The Whole World is Practically Insolvent

The people and all the countries of the world are collectively close to insolvency because their collective financial assets are only marginally greater than their collective financial liabilities. Also, although the world could never actually be technically insolvent (to owe more than it is owed), it could become insolvent in practical terms. Indeed, it might already be so.

There are two definitions of insolvency. One is when liabilities exceed assets. However, this state covers many individuals and businesses who are not normally regarded as insolvent because they have an income which exceeds their expenditure, including payments towards their liabilities. The second definition of insolvency is when expenditure exceeds income.

Bankruptcy
Bankruptcy normally only occurs when there is both an excess of liabilities over assets and of expenditure over income, for example, when the interest due on debts exceeds income, or when the excess of expenditure over income requires assets to be sold, until liabilities exceed assets.

All these quantities - assets, liabilities, income and expenditure - are measured in monetary terms, or what is called 'liquidity'. Non-liquid assets only have value if they can be sold for money. An asset that cannot be sold, no matter what price was paid for it, or what it might be considered to be 'worth', effectively has no value. Solvency is thus a matter of liquidity, which is to say, of having enough money.

To whom is the world in debt?
The question must thus arise as to whom is all the world's debt owed? What 'extra-terrestrials' are in credit with all the world's debtors?

The major creditors in the world are the commercial banks, the 'High St' clearing banks with which most people have accounts, and of which many were helped out during the initial stages of the credit crunch.

The banks themselves are also major debtors. Their debts form the world's money supply. Banks' debts are what most people regard as their 'money in the bank'. The banks have very little cash to back their liabilities, but they do have enormous financial assets. These are their customers' debts, which far exceed the banks' liabilities. By convention, a debt owed by a bank to a customer, which the customer can spend, is called money, whereas a debt owed by a customer to a bank, which the bank cannot spend, is not.

The UK money supply
The UK economy will serve as a microcosm of the whole world. In March 2011, the total UK stock of liquid assets was £2,165 billion, being the total UK money supply (M4). Of this total, £57 billion consisted of notes and coins, of which some £50 billion was held by the banks. The remaining £2,110 billion or so of the money supply consisted of £920 billion owed by one commercial bank to another (inter-bank lending) and the £1,190 billion owed by the commercial banks to their non-bank customers – individuals, businesses and government bodies - being their deposits with these banks.

Set against the liquid assets (money) of the non-banking part of the British economy, are our collective nett liabilities, which are the banks' assets. This consists of £1,450 billion of personal debt, mostly mortgages, some £500 billion of corporate debt, and about £550 billion of Government debt (out of a total Government or National Debt of £900 billion).

Total UK debt
The total amount of debt owed to the banks is more than twice the amount on deposit from their customers. The banks' ratio of assets to liabilities is about £2,500 billion against £1,190 billion (excluding inter-bank debt). This might seem to give the banks good financial security, but it does not.

There is a saying that if you owe the bank £1,000, you have a problem, but if you owe the bank £1 million, then the bank has a problem, and never was this fact more applicable than now. The banks' nett assets are almost entirely non-liquid. The banks continued viability depends upon the financial viability of their debtors, be they business borrowers or householders with mortgages. Unfortunately, many businesses and households are struggling financially because they are so heavily indebted to their bank.

In recent years, commercial property has fallen in value so much that the approach of the banks to commercial mortgages has become known as 'pretend and extend'. They pretend that the property has retained its value and have extended the period of their mortgages in order to maintain the fiction of the nominal value of their assets. In similar vein, they have become more reluctant to repossess homes, as doing so on a large scale would reduce house prices even more than the current rate of decline.

Economic growth needs more debt
Economic growth would end this log-jam, but growth requires an injection of more money into the economy, which in turn requires more people to borrow more money into existence. This is unlikely to happen given that so many people are so heavily indebted already, and given the fact that banks are already too nervous about the value of their existing assets to want to increase their liabilities (the money supply) against further assets (new loans) that could also go 'toxic'.

Debt repayment without growth
The only way that the country's myriad debts could be reduced without growth (and a necessary increase in debt) would be for everyone with any money to spend it in such a way as those with the debts could earn it and use it to pay off their debts. This in turn would reduce the banks' liabilities as the amount of money on deposit with them would fall to the same extent.

