Hypothetical - the economy goes bust

lakemac said:

As an aside to all this stuff (I have reams of research material on all this) I just wish schools would teach economics/commerce from the perspective of the banks. It would make for a far more interesting study of both history and economics. It ties in most wars in the last 400 years, assasinations, the rise and fall of various nations and the ultimate rise of the families that control the banking system. Economics has never been so much fun

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Hi Lakemac,

Some excellent material here that makes for interesting reading. I am an English and Modern History teacher, and the more I study history the more I come to the conclusion that History is about money. Its not about great personalities, or nations, or even racism. Its about money. And I am certainly no marxist! Perhaps our syllabus makers need to have a quite reflection on this stuff.

Cheers
Brad

PS. What an interesting thread this is turning out to be!

I feel humbled before you all. Four years ago I began my search to protect my retirement portfolio, roughly on the right track but what I have learned on this thread is a wonderful fast track for myself and those beginning.

Thank you this is the best thread I have found on ASF

explod said:

I feel humbled before you all. Four years ago I began my search to protect my retirement portfolio, roughly on the right track but what I have learned on this thread is a wonderful fast track for myself and those beginning.

Thank you this is the best thread I have found on ASF

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Tend to agree wholly.

Really appreciate it LakeMac, for you taking the time.

I just watched an interesting film on the creation of money on You Tube.

Type in 'corrupt banking system' on You Tube. It is in five parts.

You might also want to get a copy of this DVD:
www.themoneymasters.com

That will really bake your noodle (as someone on the Astronomy thread in this forum said quoting The Oracle from the movie The Matrix).

Thanks for that link Brad.
If you follow the money masters link to their online store, they are selling both videos. Must watch the new one myself.

As to education - well I am not holding my breath. You have to remember that the education system was set up during the start of the industrial revolution to provide workers to that system. Nothing has changed. It still provides workers to the system. School is not about being financially literate.

In fact there are four subjects never taught a school but have the largest impact on our adult lives:

1. relationships
2. the law
3. finance
4. sales

Think about it, you are never taught how to handle a relationship. We bumble along with a few emotional tools we picked up as children and are expected to deal with the complexities of marriage, our own children and a myriad of other intertwined human interactions. Anthony Robbins please step up to the plate. NLP (neuro linquistic programming) should also be there.

The law - mobile phone contracts for a start. Add your first car loan, mortgages, Family Law Act, IR laws, you name it there is a law controlling it. Legal structures - companies, trusts, partnerships, etc etc. How many of you know how the law actually works. For example is a contract legally binding if it is done on just a handshake? (I would be interest to know what people know on this one...). We are never taught.

Finance - those reading this are on their way. But how many ways are you taught to make money in school? One. Subsitute your time for money. That's right a JOB. What about teaching kids how to make a business profitable. Robert Kiyosaki has done a lot in this area of education. It is fascinating watching people play his Cashflow game. Highly recommended.

Sales - well from the moment we start to crawl across a floor (doh! I originally spelt it flaw) we are in sales. The art of persuasion. "Mummy can I have some icecream? Huh? Huh? Pleeeeease mummy". Trouble is we don't learn enough. You are always trying to sell yourself; to get a mate, to get a job, keep a job..., get promoted, sell your company's product (you do have your own company don't you...). Related to sales is marketing. Never taught at school yet as an adult we need it badly.

/Soapbox mode off for now...

Hi Lakemac,

Yes, I agree that the education system needs a fine tune and often wonder at some of it.

Personal story to show you HOW financially illiterate I was when I left school. I got a $4000 loan to buy a car. I was paying the minimum repayments and I remember thinking, 'gee this is not going down!' ... I marched up to the bank, and it was THEN, only THEN that I learned what interest was!!!

I can hardly believe how ignorant I was of finances.

However, I must disagree on Robert Kiyosaki. He simply is a book salesman in my view. And gives shonky financial advice. He never gives any specifics or how to's and I cringe when people I know read him. Don't get me wrong, he is good for educating the mindset, but IMO he is valuable for little else.

Cheers
Brad

Hi BradK,

I tend to agree on your opinion of Robert Kiyosaki particularly his financial advice, however, his three books:
1. Rich Dad, Poor Dad
2. Cashflow Quadrant
3. Rich Dad's Prophecy

Are a must read. The first two introduce you to his concept of the four types of income stream. The first book is a story, the second is the detail.

For example if you want to start a business make sure it is one you don't like doing yourself - why because you will not want to work there. Own it, control it but don't work in it. If you do you are not a business owner you are what Robert calls an "S" or self employed. I wish I had known that 20 years ago.

The third is a warning about superannuation or in US parlance 401(k) and/or Roth savings schemes.

