The Magic of Banking – The European Banking Crisis Explained

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The world stands on the edge of the abyss. A financial crisis of its own making. How did it come about? Where did it all go wrong? What can be done to salvage the coming collapse of banking and fiat currencies across the world?

Banking and monetary disasters are not new. Historically, such fiascos have been limited to very few major countries at any one time, the most well known and textbook case was the Weimar Republic. Of particular importance because Germany is a major economic power. Minor banking and currency collapses are simply part of world history.

They have been so frequent that there is a strong collectors market in government bonds, the actual paper. Works of art in their own right. In fact, the more ornate the bond script and artwork usually the more unreliable the issue (mostly a thing of the past however as the modern world is now driven by electronic currencies).

What is so different today from the crises of yesteryear? The new phenomenon is worldwide. In the past, there has always been a fall-back position. In the nineteenth century, sterling was the reserve currency of the world, while in the twentieth century it is the US dollar. Still the case today, but hanging on by its metaphorical fingernails.

In 2008, the first terrible rumblings of the looming financial crisis were felt. The banks were broke and the world knew it. As banks are built on faith and confidence when that ephemeral foundation crumbles, so too does the system. Central bankers are the last resort lenders; this is not just a glib academic phrase; it is the central bankers’ raison-d’être. These central banks have no money of their own but can create money with political support. In days gone by they would turn the printing presses, actually manufacture notes and transfer them to anywhere the fiscal hole needed to be plugged. Today they are typed into a computer and money is created out of thin air. The technical term is quantitative easing. More vulgarly money printing, perhaps more accurately: counterfeiting. This would be the term used if it were carried out by anyone but a central bank. Political support means taxpayer underwritten.

Give anyone a machine that can print money and they will use it. Not with any malfeasance in mind, usually by governments with a view to the common good. But, there is always a political dynamic, always an election pending, always a mini crisis that needs addressing, always a special case. The State can only find money for its extraordinary self-imposed responsibilities with money. As governments extend their remit, they expand their requirement for it. They can tax or borrow, but they are not immune from market forces with these two facilities. Too much tax creates a fiscal drag on economic growth, as does borrowing. In this, governments face the same restrictions as a business or indeed the common man. The recourse, therefore, is to money printing.

This printing takes the form of bond issuance in short debt. Again government is not immune from the responsibility of debt servicing, a coupon must be paid. So, even more fiscal drag, just another term for stifled economic growth.

This pamphlet is designed to help the interested, educated layman to understand the problem rather than solve it. Without an understanding of how it came about no solution can be found.

It is very clear now the 2008 crisis was not understood, this means none of the problems have gone away, indeed they remain but are much worse today than they were then.

This booklet will give you a good understanding of how world finance works and why we are heading for a financial crisis, unlike anything we’ve seen in the last 50 years.

The Magic of Banking