It is now clear that the Antipodes are tipping into a serious downturn. Australia's NAB business confidence index fell to its lowest level in seventeen years in June. New Zealand's central bank began to cut interest rates last week on fears that the economy may have contracted in the second quarter, and is now entering recession. Housing starts slumped 20pc in June to the lowest since 1986.
Gabriel Stein, from Lombard Street Research, said Australia could prove vulnerable once the global commodity cycle turns down. It has racked up a current account deficit of 6.2pc of GDP despite enjoying a coal, wheat, and metals boom, effectively spending its resources bonanza in advance. Household debt has reached 177pc of GDP, almost a world record.
"It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have coasting after their reforms in the 1990s," he said.
*snip*
"The easy money went straight into real estate," said Hans Redeker, currency chief at BNP Paribas.
"Australia will now have to generate 4pc of GDP to meet payments to foreign holders of its assets," he said. This is twice as high as the burden faced by the US.
31 July 2008
Starved and Stuffed -- Eaten Up
Eaten Up
Raj Patel’s book Stuffed and Starved predicted the current global food crisis - spiralling food prices, starvation and obesity. Ed Pilkington meets the soothsayer of agro-economics and talks about what will happen when all the food finally runs out
By Ed Pilkington
29/07/08 "The Guardian" -- - -There is a passage towards the end of Raj Patel’s book, Stuffed and Starved, which elevates its author to the rank of soothsayer. He wrote it at the beginning of 2007, well before the roar of anger about rising food prices that resounded across the planet and that he so uncannily and accurately predicted.
The passage begins with Patel’s summary of earlier sections of the book in which he depicts the wasteland, as he calls it, of the modern food system. It is a system that destroys rural communities, poisons poor city dwellers, is inhumane to animals, demands unsustainable levels of use of fossil fuels and water, contributes to global warming, spreads disease and limits our sensuousness and compassion. As if that litany wasn’t enough, he then adds this: “Perhaps most ironic, although it is controlled by some of the most powerful people on the planet, the food system is inherently weak. It has systemic and structural vulnerabilities that lie close to the surface of our daily lives. All it takes to expose them is a gentle jolt.”
When he wrote that passage, Patel had in mind his native Britain and its occasional history of food crises. There was the oil crisis of 1973 that prompted panic-buying in the shops. Or 2000, when protesting truckers blockaded the oil refineries and the shelves again came close to emptying. Those events inspired Patel to contemplate a startling question: “What would have happened,” he wrote, “had all the food on the shelves run out?”
He left that question dangling in the book. But he got thinking about it again as he was on a tour of Australia last August promoting the book. As he travelled from Perth to Melbourne and then Sydney he kept being asked the same question: how did the drought that by then was already biting hard on Australian farmers as well as on consumers who were suffering rising prices, fit into his critique of modern food production? As he faced his audiences, it began to look to Patel, in a tentative, creeping way, that the gentle jolt he had written about was really happening.
“What was weird was that the stories I was hearing about drought and farmers in desperation were very similar to the stories that had been told to me in India a couple of years before. They were all about small independent farmers up to their eyeballs in debt. They had borrowed hugely to make a go of it, and then there’d been a shock - in Australia it was drought, in India it might be harvest failure, in Britain foot-and-mouth. It only takes one small shock.”
And then the agricultural slurry really hit the fan. The first intimations of something truly out of the ordinary came in Mexico in early 2007, before he had finished writing Stuffed and Starved. There were reports of unrest in some of the larger cities about rising food prices, partly related to the decision of the US government to divert huge quantities of corn to ethanol production, in an attempt to reduce dependence on foreign oil. Then early this year some eight months after Patel had finished writing about the risk of gentle jolts - the so-called “silent tsunami” began. Food prices appeared to be out of control, spiralling up by 68% in the case of rice in the first four months of this year alone. Wheat and corn almost doubled in a year.
Such hikes on the costs of the basics of life hit the urban poor in the cities of the developing world hardest, and the misery was soon made manifest in the form of unrest. Impromptu protests grew into angry marches and then erupted into food riots. In Haiti six people died and the prime minister was ousted from power. Two days of rioting ensued in Egypt and 24 people died in Cameroon. The pattern repeated itself right across the developing world, from Guyana and Bolivia to Ivory Coast, Surinam and Senegal, Yemen, Uzbekistan, Bangladesh and South Korea. Wild events in turn prompted wild official responses. Vietnam introduced a night curfew on harvesting machines to stop illegal raiding of the fields; any Filipino caught hoarding rice was threatened with life in jail, Malaysia cancelled all public building works and switched instead to stockpiling food. Even the rich western world was hit. Food prices in the UK have risen almost 7% year on year, shaking the government’s economic confidence. And if any doubts remained about the severity of this crisis, Wal-Mart, the supermarket goliath that stands at the pinnacle of the modern food system, announced it was imposing a four-bag limit for rice on its cash-and-carry customers to stop a run on supplies.
For millions of people around the world the soaring prices have spelt disaster - the World Bank has put the number of people who have been pushed into hunger at 100 million. But for one person, the impact has been strangely and paradoxically counter-factual. When Stuffed and Starved - Patel’s first book - came out last August, he and his publishers imagined it would at best enjoy a specialist readership among globalisation activists attuned to issues of corporate greed and exploitation. But the food crisis has turned it from being a niche read into the literary equivalent of a crystal ball. As a result, the demand has in Patel’s words “gone bonkers”. Reprints have been ordered in Britain, the US and Spain, deals done for editions in Italy, China and South Korea and half a dozen translations are under discussion. “If I had been this popular at school I’d be a different man today,” he quips. His analysis of the crisis, as the author of the book that predicted it all, is now hotly sought after. Or as Patel, who has the savvy Londoner’s gift for self-deprecation, puts it: “Spank me, and call me Cassandra!”
We meet for lunch in a restaurant within a Big Mac’s throw from Capitol Hill in Washington. It’s trivial I know, but it’s impossible not to be curious - a little intimidated even - about what Patel will order from the menu. He points out in his book that the livestock industry is responsible for 18% of greenhouse gas emissions, more than cars. So will he go for the hanger steak?
He asks for a pizza with goat’s cheese and mushrooms, but when I ask whether his choice was politically or ethically motivated, he laughs. “I haven’t had a steak in my life. Growing up in a Hindu household, I clamoured for hamburgers like any other kid and my parents said: ‘Oh, if you must.’ But they drew the line at steak.”
Patel sees in himself, and his eating habits, a tale in microcosm of the globalisation he writes about. His family on his mother’s side were civil servants in Kenya, and tin miners in Fiji on his father’s side. They both were drawn to the mother country, arriving in London in the 60s, where they met. It later became a cliche, but they were among the first to open up “Mr Patel’s corner shop”, working 18-hour days in an era before 24-hour supermarkets. The earliest memories of their son, who was born in 1972, are of playing among the fags, mags and sweets in the shop in Golders Green. It would be too neat, I hazard, to suggest that his parents were forced to close down the shop because of competition with the supermarkets? “My dad did very well for himself,” he replies, speaking with a high-velocity stammer. “But they were certainly driven out. You can’t compete any more, the corner shop is a dying industry.”
Despite those difficulties, the Patels did proud by their son, sending him to a north London grammar school, then to Oxford where he studied PPE, and finally to Berkeley in California. Along the way, he became interested in, and engaged with, the anti-globalisation movement. He was among the thousands who protested in Seattle against the World Trade Organisation (WTO) in 1999, and it was there that he came face to face with what he calls the “march of the farmers’ movement” in the form of arguably the world’s largest network of independent organisations, La Via Campesina, which represents around 150 million farm workers and smallholders across the globe. “I was struck by their sophisticated and detailed critique of the WTO. Seven years before Seattle they had already translated the draft text of the Dunkel report [on trade] into Kannada and were distributing it in the fields.”
He began delving more deeply into the subject of trade, food policy and agricultural resistance as an analyst at Food First, a radical thinktank in Oakland, where an idea for a book emerged. It began life as a meditation on choice, or the lack of it - Coke v Pepsi, McDonald’s v Wendy’s. Its working title was Choice Cuts. Over the next three years he travelled to research the book from South Africa, Europe and South Korea to Brazil, Mexico and the US. In the process the thesis grew bigger in scope and more refined. Its focus was no longer just a lack of consumer choice, it embraced an entire world food system that can consign 800 million - more than one in 10 people on earth - to hunger while simultaneously inflicting obesity on an even greater number, 1 billion people. Hence the book’s new, and in his opinion better, title.
His analysis shows how communities around the planet have been disempowered by a system that appears to offer an abundance of cheap food, but in reality dictates unhealthy and limited choices to an overworked and underpaid workforce that cannot afford any better. “The figure that often stuns people outside the US when I tour with the book is that 20% of American fast-food meals are eaten in cars. People are incredulous and ask: is that because Americans so love their cars? But living here you see how hard people work, for a pittance, with no healthcare, no decent education, not even a hint of a pension - so it’s not surprising that the one hot meal you eat a day you eat off your lap. That’s where the food system becomes a lifestyle.”
Much of the broad argument in Stuffed and Starved will be familiar to those who have followed the debate on globalisation - how the liberalisation of trade has created a vast global market for heavily subsidised American and European agricultural products at the expense of local growers in the developing world; how relentless pressure to drive down food prices over 30 years has seen rich ecosystems replaced by monocultures that rely on oil-powered machines, chemical fertilisers and pesticides to drive up yields; and how international corporations and supermarkets that control the flow of technologies and of food itself have been the beneficiaries. It is a portrait of the agro-economics of the madhouse. “While we think our food is made for us, we are in fact being made for our food,” he says.
Take India, which he describes as a storm of contradictions. “India has the most people in the Forbes top 10 billionaires list, but in the past decade the average calorie intake of the poorest has fallen. There are levels of hunger we haven’t seen since the British left, combined with the world’s highest levels of type 2 diabetes from the pressure of eating too much of the wrong kinds of food.”
Or take the UK, where food producers are now less than one per cent of the workforce. The government may be committed to reducing global warming emissions, but meanwhile a quarter of all trucks on UK roads are carrying food and the average British family is driving 136 miles a year to buy it.
Or America. This is the country whose farmers, food giants and supermarkets benefit most from the global system. Such is the might of US food corporations that the double arches of McDonald’s are more widely recognised as a symbol than the cross. Wal-Mart is the largest private employer not only in the US, but also in Mexico where Walmex takes in three out of every 10 pesos Mexicans spend on food. Yet amid such largesse 35 million Americans don’t know where their next meal is coming from. “You are hearing these amazing stories of working American families adopting coping strategies that I learned about in development sociology - skipping meals, growing their own fruit and vegetables, giving up on meat. That’s happening right here right now.”
Which brings us back to the current food crisis. What surprised him, he says, is not that the food system felt a gentle jolt - after all, he predicted it - but that it has been pummelled all at once by a perfect storm of troubles. “We could have seen it coming because of the biofuels policy, which has always struck me as absurd, or the rising price of oil, or increased consumption of meat, or weird things happening with climate. But all these things happened at once, and that sent food prices through the roof.”
And this time, there were none of the safeguards of grain stores, strategic food reserves, or import barriers that used to protect vulnerable economies from the vagaries of world markets. They had all been removed in the liberalisation craze of the past few decades.
His prognosis is that in the short term at least the crisis will carry on biting. Major institutions such as the World Bank persist, he says, in responding to events with the same failed policies of liberalisation of markets. “There’s no reason why food prices should come down significantly. And if they don’t, and there’s no real impetus for governments to redistribute spending power, people will continue to take to the streets.”
In the medium term, he’s confident that change is in the air. He detects a growing seriousness and willingness to embrace new ideas in some unexpected quarters. The reason we are chatting in a DC restaurant is that Patel has just that morning been giving testimony before a Congressional committee investigating the World Bank’s approach to food and development. With representatives from the World Bank, UN, Monsanto and other monoliths listening in, he told the committee that industrial agriculture could no longer be relied upon to feed the world and that we need a shift towards less fossil-fuel dependent farming and a return to rich ecosystems based on natural crop rotations and organic fertilisers. “Those are the kinds of things that are anathema to the World Bank and development analysts at the moment, and Congress normally doesn’t want to hear them. That they called on someone like me is very weird, but very heartening.”
In the longer term, though, even the current food crisis may seem mild. The world population is set to rise from about six billion today to nine billion by 2050. Global warming is likely to disrupt growing patterns and extend drought across Africa and the American south-west. Water resources for irrigation will be depleted. If we are already in a perfect storm, then we lack the terminology to describe what lies ahead.
I put it to him that any attempt to change world food production is like a game of poker with extraordinarily high stakes: it not only has to meet the massive yield of industrial farming - and say what you like about the modern food system, the one thing it has done is churn out mountains of the stuff relatively cheaply - it also has to raise it to support three billion extra hungry mouths. Can his alternative model achieve that?
“We’ve got an energy problem, a fuel problem, a water problem and global warming all coming at us,” he replies. “Monoculture is heavily C02-emitting, water and fossil-fuel dependent. Clearly we can’t carry on as we are. We can and we must meet this challenge with something new. So the question is what?”
That’s not entirely an answer to my question. There is a slightly starry-eyed quality to Stuffed and Starved that is also striking about its author in the flesh. When he talks of alternative farming techniques that offer a way forward, the examples he chooses come from Cuba, Venezuela and a project in Oakland that follows in the footsteps of the Black Panthers. That’s hardly going to play well with sceptical American policy-makers.
The other element that is lacking from his prognosis is any role for science and technological innovation in the search for solutions. Where technology does appear it is in the role of villain - GM crops are a ruse by Monsanto and others to secure corporate profits at the expense of the rural poor.
But isn’t there a place for responsibly directed science in steering us through the coming maelstrom? Couldn’t GM, for instance, prove to be crucial in developing drought-resistant crops as global warming tightens its grip?
“I’m big on science, married to a neuroscientist, I love it,” he insists, protesting perhaps a little too much. “I like the way Cuban science approaches the problem. They say you can have GM crops if you can prove there’s no better way of doing things. So they don’t have GM crops, because there always is a better way.”
Not exactly a ringing endorsement for the value of science. But then that is not where Patel’s heart lies. For that you have to look to politics, and political resistance. The soothsayer’s next book, he says, will be a look at the individuals and communities who are refusing to bow down to the current global system. He will soon be starting another journey to meet them. On his list: the slum-dwellers of Durban and the homeless Americans who run the University of the Poor. He sees in them a lesson for us all. “We are victims,” he says as he polishes off his pizza and prepares to fly back to San Francisco where he now lives. “If we are choosing between Coke or Pepsi, Burger King or McDonald’s, that’s not choice. We should stop feeling guilty about that. We should start feeling angry”.
Ed Pilkington is the Guardian’s New York correspondent. He is a former national and foreign editor of the paper, and author of Beyond the Mother Country.
Raj Patel’s book Stuffed and Starved predicted the current global food crisis - spiralling food prices, starvation and obesity. Ed Pilkington meets the soothsayer of agro-economics and talks about what will happen when all the food finally runs out
By Ed Pilkington
29/07/08 "The Guardian" -- - -There is a passage towards the end of Raj Patel’s book, Stuffed and Starved, which elevates its author to the rank of soothsayer. He wrote it at the beginning of 2007, well before the roar of anger about rising food prices that resounded across the planet and that he so uncannily and accurately predicted.
The passage begins with Patel’s summary of earlier sections of the book in which he depicts the wasteland, as he calls it, of the modern food system. It is a system that destroys rural communities, poisons poor city dwellers, is inhumane to animals, demands unsustainable levels of use of fossil fuels and water, contributes to global warming, spreads disease and limits our sensuousness and compassion. As if that litany wasn’t enough, he then adds this: “Perhaps most ironic, although it is controlled by some of the most powerful people on the planet, the food system is inherently weak. It has systemic and structural vulnerabilities that lie close to the surface of our daily lives. All it takes to expose them is a gentle jolt.”
When he wrote that passage, Patel had in mind his native Britain and its occasional history of food crises. There was the oil crisis of 1973 that prompted panic-buying in the shops. Or 2000, when protesting truckers blockaded the oil refineries and the shelves again came close to emptying. Those events inspired Patel to contemplate a startling question: “What would have happened,” he wrote, “had all the food on the shelves run out?”
He left that question dangling in the book. But he got thinking about it again as he was on a tour of Australia last August promoting the book. As he travelled from Perth to Melbourne and then Sydney he kept being asked the same question: how did the drought that by then was already biting hard on Australian farmers as well as on consumers who were suffering rising prices, fit into his critique of modern food production? As he faced his audiences, it began to look to Patel, in a tentative, creeping way, that the gentle jolt he had written about was really happening.
“What was weird was that the stories I was hearing about drought and farmers in desperation were very similar to the stories that had been told to me in India a couple of years before. They were all about small independent farmers up to their eyeballs in debt. They had borrowed hugely to make a go of it, and then there’d been a shock - in Australia it was drought, in India it might be harvest failure, in Britain foot-and-mouth. It only takes one small shock.”
And then the agricultural slurry really hit the fan. The first intimations of something truly out of the ordinary came in Mexico in early 2007, before he had finished writing Stuffed and Starved. There were reports of unrest in some of the larger cities about rising food prices, partly related to the decision of the US government to divert huge quantities of corn to ethanol production, in an attempt to reduce dependence on foreign oil. Then early this year some eight months after Patel had finished writing about the risk of gentle jolts - the so-called “silent tsunami” began. Food prices appeared to be out of control, spiralling up by 68% in the case of rice in the first four months of this year alone. Wheat and corn almost doubled in a year.
Such hikes on the costs of the basics of life hit the urban poor in the cities of the developing world hardest, and the misery was soon made manifest in the form of unrest. Impromptu protests grew into angry marches and then erupted into food riots. In Haiti six people died and the prime minister was ousted from power. Two days of rioting ensued in Egypt and 24 people died in Cameroon. The pattern repeated itself right across the developing world, from Guyana and Bolivia to Ivory Coast, Surinam and Senegal, Yemen, Uzbekistan, Bangladesh and South Korea. Wild events in turn prompted wild official responses. Vietnam introduced a night curfew on harvesting machines to stop illegal raiding of the fields; any Filipino caught hoarding rice was threatened with life in jail, Malaysia cancelled all public building works and switched instead to stockpiling food. Even the rich western world was hit. Food prices in the UK have risen almost 7% year on year, shaking the government’s economic confidence. And if any doubts remained about the severity of this crisis, Wal-Mart, the supermarket goliath that stands at the pinnacle of the modern food system, announced it was imposing a four-bag limit for rice on its cash-and-carry customers to stop a run on supplies.
For millions of people around the world the soaring prices have spelt disaster - the World Bank has put the number of people who have been pushed into hunger at 100 million. But for one person, the impact has been strangely and paradoxically counter-factual. When Stuffed and Starved - Patel’s first book - came out last August, he and his publishers imagined it would at best enjoy a specialist readership among globalisation activists attuned to issues of corporate greed and exploitation. But the food crisis has turned it from being a niche read into the literary equivalent of a crystal ball. As a result, the demand has in Patel’s words “gone bonkers”. Reprints have been ordered in Britain, the US and Spain, deals done for editions in Italy, China and South Korea and half a dozen translations are under discussion. “If I had been this popular at school I’d be a different man today,” he quips. His analysis of the crisis, as the author of the book that predicted it all, is now hotly sought after. Or as Patel, who has the savvy Londoner’s gift for self-deprecation, puts it: “Spank me, and call me Cassandra!”
We meet for lunch in a restaurant within a Big Mac’s throw from Capitol Hill in Washington. It’s trivial I know, but it’s impossible not to be curious - a little intimidated even - about what Patel will order from the menu. He points out in his book that the livestock industry is responsible for 18% of greenhouse gas emissions, more than cars. So will he go for the hanger steak?
He asks for a pizza with goat’s cheese and mushrooms, but when I ask whether his choice was politically or ethically motivated, he laughs. “I haven’t had a steak in my life. Growing up in a Hindu household, I clamoured for hamburgers like any other kid and my parents said: ‘Oh, if you must.’ But they drew the line at steak.”
