Sleepwalking our way to hell
Sleepwalking our way to hell
By Simon Davies and Donald Hunt
We are at present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world. - Professor Arnold Toynbee, 1931 Institute for the Study of International Affairs.
What a week; world stock indexes took another serious beating while J P Morgan fired 3,000 amid speculation that total Wall Street job losses will reach 225,000 and Citibank was bailed out to the tune of $27 billion of new equity and in excess of $300 billion blanket guarantee of some of its toxic assets.
The Dow got off better than most, only falling 5% after rising 6.5% on Friday with reports that Obama would name Timothy Geithner Treasury Secretary.
Oil was down sharply again last week, falling 12% to close under $50 a barrel. Gold, on the other hand, rose more than 6.6% last week. The gold/oil ratio hit heights not seen in recent years, rising 22% to almost 16 barrels of oil per ounce of gold. The ratio has averaged less than 9 over the past four years.
This in the week after the G20 meeting in Washington.
Markets
US Recession
Consumer spending in the U.S. is dropping like a stone, fueling new fears of deflation.
Holiday retail sales figures look to be the worst in a long time, if trends from October and early November continue. Many retail sectors are seeing drops of 20% compared to the same period a year ago.
Demand is contracting so quickly worldwide that the only hope to avoid collapse is for the spender of last resorts, governments, to throw massive amounts of money into the economy. Asian governments announced their plans as did President-elect Obama. First the money went to prop up the banks, next come the industrial companies with hat in hand. Finally, laid-off workers are getting extension of unemployment benefits and, most likely, more checks. Government-funded jobs rebuilding infrastructure are also in the works. Most worrisome are hints of "military Keynsianism" as some right-wing economists are popping up in the U.S. media claiming that Roosevelt's New Deal did not pull the country out of the Great Depression, World War II did. True or not, the implication is clear.
Furthermore, there was more to public works projects in the 1930s than an attempt to restart economic growth. It was also a way to keep people productive and eating while the economy corrected itself. And, from the point of view of the elite, it kept revolutionary impulses under control. The following piece by Satyajit Das outlines what probably has to, and will, take place, but omits the human cost and the political and social cost. Given that, printing more money to pay people to build bridges and roads is better than printing money to pay them to kill each other.
The inflationary consequences of massive government deficit spending on bailouts are obvious, so why the worry about deflation? The "deleveraging" of the excessive debt of the last two decades embodied by the failure of massive financial institutions like Lehman Brothers means the disappearance of massive amounts of money; less money chasing too many goods that can't be sold equals deflation.
In some ways governments are trying to throw the exact right amount of money into the pit to counteract the loss of money from deleveraging; not an easy target to hit. If the deleveraging process is disorderly, deflation can turn into hyperinflation. In that regard Friday's sharp rise in gold prices is not reassuring.
Bizarre Gold
We and many others have commented on the obvious fact that the official gold price is a manipulated joke. This week reports of brokers being unable to fulfill physical orders only confirms what we have been saying. If the official price of gold were reflective of real supply and demand then it would be going through the roof. Another anomaly is the subdued price of gold mining company stock. The price of stock, particularly in the medium sized companies, has hardly moved these few years despite the rise in price and increasing demand of their sole product. We can only speculate as to why this might be. It did occur to us that this might be in order to limit those companies ability to mine their underground gold holdings thereby controlling the availability of physical gold in the market.
Timothy Geithner
With Obama's economic team coming together we have to return to the question of "Change" or the lack of it. Timothy Geithner has been named as Secretary of the Treasury while Lawrence Summers is likely to be the head of the National Economic Council and Peter Orszag (currently director of the Congressional Budget Office) will head the White House Office of Management and Budget.
Timothy F. Geithner started out working for Henry Kissinger's Kissinger and Associates in 1985 In 1988 he moved to the International Affairs division of the U.S. Treasury Department where he moved up the ladder with impressive speed. From 1998 to 2001 he was Under-Secretary of the Treasury for International Affairs (1998 - 2001) under Treasury Secretaries Robert Rubin and Lawrence Summers. Summers was his mentor.
As a Treasury official, he is credited with "helping manage" multiple international crises of the 1990s in Brazil, Mexico, Indonesia, South Korea and Thailand. From February to August 2001, he was a senior fellow in International Economics at the Council on Foreign Relations following which he joined the Policy Development and Review Department (PDR) of the International Monetary Fund (IMF). In 2003 he was named as president of the Federal Reserve Bank of New York. In 2006, he also became a member of the financial advisory body, the Group of Thirty. He is a trustee of the Economic Club of New York (trustee), a member of the Council on Foreign Relations, on the advisory committee of the Center for Global Development and chairman of the Committee on Payment and Settlement systems of the Bank for International Settlements.
His informal group of advisers includes E. Gerald Corrigan (also a CFR member), a managing director of Goldman Sachs and a former New York Fed president; Treasury Secretary Henry M. Paulson Jr.; John Thain, the CEO of Merrill Lynch; Paul A. Volcker, the former Fed chairman; and Peter G. Peterson, the former U.S. secretary of commerce. James "Jamie" L. Dimon, the CEO and chairman of J.P. Morgan Chase, is a Geithner ally and a member of the board of the New York Fed.
To say that Mr Geithner is an insider would be somewhat of an understatement. He is a excellent example of a man working his way upwards through the Circles of Power that we discussed a couple of weeks ago. We named six organizations as the core of the public face of world power, among them the Council on Foreign Relations and the Bank for International Settlements; Mr Geithner is a member of both.
While at the IMF, Mr Geithner was involved in the imposition of Washington Consensus polices on five countries. The standard Washington Consensus model is to ensure that a target country is able to borrow relatively liberally to finance it's growth. This debt should be in US dollars although Euro is now acceptable. The terms are reasonable so the country borrows, spends and grows. A crisis is then initiated such that the country becomes unable to pay its debts or indeed the interest on its debts. Such a crisis might be the sudden and precipitous drop in the price of its exports leading to a substantial decline in its US dollar or Euro earnings. At the same time the currency also falls, exacerbating the problem. No finance is available except from the IMF and/or World Bank which imposes severe terms including a substantial reduction in public spending with the adoption of austere budget constraints, opening of the countries markets to foreign investment without conditions, reduction or complete removal of any barrier to foreign imports and privatisation of state enterprises.
