The N-Euro Solution - My latest Youtube Presentation

Following on from my previous offerings, here is my latest proposal for fixing the economic system. It's called "The N-Euro Solution".  In this video (under 13 minutes) I propose a way of allowing Eurozone governments to introduce a nationally based, debt-free parallel currency that could be called the N-Euro (for "National-Euro" or "New-Euro"). Each country would set up a national citizens bank with accounts for all citizens. Citizens receiving payments from the government (such as salaries, pensions and benefits) could choose to have a proportion of the payment made in N-Euros. It would be completely voluntary, with the percentage varying from 0% to 100%. The government would ensure that the N-Euros had value because they would be accepted for payment of taxes. Businesses could also have N-Euro accounts, and would be able to accept payments from customers using an N-Euro payment card. The government would be able to run the payment system free of charge, meaning that merchants could avoid the fees normally charged by credit card companies.

Such a system would have the enormous advantage that the governments could create N-Euros without having to borrow from the commercial banking system, which currently has a virtual monopoly on creating the Euro money supply. This would save hundreds of billions a year in totally unnecessary interest payments.

It's pretty much the idea that I presented last week in my blog post "Eureka - Replace the Euro with the N-Euro". But there are a few differences.

First, I acknowledge the debt to all the other alternative currency systems that have sprung up around the world since the first LETS system started by Michael Linton in British Columbia in 1983. There is a very interesting site called the "Community Exchange System" that lists no less than 425 different alternative systems around the world. My proposal is essentially just the same idea, but done at an official governmental level - with the possiblity that the alternative currency can be used to pay taxes. This is a very powerful way of guaranteeing that the alternative currency has real value.

Seccond, after a lot of reflection (and an exchange with John Morrison on the Positive Money Forum), I came to the conclusion that it would be best not to allow N-Euros to be convertible into conventional Euros - at least not officially. The value of the N-Euro should be clearly guaranteed by the fact that each N-Euro is worth precisely one conventional Euro when it comes to paying taxes. There's no need to provide a way for people to swap one for the other. If there was, it would be an invitation to speculators.

Third, I noted one very interesting feature of such a scheme. Since the N-Euros can only exist in one place - namely on the government's computer that keeps tabs on who has N-Euros on their accounts - there is no way that N-Euros can be moved anywhere else. There's no way you can move N-Euros to the Cayman Islands, and no way to hide them under your mattress. The government will at all times know exactly where the N-Euro stock is held.

Anyway, here's the video. Enjoy!

Guardian : UK politicians with links to tax havens

Hats off to the journalists at the Guardian who today released a list of no less than 68 UK politicians who are linked to companies that make use of taxhavens. There are 27 Tories - six of whom are MPs – 17 Labour peers, three Lib Dem peers and another 21 are either crossbench or non-affiliated peers. These people are either directors or non-executive directors of companies linked to tax-havens such as the Cayman Islands. Clearly, with so many politicians having a vested interest in keeping the current system on the rails, it will not be easy to get reform.

The Guardian also leads with the news that the Tory party treasurer, Lord Fink, has been campaigning to get the UK turned into a tax haven. He disclosed that "that he had lobbied George Osborne for a cut in taxes on invisible earnings so that he and other hedge funders no longer feel obliged to set up companies in places such as the Cayman Islands."

Actually, I'm inclined to agree with him. Yes, the government could indeed turn the UK into a tax-haven. As I have repeatedly argued, if the UK introduced a tiny tax on financial transactions it could abolish corporation tax, income tax and VAT. Financial transations going through the City of London are currently running at someting like £1.7 quadrillion a year. You would only need to tax that at about 0.03% to replace all the other taxes.

So, why don't the 68 press for such changes? Well, I suspect that one reason is that they have never even imagined that such an option is possible. But the other reason is that many of the people who use tax-havens need to be able to do their transactions without the authorities knowing what they are up to.

EUREKA! - Replace the Euro with the N-Euro

It's 4am in the morning, but I've just got to get this written down. It might just be that I have an idea that could fix the economic crisis (Yes, I know, yet another one - sorry.....)

So, what's the recipe today Jim?

Well, in case you haven't been following this, it is now abundantly clear that there is one big problem that is at the root of virtually all our woes. It's the fact that 97% of the money in circulation in the economy is created as interest bearing debt by commercial banks. When governments need money, they have to go cap in hand to the banks, and ask - no beg - them for money. Those banks then create the money out of thin air and then  lend it to the governments. The problem is that the banks then charge governments (and hence taxpayers) interest on those loans. And so, in the European Union, governments have handed over €5.6  trillion in interest charges since 1995 - more than half the total government debt which currently stands at €10.4 trillion.

How can we end this insane system?

Here's my proposed solution.

Governments should introduce a parallel currency called the N-Euro - for National-Euro. This parallel currency would be handled by a special National Citizen's bank, that would be the only financial structure with the right to use the N-Euro. Any citizen or business would be allowed to open an account at the Citizens bank, and accounts would be automatically opened for all public sector workers and people receiving state payments such as pensions or benefits.

All those people receiving money from the government would have the option of receiving a proportion of their payments as N-Euros on their citizen's account - the rest would be paid into their standard bank account in conventional Euros.

The percentage paid in N-Euros could be modified at will by each person, from 0% (in which case there would be no change from the current system), to 100%.

N-Euros could be used to pay any government charges including taxes (income tax, local property taxes, television licence fees, hospital charges, fines etc). It is this fact that gives the N-Euro its value. And, indeed, it would have exactly the same value for these transactions as the conventional euro.

Indivduals would also have the right to transfer N-Euros from their own account to anyone else's account. This means that N-Euros could be used for making payments for other items including food, clothing, or other services. Since the N-Euros could be used for paying tax bills, they would be welcome as a means of payment by many businesses - even those not directly connected with the state.

Individuals and businesses with an N-euro account can at all times decide to convert their N-Euros into conventional Euros on their normal bank accounts. However, there would be a fixed percentage cost to making this convertion which could be for example 5%. The ability to convert N-Euros into conventional Euros would be guaranteed by the government, which again would be part of giving the N-Euro its value.

The critical feature of N-Euros is that the government would be able to use them without having to borrow them from the commercial banks. Indeed, there would be no real limit to the number of N-euros that could be generated. But here's the vital point - there would be no interest to pay on them. They can be created debt-free!

Note that there would be no actual N-Euros printed - no N-Euro notes and coins. N-Euros would only be numbers on accounts in the National Citizen's bank.

Account holders could be provided with special N-Euro payment cards that could be used to pay merchants (shops, restaurants etc) if the merchants had a sign saying "N-euros accepted here". The government could make this particularly attractive by not charging the merchants for running the system. This would give them an incentive to allow people to use their N-euro cards rather than Visa or MasterCard who both charge the merchants 3% or more on every transaction. 

Note also that you could never have a negative amount on your N-Euro account. You could never get into debt, and you would never have to pay any interest.

In principle, N-Euros would only be used within the country, although it is not inconceivable that they could end up being used elsewhere if non residents were permitted to open up an N-Euro account.

Could this work? I sincerely believe that the answer is yes. It could be an immediate solution for countries like Greece where the government is simply unable to obtain euro loans on the open financial markets without paying extortionate rates. 

What percentage of their salary would public sector workers choose to receive in N-Euros? Well, you might as well at least receive enough to pay all your taxes in N-Euros - since this would cost you nothing at all. But beyond that, as long as you had enough conventional euros on your standard bank account, you might as well get paid all the rest in N-Euros. It's likely that before long you would be able to pay for all sorts of things with your N-Euro card because merchants might well appreciate not having to pay fees to the credit card companies. And you would no doubt be happy to be paid in N-Euros, safe in the knowledge that your government didn't have to go into debt to the commercial banks to produce them.