Patel sees in himself, and his eating habits, a tale in microcosm of the globalisation he writes about. His family on his mother’s side were civil servants in Kenya, and tin miners in Fiji on his father’s side. They both were drawn to the mother country, arriving in London in the 60s, where they met. It later became a cliche, but they were among the first to open up “Mr Patel’s corner shop”, working 18-hour days in an era before 24-hour supermarkets. The earliest memories of their son, who was born in 1972, are of playing among the fags, mags and sweets in the shop in Golders Green. It would be too neat, I hazard, to suggest that his parents were forced to close down the shop because of competition with the supermarkets? “My dad did very well for himself,” he replies, speaking with a high-velocity stammer. “But they were certainly driven out. You can’t compete any more, the corner shop is a dying industry.”
Despite those difficulties, the Patels did proud by their son, sending him to a north London grammar school, then to Oxford where he studied PPE, and finally to Berkeley in California. Along the way, he became interested in, and engaged with, the anti-globalisation movement. He was among the thousands who protested in Seattle against the World Trade Organisation (WTO) in 1999, and it was there that he came face to face with what he calls the “march of the farmers’ movement” in the form of arguably the world’s largest network of independent organisations, La Via Campesina, which represents around 150 million farm workers and smallholders across the globe. “I was struck by their sophisticated and detailed critique of the WTO. Seven years before Seattle they had already translated the draft text of the Dunkel report [on trade] into Kannada and were distributing it in the fields.”
He began delving more deeply into the subject of trade, food policy and agricultural resistance as an analyst at Food First, a radical thinktank in Oakland, where an idea for a book emerged. It began life as a meditation on choice, or the lack of it - Coke v Pepsi, McDonald’s v Wendy’s. Its working title was Choice Cuts. Over the next three years he travelled to research the book from South Africa, Europe and South Korea to Brazil, Mexico and the US. In the process the thesis grew bigger in scope and more refined. Its focus was no longer just a lack of consumer choice, it embraced an entire world food system that can consign 800 million - more than one in 10 people on earth - to hunger while simultaneously inflicting obesity on an even greater number, 1 billion people. Hence the book’s new, and in his opinion better, title.
His analysis shows how communities around the planet have been disempowered by a system that appears to offer an abundance of cheap food, but in reality dictates unhealthy and limited choices to an overworked and underpaid workforce that cannot afford any better. “The figure that often stuns people outside the US when I tour with the book is that 20% of American fast-food meals are eaten in cars. People are incredulous and ask: is that because Americans so love their cars? But living here you see how hard people work, for a pittance, with no healthcare, no decent education, not even a hint of a pension - so it’s not surprising that the one hot meal you eat a day you eat off your lap. That’s where the food system becomes a lifestyle.”
Much of the broad argument in Stuffed and Starved will be familiar to those who have followed the debate on globalisation - how the liberalisation of trade has created a vast global market for heavily subsidised American and European agricultural products at the expense of local growers in the developing world; how relentless pressure to drive down food prices over 30 years has seen rich ecosystems replaced by monocultures that rely on oil-powered machines, chemical fertilisers and pesticides to drive up yields; and how international corporations and supermarkets that control the flow of technologies and of food itself have been the beneficiaries. It is a portrait of the agro-economics of the madhouse. “While we think our food is made for us, we are in fact being made for our food,” he says.
Take India, which he describes as a storm of contradictions. “India has the most people in the Forbes top 10 billionaires list, but in the past decade the average calorie intake of the poorest has fallen. There are levels of hunger we haven’t seen since the British left, combined with the world’s highest levels of type 2 diabetes from the pressure of eating too much of the wrong kinds of food.”
Or take the UK, where food producers are now less than one per cent of the workforce. The government may be committed to reducing global warming emissions, but meanwhile a quarter of all trucks on UK roads are carrying food and the average British family is driving 136 miles a year to buy it.
Or America. This is the country whose farmers, food giants and supermarkets benefit most from the global system. Such is the might of US food corporations that the double arches of McDonald’s are more widely recognised as a symbol than the cross. Wal-Mart is the largest private employer not only in the US, but also in Mexico where Walmex takes in three out of every 10 pesos Mexicans spend on food. Yet amid such largesse 35 million Americans don’t know where their next meal is coming from. “You are hearing these amazing stories of working American families adopting coping strategies that I learned about in development sociology - skipping meals, growing their own fruit and vegetables, giving up on meat. That’s happening right here right now.”
Which brings us back to the current food crisis. What surprised him, he says, is not that the food system felt a gentle jolt - after all, he predicted it - but that it has been pummelled all at once by a perfect storm of troubles. “We could have seen it coming because of the biofuels policy, which has always struck me as absurd, or the rising price of oil, or increased consumption of meat, or weird things happening with climate. But all these things happened at once, and that sent food prices through the roof.”
And this time, there were none of the safeguards of grain stores, strategic food reserves, or import barriers that used to protect vulnerable economies from the vagaries of world markets. They had all been removed in the liberalisation craze of the past few decades.
His prognosis is that in the short term at least the crisis will carry on biting. Major institutions such as the World Bank persist, he says, in responding to events with the same failed policies of liberalisation of markets. “There’s no reason why food prices should come down significantly. And if they don’t, and there’s no real impetus for governments to redistribute spending power, people will continue to take to the streets.”
In the medium term, he’s confident that change is in the air. He detects a growing seriousness and willingness to embrace new ideas in some unexpected quarters. The reason we are chatting in a DC restaurant is that Patel has just that morning been giving testimony before a Congressional committee investigating the World Bank’s approach to food and development. With representatives from the World Bank, UN, Monsanto and other monoliths listening in, he told the committee that industrial agriculture could no longer be relied upon to feed the world and that we need a shift towards less fossil-fuel dependent farming and a return to rich ecosystems based on natural crop rotations and organic fertilisers. “Those are the kinds of things that are anathema to the World Bank and development analysts at the moment, and Congress normally doesn’t want to hear them. That they called on someone like me is very weird, but very heartening.”
In the longer term, though, even the current food crisis may seem mild. The world population is set to rise from about six billion today to nine billion by 2050. Global warming is likely to disrupt growing patterns and extend drought across Africa and the American south-west. Water resources for irrigation will be depleted. If we are already in a perfect storm, then we lack the terminology to describe what lies ahead.
I put it to him that any attempt to change world food production is like a game of poker with extraordinarily high stakes: it not only has to meet the massive yield of industrial farming - and say what you like about the modern food system, the one thing it has done is churn out mountains of the stuff relatively cheaply - it also has to raise it to support three billion extra hungry mouths. Can his alternative model achieve that?
“We’ve got an energy problem, a fuel problem, a water problem and global warming all coming at us,” he replies. “Monoculture is heavily C02-emitting, water and fossil-fuel dependent. Clearly we can’t carry on as we are. We can and we must meet this challenge with something new. So the question is what?”
That’s not entirely an answer to my question. There is a slightly starry-eyed quality to Stuffed and Starved that is also striking about its author in the flesh. When he talks of alternative farming techniques that offer a way forward, the examples he chooses come from Cuba, Venezuela and a project in Oakland that follows in the footsteps of the Black Panthers. That’s hardly going to play well with sceptical American policy-makers.
The other element that is lacking from his prognosis is any role for science and technological innovation in the search for solutions. Where technology does appear it is in the role of villain - GM crops are a ruse by Monsanto and others to secure corporate profits at the expense of the rural poor.
But isn’t there a place for responsibly directed science in steering us through the coming maelstrom? Couldn’t GM, for instance, prove to be crucial in developing drought-resistant crops as global warming tightens its grip?
“I’m big on science, married to a neuroscientist, I love it,” he insists, protesting perhaps a little too much. “I like the way Cuban science approaches the problem. They say you can have GM crops if you can prove there’s no better way of doing things. So they don’t have GM crops, because there always is a better way.”
Not exactly a ringing endorsement for the value of science. But then that is not where Patel’s heart lies. For that you have to look to politics, and political resistance. The soothsayer’s next book, he says, will be a look at the individuals and communities who are refusing to bow down to the current global system. He will soon be starting another journey to meet them. On his list: the slum-dwellers of Durban and the homeless Americans who run the University of the Poor. He sees in them a lesson for us all. “We are victims,” he says as he polishes off his pizza and prepares to fly back to San Francisco where he now lives. “If we are choosing between Coke or Pepsi, Burger King or McDonald’s, that’s not choice. We should stop feeling guilty about that. We should start feeling angry”.
Ed Pilkington is the Guardian’s New York correspondent. He is a former national and foreign editor of the paper, and author of Beyond the Mother Country.
Historical prices for silver
I do have an idea how high silver will get in price. The historical high for silver was set 531 years ago in 1477, topping at (using the purchasing power of 1998 dollars) a princely $806 an ounce. By comparison, the price of silver less than $19 an ounce today, and was only about $5 an ounce in 1998, after having bottomed at under $4 an ounce in 1992.
Now, fast-forward to today as our 2008 dollars, which have fallen 50% in purchasing power since 1998, means that the all-time high price for silver, set in 1477, now stands at $1,012 an ounce, measured in the buying power of 2008 dollars! Over a thousand dollars an ounce! For silver! Whee!
In case you ain't noticed, we're unmistakably coming off the lows of a 530-year bear market in silver and, theoretically, entering a long bull market, which ought to be exciting to people who have a lot riding on silver gaining so much in price (me), or even just keep up with this kind of thing, like, for instance, Israel Friedman, writing at InvestmentRarities.com, who notes that there are 5 billion ounces of gold sitting around someplace in the world, but that there are only 2.5 billion ounces of silver, even though 5 times as much silver is mined every year than gold.
Therefore, silver is being consumed at prodigious rates, which is why Mr. Friedman says, "Silver is needed to maintain and improve future standards of living. Gold is needed for luxury and emotional reasons. Silver is for the optimist, gold for the pessimist."
In that optimistic vein, Mr. Friedman says, "I honestly believe that silver must eventually sell for five to ten times what the price of gold may be."
Now, fast-forward to today as our 2008 dollars, which have fallen 50% in purchasing power since 1998, means that the all-time high price for silver, set in 1477, now stands at $1,012 an ounce, measured in the buying power of 2008 dollars! Over a thousand dollars an ounce! For silver! Whee!
In case you ain't noticed, we're unmistakably coming off the lows of a 530-year bear market in silver and, theoretically, entering a long bull market, which ought to be exciting to people who have a lot riding on silver gaining so much in price (me), or even just keep up with this kind of thing, like, for instance, Israel Friedman, writing at InvestmentRarities.com, who notes that there are 5 billion ounces of gold sitting around someplace in the world, but that there are only 2.5 billion ounces of silver, even though 5 times as much silver is mined every year than gold.
Therefore, silver is being consumed at prodigious rates, which is why Mr. Friedman says, "Silver is needed to maintain and improve future standards of living. Gold is needed for luxury and emotional reasons. Silver is for the optimist, gold for the pessimist."
In that optimistic vein, Mr. Friedman says, "I honestly believe that silver must eventually sell for five to ten times what the price of gold may be."
Give Brazil's managers the management prize
The return of global inflation
July 28, 2008
Global inflation is back, and it is shuffling the kaleidoscope of world economic development. Some countries that had appeared to be thriving are coping poorly with inflation while others, including at least one chronic inflation recidivist, are showing a level of monetary maturity worthy of the Fed’s 1980s Chairman Paul Volcker and far ahead of his feckless successors Alan Greenspan and Ben Bernanke.
First, a brief monetary primer. It was established pretty convincingly by Milton Friedman, and proved beyond all doubt in the inflationary episodes of the 1970s and 1980s that if you want to bring inflation under control, you must set interest rates at a margin above the current inflation level. That may not be sufficient to do the job – sometimes, as today, countries may be affected by a global inflation about which they can do little – but it is undoubtedly a necessary condition for success, except in those few cases where global inflation disappears magically without significant action by an individual country. Even in such cases, exceptional monetary sloppiness may have cemented inflation so firmly into the system that monetary heavy artillery is later needed to remove it. In Britain after 1973, for example, the effect of the first oil price shock was moderate, and tempered by Britain’s own growing oil production. However monetary policy was so sloppy in 1971-75, with highly negative real interest rates, that by the time oil prices had stopped rising, in 1975-76, inflation had embedded itself deep in the British economy. At that point sterner methods were needed – which Margaret Thatcher’s government duly provided, with much pain of bankruptcies and unemployment, in 1979-82.
It is often believed that only the United States of the three major developed economies has inflation problems, but this is not entirely the case. The US certainly is in a difficult and worsening position, with inflation of 5%, even on the fudged Bureau of Labor Statistics figures, short term interest rates held down artificially to around 2% and huge amounts of liquidity being pumped into the banking system to rescue Bear Stearns, Fannie Mae and Freddie Mac and any other financial institution currently suffering a hangnail. In the Eurozone, inflation hit a record 4.0% in June in spite of the strength of the currency, and can be expected to get worse in the months ahead thanks to the European Central Bank, which has been expanding euro M3 at 10% or more for the past two years, approximately double the growth rate of Eurozone GDP.
Even in Japan, where policymakers and Western analysts have been bleating about deflation for a decade, inflation has now reared its head, being 2% in the year to June, well above the Bank of Japan’s target interest rate of 0.5%. This is unsurprising; the Bank of Japan under its previous Governor Toshihiko Fukui, appointed in 2003 by the admirable reformist prime minister Junichiro Koizumi, had been attempting to raise Japan’s target interest rate to a more normal 2-3% range for some years. After a rise to 0.5% in February 2007 Fukui was prevented from further rises for several months by the political uncertainty surrounding elections, and then in August the subprime crisis broke, depriving him of further support for tightening. Now he has been replaced by the politically acceptable and therefore inflationist Masaaki Shirakawa, and there is little sign of Japan’s interest rates being increased to deal with a rapidly increasing inflation problem.
It is a great pity the rate-increasing opportunity was missed. Japan’s economy is dominated by its legions of aging savers, who have been receiving nugatory returns on their money for over a decade, and who deserve to cushion their impending retirements with savings returns approaching a normal level of 3% plus inflation. Raising rates to 2-3% last year would thus have been economically stimulative, not restrictive, and would have prevented Japan from falling into the same inflationary bog in which the world is now wallowing.
In emerging markets, inflation has generally risen to rather higher levels. This is not because emerging markets have sloppier monetary management than developed countries (outside Zimbabwe it is difficult to imagine sloppier monetary management than that of the Greenspan/Bernanke duo, though I shall shortly present an example thereof.) However emerging markets are more exposed to commodity and energy price rises, because more of their citizens are impoverished and spend a high proportion of their incomes on commodity-related items. The price of gasoline is a more important factor in the lives of last year’s 8 million Chinese automobile buyers than in those of the 16 million US buyers.
Looking first at the four BRIC countries anointed by Goldman Sachs in 2003 as the pillars of future global growth, we find one monetary failure, two countries struggling with the problem and one surprising success.
The failure is Russia, a country blessed in this decade with every advantage, and managing even so to forge an economic trajectory leading directly back into poverty. Russian inflation is currently 14%, while its benchmark interest rate is only 11%. Needless to say, that inflation rate is heavily understated. Furthermore, Russia pursues policies of property confiscation and arbitrary state action worthy of the worst be-medaled Latin American caudillo. Once oil prices fall back it’s likely Russia will fall into a combination of high inflation and deep recession that will enrage even the battered Russian populace.
Neither India nor China are tackling inflation effectively. In India, inflation is running at 12% compared with a benchmark interest rate of only 8.5%. Furthermore, India is attacking the problem with price controls and government subsidies, which are having their usual effect of distorting the economy (making Indian oil refining, for example, an economically suicidal business). The government is also running a huge budget deficit, even at a time of massive economic boom. Fortunately in 2009 the Indian electorate will be given the chance to undo their terrible mistake of 2004, when they threw out the BJP government of Atal Bihari Vajpayee, the only truly free-market government India has ever had. Vajpayee has retired; whether the new BJP leaders are as committed to the free market and as economically competent only time will tell, but re-election of the Congress Party coalition would almost certainly prove disastrous, particularly as the mildly reformist prime minister Manmohan Singh is already 76.
In China, if you don’t like the government, tough. Inflation is nominally 7.1%, but that figure is distorted by subsidies and almost certainly artificially suppressed pending next month’s Olympics. In any case interest rates at 7.47% are far too low to have any beneficial effect, particularly as returns for savers are only around half this level. In both India and China therefore, while property rights are safer than they are in Russia, savers are losing ground all the time even before tax, not the recipe for a healthy economy .
Before turning to the last and well-governed BRIC, a couple of other examples which may be illuminating. Vietnam has inflation of 27%, but that is almost entirely imported. Its benchmark interest rate is only 14%, but its economy is highly unstable; it runs a trade deficit of 30% of GDP, balanced by a foreign direct investment inflow of 65% of GDP. While theoretically Vietnam is not doing enough to stem inflation, in practice its economic position is so singular it may find inflation an inevitable price of improving rapidly the living standards of its people. The country has a real estate boom, as one would expect given its negative real interest rates, but overall its problems are mostly those of success, and it seems likely that an end to the world commodities bubble will also cool inflation in Vietnam.
Finally, the Idle Apprentice, to contrast with Brazil’s Industrious Apprentice. Dubai has enjoyed a construction and tourism boom on the back of record revenues to the Gulf region and the oil-rich United Arab Emirates of which it is a part. It has used the money to build ever more extravagant prestige construction projects, including the world’s only 7-star hotel, its tallest building, an $82 billion aerospace project to include the world’s largest airport and a recreation of a world map in the harbor. With only 0.02% of the world’s population, and expatriates representing 80% of its workforce, it employs 10% of the world’s tower construction cranes. Its inflation rate is 22%, while long term mortgages are available there for 7%. Needless to say, the construction boom is proceeding without hope of restraint – after all the country has combined the monetary policy of Ben Bernanke on steroids with the building frenzy of the 2006 Florida condo market. Once oil prices drop back to any kind of long term equilibrium, probably much higher than their historical level but below $100, Dubai should be in for the mother of all construction crashes. By 2010 one can expect it to be a forest of half-completed concrete, with 10% residential and commercial occupancy rates. GE has just announced an investment of $40 billion in Dubai infrastructure; it is most unlikely to see its money back.
Finally Brazil, which in the past has indulged in the typical Latin American follies of excessive government spending, wild borrowing sprees, hopelessly sloppy monetary policy leading to hyperinflation and inadequate protection of property rights, particularly foreign property rights. Now things are different. Foreign debt has halved as a percentage of GDP since 2002, while the government’s finances are in only modest deficit. Foreign investment is encouraged and its rights protected. Most impressive, while inflation is around 6%, because of high commodity prices, the benchmark Selic interest rate has just been raised to 13%. At that level, inflation will be squeezed out of the system and excessive borrowing will be discouraged. Thus when the commodities boom from which Brazil has benefited deflates, Brazil will be able to lower interest rates and continue domestic expansion without fear of running out of money. The Nobel Committee really needs to give a prize for monetary policy; from the above survey of mild or extreme inflation-producing sloppiness there can be no question that Brazil would win it and deservedly so.
It is unclear why Brazil has since 2002 deviated from the usual Latin American track, exemplified by the basket-cases of Argentina, Venezuela and Bolivia. One can speculate that the honor of being termed a “BRIC” super growth market – quite undeservedly so, in 2003 – caused Brazil to attempt to live up to its new billing – like the wayward teenager who is straightened out by a teacher who values his achievements.
The overall lesson from the above review is as usual bearish. Almost all the world has abandoned proper anti-inflationary discipline and is destined to suffer a period of high inflation and recession in the coming years. Some countries, like Dubai, will become true basket-cases, others like China and Vietnam may muddle through fairly satisfactorily. Only a few countries like Brazil have taken the inflationary threat sufficiently seriously and will thus be in a position to continue expanding even while the rest of the world endures recession.
The monetary Idle Apprentices are about to get their comeuppance.
July 28, 2008
Global inflation is back, and it is shuffling the kaleidoscope of world economic development. Some countries that had appeared to be thriving are coping poorly with inflation while others, including at least one chronic inflation recidivist, are showing a level of monetary maturity worthy of the Fed’s 1980s Chairman Paul Volcker and far ahead of his feckless successors Alan Greenspan and Ben Bernanke.
