whats wrong with the economy

7/30/2019 Whats Wrong With the Economy

1/17

Whats .with the

.economy?

A laymans guide to understanding

why were in such a mess

October 2012

Whats wrong with the economy? 1

wrong


2/17

Contents..........................................Whats wrong with the economy? 3

....................................How much government debt is there? 4

.................................................................Debt versus deficit 4

........................................Where did all the debt come from? 5

.......................................................When the music stopped 6

.................................................What is the current position? 7

.....................What has been done to get us out of recession? 8

..................What effects have low interest rates and QE had? 9

.......................................................Invasion of the zombies 11

..............Why savings should be encouraged, not penalised 11............................................................................The banks 13

.............The vital question: Where does growth come from? 14

.......................................................Sleepwalking to disaster 15

.............................................Time to ask the right questions 16

.............................................................................Summary 17



3/17

Whats wrong with the economy?

In one word debt.

We have a staggering amount of it. And, despite popular perception, it is still growing.

The UKs total debt (government, household, corporate and the financial sector) is the worst

among the major Western industrial nations. According to leading consultancy firm

McKinsey, it is five times GDP (the countrys annual income). This is the equivalent of

262,000 for each and every taxpayer.

The crisis was caused by debt.

It is being exacerbated and prolonged by debt.

Paying interest on debt diverts funds away from the productive part of the economy. And yetevery solution tried or proposed by the government, the opposition and the Bank of England

involves taking on still more debt.

It is as if a shipwreck survivor, weighed down by too much wet clothing, is given, not a hand

out of the water, but yet more clothing.

As a nation, we are living well beyond our means. And the situation is approaching breaking

point.

((

( ( ( ( ( (

( ( ( ( ( ( ( ( ( ( ( (

( ( ( ( ( ( ( ( ( (

( ( (

(

(

(

(

*

'

!"#$%&'(&)*+*&,$&-$.#/+$012*#)$3*.#45$1%2&))$%&6,+2*#) !"#$%&"'($)"*+,*-*.,-'

."/0"/-1,"*$

2,*-*.,-'

,*$1,1#1,"*$

3"4%/*5%*1

6789:;< !-4%/ =*-'>1,.$?@*-1,"*-'@.%*1/-'@A-*[email protected],*$%>@3'"A-'@E*$1,1#1%

F GF@HIFF@(-1-J

H =.."/(,*K@1"@:-*-(-L$@*-1,"*-'@-.."#*1$M@N&"#$%&"'(O $%.1"/@,*.'#(%$@*"*+,*-*.,-'M@*"*P."/0"/-1%@A#$,*%$$J

)7Q;@*"1@$#5@(#%@1"@/"#*(,*KJ

!&+14$.#/+$&-$+#,$4127#)+$'1+62#$#%&,&'*#)8$9:$:;


4/17

How much government debt is there?

Governments do not create wealth. They can only spend money taken from their citizens

through current or future taxation. Even when governments borrow money to spend, future

taxpayers must be taxed to repay that borrowing.

Governments do not create wealth. They can only spend money

taken from their citizens through current or future taxation

The UKs national debt is currently 1.05 trillion, which is over two-thirds of annual GDP.

American national debt now exceeds $16 trillion, more than the countrys GDP.

It is hard to envisage a trillion. If you think of it in terms of seconds, a million seconds is 12

days. A billion seconds (1,000 million) is 32 years. And a trillion seconds (1,000 billion) is32,000 years.

The problem of excessive debt is not restricted to the UK and the United States. It is a world

problem. The Economists debt clock shows that the total of government debt in the world is

over $49 trillion.

However cheap debt may seem when it is taken on, interest needs to be paid and the debt

must eventually be paid off. Future generations are being condemned to debt serfdom to pay

for todays excesses.

Debt versus deficit

There is much confusion over the difference between debt and deficit. The Prime

Minister, Deputy Prime Minister and even the Chancellor have sometimes slipped up over

which is which.

