The Federal Reserve, your money, and the coming Crash and Bust.
"Pigmies at the Gate.
by
Ricardo Smith. 1995
CONTENTS
Glossary of Terms
Part 1
"We have reason to believe you have committed an offence." City of London, parking ticket.
The Plot ................................. 6
A Digression ............................. 10
The Plan ................................. 16
Dr. Malthus & the Eternal Collection ....................... 19
NASDAQ-The Great Casino ................. 22
E = MC2 .................................. 24
The Federal Reserve's Supermodel.......... 26
Part 2
"The more corrupt the state, the more numerous the laws." Tacitus, 55-130 BC
Does History Repeat Itself ? ............. 30
The Sordid Past .......................... 33
Inflation ................................ 35
1927-29 = 1993-95 ........................ 37
Mexican Paradise - A Warning ............. 42
The Pass The Mexican Hat Dance .......... 45
The Result - Trash Money ................. 47
The Nightmare Christmas 2012 ............. 49
Epilog. How to survive the coming crash .. 51
Appendix 1 - Derivatives ................. 5
Appendix 2 - The Dow Divisor ............. 55
Appendix 3 - The "Electro-paper standard " Eepee" & Rumplegreenspan .... 56
Appendix 4 - The Hidden Middle Class Tax 58
List of Quotes ........................... 60
Summary of Charts ........................ 64
About the author ......................... 66
CHARTS 1 - 15
"We pay the debts of the last generation, by issuing bonds payable by the next generation."1
"The best minds are not in government. If any were, business would hire them away."2
"To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable."3
"$1,000 left to earn interest at 8% annually will grow to $43 quadrillion in 400 years, but the first hundred years are the hardest."4
"The London Banker Henry Fauntleroy forged to keep his bank solvent. He was executed for it in 1824."5
+++++
GLOSSARY of TERMS
FIAT
Noun. Decree, command, edict, mandate, permission. A cheap Italian car.
FIAT CURRENCY
A currency whose value is whatever it is decreed to be, undetermined by market forces.
One Italian Lira.
PEON
Noun. Extinct Latin American worker. Usually near slavery and paid out in dollors.
DOLLAR
Noun. The chief U.S. monetary unit, buck, greenback, simoleon. See Wampum.
WAMPUM
Noun. Beads used as money by extinct N. American Indians. Had a value of whatever the Chief said.
PART ONE
"Entitlement crisis lies ahead, study says"
National Taxpayers Union.
"...will have catastrophic consequences on the incomes and living
standards of American workers in the next century."
"The organization ... foresees total tax rates as high as
69% for average workers by the year 2040..."
"total government spending will rise from 34.4% to 43.9% of GDP.
To balance the budget, total tax revenue will rise even faster."
"...a report by the federal BiPartisan Commission on Entitlements and Tax Reform ..... reflected congressional indecision on how to deal..."
"By 2012 Social Security, Medicare & Interest on the Debt will consume 100% of Federal Revenues..."
"By 2025 ... or 2030 at the latest Social Security ... will go broke."
"... the 32 member commission, demonstrating the political sensitivity on these issues, failed to agree on a specific plan."
"Anybody has the right to evade taxes if he can get away with it. No citizen has a moral obligation to assist in maintaining the government."x
1990 - THE PLOT
"It doesn't matter if you're rich or poor, as long as you've got money."6
According to a December 1994 report broadcast on America's T.V. financial news channel CNBC, the 1990's business version of the Oracle of Delphi; there is now more money in U.S. mutual funds, than in the deposits in the top 100 U.S. banks. Further, according to Money magazine, the average investment portfolio in America in 1994 now has about 41% of its assets in stocks as compared with 29% back in 1990. Both of these statistics should give pause for thought. As chart 1 clearly shows, this flow of funds has had a dramatic effect on stock market pricing. It took over 45 years for the mutual fund industry to gather in it's first trillion dollars, a period that included the go-go sixties and the baby boom generation. It took just 4 years from 1990 to 1994 to get to two trillion dollars. After all, everyone knows "a one way bet" when they see it. By the end of 1994 well over 6,000 mutual funds existed, with more being created each week. Let me put this in perspective. It took 200 years, many wars, a great depression and Jimmy Carter to get the National Debt to its first $1 trillion dollars. It took a further 10 years and Reaganomics to triple it. Yet it took only 4 years and Presidents Bush and Clinton to add almost $2 trillion more to raise it to today's $4.8 trillion dollars. That's $4.8 trillion of debt on a U.S. $6 trillion Gross Domestic Product.
How did this massive and speculative reallocation of assets come about and what are its implications for the future ? Believe it or not the answer to this question lies squarely at the door of the Federal Reserve Board, and with their recent actions and inaction's in placing Mega bets on behalf of the American people. Though not admitted to publicly by Alan Greenspan, the Mr. Geekspeak of all time and current Chairman of the Federal Reserve Board, the Federal Reserve has been targeting the stock market as its main engine for rescuing the economy and as its main weapon for monetizing the twin speculative, and fraudulent booms of the 1980's. Between Reaganomics, which ballooned the Federal Debt; the deregulation of banks, which fuelled the domestic speculative boom; and the fraudulent junk bonds of Drexel Burnham, which bust the Savings and Loan industry, by 1990 the Fed found itself in a dilemma. The economy was going into recession, the banks needed refinancing, and the massive Federal Deficits needed funding. Worse, at all costs another stock market crash like that of 1987 had to be avoided. Two courses of action seemed to provide an avenue of hope. Devalue the dollar and inflate.
Devaluing the dollar was the Treasury's responsibility and would reverse the unwanted effects of the previous Reaganomics policy. Taxes had been cut while military spending was increased resulting the gigantic deficits. Keeping the lid on the inflationary impact of this deficit required an aggressive monetary policy, meaning historically high interest rates. These high rates in turn brought in foreign funds which raised the value of the dollar in the foreign exchange market. With the dollar high, U.S. exports dropped while imports soared. With unemployment rising and imports into the U.S. "under priced," inflation slumped as people worried about their jobs. "Cheap" imports took over much of the economy and became embedded, further holding down prices. Much of American labor was now en-route to becoming "hamburger flippers." With low inflation and high interest rates, foreign exporting nations and their nationals continued accumulating dollars. These in turn were re-lent to multi national companies or increasingly invested into U.S. stocks. It was this paper chase that led up to 1987. When the crash of 87 happened, it went global practically instantly through the wonderfully successful bureaucratic policy of "interlocking economies" and the application of modern communications. Things couldn't have been worse even under the central planning of Brezhnev’s Soviet communism. By 1990 it was believed at the Treasury, that by a policy of deliberately lowering the dollar, they could stimulate exports and recapture a large part of their own U.S. economy. Best of all, all in time for the 1992 election. How nice.
The problem for the Fed was more complicated. How to engineer an unnoticed inflation, yet keep the economy out of recession if not exactly booming, and do it all without the foreigners who were then buying about 30% of the new Treasury debt, from bolting. The answer lay in the past. Speculation ! Encourage it, while pretending otherwise. Reduce interest rates so low that eventually cash would be displaced into speculation. Create a new 1927-28 and hope not to have a repeat of 1929. - Besides, no one remembers 1929 anymore do they ? !!!
By now you are probably thinking, "Wait a minute. The Fed's role is to fight against inflation. They want the U.S. to have a strong currency, don't they ?" Well, right and wrong. The original role of the Federal Reserve included both assumptions. But back then, the dollar was convertible into gold, federal and local budgets were balanced and the United States of America was a creditor nation. Also, most Americans had very little personal debt. By 1990 none of this was true. The United States of America holds the dubious honor of being the world's largest debtor while most Americans are loaded up to the eyeballs with debt. Now, some of the chickens are coming home to roost. The Federal Reserve Board's present role has dramatically changed. Despite their rhetoric, which has not changed, so as not to confuse or alarm the voting public, the Federal Reserve in the 1990's has become the greatest advocate of central planning in the world. As if this were not bad enough, it has also transformed itself into the largest gambling entity the world has ever known. Unelected, and meeting in secret, usually once a month, it now places gargantuan bets based upon its own secret super model about what it believes the U.S. economy should look like. "Not enough people working ? We'll add a few more. Too many working, we'll fix that too. Too many houses being sold, we'll soon stop that. Middle class getting into too much debt, we know best, we'll curb their excess. Hand me those dice, check the tea leaves, and roll 'em. Let's play God." You and I may be round pegs, but they'll be damned if we won't fit into their square holes.
'Bureaucracy is a giant mechanism operated by pygmies."7
Cast loose from the anchor of market forces called gold convertibility, the Federal Reserve now engineers a gigantic "fiat economy" and tailors it to its own political preference. As the "post office" of finance bets so will your life be shaped. If your business goes broke because the FED made a U-turn, don't blame capitalism, blame the FED's central planning and their managed economy. By what "model" do they manage and is the playing field level for all ? Who knows. The first is a State Secret even from the State, while the last is obvious, if you're Continental Illinois Bank, broke and a bustout, welcome to the Federal Reserve's vault. If you're Continental Chocolates struggling to survive because the FED supermodel was wrong and they messed up, go out of business but keep paying your taxes so the FED can spend your wealth as they see fit. Not for nothing is economics called the dismal science. But next a small digression for an abbreviated economic history.
"If facts do not conform to theory, they must be disposed of."8
"Considerable uncertainty is attached to all economic estimates"9
A DIGRESSION DOWN MEMORY LANE.
"I must follow the people. Am I not their leader ?"10
How did it come to pass that the Federal Reserve Board and the United States Treasury would actually end up with policies that on their face would seem to undermine the welfare of the American people. It wasn't easy. Up until August of 1971, the Federal Reserve's role in the economy was much more limited and conservative. Created in 1913 to be a non political way of policing the banks and acting as lender of last resort to those failing banks deemed worthy of saving, for much of its life, its actions were largely limited to fiddling with interest rates or doing nothing. So good was it at doing nothing that this was its active role in the Great Crash of 1929. This was so largely because with America as the world's largest creditor nation, having the world's largest economy and regularly running federal budget surpluses, there was relatively little else for them to do.
Maintaining bank stability and preventing speculative excess could be (and was) largely achieved by raising and lowering the price of money. Over most of its existence the dollar was stable and fully convertible into gold. Following the end of World War 1 in 1918, America was de facto the only solvent industrialized democracy, though for a while it was impolite to mention this. The European Empires led by the British Empire still continued to have an importance in world trade. After that Great War, those Empires were heavily indebted to America, had largely sold off their foreign and gold holdings to pay for that war, and had diverted industrial reinvestment funds from modernization and innovation, into munitions production and war support. In the United States with its stable democracy at home and a sound economy including a balanced budget, the Federal Reserve was not called upon to defend the dollar, nor to assist the Treasury in peddling government debt to foreigners. Generally it was not called upon either, to play politics by helping every Tom, Dick, or Harry get re-elected. Those roles came later. Nor could they with much ease, conduct "open market operations" (the buying and selling of U.S. Treasury securities) were they so inclined. With the U.S. government mostly running balanced budgets, until the 1930's, there just wasn't a whole lot of debt securities to play with. At the start of 1928 the Federal Reserve held only $617 million in securities. Absent a financial panic in the stock market the Federal Reserve acted as best it could through interest rates to assist the economy to grow. This continued through World War 2, where what little was left of the European and Far Eastern wealth was largely dissipated by that war.
After World War 2, all participants except the U.S. were heavily in debt and were technically bankrupt. United by a common enemy in Stalin and the Soviet Empire, the Marshall Plan for reconstruction and the Bretton Woods Agreement of fixed stable currencies were put into effect between the victors and the losers. The net effect was a rebuilding of the shattered economies and a resumption and expansion in world trade. Mindful of the Great Depression of the 30's, the expansionist Keyensian policies of Franklin Roosevelt's "New Deal" were universally adopted. In rare exceptional times of national or international distress, a good government, it was held, should increase demand by deficit spending. Later it should reverse this by running surpluses in times of peace and prosperity. Thus began a genteel form of creeping Socialism that took hold in most of the world economies and that eventually ended up in the giant corporate bailouts of the 1970's and early 80's. Capitalism's nadir. With the Dollar as the lynch pin of the Bretton Woods Agreement, it was allowed by politicians to gradually replace gold as the reserve currency of the world.
"It is always the best policy to speak the truth, unless of course, you are an exceptionally good liar."11
Until 1971 under the Bretton Woods Agreement, should the Federal Reserve Board take leave of their senses and embark on a series of aberrant policies, other countries could exchange their accumulated dollars for gold at the fixed exchange rate. By this dollar-gold link, profligate politicians and unsound policies would be curbed and freedoms for all upheld. In practise, politicians led by England, a nation in decline and unwilling to pay the true cost in jobs and taxes of maintaining the Pound's obsolete role as a pre war reserve currency, hated the idea of gold convertibility. With convertibility, came restraints upon politicians ability to get re-elected by bribing their voters with unsound give away programs. Truthfully referred to now as buying votes by printing money. Nations or central bankers engaging in unsound policy, might and did find a run on their currency. As European G-7 nations struggled to adapt to a changing world, gold "the barbaric relic" was left with only one defender, the U.S.A. However, this was about to change. In 1965 and 1966, as President Lyndon Johnson struggled to push through his costly, if not uniformly popular, Great Society legislation, he was also trying to wage an ever escalating and costly Vietnam war. The idea of raising domestic taxes or cutting other Federal expenditures to pay for these programs was a bad one, it meant electoral annihilation instead of re-election. Both would therefore have to be paid for by borrowing. Objecting to the U.S. fighting and paying for the Vietnam war via the modern equivalent of the credit card binge, "exporting inflation" as he called it, France under Charles De Gaule regularly recycled French holdings of dollars for gold. American politicians now joined their European cousins in calling gold a "barbaric relic." Coincidentally or not, France became destabilized by student riots in early 1968 and Charles De Gaulle went off into exile in Ireland. An early augury for a recalcitrant Chile of a few years later, perhaps. France then largely stopped swapping dollars for gold.
"The tragic lesson of guilty men walking free in this country has not been lost on the criminal community."12
By August 1971, a different U.S. President was still waging the credit card war, but by now the bills were getting more bothersome and the war was still no more popular. In 1970 the CIA had a "secret" force of 30,000 mercenaries (called "operatives" since financing mercenaries was against U.S. law) fighting in Laos. In fiscal 1970, Laos alone was costing the U.S. budget well over $284 million, and we weren't even there! As the Treasury financed the Great Society and the Vietnam war by borrowing, all that extra money was left "unsanitized" by a vacuous Arthur Burns and Federal Reserve Board. The economy overheated, nature abhorring a vacuum inflation appeared. As measured by the Index of Wholesale Prices, inflation was running at an annual rate of 4.9% up one percent from the year before, jumping 0.7% in July 1971 the largest monthly increase since 1965. As inflation grew, so grew interest rates. Into this volatile mix, the gnomes of Europe, the Swiss, and other countries were accumulating dollars at an alarming rate. Conducting banking under the naive impression that money should represent a store of value rather than a gambling chip, they were relentlessly moving the dollar lower and lower in the foreign exchange markets. Nightly T.V. pictures abounded, of astounded American tourists stranded near penury in front of the finest watering holes of Europe. It was not a pretty sight. Economists at the Chase Manhattan Bank in New York, selflessly thinking only of the economy rather than a pool of money to be managed for fees, began calling for a "forced saving system," whereby any increase in wages, salaries, dividends, or other income above 4.5% p.a. would go into a "thrift fund" to be run by the Internal Revenue Service. This was not comforting to a President facing re-election in 1972.
By the weekend of August 15th, the President was desperate, the opinion polls were most worrying. He sulked with his "Top Brains," the chief economic minds of the Cabinet, in Camp David. A policy of sound fiscal remedies was prepared, considered, then ignored. Incredibly, news arrived from the Vatican that Sister Fiorella, the Vatican "skirt checker" (the Immodestly Dressed Tourist Attendant) at St Peter's Basilica, had just quit suffering, from "nervous exhaustion." On August 3rd alone, she had barred over 2,000 persons, at one point stopping 1 out of every 2 women. In a flash the answer was obvious. Late that night the decree went forth, Republican fiscal dogma was "reformed" in favor of central planning, "temporary" wage and price controls, a "temporary" 10% import surcharge, plus some off-in-the-future reduction in the number of federal bureaucrats. The International Monetary Fund was informed immediately of the changes, and also incidentally, "that effective immediately" the United States was "temporarily" suspending the settlement of international transactions in gold. Though denying it was a devaluation, the President did allow that "some Americans who wanted to buy a foreign auto or travel abroad" might notice a difference. It was a line of political brilliance. One that was first "Aced" publicly on TV in the mid 1960's, by Harold Wilson, socialist Prime Minister of Britain, when following a 14% devaluation of the British Pound, he told the British voters without smiling, that "the Pound in your pocket, has not been devalued." He was re-elected, why not me ? In August of 1971, gold convertibility for the dollar and classical capitalism were in the "ash can" of history. The "paper standard" began.
"Free at last, free at last...."13
Though said for a far more important and righteous cause, one can imagine the President and fellow politicians of that day leaping and dancing for joy and singing the above refrain. After all, on August 4, 1971 the Democratically controlled House had just passed a one billion dollar jobs bill to hire over 150,000 voters for public service jobs. Happy days were here again. Thus by the stroke of a pen did sanity and freedom end and a fiat currency and peonage begin.
"What do I care about the law ? Hain't I got the power."14
"When a President does it, that means that it is not illegal."15
In actuality, the President in question was moved on and out into history rather quickly. He got the bum's rush. He never got his full chance to reap the spoils of a fiat currency. In recompense, every politician who has followed him to the Presidency ever since, has done so in spades.
