Tuesday, November 22, 2011

Notional Accounts - The Dirty Little Secret

You look at your bank statement or your pension account or, if you are fortunate enough, your brokerage account.  You see numbers.  But is what you own really there?

Let's say your statement says you own 10 shares of Apple Computer.  Do you?  Or do you have an agreement with your broker that if you sell those 10 shares they will give you the market equivalent in cash?

You don't own anything.  None of it is there.  It doesn't exist.  All you have is an agreement.  Your money is gone.  It was taken and, in turn, you were given a promise.

Promises are only worth the integrity of the person making the promise.  If the promise is being made to you by a corporation, well, you get the idea.

Bernie Madoff took everyone's money.  So did Jon Corzine of MF Global.  So did everyone else in the who's who of finance.  It is a dirty little secret that everyone is doing it and the public must never know.  But it is bigger.

When banks put money on deposit with your country's central bank, it is a notional account.  The Central Bank took the money from your bank and promises to return it.  The same thing happens to you when you place the money on deposit with your bank.

The only problem is that this is a game of "musical chairs" and you are playing with a blindfold with your ankles tied together.

1 comment:

  1. Corzine is in big trouble. He didn't leak to the US Congress what was going on well in advance of their bankruptcy so the US politicians could have "front run" the whole collapse by shorting MF Global. Without this kind of insider trading knowledge (which by the way is no illegal in the United States) the politicians could not make their fortune for the year. He will surely go to jail now for not taking care of his "buddies".

    For background for all you non-Americans, the US Congress has exempted itself from the laws it imposes on the citizens. This allows them to inside trade and get rich while Martha Stewart goes to jail for practically nothing.

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