debt-money

Nick Clegg has a piece in the Independent this morning repeating his suggestion of last week that we should consider joining the Euro. Not, it has to be said, now and in a hurry - he does not see it as a way out of the mess the financial markets are in - but in recognition that the world after this crisis will be a different economic landscape in which ganging up together with Europe may outweigh the loss of credibility the City of London will have wrought on itself. He concludes:

But given the gravity of the economic crisis in Britain, and our unique exposure to international financial markets, silence about the euro must end. The future has never been more uncertain. People are increasingly desperate for stability in our economic affairs. We must be ready to think anew. [From Nick Clegg: We should consider joining the euro - Commentators, Opinion - The Independent]

Indeed, we must think anew, but alas the Euro is still part of the old world not the new. It is the system itself that is broken. It is true that one could argue that the Euro is slightly different from the rest of the system in that its central bank is not controlled by a single government with spending plans it would like to get that central bank to finance. At the moment that is; and God forbid that it ever should - we don't want these people to have any control over our lives, as liberals, do we?

If the Euro is able to survive the current crisis, with the pressures of Greece, Spain, Portugal and Ireland at least threatening to break all the rules, it will be a stronger currency I am sure if it emerges out the other side, but how long would it take for it to be ready to absorb an economy the size of the UK's?

Then also I notice talk that the BRIC countries, and at least China and India, as global creditor nations, will hold a lot of sway when the G20 meets in a few weeks time, are resurrecting something similar to Keynes' idea of the Bancor as a sort of a supra-national reserve currency. I doubt that they will readily accept a switch from one "national" reserve currency to another. The very notion of a reserve currency linked to one particular geopolitical grouping skews the system against all the other nations by effectively ensuring they have to buy that reserve currency in order to trade. In the new world where these economies are nipping at our heels it is economic imperialism, and protectionist, to believe we have a right to be some global super-currency.

I really think we have to begin to look beyond the era of "central banking" - it's not like it's been around that long - less than a century in reality. It has proven time and again to be a hostage of markets owing to the moral hazard inherent in the private banking system knowing they will be baled out in a crisis and has been a constant source of inflation. Not even our most monetarist governments have been able to control the money supply. It is one of the great monopolies that our liberal predecessors knew were a great cause of inequity.

As well as establishing this group to look at the electoral use of technology, the party needs to establish a group of, if you like, futurologists, to look at how the technological advances, especially in communications, over the past couple of decades can facilitate even more wide ranging changes right down to the institutions we have accepted till now as the very life-blood of the economy. The genie is out of the bottle, we are in a new epoch, and it seems to me that the opportunity this financial crisis affords us to do away with some of the old and facilitate the new is unmissable.

Money is not wealth. Wealth only exists in real things that people produce and you consume, or more properly take pleasure in owning. Unless you are a very sad person whose pleasure is in counting and admiring a pile of bits of crinkly notes, money is only valuable insofar as it allows the person who has it to buy things, goods or services that add to their store of wealth.

For most people, money is just a unit of accounting that tells them they have sold their labour (or something else) for a certain amount of wealth’s worth that they can use later to buy some real wealth. It gets over the problem of so called “coincidence of demand” – that at the time you sell your labour or goods you may not in that instant want something the person buying it from you has to offer.

In a world of uncertainty, it is prudent, if we are able to, most of the time at least, to hold a little bit of money in reserve so that we can eke it out and survive if for some reason we are unable to get more of it before we need to pay our bills, buy more food and otherwise fulfil the basic needs of life. That’s just what prudent companies do to ensure they can pay you every month and buy things to sell before you come along to buy them.

But really “saving”, putting something away for that ever-looming “rainy day”, is where money (“cash”) falls down as an asset class. And in doing so it does immense damage to us all – our financial fortunes, our environment, our society.

In the context of establishing our idea of a “Community Finance Partnership” a friend and I have been reading up on various community finance networks that sprung up at the time of the Great Depression. And I believe I have finally had an epiphany in my understanding of “usury”.

Many of the groups and systems I have been looking at, formed during the Depression to help make up for the lack of circulating currency which was making a bad situation worse, worked on the understanding that charging or paying interest was itself the major problem that had led to the “credit crunch” of the time.

Interest bearing cash tries to turn money from being a means of exchange and unit of account into something fundamentally different – a store of value. It encourages the hoarding of cash balances, which are then not available to be spent in the real productive economy.

The charging of interest on loans means that the borrower has to acquire more money than they borrowed in order to pay off the principal and the interest. We have a tiny amount of non-interest bearing “money” in our system. In the UK, prior at least to the recent troubles, this amounted to only about £50bn – in the form of issued notes and coins. All the other purchasing power in our accounts was created as interest bearing debt and so over 97% of our purchasing power needs repaying at some point, with interest.

