Archive for October, 2010

Gordon T. Long nails it

October 29, 2010 Leave a comment

Jim Willie and GTL are battling it out to see who is the best analyst of the current dysfunctional monetary system.

Both are brilliant, incisive writers.  Both should be followed closely.  They probably are being followed closely.  By the CIA.

Ha Ha Ha!

Though prior to the 2008 financial crisis our largest banks had become casino like speculators with public money lacking in fiduciary responsibility, our elected officials bailed them out. Our leadership placed America and the world unknowingly (knowingly?) on a preordained destructive path because it was politically expedient and the easiest way out of a difficult predicament. By kicking the can down the road our political leadership, like the banks, avoided their fiduciary responsibility. Similar to a parent wanting to be liked and a friend to their children they avoided the difficult discipline that is required at certain critical moments in life. The discipline to make America swallow a needed pill. The discipline to ask Americans to accept a period of intense adjustment. A period that by now would be starting to show signs of success versus the abyss we now find ourselves staring into.  A future that is now significantly worse and with potentially fatal pain still to come.

Unemployed Americans, the casualties of the financial crisis wrought by the banks, witness these banks declaring record earnings while the same banks refuse to lend. When the banks once more are caught with their fingers in the cookie jar with falsified robo-signing mortgage title fraud, they again look for the compliant parent to look the other way. Meanwhile the US debt levels and spending associated with protecting these failed (and still insolvent institutions) are so out of touch with US de-industrialized productive capability that the US dollar is falling and forcing countries around the world to devalue their currencies in a desperate attempt to maintain competitive advantage. So much for the “strong dollar” mantra we heard endlessly for years from every US Secretary of the Treasury that needed foreign investment to fund our deficits. Like second rate powers, our word is no longer our bond.

The fork in the road which we chose has resulted in:

1) massive public debt levels that can never realistically be expected to be paid back,
2) Financial markets that are disconnected from fundamental historical values,
3) A global banking industry that can best be described as fragile and is realistically insolvent if the accounting games were to be removed.

I think most would agree that massive public, private and consumer debt levels are a central problem to the current global predicament. We also however need to appreciate that these massive debt build ups have also allowed the over-building of production capacity. We have global supply that is now outstripping demand.  The output gap in the US alone would require a theoretical -7% Fed Funds rate according to the Taylor Rule (6).

The currency wars are being fought because global players are being forced to fight for a piece of the global demand pie that is growing at a slower rate (a first derivative problem) versus the capacity presently available and coming online. The Asian buildup of production capacity is nothing short of startling but it is premised on a free spending and 70% consuming US economy. A slowdown in the US and a weakening US dollar are major threats to political and social stability in the Asian export economies. Everything in the mercantile, export led Asian economies must be done to avoid this. The facts however are that there are no longer sufficient jobs in America to support past and present levels of consumptions. The middle class in America is quickly becoming extinct and with it the ability to famously ‘shop till they drop’.

What are the US politicos to do?  The well recognized Michael Hudson asserts in Why the U.S. Has Launched a New Financial World World War:

“Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy’s banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources. The key is to persuade foreign central banks to accept this electronic credit.

U.S. officials demonize foreign countries as aggressive “currency manipulators” keeping their currencies weak. But they simply are trying to protect their currencies from being pushed up against the dollar by arbitrageurs and speculators flooding their financial markets with dollars. Foreign central banks find them obliged to choose between passively letting dollar inflows push up their exchange rates – thereby pricing their exports out of global markets – or recycling these dollar inflows into U.S. Treasury bills yielding only 1% and whose exchange value is declining. (Longer-term bonds risk a domestic dollar-price decline if U.S interest rates should rise.)

What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost? This is the game that is being played today.”

The chart to the right was published in early spring of this year specifically spelling out that a ‘Beggar-thy-Neighbor’ roadmap lay ahead.

How could I have been so sure when I put this chart together? The realistic fact about wars are that there are winners and losers. These however are not the people on the battlefield. Since Caesar, wars are about money. The winners are those who finance them and the losers are those that pay for them. Rich banking families are well documented to have financed both sides. It matters not much who wins but rather that a war is fought so money is made.

