Mr. Paulson¹s Deceptive Speech

Michael Hudson

Yesterday, November 20, Treasury Secretary Henry Paulson presented so deceptive a speech at The Ronald Reagan Presidential Library in Simi Valley, California, that was that its false framing of Washington's financial giveaway to Wall Street deserves to be enshrined in the annals of Orwellian doublethink.

What prompted the speech seems have been Congressional criticism of Mr. Paulson¹s bait-and-switch transfer of public funds to Wall Street, and the Federal Reserve¹s transfer of an amount twice as high as Congress's $700 billion. His most urgent aim was to ward off accusations that the Treasury and Federal Reserve have acted illegally. Federal law, and in particular the Anti-Deficiency Act, prohibits Treasury from spending money, lending money, and guaranteeing or buying assets without Congressional approval. The Federal Reserve can and does lend on a secured basis, but only if it expects not to realize losses. (Italics added.)

But Congress did not approve the Treasury's $250 billion of preferred stock investments in Wall Street banks. The happy recipients, their stockholders and officers evidently worried precisely that this "investment" would end up taking losses. That is why the Treasury stands in
back of bona fide creditors. That is why preferred stock was preferred by existing stockholders to loans and guarantees (which have priority in case of bankruptcy), not to mention the conditions that Congress thought it had laid down calling for these institutions to renegotiate mortgages to bring them in line with the debtor's ability to pay.

The Fed has refused to let Congress know any details ­ any details at all ­ about its cash-for-trash swaps with these institutions. This is what has concerns Congress, and what has prompted Bloomberg to bring a lawsuit in order to discover and publicize the details. It is not hard to'see why this curiosity exists. The only reasonable explanation as to why investment banks, American International Group (A.I.G.) and commercial banks apparently headed by Citibank (whose shares plunged yet another 30 percent during Wednesday and Thursday) have turned over a trillion dollars worth of illiquid mortgage securities, junk bonds and who knows what other junk to the Fed is to avoid taking a loss on these bad loans and investments. As Mr. Paulson explained matters, ³the Federal Reserve has statutory authority to lend against a pool of mortgage loans on a fully secured basis. The Fed was able to assist the JPMorgan purchase because they believed that there was a reasonable prospect of avoiding losses.

What time frame are we talking about here? Evidently one in which Mr. Paulson will have left the administration, sticking his successor with the losses and, presumably, the blame.

Everything seems to have been unexpected to Mr. Paulson ­ as if ignorance is a defence. When I came to Washington in 2006, he reminisced, markets were benign. We were still in Alan Greenspan's idea that inflating asset prices on credit constitutes wealth creation. At that time I myself was only one of many who warned that the real estate market had come to rest on a foundation of junk mortgage lending. Every banker with whom I spoke at the time knew this. But most were still seeking to make hay while the making was good, and it was still quite good ­ for the banks, that is. Matters were not benign for the increasingly debt-ridden U.S. economy, but at least they were rosy for Wall Street. Bank executives were paying themselves enormous
salaries and even larger stock options. Meanwhile, the smarter money managers were beginning to shift their funds out of the U.S. economy in a wave of capital flight of a magnitude not seen since Russia in the mid-1990s.

Acting as if all this could not have been foreseen, Mr. Paulson assured his mistake-friendly audience, There was no playbook for responding to a once or twice in a hundred year event.² A kind of random historical earthquake seems to have been at work, a financial San Andreas fault. Mr. Paulson then trivialized this, however, with the euphemism "housing correction."

The key is, what is to be corrected? Is it not the financial market itself?

Mr. Paulson then set about dissembling the character of the U.S. and global financial system. "Our financial system," he claimed, "is built on the hard work of our citizens; it is built on the savings of our citizens."

This is where he seeks to spread the disinformation that the explosion of debt that now burdens the U.S. economy has not been the case of Americans saving. It is the result of autonomous credit-creation by the commercial banking system. The basic financial principle of modern banking is that loans create deposits. The bank loan comes first ­ then the deposit or saving.

Here's how it works. A bank's marketing department seeks to drum up customers for debt. A borrower will go into a bank and sign a promissory note, and the bank then creates a checking account in the amount that is stipulated. The note calls for a specific rate of interest to be paid ­ a
rate much higher than that which the bank can borrow from the Federal Reserve or in the money market in general. One benchmark global rate to bankers is the London Interbank Borrowing Overnight Rate (LIBOR), and the other is the Federal Reserve's discount rate to banks. (Japanese banks also provided loans to large financial institutions at under 1% per year,
spurring the international carry trade, borrowing cheap in yen and then converting the funds into other currencies and lending at a higher rate.)

None of this involves saving. It involves credit creation in which banks have a legal monopoly, with funding monetized by the U.S, Japanese and other major foreign central banks. This free credit creation is at the root of the problem, not the natural growth of savings.

What have banks done with this credit-creating privilege? Nearly all their loans have been to enable buyers to purchase assets (real estate, stocks and bonds or entire companies) already in place, or to enable hedge funds to play the mathematical games that have come to characterize today¹s casino capitalism. Mr. Paulson depicts the resulting financial system as being essential for the good functioning of "Main Street." But surely he must know some lawyer who might explain to him that only very, very wealthy speculators are allowed to play the hedge fund game of financial derivatives that lies at the heart of today's financial breakdown and negative equity
for banks that have made bad gambles. The legal reality is that in order to invest in hedge funds and similar casino capitalism gambles (or in Broadway plays and other high-risk ventures, for that matter), prospective financiers must sign releases attesting to the fact that they can afford to lose their money.

"If the financial system were allowed to collapse,"Mr. Paulson warned, "it is the American people who would pay the price. This has never been just about the banks; it has always been about continued prosperity and opportunity for all Americans." Not really. Wall Street hardly is so altruistic. It has increasingly made its money off Americans, by engaging in increasingly predatory, extractive lending to the economy. That is what has caused the U.S. debt burden to soar so far ahead of the ability of debtors to pay. It also is what is now diverting spending away from consumption and (for companies) new capital investment to pay creditors.

Not content with misrepresenting how the U.S. economy works, Mr. Paulson then drew a picture of the global economy that also is a travesty. "The world was awash in money looking for higher return," he explained, "and much of this money was invested in U.S. assets."

Well, not exactly. The world economy has been awash in the U.S. payments deficit, which has swollen the reserves of central banks in the creditor nations from Asia to Western Europe. These central banks have recycled $4 trillion their dollar inflows to the United States under dollar
hegemony. Rather than seeking a "higher return," central banks have found themselves o liged to invest in low-yielding U.S. Treasury securities, or somewhat higher Fannie Mae and Freddie Mac securities. These returns are much lower than U.S. investors have sought in buying up foreign companies and their stocks, whose price appreciation far exceeded the rate that foreign economies were able to recoup on their dollar recycling to the United States.

Mr. Paulson wants above all to deter foreign economies from breaking away from this dysfunctional system. The second important priority, he explained to his Reagan Library audience, must be continued reform of the International Financial Institutions like the World Bank and the IMF to allow for greater participation of developing nations.² The aim here is to make the financial sector's lobbying control over the world¹s financial system global. A final reform priority must be consistent liberalization of policies on trade and investment, with an emphasis on avoiding new protectionist measures and achieving a breakthrough in the Doha
round of global trade talk.

New protectionist measures! Even as U.S. auto companies are advocating special subsidies for the U.S. auto industry in Detroit and pursuing beggar-my-neighbor financial policies (let foreign banks and economies absorb the financial loss from playing in the Wall Street casino),
foreign countries are not to develop a financial system more highly regulated, an agriculture more aimed at feeding their own people. They are not to block capital outflows from the United States based on ³free² credit creation to buy out their commanding heights as the IMF imposes austerity plans and forced privatization sell-offs on Third World and post-Soviet countries while cutting taxes at home in the face of an escalating U.S. trade deficit and rising foreign military spending.

Mr. Paulson's speech looks like a major salvo in the Bush Administration's attempt to make both the Wall Street bailout and the U.S. predatory finance irreversible, while the government replaces public debt (Treasury bonds) for Wall Street's bad gambles. His errors are calculated to
misinform, as are most lobbying efforts by the banking and financial sector. One can only hope that Congress will question his testimony that has repeatedly followed this line with more acumen than prompted its earlier acceptance of the Treasury's bailout act. It's time to clean up this act.

Devasting videos on the banking crisis

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Who Screwed Up the Housing Market and Caused the World Wide Credit Crunch ??

How the Democrats Created the Financial Crisis - (RePUGlican View)

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the st More..ory is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

MUST READ !! Webster Tarpley on the Bailout (and the jackals bringing you The Plan hahahaha)

NO To The Paulson-Bernanke
Derivatives Scam Bailout
Bail Out the American People, Not Wall Street!

An Economic Recovery Strategy for Protectionists,
Dirigists, Mercantilists, and Populists

By Webster G. Tarpley
9-23-8

WASHINGTON DC -- The grand theft bailout now being rammed through Congress by Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, and other officials of the Bush regime with the help of accomplices Pelosi, Majority Leader Harry Reid, and other parliamentarians is a monstrosity for the ages, combining every hideous feature of monetarism, elitism, oligarchism, and sheer feckless incompetence. It is to all intents and purposes a national suicide note of the United States of America, a contract with the devil that absolutely guarantees irrevocable national decline. For any person of goodwill there can be only one impulse at the present moment, and that is to stop this bailout -- to block it, to sabotage it, to bottle it up, to load it with killer amendments, and to do everything legally possible to stop this insane design from going through.

