Tag Archives: Federal Reserve

Wall Street buybacks: Another expression of parasitism

By Nick Beams
May 29, 2015
World Socialist Web Site

 

In the biological world, a parasite lives at the expense of the host, sucking out its nutrients and life forces, and sometimes killing it. Analogies of course have their limits, but nonetheless they can be suggestive. And this is certainly so in the case of the rampant financial parasitism that has become the dominant feature of the American economy and, by extension, the world economy as a whole.

An article published in the Wall Street Journal this week details some of the impact of hedge funds on the operations of major US corporations, and the way in which their insatiable drive for profit through financial manipulations is sucking the lifeblood out of the economy and contributing to its deepening breakdown.

The article is based on a study conducted for the newspaper by S&P Capital IQ. It found that companies in the S&P 500 index had “sharply increased their spending on dividends and [share] buybacks to a median 36 percent of operating cash flow in 2013, from 18 percent in 2003.” The doubling of this rate was accompanied by a fall in spending by those companies on plant and equipment, from 33 percent to 29 percent over the same period.

The study found that in companies targeted by so-called “activist investors”—that is, hedge funds that hold hundreds of millions and sometimes billions of dollars on behalf of their wealthy investors—the figures were even higher. Targeted companies reduced capital spending from 42 per cent to 29 percent of operating cash flow and increased spending on dividends and share buybacks to 37 percent of operating cash flow from 22 percent.

One of the main factors facilitating these operations has been the provision of ultra-cheap money by the US Federal Reserve, which has kept official interest rates at almost zero, leading to historically low interest rates in financial markets. Hedge funds are able to use borrowed money to acquire major share holdings in corporations and then push for share buybacks and the payment of increased dividends. The buybacks, in turn, can be financed through borrowed funds at low interest rates.

The aim is to produce a rise in the share price of the company or generate an increased dividend flow returning large profits for the “activists,” often accompanied by job cuts or the outright closure of parts of the targeted company deemed not to be making a sufficient contribution to “shareholders’ funds.” At the end of the process, vast profits have been pocketed, without a single atom of new wealth being created, while productive capacity has been curtailed.

The consequences of these vampire-like operations are most prominent in major industries. The US energy giants, which have splurged billions on buybacks, dividends and mergers, have refused for decades to invest in infrastructure, leading to a situation where workers are subjected to 16-hour days and increasingly unsafe working conditions. Likewise, the auto industry firms and telecoms are notorious for their resistance to wage increases, while engaging in the same financial manipulation.

The deeper the economic crisis, the more frenzied the speculation. The article noted that since 2010 the number of activist campaigns directed at securing buybacks and increased dividends had risen by 60 percent. Last year there were 348 such campaigns, the most since 2008, and a further 108 in the first quarter of this year. Hedge funds now control $130 billion in assets, more than double the amount they held in 2011. This means that once they leverage these funds through borrowing at ultra-low rates, they can target virtually any corporation.

Would-be reformers of the capitalist economy will no doubt argue that these dangers can be overcome through the development of mechanisms or increased regulations to promote the “good” side of corporate activity—research and development and real investment—while taking action to control the “bad” side—parasitism. But the question remains: Why has it emerged now?

Underlying tendencies at the very center of the capitalist economy are at work. The long-term downward pressure on the rate of profit, which has led to the continuous restructuring of the American and global capitalist economy over the past four decades, is the driving force behind the rise of speculation and parasitism.

Well-known voracious hedge-fund investor Carl Icahn, cited in the Wall Street Journal article, pointed to these trends saying the economy was “being dragged down by too many mediocre CEOs, and it’s dangerous if profitability is going down despite interest rates being at zero.”

However, his resort to a “bad man” theory of economics does not pass even a preliminary examination. The same tendencies are also clearly visible in Europe and throughout the world’s major capitalist economies where, despite ultra-low interest rates, investment remains at historically depressed levels, reflecting a lack of profitable outlets.

Furthermore, any attempt to separate out the “good” and the “bad’ sides of corporations runs up against the fact, as Marx explained at the time of the emergence of joint stock companies in the middle of the 19th century, that the origin of parasitism is lodged in their very structure. The formation of such companies, he wrote, “reproduces a new financial aristocracy, a new kind of parasite in the guise of company promoters, speculators and merely nominal directors: an entire system of swindling and cheating with respect to the promotion of companies, issuing of shares and share dealing.”

For a whole period of capitalist development, notwithstanding swindling and cheating, the corporation or joint-stock company facilitated the development of the productive forces through the aggregation of capital to finance large-scale developments, which sustained the living standards of the mass of the population. Those days have long gone.

The elevation of parasitism to the basic mechanism of profit accumulation is bound up with the objective crisis of capitalism and, connected to this, the absolute stranglehold of the financial aristocracy over every aspect of economic and political life. Swindling, cheating and the destruction of the productive forces—above all through the impoverishment of the most important productive force of all, the working class—is a symptom of the rot and decay of the entire socioeconomic order.

It establishes the unanswerable case for the taking into public ownership of the major corporations, the banks and the entire finance industry as part of the socialist restructuring of economic life. This is the perquisite for establishing a society where the productive forces, created by the labor of the working class, can be used for social advancement.

Obama’s “No Growth, No Jobs, No Recovery” Economy Gives Up The Ghost

By Mike Whitney
May 2, 2015
CounterPunch, April 30, 2015

 

Stock Market DropThe world’s biggest economy ground to a standstill in the first quarter of 2015 wracked by massive job losses in the oil sector, falling personal consumption, weak exports and droopy fixed investment. Real gross domestic product (GDP), the value of the production of goods and services in the US, increased at an abysmal annual rate of just 0.2 percent in Q1 ’15 according to the Bureau of Economic Analysis demonstrating conclusively that 6 years of zero rates and Large-Scale Asset Purchases (LSAP)– which have enriched stock speculators, inflated the largest asset-price bubble in history, and exacerbated inequality to levels not seen since the Gilded Age– have done nothing to improve the real economy, boost demand or reduce unemployment. As the BEA data illustrates, the US economy is basically DOA, a victim of criminal congressional negligence and Central Bank chicanery.

From the BEA release:

“The deceleration in real GDP growth in the first quarter reflected a deceleration in PCE, downturns in exports, in nonresidential fixed investment, and in state and local government spending, and a deceleration in residential fixed investment that were partly offset by a deceleration in imports and upturns in private inventory investment and in federal government spending.”

Translation: The economy is in the shi**er. Consumers aren’t spending because the crap-ass jobs they landed after the crisis pay half as much as the jobs they lost when Wall Street blew up the financial system. Personal savings are up and spending is down because households face an uncertain future where pensions are being trimmed and Social Security is under attack. Also, spending is impacted by the historic low (employment) participation rate which indicates that joblessness is much higher than the government’s phony numbers suggest. When workers are unemployed they don’t spend, activity drops, and the economy tanks. It’s that simple. Today’s data just confirms what most people already know, that the economy stinks and that they’re being ripped off by a voracious oligarchy that’s stacked the deck in their favor.

The US economy is stuck in the mud because our bought-and-paid-for congress has relinquished all authority and handed over the management of the economy to the industry-controlled Federal Reserve. Whereas our current budget deficits are in the range of 2 percent per annum, the government should be spending a lot more to compensate for the slowdown in private sector spending and investment. In the past, the congress and president would initiate sensible Keynesian fiscal stimulus programs to keep the economy sputtering along while households repaired their balance sheets or businesses struggled with weak demand. Those tried-and-true remedies have been jettisoned for the new monetarist orthodoxy that requires that all the nation’s wealth be filtered through the Wall Street casino so that the pampered thieves who destroyed the country with their mortgage-securities-Ponzi-scam be further rewarded for their insatiable greed.