The first in, was an unelected klutz from Michigan. He literally slipped in the back door and is remembered in history as the man who saw Vietnam won by the North, and for launching Chevy Chase's career. Then came the Governor from Georgia. Best remembered now for his jovial brother Billy, and discussing nuclear strategy with 13 year old Amy, he struck terror deep in bunkers of the Kremlin. Later, by randomly pushing and pulling on the levers of power, he struck terror into friend and foe alike. Next came the great communicator, the famous double R of Hollywood who together with 'the Duke" double handedly won the second world war. This was only natural, since he was also at Harper's Ferry were he nabbed John Brown. Despite many requests, Chief Al never got to meet with Trigger. The FED had high hopes for the following President for he had been born with a "silver spoon in his mouth." Previous Presidents had appointed him to nearly every job in the bureaucracy in an effort to find one he could hold. True to form, he lost the Presidency as well. The current incumbent is a Buba from Arkansas. On arrival in Washington, the FED got free chickens for a month, delivered in a large truck marked Sam's. It was an unusual start, they were expecting turkeys.
"I doubt if any of them would even intentionally double-park."16
One of the chief drawbacks of the old type of fiat currency used to be the need for some paper upon which to print it. This limitation represented the only real, if mostly ineffectual, limitation upon the fiat authority's power to create money. Truly this was, "a modern barbaric relic" which must not stand. It was thus promptly ended by today's ingenuous "electronic book entry system." "Treasury Bill printing to much for your system ? Don't worry. Just take in their cash and give them an electronic book entry. We can do this all day, so as long as there's an electron in space." The "electro-paper standard" (eepee) was born. (See Appendix three.)
"You can get much farther with a kind word and a gun than you can with a kind word alone."17
Slowly at first, quicker later, the realization sank in with the "pols" about just how many goodies a fiat currency could give to voters to secure re-election. Politicians got from running on promises of balanced budgets to Reaganomics and Clinton. Using the full faith and credit of the state, backed up by the full force of the criminal laws and faith in the prisons that enforce tax collection, unsound policy drove out sane. Like it or not, each American's new master was henceforward the U.S. government and its band of benevolent bureaucrats. Not in voluntary partnership of course, but under the unstoppable duress of a pre Magna Carta, Kingship. Best of all, bribes were now to come not from the politicians own pocket, but solely from the public's. Progress indeed ! In the land of the free, the free were rapidly moving on from hamburger flippers to peonage, and didn't even know it. Under the new system of fiat currency, the gap between the haves and the have nots, will be made into whatever the authority wishes it to be. All the same, it might be better to take away their guns through gun control, just in case. (See charts 13 & 14.)
"The leaders of the French Revolution excited the poor against the rich; this made the rich poor, but it never made the poor rich."18
By the end of the 1980's the house of cards was teetering, but not quite yet ready to fall. Mindful that very few persons are still alive who were active in the great speculative boom of the late 20's, and even fewer who are still active now; a speculative boom that inflated stock prices, the FED believed, would cause only misgiving among doomsayers, not panic among the masses. It would also, however for a time, refinance banks, swell the economy, spread prosperity to a few from whence to trickle down to others, and mostly in the collective opinions of the Treasury and Federal Reserve be sellable to all as a consequence of the end of the cold war. The "peace dividend" has arrived. If the economy inflates, the debt as a percentage declines, right ? - Anyway, who knows, "it's an old trick but it just might work." So now , back to the plan.
'Beam me up Scotty."19
THE PLAN - DISPLACEMENT
"Stock prices have reached what looks like a permanently high plateau."20
"Stocks are cheap at current prices."21
Displacement - To move from its usual place. Speculative excess, often synonymous with mania, usually begins, in economic terms, with some sort of unusual set of circumstances that creates a displacement in the financial system. Historically, such displacements occur during times of low interest rates, when capital deprived of its normal or acceptable rate of return, casts about for a way of regaining its worth. It was just this type of displacement, that the Federal Reserve set out to create when back in 1990, it opted for speculation as a means to inflation. By channelling the speculation towards stocks as opposed to commodities or tangible assets, it was reasoned no one would notice. Doesn't everyone want the stock market higher ? Better yet, stocks are not a "zero sum game" meaning there would not be a loser for every winner. If 1927-28 could be recreated without a 1929, Chief Greenspan might yet retire as the Adam Smith of the century, even if no one ever understood a word that he uttered. Indeed, it was often said of the Chief "it was easier for a camel to pass through the eye of a needle, than for a straight answer in English to pass through his lips." No one ever figured out how he ordered lunch.
"Drawing on my fine command of language, I said nothing."22
Starting in earnest in 1990 - 1991, the Federal Reserve had determined to place the ultimate bet for America. "Let it all ride we're going for broke." Free money was here. By relentlessly lowering interest rates, at first in response to the recession that wasn't; at least it wasn't to President Bush who was running unsuccessfully for re-election; the Federal Reserve had determined to move every last widow and orphan's nest egg, out of the banks where it was safe and insured and into the stock market, where it was unsafe and semi-insured. Slowly at first in ones and twos, holdings of bank certificates of deposits (CD's) were reduced and "rolled over" into mutual funds in an effort to gain enhanced yield at low risk. As the pain of "sticker shock" got worse, steeper and steeper discounts existed between the retiring CD's interest rate and that currently on offer. The trickle became a flood. Once the advertising industry converted "low risk" to "no risk" for the mutual fund boys, the flood became a tidal wave. We have ways of making you bet.
"Advertising is the art of making whole lies out of half truths."23
Given displacement in the system "new opportunities" for profit are seized. Cautiously at first, more aggressively later as the first of the new opportunities pay off. Fear of the unknown subsides, familiarity appears and even the most timid get brave. As time passes a whole new class of "advisor" or "manager" arises to "professionally assist" the novice investor. Older types need not apply. A boom commences, especially in the industry of spawning more mutual funds. Driven on by the pathetically low interest rates available on traditional investments, a positive feedback occurs, one that massages the ego and lulls the unwary into contempt. The professional manager becomes awash in money, and awash in other peoples money he chases stocks and bids up prices. Initial Public Offerings (IPO'S) soar to take advantage of this pool of speculative, I mean investment capital. Investment managers and ordinary investors alike, no longer invest for income but move up to become "traders." Historic valuation models are junked. The "old" standards no longer apply. Investors are encouraged to "reinvest their dividends." "Come on, max out. Don't be foolish, take it while it's here."
"You can have your cake and eat it too."24
"Please, sir, may I have some more.'25
Investment is subtly subverted into speculation. As speculation becomes the "norm," additional sectors of the population are lured in by the attraction of the easy money currently available by the "modern investment methods." An ever swelling raft of new "products" is created by the nerds in the boardroom, to load to the late comers and match the ever increasing pool of the funds seeking "management." Lest the new products be confused with old fashioned gambling contracts, which of course are generally unenforceable in law, special interest exemptions must be granted by the very agencies set up to protect the investing public. Using the earlier logic that determined how many angels may dance on the head of a pin, the pinhead bureaucrats grant them on application. "When Bankers Trust says jump, we only ask how high."
"Regulatory agencies within 5 years become controlled by the industry they were set up to regulate."26
The mania now fuels itself and grows into a "bubble." In the Federal Reserve champagne is poured. As the first hint that all may not be right with the market starts to appear, "hot money" surges around "rotating" from product to product. Gambling becomes the major industry of the nation. Given that many of the players, especially at the professional end of the spectrum, are the same from market to market, product to product, continent to continent, a herd instinct takes over. There's safety in numbers, right ? Anyway, I must be right because all the other pro's are doing it. Money careens from "Railroads" to "Radio," from GE, to "Telephone," from GM, to "Shenandoah," ...to Airlines, ... to Montgomery Ward, ... to Hi-tech, to Biotech, to communications to the information super-highway. Today we can just as easily add, from stocks, to currencies, to bonds, to futures, to flex options, to derivatives ! In short, to the fad of the moment, the flavor of the month. The hypists now believe their own hype, analysts their own analysis. Spin rules. This is the Nirvana upon which the FED hopes to maintain the market. The economy expanded, the "model" rejoitheth.
"Say it aint so,..."27
It aint so. Eventually, of course, there comes after one or two false starts, a top. Unease abounds, yesterday's good news is reinterpreted. Quite often a scandal breaks. Caution returns. A preference for liquidity reappears. Assets (stocks, currencies, derivatives, GM) are sold to raise cash. At first a light "distress" touches many. As distress turns to pain or fear, the great race for cash begins.
"Liquidation sometimes is orderly, but more frequently degenerates into panic as the realization spreads that there is only so much money, not enough to enable everyone to sell out at the top."28
The Federal Reserve's actions since the late 1980's remind me of the old story about the playboy son of an old robber baron. Seeking to impress his father he studied the stock tables until he found a small company he thought had merit. He ordered his broker to buy 5,000 shares. When he checked again the next week, he saw that its price had risen and he knew he was correct in his earlier judgement. He ordered his broker to buy 5,000 more. The next week it was higher again. Determined to prove to his father he could make his own fortune, he continued his buying for a year. The stock continued in its impressive gains. At length it came time to show his father his prowess. He called his broker immediately and ordered him to sell. "To whom, sir ?" came back the jaunty reply. When the FED's game ends, for whatever reason, to whom do the mutual funds unload ? "Only the "model" knows," is the less than jaunty reply.
"I never think of the future. It comes soon enough."29
DR. MALTHUS & THE ETERNAL COLLECTION.
"Very few people can afford to be poor."30
"God must love the common man, he made so many of them."31
First a quick sanity check, because in a moment things get kind of deep. What question by now is on the lips of all sane readers ? "Why did they need a plan ?" You're so smart and since, thank God, you're still sane, we'll continue. Back at the Federal Reserve, they could (but wouldn't) tell you the answer to that question in a heartbeat. Malthus, and the Eternal Collection . Dr. Malthus was an eighteenth century English, Doctor of Divinity who noticed that while agriculture was expanding arithmetically, the population expanded geometrically. Thus he reasoned "Adam Smith was wrong. Long before I can collect on my annuity from the Fauntleroy Bank, in the City of London, I will be eaten out of house and parsonage by an unwashed starving riffraff," usually referred to as "them" in text books, as opposed to us. Of course, Alan and the other Fed Gurus, knew Malthus was right but about the wrong problem. Dr. Malthus' food problem had been solved long after he'd cashed in by the simple expedient feeding "them" pork belly futures. Happily for all, these can be expanded at will without reference pig herds, or other troublesome facts. If these had been available but a century earlier, Marie Antoinette would have kept her head. "The Chief or little Al" as he was affectionately called in the latrines of power, knew that Dr. Malthus was right, but about the Dollar-Debt problem, or the "eepee standard" as it was known in the trenches. Once off the gold standard, the economy had expanded arithmetically, while dollars and debt were expanding exponentially. For example, in 1994 GDP grew by 4% while the Fed expanded money supply by 10%. The "super model" said GDP would grow by only 2.5%, so the Chief knew he would have to get out his screwdriver and wrench and try again. In 1988 this did not matter. Foolish foreigners for the moment, were still content to collect pictures of mostly past American Presidents. But as the boys in the bank knew only too well, once the cold war ended and the B. wall fell (1989,) the absence of a common enemy would eventually make people question the "eepee standard" and a dollars "worth."
"Let them eat cake."32
Like most central bankers, Alan liked clothes, he hated the thought that hurtling towards him was the day that as Chief he would be told "he had no clothes." At first under Paul Volker, the FED had expanded the "eepee standard" pushing for interlocking international economies, and interlocking "eepee" fiscal policy. The Germans alone demurred. FED reasoning was simple, "If my paper's no better than yours, then yours will be no better than mine." That worked fine until that dreadful day in October 1987. Now he lost sleep over pushing that cretin's inept policy, - interlocking "eepee" economies ! The old "spread out their sure to get one of us," became, "one for all and all for one. If you go I'm going too." Anyway it just wasn't true anymore. The plain fact was, that while in 1970 in a gold backed economy of close to $1 trillion, speculative transactions by volume amounted to about $100 billion (not including wagering at the track, sports betting, or the numbers racket,) now in an economy of $6 trillion speculative transactions were approaching $600 trillion (not including the previous list, plus lotteries and casino games.) In less than 25 years, financial gambling had grown from 10 cents per dollar of GDP to $100 per dollar of GDP. No other country's "electro-paper standard" came close.
'What a tangled web we weave when first we practise to deceive."33
Dr. Malthus' finding had yet another sting for the "eepee standard." If the newly capitalist nations of the world stayed capitalist, then as their economies grew, so would their level of prosperity as would their level of savings. As savings get deposited into their banks, those banks assets grow and those banks make loans. Those loans further improve the standard of living in those countries, resulting in yet more prosperity, savings and increased consumption. Quite quickly it happens, that those countries with a large population base, that remain true to the capitalist system, and have a high work ethic, will become the new "Japans" of the world, amassing the very dollars that the Treasury needs merely to keep the paper standard running. This was not the "spoils of cold war" victory debated back in the trenches. In the next 15 years, annual growth in the developing world is expected to average about 5.6%, or more than double that expected in the industrialized world.
"The tumultuous populace of large cities are ever to be dreaded."34
The U.S. in 1993 had a population of about 258 million, most of them legal. China had about 1.2 billion, India almost 900 million, and Indonesia about 188 million. By 2025, about the time that the Bi-Partisan Commission on Entitlement and Tax Reform, says that Social Security will go broke and that Federal spending will equal over 37% of National Income, the U.S. population is expected to be about 335 million, who knows how many legal. China about 1.55 billion, India 1.38 billion and Indonesia about 278 million. Only Japan is expected to have relatively small population growth over this period. In 1990, the consequences of this change were already in view. By 1994 the U.S. had already capitulated to the Chinese Communists over human rights rather than fight an unwinnable "trade war." "Oh come on, come on, I was only joking. Let me sell you something. Pleeease. You'll feel much better."
The FED could only dread the future when simply to maintain the "eepee system," they'd need the new capitalists generosity in buying up all the Federal Debt. When trade among the new capitalists exceeded that with the U.S. the Chief knew, the clock would be running till the day they would question the dollar's "value." The only solution was the formation of a world government, and their acquiescence in using the American Dollar while leaving control solely in the hands of the Treasury and Federal Reserve. "But suppose they should want some other picture or head on the bills." It was too frightening a thought. An Elvis ten, a Mickey Mouse twenty, he shuddered and made for the trenches. Deep in his gut, the Chief knew pigs would fly first. Then there was the problem of the Eternal Collection.
First noticed in the mid 1970's it was found after study to have always existed, but had been held in check by poverty. As the malling of America progressed and the phenomenon contaminated Europe, the "eepee standard" and Eternal Collection were fuelling the largest wealth transfer, since the Shah of Iran. It made Milk'em & Burnham look petty. Simply put, the Eternal Collection took place each December when millions of otherwise law-a-biding Christians (and others) in response to saturation advertising, went zombie and descended on the malls of America and there generously transferred about one third of their wealth to the Pacific Rim. No one at the FED understood it, but it got worse each year. The FBI was investigating. Little Al even suspected that some on the Board participated, but this was not yet proven. Everything had been tried to quash it including appeals from the Pope, usurious credit card interest rates, and shootings at malls, but all to no avail. On present FED projections, 100% of the American wealth would transfer there in 1999. He had no other choice if he was to avoid the headwinds of the future; speculation and the "great casino" it had to be.
"Now let me get this straight" Mr. Tell asked earnestly, "You want me to pay a gazillion in taxes so as to lend the money to Mexico, who went broke 'cos their rulers rigged the elections and stole all the money to Miami ?" "Got it." the laughing policeman replied. "Then they'll use some of the money to repay some of their lenders, and the rest to so's continue ruling in Mexico." "Absolutely." the smiling policeman said. "Suppose I don't want to" Mr Tell asked, incredulously. "Well, I'll have to jail you, right after you shoot an apple off this little boy's head." said the policeman, seriously.
"Liberals have practised tax and tax, spend and spend, elect and elect but conservatives have perfected borrow and borrow, spend and spend, elect and elect."35
NASDAQ - THE GREAT CASINO
"If you bet on a horse that's gambling.
If you bet you can make three spades, that's entertainment.
If you bet cotton will go up three points, that's business.
See the difference."36
To carry off the plan, required the cunning and deception of an inbred professional. No one in the political chain of command ever suspected that the Federal Reserve's policy was now to encourage craven speculation. If the "electro-paper standard" was to be successfully defended, little Al reasoned, none of the other Board Members must ever know anything. This last should be easy since that was why members were picked. However, if even a single politician got the least hint of the change, the Clintons in Arkansas would look like babes in the woods. In wigs and disguises at night and on weekends, it's believed, the Chief secretly toured libraries and Blockbuster checking out speculation and investing. Unable to order through the clerks at the Board, lest eyebrows be raised at this interest in gambling, we can only imagine the torture and shame of those early days.
In session after session in front of the mirror, the Chief trained himself ceaselessly in the art of deception. A patriot through and through, like the Colonel, there were no depths he could not plumb for his country. At length, with practise he could sit for 3 or 4 hours feigning sleep while still talking. The bi-annual congressional hearings were truly his finest hour(s). By the time it was realized, how the new Master Plan was working, it was rightly said throughout the world:
"Never in the history of the mankind, have so many owed so much to so few."37
By 1994, when spin meisters Senators Danforth and Kerry who chaired the BiPartisan Commission, estimated with true Senatorial logic that the first "day" of reckoning was "year" 2012, little Al knew from his "Tran book" this meant 2002. The "tran book," (the Official Federal Reserve Translation Guide,) was the most closely guarded secret at the FED, after the workings of the "supermodel." When General Alexander Haig arrived in Washington back in the 70's, English suffered its greatest rout ever. Slowly over time, someone at the Fed noticed that if you watched very closely, politicians and spin miesters lips moved differently to the sounds that they uttered. Constantly moving, working in secret, and always in fear, this genius had discovered that when a politician said anything, his lips secretly and silently told the truth despite the words uttered. From this little acorn had come the "tran book." Passed personally from Chairman to Chairman, its existence if ever disclosed would debase a Chairman faster than a dollar. Its originator now lived sumptuously in St Moritz, Switzerland deep in the heart of the Federal Reserve Protection Program.
