Gold Hits New All Time High But Dont Get Too Excited

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How to Use The Scrap Gold Calculator to Work Out Silver Dollar Values

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How to Use The Scrap Gold Calculator to Work Out Silver Dollar Values

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Using the Scrap Gold Calculator to work out British Sovereign Values

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How to Calculate Junk Silver Prices Using Scrap Gold Calculator

Video about how to use the In Gold We Trust  Scrap Gold Calculator to work out the value of Junk Silver




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In Gold We Trust is a Scrap Gold Calculator that gives up to the minute scrap gold prices, junk silver coin values and values of all gold coins

Technical Breakout of Scrap Gold Prices

The last time we looked at this chart we saw how  scrap gold prices bounced twice on the bottom of the wedge. The scrap gold prices has  since broke out of the wedge. Typically the price should continue down quite dramatically. If however it hovers around its current price the we may need to redraw the wedge taking in the lower price. Today however the  scrap gold price dropped below the all important 1174 mark where there was previous strong support.

In Gold We Trust is a Scrap Gold Calculator that offers up to the minute scrap gold prices and values on all gold coins and junk silver coins

Latest Technical Analysis of Scrap Gold Prices July 16th 2010

In the recent technical analysis of  scrap gold prices we were looking at a smaller wedge which broke out to the downside. There is a larger wedge (drawn in above). This is also an ending pattern in the uptrend it is just much larger than the other wedge. A move below 1175 would be the start of a dramatic move downwards in scrap gold  prices - for now. I have also drawn in a trend line which interestingly enough coincides with the bottom line of the wedge. Also the price bounced off the trend line 3 times - one of those times was today. A break below the trend line of  scrap gold prices, the a retrace upwards and the a continuation downward below that level will also indicate a change in direction of scrap gold prices.


In Gold We Trust is an Online Scrap Gold Calculator that calculates up to the minute scrap gold prices and values of all silver and gold coins

Using the Scrap Gold Calculator to Calculate Scrap Gold Prices in Aussie Dollars

How you can calculate scrap gold prices in Aussie using the In Gold We Trust Scrap Gold Calculator




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Calculating Scrap Gold Prices in Yuan with the Scrap Gold Calculator

How you can work out scrap gold prices in British Pounds using the In Gold We Trust Scrap Gold Calculator

Working Out Scrap Gold Prices in Yen with the Scrap Gold Calculator

How you can work out scrap gold prices in Japanese Yen with the In Gold We Trust Scrap Gold Calculator

Scrap Gold Prices in Swiss Francs Using the In Gold We Trust Scrap Gold Calculator

How you can work out scrap gold prices in Swiss Francs using the In Gold We Trust Scrap Gold Calculator

Working Out Scrap Gold Prices in British Pounds Using The Scrap Gold Calculator

How you can work out scrap gold prices in British Pounds using the In Gold We Trust Scrap Gold Calculator

Calculating Scrap Gold Prices in Euros Using The Scrap Gold Calculator

Instructions on how to work out Scrap Gold Prices in Euros using the In Gold We Trust Scrap Gold Calculator

Updated Technical Analysis of Scrap Gold Prices - June 25th

For the past few scrap gold prices technical analysis reports we have been looking at the formation of this wedge. Action over  the last week  has strengthened the idea of this wedge formation. Friday was a strong up day and it is quite likely we will see an up day on Monday perhaps even nudging  above the all time high. This could create excitement amongst gold price analysts as it reaches an all time high. However this is typical action for a topping wedge. I refer you to Euro action as it reached a high in April 2008.

For scrap gold prices (the gold price) to look like they are resuming an new up trend once again we need to see a strong push up above the top line and closing 2 days above this line .


In Gold We Trust is an online Scrap Gold Calculator giving up to the minute Scrap Gold Prices and values on all gold and silver coins

Updated Technical Analysis on the Price of Gold June 21st

In our last technical analysis of the price of gold on June 17th we identified this wedge which is typically a bearish ending pattern. On Friday the price broke through the top line of the wedge and actually managed to close just above that line. We spoke about how the price needed to close above the line and form support to be a clear bullish indicator. On Monday the price reached an all time high once again but then collapsed back into the wedge.

