The Eurozone needs €19.3 trillion of interest free money creation to fix the debt crisis

If you've been following my recent blogs, you will know that I am trying to understand how it is possible that Eurozone Debt is 2.5 times larger than the Money supply. Specifically, if you take the BIS figures for the 3rd Quarter 2012 for Household debt (€6,214 billion)  together with Nonfinancial (business) sector debt (€9,435 billion) and add in the ECB figures for public sector debt at the end of 2012 (€8,795 billion), you reach the eye watering total of €24.5 trillion of debt. That number is roughly 2.5 times bigger that the latest figure for M3 (€9,810 billion).

So, where's the other €14.7 trillion that we need to pay off our debts?

Some people have been telling me that the M3 figure is not complete because it doesn't include long term loans. I find that odd. If a bank has €1 million in reserves and lends it to someone for 10 years with a 5% per annum interest charge, normally that money really exists, and it should be included in the money supply, irrespective of whether it is being loaned for 10 years, 10 weeks or 10 hours.

The fact that it isn't, and that for some reason long term "loans" don't count, looks very fishy to me. It sounds like a way for banks to create money without it being subject to scruteny. I suspect that this may explain how, when you look at the assets of the 50 largest banks in the world, you discover that the average bank owns assets that are worth 380 times as much as their capital. Could this be because they have been buying up huge amounts of stuff with non-existent money? Stranger things have happened.

To get a better understanding of precisely what does and what does not get included in Money Supply figures I had a look at the lastest monthly document produced by the ECB on "Money Developments in th Euro Area" for March 2013 that was published on the 26th of April. The document includes a set of tables at the end with a whole pile of figures that break down the components of M3, and provide information about the assets and liabilities of MFI (Monetary Financial Institutions). I extracted the numbers to try and make some sense out of them. Here's the table I produced.

From that, you can see that total of M3 (€9,810 billion) is made up of Currency in Circulation (€867 billion), overnight deposits (€4,336 billion), deposits with an agreed maturity of up to two years (€1,785 billion), deposits redeemable at notice of up to three months (€2,102 billion), Repurchase agreements (€122 billion), Money market fund shares/units (€458 billion) and Debt securities issued with a maturity of up to two years (€140 billion).

Then we have MFI Liabilities which total €7,854 billion. These include holdings against central government (€295 billion), capital and reserves (€2,421 billion), and various longer term financial liabilities vis à vis other euro area residents which are divided according to the duration period involved.

Then we have a section on MFI assets which total €17,675 billion (though I had to get that number myself, since it is not actually provided by the tables in the ECB document). These include €3,432 billion in loans to general government, and €13,058 billion in credit to other euro area residents, of which €10,832 billion are in the form of loans. To that you can add another €1,058 billion in net external assets, which I presume includes loans to people, businesses and governments outside the Euro zone. Finally, there is a something called "Other components of M3 (residual)" that sounds a bit like a fudge factor to me.

How are these three areas related? What is the relation between M3 (€9,810 billion), MFI Liabilties (€7,854 billion) and MFI Assets (€17,675 billion)? Well, I have a suggestion which is shown in the next table.

The numbers in lines 1 to 3 are directly from the ECB document. Line number 4 shows that if you take total MFI assets, and subtract MFI Liabilities and M3, you get a final number of €11 billion, almost nothing when we are talking about totals of €17.7 trillion. It could almost be a rounding error!

So, I seem to be making some progress here.

One way of making sense of this would be to invent a new monetary aggregate that, in addition to the components of M3 (which only goes up to two years), includes the numbers for MFI Liabilities that exceed two years. These include €2,406 billion that are deposits with an agreed maturity of over two years and debt securities issued with a a maturity of over two years €2,631. I propose that we might call that M5 (because M4 is a term that has already been used by the Bank of England).

So, lets call M5 the number that allows us to balance the €17,675 billion that the MFIs have in assets.  We haven't accounted for all the debt, because there is another €6,829 billion to find if we want to account for all the debt in the Eurozone (€24,504 billion). I note that the figures here only includes €3,432 billion in loans and credit to general government, so that this implies that there is presumably a further €5,363 billion of credit to general government from outside the Eurozone to make up the total of €8,795 billion in public sector debt.

I've put these numbers in the following table where again, the black lines correspond to numbers extracted from official sources, and the red ones correspond to my (educated) guesses.

Even if we add in that external government debt, we still don't account for the entire €24.5 trillion. That's why I have added a final line with €1,466 billion of Non Eurozone Credit to Euro area residents which would include both households and businesses.

So, I think that I have a plausible explanation of where all the debt is, and why the total is 2.5 times what we are supposed to called the money supply (M3). First, there is €6,829 billion of debt held outside the Eurozone. Quite a bit of that could be held by banks and pension funds in the UK and the US for example.

But the biggest factor seems to be the fact that there is an arbitrary distinction between money created in the form of short term loans (up to 2 years) and loans made over longer periods. Why?

Actually, it seems to me that there is only really one type of real money. It's the money that is in circulation. It is the stuff which is held on overnight deposits. It's the stuff that is not tied up in the form of debts.  It's M1. And that stands at just over €5 trillion. My conclusion is that the amount of real debt free money that needs to be injected into the Eurozone is not €14.7 trillion (i.e. total debt minus M3). It's €19.3 trillion, that is the total amount of debt minus M1.

