Pulling up outside Greg and Britney's residence, things look pretty rosy.
At first glance the house, a Victorian dwelling, looks well maintained and you notice an EV displaying this year's registration on the paved driveway. Greg and Britney greet you warmly and during a pleasant meal you hear about their recent holiday to the Maldives (unbelievable), plans to extend and upgrade the kitchen and next year's dream holiday to the Far East.
You also discover that since leaving college Greg has progressed to a middle management role and Britney has a part-time job in childcare. Over a glass of French wine and other foreign delicacies, you can't help admiring the Swedish decorations and furniture and conclude that things look pretty good for Household GB.
However, while Greg and Britney are in the kitchen getting the glasses refilled, you notice a stack of statements from a credit company wedged together on the stripped pine bookshelf. You know you shouldn’t peek - but you do (unforgivable) and this correspondence tells a completely different story.
Household GB owes the credit company £60K with a 15% interest charge. On Greg and Britney’s return you own up to your indiscretion and apologize for reading private mail but also express your concern about their financial situation.
To your surprise both Greg and Britney seem completely unfazed by the level of debt they have taken onboard. As you recall, the conversation went something like this:
Me Are you sure you can handle this amount of debt? It seems completely unmanageable.
Household GB Not really. Our joint salary can cover the repayments and there's no point planning these holidays for ten years’ time, who knows what the future holds. We need the car to get around and if credit is available why not make use of it ?
Me I understand, but surely the amount you owe must be pretty close to your annual income.
Household GB: I guess so, is that a problem? Everybody has a credit card bill.
Me: How do you intend to clear the debt?
Household GB: You don’t have to pay it off, just make the monthly repayments.
Me: It has to be cleared eventually.
Household GB: Sure, but only in the long term. House prices are going up and I'm hoping for a promotion. We could make savings if we have to.
Me: What if you have an unexpected expense?
Household GB: We extend the credit limit - that's how we paid for the holiday.
Me: I’m not sure you’ve considered the implications of maintaining this level of debt.
Household GB: What do you mean?
Me: What happens if the interest rate moves up?
Household GB: Short term, no problem. It would be an issue if rates stayed high for a year or so but the papers say that’s unlikely because the economy’s fine.
Me: Could you support a reduction in earnings? Your debt is about the same as your income, that doesn’t give you any leeway.
Household GB: I believe my job is safe but who knows? I guess we could ask for a debt holiday until we can sort things out. I can’t afford to get ill, that's for sure.
Me: Do you have any reserves or savings at all ?
Household GB: No.
Me: What would happen if the credit company refused to extend the credit line?
Household GB: Really? Can they do that?
Over the next hour and several cups of coffee you go over the figures with them both just to make sure you haven't missed anything. You find some additional liabilities: the house mortgage of course, a severely underfunded pension plan, an uncosted budget for the kitchen extension, next year's holiday and a separate credit scheme for the brand-new EV.
You assure Greg and Britney that there are ways out of this tricky financial position, it just takes organisation and commitment. Over another hour and one more cup of coffee you present them with a plan.
Objective One: Stop spending. The expensive foreign holiday and the kitchen extension is cancelled. No major capital item to be placed on the credit bill. Future expenditure is controlled by a tight budget.
Objective Two: Reduce liabilities. Return the new EV to the leasing company and purchase a second-hand runner.
Objective Three: Increase income. Ask for an increase in salary. Search for a higher-paying position. Take on part-time work. Think of a service or skill that could generate a cash income.
Objective Four: Repay the principal.
All surplus funds should be used to reduce the debt owed to the credit company. Unless the principal is attacked directly there is no way out.
Greg and Britney greet the plan with resignation until the last detail is revealed - the plan would need at least six years to bring the principal down to anything like a manageable amount. On leaving Greg and Britney's house you’re confident that they have the desire to reorder their finances but have doubts as to whether they will stay the course.
We are all household GB.
I suspect most people reading Greg and Britney's story would feel some level of trepidation regarding their financial situation. Basically, it’s on a knife edge. Any change in personal or economic circumstance would cause the otherwise affluent lifestyle to collapse. In the short term it can work but in the long term it’s completely unsustainable as it can only lead to increasing levels of debt. However the truth is, we all live this way and nobody really cares. As of late 2024, the UK national debt is approximately £2.6 trillion. It’s important to try and keep these numbers in perspective as 2.6 of anything doesn't seem that much.
