As we stand on the brink of the second major economic collapse of this century, it would behoove us as thinking people to ask what is happening, why is it happening and what can be done about it. By the time you are done reading this, you should hopefully be thinking that I am crazy. That the world can’t possibly be so screwed up - but, you say, we have responsible people, adults, experts running things. Do you really mean to tell me that they screwed up so bad? Well, depends what you mean by screwed up. A common mistake to make is to believe that our interests are the same as those of the economic and political elites that run the show. By their own yardstick, they have not screwed up. In fact, they might be well on their way to consolidating immense power, replete with nuclear arms and starving uneducated populations. It will make medieval feudalism seem like a walk in the park, and 1984 seem like a children’s fairy tale.
By now, everyone pretty much has heard of the subprime crisis underway in America. It is taking its toll on the credit markets, leading investment banks have announced huge writedowns, 180+ US mortgage lenders have gone bankrupt in the past year, 100,000+ financial sector jobs have been lost in the US alone, several European banks have had to bailed out with taxpayer money…..the list goes on. It is bad. The largest asset class in the world - US RMBS - has halted in its tracks and there seems to be no hope of any new issuance in the near future.
You might well wonder, how is it that the collapse of the housing sector in America can send shockwaves through the world markets? The standard reason being offered is that subprime loans made to people with bad credit and sold onwards into pools of mortgage backed securities started defaulting. Combined with heavy leverage on the part of investors this means that even small losses could wipe out many participants, thus magnifying the effect. Further leverage added through CDOs and CDO-squareds has exacerbated this problem. while this view is correct, it still misses an important point - the inevitability of this occurence, not in any mystic “human nature” kind of way but with the cold, steel determinism of a machine set into motion.
The machine in question here is the world’s monetary systems. Money is everywhere now. The old gift and barter economies have all but died and the vast majority of transactions between people are intermediated by currency. Everyone wants money, in many places of the world accumulation of money is the highest virtue, exceeded only by the virtue of spending it. Here, in the world’s poorest country, we host a large number of the world’s wealthiest men, and we’re proud of it (though that is a blog post for another day). Everywhere you look, being rich rich rich has never been more in fashion. Yet, if you ask a lay person - where does money come from? - chances are you will be met with a blank stare. At this point, let us take an informal poll: Where does money come from?
a) Backed by gold
b) Out of thin air
The truth of the matter is that money comes out of thin air. If you go to a bank and take a loan of Rs. 60 lakhs to say, buy a house or something, the bank literally creates Rs. 60 lakhs out of thin air and writes you a check. This is the beauty of fractional reserve banking. The bank needs only a small fraction of money and a banking license, and it can then go and simply create the money it needs to lend out. Not only that, when you buy your house and the seller deposits his check in the banking system, the bank can use that new deposit to back a further loan and so on and so forth until the bank is collecting interest on an amount hundreds of times larger than it’s original capital. That EMI that you pay back diligently every month, for which you go to work each day, actually cost the lender nothing. It’s the kind of news that will make you want to go straight into denial, leaving the anger phase to manifest itself in uncontrollable tics and tourette’s syndrome. For a more detailed explanation of this process, please check out Banking and Scheming on google video. Watch all five parts. You will never look at money the same way again.
Now unfortunately, the banks only create enough money to pay back the principal. Where does the interest come from? This is where I will strain your credulity - the money to pay interest is never created. You have to earn it out of the available pool of money, and this is why the available pool of money must keep growing. Since money is created when debt is incurred, more and more debt must be incurred to bring this money into the economy, adding to the interest burden further until the debt monster gets to eat everything up. Why do you think there are guys at petrol pumps trying to sell you credit cards. Why are banks desperate to make loans? Do check out the video above - it makes everything crystal clear. So to sum up - some guy with a banking license can conjure up money out of thin air, lend it to you and then rule your every waking moment. We have all read the cases of people who committed suicide when the harassment became unbearable. All this for some pieces of paper? It doesn’t sound like it might be real.
