cmaukonen's picture

    Economy on a precipice

    We've all seem them. The iconic scenes of the train wreck or car wreck with the cars hanging off a cliff. Nobody dares move else they cause the whole thing to plummet into the abyss below.

    This is where the economy stands today according to Dr. Paul Craig Roberts in his current analysis.

    And why nobody dare change the equation lest the whole thing comes apart at the seams. Why the FED has kept interest rates at zero or near zero for so long and dares not change this any time soon.

    US banks also have a strong interest in preserving the status quo. They are holders of US Treasuries and potentially even larger holders. They can borrow from the Federal Reserve at zero interest rates and purchase 10-year Treasuries at 2%, thus earning a nominal profit of 2% to offset derivative losses. The banks can borrow dollars from the Fed for free and leverage them in derivative transactions.
    As Nomi Prins puts it, the US banks don’t want to trade against themselves and their free source of funding by selling their bond holdings. Moreover, in the event of foreign flight from dollars, the Fed could boost the foreign demand for dollars by requiring foreign banks that want to operate in the US to increase their reserve amounts, which are dollar based. . . . . .
    The very process of slowly getting out can bring the American house down. The BRICS--Brazil, the largest economy in South America, Russia, the nuclear armed and energy independent economy on which Western Europe ( Washington’s NATO puppets) are dependent for energy, India, nuclear armed and one of Asia’s two rising giants, China, nuclear armed, Washington’s largest creditor (except for the Fed), supplier of America’s manufactured and advanced technology products, and the new bogyman for the military-security complex’s next profitable cold war, and South Africa, the largest economy in Africa--are in the process of forming a new bank.
     
    The new bank will permit the five large economies to conduct their trade without use of the US dollar.
     
    In addition, Japan, an American puppet state since WW II, is on the verge of entering into an agreement with China in which the Japanese yen and the Chinese yuan will be directly exchanged. The trade between the two Asian countries would be conducted in their own currencies without the use of the US dollar. This reduces the cost of foreign trade between the two countries, because it eliminates payments for foreign exchange commissions to convert from yen and yuan into dollars and back into yen and yuan.
     
    Moreover, this official explanation for the new direct relationship avoiding the US dollar is simply diplomacy speaking. The Japanese are hoping, like the Chinese, to get out of the practice of accumulating ever more dollars by having to park their trade surpluses in US Treasuries. The Japanese US puppet government hopes that the Washington hegemon does not require the Japanese government to nix the deal with China.
    Now we have arrived at the nitty and gritty.
     
    The small percentage of Americans who are aware and informed are puzzled why the banksters have escaped with their financial crimes without prosecution. The answer might be that the banks “too big to fail” are adjuncts of Washington and the Federal Reserve in maintaining the stability of the dollar and Treasury bond markets in the face of an untenable Fed policy.
     
     
    In other words they are all in it together. Yes I know this in not news to most here but this relationship has a lot to do with why there has been little if any movement to get to the heart of the matter.
    Let us first look at how the big banks can keep the interest rates on Treasuries low, below the rate of inflation, despite the constant increase in US debt as a percent of GDP--thus preserving the Treasury’s ability to service the debt. The imperiled banks too big to fail have a huge stake in low interest rates and the success of the Fed’s policy.
     
    The big banks are positioned to make the Fed’s policy a success. JPMorganChase and other giant-sized banks can drive down Treasury interest rates and, thereby, drive up the prices of bonds, producing a rally, by selling Interest Rate Swaps (IRSwaps). A financial company that sells IRSwaps is selling an agreement to pay floating interest rates for fixed interest rates. The buyer is purchasing an agreement that requires him to pay a fixed rate of interest in exchange for receiving a floating rate.
     
