UK's £10tn debt timebomb could harm economy for decades, study says

PricewaterhouseCoopers warns that 'alarming' level of debt may prove hard to deal with if interest rates increase.

In his article headlined as above, Larry Elliott, economics editor, The Guardian, on Tuesday 9 November 2010 opened with: 'Britain's economy is sitting on a timebomb of debt on course to break through the £10tn barrier within the next five years, according to a report out today charting the country's two-decade long addiction to borrowing.

The study by consultancy group PwC found that property speculation by individuals and companies, coupled with an explosion of debt-financed City deals in the past decade, had resulted in the ratio of debt to national income more than doubling since the late 1980s.

It warned that "alarming" levels of debt reached since the turn of the millennium would prove hard to service if there was even a modest increase in interest rates from current emergency levels.

John Hawksworth, chief economist at PwC, said: "There is a timebomb effect from the huge amount of debt built up across all sectors of the economy."

The PwC research showed that in 1987, the UK's total debt for households, the City, non-financial companies and the government stood at 200% of gross domestic product, the amount the economy produces in one year. By 2009 debt stood at £7.5tn and was 540% of GDP.

"The UK's addiction to debt has reached alarming levels during the past decade," Hawksworth said. "The rise in debt of the financial sector from 46% of GDP in 1987 to 245% in 2009 is particularly striking as banks lent large amounts to the shadow banking sector and most financial institutions geared up in search of higher returns on equity".'

As is common to all the commentary in the corporate public media, though his whole article is concerned with the problems of 'managing' or coping with the colossal problems of current debts, not once does it consider the option of stopping banks creating our money, and having a government body issue it, free of debt at the point of issue, as proposed, for example, in the draft Bank of England (Creation of Currency) Bill 2010 – see .

This proposal would allow nearly all existing debts to be paid off over time, and directly threatens the wealth and power of the global elite who control the corporations and governments behind the scenes.

Public awareness and pressure for this vital change must grow fast, to make it strong enough to overcome the disinformation propagated by this elite, and force this change, which at last Mervyn King (see my editorial) has been bold and enlightened enough to suggest as essential. Let us hope this will lead to others in influential positions to follow his lead!

Ed Mayo is now Secretary General of Co-operatives UK, the UK trade association for co-operatives. As he notes in his Blog of 10 November, 2010:

"Monetary reform goes mainstream

There has long been a radical critique of banking that revolves around the question of how money works – in particular, how interest works and how new money is created.

The idea that money is something we have created and that could be organised in different ways is not easy to get hold of. Even so, as David Boyle has charted in books from "Funny Money" to "The Tyranny of Numbers", we have had no shortage of creative alternatives – local currencies, transition town pounds, negative interest scrips and ideas for carbon-backed money systems to align economic incentives with climate realities.

The debate has moved into the open in a welcome way with the recent references by Mervyn King on the limits of 'fractional reserve' banking.

James Robertson and Joseph Huber have estimated that the free income granted to UK banks from this model – termed seignorage – adds up to around £20 billion pa.

Shann Turnbull, the great radical theorist, puts it simply. Unlike co-operative credit unions that lend out money that members save, he says the Bank of England was formed with the extraordinary privilege of issuing currency notes redeemable into one pound weight of sterling silver when it only held a small fraction of silver it promised to provide on demand to its note holders. This legal fraud of fractional banking is now hidden by paper money not being redeemable into anything to allow paper money to be created by a stroke of pen or computer mouse.

When we use our overdraft or credit card to pay for goods or services, our bank creates a deposit. It is this feature that makes bank different from credit unions that redeem an existing deposit.

There is no sound reason to allow banks seeking a profit to have the privilege of creating public money for private profit. The practice of governments then borrowing money from private banks, and paying interest funded by taxpayers for money that the government could create itself, cannot be justified or explained. Mervyn King has got it right."

– Brian Leslie