First, a brief monetary primer. It was established pretty convincingly by Milton Friedman, and proved beyond all doubt in the inflationary episodes of the 1970s and 1980s that if you want to bring inflation under control, you must set interest rates at a margin above the current inflation level. That may not be sufficient to do the job – sometimes, as today, countries may be affected by a global inflation about which they can do little – but it is undoubtedly a necessary condition for success, except in those few cases where global inflation disappears magically without significant action by an individual country. Even in such cases, exceptional monetary sloppiness may have cemented inflation so firmly into the system that monetary heavy artillery is later needed to remove it. In Britain after 1973, for example, the effect of the first oil price shock was moderate, and tempered by Britain’s own growing oil production. However monetary policy was so sloppy in 1971-75, with highly negative real interest rates, that by the time oil prices had stopped rising, in 1975-76, inflation had embedded itself deep in the British economy. At that point sterner methods were needed – which Margaret Thatcher’s government duly provided, with much pain of bankruptcies and unemployment, in 1979-82.
It is often believed that only the United States of the three major developed economies has inflation problems, but this is not entirely the case. The US certainly is in a difficult and worsening position, with inflation of 5%, even on the fudged Bureau of Labor Statistics figures, short term interest rates held down artificially to around 2% and huge amounts of liquidity being pumped into the banking system to rescue Bear Stearns, Fannie Mae and Freddie Mac and any other financial institution currently suffering a hangnail. In the Eurozone, inflation hit a record 4.0% in June in spite of the strength of the currency, and can be expected to get worse in the months ahead thanks to the European Central Bank, which has been expanding euro M3 at 10% or more for the past two years, approximately double the growth rate of Eurozone GDP.
Even in Japan, where policymakers and Western analysts have been bleating about deflation for a decade, inflation has now reared its head, being 2% in the year to June, well above the Bank of Japan’s target interest rate of 0.5%. This is unsurprising; the Bank of Japan under its previous Governor Toshihiko Fukui, appointed in 2003 by the admirable reformist prime minister Junichiro Koizumi, had been attempting to raise Japan’s target interest rate to a more normal 2-3% range for some years. After a rise to 0.5% in February 2007 Fukui was prevented from further rises for several months by the political uncertainty surrounding elections, and then in August the subprime crisis broke, depriving him of further support for tightening. Now he has been replaced by the politically acceptable and therefore inflationist Masaaki Shirakawa, and there is little sign of Japan’s interest rates being increased to deal with a rapidly increasing inflation problem.
It is a great pity the rate-increasing opportunity was missed. Japan’s economy is dominated by its legions of aging savers, who have been receiving nugatory returns on their money for over a decade, and who deserve to cushion their impending retirements with savings returns approaching a normal level of 3% plus inflation. Raising rates to 2-3% last year would thus have been economically stimulative, not restrictive, and would have prevented Japan from falling into the same inflationary bog in which the world is now wallowing.
In emerging markets, inflation has generally risen to rather higher levels. This is not because emerging markets have sloppier monetary management than developed countries (outside Zimbabwe it is difficult to imagine sloppier monetary management than that of the Greenspan/Bernanke duo, though I shall shortly present an example thereof.) However emerging markets are more exposed to commodity and energy price rises, because more of their citizens are impoverished and spend a high proportion of their incomes on commodity-related items. The price of gasoline is a more important factor in the lives of last year’s 8 million Chinese automobile buyers than in those of the 16 million US buyers.
Looking first at the four BRIC countries anointed by Goldman Sachs in 2003 as the pillars of future global growth, we find one monetary failure, two countries struggling with the problem and one surprising success.
The failure is Russia, a country blessed in this decade with every advantage, and managing even so to forge an economic trajectory leading directly back into poverty. Russian inflation is currently 14%, while its benchmark interest rate is only 11%. Needless to say, that inflation rate is heavily understated. Furthermore, Russia pursues policies of property confiscation and arbitrary state action worthy of the worst be-medaled Latin American caudillo. Once oil prices fall back it’s likely Russia will fall into a combination of high inflation and deep recession that will enrage even the battered Russian populace.
Neither India nor China are tackling inflation effectively. In India, inflation is running at 12% compared with a benchmark interest rate of only 8.5%. Furthermore, India is attacking the problem with price controls and government subsidies, which are having their usual effect of distorting the economy (making Indian oil refining, for example, an economically suicidal business). The government is also running a huge budget deficit, even at a time of massive economic boom. Fortunately in 2009 the Indian electorate will be given the chance to undo their terrible mistake of 2004, when they threw out the BJP government of Atal Bihari Vajpayee, the only truly free-market government India has ever had. Vajpayee has retired; whether the new BJP leaders are as committed to the free market and as economically competent only time will tell, but re-election of the Congress Party coalition would almost certainly prove disastrous, particularly as the mildly reformist prime minister Manmohan Singh is already 76.
In China, if you don’t like the government, tough. Inflation is nominally 7.1%, but that figure is distorted by subsidies and almost certainly artificially suppressed pending next month’s Olympics. In any case interest rates at 7.47% are far too low to have any beneficial effect, particularly as returns for savers are only around half this level. In both India and China therefore, while property rights are safer than they are in Russia, savers are losing ground all the time even before tax, not the recipe for a healthy economy .
Before turning to the last and well-governed BRIC, a couple of other examples which may be illuminating. Vietnam has inflation of 27%, but that is almost entirely imported. Its benchmark interest rate is only 14%, but its economy is highly unstable; it runs a trade deficit of 30% of GDP, balanced by a foreign direct investment inflow of 65% of GDP. While theoretically Vietnam is not doing enough to stem inflation, in practice its economic position is so singular it may find inflation an inevitable price of improving rapidly the living standards of its people. The country has a real estate boom, as one would expect given its negative real interest rates, but overall its problems are mostly those of success, and it seems likely that an end to the world commodities bubble will also cool inflation in Vietnam.
Finally, the Idle Apprentice, to contrast with Brazil’s Industrious Apprentice. Dubai has enjoyed a construction and tourism boom on the back of record revenues to the Gulf region and the oil-rich United Arab Emirates of which it is a part. It has used the money to build ever more extravagant prestige construction projects, including the world’s only 7-star hotel, its tallest building, an $82 billion aerospace project to include the world’s largest airport and a recreation of a world map in the harbor. With only 0.02% of the world’s population, and expatriates representing 80% of its workforce, it employs 10% of the world’s tower construction cranes. Its inflation rate is 22%, while long term mortgages are available there for 7%. Needless to say, the construction boom is proceeding without hope of restraint – after all the country has combined the monetary policy of Ben Bernanke on steroids with the building frenzy of the 2006 Florida condo market. Once oil prices drop back to any kind of long term equilibrium, probably much higher than their historical level but below $100, Dubai should be in for the mother of all construction crashes. By 2010 one can expect it to be a forest of half-completed concrete, with 10% residential and commercial occupancy rates. GE has just announced an investment of $40 billion in Dubai infrastructure; it is most unlikely to see its money back.
Finally Brazil, which in the past has indulged in the typical Latin American follies of excessive government spending, wild borrowing sprees, hopelessly sloppy monetary policy leading to hyperinflation and inadequate protection of property rights, particularly foreign property rights. Now things are different. Foreign debt has halved as a percentage of GDP since 2002, while the government’s finances are in only modest deficit. Foreign investment is encouraged and its rights protected. Most impressive, while inflation is around 6%, because of high commodity prices, the benchmark Selic interest rate has just been raised to 13%. At that level, inflation will be squeezed out of the system and excessive borrowing will be discouraged. Thus when the commodities boom from which Brazil has benefited deflates, Brazil will be able to lower interest rates and continue domestic expansion without fear of running out of money. The Nobel Committee really needs to give a prize for monetary policy; from the above survey of mild or extreme inflation-producing sloppiness there can be no question that Brazil would win it and deservedly so.
It is unclear why Brazil has since 2002 deviated from the usual Latin American track, exemplified by the basket-cases of Argentina, Venezuela and Bolivia. One can speculate that the honor of being termed a “BRIC” super growth market – quite undeservedly so, in 2003 – caused Brazil to attempt to live up to its new billing – like the wayward teenager who is straightened out by a teacher who values his achievements.
The overall lesson from the above review is as usual bearish. Almost all the world has abandoned proper anti-inflationary discipline and is destined to suffer a period of high inflation and recession in the coming years. Some countries, like Dubai, will become true basket-cases, others like China and Vietnam may muddle through fairly satisfactorily. Only a few countries like Brazil have taken the inflationary threat sufficiently seriously and will thus be in a position to continue expanding even while the rest of the world endures recession.
The monetary Idle Apprentices are about to get their comeuppance.
Bear Sterns death and the US way of banking
One of the most remarkable chapters in the long history of American jurisprudence must certainly be the saga of the United States versus Anthony Accetturo et al, sometimes known as the Lucchese trial. In 1985, following a 10-year investigation, the US Department of Justice delivered a 65-page racketeering indictment against 21 members of the New Jersey branch of New York's Lucchese crime family.
The trial that commenced in November 1986 took up 240 volumes of court record, and is the longest Federal trial in American history, lasting 21 months. As depicted in Sidney Lumet's 2006 movie Find Me Guilty, the trial proceedings frequently descended into farce, in part due to the very unorthodox and ribald efforts of one of the accused, Giacomo DiNorscio, (played in the movie by Vin Diesel) to act as his own attorney
But the verdict that the jury delivered on August 26, 1988, was simple and straightforward - not guilty, for all defendants on all charges. Following the 1995 OJ Simpson trial, when the former football star was acquitted of murdering his former wife, legal observers would resurrect an old term for the circumstance of juries acquitting presumably guilty defendants for reasons other than the actual facts of their guilt or innocence - jury nullification.
After the Lucchese trial, observers speculated that, since most of the supposed victims of the defendants' crimes were not uninvolved "civilians", but other gang members also crawling across the web of organized crime in the metropolitan New York area, the victims should have, must have, realized that simply being involved in the orbit of organized crime would make them vulnerable to the type of predatory, criminal activity that they subjected others to. As Hyman Roth (Lee Strasberg) said in Godfather 2 explaining why he did not seek vengeance for the killing of a protege, "this is the business we've chosen."
That's what somebody should tell Bear Stearns when they start squawking about what happened to them last March.
Finally, the fin-de-siecle for the Bush age has arrived in the US, and across the agencies that regulate the financial markets the bonfires of the vanities are being set alight. Holding high the burning torch of moral purification is none other than a most unlikely Savonarola: Securities and Exchange Commission (SEC) chairman Christopher Cox. Once a true devotee of the free market's conventions and customs, he has most recently been going door to door among all the great houses of American finance, ordering those inside to surrender for immolation the free-market practices and techniques he only recently was purported to have cherished.
Trying to earn a seat at the big kid's table where Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke are working on saving the world, (while President George W Bush is off somewhere totally uninvolved in all these events, perhaps seeking to assure that Cliff Notes are included in the holdings at the future George W Bush Presidential Library at Southern Methodist University in Dallas) Cox has now devised a unique soothing balm for the raw, irritated financial markets. In trying to make life harder for what are now seen as the parasitic invaders besieging the bodies, shares and souls of financial companies, he seems to be hoping to be able to heal these institutions simply through disarming the forces attacking them.
Last week, I explored how the new Wall Street moral purity crusade was cracking down on the once winked upon practice of "naked" short selling (see Bush turns to the dark side , Asia Times Online, July 23, 2008). Now, it appears that Cox, seeking to stamp out sin wherever it may be found in Lower Manhattan, is also sending his financial flatfoots back onto the street with subpoenas to force all those unfortunates in receipt of one to, under pain of all of the mighty state's tortuous sanctions, confess all they know about what happened to the Bear Stearns investment house in the waning days of last winter.
With all the calamities and catastrophes that have befallen the financial markets just since the leaves returned to the trees in the Northern Hemisphere you might have forgotten just what happened in between March 10 and 17 of this year, but, for those who lived through it, it was a time of the most fundamental and far-reaching change in the structure of American finance.
Bear Stearns, the blue collar (as opposed to the rest of the Street's blue-blooded), sharp-elbowed, red in tooth and claw bond trading house, whose bankruptcy of two subprime-mortgage-based hedge funds was the starter's pistol for the entire financial crisis in the early summer of 2007, entered the week fat and happy, sitting on an US$18 billion cash reserve. It would end the week in abject destitution and penury, its stock, which had traded as high as $170 in 2007, then ordered by the government to be valued at $2.
Hunt of malfeasance
Cox wants to know if there was any criminal malfeasance involved in these circumstances; failing finding that, failing discovering the proverbial "smoking gun" that forensic tests can match with some supposed bullet lodged in Bear's now entombed corpse, it seems that Cox would be satisfied with finding practices, accepted and allowed during the long languid summer of financial markets' deregulation, that, during the current winter of reproach and rebuke, he can say that, after taking a second look, actually were crimes after all.
Whatever Cox's gendarmes' discover, it will probably be very similar to an extraordinary, 10,000 word (and you thought I was long-winded) narrative published in this month's Vanity Fair (online at http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808). Authored by respected financial journalist Bryan Burrough (the co-author, with Jon Helyar, of the definitive 1990 account of the 1988 leveraged buyout of RJR Nabisco, Barbarians at the Gate) "Bringing Down Bear Stearns" certainly should be the first stop for those, from concerned citizens to Cox's corybantic cerberuses, interested in the events of the Ides of last March, for it seems that all the principals involved have been well and thoroughly interviewed by Burrough.
So just what did happen to Bear Stearns?
On Monday, March 10 of this year, in no way was there any reason to assume the travails that Bear was soon to undergo. The mephitic rank of last summer's Bear hedge-fund collapse was mostly dissipated; the company felt that, with a capital reserve of $18 billion, it was as well fortified to weather what the remainder of the credit crisis storm would bring as any other of Wall Street's great houses of money. The stock had fallen from $170 in early 2007 to open that day at $70.28, but that was roughly in line with the performances of the rest of Wall Street's more aggressive hands at the table. If they could survive, Bear thought, so could we.
By the middle of that afternoon, Bear Stearns' principals must have been looking at their quote screens with horror. The stock was selling off, was doing it hard, and nobody could figure out why. The stock closed that Monday at 62.30, down over 11% on the day, on massive trading volume.
But what about that $18 billion war chest? To their absolute horror, Bear soon realized that they were under attack from rumors spreading across the Street of a "liquidity crisis", and, for that manner of siege, not even a fortress constructed of eighteen billion one dollar bills would be enough to fend off the scaling of the walls by the attackers.
Maybe you think of a bank as a place where an elderly woman comes in to deposit her government pension check and later in the day, the bank, in order to earn the interest it has promised to pay the woman, finds someone who is willing to borrow the money at a higher rate of interest than what it is paying on her deposit.
You're correct in assuming that this is the core of modern banking and finance, except that you've got the order in which these procedures occur precisely in reverse. Modern financial institutions do not wait until the old woman hands her check to the teller before rushing onto the street to try to find someone to lend the money to. No, they're ever out there pounding the street (these days, they're more likely to be pounding their broadband data feeds), looking for profitable investments that can be made even before they get the funds to make them. These can be in US and foreign Treasury securities, corporate bonds, stocks, warrants, futures, options - even, as the financial system has now learned to its abject misery, in subprime mortgage paper.
If left to their own devices these institutions would make these types of investments, would do this type of lending, until swine self-levitate. This is what happened in capitalist economies until the introduction of modern central banking and bank regulation in the early 20th century. Banks would lend and lend and lend, all the while creating massive monetary liquidity based on nothing of any real value, until the last fool would see through the trick and the whole teetering edifice would collapse. From boom to bust and then back to boom again economies would lurch, until government regulation came in and, hearing the terrified screams of those on the ride, pulled the throttle back a bit on the roller coaster.
In what is called fractional reserve banking, banks and other financial institutions can make loans and investments only in set and defined multiples of what they actually have in the bank. In 1988, the first of two Bank for International Settlements' Basel accords adjusted the formulas according to the risk of the investments the financial institution was making: the less risky the investment (such as short-term government Treasury Bills), the less that had to be held in reserve against it; the more risky, the greater the reserve requirement.
Taking all this into consideration, it's still not as if the banks are making risky investments and then calling the old woman to see if she's coming in with her check today so they can close the daily books in compliance with their reserve requirements. What the banks do is to find out the amount that they need to have in reserve for that day, and then have their trading desk go out and get the funding.
For the most part, the bulk of the daily variability in their funding requirements is met through operations in what is called the short term repurchase market, or repos. There, if one bank finds it has a short-term, perhaps if only for one night, need to meet a reserve requirement it can borrow the funds it needs; the funds here may be being lent by another institution that at the end of the day finds it has more in reserves than its traders have made profitable loans that day for.
Repo loans can be in the range of tens to hundreds of millions of dollars, and they are in no way, shape, or form insured by the Federal government. That's the problem. If you do an overnight loan of, say, $100 million, and the next day the bank you lent the money to is out of business, with a "Coming Soon - A New Baby Gap" sign on the door, it'll be a long, long time before you ever see that money again. You'll get in line behind all the rest of the dead bank's creditors, and, since repo loans are unsecured, you'll be a long, long way from the front of the line as well.
By the end of that first day, Bear determined that it was fear that it was going under that was driving the stock price down. Rumors were spreading like wildfire that Bear was not long destined for the financial world, and, as a result, it rapidly began to lose access to the overnight repo market. In something of a self-fulfilling prophecy, without being able to fund its loan portfolio, Bear would soon be forced out of business.
CNBC in the rumor line
Burrough reserves particular vilification in this process to US cable television network CNBC. All that week its highly competitive and aggressive young reporters were continually interrupting each other's segments with breathless "breaking news" reportage on the allegedly increasingly dire situation at Bear. Burrough notes that CNBC is wired through the world financial markets as if it was its nervous system; anyone who might have been thinking of doing a repo deal with Bear would, of course, see these reports and be dissuaded, knowing that if the repo deal was done and Bear subsequently went belly up, there could be no excuse that the trader did not know what was going on that would save his head from the chopping block.
But for Burrough, the more interesting question is, where, and from whom, was CNBC getting its negative, market moving news from?
By Wednesday, March 12, it was clear that the contest was between Bear's $18 billion reserve and the much larger amount that the market could either reward or withdraw from Bear with but a twitch of a trader's finger on a mouse, and that the twitching fingers were winning. By late in the day, Bear's reserves were down to $15 billion, and urgent feelers were being extended to New York Federal Reserve Bank president Timothy Geithner about an emergency loan, which, as an investment, not a commercial bank, Bear technically was not supposed to be eligible for.
By Thursday, the flight away from Bear in the repo market had become a stampede. The bank was looking at a $30 billion shortfall in what it needed in overnight financing, far more than what it could fund from its now dwindling reserves. Then again, even if Bear emptied the piggybank to fund Thursday's needs, there was absolutely no guarantee that the bank would not need that or more on Friday, or the day after that, or the next day after that as well.
For vainglorious and prideful Bear Stearns, the choices that faced it that Thursday night would have seemed unthinkable just the previous Monday morning. Either a savior had to be found who would either lend billions to Bear or buy it outright, or the next morning the august bank would be standing in line with all the people with excess medical or credit card bills waiting to file papers at the bankruptcy court.
Bear did some of its own banking with Morgan Stanley (whose offices were right across the street), so the first person Bear chief executive Alan Schwartz called was Morgan CEO Jamie Dimon, that night celebrating his birthday with his family at a Manhattan Greek restaurant.
As recounted by Burrough, Dimon was none too pleased when his private cell phone rang during dinner. To paraphrase the famous exchange between F Scott Fitzgerald and Ernest Hemingway, the rich really are different; their cell phone calls are a lot more interesting than the ones us average folk get requesting that we bring home cat litter and hamburger meat.
"We really need your help," Schwartz begged.
"How much?" Dimon quickly got to the point, evidently wanting to get back to his dinner.
"As much as $30 billion," Schwartz replied
"Alan, I can't do that. It's too much," Dimon said.
At which point, Schwartz played his final card. "Well, could you guys buy us overnight?"
Dimon demurred on this, citing the need to consult his board, but with that the die was cast, and the boulders had been set in motion down the hillside. The outlines of the Bear rescue had been drawn.