Where Now?

The above chart includes the latest gold price moves. As we can see even though the other wedge has been negated we can now draw a smaller wedge with Friday and Money's move  touching the top line and Monday and today's low touching the bottom line. A fall below 1215/1210 would be a fall out of the wedge and signal for a rapid drop in the price of gold. Alternatively the price could rack around inside the wedge and even make a slightly higher high. To really negate the wedge we would need to see a strong push above Monday's high, closing above the top line and continuing to push up strongly closing consistently above the top line.

Charts courtesy of www.igindex.co.uk

http://www.in-gold-we-trust.info Coin, Bullion and Scrap Gold Calculator for up to the minute scrap gold prices and values of all gold and silver coins

Technical Analysis of the Price of Gold June 17th 2010

On the chart above I have presented 2 ideas for possible future moves in the price of gold.

1) 2 weeks ago I drew in the smaller triangle and said because of the prior uptrend this was a bullish signal for the price of gold and that a breakout above 1225 would mean a continued move upwards if the price could then close above its all time high. The  gold price did break out and make a new high but the retraced but was held by the bottom line of the triangle. The price has since risen again but failed to close above the all time high. The triangle is now extended so once again if it can close above its all time high and make a clear new high then it should continue to rise.
2) The longer lines are of a wedge - this is a bearish signal. If the price fails to close above the all time and bobs around the top line but never making a clear break upwards then this would validate the idea of the wedge. This idea would further be strengthened by a fall below the bottom of the previous triangle. The formation of this wedge could continue for a while and the price could remain range bound between 1200 and 1250 but later leading to a severe drop in the price of gold. Only time will tell!

Bullish Signals on the Price of Silver

The silver chart is displaying bullish signals - this video from In Gold We Trust goes into more detail

Update on Bullish Move in the Price of Gold

This is an update to the video published on Sunday related to a bullish move in the price of gold.




In Gold We Trust in an online Coin Bullion and Scrap Gold Calculator giving up to the minute Scrap Gold Prices, Values of Silver Dollars and other Junk Silver Coins

Latest Bullish Signals for the Price of Gold

Technical analysis and commentary on the price of gold





In Gold We Trust in an online Coin Bullion and Scrap Gold Calculator giving up to the minute Scrap Gold Prices, Values of Silver Dollars and other Junk Silver Coins

Financial Collapse Scenarios and Solutions

This page looks at the different ways a financial crisis or collapse could play out and how it might affect you. For a simple explanation of the causes of a financial collapse please see my video "A Simple Explanation of the Coming Financial Collapse"

A Run on the Banks- Bank Holiday

Our money system is based on a fractional reserve banking system. In very simple terms this means our banks only have to keep on deposit 10% of all their customer deposits, they then lend out the other money on the assumption that people do not always want access to their money. In fact on 3% of all dollars in existence and 6% of all Euros exist in the form of bank notes - the rest is just number on computer screens. If there was a mass panic and everyone rushed to the bank to withdraw their money their would not be enough bank notes to cover this and the whole system would collapse. This is called a run on the bank and a bank holiday is where the government huts down all the banks to avert a complete collapse of the system. In the US there has been such runs on the banks and banking holidays in 1907 and 1933.

It is May 2010 and we are experiencing a huge government debt crisis in Europe that has only just begun and will spread to more countries and eventually the USA. The banks and financial institutions on the world lent this money and therefore risk collapse if the problem gets worse. Therefore a run on the banks at some point is a high probability.

What happens?

• The government shuts down all banks for a week maybe longer. You cannot get access to your money and ATM and credit cards do not work. 
• The banks re open but then restrict the amount of money you can have access to - maybe just a couple of hundred dollars per week. 
• One further possibility is that when they reopen the banks they try to install a new currency and say that you get one of the new currency for 3 or 5 of the old - thus develuing.

