h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

Entry: World Debt and the debt-based money system - A698178
Author: Zarquon's Singing Fish! (ACE) (Scout), Minister for Rigidly Defined Areas of Doubt and Uncertainty - U182827

Food for thought.

Comments please!

Interesting one this Zarquon especially as I did 2 years of development econimics as part of my degree.

Not a bad entry, but an article with this much scope must surely take some account of the Jubilee campaign which aims to wipe out the debt of the poorest, most unlikely nations to be able to ever repay their debt. Especially as Bono, Sting and other high profile campaigners are behind this it surely needs a mention in an article of this scope.

There are also other things which I think need adding but I'll get to back when I've had time at home to scour my notes.

Great! (how do you like to be abbreviated BTW?)

I'll look forward to it and do some more poking and prodding myself. Depending on how much information comes through, it may be worth doing a companion entry as this is already quite long. I'll have a search for more links as well.

I always have been known as DD for the last 28 months on here, Only aquired the Unclehood on Christmas Eve.

Congratulations!

I'm just adding in some links including one to the IMF. Not yet found anything to the Jubilee campaign. Presumably as the one month URL trial is up, we can't post them in conversations until they've done the evaluation?

I've expanded the entry a little and added links.

I'll await your further comments, DD.

My 2 cents:

I think this would be better split up into 2 or 3 separate entries:

the 1st on "National Debt in the UK" -- as your entry stands, your references to "the national debt" are sometimes a little unclear -- most (if not all) countries have a national debt, yet you are only referring to the national debt of the UK.

the 2nd on "International Debt" -- this could also include the info on current debt relief campaigns, or that could be a 3rd entry.

I also think it would be worthwhile to focus a bit more on how all this debt arose. Another issue is that such debts can be compared to "credit card" debts -- many people don't realize that countries can spend millions/billions per year making minimum payments that may mostly go towards interest charges.


Mikey

Thanks for the comments, Mikey!

I'll give them some thought before taking any action.

You may well be right about making the specific analogy to credit card debt. My original thoughts were that people would understand this without it having to be spelled out. If not, it will be no problem to add it in.

I'll consider changing the heading 'National Debt' to the UK National Debt. However, my intention was to be illustrative. I believe that England was the first country to have a national debt and exported the problem to other countries because of the system.

My focus on this entry was the debt-based system that causes the problems, the history (if my economic history serves me well, all this originated in the UK - well England, specifically) and the consequences for the rest of the world.

I added the information about campaigning for world debt relief after DD's comments and wondered if there needed to do a separate and subsequent entry on that. It did strike me that most people's interest would be in third world debt and debt relief, however the problem is the system and until that is changed, there will always be a problem. Debt relief is a related, but separate issue, which I included after DD's comments.

I'd really welcome other comments about this on all the matters commented on so far!

I feel that this entry as it stands is very one-sided. It seems to sum up as 'Debt Is Bad, period'. Now this is a view I grew up with. For most of their lives my parents refused to borrow, basically taking the purist view that if you can't afford something you should save up for it or go without. They despised Hire Purchase - they called it 'the never-never'. However, fairly late in their careers they had the opportunity to purchase the house they had been renting. This involved 'getting into debt', and for some reason they decided to do that. The debt was duly paid off in time (yes, with interest of course) with the result that, my father having passed away, my mother now lives in a house which is her own property, so she doesn't need to go to the state for help with the rent. It is also a great source of satisfaction to her that when she dies she will have something to pass on to her children. Many people in the UK feel the same way. Just look at the concern that is expressed about people having to sell their property to pay for long-term care. So - debt is/is not all bad: Discuss.

So much for autobiographical trivia. I think one of the general problems with this entry is that it makes insufficient distinction between 'First World' and 'Third World' economies. They are very different, have different dynamics and so on, and although in our world they are inextricably linked, as you quite rightly point out, distinctions do need to be drawn.

Some more specific comments:

"The British national debt now stands around £400 billion and is increasing year on year."

The British government denies this. Gordon Brown instituted a policy of retiring large swathes of the National Debt and claims this as a triumph of New Labour. What is not so well known is that retiring gilts has an adverse effect on pension funds, which - as you mention - are significantly invested in the national debt and depend on (and are calculated on) the yields thereof. So it reduces our pensions. Pensions, public and private, are in enough trouble already for various reasons, and will probably become a major headache for any successive government.

"The cost of borrowing by producers, manufacturers, transporters and retailers has to be added to the price of the final product, which means that goods and services are much more expensive."

More expensive than what? You don't tell us how the producers etc. would finance their operations without borrowing. Most of them have a mixture of debt and equity financing. Eliminate the debt and you have to increase the equity finance. What are all the implications of that?