    The reason for a seller to take the short side of the IRSwap, that is, to pay a floating rate for a fixed rate, is his belief that rates are going to fall. Short-selling can make the rates fall, and thus drive up the prices of Treasuries. When this happens, as the charts at http://www.marketoracle.co.uk/Article34819.html illustrate, there is a rally in the
     
    Treasury bond market that the presstitute financial media attributes to “flight to the safe haven of the US dollar and Treasury bonds.” In fact, the circumstantial evidence (see the charts in the link above) is that the swaps are sold by Wall Street whenever the Federal Reserve needs to prevent a rise in interest rates in order to protect its otherwise untenable policy.
     
    The swap sales create the impression of a flight to the dollar, but no actual flight occurs. As the IRSwaps require no exchange of any principal or real asset, and are only a bet on interest rate movements, there is no limit to the volume of IRSwaps.
     
    So it is in the interest of the banks to keep the interest rates low. And Paul also shows how this also benefits the government by making servicing the debt a whole lot easier and can in fact hide - to an extent - how big it really is.
     
    He also goes into how the banks do naked short sales on gold and silver to keep themselves afloat in all of this. There by manipulating that market as well. Good work if you can get it.
     
    But like all good scams it can easily unravel.
    How long can the manipulations continue? When will the proverbial hit the fan?
    If we knew precisely the date, we would be the next mega-billionaires.
    Here are some of the catalysts waiting to ignite the conflagration that burns up the Treasury bond market and the US dollar:
     
    A war, demanded by the Israeli government, with Iran, beginning with Syria, that disrupts the oil flow and thereby the stability of the Western economies or brings the US and its weak NATO puppets into armed conflict with Russia and China.
     
    The oil spikes would degrade further the US and EU economies, but Wall Street would make money on the trades.
     
    An unfavorable economic statistic that wakes up investors as to the true state of the US economy, a statistic that the presstitute media cannot deflect.
     
    An affront to China, whose government decides that knocking the US down a few pegs into third world status is worth a trillion dollars.
     
    More derivate mistakes, such as JPMorganChase’s recent one, that send the US financial system again reeling and reminds us that nothing has changed.
     
    The list is long. There is a limit to how many stupid mistakes and corrupt financial policies the rest of the world is willing to accept from the US. When that limit is reached, it is all over for “the world’s sole superpower” and for holders of dollar-denominated instruments.
    . . . . .
    Fed chairman Bernanke has spoken of an “exit strategy” and said that when inflation threatens, he can prevent the inflation by taking the money back out of the banking system. However, he can do that only by selling Treasury bonds, which means interest rates would rise. A rise in interest rates would threaten the derivative structure, cause bond losses, and raise the cost of both private and public debt service. In other words, to prevent inflation from debt monetization would bring on more immediate problems than inflation.
     
    Rather than collapse the system, wouldn’t the Fed be more likely to inflate away the massive debts?Eventually, inflation would erode the dollar’s purchasing power and use as the reserve currency, and the US government’s credit worthiness would waste away. However, the Fed, the politicians, and the financial gangsters would prefer a crisis later rather than sooner. Passing the sinking ship on to the next watch is preferable to going down with the ship oneself. As long as interest rate swaps can be used to boost Treasury bond prices, and as long as naked shorts of bullion can be used to keep silver and gold from rising in price, the false image of the US as a safe haven for investors can be perpetuated.     
    However, the $230,000,000,000,000 in derivative bets by US banks might bring its own surprises. JPMorganChase has had to admit that its recently announced derivative loss of $2 billion is more than that. How much more remains to be seen. According to the Comptroller of the Currency the five largest banks hold 95.7% of all derivatives. The five banks holding $226 trillion in derivative bets are highly leveraged gamblers. For example, JPMorganChase has total assets of $1.8 trillion but holds $70 trillion in derivative bets, a ratio of $39 in derivative bets for every dollar of assets. Such a bank doesn’t have to lose very many bets before it is busted.     
     
