-Caveat Lector-
-------- Original Message --------
Subject: Why are we in debt?
Date: Tue, 23 Nov 1999 22:20:22 -0600 (CST)
From: Michael Eisenscher <[EMAIL PROTECTED]>
Organization: ?
To: undisclosed-recipients:;
All the nations of the world are in debt.
But who do we owe the money to?
National debts:
UK £400 billion
Canada $650 billion
Germany DM 500 billion
Japan $ two trillion
USA $ five trillion
"....the richest nation in the world is seeking to
increase output simply to remain financially viable,
whilst the poorest nations, who desperately need to
improve their domestic agriculture and industrial
infrastructure, are orienting their economies towards
a glutted world market - all this being driven by
monetary considerations."
"International trade has degenerated into a competition
between nations to alleviate their indebtedness, rather
than a process involving a mutually beneficial exchange
of goods and services."
The Grip of Death http://cfoss.com/grip.html
"The Grip of Death: a study of modern money, debt slavery
and destructive economics" by Michael Rowbotham
(Jon Carpenter Publishing, 1998)
The author has given permission for circulation of this introductory
chapter on the Internet. Claire Foss <[EMAIL PROTECTED]>
"'The Grip of Death' is a literal translation of 'mortgage', when the
owner of a house pledges his or her house to another with a handshake
...unto death."
Chapter 1: The debt-based financial system
When a profession fails to deliver, people inevitably suffer. When
that profession happens to be the study and practice of economics,
the entire world suffers. The deluge of social and environmental
problems brought on by humanity's endeavours to be 'economic' suggest
that the economics profession is not just failing - its advice is
proving mind-bogglingly destructive.
Our government officials, political economists and newspaper
columnists appear intellectually content with the current
arrangements, oblivious to the depth of the crisis that economics
presents to the world. They still happily argue about the dangers of
'overheating' or needing to 'cool off ', as if an economy that
functions along the lines of a domestic boiler or kitchen toaster
provides an acceptable basis for co-ordinating human activity. They
also appear perfectly satisfied to continue with 'business as usual',
without questioning the most startling and contradictory statements
issuing from the world of money and economics.
For example, every country in the world suffers from a massive and
constantly increasing national debt. Britain has a national debt
that is fast approaching £400 billion. Canada's debt has reached
$650 billion and Germany's now exceeds 500 billion deutschmarks.
So are these poor countries? No more so than Japan with a debt
equivalent to two trillion dollars or America with a national debt
now in excess of five trillion dollars. Since the poorer nations
are crippled by their indebtedness to international lending
institutions and foreign banks, the overall picture is of a world
suffering acute and ever worsening insolvency.
But this is really quite illogical and absurd... The question almost
asks itself. If all the nations of the world are in debt, who are
they in debt to? Rationally, where there is a debtor, there should
be someone else who is a creditor. If every nation is in debt, who,
precisely, owes whom? In addition to the logical absurdity of all
nations being simultaneously insolvent, such escalating national
debts are a complete contradiction of the real and obvious wealth of
these nations. This is underlined by the fact that the nations which
run the largest national debts are those with the most advanced
economies. What can we say to the developing nations struggling
under the burden of their debt, nations who have copied our economic
institutions and aspire to a life free from poverty? 'Work hard,
and one day your debt will be as small as America's - a mere five
trillion dollars!'
These are not the only contradictory financial statements to go
virtually unchallenged by the majority of economists. In addition
to mounting national debts, the level of private debt shouldered by
people and businesses is also escalating. The total of loans,
mortgages, overdrafts and credit card purchases is massive and in
Britain stands at some £780 billion, £500 billion of which is borne
by ordinary people. The Americans, supposedly the richest citizens
ever to walk the face of the planet, are the most heavily indebted
people of the world, carrying mortgage debts that currently total
$4.2 trillion. They are said to go shopping with their credit cards
bolstered. As with national debts, such escalating domestic debt is
a complete contradiction of the wealth present in those nations.
