If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Saturday, 25 April 2009

A US way out?

On 23 April 2009, in its Editorial, “Polish economics”, Washington Times praises the Poland’s way out of the current crisis through cutting public spending and, if possible, cutting taxes. It contrasts it with the US approach of ever-more spending.

Washington Times compares the US model to Franklin D Roosvelt’s New Deal. However the current financial crisis does not resemble the 1930’s depression in its root cause. The current crisis is a result of a giant global financial pyramid collapse that left a quadrillions of dollars liquidity hole. Therefore President Obama’s actions may not be modelled on the New Deal, but on some other premise…

Considering the current US debt and its rate of increase, the US borrow and spend solution reminds an insolvent person who keeps on borrowing money, as long as there is anybody “silly” enough prepared to lend him. He knows that at the end of this process he will not pay anything back but simply declare bankruptcy, write off the entire debt and start its financial life anew.

The US, as the country, is economically and militarily powerful enough to declare that it no longer honours its debt and its currency. Effectively the dollar could be written off as a currency. As around two thirds of world reserves are held in dollar they will be written off. The US will have no debt. Along this action, the US will introduce a “new dollar”. Any internal US old dollar liability will be converted into it, possibly with even 1:1 ratio. This will give seamless continuity to the US internal market. Any international debt will be negotiable. Some nations on which the US depends (like critical suppliers of commodities, e.g. crude oil) may get a favourable treatment. Other nations on which the US does not depend and especially those that may be perceived as prospective threat, rival or with conflicting interests may just get nothing. As a result they will be weakened.

Such actions will mark a completely fresh start for the US. Like a company coming out of Chapter 11 with a great deal negotiated (in this case imposed by the US itself). The entire pyramid collapse will become history in the US. The next year's budget will be hugely relieved from massive debt repayments. The Obama’s administration will be awash with cash to spend on any programme, including green energy, social programmes.

In a "true" spirit of globalisation, the US will unload the costs of coming out of this crisis onto the rest of the world. Only will the US decide which other country will be compensated with “new dollar”, at what rate and on what terms.

Sounds like an economic and political fiction? Indeed it looks unbelievable. But any financial risk analyst must see this as a realistic scenario. The history books are peppered with even more drastic actions, like Opium Wars in the 19th century. If the history of the collapse of Lehman Brothers (in particular $8 billion transfer to the US from the UK that proceeded it) is anything to go by such US actions cannot really take anyone by surprise. The more the US borrows the higher the chance. On the risk-benefit balance, whilst the adverse risk will stay more-less constant, the benefit element to the US keeps increasing with every dollar currently borrowed by the US on the international markets. Not forgetting that there is also a long standing tradition in the US business culture of going bankrupt, this option must look more and more tempting to the President Obama's administration.

It is rather unlikely that Chinese leaders do not realise this. They were on the receiving end of Opium Wars. After starting the Iraq War in 2003, no US unilateral action can be excluded. No wonder China looks somewhat nervous. It has been calling for a new reserve currency and is unloading its dollar reserves on other countries by a way of acquiring natural reserves assets, commodities, buying gold, etc.

Therefore, after all, giving Poland as an example to the US may not be such a clever idea, as some options that are available to the latter are not available to the former. "Desperate times call for desperate measures".


  1. Agreed;it is White House policy to always have the United States remain economically and militarily at the fore-front among nations. Such a scenario, as suggested, is entirely plausible and not a figment of the imagination. Besides, it's Biblical! Cheers, :-) David W. Nerubucha

  2. Not to forget sharp inflation in the 1970s, which you could regard as a partial, soft default since it devalued the US dollar, making nominal US debt worth less in yen or marks. The Reagan-era Fed chief Paul Volker resorted to punishingly high interest rates to kill this stagflation (inflation plus stagnant economy). The financial world is far more complex and murky now than it was then; attempts to inflate away debt will probably lead to a more rapid devaluation and decline in the standard of living than was the case in the 70s.

