This artwork is courtesy of Mr. Taylor.
Elaine Meinel Supkis
Last week saw an important milestone in the credit default swaps sector, when counterparties to CDS trades on Lehman Brothers cash-settled their transactions.
Based on a protocol and auction process developed by ISDA, protection sellers paid 91 cents on the dollar to protection buyers. An estimated $6bn to $8bn was paid out. Over the past 25 years, the privately negotiated derivatives industry has developed a robust framework – one that governs and guides participants through such an event, and which includes procedures and processes for valuing and unwinding trades. Recent defaults show the value of these efforts – the industry’s infrastructure clearly works.
Just as clearly, the Lehman default and settlement are not the financial catastrophe CDS critics claimed they might be. The widely cited industry estimate of $400bn in notional amount of Lehman CDS trades outstanding includes a significant number of offsetting transactions. Dealer firms generally have minimal net exposure via CDS; if they sell protection, they also generally buy protection to offset the risk. Net these positions out and net amount of risk transferred is a low single-digit percentage of the notional amount. Cash payments on Lehman were about 91 per cent of that net amount.
Two more points must be kept in mind. First, companiees are required to mark positions to market, and they have already calculated the impact of Lehman’s default on their financials. Second, companies require counterparties to post collateral to back their exposures, so most of the $6bn-$8bn paid out was already collateralised. The bottom line is that groups had little incremental exposure to the Lehman cash settlement.
It’s also worth noting that, in spite of the failure of Lehman, as well as several other large counterparties, the CDS business continues to function effectively. CDS have proven to be the main – and sometimes the only – way to shed risk or express a view on market behaviour. While cash, securities and money markets have seized up, the CDS business still operates.
Here is part of my reply to this utter tripe:
'This guy is NUTS!!!! We just saw not only a 91% loss in a derivatives swap meet, AIG is now gulping down well over $140 billion in just THREE WEEKS and not at the end of this swap of derivative failures for US taxpayer dollars!
This is UNPRECEDENTED.'
Back to today:
On the other hand, the entire collapse of the G7 banking system is not due to derivatives. The Derivatives Beast may be eating up all the major banks in the G7 stellar complex but the real reason 'liquidity' dried up was due to the sudden unwinding of the Japanese carry trade! Even Bloomberg news admitted that most of the world's monetary expansion of the last 10 years has been nearly entirely due to the Japanese carry trade!
Pickels can't see this, of course. The mantra hammered into the noggins of all the economists in America is very simplistic: China is undermining world trade by using cheap labor. Even though China is not the world's number on export profit center, economists focus only on sales, not profits.
This plagues a lot of commentary on capitalism. I wonder why? One would imagine that everyone in the US would be hyper-focused on capital creation! But we are not.
This, not China, lies at the heart of what is going wrong. Americans have become so accustomed to going into debt ever since Nixon cut the gold peg from our now-fiat dollars that we imagine, we can skip the business about profits and simply have a churning economy based on consumerism and debt.
This is why not one of the solutions to our economic collapse are doing even the slightest good. The anxiety of the G7 central bankers is all about restarting lending. It is all about seeing if they can get more people to borrow more money. To make this an alluring prospect, they are all grinding out loans at ridiculous interest rates.
Back to Pickles: like many of the RGE analysts, he cannot really understand the role the Japanese carry trade played in the creation of global debt and global inflationary bubbles. The Derivatives Beast was created by the banking gnomes over the last 20 years as a tool with which they could lend recklessly while being protected from losses. These losses are also called 'bankruptcies.' This, in turn, are massive wealth destroyers.
Recessions aren't simply reductions in consumption. They are wealth destruction cycles. The entire excuse for having central banks is so they can prevent these periodic cycles of wealth destruction. But even the briefest look at history clearly shows that the ONLY thing the consortium of central bankers have succeeded in doing is this: They have MEGA-BUBBLES AND MEGA-BUSTS!
This is a notable failure. Many people who are critics of this system restlessly seek someone responsible. They light on various names and people. A common mistake is to blame various ethnic groups such as the Japanese or Jews or the Chinese or the Arabs. Some people even blame one of the oldest groups who have controlled much of the earth for the last 500 years: the ruling elites of Europe, the Old Nobility.
Everyone has exploited the modern system of interlocking central banks. This is because it makes people fabulously wealthy....but only during the bubbles. During the collapses, all hell literally breaks loose. And even though people assume ruling elites in Arabian lands or Merry England want chaos, this is FALSE.
Or rather, the chaos is supposed to happen far, far away. In Afghanistan, for example. That is a favored site for chaos between empires. But no: the chaos from bubbles bursting always comes home. When kingdoms or countries go bankrupt, revolution is not far behind. And revolutionaries are, by definition, outsiders.