Now you know how much debt free money needs to be injected into the Eurozone to get things back under control.

The scandal of Interest Only Mortgages.

The UK's new financial watchdog (the FCA) has just released a 149 page report about the ticking timebomb of so-called Interest Only Mortgages. The release of the report just made the headline news on the BBC this morning. In turns out that in the run up to the financial crisis, millions of people in the UK signed up for mortages in which they only pay the interest payments each month. They were supposed to have some other scheme for paying off the actual cost of the house at the end of the term, often 25 years. Surprise, surprise,  it appears that many of them didn't have a clue how they were going to do that. They often assumed that their house would have increased in value, and that thet would be able to move to a cheaper property at the end of the period. As a result the FCA reckons that nearly half of the 2.6 million UK households with Interest Only Mortgages will not have savings or other funds to cover the final bill, and that the average shortfall is  expected to be £71,000.

So much for the so-called debunking of the "Debt Virus Hypothesis" that I mentioned yesterday. Yes, it is possible to run a system where people can get out of debt over thirty years if they pay off both the interest payments and a part of the principal every year. But even under the most optimistic reading, it still means that the banks get paid astronomical sums for creating the money that feeds the housing bubble. 

But the massive introduction of Interest Only Mortgages demonstrates that things are even worse. 

It would be difficult to imagine a more clear demonstration of the insanity of our current system. The banks were happy to loan hundreds of thousands of pounds of non existent "money" to people who, in many cases, had no way to pay off the loan 25 years down the road. 

Those banks, which did not have the money they lent and just created the loans out of thin air, then felt that they deserved to be paid interest for the next 25 years for providing this "service". And then, at the end of the period, they will no doubt evict the people who have been paying them interest payments all along on the grounds that they don't own the house that they have been living in. 

It is totally grotesque. And I believe that once the 2.6 million households have realised that the whole thing is a complete scam, and that the banks that lent the money didn't actually have the money to lend, then the revolution will be well on the way.

Is the Debt Virus Theory true?

Back in 1992, Jacques Jaikaran published a book called "Debt Virus: A compelling solution to the World's Debt Problems". In it, he explained that the creation of money as debt, and the existence of compound interest, mean that there will never be enough money to pay off the debt. That's because when a bank creates $1 million out of thin air, and asks for 10% after one year, there will not be enough money in the system to pay back both the loan and the interest. As a consequence, the banks have to keep creating more and more debt to keep the system going.

On the face of it, something along these lines could be the cause of the fact that today, the levels of combined public and private sector debt exceed the total money supply by a factor of 2 to 1. This ratio is even higher in the Eurozone (2.5:1) and higher still in the US economy (3.55:1).

Since discovering this enormous hole in the economy, I've been asking lots of people what they think.  Some people have told me that the problem is that measures such as M3 don't include everything. For example, apparently when banks make loans over much longer periods than a few years, this doesn't get included in the standard money supply measures. Thus if a bank was to make a loan that only had to be paid back after 30 years, this would not show up. So, perhaps the missing money is in the form of these really long term loans.

If that really is the explanation, then it is a major problem. It means that banks can make loans that don't appear anywhere, and that we can never know how much lending goes on. Surely, at the very least we need another measure (let's call it M5) that includes even these very long term loans?

So, what about Jacques Jaikaran's Debt Virus hypothesis? Could that be the explanation? It's worth noting that Jaikaran himself is not an economist. He is in fact a plastic surgeon, and a number of economists tried to argue that he simply did know what he was talking about. Indeed, there have been a number of attempts to debunk his propositions.

In an attempt to see whether the debt accumulation idea could be behind the huge gap between debt levels and the amount of money in the system, I've been looking at some of those attempts to prove that he was mistaken. And, for the moment, I'm not at all convinced.

For example, Ardeshir Mehta has a site called 'Debunking the "Debt-Virus Hypothesis"' in which he shows how you could repay a $14 trillion loan (equivalent to the total cost of housing in the USA) by progressively paying back a sum that includes both the interest payments and a part of the principle loan. At the end of 30 years, and with an annual interest rate of 5.3%, he shows that the debt will in fact have been paid off. He notes that banks will have received the original $14 trillion, plus an additional $14.3 trillion in interest payments.

OK. Yes. That does work. But it also means that $14.3 trillion has been handed to the bankers in "fees", money that Mehta assumes the bankers will have spent back into the economy. Of course they may have done that, and in that case they will no doubt have had a wonderful 30 years having the rest of the population working largely to keep them supplied with Rolls Royces, Yachts and Private Jets. I'm not sure that the $14.3 trillion that the bankers got in "fees" for all their hard work could be considered a reasonable return, given that the banks didn't even have the money that they created for the original loans. But that's another question.

However, Mehta's debunking method makes a couple of other questionable assumptions. What guarantee is there that the bankers will actually spend their money back into the economy. They could, if they wish, move their gains to some off shore tax haven. In that case, the money that the population need to pay off the interest payments will not be there. Given that there are indeed estimates that there is something like $21 trillion stashed away in tax havens, I would say that the evidence that the bankers have been returning all their gains back into the economy is questionable to say the least.

