18:DEBT FINANCE AND ITS EFFECTS
The banks have generated a lot of criticism in recent years and rightly so, and sharp practice and deregulation are bound to be bedfellows of some kind. However, there has hardly been a mention about the bigger scam of the banking system's control over the money supply. This seems to be a taboo subject. Strangely, questions about the Bank of England are not allowed in Parliament; also it cannot be sued. The business of lending, borrowing and debt creation is the root cause of our unsustainable way of life which so concerns the Greens.
Debt finance is the process by which bank deposits become the basis for the multiple creation of credit out of nothing. This is then lent on at interest for private profit. With deregulation this statutory fractional reserve of assets/deposits has shrunk to the point of being negligible. In this way money has now become credit and speculates upon itself. 95% of all global financial transactions are of this kind, rather than for legitimate tangible trade. The effects of this process are all pervasive: -
1. Debt finance banking must have continual and growing levels of borrowing. Economic growth and development generates the demands for credit and money supply. The process of borrowing and lending, (which accounts for 27% of GDP), production and consumption creates the wages, profits and taxes with which to repay the loans and interest; whilst at the same time creating the economic conditions for individuals, business and governments to establish the credibility to borrow more. Indeed, if there were no borrowing there would be virtually no money in circulation. And if all the debts were to be paid there would not be enough money to pay them. In 2003 there was globally $100 trillion of debt with only $33 trillion of wealth generated to service these debts. Debt finance also produces a social and environmental downside of instability, inequality and unsustainability, exemplified by the massive drive for house building. Mortgages account for 60% of the total money supply.
2. The best mode for stimulating economic growth and maximising profit is the laissez-faire, liberal school of economics. This is the free market with its privatisation, deregulation and ‘level playing field’. The provision of credit and the optimisation of conditions for its demand and repayment are inextricably linked.
3. Consumerism is dependent upon readily available credit. Seemingly inescapable media, advertising, marketing and surreptitious life-style messages that encourage borrowing and spending, all within an ethos of enhanced personal freedom that drives on what Christopher Lasche called the culture of 'wantism'. Average debt per head of population in Britain is £17,000. In times of recession assets and credit find their way back to the banks.
4. Bankers only create the money /credit for each loan and not the extra needed for interest to be paid, so that the money supply never equals the new debts incurred. The total debt inevitably outstrips the money available in the economy because interest payments are always extracting money back to the banks. Therefore, there is always a shortage of money for the purchase of all the goods and services on offer. This leads to a cut-throat `race to the bottom' by business to dispose of surpluses, with the criss-crossing of the globe by identical goods looking for markets. Debt repayment increases the pressure for profitability, which is manifest in cost-cutting and mergers/take-overs -- organised by the banks!
5. The ceaseless warfare around the globe is no surprise when it is a function of war to (a) literally burn-off surpluses and (b) create new demand for production in the massive military-industrial complex, with the associated credit creation to make this possible. Indeed, it was the 2nd World War that finally got the US out of the mire of the Depression. Similarly, the invasion of Iraq in 2003 helped to stave off recession.
6. Free trade prevents 3rd world countries protecting their markets from the dumping of mainly subsidised surplus agricultural products, largely from the EU and the USA. Huge debts have been accumulated as a result of tilted trading conditions and the damaging activities of the IMF, WTO and the World Bank. Workforces, resources, and whole economies are laid wide open for exploitation by footloose capital and business. This, it seems, is "good medicine" for poor countries, but there are always exemptions for the North, such as the U.S. protection of its textile and steel industries.
7. The cost of borrowing is eventually passed onto the purchase cost of goods and services and is the underlying driver of inflation. 28% of all business turnover goes to banks in the form of interest payments, which is hardly surprising when Britain's top 100 companies owe a combined total of £282 billion. German research has recently shown that on average, 50% of the purchase cost of all goods is made up of debt repayment costs of the companies involved in production, transportation and retail processes.
8. Debt finance with modern electronic banking has created 97% of all the money/credits in circulation. Only 3% is made up of government issued cash. This has not always been so. In 1948 the proportion of coins and notes in circulation was 46%. The resulting loss of revenue from their manufacture and sale has directly increased the tax burden. Government also has to find £33 billion a year in interest payments that accrues from the ever-increasing national debt. This is passed onto the taxpayer.
