Debt creates our money and the supply must expand, so debt must increase. To make this growth possible, bankers can create as much money as the number of available borrowers allows.
Remember the exponential curve of our money supply growth for the past 100 years presented in Chapter 2.7. As we moved up the steep end of the curve’s slope – the last years of the 20th century – to create an exponentially growing supply of money, bankers had to come up with new borrowers.
No savings to borrow
For individuals, savings are good. When people save for their future, savings get them through emergencies, or they can lend or invest. But, banks do not need savings to create new money. And when they use savings for their lending they must pay a percentage to the saver, which cuts into their profits.
Our system does not support or encourage personal savings. So the amount of money people save has been slowly shrinking. The Federal Reserve reports that our “Net saving as a percentage of gross national income” has dropped from averaging about 11 percent in the 1960s to 1980s to averages below 3 percent since 2000. The rate in January 2018 is 1.5 percent.1 In fact, we recorded negative saving rates from 2008 to 2011, which means people were taking more out of savings than putting in. Some of this is due to retiring boomers drawing on their savings, but given the numbers, there should be a balance of young savers and there isn’t. (Increasing student debt is a factor.)
Big businesses have been doing the same. Corporations spend more buying their own stock than they save and invest in capital improvements. Buying back stock juices its value, so the business has greater borrowing power and CEOs can collect higher salaries. The New York Post reports that from 2008 to 2016, US companies spent $4 trillion buying back their own stock. In 2016, “a whopping 66 percent of corporate earnings went to buybacks.” 2
The dearth of long-term investment ultimately hollows out business. When individuals and businesses have no savings upon which to draw for big investments or to cover unforeseen calamities, they must borrow. Some businesses even borrow to buy back their stock. Since the system demands increasing amounts of borrowing, the bankers are happy.
More borrowers – Home loans
In 1900 America, the 46 percent who owned their homes generally owned them outright. Today, while we are above 60 percent home ownership, only about 30 percent of home owners actually own their home mortgage free.3 That represents a substantial increase in the amount of debt against homes. Creating new money by making a mortgage loan against real property has always been a favorite of bankers. They legally own the property until the loan is paid, so they have a solid backup should the borrower default.
After the Great Depression, when many defaulted on mortgages, bankers refused to refinance or issue new loans. A shrinking money supply was hurting the economy, so the federal government established institutions, such as the Federal National Mortgage Association, or Fannie Mae, that gave bankers a greater measure of confidence in issuing mortgage loans – and shifted some of the banks’ risks onto the commonwealth. Mortgage loans resumed a steady exponential increase. After WWII, provisions in the G.I. Bill guaranteed loans to veterans giving banks confidence to issue even more mortgages. By 2017, total mortgage debt in the US was $ trillion – about $118,000 for every US household.4 But, there are only so many people who need to buy a home, and most of us get by with one.
More borrowers – Consumers
Until the 1940s there was almost no consumer debt – the slow and low part of the exponential curve of our expanding money supply. Most families saved to buy what they needed. It was common for a family to have an account – a line of credit with a local store, which they settled every month. This debt to the store was not monetized; it could not be used by the community.
To satisfy the demand of private money creation, more people had to become bank borrowers. While in the early part of the century people would have saved for a car or a big appliance, by the mid 1950s it was becoming easier for consumers to take out a loan for these purchases. When the auto and large appliance borrower pool became saturated, banks came up with the idea of bank issued cards that gave people the ability to have revolving credit for any and all purchases. (Revolving means you pay it back and take it out again, though many people carry their balance and just pay the interest.) Prior to 1968, the Fed records no revolving credit.
Before 1974, it was hard for women to get credit. The 1974 Equal Credit Opportunity Act required banks to consider women’s applications for credit using equal standards. This doubled the pool of potential borrowers.
At the end of 2017, revolving debt, mostly credit card balances, was $1 trillion – about $8,099 for every adult in the US. Non-revolving credit is another $2.8 trillion – another $22,080 per adult. This means in addition to the average household mortgage burden of $118,232, American adults carry an average of $30,200 each – roughly $150, or more per household.5
In 2017 median household income was roughly $58,000.6 So in about 50 years, from 1970 to 2017, American households went from having almost no consumer debt to owing more than twice what they earn in a year. With an average interest rate of 5 percent, the median family dedicates roughly $7,400, or 13 percent of its gross income to pay interest on its debt. For families without a low interest mortgage, the interest on their debt is considerably higher – often above 20 percent for credit card debt. Diverting 13 percent of one’s income to pay for interest means there is less to spend – and an even greater need to borrow. Quite a feast for the bankers! And this is just ordinary debt; over 12 million Americans borrow from payday lenders that charge up to 400 percent annual interest, costing poor families billions of dollars.
There is a limit to how much debt people can carry, and in my opinion, we are likely over the limit.
More borrowers – Business
Prior to 1950, most debt was incurred by people of great wealth for big business investments – the wealthy and well connected borrowing from banker friends. It was rare for small businesses to go into debt; they used profits to reinvest in expansion and equipment. Businesses often had credit lines with their suppliers, or agreements to pay their bills in 30, 60 or 90 days, or more – which is a kind of borrowing. However, they were not borrowing from banks, who would be creating new money by the lending. And, their debt to their supplier was not monetized – it could not be used by anyone else in the community.
