Monday, 12 October 2009

We are borrowing twenty five MILLION pounds an HOUR

A speech by James Tyler to the Adam Smith Institute Next Generation Group, 6th October 2009. This speech is also available on

I have spent the best part of the last two decades picking my wits against the market. It’s an unforgiving game: I’ve seen ups and downs, and many of my rivals buried under an avalanche of hubris, passion, illogical thought and unchecked emotion.

I have witnessed the sheer folly of the ERM crisis, the Asian crisis, the failure of the Gods at Long Term Capital Management and the insanity of the tech boom.

I have enjoyed the ‘NICE’ decade (None Inflationary Constant Expansion), and scared myself silly during the credit crisis.

I am a trader.

I risk my own money and live or die by my decisions, and face the threat of personal bankruptcy every time I switch my screens on. I get no salary – indeed I turn up at the start of the month with a large office overhead – a ‘negative’ salary. I have no fancy company pension scheme, no lucrative monopoly or franchise.

I eat what I kill.

Mistakes cost me my livelihood, so, above all, my decisions have to be rooted in practical and logical decision making.

Some have called my kind parasitic, but I would have said that I bring order, efficiency, predictability, stability and deep liquidity to crucial process: a process that makes the whole world keep ticking.

I make money work.

I make the market in interest rate derivatives: a market born out of the neo classical revolution in finance fostered in Chicago during the 1970s. I am a child of Freidman, Fisher Black, Myron Scholes and the modern international financial system.

My analysis was steeped in the neo-classical, efficient markets paradigm.

Friedman’s ideal was working. Enlightened central bankers guided the free market with gentle nudges and short term liquidity infusions, free floating currencies gently adjusted themselves to the constant flow of new information and efficient and rational markets took all in their stride.

Credit flowed, people got wealthier, economies developed and all was well.

And then the crisis struck.

Markets dried up and ceased to make sense. Price moves became highly irrational.

Then the whole market edifice began to crumble. Bear Stearns going bust tore a hole in the system and Lehmans almost collapsed the entire financial world.

What had gone so badly wrong I asked myself? How could this have happened?

At about this time I was listening to the US presidential debates. A load of guff and hot air really – all except this fella called Ron Paul. He banged on about liberty, the constitution and the evil of the Federal Reserve. His ideas were fresh to my ears.

In particular he talked about what seemed like a loopy idea. He wanted Gold as money, and the free market to handle it.

Without central banks.

My curiosity had been piqued.

Well, what a Pandora’s box I had opened.

I had opened the door to Austrian economics. A discipline grounded in logic, human action and inevitable consequences of bureaucratic fiddling in free markets.

I discovered that we had been in this mess time and time again, and it always seemed to have the same set of circumstances surrounding it.

Every bubble, boom, bust and crisis had its origins in the extension of too much artificially created credit.

Historically this was by way of government favour and protection towards the banking industry, but in the 20th century, money was nationalised and it became explicit governmental policy.

The evidence is glaring. You name any boom and bust, and I bet I’ll be able to show you how this has been caused by expansion of the money supply.

Tulip mania, in the 1600s, was caused by the massive influx of newly discovered Gold into Amsterdam from the new world: in particular the capture of the Spanish Treasury fleet.

John Law’s Mississippi scheme was financed by the pyramiding of paper money on top of French government notes of credit.

In the US, the panics of 1797, 1819, 1837, 1857, 1873, 1893 and 1907 were all the result of banks lending out many times what they took in as deposits.

1921 and its ugly sister 1929 were both the creations of the Federal Reserve’s mismanagement of the economy, and every boom bust since then has its origins in mistakes made by central bankers.

Here’s how it works;

Firstly, you have to have fiat money. Fiat, meaning “let it be”.

In the good old days, money developed out of barter. I have a bushel of wheat, and you have a barrel of fish. You want the wheat, but what if I want to buy a horse? In a barter economy I would have to exchange my wheat for the fish, and try to find a horse owner who wanted some fish. But what if he hated fish?

What was needed was an intermediate commodity, something commonly accepted, trusted, portable and desired by all. Something that was scarce, thus held its value.

The free interaction of people, also known as the market, chose Gold.

I go to the market and sell my bushel of wheat in exchange for Gold. You sell your fish in exchange for Gold. I find another person with a horse for sale and then sell my Gold in exchange for a horse. The guy who sold me the horse sells his Gold in exchange for corn, and so on. Gold is just another commodity, but its common respect has allowed it to evolve into the higher function of a common medium of exchange, accepted and trusted by all.