Any realistic assessment of the situation must conclude that
America, Britain and the many other developed nations possess
fantastically wealthy economies. Such extensive personal debt is
a complete misrepresentation of the true situation. What is more,
nations are becoming more, not less wealthy all the time, as
further technological advances compound their already enormous
ability to produce. But where is the financial reflection of this
development? And why is there no natural feedback of this real
wealth in a decreased pressure to work and to produce? The
financial reflection of wealth does not exist; in fact the
financial system registers the complete opposite of wealth. There
is only increasing debt subjecting our economies and those who
work in them to increasingly intense financial pressure and
monetary poverty.
Trust in money
It is assumed by everyone - and clearly by economists - that money
is a neutral and accurate medium; that money does no more than
reflect the economic facts. This trust is shown by the
unquestioning acceptance, not just of unrealistic debts, but of a
whole range of other monetary data. For example, America is
currently expanding its already colossal output - but not to
supply itself - simply driven by the need to obtain export revenues
to improve its balance of payments. At the same time, many Third
World nations are striving to develop a stronger export sector,
again not producing goods for themselves, but to improve their
balance of payments in order to fund debt repayments. Thus we have
the bizarre situation in which the richest nation in the world is
seeking to increase output simply to remain financially viable,
whilst the poorest nations, who desperately need to improve their
domestic agriculture and industrial infrastructure, are orienting
their economies towards a glutted world market - all this being
driven by monetary considerations. This again places economics,
and financial economics in particular, quite simply in the realm
of unreality.
It is not just in the macro-economic sphere that questionable
monetary statements prevail. Every budget and every election is
dominated by spending plans, spending cuts, savings made here, and
accusations of money wasted there. 'The other party's spending
plans don't add up' they all chorus. Scores of economists and
political commentators then huddle round their calculators to check
whether one party's promises have more financial credibility than
the other's. With a triumphant shout, the claim is made that 'there
isn't enough money'... So we can't do it. Money is trusted. Money
is accepted as the final arbiter. Money is the overall economic
truth; the limiting reality. And if there isn't enough money, well
that's that...
But this perennial shortage of government funds, enshrined in the
repetitive cry 'We haven't got the money', has got to be
challenged. Money is a man-made device, and for an entire economy
to be perpetually in the position of not being able to do what it
wants, simply for lack of bits of paper with numbers on them, is
strong evidence that the shortage of those bits of paper and
numbers lacks all validity. Consider some of the decisions taken
in pursuit of cuts in expenditure... The building is already there,
the equipment is in place, the people that are employed there can
be good at their jobs, providing a much valued service to local
residents. And then along comes a 'Grey Suit' who tells us that
the hospital, college, library, post office, coastguard station,
research laboratory, swimming pool or whatever has to be closed
for lack of money. But in what possible sense can we not afford
what we already have, and which is already there? A town can be in
desperate need of a school, community centre, or repairs to its
roads and drains. The raw materials may be lying idle in a
builder's yard, people may be desperate for work, but there isn't
enough money... so we can't do it. In what possible sense can
we not afford to do what we plainly can, in physical terms,
achieve?
This situation is accepted because it is assumed that monetary
statements are valid, and that a lack of money means a lack of
something vital. But what is missing? If the lack of money were
paralleled by a lack of manpower, raw materials, desire or demand,
that would at least be rational. For any one person not to have
enough money is rational; for an entire economy constantly not to
have enough money, and thereby prevented from doing what it is
clearly capable of doing, is absurd.
Money is trusted. Monetary statistics are trusted. No one refuses
to pay their mortgage on the grounds that the monetary system is
defective. No one complains to the government that the latest
export drive for foreign currency is misdirected because our
balance of trade figures are a misrepresentation. When ministers
claim they cannot fund some service, no-one says, 'Your figures
are irrelevant'. It is assumed by almost everyone that the
financial figures provide an accurate statement of our affairs.
If we are indeed so deeply in debt and on a daily knife edge of
solvency, then surely we must all work harder. All the economists,
politicians, businessmen and industrial experts agree, so we simply
must cut expenditure, become more competitive, improve productivity,
start new enterprises, create more jobs, export more to other
countries. They are saying the same in America, France, Germany,
Sweden, Canada, and Japan. Tragically, they are now saying the same
in Sudan, Ethiopia, Madagascar, the Philippines, Sri Lanka.
