The great conspiracy of Western banking

Bank of England Governor Mark Carney

For investors, confirmation from Mark Carney last week that interest rates will remain unchanged — likely for the remainder of 2016 — was the negative revelation they are surely numb to by now. In fact, amid current turmoil in global markets and the FTSE dipping into bear market territory last Wednesday, it might not have even made it onto the radar of many.

Nevertheless, it continues the misery for savers and investors, who’ve endured seven years of record-low base rates. Yet, in terms of the financial system as a whole, just how bad a thing is it for the rate to be so low?

Let’s strip it down to basics. The interest rate, in simple terms, pertains to borrowing and lending, and is defined as ‘the proportion of a loan that is charged to the borrower, typically expressed as an annual percentage of the loan outstanding’. So this rate is the key fundamental for a banking system such as ours. These guys lend you money, and you pay it back with interest. So the cumulative sum of the interest you and every other borrower pays on a tangible capital balance of a loan from them, less the costs involved of orchestrating these loans — crudely speaking — equals the banker’s profit, right?

Wrong.

The Icke conspiracy theory

If you’re up for some controversial enlightenment, it may well be worth sparing 10 minutes of your time to absorb the fascinating insight of David Icke. This is by no means a platform for conspiracy theories, so opinions on 9/11, the war in Iraq and the assassination of JFK will have to be saved for another day. But his musings on the structure of the banking system are difficult to dispute. In fact, the only really laughable aspect of what he says is that we as a society knowingly tolerate this farce.

For those who don’t have time to get a first-hand account from the man himself, let’s discuss what he is getting at. Essentially bankers do not lend money on a pound-for-pound basis. So if you borrow £10,000 from a bank, they are not obliged to actually have that amount of money in their vaults. In fact, according to law, they usually need only have £1,000 of it on hand. This is known as fractional-reserve banking.

So they electronically punch in £10,000 into your account, even though up to £9,000 of it does not, and never will, exist. Remember, no money physically changes hands, it’s just a number on a computer. And guess what… you start paying interest on all of it!

Or if government hasn’t collected sufficient tax revenue to cover the cost of its spending, it will borrow, say, £1 billion from the Bank of England. With interest. Again, Carney and Co. won’t actually have all £1bn on hand. But a tenth, in fact. Yet you, the taxpayer, will foot the interest bill on the entire sum of this largely non-existent money.

To put it into a microeconomic context, as Icke does, imagine the farmer who has to borrow money to set up his farm to produce the food we eat. He has to up his price to cover the cost of the interest he has paid on his loan. As does the fellow who owns the transport company who takes the produce to the factory. As does the factory owner, who had to borrow money for property, plant and equipment. So too does the retailer, who will need a loan to cover their tremendous overheads. So by the time you pick that food item off the shelf, the cost of it is hugely inflated by interest these intermediaries have had to pay along the way — interest on money that is about as real as the tooth fairy.

Fractional-reserve banking and recessions

Now imagine all this ‘fake borrowing’ on a mass scale. Quite simply, the amount of debt just swells and swells and swells, and, by definition, cannot ever be repaid. So really, a recession like that of 2008 is less an unfortunate event than an inevitability. The banking system is a house built on sand — invisible sand — and as that recent collapse demonstrated, it is the consumer who has to pick up the pieces after the bankers have profited.

And the weird thing is, this structural unsustainability of the banking system is not even a secret. Or a topic of debate. It just is what it is; an institution which preys on the inertia and inaction of a subservient and obliging public.

This is not to discredit the necessity of an interest rate itself. The laws of economics dictate its rightful place as an ever-present. The problem is lending money that isn’t really there, and the cycle it perpetuates. Interestingly, that’s where peer-to-peer lending differs. All money in circulation has physically been transferred by lenders, and borrowers are matched with this lending capital on a pound-to-pound basis. There is no interference from a platform like ours, other than us charging an arrangement fee which is paid by the borrower.

The current threat of recession, unlike that of eight years ago, is actually more to do with the slowdown in China and the unexpected plummeting of oil prices, rather than irresponsible lending. The resultant poor growth and suppression of interest rates thus, to some extent, masks the artificial and inflated economy created by fractional reserve banking.

But that doesn’t mean it isn’t happening. Our biggest fear if we try and upset the apple cart is that it may cause the banking system as we have known it for centuries to collapse. “Good!” is Icke’s riposte to that possibility. In the short-term, a collapse of Western banking would be catastrophic. Yet if there was a fairer replacement, or at least dramatic reform, would it be such a bad thing in the long run?

Whatever your opinion, there is probably one thing we can all agree on… It will never happen. Because the sleepwalking on our part in the face of this flawed doctrine will never cease!