Mr. Pickles doesn't seem to do much history. The whole Derivatives Beast thing was an attempt by the central bankers to expand credit when the world was awash in credit. Already, one of the G7 central banks flooded the world with liquidity via 0% or slightly higher interest rates.
This unprecedented and very long duration of these interest rates in a world undergoing inflation was very deadly since Japan is the world's #2 economy. The fact that all the central banks are now plunging into the same abyss means that the Japanese carry trade will NOT resume. Instead, the whole of the top economic consuming nations on earth which are Europe and North America, will try to go on a huge consuming binge, directly lending to themselves money at infinitely cheap interest rates.
This, in turn, will fuel Asia's industrial development. This is why China supports this business. The battle between China's central bank and Japan's central bank ended several months ago. But I suspect, it will re-ignite due to some very shocking news out of Japan concerning a top Japanese general blaming China and the US for all of WWII. More about that later.
Asia has embarked upon a massive shifting of production from Europe and North America to Asia. This is simple: the physical facilities of manufacturing are not so easy to move if a government is determined to keep them. The US voluntarily gave up our industries because we wanted no inflation instead of facing the facts about inflation.
Namely, we wanted money growth with no downsides. This brings us back to the Derivatives Beast: it grew in direct proportion to the banking gnomes burying inflation in interesting places. IT INFLATED TREMENDOUSLY. When inflation finally poured into commodities, the shocking truth came out. Inflation was really running at over 12% a year. This wasn't isolated inflation. This was global inflation.
Proof: even the strongest currencies with interest rates above 6% saw inflation! More proof: even Japan, with severe suppression of wages of 80% of the population, still saw inflation over 3% a year! Now, inflation seems to be receding but it is not. It is continuing to grow in the darkness. The reason we don't see it temporarily is simple: all the investors are removing their money from hedge funds and investment funds and HIDING it! And they are hiding it from the Derivatives Beast.
Anyone stupid enough to keep their money in the system is seeing it lose value faster than gold or oil is dropping. So we have lots of cash sitting idle. And it will sit idle until the Beast is done eating. And it has barely begun. The fact that all the major investment banks on earth are rapidly going bankrupt or have ceased growing, isn't due to there not being enough money. THE MONEY IS BEING HIDDEN RIGHT NOW! People are waiting to see what item can be turned into an instant bubble.
Now, let's go into the past again:
"If this United States is to redeem the Fed Notes, when the General Public finds it costs to deliver this paper to the Fed, and if the Government has made no provisions for redeeming them, the first element of unsoundness is not far to seek.
"Before the Banking and Currency Committee, when the bill was under discussion Mr. Crozier of Cincinnati said: 'The imperial power of elasticity of the public currency is wielded exclusively by the central corporations owned by the banks. This is a life and death power over all local banks and all business. It can be used to create or destroy prosperity, to ward off or cause stringencies and panics. By making money artificially scarce, interest rates throughout the Country can be arbitrarily raised and the bank tax on all business and cost of living increased for the profit of the banks owning these regional central banks, and without the slightest benefit to the people.
The 12 Corporations together cover y and monopolize and use for private gain- every dollar of the public currency and all public revenue of the United States. Not a dollar can be put into circulation among the people by their Government, without the consent of and on terms fixed by these 12 private money trusts.'
"In defiance of this and all other warnings, the proponents of the Fed created the 12 private credit corporations and gave them an absolute monopoly of the currency of these United States- not of the Fed Notes alone- but of all other currency! The Fed Act providing ways and means by which the gold and general currency in the hands of the American people could be obtained by the Fed in exchange for Fed Notes- which are not money- but mere promises to pay.
"Mr. Chairman, if a Scottish distiller wishes to send a cargo of Scotch whiskey to these United States, he can draw his bill against the purchasing bootlegger in dollars and after the bootlegger has accepted it by writing his name across the face of it, the Scotch distiller can send that bill to the nefarious open discount market in New York City where the Fed will buy it and use it as collateral for a new issue of Fed Notes. Thus the Government of these United States pay the Scotch distiller for the whiskey before it is shipped, and if it is lost on the way, or if the Coast Guard seizes it and destroys it, the Fed simply write off the loss and the government never recovers the money that was paid to the Scotch distiller.
"While we are attempting to enforce prohibition here, the Fed are in the distillery business in Europe and paying bootlegger bills with public credit of these United States. "Mr. Chairman, by the same process, they compel our Government to pay the German brewer for his beer. Why should the Fed be permitted to finance the brewing industry in Germany either in this way or as they do by compelling small and fearful United States Banks to take stock in the Isenbeck Brewery and in the German Bank for brewing industries?
