As we speak I am in the midst of a road show presenting the causes, consequences and solutions of the financial crisis and the need for monetary reform across the UK (See upcoming events to attend one of these presentations). I have been presenting to audiences totalling about 2000 a month. After presenting to this many people you start to recognise some common themes in the questions that come up repeatedly that I would like to address in this post.

After my presentation where I demonstrate to the audience how 97% of our money supply is created privately through private debt loans and that money creation by banks is an expanding process in which money created by past loans is perpetually recycled, re-loaned, providing an endless supply of new money, building up into a vast infinitely ballooning total of money and debt that eventually renders unaffordable interest repayments I open up the floor to questions. Similar questions tend to arise at each presentation.

Initially most people are in shock that something as important as supplying money to our economy is not nationalised and that our economy mixes the two activities of providing a medium of exchange to our citizens and profit making lending together almost accidentally as we have not updated our monetary system to account for the fact that 97% of money is created electronically through loans and they have a few questions related to the mechanics of how this works.

Can we really question Economics?

After addressing these confusions I often get some questions as to why the government and senior staff at the Bank of England and the treasury have not done something about this. ‘Surely if there was any validity to our argument they would know’ they ask in disbelief. At this point I need to give them a brief history in economics and how current policy is run of assumptions about the multiplier effect (An economic theory which does not meet the facts), different theories of inflation and the history of Keynesianism and Monetarism in order to explain the rationale for current economic thought. For more on this you may wish to refer to my post ‘Why are we in a global financial crisis – The Problem with Orthodox Economic Theories’.

Is this a conspiracy?

At this point I might get a question from somebody who has watched a youtube video on the current system that presents the financial system alongside a full blown conspiracy theory, which claims that the financial system is being shielded from criticism and deliberately employed as a device for keeping people in a state of dependency, so as to advance a high-level political agenda. I then have to explain that most political figures clearly know nothing of the weakness of conventional economics as I experience every day when contacting such people.

You are telling me I shouldn’t be angry at the Banks?

Some ask ‘why, if you know what you know, are you actively involved in Investment Banking?’ By this I assume they mean that I am involved in some immoral practice to which I explain that the current anger directed towards bankers and greedy CEOs while valid is misguided and diverting the attention from the fact that banks have been propping up our economy. We are all in a battle for survival in a debt based economy. We have laid a foundation of unsustainable economics through our current monetary system which relies upon ever increasing debt by consumers, companies and government in order to supply the economy with the money it needs. I then explain that any re-financing by consumers (What the media and government like to refer to as spending beyond our means), companies (Investment Banks packaging loans together and selling them on as securitised products) and government (Bailing out companies that are over leveraged and up to their eye balls in debt as well as welfare expenditure by selling government securities on the money markets) are all activities that are essential under a debt-based unsustainable economy to prevent the most severe depression we have ever seen. What people don’t realise is that all this debt was inevitable and necessary in order to sustain the unsustainable for as long as we can and that in fact all this securitisation, mortgage debt and government debt is necessary to supply the economy with the money it needs to prevent a depression. If it had not occurred then our economy would have collapsed a long time ago. It was inevitable and necessary, so any anger directed at these activities is misguided and diverts our attention from the real cause of the financial crisis. The reason we are in a financial crisis and about to enter a depression is because of our monetary system, which can only be reformed at the top. We have been buying time through refinancing until we eventually reform our monetary system.

We need to nationalise our money supply NOT our banks. If we continue to be angry at banks, greed and CEOs excessive pensions and bonuses then we are doomed to remain in depression until our whole economy collapses. There is only one institution that can implement monetary reform and that is the government not the banks.

To Bailout or not to bailout?

The most common question that comes up time and time again after the initial questions is ’should we bailout the banks and companies or let them go bust?’ This is my favourite question that seems to divide the nation. The question is much more about identity then anything else. It is loaded with many previous thoughts and philosophies and is never as straight forward as the question first appears – the free market v. the welfare state and government intervention, the left wing v. the right wing, classical economics v. Keynesian economics, the conservative v. the labour, Capitalism v. socialism, Jim Rogers v. Gordon Brown, Ron Paul v. Barack Obama. Bail them out or let them go bust. My response – neither will work.

