The Civic : a proposition for an alternative currency

In my last post, I mentioned that the book "Money and Sustainability :  The missing link" contains a whole pile of very intersting propositions. One of my favourites is the idea of the Civic, a sort of local tax that can be used to encourage socially useful actions within the community.

Here's how the authors describe the idea.

"The city starts by requiring its residents to make an annual 'Civics' contribution. A Civic is an electronic unit issued by the city that is earned by residents through activities that contribute to the city's publicly agree upon aim. The unit of account could be one hour of time, valued at the same rate for everyone".

"Every household would have this obligation, with appropriate exemptions for people with handicaps, people caring for young children or elderly parents or other reasons".

"The governmental entity would accept only Civics as a form of payment for this obligation and would not set a fixed exchange rate between the Civic and the national currency. Residents could exchange Civics for national currency on free-market principles. A local online market (like eBay) could be set up to facilitate such exchances and assure transparency and trust". 

I can see a number of serious advantages to such a system.

First, it is a way of getting things done in the the community without the need to borrow money and pay interest. The city would simply be taking advantage of its right to raise taxes to encourage particular types of action. But unlike normal taxes, even people with no financial resources would be able to contribute.

Second, the activities covered by the scheme would be entirely voluntary. People who did not want to be involved could stay clear. But when then time came to pay the Civic tax, they would be obliged to  buy excess Civics from people who had more than they need.

Third, this means that those who could not find normal jobs could earn extra Civics and then trade them in for "real" money. Interestingly, depending on how civic-minded the population is, the value of those Civics would vary. If not enough people were contributing, the cost of buying the civics could get quite high. In contrast, when the overwhelming majority were participating, the free-market value of excess Civics would drop. And indeed, if the system ended up working very well, all the necessary work would be done, everyone would be involved, and it would cost no money at all.  Wonderful! No money. No debt.

Of course, I suppose that there may be some who would object to being "forced" to do work for the community. Well, I would say to those people that they should not expect to be able to use the municipal facilities such as libraries, parks, theatres, public transport and so forth. But hopefully, such antisocial attitudes would be rare. 

So, I really do think that the Civics idea is neat. And it can easily be combined with any of the other approaches that I have been endorsing - such as the N-Euro or the creation of conventional money by central banks for projects that are in the public interest.

Bernard Lietaer & others : Money and Sustainability - The missing link

I've just finished reading "Money and Sustainability : The Missing Link", written by Bernard Lietaer, Christian Arnsperger, Sally Goerner and Stefan Brunnbuber. It's really excellent, and absolutely stuffed full of interesting ideas.

The authors push for the development of a range of alternative monetary systems that would allow the economy to develop in a sustainable and resiliant way. They argue that the current system, based on the creation of the money supply as interest-bearing debt by commercial banks, is unworkable because it requires exponential growth to pay off the accumulating compound interest. They mention the 100% reserve plan ("The Chicago Plan") proposed by an increasing number of groups (including Positive Money), but argue that a better way to get the system changed would be introduce a range of alternative systems, all of which are not debt-based, and which would allow the system to evolve naturally.

While I am personally a strong supporter of moves to completely abolish the creation of money as debt by private banks, I can see that the ability of the banking lobby to thwart any such moves should not be underestimated. And since, as the authors point out, the need for reform is so urgent, we simply cannot sit around waiting for the resistance of the banking sector to wear down. In particular, they argue that the massive infrastructure investments needed to deal with climate change simply cannot wait - financial crisis or no financial crisis.

They actually make 9 specific suggestions that can be introduced in parallel - 5 that can be done at the local level, while the four others would require the intervention of national governments. I'll no doubt have a look at some of them in later posts, because there are some really intersting ideas there.

But, just for now, let me mention a couple of other points that they make.

First, like me, they talk about the insane levels of foreign exchange activity revealed by the BIS Triennial report - $4 trillion a day. However, unlike me, they were able to come up with a number for the percentage of those transactions that are actually associated with the real economy. The answer? 2%. The other 98% is pure speculation.  They note that "one day's currency speculation represents more that the annual economic output of Germany or China changing hands". Here's the graph, which shows the daily volume of foreign exchange transactions reported by the Bank for International Settlements (in billions of dollars) for the month of april once every three years compared with foreign exchange transactions based on "real" economic exchanges. The authors note that the temporary dip in 2004 was due to replacing 12 European currencies by the euro.

Second, they also take up the very interesting case of France, which until 1973 the Government was able to get money as interest-free loans from the Banque de France. And they make use of the analysis made by Derudder & Holbecq (2008), showing that had that system continued, French national debt would now be just 8.6% of GDP rather than 78%. The graph (also used by Ellen Brown in her latest piece) is very compelling.

Interestingly, the curves in the graph only start in 1979, because before that, there are apparently no records that distinguish between the reimbursement of debt and the interest payments on the debt. That, in itself, is a pretty amazing fact that reveals just how much we have been hoodwinked. But the general point is that the real cause of the massive amounts of government debt are laid bare. It is not overspending by governments that is the real problem - it is the highly toxic effects of compound interest demanded by the commercial banks for creating the money supply.

Ellen Brown : It's the Interest, Stupid!

Ellen Brown, the author of "The Web of Debt" (which is probably N° 1 on my list of must read books!), has just posted another very good piece called "It's the Interest, Stupid! Why Bankers Rule the World".

She takes some figures from the 2012 edition of Margrit Kennedy's book "Occupy Money", which came out last week, and which show that "a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP."