With the twin time bombs of Malthus and the Eternal Collection, ticking away under the "eepee standard" little Al knew he hadn't a moment to lose. His only regret, Mrs. Clinton's broker was out of the commodities business. By inflating the economy, the debt percentage might yet shrink low enough to buy the precious time that Microsoft and Viacom needed to rescue the world. If they could careen down the information super highway fast enough, he thought, America might yet be saved. C'mon Bill, c'mon Sumner. N'est-ce pas ? It was a tough job but someone had to do it - America was beginning to run out of electrons. The nightmare of Christmas 2012 visited him often.
"On Donner, on Blitzen...."38
"I was alarmed at my doctor's report: He said I was a sound as a dollar."39
E = MC2
"Everyone is a genius at least once a year; a real genius has his original ideas closer together."40
Though widely credited as a discovery of Professor Albert Einstein, the formula E = MC2 was well known in economic circles at the turn of the century. In economic terms, it means the Economy equals Muddle times Confusion squared. It also applied, on the field of battle where the E stood for enemy. Suspected by many as the basis of the FED's economic "supermodel," most economist by 1990 used it as excuse number 1 when they forgot to obey the first rule of ecodynamics: When making a forecast, give them a price or a time, never both. After the "electro-paper standard" became universal, economics changed dramatically and most economists added rule 1(a): What goes up never comes down.
Every economist in the private sector is acutely aware of the second law of ecodynamics: Prices increase proportionately, by the square of the Money Supply. This has held true under both the previous gold standard and today's "electro-paper standard." What changed most between the two systems, however, was the rate of increase in money supply and that increase was massive. Under the gold system, some peon had to be shoved down a hole with a pick and shovel to dig up ore; money supply advanced slowly, in fits and starts timed to new gold discoveries. Under the "eepee standard," money supply increases continuously with huge surges occurring in every third and fourth years. Further, the size of the surge is inversely linked to the polling health of the governing party. This is known as "Irvine's Leap" after the ignoramus who accidentally discovered it.
Most private economists, entrepreneurs, and other rationalists suspect the FED's secret supermodel to be flawed. Some have gone on to suggest there's a programming error in their second law of ecodynamics, that reads "inversely" instead of "proportionately." Many others believe there's no FED supermodel at all, just a FED random shuffle down the avenue of chance. Personally, I believe that the FED has a supermodel and it operates on an early version of "Chaos." There was rumored to be one working back in the Carter days, since then, if I know bureaucracies, it's been enhanced with artificial inteligence.
Either way, the sordid results on the economy of the FED's monthly deliberations and their secret supermodel, will bedevil us for decades to come. The really bad news for all, however, is not that while the "eepee standard" implies a gradualist drift to decline early in the 21 st century, rather it is that the parallels and similarities between 1927-1929 and 1993-1995 suggest that 1995 may bring forward the cataclysmic end to the "eepee" game into this decade if not this year. Despite the coincidence that no year ending in "5" in over 100 years has had a down stock market, and that no pre-election year since 1939 has been a loser, 1995 may yet set a precedent that belittles 1987. "Eepee go home."
"In the republic of mediocrity, genius is dangerous."41
"Every man of genius is considerably helped by being dead."42
THE FEDERAL RESERVE'S SUPERMODEL
"In politics stupidity is not a handicap."43
Although not privy to the inner programming of the FED's economic supermodel, by watching the private activities and public pronouncements of previous FED members, I have been able to gather some secrets of this enigmatic Temple. Acting on the assumption that, if there is in fact a real supermodel and not just some plastic weegie board and idle whim, then those members availing themselves of the revolving door to private enrichment, must have an intimate knowledge of its underlying premise. From that simple concept and their pronouncements and nuances it seems the supermodel's origins lay in familiarity with opiates. When religion was proved by consumerism not to be opiate of the people, the FED siezed the chance to make the supermodel the opiate of the bankers and economists. When all goes well, the bureaucrats of the FED, the high priests of the dismal science, are almost deified by their peers. Fortunately for the rest of us, this happens infrequently, if at all. In the monthly secret meetings after the luncheon-libations are imbibed, the FED super-model is "improved" by the latest dose of economic revisions. Though these revisions often negate the previous meeting's policy assumptions, the revisions are not the fault of the supermodel, merely the product of the maladroit bean counters who plug in the data. Considerable skepticism is known to exist among the FED members at the supermodels incredible conclusions, however, this misgiving is not to be shared with the masses. Publish the spin on T.V. and it must be true.
"One half the nation is mad and the other half not very sound."44
The following information is a brief summary of what little I have gleaned about the FED's economic supermodel:
First it seems to be based upon a primative numerology regarding the sanctity of the number five. Whether this is so because there are only 5 Fermat primes known to exist, or because ancient Pythagoreans associated the number 5 with marriage and bliss (being the sum of 2 the first female number, and 3 the first odd male number,) or as my dog Milly suggested, being because most FED members have only five fingers (or toes) on each limb, I cannot say. My own opinion though, is that this is bsed on five because five is the number that early economists discovered was the amount of Angells that could dance on the head of a biblical pin. Later, twentieth century capitalists were able to debase pins by reducing the size of their heads and economists now know only 3 can so dance, but that is another story. For example: the FED's supermodel targets employment by fives. If unemployment falls to 5% or less, the Federal Reserve moves heaven and earth to increase unemployment and destroy wealth creating jobs. They will continue so doing until they succeed in moving unemployment up out of the "fives" altogether. However, if as a success of FED policies, unemployment soars to 10% or higher, abject panic decends on the FED and all other policies are ditched in an unseemly stampede to job creation and makework. Despite the modern fact that only three angels may now dance on the head of a pin, no attempt has yet been tried to target unemployment between 3% and 6%.
Consider next Capacity Utilization which also operates in multiples of five. When Capacity Utilization climbs above 85%, all smiles and other signs of benigness are removed from FED member's dispositions and are replaced by collective Voodoo incantations to the appearance of the great god of inflation. Should Capacity Utilization drop below 75%, however, reverse incantations appear to a god called depression. This core "pullme-pushyou" indicator lies near the heart of the FED's reciprocating, economic, engine.
Again, when Gross Domestic Product increases by 5% or close, dire pronouncements are emmitted by the FED concerning the unhappiness of the people and the immediate need to reduce GDP growth. This is so even though every bit of observable evidence seems to contradict this. Yet, when GDP growth reaches zero or goes negative in response to their earlier actions, frantic efforts are observed among the witch doctors of the Temple to rekindle it back up towards five percent.
Finally, as an absolute proof of the FED's dependence on a numerology of five, I offer the fact that when changes are made to the Discount Rate, Fed Funds rate, or interest rates in general, they are always changed by amounts divisible by or ending in 5. Eg: 0.125, 0.25, 0.375, .50, .75 etc. This is the FED's five percent solution. All fives good, all others bad.
Demonstrably then, the supermodel is based upon a superstitious supplication before a paganistic altar of five. Despite the fact that we have five fingers per hand, only one known language used a counting system based only on five. Saraveca, a South American Arawakan language was based exclusively on working in five. To date I have been unable to locate a single surviving Saravecian to determine how their civilisation ended. However, there are 5 Platoinic solids with all but the cube being named after the Greek word for their number of faces. Euclid proved that by considering the possible arrangements of regular polygons around a point, there are no more than five. The medieval astronomer Kepler, used their mystical properties to erroneously explain the size of the orbits of planets. A polyhedron can be extended to more than three dimensions just as a polyhedron can be considered as a three dimensional polygon. Thus, there are 5 cells in the simplest regular 4-dimensional polytope, called the simplex, which also has 10 faces, 10 edges and 5 vertices, so that it's self dual. No wonder the supermodel uses five !
Faced with the FED's success with its multi faced, mysticaly endowed, reciprocating, Saravecan originated, Fermat primed, supermodel, it was a wonder to me that Werner Von Braun ever got NASA close to the moon, let alone landed men on it. "All the same," said my dog Milly "they still have only five fingers or toes."
"We have had two chickens in every pot, two cars in every garage, and now we have two headaches for every aspirin."45
PART TWO
"NASDAQ, the stock market for the next 100 years."
"Volume on the NASDAQ Stock Market in 1994 surpassed volume on the New York Stock Exchange for the first time. NASDAQ volume totaled 74.35 billion vs. 73.42 billion on the NYSE."
"The NASDAQ system itself, as well as sundry players in this computerized mart, ended the year in the regulatory soup, under federal investigation for alleged trading abuses."
"Study shows 25-cent spreads were the norn on NASDAQ while 12.5-cent spreads were norm for big exchanges. (Brokers make their money using spreads.. ... The larger the spread, the larger the fee.)"
"The dollar volume of U.S. take-overs surged to a record $339.4 billion, surpassing the all time record of $335.8 billion set in 1988."
"Derivatives are a continuing problem, he added, as evidenced by the fact that some funds hold issues of Orange County, Calif., ...."
"...three Lehman Brother Inc. offshore funds that invest in Mexico have stopped allowing investors to withdraw money. The highly unusual move has barred investors from getting their money out of the fund ..."
"Shareholders on Thursday authorized riskier investments for $5.2 billion in Fidelity Investments money-market mutual funds. ....allows Fidelity managers to bet on price declines by selling short and to invest in real estate investment trusts, among other bolder strategies."
"Sooner or later a crash is coming, and it may be terrific."46
"There may be a recession in stock prices, but not anything in the nature of a crash."47
DOES HISTORY REPEAT ITSELF ?
"History is only a confused heap of facts."48
"History is bunk!"49
We now take our leave of comedy and enter into the realm of tragedy. There we shall see the "dismal science" ever at it's best, rise to the tragic occasion. The long term bull market that ended in the Crash of 29 and the Great Depression is uncannily similar to today's current bull market. Consider the following:
The 1929 bull market may be timed as starting from a closing Dow Jones low of 54.22 on February 24, 1915. The bull market high was hit on September 3, 1929 at 381.17 just about a month before the crash. The bull market lasted about 14 years and resulted in a rise of about 700%
The present bull market may be timed as starting from a closing Dow Jones low of 577.60 on December 6, 1974. The current bull market closing high may (or may not) have been hit on January 31, 1994 at 3978.36. If so, the bull market lasted approximately 20 years and resulted in a rise of about 690% If the current bull market did not make its high last January and we are poised to thrust to a new high later this month or this year, does history repeat ?
To those who would say "that was then this is now, circumstances are now very different," Are they ?
Back then there were the very best of minds employed using the then state of the art technology to divine the tea leaves and forecast price and direction. Most missed the top and did not see the crash coming. Many of the wealthy of their day, if not all, employed the finest of investment bankers and stock brokers (the blue bloods of the time) to manage their affairs. They in turn hired the cream of the "brain surgeons" (rocket scientists came later) to crunch the numbers and "get it right." They didn't and the great depression ensued. Today, what's different ? The rich employ personal bankers, the rest of us stockbrokers and mutual funds, who in turn hire the best of the "rocket scientists" to "get it right."
While today's nerd may utilize computers in place of slide rule and charts, not much else has changed. Oh yes, "back then it wasn't regulated and so manipulations occurred." Well that's true, but in the pursuit of every last cent of possible profit the nerds have invented largely unreported "derivatives" contracts including "option plays, "knockout options," "swaps" and customized "flex" strategies, and many others. These mostly remain unregulated if only because even their inventors don't really understand them, and the regulators keep giving them exemptions. In 1929 leverage for most meant 50% margin or 2 to 1 leverage. Today the average "hedge fund" gets leverage of between
30 - 1 up to 50 - 1 or more. Until the 1994 bond market melt-down began, some even got leverage of 100 to 1.
Many if not most "derivatives" are also "off balance sheet" items while most are not recorded on exchanges. Guessing who has exposure to risk and how much is nearly impossible. When Commercial Banks report the amount they hold in derivatives, rarely do they give specific details. With options, for example, they usually report only the face value of the securities or futures controlled by those options. It's impossible to determine if the bank really is hedging risk (has balanced positions) or is speculating (gambling) to "enhance yield" and add to the bottom line. (See Appendix one.)
"There are two times in a man's life when he should not speculate: when he can't afford it and when he can."50
After just six interest rate increases by the Federal Reserve in 1994, (moving FED funds from 3% to 5.5%,) 30 year Treasury bonds plunged more than 20 % in value. By December, Robert L. Citron the Treasurer of conservative Orange County, California admitted they "had a paper loss" of $1.5 billion dollars of taxpayers’ money, but not to worry they would "hold the derivatives to maturity" and recover the loss. Unable to pay their brokers, Merrill Lynch and Prudential Securities, the interest cost of carrying those derivatives, their brokers "hammered" them by selling them out in the market. Current estimates of the loss are put at $2 billion and rising. Because of the hidden risk in derivatives trading, the unfortunate Los Angeles Times, in an editorial published May 24, 1994 had endorsed Mr. Citron as follows: "Robert L. Citron's winning record as Orange County's Treasurer-tax collector is good enough that he deserves re-election... How does Citron earn the higher rates ? He takes greater risks. But experts say the risks are not foolish..." In December after the loss, Mr. Citron resigned in disgrace. Dog catcher next, perhaps ?
The experts cited were presumably the same experts at Prudential Securities, quoted by the Wall Street Journal in December 1993. Citing the Pru's "Fearless Forecast" predictions for 1994, the experts confidently predicted "Bonds will fall slightly" and that the "FED will wait and see." In fact 1994 became the worst year for bonds since 1927 but to quote from the prestigious Barron's magazine that was only because "total return data only stretch back that far. The record probably goes back to the (bond) bear market of 1916-20..." There are experts and then again, there are EXPERTS.
The Securities Industry Association estimates more than $1 trillion of wealth was erased in the bond market slump, equal to that wiped out by the 1987 stock market crash. The only good news here; about 40% belonged to foreigners. With the FED set to keep interest rates rising throughout early 1995 if not all of it (Albert Goldman, director of market analysis for A.G. Edwards is quoted by The New York Times as looking for a FED funds peak at around 7.5%, fully 2% higher than present.) is the derivatives volume falling ? Just the opposite. According to Paul Spraos, editor of Swaps Monitor a trade news letter in New York, volume in the market "continues to grow." In 1994, under the Monitor's methodology for counting these instruments, the face value of derivatives contracts outstanding soared to $12.3 trillion from $8.2 trillion at the end of 1993, a 50% increase. The Comptroller of the Currency estimates that there are at least 1,200 different kinds of derivatives, with new ones being invented every day. According to one former client of Bankers Trust, quoted by the Wall Street Journal, " You can sit down with them [BT] and say you want to hedge the risk of having too many blue giraffes and they would be able to help you do that." (See Appendix one.)
"Step up ! Step up !" yelled the barker, "the giant Casino is open and ready, place your bets now. All "buys" are guaranteed. Hurry, hurry, hurry, easy money, easy money, get yours now." I asked the barker how they could do that. "If problems occur, the FED pays out," he said "we learnt that in 1987. Besides, who wants another '29 when the FED sat 'round and did nothing ?" I was impressed by his grasp of economics. "It's only "eepee money" anyway" he continued "Let the tax man take the risk. You get all the rewards right after our commission." Orange County needed this man. "Step up! Step up ! Bet here ! Buy more, buy more !"
Vincent Porpuro was returning home, it was Friday and he hadn't seen his wife since 6.30 a.m. Though it was now way past 9.30 he knew Mary would leave the children up late to play with their father. As a landscape laborer he didn't make much, but he paid his taxes and felt proud knowing the capital gains tax had just been halved and 18 billion flushed down into Mexico to salvage Harvard economics. "That's why were American, right ?" he thought as he walked from the subway. Maybe next week he would have enough left over to buy the kids a gift. But life was hard.
David Rich was late, it was 9.30 and home was still 30 miles off. Sure he was speeding, but the "Beamer" was safer than other cars. It was built for speed, he could handle it. He'd worked late in the dealing room, finally shorting the last 100 million Peso's at 7.00pm. What a mug at the "Nagara" for bottom fishing, he thought, the Peso would hit 6.00 to the dollar by Monday. They'd make $2 million fast. He could feel the bonus in his pocket. It'd been a good month. He'd buy a new Rolex, he thought. Maybe the submariner, he'd earned it. He would put it with the others in the draw. He swerved and cursed loudly. He hadn't seen Vinny Porpuro till the last second. Though he'd missed him, the jerk'd nearly ruined the paint on the BMW. These people deserve to get hit, really. The more things change the more they stay the same.
"Never lend money to someone who must borrow money to pay interest."51
THE SORDID PAST
"The high tide of prosperity will continue."52
Little remembered now about the "Crash of 29" and the "Great Depression" that followed it, is the fact that it itself followed by almost 60 years, the previous crash with a depression termed at the time "Great." That crash, the crash of 1873 in turn was nearly 60 years from the crash associated with the earlier collapse in 1819 of the Second Bank of the United States, and the subsequent severe depression that followed. That far back in history, news travelled more slowly from place to place, country to country, and the object of speculation often varied somewhat from locality to locality making an interrelated depression appear different in each financial center. In reality, a cycle starting in, say, 1819 may not have started until 1820 in another financial center, but nevertheless, was part of the same cycle.
