My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “You can sway a thousand men by appealing to their prejudices quicker than you can convince one man by logic.” ― Robert A. Heinlein
“As we prepare for the upcoming European elections and the future of Europe, I have recently found myself pondering this question: with the waning of religion, ethnicity, geography, and common cultural norms as uniting forces in society, what is there that will hold us together?
The more I think about this question, the more I come to a single conclusion: what can hold us together is the cultural cohesion of the nation state.”
https://radix.org.uk/news/let-the-idea-of-collaboration-between-nation-states-flourish-again/ . Here is the link to last week: Issue 52
Now that Brexit will NOT to be coming to a conclusion yet, after almost three years, I will continue to provide weekly updates as events progress:
Brexit Update – 24th May 2019 – Breaking News – MayBot to resign
The Brexit deadline remains 31st October 2019 and stays in place unless the next PM can get Parliament to agree a new exit plan. Now, on 7th June, MayBot has agreed to resign as Tory leader but remains PM until, following the appointment of a new leader by July, the battle for Brexit is re-joined.
https://radix.org.uk/the-end-of-may/
“The BBC is in denial, the Tory and Labour parties are in denial, I think you’re all in for a bigger surprise Thursday than you can even imagine,” said Farage. The biggest denier of all is MayBot herself who will be gone by 7th June anyway.
And Nigel Farage is unlikely to be wrong in his predictions. The results will speak for themselves but we will have to wait until next week as counting doesn’t finish until 26th May. “Given the multi-national composition of the European Parliament, there is a wide-range of political views held by MEPs, however, lawmakers broadly fit into one of 9 Parliamentary groups (one of which is non-attached members). These Parliamentary groups are divided by political leaning and not necessarily [by] geographical location:
In the meantime, while we are waiting, here’s an interesting observation of Britain in the 21st century:
“It has been an appalling period in British politics and government; unlike any period experienced in living memory. The British State, once high and mighty, [having] lorded over other nations with typical English condescension and patronising arrogance, has well and truly come crashing down to Earth with a very heavy bump thanks to Brexit. It will never be the same again. The defenestration of the British Government and wider British State machine including its intelligence and security services has been a spectacular sight to behold. The credibility of the British State and its democracy has been ripped to shreds. For three years now the British ‘nation’, Parliament, Government, Civil Service, media and economy has been consumed by one issue and one issue alone, whether or not the UK will depart the European Union after the 2016 Referendum.” Read on:
https://www.strategic-culture.org/news/2019/05/14/britains-brexit-armageddon/
Details of Parliament’s deliberations can be found here:
CHAPTER 10
NATIONAL ECONOMIES
“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance.” – Cicero, 55 BCE
Our Capitalist system is not really ‘capitalist’ at all
We are constantly reminded that we are living in a capitalist system. In fact this is patently not true. The UK, EU, USA and the western world (OECD economies) in general are not living under a capitalist system as would be properly implemented according to economic theories of the last century.
Liberals are fond of saying: “The capitalist system isn’t working and should be replaced.” They fail to realise that what they’re living under is not at all what Adam Smith would have regarded as capitalism, but a disjointed, dysfunctional socialist/capitalist/fascist mongrel of a system.
The free market does not truly work under our present regime and Liberals are right to criticize the existing system, but not because it’s capitalist, but because it’s not capitalist. Austrian economic theory promotes a version of capitalism which conforms to the generally accepted principles of free markets and sound money. Chapter 11 – Macroeconomics will explain these models in more detail in future Issues.
Financialisation as an engine of transition towards unequal wealth distribution
These are undoubtedly part of the reasons why wealth is not being distributed evenly but a more important cause may be laid at the door of a new monster, ‘financialisation’.
This rather awkward term refers to the tendency of financial markets to dominate the traditional industrial and agricultural economies. It reduces all market values into financial instruments or their derivatives and is the result of financial engineering as discussed in the previous Chapter 8.
The intent is to reduce any product or service to a tradable unit of currency making it possible to interchange these instruments instantly around the world; there are no national borders to be managed and no accountability to a sovereign government is required.
This process spreads risk, enabling debt to be created through asset-backed securities, which motivates economic systems to increase production of just about everything including money itself.
The central banks’ policy of keeping interest rates to near zero levels for an extended period has further aggravated the wealth gap which allows the wealthy to borrow money on the cheap and invest in higher income yielding financial instruments; it’s a no-lose situation which banks and financiers have exploited to the full.
Governments love this system because it allows them to spend beyond the reasonable limits of taxation by issuing their bonds in quantity without constraint, as witnessed by the Federal Reserve’s experiment of printing $85 billion per month for at least 20 months without a break.
