Fixing the Banking System for good

I unfortunately missed a conference called "Fixing the Banking System for Good" that was held in Philadelphia on the 17th of April. It was broadcast live on the web and apparently there were a number of highly respected speakers who were openly pushing for an end to fractional reserve banking. Michael Kumhof talked about "The Chicago Plan Revisited", and Adair Turner talked about "Money and Debt: Radical Solutions to the Challenge of Deleveraging". Hopefully, someone will have recorded what they said and we will be able to see exactly what was being proposed.

Fortunately, Bill Still managed to record the audio from Professor Jeffrey Sachs presentation, which he did by videoconference link, and put it into one of his Still Reports. As Bill puts it, what he says is truly explosive.  Here's a transcript of the end of his presentation.

"I believe we have a crisis of values that is extremely deep…. because the regulations and legal structures need reform. I meet a lot of these people [from] Wall street on a regular basis. I’m going to put it very bluntly: I regard the moral environment as pathological…… I have never seen anything like it. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to ….counterparties in transactions. They are tough, greedy, aggressive and feel absolutely out of control…… They have gamed the system to a remarkable extent. And they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies……

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the Financial markets are the Number 1 campaign contributors in the US system now. We have a corrupt politics to the core I'm afraid to say….. Both parties are up to their necks in this. It's nothing to do with Democrats or Republicans. It really doesn't have anything to do with right wing or left wing, by the way. The corruption is as far as I  can see everywhere.  But what it has led to is this sense of impunity that is really stunning, and you feel it on the individual level right now, and it's very very unhealthy. I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language. And I've not seen it once. And that is shocking to me.  And if they won't, I've waited for a judge, for our president, for somebody and it hasn't happened. And by the way, it's not going to happen anytime soon it seems."

 
Hear, hear. We clearly can't expect our current politicians to sort this mess out. But it seems to me that the evidence that the whole system is completely rigged is now becoming so overwhelming that citizens will soon be able to force their governments to react.

For example, when a government tries to impose austerity, citizens should be rising up and challenging them. They can point out that the amount of public and private sector debt is now so large that it would be physically impossible to pay off the debt, even if every citizen handed every single cent that they have to the government, and the government stopped spending any money at all. The story that we are told is that all we have to do is cut back on public services and pay more taxes and everything will get back on track. No it won't. It's impossible. There is simply not enough money in the system.

Even if we only consider government debt, it is clear that there is not enough money around just to get the governments out of debt - never mind the rest of us! As I demonstrated yesterday, government debt in the US, (currentlly over $12 trillion) is substantially higher that the money supply as defined by M2 ($10.4 trillion) meaning that you could never pay off the debt. Full stop.

In the Eurozone, paying off the public sector debt of €8.8 trillion would  require 90% of the entire Eurozone money supply (€9.77 trillion, as defined by M3). 

For the UK, I suppose you might just argue that there is a vague chance of succeeding, because total public sector debt (£1.358 trillion) would "only" need about 65% of the total M4 money supply. But that is ignoring the massive amount of private sector debt.

No. It's simple. There is not enough money to pay off debt. And as far as I can see there is only one way out of this mess. It requires the following simple measures.

1. Massive amounts of  debt-free money creation by central banks.
2. Direct injection of the newly created money into the economy by a combination of eliminating taxes, infrastructure spending and other public sector activities, and direct payments to citizens.
3. A Financial Transaction Tax imposed by the central bank on all electronic transactions involving that currency to remove any excess money in the system and divert money to the real economy
4. A ban on money creation by commercial banks.

The need for debt free money creation in the UK, USA and the Eurozone

I have recently worked out that the amount of cumulated public and private sector debt is massively higher than the total money supply, making it physically impossible to pay off the debt. It doesn't matter how much austerity is imposed, it simply cannot work as a way to cure the debt problem.

I have convinced myself that there is really only one way out. It involves forcing central banks to create enough debt-free money to make up difference. To back up my argument, here are some more figures.

I took public and private sector debt for the the UK, the USA and the Eurozone to obtain  numbers for total debt levels in each area.  I have also included available numbers for the Money Supply (M0 in the UK and USA, M1 and M2  in the UK, USA and Eurozone, M3 in the UK and the Eurozone, and M4 in the UK (which is the only country that appears to use it).

I then provide the ratio of debt to money supply, using the M4 in the UK, M2 in the USA and M3 in the Eurozone. It's not my fault that the central banks can't come up with a standard way to measure the money supply. The resulting debt to money supply ratios are 2.13:1 in the UK, 3.55 in the USA, and 2.51 in the Eurozone. Impressive.

I also show how much money is missing in each region. It's £2.37 trillion  in the UK, $26.6 trillion in the USA and €14.7 trillion for the Eurozone. The Eurozone figure is a somewhat higher than the figure that I had been using recently, simply because I used the most recent figures for Public Sector Debt, which just increased yet again.

Unless I'm seriously mistaken, these numbers represent the amounts of debt-free money that the three central banks must create and inject into each economy if there is to be any hope of people being able to pay off the debt in the system.

If you divide by population size, you discover that the Bank of England should create £37,861 for every man, woman and child in the UK. And of course I don't think that that money should be given to the banks. It should be provided to the government who should spend it directly into the economy.

In the USA, the Treasury (or the Federal Reserve) would need to create $84,369 for every US citizen. Again, it should be spent directly into the economy - not handed to the bankers.

Finally, in the Eurozone, the European Central Bank should create €44,258 for every Eurozone citizen. I've already argued the the simplest and fairest way to do this would be to provide each Eurozone government with an amount that directly depends on the population size.

It goes without saying that injecting that much new debt-free money into the UK, US and Eurozone economies would have incredibly beneficial effect. For example, the money could be used to develop renewable energy systems, build reasonably priced housing, renew the transport infrastructure, increase spending on health, education, research.... It could be used to provide decent pensions for our aging populations and those with handicaps. It could be used to provide aid to developing countries. You name it.

Of course, the bankers will complain that this will produce massive inflation. No problem. All the Central Banks have to do is impose a variable rate Financial Transaction Tax to mop up any excess money in the system. It could use that money to directly pay off government debt.  If there is any sign of inflation, just increase the FTT rate.

Sure, you might end up with an FTT rate of 2-3%. That's no big deal. It's only what the credit card companies charge when you pay in a foreign currency.

And within a relatively short period of time, the bulk of the money supply will be in the hands of the people where it can be used to get the economy going again, rather that in the hands of banks and people with accounts in tax havens.

Oh, and by the way. While this massive injection of debt free money would fix the problem temporarilly, the only way to make the solution permanent is to make it a criminal offense for anyone other that Central Banks to create money. And specifically, all money creation has to be Interest Free.

In other words we need to prevent Bankers charging interest on money that they create out of thin air. I believe that it is this ridiculous system that got us into this mess in the first place. The reason is really quite simple. If you allow a commercial bank to create money by making loans, and then allow that bank to charge interest at say 5%, the amount of debt simply has to increase beyond the amount of money in the system. And if the debts are not paid off (which is pretty much what has been happening recently), the amount of debt will be twice the amount of money in the system after a little more than 14 years. It's called compound interest. And ultimately, it is the cause of all the world's economic problems.