How to Prepare?

• Have a good supply of cash hidden somewhere safe.
• Have a good supply of food in your house perhaps for one or two months. Any banking crisis may bring  huge civil unrest and upheaval therefore making it difficult to go out and buy things
• Have a good store of basic essentials

Inflation and Deflation

Inflation is an increase in the money supply. If the money supply increases at a faster rate than the creation of goods and services then prices increase. Many financial commentators are predicting that the outcome of the current financial crisis will be super even hyperinflation where prices increase weekly, daily or even hourly. They believe that because central banks are printing money at a huge rate to bail out banks and other sectors of the economy and that are committed to carrying on doing so.

Points to Remember

•  You can only have hyperinflation if the speed at which money is changing hands increases - so far it is not because the banks are not lending the money they have been given and the public are spending less and less and saving more
•  As the central banks create money on the other side it is being destroyed as countries ,corporations and individuals default on their debt. The rate of create has to outstrip destruction before you can have hyperinflation.

What happens in hyperinflation

• Prices go up weekly, daily or even hourly like in Zimbabwe
• The value of your savings are wiped out as they buy less and less.
• Fuel shortages as it is harder for countries to buy oil on the world market with their worthless currency.
• Food Shortages - fuel Shortages affect the supply of food and other goods (In the USA on average every food item travels 1700 miles to get to the store)
• Bonds, & CDs become worthless - many people look to the bond market as a safe place to invest their money - this is no longer true.
• Certain stocks crash - companies such as insurance companies are destroyed as their asset base is largely invested in bonds which are now worthless.
• Certain stocks such as oil and commodity based companies will be a safe haven as they have assets that will increase with inflation.
• Civil unrest, anger and demonstrations towards governments, increase in crime.
• Benefit payments such as social security may not necessarily go up with any inflation as governments try to reduce their payment burdens
• High unemployment

How Can You Protect Yourself

• Have at least one months store of food at all times so you are not at the mercy of the stores and not caught up on any civil unrest unnecessarily.
• Consider buying gold and silver - they are stores of value that have withstood the test of many crises over history and will protect you against inflation- see our section on Gold and Silver for more information.
• Seriously review your investments and private pensions to see
• Get your personal debt under control and the debt you have try to lock in at a fixed rate.
  
• Create a store of the basic essentials that you need everyday in your life. These items are a store of value (just like food) because you need them. You could even buy two years worth and it would be a great investment because you will always use them and crisis or no crisis and it is likely they will cost more in 2 years than they do now.
• Change your way of living - see how much your like is currently dependent on your car and being able to go to a store whenever you want to buy whatever you want. Look at what other changes you can make in your own personal situation to be less dependent and more independent.
• Become resourceful - learn how to make things such as bread, grow your own food - you do not need acres and acres a small plot can produce a surprising amount of vegetables.
• As well as creating a store of food get into the habit of buying non perishables and food you can freeze in large quantities, this way you are less dependent on the supermarket and you have a large quantity of an asset that you will always need.
• Remember whatever happens to the dollar or the Euro or the pound - you are the real money. You create the value with your skills and labor.

Deflation

Deflation is a collapse in money and credit often brought about by a banking crisis and a collapse in confidence in the banking system. In a deflationary environment the value of money goes up because there is less of it about, as countries, corporations and individuals default on all their debt this destroys the number of dollars or Euros in circulation thereby making them more valuable. (See our article How Money is Created for a more detailed explanation) Some financial commentators rather than believing in a hyper-inflationary scenario believe the current crisis will lead to a severe deflationary period. We are seeing a huge amount of defaults like never before in history and a destabilization of the banking system.