Cheap, abundant credit, the supposed key engine of growth according to the Federal Reserve, has greatly increased wealth inequality; the wealthy elite have much greater access to credit than those remote from government and they should use this credit to invest in productive assets generating income streams that increase both overall income and wealth.
Regrettably this is not always the case because investments today do not necessarily go directly to the producers. Remember, economics is all about trading around the world to meet demand for all kinds of goods and services. The banking system facilitates this process by offering credit to allow production to take place.
In former times, simply put, a merchant could purchase goods from overseas by relying on a bank to stand for payment against collateral of the merchants ‘bill’ which gives title to the goods on final payment. This works on an international scale where merchants are trading one-to-another; national economies were dependent on this essential money transmission process.
Trading is now reliant of financial instruments to enable settlement of contracts
In the global financial system things get much more complicated although the end result is much the same as before; goods or services are moved from seller to buyer with guarantees to payment written into contracts, although today there are far more hidden risks.
It is the need to minimise these risks which have given rise to a vast complex network of financial instruments (derivatives) which can be simplified into several groups. The merchant’s bill may not be paid in full at time of maturity because it contains a hidden risk of movements in foreign exchange rates, interest changes and perhaps total default by the buyer or the guarantor through lack of actual cash (liquidity) in the market.
Debts such as these commercial bills rely on the markets to provide instant payment though their liquidity channels; when these channels become blocked, as happened in 2008, trading stops because uncertainly of payment causes a crisis of confidence in the market.
The closest thing modern finance has to the institution of bank guaranteed debt is a financial insurance contract known as the ‘credit default swap’ (CDS) but which does not so much guarantee eventual payment as settlement at current market value. According to economic theory the price of a “riskless” security is the market price of the security plus the price of the CDS risk insurance, plus the price of the ‘interest rate swap’ (a contract which compensates for interest rate changes), plus the price of the ‘foreign exchange swap’ (a contract which guards against currency exchange risk).
The end result is that trade can take place across national borders with the minimum of risk to all parties but which at their heart are driven by international money markets working together with the world’s central banks. The global world is organised around a network of ‘promises to buy’ in the future rather than the earlier ‘promises to pay’ by a bank if a contract fails in the present.
The importance of ‘liquidity’ (i.e. cash) in the financial system of derivatives
In the global financial system many ‘promised payments’ lie in the distant future, and/or in another currency, at a given interest rate. Consequently, a mere guarantee of settlement at maturity date is of little help when only a small fraction of outstanding commercial debt is due at any one time.
In a crisis the need for instant cash is paramount and the only way to get cash is to sell rights to a ‘derivative’ contract, or to use this asset as collateral for further borrowing. The amount of cash to be raised for an asset depends on the asset’s current market value and, by holding a guarantee of the market value of your assets, in effect you are guaranteeing your access to cash as needed; if no one else will give you cash for them, the counterparty will, but only if he has it.
The weird and wonderful world of ‘Over-the Counter’ (OTC) derivatives, in effect ‘private contracts’, at best creates a ‘risk-free-as-possible’ trade for settlement in the global markets. It is these OTC instruments, most of which have no quantifiable market price, which create the potential to destabilise markets during times of uncertainty.
The weak link in our modern system is the incomplete nature of global networks of promises to buy. National economies are powerless to control the proliferation of OTC contracts presenting a formidable challenge to the interconnected central and commercial banks.
America is in the unenviable position of holding the world’s reserve currency and through this the American domestic economy is forever at risk. It is for this reason that moves are already being made to develop a truly common, global currency which can be used by everyone during the trading cycle without impacting domestic currencies and their economies.
To be continued next Saturday
Sounds like NYC and London Exploiters borrow really cheap bank printed money and buy contracts on the farmer’s chickens before his eggs have hatched, actually before hens even lay them, and even before those hens or their mother’s mothers are even eggs themselves. And then create and sell billions and billions of dollars worth of Derivatives to other Exploiters with cheap borrowed cash looking to make an easy buck. They are already about 10 years into future production and consumption. What could possibly go wrong?
What indeed. An excellent analogy Robert, thank you, explains it all so easily!
Do you wonder if some of the Exploiters with Derivatives to sell know any folks that manage Pension Funds; the type of folks that might take bribes or kickbacks to buy something with Pension Funds?
Yes, Robert, the billionaires have everything their own way. For example, our British Steel has just gone into liquidation and who is behind this? A nefarious cabal of rich bastards who have been outed by Guy Adams of the Daily Mail; worth a read – it is a nest of vipers:
https://www.dailymail.co.uk/news/article-7069063/GUY-ADAMS-reveals-millionaires-takeover-ones-golden-wrecking-ball.html