The Playbook of the Bankers

It’s taken your editor long enough, but we’ve finally figured it out.

We’ve found what can only be described as the bankers’ “playbook.”

The top secret document that lays down the rules of banking. And, contrary to what you may think, this top secret document isn’t thousands of pages long.

It isn’t stored in a prestigious library or national archive.

It doesn’t even have leather binding. And it isn’t written in Latin.

In fact, the secret to banking is just twenty-three words long. I’ll reveal the secret to you in a moment. But before I do, a quick word on our publishing schedule over the holiday period…

Your editor is on a half-day today. Once we’ve finished chiseling these notes into a stone tablet we’re off to meet up with the rest of the Sayce Clan and then it’s into the Melbourne CBD for our annual trip to see the Myer windows, lunch, some shopping, movie and then home for dinner.

Our “relaxation” – with one eye on the market – will continue until next Tuesday. Then we’ll publish Money Morning on Tuesday and Wednesday of next week before we take another short break.

Full service of your Money Morning newsletter will then resume on the following Monday, 4th January.

Anyway, following on from yesterday we thought we’d begin our final run towards the end of the year in the same way as we started it – poking a big pointy stick at the property market and bankers.

In foresight it was an unlikely place to find the influence behind today’s Money Morning. Yet in hindsight it was perhaps obvious.

Over the past year and a bit we’ve struggled to work out where the mainstream economists and commentators get their ideas on finance and economics from. The most obvious is their idea that more debt is the solution to a debt problem!

We’ve also struggled to work out what influences the bankers and their overlords at the central banks.

Lord (John Maynard) Keynes is usually the easiest suspect to point the finger at. His whacky ideas on how an economy works have spread its way like an unstoppable cancer into the minds of nearly every business and economics student of the last fifty years.

But it’s hardly surprising his ideas are so popular. The belief that an all-knowing and all-powerful government and bureaucracy can manipulate the market is a powerful drug for, erm, governments and bureaucrats.

And it’s equally handy for the professors and other academics who receive their lifetime salaries thanks to stolen taxpayer funds.

No public servant in their right mind would push for a free market. They know they’d be the first ones out of work, or that they’d actually have to do work rather than living off the fat of the taxpayer.

Any theory that aggrandises the role of the coercive sector will obviously be favoured by those in the coercive sector.

But back to banking. As luck – or should we say Chance – would have it, there seems to be a much simpler text for the bankers’ to rely on rather than Keynes’ “The General Theory of Employment, Interest, and Money.”

It’s the twenty-three words that set the road map for banking. Or in the marketing phrase of the 2000s, the “mission statement.”

Here it is:

“The Bank never ‘goes bankrupt’ but can issue as much money as is necessary in the form of IOUs written on ordinary paper.”

There it is. The secret to modern banking. Everything Mike Smith at ANZ Bank or Ralph Norris at Commonwealth Bank, or Gail Kelly at Westpac, or… the tall dull looking dude at NAB never wanted to reveal.

We’re sure that wooden-headed governor Glenn Stevens would be mortified if he knew the secret to banking had been revealed.

The secret of banking is revealed not in some fancy text book written by an English peer of the realm. And it’s not contained within a leather bound book high on a shelf at Reserve Bank of Australia (RBA) headquarters on Martin Place.

Nope, the secret of banking was simply and succinctly described by the non-Nobel Prize winning Parker Brothers in their Monopoly board game.

As we’ve said before, playtime for the Sayce kids can be a hoot as their old man randomly spots otherwise insignificant things and relates them back to the world of finance.

Which is exactly what happened yesterday evening as we refreshed our memory with the rules to Monopoly as the girls laid out the board. Within minutes your editor’s eyes sparkled on reading the paragraph.

And within a few minutes more our interest in the game of Monopoly had waned, “Er, wouldn’t you prefer to play by yourselves rather than having this old duffer who’s hard of sight and hearing annoying you?”

We had to lay it on thick, but it’s good practice for when your editor becomes a frequent buyer member with Zimmer Holdings [NYSE: ZMH].

And so we made off to make some notes for today’s Money Morning.

The version we’ve quoted is our copy of the rules. You can find an almost identically worded version at the bottom of page one here.

Look, we’re only being slightly facetious here. But the fact is, the rules of banking laid down for the Monopoly board game by Charles Darrow and the guys at Parker Brothers nearly eighty years ago are the precise rules being implemented by the central banks and retail banks today.

Normally when we’re looking to draw an analogy with past events we’re left to draw a fairly long bow – “It’s kind of similar, but not quite…”

But if we took these twenty-three words: “The Bank never ‘goes bankrupt’ but can issue as much money as is necessary in the form of IOUs written on ordinary paper” and showed them to our pencil lipped RBA governor Glenn Stevens or his lifetime-in-the-public-service deputy Ric Battelino, they could not reasonably disagree that this is an exact definition of the role of central banks and the retail banks.

