UK Green Party signs up for monetary reform

Now here's some good news. The Green Party in the UK has just voted in favour of including monetary reform in their program. Here are the main proposals:

a)All national currency (both in cash and electronic form) will be created, free of any associated debt,by a National Monetary Authority (NMA) that is accountable to Parliament

b) The 1844 Bank Charter Act will be updated to prohibit banks from creating  national currency in the form of electronic credit. To finance their lending, investment or proprietary tradingactivities, banks will have to borrow or raise the necessary national currency from savers and investors;

c)The NMA will be mandated by law to manage the stock of national currency sothat it is sufficient to supportfull employment, while avoiding general inflation in prices, and taking into account the development of local currencies (Ref.paragraph EC 678);

d)Any new money created by the NMA will be credited to the account of the Government as additional revenue, to be spent into circulation in the economy in accordance with the budget approved by Parliament;

e)The members of the NMA will be appointed –for fixed terms -by a Select Committee of Parliament;
 
f)The independence and integrity of the NMA will be assured by law requiring NMA members and staff to be free of any conflict of interest; mandating full transparency of NMA decisions; and prohibiting lobbying or undue influence of NMAmembers or staffby government, financial institutions, corporations or any other private interest

This really is precisely the sort of move that we all need. They produced a nice background document that makes the case very nicely. You can download it here.

Of course, I wouldn't be surprised if this doesn't make the rest of the mainstream press. Nothing so far in the Guardian or on the BBC for example.

I wondered whether the UK Green party was the first mainstream political party to include monetary reform as part of its program. But it turns out that the US Green Party beat them to it. Back in 2008, the US Green Party had already approved of the following elements that are part of their current platform.

15. Nationalize the 12 Federal Reserve Banks, reconstituting them and the Federal Reserve Systems Washington Board of Governors under a new Monetary Authority Board within the U.S. Treasury. The private creation of money or credit which substitutes for money, will cease and with it the reckless and fraudulent practices that have led to the present financial and economic crisis.

16. The Monetary Authority, with assistance from the FDIC, the SEC, the U.S. Treasury, the Congressional Budget Office, and others will redefine bank lending rules and procedures to end the privilege banks now have to create money when they extend their credit, by ending what's known as the fractional reserve system in an elegant, non disruptive manner. Banks will be encouraged to continue as profit making companies, extending loans of real money at interest; acting as intermediaries between those clients seeking a return on their savings and those clients ready and able to pay for borrowing the money; but banks will no longer be creators of what we are using for money.

17. The new money that must be regularly added to an improving system as population and commerce grow will be created and spent into circulation by the U. S. Government for infrastructure, including the "human infrastructure" of education and health care. This begins with the $2.2 trillion the American Society of Civil Engineers warns us is needed to bring existing infrastructure to safe levels over the next 5 years. Per capita guidelines will assure a fair distribution of such expenditures across the United States, creating good jobs, re-invigorating the local economies and re-funding government at all levels. As this money is paid out to various contractors, they in turn pay their suppliers and laborers who in turn pay for their living expenses and ultimately this money gets deposited into banks, which are then in a position to make loans of this money, according to the new regulations.

So, what will it take for more Green parties in Europe to include reforming the monetary system in their programs? Or even better, how about political parties of all persuasions signing up? For me, none of these ideas should be considered to be political. They are just good sense.

With Monnaie Honnête, the movement that we are in the process of launching in France,  I hope to be able to do my bit towards giving voters a real choice at next year's elections for the European Parliament.

How US Banks have pumped $10 trillion of debt into the US economy since 1992

Here's a great website. It's called US Banks Locations and it provides tables with numbers for the value of the assets held by every single US bank. You can get new sets of figures every 3 months (the latest are from the end of June 2013), and the data goes back to 1992.

It's fairly hard work, but I have downloaded all the data and added up the numbers for each year. You also get to see every single bank individually, and you get to see the number of banks as well.

As you can see, the financial assets of US banks totaled $4.6 trillion at the end of 1992. But by the end of 2012, the number had reached over $14.5 trillion. Where had all that "money" come from? Was it people depositing their savings with the banks?

Almost certainly not. The vast majority of the $10 trillion of extra assets corresponds to money that the commercial banks created out of thin air and then used to buy assets or make loans. Lending money to someone so that they can buy a house means that the bank increases its assets, even if they didn't actually have the money they lent.