The problem with this approach is that if everyone did spend all of their savings, they would risk financial disaster themselves. There would be many more bankruptcies, both household and commercial, if fewer people had the financial cushion of some savings.

The eradication of the nation's bank accounts would see the money supply almost totally disappear, causing a complete collapse in the economy. We would still collectively owe at least £1,300 billion, with no means of paying it off. Possibly it would be soon be written off, but having returned to a sort of mediaeval pre-monetary economy, few people would care.

However, we would have a small collective nett positive liquidity (the £57 billion in notes and coins) for the first time since 1985 (Result!). We would not actually be collectively insolvent, but would be practically so.

All around the world
One can apply the same scenario across the world, not only within a country, but across borders. The Germans might complain that they are lending too much to the Irish and the Greeks, but what do they think that their money consists of? Their credit has to be someone else's debt. That is how the modern money system works. Very little money, of any currency, consists of purely positive money, such as notes and coins.

All around the world, one person's credit is another's debt, and the only way that the debtors can reduce or eradicate their debt is if the creditors spend their money with them. If the creditors refuse to spend their money with the debtors, but insist on selling them more stuff, lending them the money to buy it, they cannot in all honesty then complain when their debtors' debts continue to increase.

A zero-sum game
Debt-based money is a zero-sum game. The only way for no one to be below zero is for everyone to have zero. The only way that debtors can avoid bankruptcy is for creditors to spend so much of their money that they themselves risk bankruptcy. In practical terms this not likely, but given that creditors' credit is dependent upon the financial viability of their debtors, it is ultimately the only way that they can secure their credit.Debt-free money as a proportion of the whole

The money supply is not entirely a zero-sum game. In Britain, out of a total money supply of £2,165 billion (March 2011), £57 billion is not based on debt. This amounts to 2.6% of the total. In 1946, when the Bank of England was nationalised, notes and coins, the debt-free element within the money supply, was 46% of the total.In the following decades, both in Britain and around the world, this wholly positive, debt-free element of the money supply has steadily fallen, and as it has fallen, so the capacity for widespread solvency has also fallen.

It might seem impossible for the proportion to fall further, but it can, as less and less cash is used by people who increasingly prefer the convenience and security of various types of plastic. It is possible to envisage a world without cash, where there is no longer any margin between collective solvency and collective insolvency.

The solution
The solution to our economic problems is staggeringly simple. Ban the facility whereby commercial banks can create credit based on their borrowers' debts. Require all bank loans to be backed by the banks holding some form of positive, publicly-issued and government sanctioned money, whether as cash or as credits with the Bank of England, and then issue enough of such money to enable the economy to function without having to have people, businesses or the government itself massively in debt.

Money Reform is the Alternative

The TUC March for the Alternative that made its noisy but good-natured way through London on March 26th called for an alternative to the Government's spending cuts. Unfortunately, none of the organisations associated with this march has an alternative.

The usual suspects

Certainly, there are calls for a clamp down on tax avoidance (which is entirely legal) and tax evasion (which is alrewady illegal), but the most difficult task for our often derided and comp[aratively poorly-paid civil servants is to extract more tax from wealthy companies who are able to afford clever specialist accountants to get around whatever rules are imposed. In opposition, every political party calls for such a clampdown, only to fail in government.

Nor can denuding our armed forces of resources offer us the means of paying for our other public services. The defence of the realm is the first responsibility of any government, and Britain has been a player on the world stage for too long to assume a role akin to that of the Swiss. As a consequence of our history, we have responsibilities to fulfil

The problem of debt-based money

Furthermore, neither of the above approaches deals with the central problem facing both the British economy and most other developed economies, a problem of which few are aware, including most economists and politicians.

The central problem stemming from the Government's determination to reduce its borrowing is that such a measure will reduce the amount of money in circulation within the British economy in comparison with the amount required. The amount required grows annually at an exponential rate as more new money has to be borrowed into existence each year to pay the interest on money borrowed into existence during previous years.

Someone has to do the borrowing, whether Government (£900 billion), private business (£500 billion) or private individuals or households (£1,500 billion). It is noticeable that no one seeking an alternative seems to be suggesting that government borrowing should continue to grow exponentially, and there is opposition to increased private borrowing in the form of increased student debt. With debt-based money, the alternative to ever increasing borrowing, by whomsoever, is economic recession.