It's a stunning revelation. People naturally think that if they pay their credit card bills on time, and keep out of debt, that they are avoiding interest charges. But it's not true. The reason is that virtually everything you buy includes hidden costs for interest charges. That's because the farmer who produces the milk is nearly always in debt to the bank, and paying interest. And so is the transport company that takes the milk to the bottling plant. And so is the company doing the bottling. And the shop that sells the milk. At every step on the way, the banking system is taking a major slice of the pie. And that is because of the insane way in which the banking system has been given an effective monopoly on creating the money in the system.

Margrit Kennedy's numbers actually come from the work by Helmut Creutz, author of "The Money Syndrome" and she cites interest charges that range from 12% for garbage collection, to 38% for driking water and 77% for rent in public housing in Germany.

But it is clear that the situation is the same everywhere. And it is particularly obvious in the case of government debt - where the interest charges are costing taxpayers vast sums every year. For example, the interest payments on US Government debt since 1988 total $8.58 trillion - more than half the entire national debt. And in Europe, the interest payments on government debt for the 27 European Union countries since 1995 total €5.6 trillion - again more than half the total government debt. 

Just imagine what would happen if the money supply was created debt free, rather than being created by the commercial banks. Given the figures, it is clear that once the interest charges have been  worked out of the system, we can expect a 35-40% drop in the cost of everything. The economy would be liberated. People would get the just rewards for their work. And we would not have to accept the obscene situation where 1% of the population have been creaming off all the rewards.

It is now clear why this situation exists. It is because the entire financial system has been rigged. It is high time that citizens took the initiative to fix the system for good.

A message to President Obama

I must admit to being relieved that Obama got through. But given that both the main candidates have been massively financed by Wall Street and the Banks, one wonders how he can take on the financial system. Add to that the fact that the House of Representatives is controlled by Republicans who have vowed to block any increases in taxation, and you might think that there is no way forward.

But wait. Has anyone in the US talked seriously about using a financial transaction tax of the sort being implemented in Europe? With the BIS figures showing that financial transactions in 2011 were running at close on $3 quadrillion, it follows that a 0.1% FTT could generate something like $3 trillion a year. Enough to pay off the entire US national debt in five or six years. Or alternatively, to abolish all the other taxes.

Think about it.....

Eurex : A major player unknown to the ECB?

I thought I would follow up my posting yesterday on Eurex AG, the group that managed to generate roughly €340 trillion in trading that was visible in the BIS figures for 2011, but for some reason doesn't seem to get a mention in the ECB figures.

You can see a direct comparison of the two reports in the table below. While the BIS report for Germany lists €107.3 trillion in executed derivatives trades for 2011 and €238.2 trillion in contracts and transactions cleared, the ECB only lists a modet €3.25 trillion in securities transactions cleared. How come the ECB doesn't know about this?

It turns out that at least part of the Eurex's trading is extremely easy to find. The people at Eurex are very open about the level of their derivatives trading, and you can download the full details of all trading at the end of every day on their website. For example, the you can find the data for the 2nd of November as an excel file here, and at the bottom of the file it says that the total Euro value of trades so far in 2012 is €74,881,693,608,152 (nearly €75 trillion). Well, you can't get much more specific than that.

You can also download monthly summary sheets which provide hundreds of pages of information in the forms of graphs and tables. For example, the latest complete set for September 2012 provides total transaction levels not just month by month, but also for every year since 2008.

It's reassuring to see that the number for "Capital Volume in Mio EUR" for 2011 (107,434,671) nearly matches the €107. 3 trillion value given in the BIS dataset. Unfortunately, I've only found one set of numbers on the Eurex website - those corresponding to derivatives. I've not yet found specific details of the €235.2 trillion in contracts and transactions - but maybe I'm not looking in the right place.

But the important thing is that it is clear that companies like Eurex AG keep extremely clear records on the levels of transactions that they handle. And there really is no excuse whatsover for the ECB not providing the full details of this sort of activity too.

Given that this sort of information is really easy to find, it would be trivial to impose a modest FTT on this sort of activity. It would be money that would go directly help reduce the drain on the Eurozone's taxpayers.

Frankly, I see no reason whatsoever for not starting tomorrow....

ECB and BIS transaction figures for the eurozone : Over €2 quadrillion in 2011

I've recently been using the numbers provided by the European Central Bank and the Bank for International Settlements to try and get some hard numbers on the levels of transactions within the Eurozone in 2011.

Last week, I came up with a figure of just over €1.6 quadrillion based on the ECB's numbers. That's already pretty impressive. But I was intrigued when I noted that the BIS's figures for just five of the 17 eurozone countries (Germany, France, Belgium, Italy and the Netherlands) already topped €1.7 quadrillion.

So, what accounts for the differences?

Well, one reassuring point is that the numbers provided by the ECB for "Payment and terminal transactions using non-MFIs"(which includes "Credit Transfers", "Direct Debits", "Card payments", "E-money payments", "Cheques" and "Other payment instruments") exactly match the numbers provided by the BIS in their Table 8. And the 5 countries between them account for nearly 82% of the transactions in the entire eurozone.

Both the ECB and BIS provide numbers for TARGET payments, and for France, Italy and the Netherlands, the numbers match well. However, for both Germany and Belgium the ECB figures differ - the ECB figures for Belgium are 23% higher, whereas for Germany it is the BIS that comes up with a higher number (by about 20%). Oh well. But again, the five countries make up about 82% of the eurozone total.

The other sets of figures are harder to match up, and the decisions about where to put them seems to vary from country to country.  For example, for France, Italy, Germany and Belgium, the BIS figure in Table 26 and the ECB's numbers for "Securities Settlements" match up perfectly. But only Belgium's numbers in Table 18 of the BIS dataset match the ECB figures for "Securities Exchanges".

