Friday, July 13, 2012

Leverage


Charles Smith is a gem. Smart, commonsensical and succinct, his take on economics is spot on. Demystification is key to his analysis and his recent post, The Global Economy: It's All About Increasing Leverage, shows why the current system is certain to fail as nothing is infinite save for the multiverse, a notion the banksters will never understand.

If we look at the global economy with unclouded eyes, we reach this conclusion: "This whole thing is about leverage." If leverage doesn't increase, the system implodes. But since collateral is disappearing from the global economy like sand castles in a rising tide, and disposable income has stagnated, there is no foundation for more leverage.


As a result, the State/finance cartel has only one choice: increase leverage by whatever means are left. There are only two:


1. Allow banks to claim phantom assets as capital/reserves


2. Lower interest rates so stagnant income can leverage ever greater quantities of debt.


This explains why the State/finance Empire in Europe keeps lowering reserve requirements for its insolvent banks. If the reserve requirement is 10%, then you need 100 million euros on deposit in cash to support 1 billion euros in loans. If you lower the reserve requirement to 1 euro, then the contents of a child's piggy bank supports 1 billion euros in debt.


The other game is to claim phantom assets have market values that justify their substitution of cash. Let's say a bank owns a villa in Spain since the mortgage went bust. The market value of the villa is 100,000 euros and the bank's mortgage was 300,000 euros. If the bank sold the villa, it would have to absorb a 200,000 euro loss.


Yikes. Absorbing losses that exceed the net increase in reserves from profits would lead to the lender's insolvency being recognized. The "work-around" is to keep the villa on the books at 500,000 euros. Not only does the 200,000 euro loss go away, the bank now has 200,000 in capital to leverage into more debt. (500,000 in assets minus 300,000 in mortgage leaves 200,000 in phantom assets/capital.)

In order to do this efficiently, the banksters use tech to convert dollars (euros, yuan etc., etc.) to bits and move these increasingly worthless currencies at ever increasing speeds from nation to nation to temporarily shore up never ending holes in the system in order for the house of cards to remain standing.
Hans Brinkerthe little Dutch Boy putting fingers in the dyke comes to mind here. 


As often stated in BRT, if tech ran this way, there would be no fire as creating something out of nothing is impossible save for religion and banking, two systems forever shrouded in mystery to those who lack the initiative to find out why this is so.
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