This is a situation that neither the Coalition Government nor the coalition against the cuts are addressing, because neither side is aware of the problem.

Ending the bankers' money-creation scam

Money reform would address this problem of debt-based money and also provide sufficient funds both to maintain public services and to reduce government debt.

Money reform is simply this. A law would be passed that prohibited the clearing banks (the likes of Barclays, HSBC, LloydsTSB, RBS, etc.), or any other private body, from creating credit based on their borrowers' debts. In other words, banks would no longer be able to lend money that they did not have. They would no longer be able to create the nation's money supply in a process that requires ever-increasing indebtedness. This would, of course, reduce bank profits, down from billions to mere millions, and bankers would revert to being well-paid businessmen, rather than being the Masters of the Universe.

The shortfall in the nation's money supply would be met by increasing the amount created by the only other (legal) creator of the nation's money supply - the Bank of England, a publicly-owned Government agency.

Currently, the Bank of England creates just 2.6% of the nation's money supply, in the form of the notes and coins. The £2 billion or so of extra cash that it creates each year (in addition to old notes and coins being withdrawn) is almost wholly extra income for the Government's coffers. Printing up a £20 note costs a few pence. This is free money for the public purse, derived from the new money that the economy requires.

A public money supply

Money reform would simply increase the proportion of the nation's money supply created by the Bank of England from 2.6% to 100%. This need not be in the form of notes and coins, but could consist of credits in a Bank of England computer. In the process we could expect to see the revenue due to government grow from around £2 billion per year to some £100 billion per year, at least for about 10 years, until the economy had an adequate stock of permanent money. This money would not require anyone to be in debt.

This sum of extra government revenue would enable the deficit to be paid off in about 18 months, whilst the entire National Debt, which has been growing exponentially for over 300 years, could easily be paid off within a decade, all without spending cuts or tax increases.

Reducing inflation

A further benefit would be the stabilisation of inflation at a point closer to zero than it presently is. The Government's oft-quoted inflation target stands at 2%. Few people ever ask why it is not 0%. The reason is that with a money supply based on debt more new money has to be borrowed into existence each year to pay the interest on money borrowed into existence during earlier years. Debt-based money requires inflation.

With a money supply created debt-free by the Bank of England, not only would inflation be unnecessary, with one single body controlling the money supply and being charged with a 0% inflation target, such a target would be more readily achieved than at present, with money creation being determined by the clearing banks' pursuit of profits.

Certainly, money reform will not protect us from inflation shocks derived from external sources such as oil price increases, but it would better enable us to invest in technology that would reduce our dependence upon foreign oil.

The Financial Services (Regulation of Deposits and Lending) Bill

The distance between this idea being promoted on a blog and becoming law is not perhaps as far as many might imagine. No new legislation would be needed to enable the Bank of England to provide us with our money supply The only legislation required would be that to prevent the clearing banks (or anyone else) from creating money.

As I write (27th March 2011), such a piece of legislation is currently before Parliament. It is called the Financial Services (Regulation of Deposits and Lending) Bill. It is a private member's bill and, lacking Government support, it is unlikely to become law, if only because few politicians are aware of how crucial it is to our economic well-being.

Yet, the mere fact that such legislation stands before Parliament means that the concept will be credible to our legislators when its full benefits are drawn to their attention, even more so, given that the movers of this bill are Conservatives.

Real reform or posturing

Such an origin might ring alarm bells in the minds of many who oppose the Government cuts, but such legislation can only hope to be passed with support from the Government benches. A rallying of support for such a bill is therefore entirely possible from across the political spectrum, but support will only be effected by those interested in real reform. This is how real reform is achieved.

Of course, real reform will not interest those who are secretly delighted by the programme of cuts, which gives them the opportunity to dress all in black or in some other political imagery of their own deluded fancy, in order to posture and strut and create mayhem on the streets of London.

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)

Cutting the deficit will not be possible (without money reform)

As promised, our new Government has immediately announced its intention to cut the deficit that it inherited from Labour. This initiative was applauded by the Governor of the Bank of England and, if Mrs Gillian Duffy is to be our Everyperson, it will no doubt be accepted as inevitable and even desirable by a sizeable section of the British people. At the same time, our new Minister for Banks and Business, Mr Vince Cable, has announced his intention to force the banks to increase their lending.

