Those of us that have been studying the U.S. and world banking system for
decades have been expecting this play. It's the only play one can do in a
ponzi scheme: broaden the pool of victims. It's also the only way a
chain-letter can be kept alive. The entire world financial system is a
multi-trillion dollar ponzi scheme.

The reason YOU never have enough money and why there is NEVER enough money
in the economy is because ALL excess money goes into INTEREST payments. The
entire system is BUILT this way. Every dollar comes into existence as a new
unit of DEBT. It is thus MATHEMATICALLY impossible for this system to
continue because the productive energy of every man, woman and child is
effectively siphoned off and allocated to the creators of money. The
creators of money are the bankers behind a system known as the Federal
Reserve System. The Federal Reserve System is not only a system of unjust
enrichment, it's a system that CAUSES debt slavery. It is also a System that
violates the United States Constitution. The Federal Reserve System, and
other alter-ego systems such as the IMF/World Bank, were covertly and
gradiently institutionalized between 1910 and 1971. The full negative
effects of this System are now being realized, for the Federal Reserve
System is designed to benefit no one other than the LENDERS OF MONEY and the
APOLOGISTS OF GLOBALIZATION.

One can analyze this System, and the economy it generates, using
sophisticated accounting and economics language, but it all comes down to
one simple point: YOU CANNOT MAKE MONEY OUT OF DEBT AND EXPECT FINANCIAL
SANITY FOR LONG.

Anticipate the hyper inflation that's coming when the multi trillions Obama
is printing hit the streets.

Add to their media monopoly their control of the international banking
industry and you have a very dangerous combination here which I believe has
aided us into this situation we are in.  I have said all along that these
trials coming up for crimes against humanity and war crimes should also have
these owners and CEO's in the docket for aiding and abetting and if
convicted, should suffer the same penalty as those who committed the
crimes....

Behind all monopolies is the very wrong legalized idea of limited liability
in corporate law, whereby the shareholders may wallow in their profits, but
need not worry about their losses beyond the value of their shareholdings.
Were shareholders in these mega corporations on Wall Street, as the American
wage earners are bailing out right now, held responsible for the harm they
are doing to our economy, such mega corporations would never exist.  Instead
people would still invest in small, family owned and controlled businesses,
as built America early on.  Of course Wall Street also enjoys all manner of
legalized fraud as well as legalized irresponsibility.  This buying and
selling of non-existent commodities is the heart of the  whole "derivatives
bubble."   If those responsible were really held responsible, as they should
be, they'd be the ones living in tents and begging for food handouts instead
of their homeless victims.

From: Jaeger Research Institute [mailto:cont...@mecfilms.com]
Sent: Sunday, March 22, 2009 2:40 AM
To: conta...@mecfilms.com
Subject: MONETIZING DEBT -- Why There is Never Enough Money in the Economy

MONETIZING DEBT

Why There is Never Enough Money in the Economy

by James Jaeger

Mar 16, 2009 (BBC Monitoring via COMTEX) -- [Article by Pavel Smorshchkov
and Syuzanna Kamara: "Moscow Advises"]

Russia is proposing to the G20 the creation of a supranational super-reserve
currency, the formulation of economic policy standards, and an obligation on
the leading economies to comply with them.

Russia has formulated official proposals for combating the world economic
crisis for the summit of G20 heads of state that will take place in London
from 2 through 4 April. The world financial system is seen as the principal
lever for this, and so the proposals encompass several areas for reforming
it. These include increasing the role of international financial
institutions, diversifying the system of world currencies and financial
centres, tightening risk monitoring, and creating incentives for "rational
behaviour" by financial market players. First, the document on the official
Kremlin website suggests, "it is necessary to formulate and adopt
internationally recognized standards in the field of macroeconomic and
budget policy, compliance with which would be binding on the leading world
economies, including the countries that issue reserve currencies."

This is a dig at primarily the United States, which the Russian authorities
have repeatedly depicted as the cause of the world crisis because of its
excessively "profligate" currency and budget policy.

Source: http://news.tradingcharts.com/forex/6/5/122172256.

BUSINESS AS USUAL:

Those of us that have been studying the U.S. and world banking system for
decades have been expecting this play. It's the only play one can do in a
ponzi scheme: broaden the pool of victims. It's also the only way a
chain-letter can be kept alive.

Unfortunately, what the Russian bankers are proposing is just a broader fiat
currency ponzi. Did you hear any mention of the word "gold" or a "return to
a gold standard" in this article? Of course not. A gold standard imposes
limits on monetary expansion, something no government wants, and what this
Russian "plan" wants to avoid.

If a world fiat currency were established -- a so-called supra-reserve
currency -- all it would do is allow the world's financial systems to do
what they are already doing, but with more devastating results.

There are basically three major problems with the current monetary system
and the globalization it provokes. 1) lack of redundancy, 2) violation of
the first law of thermo dynamics and 2) endless debt. The second issue is
addressed elsewhere. See http://www.mecfilms.com/universe

MEDIA OBFUSCATION:

The mainstream media is still out there hounding away at AIG bonuses and
Bernie Madoff, both relatively insignificant issues. The real problem is: no
one has any money (except the Fed-member banks and Big Oil companies). The
phrase, "the banks aren't providing credit" is heard often. But has the
media asked the question as to why no one has any money or why the banks
won't extend credit? Wouldn't those be more sensible questions rather than
drilling into the question of who put the February clause in the TARP money
agreement that permitted the $160 million in bonuses to AIG executives?

The AIG bonus issue is paraded endlessly in the media so citizens won't ask
real questions. Remember, as discussed in FIAT EMPIRE, the mainstream
media's job is to 1) obfuscate the issue about fiat money and 2) facilitate
the unconstitutional partnership between the Congress and the Fed. The media
is beholding to the Congress for its broadcast licenses and most of its
advertising revenues come from the big corporations that rely on fiat money
from the Federal Reserve Banks. It's a tidy little conspiracy.

Thus the mainstream mass media will continue to throw at the public any and
all issues it can to obfuscate. For less sophisticated members of society,
the media will continually churn up subjects like the Octomom and missing
person reports. For the more sophisticated it will exploit controversies
like AIG bonuses and whether Senator Dodd or Treasury is to blame for the
bonus clause.

The media's job is thus to protect the Fed, the President and the Congress
but make it appear like it's "looking after the folks." And the Congresses
job is to make it appear like it's protecting the People and "going after"
the profligate executives on Wall Street. The very word "Wall Street" is an
obfuscation to protect the banks, for the Fed-member banks are at the heart
of the economic problem: not the general corporations listed on the DOW or
in the Fortune 500.

THE WELL OF ETERNAL MONEY:

The reason no one talks about the Fed, except in the most reverent or
hopeful terms, is because the Fed is "The Well of Eternal Money". It's the
place from which all paper money emanates. It's the bank of issue-authority,
the bank with an infinite balance sheet. It's the God of the U.S., hence
World, Financial System. All money, for all hope and all mere mortals,
whether People or corporations, ultimately comes from THE WELL. Also the
place where TARP and STIMULUS money come, the Well is the place where WAR
chests and all manner of SOCIAL programs come from.

THE FED IS THE PLACE WHERE MONEY COMES FROM WHEN CITIZENS DON'T WANT TO PAY
TAXES BUT STILL WANT IT ALL.

So when the talking heads (in the media/gov/bank complex) say we are
borrowing money for the TARP and STIMULUS, the salient, unasked questions
are: Where is that money coming from? WHO are we borrowing it from if no one
has any money or can get any credit? Since U.S. citizens are tapped out and
since places like China and Japan aren't doing much better, WHO is able to
lend money to the gov so it can provide bailout money and stimulus money to
the tune of over a trillion dollars?

DEBT DRIVES THE SYSTEM:

The answer to this question is relatively straight forward: the gov borrows
this money from the Federal Reserve, a cartel of quasi-private banks. Where
does the Federal Reserve get the money? Simple: it prints it. The Fed prints
the money and it then "lends" this new money to the gov at interest. The gov
then takes this new money and gives it to companies like AIG. AIG then
distributes this money to its "counter-parties." Note how former AIG CEO
Bernstein and other system apologists are careful to use the term
"counter-parties" rather than the term "banks." The counter-parties are
basically banks, banks all over the world, as well as huge US banks, like
Citi and BofA. So AIG has been acting like a huge international funnel to
route TARP money, created by the Fed cartel, via the gov and taxpayer, into
the coffers of Fed-member banks.

