If the Solution Is So Simple, Why Is It Not Being Done?

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Hi Positive Money UK,

I was wondering, if one of the solutions is to simply issue debt-free money, why is it not being done?! It’s been more than 2 years since the crisis hit!! Surely there must be at least a few intelligent people in positions of power in the government who know about this solution?

…this was a question that we’ve got recently (and it’s one we ask ourselves sometimes too).

The fact is that there is widespread misunderstanding of how the banking system really works in the first place. Most people assume (without having given it much thought) that it works in the way that we are suggesting it should. Many people would be surprised to learn that even among bankers, economists, and policymakers, there is no common understanding of how
new money is created. (In the UK there are currently only about 4-6 MPs out of 650 who truly understand how money is created by the banking sector)

As our research revealed, the most of the textbooks are very much out of date. They teach a model of banking that has not applied in the UK for a few decades, and unfortunately many policy makers and economists still work on this outdated model.

Then you can read from one of the most influential economists and one of the most influential opinion leaders Paul Krugman  in his recent article “Nobody understands debt” that:

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

In other words he is saying that it is ok for the government to continue to borrow infinitely and we should pay the ever increasing costs of borrowing to private banks infinitely. And in order to have enough money available for paying of ever increasing taxes, we need to have ever increasing money supply (hence debased currency) and ever increasing prices.

His second statement is simply not true. We owe the money to the private banks, and although some of us may be shareholders of those banks, the majority of the nation is not.

So, if the most influential economists are constantly convincing everybody that to be always in debt is actually a good thing, perhaps there lies a big part of the answer to the above question.

There are other reasons, of course: the creation of new money and the allocation of purchasing power is highly profitable for the banking sector. And it is not in the interest of those powerful forces to disclose the true nature of our money and possible solutions. (More about the lobbying practices of banks in today’s article in The Independent.)

However we believe that the ignorance of people about the problem is much bigger obstacle than is the opposition of banks.

Luckily, more and more alternative economists are pushing forward a different view. Since those alternative economists (the ones who understand money) were usually those who saw the crisis coming before the event, they are becoming more and more influential. With any luck, a better understanding of money and debt might even reach parliament!




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  • Ian McCabe

    Has anyone checked out lawful bank and if so what do you think?

    • Joao Granchinho

      McCabe, I’ve checked their website and I must say it looks like a Ponzi scheme.

      -“Interest free loans, but subject to a fee”. They say the fee is 10% (on cash upfront). A 10% interest loan or an interest free loan with a 10% fee are exactly the same thing. You ask for X, and in the end you pay back X*(1.1).
      -“A positive credit system – for every £1 of cash deposited, each member creates £10 credit in their account. This credit (created by the system) on the back of the cash deposited is the property of the member and thus not a debt to the member. This will provided streams of credit to the system – and not debt.” Free extra money for everyone? On what authority would they just create this money? I think they’d pay older members using new members’ money (as they make pressure to achieve critical mass in order for this to work) like any good Ponzi scheme.
      Nevertheless I’ll indulge myself and assume what they’re proposing is legitimate (that they really have the power to create credit as they claim), and my following reasoning is based on this assumption.

      1.The fact that this new issue won’t be coupled with extra debt seems good, but multiplying by 10 the amount in hard cash, means inflation to start (I’m assuming Gov’t isn’t going to tax this newly created money out of circulation), and this is a big problem on its own. The difference between their method and today’s credit extension is that they create new money directly and give it to their depositors, while today’s commercial banks create it to loan.

      2. If on one hand everyone would get extra money to invest, on the other hand a member from the middle class depositing 2000£ will gain 20k£, while a richer member depositing 100k£ gets 1M£, and a millionaire depositing 10M£ gets 100M£. The richer members would still make the most out of this system, perpetuating and exacerbating the rich/poor gap.

      3. Furthermore, even though the investment decision-making is decentralized (each member decides where to invest his new money – as opposed to a commercial bank deciding), none of those members have to be social accountable with their money, they can invest it just like today’s commercial banks do, in profitable non-productive activities, and indeed we should expect them to. They’d be only looking after their own interests by maximizing their profits – each of them individually is not liable for the whole country’s economy.

      If this bank were to exist (and to function as it claims) I’d expect to see major cash withdrawals from all other commercial banks, to deposit on this one, causing a major crash.

  • Rhyannan

    “In the UK there are currently only about 4-6 MPs out of 650 who truly understand how money is created by the banking sector”

    Where did you get this statistic from?

    And if it helps, I am working on my MP Conor Burns, doubt he’ll listen but I’ll persist!

  • RJ

    “His second statement is simply not true. We owe the money to the private banks, and although some of us may be shareholders of those banks, the majority of the nation is not.”

