THE WORLD’S BANKING
& MONETARY PROBLEM
It’s not a secret that national debts across western nations has become unsustainable and has more than doubled in the last 10 years. Along with the failure to fix-up the international financial system after the 2008 GFC. It is just a matter of time before the next financial crisis will occur, but this time our governments will not have the cash to revitalize the banks.
Evidence clearly points out that the Central (Federal) Banks encourage reckless behaviour as witnessed by the bankers (executives) across the entire world. The current banking system is called “Fractional Reserve Banking” – and this is one of the major problem in today’s global monetary system. In reality, the truth is that fractional reserve banking amounts to violating the nature of the law of property rights.
This banking model (fractional reserve banking) is based on the idea that people are very unlikely to demand all their deposits back at once. Banks in USA, UK and Europe have typical reserve ratios as low as 3%; so even a small loss of confidence can threaten their survival, so it is no wonder that most if not all banks have failed stress-tests over the past 5 years – and this applies to the majority of all the Banks around the world.
The ratio of cash to total assets was 100% before the development of “Fractional Reserve Banking”, in the 1950s banks were holding around a third of their overall assets in liquid instruments, this included cash and government bonds.
Then the liquidity ratio was cut to 12.5% in 1971 along with the removal of the gold standard in 1972, and finally the liquidity ratio was abolished a decade later (1980s). So, prior to the 2008 GFC the banks in Europe, Canada, Australia, UK, NZ, and the United States were holding on average less than 1% of their assets in actual cash.
In other words, fractional reserve banking truly means that a bank lends out money that clients have deposited with it. Fractional Reserve Banking thus leads to a situation in which two individuals are made owners of the same thing.
The fractional reserve banking model creates a legal impossibility if it was ever tested in a court of law. When this model is broken down to basic terms it shows how the borrower and the depositor become owners of the same money. Fractional reserve banking has lead to contractual obligations that cannot be fulfilled from the outset in practical terms, but it works in theory as is still practiced today.
How does it work? When the system starts to break down – the bankers start printing more fiat currency to lend out via the digital process, so these days they do not even print physical money any longer – they simply add numbers on the computer screen as we have seen in recent years of historically low interest rates and in many cases the absurd zero interest from our debt driven economy.
Any contractual agreement that involves presenting two different individuals as simultaneous owners of the same thing (or alternatively, the same thing as simultaneously owned by more than one person) is objectively false and thus fraudulent. The “fractional reserve banking model implies no lesser an impossibility and fraud than that involved in the global trade of “flying pigs” and or the lie that “money grows on trees.”
But, fractional reserve banking misdirects people’s attention away from the more basic problems with our banking and monetary system that causes financial crises and market volatility, which is that this sector is unorganised – caused by the obscenely inequitable distribution of power, and the wealth which follows from that power in the hands of the (merely nominally) private sector bureaucrats we call “financial elites.” This is evident in the UK, the EU, Canada, NZ, Australia, the USA, and most other nations around the world.
The main argument we raise with today’s banking system is that it provides too much privileged power in a society to bankers relative to everyone else. This power, which can be observed in the ridiculously high compensation for banking executives relative to the actual work they do, which in reality is not more than any person from other sectors do – that actually create or make real things or develops and shares ideas for people and society.
The power that the bankers hold can conceivably be attributed primarily to the privileged position such individuals have as executives in the banks that have been entrusted in our society to implement the otherwise mundane task of creating and destroying money, an enormously useful social contrivance to facilitate the efficient functioning of an exchange-based economy through a process of creating loans and collecting payments from them.
The 2008 GFC and resulting ongoing recession of economic activity in most of the industrialized world since then – is the main problem we raise to support that such a privilege for bankers is not warranted and that it is counter-productive to the efficiency purposes of the monetary system for the global economy.
Financial exclusion remains as another major problem in this unorganised sector (Banking). Since the 1970s the bankers started creating an unorganised sector from the removal of the gold standard and liquidity ratio, so today the structural solutions to provide banking to the unbanked and under-banked people of the world are very expensive for the legacy banks.
Expansion of services by the legacy banks is not very easy because of the special needs, conditions and situation of this unorganised sector, thus in 2018 we have over 2 billion people all over the world (including Australia, USA, UK) experiencing financial exclusion.
