Move from one economic chaotic attractor to another begins

I admire Jim Willie because he is not afraid to call a spade a spade. The Europeans at Leap 2020 also speck a major disconnect, as does your humble blogger; we don't agree on the details but few know them, if in fact they are knowable at all. The extent to which these processes are driven by the momentum of competing systems, planned geopolitical moves or an abrupt change in the network topology of the global infosphere caused by slow drift in the weightings of each node is difficult to determine.

Shit happens because stability breeds instability so I'd favour the third hypothesis because it accomodates the butterfly effect we see at inflection points in history.

I do rule out the Illuminati, the Elders of Zion or the alien lizard people, either individually or in cohoots, being behind the crisis, imaginary entities can be powerfull, surely, but their main power here is in the minds of those desperately seeking explanations that leave their ideology and victimhood intact without disturbing deeply rooted truisms. The dissonance between the values of the american revolution and the enormous energy and vitality of its civilisation in its heyday and the confusion of the bust must be accomodated.

But its difficult to assign blame, these processes of social and economic progress and decay seem to trancend the fashions of political or economic theory; they seem to me to require a syncretic theory of civilisational growth and decay, because the patterns seem general while the specifics vary wildly.

We only hope that while the locus of Western Civilisation may move east that the vitality of its promise remains and that even this massive geopolitical and monetary crisis is part of a larger theraputic process, a necessary breakdown on the rode to maturity.

OK, well, Gold is hot, imo......and less I digress further leave Jim Willie to speculate.....




The gold chart is wildly bullish, with a 1300 target. The gold price follows the cenHead & Shoulders pattern. The neckline is at 1000 and the top of the head is at 715. The nearly 300 point potential indicates a 1300 target, a number that has come up frequently in several different patterns identified. Notice the upward vector in both moving averages, as well as the cyclical index. The only resistance will be the illegal kind from naked shorting of futures contracts by the usual villains who operate at the behest of governments, protected from prosecution. They will not be able to stop what comes. A challenge of the 1000 level could come very soon. Once 1000 is penetrated in clear fashion, with excitement and attention, an overshoot of 1300 could even occur.tral banks monetization and diverse federal fiscal stimulus worldwide, and has ignored season. As the big banks struggle to survive, the central banks take extraordinary measures, and frontal assaults are waged against hedge funds, all patterns have been departed from. What replenishes big banks also leaks generally into the system in time. As the economic recessions show stubbornness, expect fiscal stimulus to be monstrous and almost endless. The reversal pattern is unmistakable, the classic Head & Shoulders pattern. The neckline is at 1000 and the top of the head is at 715. The nearly 300 point potential indicates a 1300 target, a number that has come up frequently in several different patterns identified. Notice the upward vector in both moving averages, as well as the cyclical index. The only resistance will be the illegal kind from naked shorting of futures contracts by the usual villains who operate at the behest of governments, protected from prosecution. They will not be able to stop what comes. A challenge of the 1000 level could come very soon. Once 1000 is penetrated in clear fashion, with excitement and attention, an overshoot of 1300 could even occur.

1) The US-UK banking systems are shattered by deep bond asset losses, shrouded in fraud, deep with leverage, teeming with collusion, which renders them as insolvent and in need of transfusions. The reality is that Wall Street firms remain in control of the USGovt financial operations despite their responsibility for both the collapse and clear legal violations. The USDollar image is badly tarnished.

2) Incredible volumes of money have been committed by the US Federal Reserve and the USGovt, much already delivered, with staggering future rescues, bailouts, and stimulus packages assured. The sums total $12.8 trillion at last count. The undermine, if not debauchery, to the USDollar and its vehicle the USTreasury Bond is vividly clear, a palpable threat to foreign creditors.

3) Foreigners have begun to worry openly about the onset of profound price inflation. What normally had been less than 4% in excess bank reserves is now 92%. US banks will channel the bulk of their excess reserves into loans and investments, when considered safe. The baseless ‘All Clear’ signal can be witnessed, orchestrated and phony. For political and credit market reasons, do not expect any noticeable central bank drain. Price inflation awaits the landscape on a path of least resistance. The USTBond yield would rise, and lose colossal sums of money for foreign bondholders.