Money, in the end, is a collective delusion. It works because people believe that they can exchange those rupees for real goods and services at some time in the future. What they fail to realise is that the system is doomed to end badly. It is no surprise that the current credit crisis is affecting the most capitalistic economy of all. Since 1912, which saw the passage of the Federal Reserve Act, the US economy has been a slave to the cartel of bankers that started the Fed. I bet you thought that the Federal Reserve - which is the US Central Bank and sole authority to print dollars - was a government organisation. Would it rock your world a little to find out that it is a privately held corporation whose major shareholders are not known and which has never been audited? We do not even know the names of the people who elect the Fed Chairman - the most powerful banker in the world (that we know of). Does all this sound very conspiracy theorist kookie? I can swear that every word is true. Watch “America: From Freedom to Fascism”
Subprime is not the disease - it is merely a symptom of a system that can only survive through expansion of credit. At some point, you can only grow the credit base by lending to people who would never ever get credit in a sane world. Can you imagine lending $750,000 to an immigrant fruit-picker who makes $14,000 a year? Or a thrity year loan made to a 90 year old man? This is the machine at work - constantly expanding credit base followed by Depression. And consider for a moment all the effects that this imaginary thing called money has on the real world, the world with forests and streams and houses and people - increasing the credit base means increasing consumption and so we have all manner of fancy toys - nokias, iPhones, Hummers, pearl earrings, Ikea furniture, DVD players cheaper than shorts - all these things have to be produced to create the demand for credit. Yes, they are advanced and yes they are shiny and cool to show off, but our consumption is causing huge amounts of pollution - so huge infact that our biosphere is collapsing. As a race, it seems we are no smarter than yeast.
We stand today at the rim of an abyss, which some people are already calling the Greater Depression. What will it look like? I see it as the Great Depression on amphetamines. Here’s what happened in the past (and what we can expect in the future)
- - first of all, millions of bankruptcies. The credit bubble that made people millionaires will claim an equal number of victims on the way down. These people will be unable to access any credit and whatever they earn will have to go towards satisfying their creditors. These people will be in debt to the banks and the government to an extent resembling slavery.
- - total breakdown of economic relations. In a world where money intermediates every economic relation, no money equals no economic relations. (Society will still retain its productive capacity but there will be no way to exchange them for each other. If hyperinflation sets in, we will see firsthand what happens to a society built on such a monetary system. We have only heard tales of the Weimar Republic. Now we might get to see it for real.)
- - Increasing power concentration. The last Great Depression was only ended by massive amounts of war spending. The “land of the free” became the land where the government would confiscate your gold. First, the powers that be string you along by your purse strings, then they bankrupt you and then they come take everything you have left. Capitalism needs workers and soldiers, and this is one way of getting them. The Second World War saw American political power solely concentrated in the hands of the big defence contractors, oil men and multinational corporations where it remains to this day.
- -War. The last Great Depression only ended due to the massive sacrifices made during the biggest conflagration ever experienced by the world, ending finally with the explosion of two, utterly redundant, utterly horrendous and morally repugnant atom bombs. With the war providing such a large economic impetus, it is no wonder that the Western world saw unprecedented prosperity in the post-war years. While we’re on the topic of atom bombs, consider for a moment the nature of the people who run our planet - People who think nothing of dropping atomic weapons on civilian populations just so you can show Stalin how big your balls are? Watch “Why We Fight” for the total lowdown on the military-industrial complex. (America’s top offices are occupied by an oil man and a defence contractor and we wonder what the war in Iraq is about.)
- - Shortly after the ‘29 depression, the gold standard was abolished leading to the ability to print unlimited amounts of money. This gave great power to the banking cartels that run the world’s economies. Postwar prosperity was shortlived, and birthed the recurrent financial crises we see - Asia 97, Russia 98, Dot-com 2001 and the daddy of them all - housing 2007. In the final analysis, it seems that all of capitalism’s claims to being fair and making the pie bigger etc are phoney claims, meant to prop up sympathy for a rapacious, unhealthy and morally repugnant philosophy that holds consumption and personal comforts as the highest goods and cares not a whit for the health of society at large and the planet as a whole. It is clearly unsustainable and we are seeing the end. The economic and moral ideology which promised riches for all will be seen in the future as the biggest disaster to ever have visited the planet.
To sum up, to say that todays credit crisis is due to subprime mortgages is like saying that World War I started due to the assasination of Archduke Ferdinand. The powers that be will always present wars as some “accident” of history, lest their cleverly planned schemes come under scrutiny from troublesome populations. In the case of the credit crisis, the symptoms are again being presented as a disease and for the same reasons.
I find that the full implications of this present nature of money take some time to sink in and be understood. I do hope you will follow the links provided and then return for a discussion in the comments section.