- Money Morning Australia

Welcome to America’s Lost Decade

Written on 04 November 2010 by Kris Sayce

…Or should that be Last Decade?

This morning’s decision by the US Federal Reserve’s Federal Open Market Committee (FOMC) is the final act in American global economic dominance.

If the US economy wasn’t already terminally ill, then this morning’s news from the FOMC has pushed it into terminal illness. But before I get onto that, more revelations on the Aussie housing bubble…

In yesterday’s Money Morning we wrote:

“I mean, hasn’t the Commonwealth Bank just completed a global tour spruiking the Aussie housing market, claiming that the income to house price ratios are nowhere near as bad as many claim?

“Seeing as the whole point of the tour was to get investors to buy the bank’s debt for as low an interest rate as possible, it must surely mean the bank has failed to convince those investors about the security of the Aussie housing market.

“Higher interest rates means higher risk. International investors clearly view Australian banks and the Australian housing market as being a higher risk than the banks and the RBA would have you believe.”

It turns out, as usual, we were spot on. Because Steven Munchenberg, chief of the Australian Bankers’ Association (ABA) admitted it.

The Commonwealth Bank (CBA) has had to increase interest rates higher than the Reserve Bank of Australia cash rate movement because international investors fear an Australian housing collapse.

Here’s what Steven “Baron” Munchenberg had to say as quoted by Chris Zappone at The Age:

“Over the last few weeks, we’ve had a lot of international investors asking very detailed and probing questions about why it is Australia thinks it doesn’t have a housing bubble. Bankers were grilled at length as to why investors should not be worried Australia has a housing bubble.”

We can only dream about what the bankers’ answer was. But I bet I can guess… OK, say it with me slowly, “Because… Australia… is… different!”


In fact we’re certain that’s what was said. You only need to look at the quote in the Wall Street Journal article titled “In Australia, Signs of Overheating in the Housing Market”, from Michael Blythe, chief economist at the CBA. He told the WSJ:

“It’s a legit concern [housing bubble] given what’s happened in other countries, but we just think…” wait for it… here it comes… “…Australia is a little different.”

Ha, ha, ha… what a clown!

And if you didn’t think the housing bust had started yet, think again. And if you’ve hung your hat on the idea that house prices won’t fall because Australians love their houses more than the foreign Hun, then, er, think again on that one too.

Today’s The Age runs the story that “Stressed home owners sell up”.

The article states:

“Matthew Tregent and Sarah Zajac are looking at selling their home in Deer Park. They are not suffering mortgage stress – far from it – but many of their neighbours are, and it is changing the character of their street.

“‘It looks like there is a bit of hardship in the area. There’s a lot of houses that are going up for sale,’ Mr Tregent said of their relatively new estate.”

“We’re pretty much surrounded by renters now. Other streets in the estate are as well.

“Why we’re planning on moving is because we’ve been taken over by investors predominantly. It’s becoming, I guess, less desirable to live here.”

The descent into slums and the rise of the slumlord is what you’re looking at here.

Look, as you know, with prices this high it makes sense to rent. But the fact is, renters will typically take less care of a home than owner-occupiers, for the simple fact that the property isn’t theirs.

A renter couldn’t give a stuff about maintaining the property. As long as it’s liveable they’ll be happy with it.

And as for the landlord, well, any landlord worth their salt knows that the building is a depreciating asset. Why spend money on maintenance when all they’re really interested in is collecting the rent money and hoping the land value increases.

If that happens they can eventually flog the thing to a developer and walk away with a tidy sum. That’s the theory anyway.

And if as we believe, house prices fall, then there will be even less incentive for landlords to maintain the buildings. If they’re getting a zero net income and zero growth how likely is it the landlord will scrub the place up or give it a new lick of paint?

That’s right, it’s not likely at all.

But, at least it’s pleasing to see another nonsensical Aussie housing myth is being bust in the mainstream press. We’ve argued for some time now that Australians have no greater attachment to a home than anyone else.

There’s no “love” for housing in Australia. Maybe there’s a love for a certain lifestyle, and in some cases that means having a certain kind of house in a certain area… but if the cost to maintain that lifestyle becomes excessive then tastes will soon change.

I know it’s not exactly the same, but think about how many people “loved” buying vinyl records thirty years ago… and how many people “loved” buying CDs ten years ago… “Oh, we could never give up our vinyl/CD collection, we love it…”

Now walk into anyone’s house and their record collection is stored in a machine five inches by three inches – an iPod or something similar – and there’s not a CD or vinyl record in sight.

As I say, it’s not the same, but it proves the point that people change their tastes and their habits over time to suit the circumstances.

Housing is no different. If it costs too much and the expected growth isn’t there, then guess what, people won’t buy, they’ll rent. And if enough people in a certain area rent, then you’ll soon see the place turn into a low-value ghetto… the South Bank area of Melbourne is one area to watch for this transformation. But nowhere will be immune to it.

Even the toffy areas will succumb to the same plague.

Just to repeat, we’re not having a crack at renters. We’re not saying they’re slobs or that they’re lazy. It’s just that they behave how they should behave towards property that isn’t theirs – they don’t care for it as much. It’s as simple as that.

The Aussie housing bubble deniers can carry on as much as they like, the fact remains Australian housing is overpriced and heading for a massive fall. The spruikers can scoff and gloat and claim that people such as your editor don’t know what we’re talking about, it doesn’t matter.

Ultimately, nothing the spruikers or bankers say will be enough to stop the housing market from collapsing once the fall gathers pace.

But that’s for all on housing today, back to the Fed and its dopey money printing scheme…

I tell you what, for a bunch of people who are supposedly super-bright, what they’ve done is nothing short of criminally comical.

Over the past few weeks the Fed has been grooming the markets. It has tried to find out what the market was expecting the Fed to do.

It has been like some sort of weird auction where there are no bids. Or like two shadow boxers not punching each brains out. Instead the buyers and sellers are just mingling around giving vague but obvious clues:

“Sooooo, just supposin’ we printed $500 billion what would you say to that? Not that we will mind you, I’m just like, kinda askin’… OK, what about, say, $600 billion, what would you say to that? Not that we will, I mean maybe it’ll be more, maybe it’ll be less…”

And so the sad comedy routine continued.

The upshot of the Fed’s ingenious cloak-and-dagger mind games was that according to Bloomberg News this week, “Fed Will Probably Start $500 Billion of Bond Buys, Survey Shows”.

This was from a survey Bloomberg had sent to a bunch of Wall Street economists. Funnily enough, the New York Federal Reserve had sent a similar survey to bond dealers and investors the week before.

So we can guess that the response the Fed received was pretty similar to the response Bloomberg got.

Armed with the results of this highly scientific and well-thought-out survey – remember that Fed chairman Ben S. Bernanke is a former “Princeton University economist who studied the Great Depression” – what did the Fed decide to do?

We can only imagine that they hunkered down, cracked open the sarsaparilla, turned on the popcorn machine and…

Knowing that the market was expecting the Fed to print $500 billion of lovely new cash, and knowing that anything less than this amount would disappoint the market, guess what they did… go on, have a guess…

That’s right, the Fed announced this this morning:

“The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

See, that’s the kind of tactic that only a Princeton edumacation can bring you.

The market expects $500 billion, here, we’ll give ‘em $600 billion.

