Libor is the benchmark for trillions of dollars of loans worldwide -- mortgage loans, small business loans, personal loans. It is believed that Libor is tied to transactions with a notional value of $500 trillion, and that it is the most important bench mark regarding interest rates. The recent LIBOR scandal is probably the biggest banking scandal in history. So far, the scandal has been limited to Barclay's, a big London-based bank that just paid $453 million to U.S. and British bank regulators. But, be rest assured that they are not the only bank involved in this scam. All major UK banks, including the Bank of England have been implicated and so has the British government.
Whether it is Robert Diamond, the Deputy Bank of England Governor Paul Tucker, or John Corzine of MF Global, when questioned these unscrupulous, dishonest scoundrels suddenly suffer from memory loss and deny any knowledge of any of the events in question. But, no doubt their net wealth has expanded exponentially, and for sure none of them will ever be convicted. Yet, the former head of the IMF, Dominique Strauss Khan was arrested on some futile allegation of sexual harassment. And, if some poor soul who has been out of work for months and who out of desperation has been forced to commit a crime in order to buy food for his family, be sure will be arrested and given life imprisonment.
The world has gone mad, and the very fabric of democracy is now at threat. In a proper democracy governments are elected by the people to serve the people. But, nowadays governments are elected by the people to serve the governments. And, in some cases, governments aren’t even elected.
Instead of penalising these corrupt individuals, governments will turn a blind eye to all the thievery and conjure up a new unrelated scenario to blame for all their misdeeds. The Patriot Act, also known as the FICA act is just an example of the insanity of people in power. Suddenly, it is bad to have cash, and every single person is now a suspected money launderer. And, any innocent law abiding citizen, who wants to open a simple bank account must now answer a list of the most meaningless and irrelevant questions. Of course, the bank will try to beguile you into believing that this process is necessary in order to prevent money laundering and terrorism. Yet, the biggest thieves of all, are the bankers themselves.
While I am the first to acknowledge that there are some incredible benefits to our modern day banking system, I am also constantly amazed at what is going on. It has become so corrupt that I wonder where it will all end. In the meantime the main central bankers continue to use the same policies that have already been proven ineffective, and as the financial crisis worsens, I am totally bewildered by the actions of investors who turn to government bonds as a safe haven for their money. Although the US is now the largest debtor nation in in the history of the world, it is still able to borrow for 10 years at less than 1.8%. And, the US dollar still remains the world's reserve currency and for now it remains the largest and most liquid market. In some cases since rates are so low, investors are even prepared to pay governments to have their money!
The economic data released during last week was pretty dismal and indicates that global economies are on a trajectory of slower economic growth. On Friday International Monetary Fund IMF managing director, Lagarde, said that the organization will cut global growth forecast this year.
“What I can tell you is that it will be tilted to the downside and certainly lower than the forecast that was published three months ago,” she told an economic forum in Tokyo during a week-long Asian tour.
“And that is predicated on the right set of actions being taken in Europe in order to avoid very significant deterioration and to eliminate major threats.”
In April, the IMF projected 2012 global growth to be at 3.5%while 2013 growth was projected to be 4.1%. That was an upward revision from January's estimate of 3.3% in 2012 and 3.9% in 2013. But it's believed that recent development and economic data has prompted IMF to lower the forecast again.
On Thursday, the central banks of China, Europe and the UK announced measures that would hopefully stimulate the global economy.
The People's Bank of China cut its benchmark lending and deposit rates for the second time since early June. The PBoC cut its one-year yuan deposit rate by 25 basis points and its one-year lending rate by 31 basis points. The central bank also announced more relaxed rules on lending, allowing bank lending rates to fall to 70% of the benchmark rate, down from 80% currently.
The BoE left the benchmark interest rate unchanged at 0.5% but expanded the asset purchase program by another GBP 50 billion. According to the BoE, business indicators showed continuation of weakness in the economy in near term, both at home and abroad. Also, the central bank remained concerned with the indebtedness and competitiveness of several euro-area economies which weighed down on confidence.
And, the ECB cut the main refinancing rate by 25 bps to 0.75%, a historical low. The deposit rate was lowered from 0.25% to 0.00% while marginal lending rate was lowed from 1.75% to 1.50%. In the press conference, ECB President Draghi said. We see now a weakening basically of growth in the whole of the euro area, including the country or the countries that had not experienced that before,” Mr. Draghi said at a news conference after Thursday’s announcement.
The rate cut from ECB and PBoC as well as BoE's asset purchase program expansion provided no support to market confidence. But rather, they were seen as sign of deep worry from central bankers. With interest rates at zero, individuals who rely on savings are going to see the value of their money dissipate. However, at the same time, financial institutions can now borrow money for nothing. But, while it is hoped that they use these low rates to offer it to borrowers in attempt to stimulate business, they would rather invest it in some useless government bond with a high yield. In time, when these relatively high yielding bonds collapse these financial institutions will be squealing once again that they are not prepared to take the loss. And, of course in the meantime, while banks are being saved and the corrupt banking system is being preserved, nothing is being done to stimulate global economic growth which is the key to solving this problem.
So as these egregious acts of the bullion banks, politicians and leading financial leaders continue, astute people are losing faith in the system. This will lead to a loss of confidence in the fiat currencies. And, as an alternative asset class, we will see a major shift to gold and silver as people strive to protect their wealth.
As I have stated previously on numerous occasions, it is better to put your faith in gold and silver than our current political and financial leaders. Owning physical gold and silver is perhaps one of the best decisions you can make.