The philosophical question of the free market and the interventionalist approach is an old argument that dominates the political views of those world over. You are either for it or against it. You are either left or right. Politics in the modern day has become a sport. People build there whole identity around their political preference. Much like sport we adopt a political preference as we adopt a football team. We strive to be with a winning team. Our purpose is to be on the side of the winning team. All we want to do is win the game and will do anything to beat the opposition. We enjoy beating the losing team and when we play foul we find reasons and excuses to remain with the winning team, we find evidence to align with the actions of the winning team. When we are winning we wear our t-shirt with pride and feel like a champion. ‘I am a part of the winning team, you are not’. ‘I identify myself around that winning team and will find any reason to stick with my winning team’. ‘I don’t disagree with the winning team and I read papers that make me feel good about the winning team and point out everything bad about the competition’. There are striking similarities between picking your winning football team and your political preference. Most adopted it from their parents and have a dire need to prove other peoples preferences wrong.

As an economist I obviously have a preference but I wish not to disclose my preference as it takes attention away from the true cause of the financial crisis – our monetary system. You may wish to ask me this at one of my presentations and I will be happy to answer. As I watch the news, the financial channels and read the financial press the heated debate is whether to bail out or not.

Those who believe in the free market believe in as little intervention as possible and that the competitive forces of the free market have an ‘invisible hand’ where only the fittest survive and that any bank that has an unsustainable business model is an inefficient business that should be replaced by one more sustainable and more ready to meet consumers demands. The other side of the argument states that we should strive to reach full employment and create as many jobs as we can, if we let those banks go bust the knock on effects will be huge, people will lose their jobs and there will be a huge drop in demand, a recession and perhaps a depression. As a result we have no choice but for the government to step in and take on huge debts to prop up an inefficient, non-competitive business. The free marketers argue that whether you bail out or not the company has been unable to compete and any interference from the government gets in the way of a vital signal in the form of lost profits, signalling that the company is no longer meeting consumer demands. Those who believe in intervention say that the government must step in for the good of the public, imagine if your job was on the line and paint free marketers as ruthless and non-caring. These arguments go back and forth, getting more and more heated and those on the winning team feel very proud of themselves as they become right when the government continually intervene and goes against the free-marketers. The free marketers will take delight when this goes wrong, as it will. They can be a part of the winning team once again and have more evidence that the free market is the winning team to be on.

Well, I am here to tell you that they are all destined to be losers. Not because I agree or disagree with the free market theory, but that the assumptions of the economic model will not work in a debt based economy. Please don’t get me wrong, when I say a debt-based economy I am not against debt (You may wish to read my other posts for more details), debt is a valid and vital activity to be undertaken by private financial institutions. I am against mixing the two activities of providing society with a medium of exchange and profit making loan providence. Give the free market a nationalised money supply and we can see it in its true glory. These philosophies, however, will only work under a sustainable economy.

As explained in previous posts, under a debt-based economy, for our economy to grow and sustain we need more debt as almost our entire money supply is created through debt. The current position is that, while individuals, factory workers, businessmen, inventors, house builders, students, teachers and hosts of others work together to make available the wealth of a country, they are not able to exchange the goods and services that they make without borrowing money into existence. This borrowing in early 2009 is becoming increasingly hard to come by. In fact the only borrowing that is keeping our economy going is from the government through national debt. We cannot eat, sleep, take shelter or obtain clothing for ourselves and our families without borrowing-to-buy. Despite the fact that the goods are available, the industries are desperate to sell them, the people of our nation are only granted access to the products of the economy if sufficient and increasing numbers of us first go into debt.

If we bail out our banks and companies we are surviving only because the government is taking on more debt and injecting our economy with a vital supply of debt-based money. The interventionist bailout approach will run something as follows.

If we continue to intervene and bailout, the government could take on enough debt to successfully create another bubble until eventually interest repayments reach such a high level that companies (As they take on more debt to meet the lack of demand during this recession), consumers (As we start to enter the property market again and pay ever more money in interest repayments in another property bubble) and government (As they sell more bonds to finance the bailouts until the market for bonds disappears and they can no longer re-finance to pay interest on old bonds) all go bankrupt due to the lack of purchasing power discussed in prior posts.