IF MCCAIN VOTES AGAINST THE BAILOUT, HE WILL WIN THE PRESIDENCY

In political terms, McCain is now running well to the left of Obama on this issue, with a much stronger populist profile. McCain has attacked the outrageous greed and corruption of Wall Street. Obama does not dare attack Wall Street, since these are his masters. Obama, sounding like Milton Friedman, only attacks Washington. Obama has said that he will support whatever Paulson demands. That is not a surprise, since Paulson represents Goldman Sachs, and Obama is a wholly owned property of Goldman Sachs, which is his single biggest source of campaign contributions. Obama is a creature of Brzezinski, Soros, and Rockefeller, and without them he has no existence; Obama is an abject Wall Street puppet, an agent of finance capital. This week, both senators will have to decide how they vote on the odious derivatives bailout. Obama will surely vote in favor of it, since this is what Wall Street demands. If McCain votes against it, he will most probably propel himself into the White House on the model of Give 'Em Hell Harry in 1948. Filthy corrupt Democrats like Schumer are already attacking McCain as the new Huey Long. Huey Long, the Louisiana populist of the 1930s, had many positive features, and we could certainly use a good dose of Huey Long in this country to counteract the elitism, oligarchism, condescension, and arrogant snobbery of foundation operatives like Obama. The bailout is already very unpopular ­ 72% of all voters are opposed to it ­ and it will become more and more hated when it becomes clear that it is also a failure. McCain's course is clear. Will he have the brains and guts to cross Obama's T on this vital issue?

PAULSON OF GOLDMAN SACHS, WOULD-BE FINANCE DICTATOR

Paulson is a ruthless and brutal eco-freak usurer who learned his trade at the Goldman Sachs stock-jobbing operation. He is now the leading member of the committee of public safety which rules in Washington, and which includes Gates, Rice, and Mullen. He now demands the astronomical sum of 700 billion dollars for the bailout of mortgage-backed derivatives, collateralized debt obligations, credit default swaps, and other poisonous derivatives. Make no mistake -- this is not a bailout of homeowners who are threatened with foreclosure; it is a bailout of the lunatic house of cards which desperate bankers have built on these mortgages using derivatives. The entire crisis is not a crisis of subprime mortgages, it is a crisis of the derivatives bubble which was launched by Wendy Gramm of the Commodities Futures Trading Commission and Greenspan of the Fed with the connivance of Robert Rubin of Goldman Sachs and Citibank, and others in the Clinton administration, some 15 years ago.

These derivatives now amount to a total worldwide notional value that can be estimated between 1 quadrillion and two quadrillion US dollars. [!!!!!!!!!!!] This sum is so large that it dwarfs the total value of the entire planet earth and all those who live here. Compared to the cancerous, bloated, and fictitious mass of derivatives which is at the root of this crisis, the $700 billion demanded by politicians, large as this may seem, is nothing but a drop in the bucket. And a drop in the bailout bucket is what it will be. The mass of world derivatives between $1 and $2 quadrillion represents an insatiable black hole which is capable of putting an end, not just to civilization, but the human life itself. The moral choice could not be clearer: humanity will either destroy the derivatives bubble in our time, or the derivatives bubble will surely destroy humanity. Those are the stakes in the current exercise.

Paulson and Bernanke, both lawyers for the Wall Street jackals, lampreys, vultures and hyenas, argue that the public interest demands a bailout of their cronies at Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Citibank, Bank of America, Wachovia, and the other large money center institutions. Before the American public antes up $700 billion just for openers in the game of genocidal poker which run by the infernal croupiers Paulson and Bernanke, we would be very well advised to examine the veracity of this premise.

COMMERCIAL BANKS ARE INDISPENSABLE

It is of course true that the healthy functioning of the United States economy requires a viable and flexible system of commercial banks. No one should doubt the necessity of commercial banks.

Andrew Jackson was clinically insane on this point, and he still has not a few followers around today. But it ought to be clear that without the services of a well developed commercial banking system, it is impossible to organize business activities as essential as payments, deposits, checking, payrolls, and the discounting of short-term commercial paper, bills of exchange, bills of lading, and all the credit instruments that are intimately connected with real productive activity. Without a functioning commercial banking system, the economic heart of the United States would stop beating, as it briefly did at the end of the Hoover administration in March of 1933. Without commercial banks, no wheel of a factory or railroad can turn, and no commodities can move to show up in supermarkets.

JPM, CITI, BoA ARE DERIVATIVES MONSTERS, NOT COMMERCIAL BANKS

But when we look at institutions like J.P. Morgan Chase, Citibank, and Bank of America, we become aware that these large money center institutions have become detached from any conceivable connection to the world of production, wages, transportation, and all other useful and productive activities. These institutions are not commercial banks any more in any meaningful sense of the term. Ten years ago, in the midst of the Asian financial crisis and the aftermath of the Russian GKO state bankruptcy collapse, the boss of JP Morgan Chase went on television to announce that his bank was specialized in the "risk business." The risk business meant that JP Morgan Chase, had simply given up on the traditional activity of commercial banks, which was primarily to provide loans to corporations for productive investment in plant and equipment that would also create well-paid industrial jobs. J.P. Morgan Chase decided long ago that that activity was nowhere near profitable enough to be continued.

Instead, J.P. Morgan Chase devoted itself more and more to the issuance, sale, and purchase of derivatives. As early as 1992, the best definition of J.P. Morgan Chase was that it was no longer a commercial bank but rather a derivatives monster. In 2002, the J.P. Morgan Chase derivatives monster came very close to imploding, collapsing in on itself like the hopeless black hole that it still remains to the present day. According to the most recent report of the Comptroller of the Curreny of the US Treasury dated September 30, 2007, JP Morgan Chase today has between $90 trillion and $100 trillion of derivatives. In reality this is a very low-ball estimate, and the real derivatives exposure is some multiple of this figure ­ perhaps $300 or $400 trillion, especially now that Bear Stearns, a smaller black hole of derivatives has been absorbed. But even a mere $90 trillion is already six times the US GDP (currently estimated between $14 and $15 trillion).

DERIVATIVES ARE FINANCIAL AIDS

The question of the derivatives is once again the central issue of the crisis. Most people may not even know what derivatives are, although by now many have some idea that they are dangerous and toxic. French President Jacques Chirac once defined derivatives as financial aids, and he was right. A share of stock supposedly represents part ownership in a corporation. A corporate bond is a debt instrument issued by a corporation, with some claim to a part of the assets in case of bankruptcy liquidation. That means that the stocks and bonds are paper, but paper that is at only one remove from the real world of production, consumption, employment, and wages. The derivative is something radically different.

A derivative represents paper based on paper, no longer a stock or bond, but a future, option, or index that is based on some stock, bond, or other form of paper. Derivatives are therefore at least one step further removed from the world of tangible physical commodity production of useful items which humanity requires in order to survive and to conduct civilization as we know it. In addition to the options, futures, and indices, we have all the possible permutations and combinations of the above, with new variations that are almost infinite. Even to catalogue these would take a book. In addition to these exchange traded derivatives, there is a much larger class of derivative which does not appear on the Chicago Board Options Exchange or analogous institutions in all the money centers of the world. The second and larger class represents the counterparty derivatives, including such things as collateralized debt obligations, mortgage backed securities, structured notes, credit default swaps, and the myriad of other derivative products.

These derivatives were originally supposed to be used as a hedge against risk, but before too long they began to represent the biggest single source of risk and the entire lunatic edifice would finance. By now, to repeat this point yet again, the total world derivatives of in excess of one quadrillion dollars -- that is to say, 1000 billion dollars, and may be already approaching the neighborhood of $1.5 quadrillion or even more. One of the inherent problems of derivatives is that nobody knows this exact figure, since derivatives are not reportable in many countries and tend to escape regulation by the proper financial authorities.

DERIVATIVES ARE USELESS AND A THREAT TO CIVILIZATION

You cannot eat derivatives. You cannot live in a derivative. You cannot wear derivatives as clothing, nor can you drive a derivative work. You cannot sail in them or fly in them. They cannot be used as tools of any useful trade. They are not computers, not machine tools, not pharmaceutical equipment, not agricultural implements.

Derivatives are therefore totally outside the realm of capital goods production needs, no matter how these may be defined.

FOR RECOVERY, WIPE OUT, SHRED, DELETE ALL DERIVATIVES

J.P. Morgan Chase, therefore, performs no useful or productive social function, and there is absolutely no reason in the world why the people of the United States should want to bail out this pernicious and socially destructive institution. It has probably been several decades since J.P. Morgan Chase created a single modern productive job. J.P. Morgan Chase's strategic commitment in favor of the derivatives bubble means essentially that we can easily dispense with most of the functions of this self-styled "bank," really a casino. Instead of being bailed out, J.P. Morgan Chase ought therefore to be seized by the Federal Deposit Insurance Corporation, and put through chapter 11 bankruptcy. In the course of that bankruptcy reorganization, the entire derivatives book of J.P. Morgan Chase must be deleted, shredded, used as a Yule log, or employed to stoke a festive bonfire of the derivatives. The world did much better when there were no derivatives, and will get along just fine without them.

Derivatives were of very dubious legality in general and were illegal in some of their specific forms until the mid-1990s.

