Positive Money – Part 2

Last week I posted that there are two particular proposals from Positive Money that I like. So now to the bad news.

Positive Money propose that the lending banks are not allowed to generate money at all. All necessary funds should instead be generated by the Central Bank (Bank of England). This would elevate electronic money, which is the vast majority of money  – to the same status as bank notes and coins which have had to be centrally controlled in the UK since 1844. This sounds a good idea. Certainly it would prevent the unstable creation of new money, secure the taxpayer from failing banks, separate payment and investment, ensure transparency, remove (in theory) the power from politicians and bankers and in some way ‘democratise’ the creation of money.

I know this is a central plank in Positive Money’s agenda but – and it is an enormous ‘but’ IMHO – this process would almost certainly become very bureaucratic and therefore slow to respond to the market. If the economy post-centralisation is to be as fluid and responsive as it was before the Great Debacle (yet of course more responsible), the BoE would have to replace or mirror the management and decision processes of all lending banks. It would become an enormous institution with hundreds of thousands of public servants either rubber stamping or duplicating work. The lending banks would just become agents without the profit or ability to maintain the financial system of clearing, payment and ATMs . So to simplify such a bureaucracy, lending limits would need to be imposed per bank which means a return to credit controls where the people who would lose out are the individuals and small businesses without the contact, clout, reputation or golf club membership.

Secondly, while the BoE in the PM proposals would have its independence ‘enshrined’ by Parliament , this is no guarantee of real independence and there are questions of accountability. But more seriously, consider this.

If a private bank fails, that is just one of many banks. If necessary we can shoot the Chairman and Board of Directors.  At least we can impose penalties so they don’t do it (again). They have made a big mess but with reform this should be fixable and we are learning.

But if the only source of money is the BoE and that messes up, then we really are in the deep and smelly. A complete collapse of a currency is on the cards. The Board of the Bank of England is only a group of people who, while no doubt very clever, are still fallible. Putting all your eggs such a basket is a single-mode failure problem. If it can fail, at some stage it will.  Any such system is therefore going to be very conservative, hesitant at creation of new money and deflationary.

Thirdly, we have to consider the international dimension. All countries exists in a global economy. Banks from all countries are here and British banks are everywhere as well. There are so many issues that I really don’t know where to begin. Do the restrictions placed on British banks apply to their overseas branches working in other currencies? And vice versa for foreign banks working in sterling? What about foreign exchange? Can I get a loan created in dollars and exchange those for pounds? If so, where does that money come from? Will exchange controls have to be reintroduced?

Other countries would be very unlikely to follow. So if the money supply were restricted because of policy or inefficiency, the effect on the economy compared to our competitors would be disastrous. Unrestricted growth is not a good thing but stagnation, deflation and recession can be even more dangerous.

My last objection to the nationalisation of money creation is pragmatic. We have to persuade the politicians and some bankers of the merits. Politics is the art of the possible and practicable. Proposals that are so radical, merit though they may have, are very unlikely ever to see the light of day – at least not without a revolution.  It is not that politicians and bankers are necessarily corrupt or greedy. Some may be but I don’t believe all are. And if they all are, this means that there is even less chance of a radical solution. We have to understand and act with the world as it is.  What about any compensation that the lending banks may demand?  Could there be a legal challenge?  Is there any contractual obligation to allow the banks free reign at the party?  Because if there is the slightest hint, be sure that the banks will employ the finest lawyers to tie the government up in knots for years, delaying things while exporting as much business as they can to more profitable regimes.  What about the effect on bank share prices which would surely collapse as banks would become much less profitable?  I think investors would have a lot to say and do about this.

We need to get everyone on the side of reform in more than the knee-jerk way currently seen in the UK with the Vickers’ report.  At the moment, the UK government seems to think that if all we do is to slash and burn and follow Vickers’ with some bells and whistles, all will be well, the UK economy will recover, people will find work from somewhere, manufacturing will flourish and Christmas will occur every week. Poo. But if we put forward proposals that are both difficult to implement and potentially damaging to the economy, no government will put them to the electorate or Parliament. So there is very little point in policies which may cripple an economy, however much theoretical benefit there is to them.

