'Debt Crisis' for Dummies

Private Banking – the principle of creating money as debt, through loans to and interest from borrowers. Private banks use deposits created or accrued via their retail or commercial banking outlets to finance investment banking, i.e. speculative gambling on the financial markets. They are also free to loan out 90% or more of all deposits - even in the form of current accounts. Since these loans are used for purchases and thus in turn end up as further bank deposits, a massive expansion of credit results in the banking system as a whole - one which is far in excess of the minimal or 'fractional'  reserves (around 10% or less) that banks are required to cover possible defaults. (See Fractional Reserve Banking).

Money Supply - under the system of Fractional Reserve Banking virtually the entire money supply of a nation is created monopolised by private banks and exists in the form of debt. Hence if all debts to the banks were to be repaid in one go, nations would lose their money supply and be instantly bankrupt.

Debts – all bank-created deposits created as loans or debts to customers count as assets for banks, even if they have next to no reserves to cover them in case of default (which is allowed under the system called Fractional Reserve Banking).

Defaulting – not being able to repay a debt to a private bank.

Toxic Debt - ‘bad loans’ that have a poor chance of being repaid.

Credit Bubble - the massive expansion of credit made possible by the system of Fractional Reserve Banking - the freedom of deregulated private banks to lend out 90% of all deposits, whilst only keeping 10% or less in reserve to cover 'bad loans' or possible defaults.

Credit Crunch – what inevitably happens when  ‘toxic debt’ comes back to haunt the banks that greedily competed with one another to hand out ‘bad loans’ and in that way accumulate the toxic debts owed to them as inflated or over-valued assets. What happens is that banks stop lending to individuals and businesses or even to each other, whilst at the same time raising their interest rates to keep their profits up. The result is a slowdown in economic growth, with even totally viable businesses being unable to borrow from the banks.

Ratings Agenciesprivate companies, principally centred in America and responsible for assessing the credit-risk or ‘rating’ of individuals, companies and nations, thus supposedly avoiding the risk of default and the accumulation of  'bad’ or ‘toxic’ debt. Yet in the years of the property boom in America agencies such as Fitch earned themselves billions of dollars from  investment banks by being paid to give an ‘AAA’ rating to what the agencies already knew were ultra-high-risk investments, mortgages and other ‘financial products’ being sold to consumers. Between 2002 and 2007 Fitch gave a Triple A rating to 4 billion dollars’ worth of ‘junk’ assets and debt securities. The rating agencies also consistently gave and an AAA rating to the USA itself - a country that had long had a greater debt than any other.  And to divert attention from the U.S. economy and protect the U.S. dollar as an international currency the rating agencies began to downgrade the credit ratings of other, far smaller nations such as Greece and Ireland - and now Portugal, Spain, Italy and even France.  Only recently has one rating agency (Standard and Poor's) pulled out of this game and removed Triple A status from the U.S. itself  - but only to put pressure on the government – and under pressure from right-wing Republicans - to cut public and social spending for the poor.

Credit Default Swaps – insurance in case of debt defaults, bought by speculators. Their value increases with the risk of default. Hence the interest of their holders in actually bringing about defaults, for example through downgrading the credit-rating of whole nations.

Interest  - additional money paid to banks to 'service' debt to them. Whilst individual debtors may be able to cover interest payments as well as redeeming their debts, in aggregate it is impossible - in principle - for all interest to be paid, thus turning 'debt-servicing through additional interest payments' into debt-slavery or serfdom. The overall interest burden on companies reduces their profits and increases their prices whilst at the same time puts downward pressure on wages - thus reducing investment and consumption and slowing the economic growth necessary to afford the repayment of interest-bound debt.

National Debt – debt owed to the private sector and other purchasers of UK ‘bonds‘ – themselves debts. The term 'National Debt' or 'Sovereign Debt' are highly misleading however, since  no government would have a national, public or sovereign debt to deal with if it was free to issue its own money through a nationalised public bank or ‘People’s Bank’ – rather than having to borrow the money it needs from private commercial and investment banks.

Cuts - Reductions in government spending. Governments often claim that there is not enough money for public spending or that cuts need to be made in it due to the ‘National Debt’ - and/or else explain this debt as a result of over-spending, Yet if this is the case how is it then that the very same governments can instantly come up with trillions to bail out those ‘too big to fail banks’ who have gambled their money away, whilst an ordinary home- or business owner would be left to go bankrupt?