    Assets, of course, are not risk-based capital. According to the Comptroller of the Currency report, as of December 31, 2011, JPMorganChase held $70.2 trillion in derivatives and only $136 billion in risk-based capital. In other words, the bank’s derivative bets are 516 times larger than the capital that covers the bets.
    So if anyone moves, over the rocks she goes.
     
    Now for the sixty four dollar question ? How much does anyone know of this in Washington ? I'll bet the next (secret) bail out that just about everyone knows. Even - and maybe especially - the tea party republicans.
     
    But no one is talking. Because if anyone lets the cat out of the bag, it tips over the train. 
     
    All this talk of austerity is simply a feeble attempt to keep the train from going over the side. And to make damn sure the dollar remains the reserve currency. So now we are at the point where we switch seats in the train every four years and try to make sure nobody goes forward or backward in the train.

     

    Comments

    China never does anything that is not in China's best interests. And you can count on the treasury to do what is the most politically expedient as well.


    For now I say this is a good thing.  No doubt other central banks will now want the same ability if for no other reason than that China has it.  

    The fall of 2008 happened largely because the Fed and Treasury had boxed themselves into the Primary Dealer system which had consolidated into a few really big banks.  That left the Fed with too few counterparties to function effectively when they started to fall.  One of the first things the Fed did after TARP was to expand its list of counterparties.   Why not let Treasury do the same  -- just in case the Fed gets compromised again.  

    Not really happy about the secrecy involved but that is somewhat understandable.  Money wars.  

     

     


    The small percentage of Americans who are aware and informed are puzzled why the banksters have escaped with their financial crimes without prosecution. 

    And there it is.   If ever We, The People, choose to accept and take responsibility to be aware and informed, we would have a very different 'democracy'.  Until then, we will indeed have the form of government actions and inactions we deserve.

    Excellent piece Chris, thanks.

     

     

     


    Dr. Paul Craig Roberts is a former Reagan administration supply side believer, who awakened sometime after his stint under Reagan to become a banking/dollar/war/Middle East doomsayer. US and world history are replete with decades and even centuries of failure, crimes and catastrophe, jingoism, conflict and fiasco that exceed anything we currently face. Roberts isn't the best guy to judge the ability of the system to keep chugging along.

    Globalresearch.org is a somewhat hysterical purveyor of stuff like "Towards World War Three' on their: campaign to head off this impending cataclysmic demise of the human race and planet earth.


    US and world history are replete with decades and even centuries of failure, crimes and catastrophe, jingoism, conflict and fiasco that exceed anything we currently face.

    This statement could be true about relatively small groups that existed in the course of human history but never has the planet seen groups of hundreds of millions, as well as possibly the entire world population, facing the wide variety of extremely serious threats as do exist today. I am speaking of threats that would/could change everything about life as those people know it today.
     The economy of many nations, in a crowded resource short, poorly managed planet populated by humans whose characteristic way of responding is to fight, being on the precipice makes instances of crimes and catastrophe, jingoism, conflict and fiasco more likely, more widespread, potentially more catastrophic, and far more likely to spread beyond any geographical borders from where they become crippling. All these things make it harder to deal with natural disasters as well and being on the precipice economically means natural disasters can push us over the edge into the other problems even if we were otherwise able to 'keep chugging along'.


    Paul Craig Roberts isn't talking about climate change, depletion and trashing of the oceans, over exploitation and destruction of arable lands, forests and watersheds, rising sea level, food production declines, population growth, communicable diseases and resistant microorganisms, pollution of air and ground water, loss of glaciers and arctic ice cover, methane release from permafrost soils, or other real mid to long term concerns which we should be addressing today. The fact is that stuff is not his field anyway.

    He is an economist, and he talks about what economists talk about: the dollar, inflation, US bonds held by the Chinese, and some things not talked about enough, like the fiasco of the Iraq War. My point is western history is full of those sort of economic/political conflict/currency problems, mismanagement and disasters. There is not likely a 'precipice' before us in that realm. My other point was that globalresearch.org is a shrill outfit of unusual characters.


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