4) Foreign creditors have owned over half the US$-based government and mortgage agency bonds for almost a decade. With the dependence upon foreign institutions (central banks and sovereign wealth funds), the United States has quietly lost control of its fate. It can no longer make decisions without consulting major creditors.

5)The USMilitary has tacitly been supporting the value of the USDollar. By pressuring the Saudis on a regular basis, they have maintained the Petro-Dollar standard without a peep of objection for a few decades. When South Korea expressed interest in diversifying out of USTreasury Bonds a few years ago, suddenly some US naval exercises occurred off their coast. The pattern is clear to foreigners.

6) Some recognition has come that the aggressive USMilitary of recent years depends heavily upon USTreasury Bond sales in order to continue their adventures. As long as the USDollar is pre-eminent, the USMilitary will continue to play in neighbor’s back yards doing whatever.

7) The Chinese have been taking numerous steps to establish the yuan currency more as a global currency for international commerce. The more important step has been to set up numerous yuan swap facilities across the globe, the latest being in Argentina and Brazil. Others are across Europe and Asia. Such facilities make easier trade in high volumes, without need for settlement in US$ denomination, as has been the custom for a few decades.

8) The Chinese have begun to switch from a US$ basis to a yuan basis in their banking system domestically. They also have given a giant assist to the new emergency fund for the extended ASEAN group of SouthEast nations. My belief is that the fund, based in yuan currency, will morph into a regional development fund. Conversation already has lead in that direction.

9) The Chinese gave authorization to two banks outside the Middle Kingdom proper to sell yuan-based government bonds. The HSBC (based in London) and Bank of East Asia (based in Hong Kong) have been given permission to do so, with details to follow. More broad-based formal trading of Chinese Govt bonds is coming soon to a nation near you.

10) Watch their moves toward creation of the Chinese yuan as a global reserve currency. Watch their simultaneous moves away from the USDollar and toward gold for reserves management. The merger of the two important strategic initiatives is a gold-backed yuan currency. In fact, that is precisely what was stated openly by Zheng Lianghao, managing director of the World Gold Council’s Far East division. That news came out this week. The Chinese are clearly the spearhead to dethrone the USDollar as global reserve currency.

11) Numerous nations have stated publicly that they regard the USDollar as inadequate and unqualified to serve any longer as the sole global reserve currency. The isolated revolt has turned into a uniformly global revolt. They are blaming the US$ for their internal crises.

12) Russia demanded an alternative to the USDollar before the G20 Meeting in London, at the G20, and after the G20. Russia and China endorsed the IMFund plan to create a basket currency as a global reserve alternative. My personal view is that the concept was and is a Straw Man device that will pave the way to a new global reserve currency, or set of currencies later. The motive was to direct attention away from the USDollar, and heap some disgrace at it.

13) The Arabs have been planning for over two years an asset-backed new currency for the Gulf region. New crude oil purchases would ostensibly be conducted in the new dinar denomination, bringing an end to the Petro-Dollar standard. In early May, the decision was made to locate their new central bank in Riyadh. NOW THE EXIT FROM THE MONETARY UNION BY THE UNITED ARAB EMIRATES SIGNALS SOMETHING BIGGER. MY BELIEF IS THAT THE U.A.E. REJECTED THE SAUDIS DUE TO TIGHT USGOVT BEDFELLOW RELATIONS. THE U.A.E. WILL NEXT COURT A GRANDIOSE ACCORD WITH RUSSIA. THE NEW ALLIANCE WILL INCORPORATE A NEW CURRENCY, NEW PLEDGES OF SECURITY PROTECTION, AND A COORDINATION OF CREDITOR ACTIONS. The Creditor Nations will soon tighten the noose around the necks of Debtor Nations, and force a global banking shift of power. It will be astonishing in its effect.

14) The Germans have demanded all of their gold held in custodial accounts inside the United States to be returned to German soil. The story is not public, but details have come to me from a private source close to the action. The Germans have also given counsel for Dubai to demand all of their gold held in custodial accounts inside London to be returned to Dubai, where a new gold trading center will spring up. In my view, THIS IS THE BIGGEST NEWS FOR GOLD THIS ENTIRE YEAR. The hidden arch-enemy for the US-UK on all matters pertaining to gold bullion is Germany. This is not a well-known concept. Insults were hurled at the US delegation during the London G20 by their ministers. Germany is also advising the Chinese on currency and gold matters. Can one detect some coordination?