  3. This time, however, due to the scale and intensity of the crisis something more drastic may happen…

  4. If you read http://www.commodityonline.com/news/History-of-collapsed-Dollar-25571-3-1.html

    you will realise that "a US way out" presented above will not be anything new.

  5. Dear Greg,

    I am not an economist, but I have taken an interest in money recently. In particular I have been impressed by the book "Web of Debt" by Ellen Brown.

    The book makes the point, which seems completely sound to me, that it is ludicrous for any country to "borrow" its own currency. The "borrowed" money does not have any existence before it is created for the "loan", and there is no sane reason why tax payers should pay an annual fee (interest) for the use of this new money. If a country wants to create money, it can do so without incurring any debt by creating it itself. This may not be wise - but it is ALWAYS prferable to paying private bank to do the same thing. Indeed a country taking a "loan" in its own currency is *more* inflationary, since it necessitates creating the interest as well.

    I am interested in your comments.


  6. Dear Tim

    I am not an economist either. I simply explain the crisis using mathematical modelling. Anyway, I have a view on your point.

    If a company wants to raise money it can do it in two ways:

    1. By debt, say, selling bonds: and then have to pay interest, i.e. thereby reducing income.

    2. By equity, issuing additional shares: i.e. diluting value of shares

    Therefore there is a cost, although paid in different way.

    We can look at a country's debt like a company's debt and a currency as shares in this country's economy. I hope you see now that a country has also the same two choices. From what you stated it appears that Ellen Brown is arguing for option two being better than option one (printing extra cash is like issuing new shares). Whether it is the case may actually depend, like with a company, on particular circumstances as the costs could be high inflation (thereby diluting people's wealth).

    So I do not think there is a clear cut answer in theory.

    Thanks for reading my blog. Please pass the link to others.



  7. Dear Greg

    Thank you for your reply. I am always impressed with the time you take to answer comments.

    Your analogy is a nice one, but I think you have missed an important point. Taking currency as a counties "shares", when a country borrows its own currency, it is "diluting its shares" *at the same time* in exactly the same proportion than if it just issued its "shares" without borrowing them. Therefore borrowing its own currency is completely senseless, amounting to paying a collossal annual tax for no useful service whatever.

    I will pass on your excellent blog :)


  8. Dear Tim

    I simply have not formed the the definite view (rather than missed the point:-). You may be correct. I am simply looking from the other side of the spectrum: if a country does not borrow its own money, it has to print them, which (depending on the circumstances) may result in high inflation. This is what my analogy is all about: "no free lunch" so to say. But, indeed, your conclusion may be correct, however I would be more careful and judge each case in particular circumstances. Just being a bit cautious.

    I think you believe, and you may be right, that in both cases a country is printing money anyway. In the former case it is paying an interest on printed money in the latter it is not, and in both cases the dilution effect is the same. I have to think about it, but I am not convinced. (If it is correct it is a very ingenious conclusion!) I suppose that when a country borrows money it is supposed to borrow from money in circulation (tying money of pension funds, endownments, investors, etc.).

    There are plenty of perverse behaviour however. For example governments rescued banks with cash injections (taking shareholding) only to borrow the same money back from rescued banks when they sold them guilts. I think it is a similar example to the one that you suggested.



  9. Dear Greg,

    "I think you believe that in both cases a country is printing money anyway. In the former case it is paying an interest on printed money in the latter it is not, and in both cases the dilution effect is the same"

    Yes, precisely. Just as when you get a mortgage this is new money, not existing money. Ellen Brown provides quite a lot of evidence including testimony from former central bankers etc. Her book is a bit rambling, but it has some good research behind it.



  10. Dear Tim

    It is a very interesting point and it touches upon the issues which I do not think has been researched: the relationship between broad money supply and printing money outright.

    I think I understand where you are coming from but I will have to look more into it. My inkling is that there is a merit to your view but within some limits (and limits are usually the most important cases).