Manufacturing, retail sales, MBA purchase applications, business investment etc, are all in the toilet. There’s a very good chance the economy is already in recession which will undoubtedly send stocks even higher since every proclamation of bad news generates a buying frenzy by clever speculators who anticipate that the Fed will continue to extend the zero rates and easy money to infinity.

It’s worth noting that the economy had been hanging on by the skin of its teeth mainly do to strong activity in the oil patch where credit expansion, intensive corporate investment, and high-paying jobs (which supported 4 additional jobs in the local economy!) contributed more than $200 billion per year to GDP. Now domestic oil production is in deep distress. Layoffs recently surpassed the 100,000 milestone (See: Oil Layoffs Hit 100,000 and Counting, Wall Street Journal) and borrowing has dried up. Economist Warren Mosler explains the impact the cutbacks in domestic oil have had on GDP in this video from RT that I have transcribed:

“The price drop in oil has turned out to be the unambiguous negative that we had talked about before….where income saved by the consumer, is lost by another consumer. For every dollar not spend by one consumer, another doesn’t get it. ..so you’re just left with the collapse in capital expenditures. (business investment) It turns out, there was about $150 borrowed in the sector last year, driving what modest growth we had last year. Since that disappeared, all the numbers have been going straight down. Unless something steps up to the plate to replace the lost borrowing-to-spend from chasing $100 oil, I see no hope whatsoever.” (Warren Mosler Interview, RT)

Economic recovery requires credit expansion, business investment and jobs. All three of these were severely impacted by the Obama’s goofy plan to push down oil prices in order to destroy the Russian economy. Here’s a brief summary:

“John Kerry, the US Secretary of State, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.” (Stakes are high as US plays the oil card against Iran and Russia, Larry Eliot, Guardian)

As indicated by today’s ghastly GDP data, Obama not only shot himself in the foot, he might have blown off his whole leg. Aside from the colossal growth in private inventories–which will be a drag on future growth–todays report was nothing short of a disaster.

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

The Mother of All Margin Calls! The Derivatives Chain May Create “A Domino Effect” which “Locks Up” the Entire Credit System

By Bill Holter
April 21, 2015
Global Research

 

goldThis past Friday, Dave Kranzler of Investment Research Dynamics put out a very thoughtful article and chart regarding the spike in “reverse repurchase agreements”

RRP’s held at the Fed http://investmentresearchdynamics.com/tag/reverse-repo-agreement/

The chart in question shows three very distinctive spikes:

RRP

The first was Sept. of 2008, again in 2011 and the current spike. It is Dave’s contention that something behind the scenes has or is blowing up financially.

Let me explain what I believe is happening, I do not disagree with his theory but I think he may have stopped just one step short of the full story.   By adding one more chart in a moment, I’ll try to explain.  Please read the above article as it is a good explanation of “reverse repurchase agreements” and saves me the need for a long winded rehash.

For years I have described the current financial situation as a “giant margin call” waiting to happen.  The derivatives market is a zero sum game where someone wins and someone loses, the danger of course is someone losing so badly they become insolvent and cannot make payment to the “winner” …which would make all parties a loser in the game.  This is the fear, the derivatives chain breaks somewhere along the way and creates a domino effect both upstream and downstream causing the entire credit system to lock up.

Think about what has happened over just the last six months alone. We have seen unprecedented FOREX movements. The dollar has strengthened close to 30% over this timeframe while oil has dropped about 50%.  The cross between the euro and the Swiss franc saw an almost 30% move in less than 10 minutes oneMonday morning in January.  There have been some very big gains AND some very big losses which would explain the need for “more collateral” which is exactly what these reverse repo’s provide.

  Please look at the following chart:

I believe this is “the rest of the story” as I mentioned above.  You can clearly see the spikes in 2008, 2011 and again currently but “this time is different”.  It is different because of both size and the long lasting duration!  The first chart that Dave put out on Friday was of RRP’s with “Foreign Official and Institutional Accounts” whereas the chart you just looked at are “ALL” RRP’s.

It is my belief the first chart’s movements are a function primarily of international FOREX movements and represents “collateral demand” from the likes of Deutschebank, SocGen, Barclays etc. …AND from The Bank of England, the ECB and other central banks.  The second chart is of ALL players, not just foreign.  This chart in my opinion is “how” the Fed has aided and abetted the system as a whole in “hiding” the losses from derivatives!  The Fed places collateral into the system which gets lent out over and over (rehypothecated) many times and “pledged” as collateral by the loser in derivatives trades… thus the system continues “unbroken” because the collateral is put up to meet the margin calls.

Do you see?  For well over a year I have wondered and even written in disbelief and amazement that no one ever admits to any large losses when in fact there had to be losses well into the multiple $ trillions!  Think about it, there are almost $10 trillion worth of “dollar derivatives” outstanding, a 30% move means someone won and someone else lost about $3 trillion.  I don’t know of any firms that could lose even 5% of this and remain solvent, do you?  And this is just “dollars”, not oil, not interest rates, not equities, not iron ore, copper, gold or anything else!

If you see the buildup of RRP’s over the last year+, this I believe is how the margin calls have been met and the losses hidden …but is it even legal?  In a technical and practical sense, no it is not.  However, from a practical sense, if this is what is being done then we now know how no one has been declared a loser and no one has had to “book” their losses.  The margin calls have been met, the positions stay open and no one is the wiser right?  I do want to point out that under the rule of law, if the Fed “knows” this, it is without a doubt a criminal act.  If they are doing business with bankrupt institutions, one which they know or should have knowledge of as being bankrupt, the Fed is flat out fraudulently and blatantly breaking all banking laws on the planet.

Going just a step further, if this is the case, what does it say about the Fed’s own balance sheet?  If they are doing swaps or RRP’s with bankrupt institutions, will the Fed ever get their collateral back?  As Dave Kranzler so aptly tied together, this is why the “failures to deliver” have spiked.  The collateral which was originally lent out has been re lent 10 times more, or even 100 times more, who knows?

Please walk away from reading this piece with one understanding, the chart above is telling you something very big has changed and been changing for over a year.  I believe it shows the system is in and has been fraudulently meeting a systemic margin call.  Maybe I am wrong but I wouldn’t bet on it.  The chart does however give you proof beyond any doubt that “stress” of some sort has been and is building up “somewhere”.  The stress is now multiples of what we saw in late 2008 …when we were only hours from the system seizing up in a giant meltdown.

I bounced this theory off of Jim Sinclair over the weekend and received a short but very enlightening reply.  He said “The concept is correct.  We have another OTC derivative explosion at hand but no practical way to expand liquidity.  Bad derivatives never die, they just get larger”.   Think about what Jim is saying here, we again have an Autumn of 2008 event triggering …only bigger!  And no way to actually meet the margin calls.  Each episode of QE was used to meet the margin calls and hide the losses.  Each one expanded the risk while pulling more and more collateral out of the system until we reached a tipping point, NOW!

Let me finish with this one point, when this era is looked at in hindsight, “it will all be about counterparty risk”.  Do you know of anything without counterparty risk?  Can you say G O L D?

Economic stagnation, financial parasitism dominate IMF-World Bank meeting

By Nick Beams and Barry Grey
April 18, 2015
World Socialist Web Site

 

The spring meeting of the International Monetary Fund and World Bank being held in Washington this weekend takes place under conditions of continuing stagnation in the real economy, combined with unprecedented levels of financial parasitism and social inequality.

Stock prices in the US, Europe and Asia have hit record highs and global corporations have amassed a cash hoard of some $1.3 trillion, fuelled by cheap credit from central banks and government-corporate attacks on workers’ wages and living standards. Yet the IMF warns in its updated World Economic Outlook published this week that the world economy will remain locked in a pattern of slow growth, high unemployment and high debt for a prolonged period.