The Main Street business attitude toward borrowing changed over time. Small business owners are often on a treadmill of debt. A 2016 Experian study of 2.5 million small business owners found that the small business owner has an average mortgage balance of $192,000, an average credit limit of $56,100 and an average income of $91,600. That’s a challenging level of debt to carry. The inescapable interest payments on previous debt can make it impossible to withstand a downturn in sales and necessitate further borrowing.7
More borrowers – Other nations
Prior to the 1970s American banks made their loans almost exclusively to American businesses and individuals. But the money supply growth curve was heading up, and there were not enough American businesses and individuals to absorb all the new money creation needed to satisfy the exponential growth imperative. A whole new market for loans was born.
In the 1970s and early 1980s there was a boom in lending to other nations – even governments on the brink of collapse. Often the collapse was part of the plan, with the other nation’s natural resources becoming collateral booty for the bankers. Bankers paid consultants to dream up expensive development schemes, like big dams and electrical plants for countries with no wire network to carry the electricity from the plant to the populace. These loans often required the borrower countries to spend the loans on buying American- made goods and services. This did triple duty: increased the supply of money as the system required by issuing more and bigger loans; increased the economic output of American business; and, put developing countries and their natural resources under American corporate thumbs. John Perkins book, Confessions of an Economic Hitman (2004) or S.C. Gwynne’s Selling Money; a Young Banker’s First-hand Account of the Rise and Extraordinary Fall of the Great International Lending Boom (1986) explain this immoral and shameful activity in detail.89
More borrowers – Students
Prior to 1984, students received more grants than loans. As a nation, we once believed support for intellectual curiosity and a liberal arts education was good for the nation as a whole; we believed in an educated citizenry. A significant shift happened under Ronald Reagan, who as governor of California said the state had no business “subsidizing intellectual curiosity” – a strange attitude for a leader in a democracy.10 But it is an attitude that makes short-sighted sense if the goal is to strengthen the money power and manipulate a poorly educated populace. A few years later as president, Reagan initiated a national shift away from grants for education to student loans – a new candy jar for Wall Street bankers.11
Before the Reagan administration there was almost no student debt. In 2006, the Fed records $481 billion in student debt. Twelve years later in 2018, the debt had tripled to $1,521 billion. 2005 marks a dramatic change in the rate of debt increase. The 2005 Bankruptcy Reform Bill made an exception of student debt. It is the only debt that cannot be discharged in a bankruptcy proceeding. This reduces the risk for those who create money to loan to students.12
Roughly 44 million of our 160 million working age adults carry an average of $37,172 in student loan debt. Of those, 5 million are in default – their job prospects have not been enough to enable them to repay their debt. Being in default on a loan is crippling and most student loans cannot be discharged by a declaration of bankruptcy. Over 3 percent of our working age adults are so encumbered – and the number is growing.13
More borrowing – US Government
The US Government debt in dollars forms a slightly lagging, tandem curve with the money supply. This has two benefits for the money system: it is a trustworthy anchor; and with a depreciating dollar, more money is needed for government operations, or government operations must be cut, which means more borrowing nationwide.
The more government borrows, the bigger its interest payments and the more it must borrow. In 2017, interest payments gobbled up 18 percent of all the Operating Fund revenue.
To maintain the same level of government service, government must collect more to make up for the 18 percent going to interest payments. And this is in addition to the steady 3–8 percent increase needed to hold even given the deliberate loss of a dollar’s value. More tax collection means less money to spend in the private sector. Less money to spend means more borrowing. The money creators do well until the people and the commonwealth are bankrupt.
More borrowing – Wall Street on margin
Wall Street has another world of eager borrowers – themselves. Bankers have always lent to their friends and cronies whenever they could get away with it. However, these kinds of loans predictably lead to a high incidence of bank failure. The Glass-Steagal Act was passed in 1933 to reduce this danger by banning banks with money creation powers from investing on their own behalf with newly created money. But the Financial Services Modernization Act in 2000 did away with the wall between money creation and investment. After the predictable meltdown, the Dodd-Frank Act of 2010 stuck a few fingers in the dam, but did little to genuinely curb Wall Street excesses. Six years later, the banks are bigger and more consolidated than ever and raking in the profits at our economy’s expense.
In addition to skimming off the top in plain sight, Wall Street has enormous private stock trading platforms, operated mostly by brokerages, called dark pools. These private exchanges for trading securities are inaccessible to the general investing public and have a complete lack of transparency. According to the SEC, in 2005 these pools accounted for roughly 5 percent of national market system trades. By 2015, they were executing about 18 percent, in fact executing a larger portion of consolidated volume than smaller exchanges.14 Here borrowing and gaming take place mostly off the books. Banks trade with each other and with well-chosen marks – often with borrowed funds. Given the exponential curve of money supply growth, the dark pools today must be soaking up a greater and greater percent of money creation activity.
Borrowing is not necessarily a bad thing. We enjoy owning things we could not have if we had to save up to buy them. Again, it is a matter of balance, and it is a matter of where the borrowed money comes from – a system choice. Without a system change, we can’t keep climbing the exponential curve safely. But, the system requires continued exponential growth of a money supply created by issuing debt. How can the system continue to function?