When everything is added up, France, Belgium and the Netherlands look fairly similar in the two databases. However,  as you can see in the table, the total figures for Germany are over twice as large in the BIS dataset. This huge difference is due to two major components that don't seem to have made it into the ECB data. First there is roughly €238 trillion handled by Eurex Clearing AG (see Table 21 of the BIS data). Then there is an additional sum of over €107 trillion of derivatives trades, also handled by Eurex which is mentioned in Table 18 of the BIS dataset. Perhaps someone could mention to the ECB that there are an additional €340 trillion in trading happening in front of their noses that they might like to include in their figures?

There is also a big hole in the ECB figures in the case of  Italy, where the BIS figures are 55% higher than those provided by the ECB. In this case the difference seems to be mainly due to numbers that appear in the BIS data set in Table 21 under LCH.Clearnet SA (which did €27.8 trillion in securities transactions) and something called CCG which did nearly €23 trillion of securities transactions and exchange-traded derivatives.

Of course, none of these differences can really be regarded as surprising. After all, both the ECB and BIS make it very clear that they are only reporting numbers for "selected" partners. In other words, there is no guarantee that there are not vast amounts of trading going on that somehow never get mentioned - like the hundreds of trillions of pounds worth of trading handled by LCH.Clearnet Ltd that never gets reported.

It looks like BIS does a better job than the ECB at getting the fullest information. And who knows, maybe the total for Spanish transactions provided by the ECB (€215 trillion) might also be a lot higher if more was included.  And the other eurozone country that would be very interesting to check on more closely is Luxembourg. According to the ECB, the country handled just over €90 trillion in 2011, but who knows, maybe the real number  could be a lot larger.

Nevertheless, it is clear that if we add the €1.7 quadrillion reported by BIS for just five countries, and the €355 trillion that the ECB reports for the other 12 eurozone countries, we already have a very healthy looking total of €2.07 quadrillion in transactions.

Now, let's see. 0.1% of €2.07 quadrillion is over €2 trillion. Why are Europe's politicians not salivating at the prospect of getting their hands on some of that lot? All it needs is a modest Financial Transaction Tax and life would be very very different....

The €1.6 quadrillion of Eurozone transactions - by country

Last week I compiled the numbers for financial transactions in the Eurozone in 2011 based on the latest figures from the ECB. The total was an impressive €1.6 quadrillion - up 8.4% on 2010 - proof if proof was needed that there is no lack of money in the Eurozone. And that was before Mario Draghi printed another €1 trillion for banks in the Eurozone to play with.

Today, I thought I would have a look at where the transactions were taking place. The table below gives the breakdown country by country.

As you can see, Belgium comes top with a very impressive €380 trillion in transactions, thanks largely to the €333 trillion handled by Euroclear Bank which is based in Belgium. Next comes Germany, with over €364 trillion - again due in large part to a single component - the fact that over a third of all TARGET transactions are handled in Germany.

The big news in the last week is that there are now at least ten EU countries that are in favour of imposing a Financial Transaction Tax. The ten countries are Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain. And Estonia should be joining soon, as soon as the project has been ratified by the Estonian parliament. It's fantastic news. But there is one thing that I cannot understand. According to the best estimates, the tax will only raise a few tens of billions at most - despite involving most of the big players in the Eurozone. Essentially, only the Netherlands and Luxembourg will be seriously missed.

So how come, with €1.6 quadrillion in transactions, the FTT is only going to raise about €10 billion - equivalent to a tax of just 0.001%? It appears that the problem is that the tax is extremely selective - applied to just a small subset of transactions.

Why on earth are the Eurozone governments not planning to apply the tax universally?

The other big question concerns who would benefit from the introduction of such a tax. Clearly, if all the €1.6 quadrillion was subject to the tax, it would be absurd that Belgium should reap a huge benefit, simply because the Euroclear offices happen to be based in Belgium. So how should any revenue from such a tax be distributed?

I think there is a simple solution. And that is that all the revenue generated by the Eurozone FTT should be handed over to the ECB who would then distribute the money to each country as a function of population. Under such a scheme, a 0.1% universal FTT could generate something like €1 trillion in revenue. Of this,  roughly €250 billion would go to Germany (which has 24.6% of the population, €196 billion to France, €187 billion to Italy, €139 billion to Spain, €34 billion to Greece, €33 billion to Belgium, €32 to Portugal, €25 billion to Austria, €16 billion to Slovakia, €6 billion to Slovenia and €4 billion to Estonia. The Netherlands and Luxembourg would get nothing, unless, of course they decide to impose the FTT too.

Sounds like a pretty good deal to me.

Total Eurozone Transactions in 2011 : €1.6 quadrillion

I've been going through more of the data provided by the ECB on its website. Yesterday, I came up with a number of €1,192 trillion using the data in provided by the ECB's Statistical Pocket Book. But it looks like those numbers don't include everything by any means.

If you go to the webpage called "Payments and securities trading, clearing and settlement", you will find several different sections. There is a section called "Payment instruments and large-value and retail payments systems" that I used to compile the numbers that I provided yesterday on Card payments, credit transfers, direct debits, e-money purchases and cheques.

There is a whole set of data on monthly statistics of payments instructions procesed by TARGET, which is short for "Trans-European Real-Time Gross Settlement Express Transfer System". The data is provided by month, but I have compiled the data so that you can see the transactions levels for 2010 and 2010 for each eurozone country.

As you can see, the total of very nearly €600 trillion is somewhat smaller than the global number provided in the Statistical Pocket Book of €651 trillion, but the difference is that I specifically limited the total to the 17 eurozone countries. It's possible that the Pocket Book figure included the other non-Eurozone countries that also use the TARGET system.

But there is more. There is a page with information about "Securities trading, clearing and settlement", that provides three different sets of data.

First there are "Securities Trading Statistics" that you can get as a pdf file, or, if you are courageous, you can download the raw data. I did that and compiled the following table.

