Tag Archives: Financial Collapse

Parasitism, plutocracy and economic depression

By Andre Damon
May 3, 2015
World Socialist Web Site

 

money-greedy1Seven years since the 2008 financial crash, the US economy remains mired in slump, stagnation and financial parasitism. This reality was underscored Wednesday with the release of figures showing that the economy all but ground to a halt in the first quarter of this year, refuting the endless claims by the Obama administration that the US is in the midst of an economic “recovery.”

The US Commerce Department reported that gross domestic product grew at a rate of just 0.2 percent between January and March, down from a rate of 2.2 percent in the previous quarter. Since the official end of the recession in 2009, the US economy has grown at an average annual rate of only 2.2 percent, compared to an average growth rate of 3.2 percent during the 1990s and 4.2 percent in the 1950s.

The ongoing economic stagnation in the United States is one element of a global crisis that continues to grip the world economy. Last month, the International Monetary Fund warned in its World Economic Outlook that global growth is unlikely to return to rates that existed before the 2008 financial meltdown.

It warned, “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.” The report added, “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.”

The IMF noted that business investment is at historic lows, significantly below the level experienced in the aftermath of any recovery since World War II. This assessment was borne out in the Commerce Department’s report on US economic growth, which showed that business fixed investment plunged by 3.4 percent over the previous quarter.

The slump in productive investment takes place even as corporations are sitting atop the largest cash hoard in history: US corporations alone have $1.4 trillion on their balance sheets.

Instead of using this money to invest, hire workers or raise wages, major US corporations are using it to buy back shares, increase dividends and engage in an orgy of mergers and acquisitions.

General Motors, which slashed pay of new-hires by fifty percent during the 2009 auto restructuring and is looking to cut labor costs even further in the upcoming contract, has announced a $5 billion share buy-back scheme, using its massive cash hoard to further enrich its wealthy shareholders.

Meanwhile energy giant Shell, which early this year waged a bitter struggle against oil refinery workers striking to demand higher pay and safety improvements, announced that it would make $70 billion available to buy up British oil producer BG group.

This year is shaping up to be one of the biggest for mergers and acquisitions in history, with a record $4.3 trillion available for merger activity, according to Credit Suisse.

Notable mergers have included the food producers Kraft and Heinz (likely to result in 5,000 job losses), and Staples and Office Depot (closing up to 1,000 stores and eliminating thousands of workers). RadioShack, meanwhile, has worked out a deal with Standard General that would close more than 2,000 stores and eliminate 20,000 positions.

Stock markets have celebrated each of these successive corporate bloodbaths. Last month, the technology-heavy NASDAQ exchange eclipsed its peak in early 2000 at the height of the dot-com bubble. The NASDAQ has nearly quadrupled since 2009, while the Dow Jones Industrial Average has increased threefold.

As a result of the soaring stock market, the 400 richest individuals in the United States, whose wealth has doubled since 2009—the era of Obama. They now have a combined net worth of $2.29 trillion, larger than the annual output of the 130 poorest countries in the world.

The soaring wealth of the financial oligarchy is another side of the continual impoverishment and immiseration of working people. One in four American children are officially in poverty, one in five do not get enough to eat, and half of public school students qualify for free or reduced price lunches.

The American state functions not to ameliorate this soaring inequality, but rather to facilitate the continuous enrichment of the corporate and financial aristocrats.

The institutions supposedly responsible for “regulating” the financial system do little more than cover up for and facilitate its crimes. This basic reality was expressed in the latest settlement between the United States and Deutsche Bank, in which the German bank last month received a wrist-slap fine for flagrantly helping to rig LIBOR, the key global interest rate, for its own enrichment.

Wall Street pays handsomely for the support and protection it receives from so-called financial regulators. A case in point is Ben Bernanke, the man who, as chairman of the Federal Reserve, oversaw the bank bailout and “quantitative easing” measures that transferred trillions of dollars onto the balance sheets of Wall Street.

Now, Bernanke is getting his payday: he has been hired by not one, but two leading financial institutions: the hedge fund Citadel and Pimco, one of the largest bond traders in the world, each of whom will pay him handsomely in exchange for services rendered.

These dominant features of economic life in the present period are not incidental aberrations, but rather express the essential character of the capitalist system first identified by Karl Marx and Friedrich Engels nearly 170 years ago: crisis, economic stagnation and ever-growing inequality.