This book challenges the widespread assumption that the monetary
statements and statistics commonly used as the basis of economic
decisions are valid. The general confidence in modern money and
monetary judgements is utterly misplaced; the apparent neutrality
of the present financial system is quite false. Modern money is not
a neutral medium; indeed, the way in which money is currently
created gives it a specific nature and serious bias. Modern money
actually operates within its own detached and limited mathematical
world. It projects its own version of 'the facts'; its own version
of an economy; its own reality. It tells us what we can and cannot
do; it tells us what we can and cannot afford. But these amount to
demonstrably false, irrelevant and misleading statements.
The origin of debt
It is actually not in the least surprising that nations are
chronically in debt, governments have inadequate resources, public
services are under-funded and people are beset by mortgages and
overdrafts. The reason for all this monetary scarcity and insolvency
is that the financial system used by all national economies
worldwide is actually founded upon debt. To be direct and precise,
modern money is created in parallel with debt. The reason for the
failure of economists to question patently invalid monetary data
becomes clear - there is a total acceptance by them of the most
extraordinary method for supplying money to the modern economy.
The creation and supply of money is now left almost entirely to
banks and other lending institutions. Most people imagine that if
they borrow from a bank, they are borrowing other people's money.
In fact, when banks and building societies make any loan, they
create new money. Money loaned by a bank is not a loan of
pre-existent money; money loaned by a bank is additional money
created. The stream of money generated by people, businesses and
governments constantly borrowing from banks and other lending
institutions is relied upon to supply the economy as a whole. Thus
the supply of money depends upon people going into debt, and the
level of debt within an economy is no more than a measure of the
amount of money that has been created.
It is important to illustrate what this debt-based financial
system actully means in practical and numerical terms. The March
1997 statistical release from the Bank of England shows that the
total money stock in the United Kingdom currently stands at
approximately £680 billion. This is the total of all the money in
existence in the economy; the coins, notes, bank and building
society deposits of everyone - the rich, the poor, businesses,
public and private corporations; the lot. The figure is the
measurement of money known to economists and bankers as'M4'. To
place this figure in context, M4 in 1963 stood at £14 billion, in
1975 it was £53 billion and by 1980 it had risen to £2O5 billion.
If people are told that there is £680 billion of money in the
economy, and are then asked if they can guess how much of this
money has been created by the government, they are likely to be
puzzled. Why, all of it, surely? Surely a government is responsible
for the currency of the nation? When people are told that the same
statistical release from the Bank of England shows that the total
of money created by the Treasury on behalf of the UK Government is
a mere £25 billion of notes and coins, they naturally ask where
does the rest of the £680 billion come from? What is the origin of
the £655 billion which has not been created by the government?
If they are then informed that this other £655 billion - 97% of all
money in the United Kingdom - has been created entirely by banks
and building societies, and that they have created this staggering
quantity of money out of nothing, most people are totally flummoxed.
If you or I make money, this is called counter-feiting, and we are
looking at the prospect of four walls, iron bars and a slim glimmer
of daylight in twenty years time.
If they then ask how private, commercial companies can create money,
and are told that it is their mortgage, their personal loan and
their overdraft which has led to the creation of this £655 billion;
that governments rely upon the majority of people going into debt
simply to create money to supply the economy; that virtually every
pound in existence, whether circulating or deposited in bank
accounts, is matched by an equivalent pound of debt - if they are
told this, people generally stop asking questions. They get that
uncomfortable look in their eye. 'This guy is definitely right out
of his tree...'
Through a barrier of doubt and suspicion, you might add that banks
and building societies account 97% of the money in the economy as
their own, temporarily 'on loan' to the economy; that the majority
of mortgages are illegitimate and unnecessary and that each
generation's debts exceed those of the previous generation; that
bankruptcies and repossessions have to be seen in the light of an
impossible scramble for inadequate money; that the creation of money
as a debt is directly responsible for recurrent booms and slumps and
generating the intense pressure for economic growth in the developed
world, as well as causing the appalling debt of the Third World; and
that these facts have been established by Royal Commissions and the
system denounced repeatedly by leading economists, bankers and
statesmen.
Most people, when they are told this, dismiss the claims utterly and
in their minds clearly regard you as a politically disturbed person;
a sad case of mental fixation, perhaps unable to cope with the
demands and opportunities of the modem world. This is really quite
understandable. The natural assumption is that there must be more to
this matter. If banks and building societies do indeed create money,
there must be a rationale behind the decision to leave the creation
and supply of money to them. It defies belief that such an
extraordinary arrangement should exist without there being good
reasons behind it.
