The G7 Banking Collapse Gets Worse

April 16, 2008

Elaine Meinel Supkis

As usual in a mega-financial collapse, the powers that be struggle to keep the old status quo going and this distorts the daily news flow of bad news. All the interested parties who wish for the old days to continue have joined forces right now to insure this happens. But the natural dynamics of a collapsing system will win in the end, as always. Today, we try to understand the business about LIBOR, the international banking systems set up by the British Empire to regulate global trade finances 150 years ago. It is now collapsing. The Derivatives Beast is called a 'Frankenstein Monster' and China is struggling to deal with a flood of funny money flowing to China, not to the US. The US is running ever-deeper in the red and needs this fatal foreign red ink. China doesn't want it.

Banks That Misquote Money-Market Rates to Be Banned, BBA Says

The British Bankers' Association said it will ban any member deliberately misquoting lending rates at daily money-market operations amid concern that some contributors are providing misleading quotes.

The global credit squeeze has raised concern lenders have been manipulating the so-called fixing process to prevent their borrowing costs from escalating, the Bank for International Settlements said in March. Participants have complained to the BBA, the Wall Street Journal said today, citing a person familiar with the matter. The BBA holds its annual board meeting today.
*snip*
``Libor will survive, although its credibility is severely weakened,'' Paul Calello, Credit Suisse Group's head of investment banking, said in a speech at the International Swaps and Derivatives Association annual conference in Vienna today. ``Continuing to base an enormous amount of derivative contracts on an index with credibility problems is a serious issue we must address.''

Bankers like to talk about 'trust'. But we can't trust them. This is very simple: the greater their powers to create money out of thin air, the greater the temptation to make more money out of thin air no matter how ridiculous or dangerous. It is like any addictive drink or drug: the same part of the brain is stimulated and this part of the brain gets great pleasure in getting more of whatever it is addicted to. Eventually, all life forces are focused only on increasing the addiction and the victim dies. This is why the classic picture of a banker is a sourpuss who is difficult to get loans from, not someone who gives 'Four out of Five!' their loans. The banker is supposed to be the one who says, when someone wants to buy a house, 'We will send over an assessor to check it out,' and the assessor then clips the price of the house and the bank sets the terms for closing. I have seen this happen. People quite willing to pay higher for a house but the bankers say, 'Nope.'

When the ultimate masters of the dark art of creating money out of nothing--the central bankers, go crazy and make too much money out of thin air, all the other bankers do the same. We have gone through a series of such bubbles the last 40 years due to the US central bankers cutting the connection between the dollar and our gold reserves. Every time it threatens to become a Weimar Republic-style hyper-inflation, the US has drawn back from the brink. But the political price is very high for anyone daring to save us from hyperinflation.

The LIBOR rates are set in London because once upon a time, long ago, Britain ruthlessly ruled the world using her guns and ships. All finances for world trade flowed through London. Since everyone used many sorts of currencies and had all sorts of inflationary or deflationary pressures, the people who coordinated the payment schedules based on all this elusive information would keep watch on the monetary systems of the world and reset it daily and then, even overnight. All the trading nations would look towards London for this information. This was thanks to the invention of the telegraph and the laying of underwater telegraph cables across the planet starting in the 1870s.

Even though London is no longer the center of world trade, it keeps its crown of 'Queen of Trade' via the LIBOR rate setting enterprises. But like all the other parts of the international banking system, this too is falling rapidly apart. Since all parts of this system interlock, it is no surprise that when one sector falls into a black hole and all of it vanishes, all other parts will do the same. The G7 can clearly see we are in a global, intense and historic devolutionary process here. This process won't end until all the 'funny money' created by the Japanese carry trade vanishes.

This is a dual system: inflation has settled into the driver's seat when it comes to necessities. No one can escape using fuel or eating. So these two things have sucked down increasing numbers of dollars. The asset market CREATED money. The commodity market EATS money. The last six months we have seen how the central bankers have tried their best to pour more and more liquidity into a system that was sopped in red ink. We saw how they desperately tried to bring up the value of assets so lending could accelerate. We know that we have reached a definite limit on the amount of debt that can be sucked up and now, all the money making simply does is cause inflation in commodities.

The world price of oil continues to shoot upwards. Gold is recovering from the panic that the hedge funds felt on the news that India stopped buying gold. Now, the excess funds provided in the multi-billions by the central banks is once again, seeking some way of dumping itself onto something, anything. With business going bad, it can't be put into markets. With housing values declining globally, it can't be parked in real estate. So it restlessly seeks something, anything, to inhabit.

The complaints today by the LIBOR officers that banks are now lying about their rates is yet another sign that this collapse is entering a new and even more toxic phase. Either they are reduced to lying outright which means these bankers are bankrupt or they are NOT lying and the LIBOR officers can't believe their eyes. This is QUITE likely. The ability of our central banking authorities to hide from reality is endless. They literally have NOT A CLUE as to what is going on. This is because they want to believe they are geniuses and on top of things when they are stupid and under things.

