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?".

Tuesday, 13 December 2011

Debt magic: a story from Devon

On a grim rainy autumn afternoon a tourist comes to a small seaside town in Devon. He plans to stay for a week. He finds a hotel and decides to stay there. At this time of the year, which happens to be during the low season, the hotel is empty and the tourist gets a great deal: an entire week for £100 provided he pays upfront in cash.

As soon as the hotel owner gets £100 he calls the hotel cook. He owes him £100 in unpaid wages as the business has not been good recently. The cook gets his £100 and goes to a local grocer, his childhood friend, who was helping with weekly shopping by providing a small credit line. The cook gives the grocer £100. The grocer then goes to his local wholesaler whom he owes £100. The grocer settles his debt. Quite often the wholesaler spends evenings in the hotel bar drinking whisky. He owes the hotelier £100 for drinks. Now he has money and the hotel owner gets it.

At that point the tourist discovers that the hotel is not really up to standard. Without going into detail (so as not to discourage anyone from visiting Devon which is beautiful and this story is a fiction) the tourist goes to the reception asks for £100 refund for his room and leaves. But he also leaves some residents in this small seaside town happy on this grim day: thanks to him they have cleared their debt.

There is a serious point to the story. The reciprocity of debt is not uncommon. Many people have mortgages and loans on a liability side and savings, endowments and pensions on an asset side. A customer has debts towards a bank and a bank has debts towards a customer. In reality these debts offset each other. However in the world of banking they add up: banks make money by servicing debt in whichever direction, especially those who are intermediaries. France owes the UK €227 billion, the UK owes France €209 billion. Germany owes France €206 billion, France owes Germany €123 billion. This BBC interactive map shows the euro debt structure. Banks make money on all debt.

This is one of many reasons why the global debt must be audited and all reciprocal debt should be offset. This was recommended in "Prime Minister, sort out this mess, please" a year and a half ago. Of course, not all debt would be nullified like in this small seaside town in Devon. But there is no doubt that a huge mountain of debt would be greatly reduced. But such an approach has been ignored thus far because if it were not, banks would lose huge income streams (for acting as debt arrangers/managers) from the taxpayers. No doubt they are unlikely to allow this to happen.


  1. Well one real big problem with economics as a theoretical subject is blind theft the use of sheer force never seems to enter it.
    Yet I recall several school bullies stealing my lunch money.
    Despite being reported no money was returned to me.
    Despite the physical abuse no compensation was paid to me.
    Yet after all these years they seem to own several properties, are on their 3rd or 4th wife whilst I live in near poverty on welfare

    Oh yeah, some work for banks

  2. Excellent point, Greg. Really it's the banks vs everyone else in this tale.

  3. Hi Greg,

    I just wanted to write in and say thank you for your efforts. You're doing a great thing. Keep it up.


  4. Hi Greg

    Dont pension funds,in a round about way, rely on those huge income streams also?

    A Legg

  5. Hi, yes, this is true but it is not clear to what degree. It is an excellent point.

    This one of the biggest potential problems. And it is one of the mechanisms the pyramid designers built into the system in order to keep the governments at ransom, so they do not liquidate the pyramid but are "forced" to keep on subsidising the scammers.

    I made that point in my first article, "The largest heist in history":


    when I wrote it 3 years ago.

    It would better (and cheaper) for the governments to liquidate the pyramid and compensate the pensioners directly (e.g. by transferring their pensions on the government books) rather than keep on subsidising the entire global pyramid scheme of which pension element is not such a big part, and definitely not the part that creates the run away aspect of the pyramid. Basically by averting a much smaller problem now, the much larger problem is being nurtured that is likely, if not stopped, to ruin in time the entire western economy (taking down all the pensions, including the state ones, with it).

    Best, Greg

    1. While I don't doubt the legitimacy of a debt pyramid, your story shows a poor understanding of economics and the role of money as a unit of account. There was no true debt (i.e. a future obligation) in that situation. The economic activity/trade had ALREADY occurred, the participants just didn't have a way of showing it - this is a money supply issue. To rephrase - 'A' does something for 'B' who does something for 'C' who does something for 'A'. The net debt of each person is zero, they just don't realize it.

    2. Hi Bob

      You criticise me for something which is not part of my short article. And as you know, if you have NOT a poor understanding of economics, that debt statistics figures do not necessarily show TRUE debt. What you are rephrasing at the end is simply the logic of my story. So if I show a poor understanding you show it too. Judge for yourself.

      Best, Greg