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The monetary system has to change: George Penaluna

July 16, 2013

Keighley’s George Penaluna of the Friend, started out with a business degree, worked in financial services marketing, in the Stock Exchange, Barclays Bank and then the Ecology Building Society. He writes:

The Fox Report on borrowing highlights the tragic personal and societal problems caused by excessive borrowing. As Patrick Chalmers reminds us, ninety-seven per cent of the money in circulation was created by commercial banks lending it into existence in the form of credit.

Under the current system, if the levels of borrowing and debt in the economy are reduced an absolute consequence is that there will be less money in the economy.

The coalition government, with misplaced confidence, asserted that lower interest rates would stimulate private businesses to grow, so creating new jobs to replace the

ones the government was taking away by cutting public spending. This growth hasn’t happened.

As the coalition government seems exclusively concerned with reducing the deficit and cutting government debt, this causes a reduction in the amount of money in the economy, which causes economic slowdown and usually a recession.

In order to mitigate against this, the chancellor is working very hard to compensate for his reduction of money in the economy by artificially creating more money (the policy of ‘quantitative easing’) and by encouraging individuals and companies to borrow more themselves (thus replacing government debt with private debt).

Quantitative easing, because it is based on manipulating the government bond market and reducing the returns for investors in government bonds, has also caused annuity rates to fall significantly for those taking their pensions recently.

The objective of encouraging more private debt is being achieved through economic policies such as ‘Funding for Lending’, which has also contributed to the fall in savings interest rates, and ‘Help to Buy’, which will help to push house prices up even further.

Without the growth in the economy that would have been generated by companies expanding, and with the government trying to cut public spending, money got even tighter. Some of those with little or no income saw their safety nets removed and resorted to unsecured loans, credit card debt and payday lenders to tide them over.

Those with more income (and usually secure jobs) have been able to pay-off more of their mortgages with the help of low interest rates, thus removing more money from the economy, which then needs to be replaced by somebody else borrowing… a very vicious circle.

Is there a solution? Positive Money suggests the abolition of the existing system of reserve banking, which is the creation of money in the form of debt by commercial lenders, to be replaced by new methods of money creation, such as the government ‘spending’ money into the economy through infrastructure and social projects. Their director, Ben Dyson, uses the example of quantitative easing, where the Bank of England created money and pushed it into the financial economy.

If the money created by quantitative easing had been spent into the real economy instead (by the government buying goods and services), it would have achieved more positive effects without creating more debt.

The wholesale transformation of the way money is created, as proposed by Positive Money, sounds very appealing. But, it seems to be based on starting with a clean sheet of paper and living in an ideal world. In reality, we have a very messy sheet of paper and a pretty imperfect world.

The system does need reform. For every pound in your pocket, ninety-seven pence is someone else’s debt on which they are having to pay interest. This results in the terrible situations described by Deborah Padfield. It has to change.

 

Originally published in the Friend (www.thefriend.org). The Fox Report is the investigative arm of the Friend. It is funded by the Joseph Rowntree Charitable Trust and co-edited by Judy Kirby and Ian Kirk-Smith.

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