9. This system of credit creation is inherently unstable and ensures the vulnerability of individuals, businesses and governments.
10. The banking system has acquired tremendous power that is dangerously centralising and undemocratic.
Debt finance is closely interlinked with globalisation, free trade and the free market. Indeed, the modern economy could well be seen as the vehicle of the debt finance empire; the world cannot be conquered by one nation or religion, but money and debt make this possible.
The power of the monetocracy has superseded the other ‘ocracys’ such as aristocracy, autocracy and theocracy. Indeed, the new priesthood rulers are the bankers, financiers and accountants who speak their own exclusive language that the laity does not understand. And they have their codes, rituals and sects. Worthiness for heaven is synonymous with a good credit rating and hell is an investigation by the revenue. The increasing claim by debt on real physical wealth means that debt is effectively unrepayable. The position of the private creators of credit is virtually invulnerable as long as there is economic growth. However, the world is rapidly coming up against physical limits and social/environmental consequences. Debt cancellation, monetary reform involving some form of social credit is probably the only hope of a soft landing.
The question then arises as to who is in control of the ship. The captains of finance and business or the crew? The latter hardly know what the cause of the problem is or have much idea of the means by which to change course. The world and its economy might as well be at the behest of the elements and circumstance, for most of the economic wisdom we are fed by the experts seems as incontrovertible as a force of nature. The present arrangement favours the minute elite whose agenda seems to tend towards the global centralisation of power and control. In debt finance they have just the right trick to do the job.
Solutions to debt finance and the problems it has created:
1. Redefine Gross Domestic Product. This is a crude figure that states the amount of money that changes hands for goods and services within a given period of time. The clean up costs of an accident such as the oil spill of the Exxon Valdez add to GDP regardless of the negative aspects. Indeed, these will show up as an economic `good'. A more sophisticated measure needs to be used, such as Adjusted National Product. The New Economics Foundation has shown that such a figure can include indices of environmental and social well being, thus giving a truer picture of economic activity.
2. Reform debt-finance. The power to create credit can be taken out of the hands of private banks and placed within democratically controlled state financial institutions. Thus social credit would be created, regulated and spent, not lent into the economy by social mandate. Development projects and services can be financed interest free in this way. Banks would carry on lending and attracting deposit money, but no more would they supply a stream of credit, creating both debt and interest payments.
3. Regulation. The financial activities which allow 21% of the GDP to be made up of money gambling on itself via currency speculation, futures and derivatives and interest rates should be curtailed. £1 trillion a day moves around the world engaged in such transactions, which can only concentrate wealth in fewer hands and contribute towards instability and impoverishment. The re-introduction of fractional reserve and statutory asset controls would curb bank lending. Real teeth given to the FSA and the SFO would help to clean up the City from its present status as laundrette, casino and demi-tax-haven. Capital movements and the liberal free market can be regulated with the Tobin tax and nationalisation to make these elements more socially accountable.
4. Cancel 3rd World debt. To break the cycle of export dependency and the dollar earning of poor countries merely to pay debt and interest. Counteract the measures imposed by the IMF enforcing minimal local protection, asset stripping and harmful privatisations. Loosen the ties of poor countries to the global monetary system. Encourage social credit and self-sufficiency.
5. Close down tax havens. The majority of the world's liquidity (estimates vary) is held in tax havens. The 28 offshore havens are predominantly British Crown connected territories such as the Channel Isles and Bermuda. Or there are the mainly European statelets such as Liechtenstein and Andorra. These facilitate the damaging activities of irresponsible mobile speculative capital around the world. In many instances such capital is involved in criminal activities and with criminal regimes. The recent accountancy scandals of Enron and WorldCom were traced back to tax havens. Tangible real wealth is hardly created in these areas, they serve only as bolthole for wealth hived off from economies elsewhere.
6. Localisation instead of globalisation. Local independent economies. Local production for local needs. TNCs only allowed in if they make a real contribution to local/regional economies, rather than being predatory.
7. Put into place the ideas about sustainability. Steady state economy and conserver society - all of which is possible if first of all the enslaving power of debt finance is restrained. The relentless drive for development and growth is destructive, divisive and inherently unstable and serves ultimately the demands of debt and the banks.