I have moved on from these books but they are a good starting point for any young (or not so young) person. The key thing is that they make you think.
Something few people do these days.

Fantastic writeup lukemac, I will definitely have a good read of those books during the holiday break!

theasxgorilla said:

You mean like neutral Sweden

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Yes it's interesting how things can change, I don't know enough of the history of Scandinavia to comment though.

I have just returned from Lithuania in the Baltics which has historically between the meat in the sandwich between Russia and the west, and recently Lithuania has joined NATO and has military bases there as well as troops in Iraq even.

Today Putin was suggesting he could point his missiles towards Europe again if America presses ahead with what is definitely an imperial agenda any further. The US want to put missile stopping technology in Poland and the Czech republic I read. History in this region is written in blood, the unifying theme is just people killing other people going back thousands of years.

I was experiencing my first European winter (-35) when Putin was using the threat to switch off the gas supply as a negotiating tool... It's no little threat you can say.

You hope that the world will muddle through but sometimes it's hard to be positive, as a gen X'er I haven't lived through a WW, depression or global crisis but accept that it might be unusual for me not to live through such things based on a normal life span.

Largely for geographic reasons it's hard to go past the Southern Hemisphere as a good place to be living whatever is likely to happen.

For your amusement:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/06/24/cnbis124.xml

BIS warns of Great Depression dangers from credit spree

By Ambrose Evans-Pritchard
Last Updated: 5:11pm BST 24/06/2007

The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

"Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.
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"Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed," it said.

The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity.

"The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry.

Some 40pc of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.

It said China's growth was "unstable, unbalance, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao

In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment build up in the boom years had suffocating effects.

While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and "sowing the seeds for more serious problems further ahead."

The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances, citing a current account deficit running at 6.5pc of GDP, a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unprecedented drop in the savings rate. "The dollar clearly remains vulnerable to a sudden loss of private sector confidence," it said.

The BIS said last year's record issuance of $470bn in collateralized debt obligations (CDO), and a further $524bn in "synthetic" CDOs had effectively opened the lending taps even further. "Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent," it said.

CDO's are bond-like packages of mortgages and other forms of debt. The BIS said banks transfer the exposure to buyers of the securities, giving them little incentive to assess risk or carry out due diligence.

Mergers and takeovers reached $4.1 trillion worldwide last year.

Leveraged buy-outs touched $753bn, with an average debt/cash flow ratio hitting a record 5.4.

"Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding," it said.

That may not last much longer.

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Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s.

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That is because they were not looking in the right place at the right figures.

Credit creation/destruction is the key.
Forget interest rates. They are a furphy.

If you look at the amount of credit (and money to a lesser extent) that was destroyed between 1929 and 1933 in the USA alone, there was a decline of something like 30% in real terms (my research library only has figures for "other money" held by the US Treasury from 1860 to 1947 which is a very poor proxy for credit. Must get some better data to back up my claims... cf P480 Report to the Treasury - Federal Reserve Bank of St. Louis 1980)

Similar figures for Japan after 1989. Credit via the Bank of Japan's window guideance system was choked off. Credit availablity dropped from approx 9% YoY in 1989 to zero by 1992 in Japan (P267 Princes of the Yen - Richard Werner. Also see P122 Figures 11.2 and 11.3 for a comparison to the US Fed credit creation rates).

Fascinating material. And an interesting forum overall (found through a search on views of recent 4corner's investigation of call centre work practices at Telstra).

I have looked at video on YouTube as suggested by BradK. A nice easy to understand succinct summary of the problems of usuries, credit bubbles, and the need for credit creation. I had very little knowledge of the creation of money prior to this video.

The idea that the economy can only be sustained by increasing levels of debt to service existing debts seemed like a ridiculous one, but it is evident with average household debts in Australia for home loans increasing to the level where they are currently at. Which suggests that your average Australian will only be burdened with more debt to purchase a house in future.

The need to service increasing levels of indebtedness with further credit creation goes some way to explaining the drop in interest rates and how credit is practically foisted on to people these days (credit cards in the mail etc). No doubt deregulation of the financial market and the reduction in tariffs in the Australian economy (the recession we had to have)(the time lag in becoming competitive by reducing the national economy to its core competencies - Howard takes credit for this no doubt...) had a lot to do with this as well.

I guess this situation can remain sustainable while the economy continues to grow to stop inflation, but when this stops...

I just wonder how it would be possible to make any sort of smooth transition from what we have now to something more sustainable.

I came across this site here:
http://www.perfecteconomy.com/

which purports the idea of an interest-free based credit system, but after a brief glance, I am not convinced (will need to study up on this - perhaps someone can explain...). There is an example of the credit for a $100,000 house based on the 100year lifespan so that people should be able to repay at $1,000/year. Surely in this example this:
* will create massive inflation (which should stabilise)
* not account for the risk in loaning a house of substantial value
* not account for the lifespan of the land the house sits on....

