The Battle for Caspian Oil During World Wars

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  Iakovos Alhadeff

*What follows is to a large extent based on a very interesting book that I read, namely the journalist Lutz Kleveman’s “New Great Game: Blood and Oil in Central Asia”. 

The First World War was the first war where the winner was determined by oil. The German Empire lost the war because it ran out of fuel. At the beginning of 1918, the conditions facing the German army were favorable. On March 1918, the Russian Communists (Bolsheviks) had deposed Tsar Nicolas II, but they needed soldiers to fight the remaining tsarist forces.

Lenin, who at the time was the Bolshevik negotiator, proposed the Germans to hold the Baltic Sea countries, plus Ukraine and Finland, in order to achieve a truce. But Erich von Ludendorff, the German army’s chief, required access to the oil of Baku too. In August 1918, the Turkish army, a German ally, was entering Baku. However this was a brief victory, since soon British troops from Persia (Iran) attacked the Turks and liberated Baku, depriving the German army from these indispensable supplies.

Caspian Countries

The Caspian oil also played a significant role in World War Two. At the beginning of 1942, the Germans attack on Russia, under Operation Barbarossa which had started in 1941, was already in progress. At the beginning of 1942, Hitler ordered Operation Blue, according to which the Germans would attempt to take control of the Caspian region, in order to get hold of the Baku oil, which was desperately needed. The German army literally ran out of fuel on the Caucasus. The Battle of Stalingrad was the failure of Operation Blue. You can see Stalingrad, today named Volgograd, just above the Caspian Sea region. The map is from


Initially Hitler refused to pull his army out of Caucasus. Finally, on January 1943, the German Army was ordered to retreat. The Germans did not gain access to the oil of Baku. Approximately two years later, the Russians were marching into Berlin. For Operation Blue you can also check the following link.

Baku is the capital of Azerbaijan, which used to be one of the Soviet Republics, and which gained its independence in 1991. Azerbaijan signed oil contracts with the American companies, in order to transfer Caspian oil and natural gas to Europe. However Russia considered Azerbaijan to belong in its sphere of influence, and wanted to stop this cooperation at any cost.

It was with the Russian support that Armenia, one of the neighboring countries, attacked Azerbaijan. During the period 1994-1997, the Russians provided the Armenians with 1 billion dollars in arms. The famous Russian missiles S-300 were part of this generous military support. Azerbaijan is a very important country for Russia, because the problem of the Americans is how to transfer Caspian energy, both oil and natural gas, from the landlocked Caspian region to the markets, thus limiting the Russian influence.

The only solution for the Americans to transfer Caspian energy to Europe was through Azerbaijan, Georgia and Turkey. This pipeline was also the only way for Azerbaijan not to be dependent on Russia. Russia approached its old rival, Iran, which is very hostile towards the Americans, in order to put Azerbaijan between Russia and Iran, and limit its capacity to cooperate with the west.

Baku Ceyhan Pipeline

There are more spies than businessmen in Baku, most of them Russians and Iranians. However in 1999, President Clinton, met the presidents of Azerbaijan, Turkey and Georgia, and signed the agreement for the Baku-Ceyhan oil pipeline, which you can see at the above map, and which was finished in 2005. The pipeline transfers Caspian oil to the Turkish port of Ceyhan, the deep waters of which can accommodate large tankers. The source of the map is

Below you can see another map of the Baku Ceyhan pipeline from Wikipedia.

Baku Ceyhan Pipeline 2

This was a partial victory for the Americans, since they also need to transfer natural gas to Europe, and both oil and natural gas to the South (Indian Pacific) and to East Asia i.e Japan etc, in order to limit both the dependence of their allies on the highly volatile Persian Gulf region, limiting the Russian influence at the same time.

In 2005, Professor Tuncay Babali, an advisor of the Turkish President, Recep Erdogan, estimated that the annual benefit of the pipeline would be 29 billion dollars for Baku, 600 millions for Georgia, and 300 millions for Turkey. You can see his paper at the following link.

For more information on the modern battle of the Americans and the Russians for Caspian oil you can go to the following links, which however are not based on Lutz Kleveman’s book, but rather on various other material.

“The Energy War Between U.S.A. and Russia”

“Why the United States Invaded Afghanistan”

The True Causes of Greek Anti-Semitism

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Iakovos Alhadeff

 Table of Contents


 The Rise of Andreas Papandreou

 The Greek Mass Media System and the Greek tycoons

 Greece’s Energy Dependency

 The Misinformation of the Greek Public

 The Gaza Crisis of 2014




 According to an Anti-Defamation League survey, Greece ranks among the top anti-Semitic countries in the world, with 69% of Greeks experiencing some form of negative feelings towards Jewish people. I see many articles trying to explain the causes of Greek anti-Semitism. They all offer long and silly explanations, and since I happen to be Greek, and I happen to know the real causes, I would like to make a contribution on the subject and explain the roots of Greek anti-Semitism. I believe that the causes of anti-Semitism are very similar in all European countries, and I hope that by explaining the situation in Greece, I will help other people understand the true causes of anti-Semitism in their countries too. I am not saying that there are no differences across various European countries, but I believe the main reasons are always the same and that’s exactly what I will try to demonstrate with this essay.

 The Rise of Andreas Papandreou

 Greece has traditionally been a pro-Arab country, and she actually voted against Israel in the 1947 United Nations resolution for the Partition of Palestine, because there was a large number of Greeks living in Egypt, because Greece was exporting a large part of its agricultural production to the Arab world, and because Greece was dependent on the Arab countries for oil. You can read a summary of the Greek Israeli relations from 1947 in the following article.

 And here is another longer summary of the Greek Israeli relations.

 However even though Greece was definitely a pro-Arab country, it was not as biased against Israel as it is today. However this changed with the rise in power of the socialist leader Andreas Papandreou. Andreas Papandreou, an ex-communist himself, surrendered Greece to the hands of communists. Or to be more accurate he surrendered the country to ex-communists, who had moved to the socialist party PASOK, and who were no longer calling themselves communists.

 The rise of Andreas Papandreou and his communists in power changed dramatically the Greek foreign policy towards the Palestine Conflict. When he became prime minister in 1981, he officially recognized the Palestinian Liberation Organization leader, Yasser Arafat, who at the time was considered as a terrorist by all European leaders. And he did not recognize Israel de jure. Greece only recognized Israel de facto in the 1950s, and only the conservative leader Konstantinos Mitsotakis offered Israel de jure recognition in 1990. Until 1990 the Greek-Israeli diplomatic relations were at the consular and not the ambassador level as you can see at the following Wikipedia link.

 As you can read in section 4.2 “Non Diplomatic Recognition-Greece” of the above Wikipedia link, “President Karolos Papoulias has stated that Greece ultimately supports the creation of a Palestinian state alongside Israel.[250] Under previous governments, Greece garnered a reputation as a staunch supporter of the Palestinian cause.[251] Within the wider Arab–Israeli conflict, Andreas Papandreou maintained a stronger stand against Israel than any other government in the European Community. Diplomatic relations were founded with the PLO in 1981, while relations with Israel were maintained only at the consular level until Greece’s formal recognition of Israel in 1990 under Mitsotakis”. At the following legal-dictionary link you can read the differences between Ambassadors and Consuls.

 In section “Ambassadors and Consuls” you can read the following:

 “An ambassador is the foreign diplomatic representative of a nation who is authorized to handle political negotiations between his or her country and the country where the ambassador has been assigned.

A consul is the commercial agent of a nation, who is empowered only to engage in business transactions and not political matters in the country where he or she is stationed”.

 Therefore Andreas Papandreou and his communists, immediately recognized Yasser Arafat, who was considered a terrorist by all other European leaders, and did not recognize Israel de jure, something that all other European countries had long done, including the very socialist France. At the following link you can read an article which was written in 1982 describing the relationship between Andreas Papandreou and Yasser Arafat.

 As a consequence all the extremely rich socialist dictators of the Middle East were indebted to Andreas Papandreou for his support of the Arab countries, at a time that Greece had already joined the European Union and could bring the Arab causes to the heart of Europe. It is therefore no surprise that the Arab leaders treated Andreas Papandreou like a king, with the strong friendship between Andreas Papandreou and Muammar Gaddafi, the socialist dictator of Libya, being the most famous example. In section “Timeline” of the following Wikipedia link, you can read that the main goal of Gaddafi’s foreign policy was to unite the Arab nations in order to eliminate Israel.

 At the following link you can read about the trip to Libya in 2010, of Andreas Papanderou son, George, who was a prime minister too, in order to convince his father’s old friend, Colonel Gaddafi, to invest in Greece in order to help the country overcome the financial crisis.

 At the following link you can read about the meeting of Andreas Papandreou, Muammar Gaddafi and Francois Mitterrand in Crete Island, where they were trying, together with other Arab countries, to form a coalition against U.S.A. and towards Russia, in order to transform the Mediterranean Sea from a NATO sea to a “red” sea.

Even today, the wife of Andreas Papandreou, Margarita Papandreou, is an activist for Iran. Margarita Papandreou, was one of the founding members of the activist group “Stop War on Iran”. As we all know, Iran is the number one enemy of Israel. The objective of this group is to put pressure on USA and Israel, in order to prevent them from imposing sanctions on Iran, due to Iran’s efforts to develop nuclear weapons. You can verify the fact about Margarita Papandreou at the last paragraph of the following link 

or at the last paragraph of the following link

or at numerous other sites, if you simply google “Margarita Papandreou Iran”.

 If you take into account that it was the Greek socialists that shaped Greece after 1980, and if you take into account that the God of Greek socialists has always been, even after his death, Andreas Papandreou, you can realize the political climate prevailing in Greece towards the Arab Israeli conflict, once the Greek communists came to power.

 The Greek Mass Media System and the Greek tycoons

 To fully explain the phenomenon of the high Greek anti-Semitism, the Greek media system must be taken into account too. Greece is one of the most socialist countries of the E.U. Socialist both in terms of redistribution of incomes (high taxes etc), but also socialist in terms of regulation. Everything is heavily regulated in Greece. This includes of course the Greek media system, which is controlled by some Greek tycoons. Politicians need these tycoons to be elected, and the Greek tycoons need Greek politicians to get involved in large public sector projects. However what is relevant for this essay is the very low quality of the Greek television and radio programs. It is actually very difficult for me to explain how bad and how disorienting for the Greek people the Greek mass media are. And I know that the news media are not perfect in U.S.A., U.K. and other European countries, but the Greek mass media are really something.

 This low quality of Greek various news channels and newspapers, includes the Israeli-Palestinian conflict too. I explained how pro-Arab the Greek political system has always been. But there is another problem. The Greek tycoons who own the Greek media are also ship owners and they carry oil from Arabia, Russia and Iran to Greece. They are therefore very well connected to the Arab countries, to Russia and to Iran. They have friends and partners there. I will only mention two very well known cases, even though there are many others. The first one is the Greek tycoon Spyros Latsis who holds 36% of Hellenic Petroleum, the largest Greek oil refinery.

 As you can read in section “Refineries Gas Stations”, the company imports oil from Saudi Arabia, Iran, Iraq, Libya and Russia. The amounts involved are huge, and the suppliers are famous anti-Semitic countries. Spyros Latsis is one of the richest Greeks, and he was also included in the famous rich people list published by Forbes magazine. He also owned a bank (Eurobank), he is also a ship owner, he owns hotels, and many other companies.

  I do not know if he owns any Greek media, but you can imagine the impact that this man has on the Greek media system, since he has been spending on them tons of money for advertising his companies. And the largest part of his business involves the Arab world, Iran and Russia, since he owns the Greek oil refinery and he transports a lot of the oil with his ships too.

 A second very famous case is the Vardinoyiannis family, who own Motor Oil, the second largest refinery in Greece. You can read about Motor Oil in the following Wikipedia link.

 The Vardinoyiannis family are also ship owners, they used to partly own Piraeus Bank, they have many other companies, and they partly own two of the main Greek television channels i.e. Mega TV and Star Channel, and they hold stakes in many other Greek media too. As you can see at the following link, Aramco, the state owned oil company of Saudi Arabia, was holding a 50% share in their company, Motor Oil.,w

 Aramco can be seen as a synonym for Saudi Arabia, since it is the state owned oil company of one of the richest oil countries in the world. Given the partnership between the Vardinoyiannis family and Saudi Arabia, one can conclude that in a sense, the Greek public was informed by Saudi Arabia when it came to the Arab-Israeli conflict. In other words not only the Greek political left was attached to the extremely rich Arab dictators, but the Greek tycoons who were controlling the Greek news media were the partners of these Arab dictators too. Actually to put it in a more correct way, both the political system and the Greek tycoons were the partners of the Arab dictators.

 Since the Greek media system is very tightly controlled and regulated, one can only hear the version of the Greek political and business elites when it comes to the Arab-Israeli conflict, which is basically the radical Arab version of the story, the version of Palestinian genocide etc. Below there is a map of the Greek Media System, which is a bit old and needs to be updated, but which gives the general idea, which is that 8 groups control almost all the Greek news media.

Greek Media Map

 Greece’s Energy Dependency

 Until now, I described how the Greek political and business elites are connected to the Arab world. You can imagine the Greek political and economic elites as very well connected, and you can imagine the Greek economic model like the Russian one, where a political elite works closely with a business elite. However all this businesses between the Greek politicians and Greek businessmen with the Arabs, Iranians and the Russians, would had not taken place if it wasn’t for the oil and natural gas.

 Everything starts from Greece’s need for oil and natural gas. Therefore the origin of the Greek anti-Semitism is the need for energy. It is this need that brought together the Greek political and business elites with the Arab and Iranian dictators. However once this partnership was formed, the rotten political and media system made sure that Greek people were really misinformed and disoriented in order to be biased against the Israelis. But as I said if it wasn’t for oil, this partnership between the Greek elite and the Arab dictators might had not taken place. At the following Financial Times link, you can see how dependant Greece was on Iranian oil, and she was actually pressing the E.U. to ease sanctions on Iran.

 The following Reuters link, also explains how dependent Greece was on Iranian oil, and how she was saved from two Russian oil companies when the E.U. banned imports from Iran.

 The following Washington Post link, states how dependent Greece is on Iranian oil, and on what generous terms Iran sells oil to Greece, and how Greece asks the E.U. not to be too harsh on Iran when it comes to its nuclear program in order to return the favor.

 Moreover you will see at the following Wikipedia link that Gazprom, the state owned Russian natural gas provider, supplies 76% of the natural gas consumed in Greece, which makes Greece very dependent on Russia too. I think the 76% figure has further increased in recent years and it is like 90% but I am not sure.

 Therefore to explain the impressive 69% of the Greek anti-Semitism, you have to take into account Greece’s need for energy sources, the corrupted Greek socialists, who did not only want to have good relations with the Arab countries but also to make favors to the powerful and extremely rich Arab and Iranian dictators, and finally the Greek tycoons who are controlling the Greek media and who are partners of the Arab dictators. It is really as simple as that and it is a waste of energy to search in other fields for the causes of Greek anti-Semitism. There might be some other minor causes too, but the causes for the 69% of Greek anti-Semitism, while there are no more than 4-5 thousands Greek Jews in a population of 10 million people, cannot be attributed to anything else than what I just described i.e. the Greek dependency on the Arabs, Iranians and Russians for oil and natural gas, the corrupt Greek political system, and the Greek tycoons of the media.

 And don’t get confused and believe that what I described can only explain anti-Zionism. It explains anti-Semitism too. When there are financial motives to turn people against Israel there are financial motives to turn people against the Jews too.

 The Misinformation of the Greek Public

 The bankruptcy of Greece in 2010 intensified all the above problems, because the corrupt Greek political system needed a scapegoat that would be blamed for the failure of the Greek State. It could not be explained to the Greek people that the bankruptcy was the result of the corrupt socialist administration of the Greek economy. Someone else had to be blamed. And now the Greek elites have a weapon that did not have in the past i.e. the internet. In the past they could only do so much propaganda, because their journalists were using their names on tv and radio programs. Today they can fund the same rotten journalists, who have web pages that support the most unbelievable conspiracy theories, either anonymously or under the name of new journalists who are struggling to make a living and do not hesitate to promote anything.