But here is the key thing to remember: all of this new money creates
interest payments for these banks sooner or later. Thus, this "financial
crises" is actually generating interest payments for the banks while you the
tax payer are charged with paying for that interest as part of the national
debt.

The only reason citizens are outraged about the AIG bonuses is because they
can actually understand THESE transactions.

Given what the Fed-gov partnership, the banks and media are doing, it's
clear, if the citizens understood what's at the heart of the situation, they
would be even more our raged.

So, why is there no money? How come we are in a recession? How come all the
stocks are falling? The answer to these questions becomes clear when one
understands how money is created, a subject the mainstream media is covering
up desperately.

In today's fiat-currency world, all money is created as a function of debt.
This means, that in order for a dollar (a Federal Reserve Note or FRN) to
come into existence, that FRN must be LENT into the system. Someone has to
borrow the newly created FRNs the Fed has printed up. Thus, when new money
is created, it is LENT into the system. Each FRN thus represents a unit of
PRINCIPLE upon which interest is owed. But if each FRN is a unit of
principle upon which interest is owed, where do the FRNs to pay the interest
come from? They must be printed as well and then lent into the system as
well. But the act of doing this, printing more FRNs to service debt, creates
yet more debt to be serviced. Therefore, the entire US financial system is a
ponzi. A ponzi is defined as: a scheme to satisfy former creditors/investors
with later lenders/investors. Debt on earlier FRNs created must be serviced
by creating yet more interest-precipitating FRNs.

The entire world financial system is a multi-trillion dollar ponzi.

WHY GLOBALIZATION IS FOOLISH:

Since irresponsible people from Nixon to Clinton have pushed for
globalization -- a system that fuels itself with a multi-trillion dollar
ponzi -- globalization is foolish. It is foolish on at least three counts:

1. Funded by a ponzi;

2. Fails to provide redundancy;

3. Violates First law of Thermo dynamics (discussed elsewhere).

We have allowed our nation's rulers to place all of our eggs in one basket
and we have allowed them to finance this system using unsound monetary
policies.

Ross Perot warned us of this when he said NAFTA was dangerous. But the
media, invalidated him. Now Ron Paul warns us of this as well as other
things. The media still invalidates this and continues to obfuscate the real
issue with a bunch of endless trivia and misdirectors.

JEFFERSON'S WARNING:

Why are the stocks of so many corporations taking plunges? Because many of
them are over-leveraged, meaning simply: they have too much debt. Why do
they have too much debt? Jefferson answered this very question over a
hundred years ago. To wit:

"If the American people ever allow private banks to control the issue of
their money, first by inflation and then by deflation, the banks and
corporations that will grow up around them, will deprive the people of their
property until their children will wake up homeless on the continent their
fathers conquered."

The Jefferson quote means this: When you allow a private banking cartel (the
Federal Reserve) to wander from the Constitution, which states that the
Congress shall coin money and this money is to be no THING but gold and
silver (see Article I), this private banking cartel will put out endless
amounts of fiat money (money NOT backed by gold and silver as stipulated in
the Constitution) and lend it to their buddies (the corporations that
surround them) at ridiculously low interest rates (i.e., rates below
free-market rates), thus causing inflation (it now takes 100 pennies to buy
what 5 pennies used to buy) and this will allow, if not provoke, these
corporations to over-extend themselves with debt (i.e. become
over-leveraged). This excessive debt on the balance sheets of these
corporations (and bank corporations) will then make these publicly-traded
entities less attractive to investors. These entities will also be less
attractive to investors because of assets no one can easily evaluate (toxic
assets) due to their overly complex derivative nature (CDSs and CDOs). Thus
investors will withdraw their money (sell their stock) in these corporations
(the corporations that have grown up around the banks) and this massive
sell-off will depress the entire stock market causing a depression
(deflation). Many of these corporations will also go out of business or
lay-off workers. Since many people have their retirement funds invested in
the stocks of these corporations, they will lose this money as well as
collateral and dividend income (be deprived of their property). Since many
of these people will (also) lose their jobs, they will not be able to pay
their bills (and debt service on a mortgage is usually the largest bill),
thus they will lose their homes (and thus they will wake up homeless on the
continent their fathers conquered, as Jefferson stated). The conquered
continent Jefferson refers to is America, then under British rule. Great
Brittan is the very country that practically INVENTED fiat money and the
very country Paul Warburg, prime architect of the Federal Reserve System. So
who has really conquered who?

THE MESSAGES ON THE WALL:

The messages on the wall are simple:

1. The mainstream media is lying and obfuscating the real issues;

2. The Federal Reserve System violates the U.S. Constitution;

3. The heart of the problem is the fact you cannot base money on DEBT;

4. The US and world fiat money system is a giant ponzi;

5. Fiat money schemes serve the globalist agenda;

6. The globalist agenda is foolish because it violates the law of redundancy
and the first law of thermo dynamics;

7. The stock market crashed because of Jefferson's warning;

8. Injecting more fiat money into the system may provide temporary relief,
but this money will also get sucked up as interest payments;

9. American's will never have any money or prosperity until they get rid of
the current debt-based monetary system and reject globalization as currently
practiced;

10. The world will be a better place if 1 - 9 happen and a worse place if
the Russian plan for some world fiat super reserve currency is instituted.

CONCLUSION:

The reason YOU never have enough money and why there is NEVER enough money
in the economy is because ALL excess money goes into INTEREST payments. The
entire system is BUILT this way. Every dollar comes into existence as a new
unit of DEBT. It is thus MATHEMATICALLY impossible for this system to
continue because the productive energy of every man, woman and child is
effectively siphoned off and allocated to the creators of money. The
creators of money are the bankers, politicians and executives behind a
system known as the Federal Reserve System. The Federal Reserve System is
not only a system of unjust enrichment, it's a system that CAUSES debt
slavery. It is also a System that violates the United States Constitution.
The Federal Reserve System, and other alter-ego systems such as the
IMF/World Bank, were covertly and gradiently institutionalized between 1910
and 1971. The full negative effects of this System are now being realized,
for the Federal Reserve System is designed to benefit no one other than the
LENDERS OF MONEY and the APOLOGISTS OF GLOBALIZATION.

One can analyze this System, and the economy it generates, using
sophisticated accounting and economics language, but it all comes down to
one simple point: YOU CANNOT MAKE MONEY OUT OF DEBT AND EXPECT FINANCIAL
SANITY FOR LONG.

The current world banking System, and so-called "financial services
industry" it spawned, is totally and completely insane and the source of
unjust enrichment. Executives at AIG taking excessive bonuses -- criminal
exploiters of the System -- are just the tip of the iceberg.

For citizens of the U.S. and/or the World to tolerate this System, or the
greedy monetary scientists and CFR-infested government officials that have
concocted it, is insane.

All People in the U.S. and World should therefore immediately cease to use
government-issued, fiat money (Federal Reserves Notes) as well as EUROS and
all other paper fiat currencies.

Further, U.S. Citizens should withhold future interest and tax payments
until the meaning of Article I of the U.S. Constitution is adjudicated by
the Supreme Court. All debts and taxes expected to be satisfied with fiat
currency found to be unconstitutional should be cancelled on the grounds
that any contract or statute that attempts to enforce payment with unlawful,
unconstitutional money is null and void.

The attempt to issue unlimited amounts of unconstitutional fiat money is a
covert attempt to destroy the United States because it undermines the
general welfare of the middle class, the economic engine of a capitalist
economy that relies on a moral citizenry and Constitutional republic to
operate. All parties to actions that undermine these principles should be
held accountable and removed from positions of influence.

Only Marxists and fascists would advocate a world fiat currency or ignore
advice in the U.S. Constitution. People should study these issues and
evaluate whether the role the mainstream media is appropriate or whether it
is abetting crimes of bankers, members of Congress and/or (corporate)
apologists of the Federal Reserve System.