Still, Dimon was cautious. He knew that if Morgan lent Bear the money and Bear then imploded anyway, both Bear and Morgan (along with Dimon) would probably be pulled under. He wasn't willing to stake everything, his bank, his shareholders, his career, on the possibility that Bear's loan book wasn't as poisonous as the market feared it was. Dimon wanted an insurance policy, and the only insurance company writing policies this big was Geithner and the US Federal Reserve Bank.
Come Friday morning, the markets awoke to unprecedented news. Through an extraordinary procedure, Bear had been given access to the Federal Reserve's discount window. In a rigmarole that impressed the markets that the Fed was not rewarding moral hazard about as much as a courtesan lowering her skirt to reclaim her virginity, the Fed would, for 28 days, loan Morgan an indeterminate amount that Morgan would then loan to Bear to meet its financing crunch.
Bear thought that it had been given at least a four-week stay from the executioner's blade, but by the end of the day the markets looked past the immediate moment and saw only trouble - what would happen after the 28 days? Bear's stock, which opened Friday at $54.24, closed at $30, down 57% for the week.
Over the weekend of March 15 and 16 came proof of the old adage that things are always darkest just before they turn absolutely black.
Bear was stunned to hear from Treasury Secretary Paulson that the 28-day line of credit it thought it had was being withdrawn. (Paulson says that there was a communications mix-up between the Treasury and Morgan/ Bear.) Bear had to make a deal to sell the company that weekend or be in bankruptcy court Monday morning.
In some delicious karma, Bear's lawyers informed the company's principals that, because of provisions in the 2005 Bankruptcy Reform Act that big finance capitalism had pile-driven through Congress, the standard option of a so-called Chapter 11 bankruptcy, in which the company is given a breathing space to sort out its affairs away from the braying hounds of its creditors, would be denied them. Make a deal - or on Monday the company is liquidated, and everybody's unemployed.
By Sunday evening, the deal would be done. Dimon, after finally having his people look at the extent of the illiquid, probably toxic mortgage securities on Bear's books, said it would pay no more than $4 a share for a company that had traded at $170 a share just 13 months before.
Paulson hungry for more
That, however, was still not enough punishment to satiate Paulson's hungry palette. He said it would be unseemly if Bear's shareholders walked away with even that much at a time when hundreds of thousands of Americans were being foreclosed out of house and home every month. He demanded that Bear be bought at $2 a share, the price that was announced for the deal on Sunday evening. (After Bear's shareholders screamed in pain, and after it seemed that the bank's mortgage book might not be as rancid as Morgan first feared, the final buyout price was raised to $10 the next weekend) If Morgan wasn't getting enough of a bargain buying Bear on the cheap, the deal also included provisions making the government liable for up to $29 billion if the securities Morgan was inheriting from Bear were defaulted on.
For Bear Stearns employees who had invested their life savings in the company's stock, the results were catastrophic. Former Bear chief executive Jimmy Cayne, made famous in a November 2007 Wall Street Journal article that noted how he spent the financial crisis of that August playing bridge and smoking pot, saw the value of his stock holdings fall from just under $1 billion the previous year to about $12 million (poor baby). For the rest of Bear's 14,000 employees, their future dreams of comfortable retirement were now very much in question, as was, of course, the prospect of the continuation of their employment at Morgan.
So the question remains: who killed Bear Stearns?
Burrough advances some of the usual suspects. Noting that Bear Stearns had made a lot of enemies from the time when it pulled out of the consortium of banks that the Federal Reserve had organized in 1988 to bail out the Long Term Credit Management hedge fund, he speculates that it was here that the long knives which had been waiting so long to strike were finally thrown.
On his Most Wanted list are Goldman Sachs (where Paulson, Bear's personal Torquemada, was previously CEO) along with Credit Suisse and Deutsche Bank, working in conspiracy with some smaller hedge funds. These were the plotters who were presumably feeding the bad news to CNBC, all the while holding huge naked short positions in Bear's stock - positions that, of course, ultimately proved insanely profitable.
Supposedly, these are the people now receiving the subpoenas from Cox in order to see if their actions rose to the level of criminal malfeasance. Burrough quotes an executive of another financial institution, displaying the signature worldview of the privileged that the universe revolves around them, that what happened to Bear Stearns was nothing less than "the biggest financial crime ever perpetuated".
Even if all of Burrough's speculations regarding the existence and perfidies of an anti-Bear cabal at the penultimate levels of world finance were true, I'm not at all sure that these actions rise to the level of an illegality under US securities law, and I'm even less sure that these actions bear the primary responsibility for Bear's collapse.
It is only since July 15 that naked short selling has been illegal in America, and that is only as regards to naked short selling in the shares of 19 financial institutions, for a limited time. The second requirement for proving illegal securities manipulation might be a hard sell for a prosecutor to present to a jury, since, in the final analysis, the rumors that somebody spread across Wall Street that Bear was in trouble turned out to be absolutely true.
'Why?' - not 'who'?
But the most important policy issue here is not who killed Bear Stearns, rather, it is why did it have to die?
Imagine a police detective coming upon a most peculiar crime scene. A group of people standing in a swimming pool filled with gasoline have burned to death. Investigating who shorted Bear's stock is like trying to ascertain who lit the match that started the inferno. The much better question is, of course, what were all those people doing standing in a pool of gasoline?
The history of political economy in the capitalist world, and after the fall of the Communist bloc what was added to the capitalist world, since about 1979 is a story of the progressive impoverishment and enfeeblement of governments, and, in their place, the rise in power, influence and wealth of the private markets.
Taxes, especially taxes on capital, have been cut over and over again, across many national borders. With these tax cuts heavily benefiting the wealthiest members of society, the result was huge pools of wealth being amassed and controlled by ever fewer and fewer hands. (See Hedge funds: Playing dice with the universe, Asia Times Online, July 6, 2006, for my discussion about the world financial architecture being subjected to ever increasing strains from the movements of these great pools of wealth.)
What befell Bear was nothing but a modern version of a 1930s bank run, with, instead of seeing hardscrabble men waiting to withdraw their meager deposits from the bank's vaults, what you saw was a stampede of computer mice directing funds away from Bear's requirements for repo financing.
Even if Bear had been as financially healthy as its $18 billion cash reserve implied, there was no way it was going to survive once these great pools of wealth started moving in unison against it. What happened to Bear could happen to any financial institution subject to the same stresses; Bear was only a little bit more vulnerable due to the reputation as a troubled institution it carried forward from its hedge fund debacles the previous year.
If you load a wheeled grand piano on a rowboat, and a rogue wave shifts the piano and thus sinks the boat, was it really the wave that sunk the boat, or was it the idiotic decision to put the piano on the boat in the first place? That's much like the situation of the current world financial architecture - the great pools of private wealth ever sloshing across the computer vaults of financial institutions are subjecting it to far greater stresses and strains than it was ever really expected to withstand.
As for Bear's protestations of being violated ("This is rape!" Burrough reports one Bear employee screaming at Schwartz upon learning just how cheaply the company was being sold to Morgan), aww, c'mon fellows. Did you really think that you were immune from all the high inside fastballs (when an American baseball pitcher throws hard at an opposing batter's head) and clothesline tackles (a similarly underhanded and unpleasant move in American football) you delivered to others? Like the jury's verdict in the Lucchese trial, wasn't your victimhood here only what you in the past delivered to others? If not, why would Goldman Sachs et al go through all the trouble to kill you?
In the words of Hyman Roth, wasn't this the business you've chosen?
Another classic in the American gangster genre, Martin Scorcese's 1995 Casino, has mob-installed Las Vegas casino manager Ace Rothstein (Robert De Niro) observing that, during his time in the 70s and 80s, "Running a casino is like robbing a bank with no cops around." For influential players and traders in the deregulated world financial markets over the past quarter century, their professional life frequently matched Rothstein's experience in running a casino without having to worry about any government intervention.
If Cox's crusade really does represent the forward wave of a re-regulation movement, as economics Professor Paul DeGrauwe suggested in the Financial Times on July 22, then a lot of wealthy hedge-fund investors are going to have to get used to not beating the general market indices by 30-50% anymore, and a lot of their previously well-compensated traders are going to have to see if they like selling bakingwear as much as they did selling bonds.
The trial that commenced in November 1986 took up 240 volumes of court record, and is the longest Federal trial in American history, lasting 21 months. As depicted in Sidney Lumet's 2006 movie Find Me Guilty, the trial proceedings frequently descended into farce, in part due to the very unorthodox and ribald efforts of one of the accused, Giacomo DiNorscio, (played in the movie by Vin Diesel) to act as his own attorney
But the verdict that the jury delivered on August 26, 1988, was simple and straightforward - not guilty, for all defendants on all charges. Following the 1995 OJ Simpson trial, when the former football star was acquitted of murdering his former wife, legal observers would resurrect an old term for the circumstance of juries acquitting presumably guilty defendants for reasons other than the actual facts of their guilt or innocence - jury nullification.
After the Lucchese trial, observers speculated that, since most of the supposed victims of the defendants' crimes were not uninvolved "civilians", but other gang members also crawling across the web of organized crime in the metropolitan New York area, the victims should have, must have, realized that simply being involved in the orbit of organized crime would make them vulnerable to the type of predatory, criminal activity that they subjected others to. As Hyman Roth (Lee Strasberg) said in Godfather 2 explaining why he did not seek vengeance for the killing of a protege, "this is the business we've chosen."
That's what somebody should tell Bear Stearns when they start squawking about what happened to them last March.
Finally, the fin-de-siecle for the Bush age has arrived in the US, and across the agencies that regulate the financial markets the bonfires of the vanities are being set alight. Holding high the burning torch of moral purification is none other than a most unlikely Savonarola: Securities and Exchange Commission (SEC) chairman Christopher Cox. Once a true devotee of the free market's conventions and customs, he has most recently been going door to door among all the great houses of American finance, ordering those inside to surrender for immolation the free-market practices and techniques he only recently was purported to have cherished.
Trying to earn a seat at the big kid's table where Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke are working on saving the world, (while President George W Bush is off somewhere totally uninvolved in all these events, perhaps seeking to assure that Cliff Notes are included in the holdings at the future George W Bush Presidential Library at Southern Methodist University in Dallas) Cox has now devised a unique soothing balm for the raw, irritated financial markets. In trying to make life harder for what are now seen as the parasitic invaders besieging the bodies, shares and souls of financial companies, he seems to be hoping to be able to heal these institutions simply through disarming the forces attacking them.
Last week, I explored how the new Wall Street moral purity crusade was cracking down on the once winked upon practice of "naked" short selling (see Bush turns to the dark side , Asia Times Online, July 23, 2008). Now, it appears that Cox, seeking to stamp out sin wherever it may be found in Lower Manhattan, is also sending his financial flatfoots back onto the street with subpoenas to force all those unfortunates in receipt of one to, under pain of all of the mighty state's tortuous sanctions, confess all they know about what happened to the Bear Stearns investment house in the waning days of last winter.
With all the calamities and catastrophes that have befallen the financial markets just since the leaves returned to the trees in the Northern Hemisphere you might have forgotten just what happened in between March 10 and 17 of this year, but, for those who lived through it, it was a time of the most fundamental and far-reaching change in the structure of American finance.
Bear Stearns, the blue collar (as opposed to the rest of the Street's blue-blooded), sharp-elbowed, red in tooth and claw bond trading house, whose bankruptcy of two subprime-mortgage-based hedge funds was the starter's pistol for the entire financial crisis in the early summer of 2007, entered the week fat and happy, sitting on an US$18 billion cash reserve. It would end the week in abject destitution and penury, its stock, which had traded as high as $170 in 2007, then ordered by the government to be valued at $2.
Hunt of malfeasance
Cox wants to know if there was any criminal malfeasance involved in these circumstances; failing finding that, failing discovering the proverbial "smoking gun" that forensic tests can match with some supposed bullet lodged in Bear's now entombed corpse, it seems that Cox would be satisfied with finding practices, accepted and allowed during the long languid summer of financial markets' deregulation, that, during the current winter of reproach and rebuke, he can say that, after taking a second look, actually were crimes after all.
Whatever Cox's gendarmes' discover, it will probably be very similar to an extraordinary, 10,000 word (and you thought I was long-winded) narrative published in this month's Vanity Fair (online at http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808). Authored by respected financial journalist Bryan Burrough (the co-author, with Jon Helyar, of the definitive 1990 account of the 1988 leveraged buyout of RJR Nabisco, Barbarians at the Gate) "Bringing Down Bear Stearns" certainly should be the first stop for those, from concerned citizens to Cox's corybantic cerberuses, interested in the events of the Ides of last March, for it seems that all the principals involved have been well and thoroughly interviewed by Burrough.
So just what did happen to Bear Stearns?
On Monday, March 10 of this year, in no way was there any reason to assume the travails that Bear was soon to undergo. The mephitic rank of last summer's Bear hedge-fund collapse was mostly dissipated; the company felt that, with a capital reserve of $18 billion, it was as well fortified to weather what the remainder of the credit crisis storm would bring as any other of Wall Street's great houses of money. The stock had fallen from $170 in early 2007 to open that day at $70.28, but that was roughly in line with the performances of the rest of Wall Street's more aggressive hands at the table. If they could survive, Bear thought, so could we.
By the middle of that afternoon, Bear Stearns' principals must have been looking at their quote screens with horror. The stock was selling off, was doing it hard, and nobody could figure out why. The stock closed that Monday at 62.30, down over 11% on the day, on massive trading volume.
But what about that $18 billion war chest? To their absolute horror, Bear soon realized that they were under attack from rumors spreading across the Street of a "liquidity crisis", and, for that manner of siege, not even a fortress constructed of eighteen billion one dollar bills would be enough to fend off the scaling of the walls by the attackers.
Maybe you think of a bank as a place where an elderly woman comes in to deposit her government pension check and later in the day, the bank, in order to earn the interest it has promised to pay the woman, finds someone who is willing to borrow the money at a higher rate of interest than what it is paying on her deposit.
You're correct in assuming that this is the core of modern banking and finance, except that you've got the order in which these procedures occur precisely in reverse. Modern financial institutions do not wait until the old woman hands her check to the teller before rushing onto the street to try to find someone to lend the money to. No, they're ever out there pounding the street (these days, they're more likely to be pounding their broadband data feeds), looking for profitable investments that can be made even before they get the funds to make them. These can be in US and foreign Treasury securities, corporate bonds, stocks, warrants, futures, options - even, as the financial system has now learned to its abject misery, in subprime mortgage paper.
If left to their own devices these institutions would make these types of investments, would do this type of lending, until swine self-levitate. This is what happened in capitalist economies until the introduction of modern central banking and bank regulation in the early 20th century. Banks would lend and lend and lend, all the while creating massive monetary liquidity based on nothing of any real value, until the last fool would see through the trick and the whole teetering edifice would collapse. From boom to bust and then back to boom again economies would lurch, until government regulation came in and, hearing the terrified screams of those on the ride, pulled the throttle back a bit on the roller coaster.
In what is called fractional reserve banking, banks and other financial institutions can make loans and investments only in set and defined multiples of what they actually have in the bank. In 1988, the first of two Bank for International Settlements' Basel accords adjusted the formulas according to the risk of the investments the financial institution was making: the less risky the investment (such as short-term government Treasury Bills), the less that had to be held in reserve against it; the more risky, the greater the reserve requirement.
Taking all this into consideration, it's still not as if the banks are making risky investments and then calling the old woman to see if she's coming in with her check today so they can close the daily books in compliance with their reserve requirements. What the banks do is to find out the amount that they need to have in reserve for that day, and then have their trading desk go out and get the funding.
For the most part, the bulk of the daily variability in their funding requirements is met through operations in what is called the short term repurchase market, or repos. There, if one bank finds it has a short-term, perhaps if only for one night, need to meet a reserve requirement it can borrow the funds it needs; the funds here may be being lent by another institution that at the end of the day finds it has more in reserves than its traders have made profitable loans that day for.
Repo loans can be in the range of tens to hundreds of millions of dollars, and they are in no way, shape, or form insured by the Federal government. That's the problem. If you do an overnight loan of, say, $100 million, and the next day the bank you lent the money to is out of business, with a "Coming Soon - A New Baby Gap" sign on the door, it'll be a long, long time before you ever see that money again. You'll get in line behind all the rest of the dead bank's creditors, and, since repo loans are unsecured, you'll be a long, long way from the front of the line as well.
By the end of that first day, Bear determined that it was fear that it was going under that was driving the stock price down. Rumors were spreading like wildfire that Bear was not long destined for the financial world, and, as a result, it rapidly began to lose access to the overnight repo market. In something of a self-fulfilling prophecy, without being able to fund its loan portfolio, Bear would soon be forced out of business.
CNBC in the rumor line
Burrough reserves particular vilification in this process to US cable television network CNBC. All that week its highly competitive and aggressive young reporters were continually interrupting each other's segments with breathless "breaking news" reportage on the allegedly increasingly dire situation at Bear. Burrough notes that CNBC is wired through the world financial markets as if it was its nervous system; anyone who might have been thinking of doing a repo deal with Bear would, of course, see these reports and be dissuaded, knowing that if the repo deal was done and Bear subsequently went belly up, there could be no excuse that the trader did not know what was going on that would save his head from the chopping block.
But for Burrough, the more interesting question is, where, and from whom, was CNBC getting its negative, market moving news from?
By Wednesday, March 12, it was clear that the contest was between Bear's $18 billion reserve and the much larger amount that the market could either reward or withdraw from Bear with but a twitch of a trader's finger on a mouse, and that the twitching fingers were winning. By late in the day, Bear's reserves were down to $15 billion, and urgent feelers were being extended to New York Federal Reserve Bank president Timothy Geithner about an emergency loan, which, as an investment, not a commercial bank, Bear technically was not supposed to be eligible for.
By Thursday, the flight away from Bear in the repo market had become a stampede. The bank was looking at a $30 billion shortfall in what it needed in overnight financing, far more than what it could fund from its now dwindling reserves. Then again, even if Bear emptied the piggybank to fund Thursday's needs, there was absolutely no guarantee that the bank would not need that or more on Friday, or the day after that, or the next day after that as well.
For vainglorious and prideful Bear Stearns, the choices that faced it that Thursday night would have seemed unthinkable just the previous Monday morning. Either a savior had to be found who would either lend billions to Bear or buy it outright, or the next morning the august bank would be standing in line with all the people with excess medical or credit card bills waiting to file papers at the bankruptcy court.
Bear did some of its own banking with Morgan Stanley (whose offices were right across the street), so the first person Bear chief executive Alan Schwartz called was Morgan CEO Jamie Dimon, that night celebrating his birthday with his family at a Manhattan Greek restaurant.
As recounted by Burrough, Dimon was none too pleased when his private cell phone rang during dinner. To paraphrase the famous exchange between F Scott Fitzgerald and Ernest Hemingway, the rich really are different; their cell phone calls are a lot more interesting than the ones us average folk get requesting that we bring home cat litter and hamburger meat.
"We really need your help," Schwartz begged.
"How much?" Dimon quickly got to the point, evidently wanting to get back to his dinner.
"As much as $30 billion," Schwartz replied
"Alan, I can't do that. It's too much," Dimon said.
At which point, Schwartz played his final card. "Well, could you guys buy us overnight?"
Dimon demurred on this, citing the need to consult his board, but with that the die was cast, and the boulders had been set in motion down the hillside. The outlines of the Bear rescue had been drawn.
Still, Dimon was cautious. He knew that if Morgan lent Bear the money and Bear then imploded anyway, both Bear and Morgan (along with Dimon) would probably be pulled under. He wasn't willing to stake everything, his bank, his shareholders, his career, on the possibility that Bear's loan book wasn't as poisonous as the market feared it was. Dimon wanted an insurance policy, and the only insurance company writing policies this big was Geithner and the US Federal Reserve Bank.
Come Friday morning, the markets awoke to unprecedented news. Through an extraordinary procedure, Bear had been given access to the Federal Reserve's discount window. In a rigmarole that impressed the markets that the Fed was not rewarding moral hazard about as much as a courtesan lowering her skirt to reclaim her virginity, the Fed would, for 28 days, loan Morgan an indeterminate amount that Morgan would then loan to Bear to meet its financing crunch.
