THE SHELL GAME
Modern economics is not rocket science. In fact, it’s not science at all. It’s a game, a confidence game. Once paper passed for money, economics became an elaborate shell game designed to hide the fact paper had been substituted for silver and gold. Debt ratings are an attempt to quantify confidence in paper assets and are an essential part of the game. The shell game is called “Where’s The Money?” The answer is simple, it’s not there.
The question “where did the money go during the Great Depression?” has now been answered to my satisfaction. During the Great Depression, money essentially disappeared and, as a consequence, consumer and business demand collapsed as did prices, beginning a downward coreolis-like spiral that was to suck the global economy into an economic black hole.
My study of the Great Depression began in the 1990s and the subsequent collapse of the dot.com bubble provided a real-time corroboration of assumptions about the connection between loose credit, excessive speculation, and financial bubbles; and, now, in 2008, one of my most troubling questions about the depression has been answered—where did the money go during the Great Depression?
Plunge In US Commercial Property, an article by Daniel Pimlott posted on FT.com (Financial Times) May 21, 2008 provided a critical clue:
Commercial property prices in the US in February saw their sharpest decline since records began nearly 15 years ago as sources of finance for deals has dried up, according to data from Standard & Poor’s out yesterday.
The value of commercial buildings fell 1.03 percent between January and February, the largest monthly decline since at least 1993, when the industry was just emerging from a deep slump.
The fall in national property prices comes as banks have retrenched on lending due to credit crisis and the slowing economy, causing the volume of deals to slow sharply. The market for commercial mortgage-backed securities, which until last August was a major route to cheaper borrowing, has largely ground to a halt.
Sales of commercial properties were down 71 per cent in the first quarter compared with a year earlier, according to data from Real Capital Analytics.
The fact that sales of US commercial real estate fell an astounding 71 % from 1st quarter 2007 to 1st quarter 2008 is shocking and the implications are quite serious. The cause of the slowdown, however, provided the very clue I was seeking.
Commercial property prices in the US…saw their sharpest decline…as sources of finance for deals has dried up… as banks have retrenched on lending due to credit crisis…
DURING THE GREAT DEPRESSION
MONEY DID NOT DISAPPEAR
The answer to: Where did the money go in the Great Depression? is found in the metaphor of the shell game. It is now clear that money didn’t disappear during the Great Depression, credit disappeared.
The money was never there in the first place. Money had been replaced by credit in the shell game introduced by the Federal Reserve in 1913 when the Federal Reserve began issuing credit-based Federal Reserve notes in place of the savings-based money from the US Treasury.
For details on how the shell game is run, Professor Antal E. Fekete’s description of the check kiting scheme between the US Treasury and Federal Reserve provides crucial information for those perhaps wishing themselves to live off the earnings of others.
It is epitomized by an elaborate check-kiting conspiracy between the U.S: Treasury and the Federal Reserve. Treasury bonds, contrary to appearances, are no more redeemable than Federal Reserve notes. It’s all very neat: the notes are backed by the bonds, and the bonds are redeemable by the notes. Therefore each is valued in terms of itself, rather than by an independent outside asset. Each is an irredeemable liability of the U.S: government. The whole scheme boils down to a farce. It is check-kiting at the highest level. At maturity the bonds are replaced by another with a more distant maturity date, or they are ostensibly paid in the form of irredeemable currency. The issuer of either type of debt is usurping a privilege without accepting the countervailing duty. They issue obligations without taking any further responsibility for their fate or for the effect they have on the economy. Moreover, a double standard of justice is involved. Check-kiting is a crime under the Criminal Code. That is, provided that it is perpetrated by private individuals. Practiced at the highest level, check-kiting is the corner-stone of the monetary system.
GOTTERDÄMMERUNG The Twilight of Irredeemable Debt, Antal E. Fekete, April 28, 2008
THE STUDY OF MODERN ECONOMICS IS SIMILAR
TO THE STUDY OF RELIGION IN A TIME OF IDOLATRY
In the shell game of modern economics, credit replaces money and when credit gives rise to speculative bubbles, the collapse of those bubbles leads to the defaulting of debt which causes credit to disappear and the economy to collapse.
