Buy in Haste, Repent at Leisure

One of the most oft-quoted, yet rarely adhered to pieces of advice must that History never repeats, but it rhymes. It’s a most interesting fact of life that we could learn the most about things by looking at what has happened in the past. Yet it seems we never do, and I include myself in that. Let’s start though by looking at a story :-

A major incident occurred, something that made world stock markets fall by over one-third in days. Governments, businesses and people panicked. In the aftermath, the law pertaining to buying property was changed and this resulted in a boom where people desperately tried to register their property transactions before a given deadline to take advantage of a tax saving.

Sounds like the Corona crash of 2020, followed by the UK government decision to temporarily abolish stamp duty on property transactions to get the economy moving, doesn’t it? Except it’s not. I’m actually referring to the 1987 stock market crash and the decision to limit and reduce MIRAS (Mortgage Interest Relief at Source) on mortgage repayments for property transactions made before a certain date, that got people in a property buying frenzy as the 1980s drew to a close. To take it further, that tax saving that people thought they were getting made them completely forget that they were overpaying in a frenzy in the present and that they just needed to be on the ladder at any price, before the ladder got pulled up forever on the deadline date.

Here, I can add my own piece of history to this, in buying my first house in Brighton in 1995. I actually met people who had been involved in that party and were living with the hangover every day. One, my manager at the time, had bought a property with a friend in 1988 in Eastbourne and they were stuck letting it out at a loss every month, hoping the price would get back to a point that they could cash out and take the loss. He also added that they weren’t really friends any more, to add to the pain. Another told me that he had sold his house in a nearby small town, Lancing and taken a loss, but he was now buying a house in Worthing. This guy helpfully also gave me some hope by telling me he felt that the crash was over and that now was a great time to actually be buying a house, if you had the opportunity to, as so many were bogged down by their recent mistakes. He was right. Looking back, the older me has no idea how someone aged 24, living on their own and earning an average salary for the time could possibly afford a three-bedroomed 1920s house with a garage. Yet that’s what I got. Let’s add in that the mortgage rate was 5.99%, fixed for 3 years and that was considered reasonably cheap, for the variable rate was about 8-9% and it had been even higher just a few years previously. When I moved into that house, purchased for under £55,000, a neighbour told me that some nearby had sold for £100,000 before the punch bowl got taken away.

In economic terms, a tide that rises high due to certain factors can also recede in line with those factors changing. Now, I’m not saying that property prices in the UK are going to fall, but I have a strong feeling that they are going to move back into some kind of long-term trendline that correlates better with average incomes, population movements and average household expediture. Back in those days of 8% mortgage rates, the general guide was that a repayment mortgage took up one-third of household income and I believe that is coming again, along with more of the free household income needing to be spent on essentials like food in a time of scarcity and rising prices, rather than frivolities like the next Ryanair trip to Malaga. There are two more factors to take account of – the massive Brexodus of cheap Eastern European labour deciding that they miss the family back home, so perhaps now is the time to take the accumulated savings back to their homelands and invest in a better life there, along with the possible death of millions of old people and the freeing up of their economic resources. Of course, in that scenario, labour shortages are also likely to mean salaries having a large and sudden rise, so the imbalances could just as easily be solved by huge average income rises in a very short space of time. That certainly did not happen in the 1990s, as the UK struggled with trying to keep the value of the Pound to the decreed band with the ERM (European Exchange Rate Mechanism). It was only upon surrendering that with a massive wealth transfer from average British citizens to George Soros, that the economy was seen to be moving up again. Years later I see it for what it really was – smoke and mirrors of an inflationary nature.

As a footnote, I dreamt about Eastbourne a couple of months ago and that helped this memory resurface. Ah how I loved that town. Whereas Brighton was rowdy, crowded and cosmopolitan, Eastbourne felt genteel, quiet and still with traces of the pre-war seaside glamour of the 1930s that the Art Deco railway posters bring to mind. It had a fantastic restored Art Deco tea room right on the seafront, where the maitre’d ensured everything was conducted in line with the era, and, if I was lucky with the timing, someone would play suitable tunes on a piano in the background while you partook of tea and scones. For a few moments you could imagine you were in an Agatha Christie Poirot story, and that when you asked for the bill, it would come back to you priced in shillings and pence. Afterwards, I’d take a walk back along the promenade to the pier, then up to the town centre and visit the fine old Art Deco department store buildings of the Co-op and Debenhams, both now defunct.

Yes, change always happens and more change is coming. Not least when we think again of the World Economic Forum’s Welcome to 2030 : You will own nothing and you WILL be happy. Perhaps then, the question of whether we buy or not is irrelevant, only survival will matter?