For more information watch a movie called
<http://video.google.com/videosearch?q=MONEY+AS+DEBT&hl=en&emb=0&aq=f> MONEY
AS DEBT and  <http://www.fiatempire.com/> FIAT EMPIRE. Read a book called
<http://video.google.com/videoplay?docid=-8484911570371055528> THE CREATURE
FROM JEKYLL ISLAND or via THE REALITY ZONE at www.RealityZone.com.

21 March 2009

  _____  

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Don't forget to watch  <http://www.fiatempire.com/> FIAT EMPIRE - Why the
Federal Reserve Violates the U.S. Constitution so you will have a better
understanding of what we believe fuels most of the problems under study by
the Jaeger Research Institute. Also, if you support a constitutional
republic engaged in free-market capitalism, you might be interested in
watching the progress of our current film production, ORIGINAL INTENT, at
http://www.FiatEmpire.com/producers

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Source URL:  <http://www.mecfilms.com/universe>
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  _____  

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<http://www.fiatempire.com/producers>  INTENT |
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 <http://www.mecfilms.com/universe> Jaeger Research Institute

 Fed planning 15 fold increase in money supply

by Eric de Carbonnel

The fed is planning moves that would more than double its balance-sheet
assets by September to $4.5 trillion from $1.9 trillion. Whether expressing
approval or concern over the fed's move, most commentators fail to
understand the real magnitude of the projected expansion of the US monetary
base because they don't take into account the amount of dollars circulating
abroad.

At least 70 percent of all US currency is held outside the country, and this
means the US monetary base is considerably smaller than the fed's overall
balance sheet. Take, for example, the true US domestic money supply at the
beginning of September 2008, before the fed started its quantitative easing.
From the Federal Reserve's website, we know that currency in circulation was
833 Billion. This translates as 583 Billion dollars circulating abroad (70
percent), and 250 Billion dollars circulating domestically (30 percent).
Since the bank reserve balances held with Federal Reserve Banks were 12
billion, that gives us a 262 Billion domestic monetary base as of September
2008. Now compare that to the projected US domestic monetary base for
September 2009 which is 3,818 billion (4,500 billion - 583 billion (dollars
circulating abroad) - 99 billion (other fed liabilities not part of the
money supply)). The fed's planned balance sheet expansion results in a
15-fold increase in the base money supply.

262 Billion = US monetary base as of September 2008 (minus dollars held
abroad)

3,818 Billion = projected US monetary base in September 2009 (minus dollars
held abroad)

3,818 Billion / 262 Billion = 15-Fold Increase in US monetary base

This is a staggering devaluation of the US currency! That means for every
dollar that existed in America in September 2008, the fed is going to
created fourteen more of them! Below is a rough sketch of what this Increase
in US monetary base would look like:

This 15-Fold Increase will be impossible to reverse

Next September, when the fed realizes it has gone too far and tries to
reverse its balance sheet expansion, it will be unable to do so. The
realities which will hinder the fed's control of the money supply are:

1) The toxic assets filling its balance sheet

Expanding the money supply is easy. All the fed has to do is print dollars
and then use them to buy assets. There is no effective limit to how much the
fed can print and spend.

Shrinking the money is much trickier. To shrink the base money supply, the
fed sell assets and takes the dollars it receives for them out of
circulation. The amount the fed can shrink the money supply is therefore
effectively limited by the market value of assets on its balance sheets.
Since the fed is in the process of loading up on toxic securities trying to
restore health to the financial sector, it is now sitting billions of
unrealized losses. These unrealized losses means the fed has little
ammunition available to bring the money supply under control.

Once September rolls around, If the fed wants to reverse the expansion of
its balance sheet and shrink the monetary base back down from 3,818 billion
to 262 billion, then it will need to sell 3,556 billion worth of assets.
However, the market value of its assets will only be worth a fraction of
that.

2) Political constrains on fed's actions

Even if the fed does try to shrink the money, it is likely to run into
political constrains on its actions:

A) Selling toxic assets at a loss could become a crippling source of major
embarrassment for the fed, undermining its authority. For example, last year
when the fed took 29 billion toxic assets to help JPMorgan's takeover of
Bear Stearns, it assured Americans that by holding those securities till
maturity, the cost to taxpayers would be minimal. If the fed sells those
toxic Bearn Stearns assets at a catastrophic loss, it would cause fury and
outrage from voters and lawmakers.

B) Selling assets at below book value will quickly cause the fed's equity to
turn negative. The federal reserves would then need to be recapitalized by
new debt from the treasury, which would increase the national debt.

3) The benefits from of its balance sheet expansion which would be lost if
the fed starts selling assets

The fed is accumulating toxic mortgage backed securities, long term
treasuries, and other assets to unfreeze the credit markets and spur
economic growth. Turning around and selling those assets would result in the
collapse of the credit markets and the financial system, which the fed has
been desperately trying to prevent.

Upwards pressure on interest rates

On top of all the issues above, the fed's woes are going to be compounded by
upwards pressure on the yields of treasuries and other US debt. This upwards
pressure will likely force the fed to monetize far more treasuries than the
planned $300 billion purchases it has already announced, and will greatly
complicate any efforts by the fed to control the money supply.

Below are the nine factors which will cause yields to move higher:

1) Massive supply of treasuries in the pipeline

The biggest force of upward pressure on treasury yield is without a doubt
the trillions of debt the treasury is going to sell to finance the US's
enourmous 2009 budget deficit. There is nowhere near enough buyers to this
supply. The graph below demonstrates the challenge facing the treasury in
trying to fund this year's deficit.

2) As a reserve asset, treasury bonds will face enormous selling pressure in
2009

There is the mistaken belief that the treasuries' role as a safe haven is
bullish for treasury bonds. It is not. This logic ignores the reality that
reserve assets, such as treasuries, are accumulate in good times and sold in
bad times:

Federal and state agencies will be selling treasury reserves. For example,
the Deposit Insurance Fund (a.k.a. FDIC) will be selling treasuries to pay
back depositors of failed banks, and the Unemployment Trust Fund will be
selling treasuries to make payments to the unemployed.

State and local governments will be selling treasury reserves. As an
example, states have already begun drawing down reserves as their budget
troubles worsen. The bulk of those reserve remain, and they will be sold
over the course of this year.

Banks and insurers will be selling off their treasury loan-loss reserves.
Financial institutions have been building their treasury loan-loss reserve
for the last year in anticipation of growing defaults. In 2009, this process
will reverse as loans go bad and insurers make good on claims.

Foreign central banks will be selling off their treasury foreign reserves.
Saudi Arabia, for example, is projecting a 2009 Budget Deficit, which it
intends to finance by selling off its US holdings. Russia, meanwhile, has
already sold over 20% of its $598.1 billion reserves, and India's central
bank has been forced to sell off its US holdings to curb its currency's
decline, and its total reserves have decreased by $62.2 billion. Japan,
which is now running record current account deficits, can also be expected
to sell treasuries.

Even China could become a seller of treasuries as it mobilizes its dollar
reserves. The Chinese government has sent clear signals that it is shifting
from passive to active management of its reserve and is exploring more
efficient ways to use its reserves to boost its domestic economy.

3) Retirement inflows into treasuries are over

The steady accumulation of treasuries by government retirement funds has
helped absorb the supply of treasury bonds over three decades. This
accumulation of government debt to secure the retirement of baby boomers
helped drive down treasury yields and fund US deficit spending. As of
September 2008, the four biggest of these funds held 3.3 trillion
treasuries:

2150 billion (Federal old-age and survivors insurance trust fund)

615 billion (Federal employees retirement fund)

318 billion (federal hospital insurance trust fund)

217 billion (federal disability insurance trust fund) (for more on these
four funds, see where social security tax amounts deposited)

3300 billion total

Today, the accumulation of treasuries by government retirement funds is now
over. Baby boomers are beginning to retire, increasing outflows, and
unemployment is rising, cutting inflows. More importantly, the 3.3 trillion
already accumulated in these funds provides an enormous political incentive
to prevent treasury prices from collapsing. Faced with a run on treasuries,
politicians, rather than explaining to baby boomers that their retirement
savings are gone, will instruct the fed to monetize treasury bonds. This
alone will prevent the fed from reversing its current balance sheet
expansion.

