ECB’s Policy, Like the Code of Hammurabi, Does Not Abolish, But Just Regulates Slavery

From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic 

Last week’s words of the president of the European Central Bank Mario Draghi that have shown his call for insurance on future liquidity made an impact on the price of gold and silver, but have also raised many questions regarding the repeating of economic cycles and situations brought through them.

We live in times when entrepreneurs are looking to finance reasonable projects, while companies with products, customers and profits are looking for savings to grow. There is still an ongoing proces of finding the way to finance these projects of the real economy, garnering capital gains and collecting interests and it is shown as extremely hard during this type of political control of the central banks that will not change a flawed monetary and financial system because of the lack of discipline. Being under pressure of more than 200,000 billion dollars of debt, the announcement of the ECB that it will sstrengthen control of interest rates could happen very soon.

What the history of finance has shown is that the control of the price of credit by the state, such as any control of this kind, will end as a disaster. The state does not have to control the currency, the price of credit or the economy, since the role of the government should be limited to ensuring equal rights between citizens and ensuring that they are respected.

While trying to come out from unusual monetary policies there could be seen numerous examples of multiplying panic-driven measures. The current policies of ECB do not differ a lot from what was prescribed in the Code of Hammurabi, turning the king into a god and leaving numerous people in the class of slaves. The difference is, however, that while adjusting the amount of money in current flows it looks like the ECB does not know what to do with its “Print”, “Rate” and “Delete” buttons. There is a strong need to make a movement in order to prepare for the end of monetary creation in euro, but the mechanisms to do so are not in sight.

This reveals another situation of repetition of numerous times vieved situations which led to the same myths. One of them is that the public money creates more wealth than private money, which is called the Keynesian multiplier. In this situation if the government invests one euro, its return on investment will be higher than that of private persons. According to this belief at the same time the government is not obliged to forcefully stab taxpayers. It can simply borrow because its return on investment will always be positive. While a wretched single entrepreneur, pursuing his guilty selfish interests may be mistaken, since the business may go bankrupt when its return on investment appear to be negative. Keynesians define the multiplier coefficient as the ratio between a change in public expenditure and the consequent change in total income. This explanation justifies the stimulus policies financed by the loan.

The ECB still injects 60 billion euros each a month into the markets in order to keep interest rates low and this trend is lasting, considering the unfortunate state of public finances of of the eurozone countries. The Keynesian multiplier also relies on the strange belief that consumption enriches and the thought that when people do not consume enough, what the government should do is just to distribute them money, created from nothing, taken from others, borrowed, whatever, which will combat economic depression and unemployment. This, however, ruins all hopes of achieving a decent return in the years to come.

Technically, ECB is more autonomous in relations with the governments, though in practice, this independence is completely apocryphical. The decisions of ECB are essentially made in the interests of several eurozone governments. By artificially lowering interest rates, ECB could facilitate public debt and by financing commercial banks lending to the eurozone countries, they guarantee to the latter an almost unlimited source of income, despite their already enormous debt. For Keynesians this situation might seem satisfactory, but its outcome is the credit market that becomes completely distorted. Resources are allocated unproductively, which contributes to slowing economic growth and thus reducing poverty.

The fact is that the large capital gains are no longer on the stock market, where central banks inject thousands of billions to inflate prices, but before the IPO and even in private equity transactions. Since 2012, the money of the insiders drained by venture capital is increasing considerably. The average real return on life insurance was 1.8% in 2016. In today’s markets, listed companies are now too big and too disconnected for their shareholders to be really involved in decision-making. Also, the banking crisis is still threatening and the European system is far from being consolidated. This all leads to a conclusion that the current monetary system, based on unrestricted credit, is a new form of crime against humanity.

There is a strong need to adopt a different approach as the mass of credit is used to protect from bankruptcy the weak links used by the parasitocracy. In these situations banks with doubtful debts, multinationals cooperating in ruinous public projects, and expensive social spendings in southern eurozone countries.

