This is a great news report from Zimbabwe via Al Jazeeera. It examines the ‘fantastic returns’ on the Zimbabwe stock exchange – and how traders are becoming ‘paper millionaires’. ‘Traders are astounded by the performance’. ‘Stock soar despite inflation’. I kid ye not.
Over the past 10 years, Labour has turned a budget surplus into a deficit equal to 13pc of GDP – the biggest in our peacetime history.
Government borrowing is at its highest since the Second World War and almost twice the previous post-war peak. And yet, and yet … when he stood up to deliver the PBR on Wednesday, the Chancellor, Alistair Darling, managed to make a ghastly situation even worse.
Scanning the papers yesterday, yes there is focus on the Deficit and plans by both parties to reduce it. Skepticism that the Labour Party will reduce and more confidence that the Conservative Party will.
There is little mention that the National Debt will actually rise to £1 trillion next year.
In terms of getting this simple message across, I put it to you readers….
Labour’s misspending will cause the National Debt to rise to £1trillion pounds next year. To put it in perspective, if you spent £1 million a day for 1 million days or 2,740 YEARS, you would spend a £1 trillion.
Or…..
Gordon Brown’s mishandling of the economy will cause the National Debt to rise to £1 trillion pounds next year. To put it in perspective, if you spent £20 billion a year for 50 YEARS, you would spend a £1 trillion.
Is this a bad dream? How are we going to get out of this mess?
A radical solution promoted by some of us at the Cobden Centre, written about by 5 Nobel Prize Winners in Economics and countless other distinguished economists, should be aired among the powers that be. Just to recap….
The money supply is made up of notes and coins — approx £50 billion — plus £1.5 trillion of demand deposits.
We must remember that when we deposit money with a bank we become a creditor to the bank (the money ceases to be yours) and a demand deposit is a claim against that financial institution that can be used for the purchase of goods and services: this becomes yours.
For a bank, the demand deposit is an IOU to you the deposit maker. This means that your bank statement is in effect an IOU from the bank to you.
Make the whole money supply notes and coins and delete all demand deposits.
This is not inflationary: as you create the cash and put it into the corresponding individuals’ bank accounts, you delete the corresponding demand deposit.
The banks then have no creditors, only assets.
You, as a depositor, are no longer a creditor but a customer who deposits his money for safe keeping.
If the banks now only have assets and their share capital, their balance sheets become positive to the exact amount of demand deposits you have replaced with cash i.e. a staggering £1.5 trillion.
As a one-off act, we can then take this £1.5 trillion away from the banks and return them to their pre-reform net worth.
With those assets, we can pay off the National Debt in an extremely short space of time.
I have pondered this at length now. Not many people are capable of understanding this very simple idea as they do not know how to distinguish between what is cash, notes and coins and what is a demand deposit i.e. a bank IOU. If you can understand this, you can solve the UK’s Debt Crisis.
Sean Corrigan always introduces me to something I did not know. Learn about the “Texas Ratio” and think about how precarious this “great recovery” really is:
Demand for £50 notes has risen sharply during the recession because the public has lost faith in the banks, the Bank of England’s chief cashier Andrew Bailey has suggested.
…
The suggestion is that more people are hoarding cash, rather than depositing it with banks, after the whole banking system was on the brink of collapse post-Lehman.
Which tends to reinforce Prof Jesús Huerta de Soto’s reform plan, explained by Toby Baxendale here and James Tyler here.
Relations between the Governor of the Bank of England and the Chancellor hit a new low today after Alistair Darling faced a barrage of criticism from both sides of the Commons over the emergence of a £61.6 billion secret loan to RBS and HBOS.
Mr Darling was forced to make a statement to MPs this morning to explain why the Government and the Bank of England had kept secret the loan made last year to prop up the two banks. The existence of the loan – which has since been repaid – was made public by Mervyn King yesterday as part of his testimony to the Treasury Select Committee.
It emerged yesterday that the Bank of England had provided £36.6 billion in emergency loans to RBS and £25.4 billion to HBOS last year, in addition to the £500 billion of taxpayer funds used to bail out the banking system. The Bank had been so anxious about the two banks’ ability to repay the loans, they insisted on taking assets worth £100 billion to secure the £61.6 billion credit line.
