B is for banking (central)

March 7th, 2014 at 4:34 pm by David Farrar

The does B this week:

It is a wonderful convenience to be able to buy almost anything we want, offering nothing in exchange but flimsy paper or an electronic claim on our bank account. We experience this convenience every time we go to the supermarket and pay by cash, ATM or credit card.

The entire system depends on the seller’s confidence that the means of payment being offered is of real value. Counterfeit cash, or fraudulent ATM or credit card transactions potentially undermine every honest person’s ability to transact.

For most of human history, confidence has been greatest in coins made of gold and silver. Ancient rulers who secretly debased their coins cheated their people and eroded that confidence. 

Today, we transact in a world of monopoly government paper money, backed only by trust in government. Like the rulers of old, today’s governments can cheat their people by creating unanticipated inflation through issuing too much paper money.

The diverse interest rates paid on borrowings by banks and governments illustrate how confidence varies in the value of each issuer’s promise to pay future interest and principal. Higher interest rates mean higher risk.

The modern government-controlled central bank is banker to the major commercial banks. It accepts their deposits (which count as banking system reserves) and may lend them money or buy some of their assets when they need more cash. The perceived soundness of a commercial bank depends, in part, on its perceived central bank support.

The soundness of a commercial bank also depends on the quality of its loans, the degree to which it matches deposit and lending risks, the level and quality of its reserves, and the financial strength of its major shareholders.

In contrast, the soundness of a central bank is dominated by the government’s ability to inject more taxpayer money into it when needed.

Governments may oblige central banks to lend unwisely, perhaps by forcing them to fund government deficits, or perhaps to support institutions that have made bad loans in a politically ‘worthy’ cause, such as housing loans to uncreditworthy borrowers.

Such situations can easily induce booms and crashes, banking crises and prolonged unemployment.

These roles and pressures place heavy responsibilities on central bankers. They stand at the apex of the confidence pyramid and play a pivotal role, for better or for worse, during any general banking crisis.

Central banking has mystique, but no magic wand. It cannot insulate the public from the consequences of collective fiscal and financial follies.

Next week is C for competition!

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27 Responses to “B is for banking (central)”

  1. kowtow (8,711 comments) says:

    C should be for Cyprus.

    The crisis there showing how corrupt, thieving and incompetent the EU kleptocrats are.

    That crisis proved that money you hold in a bank is subject to the whims of the most powerful people in the EU (acting contrary to European law)and that they can steal your money from your bank account and issue you worthless shares instead.

    That was also an anti Russian move by the EU,to teach the “corrupt” Russkies a lesson.Hahahaha ,now the Russkies are taking the Crimea as a down payment for that move.

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  2. wikiriwhis business (4,111 comments) says:

    This whole system has been hi jacked by the US banking elite.

    Clinton took away Glass Steagal which enabled bankers to gamble with depositors funds previously illegal

    Enter the dragon of debt buying and selling, high frequency trading and fractional reserve banking all of which contributed to the Eurozone crisis, criminal banking fraudulence the New York prosecutor is successfully pursuing. Elliot spitzer was doing such a fine job of making prosecutions his open marriage was made public to vilify him.

    Now in NZ the Central Bank has th epower to close and forfeit all bank and trust accounts and apply financial hair cuts similar to Cyprus. J Key announced that could happen which is a sign that it will some time in the future.

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  3. UglyTruth (4,551 comments) says:

    http://www.investopedia.com/terms/l/lawfulmoney.asp

    Definition of ‘Lawful Money’

    Any form of currency issued by the United States Treasury and not the Federal Reserve System, including gold and silver coins, Treasury notes, and Treasury bonds. Lawful money stands in contrast to fiat money, to which the government assigns value although it has no intrinsic value of its own and is not backed by reserves. Fiat money includes legal tender such as paper money, checks, drafts and bank notes.

    Oddly enough, the dollar bills that we carry around in our wallets are not considered lawful money. The notation on the bottom of a U.S. dollar bill reads “Legal Tender for All Debts, Public and Private”, and is issued by the U.S. Federal Reserve, not the U.S. Treasury. Legal tender can be exchanged for an equivalent amount of lawful money, but effects such as inflation can change the value of fiat money.