Writing it as £2,600,000,000 or two trillion six hundred billion has more of an impact. You might also like to try to visualize what one million pounds sterling would look like as a pile of £20 notes, then think of a thousand more piles and then double the whole amount and add some more. For reference a pile of £20 notes amounting to one million pounds would be just under 6m tall (5.65m to be exact). To pay back the national debt as a pile of £20 notes the stack would be just under 15 km high. A commercial jet can cruise at a maximum altitude of 12 km so a pile of cash this high would require navigation lights.
Like Greg and Britney, you might make the mistake of thinking that the scale of the national debt is of little consequence but you’d be wrong. Currently Country GB’s national debt currently amounts to approximately £38,000 for each person but that’s not really the true picture. If only tax-paying individuals are considered, the national debt would be around £81,000. Two taxpaying individuals in the household, well you're £162,000 into the hole I’m afraid. To put this in perspective the average mortgage liability for GB homeowners in 2024 is only £180,000. Most households are paying two mortgages, one for them and one for the government.
Like Greg and Britney the scale of the problem can only be truly assessed if the amount of debt is set against the household income. After all a debt of £100 is trivial for an income of £1,000 but catastrophic for an income of £10. Greg and Britney's level of debt and income is closely matched - not really a situation you want to be in. Unfortunately Country GB's situation is exactly the same.
Gross National Product (GNP) measures the total economic output produced by a country's residents and businesses, in effect the “income” of Country GB. As of July 2024, the UK’s national debt stands at just over 99% of the country’s GDP.
You may believe that the national debt belongs to the government and can be repaid using public money. Unfortunately, there is no such thing as public money, only taxpayers’ money. Like Greg and Britney an ever-increasing proportion of the taxes you pay goes towards meeting the repayments. Country GB’s debt interest payments currently absorb 2.5% of GDP which translates to around £110 billion annually, an amount which exceeds the entire defence budget.
Fixing the problem
The situation that Country GB finds itself in is much the same as Household GB, perhaps the remedy is the same.
Objective One: Stop spending.
In the UK we believe our political system to be a representative democracy and as such no party will ever be elected on a platform that proposes public spending cuts. One possible solution would be to mislead the public by campaigning on a policy of spending and then introduce an austerity program once elected, after all this tactic has worked before. The problem here is the incoming party only has five years to show tangible benefits before they have to go back to the polls and this is never long enough to unwind decades of overspending, so this idea is a non-starter.
Objective Two: Reduce liabilities.
Country GB has financial obligations that are not even included in the national debt; these unfunded liabilities are bills that Country GB is expected to pay in the future but for which it has no committed reserves. These costs are tied to long-term obligations like pensions, healthcare, and social welfare commitments.
1. State Pension
The state pension is unfunded, meaning payments rely on current and future taxpayers. In 2022, the cost of state pension liabilities was estimated to be in the hundreds of billions over the long term.
2. Healthcare (NHS)
The National Health Service (NHS) represents another large unfunded liability. While the NHS is funded annually through general taxation, growing healthcare costs, longer life expectancies and increasing demand for services creates an ongoing financial obligation.
3. Public Sector Pensions
Public sector workers (e.g., teachers, civil servants, police) have pension schemes backed by Country GB. Although some schemes are partially funded, many rely heavily on future taxpayer contributions, adding to the liability.
4. Future Social Care and Welfare Benefits
Country GB also has unfunded liabilities for social care and various welfare benefits, including disability benefits and unemployment support which amount to nearly £5 trillion.
The state pension alone accounts for around £3.9 trillion, while public sector pensions add another £1.2 trillion.
Objective Three: Increase Income.
For Country GB this would be the equivalent of an increase in GNP representing real economic growth. Since 2008 productivity growth in the UK, representing output per worker has not improved significantly. There are many reasons for this but the size of the debt means that it cannot be significantly reduced by a simple increase in productivity.
Objective Four: Repay the principal.
Unlike Greg and Britney who could in theory clear down the principal on the debt, Country GB can never repay the national debt. Not because it’s too large, or the repayments would place a high burden on the economy, although both facts are true - but because it’s technically impossible. Not just financially unworkable, in the sense of being impractical or maybe politically difficult but mathematically and logically impossible.