So who actually wins in a currency war?  The answer is found by forensically following the money.


The most effective way of following the money is to consider the major new innovations in the financial world. Like all wars the winner is the one who innovates the ‘combat technology’ the fastest.

We need to remember that the financial innovations discovered during and after the financial crisis such as: Collateralized Debt Obligations (CDOs), Credit  Default Swaps (CDSs), Structured Investment Vehicles (SIVs), Special Purpose Entities (SPE’s) and a raft of securitization products were the foundations upon which were built the “Toxic Assets” and the reason for the global financial crisis. The toxic assets were the catalyst which we continuously heard referred to during the crisis which forced the government into massive public debt government spending in an apparent attempt to avoid a financial collapse.

If we examine the latest raft of new weaponry, we can easily see where this is headed, how the money will flow, who wins and unfortunately who loses.

  1. FIAT PAPER BOMBERS – Quantitative Easing

Quantitative Easing is an euphemism for printing money. The US has embarked on a massive untested trial in recklessly printing money.

  1. CURRENCY MISSILES – US$ Carry Trade

Like the hydrogen bomb was to the early atomic bomb, the US$ Carry Trade is to the original pilot Japanese Carry Trade. IF QE are the bombs, then the US dollar carry trade are the missiles that deliver the bombs. With borrowing costs in the US approaching zero, a weakening carry currency and unlimited money creation, we have the perfect carry trade missile that can and will hit any economy in the world.

  1. REGULATORY ARBITRAGE – Guarantees and Contingent Liabilities

I have written extensively how the financial crisis has served as a vehicle to shift debt obligations from the banking and private sector to the public sector. This has been achieved through government guarantees, the use of balance sheet contingent liabilities and interest rate / currency swaps. It is the battlefield strategy of Regulatory Arbitrage.



The extensive hidden use of Public Private Partnerships & Private Finance Initiatives (PPP/PFI) recently came to light during the European Sovereign debt crisis. This tool has become the guidance system for missile delivery since it allows the conversion of freshly printed fiat paper into real, unencumbered, revenue producing assets.

ARTICLES: SULTANS OF SWAP: Explaining $605 Trillion in Derivatives! , SULTANS OF SWAP: Smoking Guns!

  1. AN UNREGULATED $615 TRILLION – Derivative Swaps 

The unregulated, off balance sheet, offshore, non exchange traded, private SWAP vehicle is the ideal vehicle with which to control global financial markets. The Sultans of Swaps now operate much as the Bond Vigilantes did at one time but with different control and much different motives. The growth of the SWAP market in interest rate and currency swaps effectively muzzled and obsoleted the Bond Vigilantes of yesteryear.

HOW THE MONEY WILL BE MADE – Paper Assets Exchanged for Real Assets

  1. TAKE OVER PUBLIC SECTOR ASSETS – buildings, land, treasuries.
  2. TAKE OVER PRIVATE SECTOR ASSETS – land and resources.
  3. TAKE OVER OF SOVEREIGN TREASURY – transfer of sovereign treasury gold holdings
  4. MAJOR CORPORATE CONSOLIDATIONS  – reduced competition, reduced monopoly laws and emergence of cartels
  5. NATIONALIZATION OF PRIVATE & PUBLIC PENSIONS – government grab of financial assets

The financiers of the currency wars understand that real wealth in its most simplistic essence can only be created by:


Paper money is simply a tool for the trading of wealth. When money is backed by a hard asset then it also becomes a store of that wealth. However that is not the case with fiat currencies. Though Gold is real wealth it does not grow wealth, but rather stores it or protects it from the debasement of paper ‘trading’ instruments. Ideal real wealth is wealth that continues to grow and yet maintains its inherent value. Over the longer term it is usually better to own well managed, unencumbered agricultural producing land, producing mines and production facilities than just the wealth product they output. The Rothschild banking family learned this hundreds of years ago and is the reason why they moved from solely owning gold to energy, mining, agriculture and selective base materials process production.