The Three Taxes is I believe the best way forward although I am currently considering the implications of the Financial Transactions Tax which is quite a complex tax to administer.  I add to these the principle of (of course, taxable) Yield Sharing accounts alongside the Custodial accounts and repairing the regulatory framework, as detailed on the Positive Money website.  Legislators should note that the tax income from these various sources would be considerable so the current scorched-earth policy could be abandoned in favour of promoting employment, investment and growth while reducing the national debt.  In effect, some of the enormous profits made by banks would be released to the benefit of society either in the public purse, in better returns for savers or by reducing the costs to borrowers.  In generating a more healthy economy, business would invest and we would all be better off – paradoxically including the banks.

Obscene though some may be, I have no particular issue with high salaries in any industry including bank bonuses – where merited. Legislating to restrict bonuses in one particular industry will either drive such experts abroad or get the bonuses paid out of sight.  It is an example of control freak politics.  By all means give shareholders a say over remuneration although I don’t think that will have much effect as they are all scratching each others’ backs.

But I do have a problem where a company – be it a bank or any other – clearly places not only the company but also the nation in peril. I therefore couple these proposals with draconian penalties for Bank Boards and senior executives who flout the rules and lead to banking failure. This includes the ability to declare contracts and agreements on salaries, bonuses and pensions null and void – even retrospectively.

12 thoughts on “Positive Money – Part 2”

  1. Yah, I just don’t know… capitalism runs the way it works. But, I have a big problem with how much the rich and even middle class are being separated. When I discovered that the top CEOs made more by noon on Jan 3 than I make all year, I almost puked! I’m not sure what the answer is at this time, but you raise some valid points.

  2. I sometimes wonder why such people are so greedy. Over here it all started in the ’80s with the idea that the more money you paid people, the better result you got. Not only has this proved to be a fallacy, the ‘drip-down’ patronising excuse shown to be very hollow but there seems to be no sanction. And it has now infected the public sector where there is even less sanction and failure is rewarded.

    Apart from this, I don’t know what people do with all this money they ‘earn’. I do admire those who use it creatively like Bill Gates and Warren Buffet and wish more were like him who spends more on things like AIDS research than most governments. Or Howard Hughes who left it all to medical research. But the sheer greed of some people beggars belief while the rest of us – maybe just as talented, with just as much to offer but without the breaks (and sometimes the wisdom to see the breaks) carry on paying through the nose for the mistakes of the super-rich.

    Surely pride in leadership should be part of the reward for success? And there must be a better way than the slash and burn we are experiencing in the UK which has as much a political as economic agenda I think. So I am trying to suggest ways of doing this which would mean that the innocent don’t suffer.

  3. 1.

    “ … (the) process would almost certainly become very bureaucratic and therefore slow to respond to the market.

    The proposal is that a public agency on the lines of the MPC should decide how much money is needed, making necessary adjustments on a regular basis. At present this is exactly what the MPC attempts to do indirectly by manipulating interest rates, at enormous cost to either savers or borrowers. There is no reason why the direct introduction/withdrawal of money should be any more bureaucratic than the present hit-and-miss procedure.

    Yes, this gives a lot of power to a few people – but only in a strictly limited area. The crucial point is that those who decide how much money is to be created/withdrawn will not also be in a position to profit by deciding how to spend it. They will be democratically answerable not to the Government but to Parliament as a whole.

    In the age of the internet, there is no reason why the figures involved should not be available online at all times, subject to continuous oversight by the electorate.

    At present the commercial banks decide not only how much new money should be created, but who should enjoy first use of this new money. According to research by Positive Money, a mere 8% is currently channelled into the productive economy, the rest going to speculative and non-productive projects. A publicly-created currency, on the other hand, could be spent into circulation on the maintenance and improvement of infrastructure, passing directly into the real economy.

    2.

    A private bank usually fails because it has abused its licence to create money by funding speculation and the excessive valuation of doubtful assets. These eventualities would not apply to the Bank of England under Positive Money’s proposals.

    As pointed out above, the role of the money-creating agency would be limited to assessing the amount of money required in the real economy at any time; and the spending agency (the democratically elected government) would not have any interest in risking its support by indulging in the kind of speculative activities currently favoured by the commercial banks.