INSTRUMENTS MEANS DERIVATIVES

According to Paulson's pact with the devil published in the New York Times on September 20, 2008, the Secretary of the Treasury is supposed to be empowered by Congress to spend $700 billion on mortgage related securities, obligations, and instruments. That last word instruments is the favorite euphemism of television commentators and journalists who want to propose a derivatives bailout without using this word, which has now become to some degree unmentionable and taboo, presumably because of its highly negative connotations left over from the crises of more than a decade ago. Accordingly, one very good killer amendment that ought to be added to this pact with the devil should state that not one penny of taxpayer money should ever be used to finance the purchase of derivatives, no matter how they may be euphemistically referred to.

WHY BUY MORTGAGE BACKED SECURITIES THAT HAVE NO PRICE BID?

Paulson wants to buy up derivatives. But at what price? Derivatives have no intrinsic value. Like the rasbucknik in the old L'il Abner comic strip, derivatives have negative value, since somebody has to be paid to cart them away. Counterparty derivatives currently have no price, since there is no market where they are trading, and nobody would want to buy them if there were such a market. Collateralized debt obligations were selling at 5 cents on the dollar a few weeks ago, but that was well before the current crisis broke in its full fury. So how will Paulson know how much to pay for the derivatives he wants to purchase? Will he use the discredited Black-Sholes model, which led to the bankruptcy of the Long Term Capital Management hedge fund ten years ago? Given all this, the only price which can be assigned to the mass of derivatives is not their notional value, but rather a big fat ZERO. Anything else is stealing from the government.

"INVESTMENT BANKS" DRIVE UP THE PUMP PRICE OF GASOLINE

Let us now leave behind the category of the commercial banks and move on to institutions like Goldman Sachs and Morgan Stanley, the stock jobbing operations or counting houses that like to call themselves investment banks these days, even though they do not have the status of a commercial bank and are not members of the Federal Reserve. Why should any public money at all be used to prolong the noxious lives of these sociopathic and pernicious institutions? A short examination of what these so-called investment banks do will reveal that there is no public interest in keeping these creatures alive, and that, once again, touch better off without them.

Investment banks used to assist corporations and floating issues of stocks or bonds on the financial markets. Investment banks were supposed to function as the advisers of industrial corporations and other corporations as they sought to raise capital needed for new plant, equipment, and jobs. But today, these functions have virtually disappeared. The investment banks do a certain amount of work in initial public offerings for IPOs of new securities, but these are almost always of a financially speculative nature. The main thing is that investment banks now place bets on certain classes of assets in the hope of turning a purely speculative profit for themselves. Goldman Sachs and Morgan Stanley maintain trading desks and engage in purely speculative trading of assets which they themselves own, and most of the time these assets represent derivatives of one kind or another. In recent times, the most important asset class which Goldman Sachs and MorganStanley have been trading is probably future indices on commodities, especially oil. Goldman Sachs and Morgan Stanley between them have in the past year by various estimates accounted for about half of the speculative activity in the commodities markets of London, New York, and other money centers which brought about the doubling of the per barrel price of oil between July 2007 and July 2008, increasing the cost of gasoline to almost five dollars per gallon.

GOLDMAN SACHS, MORGAN STANLEY CREATE I.C.E. TO FLAY AMERICANS

In a very real sense, American motorists filling their gas tanks at the pump at exorbitant prices have been involuntarily subsidizing the speculative derivatives activity of Goldman Sachs and Morgan Stanley. [absolutely true! This is a hidden tax that discriminates against the poor and working class!] How bitterly ironic that the same American motorists should now be taxed in order to permit their tormentors to live on and to continue to mercilessly loot them. Goldman Sachs and Morgan Stanley found that even the very weak regulatory regime maintained here in the United States under the auspices of the Commodity Futures Trading Commission was too onerous for them because it slightly constrained their rapacious quest for speculative profits at the expense of the American people. These two investment banks therefore created a new speculative commodity exchange, the ICE or Intercontinental Exchange located in London, with a regulatory regime is virtually nonexistent. The ICE or Intercontinental Exchange in London is where about half of the world
futures contracts in oil have been trading in recent months.

Goldman Sachs and Morgan Stanley, like their now-defunct brethren Bear Stearns, Lehman Brothers, and Merrill Lynch, have also made many speculative investments in the area of mortgage backed securities based on predatory subprime mortgages. The adjustable rate mortgages that underlie these derivatives should have been declared illegal long ago. But now let us imagine what will happen if a hapless victim of these predatory lending practices is forced into foreclosure in the current world economic great depression.

Goldman Sachs will send the bailiff to your door to throw you, your family, and your belongings out on the street, even though you have been taxed to permit Goldman Sachs to continue its sociopathic existence. You will in effect be robbed out of one pocket even as you are being pushed out the door and made homeless by the same institution which has been the beneficiary of your forced charity.

Surely any politician daring to come forward to suggest the public bailout of Goldman Sachs so that it can continue to enforce foreclosures against the American citizens who are paying the bill for the financial excesses of this bandit institution ought to be tarred and feathered and run out of town on a rail. Yet this is exactly what Pelosi, Reid, Dodd, and Frank are proposing to force through the U.S. Congress in the coming week. This represents a new low in public morality.

With Fannie Mae and Freddie Mac, the situation is slightly different, but the same criteria ought to apply. Fanny and Freddie worked very well during the three decades after the formation of Fannie Mae in 1938 as an agency of the federal government -- a hillbilly cousin of the US treasury, as it used to be called.

Things began to go wrong in 1968 when Fannie Mae was privatized, under the pernicious influence of the doctrines of the monetarist Milton Friedman of the infamous Chicago school of pseudo-economics and obscurantism. Fanny and Freddie have now been placed under the control of conservators, but they ought to be nationalized as part of a permanent state sector of the US economy, and operated as the public utility that they were intended to be. The salaries of their officials ought to be determined by the government-wide GSA schedule. Fannie and Freddie have guaranteed mortgages, and ought to continue to do so. But they have no obligation to guarantee mortgage backed securities or any other form of newfangled derivatives which were never mentioned in their charter.

Accordingly, Fannie and Freddie thought to strip away the mortgage backed securities that have been used to package or bundle the mortgages that they now hold. The mortgages represent a valuable asset for the future, under conditions of economic recovery which we intend to organize. But that extra layer of derivatives paper represents a useless additional tax on the public treasury, which the US government has no obligation to maintain. In short, it is time to separate the socially useful core of actual mortgages representing residential and commercial properties from the harmful and speculative overlay of the mortgage-backed security. By this kind of financial engineering, speculators can receive condign punishment, even as the public treasury is believed of an extra layer useless payment which would only reward speculative crimes.

If anyone should inquire as to the ultimate philosophical causes of the current George Bush world economic depression, the answer is simple: this depression is a direct result of the influence of Milton Friedman and the Chicago school, who are themselves to kind of come down American version of the Viennese school of Friedrich von Hayek. Ludwig von Mises, and other charlatans masquerading as economists. The common denominator of the Chicago school is the Vienna school which is represented by the right-wing anarchist thesis that government is always bad and the private sector, especially speculators, are always good. This absurd thesis is now being consigned to the dustbin of history. Friedman and von Hayek, if they were alive today, would doubtless demand the full fury of the free market the unleashed against the American people. This would lead, not to a recovery, but merely to death on a large scale.

The implications of the Chicago school and the Vienna school under current circumstances are nothing short of genocidal, and even the financiers are hastily dumping the discredited doctrines of Friedman and from Hayek as they rush to get their hands into the public till through bigger and better bailouts in an endless series. There is nothing anywhere in the world left today that might resemble a free market, only an endless list of cartels, trusts, monopolies, oligopolies, duopolies, and other conspiracies in restraint of trade. In fact, there has been nothing even vaguely resembling a free market in most of the world in the past several centuries. What is collapsing today in September 2008 is the delusion that such a thing as a free market might exist in the modern world.

The same negative judgment applies to the lunatic doctrines of Joseph Schumpeter, who preached the madness of creative destruction as a way out of the world economic depression of the 1930s.

Schumpeter's doctrines today are nothing less than a public menace, and persons who demand a deflationary crash of the world economy by preaching the Andrew Mellon formula of liquidating labor, liquidating stocks, liquidating bonds, liquidating real estate, etc., are to be put in a padded cell. This is even worse than Herbert Hoover. It was tried in 1932-33, and it turned out to be a bottomless pit already then, so it does not need to be tried again.

BACK TO THE NEW DEAL: RESTORE THE GLASS-STEAGAL FIREWALL

Scribblers like Friedman and von Hayek were paid by finance oligarchs to wage a relentless war against that heritage of the Franklin D. Roosevelt New Deal, the set of policies which allowed humanity to survive the Great Depression of the 1930s. The current crisis would not have been possible in the present form if the institutional safeguards enacted during the New Deal had been left in place, as they should have been. These safeguards represent permanent features of civilization, and they need to be restored. The best example is the repeal of the Glass-Steagall Act under the Clinton administration in 1999. The Glass-Steagall Act was a classic piece of New Deal legislation which established that being a commercial bank and being a stockbroker are mutually exclusive activities that could not be legally combined in the same company.

Commercial banking was one thing, and stock brokerage was something completely separate. Naturally, the greedy financiers and their spokesmen clamored for the repeal of Glass-Steagall, and they finally got their wish. Now less than 10 years later all of the Wall Street banks, seemingly without notable exceptions, are bankrupt and insolvent institutions that cannot not survive without a massive infusion of taxpayer money. We need to restore Glass- Steagal, which will mean among other things that Goldman Sachs and Morgan Stanley will not be eligible to become bank holding companies after all. If you don't like your tax bill next year, you should thank Newt Gingrich and others who made it their business to destroy and roll back the achievements of the New Deal in the name of the despicable ideology of monetarism as preached by Friedman and von Hayek. Newt, by the way, is now calling for an immediate deflationary crash to find out what the real prices of housing might be. This is like doing experiments on your own flesh, and Newt should go to the funny farm.