The deficit records how much the government spends beyond its income in a single year. Thedebt is the total amount owed. Whenever there is a deficit, the government must borrow the

difference and so the figure for total debt will continue to rise.

Whenever there is a deficit, the government must borrow the difference

and total debt will continue to rise

In April 2012, the International Monetary Fund forecast that the UK will this year borrow

124 billion. This is 8% of GDP, higher than the figure for Greece or Spain, two of the most

financially precarious countries in Europe.

http://www.economist.com/content/global_debt_clockhttp://www.economist.com/content/global_debt_clock


5/17

Since then, the economic situation has worsened. Current forecasts suggest this years deficit

will be 130 billion and that the government is borrowing 18 pence for every pound it

spends.

Where did all the debt come from?In the decade before the credit crunch, the British went on a borrowing binge. The

deregulation of the financial markets in the 1980s, combined with technological advances,

meant that banks could lend more and do it much more quickly. The liberalisation of

consumer credit was accompanied by increasing use of aggressive marketing techniques

which aimed to encourage people to take on more borrowing. The financial institutions

behaved with the eagerness of piranhas scenting fresh meat. Consumers were virtually force-

fed credit.

The financial institutions behaved with the eagerness of

piranhas scenting fresh meat

House prices almost trebled, with many institutions granting mortgages of 100% or more,

while the use of store and credit cards rocketed. Household debt rose from 90% of

disposable income to more than 160%.

The UK government joined in the borrowing free for all. Between 2000 and 2010, publicspending doubled. Even allowing for inflation, it rose 50%. But the government was spending


Percentage of population with credit cards

1975 1980 1985 1990 1995 2000

100

90

80

70

60

50

40

30

20

10


6/17

money it did not have. It bridged the gap by borrowing; government debt rose from 311

billion in 2000-1 to 905 billion in 2010-11. This merely reinforced a long-term trend; the

government has run a deficit in all but 4 of the last 34 years.

The Bank of Englands 9-member Monetary Policy

Committee (MPC) controls the price of money bymanipulating the base rate. This is the rate at which the

Bank of England lends to high street banks and so

influences the rates of interest for savings and mortgages.

Many have argued that the MPC, faced with such frenzied

behaviour by lenders and borrowers, should have acted to

prick the expanding bubble, deflate the housing boom and

prevent a crash.

The overall level of borrowing in Britain rose three or four

times faster than the economy. However, as long as the

boom continued, with incomes and house prices rising,

too few seemed unduly concerned about the surge in debt.

Unfortunately, such debt-fuelled growth required ever greater borrowing to keep it going. Too

much was spent on consumption and too little on wealth-producing investment. During the

boom years, housing, construction, retailing and the financial sector did well. But Britains

manufacturing output fell by a quarter, with its share of the economy falling from 17% in

2000 to just 11% in 2009.

When the music stopped

After the party came the hangover.

After the bursting of the dotcom bubble at the beginning of the century, American interest

rates were kept deliberately low. But another, bigger, bubble was being created in the

property market. This was skewed towards sub-prime lending, with the government

encouraging financial institutions to lend to people who would not normally qualify for a

mortgage. With normal lending criteria ignored, people bought houses they could barely

afford; a significant number of borrowers did not even make one payment.

Believing that house prices would keep rising and that the risks were low, banks bundled up

sub-prime mortgages into complicated financial instruments which could be traded. By the

time the risks in the sub-prime market became apparent, the majority of banks were heavily

involved. This was a bubble being inflated around the Western world.

As interest rates rose between 2004 and 2006, a growing number of homeowners defaultedon their mortgages. Some banks with sub-prime market exposure got their fingers burned,

http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4


7/17

sending destructive ripples around the world banking system. Institutions realised that their

sub-prime assets were worth a fraction of what they had assumed. In the summer of 2007,

panicky banks became reluctant to lend to each other and the so-called credit crunch

slammed the brakes on the world economy.

In the UK, Northern Rock which had been massively imprudent with its mortgage lending witnessed the worst bank run in the UK in a century and required emergency financial

support. It was later nationalised.