At another level this unorganised sector (banking) is shown in the central weakness of the international monetary system, which is the European banking sector, and its relation with the incomplete and highly unorganised institutions of the Eurozone.
The European Central Bank has been able to avert disaster so far, but the policy-makers and bankers remain acutely aware of the underlying vulnerabilities. Europe’s banking problems need to be dealt with — inevitably at the cost of significant pain and suffering — and at some point in the near future a moment of stress will at last tip over into a crisis that ends the Euro. And when this takes place it will have a derivatives domino effect throughout the global monetary system that will make the 1930s great depression look like a picnic.
Economists from the Austrian School of economic thought have all along predicted that the current system of paper currency, or “fiat-money,” is an economically and socially destructive scheme. The current fiat credit based system is not backed by gold or any real asset as it was before 1971, it is debt based on the taxpayer being the ultimate guarantor of all the fiat currency in issuance.
In other words, our “debt based” economic system is an irrational arrangement which in the long run, (that has finally arrived) will have a disastrous impact on the global economy!
“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented …. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again … If you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.”
– Sir Josiah Stamp, Director of the Bank of England, 1928-41
Most market analysis suggests that people from all around the world have become dissatisfied and distrust their bank for varying reasons, such as: fees are to high, lack of quality customer service, inefficiency, unfairness. and a greed culture within the banking industry.
We are witnessing a worldwide backlash against the Banks and regulators, for example: ordinary people along with businesses are being ripped off worldwide through exchange rates and high ATM and card fees.
This is a trend across all western nations and the rest of the world. The recent annual report by the United Nations Conference on Trade Development (UNCTAD) is testimony to our conclusions: the unsustainable rising debt, rapid increasing inequality, the ignoring of the rule of law and absence of necessary financial regulation, all have led the list of economic threats in 2019-2020.
Global Central Banks understand the value of Gold and Silver Bullion, especially as a hedge against inflation. Still, they are unwilling to allow a free market to determine the price of the precious metals, and to do so, would put economic control in the hands of consumers instead of Central Banks.
In actual fact the truth is, that while the Federal and Central banks have been able to postpone the day of reckoning, the inevitable collapse of the current Fiat monetary system will be far worse than that experienced during the 1930’s Great Depression.
Our governments, at will, have been allowed by all of us to expand their authoritarian rule and control of our lives.
The most important investment we can make is to do whatever is humanly possible to protect our liberty and freedoms for all of humanity, this is the responsibility of every one, as Plato stated back during the times of classical Ancient Greece; “One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.”
The time has now come for us to get engaged together as one global family regardless of status, education and or religion to reignite an interest in the principles of liberty, harmony and peace for all on our shared planet earth.
The objective of money or currency has remained the same since first recorded in China around 1000 AD, and will continue to remain the same in the future. The paper Fiat currency system is rapidly disappearing, definitively transforming the financial landscape worldwide.
Every financial instrument used in today’s monetary order is virtual (digital), e.g., credit cards, online banking, dematerialized bonds and stocks.
Average life expectancy for a Fiat currency as history shows us has proven on average to be 27 years.
Fiat currencies have always failed as a store of value. For example, the Euro has lost over 73% of its value on a Gold basis since the single European currency debuted in 1999. No fiat currency has maintained its value against Gold in the past 500+ years.
Let us look at two other examples; Firstly, founded in 1694 the British pound Sterling is the oldest Fiat currency in existence today. Once upon a time the British pound held value equal to 12 ounces of Silver, so it’s worth less than 1/200 or 0.5% of its original value today. In other words, the oldest standing currency in existence thus far has lost 99.5% of its value.
Secondly, the other example is the USD, which has lost the purchasing power that it once enjoyed since 1913 when the Federal Reserve, which is actually a privately-owned Central bank (as are the majority if not all other nations Central and or Federal Reserve banks), took over the US banking system. The reality is, that the US dollar has lost over 97% of its true value and is worth less than 3 cents to the dollar. In actual fact, this applies to most of our current debt ridden Fiat paper currencies that are used today as money.