BACK TO THE NEW DEAL: RESTORE THE UPTICK RULE

Another example is the uptick rule. This New Deal measure meant that it was illegal to sell a stock short if it were continuously in decline. The speculator had to wait until there was an uptick, meaning a trade in which the stock in question increased in price; only then could a short sale be carried out. Another piece of bitter irony inherent in the present crisis is that this uptick rule was abolished by the feckless and incompetent Chairman Cox of the Securities and Exchange Commission at the beginning of last summer, just in time for the explosion of the world credit crisis which has led to the current world economic depression. Incredibly enough, Chairman Cox of the SEC has been unable to pull himself together long enough to permanently re-impose the uptick rule.

Instead, he has drawn up a list of 799 financial institutions and banks whose stock will now be illegal to sell short for at least 10 days, although one suspects that this prohibition will be prolonged indefinitely. This crackpot expedient reveals the true nature of the current monetarist regime. Shorting and destroying General Motors, which actually produces something useful, is fine, but no shorting of JP Morgan Chase, which is a public menace that produces nothing but toxic paper. The long-term roots of the current crisis go back to August 15, 1971, when Nixon, Kissinger, Arthur Burns and George Shultz wantonly destroyed the Bretton Woods system of fixed currency parities, ushering in the new world of financial risk which is now collapsing around us.

NATIONALIZE THE FEDERAL RESERVE AS A BUREAU OF THE TREASURY

The present crisis ought to provide the death warrant for the failed Federal Reserve System. When the Fed was created back under Woodrow Wilson, its Rockefeller and Morgan sponsors promised that the Fed would protect us against all future financial panics. The Fed failed once in 1929-1933, and now it is failing again for a second time. The Fed is worthless as a firewall against depression. We must therefore seize the Fed, audit it, nationalize it, and operate it in the future as a bureau of the US Treasury. From now on, we must go back to the Constitution, meaning that the size of the money supply and short-term interest rates will have to be determined by public laws of the United States, passed by the House and the Senate and signed by the president. Using this method, we can mandate new initial credit issues of $1 to $2 trillion to be used exclusively as low interest (.5% to 1%) and long-term (30 to 40 year maturities) credit for productive purposes only ­ manufacturing, farming, mining, commerce, energy production, infrastructure, and the other things we need. We should stop having the Fed lend money to Citibank at 2% and then having the Treasury borrow that same money back for 4% to 5% in the form of Treasury paper. Nationalize the Fed, and let the Treasury finance itself, cutting out the parasitical middlemen like JP Morgan Chase, Goldman, Citibank, and the rest. The taxpayers will be the big winners.

HOOVER'S RECONSTRUCTION FINANCE CORPORATION WAS A FAILURE

The Paulson-Bernanke $700 billion is roughly comparable (factoring in about 2000% inflation from 1932 to 2008) to the Herbert Hoover Reconstruction Finance Corporation, which started with $2 billion real 1932 dollars, but failed because it tried to prop up insolvent banks and shore up collapsing financial values. Under FDR, the RFC was put under Jesse Jones, who used it to create real plant and equipment with great success. Under Jones, the RFC contributed decisively to US economic recovery by building up the Metals Reserve Company, the Rubber Reserve Company, the Defense Plant Corporation, the Defense Supplies Corporation, the War Damage Corporation, the U.S. Commercial Company, the Rubber Development Corporation, and the Petroleum Reserve Corporation. In other words, the RFC under Jones rebuilt the industrial infrastructure which we have been using down to the present day. Most of these investments represented added physical commodity production.

Today, this could be repeated to produce infrastructure and energy plants for civilian use.

CLEARING THE DECKS FOR WORLD ECONOMIC RECOVERY

It is time to forget about paper and the price of paper, and to concentrate on production ­ securing the tangible physical commodities and hard commodity production which are necessary for human life and civilization. It is impossible to prop up financial values in a panic, and it is foolish to try. To secure a decent future, we must now enact the following measures. Any of these points, all of which seek to defend the general welfare and the public interest, can and should be used as killer amendments to be attached to the current bailout monstrosity as a means of bringing it down.

Stop all foreclosures on homes, farms, businesses, factories, mines, transport systems, for a period of at least five years or for the duration of the present world economic depression, whichever takes longer. If you throw a family out of their home or shut down a family farm, taxicab company, trucking firm, ferry, airline, railroad, or factory of any kind because of debt, you will be on your way to Leavenworth. All politicians now say that we have to keep families in their homes. Excellent! A uniform federal law with real teeth is the way to do it.

Seize bankrupt banks and financial institutions. Put them through Chapter XI bankruptcy, and cancel the hopelessly unpayable parts of their debts, starting with their derivatives book.

Wipe out all derivatives, whether exchange traded or counterparty, without compensation. They have always been illegal. They are now a threat to all of our lives. Not one penny of public money must go to buy derivatives.

Securities transfer tax or Tobin tax on all financial transactions, including stocks, bonds, foreign exchange, etc. This is a sales tax on finance oligarchs who need to start paying their fair share. This will take the life out of the booze for many speculators.

Stop oil, food and commodity speculation with comprehensive re- regulation including position limits, 50 to 100% margin requirements depending on market conditions, and by distinguishing between legitimate hedgers and predatory speculators.

No tax increases on households. Surtax for foundations like the Ford, Rockefeller, Carnegie, Annenberg, and Gates Foundations, who use their funds not for charity but for subversion and divide and conquer social engineering to divide and weaken the American people in defense of the financier interest.

Restore business confidence and credit with new credit issue through the nationalized Federal Reserve, operating under the legal auspices of the US Treasury. Use credit as a public utility. Provide cheap, long-term credit for productive purposes only, not parasitical speculation or financial services.

Institute an absolute guarantee for Social Security, Medicare, Medicaid, Head Start, WIC, food stamps, unemployment insurance, and the other remaining elements of the social safety net. No "entitlement reform" under any circumstances. Austerity for bankers, not people. Use the proceeds from the Securities Transfer Tax to replenish the Social Security Trust Fund and preserve the other vital programs through the end of the twenty-first century.

Using New Deal methods, it is possible to stop a depression cold in a single day. We did it before, and we can do it again. Only 28% of the American people now support the monstrous derivatives bailout, with 37% opposed and 35% unsure, according to Rasmussen on Sept. 22. This is an issue powerful enough to crystallize the current party re-alignment in the same way that slavery in the territories did in 1860, or the last depression did in 1932. Within a month, the current empty husks of the gutted Democratic and Republican Parties could collapse, and be replaced by the pro-Wall Street Bailout Party led by Obama and his phalanx of rich elitists and Malthusian fanatics from both parties, and the pro-middle class and pro-worker Anti-Bailout Party with support from right-wing Republicans, libertarians, and working class Democrats. Who will have the brains and guts need to assert leadership over the Anti- Bailout Party? Will it be McCain? Or Hillary Clinton?

Or someone else? We will soon find out.

See also by Tarpley (he's real good on banking and the Federal Reserve):

http://www.worldproutassembly.org/archives/2007/09/surviving_the_c.html

Definition Of Economic Insanity: Handing Paulson A Blank Check For Bailouts: Crooks and Liars

Definition Of Economic Insanity: Handing Paulson A Blank Check For Bailouts

Posted: 20 Sep 2008 09:00 PM CDT

Insanity: doing the same thing over and over again and expecting different results.

Albert Einstein

Like John, economics are just not my forte. I took in at University, got decent (though not great) grades and found the whole subject stultifyingly boring. Part of my disinterest had to be due to the fact that I took my economics classes in the 80s (the “greed is good” era) by a bunch of Chicago School-types who carried dog-eared copies of Rand with them everywhere they went. Their whole economic outlook struck me as so fundamentally selfish and unfair that I had a hard time believing that anyone who wasn’t a multi-millionaire or CEO would buy into it. Truly, one only needs travel to from countries with huge income disparities to ones with socialized democracies with market restrictions to see that the exalted “Free Market” and trickle-down policies have never, EVER worked anywhere but in theory.

But despite my tendency to glaze over at the discussion of economic issues, I do have a great deal of common sense. And right now, that sense is tingling all over that this country is just staving off market collapse for another few months with the talk of bailouts. Not that I’m opposed to bailouts in general; I recognize that the alternative would be disastrous. But to hand Henry Paulson — the man who either didn’t see or didn’t care to deal with this financial crisis (which we predicted more than a year ago) ahead of time –a blank check and demand no accounting, no transparency, nothing… is literally economic insanity–doing the same thing that got us in trouble the first time and hoping for a different result. Don’t believe me? Paulson said today that taking away CEOs’ “golden parachutes” as part of the bailout process was a “poison pill.” How’s that for fixing the economy?

Paul Krugman says “No deal.“ And Dean Baker at TPM lists what should be the Progressive conditions for a bailout:

1) Combating asset bubbles must be one of the Fed’s key responsibilities.

2) The government should impose a modest financial transactions tax, comparable to the one in the United Kingdom. This can both restrain excessive trading and raise more than $100 billion a year in revenue.

3) Regulatory agencies should require that potentially tradable assets (e.g. credit default swaps) actually be traded on exchanges.

4) There should be strict limits on leverage for all regulated financial institutions.

5) Fannie and Freddie should remain fully public institutions, returning them to a status comparable to Fannie’s prior to its privatization in 1968.