In September 2008, Wall Street bank Lehman Brothers collapses, setting off a worldwide

economic panic. The financial authorities on both sides of the Atlantic cut interest rates to the

bare minimum and poured cash into many of their banks. In the UK, banks such as Lloyds,

HBOS and Royal Bank of Scotland were bailed out at taxpayers expense.

What is the current position?

It is now over five years since the credit crunch and, like most Western countries, the UK

economy remains moribund. Usually, by this stage of a recession, the economy would be

growing strongly again. Yet national output remains 4% below its peak and the spluttering

recovery is proving slower and weaker even than after the Great Depression of the 1930s.

The deficit on the countrys current account is 21 billion, the worst figure ever recorded.

Our deficit in trade (goods and services alone) is also at a record level.

The big difference from other recessions is the level of debt. Although it is often reported that

household borrowing has fallen sharply, in reality it is only a little below its peak.

The downturn has caused a deterioration in already-weak government finances. Tax revenue

has grown less than expected while, despite all the talk of austerity, government spending has

continued to climb. The coalition aimed to reduce the government deficit substantially (the

extra amount borrowed each year), but it is failing. From a high of 156 billion in 2009-10,


10,000%

20,000%

30,000%

40,000%

50,000%

60,000%

1993% 1994% 1995% 1996% 1997% 1998% 1999% 2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010% 2011%

Average'UK'Household'Debt'


8/17

the government intended to reduce it this year to 92 billion. Alarmingly, it now looks likely

to be 130 billion, an increase of 10 billion on last year.

This means that the government is currently borrowing an extra 350m every single day.

National debt will increase by more during the five years of this parliamentthan under the previous 13 years

There is a popular perception that the current government is cutting spending. In fact, over

the lifetime of this parliament, it is set to increase national debt by over 600 billion, a

greater increase in five years than under the previous 13 years of Labour rule.

The reality of debt is that interest must be paid and that the principal sum must eventually be

paid back. Money that could be invested to help businesses grow is instead servicing debt.

Many householders are having trouble paying mortgages on homes that have not appreciatedin value as expected. Millions who took out interest-only mortgages will struggle to find a

way to pay back the original purchase price of the house.

Britains public debt as a percentage of GDP was just 37% in 2007/8. It is currently almost

70% and is forecast to be around 90% in 2014/15. At that level, international studies show

that servicing debt becomes so all-consuming that governments can often no longer pay their

way.

The economic outlook for the country is considerably bleaker than the official picture. Any

further deterioration could undermine faith in the financial system completely. We risk

passing a tipping point, beyond which is possible default or unspeakable inflation.

What has been done to

get us out of recession?

Since March 2009, the Bank of England has maintained its base rate at a record low of 0.5%.

The theory is that, despite the economy being saturated with debt, lower interest rates will

encourage borrowing and thus lead to greater spending, more house purchases and new

business investment.

However, low interest rates failed to boost the economy. So the Bank

of England authorised 375 billion to be created electronically and

released into the monetary system through the previously untried

experiment called Quantitative Easing (QE). The Bank has also

begun a Funding for Lending Scheme, which offers banks up to 80

billion of cheap loans if they increase their mortgage and small

business lending.



9/17

The banks have hung onto most of the funds channeled to them through QE. They are, of

course, currently being hit with heavy fines over a series of scandals such as LIBOR and the

mis-selling of PPI, which is eating into their capital and further undermining confidence in

them.

During the Great Depression, economist John Maynard Keynes compared attempts toincrease borrowing as like pushing a piece of string

But the financial crisis has made people more cautious. During the Great Depression,

economist John Maynard Keynes compared attempts to increase borrowing levels to pushing

a weight with a piece of string. String-pushing is no easier now.

What effects have low interest ratesand QE had?

In a free market economy, prices find their own level. Nobody expects the government to set

the price of bread or beer or cars. Yet the Bank of England determines the price of money.

