Fact One – Economic growth is achieved through increased consumer demand for goods and services.
Fact Two – The demand for goods and services is controlled by the power of consumer spending*.
Fact Three – Consumer spending is determined by the amount of money in circulation at any one time.
It is upon those three facts that any sustainable financial recovery must depend.
Economic growth flows from increased consumer spending, which unless funded out of savings that can only be spent once, must rely upon borrowed money. New borrowing has the effect of mortgaging tomorrow’s consumer spending power because of interest will be paid and the loan repaid with money that would otherwise have been available to spend. The level of spending will therefore require even more debt if it is to be maintained.
Commercial banks hold an almost total monopoly over the creation of all new money with over 97% of the money in circulation being debt based. The balance of less than 3% being coins and currency notes provided by the Bank of England.
Bank of England figures indicate that Britain’s collective debts, that is nation and people, is about £2.3 trillion** and we only have about £2.1 trillion with which to repay that debt. A shortfall of £200 billion.***
The overall effect is that everything is financed by debt, including the loan interest paid to the banks. If you are free of debt, then whatever you have somebody somewhere owes.
A trillion is an incomprehensible figure. To understand it a little better, think in terms of seconds of time. One million seconds is equal to 11.5 days One billion seconds equals 32 years, while one trillion seconds equals 32,000 years.
How do Banks create new money?
By simply tapping a few keys on a computer keyboard a loan of say £10,000 immediately appears in the borrower’s bank account. No physical money is transferred. When the money is spent, then £10,000 of new money comes into circulation. At which stage the bank is wholly dependent upon the borrower repaying the loan if the bank is to balance its books.
When the debt is repaid by the borrower, the money supply is reduced by £10,000, which is why debt repayment deflates the economy.
Gainful employment comes from the demand for goods and services. Less demand means less employment.
To balance the books, the Government relies upon the taxes paid on business profits, personal incomes, Custom Duties and VAT to cover its budgeted expenditures.
When an economy is stagnating or in recession, the unemployment figures rise. Which means social welfare costs rise at a time when tax receipts are falling. The resulting shortfall between national income and expenditure, forces the Government to borrow,. By 2015 the national debt is forecast to exceed £1.5 trillion.
The Government austerity measures have meant cutting back on its spending programme to reduce that shortfall. A policy which actually reduces the amount of money in circulation and runs counter to economic growth. Until such time as the Government can not only balance its budget, but also achieve a surplus of income over expenditure, there is no possibility of paying off any of the national debt. In the meantime old debts are repaid with new debt with the debt interest also being borrowed.****
With sustainable economic growth, high employment and a balanced budget being currently dependant upon debt, how can the Government ever achieve a budget surplus?
It is indeed a rare occasion when Britain’s exports exceeded its imports, so without major changes to permanently reverse the trend, growth in exports as a savour is just wishful thinking. However a manufacturing programme for home consumption would not only reduce the export bill, it would bring back jobs that are currently being exported abroad.
* On 30. June, 2010 the Governor of The Bank of England wrote “First, you ask if I agree that increasing the money supply is the obvious way to tackle the recession. I certainly agree with this.”
** On 28 October 2011 the Governor of the Bank of England wrote “You note in your letter that new debt is not a solution. I fully agree with you.”
My follow up question of how new money is to be brought into the economy other than as debt remains unanswered.
*** It took until the year 2002 for debt to reach £1 trillion. By 2009 the figure had reached £2 trillion and in 2012 £2.08 trillion.
**** Loan interest paid to banks has been calculated at £192 million per day. bsd.wpengine.com
Without increasing incomes, how is more debt to be sustained?