But, as this book shows, there are no good reasons. Indeed, there
is abundant evidence of the destructive effect of this method of
supplying money to an economy. Relying upon banks and building
societies to create money using their 'loan system', and allowing
this to form the modern money supply, gives rise to a catalogue of
economic trends which are wholly undesirable, and without mitigating
circumstance.
Debt-driven growth
All around us, the gross failure of modern economics screams out to
be addressed. The towering indifference of those shining offices
scraping the sky above the menacing ghettos of Brooklyn; the
speculative channelling of billions of pounds of volatile
international finance, which can leave a country prosperous one week
and plunged into decline the next; the ludicrous production of cheap
goods of poor durability, so that jobs are 'protected', and we can
recycle the materials and make the goods all over again; the
ridiculous export drives by which every country simultaneously
attacks the economies of every other nation, under the pretence that
such global free trade improves the general wellbeing; the
staggering waste of a throwaway, quick-growth, all-new spiral of
constant economic change; the outrageous financial debt which Third
World countries have actually paid many times over, but which, due
to interest, is now larger than ever before - a debt which forces
those impoverished nations to compete to supply goods already in
surplus; the cynical manipulation of human emotions into buying
fashion-obsessed trivia; the burgeoning transport demands of
escalating economic growth and centralisation, with identical goods
crisscrossing the globe, regardless of environmental cost; the fact
that despite the incredible productive capacity of the modern
economy, people are obliged to work harder, with ever greater
efficiency, forever forced to adapt and retrain or face a life of
indignity and misery as one of the unemployed.
Both those in work and out must watch, as the world they know and
understand changes almost in front of their eyes like some
nightmarish Kafka-esque novel. This is the era of accelerating
economic change. The benefits are highly dubious, and no-one even
pretends that the economy is responding to what people actually
want. The only justification offered for the changes is that this
is 'the age of progress', and 'you can't stop progress', even if
you are human and the progress you are discussing is supposed to be
about people and the lives they might lead in the future. The world
of economics has got mankind by the throat and everyone knows it,
and no-one has a clue where we are going or why we are going there.
But is this surprising? If a monetary system is invalid or flawed,
then the entire economy is based on the mathematics of error, and
must be riddled with the effects. If the financial system upon
which our economies are built is defective, and yet monetary
considerations dominate our economic decisions, should we be
surprised if the results are less than satisfactory?
The major role played by bank credit, which forms over 95% of the
money stock in most developed nations, suggests that it cannot but
be implicated in these trends. This is further suggested by the
way that banking has literally become the focal point of modern
economic management, through manipulating interest rates. The
stargazers of Whitehall and the Federal Reserve hold their
councils, trying to tread the non-existent tightrope between
growth and recession by debating quarter percentage-points of
interest rates. Alan Greenspan, the Chairman of the Federal
Reserve, engagingly describes his task in controlling the American
economy through adjusting interest rates as a matter of 'taking
the champagne away once the party has started'. Businessmen around
the world hold their breath, measuring his every word, wondering
what he will decide. There could be no greater indictment of
contemporary financial economics than this; that a fluctuating
financial digit on a single computer system in a single street in
a single country should have the ability to dominate the economies
of an entire planet.
The search for an alternative
The past thirty years are almost unique by comparison with the
previous three centuries in the lack of attention that has been
directed at debt and the financial system. Throughout the eighteenth
century, there were repeated calls for reform. During the nineteenth
century, excessive banking was held by many to be directly
responsible for the waves of appalling poverty that swept Europe and
America during a period of increasing industrialisation and
agricultural development. In this century, during the depression of
the 1930s, the financial system effectively seized up and brought
virtual collapse to the economies of the world in an age which was,
perhaps for the first time, obviously wealthy, and in which
technology offered people real freedom as well as material
prosperity. One observer judged that over 2,000 schemes for monetary
reform were put forward at that time - all with a common theme in
their outright rejection of the debt-based financial system as it
then operated. The same system continues to this day, modified in
small details, but unchanged in principle; and the recent financial
crisis in Asia shows the potential for collapse still exists.
