T Nation

Bunch of Turkeys!


Vicious selling continues on Wall Street and the pathetic action of the financials is dragging down the entire market. So far, the banking index has declined by roughly 83% from its highs! As I have said for years, banking is the only industry which is always in a state of permanent bankruptcy and people have finally realised that the emperor has no clothes! We can thank the fractional reserve banking system for this mess; a totally fraudulent system which allows banks to create multiples of credit compared to bank deposits. This is the reason why I urged you repeatedly to stay well clear of financial shares and I hope that you followed my advice.

Today, investors in financials have lost nearly everything and before this is over, I suspect the majority of banks in the West will be nationalised. This would mean a total catastrophe for those who invested in bank stocks or corporate bonds. So, no matter how strongly your private banker pushes you to load up on "cheap" financial stocks, please DO NOT go "bottom fishing" in this bankrupt industry. Banking is no longer a growth industry and financials will disappoint investors for many years. Furthermore, if you have any exposure to hedge funds, structured products, accumulators or derivatives of any kind, I sincerely urge you to get rid of all this highly toxic garbage. Such ponzi schemes were very good for the private bankers (due to the huge amounts of commissions involved) but they are a disaster waiting to happen. Today, our planet has roughly US$600 trillion worth of derivatives and this is roughly 10 times the size of the global economy! So, please get rid of your derivatives based "investments" immediately.

Even though the financials are getting killed, our fundamentally sound stocks in solid sectors continue to report good operating results and their stock prices are much higher than the lows recorded last fall. So, this is a positive divergence and shows that the market's internal breadth is improving with fewer stocks breaking down to new lows. Another positive sign is that the Asian markets are faring much better and are nowhere near the lows recorded last fall.

During such turbulent times, it is worth remembering that your stocks represent partial ownership in underlying businesses with real assets (plants, reserves, land, machinery, technology, cash and human resources). And even though the stock market's current appraisal is not favourable, it has no connection with the intrinsic value of your holdings.

Various central banks continue to steer this economy like drunken sailors and they are injecting TRILLIONS of dollars into the system. I would argue that many nations in the West are already bankrupt (US, Britain, Germany, Spain, Iceland and Ireland come to mind) and the ONLY thing they can do now is to print even more money. For example, America's total debt is worth US$54 trillion and there is no way the US can ever hope of repaying its debt in today's money. In other words, either the US will default (highly unlikely in my view) or it will print and inflate so that this huge mountain of debt feels much smaller in the future due to the loss of its purchasing power. Remember, the best way to make debt more manageable is by inflating the supply of money in the system. And this is precisely what the various central banks are doing.

It is worth noting that nations like Germany and the US have already started using the printing press and more nations will soon follow. When the entire planet is covered with oceans of paper "money", its purchasing power will sink and hard assets will sky-rocket. At least this is what has happened throughout history. So, please don't be fooled by this temporary contraction in hard assets and hold on to your positions. If anything, take advantage of the ongoing fire-sale and if your financial situation permits, convert more cash to quality assets in the resources sector.

A bunch of turkeys have hijacked our monetary system and all they know is how to print money. Rather than let the market clear itself out, central banks continue to use tax payers' money to bail out insolvent institutions. This brilliant strategy has NEVER worked in the past and it will not work this time around. Instead of robbing innocent people of their savings, the establishment must allow the weak banks to go bust. For example, if Citibank is on the verge of collapse, then the US Treasury must let it go bust! All Mr. Geithner needs to do is to protect the customers of Citibank, allow Citibank's investors (shareholders and bondholders) to suffer and sell the bank's book to another institution. This is all that needs to happen. This way, depositors will not lose anything and only investors in Citibank will suffer - and they should! Why should the public share the losses with these investors? When Citibank did well in the past, did its shareholders and bondholders distribute the profits to the public? Of course not! So, why should the reverse occur now?!

Personally, I find these bail-outs absurd, unethical and a total waste of valuable resources! Who gave these politicians the authority to act like investment bankers? Mr. Geithner is not a qualified 'merger & acquisition' expert, so how does he have the audacity to use other people's money to take over insolvent banks? Likewise, Mr. Bernanke is now using American taxpayers' money and buying distressed debt! I find this outrageous! Is he going to act like a debt collector when people default on their loans?

Mark my words - the establishment is only making matters worse and prolonging the pain. Moreover, by printing insane amounts of paper, the politicians are setting everyone up for an inflationary nightmare! One thing is for sure - before this drama ends, the viability of the US Dollar as the world's reserve currency will come under question. When the US Dollar starts to implode, hard assets will go through the roof. Remember, commodity prices went ballistic in the late 1930's as well as during the 1970's. We should expect similar action in the years ahead.



fractional reserve isn't all that bad. backing by the fed is the biggest bunch of shit.

If they had to seek private insurance for deposits, and we let them fail, the industry would regulate themselves. Things would probably work quite nicely


Does it seem odd that a bank should be able to make money on money they don't really have?

Why can't I do that?


You can. Somebody has to back them. Either by insurance or with the cash.


If it's backed by 100% cash then it isn't fractional.

Fractional means exactly that. I have $1 and I lend you $10 and collect the interest and fees on $10. There is a 100% profit on my part.

If my customers make a run for their money I go bust unless the gubmint bails me out. Everyone should just be in the banking business.

What happens when someone gambles with money they don't have and then lose? This is why fractional reserve is a bad idea. Banks are too heavily leveraged and when they fail they take everyone down with them.


We should destroy the federal reserve.


the only part of what you just said is gov't bailing them out. people can make deals with whomever they like on any terms they like. just don't make the fed the bondsman or insurance agent.


they could be limited to issuing competitive currency.


The whole concept is a crock. The government asks this centralized bank, that has no standard backing it, to print money, they don't have. Then the government owes them the money they printed out of no where that really isn't backed plus the interest.

down with the system.


Wait a second...let me correct myself:

Under fractional reserve I have $1 and lend you $10, you pay me back $10 plus interest and fees and I keep $9 plus any interest or fees.

That is over 1000% profit. How is that morally justifiable? that is inflation too!


But it is not as simple as that.

If a bank creates money it is like counterfeiting, i.e. everybody else's money is worth less because of it and that is definitely not ok.


I think you guys are missing the point. money is only worth something if people choose to accept it in trade. If there are competitive currencies, we have no need to worry about the gov't inflating the money supply.

No one will accept it or they will require quite a bit more for the same product. The point of competition is that the product (currency) will be of better quality than we have today and those offering it will not want to mess with it.


I am actually surprised this is coming from you.

profit% has nothing to do with morality, nor does it have to be justified.

think of currency like any other product. competition will lead to quality currency. There will be a profit motive to keeping a currancy stable. let the best currancy win.

Even Jefferson and Madison understood this. When originally opposed a federal bank they intended states to offer currency and compete with each other.


What are you? A banker?


Great article. Thanks!


Funny you should say it's immoral. That's the exact stance the church had in Europe at the turn of the century. It was seen as immoral to charge interest because it was seen as a form of usery. So it was illegal.

The templar nights were the first and only group authorized by the church to charge interest. So they did. They also created first bank type systems with credit etc etc etc...


That is not the part that is immoral.

That they demand interest for money they do not even have, that is immoral.


no ties to finance. just thinking unemotionally.


Wrong. You do not get to keep the $10 you get back: it is not this "over 1000% profit" that you claim. It disappears on repayment, though if you still have the $1 you are (in your example) now entitled again to lend $10 off of that one dollar.