WHERE DOES ALL THE MONEY COME

    FROM?  EVER THOUGHT TO ASK?  

 

     Governments (ours included) don't have any

     money until companies and folk like you and

     me give them some through taxes.

 

     Despite often telling folk like you and me to be

      prudent and keep within one's means - they

      NEVER DO!   So they get creative!                           

 

   GOVERNMENTS GET MONEY IN TWO WAYS

     1/      THEY BORROW IT

     2/      THEY CREATE IT OUT OF THIN AIR!

 

YOU MAY HAVE HEARD THE TERM "GILTS" OR "GILT EDGED SECURITIES" Well these are government I.O.U's - posh i.o.u's but i.o.u's all the same - banks are forced to buy them and subject to certain rules they are sold in the Stock Markets.

Governments have become addicted to issuing them - the U.K. now owes about 1.8 TRILLION pounds - which is very nearly as much money as the country generates in a YEAR!!!

   And if you think that looks bad - the U.S.A. owes 

         a staggering 18.6 TRILLION dollars.

 

If you or I ran our finances in this way - we would be

                          BANKRUPT!

 

However; governments have a trump card (nothing to do with him this time!) - they can mess about with the CURRENCY, (£'s; $'s etc.) They all try to distance themselves from direct interference by creating a Reserve Bank (Bank of England, Federal Reserve Bank etc.) - but don't make me laugh!!!

 

Currency used to be backed by precious metal but there just isn't enough gold in the entire planet to back the amount of money floating around the globe now so governments convinced us all to trust paper money - you may have noticed that a British note has "I promise to pay the bearer the sum of " on it along with the signature of the Bank of England's chief cashier but I wouldn't advise popping in to see him about it!

It's pretty obvious that the 65 million people living here today need to use more cash than, say, the 3 million Tudor residents - but along with the reasonable expansion all governments cheat and ours now covers it up with a rather lovely phrase "QUANTITIVE EASING" when they really mean PRINTING MONEY!

 

BANKS HAVE VERY LITTLE MONEY OF THEIR OWN - THEY BORROW YOURS AND LEND IT TO OTHERS AND CHARGE THEM INTEREST FOR SO DOING.

THAT SOUNDS SIMPLE ENOUGH DOESN'T IT?

 

AH HA - THERE'S A CATCH!

 

BANKS  ARE "LICENCED DEPOSIT TAKERS"

THEY HAVE AN AMAZING BUSINESS MODEL -

 

IF YOU OR I HAVE £10 IN OUR POCKETS, ITS REASONABLE TO THINK THAT WE COULD LEND £10 ( or a bit less to be on the safe side) but we are not banks!

 

  Once a bank has the £10 deposited lent out - it can then go and borrow another £10

  and lend that out too - over and over again!

 

On top of this debarcle there are the so called "Merchant Banks" you can't pay your gas bill in one of these, their business is basically to provide wholesale money to other businesses, they do this by parcelling up companies into handy bond sized lumps - which they sell ( or float )  into the markets. This is called "securitising" and the notional value of the share has a direct relationship to the company it's issued on, its profits and assets - if the company does well - the price rises 

 

Now here's a big potential problem - the shiny new bonds issued by the Merchant Bank don't look anything like the underlying businesses - buyers take the bankers word on how risky they are (this is why "Risk Analysts" get paid so well!) but even the best can be easily sold a pup. Also at various times in history, there's been something of a feeding frenzy where folk will buy almost anything in their frantic attempts to snap up deals before someone else does. To make matters worst - I know this takes a bit of believing about the banking world - not all of them are honest! Hahaha!

 

Some bonds were not only backed by next to worthless businesses but were also linked into other bond funds backed by the same worthless stock.

 

           In 2008 banks were vast houses made of cards waiting for a draught!

 

          Lehman Brothers filing for Bankrupcy (Chapter 11) was a Force 10 storm.

 

This American merchant bank specialised in securitising mortgages. Now, normally mortgages are as safe as..... erm - houses! They are solid investments based on a "REAL" asset - and most of the mortgagees are solid investments too, good honest people with a job who pay their bills.

 

All fine and dandy but the problem for folk that sell mortgages - there's only so many so called prime buyers to sell to - so gradually, all in the name of increasing business they start selling to poorer and poorer folk who should never be allowed to take on a big loan even if they agreed to one.  And in the years before the BIG CRASH this is what happened in America - where commission only selling of financial plans was common at the time.

 

The loans could have made sense when they were sold but once the interest rate started rising they quickly became unaffordable and swathes of these SUB-PRIME loans defaulted. Amazingly, up in the Stock Markets, it didn't show for some time - then like the trickle from a broken dam some signs appeared - funds being marked down, bad debt allowances increased but JUNK BONDS were still being bought and sold without even the experts really knowing what was good or bad.

 

On top of that lot there are further financial markets such as Futures & Options and Derivative exchanges which can seem like a casino to ordinary folk (and many players are really no different from professional gamblers) they were originally set up to even out the worst fluctuations of the other markets but now, in many instances, act to drive them - no one wants to be holding a maturing future if the price is wrong!!!   

 

If you were to go into a casino and place a bet - all you can lose at any one time is the money you place as a stake - £5 on number 22 in Roulette say but in Futures & Options you can bet on a share or bond ( you don't even need to own it ) going up or down - your bet covers a period of time. You can get seriously rich doing this but for every winner - there's an awful lot of loosers!

 

All of a sudden - the dam burst! No one trusted anybody - no one would lend or buy so very quickly, some banks ran out of money - or at least they did temporarily - which is BANKRUPTCY. Lehman Brothers were closed down but later sort of part resurrected to recover what could be recovered and you might be surprised to learn that a few years later there was about $30 odd billions left over after all the bills were paid.