As you can see, there was a big jump to €27.9 trillion in 2011, up 27.4% on the previous year. Particularly intriguing is a massive 40% in trading on the Spanish exchanges. I have no idea what that means, although I'm pretty certain that it wasn't good news for the Spanish.

Second, there are "Securities Settlements Statistics" that you can again get as either a pdf file, or as the raw data. Again, I've done the hard work and compiled a table.

This table shows some really impressive numbers, totally nearly €817 trillion, with close on €333 trillion accounted for by Euroclear Bank in Belgium, with Euroclear France adding another €146 trillion. The numbers are up nearly 12% on 2010. Not much sign that Eurozone austerity has been hitting this sector of the economy.

Finally, there is a set of date called "Securities Clearing Statistics". The pdf is here and the raw data here. Again, I've compiled a table so that you can see where the big numbers are.

Again, we see a large 11.6% increase on 2011, with a total of €18.25 trillion.  Much of that involves  the European Multilateral Clearing Facility in the Netherlands, which, when you add up all the transactions it processed for the different Eurozone countries totals €6.14 trillion. The other really big player is LCH.Clearnet S.A. based in France. When you add all the transactions it handles for different countries you get a total of €5.95 trillion.

I'd just like to take the opportunity to, again, complain about the fact that LCH.Clearnet S.A.s big brother in London (LCH.Clearnet Ltd) has yet again failed to provide any numbers. The ECB obviously has the same problems as the Bank for International Settements, who have also been unable to compile numbers because of LCH.Clearnet Ltd's inability to hand over any figures for 2010 and 2010. Maybe they have something to hide?

By putting together all the numbers for the transactions that are provided by the ECB, I am in a position to provide what I believe is a fairly complete picture in the form of a summary table.

As you can see, total for 2011 has now reached an impressive €1,609 trillion. Let's call that a round €1.6 quadrillion. The number is pretty close to the value of €1.7 quadrillion I got using the B.I.S. figures last week. That's slightly odd, because the BIS figures were only based on 5 of the 17 eurozone countries - but they are the ones with the biggest economies, namely Germany, Belgium, France, Italy and the Netherlands.

Nevertheless, I think it is clear that the level of transactions only in the Eurozone are already extremely impressive - even without taking into account what goes on in the City of London.

So, here's a question for François Hollande, Angela Merkel, and the other EU government leaders who are pushing for the introduction of a financial transaction tax. Why is it that you never seem to talk about more a few tens of billions of revenue? If you take the ECB's own numbers, it is clear that with over €1.6 quadrillion in transactions within the Eurozone, the potential revenue that could be generated with a 0.1% Financial Transaction is huge. Just imagine what you could do with over €1 trillion. Hey, it would even pay for the €1 trillion that Mario Draghi has printed for the Banks since december last year.

Eurozone transactions in 2011 : €1,192 trillion

Every month the European Central Bank publishes a "Statistics Pocket Book" full of interesting data about the Eurozone. The october edition, which came out on the 11th of October, includes figures for Payments and Transactions in 2011.

Table 10 (on paged 35-6) gives information about "Payment and Settlement Systems". These are broken down into "Transactions involing non-MFIs by type of payment instrument" (Credit transfers, Direct Debits, Card payments, E-money purchases, Cheques, and Other Payment Instruments) which are detailed in table 10.1 and "Payments processed by selected interbank funds transfer systems" (Table 10.2).

I've compiled the numbers together in the following table which shows that the total transactions in 2011 reached an impressive total of €1,192 trillion, up over 8% on 2010. The Eurozone is clearly booming, although you wouldn't know it when you look at all the austerity that is being imposed. 

If you want to know where these transactions are taking place, you can go to the ECB's website where the figures in table 10.1 are broken down by country. Here they are.

As you can see, a substantial proportion of the €143.7 trillion transactions using the various payment mechanisms were based in Germany (nearly €68 trillion), but France managed a respectable €28.4 trillion too.

It seems to me that there is really plenty of scope here for generating large amounts of revenue using a Eurozone based FTT. I really can't understand why the revenue levels that we hear about are so small. For me, 0.1% on €1,192 trillion is over a trillion euros. You could do a lot with that.

EUREKA Postscript : Implement a foreign exchange transaction tax globally

In my post at 5h30 this morning, I was concentrating on the idea of a simple Financial Transaction Tax on all foreign exchange trading involving Euros as a way for the European Central Bank to (a) limit the fluctuations in the value of the Euro and discourage speculation, and (b) gain some very useful (and potentially very large) amounts of tax revenue which could be distributed among the 17 Eurozone countries as a function of each country's population size.

Such a move is clearly justified by the fact that while Euros are involved in nearly 40% of all trades, the BIS data shows that only 11.5% of the trading actually occurs within the 17 Eurozone countries (see the table). It only seems reasonable that the Eurozone should have some control over this speculation.

While a unilateral imposition of such a transaction tax by the European Central Bank is totally justifiable, it is clear that it may be difficult to get other countries to agree. In particular, I can imagine that the UK government will do everything in its power to block such a move. With 36.7% of the transactions being handled in the UK, Cameron and Osborne will probably do what they are paid to do - namely, protect the interests of their chums in the City.

But maybe the solution would be to make the move at a global level. Suppose that all governments could get together and agree that currency speculation is in nobody's interest. This seems like an obvious conclusion. The fact that the exchange rates between dollars and euros and pounds and yen can change literally every minute is a clear handicap for trading. It means that noone can predict how much things will cost them even over a scale of a few weeks. This has to be nonsense.

