Whose Money?

WHAT  SYSTEMIC  DEBT  MEANS  TO  YOU  AND  YOUR  FAMILY

Having read this far, you may agree that there’s something irrational about the way we create our money supply  -  but you’re probably also thinking, “Why bother to make a fuss?  All this stuff is a bit confusing, and should be left to the experts  -  they seem to think it’s ok.  I’ve got my work cut out getting by under the present system, I don’t see how reforming it would make any difference to me.”

 

But there you would be wrong.  Putting debt-free money into circulation is the single basic reform capable of transforming the prospects of every person in this country, including yourself and your family.

 

People need money to produce goods and to trade everyday essentials.   If that money is not being supplied as a public service, they must use whatever alternatives are available. 

 

For most people, that means bank credit: and bank credit comes at a very high cost to all of us, not just the actual borrowers.

 

Economists often talk of ‘consumer confidence’ or ‘investor confidence’ as if this were simply a question of deciding whether or not to spend money previously saved. 

 

Yet increasingly this “confidence” depends on the willingness and ability of ordinary people and businesses to go into debt; for, unless they do, the banks are unable to create and circulate money.

 

Obviously not everyone has to go into the red to run their household or business. In fact, most people will do all they can to avoid borrowing.  But in an expanding economy which is sustained almost entirely by systemic debt, a sufficient   -  and constantly increasing  - number of people must take out loans, simply in order to provide the country with an adequate means of exchange.

 

The obligatory nature of debt under our present system can be highlighted by an extreme example.  What would happen if all outstanding loans were paid back, without further borrowing taking place?

 

The answer is that everything would grind to a halt.  There would be NO money supply beyond cash, and almost no economic activity.  We would be back to barter.

 

Clearly, then, as long as we cling to our present financial system, more and more of us must constantly be taking on new debt.  Nobody wants to be the one to do it, but unless somebody does, everybody will suffer.

 

So what does this mean for you and your family? 

 

1 Sooner or later you, or someone close to you, is likely to get into serious debt.

 

When practically the entire money supply has to be borrowed into existence, someone, somewhere must always be laying their solvency on the line to keep the economy going.

 

You may be lucky enough to have a job which provides you with a decent standard of living without need for further borrowing.  However, there is no guarantee that your children and their families will be equally fortunate.

 

Under a financial system based on systemic debt, everybody is vulnerable.

 

2 You can expect prices to keep rising, along with debt.

 

For most start-up businesses, the only option is a bank loan: and when interest rates are low, this is a tempting possibility.  Even established businesses habitually borrow to invest, since the need to stay competitive under a system that, by its very nature, keeps money in short supply usually makes independent capital formation (the practice of putting aside profits for future investment) impossible.  (In contrast, banks can simply cream off interest charges on money which they have created out of nothing to finance themselves.)

 

The need to service and repay loans adds significantly to production costs, and must eventually force most firms to raise prices, even in today’s cut-throat business environment. 

 

Meanwhile, rising prices, plus the need to service the huge mortgages which now create the bulk of our money supply, put family budgets under strain, leading either to more borrowing or demands for wage increases, to meet the escalating cost of living.

 

Systemic debt, therefore, is a major contributor to (some would say the fundamental cause of) the wage/price spiral which afflicts modern economies.  It is a verifiable fact that, as the proportion of our money supply created as a debt has risen from 60% to 97% of the whole, inflation has become endemic: a perennial threat to business success and to the family budget, and a built-in feature of economic life.

 

 

3 You will pay through the nose to put a roof over your head.

 

In the opening years of the 21^st century, more people than ever have a mortgage. 

 

A mortgage is, traditionally, a very special kind of debt  -  a respectable debt, which is not associated with profligacy, and not thought to be risky or unduly expensive.

 

Not any more.

 

Between 1960 and 1996 total UK mortgage borrowing rose from £3,350 billion to £409,433 billion.  Since then, it has more than doubled, passing the £1 trillion point early in May 2006.

 

During this period, the rise in house prices has far outstripped official inflation figures: but prices could never have risen so high if ample loans had not been made available by the lending institutions.

 

How were people induced to undertake the degree of debt necessary to bid property prices up so high, way beyond any increase in real value?   How were we tempted into mortgage debt which frequently far exceeds what we can comfortably service and repay?

 

This level of debt was only made feasible by a considerable relaxation of the rules governing mortgage borrowing.  If minimal deposits and loans based on increasingly unrealistic multiples of not one but two wage packets had not come to be accepted as the norm, the amounts lent would have remained too low to permit excessive house-price rises.