Throughout most of history gold was money. The Dollar was worth 1/20th of a gold ounce, the pound was 1/4 of an ounce, and so on. In this way, foreign exchange rates were fixed, financial calculations were easy, and global trade was greatly facilitated.

Not any more.

Look at a bank note. “I promise to pay the bearer, on demand, the sum of £20”. What does that mean? Nothing. You take this note to the BoE and demand 20 pounds they will laugh at you and give you another £20 note. Today money is just pretty pieces of paper with some nice pictures on it, and this means there is not real limit on how fast the money supply can grow.

Secondly, there’s fractional reserve banking – the system whereby banks can lend out many times what they receive in deposits.

Every bank in the country is, essentially, insolvent, whilst the central bank cheers them on from the sidelines. This means the banks can effectively create money out of thin air.

This is the ‘Bankster’ system.

Thirdly, there’s our terror of falling prices. This is nothing more than a children’s scare story, and that the fastest growth the world had ever seen was during the 19th century – a period of falling prices.

We love falling prices when it is TV’s and computers.

But when it comes to bread and electricity prices the authorities follow the ‘progressive’ idea that we should have to pay 2% more for them each year that goes by. They then make this happen.

It is these three factors that combine to create a policy of continual inflation of the money supply, and lead to our never ending cycle of boom and bust.

It is madness, but why do it? Simple, it is a hidden tax on the nation’s savings. It allows the profligacy of government and the Bankster’s profits.

Modern monetary history is rich with stupendous bureaucrat led money failures, but I’ll just highlight a few glaringly obvious examples.

In 1987, Alan Greenspan slashed interest rates after the so called ‘great crash’ of 1987, creating the infamous ‘Greenspan Put’.

This allowed the Banksters a get out of jail free card if things went wrong, which it did, time and again. In would ride sheriff Greenspan, and save the day.

Why was there a Tech market bubble?

Could it have anything to do with the world’s central banks cutting interest rates to help save the world from the alleged catastrophe about to be unleashed by the failure of a particularly arrogant hedge fund – LTCM?

And finally: the big one.

Why did we have a crisis over the last two years?

Could it have anything at all to do with the world’s central bankers panicking after 9/11 and massively reducing interest for three long years? Could this have created the greatest property bubble the world has ever seen?

Could this have been the process that almost collapsed the world economy?

And now that the money planners have made money, essentially, free. What about that? What will be the consequence? What happens now?

Austrian economics predicted this crisis and has solutions. Austrian economics can prevent this from happening in the future. Find out about it and understand it.

It’s your responsibility. Your generation is going to pick up the bills for the morons we have in charge of us.

The massive debts my generation has amassed and the fiscal diarrhoea being sprayed upon us by the establishment. This will be paid back by you.

We are borrowing twenty five MILLION pounds an HOUR. This will be repaid by YOU. From YOUR future income.

You have a choice and a chance.

Do something about it.

I’ll leave you with a quote.

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong somebody else can have my job. I want to see this country prosperous. I want to see people get a job….. I say after eight years of this administration we have just as much unemployment as when we started… And an enormous debt to boot!

– US Secretary of the Treasury Henry Morganthau, May 1939


The next General Election is not the important one- the one after it, is. When Tory/Labour/Social Democrat tinkering and high spending is shown not to make the slightest bit of difference and the Country is still in massive debt, with an uneducated workforce and unaffordable benefits.

Just how long is it since Osborne said he would match Labour's spending and 'share' the profits of growth ? Now its post WW2 austerity as a policy.

I will say this slowly-



The Economic Voice said...

But what do we put in place that politicians' and bankers cannot tinker with ever again?

Or is it everyone's fault for going along with the boom and not asking enough questions?

SO17 said...

I sold my Gold reserves the other day and raised £42.
Call me simples but there is not enough gold in the world, that is why credit was invented.
The British adopted this concept and expanded unlike many(Pay as you go)European countrys.

Alistair Darling said...

Well fuck my old boots I reckon James Tyler is talking sense

Anonymous said...

Seems to make a lot of sense. Will this become Labour fiscal policy?Do turkeys vote for Christmas?

pissing blood said...

if you have the time to watch,
the whole system is fixed against the public

Marchamont Needham said...

Pound tanking again today. So glad I moved my savings into Euros.

And that's after Gordo assured us the recovery is underway and then started a fire-sale of anything he could lay his hands on. The proceeds of which will go not on paying down debt but on financing current expenditure.

The debt mountain can only continue to climb until somebody takes the bull by the horns and converts all public sector pensions to money purchase. That'll make the little piggies squeak.