Points to Remember

• Our money is backed by nothing, it is only as good as the confidence in governments and the banking system. As governments default on their debt, this affects not only them but also the banks that leant the money, rocking confidence in the whole system. Yes default reduces the amount of currency in circulation but a currency without confidence is worthless. You could have what looks like deflation suddenly morph into hyperinflation because there is no confidence.
• Deflation can be very painful (high unemployment etc) creating political pressure to act. Governments can print money to try to get their way out of deflation - Fed Chairman Bernanke has committed to printing whatever it takes to avoid a depression.  

What happens in a Deflation

• Because money becomes more valuable in terms of good and services this drives prices down but also creates higher unemployment. 
• Businesses go bust as they cannot get credit to invest or just maintain themselves.
• The areas of the economy that survive are the essentials people need (food etc), things they cannot live without (tobacco, alcohol) and impulse buys (chocolate etc) 
• Civil unrest  
• Historically both hyperinflations and deflationary depressions have lead to political extremism and ultimately war(Napoleon, Hitler etc) to divert attention away from national problems. 

How You Can Protect Yourself•

•  Review your employment situation, how insulated would you be from such a deflationary situation, you may need to consider moving into a different employment.
• Get yourself out of debt now and out of the mentality that you can live using your credit card as a buffer.
• Become resourceful and learn how to make and grow your own food.
• Remember however scarce the money may be, the reality is that you are the money, you create the value, so instead of being out there trying to compete for scarce dollars or Euros try to set up networks with other people and ways to trade and exchange goods and skills.

Formal Currency Devaluation

What is a Formal Currency Devaluation

This would be where the government introduces a new currency and offers to exchange the old currency at a rate of 3 to 1 or even 10 to one.

Why Would The Government Do This?

Almost every country in the western world is ladened with too much debt. We see Greece in the news on the verge of debt default but there are 19 other countries in the wings some in even worse a state than Greece (the UK and the USA to name but two). It is simply not possible to pay off all of these debts - the USA for example has debts in excess of 14 trillion and future unfunded liabilities (forecasted future payments of social security, medicare and medicaid) of over 100 trillion dollars. A formal devaluation is one way out of this.

Points To Remember

A formal devaluation may only be a temporary fix to the debt woes. The very system is based on the creation of more and more debt to keep its self running, a formal devaluation does not change the nature of the system we would have to fundamentally change the way

What Happens As A Result of a Formal Devaluation

The banks may be closed for days or weeks during the transition. So you would have no access to your cash or use of ATM or credit cards.

Savings, bonds, CDs, life insurance policies, denominated in the old currency would now buy a fraction of what they did.

The devaluation is form of debt default so under the new currency interest rates would be very high as the governments would have to pay a higher premium to convince the markets to lend them money. This would cause a huge deflationary depression.

High unemployment.

Benefit payments cut

Government spending cut drastically affecting public sector jobs

How Can You Protect Yourself

For the initial devaluation take same kind of steps for the hyper-inflationary scenario

For the following deflationary depression do the same as for a deflationary scenario

Complete Currency Collapse

In the deflation section we spoke about how currencies are backed by nothing other than confidence in the financial and political system of the issuing country or authority. All currencies in the world today operate on this system. The current government debt defaults will undermine confidence in the banking system and the governing authorities thus undermining the value of the currency. This confidence call also be undermined by social and political developments o watch the level of growing unrest in a country, political disillusionment, political radicalism.

Points to Remember

Currencies are valued relative to each other. For example EURUSD is the number of dollars one Euro will buy which today stands at around 1.24. If this goes up then this means the Euro is strengthening and if it goes down this means the dollar is strengthening. Strength and weakness in these cases are relative. If the Euro is collapsing then it automatically looks like the dollar is strengthening - this does not mean that the dollar is strong or safe, it just means for this time it is less worse off than the Euro. In serious currency crises it is therefore important to look to see how currencies are performing against hard assets like gold, silver and oil to gauge whether it is collapsing or not. It is May 2010 and while the Euro has been falling against the dollar, the yen , the canadian dollar and so on , ALL currencies have been falling against gold. Look at our section on gold and how it behaves for more of an understanding.