4) Deleveraging in credit-default swap market will drive up risk premiums

If you have been following the credit crisis in any detail, you might have
heard that the 53 trillion credit-default swap market threatening the
solvency of the financial system. What you might not have heard is the other
dire threat posed by the CDS market: drastically higher risk premiums on all
forms of debt.

These higher risk premiums are the result of reversing the process by which
credit-default swaps were leveraged up and packaged into investment
vehicles. Some examples of these horrors are:

Synthetic CDOs

As opposed to regular CDOs (which contain actual bonds), synthetic CDOs
provide income to investors by selling credit-default swaps on hundreds
bonds from companies and governments.

To juice returns, these synthetic CDOs disproportionally insured the
riskiest AAA rated debt, such as Lehman's bonds. Synthetic CDOs are
estimated to have sold insurance on between $1.25 trillion to $6 trillion
worth of bonds.

constant-proportion debt obligations

CPDOs are specialized funds which work exactly like synthetic CDOs but with
one major difference: they used leverage to boost returns. These CPDO funds
typically borrowed about $15 for every dollar invested with them. They also
contain safety triggers that force the liquidation of their investments if
losses reach a predetermined level, and most CPDO funds have begun to hit
these triggers. For example, Three CPDO funds launched in 2006 by Dutch bank
ABN Amro Holding NV have already been forced to liquidate as credit
insurance costs spiked and their credit ratings were downgraded.

credit derivative product companies

CDPPs are another group of specialized funds which work exactly like
synthetic CDOs and CPDO funds, except for one key difference: they used an
insane amount of leverage, as much as $80 for every dollar invested. CDPP
funds together with subprime CDOs squared are finalists for the title of
"most idiotic financial instrument ever created".

Since these leveraged investment vehicles sold an enormous amount of
insurance, the premiums for CDS insurance dropped sharply, making corporate
debt seem safer and lowering interest rates. In effect, the process of
building up the 53 trillion CDS market created an era of artificially low
risk premiums on all forms of debt. Unfortunately, the pendulum is now
swinging in the other direction, and the pain has just begun.

As investors attempt to get out of synthetic CDOs and CPDO/CDPP funds try to
deleverage, they push up the cost of default insurance. In turn, that raises
the risk premium on all forms of debt since most investors use the cost of
default insurance as a guide when deciding at what interest rate they will
buy bonds. Many banks are also tying corporate loan rates to credit-default
swaps, raising borrowing costs and exposing companies to an overleveraged
derivative market which is largely responsible for crippling the financial
system.

The graph below shows how the cost of insuring the debt of EU nations is
being driven up.

The rising cost of insuring debt is impacting treasuries too. The cost to
hedge against losses on $10 million of Treasuries is now about $100,000
annually for 10 years, up from $1,000 in the first half of 2007. These
rising insurance costs have helped push up treasury yields in the last few
months. Worse still, the rising costs of insuring against government
defaults will undermine faith in dollar. After all, the CDS market is
telling us that 10-year treasury note has become 100 times more risky in the
last two years.

5) Unwinding the Gold carry trade

The massive expansion in the US money supply will undoubtedly drive gold
prices several times higher and force the unwinding of the gold carry trade.
To see the threat which unwinding the gold carry trade poses, it is
necessary to understand how US and UK financial institutions got themselves
stuck in enormous short position in gold from which they have no hope of
ever escaping. For that purpose, I have outlined below the five steps Wall
Street seems to repeat endlessly on its path to ruin.

Step 1: Wall Street embraces a false paradigm

"Housing prices never fall"

-----

"gold is a relic" or "gold is in permanent downtrend"

Step 2: Wall Street makes billions embracing this false paradigm.

US/UK Financial institutions made billion in fees from making mortgage loans
and securitizing them.

-----

US/UK Financial institutions made billions via gold carry trade. Here is an
ultra quick explanation how it works from zealllc.com

So, if you can find a cheap enough cost of capital, a safe enough
destination, and you have the credit to borrow large amounts of money, you
too could make enormous profits in carry trades. The notorious gold carry
trade is based on the exact same idea. Elite money-center bullion banks were
given sweetheart opportunities to borrow central bank physical gold at 1%,
sell it in the open market, and immediately invest the proceeds in higher
yielding "safe" investments and reap vast profits.

As Moneyweek further explains:

It seemed like a no-brainer. The central banks got to squeeze a yield from
their gold. The borrowers got to sell the gold on, and use the proceeds to
fund more exciting investments like 10-year US Treasuries yielding 4% per
year or so. Yes, these 'carry trade' returns were tiny. But the cost of
borrowing gold was tinier still.

Step 3: .and creates a catastrophic mess in the process

Enormous housing bubble

Subprime CDOs squared

Off balance sheet SIVs

Etc.

-----

Commercial banks and speculators are left inescapably short gold. This
ridiculous short position is best captured by John Hathaway in his 1999
article, The Golden Pyramid.

The recipe for a shortage has been carefully followed. A few finishing
touches may be required before a market epiphany. There is no known
reconciliation between paper and physical positions, and none will be
attempted until after the squeeze. The weakness of credit analysis and
supervisory oversight, as well as the many ambiguities in the linkage
between paper gold and physical can flourish only if there is supreme
confidence in gold's permanent downtrend. The trust and confidence essential
to balance the gold derivatives pyramid depends on three critical errors:
that mine reserves = physical gold; that gold receivables = gold on hand;
and that financial markets will enjoy smooth sailing indefinitely. Trust is
nothing more than a state of mind. When this levitation is finally exposed
and its illusions shattered, it is ludicrous to think the imbalances can be
corrected by a small rise in the price and within a comfortable time frame.
Expect the resolution to be swift, furious, and uncomfortable for those
caught short.

Step 4: Something then goes horribly wrong

Subprime borrowers start defaulting

Housing prices plummet

-----

Gold prices shoot up after the 1999 Washington Agreement on Gold (EU central
banks agreed to limits on gold sales/leasing).

This gold bear trap is best described by Reginald H. Howe in his report
about central banks at the abyss.

The first Washington Agreement on Gold, announced in September 1999 at the
close of the annual meetings of the International Monetary Fund and World
Bank in Washington, D.C., placed limits for the next five years on the
official gold sales of the signatories as well as on their gold lending and
use of futures and options. Put together at the instigation of major Euro
Area central banks in response to the decline in gold prices caused by the
series of U.K. gold auctions announced in May of the same year, WAG I caused
gold prices to shoot sharply higher.

Within days, as gold shorts rushed to cover, the price jumped from around
$265 to almost $330/oz. and gold lease rates spiked to over 9%. The rally
caught the major bullion banks completely wrong-footed, resulting in the
panic later described by Edward A.J. George, then Governor of the Bank of
England (Complaint, 55):

We looked into the abyss if the gold price rose further. A further rise
would have taken down one or several trading houses, which might have taken
down all the rest in their wake. Therefore at any price, at any cost, the
central banks had to quell the gold price, manage it. It was very difficult
to get the gold price under control but we have now succeeded. The U.S. Fed
was very active in getting the gold price down. So was the U.K.

Despite managing to "get the gold price under control", US/UK bullion banks
(JPMorgan, HSBC, etc.) have been stuck on the short side of gold ever since.

Step 5: The US fed and UK do everything in its power to "safe the financial
system"

Royal Bank of Scotland bailout

Bear Stearns bailout

Freddie/Fannie bailout

AIG bailout

US/UK Quantitative easing

Etc.

-----

Leasing out all US/UK gold to bullion banks

Gold swaps with foreign central banks (then leasing out the gold)

Convincing allies to sell gold

Writing naked call options on gold

Britain's 1999 gold sales

Pre-emptive gold sales

Allowing JPMorgan's and HSBC's manipulation of COMEX futures

Etc.

Make no mistake, gold prices have suppressed, but calling this process a
"conspiracy" would be inaccurate. Gold suppression by the US and UK is
better characterized as a desperate cover-up. Furthermore, while a side
affect of the gold carry trade and gold suppression was to drive down
interest rates, that was never the .

A desire to hold interest rates would not have been enough to push the fed
or bank of England to manipulate the price of gold. It was only the threat
of the total collapse of US/UK financial system which prompted the
suppression of gold. The unwinding of the gold carry trade would have (and
will) drag the some of the biggest US/UK banks under (JPMorgan, HSBC, etc.)
and that was what had to be prevented at any cost.

