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The magic of banking the COmming coolapse



CONTENTS
Title
Foreword
1WhatisMoney?
2HowdoBanksOperate?
3YieldsandInterest
4What’sNew?
5What’stheDebate?
6CurrencyExplained
7TheMythofaCompetitiveCurrency
8Summary
AppendixA:Don’tBlametheEuro
AppendixB:GDPExplained
AppendixC:PetroDollars
Acknowledgements
Copyright


Foreword

Theworldstandsontheedgeoftheabyss.Afinancialcrisisofitsownmaking.Howdidit
comeabout?Wherediditallgowrong?Whatcanbedonetosalvagethecomingcollapseof
bankingandfiatcurrenciesacrosstheworld?
Banking and monetary disasters are not new. Historically, such fiascos have been limited to
very few major countries at any one time, the most well-known and textbook case was the
Weimar Republic. Of particular importance because Germany is a major economic power.
Minorbankingandcurrencycollapsesaresimplypartofworldhistory.
Theyhavebeensofrequentthatthereisastrongcollectorsmarketingovernmentbonds,the
actual paper. Works of art in their own right. In fact, the more ornate the bond script and
artworkusuallythemoreunreliabletheissue(mostlyathingofthepasthoweverasthemodern
worldisnowdrivenbyelectroniccurrencies).
Whatissodifferenttodayfromthecrisesofyesteryear?Thenewphenomenonisworldwide.
Inthepast,therehasalwaysbeenafall-backposition.Inthenineteenthcentury,sterlingwas
thereservecurrencyoftheworld,whileinthetwentiethcenturyitistheUSdollar.Stillthe
casetoday,buthangingonbyitsmetaphoricalfingernails.
In2008,thefirstterriblerumblingsoftheloomingfinancialcrisiswerefelt.Thebankswere
brokeandtheworldknewit.Asbanksarebuiltonfaithandconfidencewhenthatephemeral
foundationcrumbles,sotoodoesthesystem.Centralbankersarethelastresortlenders;thisis
not just a glib academic phrase; it is the central bankers raison-d’etre. These central banks
havenomoneyoftheirownbutcancreatemoneywithpoliticalsupport.
“Fiatcurrenciescancollapseinjustweeks”


Source:http://www.shadowstats.com/article/hyperinflation-2010

Indaysgonebytheywouldturntheprintingpresses,actuallymanufacturenotesandtransfer
themtoanywherethefiscalholeneededtobeplugged.Todaytheyaretypedintoacomputer
andmoneyiscreatedoutofthinair.Thetechnicaltermisquantitativeeasing.Morevulgarly
moneyprinting,perhapsmoreaccurately:counterfeiting.Thiswouldbethetermusedifitwere
carriedoutbyanyonebutacentralbank.Politicalsupportmeanstaxpayerunderwritten.
Giveanyoneamachinethatcanprintmoneyandtheywilluseit.Notwithanymalfeasance
in mind, usually by governments with a view to the common good. But, there is always a
political dynamic, always an election pending, always a mini crisis that needs addressing,
always a special case. The State can only cope with its extraordinary self-imposed
responsibilitieswithmoney.Asgovernmentsextendtheirremit,theyexpandtheirrequirement
for it. They can tax or borrow, but they are not immune from market forces with these two
facilities.Toomuchtaxcreatesafiscaldragoneconomicgrowth,asdoesborrowing.Inthis,
governmentsfacethesamerestrictionsasabusinessorindeedthecommonman.Therecourse
thereforeistomoneyprinting.
Thisprintingtakestheformofbondissuanceinshortdebt.Againgovernmentisnotimmune


fromtheresponsibilityof debt servicing,a couponmustbe paid. So, evenmorefiscaldrag,
justanothertermforstifledeconomicgrowth.
This aide memoire is designed to help the interested, educated layman to understand the


problem rather solve it. Without an understanding of how it came about no solution can be
found.

It is very clear now the 2008 crisis was not understood, this means none of the problems
havegoneaway,indeedtheyremainbutaremuchworsetodaythantheywerethen.