Of course, certain banks have been particulary active. For example, JP Morgan's assets have increased  18-fold from $109 billion in 1992 to $1.95 trillion in 2013.

But the other fascinating bit of information that you can get by looking at this dataset is that the number of banks has plumetted. From 13,973 at the end of 1992, the number has halved to just 6949 in June 2013. Where did all those bank go? Of course, 6949 is still a huge number, and it's roughly the number of banks in Europe.

Unfortunately, I've not yet managed to find an equivalent set of data for the 6000+ European banks. Leave me a message if you know where to find such information.

Taxing Foreign Exchange Transactions

There are reports that the massive lobbying by financial services industry might be paying off. Apparently, some EU lawyers think that the the Financial Transaction Taxes being introduced by 11 European Countries could be illegal. According to Reuters ;

"The legal services of the European Council, the institution which represents governments of the 28-nation EU, said in their 14-page legal opinion dated September 6 that the Commission's transaction tax plan "exceeded member states' jurisdiction for taxation under the norms of international customary law".

The same report says that Commission was defending the tax. Specifically, Algirdas Semata, the European Commissioner responsible for taxation told reporters:

"We are confident that the Commission's arguments and arguments of the legal service of the Commission will demonstrate very clearly to our member states that the approach which has been taken in the proposal is the correct one and does not breach any provisions of the Treaty"

I really hope that he is right.

I believe that it would be an absolute traversty if the lobbyists, led by the UK Chancellor and the City of London, could be allowed to get away with this.

Apart from anything else, the UK is clearly guilty of the worst kind of hypocrisy. They have been imposing Stamp Duty at 0.5% on trading in UK shares since 1986. And they charge the tax even if you buy the shares outside the UK, raising billions in revenue for the UK government every year. Claiming that the 11 European countries should not be able to do effectively the same thing is simply outrageous. I hope that someone will be sueing the UK government for "illegally" imposing Stamp Duty on trades occuring outside of the UK.

But the other thing is that, as the BIS Triennial report just demonstrated, of the $5.3 trillion a day in foreign exchange churning the financial system, 40.9% is done in the UK, and specifically in the City of London. This bloated activity completely dwarfs even the US (19.9%), Singapore (5.7%), Japan (5.6%) and Hong Kong (4.1%).  Eurozone countries hardly get a look in, with even France (2.8%) and Germany (1.7%) barely registering.

And yet, the Euro is involved in 33.4% of all these transactions, with USD/Euro transactions accounting for 24.1% of all the trading.  How can you justify the situation where this trading, which directly affects those in the Eurozone should be continuing in the City of London with absolutely no possibilty of imposing any form of regulation?

It seems to me that it would beextremely reasonable to propose a system in which each Central Bank should be allowed to impose a tax on all exchanges involving their currencies. It would provide a simple and effective way for Central Banks to remove excess money from the system and prevent any inflationary tendencies. It would allow them simultaneously to inject new debt free money into the economy by providing funds to either central governments or directly to citizens, and remove the excess from the part of the economy that clearly has more money than it needs.

But as long as the City lobbyists have the power to prevent the introduction of intelligent control mechanisms, the outlook is gloomy indeed.

BIS Triennial Report : $5.3 trillion of Foreign Exchange and $2.3 trillion of Interest Rate Derivatives per day

Every three years the Bank for International Settlements publishes its Triennial Central Bank Survey of Foreign Exchange and Derivatives Market activity. They have just released the preliminary figures for the data collected in April 2013. 

You can read the details of the Foreign Exchange activity here and the Over the Counter (OTC) Interest Rate Derivatives are here.

Here are some highlights

Trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. This is up from $4.0 trillion in April 2010 and $3.3 trillion in Apr il 2007. FX swaps were the most actively traded instruments in April 2013, at $2.2 trillion per day, followed by spot trading at $2.0 trillion.  

Trading in OTC interest rate derivatives markets averaged $2.3 trillion per day in April 2013. This is up from $2.1 trillion in April 2010 and $1.7 trillion in April 2007. Interest rate swaps were the most actively traded instruments in 2013, at $1.4 trillion per day, fo llowed by forward rate agreements at $0.8 trillion. 

If we assume that there are about 250 trading days in a year, this would add up to a mouth-watering $1335 trillion in foreign exchange per year, and a futher €575 trillion of Interest Rate Swaps. Together that's $1.9 quadrillion.

So, let's see. Suppose we impose a 0.05% financial transaction tax on that. It could raise nearly $1 trillion a year. You could do quite a lot with that. 

