Financial Crisis Weird Signal

1) Hot topic discussed during teh tarik session at Mamak restaurant yesterday is about the current financial crisis.
2) Interestingly our topic of discussion does not centered to why the crisis happen and how to the government is handling the crisis, but looking at different perspective, about the 'WEIRD SIGNAL' that this current financial crisis is sending to us? (I'm not really sure how we end up discussing this topic?)
3) To summarize, among the weird signal that market is sending in this financial crisis to us is that the commodities is no longer the safest place to put our investment during the stock and financial crisis. In '97 financial crisis, many people switched their shaky investment in stocks and assets to the commodities to store value, where the commodities act as the buffer and yield during downturn in assets and stocks porfolio
4) Second is the downslide effect in the price of gold, we consensusly agreed it should be the other way around. During the crisis, the gold price is normally sky high and people will normally switch their investment into gold to buffer their losses from the market uncertainty, but unfortunately in this current financial crisis this does not happen.
5) Third, the market bubble effect. People may looking forward to this period, because everbody will making money. But, the after effect issue is more devastated. The crisis will occur when the bubble is burst, like the subprime market bubble burst recently. The 97 Asian Financial Crisis is also due to the after effect of bubble burst in the market. Is there any way or system or mechanism, that we can avoid the bubble from develop. We think, it is wise if we do not allow the market to develop the bubble, because the impact is more worst than good.
6) The bail out scheme promoted by the US as we remembered clearly, when Malaysian Government begin to bail out the Malaysian companies during the '97 Asian Financial Crisis, we were critic badly by the western countries especially the US. We were accused of not being transparent, saving the big boys and cronies etc etc., but the move later appeared to be a success.
7) And now, the US government is following the same, by announcing the US$700 billion bail out incentive package. Suprisingly the market did not buy it.
8) We think, the US$700b is nothing to compare with the trillion dollar market that is affected
9) Second, the US$700b package did not specify who will getting the benefit most, market believe it will go to the big boys, friends and families. The real problem does not being addressed i.e the ordinary citizen who is affected most, which lost their property and become homeless. The ordinary people problem should be addressed first.
10) Third, how come the Lehman Brothers and many others before them, is allow to failed; but not AIG. Suddenly everybody is concern of the systemic effect if the US government allow AIG to failed. Who is inside AIG, who connected to who?
11) This is among the reason that we explored last night and I'm sure there's may more reason of why this US$700b incentive is a failure and the market does not buy the idea.
12) The extent and reach of this present financial catastrophe is yet to be seen. No one is sure how far it will go and to what extent. Only time will tell.

FRACTONAL RESERVE SYSTEM

1. Before explaining about the fractional reserve system (FRS), it is worth mentioning about the history of banking, how it came to its existence.

2. Long time ago, people traded using barter which later evolve to many kind of method, until finally come the age, where the gold were used in trading activity.

3. The right to issue the gold lies in the hand of monarchy ie the King. The King will instruct the goldsmith to mint gold into a form of coin. This coin will be used in daily economic activity in the country.

4. The goldsmith is appointed as the King gold keeper and producer. Everytime the King need gold, he will request from the goldsmith.

5. The use of gold in all economic transaction, later made as the King doctrin of law. Everyone wishes to do business in the country is require to use the gold.

6. The function of the goldsmith is basically to produce the gold and also as the store keeper of the gold for King's behalf. The goldsmith has to ensure that gold is safe and the supply of gold is sufficient at anytime should the need arise for the King and country.

7. When the country economic activity became more advance and complicated due to prosperous economic development, the function of Goldsmith is also expanded to not only keeping the King gold but also keeping ordinary people gold as well. People started to trust the goldsmith because it is proven the gold is safe under the care of the goldsmith. For this service goldsmith will take the service charge from the gold depositors.

8. The goldsmith has become the gold keeper for the people to keep and withdraw their gold whenever neccessary. This is the role of the present bank, today, the same role of goldsmith is played by the bank in the present economic system.

9. When economic activity become more complex, the need for larger transaction arise, thus the used of gold in more complex and bigger transaction appears difficult to handle, because the gold is too heavy to be carried around and not safe.

