Thursday 14 April 2011

ROLLING BACK THE LANGUAGE OF ECONOMICS - Part 3 : MONEY

Money or currency is one of the most misunderstood ideas.


It used to be that money had an intrinsic value. It contained a specific quantity of a rare earth metal like gold or silver. Even paper money carried a written promise such that the issuer could exchange that banknote for a prescribed amount of gold on demand. This was known as 'specie money'.


However, printed money now carries no such promise. Not since 1971 anyway. It is now known as a 'fiat currency'. That is to say, it has no intrinsic value and its worth can only be determined relativistically with a view to how much of it is in circulation and what demand there is for it.


All sovereign countries now use fiat money. It is printed and issued by 'central banks' like the US Federal reserve or the Bank Of England etc. Of course, these organisation sound very official and they also sound like they are owned by the governments of their host countries. However, nothing could be further from the truth.


They are private banks and they always have been.


The Bank of England was founded in 1694. Even though it was nationalised in 1946, it is still a privately owned company with Directors. This anomaly was formed in 1977 by creating a wholly owned subsidiary company called Bank of England Nominees Limited. This company was granted a special exemption by the Secretary of State for Trade such that it could trade without declaring who the Directors are and using the Official Secrets Act to protect their anonymity. This is wholly unique and a special case when considering the normal legal requirements of The Companies Act.


According to their website, the US Federal Reserve Bank is a government body. However, all of its shareholders (Directors) are private banks. None of its stock is owned by the US government.


These central banks have the ability to print money whenever they see fit. A private company creating money from thin air. They also provide money to their governments in order to make up their revenue shortfall or spending excesses. The government pays interest on these debts. This interests is guaranteed to compound and spiral with time.


The last time the USA balanced its books was in 1835.


A couple of quotes from the past that resonate profoundly today:



Paper money eventually returns to its true intrinsic value - ZERO ! (Voltaire 1694-1778).


If the American people ever allow private banks to control the issue of their currency, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered - (Thomas Jefferson 1743-1826)

Wednesday 13 April 2011

ROLLING BACK THE LANGUAGE OF ECONOMICS - Part 2 : STIMULUS

Various Western governments have introduced stimulus plans. These measures have also been called 'quantitative easing' (QE) among other things but basically they amount to printing money.


The mirage created with QE is that the central banks created electronic money out of thin air and used that to buy their own government's bonds. These bonds are basically IOUs and in time the governments will have to repay those debts to the central banks with interest. When the payments are recovered the central banks will then electronically destroy the imaginary money.


This process of printing money causes a devaluation of the 'fiat currency' due to the laws of supply and demand. If you make more of it, each piece of it is worth less.


As the majority of all money 'exists' only in a digital form, it can also be argued that what is actually being printed is digital debt.


The problem with introducing a stimulus is that you have to maintain that stimulus for a significant period as global markets take time to react to the change in the economic system. By maintaining that stimulus, the system can become dependent on it. This happens when a sick person is treated with stimulus drugs. They can soon become addicted to the stimulus and side effects appear. The side effects can be harmful. Even more harmful than the original disease.


These unorthodox processes are hitherto untried and untested, and it is only because it is mathematicians offering these 'solutions' to governments and banks that any credibility at all can be given to the process.


WARNING !!! These are the same breed of mathematicians that sold the financial services industry the ideas of complex derivatives including 'securitization of mortgages' and 'credit default swaps'. Watch out for Global Banking Crisis II, coming to a town near you soon.

Tuesday 5 April 2011

ROLLING BACK THE LANGUAGE OF ECONOMICS - Part 1 : INTEREST

This post will be the first in a series of posts that looks at how the use and perception of economic and political language have been changed over time.


INTEREST is a concept that we are all familiar with. Usually because we have to pay interest to banks, credit card companies, shops etc. Sometimes we receive interest on savings or other investments. The word interest comes from the notion that if you borrow for, say a house, your lender will charge you interest in order that you get to buy a house and the lender makes a profit. The lender also has an interest in your property. That is to say that he is interested because if you fail to complete the transaction at any point, that property may be sold. It may be sold for less than the outstanding value of the loan in which case the lender would make a loss. So it is no surprise that he is interested.


Compound interest means that interest is applied on an ongoing basis with respect to time. This causes problems for entities like governments where situations can occur such that the amount repaid in a given year is less than the interest due. In this case the interest will not only apply to the original debt, but it will also be applied to the interest too. Interest on interest.


Compound interest looks like this. If left unchecked, it runs away very quickly. This is due to the effect that compound interest has a mathematical function known as positive feedback.


It works in the same way as acoustic feedback. For instance if a microphone is placed too close to a speaker, the sound from the speaker goes back into the microphone, gets amplified and then comes out of the speaker a little louder. This new louder sound, goes back into the microphone and is amplified again and comes out of the speaker even louder. Effectively the amplifier adds compound interest to the sound each time. After a period if these repetitions, the noise becomes so chaotic and unbearable at which point somebody usually cuts the power to the system.

Another natural phenomenon that follows the same mathematical principle is sickness (i.e. diseases like cancers and viral infections).


As all financial services rely on the concept of interest to make profits, it is advisable to remember the analogies above.


Who's interested now?

It is interesting to note that the texts of the Christian, Jewish and Islamic faiths all expressly forbid the use of interest as the concept is seen as a levy on God's time. However, over time these ideas have been relaxed through a series of reinterpretations.


Nobody can be free of paying interest even if you save up for things before you buy them. Currently, due to the way interest has permeated through all aspects of the world economy via credit markets and commodities markets, about 45% of the price of all goods is used to service the interest on debt held in the supply chain.


Because of the invisible interest that has attached itself to the sales price of everything, most people are nett interest payers. In fact 85% of people are nett interest payers, about 5% of people are interest neutral and about 10% of people are nett interest receivers. In other words 10% of the people receive 90% of the interest that everyone else pays. Doesn't that sound like another more well known statistic. Yes, it is interest that is entirely responsible for the massively uneven distribution of wealth. How can you become a nett interest receiver. Well you just need to have a spare £500,000 hanging around that you don't need but you could invest.


Notwithstanding all of the above, the whole notion of interest is totally flawed. As an example, say that Jesus had deposited 1 penny into a bank account in the year 32AD with an account that would yield a typical long term interest rate of 5% per year. If he had returned in the year 2011 and gone to the bank to withdraw all of his money with interest, that amount would be


£8,582,678,794,222,570,000,000,000,000,000,000,000,000


That amount is difficult to imagine. However if the bank paid out in gold balls at today's gold value, it would amount to 44 trillion gold balls. Each gold ball would be the same weight as planet earth.


A great investment? Yes, but this financial model (INTEREST) cannot work in the long term.