    A bank with the power to create and maintain an adequate supply of money without generating an equal quantity of debt is not likely to “mess up” , since it would enjoy the continuing opportunity to correct any over- or under-assessments of the amount needed.

    3

    The international dimension.

    I’d refer this to people like Professor Richard Werner, or researchers at Positive Money and the New Economics Foundation.

    However, I’d disagree with your belief that other countries would be unlikely to follow with similar reforms. Once a lead had been given, indebted third-world nations, for a start, would probably be only too happy to ditch IMF austerity and the enforced sale of national infrastructure, monetise their real wealth, and start putting their own populations first, instead of making cash crops and exports their priority in a futile effort to satisfy their creditors. EU countries subjected to the austerity imposed by puppet governments might also see the advantage of leaving the euro and establishing their own national currencies, issued free from debt at source.

    In fact, for a nation which has decoupled the act of money creation from the internal requirements of the private banking sector, all the rules change. Exports, for instance, will no longer be crucial, as the sole debt-free input to the national money supply (other than the remaining 3% cash factor). The ideal, instead, will tend towards a balance of trade, with more goods being produced at home, and an exchange of surpluses, or items unique to particular geographical areas.

    Of course problems will emerge. No system is perfect: but better one that is as simple and transparent as possible than the one we have at present, which permits every possible kind of obfuscation and manipulation, and which has succeeded in plunging the entire world into exponentially increasing levels of essentially unrepayable debt.

    Regarding your last point: yes, of course there will be resistance. But now, if ever, as the present system struggles to survive long enough for its profiteers to rake in a few more rich pickings, is surely the best time to overcome it.

    1. Gillian – many thanks for your informative reply. I do appreciate that Positive Money is trying to open up the issues that have confronted us all so please take my comments as contributing to this debate. Probably no-one has the complete answer. However to deal fairly briefly (?) with your points:

      1) If the BoE takes on the role of generating money, from where does it get information about how much money to generate? Some macro-economic model? I have been around computer models for too long to believe these in enough detail I am afraid! The BoE is generating money now of course with QE but that is only reactive with a substantial lag because the banks have stopped lending. Under the proposals, it cannot be proactive nor can it respond to the real needs of business and individual borrowing without either getting information from the private banks, having its own sources of information or just doing what the private banks tell it.

      Whichever way this works out, if a business needs to borrow to cover for example delays in contracts and that particular bank has run out of its allocation, bad luck. They will have to wait for the next tranche of money to be released by the BoE so are likely to go under or have serious problems.

      I take your point about the implicit corruption of printing money for profit which is why I have advocated taxes both on the generation of money and on excessive interest charged to business and consumer. I think this is a more coherent approach which is not such a massive discontinuity but can be introduced quite slowly.

      But you have to allow banks to make some profit. Who otherwise will maintain the financial infrastructure, the ATMs, the payment and clearing systems? We need a highly efficient financial sytem that can respond to sudden changes and I really don’t see the BoE being able to replace the processes. If the banks are not allowed to make some profit, they will not be able to either.

      I take your point also about the use of newly created money – we need a National Investment Bank along German lines but the opportunity seems to be ignored as Northern Rock (the ‘good’ part) has been sold and I am sure the government will flog off RBS as soon as it can. But this is I think a red herring – the Germans seem to do OK and we could set one up in the future, EU permitting of course.

      2) The government is not the only spending agency in town and it is rather dangerous to funnel all money via it if that is the suggestion. Money needs to be injected directly into businesses and some into individuals. It has been consumer demand that has fueled a lot of the so-called growth of recent years and this has been because consumers have been only to happy to borrow on credit, believing they will be able to pay it back.

      This is OK in some cases – as money is stored labour, debt is anticipated work which frequently comes to pass. But the real economy needs investment both public and private. Banks have been rather too reluctant of recent years to lend to business I suspect because they got a much softer deal with the consumer – businesses won’t (or can’t) pay the sort of interest charged. The excess interest tax would help rebalance that by making business lending less unattractive. We can legislate to separate the investment from lending arms of banks but I suspect that will be easy to circumvent so is a pointless diversion. But as the banks under the Positive Money proposals would only make a small profit they are even more unlikely to lend to business which is less profitable and more risky. They will carry on lending to the consumer instead.