It would also be a very neat way for Central Banks to take the heat out of the economy if and when they decide that it would be much better to directly inject new debt free money into the economy by giving it directly to citizens (see my recent posts). You could inject $1 trillion into the economy via citizens bank accounts, and remove the same amount with an FTT.  This would completely avoid any risk of inflation. 

 

And it would allow a net transfer of money from those people who can think of nothing better to do with their money than move it back and forth between dollars, euros, sterling and yen hundreds of times a second, to the people who could actually do something sensible with it.

How to distribute money from the European Central Bank

I've recently been arguing that a really good way to get debt-free money into the economy would be to simply get the Central Banks to create an electronic account for each citizen, and then add a number to that account. Yes, that is how banks create money - by typing numbers into a computer terminal.

In the case of the European Central Bank, this would mean creating accounts for the 333 million Eurozone citizens. A decision would have to be made about what to do for children. Each citizen would then be able to link their ECB account to the bank account of their choice, and would be able to transfer money so they could then spend the money into the economy. They could also use the ECB account as a 100% guaranteed safe place to keep their money, thus removing the need for government guarantees for the banking sector.

My original proposal was that the money created by the ECB should be distributed in a totally neutral way - each citizen would get the same amount irrespective of where they lived within the Eurozone.

However, some people have reacted by saying that such a scheme would be unfair. The cost of living varies between different Eurozone countries, and therefore the money should be distributed in a way that favours those people living in more expensive countries.

How might this work? Well, there are various numbers used by economists that allow the Purchasing Power in different countries to be compared. In principle, these numbers could be used to vary the ECB contributions for each country. 

I downloaded the Purchasing Power Parity numbers from the Eurostat website, and have put them in the table below. It turns out that there are five different sets of numbers that are available. In each case, there is a number for each of the 17 Eurozone countries that measures the local value relative to the average for the 28 EU countries (set at 1).

The first option uses Gross Domestic Product. Using this as a base for distribution would mean that citizens in Finland would get the most.  Indeed they would get 78% more each then people in Slovakia (who incidentally get the worst deal whatever the choice).

The second option uses actual individual consumption - in other words, how much people actually spend. With this scheme, people in Luxembourg would do really well, raking in more than twice the amount paid to those in Slovakia.

The third option would use the cost of food and non-alcoholic beverages. This would be a great deal for people in Austria, wwho would get 38% more that the Slovakians.

Or you could use the fourth option, the cost of just food, which would again see the Austrians getting most - 41.6% more than the Slovakians.

Finally, you could just use the cost of Bread and Cereals (fifth column). Again the Austrians do best, with  nearly 64% per head more than those in Slovakia.

Of course, there are an infinite number of columns that you could invent. What about taking into account the cost of rented accomodation? Or the cost of unviversity education? Or the cost of public transport? Or the cost of water, electricity and gas??

My personal opinion is that none of these is any good. As soon as you fix the rules so that the ECB has to provide more money per citizen in one country than another, then this will immediately give incentives to governments in each country to increase their local costs to increase their share. Suppose that it was bread and cereals that was the key index. Increasing the cost of bread in Slovakia would be a fantastic deal for the Slovakian government, and if the amounts of money being distributed by the ECB started to become very significant, then the incentive to artificially distort the numbers to get a larger slice of the cake would be very strong.

Imagine the effect of including the cost of public transport. Why would governments not immediately decide to increase transport costs to get more ECB money?

Or the cost of university eduction? Do we really want to encourage governments  to push up eduction costs?

No, there is no way to get this to work except a totally transparent scheme where the money is distributed directly on the basis of the number of citizens in each country. In that case, only increasing the local population would have any effect on the amount that the ECB pays to a given country. Indeed, this would be good in that it means that there would be some automatic compensation for people migrating between different Eurozone countries - something that many would find normal.

Even if you do think that it would be nice to try and find a "fairer" way of distributing Central Bank money between citizens, there are other reasons why I think that it would be a bad idea. With a flat system where Greeks get the same amount as Germans, this is not necessarilly a bad thing for Germany. Injecting more money into the Greek economy would mean that there would be more money around for importing German manufactured goods. That ECB money would still tend to accumulate in the places where the manufacturing was being done, so I see no reason to believe that the German economy would suffer at all be a truly uniform distribution system.