In a marked shift from previous economic projections, the IMF acknowledges that there is little prospect of a return to the growth levels that prevailed prior to the 2008 financial crash, despite trillions of dollars in public subsidies to the financial markets. This amounts to a tacit admission that the crisis ushered in by the Wall Street meltdown nearly seven years ago is of a fundamental and historical character, and that the underlying problems in the global capitalist system have not been resolved.

A sample of headlines from articles published in the past week by the Financial Times gives an indication of the deepening malaise. They include: “An economic future that may never brighten,” “IMF warns of long period of lower growth,” “Europe’s debtor paradise will end in tears,” “QE raises fears of euro zone liquidity squeeze,” and “Global property bubble fears mount as prices and yields spike.”

The IMF report focuses on a sharp and persistent decline in private business investment, particularly in the advanced economies of North America, Europe and Asia. It concludes that “potential growth in advanced economies is likely to remain below pre-crisis rates, while it is expected to decrease further in emerging market economies in the medium term.”

It goes on to note, “Unlike previous financial crises, the global financial crisis is associated not only with a reduction in the level of potential output, but also with a reduction in its growth rate… Shortly after the crisis hit in September 2008, economic activity collapsed, and more than six years after the crisis, growth is still weaker than was expected before the crisis.”

This is a stunning confirmation of the analysis of the 2008 crash made by the World Socialist Web Site and the International Committee of the Fourth International. On January 11, 2008, nine months before the Lehman Brothers bankruptcy, the WSWS published a statement that began:

2008 will be characterized by a significant intensification of the economic and political crisis of the world capitalist system. The turbulence in world financial markets is the expression of not merely a conjunctural downturn, but rather a profound systemic disorder which is already destabilizing international politics.

The IMF report adds, “These findings imply that living standards may expand more slowly in the future. In addition, fiscal sustainability will be more difficult to maintain as the tax base will grow more slowly.” The meaning of this euphemistic language is that there is no end in sight to the global assault on the living standards and democratic rights of the working class.

The policies of austerity that have already thrown countless millions into poverty are not temporary. They will continue as long as capitalism continues.

The IMF’s updated Global Financial Stability Report, also released this week, acknowledges that central bank policies of holding interest rates close to zero and pumping trillions of dollars into the banking system by means of “quantitative easing,” i.e., money-printing, are having little impact on the real economy. Rather, they are increasing financial risk. According to the report, financial risks have risen in the six months since the last assessment in October 2014.

The IMF’s World Economic Outlook devotes an entire chapter to the slump in private investment. It notes that private investment in the major capitalist economies—the fundamental driving force of global growth—remains at historic lows. As a percentage of gross domestic product, it is below the level experienced in the aftermath of any recession in the post-war period.

But the report, setting the tone for the discussions this weekend among world finance ministers, central bankers and their myriad economic advisers, skirts the colossal role of financial speculation and parasitism in the investment slump and the crisis as a whole. All over the world, banks and corporations are using their massive profits and cash holdings to increase stock dividends and jack up their share prices by buying back their own stock, rather than investing in production. The speculative frenzy is compounded by near-record levels of corporate buybacks and mergers.

All of these activities are entirely parasitic. They add nothing to man’s productive forces. On the contrary, they divert economic resources from productive activity to further enrich a tiny global aristocracy of bankers, CEOs and speculators.

The IMF-World Bank meeting takes place amidst an exponential growth of financial parasitism, the likes of which has never been seen in the history of the capitalist system. In the past year alone, according to an article published this week in the Financial Times, some $1 trillion has been handed back to shareholders—many of them multi-billion dollar hedge funds and investment houses—in the form of buybacks and increased dividends.

Over the past decade, S&P 500 companies have repurchased some $4 trillion worth of shares. Major companies, including Apple, Intel, IBM and General Electric, play a central role in the ongoing buyback frenzy.

Last week alone, three corporate takeovers totalling over $105 billion were announced, including Royal Dutch Shell’s purchase of Britain’s BG Group. The value of all takeovers announced this year to date is more than $1 trillion, setting the pace for 2015 to be the second biggest year for mergers and acquisitions in history.

The result is massively inflated stock prices, the proceeds from which go overwhelmingly to the rich. Over the past year, the German DAX index has risen by 24 percent, the French CAC has increased 16 percent and Japan’s Nikkei has soared 36 percent.

Bank profits are also up. This week, JPMorgan Chase, Citigroup and Goldman Sachs all beat market expectations, announcing near-record profits for the first quarter of 2015, mainly on the basis of speculative trading activities.

As the real economy is starved of resources, leading to lower wages, declining job opportunities, rising unemployment and the substitution of casual and part-time employment for full-time jobs, fabulous fortunes are being accumulated on the financial heights of society.

The unprecedented degree to which the world economy is wedded to financial parasitism is an expression of the moribund state of the capitalist system.

There is another significant aspect to this weekend’s gathering that points to future developments. For seven decades, the IMF and the World Bank have formed two pillars of the economic hegemony of the United States. But the post-war regime is now cracking.

This week, Chinese authorities announced that some 57 countries—37 from Asia and 20 from the rest of the world—had signed up to the Beijing-backed Asia Infrastructure Investment Bank. The Obama administration bitterly opposed its strategic allies joining the bank, but the floodgates opened after Britain decided to join despite objections from Washington that the bank would undermine US-backed global financial institutions.

The fracturing of the global post-war economic order under conditions of deepening crisis is a sure sign that the major capitalist powers are determined to assert their own economic interests, if necessary against the US. Not only are the economic conditions of the 1930s returning, so are the political and economic divisions that led to world war.

 

 

Former Fed Chairman Ben Bernanke hired by hedge fund Citadel

By Andre Damon
April 18, 2015
World Socialist Web Site

 

Ben S. Bernanke, the former Federal Reserve chairman who funneled trillions of dollars in government funds to Wall Street, has been hired by Chicago-based hedge fund Citadel LLC, where he will presumably make millions of dollars.

Bernanke’s new job constitutes little more than a kickback for services rendered to Wall Street and the financial elite more generally. As a result of policies he implemented during his eight years as Fed chairman, the profits of Wall Street banks and hedge funds, including that of his new employer, have soared to record highs.

If the United States were a genuine democracy, the announcement of Bernanke’s new job would prompt vituperative public denunciations by senators and congressmen; hearings would be held, documents would be subpoenaed, and federal bribery charges would be drawn up against him.

Yet, since the story broke Thursday, the silence has been deafening. Not a single public official has prominently commented on the development, and major newspapers responded to the news with, at most, a shrug of the shoulders.

While Bernanke’s pay package has not been publicly disclosed, commentators noted that it is likely to be at least seven figures. In the fourteen months since he left office, Bernanke has raked in hundreds of thousands of dollars in speaking fees, charging $200,000 per appearance, more than he made in a year at his job at the Federal Reserve. The New York Times noted that his clients included “hedge fund managers like David A. Tepper of Appaloosa Management, private equity executives like Michael E. Novogratz of the Fortress Investment Group and other financial institutions.”

During the course of the 2008 bank bailout, which Bernanke played a leading role in orchestrating, the US government loaned nearly $7 trillion to the financial system, which was used to prop up over $30 trillion in financial assets—more than twice the yearly output of the United States.

It is also noteworthy that, during Bernanke’s tenure, not a single bank executive was criminally prosecuted for helping to cause the 2008 financial crisis, despite ample evidence of criminal wrongdoing demonstrated by a series of voluminous congressional reports.

Under Bernanke’s watch, the Fed initiated its so-called quantitative easing money-printing operation, which quadrupled the size of the Federal Reserve’s balance sheet, injecting some three trillion dollars into the financial system.

