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Mashmash…

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It isn’t often that one comes across data which clearly demonstrates the problematic economic circumstances in which we find ourselves now.  Everyone concerned in any business which involves selling things to people will know just how difficult this is becoming, and the simple line graph above explains why.  I’m indebted to economist Steve Keen for pointing out that the Bank of International Settlements (BIS) holds this crucial data about many world economies.  If you didn’t already know about the BIS, it’s based in Switzerland and is where the Central Banks (which control 95% of the global economy) meet to set their rules and regulations.  The BIS is frequently called the Central Bank’s banker.  The example I’m using above is the U.K. but you can download the BIS data  for most other countries and, to a greater or lesser extent, it will show the same story.  So many world economies, just like the U.K. are stagnant – because their populations are loaded down with debt.  Most people, including governments, don’t seem to realise that credit and debt are two sides of the same coin.  For any amount of credit issued there has to be a matching amount of debt created.  At its simplest, credit is usually extended with the intention that it will be repaid by the debtor with an interest charge for the use of the money.  Although most people in the Western world take this for granted, it isn’t so everywhere.  Some strict Islamic scholars consider charging interest for a loan to be so damaging for society that they forbid it; others interpret the Quran to mean avoidance of usury.  “Usury” means the action or practice of lending money at unreasonably high rates of interest, but at what point does interest cross over into usury in a low interest world?  Is it the 18.9% to 27.5% compound interest currently charged on credit cards? In an American-style, financialised, consumer society there are inherent pressures for people to use easily available credit to buy goods and services they cannot realistically afford.  It doesn’t help that with the advent of large student loans the younger generation has been primed to accept debt as an inevitable part of life.  I find it sickening that society as a whole is being conditioned by advertising not to think about the total size of debt when something is purchased but solely how apparently affordable the monthly payments are, ignoring the interest payments.  Just look at all those ads for mortgages, cars, smartphones, furniture etc., where the total price is not at all obvious just the (affordable?) monthly payment.  Faced with making what appears to be a seemingly low regular payment, people are deliberately tricked into forgetting about the actual size or cost of the loan.  It doesn’t help that more and more amenities, such as Internet services like Netflix, are only available on an ongoing monthly subscription.  This is also the way software is being sold today, because it is much more profitable that way.  Products from Adobe and Microsoft used to be sold with a perpetual licence for use for as long as one wanted.  Now Microsoft Office has been rebranded as Office 365 and is only available as a monthly subscription.  And that’s for such fundamental software as word processing!  Microsoft’s choice of Office 365 as a name is very appropriate: their intention is to point out that word processing is now a service available 365 days of the year.  But that also means you will be paying 365 days a year - year after year for that use.  This the best argument I know for using LibreOffice, the donation-supported open source suite, which includes a word processor and is constantly updated by volunteers.  This is the software I’m using to write this article.  The idea of actually paying for something outright so you own it may seem very old fashioned, but it is definitely the most cost efficient way to buy anything,  and also if you wish to be able to use something for any length of time. Albert Einstein is reputed to have said: “Compound interest is the eighth wonder of the world.  He who understands it, earns it ... he who doesn't ... pays it.”  Nearly five thousand years ago the scribes in ancient Mesopotamia certainly knew how expensive going into debt was when compound interest was involved. I’m obligated to the superb economist Michael Hudson, from whom I learnt about the magic number 72 in his book Killing the Host.  Divide the number 72 by any interest rate to calculate the period of years the loan will double in size.  So at a time when the Bank Rate is 0.25%, a credit card debt with an interest rate of 19.4% will double in just under four years (72 divided by 19.4 = 3.71 years).  A Babylonian scribal exercise, from around 2000 B.C., taught how to calculate the length of time it takes for the interest to double the size of the loan.  Nearly a thousand years earlier, in 3,000 B.C. the Sumer had a term for earning, or paying interest, on the interest: “mashmash”.  This is derived from doubling the Sumerian word for interest: “mash”.  Invariably, interest compounds at a faster rate over time than most people’s ability to pay back the loan.  When everything is craftily priced into neat monthly payments, how long the debt takes to double is hidden from even mathematically astute people.  So what chance has a poorer, less educated person? This period of debt deflation that most Western countries are living through isn’t just a result of the 2008 financial collapse.  Look at the graph line above and you can see that from around 1973 there was a massive increase in credit being extended to the masses which peaked at the time of the financial crash.  The original pumping up of demand began when the US dollar came off the gold standard bringing about the need to print extra money to pay for the Vietnam War.  