If there's even a hint of these muppets getting re-elected we'll see the currency crisis to end them all. So invest in commodities now - rice, canned goods, calor gas, lead and brass.

ducle said...

There is loads of sense in this but a couple of things I disagree with.

"Secondly, there’s fractional reserve banking – the system whereby banks can lend out many times what they receive in deposits."

That isn't how fractional reserve banking works (though the effect is much the same). Banks keep a fraction of our money in reserve supposedly to cover runs and lend out the rest.

"Could it have anything at all to do with the world’s central bankers panicking after 9/11 and massively reducing interest for three long years? Could this have created the greatest property bubble the world has ever seen?"

The depression began before 9/11. The stock markets shit away massive amounts of value in the dotcom bust and central banks overheated the economies to try and recover it, sending huge gobs of money into property markets.(In the UK this was compounded by the Government's raiding of pensions) Property was seen as a safe bet by investors and thanks to CDO funny money, also seen as a safe bet by banks. Both were irrational. The wars in Afghanistan and Iraq were handy distractions both from central bank cockups and as a means to spend the newly minted money.

Anonymous said...

I recently bought this book - An Introduction to Economic Reasoning by David Gordon from the Ludwig von Mises Institute website. It covers the theory behind economics very well. Doesn`t seem to be available anywhere else.

James Tyler said...


Which ever way you slice it, savings (i.e. deferred consumption) do not directly fund loans. Credit is created from thin air, and added to the mix, thus creating the boom bust cycle.

And the central banks DID cut rates in a panic after 9/11. The depression actually began during the euphoric mis-allocation of resources in 1997 to 1999. And, yet again, this happened due to the funny money created to deal with LTCM/Russian default/asian crisis.

Henrik Ræder said...

SO17, let me buy your gold. There's plenty enough of it, the price just happens to be too low.

Marchamont, I suggest you read this about money-printing at the ECB.

Books from Mises Institute are usually also available at Amazon. If you can't find them - or don't want to part money for them - grab them for free as PDF directly from

I'm not kidding you. LfMI does not believe in copyright and takes the full consequence by making their entire catalogue available in electronic form for free. Enjoy!

Marchamont Needham said...

Henrik - nice link thank you.

But all I'm gambling on is the pound being a weaker currency than the Euro. Endgame I think will be for us to join the Euro at way less than parity, but as soon as the market turns agin me I'll be out.

Wish I'd bought gold though!

I am Stan said...

If were borrowing that much a day and i work 60 hour weeks how come i`m still fucking skint all the bastard time...

Antisocialist said...

Ducie, James is correct. When a bank makes a loan none of the account holders receive letters saying their accounts have been temporarily reduced in order to lend out some money. The bank creates brand new money from thin air. The fractional reserve is the amount they feel able to create in relation to the actual deposits (assets) of the bank.

James, not everyone is quite so sure about a return to the gold standard. Far from it.

ducle said...

James Tyler, Antisocialist,

I think I understand what you're saying.

A bank has £100 on deposit and a reserve requirement of 10% - does it a) Lend £1000 or b) Lend £90?

In the strictest sense fractional reserve banking is the latter. As practiced by the banks they would lend more than £90 and then quickly try to find enough to maintain their capital reserve. The vast error is that they are then only trying to maintain their capital reserve rather than cover the entirety of their loan book?

Antisocialist said...

Ducie, as I understand it, it's a).

Here's a short article on the Prosperity UK site that explains it. The article itself is 'from [a] mainstream economics textbook Success in Economics by Derek Lobley B.A. (London: John Murray Publishers Ltd, 1978 edition), which was part of the "Success Studybooks" series. It was intended to be "appropriate to the Economics syllabuses of many of the professional bodies such as ... the Institute of Bankers".

Henrik Ræder said...

Antisocialist, everyone:

It's B)

But then the £90 gets deposited somewhere (same bank or a different one), which in turn lends an additional £81 to someone. Which then gets deposited, etc.

The net effect is that the £100 does become £1000 (approximately). This is money-printing in its most discreet form.

Injecting money into the bank's reserves is a more blatantly criminal form of money-printing. Swiss UBS received SFr 3 billion directly into its reserves, permitting it to immediately lend SFr 30 billion. That in turn becomes SFr 300 billion due to fractional reserve banking.

This is also the mechanism through which our financial sector becomes so bloated, and why honest working people feel like they're being ripped off. They are.

Anonymous said...

Two decades PICKING his wits.
Picking ???

Wats e on abaht

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