Bill Totten's Weblog

Tuesday, September 28, 2010

What Systemic Debt Means ...

... to You and Your Family

Prosperity (July 2006)

Putting debt-free money into circulation is the single basic reform capable of transforming the prospects of every person in this country, including yourself and your family.

People need money to produce goods and to trade everyday essentials. If that money is not being supplied as a public service, they must use whatever alternatives are available. For most people, that means bank credit: and bank credit comes at a very high cost in debt to all of us, not just the actual borrowers.

Economists often talk of 'consumer confidence' or 'investor confidence' as if this were simply a question of deciding whether or not to spend money previously saved. Yet increasingly this "confidence" depends on the willingness and ability of ordinary people and businesses to go into debt; for, unless they do, the banks are unable to create and circulate money.

Obviously not everyone has to go into the red to run their household or business. In fact, most people will do all they can to avoid borrowing.

But in an economy which is sustained almost entirely by systemic debt, a sufficient - and constantly increasing - number of people must take out loans, simply in order to provide the country with an adequate means of exchange.

The obligatory nature of debt under our present system can be highlighted by an extreme example. What would happen if all outstanding loans were paid back, without further borrowing taking place?

The answer is that everything would grind to a halt! There would be no money supply beyond cash, and almost no economic activity. We would be back to barter.

Clearly, as long as we cling to our present financial system, more and more of us must constantly be taking on new debt. Nobody wants to be the one to do it, but unless somebody does it, everybody will suffer because there will be no money circulating in society!

So, What Does This Mean for You and Your Family?

1. You Can Expect Prices to Keep Rising, Along with Debt

For most start-up businesses, the only option is a bank loan, and when interest rates are low, this is a tempting possibility. Even established businesses habitually borrow to invest, since the need to stay competitive under a system that, by its very nature, keeps money in short supply usually makes independent capital formation - the practice of putting aside profits for future investment - impossible. In contrast, banks can simply cream off interest charges on money which they have created out of nothing to finance themselves.

The need to service loans adds significantly to production costs, and must eventually force most firms to raise prices, even in today's cut-throat business environment.

Meanwhile, rising prices, plus the need to service the huge mortgages which now create the bulk of our money supply, put family budgets under strain, leading either to more borrowing or demands for wage increases, to meet the rising cost of living.

Systemic debt, therefore, is a major contributor to - some would say the fundamental cause of - the wage/price spiral which afflicts modern economies.

As the proportion of our money supply created as an interest-bearing debt has risen from sixty per cent to 97% of the whole, inflation has become endemic: a perennial threat to business success and to the family budget, and a built-in feature of economic life.

2. You Will Pay Through the Nose to Put a Roof Over Your Head

In the opening years of the 21st century, more people than ever have a mortgage. A mortgage is, traditionally, a very special kind of debt - a respectable debt, which is not associated with profligacy, and not thought to be risky or unduly expensive.

Not any more! Between 1960 and 1996 total UK mortgage borrowing rose from GBP 3,350 million to GBP 409,433 million. Since then, it has more than doubled, passing the GBP 1 trillion point in May 2006.

During this period, the rise in house prices has far outstripped inflation: but prices could never have risen so high if ample loans had not been made available by the lending institutions.

How were people induced to undertake the degree of debt necessary to bid property prices up so high, way beyond any increase in real value? How were we tempted into mortgage debt which frequently far exceeds what we can comfortably service and repay?

This level of debt was only made feasible by a considerable relaxation of the rules governing mortgage borrowing.

If minimal deposits and loans based on increasingly unrealistic multiples of two incomes had not come to be accepted as the norm, the amounts lent would have remained too low to permit excessive house-price rises.

So why did successive governments sit back and allow - even encourage - the increased borrowing which has now driven property prices up beyond the reach of most first-time buyers?

When we remember that mortgages provide the country with around sixty per cent of its money supply, it seems reasonable to assume that any loosening of the criteria for borrowing served a definite political and economic objective. Relaxation of the rules has certainly led to a massive expansion of the money supply by making it possible for people to take on previously unthinkable quantities of housing debt.

