Chapter 43 - The Solution to Debt is More Debt

The operation of national economics is different to household economics. I shall ask you the question: “Who has the authority to create the money of the nation?” Hopefully, you will answer: “The government”. I ask you a subsequent question: “Why, then, would the government be in debt?” The answer is that the government does not use its power to create money. The government borrows money to cover its needs. When the government needs money it borrows it from creditors by an ingenious system that involves debt certificates called bonds. The government contracts debt by ‘selling’ IOUs. The debt magnifies through interest. For continued operation, it becomes inappropriate to repay for various reasons.

A graph of Money Supply and Debt for the Greece. Graph by Andy Chalkley. Creative Commons Attribute

The above graph is interesting. Any attempt to pay off debt results in the destruction of a portion of the Money Supply. The creation of new loans creates money. The repayment of bank loans destroys money.

Let us consider how a loan is made. You wish to borrow one million to buy a house from Mr. Seller. You go to the bank and they eye you over and say: “The house is worth one million. You have a job. We will lend.” On the appointed day, they write one million with a plus sign into the account of Mr. Seller. They write one million with a negative sign in your account. They have created one million of new money and one million of new debt. During the year, they added one hundred thousand in interest which was added to the debt. So there is still one million of fresh money and 1 100 000 of debt. You repaid 50000 in repayments. So there is 950 000 of money and 1 050 000 of debt. Next year they add interest of 105 000, you repay 60 000. There is now 890 000 in money but 1095 000 of debt. Repayment of loans destroys money in the Money Supply. Even people in the industry tell us the same:

Right Honourable Reginald McKenna (1924), the former British Chancellor of the Exchequer and Chairman of the Midland Bank said: “Every loan, overdraft, or bank purchase creates a deposit, and every repayment of a loan, overdraft, or bank sale destroys a deposit”

Repayment of loans destroys money in the Money Supply.

This should not be difficult to comprehend as in the top diagram, almost all the Money Supply is composed of Bank Credit. This credit is used as money. Although you cannot touch it, it is transferred from person to person to effect payments. It is ‘monetised credit’. If less Bank Credit is created, the Money Supply falls. Never forget that money is a freely created commodity. If the Money Supply falls, we obtain a recession. We cannot allow the money supply to fall. This tells us that we cannot pay back loans without damaging the Money Supply.

McLeay, Thomas, & Radia, Money creation in the modern economy: “Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.”

Spain has had a consistent lack of money for quite a few years:

A graph of the Money Supply and Debt for Spain. Creative Commons Attribute - Andy Chalkley.

The banks have cut back on lending for quite a few years:

A graph of Loans Private Sector against GDP for Spain. Creative Commons Attribute - Andy Chalkley.

The volume of lending has fallen. When the banks cease to lend, the consequence is a fall in the Money Supply leading to a recession. Here we can see the lack of credit creation in Spain:

A graph of Loans for Spain. Creative Commons Attribute - Andy Chalkley.

China has not had this problem. But remember that China runs a government owned public bank that lends strategically.

A graph of the Money Supply and Debt for China. Creative Commons Attribute - Andy Chalkley.

You will, of course, notice that the banks were steadily increasing their loans. The Chinese banks did not suddenly cease the provision of Bank Credit. The Money Supply did not suffer from recalcitrant banks.

A graph of the Loans granted by banks in China. Banks in China do not have a stop-go lending pattern. Creative Commons Attribute - Andy Chalkley.

The debt of the nation is impossible to pay back for a variety of reasons:

The solution is to accept the situation and tolerate the unpayable debt and increase its magnitude when appropriate.