Commercial banks have demonstrated that they cannot be trusted to create money sensibly. It is time to completely rewrite the system.

The Eurozone needs an injection of €14 trillion of debt free money

I've been thinking hard since I discovered that the total amount of public and private sector debt (€23,784 billion) within the Eurozone was 2.5 times the total money supply (M3 €9,538 billion). Clearly, there is something horribly wrong here. It implies that even if everyone piled up all the money that there is, it would still be totally impossible to pay off the mountain of debt that has been created by irresponsible debt creation by the commercial banks.

Something has to change.

I've already made the suggestion that the ECB could impose a modest financial transaction tax on all Euro denominated electronic transactions to generate revenue that could be used to allow governments to get out of debt.

But there is a problem there. Yes, you could suck euros in to pay off government debt using the tax, but that would presumably remove the amount of available money in the system, especially if repaying the loans led to the money being destroyed.

What is really needed is an injection of fresh debt free money into the system to make up the difference. Specifically, the European Central Bank should be able to inject up to €14 trillion into the system. At that point, there would finally be enough money around to pay off the debts.

So, how might that be done? Well, you might have already heard me talking about the advantages of simply distributing funds on a pro rata basis in which each citizen effectively receives the same amount of funding. Let's see how that might work within the Eurozone. I've compiled the relevant figures in this table.

The first column shows the latest figures for Government debt in each of the 17 countries, which together add up to a very impressive €8.8 trillion. The second column shows the population size for each country, allowing us to calculate per capita debt (fourth column). I've sorted the entire table according to this number so that it is easy to read.

Ireland wins the prize with €42,813 of government debt per head of population. But Belgium isn't bad with €33,999, following by Italy with €32,681. After that, there are a whole series of countries with per capita government debt of between 25,000 and 28,000 that includes Austria, France, Greece, Germany and the Netherlands.  Not much to choose there. Now remind me? Which country is giving the entire Eurozone lectures on excessive public sector debt???

After that we find Portagal and Spain on around €19,000 along with Finland. Cypress and Slovenia, which are supposed to be totally irresponsible are way down the table. For me, these figures demonstrate that the whole system based on the Maastricht criteria has completely warped our thinking.

Now,  suppose that we say that we need to inject the €14 trillion to balance the books, and that we will do that simply on the basis of population size. The fifth column shows how this would break down by country. Germany would of course get the lion's share, but only because there are more people living there. In the next column you can see that the injection would immediately remove every single Eurozone country out of debt, with the exception of Ireland, which would still have to find another €3.4 billion. But, frankly, that's peanuts.

In the final column, you can see the net per capita cash injection for each country. It adds up to an average of €20,560 per man, woman and child in the Eurozone. Plenty there to end all the austerity programs, and get the economy kick started.

Why don't we do this?

If the European Central Bank refuses to implement such a scheme (which I am sure Mario Draghi in his role as ex European Director of Goldman Sachs is likely to do), I would like them to explain how it is even remotely possible for the Eurozone countries to get out of debt, given that there is currently 2.5 times more debt than there is money in the system.

The system is clearly broken. It needs to be fixed.

Just how much money is there?

I've recently been arguing that there is simply not enough money in the system to pay off the total amount of public and private sector debt. My original calculations were based on just a set of 39 countries that are covered by the BIS Private Sector Debt figures.

For them, I obtained values of $136.89 trillion for combined public and private sector debt, and a figure for total money supply of $68.34 trillion - almost exactly half of the debt level.

It's this massive difference that has got me thinking hard. I suspect that much of this difference could be due to the effects of accumulated interest charges. This is simply based on the idea that if a commercial bank creates $1 million in credit (debt) and charges 5% interest, and if the debt is not paid off, the total amount of debt will have more than doubled in just over 14 years.

I've had a couple of other suggestions for how you might get such a discrepency. Ralph Musgrave suggested that you might get more debt than money if people were delivering goods (he mentioned coconuts) without being paid upfront. This can create effective debt. Quite whether there could be enough such activity to explain the huge gap between the money supply and debt is very unclear to me.

Another suggestion is the possibility that someone could use borrowed money to buy a car, borrow the same money again and buy a second car. I'm not sure how to make this work on a large scale.

So, at least for the time being, my bet is that the big gap is the result of compound interest and the fact that governments have got into the very bad habit of never actually paying off debt. Instead, they just wait until the repayment is due, and then borrow again to pay back the loan plus an extra sum to cover the interest.

Nevertheless, my argument depends on having a clear idea of precisely what the size of the money supply is. There are various measures that are used - M0, M1, M2, M3 and even M4 in some countries like the UK. There don't seem to be well established definitions that are shared. Even worse, the most inclusive measure (namely M3) is not used by many important economies, including the USA.

Using datasets that I was able to download from the remarkable "Trading Economics" website, I have compiled the following table that shows M0, M1, M2 and M3 figures for all the countries where such numbers are available. I converted the raw data into millions of LCU (local currency units) and used the current exchange rate with the dollar to get the distribution of money supplies for all available countries. Here are the results.

There are lots of interesting things to note. First, there's the total for the 99 countries which comes to $71.36 trillion. The major players are clearly China with a money supply of around $16 trillion, the Euroarea with $12.8 trillion, the US with $10.4 trillion, Japan with $8.3 trillion, and the UK with $8.3 trillion.

There are three countries where I was unable to extract an exchange rate (Ecuador, El Salvador and Kuwait), but otherwise, 59 countries have a value for M3, for 34 countries I was forced to use the M2 value, and for 4 countries, the only available number concerned M0. On average, the value for M3 was about 27% higher than M2, which means that it may be possible to get an estimate of what M3 might have been for the 34 countries with only M2 available. This suggests that the number based on M3 would have been around $10.5 trillion higher  - around $82 trillion. The absence of an M3 number is particularly critical for China, where an M3 based value might be over $20 trillion, the US, where an M3 based value could be around $13.2 trillion, and Japan where the M3 based total may be around $10.6 trillion.

One of the take home messages is that clearly we really need a much more methodical approach to measuring the global money supply. Nevertheless, it is clear that even if we use the more generous estimates, there is simply no way that we are going to be able to explain away the huge gap between total money supply and the total amount of debt. My claim that we need someone (the World Bank?) to generate the missing money as debt-free credit stands.

One last point concerns the ratio of M3 or M2 to M0. If M0 is defined as the amount of narrow money (cash and coins) in the economy, it gives an idea of the percentage of the money in the system that is created by banks. In the UK, the Positive Money group often talks about 97% of the money supply being created by commercial banks, and this is visible in the M3/M0 ratio which is  37:1.

If we look across all the countries for which such numbers are available you get an average  value of about 94.4% bank created money using M3, and 91.4% bank created money if you use M2.

The best way to distribute $72 trillion of debt free money

At 3.40 this morning, I posted an idea that could be truly revolutionary. Given that there is twice as much debt as there is money to pay it off, there is an urgent need to generate the roughly $72 trillion that is lacking to get the world economy back on track.