 

So why did successive governments sit back and allow  -  even encourage  -  the increased borrowing which has now driven property prices up beyond the reach of most first-time buyers?

 

When we remember that mortgages provide the country with around 60% of its money supply, it seems reasonable to assume that any loosening of the criteria for borrowing served a definite political and economic objective.  Relaxation of the rules has certainly led to a massive expansion of the money supply by making it possible for people to take on previously unthinkable quantities of housing debt. 

 

The result is that housing costs now absorb 17.5% of the average UK home owner’s income after tax.  In 1960, the comparable figure was 9.5%: and remember, in those days ‘household income’ would usually refer to one full-time wage, whereas today it generally includes two.

 

For the banks, the property bubble is a huge money-creation bonanza.  For the government, it is a valuable source of revenue, as stamp duty and capital gains tax roll in, and inheritance tax thresholds fail to keep up with grossly inflated house prices: not to mention the fact that all those debt-soaked property “owers” are obligingly taking on, at their own risk and expense, money-creation duties which should be shouldered by a public authority.

 

However, there has never yet been a bubble which didn’t burst; and unless this one is the exception to the rule, the excessive borrowing assiduously fostered by bank and government policy may once more end in negative equity and widespread repossessions.

 

Even if, by some miracle, it doesn’t  -  say, for instance, that government decides the only solution to the present monstrous debt bubble is to unleash inflation, allowing mortgages to be paid off (while impoverishing, through no fault of their own,  those with no wage-bargaining muscle, and people on fixed incomes)  -  our dependence upon systemic debt has already brought us to the point where two full-time jobs are required to service the average family’s housing costs, when previously one would have sufficed: a situation which, under the present financial system, is unlikely to change.

 

As long as governments rely on systemic debt to put money into circulation, it is in their interests to keep mortgage lending high: and you and your children will be the ones to suffer.

 

 

4  Family life will come under increasing strain

 

According to a recent (as of May, 2006) survey by the Financial Services Authority (FSA), quoted by Credit action, “Three quarters of British couples find money the hardest subject to talk about with their partners”.  In fact, financial worries are a major cause not only of ill-health, but of marital breakdown, as partners lie to each other and argue over their different spending priorities within a tight budget.

 

And household budgets are becoming ever tighter as business and government debt drive up prices and taxes, and unreasonable levels of  mortgage borrowing further reduce disposable incomes.

 

To understand the scale of the problem, just take a look at the “Debt Statistics” section of this website.

 

Fifty years ago it was possible for a working man on an average income to provide for his family without any need for his wife to undertake full-time employment.  If she wanted to have a career, or to take a part-time job for pin money, fine: she had the choice.

 

Nowadays the one-wage-earner family is almost extinct.  If one partner or the other is lucky enough to be employed in a high-salaried sector of the economy, that option may still exist; but most individual wage-packets cannot hope to cover the monthly outgoings of today’s average family, with its huge mortgage payments and inflated council tax and fuel bills.

 

On top of this, the acute lack of disposable income after essential bills and living expenses have been paid means that even most two-earner families cannot afford to hire outside contractors to repair and decorate their houses, or to do the cleaning, and must undertake these tasks themselves, in their spare time.

 

The result is that people have less and less true leisure to share with their partners and their children; and when they do manage to grab the odd hour or two  together, they are frequently so tired and stressed that it is spent eating ready-made TV dinners, flopped down in front of larger and larger television screens (“luxury” items whose price   -  unlike those basic bills and expenses which cannot be avoided  -  is held down by improved technology and the pitiful level of wages in developing countries).

 

Fifty years ago, we were being told to expect an age of increased leisure, as machines did the hard work for us.

 

So what happened?

 

The sad fact is that, far from reaping the benefits of increased automation, many people are suffering from its consequences, as the free time we were promised, along with the money which reflects the vast expansion in productive power of the modern economy  -  a productive power which is the fruit of advances made by past generations, and which should be the common legacy of all human beings  -  is unevenly distributed.

 

Instead of the rewards of improved technology being expressed in shorter working hours, with a higher standard of living for all, and ample opportunity for hobbies and shared family activities, we have a society in which the unemployed are left with endless free time on their hands, but little money to help them make the most of it; while couples who are lucky enough to have a job apiece are forced to put their small babies into full-time care five days a week, and can barely find  time to relax with their families in the evenings and at weekends, once all the routine household chores and repairs have been done.