Both of these two announcements indicate that the new Government, as well as the old one, the Bank of England, and a sizeable proportion of the British people have no understanding of the money supply, nor of the way it impacts upon the economy.

We have had recessions before, of course, and each one was ended by a cut in base lending rates. This reduced the cost of borrowing, inducing companies to borrow to invest in their businesses and consumers to borrow in order to buy the products of those businesses, so causing the economy to resume its upward path again.

Bank base rates have been at 0.5% for well over a year. They have never before been so low, and they have never been kept low for so long. Yet, few people are borrowing. There has been no net increase in borrowing by private households or private businesses for the past year. Such borrowing that is occurring is simply matching the amount of old debts being paid off.

This level of borrowing is not enough to get the economy to grow. Indeed, it is not enough even to prevent the economy from sliding into recession. Look at the figures. Total UK debt (excluding inter-bank debt) is about £3 trillion. Half of this, £1.5 trillion, is household debt, mostly mortgages. Nearly another trillion is Government debt and the remainder is business debt. Most of this debt is low risk, low interest stuff, say 5% to 6% on average. This means that to create enough new money to pay the interest on this debt, new borrowing had to increase during the last year by at least 5% or 6% of £3 trillion, a figure of around £160 billion.

If this figure seems familiar, it is the amount of the Government's deficit on its budget for last year. In other words, only government borrowing created enough new money last year to pay the interest on all the nation's outstanding debts. If this figure is cut by any significant amount, there will be insufficent money to meet the interest on all our debts and we can expect a rise in bankrupticies, unemployment and house repossessions, causing a double-dip recession, if nothing more serious.

To get the country out of recession, net borrowing will have to be far greater than £160 billion, maybe £260 billion, which is why the government wants to get the banks lending.

To put it another way, they want to get the rest of the country, private households and private businesses, to increase their borrowing on a massive scale. But with such massive levels of debt already, who can afford to borrow the extra hundred billion that will be needed each year? And remember, as the debt rises so the level of new borrowing to pay the costs of the debt will rise as well, year after year after year. If net borrowing had to increase by £160 billion this year, it will need to increase by £170 billion next year, and by £182 billion the year after that, rising ever higher at an ever increasing rate – exponential growth.

This madness can only be ended by reforming the nation's money supply so that for our economy to function we do not have to have the nation's total debts rising exponentially year on year. We need a money supply that is not based on people being in debt.

Anne Belsey

MRP Leader

“Mankind's greatest failing is its inability to understand the exponential function.” Albert Einstein.

Wonderfully irrelevant Copenhagen

So the Copenhagen conference ended with the sort of fudged semi-commitment that might have been predicted. I am not worried. I do not set much store by such conferences.

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I am particularly unimpressed by 'legally binding international treaties'. They are legally binding upon whom? Who gets arrested and banged-up if the treaty obligations are not met? If Britain, or the USA, or China, or any other major developed or developing nation fails to meet its treaty obligations will they be faced by a gun-boat from the Maldives or Tuvalu or Bangladesh sailing in to impose those obligations? I don't think so.

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Treaties will not save the planet.
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Only changes in human behaviour will do so, and only then if the behaviour is seen as preferable to that which currently pertains. In other words, a less carbon dependent economy has to be more desirable than the present highly carbon dependent one.
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Let me set out my views on climate change. I accept that there is a strong possibility that the world's climate is changing in a way that will be highly detrimental to human civilisation as it presently exists, with a large proportion of the world's population living a few metres above present sea levels. Should sea levels rise, then those people will not simply allow themselves to drown whilst the rest of us, living at higher levels, happily continue driving our SUVs (through the flood waters?) and jetting off to ever more sunnier climes.
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I am also prepared to accept that human behaviour is a contributing factor in this change, releasing carbon that has been locked up in the Earth's fossil fuels for millions of years, over and above the carbon emissions released into the atmosphere by the rest of the biosphere and by the chemistry of the world itself, and that it behoves humanity to reduce or eradicate such emissions as much as possible in order to prevent ourselves squabbling (with nuclear weapons) over fast diminishing resources, whether farmland or oil, but the truth of this issue is irrelevant.
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For Britain, the dispute over climate change is irrelevant.
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If Britain were a country rich in fossil fuels, it would make economic and security sense to pursue a policy of continued dependence upon such resources, but our reserves of these commodities are fast running out. (Okay, so we still have a lot of coal, but extracting it is difficult, unpleasant and dangerous. I grew up in a mining area. My very first job introduced me to the crippling effects of pneumoconiosis – 'miners' lung'.)

