Wednesday, March 18, 2009

[sonus] understanding issues: part 2

This is part 2 of the Sonus series on why we're effed, who is responsible and whom we need to lynch. I've just read all of it to part 5 and have to say it gets even better the further you read.

Dates for posting the Sonus articles: March 16th, 18th, 20th, 23rd, 25th and 27th.


Part 1 of this series can be read here.




Let us now revisit the simple banking model in Part I

I do not want to over-complicate the varying mechanisms, between the US and UK banking systems, as that is not the issue here, merely to say that over time the State began to control the individual banks.

Banking licenses were issued, which allowed the banks to issue bank notes in their own name, (subject to limitations), and as banks failed, or merged, no new licenses were issued. Over time this resulted in a monopoly for the Bank of England. (Differing notes are still issued by banks in Scotland)

In order to control the amount of credit (debt) that could be issued under fractional reserve lending, (sometimes called “the multiplier effect” in the UK system) The Bank of England could require the clearing banks to hold varying proportions of the assets as deposits at the Bank of England. (The Chinese authorities are very active currently, using special deposits as a way of controlling their economy, via credit/debt issuance, and they seem to be avoiding the traps of pro-cyclicality quite well)
That is enough of the details to suffice.

There are several features of a modern Fiat system that must be understood in principle.

0. Modern Fiat systems have evolved efficient control mechanisms. If a 5%, or a 2%, or whatever %, rate of inflation is required, absent large extraneous events, that is what will be achieved. (remember the previous political machinations with interest rates prior to election times, and the Kudos Brown earned for making the B of E independent - allegedly)

0. All Fiat systems beyond a tipping point, have a definitive life-span, after which the “National Debt” is compounding at such a rate that it overcomes the ability of the economy to pay it. The Maths cannot be beaten.

0. During that life-span, incremental debt injected creates diminishing increases in GDP, on a £ for£ basis. Towards the end of a Fiat life-cycle, massive injections of incremental debt will create negative GDP. Once again, the maths cannot be beaten.

0. Increases in the rate of inflation in a Fiat system shorten the life-span of the system. Maths again.

Ron Paul says it well!

The above are enough rules for now, but think of their importance, and understand the implications of the above in relation to current circumstances.

The intrepid blogger Karl Denninger blogged about points 2, 3,and 4 above. He produced a graph here.

When reviewing this graph, take note that it was published BEFORE trillions of new debt was injected, albeit sterilised, by the Fed. The upcoming de-sterilisation will bend the trend line lower!

And the blog is here.

Simply put, there is too much debt in the economy. If people won't borrow, because they are up to their eyes in debt and non-profitable companies can't service any more, or can't roll existing debt over, the velocity of money decreases. You cannot inflate away from an over indebted position by injecting more debt via borrowings. Interest rates will not remain at, or near zero, for long, as bond vigilantes will strike, then even more existing debts become unserviceable as interest rates rise, and currency devaluation becomes the only option.

The dirty hidden secret of all Fiat systems is the theft of all savings via inflation. Gradually, over the years, everything is confiscated. Yet everything is so gradual, (when operating properly) that it goes un-noticed, becomes part of an unconscious acceptance, it is insidious and evil.

Once again, Ron Paul gets it.

To give an example, in 1972, I purchased a serviced building plot from a local council, obtained detailed planning consent, and built my own residence. The land cost £2,500, it was one quarter acre. Today, the land would cost more than £150,000.
The land has only marginally increased in value due to development, - it was bought with outline planning permission, - the difference is that the £ has devalued since 1972.

Difficult to believe?

Well here is a website that can be used interactively to illustrate my point.

Here is a website that looks at the prices of housing from 1890, to present, and adjusts them for inflation. It shows vividly the vast over valuation of housing currently, so let's say the land valuation could drop to £75,000, that is still a vast devaluation of the £ from the £2,500 purchase price.

Yes, it is American, but if anything the degree of historical over valuation is higher in the UK.

In the normal run of business activity, if a business were to issue receipts for non-existent goods, or sell a product that it did not own, it would be guilty of fraud, and the directors would run the risk of jail time.

This is what banks do as part of normal business activities, called fractional reserve lending, and it becomes legal because the Government issues a banking licence that says it is legal.

It is the global use of fractional reserve lending that increases overall inflation levels via increasing levels of credit (debt/money)-(although inflation levels may vary geographically) and results in the gentle theft of all savings, over time.

The dirty little secret restated, is that no Government running a fraudulent Fiat Banking system wants you to know, is that prices do not automatically increase, it is the currency that devalues in a Fiat system. NO FIAT CURRENCY HAS A FIXED VALUE AGAINST ANY GLOBAL ASSET, IT MUST DEPRECIATE OVER TIME. PERIOD. AND THE ASSET MUST APPARENTLY INCREASE IN COST. Absent fractional reserve lending and interest on debt, the normal evolution during a product life-cycle is one where the product becomes cheaper due to increasing volumes of mass production rising from public acceptance of the product selling in greater volumes, and improvements in technology, and competing companies entering the market attracted by the initial margins. For example, look at the advances in computing power, and the price decreases in the last 2 decades,- albeit an element of the price reduction is due to off-shoring/currency manipulation in the exporting countries.

The mistake that MOST thinkers make is to consider the currency as fixed and commodity prices as increasing. Such thinking is particularly useful to Fiat governments. It disguises their theft of the savings of the populace, and their reneging on their future liabilities, eg, for pensions.

A Fiat system cannot be deflationary without ultimately imploding. It struggles to exist profitably in near zero inflation (equilibrium). It can best exist in a “growth” situation, that is, where increasing levels of credit/debt are being created, - the classical western “growth model” of western economies.

Deflation is death to Fiat because the paying down of all debt, or the cancelling of all debt via bankruptcy destroys the money supply, and economic activity ceases, since credit (debt) is “money” in a Fiat system. This is part of what worries the global financial authorities in this current deflationary stage of global financial collapse.

Here is an excellent summary of the above issues.

The authorities are determined to preserve (their) the Fiat system at all costs, even at the expense of criminal moral hazard, and possibly the future viability of the country, and age-old democratic values. Although the current crop of political leaders seem oblivious to economic principles, there are increasing numbers of dissenters to their methods, who are becoming increasingly more vocal in their opposition.

It is this passion evidenced by the authorities, for the preservation of the Fiat system, which is becoming increasingly illogical, that causes inquiring minds to speculate the true motivations behind a seemingly noxious stand. 
 
 


Jamming with a Pretty Woman refreshment break.

Or as I remember clubs!

 
 
 
 

Part 3 of the series can be read here.


It says 'written by James Higham' below. Actually, it was written by Sonus but I can't reformat the author in my template.

2 comments:

  1. No need to reformat the author's name: Write your introduction and place the quoted text within single quotation marks (double quotation marks are reserved for quotes within quotes).

    Don't make the mistake that is common to 'Libertarians' and omit the reference to the original author and the published source.

    ReplyDelete
  2. This is how I do it when I am using someones article that they have sent me. Although putting it at the top of the post would perhaps work better.

    ReplyDelete

Comments need a moniker of your choosing before or after ... no moniker, not posted, sorry.