Saturday, August 4, 2018

The Global Debt Bomb

                                                                                                written 28 July 2018
                                                                                                published 4 August 2018

            I recently heard the sound track of Paul Grignon's 2006 video "Money As Debt" as a two-part podcast on TUC Radio (, which was very informative.
            Once societal commerce expanded beyond barter, symbolic money was created, with value maintained by consent of the community.  The first physical artifacts were eventually supplanted by paper, and today most money has no physical form, being digital records on hard drives.  To keep prices stable, the money supply must expand at the same pace as economic productivity.  Too little money slows commerce or causes collapse, like the Depression of 1929.  Too much money creates inflation, a different instability.  
            Our money is created out of nothing in two ways.  A small part is printed into existence by the government, but the vast majority is loaned into existence as debt to private banks.  The money the government creates is deposited in a private bank, which is allowed by law to create debt ten times the value of the deposit, usually secured by a real asset.  The borrower deposits this money in another bank, which must retain 10% on deposit as reserve, but can loan 90% as further debt.  This is known as fractional reserves, based on the assumption that few of the depositors will make claims on their deposits at any one time.  At each stage, the newly created money is deposited and loaned in a diminishing series, until the original deposit by the government has been expanded as debt obligation worth 100 times as much.  Our money is debt obligation.
            The bank loan creates the value of the loan principal, but interest charged as profit for the bank must be paid in addition to the principal.  The borrower is faced with the challenge of finding this extra money, which on long term loans, like mortgages, can be greater than the principal.  Since money is debt, the options are to take on more debt, or default on the loan, in which case the bank takes ownership of the asset securing the loan.
            Both options eventually threaten the stability of the whole system.  Since the borrowing option expands debt independent of actual economic growth, total indebtedness can eventually exceed the real worth of the entire society.  The default option means the banks exponentially accumulate control over a greater share of the net worth of the society.  While this serves the bankers, it impoverishes the society as a whole.  Interest-bearing debt-based money is a global phenomenon, so both these problems are now global as well.  In 2015, total global assets were valued at $250 trillion, and total global debt was $233 trillion, more than three times the annual global economic output, and increasing about $13 trillion a year.  The richest 8 people own as much as the poorest 50% of the planet.  In the US, the top 1% own 40% of the country's wealth.  Needless to say, this capitalist debt money system is unsustainable and a threat to our society.
            Even if we can unwind this precarious situation, are there any real alternatives?  Fortunately, the answer is yes, but vested interests will fight any change, until the current system crashes and needs a taxpayer bailout.  Again.
            An alternative to debt-created money is spending money into existence.  Since all money is created out of nothing, the government could create what is required to eliminate the national debt. It could fund massive infrastructure investments, employing people, and improving the quality of life for the entire society.  It could give money to everyone as a Universal Basic Income, without needs requirements.  People at the bottom of the economic pile spend their cash into the economy immediately, as opposed to the rich, who tend take it out of circulation as savings. If the money supply gets too large, taxation could trim the supply back.  All this money would be created without debt, or predatory interest.  Instead of giving created money to the private Federal Reserve, which loans it back to the government at interest, a government owned National Bank could be created, like the Bank of Canada.  Such radical solutions would creatively disrupt the current financial structure, which is headed toward chaotic collapse and depression.