"Mr. Chairman, if Dynamit Nobel of Germany, wishes to sell dynamite in Japan to use in Manchuria or elsewhere, it can drew its bill against the Japanese customers in dollars and send that bill to the nefarious open discount market in New York City where the Fed will buy it and use it as collateral for a new issue of Fed Notes- while at the same time the Fed will be helping Dynamit Nobel by stuffing its stock into the United States banking system.
"Why should we send our representatives to the disarmament conference at Geneva- while the Fed is making our Government pay Japanese debts to German Munitions makers?
All over the web, I read spurious analysis that often starts with, 'This GLOBAL banking mess has never happened before!' This false story irritates me to death. Since the birth of banking, it has been an international/trade operation. Nay, banking was launched ONLY for international/trading purposes! And funding wars, of course. The bankers were more than happy to lend to foreign lords so they could go to wars.
If you think that the current economic crisis is something that has never happened in history before, you may be wrong! After the collapse of the agriculture sector in Zimbabwe in 2000, the inflation in that country skyrocketed to 231 million percent a year! Just think about it - 231 000 000%! Unemployment went up to 80% and a third of country’s population left it. Let`s now have a look at the photos that you may not be able to see anywhere else in the world. Here is a boy getting change in 200 000 dollar notes!
Grim graphs! The debt to GDP is now nearly double what it was in the Great Depression. And that was due to the GDP being very weak! Our GDP has barely begun to decline. But it is showing signs of decline.
On the other hand, when gasoline was selling above $5 a gallon, I saw nearly no one in the malls. This week, thanks to inflation temporarily receding, I see packed stores again. So we know that inflation is merely pulling back slightly before unleashing even worse effects: identical to the 1970's.
We know that foreign powers sold or refused to buy US Treasuries. It is not only irresponsible, it is treason for our government to be run in this fashion. Our loss of sovereignty is tremendous. Few people see this but it is obvious in trade statistics: the US sells Treasuries and debt in direct proportion to demands by our trade rivals to open our markets and allow them to destroy our own economy. Ergo: it is treason.
Now, after all this grim news, we go to the Middle East again:
(Bloomberg) -- Abdullah Hajeri led a march on the Emir's palace in Kuwait last week, demanding the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh, down the Persian Gulf coast in Dubai, said he wants more government protection from the global financial crisis.
``Every day the market is crashing,'' said Saleh, a 42- year-old trader, staring dumbfounded last Tuesday as company names scrolled across the Dubai Stock Exchange's outdoor ticker in red. The region's rulers are under pressure from citizens to shore up investors, not just banks, as they try to fend off what may be the worst economic crisis since December 1998, when oil at $10.35 a barrel forced them to slash spending.
Crude prices have fallen 50 percent from a record $147.27 in July, and stock indexes in Dubai and Saudi Arabia are down by as much this year. Gulf economies are more susceptible to financial turmoil than in the past because of their greater dependency on international expertise, investment and tourists to diversify away from oil. While Dubai, home to the world's tallest building and the man-made Palm Island, is considered most at risk, no part of the Persian Gulf will go untouched.
Residents of the region are used to government intervention. All Gulf countries are run by unelected rulers who maintain political power through tribal allegiances and marriages. Generous state welfare programs have traditionally damped demands for more political participation.
How the region's rulers cope with the turmoil may define relations with their people in the future, as they try to wean their subjects off state handouts and encourage them to find jobs and embrace market capitalism.
``There's no question that it sets back the move from socialist, paternalistic societies toward more modern capitalist states,'' said Gabriel Stein, a director at London's Lombard Street Research, which provides economic analysis to investors and companies. ``It is a trend that we have seen all over the world. The immediate reaction is that you told us to do this, so now things are going wrong it's up to you to help us out.''
Of the Gulf states, Dubai may be hardest hit by a global economic slowdown because it has borrowed more to finance its transformation from a Persian Gulf trading post to a financial and tourist hub, and has only 4 billion barrels of oil reserves. Government-controlled companies owe at least $47 billion, more than Dubai's gross domestic product, and they will continue to accumulate debt faster than the economy grows, Moody's Investors Service estimated in an Oct. 13 report. It concluded that Dubai may need financing help from Abu Dhabi.
Many bankers and others are running off to the Middle East to beg for investments. Or running off to Asia. But the price we pay is very high! This is a boon that has many strings attached. And these strings will strangle us. And this is all due to the fact that we ceased being profitable. We are not a capitalist society.