Those who have mortgages linked to its base rate may be delighted that it remains low, but

low interest rates are not automatically good for the economy. One of the less favourable

consequences of low interest rates is the persistence of stubbornly high inflation. The Bank of

Englands primary statutory role is to keep inflation at the governments target of 2% for theConsumer Prices Index (CPI) yet it has been above that for most of the past six years. The

target means that the government's aim is to devalue your money by 2% a year. It has

exceeded this every month since December 2009.

With wages rising less quickly than prices, everybody is feeling poorer. Taking inflation into

account up 17% since the crisis began household incomes are back to their 2005 level.

With everybody feeling the pinch, its no wonder consumer confidence is so low.

Low interest rates and QE have poleaxed pension funds. The National Association of PensionFunds believes QE has so far cost pension funds 270 billion. Shortfalls in funds must be met

by the companies concerned, reducing their investment resources and pushing fragile

enterprises towards insolvency. Annuities, which are bought on retirement to produce an

income, have seen rates fall by a quarter in four years.

You can print money, but you cannot print wealth

You can print money, but you cannot print wealth. If it were that easy, every poor country in

the world would do it. Adding to the stock of money in the economy through QE raisesinflation and reduces the value of the pound in your pocket and your savings in the bank.

http://www.guardian.co.uk/news/datablog/2009/mar/09/inflation-economicshttp://www.guardian.co.uk/news/datablog/2009/mar/09/inflation-economics


10/17

The Bank of England reckons that the first batch of QE pushed inflation up by about 1.5%,

even though the banks only lent out a small portion. When the lending taps are turned on

full again, more inflation will gush out too.

By artificially supporting asset prices, QE is a subsidy to the wealthiest who hold the most

assets. A recent Bank of England report admitted that QE has enriched the very richest at the

expense of the poorest. QE cost the least well-off tenth of households in Britain 779, but

boosted the wealthiest tenth by 323,000!

Why should the British taxpayer subsidise the richest in society through Quantitative Easing?Its aimed was supposedly to benefit the whole economy.

QE cost the least well-off tenth of households in Britain 779,

but boosted the wealthiest tenth by 323,000!

One reason interest rates are so low is that, through QE, the government (as the Bank of

England), has bought 30% of its own debt (as issued by the Treasury). Ludicrously, it owes

this money to itself, understandably raising comparisons with the Mad Hatters Tea Party.

Low interest rates also depend upon international confidence in the UK economy. If this

evaporated and capital flowed out of the UK, the government could only keep borrowing if

interest rates rose.

Interest rates cannot remain at record lows forever. Expecting them to do so flies in the face

of history and is increasingly dangerous.


1st$ 2nd$ 3rd$ 4th$ 5th$ 6th$ 7th$ 8th$ 9th$ 10th$

Benefit$per$household$ 779$$ 1,381$$ 6,389$$ 11,708$$ 17,574$$ 26,684$$ 43,240$$ 67,061$$ 114,328$$ 322,963$$

50,000$

0$

50,000$

100,000$

150,000$

200,000$

250,000$

300,000$

350,000$

& & &QE - Transfer of wealth to the wealthiest
http://www.bankofengland.co.uk/publications/Documents/news/2012/nr073.pdfhttp://www.bankofengland.co.uk/publications/Documents/news/2012/nr073.pdfhttp://www.bankofengland.co.uk/publications/Documents/news/2012/nr073.pdf


11/17

Invasion of the zombies

Artificially low interest rates are prolonging the recession. Capitalism is not solely a profit

system; it is a system of profit and loss, with business fortunes waxing and waning.

Companies which may appear to be dominant and unbeatable often fade and disappear, leftbehind by changing consumer tastes or technological innovation. In the past four years, for

instance, one-time giants Polaroid and Kodak have filed for bankruptcy after failing to

capitalise on the move from film to digital.