1.WHATISMONEY?
Moneyisnottaughtinschools,arathergapingholeinayoungperson’seducation.Thereare
manybooksonthesubject,butforthosewithoutthetimeortheinclination,thisaide-memoire
will just outline the basics. For only the basics are necessary to understand the forthcoming
crisis.
Moneyissimplyamediumofexchange;itisnotwealthinitsownright.Historically,money
has taken many forms, usually something with intrinsic value in its own right, something
difficult to counterfeit which would devalue the medium. Gold and silver have fulfilled this
roleforthousandsofyearsbutspecialcircumstancesoftenmakelocalmoneymorepractical.
North America in the 18th century traded beaver pelts, Berlin in 1945 due to a shortage of
reserve fiat currencies promoted the use of cigarettes, nylons and whiskey. The medium in
itselfisnotimportant;therequirementonlyisthatitisbroadlyacceptedasastoreofvalue.

“Nevermistakepaperforgold”


Source:ZeroHedge:http://www.zerohedge.com/news/2016-03-04/blackrock-supsends-gold-etf-issuance-due-demand-gold

Withoutmoneytradewouldbereducedtobarter,adesperatelyinefficientsystemprecluding
adivisionoflabouranditsbenefitstothelivingstandardsofmankind.
Butmoneyisasensitiveplanttotallydependentontrust,hencethelongtermpreferencefor
gold and silver which is an internationally recognized medium with a value with London to
BombaytoShanghaiandontoNewYork.Itisalsoalongtermstoreofwealth.Goldsalvaged
fromshipwreckstodaycarriesthesamevalueasyesteryear.ABritishgoldsovereignwillbuy
thisweekwhatitboughtonehundredyearsago.Thisiswhyitisstillapopularstoreofwealth
particularlyintheEast.
So how does this square with fiat (or paper currency)? Lugging heavy gold about soon
becameimpracticalforbothnationalandinternationaltrade.Bankingthereforesteppedinto
facilitatetradebypromissorynotes.Thebankkeptthegoldsafeandissuedapieceofpaperin
theformofabanknotesuchasweseetoday.Olderreaderswillrememberthewordingonthe
Bank of England five-pound note, ‘I promise to pay the bearer on demand the sum in gold’.
Eachnotewasbackedbygold,indeedifitwerenot,noonewouldhaveacceptedit.


Mankind though has a great flaw: his love of war. Wars have to be paid for, they are
expensive. Since Roman times, all sorts of shenanigans went on with coin clipping or alloy
reductionofgoldcontenttomeetthecost.Inmoremoderntimescountriestooktheircurrencies
offthegoldstandard,theyjustissuedpaper. This worked intheshorttermbutdegraded the
currencyinthelongtermwithinflation.Adollarbillintheearly1970swhenAmericawason
thegoldstandardisnowworthinpurchasingpowerabouteightcents.
Europeancountriesarenodifferent.
The euros, dollars or pounds in your pocket are intrinsically worthless. Only a common
acceptanceofitgivesitvalue.
“Withoutgoldbackingadollarbillisjustpaper”

Source:MonetaryMetals:https://monetary-metals.com/the-gold-money-supply-correlation-report-3-apr-2016/


“YouwillnoticetheRussiansarenotstupid,
theybuybullionnotpaper”

Source:www.tradingeconomics.com

Thiscanbeperfectlyephemeral;historyislitteredwithfailedcurrencies.Thereisageneral
perceptioninthewestthatmajorcountriescannotgobankrupt,currencieswillnotfail,those
fundamentaleconomiclawswhichapplytoyouandyourfamilydonotapplytothestate.We
examinethisdangerousillusioninthenextchapter.


2.HOWDOBANKSOPERATE?