As communications improved, cycles have become better defined. Since 1916, when the U.S. became financier to the world, cycles to all intents and purposes are driven by events emanating from the U.S. economy. The U.S. became and is the dominant world financial center. While it's still possible for an outside event to be critical in starting or ending a cycle, for example, maybe Mexico's 40% devaluation at the end of 1994, more often the system can "patch and manage" an Italian corruption scandal. They are unlikely to bring down the "electro-paper standard." Even so, ever since the system of interlocking economies was foisted on to the capitalist west in the late 1970's, the possibility increasingly exists that some "local meltdown" will quickly escalate into a "global evaporation."
In the old days there was thought by most financiers, to be a seven year cycle of boom and bust, give or take a year. Significant financial events happened separated from each other by multiples of seven, i.e. 7 years, 14 years, 21 years, etc. A great "super-cycle" took place about every 63 years, give or take a year or so, representing nine seven year cycles. Though much has been written about such super-cycles, very little is scientific and quite often starting points are unclear or disputed. With no real agreement about if this is really happening let alone why, I will not belabor the point except to say that the coincidences deserve better scientific study, than they've had up till now. From a superficial perspective, however, it does seem to occur. In 1995 we are 63 years exactly from the low of the Great Depression and should be making a high.
Generally, throughout history speculative binges have been set off by low interest rates in the dominant financial center creating cheap cash and a mania to "get in on the action" of the current "product." The product(s) from tulips to biotech, are often then hyped into illegality or are later found to have been misrepresented or fraudulent all along. From the "South Sea Bubble of London in 1720, (an early Ponzi Scheme) and the John Law banks in France the same year, through the railway mania(s), to the infamous Charles Ponzi and his alleged way of making profits from International Postal Union coupons, across the Florida swampland of the 1920's, right up to the fraudulent actions of the Milk'em and Burnham junk bond crowd, investors delude themselves to the point of excluding a rational appraisal of the "product" and the consequences of the easy money. Collapse usually comes when someone (or entity,) raises the cost of money to leveraged traders for a reason ranging from: abrupt demand for repayment, default, devaluation, legal change, recession, revolution, swindle, war, or simply the "headwinds of inflation." At least that's how it used to be.
"There is nothing in the business situation to justify any nervousness."53
Since the adoption of the "eepee standard" the Federal Reserve has allowed the government of the day to monetize each successive collapse. From Lockheed and Chrysler (relative success stories) through Continental Illinois Bank, via the 87 crash, to the Savings and Loans debacle, the Federal Reserve has actively assisted the politicians in borrowing (monetizing) to "remedy" such collapses. Put off till tomorrow the excess of today, the monster, given money, may yet go away. The ostrich defence it should be called. With the writing on the wall about the future systemic economic collapse (see charts 11 and 12,), the question of January 1995 is: If the speculative bubble ended in stocks or derivatives in 1995 (or 1996,) what then ? With over $2 trillion entrapped in mutual funds and $12 trillion in derivatives, how does the FED monetize this time ? As mentioned earlier, by unhappy coincidence, we are now approximately 60 years from the last "great depression" and speculation is again rampant.
For purposes of simplicity, I have limited myself to only the uncanny similarities between 1927-29 and 1993-95 in the stock market.
"We at Chrysler borrow money the old fashioned way, we pay it back."54
INFLATION
30 - 1 up to 50 - 1 or more. Until the 1994 bond market melt-down began, some even got leverage of 100 to 1.
Many if not most "derivatives" are also "off balance sheet" items while most are not recorded on exchanges. Guessing who has exposure to risk and how much is nearly impossible. When Commercial Banks report the amount they hold in derivatives, rarely do they give specific details. With options, for example, they usually report only the face value of the securities or futures controlled by those options. It's impossible to determine if the bank really is hedging risk (has balanced positions) or is speculating (gambling) to "enhance yield" and add to the bottom line. (See Appendix one.)
"There are two times in a man's life when he should not speculate: when he can't afford it and when he can."50
After just six interest rate increases by the Federal Reserve in 1994, (moving FED funds from 3% to 5.5%,) 30 year Treasury bonds plunged more than 20 % in value. By December, Robert L. Citron the Treasurer of conservative Orange County, California admitted they "had a paper loss" of $1.5 billion dollars of taxpayers’ money, but not to worry they would "hold the derivatives to maturity" and recover the loss. Unable to pay their brokers, Merrill Lynch and Prudential Securities, the interest cost of carrying those derivatives, their brokers "hammered" them by selling them out in the market. Current estimates of the loss are put at $2 billion and rising. Because of the hidden risk in derivatives trading, the unfortunate Los Angeles Times, in an editorial published May 24, 1994 had endorsed Mr. Citron as follows: "Robert L. Citron's winning record as Orange County's Treasurer-tax collector is good enough that he deserves re-election... How does Citron earn the higher rates ? He takes greater risks. But experts say the risks are not foolish..." In December after the loss, Mr. Citron resigned in disgrace. Dog catcher next, perhaps ?
The experts cited were presumably the same experts at Prudential Securities, quoted by the Wall Street Journal in December 1993. Citing the Pru's "Fearless Forecast" predictions for 1994, the experts confidently predicted "Bonds will fall slightly" and that the "FED will wait and see." In fact 1994 became the worst year for bonds since 1927 but to quote from the prestigious Barron's magazine that was only because "total return data only stretch back that far. The record probably goes back to the (bond) bear market of 1916-20..." There are experts and then again, there are EXPERTS.
The Securities Industry Association estimates more than $1 trillion of wealth was erased in the bond market slump, equal to that wiped out by the 1987 stock market crash. The only good news here; about 40% belonged to foreigners. With the FED set to keep interest rates rising throughout early 1995 if not all of it (Albert Goldman, director of market analysis for A.G. Edwards is quoted by The New York Times as looking for a FED funds peak at around 7.5%, fully 2% higher than present.) is the derivatives volume falling ? Just the opposite. According to Paul Spraos, editor of Swaps Monitor a trade news letter in New York, volume in the market "continues to grow." In 1994, under the Monitor's methodology for counting these instruments, the face value of derivatives contracts outstanding soared to $12.3 trillion from $8.2 trillion at the end of 1993, a 50% increase. The Comptroller of the Currency estimates that there are at least 1,200 different kinds of derivatives, with new ones being invented every day. According to one former client of Bankers Trust, quoted by the Wall Street Journal, " You can sit down with them [BT] and say you want to hedge the risk of having too many blue giraffes and they would be able to help you do that." (See Appendix one.)
"Step up ! Step up !" yelled the barker, "the giant Casino is open and ready, place your bets now. All "buys" are guaranteed. Hurry, hurry, hurry, easy money, easy money, get yours now." I asked the barker how they could do that. "If problems occur, the FED pays out," he said "we learnt that in 1987. Besides, who wants another '29 when the FED sat 'round and did nothing ?" I was impressed by his grasp of economics. "It's only "eepee money" anyway" he continued "Let the tax man take the risk. You get all the rewards right after our commission." Orange County needed this man. "Step up! Step up ! Bet here ! Buy more, buy more !"
Vincent Porpuro was returning home, it was Friday and he hadn't seen his wife since 6.30 a.m. Though it was now way past 9.30 he knew Mary would leave the children up late to play with their father. As a landscape laborer he didn't make much, but he paid his taxes and felt proud knowing the capital gains tax had just been halved and 18 billion flushed down into Mexico to salvage Harvard economics. "That's why were American, right ?" he thought as he walked from the subway. Maybe next week he would have enough left over to buy the kids a gift. But life was hard.
David Rich was late, it was 9.30 and home was still 30 miles off. Sure he was speeding, but the "Beamer" was safer than other cars. It was built for speed, he could handle it. He'd worked late in the dealing room, finally shorting the last 100 million Peso's at 7.00pm. What a mug at the "Nagara" for bottom fishing, he thought, the Peso would hit 6.00 to the dollar by Monday. They'd make $2 million fast. He could feel the bonus in his pocket. It'd been a good month. He'd buy a new Rolex, he thought. Maybe the submariner, he'd earned it. He would put it with the others in the draw. He swerved and cursed loudly. He hadn't seen Vinny Porpuro till the last second. Though he'd missed him, the jerk'd nearly ruined the paint on the BMW. These people deserve to get hit, really. The more things change the more they stay the same.
"Never lend money to someone who must borrow money to pay interest."51
THE SORDID PAST
"The high tide of prosperity will continue."52
Little remembered now about the "Crash of 29" and the "Great Depression" that followed it, is the fact that it itself followed by almost 60 years, the previous crash with a depression termed at the time "Great." That crash, the crash of 1873 in turn was nearly 60 years from the crash associated with the earlier collapse in 1819 of the Second Bank of the United States, and the subsequent severe depression that followed. That far back in history, news travelled more slowly from place to place, country to country, and the object of speculation often varied somewhat from locality to locality making an interrelated depression appear different in each financial center. In reality, a cycle starting in, say, 1819 may not have started until 1820 in another financial center, but nevertheless, was part of the same cycle.
As communications improved, cycles have become better defined. Since 1916, when the U.S. became financier to the world, cycles to all intents and purposes are driven by events emanating from the U.S. economy. The U.S. became and is the dominant world financial center. While it's still possible for an outside event to be critical in starting or ending a cycle, for example, maybe Mexico's 40% devaluation at the end of 1994, more often the system can "patch and manage" an Italian corruption scandal. They are unlikely to bring down the "electro-paper standard." Even so, ever since the system of interlocking economies was foisted on to the capitalist west in the late 1970's, the possibility increasingly exists that some "local meltdown" will quickly escalate into a "global evaporation."
In the old days there was thought by most financiers, to be a seven year cycle of boom and bust, give or take a year. Significant financial events happened separated from each other by multiples of seven, i.e. 7 years, 14 years, 21 years, etc. A great "super-cycle" took place about every 63 years, give or take a year or so, representing nine seven year cycles. Though much has been written about such super-cycles, very little is scientific and quite often starting points are unclear or disputed. With no real agreement about if this is really happening let alone why, I will not belabor the point except to say that the coincidences deserve better scientific study, than they've had up till now. From a superficial perspective, however, it does seem to occur. In 1995 we are 63 years exactly from the low of the Great Depression and should be making a high.
Generally, throughout history speculative binges have been set off by low interest rates in the dominant financial center creating cheap cash and a mania to "get in on the action" of the current "product." The product(s) from tulips to biotech, are often then hyped into illegality or are later found to have been misrepresented or fraudulent all along. From the "South Sea Bubble of London in 1720, (an early Ponzi Scheme) and the John Law banks in France the same year, through the railway mania(s), to the infamous Charles Ponzi and his alleged way of making profits from International Postal Union coupons, across the Florida swampland of the 1920's, right up to the fraudulent actions of the Milk'em and Burnham junk bond crowd, investors delude themselves to the point of excluding a rational appraisal of the "product" and the consequences of the easy money. Collapse usually comes when someone (or entity,) raises the cost of money to leveraged traders for a reason ranging from: abrupt demand for repayment, default, devaluation, legal change, recession, revolution, swindle, war, or simply the "headwinds of inflation." At least that's how it used to be.
"There is nothing in the business situation to justify any nervousness."53
Since the adoption of the "eepee standard" the Federal Reserve has allowed the government of the day to monetize each successive collapse. From Lockheed and Chrysler (relative success stories) through Continental Illinois Bank, via the 87 crash, to the Savings and Loans debacle, the Federal Reserve has actively assisted the politicians in borrowing (monetizing) to "remedy" such collapses. Put off till tomorrow the excess of today, the monster, given money, may yet go away. The ostrich defence it should be called. With the writing on the wall about the future systemic economic collapse (see charts 11 and 12,), the question of January 1995 is: If the speculative bubble ended in stocks or derivatives in 1995 (or 1996,) what then ? With over $2 trillion entrapped in mutual funds and $12 trillion in derivatives, how does the FED monetize this time ? As mentioned earlier, by unhappy coincidence, we are now approximately 60 years from the last "great depression" and speculation is again rampant.
For purposes of simplicity, I have limited myself to only the uncanny similarities between 1927-29 and 1993-95 in the stock market.
"We at Chrysler borrow money the old fashioned way, we pay it back."54
INFLATION
"There are lies, damned lies and statistics."55
"The U.S. Government now borrows at a rate of $1.4 million every two minutes."56
The greatest immediate danger to the policy of speculation comes from the Federal Reserve's recent raising of interest rates. We will digress just briefly, to show why they may have to continue tightening, even though it is directly opposite their policy of speculative inflation. Chart two illustrates the "normal" way economists, politicians and journalists usually like to report or talk about inflation. Some to be sure don't know any better, others are simply duplicitous. Chart three shows a better way for it represents what is really happening even after the bureaucrats have used "slight of hand" called "seasonal adjustments" to try to minimize the reported number. In chart two we see that last year, 1994, inflation ran at about a 2.7% rate. It sounds rather tame, what's the big deal ? Chart three presents the same data where we see that inflation never ever left. Once on the "eepee standard" inflation relentlessly advances, onward and upward, in each administration alike, in good times and bad.
"If power corrupts, weakness in the seat of power, with its constant necessity of deals and bribes and compromising arrangements, corrupts even more."57
Another way of thinking about chart three is that it is the reverse of what is happening to the dollar as a "store of value." Meaning, if you want to stay at the same standard of living this is how much more you must earn to stand still. Assuming your taxes or social security contributions didn't rise during the period 1985 to 1994, for each $105 dollars you made in 1985 you must make $149.70 to maintain your life style. A basket of goods that cost you $105 at the end of 1984, will now cost you nearly $150 in November 1994. The "eepee standard" has been debased by nearly 50% in just the last ten years. Chart four shows the Knight Ridder, Commodity Research Bureau, Raw Industrials Index for the period 1974 to 1994. For a variety of technical reasons related to its composition and the way the large commodity funds trading actions can distort the better known CRB Futures Index, it represents a good insight into the future of inflation. Two completed cycles are evident with a new cycle just starting. In 1994 this index jumped from 265.13 to 344.50, a 29.9% increase and its largest one year increase in over twenty years. It also was a larger rate of change increase than in even the inflationary 1970's.
Faced with this and many other indexes "breaking out" in 1994 (the Chiefs favorite is the Columbia University, Center for International Business Cycle Research, Chart 6,) the FED had no choice but to raise rates so as to be seen to responding to a potential inflationary problem. Since these breakouts, even when held in check, usually last at least two years in length, the FED is unlikely to reverse course much in 1995. However, in 1994 it was a case at the FED of raise interest rates and add cash, raise interest rates and add cash, all year long. While ostensibly aiming for a targeted GDP growth of between 2% - 2.5%, the FED let money supply grow as follows: Adjusted Fed. Credit +8.1%, Monetary Base +6.95%, Currency in Circulation +9.79%. In the highly sensitive area of open market operations, the FED increased Govt. Securities Bought Outright by +9.79%. To no one but the FED's surprise, GDP grew instead by about 4%. So much for the super-model. The FED doesn't have this option in 1995-96. Interest rate increases from now on will have to be real or inflation will roar through whole economy. Ominously, in their December 1994 figures the National Association of Purchasing Management reported that their price index jumped to 83% from 77.9%, the highest level since March 1980. Were real inflation ever to get lose in the economy again, 1994's bond collapse will look like a puddle next to an ocean.
"If interest rates are going higher in 1995-96, won't the economy slow, won't corporate profits decline, and won't a recession loom. And if cash liquidity falls as that happens, isn't the stock market engine likely to sputter ?" asked Tiny Tim ? "Absolutely." said Scrooge. "What becomes of the FED'S inflation plan then ?" "Only the "supermodel" knows, and maybe Super Al." said Scrooge.
"Our's is not to reason why, our's is but to do or die."58
"Ask not what your country can do for you - ask what you can do for your country."59
" I give at the office."60
1927-29 = 1993-95
"Someone must stand up to those who say, "Here's the key, there's the Treasury, just take as many of those hard-earned tax dollars as you want."61
If a picture's worth a thousand words, is a statistic worth a hundred ? The great speculative binge of 1927-29 began, as with the present, with cheap money and a displacement into speculation. Though the decade of the 1920's as a whole was prosperous, it got off to a shaky start in the form of a major slowdown following the end of the first world war. By 1926 the economy had recovered and was buoyant and booming. The Index of Industrial Production jumped from 100 in 1925 to 126 in the middle of 1929.
Although United States had replaced Britain as the dominant financial center, this was not yet widely perceived. Britain, with its far flung Empire, was still very important in international trade in many ways that self sufficient America was not. In addition, following the revulsion at the slaughter of the first world war, many Americans favored isolationism, further detracting from America's new role as banker to the world. In 1925 Mr. Winston Churchill, Britain's Chancellor of the Exchequer, returned Britain to the gold standard which had previously been suspended during the Great War. For whatever reason, most likely economic ignorance, he returned Britain at the pre war rate of $4.86 to the pound. Within months Britain's exporters were priced out of world markets while "cheap" imports were flooding to Britain's docks. By 1927, misperceiving the economic situation as an American problem in that people were exchanging pounds for dollars (which had to be purchased with gold) the Governor of the Bank of England was despatched to Washington to ask the Federal Reserve to lower interest rates in the U.S. thereby making dollars unattractive. For reasons lost in obscurity, the FED obliged and short term rates were cut by 0.5% to 3.5%.
With universal peace, cheap money, a strong economy, a balanced budget, and near full employment, corporate profits were strong and rising at the time of this interest rate cut. As always with cheap money, some of it migrates to Wall Street and prices there started to advance. Higher corporate profits tend to support a higher stock multiple. As prices advanced, more investors noticed that stocks were the "right product" to own. During 1927 and on into 1928, prices advanced and when temporarily stalled or declining, quickly reversed and rebounded to new highs, similar to 1993-94. "Buy dips and hold long" became the wisdom of the day. The 1990's version, parroted uniformly on America's business channel CNBC, is "today's investor is better informed. They now take the long term view and know dips are buying opportunities."