Currencies can collapse in a deflationary as well as an inflationary environment

How Can You Protect Yourself

The effects will be exactly like that in a hyper- inflationary scenario.

Additionally though a currency collapse may reflect huge political and social instability so prepare further for longer periods of civil unrest, disruptions to supply etc

In Gold We Trust in an online Coin Bullion and Scrap Gold Calculator giving up to the minute Scrap Gold Prices, Values of Silver Dollars and other Junk Silver Coins

The Causes of the Coming Financial Crash

If you watched the mainstream media and listened to our politicians you would think that the crisis of 2008 is behind us and we are slowly slowly recovering from what was such an unexpected shock!

Please consider the facts below when assessing whether we are in a recovery or not or whether we have more to come.


US Home Mortgages

•  The crisis of 2008 was the result largely of the sub prime mortgage market which was $600 Billion in size.
• If the subprime mortgages were about lending money to people who really should not be lent to then Alt A mortgages and Option ARM mortgages were about lending too much to people who were normally a good credit risk. These types of mortgages offered an extremely low interest rate for the first few years but then would be reset to a higher rate a few years later.
• As Alt A and Option ARM loans are being reset people are finding their new payments rising as high as treble their original payment.
• You have to ask yourself if someone could afford the high payment they would have taken the original higher loan.
• Total Alt A mortgages = $2.4 trillion, total Option ARM Mortgages =$750 billion. Option ARMs are currently defaulting  at a rate of almost 40%

Commercial Real Estate

• An explosion in consumer credit and the housing boom caused a huge expansion in commercial real estate, malls, warehouse space, office space and so on. Now the bubble has burst this will ultimately have drastic effects 
• Between 2010 - 2013 $1 trillion of commercial loans will mature and need to be refinanced or paid off.
• There is currently a 7% delinquency rate

Credit Card Debt 

• Total outstanding credit card debt  almost $900 billion.
• Average credit card debt is $15,788
• Current default rate is 13.01%
• When this credit card debt was amassed holders were paying 0% on their balance transfers. These days are well and truly over with. Some cards now have APRs of over 30%
• Total US Consumer debt =$2.45 trillion.

Europe

• An EU document released in 2009 estimated that $25 trillion would be needed to bail out European Banks of all their bad debts.
• You have heard of Greece's woes, and know about the PIIG countries, what about Hungary, Latvia, Lithuania, Estonia, Poland and so on.
• Deutsche Bank have liabilities (loans) worth over $2 trillion, much of these loans are to the PIIG and other Eastern European Countries. $2 trillion is over 80% of the German Economy. Germany would not be able to bail them out alone.
• The combined liabilities (loans ) of the 2 largest swiss banks is double the GDP of Switzerland.
• Barclays Bank has liabilities totalling more than the GDP of Britain
• When we talk about leverage in very simple terms if you have a leverage ratio of 1:1 then you have very very little risk. If you have a leverage ratio of 100:1 then this is extremely high. All European Banks are leveraged higher that US banks. Much higher. Barclays has a leverage ratio of over 60 Deutsche Bank over 50 to name just 2.

Local, State and National Governments.

The US government has unfunded liabilities (future payments of social security and medicare etc) of over $100 trillion
32 States in the USA are now insolvent.
Countries raise money by issuing bonds  and hope that these bonds are bought up by eager investors.
In the last year the US and the UK have been forced to buy most of their their own bonds because no one in the market wants them. This cannot carry on forever. The whole financial system relies on the creation of more and more debt.


The Derivative Market


In our explanation of the financial crisis we talked about Credit Derivatives related to the mortgage market. There is another type of credit derivative called a credit derivative swap. This is a type of insurance on riskier bonds. If the borrower defaults then the investor is insured against loss.  
The size of this market is estimated at. $45 trillion.
It is totally unregulated.
During the hayday anyone and everyone was issuing these Credit Default Swaps, including hedge funds that do not have the assets to pay up should the underlying security default. Its a bit like me offering you car insurance. Everything is great -, you think you are insured and I get $100 a month. Until of course you have an accident and we realize that I dont and never did have the money to cover any accident.




