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3 SPEAKING
FREELY Who
really holds the gun? By Darius
Guppy
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please
click here if you are interested in
contributing.
In two essays
published elsewhere, I have attempted to show that
the way in which bankers make money is
conceptually identical to that employed by a man I
befriended back in 1994, a master-counterfeiter to
whom I have referred as "Tommy". [1]
While
the counterfeiter manufactures money out of ink
and paper, the banker does so out of thin air, an
ability that has been bestowed on him by a key
design feature of the financial system: fractional
reserve banking, which enables banks to lend out many
times more than they
hold in reserves and, in addition, to charge
interest on their virtual, newly invented money.
However, unknown to probably the great
majority of people from whom the reality is
deliberately withheld, while the ability of the
counterfeiter to manufacture money is minimal next
to that of the banks, the same can also be said of
our so-called "sovereign" governments which create
at most a mere 3% of the money - (the "legal
tender") - currently in circulation.
While
vast amounts of money are lent into existence by
the banks by means of the fractional reserve
system and then destroyed when (and if) loans are
repaid, the interest on this newly created money
remains un-destroyed, accumulating at a compounded
rate that can never be matched by economic growth
in the real world which by definition is
constrained at a certain point by the Earth's
physical limits.
Eventually a parallel
virtual economy supplants the real one until the
connection between money and what it is supposed
to represent, namely society's wealth, is severed
and the system implodes. In the interim the very
few benefit at the expense of the very many. So
too environmental and cultural despoliation ensue
- sure indicators of economic malfunction and the
degeneracy of a society which makes the creation
of money (most often simply for the repayment of
debt) its core value.
The remedies that
have been put forward to deal with the financial
crisis by Western governments in particular have
not the slightest prospect of success, precisely
because of their failure to address this, the most
critical, the most overlooked flaw in our monetary
system and the number one cause of our problems -
capitalism's "invisible wrecking machine", as it
has been called by the economic historian John
King.
Nevertheless, "experts" attempt to
placate the public by referring to a mythical
"toolbox" from which can be drawn a variety of
devices to avert disaster and keep what they argue
is essentially a sound system intact, to the
benefit of us all.
Needless to say, the
expertise of those who, in Britain for example,
include the current prime minister and the leader
of the opposition; every member of the cabinet and
shadow cabinet, together with every single
politician; the governor of the Bank of England
and the heads of all the large banks; the
Financial Times and the Economist; financial gurus
such as Richard Branson and Alan Sugar; the London
School of Economics, the International Monetary
Fund, the Organization for Economic Cooperation
and Development and so on, should be considered
with skepticism when we remember their collective
failure to foresee the advent of perhaps the
greatest economic tsunami to have hit humanity,
right up until it struck.
Perhaps the
chief problem has been that in the intensely
closeted and theoretical world of such experts who
have all basically been indoctrinated with the
same economic theory, whether at school,
university or in their professional lives, the
limits implied by a universe in which there is
order are not recognized, a sin which, ironically,
an otherworldly monk, schooled in medieval times,
but recognizing scale and proportion, could never
have committed.
And what intellectual
incoherence to argue as they do that the money
supply should be constrained because the
alternative is the inevitable dilution of the
community's wealth, whilst simultaneously allowing
the banking sector, where the money is actually
created, to indulge in Caligulan orgy.
But
the prognosis becomes even more depressing when we
examine some of the tools which their "toolbox"
contains.
Principally, there is "growth" -
a non-starter when we appreciate that in the real
world for non-ending exponential growth to compete
with exponentially increasing indebtedness on
computer screens is an impossibility.
The
environmentalist Margrit Kennedy, for example, has
described how a single penny invested at the birth
of Christ at an interest rate of 4% would have
bought a ball of gold equal to the weight of the
earth by 1750 and 8,190 such balls by 1990. But
with the interest rate increased only slightly, to
5%, then by 1990 it could have bought 2,200
billion of them.
Clearly, some form of
massive debt repudiation will be required. Were
Greece, for example, to privatize everything she
possesses down to the country's last shoelace she
could raise at most only a fraction of the amount
she owes.
In fact, it is even more
fundamental than this. For even if our governments
were in possession of a magic wand that could wave
away every single cent of debt, but the mechanism
were to remain in place whereby the substantial
majority of the world's money is manufactured by
the banks, then we would rapidly find ourselves
straight back at square one and we would need the
wand again.
Moreover, there is a strong
argument that what has been categorized as
"growth" in the past few decades has not really
been growth at all in any meaningful sense -
especially if we peg such a concept to an
improvement in the quality of our lives - but
rather a cannibalizing of our assets,
mis-described as profitability. Next, are the
low and declining interest rates - now zero in
certain jurisdictions - that have constituted the
ultimate get-out-of-jail card for roughly the past
25 years (during a bull market in bonds) and which
have enabled insolvent governments and financial
institutions to roll over the capital amount
outstanding on their debts, thereby deferring the
evil hour.
By this mechanism, debt is not
re-paid; it is simply shifted as it accumulates in
ever larger quantities from one balance sheet to
another - in a game of Enron-style pass the
parcel.
Thus, shortly before its collapse,
Lehman Brothers is discovered attempting to shunt
its debt into a shadow bank a few days prior to
reporting its earnings with the intention of
taking that debt back onto its books once
reporting has occurred. AIG moves its derivatives
onto the books of banks like Societe Generale;
JPMorgan puts its debts onto the books of the
Federal Reserve, which then transfers them to the
books of the Bank of International Settlements in
Switzerland, which then passes them round to other
banks; likewise debts are washed through the
balance sheets not just of such financial
institutions but between these institutions and
countries like Greece and France, and so on and so
forth.
Effectively, governments become
appendages of the banks.
Now, when we bear
in mind that the US government is considered
virtually insolvent with an indebtedness of some
US$15 trillion but that according to the Bank of
International Settlements, as at June 2009 there
were $604 trillion in outstanding derivative
contracts swimming around the banking system and
that a mere 10% default in those contracts would
equal world gross domestic product, then the truth
is clear: try as governments and the banks may,
their dirty laundry can no longer be hidden.
In a nutshell, while very low or zero per
cent interest rates may well provide short-term
liquidity, in the long run they will solve nothing
because it was precisely a boom in credit that got
us into the mess in the first place.
Finally, an even less effective tool -
austerity - a chisel with which to chip away at
the mountain, but dug instead into the sides of
the man on the street.
The difficulty with
austerity measures as a strategy rests in the fact
that in a non-growth scenario - as now - it is
highly improbable that any increases in exports
and private sector demand could ever offset cuts,
which means that these cuts are likely to
exacerbate economic contraction rather than
counter it.
As citizens have less to spend
and fewer of them are in employment, more and more
loans are defaulted upon, asset values decline
rendering borrowing even more problematic,
governments are forced to bail out the banks, tax
revenues fall and a vicious circle of decline
ensues.
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