A recession normally sees a growing number of struggling companies become insolvent. This

has not happened to anything like the usual extent. Instead, low borrowing costs have

enabled ailing businesses to keep ticking over, neither failing nor growing. According to

insolvency group R3, around 150,000 zombie companies some 8% of all UK businesses

are running on empty, able to pay interest on their debt but not to pay off the debt itself.Many of these companies cannot survive unaided.

Yet while zombie companies are being propped up by low interest rates and banks who do

not want to crystallise losses, businesses with the potential for growth, job creation and

boosting tax revenue find it even harder to raise finance and may not be able to continue or

even get started in the first place.

Mistakes are made in boom times. Recessions usually expose those mistakes and cause

corrections, with growth kick-started by newer, more efficient businesses. Trying to prevent

the recessions effects, as current policies do, may limit some short-term pain but only at theexpense of sound long-term growth. Its as if a doctor chose to hide news of a serious illness

from a patient so as not to upset them.

Its as if a doctor chose to hide news of a serious illness

from a patient so as not to upset them

When interest rates rise, as they eventually must, the effect upon zombie companies, and

their employees, will be all the more painful.

Why savings should be encouraged,

not penalised

In a crisis caused by excess debt, you might expect savings to be incentivised. Bizarrely,

savings have borne the brunt of the recessions effects, with central bank policy ensuring that

those who rely on savings income, such as many pensioners, have been particularly badlyhit.



12/17

The undermining of savings in the years before the crisis made the recession that much more

severe. While the savings ratio averaged about 8.5% of disposable household income

through the 80s and 90s, it dropped to 2% in the three years before the credit crunch, even

turning negative at one point for the first time since 1955. As a result, there was little by way

of a financial buffer to cushion the blow to many households. Savings are the reservoirs of

the economy. Deplete them and there will be a money drought when its most needed.

Savings are the reservoirs of the economy. Deplete them and

there will be a money drought when its most needed

Until 2009, the Bank of Englands base rate, and thus linked savings rates, were above the

rate of inflation, as is normal. For the past three years, however, inflation has been higher

than savings rates. This has made it impossible for savers, particularly those who pay tax, to

keep up with the rise in the cost of living. As a result, more than

100 billion has been wiped off the value of the UK's savings.

Central banks expected that making saving less attractive would

cause savers to spend more. In fact, the opposite happened as

savers became more nervous of what the future held.

The disincentivisation of savings is having a profoundly damaging

effect. For savings are the capital of capitalism. They provide the

investment funds for companies to grow, to create jobs and to

innovate. Wealth cannot be created by printing more money.Instead, investment generates wealth through improved productivity. Unfortunately, UK

productivity has been declining since the onset of the crisis, with companies becoming ever

less efficient.

Spencer Dale, the Bank of Englands Chief Economist, recognises that this could be related to

keeping zombie businesses afloat: Inefficient firms may remain in business for longer and so

slow the reallocation of capital and labour to more productive uses. Low interest rates and

the associated forbearance might even explain part of the puzzling weakness in productivity.

He also said: One lesson we have learnt from the financial crisis perhaps the most

important lesson is that economists and policymakers know far less about the economy and

its behaviour than many might have liked to believe We dont fully understand the

structure of the economy or the behaviour of households and companies within it. Not even

close.

He even wondered: Is there a danger that we might do more harm than good?

http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech597.pdfhttp://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech597.pdfhttp://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech597.pdf


13/17

The banks

The central banks and governments did nothing to stop the rapid expansion in debt. The

regulators were more interested in sprucing up the stables than preventing horses from

bolting. But it is the banks that rightly bear much of the blame for the financial crisis.

Rather than see major banks suffer the consequences of their woeful mismanagement, many

were bailed out or given government support. In the UK, the taxpayer still owns large stakes

in Lloyds and Royal Bank of Scotland, although their shares are worth considerably less than

when bought.

According to the National Audit Office, taxpayers were at one point on the hook for 1,162

billion; the current level of support for British banks is 228 billion. However, as the NAO

says: The Treasury retains the unquantifiable ultimate risk of supporting banks should they

threaten the stability of the overall financial system again.

