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?".

Sunday, 14 June 2009

Financial non-reality

In the recent articles on the current financial crisis, The Economist moved into a realm of non-reality. It is assessing the state of the world economy through a debt lens. Indeed normally it would have been a prudent and respectable approach. However with the current state of financial markets it simply does not make sense as banks’ books are over-flooded with toxic waste. And, for instance, the British government does not even know the scale of this.

The current financial crisis was caused by a collapse of the giant global pyramid scheme. Its collapse triggered a liquidity crisis and governments pumped trillions of dollars to plug a liquidity whole. There is a very sexy name for describing this action: a stimulus package. In fact it was no different than if the Albanian government had subsidised their own gangsters when their pyramid collapsed in 1996 – 1997. Yet the global pyramid, or rather a network of interconnected banking pyramids, did not collapse completely. There are still a few (at least one, most likely around five to six) quadrillions of dollars of toxic waste which at present are as much of the liability to the global economy as world’s debt. Therefore for The Economist’s analysis to make sense, one has to add at least one or two quadrillions of dollars to the world debt data.

The world’s GDP is just over $50 trillion. Hence it is completely unrealistic to exect that the world will ever be able to catch up with a few quadrillions. Quantitative easing (i.e. printing money) is only shifting the problem into the future and onto the consumers markets. It may be possible to print enough cash to plug the liquidity hole but then that cash would have flooded the markets triggering a hyperinflation.

However for the time being, the financiers, i.e. pyramid purveyors, seem to understand this game. That is why they limit the volume of toxic waste they convert into cash. And financial markets look seemingly quite stable. They know that if they cashed too much of the worthless papers too quickly, another liquidity crisis, like the ones in October 2008 or January 2009, would have happened. The corollary is that now these financiers control the world taxpayers in the same way as loan-scammers control their “debtors”. The toxic waste allows them the pump out as much money from the economy as they wish, but at the same time they know that they must not go into excess so as to keep it optimally going for them. Similarly the aim of a loan-scammer is not to finish off a “debtor” but to make him pay forever as much as possible. It appears that in this spirit, or maybe in a state of sheer oblivion, The Economist is arguing for less wasteful economic system that would ultimately benefit the pyramid purveyors.

In theory such arrangements can go on forever. There are many “debtors” trapped by scammers for life. In time the financial system, through financial instruments, will be as much of the public expenditure round as health, defence, education, etc. putting a massive squeeze on them. However this would not be legitimate public expenditure. This would be money extorted by pyramid purveyors. In practice however they must realise that in democratic societies such arrangements are unlikely to go on forever. Therefore it is quite likely that sooner rather than later, a financier, from one bank or another, is going to lose his nerves – or will want to be ahead of others, or just get better year-end bonus - and will trigger another liquidity crisis. This may be one too many.

The 1930’s crisis ended in 1939. The current crisis is also going to end at some point. It is not so much interesting when, but how. Especially that it also appears that the US might have its cunning plan.

1 comment:

  1. It is true that growth in the private or public money supply without concomitant growth is nothing more and nothing less than a giant pyramid scheme. It seems that after a period of excess of private money supply, we will be lumped with a period of excess of public money supply. The result of this shift will be a destabilisation of whole countries and will inevitably lead to inflation as governments seek to print their way out of debt. The problem with this future inflationary environment is that it is exponentially hard to bring under control, undermines confidence in the whole system and erodes the wealth of those least able to deal with it.

    Nicholas Frankopan