Coupled with the demand that interest rates be set at 'market' levels, the target country is set up for an explosion of unemployment coupled with a collapse in real wages leading to poverty, misery and suffering for millions. The nation's assets are essentially stolen through privatisation in a repeat of what Hannah Arendt called the "original theft" that allowed the establishment of free market capitalism in the European economies. Local products are forced out of the market which is flooded with foreign imports driving local business either into foreign arms or bankruptcy. In order to enforce this new order the target nation is required to reform its legal system to provide for stringent laws protecting private property.
The pattern has been repeated many times globally with great success for the winners, US and European banks and corporations.
The Council on Foreign Relations "sponsored" an Independent Task Force "Building Support for More Open Trade", co-chaired by Kenneth Duberstein (Reagan's Chief of Staff) & Robert Rubin (Clinton Treasury Secretary) for which Mr Geithner was Project Director. The Task Forces final report strongly endorses trade expansion, "trade expansion is not only vital to economic growth in the US and abroad, but when combined with complementary policies, can actually help address the problems cited by labor, environmentalists and others concerned with social equality" " Given the increase in employment, wages and wage equality in the 1990's, when the US expanded free trade, the Task Force holds it would be economically and socially irresponsible for the US not to pursue further trade expansion". From what we understand to be the real global effects of trade expansion it seems pretty clear where Timothy Geithner stands and for whose benefit he will be acting while Secretary of the Treasury.
You'll find that the positions held by Lawrence Summers and Peter Orszag speak of similar affiliations, associations and loyalties. We are left with a heavy heart in the acknowledgment that it looks most unlikely that there will be anything other than business as usual at the White House from 20th January 2009. The only things changing will be the bed linen and the dog.
In Mr Geithner's own words he shows the upside down way in which the current 'crisis' is presented to the world:-
It was the Fed that fueled the fire. No mention is made in the US of the reduced standards of what qualified as bank capital, nor the changes to the capital requirements of banks under Basel II, nor the changed accounting rules. Neither is the emasculation of large parts of the regulatory framework brought to public attention - in one department of the Securities and Exchange Commission a team of one hundred was reduced to one. Rather we are have been treated to a steady rollout of the mantra for a new programme of regulation.
UK Regulation
Similarly in the UK, Gordon Brown is receiving waves of adulation from the credulous as the saviour of the financial system when in fact he was one the chief architects of it's failure. In 1998, within days of taking office Brown changed the entire edifice of UK financial regulation removing the regulation and oversight of banks from the Bank of England to the newly formed Financial Services Authority (FSA). Having personally dealt directly with both the Bank of England and the FSA on both regulatory and product matters one of the present writers has direct experience of the effects of this change; for whatever its structural and control failing might be, the Bank of England was staffed by intelligent, experienced and shrewd people whereas the same cannot be said of the FSA which was regularly steamrolled by the banks it was charged with regulating. In fact, we would go so far as to say that the FSA was deliberately set up to fail despite Gordon Brown's statement to Parliament on 13th December 2001:-
Mr Geithner's Allegances
Mr Geithner wrote in the Financial Times of the need for a new regulatory programme:-
That the exact same provisions of a June 2007 paper, one that must have been a long while in the planning, now happen to be the terms of the statement issued at the end of the G20 meeting in Washington demonstrates beyond doubt the charade of the financial crisis, it's manipulated origins and purposes.
The G20 statement
It seems to us that there are three principle programmes being advanced with the necessary personnel being positioned to effect them. Under the guise of saving the system and adding sensible and prudent provisions to prevent any future crisis of this nature, a new economic world order is being imposed upon us. The G20 statement reads as if Naomi Klein had added a chapter to Shock Doctrine : The Rise of Disaster Capitalism. It is Machiavellian yet, apart from a few lone voices on the internet, there is no uproar against such audacity.
The statement reminds us that the work of the G20 will "be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment and poverty reduction." This, as regular readers of sott.net will understand, means "business as usual".
Regulation and oversight of the financial system.
A new regulatory regime is to be established that will separate the largest banks, global by nature, from the rest thus creating an elite group of financial institutions with oligopolitical power at the top of the global financial pyramid. These banks will be so large and so "systemically important", as politicians like to remind us regularly, that they will never be allowed to fail; they will control all global finance. The very situation that innumerable commentators including ourselves are warning against in the current crisis, the privatization of profits and the socialization of risks will become a defining feature of the new system. As the G20 have stressed, these mega-banks will continue to operate within a system "grounded in a commitment to free market principles" and thereby able to speculate freely so as to amass even greater fortunes for the financial elite while the risks they take will be borne by us, the ordinary people. The new system will have moral hazard built into it.
The new regulatory framework will be structured so as to ensure that there can be no newcomers to this elite club of banks unless specifically required by those that control the system. Smaller banks will be excluded from the core of the market, being themselves mere pawns of the elite, useful when needed, expendable when not. Banks are failing across the US already and many more will follow across the world. Their assets will be snapped up a pennies on the dollar by the mega-banks thereby further concentrating wealth and power and reducing the options that any of us have.
Of course we are being presented with a quite different story about "sound new regulation" and the need for "new clearing systems" (G20 statement) as if it is the regulators that control the banks when in fact it is the banks that control the regulators. In the case of the Fed it is through the simple fact that the banks own the Fed, nominate all its board members and finance Congress and the White House. Elsewhere variations on the same methodology apply though often more subtly. The appointment of Mr Geithner, a man trusted within the inner circles of power, chairman of a crucial committee within the Bank for International Settlements, suggests that the international cooperation and coordination of regulation referred to in the G20 statement is purely a smokescreen for the consolidation of global banking power to be exercised through the BIS by the primary member central banks. The language of the G20 statement makes it clear that there can be no dissent from the reforms.
Free Trade, the IMF and other Development Banks.
