Saturday, 21 February 2015



In the light of the negotiations between Greece and the EuroGroup, it is time to discuss some of the implications for money creation.

There are two forms of ‘money’.
First, ‘cash’,  which is printed and minted by governments.
In January 2015 it was calculated that the total global cash in circulation  was  
$1.39 trillion, which is 3% of the total ‘money in use.

For a long time, Governments and their Central Banks have been allowed by law to create money as cash [coins and notes]. For some reason, this is called  QE today: quantitive easing. They distribute cash  to local banks. The value of  the cash  is  measured  in terms of the amounts in circulation [e.g. too much/inflation; too little/deflation].  In this way governments  control the supply of  ‘cash’, and the value of the currency.
No-one else is allowed to print money nor mint coins.Those who do so  are prosecuted  for forgery and  imprisoned. Today, the 3% cash in circulation  is to be found in our wallets and purses; even in the mattress : in ATMs, pay packets, and shops. Banks do promise to pay cash to us on demand via an ATM or cash clerk.
Your local bank will ask the Central Bank for cash by daily/weekly payments. The Central Bank will authorise the creation of notes, and coins.The amount of money as cash in circulation varies from country to country.
Another key source of cash is Gross  Domestic Product: the income from sale of products by trading All countries are involved in manufacturing or  farming, trading products,  buying and selling and generating profit. They depend upon their GDP to provide the cash to pay their debts, as well as to create surpluses with which to pay for government and corporate projects. January 2015 the World Bank/CIA reports that $75.6 trillion is the global GDP.

Second, there is ‘digital’ money which is created out of nothing by  loans from banks/mortgages/building societies/insurance groups/savings and loan companies..  Today, of  all the monies available to bankers and fund managers,97% is digital/virtual; 3% cash/coins/notes.
The  ‘numbers’  traded every day on  the markets are many trillions in loans/in commodities/ currency exchange/ stock market dealings/ derivatives/ credit default swaps. It is estimated that more than $700 trillion is traded. every day as digital money. This may be a
$ quadrillion on some days.

During the 1980’s many banks across the world became deregulated, and  devised methods to create new money. Today, financial enterprises operate Fractional Reserve Banking which literally means that bank deposits need only be a fraction of the monies lent to customers.For example, a  cash deposit of $1000 can be ‘leveraged’ or multiplied by 100 to generate a loan of  $100,000, and the loan deposit of 100,000 converted into $1,000,000; to form the basis of a total loan of $100,000,000!
Fractional Reserve Banking enables corporations/companies/governments  to borrow millions  to finance their major projects. The loan creates new money out of nothing. The debt is a contract to repay the loan money over a specific number of years.

Fractional Reserve Banking is at the core of modern capitalism,  and acts as the driver  for profit and growth. It enables banks to create digital money out of nothing.  It enables banks to create ‘money’, free of the constraints of the Central Bank. Digital money does not depend upon the cash deposits in banks. Digital money can be manipulated, created, and  transferred at the press of a  keyboard. Creditors and debtors/ customers, assume that this virtual money,  will convert into cash.when required These assumptions lead banks to charge fees as if the numbers were cash.  Fractional Reserve Banking is designed to offer loans and  create new money out of nothing.
What is perplexing is that any $100 million as a loan  does not exist as cash in the bank. The original $1000  cash may be in a deposit account. But the new money ‘exists’ in a ledger and on a computer screen and hard drive as  a statement of account.
It is virtual. It is digital. This money is debt.  It will become  cash in the future  when repayments are made; and when  it is converted by the Central Bank.
We have to acknowledge that the E345 billion given to Greece as a bailout loan was created out of nothing. And only exists as virtual entries in the debtors account. No cash was transferred from Eurozone accounts to the Bank of Greece.   Today, the concept of ‘money’ is best regarded  as a set of numbers not a pack of notes nor a bag of coins.
We have to accept that most customers of financial enterprises are convinced that all dealings are ‘in cash’  But  Banks are lending/spending billions . that exist in statements as numbers, not hard cash. The amounts available [liquidity] are supervised by the Central Banks.
The next step in this procedure of  loans is that  bank profits are generated from the interest paid on the loans.The bigger the loan, the greater the interest.

The amount of digital money lent has little to do with the amount of cash in circulation.  Bankers and financiers and traders manipulate money numbers on a screen,  but their electronic dealings take place without regard for the consequences of their trading in numbers for cash/ stock/ commodities markets across the world.

  Even though governments have the right to print money to meet their costs,most use Central Banks to organize and supervise their monies, to avoid inflation and deflation.  Governments create  cash  but their demands are far greater and so  most countries are in debt. The current disputes about Greek debt are framed as if Greece was the only country in debt.
National debts can be as high as $18 trillion, as in the USA, with interest payments of $500 billion per year;  the UK, with 1.2 trillion GBP debts,has to meet 43 billion GBP annual interest. Other countries have large debts: Belgium $1.3 trillion; Japan, $1.5 trillion; France $1.7 trillion;China $1.9trillion; Ireland $1.8 trillion; Italy $2.2 trillion; Germany $2 trillion; Russia $76 billion. In order to pay their current debts the governments choose to contract  more debts to pay debts. and  to reconcile the credits and the debits; the assets and income with the loans and the interest payments.
January 2015 the BBC reported that the total global debt is $199 trillion: all of which is digital money.
. One of the rules of the ‘money’ game is that debts are paid on time and in full. If this is not possible, debts are to be covered by more debts  loans by more loans, interest payments by more interest.] Another rule is that the debtor is obliged to reduce costs, and increase income, so as to balance the books and repay the debts. The debtor has to be supervised, inspected and not to br trusted!