Banks fulfil a number of roles, basically, they grease the wheels of commerce. Money is a
storeofvalueandbanksofferaninternationalsettlement.DeposityourmoneyinBarclaysin
London and you can settle accounts for goods ordered in Hong Kong. These days it is all
electronically done in a few seconds. Assuming all parties have confidence in the system it
works very well. Banking is the counterparty to money, it depends on trust. This trust can
disappearontheslightestsuspicionthatabankisnotsolvent.Itleadstowhatisknownasa
‘runonthebank’.Thisisaperiodicoccurrenceacrosstheglobe,hasbeenandeverwillbe.
Thesystemisdesperatelyfragile.Why?
Retail banks have to do the impossible. The financial equivalent of defying gravity. They
borrow short but lend long. An example: a businessman or old age pensioner, deposits say
£100,000.Thebanklendsittoyoursonordaughterforahouse,therepaymentperiodis25
years,itchargesinteresttotheborrowerandpaysinteresttothedepositorandkeepsamargin
forthebank.Allofthisyouknow,butthatisonlypartofthestory.Thesystemisslightlymore
complex. The depositor imagines his or her money remains theirs in the same way a farmer
storeshisgrainwithacornmerchant.Butthisisnotso.Thedepositbecomesthepropertyof
thebank.Moreover,thebankisonlyrequiredbyregulationtokeep10%reserves.
So the £100,000 deposit becomes but £10,000, the remainder having been lent on. Let us
imagineforamomentthat£90,000isthensenttoanotherbank,whichisinturnonlyrequired
tokeep10%,itholds£9,000andlendsthebalance.
We are assuming here for ease of explanation that the international Basel III banking
regulationdemandsthisreserve.Letusalsomakethenotunreasonableassumptionthatsomeof
these bank loans go wrong. Perhaps because times are hard, a recession or some other


economic shockwherepeopleare morelikelyto wanttheir bankdeposits backtotidethem
over. No wild stretch of the imagination is needed to see how easily a bank can become
insolventorindeedbankrupt.
This is a well-known phenomenon but particularly bad in the crisis of 2008 when banks
wereheavilyinvolvedinsubprimedebt.Counterpartyinvestmenthousesimaginedtheywere
buying safe mortgage loans to the professional middle classes on premium properties, when
muchofthesubordinateddebtwasnothingofthekind.Whenconfidencecollapsedsodidthe
banks.
“Howcanthiscontinue?”

Source:FederalBankReserveofStLouis

Whathappensnext?Wheredoesthecentralbankcomein?Whatisitspurpose?
Itseemsasifcentralbankshavebeenwithusforever,notso.Theyarearelativelyrecent
idea.ThefamousUSFedisachildof1913,theBankofEnglandwasnotnationaliseduntil
after WWII. Don’t let anyone tell you central banks are independent; the governors are all
politicalappointees.Intheend,hewhopaysthepipercallsthetune,itwaseverthus.


“Britainisawashwithfakemoneywhichiswhy
yourchildrencan’taffordahouse”

By controlling the money supply, either by contraction or expansion they control interest
ratesandremainthelenderoflastresort.Theycanprintmoneyandrescuefailedretailbanks
withtaxpayersmoneyandtheydo.ThelastdramaticrescuebytheBoE(BankofEngland)was
in2008,theFedlikewise.
Thesebailoutscostthepublicsumsofmoneybeyondhumanimagination.Theyweresimply
putonthenationaldebt.Trillionsofdollars,poundsandeurosjustputonaccountforfuture
generations to somehow pay off. Such is the enormity of the debts and the cost of servicing
them that it is conceivable they can be repaid. It is impossible to illustrate the extent of this
debt to an electorate which quite naturally struggles with numbers above a few hundred
million.
UKnationaldebtisgrowingatanestimated£5,000persecond.TheInstituteforEconomic
Affairshasmadethebestattemptatexplainingtheinexplicable.Theirwebsiteisworthalook.
Whyhavebanksandgovernmentsgotintosuchdebt?Aregovernmentssomehowdifferent


from businesses or ordinary citizens? Of course not, if you continually spend more than you
earn,bankruptcyfollowsassureasnightfollowsday.
The trouble is western democracies are in the grip of a failed economic theory. It is
generallyknownasKeynesianism.ThisisnotanAleveleconomicsprima,butsufficetosay
the theory suggests in times of recession, crisis or threatened depression, state spending can
rescue an economy. For eighty years this hypothesis has held sway. It has never worked
anywhere in the world but it is the only school of economics taught in state universities in
EuropeorAmerica,soithasbecomeholywrit.Itremainstotallyunchallengedinpoliticsor
media.
But debt, public spending, and money printing cannot last forever. Even the International
Monetary Fund and European Central Bank have now counselled caution. Without serious
reform,theoutlookmustdeteriorate,perhapsmuchquickerthananyoneanticipated.
Sofaronlypublicdebthasbeenconsidered,privatedebtisatanall-timehighacrossthe
globe.Derivatives,whicharenotstrictlyspeakingdebtarestillaliability.