One mistake after another has been made in an attempt to ‘kick the can down the road’ and avoid the inevitable necessity to restructure the debt. Unfortunately when it is restructured it will be at the expense of the public and not the original parties. The cost to the tax payer will be insurmountable debt and the forced surrender of pubic assets. Public assets that in the future will be charged for by ’Private Banking’ and Special Purpose Entity (SPE) owners.

Like a well oiled machine the sequence of events continue to unfold as laid out in my Extend & Preserve article series. The implementation of Quantitative Easing (QE I) and change in GAAP Mark-to-Market accounting treatment ignited the initial rally leg. With further refinements (see EXTEND & PRETEND – Manufacturing a Minsky Melt-Up) it continued until it became evident that the US employment and GDP were not improving in any meaningful manner despite $13T of Spend, Lend and Guarantee initiatives. Then as the polarization of the EU wanting ‘austerity’ policies versus the US wanting ‘stimulus’ measures, the US dollar began weakening and stocks stopped their retracement in June. When Bernanke signaled QE II in August the financial markets were once again ignited and the US dollar weakened further. The financial markets are now propelled by both euphoria and fear of more liquidity being made readily available. It will not end well as we naively get caught in the spider’s carefully laid out trap.

=> BAILOUTs:  Banks, AIG, GM, Fannie Mae / Freddie Mac
                            => ZIRP
                                         => TARP & ARRA 
                                                       => HAMP, Cash for Clunkers etc.
                                                                     => Extend & Pretend Accounting
                                                                                   => QE I (Buying $1.7B in Mortgage & Treasury Products)
                                                                                                => QE II
An interesting fact is that the US has positioned itself for this war as a result of the spending on previous wars. According to Michael Hudson (5):

“What destabilized the system was war spending. War-related transactions spanning World Wars I and II enabled the United States to accumulate some 80 per cent of the world’s monetary gold by 1950. This made the dollar a virtual proxy for gold. But after the Korean War broke out, U.S. overseas military spending accounted for the entire payments deficit during the 1950s and ‘60s and early ‘70s. Private-sector trade and investment was exactly in balance.

By August 1971, war spending in Vietnam and other foreign countries forced the United States to suspend gold convertibility of the dollar through sales via the London Gold Pool. But largely by inertia, central banks continued to settle their payments balances in U.S. Treasury securities. After all, there was no other asset in sufficient supply to form the basis for central bank monetary reserves. But replacing gold – a pure asset – with dollar-denominated U.S. Treasury debt transformed the global financial system. It became debt-based, not asset-based. And geopolitically, the Treasury-bill standard made the United States immune from the traditional balance-of-payments and financial constraints, enabling its capital markets to become more highly debt-leveraged and “innovative.” It also enabled the U.S. Government to wage foreign policy and military campaigns without much regard for the balance of payments.”

We don’t need to go into the additional costs of the wars in Iraq and Afghanistan, Homeland Security (War on Terror) and military base expansion into 130 countries which have exploded the US fiscal deficits. Suffice it to say that these and all wars since Vietnam are wars that have been conducted without increasing taxes – a historical first which draws little attention or concern.

The present fiat currency system will end based on the strategy of Debase, Default and Deny! It is my opinion that it will be replaced by a system structured on the IMF and BIS’s Strategic Drawing Rights (SDRs) partially backed by precious metals. The question to be asked however is not what will be the replacement for fiat currency, but who will have ownership of the assets after this war ends?  Who will pay the requisite ‘tribute’ that goes to the victors?

