Bank notes and coins represent around 3% of the total money supply in the UK.
Clearly, if everyone wanted to take their money out of the bank at the same time, the bank would be unable to do this.
The vast majority (around 80%) of “money” in the UK is created by banks as debt. If you take out a loan with a bank for £1000, the bank will create that money out of thin air at the click of a button and deposit it into your account.
Banks cannot create infinite amounts of this “money”. They are limited by their capital reserves and the riskiness of their investments, and the amount of “money” that can be created varies from bank to bank.
The entire banking sector as a whole must have 13.5% of capital reserves.
This is loosely equivalent to a homeowner having a £100k mortgage on a house worth £13500. Banks’ liabilities far outweigh their assets. This is called insolvency.
There is far too much debt in the monetary system.
It is a basic financial premise that when people borrow money, they are moving money away from the future and towards the present day.
Borrowing = more now + less later.
Borrowing impoverishes the future.
The UK national debt is over £1.8 trillion.
Interest payments on the national debt are around £50bn per year. That’s nearly £1bn per week being spent just to stop the debt bubble from bursting.
Even after the recent government cuts, the UK government continues to borrow more than £24 billion per year. This equates to borrowing an additional £275,000 every hour of every day.
There are 3 ways in which a government can reduce its debt:
Pay it back. The idea that the UK government might be able to pay back this debt is so ridiculous that nobody in the government or banking sector even discusses it. There is no plan to pay it back. Ever.
Default. The UK is one of a very small number of countries that has never defaulted on its debt. Countries that default on their debt obviously find it harder to borrow money again in the future. Were the UK to default in the future, it would certainly cause another global financial crisis, as when a debtor defaults it impoverishes the lender.
Inflation. In very simple terms, pumping the system full of fake money makes the prospect of owing £1.8 trillion pounds a lot less daunting. The creation of all this fake money doesn’t increase the debt, but makes the debt small in relation to prices, earnings and tax receipts. Indebted governments rely heavily on inflation to keep the system going.
So the UK needs to keep increasing the money supply just to keep the ball rolling. As mentioned above, around 80% of new money is created as debt through borrowing.
Research shows that most of the money loaned out by banks results in higher and higher asset prices. More and bigger mortgages obviously result in higher house prices.
Governments are petrified of deflation, even though (a) people would benefit from falling prices, and (b) periods of inflation that are followed by periods of deflation are part of a natural cycle which prevents unsustainable booms and catastrophic busts.
The Bank of England stress test