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, 5 November 2011

Debt Dynamics


Debt, in itself, generates more debt by attracting interest. At present it appears that the current level of debt, in Eurozone - and in almost all western economies including the US' - attracts more interest than the repayments generated through economic growth (collected as taxes). There is no doubt that recovering from the current crisis will require debt write offs. But how much would it be on a global scale? It makes a significant difference if, for example, 20% of debt on the banks' books (globally) has to be written off for the economy to recover, or 99%. And it is actually likely to be far closer to 99% than 20%. And then there is a question who will be on a receiving end of such write offs: basically who is going to lose loads of money. As the history shows the answer to this question may make the difference between peace and war.

But debt write off is not such a simple process. If it happens it will be a default. Even if voluntary the courts are likely to rule that it is a credit event. This, in turn, will trigger CDS' payouts (sometimes referred to wrongly as insurance against a default; in fact these are the bets put that default would happen). Due to the nature of CDS' these payouts may actually be greater than the underlying debt, value of default (since it is possible to buy CDS' on a particular default event exceeding the value of the debt). So from financial system perspective, debt write offs may trigger liabilities much greater than debt itself: i.e. the cumulative value of CDS' payouts may exceed, by far, the value of written off debt (some estimates go into hundreds of trillions or even quadrillions of dollars). And who is going to pay it? The guarantee will come back again on the taxpayers doorstep.

The current credit creation mechanism in the banking system (lending with loan to deposit ratio greater than 100%) is also unsustainable. Such mechanism needs financial innovations, like collateralising and rolling over of debt, to be operated. The unsustainability of this mechanism is such - it is basically a pyramid scheme mechanism - that even if a sufficient global debt reduction is done (even a total 100% write off), and somehow CDS' liabilities are written off too, the debt write off strategy will not work anyway: the world will be back in debt and soon.

The new debt generated by credit creation with loan to deposit ratio greater than 100% will very quickly (at exponential, intractable, pace to be mathematically precise) return to pre write-off level. But a credit creation process cannot be stopped totally without killing the economy altogether. This is actually what is happening to a large extent now: banks lend very little to genuine businesses. The solution to such quagmire is given by basic mathematics (this is what the work on this blog has been all about): after making sufficient write-offs, lending with loan to deposit ratio (system-wise) greater than 100% should be banned explicitly. Thus far it is banned implicitly as pyramid schemes are banned, but financial institutions ignore it. In practice ledning with loan to deposit ratio greater than 86.5% (or even less) should be banned. This is not a guarantee of a solution to all economic and financial system problems giving a speedy recovery, but without it no solution is possible. The world will keep getting into debt deeper and deeper.

The quagmire of the current situation is that, from technical and legal perspective, for some years (at least a decade but most likely much longer) the financial institutions have been running a massive global pyramid scheme. What we have been observing for the last 3 years is a typical ongoing collapse of the pyramid. It looks exactly the same as Albanian pyramids of 1996 - 1997. The fact is that the financial system - with the support of politicians - is determined to maintain such a massive pyramid scheme. In practice it means more collapses and bailouts and never ending debt for the taxpayers to keep such a loan shark business going.

6 comments:

  1. This makes absolute complete and utter sense. What a shame your proposals will never be implemented by the criminal elite who are intent on fleecing the 99% who do not understand the true cause of this crisis.

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  2. Greg, excellent analysis of the ongoing capitalist banking debt crisis and the collapse of their banking debt pyramid Ponzi scheme.

    I believe it was the ‘’small fry’’ US Ponzi scheme king, Madoff, who remarked, while in prison, correctly IMO, that the entire capitalist financial market and Fractional Reserve banking system was one ‘giant Ponzi scheme’. As soon other banks and retail bank depositors become aware of the Ponzi scheme and lose confidence in that financial or bank Ponzi scheme, and demand their cash, you get a panic and the game is up, like it was for Madoff once exposed.

    With banks the panic is expressed in a ‘bank run’ – e.g. Northern Rock in the UK in September 2007 (the tip of the sub-prime fictitious value ‘securities’ / Ponzi debt banking scheme). The equity markets also show panic and high volatility with shares crashing every other day with each bit a bad debt news and loss of confidence as the debt crisis deepens and the ‘creditors’ and bond market/banker creditors fear a giant domino debt default.