These policies have fueled a massive run-up in the values of financial assets, causing the wealth of the financial oligarchy to soar.

Since 2009, the Dow Jones Industrial Average has nearly tripled in value. In the same period, members of the Forbes list of 400 richest people in the US have nearly doubled their net worth, which has hit a total of $2.9 trillion, or about one fifth of the United States’ gross domestic product. Over the same period, the incomes of a typical household in the US fell by more than ten percent.

Bernanke’s new employer has benefited handsomely from the policies implemented under Bernanke and continued under his successor, Janet Yellen. Citadel’s manager, Ken Griffin, made a staggering $1.1 billion in 2014, making him the fourth-highest-earning hedge fund manager in the US that year. The firm manages $24 billion, and its clients had a rate of return of 18 percent last year.

According to the Times, “Bernanke said he was sensitive to the public’s anxieties about the ‘revolving door’ between Wall Street and Washington and chose to go to Citadel, in part, because it ‘is not regulated by the Federal Reserve and I won’t be doing lobbying of any sort.’” Bernanke declared that he decided to go to work for a hedge fund, not a bank, because “I wanted to avoid the appearance of a conflict of interest… I ruled out any firm that was regulated by the Federal Reserve.”

Amazingly, no one within the media establishment, least of all the Times, has even questioned Bernanke’s absurd and self-serving defense of his shameless bribe taking. The fact is that the Fed functioned to inflate the values of all financial assets: transferring social wealth from the poor to the rich. Hedge funds benefited from this process no less than banks.

Bernanke joins a long list of fed officials, financial regulators and politicians who have cashed in on their services to Wall Street:

• In November 2013, former Treasury Secretary Timothy Geithner joined the hedge fund Warburg Pincus, where he now serves as president and managing director.

• Last month, former Federal Reserve governor Jeremy C. Stein was hired as an advisor for the hedge fund BlueMountain Capital. He had resigned from the Fed the previous May.

• Peter Orszag, the former head of the Office of Management and Budget under Obama, joined Citigroup in 2011.

• Alan Greenspan, who was Bernanke’s predecessor at the Federal Reserve, signed on as an advisor to the hedge fund Paulson & Co in 2008.

• David H. McCormick, who served as Undersecretary for International Affairs at the Treasury Department, is now co-president of Bridgewater Associates, the world’s largest hedge fund.

• William M. Daley, who served as White House Chief of Staff between 2011 and 2012, became the managing partner of Swiss hedge fund Argentière Capital in 2014.

Former regulators are far from the only ones cashing in. This week, Deval Patrick, the former governor of Massachusetts, signed on as a managing director at private equity firm Bain Capital. In 2013, David Petraeus, the former director of the Central Intelligence Agency, got a job at private equity company Kohlberg Kravis Roberts.

As the Washington Post put it, “There’s a metronomic quality to it. Anytime a public official leaves office, they write a book, maybe take a fellowship somewhere, and then, after a suitable amount of time has passed, take a job on Wall Street.”

The uniform regularity with which supposed federal regulators take jobs with the very industries they were in charge of policing underscores the fundamental reality that, far from seeking to restrain the illegal and criminal activities of the banks and hedge funds, the so-called regulators simply run interference for Wall Street, in exchange for millions of dollars in pay and perks after they leave office.

The Next Financial Tsunami Just Began in Texas

By F. William Engdahl
April 17, 2015
New Eastern Outlook

 

financial collapse

image from thedailysheeple

The last financial Tsunami was a doozer that almost destroyed the global financial system. It was the collapse of the Wall Street Mortgage Backed Securities bubble in March 2007. The results of that collapse are still very much with the world today. Never in the one hundred some years of the Federal Reserve Bank has the Fed held interest rates at an artificial near-zero level for what is soon to mark eight years duration. Not even during the 1930’s Great Depression were rates kept so low so long. It is not a sign of a healthy banking system, friends.

Now a new Financial Tsunami is beginning, this one, of all places, in the Texas, North Dakota and other USA shale oil regions. Like the so-called US sub-prime real estate crisis, the oil shale junk bond default crisis is but the cutting front of the first wave of what promises to be a far more dangerous series of financial Tsunami long waves.

Banking system vulnerability greater

I say more dangerous because of what governments in the USA, EU and elsewhere did after 2007 to make sure no repeat of that bubble-cum-collapse-of bubble cycle could repeat.

In a word, they did nothing. What they did do—explode US Federal debt and bloat the credit of the central bank to historic highs leave the USA in far worse shape to deal with the unfolding crisis.

Aside from a few cosmetic face-saving new laws, they have done nothing. No CEO of a major criminal Wall Street bank went to prison. No mega-bank, “too big to fail” was forced to break up their trillion dollar balance sheet as they were after 1933 when the Congress passed the Glass-Steagall Act forcing banks to divest their in-house stock and bond securities businesses to avoid the same conflicts of interest that reemerged after Bill Clinton signed the Glass-Steagall repeal in 1999 and banks and insurance companies and investment firms merged into giants so large Congress was terrified to touch them. No law has been passed forcing disclosure of the off-balance-sheet bank derivatives positions. Like in 2007 it is all opaque, like bankers prefer.

But something has changed. More than $700 billion of US taxpayer dollars were donated to the health and welfare of the six or seven criminal institutions called Wall Street banks. Four of those Wall Street banks—JP MorganChase, Citigroup, Goldman Sachs, Bank of America—hold 93% of the total USA banking industry notional amounts of derivative contracts, a market that in April 2014 was valued grossly or notionally at $231 trillion, yes, trillion. Were the offsetting derivatives contracts netted out, the bank risks of those four Wall Street banks would still be $279 billion of credit risk bank exposure, all concentrated in the four largest US banks.

In a full-blown meltdown or Tsunami like 2008, when no bank dared trade with any other bank for fear it would default, all calculations are out the window as there is no derivative or hedge against a systemic meltdown. In 2007-2015 the Fed reacted with unprecedented money printing to feed the brain-dead Wall Street banks. It was called Quantitative easing or QE.

The Fed created out of thin air more than $3.3 trillion worth of what they call Reserve Bank Credit after September 2008. In the QE process the Fed bought financial assets from commercial banks, mainly the Big Four or top 25 banks and other private institutions like Fannie Mae or Freddie Mac mortgage companies. The Fed bought US government bonds from the private banks, the heart of the corrupt Federal Reserve private bank system. And more recently the fed has bought $1.7 trillion of toxic mortgage backed securities from the same banks. That Fed buying called QE pumped urgently need liquidity on to those mega banks.

Only this is not 1986 and the US banking system and US economy is not comparable to that in 1986. Today the US Government is choking in $18 trillion in Federal debt. In 1986 it was a “mere” $2 trillion. The US economy in 1986 still produced manufacturing jobs that employed real working people. Today those jobs have been outsourced through to places like Mexico or China or Vietnam or even, yes, Russia. And the banking system of the USA is on year seven of artificial life support known as Quantitative Easing.

According to John Williams who produces a widely-regarded invaluable independent check on government statistical lying in his Shadow Government Statistics, the true unemployment rate in the United States in the beginning of 2015 is not the politically rigged 5% President Obama so proudly points to. Rather is is over 23%, Great Depression levels, and more than double the 12% he reckoned just before the 2007 crisis began.

What have the banks done with the Fed money? They have flooded the stock markets, emerging markets like Brazil or India or even Russia, all in search of new gains just as they flooded into junk real estate loans after the collaose of the dot.com IT bubble in 2000. And they have poured hundreds of billions of dollars into the US shale oil bonanza, creating a new bubble, much like the 1999-2000 dot.com bubble or the 2004-2007 sub-prime bubble. Now that US shale oil bubble is beginning to deflate, fast.