Free Trade has been the mantra by which the rapacious progress of imperialism (aka Free Market Capitalism) has been promoted to the world. In the recent Doha round of trade talks many countries baulked at what was being asked of them. These included France where governments can fall at the suggestion that a free market in agricultural products be opened to the world and Brasil. Yet without more countries opening up to free trade, the Free Market Capitalist machine will have nothing to devour so 'free trade' simply has to be forced upon the dissenters. Never mind that the true effects of 'free trade' have been the destitution, impoverishment, starvation and death of millions. Never mind that not one single shred of evidence exists to even remotely suggest that the current crisis is due to the few remaining barriers to imperial rape. Never mind any of the facts or truth whatsoever, these plans were laid long ago before the details of the crisis that would be used to justify them was known, so if the facts don't fit the 'crisis' this is to be expected. It hardly matters as the mainstream media won't be pointing out these glaring inconsistencies to the huddled masses.
The IMF has been used as a weapon of economic war since its inception. It's methods have been well documented as we discussed above in relation to Timothy Geithner and the Washington Consensus. Its sudden elevation to centre stage, along with the World Bank and other Multilateral Development Banks suggests that similar tactics will be brought to bear against those countries that are forced to borrow from them. It is a perfect set up as we noted above: encourage growth through debt, inflate the economy then suddenly withdraw access to money forcing your target country to borrow from the IMF or World Bank under onerous and rapacious terms, enforce those terms bringing said country to its knees while acquiring anything of value at a knock down price. In order to enforce this new order the target nation is required to reform its legal system to provide for stringent laws protecting private property. It is therefore worthy of note that the G20 statement stressed a "commitment to....the rule of law [and] respect for private property".
Information and Taxation.
While the big headlines have been about regulation and to some extent free trade there were, in the G20 statement, other measures that will effect each of us greatly. We may not feel the effects for some time yet and indeed when they come they will be part of incremental changes already well established and ongoing. Not only may we not feel the effects keenly for some time but for many they will be regarded as part of their moral duty to society. The issue is that of personal taxation.
Last week we talked about the fact that governments do not, for the most part, need to borrow. They can simply issue money into the system through paying for much needed infrastructure, education and health care. One effect of the system we have where, instead of this simple and economic approach, vast sums are borrowed, is that there is an immense interest bill to be paid. In his excellent film, From Freedom to Fascism Aaron Russo revealed, as have others, that US personal income tax receipts equaled interest payments on US government debt. In principle therefore, the absence of government debt in the US would negate the need for anybody to pay income tax.
There are numerous other aspects to taxation that need to be addressed. Taxation as a percentage of income sounds reasonable but is not applied reasonably. The level of income at which personal income tax starts in most countries is far too low. Everybody should be able to save a good proportion of their income and not have it taxed out of their hands. This is truer for the poor than any other members of society. A fair tax system would ensure that everybody was able to save. Not only that but the people that gained most from the provision of government, the wealthy, would pay the most. For example in matters of defense, it is the wealthy who have the greatest amount to lose so they should be paying the greatest 'insurance premium'.
A further aspect of unjust tax systems, of which the US is the prime example, is the relative burden of tax borne by the rich and super-rich. The burden of tax on these people has been dropping steadily since the 1980's as a matter of deliberate and sustained policy. This drop has been achieved by legislative changes lowering tax on capital (the greatest source of income for the rich and super-rich) relative to taxes on wages, by lack of enforcement and by the provision and tolerance of numerous 'tax shelters' (schemes by which the rich and super-rich avoid paying taxes). We hope to write more on this topic in due course; for the present however it suffices to stress that tax on personal income means that for some percentage of every working day you are working for the puppet masters.
These statements from the G20 need to be seen in this light:-
They aren't talking about you and I being able to see what is going in behind their walls of secrets; rather they refer to banks having to disclose all the details of their customers accounts and financial dealings to regulators abroad. This means that any of the world's major governments can see your bank records and you will never know about it. Those countries that do not agree to the disclosure of customer information are black-listed and their banks excluded from much of the choicest banking business. There is only one reason they want access to that information, to tax you and to track you. The system that is being aimed for will be all encompassing. No financial transaction will be able to take place anywhere without being recorded in their system and tax being levied against you, eventually, just like the current income tax. The tax that they deem to be due will be taken 'at source' which for any income outside your wages will mean a direct deduction from your bank account.
If you think this can't happen, think again, the laws for governments to take taxes directly from your bank account have been put in place over the last five years. All the government or any of it's departments, agencies or sub-agencies need do is inform your bank that you have a debt outstanding to them, should your bank have "reason to believe" that you may seek to withdraw any funds before that debt is paid then your account is liable to be legally frozen. In a world without cash that is a frightening prospect. In fact, in a world without cash, they can destitute you at the push of a button.
It is probably not unconnected that this week it was announced by the IRS:-
We have witnessed the initially slow but now hasty removal of our liberties coupled with the establishment of a surveillance state in which we are all numbered, recorded, monitored and tracked. There are vehicle, mobile phone and GPS tracking systems that combine with credit card, gas station, subway, train and bus system data and camera systems to give those that track us every detail of our daily movements. Every electronic purchase we make is tracked and any deviation now causes us to be "red flagged", a term most people had never heard of at the turn of the millennium. In fact we are so closely watched that any one of the faceless people who exert power over us can know the most intimate details of our lives at the click of a mouse. The real situation is so far beyond anything most people have ever dreamed of - and way beyond anything that you have seen in the movies - that it boggles the mind. Back in 1977, Steve Wright a British academic was researching the means by which the state exerted covert control upon us as part of his PhD thesis. He stumbled upon the beginning of ECHELON, a system for monitoring hundreds of thousands of telephone calls all the time (now millions). His work caused what is said to be the first raid by the British political police, the Special Branch, on a British university; a raid conducted at the behest of the US National Security Agency. Ironically the motto of the university is Omnibus Patet Veritas - Truth Lies Open to All.
We strongly advise you to research ECHELON for yourselves so that you can fully appreciate the extent of the surveillance net in which you are now caught. The NSA, MI5, Mossad and countless other intelligence agencies can listen to every phone call you make, read every email and track every webpage you visit. That means they are in your head, they know how you think, they know how you construct your sentences, how you frame your speech, every inflection in your voice and everybody you know and they will use this against you. This is not how a world should be - it is just plain wrong.