There are many other types of derivatives, ( interest rate swaps, equity derivatives, commodity options and so forth) they are extremely complicated financial instruments created by "rocket scientists" who lead us to believe that they were able to eliminate risk.
It was these same rocket scientists and their belief in the end of risk that were the masterminds behind the subprime mortgages Option ARM and ALT A Mortgages. That saw the downfall of Long Term Capital Management and so on.
The total derivatives market is worth $1.4 quadrillion.

The Causes of the Financial Crash in 2008

So we have looked at what is money and how it is created and hopefully got a good idea about why the system is so fragile, why we are always at risk of crisis and collapse. But there were specific factors that lead up to the 2008 crash, factors that are still in play and there is a high probability they will play out in further crises too.

Watch this clip - it sums up the essence of the problem at hand.




When Lehmans went bust in 2008 and the market crashed. The talking heads on TV were all coming out with their own complicated explanations about what had happened, this complexity (as we have talked about before) just obscured the basic fact which is - too much money was lent to too many people people who just could not pay it back and never could pay it back.


And when we talk about people what do we mean:

• Homebuyers, 
• Credit Card Holders
• Companies
• Countries 
• States, 
• Local governments,
• Literally all sectors of life - all over the world

Why was this, don't banks have limits on what they can lend, aren't there rules and regulations to stop this happening? Once again the talking heads on TV will blind you with the science of Credit default swaps, CDOs and so forth. For a simpler answer lets go back to our model of chickens, potatoes and Bob the Banker.

Let's start by looking at how money was traditionally lent.

So lets say my chicken business is going really well and every month I deposit $1000 with Bob the Banker. Bob the Banker can then go and lend this money out to some of his customers. So then Tom is looking to borrow $500 to expand his wheel business so he goes to Bob and applies for a loan. Now Bob does not want to take huge risks he wont just lend to anyone. After all this is his bank's money, his job is on the line and he does not want to lose the money of his customers many of whom he knows personally.

Bob sits Tom down, checks out his history, has he been a good customer, has he repaid his debt on time. Is his business plan sound and so on, and only after serious scrutinization does Bob agree to lend the money. So Tom gets his loan, he has to pay it off in 3 years at 6% interest per year.

Bob the Banker Meets Willie Wall Street...

This was the way things worked for years and years until an investment banker (lets call him Willie Wall Street) arrived on the scene. Now Willie is a very intelligent guy with lots and lots of ways to make money, not only that he has lots of friends with loads of money to invest - everyone was going to be a winner!!!

So Willie says to Bob - instead of keeping that loan of $500 on your books, why don't you sell it to me. I will give you your original $500 back + $5 for your trouble. Bob loves this idea, he gets $5 up front and then has another $500 he can lend out to someone else

Willie then goes to his friends with this great investment offering 4%. They love this so everyone is a winner. Bob get 1% for setting up the deal, Willie's friends get 4% and Willie gets to keep 1% cut.

These investments become so popular that Willie is constantly on the phone to Bob trying to buy more loans from him and even tells him not to worry too much about who he is lending to because they have now got some highly complicated way to manage risk.

Also Willie's friends are just queuing up to get on board, so much so that some of them borrow money to buy these investments - they are such a sure thing.

Who are Willie's friends?

• insurance companies, 
• banks, 
• pension funds, 
• mutual funds, 
• investment funds
•  from all over the world........

This principle of taking a loan and turning it into an investment and selling it to investors  It was applied not only to the mortgage market but to:

• credit card debt, 
• corporate loans, 
• municipal loans 
• and sovereign (national) loans. 

he term for these investments is credit derivatives and this system of credit derivatives created a huge explosion in world wide debt and because the risk seemed to be dealt with somewhere else or through some complicated means large sums of money was lent to people, corporations and countries who normally would have been too much of a risk!!!!. Not only did the credit derivative market allow for anyone one to borrow money. It also made borrowing money that much cheaper.

