How did Britain get in £7.5 trillion debt and why will it never be repaid?
The answer to this lies in how the banking system operates.
The amount of physical notes and coins (not including backing assets for commercial banknote issue in Scotland and Northern Ireland) totalled £61,752 million in April 2012. However, cash plus the amount of money deposited in banks came to £2,084,964 million on the 30th of April 2012. The public trusts the banks with over two trillion pounds, yet only £61 billion pounds exist.
Imagine a scenario in which the banking system has only just been invented.
So the very first bank opens for trading, and accepts its first deposit. Say, £1000. Keeping 10% in reserve, £100, it then makes its first loan of £900. This loan is used to purchase things from producers. The producers of the goods most likely deposited that money in a bank account.
So the bank the producers use (either a new bank or the first one, they are all part of the same system, so it doesn’t matter) finds it has a new deposit of £900. On the basis of this £900, it loans 90% of it, £810. While this £900 is very real if it’s in your bank account, its fictitious in the sense that if you tried to draw out all the money from the system, it wouldn’t exist. This continues until almost £10,000 is loaned out, with only £1,000 physically sitting in the bank.
At this point in time there exists £1,000 in real money, £10,000 in the bank and a figure in loans close to the latter. At this point you could pay back all the loans with the money sitting in bank accounts. However, all loans collect interest and no money exists to pay this off.
Interest is paid off with new loans, and these new loans are paid with... new loans. This system must increase exponentially forever, eternal debt. This means that gross debt in the UK is £7.5 trillion. Gross debt excludes derivatives.
The actual amount kept in reserve is closer to 3% today, rather than the 10% used in the example. The following graph shows the amount of money in banks compared to the amount of physical cash. So in 1982 there was roughly 12 times more money deposited in banks than in physical existence. Note that physical cash has been printed throughout this period, so that in 1982 there was only £11 American billion pounds.
This system could work in a world without limits, though most would be chained in a life of debt. However, world resources are limited, and global competition for them is intensifying. Money can aimlessly circulate through the economy, or be soaked up in new markets, i.e. in carbon emission permits, but ultimately it has to produce value if it is not to produce inflation. Simply put, this system is running out of steam, debt was 200% of the economy in 1987, 480% in 2007 and 545% in 2009.
Banks should maintain full reserves at all times. Money should be invested, but it should not be in more than one place at any one time. The leading problem occurring here is usury. Usury is the payment of interest upon unproductive loans. Interest payments (of any amount) funded from profits or rents are acceptable, as the loan provider has helped create new wealth. If the business venture is a failure, and no new wealth produced, the creditor should share in the loss (by forfeiting the loan) as well as the gain. The creditor can ask for wealth he has helped produce, but not for wealth he has not helped produce. He cannot shift all the risk onto the poor (literally) debtor and extract his pound of flesh regardless of the outcome of the venture.
A simple way to make interest payments come only from profits and rents is to tie the two together. Contracts could be arranged so that a certain percentage of the profit is paid to the creditor until an agreed figure is reached. Needless to say, this would make all mortgages on residential homes usurious, as well as all credit card debt. Even interest free loans are usury, if they require a large arrangement fee.
If a perfect shift were to occur from the current system to one without usury, then those who did work to earn their homes would be compensated. Not least because it’s this value that many are counting on for their pensions.
However, no such orderly change is in sight, and the new world order shall implement a system which will only lift the boot from the human face in order to bring it crashing down more forcefully.
Data from the Bank of England statistical series LPMAVAB and LPMAUYN.