The only way to end this cycle of parasitism and economic slump, and ensure a decent standard of living for all people, is to break the political stranglehold of the financial oligarchy. This is inseparable from the struggle to do away with the parasitic and outmoded capitalist system, and replace it with socialism, the rational reorganization of society in the interest of the great majority of the population.

 

 

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.

 

 

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”.

The Six Too Big to Fail Banks in the U.S. Have 278 Trillion Dollars of Exposure to Derivatives

By Michael Snyder
April 15, 2015
The Economic Collapse, April 13, 2015

 

Bankers-Public-Domain-300x300The very same people that caused the last economic crisis have created a 278 TRILLION dollar derivatives time bomb that could go off at any moment.  When this absolutely colossal bubble does implode, we are going to be faced with the worst economic crash in the history of the United States.  During the last financial crisis, our politicians promised us that they would make sure that “too big to fail” would never be a problem again.  Instead, as you will see below, those banks have actually gotten far larger since then.  So now we really can’t afford for them to fail.  The six banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo.  When you add up all of their exposure to derivatives, it comes to a grand total of more than 278 trillion dollars.  But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars.  In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets.  This is complete and utter insanity, and yet nobody seems too alarmed about it.  For the moment, those banks are still making lots of money and funding the campaigns of our most prominent politicians.  Right now there is no incentive for them to stop their incredibly reckless gambling so they are just going to keep on doing it.

So precisely what are “derivatives”?  Well, they can be immensely complicated, but I like to simplify things.  On a very basic level, a “derivative” is not an investment in anything.  When you buy a stock, you are purchasing an ownership interest in a company.  When you buy a bond, you are purchasing the debt of a company.  But a derivative is quite different.  In essence, most derivatives are simply bets about what will or will not happen in the future.  The big banks have transformed Wall Street into the biggest casino in the history of the planet, and when things are running smoothly they usually make a whole lot of money.

But there is a fundamental flaw in the system, and I described this in a previous article

The big banks use very sophisticated algorithms that are supposed to help them be on the winning side of these bets the vast majority of the time, but these algorithms are not perfect.  The reason these algorithms are not perfect is because they are based on assumptions, and those assumptions come from people.  They might be really smart people, but they are still just people.

Today, the “too big to fail” banks are being even more reckless than they were just prior to the financial crash of 2008.

As long as they keep winning, everyone is going to be okay.  But when the time comes that their bets start going against them, it is going to be a nightmare for all of us.  Our entire economic system is based on the flow of credit, and those banks are at the very heart of that system.

In fact, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system.

So that is why they are called “too big to fail”.  We simply cannot afford for them to go out of business.

As I mentioned above, our politicians promised that something would be done about this.  But instead, the four largest banks in the country have gotten nearly 40 percent largersince the last time around.  The following numbers come from an article in the Los Angeles Times

Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.

And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.

During this same time period, 1,400 smaller banks have completely disappeared from the banking industry.

So our economic system is now more dependent on the “too big to fail” banks than ever.

To illustrate how reckless the “too big to fail” banks have become, I want to share with you some brand new numbers which come directly from the OCC’s most recent quarterly report (see Table 2)

JPMorgan Chase

Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)

Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)

Citibank

Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)

Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)

Goldman Sachs

Total Assets: $856,301,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)

Bank Of America

Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $801,382,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)

Wells Fargo

Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)

Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)

Compared to the rest of them, Wells Fargo looks extremely prudent and rational.

But of course that is not true at all.  Wells Fargo is being very reckless, but the others are being so reckless that it makes everyone else pale in comparison.

And these banks are not exactly in good shape for the next financial crisis that is rapidly approaching.  The following is an excerpt from a recent Business Insider article

The New York Times isn’t so sure about the results from the Federal Reserve’s latest round of stress tests.

In an editorial published over the weekend, The Times cites data from Thomas Hoenig, vice chairman of the FDIC, who, in contrast to the Federal Reserve, found that capital ratios at the eight largest banks in the US averaged 4.97% at the end of 2014, far lower than the 12.9% found by the Fed’s stress test.

That doesn’t sound good.

So what is up with the discrepancy in the numbers?  The New York Times explains…

The discrepancy is due mainly to differing views of the risk posed by the banks’ vast holdings of derivative contracts used for hedging and speculation. The Fed, in keeping with American accounting rules and central bank accords, assumes that gains and losses on derivativesgenerally net out. As a result, most derivatives do not show up as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets.