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  4. alloytoo (571 comments) says:

    “Today, we transact in a world of monopoly government paper money, backed only by trust in government. ”

    This is patently misleading.

    The value of fiat currencies is based on the markets as a reflection of the total goods and services in a country. It’s underwritten by the economy.

    Independant Reserve banks try to grow the money supply in tune with the economy so as to keep the value of the individual unit relatively constant.

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  5. wikiriwhis business (4,111 comments) says:

    “Independant Reserve banks try to grow the money supply in tune with the economy so as to keep the value of the individual unit relatively constant.”

    Which can so easily be subverted. The US dollar is worth today only 1% of what is was worth is 1913. Exactly when the Federal Reserve was begun.

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  6. wikiriwhis business (4,111 comments) says:

    I notice the main nay sayers are keeping away from this thread.

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  7. EAD (1,271 comments) says:

    Wiki – wrong time of day to be discussing Central Banking…..

    Fiat money is the gorilla in the room. Central bankers are only the front men for the fraud that allows Politicos and Banks to devalue the savings of the people and transfer power to the State and Banks.

    Central Banking has created a world where the state can endlessly keep spending money and provide it’s clients unending benefits, it distorts the time value of money by manipulating interest rates and keeps heavily indebted borrowers and zombie companies afloat due to cheap loans and people spending money from lending against their ever increasing property prices. When this Alice in Wonderland party comes to an end, we will suffer the mother of all depressions.

    What destroyed Rome was years and years of currency debasement, in modern times it’s got a more polite name “stimulus”

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  8. SPC (5,746 comments) says:

    kowtow, when a bank depositors have money stored with is in financial crisis there is an inability to meet the demands of depositors for their money. A haircut is just a pre-emptive receivership act, handing out shares just allows the bank to continue to operate and maybe one day meet all depositors claims.

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  9. SPC (5,746 comments) says:

    EAD, no it was not currency debasement that undermined Rome. Currency debasement just hid economic weakness for a time, the economic weakness remained. However was it economic weakness that undermined Rome? It survived economic weakness for a long time.

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  10. SPC (5,746 comments) says:

    And despite the currency being worth much less (in terms of gold), the median person is much better off than they were. So I guess having a currency that is not debased is not essential to economic progress in the modern world – if debased means relative to gold.

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  11. EAD (1,271 comments) says:

    SPC – Central Banks are agents of inflation. I’ll leave you with an article on how Government spending destroys economies and quote from John Maynard Keynes on how inflation slowly but surely destroys society.

    “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

    Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    http://www.zerohedge.com/news/2014-03-02/guest-post-why-keynesian-political-economy-theft?fb_action_ids=10152322701970127&fb_action_types=og.likes&fb_source=aggregation&fb_aggregation_id=288381481237582

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  12. SPC (5,746 comments) says:

    EAD, the median income middle class person in the USA is better off than they were in 1913.

    However fear of inflation has allowed some central banks to use monetary policy to hold down wages and thus prevent labour from receiving a full share of the rewards of productivity gain, all while those with capital benefit from QE boosting sharemarket values.

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  13. stephieboy (3,363 comments) says:

    Numerous conspiracy theories surround the central banking system and they more than usually begin with the Federal Reserve. Typically the Jews are usually implicated in any nefarious or underhand activities, beginning with the Rothchilds.
    Here ten popular myths tediously recounted by CTErs about the Federal Reserve are critically examined at length and in some detail

    http://www.publiceye.org/conspire/flaherty/Federal_Reserve.html

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  14. kowtow (8,711 comments) says:

    SPC

    George Orwell wouldn’t be surprised at the newspeak ,”haircut” is just another word for theft by government.

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  15. kowtow (8,711 comments) says:

    Currency debasement ,here ya go,

    http://www.telegraph.co.uk/finance/personalfinance/10682032/Beer-bubble-how-price-of-a-pint-has-risen-twenty-fold.html

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  16. SPC (5,746 comments) says:

    kowtow – if a bank is insolvent without the haircut and goes bankrupt who stole the depositors money then? And until it was sorted all of the deposit would be withheld from people for some years until so many cents in the dollar was paid.

    And how was it a theft by government if no government got any money?