The result is that housing costs now absorb 17.5% of the average UK homeowner's income after tax. In 1960, the comparable figure was 9.5%, and remember, in those days 'household income' would usually refer to one full-time wage, whereas today it generally includes two.

For the banks, the property bubble is a huge money-creation bonanza. For the government, it is a valuable source of revenue, as stamp duty and capital gains tax roll in, and inheritance tax thresholds fail to keep up with grossly inflated house prices: not to mention the fact that all those debt-soaked property owers are obligingly taking on, at their own risk and expense, money-creation duties which should be shouldered by a public authority.

However, there has never yet been a bubble which didn't burst; and unless this one is the exception to the rule, the excessive borrowing assiduously fostered by bank and government policy may once more end in negative equity and widespread repossessions.

As long as governments rely on systemic debt to put money into circulation, it is in their interests to keep mortgage lending high: and you and your children will be the ones to suffer!

3. Family Life Will Come Under Increasing Strain

Financial worries are a major cause not only of ill-health, but of marital breakdown. Household budgets are becoming ever tighter as business and government debt drive up prices and taxes, and levels of mortgage borrowing further reduce disposable incomes.

Fifty years ago it was possible for a working man on an average income to provide for his family without any need for his wife to undertake full-time employment. Nowadays the one-wage-earner family is almost extinct. If one partner or the other is lucky enough to be employed in a high-salaried sector of the economy, that option may still exist; but most individual wage-packets often cannot hope to cover the monthly outgoings of today's average family, with its huge mortgage payments and inflated council tax and fuel bills.

But why, if the government can afford to pay couples a child-care allowance, can't it subsidise them to job-share or work part-time, or pay one or other partner to stay at home, at least until they begin school?

It all comes back to a question of choice.

The fact is that the government chooses to rely on systemic debt to put money into circulation, rather than creating and distributing an adequate means of exchange debt-free.

And as long as governments persist in this choice, fewer and fewer people will be able to put the necessary time and energy into evolving an emotionally supportive family unit, as both parents struggle to keep the home together while holding down two full-time jobs in order to service and repay their debts.

But why are governments apparently so determined to make every parent a wage-earner?

In an economy fuelled by systemic debt, it makes perfect sense to push as many people as possible into paid employment - whether or not the jobs they do are actually necessary.

Governments which refuse to create a debt-free money supply are always strapped for cash as they try to hold down the national debt: and the greater the number of people employed, the higher the tax revenues.

If one partner stays at home looking after the family and one goes out to work, there is only one wage packet available for Income Tax and National Insurance deductions.

If both parents work full-time, not only do they provide twice the opportunity for taxation - they also create little clients for a flourishing child-care industry, further boosting the number of jobs available, and the Chancellor's tax intake.

The bottom line is this: if levels of borrowing high enough to support our debt-based financial system are to be maintained, as many people as possible must be driven out to work, whether or not this makes the best use of their own particular talents, or fits in with their personal preferences or the needs of their partners and their children.

All too frequently, the need for both partners to undertake paid employment outside the home, with all the time-consuming commuting which this entails, contributes to the disintegration of home life and the rise in divorce levels.

Unless we abandon systemic debt, and find a sensible way of creating and widely distributing sufficient money to reflect the wealth and leisure made possible by a properly functioning high-tech economy, society is more likely to experience family breakdown.

4. You Will Leave Far Less for Your Children

The recent unprecedented inflation in house prices has been greeted with joy by homeowners, who feel they have become rich overnight.

Yet very little of this newly created "wealth" will be passed on to future generations, because it is being dissipated in current consumption.

Recent years have seen a massive drop in the level of savings in the UK. With true disposable incomes falling, as disproportionate increases in housing costs, council taxes, fares and fuel bills eat into the pay packet, it is becoming harder and harder to maintain standards of living while putting something aside for the future. Many people turned first to the illusory gains of the stock market and then, when that bubble burst, to the rising property market, to do the job for them.