So, imagine that all governments agreed to impose the tax on currency exchanges, and that the revenue generated would be paid directly to the central banks for each currency - the Federal Reserve in the USA, the Bank of England in the UK, the European Central Bank for the Eurozone and so forth. As you can see from the table on the right, this would mean that each currencies central bank would receive an amount that depended simply on the degree to which their currency was the victim of speculation. The US Treasury would be the biggest winner with 42.4% of the revenue, followed by the European Central Bank with 19.5%, the Japanese Central Bank with 9.5% and the Bank of England with 6.4%.  But all countries would get a share of the pie. And when several countries share the same currency (as in the case of the Euro), then revenue can simply be shared on the basis of population size.

How much could they raise this way? Well, obviously, it depends on the rate of the tax. My suggestion would be to fix the rate at the average rate charged by the banks and the credit card companies for making transactions in foreign currencies. In this way, you could kill two birds with one stone because the banks would be under very strong pressure to reduce the extortionate and totally unjustifiable 2-3% charges they currently levy (see this site for a list of International Transaction Charges for UK based Cards - of the nearly 300 cards on offer, the majority charge either 2.95% or 2.99% and a third of them charge 2.75%.  There are two that charge 2.50%, two that charge 2%, and amazingly, there are actually 12 that don't charge anything. You see, it can be done!).

Obviously, if all cards decided to drop their International Financial Transaction Tax charges, then the central banks might have to impose their own number for the financial transaction tax. I would think that 0.1% would be fine, and could generate up to $1 trillion a year if the traders keep speculating like they do currently. 

The other neat aspect of this method is that it directly punishes the markets when they attempt to attack a currency. The more they speculate, the more they have to pay. It seems extremely fair and reasonable to me.

Is there anyone out there listening?

EUREKA : Solving the Eurozone Crisis using an FTT on Euro foreign exchanges

It's 5.30 am.  But I've got to get this idea onto my blog. Yes, yet another idea for fixing the Eurozone crisis. Back in july, I listed the 10 different propositions I had already made. Since then, I have added a couple of new ideas. First, the idea that the ECB could simply replace money creation by commercial banks within the Eurozone, and generate an equivalent amount of money that could be distributed among the 17 different Eurozone governments simply according to their population sizes (see the youtube video "How the Eurozone countries could fix the global economic crisis").   Then there was my suggestion of  creating an alternative national currency in each Eurozone currency (the N-Euro) which would be a debt-free currency that governments could use for paying public sector wages, pensions and benefits, and which in turn could be used for paying taxes (see the youtube video "The N-Euro Solution").

But if that's not already enough to provide some input for the public debate that is so desperately needed, here's another idea.

On the 9th of October, 11 of the 17 Eurozone countries agreed to implement a Financial Transaction Tax. That was certainly great news, but I have been unable to find much detail about precisely what will be taxed. I get the impression that the objective is mainly to tax share trading.

But how about the European Central Bank imposing a Financial Transaction Tax on all Foreign Exchange trading involving Euros?

The level of foreign exchange trading is quite mind-blowing. It's difficult to get a complete picture, but every three years, the Bank for International Settlements spends a month collecting data. It's an amazing source of information, that I have discussed in detail in previous posts, such as one that I did in january 2011. The last report was based on trading during April 2010, and revealed that on average, the total level of foreign exchange transactions was virtually $4 trillion PER DAY. The number had doubled since 2004, as shown in the following table (from page 7 of the BIS report).

With around 250 trading days per year, we can safely assume that this add up to about $1 quadrillion in a year.  39.1% of that trading involved Euros (see graph from page 13), meaning that we can assume trading in Euros would be about $400 trillion in a year, or a little over €300 trillion if we assume an exchange rate of about $1.30 per euro.

So, it follows that if those transactions were subject to a financial transaction tax, the potential revenues could be hundreds of billions of euros a year. That money could be distributed directly to the 17 eurozone governments simply on the basis of their population size.

Who could object? Well, certainly not the banks. After all, as I have repeatedly complained, the 2-3% surcharge that we all get charged by the banks and the credit card companies everytime we make a credit card payment in another currency is a pure Financial Transaction Tax. If I make a purchase from Amazon.co.uk with my French credit card, they add 2% or even more to the bill, simply for multiplying the amount in pounds sterling by the current exchange rate. There is simply no way that such charges can be justified.

So, imagine what would happen if the ECB charged the people doing Euro foreign exchanges the same "handling charge" imposed by the banks. That would (in principle) generate 2% of €300 trillion every year - i.e. €6 trillion. At that rate, the entire eurozone government debt could be paid off ia couple of years (Eurozone government debt currently stands at €8.2 trillion).

OK. I agree that the banks would probably object to 2%. But, logically, there is no reason why the handling charge imposed by the ECB should not be the same as the one charged by the banks on their customers.

So, let's make it 0.1%. That could still generate a very useful €300 billion a year.

Of course, people will say that the €300 trillion of trading in euros would collapse, and there would hardly any money coming in. That's fine too. We really don't need $1 quadrillion of foreign exchange a year. If trading in euros dropped fell to just 1% of the current levels, the only consequences would be that (a) traders would have to find something more useful to do with their money, and (b) the exchange rate instability that plagues international trading would decrease.

Intriguingly, the geographical distribution of foreign exchange trading is incredibly biased. According to the BIS report "Banks located in the United Kingdom accounted for 37% of global foreign exchange market turnover, followed by those in the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%)." The Eurozone countries don't even get a mention (see the graph below)! And yet 39.1% of the trading involves Euros!

Why should all those traders be allowed to play with our money for free? A financial transaction tax on Euro foreign exchanges seems only fair.

What I like about the idea of getting the ECB to impose the tax on Euro trading is that it would not prevent the traders trading other currencies. As you can see from the next table, the traders in the City would still be able to play with the other currency pairing to their hearts content. They would still be able to continue doing $568 billion a day in exchanges between US dollars and Yen, $360 billion a day in dollar/sterling, $249 billion a day in USD/AUD, $168 billion a day in USD/CHF and so on. They won't be out of a job. At least they won't be unless all the other central banks decide to impose a tax on trading in their currencies too.

