The public has to be made aware that they have been the object of a massive scam. It has to stop.

Updated transaction values for 2012 : Euroclear €541.6 trillion, SwapClear $385.4 trillion, OCC $16 quadrillion?

A few days ago I blogged about the New York Federal Reserve's analysis of how $15 trillion gets churned through the US Financial system every day. But they admitted that the data for a number of players was incomplete, meaning that the $15 trillion figure (which would mean about $3.75 quadrillion over a year) was underestimated.

So, let me help fill in a few numbers.

I last reported on EuroClear back in January 2012 when I noted that they had processed over €526 trillion in 2010. I'm happy to report that they are still going strong, and there is a nice graph on their website showing that this increased to €580.6 trillion in 2011. But times were a bit harder in 2012 - they only managed €541.5 trillion.

Still, slap a 0.1% FTT on that lot and you could generate €540 billion in a year.

Another of my favourite companies is LCH.Clearnet Ltd. They operate a number of systems, including SwapClear for which their website says that "Swapclear clears more than 50% of all OTC interest rate swaps and more than 95% of the overall cleared OTC interest rate swap market. We regularly clear in excess of $1 trillion notional per day and have more than 2 million cleared trades outstanding".

Here's a graph of monthly volumes over the past two years.

The total for 2012 comes to an impressive $385.4 trillion. But the figures for the start of 2013 have gone through the roof. They actually provide a daily breakdown of activity for each different currency together with the total for the year so far.

As you can see, on the 21 March, SwapClear processed a total of $2.371 trillion in a single day. And since the beginning of the year, they have handled $135,971,741,893,436 ($136 trillion). It's interesting to see that the most popular currency was the Euro for which the total has already reached nearly €54 trillion. One wonders why the ECB can't simply impose an FTT on all transactions involving Euros....

But there's another name that appeared in the Federal Reserve's report. A name that I hadn't heard of before. It's the Options Clearing Corporation (OCC) described by its website as "the world's largest equity derivatives clearing organisation". Indeed, the website says that in 2012 it cleared "4,042,175,801 contracts, a 12 percent decline from the 2011 record volume of 4,600,955,949 contracts". Unfortuately, I was unable to find any numbers concerning the value of all this activity.

For Euroclear, you can work out that the €541.6 trillion for 2012 involved 158.9 million  transactions. That means that each transaction was presumably worth around €3.4 million each - call that a round $4 million. If OCC's 4 billion trades involved similar sums, that would imply that OCC had handled something like $16 quadrillion worth of transactions.

Could that number be correct? If anyone out there can confirm, it would mean that my $5.5 quadrillion number for US financial transactions is hopelessly off. It could easily be $25 quadrillion.

Now that number is 10,000 times total US tax revenue. And that means that ALL the current US taxes could be replaced by a 0.01% tax on all electronic transactions.

Think about it....

Light at the end of the tunnel?

George Osborne's Budget this week was just as bad as expected. Absolutely no sign whatsover of any realistion that austerity cannot work. As I discussed previously, Olivier Blanchard the chief economist at the IMF has already admitted that the assumptions on which the politics of austerity are based are completely wrong. For every £1 billion of cuts, the country's GDP will drop by between £900 million and £1.7 billion.

But Osborne and co continue regardless - apparently because their real objective is to use the current financial crisis as an excuse to dismantle the welfare state - a point made very forcibly in Polly Toynbee in today's Guardian ("Do people get Osborne and co yet? Even Thatcher wouldn't have gone this far").

However, there was one good bit of news on Wednesday. Osborne used his budget to announce the  publication of a 62 page "Review of the monetary policy framework"  by the HM Treasury. As Ben Dyson from Positive Money noted, the document indicates that some parts of the government may be slowly moving in the right direction. Specifically, the document seems to raise the possibility of money creation by the state as part of a series of "unconventional monetary instruments".

Indeed, when I read through the document, I really did get the impression that there may be a chink of light at the end of the tunnel.

For example, on page 46 there is a chart that shows how the Central Bank balance sheet sizes have varied since 2006 for the US Federal Reserve, the Bank of Japan, the Bank of England and the European Central Bank.

As you can see from the graphs, the ECB's balance sheet increased from 13% of GDP to something like 33%, the Bank of England roughly quadrupled from 7% to 27% of GDP. And the Fed went from 6.5% to around 20%.

In other words, Central banks are perfectly free to expand the money supply - and they do.

We then read "In principle, central banks have unlimited scope to expand their balance sheets, creating central bank reserves with which to purchase assets or otherwise support nominal spending in pursuit of domestic policy objectives."

