Modern Day Moonrakers - Can Britain and Ireland ever recover from the debt crisis?
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The Financial Crisis - The Invisible Debt
I watched a TV programme last week entitled 'Britain's Trillion Pound Horror Story'. It set out to explain to the public exactly how much money the British Government has over-spent on our behalf, and what we might do about it. Initially I was delighted that someone had come up with such an entertaining and engaging way to get this serious message across. My pleasure soon turned to disappointment, however, when the programme makers claimed to have all the answers and yet so clearly didn't.
Whatever way you cut it, a trillion pounds is a fabulous amount of money, but compared to what is owed by the USA, or even by some of our European neighbours, it is only a small slice of an enormous debt cake, that we in the West have cooked up out of invisible ingredients.
Why is this debt invisible?
This debt is invisible because it is comprised of money that has never existed. Every time we borrow money, then pay back interest, we are printing invisible money. We are growing the money supply. That is true for you and I, and it is also true for Governments. Think about it for a moment. If there is, say, £100 (or $100, or 100 euros) in the economy, and we borrow £100 more, then repay it out of our existing pot, only with 10% interest, then suddenly we have £110 in the economy. Problem is that only £100 of that is backed by currency. The rest is invisible. It is a figure on a computer, stored somewhere in the ether.
The problem we face today has been caused by an accumulation of invisible money. Our little pot of wealth is much the same size as it always was, but the huge burden of our invisible debt has become like a mighty chasm. Even if we threw in every bit of currency ever printed, we couldn't hope to match the debt penny for penny and cent for cent.
So maybe it is a nonsense to even try.
Can we 'stimulate' our way out of recession?
History tells us that throwing money into the economy to jump start spending can actually work. When I think of this scenario I get an image of a medical team attempting to resucitate a dying man. Of course, if history says this can work, then it must be so. But what if the disease has progressed too far? What if chasing debt with more debt is the financial equivalent of throwing the baby out with the bathwater? On an individual basis this solution could only work if we were each to spend money on items that would enhance our wealth generation. If we bought a new suit to impress a potential employer, or labour-saving tools to improve our productivity, or invested in transport so that we could work further afield, then maybe you could argue that borrowing money has stimulated our individual wealth. But mostly we don't do that. Mostly we borrow to pay for holidays, nice cars, or bigger homes. Some of us simply borrow to continue putting food on the table and a roof over our heads.
And our governments, right now, are in an even worse fix than we are. Because of interest payments, they are effectively borrowing even more cash just to stand still. The debts are growing. Not shrinking.
Can we 'tighten our belts' and sort it out that way?
Assuming that what I have said is true, and that we are attempting to pay back an invisible debt with real money, I would suggest that austerity alone is unlikely to pull us back from the brink. Chancellor George Osborne has trimmed the British economy with all the enthusiasm of a gardener wielding his sharpest pruning shears, but cutting the dead wood and pulling up the weeds might not be enough to save us from the same fate as Ireland and Greece. As individuals, the logical route out of debt is either to earn more or spend less. Our government is attempting the 'spend less' route, but I worry that this is merely shutting the stable door after the horse has bolted. What we need is a massive investment in our manufacturing and agricultural base. If we make nothing, then we have nothing to sell. If we grow little, then we must buy food from abroad. We have become consumers first and foremost.
The Western nations are in a big mess, and only a massive restructuring of the World's finances can spare future generations from lives of abject poverty and misery. We live on a wonderful planet where all our needs are capable of being met purely from sustainable, natural resources, but the greed and recklessness of successive generations of politicians bankers and businessmen, has put the future in jeopardy.
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Britain's Trillion Pound Horror Story
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Hi Amanda - you're right, the programme doesn't provide any answers. Your point about interest is exactly right too. Debt interest is the killer, inflating the economy and devaluing the currency. I think the West in general has completely lost the plot, and is only now starting to suffer consequences. But it's getting worse before it gets better, if ever.
There is so much mystery over this borrowing and lending on an internatiinal scale? Who do we owe it all to (set to become 2 trillion I believe), and how come we can borrow more as we need it - from whom? The Chinese? I wonder sometimes if I've haven't dreamed the whole sodding mess. Good article Amanda...Bob
Hi attemptedhumour. Like you, I remember stickers telling us to 'Buy British, buy best!' and I remember Marks & Spencers proudly boasting that the majority of their products were British made. I bet they couldn't say that now! I have friends who refuse to shop in the local farmer's market because they might pay a little over the odds for local produce. We are sleep-walking into disaster, and we need to wake up.
Hi Paraglider, I have to thank Richard Posner for introducing me to the notion that accumulated interest payments are causing our problems. He is a true visionary, and I appreciate all I've learned from reading his articles.