In the summer of 2007 we saw the start of the problem in the Credit Crunch caused by the sub prime loan market - this was where mortgages were given to literally anyone who applied for them. As people started to be unable to pay back these loans it became obvious that these "investments" were bad and there was a mass exodus causing the bank lending system to freeze up. This sub prime market was $600 billion in size and it has essentially being the largest contributing factor to the collapse of many banks - Lehman, AIG, Morgan Stanley, Merrill Lynch and so on.

Considering that the total mortgage market in the USA alone is worth $8 trillion, add to that credit card debt, corporate loans big and small, national loans big and small you are looking at a total market size for credit derivatives of $65 trillion - this is the potential size of the problem.

To give a bit of perspective:

• The world economy produces roughly $55 trillion per year.
• If you sold everything in the world you would get roughly $600 trillion......
• This problem is potentially $65 trillion in size.

There are a couple of twists to this story compounding the problem further

•  Some of Willie's friends borrowed money to so they could invest with Willie, these investments are now worth much less but Willie's friends still need to pay back the same amount. Woops!
• Because of regulations and risk appetite Some financial institutions were not allowed to or did not want to invest in some of the more riskier investments. To solve this problem another credit derivative was created - it was an insurance on the riskier investments. If the underlying borrower did not pay and the investment went sour the investor (apparently!) would be insured. This was great business and banks, hedge funds and many other institutions offered this insurance - what's more is was completely unregulated. It was great business as long as times were good, however when things started to go south and the investors wanted their insurance this created big problems and was actually the reason why AIG collapsed - we have not heard the end of this story by a long shot.

Further Deeper Collapses.......

Click here to go to The Causes of the Coming Financial Crisis

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How Money is Created

All Money is Debt - what does that mean? Lets look at how money is created to explain why this is true.

How is Money Created

Every country has a Central Bank, (the Federal Reserve, ECB, Bank of England and so on) the Central Bank is supposed to regulate interest rates and creates and controls the money supply.

This happens as follows.

• The government decides it needs some money - lets say 10 billion dollars. It then goes to the Central Bank and asks for 10 billion dollars.
• The government then draws up some official bits of paper called Treasury bonds and gives them to the central bank and the central bank gives the government 10 billion dollars in notes. Because of the nature of this transaction those bank notes are just bits of paper that indicating that the government owes money to the central bank, they are not backed by anything other than the governments promise to repay that money.

• The government takes its 10 billion dollars and deposits it with their banker - lets call him Bob the banker. The really interesting thing is what Bob does with the money next. Lets call this the Money Multiplier

What is The Money Mutliplier

• Lets say I deposit $100 with Bob the Banker. Bob has to keep $10 on deposit but is then free to lend out the remaining $90.
•  Dave comes along and borrows the $90 and buys a new wheel from Tom
• At this point Tom has $90 and I think I have $100 - a total of $190 but in reality Bob only has the original $100. 
• When Tom deposits his money at the process continues. Bob keeps $9 on deposit and lends out the remaining $81 - another $81 created.
• PROBLEM  If Tom and I go to the bank to withdraw our money at the same time Bob will not have the money. 
• This is the Achilles Heel of the Banking System. If there was a panic and everyone went to the bank to withdraw their money there would not be enough bank notes to cover all withdrawals.
• This is a run on the bank that no central bank or government wants.

In fact only 3% of all dollars and 6% of all Euros exist in the form of bank notes.

The money supply expands through the expansion of debt, through borrowing therefore the money is just a piece of paper indicating that debt. Money is debt

• To highlight the ridiculousness of this situation. Lets say you came to work for me for 5 hours at $20 an hour. 
• At the end of those 5 hours your write me a bill for $100 I then  hand you a $100 bill as payment.
•  You have given me a piece of paper thats states that someone owes someone else $100.
•  I then pay you with a $100 bill - another piece of paper that says someone owes someone else $100.