The credit based shell game, however, is nearing its end. The historic credit contraction that began in August 2007 is still in progress. Despite the efforts of central bankers, credit is still disappearing and, just as in the Great Depression, the credit contraction is continuing to spread causing more and more debt to default.
Credit, the fertilizer of human debt, when no longer available effectively spells the end of the legalized shell game masquerading as modern economics; but the kreditmeisters, their global confidence game now damaged by an unexpected lack of confidence on the part of the marks, sic investors, however, will not give up their scam easily.
THE CONUNDRUM OF THE KREDITMEISTERS
Those running the shell game, the central bankers and their codependent brethren, investment bankers, are terrified of losing their day jobs, They have lived well for three hundred years (since the establishment of the Bank of England in 1694) leveraging the productivity of others and we can be assured they will do everything in their considerable power to keep their lifestyle intact..
At this time the central bankers are collectively engaged in financial triage as they attempt to replace the credit that is rapidly being withdrawn in the face of ever increasing amounts of defaulting debt.
Following the same play book they used in the aftermath of the dot.com collapse, the Fed has quickly cut rates from 5.25 % to 2 % but this time they will not ignite a housing bubble as they did the last time. This time, they will do worse. This time, they will burn down the house.
BURNING DOWN THE HOUSE
In the long run, there is no short run
In retrospect it will all be clear, the mistakes, the reasons, the excuses, the results. Now, however, in the beginning of the collapse, events appear more problematic, the outcome still unknown. Nonetheless, even in the fog of unexpected events, certain things can be known and safely predicted; and, one of them is that we are now on the road to hyperinflation.
Appointing “Helicopter Ben” Bernanke to head the Federal Reserve now is akin to sending Sammy the Bull, the mafia hit-man, to negotiate with the Palestinians and Israelis; and when the news comes back that Sammy the Bull shot and killed the Palestinians and Israelis at the negotiating table, we should not be surprised—just as we should not be surprised that Ben “the printing press” Bernanke is erring on the side of excess in the current economic crisis by providing even more credit, by shoving even more debt based paper into now a burning house.
WHEN A HOUSE OF PAPER MONEY BURNS
Hyperinflation is to inflation like pneumonia is to a cold. Though similar, the former is much more consequential; and whereas pneumonia can sometimes kill, hyperinflation is a veritable death sentence. Hyperinflation always ends in the total destruction of paper money. In hyperinflation, the value of paper money reverts to its mean—ZERO.
The past is indeed prologue when it comes to humanity, printing presses, and the recurrent desire of governments to turn paper into gold; which through the alchemy of central banking is possible—though only for a limited time.
While central bankers and governments do not intend to cause hyperinflation anymore than drunk drivers intend to crash, they are nonetheless responsible for the decisions that lead to hyperinflation and deflationary depressions.
The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century.
Professor Laurance Kotlikoff, Federal Reserve Bank Review St Louis July/Aug 2006
The US is the largest economy in the world and the US dollar is the world’s reserve currency. Its central bank, the Federal Reserve, is the most influential, and Ben “the printing press” Bernanke is its chairman. We should not be surprised at what is now going to happen to the US, the US dollar and the world economy.
As the Fed is busy bailing out international investment banks with America’s money, we should be more concerned with what is going to happen to us; because when the US dollar goes up in smoke, the US economy will go down in flames and the world economy will stumble badly, if not collapse completely.
Hyperinflation will destroy both the US dollar and the US economy and the world will not be unaffected. Professor Kotlikoff’s warning about a US hyperinflation was published in 2006; and, now in 2008, US printing presses under Fed chairman Ben Bernanke are running faster than they’ve ever been run before.
HYPERINFLATION IS LIKE STEPPING OFF A CLIFF.