Stay away from any form of paper gold: GLD (HSBC is custodian), gold pools
and unallocated gold accounts, gold futures, etc. Paper gold investments are
guaranteed to default before this crisis ends.

Besides leaving the financial system inescapably short gold, the gold carry
trade also drove down yields on treasuries and other US debt, as commercial
banks invested the proceeds from the sale of borrowed central bank gold and
other naked short positions. Unwinding the gold carry trade involves the
purchase of physical gold, but also the sale of the investments linked to
the gold short positions. As the fed begins 15-fold expansion of the
monetary base (which logically should eventually send gold prices up at
least ten times where they are now), the unwinding and fallout of the gold
carry trade seems imminent.

6) The return of the 580 billion dollars circulating abroad

Over the last thirty years, the steady outflow of 580 billion dollars has
helped drive down interest rates. For example, If 10 billion dollars leaked
out of the US and began circulating abroad, the fed would print 10 billion
and buy treasuries in order to replenish the domestic money supply. So the
580 billion dollars held abroad resulted in the purchase of roughly 580
billion treasury bonds by the fed, thereby increasing demand for US debt.

While the accumulation of oversea dollars has been beneficial in the past,
today the large pools of dollars circulating outside the US pose a threat.
With many dollar alternatives becoming available, US oversea currency looks
increasingly likely to start flowing back home. The main currencies with the
potential to displace dollars are:

A) Chinese yuan is becoming an international currency

B) Gulf states are launching their own currency called the Khaleeji and
possibly be backed by gold.

C) Euro with its partial gold backing

D) Gold

Furthermore, now that the fed has begun creating money at an accelerating
rate, the extensive foreign holdings of US currency might exacerbate the
effects of inflation fears. As foreign dollar holders' confidence in the
dollar is eroded, they will trade their dollars for alternate stores of
value (yuan, euro, gold, etc.), potentially sending a flood of currency back
to the US. If the Fed failed to reduce the supply of currency to counteract
dollars being unloaded from abroad, the inflationary consequences would be
made worse as the mass reversal of currency flows from foreigners to the US
becomes overwhelming.

7) Interest rate derivates nightmare

This threat posed by interest rate derivates is perhaps the greatest out of
all the ones outlined so far. It is also the one hardest to understand.
First thing to note about interest rate swap is the size of the market, as
explained by the Wikipedia:

The Bank for International Settlements reports that interest rate swaps are
the largest component of the global OTC derivative market. The notional
amount outstanding as of December 2006 in OTC interest rate swaps was $229.8
trillion, up $60.7 trillion (35.9%) from December 2005. These contracts
account for 55.4% of the entire $415 trillion OTC derivative market. As of
Dec 2007 the number rose to 309,6 trillion according to the same source.

The growth in interest rate swaps creates demand for bonds because many of
these interest derivatives require the purchase of bonds as a hedge. Rob
Kirby on 321gold.com explains this in his article, the real ponzi scheme -
"unreal interest rates".

Interest Rate Swaps create demand for bonds because bond trades are
implicitly embedded in these transactions. Without end user demand for the
product - trading for "trading sake" creates ARTIFICIAL demand for bonds.
This manipulates rates lower than they otherwise would be.

Interest rate swaps were originally developed to [1] allow parties to
exchange streams of interest payments for another party's stream of cash
flows; [2] manage fixed or floating assets and liabilities and [3] to
speculate - replicating unfunded bond exposures to profit from changes in
interest rates. Growth in the first two of these activities are dependent on
their being increased end-user-demand for these products - graph 1 above
indicated that this is not the case:

In the case of J.P. Morgan in particular [forgetting about the lesser
obscenities at Citi and B of A]; their interest rate swap book is so big
that there are not enough U.S. Government bonds being issued or in existence
for them to adequately hedge their positions.

This means that the obscene, explosive growth in interest rate derivatives
was all about overwhelming the long end of the interest rate complex to
ensure that every and any U.S. Government bond ever issued had a buyer on
attractive terms for the issuer. Concurrent with the neutering of usury, the
price of gold was also "capped" largely through Fed appointed banks
"shorting gold futures" as well as brokering gold leases [sales in drag]
sourcing vaulted Sovereign Central Bank gold bullion. The gold price had to
be rigged concurrently because historically, according to observations
outlined in Gibson's Paradox - lowering interest rates leads to a higher
gold price. Gold price strength is historically synonymous with U.S. Dollar
weakness which leads to higher financing costs or the possibility of capital
flight.

Same as with the gold carry trade, while the explosive growth in interest
rate derivatives did reduce interest rates by creating demand for bonds, I
am not sure about the conspiracy element. From everything I have seen and
read during the credit crisis, the wizards of Wall Street (ie: the creators
of the subprime CDO squared, and other horrors) and the federal reserve seem
more like children playing with dynamite rather than masterminds capable of
pulling off vast conspiracies.

The greater threat posed by interest rate swap

Besides creating artificial demand for bonds, interest rate swap market pose
an even greater systematic risk than the credit default swap market because
of its enormous size and the fact that each interest rate swap contract
offers the potential for unlimited losses. The graph below should help show
this danger.

In a currency collapse (which is where we are headed with Bernanke's 15-fold
increase in the money supply), interest rates follow inflation to
astronomical heights. Loans for 24 hour periods and interest rates in the
five or six digits are common in hyperinflation, and, should they occur here
in the States, anyone "short the swap" (the floating-rate payers) will be
crushed into oblivion. At least with credit default swaps, there is a limit
to how much investors can lose.

8) The liquidation of the 8 Trillion dollar holdings of overleveraged
European banks

European banks increased their dollar assets sharply in the last decade
which help drive down US interest rates and absorbed a large portions of
America's growing debt. Their combined long dollar positions grew to more
than $800 billion by mid-2007. This $800 billion was then leveraged into $8
trillion in US assets. The low capital ratios of these dollar positions were
acceptable to regulators because European banks are allowed to apply a lot
more leverage as long as they are buying exclusively AAA rated securities.

Unfortunately, as we have learned over the past 18 months, AAA is not always
AAA. While much of the AAA rated securities bought by European banks were
treasuries and agencies, some of these AAA rated securities were senior
securitized loans that are still marked close to par on the balance sheet of
European banks despite the fact they trade around 70 cents on the dollar in
the markets. The enormous unrealized losses of their US holdings are only
one of the problems facing European banks.

The other is the loss of their dollar funding. The enormous leverage
employed by European banks to purchase toxic AAA rated US assets was funded
in great part by loans from US money market funds. After Lehman's default
led to massive withdrawals from money market funds, European banks lost
access to dollar financing to billions in dollar funding.

If European banks are forced to sell their 8 trillion US assets, it will
crash the credit markets, and they will have to recognize enormous losses.
Since the fed is desperate to prevent the collapse of the US financial
system, it lent those European banks 600 billion dollars so that they
wouldn't be forced to sell. Meanwhile, European banks accepted this 600
billion because they don't want to recognize losses on their toxic US
securities.

What is going to happen next with these overleveraged European banks?

Well, if history is any guide, the outlook isn't good for the US financial
system:

"When the American economy fell into depression, US banks recalled their
loans, causing the German banking system to collapse"

The same thing will happen in 2009, except the roles will be reversed. It
will be European banks that will recall their loans and sell off dollar
assets, causing the US banking system to collapse.

What could convince European banks sell off their US assets at firesale
prices?

The answer is simple: fear of a dollar collapse. With the fed increasing the
monetary base 15-fold, the strategy of waiting for impaired assets to
recover becomes meaningless: if European banks fear the dollar might lose
nine tenths of its value in the next year, then waiting for assets trading
70 cents on the dollar to recover is a senseless venture.

9) Inflation expectations

The US's experience during the Great Depression has left America dominated
by Keynesian thinking and prone to deflation fears. As a result, inflation
expectations are about nonexistent right now despite the current financial
crisis. However, the fed's latest plan to expand the monetary base 15-fold
should give pause to the most hardened deflationist. Indeed someone must be
worried, because the fed's Wednesday announcement has caused a dramatic
collapse of the dollar:

The sheer size the fed's monetary expansion and the dollar's fall will soon
increase both inflation and inflation expectations. This in turn will put
upwards pressure on treasury yields.