Finally, I have to admit that if I was living in Austria, I would be positively embarrassed to receive far more from the ECB than those living in the poorer parts of Europe. If bread and cereals really are cheaper in Slovakia, Estonia and the Netherlands, then I believe the Austrians should arrange to buy their cereals there, rather than expecting the ECB to subsidise their excessively expensive locally produced cereals.

So, if anyone wants to defend a distribution mechanism that involves anything other that providing the same amount for each citizen, please feel free to comment below.

More ideas for direct ECB payments to Eurozone citizens

I've been thinking more about how the European Central Bank should get freshly created debt free money into the Eurozone economy. Following my post last week, I'm increasingly convinced that the best way to get money directly from a Central Bank into the economy might well be to short-circuit politicians completely, and directly credit the bank accounts of citizens.

Suppose that, in its wisdom, the European Central Bank decides that the Eurozone needs another €1 trillion to get the economy moving. Given that the total Eurozone population is 333 million, this works out at €3000 per man, woman and child. Under the current arrangement, the European Central Bank's main options for getting more money into the economy involves adjusting the interest rate at which it provides funds to the banking system. But this is clearly not an efficient way of controlling the money supply - nobody can oblige commecial banks to make loans. And when they do make loans, this is just increasing the amount of debt in the system.

Injecting money directly into the economy debt free by adding money to the bank accounts of European citizens would be far more efficient, and would allow the money supply to be increased without increasing debt levels.

But what would be the best way to do this? Should the ECB transfer money to the conventional bank accounts that citizens have with their local banks? While this is possible, it seems to me that there may be an even better option.

My suggestion is that the ECB should itself open accounts for every Eurozone citizen. Literally, this could simply involve creating the equivalent of an enormous Excel spreadsheet, with one entry per citizen.  Initially, all those accounts would have an entry of €0.00. But, if the ECB decides to increase the money supply, it would simply add the appropriate sum (be it €10, €100, €1000 or whatever) to the account.  It would be as simple as pressing a key on a computer. (Yes, that is all that is needed to create money!).

How would people spend this money? Well, I would suggest that they would be able to link their conventional bank account to the ECB account, much as you can link a bank account to a Paypal account. This would mean that you could then transfer the money on the ECB account to your conventional account, at which point you could then use it as you would use money normally.

Note that the ECB account could only be positive. There would be no way for a citizen to become overdrawn on their ECB account because they simply would not have the option of transferring more money than there was credit on the account.

One other interesting possibility is that citizens would also be able to transfer money from their conventional bank account to the ECB account. Why would they do this? Well, the ECB would not be paying interest on the sums held on their accounts. On the other hand, any money that was held by the ECB would be absolutely safe. There would be no way that you could lose the money, irrespective of what happens to the rest of the banking system.

This idea is actually very close to the notion of "transaction accounts" that the Positive Money group has been proposing in the UK. Their idea is that the "current accounts" in the banking system should effectively be accounts held with the Bank of England. As with the current proposal, those accounts would be guaranteed by the Central Bank but would not get any interest. If someone wanted to get interest, they would need to transfer their money from the transaction account to an investment account, which would have an associated level of risk.

Both Positive Money's proposal and my own have the major advantage that it would no longer be necessary for governments and central banks to guarantee money deposited with commercial banks. This would remove the massive hidden subsidy that has been artificially propping up the commercial banking industry at tax payers expense, and has encouraged reckless behaviour by bankers.

In Positive Money's proposals, your money would be safe while it was in the transaction account (effectively with the Bank of England). Withe the current proposal, the European Central Bank would actually have a safe account for each citizen - a place where it would be easy to transfer money for safe-keeping. But at the same time, it would also provide an easy way for the ECB to be able to directly increase the amount of money in the system.

I would propose that the ECB would only have the ability to put money into these ECB run accounts. While you could in principle tax people by withdrawing money from their accounts, I think this would be a bad idea. For a start, if you were to apply a €100 tax to all citizens by reducing the ECB account balances by €100, what would happen to an account that did not have €100 in it? As I have already said, I strongly believe that such accounts should only be positive.  No, I think that if the ECB wanted to reduce the amount of money in the system, the best way would be to apply a very small FTT to the roughly €1.6 quadrillion of transactions that occur in the Eurozone each year. That way, there would be no way of causing people to go into debt. If you can't afford the 0.05% fee for transferring money from A to B, don't make the transfer.