Bear thought that it had been given at least a four-week stay from the executioner's blade, but by the end of the day the markets looked past the immediate moment and saw only trouble - what would happen after the 28 days? Bear's stock, which opened Friday at $54.24, closed at $30, down 57% for the week.
Over the weekend of March 15 and 16 came proof of the old adage that things are always darkest just before they turn absolutely black.
Bear was stunned to hear from Treasury Secretary Paulson that the 28-day line of credit it thought it had was being withdrawn. (Paulson says that there was a communications mix-up between the Treasury and Morgan/ Bear.) Bear had to make a deal to sell the company that weekend or be in bankruptcy court Monday morning.
In some delicious karma, Bear's lawyers informed the company's principals that, because of provisions in the 2005 Bankruptcy Reform Act that big finance capitalism had pile-driven through Congress, the standard option of a so-called Chapter 11 bankruptcy, in which the company is given a breathing space to sort out its affairs away from the braying hounds of its creditors, would be denied them. Make a deal - or on Monday the company is liquidated, and everybody's unemployed.
By Sunday evening, the deal would be done. Dimon, after finally having his people look at the extent of the illiquid, probably toxic mortgage securities on Bear's books, said it would pay no more than $4 a share for a company that had traded at $170 a share just 13 months before.
Paulson hungry for more
That, however, was still not enough punishment to satiate Paulson's hungry palette. He said it would be unseemly if Bear's shareholders walked away with even that much at a time when hundreds of thousands of Americans were being foreclosed out of house and home every month. He demanded that Bear be bought at $2 a share, the price that was announced for the deal on Sunday evening. (After Bear's shareholders screamed in pain, and after it seemed that the bank's mortgage book might not be as rancid as Morgan first feared, the final buyout price was raised to $10 the next weekend) If Morgan wasn't getting enough of a bargain buying Bear on the cheap, the deal also included provisions making the government liable for up to $29 billion if the securities Morgan was inheriting from Bear were defaulted on.
For Bear Stearns employees who had invested their life savings in the company's stock, the results were catastrophic. Former Bear chief executive Jimmy Cayne, made famous in a November 2007 Wall Street Journal article that noted how he spent the financial crisis of that August playing bridge and smoking pot, saw the value of his stock holdings fall from just under $1 billion the previous year to about $12 million (poor baby). For the rest of Bear's 14,000 employees, their future dreams of comfortable retirement were now very much in question, as was, of course, the prospect of the continuation of their employment at Morgan.
So the question remains: who killed Bear Stearns?
Burrough advances some of the usual suspects. Noting that Bear Stearns had made a lot of enemies from the time when it pulled out of the consortium of banks that the Federal Reserve had organized in 1988 to bail out the Long Term Credit Management hedge fund, he speculates that it was here that the long knives which had been waiting so long to strike were finally thrown.
On his Most Wanted list are Goldman Sachs (where Paulson, Bear's personal Torquemada, was previously CEO) along with Credit Suisse and Deutsche Bank, working in conspiracy with some smaller hedge funds. These were the plotters who were presumably feeding the bad news to CNBC, all the while holding huge naked short positions in Bear's stock - positions that, of course, ultimately proved insanely profitable.
Supposedly, these are the people now receiving the subpoenas from Cox in order to see if their actions rose to the level of criminal malfeasance. Burrough quotes an executive of another financial institution, displaying the signature worldview of the privileged that the universe revolves around them, that what happened to Bear Stearns was nothing less than "the biggest financial crime ever perpetuated".
Even if all of Burrough's speculations regarding the existence and perfidies of an anti-Bear cabal at the penultimate levels of world finance were true, I'm not at all sure that these actions rise to the level of an illegality under US securities law, and I'm even less sure that these actions bear the primary responsibility for Bear's collapse.
It is only since July 15 that naked short selling has been illegal in America, and that is only as regards to naked short selling in the shares of 19 financial institutions, for a limited time. The second requirement for proving illegal securities manipulation might be a hard sell for a prosecutor to present to a jury, since, in the final analysis, the rumors that somebody spread across Wall Street that Bear was in trouble turned out to be absolutely true.
'Why?' - not 'who'?
But the most important policy issue here is not who killed Bear Stearns, rather, it is why did it have to die?
Imagine a police detective coming upon a most peculiar crime scene. A group of people standing in a swimming pool filled with gasoline have burned to death. Investigating who shorted Bear's stock is like trying to ascertain who lit the match that started the inferno. The much better question is, of course, what were all those people doing standing in a pool of gasoline?
The history of political economy in the capitalist world, and after the fall of the Communist bloc what was added to the capitalist world, since about 1979 is a story of the progressive impoverishment and enfeeblement of governments, and, in their place, the rise in power, influence and wealth of the private markets.
Taxes, especially taxes on capital, have been cut over and over again, across many national borders. With these tax cuts heavily benefiting the wealthiest members of society, the result was huge pools of wealth being amassed and controlled by ever fewer and fewer hands. (See Hedge funds: Playing dice with the universe, Asia Times Online, July 6, 2006, for my discussion about the world financial architecture being subjected to ever increasing strains from the movements of these great pools of wealth.)
What befell Bear was nothing but a modern version of a 1930s bank run, with, instead of seeing hardscrabble men waiting to withdraw their meager deposits from the bank's vaults, what you saw was a stampede of computer mice directing funds away from Bear's requirements for repo financing.
Even if Bear had been as financially healthy as its $18 billion cash reserve implied, there was no way it was going to survive once these great pools of wealth started moving in unison against it. What happened to Bear could happen to any financial institution subject to the same stresses; Bear was only a little bit more vulnerable due to the reputation as a troubled institution it carried forward from its hedge fund debacles the previous year.
If you load a wheeled grand piano on a rowboat, and a rogue wave shifts the piano and thus sinks the boat, was it really the wave that sunk the boat, or was it the idiotic decision to put the piano on the boat in the first place? That's much like the situation of the current world financial architecture - the great pools of private wealth ever sloshing across the computer vaults of financial institutions are subjecting it to far greater stresses and strains than it was ever really expected to withstand.
As for Bear's protestations of being violated ("This is rape!" Burrough reports one Bear employee screaming at Schwartz upon learning just how cheaply the company was being sold to Morgan), aww, c'mon fellows. Did you really think that you were immune from all the high inside fastballs (when an American baseball pitcher throws hard at an opposing batter's head) and clothesline tackles (a similarly underhanded and unpleasant move in American football) you delivered to others? Like the jury's verdict in the Lucchese trial, wasn't your victimhood here only what you in the past delivered to others? If not, why would Goldman Sachs et al go through all the trouble to kill you?
In the words of Hyman Roth, wasn't this the business you've chosen?
Another classic in the American gangster genre, Martin Scorcese's 1995 Casino, has mob-installed Las Vegas casino manager Ace Rothstein (Robert De Niro) observing that, during his time in the 70s and 80s, "Running a casino is like robbing a bank with no cops around." For influential players and traders in the deregulated world financial markets over the past quarter century, their professional life frequently matched Rothstein's experience in running a casino without having to worry about any government intervention.
If Cox's crusade really does represent the forward wave of a re-regulation movement, as economics Professor Paul DeGrauwe suggested in the Financial Times on July 22, then a lot of wealthy hedge-fund investors are going to have to get used to not beating the general market indices by 30-50% anymore, and a lot of their previously well-compensated traders are going to have to see if they like selling bakingwear as much as they did selling bonds.
Infinite fiat draws near
The Fed said it was extending its support to primary dealers “in light of continued fragile circumstances in financial markets”.
The options facility is similar to the strategy used by the Fed in 1999 to deal with the risk of a millennium Y2K liquidity crisis. The Fed will auction $50bn of options giving dealers the right but not the obligation to swap illiquid securities for Treasuries over periods of likely funding stress, such as the year-end.
The European Central Bank and the Swiss National Bank will also offer three-month dollar loans through the offshore dollar facility set up in conjunction with the Fed. The Fed will increase the amount of dollars it provides to the ECB in exchange for euros by $5bn to $50bn.
Goldman Sachs said the moves “should help to . . . alleviate market stresses, but are incremental rather than transformational”.
Its latest initiatives follow the recent turmoil in financial sector stocks, which creates a risk that the credit squeeze in the real economy could intensify in the coming months.
The US central bank does not believe it can solve what are in many cases capital problems by providing extra liquidity. But it does believe that it can support the adjustment process by reducing the risk of a liquidity run on any individual institution or any forced firesales of illiquid assets.
The Fed's acknowledgement of the continuing stress in financial markets makes it improbable that it will raise interest rates soon. However, in the longer term, Fed policymakers believe that liquidity tools and rates could in principle diverge.
The decision to offer $75bn in three-month loans (replacing $75bn of one-month loans) marks an important concession by the Fed, which had resisted pressure from banks to extend the term from the previous single month.
The creation of a new options facility, meanwhile, is intended to pre-empt stress “in advance of periods that are typically characterised by elevated stress in financial markets, such as quarter ends” and the year-end.
The S&P 500 index rose 0.7 per cent to 1271.62. The Dow Jones Industrial Average was up 0.8 per cent at 11,489.81. The S&P financials index was down 0.2 per cent and the homebuilders sector was also in negative territory at lunchtime in New York.
The yield on the two-year Treasury rose 2 basis points to 2.637 and the 10 year yield was also up 2bp at 4.060.
The options facility is similar to the strategy used by the Fed in 1999 to deal with the risk of a millennium Y2K liquidity crisis. The Fed will auction $50bn of options giving dealers the right but not the obligation to swap illiquid securities for Treasuries over periods of likely funding stress, such as the year-end.
The European Central Bank and the Swiss National Bank will also offer three-month dollar loans through the offshore dollar facility set up in conjunction with the Fed. The Fed will increase the amount of dollars it provides to the ECB in exchange for euros by $5bn to $50bn.
Goldman Sachs said the moves “should help to . . . alleviate market stresses, but are incremental rather than transformational”.
Its latest initiatives follow the recent turmoil in financial sector stocks, which creates a risk that the credit squeeze in the real economy could intensify in the coming months.
The US central bank does not believe it can solve what are in many cases capital problems by providing extra liquidity. But it does believe that it can support the adjustment process by reducing the risk of a liquidity run on any individual institution or any forced firesales of illiquid assets.
The Fed's acknowledgement of the continuing stress in financial markets makes it improbable that it will raise interest rates soon. However, in the longer term, Fed policymakers believe that liquidity tools and rates could in principle diverge.
The decision to offer $75bn in three-month loans (replacing $75bn of one-month loans) marks an important concession by the Fed, which had resisted pressure from banks to extend the term from the previous single month.
The creation of a new options facility, meanwhile, is intended to pre-empt stress “in advance of periods that are typically characterised by elevated stress in financial markets, such as quarter ends” and the year-end.
The S&P 500 index rose 0.7 per cent to 1271.62. The Dow Jones Industrial Average was up 0.8 per cent at 11,489.81. The S&P financials index was down 0.2 per cent and the homebuilders sector was also in negative territory at lunchtime in New York.
The yield on the two-year Treasury rose 2 basis points to 2.637 and the 10 year yield was also up 2bp at 4.060.
Toward a Type 1 civilization
Along with energy policy, political and economic systems must also evolve.
By Michael Shermer
July 22, 2008
Our civilization is fast approaching a tipping point. Humans will need to make the transition from nonrenewable fossil fuels as the primary source of our energy to renewable energy sources that will allow us to flourish into the future. Failure to make that transformation will doom us to the endless political machinations and economic conflicts that have plagued civilization for the last half-millennium.
We need new technologies to be sure, but without evolved political and economic systems, we cannot become what we must. And what is that? A Type 1 civilization. Let me explain.
In a 1964 article on searching for extraterrestrial civilizations, the Soviet astronomer Nikolai Kardashev suggested using radio telescopes to detect energy signals from other solar systems in which there might be civilizations of three levels of advancement: Type 1 can harness all of the energy of its home planet; Type 2 can harvest all of the power of its sun; and Type 3 can master the energy from its entire galaxy.
Based on our energy efficiency at the time, in 1973 the astronomer Carl Sagan estimated that Earth represented a Type 0.7 civilization on a Type 0 to Type 1 scale. (More current assessments put us at 0.72.) As the Kardashevian scale is logarithmic -- where any increase in power consumption requires a huge leap in power production -- we have a ways before 1.0.
Fossil fuels won't get us there. Renewable sources such as solar, wind and geothermal are a good start, and coupled to nuclear power could eventually get us to Type 1.
Yet the hurdles are not solely -- or even primarily -- technological ones. We have a proven track record of achieving remarkable scientific solutions to survival problems -- as long as there is the political will and economic opportunities that allow the solutions to flourish. In other words, we need a Type 1 polity and economy, along with the technology, in order to become a Type 1 civilization.
We are close. If we use the Kardashevian scale to plot humankind's progress, it shows how far we've come in the long history of our species from Type 0, and it leads us to see what a Type 1 civilization might be like:
Type 0.1: Fluid groups of hominids living in Africa. Technology consists of primitive stone tools. Intra-group conflicts are resolved through dominance hierarchy, and between-group violence is common.
Type 0.2: Bands of roaming hunter-gatherers that form kinship groups, with a mostly horizontal political system and egalitarian economy.
Type 0.3: Tribes of individuals linked through kinship but with a more settled and agrarian lifestyle. The beginnings of a political hierarchy and a primitive economic division of labor.
Type 0.4: Chiefdoms consisting of a coalition of tribes into a single hierarchical political unit with a dominant leader at the top, and with the beginnings of significant economic inequalities and a division of labor in which lower-class members produce food and other products consumed by non-producing upper-class members.
Type 0.5: The state as a political coalition with jurisdiction over a well-defined geographical territory and its corresponding inhabitants, with a mercantile economy that seeks a favorable balance of trade in a win-lose game against other states.
Type 0.6: Empires extend their control over peoples who are not culturally, ethnically or geographically within their normal jurisdiction, with a goal of economic dominance over rival empires.
Type 0.7: Democracies that divide power over several institutions, which are run by elected officials voted for by some citizens. The beginnings of a market economy.
Type 0.8: Liberal democracies that give the vote to all citizens. Markets that begin to embrace a nonzero, win-win economic game through free trade with other states.
Type 0.9: Democratic capitalism, the blending of liberal democracy and free markets, now spreading across the globe through democratic movements in developing nations and broad trading blocs such as the European Union.
Type 1.0: Globalism that includes worldwide wireless Internet access, with all knowledge digitized and available to everyone. A completely global economy with free markets in which anyone can trade with anyone else without interference from states or governments. A planet where all states are democracies in which everyone has the franchise.
The forces at work that could prevent us from making the great leap forward to a Type 1 civilization are primarily political and economic. The resistance by nondemocratic states to turning power over to the people is considerable, especially in theocracies whose leaders would prefer we all revert to Type 0.4 chiefdoms. The opposition toward a global economy is substantial, even in the industrialized West, where economic tribalism still dominates the thinking of most politicians, intellectuals and citizens.
For thousands of years, we have existed in a zero-sum tribal world in which a gain for one tribe, state or nation meant a loss for another tribe, state or nation -- and our political and economic systems have been designed for use in that win-lose world. But we have the opportunity to live in a win-win world and become a Type 1 civilization by spreading liberal democracy and free trade, in which the scientific and technological benefits will flourish. I am optimistic because in the evolutionist's deep time and the historian's long view, the trend lines toward achieving Type 1 status tick inexorably upward.
That is change we can believe in.
Michael Shermer is an adjunct professor in the School of Politics and Economics at Claremont Graduate University, the publisher of Skeptic magazine and a monthly columnist for Scientific American. His latest book is "The Mind of the Market."
By Michael Shermer
July 22, 2008
Our civilization is fast approaching a tipping point. Humans will need to make the transition from nonrenewable fossil fuels as the primary source of our energy to renewable energy sources that will allow us to flourish into the future. Failure to make that transformation will doom us to the endless political machinations and economic conflicts that have plagued civilization for the last half-millennium.
We need new technologies to be sure, but without evolved political and economic systems, we cannot become what we must. And what is that? A Type 1 civilization. Let me explain.
In a 1964 article on searching for extraterrestrial civilizations, the Soviet astronomer Nikolai Kardashev suggested using radio telescopes to detect energy signals from other solar systems in which there might be civilizations of three levels of advancement: Type 1 can harness all of the energy of its home planet; Type 2 can harvest all of the power of its sun; and Type 3 can master the energy from its entire galaxy.
Based on our energy efficiency at the time, in 1973 the astronomer Carl Sagan estimated that Earth represented a Type 0.7 civilization on a Type 0 to Type 1 scale. (More current assessments put us at 0.72.) As the Kardashevian scale is logarithmic -- where any increase in power consumption requires a huge leap in power production -- we have a ways before 1.0.
Fossil fuels won't get us there. Renewable sources such as solar, wind and geothermal are a good start, and coupled to nuclear power could eventually get us to Type 1.
Yet the hurdles are not solely -- or even primarily -- technological ones. We have a proven track record of achieving remarkable scientific solutions to survival problems -- as long as there is the political will and economic opportunities that allow the solutions to flourish. In other words, we need a Type 1 polity and economy, along with the technology, in order to become a Type 1 civilization.
We are close. If we use the Kardashevian scale to plot humankind's progress, it shows how far we've come in the long history of our species from Type 0, and it leads us to see what a Type 1 civilization might be like:
Type 0.1: Fluid groups of hominids living in Africa. Technology consists of primitive stone tools. Intra-group conflicts are resolved through dominance hierarchy, and between-group violence is common.
Type 0.2: Bands of roaming hunter-gatherers that form kinship groups, with a mostly horizontal political system and egalitarian economy.
Type 0.3: Tribes of individuals linked through kinship but with a more settled and agrarian lifestyle. The beginnings of a political hierarchy and a primitive economic division of labor.
Type 0.4: Chiefdoms consisting of a coalition of tribes into a single hierarchical political unit with a dominant leader at the top, and with the beginnings of significant economic inequalities and a division of labor in which lower-class members produce food and other products consumed by non-producing upper-class members.
Type 0.5: The state as a political coalition with jurisdiction over a well-defined geographical territory and its corresponding inhabitants, with a mercantile economy that seeks a favorable balance of trade in a win-lose game against other states.
Type 0.6: Empires extend their control over peoples who are not culturally, ethnically or geographically within their normal jurisdiction, with a goal of economic dominance over rival empires.
Type 0.7: Democracies that divide power over several institutions, which are run by elected officials voted for by some citizens. The beginnings of a market economy.
Type 0.8: Liberal democracies that give the vote to all citizens. Markets that begin to embrace a nonzero, win-win economic game through free trade with other states.
Type 0.9: Democratic capitalism, the blending of liberal democracy and free markets, now spreading across the globe through democratic movements in developing nations and broad trading blocs such as the European Union.
Type 1.0: Globalism that includes worldwide wireless Internet access, with all knowledge digitized and available to everyone. A completely global economy with free markets in which anyone can trade with anyone else without interference from states or governments. A planet where all states are democracies in which everyone has the franchise.
The forces at work that could prevent us from making the great leap forward to a Type 1 civilization are primarily political and economic. The resistance by nondemocratic states to turning power over to the people is considerable, especially in theocracies whose leaders would prefer we all revert to Type 0.4 chiefdoms. The opposition toward a global economy is substantial, even in the industrialized West, where economic tribalism still dominates the thinking of most politicians, intellectuals and citizens.
For thousands of years, we have existed in a zero-sum tribal world in which a gain for one tribe, state or nation meant a loss for another tribe, state or nation -- and our political and economic systems have been designed for use in that win-lose world. But we have the opportunity to live in a win-win world and become a Type 1 civilization by spreading liberal democracy and free trade, in which the scientific and technological benefits will flourish. I am optimistic because in the evolutionist's deep time and the historian's long view, the trend lines toward achieving Type 1 status tick inexorably upward.
That is change we can believe in.
Michael Shermer is an adjunct professor in the School of Politics and Economics at Claremont Graduate University, the publisher of Skeptic magazine and a monthly columnist for Scientific American. His latest book is "The Mind of the Market."
