Why the UK Economy Needs to Support SMEs
The UK money supply consists of cash (notes and coins) and credit, yet the ratio between the two has altered dramatically. After World War II, 53% of the UK money supply was in the form of credit (debt) issued by banks at interest – that figure now stands at 97%. In effect, banks have a licence to print money, and by making more money from credit (or debt), the financial economy has become increasingly disconnected from the real economy.
This situation has become inherently unstable because the money necessary to pay for interest on credit is simply not there. Companies, organisations and individuals have been borrowing money at interest to pay off more interest as well as capital.
The mathematics of compounding interest-on-interest results in a cycle of boom and bust. Because the money supply is controlled by central banks, successive UK governments have tended to increase ‘national debt’ to fund growth or fiscal stimulus packages, rather than repay the debt (inevitably unpopular with voters).
The banks at the heart of the global economy have also enjoyed increasing deregulation in return for ever-increasing profits. The vast profits were possible because the banks were given free reign to replace money with financial ‘products’ and instruments as a medium of exchange. Essentially this meant repackaging assets such as mortgages and loans and selling them on to other banks and financial institutions. It allowed the sellers to make money quickly and the buyers to profit from the interest paid by the lenders.
When the banks sold on these assets (mortgages and loans) they also sold on the responsibilities that came with them. As a result, banks couldn’t give away mortgages and loans quick enough, lending to almost anyone, including those that could ill-afford to borrow.
When the debtors couldn’t repay their debts, the assets became ‘toxic’ and this has been allowed to happen on a massive scale. These toxic assets are sitting on banks’ balance sheets like black holes. Since the banks can’t see each other’s balance sheets, they have no idea how many toxic assets their competitors are holding. While banks once lent freely, their lines of credit have now all but dried up. The banks are refusing to lend, not only to each other, suspicious that they won’t be repaid, but also to legitimate borrowers and businesses with long histories and strong financial or trading records, which now need support in the face of the recession created by the very banks that are refusing to lend to them.
Worse still, in many cases, banks are reducing or withdrawing facilities that small and medium enterprises (SMEs), in particular, are critically dependant on: overdrafts, business loans and even credit card facilities. Entire divisions of new jobs have been created inside banks to ‘remove’ these toxic businesses, causing further jobs to be lost. This in turn means that fewer and fewer clients are available to purchase from SMEs, thus making the actions of the banks effectively a bullet to their brain. As the final straw, the uncontrolled lending by banks has led to an artificial inflation of property prices, a bubble that has now burst. SME owners, who today beg for credit, are required to put up the entire equity of their home and their business as security, and if that fails they lose everything and the bank makes more money from their collapse.
At the recent G20 summit in London, the governments of the most powerful nations decided to throw over US$1 trillion at the ailing financial system. Along with previous commitments, this will take the total to over US$5 trillion spent on propping up some of the biggest of those banks, institutions and financiers that have failed us so spectacularly. Yet even these vast sums seem to have been swallowed by the banks to shore up their balance sheets, as they are still failing to support the SMEs, which are the lifeblood of the UK economy. The value of the goods and services they produce are equivalent to 60% of the UK’s domestic GDP, and they also account for some 70% of the country’s jobs.
Instead of trying to paper over the deep cracks in the global financial system, everyone should be aiming to rebuild a more democratic and fairer global economy. While the government’s motivations for propping up the banks are understandable, as the whole economy now depends on their survival, a purely top-down approach has not worked and will not work. The fact is that banks were created by the effort and energy of entrepreneurs and business owners creating business, then jobs, and thereby requiring more and more banking services.
In a recession, most businesses look to reduce costs to compensate for falling trade. With massive fixed costs and assets, the huge multinationals (and global banks are no exception) need to make reductions. All too often this means cutting back on the assets they can dispose of, such as labour, which they have done despite all the government backing – huge numbers of staff have been laid off, further fuelling the recession.
Of course, SMEs are not immune to the global turmoil and they need to make cuts too. Usually, however, they adopt a different attitude towards staff. While for large corporate view labour as apparently disposable, for SMEs the staff are often indispensable and at the very heart of the business. Employees are expected to be flexible, take on more responsibility and work harder to drive small businesses through a recession, acting as a catalyst for recovery.
If these forgotten SMEs are allowed to fail because they cannot access financial support, the consequences would be every bit as dire as allowing the financial institutions and multinationals at the top of the food chain to fail. For example, in the UK economy, SMEs account for some 65% of new patents and technical innovations. More than 70% of new product research and development are realised by SMEs, yet they don’t have access to finance due to the global financial crisis.
How is it that the service industry – banks – designed to support businesses now rules them? And how is it that banks are able to accumulate money and, with disregard for economic outcomes, actually be rewarded for doing so? Bank shareholders and senior staff are reaping huge rewards, while tiny SMEs, who effectively built the banks businesses up with genuine productivity, are expected to lose everything to bolster banks’ balance sheets further.
It is important to recognise the contribution that SMEs make to society. Given capital and credit, this sector will use the money to increase output, contribute to and bolster the economy, instead of bolstering their balance sheets and improve share price like the banks are doing. SMEs would also use these funds to sustain or increase employees, pay suppliers and outstanding tax.
Simply put: more needs to be done. One proposal is the construction of a National Small Business Committee (NSBC) to administer funds directly to SMEs as grants. Those grants should be calculated as £500 per employee multiplied by number of years in business. The NSBC would consist of government, industry, treasury and private sector experts.
It is important to challenge the UK government to adopt a different method of fiscal stimulus. Growth and recovery should be stimulated by providing resources from the bottom up, rather than relying on a discredited banking system to distribute wealth.
The recent budget failed to address the key issues for these ‘entrepreneurial’ companies currently surviving on a day-to-day basis. Small businesses are society’s foundation for employment, productivity and culture. Trade pounds, through Bartercard, provide liquidity and new trading opportunities to SMEs but the government also needs to support SMEs directly, not through a tainted banking system that has been proven to fail them and the UK. Fresh thinking and a new approach are required.
Trade Exchange: the Possibilities
The concept of a trade exchange is a good example of an innovative SME. It acts to provide solutions to the economic downturn by helping SMEs to help themselves when other forms of credit are unavailable to them. Bartercard, which was established in Australia during the 1991 recession and dubbed the ‘recession buster’ by the Australian media, is a good example.
A trade exchange enables account-holding businesses to exchange goods and services with each other, which saves them valuable cash without having to engage in a direct item or product swap. Bartercard, for example, created a new form of stable currency – the trade pound – that allows businesses to trade and grow without the need for cash or credit from banks.
Bartercard was born in a recession so maybe we are part of the solution. It works much like a credit card, but is funded by clients’ own goods and services. On joining, account holders receive their transaction card and an interest-free line of credit. They receive monthly statements and a trade directory listing all UK members. Account holders use their card to ‘buy’ other account holders’ goods and services, the value of which is deducted from their account. When members sell goods and services on the exchange, their account is credited with trade pounds, allowing members to trade and profit from their spare capacity, generate new revenue streams and, obviously, reduce costs. The peer group business networking is another important element, along with creative marketing via the network. These can and will be the difference for many companies, determining how hard they are hit – or not.
While the recession inevitably creates new opportunities for a company such as Bartercard through increased sales and the growth of new members, the firm also provides an interest-free line of credit to companies that are subsequently bankrupted and fail. In the current climate, many companies are failing and this is taking its toll on the wider economy. Of course a trade exchange is not a recession-only business tool, as the majority of Bartercard’s members use the product in the good times and integrate it as part of their long-term strategy.