However the issue of economic volatility through booms, slumps,
crises, and collapses has never been the sole point of criticism.
It is the long-term trends that a debt-based financial system
fosters which are most destructive. The most obvious of these is
declining personal solvency. Mortgages support over 60% (£420
billion) of the money stock in the UK and over 70% ($4.2 trillion)
in the US. Housing-debt statistics for the UK and the US show that
there has been a dramatic decline in true home ownership as
mortgages become higher and ever more widespread. There can be
little question that relying upon housing debt to supply money to
an economy lacks economic and political justification. However,
taken in conjunction with the marked rise in commercial debt,
mortgages have a knock-on effect. In an economy where the price of
goods is elevated by commercial debt and consumer incomes are
deeply eroded by mortgage debt, there is a persistent and subtle
advantage given to low-quality, mass-produced goods, and growth
is fostered in this direction. The persistent decline in product
durability and the growth-culture of a rapacious consumer society
can be directly traced to the debt-based financial system.
The financial system has also generated a serious distortion of
agriculture. Excessive farming debt has driven out the most
efficient producers - small/medium sized farms. Meanwhile, the
relentless pursuit of farming and processing methods oriented
towards a low-price market now involves the production of
foodstuffs of poor nutritional value, inferior to that which the
land can provide and inferior to that which consumers actually
desire.
The nature of growth within a debt economy affects not only the
quality of output, but distribution and marketing. Intense
competition for sales within a debt-based economy results in the
use of transport as a competitive strategy by businesses. This
has led to a progressive breakdown of local and regional supply
networks, and marketing over ever-greater distances, leading to
escalating commercial traffic demands.
At the international level, trade is deeply affected by the
debt-based financial system. The aggressive pursuit of maximum
export revenues, rather than seeking a simple balance of trade,
is entirely due to the fact that even the wealthiest nations
operate from a position of gross insolvency. International trade
has degenerated into a competition between nations to alleviate
their indebtedness, rather than a process involving a mutually
beneficial exchange of goods and services.
Endemic Third World debt is also directly attributable to the
reliance upon debt and banking to supply money. The theoretical
model of borrowing from the World Bank/IMF, investing in
development and repaying loans from export revenues, is one of
the great failures of contemporary economics. The persistent
inability on the part of debtor nations to repay these loans
suggests strongly that the nature of the indebtedness suffered
by the Third World has absolutely no actual legitimacy or
validity. Chapter 10 confirms this.
The more one explores the broad impact of debt, the more apparent
it becomes that bank-credit constitutes a dysfunctional form of
money. An economy based almost entirely upon bank-credit and debt
experiences an intense drive for growth, regardless of need or
demand. Bank credit engenders financial dependence, injects
instability and fosters growth-distortions, both within an economy
and throughout the international arena.
Reform of the debt-based financial system is clearly not a minor
issue. It is not a matter of fiddling around with taxes, incomes
and allowances to make things apparently more equal, more efficient,
or perhaps more straightforward.Changing the debt-based financial
system involves gradually altering the very foundations upon which
national and international economics is based. "Monetary reform is
concerned with attempting to determine a new principle for the
supply of money to an economy - the purpose being to create a
supportive financial environment in which more constructive
economic trends are allowed to emerge, and in which more benign
systems of overall economic management become possible. In view of
the rapacious onslaught on the environment, the waste of natural
resources and the social and political friction caused by
de-regulated commerce and capital flows, this is at once a
promising, but a sobering prospect.
~~~~~~~
Jon Carpenter Publishing,
2, The Spendlove Centre, Charlbury, Oxfordshire OX7 3PQ
For credit card orders tel/fax. +44 (0)1608 811969 or
+44 (0)1689 870437. UK price: £15
Distributed in the USA & Canada by:
Paul & Company, PO Box 442, Concord, MA 01742
tel. 978 369 3049/fax. 978 369 2385. US price: $29-95
~~~~~~~
The author, Michael Rowbotham, is touring and lecturing in
Canada from Nov 24 to Dec 3. For more details see
http://cfoss.com or email [EMAIL PROTECTED] or
[EMAIL PROTECTED] or [EMAIL PROTECTED]
.............................................
Bob Olsen, Toronto [EMAIL PROTECTED]
.............................................
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