Understanding How Privatized Banking Really Works - The Power of Knowledge!

In contrast to the life insurance industry and how they manage their thinking around money and their expectations of their liabilities being death benefits, one of them, how they have to put that money to work in an ultra conservative manner so that they are well capitalized even in dark times. It's all kind of engineered for the most part. So how exactly does privatized banking really work? And more importantly, in the current economic climate when we have banks failing and there's a lot of headlines and marketplace news about certain issues that are taking place at least in the United States, with the FDIC showing up at the door even on weekends to help stop the bleed of certain banking institutions, there is these concerns and it's important to have a deeper understanding of how banking really works. So there's a great book here. I'm going to be digging into a couple sections of in today's conversation. The book is called How Privatized Banking really Works, Integrating Austrian Economics with the Infinite Banking Concept. Now this was co written by Carlos Lara and Robert Murphy, again founders of the Nelson Nash Institute. And Dr. Robert Murphy, well known Austrian economist, has a number of podcasts. Of course he was also who wrote the authorized Infinite Banking Practitioner course materials. So I'm going to zip right to a back section of the book. It's a great book. If you haven't purchased it, you want to learn more about and have a deeper understanding of privatized banking and just the banking industry in general. In fact, if you want to have a deeper understanding of how fractional reserve lending works in the open marketplace and some of the manipulation factors that take place in commercial banking, this book does a really good deep dive into those things. But the book is written in three primary parts. I'm going to jump near the end of the book to part three and I want to read a couple of segments and just kind of discuss them here. For the purpose of our conversation today in the book, I'm going to jump to page 326. There's some commentary here from a well known Austrian economist, De Soto. I believe it's Jose De Soto and he has written a number of articles in regards to both insurance and banking. And so there's a segment of one of them here I'm going to highlight on page 326. This is a section that has to do with some common objections to the infinite banking concept. Although life insurance is very boring and a bedrock institution, the purpose of life insurance is not to make a killing, but to provide for one's family in the case of a Killing. And so he goes on to explain that the institution of life insurance has gradually and spontaneously taken shape in the market over the last 200 years. It is based on a series of technical, actuarial, financial and juridical principles of business behavior which have enabled it to perform its mission per perfectly and survive economic crises and recessions which other institutions, especially banking, have been unable to overcome. Isn't that interesting? What a great sentence. We're in an issue where banks are having an issue overcoming certain crisis challenges, namely the rapid rise of interest rates which have been manipulated by the Federal Reserve which is causing an issue with their ability to make their demand deposits. Further, it goes on to say, therefore, the high, quote unquote financial death rate of banks. Oh, that's just. I want to read that again. The high financial death rate of banks which systematically suspend payments and fail without support of the central bank has historically contrasted with the health and technical solvency of life insurance companies. In the last 200 years, a negligible number of life companies have disappeared due to financial difficulties. But in contrast, the amount of banks that have collapsed, certainly in North America, mainly in the United states, over that 200 year time frame has been a dramatic amount in correlation as it makes an excellent hedge against the boom bust cycle caused by fractional reserve banking. So if you're familiar with Austrian economics, really one of the things that they talk about is the understanding of the business cycle, which is the boom bust cycle that is to a degree manipulated or amplified in its boom and its bust, relevant to the manipulation of interest rates which are no longer a cause of the market, which they should be. They're being manipulated by central banking entities. And then the addition of fractional reserve lending principles which has the result of inflating the monetary supply. The following technical principles are traditional in the life insurance sector. Assets are valued at historical cost and premiums are calculated based on a very prudent technical interest rates which never include a component for inflation expectations. Thus, life insurance companies tend to underestimate their assets, overestimate their liabilities and reach a high level of static and dynamic solvency which makes them immune to the deepest stages of a recession that recur with economic cycles. So again, we're talking about being in the middle of a pretty nasty economic cycle. The post Covid world, the massive drops that we're seeing in the stock market, the rising inflation, rising interest rates, to quote unquote, curb the inflation which most would say was created by the people who are manipulating the interest rate in the first place. But in Contrast to the life insurance industry and how they manage their thinking around money and their expectations of again their liabilities, liabilities being death benefits. One of them, how they have to put that money to work in an ultra conservative manner so that they're well capitalized even in dark times. It's all kind of engineered for the most part. In fact, when the value of financial assets and capital goods plunges in the most serious stages of a recession in every cycle, life insurance companies are not usually affected given the reduced book value they record for their investments. With respect to the amount of their liabilities, insurers calculate their mathematical reserves at interest rates much lower than those actually charged in the market. Hence they tend to overestimate the present value of their commitments on the liability side. Moreover, policy owners take advantage of the profits insurance companies bring in as long as the profits are distributed as posterity in accordance with their various profit sharing causes. The management level and the thinking of how an insurance company operates as a financial institution in comparison to how a typical brick and mortar deposit taking bank or an investment bank, which is a different style of bank, how they look at the management of their business and the probabilities or the, the capacity of I think leverage that's being used in that level, that could create an issue with trust and therefore causal effect of potentially a run on the bank. These types of things don't happen in the insurance realm in that way because of how they run, how they're managed. Next page. There's again some other interesting questions here. Talking about like some concerns about hyperinflation. So there's a lot in here. Again I'd recommend you get the book. There's just a few bullets that came up for me that I want to isolate. So in relation to, you