Greg Pytel: There is a method in this madness

The publication of this article on this blog is dedicated to Sir Mervyn King, the Governor of the Bank of England, who reportedly said a few days ago:

"When this crisis began [in] 2007 - 2008, most people including ourselves [presumably the Bank of England] did not believe we would still be right in the thick of it, in the middle of it five years later."

Well Sir Mervyn, please speak for yourself and not for "most people". To remind you the analysis that was written at the end of 2008 and has been known by the House of Commons Treasury Committee since April 2009:

"If governments do not liquidate the global pyramid scheme, the money they injected will be, in time, converted into toxic instruments (e.g. securities) and cashed in by organisers and privileged customers of these schemes (or in the case of Albania, gangsters and their customer friends). As the amount injected is around 200 times less than the notional value of toxic instruments, the economy will not even see a difference. It will be a step back to September 2008, only now with trillions of dollars of taxpayers’ money spent to sustain the pyramid scheme. It will be merely throwing good money after bad. But can governments afford to come up again with the same amount money and do it 200 times over or more? This is based on a very optimistic assumption that the notional value of toxic instruments is not increasing. If governments take the route of continuing to inject money, they will make taxpayers dependent on the financial system in the same way that criminal loan sharks control their customers — their debt is ever increasing and customers keep on paying forever as much as it is possible to extract from them."

It is well documented on this blog that the actions taken by the governments at the time, in 2007, 2008 and 2009, were designed - which was glaringly obvious at the time too - to turn the liquidity crunch and banks' failures into a perpetual "crisis" spreading it into currencies and the sovereign debt. And the governments, together with the financial industry and the mainstream media, do all their best to keep it that way.

===================================

The Bank of England, backed by the UK government, is going to pump yet another £100 – £120 billion into the economy. Regardless of a seemingly noble plan- to help squeezed businesses and ordinary people- this is yet another example of throwing a massive volume of good money after bad.

And as before, all this money will end up in the banks coffers redeemed for toxic waste (which from practical perspective is infinite) and then transferred to the super rich. It is astounding that the politicians do not see that their behaviour satisfies Einstein’s definition of insanity: “doing the same thing over and over again and expecting different results”. Is it not rather obvious that:

- that the financial system stopped working, i.e. performing properly its money distribution and multiplication function in the economy and instead became a bottomless pit of debt resulting from its financial pyramid structure?

- that money is no longer a credible carrier of value (long term), hence economic theories and assumptions (whether Keynesian more spend or neo-liberal austerity approaches) do not hold anymore and can no longer be applied in practice?

- that any bailout is only a temporary reprieve and the problem comes back soon with a multiplied force (if the politicians are too silly to understand why this is so they have had over three years to learn it from the reality, experience)?

What can be done then? The situation is very similar to a state of the financial system after a war or a massive disaster. The easiest way is to suspend old money (pound sterling, euro or dollar) and issue a new currency (new euro, new pound, new dollar). First paying for the most basic social needs: food and subsistence necessities, social security, health, education, defence and law and order. (There is more than enough slack in the economy to fund it. We do not have a shortage of any goods or of skilled people to provide services.) Only then you can start negotiating the remainder of liabilities in the financial system: (deposits, pensions, and so on) what you are going to honour 100%, what you are going to honour partly and what you will write off completely.

This is the same solution which was recommended over three years ago in a report to the House of Commons Treasury Committee. If all this is done properly there will be little drama. It has been done in the past in critical situations (e.g. Germany and Poland after World War II) and it works: the economies recovered. If, at the time, the financial system worked as today's, i.e. as a giant pyramid scheme, all stimuli such the Marshall Plan would have been wasted.

And, not a small matter, the financial system has to be reformed so it no longer functions like a pyramid scheme as it does at the moment. Again, nothing new or ground breaking: e.g. returning to banking rules and principles of the 1970′s and 1980′s in Germany would do for a starter.

However Europe would require a separate reform as apart from debt problems there are structural problems that the debt crisis exacerbated and brought to light. At present politicians completely mix up these two separate things. It suits the financial industry as it helps them getting money into the financial system, by bailouts and quantitative easing. And this is what they are after: like the heavy industries here were after the government subsidies in the 1970′s.

If it is not done by the deliberate political decision through negotiations, such or a very similar solution will be forced upon the world by the events. The later it happens, the worse, as the mountain of notional debt and liabilities keeps growing. Hence it will be more and more difficult to deal with that in an orderly fashion (i.e. notional losses will be bigger hence, even a greater room for conflict).

At the moment any bailout increases the overall liability and ends up on the financial markets which are a failure, which do not function according to free market rules. This is a textbook example of throwing good money after bad (with no end till a disaster). Is the above not really basic? This is not a financial crisis. This is an intellectual crisis, a demise. It is a stupidity galore.

But there is a method in this madness, there is a reason behind this insanity. Every time we read about obliterated pension schemes and generally falling income and purchasing power of the middle and working classes, the workhorse of the economy, and the growing gap between them and the super rich, thriving market of top end properties in London, luxury goods and services, from systemic perspective it is simply a wealth transfer.

One can argue whether this is right, or wrong, but this is exactly what is happening. Whatever the view is the current crisis is the largest wealth transfer exercise from the middle and working classes to the super rich using pyramid schemes which have exactly the same structures and mechanisms- pretty primitive actually- as Albanian pyramids in the 1990′s.

===================================

This article was published first on Nutmeg blog