They cannot see their positions are now flipped, have reversed. This is the nature of all systems that suddenly switch. Systems out of balance always do this. They flip from one dynamic to an opposite dynamic. As an outsider, I can see this clearly. As insiders, they think, as their automobile flips upside down, 'How funny it is! The world is upside down while we are right side up!'

The G7 should convene a banking meeting. They should invite people like me. We can come with many charts and graphs and I can bring old history books. We can sit down and discuss how these things work. Maybe I can tell them about the magical side and how the Furies operate. Then they can see that the status quo is DEAD. Dead and gone! And they must now face the Brave New World that is upon us. This means the G7 have to talk to China in an honest and civilized way. Impossible, of course.

More BIS bullshit:

Money markets would benefit from increased transparency and ``trimming,'' or the discarding of extreme rates quoted by participating banks, the Basel, Switzerland-based BIS said in a study released in March with its quarterly report. The system still worked as it was meant to do when rates started rising last year, it said.

``The design worked as intended to moderate the influence of strategic behavior and changing perceptions of credit quality,'' researchers Jacob Gyntelberg and Philip Wooldridge wrote. The divergence of rates quoted for different currencies ``reflected dislocation in the underlying interbank markets more than shortcomings in the design of the fixing mechanisms.''

HAHAHA. See? They are upside down and blame the landscape for looking funny. Instead of recognizing that these high, strange rates are REAL and IMPORTANT they want to...IGNORE THEM! If they toss out these rates, all is well! Geeze. This is very much what the G7 have done with inflation statistics. Since the price of food and fuel changes, they decided not to include them in inflation statistics! Charming. Note how Gyntelberg and Wooldridge erroneously believe that the system's design is great even as it fails. This is like the guys who built a car that is top heavy and flips when making sharp turns saying, 'Nothing wrong with the design, it was the ice on the road.' I drive on icy roads. I like cars that don't flip on them.

Nomura, Daiwa Say Dollar to Climb as Rate Cuts End

Japan's two biggest brokerages said the dollar will rebound against the euro and yen by year-end as economic conditions in Europe and Japan deteriorate and U.S. interest-rate cuts near an end.

The European Central Bank will be forced to lower borrowing costs in the second half as growth in the region slows, according to Daiwa Securities SMBC Co. Yen buying isn't ``sustainable'' because the Japanese economy will cool and interest rates abroad are more attractive, said Nomura Securities Co.
*snip*
Ueno at Nomura Securities, a unit of Nomura Holdings Inc., Japan's largest securities firm, said investor purchases of the yen have been excessive and are due for a correction.

Figures from the Washington-based Commodity Futures Trading Commission last week showed the difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs - - was 43,067 on April 8, close to a record high of 65,920 set on March 25. The number is sometimes seen as a contrary indicator.

``Investors have already piled up huge long-yen positions,'' said Ueno. ``Investors are buying the yen by borrowing more expensive money abroad. It's not sustainable.''

The US can cut interest rates to Japanese levels. Since we are below the rate of inflation, it no longer mattes how badly anymore. Since the ONLY reason for this is to kill Japanese trade with us, we MUST continue this. And drop it to 0%. Then the system can reset itself. This means global depression but this is the only tool left to us since we no longer believe in simple tariffs and barriers. Since monetarism is the ONLY tool, we must destroy the dollar to destroy the unbalanced trade we have. The Japanese know this which is why they unbalanced trade using 0% interest rates. They export, no one imports. This is deliberate and vicious and demented. But either we do the sane thing and institute limits and tax importers here or we die.

The dollar MUST be cheaper than the yen due to the trade imbalance! Any attempt at reversing this dynamic creates a BLACK HOLE in the financial universe. And the Japanese are very anxious to restart this black hole! They can't wait. We, on the other hand, should be hammering them on this issue, not assisting Japan in slitting our throats. Note how the Japanese, despite obvious inflation, are doggedly hanging onto their miserable interest rates. While running record global trade surpluses. They hope to ride this out and be back on top of things in a few months. We should fight them tooth and nail in this matter. This means breaking up the G7 for the G7 is a Trojan horse designed to flood the US with imports.

Dollar Rises Versus Euro as Wholesale Prices, Factories Gain

The dollar rose against the euro for the first time in three days as reports showed U.S. wholesale prices increased more than forecast in March and New York state manufacturing unexpectedly expanded this month.

The U.S. currency advanced the most against the South Korean won and British pound among its major counterparts as futures traders reduced bets that the Federal Reserve will cut its target lending rate by a half-percentage point this month. Norway's krone touched a 28-year high against the dollar as oil, the country's biggest export, climbed to a record.

Why would inflation in the US cause the dollar to strengthen? Again, this makes no sense at all. The dollar strengthened because our EXPORTS grew! And our buddies in the G7 know this and hate this. They want the old status quo back. Very much so. I see no good end to this story so long as everyone thinks they are a united front and allies. We are NOT allies at all. Not in trade, that is. And the break up of the post-WWII alliance is grossly overdue. It needs to fall and new alliances grow. The US needs this very badly for the old status quo is rapidly bankrupting our nation.