But how should that money be distributed? My basic proposal is that this should be done by the World Bank, who would be authorised to generate $10,000 of debt free money for every one of the roughly 7 billion inhabitants of our planet.

Obviously, this is just a starting point. We then have to think hard about the best way to do the distribution. My first suggestion would be that this should be done under the control of the United Nations who would have to approve the transfer of funds to the different governments.

What sorts of expenditure should be eligable? Clearly, there is absolutely no way that you could permit the transfer of large amounts of money to despots so that they could buy arms or to finance corruption. There would need to be clear guidelines.

The first type of expenditure that should be easy to justify would be paying off debt. Given that the per capita government debt of the vast majority of the world's countries is well below $10,000, this would be simple. The governments would simply have to show proof that they have paid off debt to be immediately reimbursed. Alternatively, the World Bank could make the payments directly, thus eliminating any risk that the money doesn't get used in the right way.

This sort of action need not be inflationary, since when a government pays off a debt to a bank that created the loan out of thin air, paying off the debt just causes the "money" to disappear in a puff of smoke.  Since global government debt exceeds $50 trillion, this means that this sort of action by the World Bank would simply lead to the debt level to drop with no decrease in the money supply.

Other cases where governments should be able to claim substantial amounts of World Bank money without much difficulty would be to fund any schemes that are ecologically sound and which would enhance the ability of the country to live decently. Thus, funds for developing agriculture, water production, renewable energy, sewage processing, transport infrastructure, education and health should be very easy to justify. Thus an African country that presented a well-documented project for any of these activities should be able to get direct, debt-free funding to finance it. With a budget of up to $10,000 per citizen, there is a huge amount that could be achieved this way.

Of course, not all countries have the luxury of having a reasonable government that can be trusted to use the money sensibly. I can think of quite a few dictators who could not be trusted to spend the funds in the interests of their citizens. In such cases, the World Bank debt-free money injections could be done via organisations such as the Red Cross (Red Crescent), Save the Children, UNICEF, Oxfam, Medecins sans Frontiers and so on. Imagine what could be done if those organisations could spend up to $10,000 per person in the most needy countries.

There would have to be very clear guidelines for all such funneling of funds. But it seems to me that it should not be impossible for the United Nations to come up with a set of rules for ensuring that the newly generated debt-free money is used wisely and in the best interests of the world's citizens.

Finally, I should note that in cases where there is no clear way for a particular third world country to use all the available funds sensibly, it should also be possible for that country to lend its surplus to the highly indebted countries like the UK, France, Germany and the US to help them avoid the billions in interest payments that they currently have to pay the banking sector. That way third world countries could be seen to be helping their first world neighbours.

Unless I'm very much mistaken, it seems to me that these propositions offer a simple, fair and reasonable way to get the world economy out of the quagmire of debt that it is currently in. And the immediate benefits to the world's population would be truly mind-blowing. We could fix problems like global warming and the lack of water, food, housing and education that blights vast numbers of people across the world. And it could all be done within a few years.

I may be a bit over the top sometimes. But, honestly, I can't see why this one can't be made to work. 

Comments please!

EUREKA : The solution to the ultimate question about life, the universe and everything

It's 3.40 am, but this is the biggie, and I just have to get it onto my blog.

The story so far.

I have added up the total global money supply figures for every country for which I could find numbers and get a total of $71.4 trillion (a higher number than the figure I got earlier for the 39 countries, which was $68.4 trillion - but that's pretty reasonable since the missing countries only contribute a relatively small amount each). I'll put the details of those numbers on my blog real soon now.

I have also added up the total amount of public and private sector debt for the 39 countries for which I have managed to get the full numbers. The answer to that one is $136.9 trillion.

The ratio of debt to money supply is 2 to 1 for those countries. Let's assume that the same ratio holds for the other countries and that the total global debt is twice the global money supply, namely $142.8 million. That difference of roughly $6 trillion for the other countries seems plausible.

So, let's suppose that the good and great of this world get together and say that there is a gap of $71.4 trillion between the amount of debt and the amount of money available, and that we need to generate that much debt free money to get the system back into equilibrium.

Let's say that the World Bank has the job of deciding what to do with the new debt free money that it is authorized to put into the system, and that it decides to do it in the one fair way, namely by providing the same amount of money to every man, woman and child on the planet. The World Bank's figures for population in 2011 totalled  6,951,062,787, so I think that we can assume that it will have reached 7.14 billion by now. That means that the World Bank should generate $10,000 of lovely debt free money for every person on the planet.

What could governments do with all that extra money? Well, priority number one should be to write off  all their debts.  Take a look at this wonderful chart showing the Economist's Global Debt Clock, which is currently standing at nearly $50.5 trillion. Given that the clock adds another $400,000 every three seconds, it won't be long before it gets there. -->

The different colours show the per capita public debt. Dark green countries have very low per capita debt. For example, Nigeria is at $274, Ethiopia at $243, Papua New Guina is at $420 and so on. Lighter green countries like India are at $866 while Algeria is at $432. For all the green countries, $10,000 per person will get them completely out of debt, with plenty to spare.

The $10,000 is even plenty to cover the debt for all the pink countries. Poland is at $7,281, Brazil is at $7,179, South Korea at $7,367 and so forth.

Only the red countries would not get directly out of debt. So, the USA is at $38,194, the UK at $36,259, France at $36,953, Germany at $34,222, Greece at $34,228 and so forth. Note in passing, the Greeks owe $6 a head more that the Germans. Not really much there to justify the Germans imposing massive austerity on the Greeks.

It looks like the Irish may win the competition, with per capita public sector debt at $55,595, but intriguingly, the Canadians are not much better with a debt level of $44,802.

But not to worry. With this system, all of these highly endetted countries would be able to borrow the money from the third world countries who would have a surplus. After all, total public sector debt is $50.5 trillion, and the World Bank will be pumping $71.4 trillion into the world economy. Even after paying off all the debts, there would be another $21 trillion to be used for other things. It's interesting to note that $21 trillion is the same amount of money as is stashed away in private accounts in tax havens.

For example, Ethiopia which has a population of 84.7 million, would have received $847 billion, but only has debts of $18.8 billion. It therefore would have a surplus of nearly $830 billion. Perhaps they would be prepared to lend a bit of that to countries like the UK and France. Whether or not they decide to charge interest would be up them of course. It would be the markets that decide.....

Is this scheme total fantasy? I don't see why. If you agree that there is a massive gap between the amount of debt and the amount of money around, it is clear that something has to change. I for one think that the idea of distributing the new debt free money according to population size is perhaps the only one that is clearly fair. You would eliminate third world debt at a stroke, remove the stranglehold that the markets have on governments, and end the current insanity.

So, it turns out that the answer to the ultimate question of life, the universe and everthing isn't 42. It's 72 (trillion). But Douglas Adams was pretty close.

The 50 biggests banks : $64 trillion in assets

A few days ago, I was puzzling about how it was possible that the total amount of private sector and public sector debt was twice as large as the total money supply and whether that really meant that it would be physically impossible to ever pay off all the debt.

