Anthony Migchels – Real Currencies August 25, 2012

How do we know this?

Consider a mortgage. We borrow $200k, and after 30 years we will have payed about $500k. So we pay $300 thousand dollars interest over the loan.

What would happen with our purchasing power, if we only needed to repay the principal? It would mean we would have 10.000 per year more purchasing power during the 30 years we repay the mortgage.

Our credit would greatly improve, because our liabilities would be much smaller.

Interest is payed to those who have money, and payed by those who don’t, and therefore need to borrow.

Interest is therefore a wealth transfer from poor to rich. Margrit Kennedy, a German monetarist, has quantified this wealth transfer in Germany. Her conclusions: the 80% poorest Germans pay 1 billion euros per day (365 billion per year) in interest to the richest 10%. The next richest 10% pay about as much interest as they receive.

Also, with in the 10% brackets the same wealth transfer is happening: so the poorest 8% of the richest 10% pay interest to the richest 1%.

It stands to reason that the situation is more or less the same everywhere. This means, that the poorest 80% Americans pay about 1,5 trillion dollars per year to the richest 10 percent.

This is the key driver centralizing wealth in the hands of the plutocracy.

Another problem with interest is, that it is not transparent who pays what. The strange thing is, that even if you don’t have any debts at all, you will still lose up to 45% of your disposable income through interest.
Producers incur ‘capital costs’. They pass these costs on to their customers. The amount of interest they pay on the loans to finance their production differs per sector. But it transpires that on average 45% of the prices we pay can be related to cost for capital.

Now, back to the debt.

Is it reasonable that one should be able to get a mortgage? Is their something intrinsically wrong with the debt?

It is probably quite useful for the large majority of the people to be able to get a mortgage. Most people would not be able to buy their own homes if they were not able to go into debt.

Another important aspect is, that in the case of a mortgage the creditor incurs no risk at all: he has the house as collateral.

And who is the creditor? In most cases a bank. A bank basically is a credit facility. However, the bank has made us believe that it is their credit, that we are borrowing their money.

This is not the case. Credit is the result of collateral and future income. A person has about 30 to 40 productive years and it that timespan an average American will make about 1 or 2 million dollars.

This future income is what makes the bank provide the credit.

But this future income is not the Bank’s, it’s the individual’s income. It is therefore their credit.

So banks capitalize the credit of the population.

We know that in the current construct all this interest is being raked in by the banks by creating the money at the time the money is loaned out. Through Fractional Reserve Banking.

We consider it unfair that the bank has the right to create money. Therefore a full reserve gold standard is propagated. Not only taking away the iniquity of money creation, but also the nasty habits of banks going broke by overleveraging themselves.

But if we take out a mortgage in a full reserve gold bank, we would still pay 500k for a 200k home. We would still lose 45% of our disposable income through interest passed on in prices.

To further the above points I’ll leave you with a little thought experiment.

What would happen if………

We would nationalize all banks. This would not be unfair, they are all busted and they already needed 16 trillion in Federal Reserve handouts. They are still all under water.

We would weed out all the BS. Derivatives would all be canceled, all the funny financial products gone.

We would maintain real debts by businesses and consumers, mortgages, and the national debt.

But we would cancel all interest payments from now on. Of course, savers would also no longer receive interest, but keep in mind that the average American loses far more in debt service than he gains in interest on his savings.

If debts are repaid, the money supply deflates, to maintain a stable money supply we would give out as much new credit as there are loans being payed off.

What would this mean? A direct end to the depression, because enormous purchasing power in the economy would be released. Consumers would be twice as rich, prices would collapse because capital costs are gone.
The credit of the people borrowing from the banks would massively improve, immediately putting an end to solvency problems of these banks. There would be no more bailouts.

The Government would have an immediate windfall of 700 billion per year, which is what it currently loses on debt service. But the Government, too, loses half of it’s disposable income to capital costs through prices. Not to mention the increased tax income from an exploding economy. So it is likely that without any austerity the deficit would disappear quite soon.

The banks would be reorganized, many people, especially the expensive ‘traders’ and ‘investment bankers’ would all be gone. All that would remain are the people running day to day banking services. Therefore the costs of these banks would be much lower. These costs can (and must) be passed on to debtors, but they would be low.

I believe that managing a risk free loan like a mortgage should cost no more than max. 10% over thirty years, so you would pay maybe 220k for 200k home.

There would be no more bailouts, no more bonuses. The wealth transfer from poor to rich would end over night.

All these benefits would go to Main Street. It would imply a major decentralization of economic power, which is also a key point.

Of course, it would disown the Trillionaires, but hey, I say enough is enough.

Now, I’m not saying that this what we should do at this point. This is just a thought experiment.

