If you think the Libor scandal that came to light last month does not affect you, think again. The Libor scandal to which I refer is where the leading banks in London, who make up the British Bankers association, have colluded to artificially keep interest rates low. It is a problem so big, that it cannot be fixed. It is at the very core of the modern monetary system, the debt system. Money as we know it can no longer be priced fairly, and should now be replaced with a new system of account.
Libor is an abbreviation for London Interbank offered rate. In layman’s terms it is the average interest rate at which leading London banks would be charged if borrowing from other banks. It is calculated daily, and is the benchmark for interest rates around the world
At least $350 trillion in derivatives and other financial products are tied to the Libor. If you write it down in numerical form, using the short scale countries standard, which is what is used when referring to U.S. dollars, it is a 15 digit number; 350,000,000,000,000. Most of us tune out or our eyes glaze over when we hear and see figures like 350 trillion and the word Libor. Libor rates range from overnight to one year, and is the basis for interest in 10 countries’ currencies, including the United States, Britain, Europe, Australia, Switzerland and Japan.
Most financial institutions around the world use Libor rates to calculate the cost of mortgages, credit card, car loans, student loans, financial products and derivatives. It is the calculation of the cost of money. If banks believe that the economy is in good shape, and their counterparts with whom they borrow are financially sound, then the Libor interest rate is usually low. If however the banks have some concerns about the state of the economy or their counterparts, then the Libor interest rate is higher. Given the banks have mostly been bailed out by the taxpayer and the world economy is anything but good at the moment, one would assume the Libor interest rate should be high, not low, as it is.
The first lesson you learn about how bonds work (debt instruments) when studying economics is that bonds and interest rates have an inverse relationship. If interest rates go down, the price of bonds in the market goes up, and vice-versa. The effect of the Libor scandal, with banks artificially keeping interest rates low is that it keeps bond prices and other financial securities whose price is derived from interest rates, high. The Libor scandal has the effect of falsely overvaluing bank balance sheets. When you consider the extent to which banks pledged variable interest rate securities as collateral to the Federal Reserve, for example, in return for more funding, you can begin to understand the scale of the overvaluing of bank balance sheets through keeping Libor rates low, not to mention the overvaluing of the Fed’s balance sheet.
Similarly, anyone who has savings is receiving a lower rate of interest income on the money. When you consider that most working people in the countries where Libor is used to price its currency are part of a pension scheme or pension fund, you start to realize that pension funds are losing out on a grand scale as they are receiving less for their interest on their savings, which penalizes those who do bother to save and at the same time inflating the price of bonds which pension funds might choose to invest in.
Of course, lower interest rates mean lower interest payments on a mortgage payment or loan. However, if you take into account the effect that cheap money has on asset prices, it inflates them. So while you might be paying less in interest rate payments, you have to pay more for the price of the asset you are buying. In many cases people have to borrow more to buy the asset in the first place.
Libor calculates the cost of money, which in turn puts a value on most asset classes. In simple terms, the cost of money has been artificially too low and the values of assets that are priced as a result are too high. Specifically, bond prices are in a bubble, and when this bubble bursts, which it inevitably will, the losers will be all those who have bought interest rate related products, including bonds, as the price of these instruments will plummet.
The era of printing more debt to pay debt surely must be coming to a close. How long can the game, the scam, of rigged markets go on when it is clear that there has been complicity at every level of banking and central banking in the Libor scandal?
Money as we know it, or Fiat money, has no intrinsic value. What the Libor scandal is proving, apart from the fact that our banks cannot be trusted, is that we can no longer price assets that have value with something that does not. Since debt has no intrinsic value, we should replace the debt-based system with a system that has intrinsic value. One thing is certain, the day of reckoning for the corrupt banking cadres is fast approaching and it is unavoidable.
The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.
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