How long will it take to pay off the £1 trillion of National Debt?

Scanning the papers yesterday, yes there is focus on the Deficit and plans by both parties to reduce it. Skepticism that the Labour Party will reduce and more confidence that the Conservative Party will.

There is little mention that the National Debt will actually rise to £1 trillion next year.

In terms of getting this simple message across, I put it to you readers….

Labour’s misspending will cause the National Debt to rise to £1trillion pounds next year. To put it in perspective, if you spent £1 million a day for 1 million days or 2,740 YEARS, you would spend a £1 trillion.

Or…..

Gordon Brown’s mishandling of the economy will cause the National Debt to rise to £1 trillion pounds next year. To put it in perspective, if you spent £20 billion a year for 50 YEARS, you would spend a £1 trillion.

Is this a bad dream? How are we going to get out of this mess?

A radical solution promoted by some of us at the Cobden Centre, written about by 5 Nobel Prize Winners in Economics and countless other distinguished economists, should be aired among the powers that be. Just to recap….

The money supply is made up of notes and coins — approx £50 billion — plus £1.5 trillion of demand deposits.

We must remember that when we deposit money with a bank we become a creditor to the bank (the money ceases to be yours) and a demand deposit is a claim against that financial institution that can be used for the purchase of goods and services: this becomes yours.

For a bank, the demand deposit is an IOU to you the deposit maker. This means that your bank statement is in effect an IOU from the bank to you.

Make the whole money supply notes and coins and delete all demand deposits.

This is not inflationary: as you create the cash and put it into the corresponding individuals’ bank accounts, you delete the corresponding demand deposit.

The banks then have no creditors, only assets.

You, as a depositor, are no longer a creditor but a customer who deposits his money for safe keeping.

If the banks now only have assets and their share capital, their balance sheets become positive to the exact amount of demand deposits you have replaced with cash i.e. a staggering £1.5 trillion.

As a one-off act, we can then take this £1.5 trillion away from the banks and return them to their pre-reform net worth.

With those assets, we can pay off the National Debt in an extremely short space of time.

I have pondered this at length now. Not many people are capable of understanding this very simple idea as they do not know how to distinguish between what is cash, notes and coins and what is a demand deposit i.e. a bank IOU. If you can understand this, you can solve the UK’s Debt Crisis.

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