Why do they need all this access to data, this unlimited ability to be inside the heads of millions of people?
They need it because they fear you and they fear you because they know that if enough of you realise how badly you've been screwed and by whom then you might just set aside your differences to challenge the puppet masters and they know that if you do that they will fall.
You're being screwed to the wall at the moment and you probably know it but you also know that there are millions out there who haven't worked it out yet which is one of the reasons why nothing changes. There is a race on between all of us and the puppet masters - pathological deviants. They are seeking to exert more control while we must seek to inform people, to give them knowledge which they then must share to generate understanding. They need to know what is happening and they need to know the real deal, that it's all about psychopaths and how they have twisted everything we take as normal into a pathological hell. We can see evidence of this race in the G20 statement.
They are not finished, they are racing towards a goal and they seem to be under some sort of time pressure; there seems to be a timetable to be met. While the puppet masters have set the world rushing headlong towards their New World Order, the vast majority of people are sleep-walking their way to Hell.
By Simon Davies and Donald Hunt
We are at present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world. - Professor Arnold Toynbee, 1931 Institute for the Study of International Affairs.
What a week; world stock indexes took another serious beating while J P Morgan fired 3,000 amid speculation that total Wall Street job losses will reach 225,000 and Citibank was bailed out to the tune of $27 billion of new equity and in excess of $300 billion blanket guarantee of some of its toxic assets.
The Dow got off better than most, only falling 5% after rising 6.5% on Friday with reports that Obama would name Timothy Geithner Treasury Secretary.
Oil was down sharply again last week, falling 12% to close under $50 a barrel. Gold, on the other hand, rose more than 6.6% last week. The gold/oil ratio hit heights not seen in recent years, rising 22% to almost 16 barrels of oil per ounce of gold. The ratio has averaged less than 9 over the past four years.
This in the week after the G20 meeting in Washington.
Markets
The markets this week
| Previous week's close | This week's close | Change | % change | |
|---|---|---|---|---|
| Gold ($) | 742.50 | 791.80 | 49.30 | 6.64% |
| Gold (€) | 589.01 | 628.96 | 39.96 | 6.78% |
| Oil ($) | 57.04 | 49.93 | 7.11 | 12.46% |
| Oil (€) | 45.25 | 39.66 | 5.59 | 12.35% |
| Gold:Oil | 13.02 | 15.86 | 2.84 | 21.83% |
| $ / € | 0.7933 / 1.2606 | 0.7943 / 1.2589 | 0.001 / 0.0017 | 0.13% / 0.13% |
| $ / ₤ | 0.6784 / 1.4741 | 0.6700 / 1.4925 | 0.0084 / 0.0185 | 1.24% / 1.25% |
| $ / ¥ | 97.038 / 0.0103 | 95.938 / 0.0104 | 1.100 / 0.0001 | 1.13% / 0.97% |
| DOW | 8,497 | 8,046 | 451 | 5.31% |
| FTSE | 4,233 | 3,781 | 452 | 10.68% |
| DAX | 4,710 | 4,127 | 583 | 12.37% |
| NIKKEI | 8,462 | 7,911 | 552 | 6.52% |
| BOVESPA | 35,789 | 31,251 | 4,539 | 12.68% |
| HANG SENG | 13,543 | 12,659 | 883 | 6.52% |
| US Fed Funds | 0.25% | 0.50% | 0.25 | 100% |
| $ 3month | 0.13% | 0.01% | 0.12 | 92.31% |
| $ 10 year | 3.73% | 3.20% | 0.53 | 14.21% |
US Recession
Consumer spending in the U.S. is dropping like a stone, fueling new fears of deflation.
Recession Probably Deepened in October: U.S. Economy Preview
Shobhana Chandra
The U.S. recession probably deepened as consumer spending plunged in October by the most since the 2001 downturn and businesses slashed investment, government reports may show this week.
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The credit crisis has forced cash-strapped consumers to pull back on purchases and companies to cut spending and step up firings. Housing and manufacturing also are deteriorating, a sign the economy is sinking further into what may be the most severe slump in decades.
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The projected decline in spending, which accounts for two- thirds of the economy, foreshadows a holiday season that may be the worst in six years, according to industry projections. A record two-decade expansion in consumer spending ended in the third quarter, causing the economy to contract.
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Inflation figures in Commerce's spending report may show price pressures have waned, giving way to the risk of deflation, or a prolonged slide in prices. The Federal Reserve's preferred gauge of inflation, which excludes food and energy costs, was unchanged in October after rising 0.2 percent in September.
........an index of home prices in 20 U.S. cities slumped in September at the fastest pace on record, the survey median shows...
Holiday retail sales figures look to be the worst in a long time, if trends from October and early November continue. Many retail sectors are seeing drops of 20% compared to the same period a year ago.
Demand is contracting so quickly worldwide that the only hope to avoid collapse is for the spender of last resorts, governments, to throw massive amounts of money into the economy. Asian governments announced their plans as did President-elect Obama. First the money went to prop up the banks, next come the industrial companies with hat in hand. Finally, laid-off workers are getting extension of unemployment benefits and, most likely, more checks. Government-funded jobs rebuilding infrastructure are also in the works. Most worrisome are hints of "military Keynsianism" as some right-wing economists are popping up in the U.S. media claiming that Roosevelt's New Deal did not pull the country out of the Great Depression, World War II did. True or not, the implication is clear.
Furthermore, there was more to public works projects in the 1930s than an attempt to restart economic growth. It was also a way to keep people productive and eating while the economy corrected itself. And, from the point of view of the elite, it kept revolutionary impulses under control. The following piece by Satyajit Das outlines what probably has to, and will, take place, but omits the human cost and the political and social cost. Given that, printing more money to pay people to build bridges and roads is better than printing money to pay them to kill each other.
De-leveraging - Fairy Tale EndingsInflation or deflation?
Satyajit Das
In the "Arabian Nights," the beautiful princess Scheherazade buys one day of life at a time by recounting fantastic fables that enchant the King who has condemned her to die. Investors and traders are currently telling each other fairy tales to buy one day at a time to stave off the inevitable.