I thought I would try another tack. Using information from an interesting site called BankersAccuity, I downloaded information about the world's 50 biggest banks. I've compiled the numbers into the following table which gives numbers for the total assets of each bank, together with the amount of capital that each one has. It makes for interesting reading.

First, if you add all the assets together, you get a total of over $64 trillion. This is actually quite close to the number for the total money supply that I got. But given the way that the numbers are dropping, I presume that total bank assets are going to go way over that value. In fact, the distribution looks fairly exponential in form in that the bank that is 22nd in the list has half the asset value of the 1st on the list, and by the time you get to number 44, the assets have halved again. Continue like that for another couple of hundred banks and the total reaches about $90 trillion. Add to that $31 trillion in assets held by Pension funds, and $21 trillion said to be held on personal accounts in tax havens and you have a number that is quite close to the $137 trillion in total debt that I found by combining the numbers for private and public sector debt.

So, that's where I think the debt is held. Around $90 trillion is held by banks, $31 trillion by pension funds, and $21 trillion by "pirate" banks in tax havens.

The other remarkable feature of the table are the numbers that the banks provide for their capital. The ratio of assets to capital varies from 20:1 for the China Development Bank Corporation to an incredible 3705:1 for the Swiss Bank UBS. Taken together, the total assets to capital ratio is 82:1, but the average is 380:1.

I presume that these numbers give some idea about just how much money the commercial banks have been injecting into the world economy. When they create new money by making loans, they increase their assets. This happens, for example, when someone borrrows money to buy a house. The bank makes the loan and the person who borrowed the money owes them that money.

Clearly there is a big difference between these numbers and the capital requirements that are supposed to be imposed by Basel III  around 30:1.  It looks like nearly all the banks on the top 50 list could are going to have a difficult time getting enough capital to meet those requirements.

Maybe the central banks could help out. They could start by taking over the $47 trillion in public sector debt, and charging 0% interest.

European Public Sector Debt and Interest Payments for 2012 - €11 trillion debt, €380 billion in interest

The latest Eurostat figures for Government Debt and Interest payments have just come out.  You can find them on the website and there is a summary document that you can download here. I've compiled the key figures in the following table (updated on the 24th of April to include numbers for the cumulated interest payments).

First, total government debt for the 27 countries has now topped €11 trillion, up 5.5% on 2011. For the 17 eurozone countries, the total is now nearly €8.8 trillion (for some reason, the Eurostat data gives a total of €8.6 trillion - not sure why there's a difference). Germany is still easily the most endetted country of them all - its debt levels have increased by nearly 4% since 2011 to €2.17 trillion. Interestingly, Greece has managed to reduce its debt level by around 15%, but Spain's debt level has increased by 20%. The record has to be Estonia, whose debt level has increased by 73%.

Outside the Eurozone, it is interesting to see that the UK's debt level has increased by 9.6%.

The 27 countries paid a total of over €380 billion in interest payments, which means that 2.9% of GDP is lost in paying these fees. For the 17 eurozone countries, the bill for interest payments was €294 billion - about 3% more than in 2011, and amounting to 3.1% of Eurozone GDP.

If we add the total cost of interest payments for the Eurozone for the entire period for which the figures are available  (1995-2012), we get the impressive total of €4.83 trillion, about 55% of all government debt (The numbers in Red mean that the figures are not available for the entire period). French taxpayers have paid out €835 billion and German taxpayers have paid €1,173 billion. But the most generous have been the Italians who have paid out €1,433 billion since 1985.

For the UK, which paid out another £46 billion of taxpayers money in interest in 2012, the total since 1985 now totals £542 billion (€737 billion).

The proportion of debt which is directly attributable to interest payments since 1995 varies a lot between countries. Over all 27 countries, total interest payments have reached €5.97 trillion - lets call that about €6 trillion - a number that constitutes 54% of all government debt. But over 80% of government debt in Sweden, Hungary and Bulgaria can be directly explained by interest payments. And in the Eurozone, the worst examples are Italy and Belgium where over 70% of  government debt is the result of interest payments.

I won't bother commenting on these numbers just yet. I think they speak for themselves.

How can we owe twice as much as there is money in the system?

My last blog provided clear numbers that demonstrate that the total amount of public sector and private sector debt is twice the amount of money in the system. In other words, it is physically impossible to pay off the debt in the system. It doesn't matter how much austerity you impose. You could abolish all public sector jobs, abolish pensions, end state education, end state health systems, completely eliminate any remains of a welfare state, and there still wouldn't be enough money to pay off all that debt.

How on earth did we get here?

How is it possible to owe more money than there is in the system?

Well, let's think about it a bit.

Let's imagine that there was a day when the money supply was created in one day. Someone waves a wand, and the banks have the $68.3 trillion that is currently in the system. They then start lending the money into the economy. They lend the money to individuals to buy houses and that money gets used to pay the builders to build houses. They lend the money to businesses who invest in new plant and distribution networks. They lend the money to governments who use the money to build schools, hospitals, transport systems etc etc. All the money that goes to individuals, businesses and governments gets into the economy. All is happiness and light.

On day one, the  size of the money supply (lets call it M3 for the sake of argument) is exactly equal to the amount of debt that individuals, businesses and governemnts have taken on. No problem with that. After all, when some people have money that they are not actually using, it is normal that they lend that money to those that need it. And the banks are just trying to do their job of making sure that the money goes to the places where it is needed, right?

Yes, but there is a slight problem. The banks that lend the money into the system feel that they should be able to charge interest for making the loans.  Thus, while there is $68.3 trillion in the system on day one, after one year, the amount of debt is no longer equal to $68.3 trillion. It is equal to $68.3 trillion plus the interest. Let's assume that the banks are charging 5% interest per year - very reasonable compared with the rates charged by credit card companies, or payday loan outfits. After one year, the amount of debt has now increased to $71.7 trillion.

With compound interest at 5% per annum, it is not difficult to see that after a 14 years and 11 weeks,  the total amount of debt in the system will have more than doubled.

So, hopefully you can now see how it is possible that with €68.3 trillion of money creation, you only need to wait a bit, and the amount debt will be double that amount. And it's not going to stop. Assuming 5% interest, we can safely conclude that in another 14 years or so, the amount of debt will have doubled again.

Of course, the banks won't let that happen - if that continued, there soon would be four times as much debt as money in the system. Then 8 times, then 16 times.

Fortunately, the banks are there to help. They will be happy to create yet more money (read debt) to keep the system going. I think we can confidently predict that by 2027, the money supply will have doubled to $136 trillion. But the amount of debt will have reached twice that - namely, $272 trillion.

I'm pretty confident about that because when I looked at how the ratio of debt to money supply in the Eurozone has changed over the last decade or so, I was intrigued to see that the 2.5:1 ratio has stayed constant.  Here are the actual figures.

Remarkable, eh? For some reason, the commercial banking system manages to create enough new debt each year to keep the system at the same ratio of debt to money, despite the effects of compound interest. I guess that there must be some very bright people running the show.

The net result of this is exactly what we currently have. A situation in which we collectively owe twice as much money to the banking system than there is money in the entire system.

