Money As Debt: Our Insane Banking System Is Driving Us Off A Cliff

This interview with economist Steve Keen might be hard to follow in places because he talks so quickly but his central message is clear. The growth in private debt (mortgages, loans, credit cards, etc.) over the last 40 years has been more or less exponential, and conventional economic policies have no effective way of stopping the trend.

For those of you who are hazy about the meaning of exponential growth, the old chessboard and rice example shows how it works. Place one grain of rice on the first square of the board, two grains on the second square, four grains on the third square, eight on the fourth square, and so on, doubling the number of grains of rice on each successive square.

By the time you get the the sixteenth square (two rows of the board) you’ll have to find a way to pile 65,536 grains onto it. If you go much further you’ll soon run out of rice. By the time you get to the 64th square of the board you’ll need 18,446,744,073,709,551,615 grains of rice – around 500 billion tonnes of the stuff.

Now think of the squares on the chessboard as years, and the grains of rice as pounds sterling of private debt, and you’ll start to get a picture of what’s going on.

If you plot this type of growth on a graph with years along the bottom and debt up the side you get a curve that starts very shallow and rapidly gets steeper until it becomes almost vertical. That’s where we’re headed with private debt.

At some point the repayments on this debt (principal and interest) will become so big that they will overwhelm everything else, leaving us with a shortage of money to keep the productive economy working.

The productive economy is where all of the stuff is made and done that keeps us alive, secure and comfortable. It’s the only bit that really matters.

No-one knows how far away we are from being drowned by private debt repayments but the cliff edge is somewhere on the road ahead and we’re trundling towards it.  An increase in interest rates will be like putting the foot on the accelerator, getting us there sooner.


For those of you who live modestly, debt free, and think our problems can be solved by everyone following your sober example, think again. The only way that you can live without debt is by riding on the backs of others who are borrowing on your behalf.

Almost all of the money that we use (c.97%) was created as debt by the banks. Without debt there would be almost no money for anyone to earn or spend. All of us are participants in the debt crisis because we’re all using money that was created as debt, all of the time. Like it or not, that’s how our system works.

And while we’re on the subject of self-delusion, those of you who are obsessed by government debt need to watch the interview. Steve Keen describes government debt as a sticking plaster that’s covering the gaping wound of private debt. If you remove the plaster (because you don’t like government debt) the economy will bleed to death. 

Government debt represents (more or less) our combined savings, which pay for our pensions and such like. Interest payments on government debt are just another way of recycling money through the economy: taxes are used to pay interest on government debt which is used to pay pensioners, who spend it on stuff, which is taxed, and so on.

Getting back to the main point…

Conventional economics gives us two choices for dealing with this exponential increase in private debt:

1. We can keep borrowing so that the productive economy has enough money to thrive, which means the debt mountain will continue to grow, which means our repayments will grow until they overwhelm the rest of the economy. Borrowers will default on loans, houses will be repossessed, businesses will go bust, and banks will collapse. There will be widespread economic and social chaos.

2. We can stop borrowing and use any spare money we have to pay off our debts, which means we won’t be able to use that money in the productive economy, which means we’ll fall into a recession that’s deeper and longer than anything that we’ve ever seen before. Unemployment will rise, poverty will increase, houses will be repossessed, businesses will go bust, and banks will collapse. There will be widespread economic and social chaos.

So conventional economics has us cornered between the devil and the deep blue sea. Maybe it’s time to think of something else.

In the interview Steve Keen suggests that a debt jubilee is the best way to resolve the private debt crisis. By “jubilee” he means that everyone is given a chunk of new money (created by the Treasury) on condition that they use it to pay down any debt that they currently have (if they don’t have any debt they get to do what they like with the money).

If you’re thinking that printing money and handing it out willy-nilly will lead to rampant inflation then you haven’t yet got to grips with how bank-created money works. When bank loans are repaid the money disappears into the same thin air from whence it was originally created, so paying down debt is deflationary. Most of the money that’s created for a jubilee will simply disappear along with the debt.

It was common (I’m told) in ancient times for rulers to declare jubilees from time to time in order to prevent economies from being swamped by ever-increasing debt, so although the idea might sound radical it’s actually a tried and tested method of re-setting an economy so that the borrowing can begin all over again.

Steve’s debt jubilee could solve the immediate problem but it would do nothing to sort all of the other problems that are caused by allowing banks to create money as debt. There are better ways of fixing our dysfunctional economy than dishing out money for a debt jubilee.

