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, 20 October 2010

On a slippery slope

This week announced spending cuts on defence in the UK indicate the scale of the current financial crisis. Even, as a result of the previous Labour regime brought about economic disaster, at the end of 1970's the UK did not have to cut its forces that deep. In 1982 it was still able to mount a successful Falklands campaign. In the height of Conservative induced recession of the early 1990's it was able to provide a significant contribution to the First Gulf War. After the defence budget cuts just announced the British conventional military capability will be reduced to symbolic. Only nuclear deterrent will keep British position on the UN Security Council not reduced to a rather indefensible remains of a period when Britain was still a power.

Cuts of public spending in general on a similar scale will happen in other areas. They are also happening other countries like France where a very generous pension age is to be extended from the age of 60 to 65. So be it one might say. Maybe it all makes sense. Maybe it is not in British national interest to remain a significant military power. Maybe rising pension age is good for society. After all people who work longer (in good conditions, of course) are healthier and live longer. Besides industries and businesses propelled by the public sector are usually not the best examples of efficiency and productivity. The point is however not whether such saving and cuts make sense but why they are a financial necessity. Why such public spending cuts are not diverted through tax cuts or other spending to education, research, better pensions, health service, etc.

All the public spending is necessary because of the depth and spread of the financial crisis. This financial crisis is reshaping our social lives. It is done under propaganda of necessity and impunity for all those responsible. There is not much public debate. Having organised a pyramid scheme that pumped the cash out of the economy (and a lot of it is sitting in shadow banking and offshore financial centres), as described in "The largest heist in history", governments have kept taking money out of taxpayers pockets by making cuts and raising taxes, to sustain a pyramid of liabilities created by the financial industry (that incidentally has been funding a pretty good lifestyles of its administrators, i.e. the bankers).

In the UK the Prime Minister, Mr David Cameron, naively believes that this is "taking the Britain out of the danger zone". Nothing can be further from the truth. In fact the bankers achieved what the author of this blog warned about well over a year ago: they control, through mechanisms of the financial markets, the taxpayers in the same way as loan sharks control their victims with bullies with baseball bats. It is not more sophisticated in practice. It is not a socialist view but a laissez-faire perspective. The bankers are running a creeping October Revolution of our times: killing free market-based capitalism and replacing it with a communism for the filthy rich. As the recent Irish experience indicates, they are preparing to come for more. The present improvements of the UK standing on the financial markets after making cuts promises is an encouragement to make further cuts. Once the "markets" judge them deep enough, i.e. maximising a room in the budget to transfer more money to the banks, the "markets" will go the other way. The most obvious mechanism will be through downgrading British rating giving completely free cash to the financial industry. Due to the scale of the financial pyramid the end to this is not in sight. We are on a slippery slope and any talk about a better future is fooling people. Unless it is a better future for the bankers. On the face of it, leaving political wranglings aside, whilst the last Labour administration allowed (or even colluded) the financial pyramid to grow, the current Conservative one appears to sustain it. There is a solution however. But it requires guts, competence and wisdom.


  1. Very incisive as always. Well done.

  2. Mr Pytel, I am an admirer and reader of your blog. This is my first post.
    The idea of a cartel of people "in the know" funneling money out of the system in what would be a massive "heist" might be appealing to many people. But using this concept to squarely place the blame on that group of people for the cuts that are sweeping Western economies is going a bit too far in my opinion. Why? Because IMHO the ultimate reason for this crisis is "peakoil". I have come to believe that this crisis that started in August 2007 is the result of "peakoil". Earth it is now at the peak of oil production while demand was increasing. A dislocation between supply and demand of oil occured; demand could not be fulfilled so a process of "demand destruction" ensued in order to adjust it to supply. This "demand destruction" process set the pieces in motion for the unwinding of the pyramid schemes described in this blog and it is the root cause of this finantial in my opinion.
    Money allow us "to do things" and it is an "alterego" for units of energy (i.e Oil and others). In a world where oil has stopped growing and will soon enter decline everybody is going to feel poorer than X years into the past. No amount of money printing or QE will saves us from that. So cuts in expenditure are or will be necesary. Only if humanity finds a source of energy with EROEI equal or higher than oil and abundant enough to replace the forthcoming oil decline in the future that Western economies will come out of the crisis to the same point "wealth wise" as it started and "carry on".
    One could argue that, should those pyramid schemes had not existed the extend of the cuts would had been much less and the crisis less severe. And you could argue that the people in the know financially are trying not to lose out and hide their wealth away. Me too I wonder who is being served by QE. But placing all the blame squarely on the finantial sector for this crisis and the cuts is missing "a very big factor".
    Keep in mind that wealthy people who happened to be heavily leveraged at the the time the crisis broke out have also lost out (Tom Hicks and George Gillett, former Liverpool owners come to mind as examples).

    Alex DM

  3. Hi Alex

    Thanks for reading my blog. Of course you are entitled to your opinion and I am not claiming that I have monopoly for making a correct diagnosis. But let me defend my corner:

    1. I think you may not realise the scale of the liquidity hole that exists as a result of a pyramid scheme. Do not take it as an offence: HM Treasury did not (and do not?) realise it either (http://gregpytel.blogspot.com/2009/10/uk-government-officially-confirmed-it.html). This is what makes this crisis very unique.

    2. I do not claim a conspiracy but rather a result of common interest of certain powerful groups (in finance). This phenomenon is not unusual and is typical for influential professions and groups. (Please read also: http://gregpytel.blogspot.com/2009/10/economist-exonerate-bankers.html)

    3. "Smart" wealthy people did not lose money. Please note that bankers paid (and pay) themselves bonuses in cash (which goes to show they do not trust their "innovations" which is quite telling). Wealthy people that were heavily leveraged were not really wealthy (or smart). They were like Iceland that thought of itself as an offshore financial centre. Maybe technically and geographically it was offshore. But proper offshore financial centres are somewhere else. Thus far there is no sign of any crisis there. And do not expect any.

    4. For the last two years my pyramid based analysis faultlessly predicted the trend of developments. It is not a fortune telling tool so exact timing and scale is difficult to predict. But, unfortunately, in terms of showing the direction it works. Believe me, I want to be wrong as if I am proved correct we are really heading for something big again.



  4. Thank you Greg - incisive and closely reasoned as always. Much food for thought...

  5. This is the first time I've come across your blog. I've been certain from some time that the causes of the 2008 crisis have not been resolved, making another crisis inevitable. However, I didn't know exactly what had happened. Now thanks to you I have a very coherent argument for why it happened. I'm sure there are more factors, but the one you have drawn our attention to certainly seems to be the most important. Thank you for an enlightening blog.