Mr. Hoenig uses stricter international accounting rules to value the derivatives. Those rules do not assume that gains and losses reliably net out. As a result, large derivative holdings are shown as assets on the balance sheet, an addition that reduces the ratio of capital to assets to the low levels reported in Mr. Hoenig’s analysis.

Derivatives, eh?

Very interesting.

And you know what?

The guys running these big banks can see what is coming.

Just consider the words that JPMorgan Chase chairman and CEO Jamie Dimon wrote to his shareholders not too long ago

Some things never change — there will be another crisis, and its impact will be felt by the financial market.

The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets

In the same letter, Dimon mentioned “derivatives moved by enormous players and rapid computerized trades” as part of the reason why our system is so vulnerable to another crisis.

If this is what he truly believes, why is his firm being so incredibly reckless?

Perhaps someone should ask him that.

Interestingly, Dimon also discussed the possibility of a Greek exit from the eurozone

“We must be prepared for a potential exit,”  J. P. Morgan Chief Executive Officer Jamie Dimon said. in his annual letter to shareholders. “We continually stress test our company for possible repercussions resulting from such an event.”

This is something that I have been warning about for a long time.

And of course Dimon is not the only prominent banker warning of big problems ahead.  German banking giant Deutsche Bank is also sounding the alarm

With a U.S. profit recession expected in the first half of 2015 and investors unlikely to pay up for stocks, the risk of a stock market drop of 5% to 10% is rising, Deutsche  Bank says.

That’s the warning Deutsche Bank market strategist David Bianco zapped out to clients today before the opening bell on Wall Street.

Bianco expects earnings for the broad Standard & Poor’s 500-stock index to contract in the first half of 2015 — the first time that’s happened since 2009 during the financial crisis. And the combination of soft earnings and his belief that investors won’t pay top dollar for stocks in a market that is already trading at above-average valuations is a recipe for a short-term pullback on Wall Street.

The truth is that we are in the midst of a historic stock market bubble, and we are witnessing all sorts of patterns in the financial markets which also emerged back in 2008right before the financial crash in the fall of that year.

When some of the most prominent bankers at some of the biggest banks on the entire planet start issuing ominous warnings, that is a clear sign that time is running out.

Greeced Lightning! Will Greece Default? Will Athens Cut a Financial Deal with Moscow and Beijing?

By Bill Holter
April 7, 2015
Global Research

 

The Disinformation Campaign on the Greek Debt and the Rescue Plan by Private CreditorsWe seem to have finally arrived at some sort of moment of truth regarding Greece and their inclusion in the EU.  The speculation is they will be out of money by April 9th, this Thursday, unable to make a less than 500 million euro payment.  Please keep in mind they have already been raiding the country’s pension plans to fund day to day services.  How large of a “dent” they have already made remains to be seen but that is not the point.  The point is this, any person, corporation or government who needs to dig into retirement savings for daily operations is like buying a carton of cigarettes with a credit card at 14.99% …and then carrying the balance!

Before laying out their potential options, please keep in mind that Mr. Varoufakis  was in New York this past weekend meeting with Christine Lagarde , Mr. Tsipras plans a trip to Moscow for Tuesday.  Are they pleading for unpaid bailout funds from the IMF?  And if they don’t get them, do they cut a deal and fall into Russia’s arms?  This, just as so many nations have pledged their allegiance to the East and the AIIB bank (topic for tomorrow), Greece may be forced into a pivot toward the rising Sun.  They do however have something left to offer, they stand between Turkey and Eastern Europe, they can provide a route for Russian gas to flow to Europe.

What options does Greece have left?  As I see it, they really only have three, and all with blurry edges.  First, they can cut some sort of deal with Germany (the EU) and the IMF.  They can kick the can down the road by extending maturities of existing debt and restructuring it.  The IMF still owes past monies pledged in bailouts, will they really throw new money away knowing it cannot be paid back?  Obviously this does nothing to face the real problem, Greece simply has too much debt for the size of their economy (this is a global problem but not “admitted yet”).  This option may have been taken off the table on Friday.  As a side note, it was reported Friday by Der Spiegel the IMF evacuated their Athens office.  Why would they do this?  I can only come up with one or two scenarios.  The IMF is giving up and know it is over … or, they are getting out of town while they still can.  Maybe they realize massive social unrest will be unleashed and don’t want to see their employees hanging from lamp posts?  This was denied by Saturday but interesting nonetheless!