If we return to the comparisson of current situation with the ancient one we will see that it was not the king or the emperor who decided that gold or silver was the best suited to trade and exchange, but it was crowd of individuals, now fallen into dust, who have come to this conclusion. In their situation gold was imposed in a pragmatic and democratic way simply because it worked best, while the so called added value of a centralized system imposed by a ruler was limited to a seal certifying purity and weight. There should be noted that elites hate gold but have not dared to make the last move since central banks still have a gold reserve. Today central banks still have their treasuries, or at least, that is what is being said, while the people bother to rate precious metals. In current situation dollar and the euro have fallen against gold (and silver), while dollar dropped more than the euro. As it is the case anywhere else, there is value and price. Value is what each one attributes at a given moment to something, that is, the satisfaction that everyone anticipates of possessing something one desires the most — the price is what an infividual agrees to pay according to his own value scale.

There are three key problems that became more visible under these circumstances. The first one is that zero interest rates and generous liquidity kept the dying business alive, which inflated supply. In all sectors there is an oversupply of everything, where marginal companies have been able to continue to function even though they are fading, generating just enough income to borrow more money and to postpone the repayment of their debts. The second problem is that the income was carried by a steady growth in social security contributions instead of sallaries. The third problem is that the majority of employers is unable to afford to pay higher wages without considering the labor market as they are faced with ever higher costs, while their power over prices is zero because of the surplus supply. Confronted with a total lack of power over prices and higher costs, employers can either increase the working hours of their current employees or hire part-time workers without contractual benefit.

These three problems represent the most visible effects of monetary measures implemented by the ECB. By market capitalization with the money achieved by borrowing, instead of balancing the market, ECB creates an even greater problem of social stratification, making part of the  companies and therefore huge part of population literally slaves and as it was prescribed by the Code of Hammurabi, anyone who attempts to counter financial movements to these flows in order to facilitate the position of slaves receives a fatal outcome.

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Encouranging the Growth of Indebtedness Is the Crime Against Humanity

From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic 

The years of recovery from the global financial crisis are characterized by the phenomenon of negative effects that point to the detrimentalities of the overall concept on which the monetary policy of the leading central banks in the world is based, with the European Central Bank leading in flaws.

All the shortcomings of the ECB’s movements are noticeable on their results and under the mask of public goods funding, public money instead of funding public goods is diverted to corporate giants, with particular reference to certain industries where the level of risk is extremely high, whose costs grow exponentially, and whose earnings reinforce the position of these lobbies in the creation of public policies of EU member states in partnership with their governments that hire them to carry out public projects.

In the history of the economy, there are innumerable examples of exploiting the poor for the needs of the rich, and now it is systemically, strategically and with the institutional help of the common central bank for 19 countries. As has been the case ever since the money began to dominate human beings, the story is being based on the belief that bad money is supposed to be transformed into good money, where th bad one is private money, acquired by exploiting the weak and the poor, and it is being fictiously transformed in good public money. In the eye of taxpayers this creates the image how the private money is purified when it is taken by the authorities and becomes public money distributed by the government.

In these circumstances public money is without doubt good since it is being spent in order to finance the common interest. The minds of the people are guided by this myth and it is actually the one of the most rewarding undermining of our power to understand how money circles. In the eye of citizens private money is perceived as dirty result of dishonest actions, while the public money relieves, as, according to what governments are trying to explain, it creates more wealth than private money.

The whole theory is based on the idea that the return on the investment made by the state will be higher than that of private persons, adding that the state can do it by borrowing instead of violently exploiting its taxpayers, basing it on the hope that its return on investment will always be positive. The image of private sector is completely different, starting from the fact that the ideas of an entrepreneur are always being described as selfish, as well as that any business may go bankrupt and therefore the return on those investment may be negative.

The current situation in the Eurozone shows how a change in public expenditure and the consequent change in total income is being used to falsely justify each and every stimulus policy financed by the loan. This is also one of the most harmful misinterpretations of the overall benefits of the increase of the level of consumption, since the money that is supposed to be spent is actually created from nothing, borrowed or redistributed creating drawback on some other budget item, which results in the creation of economic depression and an increase in unemployment. The key problem is the decision to keep Quantitative Easing program unchanged, despite strong growth data in Eurozone countries.