"Consumers are burdened by the cost of mortgages, overdrafts, credit cards, personal loans as a result of the cost of goods and services and have much less money to spend as a result."

'Burdened' is a loaded word. (You like using loaded words. For example, you always describe competition as 'cut-throat'.) Consumer credit stimulates the economy and encourages producers, because it enables consumers to buy their products. It can of course be inflationary, which is why governments need to keep an eye on it. Consumer credit actually increases spending power - it does not, as you suggest, diminish it. It is also popular. And gearing is an important aspect of the economy.

"Because the population can't afford to buy up all the goods and services being produced, this produces cut-throat competition"

And competition among producers is, as we all know, a Bad Thing (as well as always being 'cut-throat').

"Businesses try to cut prices and costs to grab a share of the limited purchasing power in the economy"

Ergo what? They shouldn't try to 'grab' their share? They should try to push up prices and costs? Purchasing power in the economy should be unlimited?

"Banks, therefore are creating new money out of nothing"

'Therefore'? No, it's a non-sequitur. And banks do not, cannot, create money out of nothing. Money is created by producing something of value.

"Government could stop borrowing money at interest and start creating it by itself by spending it"

You can't create money by spending it. And governments don't create money anyway. It's people who create the wealth in the economy.

There are lots more specific comments I could make, but I just wanted to point to a few things. There are many cogent points in your entry, and you touch on matters of great concern which need to be aired and, if possible, resolved. But economics is very complicated, and world economics even more so.

I sincerely applaud your attempt to deal with these issues, but feel that you need more balance and, in some areas, greater accuracy. This entry is well worth developing further, if you have the time and the inclination.

Hi Belshazzar!

Your parents and mine, eh! Although they purchased their house with a mortgage, I don't think they have ever paid for anything else on credit and their word for it was 'never-never' as well.

Whatever Gordon Brown says, the general trend over the years (indeed the centuries) has been upwards, don't you think?

There is a distinction to be drawn between public and private credit, I think, although the one influences the other. As you will be aware, there are huge concerns at present about the indebtedness of large sections of the population and credit card debt would be a subject in its own right.

I'm aware that I've bitten off a huge subject and I'm going to give lots of thought to the points that have been made so far.

This entry makes a case for change and it may be that I need to retitle it to reflect this. I am also considering whether the entry needs to be split along the lines suggested earlier.

I think that this is an important issue though, so I'm willing to spend the time on it. I would be interested in any specific improvements you might suggest.

I think this subject needs input from an economist. Perhaps Uncle DD can help. Anyway, best of luck.

Uncle DD did say that he had further info on this and I'm looking forward to it. As you'll see, I've made a couple of changes to reflect comments made so far, but I'll wait to see what he has to say before making further changes and I'll look at any outstanding comments in that light.

Hi Z,

This is a good stab at a complex subject, and one I don't pretend to know much about. I've certainly learnt a lot from reading this. I have to agree that this is such a large and complex subject, and one so poorly understood even by the 'experts', that the article could do with more detail.

All the points you list in the first paragraph seem more like problems with capitalism in general than debt.

Surely there must be advantages to having a national debt? Or did other nations look at England in the 1600s, think 'wow, they've really f**ked up their economy' and then do exactly the same?

With inflation, I'm not sure that the figures you quote for 1960 and now do show an increase in national debt in real terms.

If you're mentioning 3rd world debt, you should say how these countries ended up with unmanageable debts, e.g. the rubber boom in South America. (Rubber only grew in the Amazon and was a valuable export - Venezuala et al. took on manageable debts - someone smuggled some rubber plants to Asia - rubber prices crash under competiton - Venez. economy collapses and, as you say, they now can't afford the interest.)

I think 3rd world debt is one of the most important world issues atm, but it's also one of the most complex. It's also not central to your article. I really think this needs to be expanded and split.

Good luck, and don't give up on it!

Gif

Thanks for your comments Gif!

One of my aims in submitting this entry was to bring the issues up for debate, to look at where we are and what could be done to bring about not only a fairer world, but a safer and more stable one.

From what I can see, the causes of much world debt are in the system and the power exercisable by multinationals, especially since the de-regulation of global financial markets.

I've not done much work around other countries national debts or how they arose, however I assume (correct me anyone if I'm wrong), that countries looked around to see what others were doing and followed suit.

I can't think of a single advantage to a national debt, except that it allows you to borrow to finance extremely expensive things (wars come to mind - that's how the UK's started, or reconstructing after a war) without the immediate wherewithal to pay the money back.

