Since the 1980s, markets have had to adapt to a world of infinite credit.

Of course, this credit has not been available to everyone: it has been principally deployed in favour of governments, financial markets, and big business. It amounts to a cartel, planned or unplanned, a partnership between banks and government that dominates and controls previously free markets.

The justification for this arrangement is based on anti-market macroeconomic theories, always sympathetic to central planning. The partnership is between governments, their central banks and the commercial banks, granting them a licence to operate by expanding credit out of thin air. To this state-sponsored monopoly has been added control of securities markets, inflating them as well. Bank credit and securities markets are on parallel tracks, because bank credit fuels the securities business. We should look at them both to make sense of the implications, and to understand the consequences for the ordinary person.

It has been said not one person in ten thousand understands the process by which banks conjure money out of thin air, but it is a simple process. A favoured customer asks the bank for a loan. The bank credits the customer’s account with the money at a stroke of the keyboard. As the customer draws on the facility, for example to pay his creditors, this creates matching deposits at the creditors’ bank accounts. Their deposits are recycled through the banking system to cover the original loan as it is drawn down.

This is how a loan creates deposits, and from the bank’s point of view it can expand its loan book and deposits to the maximum level related to the bank’s own capital as set by the government regulator. The regulator is usually under the control of the central bank which oversees the system, ensuring the process operates seamlessly. The fact that the state regulates the banks legitimizes credit creation, maintaining public confidence, so that whatever their misgivings, people believe the system is controlled in their interest.

At the heart of it is an exemption from property law. Anyone who sets himself up to take someone else’s property to use it as he wishes is guilty of fraud. But not the banks: they have an exemption granted to them by virtue of their banking licences, allowing them to use everyone’s deposits as their property, offsetting loans to their debtors, and leaving depositors as unsecured creditors. This is a second point that only one in ten thousand understands: his money in the bank is not his money at all. Furthermore, no bank goes out of its way to tell their customers that by depositing money it is no longer theirs. A fraud in natural law is bolstered by an economy of the truth.

So what? Well, the system allows the partnership of government and banks to expand the quantity of money in circulation in directions which suit it most. Crucially, the expansion of money is facilitated by falling interest rates, because lower interest rates allow borrowers to borrow even more. Furthermore, since the 1980s, when the UK government handed the securities industry on a plate to the banks, and the US Glass Stegall Act’s impediment to integrated banking was dropped, banks have expanded into and monopolised the lucrative securities business as well.

Perhaps not one in a hundred thousand fully understands the implications of the banks taking over the securities business. It’s said to be a good thing, because the banks have enhanced market liquidity. But the twin nexus of government and banks has not only acquired the ordinary person’s money through fractional reserve banking, but it now controls the value of his assets as well. It’s a wonderful trick to be able to devalue your own obligations by flooding the economy with money created out of thin air, while at the same time increasing the values of everyone else’s assets. Nobody complains.

Zero interest rates are what the banks now pay for easy money. Crony capitalists, in the form of big and politically influential businesses pay a little more. Banks really don’t need ordinary customers, except perhaps for appearance’s sake, because they are expensive to administer. Solvent small and medium size businesses will pay seven to ten percent interest when deposit rates are zero. Mortgages, student debt, car and credit card loans are mostly securitised, but the banks have little need to worry about credit risk. They are ultimately a liability for the central bank, which in America was first expressed in the Greenspan put, then the Bernanke put, and now the Yellen put. The systemically important banks will always be bailed out, and the bankers whose bonuses can only reflect the good times know it.

This creeping control over securities markets evolved from the mid-eighties before the banking crisis in 2008 put a temporary stop to it. But the end result of the banking crisis was to strengthen the cartel’s business, instead of hastening a return to the sanity of free markets. In America, the Fed bought valueless mortgage securities from the commercial banks, paying face value by printing money. It may be astounding to outside observers that the banks were rewarded in proportion to their losses. The Fed also offered an open-ended facility guaranteeing the banks could continue to trade as if nothing had happened. The Fed simply chose to perpetuate the system by issuing yet more money.

They say lessons were learned, but since the banking crisis, the expansion of the money supply, government bonds and derivatives has continued as if nothing happened. In round numbers global debt now easily exceeds the equivalent of $200 trillion, to this shadow banks add $70 trillion, and derivative contracts a further $650-700 trillion. These are huge numbers: one quadrillion dollars would easily carpet the whole of the United States with lots to spare. Banks are at the centre of the creation of all these obligations, which together exceed global GDP by thirteen times.

Banks have also diversified their profit generation from interest-bearing business towards arrangement fees and dealing profits, so they are now dependent on perpetually rising markets. They have also managed to depress the general level of commodity prices by flooding markets with synthetic commodities in the form of futures and options, absorbing speculative buying which otherwise would have led to higher prices. Instead, lower commodity and raw material prices have suppressed price inflation below what it would otherwise have been in these easy-money conditions, maintaining the illusion of currency stability. Print money and credit without any discernible loss of purchasing power, and the merry-go-round can continue indefinitely.

The foregoing is a summary of the developing stranglehold that has progressively tightened over free markets since the 1980s. But it leads us to the point where with many short-term government bonds in Europe sporting negative yields, the government and banking cartel must be approaching an end-point.

As is often the case in life, when the music stops there will be unexpected consequences. Silence becomes everyone’s enemy and survival instincts take over. This is when black-swan events happen. The global banking system has much to worry about. Without the helium of yet lower interest rates, the debt balloon stops inflating and rising. The burden of hidden taxation through monetary debasement that has shifted resources from the non-financial economy into the financial will be increasingly noticed. The level of genuinely productive employment bulled up by government statisticians is closer to depression-era levels than the propaganda admits. The whole financial system, having been based on an ever-inflating dollar and facilitated by falling interest rates, has now become dangerously unstable.

External threats to the dollar as the world’s reserve currency are mounting as well. Trade patterns have changed with the rise of Asia and the demise of the petrodollar. America, which is at the heart of the global monetary system, is losing the political power necessary to maintain the dollar’s hegemonic status. When foreign demand for the dollar fails, so will its purchasing power. In that case, it will require a significant rise in dollar interest rates to maintain confidence in the currency.

It would mark the end-point in the expansion of bank credit, and is not only a terminal risk for the current relationship between governments and their licenced banks, it will also threaten the little people, the 9,999 out of 10,000 who do not understand what is happening to the money they think they possess.

But why should they worry, when the government guarantees small deposits? When, and this is increasingly likely, the banking system faces a systemic event, the policy of expanding money as a cure-all must go into hyper-drive: there is no other option that will keep the game going just a little longer. That is lesson of the Lehman crisis. This time, increasing numbers of our ten thousand will begin to discover the truth about money and the banking system. And when they do, they will find there are measures in place to stop them from reclaiming what was their property by withdrawing physical cash. Our newly-educated masses will only have limited options: dump their bank balances in return for tangible goods, or turn to other payment methods.

It is from here that the phoenix will arise from the ashes of state control of markets. The public can begin to make itself independent from fiat currencies and the banking system. We are seeing early signs of this at Bitgold, which is expanding at a pace to rival any of the internet superstars. The technology of payments is no longer a banking monopoly.

The moral of the story is that markets always sidestep or defeat state-sponsored control eventually. Ask anyone from Eastern Europe who experienced the collapse of central planning twenty-five years ago. This is not a negative message, but an immensely positive one: when the state-sponsored system of planning and control is driven from the marketplace, it will be a new dawn of economic freedom and opportunity.

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.