However, these ersatz "savings", in the form of housing equity, have not remained untouched. With pensions failing to keep up with the cost of living, and the government raiding the funds of those who take the trouble to save for their old age, elderly people in particular are choosing to supplement their income with "equity release".

Fewer people nowadays actually hold the deeds of their houses. Mortgages are far bigger than they used to be; it takes longer to pay them off; and even after they are paid, remortgaging is becoming commonplace, perhaps to meet some pressing financial obligation, perhaps when parents help their children with a deposit, to get them onto the first rung of the housing ladder - a deposit which young couples would have been able to save up for themselves when wages went further, and the basic expenses of living were less crippling.

Since the great inflation of the 1970s, everybody knows that wage demands lead to higher prices; yet even dirt-cheap imports from low-wage economies do not compensate for the rising cost of unavoidable outgoings like housing, fares and council tax, with interest charges an inbuilt component of that cost.

The only alternatives to wage demands, when faced with the rising prices associated with systemic debt, is a drastic cut in standards of living; or increased borrowing, leading to even less disposable income; or, for those who own property, "equity release" - the equivalent of a visit to the pawn shop.

In an economy which borrows its money into existence, increasing numbers of people consider equity release the "least worst" option, and decide to exchange lasting value for short-term liquidity, just to keep up with the rising costs generated by the servicing and repayment of all that debt.

But when real wealth in the form of one's house, is exchanged for money, and used for current consumption - either voluntarily, to purchase goods which quickly lose their value, or of necessity, in the struggle to make ends meet - there is less and less to pass on to the next generation.

What is more, the "wealth" generated by rising house prices may well prove to be illusory. If the property bubble bursts, a lot of people will find themselves owing more than the banks consider their houses to be worth.

Nevertheless, under a financial system based upon systemic debt, more and more of us will be forced to tap into our highly questionable "equity", in the battle to meet rising costs; and more and more real wealth will be transferred to the lending institutions, both through mortgage equity release and, in the event of a property market collapse, repossessions.

The fact is, that unless the government grasps the money reform nettle, you will be very lucky to have any "equity" to pass on to your children in future years.

5. You will be Taxed "Until the Pips Squeak"

It was Denis Healey, when he was Chancellor of the Exchequer, who was said to have threatened to "tax the rich until the pips squeak".

Under our present regime of systemic debt, things are far worse: when every level of government is in hock to the banks, it's not just the rich who suffer. In order to service the debt - just service it, not pay it off - everybody must be taxed until the pips squeak!

Income tax, National Insurance tax (both employer's and employee's), council tax, company taxes, capital gains tax, inheritance tax, stamp duty, fuel tax, motor vehicle tax, VAT ... however poor you are, you can't escape.

When governments have interest charges to pay, they need to raise more in taxes.

Take the case of North Tyneside, where council tax goes up each year way beyond the official rate of inflation, much of it swallowed up unproductively in interest payments on past borrowing.

In 2004/5, for instance, North Tyneside's debt was GBP 139,250,786, and required interest payments of GBP 16,734,000 to service it - about 25% of total Council Tax revenues.

Look at the huge sum necessary to service the national debt! The March 2006 Budget projected GBP 27 billion for 2006-07, more than spending on transport (21 billion), and housing and environment (19 billion).

Imagine the difference to all of us, if there were no need for public authorities to pay the costs of borrowing!

Joseph Huber and James Robertson in their book, Creating New Money (New Economics Foundation, 2000) reckon that the decision to create our money supply as a debt owed to the banks, rather than issuing it debt-free as a public service, robs the country of around GBP 47 billion a year, ensuring poor services, miserly pensions and ill-maintained infrastructure.

This endemic lack of money also encourages the adoption of dubious Private Finiance Initiative (PFI) projects and the sale of public assets, in a vain struggle to make ends meet.

We are constantly told that we must choose between low taxation and good public services: but this is just not true. It is only in an economy based on systemic debt that we are forced to make this unnecessary choice.

But until we insist on reform of the present insane financial system, we will continue to be taxed "until the pips squeak"!

Bill Totten


Post a Comment

<< Home