3.YIELDSANDINTEREST
Awordortwoonyieldorinterest.Inthepastthemarketgovernedinterestrates.Thepriceof
moneyifyouprefer.Whatisthepointofinterest?Wheredoesitfitintotheschemeofthings?
Spendingmoneyisabouttimepreference.ShallIbuyaproducttodayorwaitabit?IfIwait
andsavemoreIcanaffordabetterproduct,oryoumightwanttojustdeferallbigpurchases
untillater.Perhapstobuildprotectionagainstanunforeseencircumstance,orretirementorthe
possiblearrivalofchildren.Theoptionsarelimitless.Thisissimplytimepreference.
However if there is no reward for thrift in the shape of compensation, interest, it
destabilisestheconceptoftimepreference.Ifyoucanbuythatproducttodaybyborrowingat
very low interest it seems tempting, it revs up the economy does it not? After all received
wisdomiseconomiesaredrivenby‘aggregatedemand’,apopularacademicmisunderstanding
ofhoweconomiesreallywork.Ifyouthinkaboutithowonearthcouldwealthbecreatedby
consumption?
A bit counter intuitive is it not? Your next door neighbour’s son buys a two year old
Mercedes sports car, very nice too, but he has borrowed the money. His time preference
decision has been made. Not an unreasonable one at that. The neighbour gets his car, the
salesmanmakeshiscommission,butthemoneyhasbeencreatedelectronically.Intheolddays
theladwouldhavesavedhismoneyaccruinginterestandboughtthecarinthreeyearstime.
Hewouldhaveearnedrealmoneywhichwouldhavebeeninvestedintotheeconomy,itwould
haveworkedtocreatewealth.
Butwithzerointerestfewerpeopleareinclinedtoinvest,thereisnomotivationtodoso.So
theworldlivesonartificialfakemoneyforconsumptiontoday.Butletuslookatotheraspects
oftheeconomyoutsidethefool’sgoldofaggregatedemand.Asmentionedearlierbondshave
theiryieldsreduceddramatically,doesthismatter?Nottotheyoungmannextdoor,hehashis
car,evenifhecannotaffordtokeepupthepaymentstheworsttheycandoisrepossessthecar.
Nobigdeal.Orisit?
Ifthereisarecessionmillionsofyoungmenacrosstheglobedefaultontheirloans.Millions
ofnowageingMercedes&BMWsaredumpedonthemarket,theassetsaresignificantlyless
thantheloanbook.ThemonetiseddebtboughtbyamongstotherstheECBbecomesjunkrated,
anyofthisfamiliar?
Because the money supply is grossly inflated real estate, bonds and stocks become
overpriced.ThemoneymightnothaveinflatedtheCPIbutithassentassetsthroughtheroof.
Yet savers & pensioners rely on yield, of which there is now none. Pension funds are
destroyed, savings are worthless old people suffer. Without yield pensioners in retirement
suffer no discretionary increases, life assurance companies struggle, endowments and whole
life plans are subject to drastic underfunding, so are all other classes of insurance, no yield
means no reserve, premiums soar. But what of the young man with his lovely car? And all
those other young people with their fancy cars or holidays? It is not good news at all really
becausetheycannotaffordtheirfirsthouse,sotheylivewiththeirparentsorpaymonsterrent.


