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?".

Thursday, 16 July 2009

Is another liquidity crunch on the way?



It is impossible to be a prophet in this crisis. But it is possible to assess the causes and mechanics on the crisis and do risk assessment. The first massive liquidity crisis occurred in September 2008. The market got drained of cash. Then the governments stepped in and injected billions of cash.

However the market was, and still is, full of toxic waste. This is going into quadrillions of dollars. They are completely worthless papers but with notional value. They can be redeemed for cash.

The next liquidity crunch came in January 2009. Timing was important: not before Christmas to dampen the public mood for a festive season, but after the New Year when people suffered from hangover and mood misery anyway. Their perception to outside events was somewhat limited then.

As it appears the January liquidity crisis was caused by the banks converting their toxic waste into government injected cash. Very little of that cash found its way to main street economy. Governments again injected huge amounts of cash, reaching a few trillions of dollars. And again we do not see this cash reaching main street economy. Now banks like Goldman Sachs and JP Morgan are posting record profits. We will see whether others will follow.

One has to wonder whether banks are not converting the toxic waste they hold (and they have absolute mountains of it) into taxpayers’ cash (injected by governments) draining the market of liquidity. If this is the case, then the next crunch (or some setback) may come very soon. And governments are likely again to react by injecting even more taxpayers’ cash, which again is unlikely to find its way to main street economy. This time it would be during a summer season when people are away enjoying their holidays, not really focused on the world events. And the story will go on and on and on...

The pyramid scheme that was the cause of the current crisis turned the economy into a perverse arrangement: financial institutions’ profits is a very bad news as these profits are at the costs of main street economy liquidity.

3 comments:

  1. Very interesting blog greg. Your posting is very prescient following the decision of the BoE MPC to increase QE by $50Bn.

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  2. Thanks Leonard for reading my blog. Please spread a word about it (if you think it's worth it).

    This blog is meant to intrigue but, above all, the analysis posted here is meant to be correct. Therefore more readers, providing more scrutiny as to the correctness are most welcome.

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