I found the site that the YouTube video is sourced from:
http://www.moneyasdebt.net/

I look forward to more interesting discussions....

For a more rigourous explaination of things I can highly recommend
www.mises.org - especially the writings of a Mr Frank Shostak (a fellow Australian btw).

Mises and his ilk (particularly Rothbard) form what is called the Austrian school of economic (as against the Chicago school - Milton Friedman was its well known frontman or the dreaded Keynesians who really got it wrong).

CAUSES OF THE GREAT DEPRESSION.

There are several explanations for what happened but the most obvious conclusion is that it was the confluence of several shortsighted and commiserating factors. Three main themes emerge: historical factors, central bank policies, and political decision making. For the purposes of this discussion the focus will be on the United States.


The US in the 1920's: Buying into the Boom

The 1929 stock market crash marked the beginning of the Depression. Prior to the crash the stock market had been an important source of funding for industry; thus the crash itself was a contributing factor to the downturn as well as a harbinger of things to come. Since stock prices are based on estimates of future earnings potential, the stock market performance of the 1920's tells a story of runaway optimism for the future. When it peaked a few weeks before the crash, The Dow Jones had risen 597% over the previous 8 years. It was soon to become a symbol of runaway pessimism.

The freeing of capital from government use to commercial use following World War I caused commodity prices to inflate. In 1920, Ben Strong of the US Federal Reserve Bank of New York raised interest rates sharply to prevent inflation. This caused a recession and the stock market to fall. Once hard assets like commodities and real estate were no longer rising in price, money began to pour into stocks and bonds. The Dow started climbing from its low at 63.90 in 1921 and rose 150% over the four years to 1925.

According to Ron Chernow, in "The House of Morgan", It was in 1925 that Ben Strong made a secret commitment to Montague Norman, Governor of the Bank of England, to help England reinstate the Gold Standard. This action would later be shown to have undermined the British economy but the Pound had been the main medium of international exchange at that time and it was felt to be in everyone's interest to have it be exchangeable for gold. With moral support from the US Treasury, Strong chose to help strengthen the value of the Pound by depressing US interest rates. This depressed the value of the US Dollar and caused the already robust economy to boom.

It was suddenly cheaper to borrow money to invest in the stock market (called margin investing). Since the Dow had risen steadily since 1921, "small investors leapt giddily into the stock market in large numbers". The margin requirement at that time was only 10%, meaning you could buy $10,000 worth of stock with only $1,000 down, borrowing the rest. With artificially low interest rates and a booming economy people and companies were more apt than ever to invest in grandiose business expansions and over-priced stocks. Mergers and acquisitions soared.

In 1927, Britain ran into trouble with its gold standard again and Ben Strong lowered US interest rates in sympathy for a second time. This ignited the boom into the speculative frenzy that brought the market to its peak on September 3, 1929. It was like pouring gasoline onto a fire - the flames rose up, no lasting fuel was added, but the economy sure looked great.

Ben Strong died in October 1928. George Harrison, his successor immediately lobbied for higher interest rates to cool the speculative fervor. Rates were finally raised 1% in August of 1929, but by then it was way too late. The Dow peaked at 381.17.

The market and the economy had buoyed itself from one source of hope to the next for a whole decade. First it was the end of war-related inflation and booming exports for war reparations, next artificially low interest rates in 1925 and 1927 and booming exports due to a reduced value of the Dollar vs. the Pound. There were major tax reductions instituted by the Republicans under Hoover and finally in June of 1929 an international accord was struck with the Germans (albeit short-lived) over the financing of war reparations, a major issue of the decade.

By Monday, October 28, 1929 the Dow had fallen 20% to 300. It fell 40 more points that day and another 30 on Tuesday (Tragic Tuesday) to reach a temporary bottom at 230.07. It was down 40% from the peak 56 days earlier.

George Harrison bravely stepped in to provide tremendous amounts of credit to the banking system. This action prevented immediate bank failures and bankruptcies and a total collapse. The market recovered a good bit of ground but began to fall again before year-end. By mid-1930 this liberal credit policy was to be reversed affecting the money supply crisis discussed below.

In early 1930, there were 60 bank failures per month in the US but when the Fed tightened its purse strings, things got much worse. 254 banks failed in November and 344 in December of 1930. Among these was the Bank of the United States, with 450,000 depositors it was the fourth largest bank in New York. Although it was a private bank, "The biggest bank failure in American history, the Bank of the United States bankruptcy fed a psychology of fear that gripped depositors across the country."