Whothereforeisgettingaresultfromthislunaticasylumsystemofmoneyandbanking?
Onlypoliticiansandbankers,thedebtisinflatedawayovertime,inthirtyyearsnoonecan
understand why a pint of beer is £25, why houses are out of the reach of even middle aged
professional people in the big cities. Why their pension payments are derisory. Why the
nationaldebtisanumberbeyondhumancomprehensionwhydoestheeconomynotgrow,why
havemiddleclasslivingstandardsstagnatedforanentiregeneration?
The answer is neither the media, press, bankers, academics, politicians or the electorate
understoodmoneyandbanking.


4.WHAT’SNEW?
SofareverythingyouhavereadcouldhavecomeoutofanyStateUniversitytextbook.Nowit
starts to get more interesting. Banking and finance move at a rapid pace. As an academic
disciplineeconomicsmovesmuchfasterthanothers.Itisalivingbeast.History,mathematics,
geography,evenphysicsmoveatasnail’spaceincomparison.

What might have been true thirty years ago is no longer relevant. Look at computers, cars
andtelephonesofthirtyyearsago,unrecognisabletoday.Whywouldbankingbedifferent?Yet,
intheStateclassrooms,textbooksandrecommendedreadinghavebarelychanged.
Moneyisnowcreatedinamuchbroaderwaythanyearsago.Commercialbankscreatemost
ofthemoneyincirculation,howso?
Ifyougointoyourbanktodayandfilloutasuccessfulapplicationforaloanyourbankwill
facilitateadepositaccountallowingyoutodrawuponit.Letusassumeitwasforacar,you
buyyourcarforthetwentythousandpoundsagreed,thesellerdepositsthemoneyinhisbank,
bingoyourbankhasanassetinitsloanbook,theseller’sbankhasadeposit.Suddenlythere
are forty thousand pounds in the banking system where until yesterday there was none. This
goesoneverydayallovertheworld.Thetechnicaltermforthisiscreditboom.
Ifyoulookatbankingregulation(let’skeepitsimple),abank’sloanbookisshownasan
assetonanagreedregulatoryslidingscale.100%ofthepurchaseofsovereigndebt,downto
just20%foraloantoasmallbusiness.Nosurprisethatbanksprefertomaketheirprofitatthe
bottomendoftheriskscale.
Thisiswhyanecdotallyyouwillfindsmallbusinessescomplainingabouttheuncooperative
nature of their bank when they want to expand but the housing market is awash with cash
fuellingoutofcontrolestateagents.


“Theinevitableresultofgoingoffgoldandgiving
politiciansamoneymachine”

Source:https://fred.stlouisfed.org/series/GFDEGDQ188S#0

Whereisthedangerforbanks?Thesameasitwasin2008.Nothinghaschangedexceptthe
numberswhicharenowbiggerthanever.Considerthose‘assets’,theregulatorysystem(Basel
III)encourages.Sovereigndebt,mostofwhichisreallyjunkstatus,Italian,FrenchandIrish
bonds. Monetised packaged debt, everything from your neighbour’s mortgage to your son’s
second-handcarloan.
Ifweacceptabroadrequirementofatenpercentreserveratioforbanksitisnotdifficultto
see that a cyclical recession only needs a modest fall in any of these assets to break most
commercialbanks.Indeed,acloselookattheirassetswouldprobablyexposesuchafalleven
now,particularlythebanksoftheMediterraneanbasin.
Publicandprivatedebtacrosstheglobestandsatsuchanumbertherewouldbenoroomin
thisaidememoiretoprintinfull,justtoomanynoughts.Moreover,itwouldbemeaningless,
thesortofnumberusuallyassociatedwithspacetravelattheedgeoftheGalaxy.
Most individuals incur debt for a specific reason, the purchase of houses and goods. The
loanshaveafinitelifespan,saythreeyearsforacartotwenty-fiveforahouse.
Thegovernmenthasnosuchconstraint.Theyborrowtopayoffpreviousloans,theycreate
moneybyissuingbonds,thedebtspiralsdaily.Yet,asthereisnorestrainttherecanbenoend
gameforthebanking/politicaldynamicexceptanArmageddonofhithertounprecedentedscale.
InthenextchapterwewilllookinmoredetailatthemechanicsofmoneycreationbytheState.
So far we can deduce perhaps just one thing for sure, that money in a modern society is
createdbymoderndaywitchcraft.
Itissocomplexmostacademiceconomistsdon’tunderstandit–asoneglanceatuniversity
textbooksdemonstrates.Fewbankersunderstanditandnopoliticianseither.Ifallthesepeople
whomakeupthegreatandthegoodofthefinancialworlddid,thesystemwouldnotcollapse
with such monotonous regularity. In 2008 it was the shadow banking system that dragged
westernbanksinthequagmire.Butmarkthisforirony;thereisnoaccepteddefinitionofthe
term‘shadowbanking’.Soephemeralistheconceptwearenotevenclearwhatitis.Whatwe
doknowisitdominatesinternationalbankingandremainsoffbalancesheet,beingoffbalance