To understand how Fiat currencies devalue; let’s use the US dollar as an example; you just divide the 1913 price for an ounce (Oz) of Gold which was around $20.00 by today’s price which is around the $1,250 mark – just subtract that from 100 and you get the 97%, or there about.
Fiat Currency devalues by printing more, as they have been doing in order to prop-up the global monetary system from collapsing since the 2008 GFC. The truth is, by printing more money (Fiat currency) it causes monetary inflation, in other words – price inflation. Unlike paper money dollars (Fiat currency), which can be printed out of thin air, Gold does not lose value and or fluctuate in the same manner as paper Fiat currencies have shown and as history can prove.
This applies to all, if not most current Fiat paper currencies that are used in today’s global monetary system. The value of all our currencies have lost their purchasing power, the more a currency is devalued the less you can buy with it because the purchasing power has decreased.
The Fiat currency system we use nowadays that replaced Gold and Silver as money has had a very similar impact as when credit cards replaced cash in our wallets. Fiat money is a currency without any value that has been established as money, by government regulation.
Fiat money does not have use value, and has value only because our governments maintain its value. It is an intrinsically useless object, which in reality is only a legal tender that serves as a medium of exchange, it is known as fiduciary money. The meaning of the term Fiat originates from Latin, and simply denotes “let it be done”.
Mankind has utilized many financial instruments post the “barter days” to create trade movement, products and services. Governments have always endeavored to control and manipulate humanity with monetary systems. One of the extreme examples is the Global Financial Crisis (GFC) of 2008, that was caused by the incompetent irresponsible practices of banks.
The governments indirectly supported the banks by allowing them to lend risky loans and create financial instruments, such as derivatives. The Quantitative Easing that followed the 2008 GFC has kept the global banking and economic system alive.
“Money is Gold, Nothing Else.”
– JP Morgan
While testifying in front of Congress back in 1912 shortly before his death.
History is a factual witness that all currencies eventually fail, meanwhile Gold and Silver bullion have enjoyed a monetary status for thousands of years. All fiat currencies have failed as money – Only Gold Is Real Money!
Moral Hazards of the Banking Instability
- Moral hazard happens when an agent is given an implicit guarantee of support in the event of making a loss – for example insurance pay-outs or the guarantee of a bail-out.
- In the commercial banking industry, the belief that the government will absorb the losses that bank creditors would otherwise bear can lead to moral hazard.
- This may lead banks to take on more risk than is optimal, since they believe they receive any private benefits from the risk taking (i.e. higher profits) while the government will bear the cost of failure (funded eventually by the tax payer).
- Some institutions may be deemed “too big to fail”, as we witnessed during the 2008 GFC – leading to diseconomies of scale and increasing the risk of financial collapse.
- Government guaranteeing the deposits of savers also creates the risk that banks can attract deposits by offering lower rates of interest.
Today, the reputation of the legacy Banks across the world in is in total turmoil. For example, the Libor scandal was a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) and also the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks across the world.
Another example, the Commonwealth Bank Australia (CBA) has agreed to pay the biggest fine in Australian corporate history for breaches of anti-money laundering and counter-terrorism financing laws that resulted in millions of dollars flowing through to drug importers. CBA will pay $700 million plus legal costs after federal financial intelligence agency AUSTRAC last year accused the bank of serious and systemic failures to report suspicious deposits, transfers and accounts.
Furthermore, regulators in the United States and Europe have imposed $342 billion of fines on banks since 2009 for misconduct, including violation of anti-money laundering rules, and that is likely to top $400 billion by 2020.
Pending cases involving missteps in the US mortgage market in the run-up to the 2008 financial crisis (GFC) and a fresh penalty on mostly regional banks for anti-money laundering breaches would result in a surge in fines over the next few years, Quinlan and Associates said.
In a survey conducted by Duff and Phelps, it was estimated that 89% of firms believe that regulations are not only increasing costs for their organizations, but that compliance spending could more than double within the next five years. Here are some compelling stats to put this into perspective:
- Banks paid an excess of $42 billion in fees for non-compliance infractions in 2016.
- The estimated cost for MiFID II compliance set to launch in January 2018 is $800 billion.
- Since the financial crisis of 2008, banks have paid over $204 billion in compliance related fines and infractions.
- One New York bank was ordered to pay fines of $185M for failing to comply with rules intended to protect client assets in 2015.