6) The Fed should be restructured so that all the key decision makers (e.g. the open market committee) are appointed by democratically elected officials. Its responsibility is to manage the economy in the interest of the general public, not the financial sector.

READ ON…

Hear that, Nancy and Harry? No more caving…no more blank checks. Anything less is insane.

The latest PRIVATEER !!! long, worthwhile - MUST read

Hi My friends!

I am getting this one out a bit late.

At the end of the first section, Bill Buckler talks about the relevant time in history similar to ours today when the Democratic Republic of Weimar Germany went into a tailspin financially. He said that smart Germans shifted their currency out into gold-based currencies. The same financial pressures bearing down on early part of the 1900's is happening again today, only it is bigger this time.

During Stalin's Russia, world famous economist Nikolai Kondratiev developed the "long wave" model that accurately predicted that we would have this currency crash right about now. We are in the winter "season" according to his model -

http://www.financialsense.com/transcriptions/2002/Gordon.html

So accurate was his model for Western economics that he was killed by jealous Stalin at the height of his late 1930's purges. Kondratieff's model is worth checking out once again especially now that we are seemingly moving right along on cue towards that predictable debt cleansing function that seems historically unprecedented in size and scope this time around.

Other parallels are political. As most of us have heard, the German Republic was overrun by the Nationalist Socialists or "Nationalsozialistische", (Nazi for short) after some corrupt insiders firebombed their own Reichstagg building and blamed a foreign enemy while rolling out draconian laws internally under the guise of "Homeland Security".

Now we see the exact same play book being employed by the US as it morphs increasingly into greater corporate + state controlled politics, justifying profitable pre-emptive wars on a shifting set of continuous false proofs that insult our intelligence. Is pre-emptive war in a helpless country that happens to sit on the world's second greatest undeveloped oil patch really necessary to stop "the Reds"... er... I mean "The terrorists" who are known to be "Jews" ... er... I mean "Radical Islamists"? Total sham, a cheap re-run.

As goes the economy, so goes the politics and the masses fail to see the pattern... but there is a way out. Smart Germans knew what to do with their doomed paper assets. And you do too!

Well, enough from me. Let's move our paper to precious metals and let's monitor the obvious trends excellently laid out by the numbers below...

Cheers,
Tate


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GLOBAL REPORT

THE BIG GLOBAL CRUMBLE

The global economic recession is here. Worldwide, the story is nearly the same on every continent as nation after nation reels backwards from suffering a "mere" economic slowdown to actually entering a recession.

World Stock Markets Tell The Story:

All of the 23 developed nations in the MSCI World Index except Canada have made bear market plunges of 20 percent or more since September 2007 as credit losses surged and commodity prices stoked price inflation.

Stock markets discount the future prices of the shares of productive companies into the present prices of today's shares. Lower share prices signal (and in many ways give) a picture of what real economies will concretely look like in future as declining earnings are discounted.

The US second quarter now marks the fourth straight quarter of declining earnings for S&P 500 companies. Earnings have decreased 93 percent at US financial firms, 36 percent at companies that depend on discretionary consumer spending and an average 1.2 percent at commodities producers.

The US Future Price Pipeline:

Prices paid by US manufacturers for crude materials rose 70 percent over the three months ended in June. Prices for the intermediate goods made from those materials rose much less, about 27 percent. Prices for finished products made from those goods rose 14 percent, according to the Bureau of Labor Statistics Producer Price Index. US consumer prices will be next.

US companies cannot raise prices much, so they will start layoffs instead.

In The US - Somebody Always Tells You:

In June, the US saw more mass layoffs than it has in any one month since June 2003, the US Department of Labor said. There were 1,643 instances of mass layoffs affecting 165,697 workers in June. The US financial bloodletting since last summer has torn $US 2.6 TRILLION from the value of shares in the Standard & Poor's 500 Index since Oct. 12, 2007 when it reached a record 1561.80.

Some 9.6 million US homeowners now have mortgages which exceed the market value of their homes. This is up from 4.1 million homeowners with negative equity one year ago and 2.7 million two years ago.

The typical price Fannie Mae received for foreclosed homes sold in the first quarter fell to 74 percent of the unpaid mortgage principal from 93 percent in 2005. This signals DEFLATION on a massive scale.

Too Many US Losses To Count - An Example:

Merrill Lynch lost $US 2.2 Billion in the third quarter of 2007. It lost $US 9.8 Billion in the fourth quarter, $US 1.9 Billion in the first quarter of 2008 and another $US 4.65 Billion in the second quarter.

For Fannie And Freddie - This Is The LAW:

Bailout or no bailout, this is the present law for Fannie and Freddie. The two companies must hold 2.5 percent of capital against their $US 1.5 TRILLION of investments and another 0.45 percent against their guarantees of $US 3.6 TRILLION of securities. Do you feel reassured? With prices paid for foreclosed homes already down to 74 percent of the unpaid mortgage principal at the end of the first quarter, Fannie and Freddie's books are certain to be a shambles. When President Bush signs the bailout bill, it will be the American taxpayers' hard earned money which will be poured down this deflationary sink hole.

Standard & Poor's puts the full cost of a tax-funded bail-out of the two now truly "government sponsored enterprises" - Fannie and Freddie - at between $US 420 Billon and $US 1.1 TRILLION. Woe to US taxpayers! Annual American family incomes adjusted for inflation have grown by just 0.8 percent in the just over six and a half years since the end of 2001. Fannie and Freddie's combined losses over the past three quarters - that's nine MONTHS - reached more than $US 11 Billion.

Who Holds This Stuff?:

Asian institutions and investors hold some $US 800 Billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China had $US 376 Billion and Japan $US 228 Billion as of June 2008. Europe holds approximately $US 72 billion in Fannie and Freddie debt. Investors in Britain hold $US 28 Billion. Russian buyers hold $US 75 Billion. There is $US 3.750 TRILLION of this stuff held inside the US financial system. Clearly, it was these US holders who had to be bailed out.

A Lingering Look At The Past Seven Years:

The US savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year according to the US Bureau of Economic Analysis. US mortgage debt stood at $US 10.5 TRILLION at the end of 2007, more than double the $US 4.8 TRILLION just seven years earlier. $US 5.7 TRILLION was borrowed and poured into houses in only seven years!

On top of that, Americans carry $US 2.56 TRILLION in consumer debt, up 22 percent since 2000 according to the Federal Reserve Board. The average household's credit card debt is $US 8,565, up almost 15 percent from 2000. Average household debt has swelled to 120 percent of annual income, up from 60 percent in 1984, according to the Federal Reserve. Americans are peons.

In America - Your Deposit Is "Insured" By Law:

Fannie And Freddie hold 2.5 percent of capital against their "investments" and 0.45 percent against their investment "guarantees". The Federal Deposit Insurance Corporation (FDIC) guarantees all American bank deposits up to $US 100,000 and up to $US 250,000 in certain US retirement accounts. The FDIC has $US 52.8 Billion in "reserve" to cover TRILLIONS of US Dollar bank deposits. As of June 2008, the FDIC insured US 8471 banking institutions which had total deposits of $US 8,575 TRILLION.

NOW do you feel reassured? The FDIC's "reserve" is a whopping 0.62 percent. This gargantuan financial mess has rolled through Congress in the form of a "housing bill" now signed by President Bush. Buried somewhere in the 694-page bill is an $US 800 Billion hike in the US Treasury's debt ceiling, raising it to $US 10.615 TRILLION from $US 9.815 TRILLION. The Treasury's debt "limit" has been raised by $US 1.65 TRILLION (or almost 20 percent) in the TEN MONTHS since September 27, 2007.

The Grossly Misnamed US "Treasury":

If names had any relationship to the entity they describe, the US Treasury should be called the US Debtory. The Treasury is the place where what the US federal government owes is on the record. On July 30, President Bush signed the "housing bill" which included an $US 800 Billion increase in the Treasury's debt " ceiling" to $US 10.615 TRILLION! Let the borrowing and spending roll on.

Once the Senate passed the bill on July 27, the White House sprang into action. On the morning of July 28, the Bush Administration released a revised estimate, putting the new budget deficit at $US 482 Billion for next year. The Bush Administration then had the audacity to blame the sagging US economy and all the "stimulus checks" it sent out earlier in the year for causing the increased deficit!

Piling Debts On Top Of Debts:

The US Treasury - which has just had its credit "limit" raised by $US 1.65 TRILLION in ten months, will now "backstop" Fannie and Freddie, and their $US 5.2 TRILLION of toxic paper. The only way that the Treasury can do this is to borrow even more and then hand all the borrowed money over to the two GSEs! At some point, there is going to be a form of debt revulsion across the rest of the world. When that happens, the Treasury will suddenly find one day that there are few if any foreign buyers for its paper.

The Word From The Top - "Disastrous Consequences":

"The obligations Fannie and Freddie have outstanding, something in the order of $US 5 TRILLION, are so large that there would be a worldwide financial catastrophe should they default. The financial system would seize up." So said former St. Louis Fed President William Poole in a recent interview.

The Wall Street Journal's Own Nightmare:

The Wall Street Journal (WSJ) posted a doomsday scenario should Treasury Secretary Paulson's plan fail:

"Falling house prices and nonpaying homeowners cause the value of the TRILLIONS of US Dollars in outstanding debt held by these government-sponsored enterprises, Fannie and Freddie, to plunge. Many banks have balance sheets stuffed full of this paper. They face huge losses, which some can't survive."

"They and other investors, such as foreign central banks, then dump the GSE paper."