Who knows - within a few years, many citizens might find that they are much happier being paid entirely in debt-free N-Euros. 

Since a very large proportion of government expenditure is in the form of salaries, pensions and other benefits, this means that the government would be able to make very substantial savings by not having to borrow from the banks. And indeed, there would be nothing to stop the government increasing the money supply by generating even larger quanties of N-Euros to get the economy moving again.

Could it work? I really hope so....

And I must admit that, as a neuroscientist, the idea of using Neuros as a currency system is rather amusing....

Money Creation by Banks : A personal story

After reading Michael Rowbotham's claim that when banks make loans, not only do they create the money out of thin air, they actually treat the money as their own, I was reminded of the time back in 1986 when the Société Générale lent my wife and me the money we needed to buy our first house.

It's difficult to believe now, but at the time, interest rates were around 14%. We were young with a 3 year old son, and we really had to struggle to borrow enough money to buy the house we wanted. We were both working for the CNRS with government jobs where you knew precisely when you would be getting pay rises. And as a result we were able to negotiate a loan that we could pay back over 15 years with a fixed rate, but where our monthly repayments increased every year for the first five years. Normally, they would only let you pay a maximum of 30% of your combined salaries in repayments. But thanks to our government jobs, and the fact that we could show the bank our projected salaries for the following years, the bank generously allowed us to take on even more debt.

The repayments went up from 5886.58 francs a month for the first 12 months (around €900), to 7161.91 francs a month in year 6. And then from year 7 till the end the repayments were 7448.46 francs a month.

We thought ourselves very lucky. Unlike my friends in the UK, we actually knew precisely what we would be paying every month for the next 15 years. Fixed rate mortages like that have (for some inexplicable reason) never been available in the UK - and they still don't exist. As a result,  in the UK, you could easily recieve a letter one day from the bank to let you know that they had unfortunately been forced to increase the interest rate. Indeed, as many homeowners found out to their cost, the banks could effectively increase the interest rate to any random figure they like.

As it happened, we sold our house about 7 years later, and it turned out that its value had nearly doubled. It was fantastic - we had earned more on the increase in the value of the house than we did with our combined salaries. Great... right?

Well, with hindsight, the whole system seems outrageous.

We only borrowed 568,000 francs to buy the house. And yet, if you add up the total cost of the repayments, the bank gets a grand total of 1,272,980.16 francs at the end of the 15 years. That means nearly 705,000 francs in interest charges.

Remember that, in fact, the bank didn't even have the money that they lent us - they just created the 568,000 francs out of thin air. So the idea that they could charge us more than twice that sum in interest just seems obscene. And if it turns out that Michael Rowbotham is right, and the bank not only "earned" 705,000 francs of interest charges for lending us their "money", they also got to keep the money they created, then I think that there is something very very wrong with the way the system works.
Yes, if the bank has to get the money from someone else, and has to pay that someone interest on their deposits, then it is normal that they can charge me a higher rate of interest to borrrow that money. If someone who puts their savings in the bank gets paid 10% interest, then I can handle the idea that the bank will charge me 4% to borrow that money.  But if the bank just created the money out of thin air, what possible justification can there be for charging interest at all?

None of this makes any sense. Commercial banks should not be allowed to create money. Full stop.

Michael Rowbotham : The Grip of Death

I'm in the middle of reading Michael Rowbotham's incredible 1998 book "The Grip of Death : A study of modern money, debt slavery and destructive economics". It was one of the very first books in recent times that really exposed the truth behind the way money is created as debt by banks. Indeed, it was this book that Ben Dyson picked up by chance in the university library, and which led him to set up Positive Money a few years later.

I've not finished it, but I have to tell you that there was one bit of chapter 2 that has already made my jaw hit the floor.

I had already got used to the idea that banks can create money when they make loans. And that they can charge interest on those loans.

But I had naively assumed that when those loans get paid off, the "money" effectively disappears in a puff of smoke. Obviously, the bank will have sucked out of the economy all the interest payments that were made during the loan period, but I honestly believed that the money that was lent would get destroyed when the repayment was made. That's the story that we are all told as soon as we cotton on to the fact that commercial banks are allowed to create the money supply as debt.

This is one reason why I have been arguing for some months that if Central Banks (like the ECB and the Bank of England) were to lend money to governments (via a "'publicly-owned credit institution" to get round the restrictions in the Lisbon Treaty), and the governments were to use that money to repay their loans to the banking system, then this could not cause inflation. I thought that the "money" would simply disappear in a proverbial puff of smoke. No chance for inflation. As a consquence, I really could not understand why the Germans (in particular) could object to repayment of government debt on the grounds that it could be inflationary.

But then, on pages 28-30 of Michael Rowbotham's book, I read the following:

"The banking system is able, at a pinch, to claim that it does indeed create money, and does so in large quantities, but 'only as a service to the borrrower'[....]

"This claim, that money is created as a service to the borrower, like the suggestion that they are 'only lending their depositors' money', is utterly false, and an argument that completely ignores all the facts of standard banking practice. Banks make money and although the act of lending might be regarded as a service, the truth is that banks account all the money they create as their own. In total effect, banks create money for themselves." [....]

"It used to be argued that money repaid to banks in respect of a loan was effectively destroyed. This was portrayed as the simple reverse of the spiral money creation process. In the same way that a bank loan created a new deposit of number-money or credit, the repayment of a loan or mortage was held to cancel out an equivalent amount of credit. It was argued that when someone paid money into their overdrawn account, the debt and that amount of money were set against each other and cancelled each other out." [....]

"But this is not what actually happens at all! As any bank manager will confirm, when money is repaid into an overdrawn account, the bank cancels the debt, but the money is not cancelled or destroyed. The money is regarded as every bit as real as a deposit; it is regarded by the bank as the repayment of money that they have lent. And that money is held and accounted as an asset of the bank."

"The fact that upon repayment, money that they have created is not destroyed, but is accounted as an asset of the bank, proves beyond dispute that when banks create money and issue it as debt, they ultimately account for that money as their own. The only factor which disguises their indisputable ownership of the money they create is that this returning money is usually rapidly reloaned. Borrowing in the modern economy almost always outpaces repayments, which is why the money supply escalates. This means that the money returning as repayments does not accumulate embarrassingly in the bank's own account, but is quickly reloaned, along with more debt."

I am completely gob-smacked.  What difference is there between this and counterfeiting money? Nothing, except that what banks do is legal.

I am so amazed by this that I am tempted to think that Michael Rowbotham must have been mistaken. If so, can someone in the banking system please explain to me and everyone else what really does happen when someone pays back a loan? Does the money disappear (as it should)? Or does the bank just keep it?

Answers on a postcard please....

Did the ECB fix the crisis yesterday?

Well, there is potential in the announcements made by Mario Draghi yesterday. The ECB has said that it has unlimited firepower to buy up government bonds. But, importantly, no government will be able to get that sort of help unless they sign up for massive austerity. Furthermore, it is clear that it is the ECB that will decide how much bond-buying is needed.

Let's make it clear. If any Eurozone government is paying interest rates to the markets that are higher than the rates that the banks pay the ECB, then there is something very wrong. The banks that lend the money to governments create the money out of thin air, and they lend to Eurozone governments with (virtually) zero risk, and then sit back and charge interest. There is no excuse for the excessive and unfair rates that are visible in the graphs for interest rates for the 17 Eurozone governments - graphs that reveal that while the rates had converged at around 4.5% at the end of 2008, the spread is now completely ridiculous - 1.24% for Germany, 25.82% for Greece.