      3) I share your concern about the Third World and the activities of the IMF. But how will such countries escape their clutches? The only procedure I can see is for them to nationalise without compensation and then they would be locked out of the rest of ithe world for a long time. And if they do, as they are third world countries, they really don’t show up on the radar as significant financial players. I am aware that this is effectively what Argentina did some time ago – and it cost them quite dearly.

      No, for a policy to be credible, it must be applicable to other ‘First World’ countries and I really don’t see that happening short of a bloody revolution. A better solution is to help the Third World debt – which is in manufactured money anyway – to be cancelled but we have seen how difficult that is.

      4) The resistance will be that the banks not only engage in every delaying tactic they can but they will up sticks and look for more profitable pastures. As with any private business, their responsibility is to their shareholders – and perhaps to their employees.

      Some may think that a good thing if they do go elsewhere but it is cutting off one’s nose to spite one’s face. It will be the poor and underprivileged who bear the brunt of not being able to get money, not being able to feed themselves and the inevitable collapse in society. Maybe in a few generations, things would be better but I think most people are not prepared for that enormous gamble.

      As I said in my earlier post, there are some proposals in Positive Money that I like and I think adding the Yield Sharing accounts to the other ideas in these columns would provide a better way forward. A very simple calculation indicates that the tax income from the various sources would be roughly between £50 and 100 billion a year depending critically on whether the banks lower their interest charged – but if they do and the income from the Excess Interest tax is reduced, borrowers benefit anyway and the economy becomes more active. Unfortunately I don’t have a proper economic model available 🙂 even if I were to believe it!

    1. That would be a good idea in principle but I fear the horse has well and truly bolted.

      In the UK one of the Vickers’ proposals is to separate investment activities from ordinary banking. I suspect most banks will find ways round that offshore.

      The same would happen across the pond by banks setting up their investment arms in the Bahamas or somewhere. You can’t then stop the individual depositor from trading with them if they offer a better return, particularly with the internet, even if it comes to the attention of the IRS!

  4. John,
    You make some good points and it’s a great to have some debate on this issue. This is a discussion that needs to get much more into the mainstream.

    Re your points
    1. A relatively simple way to decide how much money to create is to look at the change in price of a basket of goods such as the RPI does. The money policy committee could aim to keep the RPI between 1.5 and 2.5%. It wouldn’t be hard to set up a system that created less or no money if the RPI went over 2% and more money if the RPI fell below 2%.

    It is important to stress again as Gillian did that the institution creating the money is independent from the democratically elected government that is spending it either in the form of tax breaks (conservative) or infrastructure building (labour). See the actual draft legislation for more information. Either way the result is debt free money into the economy that people can decide how to use best, either consuming themselves or lending via banks or other (for example peer to peer) lending institutions to those who need the money now.

    I am not sure how important the concept of a time lag in availability of money is. Money is not a commodity, it is always in demand and people always want more of it. Where the new money ends up under this system is determined by the government and I admit this allocation may be slow and bureaucratic but that is only a tiny fraction of the existing money supply. Where the existing money goes is determined by consumers’ wants and lenders’ interpretations of risk, reward and how much they support a particular project they can fund.

    4. Of course banks need to make some profits to keep the financial infrastructure up and running and they would still be able to do this. They can still make money from lending (though without money creation), from advertising on their ATMs, websites etc., from products such as insurance that they sell and from other ingenious methods I have failed to think of off the top of my head.
    With this in mind banks are not going to leave the UK especially given the investment and infrastructure they already have in place. Banks provide a valuable service in terms of electronic payment systems but their contribution to the economy must not be overestimated. They currently receive a huge government subsidy in terms of the deposit guarantee scheme and their legal ability to create money out of thin air. It is very debatable whether the tax income from bank employee and bank corporation contributions actually manage to offset these subsidies and the costs incurred by the boom bust cycle which is a result of our debt based money system.

    We pay not only as expanding and shrinking credit cause crashes and economic crisis but also through inflation as the money supply is diluted by banks creating money from nothing. Creating money out of nothing for private gain is theft pure and simple. If banks want to leave the UK because they are no longer able to thieve from the general public then frankly good riddance.