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Instead, Britain, being an island, is perfectly situated to take advantage of renewable energy. We are surrounded by tides, some of the strongest in the world, which flow whatever the weather, and by waves and wind, and if we need to dig holes in the ground, let us do so to create geothermal energy. We need renewable energy for energy security, if for no other reason.
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More particularly, would it not be a grand thing to create an economy where we simply do not need to use such amounts of energy as we presently do and still enjoy a higher quality of life; where the normal trip to work is a ten minute walk, not a half hour drive through traffic jams; where we don't keep having to make new stuff to replace stuff that, at two or three years old, is 'out-of-date' or 'life-expired'; where parents have time for their children so do not keep having to quieten them with this year's latest fad; where grand-parents live in walking distance of their grand-children and not half a world away as a consequence of someone's oh-so important career; where businesses are not so immersed in debt that they have to keep increasing production and their customers' consumption in order to stave off bankruptcy; where governments do not have to keep coming up with new reorganisations of the nation's public services to mask the inevitable unravelling of society as a consequence of the pressured lives that so many people lead?
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The world needs to chill out, but to do so it needs to remove the great driver of our increasingly frenetic and decreasingly productive society and economy – debt.
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We cannot hope for a sustainable economy, whether for environmental, economic, social or security reasons, unless we have a sustainable money supply, one that does not require its own constant expansion, and the expansion of consumption along with it.
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Before we can even think about protecting the environment, we have to reform the money supply.
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The money supply is not some natural phenomenon over which we have no control, like the weather or the amount of oil reserves that are still left to be exploited. The money supply is entirely man-made. It is the one factor in our economy over which we, collectively, have total control, and don't let economists kid you otherwise.
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Money is the driving factor in all our lives or, rather, the lack of it compared to our financial commitments is the biggest factor in most of our lives. The bonds of debt are stronger than the metal chains of slavery.
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Bind someone into high levels of debt, through the lure of all the goodies that our modern technology can provide, and you have an obedient and compliant worker, willing to work long hours for low wages, to travel great distances simply to get to work, to expend enormous amounts of time and effort in securing and maintaining employment (and to condemn their fellow citizens who are less successful in this game of musical chairs), to suffer high taxation and ever increasing prices as more and more of their nation's wealth is creamed off by those who still create the money supply - unbelievably so after the shenanigans of the past two years.
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We must end the absurdity of a money supply created by private interests, based upon the debt-bondage of the working population.
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Removing this pressure from peoples' lives is akin to turning off the water at the mains before fixing the plumbing. It is an essential first step without which no other steps can be undertaken. Furthermore, a money supply created by a public agency would create the means to pay for all the renewable energy projects that we need to give us energy security into the future. We have the technology, and it can be improved as we use it and develop it.
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Britain should not be arguing the case for 'legally binding international treaties'. Instead, we should be quietly leading the way towards an ever more prosperous, debt-free economy and an ever more contented society based upon an ever reducing need for the world's finite resources. The fewer our needs, the more luxuries we can have. For example, the car that is no longer needed as an everyday necessity can become the luxury used merely for social occasions, for days out and visiting friends.

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It may be that only Britain can take the lead in money reform, and so provide an example for the rest of the world to follow. We still have our own currency, making money reform easier within Britain than in Europe. We do not have the USA's perverse antagonism towards government involvement in the economy. We still have strong links with a diverse range of countries around the world - the Commonwealth - amongst whom we could create a genuine Commonwealth of Nations, sharing resources and technology in a mutually beneficial and co-operative manner, rather than engaging in the divisive and destructive 'beggar thy neighbour' approach of the World Trade Organisation.
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Despite our modest size as a nation, we have led the world before. We can do so again.

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Anne Belsey

(Leader of the Money Reform Party)

The Pre Budget Reform - Do I laugh or do I cry?

