"DEBT" from PositiveMoney at: http://www.positivemoney.org/issues/debt/
“Most of money in the UK is created by banks when they make loans. The only way to get extra money into the economy is to borrow it from banks, leaving us all trapped under a mountain of personal debt and mortgages.”
- Banks create new money when people go into debt. When you take out a loan, new money is created. As people borrow more, more new money comes into the economy. All the extra spending this newly created money funds gives people the impression the economy is doing well, which encourages them to borrow even more. As the debt goes up, so does the amount of money.
- For every pound of money, there’s a pound of debt Because banks create money when people borrow, for every pound of money in the economy there will be a pound of debt. If there’s £100 in your bank account, someone else must be £100 in debt. Across the whole economy there will be as much debt as money.
- If we want more money in the economy, we have to go further into debt
If we need to get more money into the economy – for example, during a recession – then we have to go further into debt to the banks. This is why the government is desperate to get banks lending again: if banks start lending more, they’ll create more new money in the process, and the people who borrowed will spend this new money.
But if the financial crisis was caused by people having too much debt, how can the solution be for people to take on more debt?
- If we try to pay off debt, then money disappears.
When you pay down your debts, the money that leaves your bank account doesn’t go to anyone else – it just disappears. This is because loan repayments are just the opposite process to money creation: banks create money when they make new loans, and effectively ‘destroy’ money when they repay loans.
So when lots of people try to pay down their debts at the same time, money disappears from the economy. As a result of there being less money and less new lending spending slows down. When this happens, it’s like draining the oil from the engine of a car: pretty soon, everything stops working.
This means that it’s almost impossible to reduce our debts without causing a recession. And you personally can only pay off your debts using money that was created when someone else went into debt. This creates a debt trap, where over time the level of personal debt in the economy has to keep growing.
"Why are House Prices So High?" from PositiveMoney at: http://www.positivemoney.org/issues/house-prices/
Many of us were told that house prices are so high because there are too many people and not enough houses. While this is true, house prices have also been pushed up by the hundreds of billions of pounds of new money that banks created in the years before the financial crisis.
- Banks created hundreds of billions of pounds and put it into property
In the ten years up to the start of the financial crisis, house prices tripled. Many people think this is because there were not enough houses around, but that is only part of the picture. A major cause of the rise was that banks have the ability to create money every time they make a loan. During the period in question the amount of money banks created through mortgage lending more than quadrupled! This lending was a major driver of the massive increase in house prices.
- House prices rise faster than wages
House prices rise much faster than wages, which means that houses become less and less affordable. Anyone who didn’t already own a house before the bubble started growing ends up giving up more and more of their salary simply to pay for a place to live. And it’s not just house buyers who are affected: pretty soon rents go up too, including in social housing.
This increase in prices led to a massive increase in the amount of money that first time buyers spent on mortgage repayments. For example, while in 1996 the amount of take home salary that a first time buyer would spend on their mortgage was 17.5%, by 2008 this had risen to 49.3%. In London the figures are even more shocking, rising from 22.2% of take home pay spent on their mortgage in 1997 to 66.6% in 2008.
- House price bubbles benefit almost no-one
Asset price bubbles and the speculative behaviour associated with them tend to cause financial crises, which lead to lower growth, higher unemployment and higher government debt. High house prices also act as a mechanism for transferring wealth from the young to the old, from the poor to the rich, and from those that don’t own their own home to those that do. Even those with housing don’t benefit massively from higher house prices – after all, we all need somewhere to live, and anyone selling their home will find that on average other house prices will have risen by the same amount, leaving them no better off. In reality, only the banks and those with many properties benefit from high house prices: high prices mean that people will have to take out larger mortgages for longer periods of time, which means more money in interest payments for the banks.
- The system distributes money from the bottom 90% to the top 10%
Because 97% of the money in the UK is created by banks, someone must pay interest on nearly every pound in the UK. The bottom 90% of the UK pays more interest to banks than they ever receive from them, which results in a redistribution of income from the bottom 90% of the population to the top 10%. Collectively we pay £165m every day in interest on personal loans alone (not including mortgages), and a total of £213bn a year in interest on all our debts.
Relative distribution of wealth drain from banking sector
- It transfers money from the real economy to the banks
Businesses are also in a similar situation. The ‘real’ (non-financial), productive economy needs money to function, but because all money is created as debt, that sector also has to pay interest to the banks in order to function. This means that the real-economy businesses - shops, offices, factories etc – end up subsidising the banking sector. The more private debt in the economy, the more money is sucked out of the real economy and into the financial sector.
- It transfers money from the rest of the UK to the City of London
Banks pay their staff out of their profits, which in large part comes from the interest they charge on loans. Because most of the high earning bank staff work in the City of London, this results in a geographic transfer of wealth from the UK to those working in the City of London.
- The instability that the system causes means that temporary and low-paid jobs are insecure
When banks cause a financial crisis the subsequent recession leads to an increase in unemployment. It tends to be low-paid and temporary contract workers who are the first to get made redundant, so that instability in the economy has a bigger effect on those on low incomes with insecure jobs.
- High house prices increase inequality
When house prices are pushed up by banks creating money, those on low incomes suffer the most – they won’t be able to get a mortgage big enough to buy a house, so they won’t benefit from the higher prices. Younger people also lose out, as the cost of buying their first house swallows an ever larger amount of their income. Meanwhile, those who can get access to mortgages can buy multiple houses and thus benefit from the inflation in asset prices. In large part these people tend to be older and wealthier. This all increases inequality across different income groups and between the young and old.
"Inequality" from PositiveMoney at: http://www.positivemoney.org/issues/inequality/
Because almost all of our money is ‘on loan’ from banks, someone has to pay interest on nearly every pound in the UK. This interest redistributes money from the bottom 90% of the population to the very top 10%. Meanwhile, inflated house prices and financial instability all lead to a growing gap between the poor and the rich.