Understanding The Global Financial System And The Monetary System

5 238
Avatar for MobTwo
Written by
4 years ago

Everyone uses money every day but surprisingly, how people understood so little of it. Recently, I asked someone if they knew what inflation was, and they don’t even have a clue. I doubt the average people out there know about the workings of the global financial system, the repo market, Eurodollar, QE, LIBOR, IOER, etc.

Some people believed that the 2008 global financial crisis is a one off event that has been resolved. The reality is that they only fixed the symptoms but not the root cause, and these symptoms will keep repeating itself. In fact, one of India’s largest bank has already collapsed this year and the government is forced to take over. I believe during the upcoming financial crisis, more banks will collapse (cascading effect) because they are incentivized to fail. They are incentivized to overleverage as much as possible, because when times are good, bankers get maximum big fat bonuses… and when times are bad, the government bail out the banks. If anyone needs to understand my passion for Bitcoin Cash, it’s because I think the global financial system is rigged against the common people and I want to do something about it.

When a bank is failing, there is no good solution out of it. The government can either let it fail or they can bail it out. If they choose to let it fail, then depositors lose their money. Anyone who believes their money is safe in the bank may lose all their money when that happens. And when people lose their money, they get angry and take it out on the government. So usually, governments will prefer to step in to bail out the banks than face the angry mobs. The way they do that is by printing more money, which is essentially stealing from people like you and me, to bail out the wealthy. When governments print more money, they are essentially reducing the purchasing power of everyone holding cash, a simple concept not many people yet understand.

Today, I was trying to understand the psychology of it and here is my attempt to explain. If a guy comes up to you and take $50 from your wallet without your permission, you get angry because he is stealing from you and you can see that. But if you have $100 before and $100 now, but your $100 before can buy 2 bags of food and your $100 now can only buy 1 bag of food, people don’t get angry at this theft via inflation, why? Sorry to say this but I think most people have problems understanding abstract ideas and connecting the dots. This is also exactly why people only panic when the Wuhan coronavirus hit their hometown. Anyone whom understood exponential numbers, should have connected the dots and panicked way back in January when the exponential numbers came out.

Back to the banks (and by extension the global financial system), I think there is a very big problem. It’s a very complicated problem of which each bank has some visibility, but none of them has full visibility. Last year, when the interests in the repo market surged to 10%, we have evidence that even the Federal Reserve in charge of monetary policy does not understand what’s going on. I’ll explain this in the next paragraph but I just want to let you know that if you’re thinking someone in charge is smarter than you or me, I’m here to tell you no, they are not.

How do banks make money? They make money by taking depositor Alan’s money $10, give Alan 1% interests for that $10, and then loan out that $10 to Bob for 20% interests. One day, Alan went to the bank to withdraw $2 and the bank realize it has no money, because it already lent the full $10 to Bob, which leads to something called a bank run. To “solve” this, governments then say, ok bank, you cannot lend out the full $10 next time. You always need to keep $2 in your reserves in case Alan comes back to withdraw some money. In other words, it doesn’t really solve the problem but it reduces the frequency of the problem far enough, except during exceptional times (like a global financial crisis), you still have bank runs or banks failing.

Knowing how fractional reserve banking works, you can also see why banks are incentivized to loan out as much depositors money as possible, while staying compliant on sufficient reserves, so that they make maximum profits. This is also where the repo market comes in, when bank A realize they don’t have enough cash, so bank A puts up a collateral to bank B for quick cash liquidity.

This works fine for some time until in 2007, some of these collaterals quality is literally dog shit and the banks left holding the bags went bankrupt (some got bailed out with taxpayers money because they are too big to fail). Last year, when the interest rates for the repo market surged to 10%, suggesting that banks are scared to lend money to other banks, the Federal Reserve step in. They were forced to do this because if they don’t, banks may start failing and lead to cascading effects when bank A collapse and can’t pay bank B, leading to bank B collapsing and can’t pay bank C, leading to bank C having problems. The global financial system is more fragile and connected than we think.

Federal Reserve has a toolkit called IOER to incentive banks to (hold more reserves or) loan out their money to add liquidity in the repo market. IOER is basically what the banks earn in interests if they have money in their reserve so when the Federal Reserve wanted the banks to add liquidity in the repo market, Federal Reserve just reduce the interest rates (IOER) such that the banks find it more lucrative to loan out their money (to other banks) in the repo market instead of keeping it in reserves. Last year, Federal Reserve did exactly that but somehow it didn’t work and banks still refused to loan out their money to other banks despite the opportunity to make more money (which means the banks knew something we don’t), leading to the repo market crisis last year. Like I said, even the people in charge of monetary system does not understand it completely, because it is super complicated and nobody has the full visibility on what’s going on.

What’s the key takeaway here? I’m telling you right now that if you think people in charge of the financial system knows everything, then you are in for a surprise and repeat of the 2008 global financial crisis. We have not solved the problem, merely postponing it. And if you think your money is safe in the banks, well one of India’s biggest bank just failed and needs government bail out. By bailing out, I really mean stealing money (purchasing power) from people like you and me.

I already lost faith in traditional fiat money. Governments can print as much as they like to benefit the wealthy and the banks leading to hyperinflation like what we see today in multiple countries across the world, screwing ordinary people, I don’t care anymore. I already traded the fake money for Bitcoin Cash because I know there will only ever be 21 million of it. My only hope is that more people can see past this rigged monetary system and say, enough is enough, I am sick and tired of others stealing my hard earned money. And that’s why, I love Bitcoin Cash, the peer to peer electronic cash system.

1
$ 14.20
$ 13.37 from @molecular
$ 0.50 from @ErdoganTalk
$ 0.25 from @btcfork
+ 3
Avatar for MobTwo
Written by
4 years ago

Comments

read.cash note: Probably not original content

Repost from Reddit?

$ 0.00
4 years ago

Not sure yet, need to research.

$ 0.00
4 years ago

False positive, fixed.

$ 0.00
4 years ago

Was incorrectly detected as "Non-OC", fixed, sorry! Still fine-tuning.

$ 0.00
4 years ago

If anyone needs to understand my passion for Bitcoin Cash, it’s because I think the global financial system is rigged against the common people and I want to do something about it.

came to Bitcoin in 2011 for the geeky computer science and stayed for this after I learned how fiat money worked.

thanks Bitcoin for the education and for giving the people a tool to fight back (or route around, rather)

and thanks mobtwo for this article. it's very well written and has a good length. you're mostly preaching to the choir here, of course, but hopefully one or the other who might still be ignorant can be woken up.

$ 0.00
4 years ago