Ever since then the value of the dollar has only been sustained by people’s confidence that a dollar is really worth a dollar and it isn’t exchangeable for anything else.  We entered a global era of fiat money when the Central banks decided that they could push whatever amount of money they deemed necessary into the economy.  Unfortunately most economists seem to have been schooled, or perhaps pressured, into a bizarre way of thinking because, when looking at their macroeconomic models, they don’t seem to have considered that national banks, as well as Central Banks, also create new money. Most of that new money ended up being extended in mortgages and loans that pay compound interest to the banks.  You can trace the house price inflation in the U.K. directly back to this period because more money was available than there were houses for purchase.  Of course so called “quantitative easing,” (the printing of ever more money to subsidise banks), added another twist up in asset price inflation.  Money couldn’t buy as much of any asset (desirable stuff not being mass produced e.g. houses) as it used to be able to purchase.  Today’s generation of new house buyers consider themselves privileged to join the gravy train of rising house prices yet they have to put down a large deposit and take on debt four and half times their income to do so. The danger point in any economy is generally considered to be when credit/debt to the non- financial sector exceeds 150% of GDP.  The chart above shows that the U.K. is hovering around 160%.  Look at any BIS data and you will see that many other countries also have this level of consumer debt.  We are living in an era where creating fiat money is blowing a huge bubble of credit/debt just waiting to burst.  These are terribly risky times for many individuals because with so much debt around it doesn’t take very much to produce a financial disaster on a personal level.  At long last the lumbering Bank of England has finally become aware of this dire situation.  It recently ran stress tests that revealed British banks could lose £30bn on their loan books covering credit cards, personal loans and car finance if interest rates and unemployment were to rise.  The tests were set at an interest rate of 4% and an unemployment rate of 9.5% and showed that lenders were underestimating the risks involved.  U.K. banks are now required to hold an extra £10 billion of capital in reserve.  What the tests didn’t illustrate, of course, is what a huge tragedy it would be for millions of families if interest rates and unemployment were to rise.  People who are forced to borrow money have little or no reserves when they hit the inevitable lean times, like a spell of unemployment, an unexpected pregnancy, or illness. Surely the lesson for all of us, including the banks, has to be to avoid getting into debt like the plague. September 2017 
Click here to download the PowerPoint chart: Click here to download the PowerPoint chart:
Click here to download the PowerPoint chart: Click here to download the PowerPoint chart: Click to return to page
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It isn’t often that one comes across data which clearly demonstrates the problematic economic circumstances in which we find ourselves now.  Everyone concerned in any business which involves selling things to people will know just how difficult this is becoming, and the simple line graph above explains why.  I’m indebted to economist Steve Keen for pointing out that the Bank of International Settlements (BIS) holds this crucial data about many world economies.  If you didn’t already know about the BIS, it’s based in Switzerland and is where the Central Banks (which control 95% of the global economy) meet to set their rules and regulations.  The BIS is frequently called the Central Bank’s banker.  The example I’m using above is the U.K. but you can download the BIS data for most other countries and, to a greater or lesser extent, it will show the same story.  So many world economies, just like the U.K. are stagnant – because their populations are loaded down with debt.  Most people, including governments, don’t seem to realise that credit and debt are two sides of the same coin.  For any amount of credit issued there has to be a matching amount of debt created.  At its simplest, credit is usually extended with the intention that it will be repaid by the debtor with an interest charge for the use of the money.  Although most people in the Western world take this for granted, it isn’t so everywhere.  Some strict Islamic scholars consider charging interest for a loan to be so damaging for society that they forbid it; others interpret the Quran to mean avoidance of usury.  “Usury” means the action or practice of lending money at unreasonably high rates of interest, but at what point does interest cross over into usury in a low interest world?  Is it the 18.9% to 27.5% compound interest currently charged on credit cards? In an American-style, financialised, consumer society there are inherent pressures for people to use easily available credit to buy goods and services they cannot realistically afford.  It doesn’t help that with the advent of large student loans the younger generation has been primed to accept debt as an inevitable part of life.  I find it sickening that society as a whole is being conditioned by advertising not to think about the total size of debt when something is purchased but solely how apparently affordable the monthly payments are, ignoring the interest payments.  Just look at all those ads for mortgages, cars, smartphones, furniture etc., where the total price is not at all obvious just the (affordable?) monthly payment.  Faced with making what appears to be a seemingly low regular payment, people are deliberately tricked into forgetting about the actual size or cost of the loan.  It doesn’t help that more and more amenities, such as Internet services like Netflix, are only available on an ongoing monthly subscription.  