The West has indeed lost the plot, but things can change, though they're unlikely to without a good deal more pain all round.
Hi Bob, I believe the answer, incredible as it may seem, is that we actually owe the money to the banks, though how that works is all beyond me. At the end of the day, you cannot get blood out of a stone, and if the West becomes completely bankrupt, all other economies will fall too, as there will be no-one left to sell to!
Nicely put. Merely stimulating the economy with money is not going to work unless the money is put to good use in generating more money in the future. Such a simple logical idea. Now, can we put it in simpler terms so that the governments can understand it? :)
Does make you wonder if it is all set still to come crashing down, especially in the States. Just imagine the devastation with respect to the value of money. Hard earned savings, pensions, investments and even property would be pretty much worthless. Nothing would hold any value because demand would vanish and we could find ourselves back to a system of bartering and skill swapping again, just like it was before money was invented. Surely not?
Great hub, Amanda. Lately, an intellectual giant commented on my hub on Who Are America's Creditors, stating the government doesn't have to borrow to spend, it can simply print more money. And we shouldn't worry, because the US will never be bankrupt. Forget the fact it already is. I wrote a hub on world debt called hey, big spender. Most countries are in dire straits, debt wise.
The UK's debt actually sits at 1,669,195,616,438 at 10:39 AM, November 21, 2010, or 27,000 per person and 76.1% of GDP. Under no stretch of the imagination would I ever consider this a small slice of the world debt cake.
You are also correct when you state cutting spending will not solve the problem. In the US it requires the entire annual tax revenues to service the interest on existing debt, which means, unless govt is willing to shut down and spend absolutely nothing, borrowing will be necessary -- in one form or another. (Despite the rather novel idea that just printing more money will save us -- !!!!)
Thanks Amanda for an interesting read for my morning coffee. Lynda
Hi wandererh, I'm neither an economist, nor a mathematician, so this had to be simple enough for even me to understand. Making it any simpler would be quite a challenge! LOL!
Hi Brian, I don't really see how things will improve without some really radical action. I don't see society reverting to a barter system, but alternative currencies are flourishing world-wide, so maybe people are already hedging their bets. If the whole international money system collapses people who are cash rich and property poor possibly stand to lose the most. Hence the rush to invest in gold I suppose.
Hi Lynda, you obviously have a far better head for these things than I do, but even I can understand that there would be absolutely no point in printing more money. The very act of borrowing money on an interest carrying basis, is already the equivalent of doing so, and the more money there is sloshing around in the economy, the less each dollar bill will be worth. At some point the world leaders will be obliged to come together and address this issue collectively, and I shudder to contemplate what will come out of that meeting.
Thanks for commenting Lynda, it's always good to see you.
Greece, Ireland, which country will be the next? Only one thing is sure - the last one will switch off the lights. There is no way to stop the rot, sooner or later the whole financial system will collapse - an end with horror! The slaves of this system, the politicians, are not able to make changes, there is only one way out - the power of the people! But there is still a long way to go as long as the people are manipulated by this outdated financial/political system.
Thank you for this hub!
Hi nextstopjupiter, I believe you're right, the financial/political system needs one radical overhaul, and only the people can bring this change about. We're living in interesting times, and they're all set to become even more interesting.
That’s what we get for trying to borrow our way out of debt, and for our ideological naval-gazing, as the asset strippers helped themselves to our industrial inheritance. That’s history now.
They say money doesn’t grow on trees - but food does, and trees can give us shelter and warmth. Yet, whoever owns the money also owns the trees - until we learn to work together. That’s the key.
A very interesting hub, and certainly more balanced than that dodgy programme. By the way, I hope it wasn’t a BBC programme, although I wouldn’t be surprised nowadays.
Hi Amanda. Every country is in the same boat. The only way out is to declare all international banks and the debts they hold to be illegal and then dissolved. Too bad "they" have enough money to make only the laws "they" want.
I think the best thing we can do imagine one or two of "them" waking up and recognizing their rape of humanity.
I remember being told about the deficit and debt in grade 6. The teacher explained how we would someday all have to pay 100% of our earnings as tax to pay the deficit...and that still wouldn't be enough. So. If everybody knows this monetary system is destined for ruin...why do we still have it?
Hi amillar, it was a Channel4 programme, and it has now been added to Youtube in it's entirety. Did you see it when it was on TV? I was recommended to watch it on catch-up by a friend, and I started off by being quite impressed, but finished off by being quite angry. i found it very depressing that a competent film maker could use such a high profile vehicle to get across his own, ill-thought out arguments. The notion that reducing taxes to 15% would somehow solve everything is naive to say the least.
The more I think about the debt crisis, the more I believe that there is no conventional solution. Something radical must ultimately be proposed, and I can't wait to see what our leaders come up with.