So what needs to be done?

Actually, lots of things. But one would be to make money creation with debt associated a criminal offense. In a sense it is the worst form of usuary. Lending money with a high interest rate is bad enough. But lending money that you don't have and charging a high interest rate can not be described as anything other than a criminal racket - at least as bad as Madoff's famous Ponzi scheme.

And that's precisely what commercial banks are currently allowed to do.

But Bernie Madoff only ripped off his clients for $50 billion. The current banking system has allowed us to be ripped off to the tune of $68.3 trillion.

We need 100% reserve banking. And we need it now....

Total Global Debt and Money Supply : Twice as much debt as there is money

A week or two back, I raised the question of how it was possible that total debt within the Eurozone (i.e public sector debt and private sector debt combined) could be 2.5 times higher than the total Eurozone money supply. Specifically, the debt at the end of 2011 was €23.78 trillion, whereas the money supply measured by M3 was only €9.76 trillion.

Does this  2.5:1 ratio of total debt to money supply apply outside the Eurozone? Well, to find out, I have compiled data for the 39 countries in the BIS Private Sector Debt database and then added in the numbers for Public Sector (which I got from a very nice World Debt Clock website done by the Economist) to get total debt.

I then used the data on money supply provided by a remarkable site called Trading Economics where you can get money supply data by clicking on each country's link. Money supply numbers are not always standard, but most of the time you can get either M2 or M3. I had to multiply the numbers by the USD exchange rate to get the money supply in dollars.

So, here is the result.

I have ranked the 39 countries in terms of the Money Supply. China comes top with a money supply of $15.72 trillion, followed by the Eurozone ($15.2 trillion), the USA ($10.44 trillion), Japan ($10.40 trillion) and the UK ($3.19 trillion). Note that some of  the Eurozone countries are effectively in the table twice (Germany, France etc) because the BIS figures include a 40th number for all the Eurozone countries, but the totals and the bottom exclude the Eurozone figures.

Total Private sector debt is $89.27 trillion and Total Public Sector debt is $47.62 trillion, making a total debt level of $139.89 trillion.

Adding together the money supplies of all the countries together produces a total of $68.34 trillion. That is exactly half the level of debt.

In other words, even if every last cent was added together, we could still only pay off half the debt. In other words, the 2.5:1 ratio of debt to money supply that I noted for the Eurozone is a pretty typical case.

The last column gives the ratio of debt to money supply for each country. For some reason, Scandinavian countries like Norway, Sweden and Denmark all have very high ratios of well over 4:1. But the USA is also up there with a debt to money supply ratio of 3.5:1.

There are only five countries that actually have a money supply large enough to cover their debt (coloured in green in the table). Apparently Mexico is one of them, but this seems extremely odd - maybe an error in there somewhere.

The other four are China, Hong Kong, Saudia Arabia and Luxembourg. That seems to make sense. But even if you combine all their money supply surplusses, you still only get about $18.5 trillion. So, even they are totally unable to help pay off the mountain of debt that the world has amassed.

I find these figures quite incredible. They demonstrate quite clearly that those who have been lending the money that we owe can't possibly have had the money they lent. The whole thing is a complete con.

What's the solution? Well, it seems to me that everyone should agree that we actually effetively need to temporarilly double the world's money supply and use that money to pay back this fictitious debt.  The only place that this can be done is by using the Central Banks to create new debt free money and using that new money to pay off the debt.

Seems like a sensible plan to me. 

US taxpayers have handed 3.7% of US GDP to the financial sector in interest payments since 1988

Just in case you thought that the 3% of GDP that Eurozone governments hand over to the Financial Sector in interest payments on Public Sector Debt, and the 3.2% of GDP paid by UK taxpayers is unusual, here are the numbers for the USA.

I'd already commented on the fact that the total amount of taxpayers money handed over in interest payments was a staggering €8.58 trillion since 1988 - i.e. well over half of the entire national budget deficit. But here, I wanted to know how the figures for the percentage of GDP compare.

As you can see, the average value is 3.67% over the period. There are actually signs that the greed of the markets has dropped a bit recently because it has indeed dropped from a peak of 4.82% in 1991 to only 2.38% last year. But the $360 billion of taxpayers money handed over in 2012 is still one hell of a lot to pay. Especially when you realize that (a) the US Treasury could have generated the money free of charge, and that (b) the Banks who have been lending "money" to the Government can create the money they lend out of thin air.

Methinks it's time to change the system. The idea that it can be normal to hand over 3-4% of GDP in interest charges to the Financial Sector simply cannot be defended.

French Public Sector Debt and Interest Payments - The Full Story

I had seen graphs showing how France's public sector debt would have looked if the Government hadn't had to pay interest  - see for example the graph from Bernard Leitaer's book "Money and Sustainability". But, frustratingly, the graphs always started in 1978, and I was told that it was difficult or impossible to get the figures from before then.

However, after a long series of exchanges with people at the INSEE, I have been able to put together the full story for the period from 1970 to the present day. Intially, I was told that the INSEE didn't have the numbers, but after a bit of pressuring from my part, the complete set of numbers can now be revealed to the world! Here they are.

You can see that Public Sector Debt has increased from €25 billion in 1970 to €1833 billion at the end of 2012. This corresponds to an increase as a percentage of GDP from around 20% in 1970 to over 90% at the end of 2012. Interestingly, this percentage actually dropped down to about 11-12% from 1973 to 1977, essentially because the economy was still expanding (as shown by the increase in GDP).

But then, the cost of the interest payments starts to really kick in. In 1973, when Pompidou and Giscard passed their famous law that prevented the Government borrowing from the Banque de France, interest payments on public sector debt were a mere 0.57% of GDP. But then, those interest payments cost more and more each year, reaching a peak of 3.73% of GDP in 1996. Since that time, that percentage has dropped off a bit - totalling 2.72% of GDP at the end of 2011 (I'm waiting for the official figures for 2012, which is why the figure in red is just an estimate).


The graph below shows the increase in Public Sector debt for the period 1970 to 2012 as a percentage of GDP (see the red curve). But I thought it might be amusing to look at two other possible scenarios. The purple curve shows how  debt level would have changed if the government has not paid the interest payments every year. As you can see, although the level would have increased a bit recently to about 30% (essentially because of the financial crisis in 2008-9 and the cost of bailing out banks), for nearly all the forty year period, the level of public sector debt would have stayed well below 20%, dropping to lows of 11% in 2001 and around 13% in 2006-7.

But there's another curve - the one in blue. This is what would have happened if, instead of paying interest payments to the banking sector, the same amount of money had been used to pay off the public debt. As you can see, if the government had done that, the entire public debt would have been written off in 1987. And since that time, the government would have been running a surplus. It could have cut taxes, increased investment in energy, transport, housing or whatever.

For me, these curves demonstrate the complete folly of a system in which goverments are forced to borrow money from the commercial banks and then pay interest. And, don't forget, the commercial banks that lend the government don't actually have the money they lend. They just create it out of thin air. It is complete madness.

