UNISONActive is an unofficial blog produced by UNISON activists for UNISON activists. Bringing news, briefings and events from a progressive left perspective.

Wednesday, 5 October 2011

Cameron's bankrupt monetary policy

Today the Guardian previewed prime Minister Cameron’s speech to the Tory Party conference. It exposes the complete lies and confusion that sit at the heart of the government’s economic policy. Cameron demonstrates a complete lack of basic economic understanding, either this is done on purpose to lull people into a false understanding or it is frightening example that the Tories in power really are quite stupid.

Under the banner “David Cameron to urge households to pay off debts” he reveals some deep mistruths.

He claims the "The answer is straightforward, but uncomfortable. This was no normal recession; we're in a debt crisis. It was caused by too much borrowing, by individuals, businesses, banks – and, most of all, governments." This is just not true private sector debt is far higher than government debt .

What’s more Mr Cameron the economy is based on debt money and attempting to pay it back in all sectors at the same time (household, private and public) would result in a massive slump which would be self reinforcing.

Households stop buying products as they use the money to pay off debts. Companies won’t produce goods because there is no demand for their products. They make less products and lay off workers. Workers have no money so can’t spend. Worse still prices fall as companies try to entice people to spend. Consumers notice that if they delay spending they can get goods at a cheaper price so they don’t spend. Firms accelerate the price cuts in desperation. An awful feedback loop leading to deflation.

Cameron is being as stupid and dishonest as you can be. Furthermore this is not a crisis of borrowing it is a crisis of lending – banks lend and for as many people who borrowed were turned down. The true fact is money supply is in the hands of private profit making banks who create money out of nowhere in the form of loans and charge interest on it.

The whole economy depends on banks’ lending money, you can hear the cries now that banks are not lending to small businesses and the government demands that they lend… can you see the contradiction on one hand he wants us all to pay back our debts and on the other to borrow more!

But the most glaring mistake from Cameron is this – if we all were to pay down our debts tomorrow and the banks didn’t lend anymore then we would run out of money. We have to borrow to circulate money in a debt based system.

97% of our money is debt lent by banks and building societies only 3% is cash and coin. For every £1 they create there is a corresponding £1 debt somewhere else.

This is what leads to the business cycle and rampant inequality and in many cases the financial crunch we have just been through because debt is actually not payable due to the interest attached to the debts. There is not enough money in circulation to pay all of the outstanding debt and interest the balance would be below zero or a minus amount.

Once again the government, like the one before it, is leading us all to disaster which ultimately a debt based money system will always do. There is a solution - money created by governments has no corresponding debt and the state can never go out of business, particularly if it owns and distributes its own currency for the benefit of its people and not for a bunkered elite.

The task now is to understand how money works and where it comes from and how to change the monetary system. To help us do that a new book has just been published by the New Economics Foundation and Southampton University! Where Does Money Come From? http://www.neweconomics.org/publications/where-does-money-come-from

The book argues that the process of money creation, and how new money is allocated within the economy, is widely misunderstood by economists and policymakers, and yet needs to be reformed if future financial crises are avoided.