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  17. Meatloaf (231 comments) says:

    So the Federal Reserve is a conspiracy theory aye, any economics book will tell you that the Federal Reserve can create money out of nothing, and it is not owned by the government. Even the wikipedia says that our Reserve bank is different in that it is owned by the government. All the money created is created out of central bank money. For those countries that have privately owned central banks, this means they are charging banks and government interest. This is why America has hardly ever had a budget surplus.

    But New Zealand, until 2008, had surpluses. In 2005, our retirement savings was $1 billion greater than our total debt. Its only when we had the ETS that we started to have massive deficits. So you might think the Federal Reserve is a source of all conspiracy theories, rubbish. Even Warburg, started to say that they met in Jekyll Island, and he said that once the Federal Reserve Act was passed, as it was too late. The very person who spearheaded the research, Eustace Mullins, has said that this isn’t a jewish conspiracy, in his book Curse of Canaan, he lets people know that the Rothschilds are not Jewish.
    And Eustace requested a certificate of ownership from the Federal Reserve bank in New York, so that’s how he knows who owns it. Clue one of the seals on the $1 US is an Egyptian pyramid.

    Finally, this Fiat money is backed by something. The communist manifesto says income tax, and central banking, 2nd and 5th plank. Your education and any working for families your parents received for you, were not paid by the government. It was borrowed, by the right to declare an income tax. As long as people pay income tax, the government is allowed to borrow for education and low income assistance. In 1933, in New Zealand income tax and central banking became law. When I get my business income tax return, it says this information will be available to any country we have a treaty with. The countries that lend to us, have a right to know, what people’s earnings are, otherwise, how do they know we’ll pay it back.

    In the 14th Amendment to the Constitution of the United States which was passed, soon after the communist manifesto was written, same deal.

    No longer was a citizen of California, a California citizen, they were also a citizen of America/Washington D.C. (section 1), and the 4th section, says all debts of the US/DC, will be honored and repaid. So to pay back the civil war, they declared an income tax on the citizens. And they paid this income tax until, the debt was almost repaid. Then in 1913, income tax and central banking became permanent.

    As long as their is an income tax, governments can borrow. If you think I’m joking, look up the constitution of the United States, 14th Amendment.

    By the way, I consider myself very right wing, and I prefer other taxes to income tax. In America it used to be, a tax on land, a tax on domestic goods, and a tax on imported goods, just in case, their’s any confusion.

    Finally, I would prefer to have our currency quoted in metals. A dollar meant an ounce of silver, if you had a dollar, the bank owed you an ounce of silver. If it was a pound note, this was redeemable for a pound of silver, which is 16 ounces of silver. So in the days when money was redeemable for metal, the exchange rate was simple. A dollar is an ounce of silver which is a 16th of the weight of a pound. So one pound is redeemable for an ounce of silver. So for this reason alone, I would prefer a system where money is redeemable in metals, as the exchange rate wouldn’t change all the time.

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  18. Meatloaf (231 comments) says:

    Correction, one pound is redeemable for 16 ounces of silver.

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  19. Ben Dover (526 comments) says:

    B is for Banana Republic

    http://www.rbnz.govt.nz/regulation_and_supervision/banks/policy/4368385.html

    Open Bank Resolution (OBR) policy – Q&A

    What is an OBR?

    That is when the banks and the government share their losses with you.

    The Grubbermint of nee zeealand

    can take over any of the major NZ banks within 24 hours.

    Be aware

    B is for Beware

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  20. Meatloaf (231 comments) says:

    Thank you very much Ben Dover, I’m not being sarcastic. I’ve heard from four sources, that if a bank has insufficient funds, those depositing savings, can have half of their funds taken overnight, with the confiscated funds, into the bank’s shares meaning, that if the bank miraculously makes a profit you’ll eventually get your losses back. So I’ve heard that from four sources. I’ve had a quick look at your link, and my guess is that this is the document people are referring to. I’ve also heard this has happened in Cyprus. So, is this your understanding of it. Cause when Consumer NZ reported it, that’s when I knew this was no joke. Oh, and if what I’ve heard is true, this doesn’t apply to term deposits, only to a normal savings account.

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  21. EAD (1,271 comments) says:

    Excellent post thanks Meatloaf.

    Now that it is a more respectable hour, I’ll try and explain how our fiat money, fractionally reserved central bank system works, and creates the ever increasing wealth divide we see in society.