But I fear that the ECB will only buy enough bonds to keep the interest rates at what is supposed to be a "sustainable" level of interest rates - namely 6%. If that is all they do, then all that will happen is that the banks will be guaranteed that they can continue to make huge profits for creating the money supply.

Nevertheless, the existence of a mechanism for transfering government debt from the financial markets and the banks to the central bank is a good thing. I can still hope that one day it will be possible to transfer all government debt to the ECB and allowing all governments in the Eurozone to pay the same low interest rates.

Could the ECB fix the crisis today?

According to a report from Bloomberg yesterday, Mario Draghi, head of the ECB could announce a plan to buy unlimited amounts of government bonds. Apparently, the plan is to buy up massive amounts of government bonds, but will be accompanied by measures to neutralize the effect on the money supply. As the Bloomberg report puts it : "To sterilize the bond purchases, the ECB will remove from the system elsewhere the same amount of money it spends, ensuring the program has a neutral impact on the money supply". If that involved  imposing a financial transaction tax to mop up the excess money supply, then my dreams will have come true! That is really getting pretty close to what I proposed recently in my youtube presentation "Some radical propositions for monetary reform".

It is important to realize that this sort of scheme really could work. As you hopefully already know if you have been reading my blog, eurozone government debt currently stands at €8.2 trillion, and cost €286 billion in interest payments last year. The total for interest payments since 1995 is €4.5 trillion - i.e. more than half of all government debt. The numbers are all here.

If the ECB took on all the debt by buying unlimited amounts of bonds, and charged the governments the same very favorable rates it offers commercial banks (or even no interest at all), the Euro crisis would be dead. But so would the goose that has been laying golden eggs for the banks for centuries. Could Mario Draghi, the ex-European director of Goldman Sachs have the courage to do this? I really hope so...

The IMF on Taxing Finance

Following the amazing news that two IMF economists fully back the original Chicago Plan for full reserve banking, I'm impressed to find another IMF report showing that there seem to be people working there who are prepared to rock the boat.

There's a paper that has just come out called "Taxing Finance", written by Geoff Gottlieb who is an economist, and two IMF staff members - Gregorio Impavido and Anna Ivanova. You can download a pdf version of the document here.

They start by stating that during the 2007-8 financial crisis "governments in  North America and  Europe spent an average of 3 to 5 percent  of GDP to support"... "to stave off a systemwide financial collapse". And they go on to discuss four different tax instruments that are currently being used to recover these sums.

• A  financial stability contribution which would be a simple levey on a financial institutions balance sheet
• A financial transaction tax (FTT) that can be levied on the value of specific financial transactions such as equity trading
• A financial activity tax that can be applied to the sum of an institution's profits and remuneration
• A reform of corporate income tax to reduce leverage in the financial sector

They provide a graph of  the amount of money that is curently being raised using these methods in western Europe which I show here.

Overall all, they note that these various devices are currently only recovering about 0.2% of GDP per year on average, "suggesting that it would take 15 to 25 years to generate resources equivalanet to the direct costs of the current crisis". 

My reading of the article suggests that the IMF thinks that at lot more needs to be done to redress the balance. I couldn't agree more.

The causes of US government debt

There's an interesting piece in Today's Washington Post. The report contains a graph produced by the Center on Budget and Policy Priorities that does something very simple. It takes US public debt since 2001 — which is the last year that the budget saw surpluses — and breaks it into its component parts. The graph plots the numbers as a percentage of GDP. Here is the figure.

It shows that half the projected public debt can be directly attributed to Bush-Era Tax Cuts and the cost of the wars in Iraq and Afghanistan. A fair propostion is the result of the economic downturn and the cost of various bailouts. Obama's recovery measures (light blue) are having a relatively modest effect.

What intrigued me in particular was the grey bit - "Other Debt". I wonder what is in there?

Well, in one of my earlier blogs, I looked at the US Treasury figures for the cost of interest payments on US Government Debt. Specifically, you can find numbers for the Interest Expense on the Debt Outstanding which includes the monthly interest for:

• U.S. Treasury notes and bonds
• Foreign and domestic series certificates of indebtedness, notes and bonds
• Savings bonds
• Government Account Series (GAS)
• State and Local Government series (SLGs) and other special purpose securities.

The total in interest payments in 2011 was $454,393,280,417.03. The USA's GDP in 2011 was $15.09 trillion, which means that 3% of the total is simply interest charges.

It goes without saying that if that 3% was removed from the bill by allowing the US Treasury to create the US Dollar money supply directly, instead of borrowing money from a consortium of private banks (i.e. the Federal Reserve), then things would rapidly get a lot better.

It would also help a lot if the super rich Americans who finance the Republican party actually paid the same level of tax that they paid pre-Bush, and if the US didn't plough so much money into fighting wars. But that's another story.

Money Creation by Commercial Banks : The house price bubble

There was an interesting bit BBC Radio 4 this morning - a discussion with Karl Case who, with Robert Shiller developed an index for comparing repeat sales of the same homes in an effort to study home pricing trends, the Case-Shiller index.

The news is that today, the index has just gone slightly positive following an incredible period in which house prices had plummeted in the USA since the peak of the housing bubble in 2007. I extracted the graph from a press article, and you can see it here. You can see that year on year prices increases reached an unbelievable 16% at the peak, before dropping by up to 20% in 2009.

What amazed me was Karl Case's statement that the banks had pumped $10 trillion in new credit into the housing market between 2000 and 2005, and that because of the crash, $6 trillion of that value has simply disappeared in smoke. That's $10 trillion dollars that the banks just created out of thin air.

$10 trillion dollars! That is what happens when the money creation process is put in the hands of commercial banks. They create money for buying the same houses over and over again, causing a totally insane cycle of inflation that eventually ends with a crash.

I simply cannot believe that there is any reasonable way of keeping this sort of insane money creation under control unless the the money creation mechanism is changed fundamentally. If all money creation was done by central banks who would then allow governments to spend the money into the economy (or pay off debt), then such problems would be a thing of the past.

Campaigners for monetary reform unite!

There seem to be more and more people across the world who have realized that many the real problems that face us could be fixed by reforming the money creation mechanism.

In my recent video, I said that while there are active and well-organized groups in the UK (Positive Money) and the USA (the American Monetary Institute, who are organising a very tempting Monetary Reform Conference in a few weeks time),  efforts in the Eurozone appear to be fragmented.

In the last few days, I've been in contact with a number of other people, including Joseph Huber who was the co-author with James Robertson of a very important book on "Creating Money : A monetary reform for the information age" that came out in 2000. Joseph is active in Germany where there are a number of vocal groups. But we were bemoaning the fact that there don't seem to be many people in countries like Greece, Spain and Portugal who have realized that monetary reform could be THE solution for them.

One of the most active groups in Germany is the Monetative movement. Joseph pointed out that they have an interesting list of sister organisations and websites that I recommend.

The list includes the AMI and Positive Money of course, but also

• Vivant (in German), Belgium 
• Vivant (in French), Belgium
• Osons Maurice Allais, France
• Geldsystem Verstehen, Germany
• LiebeAngelaMerkel, Aufruf zur kritischen Analyse und Reform des Geldsystems, Germany
• Sensible Money, Ireland
• Centro Studi Monteri, Italy
• Moneta@Proprietà, Italy
• Programma per la Riforma Monetaria Italiana, Italy
• Penazna reforma, Slovakia
•  
• Positive Money NZ, New Zealand
• MoMo (Verein Monetäre Modernisierung), Switzerland
• Full Reserve Banking, UK
• International Institue of Certified Public Accountants, USA
• Plan for Monetary Reform, USA

There is also a list of personal website's including a certain guy in France who has one called "Simon Thorpe's Ideas" (Thanks Monetative!!).