And then, on page 54, we read:

"In theory, central banks could go beyond the range of unconventional instruments deployed by central banks in advanced countries since the 2009-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money"

(at this point they cite Milton Friedman, 1948, and Ben Bernanke's famous "helicopter money" speech from  2002 "Deflation: Making sure it doesn't happen here"). And then they say:

"Adair Turner, Chairman of the Financial Services Authority, has suggested this could be a tool to used in extreme circumstances".

So, the question is - just how extreme do the circumstances need to be? Things are not critical enough??

The problem is that once people realize that there is absolutely no reason whatsoever why central banks could not replace the creation of the money supply by commercial banks and create the money supply debt free, we would be very close to killing the goose that has been laying golden eggs for the banking system for centuries. And the bankers have huge resources to bribe politicians, economists and journalists and prevent the subject being debated openly.

If even the UK Treasury is starting to put pressure on the Bank of England, then there may be hope that Mark Carney, the newly appointed governor of the Bank, may have a few new levers to pull on.

Private sector debt : $25.0 trillion (US), €15.7 trillion (EU) and £3.2 trillion (UK)

(NOTE added 27th March 2013 : Due to a weird error in the way Excel handles dates, the graphs I originally presented were offset by four years, and so the values were actually those for the end of 2008. Sorry about that. I've recalculated the graphs and discovered that private sector debt has since levelled off, and even dropped slightly in the US and UK. A beautiful demonstration of how the crisis has crippled the economy).

On the 18th of March, the Bank for International Settlements released a new dataset that compiles figures on Private sector borrowing in 40 different countries. There's a webpage about it here. It's an impressive set of numbers that can be downloaded as an Excel file here. And there's a document that goes with the data called "How much does the private sector really borrow - a new database for total credit to the private non-financial sector".

I took the numbers for the US, the UK and the Eurozone countries for which figures are available, and plotted how the numbers have increased over the years.

For the US, where the figures go back to 1952, you can see that the increases has been totally spectacular. The level of debt has doubled in the space of 9 years to reach a peak of £25.2 trillion at the end of 2008. It then dropped a bit and has since increased again to reach $25.0 trillion at the end of the third quarter 2012.

For 12 of the Eurozone countries, where the figures go back to 1971, you can see that again it only took 9 years to double the amount of debt, reaching an impressive €14.3 trillion at the end of 2008. Since then, the amount of debt has increased more slowly to reach a total of €15.15 trillion at the end of the 2nd quarter 2012 (15.69 trillion if all 17 countries are included).

Finally, for the UK, where the numbers go back to 1963, it's a similar story except that it  only took 7 years to double the amount of private debt in the run up to the peak of £3.18 trillion at the end of 2008. Since then, it has been wobbling around, with the latest value of £3.12 at the end of the third quarter  2012.

Impressive. And when you think that all that debt has interest charges attached, is it any wonder that the entire global economy is on its knees. Lets be generous and assume that this debt is only being charged compound interest at 5% per year. Even on that figure, it means that in the US, about $1.2 trillion is being paid out by the private sector (households and companies) to the financial system every year. In the Eurozone, the figure will be around €800 billion a year. And in the UK, we can assume that the number will be £150 billion.

And that's without taking into account that a lot of the private debt is on credit cards that will happily charge up to 20%. And some of it will be debts toward payday loan companies that can sometimes charge over 14,000% interest.

It goes without saying that this insanity has to stop. Remember that the banks that lend the "money" to the private sector don't actually have the money to lend. They create it out of thin air, and then have the nerve to charge interest.

But they only do that because we let them. Money creation should be done Debt-Free by central banks. If the system is not changed, then those three graphs will just keep on going up and up. As will the graphs for the other thirty odd countries whose private sector debt levels are detailed in the BIS dataset. Nobody is going to get out of debt. Not individuals. Not companies. And not even governments.

It is time to change the system.

How the US financial system processes at least $15 trillion every day

My thanks to Susy for pointing me towards a remarkable 39 page document that the New York Federal Reserve published in March 2012. It's called "Intraday Liquidity Flows" and was produced by the Federal Reserve's Payments Risk Committee which "contacted and gathered  information from seventeen firms that provide utility services for the U.S. financial system and from operations within two banks that provide certain specialized securities clearing services." "The PRC asked for hourly statistics on intraday flows of USD for “normal” days and for the peak day during the 4th quarter of 2010. "

Here's the list of the various actors.

And here is how the different actors work together.

This is how the volumes of transfers break down between the different components.