 These journalists are cursing the Greek political and business elites, and pretend to be on the other side, and attract all the angry Greek people who have had enough with the current economic crisis, and whose thinking has been distorted by the Greek media. To give you an example, I will mention the issue of the Greek Exclusive Economic Zone (EEZ) in the Aegean Sea. At the following Wikipedia link, at section “Greece”, you can read that Israel has recognized the Greek EEZ, a sensitive issue for Greece since her EEZ is not recognized by Turkey, who threats to take military action against Greece, if Greece dares to unilaterally declare her EEZ, since that would allow Greece to exploit the oil and natural gas of the Aegean Sea.

 However the Greek public does not know that Israel recognized the Greek EEZ. The main Greek media never mention that, while the supposedly well funded “anti-conformist” sites of the internet, teach Greek people that it is the Jews who caused the Greek bankruptcy in order to steal the Greek oil and natural gas in the Aegean. It is much easier than you think for the Greeks to believe such theories. You would be amazed if you knew how many Greeks believe that Andreas Papandreou, the socialist leader who did so much for the Arabs, and for whom the Arabs did a lot too I guess, was an agent of a Jewish conspiracy that wanted a bankrupt Greece in order to steal her riches.

  I understand that it is hard to believe that the Greek public is so misinformed, and yet what I am saying is so true. The average Greek believes that the Jews control the U.S.A., that the Jews control Greece, that most rotten Greek politicians are working for the Jews etc. And I am not talking about uneducated people. All people without education believe that. I am also talking about many people that have studied at university level. Because being a doctor or a lawyer does not mean that you know what happens in the middle east. On the contrary, it means you were too busy, and did not have the time to find out what happens in the Middle East, and therefore all the knowledge you have on the subject is based on the information provided by the mass media. And how can you blame these people with the kind of information they have been given for so many years by the communist journalists, who work for the Greek tycoons?

  I must mention that the Greek tycoons always prefer and promote socialist politicians and journalists, since the latter favor a lot of regulation and bureaucracy, which is very convenient for the Greek tycoons, since it makes it much harder for foreign companies that are not friends of the Greek politicians to enter the Greek market. They can enter the Greek market only for sectors that the Greek elite is not interested i.e. Zara, H&M, Marks and Spencer etc. If the Greek elite is interested they can enter only if they form partnerships with the Greek tycoons. When I say they cannot enter the Greek market I do not mean that they are officially banned, but they know that the Greek political system with its huge influence in everything will give them a hard time if it does not approve them.

 The Gaza Crisis of 2014

 I want to use the Gaza crisis of 2014 to demonstrate some of the things I have been saying so far. Since 2010, Greece, Israel and Cyprus have a common defense doctrine against Turkey. The main reason is that Turkey and Israel, which were ex-allies some time ago, are in very bad terms under the Islamist and Muslim Brotherhood supporter, Recep Erdogan. At the same time Greece, Israel and Cyprus, have a lot in common since they can all profit from the crude oil and natural gas reserves in the Mediterranean Sea. You can read a summary at the following link, or many other links if you google Greece-Israeli defense doctrine.

 Therefore Greece and Israel have a defense doctrine against Turkey. During the Gaza crises, Egypt, Jordan, United Arab Emirates and Saudi Arabia blamed Hamas for the crisis as you can read at the following New York Times link.

 You can read about it at the following Reuters link too.

 The reason of course that Egypt and Saudi Arabia blamed Hamas was not because they love Israel. They hate Israel. But Hamas is the off-spring of the Muslim Brotherhood which really scares the current Egyptian and Saudi status quo, and they are afraid that the Brotherhood poses a threat to them too. Therefore Saudi Arabia moved against Hamas while Qatar, which together with Turkey and Iran are the main supporters of Hamas, used their influence to support Hamas during the Gaza crisis. You can read about Hamas and Qatar at the following link.

 But before I continue I have to say that the legendary socialist PASOK party of Andreas Papandreou is currently preferred by only 5% of the Greek voters. The financial crisis destroyed the party since it was no longer possible for socialists to hire people in the public sector and build their personal armies of voters. The Greek electorate has now moved to SYRIZA, a party of the radical left which is full of Marxists. Actually one of the former leaders of SYRIZA, Nikos Konstantopoulos, is known for his excellent relationships with the Vardinoyiannis family, who had at some time appointed him as the chairman of Panathinaikos, a very big Greek football club that the family used to own. You can read about Mr. Konstantopoulos football presidency at the following link. Please note that the link describes Mr. Konstantopoulos as the ex-leader of Synaspismos party, which was the original name of Syriza.

 The ex-wife of Mr. Nikos Konstantopoulos, Mrs. Lina Alexiou, is the vice president of the Greek supervisory body for television and radio programs. In other words Mrs. Lina Alexiou supervises the media of the Greek tycoons. You can read about Mrs. Lina Alexiou at the following link. Please note that Zoi Konstantopoulou, a current member of parliament and SYRIZA, is the daughter of Mr. Konstantopoulos and Mrs. Alexiou.

 I was therefore under the impression that the Greek left was influenced by Saudi Arabia. However under the current Gaza crisis, while Saudi Arabia stood against Hamas, SYRIZA leader Alexis Tsipras appeared in a public protest wearing a Palestinian neckerchief as you can see at the following link.

 This indirectly implied his support for Qatar and Turkey that are the countries supporting Hamas and its current attack on Israel. It seems that Saudi Arabia does not influence Greece anymore, at least not as much as Qatar.

 At the following link you can see that in 2006, Aramco sold back to the Vardinoyiannis family its 50% share in Motor Oil, who sold it somewhere else.,w

 You can read about it at the following link too.

 Actually the two partners were in the courts over a dispute for approximately 200 million euros. You can read about it at the following link.

 It therefore seems that Aramco left Greece as an investor, and that has affected the stance of the Greek left too, which supported the Qatar stance on the Gaza crisis. And if anybody thinks that the Greek left has done so for humanitarian reasons, I will have to say the following. The Greek left did not protest, and the Greek people do not know about the genocide of the Sudanese Arab leader Omar al Bashir, who killed approximately 300 thousands black Muslims in Sudan, and was convicted by the International Criminal Court of Hague for his crimes, and there is a warrant against him. You can read about it at the following BBC link.

 At the following link you can read about the Arab racism in Sudan.

 You can read more about their racism at the following link.

 However the Greek left never brought to the attention of the Greek people the atrocities of Omar Al Bashir. I mean with demonstrations and protests of similar strength to the ones that always take place against the Israelis, where the victims are amazingly less, and the Israelis are responding to the Hamas’ or others aggression. The reason is that Omar al Bashir is a supporter of the Muslim Brotherhood too, and that he is a very good friend of Qatar. Qatar was actually complaining against the warrant issued against him by the International Criminal Court as you can read at the following Spiegel link.

 At the following Wikipedia link, you can read in section “Sudan” about the many members of the Muslim Brotherhood that were included in Omar Al Bashir’s government.

 Moreover, note that Greece has a common defense doctrine with Israel, and the opposition leader Alexis Tsipras went out in the streets protesting for Gaza, doing exactly what Turkey was doing. And in reality the fighting sides in Gaza are Israel on one side and Qatar, Turkey and Iran on the other. It is not Israel on one side and Hamas on the other as it might seems to people who do not follow the news. And Greece has signed a common defense doctrine with Israel against Turkey. But the opposition leader Alexis Tsipras appeared publicly wearing a Palestinian scurf, because the oil business is so strong, that it can have its own effects in the Greek political system, outside the national strategy.

 With all the above, I want to describe the ways that oil pours into the European left, and the ways oil actually affects the European left, and the European political systems in general. Oil is a very powerful thing, and you need to remember that when you fight against oil, you are in deep trouble. And the main energy suppliers for the European countries are Iran, Russia and the Arab countries. That’s the main reason of European anti-Semitism. Maybe in the past there was no Israel, but there were Jews who had power in the banking system. There were always financial motives for anti-Semitism.

 I also want to say a few more things about Qatar. Qatar is a small but very rich country of the Persian Gulf, and it is heavily investing abroad, very often in order to buy political influence. At the following link you can read about the Qatar’s investments in England.

 At the following link you will see that Qatar has invested 65 billion dollars in European countries.

 At the following link you will read that Qatar is funding the radical Islamism in Europe.

 Note that it is much easier to fund the European left in order to protect the European Islamists, since red socialists are less attached to local religions.


 Therefore if you want to understand the causes of anti-Semitism in your country, you will need to examine the routes of energy. You will need to find who are the importers of energy in your country, who controls the media, what are the relationships of the media with the political system etc. I am sure that if you do that you will end up with a story very similar to mine. I have to repeat that there might be other minor causes for the European anti-Semitism, but anti-Semitism is always a financial phenomenon.

 It is only the simple people at the bottom of the political pyramid that develop original anti-Semitism, but this happens only because they are brain washed by political and business elites who are driven by financial motives. If the Jews were not powerful in Germany, Hitler would had not given a damn about them. When examining anti-Semitism forget about the bottom, forget about psychology. Always look at the top, always look at the numbers. Anti-Semitism is always and everywhere a financial phenomenon and as such it should always be examined.

The Energy War Between U.S.A. and Russia and the Threat for Israel’s Survival

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 Iakovos Alhadeff

 The Conflict in Ukraine

The conflict in Ukraine is only a part of the energy war between Russia and United States. Europe is very poor in terms of energy resources, but very rich in all other aspects. Both U.S.A. and Russia want to dominate the European energy market, since this does not only involve economic gains, but aslo increased diplomatic power. Energy is very important for all developed economies, and energy providers normally have political power over energy recipients.

Russia is the richest country in natural gas reserves and the number one oil producer. It is not however the richest country in oil reserves. Please note that the richest countries in energy reserves are not necessarily the largest energy producers too. At the following Wikipedia link you can see Gazprom’s European market shares. Gazprom is the Russian state owned natural gas giant, and on average it holds 30% of the European natural gas market.

Moreover Russia supplies a large part of the oil consumed by European countries. This energy dominance is a big pain for United States, since it gives Russia political power over NATO members. Therefore the Americans wish to provide Europe with alternative sources of energy, and more specifically with alternative sources of natural gas, since natural gas is most of the time delivered through pipelines, and it creates a greater dependency on the part of the energy recipient than oil, which is normally transferred with ships.

The Nord Stream and the South Stream Pipelines

Most of Gazprom’s natural gas, approximately 80% of it, is distributed to Europe through Ukraine. At the following link you can read about the disputes between Russia and Ukraine over natural gas distribution.

That’s the reason the Americans are so keen to help anti- Russian and NATO friendly Ukrainians. The Russians on the other hand do not like this dependency on Ukraine, and have developed the North Stream pipeline which delivers Gazprom’s natural gas directly to Germany through the Baltic Sea, thus bypassing Ukraine. You can see at the following BBC map the North Stream pipeline with Green color.

Map 1

North Stream South Stream Nabucco

Source BBC (

Russia wants to also develop another pipeline, the South Stream, which you can see with the blue color on the map, which will again bypass Ukraine and will deliver Gazprom’s natural gas to Southern Europe. When both these pipelines will be ready, the Russians will not depend anymore on Ukraine to supply the whole Europe with Russian natural gas. As you can see the South Stream will cross the Black Sea, and from Bulgaria will distribute natural gas to Southern Europe.

To develop the South Stream pipeline, Russia needs the help of Bulgaria, and also the help of Turkey, since the Exclusive Economic Zones of both Bulgaria and Turkey are involved. One, but not the only, reason there was so much noise about Crimea was because of Crimea’s effects on the Ukraine and Russian Exclusive Economic Zones. Crimea is the piece of land under Ukraine on map 2

Map 2


As you can see, if Ukraine controls Crimea, Ukraine would have a saying on the South Stream crossing the Black Sea, since it would fall inside Ukraine’s exclusive economic zone. But if Crimea belongs to Russia, Ukraine does not have a saying on the construction of the pipeline. And Russia annexed Crimea as we all know. And as you can see on map 3, from, which is accurate, the Russians designed the pipeline nearer Turkey to totally avoid Ukraine.

Map 3


The Europeans are divided on the issue of the South Stream. As you can see at the following Reuters’ link,

some countries perceive it as a positive development i.e. Germany, Italy, Bulgaria. The important point to note is that once the South Stream is ready, together with the North Stream, will allow Gazprom to supply with natural gas the whole European Continent without relying on the Ukrainian pipelines. Moreover, as you can see on the following Wikipedia link, Ukraine is the 26th richest country in the world in terms of natural gas reserves, which further adds to its geostrategic position.

U.S.A. and Europe

As I already said, the Americans and the Europeans want to have many sources of natural gas, in order to limit the economic but mainly the diplomatic influence that Russia enjoys over NATO members, and which arises by the 30% of Gazprom’s share in the European market. It also has to do with competition issues. The more energy options a country has the cheaper it buys its energy.

The Americans and the Europeans want to bring natural gas from the energy rich Caspian Sea to Europe. The Nabucco Pipeline and the Pans Adriatic Pipeline are two of the possible routes. The Nabucco pipeline which you can see with red color on map 1 will bring Caspian natural gas to Europe through Turkey. The other possible pipeline, the Trans Adriatic Pipeline TAP, which you can see on map 4 below, will again bring natural gas from Caspian Sea to Europe through Turkey.

Map 4


Turkey and Iran

 It is clear how important Turkey is for the Americans and Europeans, since both the Nabucco and the TAP pipelines will have to pass through its territories to deliver Caspian natural gas to European markets. And I am not talking for the obvious economic benefits. I am talking about Turkey’s increased geopolitical power. It is very important for the Americans and Europeans to have Turkey on their side, so if they decide to take sanctions against Russia and there is a disturbance in natural gas supply, Turkey will not cut off supplies from the Caspian Sea too to support Russia. Currently it is very painful for the Americans and the Europeans to take sanctions against Russia, since Gazprom provides a large share of the natural gas consumed in the European markets. As you can see on map 5 below

Map 5

Caspian Countries

Iran’s is also very important for the Americans and the Europeans. Iran is situated on the Caspian Sea and it will be very difficult for the Americans to ensure stable natural gas supply to Europe if they face a hostile Iran. Moreover Iran is a very energy rich country, one of the richest ones in fact, and its natural gas could be transferred to Europe too. The Nabucco and TAP pipelines are supposed to transfer natural gas from NATO friendly Azerbaijan, but other countries can be connected on the pipeline network too. Therefore both Iran and Turkey are extremely important for the American and European efforts to provide Europe with abundant non Russian natural gas.


 The increase in Turkey’s and Iran’s geopolitical power poses a lethal threat to Israel. You have to keep in mind that Turkey and Iran are two of Israel’s lethal enemies. Iran’s goal is to eliminate Israel, and Turkey, an ex Israel ally, does not seem to be further away from this view, under the leadership of Recep Erdogan. Actually everybody knows that it is mainly Iran, Turkey and Qatar that support and provide funding to Hamas, which is recognized by U.S.A., the E.E., Japan and other countries as a terrorist organization. Hamas runs the Gaza Strip, and came to power with elections in Gaza. It is Hamas that fires all these rockets that you hear about from Gaza to Israel. At the following article you can read about the funding of Hamas.

In this changing geopolitical map, Israel does not seem to be able to count on United States for its survival, as it has for so many years done. This has already caused a deterioration in the American- Israeli relations, and an improvement in the Russian-Israeli relations. You have to keep in mind that rich natural gas fields were also found in the Mediterranean See, in the region between Greece, Turkey and Israel. This could be also an energy alternative for Europe as you can see on map 6

Map 6


The problem is that it is very difficult and very costly to build a pipeline network through the Mediterranean See, if Turkey is involved in the project. But with the current political situation between Turkey and Israel this does not seem to be feasible, at least not for Israel’s part of energy.

The natural gas found in the Israeli sea, might be the only chip that Israel has in this energy hungry world. It seems that Israel is giving Russia a role in its energy wealth. At the following Bloomberg link you can see the cooperation between Gazprom and the Israelis.

It seems that in a world where Israelis cannot count on the protection of the Americans, they are moving towards Russia. They are not connected to Russia in the same way they were connected to the U.S.A., but it seems they are somewhere between these two countries. At the following Financial Times link, you can see that Israel did not vote against Russia in the U.N. resolution about Ukraine. It rather preferred to abstain.

The FT examines the causes for this behavior and at the end of the article say:

“But the strongest motivation for Israel to stay out of the Ukraine fracas lies in the present day and closer to home: Russia is a strong and growing power in the Middle East.