That’s the extent of the brain power that’s gone into this. Trumping the market was the only goal.

If the market surveys had revealed expectations of $200 billion then the Fed would have given them $300 billion. If they’d expected $700 billion they would have given them $800 billion.

If the market had expected free cheeseburgers all-round the Fed would probably have given them two free cheeseburgers all-round.

So, what does this all mean? Are America and the rest of the world on the edge of a hyper-inflationary death-spin? Is it time to stock up on cans of baked beans and hotdogs?

Not so fast. That’s perhaps too obvious. Let’s pause and think about how this could all play out… I’ll get back to you with my thoughts on it tomorrow.


Kris Sayce
For Money Morning Australia

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84 Comments For This Post

  1. KP Says:

    The radio statio I listen to in the morning had a soundclip from a couple of Yanks who printed a sign saying “Obama=Keynesian” and asked passersby what they thought. The clip was all replies arguing about where Obama was born, including the classic lady who said “you wait till November and you’ll find out we’re not as stupid as you think!”

    One guy realised it had nothing to do with Kenya and accurately agreed with it from an economic viewpoint, but for the man in the street, there is no hope!

  2. Peter Fraser Says:

    Yawn – you know after listening to the same prediction every day for over two years, I have to ask when is enough enough.

    At what point should a loser lick their wounds and say “I was wrong” or do we need another hike to Mt Kosciusko.

  3. KP Says:

    Ah- here it is..


  4. BB Says:

    How’s this for a reason why CBA doubled up on the RBA hike for borrowers of their mortgage products. Do you reckon it was a strategy to encourage more customers to take out home loans with CBA at much higher interest rates than Westpac, NAB or ANZ? Do you reckon it was to stop their current mortgage holders from packing up and leaving to go join one of their competitors? Ahhh probably not?Perhaps after a little soul searching and the realisation that following their recent worldwide roadshow to calm the horses of credit finance the international market is going to pop the aussie bubble by hook or by crook. CBA jumped so early – you can’t get much quicker than 5 minutes after the RBA makes their announcement to raise rates – with a plan to reduce their loan book. That’s right folks. The CBA strategy is to give the business of stressed out borrowers to their competitors before the big bang. And haven’t they accurately gauged the predictable response of the outraged public and politicians – with PM Ranga leading the call for mortgage holders to vote with their feet and switch from the CBA. The other 3 pillars are s****ing themselves for getting comprehensively snookered. Haha!

  5. Drew Says:

    haha BB – a battle to LOSE customers. It’s an interesting business, banking.

  6. Drew Says:

    cb, re your “thought exercise” from a previous post, it’s an interesting question and a great way to think about things. It sounds like it would have an easy answer, but I can’t think of one at the moment. Did you have any ideas?

  7. oysterboy Says:

    BB – I like it, however I won’t believe it until CBA drop their “exit” fees to make it less painless to change banks. :)

  8. oysterboy Says:

    Oops I meant less painful to change banks.

  9. rob16a Says:

    It’s way beside the point, but some sources suggest that sales of turntables (record players in the old parlance) are growing faster than any other type of hi-fi equipment. Of course ipods/iphone sales would be killing turntables stone dead, but they’re not considered to be hi-fi

  10. BB Says:

    oysterboy – c’mon now. After all they are still ‘A Bank’ and a thousand bucks is a thousand bucks after all in bankworld.

  11. cb Says:

    BB – Interesting hypothesis, but it is unworkable in practice. Distressed borrowers will not be able to refinance, but are stuck with whomever they happen to be with. They will not qualify with alternate lenders, especially with today’s tight lending conditions. PF will confirm this, no doubt.

  12. cb Says:

    Okay Drew, then how about we start examining the current system we have? So, the scenario is this: We have the economy we have, but we lack a currency that is universally acceptable, so what we have is a bartering system only, which is awkward and inconvenient in the extreme for trading the surplus goods and services in need and on offer. So, we are going to have to print up some paper money, or digital money, etc. Working with the current rules, what is your understanding of how this is going to be done? How are we going to introduce the currency? Who will create it and regulate its value thereof? And what will be their reward or payment for the trouble (service)?

  13. BB Says:

    cb. I disagree with your assessment of any tighter lending practices existing but be that as it may how about ‘newby’ mortgage seekers. How could you interpret the CBA’s strategy of higher cost home loans (as compared to their competitor banks and other non-bank lenders) as being anything other than a disincentive?

  14. Peter Fraser Says:

    oysterboy – the CBA exit costs are not that high. The real cost is in the LMI for the new loan if the loan is over 80% LVR.

    Some lenders do have excessive exit costs though. Gillard is making noises indicating that she has done something about that, but I don’t see any evidence.

  15. KP Says:

    “Who will create it and regulate its value thereof?”

    Ah- going back to private currency are we CB?? The bank issues notes in exchange for your ‘gold’ and you trade with those banknotes. A CBA $10 might be worth less than a Westpac $10, depending on a myriad of factors, but it used to work OK.

    Of course it keeps the power of printing money out of the Govt hands, so they ban it!!

  16. cb Says:

    Medunno, KP. I originally posed it as an open question, but nobody volunteered any suggestions about the best way to introduce and universally acceptable means of exchange into the economy. So I suggested that we should then introduce such a currency under current monetary rules and laws, so I am awaiting answers as to how it exactly would be done. Who will print up the currency under current rules and who or what will regulate its value, and what will they be permitted to charge for these services?

    Nobody understands this, or nobody is interested?

  17. cb Says:

    BB – I would guess that credit worthy victims will go to whoever promises to victimise them least, so I have no argument with your suggestion there. It may well be that the CBA would rather milk its existing victims harder at this point, than take on too many new ones. Or it could be that this is just typical cartel behaviour and it has been the CBA’s turn to go first and cop the heat. Last time it was Westpac’s, and next time will be someone else’s. We don’t know, and the only thing I can be sure of is that, in spite of all the argy bargy sabre rattling, there will be precious little done about anything and the looting, if anything, will intensify.

    As people here are well aware, I happen to be condemned to work with an oversensitive BS detector as a consequence of which I tend to make what look like outlandish hypotheses, but for anyone who still has time for me, here is the latest possibility that has been on my mind: Oops, I have to take a little break, but will be back.

  18. Beauner Says:

    Is War imminent?

    You know, the BIG type of War?….it seems to be leading down a shady path…

  19. cb Says:

    Okay, this is what I have been thinking of for a while. One of the things that the looters and the raiders will want to achieve at some point Downunder is to make the mammoth amount of private debt in this country a Government liability. We entered the GFC, which is by no means over at this point, with virtually no government debt to speak of, which was in stark contrast to just about every other nation in the developed world. Those who have lent all this money, even if it was largely lent into existence unbacked and from sweet nothing, would feel much better about the same if the Federal Government stood behind these financial assets of theirs, since this would make their “investments” far more secure, as well as give them more direct power over the government and its future actions and policy directions.

    So, if I am more or less making sense up to this point, the next question is this: How will this be most plausibly accomplished? I cannot see my way all that clearly from here, but it will have to be through some sort of bank guarantee, so that all the debts that have been sold to willing dupes will be backed, not just by those dupes, but by a wider tax base, through the government. Some of you will be more qualified than I am to opine about how such a thing could, and might be likely to be accomplished. Any suggestions?