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The Chancellor of the Exchequer has set out the state of the nation's finances in his Pre-Budget Report. He has set out his tax increases and his rather more vague spending cuts, and he has talked of his expectation of significant future growth in the economy in the medium term from which will be drawn the revenues to pay off the still considerable differences between these economies and the high level of Government debt (the National Debt).

It is enough to make one weep.
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Nor have we received any sense from the opposition parties. The ignorance of the Shadow Chancellor beggars belief. Slightly more sense comes from the Liberal Democrat's Treasury spokesman, but that is not saying much.
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Let us start at the very beginning; that's a very good place to start. When you read, you begin with A B C; when you count, you begin with 1 2 3...
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A functioning economy needs to have a money supply, a means by which goods, services and employment can be paid for. It is not rocket science.
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So what does Britain's money supply consist of?
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There is £54 billion in notes and coins in circulation (Bank of England Monetary & Financial Statistics October 2009 – the Bankstats). This is clearly not a very large sum when set against the hundreds of billions of pounds mentioned whenever Government borrowing or bank bailouts are discussed. Indeed, the Bankstats give us a total UK money supply of just over £2 trillion (£2,000 billion).
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This £2 trillion does not consist of bank notes or coins. Despite what has been said about quantitative easing over the past year in the popular media, neither the Bank of England, nor the Royal Mint, nor the Treasury nor any other Government agency has been printing up hundreds of billions of bank notes.
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Money in the UK and around the world consists of debt. When you have money 'in' a bank, that bank is in debt to you. Its debt to you, is your money. Similarly, a bank's money consists of its customers' debts to it. A bank can be said to have money 'in' those customers to whom it has lent.
In this whole process, no real money actually exists. It is just numbers in computers.
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However, the net result is that for there to be deposits in some people's bank accounts – giving us a national money supply (£2 trillion at the present time) - other people or businesses or the government have to be in debt to the banks. Without their debt, the money supply would not exist (except the £54 billion of notes and coins).
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“Everyone agrees that government spending has to be cut.”say all the major media outlets. “Oh no they don't!” say I.
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The popular media, proving itself to be no more knowledgeable than our politicians, keeps on spouting the mantra of austerity, that government spending has to be cut, and that taxes have to rise. The reason for such austerity is to reduce the level of government debt (the National Debt), currently some £800 billion and approaching 70% of GDP.
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This is the sort of thinking that we might expect to read in a schoolchild's essay, not opined by our leading politicians, economists and commentators. No wonder we are in a mess.
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THAT DEBT IS A MAJOR PART OF OUR MONEY SUPPLY, YOU CLOWNS! Reduce it and you will reduce the overall level of money within the UK economy, and it is due to a shortage of money already that we are in recession.
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The only way we can get out of recession is to increase the amount of money within the economy, and given that 97% of our money is based on debt, to increase the money supply, we have to increase the total level of debt!
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Who is going to have to carry all this debt if not the government? The people of Britain will, whether as private householders or private businesses. Although, of course, it is questionable whether we can afford to borrow significantly more. Most people, having woken up to their own high degree of indebtedness, are trying to reduce their own debts. This is good for them, their families and their businesses, but it is disastrous for the economy.
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So why is it that we need to keep expanding the money supply?
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More debt is needed to create enough new money repay the high levels of debt currently in existence.
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You might need to read that last sentence more than once to grasp the full absurdity of the situation in which we find ourselves.
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Yes, it is true. We can only repay past debts, both principal and interest, by borrowing even more money into existence. Without that, an ever increasing proportion of the money supply would need to go on repaying the principal and interest of existing debts, effectively shrinking the money supply and plunging us further into recession.
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If we have to borrow to provide the money supply, then government borrowing is best as it is cheapest. Governments, even the supposedly dubiously credit-worthy British Government, can still borrow at cheaper rates than most citizens or businesses.
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But why have a money supply based on debt at all? Even with 'cheap' government debt, the debt-based money system is mathematically unsustainable. With a bit of jiggery- pokery, we might be able to eke out another decade or so, especially if the Chinese people can be persuaded to follow the UK and USA into high levels of personal debt. But as with all pyramid schemes, eventually one runs out of people – of credit-worthy borrowers, in this case.
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This is the question that none of our senior politicians are addressing.
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It would be farcical if it were not so tragic.
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Anne Belsey
(Leader of the Money Reform Party)

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?'