The Saudis strike

Recall that in September 2014, in a misguided attempt to up the heat on the Russian economy and weaken Vladimir Putin, Secretary of State John Kerry flew to Saudi Arabia to meet with the dying King Abdullah. Kerry reportedly proposed the Saudis dump oil, then selling for around $100 a barrel, onto the market at drastically lower prices. It was crude, in the sense not of crude oil but of a poorly thought-out crude rerun of a tactic then Vice President Bush and Secretary of State George Schultz made with the Saudis in 1986 when oil prices plunged to below $10 a barrel and prepared the financial backdrop for the collapse of the Soviet Union three years later.

What Kerry and the Washington neo-conservatives neglected to look at was the double agenda of those sly Saudi Wahhabite royals. They gleefully agreed to Help Washington deepen Russia’s financial crisis and to hitting their Shi’ite foe Iran by hitting oil. But they also saw a golden chance to rid themselves of their new rival for global oil supremacy, namely, the United States, specifically the shale oil sector.

A Sorcerer’s Apprentice

Owing to the geology in extracting gas from shale rock interstices by underground fracturing or fracking, by pumping millions of gallons of chemicals into the rocks, shale oil and gas deposits deplete far far more rapidly than conventional gas or oil deposits. That has meant shale companies had to borrow more and more to drill new wells in order to maintain oil volumes. So long as oil was above $100 a barrel, it was still a profit bonanza for banks as for shale oil companies.

Those new shale oil wells cost money. After 2011 Wall Street banks hungry for new profit in a depressed economy teamed up with shale oil drilling companies in what soon became a remake of the Goethe Sorcerer’s Apprentice, where this time he can’t stop the flow of oil. As a result of shale oil, the USA has surpassed Saudi Arabia to become the world’s largest oil producer, but the rising oil supply is worsening the US oil industry crisis.

When Fed interest rates were zero, Wall Street liquidity seemingly unlimited and oil prices well above $100 a barrel as they were since 2011, the money flowed into shale gas until the gas supplies collapsed the price. At that point, around 2011 shale drilling shifted to far more profitable shale or tight oil drilling. Here the debt began to rise like in every previous speculative bubble. Bankers have short memory on Wall Street when they know the Government will always be there because they are “too big to fail.” So they have created the shale oil bubble with no regard to risk.

Junk bonds

Since the shale oil boom took flight in 2011 Wells Fargo and JP Morgan have both issued shale oil company loans of $100 billion.There has been a huge rise in high risk high return bonds, so called “junk bonds.” They earned the appropriate name because in event of a company’s going bankrupt, they become just that—junk. The bonds have been issued by Wall Street banks to shale oil and gas companies since the bubble started in 2011. The US oil and gas industry share of junk bonds has been the fastest growing portion of the overall US junk bond sector of the bond market.

Now as oil prices hover around $49 a barrel, the shale oil companies that indebted themselves with junk bonds to finance more drilling are themselves facing bankruptcy or default more and more every additional day the US crude oil price remains this low. Their shale projects were calculated when oil was $100 a barrel, less than a year ago. Their minimum price of oil to avoid bankruptcy in most cases was $65 a barrel to $80 a barrel. Shale oil extraction is unconventional and more costly than conventional oil. Douglas-Westwood, an energy advisory firm, estimates that nearly half of the US oil projects under development need oil prices greater than $120 per barrel in order to achieve positive cash flow. 

Now as the Saudi oil price operation enters its eighth month with no end in sight, the shale oil dominoes are beginning to fall. US shale oil producers Quicksilver Resources, American Eagle Energy, Saratoga Resources and BPZ Resources all missed interest payments this year. Houston oil field service firm Cal Dive International just filed for Chapter 11 bankruptcy. Moody’s Investors Service just downgraded Swiss oil rig contractor Transocean’s $9.1 billion in debt.

The US energy sector’s high-yield bonds – so-called “junk bonds” considered at risk of default – have climbed to $247 billion. But the implosion of the shale oil bubble and its debt is just beginning. Because the shale oil producers are desperately trying to stay afloat and hope for higher oil prices to stay alive they are forced into the paradoxical position of pumping as much oil as possible in order to service their debt to the banks to avoid default. That has meant record volumes of oil flooding the US market in recent months, pushing prices even lower.

And to make the oil glut even worse, the Saudis have apparently no intention of easing on the price of oil until far more blood flows in the streets of Laredo and across Wall Street. In the first week of April the US crude oil inventories surged 11 million barrels – three times more than expected – to a modern-day record 482 million barrels, the biggest one-week increase since 2001. Stockpiles in Cushing, Oklahoma, rose by 1.2 million barrels, far more than expected. On top of the flood of oil in the US led by increasingly strapped shale oil producers, Saudi oil production rose to 10.3 million barrels per day in March, their highest monthly total on record.

Saudi oil minister Ali al-Naimi said he was ready to “improve” prices only if producers outside the Organization of the Petroleum Exporting Countries (OPEC) joined the effort. But even in OPEC Iran is boosting oil sales to China and Japan despite sanctions, with prospect of a possible, if increasingly unlikely, US lifting of Iran sanctions in July, bringing a big increase of Iran oil on the market. Iraq and Libya also increased their output in March and Russia is pumping all it can, meaning the world oil glut will likely run to at least end of 2015 according to Olivier Jakob at Swiss-based Petromatrix. The US Energy Department EIA estimates US oil prices will fall now another $5 to $15 a barrel to levels around $35 to $45 a barrel because of the glut continuing, which in turn will trigger a chain reaction of shale oil sector bankruptcies and loss of tens of thousands of well-paying US oilrig jobs from Pennsylvania to Texas to North Dakota to Arizona to California.

There is a symbiotic bond between the shale oil industry and the Wall Street banks that financed the shale bonanza. The banks have an estimated $498 billion in loan exposure to the US energy sector. Wells Fargo bank got 15 percent of its investment banking fee revenue in 2014 from the oil and gas industry. At Citigroup, the business accounted for roughly 12 percent, according to Dealogic. Now, as the problems mount, the Wall Street banks that financed the shale energy deals are having trouble offloading the debt as news of the deepening crisis spreads. This time Wall Street may have trouble finding naïve Chinese bankers willing to buy US toxic waste oil loans as they were lured into buying toxic waste real estate sub-prime mortgage debt before 2008.

It isn’t only oil companies that are beginning to go under. The entire infrastructure of the USA energy boom, one of the only growth areas in a depressed economy, has financed new homes by oil employees, oil company office buildings from Houston Texas to North Dakota, creating growth pockets amid the larger Detroit-like depression regions. Now bank lenders are reassessing risks in shale energy towns as roughly $1.1 trillion of property loans come due across the US over the next three years, according to real estate debt analyst Richard Hill at Morgan Stanley.

The collapse of the shale oil junk bond market will be the start of the next Tsunami underwater financial earthquake. The entire Junk Bond market has boomed as banks in the USA and even in the EU and elsewhere assumed so long as the Fed kept rates at zero, and so long as oil was at $100 a barrel. Bank risk was zero and rewards were double digit interest rates on junk. In the end that junk, shale and other, is now in an early wave Tsunami despite zero fed interest rates, because of the falling oil prices. Martin S. Fridson, a prominent analyst of the high-yield junk bond market, sees as much as $1.6 trillion in high-yield defaults coming in a new wave he expects to begin shortly.

Fridson said that five months ago. The “shortly” has now arrived. The next months promise a bare knuckle ride in the rotted debt-bloated US financial sector that will promise an even more dangerous rerun of the global crisis after 2008. The banks most exposed are JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.—the same criminal enterprises that created the 2007 mortgage-backed-securities collapse and virtually every financial collapse crisis since 1907. Some might think it high time soon to consider another banking model for the USA, perhaps bringing the CEOs responsible before the courts, nationalizing the banks too big to fail, breaking them up into “bite sized” pieces, removing at least that cancer from the economy to let healthy investment resume by honest banks in honest people in America once more as we did only some sixty years ago.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.