Israel needs to engage Moscow on several vital issues: Iran’s nuclear programme and the dismantlement of Syria’s chemical weapons stockpile. Moscow is the biggest foreign patron of Bashar al-Assad’s Syria and a major supplier of arms to the Middle East in general.

Behind closed doors, Israel has prevailed on Russia to refrain from supplying game-changing weapons to Syria that could land in the hands of Hizbollah, its best-armed regional enemy.”

Moreover as you can see at the following Wikipedia link, Avigdor Lieberman, the Israeli Foreign Affairs Minister, is a Russian Jew. He was born in Russia, served in the Russian Army, and later immigrated to Israel with his family. It is “strange” that the Israelis chose a Russian soldier as their Minister of Foreign Affairs.

Some people are confused because the U.S. is still giving Israel some financial aid. For example they recently offered Israel 200 million dollars in terms of financial aid. But Israel was receiving approximately 3 billion dollars a year in American aid some years ago. This 200 million dollars, is some of the last money Israel is receiving from United States as you can read at the following article

For Israel there is another big problem, namely the pipelines that will transfer natural gas from the Persian Gulf to European markets, and more specifically the pipelines that will transfer natural gas from the Persian Gulf’s South Pars/North Dome field. South Pars/North Dome is the richest natural gas filed in the world and it lies between Qatar and Iran. It is jointly owned by Qatar and Iran. You can see it on map 7.

Map 7

south pars

These pipelines are the real cause of the current war in Iraq and Syria. Muslims are divided in Sunis and Shias. And the Shias want to transfer the natural gas through the route Iran-Iraq-Syria-Lebanon-Mediterranean Sea- Europe and the Sunis through the route Qatar-Saudi Arabia-Jordan-Syria-Turkey-Europe. You can see both the Suni (purple color) and Shia (red color) pipelines at the following map.

Map 8

Souni Shia Pipelines

Sunis and Shias are currently fighting in Syria and Iraq. As you can see on map 9, if Sunis take Syria and Iraq, (where the majority consists of Shias) Shias cannot go ahead with their pipeline. The only other route to reach Europe would be through Turkey. But Turkey is on the Suni side. Similarly, if Shias control Syria and Iraq, Sunis cannot construct a pipeline that conects Qatar to Turkey.

The problem for Israel is that Americans are supporting the Sunis in this conflict. Americans are very good friends with Qatar, one of the owners of South Pars/ North Dome. The Russians support the Shia pipeline i.e. Iran.

It is known that Qatar is one of the countries that heavily fund Hamas, which is the terrorist organization that throws rockets from Gaza to Israel, and it is officially recognized by U.S.A. and Europe as a terrorist organization as you can see on the first paragraph of the wikipedia link,

Therefore Israel cannot count on the Americans at least for as long as they back their lethal enemies. Because they consider Hamas as a terrorist organization, but it does not seem that this is how Obama feels.

On the other hand, Iran is with Russia on this fight, and together they support Assad in Syria. But Iran is also funding Hamas. But it is in direct competition with Qatar on this pipeline fight. But it is Iran’s nuclear program that is the lethal threat to Israelis. And it is the Russians that control the nuclear program of the Iranians. And the Americans do not seem very interested in preventing Iran from developing its nuclear arsenal. As you can see on the fourth paragraph of the following Wikipedia link, it is the Russians that developed the first nuclear factory in Iran.

And as you can see on the following Reuters link, the Russians will develop another 8 nuclear reactors in Iran.

If you also take into account that Obama is a president who seems to have strong ties with the Muslim world but also with the Muslim Brotherhood, it should not be a big surprise that the Israelis have a Russian soldier as their Minister of Foreign Affairs. You should also have a look at this video about how U.S.A. indirectly helps Hamas.

You should also do some research on the relations of the U.S.A. and Qatar, and on the relation of Qatar, Iran and Turkey with Hamas. It will help you understand the current geopolitical situation.

Map 9

suni bloc

For example at the following Reuters link,

you will read about the 11 billion dollar deal between U.S.A. and Qatar. Obama is selling Qatar patriot misiles. And Qatar is funding Hamas. And the primary goal of Hamas is to eliminate Israel.

It seems that the 21st century will be a very difficult one for Israel.

Please note that you should not see the Sunis or the Shias as unified blocks. For example Suni Saudi Arabia and Qatar do not want the Shia pipeline, but they have big problems between them. Qatar is funding hamas, but the Saudis perceive Hamas as a threat to their regime. It is a bit complicated. The following post of a Financial Time reader,


describes the situation very well. It is a lot more sophisticated than it seems. You can read about it here

If you enjoyed this essay you might want to have a look at some of the following essays too:

Conspiracy Theories About Israel

The Socialist Myth of the Greedy Banker

The Socialist Myth of Economic Monopoly

The Socialist Myth of Economic Bubbles

The Socialist Anti-Semitic Myth of the Creation of Money Out of Thin Air

Introduction to Banking

The Socialist Anti-Semitic Myth of the Creation of Money out of Thin Air

Iakovos Alhadeff

 One of the most widely spread socialist anti-Semitic rhetorics is the “creation of money out of thin air” story.  It is extensively used by socialists of both kinds i.e. socialists of communist and socialists of Nazi origin.  Those of communist origin talk about the “greedy” banker, and those of “Nazi” origin talk about the “greedy Jewish” banker. All the difference  is this one word, which can be added or subtracted according to personal tastes.

This anti-Semitic propaganda says that “greedy Jewish” or “greedy” bankers create electronic money out of nothing. They press their keyboard and they create money, and they use that money to indebt people and control the world. This is one of the most important and widely spread socialist anti-Semitic rhetorics, and it is very important that it is destroyed.

Before destorying it, I have to explain what socialists mean when they say create money “out of thin air”. They mean that a banker, agrees with a customer to give him a loan, and when the contract is agreed, the banker opens a deposit account in the name of the borrower. This new account is money, since the borrower can write a cheque on it. Therefore the heart of this propaganda theory is that a Jewish banker, sitting at his chair, issues a loan, hits his keyboard and opens a deposit account too,  and charges interest on the borrower.

Therefore socialists claim, that Jewish bankers create money out of nothing and indebted the people in order to control the world, since they create money and charge interest on it. I will come back with a much longer and detailed document combating socialist anti-Semitic banking rhetoric, but I want to offer a first shorter and more general explanation of why this is pure anti-Semitism. Do you know how easy it is for a government to stop this “out of thin air” money creation? All it would have to do, would be to ask private banks to back deposits by 100% of paper money i.e. euro notes. Imagine an economy, where there is 1.000 euros circulating in the economy.

If the government asks private banks to back deposits with 100% of paper money, the following will happen. Let’s assume that I am the greedy Jewish banker, and one of you holds the 1.000 euros circulating in the economy. And you come and deposit it to my bank. If the government requires that I back my deposits with 100% of paper money, I cannot create money. If I want to create money, I will have to do the following. Issue a loan to a customer, and open a deposit account to this borrower. Let’s say I issue a loan of 1.000 euros, and I open a deposit of 1.000 euros to the borrower. Now deposits in my bank are 2.000 euros, and covered only by 1.000 paper euros, which is illegal, and my bank goes down.

If on the other hand the government asks me to back my deposits with 50% of paper money, I can do the following. Issue a loan of 1.000 euros, open a deposit to the borrower of 1.000 euros, and my total deposits will be 2.000 euros, while my reserves in paper euros will be 1.000 euros, which means 1.000/2.000=50% exactly as required by the law. Therefore a banker’s ability to create what socialists call “money out of thin air”, derives from the much lower than the 100% reserve requirement imposed by governments. To stop this “out of thin air” thing, all a government would have to do, would be to require private banks to back deposits by 100% paper euro notes. But do you ever hear socialists either of Communist or of Nazi origin saying so? No, you never do. You always hear them crying that “greedy Jewish” bankers create money out of thin air.

But they are so silly, that they forget that for a person to borrow, and indebted himself, he must know what he can buy with the money he borrows. I borrow 500 euros, because I want to buy a tablet. And as soon as I get the money I buy it. And I pay an interest of 3-5% which is very low. It is not real. It is the European Central Bank that keeps interest rates artificially low. They should be at the level of 15-20%.  But that’s not the issue. Therefore if the Jewish banker creates money out of nothing, it is not the borrower who is his victim. His victim is the producer, whose products the borrowers buys with money produced from nothing, and on which they pay very low interest rates.

Therefore if the Communists and Nazis were honest, they would attack the Jewish banker because he harms the producer, whose products are bought with money produced out of thin air. But do you ever hear them saying so?  No you don’t. They always present the borrower as the victim. The reason is that all socialists care about is controlling the banking system. And producers are the depositors/savers. And deposits are a liability for the banks. Therefore socialists always see positively a haircut in deposits because it makes banks healthier. But loans i.e. mortgages etc, are the banks’ assets. And if you allow the houses of the borrowers who do not pay their mortgages to be sold, their prices will go down. And if their prices go down, the banks’ assets will worth less and will be easier for foreign investors to buy them.

The truth is that producers’ goods were bought with money produced out of thin air by governments and not by Jews. But someone must be blamed. Moreover socialists like fractional reserve banking, because they want private banks to expand money supply swiftly, because they use the money supply to finance government spending, and as a means of stimulating the economy, as I was explaining in my essay “The Socialist Myth of the Greedy Banker”, which can be downloaded for free in pdf, mobi, or epub format from Smashwords, at the following address

Reading my essay “The Socialist Myth of Economic Bubbles” will also help one debunk socialist anti-Semitic propaganda. This essay can be downloaded for free from Smashwords at the following address

Or you can download for free my essays from Apple’s ibook store at the following address

Or you can download them for free for the nook devices at Barnes and Nobles

If you enjoyed this essay you might want to have a look at some of the following essays too:

The Socialist Myth of the Greedy Banker

The Socialist Myth of Economic Monopoly

The Socialist Myth of Economic Bubbles



The Socialist Myth of Economic Bubbles

***You can obtain a free copy of this essay in pdf, kindle and epub format at Smashwords

or you can download it for free at Apple’s ibook store

or at Barnes and Noble for nook devises at

or buy the kindle edition at Amazon


Iakovos Alhadeff


In my essay “The Causes of the Economic Crisis for non Economists”, I explained why the American crisis was caused by government intervention and not by the free market. Since the housing bubble was one of the main elements of this crisis, I discussed on the issue of the American housing bubble too. In this essay I want to examine asset bubbles on their own, and not as part of the American crisis or any other crisis. I will use various examples, but the emphasis will be on asset bubbles themselves and not on a particular crisis.  More specifically the emphasis will be on the forces that lead to their formation and collapse. I will focus on housing bubbles, since they are very common, and also a kind of bubble we have all gathered a lot of experience about.

I want to begin with a bubble in a simple barter economy, which will actually say almost everything that can be said about bubbles, because I believe asset bubbles are a much simpler phenomenon than they seem to be. The aim of this essay is to explain why bubbles are always the result of government policies and not of the free market. I believe it is better to read my essay “The Socialist Myth of the Greedy Banker” before reading this one. Because most people think that it is private banks that create money and crises, and in the aforementioned essay I explain why this is not so, which is the first step to understand bubbles. But the two essays are independent documents.

A Bubble in a Simple Barter Economy

Assume an economy with two individuals and many goods. The good used as money in the economy is oranges. And I happen to produce oranges. Everyday I produce 10 oranges and I consume 5 of them. I put the 5 oranges that I save in a box called “bank”. This box keeps track of the number of oranges I place in it everyday, and issues a receipt. This box is a mechanism that finds someone to lend my oranges and who is willing to pay a higher interest rate than the one the “bank” has to pay me. I do not know how my savings/oranges will be used. I simply have a deposit account which keeps track of the oranges I put in the box/bank.

Let’s assume that this mechanism/box/bank agrees with the other individual in the economy to lend him my oranges. The other person somehow decides that the most profitable way to use my oranges is to convert them to houses i.e. eat them in order to sustain himself and build houses. I assume for simplicity that he is using whatever materials he finds around to build the houses i.e. he does not have to buy and sell construction materials.

At some point the houses are ready. So I have deposited let’s say 1.000 oranges in the box/bank, the builder has eaten the oranges, and has built the houses. But now he has to repay his loan i.e. the 1.000 oranges. But in order to do so he needs to sell some of the houses. If I am willing to buy a part of the houses for 1.000 oranges, I will transfer him the credits in my deposit account, and everything will be fine. There is an intermediary of course i.e. the box/bank, but it is the two of us who are the important players. If I agree to buy at the price he is selling, and which is the price that covers for my oranges, everything is fine. Therefore if I want a house and I am willing to pay approximately 1.000 oranges for it, I will write a check transferring him the credits I have in my deposit account, he will put these newly earned credits in the box/bank to clear his debt, he will also make  a profit, and everything will be fine. Case closed.

If however I find the price he is asking i.e. something around 1.000 oranges very expensive, I will not buy the house. But this is a big problem, because the only way this man can find money to pay his debt is by selling houses to people with the purchasing power to buy houses i.e. people with the bank accounts i.e. people with the savings i.e. people whose savings (past surpluses) he used to built the houses i.e. only me in this case. If I do not want to buy the house at this price, it means I prefer something else i.e. a car. But my savings were used to produce a house and therefore there is no car. I therefore go to the bank to take my oranges back.

But my oranges are not there since the house builder ate them in order to produce the house. I am very upset and I ask for my oranges. The bank says that it does not have the oranges, but it can confiscate the houses of the person to whom my money was lent. But I have already seen this house as a consumer, and I did not want this house for 1.000 oranges. I would buy it maybe for 500 oranges. Therefore the bank confiscates it and gives it to me. But I am not happy. I want my other 500 oranges. The bank does not have these oranges, and it goes bankrupt. If there was a government it would either let me lose my savings/deposits of 500 “oranges”, or as it usually happens, it would ask the tax payer to pay for my deposits/ “oranges”.

So what really happened in this little story? What happened is that somehow my savings were used for something that I did not value as much as my 1.000 oranges, and which I would therefore not exchange for my savings/ “oranges”. This asset (the house in my example) is a bubble, since it cannot be sold for an amount which will cover its costs (1.000 oranges) i.e. the savings that were used for it. If you think about millions or even billions of savers you are talking about a huge bubble. That’s exactly the housing bubble today. Some people’s savings were used for housing or for other purposes, but these other purposes and housing were not what these savers wanted. They would not be willing to exchange their savings with what has been produced with their savings. Therefore, a bubble is a situation where savings have been used in the wrong way but in a massive scale. You might hear many definitions for bubbles, which might sound smarter, prettier, more sophisticated etc, but I believe this one is more accurate even though it sounds somewhat simplistic. And you should not think that only houses are involved in bubbles. As I already said, there are many other ways that savings can be used in the wrong way i.e. to produce something that savers do not value as much as their savings.


Therefore the magic word in order to understand bubbles is savings. And the magic question that needs to be answered in order to understand bubbles is why savings were inappropriately invested in the bubble market?  If we were to ask people what a housing bubble is, most of them would probably give the simplistic answer “too many houses were built and their prices collapsed”. Even though this statement has an element of truth, it is very simplistic and it does not help one understand what asset bubbles are. What is of great importance to realize, is that if the prices of houses were to decrease significantly, there would be a price level at which they would all be sold. If we all sell our property for 1 euro for example, everybody will rush to buy. Therefore if we want to be more accurate, the problem is not that too many houses exist. The problem is that market prices are so low that they cannot cover for their costs i.e. the loans provided by the banks i.e. the “oranges” that were deposited at the banks.

For instance I owe the bank 300.000 euros, and I have stopped paying my loan, and the bank cannot sell the house to someone else for let’s say more than 150.000 euros. This is exactly the same situation with the situation in my simple barter economy. At a price of 150.000 euros the bank will make a loss of 150.000 euros. If this was a single case it would not matter at all. The problem is that when bubbles arise this is a very common phenomenon. Therefore the banks make huge losses, and if the banks make huge losses the first thing that happens is that shareholders lose their equity and the bank shares go to the state, the second thing that happens is that banks’ creditors lose their money, and finally either depositors will have to lose their savings/deposits/ “oranges”, or the tax payer will have to pay for their deposits/savings/ “oranges” not to be lost. Depositors whose savings the banks cannot pay back are the equivalent of the orange producer in my example. What is of great importance is the issue of miscalculation of profits and misallocation of savings/ “oranges”. And the very important question that needs to be answered is “why so many people were the victims of this miscalculation of profits i.e. why they expected they would make profits from the houses at very high selling prices, and why savings were massively directed to the development of the wrong products? 