Finally, why do I think that directly crediting citizens is better than providing money to governments? Well, one reason is that if the ECB wanted to inject €1 trillion into the economy and did it by transferring the sums to the 17 Eurozone governments, it would be much harder to be sure that the money really did get into the economy. Providing money to governments does have the risk that money could end up being used for corrupt practises. Who knows what proportion of money provided directly to the Italian government would end up with the Mafia? Directly crediting the accounts of individual citizens would completely avoid this sort of risk.

Any comments?

Eurozone Transactions from 2006 to 2012

I had previously calculated that transactions in the Eurozone in 2011 were around €1.6 quadrillion, and I provided a detailed breakdown country by country. With the latest numbers from the ECB I have compiled the numbers for "Securities Trading", "Securities Clearing" and "Securities Settlements" for 2006 through 2012.

But I thought it would be interesting to calculate the combined numbers by adding in transactions handled by TARGET, EURO 1, and the various other payments made by Credit Transfers, Direct Debits, Cheques, E-money and other payments methods. So, here they are for every year since 2006. All the figures come directly from the ECB's website. Note that since some of the numbers for 2012 aren't yet published, I've just used the numbers for 2011 - these are the figures shown in red.

You will note that the figure for 2011 was actually a bit more than the €1.6 quadillion I quoted earlier. That is because I had not included the EURO 1 system, which pushed up the total to €1.68 quadrillion.

The total for 2012 will be something like €1.58 quadrillion - somewhat down on 2011, but actually quite in line with previous years, matching the number for 2007.

All this means that the ECB could easily apply a small FTT on Eurozone financial transactions that could be used to prevent any inflationary tendency that might result from direct injections of new debt free money into the economy via citizens bank accounts.

The more I think about it, the more I am convinced that this would be a great way to really get the economy moving.

ECB Transaction Figures for 2012

Yesterday, I was suggesting that the ECB could easily finance direct payments to all Eurozone citizens by applying a very modest FTT on all financial transactions within the EU. I suggested that a 0.05% tax on the €1.6 quadrillion of transactions would provide €2500 for every man, woman and child in the Eurozone - thus providing a massive boost to the Eurozone economy.

The €1.6 quadrillion figure is one that I published last year on the basis of the ECB's own figures. However, the figures I used were based on transactions in 2011. So I thought it would be a good idea to try and get some numbers for 2012.

The complete figures are not yet available. In particular, the numbers for Payment Transactions for 2012 are not yet on the ECB website (they were €143.5 trillion in 2011). However, we do already have the values for transactions handled by the TARGET system in 2012. This totalled €634.1 trillion, of which €630.2 trillion was handled by the 17 Eurozone countries. To this we can add a further €57.9 trillion that was handled by the EURO 1 (EBA) system - you can find all the details here.

But the ECB also provides 3 other sets of data that you can find http://www.ecb.europa.eu/stats/payments/payments/html/12_table2.en.html. The first concerns numbers for Comparative Tables on Secrurities Trading Statistics which can be downloaded in pdf form for 2011-12 here. The second concerns "Securties Clearing Statistics" and can be found as a pdf here. Finally, there are numbers for Securities Settlement Statistics" for which the pdf can be downloaded here.

However, to compile the figures in a single sheet, I downloaded the original data as Excel sheets, and generated the following table that gives all three sets of data for every year since 2006. I've ranked each component for the three datasets by turnover so that you can see where the action is.

As you can see, 2012 was not a good year for the traders. Overall transactions were down substantially on 2011's record total of €862.9 trillion. In fact, there was a drop of 13.3% year on year, resulting in a total of only €747.9 trillion. Hard times indeed.

Nevertheless, Eurocelar Bank (Belgium) managed to process an impressive €309 trillion, followed by the €123 trillion that was handled by Euroclear France, €76.1 trillion by Iberclear, and €71.8 trillion processed by Clearstream Banking in Luxembourg.

In fact, it would appear that 2012 really was a tough year at the global level too - not just in the Eurozone. A report from the World Federation of Exchanges said that transaction figures in 2012 were down substantially:

• Electronic Order Book (EOB) Share Trading was down 22.5% to $49 trillion
• Cash value of Bond trading was down 20% to $26.1 trillion
• ETF trading was down 31.6% to $7.3 trillion
• Securitized Derivatives were down  43.3% to a mere $632 billion

Nevertheless, I still think that the claims that a 0.05% FTT would wipe out all this activity completely are somewhat exaggerated.  I really do think that the ECB can count on around €1.5 quadrillion in transactions within the Eurozone that it could very easily tax.