  20. cb Says:

    What are you thinking of, or hinting at, more specifically, Beauner?

  21. cb Says:

    Poor Yanks. With their black box voting machines they cannot even count on their votes being counted anymore. It may not be too far off before the US is declared an outright dictatorship.

    Did Harry Reid Steal Nevada?

  22. cb Says:

    I mean, once the people cannot trust that their elections are free and fair, what peaceful and orderly avenues are there left for changing what they want changed? Their only means of resistence will be protest and resistance, to which the state will only respond with overt repression and violence.

  23. Beauner Says:

    Hey cb! :D

    I dont really know what im thinking — I grew up as a Jehovahs Witness – so Armageddon was always just around the corner – ive thought just about nearly every possible “end time” scenario, that its almost like, “get it over with already”.

    Its hard not be a pessimist when your brain is hardwired towards seeing the bullshit in this system — and its even harder when the beliefs your brain has in store, seem to connect dots externally that paint a picture that is basically along the lines of Armageddon is just around the corner. But probably not the JW Armageddon, but more like a WW3 Armageddon. Seems logical.

    Not that I am a JW anymore (no way would I ever go back to that religion!) — but personally, as I see it >

    It seems that there is an effort being put towards the dismantling of national and state sovereignty, through the creation of global institutions and the transfer of power from countries to these instiutions to form what is called the NWO (as you know). All these things that we see happening are symptomatic of a greater unfolding that is occuring. Whether it is done through debt, or other means, im not sure.

    The ultimate transfer of power, seems like it has to come via a gigantic black swan event, in which, the world being in chaos, will accept the solution which is a unified world power — whatever happens after that, I dont know.

    It helps to have a spiritual perspective — because without that — this world doesnt seem like it will ever get passed puberty.

    I could be wrong – I hope I am – but thats what I think, anyway! :D

  24. cb Says:

    “Sen. Harry Reid has won reelection in a tightly contested battle with Sharron Angle. Angle, a strong supporter of the Constitution and small government, appears to have lost despite recent polling that had her up by as much as 3 points.

    Reports of fraud and intimidation have circulated for weeks, with early voters complaining of rigged voting machines throughout Clark County.

    Residents of Clark County Nevada have reported that upon attempting to vote for Angle they found that Reid’s name had already been checked. This is not surprising as widespread voting fraud has been reported since the inception of the fraudulent electronic voting machines.

    Washington Examiner

    Clark County is where three quarters of Nevada’s residents and live and where Senate Majority Leader Harry Reid’s son Rory is a county commissioner. Rory is also a Democratic candidate for governor.

    Since early voting started, there have been credible reports that voting machines in Clark County, Nevada are automatically checking Harry Reid’s name on the ballot.”


  25. cb Says:

    Well, Beauner, you have my sympathies. You probably have seen enough witnessing for the two of us to last a lifetime. And, unfortunately, for what it’s worth, my penny would be on the bastards still being at it. And with the death grip they have on money all over the world, they can buy and bribe enough slavish servants to sign them up to do the necessary dirty work to keep the rest of us down. It’s just the way it goes, until some mad bastard once again rises and creates even more misery and and hell. As you say, humanity is still in nappies at this point, and notwithstanding our high ideals, tribalism and the impulse to dominate still rule.

  26. earlwag Says:

    (Excuse if this is a repeat but first attempt to post appears to have failed).

    Has anyone heard the term “social cohesion” before or “social cohesion in Australia”, its got a foundation (Scanlon Foundation) and everything…

  27. Beauner Says:

    @cb — its all good mate — hopefully things are different on the other side… ;)

  28. KP Says:

    “get it over with already”.

    yeah, I’m keen to bring it on, I’ve had a guts full of trying to buy a fking mobile phone from Telstra and being grilled about my private life, just after they have put our call rates up by 80% and offered us some stupid bundle to try and sell their lamestream media cable TV rubbish in compensation!

    If the Govt is in charge of security and this is how they do it, I’d rather burn the Govt and look after myself! A more corrupt and gigantic bunch of parasites has never existed, and that goes right across the Western world.

    Burn it down and get back to some self-reliance!

  29. cb Says:

    Hear, hear!!!

  30. cb Says:

    An interesting comparison between Canada and Australia and their respective currencies and property markets from around the 10:00 mark.

    Definitely Not Down Under *AUDIO*
    David Skarica November 1

  31. cb Says:

    STIGLITZ: We Have To Throw Bankers In Jail Or The Economy Won’t Recover

    Read more: http://www.businessinsider.com/nobel-economist-says-we-have-to-prosecute-fraud-or-else-the-economy-wont-recover-2010-11#ixzz14KAnQoWs

  32. cb Says:

    “Keiser Report” No. 92 Guest: David McWilliams

  33. Beauner Says:

    Thanks for link to David Skarica, cb. He made an interesting point about the Aussie market and why he thinks it isnt going to correct like many think it will (housing shortage) – he also makes some nice observations regarding his personal preference of the Aussie over the Loonie – citing higher interest rates, and less Central bank meddling via currency value suppression (unlike the Canadian central bank which appears to be trying to push the value of the Canadian dollar down)…

    Not bad, for someone who lives on an island in the Bahamas…


  34. Beauner Says:

    Oh crap…its 3:45am….oh wait! Still on day off number 7….LOL! :D

  35. cb Says:

    I have only just started watching this one, but I would guess that it is one of those must watch interviews like Aaron Russo’s with Alex Jones.

    Thursday, November 4, 2010
    Catherine Austin Fitts: The Looting Of America

  36. cb Says:

    ahahahaaa, fantastic phrase about the tapeworm economy. You gotta listen to that one. It is a fantastic explanation of what is going down.

  37. cb Says:

    Wednesday, November 3, 2010
    Alex Jones: The second American Revolution

  38. cb Says:

    Yes, Beauner, although I am not so sure that it is such a good thing. What it signifies, I suspect, is our total and utter exposure to the tapeworm, money junkies of Wall Street. One day all this hot money is going to wash out of this country, and all we will have left behind is going to be crippling debt and debt peonage for as far and wide as the eye can see.

  39. cb Says:

    Louis Farrakhan: America Is On Her Deathbed 1994

    A profetic speech about the faith of America by Louis Farrakhan speaking in Fresno, CA back i 1994 …

  40. Drew Says:

    cb – re “Nobody understands this, or nobody is interested?”

    It’s a very interesting question but not an easy one to answer. Would you care to get us started?

  41. cb Says:

    Wednesday, November 3, 2010
    The Elitist Takeover, 2010

    “Find out who they are and why they are dangerous. Globalist ideology is a threat to each nation’s sovereignty and independence.

    This is an updated version of a video I originally uploaded in May 2008. It contains just a SMALL sampling of past and current CFR members. What used to be very secretive, as opposed to the way things were a mere 2 & 1/2 years ago, now are plainly stated out in the open.

    The Council on Foreign Relations is a non-partisan globalist think tank. This is why I keep harping that both political parties are the same. Sure, there are minor differences, but the players are working toward the same goal…globalization. That is the agenda.”


  42. cb Says:

    Okay Drew, I don’t mind, but try to chip in as we go along, so that at least the two of us can bounce off each other as we manage to evolve the conversation. So, let us start with the current rules, the system of money creation as we happen to have it. As it turns out, all currency, the means by which trade is made smoother and easier, is licenced out to private bankers.

