Friday, December 25, 2009

Santa and Banks

In China a severely handicapped man (see below) teaches maths to the children of 'migrant workers'. According to China Hush he suffered from medical malpractice and struggled through life doing well at maths and self-educating himself to the point where he now runs after school programmes.

He lives on and his ambition is clearly to empower these children with the tools of life that maths confers.

At school, I was really good at picking up maths but for some reason, after a couple of weeks I forgot what I'd learned. The consequence of this was that as the maths brought more and more concepts together, I lost the way because I'd forgotten what I'd learned before. I often wondered why that happened to me and not others. My latest answer is that the maths didn't mean anything to me.

And, now as we head into a depression it seems that the vast majority of the Scottish political and journalistic class along with the electorate and the blogeratti are clueless about the meaning of numbers. Why was our understanding of maths never extended to finance? Would we be too powerful as citizens if we understood numbers and apply them to real life?

It would seem so.

Even simple things are not understood. Take for example all the money that Britain makes every year. It amounts (or did recently) to around GBP 1.5 trillion. That's all the money going through people's hands over a year. Then, the Bank of England creates new money to the tune of GBP 150 billion and gives it to the banks. Those banks are then allowed to 'leverage' or multiply that by sometimes as much as 50 times. Let's for the sake of it say 10 times. That gives the banks the right to make new money to the tune of GBP 1.5 trillion. At the flick of a switch the citizens' wealth has been halved in two. The people have been robbed, their futures stolen and unborn grandchildren will be laden with this debt. This is the best case scenario.

This is pretty basic stuff in terms of maths and yet very few commentators seem to get it. Last year the entire population was looted in order to help out bankers who, through massive fraudulant schemes, became so greedy that they ended up owing hundreds of trillions of dollars and pounds. British banks may well owe a hundred times Britain's GDP.

To try and get out of this massive black hole, PM Brown gave more money to the banks so that they could amplify the money and try to get back to where we were. The problem is that where we were was the result of decades of too much credit and fraudulant trading. It burst because it could expand no further. That's why 'quantative easing' is doomed to failure.

Politicians will remain in denial. Governments have the exclusive right to take your money. That's why banks like to control governments and they do! In 2010 they'll take more. They will try to blow up that old fraudulant debt bubble but it is over. In the words of the famous Austrain economist Ludwig von Mises (1881-1973):

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Modern economics preaches that debt is the same as capital. People can apparently borrow to spend and that is healthy economics. Spending not saving has been the name of the game now for decades. No-one has bought into that economic theology more than Gordon Brown. Pain-free gifts are what politicians love. Imagine being able to promise everything that everyone wants. What do the little children want from Santa this year? So, the money-printing machine is incredibly popular with politicians.

As the old saying goes: 'Money doesn't grow on trees'. The theology that it does has taken a strong grip in recent decades. It suits politicians but it also suits banks. Banks sell debt. When you have more debt the banks have more control over your life, more power. It's neo-feudal economics - you become a debt serf.

The 'credit crunch' was caused because the availability of credit was expanded too much. People borrowed and borrowed. With all the extra money going around it drove up house prices. Well, people didn't need to save because if they ever needed a lump sum they could refinance their house. When the debt became out of control people stopped believing they'd be payed back and so the banks stopped giving credit to each other and to businesses and people. So, people (consumers) have less money and businesses (employers) are going under. Leveraged house prices trying to correct downwards..

The government makes no money, it has money given to it by employees and businesses. So, when it gave money to the banks it had to take it from people and productive businesses. So, these consumers can't support the economy and these businesses can't afford to produce nor hire staff. The money was given to the banks but the banks have not extended credit. Well, they continue to lend some in terms of credit cards. How does that work? Well, the banks borrow money from the Bank of England (that's yours and my money) at 0.5% interest and they lend it back to us at sometimes 40 or 50% interest. So, they take the money off you so you need to borrow from them at immoral rates of interest. This interest takes more money from the real economy and we spiral further down the hole.

So, as they try to 'fix' the problem they cause economic collapse. However, the economists and the politicians then tell you that the 'recession' was worse than they thought and that they need to print more money. And so the problems become more and more acute. Many of these people through arrogance or ignorance actually believe this economic theology and so they pump it through the media with zeal. We need more of this vaccine. They have no clue that the vaccine holds the contagion. To hide the severity of the problem they had to co-opt the ratings agencies and the regulators, then change the rules of accounting that apply to financial services and bring in new laws relating to the Bank of England. All about concealment. While they talked about recovery, many knew the true mess we are in and the hid it from us. This is aiding and abetting fraud schemes which transcend anything ever seen in the history of the world.

The problem is that some actually realise that this economic theology transfers wealth from the many to a few oligarchs. The money involved is so vast that these oligarchs overpower elected governments. The politicians are terrified of them. Hank Paulson threatened the US congress with economic armageddon if it did not pass a bill giving $ hundreds of billions to the banks. This is the equivalent of a financial suicide bomber. More recently Royal Bank of Scotland tried the same thing. These banks were called 'too big to fail'. This 'too big to fail' concept meant that more and more taxpayers money was pumped into them to prop them up. The result is that they are even bigger and even more dangerous but still not stable.