    Of course the ongoing banking debt crisis which has morphed into a sovereign debt crisis
    (since Central banks bailed out the indebted private Ponzi commercial banks and continue to prop up the insolvent banks across the planet) is proof of the capitalist ‘Law of Value’ (Marx) and is exposed in ‘Fictitious Capital’ ( Marx; the exposure of fictitious capital values; worthless sub-prime ‘securities’, ‘assets’ etc ) held by banks; which is now fast being exposed in European banks through ‘stress tests’ (to extent) and their desperate measures adopted to deal with the bank debt crisis in the Euro zone and the weakest link, Greece, followed by Italy and France and their bankrupt banks that have lost (where did it vanish to?) 50% to 66% plus of their fictitious ‘share value’ over the past year.

    What the Central bankers and casino bankers and their friendly casino banking Governments fear is an official ‘’bank default’’ that will trigger a massive major ‘’credit event’’ to expose the £ $ multi trillion Ponzi CDS debt market / bank ‘’insurance’’ [sic] casino gambles and bring down the entire Ponzi banking pyramid system.

    Thus their desperate need to avoid ‘default’ and to continue to impose debt rescues / loans/ deals [sic] and austerity measures to keep Greece afloat in the Ponzi Euro banking fold and the crisis within the political Greek Government leadership that wants to keep the bankers Ponzi pyramid scheme going at any costs and impose the bank debt austerity measures on the Greek people to save the banks and bankers!

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  3. Hi Midasok

    Thanks for your comprehensive comment. In a broad sense I completely agree.

    I am not going to defend Fractional Reserve Banking but, from legal and technical standpoint, it is NOT a pyramid (or Ponzi) scheme. The current financial system is far more (technically infinitely) risky than Fractional Reserve Banking. The current financial system operates as, what I termed, Depleting Reserve Banking. For more please read here:

    http://gregpytel.blogspot.com/2010/03/computational-complexity-analysis-of.html

    http://gregpytel.blogspot.com/2011/10/its-pyramid-indeed.html

    It is an important point: whilst Fractional Reserve Banking may be considered as inadequate (faulty, wrong, etc) it is, strictly speaking, legal. Depleting Reserve Banking is a classic example of a pyramid scheme and it is highly illegal. That's why I argue that all those who caused the current crisis should be prosecuted under the existing law.

    Best

    Greg

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  4. Hi Greg,

    Thanks for your prompt reply and information re: ‘Depleting Reserve Banking’ (DRB).

    I must say that I had not heard of the term DRB before but I fully agree with your analysis and definition of the DRB as ‘a classic example of pyramid scheme’ and is thus ‘illegal.’

    Is anyone to your knowledge taking legal action to challenge this DRB pyramid scheme?

    On another related issue raised in your debt blog today on the CDS market. How do you see this debt and CDS crisis developing?

    I recall watching a fascinating video* on You Tube two or three years ago re the huge CDS market and the way the US Government/ White House together with the Federal Reserve and those in the US banking fraternity blocked and closed down the US SEC investigation of the CDS market many years ago. You may have seen the video? And or be familiar with the SEC investigation? I think Greenspan was at the Fed at the time. (*I’ll try to find the video and post a link later.)

    Thanks for the links to your other blogs.

    Regards,

    Midasok

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  5. Hi Midasok

    I am not aware that anyone is taking any action to prosecute those who caused the financial crisis under 'anti-pyramid schemes' laws and regulations. However politicians, such as Dr Cable, and top lawyers, such as Lord Pannick, are fully aware of such grounds.

    I do not have an idea how the financial crisis (things like CDS' stuff, etc) will develop. My analysis is not a fortune telling tool. Basically it simply proves that the current financial system is a giant pyramid scheme and as such is illegal and unsustainable (it has to keep collapsing until the root cause, a pyramid structure, is eliminated). The detailed predictions, I sometimes make, may not work and really are as good as anybody's who has historical view and understands that the pyramid problem is not going to go away simply by putting more taxpayers money into it. (It will actually get worse.)

    What I sometimes find fascinating is the fact that the stauchest critics of capitalism do not realise how bad the situation is. It is actually far worse than they think. It is not a capitalism anymore in any meaningful sense of this word but a gigantic global fraud machine. And, BTW, I believe in capitalism, peoples' liberties, free markets and all that. But I may be an idealist in that respect.

    Therefore the capitalism critics miss the point altogether. They are getting into philosophical discussions and demonstration, whilst the real issue is to prosecute the fraudsters under the existing law.

    Best

    Greg

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  6. It is interesting that this post mentions how we handle this debt problem can be the difference between peace and war. I pause before further comment.

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