Their second option is to just default.  If they cannot make debt payments, they simply don’t pay and thus become classified as a default.  The next question is whether or not they would stay in the EU?  Would they want to?  Or even be allowed to?  Option number three, an offshoot of number two, is Greece defaults and they decide to leave the EU (or are kicked out) and join team Russia.

My guess is we will see Greece default, leave the EU and cut a gas pipeline deal with Russia becoming a stepping stone for China’s “silk road”.  At this point, it’s the only thing that makes any sense …if you are Greek and try to do what is best for Greece.  A story also making the roundson Friday was preparations to re issue the “drachma” .  If this is true, I would say the decision to leave the EU has already been made except for the formalities!  The next question is the biggie, and one which will affect the entire world.  How do the markets and financial systems react to this?

Before exploring this, James Turk proposed a theory the Greek banks will be bailed in as their deposit balances slip down to equal the close to 100 billion Euros that Greece owes the ECB.  He believes this will be done within the next 10 days or so.  In my opinion, there is one big ”IF” in this theory.  I would question whether or not the ECB or even the BIS would have the authority to do Cyprus style bail ins if Greece leaves or has already left the EU.  Wouldn’t this be a sovereign decision?  One made by the Greeks themselves?  If I were a Greek depositor, I wouldn’t however hang around to see how it turns out, I’m just not sure if the authority exists to bail in Greek banks?  Another story out over the weekend is Germany may be preparing to freeze deposits of wealthy Greeks, will the rest of Europe follow?

As for market reactions, if Greece does end up cutting a deal with Russia/China and in fact does default, the first and most obvious reaction will be a further crash in the Euro itself.  Participants will then turn their attention to Spain, Portugal and Italy and ask “who’s next”?  The thought process will be frenzied with investors wanting out first and asking questions later.

A Greek exit will be extremely complicated.  They owe 350 billion euros, much of this debt was held inside under collateralized German and French bank portfolios, much of this was “swapped” out with the ECB.  A default by Greece would “un swap” these bonds and thus bring the question of solvency to the heart of the Eurozone.  Even more complicated is how the money will be handled for the “Target2″ amounts owed to other Euro nations?  This is a running balance of payments accounting for countries running trade deficits versus surplus nations.  Greece obviously cannot pay for their already accumulated deficits, the question is, who eats the loss?  Then of course there are derivatives at maybe 10 times the amount of debt outstanding, now we are talking big money and in the trillions.

Hedges will be broken, losers busted and winners not paid.  The derivatives chain will be shaken by massive valuation swings and then broken by losing counterparties becoming insolvent.  As I have said many times before, we live in an “instant information” age where computers (programmed algorithms) will all move in the same direction and all at once.  In my opinion, a true Greek default has the potential of shutting down global markets within 48 hours of an announcement.

As I wrote last week, Greece is just one of three or more potential flash points which have the ability to tip our world upside down,  The U.S. has sent 50 Abrams tanks to Ukraine, specifically defying Russia’s warnings.  The Austrian banking system is experiencing a systemic margin call and one that will reach the German banks themselves.  We also have the U.S. throwing political matches all around a very dry Middle East.  We fight against the Iranians in Yemen and alongside them in Iraq.  We back the Saudis who just joined the Asian infrastructure bank against U.S. wishes.  It is not even known if we still back the Israelis who also joined the AIIB.  I have no idea what history will exactly point to as the spark, I do know “Greeced lightning” will be a good description as to the speed of the collapse once started.

A decisive turning point in the crisis of American imperialism

By Nick Beams
April 1, 2015
World Socialist Web Site

 

Yesterday was the deadline for countries to sign up as founding members of the China-backed Asia Infrastructure Investment Bank (AIIB). It will go down in history as marking a significant defeat for the global foreign policy and strategic objectives of United States imperialism.

Against strenuous opposition from Washington, more than 40 countries have now indicated they want to be part of the AIIB. Major European powers including Britain, France and Germany, as well as Norway, Denmark and the Netherlands, are on board. Almost all countries in the South East Asian region, which count China as their major trading partner, have also signed up. India is also a signatory, together with Taiwan.