The other assumption is that the population is indeed paying off the debt. It's true that when you take out a mortgage and you pay off the loan over a fixed period, the amounts you pay will typically be calculated so that the entire loan plus the interest gets paid off at the end of the loan period. Unfortunately, that's not what most governments are currently doing. Instead, governments go to the markets, borrow €10 billion over a fixed term of say 10 years, and then do nothing during that period. At the end of the 10 years, the governments then go to the markets and try a borrow the €10 billion again, but this time they need to borrow even more to cover the interest charges.  With an interest charge of 7.2% per annum, they will need to find €20 billion.

Thus the so-called "Debunking" only applies to the case where there is (a) a preset plan to repay the entire debt over a fixed period, and (b) the banks reinject their interest fees back into the economy. Any situation where the loan is left untouched for a long period is guaranteed to end up with a massive difference between the amount of money in the system and the amount of debt.

Another attempt to "Debunk" the Debt-Virus Hypothesis argues that when you have a given amount of debt, you don't need that amount of money to pay off the debt. For example, there is a website called "Why the Debt Virus Hypothesis is False" which says that "one dollar circulating in the economy can pay off a million dollars of interest if it passes through a million people’s hands and each one uses it to pay a dollar’s worth of interest on their loans".  Another place you can find the same argument is in a Youtube video called "The compound interest paradox mistake".

The idea is that you could have 5 people, lets call them A, B, C, D and E. Suppose that A owes B $1, B owes C $1, C owes D $1 and D owes E $1. That means that total debt is $4. But then suppose that A pays off his debt to B with a $1 bill, and that B then passes the bill on to C, then to D, then to E. Thus, a single $1 bill can indeed be used to cancel $4 of debt (and even $1 million, if needed).

OK. Yes. But suppose that A, B, C and D all owe $1 to just one person, namely E. In that case you really do need $4 to get everyone out of debt. Let's call E the bank. It's clear that when everyone owes money to the bank, this attempt to get out of the problem will not work.  And since, under the current system, money creation is almost all done by commercial banks, in the end you really do need that money.

And as I have been arguing, it really does look like there is simply not enough money in the system to pay off the accumulated debt. And yes, I think that Jacques Jaikaran hit the nail on the head back in 1992. Debt and Compound Interest is indeed like a virus that you can never get out of the system.

The solution, in case you didn't know, is (a) to take money creation out of the hands of the commercial banking system,  (b) make all money creation debt free, and (c) create enough debt free money to allow the system to get out of debt.

Eurozone Debt : A detailed country by country analysis - Germany has no right to lecture anyone.

I'm still trying to come to terms with the fact that the total amount of debt in the 17 Eurozone countries is something like €24.5 trillion and yet the total money supply (M3) is only €9.77 trillion. In other words, there is 2.5 times as much debt as money to pay it off.

I'll have a look at the possible causes of this enormous gulf in another post, but for the moment, I thought I would have a look at the details of  precisely where the debt is.  I'm using the recently published ECB figures for public sector debt in 2012, and the BIS figures for private sector borrowing. The BIS figures are for the third quarter 2012, except for the figures that I show in red (Germany, Netherlands and Greece) for which the most recent figures are for the second quarter 2012. Unfortunatley, the BIS data set only includes household and business debt figures for 12 of the 17 Eurozone countries,  but they do also provide figures for the entire Eurozone, and so the figures in grey are estimates that I made on the basis of the population sizes of the 5 other countries (Slovakia, Slovenia, Estonia, Cypress and Malta). Have a look at the numbers in the following table, where I have ranked the main countires by the size of total debt.

 I've provided both the total debt numbers (yellow section) and per capita numbers (light blue section) so that you can see more easily how different countries compare.

The bottom line gives totals for the Eurozone (for the yellow section) and per capita averages (for the blue section).

I find it very intersting that Germany, which likes to lecture everyone in the eurozone about how only they know how to behave in a responsible way, is almost exactly at the average for per capita public sector debt (€26,400) and household debt (€18,700). OK, their business debts levels are a bit lower that the Eurozone average (€19,700 instead of €28,500), and so overall per capita debt is a bit less than the average.  Big deal, given how fantastic German industry is. If they are so wonderful, why is the German business community in debt to the tune of over €1.6 trillion?

But now look at Greece. Their per capita debt is only €50,200 compared with Germany's €65,000. Objectively, they are considerably more reasonable than the Germans. In fact, the debt kings of the Eurozone turn out to be Luxembourg (€303,000 per head), the Netherlands (€106,400 per head) and Belgium (€114,900). In fact, the only "badboy" country with above average per capita debt is Ireland (€155,000 per head). The other "criminally irresponsible" countries who are being hammered by the troika, namely, Greece, Spain, Portugal and Italy all have per capita debt that is below the Eurozone average!

When I see how these countries are being punished by German driven ECB austerity, I am appauled. Angela Merkel should be ashamed.

If I was German, and I realized just how much the ECB's refusal to do anything to fix the Eurozone crisis is the direct result of German intransigence, I think I would be ashamed too.

Of course, being British, I've also got plenty to be ashamed about. It is the UK government's intransigence in defending the interests of the City that is blocking other vital areas of banking reform. Cameron's cynical attempts to block the introduction of a financial transaction tax in 11 European countries is the height of hypocrisy, given that much of the UK's billions in stamp duty income comes from outside of the UK.