How America Became an Oligarchy

By Ellen Brown
Global Research, April 7, 2015
Web of Debt

 

The politicians are put there to give you the idea that you have freedom of choice. You don’t. . . . You have owners.  — George Carlin, The American Dream

According to a new study from Princeton University, American democracy no longer exists. Using data from over 1,800 policy initiatives from 1981 to 2002, researchers Martin Gilens and Benjamin Page concluded that rich, well-connected individuals on the political scene now steer the direction of the country, regardless of – or even against – the will of the majority of voters. America’s political system has transformed from a democracy into an oligarchy, where power is wielded by wealthy elites.

“Making the world safe for democracy” was President Woodrow Wilson’s rationale for World War I, and it has been used to justify American military intervention ever since. Can we justify sending troops into other countries to spread a political system we cannot maintain at home?

The Magna Carta, considered the first Bill of Rights in the Western world, established the rights of nobles as against the king. But the doctrine that “all men are created equal” – that all people have “certain inalienable rights,” including “life, liberty and the pursuit of happiness” – is an American original. And those rights, supposedly insured by the Bill of Rights, have the right to vote at their core. We have the right to vote but the voters’ collective will no longer prevails.

In Greece, the left-wing populist Syriza Party came out of nowhere to take the presidential election by storm; and in Spain, the populist Podemos Party appears poised to do the same. But for over a century, no third-party candidate has had any chance of winning a US presidential election. We have a two-party winner-take-all system, in which our choice is between two candidates, both of whom necessarily cater to big money. It takes big money just to put on the mass media campaigns required to win an election involving 240 million people of voting age.

In state and local elections, third party candidates have sometimes won. In a modest-sized city, candidates can actually influence the vote by going door to door, passing out flyers and bumper stickers, giving local presentations, and getting on local radio and TV. But in a national election, those efforts are easily trumped by the mass media. And local governments too are beholden to big money.

When governments of any size need to borrow money, the megabanks in a position to supply it can generally dictate the terms. Even in Greece, where the populist Syriza Party managed to prevail in January, the anti-austerity platform of the new government is being throttled by the moneylenders who have the government in a chokehold.

How did we lose our democracy? Were the Founding Fathers remiss in leaving something out of the Constitution? Or have we simply gotten too big to be governed by majority vote?

Democracy’s Rise and Fall

The stages of the capture of democracy by big money are traced in a paper called “The Collapse of Democratic Nation States” by theologian and environmentalist Dr. John Cobb. Going back several centuries, he points to the rise of private banking, which usurped the power to create money from governments:

The influence of money was greatly enhanced by the emergence of private banking.  The banks are able to create money and so to lend amounts far in excess of their actual wealth.  This control of money-creation . . . has given banks overwhelming control over human affairs.  In the United States, Wall Street makes most of the truly important decisions that are directly attributed to Washington.

Today the vast majority of the money supply in Western countries is created by private bankers. That tradition goes back to the 17th century, when the privately-owned Bank of England, the mother of all central banks, negotiated the right to print England’s money after Parliament stripped that power from the Crown. When King William needed money to fight a war, he had to borrow. The government as borrower then became servant of the lender.

In America, however, the colonists defied the Bank of England and issued their own paper scrip; and they thrived. When King George forbade that practice, the colonists rebelled.

They won the Revolution but lost the power to create their own money supply, when they opted for gold rather than paper money as their official means of exchange. Gold was in limited supply and was controlled by the bankers, who surreptitiously expanded the money supply by issuing multiple banknotes against a limited supply of gold.

This was the system euphemistically called “fractional reserve” banking, meaning only a fraction of the gold necessary to back the banks’ privately-issued notes was actually held in their vaults. These notes were lent at interest, putting citizens and the government in debt to bankers who created the notes with a printing press. It was something the government could have done itself debt-free, and the American colonies had done with great success until England went to war to stop them.

President Abraham Lincoln revived the colonists’ paper money system when he issued the Treasury notes called “Greenbacks” that helped the Union win the Civil War. But Lincoln was assassinated, and the Greenback issues were discontinued.

In every presidential election between 1872 and 1896, there was a third national party running on a platform of financial reform. Typically organized under the auspices of labor or farmer organizations, these were parties of the people rather than the banks. They included the Populist Party, the Greenback and Greenback Labor Parties, the Labor Reform Party, the Antimonopolist Party, and the Union Labor Party. They advocated expanding the national currency to meet the needs of trade, reform of the banking system, and democratic control of the financial system.

The Populist movement of the 1890s represented the last serious challenge to the bankers’ monopoly over the right to create the nation’s money.  According to monetary historian Murray Rothbard, politics after the turn of the century became a struggle between two competing banking giants, the Morgans and the Rockefellers.  The parties sometimes changed hands, but the puppeteers pulling the strings were always one of these two big-money players.

In All the Presidents’ Bankers, Nomi Prins names six banking giants and associated banking families that have dominated politics for over a century. No popular third party candidates have a real chance of prevailing, because they have to compete with two entrenched parties funded by these massively powerful Wall Street banks.

Democracy Succumbs to Globalization

In an earlier era, notes Dr. Cobb, wealthy landowners were able to control democracies by restricting government participation to the propertied class. When those restrictions were removed, big money controlled elections by other means:

First, running for office became expensive, so that those who seek office require wealthy sponsors to whom they are then beholden.  Second, the great majority of voters have little independent knowledge of those for whom they vote or of the issues to be dealt with.  Their judgments are, accordingly, dependent on what they learn from the mass media.  These media, in turn, are controlled by moneyed interests.

Control of the media and financial leverage over elected officials then enabled those other curbs on democracy we know today, including high barriers to ballot placement for third parties and their elimination from presidential debates, vote suppression, registration restrictions, identification laws, voter roll purges, gerrymandering, computer voting, and secrecy in government.

The final blow to democracy, says Dr. Cobb, was “globalization” – an expanding global market that overrides national interests:

[T]oday’s global economy is fully transnational.  The money power is not much interested in boundaries between states and generally works to reduce their influence on markets and investments. . . . Thus transnational corporations inherently work to undermine nation states, whether they are democratic or not.

The most glaring example today is the secret twelve-country trade agreement called the Trans-Pacific Partnership. If it goes through, the TPP will dramatically expand the power of multinational corporations to use closed-door tribunals to challenge and supersede domestic laws, including environmental, labor, health and other protections.

Looking at Alternatives

Some critics ask whether our system of making decisions by a mass popular vote easily manipulated by the paid-for media is the most effective way of governing on behalf of the people. In an interesting Ted Talk, political scientist Eric Li makes a compelling case for the system of “meritocracy” that has been quite successful in China.

In America Beyond Capitalism, Prof. Gar Alperovitz argues that the US is simply too big to operate as a democracy at the national level. Excluding Canada and Australia, which have large empty landmasses, the United States is larger geographically than all the other advanced industrial countries of the OECD (Organization for Economic Cooperation and Development) combined. He proposes what he calls “The Pluralist Commonwealth”: a system anchored in the reconstruction of communities and the democratization of wealth. It involves plural forms of cooperative and common ownership beginning with decentralization and moving to higher levels of regional and national coordination when necessary. He is co-chair along with James Gustav Speth of an initiative called The Next System Project, which seeks to help open a far-ranging discussion of how to move beyond the failing traditional political-economic systems of both left and Right..

Dr. Alperovitz quotes Prof. Donald Livingston, who asked in 2002:

What value is there in continuing to prop up a union of this monstrous size? . . . [T]here are ample resources in the American federal tradition to justify states’ and local communities’ recalling, out of their own sovereignty, powers they have allowed the central government to usurp.