    No less than the US constitution makes it quite explicit that only the people, through their elected representatives, have the right and the mandate to coin money from gold and silver, and regulate its value thereof. This right and responsibility has been abrogated by the political whores, and gave exclusive licence to private bankers to create phantom money, fiat money, in the form of accounting entries and printed pieces of paper that are more inherently useless than the paper in a toilet roll.

    But never mind that. The focus of our inquiry needs to be the fact that private bankers have been given the exclusive right to create the national currencies with which people are doing their trading, their buying and selling. So, the question to you is this:

    How do these private bankers created the national currency. Starting from our original position where there is no currency in circulation and all trade is through barter, how would these private bankers supply us with a universally accepted and more convenient form of money for trading purposes? How do they do it, and what do they charge for the privilege of having the monopoly over creating the national currency?

  43. cb Says:

    Okay, let us assume also that at this point all money they create is in the form of printed bank notes. No accounting entry money. All money introduced into the economy and commerce on main street, is in the form pretty pieces of paper, physical bank notes. The question is still this: How does a bunch of freshly printed bank notes get from the bankers vault out into the economy on main street, into the hands of Jo and Joe Average?

  44. cb Says:

    Gary Webb on the Contras and the Crack Cocaine Epidemic – Dark Alliance Interview (Part 3)

  45. Peter Fraser Says:

    rob16a – you’re in the States, how are things going there from your perspective, and which state are you in?

    If you don’t mind enlightening us that is. Wolf may like to throw in his comments as well.

  46. Nick Says:

    With reference to Cb..@ November 5, 2010 at 4:29 am

    Who said this….”….there is no bloody conspiracy”?

    Who mocks the merits of gold in the current environment.?

    Who considers Australian businesses seeking to expand export markets as “greed”.?

    Who blames our farmers for the destruction of our agricultural business.?

    Who mocks any attempt by free thinking, knowledgeable people to reveal the truth about the fraud that is the finance industry?

    Who considers free speech as “racism” and tries to shut it down under that premise.

    Who consider themselves such a bag of wisdom that they lack the foresight to determine the financial climate only one year ahead, …..yet my humble parents who lived the Depression and devastation of WWII could see it coming some 50 years in advance?

    AUSTRADE has invited me to a conference to discuss opportunities for doing trade with Canada. What they don’t mention is that it is focussing on Canada because all export business with Asia is diving in a flat spin due to the wonderful “strong AU$”.

    I’ve won a Sth African tender and currently pursuing a Mexican Postal Service tender (some call that greed. I consider it, saving my kids future). On product and technology this tender has been won already. Price is the huge obstacle. This can be easily solved by setting up manufacturing and assembly in Malaysia. IP will remain Australian with two staff sent to overseer project in Malaysia and based in Singapore. Singapore $ is being considered in terms of trade. Many feel AU$ is being “played” just like the Greeks and many other countries in Europe. Don’t ask me timing, I work on trend not day to day fluctuations.

    Catherine Austin Fitts sums it up exceptionally well. Just substitute the word “America” with the word “Australia” (and in fact the western world) and you will get the drift.

    I’m still not regretting selling some of my RE portfolio starting early 2008. Bless those who warned me.

  47. Peter Fraser Says:

    Hey Nick, sorry to hear you are doing it tough wth the strong $AUD.

    I hope the strategy of taking our jobs offshore works for you though. That way you can capitalise on both the cheaper offshore labour and weaker currencies in Malaysia and Singapore.

    Correct me if I’m wrong, but didn’t you once say that you would never do this, and now you are doing it.

    Well never mind, as long as business is profitable for you.

    I hope that you make a fortune Nick.

    Best wishes as always….

  48. Nick Says:

    Wrong again PF!!!….It keeps my current staff in a job well into the foreseeable future. It keeps the technology Australian owned. My IT section will actually be taking on another Uni grad. So you can say I’ve just increased my staff further…and no debt involved…wow! you must really hate me now!!

    Keep feeding the black swans PF, and leave the real world to those who have a spine.

  49. J.C. Says:

    Well, it’s a good day to be owning Japanese gold and copper mining and other resource related stocks , even if the world is going to hell in a basket. The cheapest, most cash-rich resource producers on the planet weren’t going to stay down forever….. particularly with all that cash from heaven.
    It’s also good to remember that if you sucked Japanese demand away from Aussie resources, you’re going to have some significant impact. Isn’t it just as well that Mitsui and Mitsubishi had been bank-rolling the industry long before the Chinese arrived on the scene? Shouldn’t we be sharing the love with the Japanese?

  50. J.C. Says:

    I’m surprised that nobody has mentioned the “perfect storm” for the appreciating gold price that soar it 3% over-night. I wonder if the SMH will keep up the trashing of the metal that they’ve been promoting for some time. Perhaps time for another article about gold-dispensing ATMs or some Michael Pascoe half-truths?

  51. Peter Fraser Says:

    Actually Nick I don’t have any animosity towards you, but when you open up with a salvo of six paragraphs of poorly disguised bile all directed at me, then what do you expect, a thank you letter.

    I know who you are and I can see that you have achieved a lot in your time, so I respect that. The fact that we disagree on some issues isn’t a problem, I disagree with my best friends without any damage to our ongoing friendship.

    I have also been in business many years, and I understand that sometimes you have to do what you have to do, but when you open with a sanctimonious post like that, then yes I do delight in taking the piss out of you, you deserved it.

    I don’t get to your home town, so give me a call the next time you come to Brisbane and we’ll share a coffee and a few minutes of each others times to discuss this. You may be surprised to see how much we have in common.

    And seriously I do hope that your overseas production venture goes well. I’m sure that as a proud Australian you would prefer to produce in Australia, but with our strong $AUD that isn’t cost effective for you, so a compromise is needed.

    Perhaps if you put your sword away future exchanges will be more amicable.

  52. GTO Says:

    “Property Collapse”. Yeah keep bangin’ that tired old drum.

  53. J.C. Says:

    GTO, the “property collapse” comment is a bit ironic, isn’t it? I mean this newsletter isn’t exactly orgiastic celebration of the system and property’s place in mesmerizing the populace. It’s probably the arena in which you expect property to get a right old thrashing.
    Furthermore, besides gold, what other investments get a decent airing here? Have you joined any of Kris’ stock picks newsletters? Any comment to make there?

  54. cb Says:

    Hey, Nick, in one of those clips I heard a great descriptor for the “gold is no good, let’s all go back to sleep” shills: financial weapons of misinformation. Describes them to a T, I’m sure you agree.

    And how about Farakhan’s foresight of what was to come some decade and a half ago?!!! Make sure you watch it. It was a prophetic, hard hitting speach. Alas, it did little to prepare the people over there, and I’m afraid that the very same thing is going to happen here. Some clearly believe that it is a necessity, that it all will happen as an inevitable result of some bubble bursting, while others will regard it as unpredictable and unfortunate. But the more I learn about the financial crimes around the world that has brought real economies to their knees, the more I am inclined to believe that little of what we see, or are going to see, is accident. More of a controlled demolition, I would say, not unlike WTC 7.

  55. cb Says:

    hahaaa, JC, and if all of those should fail, you can always count on some sly, “gold is useless” insinuation from our resident gold basher in favour of some financial terrorism and environmental vandalism stock, like Exxon Mobil. You are not financing these criminals, I hope.