The people behind the Positive Money campaign have come up with a set of proposals for reform of the banking system that will eliminate the problems associated with creating money as debt. You can find out what they’re suggesting here:

I’m 100% behind what the Positive Money people are proposing. Their reforms will stabilize the banking system and get rid of the absurd necessity for ever-increasing debt in a thriving economy. There is, however, a serious flaw in their plans.

Positive Money’s reforms will make it very safe to keep money in the bank at zero interest (100% safe at all times for any amount of money) and much less safe to invest money in order to get a return on it (all of the money that you give to the bank to invest on your behalf will be at risk).

This wouldn’t be a problem if we were dispassionate about money. Logically we would choose to invest our spare money and get some income from it rather than leave it lying in the bank doing nothing, but we’re not logical when it comes to money.

Money in the bank makes us feel wealthy, which we like. Giving money to someone to invest on our behalf with no guarantee that we’ll ever see it again makes us feel anxious, which we don’t like.

Under Positive Money’s reforms we will be very inclined to hoard our money in the bank which means that the productive economy will be starved of investment, which will make it difficult for our economy to prosper.

For an economy to thrive money must be available and mobile, not hoarded away where it can’t be used. With this in mind I have proposed in my book a mechanism that encourages us to keep our money working for us as individuals, and for the economy as a whole.

The mechanism acts like a negative interest rate, continuously shaving off a small proportion of all money that’s held anywhere in the economy. If that sounds like theft, fear not. The money that’s shaved off is collected and distributed in equal share at the start of every month to everyone in the country, on condition that it’s spent back into the economy before the end of the month.

The system is designed to ensure that there’s always a reliable flow of money from consumers to producers and back to consumers, which is exactly what a thriving economy needs.

It also eliminates a whole raft of benefits and the taxes that currently pay for them. The example that I discuss in the book makes most subsistence welfare benefits and tax credits obsolete, shrinking government spending by around 40%, which means we can abolish some of the taxes that discourage productive activity (e.g. VAT and National Insurance Contributions).

If you’re interested in finding out more about these ideas please read the book – Our Money – which is available at Amazon in paperback and eBook.

If you think that the impending private debt crisis is a figment of Steve Keen’s imagination, that people like me are scaremongering, and that things will sort themselves out like they always do, think about how angry you were with the banking system and the politicians that let it get so out of control that it almost crippled the world economy in 2007/08. Then consider that nothing, absolutely nothing has changed in the way that the banking system works.

Our money, the money on which we all rely to keep our lives safe and comfortable, is still being created as debt by the banks so that their directors and shareholders can get rich on the interest that we pay. And the only way that we, collectively, can pay the interest is by borrowing even more money from the banks. Insanity.

Since the credit crunch of 2008 the rate of private borrowing has decreased but the slow-down is temporary. Under the current system the only way for our economy to recover is for more money to become available for spending, which means private borrowing has to increase, which means that the exponential curve will get steeper and steeper until the next crisis hits us, or we go over the edge of the cliff.

Our system of money as debt is absolutely bonkers. We will never have a stable productive economy until we change the way in which money is created, and until we develop a mechanism that ensures a reliable cyclical flow of money through the whole economy.

Understanding how our financial system currently works, demanding an end to the insanity of it, and finding sensible ways to change it is the primary challenge of our age. We will never manage to tackle other stuff like poverty and sustainability while our economies are crippled by private debt and people live in fear of not being able to pay their bills.

Educate yourselves and then educate your political representatives so that we can take control of our money and make it work properly for everyone.

Or sit back and wait for your heart to rise into your mouth as we go trundling over the cliff.

8 thoughts on “Money As Debt: Our Insane Banking System Is Driving Us Off A Cliff

  1. Pingback: Russell Brand Ate My Hamster! | Views From The Boatshed

  2. Hi Malcolm,

    I might have more time and brain power to give you some feedback later, as I have had a long day and am retiring soon. Thank you for your insights and analyses.

    • I’ve just read your article “The Fallacy of Money as Debt” in which you claim that “Only governments have the ability to pay their debts by printing money, thus stealing everybody.”

      Banks create money as debt whenever they issue a loan. They appropriate some of this money as arrangement fees and interest payments – money that is routinely used to pay the banks own debts.

      Over the last 17 years UK banks have added more than £1.5 trillion pounds to the UK money supply in the form of debt. In the same period the UK government has added less than £0.044 trillion to the UK money supply. The banks are “thus stealing everybody” by 35 times the value of the government’s larceny.

  3. Pingback: Scottish Independence: Status Quo (Whatever You Want) | Views From The Boatshed

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