15) Venezuela has followed the Chinese and Russian pattern to lock up the majority of domestic gold mining output. They will keep most gold output in domestic hands, primarily with the government, which will have first crack at buying it.

16) A near default was averted at the Eleventh Hour when Deutsche Bank found almost a million ounces of gold to cover its (naked) short in gold futures at the COMEX at the end of March. Thanks to the Euro Central Bank, which happened to sell over a million ounces for some reason. My conjecture is that the Germans decided the time was not right to bust the COMEX. From sources, that date might be this September in a coordinated attack that requires preparations to remove the levers and kick out the pillars that support the COMEX.

17) Germany has been the broker in creating a Russian-German barter deal involving billion$ in trade between the two nations. Credits will be gained from delivery of a raft of commodities, led by energy products from Russia. In turn, Russia will receive finished products, equipment, and consumer staples. Germany has been the broker in a similar barter accord between Russia and China under similar terms. These barter deals will create entire systems that bypass the US$-denominated trade settlement.

18) The Chinese announced an increase in their gold reserves from 400 tonnes to 1050 tonnes in the last five years. At the same time, they have been harping on the extreme risk to their $2000 billion in savings, held in USTreasury Bonds, USAgency Mortgage Bonds, and USCorporate Bonds. They openly complain about US$ mismanagement, unbridled USGovt spending (for numerous crisis projects), and the resulting risk to the US$ exchange rate. They have engaged a war of words, precursor to trade war, with USDept Treasury officials, one that has lasted for at least two years. The Chinese have openly talked about a covert USTreasury Bond default, which is a very serious accusation to make.

19) The Chinese Business News (CBN) has made several queries with the GATA group, the US-based outfit challenging the USGovt on the legitimacy of the USDollar on a Constitutional basis, and challenging the USGovt on its illegal naked shorting of gold futures contracts in a long-running gold price suppression scheme. The Chinese might be building a weapon to challenge the USDollar’s legitimacy, in response to stupid currency manipulation charges lodged by the hack USGovt bureaucrats in high offices.

20) Either lawsuits or Congressional Bills have begun against the US Federal Reserve to force a formal accounting of their balance sheet, and of the gold contents at Fort Knox. A surprise would await them, to learn no gold exists at Fort Knox. Another lawsuit has begun to force the USFed to reveal the spending of the T.A.R.P. funds. Foreigners must watch the Wall Street syndicate with some degree of disgust. Watch the Supreme Court enter the picture.

21) Meanwhile, the big US banks are maneuvering themselves to return T.A.R.P. funds when their insolvency is obvious, their balance sheet accounting is phony, and numerous events have begun or are planned to raise equity capital. They are rectifying their capital inadequacy and vanished loan loss reserves. The real reason they plan to return USGovt funds is to put an end to the extreme risk of underlings at the USDept Treasury, Congressional Budget Office, Govt Accountability Office, and various Congressional Banking Committees who have had access to records, the paper trails. Eight months have passed since TARP funds were injected into big banks, giving way too many eyes too much access. The situation is not manageable, an unexpected grand intrusion after fund confiscation. The financial (crime) syndicate must be protected. Quite a contrast event, in view of foreign actions listed above.

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KNOW YOUR ENEMY ` James Quinn

Welcome to a new kind of tension.
All across the alien nation.
Where everything isn't meant to be okay.

American Idiot - Green Day

Strauss & Howe described the Prophet/Idealist generation as being born during a High, spending its rising adult years during an Awakening, spending midlife during an Unraveling, and spending old age in a Crisis. Prophetic leaders have been cerebral and principled, summoners of human sacrifice, wagers of righteous wars. Early in life, few saw combat in uniform. Late in life, most prophets come to be revered as much for their words as for their deeds. The three previous crisis periods in U.S. history were dominated by the prophetic leadership of George Washington, Abraham Lincoln, and Franklin Roosevelt. George Bush has led us through the 1st half of this crisis. It is likely that Barack Obama will lead us through the 2nd half of the crisis. I don’t think George Bush will be revered for being cerebral or making inspiring speeches. He did wage a righteous war against terrorism. Barack Obama is cerebral and principled. He is waging a righteous war in Afghanistan, though he has never seen combat. He is already known for his inspiring speeches. Will he rise to the level of Lincoln?