    When new currency is created out of thin air and injected into the system by government or banks – those who receive those funds first profit the most. Banks and the State that get the privilege of creating the currency get the benefit of spending the money first before prices have risen while those who receive the newly created currency first though borrowing or government spending (housing, education, healthcare, infrastructure, financial assets) see prices rise before it hits the wider economy. The poor salary earner in a non-connected industry finally sees his pay-packet increase by a deliberately manipulated “inflation rate” after which time the currency has passed through the system after all prices have risen by the earlier inflation.

    The end result of this is that more and more wealth is transferred to the wealthiest – those close to the ‘spigot’ of cheap money flowing from government and banks.

    Those farthest away are hit with the full costs of this policy through the rising cost of essentials. The government that is causing all this poverty via inflation then claims to solve the poverty by creating more currency to pay out in benefits including “working for families” and “student loans” to meet the “cost of living crisis” which it causes.

    Putting more and more people on welfare, paid for by more and more borrowing, more and more taxation and debasement of the currency is unsustainable and will collapse. Every single great society that collapses, does so for the same reason – the currency gets debased to pay for an unearned lifestyle and the takers(welfare and corporate) outnumber the makers.

    Right throughout history, society has repeated the cycle from paper currency, to collapse, then back to hard money (gold and silver). With the so called “West” engaged in massive amounts of QE and lowering of interest rates to stay solvent, there is very soon going to be a once in a lifetime opportunity for those who can make sense of this crazy world in which we live and have the foresight to hold precious metals.

    QED

    http://www.mises.org/daily/6653/How-Central-Banks-Cause-Income-Inequality

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  22. EAD (1,271 comments) says:

    And finally a couple of quotes from Warren Buffet’s Father and Alan Greenspan about why we need to go back to Gold:

    REP. HOWARD BUFFETT
    “The gold standard acted as a silent watchdog to prevent ‘unlimited public spending.’ Our finances will never be brought in order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion.” ” When you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the the rare prize known as human liberty. Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom.”

    ALAN GREENSPAN
    “The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value… [Gold] stands as a protector of property rights. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

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  23. hj (7,059 comments) says:

    What about the banks role in keeping house prices high?

    For Example:
    The Savings Working Group believed immigration puts up house prices (they factored in supply and cost of new infrastructure into the argument). Along comes Tony Alexander poo-hooing citing some made to measure research ( the sort you would get from the NZIER). This becomes the lexicon of the Productivity Commission (whose terms are set so as to be “relatively uncontroversial”, in order to achieve “broad political consensus”, and the lexicon of the national government. Meanwhile pundits continue to talk (as they always have) about a link between immigration and house prices.

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  24. Meatloaf (231 comments) says:

    Well spoken EAD, I agree with every word. In regards to not your last post, but the post before, this is what the Austrians say, and I agree with that, I am familiar with it. But their’s something even worse about this whole Fiat money system. Bankers like to make loans on property, and loans to the government. Their is a thing called capital adequacy requirements. A bank is meant to keep up to 8% of all deposits on hand. If you deposit $100, they can only lend out $92. However, this is conditional on the loan. If the loan goes to business equipment or a personal loan, they must keep the full $8 on hand. However, if it is on property, they only need to keep $4 on hand. This is why mortgages are half the rate of interest as personal loans.

    But it gets even worse. Loans to governments and other banks, require the bank to keep even less money on hand. So when you deposit into a bank, property and government get the firstfruits, then comes personal loans, and they will lend a personal loan, if the earnings are good. What about a start-up business that have no current earnings? A central bank requires banks to keep to the Capital Adequacy Requirements, which gives each kind of loan a riskweighting. The higher the riskweighting, the more money needs to be kept on hand. Property has a 50% riskweighting, which means they need to keep 8% x 50% = 4% on hand. Personal/business loans have a 100% riskweighting, which means 100% x 8% = 8% on hand.