Categories: Predictions

Jim Willie calls it like it is

October 28, 2010 Leave a comment

Golden Jackass nails it again:

The mortgage & foreclosure scandal runs so deep that ordinary observers can conclude the US financial foundation is laced with a cancer detectable by ordinary people. The metastasis is visible from the distribution of mortgage bonds into the commercial paper market, money market funds, the bank balance sheets, pension funds under management, foreign central banks, and countless financial funds across the globe. Some primary features of the cancerous tissue material are mortgage bond fraud, major securities violations, absent linkage to property title, income tax evasion, forged foreclosure documents, duplicate property linkage to single mortgage bonds, NINJA (no income, no job or assets) loans to unqualified buyers, and more. In fact, more is revealed it seems each passing week toward additional facie to high level and systemic fraud. The world is watching. The growing international reaction will be amplified demand for Gold, from recognition that the USDollar & USEconomy have RICO racketeering components extending to Wall Street banks and Fannie Mae mortgage repositories.

Bill Gross admits the US monetary system is one huge Ponzi scam

October 28, 2010 Leave a comment

It’s even too late to pray.

In a bid to restart the stalling recovery, the US Federal Reserve is next week expected to unveil a second round of quantitative easing (QE) of as much as $500bn, on top of the $1.2 trillion already completed.

In typically robust comments, Mr Gross said the Fed had run out of other options but warned that more QE would in the long-term mean “picking the creditor’s pocket via inflation and negative real interest rates”.

“[Cheque] writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme,” he wrote on his investment outlook, arguing that creditors have always expected to be paid out of future growth.

“Now, with growth in doubt, it seems the Fed has taken Ponzi one step further,” he said. “The Fed has joined the party itself. Has there ever been a Ponzi scheme so brazen? There has not.”

More QE is a huge gamble, he said, but necessary because the US is “in a ‘liquidity trap’, where interest rates or QE may not stimulate borrowing or lending because consumer demand is just not there.”

Mr Gross is best-known in the UK for saying gilts were “resting on a bed of nitroglycerine” as a result of the nation’s high debt levels. Pimco has since reversed its position on the UK and advised clients to gamble on a British recovery.

Categories: Miscellaneous Musings

Mr Bean’s New Monetary Adventures

October 28, 2010 Leave a comment

A central banker admits they are all idiots.

This is rare.

In a damning comment on the models used by central bankers and other economic forecasters, he stressed: “The moral from this is that one should not expect to be able to predict the timing and scale of these sorts of events with any precision.” The best policymakers can hope is to “be more alert to the vulnerabilities” building up to a crisis.

“It is somewhat analogous to seismologists trying to predict earthquakes along a fault line,” Mr Bean said. “It is impossible to predict the day and magnitude of a shock with any precision, but it may be possible to say something about the likelihood of an earthquake occurring within a given period from seismic measurements and indicators of latent stress.”

His comments suggest that countries can not ever prepare properly for recessions because the depth and timing will always take forecasters by surprise. For “downturns associated with financial or banking crises… One would need to be endowed with perfect foresight to have been able to predict how the financial crisis would unfold”, he added.

Mr Bean argued that one of the problems is the available data is limited in its use and, therefore, forecasts of recessionary behaviour will not be accurate if the information is applied correctly. Mr Bean claimed: “Deviations of outturns from central forecasts should be unpredictable if those forecasters are using the information that is available to them efficiently.

“While it was predictable that the availability of credit would tighten as risk aversion rose and financial institutions rushed to de-leverage their balance sheets, it was far harder to know by how much.”

The UK economy shrank by 6.5pc from peak to trough during the recession, which lastest 18 months from the second quarter of 2008, the deepest contraction since the 1930s. In August 2008, the Bank put the chances of contracting more than 1.5pc at just “1 in 20”, Mr Bean admitted.

“It is a fair bet that, if we had, then we would have put the chances of a contraction as large as the ONS’s current estimate as being virtually negligible,” he added.

While forecasters may not be expected to get it right all the time, the past recession demonstrates that “financial institutions and policymakers could – and should – have been more alert to the vulnerabilities that were building during the years leading up to the crisis and therefore to the possibility of a major shock to the financial sector and to the economy more generally”.

To ensure that policymakers are more aware of a brewing storm in the financial system in the future, “financial data collection will need to be more flexible,” he said. “Almost certainly the seeds of the next financial crisis will sprout in a different corner of the financial system from this one.”