The Gross Value of the Payment Transactions was almost $15 trillion per day, and those transactions involved net transfers of over $9 trillion. Here are the numbers plotted in chart form so that you can see where the activity is occuring. You can see that the largest sector is Government Securities Clearing, involving FedWire, Clearing Banks and the FICC which handles over $7.6 trillion every day.

Impressive numbers.  Anyone out there doubting that applying a Financial Transaction Tax to these massive flows of funds? With $15 trillion a day, and at least 250 trading days a year, it is clear that there are at least $3.75 quadrillion being handled every year.

But even this number is certainly seriously underestimated. For example, as I noted in a previous post, the Chicago Mercantile Exchange Group (CME) was boasting that it handled over $1 quadrillion in 2011  - but that number doesn't seem to appear anywhere in the Federal Reserve's analysis. This fits with the little asterisk that you can see in the figure which notes that "Information is not available or de minimis for some CCPs and CSDs". The "CCPs" include the CME group, but also ICE Clear Credit, LCH.Clearnet and the Options Clearing Corporation. The CSDs include Euroclear and ClearStream, neither of which were under any real obligation to hand over their full figures to the Fed.

My guess is that the  $5.5 quadrillion figure that I gave previously may be a minimum. It could be a lot higher.

And of course, the Fed would have to do this sort of excercise continually if we wanted to know what the current numbers are. We already know that the figures in 2011 were substantially higher than the period in 2010 that was used for the Fed's analysis. It's anyone's guess how much these numbers will have increased in 2012.

As I have said repeatedly, the US government could scrap business taxes, income taxes and sales taxes completely, and replace the whole lot by a tax on the $3.75 quadrillion (minimum) in payments of well under 0.1%. Why don't they do it? 

Bryan Gould : Spot On.....

Bryan Gould, the ex-Labour politician who once ran for the leadership of the Labour party (in 1992) but has since given up politics and retired to his native New Zealand has just posted a piece in the Guardian called "Osborne is committed to austerity... but is even he still a real believer?"

In it, he asks a series of questions that demonstrate that he has understood where the real problems are. Just take a look at them.

"Take the propositions that the market (and especially financial markets) can be accurately predicted on the basis of mathematical models, that they are self-correcting and do not therefore need regulation, and that any intervention in unregulated markets will automatically produce results that will be worse than if they had been left alone. As Keynes warned, and experience in the form of the global financial crisis has confirmed, markets – and financial markets in particular – are all too likely, if unregulated, to lead to excess and collapse.

Or, what about the belief – maintained for more than three decades – that macroeconomic policy is not a matter for government but is a simple matter of restraining inflation – an essentially technical task through setting interest rates that can safely be entrusted to unaccountable bankers? Do we still believe that monetary policy is all that is needed for a healthy economy? Or that it is any more effective than pushing on a piece of string as a means of escaping from recession? Or – when we look to more successful economies overseas – that there is no role for government?

And what about the related confidence displayed in the expertise and objectivity of bankers in running our economy? Do we still believe that bankers have the common interest at heart and do not make decisions to suit themselves? Are we happy that they continue to enjoy the astonishing privilege, as private monopolies, of creating money out of nothing, thereby exercising hugely more power over our fortunes than do elected governments?

What do we think of the faith placed by successive governments, not least by New Labour, in the financial services industry as the means of paying our way in the world? Do we still accept that the huge fortunes made by a few in a largely unregulated City represented real and sustainable wealth-creation in which the rest of us would share?

Even more importantly, what do we think of the careless assumption that focusing on financial services made it unnecessary to concern ourselves with our manufacturing base? Do we now understand that the loss of manufacturing means – now that the chips are down – that we are denied the most reliable way of maintaining our standard of living, the most important source of innovation, the most substantial creator of new jobs, the most effective stimulus to improved productivity and the provider of the quickest return on investment?

Do we understand that globalisation has meant, with the removal of exchange controls, that major global investors can now move huge volumes of money – totalling as much in a single day as the total annual production of most economies – from one country to another, and have thereby disabled democratic governments from doing anything to protect us?

And do we understand that the combined effect of all these policies has been to create a huge mechanism for shifting wealth and resource from the poor to the rich, and that it is that which is responsible, rather than any great ability or virtue on the part of the rich, for the widening inequality that weakens and disfigures our society?"

As I noted in the comments section,  I think this guy deserves a medal.

"Spot on!!

Thank you Bryan Gould for asking some absolutely vital questions that amazingly never get asked by journalists - even in the Guardian.

For example:
" Do we still believe that bankers have the common interest at heart and do not make decisions to suit themselves? Are we happy that they continue to enjoy the astonishing privilege, as private monopolies, of creating money out of nothing, thereby exercising hugely more power over our fortunes than do elected governments?"