The drama and tumult of recent events are not symptoms of the disease but the cure. The "disease" is the excessive debt and leverage in the financial system, especially in the US, Great Britain, Spain and Australia. In the lyrics of the Bruce Springsteen song - many have "debts that no honest man could pay".
The "cure" is the reduction of the level of debt (the great "de-leveraging"). In 1931, Treasury Secretary Andrew Mellon explained the process to President Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. ... enterprising people will pick up the wrecks from less competent people."
The initial phase of the cure is the reduction in debt within the financial system.
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The second phase of the cure is the higher cost and lower availability of debt to the real economy. This forces corporations to reduce leverage by selling assets, reducing investment and raising equity (for example, as GE has done). This also forces consumers to reduce debt by selling assets (where available) and reducing consumption.
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Within the financial sector, de-leveraging is well advanced. In the real economy it is in the early stages.
Fairy tales in financial markets focus on the "superhuman" abilities of regulators and governments to avoid the de-leveraging under way. Central banks and governments have taken progressively more aggressive actions to try to influence events.
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Central bank guarantees of all major borrowings and other transactions to reduce solvency risk for banks are designed to enable normal transactions between parties in the financial markets to resume. The necessary coordinated global action appears at last to be under way.
The initiatives are sensible short-term measures to stablise markets. In the longer run, they transfer the problem onto the government and taxpayer balance sheet. For example, US Government support for financial institutions in this financial crisis is already approaching 6% of GDP (compared to less than 4% for the Savings and Loans crisis). The bailout of Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) has almost doubled US national debt. This will ultimately place increasing pressure on the US sovereign debt rating and vitally the ability of US to finance its requirements from foreign creditors.
Government and central bank initiatives to date have been ineffective. Money markets remain dysfunctional and inter-bank lending rates have reached record levels relative to government rates. The failures are unsurprising.
At the height of the boom, banks used a variety of techniques to increase the velocity of money. As the system de-leverages, the velocity of money has sharply decreased.
Money being supplied to the banks is not being lent through. Banks are parking the money in short dated government securities in anticipation of their own funding requirements. Around $3-4 trillion of assets are returning to bank balance sheets from the "shadow" banking system - off-balance sheet structures - that can no longer finance themselves. In addition, banks have large amount of maturing debt (estimates suggest $1.5 trillion by the end of 2008) that they must fund.
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The risk of a severe dislocation in global capital flows remains a real risk in the present environment.
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Ultimately, "all the king's horses and king's men" cannot prevent the de-leveraging of the financial system under way. The extent of de-leveraging is substantial and likely to take time. In recent years, money was cheap and other assets were expensive. As each of the global economy's credit creation engines breaks down and systemic leverage reduces, money becomes scarce and more expensive triggering substantial adjustments in asset prices in a reversal of the process.
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Like a giant forest fire the de-leveraging process cannot be extinguished. Thoughtful actions can create firebreaks that limit preventable damage to the economy and the international financial system until the fire burns itself out.
The Arabian Nights had a happy ending. The King after 1,001 night of enchantment and three sons pardons the beautiful Princess Scheherazade who becomes his queen. Despite the fairy tales that investors are putting their faith in currently, the de-leveraging that is at the heart of the current financial crisis may not have such a happy ending.
The inflationary consequences of massive government deficit spending on bailouts are obvious, so why the worry about deflation? The "deleveraging" of the excessive debt of the last two decades embodied by the failure of massive financial institutions like Lehman Brothers means the disappearance of massive amounts of money; less money chasing too many goods that can't be sold equals deflation.
In some ways governments are trying to throw the exact right amount of money into the pit to counteract the loss of money from deleveraging; not an easy target to hit. If the deleveraging process is disorderly, deflation can turn into hyperinflation. In that regard Friday's sharp rise in gold prices is not reassuring.
Bizarre Gold
We and many others have commented on the obvious fact that the official gold price is a manipulated joke. This week reports of brokers being unable to fulfill physical orders only confirms what we have been saying. If the official price of gold were reflective of real supply and demand then it would be going through the roof. Another anomaly is the subdued price of gold mining company stock. The price of stock, particularly in the medium sized companies, has hardly moved these few years despite the rise in price and increasing demand of their sole product. We can only speculate as to why this might be. It did occur to us that this might be in order to limit those companies ability to mine their underground gold holdings thereby controlling the availability of physical gold in the market.
Timothy Geithner
With Obama's economic team coming together we have to return to the question of "Change" or the lack of it. Timothy Geithner has been named as Secretary of the Treasury while Lawrence Summers is likely to be the head of the National Economic Council and Peter Orszag (currently director of the Congressional Budget Office) will head the White House Office of Management and Budget.
Timothy F. Geithner started out working for Henry Kissinger's Kissinger and Associates in 1985 In 1988 he moved to the International Affairs division of the U.S. Treasury Department where he moved up the ladder with impressive speed. From 1998 to 2001 he was Under-Secretary of the Treasury for International Affairs (1998 - 2001) under Treasury Secretaries Robert Rubin and Lawrence Summers. Summers was his mentor.
As a Treasury official, he is credited with "helping manage" multiple international crises of the 1990s in Brazil, Mexico, Indonesia, South Korea and Thailand. From February to August 2001, he was a senior fellow in International Economics at the Council on Foreign Relations following which he joined the Policy Development and Review Department (PDR) of the International Monetary Fund (IMF). In 2003 he was named as president of the Federal Reserve Bank of New York. In 2006, he also became a member of the financial advisory body, the Group of Thirty. He is a trustee of the Economic Club of New York (trustee), a member of the Council on Foreign Relations, on the advisory committee of the Center for Global Development and chairman of the Committee on Payment and Settlement systems of the Bank for International Settlements.
His informal group of advisers includes E. Gerald Corrigan (also a CFR member), a managing director of Goldman Sachs and a former New York Fed president; Treasury Secretary Henry M. Paulson Jr.; John Thain, the CEO of Merrill Lynch; Paul A. Volcker, the former Fed chairman; and Peter G. Peterson, the former U.S. secretary of commerce. James "Jamie" L. Dimon, the CEO and chairman of J.P. Morgan Chase, is a Geithner ally and a member of the board of the New York Fed.
