Fed Reserve Built America Into Giant Debtor's Prison

Every day is Trick or Treat Day for the gnomes.

This artwork is courtesy of Mr. Taylor.

Elaine Meinel Supkis

I hurt my fingers yesterday so I couldn't post anything. Now, with band aids all over the place, I can type again. Typepad continues to annoy me with bugs and a refusal to understand their coding is awful. But on to less serious matters [hahaha] the economy: time to pause and look at a bunch of graphs. They show a rapidly deteriorating situation which the US has never had before. Roubini's RGE Monitor publishes a ridiculous analysis about the Derivatives Beast. Evidently, this economist named 'Pickel' thinks there is no problem, all is well. The Beast is NOT eating our banking gnomes and spitting out bones! Right. And the Middle East is now sliding into a pre-revolt mode as the oil kings decide to cut welfare payments. Bin Laden is ecstatic.

From Roubini's web page comes this utter rot---Insight: The CDS sector is not the central villain PrintShare Robert Pickel

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:

Congressman McFadden on the Federal Reserve Corporation Remarks in Congress, 1934:

"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.

But the international character of banking is the basis of banking. Banks were NOT started so people could buy property! In the Middle Ages, there were several interesting ways of gaining property: war, marriage or fealty deals with kings. And the Church gained via death bequests. And kings seized this property from the Church in various ways like Henry VIII of England. People didn't buy land.

There was another way: trading one property for another. But the preferred way remained the most ancient: sex and war. And frankly, we are never far from this. The US did this recently to Iraq. We wanted the oil so we invaded.

No, banks were mainly for traders. I have seen short histories of banking where the authors would explain that people would want to protect their gold by giving it to a banker with a safe.

But why would they do that? If they were rich enough to have gold, they were rich enough to hire guards and to hide the gold, themselves. No, the people who parked money with someone else were the traders who had to move from place to place. And they didn't park it with anyone. They had to park it with a family they could trust, one that had members across Europe and Asia. So a simple letter would effect a transfer of value from one place to another.

All paper currencies are contracts. I wrote about this in the past. If you read the language on older paper currencies, they are obviously contracts. The very first paper money issued by the new US government were covered with fine print detailing how the notes were issued, how they could be used and who was responsible for REDEEMING them! An important issue that is now hidden totally from the unsuspecting public today.

The conservative Congressman from 1934 is basically complaining that the US dollar was now being used for global trade and bills were being created overseas that eventually turned into dollars and thus, the US lost control of its own currency!

Well, this is happening today, in spades! The world mostly uses dollars and so, they create dollars via debt creation. And no one created more 'debt for export' than Japan. The Bank of Japan, not the Federal Reserve, is the real agent who is 'printing dollars'. But this is not discussed at all by much of the media.

I saw in a New York Times editorial the other day, a long chat about the economic mess. Like most people, the unwinding of this mess is blamed on US home owners who are too deep in debt. As if they could magically make these debts appear! Now, the government must bankroll a reduction of these debts. And the banks which manufactured money in Japan and then parked it here, will demand the Treasury and the Federal Reserve turn these Japanese debts into AMERICAN CURRENCY. Which flows back overseas again!

Click here to see photos showing the course of hyper-hyper inflation in Zimbabwe:

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!

Not a soul on earth wants Zimbabwe's paper money. But everyone on earth wants dollars. If all the dollars floating about the planet suddenly come home, this is what it would look like: to buy a one pound loaf of bread, you would need 10 pounds of paper money. This, of course, makes no sense at all. But Zimbabwe shows that hyperinflation isn't just a Weimar nightmare. It can happen to anyone.

So it is now time to visit the Federal Reserve to see what is going on this week [click on images to enlarge]:

M1 money stock:

So, this last week, the Federal Reserve increased the basic money supply exactly the same amount as on 9/11. At 1% interest post-9/11, we saw a global equities inflation bubble. Then, when the climbing money supply leveled out, we saw a commodities inflation spurt! This was all the US dollars coming out of hiding when it could no longer be parked on top of global housing or stock markets.

Now we are at a LOWER interest rate and the same day, the Fed jumps the M1 money supply. And smart people will bet that we get a repeat of the previous 5 years. But this cannot happen unless first, enough debt disappears via bankruptcy.