    1. Richard – thanks for joining in! It is useful I think to bash about ideas and possible solutions. So I will carry on and try to be brief – again!

      1) The MPC at the moment of course is doing exactly as you surmise altough the RPI/CPI or whatever is currently through the roof. In this case, the MPC should not be using QE at all in your scenario, in fact it should be reducing the money supply by whatever tricks it can use which would close down UK Ltd.

      The main difference of course is that loans ie money are still being created by the private banks even if on a smaller scale. This does indicate the scale of the problem if a Mark 2 MPC is to create money instead of the banks because I suspect that the £275 billion or so is only a small fraction of the amount printed by the banks even now.

      So MPC2 would have to relatively blindly create many tens of billion a month. If one month too much money were to be created, what would happen? I suspect the lending banks would lend it anyway on the basis that they may not get the same supply the next month. If too little were created, then failures would occur immediately. And in fact money is currently lent/created every hour or minute even – would the BoE be able to respond on these timescales? I doubt it without, as I surmised earlier, a huge bureaucracy. I think it is putting a lot of fragile eggs into one very large basket!

      I have also been puzzled by your assertion that such centrally created money would be debt free. Money is not a commodity (although they do call their services ‘products’ of course!) but as I say somewhere to store your labour. So the only difference is that the current money created is demand driven by government, business and consumer but if it is created by the BoE, it would have to be anticipatory and as soon as it is demanded, it would become actual debt to be repaid at some stage. The status in that interregnum is not important. If the economy is to be fluid, money needs to be available pretty nearly immediately for sensible lending.

      I can’t believe that even the cleverer politicians in government (a) would be competent to oversee the distribution of this new money and (b) some would not become corrupted by this process much like the commissars in the Soviet Union or in the appropriations committees on the Hill over the pond (or of course in our own system). So unless we were to find a whole new breed of honest and brilliant legislators to distribute the BoE’s largesse, the bureaucracy would lead everything to grind to a shuddering halt.

      4) The money that banks would make from lending in the envisaged scenario would be between 1 and 3 orders of magnitude less than they currently make, even if the Vickers’ proposals come into place. This is a massive hit on their profitability. No chairman would put convenience and possibly patriotism ahead of profit – that’s the reality of the world.

      I am sure that they will think of all sorts of ingenious approaches to save a few percent but the most likely one is that they will look lovingly over the water and follow the profit. Other nations who will not (even if they were eventually to do so) adopt the same measures at the same time would beckon them with open arms. They may mess up there as well but the experience of the past few years will have taught the receiving nations (or currency zones – Frankfurt is already rubbing its hands) what to avoid. But any mess would be a number of generations away. All that would happen would be that we would have no finance industry because insurance and all the other ancilliary services would follow so they could have immediate access to banking. So having junked manufacturing in the ’80s, having priced people out of education in the noughties, and then having evicted finance, what would the UK be left with?

      We need finance and the financial community. I watched a recorded BBC program the other day on the failure of RBS – how Goodwin talked about ‘diligence light’ when paying £26 billion in cash for ABN-Amro, that one of the major players in the sub-prime crash was RBS Greenwich Capital while claiming there was no exposure. HBOS was nearly as bad and Northern Rock also caught a cold at the party. But it was really only a few arrogant and stupid people who have caused this crash.

      I really don’t think there is anything to be gained by throwing the whole financial expertise that we have in the UK away just because if such gross stupidity. As I said before, the law should be changed to that the nation can be protected. In fact I see Goodwin and the others as guity of high treason and should be punished but the other employees of RBS and other parts of the financial community are clearly not guilty.

      They do receive effective subsidies and you have been right to point these out. But by taxation and other means, this can be controlled – we cannot do much about history and the mistakes of the past I am afraid!

      ’nuff said!

  5. John, after reading both parts of your article I was left with a grin. You seem to be the type of person who tackles problems head on and in a practical way. I praise your goal of protecting the common citizen from the mistakes of the super-rich, as you put it. Our differences whichever they may be, will be little if we agree on that point, and I’ll be happy if we can achieve anything that secures that as a fundamental citizenship right.