This is also the way software is being sold today, because it is much more profitable that way.  Products from Adobe and Microsoft used to be sold with a perpetual licence for use for as long as one wanted.  Now Microsoft Office has been rebranded as Office 365 and is only available as a monthly subscription.  And that’s for such fundamental software as word processing!  Microsoft’s choice of Office 365 as a name is very appropriate: their intention is to point out that word processing is now a service available 365 days of the year.  But that also means you will be paying 365 days a year - year after year for that use.  This the best argument I know for using LibreOffice, the donation- supported open source suite, which includes a word processor and is constantly updated by volunteers.  This is the software I’m using to write this article.  The idea of actually paying for something outright so you own it may seem very old fashioned, but it is definitely the most cost efficient way to buy anything,  and also if you wish to be able to use something for any length of time. Albert Einstein is reputed to have said: “Compound interest is the eighth wonder of the world.  He who understands it, earns it ... he who doesn't ... pays it.”  Nearly five thousand years ago the scribes in ancient Mesopotamia certainly knew how expensive going into debt was when compound interest was involved. I’m obligated to the superb economist Michael Hudson, from whom I learnt about the magic number 72 in his book Killing the Host Divide the number 72 by any interest rate to calculate the period of years the loan will double in size.  So at a time when the Bank Rate is 0.25%, a credit card debt with an interest rate of 19.4% will double in just under four years (72 divided by 19.4 = 3.71 years).  A Babylonian scribal exercise, from around 2000 B.C., taught how to calculate the length of time it takes for the interest to double the size of the loan.  Nearly a thousand years earlier, in 3,000 B.C. the Sumer had a term for earning, or paying interest, on the interest: “mashmash”.  This is derived from doubling the Sumerian word for interest: “mash”.  Invariably, interest compounds at a faster rate over time than most people’s ability to pay back the loan.  When everything is craftily priced into neat monthly payments, how long the debt takes to double is hidden from even mathematically astute people.  So what chance has a poorer, less educated person? This period of debt deflation that most Western countries are living through isn’t just a result of the 2008 financial collapse.  Look at the graph line above and you can see that from around 1973 there was a massive increase in credit being extended to the masses which peaked at the time of the financial crash.  The original pumping up of demand began when the US dollar came off the gold standard bringing about the need to print extra money to pay for the Vietnam War.  Ever since then the value of the dollar has only been sustained by people’s confidence that a dollar is really worth a dollar and it isn’t exchangeable for anything else.  We entered a global era of fiat money when the Central banks decided that they could push whatever amount of money they deemed necessary into the economy.  Unfortunately most economists seem to have been schooled, or perhaps pressured, into a bizarre way of thinking because, when looking at their macroeconomic models, they don’t seem to have considered that national banks, as well as Central Banks, also create new money. Most of that new money ended up being extended in mortgages and loans that pay compound interest to the banks.  You can trace the house price inflation in the U.K. directly back to this period because more money was available than there were houses for purchase.  Of course so called “quantitative easing,” (the printing of ever more money to subsidise banks), added another twist up in asset price inflation.  Money couldn’t buy as much of any asset (desirable stuff not being mass produced e.g. houses) as it used to be able to purchase.  Today’s generation of new house buyers consider themselves privileged to join the gravy train of rising house prices yet they have to put down a large deposit and take on debt four and half times their income to do so. The danger point in any economy is generally considered to be when credit/debt to the non-financial sector exceeds 150% of GDP.  The chart above shows that the U.K. is hovering around 160%.  Look at any BIS data and you will see that many other countries also have this level of consumer debt.  We are living in an era where creating fiat money is blowing a huge bubble of credit/debt just waiting to burst.  These are terribly risky times for many individuals because with so much debt around it doesn’t take very much to produce a financial disaster on a personal level.  At long last the lumbering Bank of England has finally become aware of this dire situation.  It recently ran stress tests that revealed British banks could lose £30bn on their loan books covering credit cards, personal loans and car finance if interest rates and unemployment were to rise.  The tests were set at an interest rate of 4% and an unemployment rate of 9.5% and showed that lenders were underestimating the risks involved.  U.K. banks are now required to hold an extra £10 billion of capital in reserve.  What the tests didn’t illustrate, of course, is what a huge tragedy it would be for millions of families if interest rates and unemployment were to rise.  People who are forced to borrow money have little or no reserves when they hit the inevitable lean times, like a spell of unemployment, an unexpected pregnancy, or illness. Surely the lesson for all of us, including the banks, has to be to avoid getting into debt like the plague. September 2017 
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Mashmash…

Click to return to page Click here to download the PowerPoint chart: Click here to download the PowerPoint chart: