Tag Archives: banking

Paying Down The Debt Is Now Almost Mathematically Impossible

2.7K ZeroHedge / by Tyler Durden / 22 hours ago

Submitted by Simon Black via Sovereign Man blog:

Exactly 199 years ago, in 1815, a “temporary” committee was established in the US Senate called the Committee on Finance and Uniform National Currency.

It was set up to address economic issues and the debt accrued by the US government after the War of 1812.

Of course, because there’s nothing more permanent than a temporary government measure, the committee became a permanent one after just one year.

It soon expanded its role from raising tariffs to having influence over taxation, banking, currency, and appropriations.

In subsequent wars, notably the American Civil War, the Committee was quick to use its powers and introduced the union’s first income tax. They also detached the dollar from gold to help fund the war.

This was all an indication of things to come.

Over the subsequent decades there was a sustained push to finally establish the country’s central bank that will control money and credit, as well as institute a permanent income tax to feed the expanding aspirations of government.

They succeeded in 1913 when the Federal Reserve Act was passed and the 16th Amendment ratified, binding the country in the shackles of central banking and taxation of income.

Over the century that followed, the US has gone from being the biggest creditor in the world to its biggest debtor.

Decades of expanding government programs, waste, endless and costly wars, etc. have racked up such an enormous pile of debt that it has become almost impossible to pay it down.

A lot of folks don’t realize that, since the end of World War II, the US government’s total tax revenue has been almost constant at roughly 17% of GDP.

In other words, even though the actual tax rates themselves rise and fall, the government’s ‘slice’ of the economic pie is almost always the same – 17%.

I’ve worked out a mathematical model which shows that, even with absurd assumptions (7%+ GDP growth for years at a time, low interest rates, etc.), it is simply not feasible for the US government to ‘grow’ its way out.

Default has become the only option. And that could mean a number of things.

They could default on their creditors (other governments like China who loaned money to the US government). But this would spark a global financial and banking crisis.

They could default on the Federal Reserve, which owns trillions of dollars of US debt. But this would create an epic currency crisis for the US dollar.

They could also default on their obligations to their citizens—primarily to future beneficiaries of Social Security (who collectively own trillions of dollars of US debt).

Or they could choose to default on their obligations to every human being alive who holds US dollars… and engineer rampant inflation.

None of these is a good option. And simply put, the US government has reached a point of no return.

I aim to demonstrate this to you in today’s video podcast episode. It’s a very sobering realization.

Join me to see it for yourself:

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Islamic banking draws new interest from West

Staff work behind the glass at Dubai Islamic Financial Services at the stock market in Dubai, Nov. 10, 2013. (photo by REUTERS/Omr Mohamed)

At the beginning of last June, the European Central Bank issued a decision to reduce the deposit rate to below zero — a first for the bank. This fell within the framework of a package of economic incentives. The decision aimed at reducing the deposit rate to -0.10%. This means that the depositor will not obtain the interest on the deposited funds, but rather the bank will obtain returns on deposits made with the institution. According to some analysts, the idea draws inspiration from the concept of ​​zakat in Islam to prevent accumulation of wealth by imposing a certain percentage on capitals that remain intact for one year.

However, the differences are clear. First, the zakat in Islam is imposed on the individual within the scope of his religious duties, while the step taken by the European Central Bank targets banks who offer deposits. Second, zakat has well-known and specific allocations, while the step taken by the European Central Bank aims at encouraging the channeling of funds toward economic activities rather than investing them and depositing them in banks. The philosophy behind this step may be viewed as in line with the values of Islam, where wealth is perceived as a means that must be spent for higher purposes and must not be amassed.

Indeed, regardless of the link between this policy and the concept of zakat, Western societies and institutions increasingly look to Islamic financial regulations in their desire to renew themselves and use what they see as useful, one way or another. This is also due to the existence of social blocks unwilling to charge interest. Therefore, it is no longer strange to see major Western banking institutions such as Citibank, Chase Manhattan and HSBC dealing in accordance with the provisions of Sharia in terms of financial products such as murabaha, mudaraba and musharaka (joint venture). Moreover, the headquarters of five Islamic banks exist in London, and 50 countries around the world allow the practice of various types of Islamic banking.

