For months and months the news has been full of stories about debt and austerity. We are told that austerity is necessary in order to eliminate government deficits and ultimately reduce government debt.
Sometimes it can seem as if the whole world is in debt. But let’s just pause and think for a minute. How exactly is it possible for everyone simultaneously to be in debt? Rationally, where there is a debtor there should be someone else who is a creditor. If everyone is in debt, who are they in debt to?
When a financial actor (individual, company, government) wants to spend more money than it has, it goes to a bank. The bank provides the actor with the (electronic) money it demands in exchange for a debt, that is, a promise by the actor to pay back the bank at a later stage.
The important point to note is that any electronic money issued by the bank in this process is tied to a debt.
It is logically impossible to reduce the total amount of debt in an economy by creating money that is attached to more debt. The only way to reduce the total amount of debt whilst maintaining the amount of money in the economy is to issue debt-free money*. Private banks aren’t allowed to issue such money (they can only issue money attached to debt). The only institution with the power to issue debt-free money is the central bank (in the UK, the Bank of England).
If the total amount of debt in the economy is ever to decrease whilst maintaining the same amount of money (and thus avoiding potentially devastating deflationary effects), it will be because the central bank issues debt-free money. This is not a policy ask. It is a logical certainty.
Now we’ve cleared that up, we might ask: how we can issue debt-free money in a way which isn’t itself harmful?
The biggest concern people have with this process is inflation, that is, a decrease in the purchasing power of money as too many pounds chase too few goods and services. How can we ensure that the total amount of money issued into existence in a given year does not produce a decrease in purchasing power of more than a few %?
- Stop private banks from issuing electronic money, i.e. have the state reclaim total control of the money supply. This makes a lot of sense from the perspective that the state basically underwrites all money in the economy anyway, as we saw from the bailouts of RBS and others in 2008 – once created, the state is unwilling to allow any money to just ‘disappear’ for fear of destroying confidence in the system.
- Restrict the central bank’s ability to issue new money according to the increase in the amount of goods and services in the economy. If there is no year-on-year increase in the amount of goods and services, money creation should be restricted to a few % of the existing amount of money in the economy to ensure purchasing power does not fall by more than a few %. (There are around £2 trillion pounds in circulation, suggesting the Bank of England shouldn’t issue more than around 0.05*£2tn ~ £100bn/year in new money.)
The sooner policymakers understand the (relatively simple) logic of our money system, the sooner they can start focusing on solutions that are at least logically feasible. Any way out of debt will necessarily involve the creation of new, debt-free money by central banks.
* Assuming simply cancelling debt is not an option.