    This statement is not correct

    Govt debt is owed to whoever owns the debt. Which is often pension funds.

    If banks owe the debt (and they can only own it if non banks decide not to purchase it) it is only as an ASSET to compensate the bank for an equal customer deposit (a bank LIABILITY).

    So Krugman is correct. In fact his comments are excellent so thanks for posting them. It explains the importance and benefit of Govt debt.

    • tim chiswell

      That simply isnt true RJ. Owing to fractional reserve lending, more than 97% of the money a bank lends DOES NOT represent a customer deposit but is in fact ‘created’ money. Your post nicely demonstrates the very lack of understanding of how the fiscal system works that the article above is seeking to highlight… bank assests (ib the form of debts owed to the bank) bear little relation to the deposits held…

      • RJ

        I can assure you that my comment is correct. And fractional reserve banking was a method to restrict bank lending (based on base money held) that has been discontinued.

    • Eduardo

      Actually both statements are true. The point is that there are two kinds of debt:
      – bank debt (which is created out of thin air based on fractional reserve)
      – market debt (which is a loan between private agents)
      Your example about pension funds as well as the Krugman’s explanation corresponds to the second case. The money circulate between private parties (stock, bonds, derivatives, etc…). But this exchanges liquidity is originally provided -created- by banks, as bank loans.
      And 95% of the money in circulation is based on bank debt. Then, although the money is exchanged between pension funds, companies, people, in the end this amount is still owed to the banking system (the money creators).
      Sorry for my english, I hope this is understandable..

    • Gary

      His first statement is true but only in the context of the awful debt-based monetary system we currently use. Governments should always run a deficit (i.e. tax less than they spend) as the resulting difference will be the money supply of the nation. However, the point you are missing is that currently the deficit is made up by a nation borrowing its own money in to existence at interest. This means that some government spending has to go on paying the interest. If a nation creates its own money (rather than borrowing it) then not only is there no interest to pay but there is more money for services and the nation gets the seignoirage (benefits of first usage of the money).
      His second point is also sort of true. The national debt is money we owe ourselves. However, currently we don’t pay it back but we pay ever increasing interest on it which will only ever increase causing more tax and/or more austerity. In a non debt-based system we wouldn’t pay it back and have no interest to pay on it meaning no austerity and probably less or fairer taxes.

      • Benjamin Jones

        Finally someone who grasps it, when I explained this similar point to the Treasury it was ignored entirely.

      • Conrad Jones (Cheam)


        Well said.

      • RJ

        Govt debt (created by journal entries) equals a non Govt FINANCIAL ASSET. Often held by pension funds.

        Govt interest expense (also created by a journal entry) equals non Govt interest REVENUE.

        • Simon

          What about the tax payers who have to pay the debt interest, usually to banks or pension funds ?

      • http://me.com Ourselves

        i don’t own treasury bonds so krugman isn’t talking about me when he says we’re paying interest to ourselves.

        i do have $5 in a savings account at a credit union, but i’m not seeing the full interest on even the $5 in the savings account. i’m surely not collecting the interest on the $5 in my pocket.

        i think krugman meant to say (he almost said it) is that the working class is paying interest to the aristocrats around the world who hold our national debt and who own the banks. we’re still a bunch of serfs making tribute payments to the idle rich.

  • Benjamin Jones

    I’ve been bombarding the Treasury & Local MP. Treasury seems to be fixated on this new white bill and ring-fence banking. They are determined to bury their head in the sand. I have even asked the treasury why we need to create money with debt at all, unsurprisingly they have yet to reply. If PM wants I can send in the stuff might be useful for them. Ultimately I think they all in a state of denial, stupid really because there is only one way this route will go and sadly it’s down.

    Keep bombarding them, then when the public turns rounds and acts dumb: “Why didn’t anyone offer alternatives” I can say well a few of us tried but you weren’t interested and nor were your highly intelligent leaders … I let your imagine paint the rest of the picture!

    • John

      Well, we’d better hope that Ron Paul is the next American president for he has sworn to close the Federal Reserve (Bank).

      And of course people are ignorant, the education system is intended to keep them that way.
      If you want real education you should go http://www.bollingbrookeinstitute.org

      • tim chiswell

        There have only been two previous Presidents who have considered nationalising the Federal Reserve – Abraham Lincoln and John F. Kennedy. Can you think of one other thing that these two have in common? Interestingly both assassinations happened right when they were getting serious about making a move on the Fed… you can accuse me of being a tin-foil hat wearer if you like, but I cant help wondering if that isnt just coincidence….

        • Mike Gregory

          Couldn’t agree more, Tim. How can an American President close or nationalise the most powerful organisation in America (if not the world) – the organisation which controls all of America’s money?