Are the banks any healthier than when the crisis hit? Not according to Christine Lagarde,

head of the International Monetary Fund: "I am often asked, five years into the crisis, whether

the financial sector is safer today than it was then. My answer? 'Despite real progress, not

yet.'"

"I am often asked, five years into the crisis, whether the financial sector is safer today than

it was then. My answer? 'Despite real progress, not yet.'" Christine Lagarde,

Managing Director, International Monetary Fund

As well as outright support, the UKs banks are being helped by Quantitative Easing, by the

Funding for Lending Scheme and by the record low Bank of England base rate. Above all,

they are assisted by the knowledge that they are considered so important to the economy that

they will be bailed out if they mess up again. They are thought to be "Too Big Too Fail". If the

banks make money theyll continue to pay enormous bonuses. If they take stupid risks and

blow up the financial system once more, the government will step in with taxpayers cash

and the banks will still pay enormous bonuses. This is known as moral hazard.

The Bank of England believes this implicit subsidy has benefitted British banks to the tune of

100 billion a year, leading to greater profits and salaries yet doing nothing to diminish their

appetite for stupid risks.

Our banks are as stricken as when the crisis began, one

reason the banks are so reluctant to grant loans unless

bullied into it by the government and the Bank of England.

Banking reforms are in the pipeline, but many would argue

that they do not go far enough to separate risky casinobanks from high street banks. In any case, they will not

http://www.bankofengland.co.uk/publications/Documents/fsr/fs_paper15.pdfhttp://www.bankofengland.co.uk/publications/Documents/fsr/fs_paper15.pdfhttp://www.bankofengland.co.uk/publications/Documents/fsr/fs_paper15.pdf


14/17

come into effect until 2019 and their cost up to 10 billion will probably be borne by

customers.

Sir Mervyn King, Governor of the Bank of England, summed up the situation: In good times,

banks took the benefits for their employees and shareholders, while in bad times the taxpayer

bore the costs. For the banks, it was a case of heads I win, tails you the taxpayer lose.That remains the position today.

The vital question:

Where does growth come from?

When reading or listening to any discussion about the economy, it is always worth asking:

Where does wealth come from?

Suggestions on how money might be spent are usually without wealth first being generated.

Printing money, even though many governments are doing it through quasi-QE programmes,

does not generate wealth. On the contrary, printing money simply undermines the value of

existing money and thus creates inflation and rising prices.

A country generates wealth by consuming less than it produces and using the resulting

savings for investment. In a subsistence economy people live hand to mouth, consuming

everything they produce. Only when they are able to save something can they afford to

purchase better crops, machinery, irrigation equipment and so on to increase production.

What is save is later used to invest in factories and machines to make the workforce more

productive.

A country generates wealth by consuming less than it produces

and using the resulting savings for investment

A developed economy only grows if its production methods become more efficient, if

businesses become more inventive, if innovation and improved technology generate newventures. Look around your house and see how many household items were unknown 20 or

even 10 years ago.

Whenever anyone calls for the government to spend more money, bear in mind that all

government spending comes from taxation, either current, or in the future when taxpayers

must pay back money borrowed now. While some government spending might be essential,

the more a government spends, the less efficient its economy becomes as wealth-creating

businesses are starved of capital. A 2008 study by the European Central Bank found that,

contrary to the belief of most politicians, Government size is likely to be detrimental toeconomic growth Countries with a higher share of expenditure in GDP tend to grow more

https://www.repository.utl.pt/bitstream/10400.5/2139/1/ecbwp849.pdfhttp://www.telegraph.co.uk/finance/economics/9242245/Sir-Mervyn-Kings-speech-in-full.htmlhttps://www.repository.utl.pt/bitstream/10400.5/2139/1/ecbwp849.pdfhttps://www.repository.utl.pt/bitstream/10400.5/2139/1/ecbwp849.pdfhttp://www.telegraph.co.uk/finance/economics/9242245/Sir-Mervyn-Kings-speech-in-full.htmlhttp://www.telegraph.co.uk/finance/economics/9242245/Sir-Mervyn-Kings-speech-in-full.html


15/17

slowly. In 2000, UK public spending was 37% of GDP. It is now nearly 50% of GDP and

still growing.