Categories: Miscellaneous Musings


October 26, 2010 Leave a comment

King opens up the debate over fractional reserve banking.   What the Hell is going on?!?

WHEN central bankers talk about setting interest rates they are famously obscure. Not so when it comes to discussing banks. In a speech on October 25th (see video), at The Economist’s Buttonwood gathering in New York, Mervyn King savaged the performance of Britain’s banks before the crisis and criticised the new Basel 3 proposals as too soft. Then he said what he really thought, arguing “of all the many ways of organising banking, the worst is the one we have to day.” Possible remedies included not just breaking up banks, but also “eliminating fractional reserve banking”—that is, the centuries old practice of banks taking in short term deposits and lending most of them out in riskier and longer term loans. Having left finance to its own devices for a decade the Bank of England now seems to want to redesign it. 

That is, admittedly, a lot more fun than shifting interest rates by 25 basis points once in a while. But given the Bank will soon take over responsibility for regulating lenders from the Financial Services Authority (FSA) Mr King’s hardening stance is likely to become deeply controversial. Within the Bank itself, there seems to be a lack of unanimity. Mr King, alongside Andy Haldane, the author of a number of imaginative papers on finance, leans towards radicalism. Paul Tucker, a deputy governor of the Bank who was involved in drawing up the Basel 3 rules is thought to be more pragmatic, as is Adair Turner, the chairman of the FSA, who recently said the new rules struck a good balance. 

Britain’s government has been fairly clear that it doesn’t want to break up Britain’s largest firms—even if that is the recommendation of a committee of wise men it has asked to review banking reforms. And outside of Britain, no major regulator agrees with Mr King. This includes the Swiss authorities, who also face the problem of giant banks based in a medium sized economy, and who recently rejected structural reform of Credit Suisse and UBS in favour of a bigger layer of so called “contingent-capital” on top of the new Basel 3 regime.

That compromise—requiring Britain’s big banks to carry a further layer of convertible debt—is both sensible and still the likeliest outcome of Britain’s bout of soul searching about its banks. But Mr King seems to have backed himself into a corner. If the committee of wise men, whose judgement he has endorsed, does recommend a break-up of banks and the government rejects their conclusion, could he really remain the regulator of Britain’s banks? 

For the banks, there is a looming sense of horror. Mr King’s speech was replete with academic references but, bankers argue, he shows little knowledge of or interest in what the firms say. Only one of Britain’s big banks, HBOS, made losses that would have overwhelmed the new Basel capital standards. In his speech Mr King appeared to reject this defence outright, arguing that actual losses are less relevant than theoretical losses banks would have suffered had the state not intervened in finance. Mr King rightly disdains a reliance on short term borrowing, but does not acknowledge that two of Britain’s big banks, Barclays and the rescued Royal Bank of Scotland, have already substantially cut their reliance on it and built up cash reserves, while HSBC and Standard Chartered have long had an excess of deposits over loans. As to whether it would matter if any of these big banks moved their headquarters abroad, or if their constituent bits were taken over by foreign firms, the Bank has expressed no opinion.

All of which may be dismissed as the self interested carping of Britain’s discredited fat cats. But even some foreign financiers with little business in Britain or the City of London are looking on with amazement, given it now appears that the governor of the Bank of England does not seem to want any of the large banks he is charged with regulating to exist. The central bank’s top brass, says the boss of one of the world’s largest lenders, are “behaving like a bunch of middle-class guys [or what Americans might call white-collar guys] who cannot see the bigger picture”. Mervyn King, the banker adds, had a bad crisis and now has “no idea” what he is doing. To some that kind of attack is evidence that Mr King and his colleagues are finally taking on the banking lobby; to others it is an unsettling judgment on the institution now charged with regulating the world’s biggest international banking centre.

Categories: Miscellaneous Musings

Unhappy Halloween

October 26, 2010 Leave a comment

Categories: Miscellaneous Musings

Great work, MISH

October 26, 2010 Leave a comment

MISH nails it again

Big time.