The ECB still injects 60 billion euros monthly into the markets to maintain interest rates low, destroying any anticipation of achieving visible return in the years to come. Besides that the banking crisis is still menacing, the level of indecisiveness is too high and the European system is far from being restored. Considering the situation on the markets, it is very obvious how listed companies are now too big and too incoherent for their shareholders to be really concerned in decision-making, so a huge stock market bubble has formed.

Also, big capital gains are no longer on the stock market where central banks inject thousands of billions to boost prices, but before the IPO and even property in private equity transactions. This increases the wealth of the insiders whose money shattered by venture capital is increasing significantly over the past five years, explaining how QE program actually enriches a narrow circle of the powerful elite, leaving the rest of the population deeply in debt. Therefore, the monetary system is currently being based on free credit and literally forcing the citizens to use those credits is actually the crime against humanity.

Thanks to the QE program of the ECB the mass of credit is used to protect the system from bankruptcy, where the weakest link is the banking sector with dubious debts. When this is being combined with multinational corporations that are working on harmful projects supported by the governments, i.e. financed by the public money and the costly social spending in almost half of the Eurozone countries it is not hard to the imagine how hard the situation will be by the end of this decade.

What should be kept in mind is the logical fact that the debt cannot be unlimited since the remuneration capacities of people are limited and since their ability to work fades over time. If the ECB continues to base its activities on an infinite debt, the European population will be enslaved by their credits, and creating any type of slavery that is contrary to human rights means being involved in committing a new kind of crime against humanity.

The proces of making decisions in the ECB is oftenly perceived as a democratic, though it will not change an inconsistent monetary and financial system because of its lack of the regulation and being in command of the price of credit by the authorities will end in devastation. In a system as such under the ECB the member states do not have to have power over the currency, the price of credit, or the control of the economy, while at the same time its goal is to protect human rights of its citizens.

National central banks under the system of the ECB are percieved as more self-directed, while in practice, this autonomy is completely fabricated. Their decisions are essentially made in the interests of governments. By artificially lowering interest rates, central banks smooth the progress of public debt and by financing commercial banks lending to their governments, they pledge to the latter an almost unlimited source of income, despite their already oversize debt. Despite the changes that occur during this process and despite how much growth occurs, this progress is pervasive, since the only long-term outcome of this policy is the creation of debt slavery.

The Latest Rise in the Price of Gold – a New Cause for Concern

From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic 

While the price of gold continues to rise it is a sign that financial resources should be turned into gold, opening the question about the latest causes of this phenomenon and whether gold really still has the status of “safe heaven” investment.

This month’s trading on a global financial market was under the impact of the president of the United States Donald Trump who dismissed the director of the FBI, since an investigation underway could lead to the opening of an exclusion procedure. This unavoidably had an impact on the value of the American dollar, moving the investors to other assets.

On the other side of the Atlantic the start of the monetary downturn from the European Central Bank, their decision not to add 80 billion euros every month, but to reduce it to 60 billion monthly. The expectation that this situation will not be something that the banks in the Eurozone will not be willing to accustom easily tempted bigger awareness of the stock market which so far has been pulled up mostly by banking shares.

Both of these situations have caused the rise of the price of gold. Besides that, two big countries, Russia and China, are the leading global importers of this precious metal and they are making efforts in arranging a new global financial system that is supposed to be completely autonomous and detached from the dollar.

The first half of 2017 was marked by several serious political events, including some of the most critical elections in the Netherlands and France, there are odds-on chance that the financial world is relatively distress with the apparent outcome of a renewed demand for safe assets, where the gold takes first place.

Another thing is that since 2015 the Chinese yuan is incorporated into its official reserves of the Central Bank of Russia announced for the first time to have integrated, which until that time consisted of 44 percent of dollars, 42 percent euros and a bit more than nine percent of pounds sterling.

At this time China and Russia are increasing their gold reserves considerably, making an allowance for progressively strict way of monetizing gold as the foremost mechanism of trade arrangement, particularly through their currencies now held up by gold and also within the structure of an exchange system analogous to that of the rest of the world still locked by a dollar in decline.

Last year at the same time, demand for gold, supported by purchases of the exchange-traded funds, was exceptional. With the uncertainties generated by the prospect of a possible Brexit, investors had massively taken refuge in the gold contracts during the first quarter of 2016.