Conclusion

Since the thirty years, long-term interests rates have steadily fallen in
US, as demonstrated by the chart below

Logically speaking, the chart above makes no sense. The US fundamental
underlying the US economy have grown steadily worse over the last thirty
years. For example, in 2006, the US's current account deficit nearly hit 9
percent of gdp, and economists usually consider 4% to be unsustainable.
There are also the US's chronic budget deficits and the massive projected
social security shortfalls. Even more incomprehensible, over the last six
months the yield on long-term treasuries has fallen in the face of a
disintegrating economy and a massive expansion of the supply of treasuries.
This is NOT how the world works: as the financial health of borrowers
decrease, their interest rates are supposed to go up. The only rational
explanation is that some combination of forces has been unnaturally driving
rates lower. These forces, (outlined above) which have driven interest rates
down in the last three decades, have today become threats and issues which
need to be resolved before the current crisis can end:

The US budget deficit

The crisis in entitlement spending

The trade deficit and large holdings of treasury reserves

The credit-default swap market

The gold carry trade

The 580 billion dollar circulating overseas

The 8 trillion dollar assets accumulated by European banks

The interest rate swaps market

The Keynesian thinking dominating US economic and fiscal policy

THE FEDERAL RESERVE HAS GONE NUTS Image removed by sender.

What do you think of what the Fed did? They announced to CHINA that if no
more T BILL/ BOND BUYING and cash LOANS were forthcoming, the FED was going
to print a trillion dollars and lend it to themselves. Economic Onanism!
Apparently the Chinese were no longer interested in buying anymore of our
debt. Means we'll all have worthless dollar bills running out of our noses.
My favorite 99c store will close! Or become the l00$ store. Hyperinflation
is coming and that's not if but when!! Experts said that where this scheme
had been tried in the past, it had never worked. Ask Nazi Germany who
'printed their own starting after the VERSAILLES treaty took them down after
WW I. Read my grandfather on this. INFLATION
<http://www.masterjules.net/inflation.htm>  IN GERMANY.  The German
government thought that inflation was caused by too little money in
circulation and so they started printing... but... the more money they
printed the more the prices went up! Americans could come to visit with a
pocket full of 20 dollar bills and buy a home for 200$ as that translated to
$400,000 marks.  Hungary in 1946  had inflation even worse than in Germany.
This may have been Stalin's doing to destroy the Hungarian middle class and
its financial base to prevent Hungarians from rising against Communist rule.
[So inflation and financial holocausts can be arranged!!!!]