Finally, in case you are worried that the figures that the BIS provided for April 2010 may no longer be valid, fear not. In fact, something like 68% of all Foreign Exchange trading is handled by a single company - CLS. And, according to their latest news release "The average daily value submitted to CLS was US$5.19 trillion, up 16.9% from US$4.44 trillion in August. And you can download the latest monthly report for August 2012 as a pdf file. And that is just one company.

Taxing Foreign Exchange Transaction carried out in Euros should be a piece of cake when the activity is so highly concentrated.

So, in conclusion, this seems to me like a very fair and reasonable way to (a) limit speculation on the Euro, and (b) provide a substantial source of revenue to the European Central Bank that could be directly used to help Eurozone governments get out of debt.

What are we waiting for?

LCH.Clearnet Ltd : $354.4 trillion of OTC Interest Rate Swaps this year

When I downloaded the BIS data for 2011 last weekend, I was annoyed to see that, yet again, LCH.Clearnet Ltd had neglected to provide details of their levels of transactions. As a result, any attempt to estimate the level of transactions for the UK is almost meaningless. The BIS figures in 2008 showed that LCH.Clearnet managed an impressive £862.6 trillion (of which £745 trillion were "exchange-traded derivative contracts". However, as you can see from the table below (taken from page 405 of the BIS report),  the numbers for 2010 and 2011 are both "nav" (Not available).


But, fear not. It looks like LCH.Clearnet is still doing well. They provide daily numbers for the levels of Over the counter (OTC) Interest Rates Swaps. And their web site today shows that on Friday the 12th of October, they managed to clear $1,863,334,640,045 ($1.8 trillion) in a single day. And you can see from the graph below that 2012 is turning out to be a bumper year.

The total so far this year is $298,599,162,468,235 (nearly €300 trillion), and if we include the last three months of 2011 (to make a full year) we get a total of $354.5 trillion.

As I have complained before, the website only provides details for just one of their "business streams". For the others, it's anyone's guess.

Usury : A new definition and the possiblity of usury-free lending

I'd already mentioned Nicholas Shaxson's discussion of usuary in his book "Treasure Islands". Here's what he said:

"The practise of usury - lending money out at excessive interest rates - has a nasty historical taint. The prophet Ezekiel included it with rape, murder and robbery in a list of abominable things; the books of Exodus, Deuteronomy and Leviticus forbid it, and Plato and Aristotle called it immoral and unjust. In Dante's Inferno 'lewd usurers' sit in the seventh circle of hell, and the Koran states that 'whoever goes back to usury will be an inhabitant of the Fire".

Pretty strong stuff.

The problem is that the definition of what are "excessive interest rates'' is ill-defined.  There are clearly some cases where hopefully everyone would agree. For example, the payday loans companies in the UK are pretty abominable. I see that my favorite payday loan company, Quid24.com, has changed its system. Before, it was offering an APR rate of an unbelievable 14348%. Its website is now offering a much more modest rate of only 5558%. I still think that is "unreasonable".

However, I think that there is potentially a simpler and much more straightforward definition of usuary. How about limiting the term to the case where someone charges interest for lending money that they don't actually have to lend? In other words, interest charged when money is created using fractional reserve banking, the system that allows commercial banks to lend out money that they don't possess. Perhaps it would be fair to include this "with rape, murder and robbery in a list of abominable things".

If banks were acting as the vast majority of people think they do, by lending out money that already exists, then there would be no problem - even if sometimes the difference between the rate of interest their savers and the rate that they use to lend out sometimes gets quite large. 

Interestingly, there are now systems that allow money to be lent directly from one person to another - effectively short circuiting the banks.  For example, in France, there is a newly created system called "Prêt d'union" that organises loans between individuals. Suppose that you have a spare €10,000 that you would like to invest. Prêt d'Union has a system that allows you to lend it for a period that you define in advance. If you lend for 2 years, you get a return of 4% per annum. But if you lend for 3 years, you get 5% increasing to 5.7% over 4 years and 6.5% over 5 years.

On the other side, if you want to borrow money, you pay a rate that is very close than the rate paid to the investors. There is a handling fee, and insurance that means that the actual effective rate paid by the borrower goes up, but the difference between the rates paid to the investor and the rate paid by the borrower are reasonable.... no sign of usury there.   The table shows the details that I got by simulating various loans using the website.

The problem is that you might well ask why you should go and borrow money from the Prêt D'Union sytem when you can often get lower rates from commercial banks. Fair point. But the difference is that the commercial banks don't have to have the money they lend you. As far as they are concerned, any rate of interest allows them to make profits. When they create the money themselves, they don't even have to pay their savers anything. And if they need a bit more backing to keep the books looking OK they just have to go to their freind Mario Draghi at the E.C.B. who will happily generate an extra €1 trillion (as he did in december 2011 and february 2012) and lend it to the commercial banks at 1%.

Sure, the commercial banks do in fact pay their savers something - even though they don't actually have to. But, in my opinion, this is largely cosmetic - to give the impression that they are lending out their savers money when they make loans. The fact is that they don't need savers - and that is the reason why interest rates for savers are so terrible.

The sort of lending mechanism being developed by Prêt d'Union seems to me to demonstrate that there is a real alternative to relying on commercial banks.  A 6.50% rate of return for an investor is actually very good - especially with inflation at only 2-3% a year.

But above all, I think that there is a moral reason for preferring this sort of system. With the sorts of system proposed by Prêt D'Union, there is no creation of money, and no charging of interest for debt creation. Using my proposed definition, there is no usury either. The world would be a better place.