The US Treasury's International Pawn Shop:

As The Privateer goes to press, it is clear that the entire Fannie/Freddie saga is heading toward the doors of the US Treasury. The Congress has finished festooning the Housing Bill with "other items", some of which Mr Bush has been threatening to veto for years. Yet when the 694-page bill arrived on Mr Bush's desk, he lost no time in signing it. He had no choice.

With the bill now law, the REAL crisis begins. The US Treasury is in position as a "captive buyer" of the paper from Fannie and Freddie. If US Treasury baulked even for a moment in front of the necessity to buy this paper, the "value" of the paper would plunge and the WSJ's "nightmare" would become a reality.

There can be scant doubt that right across the world - from central banks to commercial banks to insurance companies and all the rest - there are financial institutions simply itching to sell the Fannie and Freddie paper they currently hold. There was no buyer in sight before. There is now!

That buyer is the US Treasury! And that is why the Treasury could turn into an international pawn shop for Fannie and Freddie's paper. Always remember, the US Treasury can only buy if it borrows first.

A Financial Earthquake From Down Under:

An Australian commercial bank has torpedoed the world's financial system below the waterline. It has had the audacity or the dire necessity to do a massive write-down on its holdings of US Collateralised Debt Obligation (CDO) paper. The National Australia Bank (NAB) has made a debt provision for as much as 90 percent of the value of its portfolio of CDOs, most of which were derived from US mortgages - and all rated AAA! The NAB had already flagged $A 181 million in losses. It increased this by $A 830 million to $A 1.011 Billion. This is a 90 percent write down on AAA rated US paper!

The GLOBAL Ramifications:

It is not this single action by this Australian bank which matters that much, it is the global precedent which it has set. This is the first time that a write-down - of 90 percent in this case - has been done in the open for all to see. The Bear Stearns takeover by the Fed back in March was done to PREVENT this from happening. Now, it has. The news sent a thrill of fear through the Asian markets. Any matching write-down by Asian holders of US CDO paper would destroy balance sheets right across the region.

The news quickly got worse. In the US, Merrill Lynch sold $US 30.6 Billion in CDOs at 22 cents on the US Dollar. This AAA rated US paper was thereby written down by 78 percent. In global terms, a value has here been set on US originated CDOs of between 10 and 22 cents to the US Dollar!

There is Serious Work For The US Treasury:

As reported earlier in this Global Report, the true focal point remains inside the US. There is at least $US 3.6 to $US 3.75 TRILLION of this kind of paper on the books of American banks, insurance companies, financial houses, pension plans ad (almost) infinitum. All of them are now looking at matching write-downs of US originated CDO paper and assorted other US financial paper of like kinds. All of them are staring at write-downs of between 78 percent to 90 percent courtesy of the first two financial houses to face the truth - Merrill Lynch and National Australia Bank.

The Write-Down To 22 Percent:

Merrill Lynch agreed to sell $US 30.6 Billion of CDOs, the mortgage-related securities that have caused most of the firm's losses, for $US 6.7 Billion. Merrill Lynch itself provided the financing for about 75 percent of the purchase price by LENDING the new buyer the money to make the purchase.

The World Of Finance Is In A State Of "Pre Panic":

As The Privateer goes to press with this issue, there are undoubtedly untold numbers of financial people looking at their balance sheets and tallying up the difference between 78 percent losses and 90 percent losses on their investments in US financial paper of almost any and all description.

The one thing holding off a full-scale panic is the fact that President Bush has signed the Housing Law which raises the US debt "ceiling" to $US 10.615 TRILLION. The US Treasury can now come in as a CDO buyer - funding it through Fannie and Freddie - and stave off a global valuation catastrophe.

A Short Excursion On Price Maintenance Programs:

Historically, what the US Treasury has set itself up to do is a price maintenance program. It is a program to try to keep the price of certain items in the market higher than where the market would have put them. All these programs have failed when the nation funding them ran out of money. After that, the prices in question fell down to their market clearing levels. This is the fate staring the US Treasury in the face. It will only be able to maintain this charade as long as it can borrow and spend the borrowed money.

The First Rule Of Price Maintenance Programs:

This one is simplicity itself. When one discovers such a program - SELL if one should happen to hold any of the stuff whose price is artificially being held too high. This is what the US Treasury now faces. Here, Fannie and Freddie are only speed bumps on the road to the doors of the US Treasury. The second rule when one discovers a price maintenance program is to examine the underwriter of these (too high) prices. In doing so, one discovers that the program is causing ever climbing damage to their own balance sheet. The solution is to SELL the underwriter's financial paper! When the underwriter finally gives up, not only will the price of what it was trying to keep up at higher levels fall, but the underwriter's own financial paper will follow it down.

From The US Treasury To The US Dollar:

The US Treasury faces the prospect of paying nearly 100c on the US Dollar for CDO paper which is already being valued in the market at between 0 and 10 cents on the US Dollar. That huge gap will mean that this will be a VERY costly exercise. To all current holders, Americans as well as foreigners, the fact that the US Treasury is engaged in a price maintenance program is an invitation to sell this US-originated CDO paper at prices which will not be seen again. At some point in this ploy by the US Treasury, the value of its own paper will come into the spotlight. And when that starts to get sold off, the entire mess will recoil backwards towards the US Dollar. After that - there is no other place to go.

The Fast Approaching US Dollar Crisis:

A flight OUT of money is a flight INTO real goods. That is what the Germans called it during the three years between 1920 and 1923 when the German currency was destroyed. Increasingly desperate Germans started buying real economic goods with increasing speed as their currency lost value and prices of all other economic goods soared all around them. But back then, intelligent Germans had another choice right before their eyes. There were many sounder currencies in countries all around their borders.

Germans who understood this simply exchanged their failing money for Dutch Guilders, Swiss Francs, US Dollars (then fixed at $US 20.67 to an ounce of Gold), British Pounds etc.. All these other currencies were still on a Gold Standard with their currencies anchored to Gold at a fixed rate.

What is so truly important to understand today is this: What the intelligent Germans did in the early 1920s cannot be done now. There is not a single currency which is directly anchored to Gold. Not even the Euro, though the Euro's central banks and the ECB itself counts Gold as part of their international reserves. What is missing is the possibility of exchanging the Euro for Gold at a fixed rate by the simple presentation of Euro notes on the counter of any bank. The last currency with any form of connection to Gold was in fact the US Dollar at its rate of $US 35.00 per ounce of Gold, but this only held for transactions between governments and central banks. Mere mortals were not allowed to do it at all.

That last monetary connection to Gold was broken on August 15, 1971 by President Nixon. Ever since then, the world has been swimming in fiat paper money and - increasingly - simply credit money which commercial banks issue as loans. Today, a flight into real goods has already taken place. That can be seen in the huge surge of commodities, most of them priced and traded in terms of the US Dollar.

This flight away from money and into real economic goods, into commodities, is a short step away from a flight away from fiat or credit money into REAL money - into Gold. All it will take to bring that about is a massive fall in the international value of the US Dollar. Fannie and Freddie can't crash because they already have - just look at their share prices. Next in line is the debt paper of the US Treasury. Once that starts falling, the US Dollar is next in line.

The advantage of holding Gold coin now is that, as an individual, one stands with the money of the future.

INSIDE THE UNITED STATES

THE NEW TWENTY-TWO CENT STANDARD

It didn't take long after Merrill Lynch had announced its CDO write down before others inside the US had to follow. In Merrill's case, the CDO's were originally valued at $US 30.6 Billion. By the end of the second quarter, Merrill had written them down to $US 11.1 Billion. It sold them for $US 6.7 Billion.

The BIG Write-Down:

Merrill's price of 22 cents on the dollar is now the new standard. Then came all the others. Citigroup's chief financial officer said that many of the bank's CDO's are valued at 61 cents on the dollar - for now. Other mortgage assets at Citigroup such as "mezzanine" and high-grade CDO's are marked closer to Merrill's 22-cent level. Bank of America, told The Times of London that the bank is taking Merrill's sale into consideration. Bank of America values its CDO's at 44 cents on the dollar. But since Merrill Lynch lent the buyer Lone Star $US 5 Billion so it could buy the CDOs (Lone Star supplying the other $US 1.7 Billion), Merrill Lynch is in effect selling the CDOs for slightly less than 6 cents on the dollar.

That 6 cents is in fact lower than the write-down which National Australia Bank did to 10 cents.

The US Mortgage Price Maintenance Program:

Fannie Mae, the largest US mortgage finance company, said its portfolio of mortgages expanded at a 23 percent annualised rate in June, the fastest pace since 2003. Fannie's holdings had risen by $US 12.7 Billion to $US 749.6 Billion. Freddie Mac said its mortgage investments expanded at a 33 percent annual rate to a record $US 792 Billion. Note that these buying sprees by Fannie and Freddie took place well before Congress passed the Housing Bill and President Bush signed it into law. Bush has done that now. The authority for the Treasury Department to help Fannie and Freddie is limited only by the debt ceiling which was raised $US 800 Billion to stand at a record $US 10.615 TRILLION.

From here on, these write-downs will not only act as benchmarks, but they will force many financial institutions across the US to come forward with their own write-downs should they also hold any CDOs on their books. Internationally, the same is the case. Here too, there are many banks and other financial houses which hold all kinds of US financial paper including CDOs. In the weeks ahead, they will have to come clean. Worse, such write-downs of US paper will increase the world's suspicions about all other kinds of US paper - including US Treasuries.