But there are loads of holes. Only 6 of the 17 Eurozone countries appear to have anything - correct me if I'm wrong.

There are a few other ones that I can add:

• Bank of Joy, Netherlands

And we also need something at the European level. 

Given that Positive Money now has a New Zealand branch, could it be that we could build on the Positive Money framework and spread that across Continental Europe and in particular the Eurozone? Or maybe we could build up from the Monetative base?

Whatever option is chosen, it seems to me that we absolutely need to try and get an international movement going. And this is particularly critical for the 17 Eurozone countries. The current policies being implemented by Mario Draghi (ex European Director of Goldman Sachs, and now head of the European Central Bank) simply cannot be allowed to continue.

Louis Even and the Michael Journal

My thanks to Paul Nollen for pointing me towards the work of a truly remarkable man - Louis Even (1885-1974). He was a lay Christian leader who founded the social credit movement in Quebec and a movement called the Pilgrims of Saint Michael. The Pilgrims produce something called the Michael Journal which turns out to be a treasure trove of fascinating ideas.

Take for example Louis Even's fable about five people washed up on a desert ile, which explains how money is created as debt by private banks. The story was first published in 1940 in the magazine "Vers Demain".  It's a great story - just 8 pages long - that you can read in English "The Money Myth Exploded", French "L'île des naufragés", Spanish "La Isla de los Naufragos", Portugeuse "A Ilha dos Naufragos", German "Die Insel der Shiffbrüchigen" and Polish "Wyspa rozbitkow". No excuses - you have to read this.!

The "Michael Journal" is available in several languages.

In the English section you can find many true gems. For example:

• an article by Louis Even from 1941 that talked about the infamous article in the United States Banker Magazine in 1892
• Louis Even's book originally published in French in 1946 and called "In this age of plenty"
• a nice set of quotes on money
• a phone call to Fed where a banker gave away the secrets of the Federal Reserve in 1992
• a piece about the Bilderberg club

As I say - a real treasure trove. 

Quantitative Easing - a fantastic deal for the very wealthy

The Bank of England has published a report in which it admits that the effects of its Quantatative Easing strategy has mainly benefited the top 5% of households, because they hold 40% of financial assets. You can read the full report here, and it was discussed in an article in today's Guardian - "Britain's richest 5% gained most from quantitative easing - Bank of England".

I had a look at the report, and one figure particularly grabbed my eye. It was the distribution of financial assets - the figure where you get to see that 40% of the assets are held by 5% of households.

I can imagine that in the break down was even finer, it would have been even clearer. The assets held by the top 1% of households will certainly be even more skewed, and the relative advantage would be even more eye watering.

Can we seriously be expected to believe that QE is a sensible way to put central bank money into the economy? It clearly  goes to people who are highly likely to move their assets out to tax-havens. The probability of anything even remotely like "trickle-down" is zero.

TARGET : €2,159,025,000,000,000 in transactions since 2009

Yep. That's right. The European system for interbank transfers called TARGET (Trans-European Real-Time Gross Settlement Express Transfer System) has processed over 2 quadrillion euros worth of transactions since 2009.

You can get all the details from the wonderful ECB databank here.  Of course, you won't find the totals there. They only give you the total values month by month, and country by country. But, if you put all the numbers into an excel sheet, and add them up (something that I have done), you get the following

• 2009 :                €551,172 billion
• 2010 :                €593.195 billion
• 2011 :                €612,936 billion
• 2012 (Jan-Jul) : €401,722 billion

Since the average in 2012 is so far €57,389 billion a month, it looks like 2012 is going to be a truly bumper year for the banks. They should be able to manage over €688 trillion if they keep it up. That's over 12% up on last year.  It's nice to know that there are some people out there for whom business is booming.

Here's a table showing the breakdown country by country

Germany is obviously doing a lot for the levels of transactions, with a whopping €721 trillion - well done Germany! But France, Spain and the Netherlands aren't doing badly either, with over €300 trillion each.

One country is very notable by its absence - the UK. They don't want to join up with those in Continental Europe. So we can certainly add some more eye watering numbers for CHAPS (who had processed a total of  1 quadrilion pounds by the 25th of July 2011) , CLS Ltd ($4.8 trillion a day in 2011),  NYSE Liffe (who managed €2.67 trillion in a single day on the 13th of January this year) as well as many others.

The moral to all this? Well, just imagine if the 0.1% Financial transaction tax had been in place since 2009. The TARGET system alone would have generated something like €2 trillion in revenue for Europe.

And we are told that there is no money about. Something tells me that someone is pulling the wool over our eyes.

Ending the Eurozone debt problem in a decade (or less)

In my latest youtube video on "How the Eurozone countries could fix the global economic crisis" I proposed that we should push to replace money creation by commercial banks (who charge interest on loans made with money that they create out of thin air) by direct interest free money creation by the European Central Bank.

I specifically proposed that the ECB should be able to generate at least as much money as the commercial banks have been doing. M3 has been increasing by around €450 billion a year since 2005, although the rate of increase reached a staggering €968 billion in the single year leading up to November 2007 (those are the numbers from the Eurostat website).

Could the ECB generate that much money in a year? The answer is clearly yes. They've already done it, since Mario Draghi pumped over €1 trillion of cheap money into the banking system in two rounds of financing in the space of just 3 months. And I have it on the word of the ECB that there was actually no upper limit to the amount that could be generated.

So, for the sake of argument, lets just imagine what could be done with €1 trillion of nice fresh debt free money.

Well, the proposition that I made in my video was that the newly created money supply could be simply divided up according to the populations of the 17 eurozone countries. What could the countries do with the money?

One option would be simply to use the money to get the countries out of debt. The table shows the populations of each of the countries and the percentage. It also shows how much they would get of the €1 trillion created by the ECB, the size of the government debt, and the number of years that it would take to pay off the whole loan.

Germany would pay off all its debt in 8.5 years, France in 8.7 years and so on. Even Greece would pay off all its debts in little more than 10 years. Even the worst case, Ireland, would be out of debt by 2025.

Can anyone explain to me why this is not a perfectly good way of solving the Eurozone debt crisis?
And this is based on the very modest suggestion that the ECB creates only the same amount that it just did for the banks, and the same amount that the banks themselves produced in 2007. Increase the amounts further and you could solve the entire problem in three years or less.

The reason why we don't do this is simple. It would mean that the commercial banks would be deprived of the €286 billion in interest that they extracted from Eurozone taxpayers in 2011 alone.  And if anyone else tries to tell you that there is no alternative to austerity to solve the Eurozone debt crisis, it might just be worth checking that they are not directly receiving some of the money that gets creamed off. Objectively, it is impossible to justify the current system - unless you are a member of  the 1% who are on the gravy train.

Oh, and by the way, fixing the Eurozone crisis this way could not possibly result in inflation. Since the governments would be paying off debts that correspond to money that the banks have created out of thin air, when those debts get paid, the money disappears in a puff of smoke. The banks cannot relend the money - especially if their licence to use fractional reserve banking to create more will have been removed. But at the same time, it would reduce the exposure of the banks enormously - something which normally they should like, except of course for the fact that we would have killed their golden goose.

So, given that the ECB could pump €1 trillion a year into paying off the Eurozone government debt without producing any inflation at all, there is no reason not to add a few hundred billion more every year for doing some even more useful things. 

