The Global Financial System:

The Elephant in Every Room

There is a common theme throughout history that the root of everything that is wrong with the world we live in today is related to money and the greed and corruption that comes with it. However, maybe money does not have to be such a trouble maker. Perhaps the issue is the monetary system rather than money itself. In order to fully understand the pitfalls of today’s monetary system, we must first understand the Global Financial System, how it operates and how it impacts on so many aspects of our lives.

What is the Global Financial System?

Let’s start at a “high level” – The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade financing. The global financial system can be divided into regulated entities (international banks and insurance companies), regulators, supervisors and institutions like the European Central Bank or the International Monetary Fund.

I think you will agree that there are a lot of players in there moving across a number of sectors. Our minds are infiltrated with various stories in mainstream and alternative media about who is to blame for the 2008 financial crisis and how we are going to get away from it. However, the simplest way to get your head around all of this is seeing that it is one global system, controlled and directed from the top down. Shifting blame from Government to Central Banks to Wall Street and the City of London is just a distraction.

The system must be seen as a whole, i.e. it includes all the Central Banks, all major commercial banks, BIS, the academic world ‘studying’ economics and finance and the financial press. The success of the Global Financial System is based on the fact that each of the parts are interlinked and each has a role in ensuring the Global Financial System thrives. In order for that system to succeed and thrive, it is critical that all of the ordinary people in the world accept the concepts and rhetoric that enable the system to operate.

Who are the Major Players?

In the autumn of 2011, a study by a number of Swiss scientists revealed that a small number of banks controlled a decisive stake in the globe’s economy. The idea that the banks are a cartel and that this cartel controls the economy is now a scientifically quantified matter of record. The study, called ‘The Network of Global Corporate Control’ (a copy of the study can be found here: http://arxiv.org/pdf/1107.5728.pdf ) was completed by Stefania Vitali, James B. Glattfelder, and Stefano Battiston, in Zurich, Switzerland. The study was published in the New Scientist, a highly respected outlet of mainstream science.

So what conclusions were reached in the study?

It transpires that there are about 43,000 companies that are “Transnational” according to the OECD definition. The top 1,318 seem to form the core or centre-point of the entire group. This core group has three important characteristics.

Between them, they generated 20% of the world’s income. They own each other: The Orbis database clearly showed that most shares of these corporations were owned by other members of the group of 1,318. This means that the biggest, most profitable and influential corporations in the world all own each other and are basically one massive cartel, or even monopoly. The core owns all the other biggest 43,000 Transnational corporations. These companies generate another 60% of the entire world’s income. 80% of the total control was in the hands of an even smaller group of 737 corporations. At the very top, only 147 corporations directly control 40% of the total wealth.

So who might we see in the Top 50 list? Yep you guessed it – all financial institutions of some description (see page 33 of the study http://arxiv.org/pdf/1107.5728.pdf )!

It would seem safe to me to draw the conclusion that financial institutions own substantially all of the world’s large industries such as Oil, Weapons, Pharmaceuticals, Food, Telecom and IT, etc. I am slow to buy into conspiracy theories but the study performed by these Swiss gentlemen seems to be credible, well sourced and scientifically calculated to me.

Why is Control of Money Supply so Important?

Now that we know what the Global Financial System is and we have identified that a small number of large financial institutions effectively control 80% of the world economy, the next logical step must be to understand how that will impact us regular people that just want to live a happy and comfortable life and I think everyone will agree that money is probably one of the most important factors (whether you like it or not) in how we live our lives.

An unconfirmed quote from Nathan Rothschild captures the importance of the control of money supply perfectly:

The “Money Supply” can be defined as the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Economists analyse the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy.

Before moving on, it is important to remember how money is actually created. In the UK, most of the money in our economy is created by banks, in the form of bank deposits – the numbers that appear in your account. Banks create new money whenever they make loans. 97% of the money in the economy today is created by banks, whilst just 3% is created by the government. I have blogged previously about the lack of understanding that exists around money creation (particularly amongst MP’s) but the key point to note here is that banks control 97% of our money supply (in the UK). They create money through lending and that money is destroyed when the loans are repaid and in the middle of all of that the banks make a nice chunky profit through the interest repayments on that debt (we effectively pay rent to the bank while our loans are being repaid).

I would suggest again that readers familiarize themselves with the work of Positive Money (www.positivemoney.org ) as it is critical to changing the society we live in!

However, if you do a quick google search you will find many references to the fact that the money supply is controlled by Central Banks. I disagree with that somewhat and here is why…

As private bankers decide how much to lend and business/consumers seek loans, they determine the money supply. The Central Bank can encourage private banks to lend by lowering reserve requirements or encourage borrowing by lowering interest rates. The Central Bank can also encourage the money supply to contract by doing the opposite.