The JAK bank in Sweden, which has its origins in a similar Depression-era Danish venture, calculates that up to between 30% and 40% of everything we spend goes on paying this embedded interest committed to by all the borrowers in the supply chain of the goods and services we are purchasing and have been created in the past. This represents a huge transfer of wealth from those who have little, to those who own the financial institutions that create this debt-based purchasing power.

In such a system also, inflation is virtually guaranteed, as it helps those in debt (most often governments telling us they are acting in our name) reduce the value of their debt by reducing the purchasing power of those who hold current purchasing power unencumbered by debt. This is a transfer of wealth from those prudent enough to operate within their means to those who don’t.

It is a vicious cycle at the centre of our economic lives that allows the rich and powerful, including states and bankers, to manipulate our purchasing power for their ends rather than ours. If we did not have to finance this 30-40% embedded interest then, not only would our purchasing power hold its value better, but we’d have 30-40% more of it, for the same amount of labour sold, with which to purchase real wealth and get closer to financial independence.

Money is a human creation, and the way it operates can be changed by human intervention. If we do not change it now, in the process of rebuilding the financial system that has just crashed, we are doomed, absolutely inevitably, to repeat this crisis in the future. And we should not be afraid to demand such change. After all, it affects the vast majority of us negatively at the moment and only benefits a tiny minority. It is a test of our democracy if you like that we must rebuild the system in a way that works for the majority rather than against the majoroity.

They've been rumbled. The very shaky foundations of the entire house of cards have been exposed. The vast fraud against lower and middle income households that is the financial system, and, ultimately, government has been laid bare. Surely everyone can now see that? No? That doesn't surprise me. Just as there was very little outcry in this country when former Governor of the Bank of England Eddie George revealed that their commission on independence in 1997 was not just to maintain an inflation target but also to see to it that house prices continued to rise by keeping money as cheap as possible for as long as possible.

In my opinion, whatever the consequences in the short term, it would be better if Fannie and Freddie were allowed to die gracefully even as their lives have been a disgraceful deceit. What have they done that is so bad that a normally forgiving person like me would be calling for the corporate equivalent of the death penalty? The seemingly innocent practice of underwriting mortgages is in fact a key factor in the creation of the property price bubble and in the transfer of wealth from poorer to richer.  Yes that's right, redistribution the wrong way!  Without that underwriting the front line lenders would have been more cautious in their lending stabilising prices and not stretching households to the financial limits just to have a home over their heads.

Oh, what a clever idea, you still say perhaps - after all, it surely helps more people buy a home. And that's what Fannie and Freddie were supposed to do, by offering an implicit government guarantee people who would previously not have been considered for a mortgage got to join in the jamboree. And that's the problem - a government guarantee. They, the state, have pledged an eye-wateringly close to unlimited amount of money, that's *our* money of course, to make us have to pay more for our homes to the banks who effectively create the credit in the first place and line the pockets of landowners. And this in a nation that is still so relatively empty as to have marginal land in abundance so other land values should still be relatively stable other things being equal.

But those other things are not equal, the cycle of lending inflates the broad money supply so over time reducing the value of the asset that very system conspired to make you pay so much for in the first place. And all this is only possible because of the enclosure of land, the privatisation of the entitlement to and collection of the value that the whole of the community creates at any particular unique location.

At best, Fannie and Freddie are shining witnesses to the power of unintended consequences - I am sure the New Dealers whose brainchild they were earnestly believed they were helping: at worst, they can be seen as part of a conspiracy between government and those who own the financial system and its institutions to transfer vast amounts of wealth from Average Joe to the richest few. Add the evidence of Eddie George that in the UK the past ten years' property price boom was deliberate though unannounced political policy and it's harder to rule out conspiracy over cockup.

Either way, Fannie and Freddie should go, and go quickly, and, as they say, be buried in a closed casket to boot. It will unleash financial turmoil of unprecedented ferocity I am sure. But it will be the herald of death to a fundamentally flawed, corrupt and downright fraudulent system that continues to benefit a tiny few at the expense of the vast majority. I was introduced to a new, to me, term at the weekend, the Kondratiev wave. Looking at the vast amounts of money involved in the current potential crisis, the fact that the asset bubble is bursting as production is also slowing and there's ever decreasing amounts of money available to maintain existing economic activity, and I'm beginning to wonder if Kondratiev wasn't on to something.