10. To avoid this problem, the goldkeeper come up with a brilliant solution idea instead of using gold they issued the paper receipt to represent the gold to execute transactions. This paper receipt will act as the medium of exchange. This paper receipt stored value according to the gold price it represent in the goldsmith safe. Who ever keep the paper receipts is entitled to claim the ownership of the gold at equivalent value at any time.

11. Everyone happy with this solution, including the King. Eventhough, the new introduced paper receipt is not well accepted by public at that time, but later were forcely accepted by the public when the King buy the idea (under the advice by the goldsmith), and issued a new doctrin as the new law for the country.

12. It is indeed the best solution for the heavier gold. People start accepting the paper money, which later on consensusly called money in the financial term. In America and most part of the world, this money is called a legal tender.

13. By this time, the goldsmith is now known as the 'bank'. Through the experience, the bank notice that at any one time, only certain volume of gold is withdraw by the depositors from the bank through the exchange of the money (paper receipt). The rest of the gold is sitting pretty in the bank doing nothing.

14. The bank feel this lazy gold (assets) should be utilised for the bank to produce more profit and wealth. To unlock the value of these lazy asset, the bank introduced the first fractional reserve system (FRS) in the economy.

15. How the FRS work is very simple, the first keyword is FRACTIONAL and the second is RESERVE.

RESERVE SYSTEM

16. The RESERVE mean, the bank is require to maintain certain level of deposit money at any one time. The require minimum level shall be determine by the Central Bank according to the average withdrawal activity.

17. The bank will maintain certain level of deposit amount and the rest is allowed to be loan out to the borrowers (personal or corporate borrower). When this money is loan out, the borrowers is require to repay back the principal together with the interest charges. Through this way, the bank will be able to unlock the value of the lazy assets.

18. Based on the current example, the bank minimum reserve requirement is ranging from 4% up to 15%. This reserve requirement is mainly to ensure the depositors withdrawal activity is fulfil. The 4% to 15% is basically the average withdrawal transaction activity in the bank at any one time.

18. Say if Bank A reserve requirement is 4%, for the total deposits of $100mil, only 4mil remain in the bank, the rest $96mil is loan out to the borrowers. This is why, in the case of Northern Rock in the UK, the bank collapse simply because it was unable to return the depositors money simultaneously, because the bank only keep at the minimum reserve level. The Bank of England has to save the bank, by pumping in more money in order to return depositors money.

FRACTIONAL SYSTEM

19. The fractional system gives right to the bank to create money. The money is basically an electronic money or accounting system money. The money which does not exist physically but virtually on the computer system.

20. Say, for reserve requirement of 4% and total deposit money of $100mil, the new money can be created is $2.5billion. From $100mil, the bank suddenly has $2.5billion of money.

21. This newly created money is meant for borrowing and loan purposes. Should the $2.5b money is loan out with an interest charges of 7%, imagine that the bank will make $182mil of interest charges gain from the borrowers on top of $25b principal loan that need to be repay by the borrow. All this is create out of nothing but the gain to the bank is real hard money. The one who suffer most is the borrowers like us.

22. This cruel FRS works in our system intelligently without us even notice. Our financial system is design to collapse from day one. So it is not suprising that today financial system is about to collapse in the scale that we waiting to see. When the electronic money become too huge in the system overpass the real physical money circulated in the system, it is like an overturn pyramid design teetering to collapse.

23. Our today financial system is controlled by the people inside the Federal Reserve. The intelligent mastermind who control the world. Ever heard of BASEL I and II, this are their legislated law, who protected them forever. All countries in the world in a way were forced to signed the agreement, any country who resist become their enemy.

24. No one in this world is spare by this evil, we are working for them, we are slave to them.

OUR WORLD

1) We were taught that money stored value, a unit of account and act as a medium of exchange. This is what have been taught in the class room in university days.


2) Unfortunately, today this is not the case. We are living in the fiat money system, where the money no longer stored value and far from being the medium of exchange.


3) In fiat money system, money no longer backed up by commodities (normally gold) and money is traded as if it is the commodities. Today money does not represent anything, it just a piece of paper.


