The Global Debt Crisis and How We Can Get Out of It

Banks are the exclusive first buyers of companies as they are sold during an initial public offering or IPO. Moreover, banks are permitted by governments to multiply money twenty times over when purchasing assets, such as companies. For example, Apple Inc. went public in 1980 for $100 million. Assume for a moment that ten banks underwrote the Apple IPO. Each bank only requires half a million dollars to buy $10 million dollars’ worth of Apple stock. This is called the money multiplier effect of the fractional reserve banking system. It enables a bank to turn half a million dollars—into ten million dollars! Banks have two sources for the initial half million dollars to be multiplied: overnight lending with the central bank and/or our money on deposit in their banks. More on these points in a moment. Initially, the underwriting banks sell their newly purchased IPO companies to other banks, and often they sell to private banks. If a company looks to be very valuable, such as an oil company, then it would not be surprising for many of the selling banks to have the same principle owners as the buying banks. Why transfer ownership from public to private banks? Public banks are required to make public financial statements, such as earnings. Whereas, private banks can keep everything confidential. If the earnings of some private banks became public knowledge, it would be noticed. Banks generally buy and sell directly with each other, rather than use a stock exchange on the secondary market. If each bank sells 5 percent of its Apple Inc. holdings, this would generate enough money for each bank to repay the central bank what they borrowed to acquire Apple Inc. This would still leave these banks owning 95 percent of outstanding shares. Note that for these banks to become the new principle owners of Apple Inc., it didn’t cost these banks—or their owners—anything. That’s because we paid for it. More on this point in a moment. As the new owners, these banks now receive most of the earnings, either as dividend payments or as retained earnings. Dividends are company earnings paid to the owner stockholders. Earnings that are not paid as dividends to the owners, stays with the company to become retained earnings, and this usually increases the company’s stock value proportionately. Money borrowed from the central bank is new government money. The Central bank is a part of our government. New money created by our government (via our central bank) is a public asset that belongs to all of us. At the very least, it belongs to our government. When banks purchase assets, they are using our money on deposit, and our money created new by our government. And since our money is used, we assume most of the risk, but somehow bankers receive all the reward. How can a few bankers be the new owners of all these companies, when they were all paid for by us—using our money? Over the past one hundred years (for North America, three hundred years for Europe), governments have expanded the money supply roughly a thousand times, by essentially just giving this new government money to bankers. Bankers will be quick to say that money borrowed from the central bank is a loan that must be returned with interest. However, for every new dollar borrowed from the central bank, a bank can buy twenty dollars’ worth of property. By selling one dollar of that property, they payback the dollar they borrowed, but this still leaves the banks holding nineteen dollars’ worth of property—that never gets paid back! Generally, hedge funds, mutual funds, and other institutional investors are the first to buy from banks. And for this they have their road show, where banks give presentations to preferred customers on upcoming IPO companies to be sold. Banks generally sell at least 10 percent of their company holdings, and often much more if a company looks to have some risk. Banks sell 5 percent in order to payback the initial amount they borrowed to buy the company, and then sell another 5 percent to satisfy capital requirements. This is explained in more detail in Addendum A. After hundreds of years of this market, banking, and monetary system, some well-connected private bankers have amassed such a vast fortune, they are able to purchase promising companies even before they reach the IPO phase. Private bankers also became venture capitalists and angel investors, fronting seed money to start-up companies, usually in exchange for half or more of the companies. It’s not only public companies affected by this financial system. Many private companies have also been purchased with our money, and yet they are mostly owned by only a few financiers. Our present financial system has been called a zero-sum game. For a few to be up billions of dollars—via the process described above—then the rest of us must be in debt tens of thousands of dollars. This debt often comes by way of government debt, at the federal, state, and municipal levels. Which many of us overlook, but it’s mathematically inevitable, since everything must sum to zero. Why must all accounts sum to zero? Think of a game of poker. For some to be up, the rest must be down. If five people sit at the table, and each starts the game with one hundred dollars—and the game ends with one person having five hundred dollars—then the rest must have zero left. With this analogy, each player starts the game with one hundred dollars. However, in life, we all start out with zero dollars. Unless our families or the lottery give us some wealth. But whatever amount they give us, theirs is also reduced by that same amount. Since really, we all start out with zero dollars, it all sums to zero.