The US Treasury Is On The Critical List:

Internationally, there are two things to watch for: First, watch the US Treasury refunding exercises to see whether foreigners still show up to buy the US debt offerings. Second, keep a close eye on the yields on US Treasury bonds, notes, bills etc. to see if US interest rates start to climb in the secondary market. That is likely to be the first signal that foreign holders of US Treasuries are starting to actually sell!

The US Dollar Price Maintenance Program:

Merrill Lynch has warned that the United States could face a foreign "financing crisis" within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread throughout the world.

The US depends on Asian, Russian and Middle Eastern nations to fund its $US 700 Billion annual current account deficit, leaving it HIGHLY vulnerable to a collapse of confidence. Obviously, were this foreign buying of US Dollars to end, not only would the US current account deficit stand unfunded but the US Dollar would stand naked. The US Dollar could crash!

INSIDE JAPAN - AND - CHINA

JAPAN'S ECONOMY CONTRACTS - AND - CHINA HAS RETURNED

Japan's industrial output fell 2 percent in the single month of June from the previous month on declining worldwide demand for passenger cars and factory equipment, the government said on July 30.

Any 2 percent fall in industrial output is drastic in real economic terms. In global terms, it shows very clearly that international trade is contracting at a high rate of speed. Inside Japan, layoffs and inventories are climbing as is unemployment. Japanese consumer spending has likewise contracted in the past few months. On a GDP basis, Japan is on the verge of economic recession and could be there soon.

A Bad Sign Of The Times:

The world trade talks held by the World Trade Organisation (WTO) collapsed on Tuesday, July 29, after seven years. The spectre of the dirty thirties is again raising its head. Back then, nations barricaded themselves behind trade walls while at the same time trying to maintain their exports by plowing massive subsidies behind them. Today, global food trade is already affected with at least 65 nations placing new export barriers in an attempt to keep their own internal food prices lower than they otherwise would have been. The old result of this is already apparent. By disallowing farm exports to the higher priced markets, these nations are lowering the living standards of their own farmers and food producers. Meanwhile, in the nations where the food no longer arrives, prices for consumers are higher than they would have been. In one place farmers and food producers are poorer, in the other, the consumers are.

A Late Warning From On High:

Mr Hiroshi Watanabe, Japan's chief market regulator, rattled the markets when he urged Japanese banks and life insurance companies to treat US agency debt with caution. The two sets of Japanese institutions hold an estimated $56 Billion of Fannie and Freddie paper as well as US subprimes and CDOs. The warning came too late. Merrill Lynch has already invoked the 22 cent rule. The Japanese write-downs and the broader write-downs across the Asian markets will arrive over coming weeks. Late this week, as The Privateer goes to press, there are already stories appearing in the Asian press that "authorities" and even central banks in Asia are stepping into the breach as the losses on Merrill's 22 cent rule have already forced some Asian financial institutions to the wall. If many nations in Asia start to paper over the losses they now face on their US financial paper with new money creation, the result would be an upward explosion in Asian consumer prices. If they don't paper over these losses, that would ensure a wave of bankruptcies across their financial sectors from banks to life insurance companies.

China - BEFORE And AFTER:

Before and after the Olympic Games in Beijing, that is. Beijing has made it abundantly clear that it will let nothing and nobody stand in the way of making these Olympic Games a thunderous success. This is China's way of saying that it has returned to claim its rightful place amongst the great nations in the world. The Olympic Games run from August 8 - 24. The world will have a form of a timeout from all its present troubles. In China, once the afterglow fades (assuming there is one), the door opens for several possible drastic changes in policy. First amongst these changes will undoubtedly be a reassessment of China's present policy of the central bank "swallowing" inflowing US Dollars as fast as they arrive.

This policy has led to the enormous increase in China's holdings of foreign exchange, now standing at $US 1.81 TRILLION. Buying US Treasuries and Agency paper from Fannie and Freddie is a certain losers' game. The Chinese know this, having complained bitterly about their US Dollar losses.

If the Chinese government decides to do a flight into real goods, it will buy resources all over the world.

INSIDE THE EUROPEAN UNION

EUROPE IS ON VACATION - COME BACK IN SEPTEMBER

It happens just about every year in Europe around this time. Anyone looking for political, economic, financial or strategic news will find none in the European papers. Europe is on vacation!

All (Nearly) Quiet On The European Front:

Such news as is to be found primarily deals with international events - and even this is scarce. What is to be found mainly deals with national internal events of a secondary order. Here, one could say that this is a version of "no news is good news".

In a way, this is true. Europe is doing quite well thank you. The European Central Bank (ECB) though, is somewhat of an exception to this. Barely a week goes by without one, or several, of its top people saying that inflation is still a danger and that the ECB is vigilantly watching price developments.

On The Shores Of Geneva:

The world trade talks held by the WTO collapsed in Geneva on July 29 after seven years of trying. That did get some in depth coverage, but the undertone was complacent. The Eurozone alone contains 320 million people. The broader European Union (EU) has about 510 million people. The EU internal market is one of the economic giants. The European press is contending that Europe can stand alone.

In The Offices In Brussels And Moscow:

In fact, Europe can't stand alone, and the Europeans know it. As reported in recent Privateers, Russia and the EU are engaged in detailed talks involving the strategic and geo- strategic balance in Europe and everything else on the economic front - from property rights and the right to make any kind of investments in each other's territories up to (perhaps) making the Ruble a reserve currency in its own right and a partner currency to the Euro itself. Here, the Europeans want a grand deal with Russia and the Russians too want it with Europe. Politically, it is simply a case for both Russia and the European Union of getting from here to there - "there" being the final treaties.

A Grander Geo-Political Design - From Moscow:

Meet - "EATO"! Russian President Medvedev's plan, announced in Berlin last month and reported upon and analysed in The Privateer, has been and is being covered in the Russian media at full volume. It would redesign Europe's security system from the bottom up. This time, Russia would participate as an equal partner and a co-founder of the new bloc. Russian foreign policy experts are dubbing the new concept "EATO" (Euro-Atlantic Treaty Organisation). Clearly, this grouping would replace NATO.

Note here that the US has not (repeat - NOT) been excluded by Russia. Instead, Russia is aiming at making the United States one of the three legs on this vast geo-political design. But the price the US will have to pay is that NATO is disassembled - just like the Warsaw Pact was more than a decade ago.

Russian President Medvedev has repeatedly said that one of the main aims of his Presidency will be to establish a strategic partnership with the European Union that could be the mainstay of: "A Big Europe without dividing lines. The existing architecture is in crisis, and it isn't working. We need a new design, with an emphasis on security for all countries in Europe." Europe and Russia are now working on this.

In Washington, there have been no expressions of even a passing interest in any of this. In fact, the US is not involved even as observers! But Washington knows that disassembling NATO ends the US Empire.

AUSTRALIAN REPORT

WAIT FOR THE OFFICIAL SIGNAL - THEN PANIC

In the face of the debacle in Australia's main banks, the Rudd Labor government has already panicked. It has sent its Treasurer, Mr Swan, out to tell everybody else not to (panic, that is)! The Rudd government is now counselling against a panic as massive billion dollar write-downs by Australia's leading banks raise fears about the safety of Aussies' savings and investments. Australia's five biggest banks have now lost a combined A $29.1 Billion of market value after National Australia Bank (NAB) and Australia & New Zealand Banking Group Ltd. (ANZ) unveiled their bad loan provisions. ANZ raised its provisions for the 2008 financial year by a further $A 1.2 Billion, taking the total write-off to more than $A 2.1 Billion. Earlier, NAB made a provision for as much as 90 percent of the value of its portfolio of CDOs which were derived from US mortgages and rated AAA. That ignited the storm.

The NAB had earlier announced $A 181 million in losses. It has now increased this by $A 830 million to $A 1.011 Billion. One can hardly wait for the rest of the "big five" Aussie banks to report their positions.

A Spreading Contagion:

Worse is coming. New data now shows that superannuation funds have turned in their biggest losses since superannuation became compulsory in 1992. Business confidence has fallen to its lowest level since the 1991 recession. The latest figures show $A 60 Billion has been lost from all balanced funds.

Balanced funds make up about 90 per cent of Australian superfund investments. Now, here come reports that Australia's property market is cratering. Australian Property Monitors have found sharp price reversals across the land. It is now predicting a 10 per cent fall in house and unit prices this year with prices in all the capital cities softening in the June quarter. First the banks - then super - now houses.

Retail Is Being Routed:

Aussie retail sales have fallen for the second quarter, marking the first consecutive decline since 1996. Quarterly nationwide retail sales volume (inflation taken out) fell to negative 0.6 percent from negative 0.1 percent in the previous quarter, the Australian Bureau of Statistics reports.

A Stress Test Of The National Paycheque:

The number of Australians who spend more than half of their income repaying their mortgages has more than doubled the past year, the Australian Financial Review reported. Twenty- five percent of people with mortgages use more than half their income on payments. That is known as "mortgage stress". The figure was 12 percent a year ago. There are now about 837,000 households experiencing some form of mortgage stress, up from 784,000 in May. With house prices starting to fall across the nation, there will be many Australians tempted to walk away from their houses, handing the banks the keys.

Where The Australian Economy Is NOW:

As far as the FACTS are concerned, the Aussie economy is imploding. But what truly matters on a larger scale is Australia's situation internationally. Australia is rolling out an annual current account deficit of 6.2 percent of GDP despite having the best terms of trade since the end of WW II. Such an external deficit has to be funded from offshore - Australia must borrow the money internationally. What happens when foreign lenders refuse to lend more money? The doors for getting more international loans are starting to close. The NAB had to cut a planned $A 850 million bond sale by two-thirds after its credit market losses. International investors "elected not to proceed". The Aussie Dollar will crash if foreign creditors take this one step further and show up asking for their money back.