Finally, the idea that the money is dispatched purely on the basis of population size means that those countries whose govenments have been prudent in the past will start getting money they can use for these other projects much more rapidly. Estonia would be able to pay off its debt in just a few months, and start doing useful stuff. Even Spain would be out of the red in only 5 years - way before the Germans, who, contrary to the myth, are actually the worst culprits of all for the size of their government debt.

In other words, there is real justice here. But justice is not something that seems to have a very high priority among our leaders.

The Chicago Plan Revisited

My thanks to a couple of people who have pointed me to a new paper by a Jaromir Benes and Michael Kumhof from the IMF called "The Chicago Plan Revisited". The paper will be presented at next meeting of the American Monetary Insitute next month (see the program here). I also note that the appearance of this paper caused the people at the Positive Money group to enter a state of mild shock! It is indeed a real surprise to see an IMF working paper offering support for full reserve banking!

The paper looks really important because, finally, it has a look at some of the key claims made by the authors of the original Chicago Plan - published in the mid 1930s by a group of prominant economists. They were proposing exactly the sort of reforms that an increasing number of authors are arguing for today - including myself. Namely, the abolition of the ability of commercial banks to create credit (money) out of thin air, and the replacement of the money creation mechanims by central banks.

Here's what the abstract of the article says:

"At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy."

 The text is full of interesting material. For example, when discussing the idea that central banks have can influence the amount of money creation by the commercial bank sector, the authors note that, "the “deposit multiplier” of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money into the banking system that gets multiplied through bank lending... is simply, in the words of Kydland and Prescott (1990), a myth. And because of this, private banks are almost fully in control of the money creation process."

Nice to hear real economists admitting that this idea is a complete fiction. Commercial banks do precisely what they want.

The authors also note that "This is of course the reason why quantitative easing, at least the kind that works by making greater reserves available to banks and not the public, can be ineffective if banks decide that lending remains too risky." I think we can probably replace the "can be ineffective" by "is ineffective".

Perhaps someone could mention this to Mervyn King and Mario Draghi before they embark on yet another round of completely pointless Quantitative Easing.

Note added 22nd August:

Bill Still has a great and inspirational presentation on this subject  - "IMF Paper Supports Monetary Reform"
Do watch it!

Latest Youtube Presentation : How the Eurozone Countries could fix the Global Economic Crisis

I have just uploaded a new 14 minute Youtube presentation entitled "How the Eurozone Countries could fix the Global Economic Crisis". I hope you like it. As always, please feel free to leave comments. I will try to answer them all.

The presentation takes up the themes that have been foremost in my mind in recent weeks. Specifically, I argue that the Eurozone countries could act together to provide a solution to the global economic crisis. The basic cause of much of the current mess is the money creation mechanism . Commercial banks currently have a virtual monopoly on money creation and, in recent years, they have been creating trillions of euros in debt by creating money out of thin air, lending that "money" to governments, businesses and individuals, and then charging interest on those loans. Governments are currently paying hundreds of billions a year in interest charges - thus crippling the economy.

I present some of my recent simple numerical demonstrations to show that such a system simply can never be made to work in the interests of the general population - economic power will inevitably end up with those who control the creation of the money supply - i.e. private bankers in the current system.

I argue that, if the 17 eurozone governments acted together, then could ban money creation by private banks, and require all new money to be created debt-free via the ECB. I propose that the money created this way could be distributed between the 17 countries pro-rata as a function of the size of each countries population.

A key advantage would be that the Eurozone economy would no longer have the inbuilt inflation required in currency areas where the creation of the money supply requires interest to be paid. This would make Euros very attractive relative to other currencies which are forced to continuously devalue. As a result, the ECB could create large quantities of Euros without risking inflation - thus providing a massive boost to the Eurozone economies.

I suggest that once a major currency block like the Eurozone has switched to debt-free money creation, it is highly probable that other currencies zones would be compelled to follow - thus ridding the world of the millstone of debt-based money creation.

You can find the video on my Youtube Video Site, or by clicking directly on the player below.

I want the earth : Plus Five Percent

For those who need someone else to tell them that the root of most, if not all, our current problems stem from the fact that our money supply is created as interest-bearing debt by commercial banks, I can recommend a 45 documentary called "I want the earth : Plus Five Percent".

It's based on  fable written by an Australian guy called Larry Hannigan in 1971. He had clearly worked out what was going on. You can find the original story on here, or an updated version (dating from 2009) here. There's also a pdf version to download here.

Great stuff. The video version has some extra bits at the end that describes how the takeover of the system has occured in Australia.

"The Federal Government already has the power and duty to create our money system with No interest and NO Debt" (Australian Constitution Section 51 and Section 115)."

"The Nullabour Railway, the Snowy River Scheme and many other projects were financed with No interest and No debt."

"So why has it not been done by any Federal Government since 1960?"

"The Commonwealth Bank (the peoples's Bank) was illegally "sold" 16 April 1991 to the International Banksters."

Sounds like it has been a similar story all over the world.  When will we wake up and do something to get this changed?

How the money creation system hits ordinary people

There have been a number of recent reports that have really highlighted just how the insane money creation mechanism that we have is having totally devastating effects on ordinary citizens in the UK.

First, house price inflation. An article in today's Guardian describes the result of a report from the National Housing Federation showing that "in 2001 the average price of a home was £121,769, and the average salary was £16,557. In the space of ten years the price of a home has rocketed to £236,518 – an increase of 94% - whereas wages have risen just 29% to £21,330, making buying a home increasingly unaffordable for millions of workers". Not only have the prices risen way faster than wages, the amount of deposit required has also increased enormously. We learn that "In 2001 the deposit for a typical 90% mortgage was £12,177, about nine months' salary.... Now, because banks and building societies have tightened their lending criteria, a buyer can typically expect to put down a 25% deposit at £59,129, almost three years salary."

Where does the blame lie for these ridiculous rises? Hopefully you will already know that the origin lies in the fact that commercial banks have been given virtual monopoly on money creation. And when commercial banks get to decide on where to put newly created credit, their number one priority tends to be lending to people to buy houses - and in particular,  houses that already exist. Result - a house price bubble that has left many people in a position where finding somewhere affordable to live is a distant dream.

That brings me on to a second subject - the appaulingly low rates that banks offer to savers. According to another report in today's Guardian,

"With the consumer prices index now at 2.6%, a 20% basic rate taxpayer needs to find an account paying 3.25% to offset the impact of inflation. A 40% taxpayer needs an account paying at least 4.3%.
According to Moneyfacts, which monitors UK savings products, there are 1,092 savings accounts available on the market and only 227 of them will offset the inflation rate (and then only just). Of those, 128 are ISAs and 96 are fixed-term accounts. There are just two notice accounts that allow savers to stay ahead of inflation (by 0.05% and 0.1%) and not a single no-notice account."

Why are interest rates so low? Well one reason is that banks really have no incentive to try and encourage saving. Since the Bank of England will happily lend them money at 0.5%, why would they bother offering higher rates to attract savers? Furthermore, since they can use fractional reserve banking to create more money out of thin air, there is clearly going to be no need to go chasing after savers.

Of course, if banks were no longer allowed to create their own money, they would be forced to try and attract savers. Yet another reason why we need to get rid of the current corrupt and stupid system.

Finally, there is the general question of inflation.  An editorial in Tuesday's Guardian discussed the latest figures from the Office for National Statistics. In the last five years, food prices in the UK have shot up 28.7%. Electicity, gas and other fuels have shot up 45.5%, and transport costs by nearly 25%. I had a look at the dataset from the ONS, and compiled the following table that shows the increases in price index for the 124 different items in their "shopping basket". The numbers give the increase in prices using 2005 as a baseline of 100.

