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?".

Saturday, 8 October 2011

It's a pyramid indeed


The analysis on this blog was written as an intellectual exercise deliberately outside the mainstream academic research, so it was not influenced by the conventional thinking. But the work, especially its technical aspect, was meant to be serious and correct. In August last year the work on this blog was reviewed and used by Ms Marina Stoop of Swiss Federal Institute of Technology in Zurich (one of the world leading universities, alma mater of Albert Einstein and no less than 30 Nobel Prize winners). Under the supervision of Professor Didier Sornette, she wrote her Master Thesis "Credit Creation and its Contribution to the Financial Crisis".

The thesis acknowledges the taxonomy of credit creation process introduced in an article on this blog "Computational complexity analysis of Credit Creation": Full reserve banking, Fractional reserve banking, No reserve banking and Depleting reserve banking (page 29 of the thesis). It concurs that as a result of practice of Depleting reserve banking (or Depletion banking system as it was called in the thesis) "the money multiplier tends to infinity and the liquidity risk is 100% in a finite time." (page 30 of the thesis)

The thesis also cites financial perpetuum mobile example from the blog article showing how Depleting reserve banking works and then concludes:

"This describes well how the bubble economy worked that led to the current financial crisis. In the years preceding the crisis, the money (“wealth”) created in the system was not tied to the real growth rate of the economy. It therefore created the illusion of a perpetual money machine where wealth would grow at an accelerated pace." (page 31 of the thesis).

Having acknowledged that a "Ponzi scheme is a fraudulent investment operation", with respect to Depleting reserve banking, the thesis confirms that it "is a classic example of a Ponzi (pyramid) scheme". (page 92 of the thesis) This is exactly what the author of this blog asserted since the end of 2008: the financial system had been been turned into a pyramid scheme and its collapse was inevitable (and indeed easily predictable).

As this conclusion comes from a leading university in the world, are politicians and, more importantly, prosecutors going to do anything about it?. The ball is in their court.

The graph below shows exactly an exponential growth of Money Multiplier (this time it is expressed as a ratio of broad money to currency supplies in the United States), the direct effect of Depleting Reserve Banking: (source: US Federal Reserve)


Looking at the diverging trend of M3 (broad money) to currency on this graph, it is simply too terrifying to discuss what happened after 2006, when the reporting was ceased. The graph HERE shows even faster increase till 2008, then a decrease of growth, deleveraging between 2009 and mid 2011 and back to the old pyramid pattern. So the current collapse should not come as a surprise.

This is precisely what is achieved by lending with loan to deposit ratio greater than 100%. It is a classic representation of a pyramid scheme. (Both top and bottom graphs: top one showing broad money exponentially diverging from currency and the bottom one - as near linear on a logarithmic scale - showing a pretty steady pace of exponential growth.) This is what is called a Depleting Reserve Banking (not Fractional Reserve Banking any more). This is what the model presented in "The largest heist in history" captures (as said: "the proof of the pudding is in the eating").

3 comments:

  1. Your pictures are broken. They are pointing to gmail.com

    ReplyDelete
  2. Thanks Theodore. I hope I fixed it. Best.

    ReplyDelete