Islamic bonds are issued and managed in accordance with the provisions of Sharia, prohibiting the trading of forbidden projects, goods and services, and involving the client in the profits and losses according to his share. These sukuk [Islamic bonds] are now attractive in light of their significant market growth, which is estimated to exceed $1.5 trillion. It is also estimated that the market for Islamic bonds registers an annual growth of around 15% and that a large proportion of them are indeed sold to non-Muslims.

Moreover, it was anticipated that the value of the Islamic bonds issued during the first quarter of this year would exceed the threshold of $30 billion. This urged London to attempt to become the first Western capital to attract Islamic banking activities. Late last year, British Prime Minister David Cameron addressed the participants of the Islamic Economic Forum, announcing that the UK Treasury plans to issue sukuk worth approximately 200 million pounds [$326 million]. This was a modest amount compared to the value of the other instruments issued in this field. However, the fact that the issuance is made in London gives it an additional value. This transaction is expected to be completed during the next few weeks.

Four months ago, the parliament of Hong Kong — an island enjoying some executive and legislative autonomy despite its subordination to China — completed the laws and regulations allowing it to issue sukuk. It is planned that the value of the first issuance will amount to $500 million.

The phenomenon of Islamic banking dates back to the sixties. It began in Egypt with a number of savings banks. Then, during the following decade, it started to spread when the Sudanese Islamists allied with former Sudanese President Jaafar Nimeiri and managed to convince him (in the late seventies) to allow the establishment of the first Islamic bank subject to the provisions of Sharia, Faysal Bank. The bank was exempted from several procedures and conditions, and thus it achieved profits that were then forwarded to support the political action of Islamists by providing soft loans to the members of Islamist organizations. This provided them with a funding possibility that was not available to others and contributed to the emergence of a new social class of Islamist businessmen.

The experience expanded. Other [Islamic] banks and companies were established in the field of trade, insurance, etc., which provided strong support for the Islamist political structure. This made the Islamic banks part of the conflict within the political process. Islamists always replied to those who criticized their financial practices of monopoly or discrimination in the provision of loans that their criticism was directed at Islam and not at specific practices that could be rectified. It is strange that at the time when Islamic banks, led by Faysal Bank, spread into Sudan, Egypt and other countries, they were banned from operating in Saudi Arabia.

Some believe the reason behind this was that the banking system in Saudi Arabia functioned initially on the guidance of Sharia. Allowing a certain bank to raise the Islamic banner could have implied that the rest of the banks were not Islamic. However, when the “Islamic Awakenings” emerged in the 1990s, the Islamic banks found their appropriate path after al-Rajhi Group, while operating in exchange, was allowed to establish a bank according to Islamic foundations. The rest of the banks then rushed to provide financial products under the Islamic banner.

After decades of practice, certain negative aspects of Islamic banks began to emerge. They were often called Islamic usury banks and accused of creating an Islamic illusion for usury practices, with simple name adjustments. The Islamic banks were mainly criticized by politicians on the basis of their personal interests and political programs.

In Sudan’s experience, these kinds of banks contributed to moving the Islamists in the country from being a small party to the third electoral rank, in addition to having significant financial powers compared to their competitors. This allowed them to spend money on media and membership, as well as paving the way to the coup led by current President Omar al-Bashir. Not to mention they were capable of staying in power for a quarter of a century, which no other political authority was able to accomplish in Sudan before.