This is therefore the question that must puzzle us i.e. why there was this misallocation of resources, why so much of peoples’ savings were inappropriately invested in the bubble asset and not in something else more valued by savers. Man has unlimited wants, and therefore it can’t be that there was some idle capital and somebody said “hey guys lets build some housing with this extra capital”. Some countries with housing bubbles cannot even satisfy their primary needs i.e. meat, grains etc, and once the bubbles burst they face severe political turmoil or even the danger of  hunger, or even of civil war, if not supported by other countries i.e. Greece. And yet they excessively invested in houses that now nobody wants at prices that would cover their costs i.e. the mortgages. Therefore resources and savings that were used in housing in such countries should have been used in something else or even somewhere else i.e. in other countries. It is therefore very important to realize that the savings that are used in bubbles are not abundant savings,but rather misallocated savings. Once we realize that, we need to proceed and examine what leads home owners and house constructors all together to be so wrong at the same time.

Because many people think that the problem is that homeowners can’t pay their mortgages. That is indeed a problem, but it is not the main problem, because the houses these people are living in were not built with their own money (savings). They were built with depositors’ money/ “oranges”. The problem is that the people that are living in the houses cannot pay their mortgages, and people with whose savings/deposits/ “oranges” these houses were built, do not want to exchange their deposits/savings with these houses. If the real owners of these houses i.e. the people whose savings were used in order for these houses to be built i.e. the people with the deposit accounts, wanted the houses for prices that would cover their costs (mortgages), everything would be fine. The houses would be confiscated from the people that do not pay their mortgages and given to the people who really own them i.e. depositors. But as I already said depositors do not want to buy these houses at current prices i.e. they do not want to exchange their deposits/ “oranges” with these houses. They value more other products i.e. cars, oranges, televisions, computers, holidays etc.

As I will explain, behind every bubble there are one or more governments that mess with the way savings are allocated. By doing so, governments do not allow the market to allocate scarce resources according to economic fundamentals, and there is a misallocation of resources, and at some point the misallocation is so great that readjustment is unavoidable. There are endless policies by which governments affect the way savings are allocated. Different policies are used for different purposes by different governments in different countries. I cannot describe all of them. I will provide some examples, and I hope it will be quite easy to imagine many other paths by which governments try to affect the way savings are allocated focusing on their policy objectives and ignoring economic fundamentals.

Taxation, Debt and Inflation as Means of Financing Government Deficits 

Before I proceed, I want to mention that there are three ways by which governments can finance their spending, namely taxation, borrowing, and money creation (inflation). The first and second ones are quite straight forward. A government can tax its citizens or it can borrow domestically or internationally. The third one is somewhat less obvious but it is a very simple idea. A government can create new paper money through its central bank, either in electronic or paper form, and use it “buy” domestic or foreign citizens’ wealth. This is obviously a form of taxation, since the country’s wealth did not increase because new money was created. With newly created money, there is more money running after the same amount of wealth (goods), thus causing inflation.

In my essays “Central Banks for non Economists Part I: Inflation and Taxation”, and “The Socialist Myth of the Greedy Banker”, I describe in great detail how governments use their monetary policy to tax their citizens. However I will say a few words here too in order for this document to be autonomous. From these three ways of financing government spending, the most dangerous one is the creation of money, and the safest one is taxation. Taxation is observed both by the beneficiary and the payee, and therefore it does not create any illusions since both the payee and the beneficiary are fully aware that they are receiving and paying money. However this is not the case with money printing. In this case the payee incurs an obligation which is not obvious. Money creation is an indirect tax in the form of inflation. For instance let’s assume that there are 10 oranges in the economy and 10 euros, and each orange costs 1 euro.

If the government prints another 10 euros, there will be 20 euros running after the same oranges, and their price should increase to 2 euros each (this is an oversimplification of course). The government can now buy 5 of the oranges with the 10 newly printed euros (10/2 = 5 oranges), which means its citizens paid a real tax of 5 oranges. However they were not aware that they were paying a tax. They thought that their money lost its purchasing power because of inflation, and they think inflation is an exogenous phenomenon. It is exactly this difficulty on the part of the tax payer to understand the relation between money creation and taxation that makes financing government spending through money creation (inflation) so popular with politicians. I can now continue in demonstrating various ways that government policies can create bubbles. As I already mentioned, my examples will not be exhaustive, and they are meant to present only some of the possible ways that government intervention creates asset bubbles.

A Primitive Example of Government Induced Bubbles

I now want to use a second example of government intervention and bubble creation. Imagine a closed economy with no foreign trade and no paper (fiat) money. Let’s assume there are only two kinds of professions, the orange producers and the house builders. Oranges do not perish. People eat oranges to survive and build houses to protect themselves from the cold and rain, and when they can afford it they improve these houses to make them more comfortable. Therefore oranges cover a more basic need, and housing a more luxurious one.

For simplification imagine that house building is a pure service. House builders do not buy or sell materials. They only use their skills to build houses with whatever materials they find around. In the real world each person has his own personal preferences towards consumption (eating oranges), savings (saving oranges) and housing (giving oranges to house builders) etc, but in order to build an example, I will assume that all people have identical preferences, and want to consume 50% of their income (eat 50% of the oranges they have), save 30% of them (save 30% of the oranges they have), and invest 20% in housing (giving oranges to someone to build them a house, or eating oranges themselves while building a house themselves).

Thus the economy’s appetite for consumption, savings and housing is 50-30-20, it is constant, and identical for everyone. To invest in housing for the orange producers means to give oranges to a house builder, in order for the latter to build a house for them. To invest in housing for the house builders means to eat oranges previously earned for building houses for themselves. And let’s also assume for simplicity that productivity is constant, which means that to build more houses you must produce less oranges, and to produce more oranges you must produce less houses. In other words I assume for simplicity that there are no positive productivity shocks.

Please note that savings are not equally spread in the population. I assumed for simplicity that all people have equal tastes regarding consumption, savings, and housing (50-30-20), but that does not mean that they are all equally good in production. I did not assume wealth is evenly distributed in the economy. There are rich and poor. The oranges that were saved are not evenly spread. Some people produced more than others, and therefore the 30% of their savings amounts to a larger number of oranges in absolute terms.

Let’s assume that we are at time 0, and the government sets up a central bank, where people deposit their oranges (savings).  In the first year the economy produced 100.000 oranges. Therefore at the end of the year the citizens have consumed 50.000 of them, have deposited at the central bank 30.000 oranges, and have invested in housing 20.000 oranges. Let’s assume that next year they produce another 100.000 oranges. However the government needs some oranges to finance some expenditure. Let’s assume it wants to help some of the poorest citizens. Or it wants to construct a road. But because it does not want to tax its citizens, it takes their savings of 30.000 oranges and distributes it to the poor or use it for the road. And it replaces the oranges in the vault with pieces of paper that say how many oranges each citizen had, in order to pay them back at later more affluent times. Therefore there are now 130.000 oranges circulating in the economy during this second year. The 100.000 oranges produced, plus the 30.000 that were saved last year and which were thrown back in the economy by the government.

But the citizens’ tastes have not changed. Therefore they consume 50% i.e. 65.000 of the 130.000 oranges, save 30% of them i.e. 39.000 (130K * 30%) of them, and invest in housing 20% of them i.e. 26.000 (130K*20%) of them. Notice that total savings are 39.000 (0 left from last year plus the 39.000 oranges of this year), but citizens think they have saved 69.000 oranges, because they have not realized that the government has used their savings. Moreover notice that this year citizens invested in housing 26.000 oranges, while their true wish would have been to invest 20.000 oranges (i.e. 20% of the real production). But they were fooled by the 30.000 oranges that were thrown at them by the government, and which they perceived as new wealth, while in reality it was their last year’s savings. That means that the economic agents’ behavior was altered not by real factors but because of the government’s policies, and this led to higher consumption, higher investment in housing, and lower savings, all these contrary to the citizens’ wishes and without their knowledge.

In reality, the artificial increase in housing activity could have only been generated by a movement of workers from orange production to housing construction. Remember I assumed for simplicity constant productivity. If the government continues to throw savings in the economy, the increased investment in housing and the increased consumption will continue, which means that more and more workers will move from orange production to housing construction. As this process continues, orange production will keep falling, savings will keep falling, and housing construction and spending (orange eating) will keep rising. But as this process continues the government will find it increasingly hard to provide the same quality of social services, since orange production which satisfies the more basic needs is falling.

This situation is not sustainable. To build houses you need orange production to sustain the workers in the housing industry. At some point everybody will realize that there is not enough orange production to fund the house construction industry i.e. the economy does not produce enough oranges to feed so many workers in the housing industry, which means that some house builders will have to move from house construction to orange production. Citizens will realize that the prospects of the economy are not good, and will be panicked. They might rush to take their savings from the central bank. But to their surprise there will be no savings or there will be only a part of it. Everybody will try to sell their houses in order to get more oranges.

But because they are all trying to sell their houses and buy oranges, the prices of houses collapse. Actually the price of houses relative to the price of oranges must fall, since it became apparent that the economy has too many houses and too few oranges. But the panic makes things even worse. And citizens find it very difficult to find someone to pay them a descent amount of oranges for their houses. The reason that this happened is that an imbalance was created in the economy. Due to government intervention, the economy produced more housing and less oranges than the citizens wanted and could afford. This can now be only corrected by a painful depression. A reverse process must begin for the economy to go back to equilibrium, where workers must move from the housing business to orange production.

Unfortunately this cannot be done immediately because orange production requires a different set of skills than housing construction. Moreover people find it very painful to change professions and industries since they must start from scratch i.e. in a field they have not at all expertise, which means a decrease in their standards of living. Most of the citizens however, believe it was the free market that led to the misallocation of resources. They do not realize that it was the government’s mistake. And they are not helped by the media to realize it, since in every country the political system is always very well represented in the media. There will be growing political tension.

House builders will be losing their jobs and will be asking for more government protection, and house builders and orange producers will be asking the government to give them back the oranges they deposited. There can be riots or even a civil war between orange producers and house builders. Politicians will not accept responsibility and will try to persuade the public that the damage was caused by someone else i.e. capitalism, private banks, the Jews etc.

Introducing Paper Money 

The above example might not seem very realistic, but unfortunately it is not far from reality. Actually in reality it is much easier for governments to steal peoples’ savings/ “oranges”, because the good which is used as money (and as a store of value) is not a real good (i.e. oranges, gold etc), but paper money instead. Paper money is not a real good and it derives its value by a government law which establishes it as the legal means of payment. Therefore in monetary economies people do not save in real goods but in paper made by governments. In the example with the oranges, there was always the possibility that citizens’ would lose their confidence and ask to see their oranges, but there would be no oranges since the government cannot create oranges. This is a constraint for governments since it imposes a limit on the money creation process. However with paper money, the government can create as much paper money as it wants and can therefore confiscates its citizens’ savings without them noticing.

And even if they notice it, the government can always produce more paper to pay them back. Therefore even though my previous example seemed a bit simplistic, in reality it is even easier for governments to steal their citizens’ savings. But citizens are not aware that this is happening, they feel wealthier when the government is throwing paper money at them, and they do not change their consumption/savings patterns to account for the reduction in their real savings, which is a reduction in their real wealth, and they might even feel wealthier due to the expansionary government policies and increase spending, housing purchases etc.

Interest Rates, Real Savings and Paper Savings 

In previous sections I explained how governments can distort the market mechanism by irresponsible fiscal and monetary policies. But I omitted the main distortion caused by such policies, namely the effect such policies have on interest rates. The interest rate is the price investors have to pay if they want to borrow savings. If for instance the interest rate is 100%, it means that to borrow 1 orange of savings today, an investor has to pay 2 oranges in a year’s time i.e. a whole extra orange is the price for borrowing one orange of savings today (that is with an interest rate of 100%). The level of interest rates i.e. whether you pay 2%, 10% or 20% when you borrow savings, depends on the quantity of savings in the economy. The higher the quantity of savings the lower their price (interest rate), and the lower the quantity of savings the higher their price (interest rate).

Imagine an economy with 1.000 people who produce 1 orange each (1.000 oranges in total). And assume that everyday they need 1 orange each to survive. With less than that they die. For the economy to grow, there must be some people that do not work in orange production, but they spent their time constructing machines that will enhance orange production i.e. tractors, or building houses to improve the standards of living etc. People that will undertake such projects need to borrow savings i.e. oranges, to sustain themselves during the investment period, and pay for the savings they borrow when their investments bear fruits, which by the way is not certain (investments can go sour too).

But it is impossible to borrow in such an economy since each individual produces 1 orange and needs 1 orange to survive. Therefore if I wanted to borrow some oranges everyday in order to invest in something, it would be impossible. What would the interest rate in this economy be i.e. what would the price (interest rate) an investor would have to pay in order to borrow oranges? It would tend to infinity, because if a person wanted to save his orange and lend it to an investor, that person would die from famine, since I assumed each person needed at least 1 orange per day to survive. If the 1.000 people of the example did not only produce 1.000 oranges every day, but a bit more, interest rates would not tend to infinity, but they would be extremely high, because in a poor agricultural economy savings are very valuable, and people are very reluctant in using their savings to fund more sophisticated or luxurious projects. They worry about satisfying their most basic needs.

Very high interest rates are a signal to investors that there are not enough savings in the economy i.e. oranges are very scarce and valuable to citizens. They are therefore very reluctant to invest in luxuries i.e. better houses. They feel the pressure to invest in something that will deliver oranges quite fast i.e. in the next period. Because even when you invest in something that ultimately delivers oranges and not something more luxurious (houses), you have to decide on the time horizon of the investment. If oranges are scarce and interest rates for borrowing them are very high, an investor would go for the development of a simple tool i.e. shovels which would increase orange production soon. If on the other hand there is an abundance of oranges (savings) and the price (interest rate) of borrowing savings is very low, investors would go for a more ambitious and of longer term projects i.e. to develop tractors.

We therefore see that the interest rate is the price of borrowing savings (oranges), and the price of borrowing savings is one of the most important factors that businessmen take into account in order to decide whether a project is profitable or not. The lower the interest rates the more projects are profitable. A project that is profitable with an interest rate of 2% might be unprofitable with an interest rate of 10%. What I am trying to say is that interest rates play a major role in what will be produced with an economy’s savings i.e. oranges or houses, but they also play a major role on the time horizon of investments i.e. whether shovels or tractors will be produced. Prices are extremely important in free market economies, but if one had to decide which price is of the greatest importance, it would probably have to be the price of borrowing savings i.e. the interest rate. If the price of bread is for some reason distorted by government policies i.e. because of subsidies or tariffs it is of minor importance compared to distortions in the level of interest rates which have a much wider effect on the economy, since they play a major role in the process of savings allocation.

Interest rate is the free market mechanism that ensures savings will be directed towards the uses most preferred by the owners of these savings i.e. the people who had surpluses in previous years i.e. people with deposit accounts. To distort the interest rate mechanism, is to distort the ability of the economy to transform savings into something that depositors would exchange for their savings. It is mainly this distortion in interest rates caused by irresponsible fiscal and monetary policies that causes the creation of economic bubbles.

With the system of fiat (paper) money, governments can not only confiscate the economy’s savings without the owners of the savings (depositors) noticing as I explained before, but they can also artificially decrease interest rates (the price of borrowing savings), in order to make borrowing cheaper, thus boosting economic activity as I will now explain. Politicians always like low interest rate because they boost economic activity, and increased economic activity makes politicians popular. Imagine an economy where the medium of payments and the store of value are golden coins. In this economy, if I save an orange, I exchange it for let’s say a golden coin, and I keep my savings in gold. Gold is a scarce and real good like all other goods. It takes a lot of effort to produce gold. Sometimes more gold will be produced sometimes less, and accordingly its price relative to the prices of all other goods will fluctuate, in the same way that the price of apples will fluctuate relative to the prices of all other goods according to supply and demand. If for example there is enough gold, and what the economy needs is oranges, the price of gold will start falling relative to the price of oranges, which means people will start moving from the production of gold to the production of oranges.

Therefore when savings are kept in the form of a real good i.e. gold etc, the government cannot affect the price (interest rate) one has to pay for borrowing these savings, since the government cannot influence (increase or decrease) the quantity of savings (gold). And if the government cannot affect the quantity of savings (gold, oranges etc), it cannot affect their price either (the interest rate one has to pay to borrow these savings). But with fiat money, savings are kept in paper (fiat money) or electronic form (deposits), and the government can create as much of it as it wants. Therefore through its central bank it can increase the supply of paper and electronic savings until the price of borrowing savings i.e. the interest rate of borrowing paper savings, increases or decreases to the level that satisfies the government’s objectives. And that’s exactly what governments do. They print paper savings to buy (confiscate) a part of the real savings, and they ask banks to expand electronic savings (credit), in order to decrease interest rates and boost economic activity too. 

These actions have the following simple implications. Let’s say I have savings of 10 oranges. A part of it, let’s say 5 oranges, is confiscated by the government i.e. the government prints paper money and buys these 5 oranges directly and does whatever it wants with it. I am under the impression that I sold the 5 oranges while in reality they were confiscated. Investors can borrow what is left from my savings i.e. the other 5 oranges in order to invest them in something useful and profitable. However most of the time they pay a much lower price (interest rate) to borrow my real savings than the one dictated by economic fundaments, because governments perform a credit expansion through their central banks (an increase in paper and electronic savings), in order to lower interest rates and boost economic activity.

Therefore an investor goes to the bank, he takes a loan in paper or electronic form, and comes and buys these oranges from me, and I in turn take this paper money and deposit it to the bank, and earn an interest rate on my paper savings. The interest rates that the investor pays and I earn, are much lower than the interest rates he would pay and I would earn if the government had not ordered a credit expansion i.e. an increase in paper and electronic savings.

Therefore not only I lose the 5 oranges that were confiscated by the government with the newly create money, something I did not realize and therefore I feel wealthier than I really am (and I therefore spend more and save less), not only my savings are lent at interest rates that are much lower than the ones dictated by market fundamentals, but also the entrepreneurs that borrow the other 5 oranges which were left, receive the wrong signals from the very low interest rates that they have to pay. They are fooled to believe that there is an abundance of savings in the economy. Many projects seem to be profitable only because of the low interest rates one has to pay to borrow paper savings. But this is an illusion because lower interest rates are the result of the increase in paper and electronic savings, and not the result of an increase in real savings (“oranges”). That’s the problem with credit expansions. Credit expansions do not create more real savings they only lower the interest rate one has to pay for borrowing real savings.

Moreover with government induced credit expansions, consumers can borrow at very cheap rates too, and they might thing that it is a good idea to borrow in order to buy a house, a car, a holiday, or to invest in the stock market etc. I might decide to borrow to buy a house with an interest rate of 5% but maybe I would have decided differently if the interest rate was 15%. The point is that increases in paper and electronic savings are fake expansions of savings, but they have very real effects on the behavior of economic agents, and this smells like a bubble. At the end of this process, savers end up in a situation like the one described in my first example, where the person who saved the 1.000 oranges only had the option to exchange his savings with a house he did not value as much as his savings. Unfortunately a part of his savings was confiscated by the government without him realizing, and the other part was lent at artificially low interest rates and as a result it was malinvested.

He is therefore very upset, and the government instead of explaining him what really happened, it tells him that it guarantees his paper savings. But what it does not tell him is that his real savings i.e. the “oranges” are gone. Some of them were confiscated by the government (the ones confiscated with money creation) and some were misallocated by the private sector due to the artificially low interest rates that followed the aggressive monetary policy and the credit expansion. He is therefore left with paper savings and inflation or hyperinflation. The government by assuming responsibility of the savings (guaranteeing the savings), is essentially asking the tax payer to pay for these savings, which is called a “bail out”. The other option is to let depositors to lose their money, which is called a “bail in”.

Is It Moral for a Government to Use the Economy’s Savings? 

Before I continue with government distortions, I would like to clarify something. The aim of this essay is not to discuss how moral it is or it is not for a government to use its citizens’ savings. This is a very different issue, namely whether socialism is better than capitalism and whether equality is better than freedom. The aim of this essay is not to defend capitalism and freedom over socialism and equality. The aim of the essay is to demonstrate that it is government intervention that creates asset bubbles.

All the above distortions could have been avoided, if only the government had used taxation instead of monetary policy to finance its spending. Taxation does not create the illusion of wealth. People that pay for the social network through taxation are fully aware that they are paying, and they are not under the illusion that they are saving as the citizens of my examples were. Taxation does of course increase interest rates, because when a government is using a part of the economy’s savings, the quantity of savings that is left for the private sector is reduced, and therefore its price (interest rate) rises. But if the supplies of real savings fall interest rates must rise, so that investors receive the right signals and react accordingly, in order not to misallocate them (do not built houses instead of tractors).

Therefore the question is not whether the socialist principle of redistribution is correct or not. The issue is that socialist and interventionist governments should mainly use taxation as a form of financing their expenditures, in order to keep economic agents informed about the real wealth they possess. The problem is that the more socialist and the more interventionist a government is, the more it needs monetary policy as a means of taxation, since heavy taxes are never popular. On the contrary, the less socialist and the less interventionist a government is, the less it needs monetary policy, since some reasonable taxes are welcomed by everyone, and these reasonable taxes suffice to finance the activities of a market friendly government. And this is the reason that free market proponents are always in favor of passing laws that require balanced government budgets (no deficits). With balanced budgets (government expenditures equal government revenues i.e. taxes), and a government can only finance its policies through taxation, and therefore socialists and statists cannot fool voters by using monetary policy as a source of redistribution.

Trade Deficits 

In the previous examples I discussed misallocation of savings due to irresponsible fiscal and monetary policies within the same country i.e. for countries with production surpluses. However this is the good scenario. At the end of this process, banks owe money (savings) to depositors (whose savings were used), and these savings are not available. The good thing is that people with savings/deposit accounts are domestic citizens. They do not want to exchange their savings with these houses, but at least they are local citizens. After all, the government can say to local depositors “gentlemen, unfortunately your savings are gone, and now whether you like it or not you will take the houses held as collateral by banks in exchange for your savings/deposits”. That’s basically the outcome whether the government chooses a bail out or a bail in solution i.e. whether depositors’ money is guaranteed by the government and the taxpayer, or whether depositors lose their money. But since depositors are also tax payers and tax payers are also depositors, these solutions are not as clear cut as they seem to be. I personally think that bail ins are a bit more fair than bail outs, but this is open to discussion.

However things are more complicated when it is foreigners’ savings that have been used to finance the bubble. For instance the American and the Greek housing bubbles were financed with Chinese, German and other exporting countries savings. It is even worse when the misallocation of savings is not of domestic but of international nature. How can the Greeks say to Germans, Chinese etc that they will have to take the Greek stock of houses held as collateral by the Greek banks, in exchange for the loans they made to Greece, which were the savings of the German and the Chinese people? This situation does not only create political turmoil domestically, but it also creates international tensions and potential conflicts in the international arena.

USA and China 

A classic example of a housing bubble that involved international misallocation of savings i.e. misallocation of foreign savings, was the American one. The American bubble was funded through a flood of imports flowing from China to U.S.A. (from elsewhere too, but the main trading partner of U.S.A. was China). On one side there was a country hungry for imports i.e. U.S.A., and on the other side there was a country hungry for exports i.e. China. Huge production surpluses were flowing from China to cover huge production deficits in U.S.A., and huge numbers of securities (i.e. government and corporate bonds/debts) were flowing from U.S.A. to China to cover for the deficits in trade. For instance China was sending to U.S. a 50$ television and the U.S.A. was sending an American bond (debt) of 50$ to China (in a massive scale though).

It was therefore very easy for American people to obtain “oranges” from China. It was so easy that nobody had to worry about “oranges” anymore. Everybody worried about improving their standards of living i.e. buying nice houses, nice cars etc. Until one day the Chinese realized that it was not such a clever idea to send their “oranges” to the USA for the Americans to build nice houses and military aircrafts, since these nice houses and military aircrafts would not produce “oranges” to pay them back. Moreover the Americans realized that their “orange” production had decreased dramatically, and they had become very dependent and indebted to the Chinese.

Moreover the Chinese did not want to exchange their savings/oranges (which were lent to the U.S.A.) with the houses, the cars etc that were made with these savings/ “oranges” in the U.S.A. Maybe they would be willing to exchange a part of it with the military aircrafts that were made with these “oranges”, but of course the Americans would not agree. At some point, the Americans who were living in these houses, and were driving the nice cars stopped paying their mortgages and loans, and since the people (Chinese) whose savings had been used to produce these houses and cars did not want to take them in return for their savings, the prices of houses and cars etc collapsed, and the banks who were the intermediaries went bust.

One might say that the above situation is a free market flaw, but it is not. As I explain in my essay “Free Trade or Protectionism? The Case for Free Trade”, under a regime of free international trade it is impossible for significant trade imbalances to arise. However things are very different when international trade is conducted under heavy government intervention, which was the case in the American-Chinese trade relations. In the same way that it takes two to tango, it takes two to generate a great trade imbalance. Let’s assume that only the American government was willing to borrow excessively while the Chinese government was not willing to lend excessively. The U.S.A. would start importing excessively Chinese goods, but if the Chinese government was not interested to systematically fund American deficits, it would not intervene in foreign markets, and there would therefore be less demand for dollars and greater demand for yuans.

The higher demand for yuans would make the yuan more expensive vis a vis the dollar, making American goods more attractive for the Chinese, and Chinese goods less attractive for the Americans. In addition, the flood of the Chinese imports in the American markets would cause an increase in unemployment in the U.S.A. This would put downward pressure on American wages, making American goods cheaper and more attractive to foreigners. All the above would reverse the flow of imports. In a nutshell, when I trade with my neighbor, even if he is better in everything, if he does not want anything I produce, there will not be a trade deficit, because he will not desire any of my products, and if he does not desire any of my products he will not be willing to offer me any of his products either. But things are very different when you have an American government hungry for imports, and a Chinese government hungry for exports.

The Chinese government did want to fund American deficits, and the American government did want to run these deficits. The Chinese would therefore print new yuans, and use them to buy American bonds (from both the public and private sector), essentially giving American people yuans to buy Chinese goods, and thus creating artificially a high demand for the dollar. The Americans would use these yuans to import Chinese goods. Therefore even though Americans were asking huge quantities of yuans to import Chinese goods, the price of the yuan would not rise relative to the price of the dollar, because the Chinese government was offsetting the downward pressure on the price of the dollar by asking for dollars i.e. by buying dollars i.e. by buying American securities i.e. mainly American government bonds i.e. by lending to Americans in order for the latter to keep running deficits and keep buying Chinese goods. Thus the yuan would remain artificially cheaper and the Chinese competitiveness would not decrease, as would have happened under a free trade regime.

Moreover you have to keep in mind that China is under a Communist dictatorship, and therefore wages are set by the communist government and not by the market. Therefore wages would not rise as a result of the increasing demand for Chinese products as would have happened under a free market regime, since the Chinese government would not allow this to happen, and therefore the competitiveness of the Chinese economy was again kept artificially high.

But as I already said it takes two to tango. At the same time the Americans allowed an unprecedented credit expansion to take place at home. The huge credit expansion led to very low interest rates. Therefore economic activity did not decrease because Americans could borrow at very low interest rates and buy Chinese savings/“oranges”, and they could do whatever they wanted with these “oranges” i.e. eat them, build houses, invest in tractors etc. Unfortunately this is a recipe for bubbles. The bubble did not have to manifest itself in housing. It could have appeared somewhere else. But both Democratic and Republican governments were very active in channeling funds to the housing industry. If they had channeled them somewhere else, the bubble could have appeared somewhere else. Actually housing was not the only American bubble but that’s not the issue here. The above hunger of the U.S. to increase their standards of living and finance their wars, and the hunger of China to keep its economy rising by boosting competitiveness and exports, led to the American bubbles. However this crisis would have not happened if the U.S. and the Chinese governments had not undermined the free market forces.

But they did undermine the free market, and they ended up in a situation where Chinese savings were used to fund the American housing bubble and other American expenditures, and the Chinese are not happy about it, since the Americans are now paying them back by printing “soft” fresh dollars, doing what is called “debt monetazation”. Monetazing your debt is good since you do not pay your debt, but it creates tensions with the creditor countries, and moreover it involves the risk of destroying your currency through excessive use of the printing press i.e. high inflations or even hyperinflations at the end of the process. Therefore the American bubbles involved the misallocation of mainly Chinese savings into American houses, cars, military aircrafts etc.

The Eurozone Crisis

 With the introduction of the euro, the socialist Southern European countries had access to very cheap credit, since people thought that the euro would be a copy of the Deutsche Mark, and moreover that the northern countries would guarantee the debts of the southern countries. I have to say that the socialist South believes much more than the European North in using monetary policy aggressively for redistribution purposes. You have to remember that in monetary economies people do not save in real goods i.e. oranges, gold etc. If I have a surplus of an apple, I sell it for let’s say 1 drachma (the Greek currency), and I store my surplus/savings of 1 apple in drachmas.

Therefore the socialists can print more drachmas and confiscate part or all of my savings without me realizing at least for a while, what happened to my savings. The Southern European countries i.e. France, Spain, Italy, Greece, are socialist in the more traditional sense i.e. the do not only believe in redistribution, but also in heavy interventionism, and monetary policy is always the best tool for interventionism. On the other hand, the Northern countries had a lot more respect for their citizens’ savings, and would not fool them by taxing them indirectly through money creation. They were doing it too of course, but to a much lesser extent compared to the South. And you should not think that the Southerners are more sensitive when it comes to social issues. If you look at the following Eurostat link, you will see that spending for education (green color), health (light green color) etc are not lower in the Northern countries compared to the socialist south. The only difference is that the politicians of the Northern countries are more honest than the ones of the South.,_2011_(1)_(%25_of_GDP).png&filetimestamp=20130429100920

Therefore the Northerners were much more restrained in their monetary policies compared to the Southern countries, with Bundesbank being the best example of an independent central bank, which was beyond the political system’s control, and could not be used during elections etc. As a result people all around the world preferred to put their savings in the currencies of the Northern countries, since they knew that if they put them in the currencies of the Southern European countries, the socialists would confiscate them by money creation. As a result, the Northern currencies, and especially the Deutsche mark, were always embarrassing the currencies and the governments of the South, who very often would have to devalue their currencies and offer higher interest rates to depositors as a result of their aggressive monetary policies. After the fall of the Berlin Wall in 1989, the Germans had to surrender their currency to the socialist South (especially France), in order for the winners of WWII to allow the reunification of Germany.

The political background of the euro is beyond the scope of this essay, but those interested on the politics of the euro should read “The Tragedy of the Euro” by Philip Bagus, which is a great account of the Eurozone adventure. You can read this book at for free, or you can buy the kindle edition at Amazon. However the main economic issue, which is the one that led to the Southern housing bubbles, is that the socialist politicians of the South were suddenly found with Northern European credit cards in their hands, since investors saw the Greek, the Italian, the Portuguese debt as guaranteed by the Germans and the other Northerners. And the socialists of the South decided to do what socialists very often do. They used these northern “credit cards” to go shopping. According to the agreement for the common currency, Eurozone members were supposed to avoid budget deficits or keep them at very low levels. Unfortunately there was no mechanism to enforce fiscal discipline to the socialist South. This was a road which guaranteed the creation of bubbles.

Therefore because of the euro the southern countries had access to rivers of borrowed funds. There was a situation with irresponsible governments that could borrow savings/ “oranges” at very low prices (interest rates) using the credibility of the European North. And that’s exactly what they did. Now there is a lot of tension because the Northerners are very upset for having to pay irresponsible southern policies. They ask the southerners to liberalize their economies and make them more competitive in order to be able to produce more. However the southern countries don’t want to change their socialist and interventionist economic models. They want the northerners to pay even more than they are already paying, which generates even more tension.

In a nutshell, the bubbles of the European South were funded by the savings of people who thought that the Greek euros were identical to German euros etc. Therefore the bubbles were not created by the free market, but by establishing a common currency without first establishing a mechanism that would impose fiscal discipline on irresponsible southern politicians.

The motives of the American and the southern European governments that led to the bubbles were quite different, but the outcomes were quite similar. A flood of imports/ “oranges”, a lot of cheap credit, and too many houses, cars, holidays etc. The U.S.A. is not a socialist country though. Even though the U.S.A. has moved a lot from the ideal of freedom towards the ideal of equality, it is still a much more free country than the European countries which take equality much more seriously than freedom. I believe that if they didn’t have to fight the wars they would have not used their monetary policies in such an irresponsible way. The story is quite different for the socialist Southern European countries where redistribution counts a lot more than freedom as a policy objective. The Southerners would use their monetary policies aggressively even if they did not have to finance a defense system, because monetary policy is the most efficient way for redistribution. But at the end of the day, if you ignore the different motives, the mechanics of the bubbles were quite similar.

The American Great Depression of 1929

What China was doing in the 21st century i.e. exporting and lending to everybody, the U.S.A. was doing in the 1920’s. The U.S.A. was one of the few industrial countries (together with Sweden) that did not have battles on its territories (with a few exceptions i.e. Pearl Harbor).

The U.S.A. not only had to help the allies during the wars, but they also had to help them after the war in order for the latter to rebuild their countries. Actually they were not only helping the allies, but even the axis powers i.e. Germany. Helping the destroyed European continent involved huge costs. It is not a coincidence that the U.S.A. did not establish a central bank until 1914 (actually December 1913). On December 1913, the Federal Reserve Bank (the American central bank) came into being. It can be no coincidence that the American central bank, the Fed, was established at the outbreak of the First World War (1914-1918). It is a very common practice for all countries to use their central banks during wars in order to finance their military expenditures. The U.S.A. was not an exception to this rule.

From 1914 until the crash of 1929, there was a dramatic increase in the money supply in the U.S.A. American governments not only wanted to help their allies, but they also wanted to protect American producers from foreign competition i.e. farmers etc. They therefore imposed tariffs as a means of protecting American producers with political influence. This made it even harder for the rest of the world to buy badly needed American products, since it was even harder for them to sell to the U.S.A. their own goods, obtain dollars, and use them to buy the huge American production surpluses. American governments should have abolished tariffs in order for foreigners to be able to sell to the U.S.A. and obtain dollars to buy American goods. But instead of doing that, they started to encourage foreign lending, in order to help their allies, and protect their producers at the same time. They were therefore printing dollars, handing them to foreigners, who in turn used them to buy American goods. This was taking place both through the public and the private sectors. American governments were even encouraging the private sector to lend abroad.

The ability of the foreigners to repay these loans was not taken into account though. The lending was mainly based on politics. These foreign bonds were toxic bonds, and they were the equivalent of the toxic sub-prime mortgages of 2008. Foreign bonds held by Americans were the bubble of the time. They were a bubble in the sense that they represented savings of the American people that were lent or given in the form of help or lending abroad, which were never going to be paid back. They were a bubble in the same way that the American bonds held by the Chinese government today are a bubble since the Americans cannot pay them back with real goods but only with freshly printed dollars. Therefore the savings of the American people were misallocated in the 1920’s i.e. they were handed to foreigners who did not have the ability to pay back. At the same time the very low interest rates that resulted from the expansionary monetary policy in the U.S.A. distorted production and even led to a housing boom.

I am not judging whether American governments were right or wrong to help foreigners. I am judging the way they did so i.e. by indirect taxation i.e. by money creation. After the 1929 crash, foreign bonds held by Americans were selling at about 10% of their face value i.e. they lost approximately 90% of their value, which was also what happened to the bonds for the sub-prime mortgages of 2008. What happened to American people during 20’s is what recently happened to the Chinese people.

Once the foreign bond bubble burst, the foreign demand collapsed and so did the demand for American exports. The American economy had to readjust to absorb this great decline of foreign demand. The American automobile production capacity was 2 million vehicles annually in 1920 and increased to 6 millions in 1929. Automobile sales were 5.3 million vehicles in 1929 and decreased to 1.4 million in 1932.

It is therefore ridiculous to blame the free market for the 1929 crash. It was a period of world wars. Even in the freest economies of the world i.e. U.S.A. , governments were deciding what and how to be produced. And you have socialists advocating that the 1929 crash was caused by the free market. What can you do? Socialists….. 

The Dutch Tulip mania of the 1634 

Before the appearance of central banks it was very difficult to tax people by money creation. There were ways of course to do so, none of which had the efficacy of a central bank and paper money. For instance very often a king would ask his people to hand in their golden coins, and would debase these coins. For example he would make 3 out of each golden coin, and would give only 1 of them to the person who had handed in the original one. This was in effect a means of taxation, and such actions were a primitive form of central banking.

In early 17th century (1600-1699), Holland was one of the most dominant forces in European commerce. Even New York was originally under the control of the Dutch and was originally called New Amsterdam before the English took control of it and renamed it. At the time each country had its own coins, but it was difficult to be sure of the quality of these coins, and this was a restraint to trade. The Dutch government allowed free coinage. Free coinage meant that anyone could hand in his gold, and they would be minted to golden Dutch guilders by simply paying a commission. Moreover the Bank of Amsterdam was established in 1608, which offered deposits covered 100% by gold. In other words I could hand in my gold, and would receive a deposit for that gold. These deposits were highly regarded, since they were a uniform means of payment and did not carry the risk of golden coins which could be fake etc, and moreover they were covered 100% by gold.

This was a period that the Spanish and the Portuguese were stealing the gold of the Indians in Latin America. They were literally stealing it (their jewelry), but they were also using them as slaves to extract gold from the gold rich Latin America. The Free coinage regime in Holland, the provision of a sound monetary system, and the commercial significance of Holland, made a lot of this gold to find its way to Amsterdam. Having the Latin Americans working as slaves in order to extract gold and stealing this gold, was in essence like having a central bank. Of course gold can never be like fiat money, because even with slaves there is a limit to its production, while there is no limit in the production of fiat money.

There was therefore a tremendous increase in the Dutch money supply which led to the tulip mania. People were buying tulip bulbs at very high prices. The stranger the tulip color, the higher their prices. This frenzy lasted for three years, from 1634 to 1637.  This was one of the first bubbles in history. In this case the savings of the Indians were misallocated, and were used in the Netherlands for tulip bulbs and other purposes. But it was a minor bubble compared to the ones created by central banks.


 What I said for the socialist European South is also true for Greece. However all the wrong doings of the South are exacerbated in Greece. In this section however I do not want to elaborate on the Greek socialist economic model, with the large and corrupted public sector, but rather to say a few things about the Greek banking crisis.

Greek banks were not very exposed to toxic products of the sub-prime mortgagecrisis, but they were very exposed to Greek government debt. With the Greek bankruptcy and the PSI (the haircut in Greek government bonds), Greek banks lost approximately 35 billion euros. To give you an idea of how significant this figure is for the Greek banking sector, I must say that the fortune of one of the richest Greek banker, Spyros Latsis, is according to forbes’ list 2 billion euros. We all now that if he tried to sell everything he would obtain much less but anyway let’s pretend it is indeed 2 billion euros.

Spyros Latsis was the biggest shareholder of EFG Eurobank, one of the major Greek banks. And the Greek bankruptcy imposed a cost of 35 billion euros to the Greek banking sector. It therefore wiped out all of the big bankers share capital and much more. However this is not explained to the Greek people. The reason is that the Greek banking system was heavily controlled by the corrupted Greek political system, and that’s the reason that all political parties are heavily indebted to Greek banks, and these loans will never be paid back, and the Greek people will have to pay instead. After the haircut of the Greek government bonds, Greek banks had to be recapitalized. For bank recapitalization see my essay “Introduction to Bank Recapitalization”. But the Greek oligarchs did not have or did not want to put additional capital in the Greek banks.

Therefore the Greek government borrowed from the relevant European mechanism and injected more capital in the Greek banks, and the ownership of the Greek banks passed to the Greek state, and at some point it will go back to the private sector. The problem is that the Greek political system is very upset, because the Greek banking system was one of its major sources of funding. Not only in the form of lending to Greek parties, but also in the form of lending to private companies owned by friends of Greek politicians. Therefore Greek politicians do not want to lose control of the banking system. They want to control it either directly by public ownership, or they want the Greek banks to be run by businessmen who are within their control.

For this reason they do not explain to the Greek people what has happened. They blame the Germans, and they say to the Greek people that it is very unfair for the people that borrowed to buy the houses to lose the houses they are living in, and which are held by the banks as collateral. Depositors and taxpayers on the other hand, do not realize that these houses are their ownership and therefore they have no problem with that. Therefore the Greek political system (especially the left) has transformed mortgage owners (borrowers) to hostages, and they have persuaded them that it is the greedy bankers and the mean Germans that want to confiscate their houses. Therefore they have a large part of the electorate that wants the Greek banks to be permanently publicly owned, because they believe the state will let them keep the houses for free.

A main technique used by the Greek political system in order to attack mortgage lenders, is to ask them to count the total amount of payments they made to the banks. For instance if the monthly payment is 600 euros, and if they have been paying for 10 years the amount is 72.000 euros. And they tell them the capital paid is much smaller i.e. 30.000 euros, and therefore the banks are stealing them by charging too much interest. And they do not explain to them that in the first phases of a loan, the debtor has to pay a small part of the capital and a large part of the interest in order for the monthly payment to be small (because the full amount of capital is owed). As time goes by, capital owed is reduced and interest payments start falling, and at the end of the loan most of the payment covers capital and a small part covers interest.

But throughout the whole period the interest rate is 3%-4% something like that, which is extremely low. If I go now (2014) to borrow money from the Greek banks, they will not give me credit. And if I try to borrow from outside the banking system, I might have to pay 15% or even 20% to borrow, and that’s IF I find someone to lend me money. And at the same time the interest rates for people that borrowed to buy houses are kept at artificially low levels i.e. still in the region of 3 to 4 per cent. The low interest rates are not real, and it is the European Central Bank that keeps interest rates artificially low. And at the same time you have the Greek politicians saying to the Greek borrowers (mortgage owners) that the banks are stealing them, only to have them ready to ask for banks to become permanently owned by the state, so that politicians do not lose their control.

They do not say all the things I have said in this essay i.e. that the Greek political system has stolen the savings of the Greek people either in the form of deposits or in the form of insurance and security payments. And that in reality the houses held as collateral by bankrupt banks is these people’s property and not the property of borrowers. It is with their savings/ “oranges” that these houses were built, and not with the savings of the borrowers. But all Greek politicians care about is not to lose control of the goose with the golden eggs, and they therefore need borrowers as hostages. Therefore people have no idea about how their savings have been misallocated, and how the houses held by banks are these misallocated savings, and so they are not angry. Borrowers at the same time think that the houses they are living in, and for which they have stopped paying are their property and that the greedy bankers want to steal them from them. Therefore foreign banks will not dare to buy Greek banks, since they know that the Greek political system can turn borrowers against them. Only with the blessings of the Greek political system a foreign bank will dare to invest in Greek banks.

Free-Market versus Government Induced Bubbles

 As Murray Rothbard says in his famous book “America’s Great Depression”, main economic crisis of the bubble type that we experience today, appeared approximately in the 18th century (1700-1799). Before the 18th century, there were major crisis, but their causes were obvious. There was for instance a drought which would destroy agricultural production and would cause famine. Or there would be a war which would destroy the production process. Or there was a king who would confiscate most of his citizens’ wealth for some purposes. The causes of major economic crisis were always very visible and very easily explained. It was from the 18th century (1700-1799) onwards, that major crisis would arise, and which could not be easily explained. In other words after the 18th century, the causes of major economic crises stopped being obvious.

So in what respect was the world different in the 18th century? There were two major changes. One of them was the industrial revolution (approximately 1760), and the other was the appearance of central banks, with the Bank of Sweden being the oldest central bank, and the Bank of England being the second oldest one (Bank of Sweden 1656 and Bank of England 1694). According to socialists, crises are the result of the industrial revolution and the free market, and according to the free-market economists (mainly economists of the Austrian School) the crises are caused by central banks. Since socialists blame it on the market they ask for more government regulation, and since free-market economists blame it on governments they ask for less government intervention.

Socialists and interventionists use various theories to explain crises and bubbles. Very famous explanations are the “over production” crisis theory, the “under consumption” theory, and the “speculative” or “behavioral” explanations of crises. 

Under Consumption Theory

 The under consumption theory is a Marxist explanation of crises. Marxism has long been discredited as a valid economic theory. In my essay “Why Marx Was Wrong”, I explain why the Marxist theory is  discredited as a valid economic theory. But let’s assume that the Marxist theory was a valid one, and let’s examine housing bubbles using the under consumption theory. According to this theory, capitalists (producers) exploit poor people (workers), and therefore the latter do not have the purchasing power to absorb what they produce i.e. houses (or some other goods in bubble markets).

However Marxists fail to answer the most important question. Why prices do not fall enough for surpluses in the bubble markets to be sold? There are two possible explanations why sellers do not lower their prices. The first one is that sellers wait to obtain better prices in the future, and the second is that the current market prices do not cover costs. Which one of the two we observe today? If sellers could afford to wait, they would not be under extreme pressure, and they would not face the threat of bankruptcy. Is that what we see with banks for example? No, it is not. What we see is the second case i.e. the market prices of the houses held by banks as collateral, cannot cover the loans that were provided for these houses, and the banks go bankrupt.

But then the problem is not that the market cannot absorb these houses. If prices fall enough the market can absorb them. The problem is that market prices do not cover costs and cause bankruptcies. Therefore the problem is that for some “unexplained” reason, all market participants believed that these houses could be sold at higher prices. But then it is not a problem of under consumption, but a problem of misallocation of savings and miscalculation of profits. Put it in another way at current prices i.e. prices that cover bank loans, depositors/savers do not want to buy the houses. But the purchasing power is there i.e. the deposits. These deposits could be used to buy these houses. Therefore we have to assume that the market has used depositors’ savings in the wrong way and it did so in a massive scale.

And Marxists have no explanation of why market participants were wrong in such a massive scale. Shouldn’t we assume that there was an exogenous factor that fooled both producers and consumers? Why didn’t capitalists realize that poor people could not purchase these houses in order to produce something else? Remember that all countries with trade deficits that experience housing bubbles cannot cover their primary needs after the bubbles burst i.e. meat, grain, oil etc. Why then so much was invested in housing and not in meat production for example? Why didn’t capitalists realize that poor people could not purchase these houses in order to produce meat instead?

All Marxists will tell you that the Greek workers were exploited by Greek capitalists and that’s the reason of the crisis, but no Marxist will explain to you, why if Greece had not received the European support there would be many poor Greeks in expensive houses without meat to eat. How could that be?

I believe that a lot of confusion is due to the fact that many people do not realize that the housing bubble is a problem for depositors/savers and not for mortgage owners. The problem is that depositors do not want these houses. These houses were built with the depositors’ savings and not with the savings of the people who do not pay their mortgages. But nobody says that, because they do not want depositors to realize what happened, because if they do realize what happened, they will also realize what their governments did to their savings.

Moreover you have to remember that when a bubble bursts, it is the relative and not the nominal price of the good in the bubble market that must be adjusted. It is the relative price adjustment that is important and not the nominal one. For example during the bubble the price of a house was 1.000.000 oranges when its cost was measured in oranges, and now it has to drop to 500.000 oranges, its cost was 10.000 cars and now its price has to drop to 6.000 cars etc. In other words not all real prices go down. Some prices go up. What is a dramatic decrease in the relative price of the asset in the bubble market i.e. houses, is a dramatic increase in the relative price of all other goods when measured in houses. The relative price of houses drops from 1.000.000 oranges to 500.000 oranges but the relative price of oranges increases from 1/1.000.000 of a house to 1/500.000 of a house. A dramatic decrease in the relative price of houses is matched by a dramatic increase in the relative price of oranges. This is a clear indication that for some reasons the market produced more houses than oranges, and the mistake was not corrected for a long time. It is a clear misallocation of savings.

