Cardinal O'Brien does not get it

"Scotland's most senior Roman Catholic, Cardinal Keith O'Brien, has accused the prime minister of acting immorally by favouring the rich ahead of ordinary citizens affected by the recession. The cardinal also denounced David Cameron's opposition to a "Robin Hood tax" on financial institutions. And he urged Mr Cameron not just to help "your very rich colleagues."

The cardinal clearly doesn't get it. The current government is on a mission to build a "big society": bunch of volunteers providing key services and food banks instead of benefits and services guaranteed by the state, i.e. taxpayers, ourselves.

We are all in it together and ultimately we will all be equal: broke. Our, the taxpayers, main role has changed in the last 3 years from paying for services provided to us by the state to subsidising the financial services industry. If we take away the issue of super-rich who are getting richer as the super-rich have always been and always will be, this is the largest equalisation project in history: taking the middle classes to the cleaners. Even Karl Marx and his followers had not dreamt of such radical and progressive system: big society all in it together.

Crisis? This is how it works

Today, not surprisingly, it was announced that the UK is again in recession. Politicians and mainstream commentators keep saying that, somehow, we have been experiencing a crisis, an economic downturn or a double dip recession. Maybe this is correct by some textbook definitions but in reality it is not a crisis or an economic downturn. This is how the current economic system was designed to work. It has very little, if anything, to do with the workings of the free market or capitalism, but much more to do with another, much more disturbing innovation system, that of communism for the rich.

For over a decade, the "captains" of the finance industry with the blessing or possibly the collusion, of the politicians and regulators have engineered a massive global pyramid scheme, the largest heist in history. It is the largest-ever transfer of the wealth generated and accumulated by the middle classes to the super-rich. Every spending cut, increase in taxes, every negative differential of interest rates, i.e. when saving rates are below the inflation, the negative differential between wage inflation and price inflation, additional money printed (so-called Quantitative Easing), significant drop in house prices, amounts to a massive raid on wages, savings, pensions, endowments and generally the wealth accumulated for lifetimes and sometimes through the generations by the middle classes. This heist, this massive misappropriation, continues. We also clearly see the other side of wealth accumulation: the global market for premium properties and luxury goods is thriving and there is no sign of the financial crisis in offshore financial centres.

Obviously the politicians keep saying that they are fighting the crisis and want to bring back stability and prosperity. We have been hearing this since 2008. Maybe some of them, those that are not particularly smart, even believe what they are saying. But this is just a front so that the system, which is extremely efficient in transferring middle class wealth to the super-rich, is allowed to continue operating at full speed. The so-called "financial markets", which are grotesque and primitive parodies of the concept of the free market, keep ruining the economy and the lives of ordinary people. And despite the rhetoric of the politicians and many in the main stream media which supports their claims to be fighting the crisis, this is effectively just a smokescreen behind which the real agenda is hidden, that of cleaning out the middle classes. Both the media and the politicians ensure that the largest heist in history continues and are fully aware of what is going on.

Computational Complexity Analysis of Credit Creation v Austrian School of Economics reserve analysis

The computational complexity analysis of credit creation presented on this blog is an analysis of the dynamics of the reserves generated in the credit creation process. There are four disjoint and complete (taken together) classes that capture the dynamics of the reserves: full reserve banking, fractional reserve banking, no reserve banking and depleting reserve banking. Briefly, lending with loan to deposit ratio of 0% results in full reserve banking, lending with loan to deposit ratio of more than 0% and less than 100% results in fractional reserves banking, lending with loan to deposit ratio equal 100% results in no reserves banking and lending with loan to deposit ratio of greater than 100% results in depleting reserves banking. The Austrian School of Economics gives the static analysis of the reserves: if a ratio of reserves to deposits is 100% it is full reserve banking, otherwise it is fractional reserve banking.

The relationship between static and dynamic analyses

A static full reserve banking is a result of dynamic full reserve banking credit creation process. A static fractional reserve banking is a result of the dynamics of either fractional reserve banking or no reserve banking or depleting reserve banking. Therefore the static analysis is less fine-grained. Importantly static analysis of reserves by Austrian School of Economics completely misses the pyramid creation aspect of the credit creation process when loan to deposit ratio is greater than 100% (i.e. it is only the case of depleting reserve banking).

This note was prompted by a number of comments from academic economists who considered the reserves analysis on this blog isomorphic to Austrian School of Economics'. Hence they missed the key point of distinguishing a static aspect of reserves from their dynamics.

How the City ruined the British industry

Yesterday Daily Mail published a serialisation of a new book by Alex Brummer: "Britain For Sale: British Companies In Foreign Hands". It has been argued in many articles on this blog that the financial industry is heavily subsidised by the state, in form of direct subsidies like bailouts and stimulus packages and indirectly by being provided by the state, at a massive costs of the taxpayer, with an implicit insurance against failure ("too big to fail" phenomenon).

Mr Brummer's book shows even more sinister side of the financial industry: how parasitical it has become in the last 30 years and how dysfunctional and damaging it is for the British economy.

As Mr Brummer explains:

"What tipped the balance towards foreign takeovers in the late Nineties and 2000s were three key factors: the cheap cost of borrowing; liberal takeover rules; and the presence of global investment banks in the City, with ready access to the world’s capital.

Throughout the boom years, these banks were allowed to write their own rules. What this meant, in essence, was that a bank which might once have considered it risky to lend ten times its share capital would now lend up to four times that amount.

The result? Foreign companies took full advantage of all this cheap and easy credit to snap up increasing numbers of great British brands.

Not only that, but our eccentric tax system actually made it more profitable for overseas owners to buy companies with borrowed money. For example, foreign firms who buy British companies using borrowed money are able to deduct the interest they have to pay on those loans from their tax bills.

And this had a direct effect on jobs in the UK. Weighed down with often massive debts, new owners were far less likely to invest in the future of the firm and were instead more likely to close down factories and plants, throwing thousands of Britons out of work.

(...)

In the real world, away from the gilded environs of the City, the tragedy is that tens of thousands of jobs have gone. Crucial skills have been lost — probably for good. And the strategic heart of British manufacturing has been ripped out, which affects our ability to climb out of recession.

Still, the outlook isn’t all bleak: bankers and foreign shareholders are doing just fine."

Mr Brummer's book should be dedicated to the British government, the London mayor, Mr Boris Johnson, and The Economist team and its Editor, Mr John Micklethwait, and all City supporters. Maybe they will realise, at long last, that it is not a matter of academic arguments or having different views. Their views are not only irrational but also are highly damaging to the interest of the country.

George Soros: Euro entered "a less volatile but more lethal phase"

In today's FT

"Far from abating, the euro crisis has recently taken a turn for the worse. The European Central Bank relieved an incipient credit crunch through its longer-term refinancing operations. The resulting rally in financial markets hid an underlying deterioration; but that is unlikely to last much longer.

The fundamental problems have not been resolved; indeed, the gap between creditor and debtor countries continues to widen. The crisis has entered what may be a less volatile but more lethal phase."

This is refreshingly very old news.