know, the person reading the book with the perspective of thinking about infinite banking and infinite banking concept, a person is not investing in whole life but is rather headquartering its wealth in a whole life policy. In particular, if someone wants to buy gold, real estate, non hybrid seeds, ammunition or any other theoretical inflation hedge, he is free to do so. Even while practicing ibc. We have a lot of our content that talks about this being a. Not an investment strategy, it's a, it's a banking strategy. It's a banking process. The, the insurance, whole life insurance and its specialized design is really just the mechanism, the vehicle for storing things. When we think about a bank, there's lots of different things that you can bank with. As an example, you donate blood. Well, all that gets stored at a Blood bank. That's a type of a bank. It's a storage facility. In winter in Canada, there's snow plows that go along the road and the result of them plowing roads is that there's a whole bunch of money piled up on the side of the road. It's referred to as a snow bank. It's basically a storage mound of snow. So a bank from a perspective of a storage location is really what we're talking about. And the whole life contract mimics some of the fundamental characteristics of what you would normally associate a typical brick and mortar bank to do. You can deposit money in that you are redirecting deposits that would have went to a normal bank, and instead you're now paying a premium. And that premium is for, you know, different components of whole life contracts, which the result of that behavior ends up creating a cash value which is now a storage facility that you can access capital from. You're not withdrawing the capital. You could do that. We don't recommend it. It's a possibility, but not recommended. But instead you can access equivalent value or a large portion of that value from the life insurance company directly as a collateral instrument, as a policy loan. And you have total control over those loans, which is very, very important. So another piece that comes up with this is looking at and understanding the relevance and the quality of collateral. So you can collateralize a house. Everyone's familiar with that. However, when the market shifts and the lending rules change, or interest rates change, or those three things are happening at once, if your ability to qualify for access to capital shifts and changes as well, given again the COVID climate, a lot of people were out of work or businesses were struggling to make payrolls. There was a lot of flux and change in a short period of time. And a lot of banks were holding on to money and they weren't releasing, they weren't granting loans the way that they were before because they were concerned about the ability to make repayments. And if you lost your job or had a layoff temporarily, no bank is going to lend you new money. They're not going to take that risk. So your ability to access capital or collateralize an asset you have is mitigated, limited because you don't control the rules. So working with the insurance company, you can always access collateral using the cash value as the asset base to pledge against that collateral. Because of the fundamental contractual elements that are available to you. It goes down to the quality of, of what you're doing. Further to this, on page 331, there are two major reasons that a whole life policy is the perfect vehicle for Nelson Nash's idea. Whereas going to a bank to obtain a secured loan on assets is definitely inferior. In the first place, when someone applies for a loan at a bank, even with a secured asset such as home equity, a boat, et cetera, the bank will make the applicant go through a rigorous process. Go ahead, leave a comment. Put your hand up. If you've had to deal with one of those rigorous processes and not really enjoyed it a whole lot, the bank will want to know the purpose of the loan. It will also want to know the credit history and income sources of the applicant to make sure he or she can pay back the loan. Of course, it's their money. They don't want to take on the risk. They need to make sure that you can make the payments. There will also be a fixed payback schedule once the loan is made. The applicant can't decide a few months in that his finances are tighter and that he realized he's just not going to be able to stop making those installments. So that goes down to the function of control. It's very different. Whereas if we look at the contrast of that someone requesting a policy loan where they're pledging whole life cash values as the collateral, they just need to give the dollar amount to the insurance company and fill in often one piece of paper. Sometimes it's as simple as a phone call. They don't have to ask the purpose, they don't run a credit check, they don't care if the applicant has income at all. They will grant the loan with with a contractual rate of interest. And if the applicant decides to stop making payments, the outstanding balance will grow but the insurer will not inject. In other words, this simply reduces the total death benefit paid on the back end. The reason for this night and day difference in treatment isn't that banks hire jerks while insurance companies hire sweethearts. No, the difference is due to the nature of the collateral. In the two scenarios, the bank doesn't really want to see somebody's house or their boat when they default alone. The bank would much rather get its money back in the form of checks in the mail or automatic debits rather than in the form of an extremely liquid asset. The insurance company on the other hand, which you co own by the way, in this scenario is quite content to let the balance of the policy loan roll over at interest because it will instantly get its money back when the insured dies and the death benefit must be paid on the policy. At that point, the insurance company deducts the outstanding loan balance with a simple keystroke, as it were. No need to put a house up for auction, hoping to get a good price for it. So again, this really goes down fundamentally to the quality of the collateral that's in place when we implement this. So if you haven't read this book, How Privatized Banking really Works, it's a great book. Encourage you to do that. It's a very interesting read. There's a lot of really good golden nuggets. I've got a lot of flag pages and a highlighter running through this book as well. And if you want to learn more about some of the content in this book, if you want to hear some more things and some of my takeaways on it, go ahead and leave a comment down below and I'll I'll pick up and read a few more chapters and we'll dig into some more of the cool things that come out of this from Carlos Lara and Robert Murphy Understanding a little bit about the Austrian economics in general, the Business Cycle Nelson Nash thought it was fundamentally important for people to recognize this economic school of thought when it comes to implementing successful behaviors in their financial life, and certainly for the purposes of incorporating the infinite banking concept in your life. So hope you enjoyed the content. Make sure you zip on over to watchIBC.com learn more about how you can implement this process in your life. We have a lot of great content. There should be a playlist popping up right now. My name is Richard and thanks for tuning in.