Right under our noses we have witnessed the biggest robbery in history. By the banks. The scale of the transfer of wealth is so wide and so deep that otherwise intelligent commentators and observers have no idea how to understand what they're looking at. They quibble over civil servants' pay or allow themselves to be stupified by weapons of mass distraction like the war on drugs or binge drinking. The scale of the looting is just too big to come into view and our innumeracy defends the fraudsters. 'Too big to fail' and 'bail-outs' have created what is called 'moral hazard' whereby banks try to speculate on a high risk basis knowing that if they lose the taxpayer is behind them. There is no end to this lunacy until there is an ultimate currency collapse!

The solution to the crisis was easy. If the banks who got into trouble through fraud were allowed to go bankrupt, shareholders and bondholders would have lost their investments and the depositors would have been insured. The assets that were of any value would have been bought by competent, 'untarnished' investors and a new financial system would have emerged. If a fraction of the money that was given to the banks was used to cancel mortgage and credit card debt then our citizens would have emerged consuming and saving. Instead, the banks are still zombies, consumption is dead and the real economy is collapsing. The tax-take is nose-diving, unemployment is sky-rocketing and the pound is being increasingly devalued through printing. Britain is becoming a basket-case and yet AND still the sheeple cling to the theology of debt economics.

The tradgedy is that with all the pain that has been taken and is still to be taken the banks are still not in a position to be saved. There will be no credit. So governments will print and print. Eventually, hyper-inflation will cause panic, the banks will go into liquidation and with next to nothing Britain will have to climb out of the hole through manufacturing. This will take decades because the manufacturing base is destroyed by debt economics and because you need savings or capital to invest in manufacturing. In Britain, as the oil runs out and The City collapses, all that is left is some weapons manufacturing and some foreign owned football teams. Nothing else. The great delusion, oil driven, of British wealth and power since Thatcher kicked the bubble off now has to be paid for. A large % of Britain's sovereign debt is owed to foreigners because the people were told to spend not save.. Foreign investors want their money back and are now thinking that they may not get it or if they do the pound will have lost so much value that their investments are diluted. See this article in The Telegraph.

The best example in European history of such a situation where massive foreign debt must be paid back from a shrunken manufacturing base is Germany's Weimar Republic. Printing caused currency collapse and ended up with civil disorder and some rather ugly politics which threatend peace in the world. Let's not forget that Britain is a nuclear power. The nuclear threat is the only influence we'll have.

And so we march into 2010. High value jobs will be destroyed in the name of 'recovery'. As the government pumps more money into the economy so we will have no real idea of market prices of assets or even the true value of the pound. The economy wants to correct itself through recession but the government will just not let it happen. So, with false money people will buy things the economy can't afford and the transfer of labour from the leveraged 'distorted' economy to the productive real economy will be prevented from taking place and this will be done at massive expense to the taxpayer. The real problem which is debt will be worsened. The banks and the government they control are going to continue robbing us because we just don't understand numbers. There will be more 'stimulus' and 'quantative easing', the pound will sink, unemployment will rise. We'll be fed doctored statistics about GDP, unemployment and inflation.

Corporate economists and politicians will tell us they've seen green-shoots. There'll be no serious debate until a real crisis hits. Perhaps we'll have another war to stimulate production in the short term and distract us from economic mayhem. Iran for example.

We'll be paying for a long time for the illusion of wealth that debt economics gave us. The young would be wise to emigrate. Government will distrust the people more and more -not long ago they tried to give the police tazer-guns and the police refused them.

The banks will demand money or threaten to destroy the economy. They'll get it. The people will become poorer and more desperate.

This year Santa only visited the banks.

Merry Christmas


Bob said...

Merry Christmas Alex.
Pretty sad scenario you've outlined.
I was reading an article about the state of Americas finances called' brace for impact'. Scary stuff. $2.2trillion needing to be found in 2010 with just £200Bn in QE available.
The solutions weren't very good. More QE, wars, crashing the stock market, defaulting.

Anonymous said...

Your article is pessimistic, but I cant see much to quibble with. Just one point. The banks capital ratios are being supported with the QE, but they are not lending money to consumers and businesses. They are buying government debt. This is being used to pay the army of public employees, as well as buy out the foreign holders of the existing gilts. I would be unsure therefore if the usual fractional lending is going on. There is a huge confidence trick going on, but it is with an eye to the present government minimising its losses at the election. Our currency is clearly only holding up because the markets think the Tories are a safe bet to win.

I don't think there is going to be any revival of manufacturing. The productive capacity of our economy is severely shrunken. No-one knows how to make anything any more. New manufacturers will go to China. We cannot compete with workers who earn peanuts. It is not clear in fact where any revival is going to come from at all.

