[A-List] What Systemic Debt Means ...

[Bill Totten]

... to You and Your Family

Prosperity (July 2006)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Family Life Will Come Under Increasing Strain

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

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

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

It all comes back to a question of choice.

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

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

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

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

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

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

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

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

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

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

4. You Will Leave Far Less for Your Children

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

http://prosperityuk.com/2006/07/what-systemic-debt-means-to-you-and-your-family/

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