You Can't Solve the Debt Crisis with More Debt

Here`s a simple fact that we need to bear in mind as the financial crisis continues:

We cannot solve a debt crisis by adding more debt.

It`s a fact that seems to have been completely missed by the IMF, European Union and our own government.

The solution to Greece? More debt. The solution to the US government`s inability to fund two simultaneous wars from tax revenue: more debt. The solution to the high indebtness of ordinary people in the UK? Get banks lending again: let`s have more debt.

The unfortunate fact is that the authorities, governments, central banks and many mainstream economists simply do not have an answer. They are trying to postpone the inevitable collapse of a banking and monetary system that is systematically bound to collapse sooner or later. From our own personal experience with the civil servants doing the grunt work at the Banking Commission and the Treasury, and discussions with people at the FSA, the people that we are relying on to fix this crisis simply can`t think outside the framework that they were taught at university.

They accept as normal a system where all the money used by the public is created – in the words of Financial Times economics Martin Wolf – `out of nothing by private banks` often foolish lending`.

They never think long enough to realize that this means that the only way of getting more money into the hands of the public is for them to go further into debt.

Or that ordinary people collectively decide that getting out of debt is a good thing, then as they repay their debts to the banks, the amount of money in the hands of the public will start shrinking, triggering a recession.

The crisis was caused because almost everyone had too much debt. What we need now is not more debt, but less of it.

But for the economic mainstream and those young and inexperienced civil servants who are deciding how to fix one of the largest banking systems in the world, it seems perfectly normal to let banks create money out of nothing to lend to people who already have too much debt. The idea of taking that power away from the banks, and using newly-created money to actually reduce the indebtedness of ordinary people seems radical and somewhat dangerous to them.

It isn`t. The Bank of England has already created £200billion of money out of nothing to buy government bonds from the financial markets, as an indirect way of encouraging banks to lend more. Just like the commercial banks, the Bank of England can create money out of nothing if it wants to.

But imagine if instead of pumping this £200billion into financial markets, the Bank of England had shared it between ordinary people, as a one-off grant of around £4,000 per person, allowing ordinary people to pay down their own debts, and stimulating the economy by lowering the overall debt burden. This would be one (incomplete) alternative to trying to solve a debt crisis by piling on more debt.

Creating money out of nothing and giving it to the people does have some side-effects, including inflation. But these side-effects are much less harmful than the side-effects of letting commercial banks create the entire money supply out of nothing via lending to already over-indebted families and businesses.

The proposals that we`ve developed at Positive Money are (as far as we know) the only comprehensive solution to the situation that families, businesses and even entire countries find themselves in right now. These proposals are the only ones that try to address the problem by reducing debt for everyone, rather than increasing it for everyone.

Over the coming months we`ll be much more aggressive in getting that message out to the people who need to know. We`ll elaborate on what needs to be done and when.