It shows it is not debt that is the problem, but interest. It shows that it is not a full reserve gold banking system we need, but interest free credit.

Of course, with this analysis we have not addressed inflation, which is strongly on the minds of most proposing full reserve Gold backed currency. We will deal with that next time.


Posted by Mr Thx Tuesday, August 28, 2012 0 comments

Aug 06, 2012 - 03:38 PM

By: Graham_Summers


Best Financial Markets Analysis ArticleMany people have been writing in to ask me, “why are you focusing on Europe so much? Who cares about Spain?”

The short answer is that everyone should care about Spain. Spain could potentially take down the banking system in Europe, which would mean the US facing a Financial Crisis at least on par with 2008.

How would this unfold?

To understand this, you need to understand how the European banking system works. By now everyone knows that many European countries have massive debt problems: Portugal, Italy, Ireland, Greece, and Spain, the infamous PIIGS.

Well, when these countries issue debt, it is mainly the European banks that buy it. So let’s say Spain issues €5 billion in new debt. Most of that will be snatched up by Spanish banks or some other European financial entity.

This bank will then park this debt on its balance sheet as a “senior asset” or an asset that has the least amount of risk (I realize this sounds insane given how bad Spain’s finances are, but this is how the banking system’s “risk models” work).

The bank will then use this Spanish bond to backstop loans to Spanish businesses, developers (not so much any more) even student loans: pretty much every other type of loan the bank might make.

On top of this, the bank will also use this Spanish bond to backstop hundreds of billions of Euros worth of trades.

Do you see the problem with this? If Spain defaults, one of the most important “assets” used to backstop its loan and trade portfolio goes up in smoke. At that point the bank is essentially insolvent and would have to liquidate its loan portfolio while trying to stave off a bank run (as you’ve likely noticed, Spain is facing bank runs galore).

So what? Who cares? This is Spain’s problem right?

Wrong. This is Europe’s problem as European banks across the board are sitting on Spanish debt: Spain’s sovereign bond market is €2.1 trillion in size.

So if Spain defaults, then a heck of a lot of EU banks (and some US banks for that matter) will see some of their “Senior Assets” go up in smoke, rendering them insolvent. This in turn could spread like wildfire throughout Europe’s banking system.

This is why the Spanish bank bailout was so rapid (it took only one weekend). EU officials know that if Spain’s banking system goes down, most of Europe will as well. This is also why EU officials continue to give money to Greece despite the clear fact that Greece is completely and totally bankrupt and has failed to meet fiscal demands placed on it throughout the EU Crisis.

Indeed, I wager most people at some point have asked themselves, “what’s the big deal about Greece? It represents only 2% of the EU economy. How is it that a country this small is still an issue after TWO YEARS!?!”

Now you know. By some estimates, Greece’s true debt exposure is north of $1 trillion. Lehman brothers had $649 billion in assets when it collapsed. Can you imagine the impact that a $1 trillion vacuum would have on the EU’s banking system (a banking system which backstops well over €200 trillion in derivative trades by the way).

How would the debt implosion of Spain’s $2.2 trillion in sovereign bonds affect the financial system? What about the effect of Europe’s $46 TRILLION banking system collapsing?

It would be Lehman by a factor of ten, easily.

So what does this have to do with the US?

The US banking system is $12 trillion in size. And this backstops over $220 trillion in derivative trades. Of this $220 trillion, 85% are based on interest rates. So…

If Spain, or any of the other PIIGS default, and Europe’s banking system (which is $46 trillion in size by the way) crumbles, interest rates across Europe will spike as the EU sovereign crisis spreads.

At the same time, Treasuries will spike pushing interest rates close to ZERO in the US, if not into negative territory (this happened when Lehman went under).

This in turn would very likely trigger an implosion of all those derivative trades based on interest rates. This blows up Wall Street and likely results in bank holidays and the stock market even being closed down for a period.

This is why Europe matters. This is why Spain could wipe out your 401(K). This is why European leaders are so frantic NOT to let a default occur in Greece or Spain (remember, the Spanish bailout was rushed through in less than a weekend).

In simple terms Europe is a HUGE deal for everyone. We’re not talking about some distant region far off in the distance that we will watch go down from our decks. We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.

This is why I keep talking about Europe so much. And it’s why I’m more concerned now than I was in early


Posted by Mr Thx Tuesday, August 7, 2012 0 comments
Related Posts Plugin for WordPress, Blogger...

Sekapur Sirih Seulas Pinang

My photo
Alor Gajah, Melaka, Malaysia
Sharing is caring. This blog is about sharing information that available in web space. The information is related to Finance, Business & Trading.

Enter your email address:

Delivered by FeedBurner