8: Credit Market Debt vs. Gross Domestic Product

A Chart of a Runaway Monetary System

Figure 1 shows a moving ratio. It is the total credit market debt as a percentage of Gross Domestic Product (GDP) from about 1920 to 2008. What is “total credit market debt”? Simply put, it is the total of all debt in the country (the USA in this case; Canada’s situation is likely to be very similar), including personal, corporate, and government debt at all levels.

F Fig.1

We hear a constant noise about government debt but little about the total privately held debt. This is far more dangerous than the debt held by the central government at any time and in the current situation it is much larger. The government has recourse to its fundamental right and duty to create money when the situation requires it. The only way out of un-payable private debt is bankruptcy. Bankruptcy on a sufficiently large scale spells depression.

So let’s look at the progress of this ratio. We can see spikes of debt in 1928 and 1929 and then massive spikes in 1932 and 34. In the first case, debt was driven to a large degree by the speculative frenzy on the stock and commodity markets. In the second case the debt/GDP ratios were driven to astronomical heights by the collapse of the GDP. Those years were the deepest point of the Great Depression. The reduction of the debt burden after that is partly provided by a significant recovery in the economy, but mostly by a massive wave of bankruptcies that cancelled most of the private debt.

After the Second World War and in the post war boom we see a low point in the debt burden of the US economy in 1953 at about 130% of GDP. Over the 30-odd years 1950 to 1981(the reasonably healthy years for the majority economically), the average debt level was around 150%. Then in 1981 it starts to reach for the sky. In less than 30 years debt reaches almost 350% of GDP (it’s actually 368% as of September 2009). Something happened during the 70s and the beginning of the 80s to put our monetary system almost into orbit. The simple fact is that an enormous amount of money had to be created to purchase all that extra debt. This was the era of deregulated banking. Some of the banking laws changed over this time, but the biggest factor here was what is called “regulatory capture.” The central banks (the Federal Reserve Banks in the US and the Bank of Canada here) which were designed to keep a rein on the banks became their biggest boosters. The banks found more and more ways to package debt and then create the credit for investors to purchase it. Much of this sea of debt was picked up on our behalf by the mutual and pension fund managers. For instance, the Canada Pension Plan Investment Board is now creating its own debt instruments (bonds or debentures) to do further speculation in the markets. This is debt that the working people of Canada will be liable for if the CPPIB investments go south.

Without monetary and fiscal reform, the long-term outlook is deflation and depression.

Now the economy is burdened by a mass of debt – probably over 60% of the total – that has little or no direct connection to the real economy. In other words it’s junk. Once the holders of this debt try to realize these values in a more tangible way we will be faced with another meltdown that will make 1929 look like a picnic.

There is, of course, much more to be said about this situation but one factor is worth noting. This chart did not come from any academic institution or government body. You won’t find this kind of material in any university course. It was published by a conservative market watch firm in Atlanta, Georgia. When investors have serious money on the line they want the facts, not propaganda. Most of what passes for economics today is just propaganda for the financial system. Notice how so many economists are employed by the banks?

One thing this chart should make clear is that until this debt ratio is drastically reduced there is little hope of genuine economic recovery. It is unlikely that any politicians know any of this. It is also likely that the major central bankers and private bankers do know this. Probably not many of their hireling economists know, but the CEOs and their close circles would need to know.

What’s the solution – other than another massive write-down and depression? The bankers and their politicians have only one set of solutions – more taxes, more cutbacks at every level – to try to keep servicing this debt with no relief in sight. The other is for the government to use it’s basic powers to create new money without the interest burden and inject it directly into the real economy by spending it on massive infrastructural renewal, education, increased basic pensions, start-up business loans, health care, scientific R&D, and the like, while drastically reducing the banks’ ability to create debt along with their interest-burdened money.

Stewart Sinclair

Stewart Sinclair attended UBC before establishing himself as a millwright and, subsequently, as a computer technician. He is now retired. Stewart has been active in grassroots politics for many years with a particular interest in the effects of inflation.

Our Comment

And we can do this!

That is the good news at the core of the COMER message. We’ve done it before. We can do it again.

The potential of government-created money has been amply demonstrated on many historic occasions.

The island state of Guernsey:
In 1815 on the Island of Guernsey: poverty existed for want of employment. People were moving away. The sea-wall was crumbling. Roads were rutted and narrow. The public market was in need of repair. The government coffers were empty. A Committee was struck to look into the problem. They finally went to the Governor. “We need a new market, but we have no money to build it.”

The intelligent Governor, Daniel Desisle Brock, solved the problem by asking four simple questions.

1. “With what material are you going to build the market?” Answer: “With stone and wood.”

2. “Do you have it in the Island?” Answer: “Yes, certainly, and in plenty.”

3. “Do you have workers?” Answer: “Yes plenty, but it is the money that is lacking.”

4. “Could not your parliament issue the money?”

Wow, a new idea!

The Guernsey Island government began to issue “state currency.” The works were done. Everyone on the Island was employed.

And the people prospered. Guernsey Islanders today, still enjoy a high standard of living as a result of that policy begun in 1817. EU and OECD are pressuring the Island to conform with the current global usurious private banker policies (Money, compiled by Bill Abram).

Similarly, in Canada, between 1938 and 1974, the government used usury-free money, created by its own bank, the Bank of Canada, to greatly advance the economic welfare and the social progress of Canada, without generating damaging debt or inflation.

The political decision to abandon that policy and, instead, borrow from private banks, has so far cost Canadians over a trillion dollars in interest and that debt has been used to justify choices that further betray both the nation and its citizens in The Web of Debt by Ellen Brown.

We can afford to free ourselves! This truth was confirmed by Graham Towers, the first governor of the Bank of Canada, when he appeared before Parliament’s Banking and Commerce Committee in 1939 (A Power Unto Itself, The Bank of Canada, William Krehm).

Q: But there is no question about it that banks do create that medium of exchange?

A: That is right. That is what they are there for…. That is banking business, just in the same way that a steel plant makes steel.

Q: Ninety-five percent of all our volume of business is being done with what we call exchange of bank deposits – that is, simply bookkeeping entries in banks against which people write cheques?

A: I think that is a fair statement.

Q: When the government delivers a $1,000 bond to the bank, what does the bank use to purchase it with? Is it the creation of additional money?

A: It is the creation of additional money.

Q: Would you admit that anything physically possible, and desirable can be made financially possible?

A: Certainly.

Anything physically possible, and desirable can be made financially possible.

“Could anything be more insane than for the human race to die out because we ‘couldn’t afford’ to save ourselves?” – John Hotson

– from COMER, July-August 2014