Casey on Gold and Silver
The ability of a borrower or lessor of property to sell that property for full value as if the sale were free and clear of all other interests has absolutely no basis in United States jurisprudence, or in any other manner of jurisprudence for that matter. A full and complete title to any asset, under all systems of jurisprudence, can only be conveyed with the consent of the title owner, usually by the title owner's signature on the documents evidencing the conveyance. The names and identities of title owners of substantial assets such as real estate and cars can usually be identified through public records which are generally kept for the express purpose of protecting the true owners from having their property sold out from under them. Any conveyance of property by a title owner is made subject to any rights which the title owner has previously conveyed to anyone else in the subject property, such as a leasehold interest given to a lessee or a mortgage or UCC lien given to a bank. In order to convey a full and valid title to any purchaser, the title owner must not only convey such title owner's interest in the property, but must also extinguish, or arrange for the conveyance of, all prior interests granted by such title owner to others, unless the new owner is protected against such prior interests by a recording statute or other notice requirement. In most cases, the new owner is protected by recording and notice requirements only if the new owner has no actual notice of the prior interests. Take for instance a house or a car. If you have leased a house or car, can you then convey title to that house or car for its full, appraised value without the consent of the title owner? Of course not, you can only convey your leased interest, and then only if your lease allows you to do that. You cannot, by yourself, convey a full, legal, perfected title. And your leased interest would be worth far less than the full, appraised value of the property that would be paid for a perfected title to that property free and clear of all prior interests. The title owner would have to join in the sale with you to give the new owner a full title free of all prior interests. Only then would the new owner agree to pay the full value of the property. This is how assets have been handled, from a legal point of view, since the beginning of time.
Until, of course, the criminals who run our country came up with the legal fiction of allowing the short sale of leased or borrowed property for full value.
Short-selling of stocks, which is currently legal, or worse, naked short-selling of stocks, which is currently illegal, are fictions created by elitist criminal minds that have been foisted on the markets so the elitists can make profits at will by killing any stock, at any time, for any reason (usually for profit, but sometimes for simple revenge). The reason given for the short-selling of stocks is to provide a means whereby overpriced stocks can be ratted out and fairer stock valuations for the benefit of the investing public can be produced. But this is just a ruse. It is a scam to justify rampant and otherwise illegal manipulations of stock prices for the personal gain of the scamsters. By allowing stock to be borrowed, and then sold for full market value by someone other than the title owner, you are allowing the creation of stock out of thin air, which can then be used to run down the price of the stock ad infinitum. Normally, you can only sell as much stock as you own. After that, you would have to buy more stock, thus driving the price back up, before you could start selling again. Thus, short-selling, and especially naked short-selling, are both morally wrong and legally unfounded. These short-sale scams are made possible by the anonymous ownership of stock, and often this anonymity allows the perpetration of many illegal manipulations, such as where the same stock is borrowed from the same person over and over again by different borrowers in a manner that is difficult to trace. The anonymous ownership of stock in publicly traded companies is another Illuminist scam which allows them to manipulate stock transactions while making it difficult, if not impossible, to pin the blame for any illegal manipulation on a specific trader. Stock ownership in publicly traded companies should be made public like real estate and cars, and only shareholders of record should be able to sell their shares. This is the only way stock markets can be made fair. Otherwise, to allow the sale of an infinite number of shares in any company paves the way for insider trading, for the floating of vicious and patently false rumors and for all kinds of other malicious mischief, including the corrupt elimination of competition by enabling scamsters to ambush companies that compete with their own.
Adding to the criminality of short-selling is the SEC. For some time now they have not investigated or taken action against naked short-sellers, even though naked short-selling is blatantly illegal. With naked short-selling, stock is created out of thin air without even the fiction of being borrowed from a true owner before being sold, as in regular short-selling. As an aside, even regular short-selling should be illegal. This is because regular short-selling, even where the same stock is not borrowed from the same person multiple times by different borrowers, allows the literal doubling of outstanding, authorized shares in public companies without SEC approval. Normally, you would go to jail for selling unauthorized, unapproved stock in a public company. But not short-sellers, who get to stand in the shoes of both regulators and investment banks simultaneously. Regular short-selling should be illegal because as we said, selling borrowed property for full value has no basis in law. Getting back to the SEC and naked short-selling, they keep a list of stocks where naked short-selling is suspected just to tick off the shareholders of these companies who are being ripped off. This is like saying, ha-ha, we know you're being ripped off, but we're not going to do anything about it, so go scratch. We work for the Illuminati, who can do as they please. As if this was not enough moral hazard, the SEC is now selectively enforcing laws against naked-shorting of shares in Fannie, Freddie and 17 other commercial and investment banks, all of them Illuminist to the core. This temporary ban against what is already illegal has just been extended to mid-August so that earnings season can pass without too much damage being done to the fraudsters. Remember, these are the same scum-bag Illuminist institutions that got us into the current mess we are in and are the same bankster fraudsters who are all presenting fraudulent financial statements to temporarily save the stock market from destruction for the benefit of the incumbent traitors in Congress. As always, there are two sets of rules, one set for the would-be lords of the universe, and the other set for the serfs and peons (i.e. the rest of us).
Also, the legal fiction which allows for the sale of borrowed property for full value is not limited to stocks. The same criminal scam has long since been extended into gold and silver leasing. The ruse given for this scam is that gold and silver are non-producing assets (i.e. they produce no financial return), and that leasing of these gold and silver reserves gives the fraudsters a chance to earn a return on their bullion holdings, which are supposed to secure their depositors accounts. Gee, that must be why lease rates are now near zero or even negative, especially for the shorter terms, so that a whopping financial return can be earned on bullion holdings. That must be why the cartel fraudsters are paying the bullion banks to lease their bullion, instead of the other way around. Obviously, the real reason for gold and silver leasing is gold and silver suppression. In fact, that is the sole reason in this market. And now we have a situation where borrowed bullion has been sold for full value by bullion banks, often to another bankster fraudster, which then leases it again to yet another bullion bank, which in turn sells it to another bankster fraudster, ad infinitum. As a result, multiple banks now carry the very same physical gold and silver bars as part of their bullion reserves even though only one of them actually has physical possession of that bullion! The entire alleged bullion holdings of the US treasury, the Fed and the ECB is one big, scum-sucking scam!!! And often, these same bars have been sold by one of the bullion banks in the fraudster daisy chain to jewelers who have converted the gold and silver into rings, chains and bangles. The gold and silver is all freaking gone, and, to use the words of the Beaver: "it ain't never comin' back!" Yet multiple banks list this -- jewelry -- which is hanging from the necks and wrists of new Indian brides -- as phony paper "gold reserves" in their financial statements! Central banks around the world have become the ultimate alchemists, for they have somehow managed to create their "gold reserves" out of -- well -- NOTHING!!! We can just picture the bullion banks scurrying the new brides off to a detention center to reclaim their "gold reserves" when they implode from all their deceits and scams as the gold and silver leases come due. Will they pay back their lease debts with worthless paper dollars instead? No, because the bullion banks will be totally bankrupt. How do pay back in dollars the amount due for all that leased gold and silver which have just had a zero added to their value per ounce? Perhaps they can create some dollars out of thin air like the banks created their paper gold reserves? Of course, barring this magical creation of dollars from nothing, perhaps in yet another bailout, the banks that leased the gold to the bullion banks will then promptly go under!!! And their depositors will say: "You mean the gold reserves that were securing our deposits have been made into jewelry that was sold to women in a foreign country?" And the fraudsters will say: "Yep, sorry about that." There won't be a run on banks then. There will be a run after bankers, to tear them limb from limb.
Of course, the IMF thinks that this state of affairs with paper gold reserves is perfectly acceptable. That is why the IMF's new rules, which it promulgated to prevent this multiple-counting of reserves, were made only voluntary, and only a few banks thus far have adopted them. The reason for the paucity of banks adopting the new rules should be patently obvious giving what we have just revealed to you. The whole scam would be exposed if all banks honestly complied with the new rules, and especially if those rules were made retroactive.
Oh, and may we add that much of the gold used to start many of the daisy chains of gold paper reserve frauds through multiple-counting of gold reserves was from gold swaps with the US Treasury, which pledged a portion of our national gold to the initial central bank that leased its gold to a bullion bank to start the daisy chain of fraud. Thus, the initial central bank agreed to sell its bullion based on the promise by the Fed and the US Treasury to replace that gold with some of our own at a later date. Hence, the term "deep storage gold" that is used to describe the US Treasury's and Mint's gold reserves, which have all been stolen, leased, swapped or otherwise compromised. These swaps were used to prevent people from learning the true source of gold suppression, which was the Fed in cahoots with the US Treasury. The blame for gold suppression would be directed to the central bank that publicly sold the gold, and not to the Fed and the US Treasury, whose gold swaps were kept secret from the public.
The elitists may try to use the next Congress to shut down the internet, take away grass roots lobbying, implement the Fairness Doctrine to cut off conservative talk show radio and get greater control over guns. Then would come the false-flag attack to implement martial law at a time when communication among a concerned populace and gun ownership have been vastly curtailed. They will also use this time to continue to heap up information on citizens illegally, while attempting to implement a national ID card so that Big Brother can become reality. They must be stopped from doing this. Throw out all incumbents in November.
Gold continues to consolidate, as pressure comes from continued rollover of COMEX gold futures from August to December, 2008. Other pressure is being applied through dead-cat dollar rallies, which are also causing oil to come down, moderating inflation a tad. These dollar rallies can only be the result of multiple Fed and central bank collusion involving several nations. Nothing else can possibly support the dollar other than manipulation and intervention. The dollar has no intrinsically good fundamentals to support it. Buck-Busting Ben saw to that, and now the Fed has become irrelevant. Real interest rates are about to become whatever investors say they should be based on ever-increasing risk from massive consumer defaults and ever-decreasing rates of return caused by ever-worsening hyperinflation. As of last Thursday, December became the most active contract, and soon August will become the leading contract. As of Monday, there were 74,603 August contracts and 224,080 December contracts. Most COMEX gold options are now centered on December, so there will not any opportunities to steal from traders of call options until yearend. Bank failures, poor earnings, war threats, increasing consumer defaults, option ARM implosion, further real estate market deterioration, as well as gigantic bailouts and bond monetizations to save fraudsters will keep gold well bid. Then when the elitists bail from paper assets and let the dollar fail, gold and silver will go intergalactic. The run up for the next big gold phase is right around the corner, so don't miss it. You do not want to be left out of the next big rally. Keep a little powder dry if you want to take advantage of the oil takedown potential, but make sure you are in big before this fall rally gets underway. The rollover from August to December will be completed near the end of this week, and then the fun begins.
The stock markets are being supported by lower oil and a weaker yen. The yen has not been this weak against the dollar in over a month, so some carry trader support for the PPT has come in as bank losses continue to be hidden and oil subsides. Even so, we are still way below 12,000 as de-leveraging continues to be a priority. The only alternatives are to either float new bonds, which is difficult during this credit-crunch as no one trusts anyone else's debt anymore and rates have been climbing, or to float new shares, which dilutes the holdings of current shareholders. Time is running out as the losses on toxic waste can only be fraudulently delayed for so long, and the ability to dump toxic waste may become more and more difficult with the passage of time. Banks are afraid to start a sell-off of toxic waste because they will then be forced to mark to market, but they had better start soon while they can still get something for their poisonous assets. Merrill Lynch is now starting to do this, but contrary to what the fane-stream media might tell you, what they have just attempted to dump is a pittance compared to their overall holdings of toxic waste.
Trillions will be dumped on US taxpayers by the Fannie and Freddie bailout. Not only will losses mount based on the current levels of toxic waste, but now more toxic waste will be heaped up on top of what is already there as loans that are not backed by the twin titans of profligate lending are almost impossible to unload on investors. Either hundreds of billions more in losses will be heaped on top of what they are already carrying, or markets will implode and freeze up due to tighter credit standards which would tend to keep the amount of toxic waste to a minimum. Either way is bad news for taxpayers and homeowners. Obviously the fraudsters, desperate for profits to shore up balance sheets, are likely to cook up more bad loans to boost profits knowing that they are backstopped by Paulson's bazooka, and we predict more rampant fraud to come. Paulson's bazooka is in reality a license for the fraudsters to steal once again, as the Fed blinks and looks the other way despite its tighter regulations for mortgage lending, which are five years too late. Anyone who is stupid enough to buy the paper offered by Scylla and Charibdis deserves to be eaten alive. For allowing all of this to happen, and in fact for actively encouraging it to happen, the Fed should be terminated, not given more power. Paulson can aim his bazooka at the Fed if he wants, and blow them away. He won't get any complaints from us if he does.
Almost 4 years ago we said Fannie Mae and Freddie Mac could be catalyst for the collapse in the financial system. At that time we said they were bankrupt. In the past 8 years, in spite of their questionable financial conditions they increased their growth $1.6 trillion to $5.8 trillion. Just over the past year Fannie Mae and Freddie Mac’s combined commitments have expanded $627 billion, or 13.7%.
This expansion is part of the manifestation of the massive scope of additional credit creation over the past 8 years to sustain a collapsing financial system, not unlike hundreds of other collapses over the past 1,000 years. Those who have studied financial history, and the Illuminists have not only lived it, but also created it, know that it is impossible to sustain such an expansion. Sinking asset prices finally overwhelm the system and it collapses.
Fannie and Freddie are a Ponzi scheme. Our Treasury and the Fed talk in terms of additional capital of $25 billion or perhaps $50 billion that taxpayers will have to pay to bail out banks, Wall Street and lying borrowers. In reality their needs will exceed $600 billion for just this year. Next year the cost will be greater and who knows where it will end.
The powers in and behind government used Fannie and Freddie to manipulate the American economic system. They were used to delay a major recession and now as a result we are facing hyperinflation, stagflation and a major depression worse than that of the 1930s. This is going to rip apart the social fabric of America and the world as well. This has created an economic, financial and political nightmare. It has also created a speculator class, which has grown to unfathomable size. That is bad, but what is worse is that these speculators will eventually lose everything adding dynamics to the collapse.
The government guarantee of the debt of these GSE’s is no longer implied. It is a reality. The elitists knew from the beginning that the American taxpayer would foot the bill as the insiders enriched themselves. Fannie and Freddie are the ultimate scam to cover the tracks of the worst bunch of crooks in economic history. Never in history has an inflation generator enjoyed such capacity to issue endless quantities of money like instruments with not a word of complaint professional or public that this is a Ponzi scheme. Even as it becomes obvious they are broke, and controversy rages, as Congress sets on their hands, in June they made $21 billion in new commitments, an annualized 33% increase. What unbelievable brass.
Over and over the increase in money and credit, the pumping up of stock and real estate markets has staved off recession and depression. Since 1980 it’s happened every 4 or 5 years like clockwork. The powers behind the scenes have abused the system once too often. This time it is going to be different. The GSE’s played a major role in rescuing the economy in 1982-85, in 1990-92, in 1996-97, in 2001 an onward. They perpetually brought greater amounts of credit to the system. The GSE’s were the backstop – the ultimate bailout instrument of the financial and moral degeneracy. Now we have the ultimate in corruption, Congress will provide the Treasury with blank check discretion to keep the bogus money machine going. You might call this the ultimate in hypocrisy. This probably is the beginning of the end of securitization of mortgages. This in time will further restrain mortgage credit growth and place downward pressure on home prices for many years to come and in turn exert major pressure on the entire economy. The GSE’s are in a box and cannot get out just as the rest of the system is. They can probably keep the charade up for a few years, but it will end when depression begins.
It continues to come to light that financial entities have a treasury trove of off balance sheet assets that are horrible to behold. As professionals and investors come to terms with these facts they will finally realize just how serious the situation really is.
As these assets, or what is left of them, are carried over to the balance sheet there will be some staggering revelations. This exposure should put pressure on bond and stock markets and lead to more than $2 trillion in write-offs. This will be accompanied by failures at many financial institutions. That will produce higher gold and silver prices. Get all of your free assets out of banks, commodity funds and Forex funds and into gold and silver related assets and Swiss franc government bonds.
Until, of course, the criminals who run our country came up with the legal fiction of allowing the short sale of leased or borrowed property for full value.
Short-selling of stocks, which is currently legal, or worse, naked short-selling of stocks, which is currently illegal, are fictions created by elitist criminal minds that have been foisted on the markets so the elitists can make profits at will by killing any stock, at any time, for any reason (usually for profit, but sometimes for simple revenge). The reason given for the short-selling of stocks is to provide a means whereby overpriced stocks can be ratted out and fairer stock valuations for the benefit of the investing public can be produced. But this is just a ruse. It is a scam to justify rampant and otherwise illegal manipulations of stock prices for the personal gain of the scamsters. By allowing stock to be borrowed, and then sold for full market value by someone other than the title owner, you are allowing the creation of stock out of thin air, which can then be used to run down the price of the stock ad infinitum. Normally, you can only sell as much stock as you own. After that, you would have to buy more stock, thus driving the price back up, before you could start selling again. Thus, short-selling, and especially naked short-selling, are both morally wrong and legally unfounded. These short-sale scams are made possible by the anonymous ownership of stock, and often this anonymity allows the perpetration of many illegal manipulations, such as where the same stock is borrowed from the same person over and over again by different borrowers in a manner that is difficult to trace. The anonymous ownership of stock in publicly traded companies is another Illuminist scam which allows them to manipulate stock transactions while making it difficult, if not impossible, to pin the blame for any illegal manipulation on a specific trader. Stock ownership in publicly traded companies should be made public like real estate and cars, and only shareholders of record should be able to sell their shares. This is the only way stock markets can be made fair. Otherwise, to allow the sale of an infinite number of shares in any company paves the way for insider trading, for the floating of vicious and patently false rumors and for all kinds of other malicious mischief, including the corrupt elimination of competition by enabling scamsters to ambush companies that compete with their own.
Adding to the criminality of short-selling is the SEC. For some time now they have not investigated or taken action against naked short-sellers, even though naked short-selling is blatantly illegal. With naked short-selling, stock is created out of thin air without even the fiction of being borrowed from a true owner before being sold, as in regular short-selling. As an aside, even regular short-selling should be illegal. This is because regular short-selling, even where the same stock is not borrowed from the same person multiple times by different borrowers, allows the literal doubling of outstanding, authorized shares in public companies without SEC approval. Normally, you would go to jail for selling unauthorized, unapproved stock in a public company. But not short-sellers, who get to stand in the shoes of both regulators and investment banks simultaneously. Regular short-selling should be illegal because as we said, selling borrowed property for full value has no basis in law. Getting back to the SEC and naked short-selling, they keep a list of stocks where naked short-selling is suspected just to tick off the shareholders of these companies who are being ripped off. This is like saying, ha-ha, we know you're being ripped off, but we're not going to do anything about it, so go scratch. We work for the Illuminati, who can do as they please. As if this was not enough moral hazard, the SEC is now selectively enforcing laws against naked-shorting of shares in Fannie, Freddie and 17 other commercial and investment banks, all of them Illuminist to the core. This temporary ban against what is already illegal has just been extended to mid-August so that earnings season can pass without too much damage being done to the fraudsters. Remember, these are the same scum-bag Illuminist institutions that got us into the current mess we are in and are the same bankster fraudsters who are all presenting fraudulent financial statements to temporarily save the stock market from destruction for the benefit of the incumbent traitors in Congress. As always, there are two sets of rules, one set for the would-be lords of the universe, and the other set for the serfs and peons (i.e. the rest of us).