You're right. The entry does need to be split. I'll work on it over the weekend.

I agree that it's an extremely important issue. I'll give thought to how much should go into it about the causes of unmanagable third world debt as I'm aware it could become like Topsy.

I'm trying to be objective rather than emotional and to give imformation about ideas for alleviating the problems. At present, I have done a lot of it via the links. Maybe I should summarise the approaches suggested in the linked sites?

I anyone else has comments before I reshape the entry into two, I'd be interested to hear them!

I've done some thinking about this and my thoughts are as follows.

I could split the entry into three - 'The Debt-based Money System and the Case for reform', 'National Debt in the UK' and 'Third World Debt'.

The second two entries would be heavily dependant on the first and the first may need the second as explanation for how it all began. I also have the problem of not knowing enough about the causes of third world debt, although I could expand on the present position and put the case for debt cancellation.

Or I could split the entry into two and include the national debt stuff in the first entry, with the second on third world debt.

Or I could do a descriptive entry of the present position, maybe one for the UK, one for the third world and a third with proposals for the case for reform of the system and include stuff like LETS (local exchange trading schemes) and Time Banking.

Does everyone agree that third world debt needs more explanation as to how the countries got into debt so much. I don't really want to go down the avenue of victim blaming or pointing the finger at corrupt governments overmuch. From what I can see, the IMF system appears to encourage spending on items which are not conducive to the good of the population as a whole.

Comments please!

I have amended the entry somewhat to take account of some of the comments so far. I have not split it, as I am having difficulty doing so. I've been advised to make World Debt a separate entry, however I feel that leaving it out of this completely will make this an incomplete entry.

I would be happy to do a separate entry on World Debt including causes and campaigns to cancel it. I have already started on a more complete entry about the UK National Debt, which isn't ready for PR yet.

So ... comments please!

I've expanded the entry to make the role of the banks clearer.

I am awaiting advice on splitting the entry. I would also welcome further comments on the entry itself.

A very interesting article. I'm an accountant, and my macro-economic knowledge is extremely basic.

But what I was taught seems to have been missed (or maybe it's my own understanding ). I understand that a nation generates income from taxing the wealth creation of its companies ie their profits. This is in addition to the money genreated from bonds issues. The UKs debt is not as large as its annual GDP

Wealth creation is when an individual takes a lump of material and uses their skills to make that lump into a useful item. If that item is sold, presumably it will sell for more money than the original material. Thus wealth has been created, or "value added" as it is often called.

In the UK, Value Added is taxed at 17.5% of the sales value, and this burden is borne by the end consumer. Companies pay taxes on the difference between their sales and their costs ie their profits. Companies can also invest their profits back into the business, and so wealth can generate wealth.

Debt can be necessary. For any manufacturing process, material has to be bought in order to start making products. If the production process takes time, that means that money has to be spent with no immediate prospect of getting it back. Debt bridges that cash gap.
For a brief explanation of cashflow, see my Entry on double-entry bookkeeping


I like the article, and I'm going to follow the debate closely. Thanks for kicking it off.

Hi Geoff!

Thanks for your contribution.

I agree with much of what you say and will reply in full a little later.

The main problem is in the way that money enters the economy. In the book 'The Money Bomb', it is estimated that only 3% of money in the UK is created by government - 97% is created as loans - at interest. Therefore the amount of debt is always greater than the amount of money. Banks and large corporations are unelected. Their power is such that they can make governments dance to their tune, eg for subsidies to locate factories or to force countries to open up their markets to competition.

Yes, debt can be unavoidable - housebuying for instance. However the traditional building societies are being turned into banks. The power of the banks globally does not appear to be being used as a force for good.

I agree with your definition of wealth creation. However the 'wealth' being created by some of the banks and corporations in providing loans means that they get goods and give in return paper money that the debtor countries have no hope of repaying. The current position for factory workers, businessment, inventors, house builders, teachers, etc is that although they work together to make available to wealth of a country, they are not able to exchange the goods and services that they make without borrowing money into existence.

BTW, I would like to be clear that I do not know all the answers! I am not an economist. However, this is a subject that I am deeply concerned about and the more I read about it, the more concerned I become.

I read today in the Quaker network for Economic Change that of the world's 100 largest economies, 51 are multinationals and 49 are countries and that the gap between the richest 20% of the world and the poorest 20% has doubled since 1960. Whilst the world produces more food per capita than ever before, more people go hungry than ever before.

More than 30% of the global seed market is controlled by 10 transnational corporations. International treaties favour corporate interests. The TWO's Agreement on agriculture permits massive subsidies to Western agribusiness, while stopping developing countries from protecting their small and medium producers.