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, 4 November 2010

Currency wars: where will it end?

The current financial crisis put a huge question mark on the credibility of the major currencies. The rounds of massive quantitative easing - printing of trillions of dollars - of unpredictable consequences, major banks balance sheets crisis, sovereign debt crisis and so on. In the midst of it the economic prospects of the US and the EU still look gloom as there is no apparent revival trend that would lead to a sustainable growth. All the governments are doing looks like life support of the dead corpse of the financial system rather trying to stimulate the economy. No wonder, as the financial system was turned into a giant pyramid scheme it keeps on collapsing. And it will keep on collapsing until the pyramid is liquidated. The currencies such as the US dollar, Euro, the British Pound are in fact such a pyramid scheme vouchers.

The recently proclaimed currency wars underpinned by the current US initiative of quantitative easing, kind of a major fiscal offence, are likely to result in further undermining of the major currencies. In fact it is likely to further undermine the world financial system as we know it which is based on fiat money where currencies represent the credibility and financial worthiness of economies they represent. As currencies are used so crudely as financial weapons their credibility as a value store will soon be gone. So what next?

There are economies and businesses in the world that generate profit. They need to store value in a credible way. If the major currencies lose such a role the natural way will be a come back to a barter-type economy. Buying commodities, land, etc. and trading it. It looks likely it will go in this direction but the system will be managed in far more refined manner rather than a typical barter of a gone by age. The obvious candidates would be virtual currencies. Each of which would represent a basket of commodities agreed by parties to a transaction. The obligation to pay a bearer would not be in any currency but in a basket of commodities. However, one can expect, that typically a payment would be accepted by a receiving party in some currency - or currencies - equivalent at the time when it is settled. Technically there is no limit to a number of such currencies: a new one may be created for the purpose of a new transaction. However one can reasonably expect a good degree of standardisation, i.e. a major 3 - 5 virtual currencies, commodity baskets. This would facilitate trading between them and trading between the contracts based on them. In fact China's massive multibillion dollars commodities-for-cash deals are good early examples that such a system is already emerging.

Virtual currencies would be inflation immune within the commodities they represent. They would be durable and non-perishable as they will not be actual commodities but rights to get them on demand when a contract representing a particular currency is settled (i.e. value is exchanged). Such model should be quite appealing to countries like China and India whose development depends to a large degree on the access to commodities. It should also be appealing to commodities producing and trading countries as they would not be dependant on a very uncertain fate of the US dollar (a major, by far, current commodity trading currency). And as a value store, virtual currencies would always store a real value despite the fact that there would always be a risk of a commodity going up or down against the others. After all, this might not be such a big revolution: ultimately it may lead to re-basing the national currencies, turing a full circle from abandoning de-based and worthless paper money and going through a modern form of bartering. This time round not strictly currency based on gold but on various commodities baskets. However there could be a lot of bumps, or worse, along the way.


  1. I came across a link to Bitcoin which needs some form of explanation like they try to do here http://modeledbehavior.com/2010/06/30/bitcoin-and-the-wild-west/ - any thoughts?

    Their FAQ page is here http://www.bitcoin.org/faq

  2. But don't commodities fail 2 measures of a viable currency (or base for one) in that they are not durable and they are perishable?

    Has it not also been shown that they are open to price manipulation via natural causes (drought in Russia) or financial interfearance (the current Silver supression fraud cases against JP Morgan and HSBC). My point being they are not stable.

  3. Greg - I fear you must be mistaken. Only a few weeks ago Tim Geithner stated that the USA supports a strong dollar. This statement was made at a time when plans for QE2 were crystallizing. Are you suggesting Tim Geithner is a bare faced liar?

  4. @Trying to make: I think you misunderstood my article. I am not writing about baskets of commodities as currencies but rights to commodities as currencies. And rights, if properly defined in contracts and enshrined in law, are durable and not perishable? In fact such system already exists on the markets for years. I am simply writing that it looks as it may become more widespread, standardised and will take the role of currencies as a value store and mean to settle commercial contracts. So there is nothing new in essence that I suggest: simply improvement, standardisation and scaling up of what already exists.

    @R S: I do not have a view whether Tim Geithner is a bare faced liar. I simply point that if assurances of public officials, politicians worked we would not be in the current financial and economic mess. E.g. when Gordon Brown assured the British public (and indeed the world) that "we abolished boom and bust" was he a bare faced liar? I do not think it is a right way to approach the debate on the causes of the current crisis.

  5. Jim Rogers "wrote" a postscriptum to this article. At a meeting with students at Balliol College (Oxford) he said: "“The power is shifting again from the financial centers to the producers of real goods,” he said. “The place to be is in commodities, raw materials, natural resources.” (http://www.bloomberg.com/news/2010-11-04/bernanke-doesn-t-understand-economics-investor-jim-rogers-tells-oxford.html)

    Mr Rogers words indicate the viability of the above scenario (new currencies based of rights to commodities) as the world started thinking (again) about re-basing money and the tangible value of commodities.