David Cameron published an article yesterday on his LinkedIn page telling us how wonderful his Help To Buy scheme is.

What he doesn’t tell you is that Help To Buy is merely an extension of the asset inflation farce that was responsible for the recession, and it can only lead to more misery further down the road.

Here’s how it works…

When we take out a mortgage to buy a house the bank creates new money out of thin air and credits our account.

Some of this new money is retained by the bank as “arrangement fees”, so they’ve basically printed money and given it to themselves.

Some of the new money leaks into the economy via other fees (surveyors, estate agents, solicitors) and maybe a bit on home improvements or furniture.

The bulk of the new money goes to the seller of the house that we’re buying. Many of these sellers will be moving up a rung on the property ladder so the newly-created money will be used to lever even more new money in the form of a mortgage, which will get used as above. And so on. The money supply is inflated along with private debt.

Superficially this is good for the economy – money is flowing through people’s hands – but the debt has to be repaid. Where does the money come from for the mortgage repayments?

The principal was created when the loan was issued, so it can plausibly be recovered from the general economy bit by bit and repaid, at which point it disappears into the thin air from whence it came.

The interest, however, has to be paid out of money that’s already in the economy. This is money that the banks get to keep, which is how bankers become rich.

The money that’s being captured as interest by the banks means that there’s less money available for general commerce. Unless this money is being replaced by investment in the productive economy, or by more borrowing, we end up in recession (where we’ve been for the last few years).

Our “strong financial services industry” means that most of the money that’s captured by the banks is used for asset speculation (gambling), which means it never gets invested in the productive economy.

So the only way to replace the missing money from the general economy – the liquidity that we need to get us out of recession – is more private borrowing.

At some point the capital and interest repayments on private debt will become a disproportionate burden on the economy – sucking liquidity out of the system at such a rate that money will become very hard to find. At this point our systems of commerce will start to collapse.

This is exactly where we’re heading.

The credit crunch of 2007/08 was a mere bump in the road that leads us over the cliff.
Help To Buy, or any increase in interest rates, will help us to get to the end of the road that little bit quicker.

In pursuing this policy Mr. Cameron and co. show themselves to be economically illiterate (believing that they’re doing the right thing) or dangerously complacent (leaving the problem for someone else to sort out in the future). Or maybe both.