I think you can compare what we have been doing over the last forty years with a young couple who start their married life together in 1970. Let's suppose that between the two of them they have been earning around €100,000 a year. If they had been sensible, they might have bought a house and regurlarly paid off the debt so that after 25 years, the house was theirs. The would have kept their accounts in order, they would have never let their credit card bills accumulate,  and at the end of forty years, they would be able to look forward to a happy retirement.

The system that we have been running is the equivalent of saying to the couple - go out and buy a house using a credit card. But don't bother paying of the loan. Just keep allowing the level of debt to accumulate. As long as you don't let your level of personal debt exceed 60% of your annual income (i.e. €60,000) everything is fine.

Well, yes, it is fine. It's fine for the bankers who lend the couple the money to pay for the house that they never actually own. They will continue paying more and more to the banks. It is a fantastic scheme for the lenders. But it is a total disaster for the young couple. And it is also a complete disaster for our elected governments.

Surely, the time has come for a change in system. Governments should simply not be allowed to get in debt to commercial banks. And only the central banks should have the ability to create new money.

Why the EU's FTT proposals need to be changed

I'm a big fan of Financial Transaction Taxes, but I have to admit that the current versions that are being implemented by 11 EU countries are far from optimal.

There is a report on Bloomberg by Tax lawyer Maud Poncelet which shows how the implementation in France is incredibly complicated. There are many situations where the tax doesn't apply, making it a minefield. It sounds like a fantastic deal for anyone who earns their money by proposing ways to get round the tax.

Another problem is that there is a serious risk that the traders will relocate - despite attempts to come up with ways of forcing people trading in French shares outside the FTT zone. This risk is made particularly evident when you look a this table that I found in the CityUK's "International Key Facts" document.

As you can see, in a whole range of areas, financial activity in the two key Eurozone countries - France and Germany - is completely dwarfed by activity in the US and UK. For example, foreign exchange turnover is nearly 11 times higher and Interest rate swaps nearly 8 times higher. Moving transactions out of the Eurozone would be very simple.

There are already reports of how the introduction of the FTT is leading to a drop in activity in Italy and France. I have little doubt that we will see a repeat of the oft-repeated story about how the introduction of a tax in Sweden led to everyone moving their operations to London. But, frankly, I suspect that you would see this sort of phenonomenon irrespective of what tax level is used. The traders in the City are so opposed to any possiblity of having to pay to do their transactions that they would probably have a strong motivation to deliberately reduce activity in the FTT zone, simply to back up their claim that any sort of tax is incompatible with economic activity.

But I seriously believe that my latest propositions provide a real alternative. Rather than trying to devise complex schemes to try and force people outside the FTT zone to contribute, I think that the solution is for the European Central Bank to impose a flat rate Financial Transaction Tax on absolutely ALL Euro-denominated electronic transactions - No exceptions. The tax should be paid by everyone, wherever they are in the world. And that includes individual citizens like me who would see a small tax on their bank statements.

By doing it this way, you could completely block any incentive to disguise transactions by calling them something else, or to devise complex schemes to get round payments. I have no doubt that if you leave any potential loopholes, the multinationals will find a way to exploit them.

But suppose that we apply the tax to absolutely all Euro denominated transactions. What way round that could their be?  Yes, you could potentially walk around with suitcases full of Euros. But frankly, that would be extremely risky, and not worth the effort to avoid paying 0.1% or whatever the rate is.

What is the next stage? Well, we really need some complete numbers on the volume of transactions that involve each different currency. In my youtube presentation, I showed the figures the indicate that roughly 20% of foreign exchange involves Euros. Given that the current volume is almost certainly getting on for $6 trillion a day ($1.5 quadrillion a year), this means that there is around $300 trillion in Euro trading that would be easy to tax.

Likewise, it would appear that around 40% of Interest Rate Swaps involve Euros, as you can see from this graph, conveniently provided by LCH.Clearnet on their SwapClear website.

Amazingly,  LCH.Clearnet's website also provides updated data everyday about exactly how much they have handled, with a breakdown by each currency. In my presentation, I gave numbers for the 12th of April. Here's the chart for yesterday (16th April).

There you have it. $3.54 trillion in Interest Rate Swaps in a single day. $171.8 trillion since the start of the year. But the really interest thing is that they also tell us that preciely €1,195,492,098,262 of those were denominated in Euros - making a total for the year so far of over €69 trillion.

Now, let's see. If the ECB was to impose a 0.1% tax on all those Euro-denominated transactions, we are well on the way to reaping €250 billion a year. Very useful for getting the Eurozone out of debt. And that's just interest rate swaps. Imagine what the revenue would be if the other €2000 trillion of Eurozone transactions was taxed at the same rate.

It would be really useful if we could compile numbers not only for the levels of financial transactions in different countries (something that can be done with the numbers from the BIS report, and from the ECB for countries in Europe), but also for the value of transactions in each different currency.

If anyone has any ideas how to get hold of such numbers, please let me know. 

Ending the Eurozone Debt Crisis - My talk in Montbrun-Bocage

Last night I was invited to talk at a meeting in a place called Montbrun-Bocage, a delightful village about one hour's drive to the south of Toulouse. The theme was 'La "démocratie" est-elle soluble dans la crise? (ou l'inverse?)', and we watched a couple of films about the situation in Greece. It was all very moving. I had the distinct feeling that the Greeks are going through what may happen to all of us if we don't manage to fix the financial system.

It was actually the first time I had spoken about my proposals for economic reform in public (apart from the time when I invited myself to the Toulouse School of Economics to give a talk - but on that occasion, only 4 people turned up - it had been programmed at the same time as the Finance Seminar!).

But on this occasion, there were not far off 100 people there, and they were actually interested in the subject! Wonderful! My thanks to the organisers for the invitation, and all the volunteers who provided a meal for everyone. I had a great time.

I shared the stage for the evening debate with Professor François Morin, an economist from the University of Toulouse. François has published a number of books on the nature of the economy including "Un monde sans Wallstreet", and "Le nouveau mur d'argent: Essai sur la finance globalisée", so it was very nice to find out what he thought about my proposals.

My talk tried to bring together a number of the themes that I have been thinking about recently, and in particular the idea that we could fix the Eurozone crisis for good by making a number of specific reforms.  Firstly, it is essential that the European Central Bank takes on the public sector debt in the Eurozone. By doing this, it would immediately save Eurozone taxpayers hundreds of billions in interest payments every year.  But, it order to pay off those debts, the ECB could impose a financial transaction tax on all Euro-denominated transactions - wherever they occur. Finally, the revenue generated by the tax should be redistributed among the different Eurozone countries according to population.

They are all ideas that I have previously mentioned here. But this was the first time that I had brought them all together, and I tried to update the figures to use the latest data.

The discussions with François and the members of the audience were very stimulating. I was pleased to hear that François agreed with the sorts of numbers I had been using. And I didn't hear of any real problems with what I propose - except for the fact that we should expect to get massive resistance from the financial sector. Not surprising, since the proposals will effectively kill the goose that has been laying golden eggs for the financial sector for 60 years at least - allowing the banking sector to siphon off 3% of GDP from taxpayers every year in the form of totally unjustifiable interest payments.