Also, the legal fiction which allows for the sale of borrowed property for full value is not limited to stocks. The same criminal scam has long since been extended into gold and silver leasing. The ruse given for this scam is that gold and silver are non-producing assets (i.e. they produce no financial return), and that leasing of these gold and silver reserves gives the fraudsters a chance to earn a return on their bullion holdings, which are supposed to secure their depositors accounts. Gee, that must be why lease rates are now near zero or even negative, especially for the shorter terms, so that a whopping financial return can be earned on bullion holdings. That must be why the cartel fraudsters are paying the bullion banks to lease their bullion, instead of the other way around. Obviously, the real reason for gold and silver leasing is gold and silver suppression. In fact, that is the sole reason in this market. And now we have a situation where borrowed bullion has been sold for full value by bullion banks, often to another bankster fraudster, which then leases it again to yet another bullion bank, which in turn sells it to another bankster fraudster, ad infinitum. As a result, multiple banks now carry the very same physical gold and silver bars as part of their bullion reserves even though only one of them actually has physical possession of that bullion! The entire alleged bullion holdings of the US treasury, the Fed and the ECB is one big, scum-sucking scam!!! And often, these same bars have been sold by one of the bullion banks in the fraudster daisy chain to jewelers who have converted the gold and silver into rings, chains and bangles. The gold and silver is all freaking gone, and, to use the words of the Beaver: "it ain't never comin' back!" Yet multiple banks list this -- jewelry -- which is hanging from the necks and wrists of new Indian brides -- as phony paper "gold reserves" in their financial statements! Central banks around the world have become the ultimate alchemists, for they have somehow managed to create their "gold reserves" out of -- well -- NOTHING!!! We can just picture the bullion banks scurrying the new brides off to a detention center to reclaim their "gold reserves" when they implode from all their deceits and scams as the gold and silver leases come due. Will they pay back their lease debts with worthless paper dollars instead? No, because the bullion banks will be totally bankrupt. How do pay back in dollars the amount due for all that leased gold and silver which have just had a zero added to their value per ounce? Perhaps they can create some dollars out of thin air like the banks created their paper gold reserves? Of course, barring this magical creation of dollars from nothing, perhaps in yet another bailout, the banks that leased the gold to the bullion banks will then promptly go under!!! And their depositors will say: "You mean the gold reserves that were securing our deposits have been made into jewelry that was sold to women in a foreign country?" And the fraudsters will say: "Yep, sorry about that." There won't be a run on banks then. There will be a run after bankers, to tear them limb from limb.
Of course, the IMF thinks that this state of affairs with paper gold reserves is perfectly acceptable. That is why the IMF's new rules, which it promulgated to prevent this multiple-counting of reserves, were made only voluntary, and only a few banks thus far have adopted them. The reason for the paucity of banks adopting the new rules should be patently obvious giving what we have just revealed to you. The whole scam would be exposed if all banks honestly complied with the new rules, and especially if those rules were made retroactive.
Oh, and may we add that much of the gold used to start many of the daisy chains of gold paper reserve frauds through multiple-counting of gold reserves was from gold swaps with the US Treasury, which pledged a portion of our national gold to the initial central bank that leased its gold to a bullion bank to start the daisy chain of fraud. Thus, the initial central bank agreed to sell its bullion based on the promise by the Fed and the US Treasury to replace that gold with some of our own at a later date. Hence, the term "deep storage gold" that is used to describe the US Treasury's and Mint's gold reserves, which have all been stolen, leased, swapped or otherwise compromised. These swaps were used to prevent people from learning the true source of gold suppression, which was the Fed in cahoots with the US Treasury. The blame for gold suppression would be directed to the central bank that publicly sold the gold, and not to the Fed and the US Treasury, whose gold swaps were kept secret from the public.
The elitists may try to use the next Congress to shut down the internet, take away grass roots lobbying, implement the Fairness Doctrine to cut off conservative talk show radio and get greater control over guns. Then would come the false-flag attack to implement martial law at a time when communication among a concerned populace and gun ownership have been vastly curtailed. They will also use this time to continue to heap up information on citizens illegally, while attempting to implement a national ID card so that Big Brother can become reality. They must be stopped from doing this. Throw out all incumbents in November.
Gold continues to consolidate, as pressure comes from continued rollover of COMEX gold futures from August to December, 2008. Other pressure is being applied through dead-cat dollar rallies, which are also causing oil to come down, moderating inflation a tad. These dollar rallies can only be the result of multiple Fed and central bank collusion involving several nations. Nothing else can possibly support the dollar other than manipulation and intervention. The dollar has no intrinsically good fundamentals to support it. Buck-Busting Ben saw to that, and now the Fed has become irrelevant. Real interest rates are about to become whatever investors say they should be based on ever-increasing risk from massive consumer defaults and ever-decreasing rates of return caused by ever-worsening hyperinflation. As of last Thursday, December became the most active contract, and soon August will become the leading contract. As of Monday, there were 74,603 August contracts and 224,080 December contracts. Most COMEX gold options are now centered on December, so there will not any opportunities to steal from traders of call options until yearend. Bank failures, poor earnings, war threats, increasing consumer defaults, option ARM implosion, further real estate market deterioration, as well as gigantic bailouts and bond monetizations to save fraudsters will keep gold well bid. Then when the elitists bail from paper assets and let the dollar fail, gold and silver will go intergalactic. The run up for the next big gold phase is right around the corner, so don't miss it. You do not want to be left out of the next big rally. Keep a little powder dry if you want to take advantage of the oil takedown potential, but make sure you are in big before this fall rally gets underway. The rollover from August to December will be completed near the end of this week, and then the fun begins.
The stock markets are being supported by lower oil and a weaker yen. The yen has not been this weak against the dollar in over a month, so some carry trader support for the PPT has come in as bank losses continue to be hidden and oil subsides. Even so, we are still way below 12,000 as de-leveraging continues to be a priority. The only alternatives are to either float new bonds, which is difficult during this credit-crunch as no one trusts anyone else's debt anymore and rates have been climbing, or to float new shares, which dilutes the holdings of current shareholders. Time is running out as the losses on toxic waste can only be fraudulently delayed for so long, and the ability to dump toxic waste may become more and more difficult with the passage of time. Banks are afraid to start a sell-off of toxic waste because they will then be forced to mark to market, but they had better start soon while they can still get something for their poisonous assets. Merrill Lynch is now starting to do this, but contrary to what the fane-stream media might tell you, what they have just attempted to dump is a pittance compared to their overall holdings of toxic waste.
Trillions will be dumped on US taxpayers by the Fannie and Freddie bailout. Not only will losses mount based on the current levels of toxic waste, but now more toxic waste will be heaped up on top of what is already there as loans that are not backed by the twin titans of profligate lending are almost impossible to unload on investors. Either hundreds of billions more in losses will be heaped on top of what they are already carrying, or markets will implode and freeze up due to tighter credit standards which would tend to keep the amount of toxic waste to a minimum. Either way is bad news for taxpayers and homeowners. Obviously the fraudsters, desperate for profits to shore up balance sheets, are likely to cook up more bad loans to boost profits knowing that they are backstopped by Paulson's bazooka, and we predict more rampant fraud to come. Paulson's bazooka is in reality a license for the fraudsters to steal once again, as the Fed blinks and looks the other way despite its tighter regulations for mortgage lending, which are five years too late. Anyone who is stupid enough to buy the paper offered by Scylla and Charibdis deserves to be eaten alive. For allowing all of this to happen, and in fact for actively encouraging it to happen, the Fed should be terminated, not given more power. Paulson can aim his bazooka at the Fed if he wants, and blow them away. He won't get any complaints from us if he does.
Almost 4 years ago we said Fannie Mae and Freddie Mac could be catalyst for the collapse in the financial system. At that time we said they were bankrupt. In the past 8 years, in spite of their questionable financial conditions they increased their growth $1.6 trillion to $5.8 trillion. Just over the past year Fannie Mae and Freddie Mac’s combined commitments have expanded $627 billion, or 13.7%.
This expansion is part of the manifestation of the massive scope of additional credit creation over the past 8 years to sustain a collapsing financial system, not unlike hundreds of other collapses over the past 1,000 years. Those who have studied financial history, and the Illuminists have not only lived it, but also created it, know that it is impossible to sustain such an expansion. Sinking asset prices finally overwhelm the system and it collapses.
Fannie and Freddie are a Ponzi scheme. Our Treasury and the Fed talk in terms of additional capital of $25 billion or perhaps $50 billion that taxpayers will have to pay to bail out banks, Wall Street and lying borrowers. In reality their needs will exceed $600 billion for just this year. Next year the cost will be greater and who knows where it will end.
The powers in and behind government used Fannie and Freddie to manipulate the American economic system. They were used to delay a major recession and now as a result we are facing hyperinflation, stagflation and a major depression worse than that of the 1930s. This is going to rip apart the social fabric of America and the world as well. This has created an economic, financial and political nightmare. It has also created a speculator class, which has grown to unfathomable size. That is bad, but what is worse is that these speculators will eventually lose everything adding dynamics to the collapse.
The government guarantee of the debt of these GSE’s is no longer implied. It is a reality. The elitists knew from the beginning that the American taxpayer would foot the bill as the insiders enriched themselves. Fannie and Freddie are the ultimate scam to cover the tracks of the worst bunch of crooks in economic history. Never in history has an inflation generator enjoyed such capacity to issue endless quantities of money like instruments with not a word of complaint professional or public that this is a Ponzi scheme. Even as it becomes obvious they are broke, and controversy rages, as Congress sets on their hands, in June they made $21 billion in new commitments, an annualized 33% increase. What unbelievable brass.
Over and over the increase in money and credit, the pumping up of stock and real estate markets has staved off recession and depression. Since 1980 it’s happened every 4 or 5 years like clockwork. The powers behind the scenes have abused the system once too often. This time it is going to be different. The GSE’s played a major role in rescuing the economy in 1982-85, in 1990-92, in 1996-97, in 2001 an onward. They perpetually brought greater amounts of credit to the system. The GSE’s were the backstop – the ultimate bailout instrument of the financial and moral degeneracy. Now we have the ultimate in corruption, Congress will provide the Treasury with blank check discretion to keep the bogus money machine going. You might call this the ultimate in hypocrisy. This probably is the beginning of the end of securitization of mortgages. This in time will further restrain mortgage credit growth and place downward pressure on home prices for many years to come and in turn exert major pressure on the entire economy. The GSE’s are in a box and cannot get out just as the rest of the system is. They can probably keep the charade up for a few years, but it will end when depression begins.
It continues to come to light that financial entities have a treasury trove of off balance sheet assets that are horrible to behold. As professionals and investors come to terms with these facts they will finally realize just how serious the situation really is.
As these assets, or what is left of them, are carried over to the balance sheet there will be some staggering revelations. This exposure should put pressure on bond and stock markets and lead to more than $2 trillion in write-offs. This will be accompanied by failures at many financial institutions. That will produce higher gold and silver prices. Get all of your free assets out of banks, commodity funds and Forex funds and into gold and silver related assets and Swiss franc government bonds.
30 July 2008
Failing US banks
Failed Banks So far:
Northern Rock
Bear Stearns
IndyMac
First Integrity Bank
ANB Financial
Hume Bank
Douglas National Bank
First Heritage Bank
First National Bank of Nevada
Next to fail:
Barclays
Bradford & Bingley
HBOS
Downey Financial
Corus Bankshares
Doral Financial
FirstFed Financial
Oriental Financial
BankUnited Financial
Washington Mutual
Northern Rock
Bear Stearns
IndyMac
First Integrity Bank
ANB Financial
Hume Bank
Douglas National Bank
First Heritage Bank
First National Bank of Nevada
Next to fail:
Barclays
Bradford & Bingley
HBOS
Downey Financial
Corus Bankshares
Doral Financial
FirstFed Financial
Oriental Financial
BankUnited Financial
Washington Mutual
When Dr. Doom speaks, we should listen
When CNBC or Fox needs a guest who can be counted on to deliver a thoroughly gloomy outlook for the U.S. economy, they call on "Dr. Doom."
To say Peter Schiff is bearish is like saying Tiger Woods is an okay golfer, or China has a small problem with air quality. The president of Connecticut-based Euro Pacific Capital Inc. is so pessimistic about the U.S. economy that he lives in a rented house and keeps the vast majority of his and his clients' money outside the country, a healthy chunk of it in gold and energy stocks.
"America is finished. We are going to destroy this country. Our economy is just going to unravel," he told me yesterday. "The question is how much money is the world going to lose before it writes us off?"
Apocalyptic forecasts are a dime a dozen these days, so why should anyone pay attention to Mr. Schiff? Because his past predictions have proved uncannily accurate.
When dot-com stocks with no earnings were shooting skyward in the late nineties, he was advising clients to stay away and instead putting money into the unloved energy sector, just in time for the great oil bull market.
A few years later, when the housing bubble was inflating, he was warning about the dangers of reckless mortgage lending and the precarious state of Fannie Mae and Freddie Mac. "If it looks like a bubble, walks like a bubble and quacks like a bubble, it's a bubble," he wrote. That was in 2004, when speculators were still lining up to buy investment properties in Las Vegas.
Ever the contrarian, Mr. Schiff made a bundle shorting the subprime mortgage sector.
So, one year into the credit crunch and with more than $400-billion (U.S.) of mortgage losses piling up on company books, where does Dr. Doom see the U.S. economy heading now?
Unfortunately, into an even deeper hole, one from which it could take years to emerge.
Far from rescuing the economy from the housing debacle, the government's efforts to prop up Fannie and Freddie - which own or guarantee nearly half of the $12-trillion in outstanding U.S. mortgage debt - will only compound the problem by delaying the inevitable day of reckoning. The same goes for plans to help hundreds of thousands of homeowners refinance into more affordable mortgages.
Apart from encouraging the very moral hazard that got the U.S. into this mess in the first place, the government bailout will come with an enormous price tag in the form of soaring inflation, Mr. Schiff argues. He believes government figures vastly understate the true rate of inflation, which he estimates is now running at 10 to 12 per cent. Before long, it could be north of 20 per cent.
"The government doesn't have the balls to raise taxes. It's going to print the money. It's going to destroy the currency," he says.
During the Depression of the 1930s, at least people who held cash made out okay. Because prices were falling, their money actually bought more. But if Mr. Schiff is right and the U.S. is heading into a period of hyperinflation, then even the most prudent savers will see their wealth eviscerated.
With the walls closing in on the U.S. economy, where is an investor to turn? Apart from gold and energy producers, which benefit from a plunging U.S. dollar, Mr. Schiff likes conservative, dividend-paying stocks such as pipelines and utilities. He's especially fond of Europe, Asia, Australia and Canada, where his holdings include Barrick Gold Corp., Goldcorp Inc., Crescent Point Energy Trust, Baytex Energy Trust and Pembina Pipeline Income Fund.
He has two words for Canadian investors thinking now is a good time to shop for bargain-priced U.S. stocks: "Stay away."
To say Peter Schiff is bearish is like saying Tiger Woods is an okay golfer, or China has a small problem with air quality. The president of Connecticut-based Euro Pacific Capital Inc. is so pessimistic about the U.S. economy that he lives in a rented house and keeps the vast majority of his and his clients' money outside the country, a healthy chunk of it in gold and energy stocks.
"America is finished. We are going to destroy this country. Our economy is just going to unravel," he told me yesterday. "The question is how much money is the world going to lose before it writes us off?"
Apocalyptic forecasts are a dime a dozen these days, so why should anyone pay attention to Mr. Schiff? Because his past predictions have proved uncannily accurate.
When dot-com stocks with no earnings were shooting skyward in the late nineties, he was advising clients to stay away and instead putting money into the unloved energy sector, just in time for the great oil bull market.
A few years later, when the housing bubble was inflating, he was warning about the dangers of reckless mortgage lending and the precarious state of Fannie Mae and Freddie Mac. "If it looks like a bubble, walks like a bubble and quacks like a bubble, it's a bubble," he wrote. That was in 2004, when speculators were still lining up to buy investment properties in Las Vegas.
Ever the contrarian, Mr. Schiff made a bundle shorting the subprime mortgage sector.
So, one year into the credit crunch and with more than $400-billion (U.S.) of mortgage losses piling up on company books, where does Dr. Doom see the U.S. economy heading now?
Unfortunately, into an even deeper hole, one from which it could take years to emerge.
Far from rescuing the economy from the housing debacle, the government's efforts to prop up Fannie and Freddie - which own or guarantee nearly half of the $12-trillion in outstanding U.S. mortgage debt - will only compound the problem by delaying the inevitable day of reckoning. The same goes for plans to help hundreds of thousands of homeowners refinance into more affordable mortgages.
Apart from encouraging the very moral hazard that got the U.S. into this mess in the first place, the government bailout will come with an enormous price tag in the form of soaring inflation, Mr. Schiff argues. He believes government figures vastly understate the true rate of inflation, which he estimates is now running at 10 to 12 per cent. Before long, it could be north of 20 per cent.
"The government doesn't have the balls to raise taxes. It's going to print the money. It's going to destroy the currency," he says.
During the Depression of the 1930s, at least people who held cash made out okay. Because prices were falling, their money actually bought more. But if Mr. Schiff is right and the U.S. is heading into a period of hyperinflation, then even the most prudent savers will see their wealth eviscerated.
With the walls closing in on the U.S. economy, where is an investor to turn? Apart from gold and energy producers, which benefit from a plunging U.S. dollar, Mr. Schiff likes conservative, dividend-paying stocks such as pipelines and utilities. He's especially fond of Europe, Asia, Australia and Canada, where his holdings include Barrick Gold Corp., Goldcorp Inc., Crescent Point Energy Trust, Baytex Energy Trust and Pembina Pipeline Income Fund.
He has two words for Canadian investors thinking now is a good time to shop for bargain-priced U.S. stocks: "Stay away."
29 July 2008
Coincidence or Confirmation?
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
Big news recently is the world record loss in crude oil trading, taken by SemGroup, of Tulsa, Oklahoma, a large but mostly unknown oil pipeline, storage and trading company founded in 2000. To my knowledge, the reported $3.2 billion loss is the second largest commodity debacle ever, only behind the $6 billion loss recorded by Amaranth Advisers two years ago in natural gas.
What is remarkable is how little has been written about SemGroup’s loss. I realize that we have become numb to reports of multi-billion dollar losses, thanks to the mortgage and credit disaster. But it is still amazing to me that more attention has not been placed upon this oil trading loss, because it explains so much about the recent volatility in the price of oil. If there’s one concern ahead of the mortgage and credit crisis, it has to be the price of crude.
Given the recent fervor by elected officials to pin the blame for the unprecedented price moves in crude on speculators, I’m surprised that more observers are not making the connection between SemGroup’s actions and the big price move in crude oil. I thought the CFTC would be all over this major market event, but they instead announced, with great fanfare, charges concerning truly insignificant oil market violations. These events occurred more than a year ago and the dollar amount was a million dollars. The SemGroup’s loss was 3200 times more significant, yet neither the CFTC nor the NYMEX, where $2.4 billion of the loss reportedly occurred (the rest was OTC) have said a word about the 2nd largest commodity loss in history.
So, how do you lose $3.2 billion dollars in crude oil trading and how did that affect the price? The answer is with an obscene number of contracts on the wrong side of a rising market on the short side. That’s smack-dab where SemGroup was positioned, with more (and perhaps much more) than 100,000 short futures and options contracts.
The exact number of contracts that SemGroup actually held short has not been revealed. However, by dividing the total loss listed in bankruptcy filings and published reports, by a reasonable loss per barrel, it’s not hard to deduce the total number of short contracts held. To appreciate what a 100,000 contract position represents, it is the equivalent to 100 million barrels of oil, or more than every barrel produced and consumed in the entire world for a day.
In terms of dollar amounts, it appears that SemGroup held short positions on more than $15 billion worth of crude oil and perhaps much more. In practical terms, it would take a position of that size going against you in order to generate a loss of $3 billion. You should be asking yourself, how did the NYMEX and the CFTC allow SemGroup, or anyone, to amass such a large position that it, obviously, couldn’t stand behind? What do these regulators do all day?
I’m certain that when the details emerge, we will read of a story that has recurred in previous market debacles, namely, an initial market miscalculation compounded by repeated attempts to get whole by doubling up. As those increased bets don’t pan out, and margin calls can’t be met, the game is over in an instant and the loss is recorded.
In this case, it’s easy to see, based upon the timeline, how SemGroup’s trading debacle influenced oil prices, first up, then down. As the end came near for SemGroup’s large, increasing short position, that position was forcibly bought back (probably by SemGroup’s lead broker, said to be Barclays). This accounted, by my calculations, for the last $15 to $20 increase in the price of oil, up to the $147 price high. When the forced buyback of the short position was concluded, a buying void was suddenly created and prices then fell $20+ to date. So, not only did SemGroup manage to lose over $3 billion and go bankrupt in the process, it also dramatically influenced the price of oil and fuel for the rest of the world.