    So a loose monetary policy of low interest rates, means property prices go up, and governments can borrow at low rates, and a tight monetary policy means prices go down, and the government needs to be responsible. Loose or tight monetary policy doesn’t stimulate business, because of the Capital Adequacy Requirements, it means unlimited loans to government, and property prices going up all the time. If more money printing went to more business start-ups, at least the amount of goods available would rise. But this is not the case at all. And as said before, if we have a metallic currency, the exchange rate is simple. A pound of silver is 16 ounces of silver. A dollar used to be an ounce of silver. So if you sell a month’s farm goods for 10,000 pounds, you would get 16 x 10,000 ounces of silver, or 160,000 dollars. With all money convertible into metal, exchange rates are simple.

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  25. Ben Dover (526 comments) says:

    Oh, and if what I’ve heard is true, this doesn’t apply to term deposits, only to a normal savings account.

    NO “oh” is for OBR

    “B” is for Banking

    Stop kidding your self

    IF IT ALL TURNS PEAR SHAPED overseas AS IT DOES
    AS IT HAS – AS IT WILL

    You can go away for a long weekend take your eye of the Ball
    or wake up one morning

    AND THE NZ GVT can BE RAIDING YOUR BANK ACCOUNT

    That is what OBR OPEN BANK RESOLUTION IS

    Is it not – Potentially?

    Your savings and term deposits etc etc are not “GVT Guaranteed” Buddy?

    Just telling you – I am amased that many people did not realise the significance
    of this policy?

    Now it has to get pretty Bad for that to Happen BUT

    It is there as a Contingency and why?
    because it is a “possibility”?

    that is why all Banks in NZ have their IT set up
    can be passed to the State
    in 24 hours

    OBR

    that is the reality of Banking in this wonderful age?

    BNZ has been bailed by the tax payer once – has it not?

    What this means is the Same Organisations that are happy to make

    A PROFIT out of EVERYONE that they do not share

    are SET up so that they SHARE THEIR LOSSES – WITH YOU
    AND EVERYONE _ HURRAH FARAH
    when the time arises
    with government ASSISTANCE

    Do your own reading
    Make your own plans
    before they invest anymore of your
    Tax money into chasing “Taniwhas”

    OBR it is almost like dealing with a Nigerian Investment scheme

    It is a “little loop hole” tap to your funds “for creative emergencies”
    that when the time arises they can attach a hose and a high powered
    pump and syphon to their little hearts content

    Any way I put my little counter in place I just think you need to be aware of it

    Imagine the scenarios
    imagine being in the process of purchasing a “property”
    and having the Bank Account holding your “deposit”

    Taken over by “OBR”

    Yahoo party central

    Interest.co.nz has an article
    https://www.interest.co.nz/bonds/65222/open-bank-resolution-policy-now-rbnzs-toolkit-any-use-would-be-assessed-case-case-basis

    B is for Banking

    For banks to be ope they must be set up for “OBR”

    think of OBR
    OPEN BANK RESOLUTION
    as the Bank being OPEN for anyone to take “YOUR” money out of?

    Gloss it up as anything else but that is what it is.

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  26. Meatloaf (231 comments) says:

    Thanks for that, Ben Dover, I heard that if a bank is in trouble they will take it out of your savings I’ve heard this from 4 sources, including consumer NZ magazine. But I haven’t heard of the reference to it, but now I do, so I thank you for that. To me, what I’m going to look at is my bank’s financial statements, and make sure that it is in tip top shape. With property overvalued, if all of a sudden people can’t pay, and the price of property goes down, then I’m in trouble of losing some of my savings.

    Having said this, out of the four sources I’ve heard about this from, one of the sources said if it is in a normal savings accounts, you count as an unsecured creditor, but if its in a term deposit, you’ll be the first in line to be repaid. Meaning your the last in line to be repaid, if it is in a normal savings account. However, just in case this isn’t the case, just in case it makes no difference (term deposits to normal savings), I’m going to start to put some of my money in something safer than a bank. By looking at a company’s profit and loss, and Balance sheet, and using financial analysis, I will be able to see, who’s safe and who’s not. I’m an accountant, so I know these things. So I’ll keep what I need in my bank account to pay the rent and stuff, but once it grows to a big enough size, I’ll be putting it somewhere else.

    Or maybe I should just put it in silver in gold. Thanks for the warning mate.

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  27. Ben Dover (526 comments) says:

    B is for “Bank”

    Mums the word

    Psst Those Nigerian Emails are funny

    Not as funny as John Key holding up Cowala milk

    What next “Taniwha investments”

    Has someone trademarked that one yet

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