This is because in a debt based financial system all cash is debt, or “credit” as it’s sometimes described.
Explaining why all cash is debt is left to a later section. It's a story so unbelievable it deserves its own section however the consequence of this fact is bizarre and quite surreal.
If the national debt was repaid, the “money” representing the debt would be destroyed.
The ‘money’ doesn’t move location or change ownership, it actually ceases to exist.
Unfortunately removing £2.6 trillion from the economy would not leave enough money for the financial system to function. It would be like playing a game of Monopoly with only a dozen £100 notes. At some point the game would grind to halt because the players would simply run out of money. They may own properties on the board but they will not have the cash to pay a tax fine. In financial terms the players would run out of liquidity.
Remove the debt/credit and the cash also disappears, causing the economy to seize up like an engine running out of oil and for this reason the national debt cannot be repaid.
Any person reading this might ask the obvious question.
With all these difficulties and the impossibility that the debt can never be repaid - how has the system remained stable for such a long period? Additionally, if the strategy works for Country GB, why not Household GB?
There is one central reason why a country can operate a debt based economy but a household cannot.
The government of a country can grant itself the authority to act in a way that would put Greg and Britney in jail for a very long time.
Extortion
It might occur to Greg and Britney that one way out of their predicament would be to go to their neighbours’ house and insist that they hand over 40% of their income with a threat of violence if they don’t see the value of the proposition. There might even be some suggestion that a service is being provided, such as personal protection.
“Nice house you have here, pity if something bad were to happen to it.”
Sounds like a plan except it’s a classic “shakedown” racket and it’s illegal. Except of course when you're the government, in which case it’s called taxation.
If you think taxation is a genuine financial transaction between two equal parties, try informing the government that the services are no longer required and you are cancelling the payment. I can assure you the boys will soon pay you a visit. If you're lucky they’ll just knock a few ornaments off the shelving and leave with the cash. Worse case they'll kidnap you and hold you hostage for three years until you pay up.
One of the classic features of a shakedown racket is you have no idea how your contribution is being spent. It could be used to bankroll turf wars with local gangs, finance other illegal operations, placed into speculative investments or simply used to enrich the higher order gang members. All the time you're getting poorer but are still grateful that the bad things haven’t happened yet.
Does that sound familiar?
Face facts. Taxation is a shakedown scam backed by threats of violence. It is quite simply the legal definition of an extortion racket.
However profitable the taxation extortion racket is, it can ever generate the amount of income necessary to maintain the national debt. Even if the tax rate was 100% and people were stupid enough to pay it it still wouldn’t clear the national debt. Another scam is necessary to generate the ridiculous amounts of credit needed to sustain the illusion of economic stability
Counterfeiting
What Greg and Britney really need is a banknote photocopier in the garden shed. Whenever a payment is due they can simply fire up the photocopier and knock out any number of £50 notes they need. Problem solved. However crazy this may sound, for some this was a real solution. Prior to the introduction of the 12-sided £1 pound coin in 2017 roughly 1 in every 40 coins in the UK were fake.
Unfortunately counterfeiting any country's legal tender is a serious offence. In the UK the penalties are a maximum of ten years in prison and unlimited fines, unless of course you are the government. The government can generate as much money as it needs to balance the books. It’s never described in this way, rather it's hidden behind terms such as ‘borrowing to invest in services” and “quantitative easing' but in reality it’s just the government printing money.
However the statement “government printing money” is misleading in two respects.
The government doesn't have the authority to create money and no physical cash is actually printed. So an explanation is required.
The money is created by the central bank of the country. In the UK that’s the Bank of England, in the USA the Federal Reserve, France has Banque de France and Germany Deutsche Bundesbank. Most countries in the world have a central bank. In fact, as we shall see later, unless you would like the U.S. military to pay you a visit, it’s pretty dangerous not to have one. The central banks of each country have different characteristics. The Bank of England was originally established as a private institution but was nationalised in 1946 and is now owned by the UK Treasury. The Federal Reserve in the U.S. is neither federal nor has any mandate to hold reserves, and is privately owned.
However all central banks have one common characteristic - they have the authority to control the supply of money for the countries they serve.