During 1927-29 newspapers and radio began featuring stock market news more prominently, touting this rumor or that stock. Today CNBC fills that role nicely, although newspapers still exist for puppy training. The "Politically Correct" of the wider world, is the "Financially Correct" of today's new advisors. The new 1929 technologies of radio and airlines were aggressively pushed as "the way of the future," while those engines of the economy, the automobile companies were knocking out cars like there was no tomorrow. Auto production jumped from about 4.3 million in 1926 to 5.3 million in 1929. In 1994-95, auto production is running at a near record rate of about 8 million and we have our "information age" and "the communications super-highway." Traditional industries like iron and steel, coal, railways and retailing remained in 1929 bedrock bastions for the truly conservative. We still manipulate the DOW also, window dressing the likes of International Paper, Aluminum Co. of America, Union Carbide and others In fact thanks to the shrinking Dow divisor, a small change on a few stocks gets magnified into a big change in the Dow Average (See Appendix two.)
As prices rose in 1929 so did the volume and volatility. Ditto for 1993-95. The record daily volume of 3.8 million shares traded on March 12, 1928 became a new record volume of 6.6 million by November 16, 1928. 1927's record annual volume of 577 million became 1928's record of 920 million. Surely 1929's volume must become 1.5 billion. In 1994 NASDAQ volume surpassed the NYSE for the first time ever, with both exchanges posting close to 74 billion. Major corrections were often prematurely and wrongly heralded as the "end of the bull market." Today a top has been incorrectly predicted every year since 1987. In 1927-29 new money continued to pour in to the market and chase prices ever higher. In 1993-94 equity mutual fund sales totalled almost $445 billion against redemption's of $212 billion for a net equity fund gain of $233 billion.
With cheap money available, brokers encouraged trading on margin. By putting up 40% to 50% cash, the brokerage would lend the remaining cash against the security purchased. Slowly at first later with abandon, investors grew comfortable with debt and converted themselves into traders. That two to one leverage is almost laughable by today's standards where hedge funds routinely trade on 30, 40, 50 to 1 leverage and until recently up to 100 to 1. In 1928 the Republicans and Herbert Hoover swept into office in a landslide. In 1994 Republicans and Newt Gingrich swept into everything except the Presidency, which was unavailable. In 1929 Republicans were talking tax cuts for the rich. In 1995 Republicans are talking tax cuts for the rich.
In 1926 broker loans, mostly collateralized by securities, stood at about $2.5 billion. By the end of 1928 they were nearly $6 billion. As demand for money increased so did the interest rate charged for "call money" as broker loans were known. Call money rates jumped from 5% at the start of 1928 to 12% at the end. At 12% interest, money quickly was diverted from production into lending to the "players" on Wall Street. The Proctor & Gambles of the time even lent their excess liquidity to "enhance" their bottom line. Standard Oil of New Jersey , in 1929, lent an average of $69 million daily, others lent more. Some corporations in the style of Orange County, sold securities to the market so as to lend the proceeds in the call market. Players expecting far higher gains than a measly 12%, grabbed the money. Nothing's different now, even Proctor & Gamble gambles in derivatives (see Appendix one.)
As the pace of investing grew more torrid in 1929, the FED from time to time would issue statements urging restraint. It did nothing in its actions, however, to meaningfully reduce liquidity. With such a strong stock market, promoters rushed new offerings to market. In 1994 take-overs surged to an all time record surpassing that of 1988. In 1994, the Chicago Board Options Exchange traded 184 million contracts beating the 1987 record by 1.8 million. Promoters in 1929, among them Goldman Sachs, J.P. Morgan, Merrill Lynch all discovered the wonders of mutual funds, known back then "investment trusts." Long a speciality of the British investment scene where the widows and orphans could pool their pittances and employ professional managers for their investments, these mushroomed from about 160 at the beginning of 1927 to about 300 at the beginning of 1928, to nearly 500 by the beginning of 1929. During 1929 they were forming at a rate of about one a day. In 1993-94 mutual funds were being created at a record pace, standing at over 6,000 at the close of 1994.
"Anytime you don't want anything, you get it."62
By 1929 the "nerds of the boardroom" had figured out how to leverage up the trusts by cross investing, sponsoring subsidiary trusts, and alla Milk'em and Burnham, self valuation. Such leverage produced spectacular results when prices rose. If prices were ever to fall, well... During 1927 investment trusts sold to the unsuspecting public about $400 million of securities; by 1929 it was estimated about $3 billion. In 1993-4, equity, bond, and income funds took in almost $900 billion of sales. Just before the October '29 crash, investment trust assets had grown to over $8 billion. During 1929 it later turned out, the investment trust boondoggle was accounting for over a third of all new capital issues. The "bookies" of their day, the investment banks, the commercial banks, the securities dealers and others all made millions from fees and millions more again by selling insider stock. In 1994, even conservative counties and others took to the high road of derivatives gambling aided and abetted by the giant banks and brokerage houses of the nation.
For today's communications companies back then it read "pictures." For computers it read "autos." For Wal-Mart it read Woolworth or Montgomery Ward, and so on and so on and so on. Where we have triple witching option expirations and "flex" plays, they had old fashioned manipulation without the high sounding words. Financial fun and games abounded everywhere, both then and now. Eventually back then, the FED did start raising interest rates in response to the New York banks borrowing from them "cheap" to lend "dear" in the call market. In 1994 the FED has just started tightening in response to inflation worries. By mid 1929 even the extra volatility, though unsettling, had become familiar. Everyone, however, knew what to do. "Buy more" or "sit it out and stay in for the long run." "You can't go wrong investing in stocks." As Hornblower and Weeks told its punters in September 1929, "We should not be stampeded into selling stocks because of ...." Even the Wall Street Journal espoused "... the main body of stocks yesterday continued to display the characteristics of a major advance temporarily halted for technical readjustment."
"Anytime you don't want anything, you get it."62
By 1929 the "nerds of the boardroom" had figured out how to leverage up the trusts by cross investing, sponsoring subsidiary trusts, and alla Milk'em and Burnham, self valuation. Such leverage produced spectacular results when prices rose. If prices were ever to fall, well... During 1927 investment trusts sold to the unsuspecting public about $400 million of securities; by 1929 it was estimated about $3 billion. In 1993-4, equity, bond, and income funds took in almost $900 billion of sales. Just before the October '29 crash, investment trust assets had grown to over $8 billion. During 1929 it later turned out, the investment trust boondoggle was accounting for over a third of all new capital issues. The "bookies" of their day, the investment banks, the commercial banks, the securities dealers and others all made millions from fees and millions more again by selling insider stock. In 1994, even conservative counties and others took to the high road of derivatives gambling aided and abetted by the giant banks and brokerage houses of the nation.
For today's communications companies back then it read "pictures." For computers it read "autos." For Wal-Mart it read Woolworth or Montgomery Ward, and so on and so on and so on. Where we have triple witching option expirations and "flex" plays, they had old fashioned manipulation without the high sounding words. Financial fun and games abounded everywhere, both then and now. Eventually back then, the FED did start raising interest rates in response to the New York banks borrowing from them "cheap" to lend "dear" in the call market. In 1994 the FED has just started tightening in response to inflation worries. By mid 1929 even the extra volatility, though unsettling, had become familiar. Everyone, however, knew what to do. "Buy more" or "sit it out and stay in for the long run." "You can't go wrong investing in stocks." As Hornblower and Weeks told its punters in September 1929, "We should not be stampeded into selling stocks because of ...." Even the Wall Street Journal espoused "... the main body of stocks yesterday continued to display the characteristics of a major advance temporarily halted for technical readjustment."
When the crash of '29 came it was a double hit. The real economy had slowed a few months earlier, although not in a dramatic way. Probably, it was just the regular "business cycle" slowing down possibly in response to the diversion of funds into speculation. Steel production declined slightly, the Industrial Production Index slipped from 126 to 117. Then out of the blue came Saturday October 19th. In the second heaviest Saturday's trading session 3.48 million shares traded and the market closed lower. Monday extended the losses as over 6 million shares traded. Pundits then predicted the worst was over and that " the decline had gone too far."
After a two day respite, next came Thursday October 24th 1929. Nearly 13 million shares traded. Often stocks had no buyers at all. Margin call selling and panic swept the floor. The big banks met to try to stem the panic, a little sanity returned. Prices stabilized somewhat. Finally came Monday the 28th and "black" Tuesday, October 29th. By the end of the 29th the previously unthinkable figure of 16.4 million shares had traded and the gains of the previous 12 months were history. Declines in the trusts were spectacular. Goldman Sachs Trading Corporation which was loaded on the public at 104 in December 1928, fell 25 points on October 29th, to 35. Blue Ridge Corporation, went from 24 in September to 3 on October 29th. Others trusts had no buyers.
It will come as no comfort to know that on October 19th, 1987 the greatest meltdown in the history of all stock markets, the extent of the crash was enlarged in part due to earlier redemption's at mutual fund companies. "...the Fidelity group of mutual funds of Boston was a heavy seller in the London market before the New York Stock Exchange opened on the nineteenth. ....But Fidelity was not taking positions on its own so much as responding to a loss of confidence in the stock market on the part of the many holders of its mutual funds who had been redeeming their shares the previous week. When the group of funds ran out of cash, they had to sell stocks for cash,..." In 1994 although new equity mutual fund sales rose by 23.5% , equity fund redemption's soared 55%. Now with over $2 trillion in mutual funds, double the amount of cash invested back in 1987, when a new sell off comes, many investors will find out for the first time that mutual funds are not the equivalent of banks.
"The first rule is not to lose. The second rule is not to forget the first."63
It will come as no comfort to know that on October 19th, 1987 the greatest meltdown in the history of all stock markets, the extent of the crash was enlarged in part due to earlier redemption's at mutual fund companies. "...the Fidelity group of mutual funds of Boston was a heavy seller in the London market before the New York Stock Exchange opened on the nineteenth. ....But Fidelity was not taking positions on its own so much as responding to a loss of confidence in the stock market on the part of the many holders of its mutual funds who had been redeeming their shares the previous week. When the group of funds ran out of cash, they had to sell stocks for cash,..." In 1994 although new equity mutual fund sales rose by 23.5% , equity fund redemption's soared 55%. Now with over $2 trillion in mutual funds, double the amount of cash invested back in 1987, when a new sell off comes, many investors will find out for the first time that mutual funds are not the equivalent of banks.
"The first rule is not to lose. The second rule is not to forget the first."63
It is a well hidden fact of the mutual fund industry that, as the Wall Street Journal so succinctly put it, "U.S. mutual funds are allowed to prohibit withdrawals at times of market catastrophe, if they receive an exemption order from the Securities and Exchange Commission." If you're not out in time, you're in. In an odd twist of fate the old advice "when the pitchman calls, hang up" has been turned by the "eepee standard" into "when the client calls, hang up." After the crash of '29, the Dow declined from its closing high on September 3rd of 381.17 to a closing low of 59.93 on July 8, 1932. Staying in was very costly. But then again, who's let out may ultimately turn on who you know at the fund, rather than your speed in reacting. A glance at chart five adds to the misgiving. Upward momentum seems to be dying at these lofty levels, while the indicator looks worryingly similar to the past of 1987.
Luckily, history never repeats itself exactly, so the poor souls who got blown out in '87 were different to the ones blown away in 1929. I have every confidence, therefore, that the next crash will wreck an entirely different group of plaintiffs. Given the enormous jump in legal graduates through the 70's and 80's, and the new class of vultures studying hard via the media and the Simpson trial, the tort bar should remain prosperous well into the next century.
"If they try to rush me, I always say, I've only got one other speed- and it's slower."64
DOLLAR - Noun. An extinct unit of exchange formerly used by North Americans during the years of plenty.
Replaced by the CanPeDo after NAFTA went to work.
Luckily, history never repeats itself exactly, so the poor souls who got blown out in '87 were different to the ones blown away in 1929. I have every confidence, therefore, that the next crash will wreck an entirely different group of plaintiffs. Given the enormous jump in legal graduates through the 70's and 80's, and the new class of vultures studying hard via the media and the Simpson trial, the tort bar should remain prosperous well into the next century.
"If they try to rush me, I always say, I've only got one other speed- and it's slower."64
DOLLAR - Noun. An extinct unit of exchange formerly used by North Americans during the years of plenty.
Replaced by the CanPeDo after NAFTA went to work.
"When people look back on this period in five or ten years from now, they'll say that this was something approaching a turning point for the American economy."65
MEXICAN PARADISE - A WARNING
MEXICAN PARADISE - A WARNING
"I wasn't worth two cents two years ago, and now I owe $2 million dollars."66
"Wall Street lays an egg."67
At the end of 1994, Mexico, the "Taco Belle" of Wall Street since the North American Free Trade Area was rammed through for the benefit of the multi-national corporations, was financially unravelling. After devaluing its Peso by about 40% in less than three weeks, the Mexican stock market plunged by nearly 15%, with most of the drop coming in just two days. Quickly the realization swept Wall Street that most of the bets placed down there were not coming back for several years, if at all. Mutual fund managers panicked and the race for cash began. Though not directly comparable to the situation in the United States where trillions are at risk not billions, there are some broad parallels that present an early warning about what will happen in the U.S. when the mutual fund boys turn seller. First a little NAFTA history.
Though Mexico is governed by a mildly benevolent oligarchy rather than a true dictatorship, one party rule is a fact of daily life down there and a handful of families effectively control most political and economic decisions. Nevertheless Mexico was allowed to join the U.S. and Canada in the North American free trade area largely because they were viewed by mega business as a source of cheap labor and, if their prosperity increased slightly, Mexico could be a place where American and Canadian mall builders and retailers could expand, now that the easy pickings were gone further north. To gain admittance to NAFTA, Mexico opened up some of its economy to outside economic forces and pledged to continue doing so in accordance with the NAFTA treaty. Mexico also promised to continue with some democratic reforms. They were then "sold" to the American people as a "New" Mexico rather like Mr. Clinton was sold to American voters as a "New" Democrat. In practise little really changed except that the "hype" allowed for a lot of Wall Street mutual fund expansion into Mexico (for up front fees) and for a few "top tier" Mexican companies to tap into Wall Street for financing (for big Wall Street fees.)
As might be expected in a nation where the state oil monopoly can blow up with impunity, half of the poorer section of Guadalajara by the simple expedient of discharging flammable wastes into Guadalajara's sewers, only the most blatant of corruption was altered or window dressed. To finance this economic change yet lessen the economic pain, Mexico borrowed heavily in the international financial centers, led by New York. There for heavy fees, slick spin miesters were willing to spew hype to an unsuspecting public about the new opportunities available south of the border for relatively little risk. Mexico was to become the next economic miracle, just like Japan and Germany before them. Most Americans ignored the hype, but the "professional money managers" the nouveau riche of finance, flush with the spoils of other peoples money, rushed out to purchase Mexican stocks, bonds, T. Bills and anything else with "Mex" stamped on it. To help pass the NAFTA legislation mired in the congress and to defeat the "little General" Ross Perot, who was leading the charge against it, Mexico tacitly promised Washington not to devalue the peso, thereby stealing a competitive economic edge against American workers and thereby stealing their jobs, at least, it promised not to devalue for a while.
By late 1994 this mountain of Taco debt became unserviceable, much like the mountain of U.S. debt will become early in the next century. Though Mexico's debt was tiny in comparison to the U.S. debt, it was massive in relation to Mexico.
Early in 1994 two things happened that put the skids under the Mexican paradise. The first was that a group of Mexico's poorest in Chiapas, one of Mexico's most backward and feudally run states, became confused by the hype about a "New democratic and fairer Mexico" emanating from Mexico City.
Incredibly, they actually bought all the spin and thought it was about to happen in their state of Chiapas.
Once they discovered they were misled, they were mad as hell and "rebelled." In one of the meekest, most polite and civilized, armed revolutions ever occurring in the New World, Mexican confidence was shaken to its core with the realization that its army, last heard from massacring students at the Olympics in 1968, might actually have to assemble and do a repeat. The second event that pulled the plug on Mexico was that the FED began raising interest rates back in the U.S.A. This meant that chasing extra yield down Mexico way, became less important to U.S. money managers and forced Mexico to increase its own interest rates to lure in foreign cash. By the end of 1994 Mexico was overwhelmed by the task.
In 1994 a new government of Harvard educated economists took over in what passes for an election in Mexico, they gave up the ship and devalued. Overnight the emperor was seen without clothes and he was ugly. The race for cash commenced though at first the laggards believed the spin coming from politicians in Mexico and "financial experts" in New York. "The crisis will quickly pass." they said. "Don't sell, stay in and get ready to buy more." Real pro's did just the opposite. On December 31st, 1994 the giant Templeton Fixed Income Group announced that it had "sold its Mexican peso positions in its fixed income funds immediately after the [Mexican] government devalued the currency [by 13%] and prior to its flotation." The Mexican peso "floated" down 40% and the rest is history.
In contrast three small Lehman Bros. offshore mutual funds took their own advice and decided to stay in. Unperturbed by the Mexican meltdown, they instead halted withdrawals by their investors. "Once you're in you're in, we pro's know best."
By Tuesday January 10th, 1995 the Mexican stock market was in free fall and J.P. Morgan bank was estimating that Mexico didn't have enough dollars to pay off its $28 billion of "tesobonos" (Mexican treasury bonds paid out in U.S. dollars.) Mexico desperately increased interest rates to 50% in an effort to draw in foreign cash to stabilize the Peso.
The FED and the U.S. Treasury were quickly inveigled into monetizing and putting a rescue package together. A special $18 billion line of credit ($9 billion of it from the U.S.) was flushed deep into Mexico and disappeared. There the authorities began buying Pesos to prop up the peso, and buying shares in the Mexican stock market?? (to prop up their personal holdings?) The FED also joined in the fun buying up over 550 million dollars of almost worthless wampum.
