The global financial/economic crisis: causes & solutions

Sovereign Life's David McGregor has penned a great summary of the global financial and economic crisis: it's real causes and the only long-term solution.

If you're looking for some clarity as to why the current financial crisis has happened - and what needs to be done to not only fix it, but to ensure such events need never happen again -- then I urge you to read and reflect -- and to download the quoted publication at the conclusion.

The Global Financial/Economic Crisis:
The True Causes And Only Long Term Solution

    As financial and market instability persist, as governments flail and fumble, one thing is for sure - we're on the brink of a most serious economic event - a "depression" which is the BUST component of the typical "boom/bust" cycle.
    Popular criticism is centred on blaming the bankers, the financiers, and to some extent the politicians, and the overall lack of "regulation." And above all there is a consensus emerging that it is ultimately the fault of the free market, of capitalism - and that what is needed to "fix" this problem is more regulation, more easy credit (debt), and ultimately more government.
    Nothing could be further from the truth.
    The cause of the "bust" is the same as the cause of the previous "boom" - the willy-nilly creation of credit out of thin air, for the purposes of creating political and economic advantage in the short term.
    To understand the root cause of this crisis you need to understand the root cause of "boom and bust". Contrary to popular opinion, this is not the result of capitalism or the free market, rather it's caused by the nature of the banking and monetary system itself - the way it operates.
    The boom cycle is achieved by the three pillars of the global financial system - the "Trinity" of the banking "religion" - which are fiat money, fractional reserve banking, and central banks. When the pyramid of debt generated by this unholy Trinity gets out of control, it must be liquidated, creating what we call the "bust."
    Consider these facts:

1. Banks lend out more than they take in. The reason banks
   can and do fail, is because if all depositors ask for their
   money back at the same time, the bank is unable to meet such
   a demand. The money is simply not there.
2. Banks employ what is termed a  "fractional reserve" policy,
   which means they can literally take in $1 on deposit and
   lend out $10. Thus the basis of the banking system we all
   take for granted is fundamentally fraudulent. The money you
   think the bank has on your behalf is in fact not there. The
   business of fractional reserve banking is based on faith and
   confidence. In other words, it's a CONfidence trick.
3. It's fraudulent because banks are lending out money held
   on deposit which is supposed to be "on demand" and are
   effectively making money on money they do not have, and
   have no right to use.
4. Because of this fractional reserve system, and the essentially
   fraudulent nature of it, it's always possible that banks can
   fail - if enough depositors suddenly show up to withdraw all
   their money. And to avoid this "ugly" scenario, central banks
   were created to be "lender of last resort"  - in other words to
   provide the money (out of thin air) the banks don't have, in
   order to make good on their bogus promises. This is designed
   to maintain the "faith" in banks.
5. Central banks manipulate the money supply at will, by
   controlling all elements of the fractional reserve process,
   by altering the reserve requirements and the total money
   supply as and when deemed necessary. Operating under a state-
   granted monopoly, central banks wield enormous "hidden"
   power.
6. Governments love fiat money, fractional reserve banking
   and central banks, because it allows them access to "free"
   money with which to bribe the electorate and carry out their
   objectives. It allows governments to appear "generous" by
   over-promising on social welfare - and to take aggressive
   actions by financing wars and mayhem out of the same
   store of "funny money".
7. Money can be manipulated in this way because it is money
   by edict/command - or what is called fiat money. Fiat money
   is paper money without any true or inherent value - and is given
   "value" simply by government command, via the legal tender
   laws in each country. Unlike the money which naturally evolved
   during history - gold and silver - fiat money has no natural
   constraints and no historical precedent for long term success.
   When the state inflates the fiat money supply ad infinitum, then
   such money simply loses its purchasing power, becoming a
   stealth tax on the people. And when the end-game arrives it
   becomes as valuable as toilet paper (but not as absorbent!).
8. Governments and bankers love fiat money and fractional
   reserve banking because they are "partners in crime" and
   co-conspirators in the business of engaging in fraudulent
   financial transactions - at the expense of the rest of us.
9. The current financial/economic crisis has its roots in
   the expansion of easy credit (debt) - which creates the boom
   and bust cycles. This is made possible by loose monetary
   policy as initiated by central banks and endorsed by their
   political masters - using the mechanisms of fiat money,
   fractional reserve banking and central banks.