Still, I'd like to think that this could be the start of something big. I really do think that with the European Elections coming up in 2014, the time could be right to get political parties to take on board some of these radical proposals.

Anyway, I've just uploaded a Youtube version of the talk which last about 32 minutes. It's called "How to eliminate Eurozone Public Sector Debt without austerity". I hope you like it.

There's also a version in French for those of you who want to know how bad my French accent is. You can find it on my other blog under the title "Ma nouvelle présentation Youtube : Comment éliminer la dette publique de l'Eurozone sans austérité".

The UK Banking Model for siphoning off 3% of GDP per year

Earlier today I claimed that the Maastrict Criteria (National Debt limited to 60% of GDP, coupled with a Budget deficit limited to 3% of GDP) could be thought of as a way of optimising the amount of money that can be siphoned out of the economy by commercial banks. Assuming interest rates of roughly 5%, and a law preventing Central Banks lending to governments, these numbers mean that Commercial Banks can legally siphon 3% of GDP in interest charges every year.

To back up the hypothesis that the whole scheme was inspired by what I could call the "UK banking model", here is a graph of the figures that I extracted from the House of Commons report for the percentage of GDP handed over to banks in the form of interest payments on government debt since 1955.

I worked out what the average number was. It's 3.1%. A remarkably close match to the budget limit of 3.0% of GDP imposed by Maastricht.

In other words, governments are allowed to run deficits - but only enough to ensure that they can pay their dues to the commercial banks. It makes sense. Maastricht could have said that governments should aim to reduce the national debt to 0% of GDP, and aim to keep the budget deficit at 0% too. But no, we are almost encouraged to think that 60% and 3% are actually some sort of optimum.

They are - for the banks.

I also added up the numbers for the percentage of UK GDP siphoned off over the full period from 1955 to 2011. It comes to 180% of GDP.

That means that had the UK been using a sensible system in which either (a) the government runs a balanced budget, or (b) borrows any money it needs from the Central Bank at 0% interest, the UK could potentially have been massively more prosperous that it is.


Of course, you might argue that paying 3% of GDP to commercial banks every year is OK if those banks put that money back into the economy.

But my guess is that the vast majority of that money has been transfered to offshore tax havens, where it would appear that about 1/3 of the world's wealth has been stashed.

Where did the Maastricht Criteria come from?

At 4 o'clock this morning, the penny dropped. Or maybe I should say that the $1 trillion dollar coin dropped.

First, a quick reminder of the criteria on Government budgets imposed by the Maastrict Treaty:

Government budgetary position: Member States are to avoid situations of excessive government deficits, that is their ratio of planned or actual government deficit to gross domestic product should be no more than 3 %, and their ratio of (general) government debt to GDP should be no more than 60 %, unless the excess over the reference value is only exceptional or temporary or the ratios have declined substantially and continuously;

Now, have a look at thes table showing how much different countries within the EU pay in interest charges on government debt as a percentage of GDP.  In particular, have a look at the percentage of GDP paid in interest for the Eurozone countries.

Notice anything interesting?

Do you think that it is just a coincidence that the percentage of GDP used to pay interest on government debt (i.e. 3%)  just happens to match the percentage of GDP that governments are allowed to have as a budget deficit under the Maastrict rules (i.e. 3%)?

Now look at the graph for the Percentage of UK GDP that has been going to pay the interest on the UK national debt since 1955 that I posted yesterday. That also just happens to average about 3% over the 6 decades. Coincidence??

Imagine a meeting of bankers back in the early seventies. The bankers from the UK are showing a graph that shows how they have been succesfully creaming off 3% of GDP from UK taxpayers for decades. And they say to their colleagues from other countries - "You can do this too!".

"Here's what you need to do. First, you have to impose rules that stop governments borrowing from their Central Banks. Make up some story about how this is really important to guarantee the stability of the money supply. If you sound sufficiently knowledgeable, and you speak using incomprehensible  language, you will be able to convince the politicians. They will assume that you know best.

Then, you arrange things so that when the governments borrow money from the commercial banks, they end up paying interest charges that are not so high that people object, but which maximise bank profits.

So, let's see. What would be the amount of government debt and the level of interest charges that would maximise the revenue for the banks?

Well, suppose that the government's debt level was about 60% of GDP, and that we can charge about 5% in interest per year. That would mean that we could extract a maximum of 3% of GDP from the economy every year.

Brilliant! Now, all you have to do is to get the politicians to agree to a pact where they try to keep the debt level at 60% and we will be able to arrange things so that we get 3% of GDP in interest, and you are guaranteed maximum profits for as long as you can keep the scheme going.

Of course, we all know that we don't have the money we lend the governments - we just create it out of thin air. But the public don't know that. And if we can keep our scheme secret, then we are all rich."

Wind forward forty years. And you will see that to keep the interest payments at the optimal level (3% of GDP) when government debt levels exceed the magic 60% level, it may well be necessary to offer to lend governments money at below 5%. Hey, you can even get down to 1.54% (which is the current rate for Germany). But as long as Germany has over €2 trillion in government debt, you will still be able to milk them for 2.5% of their GDP per year. OK, it's not quite 3%, but it's not bad.

Magically, every time that governments go to the markets to borrow yet more money, they almost always get the money they need - at a rate which miraculously allows the banks to extract roughly 3% of GDP in interest. 

Is this scenario fantasy? Maybe. But, seriously, I don't think so.

I believe that the whole Maastrict treaty and in particular the rules that prevent Central Banks lending to governments, and the 60% value for government debt, and the 3% value for permissible budget deficits can be explained if you see them as being designed to allow the commercial banks to cream off the maximum amount of taxpayers money.

The solution? Force the Central banks to take over all government debt and charge 0% interest.

The cost of public sector borrowing in the UK

Just in case you weren't already convinced about how stupid the current system is, take a look at a report called "Government borrowing, debt and debt interest payments : historical statistics and forecasts" that was published on the 13th March by the Economics Policy and Statistics Section of the Houses of Parliament.

I'd already found one graph showing how UK taxpayers had been handing over 3.5% of GDP to the banks in the form of interest payments on government debt for most of the 60s and 70s - see my piece called "How long has this been going on?"

But in this short document, you not only get a more up to date graph, they also give you all the numbers. Here's the graph, which is actually a bit different from the previous version, but it still shows how the UK taxpayer has been saddled with massive interest payments for borrowing all of my life.

And here's the table with the real numbers (the document actually provides some numbers as far back as 1946-7.

It's already impressive, and you can see that the % of GDP that is wasted on paying the banking sector interest for creating money out of thin air and then lending it to the government is currently 3.1% and is set to increase to 3.5% in the next few years. But, as you can see from the footnote, "borrowing and debt figures exclude effect of financial sector interventions".

The Guardian has a complete set of data, including the financial interventions, that shows that while the level of debt is 73.5% of GDP if you exclude financial interventions, it increases to 137.6% of GDP if you include them. So we can increase the full debt level to something like £2066 billion.