George Bush and Barack Obama are both Baby Boomers. The oldest boomer is 63, the youngest 45. Boomers occupy the leadership positions in government, corporations, military, and educational institutions. Boomer leaders are cocky, aggressive, and quoting Doug Casey,

“quite willing to burn down the barn in order to destroy whatever rats they see.” George Bush was sure there was WMD in Iraq. He was sure that cutting taxes, sending out rebate checks, and letting banks regulate themselves was the path to prosperity. Hank Paulson and Ben Bernanke were sure that TARP would save our financial system from collapse. Barack Obama was sure that if we didn’t pass his bloated stimulus bill, catastrophe awaited the country. Baby Boom leaders are always sure and often wrong. The masses are drawn to leaders who are sure of themselves. They want to believe that a wise man will lead them to the Promised Land. They won’t realize that he is leading them to hell, until it is too late.



Civil Unrest – The Great Unraveling

Overthrow the effigy
The vast majority
Burning down the foreman of control

Silence is the enemy
Against your urgency
So rally up the demons of your soul

Know Your Enemy – Green Day

Strauss & Howe explained their view of how America was feeling in 1997. They were dead on. We are a country that has been rotting from within for decades.

America feels like it’s unraveling. Though we live in an era of relative peace and comfort, we have settled into a mood of pessimism about the long-term future, fearful that our superpower nation is somehow rotting from within. The America of today feels worse, in its fundamentals, than the one many of us remember from youth, a society presided over by those of supposedly lesser consciousness. We yearn for civic character but satisfy ourselves with symbolic gestures and celebrity circuses. We perceive no greatness in our leaders, a new meanness in ourselves. Each new election brings a new jolt, its aftermath a new disappointment.

Many Americans know we are on the wrong track but are so distracted by the circus like distractions of every day life, they choose not to think about it. It is likely that the 123 million eligible voters who chose not to vote in the 2008 Presidential election don’t even realize the country is on the wrong track. The sedated masses were easy to manipulate when unemployment was 4%. There are now 6 million more people unemployed today than just 16 months ago in November 2007. Another 2 to 3 million will lose their jobs in 2009. The government doesn’t count another 5 to 10 million people who are classified as out of the workforce, but would like to work. This means there will be 20 to 25 million people out of work by the end of this year. Unemployed people have a propensity to be angry. In the last few months there have been several mass murders committed by angry unemployed men. As the economic “solutions” rolled out by politicians and Federal Reserve bureaucrats lead to an inflationary depression similar to the Weimer Republic of the early 1930’s, civil unrest will rear its ugly head.

Doug Casey describes the likely scenario:

People believe they have little to lose, they’re eager to hang those they believe responsible for their problems, and they’ll listen to radical or violent proposals. We’re now just entering what will likely be the worst economic trough since the Industrial Revolution. A rioter is typically an angry person looking for vengeance because he blames someone else for his problem. So far, rioters seem to be directing their attention at governments. Correct target, of course, but they don’t have the rationale quite right. They’re not angry because governments inflated the currency, promoted fractional reserve banking, and nurtured all the cockamamie socialist programs that caused this crisis. Not at all; they rather liked all that. They’re angry only because their governments haven’t adequately protected them from the consequences of what they did. So as conditions worsen, we can expect governments worldwide to pull out absolutely all the stops to show they’re “doing something.” And round up scapegoats to satisfy the mob and divert anger from themselves. I fully expect civil unrest to spread everywhere, simply because the depression will spread everywhere. It will be worst in places that have been most overextended, most debt leveraged, most urban, and have the largest numbers of unemployed workers -- the U.S., Europe, and China.

The civil unrest is most likely to erupt among Hispanics and African Americans. The unemployment rate of Hispanics is 11.4% versus 5.0% in November 2007. It is doubtless far worse, as many Hispanics worked “under the table” in the housing industry. The unemployment rate of African Americans is 13.3%, the highest since 1993, and up from an all-time low of 7.0% in 2000. The urban areas of the United States are a powder keg, with automatic weapons available to anyone. Policemen are being slaughtered at a record pace. Mexico is on the verge of becoming a failed state. Drug lords are running the country. Its oil fields are in rapid decline and it will no longer be an exporter of oil within 5 years. The Mexican government depends on oil for 40% of its tax revenues. The collapse of Mexico’s government, extreme power of murderous drug lords, and worldwide depression will drive millions of poor towards the U.S. border. The anti-immigrant feelings in the U.S. continue to grow as more white Americans lose their jobs. This is an explosive combination that will eventually require military and National Guard intervention.

