To understand how our economy works can seem to be very complicated, but if you visualise it as being a glass of water it becomes much easier to understand.
The economy needs a quantity of money permanently circulating to finance all of the day to day transactions taking place. The payment of wages and salaries, the spending on food, clothing and housing, to mention just the obvious.
Britain’s economy is debt based i.e. the amounts of money borrowed determines how much money is circulating at any one time and available to be spent. However this level is constantly changing as interest and loan repayments are made to the commercial banks.
The height of the water in the glass represents the total money available in the economy at any one time. Because of the interest and the loan repayments, the level drops and so needs more borrowing to keep the level topped up.
Now comes the problem, the more borrowing, the more interest and loan repayments there will be constantly reducing the level of the water in the glass. Borrowing has to keep rising to offset this loss of money going back to the banks. This causes the level to continue rising until the level of water in the glass reaches the top of the glass and starts pouring over the edge.
The glass cannot hold any more water. The economy cannot hold any more debt and so bank lending falls. The amount of money in circulation drops, spending falls and there you have the start of a new recession.
That is the inevitable cycle our economy has followed. A build up of debt to breaking point followed by a period of recession to resolve the problem caused by excessive debt.
During a recession, bank lending is restrained, until everything returns to what is perceived as ‘normality’ and then the cycle is repeated with the same end result.
The problem that current banking practices cause can only be overcome by having a sufficient amount of money permanently held in the economy. Money that is not subject to repayment. Currently less than £3 in every £100 exists as notes and coins. The other £97 plus is made up of bank debt.
The purpose of the economy is to supply goods and services as, where and when required. Money should service this distribution, not be impeded by constant growth in debt. Stability can only come about by changing Britain from a debt reliant economy to one where the major part of the money supply is created debt free by the Bank of England, who at present only create the currency notes and the Royal Mint the coins.
It is only our collective lack of knowledge that allows this situation to continue to our great disadvantage.