YOU ONLY EXPERIENCE IT AFTER YOU’VE GONE TOO FAR
Friedrich Kessler, a law professor at Harvard and at Boalt Hall UC Berkeley described the onset of hyperinflation during the Weimar Republic in Germany.
It was horrible. Horrible! Like lightening it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money.
From Fiat Paper Money, The History And Evolution of Our Currency $28.50 by Ralph T. Foster, firstname.lastname@example.org (510) 845-3015 This book, a primer on the end game, is everything you wanted to know about fiat paper money and were too afraid to ask.
At Session III of Professor Fekete’s Gold Standard University Live in February, I discussed the possibility of a sequential or simultaneous hyperinflationary deflationary depression, the economic equivalent of having both a severe heart condition and a possibly fatal cancer at the same time. Such is not impossible; in fact, it is increasingly likely.
I highly recommend the thorough and studied analysis of hyperinflation and concurrent possibilities in John Williams’ Hyperinflation Special Report, Shadow Government Statistics, Series Issue No. 41, April 8, 2008, http://www.shadowstats.com/article/292. John Williams also references and recommends Ralph T. Foster’s Fiat Paper Money, The History And Evolution of Our Currency noted above.
The critical question should now be asked: What can we do?
THE PARACHUTE OF GOLD AND SILVER
JUMPING OUT OF UNCLE BEN’S SPUTTERING HELIPCOPTER
The following is from The Nightmare German Inflation, Scientific Market Analysis, 1970, which describes the extreme hyperinflationary conditions during the Weimar Republic in the 1920s:
The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.
The difference between 1920s Germany and today is that there are no longer any currencies convertible to precious metals. In the 1920s, when hyperinflation destroyed the German mark, other currencies were still tied to gold. Today, this is no longer the case. Today, only gold and silver will offer guaranteed monetary refuge during the coming crisis.
A hyperinflation is a monetary phenomena caused by the rapid printing of money not convertible to gold or silver. The inflation of the paper money supply happens gradually, but hyperinflation is itself a sudden-onset phenomena. Suddenly and unexpectedly, inflation becomes hyperinflation and unless you are already prepared, it is already too late.
Today, we are moving closer to the end game, the resolution of past monetary sins when the banker’s shell game is exposed for what it is—a monetary abomination, a parasite on the economic body that over time kills the host on which it feeds.
Be aware. Be careful. Be safe.
Note I: I now have a blog, Moving Through The Maelstom with Darryl Robert Schoon. My first blog discusses the underlying reasons for our increasing series of crises.
Note II: I will be speaking at Professor Antal E. Fekete’s Session IV of Gold Standard University Live (GSUL) July 3-6, 2008 in Szombathely , Hungary. If you are interested in monetary matters and gold, the opportunity to hear Professor Fekete should not be missed. A perusal of Professor Fekete’s topics may convince you to attend (see http://www.professorfekete.com/gsul.asp ). Professor Fekete, in my opinion, is a giant in a time of small men.
Darryl Robert Schoon
March 4, 2008
In response to the arrest of a 9/11 demonstrator during a Bill Clinton appearance in Corpus Christi, corporate media shill and former Republican Congress critter Joe Scarborough and his co-hosts demanded 9/11 truthers be tasered and taken to detention camps. “Where’s the taser?” Joe wants to know as MSNBC runs footage of the man’s arrest. “Tase him!” His co-host adds: “Led away in handcuffs and hopefully taken to one of those secret prisons in eastern Europe and never to be heard from again… I hope we have a special prison for 9/11 conspiracy theorists.”
In other words, the corporate behemoth MSNBC believes people who disagree with the government not only do not deserve First Amendment rights and protection, but also believe demonstrators should be kidnapped by the CIA and taken to a “special prison” to be tortured and ultimately killed, as this is the fate of many who disappear suffer.
Is it possible the United States is about to become like Pinochet’s Chile? In 1973, thanks to the CIA and U.S. corporations, Chile became a brutal police state. Chileans were subjected to systematic and massive violations of their most basic human rights. Official figures indicate that nearly 3,000 people were executed, disappeared or lost their lives as a result of torture and political violence. It would seem “Morning Joe” would enthusiastically welcome the installation of a fascist state where those he disagrees with are disappeared, tortured, and murdered.
Last October, CNN host Glenn Beck called 9/11 truthers “insane” and “dangerous anarchists” in response to 9/11 truthers infiltrating the Real Time with Bill Maher show. “These truthers are exactly the kind of people who want to rock this nation’s foundation, tear us apart and plant the seeds of dissatisfaction in all of us… [this is] the kind of group a Timothy McVeigh would come from,” declared Beck, setting a precedence followed this morning by the scurrilous Joe Scarborough and his complaisant minions.
“In thousands of 9/11 protests over the course of the last six years, not one person has been arrested for violent conduct,” Steve Watson wrote at the time. “To cart blanches suggest that the truth movement is dangerous, ‘a threat to children’ and intent on violence is extremely inflammatory and indicates just how afraid of investigating and debating the facts people like Glen Beck actually are.”
The core of the 9/11 truth movement is composed of highly educated and progressive individuals who are strictly opposed to violence and are intent on protecting a free and peaceful society which has been under dire threat ever since the attacks of 9/11 and the ensuing cover up.
Furthermore the movement represents the very antithesis of anarchism in that it is actively seeking to restore and protect our traditional form of government which has been usurped by an unaccountable cabal that continues to operate outside of Constitutional law and with little restraint using 9/11 as justification.
Indeed, Beck and Scarborough are calling for such draconian measures simply because the 9/11 truth movement is comprised “of highly educated and progressive individuals who are strictly opposed to violence” and because of this they must be demonized as a threat to national security and thus the government must kidnap, torture, and murder them. Although Scarborough did not suggest 9/11 truth “idiots” be murdered, this is of course the ultimate fate of those who oppose militarized fascism, now gaining speed in the United States.
|December 06, 2007Credit ‘Crunch’ – or Credit Collapse?
by Alex Wallenwein
How can you protect yourself during the worsening credit crunch?
To figure that out, we first need to understand what this ‘credit crunch’ really is, from the most fundamental perspective possible. For, it’s root cause is not the sub-prime mortgage default crisis as financial pundits like to claim. It goes far, far deeper than that.We all know by now that the entire world financial structure is dependent on one thing, and one thing only. That one thing is the very brick from which the splendid looking but dangerously tilting edifice is constructed:
Fundamentally, however, that term is nothing more than a dressed up word for:
The world’s financial system is held up and powered by banks, and banks are in the business of loaning money, which means they are in the business of getting individuals, companies, and governments into debt.
That would be okay if there was a way to retire this debt, but unfortunately the very ‘money’ we all use is itself a creature of debt and consists of nothing but debt.
How is that possible?
It is possible because the very definition of money (i.e., “M1” or the most liquid form of a country’s total money supply) includes bank deposits – and bank deposits are created when someone borrows money from a bank.
When you loan your neighbor a cup of sugar, you go and get some of yours and give it to him, hoping he will return the favor some day. As a normal human being, you cannot loan what you don’t have. That’s pretty obvious.
A bank, however, is a special creature. It is legally authorized to create what it loans you right then and there on the spot. Any funds credited to your loan account by the bank are immediately counted as part of your country’s money supply.
In other words, the bank parts with nothing of its own – but you now legally “owe” the bank the amount money you just borrowed.
Neat, isn’t it?
The bank now has a legal right to your future productivity as either an individual or business earning money in return for what is essentially – nothing. That means the money you just borrowed has no real existence, no real value, other than your promise to “repay”. That promise is what the bank now carries on its books as an “asset.”
There is another way to look at this.
The “money” that circulates throughout individual countries and the is a legal fiction, backed up only by the issuing government’s license to the banks allowing them to create it in this fashion while at the same time giving banks the legal right to enforce your promise to repay against you in a court of law.