The only solution to all these shenanigans is to unwind the CONfidence trick, and de-nationalise the world's money:

1. Abolish fiat money and reinstitute sound money, backed by
   real commodities.  Ideally, make all currency backed once
   again 100% by gold - the only money that has evolved over time via
   the true free market in money. [George Reisman explains very simply how to go
   about it.]  Note that gold (and to a lesser extent silver)
   is "market" money, whereas as fiat money is government
   money - backed by force.
2. Change the laws so that banks must hold 100% of all
   demand deposits in reserve - and put an end to all fractional
   reserve banking. Make banks behave like any other business
   - and to ensure no fraud takes place.
3. Close down/abolish all central banks.
4. Remove the issuance of money from the government's
   hands - because as long as they control its issuance, either
   directly or via their central bank proxies, they can and will
   manipulate it to their own political advantage.
5. Allow private banks to issue money -- 100% backed by
   gold -- and keep them in line via anti-fraud legislation,
   i.e. legal provisions to ensure they do not lend any more
   than what they have on deposit. In other words, end fractional
   reserve banking.
6. Do away with national fiat currencies and floating exchange
   rates. Instead, allow gold to become the naturally evolved
   global currency - a money fully backed by something which
   cannot be manipulated by banks OR politicians.
7. Establish a free banking, non-fractional reserve, 100%
   gold-backed global monetary system - the only monetary
   reform that attacks the problem at the root, and the only
   reform that will not only abolish boom/bust, but will bring
   about a rational international system of exchange.
8. Abolish the "boom and bust" mentality and reality, and
   allow purchasing power to increase over time, as production
   grows in relation to the gold held as currency backing.

Any monetary "reform" that does NOT attack the cause of the
problem - fractional reserve banking and monopolised banking
using fiat money - is doomed to failure.

Don't let those who have caused the problem in the first
place be the only ones writing the "rules" of reform - because
you can bet your bottom dollar, it will not be the reform we
need or want.

If you think the proposal is crazy, or that commodity-backed or gold-back money doesn't work, or leads inevitably to instability,  then just see how things worked out in New Zealand and Britain in the nineteenth-century, back before our money was nationalised.  What you see below (which shows The Course of Prices in NZ, 1960-1910) is a stable currency in both countries, gently easing prices and increased purchasing power for every pound in your pocket-- which effectively means increasing real wage levels and more prosperity for all -- with no great schocks or monetary booms and busts -- and this is despite the over-borrowing by the likes of Julius Vogel:

And compare that to all the ups and downs in the price levels over the twentieth century once the gold standard was abandoned in 1914, and money was finally completely nationalised in 1936, two years after the Reserve Bank's founding in 1934 [graph courtesy Bryce Wilkinson from Wellington's Capital Economics Ltd, referenced in Frederic Sautet's article: 'The Disastrous Effects of Central Banking: Let’s Get the Story about Inflation in New Zealand Straight.']

Anyway, David McGregor concludes (and I thoroughly approve his recommendation):

    For a complete theoretical and practical exposition on all of
the above - and a rigorous assertion of the viability of a 100%
gold backed currency and non-fractional reserve banking, I
recommend you download the following e-book. At 876 pages
it's not your average bedtime read, but if you have any interest
at all in where all this is headed, then you owe it to yourself
to discover why it has happened and the only sure way to prevent
it happening over and over again in the future.

    "Money, Bank Credit And Economic Cycles"
    By Jesus Huerta de Soto

    Published by the Ludwig von Mises Institute and available for
free download here:  http://mises.org/books/desoto.pdf

Like I said, it's a BIG book - but even if you only read
certain chapters, the ones that immediately interest you,
you will already be better informed on this crucial subject
than all your "leaders" put together!

To get a heads up on the brilliance of De Soto's analysis, listen to this richly explanatory recent interview while you sort out your download, and check out his article: Financial Crisis & Recession.