This week we take a look at the economics of short and long term credit cycles, the roles they play in free markets and we look at the Asian Currency Crisis of 1998 and the Suez crisis of 1875 as demonstrations of how bankers can take control of central banks for personal gain.

Credit Cycles

Short term credit cycles of five to eight years or vacillations in money supply are known to occur naturally in free capital markets. In simple terms, to stimulate economic growth, Central Banks (the Reserve Bank of Australia here) reduce interest rates which increase the borrowing appetites of consumers and businesses. The increase in credit adds to the money supply and increases transactions. However, a surplus supply of money leads to an increase in prices (otherwise known as inflation). A little inflation is a good thing but too much is generally a very bad thing, especially where earnings fail to rise at a comparable rate. So when inflation exceeds the target of central banks, it increases interest rates to dampen the borrowing appetite of consumers and businesses. This reduces money supply which results in a drop in transactions and causes a consequential drop in prices (also known as ‘deflation’).

This credit vacillation is not linear and does not occur along a horizontal plane (see graph below). This is because of the multiple effects of credit and cash supply. This can be explained by imagining that everyone in the world earns $100 per annum. A creditworthy individual borrows $10. Assume they then spend all this capital (now $110) which increases another person or persons’ wealth. Those people will have their original $100 plus a share of the $10 credit spend.

This increases each individual’s creditworthiness and allows them to each borrow (say) $11. Their available capital becomes $111, which when spent, results in an exponential gain for others. This cycle continues and causes a rising wavelength which leads to a situation where, over a period of between 10 and 30 years, the continued increase in money supply drives asset prices to the point where they outstrip the ratio of money supply to wage inflation. Unless rapid action is taken by governments at this point allowing prices to deleverage, and undertaking measures to redistribute wealth, there can be political and social discord.

Economies reach a point of long-term credit downturn when, along with other factors, asset prices far exceed the ratio to wage rise increases – the  so-called asset bubble – and when interest rates have been lowered to their absolute minimum but fail to stimulate growth. At this point governments are forced to allow a period of deleverage, or to use extra measures to stimulate growth. This can involve printing money which is done by central banks who are effectively buying assets such as government or corporate bonds in an attempt to stimulate spending. This is known as Quantitative Easing and is simply borrowing today and paying back from future revenues.

Markets must deleverage periodically to allow asset prices (housing for example) to reset and become affordable again. This may take the form of a long period of low growth where asset prices do not move while wages inflate (a so-called soft landing) or a rapid period of asset deleveraging and recession (a so-called hard landing).

Governments at the point of asset deleveraging have traditionally assisted the process of recovery with wealth redistribution measures. These include increasing taxes on the wealthy to reduce the burden on the poor. However, in western economies whose governments have become accustomed to offering nothing but positive economic news, and whose young voters and wealthy new business entrepreneurs have never known recession, these processes of wealth redistribution are very unwelcome.

Here in Australia the RBA must be sweating the Consumer Price Index at present. With inflation targets of 2-3% which have proven beyond reach except for two quarter periods, Australia’s world breaking period of economic growth may seem a Pyrrhic victory. Faced with the pressures of a housing boom and a cash rate at an all time low, there is little room to reduce interest rates if GDP falls. Added to this concern is an apparent reduction in bank lending which will inevitably lead to a reduction in absolute expenditure and potential recession. You may wonder then, where Australia sits in regard to the long term credit cycle.

The Rothschild’s

Are the Rothschild’s really the bad bank everyone seems to think they are?

The Bolivian President Evo Morales recently announced that Bolivia will “no longer respond to pressure of blackmail from the US Government or Rothschild-controlled international banking institutions”. So what is behind this?

It is commonly claimed that the International Monetary Fund (IMF) and US-dominated World Bank are privately controlled by the Rothschild banking family (among others).

In 1998 I sponsored the University of Singapore to produce a report on the causes of the Asian Currency Crisis. For those not familiar with the event, the trigger was a rapid fall in value of the Korean Won, Thai Baht and Indonesian Rupee which dragged down most other South Asian currencies as investment capital took flight. At the time, the South Korean, Thai and Indonesian currencies employed an unofficial peg to the US Dollar and their central banks used interest rates to maintain their nominal value to the US Dollar. This meant that borrowing from US Banks in US Dollars became very attractive to borrowers in these countries because of comparatively lower rates of interest attached to US Dollar loans versus those available from local banks in domestic currencies.