  56. cb Says:

    lol, PF, that is a commendable offering of an olive branch, but I suspect that, before they can be forgotten about, you would first have to repent, and duely atone for your sins. :-)

  57. cb Says:

    Thursday, November 4, 2010
    Paul Craig Roberts on The Alex Jones Show – Thu 11.04.2010

  58. J.C. Says:

    CB, I admit that I am financing those criminals, but I am merely a desperate pirate in a fishing boat tearing paint strips of the hull of their supertankers before I quickly disappear into the night.

  59. Peter Fraser Says:

    cb – I have absolutely none to atone for cb, but I forgive Nick for his, and you as well.

  60. J.C. Says:

    I’m feeling a little cheeky today so what about those Japanese miners CB? I bet you they’re not bathing in Bollinger every evening like Twiggy Forrest & Co. Also, I’m sure as the morning sun that they won’t be paying people 100K a year to clean toilets and drive trucks. Imagine if they were running in the Aussie mining industry. There’d be none of this two weeks on/off nonsense. No doubt they’d be building decent dormitory and employee housing in the Pilbara that would drive the local real estate industry and other extortionists into the ground.

  61. Drew Says:

    cb re your “though exercise” regarding how it would work if we started again in an economy with no currency, this could be the dumbest thing I’ve ever posted, but here goes anyway:

    1. The function of private banks would be to simply offer the secure storage of cash. They would make money by charging for this service, as opposed to paying interest on it.

    2. Private banks could not lend out your cash, unless agree by the depositor, and only under the condition that the depositor could not redeem their cash until the loan was payed back.

    3. Once money becomes completely electronic, private banks would become redundant.

    4. Individuals, business and an independent “RBA” would start with zero balances in their accounts.

    5. The “RBA” would create money by loaning it out to individuals and businesses.

    6. Deposit requirements for loans would be 0% if the money was for wealth-generating purposes.

    7. Deposit requirements for loans would be 25% if the money was for consumption.

    8. Interest rates on loans would be 0% or a nominal fee (which doesn’t mean it’s free money because it has to be paid back).

    9. Capital gains tax would be 60% to discourage speculation.

  62. Peter Fraser Says:

    Drew – May I ask why if there is no money, would we want a bank to store our cash in? Refer point 1.

    It’s a worthwhile thought exercise though. Where would we start, cowrie shells, arrow heads, bullets, bushells of rice.

    Don’t be shy – please expand.

  63. Peter Fraser Says:

    For a little information – http://www.rba.gov.au/publications/smp/2010/nov/pdf/dom-eco-cond.pdf

  64. Peter Fraser Says:

    The whole report is here – http://www.rba.gov.au/publications/smp/2010/nov/html/index.html

  65. cb Says:

    PF – The starting point is a 100% barter economy. You have surplus rice for sale, and I have some goats that I want to trade for other goods. Only barter, no money, except for gold or silver coins, perhaps, or some other form of commodity money. And the question posed was this:
    – If current rules apply, who and how will get bank notes into the economy, into people’s hands?

    Drew cut back to the original question of what the ideal monetary system would look like, but let us explore first what we now have and try understand what it means, how it works and who benefits.

  66. Drew Says:

    PF, my post might have made more sense if I moved points 1,2,3 to the bottom of the list.

  67. Peter Fraser Says:

    cb – well if you want a real case in point, when Argentina had an enormous currency problem recently, the locals turned to a “Barter Card” type solution, which is just an organised and monetised barter solution.

    People who had ample money in their bank, couldn’t get it out, so they had to improvise. It was a terrible state of affairs.

    People here should Google the Argentina Currency Crisis and see what happens when a country doesn’t have a strong banking system.


    It’s the devil and the deep blue sea isn’t it, we can’t have strong banks if they don’t make a profit, but if they make a profit we complain. Life isn’t perfect, is it.

    cb – I have no idea what the solution is, but I don’t think either gold or a fiat money system based on perceived national wealth would be the new outcome. Lets face it if you can’t eat it, burn it, shag it, or shoot it, the value is non existent in an armageddon moment.

  68. Peter Fraser Says:

    Drew – yes that would be an improvement. Sorry I wasn’t meaning to criticise. It is good that you are willing to think about the problem, and have a go at tackling it.

    Lets face it no one else has got it right so far, so take some chances and fly.

  69. Drew Says:

    cb, didn’t I also answer the latest question – “how will bank notes get into the economy, into people’s hands?” – in my 5th point?

  70. Drew Says:

    No worries PF.

  71. cb Says:

    Yes, Drew, you did as a suggestion of how it should happen. I am suggesting that we find out and articulate how in fact the money printed up and now resting with the banker would get into the economy, into people’s hands, under the CURRENT monetary and financial system rules.

    How would Jo and Joe Average get some of that banker money, so that they could buy things with more fluid currency, instead of selling off a goat or a bushel of rice of their surplus in order to buy some oil or firewood for winter?

  72. cb Says:

    Drew, the short answer is this:
    The very first person who is going to get their hands on paper money, so that they can use that in order to buy what they want, instead of bartering off something they already have, is: DEBT.

    They will have to go to a private bank and sign up for a loan. That is how ALL currency that comes into the economy to serve as a means of exchange. There is no other way. Since the licence to print money has been issued to private bankers, they are not going to just print up some fresh money and give it to you free, or shower it onto you from helicopters. No, they are going to lend it at interest. All currency, whether given to private individuals, or government is issued and brought into existence as an INTEREST BEARING DEBT. And without going into debt, under the current system, we do not have and cannot have any currency in circulation through the economy. The only possible exception would be coins minted at government owned mints, by their quantity is a piddling and negligible in comparison to what the bankers create as DEBT, and therefore can, and will be ignored in this thought experiment.

    Now, the next question is this:
    – Where is this so-called “money” coming from? And the answer should be clear: FROM SWEET NOTHING, and unbacked by anything.

    Next question:
    – What does it cost the borrower, and by implication the economy to have the convenience of such a currency, so that they do not have to barter for everything?
    Answer: – Whatever the going interest rate happens to be, say 7% – 10% of what was lent into existence EVERY YEAR. Plus some whopping fees and charges, all of which, along with the interest, become bank income.

    So, to summarise everything up to this point, we have now moved away from a cumbersome and inconvenient bartering system to a more fluid and convenient currency system to conduct our trades, our buying and selling through the economy. However, this convenience comes at a heavy cost, the heavy and crippling burden of usury.

    Next question:
    – What does that mean? Let me put that another way:
    – Can these debts ever be repaid?
    Answer: NO, NEVER. Why? Because at say, 10% impost in interest and fees for all monies created and lent into the economy, will suck back out $10 for every $100 created, so just after 10 years, all the money will have been paid back to the bankers in interest and fees, and the original $100 still owing to the bankers.

    So, what does the bankers do? Will they forgive your debt, seeing that they never create enough money to pay back both the original loans and the interest and fees on it? NO, THEY WILL NOT. So, what will they do? They will send you to the wall and take your assets and possessions for defaulting on the loan.

    Summary: So, for the convenience of having a more fluid currency to conduct trade and business, the amount of money created for the purpose will also have created an equivalent amount of burden in UNPAYABLE DEBTS for that economy. Ergo: everybody goes bankrupt and lose out to the banks, and can live forever after in indentured servitude to them.

