It is the Interest, Stupid! With Ellen Brown

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As I have explained before,Governments create money or provide a license to create money which is theneither lent out or spent.  It is thentaxed or paid back.  None disappears.
However, charging interest alsocreates money in addition to all the rest. This obligation must also be printed or we have an equation that willnever balance.
For this reason, the US fed allowsthe money supply to increase at a rate of about three percent a year.  If it did not, the economy would be forced tocontract artificially.
The author is quite correcthere.  Public banking needs to become thenorm for any government managing a population in excess of about tenmillion.  I would go further andinvestigate methods to take it even further down stream, however, just gettingevery state or city in charge of the ten million will take plenty of time.
California is obviously desperate, yet theybegan to tackle the possibility only quite recently.  Actual implementation is clearly a long waysout.
The truth is that politicians areintimidated by bankers and foolishly trust their self serving opinions.  Thus financial folly is perpetuated.
It's the Interest, Stupid! Why Bankers Rule the World
 Thursday, 08 November 2012 10:10
 By Ellen Brown, Truthout | NewsAnalysis

 http://truth-out.org/?key=28166740
Interest charges are a strongly regressive tax that the poor pay to therich. A public banking system could realize savings up to 40 percent - allowingtaxes to be cut, services increased and market stability created - with banksfeeding the economy rather than feeding off it.
In the 2012 edition of Occupy Money released last week, ProfessorMargrit Kennedy writes that a stunning 35 percent to 40 percent ofeverything we buy goes to interest. This interest goes to bankers,financiers, and bondholders, who take a 35 percent to 40 percent cut of ourGDP. That helps explain how wealth is systematically transferred from Main Street to WallStreet. The rich get progressively richer at the expense of the poor, not justbecause of "Wall Street greed," but because of the inexorablemathematics of our private banking system.
This hidden tribute to the banks will come as a surprise to mostpeople, who think that if they pay their credit card bills on time and don'ttake out loans, they aren't paying interest. This, says Dr. Kennedy, is nottrue.
Tradesmen, suppliers, wholesalers and retailers all along the chain ofproduction rely on credit to pay their bills. They must pay for labor andmaterials before they have a product to sell, and before the end-buyer pays forthe product 90 days later. Each supplier in the chain adds interest to itsproduction costs, which are passed on to the ultimate consumer. Dr. Kennedycites interest charges ranging from 12 percent for garbage collection, to 38percent for drinking water, to 77 percent for rent in public housing in hernative Germany.
Her figures are drawn from the research of economist Helmut Creutz,writing in German and interpreting Bundesbank publications. They apply to theexpenditures of German households for everyday goods and services in 2006; butsimilar figures are seen in financial sector profits in the United States, where theycomposed a whopping 40 percent of US business profits in 2006. That's more thanfive times the 7 percent made by the banking sector in 1980. Bank assets,financial profits, interest and debt have all been growing exponentially.

(Source: Adapted from Of Two Minds)
Exponential growth in financial sector profits has occurred at theexpense of the non-financial sectors, where incomes have at best grownlinearly.

(Source: Consider the Evidence)
By 2010, 1 percent of the population owned 42 percent of financialwealth, while 80 percent of the population owned only 5 percent of financialwealth. Dr. Kennedy observes that the bottom 80 percent pay the hidden interestcharges that the top 10 percent collect, making interest a strongly regressivetax that the poor pay to the rich.

