Sunday, July 19, 2009


In our previous blog we declared that Henry Ford spent his life protecting his company from bankers and stated, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” He was speaking about the US system but what the hell was he on about?

What Ford was talking about is the much excepted and misunderstood magic of fractional reserve banking and central banks setting of interest rates. One may think that for each loan made there is a saver to match it but that is not the case. One may also think that inflation is all the same but we have “monetary inflation” which is manipulated by the banking system to have an every increasing amount of money in the system. We then have commodity inflation/deflation which is a natural oscillation of prices based on supply and demand. The banking and monetary system legally robs people of much of the productivity gains achieved by society. Now, that is a good enough reason to revolt if one reflected and understood it.

Savings are diluted by an ever increasing supply of money forcing this wealth to be mal-invested. Prices continue to rise forcing society to borrow more and of course each time a bank makes a loan this value is added to the money supply. More money goes into the system allowing others to earn it and pay off the principle and interest on their loans. The ECB tries to manage this increase with interest rates so we have a smooth level of “monetary inflation”. This has gone on successfully for years and now people see it as a part of life i.e. “we always have this curse of inflation but the central bank is trying its best to deal with it and the last thing we want is deflation.”

Now all that may be true but what happens when thing go wrong? For this system to work it needs an every increasing supply of money. So banks must continue to make new loans, adding more money to the system which allows other borrowers the opportunity to earn some of it and pay off their loans. If it comes to a halt (borrowers get tapped out) the money in circulation begins to dry up as each time a borrower makes a payment on a loan, that money is taken out of the system. It goes from a situation where if you borrowed it was always easier and easier to make the payments as time went on due to “monetary inflation” to a situation where it gets harder and harder to earn the money to pay off the loan due to “monetary deflation”.
Monetary deflation is the situation we currently find ourselves in and the ECB seem to be taking a different approach in this situation than the US. Both have dropped interest rates trying to get the monetary inflation back on track but when zero interest rates will not work to get society to borrow more the USA are choosing to dilute the money supply themselves while the ECB are allowing it to contract. Both approaches have pros and cons in what they wish to achieve but as with all pyramid schemes this banking and monetary system will end in tears and probably in revolt and war as well. Savers and borrowers are the big losers and the ones that make the magic loans get to keep all the securities in the end.

For most it may be enough to get from this article that there is something seriously fishy about banking and all the clichés about fat bankers are clichés for a reason.

However, it would be leaving the reader up in the air if we didn’t explore some of the below topics and ask some further questions that we need to reflect on.
How much fiat money is in the ECB system?
How much gold reserves are in the Euro Zone Central Banks?
If gold is outdated why are central banks still holding it?
Is there an alternative, better system?

These magic tricks of bankers are around a long time and by just having a gold standard to back currencies will not prevent against fractional reserves banking. However, the reserves would be backed by gold (which is a store of value) and not just a promise of a printed piece of paper which can be produced at little cost.

Money supply is measured by M0, M1, M2 and M3

The Euro money supply from 1998-2007 has doubled (See graph). Has the released CPI and Eurozone Harmonised Price Index doubled in this period? At most it is up about 40%????????
The European Central Bank's definition of euro area monetary aggregates.
M1: Currency in circulation + overnight deposits
M2: M1 + Deposits with an agreed maturity up to 2 years + Deposits redeemable at a period of notice up to 3 months
M3: M2 + Repurchase agreements + Money market fund (MMF) shares/units + Debt securities up to 2 years

As of June, Euro Zone M0, (paper and coins) was €784 billion or about €2400 per capita. Below is the ECB report of M1 M2 and M3 in billions.

How much gold reserves are in Euro Zone Central Banks?
Euro zone gold reserves = 11,065 tonnes @ €21million a tonne = €235 billion and about 1oz per capita.
Euro paper and coins (M0) = €784 billion or 3.3 times more than the gold value. So gold is worth €2191 an OZ or they need about 35,000 tonnes of gold to back M0.
M1 is €4,190 billion or 17.8 times their gold reserves. So gold is worth €11,819oz or they need 200,000 tonne of gold to back M1 and only 158,000 tonnes of gold have ever been mined?
M2 is €8126 billion or 34.5 times gold reserves (gold €22,908oz)
M3 is €9408 billion or 40 times gold reserves (gold €26,560)

If gold is outdated why are central banks holding it?
I think many believe in the system that is in place and of course it’s instigators and people that understand it will do well to the loss of those who don’t (most savers and borrowers). It is likely that these instigators hold most of the gold as well as the securities that back all the loans as they know the basic difference between money and wealth. So in the case of the ECB, when less and less money is in the system and you can’t pay your loan, you will lose your assets. In the USA they just print more money diluting more, the $ value to the determent of savers. By the time this money reaches borrowers prices have gone up as well as market interest rates, making it more difficult to pay off their loan. They also lose the asset securing the loan.

Is there an alternative better system?
Almost any system would be better for the majority of society than the system in place today. It will collapse, if not in this year sometime in the near future. The majority of real money and assets will be legally in the hands of a few. Capitalism and free markets will likely get the blame for the mess and not the real culprits, banking and the monetary system. To spell it out this system is not capitalism. It is up to citizens to discover how society progresses, what causes stagnation as well as cycles of boom and bust. While people keep listening to the vested interest groups and those who haven’t a clue they will get poorer and poorer without even knowing it. Free market capitalism is how all of society progresses most. However it is a system that once established will continuously be attacked from all angles and especially from within. It is worthwhile getting to understand it for one’s self.

