This interview with Rafi Faber discusses my recent article on how bank credit is created out of thin air and why the entire system is close to collapse.
You were asked how bank runs can lead to bank failures. You answered with two examples:
1.Borrow Short , lend long. Banks take in short term deposits and may invest those in long term investments. So if someone asks for their deposit back, but they can't realise their long-term investment then they go bust. This is where the Central Bank as "lender of last resort" should step in and save the bank IF the long term investment (e.g. in UK Government Gikts -haha) is really worth what was paid for it.
2. If loans go bad/can't be repaid. You gave this as a reason for how a bank could go bust. However, if the "credit" was created from nothing/thin air, how can a "borrower's" default lose the bank anything? Presumably they will have had some interest and repayments against the "thin air credit creation" so how does a failure to "repay" the rest of the thin air credit creation make it go bust? I don't get it
At around 17 minutes in the interview Alistair say something like "the idea that banks are dishonest by using their credit is completely wrong". I have to disagree. I see what you are saying, which is banks are just like everyone else in that they are the creditor and they get you the debtor to pay off the debt by their creation of credit. However (having been an ex banker) they teach you that you are lending depositors money (or at least the loans you make are ratioed against that) - that is a lie and it is a lie when they say that to customers. If everyone knew banks create loans out of thin air, they would rightly ask why pay interest? There is no risk to the bank, as they just created the " loan" out of thin air, so if it is never repaid then they have lost nothing. So banks are not being honest - the opposite of which is being dishonest - by not revealing that when people ask for a loan.
If a workman comes to your house to build a wall and you agree to pay him £500 when it is built, he is the creditor and you are the debtor, as the creditor creates. If he builds the wall properly and you fail to pay, the you are in debt to him for £500.
Now that the scenario of a bank loan. You ask to borrow let's say £1000 from a bank and the bank will only make the loan if you agree to pay it off from your monthly wages over say 24 months. The bank creates the "loan" out of thin air and then sells ypur promise to pay in the market, possibly for more than the amount of the loan as you will also be charged "interest" because they have "lent" the money, but they have not "lent" or "loaned" anything, your signature to the agreement creates the value. It is your hard work that enables the loan to exist, so you are surely the creditor. There is no "money (aka gold)" being lent, credit is being created. What gives a bank the right to do this? Licensing from government? It is all hidden, there is no proper disclosure. Prove me wrong...
As you can see "banks" are a perversion. They don't even inver the normal creditor/debtor position, it is just perverted.
Take another wet of scenarios:
A person paints a picture and takes it to an art gallery in the hope it will sell. Sure enough someone turns up and wants to buy the painting. The "pay" the gallery owner who in turn, after taking their commission "pays" the painter.
A banker will never transfer your "loan" money even to a solicitors trust account, without signed paperwork...why? Its not like the solicitor will release the money without the signed document. No its because the banker can't "create" the loan without your signature
The three videos referenced in the last post were excellent, but mentally exhausting.
But the questions we have show that none of us fully understand it.
For example, can it really all be made whole by the Fed absorbing bad debts and a revaluing of gold, or a dollar default? A Nice New Dollar?
Surely it is much more likely that the credit boom means vast amounts of credit will soon just disappear. Gold price in dollars might conceivably even fall, because its main use is to back genuine banks in setting a natural interest rate. Not in backing debt or credit but in forming the monetary base.
And this can happen, gold falling, because govt will interfere and the banks won't use it.
It can interfere to the point that the govt 'banks' won't use gold for that natural purpose. Govt of course wont even consider revaluing its debts in gold. Bitcoin, our stocks and pension funds, our houses and property, military force, oil, trade routes, hostages - anything but gold. It will ignore gold, whose use even to set rates between private banks would shackle and bankrupt the enormous enterprise of modern govt.
In that context, the 'forward movement' in an economy, the animal spirits, would be killed off and production and consumption will collapse in a credit collapse along with the existing modern financial system of derivatives etc. It's easy to destroy things and the Fed can't fix those ones, because they are not regulated and they are not at heart monetary - they are just massively large consequences of the financial system we have.
Then any banks left standing will truly be in an evolving situation.
A spiralling situation the dust won't settle on for years.
Monetary inflation with consumer deflation. And govt 'banks'.
We may be issued a Second New Dollar, when that blows up we will get A Greater Greenback, followed in turn by a Bigger Buck.
Sure, the banking system might welcome non-interference by the govt. At first a few of them might even say so. Maybe the interest rates banks will charge one another could be set by gold lease costs, or other commodity or assets, as in the past those Romans or Scotsmen did. (But not Jacobites obviously. The facial expressions at 29.00 produced by Alasdair's mere mention of Jacobites were priceless).
But - whether here or in China -
the govt we get won't let that happen. The bankers, led by the commercial banks, will all surrender to the govt. and suck it up.
It sure looks today like the public will get government 'banks' with lots of steering and interference and their Funny New Stablecoin Money with Trump's face on it and the rich will have something else for banks that we won't be hearing about on Substack.
If we stack gold bars and survive the credit crash can we all open a real bank after? How many years will it take? Who are these Jacobites? Are they on Trump's team?