In the previous downturn, that idiot, Donald Trump, went bankrupt. Then, he got even more money to waste on stupid real estate deals. When he goes bankrupt again, this will prepare the ground for him to get even more loans to do this again. Unless he gets arrested.

Right now, the central bankers are struggling to prevent the cleaning house via bankruptcies. They hope to increase lending and increase trade without first eliminating at least 50% if not 100% of the previous dollars created between 2002-2006.

Monetary Base [BASE]:

The monetary base ceased growing in Asia so it is now being artificially grown here in the US. Only we didn't allow for most of the previous, Asian-manufactured debt to be cleared out via bankruptcy. Nor has the Derivatives Beast been able to munch on much more than just $3 trillion of the $66 trillion in funny money deals created by the bankers seeking ways to lend like crazy despite risks.

Total Borrowings of Depository Institutions [TOTBORR]:

In all the previous years of our nation, we never, never, never saw this sort of insanity. The 9/11/1 borrowing binge was billed as a one-time thing due to a direct attack on Wall Street that killed many of the workers there as well as halting trade for a number of days.

But that has been utterly dwarfed by the present rescue. Was America attacked? Did Wall Street shut down? Has anything happened at all? As far I am concerned, the charts agree with me that the trigger event was in July, 2007: the day the carry trade with Japan suddenly began to unwind. This is a most singular event. It is being deliberately ignored not due to stupidity.

The actors on stage who did this to us still run things. They very definitely want the carry trade to resume. The G7 central bankers all yelled that they wanted this! It was in the news this week! They were all blatantly obvious about this. They hope to hide the mess again the old way: via lending this money to the West via Japan. Then, it doesn't show up in any charts!

Except it is very inflationary.

The 4 Horseman Have Arrived Debt, Derivatives, Deficits and the Dollar

By John Riley Chief Strategist

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:

Gulf Citizens Beg for Bailout Amid Stock Rout: Week Ahead

(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.''

Unlike Asia, the Middle East generally consumes rather than builds industries. The only possible exception for this is in Turkey, Iraq, Iran and Palestine. That is, when Palestinians are allowed to build anything at all. This is due to historical cultural biases. But the proto-nomads of the desert view money as loot. To be spent having fun. Frankly, this is now our own ethos.

Profits are windfalls, not via labor-added manufacturing systems. Now on to the Jewish director in London: cutting back on 'socialism' in the oil pumping nations will lead directly to revolutions. For these are people who remember and know how to do something: fight.

Which takes me back to history: revolutions and wars are very intertwined with economic matters. And banking can launch a thousand ships or inspire a million revolutionaries. And there is one big revolutionary who just cannot wait for the kings and sheikhs to cut social services!

This is bin Laden's plans! To have the biggest rulers of Muslims fall before the sword as outraged people swarm the palaces and behead them! And the chances of this happening is around 50% right now. Give people no money, no hope and no way out and they will be willing to die, fighting. The Jewish freedom fighters in the Warsaw ghetto fought with all their hearts, contesting every inch the Nazis tried to gain. Ditto, Stalingrad.

There are many historic battles of this sort. This is why Chinese generals warn their fellow generals to always allow an 'out' so the opposing armies can retreat rather than stand and fight. The western pundits advising the king of Saudi Arabia, a despot who got the throne via murder, that he should encourage his people to become 'capitalists' is pure insanity. They will become DECAPITISTS. Namely, 'guillotine experts'. Or in their case, they use swords.

And guess how much oil these revolutionaries will sell Europe and the US afterwards? And if you want to see hyper-inflation, if the price of oil hits over $500 a barrel due to revolutions and civil wars sweeping all our pets from power, we will see tremendous inflation.

Bloomberg:

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.

We are in a debtor's prison.

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Comments

[simon]

the expansion of the monetary base isn't necessarily inflationary. if commercial banks refuse to lend (or borrowers refuse to borrow), this newly created "money" stays with the commercial banks as reserves. it has to go into circulation to be multiplied and cause inflation. many anecdotal reports of banks hoarding, rather than lending. equally i see mention from john doerr that total global financial assets have declined 40% recently:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/29/BU9613PTFQ.DTL&type=tech

i think what we're seeing is the bankers parasitising the real economy (making stuff that people use) again to such an extent that they are killing it. they last did this in 1345, took the world 200 years to recover, population wise. now again we're in the position that financial assets are 4 times the size of the real world economy (before that 40% fall, anyway).

[adamparore8]

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