Taking Back Our Power

If governments are recalling their sovereign powers, they might start with the power to create money, which was usurped by private interests while the people were asleep at the wheel. State and local governments are not allowed to print their own currencies; but they can own banks, and all depository banks create money when they make loans, as the Bank of England recently acknowledged.

The federal government could take back the power to create the national money supply by issuing its own Treasury notes as Abraham Lincoln did. Alternatively, itcould issue some very large denomination coins as authorized in the Constitution; or it could nationalize the central bank and use quantitative easing to fund infrastructure, education, job creation, and social services, responding to the needs of the people rather than the banks.

The freedom to vote carries little weight without economic freedom – the freedom to work and to have food, shelter, education, medical care and a decent retirement. President Franklin Roosevelt maintained that we need an Economic Bill of Rights. If our elected representatives were not beholden to the moneylenders, they might be able both to pass such a bill and to come up with the money to fund it.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN.fm.

Growing warnings of another financial disaster

By Nick Beams
March 25, 2015
World Socialist Web Site

 

bankerGlobal financial markets are on the road to another crash, with consequences even more serious than the collapse of September 2008. There have been a series of dire warnings from within the ruling class itself that present monetary policies have created massive financial bubbles with devastating consequences.

In an interview with the Financial Times, James Bullard, the head of the Reserve Bank of St Louis, and a non-voting member of the Federal Open Market Committee, said the Fed had to start normalizing interest rate policy as soon as possible. Continuing the present near-zero rate would feed into an asset price bubble which would “blow up out of control.”

Bullard and others are pointing to what has now become an obvious fact, that the combined effects of quantitative easing (i.e., printing money) and interest rate cuts by central banks are powering a feeding frenzy in global equity and bond markets.

Last week, an analysis of the S&P 500 Index from the Office of Financial Research, attached to the US Treasury Department, concluded that the US stock market had entered a situation comparable to patterns seen in 1929, 2000 and 2007. That is, a major downturn, if not a crash, was looming. Entitling his report “Quicksilver Markets”, the author noted: “Quicksilver markets can turn from tranquil to turbulent in short order.”

There are growing fears of a “liquidity crunch” if all the major investors and speculators, which operate on basically similar financial models, try to make an exit at the same time, only to find that there are no buyers.

According to a report in the Financial Times on Tuesday, some fund managers have warned “not since the collapse of Lehman Brothers in September 2008 and the freezing of money markets in August 2007 has there been such widespread concern over the structure of fixed income [i.e., bond] markets.” It said that prices of bonds had risen appreciably as investors had “gorged” on the cheap money provided by the low-interest rate regime of central banks and warned that there could be a “liquidity crunch” if they “collectively run for the exits.”

The same situation has developed in corporate and government bond markets, which have surged ahead on cheap money, making commonplace the previously extremely rare phenomenon of negative yields. (The price of the bond moves in the opposite direction to the yield.)

Negative yields mean that investors are in effect paying governments for the privilege of lending them money. The phenomenon is the result of a situation in which, despite the fact that bondholders would make a loss if they held the high-priced bond to maturity, they can still make a capital gain because the outflow of central bank finance will push bond prices still higher. They can simply sell the bond to another investor, who is himself operating under the assumption that he can do the same.

In effect, corporate and bond markets have been turned into a giant Ponzi scheme where profits can continue to be made so long as money continues to pour in. In other words, the modus operandi of what started as a criminal venture in the US during the 1920s has now become the central operating principle of the global multi-trillion dollar financial markets.

The official justification for this system advanced by its promoters is that these measures are necessary to stimulate economic growth. Such claims are refuted by facts and figures. The world economy as a whole is characterized by growing deflationary trends coupled with stagnant or low growth rates.

Yesterday it was announced that in Britain consumer prices for February had failed to show a rise for the first time in 55 years, a sure indicator of economic contraction. At the same time, a key indicator of manufacturing activity in China fell to an 11-month low. Decreases occurred in the key areas of new orders, export orders, employment and output prices.

The day before in Europe, projections prepared by the European Central Bank found that its quantitative easing program, aimed at pumping more than €1 trillion into financial markets over the next 18 months, would do virtually nothing to boost employment. The jobless rate will continue to remain at above 10 percent even after the program has been completed.

The main effect of the QE measures has been to boost European stock markets, which so far this year have risen at a faster rate than in the US, even as European economic output still remains below where it was in 2007, with investment in the real economy down by more than 25 percent on pre-crisis levels.

While the corporate and financial aristocracy continues to enrich itself, the conditions for the working class are subject to an unending austerity drive. The dictates of the financial oligarchy with respect to Greece are the consummate expression of what is a global program: the forcible impoverishment and starvation of ever-wider sections of the population.

In the aftermath of the devastation of the Great Depression of the 1930s, the political representatives of the ruling classes—desperately fearful of socialist revolution—claimed that they could regulate the worst effects of the profit system through so-called Keynesian measures based on government spending to simulate growth and secure a return to “normalcy.”

For a very short period, in historical terms, these policies seemed to bring success. However, they rested on the strength of US capitalism and the boost that its more productive methods provided for the global economy as a whole.

The situation today has been completely transformed. The US economy is no longer the center of economic expansion but is the headquarters of global parasitism. The central position in the world economy is no longer occupied by corporations such as Ford and General Motors, but by Goldman Sachs, JPMorgan Chase and their equally parasitic counterparts internationally, which are not engaged in the creation of new wealth but in its appropriation, often through outright criminal methods.

The utter bankruptcy of the entire profit system is exemplified by the policy debate now taking place in ruling financial and economic circles. It is between those who maintain that the cheap money policies of the central banks must be continued lest a disaster result, and those who insist the taps have to be turned off, and the system purged, if necessary through bankruptcies and financial collapses, in order to try to prevent an even bigger catastrophe.

The various defenders of the profit system, in the media, academic circles and in pseudo-left organisations such as Syriza in Greece, maintain that the perspective of a planned world socialist economy is not possible and therefore the only alternative is to try to “save capitalism from itself”.

In fact, the perspective of international socialism is the only viable and realistic answer to the historic crisis of capitalism. To be realized, it must be made the basis of the political program for which the international working class begins to fight.

 

 

Why a Stronger Dollar will Lead to Deflation, Recession and Crisis

“Margin Call from Hell”

By Mike Whitney
March 14, 2015
Counter Punch

 

banker“There are no nations…. no peoples…. no Russians.. no Arabs…no third worlds…no West. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multi-variate, multi-national dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels. It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today.”

– Arthur Jensen’s speech from Network, a 1976 American satirical film written by Paddy Chayefsky and directed by Sidney Lumet

The crisis that began seven years ago with easy lending and subprime mortgages, has entered its final phase, a currency war between the world’s leading economies each employing the same accommodative monetary policies that have intensified market volatility, increased deflationary pressures, and set the stage for another tumultuous crack-up. The rising dollar, which has soared to a twelve year high against the euro, has sent US stock indices plunging as investors expect leaner corporate earnings, tighter credit, and weaker exports in the year ahead. The stronger buck is also wreaking havoc on emerging markets that are on the hook for $5.7 trillion in dollar-backed liabilities. While most of this debt is held by the private sector in the form of corporate bonds, the stronger dollar means that debt servicing will increase, defaults will spike, and capital flight will accelerate. Author’s Michele Brand and Remy Herrera summed it up in a recent article on Counterpunch titled “Dollar Imperialism, 2015 edition”. Here’s an excerpt from the article:

“There is the risk for a sell-off in emerging market bonds, leading to conditions like in 1997. The multitrillion dollar carry trade may be on the verge of unwinding, meaning capital fleeing the periphery and rushing back to the US. Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only put oil on the fire.