We have been considering  a situation in which the principal sums on loan are digital, and created out of nothing. The lender has made entries on a balance sheet, and charges the debtor for the completion of the contract. The profits of any financial enterprise are linked to the interest charged on loans.    For example, if a government or a corporation wants to borrow E100 million for 20 years at 7.5%,  the compound interest will be E424.7 million. The total to be repaid  will be E524.7 million. The borrower has to pay back 4.24 times the original loan.The total to be repaid  on global debt would be $1043 trillion or $1.04 quadrillion.
A country like Greece may borrow E345 billion for 20 years @ 7.5%, and be required to pay back E1.46 trillion. The current disputes are claiming that these totals are excessive. The new Greek government is challenging this system claiming that the interest charged is intended to benefit the creditor and punish the debtor. The bailout loans, that were supposed to rescue Greece, will bankrupt the country and destroy the government. The bailout monies could have been.GRANT AID with a low interest rate within a system of simple interest.
Recently, the USA was at the brink of bankruptcy when the the Treasury was not able to pay the interest of $500 billion on a national debt of $18 trillion. This reminds us that most  of the 195 countries in the world are in debt and need their GDP, profits and growth to pay their debts!
It would be fairer to adopt a system of simple interest,  whereby the interest is charged on the original principal
 The payment of interest would not be seen as a problem for a country such as Germany, USA, or China whose economy was growing by +5%/7%/10% a year. But for Greece, and many other poor countries across the world, whose economies are shrinking by -7% per year, these payments have become impossible.

In the years following the credit crunch of 2008/9 when some of the biggest banks in the world went bankrupt, and many countries went into recession, and the global financial system almost collapsed, some alternative strategies are necessary so as to ease the economic pressures on poor countries: that is, most countries in the world..One solution could be to lower the compound interest rates charged. .Another solution would be to calculate the simple interest on loans  The interest payable on E100,000,000 @1% simple interest for 20 years would be E20 million. The total repayable would be E120 million.These totals are significantly less than E424 million repayable on a loan at 7.5 %. And all represent significant profits for the creditors on transactions that are trading virtual sums created and deleted at the push of a button.These transactions are politically significant in circumstances when a government has to raise taxes and to cut all social services in order to repay the interest on a loan; or when a government, like the USA, has borrowed so much that it can only afford to pay the annual interest, and therefore has to sell off national assets so as to remain solvent. Governments, such as Greece or Ireland or Portugal or Iceland or Spain or Italy, may have repaid the principal of their loans, but cannot pay the interest. This interest could be four times the principal! Ireland with a national debt of $1.8trillion is facing interest payments of $7.2 trillion; or Italy, $8.8 trillion interest. These are all inconceivable amounts of money: particularly for countriesthat are barely covering their costs.  Should any government be permitted to borrow more than it can ever possibly repay? Should any government be permitted to borrow sums at interest rates that will lead to bankruptcy? Should funding agencies be able to charge punitive interest rates? Should creditors be able to lend money to clients who cannot pay their debts? Should interest rates be variable according to the circumstances of the debtor?  Should interest rates be capped for everyone, so as to limit the profits of the creditors? Would it be better if all loans had a fixed fee? How could a regulator stop the debtors and the creditors from taking advantage of any preferential contracts? This leads us to another solution: the necessity for oversight and regulation. Which organization could be given authority to supervise, regulate, and control the financial affairs of individuals, corporations, countries? The WorldBank, the IMF, the United Nations, the EU, the AU? among others.It is not surprising that many clients, corporations or countries, become unable to repay the sum in total and default.It is clear that none of the funding agencies and their traders care about the circumstances of the debtors. All they are interested in is the generation of profits and bonuses. It is none of their business that many countries like those in Africa: Namibia, Niger, Sudan, Somalia, Congo,need loans to pay for foods to feed their starving peoples. The countries want grant-aid, but are driven to loans.that will bankrupt them.. It must be admitted that none of this would matter, because many countries would be unable to raise enough cash to provide collateral for any loans.So we are faced by a dilemma. How to structure and regulate a fractional reserve system that does not bankrupt those countries that try to borrow money? How to design a full reserve system which is more flexible in demands for collateral and assets? On reflection, it seems that banking systems that are intended to benefit the banksters and fundsters, and sacrifice the debtors, are not socially nor morally justified. They protect the interests of the 1% and control the savings and investments across the world. They are only interested in peoples and governments who want to borrow money, and pay maximum interest. One can conclude, that any banking system that is totally dependent upon the generation of profits from the interest on loans, is unacceptable. As we have seen, the calculation of the interest due from poor debtor countries leads to their bankruptcy. Such loans and compound interest are not intended to alleviate global poverty. They are intended to maximize the profits and bonuses of the banksters