We remember years ago how the currencies of tinpot dictatorships were referred to as monopoly money. That the promises to “pay the bearer on demand” were worthless thanks to their inflationary policies.

Now – sadly – the same can be said for the paper (fiat) currencies of Australia, the US, UK, Europe, and anywhere else that runs a paper based currency system.

There can be no dispute that these same currencies should be labelled ‘Monopoly’ money. Because in effect they are almost worthless.

In essence there is almost no difference between the $20 issued by the Reserve Bank of Australia and the $20 issued by the little fat man with the moustache on the Monopoly box.

Neither is backed with anything of any value. And both are printed for little cost and no effort on a printing press. The only difference is that for now one of them will allow you to buy a Mighty Angus from McDonald’s while the other won’t.

But why should the RBA issued $20 note be worth any more than the Monopoly issued $20 note? Why can the RBA print money when it wants and circulate it around the economy when if we did the same thing we’d be hauled off to gaol?

How come the banks are allowed to create money out of thin air by telling you your money is available on demand in a savings account while simultaneously lending it out for someone to buy a house with?

The same money surely can’t be available at the same time to both borrower and lender…

In any other walk of life or business this would be considered embezzlement or fraud or counterfeiting. But not in banking circles. They can do what they like.

But it all goes to make a mockery of the nonsense you see in the papers about the robust banking system. It’s nothing of the sort. NABs $13 billion Italian debt problem is a perfect example.

This simple definition in an eighty year old board game shows you exactly why central banks can’t be trusted with your money. And neither can they be trusted to maintain the value of your money.

As we pointed out last week, since the RBA was established, the value of the Australian dollar has been decimated by 90%. In other words it has lost nine-tenths of its purchasing power.

Or to put it another way, if you were a young lad starting out in work at the end of the 1950s you would have needed to see your wages rise by 1,000% in the following fifty years just to maintain your standard of living!

That’s right, “maintain”, not to get ahead, but just to hold on to your standard of living.

Does that sound like the work of a competent central bank? No answer required there.

Yet this is the same central bank that lamebrain commentators such as Ross Gittens – “The Reserve Bank is relaxed about its forecast next year the economy will be right back in the groove… I can guarantee this forecast will be rock solid” – and Michael Pascoe – “Does anyone really think the Reserve Bank is silly enough to be forecasting two months out what it might or might not do in February? Nah, they leave that sort of nonsense to the poor old market economists.” – who believe the RBA are geniuses.

That the RBA can’t possibly put a foot wrong. That because the RBA is made up of a bunch of anaemic public servants it knows exactly how to forecast and manipulate an economy of 21 million people.

We’re sorry to break the news to Gittens and Pascoe, but the RBA ain’t geniuses. It has destroyed the Australian currency by 90% in fifty years simply by issuing “as much money as is necessary in the form of IOUs written on ordinary paper.”

That reader is why we’ve been saying all along, that a paper based monetary system is unsustainable. Unless it is backed by something of value, the bankers have unlimited ability to create as much paper money as they wish.

And it is that act of inflating the money supply which results in the value of your money, your wealth and your earnings being destroyed.

On that note, Merry Christmas, a Happy New Year, and try not to think too much about the theory of money when you settle down to play Monopoly over the holidays!

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished the day 1.49% up, closing at 4,704.20. International markets were all up overnight and the Aussie market has opened higher again today.

Making headlines today is the Australian Securities Exchange’s (ASX) criticism of Treasury’s planned new market supervision regime. Read more here.

The Dow Jones Industrial Average was up by 50 points overnight, ending the session at 10,464.93. The positive news on American housing numbers was seen as an optimistic sign to investors.

Overnight in the UK, the FTSE added 34 points to finish at 5,328.66

The Nikkei finished the day at 10,378.03, higher by 194 points.

The price of spot gold in Australian dollars is trading at $1,239.02 while in US Dollars it is trading at $1,084.16. The price of silver in Aussie dollars is $19.41 and in US Dollars it is $16.99.

The Aussie dollar was lower this morning against the US dollar as home sales in America were stronger than expected for November. Experts are suggesting that more data like this will see an interest rate rise in America by mid-2010.

The Aussie dollar versus the US dollar is trading at USD$0.8756, and against the Japanese Yen JPY80.41

Crude oil closed at 74.45.

For the biggest movers on the market yesterday click here…

That’s my final market wrap for this year. I’d like to wish you a very Merry Christmas and a safe and happy New Year. I’ll return on the 4th January 2010.