Just imagine what providing €2500 to every man, woman and child in the Eurozone would do for the economy.

I'm back - with a new idea. Direct ECB payments to Eurozone citizens.

I'm embarrassed to say that I have not added anything new to my blog since the 8th of May - nearly four months. It's nevertheless nice to see that people have kept on visiting the site - with more than 7000 visits since then, and 2540 in the last month. I presume that can't all be due to Google's search robots and the NSA.

It would be nice if I could say that I have spent all this time working on the new "Monnaie Honnête" website that we have been setting up. Unfortunately, that's not really true. I've been busy with plenty of other things (like trying to work out where Consciousness comes from) . However, the association "Monnaie Honnête" now legally exists - we have a president (Claire Boine), and my cousin Chris and I make up the rest of the "bureau". We really hope to get more than a welcome message online "real soon now". Sorry that it has been taking so long.

In the meantime, the members of the bureau have been having some interesting discussions about what we should be pressing for. Given that we are all fans of Positive Money - the UK based movement for monetary reform that has done such an excellent job of generating a highly coherent set of propositions - it is not surprising that their main propositions will be centre stage. Here's my latest version.

1. All money creation should be debt free
2. The current licence to create money and charge interest that has been given to commercial banks should be immediately removed. Lending money that you don't have and charging interest really is as outrageous as it sounds - and anyone who does it should be put in prison, just like you should be in prison if you print banknotes in your basement
3. Any new money creation should be done in a democratically accountable manner by central banks or their equivalent.

But now there is the interesting question of how precisely newly created money should be injected into the system. According to Positive Money's proposals, money created by the Central Bank "Money Creation Committee" would be provided directly to governments, who would then be able to choose what to do with it. Eseentially, there are four main options.

1. Reduce taxes
2. Spend money directly into the economy by financing projects such as building schools, hospitals, housing, developping the transport infrastructure, renewable energy systems etc
3. Provide money directly to citizens in the form of a citizen's salary
4. Pay off government debt

Positive Money steers clear of saying what the priorities should be. Such decisions are highly political and are best left in the hands of the democratically elected government. This is a position that Monnaie Honnête also defends.

But, in talking with my colleagues, I've come to the conclusion that there is another possibility, one that is particularly interesting in the case of the Eurozone. Let's assume that the future governer of the European Central Bank decides that the Eurozone needs an injection of  (say) 1 trillion euros. This number is not ridiculous - after all, it's the amount that the ECB handed over to the European Banks in two rounds of Long Term Financing Operations (LTROs) at the end of 2011 and the beginning of 2012.

I've previously made the suggestion that instead of handing money to the banks and praying that they might decide to do something sensible, the ECB should hand the same amount of money to the 17 Eurozone governments, and that the decision about how much each country gets should depend simply on population size.  Roughly 25% would go to Germany (because roughly 25% of the Eurozone population lives in Germany) and so forth down to 0.1% for Malta (see the table).

While this seems absolutely fair, and quite sensible to me, there is a problem. The Lisbon treaty does actually prevent the ECB providing funds directly to governments (although there is a way of getting round this by lending to "Publicly Owned Credit Institutions", as I have argued repeatedly). Nevertheless, there is perhaps and even simpler solution.

How about the ECB simply adding a fixed sum to the bank account of every Eurozone citizen. If they wanted to add €1 trillion to the economy, this would mean adding roughly €3000 to the bank accounts of every man, woman and child in the region. Of course, €1 trillion is being particularly generous, but even €10 billion would make a lot of difference to quite a lot of people in Europe - particularly those in cash starved areas like Greece, Spain and Portugal.

What would people do if they were provided with such funds? Well, obviously in some cases it would just allow them to reduce their overdrafts, but that would in itself be a good thing for banks who would be able to reduce their risk levels. For others, they might use the money to do some useful work like insulating their houses, which would be good for the ecology. Others might use the extra cash to go on holiday, perhaps to places like Greece or Spain who could do with the trade. Yet others might go out and eat in restaurants, again stimulating the local economy, or buy a new car.  Virtually all these things would be good news for the Eurozone economy. Almost the only thing that would not be great news for Europe would be if people decided to use all the money to buy Flat Screen TVs from China - but well, you do have to give people some choice.

Compare that with the effect of throwing €1 trillion at the banking system and praying (which is what Central Bankers currently do). What evidence is there that much of that ended up getting into the real economy rather than being used to fuel house price inflation or other speculative bubbles?