There are two other hot button issues which will increase the anxiety in this country. Guns and ammo are selling like hotcakes. The combination of apprehension that Obama and his Democratic majority will put restrictions on gun ownership and the severe economic downturn has led to an exorbitant increase in gun sales. Ruger has a $48 million backlog of guns on order. Many citizens in the Western states live by the motto: You can have my gun when you pry it from my cold, dead fingers. Any effort by the Obama administration to restrict gun ownership will be met with major resistance. The Tax Day Tea Parties revealed the other hot button issue for many Americans. When the Bush tax cuts expire in 2010 and Obama institutes his Cap & Trade energy tax, the economy will receive a double whammy. At that point the failed economic policies and higher taxes will lead to consternation and resentment throughout the land. The unending economic turmoil throughout the world will result in protests and anger in many countries. The more disturbing issue is how politicians will try to divert the attention of the masses through the use of an external threat.

War – Fingers of Instability

The insurgency will rise
When the bloods been sacrificed
Don't be blinded by the lies
In your eyes

Violence is an energy
From here to eternity
Violence is an energy
Silence is the enemy
So gimme gimme revolution

Know Your Enemy – Green Day

Back in 2006 John Mauldin wrote an article titled Fingers of Instability. It was based on a book written by Mark Buchanan called Ubiquity, Why Catastrophes Happen. It examines chaos theory, complexity theory, and critical states. Physicists, using a computer model examined what takes place when sand is continuously piled up grain by grain. They were endeavoring to understand what makes the pile ultimately collapse. Buchanan described the experiment:

"Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, 'ready to go,' color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sand pile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."

"In this simplified setting of the sand pile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size."

You may be wondering what sand has to do with war. The relevance is that a small seemingly minor incident could lead to a large world war.....

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Summers. He's just an average person in a world where the average person is a crook.

And the sickening stench hasn't ended. The same greedy, destructive Boomers and Gen-Xers who brought about this disaster are continuing to do so and continuing to lie about it.

One of the slimiest performances I've seen was last week's presentation at Washington's Economic Club by Lawrence Summers, White House National Economic Council. Summers bragged about his life's accomplishments and then, smiling smugly, he said, "I think the sense of a ball falling off the table -- which is what the economy has felt like since the middle of last fall -- I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of freefall."

Well, you can just look at the above graph and see that he's lying. Industrial production figures in all the G7 (developed) countries have been like "a ball falling off the table." And you can look at all sorts of other data. There's absolutely nothing to justify Summers' claims.

Now, I don't really care if someone makes a lot of money, even someone like Summers, who made $5.2 million in 2008 from hedge funds, plus $2.7 million in speaking fees, and who also consulted for hedge funds when he was President of Harvard University. If the Harvard University trustees don't care, then why should I care?

But I'm offended when someone like that becomes the economic front man for the Administration, and then openly lies, especially after a year of hearing a lot of crap during the campaign that the Obama administration was going to be completely open and honest, without even the appearance of impropriety.

But I don't mean to pick on just Summers. He's just an average person in a world where the average person is a crook. The same generations of people who perpetrated the fraud, who created the worthless mortgage-backed securities and worthless CDS securities contracts, and sold them to the public as risk-free AAA securities are still in charge. Those people haven't disappeared; they're still pulling scams. They're just using new variations, to take advantage of this year's opportunities.

I've been writing about these scams for years, as regular readers of this web site know. One of the most disgusting was the subprime mortgage company that I wrote about last year in January. They had made huge sums of money by defrauding thousands of people by talking them into lying on their mortgage applications, and had defrauded the lenders through these falsehoods.

The reason that that story caught my attention was that the Boomer executive vice president Walter Buczynski, 59, was married to a Gen-X wife, 37. When the company went bankrupt, the wife decided to dump the husband and take the kids (why not?), in order to get as much money as possible. Buczynski killed his wife, then killed himself.