To say that Mr Geithner is an insider would be somewhat of an understatement. He is a excellent example of a man working his way upwards through the Circles of Power that we discussed a couple of weeks ago. We named six organizations as the core of the public face of world power, among them the Council on Foreign Relations and the Bank for International Settlements; Mr Geithner is a member of both.
While at the IMF, Mr Geithner was involved in the imposition of Washington Consensus polices on five countries. The standard Washington Consensus model is to ensure that a target country is able to borrow relatively liberally to finance it's growth. This debt should be in US dollars although Euro is now acceptable. The terms are reasonable so the country borrows, spends and grows. A crisis is then initiated such that the country becomes unable to pay its debts or indeed the interest on its debts. Such a crisis might be the sudden and precipitous drop in the price of its exports leading to a substantial decline in its US dollar or Euro earnings. At the same time the currency also falls, exacerbating the problem. No finance is available except from the IMF and/or World Bank which imposes severe terms including a substantial reduction in public spending with the adoption of austere budget constraints, opening of the countries markets to foreign investment without conditions, reduction or complete removal of any barrier to foreign imports and privatisation of state enterprises.
Coupled with the demand that interest rates be set at 'market' levels, the target country is set up for an explosion of unemployment coupled with a collapse in real wages leading to poverty, misery and suffering for millions. The nation's assets are essentially stolen through privatisation in a repeat of what Hannah Arendt called the "original theft" that allowed the establishment of free market capitalism in the European economies. Local products are forced out of the market which is flooded with foreign imports driving local business either into foreign arms or bankruptcy. In order to enforce this new order the target nation is required to reform its legal system to provide for stringent laws protecting private property.
The pattern has been repeated many times globally with great success for the winners, US and European banks and corporations.
The Council on Foreign Relations "sponsored" an Independent Task Force "Building Support for More Open Trade", co-chaired by Kenneth Duberstein (Reagan's Chief of Staff) & Robert Rubin (Clinton Treasury Secretary) for which Mr Geithner was Project Director. The Task Forces final report strongly endorses trade expansion, "trade expansion is not only vital to economic growth in the US and abroad, but when combined with complementary policies, can actually help address the problems cited by labor, environmentalists and others concerned with social equality" " Given the increase in employment, wages and wage equality in the 1990's, when the US expanded free trade, the Task Force holds it would be economically and socially irresponsible for the US not to pursue further trade expansion". From what we understand to be the real global effects of trade expansion it seems pretty clear where Timothy Geithner stands and for whose benefit he will be acting while Secretary of the Treasury.
You'll find that the positions held by Lawrence Summers and Peter Orszag speak of similar affiliations, associations and loyalties. We are left with a heavy heart in the acknowledgment that it looks most unlikely that there will be anything other than business as usual at the White House from 20th January 2009. The only things changing will be the bed linen and the dog.
In Mr Geithner's own words he shows the upside down way in which the current 'crisis' is presented to the world:-
The world experienced a financial boom. The boom fed demand for risk. Products were created to meet that demand, including risky, complicated mortgages.As we discussed last week the boom was in fact engineered through the injection of massive amounts of "liquidity" (i.e. money) into the system. This money needed a home. It was this need that drove the demand for 'risk'. What Mr Geithner calls 'risk' would be better termed as money needing a home that pays as much as possible in return; wholly immoral home mortgages, excessive consumer and corporate debt packaged neatly into Mortgaged Backed Securities (MBS), Asset Backed Securities (ABS), Collateralised Debt Obligations (CDO) and Collateralised Loan Obligations (CLO) met the criteria. They created the illusion of low risk high paying investments coupled with low capital requirements.
It was the Fed that fueled the fire. No mention is made in the US of the reduced standards of what qualified as bank capital, nor the changes to the capital requirements of banks under Basel II, nor the changed accounting rules. Neither is the emasculation of large parts of the regulatory framework brought to public attention - in one department of the Securities and Exchange Commission a team of one hundred was reduced to one. Rather we are have been treated to a steady rollout of the mantra for a new programme of regulation.
UK Regulation
Similarly in the UK, Gordon Brown is receiving waves of adulation from the credulous as the saviour of the financial system when in fact he was one the chief architects of it's failure. In 1998, within days of taking office Brown changed the entire edifice of UK financial regulation removing the regulation and oversight of banks from the Bank of England to the newly formed Financial Services Authority (FSA). Having personally dealt directly with both the Bank of England and the FSA on both regulatory and product matters one of the present writers has direct experience of the effects of this change; for whatever its structural and control failing might be, the Bank of England was staffed by intelligent, experienced and shrewd people whereas the same cannot be said of the FSA which was regularly steamrolled by the banks it was charged with regulating. In fact, we would go so far as to say that the FSA was deliberately set up to fail despite Gordon Brown's statement to Parliament on 13th December 2001:-
The UK Government's powers within the Financial Services and Markets Act enable it to launch a statutory inquiry into possible serious regulatory failure. One wonders if such an inquiry will be launched in the UK or whether the lack of one might be reasonably construed as showing that there was no 'regulatory failure' rather, the system worked exactly as intended.
" I propose to use my legislative powers so that we can all be satisfied that the FSA is meeting its objectives and that the accountability process works as effectively as possible.
"Now that the FSA has assumed its full powers, I and the Chairman of the FSA have set out explicitly how the FSA will keep the Government informed of regulatory cases with serious and wider implications."
Mr Geithner's Allegances
Mr Geithner wrote in the Financial Times of the need for a new regulatory programme:-
"... we have to increase the shock absorbers ...this will require more exacting expectations on capital, liquidity and risk management for the largest institutions....we have to improve the capacity of the financial infrastructure to withstand default by a big institution. This will require taking some of the risk out of secured funding markets, ....encouraging more standardisation, automation and central clearing in the derivatives markets.This is exactly the new regime Henry Paulson planned, as set out in the US Treasury Blueprint announced in June 2007 and further clarified in March 2008. Geithner is credited with being something of a diplomat; one wonders whether he was just toeing the party line in the above article or whether these are his beliefs. Given with whom he associates, his history and who pays his salary, it is probable that the latter is the case.
