Sprung again! The total and utter scam that is banking was revealed for all to see once more last month. Except nobody’s listening…or cares. I’m not sure which. But you should. You’ll be a better investor for it. Today’s Daily Reckoning will show you why.
The background to this is the small country of Iceland. Few countries suffered after 2008 as much as this island nation. It’s not the first time the country has been put through the financial wringer either. And they want to put a stop to it.
So, what gives? Last month, a report was put in front of their Prime Minister with a ‘radical’ proposal to end the boom bust nature of the economy.
What was the proposal? More financial oversight from regulators? Limiting banking bonuses? Higher capital ratios? Better credit checks for borrowers?
No. They actually put on the table the only reform that really counts. The report’s conclusion is to take away the banks’ power to create money.
Because that’s what banks do, by the way. They create credit out of nothing. You may not be aware of that because mainstream economics tells you that banks merely loan out what they take in as deposits. That’s total BS.
Don’t just take my word for it. The Bank of England put out a paper last year pointing this all out. Google it.
Banks are not intermediaries, taking from savers and passing to borrowers, as the neo-liberal quacks believe. They create credit. And that mostly finances asset speculation.
Which is why the Iceland report begins the case against this process like this:
‘For more than half a century, Iceland has suffered from serious monetary problems including inflation, hyperinflation, devaluations, an asset bubble and ultimately the collapse of its banking sector in 2008. Other countries have faced similar problems.
‘Since 1970, bank crisis have occurred 147 times in 114 countries causing serious reductions in output and increases in debt. Despite its frequent failures, the banking system has remained essentially unchanged and homogenous around the world.’
Here’s how the scam works, just so we’re clear. Banks don’t lend deposits when they make a loan. In fact, it’s the complete opposite. They create a deposit when they make a loan. They create money, from nothing! Then they charge us interest for the privilege.
The interest bills alone all over the world are staggering. The profits are enormous. The bankers will never, ever surrender this privilege.
Here’s one problem with this banking scam, amongst many. The only thing restricting the money supply is the number of ‘creditworthy’ borrowers the bankers can find.
The problem with that is the banks long ago stopped focussing their business model on providing ‘loans’ to businesses that actually produce real wealth and productivity gains.
Eventually, you get what Iceland did: a huge increase in the money supply far outstripping the genuine economic growth of the country. What happens is that bank-created credit goes mostly into asset prices, especially real estate.
This here is the heart of the monstrous financialisation of the modern economy. The politicians and their pet bureaucrats can waffle on about financial stability and capital ratios and safeguards all they want.
The whole economy is, and always will be, built on sand until the system changes. The only question is when it collapses…not if. That’s why major booms and busts will be with us for a long time to come yet. These boom bust cycles time into 18.6 years, by the way. Here’s why.
The way governments finance their spending illustrates the broad point. Governments everywhere issue bonds to raise cash. The government then spends the cash into the economy. Notice though, the spending in this manner produces a debt, which the government owes to the bond buyers.
The government pays interest on the bonds for the privilege of getting the money. The bonds are considered high quality since governments tax their citizens to pay the interest and the bond itself once the term of the loan is over. In this way, banks secure a lot of power for themselves. The piper calls the tune mostly.
But here’s what the bankers don’t want you to know and what the Iceland report points out. The government could, if it wanted, simply create the money itself, i.e. print the money, and then spend it into the economy without the debt attached.
This would eliminate much of the power banks hold. We won’t bother exploring today what an alternative monetary system looks like. The odds are it will never happen anyway. We can’t change it, so the best way to get ahead in life is to put this knowledge to your advantage and start making money from it. To do that, start here.
for The Daily Reckoning Australia