And even after all this, the remaining company officers were in bankruptcy court requesting that all remaining money be split among them as bonuses, rather than give it to some of the people who had been defrauded.

For some reason, this story epitomizes all that's been going on. Greedy, selfish, destructive Boomers and Gen-Xers, willing to destroy anyone else's life for their own gain, and committing further destruction when their attempts are foiled. The standard today in government, business and journalism is of dishonesty and unethics (is that a word?).

I recall a job interview from late 2007, just after the credit crisis began. (For why I was looking for a job, see "Boomers and Gen-Xers: Dumbing down IT / How Digimarc Corp. self-destructed.") I was talking to a company VP, and as was my obsessive habit, I warned him that there was a great deal of fraud going on in the world, and that he should make sure that his company's assets were safe. He said, "So you think everyone in the world is a crook?" I knew he thought I was nuts, and of course I didn't get the job.

So what's interesting to me now is that the stories behind all of these frauds that I've been writing about for years are starting to come out. If anything, what I wrote in the past underestimated the situation.

I've written about the "culture of complicity" that pervades today, and the overwhelming circumstantial evidence that proves that people were knowingly committing fraud.

In a airing of Bill Moyer's journal, William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s, described what's been going on:

"BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?


WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste."


Black doesn't name any names, unfortunately, but makes a general argument like the one I'm making -- that the fraud was so massive, that everyone must have been involved.

In another part of the interview, he does name two government regulators who failed to do their jobs:

"WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.


These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator."

Black indicts both Treasury Secretaries -- Hank Paulsen and Timothy Geithner -- and I can only agree. In this "culture of complicity," neither of them could blow the whistle or tell the truth without exposing their own complicity in the repeated fraud.

Another article, written in December, does name names, and gives specifics for how the fraud was perpetrated.

The article was written by Michael Lewis. In the 1980s, at age 24, with no business experience whatsoever, he stumbled into a job paying him a six-figure salary to advise investment bankers about something he knew nothing about. After a few years, he got out while the getting was good, and wrote a book called Liar's Poker about his experiences:

"I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.
Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual."

Lewis was shocked at this response at the time, and indeed it's still shocking today. These were Generation-X students at Ohio State University looking for ways to get into the business of defrauding people. What kind of college must Ohio State University be to graduate a class of crooks? It's pretty safe to say that ethics is not a strong point at Ohio State...

Generational dynamics

MBA: Mostly bloody awful

Something happened to management culture decades ago and now being a Master of Business Administration, especially from Harvard, is rather on the nose. MBA, it's being said, can also stand for 'Mediocre but Arrogant', or 'Management by Accident'. Reporter, Stephen Crittenden.

Audio

Stephen Crittenden: As the unemployment queues grow and the bailouts continue, they're beginning to say that narcissists with Harvard MBAs killed Wall Street.


Hello from Stephen Crittenden, welcome to Background Briefing on ABC Radio National.


This week, we're taking a look at the business culture behind the financial meltdown and the kind of business education which shapes that culture.


This is a story that goes a lot further back than Lehman Brothers, or Fanny Mae and Freddy Mac, to the glory days when America's leading manufacturing companies were the envy of the world.


It's the story of how this great corporate heritage was squandered, and what this all has to do with the rise of a comparatively new social figure: the professional manager.


There's no doubt that American business has relied heavily on the Masters of Business Administration as a credential. Some say too heavily: 100,000 new MBAs pour out of American business schools each year, and more than 40% of them go into the financial services sector.


But now they're being called the Masters of Disaster. As you'll hear in this program, some of the leading critics of the MBA culture are actually business school professors who have been raising the alarm for some time.


The most prominent among them is Henry Mintzberg, Professor of Management Studies at McGill University in Montreal. He says there is no question that business schools like Harvard, Wharton, Stanford and MIT deserve a large part of the blame for creating and sustaining the business culture that caused the meltdown, because they have been promoting an utterly dysfunctional form of management practice for decades.


Henry Mintzberg: Look, my view is you cannot create a manager in a classroom, let alone a leader. You simply can't. Management is not a science, it's not a profession, it's a practice; you learn it by doing it. To claim that you're training people who are not managers to be managers, is a sham, pure and simple, it's a sham. You can't do it. You give completely the wrong impression and you send them out with an enormous amount of hubris which is, 'I can manage anything, even though I've never managed anything'.