Ben Franklin just couldn't seem to grasp it. It just didn't make sense. "Tell me again" he asked St. Peter.
"It's really quite simple." St Peter replied. "Mexico got into a lot of debt so as to modernize the country and look just like the USA." "They borrowed in the U.S. credit markets, spent half on the economy and the rest in Miami and L.A." "Then" he said sadly "things turned a little sour and they couldn't pay the interest on the debt. So they devalued the peso and let it sink. When the peso collapsed, their lenders got panicked and the stock market collapsed. Then the lenders really panicked and persuaded the central bankers to give Mexico $18 billion more to bail out the mess." "Pouring good money after bad, uh.
Did that work?" Ben asked. "Not exactly," St. Peter said. "You see they used some of that money to buy up some pesos and the rest to buy stocks they that thought were too cheap, you know, the ones that they already owned or had pledged."
"Ah," said Ben, "then everyone else sold their stock to the government and the peso recovered, right Peter."
"Well no," said St. Peter, "when they got paid for the stock they were paid off in Pesos then they had to sell the Pesos to buy dollars so's to get out of useless pesos."
Ben looked puzzled. "But the people who lent them the money, the taxpayers in the U.S. and elsewhere, weren't they mad that they didn't use it as promised? he asked.
"Well they might have been if they'd known. St. Peter went on. "But the politicians couldn't tell them "we have no money for schools or the elderly or the sick," and then give billions to Mexico just to bailout rich speculators, so they kept it off budget and only added the interest to the national debt. It was really very clever."
"But then the U.S. taxpayer is subsidising rich speculators in Mexico, while most taxpayers can barely make ends meet at home." Ben said. "Yes I know, it's the eepee standard" sighed St. Peter, and he picked up his harp and began weeping.
Back in the U.S. stock market, when the mutual fund boys, for whatever reason turn seller, for most investors it's too late to get out.
Back in the U.S. stock market, when the mutual fund boys, for whatever reason turn seller, for most investors it's too late to get out.
"You can't cheat an honest man."68
THE PASS THE MEXICAN HAT DANCE.
"It is all one to me if a man comes from Sing Sing or Harvard."69
Under the bureaucratic eepee standard, the power of the state to tax at will was transformed into the Sheriff of Nottingham's revenge. "We take from the poor and give to the rich, but it's for their own good. They don't know what to do with their money They'd only misuse it and waste it." When American voters went to the polls last November and threw out the Democrats after 40 years of misrule, it might have been surmised that they intended to get change. Sadly in less than three months, we are treated to the example of politics as usual at least where it comes to the economy. As the Mexican meltdown continued, it was quickly apparent that $18 billion of taxpayers money was not sufficient to support both the Peso and the Mexican elite in the stock market. While the new congress began openly debating how to evict the welfare recipients and thus save $22 billion for the nation, in secret, the President, Chief Greenspan, and the Secretary of the Treasury were deciding to monetize Mexico to the tune of $40 billion of U.S. taxpayers money. The full faith, credit and taxation of the United States were now extended to Mexican debt. After a couple of false starts, eventually $50 billion of unsound money was invested in unsound Mexico.
Lacking any debate, discussion or public airing over the appropriateness or otherwise of this monetization, the body politic was quickly mobilized through private sessions with the President to "get out front" of this issue and aver "that there was no alternative" or "that it was necessary to stem illegal immigration" or for some other such noble reason. Thanks to the eepee standard, American government policy was to become "ship 'em to orphanages and ship money to Mexico." The fact is, that this is the second Mexican bailout and the third Mexican reorganization in 13 years. Totally ignored in this new policy is the 1982 bailout of what was at the time described as "the Mexican Debt crises" and the 1989 Mexican debt write off and re-issuance of that debt via the "Brady bonds" named for former Treasury Secretary Nicholas Brady who's credited with inventing them. These new Mexican bonds were backed by the purchase of U.S. Treasury, 30 year zero-coupon bonds, leaving Mexico responsible for the dollar denominated interest. In both of the earlier bailouts, the Mexican government promised to "reform" and "modernize" and "live within its means," the bailouts were then sold to the American public as heralding prosperity in Mexico and a means to ending illegal emigration. They didn't and emigration didn't. The write offs bailed out the speculators and other elite of Mexico, who were predictably loathe to share their unearned spoils with ordinary Mexicans. Normal service resumed down there, immediately.
This time, however, we are told it will be different. Mexico will "modernize, live within its means, and reform." From 1987 onwards, the Mexican economy has been largely in the hands of Harvard educated reformist economists, using the U.S. as their role model. The eepee standard and the dismal science struck again. Since the latest $50 billion when sent and the earlier $18 billion bet on Mexico do nothing to reform the economy, but merely act as palliatives to the current distress, American taxpayers are unwittingly delaying the day of true reform in Mexico. "Give the junkie another fix, it's easier than fixing the problem." As we shall see in the next section however, all this monetization of debt and junkie fixes is creating real unforeseen ecological impacts worldwide. As for Mexico - bring on the clowns.
Lacking any debate, discussion or public airing over the appropriateness or otherwise of this monetization, the body politic was quickly mobilized through private sessions with the President to "get out front" of this issue and aver "that there was no alternative" or "that it was necessary to stem illegal immigration" or for some other such noble reason. Thanks to the eepee standard, American government policy was to become "ship 'em to orphanages and ship money to Mexico." The fact is, that this is the second Mexican bailout and the third Mexican reorganization in 13 years. Totally ignored in this new policy is the 1982 bailout of what was at the time described as "the Mexican Debt crises" and the 1989 Mexican debt write off and re-issuance of that debt via the "Brady bonds" named for former Treasury Secretary Nicholas Brady who's credited with inventing them. These new Mexican bonds were backed by the purchase of U.S. Treasury, 30 year zero-coupon bonds, leaving Mexico responsible for the dollar denominated interest. In both of the earlier bailouts, the Mexican government promised to "reform" and "modernize" and "live within its means," the bailouts were then sold to the American public as heralding prosperity in Mexico and a means to ending illegal emigration. They didn't and emigration didn't. The write offs bailed out the speculators and other elite of Mexico, who were predictably loathe to share their unearned spoils with ordinary Mexicans. Normal service resumed down there, immediately.
This time, however, we are told it will be different. Mexico will "modernize, live within its means, and reform." From 1987 onwards, the Mexican economy has been largely in the hands of Harvard educated reformist economists, using the U.S. as their role model. The eepee standard and the dismal science struck again. Since the latest $50 billion when sent and the earlier $18 billion bet on Mexico do nothing to reform the economy, but merely act as palliatives to the current distress, American taxpayers are unwittingly delaying the day of true reform in Mexico. "Give the junkie another fix, it's easier than fixing the problem." As we shall see in the next section however, all this monetization of debt and junkie fixes is creating real unforeseen ecological impacts worldwide. As for Mexico - bring on the clowns.
"I don't even know what street Canada is on."70
Back in NAFTA, Canada, that other NAFTA bulwark, is also having economic problems compounded by complications like its potential for never quite splitting into two separate countries. These problems have lowered the Canadian dollar by about 25% to a nine year low against the U.S. dollar. With both Mexico and Canada devaluing against the Dollar, NAFTA market share will quickly transfer to one or other of them over time. In response, the FED may be tempted to hold U.S. interest rates unchanged for a while rather than continue raising them, so as not to exacerbate this shift. In a U.S. economy running near full employment, and operating near full capacity, this is like throwing gasoline on a fire. While the stock market may rocket up to a new 21 year high (adding to the parallels with 1929,) it is likely to be very short lived.
Once the realization takes hold that the inflation fight is over once and for all, and U.S. policy is now beholden to Mexican politics, U.S. long term interest rates will truly become "market driven." If the U.S. policy is now to merge into Mexico, then the dollar at the end must equal one Peso. Under that system we are headed for a new South American style dollar. (See appendix three "Rumplegreenspan.)
"Power tends to corrupt and absolute power corrupts absolutely."71
THE RESULT - TRASH MONEY
"If all the rich men in the world divided up their money amongst themselves, there wouldn't be enough to go around."72
THE RESULT - TRASH MONEY
"If all the rich men in the world divided up their money amongst themselves, there wouldn't be enough to go around."72
"A disordered currency is one of the greatest political evils."73
The burgeoning and swollen eepee money supply has created some truly amazing, unintended consequences. While the "everyone can borrow from the future to consume now" approach has replaced the historical model of hard work, thrift and prudence, this is so because in the less than 25 years of the electro-paper standard, the politicians and the FED have never ceased monetizing to put off the day of reckoning. Socialism is alive and well but only available to the rich. This ability to put off till tomorrow the consequences of today may finally, however, be coming to a undelayable "natural" end. The throwaway eepee society has given us "trash" money at one end and a poverty trap at the other. In 1994, a Senatorial candidate in California spent $27 million of his own money on an unsuccessful effort to buy office. At his end it's trash money. In 1995 the minimum wage pays just $4.25 an hour. At this end it's life or death money. In 1995, the San Diego football team unable to practise on their premises due to heavy rains, hired the carpeted grand ballroom of a major hotel, - trash money. In 1995, the idea is floated of balancing the budget by cutting off welfare, rebuilding orphanages and raising the retirement age maybe to 80, - life and death money. In 1994 a USAF General on his way to a new appointment, rather than travel with mere mortals on a regular plane, flew at prohibitive cost, from Naples, Italy to Colorado, U.S.A in specially summoned military plane caring only the crew, an assistant, a family pet, and himself. Nero would have been proud - trash money.
Thanks to the electro-paper standard, paper games teem everywhere. If the U.S. can do it - so can we, say the other nations. When all goes wrong, we monetize, reissue the currency, work out special refinancing deals with those socialist outfits the World Bank, the International Monetary Fund and the Bank for International Settlements. Just add the extra interest onto the U.S. national debt. The taxpayer'll pay it. Create the paper prosperity now, boost consumption, get elected, loot and self aggrandize; then leave the problems for another. If all else fails print more.
All this largesse creates a false demand. This instant consumption has taken a heavy toll on the world ecology. From the oysters of Maryland's Chesapeake Bay to the Cod fish of the Georges Bank in the Atlantic, to the icy waters off Alaska's Pribiloff Islands and the King Crabs, to the waters of the Caspian sea and Sturgeon, trash money has fuelled overfishing and economic exploitation. From the Ivory Coast in Africa, though Brazil in South America, to the jungles of Sumatra, Indonesia and Borneo, Malaysia trash money has created deforestation. From the beaches of the Gulf of Mexico, to the beaches of South Africa, to the rocky ledges and islets of Prince Georges sound Alaska, trash money has fostered the get rich quick exploitation and degradation of the environment. Whether its speculation in vacation homes on coastal barrier islands to the over malling of Florida in the pursuit of instant riches, trash money greases it all.
With the abandonment of money as a store of value, money became only a casino gambling chip. Having destroyed more natural resources between 1945 - 1995 than in all previous centuries put together, nature may simply be exhausted. The paper game may yet have a natural end. "If its value won't hold up and if the system's going broke anyway when the baby boom generation retires, if the Federal Reserve is going to monetize all the world and his brother right down to the last American taxpayer, and if the "eepee game" could end anyway in an unplanned stock exchange meltdown, why be responsible. No-one else is. It's only trash money. Besides, the FED's supermodel's got it all covered, hasn't it ?" Boss Tweed asked "But tell me." he queried. "How did the Roman empire end anyway ?" "Ask Rumplegreenspan," I said I was getting a little ill.
Thanks to the electro-paper standard, paper games teem everywhere. If the U.S. can do it - so can we, say the other nations. When all goes wrong, we monetize, reissue the currency, work out special refinancing deals with those socialist outfits the World Bank, the International Monetary Fund and the Bank for International Settlements. Just add the extra interest onto the U.S. national debt. The taxpayer'll pay it. Create the paper prosperity now, boost consumption, get elected, loot and self aggrandize; then leave the problems for another. If all else fails print more.
All this largesse creates a false demand. This instant consumption has taken a heavy toll on the world ecology. From the oysters of Maryland's Chesapeake Bay to the Cod fish of the Georges Bank in the Atlantic, to the icy waters off Alaska's Pribiloff Islands and the King Crabs, to the waters of the Caspian sea and Sturgeon, trash money has fuelled overfishing and economic exploitation. From the Ivory Coast in Africa, though Brazil in South America, to the jungles of Sumatra, Indonesia and Borneo, Malaysia trash money has created deforestation. From the beaches of the Gulf of Mexico, to the beaches of South Africa, to the rocky ledges and islets of Prince Georges sound Alaska, trash money has fostered the get rich quick exploitation and degradation of the environment. Whether its speculation in vacation homes on coastal barrier islands to the over malling of Florida in the pursuit of instant riches, trash money greases it all.
With the abandonment of money as a store of value, money became only a casino gambling chip. Having destroyed more natural resources between 1945 - 1995 than in all previous centuries put together, nature may simply be exhausted. The paper game may yet have a natural end. "If its value won't hold up and if the system's going broke anyway when the baby boom generation retires, if the Federal Reserve is going to monetize all the world and his brother right down to the last American taxpayer, and if the "eepee game" could end anyway in an unplanned stock exchange meltdown, why be responsible. No-one else is. It's only trash money. Besides, the FED's supermodel's got it all covered, hasn't it ?" Boss Tweed asked "But tell me." he queried. "How did the Roman empire end anyway ?" "Ask Rumplegreenspan," I said I was getting a little ill.
"You can only predict things after they've happened."74
THE NIGHTMARE - 2012
THE NIGHTMARE - 2012
"Under capitalism man exploits man; under socialism the reverse is true."75
GUANGZHOU, GUADONG, CHINA - It had been six hours now, and Walter Winston was chain-smoking and on his third valium. Technically insolvent since Monday, as Chairman of the United Reformed, Citi-Chase Bank of the Americas, he was the lead banker in the desperate government-industry delegation to extract funds from the global mega banks of the wider Pacific. Outside, in Guadong's immense, newly completed, Square of the Capitalists, overshadowed by the outsized representation of the almost mythical Adam Smith, Geraldo Mellon, Secretary of the United States Treasury, was giving his third impromptu television interview to Asian giga station, Trans-Han 2. At $3 million a minute, he at least would have something to show for his visit. After all, once back in Washington, he would be fired. Behind the ornate Rosewood and lacquer doors of central meeting room in the First Guadong Peoples Bank, the world's creditor bankers were debating the fate of the U.S., and with it effectively that of all other debtor nations.
Chairing the meeting was the Deputy Director of the German Bundesbank, an honor bestowed for purely sentimental reasons and because as the smallest bank attending and the only one from the west, it was felt by the others they would be more persuasive in selling the outcome. In attendance are, The Central Bank of China Guadong, the central banks of China Beijing, China Taiwan, China Hong Kong and Singapore, Indonesia, Japan, United Korea, Malaysia, Iran and The New German Economic Union. Also in attendance is a representative from The Gulf Co-operation Council, although for the moment, due to the profligacy of the former Saudi Arabia, they are technically debtors. At issue is whether and how to stop the imminent collapse of the United States of America and its separation into two new nations. For the Christmas Eve of 2012, it is a decidedly un-merry occasion.
In the industrialized west for the most part, banks, nations and companies lie in financial ruin; in the rest of the world The Great Asiatic Co-Prosperity League is alive and flourishing. Containing over 4.7 billion of the world's 8 billion population, having three out of every four savers in the world, with almost no external debt, strong individual currencies and little bureaucracy to stifle business, the inter League trade in goods and services has never been stronger. As exports to America declined in importance relative to exports between each other, the old settlement system based on "fiat" dollars gave way to the Regional Settlement System based on metal. When the American and Western banks together with their politicians created "paper" games whereby a few got enormously rich by ever crazier and crazier derivatives gambling, the League built factories and infrastructure, creating jobs and wealth. While the value of the dollar moved inexorably lower, driven by market reaction to illogical policies in Washington, most Americans were unwittingly descending towards anarchy and destitution.
Chairing the meeting was the Deputy Director of the German Bundesbank, an honor bestowed for purely sentimental reasons and because as the smallest bank attending and the only one from the west, it was felt by the others they would be more persuasive in selling the outcome. In attendance are, The Central Bank of China Guadong, the central banks of China Beijing, China Taiwan, China Hong Kong and Singapore, Indonesia, Japan, United Korea, Malaysia, Iran and The New German Economic Union. Also in attendance is a representative from The Gulf Co-operation Council, although for the moment, due to the profligacy of the former Saudi Arabia, they are technically debtors. At issue is whether and how to stop the imminent collapse of the United States of America and its separation into two new nations. For the Christmas Eve of 2012, it is a decidedly un-merry occasion.
In the industrialized west for the most part, banks, nations and companies lie in financial ruin; in the rest of the world The Great Asiatic Co-Prosperity League is alive and flourishing. Containing over 4.7 billion of the world's 8 billion population, having three out of every four savers in the world, with almost no external debt, strong individual currencies and little bureaucracy to stifle business, the inter League trade in goods and services has never been stronger. As exports to America declined in importance relative to exports between each other, the old settlement system based on "fiat" dollars gave way to the Regional Settlement System based on metal. When the American and Western banks together with their politicians created "paper" games whereby a few got enormously rich by ever crazier and crazier derivatives gambling, the League built factories and infrastructure, creating jobs and wealth. While the value of the dollar moved inexorably lower, driven by market reaction to illogical policies in Washington, most Americans were unwittingly descending towards anarchy and destitution.