Russia had it in the 1990s - Peru had it,  Yugoslavia had it. Zimbabwe had
it in 2006 - bad but not in a class with Germany and Hungary.  17% of our
American dollars are circulating outside US borders. Dollar tied to Arab oil
which causes Inflation/deflation.

~~~~~~*~~*~~~*~~~*~~~*~~~~~~~~~~~~~~~

http://turjalainen.blogspot.com/2008_12_01_archive.html
Dec 28 2008 - Financial prediction

2009 will bring the worst financial crash and depression... its depth,
duration and consequences
comparable to the last world war. It'll last 4to-7 years and bring down the
world economic system as we
know it and change the political and geopolitical power structure. The
downhill slide of the US dollar and the collapse of the global economic
system

According to the LEAP prediction, the US dollar will turn to toilet paper by
fall which will affect the
economies of the countries depending on US markets and the dollar. The
depression will hit hardest in
Britain, and in addition to the OPEC countries also China and the Eastern
Asian 'tigers' especially Japan.

Everybody who's invested in American IOUs, stock market and whose capital is
tied to the dollar have already lost their money. They just don't know it.
But they have.

In spring the US dollar starts sliding down a la Zimbabwe. All the FED can
do is print money like hell
leading to a gigantic inflation.

Most banks of the world have their vaults filled with dollars as guarantee
for their own currencies. There
are only 120 million Japanese but they have provided money to one third of
the astronomical US foreign
debt. EU about 40%, but there are about 700 million Europeans so it's less
of a burden per capita, which
means only a 30% inflation to the euro.

You determine the value of a country's currency by:
* Gold and precious metals reserves
* Foreign currency reserves in central bank and other financial institutions

* Value of investments and foreign IOUs in the country's banks and
financial institutions
* value of the country's infrastructure, industrial capacity, productivity
etc
* The natural resources withing the country's borders

The US has managed to externalize the value of the dollar to a natural
resource OUTSIDE its borders i.e.
Arab oil. Since the 1970s the dollar has been kept up by the US dominance of
the world economy and the
fact that oil is priced in dollars so the oil functions as a guarantee of
the dollar's value. When OPEC breaks
away from the dollar, the dollar will lose its creditworthiness.

[Hence the Iraq war!!! Saddam wanted to tie his oil to the euro.]

In March 2006 the Fed stopped publishing the M3 that tells how many dollars
are in circulation.

Lots of bla bla about the market value of the dollar. And the OPEC
abandoning the dollar, slip of the
dollar which will raise the price of a $2 hamburger to $600...Hello
Zimbabwe! Plus the effects of all the money printing. etc, etc."

The writer is an interesting guy who has been accused of being a doomsday
prophet. He says he hopes that
he's wrong but points out that after the depression which will be hard and
long comes the upswing. It
may last as long as 7 years.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantel...@yahoo.com.

http://www.atimes.com/atimes/Global_Economy/KC21Dj03.html

It couldn't always have been like this. No, the country today would be a far
different place if across the span of American history had the nation
constantly chosen to focus on the most picayune of arcane and unimportant
irrelevancies, as it's doing currently with the AIG bonus controversy,
instead of on matters with some actual import.

It's early in the evening of June 5, 1944 - the day before the D-Day
landings in Normandy, in Supreme Allied Commander Dwight D Eisenhower's
Goodge Street Headquarters in London. The general is addressing his senior
staff.

    "Men, we are at a truly momentous crossroads in history. Tomorrow we
commence America's crusade in Europe, wherein the New World, fired by the
tradition of liberty and justice it inherited from the old, returns to
liberate the Old World from the most barbarous brand of tyranny and
injustice ever seen by man. We must not fail; or falter, we must ... "
    "Excuse me General, but we can't invade tomorrow."
    "Can't invade? Why? Will the weather hinder our paratroop landings?"
    "No sir, it's not that?"
    "Have the Nazis moved Panzers to Caan?"
    "No sir."
    "Well, what is it man?"
    "It's our tanks! They don't have cup holders! We can't invade France
with tanks that don't have cup holders!"

And as a two-year debate is initiated over whether the cup holders should be
adjacent to the tanker's right or left knee, the Germans construct their
atomic bomb, go on to win the war. "For want of a nail ... the battle is
lost" an old verse goes, here, for want of a cup holder, the Nazis would
have conquered the world.

At occasions like the present, the American people act much like the
dyslexic idiot savant Raymond Babbitt in the 1988 movie Rain Man. He
couldn't shake a monomaniac fixation on the TV show People's Court or the
alleged superiority of his K-Mart underwear; America can't seem to lose its
fixation, its rage, over the issue of the US$165 million of bonuses granted
to members of the American International Group (AIG) financial products
division (AIGFP), the sector of the 90-year-old company that so mismanaged
the writing and trading of the newfangled financial product called credit
default swaps ( CDS) that the company has been forced to accept $180 billion
in Federal Reserve and US Treasury largesse since last autumn.

At a congressional hearing on Wednesday, current AIG chief executive Edward
Liddy said he had received a letter advocating that the senior officers of
the company be strung up with piano wire - perhaps one of the people who
held on to the stock as it declined from its 2001 highs of just under $104
to its lows last month of $0.33 was a music teacher. Another called CNN and
said that the company's directors should be shot; who cares if the network
can easily find out name-and-address information on every toll-free call it
gets and report such information to law enforcement? One observer was more
sedate, suggesting that the bonus receivers follow Eastern tradition and
commit seppuku, Japanese ritual suicide - then again, this came from an
actual 28-year serving US senator, Republican Chuck Grassley of Iowa.

About the hearing itself little needs to be said. I think it most reminded
me of the scene in the Iliad, where Achilles exacts his vengeance after the
slaying of Hector.

    On this he [Achilles in the Iliad; committee chairman Barney Frank at
the hearing] treated the body of Hector [Liddy] with contumely: he pierced
the sinews at the back of both his feet from heel to ankle and passed thongs
of ox-hide through the slits he had made: thus he made the body fast to his
chariot, letting the head trail upon the ground. Then when he had put the
goodly armor on the chariot and had himself mounted, he lashed his horses on
and they flew forward nothing loth. The dust rose from Hector as he was
being dragged along, his dark hair [actually, Liddy's was white] flew all
abroad, and his head once so comely was laid low on earth, for Jove had now
delivered him into the hands of his foes to do him outrage in his own land.
Thus was the head of Hector being dishonored in the dust.

Everybody likes simplistic, public passion plays of good and evil - where
would the Maury Povich tabloid TV show, now the Maury show, be without DNA
tests or lie detectors? But the real scandal here is not the $160 million in
AIG bonuses - it's the $180 billion in AIG bailouts, and, unfortunately,
very little is being discussed about them.

If you are a leftist never much enamored of what was up until then the
dominant political economy philosophy of market suprematism, September 2008
must seem like something of a blur to you, like the mad, happy, chaos that
precedes a girl's wedding.

First Fannie and Freddie went down the tubes, then, in the space of a few
hours on a weekend, Merrill Lynch was consumed by Bank of America and then
Lehman Brothers went bust. By the end of the month, market capitalism's
reigning chief lackeys, George W Bush-appointees Ben Bernanke at the Federal
Reserve and Treasury secretary Henry Paulson were begging the US Congress
for $700 billion or so - what later became the Troubled Assets Relief
Program - of taxpayer money to pull the financial system out of the mess it
had created for itself.

Less noticed at the time was what was happening with the American Insurance
Group, or AIG. There, in exchange for stock warrants representing 79.6% of
the company's equity, the Federal Reserve Bank agreed to provide AIG with
$85 billion; further cash injections by the Fed and Treasury in October,
November, and just a few weeks ago put the total amount the government was
on the hook for with AIG at $180 billion.

Clearly, AIG needed a whole lot more work on its business plan.

Last summer (see Jaws close in on Bernanke, Asia Times Online, July 16,
2008), I described how, where once US mortgages were ultimately guaranteed
by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the
mortgage guarantee function during the glory days of this decade's credit
boom up to 2007 was mostly performed by something called credit default
swaps (CDS), private, unregulated, non-exchange traded derivative
instruments that allowed two parties to come together to place bets on the
health of a bond, the company that issued it, even the sovereign debt of
whole countries.

What we are gradually learning is just how central CDS became to the great
expansion, and now deflation, of the credit bubble. As the securitization
craze deepened and expanded, as everything from loans for houses, cars,
office buildings and credit cards got rolled up and then sliced off into
ever- and ever-larger successive rounds of debt issuance, CDS were always
there, providing the participants in this market the false sense of security
that whoever was on the other side of the debt security they had just bought
or sold could fulfill their commitment to make good on their obligation. In
essence, the $62 trillion market in CDS became the enablers of the entire
shadow banking system that provided the liquidity for the whole real estate
and other asset boom.

But it's not like there was not even more opportunities for mischief. CDS
betting on a company's decline could be bought for very little, if any,
initial investment in this non-exchange traded market. Many are saying that
much of the crashing decline in the shares of the financial system occurred
when people bought CDS that would increase in value if a company foundered;
whoever was the market maker on that side of the trade would, if at all
prudent, enter the market to either short the stock or buy its puts - thus,
a very small initial investment could have a large and wholly
disproportionate effect on the stock price.

On the other side of the trade, the selling of CDS has a payoff profile much
like that of selling options - an up-front payoff received for the seller
bearing risk. If you do this on an established exchange you either have to
put up an initial margin to prove that you can fulfill your part of the deal
if it turns against you, or have an underlying ownership of the stock that
roughly corresponds to your covered call option position.

CDS were totally unregulated; one could sell and sell and sell them for
premium - as AIG did with CDS on the mortgage-backed securities that came
out of the subprime boom - and just hope that the prices of the underlying
mortgages, and the real estate that backed them up, held up.

If they didn't, it's a mad dash to find Ben Bernanke's phone number.

The free-market advocates of this system, most prominent among them former
Federal Reserve chairman Alan Greenspan, blessed this system, for it seemed
to allow risk to be transferred from those who didn't want it to those who
were comfortable with it. However, once this system was utilized to make it
appear that it was much safer to issue and hold much higher levels of debt
than was previously considered prudent, that logic was turned on its head.
As risk got shuffled and dealt around like playing cards, what financial
regulators did not realize until it was too late was that the total amount
of risk the system was bearing was, if anything, exploding.

At the center of it all was AIG. The essence of insurance is the measurement
of risk - that's why a teenager with a Corvette pays a lot more in car
insurance premiums than a grandmother with a station wagon. AIG thought that
this experience provided background in pricing CDS risk.

They weren't even close. In exchange for premium, and not necessarily a lot
of premium., they sold every CDS they could beg borrow or steal. As Gillian
Tett put it in the Financial Times:

    On paper, banks ranging from Deutsche Bank to Societe Generale to
Merrill Lynch have been shedding credit risks on mortgage loans, and much
else. Unfortunately, most of those banks have been shedding risks in almost
the same way - namely by dumping large chunks on to AIG. Or, to put it