Austerity Economics

Simplistic thinking might might lead one to believe that the solution to debt is to implement austerity. This seems logical. The logic matches household economics: “Clear your debts.” “Spend within your means.” “Tighten the belts.” The economics of households is quite different. The household does not have the authority to create money. The household is not required to ensure and adequate availability of money tokens. Tightening the belt reduces the number of money tokens circulating in society. This damages economic activity. Money is a freely created item that enables trade between humans. The tokens must exist and they must move. Any person that suggests austerity is living in cuckoo land. It is a duty of government to provide services, but it is also a duty of government to ensure an adequate supply of money tokens in the nation. Although the governments have handed over the money creation to private interests, there is still a responsibility to ensure an adequate supply of money tokens to sustain trade within the nation. Money must exist and it must move. After a war or revolution, there is often a sneaky change in the money system. The government agrees to borrow its money needs rather than create its money needs. The government concedes money making to private interests at the end of a war. Monarchs are eliminated or turned into puppets. The result is perpetual debt. These debts can never be paid off. The result is perpetual debt. Governments can live with debt provided they do not pay off the debt. Debt to a nation is not the same as debt to an individual. Individuals need to repay their debts but governments can never repay their debts. Providing sufficient money tokens and ensuring that they move has a higher priority than paying off impossible debt. The debt is created as an unwanted by-product when fresh money is created. The spending of the fresh money is more important than the debt. It is not possible to have fresh money without debt. Debt must be tolerated. One might even go as far as saying that debt must be encouraged. If debt does not increase, the money supply will not increase. In reality, the debt cannot be collected and any large scale attempt to do so will bankrupt the banks. The banks can never collect on the debt so never try to pay it off. Austerity Economics will create a recession for the people. At the same time, Austerity Economics reduces the tax revenue for the government whilst increasing the government expenditure on welfare and bullets. If for example, we reduce 100 billion government expenditure by 1 billion, whilst continuing to collect taxes, the Circulating Money is likely to reduce by one billion. This will send the GDP south by a few percent. The tax revenue has the potential to fall by two billion. Meanwhile, government expenditure on welfare and bullets for the police to shoot protesters has risen by one billion. The result of cutting expenditure was reduced tax collection and increased pressure on expenditure. The same effect occurs when banks destroy money by cutting their lending. If they cut back on lending by one percent, this might reduce the money supply by one percent. If 90% of the Money Supply is held in bank accounts for extended periods of time by the affluent, the reduction will occur in the Circulating Money and the magnitude of the fall will be 10%. The 10% fall in the Circulating Money will cause a 10% fall in the employment, a twenty percent fall in tax revenue, a ten percent rise in government expenditure, a 30% increase in the deficit, a 10% increase in business owner suicide and a ten percent increase in business closures. These are hypothetical workings. The effect is much more pronounced in nations with a low velocity. Many countries have velocities around one. These indicate extraordinary high, dangerous levels of hoarding.

I am trying to demonstrate that Austerity Economics is not only wrong, it does not work. The reason given for Austerity Economics is the need to ‘balance the budget’. But there is never a need to balance a nation’s budget. Money is a freely created commodity that expands with need. It should not expand beyond need, but expand, it must. Efficiency in government it necessary, but not austerity. We live in a community and share the fruits of the labours of all and share what nature gave us to share. If some persons are operating inefficiently, we all suffer. There is a smaller pool of goods and services to share. If too many live by the collection of rents for the land we have an inefficient society. Those collecting the rent are collecting from something that was created by nature or god for all to share. The rent collector is no better than the welfare person who could be doing something productive in his daily hours.

The method of collection of tax aggravates the situation because it takes money only from the Circulating Money. Circulating Money operates in the real economy. Hoarded Money leans toward the Financial Economy.

The Failure of Austerity Economics.

Comprehension of the mechanics of Circulating Money will inform us that Austerity economics will not work. Austerity simply brings economic stagnation. Austerity will not enable debt reduction. Austerity tends to cut back on pensions, healthcare, and and education. It may also include a cut in spending on bridges roads, ports, hospitals and airports. The typical scenario is:

I am a great lover of efficiently. I detest government inefficiency. I am a supporter of individual enterprise. I say to all “Your reputation is the most precious thing that you own.” I once thought it was impossible to get greater than 100% efficiency. I once saw a man in a pizza shop folding pizza boxes whilst answering the phone. High efficiency is possible. However, a call for Austerity cuts services without increasing efficiency. I stand by a call for government efficiency and the culling of unnecessary services, but not for a cutting of essential services. A nation cannot be efficient without a healthy population.

The first observation is that the debt can never be repaid due to the very nature of usury. The second observations is that the cause is not government profligacy but Bank Credit inadequacy causing a cut in the Money Supply. I now take you through the Greek tragedy. Lending in Greece was curtailed:

Bank Lending and Credit for Greece. Graph by Andy Chalkley. Creative Commons Attribute

This caused a fall in the Money Supply:

A graph of Money Supply for the Greece. Graph by Andy Chalkley. Creative Commons Attribute

Money was drained mainly from the real economy. The velocity falls because the fall in the money supply was from the real economy whilst hoarded money remained hoarded.

Greece velocity of money. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece and OECDstat

Economic activity fell:

GDP Greece. Graph by Andy Chalkley. Data: Eurostat. Creative Commons Attribute

As the GDP falls, the unemployment rises:

GDP Unemployment. Graph by Andy Chalkley. Creative Commons Attribute. Data:Greece Unemployment API_SL.UEM.TOTL.ZS_DS2_en_excel_v2.xls at World Bank

Tax collection falls:

Tax revenue in Greece. Graph by Andy Chalkley. Creative Commons Attribute. Data:Greece Unemployment API_SL.UEM.TOTL.ZS_DS2_en_excel_v2.xls at World Bank

Government revenue falls:

Tax revenue in Greece. Graph by Andy Chalkley. Creative Commons Attribute.

Government Expenses rise until Austerity economics is in force:

Tax revenue in Greece. Graph by Andy Chalkley. Creative Commons Attribute.

The inappropriately named "Deficit" is the difference between the two. It rises:

Deficit in Greece. Graph by Andy Chalkley. Creative Commons Attribute.

The Deficit was not excessive until the onset of the bank cutback in credit.