I do not believe it would be desirable or feasible to extend capital requirements to leveraged institutions such as hedge funds. But supervision has to ensure that .....supervised institutions limit the risk of a rise in overall leverage ........that could threaten the stability of the financial system. And regulatory policy has to induce higher levels of margin and collateral in normal times against derivatives and secured borrowing to cover better the risk of market illiquidity.
..... we need to streamline and simplify the US regulatory framework. Our system has evolved into a confusing mix of diffused accountability, regulatory competition and a complex web of rules that create perverse incentives and leave huge opportunities for arbitrage and evasion. The blueprint by Hank Paulson, Treasury secretary, outlines a sweeping consolidation and realignment of responsibilities.
The institutions that play a central role in money and funding markets - including the main globally active banks and investment banks - need to operate under a unified framework that provides a stronger form of consolidated supervision, with appropriate requirements for capital and liquidity. To complement this, we need to put in place a stronger framework of oversight authority over the critical parts of the payments system - not just the established payments, clearing and settlements systems, but the infrastructure that underpins the decentralised over-the-counter markets.
Because of its primary responsibility for the stability of the overall financial system, the Federal Reserve should play a central role in such a framework, working closely with supervisors in the US and in other countries. At present the Fed has broad responsibility for financial stability not matched by direct authority and the consequences of the actions we have taken in this crisis make it more important that we close that gap.
That the exact same provisions of a June 2007 paper, one that must have been a long while in the planning, now happen to be the terms of the statement issued at the end of the G20 meeting in Washington demonstrates beyond doubt the charade of the financial crisis, it's manipulated origins and purposes.
The G20 statement
It seems to us that there are three principle programmes being advanced with the necessary personnel being positioned to effect them. Under the guise of saving the system and adding sensible and prudent provisions to prevent any future crisis of this nature, a new economic world order is being imposed upon us. The G20 statement reads as if Naomi Klein had added a chapter to Shock Doctrine : The Rise of Disaster Capitalism. It is Machiavellian yet, apart from a few lone voices on the internet, there is no uproar against such audacity.
The statement reminds us that the work of the G20 will "be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment and poverty reduction." This, as regular readers of sott.net will understand, means "business as usual".
Regulation and oversight of the financial system.
A new regulatory regime is to be established that will separate the largest banks, global by nature, from the rest thus creating an elite group of financial institutions with oligopolitical power at the top of the global financial pyramid. These banks will be so large and so "systemically important", as politicians like to remind us regularly, that they will never be allowed to fail; they will control all global finance. The very situation that innumerable commentators including ourselves are warning against in the current crisis, the privatization of profits and the socialization of risks will become a defining feature of the new system. As the G20 have stressed, these mega-banks will continue to operate within a system "grounded in a commitment to free market principles" and thereby able to speculate freely so as to amass even greater fortunes for the financial elite while the risks they take will be borne by us, the ordinary people. The new system will have moral hazard built into it.
The new regulatory framework will be structured so as to ensure that there can be no newcomers to this elite club of banks unless specifically required by those that control the system. Smaller banks will be excluded from the core of the market, being themselves mere pawns of the elite, useful when needed, expendable when not. Banks are failing across the US already and many more will follow across the world. Their assets will be snapped up a pennies on the dollar by the mega-banks thereby further concentrating wealth and power and reducing the options that any of us have.
Of course we are being presented with a quite different story about "sound new regulation" and the need for "new clearing systems" (G20 statement) as if it is the regulators that control the banks when in fact it is the banks that control the regulators. In the case of the Fed it is through the simple fact that the banks own the Fed, nominate all its board members and finance Congress and the White House. Elsewhere variations on the same methodology apply though often more subtly. The appointment of Mr Geithner, a man trusted within the inner circles of power, chairman of a crucial committee within the Bank for International Settlements, suggests that the international cooperation and coordination of regulation referred to in the G20 statement is purely a smokescreen for the consolidation of global banking power to be exercised through the BIS by the primary member central banks. The language of the G20 statement makes it clear that there can be no dissent from the reforms.
Free Trade, the IMF and other Development Banks.
Free Trade has been the mantra by which the rapacious progress of imperialism (aka Free Market Capitalism) has been promoted to the world. In the recent Doha round of trade talks many countries baulked at what was being asked of them. These included France where governments can fall at the suggestion that a free market in agricultural products be opened to the world and Brasil. Yet without more countries opening up to free trade, the Free Market Capitalist machine will have nothing to devour so 'free trade' simply has to be forced upon the dissenters. Never mind that the true effects of 'free trade' have been the destitution, impoverishment, starvation and death of millions. Never mind that not one single shred of evidence exists to even remotely suggest that the current crisis is due to the few remaining barriers to imperial rape. Never mind any of the facts or truth whatsoever, these plans were laid long ago before the details of the crisis that would be used to justify them was known, so if the facts don't fit the 'crisis' this is to be expected. It hardly matters as the mainstream media won't be pointing out these glaring inconsistencies to the huddled masses.
The IMF has been used as a weapon of economic war since its inception. It's methods have been well documented as we discussed above in relation to Timothy Geithner and the Washington Consensus. Its sudden elevation to centre stage, along with the World Bank and other Multilateral Development Banks suggests that similar tactics will be brought to bear against those countries that are forced to borrow from them. It is a perfect set up as we noted above: encourage growth through debt, inflate the economy then suddenly withdraw access to money forcing your target country to borrow from the IMF or World Bank under onerous and rapacious terms, enforce those terms bringing said country to its knees while acquiring anything of value at a knock down price. In order to enforce this new order the target nation is required to reform its legal system to provide for stringent laws protecting private property. It is therefore worthy of note that the G20 statement stressed a "commitment to....the rule of law [and] respect for private property".
Information and Taxation.
While the big headlines have been about regulation and to some extent free trade there were, in the G20 statement, other measures that will effect each of us greatly. We may not feel the effects for some time yet and indeed when they come they will be part of incremental changes already well established and ongoing. Not only may we not feel the effects keenly for some time but for many they will be regarded as part of their moral duty to society. The issue is that of personal taxation.