In a free market relative price changes occur all the time of course, and it is a very healthy phenomenon. However what happens in bubbles is quite unique. The relative price of the asset in the bubble market not only falls dramatically, but it also falls for almost all other goods in relative terms. Changes in relative prices which are due to changing market conditions are much smoother and they move in opposite direction i.e. the price of oranges measured in apples falls, but the price of oranges measured in pears rises. When a good’s relative price falls dramatically and for almost all goods, it means that its price was for some reason irrationally high i.e. there was a bubble. This can be only explained when there is an exogenous and obvious shock. For instance the OPEC countries reduce the quantity of oil supplied and the relative price of oil rises for all goods. But in cases of asset bubbles there is no exogenous shock. At least there is not an obvious exogenous shock. In reality there is an exogenous shock, and that shock is the dramatic increase in the money supply.

Therefore the problem is not as Marxists say that consumers do not have the purchasing power to absorb the goods. There are many depositors who could use their money to buy these goods. The problem is that these depositors and the economy in general need something else. The wrong goods have been produced, and the whole production structure was disrupted i.e. the market produced houses when it should have produced oranges. And now not only borrowers are found with houses they cannot pay, not only lenders (depositors) do not want to exchange their deposits/savings with these houses, but there is also an economy that does not have the production structure to produce the right goods i.e. the economy is set up to produce houses when it should have been set up to produce oranges. And the adjustment is a very painful recession.

We all experienced the Great Depression of 2008. We can judge for ourselves now, we do not need Marx, Adam Smith and John Maynard Keynes to understand. It is very easy to understand that what happened is not that workers were overexploited. The problem is that somehow the economy was overproducing luxury goods i.e. houses, cars, holidays etc, and under producing more basic goods i.e. meat, oranges etc. And Marxists have no explanation for that.

Another thing that Marxists cannot explain is that it is the industries producing producer goods that suffer first, and not the industries producing consumer goods i.e. companies producing goods for other companies suffer first, and not companies producing goods for consumers. If the Marxist theory was correct, the companies producing goods for consumers should have been hit first during recessions. But that’s not what we observe in practice. This might not seem to be a very important argument, but some economists consider it as the greatest flaw of the Marxist theory. 

Over Production Crises

 This theory is closely related to the under consumption one. Proponents of this theory, argue that sometimes the capitalist machine outperforms itself and it produces so much, that consumers’ incomes do not keep pace with increases in production, and they cannot absorb the outcome of the capitalist machine. They mean that they do not have the necessary means to absorb production increases. It is indeed a very naïve theory because producers could simply lower prices enough for the “bubble” products to be sold. And then again we enter a path of reasoning similar to the under consumption one, i.e. that there are two possible explanations why sellers do not lower their prices. One is that they wait to obtain better prices and two that market prices cannot cover costs. The reasoning is exactly the same with the under consumption theory, and the conclusion is that there is no over production in general, but over production in some sectors and under production in some other sectors i.e. misallocation of savings and miscalculation of profits and so on.

Psychological-Speculative Crises 

Others say that bubbles are due to psychological factors. People see rising house prices, and they believe that they will keep rising for ever, and they start investing in houses, and they keep buying houses, and that kind of nonsense. These people confuse the symptom with the cause. Optimism is the symptom of the excellent economic climate that follows the overproduction of paper money. The cause of this optimism is what people perceive as an abundance of “oranges”, an abundance of savings. “Oranges” are not important anymore, people stop worrying about the basics, the question is how to improve the standards of living i.e. houses, cars, holidays, education etc, how to increase profits etc. Everybody takes “oranges” for granted. Nobody believes that one day will come that oranges will be scarce again.

In the same way, the panic that follows the boom is not due to psychological factors. It is due to objective facts i.e. that everybody realizes that “oranges” should not be taken for granted, and there is even a possibility of living in a great house without any “oranges” to eat. It is very natural for people to panic. They panic because they realize there is a shortage in “oranges”, a shortage in savings, and in the same way they were optimistic because they thought there was an abundance of savings they are now pessimistic because they realize there is a shortage of savings. Both their optimism and pessimism were based on what was going on around them. The increase in the production of paper and electronic savings generated by the government was very real. How could people know that what they perceived as and abundance of savings was not real and that a recession would follow?

It is therefore the increase in paper savings that causes the optimism and the bull market and not psychology or a thirst for speculation. As I already explained, the increase of paper savings does not increase the real savings i.e. “oranges” of the economy. It either allows domestic citizens to borrow very cheaply domestic real savings i.e. at interest rates that are much lower than the ones dictated by economic fundamentals (in the case of countries with production surpluses), or they allow domestic citizens to borrow very cheaply foreign real savings. When the bubble is created with cheap foreign savings, the foreign governments did something wrong too i.e. China in the 21 century and U.S.A. in the 1920’s.

The Socialist Myth of the Greedy Banker 

An explanation of the crisis very often put forward by socialists is the one of the greedy banker. In my essay “The Socialist Myth of the Greedy Banker”, I explain why private banks have nothing to do with the crisis. Private banks buy and sell paper savings. The more paper savings they buy (deposits) and sell (loans), the more profit they make. However private banks have nothing to do with the quantity of paper savings in the economy. The amount of paper and electronic savings in the economy is controlled by the government and its central bank.

It is of course true that private banks will never say no to more credit, since with more credit they will make more loans and more profit. But they cannot create money as I explain in the aforementioned essay. People are confused by the fractional reserve system, under which private banks can lend more than they take in deposits. But this is a tool used by governments to boost credit and economic activity. It is very easy for governments to ask for less credit expansion. Anyway, since I explain it in detail in the relevant essay I will not elaborate further.


Murray Rothbard “The Great American Depression”

Murray Rothbard “What Has Government Done to our Money”

Murray Rothbard “The Case Against the Fed”

David Stockman “How the Artificial Boom of 1914 Caused the Great Depression”

Douglas French “Early Speculative Bubbles and Increases in the Money Supply”

Philip Bagus “The Tragedy of the Euro”

Irwin Schiff & Vic Lockman “How an Economy Grows and Why it Doesn’t”

If you enjoyed this essay you might want to have a look what some of the following essays too:

Conspiracy Theories About Israel

The Energy War Between U.S.A. and Russia and the Threat for Israel’s Survival

The Socialist Myth of the Greedy Banker

The Socialist Myth of Economic Monopoly

The Socialist Anti-Semitic Myth of the Creation of Money Out of Thin Air

Introduction to Banking



Introduction to Bank Recapitalization

***You can obtain a free copy of this essay in pdf, kindle and epub format at Smashwords or you can download it for free at Apple’s ibook store or at Barnes and Noble for nook devises at or buy the kindle edition at Amazon   Iakovos Alhadeff Introduction  After the economic crisis of 2008, and the banking crisis that followed, we have all heard hundreds of times the expression “banking recapitalization”. Because most people do not know how banks work, populists have extensively used the banking industry in order to disorient the public, and achieve political benefits for themselves. The way they do so, is by telling the innocent and ignorant on the subject people, that the government gives lots of money to the bankers instead of giving it to the poor. In this essay, I want to explain in very simple words what we mean by bank recapitalization, and how this takes place, so that everybody understands what it really is. I will use an example that I used in my essay “The Housing Bubble and the Banking Crisis for non Economists”, and modify it, in order to place the emphasis on the issue of bank recapitalization. I might add some accounting comments i.e. about balance sheets etc, but people who are not at all familiar with accounting can skip these comments, and still be able to understand everything. A Banking Example with Recapitalization Let’s assume that I want to open a bank. I put down 120 million euros in share capital in order to do so. The amount of 120M euros is arbitrary, as will be all the figures I will use. So I put down 120M euros. The money goes in the newly opened bank’s vault, and I get paper (shares) for 120 million euros (in the bank’s balance sheet the 120M euros will appear as cash on the asset side and as share capital on the liabilities side). The shares that I will get will be traded in the stock market. Their price goes up when the bank makes profits, and people have faith in the bank and want to buy its shares, and goes down when the bank makes losses, and nobody wants to buy them, and everybody wants to sell them instead. And for the moment I am holding all the shares. Therefore for the moment the bank is only funded with capital from its owners (me and the share capital I contributed). Therefore the bank finances its activities, mainly loans, with its own capital. But as time goes by, the bank will receive capital from outsiders (not the shareholders). The obvious sources of external funding are deposits and borrowing. You can deposit 1 million euros, and the bank can use it to make loans. Or the bank can issue a 1 million bond, and you can buy the bond thus lending the bank 1 million. The bank can again use this 1 million to make loans. Banking regulations require that some of the capital with which a bank finances its activities comes from its owners (shareholders), and that this capital (own capital) does not fall below a given percentage of total capital. Let’s suppose that regulation requires that own capital does not fall below 20% (arbitrary figure) of total capital. Imagine a bank with 100 million of shareholder (owners’) capital, which has also taken deposits of 100 millions, and has issued bonds (borrowed) another 100 millions. This totals to 300 million euros of capital (100+100+100), and if banking regulation requires that own capital does not fall below 20% of total capital everything is fine, since own capital is 100/300=33% of total capital. It is very reasonable to expect banks to have a part of their capital in the form of share capital (own capital), in order to make sure they are prudent. If I have a bank that is only financed through deposits and borrowing, I can take excessive risks, since even if the bank goes down I will not lose anything. On the other hand if some part of the bank’s capital is my capital (shareholder capital), and the bank goes down, I will lose my capital. And therefore I am more cautious in my management. So, there are 3 main sources that banks can use to finance their operations i.e. shareholder capital, deposits and borrowing. And banking regulations require that own capital (shareholder capital), does not fall below a given percentage of total capital as I already said. It can be more than that percentage, but not less than that. If the shareholder capital as a percentage of total capital falls below that percentage, the bank goes bankrupt and it is liquidated. In my essay I will arbitrarily set that percentage to be 20% of total capital i.e. (share capital) / (share capital + deposits + borrowing) must be greater or equal to 20%. An arbitrary figure I repeat. I must also add that banks can mainly borrow from other banks (inter-bank market), from the central bank, or directly from the public by issuing bonds. Now let’s come back to my example. Remember I opened a bank with 120 M euros. Now I also take a deposit of 100M euros from a rich customer. Now the bank has in its vault 220M euros, which are financed 55% by share capital (120M), and 45% by deposits (100M). Now the bank also issues bonds, and borrows from the public another 100M euros. Now the bank has in its vaults 320M euros, which are financed 37.5% by share capital (120M), 31.25% by deposits (100M), and 31.25% by borrowing (100M). The bank has not yet issued any loans or performed any other actions (it has a balance sheet with 320M cash on the asset side, and 120M share capital, 100M deposits, 100M debt (bonds) in the liabilities side). Everything is according to the banking regulations. Share capital is 37.5% of total capital, which is 17.5% more than the minimum level of 20%.

Assets Millions Liabilities Millions
Cash 320 Share Capital 120
Bonds Issued 100
Deposits 100
Total 320 320

Now the bank wants to make a loan of 150 million euros to a businessman who wants to buy a big building worth 150M. We are in 2008 before the crisis. So the bank issues a loan of 150 millions and the businessman buys the building which also serves as collateral for the loan. Nothing has changed in the liabilities side of the bank. Capital still stands at 320M, with 120M share capital, 100M borrowing (bonds) and 100M deposits. But on the asset side, the bank has only 170M euros in cash, and 150M in loans. This is not a problem, since the loan has a value of 150M euros. The bank can confiscate the building if the businessman does not pay his monthly instalments, and receive its 150M in cash. If the businessman meets his obligations, it will be even better for the bank since it will receive its money plus interest.

Assets Millions Liabilities Millions
Cash 170 Share Capital 120
Loans 150 Bonds Issued 100
Deposits 100
Total 320 320

So far, so good. But at the end of 2008 there is a huge economic crisis. The businessman leaves the country and the bank is left with the building. Let’s assume for simplicity that the businessman has not paid anything to the bank yet. Because of the crisis, the building’s value has fallen to 50M euros. Losses are always incurred by the shareholders and not by depositors and lenders, since the former are the owners of the bank. That is as long as there is shareholders’ capital. But in our case there is sufficient shareholder capital against which the losses can be written off. In accounting terms, the loss of the 100M euros, will go to the profit and loss account, and will appear as a negative number at the liability side of the balance sheet, thus reducing shareholders’ capital by 100M euros. Therefore at year end, the bank has 170M euros cash in its vault, and a building worth 50M euros. That’s the asset side of the balance sheet. And at the liability side, the bank has 20M shareholders’ capital, 100M borrowing (bonds) and 100M deposits. Now the 100M loss from the reduction in the building’s value has been taken off, both from the building’s value (as an asset), and from the shareholders’ capital (at a part of the bank’s capital at the liability side). The situation is presented in the following table.

Assets Millions Liabilities Millions
Cash 170 Share Capital 20
Loans 50 Bonds Issued 100
Deposits 100
Total 220 220

Don’t get confused by the accounting. Simply see the above economic event as a loss for the owners. The owners made a loan of 150M euros, the borrower could not pay back, the bank confiscated his building, which however has a value of only 50 million euros, and therefore there was a loss of 100M euros. Therefore the owners’ wealth is reduced by 100M euros. Therefore only 20M (120M initial offering- 100M loss) of shareholder capital is left. You can look at it in this simple way if you are confused with the accounting. It makes no difference at all. The accounting simply records this loss in the bank’s books. But the loss has nothing to do with accounting. It is a real loss. A real loss generated from a real economic event, which cost to the bank’s shareholders 100M euros. So, let’s now look at the bank’s capital. The bank has 20M of shareholder capital, 100M of borrowing (bonds), and 100M of deposits. Own capital (shareholder capital), now stands at 20M / 220M = 9%.

Share Capital 20M
Bonds Issued 100M
Deposits 100M
Total Capital 220M
Share Capital/ Total Capital = 20M/ 220M = 9 %

If the loss was greater the shareholder capital could have been totally erased. If the loss was even greater, a part of the bondholders’ and depositors’ capital could have been erased too. Imagine for example, that the loss was 200 million. All the 120 M of shareholder capital would have been erased. But another 80M euros would have been erased from bondholders and depositors. Actually it is right to assume that the 80M loss would be incurred by bond holders, since depositors are always the last ones to incur losses. If they incur any losses at all, since very often the government prefers to pass their part of the losses to the taxpayers. How Recapitalization Takes Place Now let’s go back to my example. There is a problem. Shareholders’ capital stands at 9% of total capital, and regulators require it to be at least 20%. Therefore the bank must be recapitalized. It is not a liquidity problem. The bank still has 170M euros in its vaults, and if depositors are not panicked and they do not rush to take their money there is no problem. The bank does not have a liquidity problem. But it has a capitalization problem. Shareholders’ capital stands at only 9% instead of 20%. Therefore the bank has to issue new shares, and receive new shareholders’ capital (be recapitalized) in order to meet minimum capital requirements. Under normal circumstances there is no problem. There are many people willing to buy the banks shares. But under a severe economic crisis, it is very likely that no one will be willing to risk his money by buying the troubled bank’s new shares. If that happens, there are two options. Either the bank will close down and be liquidated, or the government will become a shareholder, by contributing the shareholder capital that is missing. In our example, the government would have to contribute 30M euros, thus bringing shareholder capital at 50 million euros, and therefore 50M / (50 + 100 + 100) =  20% of total capital, as required by regulation. Therefore the bank was recapitalized. It could have been recapitalized by the market instead. But in troubled countries it is very likely that the market will be afraid to buy such shares. In my example, after the bank was recapitalized, the government holds 60% of the bank’s share capital, and the market holds 40% of the bank’s capital.

