The Financial Jigsaw – Issue No. 5

My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 issues by Peter J Underwood, author

Last week we looked at some of the outcomes and lessons of the Cyprus event as a portent of things to come: see here: https://www.theburningplatform.com/2018/06/09/the-financial-jigsaw-issue-no-4/  Today, by way of a diversion, I want to explain some of the background to the global financial jigsaw, the reason I have named it as such and how it relates to the overall complex global financial system itself, and which has within it the seeds of its own destruction.  The present troubles in Europe, USA, emerging economies and the looming trade wars are causing the system to destabilise, the results of which will become evident as the imminent debt crisis falls upon us in the coming months.

A complex, global financial system

During the last twenty years countries’ economies have been closely linked to each other through the globalisation of their banking and financial institutions, driven by developments in technology and communications. The birth of the internet and faster and more powerful computers have so entwined financial systems globally that a failure in one small part of the system can suddenly affect many other parts, otherwise described as contagion – like a virus.

Institutions which are large enough to cause adverse effects throughout the financial world are known as Global Systemically Important Financial Institutions (G-SIFI), of which there are thirty global banks as well as over one hundred global mega-corporations such as BP, Monsanto, GE et al. These massive institutions are larger than many countries’ economies and effectively control global economies and governments around the world and who are beholden to them when formulating fiscal policy.

The global financial world is a highly complex system and has become much like our weather systems, when it is virtually impossible to accurately predict the future course of events for more than a week or so, as we have all found to our cost. Sudden floods, snow and hurricanes often arrive unannounced. The same is true of our financial systems.

This is what caused the crash in 2008 when the Lehman Bros investment bank collapsed in America, the result of the fall in housing prices in America, which reverberated around the world very quickly – in merely days. This induced the Federal Reserve Bank of America (the ‘Fed’), the central bank of America, and its equivalent in the European ECB and Bank of England, to take immediate and unprecedented action by printing over $14 trillion virtually overnight, but that is another story.

The Cyprus event is similar to the Lehman Bros failure in 2008 in its potential to create another financial crisis, caused this time by the public’s lack of trust in the banking system, because it continues to promote future ‘bail-ins’. Cyprus is also a reminder, for those who are watching and listening, of what happened to Northern Rock in 2007 in the UK. This is known as a ‘bank run’ made possible because depositors became so worried that they would not be able to access their money that suddenly everyone wanted their money returned.

Of course, Northern Rock didn’t have any of their money on hand in the first place; they only announced that they had it, according to the fractional reserve banking system.  They had loaned out, on longer term, the depositors’ money for mortgages and businesses and many of them became bad debts.

HBOS was another bank that suffered over £50 billion of losses through making bad loans; the former CEO was featured in the press charged with malpractice. The HM Government had to step in with billions of taxpayers’ funds to save Northern Rock and HBOS, but that didn’t last long. Contagion spread like wildfire as other banks and financial institutions failed the following year.

The failing global financial system

Our obsolete 20th-century economic system is breaking down and, although patches have been applied and drugs administered, the patient is likely to die and a new, 21st-century solution will have to arise, phoenix-like, from the ashes. As of 2018 governments and bankers around the world have no idea how to fix the system; they are experimenting and applying their obsolete remedies from the past which history will prove to be inadequate and inappropriate.

It is predicted that we will all be much poorer before this is over; however, a new, fairer and more sustainable global regime could emerge, although with much less ‘bling’, goodies and gross waste as witnessed in our present generation.

In this series I do not intend to dwell on the causes and failures of the 2007–8 global financial crisis. Suffice to say that these events are only the beginning of a continuing journey of collapse in our financial systems, of which Cyprus is yet another interwoven piece in this complex jigsaw.

In order to more easily appreciate and understand what is happening in the financial world, I judged that the notion of a jigsaw is appropriate and will help to simplify an understanding of our complex money systems and their effects upon each of us every day. It is so complex that just one jigsaw might not be enough; perhaps we should try ten instead and see how this works for clarity of understanding.

‘Winning’ the lottery of life

Have you ever completed a jigsaw? It’s a game, just like real life, in which we all play games with each other seeking security and peace of mind and for me it is what life can be like. I have lived the jigsaw of life in a very privileged place. A South African once remarked to me: “You’re lucky, you have won the lottery.”  With disbelief, I denied that I had ever done so, and he responded: “But you were born in the UK and for us that means you have already won the lottery!”

It was a sudden awakening for me, as I reflected on all those things I had previously taken for granted to secure my place, like most of us in the UK, in the top 10% of the world’s population measured by income and wealth (net worth). I am not special, but I was born, by chance, in a special place and thus unknowingly took for granted all the advantages and benefits on offer.

I knew no other system, until I travelled the world and ended up in South Africa, where I learned many new things about life in general and lessons for myself in particular. I had been happy in my ignorance, but now I had to do some serious re-thinking and evaluating of my long-held values and beliefs.

I started by listing some of those things with which I could identify and which I had taken for granted in my cosseted paradise embedded in the heart of the English countryside:

• I was born in the UK, an advanced, rich, civilised and peaceful country.
• I was born without complication and with a good brain.
• I had access to free healthcare by the miracle of the NHS.
• I spoke English as my first language, which helped my education and communication and made travelling the world much easier.
• I was born in 1944, at the end of the war. Although I had experienced some shortages in my war-torn country, I accepted my lot unconditionally.
• My ‘boomer’ group happened to become the most blessed of all generations.
• We never knew war except at a distance and were never forcibly made to enter into military service.
• I was born into a functional, middle-class family with an emphasis on learning.
• I was educated (free) at a grammar school, gaining competent basic life skills.
• I became an apprentice when there were jobs and opportunities freely available and through further (free) education I became a professional.
• I had access to clean, cheap running water in abundance.
• I was warm, dry and well fed at all times. I have never known hunger.
• I married and was blessed with a loving wife who gave me four children, two boys and two girls, all fit and healthy.

I am sure you can add to this list, for there are too many blessings to be counted. My question however is: to whom do I owe all this abundance?

This is the essence of my book and why I chose to write it, because in 2013 I believed our world was again facing a great crisis and that yet another revolution will follow naturally from the technology and communications boom of the 1990s and 2000s.

It is an interesting story, and I will try to paint for you the picture I have in my mind using the jigsaw game example. Albert Einstein claimed that many of his inspirations, created through original thought, were realised by the use of ‘mind games’. One of my ‘mind games’ is about The Financial Jigsaw puzzle which we will follow next week.

 To be continued next Saturday

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Author: Austrian Peter

Peter J. Underwood is a retired international accountant and qualified humanistic counsellor living in Bruton, UK, with his wife, Yvonne. He pursued a career as an entrepreneur and business consultant, having founded several successful businesses in the UK and South Africa His latest Substack blog describes the African concept of Ubuntu - a system of localised community support using a gift economy model. View all posts by Austrian Peter