Global gold demand continued to grow in the second quarter of 2016, marked by the deepening crisis with Brexit and worsening geopolitical factors by 15 percent. Demand for gold reached 1,290 tons in the first quarter of 2016, an increase of 21 percent in comparison with the first quarter of 2015, making it the second-largest quarter in terms of demand.

The price of gold has even augmented by 25 percent in this first half of the year, which represents its highest performance for more than 35 years, while on a twelve-monthly basis global demand for gold fell by 18 percent, a plunge to be put into perspective given the exceptional demand last year, evoking that the first three months of 2016 correspond to the strongest first quarter ever in terms of demand. Gold demand, with a total of 1064 tones, reached a new record in the first half of 2016, surpassing the previous peak by 16 percent in 2009 that was present in the peak of global financial crisis.

When it comes to the strongest political impacts on global financial market it was the election of Trump that pushed investors into a short-lived optimism. Regardless of the prospect of a stronger dollar and a rise in U.S. interest rates, there is still vagueness at the global level today, both economically and geopolitically.

Central banks remained strong buyers, buying 109 tons in the first quarter, while the supply increased by five percent. This increase was fueled by a massive influx of 364 tons of gold-traded funds, reflecting a huge escape from currencies into gold, since the market participants are concerned about the global economy. Also, the investment was the largest component of the demand for gold for two consecutive quarters.

There are two possible outcomes of the current situation, where the first one is reaching the global agreement for maintain the dolar’s status of the world currency, while the other one is related to manipulation with the price of gold. The global agreement is related to upholding the value of the dollar. Since the macroeconomic data of the United States are showing a decline from quarter to quarter, the dollar is no longer used as much in everyday life around the world. The central financial institution in the U.S. Federal Reserve continues the trend of printing money, opening the space for the deficit that became unmanageable. This made the investors recognize that they have to look for alternatives to the green currency.

On the other hand, finding alternatives is not something that banks cannot practice. In this regard, the setback comes from the investment banks, creators of the gold and silver markets and its agents, which are looking for a particular advantage at the cost of investors, as it was the situation in the past. This is obtainable by spreading panic and transferring funds to others, so they can take advantage of the upbeat period until the next similar occasion.

As this has happened several times during the past decades, those were the emerging countries, in particular China and Russia that have benefited from buying gold at artificially low prices, expressed by all these manipulations, which explains the shortage of this precious metal, particularly because Chinese buyers do not return it to the market.

At the same time it is Germany that does not considering publicly the fact that its gold is stored in the United States could be sold and therefore there is no asking for its repatriation. This is why this enthusiastic phase would last for a certain time based on the correction where the potential is considerable for the emerging countries to make further movements in order not to be allied to the dollar.

Rematerializing the Upper Limit of the Debt In Order to Be Renegotiated

From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic 

American central financial institution Federal Reserve had a goal to stimulate economic growth after the crisis of 2008 by issuing assets ready to be sold on capital market with Quantitative Easing program. Released in three series, QE programs were far from boosting growth, on the contrary, it made economy weaker and more dependable on artificial measures.

That type of a massive financial formation without having real support in the creation of goods and services has proven to be a disaster and instead of learning an important lesson on what the risks of this type of action look like, European Central Bank decided to do the same few years later.

The only institution that has sincerely opposed this type of program was central German financial institution – Bundesbank. The thing is that the ECB was unable to copy the model, while also something that was taught to be the derivative was not applied properly.

Fed was paying off a record dividend to the US Treasury, which was directly linked to the enormous revenues that the Fed received from its acquisitions of assets under its smallest amount of compliant monetary policy followed in 2015 in order to grant liquidity to capital markets and to ponder on long-term interest rates to encourage economic revival.

It might seem unclear whether the influence of the USA comes from its GDP that is still as high as the real economy is in underprivileged shape, so there should be highlighted that most of the wealth produced in that country this way is, in fact, fabricated and comes from financial or banking yields.