    And, clearly, all other things being equal, the higher the interest rates are, the quicker ruin is visited on people and the economy.
    This is the nature of a debt based monetary system. Now each one of us has to decide whether it is fair, and whose interests it really serves.

    PF says that a very profitable banking system is essential for a healthy economy. Yeah, right. Why don’t you pull the other one, too?

  73. cb Says:

    Now, Drew, back to the starting point of our enquiry, which was your question as to why people were so upset about the latest rate hikes, and especially about the CBA jacking rates even higher than the RBA:
    – Can you see why people are right to be angry?

    Incidentally, here are some quotes from people who understood how the bankers worked and what they were about:

    “Our first and greatest President George Washington said, “Paper money has had the effect in your State [Rhode Island] that it ever will have, to ruin commerce–oppress the honest, and open the door to every species of fraud and injustice.”

    If George W. Bush, John McCain, or Barack Obama had any honesty and integrity, they would approach the current banking malady in much the same way that President Andrew Jackson did. In discussing the Bank Renewal bill with a delegation of bankers in 1832, Jackson said,

    “Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”


  74. cb Says:

    And finally, can you now understand why one of the greatest US presidents, Thomas Jefferson, warned about the banks:

    “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”

    Thomas Jefferson, Letter 1802 to Secretary of the Treasury, Albert Gallatin

    Now, all you have to look at is the state in which ordinary Americans find themselves t0 appreciate just how much on the money those warning were.

  75. Drew Says:

    Very interesting cb! So are you saying that with the current system, where money is loaned into existence and interest is owed on that money, it is inevitable that the people will go bankrupt – because where will all that interest money come from without borrowing even more?

    Maybe my 8th point wasn’t so dumb after all.

    But what if the money that is loaned into existence is used to build real wealth, to grow crops for example, that will yield several times the original loan amount. Won’t the interest be able to be paid back without inevitable bankruptcy?

  76. cb Says:

    Drew – Your 8th point is spot on in terms of providing a solution to the current rigged and rotten system. The fundamental problem is that the economy’s currency is entirely dependent on debt, and that there is never enough currency created to service the interest and fees due on the debt, as well as pay back the debt. This inevitably leads to bankruptcies and total economic collapse, unless debts are forgiven. This was the very idea behind the Biblical notion of the Jubilee. But today’s bankers do not want to forgive, or write down any debts without sending someone or other to the wall. More on all this further below.

    You’ve also got it to a T in your first paragraph.

    However in the last one, you are starting to lose sight of the problem somewhat, so let us re-focus on the problem. The problem is not a lack of productivity and surplus, but the sheer fact that no money is created with which both the interest and the original debt could be repaid. No amount of extra goods and services that are brought into existence changes this fact, that in a debt based currency and monetary system there is never enough money created to pay both the interest, as well as the original debt. This is the bottom line, and there are no ifs and buts about it. Think if through again to satisfy yourself that this is indeed so. Run it on paper, inject so much money into your economy and charge 10% interest on it on a yearly basis. After a few years, call in the debt, or simply stop creaing more debt, while continuing to extract 10% per annum. What happens at the end of the line? How much currency is still left in the economy after 10 years of doing this, even if you did not demand repayment, and only the interest servicing from the economy? What is your result?

    Again, remember: the orignal problem of the barter economy was not that there were no surpluses to trade, but that there was no universal currency with which to make trading easier. So, no amount of extra surplus in goods and services is going create more currency, because the creation of the currency can be done only by the monopoly licence given to the bankers, who never inject any free currency into the economy, but always attach the going rate of interest to it – year in, year out.

    And there is the rub: if the bankers flood the economy with paper, provided that it is directed at people and businesses, instead of just speculation in asset prices, then this will give a boost to economic activity, because people will create more surplus goods and services in exchange for paper money, which at that point in time is nothing more than a promise to pay, the promise being that they can use those paper dollars later to buy whatever goodsa and services they will want. And with all that extra creativity and production unleashed through the economy, society becomes more prosperous with the standard of living increasing with the expansion in the production of surpluses in the form of more and more goods and services.

    And how do the bankers flood the economy with paper? Well, by providing easy credit at low interest rates, which will encourage people to take out more and more debt, which is so far so good, but then there is the rub: As society becomes more and more prosperous with all that extra creativity and productivity that is unleashed in response to readily available payment for anything and everything they decide to create and do, the entire economy and people’s standard of living becomes heavily dependent on this debt being maintained, and EXPANDED on an ongoing basis. As long as this goes on, all are happy, and all is hunky dory.

    But as the music slows down and stops, as credit and debt are contracted or kept stagnanat, people will necessarily start going bankrupt because the debts are simply unpayable. And no additional wealth or goods and services are going to make the debts more payable, because, once again, it is only the bankers who can create money with which those debts must be serviced and paid back.

    If the bakers tighten up lending, the money supply becomes stagnant, or shrinks, and the means of exchange is effectively withdrawn from the economy, people will go bankrupt and eventually be forced back onto a barter system once again. There are plenty of surpluses to trade, but there is no currency with which people can buy those goods and services, and hence entire crops will be left in the field to rot while people in the city starve for lack of food because they do not have the currency, the means of exchange with which to pay the farmer.

    At the root of the problem with the current system lies the follwing equation: CURRENCY = DEBT, and DEBT = CURRENCY.

    This is why it is such a scam and a travesty for any society to allow the tyranny of private bankers through their exclusive licence to control the nation’s currency. Once again, as Jefferson warned:
    “If the … people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”

    Can you see the mechanism through which that happens? And can you appreciate that no amount of extra productivity makes one jot of difference to whether debts are payable or not? The more currency that is needed by an economy that is producing extra productivity in goods and services, the more debt needs to be issued, because that is the only way bankers will provide curency. But then the more debt that is issued, the more money they are going to extract back out through interest and fees, so that the mountain of unpayable debts is piled higher and higher.

    Through this escalating and vicious process, the entire nation is eventually bankrupted as debt expansion slows and goes into reverse, because as soon as these happen, debts are no longer payable and more and more people and businesses, and eventually the government are going to default.

    And through all this process, the focus will be on debt, and how the bankers cannot issue any more debt because there are no credit worthy borrowers, but what is not appreciated is that their very actions of cutting off the money supply, the currency of the economy are the reason why there are less and less credit worthy borrowers. And this is why every so-called bubble in history is “pricked” as it were by the bankers starting to withdraw credit to the real economy, and as they slow and stop lending, the currency already issued will be sucked out of the real economy through servicing charges of the debts already issued in very short order.

    Anyhow, are you with me on all this? Do you have any comments or questions before we go any further?

  77. Drew Says:

    Wow cb, are just thinking this all through now?

    Yes, I’m still with you. I find it very interesting. And I can see that CURRENCY = DEBT.

    In fact, I think I realized that when you asked how a new currency could get out to the people.

    And maybe subconsciously, I also knew that interest was the problem when I suggested that interest rates should be zero.

    But I don’t think fiat money is the problem. Do you? I think the system is to blame.

    Do you see my 9 points as a viable theoretical alternative? What would your system look like?

    And finally, with your pessimistic view about the inevitable outcome facing us all, I’m surprised you aren’t a bigger property bear!