But it seems to me that the ECB holds the key to the Eurozone crisis. Given that there is a massive hole in the monetary system, it seems to me that a massive direct injection of debtfree money into the Eurozone is the best possible way of getting out of this mess. I've made some very clear proposals about how the €14.7 trillion of missing money could be distributed among the 17 eurozone countries, eliminating all public sector debt at a stroke.

Please Frau Merkel. Will you stop blocking the solutions. This analysis shows that when it comes to debt, Germany is absolutely not in a position to give lectures on how the rest of us should behave.

Fixing the Banking System for good

I unfortunately missed a conference called "Fixing the Banking System for Good" that was held in Philadelphia on the 17th of April. It was broadcast live on the web and apparently there were a number of highly respected speakers who were openly pushing for an end to fractional reserve banking. Michael Kumhof talked about "The Chicago Plan Revisited", and Adair Turner talked about "Money and Debt: Radical Solutions to the Challenge of Deleveraging". Hopefully, someone will have recorded what they said and we will be able to see exactly what was being proposed.

Fortunately, Bill Still managed to record the audio from Professor Jeffrey Sachs presentation, which he did by videoconference link, and put it into one of his Still Reports. As Bill puts it, what he says is truly explosive.  Here's a transcript of the end of his presentation.

"I believe we have a crisis of values that is extremely deep…. because the regulations and legal structures need reform. I meet a lot of these people [from] Wall street on a regular basis. I’m going to put it very bluntly: I regard the moral environment as pathological…… I have never seen anything like it. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to ….counterparties in transactions. They are tough, greedy, aggressive and feel absolutely out of control…… They have gamed the system to a remarkable extent. And they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies……

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the Financial markets are the Number 1 campaign contributors in the US system now. We have a corrupt politics to the core I'm afraid to say….. Both parties are up to their necks in this. It's nothing to do with Democrats or Republicans. It really doesn't have anything to do with right wing or left wing, by the way. The corruption is as far as I  can see everywhere.  But what it has led to is this sense of impunity that is really stunning, and you feel it on the individual level right now, and it's very very unhealthy. I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language. And I've not seen it once. And that is shocking to me.  And if they won't, I've waited for a judge, for our president, for somebody and it hasn't happened. And by the way, it's not going to happen anytime soon it seems."

 
Hear, hear. We clearly can't expect our current politicians to sort this mess out. But it seems to me that the evidence that the whole system is completely rigged is now becoming so overwhelming that citizens will soon be able to force their governments to react.

For example, when a government tries to impose austerity, citizens should be rising up and challenging them. They can point out that the amount of public and private sector debt is now so large that it would be physically impossible to pay off the debt, even if every citizen handed every single cent that they have to the government, and the government stopped spending any money at all. The story that we are told is that all we have to do is cut back on public services and pay more taxes and everything will get back on track. No it won't. It's impossible. There is simply not enough money in the system.

Even if we only consider government debt, it is clear that there is not enough money around just to get the governments out of debt - never mind the rest of us! As I demonstrated yesterday, government debt in the US, (currentlly over $12 trillion) is substantially higher that the money supply as defined by M2 ($10.4 trillion) meaning that you could never pay off the debt. Full stop.

In the Eurozone, paying off the public sector debt of €8.8 trillion would  require 90% of the entire Eurozone money supply (€9.77 trillion, as defined by M3). 

For the UK, I suppose you might just argue that there is a vague chance of succeeding, because total public sector debt (£1.358 trillion) would "only" need about 65% of the total M4 money supply. But that is ignoring the massive amount of private sector debt.

No. It's simple. There is not enough money to pay off debt. And as far as I can see there is only one way out of this mess. It requires the following simple measures.

1. Massive amounts of  debt-free money creation by central banks.
2. Direct injection of the newly created money into the economy by a combination of eliminating taxes, infrastructure spending and other public sector activities, and direct payments to citizens.
3. A Financial Transaction Tax imposed by the central bank on all electronic transactions involving that currency to remove any excess money in the system and divert money to the real economy
4. A ban on money creation by commercial banks.

The need for debt free money creation in the UK, USA and the Eurozone

I have recently worked out that the amount of cumulated public and private sector debt is massively higher than the total money supply, making it physically impossible to pay off the debt. It doesn't matter how much austerity is imposed, it simply cannot work as a way to cure the debt problem.

I have convinced myself that there is really only one way out. It involves forcing central banks to create enough debt-free money to make up difference. To back up my argument, here are some more figures.

I took public and private sector debt for the the UK, the USA and the Eurozone to obtain  numbers for total debt levels in each area.  I have also included available numbers for the Money Supply (M0 in the UK and USA, M1 and M2  in the UK, USA and Eurozone, M3 in the UK and the Eurozone, and M4 in the UK (which is the only country that appears to use it).

I then provide the ratio of debt to money supply, using the M4 in the UK, M2 in the USA and M3 in the Eurozone. It's not my fault that the central banks can't come up with a standard way to measure the money supply. The resulting debt to money supply ratios are 2.13:1 in the UK, 3.55 in the USA, and 2.51 in the Eurozone. Impressive.

I also show how much money is missing in each region. It's £2.37 trillion  in the UK, $26.6 trillion in the USA and €14.7 trillion for the Eurozone. The Eurozone figure is a somewhat higher than the figure that I had been using recently, simply because I used the most recent figures for Public Sector Debt, which just increased yet again.