The most significant blow against the US was struck by Britain, its chief European ally, which announced its decision to join on March 12. It opened the floodgates for others to follow, including two key US allies in the Asia-Pacific—Australia and South Korea. Japan is also reported to be considering joining, possibly as early as June.

The full significance of the US defeat and its far-reaching implications emerge most clearly when viewed from a historical perspective.

One of the chief objections of the Obama administration to the new bank was that it would undermine the International Monetary Fund and World Bank. Together with the Bretton Woods Agreement of 1944, they constituted central pillars of the global economic order established after World War II by the United States, which played the central role in rebuilding world capitalism following the devastation of the 1920s and 1930s and the wars and revolutionary struggles it produced.

Of course, both of these institutions, together with the Marshall Plan for the restabilisation of war-torn Europe, operated to the economic and strategic benefit of American imperialism.

But while America drew enormous gains from the post-war order, it was not narrowly conceived. There was a recognition in ruling political and economic circles that if American capitalism was to survive, it would have to use the enormous resources at its disposal to ensure the growth and expansion of other capitalist powers, above all, those against which it had fought a bitter and bloody conflict.

Post-war reconstruction enabled the expansion of Germany and turned it once again into the industrial powerhouse of Europe. At the same time, concessions to Japan on the value of its currency—it was pegged at 360 yen to the dollar—opened up export markets for its industry. The decision to build trucks and other military equipment in Japan during the Korean War laid the foundations for the development of Japan’s auto industry, as it incorporated, and then developed, the advanced production techniques that had been established in the US.

The industrial and economic capacity of the United States, even when it took reactionary forms as in the case of the Korean War, was utilised to facilitate a new phase of global capitalist expansion—the post-war boom.

What a contrast to the present situation! American capitalism is no longer the industrial powerhouse of the world, ensuring the expansion of the capitalist economy as a whole. Rather, it functions as the global parasite-in-chief, as its rapacious banks, investment houses and hedge funds scour the world for profitable opportunities, engaged not in the production of new wealth, but in the appropriation of wealth produced elsewhere, often via criminal or semi-criminal operations.

In the immediate post-war period, the US was the champion of free trade, recognising that the restrictions and beggar-thy-neighbour policies of the 1930s had produced a disaster. Today, through measures such as the Trans Pacific Partnership and similar arrangements being prepared with regard to Europe, Washington seeks to forge exclusivist agreements aimed at protecting the monopoly position of US corporations. America, Obama has stated, must write the global rules for trade and investment in the 21st century.

American influence in the post-war period was not confined to the immediate economic sphere. Notwithstanding all its contradictory features, American society appeared to have something to offer the world as a whole, which had suffered decades of war, fascism and military forms of rule, along with economic devastation.

Again, the contrast with the present situation could not be starker. American democracy, once held up as a beacon for the rest of the world, is a withered caricature of its former self, no longer capable of concealing the dictatorship of the financial and corporate elites.

Social conditions are characterised by deprivation and state violence, reflected not least in the daily police killings. America has the highest rate of incarceration in the world, and in Detroit, once the centre of the American industrial economy, paying the highest wages, water shutoffs are being imposed. The US government carries out torture, abductions, assassinations and mass spying on its own people and others around the world. The country is ruled by criminals who cannot be held accountable for their crimes.

In the wake of the dissolution of the Soviet Union in 1991 and the removal from the scene of its global rival, the American ruling class was gripped by the idea that while its economic position had been severely weakened—the stock market crash of 1987 was a harbinger of things to come—American hegemony could nevertheless be maintained by military means.

But as Frederick Engels had earlier explained in refuting another exponent of “force theory,” the notion that economic developments—the advance of industry, credit and trade—and the contradictions to which they gave rise could be “blown out of existence” with “Krupp guns and Mauser rifles” was a delusion.

The past 25 years of American foreign policy, based on the use of cruise missiles and drones, combined with invasions and regime-change operations grounded on lies, have produced one debacle after another.

Now the chickens are coming home to roost, as other capitalist powers, great and small, begin to conclude that hitching themselves to the American juggernaut is the surest road to disaster. That is the historic significance of their decision to join the AIIB.

How will American imperialism respond? By increasing its military provocations, threatening to plunge the world once again into war.