THE Bank of England is the lender of last resort for British banks. That is part of its function.
It has routinely issued banks which have temporary liquidity problems with sufficient funds to tide them over their embarrassments.
So in principle the fact that the Bank lent HBOS and RBS £61.6 billion at the height of the financial crisis, last October and November, to ensure they continued to function, was not in itself remarkable.
What is remarkable, and deserving censure, is that this guarantee is only now coming to light. The Bank’s deputy governor, Paul Tucker, told the Commons Treasury Select Committee that “this was a dire emergency”.
The 1997 Labour victory promised major changes to regulation and supervision of banks and the financial services industry. Shortly after Labour came to power I was working as a structuring engineer on the derivatives/securitisation desk at a big brand UK bank; I was aware of a few of the tricks of the trade, and I looked forward to rules being published that would no doubt tighten things up.
It soon became clear that the scope of the Financial Services Authority’s supervisory remit would grow. Regulators were gaining airtime and political clout, particularly in the aftermath of the 1998 collapse of Long Term Capital Management, a large US hedge fund set up by famous traders and derivatives specialists.
By early 1999 I began to realise that the actual regulatory function of the Financial Services Authority (FSA) was indeed changing; it was weakening markedly.
Relationships between bank staff and regulators were becoming friendlier, more personal. Actual supervision appeared to be widening but was in fact becoming less substantial. Greater weight appeared to be being placed on the bank’s “internal” regulatory function and I suspect that the FSA officers looked up to many of my internal colleagues. Why? Because I sensed the officers were just a little out of their depth. They needed help from the team of bank staff tasked with presenting our new structures to the regulators for approval.
Through tomorrow and Saturday, ESCP Europe and The Cobden Centre are hosting a Colloquium on Sound Money. The Colloquium is to be directed by Founding Fellow Dr Anthony J Evans and chaired by Corporate Affairs Director, Steve Baker.
A team of academics, banking professionals, entrepreneurs and politicians will meet to discuss:
What is Money?
The Interest Rate and Intertemporal Coordination
The Gold Standard and the Great Depression
Deflation and Prosperity
Free Banking vs 100% Reserves
Central Banking
Proposals for Reform
The authors whose work will be under consideration are Carl Menger, Joseph Salerno, Frank Shostak, Ludwig von Mises, Friedrich A Hayek, Joan and Richard James Sweeney, Murray Rothbard, Lawrence Reed, Lawrence H White, George Selgin, Vera Smith, Tim Congdon, Richard Salsman and Jesús Huerta de Soto.
Is an Austrian style boom followed by a bust just about to happen in China? See this video sent to us by Catlin Long, MD of Morgan Stanley and make up your mind yourself!
Via Reclogging the US credit system, Caitlin Long warns us that there is another impending credit fuelled bubble that is due to be created to accommodate the commercial property market renewals in the next few years. Either a new bubble will emerge as this large level of re-issuance is financed by new bank credit creation, or there will be another bust of epic proportions should this not happen.
Either-way, if it gets funded, this will cause more mis-allocation of capital to this and associated sectors postponing the recovery. If it does not get funded, then we could be back with another Lehman style “event” with all its terrible consequences.
The US financial system faces a daunting challenge in the next five years: $4,200bn of debt that is largely of speculative quality comes due in the commercial real estate and non-investment grade debt markets. At best, this wall of maturing US debt will strain credit capacity. At worst, it will prolong the credit crunch and restrain economic growth.
The next two years are crucial, since delay by banks and other lenders in recognising losses on commercial real estate loans could lead to a pile-up of debt maturities in the credit system in 2012 as this is when loans to highly leveraged corporate borrowers begin to mature en masse.
Such a 2012 reclogging of the credit system, if it happens, could force businesses to liquidate bad investments or pressure the Fed to re-open the monetary and credit spigots, potentially complicating the Fed’s exit from its existing stimulus programs.
The biggest risk to refinancing capacity for this wall of maturing debt, though, is the Fed raising interest rates to control inflationary pressures and dollar depreciation, if necessary. Higher interest rates would preclude marginal borrowers from qualifying for refinancing, regardless of whether credit capacity exists.