another way, what AIG has essentially been doing in the past decade is
writing the same type of insurance contract, over and over again, for almost
every other player on the street. Far from promoting "dispersion" or
"diversification", innovation has ended up producing concentrations of risk,
plagued with deadly correlations, too. Hence AIG's inability to honor its
insurance deals to the rest of the financial system, until it was bailed out
by US taxpayers. "

In other words, risk, far from being diversified across the world, was
highly concentrated, in AIG's computers. This would be a far more productive
focus for the public's outrage than the bonuses, but there's no
investigation of this, as opposed to the bonuses, which all have a face and,
probably a very exclusive address.
The issue of who loosed the shadow banking/CDS financial system onto the
world is mostly uninvestigated. There was the Commodity Futures
Modernization Act of 2000, pushed through the Congress with no debate in
either chamber, mostly by Republicans such as Phil Gramm of Texas, and
signed into law by president Bill Clinton a month before the end of his
term. It removed private party derivatives from regulation by the US
Commodity Futures Trading Commission; as applied to CDS, that was what
allowed one to hold so many of them without posting a margin.

On April 28, 2004, the US Securities and Exchange Commission approved a rule
that permitted major investment banks to operate with much higher leverage
ratios, allowing for up to $40 in loans for each dollar in capital.
Explaining his vote for the change, SEC commissioner Rod Campos is heard on
the tape of the meeting saying that "I keep my fingers crossed for the
future".

We now see that more in terms of prudent regulation was needed than just
what could be provided for by commissioner Campos' digits.

Asking how the shadow banking system grew these past years is like asking
why plants grow in highly fertile soil; no one in authority had to take a
lot of positive action - it just did.

Specifically, the conception of government as a negative, inhibiting force,
and the freedom of private finance to dream up and create just any financial
product they could think of, led to this circumstance. Those who knew, like
the Greenspan Fed, and the bankers themselves, were either profiting from
the experience or expected to profit from it once they left government
service. If you knew what was going on and objected, you were a veritable
spoilsport at the orgy; if you came all this way to understand what was
going on, why not go one more penultimate step, take off your clothes and
morals, join the fun?

AIG used to be a pure insurance company. General Electric used to sell good
toasters, Sears clothed the backs of Middle America. In one way or the
other, all three staid-and-true American commercial names have recently
allowed themselves to roll down the road to ruin and turn their companies
into hedge funds.

That, the recent obsession over manipulating leveraged finance instead of
actually producing something to be successfully sold in the markets of
commerce, is something that aches for a public debate it will never see.
(Consider Sears: majesty to hedge fund dust, Asia Times Online, May 14,
2008.)

But if the public is getting the AIG story wrong, it's also now getting an
even bigger story wrong.

An addicted cigarette smoker might deny that his nagging cough and scratchy
throat was the onset of the lung cancer or emphysema he was so often warned
about; "It's just a cold or allergy, right, Doc?" So seems to be happening
with America's addiction to foreign capital.

The first article I ever wrote for Asia Times Online, (US living on borrowed
time - and money" March 28, 2006), introduced readers to the US Treasury's
monthly Treasury International Capital (TIC) report, a compendium of how
much investment or short-term capital the US receives from foreign sources
every month. Back then, the US was quite the popular parking spot for
foreign capital, frequently drawing in over $100 billion a month.

That worm has certainly turned; the US in January, the last month data is
available, was actually net drained of foreign capital, to the tune of $150
billion. On his blog at the Council of Foreign Relations, economist Brad
Setser interpreted the data this way.

    Today's TIC January data was a disaster. $150 billion in (net) capital
outflows (negative $148.9 billion to be precise) cannot sustain even a $40
billion trade deficit.

Obviously, the concern is that those with still the capital to lend to the
US, primarily China, seeing the huge increase in US government demand for
borrowed funds with its now huge and ever-burgeoning budget deficits being
used to finance the economic crisis recovery programs, will fear that the US
dollars they use to buy US debt will depreciate in value, devastating the
value of their investments.

Previously, China has tried to give messages that slowly pulling out of its
dollar positions was exactly what it wanted to do, but America's cherished
habit of ignoring anything that foreigners say to it had it lending a
stone-deaf ear to the warnings.

Last week, as detailed on this site with W Joseph Stroupe's three-part
series (see Dollar crisis in the making Asia Times Online, March 14-18,
2009) and by Olivia Chung's article on Chinese Premier Wen Jiabao's warning
to the US to maintain the value of its currency as a matter of national
honor, (see Wen puts US honor on the debt line Asia Times Online, March 14,
2009) the message seemed to be being sent as loudly and clearly as possible.
Still, the US stockmarket ran true to form - it ignored Wen's warnings, and
continued its recent bounce off the lows.

So Ben Bernanke decided to give America's Chinese and other foreign
investors a good swift kick in the keyster as they headed out the door.

Meetings of the US Federal Reserve's interest-rate setting Open Markets
Committee used to be a lot more interesting back when there were actually
interest rates to set. Now, with rates at zero, the Fed has to work extra
hard to get the markets to take notice. At Wednesday's meeting, they did.

After committing another $750 billion for purchases of mortgage-backed
securities as part of its program of adding liquidity to the system through
"quantitative easing", the Fed had this for those foreigners who apparently
think that they can put America over a barrel by refusing to buy its debt.

    To help improve conditions in private credit markets, the committee
decided to purchase up to $300 billion of longer-term Treasury securities
over the next six months.

In other words - foreigners, we don't need your money; we'll print our own!
That's what's essentially been done with the short end of the Treasury yield
curve since the Fed's rescue operations from last September; it was probably
only a matter of time before they would attempt the same with longer-term
securities.

What will this do to the Fed's balance sheet? It will cause it to grow - a
lot. From being virtually non-existent a few years ago, the Fed has it soon
growing to almost $4 trillion - more than 25% of the country's gross
domestic product.

That's supposed to inspire confidence?

The potential drawbacks to this approach are obvious. Does Bernanke really
think he can convince foreign investors to make new investments in US
government securities by threatening the dollar value of their existing
securities? The last thing the recovery effort needs is long-term interest
rates in an uncontrolled rise.

A key factor currently holding down inflation in the face of the incredible
monetary expansion recently has been a decline in what is called monetary
velocity, the rate of which money circulates in the economy. Nothing will
ramp up velocity faster than a falling dollar; people will want to get rid
of that accursed green thing as soon as possible, before it falls even
further.

In the markets, the effect of the Fed announcement has been entirely
predictable. Although yields on 10-year US government securities fell to
2.5% from near 3% before the announcement (entirely expected, what with $300
billion of new buying to hit this market) they were back on the rise by late
Thursday.

With the US dollar, there's been no such ambiguity of effect. The euro rose
from 1.31 against the dollar to 1.37 immediately after the announcement, its
highest level against the greenback since early January. The dollar also
fell five cents against the yen, to under 0.93 cents/yen. Other
inflation-sensitive markets also fell in line: crude oil broke above $50 per
barrel for the first time since the New Year; gold takes the cake for
sounding the alarm bell, up over $77 per ounce just since the announcement.

But this collective 5% impoverishment of America drew no notice on Capitol
Hill. The House of Representatives, in the very rare mode of considering
themselves and acting as servants of the plebeians, overwhelmingly voted to
seize the AIG bonuses through confiscatory taxation; to have a similar
beneficial effect with the currency markets might require a repeal of the
laws of gravity.

I almost get the impression that, like a child with too many toys and who
has become bored with his most recent one, the public is tiring of AIG rage.
Will they now turn their focus to an actually important public issue?
Doubtful.

~^~^~^~^~^~^~^~^~^~^~^~^~^~^~^~^~^~^~^~^~^~
What are we going to do? A filmmaker pal who lives in Moscow was asking me
what kind of film he could do on this theme. "Making a movie like Zeltgeist
could be popular, words financial sceme, Greenspan, World >Bank, all kinds
of financial, banking schemes originated in the US would be a great
premise." I answered: "YOU PROBABLY do not see these programs in RUSSIA
but... if you watched tv here you'd see the entire country going nuts no
jobs, no homes, no money, many without food. half the homes in suburbia are
vacant. You can buy one for l0k a huge home. If you have a certain job. I
tell you, Karl Marx is laughing from the graveyard. Full punishment for
americans who wasted money, dreamt awake of the celebrity culture and 'ate
candies in Hell' as Pablo Neruda said in a poem...ignoring the fact that
their after rulers killed JFK for wanting to end the tyranny of the FEDERAL
RESERVE, they were off genociding in El Salvador, Nicaragua, Angola, Panama,
wrapped in the flag.  THE AMERICANS didn't read up on this, they let the
genocide happen, wasted their time. wasted their energy made bad choices,
this country is not only financially bankrupt THAT MELTDOWN  is a symbol of
the emotional bankruptcy we have here. RUSSIA is a STEP UP up from what we
have here. I've done research and unless a civilian manufacturing sector
starts up, even if SCHUMACHER SMALL, like you make sandals I sell you
oranges... we are going under. My kids will be crossing the border to clean
houses in Tijuana.

The reason YOU never have enough money and why there is NEVER enough money
in the economy is because ALL excess money goes into INTEREST payments. The
entire system is BUILT this way. Every dollar comes into existence as a new
unit of DEBT. It is thus MATHEMATICALLY impossible for this system to
continue because the productive energy of every man, woman and child is
effectively siphoned off and allocated to the creators of money. The
creators of money are the bankers, politicians and executives behind a
system known as the Federal Reserve System. The Federal Reserve System is
not only a system of unjust enrichment, it's a system that CAUSES debt
slavery. It is also a System that violates the United States Constitution.
The Federal Reserve System, and other alter-ego systems such as the
IMF/World Bank, were covertly and gradiently institutionalized between 1910
and 1971. The full negative effects of this System are now being realized,
for the Federal Reserve System is designed to benefit no one other than the
LENDERS OF MONEY and the APOLOGISTS OF GLOBALIZATION.

One can analyze this System, and the economy it generates, using
sophisticated accounting and economics language, but it all comes down to
one simple point: YOU CANNOT MAKE MONEY OUT OF DEBT AND EXPECT FINANCIAL
SANITY FOR LONG.

Anticipate the hyper inflation that's coming when the multi trillions Obama
is printing hit the streets. Famine. THINGS TO COME a famous English film
from 1936. Find a copy. You can shoot that B&W cheap but you don't want to
come back to USA right? You need to be a tad bicoastal. Film the poverty
here, then make it a RUSKI movie Shoot rest of it in your country. But know
this: a film where russians LAUGH at the demise of capitalism is not a good
plot 'center ' BETTER would be Russians HELP US. THey send food or
something. They send SOCIALISM TRAINERS to the villages here. HOW TO MAKE
sandals, how to trade fruit for grain, how to make bread. sauerkraut,
pickles. We need a lot of BABUSHKAS to come over here, right? Ruski welfare
for us. Call it the BABUSHKA AIR LIFT!

<==== BACK  <http://www.masterjules.net/meltdownwebpage.htm> TO THE MELTDOWN
WEBPAGE

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