Now here's a £64 billion question. Did the government borrow the money for the bank bailout? If so, how much is being paid in interest? If not, and the Bank of England provided £1 trillion of funding interest free to bail out the banks, why the hell can't it provide the same sum to bail out the UK government?

By the way, I'm desperately trying to get an equivalent set of figures for other countries including France. Unfortunately, numbers on the % of GDP used to pay the interest on government debt are mysteriously missing from the datasets at the INSEE - I've asked them to provide the numbers, but only figures from 1995 seem to be available. Oh well....

EUREKA! How to solve the debt crisis - again.....

It's 5am, but I have to get this one on my blog.

First point.  As Deborah Orr reported in the Guardian last friday, there are now serious economists who are proposing that "Quantitive Easing should be used to write off government debt". Here's what she said:

Professor Michael Woodford of Columbia University says governments shouldn't create money and give it to the banks as quantitative easing. He's coming round to the idea that leaving the banks in control of wealth creation was what got us into this mess. QE is meant to keep borrowing costs down and make it easier for banks to lend. But since banks are also being required to rebuild their balance sheets, that isn't happening. Woodford says QE should be used instead to "eliminate government debt on the bloated balance sheet of central banks". Quite right: central banks should write off their debt instead of paying the interest via "austerity". The first politician to take up this idea and make it work is going to be very popular indeed.

Note that she linked to another report in the Daily Telegraph on Michael Woodford's proposal called "Helicopter QE will never be reversed".

The idea that Central Banks are already taking on public debt by Quantitative Easy is clearly demonstrated by the graph I showed in my blog called "Light and the end of the tunnel?". It showed that since 2006, the ECB's balance sheet increased from 13% of GDP to something like 33%, the Bank of England roughly quadrupled from 7% to 27% of GDP. And the Fed went from 6.5% to around 20%.

If we can acccept the idea that Central Banks can take over government debt, and then charge 0% interest, then we know that this would immediately save the €370.8 billion in interest payments that were made by European Governments in 2011 and the $360 billion paid by the US Government in fiscal year 2012.

Of course, we will have the standard objection that this is printing money, and that it will lead to hyperinflation - Zimbabwe, Weimar Republic etc etc etc.

So, to solve that one, the Central Banks should directly apply a financial transaction tax on transactions involving their currency. They could start with the $4 trillion a day in foreign exchange reported by the BIS Triennial Report for April 2010. They are presumably currently compiling the figures for April 2013, so we will see how the Foreign Exchange markets have evolved since then. But given that CLS Group alone is reporting $5.17 trillion a day for March 2013, it clearly hasn't dropped. With 250 trading days a year, this would add up to virtually $1.3 quadrillion per year - and that's just CLS Group. The total  is likely to be a lot higher when all the actors are included. For example, yesterday I discovered that ICAP Plc that I hadn't even heard of handled over $29 trillion in foreign exchange in 2012. There are plenty of others like Barclays who never report numbers at all.

Now, consider the breakdown between the different currencies that I reported last october. 42.4% of the transactions (around $540 trillion) involved dollars, and 19.5% involved Euros. That would be about $250 trillion in Euros traded per year.

It would relatively easy for the ECB to tax those transactions at whatever rate it liked. And each Central bank could choose its own value. Let's suppose that that the ECB chooses 1% and that the revenue generated was €1 trillion a year. It could then use that trillion a year to pay off each Eurozone government's debt without that government having to do anything. No need to impose austerity measures etc. The ECB would get its "money" back without having to go and tell the Greeks, the Spanish, the Portuguese or the French to impose budget cuts.

Back in august, I generated a table that showed how each Eurozone country's debt could be paid off progressively with €1 trillion a year of ECB money using a totally fair system in which the money is distributed according to the population of each country. Here it is again.

Germany would have cancelled its debt to the ECB in 8.5 years, France in 8.7 years and so forth. Even Ireland would be out of debt in 12.5 years.

After the country's debt to the ECB has been paid off, they would actually get their share of the revenue in cash that could be spent into the local economy. That should satisfy those Germans who refuse to allow the ECB to favour countries that have not managed their economies well. Indeed Estonia would start getting direct cash injections after just a couple of months. That's fair enough, because their government has a very low debt level.

And, interestingly, Germany, whose debt level at over $2 trillion is the highest of all the Eurozone countries would have to wait.

Of course, this particularly scenario assumes €1 trillion a year of ECB revenue. But depending on what sorts of transactions are included, the numbers could easily be at lot higher. After all, I estimate that, even within the Eurozone, transactions are running at over €2 quadrillion a year. In fact, the tax level can be set at whatever number is needed to keep the money supply at an appropriate level. Increase the number to €2 trillion a year (i.e. a 0.1% tax on all Eurozone transactions), and the process would take half as long.

So, yes. I'm proposing that we push the Quantative Easing lever to the maximum needed for the Central Bank to take on ALL government debt by buying on the secondary markets - something that they are already doing. This would "cost" the ECB something like €8.2 trillion plus the additional government debt added in 2012. It would cost the Bank of England something like £1.7 trillion.

But any risk that this injection of "money" could result in inflation can be avoided by using an FTT on all transactions involving a particular currency. And since there is no limit on the size of the FTT, it is a totally safe mechanism. If the banks flood the economy with money when they get their QE, the excess could easily be mopped up.

One important point to note is that the proceeds of the FTT on Foreign Exchange dealings are not recovered locally, but rather by the Central Bank whose money is being used. Thus, it is not a problem that 37% of Foreign Exchange is done in the City of London. The Bank of England would get revenue that corresponds to the 6.4% that involved sterling, the ECB would get revenue corresponding to the 19.5% that involved Euros, and so on. And a country whose currency was being attacked by the speculators would actually get more revenue as a result! Beautiful!

Does anyone see problems with this??

ICAP Plc : $179.5 trillion in 2012

I read today that ICAP Plc (IAP) says "EU Trasaction Tax would hurt economies, raise costs". They said that "The tax may increase the annual interest cost as much as 8.5 billion Euros ($11 billion) for Germany, Italy and France in the first year of implementation".

Sounds terrible.

But who or what is ICAP? Well, I had never heard of them, but apparently they are the world's largest inter-bank broker.  I had a quick look on their website and discovered that you can download their monthly volumes here. Very convenient. Here is the summary for what ICAP Plc did last year. All the numbers are daily averages in billions of dollars.

I thank ICAP for providing the number of trading days per month, which allowed me to calculate total transactions over the whole of 2012. Here are the numbers.

So, there you have it. That's another $179.5 trillion to add to the list of activities that can be taxed. 0.1% of that makes a very useful $179 billion. Sure, the interest costs may increase by $11 billion, but just applying the FTT to IPAC's activity alone would raise 16 times as much. Add in the quadrillions handled by Eurex, LCHClearnet, OCC, CLS, TARGET2, EURO1 and so on, and something tells me that the taxpayer may just get a good deal from such a move.

I note that IPAC is nowhere to be seen in the BIS dataset on financial transactions. Nor will you find it in the ECB's data.

Any other firms like IPAC who would like to try and argue that FTTs are a bad idea?
Warning : every time you come out in the open, you risk having me looking at your data.