More Debt means a Health Economy.

In nations with a healthy economy, there is commonly an increasing debt. In nations in recession, there is generally a stagnant or decreasing debt. This does not mean the more debt automatically means that the economy is healthy. However, in an economy that is expanding, the debt will is likely to be rising. The link is not direct. The mechanism is as follows. In an economy that has an increasing GDP, there will likely be an increase in Circulating Money which had to come from somewhere. It may come from Hoarded Money, but the hoarders are exceedingly good at maintaining their hoards and government is loath to touch the money of the hoarders. They always take money from the working section of the society which is those operating in the Circulating Section of the Money Supply. Thus more debt will appear matching the increase in investment in the circulating economy. More Debt means more investment and more economic activity.

Debt Reduction Causes Depressions

An interesting set of data was released by Professor Frederick Thayer of George Washington University. [1] Frederick linked the American repayment of debt with depressions.

Deficits do not cause depressions because they allow the money to circulate. Any attempt to reduce national debt will be followed by a depression.

Loans Granted in Europe

A graph of the Loans granted by banks in the Euro Area. Creative Commons Attribute - Andy Chalkley.

You can see the effect of the cutback in lending in the Money Supply graph bellow. You can also see it in the private debt figures which is represented by the dark line half way down the red section.

A graph of Money Supply and Debt in the Euro Area. Creative Commons Attribute - Andy Chalkley.

In the above graph, it is not the red area that affects the economics, it is the green area. Even more specifically it is the volume of money that is actually moving within the green area. The task for the managers of the money system is to keep the green section healthy and to ensure that as much of the green section is moving regularly. If the green ceases to move the economy becomes constipated. The money must be moving.


During periods of economic stability, there is a tendency to borrow for speculation. When financial problems occur, the problems are likely to be greater because of the idiotic toleration of speculation. Recessions will tend to be longer and deeper.

“Longer stretches of economic growth imply greater leverage and complacency and thus, greater financial problems when recessions do occur.” [William Dudley and Edward McKelvey] [2]

European Governments in Europe have adopted stringent austerity policies as a response to the bank created Money Supply crisis. This was either of their own choice or under the insistence of so called international financial institutions. The USA and Australia implemented a financial stimulus. The American and Australian economies grew, whilst those nations that implemented austerity stagnated and remained unable to repay debt. Recovery in the UK was ceased when austerity was implemented. Austerity has failed as an economic action.

Starting in 2012, George Osborne, the Chancellor of the Exchequer in the UK, implemented Austerity Economics. Osborne slashed the budgets of various government departments by up to thirty per cent. At the time, he stated that this would cut the UK budget deficit to zero within four years. He said that this would then allow the UK to start paying back its public debt whilst boosting economic growth. He was wrong on all of these claims. The deficit remained high. The citizens have experienced recession. [3] Austerity is self defeating. Austerity cripples growth resulting in a reduced tax collection. The opposite is required. The government needs to efficiently spend such that the spend money circulates. Circulating money generates tax. George Osborne’s cuts had done the opposite of what he claimed they would do. They created a recession. Debt to GDP increased. The “austerians” were wrong.

Austerity policies do more harm than good. This is not to say that we should not expect efficiency from government. Nor does it suggest that the government should not spend wisely. The government has a role to ensure that there is enough money circulating in the real economy. Austerity policies should be replaced with policies that ensure:

It should be recognized that ‘Deficit’ is not a dirty word. Deficit is natural when the Money Supply relies on debt creation.

Austerity creates recession.

The Solution to Debt is More Debt

I shall go back to the title. It even sounded stupid to me as I wrote it in an moment of humor. Debt is not a solution. Debt is inevitable in a debt based money system. Money starts life as debt, so without increasing debt, we cannot have an increasing Money Supply. It is a consequence of choosing a debt based money creation system. The act of contracting more debt will lift the economy provided it is spent into the real economy where people buy things to live. Temporary solutions include pushing money from Hoarded Money into Circulating Money, taxation of Hoarded Money, modifications to the taxation system to reduce tax on Circulating Money etc. Nothing will get rid of debt whilst we rely on debt as a means of creating money on which to run a civilization. Economist adjust this and that and wait to see what happens without understanding the nature of the money and its movement. This reminds me of an Irish girl that wanted to change the music on my music system. She started randomly pushing buttons to see what would happen. I had to shut down the system to reset the controls. If you want to cut worker costs, cut landlordism by implementing Land Tax. It is the nations with high rents that have high wage costs. Mohamed allowed traders to sell in the medina at no cost. If money is not skimmed off for landlordism in a form of ‘Usury of Land’, then costs are low. Multinationals move to areas with low wages which happen to be locations where the ‘Usury of Land’ and landlordism has not taken hold.

Debt is inevitable in a debt based money system.

New Messiah says: Money should be created as credit by the government.Money should be created as credit by the government.

New Messiah says: Do not use debt based money systems.Do not use debt based money systems.