Physical cash (i.e., coins and central bank notes) circulating only constitutes a very small fraction of the total money supply, usually about five to ten percent. Most money circulates in electronic form, transferred by checks or EFT technology.
Now, guess what the issuing government receives as its consideration (a legal term for counter-promise) in this bargain?
The issuing government essentially gets a perpetual blank check from the central bank.
The central banks get authority to operate by promising the government in question that they will loan the government whatever “money” it needs to pay its ever-rising bills (at interest, of course).
That way, the banks make both us as individuals as well as our national government their debtors.
You and I, on the other hand, are promised by our government that we will be able to spend this debt. They do this by passing and enforcing a law that requires anyone to whom we offer this debt-money in payment for any debt to accept it – or else the debt is wiped out. The legal term for our offer is called a tender of payment (not “payment” itself). Hence the phrase “legal tender”.
Debt – as payment for other debt.
This system has its own tricky checks and balances consisting of bank reserve requirements and “money multipliers” etc., but there is no need to go into these right now to understand what the true origin of this so-called “credit crunch” is.
The True Nature of the Credit Crunch
Mortgages are really nothing more than another type of promise to repay.
When you take out a mortgage, the bank clerk types a number into the bank’s computer that shows up in the system as a “credit” on your account. This is done in return for your promise to “repay” the bank. That way, the bank gives you a legal fiction and your government backs up the bank’s claim against you, in case you default, with the banks right to sue you in court.
In essence, it is you – not your government – that backs up your country’s money supply. In truth, it is your future productivity that creates the money that “makes the world go “round” as the popular ditti says.
You are Atlas holding up the financial world, and the banks are riding on your shoulders.
The banks, though, have now finally shot themselves in the foot.
Their quintessential need to get more and more people into debt so that the banks themselves can prosper, has led them to generate more and more creative ways of finding more and more potential borrowers.
Their last resort was to make loans to home buyers who really didn’t qualify for a mortgage. They felt constrained to loan to people who really didn’t demonstrate the requisite future productive power they could pledge in return for the “credit” the bank created on their accounts.
So, when times eventually got a little tougher as interest rates rose, they began to default on their mortgages – in growing numbers.
Those borrowers didn’t have much to lose. They got their homes for zero or near-zero down payments, based on fictitious “stated income” figures which the mortgage brokers were encouraged to dream up for them in order to make it look on paper as if the loan was justified. The loan broker’s supervisor closed both eyes, issued the loan, and bagged his bank-sponsored bonus vacation for having found yet another sucker who would go for this gambit, and the world kept spinning.
These mortgages are now the epicenter of the so-called credit crunch.
But they are no different in nature than the very “money” that everybody earns and spends, the very money that governments, banks, and businesses now fear may one day stop flowing as abundantly as it has so far.
The sad truth is that both the mortgages and they money they are supposed to be repaid with are nothing more than – debt.
When Banks Don’t Trust Banks …
Normally, banks fear that individual or business borrowers won’t be able to repay them in time. Now, they are afraid of each other because no single bank knows what the other’s real exposure to the credit crunch really is.
You have read about the gragantuan losses of the biggest financial houses in the world. Some of these losses go into the tens of billions of dollars. Smaller banks have similar problems albeit on a smaller scale.
Knowing this, and knowing that these losses stem from banks’ exposure to disappearing mortgage assets, no bank in its right mind would loan to the other money that the lending bank itself sorely needs to fund its own operations.
That little problem has made the interest rate at which banks loan each other money shoot straight up.
By now, not only subprime mortgages are at risk, but even prime borrowers with sterling credit are defaulting. Their mortgages (debt) were sold by the originating lenders to other outfits called “SIVs” or ‘specialized investment vehicles’ – a fancy term for what boils down to sham corporations set up to buy the mortgages.
Remember that mortgages constituting promises to repay are “assets” in the debt economy. The originating banks sold these to investment funds like hedge funds and to SIVs so the mortgages wouldn’t appear on the originating bank’s .
