Banks, Debt and Inequality (plus "People's Quantitative Easing")

Speaker: Peter Verity, coordinator of the Sheffield Group

Peter explained that the talk was really in two parts -

• Banks, Debt and Inequality
• The talk started with an introduction about how money is created by private banks, illustrated by the video What is money?
• Debt - as long as we rely on bank credit for our money supply, we cannot avoid being heavily indebted to the banks. The speaker made a distinction between "Primary" debt (that is owed to the banks, backing the money supply), "Secondary" debt (relending pre-existing money), and the National debt. The main focus of the Positive Money campaign is the Primary debt.
• Inequality
• Income inequality is created by the interest we have to pay (£192m per day), which causes a transfer of wealth from the poor to the rich. Illustrated by a graph showing money flows between households and banks. The trend of income inequality (Gini coefficient) largely follows the ups and downs of the financial sector.
• Wealth inequality is caused by
• 77% of new money goes into asset inflation (including housing) making the rich richer. Only 13% supports the real economy
• Quantitative Easing largely benefitted the wealthy (bond holders), at the same time as the Government introduced austerity measures
• Finally, the Positive Money solution ("Sovereign Money") was explained with the aid of the video 3 simple changes 

• People's Quantitative Easing (PQE)
• This section of the talk was added to the advertised talk, as a result of the press and public interest in state-funding following the Labour leadership campaign.
• There were three topics
• what is PQE and how does it differ from "conventional" QE?
• common criticisms
• what it means for the Positive Money campaign

The slides of Peter's talk can be downloaded here > 150928 Peter - Banks Debt and Inequality - plus PQE.ppt

Discussion

Is the bank's profit just the interest or is it the principal as well? Where does it go, and where does it come from?

Only the interest is profit, and it goes to shareholders.  Banks have to create new money, in order for us to pay back the interest

Why do banks encourage us to save?

In reality - do they?  Surely they mainly encourage us to borrow!

Is it really a lie that the Government guarantees savers £85,000 if banks fail?

If this happened, where would the money come from - the government? it would be 'our' money which would be used to bail us out!

What is it about our culture that we are so heavily dependent on credit card borrowing, compared with the rest of Europe?

It could be because UK is so heavily dependent on financial services, as opposed to manufacturing.

Why don't banks just lend massive amounts to everyone who asks?

Because lending is a liability to the banks ... since the crash, they have become much more risk-averse.

Where would money come from in a Positive Money world?

An independent committee would decide.  But what it would be used for (eg infrastructure, tax cuts, etc) would be a political decision.

NB  House owners benefit from the current system mainly if they have more than one property.

What is the Positive Money attitude to gold bullion?

It's not money - it's just a commodity like any other.  Some people think we should return to the gold standard ... PM disagrees.

But gold has been used as money for many years.  It is both scarce and hoardable.  During WWII, when the rouble wasn't recognised, gold was used.  Gold is hard to extract, so does have a value - and it's kept its value. Money only works because people have confidence in it.

In the USA, during the sub-prime property debacle, banks decided to go bankrupt.  They didn't have to.

If the Government doesn't reform the money system, people should just create alternatives - eg bitcoin.

What about demurrage (money losing its value)?  This would stop people hoarding it!

inflation does the same thing. Some (left-leaning) economists think that the target should be 4% rather than 2%

Have banks always behaved as they do now, or was there a time when they did what we think they do (ie lending out deposits)?

It is possible the current practice had its roots with gold merchants, who started to use receipts for deposited gold as money, and worked out that not everyone wanted to collect the actual gold at the same time.

Not that long ago, most people were paid in cash - only the wealthy had bank accounts.

In around 1860, banks had to keep 20% in reserves, to protect against a 'run' on the banks.  Thatcher got rid of reserve ratios.

There has also been the rise of computers, and digital money.

When there was more cash in use, there used to be more seigniorage - indeed, enough to fund the NHS.

NB  Historically, both Lloyds & Barclays were originally Quaker organisations (with ethical principles)