How is that achieved?
Like Household GB, Country GB has a financial budget that it needs to work within. In an ideal economy the revenue income (taxation) should balance out the spending on things such as defence, pensions, infrastructure and healthcare.
Country GB last ran a balanced budget in 2000-2001. Since then it has consistently run a budget deficit, where government spending exceeds tax revenue.
For the current fiscal year of 2024-25, the UK government is likely to face a budget deficit of approximately £128 billion. While you might be able to extort a little more money from the population by tweaking various tax thresholds and allowances, you’re not going to find £128 billion. However the money has to come from somewhere so It’s time to talk to the bank manager.
In the UK the process of placing £128 billion on the Country GB credit card goes something like this.
The UK Treasury creates a bunch of IOU’s called gilts. In some respects they are analogous to savings bonds you might buy from your local high street bank.
Gilts are contracts to borrow money over a fixed time period at a specified interest rate. Basically if you give the government some money they will pay you back in x years time plus a bit of interest.
The majority of gilts are issued through competitive auctions, where financial institutions, investment banks, and other authorised participants submit bids. The gilts are sold to the highest bidders until the desired amount is raised. So where does the £128 billion that the government needs actually come from? Some will come from businesses looking to invest profits but a large proportion will be commercial banks and investment funds looking to create a return on your deposits and private pension pots - or more accurately their deposits and pension pots. More on that distinction later.
But, just like in our game of Monopoly, what happens if liquidity dries up and the market doesn’t have the money to buy all the UK debt?
In this case the Bank of England will step in to buy the remaining debt. That way the government can guarantee that the gilts will have a buyer and that the budget deficit is funded. Whatever the amount of debt - it will always be covered by the Bank of England.
However if the Bank of England uses its fancy platinum card to cover the tab, where does it get the money?
From nobody - the Bank of England creates the money out of thin air.
Simply by entering figures into a central ledger, credit is created which is used to buy government debt. For the record this process is covered by another fancy term “debt monetisation”. The government swaps the IOUs it creates (gilts) and the bank moves the credit into the treasury account to cover the deficit.
There is another feature of this process which defies logic. The money loaned to the government by institutions attracts a level of interest, normally described as the yield which compensates the lender for the capital loss and the risk involved. However the interest is also paid to the Bank of England who simply created the money from nothing and therefore has no loss of capital or increased risk. So the bank exchanges a product that’s created from nothing for the promise of cash in the future, plus interest. It’s a perfect business model.
You may wonder why the government even bothers to tax its citizens if the Bank of England can create as much money as it needs to cover it’s costs. There is a technical explanation but the simple answer is - if the population realised that their labour is being exchanged for worthless scraps of paper there would be a revolution. Therefore the crime syndicate has to go through the charade of taxation to give the impression of a functioning economy based on sound money… when in reality the currency is worthless. Taxation also provides a level of control on the population, a point that’s important when we examine the future role of the Everything List.
Back to the point in question: if Country GB is in debt who is the money owed to?
UK retail investors, pension funds, insurance companies, and investment funds hold a significant proportion of gilts. In other words the British public (you) are owed some of the money. Another 25-30% of UK government debt is held by foreign banks and investors, including other central banks and sovereign wealth funds. This leaves the Bank of England holding roughly 30-40% of total government debt purchased using money created from nothing. That's a fancy way of saying the children of the current generation of the British public are owed the money. The government has borrowed the money from your children’s piggy bank - their future earnings and tax revenue.
So apart from the fact that up to 40% of the GB County debt is serviced by counterfeit cash, there is another twist in the tail.
All gilts have an expiry date after which both the original investment (principal) and the interested must be repaid. Short-dated gilts expire after a period of seven years. Medium gilts have a maturity between 7 to 15 years with some long-dated gilts extending between 15 to 50 years. At any point in time the government has to find the money to pay off the IOU’s (gilts) it issued in the past. If it was running a budget surplus it could use money from taxation to repay the debt but there is never a budget surplus so the maturing gilts just add to the budget deficit. Technically the debt is “rolled over” which is a clever way of hiding the fact that the government simply borrows the money to cover the IOU’s in the same way it covers all the debt - all guaranteed by the Bank of England.