Share Capital (20M Private and 30M Public) 50M
Bonds Issued 100M
Deposits 100M
Total Capital 250M
Share Capital/ Total Capital = 50M/ 250M = 20 %

If the losses had erased 100% of share capital, the government would hold 100% of share capital. I must now say that I made a simplification. I assumed that the bank’s share price in the stock market did not change during 2008. This is of course very unrealistic, but it is a simplification that greatly helped me to explain what recapitalization is. Bank recapitalization should not be confused with short term liquidity provided by central banks to the banking sector, when the latter faces the danger of liquidity crisis and bank runs. I now turn to liquidity crisis to make sure there is not confusion between the two. A Banking Example with Liquidity Crisis I hope that by now it is clear what bank recapitalization is and how it takes place. And why it is important of course. Liquidity crisis are something very different. To demonstrate what liquidity crisis are I will use an example again. There is a bank, with 100M euros share capital, and 200M euros in deposits. There is no debt this time. No operations have been undertaken yet. So there are 300M euros in the company’s vault, financed by 100M of share capital and 200M of deposits. Like before, the bank issues a loan of 150M euros to a businessman wishing to buy a big building, and the building is used as collateral. As before, there is now 150M in cash at the bank’s vault, 150M in collateralised debt, which are financed as described above. But this time the businessman is very credit worthy, and has calculated everything correctly. Therefore he is not affected by the crisis. But due to the severe economic crisis, depositors are panicked and run to take their deposits from the banks. But the bank does not have 200M euros in its vault. It only has 150M euros in its vault. The bank does not have money to pay the depositors, even though it is perfectly healthy. In this case the central bank will provide liquidity to the bank, and when the confidence returns and depositors take their money back to the bank, the bank will return the short term liquidity back to the central bank. The real world The government (central bank) support under liquidity crisis is very different from the government support under recapitalization. But in the economic crisis of the recent years, both kinds of support were required. Because huge amounts of housing values held as collateral by the banks were evaporated, and when the corresponding loans became red, heavy losses were incurred erasing shareholder value. Therefore there was a need for recapitalization. At the same time in many countries i.e. Southern European countries there was a loss in confidence, and depositors were taking their deposits either to put them under their matrices, or to send them to more secure northern banks. I must mention that decreases in the value of houses held as collateral are only one of the possible sources of losses for the banks. There are many others. For instance in Greece, when the country’s debt was restructured in 2012 (a form of default actually), the Greek banks lost 37.5 billion euros. Because they were holding approximately 70 billion euros in government debt, and there was a haircut of approximately 50%. If you liked this essay you might want to have a look at the following essays too: Conspiracy Theories About Israel The Energy War Between U.S.A. and Russia and the Threat for Israel’s Survival The Socialist Myth of the Greedy Banker The Socialist Myth of Economic Monopoly The Socialist Myth of Economic Bubbles The Socialist Anti-Semitic Myth of the Creation of Money Out of Thin Air

Israel and Conspiracy Theories

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Iakovos Alhadeff


The aim of this document is to offer a quick and simple presentation of the circumstances under which Israel was created. The document does not have any historical value, since thousands of books have been written on the subject, and I am not a historian either.

I write this document because I am tired of listening about a Jewish conspiracy for world dominance, part of which was the creation of Israel. I hope this essay will help the well intentioned and confused reader realize, that Israel was created in the same way that the Arab states and all other states were created. I will not touch the Arab-Israeli conflict which is a more complicated issue.

For each document like this one, hundreds of others supporting conspiracy theories are written. Therefore I cannot afford to use sources that are very good, but which are not “brand names”. I will use only well known sources like Wikipedia and History Channel, which are known to everybody.

The Arabs and the Israelis Today

Before I start presenting how Israel was created, I want to present a picture of the Arab Israeli world as it exists today. At the following map,


Map 1

the Arab world is the green colored area, and the Israeli world is the red colored area.

According to the following Wikipedia link (second paragraph)

the Arab world comprises 22 states and 422 million people (the green countries)

And according to the following Wikipedia link,

there are approximatelly15 million Jews worldwide, 6 of which are located in Israel.

This is the picture of the Arab Israeli world today.

The following map shows the geographic region that is called Middle East.


Map 2

It can be seen that Middle East does not include all the Arab countries, and it contains countries that are not Arabic i.e. Turkey and Iran.


A few years before 1900, a Jewish movement for the creation of an independent Jewish state starts developing. It is the well known “Zionist” movement. For many people the world “Zionism” is synonymous to the word “conspiracy”. And it is very understandable that many people believe so, since there is so much propaganda on the subject, financed with petrodollars.

In reality Zionism, was simply a Jewish movement for the development of an independent Jewish state, which would offer a shelter for the Jews that were leaving in countries were anti-Semitism was on the rise. And Zionism was not a world conspiracy, but rather a very reasonable response to the rising European anti-Semitism of the late 19th century (around 1900).

It is the time of the Dreyfus Affair in France (1894), the time the publication of the “Protocols of the Elders of Zion” in Russia (1903), and in general a time of declining civil rights and rising persecutions for the European Jews. I provide one of many links on the subject (Wikipedia),

which says in section “Persecution of Jews in the late Russian Empire”, that between 1881 and 1920, 2 million Jews left Russia due to the anti-Semitic laws and the Russian pogroms. Eastern Europe was at the time the home of the majority of the Jews. Therefore the creation of Zionism was a response to the rising European anti-Semitism, and not a world conspiracy for world dominance as propagandists suggest.

Palestine and the Ottoman Empire

When Zionism started developing, the region that is Israel today was part of the Ottoman Empire. Palestine was under Ottoman occupations since 1570. And what helped the Jews and the Arabs create independent states, was that the Ottomans were on the side of the Germans in World War 1 (1914-1918 WW1), and not on the side of the Allies (Britain, France, Russia). At the start of WW1 the situation in the Middle East is represented in the following map.


Map 3

As it can be seen, what is today Israel, Syria, Irak (Mesopotamia), Jordan, Lebanon, and part of Saudi Arabia, was part of the Ottoman Empire. The other country that was strong in the region was Britain (colored pink on the map).

The following map shows the region today


Map 4

Great Britain in the Middle East

It can be seen that at the time, England was controlling Egypt and the Suez Canal. As it can be seen on the following map, the Suez Canal was of great importance for the British since it almost cut in half the distance between England and its colony India.


Map 5

Moreover, as it can be seen at the following map,


Map 6

the region behind Israel, is a region of great importance. It is the region of the famous Persian Gulf (the gulf between Iran and Saudi Arabia), with the richest countries in oil i.e. Saudi Arabia, Kuwait, Iran, Iraq and Qatar. Therefore the region was of vital importance for England. It was offering a passage to the Indian Ocean and India, and it offered oil as well. I must mention that USA was not yet the great power that we all know today.

The English and the Ottomans

In 1915, the Ottoman Empire enters WWI on the side of Germany. This is something that terrifies the British, since, as it can be seen on map 3, the Ottomans were next to the Suez Canal. And the Ottomans are now on the side of the Germans and therefore an enemy of England. Moreover, as it can be seen on map 3, the Ottomans are very close to the Caspian regions (south Russia), from where Russia, an ally of the English, was getting its oil. And the Ottomans were also very close to Iran, from where the English were getting their oil.

Therefore the English badly needed allies to fight the Ottomans. And they tried to reach agreements with all parties that could help their war against them. Jewish and Arab nationalism were two such forces. The English will promise the Arabs independence if they help them defeat the Ottomans. The English agent Lawrence (the famous Lawrence of Arabia) will lead the Arabs against the Ottomans.

Moreover they promise the Jews that they will help the creation of a Jewish state in Palestine. The British were hoping that American Jews would use their influence in order for the USA to enter the war, and that Russian Jews in the Communist Party would use their influence for Russia to remain in the war on the side of the Allies. I must mention that during WWI (1914-1918) the Russian communists came to power (1917). The Jews also provided soldiers to the British, but not as many as the Arabs who were a much larger population.

Moreover with the Sykes-Pikot agreement, the British promised the French, control over the region that today is Syria and Lebanon. For the Sykes-Picot agreement, see the following Wikipedia link,

The following map shows how the British and the French had agreed to split the Middle East.


Map 7

As it can be seen on the map, the British would take control of Iraq, Jordan and Israel, so that they would control the rich in oil Iraq, and have access to the Mediterranean Sea. We therefore see that the British had promised too many things to too many interest groups. And their promises to various groups were sometimes conflicting. But in the end they did manage to defeat the Ottomans.

At the following link,

there is a History Channel documentary, “Promises and Betrayals”, which illustrates the various and conflicting English promises during WWI. It is a very good documentary and it takes only 50 minutes to watch. On 20.15, it says that the English believed that whether the Americans would enter the war, greatly depended on the public opinion. And by promising to help the establishment of a Jewish state, they were hoping that the American Jews would use their influence on this direction.

That does not mean of course that the Jews control the USA as many idiots believe. But this is another story. But according to History Channel (20.15) the British greatly overestimated the Jewish influence in the USA. But they certainly had some influence. According to the documentary (from 26.00 to 33.00), with the creation of the Jewish state, the English were also hoping to motivate the Russian communists of Jewish origin, to use their influence to keep Russia in the war. The English promised they would help the creation of the Jewish state with the Balfour Declaration in 1917, and the communists took control of Russia in October 1917. This promise should be very interesting, since in November 1917 the English army was entering and taking control of Palestine. In other words the English were promising to help the establishment of a Jewish state, in a region they already possessed.

In 30.30 of the History Channel documentary, it is said that it was very silly on the part of the English to believe, that the Russian  communists of Jewish origin would be touched by such an offer, since the latter were internationalists and believed that Zionism was a capitalist movement. Moreover, when communists took control of Russia, they turned their back on the allies, and left the war. And we are used to listen that communism was a part of the Jewish conspiracy for world dominance. And we can realize how wrong this is, by considering the communist reaction to the English offer for a Jewish state with the Balfour Declaration. And the communists not only left the war, but they also made public many secret agreements between the English, the French and the Russian Tsar, thus greatly embarrassing the allies. The Sykes-Picot agreement was one such document made public by the Russian communists.

And all this carries the authority of History Channel. The following Wikipedia link,

in section “Jews in the Bolshevik Party”, explains that the Jewish presence in the party was significant but not at all decisive. But I guess it was very convenient for the Nazi propaganda to identify communists with the Jews. A great hatred was cultivated to the German people for the Jews during WWII, which could be very easily passed to the Russians, if they were perceived as led by the Jews.

Therefore what I described above is the context within which the English, the Jews and the Arabs were trying to pursue their interests during WWI. I now want to take a closer look on the English and Jewish interaction during this period.

The English and the Jews

The commitment of the English towards the Jews for the establishments of a Jewish state is the famous Balfour Declaration in 1917. For Balfour Declaration see the following Wikipedia link,

The Balfour Declaration is the letter sent by Arthur Balfour, English secretary of foreign affairs, to Baron Rothschild, who was the most prominent figure of the British Jewry. Arthur Balfour was asking Baron Rothschild to pass this letter to the Zionist Council. With this letter the British were promising the Jews that they would help them create a Jewish state in Palestine. Actually with the Balfour Declaration the British were committing to help the establishment of a Jewish state in the area which is today Israel and Jordan, and not just in what it is today Israel. In the following map,


Map 8

you can see the area of the Balfour Declaration. And the following map shows the same area today (Israel+Jordan).


Map 9

As I said, it was in this area (Israel+Jordan) that the English promised to help create a Jewish state. This region (Israel+Jordan) was very underdeveloped, with only 1 million inhabitants at the time. There was therefore plenty of space for the creation of a Jewish state. The majority of the people living there at the time were Arabs though. And this is the reason the Arabs claim the Jews are not entitled to their own state, because in reality the Arabs are not willing to accept a state of Israel under any circumstances. The Jews on the other hand claim that this was the land of their fathers who were driven away by the Romans many centuries ago, and there was always a significant Jewish presence in the region throughout the centuries.

This region was called the British Mandate for Palestine, and was assigned to the British by the predecessor of the United Nations, namely the League of Nations, in order for the British to see the establishment of a Jewish state. All this happened of course with the help of the English. However with British initiative this mandate was later modified in order to exclude what is today Jordan (the region east of Jordan river) from a future Jewish state, and Jewish people were forbidden to move to this region. The reason the British did so, was because they wanted to offer the region to one of their Arab allies, namely Emir Abdulah. Abdulah was from the region that today is Saudi Arabia.

That’s how states were established during the world wars. Not only in the Middle East. The winners of the war were cutting pieces of land that belonged to their defeated enemies, and were offering them to their allies. Therefore the British cut 77% of the British Mandate for Palestine, which was the area where the Jewish state was supposed to take place. After that only the other 23% was left (what is today Israel). With most of the land of the British Mandate having gone to the Arabs, there was much less room for bargaining for the Jews and the Arabs living on what is today Israel. Even though as I said, the problem for the Arabs is existential and not territorial. They cannot accept a Jewish state. And the most honest of them admit so. The others pretend that the problem is a territorial one in order for the journalists they buy with petrodollars to have a stronger case. It is easier to gain support for a change of borders than for support of Israeli extinction.

Moreover if there was more space a stronger Jewish state could have been created. And at this point one can see that the English were not acting in favor of a world conspiracy. Otherwise they would have not cut 77% of what was the British Mandate and give it to their Arab allies. Moreover, with the White Paper of 1939, the English forbid the movement of more Jews to Palestine. According to this policy paper, only another 75.000 Jews could go to Palestine over the next 5 year period. And after this 5 year period, more Jews could go there only if the Arabs approved so. If the English had not forbid the Jews to go to Palestine, many of Hitler’s victims could have gone there and a much stronger Israel would exist today. Even if only a million of the Nazis’ victims had moved there, it would have been a huge number for the time, and would have made a great difference to the balance of power. But the Arabs new that, and under their influence the British forbid the establishment of further Jews in Palestine.

And therefore the people that claim that the British were acting for some dark forces, they must explain why the cut 77% of the British Mandate and gave it to the Arabs, and they also forbid the Jews to go there in 1939. The reason they forbid them to go there at the break of WW2, is that under the Nazi persecution there would be millions of Jews that would be willing to go there. And there were rich Jews like the Rothschild family, that they could buy land and send them there. And to prevent so, the Arabs and the British issued the White Paper of 1939 which fenced the European Jews in the European countries, and they were finally slaughtered by the Nazis.

And there are people that seriously claim that Hitler was working for the Rothschilds, in order to scare the Jews, and force them to go to Palestine and create Israel. But they can’t explain why the Rothschilds did not persuade the English not to cut 77% of the British Mandate and offer it to the Arabs. And they can’t explain why the Rothschilds did not persuade the English not to issue the White Paper of 1939 which forbid the movement of the Jews to Palestine. For the White Paper 1939 see

And in essence the English are partly guilty of the murder of millions of Jews, because they could have allowed them to go to Palestine, since the Jews did not have anywhere else to run. Nobody wants immigrants at a time of rampant economic crisis. And they therefore were fenced in Europe. But on the other hand without the help of the British at the time, there would not be a Jewish state today.

And then they do not explain why with the United Nations of 1947 and the partition of Palestine, another half of the remaining 23% of the British Mandate was also offered to the Arabs. The following map shows the partition of the 1947 United Nations partition.


Map 10

The orange region was the region where the Jewish state would be created, and the yellow region is the region where an Arab state would be created. The Jews welcomed the partition with great enthusiasm, while the Arabs attacked the newly established state, because as I said the issue is existential and not territorial for the Arabs. And in the war the Israelis won and they took more land.

Today the situation is as shown in the following map, with the orange areas, Gaza Strip, West Bank, and the Golan Heights, being the one we mostly hear in the news.


Map 11

I hope that with all the above, it will be clear to the well intentioned reader, that Israel is not the result of a world conspiracy, but rather the creation of a state, which was created in the way all other states were created. There were so many Arab states that were created in the 20th century, i.e. Lebanon 1943, Syria and Jordan 1946, Libya 1951, Morocco and Tunisia 1956, Iraq 1958, Algeria 1962, United Arab Emirates 1971, Saudi Arabia 1932, Yemen 1918, and nobody says they are the result of a world conspiracy. But the Jewish state is the result of a world conspiracy for world dominance.

And it makes one wonder, why this is so. Why only for the Jewish state there is so much conspiracy theory? And the answer is the following map


There are 400 million Arabs in the green regions, and only 6 million Jews in the red region. And the Arab countries are extremely rich in oil. And while the propagandists try to persuade everyone that Israel is the strongest country in the world and controls everybody, the truth is that Israel still exists due to its close ties with the USA. Not in the sense that the American Jews control the USA. This is another anti Jewish propaganda. The reason is that Israel and USA have a lot in common, Israel is the only democracy in the Middle East, and Israel has always been the loyal and reliable dog of the USA in the region.

If you enjoyed this essay you might want to have a look at some of the following essays too:

The Energy War Between U.S.A. and Russia and the Threat for Israel’s Survival

The Socialist Myth of the Greedy Banker

The Socialist Myth of Economic Monopoly

The Socialist Myth of Economic Bubbles

The Socialist Anti-Semitic Myth of the Creation of Money Out of Thin Air

Introduction to Banking