  • Indy

    Of course people are ignorant. But there is a reason for that. Look at the media – they telling just a part of the truth. And look at the education – it’s completely based on compulsory, textbooks information is similar to the media. That’s why people misunderstanding the essence of system.

    And won’t let yourself be ignorant too. The people who created this system, won’t let you change it easily. There are examples in history – president Jackson (avoided bullets), Lincoln, Garfield, Kennedy.

    I’m not tend to be conspirologist, but there are valid facts how media, education and other fields was influenced in history.


  • david smith

    The real problem is that politicians and officials have been corrupted and ‘captured’ by the banks. It’s not that they are thick. They are just acting in their own selfish interests. The situation is not helped by those high priests of casino capitalism, orthodox economists. Their doctrines are not science. They are a cargo cult. The trouble is that these doctrines are trotted out in defence of deregulated banks. The Occupy movement should challenge these people.

  • Steve

    why is nothing being done? simple, the government is made up of political parties who depend on the financial system and its proponents for funding, if they rock the boat of these very rich people they won’t be in government for very long

  • Conrad Jones (Cheam)

    “First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. ”

    As always – this statement can be proven correct but there is no explanation as to why a Government should need to get into debt given that it has the authority to create money, or at least set the policy of when to create or destroy money.

    Was the Housing Boom caused by simple supply & demand economics ? Yes. But does a lack of supply of Houses relate to affordability or the quatity of physical Houses ? The fact that de-regulation created credit expansion – mainly targetting the Housing Market – did not reduce the number of physical dwellings, but it did reduce the number of affordable dwellings. The Increases in Land Prices also encouraged Developers and Builders to not build on their purchased Land as it was cheaper just to wait until the Prices went up, then sell for a profit.

    Many Politicians would argue that House Price Bubbles are mainly caused by shortages in the Housing stock. So what policies do politicians argue would solve the problem – in fact are they trying to solve the House Price Bubble or Shortages of Affordabe Housing. To someone who already owns several properties, the House Price Bubble is not even a problem – it’s a windfall. We all have – or appear to have; a different perspective on whether a situation is a problem or a windfall.

    I am still waiting for a sensible argument against the PositiveMoney proposals. As yet, I have not seen or heard any.

  • Conrad Jones (Cheam)

    “However we believe that the ignorance of people about the problem is much bigger obstacle than is the opposition of banks.”

    Absolutely agree.

    There’s another problem – many people believe there’s something wrong and pride themselves on knowing what it is without understanding what money is and who creates it. They see there property increase in “value” not realising that it is only increasing in price. They appear to see currency as a stable measure of value. They feel that they are above the problem as there wealth is in their property. They are not concerned with anyone outside their small circle of friends and family. They may have paid off the mortgage and do not see why others can not do what they did. They may be strong Labour or Conservative supporters and like to think that they fit snugly into one or other political group. Understandiing Money – for them; is like tryng to understand how the transistors work in their car radio; “who cares so long as it works”. This is the challenge of the PositiveMoney campaign.

    • tim chiswell

      Good point. Its not only the banks and politicians that have benefitted from the status quo- there is a proportion of the general population that have as well (mainly those that were on the right side of the property bubble).
      the message needs to be got across that just because one may personally have benefitted from something does not make it inherently ‘beneficial’ or good for society at large, nor does it make it morally right. … I could have personally made a fortune by buying shares in the firm that made Zyklon B gas in the 1940’s… but that doesnt in any way justify the Holocaust…

  • http://www.globalhyperinflation.com jonathan James harrison

    “His second statement is simply not true. We owe the money to the private banks, and although some of us may be shareholders of those banks, the majority of the nation is not.”

    Maybe you should spend more time promoting building societies like nationwide.
    They are run for the members by the members and this would solve this issue.

    • Michael_dawson3

       The difference between Nationwide and Banks is not that great. Both are run for the benefit of the directors. Bank dividends have  been miserable for a long time and share prices are a fraction of what they were before the crash. terms for customers borrowers or savers are much the same for the two.

  • Tom Espley

    I think there’s a bit of emotive language being used by Mira’s article here, which is a little misleading.

    Mira paraphrases that : Krugmans says “its ok for goverments to borrow infinitely” – and I don’t think Mr Krugman would agree to that. Too much borrowing can be a bad thing for a government. I don’t think in 2011/12 there’s any argument about this.

    Over infinite time, borrowing will grow infinitely. Within any finite time frame, there have to be limits on the borrowing. Our economy relys on borrowing to be the source of new money. The new money initiates growth, which creates tax revenues. It’s a delicate balance.