Charting the rise of American imperialism in the late 1920s, Leon Trotsky noted that in the period of crisis, its hegemony would operate “more openly and more ruthlessly than in the period of boom,” and that it would attempt to extricate itself from its difficulties and maladies at the expense of its rivals, if necessary by means of war.

However there is another, and, in the final analysis, decisive, aspect to the economic decline of American imperialism, marked so powerfully by the events of yesterday.

For decades, the American working class was disoriented by the idea of a continually rising power—that America’s “best days” were always ahead. Reality is now coming home with ever-increasing force.

Events are shattering the delusions of the past and will propel the American working class on to the road of revolutionary struggle, creating the conditions for the unification of the international working class in the fight for world socialist revolution.

 

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.

 

2015 is the year the global debt delusion implodes, says capital investment guru

By J. D. Heyes
February 4, 2015
Natural News

 

2015A capital investment expert who chose to shutter his short-only hedge fund during the depths of the Great Recession of 2008-09 has warned in a recent interview that 2015 is likely the year in which the U.S. dollar takes a steep decline.

In his interview with King World News, Bill Fleckenstein, president of Fleckenstein Capital, also warned that the dollar “is an Internet stock that’s on borrowed time.”

“People are going to lose confidence in the central banks and there is going to be an ugly dislocation when that happens,” he continued. “Will they come back for another round (of money printing)? I’m sure the Fed will come with QE [quantitative easing] again when it turns out this one doesn’t work.”

Continuing, he said that, at the moment, there are people who believe in “the fantasy of central banks delivering economic Nirvana,” and that they are capable of keeping financial markets elevated indefinitely, as well as “those of us who say that this is going to end in disaster…”

Fleckenstein said that, once financial sectors begin to tumble, the market won’t be far behind, and momentum towards a crash will build. And he says the time is coming — soon.

Crashing sooner rather than later?

“But I think it (disaster) will (start to unfold) pretty soon because the dominos that are going to fall from the oil patch will mean credit problems in fixed income markets, be it government or fracking, exploration or drillers — anyone who used too much debt because they thought it was so cheap and ridiculous and nothing could go wrong,” he said. Oil prices are, at present, lower than they have been in years, largely due to a glut on the global market triggered by unprecedented growth in the U.S. energy sector.

“I think there are going to be a lot of dominos that will cascade on the back of that,” Fleckenstein told King World News. “The reason I alluded (earlier) to how fast oil broke (to the downside) was because that shows you in this environment that we live in, especially with algorithmic and computerized trading — how quickly you could have a rout in the stock market. In the space of virtually no time you could see stocks drop 25 or 30 percent. I know the whole thing is a fantasy.”

There have been other critics of quantitative easing, which is best described as a rather unconventional monetary policy used to stimulate economies by central banks, simply by printing money out of thin air.

Alan Metzler, a historian of the Federal Reserve and a Carnegie Mellon economist, said the police of QE was misguided largely because it did not accomplish one of its primary goals — increased bank lending.

“With $3.5 trillion in excess reserves sitting in the banking system, what good can the Fed do by adding to it that the banks couldn’t do on their own? The answer is nothing. Whatever has happened in the economy isn’t being caused by quantitative easing,” he told Fortune magazine in July.

He also said the failure of the policy is evident by the fact that corporate investment remains at lower-than-average levels. Corporations instead have taken advantage of historically low interest rates to buy back stock and issue debt, but they are not using much of that money to invest in growing their companies.

Who’s right?

Jim Bianco, president of Bianco Research, added in the Fortune piece that QE has “had somewhere between zero and no effect” on the economy.

As some predict the dollar’s collapse, the dollar, meanwhile, has soared to new heights. MarketWatch reported January 2:

The U.S. dollar soared Friday, building on big gains scored in 2014, on expectations the Federal Reserve will raise interest rates while the European Central Bank and Bank of Japan continue to loosen monetary policy in the year ahead.

The ICE dollar index… rose to 91.11, up from 90.27 in late North American trade on Wednesday and marking its highest level since March 2006, according to FactSet data. The index rose almost 13% in 2014, to mark its best yearly gain since 2005.

Who’s right?

The best answer is to simply diversify your assets, by keeping some dollar reserves, some land, some gold, some in the market and other assets. It’s never really been a good idea to put all of your economic eggs in one basket, especially in this, the “Year of Self-Reliance.”

Sources:

http://kingworldnews.com

http://fortune.com

http://www.marketwatch.com

http://www.naturalnews.com