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, 11 August 2010

Heading towards global Zimbabwe?


On 9 August 2010, BBC Newsnight reported that $1 trillion stimulus package was not sufficient v, "the recovery is losing momentum" and that quantitative easing (QE) is now expected to follow, to stimulate the economy.

In her report, a BBC Newsnight journalist, Ms Naga Munchetty, gave an explanation what QE was. Her account was absolutely consistent with the foundation premise of this blog, and the analysis based on it. The current crisis was caused by the financial institutions that constructed a giant pyramid scheme (by lending with loan to deposit ratio greater than 100%, thereby generating in a run away manner a massive and uncontrollable money multiplier).

Ms Munchetty said: "Quantitative easing is likened by some economists to pouring liquid down the black hole in the dark." This black hole is nothing mysterious. In fact it is the amount of money needed to reduce the current massive level of money multiplier to an acceptable level. Smaller money multiplier means higher financial liquidity as one dollar of real cash has a smaller number of dollars of liabilities to serve. Historically, when economy functioned properly, it used to be in 5 - 8 region. In simpler terms, this is printing money to support the financial pyramid so it does not run out of cash. Had Albanian gangesters been allowed to do the same in 1997, their pyramids would not have collapsed either. However they did not have a clout of the modern days' financiers to convince Albanian government that this was the "right" way forward.

Ms Munchetty continued: "It's hard to tell how deep the hole is, or when you are close to filling it up." This precisely refers to the fact that we do not know the current level of money multiplier. (As it has been proved on this blog this is a direct result of a lending with loan to deposit ratio greater 100%: it is its characteristics. It is a loss of control of money multiplier resulting from lending with loan to deposit ratio greater than 100%.)

The filling in"holes of confidence", i.e. restoring confidence between banks, companies in the commercial world, mentioned by Ms Munchetty is simply a reduction of money multiplier to an acceptable level. It is also clear why banks are not lending: they hold off to QE money as it reduces the money multiplier, which any lending whatsoever would have increased (even with a minimal loan to deposit ratio).

However, contrary to what Ms Munchetty's suggested, "what happens next" once the black hole of liquidity is filled up is completely predictable. Once money multiplier reaches acceptable level, the banks will start lending again. It is their business and in fact they are urged to do so by politicians and business people. At that point the QE money, trillions of dollars will find its way to the market and will get multiplied. Even if the banks lend with a very low loan to deposit ratio of 50%, this money will be doubled. If they use a conservative 80%, a much more realistic scenario, the money will be multiplied by 5. I.e. every trillion of dollars in circulation will very quickly create a demand for 5 trillion worth of products and services in the current low inflation economy. To economists who "do not know": this means, surprise, surprise raise in inflation at an instant. Now you have been warned.

Any suggestion - supposedly by some economists - that printing money will result in economic growth, as Ms Munchetty also mentioned, defies belief and rational thinking. If that was possible any country would grow its economy by printing money. We all would be rich without doing much work (apart from running the printing presses). Presently Zimbabwe would have led the world as the most successful economy. It is simply amazing what some bewildered or dishonest economic pundits come up with trying to avoid the central issue of this crisis: the financial system has been a massive pyramid scheme with all its fraudulent characteristics.

13 comments:

  1. Im no economist by a long shot and am very confused about how simply printing money would create inflation?

    The reason I say this is if my monthly outgoings are already "maxed out" then I am simply unable to service any more debt and therefore wouldnt take up the offer of any more money no matter how much I could borrow or at what percentage (even 0% - unless I intended to default on 1 or more of my debts - which would be deflationary).

    In fact there are many 0% offers on goods and services right now that are not being taken up. Increase these and surely you just have more untaken offers?

    How would simply printing money "make" people borrow and spend when the majority are already "maxed out" because of the last bubble, increased taxes etc etc

    if prices go up on for example petrol. wouldnt I simply not use my car as much or start walking or cycling more? dont forget Im not getting any more spare money in my pocket so I would just have to economise. If wheat goes up I just switch to corn based food etc

    isnt deflation inevitable until we have "paid the piper" or written off enough debt?

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  2. Hi Mark

    Not everyone is maxed out. There are plenty of businesses and individuals who want to borrow (on reasonable terms) but they cannot now. (It is a lot of that in the media.)

    If the prices go up on petrol a bread delivery company is not going to stop delivering bread but will pass the extra costs on bread buyers.

    BTW, writing off debt/liabilities is also a solution to liquidity shortage (too large money multiplier). But the question is who's going to lose then? Not a simple thing by any standard especially if we deal with trillions of dollars.

    Best

    Greg

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  3. Hi Greg,
    I have some questions so please pardon my ignorance.
    I don't understand the distinction you make between real cash and liabilities. Isn't all cash just a treasury note reflecting a liability? Or do you mean that when you net out deposits and loans at a particular bank, what is left, the capital, is the real cash? Or do you mean base money, the pure printed which we started off with after going fiat?
    Also, isn't it a requirement that the loan deposit ratio is over 100% because otherwise it would be impossible to keep 2% inflation going forever.

    Any expansion on your points would be very welcome.

    ReplyDelete
  4. Hi J

    Cash is a treasury note reflecting liability guaranteed by a state issuing it. If we accepted private treasury notes (like private debt notes etc) as good as cash we would not have had liquidity crunch but a massive inflation. It is simply a matter of confidence: we trust (at least some) states to honour the notes. We do not trust private issuers.

    With regards to loan to deposit ratio greater than 100%, please read the first article on this blog " The largest heist in history". I think it is the best answer.

    Best

    Greg

    ReplyDelete
  5. Hi Greg,

    if inflation starts to rise rapidly what do you think the bank of england could do about it?

    Raise interest rates?

    Anything else?


    Best

    Mark

    ReplyDelete
  6. Hi Mark

    The inflation is already high compared to interest rates (especially real ones on savings). Hence taxpayers are already paying the costs of QE.

    What to do? Here are my ideas: "Prime Minister, sort out this mess, please" - http://gregpytel.blogspot.com/2010/06/prime-minister-sort-out-this-mess.html.

    Best

    Greg

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