What’s even more startling is 73% of risk and compliance managers admit they’re not aware of non-compliance penalties of up to $5 million even though it’s their job.
In the recent mid interim report from the Australian Banking Royal Commission it exposed significant failures of the financial services providers that included; failing to act in the best interests of customers, fraudulent documentation and breaches of responsible lending obligations. The social license of financial institutions across the nation should be revoked.
The Incomplete Global Banking Market
An incomplete market exists when the available level of supply is not enough to meet the needs and wants of consumers, i.e. only a proportion of potential demand is met.
- There are around 2 billion adults in developing nations without a bank account.
- Along with 10 million US households without a bank account.
- And over 1.5 million UK adults that are also unbanked.
- There are over 3 million Australians experiencing financial exclusion.
This is only a summary of the people around the world that are experiencing exclusion caused by the traditional banking system. This raises questions, such as, why do the banks exclude people knowing it only creates and contributes towards poverty and crime. Various research papers have identified that the underbanked people are primarily composed of low-income earners and millennials.
Historically, banks and other financial institutions have found it difficult to capture the unbanked and underbanked segment due to constraints in resources and in-house capabilities, it is obvious that the current legacy banks and financial service money operators cannot meet the demand.
The 2008 GFC and aspects of
Market and Regulatory Failure
Many systemically important financial institutions received government assistance during the Global Financial Crisis (GFC) to support their balance sheets and prevent insolvency. These measures eased concerns over systemic risk in the short-term. The cost, however, was that a great deal of private sector credit risk had been transferred onto the public sector in a period when public debt was growing rapidly.
This combination ultimately led to the sovereign debt crisis in Europe and to a resurgence of systemic risk driven by the adverse feedback between sovereign and financial sector credit risk. The inter-play of public and private risk is now one of the foremost challenges facing policymakers and regulators in the world’s advanced economies, yet much remains unknown about the sovereign–financial nexus.
“Banking Is Needed; Banks Are Not. It’s That Simple.”
– Falk Rieker, the current Global Vice President and Global IBU Head for Banking at SAP
The Bank bailouts caused by the 2008 Global Economic Crisis (GFC) played a key role in the management of systemic risk at the height of the GFC has only resulted a short-term fix to a broken down system. These bailouts are a pyrrhic victory as they transformed the relationship between the financial sector risks and sovereign risks, leading to the emergence of a self-referential loop which will eventually contribute to a major sovereign debt crisis in the USA, Australia, NZ, Canada and Europe. The present cross-country heterogeneity that is systematic and worldwide is imploding and heading towards a total collapse of the current western monetary system, in other words, the western nations are in a race to the bottom.
Aspects of Banking Sector and Regulatory Failure
- Irrational Exuberance:
- Bank and financial institutions over-optimistic, herd behavior
- Failure to understand tail-end risks or “Black Swan events”
- Principal Agent Problem:
- Senior bank executives did not understand complex financial instruments such as CDOs
- Executives unaware of the scale of leveraged, risky trading
- Moral Hazard:
- Deposit insurance, provision of central bank liquidity, and bail-outs made it rational for banks to take on excessive risk
- Asymmetry of Risk:
- Gains to private investors, losses absorbed by the public sector
- Labor market discrimination
Now, if men and women were equally represented on the executive level across all sectors, we ask the following question: If there were more women as banking executives would that have helped to avoid the financial crisis (that has led to the unstable geopolitical position we face today)?
According to the latest Global Banking Annual Review (Oct 2019), The last pit stop?‘ published by McKinsey Consulting, the new survey found that more than half of the world’s banks are too weak to survive the next recession and calls for urgent action before the next down-turn in the global economy. The consulting firm said in this latest global banking review that more than a decade after the 2008 financial crisis, banks still have not regained the profitability they enjoyed in 2007. Furthermore, over 60% of banks worldwide don’t generate their cost of equity.
Please refer to our White Paper and other related documents for further information relating to the problems outlined above, aong with the powerful visual added below. These visual reports below have been produced by a dynamic group of people at Visual Capitalist, we consider their outstanding work as a wonderful community initiative that helps people easily understand topics that are of importance but not explained to us by our MSN and or by elected representatives.