Even after completing three series of QE, economic growth in the US continued to be poor, without any visible improvement. One might say that without it American economy would have collapsed, but the thing is that these measures have a result that is in financial sense equal to the amount of resources invested. Contraction the fiscal conditions of the federal authorities, with a quick turn down in the deficit could not, nor in theory, nor in practice, promote growth.

The upper limit of the debt was rematerialized in order to be renegotiated, which caused the increase in real estate price matching with tightening of credit conditions, so consequently the unemployment rate became higher than the situation with this program was supposed to allow. Though, at the very beginning this type rescue was designed to be something that others __ and would therefore be the supreme irony because, as we know, it is the Fed that has been actively working to set aside the financial institutions in the U.S.

The growth rate since last June is lower than projected, which is certainly the major point, since it might mean that there could be a doubt in the efficiency of the Fed policy, because that institution would become a victim of the prominent law of withdrawing.

Sooner or later the operations being discussed become less valuable and apparently create stubborn effects that will be complicated to manage, so the results are finally rather underprivileged in terms of the means arranged through the amount of money added to boost the liquidity.

In this regard, the Fed is paying to the Treasury the total of its earnings, reduced in particular by the operating costs of its headquarters in Washington and the dividends paid to the twelve regional banks constituting the Federal Reserve system. This status is supposed to ensure the sovereignty of its choices in relation to the government. The Federal Reserve does not receive subsidies from the Congress for its operation.

The advantage of the current position is derived from accrued interest on financial securities obtained by the central bank as part of its monetary policy support to the economy, consisting of treasury bills and mortgage-backed securities.

Yet the exit strategy of quantitative rate is lowering down, which would not only stop buying bonds, but also sell them back step by step, could prove disastrous for the Fed if it were to correspond with a strengthening of interest rates.

There is a fear of the explosion of a bubble which never stopped inflating, especially as the number of jobs is falling and that the number of bankruptcies is continuously increasing. Besides that it should be stated that, unlike the ECB, the Fed has the right to buy public debt securities directly on the primary issues market, so it can consequently directly finance part of the budget deficit of the U.S.

ECB Is Hiding Public Debt Instead of Stimulating Growth

From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic 

The European Central Bank has injected huge amounts of assets into the economy over the past two years in the course of rediscounting public debt of the Eurozone countries, which represents an exceptional monetary measure, referred to as quantitative easing is intended to bring back the rise of the inflation rate, which is itself supposed to neutralize the deflationary and recessionary forces that are affecting development.

euroWhile in the beginning the single European currency was weighed down by the proclamation of these new measures to support the European economy, it has recovered against the dollar once the ECB has suggested that descend in interest rates should not necessarily carry on for the foreseeable outlook.

Since at that moment investors are beginning to distrust the efficiency of the monetary policy of the ECB and are increasingly worried about the collapse of solutions, and since the hope that its leaders have expressed that the rates should not go lower is not something that could restore their confidence. After that the dollar plunged to the lowest level since mid-February against the single European currency.

The whole situation has emerged at the times when recession started to put pressure on interest rates, because the investment requirements were extremely low, so the quantity of money borrowed falls by diminishing the interest rate. After this the ECB announced that it would lower its major interest rate to zero, with the plan of infusing inflation and increasing growth.

These conditions have caused the creation of three big problems – first of all, the situation that even the ECB has lowered rates the growth of the inflation rate did not return; second, the euro that lost its value because there was plenty of ready to use money in the financial sector of the Eurozone; third, the increase of public debt, since it was the tool that served as a security to the money produced.

Besides that, all of the liquidity boosters made the euro more plentiful, which decreased its value, first of all against the dollar, causing it became cheaper in terms of interest rates, while on the other side these financial actions constitute the access of the unsound environment of public debt. Conversely, any downgrading of the green currency makes dollar purchases of gold less expensive for traders with other currencies, which is a trend expected to uphold the price of gold, which as well benefits from its category as a safe haven, boosted by these circumstances.

With no the refinancing of the ECB, this kind of debt would have suppress the economy by collecting the money of individuals and companies, in the course of the balance sheets of banks and insurance companies, so the Eurozone countries have found a disposed creditors for their own refinancing at zero or even negative rates.