sheetareunregulated.Notthatfinancialregulationhasmuchofatrackrecord.Weunderstand
from the Austrian School of Economics regulation is all but impossible without perfect
knowledge of a market. This in itself is absurdly impossible. Modern derivatives of which
mostshadowbankassetsconsistarelittlemorethananodandawinkbetweenbankers.Bear
inmindmostlendingisinter-bankratherthandirectlytoprivateborrowers.Giventhatmost
individualandcommercialorganizationsusebanksthemoneystaysinthesystem.

The German banks are believed to be owed £900 billion by the shadow banking system.
Largely from European banks which are fundamentally insolvent. The ECB is attempting to
keep this unsustainable financial merry go round alive by buying £80 billion of commercial
and sovereign bonds every month. Some of these bonds are more worthless than others, but
mostareifnotjunkstatusgrosslyoverpriced.Wouldyoulendmoneytoagovernmentfor2%
per annum for 20 years when that country already had debt liabilities of £5 trillion and
inflationat1.5%?ThatincidentallyiswhataUKgovernmentgiltasksyoutodo.Asapointof
academicinterest338%ofGDP!


TheMaastrichtTreatyenvisagedthesesortsoffinancialpoliticalshenanigansandforbade
the purchase of bonds directly under article 101 of the treaty. But finance and political
expediencywillalwaysfindaway,theECBnowbuysthemonthesecondarymarket.
“Justimagineifthiswasyourfamily’sposition”

Bond yields are now so low and bank deposits interest is entering negative territory,
crucifyingpensionfundsandsavings.Harmingpensionersatoneendofthesocialscaleand
producingmassyouthunemploymentattheother.
“Observethewideninggapinpensiondeficitfunding.Noticeparticularlywhenitstarted.Nothingtodowith
BREXIT”

Source:http://www.independent.co.uk/news/business/news/the-chart-that-shows-how-big-the-pensions-deficit-at-uk-firms-hasgrown-a7015256.html


Many make the mistake of blaming the euro for the demise of many of the EU economies.
Thisistomisunderstandtheroleofmoney.AustrianSchooleconomistsendorse‘hardmoney’,
that which has been traditionally backed by gold or silver. Yet, commodity money as this is
knownisnotnecessarytheoretically.TheancientSumerianworldrecordsthefirstuseoftally
sticks,inherentlyvaluelessbuteffectiveforhundredsofyears.
Thehardmoneytheoristsoftodayarguethatfiatcurrencywillalwaysinevitably produce
periodicbankingcrises.This,however,istheresultofhumanbehaviorsoexpertlyexpounded
byVonMises.Thisistruetoday,economicdepressionsarenotcausedbytheeuroanymore
thanpeoplearekilledbyguns.

