Horse Sense Economics

by Rolf Witzsche


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When we speak of the western financial system that controls much of the world, we speak about a system of fraud, because this is what it has become, especially so since all governmental regulations that once had protected society, such as the Glass-Steagall law of 1933, has been repealed, and the Bretton Woods fixed-exchange-rate system has been overturned. With these restrictions removed, the 'barn doors' were opened wide to money speculation of every imaginable sort, by the private banking system and its derivatives institutions.

The financial system has become a gambling casino of unimaginable size. More than a quadrillion dollars in money bets are now riding the roulette tables at any given day in the form of financial derivatives contracts. A quadrillion dollars is equal to a stack of hundred dollar bills standing 670,000 miles high, which when laid on its side would encircle the entire Earth 26 times.

This huge volume of bets in the form of money-derivatives 'contracts' are highly profitable for the banks who own the casino, but even they sometimes lose. If they lose, the losses are gigantic. In 2008, the losses became so enormous that government bailouts became necessary in order to keep the entire banking system, which is the casino, from collapsing. The bailouts are costing the American people at the present time, a whopping 80 billion dollars a month, which has been committed to with no end in sight. The sum is equal to a stack of hundred-dollar bills, laid face to face, stretching from Boston to Los Angeles and back. While this vast flood of money is dumped into the trough for the gamblers, now month after month, nothing of value is produced in return for society. If this isn't fraud on a grand scale, what then would qualify for the term?


transcript


     The morning sunshine was flooding her apartment by then, while we were sitting in the good room having tea. The eyelids were still heavy from too much sleeping, hers apparently too.

 

     "I can guarantee that you won't fall asleep by my story," I continued, "though the story straddles the boundary between fiction and fantasy. It doesn't seem real, but it is basically tragically real. It is a story from the real-life modern world where fact and fantasy are reversed, where the most insane rules the day, and where true reality is deemed not to exist. The story is told in many versions, but all the versions speak of one thing, and that thing is real."

      "And the hero is a horse rancher?" said Helen.

      I nodded and leaned back. "The story is set in America, but it could happen anywhere:"



      A horse rancher named Albert comes to visit his neighbor Frank, also a horse rancher. They talk about how slow the business has become. Albert said it was so because modern people rather ride sports cars than horses. "It's a thankless job raising horses now."

      "You don't have to do this," said Frank. "Sell the ranch and live like a king. We could do this together you know, and move to some beach paradise. We could sleep in till noon then, if we wanted to. My brother Jason told me how this could be done, he is a financial wizard you know. He owns an investment company in New York; a very successful one. Jason said we could be millionaires if we wanted to do a few things right."

      "Like what, Frank?"

      Frank points to the coral. "Do you see the brown stallion on the right? I would like you to buy it from me for a million dollars, and I promise to buy it back for a million and twenty."

      "This trade nets me twenty," said Albert. "I can use the twenty. I still owe a bundle on the last feed delivery." Albert reaches his hand out.

      "Not so fast," said Frank. "The horse that you were riding in on, would you like to sell it to me for a million, and promise to buy it back for a million and twenty? In this case we would be even."

      Albert nodded perplexed and laughed. "We are even then. What have we accomplished?"

      "We have become millionaires," says Frank. "That's how the financial system works. I send you a bill of sale tomorrow, and you will send me the same. This makes all of our horses worth a million and twenty. A real certificate of purchase backs up the price. But the price once established applies to all of your twenty horses. Under the modern financial system the established price for one traded asset becomes the benchmark price for all assets of a similar nature. That makes you worth twenty or twenty-three million dollars, depending on how many horses you have, and my worth would be nineteen million."

       "How can this be," says Albert. "I couldn't sell the best horse of the lot for a thousand last week. Who would pay a million?"

       "It doesn't work that way," says Frank. "Jason told me what we need to do. We need to sell the entire business as a single asset to his investment company. He promised to buy it if we give him a 50% discount. We would walk away with about ten million each. Jason would then report to his shareholders a 20 million profit from a single trade, which would drive up the stock value of his company. Also other investors would then offer twenty percent more for the asset that showed this phenomenal gain. Jason would walk away with 4 million in cash for this subsequent trade. That's not bad for a day's work, is it? The other investor will then sell the package again, maybe at full value to someone who needs a big tax write-off. Sometimes companies have too much of an income, said Jason, which doesn't look good on their balance sheet, when it comes from illegitimate sources. In this case the new owners of the asset want the asset to loose its value. To do this they invent an epidemic and donate the horses to the slaughterhouse and burn the buildings to the ground. In this way the company owns the burned down property pays twenty million dollars less taxes, which is a great profit for a property that wasn't paid for with real money to begin with. Jason suggested that the CEO would then likely sell the devalued property to himself for a few dollars, and built it up again into a fancy holiday ranch, to be used exclusively for his own pleasure. Jason suggested that in time the CEO might get tired of riding horses and would then invite one of his fellow CEOs for lunch and propose that he buy the ranch from him for a hundred million with the promise that he'd buy it back for a hundred million and twenty. His fellow CEO would understand the process and then likely propose to him that he do the same for him by buying his fishing lodge business and selling it back to him. Both CEOs would agree to it with a smile and a handshake, and the paperwork would be in the male the next day.