Demographic pressures alone will force government spending still higher. With the

population ageing rapidly, the cost of simply paying the basic state pension will, says the

Department for Work and Pensions, double to more than 120 billion within the next 20years.

Sleepwalking to disaster

How can the government afford this?

It cant. It cannot even afford its current obligations. Spending is rising while the economy

remains moribund. With stagnant or declining tax revenues, the government will be forced toborrow ever more.

This is an unsustainable economic plan. And yet it is the only one we are being offered by

the government, the opposition and the Bank of England.

If what you hear and read about the economy makes no sense, dont assume the fault is

yours. Albert Einstein said: Insanity is doing the same thing, over and over again, but

expecting different results.

Five years into the economic crisis our economy is considerably worse off and shows no signof a sustained recovery. If Einstein is right, our politicians belong in straitjackets, not

Parliament.

Forcing us to take on more debt is akin to pressing an alcoholic to have more booze in an

effort to avoid a short-term hangover.

Forcing us to take on more debt is akin to pressing an alcoholic to have more booze

The diagnosis is wrong and so, inevitably, is the treatment. Asthe Bank of Englands Spencer Dale says: If the handbrake on

your car is stuck, putting your foot further and further down on

the accelerator wont get you very far before the car starts to

overheat.

We are sleepwalking to disaster and we must wake up before it

is too late.



16/17

Time to ask the right questions

It is imperative that politicians and everyone else begin to address the following sets of

questions.

1. Is UK debt now so great that the old ideas of borrowing more to spend or cutting more

to save will no longer work? Has public spending already passed a tipping point and

is heading inexorably towards a default and/or unspeakable inflation, with all the

injustices and political upheavals that this could entail?

2. Do our leaders have the ability to dramatically rein in public expenditure, encourage

private sector wealth creation and, through growth, find a way out of this mess? Can

our society and institutions withstand the upheaval that this would require?

3. When Britain, America and many other countries risk being sucked into a vortex ofever more indebted, shrinking economies, when the money in our pocket loses over a

third of its value in just 15 years, when the Bank of England resorts to printing money

through QE in a desperate attempt to revive the economy, is it not time our leaders

considered whether our monetary system is being properly managed?

4. If Mervyn King, the governor of the Bank of England, was right to claim that of all the

many ways of organising banking, the worst is the one we have, what are the

alternatives? What might a better, more open, diverse, customer-driven and

sustainable banking system actually look like?

The authors believe these are the key questions politicians, journalists and everyone else in

our society should urgently be addressing. We cannot get to the real root of this crisis until

we have begun to address them.



17/17

Summary

The problem is not a lack of demand, but an excess of debt.

Despite living beyond our means, most proposed solutions involve us taking on still more

debt.

Contrary to popular belief, the UK remains massively indebted, with the government

adding over 100 billion to national debt every year.

The only solution to a problem caused by too much debt is to have less of it. Our loans

must be paid down.

Savings are being undermined. But savings provide the investment funds without which an

economy is incapable of long-term sustained growth.

Low interest rates and QE do not produce growth but distort the economy, devalue

pensions and annuities and create inflation.

Policies that prop up zombie companies and try to control the pain of the recession are

actually prolonging and worsening it.

Support for the banks is making the very richest still richer at the expense of everyone else,

while doing little to boost the economy.

You can print money but you cant print wealth.

These are the all-important questions we need answered:

Has our current system checkmated itself in such a way that the government are heading

towards a default and/or an unspeakable inflation?

Is it possible to think the unthinkable, rein in public expenditure, encourage private sectorwealth creation and rebalance our economy without widespread social unrest?

Is it time for our leaders to consider whether our monetary system is being properly

managed and fit for purpose?

Is it not time to move to a more open, diverse, customer driven and sustainable banking

system?
