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?".

Wednesday, 10 February 2010

Default: Greece first then US?

Yesterday Professor Joseph Stiglitz stated on BBC Newsnight, in response to a suggestion resulting from "speculators" (i.e. money markets) behaviour that Greece might default on its debt:

With the greatest respect to Professor Stiglitz, I would not dismiss the "speculators" behaviour that easily as "absurd". They are not poor people working in an irrational way. In the past their behaviour was a really good sign of the forthcoming events (including governments' intentions). Do we remember how the Bank of England was building the "firewall" in September 1992 to protect the pound and how it eventually ended? And who made and who lost the money? That what the Germans appear to be doing now. Good luck to them! To answer Professor Stiglitz' question directly: "Does anybody believe that US government is going to default?". The author of this blog believes that there is a realistic risk of this happening, growing with every dollar borrowed by the US government. For more read "A US way out?"


  1. The opinion on the Yank side of the pond leans toward inflating their way out of debt. Defaulting is a bit extreme, tatamount to a declaration of war on countries that have a lot to lose. But, given our excess manufacturing capacity, high unemployment, and the push to improve infrastructure, is not entirely out of the realm of possibility.

    If one wanted to delve/devolve even deeper into conspiracy theory, one could find seeds in the Patriot Act, which allows for greater monitoring and control of all transactions involving the US dollar. Perhaps this is what Cheney meant in his "new world order"...

  2. You may well be right and I do not claim to know for sure. But quite often the prevailing opinion is used as diversionary tactics to hide the real aims.

    Well, wars happened in history. And quite often they were about money.

  3. I've never been impressed with Stiglitz. He is no more than an erudite and competent mouthpiece for the Wall St. establishment.

    Did you see his humiliation at the hands of Hugh Hendry on News Night a couple of days ago?:(http://www.businessinsider.com/watch-hedge-funder-hugh-hendry-say-he-wants-the-euro-and-greece-to-tumble-fight-with-joe-stiglitz-2010-2)

    Perhaps I'm biased because Hendry is a rare beast, a pundit whose recommendations over the last decade have made me a lot of money, so for all his ranting and pessimism he is one of my heroes.

    In my oppinion, Stiglitz is a paid for shill, and following his advice would likely lead to bankrupcy.

  4. Translation from Chinese (of the above) by Google Translate:

    "Their fight for things that can not be better to use their own good since the value owned by ................................. ......."

    Any other meaning?

  5. @John East

    The quote from Professor Stiglitz used in this article was actually taken from a discussion with Hugh Hendry (and the Spanish Ambassador in London) on Newsnight that you are referring to.

    As to Hugh Hendry: I do not have any reason to be biased towards him. Interestingly, in an interview with Jeff Randall, he confirmed the correctness of the basis of the analysis on this blog as he stated:

    "Loans should never be greater than deposits"

    (http://www.youtube.com/watch?v=Dl5ebMGgtOk - at 7:20 of the interview, almost the end)

  6. Greg, perhaps I'm having a thick moment, but I don't understand your point which I assume is being critical of Hendry.

    I just watched the Youtube link you provided and Hugh was on top form - not difficult against a self proclaimed clueless Labour MP, "The bank shareholders and the bank boards were to blame - nothing to do with us on the Treasury Select Committee guv, there's no way we could have seen the crisis comming." (or words to that effect.)

    I think Hendry was being a bit tongue in cheek and provocative when he said that, "Loans should never be greater than deposits." He surely he knows that this will never happen because it is effectively a call for an end to fractional reserve banking and the whole corrupt world of modern finance.

    Anyone echoing the sentiments of Thomas Jefferson has my supports, and who knows, when this fiat regime eventually comes to an end, Hendry's ideas may be in vogue.

  7. John, you seem to confuse, as many other readers, Fractional Reserve Banking with Depleting Reserve Banking.

    Fractional Reserve Banking means that loans are never greater than deposits. Even with this mechanism you can achieve Money Multiplier of any arbitrary high figure, 100, 1000, 10000 and so on which would be reckless.

    Depleting Reserve Banking means that there is no upper limit on Money Multiplier and it keeps on increasing at exponential pace to infinity.

    Please read: http://gregpytel.blogspot.com/2009/09/narrow-banking-barking-up-wrong-tree.html very carefully. It should answer all your questions.

    Hugh Hendry is NOT calling for end of Fractional Reserve Banking but for end of Depleting Reserve Banking. I proved on my blog that Depleting Reserve Banking constitutes a pyramid. It follows that bankers committed crimes exactly in the same way as Albanian gangsters in 1996 – 1997.

    (Depleting Reserve Banking carries liquidity risk of 100% in a finite time. Fractional Reserve Banking, unlike Full Reserve Banking, also carries liquidity risk depending on loan to deposit ratio. I have a lot of detailed quantitative work on it on my blog.)

  8. John, the biggest success of the bankers is that they managed to convince a lot of people that they were doing nothing out of ordinary in terms of credit expansion. The fact that you are convinced that lending with loan to deposit ratio above 100% is still a Fractional Reserve Banking is their success. Of course, there is no way of returning to Full Reserve Banking.

    The point that I proved on my blog is that bankers were doing Depleting Reserve Banking, i.e.lending with LTD > 100% (rather than Fractional Reserve Banking, i.e.lending with 0% < LTD < 100% ) and that this constituted a scam called pyramid.

  9. I've read further down your blog concerning depleting reserve banking and it's a fascinating analysis, but a bit difficult to get my head around because this is the first time I've come across the concept.

    I have a couple of naive questions, but please humour me.

    Are we talking about reserve banks with the ability to print currency or high street banks.

    OK, I understand that current required reserve ratios for high street banks have fallen over recent years, and that loopholes exist permitting 0% reserve ratios for some transactions. Presumably, being legal, existing fractional reserve banking can therefore currently approach infinite debt creation by shuffling money between the banks at zero ratio. In addition, securitisation is another legal route to effective infinite money creation.

    So I'm missing the significance of depleting reserve banking.

    Does not operating LTD >100% entail creating money out of thin air. Are the high street banks doing this, or is it just the reserve banks to which you are referring?

  10. John, I am talking about entire banking system that includes central banks. Central banks can print money. But if they do so under Depleting Reserve Banking to keep cash liquidity at a constant level, say 5%, they will start pumping money extremely fast on the market. In this case we would not end up with global credit crunch but with global Zimbabwe.

    I think if you go step by step through: “Example/exercise – how does it work?” http://gregpytel.blogspot.com/2009/04/exampleexercise-how-does-it-work.html you will see exactly how fast and how easy Depleting Reserve Banking leads to liquidity shortage.

    I am not arguing that Fractional Reserve Banking does not present problems and may even lead to a disaster. However this crisis was caused by far worse, and indeed illegal, practice called Depleting Reserve Banking (which is a pyramid scheme).

    For Fractional Reserve Banking Money Multiplier is always finite at the limit and constant for constant loan to deposit ratio. For Depleting Reserve Banking Money Multiplier is always infinite at the limit and is not constant for constant loan to deposit ratio but goes to infinity at exponential pace. This difference constitutes a massive significant difference between something that is manageable, commercial risk and something that is reckless and unacceptable risk (in fact practically it is not a risk anymore but a certainty of liquidity shortage).

  11. Thanks for your time Greg. I think I'm beginning to get the message, but I need a few days for it to sink in.