  78. cb Says:

    Drew – I agree. Fiat money is not the primary problem, although it is true that fiat money can, and it has always before in history been abused by people and politicians who simply cannot help themselves to more and more of a good thing until confidence in their printed paper is lost, at which point people become reluctant to hold it for any length of time until they refuse outright to accept it as payment for goods and services. This is what is called a hyperinflationary episode, or a currency crisis. And this is where a stable commodity curency has its strongest arguments working in its favour.

    These aspects of our monetary system have come to my attention over the past few years, but such dangers with our system that are attributable to the fiat nature of national currencies are quite apart and clearly distinguishable from the much more serious and fundamental problem of usury. This can be seen from the fact that even if your currency is 100% backed by gold, the usury system will still generate unpayable debts almost the same way as with an unbacked system, with the only difference being that freshly panned gold will be acceptable as a form of payment for interest and other charges, as well as for the money you borrowed, even if you cannot get your hands onto paper currency. With a gold backed system, the bank would be obliged to accept payment in gold, effectively allowing private individuals, businesses and the government into creating currency by mining for gold, and use it as payment for debts, public and private.

    But even so, the end result would be that all the gold being mined would end up with the banks as payment of interest and bank charges for loans taken out, and in repayments of the debt. And because mining for gold is such an expensive, demanding and laborious affair, I seriously doubt that enough gold could be mined to keep up with the giant money sucking machine that is the usury system. Effectively, fresh gold supply would have to match the amount borrowed every 10 years just to keep things ticking over and avoiding default at 10% interest on borrowings.

    You can see this from our earlier calculation where for every $100 lent, $10 are sucked back out every year, so this would have to be paid with freshly mined gold every year, if there be enough currency left in circulation to repay that loan at the end of the 10 year period.

    The connection between debt money and inevitable bankruptcies has dawned on me a long time ago while still a young man, but at the time I was busy with other things and did not pursue it too rigorously for very long. I did, however, at that time take the trouble of ringing up a few qualified economists, including one at the RBA, and put to them the proposition that debt based money made bankruptcies inevitable and certain, and that the only uncertainties concerned, not whether, but WHO would end up shipwrecked. Guess what their responses were: They all twisted and turned and obfuscated, and none would acknowledge the central thrust of my arguments and conclusion. At that point I had to get back to other things, but all of it came back into focus again with this GFC, and I have seen since a couple of people articulate the same arguments on the net that I discovered some 20 years ago.

    Anyhow, the bottom line answer to your question about fiat money is that No, fiat money is not the main problem. Our problems would largely remain the same even if money was backed by gold, or some other commodity. The main problem if usury, and the lack of periodic Jubilees for unpayable debts. If usury is not tempered and complemented with periodic Jubilees, the entire world will end up in indentured servitude to the bankers. Not many care to understand this at the moment.

  79. cb Says:

    And, Drew, even having said that, I should also make it explicit that my sympathies would be along lines you suggested. At the very least, the national currency should be created debt free by the government for the benefit and in the service of the commonwealth, the common good, and its creation and bringing into existence must have an interest burden attached to it. Or if there is, then such money creation must not be farmed out to the private sector, but must be run for the benefit of the people, the common good. Any interest paid, it should go to Treasury, and used for looking after the public welfare, paying public service salaries, building roads and bridges, etc.

    Beyond that, if private individuals wante to lend out their savings and charge interest on it, or if there were private banks who proposed to provide banking and lending services like that on a non-fractional basis, then let them run such enterprises. But what they should never be allowed is to create and control the national curency, the primary means of exchange between people who sell and buy their labour and goods and services. Because if they are allowed such power, then the nation is exposing itself to financial terrorism by psychopathic bankers of all sorts, including the suicide bankers that Max Keiser is so good at harping about.

  80. cb Says:

    sorry, “must NOT have an interest burden attached to it”

  81. Beauner Says:

    Andrew Jackson is my favourite American President.

  82. cb Says:

    Drew, Beauner – I have just come across this brief video segment on Celente’s site, right on the topic:

    Friday, November 5, 2010
    United States Economy Collapsing

  83. Drew Says:

    cb, what do you make of this video (and the one after it).


    It makes fractional reserve banking sound a lot less sinister.

    But it does leave interest out of the equation which, based on what you are saying, is the cause of the system’s downfall.

  84. cb Says:

    Drew – Yes, that is a very good explanation of the rules under which fractional reserve banking operates, and it makes if quite clear that a commodity based currency, such as gold or silver, still allow for tons of phantom money being created through the fractional banking and lending process. Under a 10% reserve requirement, a banker can create 9 times as much money in the form of loans than there in fact exists in hard, cold, physical gold.

    Most people do not realise this, but 9 out of 10 people, or 9 out of 10 coins people believe they have on deposit with the bank are in fact unbacked, and would not be able to get their coins out in a bank run when confidence in the bank’s ability to pay is shaken and everybody decides to take their coins out. So, the fractional nature of the monetary system is one source of uncertainty and potential trouble. You can see how disaster prone such a system is, don’t you? Clearly, the remonetaisation of gold and silver are hardly a panace for the volatility and uncertainty that is created by phantom money creation through the fractional reserve system.

    But that is only an element of uncertainty, that disaster may strike any moment the herd is spooked. But, so long as the sheeple trust their banker and the system, no disaster need to come from this feature of the system.

    But an inevitable disaster is built into the system from another feature of it, which is the usury, the interest and bank charges that are due on the borrowed money. Pushing that example to its logical boundaries under the rules, under ta 10% reserve requirement and with 10% interest payable per annum on all borrowings, how would we be doing, year after year? Let’s see:

    0: The initial conditions, or: The yearly summary of the situation:

    0.1 — 1,000 gold coins have been put on deposit to start with. They are the only gold coins or real currency that there are.
    0.2 — However, through the fractional reserve banking and lending process, the money supply was boosted to 10,000 coins, 9000 of which are phantom coins that were simply lent into existence under the rules out of sweet nothing, but which were put on deposit by those workers and contractors who earned them for the goods and services they provided.

    Nominally, the depositors now have a total claim to 10,000 coins against the bank, even though there are only 1,000 coins in existence. It is nothing short magic, it seems. By expanding the money supply, the banker’s credit has set off an economic miracle rivalling Jesus feeding crowds from a couple of baskets of bread and a handful of fish. Suddently, everybody seems to have gotten wealthy.

    But not so fast. This is obviously a setup for a 90% disappointment rate, should anyone be insane enough to ask any probing questions, let alone blink. There are 10 times as many claims against the underlying physical than what in fact exists. But still, so long as nobody panics, everybody can go about their merry lives, hardly noticing the sword of Democles is hanging overhead of each and every one of them. For the time being, the depositors are a happy bunch of savers, who are being paid 6% interest (600 coins per annum) by the banker for the use of their money. Indeed, in their eyes, the banker is nothing if not a hero.

    So, that is the happy, if delusional, world of the savers and depositors under the fractional money multiplier system. Not everyone considers it sinister, even though there are grave reasons why they should, and should not trust their luck not running out at some poin, because that seems quite a clear possibility.