Bailouts by international banks – imposing yet more debt with higher or longer term interest on supposedly sovereign nations already indebted to those banks, but only on the strict condition that nations find the money to pay the banks by privatising all they have, privatising and selling off  their key assets and imposing massive 'austerity' cuts on public investment, welfare services, wages and pensions.

Bailouts to national banks – imposing yet more debt on the people by borrowing money to give to banks in difficulty.

'Quantitative Easing' – a device supposed to inject new money in the real economy.  In reality,  it goes straight into the hands of the banks – whether or not they lend it out to support businesses or individuals in need or just use it to increase their reserves. Quantitative Easing is NOT 'printing money'. It is not even governments directly 'issuing' money and so it is not truly Public Banking or National People's Banking. For it relies on governments purchasing government bonds from the banks, investment and insurance companies and pension funds. These bonds however are themselves nothing but government issued IOUs - in other words they are themselves a form of interest-bearing government debt. Quantitative Easing means nothing more than buying back government debt from its existing private holders, thus increasing their money supply and not that of the people! And yet QE it is all that today's so-called 'national' or 'central' banks can do - since they no longer have the right  to create and inject new money directly into the real economy, and to and for the people.

Money Creation – currently a total monopoly of private banks, and not of so-called 'national' or 'central banks' such as Bank of England or the U.S. Federal Reserve Bank (itself not a national or state-owned bank but a wholly independent cartel of private banks that does not even allow its accounts to be audited by the U.S. government and on which it is dependent). Private banks can and do ‘create money from nothing’ by just keying in a deposit figure for loans - yet without needing by law to have full reserves to cover them. This ‘money from nothing’ could equally well be issued by state-owned central banks - from whom interest-free money could go directly into the real economy - without borrowing from private banks or going into the 'casino' of the financial markets.

Nationalised Banking, Public Banking or People’s Banking – the freedom of a country to issue its own money and inject it into the real economy  without borrowing at interest from private banks. Abraham Lincoln and John F. Kennedy were the last heads of government – besides Hitler – to attempt to do this. Both American Presidents were assassinated.

The Bank of International Settlements in Basel – an international organisation of central banks. Yet though it is neither elected nor accountable to any national government – or to any other body except itself – it expressly forbids all national governments signed up to it from introducing nationalised or public banking.  Originally owned by governments, it is now wholly owned by its member banks and meets to regulate the minimal reserves they are required to hold.

Fractional Reserve Banking – the key system governing the international banking system, permitting banks not to hold sufficient reserves that amount to only a small fraction of what they lend out.  As a result, banks effectively create fictional loan money at will, which in turn ends up as deposits in the hand of other private banks - which are then also free to lend most of it out whilst only keeping a fraction in reserve. The result is a pyramid 'ponzi scheme' of money creation by private banks, but one on which whole nations are dependent to create and maintain almost their entire money supply.

Full Reserve Banking – requiring all banks to maintain 100% or full reserves to cover the loans they would create as or from fictional money deposits.

Financial Debt Crisis – the question here is crisis for whom? The term actually refers to an unavoidable contradiction in the system of international finance or 'credit' capitalism. For in this system all money is created as debt, and the competition between banks to accumulate money as debt imposes ever greater burdens on individuals, businesses and whole nations. If an individual can’t pay off a debt to a bank he is in financial debt crisis and may lose his home and property. If a business can’t pay its debts to a bank it is in 'financial crisis' and may go bankrupt and lose its assets. Yet if private and international banks are in crisis (for example through the down-rating of their loans) the people must pay to rescue them – through their national governments being pressured to take on yet more debts - whilst at the same imposing ruinous 'austerity measures' such as tax hikes, privatisation and asset-stripping and massive cuts in wages and public services and welfare.

'Sovereign Debt' - another term for National Debt, but a euphemistic one - for it is the very opposite of national sovereignty. Sovereign debt is a result of national governments being forced to accept  debt-slavery and impose austerity measures on the people of the sort demanded by the international banking system. Yet the only reason why they feel forced to do so is because the money supply of nations remains in the hands of private and  international banks - and because international banking regulations actually forbid them from exercising the sovereign right to issue and invest their own interest-free money without having to borrow from the private banking sector. Only fully state-owned National People's Banks would allow them to do so - to cultivate their economies by issuing money directly to and for the people - directly to and for individuals, families, businesses, industries, public works and social welfare.