But what I find particularly attractive about the idea that the ECB (and other Central Banks like the Bank of England) justs credits money on the bank accounts of ordinary citizens is that it completely bypasses the entire world of politics. There is no way that the money could be used for corruption, buying votes, or any of the other reasons why allowing politicians access to the money creation process is such a taboo. It would be the most neutral way imaginable to get money into the economy. It's Ben Bernanke's helicopter money, but without having people fighting to grab the banknotes being thrown out of the helicopter's window.

Of course, there could be checks. For example, the ECB could decide to only credit a citizen's bank account if that citizen is up to date for tax purposes, and can claim to be a true resident. Children could also count towards their parents allocation, if they were included in the country's educational system, and so forth.

How much could the ECB pump into the economy this way before the tell-tale signs of inflation would lead them to say that the sluice gates needed to be closed down? My guess is that the economy could handle a lot more money without overheating. Indeed, while unemployment is still so high, there is every reason to think that the extra cash could easily get transferred into getting people back to work. 

And you know what? If the cash injections directly into people's bank accounts does start lead to some signs of inflation, there is an easy solution. The ECB could directly apply a Financial Transaction Tax on all Euro denominated transactions to just take the money out of the economy.  Of course, the traders and speculators would object. But, given that the Eurozone handled  at least €1.6 quadrillion in 2011, each 0.05% of FTT would allow the ECB to redistribute another €800 billion among the Eurozone's 333 million inhabitants - around €2500 each - without any possibility of causing inflation because the net effect on the money supply would be nil. Who wouldn't vote for that?

Finally, I note that this suggestion differs from the idea of a citizen's salary - something that would be paid regularly. My suggestion is that the ECB should do all this money injection as a one off. Everytime there are signs that the economy needs more "fuel", the ECB would add a bit more - directly via citizen's bank accounts.

Can you see any problems? I can't.

The French "Positive Money" has been launched. It's called "Monnaie Honnête"

I've been saying for some time that we really need a Europe wide movement to press for monetary reform. Positive Money are doing a great job in the UK, and there are other movements that have been springing up in other countries.

• Monetative, Germany
• Occupy Money, Germany
• Vollgeld-Initiative (Verein Monetäre Modernisierung MoMo),  Switzerland
• Sensible Money, Ireland
• Ons Geld, Netherland
• Movement for Monetary Change, Israel  (Hebrew)
• Positive Money, New Zealand
• Center for Progressive Economics, USA
• American Monetary Institute, USA

But, so far,  I haven't been able to find a real francophone equivalent.

But that is now on its way to being fixed.

With Claire Boine and my cousin Chris, we have just taken the first steps to creating a movement called "Monnaire Honnête" (Honest Money) which shares the six main proposals made by Positive Money:

1. Remove the banks' power to create money
2. Return that power to a transparent and democratically accountable process
3. Create money free of debt
4. Create money in line with a democratically mandated target (such as a flexible inflation target, as is the case today)
5. Make sure that new money enters first into the real economy instead of through financial markets
6. Give individuals control and transparency over how their money is invested

Our French versions come out as

1. Retirer aux banques le pouvoir de créer de l'argent
2. Donner ce pouvoir à une instance  au fonctionnement transparent et démocratique 
3. Créer de l'argent sans dette
4. Assujettir la création monétaire à des objectifs décidés démocratiquement
5. S'assurer que l'argent créé soit directement injecté dans l'économie réelle sans transiter par les marchés financiers 
6. Assurer aux individus la transparence et le contrôle de la façon dont leur argent est investi

We'll no doubt be adding some other suggestions to make the ideas work well in the Eurozone, as well as other reforms that make sense.

So far, we've colonised the websites 'monnaiehonnete.org' and "monnaiehonnete.fr", and there is now a welcome message that I did with a new blog that I set up.

But, hopefully, soon we will have a much more impressive website up and running (and if anyone has webdesign skills, we would love to hear from you).

The aim is to provide solid arguments for the changes that we think are vital. But we will be very careful to avoid areas that can be regarded as politically driven. 

For me, the ideas that are being proposed are neither left wing or right wing. They are just good sense. And they will benefit absolutely everyone, except maybe for a few people working in the banking system. But, frankly, I think even those people will be better off morally if they didn't have to try to pretend that the current insanity can be justified. 

Stay tuned!

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.