As time went by this caused a formidable appetite for US Dollar loans and US banks marketed themselves strongly in these countries. In doing so they would have known that the increasing sale of domestic currencies by borrowers, who subsequently bought US Dollars to pay interest and principal on their loans, was going to place an unmanageable burden on domestic central banks to maintain currency value if it dropped. It did, and they tried in vain to maintain domestic currency values by increasing interest rates. However, the effect of this was to dampen domestic spending and cause a rapid increase in domestic loan defaults. The Central banks were eventually forced to float their currencies, breaking their pegging to the US Dollar which caused their respective currencies to tank. In a desperate attempt to prop up domestic currency values central banks used their remaining US Dollar reserves to buy up local currency; this did little except whittle away valuable reserves. When they ran out Dollars, and their own domestic banks were bankrupted by defaulting domestic loans, the US banks called in their debts thus breaking the affected Asian economies. The IMF then came in to prop up the central banks under terms which effectively put them in control.

What we were not aware of at the time we produced the Report in 1998, but what we now know is that one of the conditions for the IMF loans was an agreement by the governments of Korea, Thailand and Indonesia to not to prop up ailing banks. This put US banks in a favorable position for takeover. Interestingly, when the US banks were faced with the same problem following the sub-prime mortgage saga that precipitated the GFC, the IMF did not make the same demands on the US Government. Why do you think the IMF treated the US banks differently to the Asian banks?

What history teaches us – The Suez Canal

Successive generations of adventurers throughout history postulated the untold benefits of joining the Mediterranean Sea with the Red Sea to shorten the Europe to India and East India trading route and removing the risks of passing the treacherous Cape of Good Hope. It took a French engineer, Ferdinand De Lessops, to achieve this feat of engineering by making favorable terms with the Khedive of Egypt to build and then manage the canal for 99 years. It was one of the world’s first and most significant Build Own Operate and Transfer (BOOT) public / private partnerships (PPP’s).

The Khedive had his own motivations for getting closer to Europe and he favored a deal with the benevolent post-Napoleonic French over the ever-powerful British Empire. However, to achieve his aims the Khedive had to borrow, and over time he found himself deeper and deeper in debt to European banks.

The British, who had been skeptical of the Khedive’s ability to pull off such a development, remained skeptical. They might also have been a little jealous at the audacity of the French.

When the Khedive found he was in financial trouble, the inevitable power struggle ensued with the Russians, Germans and French all positioning for control of the Canal. Of course the British, with increasing reliance over the Canal for naval and trade dominance, could never allow a foreign power to control the passage of traffic through it. They also had a benefit over the other governments in that Disraeli, the Prime Minister, had inside knowledge of when the banks planned to act to call in Egypt’s debt, am event that would inevitably see Egypt declare Bankruptcy. And so it was one night in 1875 that the Prime Minister of Britain found himself in a position to strike by buying the Khedive’s interests in the canal.

History tells us that Disraeli acted without the authority of the House of Commons. It was said that he took it upon himself to borrow funds from a trusted banker on behalf of the Government to conclude the transaction. It is likely he knew that to succeed he had to act secretly and without the inertia that comes with consensus. Furthermore, it would have been politically expedient to have a scapegoat in the event that the ruse failed.

There were conditions on Disraeli’s loan that involved Britain taking effective control of Egypt and its Treasury in what would become an economic coup de main. And Britain remained as rulers of Egypt, with control over the Suez Canal, until 1914. The banker who ‘backed’ Disraeli was Lionel Rothschild. And the Rothschild’s have never left.

So, the collusion of bankers and governments is nothing new. And money is control and control of money is something the Rothschild’s understand very well.

“The Unexpected Story of Nathaniel Rothschild” by John Cooper, Bloomsbury Publishing.

When Central Banks are influenced by outside forces

The lessons from we learn from history teach us that central banks can be manipulated and that there are banks and bankers who like to place themselves in positions to take advantage.

The Bolivian President is attempting to prevent his country’s central bank from manipulation by large, wealthy bankers and their institutions that are able and willing to manipulate markets influencing short and long term credit cycles to their benefit. By determining when the credit tap is turned off these bankers can take advantage by selling assets  at their highest price before cutting off the credit supply and calling in debts. This causes asset values to plummet at which time the same bankers can buy back before turning the credit tap back on to ride the next wave of asset growth. This is true of stocks, bonds and property prices.

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