The true story of our ominous doom – Part II

As mentioned, economics is a very easy subject to grasp and understand. Contrary to popular belief you do not need to be a financial wiz to be able to interpret the market, and politicians don’t need to make judgment-calls in response to an economic crisis. You do not even need an education in finance or business, in fact, such an education might very well be in the way. Just look at all the mainstream cornflake economists that never seem to get anything right.

The free and open market works upon a couple of very understandable rules that never change. A couple of axioms that exists no matter what anyone says or tries to do.

Firstly supply always corresponds to demand and vice versa.

Secondly 1+1=2 and 2-1=1

Thirdly, our main source of information and what it all comes down to is prices. Prices is the way we measure how sort after a merchandise is, how valuable, how easy we can buy it, what the cost of making it versus the profit we can make in the end, and so on and so on.

So what happens when someone tries to manipulate the market, or if a government imposes a set of laws to control it? Basically nothing, the same rules apply still; however, the equation may differ a bit. If Government increases prices on something they consider to be dangerous, like tobacco, the real price stays the same. What has changed is the price plus the additional cost. If this additional cost goes to high, smuggling ensues, alternatives pops up, people start making their own. A very obvious example of this is drugs. Government has through imposed illegality and harsh penalties made sure that the price is astronomical, hence large profits can be made. In affect inviting people to produce and sell drugs. If the government happens to knock out a drug lab, prices goes up and the effect is even more criminals. This is why the war on drug never can be won. It’s a mathematical and factual impossibility.

Let’s take a fictive example as well and look at milk. Milk is one of mankind’s main sources of food, we use it for baking, quenching our thirst and lots of other things. Now, let’s assume that a couple of state-employed scientists figure out that milk is the main cause of cancer. After a couple of months of scaremongering in the media our bellowed politicians need to act and ban milk. They make it illegal and introduce a sentence of 10 years imprisonment for selling milk. This would make the milk-price quadruple or even more and since there are a lot of grandmas wanting to bake and kids that wants to drink milk, you have a huge market, and so in steps those that can and are willing to produce and sell milk on the illigal milk-market.

These sorts of distortions of the price, which it’s, all about, only change the preserved price, not the actual value or real price that would exist without the regulations and laws.

And as said, this is always true, no matter what anyone does, no matter how high the taxes goes or what the product or service in a particular case happens to be. It also applies to two very common commodities that is the main culprit behind our economic crisis and why it hasn’t and cannot end any time soon.

The two things I’m talking about are Interest rate and money.

Interest rate is actually the rate of paying back or getting back a certain percentage of money. If interest rates go up, loaning money or taking out a mortgage gets more expensive. If interest rates go down, it gets cheaper to borrow and getting into debt gets more appealing the lower the rate is. Or, in effect, when interest rates go down we tend to borrow and spend more money because saving it is in comparison a less rational choice. The opposite is also true, if interest rates go up, we tend to save the money and make more prudent choices of what to buy.

Money is just paper a certain central bank and a certain country have decided should be the way of doing trade. Instead of changing a bicycle for a carton of juice we use money. It makes trade easier and accumulated wealth can easier be stored and used for investments.

The money is printed and supplied from the central bank. The central bank lends or “gives” this money to other banks or financial institutes that in turn put it out on the market. However, and this is very important to understand, the banks does not lend out that particular amount they get from either the central bank or peoples savings, no, they lend out a lot more. This is called Fractional-reserve banking.
Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. By its nature, the practice of fractional reserve banking expands money supply (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators.

Or, to put it in simpler terms; a bank has $100 in actual money, but lend to customers $2000-3000-4 000. As long as people don’t withdraw all their savings and pay back all their loans at the same time, the system “works”.

And, what is really important, the more people that borrow, the more customers, the more the bank can lend. For every additional $100 another couple of thousands are lend to the market.

If you understand everything written here, you also understand why this crisis emerged. What has happened is that too much money and too low interest rates have created distortions on several markets, most notably the housing and real-estate markets. So when people cannot pay back their loans, when mortgages are defaulting and the limit of spending has been reach, a contraction will happen. In fact it should happen. But in our saviors and great leaders steps and what do they do? They lower interest rates even further, throws more money into the system, borrow loads of more from other countries to spend it because the people are not spending enough.
So tell me again, how can this crisis be over?

As I said in the start, and as I have pointed out so many times, the math does not tell lies. The actual foundation cannot be changed.

Temporarily, this entire “stimulus”-madness can plaster over the basic problems; sweep them under the rug for a while. Not only will such actions eventually fail, but it will make the problems even worse.

Take a look at this little movie to further enhance your knowledge to what I have just told you. Then, to really make sure you understand, read through my text again. If you do this and you come out on the other side with this knowledge you will never trust anything any bank does ever again. You will stop listening to politicians crap and you will finally understand why our current crisis isn’t over.






The free and open market works upon a couple of very understandable rules that never change. A couple of axioms that exists no matter what anyone says or tries to do.
Firstly supply always corresponds to demand and vice versa.

Secondly 1+1=2 and 2-1=1

Thirdly, our main source of information and what it all comes down to is prices. Prices is the way we measure how sort after a merchandise is, how valuable, how easy we can buy it, what the cost of making it versus the profit we can make in the end, and so on and so on.