"Ah" but I hear you cry - you can take the $100 bill and then exchange it for goods at a store. True but only because everyone believes that the $100 has value, but beliefs can change very quickly.

If we look here at a chart of the purchasing power of the dollar over the last 100 years you can see that $1 buys today 5% of what it bought 100 years ago. Obviously belief in the value of $1 has changed radically over that time.

If you think of the story of the Emperor's New Clothes, there never were any clothes, it is just everyone was tricked into believing there were clothes and because everybody believed then so did everybody else. But once the little boy pointed out that the Emperor has no clothes on then that belief changed in an instant. There is no intrinsic value to the money we have, it is only supported by our belief that it has value. Our beliefs can change very quickly thus rendering our money worthless and the financial system collapsed.

Once you see that the whole system is supported by just a belief then you will understand why certain events can undermine currencies and collapse financial systems.

It is May 2010 and we are witnessing the start of a sovereign debt contagion - countries unable to repay loans. The media is focussing just on Greece and see how the perceived value of the Euro has plummeted. Confidence in the system is waning and therefore so is the value of the currency. Greece is just the start, it soon will spread to other parts of Europe and then across the world. It is these types of events that attack confidence in the currency often fatally so.

Next we will look in detail at what are the causes of the 2008 Financial Crisis and Coming Crises.

Click here to go to The Causes of the 2008 Financial Crisis

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What is Money

When we talk about financial crisis really what we are talking about is money.In order to explain as simply as possible the causes of the financial crisis we really need to look at what is money. So lets go back thousands of years to a time when people bartered so understand where money came from.

Lets imagine I am a Chicken Farmer 

Lets also imagine that I have a friend Dave who is a Potato Farmer

And another friend called Tom who makes Cart Wheels

Now I like to have potatoes with my chickens and Dave likes to have chicken with his potatoes so we come to arrangement that whenever Dave wants to have a chicken I will swap him one for a bag of potatoes.

Equally I need a new wheel from time to time so I come to an arrangement with Tom that every time I need a new wheel I swap him 2 chickens and get my new wheel.

The problem arises when Dave needs a new wheel for his cart because Tom does not like potatoes they have no value for him. Dave has nothing to offer in exchange for a new wheel so we have a breakdown of the barter system.

So this is where money came in. Communities, societies, countries would find something that was commonly agreed had value and use this as a means of exchange. This has most commonly been gold and silver but tobacco leaves, shells and salt have also been used as a form of currency because they were all perceived as having value. So instead of swapping his potatoes for my chickens Dave could get gold or silver from me and then give that to Tom for a new wheel.

Note this that money is supposed to act as a store of value. I create value by raising chickens but may not wish to immediately exchange that value for other items of value (potatoes or wheels) so the money that we use is therefore used to store that value to be used at a later date. The money itself is not the value, I create value through my work and labor, I am the money, not the pieces of paper.

As time went by people got tired of carrying bags of gold and silver around so they would deposit this with a goldsmith who would then give them a receipt for their gold or silver which they could then use to buy things. This is how the modern banking system developed and even up until the late 1960s you could walk into a bank in the USA and exchange your dollars for gold. The money was considered "as good as gold" because it was redeemable in gold.

Today wherever you live in the world: Europe USA, Australia, Japan, Switzerland, your money is backed by nothing. It is printed out of thin air by governments, it only has value because they tell us it does - and we believe them. The only thing supporting the money is our belief and confidence in governments and the financial system, take away this confidence and the money is worthless.

You could say that it does not matter that they are just worthless bits of paper as long as everyone agrees that this is the method that will be used to do trade. That as long as you only create more paper when I raise another chicken, or Dave grows some more potatoes then everything should work fine.

The reality is is that money is not just worthless bits of paper, it is not just created every time someone creates more value.The fact is all money is debt - it is just a piece of paper saying that someone owes money to someone else

To explain what I mean about this we need to look at how money is created. Which we will go into more detail about in the next part.

Click here to go to How Money is Created

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