Exactly! Commercial Banks have been handed the liberty to create money out of thin air by creating loans and then charging us interest. Since 1983, they have increased the money supply by an average of 10% a year using fictitious money. They do it by lending "money" to individuals, businesses and even governments. And the interest charges on those loans has cost people in the UK £2.4 trillion since 1987.

"Do we understand that globalisation has meant, with the removal of exchange controls, that major global investors can now move huge volumes of money – totalling as much in a single day as the total annual production of most economies – from one country to another, and have thereby disabled democratic governments from doing anything to protect us?"

Spot on again! Financial transactions in the UK were something like £1.76 quadrillion in 2011. In the US, the figure was $5.5 quadrillion. It is no wonder that governments cannot protect their citizens when the financial industry can move such colossal sums around at no cost. And when anyone tries to put a 0.1% tax on such transactions we are told that it will destroy peoples pensions. Rubbish. It will maybe destroy the ability of the financial markets to blackmail elected governments.

Bryan - any chance that you could be persuaded to come back to Europe? We desperately need politicians like you. Maybe you have been talking to the people at Positive Money New Zealand? In any case, you are talking complete sense."

David Cameron gets it completely wrong - twice

David Cameron made a speech last Thursday in which he made two particularly bad errors. First, he claimed that his government's budget cuts were not responsible for the UK's economic woes. I quote:

"As the Independent Office for Budget Responsibility has made clear, growth has been depressed by the financial crisis, by the problems in the eurozone and a 60% rise in oil prices between August 2010 and April 2011. They are absolutely clear, and they are absolutely independent. They are absolutely clear that the deficit reduction plan is not responsible: in fact, quite the opposite."

The next day, Robert Chote, the head of the OBR wrote to Cameron to explain that this claim was untrue. In the letter, Chote says the following:

"To date our forecasts have used 'mulipliers' that imply that every £100 of fiscal consolidation measures reduce GDP in that year by around £100 for capital spending cuts, £60 for welfare and public services cuts, £35 for increases in the VAT rate, and £30 for income tax and National Insurance increases, with the impact diminishing thereafter....[ ]... applying these multipliers to the consolidations measures put in place by the previous and current governments would have been sufficient to reduce GDP in 2011-12 by around 1.4%"

Chote admits that the multiplier values are the subject of debate. But he neglects to mention that specifically, the IMF Chief Economist recently said that the value of 0.5 for the fiscal multiplier used by economists in their models was seriously understimated, and that the real value was probably between 0.9 and 1.7. If those numbers are used, one would expect the drop in GDP to be somewhere between 2.5% and 4.75%.

So, just look at the graph of UK GDP growth (or rather absence of growth) since the financial crisis, and imagine what it would look like without the governments pointless and counterproductive cuts. That graph could have been off the scale....

But the problem is that Cameron and Osbornes brilliant plan A for which "There Is No Altenative" (TINA) is not justified by a real desire to fix the economy. As economist Ha-Joon Chang put it in  in today's Guardian : 

"In reality, though, the coalition government isn't as stupid or stubborn as it appears. It is sticking to its plan A because spending cuts are not about deficits but about rolling back the welfare state. So no amount of evidence is going to change its position on cuts."

 The other point in David Cameron's speech where he got it completely wrong is when he said this:

"There are some people who think we don't have to take all these tough decisions to deal with our debts. They say that our focus on deficit reduction is damaging growth. And what we need to do is to spend more and borrow more. It's as if they think there's some magic money tree. Well, let me tell you a plain truth: there isn't." 

Well, as I pointed out in a comment to the Guardian, he's wrong there. 

"Actually, David, there are plenty of money trees around. There's the money tree at the Bank of England that has provided £375 billion in QE for the UK financial sector. There's the money tree at the ECB that Mario Draghi used to provide over €1 trillion for hundreds of European Banks in late 2011 and early 2012. There's the money tree at the Federal Reserve which has promised to provide $50 billion or more a month if needed - again to the financial sector. Those money trees are the direct cause of the booming stock markets.

And finally, there is the money tree that all commercial banks have which allows them to create money out of thin air in the form of interest bearing loans. Since 1983, the UK banking sector has been increasing the money supply by an average of 10% every year - even after inflation that still works out at an average of 7%. Your chums in the City have been using that particular money tree to pay themselves a total of £2.4 trillion in interest payments since 1987.

Yes, there are plenty of money trees. Unfortunately, they are all in the hands of your chums, and your friends have no intention of letting any governments use those money trees in the public interest."