In spite of further tax cuts, public works programs and optimistic speeches, spending and thus economic activity just kept going down. The stock market would make temporary recoveries, sucking buyers in, only to free fall again. The Dow finally hit bottom at the level of 41.22 on July 8, 1932, 10.5% of its peak three years prior.

resource: http://www.shambhala.org/business/goldocean/causdep.html

Spartn

:viking:

Ignore the interest rate hype - have a look at the graph of money supply contained in the link spartn provided.

Kool. Thanks spartn.

Check the graph of the Dow Jones post 1929 then post 1933 in my previous entry to this thread (here). The stock market crash looks like a small blip in comparison to the drop from 1929 to 1933. Interest rates don't cause that kind of drop. Only a reduction in credit does that.

Of course most of those bank failures were "non-federal reserve" based banks. Funny how the depression ended just as the last of these banks closed their doors. Control my friends, control.

The story behind gold (and its cousin, oil) is one that is even more fascinating than the banks.

Teaser: consider this - the Saudi royal family only accepts gold for payment in business dealings.

Teaser 2: why did the US make it illegal for its citizens to own gold?
Hint: it has something to do with oil...

1933 -April 5 - One month after his inauguration, at the nadir of the Great Depression, President Roosevelt declared a national emergency and unconstitutionally ordered all gold coins, gold bullion, and gold certificates to be turned into the Federal Reserve banks by May 1st under the threat of imprisonment and fines. It was a national confiscation of gold and silver.

June 5 - Congress enacted a joint resolution, that all gold clauses in contracts were outlawed and no one could legally demand gold in payment for any obligation due to him. This resolution is clearly in violation of Article 1, section 10 of the Constitution.*

1934 - The Gold Reserve Act of 1934 officially prohibited private persons subject to U.S. jurisdiction from holding gold for monetary purposes. It became illegal for U.S. citizens to own gold! The old standard was officially dead.

The result was this:

Exhibit B: The series 1934 D Federal Reserve Note

This is what happened to our money in just 6 short years:

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(I think I know too much about this stuff - it give me a headache at times LOL)

Hi ..great thread.Thanks Lakemac and all who have kept contributing such high grade information.

I'd like to alert you to a book I read recently.

"Empire Of Debt" Bill Bonner and Addison Wiggin.

Lays out the pathway that the U.S. has been on for years..a path to ruin...

Mucho madness!!

Cheers Ya'll

Boyou said:

Hi ..great thread.Thanks Lakemac and all who have kept contributing such high grade information.

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You are welcome.

I'd like to alert you to a book I read recently.

"Empire Of Debt" Bill Bonner and Addison Wiggin.

Lays out the pathway that the U.S. has been on for years..a path to ruin...

Mucho madness!!

Cheers Ya'll

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Oh dear another one to add to my reading list.
Thanks for the referral.

Lakemac. This is another one of those fascinating threads on ASF that stir my imagination. You've clearly thought a lot about the human condition and society

Reading it, I idly wondered if you had considered whether the control exerted in this fashion was a positive thing. Correct me If I am mistaken but I got the sense this "control" was used in a pejorative sense and that it was these banks which were causing wars and depressions, etc., rather than these being the expression of human competition for resources or other things - sometimes as ineffable as the thin air which comprises "credit" - such as shared delusions of superiority, or even sectional interests disguised as ideals which drive group or national violence.

The existence of small banks, each printing their own currencies seems inimical to a modern economy, so its reform, even in the brutal way described, at least seems a rational move. The fact it vested greater power in the central banks and its members seems a logical consequence.

However, we needed efficiency improvements of that kind and continue to do so today as evidenced in the increasing efficiency of the internationalisation of markets.

Ironically, we might even be saved from a doubtless oppresive and insensitive single world government, rather than driven to it, by increasing efficiency, integration and rationalisation of markets (including financial markets and instruments) which you characterise as the establishment of "control" by menacing banking dynasties.

Perhaps your mates at the Bank orchestrating this efficiency will actually save us from Orwell's "new world order" imagery of a jackboot forever stomping on a human face?

If there are going to be pivotal (and controlling) structural mechanisms at work in the world, and it seems there must, what would you see as a preferable, universal and underlying control mechanism for humans, if not money and credit? And if not central banks, who? The other candidates seem to be less attractive than money and banks.

thanks

I am glad that this thread had come to life again. It really makes you think, not so much about the human condition as one poster put it, but rather about the ubiquity of the economy in our everyday lives.

I wonder if anyone who has a commerce or financial planning degree could comment on whether this sort of stuff is covered in their courses?

By the way, is the Australian Reserve Bank set up along the same lines as the US Fed? I went to both the Australian and the Bank of England and they seemed to sing from the same hymn sheet.

Cheers
Brad