No, I predict social tensions and intergenerational tensions, and a rapid loss of real wealth for our people. But where to put the nestegg? God alone knows that.

Merry Christmas ( made in Chins )

Alex Porter said...


Some excellent points. Do you have a blog? I'd be interested in hearing your points in the future. We need a better informed blogosphere and you have a lot to say!

I think a lot of the tax base in the last decade especially came from 'financial services'. We now know that it was underpinned by oil and inflated by fractional reserve lending. There's a lot of stuff talked about fractional reserve lending being the problem but it isn't. I mean if I lend you depositors money to buy a car and you default on the loan, I can take possession of the car so no losses. No, the problem is that there was fraud in the underlying asset. The financial derivates that were being traded had mortgages and other loans that simply couldn't be paid back. These were sold to one bank, repackaged and sold to others and so the leveraging went sky-high. As the financial companies made a fortune out of this so the tax-take was high. To keep this scam going banks were given cheap money to leverage and so the tax take kept growing - a political dream for Brown who talked about 'abolishing boom and bust'.

(I think that the Bank of England is buying government bonds directly through QE, not sure that banks are doing it?)

Anyway, now that all this has exploded there's nothing to hold up the public sector like you said. So, they are using 'printing' or QE to reinflate the banks in the hope that the financial sector and the tax-take will return to where it was. They just can't imagine it not being the way it was! In the meantime they are borrowing to balance the budget in the hope that the financial services tax-take will come back. I think it's becoming clear that it's not coming back and so economic and currency collapse looms large on the horizon.

I doubt the Tories are going to take the right measures to fix things. It really would involve a lot of cuts and the risk of social and intergenerational tension like you say. No, I think we're heading straight for the brick wall.

As for manufacturing. Well, when the pound sinks and the RMB goes up, as it has to, Chinese products may well become a lot more expensive. The Chinese must turn their population into consumers. Consuming less than we make must become the economic policy of Britain. How else will the debts be paid? The standard of living will be so poor that people will make things and sell them to each other on the black market. There is the possibility of high value jobs but let's face it - the brain drain is going to go exponential.

Scotland has an opportunity through oil to get out of this mess. I wish that the SNP hierarchy had a clue about the real state of the economy. The hypnotic charms of debt-driven consumer economics has engulfed the leadership.

There can be no excuse for an oil economist except for the confusion caused by proximity to bankers..

The SNP needs a radical debate on Scotland's economy - the sooner the better!

Alex Porter said...

Hi Bob,
Thanks for that.

Have you ever checked out Gerald Celente? I've listened to him so much that I know his shpeel. He's the global leader in trends forecasting. Look him up on youtube..

I think the next couple of years is going to be a fascinating period of history. The more we can spread the word on what's really going on the better..

Bob said...

Alex, I'll check out that youtube on Celente that you mentioned. I think we're in for interesting times right enough. It will be a good spectator sport. Just a pity we'll be so affected by the outcome ! A bit like watching a boxing match then getting dragged into the ring in round 12 and attacked by the boxers.
I was reading Alex Salmond's interview in the paper today with reference to the 'leaders' debate.
He said the 3 main parties all wanted to introduce "massive public sector cuts" and he should be able to counter this argument. No sense from the SNP then. That's uncontrolled immigration, more EU integration, more global warming carbon taxes and no cuts. I think I'll try UKIP this time.

Alex Porter said...

Hey Bob,
Aye, well I've been advising friends to get gold since it was $730 per ounce and recently it went above $1200. Unfortunately, coming from a scheme and having gone to Uni during Thatcher's era I've had nothing but debt so not able to take part in my own strategy. I guess that makes me neutral..

Yeh, we'll all get sucked into it. We've been taking it from behind and can do nothing because our fellow citizens and bloggers are clueless. We're in for more.

Business models will change and opportunities will arise. A lot of fortunes were made during the last depression. The holes left by giants falling will open things up. Providing quality products at affordable prices is now the name of the game instead of disposable junk. Britons will need to feed themselves so farmers will be snapping up second-hand ferraris and agricultural products will be in demand. Smart folk with survival instincts and information will do well enough. I really don't want to comment on the rest.

Like I said, the more we spread the word the better..

Not much sense from the SNP, I agree. Unfortunately they're in a straight-jacket. Can you imagine they advised public service cuts and no bail-outs? They'd have been savaged by the unionist media.

For me, independence for Scotland would open up the debate about the short and the long term. It's in my blood, I just can't not vote for independence..

What do you do? Would you consider blogging?

Bob said...

Hi Alex
It will be back to ' make do and mend' rather than just throwing things away and buying the latest gadget.
I'm pretty powerless aswell. Retired from the forces but now dusting down my CV and going all out in the New Year to get back into full time employment ( aircraft fitter)
I thought about doing a blog but I can get a bit carried away after a few drinks so would probably spend the following day deleting and re-writing !

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Alex Porter said...

Happy New Year!

glad to have helped. It's good to know that I'm useful ;)

Good blog for ya -

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