The table makes for sobering reading. Gas prices have more than doubled. So have postal services. Anything to do with energy and transport are through the roof. How can we explain those increases? Surely, if money is in short supply, there should be a tendency for prices to increase more slowly.

Well, not necessarilly. When energy and transport companies have been privatised and their shareholders are looking for very high returns, then those companies will be tempted to increase prices as much as they can. And for food prices, don't forget that the ability of commercial banks to create money that can be used to speculate on the prices of basic commodities means that here again, a lot of the problems can be traced back to the same original cause: the fact that the money supply is created by commercial banks for profit.

It is definitely time for a change

Money Creation : How about turning the tables?

It's funny how, when you realize that there is no reason why the monetary system has to be the way it is currently set up, you see that there are a whole host of alternatives that could be used. We are literally spoilt for choice. The problem is that there is absolutely no discussion about such issues. We behave as if the current system is there because it is written in stone - an unavoidable fact of nature.

Most people don't realise that virtually all the money in the economy has been created out of thin air by commercial banks, who lend "money" to individuals, companies and governments, and then charge interest. But, even if you are one of the relatively small number of people who have worked out that the system has been rigged,  then there is a pretty good chance that you will think that since it has nearly always worked that way, that it is impossible to change.

Not true.

If we had a truly free debate on the subject, it would be clear that there are countless alternatives that could be used.

I've been pushing for the idea that all money creation should be debt free. Central banks should create the money supply debt-free and governments should spend the newly created money into the economy for financing projects that are in the public interest. I was thinking that maybe this should be a general rule - that anyone vested with the authority to create the money supply should be forbidden from charging interest.

But then I thought that maybe this was not the only option. How about a situation where governments can still spend money debt-free directly into the economy, but where they can also lend money, with interest, in certain cases. Would this be a good idea? Well, suppose that those who could benefit from such loans were the commercial banks. That would mean that when the government (or the central bank) lends the commercial banks money, those banks could be required to pay the same sort of average interest rates that the governments are currently forced to pay to the commercial banks - namely, around 5%. Now, that would be a real change. It would now be the banking system that has to pay the interest charges for creating the additional money supply, rather than taxpayers.

Looked at this way, this could be a rather neat way of effectively getting tax revenue for the government. That is because interest payments that the banking sector would have to pay to get their hands on additional newly created money would effectively act as a tax.

Consider a situation where the government uses the central bank to generate €200 billion of new money a year. And suppose that while €100 billion of that is spent directly into the economy, with no interest to pay, the remaining €100 billion can be borrowed by commercial banks for financing other activities that are less directly public in nature. If the banks had to pay 5% interest on that money at the end of the year, that would be an extra €5 billion in revenue for the treasury every year.  And if, as is currently the case for governments, the banks didn't pay off the debt at the end of the year, they would continue paying €5 billion a year indefinitely. And, just as with government debt, you could end up with a situation where, after 20 years, the banks would have paid a total of €100 billion and still not paid off the original loan.(Actually, something tells me that the banks wouldn't be so stupid as governments currently are - they wouldn't let the debt rollover from year to year - only our governments are that stupid).

So, maybe allowing money creation with interest is OK - just as long as the interest charges go to the government and are used in the public interest, rather than going to provide unjustifiable profits for commercial banks.

As I say, the range of options is enormous. But what is lacking is any real debate. And I suspect that this absence of debate is because the banks have used a substantial part of their massive revenues to buy the vast majority of politicians, economists and journalists.  That is why it will largely be up to independent thinkers and ordinary citizens to bring the spotlight on these vital questions.

Money creation for interest : A truly insane system

A couple of days ago, I used my blog to show that allowing commercial banks to create money and charge interest is a sure recipe for disaster (see "The Money Creation Racket must end").  I gave the example of an island where a commercial bank is allowed to create €1,000,000 of money, which it lends to the population at 5% interest. Irrespective of how things are run, the inevitable consequence is that after 20 years or so, the bankers control the economy. Either they use the interest payments to pay themselves huge salaries, which they can then spend back into the economy, or their create more money every year to provide the population with enough new money to pay the interest on the previous loans.

I mentioned one further variant in which the bankers not only create enough new money every year to both cover the interest payments, and give people enough extra money to give them the impression that things are improving.

To make the story clear, I decided to fill in the details of this. The table shows what would happen if the bank loans out enough money to allow the interest for the previous year, but in addition provide a roughly 2% increase in the free money - what I call "People's Money".

You can see that the population does indeed get an increase in the amount of available cash - increasing from €950,000 at the end of year one, to over €1,350,000 after 20 years. This would allow them to get a 2% increase in salary every year. Great! But, at the same time, the total money supply is going through the roof - increasing from €1,000,000 in year one to €3,335,961 after 20 years. The really critical feature is that nearly €2 million of that money has been paid to the bank in interest charges - meaning that the bank now has nearly 60% of the entire economy.

The consequences of this will depend on what the bank does with all the money it rakes in. If it spends the money back into the system, then the automatic consequence will be inflation. Goods that could be bought for €10 in year one, will probably cost nearly 3 times as much after 20 years. Alternatively, it could just hoard the money or transfer it to some other island.

But perhaps even more importantly, having all that money gives the bank the power to pay anyone who might threaten to derail the gravy train by exposing the scam. That allows them to keep the system going for their benefit. You can imagine that it would be particularly important to pay the politicians, economists and journalists enough to keep the scheme out of the spotlight.

I would just love to hear anyone trying to defend the current money creation system - a system in which the money supply is created by commercial banks with interest attached. I am certain that anyone who tries to convince us that it makes sense to do things that way is either (a) stupid, or (b) being paid to keep the gravy train going.

It is definitely time to put an end to this fiasco.

Helicopter Money : Not the right answer

This morning's Guardian has an article saying that nearly half of the economists who originally backed Cameron and Osborne's austerity program are now saying that the government should be borrowing money to invest in infrastructure.  You can see the original report in an article in the New Statesman.

Well, I suppose you could call that progress. There appear to be some economists who have realized that they were previously talking rubbish.

But apparently none of them seems to have realized that the idea that governments should be borrowing money from commerial banks makes no sense. The Bank of England can create money, as it did when it happily generated £375 billion of quantitative easing that it pumped into the financial sector - with no useful effect.

Surely, there must be better things to do with central bank money?

One option that has been proposed by a number of people, including Simon Jenkins, writing in the Guardian, is the idea of "helicopter money", an idea that was apparently originally mooted by Milton Friedman. The government simply prints lots of new bank notes, and drops them out of helicopters. People scramble for the notes and then use the money to spend into the economy.

It is admittedly a better way of injecting new money into the economy than the one that we currently have. Right now, commercial banks create new money as debt. So any increase in money is automatically associated with getting yet money people (companies or governments) even more in debt. But you cannot borrow yourself out of debt. Helicopter money does have the advantage that it gets money into the economy without the need to increase debt further.

When will politicians and ecnomists and journalists realize that there is absolutely no problem with the government spending newly created money into the economy. The power to create money and decide where it goes is far too valuable to just chuck it out of a helicopter. Here are some examples of what an intelligent government could do.

