Showing posts from November, 2011

The merits of a debt money system

In my previous post I explained how the Western world's debt money system works.  Currently, in our system, all money is created as debt. Debt precedes savings: it is lent out by financial intermediaries and becomes someone else's savings when it is spent. Therefore, contrary to popular opinion, for someone to have savings it is  necessary for someone else to have debt. And because debt (in its widest sense, so including corporate equity) and savings are equally balanced over the economy as a whole, when debt is paid off savings are reduced by an equal amount. In a debt money system the value judgements so frequently applied to debt and savings are unhelpful and can lead to completely inappropriate courses of action being taken by individuals, corporations and - particularly - by governments and supra-governmental organisations such as the IMF . Popular morality, particularly in the Anglo-Saxon world, has it that debt is a BAD thing and savings are a GOOD thing. These mor

Knowledge and belief

This post is a long overdue response to Richard Murphy's post " I believe in belief" , which directly criticises comments I made about another of his posts and makes false and unjustified assertions about my beliefs and my background. I thought long and hard before writing this post. I don't want to be seen as someone whose aim is to discredit another writer: frankly, life's too short to expend much time on such a fruitless task, and I have far more interesting things to do. But this post touches on some fundamental issues. And that is my real reason for writing this post. I reproduce here the comments I made on the Liberal Conspiracy blog regarding this post from Richard Murphy: Can I comment on two quotes:  Quote number 1: “A Courageous State is populated by politicians who believe in government. They believe in the power of the office they hold. They believe that office exists for the sake of the public good. They know what that public good is.”  Quote no

The other side of debt

This post is sparked by the debate that there has been in the last few days around Positive Money's proposals for reform of the monetary system in the UK. You can read their proposals here .  I'm not in this post aiming to debunk Positive Money's ideas so much as to clarify for people's benefit the nature of our debt money system and how fractional reserve banking works in practice. If more people understood how things REALLY work (rather than what the textbooks say) we would be better able to have a sensible debate about how we want it to work in future. The matter I want to address in this post is relationship between debt and savings. Positive Money correctly describe the way bank lending works, but they ignore the impact on savings, and therefore tell only half the story. And in the course of the debate it became apparent that there are many people who simply don't understand the relationship between debt and savings. Yet the relationship between debt and savi

Austerity and the Eurozone

There has been much discussion recently about the austerity measures being imposed on Greece, Italy and others in the Eurozone in the interests of returning their budgets to balance and implementing much needed structural reforms. The question is not whether these measures are necessary, but whether in the current economic situation they are achievable. Firstly, some basic economics. If a country runs a trade surplus it is a net exporter of goods & services and an equivalent net importer of capital. Conversely, if a country runs a trade deficit it is a net importer of goods & services and an equivalent net exporter of capital. If a country runs a fiscal surplus it means that the government's income is greater than its spending. Conversely, if a country runs a fiscal deficit it means that government spending is greater than its income. There is of course a relationship between trade surplus(deficit) and fiscal surplus(deficit). If the domestic private sector is balan