So effectively we are in a position where private banks control 97% of the money supply in the UK economy and if Nathan Rothschild’s logic is applied, they effectively own 97% of the UK economy as a result. That is why control of money supply is so important and the role of the Central Bank is not really as powerful as it ought to be. The fact the Central Bank operates independently from our elected Government also concerns me as one would have thought that the Bank of England should be 100% answerable to the public. It is instead, I suspect, answerable to the Global Financial System of which it is part!

All of this can be extrapolated out for the global economy!

Why Does This All Matter?

It all comes back to the environment we find ourselves in today. We find ourselves in a position where the Global Financial System was effectively bailed out by Governments when the risks taken by banks back-fired. As a consequence, the economy crashed and private debt was effectively transferred over to the State and the result is that we are being inflicted with austerity measures and severe lack of investment in our infrastructure and the economy as a whole.

However, was this all an unfortunate accident or are we stuck in a constant cycle of boom and bust?

First of all, it is important to understand that the main driver behind recessions and depressions is the contraction of the money supply caused by deflation. Deflation results in the value of money increasing (nice for those who have a lot of it, i.e. the 1%) but wages are declining (not nice for those working for a living, i.e. the 99%). In addition, debts become worth more in real terms which is obviously disastrous when so many people in society are drowning in debt. The contracting money supply causes a collapse of demand in the economy and there you have your recession!

In the old days, the banks could initiate deflation by simply agreeing with each other to call in loans, thereby destroying the money in circulation causing deflation. However, things have evolved significantly nowadays and the biggest risk to the Global economy is the global derivatives market (part of the “shadow banking system”) which in theory should have nothing to do with the money supply controlled by private banks.

Derivatives

Derivatives are financial products that are derived from the existence of ‘real’ assets. A famous example is the Mortgage Backed Securities (MBS), i.e. take ten mortgages, slice them all into ten pieces, mixing a tenth of each together and selling them as one product. The buyer is then owner of one tenth of ten mortgages, instead of one complete one. The idea is that this spreads the risk of default.

Another example would be Credit Default Swaps. Lenders buy guarantees from other lenders. If a loan goes sour, the lender is no longer on the hook for the entire loan. The rationale is again that risks are shared by the lending community.

In reality, derivatives are the main plundering scheme used by the Global Financial System. When you think of the Global Financial System as being such a tight knit community, it adds some context as to why they are trying to spread risk across the board.

It transpires that the top 5 Wall Street banks (JP Morgan, Bank of America, Morgan Stanley, Goldman Sachs and HSBC) are the counterparty for 95% or more of all derivatives worldwide. This means that they are ultimately on the hook for all risks insured in the entire financial sector, globally.

The derivative trade is hugely lucrative for players, as long as things go well. Their total nominal outstanding value was at some point nearing a Quadrillion, dwarfing total global GDP. As if they were not shady enough in terms of their risk reducing function, they are all “off balance sheet” items, i.e. they are not seen as assets and a review of a financial institution’s Balance Sheet will not provide you with any detail on the value of the derivatives! Consequently, nobody really knows what the real asset position of any financial institution actually is, i.e. they might have huge obligations through the derivative trade, but it’s not visible in their accounts.

As we have seen above, the basic selling point or value proposition for derivatives is that they manage and mitigate risks. This helped create the false sense of security with the banks and regulators in the 2000’s that lending had lost its traditional ‘risks’ and that therefore speculation in real estate was no longer a problem and that real value was being created. That created a huge bubble of soaring house prices and as soon as the Global Financial System decided it was time for deflation and contraction of the money supply – BOOM – the bubble burst! There are two reasonable conclusions one might arrive at in determining the cause of the crash:

The Global Financial System powers that be did not understand the consequences of creating the bubble and when the bubble burst it was a shock to everyone in the system; or This was just the latest in a long line of organized inflationary bubbles and deflationary bust cycles which are controlled by the Global Financial System

The truth is that the 1% have benefited greatly from the 2008 crisis and the 99% are paying the price. To argue that that is coincidental is naïve in my opinion.

Conclusion:

It is clear that the Global Financial System controls substantially all of the world’s economy and that all of the games they play will go unnoticed while they are making money and keeping risk low. However, if the risk-taking goes pear-shaped, it will be the Government and taxpayers globally who need to step in and assume the risk and the cost of repaying private sector debts. It is one big game for them but it has a very real impact on the lives of billions of people worldwide.

The whole system has been created to ensure that a small portion of the world population get very wealthy while everyone else pays the price. The greatest challenge facing our society is the Global Financial System. Until we break down the links between Governments, Central Banks and Financial Institutions and bring control over money supply back into public hands, we can never achieve true equality, fairness and compassion in society.

Every progressive political party in the world should be pioneering significant changes to how the Global Financial System operates within their respective countries and at a minimum should be championing policies that ensure powers over money creation and the money supply are taken out of the private sector.

The elephant in every room when talking about economic and monetary policies is undoubtedly the Global Financial System! If you fail to understand the Global Financial System, you will fail at understanding politics, economics, regulation and everything else that is touched by the players in the Global financial game!

It’s time for the 99% to fight back and change the system!

Like this: Like Loading...