Thehardmoneytheoristsoftodayarguethatfiatcurrencywillalwaysinevitably produce
periodicbankingcrises.This,however,istheresultofhumanbehaviorsoexpertlyexpounded
byVonMises.Thisistruetoday,economicdepressionsarenotcausedbytheeuroanymore
thanpeoplearekilledbyguns.
The problem is the human element. The single currency requires fiscal responsibility; the
moresoftheeuroaretheresultofwesternsocialandcorporatewelfareanduniversalsuffrage.
Inshort,anyonewhohasamachinethatcanprintmoneywilldoso.Especiallypoliticiansto
whomthenextelectionresultisthegoal,notthelong-termsuccessoftheeconomy.Theeurois
butthesymptomofthemonetarydisease,notthecause.
Themodernbankingsystemisirrevocablyflawed.Itdoesnotprotectthevulnerable,itdoes
notfacilitatesmallbusinesswhichisthelifebloodofanyeconomyanditrewardsoneclassof
the community over another, debtors over savers. Although the State pretends inflation is
subduedthisisonlyusingagovernmentformula,CPIthatmuchmanipulatedindexonlyreflects
partoftepicture.Assetpriceinflationisrampantasanyonewithgrown-upchildrentryingto
buyahouseunderstandsonlytoowell.
Moreover, it builds a debt too great for the human mind to conceive. The end game must
comeandcomeperhapssoonerthanwethink.


5.WHAT’STHEDEBATE?
Thefinancialcrisisof2008triggeredinterestratereductionsonanunprecedentedscale.The
BankofEnglandratefellfrom5%tothecurrent0.5%.IntheEurozone,ratesfellfrom4.25%
to0%.TheBoEbalancesheetsoaredfrom22%growthinJanuary2008to163.8%inOctober
of the same year. The ECB accelerated its growth from 15.3% in January 2008 to 55% the
followingNovember.

Whatdoesthismeanthoughtoyouandyourfamily?
Acreditexplosioninflatesthemoneysupply.Itfindsitswaypiecemealintotheeconomy;
thosewhobenefitmostarethoseontheinitialreceivingend,thetechnicaltermforthisisthe
Cantilloneffect.Simplyputthosewithassetsbenefitaspricesrise.Forthosewithnone,the
prospectofeverowninganyrecedesyetfurther.
“Noteagainthetimingsofheavystressonpensionfunding.DirectlycommensuratewithQEandmassiveinterest
cuts”


Source:http://www.pensionprotectionfund.org.uk/DocumentLibrary/
Documents/PPF_7800_January_16.pdf

This is most apparent in house prices, but more importantly and not so obvious to the
layman, inflated bond prices. This manifests itself in historically low yields. This has the
knockoneffectofmakingyourpensionfundinsolvent.Thepublicsectorisprotectedbecause
the taxpayer covers the position. It is also disastrous for savers, many of whom are old age
pensioners. Low-interest rates benefit debtors over creditors, a disastrous form of social
financialengineering.Thesearchforyieldforcesinvestorsintoheavierriskassets,overvalued
stock markets and poor quality monetised loans. The very thing that triggered the 2008
meltdowninthefirstplace.
In an earlier chapter, we saw just how fragile the capital adequacy of banks was
international.Acorrectionofonly10%ofreserveassetsforcesabankintoinsolvency.Hardly
an unimaginable or even unprecedented phenomenon. Notice the careful word ‘correction’.
Notacrash,arelativelymodestfallcanbreakthebanks.TheUSFedandBankofJapanare
allinthesameposition.
Thiscreditbinge,bothpublicandprivateisworldwide,itisbeingsustainedbymoreand
morecredit.Nooneknowshowtojumpfromtherunawaytrain,wecan’tgetoffbutwecan’t
stayon.
Thewholefiatcurrencyandbankingsystemisbasedonfaith,confidenceifyouprefer.The
firstbanktobreakwillbringdownalltheothers,interbanklendingwillcollapseasitdidin
2008onlyonascalenoweighttimesworse.Bankswillnolongerbetoobigtofailbuttoobig
torescue.
At present politicians, press, media, bankers and civil servants are in denial. There is no
informeddebate.ThesituationinChinaisbeyondwesternunderstanding.
JusttogiveanunderstandablenumberthenationaldebtinGreatBritainis£80,000forevery
familyintheland,thatisamodestestimate.
In2008herMajestyQueenElizabethaskedwhynoonesawthedisastercoming?Whenthe
inevitablecrashcomesonanawesomescaleshewillaskthesamequestionagain.