(Source: Who Rules America?)
Exponential growth is unsustainable. In nature, sustainable growthprogresses in a logarithmic curve that grows increasingly more slowly until itlevels off (the red line in the first chart above). Exponential growth does thereverse: It begins slowly and increases over time, until the curve shoots upvertically (the chart below). Exponential growth is seen in parasites, cancers- and compound interest. When the parasite runs out of its food source, thegrowth curve suddenly collapses.
People generally assume that if they pay their bills on time, theyaren't paying compound interest; but again, this isn't true. Compound interestis baked into the formula for most mortgages, which comprises 80 percent of USloans.
If credit cards aren't paid within the one-month grace period, interestcharges are compounded daily; and even if you pay within the grace period, youare paying 2 percent to 3 percent for the use of the card, since merchants passtheir merchant fees on to the consumer. Debit cards, which are the equivalentof writing checks, also involve fees. Visa-MasterCard and the banks at bothends of these interchange transactions charge an average fee of 44 cents pertransaction  - though the cost to them isabout 4 cents.
Even if you pay cash, you are liable to be paying an additional 2percent to 3 percent, since, until recently, merchants were not allowed to givediscounts for cash payments. A July 2012 settlement  with Visa and MasterCard, however, allowedmerchants in the settlement to add a surcharge for credit card use.
How to Recapture the Interest: Own the Bank
The implications of all this are stunning. If we had a financial systemthat returned the interest collected from the public directly to the public, 35percent could be lopped off the price of everything we buy. That means we couldbuy three items for the current price of two, and that our paychecks could go50 percent farther than they go today.
Direct reimbursement to the people is a hard system to work out, butthere is a way we could collectively recover the interest paid to banks. Wecould do it by turning the banks into public utilities and their profits intopublic assets. Profits would return to the public, either reducing taxes orincreasing the availability of public services and infrastructure.
By borrowing from their own publicly-owned banks, governments couldeliminate their interest burden altogether. This has been demonstratedelsewhere with stellar results, including in Canada,Australia, and Argentina,among other countries.
In 2011, the USfederal government paid $454 billion in interest on the federal debt - nearlyone-third the total $1.1 trillion ($1,100 billion) paid in personal incometaxes that year. If the government had been borrowing directly from the FederalReserve - which has the power to create credit on its books and now rebates itsprofits directly to the government - personal income taxes could have been cutby a third.
Borrowing from its own central bank interest-free might allow agovernment to eliminate its national debt altogether. In Money and Sustainability:The Missing Link, Bernard Lietaer and Christian Asperger, et al., cite theexample of France.The treasury borrowed interest-free from the nationalized Banque de France from1946 to 1973. The law then changed to forbid this practice, requiring thetreasury to borrow instead from the private sector. The authors include a chartshowing what would have happened if the French government had continued toborrow interest-free, versus what did happen. Rather than dropping from 21percent to 8.6 percent of GDP, the debt shot up from 21 percent to 78 percentof GDP.
"No 'spendthrift government' can be blamed in this case,"write the authors. "Compound interest explains it all!"
More than Just a Federal Solution
It is not just federal governments that could eliminate their interestcharges in this way. State and local governments could do it too.
Consider California.At the end of 2010, it had general obligation and revenue bond debt of $158billion. Of this, $70 billion, or 44 percent, was owed for interest. If thestate had incurred that debt to its own bank - which then returned the profitsto the state - Californiacould be $70 billion richer today. Instead of slashing services, selling offpublic assets, and laying off employees, it could be adding services andrepairing its decaying infrastructure.
The only US state toown its own depository bank today is North Dakota. North Dakota is also the only state to have escaped the2008 banking crisis, sporting a sizable budget surplus every year since then.It has the lowest unemployment rate in the country, the lowest foreclosurerate, and the lowest default rate on credit card debt.
Globally, 40 percent of banks are publicly owned, and they areconcentrated in countries that also escaped the 2008 banking crisis. These arethe BRIC countries - Brazil,Russia, India, and China - which are home to 40percent of the global population. The BRICs grew economically by 92 percentin the last decade, while Western economies were floundering.
Cities and counties could also set up their own banks; but in the US, this modelhas yet to be developed. In North Dakota, meanwhile, the Bank of North Dakotaunderwrites the bond issues of municipal governments, saving them from thevagaries of the "bond vigilantes" and speculators, as well as fromthe high fees of Wall Street underwriters and the risk of coming out on thewrong side of interest rate swaps required by the underwriters as"insurance."
One of many cities crushed by this Wall Street "insurance"scheme is Philadelphia,which has lost $500 million on interest swaps alone. The complicated way inwhich the swaps work was explained in an earlier article here.  Last week, the Philadelphia CityCouncil held hearings on what to do about these lost revenues, which have gonedirectly into the coffers of Wall Street banks. In an October 30 article titled"Can Public Banks End Wall Street Hegemony?" Willie Osterweil discusseda solution presented at the hearings in a fiery speech by Mike Krauss, adirector of the Public Banking Institute.
Krauss' solution was to do as Iceland did: Just walk away. Heproposed "a strategic default until the bank negotiates at betterterms." Osterweil called it "radical," since the city would loseit favorable credit rating. But Krauss had a solution to that problem: thecity could form its own bank, and use it to generate credit from publicrevenues just as Wall Street banks do now.
"The crux of Krauss' argument, and most radical of all, is for thecreation of a public bank," wrote Osterweil, which "will keep thetaxes and other financial assets of the people ... circulating in the city, byleveraging them to provide the sustainable and affordable credit required in amodern economy to power locally directed economic development and jobs creation."It is a radical solution whose time has come.
Public banking may be a radical solution, but it is also an obviousone. This is not rocket science. By developing a public banking system, governments can keep the interest andreinvest it locally. According to Kennedy and Creutz, that means public savingsof 35 percent to 40 percent. Costs can be reduced across the board; taxes canbe cut or services can be increased; and market stability can be created forgovernments, borrowers and consumers. Banking and credit can become publicutilities, feeding the economy rather than feeding off it.