Unless I'm seriously mistaken, these numbers represent the amounts of debt-free money that the three central banks must create and inject into each economy if there is to be any hope of people being able to pay off the debt in the system.

If you divide by population size, you discover that the Bank of England should create £37,861 for every man, woman and child in the UK. And of course I don't think that that money should be given to the banks. It should be provided to the government who should spend it directly into the economy.

In the USA, the Treasury (or the Federal Reserve) would need to create $84,369 for every US citizen. Again, it should be spent directly into the economy - not handed to the bankers.

Finally, in the Eurozone, the European Central Bank should create €44,258 for every Eurozone citizen. I've already argued the the simplest and fairest way to do this would be to provide each Eurozone government with an amount that directly depends on the population size.

It goes without saying that injecting that much new debt-free money into the UK, US and Eurozone economies would have incredibly beneficial effect. For example, the money could be used to develop renewable energy systems, build reasonably priced housing, renew the transport infrastructure, increase spending on health, education, research.... It could be used to provide decent pensions for our aging populations and those with handicaps. It could be used to provide aid to developing countries. You name it.

Of course, the bankers will complain that this will produce massive inflation. No problem. All the Central Banks have to do is impose a variable rate Financial Transaction Tax to mop up any excess money in the system. It could use that money to directly pay off government debt.  If there is any sign of inflation, just increase the FTT rate.

Sure, you might end up with an FTT rate of 2-3%. That's no big deal. It's only what the credit card companies charge when you pay in a foreign currency.

And within a relatively short period of time, the bulk of the money supply will be in the hands of the people where it can be used to get the economy going again, rather that in the hands of banks and people with accounts in tax havens.

Oh, and by the way. While this massive injection of debt free money would fix the problem temporarilly, the only way to make the solution permanent is to make it a criminal offense for anyone other that Central Banks to create money. And specifically, all money creation has to be Interest Free.

In other words we need to prevent Bankers charging interest on money that they create out of thin air. I believe that it is this ridiculous system that got us into this mess in the first place. The reason is really quite simple. If you allow a commercial bank to create money by making loans, and then allow that bank to charge interest at say 5%, the amount of debt simply has to increase beyond the amount of money in the system. And if the debts are not paid off (which is pretty much what has been happening recently), the amount of debt will be twice the amount of money in the system after a little more than 14 years. It's called compound interest. And ultimately, it is the cause of all the world's economic problems.

Commercial banks have demonstrated that they cannot be trusted to create money sensibly. It is time to completely rewrite the system.

The Eurozone needs an injection of €14 trillion of debt free money

I've been thinking hard since I discovered that the total amount of public and private sector debt (€23,784 billion) within the Eurozone was 2.5 times the total money supply (M3 €9,538 billion). Clearly, there is something horribly wrong here. It implies that even if everyone piled up all the money that there is, it would still be totally impossible to pay off the mountain of debt that has been created by irresponsible debt creation by the commercial banks.

Something has to change.

I've already made the suggestion that the ECB could impose a modest financial transaction tax on all Euro denominated electronic transactions to generate revenue that could be used to allow governments to get out of debt.

But there is a problem there. Yes, you could suck euros in to pay off government debt using the tax, but that would presumably remove the amount of available money in the system, especially if repaying the loans led to the money being destroyed.

What is really needed is an injection of fresh debt free money into the system to make up the difference. Specifically, the European Central Bank should be able to inject up to €14 trillion into the system. At that point, there would finally be enough money around to pay off the debts.

So, how might that be done? Well, you might have already heard me talking about the advantages of simply distributing funds on a pro rata basis in which each citizen effectively receives the same amount of funding. Let's see how that might work within the Eurozone. I've compiled the relevant figures in this table.

The first column shows the latest figures for Government debt in each of the 17 countries, which together add up to a very impressive €8.8 trillion. The second column shows the population size for each country, allowing us to calculate per capita debt (fourth column). I've sorted the entire table according to this number so that it is easy to read.

Ireland wins the prize with €42,813 of government debt per head of population. But Belgium isn't bad with €33,999, following by Italy with €32,681. After that, there are a whole series of countries with per capita government debt of between 25,000 and 28,000 that includes Austria, France, Greece, Germany and the Netherlands.  Not much to choose there. Now remind me? Which country is giving the entire Eurozone lectures on excessive public sector debt???

After that we find Portagal and Spain on around €19,000 along with Finland. Cypress and Slovenia, which are supposed to be totally irresponsible are way down the table. For me, these figures demonstrate that the whole system based on the Maastricht criteria has completely warped our thinking.

Now,  suppose that we say that we need to inject the €14 trillion to balance the books, and that we will do that simply on the basis of population size. The fifth column shows how this would break down by country. Germany would of course get the lion's share, but only because there are more people living there. In the next column you can see that the injection would immediately remove every single Eurozone country out of debt, with the exception of Ireland, which would still have to find another €3.4 billion. But, frankly, that's peanuts.

In the final column, you can see the net per capita cash injection for each country. It adds up to an average of €20,560 per man, woman and child in the Eurozone. Plenty there to end all the austerity programs, and get the economy kick started.

Why don't we do this?