This is a huge opportunity. An opportunity to reinvent a stable monetary system more suited to a globalised world of trade and increasing aspiration amongst a whole new world of consumers, a world in which, of necessity, economic activity is shifting relatively away from the west, from the existing reserve currency and its close followers and towards the east and the global mass of population.

And that, dear reader, is why I am likely to die waiting. An opportunity those who wield power would prefer us to miss.

Sir Josiah Stamp, reckoned at the time to be the second wealthiest person in Britain, sometime Bank of England director, Chairman of the LMS railway and Liberal economist, winning a 1912 prize for an essay about taxing the "unearned increment" instead of incomes, is quoted as saying:

"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money ."

Particularly apt this week I should say. You see, what's been happening this week should make most of us take to the streets in demonstration and revolt; if only we understood our unwitting role in the gargantuan pyramid selling fraud that's been playing out in global financial markets this last few weeks and who, ultimately, is going to pay in the fall out.

Follow the money trail...

The economy needs money to function just as we need air to breathe. The more we produce, the more money we need circulating to consume that production. That production is our collective creditworthiness - the measure of how much wealth we are all creating and swapping with each other. We trust the money that facilitates those swaps because we are told to. The green/blue/purple crinkly stuff, of which there exists less than £50 billions' worth, says on it "I promise to pay the bearer on demand the sum of..." as that most potent national icon, the monarch, smiles benignly up at us in reassurance.

So, do we have a benign national institution that keeps watch on economic activity and creates the currency to match our national creditworthiness? Do we hell. We have an Old Lady that the monarch once gave a monopoly to to create money and sell it back to him who can no longer be bothered to do the job and has subcontracted it to private banks. She keeps an eye on all the economic activity and so on, she has all the figures and tools needed to do as good a job as anyone else, but instead of actually creating money into productive circulation she lets that cartel of private bankers know how much she thinks should exist by telling them the rates of interest they should be charging for actually lending the money into circulation. They create nothing except numbers. Pixels on a computer screen that we all trust we will be able to turn into those "promises to pay" whenever we need it.

These bankers, being a conservative breed at heart, not wishing to lose their investment, look to lend to those most likely to pay them back with interest. But even making such a risk calculation based on the prospective borrower's ability to repay, they look also to take some security, something they can sell to get as much of their money back as they can if the borrower finds he can no longer repay. And what's the safest security? Safe as houses? Well, houses of course, or more particularly the land value it sits on (a house, like any other capital good depreciates and needs constant maintenance to hold its value).

There's very little, in the ordinary course of things, less likely to go south in value than land, except perhaps very small specialized bits of land like gold and other rare natural resources. Keeping those rates low makes the money borrowed more affordable. More people think they can afford it. The banks lower the interest cover they're prepared to take by increasing the multiples of income people can borrow. Still the insatiable economy needs more money circulating, so the banks, usually not the front liners with big reputations to keep, go chasing more and more marginal borrowers. The house price/land value increases make people who don't own nervous that they never will if they wait as prices rise, so the age old human natural inclination to want to "own" the place you live in takes over and you stake more than you could comfortably afford in less benign economic conditions on getting your foot on that housing ladder.

The more front liner banks are however prepared to back up this borrowing with "managed risk" packages of these loans. But when the Old Lady gets a bit nervous about inflation at the centre of this web and decides money should be more expensive and the cartel operators duly follow suit, whilst those of us with enough simply cut down on spending now to afford the higher interest payments, those of us who were only just able to afford to get on the ladder at the lower rate now find it impossible and stop paying. The image from "Life in the Freezer" comes to mind of chin-strap penguins trying to get ashore on a south Atlantic rocky crag where the unfortunates that only slightly mistime the wave scrabble about and fall back into the thrashing ocean.

The security, the house and its land value, takes a while to turn into liquid cash, the buyers of the "managed risk" packages that back up those loans see the prospect of getting the yield they expected diminishing and tighten their belts. This whole house of cards rests on every card in it honouring their obligations every night and so suddenly the Old Lady awakes, reaches over to the button that is all it takes to create credit into the system and rather than the private bankers see their stockholders losing their investment the retail debts of dubious morality they marketed and created are magically covered.

Excuses, excuses...

Of course the banks and monetary authorities give out all sorts of excuses that, because of the mystery they have created of smoke and mirrors and the awe with which we will believe the sort of people who are obviously so brilliant they merit multi-million pound a year bonuses and management fees, us mere mortals swallow out of fear of recession, slump, unemployment, meltdown...