People will start to realise that the government are already up to their eyeballs in debt and start to wonder how all this extra government money is going to be repaid. As corporate debt increases, the interest repayments increase and companies increase their prices to survive causing inflation. Consumers cut back spending as they are up to their eyeballs in debt and companies go bankrupt as demand falls. With more bankruptcies and unemployed the demands on government lead to more and more bond issues which eventually cannot be sold and inevitably default and go bankrupt. If the bailouts are successful or not, now or later this system cannot be sustained. This means that the bailout option will not work.

Well what about the free market approach? Under our current debt based economy only 3% of money is supplied to us through the government, and 97% through debt. A huge part of that money is supplied through government debt. If we left the market to its own devises and the government stopped taking on ever more debt, that money would have to come from somewhere else as a debt. There would be such a scarcity of money that we would enter a depression like we have never experienced before. Remember the government debt can never be settled without a depression, unless somebody else takes on more debt to make up for the shortage of money. Consumers and companies would have to take on sufficient amounts of debt to make up for the lack of debt the government is taking on and they of course would go bankrupt as the interest repayments become unsustainable. If the government committed to less intervention and settled its huge debts, then the government would only contribute the current 3% of government debt free money to the economy and consumer and corporate debt would have to take on debts equivalent to the 97% of money created through debt today just to sustain the current economic situation. To maintain growth this would have to increase forever. As this is unsustainable the economy would collapse as consumers and companies default on debt and the money supply shrinks. The free market option will end in the same result as the bailout option but sooner.

We have only one choice – monetary reform or monetary reform. We can take the bailout option now and reform money before the great crash or we can spend money into the economy debt free now and nationalise our money supply much like Abraham Lincoln did in the past. Unfortunately Abraham Lincoln was assassinated before he got to finish his work and implement a full monetary reform. So there it is, reform or collapse under a free market or a bailout/welfare state.

Will Conservative or Labout get us out of the financial crisis?

The next question that comes up time and time again is one of political preference, would we be better under labour or conservative, as conservative seem to be committed to less debt than labour? I would respond by letting people know that the squabble between left and right on taxation and spending priorities does not represent the full range of choices. As the conservative party attempt to win votes by campaigning ‘Gordon Browns debt’ and discuss the uncontrollable government debt, what they don’t realise is that labour or conservative, neither will work. This is why the debt has exponentially increased under both governments over the years. It is easy to point out that ‘Gordon Browns debt’ will make us broke in the future, but the reality is that this debt is a vital part of our money supply, take it away and there will be such a scarce supply of money that we will enter the worst depression ever. The national debt will not make us broke in the future, it will never be paid off, it will increase forever until we implement monetary reform. The current argument is invalid and the results under conservative or labour will be the same. Being on a winning team wont feel too good when we enter the depression!

The real political option is embraced by the creation and supply of money by government instead of private banks when we nationalise our money supply. This completely opens up the economic options of extra funding, increases the political choice of expenditure and offers the prospect of true welfare. This is not a left or right argument. Less or more spending can occur once we nationalise our money supply. How dare a government claim it cannot find the money to pay for this or that, but can afford to bailout banks in the name of welfare when they do not bother to create any money? The reality is they probably don’t know there is a third alternative, but now we are in a global financial crisis they will find out as we make way for a new paradigm called monetary reform. It is inevitable and will have to happen now or later.

Which is the winning team?

This is not about being on a winning team. It is no exaggeration to claim that the reform of the debt-based monetary supply system is the single most important area of reform confronting us in 2009. Reforming the monetary system is more important than war against poverty and starvation, more impotent than the movement to protect the environment, the struggle against pollution, the peace movement, the fight against drugs and racism, and the battle for social justice and welfare. Monetary reform is more important than all these other problems for the simple reason that the current monetary system is responsible, both directly and indirectly for creating, or at least contributing to them.

In my next post I will publish a more detailed proposal for monetary reform. Please leave your details so I can keep you up to date with this and feel free to leave comments below.

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