More on the N-Euro idea

I've been thinking more about the N-Euro idea that I proposed in my latest Youtube presentation a week ago. Essentially, my proposition is that each of the 17 eurozone governments could introduce a parallel national level money system called the "N-Euro" for "National Euro" or "New Euro". This would be debt-free money that the government could manage using a single national citizens bank. Each citizen could have an account and could choose to receive payments in N-Euros rather than on a conventional Euro bank account. The government would accept N-Euros for the payment of taxes and other charges at the same value as conventional Euros.

As my brother-in-law John pointed out, it wasn't necessarilly obvious to people watching the video why it is such a good thing to be paid in N-Euros. Indeed, why have N-Euros when you can have conventional Euros instead?

Good point John! I guess that for me, the fact that I have now read a whole pile of books about the nature of money and the fact that I am now convinced that creating the money supply as debt is a very bad thing means that the N-Euro option is obviously a good idea. But I was probably going too fast.

So, what would be the advantages of shifting to a debt-free alternative currency? And why should citizens want to be paid with N-Euros?

Remember that most of the money supply in circulation is not in the form of bank notes and coins. Most of it is electronically generated by commercial banks when they make loans. And the critical point is someone has to pay the banks the interest on those loans. That fact is almost certainly the cause of most of the worlds economic misery. We are all having to fight to get our hands on enough of the money to keep our heads above water. But, as Michael Rowbotham pointed out in his book "The Grip of Death", it is a fight that we can never win  together. To keep your head above water in the sea of debt, you are forced to push someone else under in your place. It doesn't have to be that way. Governments could and should be creating the money supply debt free.

The proportion of money that depends on debt is clear from the latest  figures provided by the BIS.  For example, in the UK, there are £57.75 billion in notes and coins in circulation.  But the "Narrow money supply" (M2) is £1,271.62 billion, meaning that 95.5% of all the money in circulation is bank generated.

For the Eurozone, there are currently €913.68 billion in Euro notes and coins in circulation. But the Narrow money supply (M1) is €4,865.5 billion, meaning that 81.2% of the money supply  is in the form of debt-bearing loans made by the banks.  It's less that in the UK, but it is still ridiculous that we have allowed so much of the money supply to be created by commercial banks with no controls.

It is time to break this insane system. But how? The financial sector has managed to get the requirement that governments have to borrow money from the banks written into the Lisbon treaty. I've already argued that there may be a way round this by using paragraph 2 of article 123 of the treaty that leaves the door open for Central banks to lend to "publicly-owned credit institutions" - an idea that I developed in my youtube video "Solving the Debt Problem".

However, I fear that the ability of vested interests to block such moves may be too powerful to allow any progress. We need alternatives. And this is where the N-Euro idea comes in.

Yes, Eurozone governments have to go to the commercial banks and beg if they want euros. But what if they were to use some other payment means? If citizens could be persuaded that N-Euros are valuable and don't insist to be paid in conventional Euros, then their governments could pay them their salaries, pensions and benefits in a form of money that did not need to be borrowed from the markets. As I mentioned in the video, there are now literally hundreds of alternative currencies that have been set up across the globe. And some of these are working well. There are several that have emerged in places like Greece, where there has been a lot of coverage of the TEM, a local currency that has been introduced in the port city of Volos (see the reports on the BBC and elsewhere). But, while these schemes can be very useful,  they lack the official stamp that would come by making those currencies valid for paying one of the most significant things that we all have to pay - namely taxes.

So, all that would be needed is for a government to set up its own system. And it would clearly be in the governments interest. For example, the Greek government can't afford to pay its employees in Euros because it is being crippled by extortionate interest payments that it is having to pay the markets for lending euros. But if its citizens are happy to take N-Euros, there is no problem for the government to "print" the money. Of course, it would have to accept that it won't get paid taxes in conventional euros, but that is alright.

And for the citizens who accept to be paid in N-Euros, they would have the satisfaction of knowing that they are helping to get their government off the hook.

Once the system is off the ground, I strongly suspect that it will rapidly take an increasingly important place in the national life. Shopkeepers and merchants would be happy to take N-Euros in payment because they know that those N-Euros are perfectly valid for paying taxes. And the more merchants join the system, the better.

Within a year or two, it may be possible to have a system where governments can manage much of the economy without the need for begging from the financial markets. Ratings agencies would become virtually irrelevant. 

And along with all that, there would be a host of other benefits.

For example, the governments could no longer be threatened by markets who could threaten to move all their money elsewhere. That is because each countries N-Euro supply can only exist in one place - namely, on the computer that belongs to the citizens bank. You cannot move the money elsewhere. It can't be moved to the Cayman Islands or hidden under a mattress. It has to stay in the economy.

My proposal is that each of the 17 Eurozone governments could set up their own local currency. There would be French N-Euros managed by the French government, Spanish N-Euros managed by the Spanish government, Greek N-Euros managed by the Greek government and so on. Normally, these different local currencies could not be exchanged. That is important because it is essential that each country can keep track of the N-Euro money supply in its own economy.

However, there would be some flexibility. For example, it would be possible that the French government could allow the Greek government to open an account in the French N-Euro system and vice versa. If they wanted to, the two governments could decide to add an equivalent sum to eachothers accounts, thus allowing purchases to be made locally.

But, very importantly, it is the governments that would be able to control this sort of process. It would no longer be the commercial banks that would have the monopoly on money creation. Money would be finally used for what it should be used for - as a way of allowing citizens to develop the economy by providing each other with goods and services - rather than as a way of allowing a tiny group to wield almost unlimited power over the rest of us.

BIS Transaction Data for 2011: Roughly $3 quadrillion in the USA

In my final post based on the dataset provided by the Bank for International Settlements Preliminary results for 2011 ("Statistics on payment, clearing and settlement systems"), I would like to provide an update on the figures for the USA. Here they are.