The "sub-prime" market is made up of feckless folk who really should have known better that they really couldn't afford to borrow. They fail to explain that it is being relentlessly sold to them through aggressive marketing and in the hype that they might miss the bandwagon if they don't sacrifice now to get on the rapidly rising housing ladder, rising of course because of the amounts of money they've created over the past few years chasing the monopoly of desirable locations. Not only are these sub-prime chin-straps cast back into the tumultuous briny, but they are pulled down by the under-tow. Not only have they lost their home, and whatever credit rating they had achieved, but now they probably also owe money on something they no longer own. They are not just back at square one, but off the game board for a good long while.

The liquidity injection protects the creditworthiness of the pound in your pocket. They fail to tell you that its creditworthiness has only been compromised because the subcontractors that actually create the vast majority of it took bad investment decisions in the pursuit of ever more profit for their shareholders.

That we're all protected because we are all, or nearly all, shareholders in banks through our pension funds. They fail to tell us that the vast majority of non-housing financial assets are held by a tiny minority of the wealthiest people on the planet and that the bottom third or so of folk, including, most likely, the hapless sub-prime mortgage market, do not own any financial assets. Besides, the propensity in the UK for pension funds to hold bank shares comes at least in part because through all the special privileges involved in creating our money stock out of nothing and the protectionism in having a sugar daddy in the form of a lender of last resort that will ensure the whole thing doesn't go down the tubes they are usually a pretty dependable investment.

That we need to prevent a run on equity markets becoming a rout. Of course they tend not to point out that the underlying business prospects of the companies facing huge write-downs in their values because of the "dash to cash" to shore up the credit markets have usually not changed. That these values are being slashed by large volume gamblers for whom the shares in those companies are little more than poker chips to buy and sell, swap into other assets and so on in technical trading, game theory scenarios and arbitraging between all but unrelated markets.

And that, dear reader, is why the collective noun for bankers is "wunch".

A call to arms...

This kind of money system, based on debt and causing the very asset price bubble that brings about its own collapse is first and foremost unsustainable. Every time there's an expansion it's the big players, those on the inside of that smoke and mirror fraternity, that gain by skimming off the cream from their ever increasingly precarious plate spinning, and those on the outside, with everything to lose, who get dumped on. And our governments collude in this iniquity.

If it weren't for this last fact, that it's always the little man that loses in this, I'd be hoping and praying this weekend that the whole house of cards does collapse this time and we are forced to find a different way to monetize our national creditworthiness for the future without creating these artificial asset bubbles and mountains of debt.

Yet there are a couple of ways to use the current turbulence to effect far-reaching changes so that our money system becomes more stable. Depending largely on whether you view the world from the market or the state point of view:

We could on the one hand break the link between the state and the real creators of credit, the commercial banks, by refusing to be the lender of last resort, by completely privatising currency so that what and whose money we use and trust most will be down to which of the commercial banks are best managed. Instead of Dollars and Yen, Pounds and Euro we might use Barcs or Honkers, BOSses, AirMiles or CitiCash right around the globe. Those with a favour for market solutions would point out that this removes the state protectionism, removes trade tariffs (by abolishing national currencies in favour of competing, global, commercial currencies) and crucially does not involve anything that could be connected to government.

On the other hand, for those of a more statist constitution, or perhaps just too timid to sever the ties between crown and the "coin of the realm", there's another possibility - the C H Douglas style national credit authority. Controlled by statute rather than by government, such a body would do as the Bank of England does now in monitoring economic indicators and deciding whether there should be more or less money in the system to cope with the economic climate. But instead of subcontracting the power of new money creation to a cartel of commercial interests, they would create all new money and be the lender of first resort to a banking system reduced to brokering loans between people who have cash to invest and people who need that investment. The national credit authority makes a profit as it does so on the lending of newly created money that costs it little or nothing to produce that can then go to its shareholders - the people of Britain, as a dividend, or our representative, the government, as money to spend.

And we could begin to make this latter change right now, with no legislation needed and no expenditure required. Instead of buying back all the liquidity central bankers have put into the system these past few days when markets stabilize, they could just increase the reserve requirements by the same amount, forcing the commercial banks to keep the debt-free money and restricting the new debt-money they can create on the back of it. Over time this reserve requirement could be increased until the majority of money is created by the national credit authority in response to economic growth needs.

But in order for there to be a will for such a thing to happen, people need to understand how skewed towards those who already wield wealth and power the current protectionist system is, and who loses...us. Nearly all of us. So why aren't we marching? We aren't even daring to discuss it. We're accepting that the situation financial markets are in today is because of feckless borrowers wanting to better themselves beyond their means. And that we all have to take a bit of pain for the irresponsibilities of our fellow borrowers.

And THAT, dear reader, is also why the collective noun for bankers is "wunch".

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