So as increasing amounts of debt are rolled over, the proportion of the debt covered by counterfeit cash slowly expands, which takes us back to the original question - who is the debt owed to?
Basically other countries with a trade surplus (think oil producing nations), you, future generations of UK citizens and increasingly the Bank of England.
But if the debt is owned by the Bank of England and the Bank of England can simply print money to cover the debt - what's the problem? Obviously the question from any normal economic perspective is completely insane but at this stage who cares?
Unfortunately you have to care, because, like Household GB, the debt will have to be settled at some point in the future. Clearing the principal sum is mathematically impossible as we shall discover later, but without significant growth annual interest payments will at some point overtake County GB total tax revenue.
Currently, interest payments on the national debt are larger than defence spending so we are well on the way to that position. This is the reason why the media always seems to have an unhealthy interest in the subject of economic growth as measured by the Gross Domestic Product (GDP). If County GB’s output falls by 0.1% over a year you can be assured that it will be headline news throughout the day and if the trend continues over three consecutive months you will hear the screams of “RECESSION!“ and there will be much wailing and beating of chests from politicians.
In a functioning economy based on sound money, growth would move through predictable cycles of good years and bad years but in a debt based economy even the threat of a recession is treated like an Ebola outbreak in a children's playgroup. According to the politicians and media pundits the economy MUST expand year on year otherwise bad things will happen and in this respect, they are right.
Think of the output of County GB’s economy as a pie from which both the crime syndicate and the long suffering population both take a share. The government takes cash from pie through taxation to meet the cost of the budget and the rest we get to keep for a while until we try and spend it or die, in which case it's taxed again.
The government always spends more than it can extort through taxation so it borrows the difference using the mechanism described earlier. As a result the government's slice of the pie is constantly growing due to the progressive increase in the interest on the debt. This can be mitigated in part by an austerity program (unpopular) or increasing the size of the debt (unscrupulous). The second option is always the one selected and the government's slice expands as the debt repayments become an increasing drain on the budget. The inevitable growth in the government's pie slice is not a problem so long as the overall size of the pie keeps growing, ideally at the same rate or greater than the interest payments but if growth slows, or even worse, reverses you have a problem.
In this case the budget is squeezed from two directions. Tax income falls as the economy slows down but the interest on the debt still has to be met, which leads to more borrowing and increased interest payments. It’s an economic death spiral.
That's why, in a debt based economy and with governments running unbalanced budgets. you must always have economic growth. If you don’t the economy will eventually collapse due to the weight of debt repayments. Predicting when the interest on County GB’s national debt might exceed tax revenue is an impossible task but one scenario suggests that under high-interest rate growth and sustained borrowing, interest payments could overtake tax revenues within a decade.
It’s encouraging to think that by 2035 we will all be working to pay the Bank of England interest on money it created from nothing. That doesn’t sound like much of an incentive for getting up in the morning and putting in a shift.
In reality, the death spiral outcome is probably unlikely because before County GB gets close to that point the value of the currency will be destroyed by inflation.
You can be sure of that fact because it’s already happened - we just don't realise it.
Summary
The financial circumstances of Country GB are easier to understand once you frame it in the context of a household budget.
Like Greg and Britney, Country GB spends more money than it earns and makes up the difference using a credit card issued by the Bank of England. In both cases the total debt has grown to match annual income. However, so long as Country GB and Household GB can make the monthly interest repayments the situation is precarious but manageable.
Additionally, Country GB has two advantages not enjoyed by Greg and Britney.
First, under the guise of taxation, Country GB can lawfully extort money using threats of imprisonment and confiscation.
Second, it has an unlimited line of credit. Country GB knows that the bank will never refuse an overdraft request because it has the right to create money from nothing and (even better) charge interest on the loan.
For this reason the government has little incentive to reduce spending as all the bills can be passed onto the next administration using the counterfeiting mechanism and taxation, all backed by the force of law. In a democracy, growing the debt (normally described as “public service investment”) is always a vote winner. Because it can never be repaid, politicians know that the level of Country GB’s national debt is irrelevant, so you might as well be in for £10 trillion as £1 trillion.
The poison pill is not the debt itself but interest on the debt.
Unfortunately this is the end of the good news. From here things get really bleak.
Next : It’s only money- except it isn’t