However, the two key features of this kind of indebtedness are that the total amount is equal with the aggregate of the sums borrowed by the country and the interest on the debt that the government has agreed to pay. On the first sight one might conclude that it is acceptable to practice financing by debt, though in this case, without bearing the burden of salaries, so in order to repay this debt the Sđstate has only one option and that is to charge a tax by forcing the taxpayers to pay it, which also has its particular cost.

In those cases when the central bank lends the money to the government at zero-rate, the central bank makes pure monetary creation since it does not pay off. This creates the market tension, especially because of the growing complexity of the repayment of the debt reinforcing the distrust of the depositors.

The only subject in the Eurozone that has the privilege of monetary creation is the ECB, although the Treaty of Lisbon bans lending directly to the states, explaining that that might mean rescuing the countries that would be those who receive the money by other members at their own cost, as well as in order not to cause inflation. Consequently those would be the Eurozone members that agreed the massiveness of their public debts, slightly in the form of deposits made with credits where other members act as lenders.

The situation as such would generate an extremely high inflation rate. Besides that there would be seen the strong tensions on interest rates or stimulated outcomes that would further increase it, creating an environment completely insupportable, both for households and companies, strongly affecting the poorest ones, as well as inflicting a heavy blow on middle class whose purchasing power would decrease so rapidly that the income tax would be impossible to collect in the amount planned by the yearly budget.

These were the reasons why monetary creation was presented as required. However it is inadequate to stimulate growth and inflation this way, because its actual purpose is to hide the public debt in the balance sheet of the ECB in the course of insignificant interest rates. Besides that, these are the banks that this possible through very low or zero interest rates, and whose savings will ultimately be cut off by inflation.

European contracts do not allow ECB to buy new debts issued by the Eurozone members, though it could only purchase them on the secondary market, using the existing savings rather than printing new money out of nothing. However, such public debts stay in proper balance sheets only as much as it is required to relocate newly issued money through quantitative easing program, which made these public debts replaced by nonexistent monetary assets.

All of this is a subject of financial authoritarianism, which represents a situation that leads to recession and a struggle against debt repayment. Financial repression is a context characterized by artificially low rates to reduce the burden of the public debt burden.

Medium of Exchange Rather than the Tool for Value Accumulation

From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic 

Explaining the meaning and the purpose of the digital currency bitcoin has lead to defining its level of soveregnty in comparison with the existing monetary system or the position of leading central banks, where many people think that a country is sovereign and that if it has contracted a debt in a currency, it is free to reimburse it in another country it chooses.

Since bitcoin was not created by banks, it does not depend on any state and it is also not linked to any specific currency, therefore it is not tied to a specific central bank. Bitcoin is interchangeable with dollars, euros or any other major currency. From the economic standpoint, it is a classified currency that is not issued by a bank, and is not linked to a currency agreement.  Beside sthat, it does not have a monetary policy.

If we consider currency such as euro a reward without fundamental value whose procedure is imposed on their users, there is an open question what actually digital currency is and what is it used for.

The easiest way to explain it is to observe euro as a coupon in the monetary sector in which the euro has legal tender. A banknote is a holder’s declare valid in any country where it is in the payment system and it represents a means of payment without inherent value, valid in a large geographical area.

Bitcoin is not a commodity money, nor a fiat currency, since it has no required price. It shares are not being backed by a material asset, since it has value only because economic actors agree to use it in cases where the internet facilitates exchanges between them.

There is no need for great thoughts to look forward to the effects of such guidelines. It is oriented more towards the monetary exchange purpose than to be a tool for accumulating value, even though its deflationary character can theoretically guide to that.

While alternative currency applications are generally distinct by a very strong constructivism or by the necessity of force to enforce a new conception, bitcoin is a merely individual project which aims to rise above private initiatives.

A restricted amount of a valuable supply whose worth cannot be affected by state assessments shows that this is an example of something that can be called digital gold, because the volume of the user base is increasing, which show the way to a price increase.

Besides that, the profile of buyers is widening, too, so it is no longer reserved only for experts in the digital world, assuring users by the rapidity of transfers and the safety of the new currency.