Back in Washington, the twin follies of switching Treasury borrowing from long term debt to short term in 1993 coupled with the repeat of "voodoo economics" in 1995-98, are widely recognized as the greased pole down which the U.S. slid into the financial abyss. Now, in 2012, though well over two thirds of the American population is no longer covered, the U.S. is in the second year in which Social Security, Medicare and Debt Interest is consuming over 100% of Federal Revenues. With interest rates running at over 30% per month when loans can be obtained, economic activity is at a near standstill and federal revenues are in a tailspin. The last straw arrived four months earlier when the Congress reluctantly decided to back the dollar with gold. Within weeks it was discovered that much of the "Government" gold stock, the peoples gold, had been stolen over the years. Some to finance the military "black budget," much more for the more mundane reasons of political knavery, and to support the domestic consumption which bought re-election. Now with destitution rampant, the army occupies the center of most of the great cities in an attempt to enforce some semblance of order. Even then, the military have not been paid in months and corruption and indiscipline are pervasive. Given that shakedowns and military "free-lancing" are rife, it is a relief that the country has no real outside enemies.
Politicians of all stripes are widely reviled and despised, many are shot at when they appear in public, the army now holds them in "protective custody" in the newly created Central Congress Military Zone.
Once the creditors terms are sealed, all that remains after the ratification is for the Acting President to grant the political pardons and resign in favor of the twin Governors General of the Eastern and Western Regions. They and their respective Emergency Councils are to rule for 10 years. Vastly different in character from each other, it is anticipated that the western region will adopt Spanish as its official language, and issue its own currency and stamps.
"Foreign Aid: taxing poor people in rich countries for the benefit of rich people in poor countries."76
EPILOG - HOW TO SURVIVE THE COMING CRASH.
"Blessed are the young, for they shall inherit the national debt."77
This section is not a solution to the twin problems of speculative excess and unsound money, merely a prudent way to get through the next few critical years of unsound money. Essentially the problems fall into two distinct categories. Short term problems associated with a speculative collapse in the stock market, and systemic long term problems associated with the unsound money and the retirement of the baby boom generation. While the former may hasten and exacerbate the latter, the end is much the same in both cases. A U.S.S.R. style economic collapse and the impoverishment of many. At the height of the Great Depression, 14 million people were unemployed out of a population of about 125 million. If the same were to happen today, we would have 28.5 million unemployed out of a population of about 255 million. The difference, however, is that back then the government and the people owed very little debt and the U.S. was a creditor nation, while now we owe $4.8 trillion and are a debtor nation.
This section is not a solution to the twin problems of speculative excess and unsound money, merely a prudent way to get through the next few critical years of unsound money. Essentially the problems fall into two distinct categories. Short term problems associated with a speculative collapse in the stock market, and systemic long term problems associated with the unsound money and the retirement of the baby boom generation. While the former may hasten and exacerbate the latter, the end is much the same in both cases. A U.S.S.R. style economic collapse and the impoverishment of many. At the height of the Great Depression, 14 million people were unemployed out of a population of about 125 million. If the same were to happen today, we would have 28.5 million unemployed out of a population of about 255 million. The difference, however, is that back then the government and the people owed very little debt and the U.S. was a creditor nation, while now we owe $4.8 trillion and are a debtor nation.
Additionally, consumer instalment debt now stands at over $904 billion. While the Republicans are busy rearranging the deck chairs on the Titanic, the Democrats are still playing football with the ice cubes.
The first step in the individual survival plan is to get out of mutual funds immediately before they turn seller. By selling out now, near the top of the twenty year bull market, the prudent at least will be getting top dollar for their investments. Those investors daring to linger to the very end, should still substantially reduce their holdings by 80%- 90%, leaving a balance with domestic growth or asset funds. Individual holders of stocks should liquidate in like proportion, and hold only stock of vital industries or industries with underlying real assets e.g. oil, gold, food production. Even here, care must be taken that these remaining companies are not leveraged, derivative gamblers, or else are chastened ones like Proctor and Gamble. Despite the size of the probable stock market drop, re entering should be delayed until real economic activity picks up. Remember though the crash occurred in October 1929, the low was not reached until July 1932.
Once out of the short term risk to the system, focus on the long term risk and invest accordingly. I favor the four bastions approach to investing at least until after the 1996 Presidential election and the enunciation of the economic policies to be followed thereafter. The very bankers who demonetized gold through the Jamaica Agreement in 1978, will eventually remonetize it some time in the not too distant future. Buy physical gold and quality gold mining stocks that have large verifiable reserves. Think in terms of 25% of one's assets allocated into this area. Buy short term U.S. Treasuries of 6 months to two years duration. Get a part of the income transfer running in your direction. Do not own them in street name. Roll them over for the same maturity and do not get pressured into extending the maturity no matter what the so called experts say. Again, think in terms of about 25% of one's assets in this area. Next reduce one's dollar exposure by purchasing quality mid term bonds of the stronger economic nations. The 5 year German bund is a good example, but Swiss bonds should also be bought. Japanese, French, Dutch, British and Australian bonds in mix would round out this section. Stay clear of other Asian debt and Asian investment since these countries and companies are still young and untested in crises'. Again about 25% or so should be allocated here. Hold these bonds through a reliable Swiss bank. Finally, the remaining 25% should be held in Swiss Francs in a Swiss bank account as insurance against confiscation of other assets by a populist spendthrift government back home.
The first step in the individual survival plan is to get out of mutual funds immediately before they turn seller. By selling out now, near the top of the twenty year bull market, the prudent at least will be getting top dollar for their investments. Those investors daring to linger to the very end, should still substantially reduce their holdings by 80%- 90%, leaving a balance with domestic growth or asset funds. Individual holders of stocks should liquidate in like proportion, and hold only stock of vital industries or industries with underlying real assets e.g. oil, gold, food production. Even here, care must be taken that these remaining companies are not leveraged, derivative gamblers, or else are chastened ones like Proctor and Gamble. Despite the size of the probable stock market drop, re entering should be delayed until real economic activity picks up. Remember though the crash occurred in October 1929, the low was not reached until July 1932.
Once out of the short term risk to the system, focus on the long term risk and invest accordingly. I favor the four bastions approach to investing at least until after the 1996 Presidential election and the enunciation of the economic policies to be followed thereafter. The very bankers who demonetized gold through the Jamaica Agreement in 1978, will eventually remonetize it some time in the not too distant future. Buy physical gold and quality gold mining stocks that have large verifiable reserves. Think in terms of 25% of one's assets allocated into this area. Buy short term U.S. Treasuries of 6 months to two years duration. Get a part of the income transfer running in your direction. Do not own them in street name. Roll them over for the same maturity and do not get pressured into extending the maturity no matter what the so called experts say. Again, think in terms of about 25% of one's assets in this area. Next reduce one's dollar exposure by purchasing quality mid term bonds of the stronger economic nations. The 5 year German bund is a good example, but Swiss bonds should also be bought. Japanese, French, Dutch, British and Australian bonds in mix would round out this section. Stay clear of other Asian debt and Asian investment since these countries and companies are still young and untested in crises'. Again about 25% or so should be allocated here. Hold these bonds through a reliable Swiss bank. Finally, the remaining 25% should be held in Swiss Francs in a Swiss bank account as insurance against confiscation of other assets by a populist spendthrift government back home.
Reinvestment should always be within sector, although adjustments with the bond mixes is desirable over time. Some transfer into additional purchases of physical gold will also have to be made. If one has left 10% still riding in stocks or mutual funds, dividends should not be reinvested. Eventually, when a final fix is made to the system, or when the dust has settled following a speculative collapse, an investment reappraisal will be needed, but we are far from that day now. For the fortunate few who already exceed the 25% limit on short term U.S. debt, they should reduce exposure by selling and repositioning into the other sectors.
From this basic defensive structure, the next few years will provide a window from which to watch whether a real fix to the system will be made or if we won't just lurch down the road to collapse. Transition from old guard to new will occur in China, as will the transfer of Hong Kong. How the Pacific Rim tigers weather the storm will determine whether they truly are suitable for investment or merely accessories in hype. In the U.S., the 1996 election may well be critical in determining the outcome of systemic change. For the immediate future, however, caution is needed. Hopefully, the return to sound money will be orderly, planned and relatively painless, but one way or another, sound money will eventually return. The gambling economy will die, like all speculative manias before it.
"Too bad ninety percent of the politicians give the other ten percent a bad reputation."78
APPENDIX 1 - DERIVATIVES
"There is no expedient to which a man will not go to avoid the real labor of thinking."79
"There's a sucker born every minute."80
One of the most frequently asked questions today, in light of the publicity regarding the massive derivatives losses, is "What is a derivative ?" The simple answer is that a derivative is a financial instrument that is "derived" (i.e. downstream from the source) from another instrument or contract.
Unfortunately this simple definition is too broad and sweeping in scope, for it would encompass financial instruments such as Treasury Bond futures and commercial instruments such as Live Cattle futures that are not generally thought of as derivatives. A better definition is that derivatives are a range of customized financial or commercial cash settled contracts with a value linked to and dependent on, an underlying market or instrument, or range of instruments. Customized, means individually tailored to fit a particular circumstance, be it length of time, degree of risk, etc. between the buyer and the seller. Cash settled, means that neither of the parties delivers anything to the other except cash in completion of the contract.
Derivatives were originally intended to reduce or "hedge" risk by one of the parties to the contract, though they are also be entered into for purely speculative profit by the misnamed hedge (gambling) funds. A simple example might be a small regional bank that purchases from a money center bank, a 18 month derivative contract tied to a change in the 5 year Treasury Note yield. It might do this in an effort to hedge risk associated from an increase in interest rates. Unfortunately, most of the problems that have surfaced so far with derivatives losses seem closer to betting contracts, rather than hedging contracts. In certain jurisdictions in the world "gambling" or "gaming" contracts are legal and enforceable in law. Thus if you contract with your banker to bet $1 million on the color of the next bus to come around the corner, and you lose you will have to pay up no matter how unwise the "bet" was.
In the United States gambling or gaming contracts were usually illegal and unenforceable, and there were laws against "off exchange futures contracts." For the most part the issuers (professional gamblers) of derivatives contracts needed to get the U.S. government to define derivatives in such a way as to make them legitimate and then to exempt them from rules requiring the them to be "exchange traded."
In the United States gambling or gaming contracts were usually illegal and unenforceable, and there were laws against "off exchange futures contracts." For the most part the issuers (professional gamblers) of derivatives contracts needed to get the U.S. government to define derivatives in such a way as to make them legitimate and then to exempt them from rules requiring the them to be "exchange traded."
Happily for them the government agency largely responsible with regulating this area was the Commodity Futures Trading Commission, the regulatory equivalent of the "post office," but lacking the efficiency and public esteem. As a result most derivatives contracts are now traded in secret between matching degenerate gamblers cloaked in white collar respectability.
Who are these white collar gamblers ? Amazingly they are the money center (bookie) banks on the issuing side, led by Bankers Trust, Citicorp, J.P. Morgan & Co., Bank of America, Chase Manhattan, Chemical Bank and others (all Federal Reserve protected) assisted by the bookie brokers, Merrill Lynch & Co., the nations largest brokerage firm, Morgan Stanley Group, Salomon Inc., Goldman Sachs and others (all virtually Federal Reserve protected.) If they get the color of the bus wrong, guess who gets to pay ? "But surely you overstate the case." you say. "Are they really gambling ?" Let me give just two examples, starting with the Bankers Trust vs Proctor & Gamble derivatives "contract."
Though it was, as usual, a secret customised derivative contract between the notorious Bankers Trust on one side, the bank that although it did not admit guilt, out of the goodness of its heart paid a fine of $14 million to the government to settle alleged fraud in the Gibson Greetings Case, and the aptly named Proctor & Gamble on the other side, it has been reliably reported as follows
Bankers Trust would pay to Proctor & Gamble the commercial paper rate on $200 million, and Proctor & Gamble would pay to Bankers Trust that same rate less 75 basis points plus a quantity of basis points calculated by taking the market price of the Treasury's August 2023 bond and subtracting it from a number that was 1/100 of 17.04 times the market interest rate on the current five year Treasury Note. Got it.
It doesn't sound much like the kind of banking that the Federal Reserve should be insuring, but them it doesn't sound much like banking to me. Either way, tax dollars encourage it. Next try "knock-out options," the darling of the inter-bank currency markets.
Here the bookie banks and others bet against governments and each other on the movements of paper currencies. They have a slight edge, however, because though very often betting against their own U.S. government, the government will bail them out via the FED if they go broke. That's why we have taxpayers, right ? A regular call option in Japanese Yen for example might allow the buyer over the next 30 days to buy the dollar at 100 Yen. A knock-out option allows the same thing but if, for example the dollar fell to 90 the option expires worthless or is "knocked-out." Costing up to 50% less than a regular option, the knock-out option gives the granter, usually a bookie bank, a direct conflict with the punter because if they can drive down the dollar, in the above example, they can "knock-out" the option, pocket the premium and end their contractual risk. Carlo Ponzi, must be spinning in his grave. The "eepee standard" strikes again.
"You are the pits of the world! Vultures! Trash!"81
APPENDIX 2 - THE DOW DIVISOR
"Rarely have so many people been so wrong about so much."82
The Dow Jones industrial average, "the Dow" is the measure by which most people are familiar with the health of the stock market. News media commonly report that "the Dow Jones is up 11 this hour at 3850.19" or something like that. The industrial average is made up of 30 stocks intended to be representative of American industry. The average is price weighted, making for price changes in one component to be equal to an identical price change in another component. For example, if Exxon moves up a point from 60 to 61, it will have the same effect on the average as if Merck goes from 35 to 36.
When the present Dow 30 stock average was started back in 1928 the divisor was 16.67. If all Dow components advanced by a combined 16.67, then the index would advance by 16.67 divided by 16.67, or 1 full point. By the end of 1994 thanks to modifications to the components to account for, stock splits, take-overs, spin-offs, etc. the Dow divisor had declined to stand at 0.37153418. Of course once it broke 1.00 it effectively became a multiplier. So if the Dow components advance by a collective 10.00 points, the Dow average will advance by 10 divided by 0.37153418 or 26.92 points.
The component stocks of the Dow average trade with a bid asked spread. Depending on circumstances and market volatility, the spreads may be large or small, but if, for example, the spreads were to collectively equal plus 5 points on the opening, then the average would advance 13.45 points. On days where a buy program is executed at the close, there is an additional upward effect on the average since buys will be made at the offered price. Similarly, if a sell program is executed at the close a additional downward effect will be present. If programs are executed in times of high volatility where the collective spread was wide, eg. 10 points, then the "divisor effect" can be large. The multiplier effect of the Dow divisor can have a masking effect upon the real health of the underlying market.
"I know but one sure tip from a broker.... your margin call."83
APPENDIX 3 - THE "EEPEE" & RUMPLEGREENSPAN
"This is another fine mess you've got me into."84
The electro-paper standard or "eepee" was a direct result of technological innovation, the west's need to outspend the evil empire of communism and the massive inflation created once the link to gold was broken. Once off the last vestige of a sound money system, bankers and politicians quickly became aware that since "they made the rules" they could call the tune. If speculators or your own citizens are selling because they think your policies are barmy, and that you'll bankrupt the treasury faster than a pol can say "I believe in a balanced budget," then the bankers could and do if they like you, give you "funny money" to prop up the currency and incidentally increase you and your party's chance for re-election. Of course it went without saying, if the situation reversed I would do the same for you. One hand washes the other. Why would bankers do this ? Simple, politicians through G-7 meetings (Group of Seven industrialised democracies) ordered them to do it and besides they sweetened the pot by encouraging them to engage in massive speculations with the knowledge that if the won they could keep the profits, if they lost they would be bailed out via one state mechanism or another.
Among the first types of eepee money created were Special Drawing Rights (SDR'S) from the International Monetary Fund. These SDR's, countries could hold in their reserves as if they were cash. "If we all pretend they exist and all pretend they are cash, then we can swap them around among ourselves and treat them just like cash." From this small step for mankind but giant leap for bankers, the ballooning of the debt and the theoretical paper "assets" that underlie the system began. The system quickly became awash with "new types of money" as the bankers and pol´s found this a wonderful cash cow. It's money that's only money because we say it is, that is the Central Bankers say it is. This is the Rumplestiltskin Expansion named in honor of the technologically backward dwarf of the Grimm Brothers fairy tales, who could only spin straw into gold. In the hands of real pro's like Rumplegreenspan and the other gang of 7, "eepee" credits inflated money supplies worldwide. But then an unforeseen problem arose with this creation of money.
"I was not successful as a ball player, as it was a game of skill."85
As money supply grew, the gap between the top and the bottom also grew. A "mammoth" might make say $40 million for chatting on T.V. about football games a couple of nights a week, but at the other end of the spectrum, most could get only $4.25 an hour flipping hamburgers. That's because, in a paper game where gambling is king, real goods and services get crowded out by the paper profits to be made by guessing right in the casino. With no downside consequence to losing thanks to guarantees to banks and brokerages, guarantees that are predicated upon the taxes of the people, Governments can always create a new paper fix for themselves when a new Savings and Loan scandal breaks. "Just create a new Resolution Trust Corporation and add it to the National Debt." The taxpayers will pay the interest on all this new debt, they'll just have to flip more burgers for less. "Rumplegreenspan" and the FED have shown no sign of ever demurring to this kind of monetization. But then why would they ? With the new gold mine of funny money at their command, the golden rule applies. "He who has the gold rules." Henceforward, the rest of us would now labor and toil for an unholy alliance of oily central bankers and slimy politicians. Once off sound money, they could resist everything except temptation. (See chart 15.)