Swaps Tied to Losses Became `Frankenstein's Monster'

Rather than dispersing risk and lowering borrowing costs as former Federal Reserve Chairman Alan Greenspan predicted, the contracts have exacerbated the debt crisis. What was intended as a way for lenders to protect against defaults spawned a market covering $45 trillion of bonds and loans where no one knows how much is traded and speculators who bet on deteriorating credit quality end up forcing that reality.

Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ``Frankenstein's monster'' because they now often drive prices in the so-called cash bond market, rather than the other way around. Fearing a repeat of losses, banks are refusing to support new indexes that would allow investors to wager on everything from auto loans to European mortgages, reining in a market that's about doubled in size every year for the past decade.

``The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that's ceased to exist,'' Jacques Aigrain, chief executive officer of Zurich-based Swiss Reinsurance Co., said at a March 18 insurance conference in Dubai.

These 'markets' were simply excuses for creating a host of entities and places where the flood of free, funny money to go. A bunch of pirates can't go to the Bank of Japan for lending if they can't park it somewhere it can pay back the loans! They needed something and this was a nifty game they created. They could use the loans to make bets on systems! They didn't need to produce or run anything at all! They could simply bet on movements within other systems. A classic con game.

These idlers paid themselves billions in bonuses for these gambling operations that were economically useless. Since these gambling games had absolutely nothing to do with anything concrete nor produced anything useful at all, they could run to infinity and the game was to see if the gamblers could do this. The human brain tends towards this sort of addictive activity. NOTHING doubles every year without rapidly reaching infinity. A drop of water, if it doubles every minute, will flood the world in a year. All such systems flip when flooded. A limit is reached and then everything collapses or dies or explodes. And this is one fiscal Frankenstein that will die a messy death. And the G7 should be holding emergency meetings about this! The Bilderbergers should be rushing to Davos to yell at each other, 'What did we hatch?' Heh.

The world ruling elites who thought that at last, they found a means to make money doing absolutely nothing useful, are at fault here. Note how they refuse to act to stop this.

Frankenstein continues:

Markit Group Ltd., the London-based index provider, said banks last month shelved plans for indexes intended to allow investors to speculate on the $200 billion market for bonds backed by U.S. auto loans because of a lack of dealer support. Indexes on European mortgages and U.S. Alt-A loans, or mortgages made to borrowers a step above subprime, were also postponed.

``The last thing the securitization market needs is another no-cash-upfront instrument that people can use to knock the markets about with,'' said Andrew Dennis, the London-based head of the asset-backed debt syndication group for UBS AG of Zurich.

The last thing the world needs is more systems to park more red ink. The sea of red ink is flowing like crazy now. Far from being done, it is accelerating. Far from diminishing, even as assets in the G7 collapse in value, the flood of lending continues unabated.

China: Hot Money Inflows Coming in Fast and Furious

Monday’s China Daily reports a speech made over the weekend by a senior central bank advisor at the Boao Forum for Asia, in Hainan. According to the article, Fan Gang, a member of the central bank's monetary policy committee and someone whose concern about hot money has often been cited in this blog, said China should remain wary of hot money inflows. “China is seeing an even stronger capital inflow now, despite some nations suffering a credit crunch,” he said.

A perhaps franker assessment was then provided by Zhu Baoliang, vice president of State Information Center, a research institution under the National Development and Reform Commission. According to a China Daily article referencing the official Shanghai Securities News:

“More than $80 billion in hot money came into China in the first quarter, compared to the total hot money inflow for the whole of 2007 of around $120 billion and an average monthly amount of $10 billion (last year). So this year's hot money volume is three times last year's,” Zhu was quoted as saying.

The inflows in the first quarter have increased market liquidity, which in turn could put further upward pressure on inflation, he warned. Because of this, the Chinese government must be cautious in allowing faster yuan appreciation, he said. While faster currency appreciation will help ease domestic inflation by dampening the price of imports, it will also cause higher hot money inflows speculating on the currency's rise.

It is now attempting to flow into China. The Chinese were alert to this last August. The Japanese sneered that they would flood China with funny money. The Chinese tried using classic banking tools to stop this but they failed because EVERYTHING IS UPSIDE DOWN. Raising interest rates to stop inflation attracts the hoard of piratical buzz flies that feasts on corpses. Everyone is still able to get nearly free loans from the Bank of Japan that ignores inflation in Japan. So the funny money, far from vanishing, is still be generated! It can't flow to England, the US or now, even Europe. They are saturated. But it is flowing to China seeking a place to latch onto so it can become 'real'. These loans have to be turned into higher-interest paying loans so the guys who borrowed from the Bank of Japan can repay the Bank of Japan.

And the Bank of Japan is doing this so they can dominate world markets. This is pretty simple and is due to a grave misunderstanding about 'free trade'. Free trade is a hoax. It is undermined if a determined country prevents its own people from improving their lives or getting loans for anything. Japan has done this with great viciousness. They managed to create global inflation while managing a DEPRESSION at home. And note this: all systems flip. And this Bank of Japan inflation will flip to global depression the minute the US ceases wild deficit spending and China slams the doors shut on this flood of global funny money.

A prediction: this will happen in September. After the Olympics.

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