The World Bank warned in January against a “disorderly unwinding of financial vulnerabilities.” According to the Financial Times on February 6, there is a “swelling torrent of ‘hot money’ cascad[ing] out of China.” Guan Tao, a senior Chinese official, said that $20 billion left China in December alone and that China’s financial condition “looks more and more like the Asian financial crisis” of the 1990s, and that we can “sense the atmosphere of the Asian financial crisis is getting closer and closer to us.” The anticipated rise of US interest rates this year, even by a quarter point as the Fed is hinting at, would exacerbate this trend and hit the BRICS and other developing countries with an even more violent blow, making their debt servicing even more expensive.” (Dollar Imperialism, 2015 Edition” Michele Brand and Remy Herrera, CounterPunch)

The soaring dollar has already put the dominoes in motion as capital flees the perimeter to return to risk-free assets in the US. At present, rates on the benchmark 10-year Treasury are still just slightly above 2 percent, but that will change when US investment banks and other institutional speculators– who loaded up on EU government debt before the ECB announced the launching of QE–move their money back into US government bonds. That flush of recycled cash will pound long-term yields into the ground like a tent-peg. At the same time, the Fed will continue to “jawbone” a rate increase to lure more capital to US stock markets and to inflict maximum damage on the emerging markets. The Fed’s foreign wealth-stripping strategy is the financial equivalent of a US military intervention, the only difference is that the buildings are left standing. Here’s an except from a Tuesday piece by CNBC:

“Emerging market currencies were hit hard on Tuesday, while the euro fell to a 12-year low versus the U.S. dollar, on rising expectations for a U.S. interest rate rise this year. The South African rand fell as much as 1.5 percent to a 13-year low at around 12.2700 per dollar, while the Turkish lira traded within sight of last Friday’s record low. The Brazilian real fell over one percent to its lowest level in over a decade. It was last trading at about 3.1547 to the dollar…

The volatility in currency markets comes almost two years after talk of unwinding U.S. monetary stimulus sent global markets reeling, with some emerging market currencies bearing the brunt of the sell-off…

Emerging market (EM) currencies are off across the board, as markets focus back on those stronger U.S. numbers from last week, prospects for early Fed tightening, and underlying problems in EM,” Timothy Ash, head of EM (ex-Africa) research at Standard Bank, wrote in a note.

“In this environment countries don’t need to give investors any excuse to sell – especially still higher rolling credits like Turkey.” (Currency turmoil as US rate-hike jitters bite, CNBC)

Once again, the Fed’s easy money policies have touched off a financial cyclone that has reversed capital flows and put foreign markets in a downward death spiral. (The crash in the EMs is likely to be the financial calamity of the year.) If Fed chairman Janet Yellen raises rates in June, as many expect, the big money will flee the EMs leaving behind a trail of bankrupt industries, soaring inflation and decimated economies. The blowback from the catastrophe is bound to push global GDP into negative territory which will intensify the currency war as nation’s aggressively compete for a larger share of dwindling demand.

The crisis in the emerging markets is entirely the doing of the Federal Reserve whose gigantic liquidity injections have paved the way for another global recession followed by widespread rejection of the US unit in the form of “de-dollarization.” Three stock market crashes and global financial meltdown in the length of decade and a half has already convinced leaders in Russia, China, India, Brazil, Venezuela, Iran and elsewhere, that financial stability cannot be achieved under the present regime. The unilateral and oftentimes nonsensical policies of the Fed have merely exacerbated inequities, disrupted normal business activity, and curtailed growth. The only way to reduce the frequency of destabilizing crises is to jettison the dollar altogether and create a parallel reserve currency pegged to a basket of yuans, dollars, yen, rubles, sterling, euros and gold. Otherwise, the excruciating boom and bust cycle will persist at five to ten year intervals. Here’s more on the chaotic situation in the Emerging Markets:

“The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar. […] The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are ‘short dollars’, in trading parlance. They now face the margin call from Hell…. Stephen Jen, from SLJ Macro Partners said that ‘Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers. Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015.’” (Fed calls time on $5.7 trillion of emerging market dollar debt, Ambrose Evans Pritchard, Telegraph)

As the lone steward of the reserve currency, the Fed can boost global liquidity with a flip of the switch, thus, drowning foreign markets in cheap money that inevitably leads to recession, crises, and political unrest. The Fed was warned by Nobel Prize-winning economist, Joseph Stiglitz, that its loosy goosy-monetary policies, particularly QE, would have a ruinous effect on emerging markets. But Fed Chairman Ben Bernanke chose to shrug off Stiglitz’s advice and support a policy that has widened inequality to levels not seen since the Gilded Age while having no noticeable impact on employment , productivity or growth. For all practical purposes, QE has been a total flop.

On Thursday, stocks traded higher following a bleak retail sales report that showed unexpected weakness in consumer spending. The news pushed the dollar lower which triggered a 259 point rise on the Dow Jones. The “bad news is good news” reaction of investors confirms that today’s market is not driven by fundamentals or the health of the economy, but by the expectation of tighter or looser monetary policy. ZIRP (Zero interest rate policy) and the Yellen Put (the belief that the Fed will intervene if stocks dip too far.) have produced the longest sustained stock market rally in the post war era. Shockingly, the Fed has not raised rates in a full nine years due in large part to the atmosphere of crisis the Fed has perpetuated to justify the continuation of wealth-stripping policies which only benefit the Wall Street banks and the nation’s top earners, the notorious 1 percent.

The markets are bound to follow this convoluted pattern for the foreseeable future, dropping sharply on news of dollar strength and rebounding on dollar weakness. Bottom line: Seven years and $11 trillion in central bank bond purchases has increased financial instability to the point that any attempt to normalize rates threatens to vaporize emerging markets, send stocks crashing, and intensify deflationary pressures.

If that isn’t an argument for “ending the Fed”, then I don’t know what is.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

 

QE Inventor: It’s EASY to Create a Full-Blown Recovery, But Central Banks Chose to Make Banksters Rich Instead of Helping Main Street

By WashingtonsBlog
March 6, 2015
Washington’s Blog, March 5, 2015
QE Is a Sham
bankerRichard Werner (economics professor at University of Southampton) is the inventor of quantitative easing (QE).

Werner previously said that QE has failed to help the economy. (Former long-time Fed chair Alan Greenspan agreesNumerous academic studies confirm this. And see this.)

But Werner is now taking off the gloves …

He said recently:

  • It’s easy for central banks to take steps which would quickly create “full-blown recovery” for the economy
  • But the central bankers are instead choosing to act in a way which creates massive profits for the big banks, instead of stabilizing the economy. Werner blames the revolving door between central bankers and private bankers
  • The central banks have twisted the whole concept of easing … pretending that they’re trying to help the economy, when they’re doing something else entirely
  • Credit should be extended to the productive economy – businesses which create goods and services – and not to financial speculators or high levels of consumer debt.  Extending credit to small businesses former creates prosperity; lending to financial speculators only leads to economic instability and soaring inequality; and when too high a percentage of lending goes to luxury consumer consumption, it’s bad for the economy
  • Banks create money and credit out of thin air when they make loans (background)
  • It’s a myth that interest rates drive the level of economic activity. The data shows that rates lag the economy

Indeed, economists also note that QE helps the rich … but hurts the little guy. QE is one of the main causes of inequality (and see this and this). And economists now admit that runaway inequality cripples the economy. So QE indirectly hurts the economy by fueling runaway inequality.

A high-level Federal Reserve official says QE is “the greatest backdoor Wall Street bailout of all time”. And the “Godfather” of Japan’s monetary policy admits that it “is a Ponzi game”.

And – as counter-intuitive as it sounds – QE actually hurts the economy and leads to deflation in the long-run.