Thanks again for coming on!
On another point in the interview:
You were asked how bank runs can lead to bank failures. You answered with two examples:
1.Borrow Short , lend long. Banks take in short term deposits and may invest those in long term investments. So if someone asks for their deposit back, but they can't realise their long-term investment then they go bust. This is where the Central Bank as "lender of last resort" should step in and save the bank IF the long term investment (e.g. in UK Government Gikts -haha) is really worth what was paid for it.
2. If loans go bad/can't be repaid. You gave this as a reason for how a bank could go bust. However, if the "credit" was created from nothing/thin air, how can a "borrower's" default lose the bank anything? Presumably they will have had some interest and repayments against the "thin air credit creation" so how does a failure to "repay" the rest of the thin air credit creation make it go bust? I don't get it
At around 17 minutes in the interview Alistair say something like "the idea that banks are dishonest by using their credit is completely wrong". I have to disagree. I see what you are saying, which is banks are just like everyone else in that they are the creditor and they get you the debtor to pay off the debt by their creation of credit. However (having been an ex banker) they teach you that you are lending depositors money (or at least the loans you make are ratioed against that) - that is a lie and it is a lie when they say that to customers. If everyone knew banks create loans out of thin air, they would rightly ask why pay interest? There is no risk to the bank, as they just created the " loan" out of thin air, so if it is never repaid then they have lost nothing. So banks are not being honest - the opposite of which is being dishonest - by not revealing that when people ask for a loan.
Further to the above point consider this:
If a workman comes to your house to build a wall and you agree to pay him £500 when it is built, he is the creditor and you are the debtor, as the creditor creates. If he builds the wall properly and you fail to pay, the you are in debt to him for £500.
Now that the scenario of a bank loan. You ask to borrow let's say £1000 from a bank and the bank will only make the loan if you agree to pay it off from your monthly wages over say 24 months. The bank creates the "loan" out of thin air and then sells ypur promise to pay in the market, possibly for more than the amount of the loan as you will also be charged "interest" because they have "lent" the money, but they have not "lent" or "loaned" anything, your signature to the agreement creates the value. It is your hard work that enables the loan to exist, so you are surely the creditor. There is no "money (aka gold)" being lent, credit is being created. What gives a bank the right to do this? Licensing from government? It is all hidden, there is no proper disclosure. Prove me wrong...
As you can see "banks" are a perversion. They don't even inver the normal creditor/debtor position, it is just perverted.
Take another wet of scenarios:
A person paints a picture and takes it to an art gallery in the hope it will sell. Sure enough someone turns up and wants to buy the painting. The "pay" the gallery owner who in turn, after taking their commission "pays" the painter.
A banker will never transfer your "loan" money even to a solicitors trust account, without signed paperwork...why? Its not like the solicitor will release the money without the signed document. No its because the banker can't "create" the loan without your signature
The three videos referenced in the last post were excellent, but mentally exhausting.
But the questions we have show that none of us fully understand it.
For example, can it really all be made whole by the Fed absorbing bad debts and a revaluing of gold, or a dollar default? A Nice New Dollar?
Surely it is much more likely that the credit boom means vast amounts of credit will soon just disappear. Gold price in dollars might conceivably even fall, because its main use is to back genuine banks in setting a natural interest rate. Not in backing debt or credit but in forming the monetary base.
And this can happen, gold falling, because govt will interfere and the banks won't use it.
It can interfere to the point that the govt 'banks' won't use gold for that natural purpose. Govt of course wont even consider revaluing its debts in gold. Bitcoin, our stocks and pension funds, our houses and property, military force, oil, trade routes, hostages - anything but gold. It will ignore gold, whose use even to set rates between private banks would shackle and bankrupt the enormous enterprise of modern govt.
In that context, the 'forward movement' in an economy, the animal spirits, would be killed off and production and consumption will collapse in a credit collapse along with the existing modern financial system of derivatives etc. It's easy to destroy things and the Fed can't fix those ones, because they are not regulated and they are not at heart monetary - they are just massively large consequences of the financial system we have.
Then any banks left standing will truly be in an evolving situation.
A spiralling situation the dust won't settle on for years.
Monetary inflation with consumer deflation. And govt 'banks'.
We may be issued a Second New Dollar, when that blows up we will get A Greater Greenback, followed in turn by a Bigger Buck.
Sure, the banking system might welcome non-interference by the govt. At first a few of them might even say so. Maybe the interest rates banks will charge one another could be set by gold lease costs, or other commodity or assets, as in the past those Romans or Scotsmen did. (But not Jacobites obviously. The facial expressions at 29.00 produced by Alasdair's mere mention of Jacobites were priceless).
But - whether here or in China -
the govt we get won't let that happen. The bankers, led by the commercial banks, will all surrender to the govt. and suck it up.
It sure looks today like the public will get government 'banks' with lots of steering and interference and their Funny New Stablecoin Money with Trump's face on it and the rich will have something else for banks that we won't be hearing about on Substack.
If we stack gold bars and survive the credit crash can we all open a real bank after? How many years will it take? Who are these Jacobites? Are they on Trump's team?
Good videos, but so many uncertainties.