1. New money could be used to build low-cost rented public sector housing - allowing ordinary citizens to find somewhere decent to live. It would provide a much needed boost to the construction industry. But in addition, if the houses were built and owned by local councils, they would provide a much needed source of rental income - a source that all but disappeared following Thatcher's selling off of council houses in the 80s. 
2. New money could be used to build better public transport systems. This would have a massive long-term benefit - allowing people to get to work far cheaper than now. In the UK, rail fares have been going up far faster than inflation for years - with the latest fare increases of 6.2% due next january meaning that many commuters will be paying over £5000 a year for a season ticket. We are told that this is to cover the need for investment. Well, why not use newly created central bank money to build the new infrastructure. The savings on transport costs and delays would mean that all British industry would be better off.
3. Building hospitals using private funding has proved disastrous for everyone except the people who will be raking in the fees for several decades. Direct government investment, with no debt attached is a perfectly sensible way on financing projects that a clearly in the interests of all citizens.

So, no. Helicopter money is not a solution. Debt-free public financing of projects that are directly in the public interest is the most intelligent way to get money into the economy.

The Money Creation Racket must end

Inspired by my last post, in which I tried to explain why the current system is rigged to allow the financial sector to take over the economy, I thought it would be amusing to provide a detailed numerical illustration of why the current system must be changed.

Imagine an island with a commercial bank that has been given the right to create the money supply and charge interest on the loans. At the beginning of year 1, it creates €1 million and loans it to the population who then use the money to go about their everyday business.  Suppose that the bank is  allowed to charge 5% interest. At the end of year one everyone has to cough up, and the bank gets €50,000 in interest charges. As you can see from the table below, a system designed like that would be a total disaster because, after 20 years, all the money has gone.

One option for the bank would be to recycle the interest they get paid on the original loans. For instance, this could be done if the people running the bank paid themselves enormous salaries. That way, the system could be maintained, but obviously there would be some extremely well paid people, and a lot of people who would effectively be their slaves - they would have to work for the bankers to get enough money to live. They could work as cleaners, cooks or gardeners for the bankers for example. It's still not very satisfactory - people might realize that they were being ripped off and insist that the system is changed.

Another option for the bank is not to require that the interest be paid. Just add it to the existing debt. Thus, at the end of year one, the population of the island now owe the banks €1,050,000. And that means that there will be even more interest to pay the following year. Leave that system running for 20 years, and the debt will have increased to over €2.5 million and the banks will effectively own over 65% of the economy.

But there even more subtle ways of rigging the system, that are maybe even more like reality. In one such alternative scheme, which requires being pretty crafty, the bankers don't just create the €1 million at the start of year one. Instead, they create enough new credit every year to pay the interest that the people had to pay the previous year. If they do this carefully, they can make sure that the total amount of "people's money" in circulation is keep constant. People will actually be paying off all the interest they owe - it won't be rolled over. However, it is just as effective at allowing the bank to take control of the system.

In the next table, you can see that, with this scheme, at the end of year one, the "people" have €950,000 (they've just paid the bank €50,000). But if the bank is careful and creates just enough new money every year, it is possible to keep that number completely stable. People will have the illusion of still having money, and paying off their debts to the bank every year. 

To get this to work I had to use a rule where the banks create an amount that is precisely 5.26316% more than the amount of interest paid the previous year. Don't ask me why it has to be that number. There is presumably a way of calculating this value, but my maths skills aren't up to it. Nevertheless, as you can see, by using this magic value, the amount of money in the economy is adjusted so that the amount that hasn't been paid in interest to the banks stays fixed. The "people" have the impression that they still have the same amount of money as they had at the end of year one.

In this case, even after 20 years, there is still the same amount of free money. But you can see that the total money supply has gone up from €1,000,000 in year one, to €2,650,034.  The obvious and inevitable consequence of that is inflation. Even if the people are keeping their salaries constant, they will be able to buy less and less every year.

The other remarkable feature is the amount of money that has been siphoned out of the economy in the form of interest charges- a whopping €1,700,034. Effectively, the bank will have accumulated a 64.2% share of all the money in the system.

There's yet another option for the bankers. Instead of just keeping the amount of "people's money" constant, as in the example I just gave, the bank can pump even more credit into the system. Give people even bigger loans to buy houses, flat screen TVs, holidays. That way they get the impression that they are rich.  You can even make it seem as if the economy is booming. But, in fact, the so-called boom is illusory. It is simply the result of people getting more and more into debt.  In the end, though, the most significant result is that after 20 years, the percentage of the economy that is in the hands of the bankers and their friends will be even higher than 64.2%.

What could the bank do with all the that money that they get from those interest payments? Well there are lots of things that could be done. For example,

1. It could use part of the money to pay the people in the bank huge salaries and bonuses. 
2. It could just move the money to somewhere else (like the Cayman Islands, or to buy other currencies if such things exist). 
3. It could buy up the media to make sure that nobody gets to talk about what is going on. 
4. It could pay all the economists not to say anything, even if they do manage to work out what has been going on. 
5. It could pay the politicians who decide how the system should work and make sure that none of them even dares to suggest that it might just be more sensible for central banks to generate the money supply debt free to governments. 

I suspect that this is a pretty clear description of the current situation.

One last point. I stopped the table after 20 years of running the scheme. At that point, the financial system has increased the money supply by 265%. Since there is so much more money around, there will have been massive inflation, meaning that ordinary citizens will effectively be much poorer. It now has control of 64.2% of the economy.

But it won't stop after 20 years. Give the system 100 years, and the money supply will have increased to 471 million. 99.8% of that will be in the hands of the bankers and those in the financial system. And the ordinary citizens will be left with just a few crumbs, unless, of course, they are prepared to play along with the bankers and reap the rewards you get for keeping the gravy train on the rails.

 It is clearly time for a change.

1) Money creation by commercial banks should be BANNED. It is demonstrably a complete racket. And I defy anyone to defend it.
2) All money creation should be done interest free by central banks and used directly by governments for financing activities that are in the public interest.

Why the Eurozone should take the plunge

In my "Eureka" post yesterday, I argued that the first currency block to take the plunge, ban creation of the currency by commercial banks, and funnel all money creation by the central bank though the elected governments on a pro rata basis, using just the size of the population as the criterion, would have a major advantage over other systems.

The more I think about it, the better it seems.

Here's why. The fundamental difference is that when the money supply is created by commercial banks, they charge interest. When they lend to governments, they typically charge 5-6%, although if they don't like your politics, they can impose the 25.82% that Greece is currently having to pay. And of course, if the government does what the markets tell them and block financial reform, they get super low rates like the 1.24% that Germany currently gets charged. Note that even that super discount rate is substantially more than the ECB charges the banks. That's just government debt. What about the interest that gets charged for creating money and lending to consumers and companies. I have been unable to find any overall figures, but just note that credit card companies and loan companies will happily charge you 15-20% (I won't even mention the 14,368% charged by the payday loan sharks in the UK, because that particular English Disease seems not to be present in the Eurozone).

Since essentially all the money is produced as interest bearing debt, it follows that you need to have inflation. Central banks such as the ECB and the Bank of England aim to have inflation at 2%. Why? Because you need to have price inflation to be able to pay the interest charges. To see why, imagine an island with a bank that lends out 1 million currency units to people to spend, but requires them to pay back the money with compound interest at 2%. After 35 years, the people on the island would have paid 999,890 of the currency units to the bank in interest charges.

There are various scenarios possible. One is that the bank keeps all the interest for itself. It could, for example, move all those interest charges to another island (let's call it the Caymans). If they did, there would be just 110 units of money in circulation (999,890 is 2% of a million, compounded over 35 years).  Maybe people would object a bit.

A second option is that the bank could be nice and put the money gained in interest charges back into circulation. One way to do this would be by paying its directors and traders massive bonuses. In that case, you would have an island where 99% of the population was living and poverty, and 1% (those who were in the banking system) living the life of kings and driving around in Ferrari's paid for with this years bonus. Sounds rather familiar to me.