    First let me start by saying I don’t believe in the “mistakes of the super-rich”. Our monetary system is prone to cyclical booms and busts by design. If the system is designed so that eventually it’s going to fail to some degree, then it’s not really anyone person’s mistake. I guess it’s another common fate of the human mind to find a culprit. I believe to correct this the system must be – perhaps, as you acknowledge only by revolution – redesigned.

    You argue that full reserve banking would seriously cripple banks’ ability to lend and invest. Well considering the tiny percentage they allocate to the real economy, I’d say it would affect mostly their bubble-producing non-productive activities – so this extra stability would be a big plus on the whole economy. Then there’s the productive economy which still needs funds, and might thus be hindered. Well, the State could easily take care of that, if an individual or enterprise are good for the loan, they should rightly receive one from a State bank (which could provide them at record low interest rate).

    As for the BoE failing, as Swanson pointed out it simply can’t fail if the money is to be debt-free. It’s there providing a platform for the Gov’t to run the country with. Also Gov’t won’t be allowed to use money for non-productive activities – there are no toxic assets.

    How will the MPC know how much money to create? I think the MPC would have to know the history of previous public expenditures, in order to provide an estimated amount to cover public service expenses. Also either the parliament or the Gov’t need to make it clear on any public national projects which are to be undertaken and the MPC should allocate money for this purpose. The MPC would also need to take into account the history of previous tax income, and the State bank earnings, to make sure it won’t issue too much money making it impossible to the Gov’t to meet inflation targets. Note that the State bank would also be capitalized by the MPC and the system would work in a feed-forward control.

    You raise interesting questions which I wondered myself, and which I think Positive Money needs to tackle as well, regarding the international dimension. With a State bank providing record low interest loans, and with a steady inflation enterprises will have no problem prospering. But indeed if there’s only one country enforcing a full reserve policy on its banks I can see them making themselves scarce and moving on to other countries where they can maximize their profit. Here I share your concerns regarding the exchange rate, John, and also wonder if there could be political/economic punishment. Wouldn’t we need for example the whole European economic zone to adhere to full reserve banking? Agreeing with Swanson, I can see some third world countries and those suffering with too much austerity at some point wanting to move to this kind of system, as they would not be alone and “cut from the rest of the world” (as you put it, John), if there’s enough of them doing so. And they would definitely be better off.

    1. Joao

      Many thanks for your contribution and we do agree on the need to protect the citizen (or subject) from the excesses of the banks.

      My issue with any solution is how to get there from where we are without crippling the economy which always hurts the common man, woman and small business. Any revolutionary change will be opposed by the massive powers that exist and are documented for example on xat.org. Looking at history, it always the bottom of the pile that has suffered and while some heads rolled in 1789 or 1917, they were replaced by other at least equally corrupt and greedy heads.

      Given the pervasiveness of the financial community, it is naïve not to expect opposition that may not be bloody but will be very effective all the same.

      Some conditions therefore need to be met for any proposals to see the light of day:

      1) The population must not be put at risk and must cease being punished for the sins of others
      2) We must assume that no other currency zone big or small will adopt the same ideas
      3) Any changes must improve society, enable more opportunites and equality
      4) The financial community must be persuaded of, not threatened by, these changes.

      We do have an opportunity now to do things because they have gone seriously wrong. It is clear that the UK is affected above all other countries because of the proportionate size of our financial industry. The Eurozone issues are because of fundamental design flaws but of course as they are major trading partners that also affects us badly. I do not believe that evicting the financial community is of any benefit to the UK and we should do everything possible to improve its governance and efficiency.

      You may like to see a return to full reserve banking by repatriating the power to create money. This may be a noble objective but immediate change would be too sudden a shock. So you need a path towards that and here I think there is a possible meeting of minds because a Funny Money tax at 100% would be effectively full reserve banking and the Excess Interest tax would ensure that this is not passed on to businesses and the consumer. I do think both the legislative proposals currently before Parliament are a good idea and as you know also suggest sharing the benefit with the consumer as Yield Sharing accounts. Both Custodial and Yield Sharing accounts would of course beg no support from the taxpayer yet the sum of these taxes would go along way to eliminating the public debt and enable investment and growth to get back on the real agenda.

