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Finance: The World Financial System-How It Really Works: Updated 11/28/12 By Lonnie Hicks
Posted: Monday, December 12, 2011
Last edited: Wednesday, November 28, 2012
This short story is rated "G" by the Author.
How Does The World Financial System Really Work and How Does It Affect US?
Updated: 11/25/12 The World Shadow Banking System: The Video
Updated: 12/13/11 So smarty pants (I hear you say) do you have any ideas about how all this can be fixed?
Updated: 12/18/11 The British fire salvos aimed at the big banks. What will the US do?
Updated: 12/20/11 The Federal Reserve Bank proposed reforms. (Make me laugh)
Updated:12/23/11 Congress engages in insider trading and enrich themselves doing so.
The issue at hand is how the world financial system works.
What are the drivers?
First there are three actors: Governments, the middle class and the banks.
The middle class is the major producer of goods of value in systems; they are the only ones who produce anything of value in terms of actual goods.Governments produce valuable services and the banks and Wall Street-like institutions produce very little but trade and make money on the goods produced by the middle class.
The main driver in the system is population.
The explosion of population around the world was made possible by the use of oil and oil products. From a population of around two billion, a number which had been stable for centuries, with oil and petroleum we now have a planetary population of 7 billion in a little over 100 years. This is tremendous grow and is now exponential growth. The population is now expected to see accelerated growth to where it may double every 50 years. We will see population explode to 9 billion souls in less than 30 years!
This overall population growth has occurred in less than 200 years, producing an enormous burden on governments.
It has produced life style changes of a dubious and unsustainable nature. It has produced famine, war, strides in education true but all in all it has been a mixed bag and will likely not last.
But it is also clear now also such “strides” endanger the planet and threaten the very existence human race.
So how did this occur and what does it have to do with the world financial system?
This explosion of population also created a concomitant need for food, for services, it also resulted in massified institutions.
The massification of society from its rural roots to people crammed in cities created huge demands on governments for revenue, for planes and tanks to fight wars over resources and to keep their populations happy least they be toppled by revolution and uprisings.
Governments needed more than taxation money from the middle classes and turned to the banks as a way of getting their hands on the needed revenue.
There is this partnership between banks and government.
Banks offered ways for the government to get at middle class money beyond taxation. That is, we put our money in the bank everyday and that money is loaned in turn back to us, but, most of it goes to loans to governments.
This is the pattern all over the western world.
In order to get the funds governments have had to promise banks that any money lost to commercial loans or even government loans would guaranteed by those very same governments and be paid for by more taxation or by growth of their economies.
So banks have been guaranteed an income in exchange for their continuing to pass along to government more and more of our money which we have placed into those banks.
All this was supposed to work given steady growth of an economy, and hence more wealth and jobs and taxes and this would make everything ok.
More growth means more taxes for governments and more wealth being placed into the banks and the governments would get the money back to finance more growth and to pay for more services of a ballooning world population.
All this works, somewhat, until the banks get greedy and keep more than a fair share of the wealth, or until population grows so much that taxation cannot keep up with the needs of that very same population. There busts follow booms, follow busts.
We are now at a situation where no amount of conceivable growth can meet the needs and population driven needs and costs cannot be made up by additional taxations on the middle class.
We at a point where the third alternative of exploiting third world populations for their resources and cheap labor also cannot make up the difference either.
We at a point where peak oil has occurred and that resource is running out and becoming more and more expensive to dig out of the ground, to the point where we are willing to dig up under the Arctic shelf to find more of the stuff to keep this balloon going.
In Europe the debt crisis, where the banks are bankrupt and have, in turn, bankrupted the governments who guaranteed all of the loans these banks made and these governments have had to, in turn, try to get money from the populations by more taxation, or by reducing the costs of government drastically, which is fact another form of taxation on the middle classes.
These are the so-called austerity programs now being foisted upon the middle classes in the entire western world.
This is happening as well all over the world, east and west, in the United States as well.
Greed has exacerbated the situation where the super-rich are tryingto save themselves and their wealth effectively now have taken to hoarding middle class deposits, threatening not to loan money to governments, or now use it to exploit and dominate domestic governments or use it to exploit the poor, and/or third world countries to increase their wealth.
Governments tolerate this because they are hoping the rich will loan part of the profits from all this to these governments to help them keep the wolf from the door.
None of this mind you, in fact, really works and is a gigantic robbing Peter to pay Paul scheme which periodically collapses.
Now there is a second banking system at work here as well, that is the central banks.
Every country has a version of this hidden shadow banking system.
In the US this is the Federal Reserve Bank.It is neither federal, nor governmental and is fact is the cartel of the largest banks in the United States-Wells, Chase etc.
In 1917 by machination and subterfuge the US government was duped into creating the system where control of the currency, printing money, is given over to these private banks, who of course, use that power to enrich themselves.
Their power is the power to print money, literally print money which they then loan to themselves at low interest rates.