As the SemGroup story comes out, I’m certain my version will prove fairly accurate. In fact, I already wrote about it, or nearly so, in an article on June 10, titled "The Real Speculators"
http://www.investmentrarities.com/06-10-08.html In that article, I opined that speculators were influencing the price of crude oil alright, but it wasn’t the speculators everyone thought were the culprits, like hedge and index funds on the long side. Instead, the real speculators were short traders, mainly in the commercial category, who were stuck in losing positions and the buying back of those losing short positions was driving prices higher. I pointed out that these speculators on the short side were masquerading as commercials or legitimate hedgers.
I’ll leave it up to you to decide if this previous article of mine was just a remarkable coincidence, or a confirmation of my point. To that, add last week’s announcement by the CFTC that it had reclassified a very large trader in crude oil from the commercial category to the non-commercial category, because it determined that the trader wasn’t legitimately hedging. It would appear that trader may have been SemGroup. Regardless, the CFTC’s reclassification came after the harm was done and appears to be nothing more than public relations damage control from an ineffective regulator. As usual.
Let me be clear here. I am not suggesting that the price of crude oil doubled in less than a year solely because of SemGroup or any other short speculators, pretending to be legitimate hedgers, bought back those losing short positions, driving prices higher. Obviously, oil is the biggest commodity market by far, and it takes real fundamentals to move the price by that magnitude.
But, if there was a speculative premium to the price of oil, I contend that premium was created more by the speculative shorts buying back those short positions, rather than the speculative longs buying and adding to their longs. After all, the public data clearly indicates that open interest in crude oil futures has been declining over the past six moths, indicating that contracts have been liquidated on balance. That means that the longs have been selling and the shorts have been buying. It doesn’t take a rocket scientist to figure out that the buying pressure has been coming from the shorts, and even our elected officials should be able to figure this out.
I have taken your time in explaining what has occurred in oil, not because it may have confirmed what I had written in a previous article, but because I think it is important to fully understand what has transpired. Additionally, I believe it has special relevance for silver investors. There is a remarkable similarity to what has just occurred in oil to what will occur in silver.
The first observation is that both commodities are traded on the same exchange, the NYMEX/COMEX. This is no small coincidence, as I believe there is a common culture of management and regulatory attitude that has created in silver the same set up that permitted what just occurred in crude oil. This is particularly significant for silver investors, because it represents a force that will propel the price of silver far higher than most could ever imagine.
To those who may question how paper trading in oil or silver, no matter how extreme, might influence the worldwide pricing in each commodity, it is important to recognize the significance of being the world’s largest futures exchange, as the NYMEX is in oil and COMEX is in silver. Most real world transactions are priced off the prices set on whatever is the most dominant futures exchange. So forces that drive prices on the leading futures exchanges also drive world prices on physical transactions.
The common denominator in oil and silver is the large, and largely illegitimate commercial short position. I’m not saying that all commercial shorts are really speculators in drag, but some are. Certainly, in oil, SemGroup was not a legitimate hedger, as it is not possible to lose more than $3 billion on a legitimate hedge. And this took place under full view and supervision of the NYMEX and the CFTC.
Likewise, the public evidence indicates a commercial short position in COMEX silver that is so large that it defies common sense and economic justification. In fact, the commercial short position in silver is relatively and proportionately many times more extreme than the short oil position held by SemGroup. Whereas their failed oil short position represented just over one day’s world oil production and approximately 10% of total crude oil futures open interest, the big commercial shorts in silver make SemGroup look like a pipsqueak.
But make no mistake, the short position held by SemGroup was large enough and ill-conceived enough to make it vulnerable and capable of artificially distorting the world’s largest market. In fact, what occurred was as close as you could get to a contract default without having to declare such. All that separated this event from being a formal default was the clearing firm’s willingness to eat the loss. My point is that the silver short position is dramatically larger and more ill-conceived and, therefore, makes it more vulnerable and likely to artificially impact the price of silver upwards and/or threaten default.
The most recent Commitment of Traders Report (COT), for positions held as of 7/25, shows a new record for the 4 largest shorts in silver futures, with the 8 largest traders close to a record. (For the record, I think the CFTC may have made a mathematical error in this report in overstating the size of the 4 largest traders, but it does not materially alter the conclusion, so I am treating the numbers as reported). The new COT indicates the big 4 are net short more than 175 days of world mine production, and the 8 largest traders short 217 days. This, compared to a little over one day’s worth of oil production held short by SemGroup. As I have written previously, no commodity comes close, or has ever come close to having such a large concentrated short position on this metric.
In terms of the percentage of the total COMEX silver futures market, the 8 largest traders hold 81% of the entire short side, once all spreads are netted out. This is an outrageous level of concentration, not seen in any other market (except gold, which is also 81%).
There is another very important difference between the silver market short position, compared to the SemGroup’s failed oil short position, aside from the obvious and glaring mismatch in terms of size and concentration. That difference is that while there was little public warning of SemGroup’s ill-fated short oil fiasco, that is certainly not the case in silver. In fact, aside from my recent article pointing to the commercial oil shorts as being the real speculators, I am aware of no finger-pointing at these traders in oil.
Compare that to silver, where on more than one occasion over the years, several hundred concerned investors and citizens have petitioned the CFTC to deal with the outsized and non-economic COMEX commercial silver short position. Each time, the CFTC has denied, in detail, that this unprecedented short position is manipulative and represents a danger to the market. Each time, the vast majority of petitioners were unconvinced with the CFTC’s denials. The SemGroup episode is unlikely to persuade objective market observers that the silver short position is not manipulative and dangerous.
It is hard to imagine, after the unnecessary oil market volatility caused by SemGroup’s failed short position, that the CFTC could still maintain the no problem in silver story with a straight face. After all, the CFTC and the NYMEX clearly failed in their prime oversight role in allowing SemGroup to amass such a large, non-economic and dangerous short position. According to their own data, the silver short position is many times larger, more concentrated and, therefore, more dangerous than SemGroup’s oil short position ever was.
Regardless of whether the CFTC or the NYMEX/COMEX are finally forced to uphold the law and live up to their responsibilities, the message to silver investors should be clear. If SemGroup’s failed short position could have the price influence it had on the world’s largest commodity, oil, then what is the likely price impact of the failure of a very much larger short position on one of the market’s smallest commodities, silver?
My point is that because silver is such a small market and because the short position is so large and concentrated, the impact on price is certain to be much more dramatic than what we just witnessed in crude oil. One trader, buying back a short position equal to one day’s world production in the largest commodity market caused the price of oil to rise and fall by $20 a barrel and more.
What would be the effect on a small market, like silver, if several traders bought back, or tried to buy back many days of world production, perhaps a hundred days or more, in a very short and compressed time frame, such as was just experienced by SemGroup in oil? My back-of-the-envelope calculation would be silver would move up by double to triple the amount just seen in oil, on a dollar per barrel/dollar per ounce basis. In other words, if oil was moved by $10 to $20 per barrel by SemGroup’s buying, silver, in comparable circumstances, would move by $25 to $50+ per ounce.
Even this rough calculation understates what is likely to occur in silver price-wise, as it leaves out the most important difference between oil and silver, namely, the very nature of each. First, oil is a primary consumption commodity. By that I mean it is the prime cost component in most of it’s major uses, such as a transportation or heating fuel. This means that, although oil is a truly essential commodity, a price rise in oil is felt immediately by everyone, encouraging conservation and a fall off in demand, as we’ve seen in the US.
Silver, on the other hand, is not the prime cost component in the vast majority of it’s industrial applications, because so little of it is used per average application. This makes silver demand more insensitive to rising prices. The term used to describe this phenomenon is price inelasticity. Even in jewelry, because of the current low price, labor and fabrication outweigh the metal in calculating the total cost. Therefore, unlike oil, sharply rising prices shouldn’t bring about an immediate fall in silver demand.
But the most important difference in the nature of oil and silver is that higher prices for each bring entirely different reactions from investors and speculators. Higher oil prices have led to a reduction in investor demand for long positions in the commodity itself. This is borne out in the public data that shows long positions have been reduced on the price rise (Remember, it is the shorts who were doing the buying to the upside).
In silver, higher prices excite and encourage investor demand, as is seen in the strong growth in silver holdings in the ETF’s, and other public data sources, such as the US Mint’s record sales of Silver Eagles. That’s because silver is a primary investment asset, in addition to being a vital industrial commodity. Oil is the most vital industrial commodity of all, but, as a commodity, it is not also a primary investment asset.
It is this difference in the nature of these two commodities, that makes the prospects for sharply higher silver prices so exciting. When oil goes up, everyone tries to use less. When silver goes up, not only is there no great push to use less, but investors want to buy more. Recognizing and taking advantage of this difference will make many wealthy in the future.
Big news recently is the world record loss in crude oil trading, taken by SemGroup, of Tulsa, Oklahoma, a large but mostly unknown oil pipeline, storage and trading company founded in 2000. To my knowledge, the reported $3.2 billion loss is the second largest commodity debacle ever, only behind the $6 billion loss recorded by Amaranth Advisers two years ago in natural gas.
What is remarkable is how little has been written about SemGroup’s loss. I realize that we have become numb to reports of multi-billion dollar losses, thanks to the mortgage and credit disaster. But it is still amazing to me that more attention has not been placed upon this oil trading loss, because it explains so much about the recent volatility in the price of oil. If there’s one concern ahead of the mortgage and credit crisis, it has to be the price of crude.
Given the recent fervor by elected officials to pin the blame for the unprecedented price moves in crude on speculators, I’m surprised that more observers are not making the connection between SemGroup’s actions and the big price move in crude oil. I thought the CFTC would be all over this major market event, but they instead announced, with great fanfare, charges concerning truly insignificant oil market violations. These events occurred more than a year ago and the dollar amount was a million dollars. The SemGroup’s loss was 3200 times more significant, yet neither the CFTC nor the NYMEX, where $2.4 billion of the loss reportedly occurred (the rest was OTC) have said a word about the 2nd largest commodity loss in history.
So, how do you lose $3.2 billion dollars in crude oil trading and how did that affect the price? The answer is with an obscene number of contracts on the wrong side of a rising market on the short side. That’s smack-dab where SemGroup was positioned, with more (and perhaps much more) than 100,000 short futures and options contracts.
The exact number of contracts that SemGroup actually held short has not been revealed. However, by dividing the total loss listed in bankruptcy filings and published reports, by a reasonable loss per barrel, it’s not hard to deduce the total number of short contracts held. To appreciate what a 100,000 contract position represents, it is the equivalent to 100 million barrels of oil, or more than every barrel produced and consumed in the entire world for a day.
In terms of dollar amounts, it appears that SemGroup held short positions on more than $15 billion worth of crude oil and perhaps much more. In practical terms, it would take a position of that size going against you in order to generate a loss of $3 billion. You should be asking yourself, how did the NYMEX and the CFTC allow SemGroup, or anyone, to amass such a large position that it, obviously, couldn’t stand behind? What do these regulators do all day?
I’m certain that when the details emerge, we will read of a story that has recurred in previous market debacles, namely, an initial market miscalculation compounded by repeated attempts to get whole by doubling up. As those increased bets don’t pan out, and margin calls can’t be met, the game is over in an instant and the loss is recorded.
In this case, it’s easy to see, based upon the timeline, how SemGroup’s trading debacle influenced oil prices, first up, then down. As the end came near for SemGroup’s large, increasing short position, that position was forcibly bought back (probably by SemGroup’s lead broker, said to be Barclays). This accounted, by my calculations, for the last $15 to $20 increase in the price of oil, up to the $147 price high. When the forced buyback of the short position was concluded, a buying void was suddenly created and prices then fell $20+ to date. So, not only did SemGroup manage to lose over $3 billion and go bankrupt in the process, it also dramatically influenced the price of oil and fuel for the rest of the world.
As the SemGroup story comes out, I’m certain my version will prove fairly accurate. In fact, I already wrote about it, or nearly so, in an article on June 10, titled "The Real Speculators"
http://www.investmentrarities.com/06-10-08.html In that article, I opined that speculators were influencing the price of crude oil alright, but it wasn’t the speculators everyone thought were the culprits, like hedge and index funds on the long side. Instead, the real speculators were short traders, mainly in the commercial category, who were stuck in losing positions and the buying back of those losing short positions was driving prices higher. I pointed out that these speculators on the short side were masquerading as commercials or legitimate hedgers.
I’ll leave it up to you to decide if this previous article of mine was just a remarkable coincidence, or a confirmation of my point. To that, add last week’s announcement by the CFTC that it had reclassified a very large trader in crude oil from the commercial category to the non-commercial category, because it determined that the trader wasn’t legitimately hedging. It would appear that trader may have been SemGroup. Regardless, the CFTC’s reclassification came after the harm was done and appears to be nothing more than public relations damage control from an ineffective regulator. As usual.
Let me be clear here. I am not suggesting that the price of crude oil doubled in less than a year solely because of SemGroup or any other short speculators, pretending to be legitimate hedgers, bought back those losing short positions, driving prices higher. Obviously, oil is the biggest commodity market by far, and it takes real fundamentals to move the price by that magnitude.
But, if there was a speculative premium to the price of oil, I contend that premium was created more by the speculative shorts buying back those short positions, rather than the speculative longs buying and adding to their longs. After all, the public data clearly indicates that open interest in crude oil futures has been declining over the past six moths, indicating that contracts have been liquidated on balance. That means that the longs have been selling and the shorts have been buying. It doesn’t take a rocket scientist to figure out that the buying pressure has been coming from the shorts, and even our elected officials should be able to figure this out.
I have taken your time in explaining what has occurred in oil, not because it may have confirmed what I had written in a previous article, but because I think it is important to fully understand what has transpired. Additionally, I believe it has special relevance for silver investors. There is a remarkable similarity to what has just occurred in oil to what will occur in silver.
The first observation is that both commodities are traded on the same exchange, the NYMEX/COMEX. This is no small coincidence, as I believe there is a common culture of management and regulatory attitude that has created in silver the same set up that permitted what just occurred in crude oil. This is particularly significant for silver investors, because it represents a force that will propel the price of silver far higher than most could ever imagine.
To those who may question how paper trading in oil or silver, no matter how extreme, might influence the worldwide pricing in each commodity, it is important to recognize the significance of being the world’s largest futures exchange, as the NYMEX is in oil and COMEX is in silver. Most real world transactions are priced off the prices set on whatever is the most dominant futures exchange. So forces that drive prices on the leading futures exchanges also drive world prices on physical transactions.
The common denominator in oil and silver is the large, and largely illegitimate commercial short position. I’m not saying that all commercial shorts are really speculators in drag, but some are. Certainly, in oil, SemGroup was not a legitimate hedger, as it is not possible to lose more than $3 billion on a legitimate hedge. And this took place under full view and supervision of the NYMEX and the CFTC.
Likewise, the public evidence indicates a commercial short position in COMEX silver that is so large that it defies common sense and economic justification. In fact, the commercial short position in silver is relatively and proportionately many times more extreme than the short oil position held by SemGroup. Whereas their failed oil short position represented just over one day’s world oil production and approximately 10% of total crude oil futures open interest, the big commercial shorts in silver make SemGroup look like a pipsqueak.
But make no mistake, the short position held by SemGroup was large enough and ill-conceived enough to make it vulnerable and capable of artificially distorting the world’s largest market. In fact, what occurred was as close as you could get to a contract default without having to declare such. All that separated this event from being a formal default was the clearing firm’s willingness to eat the loss. My point is that the silver short position is dramatically larger and more ill-conceived and, therefore, makes it more vulnerable and likely to artificially impact the price of silver upwards and/or threaten default.
The most recent Commitment of Traders Report (COT), for positions held as of 7/25, shows a new record for the 4 largest shorts in silver futures, with the 8 largest traders close to a record. (For the record, I think the CFTC may have made a mathematical error in this report in overstating the size of the 4 largest traders, but it does not materially alter the conclusion, so I am treating the numbers as reported). The new COT indicates the big 4 are net short more than 175 days of world mine production, and the 8 largest traders short 217 days. This, compared to a little over one day’s worth of oil production held short by SemGroup. As I have written previously, no commodity comes close, or has ever come close to having such a large concentrated short position on this metric.
In terms of the percentage of the total COMEX silver futures market, the 8 largest traders hold 81% of the entire short side, once all spreads are netted out. This is an outrageous level of concentration, not seen in any other market (except gold, which is also 81%).
There is another very important difference between the silver market short position, compared to the SemGroup’s failed oil short position, aside from the obvious and glaring mismatch in terms of size and concentration. That difference is that while there was little public warning of SemGroup’s ill-fated short oil fiasco, that is certainly not the case in silver. In fact, aside from my recent article pointing to the commercial oil shorts as being the real speculators, I am aware of no finger-pointing at these traders in oil.
Compare that to silver, where on more than one occasion over the years, several hundred concerned investors and citizens have petitioned the CFTC to deal with the outsized and non-economic COMEX commercial silver short position. Each time, the CFTC has denied, in detail, that this unprecedented short position is manipulative and represents a danger to the market. Each time, the vast majority of petitioners were unconvinced with the CFTC’s denials. The SemGroup episode is unlikely to persuade objective market observers that the silver short position is not manipulative and dangerous.
It is hard to imagine, after the unnecessary oil market volatility caused by SemGroup’s failed short position, that the CFTC could still maintain the no problem in silver story with a straight face. After all, the CFTC and the NYMEX clearly failed in their prime oversight role in allowing SemGroup to amass such a large, non-economic and dangerous short position. According to their own data, the silver short position is many times larger, more concentrated and, therefore, more dangerous than SemGroup’s oil short position ever was.
Regardless of whether the CFTC or the NYMEX/COMEX are finally forced to uphold the law and live up to their responsibilities, the message to silver investors should be clear. If SemGroup’s failed short position could have the price influence it had on the world’s largest commodity, oil, then what is the likely price impact of the failure of a very much larger short position on one of the market’s smallest commodities, silver?
My point is that because silver is such a small market and because the short position is so large and concentrated, the impact on price is certain to be much more dramatic than what we just witnessed in crude oil. One trader, buying back a short position equal to one day’s world production in the largest commodity market caused the price of oil to rise and fall by $20 a barrel and more.
What would be the effect on a small market, like silver, if several traders bought back, or tried to buy back many days of world production, perhaps a hundred days or more, in a very short and compressed time frame, such as was just experienced by SemGroup in oil? My back-of-the-envelope calculation would be silver would move up by double to triple the amount just seen in oil, on a dollar per barrel/dollar per ounce basis. In other words, if oil was moved by $10 to $20 per barrel by SemGroup’s buying, silver, in comparable circumstances, would move by $25 to $50+ per ounce.
Even this rough calculation understates what is likely to occur in silver price-wise, as it leaves out the most important difference between oil and silver, namely, the very nature of each. First, oil is a primary consumption commodity. By that I mean it is the prime cost component in most of it’s major uses, such as a transportation or heating fuel. This means that, although oil is a truly essential commodity, a price rise in oil is felt immediately by everyone, encouraging conservation and a fall off in demand, as we’ve seen in the US.
Silver, on the other hand, is not the prime cost component in the vast majority of it’s industrial applications, because so little of it is used per average application. This makes silver demand more insensitive to rising prices. The term used to describe this phenomenon is price inelasticity. Even in jewelry, because of the current low price, labor and fabrication outweigh the metal in calculating the total cost. Therefore, unlike oil, sharply rising prices shouldn’t bring about an immediate fall in silver demand.
But the most important difference in the nature of oil and silver is that higher prices for each bring entirely different reactions from investors and speculators. Higher oil prices have led to a reduction in investor demand for long positions in the commodity itself. This is borne out in the public data that shows long positions have been reduced on the price rise (Remember, it is the shorts who were doing the buying to the upside).
In silver, higher prices excite and encourage investor demand, as is seen in the strong growth in silver holdings in the ETF’s, and other public data sources, such as the US Mint’s record sales of Silver Eagles. That’s because silver is a primary investment asset, in addition to being a vital industrial commodity. Oil is the most vital industrial commodity of all, but, as a commodity, it is not also a primary investment asset.
It is this difference in the nature of these two commodities, that makes the prospects for sharply higher silver prices so exciting. When oil goes up, everyone tries to use less. When silver goes up, not only is there no great push to use less, but investors want to buy more. Recognizing and taking advantage of this difference will make many wealthy in the future.
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