6.CURRENCYEXPLAINED
There always appears to be some confusion when I talk to university undergraduates on the
underlyingnuancesofcentralbankers.Thisisindeedadarkart.Hedgefundmanagersusedto
play back AlanGreenspaninterviewsinslowtimetoseewhicheyebrowstwitched.Didhe
meanwhathesaidorwasitjustrhetoric?IhaveeyeballedtwoECBPresidents,JeanTrichet
and Mario Draghi. You have to be really close, you must understand body language, eye
contact,phraseologyasIsayadarkart.Onethingyoucannotdoisreadatranscript.Itwould
belikeplayingpokerinablindfold.Yetjournalistsoftendo.
Youalsohavetoknowwhattoaskacentralbanker,mywebsitegivesanexampleofthis
whenIbulliedDraghiintoanindiscretion,it’sonmywebsiteforthoseinterestedalthougha
fewyearsold.
Politicsdoesn’treallymovecurrencymarketsshortofarmedconfrontation.Orachangeof
government with diametrically opposed fiscal policy. This is now very rare, as all western
democraciesarebroadlyKeynesian.Inshortprintmoney,spend,borrow,fiscalrectitudeisa
thingofthepast.Don’ttrusttherhetoriclookatthenumbers.Thisisafieldwherenumbersare
king.
Greenspan,Bernanke,JanetYellenattheFedarefairlyinscrutable.Youneverknowifthey
willraiseinterestratesornot.Theyneverdobecauseitisimpossible,intheheartsoftraders
and investors they know this but they always leave a tiny space for doubt. Being a central
bankerisabitlikebeinganarmyofficer.AtSandhurstweweretold‘neverbleedinfrontof
themen’.CentralBankingisaboutconfidence,nothingelse,withoutitthesystemcollapses.
Even a slight inkling that all is not well will depress currencies. Sometimes that is what
bankers intend, a word here, a shrug there to take a rising currency off the boil. Who could
forgetGreenspan’s‘irrationalexuberance’?Deliciousinnuendodesignedtotaketheheatoutof
thestockmarket.
QEormoneyprintingifyoupreferwillautomaticallydepressacurrency,evenonlyinthe
short term. The implication it is a permanent feature will tank the currency and a further
suggestion interest rates will remain on zero will depress it further. Overt concern over the
bankseconomywilllikewisemurderthecurrency.Whenacentralbankerconfirmspermanent
QE,lowinterestrates‘becauseheorshefearsarockypatchahead’youhaveafiresale.
ThisisnowasweallknowwhatMarkCarneyattheBoEhasdone.Itisinconceivablethat
this could have been an accident. Moreover central bankers are political appointees so this
mustbeagreedataveryseniorlevel.Ifthereisanaddedcomplicationsuchasanationaldebt
beyond humancomprehension crashingthecurrencytakesdebtoffthebottomline.Sadlyfor
ordinaryworkingfolkthebabygoesstraightoutwiththebathwater.
Whogetsitintheneck?Savers,pensioners,importersofgoods&rawmaterials.Shouldn’t
thisbeillegal?Well,itwasintheMiddleAges,degradesofcoinoftherealmhadtheirhands
andfeetcutoff.Shouldwereinstatethatbarbaricpunishment?
Certainlynot,asimplehangingisquitesufficient.


7.THEMYTHOFACOMPETITIVECURRENCY
Oneofthegreatcurrencymythsisdevaluationsomehowbenefitsaneconomy.Nottoomuchof
course,justabit.Thisisratherasubjectivejudgement,whatshouldthevalueofsterlingbe
againstthedollar?TheEuro?TheYen?Afterall,theyareallfundamentallyworthless.Why
wouldtheirvaluevary?Weknowbankscreatemoneyelectronicallyinaratherrandomway,
wealsoknowacountry’scentralbank(forcentralbankreadtaxpayer)attempttosecondguess
worldmarketstofavourcertainsectionsoftheirelectorate.
ExportsasapercentageofGDPvaryfromcountrytocountry,theyareincidentallyaterrible
formula for judging a nations well-being but let us leave that for a moment and take the
numbersatfacevalue.IntheUnitedStates,thefigureisreckonedtobeabouttenpercent,the
UK12%,Germanymuchmore,itmattersnot,itishistorythatmatters,empiricalevidencenot
economicdogma.

“DebasementofthePound”


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