      "Jason also suggested that the ranch would then be mortgaged for a hundred million," Frank continues his explanation. "The CEO would take the money he would get for the mortgage and buy up 51% of the outstanding shares of an aircraft company. Perhaps he would like flying airplanes better than riding horses. Once that purchase is accomplished, he would appoint himself as the CEO of the company that he has now control of. He would then sell the ranch to it with the outstanding mortgage on it. Nobody could block him from doing that, because he would own the majority vote. Of course, as the CEO he would give himself a free airplane, a test model perhaps, that he would test for the company at a fee. Then he would asset strip the company and give himself a huge bonus for the cash increase, and vote up a golden parachute for himself. In the end, he would resign, but before resigning he would force the company to buy the shares back that he controls, and to buy the whole lot as a package for the original value, which Jason said would be a bargain for the company in terms of getting its control back.  The CEO might walk away with two hundred million in his pocket. That's not a bad return for a ranch that is actually a liability by then. The company would probably go bankrupt after that. The mortgage would probably default. The property be auctioned off for a song. Maybe a farmer will buy it for a few hundred, to be used as additional grassing land."

      "And the bank would be holding the empty bag of the defaulted mortgage," says Albert. "This would be fraud against the bank."

      "The bank wouldn't care," says Frank. "In fact, the bank wouldn't loose a penny. The bank never keeps the mortgage. It takes the mortgage and cuts it up into confetti and mixes it up with confetti from other mortgages. Then the whole bucket of confetti gets bundled up into small packages that are sold on the world market as collateral backed debt obligations or things like that. Then, when the mortgage on the debt for the ranch goes belly-up, it will be hard to tell who owns what part of it. The confetti parts may be owned by investors all over the world, or by other funds located in Russia, and India, and Africa, and in South America. It's called spreading the risk."

      "It should be called, hiding the fraud," says Albert. "Everything that you told me, Frank, is fraud built on fraud. It's immoral, I tell you."

      "But it is not illegal," said Frank. "As Jason told me, fraud is good for the financial system. The bank, that would issue the CEO's mortgage for a hundred million, knows that the ranch isn't worth a squat. But that's not its concern. The bank pays big fees to brokers to come up with big mortgages. The bigger, the better. Besides, the hundred million mortgage for the ranch would be sold anyway, and be gone, but before it was sold, it would be counted as an asset that the factional reserve banking system allows the bank to create itself new credit against, as a backing for new lending. The bank would get out of this deal ten times the value of the mortgage, in new credit, for other mortgages to be sold, that it them collects interest on, and fees, or it collects big profit from the scam as it takes the resulting bigger pile of mortgages and creates an even bigger pile of bundled confetti with it. The bank certainly wouldn't discourage fraud, it lives and prospers by it. Jason laughed at me and said that us little horse ranchers had no ideas of how the modern world financial system actually works, which has been fully globalized. Sure, Jason admits that there is fraud everywhere, but he says fraud is legal, and is encouraged in the modern world, that after all, has become a cultural wasteland by our rancher's standards. Jason suggested that we move with the time. He said, that fraud was now indexed and derivatives are being sold on bets that are based on the efficiency of the fraudsters. He said, that there is no end in sight for this game, which may some day be 500 trillion dollars in size, or a quadrillion. Jason said, that the banks make big profits in fees from this game, and everybody is happy playing the game. And the banks don't even care if the game goes belly up and their derivatives bets go sour. They are not playing with their own money. They are taking on risks they can never cover when the game goes sour, or their depositors could cover. They don't care, because they bet that the government wouldn't dare to let the banks go under. They are betting that the government will bail them out. The taxpayers would then pay for the bank's gambling losses."

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From Chapter 9 of my novel:  Discovering Love
online page 82 to 88 - Transcript 

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