 

Today, we have overcome the problem of production.   The productive power of the modern economy is unprecedented  -  yet much of it is being wasted in planned obsolescence and overproduction of only marginally useful goods, simply in order to keep money going round in the traditional way, in the form of wages.  

 

But why, if more goods than ever can be created with minimal man-power, should we continue to depend almost exclusively on paid employment to distribute the money which represents and gives access to this increased production?

 

Why, if the government can afford to pay couples a child-care allowance, so that they can both take on full-time jobs while farming out their tiny children from morning to night, can’t it subsidise them to job-share or work part-time, or pay one or other partner to stay at home giving those children the loving parental attention which should be their birth-right, at least until they begin school?  

 

It all comes back to a question of choice.

 

The fact is that the government chooses to rely on systemic debt to put money into circulation, rather than creating and distributing an adequate means of exchange debt-free.

 

And as long as governments persist in this choice, fewer and fewer people will be able to put the necessary time and energy into evolving an emotionally supportive family unit, as both parents struggle to keep the home together while holding down two full-time jobs in order to service and repay their debts.

 

Why, then, are governments apparently so determined to make every parent a wage-earner?

 

In an economy fuelled by systemic debt, it makes perfect sense to push as many people as possible into paid employment  -  whether or not the jobs they do are actually necessary.

 

Firstly, governments which refuse to create a debt-free money supply are always strapped for cash as they try to hold down the national debt: and the greater the number of people employed, the higher the tax take.

 

If one partner stays at home looking after the family and one goes out to work, there is only one wage packet available for income tax and National Insurance deductions.  If both parents work full-time, not only do they provide twice the opportunity for taxation  -  they also create little clients for a flourishing  child-care industry, further boosting the number of jobs available, and the Chancellor’s tax intake.

 

So, instead of advances in production methods bringing the benefits of increased leisure without any fall in income, we have the absurd situation where jobs which are only marginally necessary must be created  -  jobs in government; jobs in PR and advertising; jobs in regulatory agencies; jobs in financial services; jobs in call centres; and, of course, jobs in childcare; all of them jobs which produce no real wealth, or which do work which would be best performed free of charge within a loving  family unit:  but jobs which, though essentially feeding off the real wealth producers, distribute the wages which ensure that  money keeps flowing  through the economy and into the government’s coffers.

 

Secondly, since mortgages now create around 60% of the money supply, people have got to be able to afford them; and this is now impossible for most couples unless two pay packets are available to service the huge debts required.

 

The bottom line is this: if levels of borrowing high enough to support our debt-based financial system are to be maintained, as many people as possible must be driven out to work, whether or not this makes the best use of their own particular talents, or fits in with their personal preferences or the needs of their partners and their children.

 

In this way, an economy in thrall to systemic debt warps our instinctive priorities.   The PR line may be that employment outside the home “emancipates” women; but some women (and some men, too) might prefer to be their own boss, running a home and looking after their family, to doing a boring and repetitive job under somebody else’s thumb; yet, unless their partner has a prestigious and well-paid career, this has become financially impossible.

 

All too frequently, the need for  both  partners to undertake paid employment outside the home, with all the time-consuming commuting which this entails, contributes to the disintegration of family life; and divorce is already becoming less the exception than the rule.

 

Unless we abandon systemic debt, and find a sensible way of  creating and widely distributing sufficient money to reflect the wealth and leisure made possible by a properly functioning high-tech economy, you yourself, or someone close to you, will be increasingly likely to experience family breakdown.

 

 

5 You will be able to leave far less to your children

 

The recent unprecedented inflation in house prices has been greeted with joy by home owners, who feel they have become rich overnight. 

 

Yet very little of this newly created “wealth” will be passed on to future generations, because it is being dissipated in current consumption.

 

Recent years have seen a massive drop in the level of savings in the UK.  With true disposable incomes falling, as disproportionate increases in housing costs, council taxes, fares and fuel bills eat into the pay packet, it is becoming harder and harder to maintain standards of living while putting something aside for the future; and many people turned first to the illusory gains of the stock market and then, when that bubble burst, to the rising property market, to do the job for them.

 

However, these ersatz “savings”, in the form of housing equity, have not remained untouched.  With pensions failing to keep up with the cost of living, and the government raiding the funds of those who take the trouble to save for their old age, elderly people in particular are choosing to supplement their income with “equity release”.