USA Reduces Reserve Lending Requirement to ZERO

In 2020 during the Corona crisis, the USA simply reduced the reserve lending requirement to zero, giving banks the power to issue new money with interest added, without any savings in the bank to back it up. The media response in reporting this incredible, never-seen-before, financial act?

Zilch.

Well, virtually zilch. that was the only mainstream clip I found mentioning it.

How it Began

In 2006-07, originally as a hobby project, I wrote my first book, imaginatively entitled “How to Invest in Gold and Silver.” It was meant just to be a self-published work, distributed to a few friends and relatives, no further than that. However, in late 2007 and early 2008, strange things began to occur in world financial markets again, culminating with the BBC showing footage of people queueing outside Northern Rock, a UK-based bank, patiently waiting their turn to withdraw their savings from the bank in cash. These scenes looked exactly like something being replayed from history, familiar, common even. They were well-documented from a 1907 financial crisis in the USA when the imaginatively-named Knickerbocker Trust got into trouble, and history books tell us decisive action by the financier James Pierpont (J.P.) Morgan saved the day and more commonly-known, the 1930s in the aftermath of the 1929 Wall Street Crash. Only, whereas the BBC was subtly mocking them as fools and playing lots of footage of experts saying they were silly to worry, history showed something written in the book.

“Contrary to Popular opinion, banks do go bust.”

― Alan Dunwiddie, 2007

Bank Holidays

Fractional Reserve Banking is responsible for something we all nowadays take as a positive thing because it means we get a day off work. Bank Holidays. The origin of bank holidays is historically based on banks taking a holiday from paying out to customers. They could tally the books during this holiday and ensure that they weren’t technically insolvent from having lent out too much money against deposits. The idea is that, if the bank was insolvent, they could call in a few favours during the day off and be in a position to continue the business, as usual, the next day of opening. If it sounds like something ancient, think again. The whole USA even had an eight-day bank holiday in 1933, after an emergency law was passed to stop more banks from going bust.

Mary Poppins Bank Run

The 1964 Disney film “Mary Poppins”, starring Julie Andrews and Dick van Dyke, also demonstrates how a run on a fractional reserve bank works. In one scene, the bank manager sings about funding imperial projects like ‘railways in Africa’ and ‘dams in Egypt.’ The bank then snatches tuppence from a young boy who then shouts, “Give me my money back!” This prompts other bank customers to be concerned about why the bank manager won’t give his money back, and they begin demanding theirs, too, leading to the bank closing the withdrawal counters.

With the withdrawal counters closed, the bank accidentally spills a huge pile of gold coins on the floor, a subtle suggestion, perhaps, to help you realise they do have your money really. As long as all depositors don’t want their money back simultaneously, banks are fine. Trust is key.

The timing of this film is in itself interesting, if one digs a bit deeper. 1964 was a time when the public was beginning to have doubts about American superiority and dominance and with just reason. In 1963, the USA has 93 million silver dollars as security against silver certificates, but by 1964, it had dropped to 22 million. Also, the death of a president in 1963, one who had opposed the selling off of the nation’s silver reserves at $1.29 an ounce (it would be $50 an ounce 16 years later), was another factor in monetary change. In 1965, Lyndon Johnson signed the coinage act, reducing silver content in coins to 40% for half dollars and making the smaller coins, nickels and dimes, an inferior cupro-nickel alloy. Coin collectors and hoarders may be blamed, but we can guess the truth.

In reality, this story is little different to how the Roman Empire and countless others effected their thefts from the populace. Whereas once the bread and circus charade probably involved Gladiators wearing banners proclaiming the newly-debased copper solidus was “as good as gold”, we now have direct imagery hitting the brain. Disney certainly has a chequered history with possible abuse of it’s power that is worthy of special investigation. Then do you remember how 3 is the Magic Number? It seems it is for Disney too.

It’s a Wonderful Life

Fractional Reserve Banking got a large mention in the 1947 film, “It’s a Wonderful Life.” In the film, worried depositors are seen turning up at the local private bank in a panic to withdraw their money. They also turn up to the small Savings and Loan institution run by James Stewart and try to withdraw their money.  He makes an impassioned speech explaining that their savings are loaned out to other members of his institution, reminding them that the private bank is not so generous or fair. Customers are unaware of behind the scenes machinations, where the large private bank is trying to put him out of business. He eventually backs up trust in the business with his own money and manages to survive.

There are clear messages in this film, also regarding Usury, large corporations, and community. The USA had suffered many bank runs in the 1930s, as worried depositors took out their dollars to pay for emergencies, or just to retain them as physical savings in their house. It’s estimated that by 1933, 9,000 banks had collapsed, so there’s no doubt this film would’ve meant a lot more to that generation watching it than us today. When it was released, the film was regarded suspiciously by the authorities, even as communist and subversive. It’s still as relevant, though, and well worth watching at least this clip.