As a result, the bitcoin sustained to grow to the point of declaring itself as the financial asset with the best annual performance in all currencies during 2016. The bitcoin reacts like an asylum since younger generations do not believe in gold as their parents do, and in emerging markets in particular, this cryptocurrency becomes the investment to refer to, whereas it is much easier to use than gold.

This digital currency is resistant to money-laundering, which is the catching disease of growing number of central banks. The reason of its immunity to this it is written in its algorithm of operation (not modifiable) that there will never be more Of 21 million bitcoins in circulation.

Some of them have already earned enormous gains … while we continue to settle for a few percent per year. As one can imagine, such an increase has made some people extremely wealthy, but for once, it was not a handful of bankers. The funds could be generated in order to start new business and helping others in the transition to this new form of savings and banking.

When a Rescue Plan is an Obstacle to Recovery

From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic 

The central financial institution of the United States, the Federal Reserve, directs global finance, as well as the big part of the global economy, and that is the reason why financial markets worldwide apparently replicate unreservedly qualified prices, since they are entirely under the Fed’s control.

unnamedThe highest position in the system of Fed’s regulations is the way it regulates admission to the American dollar, since currency is no more than the credit, so the money became no more than additional alarming part in the flow. In processes as such it is the ready money that is guaranteed by a government, while the credit is guaranteed by the banks, so the Fed regulates the price of credit by setting the policy rate, though banks, Wall Street and financial markets depend on these proceedings.

The regulations of the Dodd-Frank Act delayed their way of performing, which has resulted with certain very specific changes so far. The Dodd-Frank Act was adopted after the 2008 financial crisis in order to enforce capital inflow and annual stress tests performed on large banks, whose insolvency may create risks to the global financial system, ensuring that they would hold out financial shocks. However, this act is the object of disapproval of the new American administration, which condemned the guidelines of banking business.

President of the U.S. Donald Trump stated that he hopes that his administration will cut down on Dodd-Frank’s law tremendously because “some of his friends with beautiful companies cannot borrow money”, explaining that the reason is that the banks do not want to lend them “because of the rules of the Dodd-Frank law”.

The whole process represents a big challenge, though the current administration does not have a strong point on numerous of these issues, apart from trade and overcoming the Dodd-Frank Act on financial regulation, there is still a chance to achieve a compromise. The Dodd-Frank Act, quite the opposite, offers a complete framework enabling the institution that plays very important role, the securities Exchange Commission and its commodity equivalent, the Commodity Futures Trading Commission, to assume responsibility of these financial instruments.

Since Trump became the president and since he began to talk about deregulation, the shares of the six major banks saw their price rise by more than a third, lead by the Bank of America with a spectacular 48.8% in one quarter. The exceptional debt of US non-financial corporations rose to more than 13 trillion dollars, including around $3 trillion in debt since this act was passed in July 2010, though not all of them come from bank loans.

As the Fed has trimmed down interest rates to zero, the cost of borrowing became extremely low in the capital markets, so that situation encouraged makes use of ready money available. However, even if some of these debts come from the bond market, the guarantee of the debt in itself is often controlled by the biggest banks.

There are several things that occurred this month that lead to wrong conclusions regarding plans of Trump’s administration that does not act like nation-state and that is unwilling to correct their own mistakes, creating an apprehension of huge self-destruction. There is also a fear that, as it is the case in many other developed countries, the middle class will be furthermore downgraded especially because the growth is based on indebtedness, so there are only credit sellers who actually see the benefits of such “potential” where thousands of billions have been unsuccessfully redistributed.

From Fed’s standpoint there is a change in the approach where, instead of using the speed up tools in order to stimulate the economy, they now let it step up, limiting it with the point where it completely holds up the accelerator. This practice still allows a sufficient amount of control, as well as the possibility to exploit market potential in order to strengthen financial sector rather than really stimulating growth. It is yet unclear what at what phase of this process American economy is at the moment, but it unquestionably took one more step towards the ultimate devastation when it started to practice Quantitative Easing programs and everything that was later meant to be the substitute.

The situation after those programs ended was lead with fictive increase of interest rates, which have caused even more confusion since the lower the rate – the more credit is available, while at times of higher rates, the fewer ready money is available, allowing only banks to recover. Those credits were primarily given to institutions significant for Fed’s success, combining the policies of the U.S. government and the leading banks, who then redistribute it to their partners at higher or lower prices, such as multinational corporations with top credit rating, oil producers, other banks and other governments etc.