If the European Central Bank refuses to implement such a scheme (which I am sure Mario Draghi in his role as ex European Director of Goldman Sachs is likely to do), I would like them to explain how it is even remotely possible for the Eurozone countries to get out of debt, given that there is currently 2.5 times more debt than there is money in the system.

The system is clearly broken. It needs to be fixed.

Just how much money is there?

I've recently been arguing that there is simply not enough money in the system to pay off the total amount of public and private sector debt. My original calculations were based on just a set of 39 countries that are covered by the BIS Private Sector Debt figures.

For them, I obtained values of $136.89 trillion for combined public and private sector debt, and a figure for total money supply of $68.34 trillion - almost exactly half of the debt level.

It's this massive difference that has got me thinking hard. I suspect that much of this difference could be due to the effects of accumulated interest charges. This is simply based on the idea that if a commercial bank creates $1 million in credit (debt) and charges 5% interest, and if the debt is not paid off, the total amount of debt will have more than doubled in just over 14 years.

I've had a couple of other suggestions for how you might get such a discrepency. Ralph Musgrave suggested that you might get more debt than money if people were delivering goods (he mentioned coconuts) without being paid upfront. This can create effective debt. Quite whether there could be enough such activity to explain the huge gap between the money supply and debt is very unclear to me.

Another suggestion is the possibility that someone could use borrowed money to buy a car, borrow the same money again and buy a second car. I'm not sure how to make this work on a large scale.

So, at least for the time being, my bet is that the big gap is the result of compound interest and the fact that governments have got into the very bad habit of never actually paying off debt. Instead, they just wait until the repayment is due, and then borrow again to pay back the loan plus an extra sum to cover the interest.

Nevertheless, my argument depends on having a clear idea of precisely what the size of the money supply is. There are various measures that are used - M0, M1, M2, M3 and even M4 in some countries like the UK. There don't seem to be well established definitions that are shared. Even worse, the most inclusive measure (namely M3) is not used by many important economies, including the USA.

Using datasets that I was able to download from the remarkable "Trading Economics" website, I have compiled the following table that shows M0, M1, M2 and M3 figures for all the countries where such numbers are available. I converted the raw data into millions of LCU (local currency units) and used the current exchange rate with the dollar to get the distribution of money supplies for all available countries. Here are the results.

There are lots of interesting things to note. First, there's the total for the 99 countries which comes to $71.36 trillion. The major players are clearly China with a money supply of around $16 trillion, the Euroarea with $12.8 trillion, the US with $10.4 trillion, Japan with $8.3 trillion, and the UK with $8.3 trillion.

There are three countries where I was unable to extract an exchange rate (Ecuador, El Salvador and Kuwait), but otherwise, 59 countries have a value for M3, for 34 countries I was forced to use the M2 value, and for 4 countries, the only available number concerned M0. On average, the value for M3 was about 27% higher than M2, which means that it may be possible to get an estimate of what M3 might have been for the 34 countries with only M2 available. This suggests that the number based on M3 would have been around $10.5 trillion higher  - around $82 trillion. The absence of an M3 number is particularly critical for China, where an M3 based value might be over $20 trillion, the US, where an M3 based value could be around $13.2 trillion, and Japan where the M3 based total may be around $10.6 trillion.

One of the take home messages is that clearly we really need a much more methodical approach to measuring the global money supply. Nevertheless, it is clear that even if we use the more generous estimates, there is simply no way that we are going to be able to explain away the huge gap between total money supply and the total amount of debt. My claim that we need someone (the World Bank?) to generate the missing money as debt-free credit stands.

One last point concerns the ratio of M3 or M2 to M0. If M0 is defined as the amount of narrow money (cash and coins) in the economy, it gives an idea of the percentage of the money in the system that is created by banks. In the UK, the Positive Money group often talks about 97% of the money supply being created by commercial banks, and this is visible in the M3/M0 ratio which is  37:1.

If we look across all the countries for which such numbers are available you get an average  value of about 94.4% bank created money using M3, and 91.4% bank created money if you use M2.

The best way to distribute $72 trillion of debt free money

At 3.40 this morning, I posted an idea that could be truly revolutionary. Given that there is twice as much debt as there is money to pay it off, there is an urgent need to generate the roughly $72 trillion that is lacking to get the world economy back on track.

But how should that money be distributed? My basic proposal is that this should be done by the World Bank, who would be authorised to generate $10,000 of debt free money for every one of the roughly 7 billion inhabitants of our planet.

Obviously, this is just a starting point. We then have to think hard about the best way to do the distribution. My first suggestion would be that this should be done under the control of the United Nations who would have to approve the transfer of funds to the different governments.

What sorts of expenditure should be eligable? Clearly, there is absolutely no way that you could permit the transfer of large amounts of money to despots so that they could buy arms or to finance corruption. There would need to be clear guidelines.

The first type of expenditure that should be easy to justify would be paying off debt. Given that the per capita government debt of the vast majority of the world's countries is well below $10,000, this would be simple. The governments would simply have to show proof that they have paid off debt to be immediately reimbursed. Alternatively, the World Bank could make the payments directly, thus eliminating any risk that the money doesn't get used in the right way.

This sort of action need not be inflationary, since when a government pays off a debt to a bank that created the loan out of thin air, paying off the debt just causes the "money" to disappear in a puff of smoke.  Since global government debt exceeds $50 trillion, this means that this sort of action by the World Bank would simply lead to the debt level to drop with no decrease in the money supply.