As you can see, the numbers are really very close to those that were reported in 2010 - with a total that is very close to €3 quadrillion (a 3 with 15 zeros), despite the fact that the figures for "Card payments" are currently "nav" (not available). We can probably assume another $4 trillion there.

What I find very interesting here is that this total is something like 1200 times larger than the total tax revenue of the US government.That means that the US government could probably abolish all the existing taxes and replace the whole lot with a universal financial transaction tax of only about 0.1%.

It's truly tragic that Andrew VanHooks TRAN$ACTION  TAX website in the US still only has 110 "likes" (they are hoping for a million). Barack Obama - are you listening?? Surely, introducing a financial transaction tax in the US has to be a No-brainer. Who would not vote for getting rid of all taxes and just paying a fraction of one percent on all electronic transactions? Even the Tea-party should be salivating at the prospect.

I also note that the €3 quadrillion number is also roughly 20 times the entire US governments national debt (currently standing at around $15 trillion). How long would it take to pay off the whole sum using a Financial Transaction Tax?

BIS Transaction Data for 2011 : €1.7 quadrillion in 5 Eurozone countries

Following on from yesterdays post showing that in the 23 countries covered by the B.I.S. dataset managed well over $9 quadrillion in transactions last year, I've compiled the figures for the 5 countries in the Eurozone that are included.

The winner is Germany, with a very respectable total of nearly €751 trillion - up 6% on 2010, and nearly beating the record of €753 trillion in 2007.

Next comes Belgium, which saw a record-breaking total of nearly €367 trillion - up a very impressive 12.5% on 2010 - thanks in large part to the fact that the EuroClear Bank is based in Belgium.  And since EuroClear Bank managed nearly €333 trillion on its own....

France came third with a total of close on €293 trillion - 9% up on the previous year, but substantially below the record sum of €358 trillion in 2007. Not bad though.

As everyone knows, Italy is in crisis. And their total of €190 trillion is actually 1% down on 2010. But it's still nearly a record for them.

Finally, we have the Netherlands, which manage to break all previous records with a total of nearly €95 trillion - up more than 2% on 2010.

The chart for the Netherlands also includes the total figure for all 5 countries, which at over €1.7 quadrillion is over 8.5% up  on the previous year.

These are pretty impressive numbers, especially when you consider that they only cover 5 of the 23 Eurozone countries. I suspect that Luxembourg would manage some pretty eye-watering numbers too, based on the numbers from the European Central Bank. So much for the theory that there is no money in the Eurozone. There must be plenty if just five countries can generate €1,704,990,000,000,000 in transactions in a single year.

And it only goes to demonstrate that if the Eurozone countries led by France and Germany actually get a Financial Transaction Tax introduced, the tax's potential for generating revenue is truly impressive. Specfically, a 0.1% FTT on that lot would generate up to €1.7 trillion. What are we waiting for?

Sure, a 0.1% tax would no doubt result in a drop in the total level of transactions. So what? Are those transactions doing anything useful? Or are they pointless and parasitic? I think you can probably guess what I think....

BIS Transaction Data for 2011 : Over $9 quadrillion in financial transactions

The Eurozone may be about to collapse and governments may be queuing up to impose intolerable levels of austerity on their citizens, but the financial world is still going strong.

The Bank for International Settlements has just released its preliminary "Statistics on payment, clearing and settlements in the CPSS countries" for 2011. You can download the tables from the BIS website here.

You have a choice between a 575 page pdf file,  an Excel file with the data for each of the 23 countries (2 Megabytes of data sheets) or alternatively comparative tables in Excel forma.

It's quite hard work going through all that data, because they don't bother combining the data to make it easy to work out what the totals are. But as in the last two years, I have put the numbers together to get some overall numbers.

Here is the break down using the various tables in the comparative tables, showing the totals for the last five years. The column called "Source" refers to the place in the BIS dataset where I got the numbers.

As you can seen, it was 2007-8 where the numbers were highest, with more than $10.5 quadrillion in transactions in 2008. The numbers dropped in 2009 and 2010, but they are coming back up again with over $9 quadrillion in 2011. Note that the numbers are clearly underestimates - the numbers refer to payments and trades using "selected" interbank transfer systems and exchanges.

I've also done the figures separately for the 23 countries - the totals aren't quite identical - I'm not quite sure why. But what's $10 billion of error when you you are talking about numbers that are nearly 1000 times larger.

As last year, I am annoyed to see that numbers for the UK are clearly massively underestimated (which is why they are in red). This is essentially due to the fact that both the London Stock Exchange and LCH.Clearnet Ltd have failed (yet again) to supply their numbers to the BIS. I think we can safely add several hundred billion extra there.  Indeed, my own calculations put the level of transactions in the UK at something like £1760 billion a year. And Australia is another place where a lot of the figures are "nav" (Not available). -

The conclusion from all this? Well, it is clear that with at least $9 quadrillion in transactions going on in just 23 countries (and well over $10 quadrillion if you include sensible numbers for the UK), it would not take much by way of a financial transaction tax to generate enough revenue to allow many governments to scrap conventional taxes altogether. It's the idea that I have been pushing for close on two years, and which I have explained in detail in my Youtube video called the "0-0-0-0.x Tax Reform Plan" - zero percent income tax, zero percent sales tax (VAT), zero percent tax on company profits (eg. corporation tax) and replace the lot with an FTT that in many cases would be a fraction of a percent.

And of course, the idea that there is no alternative to austerity is completely farcical. It really would be simple to get the financial sector to pay for the mess that it caused back in 2008. There can be no justification for making citizens carry the can for the financial sectors irresponsible behaviour.

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.