      On Positive Money you have the ear of parliamentarians and economists. I am just a humble statistician without these resources. It may be worth while moving this discussion over and trying to forward the agenda. What do you think?

  6. John, I really like your 4 conditions.
    I’m sure positive money would be really happy to host a discussion. If you emailed them a blog post they’d be happy to put one up and get ideas going.

    The question of international impact of transitioning to a full reserve banking system is a very interesting one. The possibility of penalties being imposed by the financial elite who would stand to lose out and perhaps a subsequent press campaign pointing to the consequences of those penalties as reasons the system is unworkable is something that warrants attention.

    However, I do think (or would like to believe) it’s possible to convince a large portion of the financial sector on the grounds that the current debt based system is near breaking point.

    We face the problem that the interest payments on the debt are becoming unaffordable. But cutting the debt reduces the amount of money in circulation (it shrinks the money supply). This has the effect of making money more difficult to get hold of and therefore increases default rates (there is simply less money out there for everyone paying back principal + interest on their loans to earn). The principal of the loan is created out of nothing by banks but the interest to pay it back isn’t. Our current system can only work without defaults and subsequent crashes if all the money paid to the banks as interest is spent back into the economy so people paying the loans can earn it. Banks however frequently loan out or occasionally hoard this money and so to prevent the defaults more debt is issued. This then makes the debt repayments even more unaffordable so contributes to increasing the risk of default. (see Paul Grignon’s excellent money as debt series for a superior cartoon explanation of this)
    How far away are we really from a huge mass of defaults? It has been delayed for example in Greece by putting them even further into debt but how long can this keep being done?

    Some other quick points
    The MPC tries to regulate the money supply and hence inflation by setting the rate at which the Bank of England lends to financial institutions. In reality this has little effect over how much new money is created because this is determined by demand for credit and the banks willingness to loan (they set their own interest rates regardless of the BoE rate). You are right that it shouldn’t be using QE if it wants to reduce inflation especially when it is used to buy government bonds and put money into the hands of groups who are not particularly likely to invest it in the productive part of the economy.
    Under the PM proposals the money is put into the treasury along with the 500 odd billion pounds worth of tax that gets paid into there each year. With economic growth of 2%, fixing the inflation rate at 2%, GDP of 1.3trn and M4 (money supply) 1.8trn the maths give you a yearly “QE” (money in this case paid into the treasury) of roughly 60 billion pounds. This could for example pay for a reduced tax burden on small businesses or small business grants, it all depends on the elected governments policy.

    Debt free money refers to this “QE” money allocated by the MPC under the proposals. For example a business borrows ₤1000 to develop its website. The ₤1000 gets its so many hours of labour from an IT pro (the “labour debt”) but it has to also pay back the ₤1000 + interest to the bank it borrowed from (the bank debt). A division of the department for work and pensions gets ₤1000 to develop its website and also pays at IT pro for so many hours of labour however it owes nothing to the bank.

    I look forward to seeing more debate raised on the positive money website

  7. Richard

    Yes I will email them once I have digested some more issues. If the Eurozone were to adopt some of these suggestions, the taxes raised would I think solve a lot of the problems. These taxes of course are effectively placing a girdle on the banks that is a function of the currency rather than the profit and hence are difficult to avoid.

    I have seen the Money as Debt series on YouTube of course and also the video on xat.org which contains a lot of interesting facts and figures. But the most striking video I saw last night when almost by accident we got Charles Ferguson’s Inside Job from Lovefilm.

    It is quite shocking and puts the excesses on this side of the pond into the shade, excesses though they are! It is corruption pure and simple. My immediate thought is that of controlling bonuses. Can you believe someone paid themselves $416 million? What for?

    Bonus payments should be made only for exceptional performance in exceptional circumstances and not as part of the ‘package’. Other people are not given bonuses for doing their jobs. In addition, bonuses if any should only be paid to the people doing the work and not the CEOs and Chairmen who don’t get their hands dirty. Lastly on any bank that handles above a certain amount, all payments above some multiplier should be subject to external sanction not only from shareholders as Cable suggests but from the Inland Revenue because the major shareholders (or their representatives) are just scratching each other’s backs.

    Let’s return that part of the service economy to a service and not a heist! But without leading to a recession because the money supply is contracted too quickly.

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