4) Originally money is only a legal tender or paper receipt, where people use as a medium to exchange the gold with foods or any human neccessities. People use receipts because gold is heavier, and not suitable to be carried around especially involving larger transaction. To avoid this people introduce paper receipts which later made a legal tender.


5) Imagine you require a pair a shoes, you will use the paper receipts issue out by the bank in equivalent value to the gold you deposit in the bank earlier. Say, that for one coin of gold you deposit in the bank, the equivalent value is $100, therefore bank will issue paper receipt for $100 value. With this $100 value of paper receipt, you will carry in your wallet to shop around to get the pair of shoes and other necessities.


6) When everyone in the world start using this paper receipt, consensusly people start accepting this method is infact easier to execute everyday transactions and the solution to the heavier gold. People start calling this receipt as MONEY.


7) After purchasing a pair of shoes at $100, the MONEY has now changing hand to the seller, in exchange for the pair of shoes that you take home. The seller will go to the bank to reedem the $100 money with your coin of gold deposited earlier in the bank, thus the ownership of the gold coin is now transfer to the seller.


8) This is the true spirit of money, used before and should be used forever. However, today money circulated in our economy does not 100% back up by gold, especially in the US. The US Dollar infact has no value, because there is no gold to back it up. As the former Prime Minister Mahathir quoted in his blog chedet.com, US is a bankcrupt nation. The Federal Reserve issue money at their own will for their own interest.


9) The rightful responsibility to issue money should lies in the government hand, however the US government delegate this important power to the Federal Reserve. It should be issued directly by the Treasury Department. To make thing worst, the Federal Reserve does not even owned by the US government. The Federal Reserve is own by a group of smart bankers (bank cartel) who manipulate the law to their advantage.


10) JD Rockefeller and Morgan family, is the true owner of Federal Reserve, which later evolve through time spinning around to the few big boys who owned the World. It does not matter who control the US government, as long the power to print the money stays with them. Who control the MONEY is actually own the world not the US government. The US government control the World because they allowed it to happen.

11) The Federal Reserve is perceived by the public to issue the money upon the instruction of Senate. This may be true, but look carefully, if you care to read, they actually is the one who suggest what to do in the crisis. When crisis arises, the government will look for them for a solution not the treasury department.

12) Ever came across to your mind, where the US$700 billion package announced recently would come from, when everyone knows US is the bankcrupt nation. Does the gold reserve in the Federal Reserve increase out of sudden. Does the gold fall from the sky out of sudden.

13) When they print the money, apart from no gold reserve to back it up, the Feds make the profit called seigniorage profit which is the difference from every US Dollar face value issued with the cost of manufacturing and distributing the dollar.

14) This new money issued by the Feds, will be loan out to US government attached with the interest charges. The US government will never be able to pay this debt, because the debt keep on balloning and never paid. This mean each American citizen is indebted to the Federal Reserve.


15) Originally the US Dollar currency, like other majority currencies in the world has gold reserve to back it up, but when the demand for dollar is high, the Feds has to print it more and more to fulfill the ever increasing demand, bacause the dollar is worldwide accepted and highly used. When the demand is high, the Feds issue the money without gold reserve to back it up, since the gold is not easily available, accessible and in short supply.


16) The Feds job is much more easier, when no one is questioning the gold reserve issue, everyone thought that the Feds has already had the gold before they issue the money.


17) When the money in circulation become too many, the value of money is halved. They say this was caused by the time value of money effect, because $1 value you keep today will not be the same with $1 value, 2 years later. The truth is the value of money is diluted everytime the Feds pump in the money in circulation, forcing us to buy less with the same value of money. This is inflation.

18) Our money have been stolen right infront of us, without us even notice. The money value in or wallet is getting less and less, everyday.

19) This is the real story of what is happening in OUR WORLD. If you care to read this article, you do not have to believe me totally, but for our future generation sake, do your own research, MASTER THIS TOPIC. This is a continuous learning objective, the more people understand this dubious scam in our financial world, the easier the financial reform effort and support could take place. This is not the struggle of alone but together we would be able to change the World or at least at our very own nation and community.