However, the unwanted effect of all this funny money is massive monetary inflation at the top end. Whereas once a bank might actually count up $5 million in hundreds and send it over to the FED in a truck, it only took Harry counting on his own, about 14 hours to accomplish. If the bank had an electro mechanical counting machine, even better. Now, with inflation they might have to send over $50 billion. Here, even with an electro mechanical counter it's useless, Harry quits before he finishes counting. Electro-paper was born with the computer age to overcome this problem. Provided no one uses an old Intel Pentium chip, we all swap only electronic pluses and minuses. At one end the FED or your bank takes in dollars and cents, at the other electronic entries are kept in a computer and called money.
As frightening as this development is, it's nothing compared to what happens when there's a programming error that erases part of the entries or worse if some computer guru "breaks" into the system and steals for their own benefit. When that happens the FED "temporarily fixes the problem by issuing credits to the problem bank, while everyone in programming frantically attempts to debug the program. Since all this happens in secret, we'll never know if they really fix the problem or solve the crime, or whether it isn't just monetized and "fixed in the electronic FED ledger." Now we're, "not as sound as a dollar," but only as sound as the last programmer and silicon chip. With the gap between rich and poor now widening again for the first time in 40 years, and the system facing collapse early in the next century, will the next Thomas Edison please go to work on how we buy that hamburger once it costs 3 million dollars, 500 SDR's and 25 FED electronic credits.
"If you can count your money, you don't have a billion dollars."86
APPENDIX 4 - THE HIDDEN MIDDLE CLASS TAX
"We hang the petty thieves and appoint the great ones to public office."87
As we struggle with an eepee deficit of a mind boggling $4,800,000,000,000 the argument is made, by the bookie economists who benefit from unsound money and the gambling economy, "that it really doesn't matter, no one will ever have to repay it." In other words, because it "belongs" to the Federal government, "they" will simply keep rolling the debt forward as it matures. This line of thought runs something like the following: as long as the debt can be serviced; as long as the debt is owed to ourselves; as long as the economy keeps growing, then the debt is not a problem and is of little consequence. Don't worry, be happy. Let's look at each point in turn.
1) Servicing the debt may not seem a problem but it represents a hidden and severe tax upon the middle class. Servicing is only possible by taxing and reallocating the revenue to pay out in the form of interest. The poor by definition are either paying no taxes or marginal taxes. By definition they hold no interest bearing securities from the federal government or anywhere else. They neither contribute much to defer the cost of interest payments nor do they receive the interest as income. The rich contribute taxes but also receive offsetting interest income, in some cases (if retired, for example) they may even take in more in interest than they pay out to the government in taxes. It's reliably reported that households with a net worth of $500,000 or more own over 20% of federal bonds while the average American family owns no bonds directly. The burden of servicing the debt rests squarely on middle class taxation. This is the hidden tax. As the debt rises, more and more taxes are required to continue servicing the debt. In good times this is a problem but in bad times it moves the middle class downward towards poverty, as their wealth is redirected upward to the bondholders and downwards to the swelling ranks of poor. Though they pay the piper, they benefit little from the unsound money game loved by the politicians and their crony bankers.
2) If Americans own the debt, purchased out of savings, then the debt is owed to ourselves and Uncle Sam is merely transferring wealth from pocket A to pocket B. As these luckless Americans live within the clutches of Uncle Sam's benevolent bureaucrats the IRS, this cash can be taken back at will through extra taxes should the need arise. Two problems arise with this. The logic that this is somehow Uncle Sam's property to be taken back at will is a false one. This unearned income does not belong to the government by right anymore than the bond holders house or car belongs to the government to be seized at will. That concept earlier caused King George a lot of bother and earned him the epithet of tyrant. Second, more and more of the debt is now owned by foreigners who are not taxable by Uncle Sam unless he taxes the interest directly and withholds at source. To do that lowers the attractiveness of the debt to foreigners who demand a higher interest rate in compensation. An endless circle in futility. In 1970 only about 5% of the debt was foreign owned, by 1988 about 13%, by 1993 it was estimated about 35% was foreign owned. Given the low savings rate in the U.S. and the ever growing debt, that percentage will increase.
3) As long as the economy keeps growing, "national income will increase so the debt is not a problem." Charts 8 through 12 address this issue visually, more eloquently than any words of mine. Between 1974 and 1994 Gross Domestic Product (a measure of national income) increased almost fourfold after leaving the sound money system. Unsound debt increased tenfold during the same period. Chart 12 shows where we are headed. By comparison on sound money, debt increased by only a factor of 1.00 between 1952 and 1972, and by only a factor of 3.7 between 1962 and 1982. If we ever do get to a 40 trillion-dollar debt, the annual interest at 5% will amount to 2.0 trillion dollars as compared to 51 billion dollars in 1980.
Somewhere along the way the madness ends and either:
a) most Americans are impoverished and "drop out" returning to
a barter system via an underground economy.
b) the rest of the world shuns the dollar in favour of some
other kind of sound money.
c) both.
Since for the moment we are headed for the quadrillions and collapse the following table is provided as a service to those unable to master the scientific notation that will rapidly be needed in handling the currency. In the U.S system (the British system is even worse) we work as follows:
Million - 1,000,000
Billion - 1,000,000,000
Trillion - 1,000,000,000,000
Quadrillion - 1,000,000,000,000,000
Quintillion - 1,000,000,000,000,000,000
Sextillion - 1,000,000,000,000,000,000,000 for comparison,
in seconds Million - 11.5 days
Billion - 31.7 years
Trillion - 31,700 years
Quadrillion - 31,700,000 years
Quintillion - 31,700,000,000 years
Sextillion - 31,700,000,000,000 years
"Get a good night's sleep and don't bug anybody without asking me."88
LIST of QUOTES.
"Nothing contributes so much to the prosperity and happiness of a country as high profits."
David Ricardo, 19th century economist.
1) Dr. Laurence J. Peter, author, The Peter Principal.
2) Ronald Reagan, 40th United States President.
3) Edgar Bronfman, Chairman, Seagrams .
4) Sidney Homer, Salomon Bros.
5) Charles P. Kindleberger, author Manias, Panics and Crashes.
6) Joe E. Lewis
7) Honore de Balzac, 1799-1850.
8) N.R.F. Maier, Maier's Law.
9) Alan Greenspan, Chairman Federal Reserve Board, testimony 1994.
10) Benjamin Disraeli, 19th century British Prime Minister.
11) Jerome K. Jerome, 19th century English novelist.
12) Richard M. Nixon, 37th United States President.
13) Martin Luther King, Jr., Civil rights leader.
14) Cornelius Vanderbilt, 1794-1877.
15) Richard M. Nixon, 37th United States President.
16) Richard M. Nixon, 37th United States President, about the Watergate suspects.
17) Alphonse Capone, Chicago gangster.
18) Fisher Ames, 1758-1808.
19) Most of the cast of Star Trek, at one time or another.
20) Prof. Irving Fisher, Yale economist, autumn 1929.
21) Calvin Coolidge, 30th United States President, spring 1929.
22) Robert Benchley.
23) Edgar A. Shoaf, advertizing executive.
24) Stan Laurel to Oliver Hardy.
25) Oliver Twist, by Charles Dickens.
26) Gabriel Kolko.
27) Attributed to many.
28) Charles P. Kindleberger, author Manias, panics and crashes.
29) Prof. Albert Einstein, scientist.
30) George Bernard Shaw, author.
31) Abraham Lincoln, 16th United States President.
32) Marie Antoinette, last French Queen.
33) Robert Burns, Scots poet.
34) George Washington, Revolutionary, General and 1st United States President.
35) George Will, conservative columnist.
36) Blackie Sherrord, gambler.
37) Winston S. Churchill, 20th century British Prime Minister.
38) Santa Claus, Night before Christmas
39) Ronald Reagan, 40th United States President.
40) G.C.Lichtenberg, 1742-1799.
41) Robert G. Ingersoll, industrialist. 1833-1899
42) Robert S. Lynd.
43) Napoleon Bonapart, Dictator.
44) Tobais Smollert, author.
45) Fiorella La Guardia, Mayor New York City.
46) Roger Babson, speech to National Business Conference, Sept. 5th, 1929.
47) Prof. Irving Fisher, Yale economist, September 1929.
48) Earl of Chesterfield, 1694-1773
49) Henry Ford, automobile maker.
50) Mark Twain, 19th century humorist.
51) Swiss Banker's Maxim.
52) Andrew W. Mellon, Secretary to the Treasury, 1928
53) Eugene M. Stevens, President Continental Illinois Bank, October 1929.
54) Lee Iacocca, Chairman Chrysler Corporation.
55) Attributed to many.
56) Richard Mayberry, columnist.
57) Barbara Tuchman, authoress. Tuchman's Law.
58) Rudyard Kipling, 19th century English author.
59) John Fitzgerald Kennedy, 35th United States President.
60) Groucho Marx, comedian.
61) Ronald Reagan, 40th United States President.
62) Calvin Coolidge, 30th United States President.
63) Warren Buffett, founder Berkshire Hathaway corporation.
64) Glenn Ford, actor.
65) Robert A. Rubin, Chairman National Economic Council, 1994.
66) Quoted by Mark Twain, author.
67) Headline Variety newspaper, October 1929.
68) W.C. Fields, comedian.
69) Henry Ford, auto maker.
70) Alphonse Capone, Chicago gangster.
71) Lord Acton, nineteenth century British Prime Minister.
72) Jules Bertillon.
73) Daniel Webster, 1782-1852
74) Eugene Ionesco, author.
75) Polish proverb under communism.
76) Bernard Rosenberg.
77) Herbert Hoover, 31 st United Staes President.
78) Henry Kissinger, Secretary of State.
79) Thomas Alva Edison, inventor.
80) P.T. Barnum, showman.
81) John McEnroe, Tennis Player, to the umpires Wimbledon 1984
82) Richard M. Nixon, 37th United States President.
83) Jesse Livermore, stock manipulator.
84) Oliver Hardy, to Stan Laurel, commedians.
David Ricardo, 19th century economist.
1) Dr. Laurence J. Peter, author, The Peter Principal.
2) Ronald Reagan, 40th United States President.
3) Edgar Bronfman, Chairman, Seagrams .
4) Sidney Homer, Salomon Bros.
5) Charles P. Kindleberger, author Manias, Panics and Crashes.
6) Joe E. Lewis
7) Honore de Balzac, 1799-1850.
8) N.R.F. Maier, Maier's Law.
9) Alan Greenspan, Chairman Federal Reserve Board, testimony 1994.
10) Benjamin Disraeli, 19th century British Prime Minister.
11) Jerome K. Jerome, 19th century English novelist.
12) Richard M. Nixon, 37th United States President.
13) Martin Luther King, Jr., Civil rights leader.
14) Cornelius Vanderbilt, 1794-1877.
15) Richard M. Nixon, 37th United States President.
16) Richard M. Nixon, 37th United States President, about the Watergate suspects.
17) Alphonse Capone, Chicago gangster.
18) Fisher Ames, 1758-1808.
19) Most of the cast of Star Trek, at one time or another.
20) Prof. Irving Fisher, Yale economist, autumn 1929.
21) Calvin Coolidge, 30th United States President, spring 1929.
22) Robert Benchley.
23) Edgar A. Shoaf, advertizing executive.
24) Stan Laurel to Oliver Hardy.
25) Oliver Twist, by Charles Dickens.
26) Gabriel Kolko.
27) Attributed to many.
28) Charles P. Kindleberger, author Manias, panics and crashes.
29) Prof. Albert Einstein, scientist.
30) George Bernard Shaw, author.
31) Abraham Lincoln, 16th United States President.
32) Marie Antoinette, last French Queen.
33) Robert Burns, Scots poet.
34) George Washington, Revolutionary, General and 1st United States President.
35) George Will, conservative columnist.
36) Blackie Sherrord, gambler.
37) Winston S. Churchill, 20th century British Prime Minister.
38) Santa Claus, Night before Christmas
39) Ronald Reagan, 40th United States President.
40) G.C.Lichtenberg, 1742-1799.
41) Robert G. Ingersoll, industrialist. 1833-1899
42) Robert S. Lynd.
43) Napoleon Bonapart, Dictator.
44) Tobais Smollert, author.
45) Fiorella La Guardia, Mayor New York City.
46) Roger Babson, speech to National Business Conference, Sept. 5th, 1929.
47) Prof. Irving Fisher, Yale economist, September 1929.
48) Earl of Chesterfield, 1694-1773
49) Henry Ford, automobile maker.
50) Mark Twain, 19th century humorist.
51) Swiss Banker's Maxim.
52) Andrew W. Mellon, Secretary to the Treasury, 1928
53) Eugene M. Stevens, President Continental Illinois Bank, October 1929.
54) Lee Iacocca, Chairman Chrysler Corporation.
55) Attributed to many.
56) Richard Mayberry, columnist.
57) Barbara Tuchman, authoress. Tuchman's Law.
58) Rudyard Kipling, 19th century English author.
59) John Fitzgerald Kennedy, 35th United States President.
60) Groucho Marx, comedian.
61) Ronald Reagan, 40th United States President.
62) Calvin Coolidge, 30th United States President.
63) Warren Buffett, founder Berkshire Hathaway corporation.
64) Glenn Ford, actor.
65) Robert A. Rubin, Chairman National Economic Council, 1994.
66) Quoted by Mark Twain, author.
67) Headline Variety newspaper, October 1929.
68) W.C. Fields, comedian.
69) Henry Ford, auto maker.
70) Alphonse Capone, Chicago gangster.
71) Lord Acton, nineteenth century British Prime Minister.
72) Jules Bertillon.
73) Daniel Webster, 1782-1852
74) Eugene Ionesco, author.
75) Polish proverb under communism.
76) Bernard Rosenberg.
77) Herbert Hoover, 31 st United Staes President.
78) Henry Kissinger, Secretary of State.
79) Thomas Alva Edison, inventor.
80) P.T. Barnum, showman.
81) John McEnroe, Tennis Player, to the umpires Wimbledon 1984
82) Richard M. Nixon, 37th United States President.
83) Jesse Livermore, stock manipulator.
84) Oliver Hardy, to Stan Laurel, commedians.
85) Casey Stengel, Professinal Baseball Manager
86) J.Paul Getty, oilman.
87) Aesop
88) Richard M. Nixon, 37th President, to re-election campaign manager.
x) Guess.
"There is no way of keeping profits up but by keeping wages down."
David Ricardo, 19th century economist.
+++++++
SUMMARY of CHARTS
"The Republicans are busy rearranging the deck chairs on the TITANIC, while the Democrats are busy playing football with the ice cubes."
1-A Cash chases stocks higher. The short term problem.
1-B Debt outpaces GDP. The long term problem.
1-C The mutual fund growth that fuelled the chase. Sell ? To whom ??
2 The Consumer Price Index, percent change year on year. The politically correct way for peons to follow CPI.
3 CPI what actually happened. Why the peons are mad.
4 Potential inflation. What scared the FED in 1994.
5 The Dow momentum stalls. One last push, then... ?
6 The Chiefs preferred inflation index. What goes up under electro-paper never comes down.
7 Government gold stocks decline, while the population rises. The declining insurance policy.
8 Debt and the GNP, a historical perspective. Under "eepee" the pols and the bankers make hay.
9 Debt and GDP, the governments new "better" measure of our national well being.
10 If America had 100 times the population, this is how we'd stand with the debt.
11 Once on unsound money, the pols aided by the bankers went mad. Don't worry, be happy; the chumps in the middle class will pay.
12 The future of debt, if only the world would let us.
13 - 14 Thanks to GATT and NAFTA, dropouts jobs are exported while graduate gamblers grab most of the pie.
15 Yet more debt. The "off-budget" debt politicians don't want you to know about. Under "eepee and Rumplegreenspan" there will soon be half a trillion of it.
About the Author.
Ricardo Smith was born in the pre-industrial village of MacHinery, Glen Campbell, Scotland on September 4th, 1752. Though a self made man, he now acknowledges some help from his parents at the beginning. His bete noire with literature is believed derived from his ancestry which is almost traceable to Anne Hathaway in 16th century England and Sheik A. Spierre an itinerant French horse trader, dealing in Arabs. He first became aware of economics during his youth, when as a pin maker for the miser Adam Smith (no relation,) he discovered that by scratching "japan" on the container they could be sold for double the price. A millionaire by the age of sixty he moved to 221 Baker Street, London where he remained many years, until the arrival of neighbours in the mid 1880's attracted the attention of Inspector Le Strangeways. Emigrating to New York shortly thereafter, he was befriended by P.T. Barnum, who was inspired to note "There's a sucker born every minute." Furthering his interest in all aspects of economics he conducted extensive early research into L.s.d. in both England and New York, though his mind was apparently frozen until 1943. Remembering nothing now of that early research, he describes that period as "wasted."
Moving to California in the mid 1950's for the climate, he dabbled in crime assisting LAPD Sergeant Frank Smith (no relation) every Friday. Later, during a visit to the notorious Sunset Strip he helped get Kookie his first job involving autos. Mechanically bent, Ricardo during the early 1960's taught Jeff Smith (no relation) how to drive motorcycles. Vacationing for a week in the Southwest, he briefly assisted a Nevada Smith (no relation) in his search for his missing relatives. In 1994 he returned to his true calling of economics after experiencing flash backs of October 1929. Increasingly aware of the perils to his economy, the apparent easy victory of the "bills" over the "mills" on the sports fields, spurred him into action. During an extraordinary three week session at McAnn's bar and tavern in New York City, Ricardo Smith has written his first economics book since his "Dis Capital" appeared in the vanity press of 1867. Boldly treading where Angells and the IRS fear to step, Ricardo Smith and "The Chief" bring an unmistakeable odour into modern economics. He is currently working on his next book "Crashes and How to Avoid Them" for the auto-derivatives industry. Other works include "In Flagrante Delicto" the memoirs of a politician named Smith, "Mal de Mer" the logbook of Christofero Smith and "Comme ci, Comme ca" definative equivocation, a text book for officials.
+++++
