Tuesday, October 14, 2008

Morgan and Chase agree to hold each other’s coconuts

Wonderland Economics: Bailouts balloon, markets crash, the dollar strengthens and gold does nothing

Some estimates put the value of outstanding credit default swaps on Lehman Brothers debt at $400bn, Not only are there the Credit Default Swaps written on Lehman's name but there are also the $639 billion (as at the date of it bankruptcy filing on 15th September 2008) of swaps and other derivatives that Lehman wrote in its own name that need to be settled or sold. These two vast sums hang over the market like the sword of Damocles - one slip by just one major counter-party to these financial transactions could cause the system to implode. No wonder central bankers look nervous these days. Ran P "Imagine an island with three people, Morgan, Chase, and you. Each of you has ten coconuts. Morgan and Chase agree to hold each other's coconuts and pay interest to each other, cont.

Posted by malct @ 12:35 PM (480 views)
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2 thoughts on “Morgan and Chase agree to hold each other’s coconuts

  • from the article :-

    So how did we get here? There are various answers to that question, depending on how far back and how deep you want to go.

    Going far back, lending money at interest, usury, or fractional reserve lending, would seem to lead inexorably to where we’re at now.

    Ran Prieur explains:
    You might have heard the thought experiment where we’re all on an island using a fixed number of coconuts for money, and if we start lending coconuts at interest, we create imaginary coconuts so it’s impossible for all the debts to be repaid. T

    o make the simplest possible example, if there’s only one coconut, and I lend it to you on the condition that you pay me back two, we now have two imaginary coconuts and only one real coconut.

    You can’t pay me back two, so instead you pay me back one and become my slave. Now, I could give you the coconut as wages and you could give it back to me, but it’s much better for me if I loan it to you again and create more debt, and that’s what happens in the real world.

    Multiply that by billions, and it’s still not as bad as the real situation, because once we have a system where someone can make money merely by lending, we get predatory institutions that don’t just lend the money they have, but money they don’t have.

    The really big fake money is not created as interest, but as fake principal to enable the creation of more debt/slavery. Inevitably, the lending institutions grow like cancers to consume the whole economy, and the supply of real stuff cannot match the exponential growth of money/debt, and the system collapses.

    And the foundation of the whole nightmare is the rule that if you loan someone money, they have to pay you back more…

    I came up with another island-coconut story that makes the point better: Imagine an island with three people, Morgan, Chase, and you. Each of you has ten coconuts. Morgan and Chase agree to hold each other’s coconuts and pay interest to each other, and you think that’s silly and just keep your coconuts under your bed.

    Eventually, through compound interest, they have accounts worth hundreds of coconuts, while you still have only ten. Of course, if they try to withdraw their coconuts, the system collapses, so to make it more stable, they use pieces of paper that represent coconuts, and later they don’t even use paper, but just keep a ledger of how many coconuts everyone supposedly owns.

    They agree to rules where they can lend each other even more coconuts than they have in paper money, so they can grow their money faster, until there are tens of thousands of symbolic coconuts. Meanwhile you still have only ten, and now if you want to buy stuff, it’s going to cost more than it did before.

    Probably you will have to sell your actual coconuts to Morgan and Chase to afford to eat.

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  • planning4acrash says:

    Destruction of the derivatives would be the best solution! The bailout is the problem. It monetizes the fraudulent derivatives, letting the financiers use consolidation/bailout £2 buy all the real assets, using your£2 saddle you with inflation&interest!!

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