The Debt Pyramid

by Anne Belsey
(Leader of the Money Reform Party)

One way to get a sense of the historical significance of the present financial crisis is to visualise society as a triangle with a pointy top and a broad base. It is the picture of a side of a pyramid.

The rich people are those at the small pointed top of the pyramid, which broadens to encompass the 'comfortable' middle-classes and broadens further to include those less well off with the wide base of the very poor.

At the beginning of the 20th Century, that part of society which had bank loans consisted solely of those at the very top of this pyramid. The aristocracy, people with 'private incomes', were the only individuals who borrowed from banks. They were joined by large companies seeking short term loans and the government seeking much longer term loans.

As the century progressed, after the First World War, so bank-lending began to slide down the social scale, absorbing more and more of the population. A step down from the aristocracy, the upper-middle classes, professionals such as doctors and lawyers, began borrowing to buy the suburban villas they had previously rented, and smaller limited companies began to borrow to finance expansion or to cover cash-flow shortages.

After the Second World War, the lower middle classes, clerks, middle managers, teachers and other salaried workers, also started to take out mortgages to buy their three-bedroom-semis, whilst even very small family firms began to rely on an overdraft facility. This expansion of new lending was important for the economy because successive governments began to pay down the National Debt as a proportion of GDP (even though it kept rising in real terms), from 250% in 1945 to 40% in 2007.

So the burden of borrowing into existence the money supply that the economy needed (and paying it back with interest) shifted from the government to private individuals.

Into the 1980s and borrowing increasingly became a way of life for the 'skilled working classes' and anyone in secure employment, as council houses were sold, house-ownership became the realisable dream for almost everyone and credit cards became popular.

Then in the 1990s, students were brought in to carry their share of the nation's debt burden, as were the elderly in the form of equity release schemes. Meanwhile in business, a great many companies were the subject of highly-leveraged buyouts, leaving those companies heavily indebted.

By the early 21st Century, anyone who was willing to borrow and able to afford the repayments on such borrowing was in debt up to the hilt, but further borrowers were needed. With money coming into existence in the form of debt, not as an expression of positive value as many people suppose, the amount of borrowing has to rise year on year simply to keep the whole system from collapsing.

With the money supply being the collective principal of all outstanding bank loans, the amount of money needed to pay back these loans (with interest) is greater than the money supply. So more new money has to be borrowed each year in order to pay back both the principal and the interest on the borrowings of previous years. In effect, the amount borrowed each year has to meet the amount borrowed the previous year plus the interest on that debt.

It is an exponentially growing debt and one that is not repayable. It can be likened to a pyramid selling scam, wherein each successive intake of gullible participants has to be double the previous intake until the whole scheme collapses due to a lack of gullible participants.

In the real economy, over the past century, we have expanded the proportion of the population that is heavily in debt to the banks until we have reached exhaustion. We have run out of credit-worthy borrowers. Therein lies the simple reason for the credit crunch.

For those of us who advocate a reformed money supply, the solution to this problem is obvious. It is also very simple, and could be applied very quickly and easily. We should have a money supply that exists as a positive, permanent medium of exchange, the existence of which is not dependent upon anyone being in debt.

Unfortunately, mainstream economic thinking is tied to the existing system of money being based upon an ever increasing level of debt. Those economists and politicians who adhere to this viewpoint have to answer this question: 'With debt at saturation point, who is going to borrow into existence the extra money that the economy needs?'