In a situation where Congress is not in a position to balance the budget or cut spending substantially it is not even possible for Fed to let monetary policy return to standard, since a huge amount of artificial credit facilitated by this monetary system flooded all tools of regulations, making them dysfunctional. Years of development of a financial system as such allowed cheap credit to go first to those with debt capability, such as the richest subjects, big corporations and Wall Street magnates, instead of to those whose wealth stimulates spending, i.e. consumers, since an average worker gives one hour of their limited time, where only 25 dollars could be brought, while a Wall Street insider could get an unlimited credit at the price that is under the actual rate of inflation.

A huge concentration of these credits made them become bad debts which have significant reflection on Fed’s balance sheet, and in order to solve that problem there is a taught that they should be putted back on the market, which created a remarkable concern, since the collection of credit up to that point grew relatively fast. In case of the situation where Fed revisits debt selling, it continues in return for the money and therefore the amount of credit or currency diminishes instead of growing constantly. By doing so, the Fed risks the explosion of the bond bubble, since there will be fewer buyers for bonds so rates will go up.

One of the key arguments that Trump’s administration suggests is to withdrawing all or part of the Dodd-Frank Act, besides the fact that it was created by the administration of Barack Obama is that it reduces bank loans. For the current American administration this represents an obstacle to economic recovery, while, according to Fed, all loans and leases over the last three years granted by US banks increased by 6.9 percent each year, while during seven years before the crisis that rate was 7.9 percent. The central U.S. financial institution still preserves the option to restore a possibility for monetary discourse, indirectly showing that it will never take a chance of disturbing the markets.

There are several implications of such policies on the current financial policies of the U.S. that reflect on other central banks worldwide and the one is that the banks lent the companies about 80 billion dollars every year, where corporations had approximately two billion dollars of ready money that they could use to expand employment or growth, though instead they borrowed huger than ever amounts of money in order to convert their shares or to reimburse dividends. During this process companies supported by banks disfigured the market equity by not allowing it to boost through actual investment or reasonable assessment of their companies.

Conditionally, and if the Fed keeps on with these policies, the equity markets will witness distractions, since there are many cases where trading items have seen an upward march, so while the reforms and major investments are slow to occur, they could take the threats very seriously. There is also a fear about the decline of many debt-dependent economies, having in mind that central banks have established themselves as major consumers of all kinds of bonds, but also as backers of available credit, both for business sector and for governments, so if they give up this position, the whole situation will be very difficult.

Besides that, banks involved in this process are mandatory to maintain an assured quantity of reserve requirements with the Fed, having in mind that the quantity of reserves deposited with the central bank of the U.S. was close to the required reserves, but since the 2008 crisis, the amount of reserves overload deposited has reduced and it now stands at around two billion dollars, which means that it is not the Fed regulations on minimum reserves that bound bank lending, but that those are the banks that are limiting themselves because they fear future defaults.

This means that the Fed no longer performs quantitative easing officially in terms of not printing money to buy Treasury bills, though in reality, when a requirement it holds matures, they are buying another to roll the debt. Therefore, there is a possibility for Fed to reduce its financial statement, since its balance sheet would therefore be subject to an easier regulation and for the current U.S. administration that is not a satisfying outlook, because the Fed was certainly a shock absorber regarding its purchase of Treasury bills at times when the government became dependant on borrowing.

Another thing is that Fed figures demonstrate that business lending action has been stronger than it was supposed to be and that is why it is beginning to weaken. There was an immense credit spreading out cycle with low-priced money created by central banks and ultra-accommodative monetary policies, though the failures to pay and complexities in the credit sector were increasing.

At this moment it is Trump’s administration that could relieve tension by transferring supremacy and money from one section to another, which, of course, would not be sufficient to change the system and neither the Congress nor the Fed could stop the credit cycle at this moment. Unlike actual money, borrowed money is subject to the credit cycle that causes its boosts and falls, and at times when the reduction is acceptable, the whole system is under threat.