Due to this political dimension of Islamic banks’ activity, it became difficult to criticize their path, as is the case with the murabaha mode, as the banks do not take any kind of risks. The agent has to pay the Islamic bank double what he usually pays the usury banks. These banks operate under the auspices of supervision committees who control their financial operations according to Sharia. However, the members of these committees are designated by the banks’ administration, which makes their independence questionable. They often include traditional sheikhs who are not up to date with the modern economic mechanisms and functions, which makes them incompetent. This criticism came from within groups that could not be accused of opposing the experience from a political aspect — for example, Sheikh Saleh Kamel, head of Saudi Dallah Group, which has been working in Islamic banks for over three decades and whose al-Baraka Bank has branches in several countries.

According to Sheikh Saleh, these banks were busy making money and ignored the process that led them to this situation, as well as all the guidance of Sharia. These banks also suffer the difficulties of liquidity planning. Their relationship with depositors was never a partnership, which is probably due to them starting off as traditional banks instead of as investment companies. Saleh suggested calling them Abrahamic banks instead of Islamic, based on the fact that all three monotheistic religions (Islam, Christianity and Judaism) forbid usury.

The lack of a central authority that could establish the required policies and regulations for Islamic banks’ activity played a role in not allowing them to achieve the objectives they were initially established for, despite them being gathered under one union that organizes their operations.

On the other hand, the Islamic banks’ experience could push Islam toward a prominent role in the political, economic and social mobilization in Qatar. The fact that this experience appeals to the depositors’ religious and emotional side has helped its expansion. This has attracted the attention of foreign institutions and societies, which aim at having access and taking advantage of a large range of unexploited capital.

The experience might have been modest at first in Sudan and Jordan, but it was effectively launched in Malaysia, since it sympathizes with Islamic propositions. During the 1980s and the 1990s, many of the Malaysian government’s institutions in all domains were privatized, which provided the opportunity to activate Islamic finance. The financial boom in the countries of the Gulf, specifically after 2005, provided great financial resources, which aimed at finding new financial instruments. They found it in sukuk, which attracted the attention of international markets that sought to open the doors for any practice that would help them face these [2008 financial] crises within the scope of capitalist traditions for innovation and new intake.

Thus, the Islamic finance experience can be seen as a humane financial and banking jurisprudence, which can be criticized and reviewed, as well as distanced from politics. Perhaps this experience will contribute in providing a solution for the complex economic situation, instead of the vicious cycle of violence that has marked the conflict between Islamists and their opponents on the political scene.

5 things you must know about BRICS development bank

Posted by: Sandra Marina Fernandes
Updated: Monday, July 14, 2014, 12:52 [IST]

Bangalore, July 14: Even as Indian Prime Minister Narendra Modi is enroute to Brazil for BRICS (Brazil, Russia, India, China, South Africa) Summit, the launch of BRICS Development Bank is making news.

Prime Minister Narendra Modi left on Sunday to attend the five-nation BRICS Summit in Brazil. Modi will be meeting the heads of the other countries to discuss regional crisis and to have a stabilised economy.

Among all this the leaders are also to finalise setting up of a development bank and seek reforms of the United Nations and international financial organisations in the July 14-15 event.

The BRICS Development Bank is expected to be launched on July 15. The BRICS Bank is a proposed bank run by the five BRICS states. Here are five points that you must know about BRICS Bank-

1- The idea to have a BRICS Bank was first proposed in July 2009, in Durban, South Africa at the 5th BRICS Summit. At the upcoming 6th BRICS Summit, leaders are likely to sign a treaty to launch the bank.

2- New Delhi, is in the race with Johannesburg and Shanghai to house the headquarters of the BRICS Bank. Though reports suggest that Shanghai is likely to win the race, many have cited language barrier and freedom of expression to be a problem with Shanghai.

3- Main aim of BRICS Bank is to ensure the economic stability for the emerging economies in case the US dollar continues to fluctuate.

4- The Bank will have a capital of 50 billion US dollars, with each country contributing 10 billion US Dollars. Initially China had said that it would offer 41 billion US dollars but this raised a concern among others who though that it may give China more power.

5- China initailly was apprehensive about the BRICS Bank and had expressed differences over setting up of the headquarters and other technical issues but later on China supported the idea of the Bank and said that issues can be resolved.