Other cases where governments should be able to claim substantial amounts of World Bank money without much difficulty would be to fund any schemes that are ecologically sound and which would enhance the ability of the country to live decently. Thus, funds for developing agriculture, water production, renewable energy, sewage processing, transport infrastructure, education and health should be very easy to justify. Thus an African country that presented a well-documented project for any of these activities should be able to get direct, debt-free funding to finance it. With a budget of up to $10,000 per citizen, there is a huge amount that could be achieved this way.

Of course, not all countries have the luxury of having a reasonable government that can be trusted to use the money sensibly. I can think of quite a few dictators who could not be trusted to spend the funds in the interests of their citizens. In such cases, the World Bank debt-free money injections could be done via organisations such as the Red Cross (Red Crescent), Save the Children, UNICEF, Oxfam, Medecins sans Frontiers and so on. Imagine what could be done if those organisations could spend up to $10,000 per person in the most needy countries.

There would have to be very clear guidelines for all such funneling of funds. But it seems to me that it should not be impossible for the United Nations to come up with a set of rules for ensuring that the newly generated debt-free money is used wisely and in the best interests of the world's citizens.

Finally, I should note that in cases where there is no clear way for a particular third world country to use all the available funds sensibly, it should also be possible for that country to lend its surplus to the highly indebted countries like the UK, France, Germany and the US to help them avoid the billions in interest payments that they currently have to pay the banking sector. That way third world countries could be seen to be helping their first world neighbours.

Unless I'm very much mistaken, it seems to me that these propositions offer a simple, fair and reasonable way to get the world economy out of the quagmire of debt that it is currently in. And the immediate benefits to the world's population would be truly mind-blowing. We could fix problems like global warming and the lack of water, food, housing and education that blights vast numbers of people across the world. And it could all be done within a few years.

I may be a bit over the top sometimes. But, honestly, I can't see why this one can't be made to work. 

Comments please!

EUREKA : The solution to the ultimate question about life, the universe and everything

It's 3.40 am, but this is the biggie, and I just have to get it onto my blog.

The story so far.

I have added up the total global money supply figures for every country for which I could find numbers and get a total of $71.4 trillion (a higher number than the figure I got earlier for the 39 countries, which was $68.4 trillion - but that's pretty reasonable since the missing countries only contribute a relatively small amount each). I'll put the details of those numbers on my blog real soon now.

I have also added up the total amount of public and private sector debt for the 39 countries for which I have managed to get the full numbers. The answer to that one is $136.9 trillion.

The ratio of debt to money supply is 2 to 1 for those countries. Let's assume that the same ratio holds for the other countries and that the total global debt is twice the global money supply, namely $142.8 million. That difference of roughly $6 trillion for the other countries seems plausible.

So, let's suppose that the good and great of this world get together and say that there is a gap of $71.4 trillion between the amount of debt and the amount of money available, and that we need to generate that much debt free money to get the system back into equilibrium.

Let's say that the World Bank has the job of deciding what to do with the new debt free money that it is authorized to put into the system, and that it decides to do it in the one fair way, namely by providing the same amount of money to every man, woman and child on the planet. The World Bank's figures for population in 2011 totalled  6,951,062,787, so I think that we can assume that it will have reached 7.14 billion by now. That means that the World Bank should generate $10,000 of lovely debt free money for every person on the planet.

What could governments do with all that extra money? Well, priority number one should be to write off  all their debts.  Take a look at this wonderful chart showing the Economist's Global Debt Clock, which is currently standing at nearly $50.5 trillion. Given that the clock adds another $400,000 every three seconds, it won't be long before it gets there. -->

The different colours show the per capita public debt. Dark green countries have very low per capita debt. For example, Nigeria is at $274, Ethiopia at $243, Papua New Guina is at $420 and so on. Lighter green countries like India are at $866 while Algeria is at $432. For all the green countries, $10,000 per person will get them completely out of debt, with plenty to spare.

The $10,000 is even plenty to cover the debt for all the pink countries. Poland is at $7,281, Brazil is at $7,179, South Korea at $7,367 and so forth.

Only the red countries would not get directly out of debt. So, the USA is at $38,194, the UK at $36,259, France at $36,953, Germany at $34,222, Greece at $34,228 and so forth. Note in passing, the Greeks owe $6 a head more that the Germans. Not really much there to justify the Germans imposing massive austerity on the Greeks.

It looks like the Irish may win the competition, with per capita public sector debt at $55,595, but intriguingly, the Canadians are not much better with a debt level of $44,802.

But not to worry. With this system, all of these highly endetted countries would be able to borrow the money from the third world countries who would have a surplus. After all, total public sector debt is $50.5 trillion, and the World Bank will be pumping $71.4 trillion into the world economy. Even after paying off all the debts, there would be another $21 trillion to be used for other things. It's interesting to note that $21 trillion is the same amount of money as is stashed away in private accounts in tax havens.

For example, Ethiopia which has a population of 84.7 million, would have received $847 billion, but only has debts of $18.8 billion. It therefore would have a surplus of nearly $830 billion. Perhaps they would be prepared to lend a bit of that to countries like the UK and France. Whether or not they decide to charge interest would be up them of course. It would be the markets that decide.....

