How Banks Rule the World
Today some 255,000 Americans age 85 and older are still working – many more above 65 are still working today. That is a record figure and almost 90% up from before the financial crisis, which was caused by insane amounts of debt created in the world. Trust me, when I say most of these 85+ year old people are not working because they love their jobs so much but rather they cannot afford their retirement – they haven’t saved enough and/ or were fooled into poor performing investments, which effectively funded those self-proclaimed ‘financial planners’ and ‘retirement fund managers’. 65% of Americans have so much debt that they don’t save enough for retirement and end up struggling financially in their future. By 2018, or ten years after the financial crisis, personal, corporate, and government debt in the USA and many other countries have more than doubled. You can read in the news how banks have been declaring record profits, mainly from people and organisations having to service their loans. In early 2018 the privately owned Federal Reserve, or the Central Bank of the United States, has commenced increasing their interest rates, cashing in on the record levels of debt held by organisations and the general public – plans are to raise interest rates four times this year alone. Consumers were all enticed to take out loans by the record low interest rates set by the Federal Reserve over the past decade. Lowering interest rates to fool people into taking loans and then gradually increasing repayment amounts by lifting interest rates later is a well–calculated long-term strategy used by the global central banks. Effectively raising a 1% interest rate to 2% would be 100% increase in loan repayments. Before the Financial Crisis, 5% interest rates in the developed world were considered normal, 2-3% more than the average today. We can observe similar even more exaggerated schemes in other countries, i.e. Denmark even offered loans at negative interest rates just to keep loans attractive, causing Denmark’s households to be in the top three most indebted nations globally comparing the household debt to GDP ratio.
The Loan Experiment
When I was 23, before the financial crisis of 2008, I was curious to see how I would cope with having a huge bank loan, so I decided to do an experiment – taking out a car loan. It was a great way to test being in debt whilst not locking myself in on a 30 year home loan. I financed a fast and flashy car, paying off my loan in three years with an initial 5% deposit. At that time it took almost 30% of my disposable income and for the very first time in my life, I felt like I was working as a modern slave for a bank. The financing was based on a 8% interest a year on top of the principal amount – four times more than it would cost today. Later, I learnt more about the financial and monetary system. The logic escapes me till today on how a bank is able to charge me 8% a year for money it created out of thin air through the so–called ‘fractional reserve mechanism’. Yes, this is how banks make record profits and rule the World. Do you know that the ‘fractional reserve mechanism‘ allows banks to loan out money for which they don’t really have collateral held against or in simple speak – deposits. The ratios differ by country and the size of the bank, some have no restrictions at all but let’s give you an average example from the US: Person A deposits $100,000 in a savings account in Bank X. Now Bank X is entitled to loan out to Person B 10x the held deposit (10x $100,000 = $1,000,000) it received from Person A, plus whatever interest charges and profit margin on top of what the central bank dictates. When I took out my loan, I immediately despised the feeling of being in debt. It seriously limited my disposable income and feeling of freedom. Furthermore my savings rate hit rock bottom as there was not much left to save from. Instead of investing into my future, I was now paying for the future of a bank. Granted, I now had a fast and fancy car, which I had fun with but in reality, it was really owned by the bank. It was a bad move, depreciating in value quicker than I could drive it. I was working 51% of the year for the tax man and the mandatory government retirement fund (which consistently underperformed the market) and almost 30% for the bank, leaving me with a mere 19% for living expenses. I felt completely trapped and enslaved, spending over 80% of my life energy on serving my modern masters: the government and the banking system. Almost immediately I started thinking how to get out this scheme and rid myself of my masters. I worked very hard on increasing my income through self-development, gaining experience, and climbing the career ladder. It didn’t stop here – I even moved countries based on favourable income levels as well as income tax rates and furthermore invested in countries where I felt it was safer and/ or a better bang for the buck. Most importantly though I avoided talking to personal bankers and financial planners like I was avoiding a deadly disease, always politely declining their invitations for coffees and meetings.
Robbing your Future Self
I fully understand that most people decide to take out loans to fulfil their life desires, owning a bigger house, a fancier car, long holidays etc; things they realistically cannot afford today. Doing so effectively means robbing their future selves and chaining themselves to the financial industry by servicing their debts. I experienced this myself but I learnt my lesson and didn’t fall into their trap. Instead, I took saving more seriously and saved roughly 35% of my income on an annual basis, which later allowed me to stop working entirely – you can read about it here.
Warrant Buffet once said that his #1 advice for young people was ‘not to get into debt’. However, the banks behave the opposite way – offering these young consumers lots of opportunities to fall into the debt trap. I clearly remember when I was a high school student in the US, I was unsolicitedly being sent seven active credit cards, with a total credit limit of $45,000, even though my income was zero. Personally I found this criminal at the time but it wasn’t illegal at that time. If you look at the average household debt (mortgages, credit cards, auto loans, higher education loans, etc) compared to a country’s Gross Domestic Product (GDP) you see some truly frightening figures (source: trading economics). Switzerland, Denmark, Australia and the Netherlands are ranked worst in the world with each country’s household debt passing well beyond 100% of their respective GDP. Well, that alone doesn’t sound so bad, right, but let’s take a deeper look at Switzerland for example. There are an estimated 3.36m households and the GDP is roughly $660bn. So with a nationwide household debt of 127.7% of the GDP or a calculated $842bn the average household debt computes to a staggering $251,000. That is an insane value!
We are Modern Slaves, serving Modern Masters
Without a doubt in my mind, banks are today’s rulers of the world, modern masters of modern slaves. How many people live pay cheque to pay cheque, serving banks everyday, choosing to live today rather than saving for tomorrow? Thankfully we do have a choice: To live within our means, consume less, save earlier, effectively not robbing our future selves by going into debt and supporting the banks. Do you feel like a modern slave? Are you in debt? I would love to hear from you about your experience with loans and how they make you feel.
For Freedom and to Live Your Dreams,
Your Financial Gladiator
About: This Financial Gladiator retired early at age 34 by investing most of his savings in a small real estate portfolio in Eastern Europe. Today he saves approximately 75% of his income while roaming the world and occasionally teaching as a Scuba Instructor on tropical islands. It helps him to keep fit while doing what he loves – teaching, traveling, and scuba diving. He called quits following a successful 13 year career in Information Technology throughout which he saved between 30-40% of his net income annually. Before he quit he positioned himself in a role he suspected was going to be made redundant eventually. The day arrived quickly and he ensured not to leave without a retrenchment package reducing the need to work and save 3 more years. His real estate portfolio draws a return high enough to pay him twice his annual expenses, allowing him to continue to build up his retirement portfolio while enjoying 100% freedom today.
Disclaimer: All information provided on this site is for informational purposes only and does not constitute professional financial advice.