Stephen Crittenden: In 1986, when Russell Ackoff, a pioneer of management education, retired as Professor at the Wharton Business School, he was asked what were the benefits of a business education. With savage irony he replied that there were three:


Ackoff Reading: The first was to equip students with a vocabulary that enabled them to talk with authority about subjects they did not understand. The second was to give students principles that would demonstrate their ability to withstand any amount of disconfirming evidence. The third was to give students a ticket of admission to a job where they could learn something about management.


Stephen Crittenden: Everyone we spoke to for this program was quick to point out that there are many very capable MBAs, and many good business schools offering sensible MBA courses.


But the number of failed CEOs with MBAs has not escaped notice. Stan O'Neill and John Thane at Merrill Lynch, Andy Hornby at HBOS, and the best-known of all, Enron's Jeff Skilling who's serving a 24-year jail sentence, and the former President of the United States, George W. Bush.


McGill University Professor Henry Mintzberg says what we call a financial crisis is really at its core a crisis of management, and not just a crisis of management, but a crisis of management culture.


Henry Mintzberg: It's a syndrome, it's a whole attitude. We've corrupted the whole practice of management, it's utterly, utterly corrupt from top to bottom; not everybody, but much too much of it is corrupt. It is a cultural problem. And by the way, it's largely an Anglo-Saxon problem I think. I think the worst of it is in the US, and second is the UK. I think Canada has been smarter. In England the UK for example, there's a long history not just of MBAs but of accountants running everything. In other words, what you had is a detachment of people who know the business from people who are running the business.


Stephen Crittenden: Another critic of the MBA is Harvard Business School Professor Rakesh Khurana. He says the business schools have been teaching some pretty anti-social theories which their graduates go away and put into practice.


For example, Rakesh Khurana says it was the business schools who were the source of the theory of shareholder maximisation. They originated the idea of using derivatives and credit swaps to manage risk, and the idea that managers are so fundamentally self-interested that they can't be trusted to do their jobs unless they're provided with huge stock options.


Rakesh Khurana.


Rakesh Khurana: What we taught were very simplified and not necessarily accurate models of human behaviour, that over time become self-fulfilling. And so there was this model that in fact by basically being self-interested to an extreme, that was the appropriate way to behave and act. And what that does over time, because this is not an innocent exercise, it actually over time because it is a professional school, comes to shape the identity of those individuals. That is, they begin to see themselves in those views. And one of the consequences of that is that if you look with respect to executive compensation for example, and the incentives around that, the view becomes that I actually have to be compensated to do the job I was hired for, and on top of that you have to bribe me with stock options to make sure I do that job. In no other occupation or profession is that part of the modus operandi.


Stephen Crittenden: This is also a story about how society educates its elites. Phillip Delves Broughton is a former Paris correspondent for Britain's Daily Telegraph. He recently took two years off to do an MBA at Harvard Business School - HBS - and he's just written a book about the experience. Here's the man himself, reading from his book.


Phillip Delves Broughton: A second year student rose to welcome us, and to reiterate the importance of values to our future in business. He told us that simply by getting into HBS, 'You've won'. From now on, it was all about how we decided to govern our lives. What he said would be repeated throughout my time at Harvard. Harvard Business School was a brand, as much as a school, and by attending, we were associating ourselves with one of the greatest brands in business. We were now part of an elite, and we should get used to it. I struggled with this idea. It seemed so arrogant on the part of the school, and somehow demeaning to those of us who had just arrived. Regardless of who we were when we arrived, or what we might learn or become over the next two years, simply by being accepted by HBS, we had entered an über-class. It was Harvard Business School, not anything that came before it, that conferred the 'winner' tag on all of us.


Stephen Crittenden: Some defenders of business school education say the present financial meltdown has been caused by a few greedy and dishonest people, and that the problem can be fixed with more regulation. But Phillip Delves Broughton, speaking from New York, says it wasn't just a few people. It's a problem systemic to an entire management culture.