Last week we talked about the fact that governments do not, for the most part, need to borrow. They can simply issue money into the system through paying for much needed infrastructure, education and health care. One effect of the system we have where, instead of this simple and economic approach, vast sums are borrowed, is that there is an immense interest bill to be paid. In his excellent film, From Freedom to Fascism Aaron Russo revealed, as have others, that US personal income tax receipts equaled interest payments on US government debt. In principle therefore, the absence of government debt in the US would negate the need for anybody to pay income tax.
There are numerous other aspects to taxation that need to be addressed. Taxation as a percentage of income sounds reasonable but is not applied reasonably. The level of income at which personal income tax starts in most countries is far too low. Everybody should be able to save a good proportion of their income and not have it taxed out of their hands. This is truer for the poor than any other members of society. A fair tax system would ensure that everybody was able to save. Not only that but the people that gained most from the provision of government, the wealthy, would pay the most. For example in matters of defense, it is the wealthy who have the greatest amount to lose so they should be paying the greatest 'insurance premium'.
A further aspect of unjust tax systems, of which the US is the prime example, is the relative burden of tax borne by the rich and super-rich. The burden of tax on these people has been dropping steadily since the 1980's as a matter of deliberate and sustained policy. This drop has been achieved by legislative changes lowering tax on capital (the greatest source of income for the rich and super-rich) relative to taxes on wages, by lack of enforcement and by the provision and tolerance of numerous 'tax shelters' (schemes by which the rich and super-rich avoid paying taxes). We hope to write more on this topic in due course; for the present however it suffices to stress that tax on personal income means that for some percentage of every working day you are working for the puppet masters.
These statements from the G20 need to be seen in this light:-
"We will promote information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency".
Tax authorities, drawing upon the work of relevant bodies such as the Organisation for Economic Cooperation and Development (OECD), should continue efforts to promote tax information exchange. Lack of transparency and a failure to exchange tax information should be vigorously addressed.
They aren't talking about you and I being able to see what is going in behind their walls of secrets; rather they refer to banks having to disclose all the details of their customers accounts and financial dealings to regulators abroad. This means that any of the world's major governments can see your bank records and you will never know about it. Those countries that do not agree to the disclosure of customer information are black-listed and their banks excluded from much of the choicest banking business. There is only one reason they want access to that information, to tax you and to track you. The system that is being aimed for will be all encompassing. No financial transaction will be able to take place anywhere without being recorded in their system and tax being levied against you, eventually, just like the current income tax. The tax that they deem to be due will be taken 'at source' which for any income outside your wages will mean a direct deduction from your bank account.
If you think this can't happen, think again, the laws for governments to take taxes directly from your bank account have been put in place over the last five years. All the government or any of it's departments, agencies or sub-agencies need do is inform your bank that you have a debt outstanding to them, should your bank have "reason to believe" that you may seek to withdraw any funds before that debt is paid then your account is liable to be legally frozen. In a world without cash that is a frightening prospect. In fact, in a world without cash, they can destitute you at the push of a button.
It is probably not unconnected that this week it was announced by the IRS:-
Internal Revenue Service Commissioner Douglas Shulman today announced the appointment of Terence (Terry) V. Milholland as the agency's new Chief Technology Officer (CTO).Control of information has always been essential for any totalitarian power as has the ability to enslave the masses. The appointment by the IRS of the man who oversaw the implementation of systems that pry into your private life (see below) while at Visa has an ominous feel to it.
As the CTO, Milholland will be responsible for all aspects of the systems that operate the nation's tax infrastructure. He will oversee a multi-billon dollar budget and the 7,000-person organization that maintains over 400 systems that enable the processing of over 200 million tax returns each year.
Milholland brings almost 30 years of technology leadership to the IRS. Most recently, he was the Executive Vice President and CTO for Visa International.
We have witnessed the initially slow but now hasty removal of our liberties coupled with the establishment of a surveillance state in which we are all numbered, recorded, monitored and tracked. There are vehicle, mobile phone and GPS tracking systems that combine with credit card, gas station, subway, train and bus system data and camera systems to give those that track us every detail of our daily movements. Every electronic purchase we make is tracked and any deviation now causes us to be "red flagged", a term most people had never heard of at the turn of the millennium. In fact we are so closely watched that any one of the faceless people who exert power over us can know the most intimate details of our lives at the click of a mouse. The real situation is so far beyond anything most people have ever dreamed of - and way beyond anything that you have seen in the movies - that it boggles the mind. Back in 1977, Steve Wright a British academic was researching the means by which the state exerted covert control upon us as part of his PhD thesis. He stumbled upon the beginning of ECHELON, a system for monitoring hundreds of thousands of telephone calls all the time (now millions). His work caused what is said to be the first raid by the British political police, the Special Branch, on a British university; a raid conducted at the behest of the US National Security Agency. Ironically the motto of the university is Omnibus Patet Veritas - Truth Lies Open to All.
We strongly advise you to research ECHELON for yourselves so that you can fully appreciate the extent of the surveillance net in which you are now caught. The NSA, MI5, Mossad and countless other intelligence agencies can listen to every phone call you make, read every email and track every webpage you visit. That means they are in your head, they know how you think, they know how you construct your sentences, how you frame your speech, every inflection in your voice and everybody you know and they will use this against you. This is not how a world should be - it is just plain wrong.
Why do they need all this access to data, this unlimited ability to be inside the heads of millions of people?
They need it because they fear you and they fear you because they know that if enough of you realise how badly you've been screwed and by whom then you might just set aside your differences to challenge the puppet masters and they know that if you do that they will fall.
You're being screwed to the wall at the moment and you probably know it but you also know that there are millions out there who haven't worked it out yet which is one of the reasons why nothing changes. There is a race on between all of us and the puppet masters - pathological deviants. They are seeking to exert more control while we must seek to inform people, to give them knowledge which they then must share to generate understanding. They need to know what is happening and they need to know the real deal, that it's all about psychopaths and how they have twisted everything we take as normal into a pathological hell. We can see evidence of this race in the G20 statement.
They are not finished, they are racing towards a goal and they seem to be under some sort of time pressure; there seems to be a timetable to be met. While the puppet masters have set the world rushing headlong towards their New World Order, the vast majority of people are sleep-walking their way to Hell.
Labels: Banking Crisis, psychopaths, Timothy Geithner
posted by Donald Hunt at 10:46 AM
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