The media furor about banker’s bonuses continues. However, monetary reform would effectively create a ‘people’s bonus’ of around £5,000 for every adult in the UK, at no cost to anyone. How is this possible? Surely there’s no such things as a ‘free lunch’?
Well, yes, there is such a thing as a free lunch. Peter Young of EconomicStability.org has written a fantastic article explaining exactly how we get this free lunch. You can read ‘The Mother of All Free Lunches‘ in full. The article relates to the situation in the US, so the following is the brief summary of the main points with the figures for the UK.
How big of a free lunch would the people of the UK get if we adopted monetary reform?
In 2008 the banks created just short of £200 billion, thanks to the fatally flawed design of fractional-reserve banking. This money was created by increasing the total level of debt from the public (and government) to the banks.
All this money has been spent into the economy (probably staving off the second Great Depression). In normal times, about 60% of the money that banks create is created through mortgages, and is therefore pumped in the housing market (and now you understand why we have just seen a huge bubble in the housing market).
What if, instead of pumping that money into the housing market and further increasing the debt burden of the UK population, we allowed the government to create it and spend it into the economy? What would that mean for the economy?
33% of Government Spending
Government spending over the last few years (excluding financial sector bailouts) has hovered around £600 billion. If the £200bn created by the banks in 2008 had been created by the government instead, taxes could have been reduced to allow you to keep an extra 10-14% of your income.
Alternatively, the money could have been spent in addition to normal tax revenue, allowing the government to spend an extra £200bn without raising taxes.
What Does £200bn Mean in the Context of Government Spending?
In 2008, government spend approximately £72 billion on the entire education system. They spent in the region of £90 billion on the National Health Service. They also spend £32 billion on interest on the national debt.
With that £200bn (which remember, doesn’t cost us anything at all to create), the government could wipe out about 30% of the national debt (not including the financial sector bailouts). As each UK adult currently pays around £700 in tax each year simply to cover interest on the national debt, this is a costless way to reduce your tax bill by £230 next year, £430 the year after, and £700 for every year that follows. In other words, the average disposable income would have just been increased by around 1% permanently, which is significant considering that the average annual pay rise rarely hits 3%.
In 3-5 years, we could have cleared the national debt and be saving every UK tax payer £700 per year.
After the three years, we could then use this £200 billion per annum of newly created money to maintain government services at the current level whilst reducing taxes by 33%. By a very rough estimate, this would allow each working adult to keep an average of £3,900 more of his or her own income.
The Current System is Insane
The only reason that the media and politicians are not up in arms about the current monetary system is that they a) don’t know about it, or b) don’t understand it. This is something we need to change.
In what way is it sane for the government to concede the power to create new money to a small group of profit-making companies, and confer the benefit (the ‘free lunch’) upon the small group of people who work in high-street banking or own shares in banks?
What This Really Means For You
The impact of the current banking system is this (assuming you are on a salary of £20k per annum):
- You must hand over an extra £2-3,000 of your earnings to pay the mortgage (since house prices are around 3 times greater than they should naturally be)
- You must hand over an extra £720 to the government to cover interest on the national debt
- You must pay £3,000 extra in tax each year because the government has handed over the keys to the ‘printing press’ to a small group of private companies.
So, if you want that free lunch, and you want to reclaim around £6,720 of your annual income for your own use, you need monetary reform.
I encourage you to read Pete Young’s article ‘The Mother of All Free Lunches‘ in full.