Debt/money requires some people to 'live beyond their means'

Much has been made of late of 'living within our means'. At a personal level, I could not imagine living any other way. As I sit and write this blog on a cool November morning, I am well wrapped up wearing two thick cardigans as the central heating is not on. It has not worked for 10 years.

If one is single, free of debts, a home owner (with mortgage paid off) and in good health, I have discovered over recent years that one can live well on a modest income. I hear talk of the level of income that constitutes 'the poverty line' and imagine the luxury that I could enjoy if only I had such riches – a working central heating system, perhaps.

As a volunteer with my local credit union, I have often found myself discussing the money troubles of people with far larger incomes than my own, two or three times my own, who yet somehow never have any surplus funds at the end of each week or month that they squirrel away for the proverbial rainy day. With no surplus disposable income, over and above their normal living expenses, I am wont to ask how will they repay the money, together with its modest interest charge, that they seek to borrow?

Indeed, with some younger people in particular, the very concept of savings seems entirely alien. Often, they are in debt already and turn to us as other sources of borrowing are exhausted. Mr Micawber would be spinning in his grave like a top, were he not a fictional character.

It is easy for those us comfortably in credit with the financial system to regard with pious disdain those of our fellows who are wallowing in a mire of self-inflicted debt, just as the Chinese can regard the trade imbalance between themselves and the 'North Atlantic' countries as our problem, not theirs; but there are two sides to every coin, and just as a single-sided coin or a single-sided sheet of paper is a physical impossibility, so a credit balance is impossible without a corresponding debt held by the other party to the credit.

Consider money in a bank. We talk of having money in a bank, and of putting money in a bank, when in fact, we do not put money into banks, so much as lend money to banks, and we certainly do not have any money 'in' a bank, unless, of course, one uses the same terminology to describe the other side of the coin.

Do banks have money 'in' their debtors? Do Barclay's, HSBC, LloydsTSB, etc, regard the loans and mortgages owed to them as money 'in' Mr and Mrs Smith of Acacia Avenue, or 'in' Dr Jones of Sunnyside Close, or 'in' the van of Fred Brown, self-employed plumber and central heating engineer?

Probably not. So it makes no more sense to think of ourselves as having money 'in' a bank. What we have is the bank's debt to us. The bank itself has nothing more than its debtors' debts owed to it, whether they are home mortgages, businesses loans, credit card advances or Government bonds. These are the assets which (more than) balance out the liabilities in the form of its debts to its depositors.

So, indirectly, those of us with money 'in' a bank are dependent upon those with debts owed to the banks for our money even to exist. This is the reversal of the common assumption, that people who borrow do so from people who have something to lend. This borrowing of existing money happens when one borrows from a (small) building society or credit union. They are not part of the bank clearing system, so cannot create debt/money. They can only lend out such money as they themselves have on deposit with a bank. (Some of the larger building societies are part of the bank clearing system, enabling them to provide current accounts, but do not seem to rely on inter-bank lending except as creditors like ordinary depositors.)

When borrowing from a bank, the bank has no bank account from which it can take the money, as most people would imagine it. Its depositors' money is what it itself OWES, it is not a credit upon which it can draw. It can no more pay out loans from its debts to its depositors than I could lend you a sum of money in the form of a bill to me from my telephone company.

Banks do not lend money, as most people think of it. Instead they lend credit, which can be thought of as a single entity, which I think can best be called 'debt/money.' or even 'debtmoney'. It is not money based on debt, wherein the money and the debt are associated but distinct. Rather, it is a single entity, like the two sides of a coin, or the two sides of a sheet of paper. The money only exists when the debt exists, and both disappear together when the debt is paid off.

The reverse, however, is not true. Disregarding the 2.6% of the money supply that is not debt/money, that exists in the purely positive state of notes and coins, the entirety of the UK money supply is debt/money, wherein the money cannot exist without the debt, but debt can happily exist without money.

It does so when when I receive a bill from my telephone provider. The telephone company doubtless regards my debt to it as an asset on its books the moment it raises the bill and sends it to me, but it won't regard it as money until I transfer their credit with me to their bank, by transferring credit that I enjoy with my building society to credit that they enjoy with their bank.

By contrast, I am happy to be in credit with my utility companies, notably my gas and electricity supplier. I pay, by direct debit, rather more than they estimate - still no central heating, guys! - so when bills arrive they are usually showing that I am owed money, which is a form of savings. I can, and occasionally do, ask for them to credit it to my building society current account.

This existence of debt without what we would regard as money, although it is certainly an asset on the banks' books, enables the banks to build up massive credit balances with the rest of the economy. It is not money that the banks can lend out, because it is what they are already owed, it is the money that they have 'in' their debtors, many of whom are quite possibly 'living beyond their means'.

Without someone 'living beyond their means', the rest of us would have no money to enable us to live comfortably, and piously, within our means. We will only be able to achieve a situation whereby nobody needs to 'live beyond their means' and for the economy still to be able to function, at both a global and national level, when one party's credit does not, necessarily, consist of another's debt.

Anne Belsey
(Leader of the MRP)