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?".

Friday 2 July 2010

Don't jump over yet. It will get worse.


"An nescis, mi fili, quantilla prudentia mundus regatur?" - Axel Oxenstierna
("Do you not know, my son, with how little wisdom the world is governed?")

Watching Newsnight report on European banks last night was a truly shocking experience. Neither Mr Paul Mason, who prepared the report, nor Mr Gavin Esler who hosted the discussion, nor the invited pundits Mr Raghuram Rajan and Ms Gillian Tett, went beyond a shallow analysis that described how really bad it was (using some rather vacuous parallels, e.g. "a sticking plaster"). But we know all that: this has been blatantly obvious since the financial crisis erupted towards the end of 2008.

The only sound words of advice from the experts were that we should find out more precisely how bad the banking situation was (implying the size of liquidity hole, i.e. the level of money multiplier). Mr Raghuram Rajan added that there should also be a programme to deal with the banks that are found to be in a bad shape. But this is all trivial and blatantly obvious since 2008. You do not employ experts to find out these. It must have insulted intelligence of any half sober viewer. (But who is actually sober at the time of Newsnight?) This has been described in the "The largest heist in history" immediately after the crisis erupted.

If it takes experts and pundits well over a year to work out such basics, that are not even a start of understanding the causes and mechanism of this crisis, little wonder why got into such mess in the first place and even less hope that the crisis will be resolved peacefully. It provides disturbing reassurance that we are heading for quite a disruptive end to it. The Great Depression that started in 1929 ended with World War Two ten years later. It seems increasingly likely that an event of a similar scale will sort out the current mess since neither the politicians nor the expert have even a basic understanding what they are dealing with.

And the causes are actually trivial. They are huge and of a criminal nature: using a pyramid scheme mechanism the money multiplier (leverage) was ballooned massively. To solve it, it is necessary to reduce it: either by engineering high inflation (printing money solves the liquidity shortage) or liability write downs (less banks liabilities solves the liquidity shortage), or, of course, some combination of the two. The entire process for the UK, including how to protect the taxpayers' interests, has been described in "Prime Minister, sort out this mess, please" but it applies to eurozone (and the US) too. But with clueless (or corrupt) politicians and experts there is very little, if any, hope for an orderly solution of this crisis. "Do you not know, my son, with how little wisdom the world is governed?"
Posted by Greg Pytel at 08:44
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7 comments:

  1. Unknown2 July 2010 at 09:22

    'although the idea of government stimuli as an antidote to the apparent failures of capitalism was born with keynes and nutured with roosevelt, it wasn't until Alan Greenspan, George Bush, Ben Bernanke, and Barrack Obama that the idea really came into its own. Before 2002, we had never seen federal deficits of this magnitude, and we had never experimented so radically with ultra low interest rates and manipulation of credit markets. The mistakes have been so simple, and yet we continue to make them'. A quote from Peter Schiff's book .. he predicted every stage of this crisis .. Even naming the companies that would fail. Read any of his books to find out the real story .. he spells the whole process out in clear terms. Unfortunately people don’t wish to hear such a simple version .. it makes them feel less intellectual.

    ReplyDelete
  2. miken2 July 2010 at 09:39

    So how can the ordinary saver avoid being caught up in the culmination of this crisis? Is buying up physical assets the only answer? Surely we are heading back to the times where objects were traded as money!

    ReplyDelete
  3. Greg Pytel2 July 2010 at 09:57

    Mike

    Thanks for reading my blog. If you think it merits it, please spread the link to it around.

    I cannot give you any advice as I simply do not know. I have some instincts which may prove wrong. So if you rely on any of my thoughts you are doing at your own risk. Times are unprecedented and I really do not have a clue.

    1. Investment in property in long term. It is land and place to live. So you can always rent it out and have some income and hope for better times (or your descendants). Of course it has to be wisely bought in quite attractive area (especially for rental). Despite what some advisors say now I think property is a really good real bet long term (even if you may take some hit). Property is for real so the key is to be smart in acquiring them (best value for money).

    2. Savings in currencies of countries which are well managed and natural resource rich. Not that many. Norway and Canada I can think of.

    3. Quality works of art: sometimes not easy to sell, but if kept long period good investment when times come back as good.

    Think for yourself as well: it has to be tangible, provide some return in the meantime (like property, Norwegian or Canadian currency), well backed

    Do not treat my words as a Bible or advice in a formal sense. I may be wrong like anybody's: so ultimately it is your risk (as I am not giving any guarantees). So just be careful: take advice and opinion from everybody whose opinion you value and make your mind up. This is what I do.

    Please also note that there is unpredictable aspect to any financial advice: if too many people follow it it stops working even if only for that reason alone. Tough mate.

    Best

    Greg

    ReplyDelete
  4. Anonymous2 July 2010 at 22:36

    Hi Greg,

    Thanks for your blog, it is excellent.

    I would like to ask at what number you would include China in your list of well managed countries? Top ten?

    Thanks
    Rory

    ReplyDelete
  5. Greg Pytel2 July 2010 at 22:57

    Hi Rory

    Thanks for a kind word. If you think my blog is worth it please spread the link to it around.

    I have not made my mind up on China regarding how well managed they are (in terms of finance). We deal with a country with still a massive slack to catch up (i.e. huge potential) and which is centrally controlled (this generally is not conducive to growth but is rather good in managing any crisis: but the growth has been outstanding anyway).

    There is also a pretty sophisticated element of China economic management: they "exploit" the western addiction to buying cheap consumer goods. They keep yuan artificially low and this works as a massive cash transfer machine of western currencies to China (by not allowing any meaningful competition from elsewhere).

    At the same time China does not really compete with anybody. It is a well over 1 billion people country (something like twice the EU, three times the US). Their solution is a pretty sophisticated competition within: amongst towns and provinces.

    So whilst I am not sure how it is going ultimately to work out, my instinct is that China is likely to keep on growing regardless what's happening in the west. The history might reverse: the western powers and Russia devastated China some 150 - 300 years ago, now China - using rather different tools - might devastate the western world. I am still trying to work out the scenario.

    Best wishes

    Greg

    ReplyDelete
  6. Rory McMullan2 July 2010 at 23:41

    Thanks Greg,

    So would you say that at £1 - 10.3CYN is a good time to get out of Sterling?

    Alternatively is it a good time to buy property in the UK?

    Thanks
    Rory

    ReplyDelete
  7. Greg Pytel2 July 2010 at 23:45

    Hi Rory

    I refer you to my comment just above your first one on this page. But, honestly, I do not know and do not have a really solid opinion.

    Best

    Greg

    ReplyDelete

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