Actually, there's a third way, which goes some way to masking the level of the scam. And that is to pump more money (i.e. debt) into the system every year. To provide enough money to pay the 2% interest charges, you would need to pump at least 2% extra every year to keep people reasonably happy. By getting them to take on more debt, they would be able to buy those flat screen TVs and have the impression that they were reasonably well off.  After 35 years, the bankers would now have half the money in the system, and the people would have the other half. That's pretty much the situation we have now.
The one obvious drawback (apart from the fact that it is outrageously unfair) is that there is now twice as much money around (the original 1 million, plus the 1 million that was gotten by the banks in interest charges). And with twice as much money around, there has to be inflation at about 2%. Everything will  go up in price every year by about 2%.

In other words, the 2% inflation target is the price we all have to pay to allow a system to operate in which the money supply is provided by commercial banks who charge interest.

OK. End of explanation.

Now what is the relevance for the idea of the Eurozone switching from money creation as interest-bearing debt by commercial banks, to debt-free public money creation by central banks? Well, the fact is that in the new Eurozone, there is no need to pay the interest charges to the banks. And because there are no charges, you don't need to pump extra money into the system just to keep the system running. And that means that you could have a currency zone where there was no inbuilt need for inflation.  If 10,000 euros is enough to buy a Eurozone-constructed car in 2012, there is every reason to believe that you could get something equivalent in 2022 for the same amount of money.

So, let's suppose that you have a million dollars and you want to put the money in a safe place for your retirement. You have a choice of leaving the money as dollars, or alternatively, you could trade your dollars for euros. What should you do?

Well, unless I'm horribly mistaken, you would be well advised to choose to convert to euros. Why? Because in the dollar zone you will be living in a world where commercial banks are pumping hundreds of billions of credit into the economy every year and requiring that people find the money to pay the interest. And that means one thing. Inflation. Your $1 million might buy you a lot today, but in a few years time, you are almost guaranteed to have lost out unless you are clever and find a way to make more money.

In contrast, if you change to Euros, you can be much more confident that your savings will still be worth something when you get to retire. As a consequence, I would predict that as soon as the Eurozone countries make the shift to debt free public money creation, everyone will be tempted to convert their money into Euros. In turn, this means that there will be a lot of demand for Euros, and the ECB would be able to open the taps for creating more Euros. That money would be given directly to the 17 eurozone governments who would be able to spend the money directly into their local economies - building efficient transport systems, renewable energy, schools, hospitals, universities, research, social services etc etc... whatever their citizens want.

Is this too good to be true? Well, I'm having a bit of difficulty myself in grasping just how revolutionary this would be. Certainly, I am not aware of any economists who have seriously modeled this key issue of how a mixed world where the money creation mechanisms for dollars, pounds and euros  is so radically different. If there are any economists reading this who would be prepared to help analyse the situation, please do get in contact.

In the meantime, I am feeling absurdly optimistic.

EUREKA! A way out of the crisis?

At 5am this morning, I awoke with an idea that may just be really important. Maybe it was the excitement of the Olympics, of seeing over 10,000 sportsmen and women from 204 different countries, coming together to celebrate what is good in humanity. Maybe I was inspired by that. But, in any case, I really think that I may have a proposition that could provide some light at the end of the tunnel.

So, what's the idea?

First, let's recap on the world in which we currently live. Commercial banks have been given the right to create virtually unlimited amounts of money (credit) in the form of interest bearing debt. Paying the interest on those loans costs taxpayers something like $1 trillion every year.  In the case of multinational banking corporations like HSBC, Credit Suisse, Goldman Sachs etc, they can create money in any currency they like. And, thanks to the existence of a system where they can convert from one currency to another, at no cost, this gives them enormous power. If the banks decide to, they can flood the markets with dollars, pounds, euros, swiss francs, yen or whatever. And they can move the money around from one place to another, making free use of taxhavens to hide their activities. Every three years, the BIS provides some numbers on the level of these foreign exchange swapping activities - at least $1000 trillion a year.

Most of the people I know who have been proposing that this system needs to be changed - people like Ellen Brown, Bill Stills, Stephen Zarnlenga, James Robertson, Joseph Huber and Ben Dyson - have been taking a rather local view. They have been arguing that the US Treasury should take over the money creation process in the USA, or that the Bank of England should be in charge of money creation in the UK. Strangely, I've not yet come across many people arguing for the same sort of action in the case of the Eurozone and the ECB (do let me know if there are any groups out there).

But a second point that strikes me is that I haven't heard anyone talking about what would happen if a single currency zone were to impose a shift from money creation by commercial banks to debt-free creation of the money supply by central banks. However, my Eureka moment at 5am this morning was the realisation that such a move could be very, very intereresting.

The bankers are not going to give up their right to create money easily. Nor will they accept that there should be restrictions on foreign exchange. OK. So leave them the right to create money in other currencies.

Suppose that tomorrow, the Eurozone governments got together and passed a law making it illegal for banks to create new Euros. The banks would still be able to create credit in other currencies such as dollars and pounds. But any bank that extended credit in Euros without having the funds to cover the loan would be charged with counterfeiting. If they wanted euros, they could always create some dollars, and then buy the euros. But the supply of euros could not be increased by the banks.

Now, obviously, people need euros. In particular, if you are living in a eurozone country, you are obliged to pay your taxes in euros. Since the banks are no longer able to create euros at will, there will probably be an increased demand for euros. Indeed, since investors know that the supply of euros cannot be increased at the whim of some powerful bankers, they would probably feel that having euros is safer than having other currencies.

When people start trading other currencies (which can be generated by banks) for euros, this could lead to the euro increasing in value. So, what do we do? Well, we get the European Central Bank to do its job by creating more euros so that the relative value of the euro (and hence prices) remains stable. But what will the ECB do with the money? I would propose that it simply gives the funds to the governments of the 17 eurozone countries to spend into their economies. Not in the form of an interest bearing loan, but simply as a donation. The money could be specifically used for projects that are in the long-term interests of citizens. It could be used for infrastructure spending, including the development of transport and energy systems. It could be used for educational purposes, by building new schools and universities, providing grants to students. It could be used for financing research. You name it. If it is in the interest of citizens, then it can be used.

How many euros would have to be created by the ECB and spent into the economy by the 17 eurozone governments to keep the value of the euro stable? Well, I'm only guessing, but I suspect that the answer is probably very large. At least as big as the trillion euros or more that were being generated by the commercial banks every year between 2006 and 2008.

Imagine that. Huge amounts of euros could be generated centrally and under full public scrutiny. And yet, at the same time, the commerical banks are still able to create their own credit in other currencies. They can still create dollars, pounds and swiss francs. And they can buy euros with their own fictive money. But whereas there are no controls on the volume of dollars and pounds that can be produced (which means that they are more risky), such variations in value for euros can be controlled by the central bank.

I suspect that once a powerful and important currency like the Euro has made the shift, then the other currencies would be forced to act in the same way. 

One last thought. You might think that a major problem would be to decide how much of the newly created ECB money supply should go to each of the 17 eurozone countries. Indeed, it could be tough sorting that one out. So, how about simply dividing up the money pro rata with the number of inhabitants in each country. That would immediately provide a relative boost to those countries which have been suffering the most as the result of the market-imposed austerity - countries like Greece, Spain and Portugal.

That's all for the moment. I'll be thinking hard about the implications of the idea, and will no doubt come back with further thoughts in the days to come.  And I would be very happy to hear your comments.