    But it also gets worse, because now here come the borrowers, and we cannot forget about them. What is their story? It is this:
    0.3 — They have borrowed heavily. They have borrowed 9,000 coins and they are paying 900 coins to the bank every year for the privilege. They better do well with their businesses, you could say, or the whole happy house will come down around everyone’s ears, and not many would be happy about that!!!

    Anyhow, what about the banker?
    0.4 — Pity the banker. He starts with nothing. NOTHING. All that gold that he has been handling and counting belong to other people. But he is a hopeful and shrewed fellow, and he reckons he can make a modest dollar of the whole thing. Why? Simple: Because the rules are stacked in his favour, and so long as he can avoid the misfortune of being struck by lightning, or run over the bus, he has much to gain. In fact, he plays for keeps, and he is playing for everything. Yes, you read that right: EVERYTHING. It will take a little time, but he is not going anywhere. He is here to play and WIN!!!

    So, let us now run the numbers for the results, anniversary by anniversary. To start with, all the gold, all the currency belonged to the people, the savers and depositors who earned it fair and square, and 90% of it has been lent out to circulate through the real economy, while 10% of it is being held in reserves by the banker. The borrowers pay the banker 900 pieces per year in inerest. The banker then pays the depositors 600 pieces in interest and keeps 300, which is his spread, or the payment for his genious and trouble. So, at the end of the first year, the actual physical distribution of the currency between the productive economy and the financial sector is as followes:

    Year 1:
    MS ( for Main Street) = 9000 – 900 + 600 = 8,700
    WS (for Wall Street) = 100 + 300 = 400 [300]

    The figure in brackets indicate the banker’s profits, which he now uses as he pleases. For, once these profits are paid out in salaries and bonuses, the people have no claim over this money, if anything should go wrong with the money machine. It is important to keep this in mind, for what we are trying to get clear about through this simulation is the question of who, at the end of the day, is going to be left holding the can when the brown stuff hits the fan. Anyhow, we move on to consider the next anniversary.

    Year 2:
    MS = 8,700 – 900 + 600 = 8,400
    WS = 400 + 300 = 700 [600]

    Year 3:
    MS = 8,400 – 900 + 600 = 8,100
    WS = 700 + 300 = 1,000 [900]

    Year 4:
    MS = 8,100 – 900 + 600 = 7,800
    WS = 1,000 + 300 = 1,300 [1,200]

    Year 5:
    MS = 7,800 – 900 + 600 = 7,500
    WS = 1,300 + 300 = 1,600 [1,500]

    Year 6:
    MS = 7,500 – 900 + 600 = 7,200
    WS = 1,600 + 300 = 1,900 [1,800]

    Year 7:
    MS = 7,200 – 900 + 600 = 6,900
    WS = 1,900 + 300 = 2,200 [2,100]

    Year 8:
    MS = 6,900 – 900 + 600 = 6,600
    WS = 2,200 + 300 = 2,500 [2,400]

    Year 9:
    MS = 6,600 – 900 + 600 = 6,300
    WS = 2,500 + 300 = 2,800 [2,700]

    Year 10:
    MS = 6,300 – 900 + 600 = 6,000
    WS = 2,800 + 300 = 3,100 [3,000]

    Year 11:
    MS = 6,000 – 900 + 600 = 5,700
    WS = 3,100 + 300 = 3,400 [3,300]

    Year 12:
    MS = 5,700 – 900 + 600 = 5,400
    WS = 3,400 + 300 = 3,700 [3,600]

    Year 13:
    MS = 5,400 – 900 + 600 = 5,100
    WS = 3,700 + 300 = 4,000 [3,900]

    Year 14:
    MS = 5,100 – 900 + 600 = 4,800
    WS = 4,000 + 300 = 4,300 [4,200]

    Year 15:
    MS = 4,800 – 900 + 600 = 4,500
    WS = 4,300 + 300 = 4,600 [4,500]

    Year 16:
    MS = 4,500 – 900 + 600 = 4,200
    WS = 4,600 + 300 = 4,900 [4,800]

    Year 17:
    MS = 4,200 – 900 + 600 = 3,900
    WS = 4,900 + 300 = 5,200 [5,100]

    Year 18:
    MS = 3,900 – 900 + 600 = 3,600
    WS = 5,200 + 300 = 5,500 [5,400]

    Year 19:
    MS = 3,600 – 900 + 600 = 3,300
    WS = 5,500 + 300 = 5,800 [5,700]

    Year 20:
    MS = 3,300 – 900 + 600 = 3,000
    WS = 5,800 + 300 = 6,100 [6,000]

    Year 21:
    MS = 3,000 – 900 + 600 = 2,700
    WS = 6,100 + 300 = 6,400 [6,300]

    Year 22:
    MS = 2,700 – 900 + 600 = 2,400
    WS = 6,400 + 300 = 6,700 [6,600]

    Year 23:
    MS = 2,400 – 900 + 600 = 2,100
    WS = 6,700 + 300 = 7,000 [6,900]

    Year 24:
    MS = 2,100 – 900 + 600 = 1,800
    WS = 7,000 + 300 = 7,300 [7,200]

    Year 25:
    MS = 1,800 – 900 + 600 = 1,500
    WS = 7,300 + 300 = 7,600 [7,500]

    Year 26:
    MS = 1,500 – 900 + 600 = 1,200
    WS = 7,600 + 300 = 7,900 [7,800]

    Year 27:
    MS = 1,200 – 900 + 600 = 900
    WS = 7,900 + 300 = 8,200 [8,100]

    Year 28:
    MS = 900 – 900 + 600 = 600
    WS = 8,200 + 300 = 8,500 [8,400]

    Year 29:
    MS = 600 – 900 + 600 = 300
    WS = 8,500 + 300 = 8,800 [8,700]

    Year 30:
    MS = 300 – 900 + 600 = 0
    WS = 8,800 + 300 = 9,100 [9,000]

    So, what we have here after 30 years is a situation in which the real economy, is totally bereft of ANY coins for doing its regular trading. and that includes, not only the real ones that people deposited at the bank, but also the phantom coins created by the banker through the magic money machine. In fact, if you think about it, the magic money machine is slowly but surely transferring the wealth out of the real economy into the financial sector. The parasite overdid a good thing, and killed its host.

    As a matter of fact, within a few short years, just a little over three years, and even though he started with abosolutely nothing, the banker has made enough money for himself on the spread to lay claim to all the physical cold in the system, and is already in a position to send everybody else to the wall. Given that he has now legally earned the right to do with his share of interest and profits as he pleases, he can simply hang onto all the gold coins he is entitled to keep for himself and take them out of circulation, while at the same time insisting that borrowers pay their yearly interest with real money, not in phantom money. But this would be impossible, given that there are still only 1,000 real coins and he has the lot of them.

    So, what happens if he does that? First, the borrowers go broke, and the baker claims their assets. Second, if any depositor wants to withdraw their money, the banker can legitimately claim that because the borrowers defaulted, the bank is broke, and there is nothing with which to pay the depositors. So, both the savers and the borrowers that make up the real economy are toast, while the banker can now go on a buying spree with all his gold, and pick up assets for pennies on the dollar.

    Remember, the banker started with nothing, and now he has, and can have, virtually anything and everything. Such is the nature of our wonderful financial system.

    Jesus promised the Earth to the meek and the poor.
    I think the bankers have other ideas, and you can see why. And, as if to leave nothing to doubt, they also, are claiming to be doing God’s work.


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