    Someone taking a loan, is taking on a serious obligation. May be that motivates them to think carefully about whether it really is well spent. I’m not convinced that giving “free” money to politicians is a better recipe for allocating money in the hope of creating growth. Is there any evidence of this? (I know the bankers failed recently, but would goverment be better?)

    I really appreciate the Positive Money initiative – it’s a great piece of education. Society needs to take a greater interest in these questions. They are often misunderstood. But simply understanding that money is “created” doesn’t mean we immediately have the solutions. It’d be nice to see some professional rebuttals of Postive Money’s argument. It would help me understand what is really going on here – and whether PM is actually suggesting a realistic alternative.

    • Conrad Jones (Cheam)

      “Someone taking a loan, is taking on a serious obligation.”

      You are right – they are.

      But do they realise it – isn’t there a tendency to borrow the absolute maximum amount one can borrow – especially when locked into the emotion of finding the ideal Property ? There is a serious obligation to pay the money back – but we are able to obtain that money merely by signing on the dotted line, where as savings are accumulated over a number of years and there is more apreciation of how much effort it has taken to obtain that money.

      Money is just “created” and will be just “created”, the difference will be that we will create the money debt free – and the Banks will have to attract OUR money – instead of magic it out of thin air. Interest will be charged on existing money and seigniorage will be paid to the Government for all money as it is already for notes and coins.

      We pay almost as much on servicing our debt as we do on Defence. this Government debt is totally unnecessary and proves that borrowing money does not make the borrower more prudent, it makes it less so as they can leverage their current assets and ability to service the debt upwards and spend more than if they could only live within their budget. Some debt is necessary – even essential; but to have a money system based on debt demands profligacy from Government, Commercial and Private borrowing. Someone has to be in debt – it is no longer a choice.

    • Simon

      @ Tom Epsley
      Positive Money is not suggesting that Politicans are given money. New money would be created under the authority of the Monetary Policy Comittee and Bank of England, which currently sets interest rates and does quantitive easing, which some would say is a bcack door method of money printing. The banks have hugely misallocated all the new money in the last 13 years, mainly creating a property bubble to the detriment of the productive part of the economy. As someone said on a Telegraph blog yesterday, there are too many living off the hard work of others. Banks, and people charging too much for commercial and private rents are living off the hard work of others. We cannot all be bankers and landlords, and debt interest and rent have to be paid for from the productive economy.

  • http://me.com Ourselves

    We’re not paying interest to ourselves. The working class is paying interest to the non-producing rich around the world. We owe interest on a few trillion on national debt to foreign aristocrats. That isn’t something we should pretend doesn’t exist like Krugman suggests we should.

  • http://freewales.org glasiad

    There was another chap (name slips me for the moment) who was running a successful campaign to become President of USA in the 1890’s. He was running a campaign to nationalise the money supply. Unfortunately he was assassinated for unknown reasons before the election took place. It seems that influential Americans who have sought to democratise the monetary system have run into bad luck.

  • https://me.yahoo.com/a/7QIZhpQln8IuNLAoxZuRcXzBRBcgX5g8HszL#95094 Mats Lindqvist

    I can’t help seeing Krugman as being loyal, and subservient to the prevailing power hierarchies. As Austrian school economist Rowbotham put it, “The surest way to ruin a promising career in economics, is to venture into the crank’s and crackpots world of suggestions for reform of the financial system.” 

    Basically, they all went to the same  school (church ?) , Bernanke, Krugman et. al. In Sweden where I live, Lars E.O. Svensson is on the central bank’s board of directors. Just like Bernanke he used to study at MIT, then he worked for Bernanke while he was at Princeton, if I remember correctly. 

    Riksbanken, the Swedish central bank, nominates the winners of the “fake” Nobel prize in economics. Krugman won it, some years back. It’s official name is “The Riksbank’s prize in the economic science, in remembrance of Alfred Nobel.” It was inaugurated in the 1960ies, its paid for by the Riksbank and not by the Nobel trust. There was no mention of a prize in economics in Alfred Nobel’s will. But the prize is awarded at the very same ceremony, the prize winners get the medal from the King, they get interviewed in TV-shows etc. They all scratch eachother’s backs, confirming each other’s status in various ways, while doing nothing to try to educate the public on how this pyramid scheme actually works. John Kenneth Galbraith (Keynesian economist) wrote several books, and did in fact make an effort to shed some light on money creation. Result: he was dissmissed by Krugman as being populistic, overrated and not having made any significant contribution to science. 

    “Ignorance is strength.”

    /Mats Lindqvist

  • awakenedmind

    4-6 MP’s out 350 know how money is created – then what the hell are they doing.  Are they all stupid or are they simply utterly corrupt? The latter I suspect

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