Tuesday, July 14, 2009

Irelands external debt

I wish to explore our external debt of $1,841,000,000,000
I believe this figure is the elephant in the room that is not being discussed and I wish to outline how the Government interventions has, I believe socialised much of this debt putting the death nail in any chance we had for future prosperity.

As you can see from all the zeros this number is off the scale and the idea that we were a wealthy nation is a myth. Per capita, we borrowed almost $500,000 and from the taxes on how this was spent the Government increased the size of the Public Services that now costs €65 billion PA to run. Interest repayments on this borrowing has to be between $50 and $100 billion or up to half current GDP. Of course some people got wealthy as some of this money stuck to their fingers as it circulated. But wealth of nations is build by savings and investment that improve productivity. But we are being fed that its consumption and spending that makes the world go round.

Until recently our National Debt was about €45 billion, less than 5% of this external debt and well manageable at under 25% of GDP.

Now this $1.8 trillion we bowered was I believe made up of unsecured debt, as well as debt secured by assets and personal and business guarantees. When things went pear shaped, the underwriters of this mess were in a serious situation and it was a bad situation for many individuals and businesses that were over leveraged. However it was not a very bad situation for many of us. We as well as the Government were living pretty much within our means and had the ability to adjust down if necessary. The banking and legal system was in place to deal with the risks that were taken and we could all begin again on solid ground with valuable lessons learned.

However this situation changed when the Government gave the bank guarantees. All the so call economist and bankers can dress up or down the figures all they like but the bottom line is that we the people are now the underwriters of much of this figure. While individual and business can say to the lender this is the security for the loan, you know the risk etc. this is not possible for Governments and every effort will have to be made to make full repayment.

We are being drip fed sound bites about this issue. Crap like “we couldn’t let the banks go under, letting Lehman Brothers collapse caused the current crisis”. My favourite is, “we must get the consumer spending”. The diversion that is an Board snip and a €5 billion cut over 5 years when we are short €30 billion this year alone. Most of this comes from a few sources and it is continuously rehashed by journalists and the media. The international bankers are laughing all the way to the bank. Their pile of bad loans is now AAA. With a stroke of Brian Lenihan’s pin the Irish nation is enslaved by debt.

Henry Ford spent his life protecting his company from bankers and stated if the people understood what they were up to there would be revolts before morning. However, it was our Government that signed the deal and of course will play dumb when the reality of these figures finally hit the fan.

Saturday, July 4, 2009

Why 5000 year old rules on getting wealthy will not work today

When asked for advice on investing I would generally refer people to a book called “The richest man in Babylon”. This is not an attempt to avoid their question but is due to the amount of regulation designed to “protect the consumer”. It is very difficult to advise clients on the reality of investing and advisors are forced to give very generic recommendation making clients money fodder for the system that exists.

While much of the simple advice in this little book holds true 5000 years on, the first rule of “pay yourself first” has been made a lot less feasible. The propaganda put out today and then rehashed by the media is all about the important role of the ECB and the need to control inflation. If society had a real understanding of this phenomenon the ECB would not exist. Now, we will hear all sorts of arguments on their importance but I will try and make the facts speak for themselves. First we will look at a chart of inflation since 1650.
What has to stick out is that we have no green on the chart after 1950. Before this we were continuously oscillating from periods of inflation (blue) to periods of deflation (green). However, during the most of our lifetime all we have had is periods of low inflation and periods of high inflation.

To give a simple explanation of this, throughout most of history money has been precious metals. The periods of blue (inflation) were times when commodities were scare or in high demand and it required more gold (money) to acquire them. The periods of green (evil deflation) were times when you required less gold to acquire goods. This may be due to an increase in the supply of goods or an increase in the amount of gold. We are often told that this system will not work today and central banking ironing out high inflation and stimulating economies during periods of low growth is what’s required.

The question one may ask is why is deflation seen as such an evil today? Surely it is a positive thing if one can get more goods for less money? I would suggest that we really may have had a period of green from the 1980s until recently. This was mainly due to the massive productive gains achieved during this period. If one reflects on this period, the advances made were phenomenal but instead of our money going further the majority of us seemed to be working harder for less.

The simple answer to this chart being blue has been central banking controlling the money supply. So, instead of society realising these productivity gains, their wealth was stolen by the continuous dilution of paper currency. Besides having this hidden tax, monetary inflation made it unfeasible for people to save (pay themselves first). This system forced people to consume, build up debt and make mal-investments.

Consume: I better buy today as tomorrow it will take more money to purchase this product.
Borrow: It makes sense to take on more debt and as things go up, including wages it will be easier to pay off and I will benefit from leverage.
Mal-invest: The system forced people to invest in managed pensions, stocks, bonds and property. Your success depended more on market timing than on making prudent investments. The real winners were the middle men. This is so obvious today when this house of cards is collapsing. I say collapsing as this game is not over yet.

I would argue that our society as a whole would have been better off if a capitalist system was in place and the 5000 year old rules of creating wealth were available for all to implement. Through work one could produce and save their surplus without fear of it losing its purchasing power. This capital could also be invested to make society more productive and allowing the risk taker the opportunity to receive some of the rewards.

Without getting in too deep it looks like society is coming more under the spell of government control. The smokescreen tries to make it look like capitalism has been what we have had and due to bad boys in the system and lack of regulation it has failed. So we now need more Government intervention, more regulation and of course more Central banking manipulation. The people in control may not be lying when they preach about the importance of this central banking system and the necessity for government regulation and intervention. But the question we must ask is “who is this important to”?