This is the manufacturing of money at no cost except the cost of the paper it is printed upon. The dollar bill is not a US treasury note, but is a Federal Reserve note. This should tell you something.
Governments around the world have adopted this shadow banking system because the central banks agreed to lend that paper money to fund the debt of the governments involved. The governments then used the printed money to keep up with the demands of their ever growing populations and to promote growth by giving money back to the super-rich in the form of no or reduced tax rates.
This is the unstated deal between governments and banks.
This is a round robin using middle class money: a ponzie scheme.
But, this too, is a hidden tax on the middle class in that if growth does not occur then inflation is a result; inflation is a tax upon the middle class in a no-growth scenario where wages are flat. US wages have been flat or declining for 30 years while prices have gone up.
If this all seems confusing it is because it is not only confusing but makes no financial sense what so ever.
Note also, that governments loan money to governments as well.
The Chinese have loaned the US govenment trillions. This system is, in fact, a world order where the middle class populations of every country support the governments and the banks.
Financial control is now more important than political control; in fact, political control is now subordinated to he who has financial control over middle class populations who really produce the only real wealth on the planet.
All of this is, therefore, as I have described elsewhere, in the end, a gigantic scheme for a few to enrich themselves at the expense of others, using other people's money, that is the money of the middle classes who everyday give the banks their money, their deposits every day.
Without that latter action the system fails because the only real money lies with the middle class.
But what to do?
Population, is the major driver in all this, and population it seems will continue to grow exponentially while resources only grow arthmetically. This fact is ominious.
We examine possible solutions tomorrow. And there are solutions.
In preparation I have written a bit on this on this site in "What America Needs to Do to Survive" and in my blog on "Obama- The Report Card."
But there is more tommorow beyond these items written over a year ago.
First in the area of solutions is to examine why this system fails so regularly. There, are of course, many reasons. Here are a few preliminary ones.
1-Putting banks in control of other peoples money and no regulations is a lousy idea and has failed.
We have to end this. See my blog on this site entitled "The Big Banks: What Are The Alternatives."
2-Much of the issue is unregulated greed and this in turn is fueled by our banking system is based on the fact that every one in the system is seeking to make a profit on every transaction. This led to banks selling the same mortgage 50 times (derivatives) over to various customers, something that makes no sense financially or otherwise and is outright fraud; which the banks fully knew as they placed big bets that these derivatives would fail and they did. In fact the banks had a financial interest in that failure through "re-insuranace schemes (AIG.) This is what is known as "hedging."
And these phony derivatives did fail and the banks made bllions on them this over and above what they got in bail outs.
That is why they recovered so quickly. They are betting on failure again, betting that America will go bust and will get rich if America does and are in a position to make sure their bets come true by their daily manipulations of the markets. Governments tolerate this because they get some of that money demanding that banks buy say US treasury notes.
But the damage done in 2008 did not go away--over 700 trillion in these now worthless derivatives are still out unpaid and is debt hidden on the balance sheets of banks around the world. (Some estimate the number, if we include private equity funds, at a quadrillion dollars.)
3-The last of these preliminary solutions include lets get rid of or at least create a non-profit banking system with real controls on the for-profit banks.
4-Stop giving the predatory banks our money everyday and put our money in local banks with the proviso that this money be invested locally to create jobs locally.
The state bank of North Dakota is an example of a state-owned, not profit bank that has been in place for decades and really serves the citizens of that state as opposed to exploiting them. That state has no recession.
More over California and cities are not looking into municipal and state banks where contagion of profit with people's money is taken out of the equasion. See my article "The Big Banks-What Are the Alternatives?" on this site.
5. Launch a federal program to fund local banks through the Community Reinvestment Act which currently exists. This act requires that banks set aside 1% of their deposits for local investments and local economic development. Since small businesses produce most of the jobs in this country, not corporations, it makes sense to put 150 billion into this program.
Currently the conservatives are trying to kill this program but it in fact should be expanded. A catch, however, is that the presidents of the big banks and the federal reserve actually run this program and might resist more money being put into this effort. It should be done regardless, and is a fight worth fighting for.
Solutions UK style. These will be imitated in the United States. They are logical ones to pursue.
For an peek at the round robin process I have described above see the NY Times article below. The authors describe this in the context of governments, and banks trying to deal with the Euro Debt Crisis and in doing so we get a rare peak behind the green curtain at OZ.
Interesting article. I agree with your opinion that a relatively few people have designed this elaborate system in order to enrich themselves. The average person on the street is either too busy to look into this money-making exploitation scheme, or else not smart enough to see through the facade. Occupy Wall Street is composed of people who are on to this 1%, but the 1% controls the police forces, courts,press etc. and so has the 'muscle' to legally muzzle this movement. As in the rest of the world, it may take literally extracting these leeches from their host. Well written.
a "wealth" of information imparted for the "welfare" of the masses...who but demand "credit" when they have none...nor job...nor desire to EARN the credit...it is a dance with the devil... i am afraid.