THE GLOBAL MARKET REPORT

THE CREDIT CRISIS - A YEAR OLDER

"On Monday, August 6, the 'word' spread across Wall Street like a firestorm. ...The 'word' was that Fannie and Freddie would buy the toxic sludge in mortgages, subprimes, etc. and take it off the banks' books. There is only one very basic economic/financial problem here. In order to do this, both Freddie and Fannie will have to borrow before they can buy the toxic sludge off the books of the US lenders of same. The question is: 'Who will lend Fannie and Freddie the new money with which to do this?'"

(The Privateer - Number 584 - August 12, 2007)

For most of the year since that was written, it was US individuals and financial institutions along with foreign governments and "sovereign wealth funds". Now, the lender of last resort is in fact what it was always presumed to be - the US Treasury - aided and abetted by the Fed, the US central bank.

As we enter the second year of the global "credit crunch", the only immediate "relief" in sight is the coming distraction of the Beijing Olympics which start next Friday (August 8). The day after the Olympics ends, the Democratic convention convenes. Then, on Labor Day, the Republican convention convenes. After that comes the campaign. It is a very safe bet that the chasm between the real state of the US economy and financial system and that portrayed by BOTH Mr Obama and Mr McCain will be at its widest ever. It is an even safer bet that there will be no debate on any item of fundamental economic or financial importance. The disconnect between politics and reality will be all but total.

In short, it will be political business as usual. The facade which has stood between economic reality and public perception in the US has been shaken with each new intensification of the credit crisis over the past year, and with each new "liquidity injection" and/or bailout. We have come a long way in the year between the "glitch in the road" comment made by President Bush in 2007 and the "Housing and Economic Recovery Act of 2008" he signed on July 30, 2008.

The "Concern" For The American Taxpayer:

Treasury Secretary Paulson did not want to wait until the end of July for the passage of this "housing bill". As we reported in our previous issue -

"The major 'sticking point', according to the Democrats who chair the various financial and banking oversight committees, is to include safeguards to 'protect the American taxpayers'."

Please note carefully the term "American taxpayers".

The term is exact, extracted from quotes from prominent Democrat (and Republican) Congressmen and Senators in the lead up to the passage of the bill. One would have thought that "American homeowners" or "American citizens" or just plain "Americans" would have been more "politic" and more appropriate.

The sad fact of the matter is that to those who make up the government, in the US and throughout the world, the citizens of the nation they govern are regarded as little more than "milch cows". One can measure the "concern" of Washington DC with the well-being of their "taxpayers" quite easily. Take a look at the Treasury's debt (and the new "limit" placed on this debt) and remember that ALL of it is underwritten by the ability and willingness of Americans to go on producing wealth and paying taxes.

Washington DC is certainly very concerned indeed about the American "taxpayer". In the final analysis, they have no other source of REAL wealth to draw on. Every rate cut, every new "liquidity injection", every bailout - all of them following one after the other with increasing rapidity as the past year has unfolded - has taken place on the unspoken assumption that there is something of real "value" behind it. When one hears the phrase - "The Full Faith And Credit Of The US (or any other) Government", reflect for a moment. Who underwrites both the "faith" and the "credit"? Only that dwindling proportion of the population of any nation who produce more than they consume. In short, the taxpayer.

SOMEBODY Has To Spend:

Mr Obama contends that the US cannot afford not to. He is promising "major initiatives" on health and energy and education - along with "middle class" tax cuts, of course. Mr McCain agrees on the need for the government to go right on spending, if not on the areas where the spending should occur. He is promising to renew ALL of President Bush's tax cuts which are due to "expire" at the end of 2010. Along with that, of course, Mr McCain promises to maintain and even ramp up the "war on terror" presently taking place in Iraq and Afghanistan. There is no change here. According to both presidential contenders, their function is to spend. The function of the American "taxpayer" is to underwrite it.

The one certainty in all this is that the profligacy of government cannot be "underwritten". When Mr Bush inaugurated his tax cuts in 2001, his government was projecting a budget surplus(!) of $US 1.288 TRILLION over fiscal years 2001-2004. In fact, over that same period, the US Treasury's debt "subject to limit" increased by $US 1.8 TRILLION. "Mistakes" of this magnitude - over $US 3 TRILLION between "projection" and FACT - are not made accidentally.

When Mr Bush was inaugurated in January 2001, the Treasury's debt "subject to limit" stood at $US 5.64 TRILLION and the debt "limit" stood at $US 5.95 TRILLION. The latest figures, as of July 31, 2008, are a debt "subject to limit" of $US 9.52 TRILLION and a debt "limit" of $US 10.615 TRILLION. Those two figures are up 68.8 percent and 78.4 percent respectively.

The difference is that up until last August when the credit crunch hit, ALL facets of the US economy - government, business and consumer - were borrowing and spending up a storm. Today, the only one of the three engines of modern economic "growth" via credit expansion still functioning is the government. The measure of the desperation of the government to perpetuate the credit expansion is the simple fact that they have raised the US Treasury's debt "limit" by $US 1.65 TRILLION in less than a year.

The official "projections" made by the Office of Management and Budget are now pointing to a deficit of more than $US 500 Billion in the fiscal year which starts on October 1, 2008. Remember, this is the same outfit that was projecting an almost $US 2 TRILLION budget surplus during Mr Bush's first term.

A Recipe For Others:

In the days when the International Monetary Fund (IMF) was still a functional entity which carried some clout in the world, it had a standard recipe for nations which it was proposing to bail out after they had got themselves into a financial tangle through profligate borrowing and spending. It was known as the "Washington Consensus" and included a number of items.

Among these standard items were fiscal policy discipline, redirection of public spending from subsidies, tax reform, market determined and positive real interest rates, competitive exchange rates, trade liberalisation, liberalisation of inward foreign direct investment, privatisation of state enterprises and deregulation. As The Privateer pointed out many times during the years when the IMF was enforcing these items, the primary goal was never to get the nation (or nations) back on its feet as an independent entity, it was to safeguard the "investments" of the western banks which had in most cases precipitated the collapse by lending to the governments of the nation in strife.

This "Washington Consensus" has never been applied to Washington (DC) itself. A year into the global credit crunch, the time is getting closer when it will be. This will not happen because the people in Washington and on Wall Street see the error of their ways and resolve to straighten up and "fly right". It will come because there is nothing else they can do. When taxes can be raised no higher and debt paper can no longer be sold either inside or outside the country which issues it, there is nothing else to do but to spend less - MUCH less. The alternative is to face a time when you have to knock ten "ZEROS" off your currency. Zimbabwe just did that, on the same day as Mr Bush was signing the "housing bill".

The Approaching Buyers' Strike:

The latest figures on global buying of US government and "agency" debt paper is an advance warning of what is to come. While global buying of US Treasury debt paper was still increasing, global buying of "Agency" (read Fannie and Freddie) paper actually FELL. Now, as analysed in the Global Report, the US Treasury has been set up as a "captive buyer" of this paper. The current Treasury debt limit is about $US 1.1 TRILLION above the current level of Treasury debt "subject to limit". The rest of the world combined holds about $US 1 TRILLION of Fannie and Freddie's paper.

For many decades now, the unwritten rule enforced by Washington and abided by all over the world has been that nobody does anything to "rock the boat" while the US is in the throes of an election, especially a Presidential election and "extra especially" a Presidential election in which the incumbent is not participating. That may (we repeat - MAY) hold up this time around. If it does, then any concerted "buyers' strike" of US Dollar denominated paper may hold off for most of the rest of this year. If it doesn't, such an event could happen at any time from now on.

Recent Events:

On US stock markets, the Dow confirmed a bear market a month ago on July 2 when it closed more than 20 percent below the high it set back in October 2007. So far, the US stock markets have not deteriorated further. There was one close below the 11000 level on the Dow in the middle of last month but the US markets were then resuscitated by the hoopla leading up to Mr Bush signing the housing bill.

The big news on global markets over the past week is the HUGE correction in global commodities prices. The oil price, for example, fell almost 16 percent over the last two weeks of July. Over July as a whole, the Commodity Research Bureau (CRB) index had its biggest monthly fall for 28 years, since March 1980. The initial "flight into real goods" is being overwhelmed by the deflationary pressure of ever accelerating debt write-downs. The REAL flight into real goods - and into real MONEY - is yet to begin.

Gold:

For MUCH more on Gold - please see Gold This Week (GTW):
http://www.the-privateer.com/subs/goldcomm/gold.html

What's Next?:

With the breakdown of the WTO talks in Geneva on July 29, yet another attempt (this one seven years in the making) to at least give lip service to the concept of "free trade" has come to nothing. The last thing that the world needs now, on top of the credit crisis, is an outbreak of "trade wars".

The Beijing Olympics begins on August 8 and runs until August 24. This is China's great global showcase and has been anticipated for years. One can be sure that there will be nothing done by the Chinese government during this period to roil global financial waters. After August 24, that changes.

The SEC in the US has extended their recently announced rules banning "naked short" sales of Fannie and Freddie and seventeen other "too big to fail" US financial stocks until August 12. But, they have also stated that they are NOT going to extend their ruling beyond that date.

Europe, as it always is at this time of year, is on "vacation". In the US, Washington DC is bracing itself for either the next "regulatory emergency" or the start of the Presidential campaign in earnest - whichever comes first. The kickoff for the Democratic convention is August 25 - the day after the Olympics ends.