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Monetary Reform!

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Author Topic: Monetary Reform!  (Read 15538 times)
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« on: August 24, 2010, 05:21:18 pm »

Of all the artricles I've read concerning derivatives, I've yet to see one in which the issue of "consideration" is specifically addressed.

For those unfamiliar with the concept of "consideration" as it relates to finance, allow me to provide a brief introduction.

First there's the following video clip:


Then there's the following written explanation (which, although excerpted from a web site based in India, is nevertheless the most straightforward explanation I've seen yet):


Essential Elements of a Contract   

Minimum two parties:  At least two parties are needed to enter into a contact. One party has to make an offer and other must accept it. The person who makes the 'proposal' or 'offer' is called the 'promisor' or 'offeror'. While, the person to whom the offer is made is called the 'offeree' and the person who accepts the offer is called the 'acceptor'....

Lawful consideration:  A contract is basically a bargain between two parties, each receiving 'something' of value or benefit to them. This 'something' is described in law as 'consideration'. Consideration is an essential element of a valid contract. It is the price for which the promise of the other is bought. A contract without consideration is void. The consideration may be in the form of money, services rendered, goods exchanged or a sacrifice which is of value to the other party. This consideration may be past, present or future, but it must be lawful....

Lawful object:  The object of the agreement must be lawful. An agreement is unlawful, if it is: (i) illegal (ii) immoral (iii) fraudulent (iv) of a nature that, if permitted, it would defeat the provisions of any law (v) causes injury to the person or property of another (vi) opposed to public policy.

As some of you already know, an airtight case could be made for invalidating virtually all bank loans on the ground that no "lawful consideration" was made on the part of the banks, since the "money" they offer as consideration for the borrower's promise to repay doesn't really exist. (Ellen Brown explains this more thoroughly here.)

I oppose invalidating traditional bank loans, however, because doing so would cause the entire money supply to collapse and the economy along with it. That's where "converting the existing volume of bank credit into actual money having an existence independent of debt" (while simultaneously abolishing fractional reserve banking) comes in.

Derivatives, however, are another story. Allow me to explain, as best I can, why derivatives contracts are more fraudulent -- and many times more parasitic and destructive -- than even fractional reserve lending, and why they should be invalidated accordingly.

When a regular bank loan is made, the collateral-backed IOU offered by the borrower becomes an "asset" of the bank, while the money offered by the bank becomes an "asset" of the borrower.  Granted, the so-called "money" offered by the bank doesn't even exist until the very moment the loan is extended, and even then exists only as a bookkeeping entry; but at least each party is going through the pretense of offering one legitimate financial asset as "lawful consideration" for another.

Such is not the case with derivatives, because these are mere bets as to whether a given asset will go up in market value.

Ellen Brown explains it this way (all emphasis original):


In a 1998 interview, John Hoefle, the banking columnist for EIR [Executive Intelligence Review], clarified the derivatives phenomenon using another colorful analogy. He said:

    During the 1980s, you had the creation of a huge financial bubble....You could look at that as fleas who set up a trading empire on a dog....They start pumping more and more blood out of the dog to support their trading, and then at a certain point, the amount of blood that they're trading exceeds what they can pump from the dog, without killing the dog. The dog begins to get very sick. So being clever little critters, what they do, is they switch to trading in blood futures. And since there's no connection -- they break the connection between the blood available and the amount you can trade, then you can have a real explosion of trading, and that's what the derivatives market represents. And so now you've had this explosion of trading in blood futures which is going right up to the point that now the dog is on the verge of dying. And that's essentially what the derivatives market is. It's the last gasp of a financial bubble.

What has broken the connection between "the blood available and the amount you can trade" is that derivatives are not assets. They are just bets on what the asset will do, and the bet can be placed with very little "real" money down. Most of the money is borrowed from banks that create it on a computer screen as it is lent. The connection with reality has been severed so completely that the market for over-the-counter derivatives has now reached many times the money supply of the world. Since these private bets are unreported and unregulated, nobody knows exactly how much money is riding on them; but the Bank for International Settlements reported that in the first half of 2006, their "notional value" had soared to a record $370 trillion. The notional value of a derivative is a hypothetical number described as "the number of units of an asset underlying the contract, multiplied by the spot price of the asset."  Synonyms for "notional" include "fanciful, not based on fact, dubious, imaginary." Just how fanciful these values actually are is evident in the numbers: $370 trillion is 28 times the $13 trillion annual output of the entire U.S. economy. In 2005, the total annual productive output of the world was only $44.4 trillion....

How are these astronomical derivative sums even possible? The answer, again, is that derivatives are just bets, and gamblers can bet any amount of money they want. Gary Novak is a scientist with a website devoted to simplifying complex issues. He writes, "It's like two persons flipping a coin for a trillion dollars, and afterwards someone owes a trillion dollars which never existed." He calls it "funny money." Like the Mississippi Bubble, the derivatives bubble is built on something that doesn't really exist; and when the losers cannot afford to pay up on their futures bets, the scheme must collapse. Either that, or the taxpayers will be saddled with the bill for the largest bailout in history.

-- Web of Debt, pp. 195-97


In light of the above, may I correctly assume that the person reading this will agree with me when I say that Webster Tarpley was absolutely spot on when he wrote the following?

    J.P. Morgan Chase, therefore, performs no useful or productive social function, and there is absolutely no reason in the world why the people of the United States should want to bail out this pernicious and socially destructive institution. It has probably been several decades since J.P. Morgan Chase created a single modern productive job. J.P. Morgan Chase's strategic commitment in favor of the derivatives bubble means essentially that we can easily dispense with most of the functions of this self-styled "bank," really a casino. Instead of being bailed out, J.P. Morgan Chase ought therefore to be seized by the Federal Deposit Insurance Corporation, and put through chapter 11 bankruptcy. In the course of that bankruptcy reorganization, the entire derivatives book of J.P. Morgan Chase must be deleted, shredded, used as a Yule log, or employed to stoke a festive bonfire of the derivatives. The world did much better when there were no derivatives, and will get along just fine without them.

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"For the first years of [Ludwig von] Mises’s life in the United States...he was almost totally dependent on annual research grants from the Rockefeller Foundation.” -- Richard M. Ebeling
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