 

Fewer people nowadays actually hold the deeds of their houses.  Mortgages are far bigger than they used to be; it takes longer to pay them off; and even after they are paid, re-mortgaging is becoming commonplace, perhaps to meet some pressing financial obligation, perhaps when parents help their children with a deposit, to get them onto the first rung of the housing ladder  -  a deposit which young couples would have been able to save up for themselves when wages went further, and the basic expenses of living were less crippling.

 

Since the great inflation of the seventies, everybody knows that wage demands lead to higher prices; yet even dirt-cheap imports from low-wage economies do not compensate for the rising cost of unavoidable outgoings like housing, fares and council tax, with interest charges and debt repayments an inbuilt component of that cost.

 

The only alternatives to wage demands, when faced with the rising prices associated with systemic debt, is a drastic cut in standards of living; or increased borrowing, leading to even less disposable income; or, for those who own property, “equity withdrawal”  -  the equivalent of a visit to the pawn shop.

 

In an economy which borrows its money into existence, increasing numbers of people consider equity release the “least worst” option, and decide to exchange lasting value for short-term liquidity, just to keep up with the rising costs generated by the servicing and repayment of all that debt.

 

But when real wealth is exchanged for money, and used for current consumption (either voluntarily, to purchase goods which quickly lose their value, or of necessity, in the struggle to make ends meet), there is less and less to pass on to the next generation.

 

What is more, the “wealth” generated by rising house prices may well prove to be illusory. 

 

As Mervyn King, Governor of the Bank of England, has pointed out: “House prices are a matter of opinion.  Debt is real.”

 

If the property bubble bursts  -  as is the nature of every bubble that ever was, is or shall be  -  a lot of people will find themselves owing more than the banks consider their houses to be worth.

Worse, should the banks decide to call in their loans, in the event of a severe recession, those who have no savings to cover borrowing undertaken during the boom could find themselves bankrupt and homeless.  It has happened before, and there is no guarantee that it could not happen again. 

Nevertheless, under a financial system based upon systemic debt, more and more of us will be forced to tap into our highly questionable "equity" in the battle to meet rising costs; and more and more real wealth (ie, the kind of property that maintains its intrinsic value) will be transferred to the lending institutions, both through mortgage equity release and, in the event of a property market collapse or a depression, repossessions.

On top of this, as people live longer, and cash-strapped governments renege on promises to pay for “cradle to grave” health care, more and more of us are having to sell the houses we hoped to leave to our children to cover the costs of residential care.

 

The fact is, that unless the government grasps the money reform nettle, you will be very lucky to have any “equity” to pass on to your children in future years.

 

6  You will be taxed “until the pips squeak”

 

It was Denis Healey, when he was Chancellor of the Exchequer, who was said to have threatened to “tax the rich until the pips squeak”.

 

Under our present regime of systemic debt, things are far worse. When every level of government is in hock to the banks, it’s not just the rich who suffer: to service the debt  -  just service it, mind, not pay it off  -  EVERYBODY must be taxed until the pips squeak.

               

Income tax, “National Insurance” tax (both employer’s and employee’s), council tax, company taxes, capital gains tax, inheritance tax, stamp duty, fuel tax, motor vehicle tax , VAT  …  however poor you are, you can’t escape.

 

When governments have debts to service, they need to raise more in taxes.

 

Here in the north-east of England, take the case of North Tyneside, where council tax goes up each year way beyond the official rate of inflation, much of it swallowed up unproductively in interest payments on past borrowing.

 

In 2004/5, for instance, North Tyneside’s debt was £139,250,786, and required interest payments of £16,734,000 to service it: about 25% of total Council Tax revenues.

 

Look at the huge sum necessary to service the national debt!

 

This amounts to between £30 and £40 billion a year:  more than total spending on housing, education and the police force!

 

Imagine the difference to all of us, if there were no need for public authorities to pay the costs of borrowing!

 

Joseph Huber and James Robertson of the New Economics Foundation reckon that the decision to create our money supply as a debt owed to the banks, rather than issuing it debt-free as a public service, robs the country of around £47 billion a year, ensuring poor services, miserly pensions and ill-maintained infrastructure.  This endemic lack of money also encourages the adoption of dubious PFI projects and the sale of public assets, in a vain struggle to make ends meet.

 
We are constantly told that we must choose between low taxation and good public services: but this is just not true.

 

It is only in an economy based on systemic debt that we are forced to make this unnecessary choice.

 

But until you insist on reform of the present insane financial system, you will continue to be taxed “until the pips squeak”.