Occupy the EU

“I stood on this platform only a year ago and said that Europe could recover its dynamism. I still believe we can. But only if we are bold. Only if we fight for our prosperity. Get to grips with the debt. Take bold decisions on deregulation, on opening up the single market, on innovation and trade and address the fundamental issues at the heart of Eurozone crisis.

All these decisions lie in our own hands. They are the test of Europe’s leaders in the months ahead. Yes, the stakes are high, incredibly high. But there is nothing about the current crisis that we don’t understand. The problems we face are man-made and with bold action and real political will we can fix them.”

Prime Minister David Cameron, at Davos 2012

Taking stock

Chris Cook, a former director of the International Petroleum Exchange and new member of the Economics Working Group, takes issue with David Cameron’s analysis of the financial crisis…

Perhaps the most striking statement made by David Cameron in his speech at Davos this year was right at the end… “But there is nothing about the current crisis that we don’t understand.” This may come to be seen as one of the most staggeringly complacent, blithely arrogant and completely and utterly wrong statements in political history. Mr Cameron’s speech is a classic text in the Shock Doctrine genre. The € patient is bleeding to death from the effects of disastrous neo-liberal fiscal and monetary policies, and the apothecary’s remedy is a combination of the application of leeches and the removal of healthy limbs. There is unfortunately nothing about the current crisis which Cameron or his audience in Davos understands since the € system is based upon a vacuum, and his rhetoric upon myths.

The vacuum

The European Central Bank (ECB) is the Black Hole at the heart of a monetary system which is based exclusively upon interest-bearing debt. The € consists of credit created and lent or spent into circulation by private credit institutions (also known as banks) and by the ECB.

Private bank credit is essentially a pyramid scheme of credit based only upon a tiny sliver of bank capital. The ECB is just a private bank writ large, and the public credit it creates as currency has no basis on any underlying value – such as tax revenue – and is supported by confidence and trust alone.

Credit is a Latin word meaning ‘he believes’ and the problem is that belief in the € system has been lost because the pyramid of debts upon which it rests is unrepayable which in turn means that the banks are almost without exception insolvent.

The myths

Firstly, Banks do not take in deposits and lend them out again: that is the Fractional Reserve Banking myth.  As stated above, banks create modern ‘fiat’ currency upon the basis of a small amount of capital when they lend or spend and this currency is simultaneously deposited into the system.  Bank creation of money is not constrained by reserves of cash (ie liquidity); but by the bank’s reserves of capital (ie solvency).

Secondly, Treasuries do not collect taxation and then spend it: that is the Tax and Spend myth.  For 500 years our sovereigns were able to spend and invest in public assets by issuing Stock (in the form of half of a wooden tally-stick) to those who provided value to them. This Stock was then returnable to the Exchequer in payment of taxes. Indeed, the very phrase ‘rate of return’ described the rate over time at which stock-holders could return stock to the Exchequer for cancellation against taxation. Unfortunately, from 1694 onwards, when the (then private) Bank of England started to manufacture credit with which to purchase government Stock, we have become accustomed to think that the source of credit is the banking system, rather than the Treasury on behalf of the people. The € is based on a pyramid of debt built upon pyramids of debt. In order to re-base the € we must in a parallel process resolve unsustainable debt, and transition to a sustainable credit system based directly upon value, rather than claims over value manufactured by a bank.

Resolution – Euro stock

Every EU national Treasury – or their Central Bank on their behalf – could issue undated Stock to the ECB  at a discount, in much the same way that government branches issued Stock to each other.

So a €1.00 Unit of € Stock sold for 80c gives a 25% absolute return: the rate of that return depends upon the ability to return the Stock in payment of taxation, or to sell it to a tax-payer. The ECB in turn could then issue a undated Consolidated € Stock (Euro Consols?) at a discount to investors in exchange for both ECB and domestic EU member debt.  The amount of € Stock exchanged for a particular national debt issue would reflect the value of that debt in the market.

The outcome – at a stroke – is to resolve all dated Euro debt into undated Euro Stock, the value of which would depend upon the flows of taxation within member countries. This top down process would give a breathing space – since there is no longer any debt repayment – and would stop the bleeding. But it will not put the € patient back on his feet, since it addresses only public sector debt.

Transition to a sustainable EU economy will take place bottom up through resolution of private housing debt, and networked community based investment in housing; renewable energy and – the cheapest energy of all – in energy savings or NegaWatts.

But that is another story.

Chris Cook is currently working on networked, resilient markets and non-toxic market instruments. His blog is: www.nordicenterprisetrust.wordpress.com