Hi pjk_artist, there used to be a hubber known as Cold War Baby who wrote very extensively on this subject. Unfortunately he no longer posts on here, but I well remember one particular article he wrote about the effect that compound interest was having on the economy. His idea was that interest should never be charged in order that the money supply should remain fairly constant. This way everyone could always balance their budgets, and debts would only consist of real currency. I'm no expert on these matters so I don't know how that would work, but anyone with a reasonable grasp of basic maths can see that the current system is fatally flawed.
I have not idea about the economy as such but the future looks very bleak. Your brilliantly written hub was an eye opener because so far the Conservatives only talk about billions. Thank you for a clearer picture.
Hi Hello, hello. The future looks bleak at present, but I feel sure that things will turn around in a completely unexpected way. With so much pressure on the European member states, I anticipate some radical activity in Brussels at the very least.
Hi Amanda - yes, you're right - without pegging currency to something of value and without focussing on the core sectors, I doubt if any country can survive without problems. China and India have huge problems as far as corruption and poverty go - but we also have our core sector competencies in place and that's one of the main reasons perhaps that our economies are doing well.
Hi Shalini, China and India have a far lower cost of living than we do in the West, and consequently wages can be correspondingly lower, yet still meet peoples needs. This has given India and China the competitive edge over Western industry, and in the global market-place, it has become common-place to outsource manufacturing and services abroad. This has brought wealth to fledgling economies, but it has wreked havoc with the established ones. Somewhere there has to be a balance, but there may be a lot of pain to go through before this is achieved.
The solution is so simple it's really almost laughable.
1862: By April $449,338,902 worth of President Lincoln's debt free money had been printed and distributed. He went on to state,
“We gave the people of this republic the greatest blessing they ever had, their own paper money to pay their own debts.”
The Times of London publishes the following statement,
"That government will furnish its own money without cost. It will pay off debts and be without a debt. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of civilized governments of the world. The brains and the wealth of all countries will go to North America. That government must be destroyed or it will destroy every monarchy on the globe."
“The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”
Abraham Lincoln
Hi Richard,
It's very good to have your input here, as you are really the inspiration behind this hub. I well remember your hub about usury and I wish more people had had the chance to read it!
Presumably printing money was a good solution for Lincoln, but would it work in the current world situation? Something needs to be done, and soon!
Hi Amanda and thanks for the kind words.
As long as fiat money is issued debt free it works fine. The Roman Empire was built using debt free fiat money. It didn't begin its decline until the private sector took control of the currency and commodified it.
The money we have now is fiat, that's true, but it is issued with interest due from the moment it's printed. To make matters worse, intentionally, no currency is ever printed for the purpose of paying the interest. Therefore the debt simply grows forever with no possibility of getting it paid, ever. That is the whole problem in a nutshell.
Hi Richard. It took me a while to understand your argument when I first read it a year or so ago. I thought that inflation took care of the interest and that things would somehow work themselves out, but I gradually got to grips with what you were saying. Of course it's all a numbers game, and there are ways to sort it out, but there has to be concensus amongst so many people that at this stage, it's very unlikely to happen.
I really enjoyed your article, it was very illuminating. I popped over here after I read your comment on my comment (A Good Day for Conspirisist Theories). I spent like ten minutes trying to respond, and accidently closed the window, and deleted it???. I'll try again after the sun goes down.
I hope Britain can pull through! Intrigued by your title 'Moonraker'?
Hi Les Trois Chenes, I really hope we can pull through too! The title 'Moonrakers' is based on the old story of villagers trying to rake the reflection of the moon from the village pond. It's probably a bit of an obscure reference, but it does seem to sum up what the Western governments are attempting to do, i.e. the impossible!
How are things in France BTW?
Fab Hub! Rated Up.
James.
Hi James, Thanks for stopping by and commenting.
Hi everyone,
I like the comment about we need to invest in making things again, but how do we put it simply for the politicians!! I find it incredible that the countries with the money make things and export them, but our so called elete don't get it! It's not rocket science!!
Hi Gary, I'm certain that our government know only too well that our manufacturing base needs urgent resussitation. The big problem right now, is treading the fine line between subsidising British Industry via attractive tax packages etc, and blatant protectionism.
Thanks for stopping by.
attemptedhumour Level 5 Commenter 18 months ago
We knew what the problem was back in the sixties with the 'I'm backing Britain campaign'. China, India, Korea etc have taken over our economies and we are all to blame for allowing it. When i want to buy tools for my business i have to order them in. Soon those companies won't be in business and our standard of living will keep dropping. My mate sells a product here in Oz. He took samples over to China of the Aussie Product and now he imports it at half the cost. Good for him but bad for the country in the long run. Good job we've got a few runs on the board.