Is this scheme total fantasy? I don't see why. If you agree that there is a massive gap between the amount of debt and the amount of money around, it is clear that something has to change. I for one think that the idea of distributing the new debt free money according to population size is perhaps the only one that is clearly fair. You would eliminate third world debt at a stroke, remove the stranglehold that the markets have on governments, and end the current insanity.

So, it turns out that the answer to the ultimate question of life, the universe and everthing isn't 42. It's 72 (trillion). But Douglas Adams was pretty close.

The 50 biggests banks : $64 trillion in assets

A few days ago, I was puzzling about how it was possible that the total amount of private sector and public sector debt was twice as large as the total money supply and whether that really meant that it would be physically impossible to ever pay off all the debt.

I thought I would try another tack. Using information from an interesting site called BankersAccuity, I downloaded information about the world's 50 biggest banks. I've compiled the numbers into the following table which gives numbers for the total assets of each bank, together with the amount of capital that each one has. It makes for interesting reading.

First, if you add all the assets together, you get a total of over $64 trillion. This is actually quite close to the number for the total money supply that I got. But given the way that the numbers are dropping, I presume that total bank assets are going to go way over that value. In fact, the distribution looks fairly exponential in form in that the bank that is 22nd in the list has half the asset value of the 1st on the list, and by the time you get to number 44, the assets have halved again. Continue like that for another couple of hundred banks and the total reaches about $90 trillion. Add to that $31 trillion in assets held by Pension funds, and $21 trillion said to be held on personal accounts in tax havens and you have a number that is quite close to the $137 trillion in total debt that I found by combining the numbers for private and public sector debt.

So, that's where I think the debt is held. Around $90 trillion is held by banks, $31 trillion by pension funds, and $21 trillion by "pirate" banks in tax havens.

The other remarkable feature of the table are the numbers that the banks provide for their capital. The ratio of assets to capital varies from 20:1 for the China Development Bank Corporation to an incredible 3705:1 for the Swiss Bank UBS. Taken together, the total assets to capital ratio is 82:1, but the average is 380:1.

I presume that these numbers give some idea about just how much money the commercial banks have been injecting into the world economy. When they create new money by making loans, they increase their assets. This happens, for example, when someone borrrows money to buy a house. The bank makes the loan and the person who borrowed the money owes them that money.

Clearly there is a big difference between these numbers and the capital requirements that are supposed to be imposed by Basel III  around 30:1.  It looks like nearly all the banks on the top 50 list could are going to have a difficult time getting enough capital to meet those requirements.

Maybe the central banks could help out. They could start by taking over the $47 trillion in public sector debt, and charging 0% interest.

European Public Sector Debt and Interest Payments for 2012 - €11 trillion debt, €380 billion in interest

The latest Eurostat figures for Government Debt and Interest payments have just come out.  You can find them on the website and there is a summary document that you can download here. I've compiled the key figures in the following table (updated on the 24th of April to include numbers for the cumulated interest payments).

First, total government debt for the 27 countries has now topped €11 trillion, up 5.5% on 2011. For the 17 eurozone countries, the total is now nearly €8.8 trillion (for some reason, the Eurostat data gives a total of €8.6 trillion - not sure why there's a difference). Germany is still easily the most endetted country of them all - its debt levels have increased by nearly 4% since 2011 to €2.17 trillion. Interestingly, Greece has managed to reduce its debt level by around 15%, but Spain's debt level has increased by 20%. The record has to be Estonia, whose debt level has increased by 73%.

Outside the Eurozone, it is interesting to see that the UK's debt level has increased by 9.6%.

The 27 countries paid a total of over €380 billion in interest payments, which means that 2.9% of GDP is lost in paying these fees. For the 17 eurozone countries, the bill for interest payments was €294 billion - about 3% more than in 2011, and amounting to 3.1% of Eurozone GDP.

If we add the total cost of interest payments for the Eurozone for the entire period for which the figures are available  (1995-2012), we get the impressive total of €4.83 trillion, about 55% of all government debt (The numbers in Red mean that the figures are not available for the entire period). French taxpayers have paid out €835 billion and German taxpayers have paid €1,173 billion. But the most generous have been the Italians who have paid out €1,433 billion since 1985.

For the UK, which paid out another £46 billion of taxpayers money in interest in 2012, the total since 1985 now totals £542 billion (€737 billion).

The proportion of debt which is directly attributable to interest payments since 1995 varies a lot between countries. Over all 27 countries, total interest payments have reached €5.97 trillion - lets call that about €6 trillion - a number that constitutes 54% of all government debt. But over 80% of government debt in Sweden, Hungary and Bulgaria can be directly explained by interest payments. And in the Eurozone, the worst examples are Italy and Belgium where over 70% of  government debt is the result of interest payments.

I won't bother commenting on these numbers just yet. I think they speak for themselves.

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

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

How on earth did we get here?

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

Well, let's think about it a bit.

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

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

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

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

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

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

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

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

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

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

So what needs to be done?

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

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

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

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

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

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

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

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

So, here is the result.

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

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

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

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

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

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

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

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

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

Seems like a sensible plan to me. 

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

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

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

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

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

French Public Sector Debt and Interest Payments - The Full Story

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

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

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

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


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

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

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

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

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

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

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

Why the EU's FTT proposals need to be changed

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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