Wednesday, 10 December 2014
The World on the Verge of Another Financial Crisis
The emblem of the U.S. Treasury Department in Washington, D.C. (Mladen Antonov/AFP/Getty Images)
Paul Moore came to broad public attention as a whistleblower during the banking crisis of late 2008. Four years before, he had been dismissed from his position as head of HBOS (Halifax Bank of Scotland) financial risk management after warning the bank—the largest mortgage bank in the U.K. at the time—that it was taking excessive risks.
Paul originally blew his “risk-alert” whistle because he saw that HBOS was in danger of collapse. It was ultimately forced into a merger with RBS (Royal Bank of Scotland) in 2008, which in turn was itself bailed out by a multi-billion-pound infusion of capital from the U.K. Treasury.
During a trip to London last October I asked Paul if he believed anything had changed in terms of financial risk since the 2008 crisis. He answered unequivocally no, explaining that, since the 2008 crisis, the debt risk both in the U.K. and the U.S. has only grown worse.
Let me explain.
Most people don’t comprehend that we are living in a protracted debt crisis with no possible solution, because the majority of money (about 98 per cent) in today’s economies in the U.S., the U.K., Canada and Europe is debt-money, primarily generated by private banks when they issue loans.
The problem is that the sum total of these debts—which can never be repaid no matter how much the economy grows—has grown exponentially since the end of the Second World War. In the U.S., the total amount of debt outstanding is nearing $60 trillion.
There are only two ways out of this dead-end debt street: a catastrophic global financial collapse or a courageous act declaring an international debt jubilee, that is, the forgiveness of all outstanding debts and the rebuilding of a global money system not based on debt.
The problem with our debt-based money system is that debt accumulates over time through the effect of compounding interest on ever-larger amounts of outstanding debts. In the U.S., the amount of total outstanding debt has been doubling roughly every seven years since the 1950s. In 1950, the amount of total outstanding debt was $425 billion ($2,792 per capita); by the end of 2012 it had reached $58.8 trillion ($187,371 per capita). This represents a whopping 13,731 per cent increase over 62 years. In contrast, the U.S. economy only grew 5,142 per cent over the same period.
The debt situation in Canada is not much better. In the second quarter of 2014, total debts outstanding (personal, government, business, financial institutions) in Canada were $5.64 trillion or $158,695 per capita. Equifax Canada recently released new figures that show Canadians are more in debt than ever—a staggering $1.513 trillion in personal debts. Excluding mortgages, average debt held by Canadians has increased 2.7 per cent to $20,891.
What’s worse is that this growing mountain of debt demands increasingly higher interest payments to service the previous outstanding debts. Interest payments suck life-energy from the economy by taking up a significant portion of every dollar we make. I’ve estimated that interest payments on the total amount of U.S. debt of $58 trillion is approximately $0.36 on every dollar American’s spend on goods and services in the economy. This means that the average American will spend about a third of their working life working just to repay interest payments on debt that is fundamentally unrepayable.
At the heart of this crisis is the level of ignorance amongst the vast majority of people about the nature of money. Most people assume that the government produces the majority of our money supply by printing money. Not true. Private chartered banks create 98 percent of the money supply in the U.S., Canada, and the U.K.
Private banks use a money-creation process called “fractional reserve banking” to issue brand new money (at virtually no cost) in the form of debt (loans) many times greater than funds on deposit. For every one dollar on deposit at a bank, roughly $100 dollars (or more in Canada) of brand-new debt money is created. Banks literally have a monopoly on the creation of money.
Unfortunately, no one has a clue what to do next about the current situation or how to defuse the ticking debt time bomb.
Mark Anielski is a Canadian economist and author of The Economics of Happiness: Building Genuine Wealth. This article previously published on TroyMedia.com.