That, in turn, was important so that the banks could make more money by making even more loans. A bank is required to keep a certain “reserve to loan ratio”. When it originates a loan and keeps servicing it, the loan show up on its books as both an asset (the right to receive future payments from the borrower) and a liability (money loaned out). Assuming the ratio is one to nine, for each $100,000 of reserves, the bank is “only” allowed to make $900,000 in new loans.
By selling the loans to other entities, a bank can turn the formerly balancing asset-liability pair into a pure asset. Once it receives payment for the mortgage (at a discount, of course), its “reserves” increase by that amount.
The bank can then go and loan out up to nine times of that new reserve amount.
That’s how the original mortgage mushroomed into the financial equivalent of nine other mortgages, each for nearly the same amount. Take this process and repeat it thousands of times, every day, throughout the entire US economy, and you have a pretty good picture of the amount of default risk that has been created in the process.
The really big problem is, however, that many banks gave the buyers of their mortgages an open line of credit on which the buyers can call if they run into financial trouble. These backdoor agreements are now being called in by the buyers of these mortgages who are not receiving what they bargained for. The reason: the mortgage-“assets” they bought are being defaulted upon by under-qualified homeowners.
It is this exposure that now makes banks very, very leery of each other.
Banks regularly loan each other low-interest money to finance their daily operations. Without these loans, they cannot operate profitably. Without them, they must either use their reserves to pay for expenses or pay higher interest on their day to day operating cash. Both of these options shrink the amount of new loans they are allowed to make,
That is the truly devastating effect of the credit crunch.
When banks can’t make loans, borrowers who need to borrow can’t get what they need, so they can’t spend it, so that flow of money is not available to the economy, so the economy eventually slows and then shrinks when gross domestic product goes negative – and that’s what we call a recession.
The Mutant Recession
Just as viruses mutate to become resistant to lower level antibiotics, we are now seeing new types of recessions brewing that will no longer respond to the usually prescribed “treatment” of lower interest rates.
Under normal circumstances, recessions can be temporarily alleviated and even turned into another boom by injecting more “credit” (debt) into the economy. This is done by lowering interest rates, and central banks have a number of ways of achieving that.
But when banks don’t trust each other and stop loaning money to each other, that’s when you have a real problem on your hands.
If they don’t trust each other, you can bet that they trust their customers less. We are already seeing mortgage lending standards tightening up – and that is happening even though interest rates have been lowered 75 basis points since the credit crunch hit this past summer, and further significant rate cuts are expected.
This puts banks in a bind: They can’t trust borrowers to pay their loans back as they did in the past, but making loans is the primary way for them to make money. The result: They end up making fewer loans.
Fewer loans mean they make less money.
Fewer loans also mean that the rate at which credit (the money supply) grows begins to shrink.
When this gets to a point where not only the growth rate of credit shrinks, but where the total amount of outstanding credit shrinks, we have a full-blown credit contraction in the making – and the name we usually pin on credit contractions is “Deflation.”
The only ‘solution’ to this dilemma is for the Fed to inject more money (debt) into the system.
That is the root cause of the entire problem.
Debt must be created in order for money to even exist. To repay that debt, more money must be created, and that requires even more debt. Debt piled on debt, and then more debt piled on top of that. It’s an inverted pyramid of debt creation, and you know that structures like that cannot stand on their own. They must be propped up – but the system is rigged in such a fashion that only more debt can prop it up, which only exacerbates the entire problem.
You, as a business owner, private citizen, father, mother, employer, or whatever, are carrying this inverted pyramid. Picture Atlas himself, carrying an inverted pyramid on his back,except that Atlas’ size is about the same in proportion to the pyramid he carries as your size to the great pyramid of Cheops.
That’s you, functioning in this economy.
How do you get out of this situation? Is it all gloom and doom? No. There are ways to escape this crushing load – but that’s the subject of the next installment of this mini-series.
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