Phillip Delves Broughton: The big problem with the MBA culture is that it creates this elite group of people who are there by dint of nothing more than this qualification, which is useful, but little more than that. To say that it qualifies anyone to really do anything is absolutely false. And I also think it's fundamentally anti-democratic. One of the weirdest things about this country is you have enormous churn and entrepreneurialism, and you have a place like Harvard Business School that essentially says 'Once you get in, you're now part of an elite, almost regardless of what you do subsequently.' and it seems so antithetical to everything else in American culture. You see it in their behaviours, this sense of entitlement, the way these people take these golden parachutes. There is a sense that these people deserve more than their fair share because of who they are because they're this magnificent elite. And I think a little humility from these people would be very much appreciated, because it's been shown they haven't done a tremendous job.


Stephen Crittenden: Given all the risky behaviour we've seen with derivatives and toxic debt, Phillip Delves Broughton says it's ironic that in his experience, Harvard Business School seems to attract people who are actually risk averse, at least in relation to themselves and their own careers. He says unlike genuine entrepreneurs, they tend to be people who want fast-track careers, and by associating themselves with the powerful Harvard brand, what they're really doing is seeking to minimize risk in their own lives when they go after future opportunities.


Phillip Delves Broughton: Well it's always a big joke, essentially. You look at the great entrepreneurs in the world, the Bill Gates's, the Rupert Murdochs, the Kerry Packers, the guys who founded Google, Larry Page and Sergey Brin, not one of them went near a business school and yet they've built fortunes with companies that really have had a big impact on the way a lot of us live. So people who tend to go to business school I think are people who are trying to set themselves up for life in a certain way, they're grabbing onto an elite structure again, but they're not the great adventurers, they're not the buccaneers, they're not the people who are going to change the economic universe.


Stephen Crittenden: What about the atmosphere in the classroom at the Harvard Business School? In your book you paint a picture of a whole lot of pumped up, not necessarily very critical people, playing corporate games and elbowing each other out of the way, and you say that your wife, Margret, came to the conclusion pretty quickly, that they were a bunch of freaks.


Phillip Delves Broughton: Well you know, I think there's two things at play here. One is, I'm British, I was a journalist for ten years. You don't get a more cynical profession than Fleet Street. And so you take that, and put that in a terribly earnest environment. It's an American environment and I'm a great fan of America, but again, it can be jarring if you come from a more Anglo-Saxon, English, Australian, whatever it is, where people aren't so accepting of corporate game-playing. You know, in England, you start a corporate game, everyone is rolling eyes, saying, 'Oh Christ, do we have to do this?' I quote a friend of mine, a Chinese woman who just got driven crazy because at Harvard Uni, you're in these classes of 90, and every class is essentially everyone putting their hands up, there are no lectures, it's all case studies. You look at a business situation then you discuss it. So an enormous premium is placed on your ability to stick your hand up in front of 90 people and make a point. So for a Chinese woman, she just said, 'Why on earth is my ability to fill air space with just blather, matter?' What matters in Chinese business is your ability to get things done. The last thing they want is these kind of chest-bumping meetings. And I think again, if you're not from the American business culture, you can look at this and just find it nonsensical. Why does it matter if you're good at meetings? Why does it matter if you have an ability to B.S? And these things seem to be prized.

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Global systemic crisis Alert

- Summer 2009: The US government defaults on its debt
- Public announcement GEAB N°28 (October 16, 2008) -
16/10/2008

In this 28th edition of the GEAB, LEAP/E2020 has decided to launch a new global systemic crisis alert. Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to pay back its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.). Of course such a bankruptcy will provoke some very negative outcome for all USD-denominated asset holders. According to our team, the period that will then begin should be conducive to the setting up of a « new Dollar » to remedy the problem of default and of induced massive capital drain from the US. The process will result from the following five factors studied in detail further in this GEAB:

1. The recent upward trend of the US Dollar is a direct and temporary consequence of the collapse of stock markets

2. Thanks to its recent « political baptism », the Euro becomes a credible « safe haven » value and therefore provides a « crisis » alternative to the US dollar

2. The US public debt is now swelling uncontrollably

3. The ongoing collapse of US real economy prevents from finding an alternative solution to the country’s defaulting

4. « Strong inflation or hyper-inflation in the US in 2009? », that is the only question.

Studying the case of Iceland can give an idea of the upcoming stages of the crisis. That is what our team has been doing ever since the beginning of 2006. This country indeed provides a good illustration of what the US and the UK should be expecting. It can be considered – and that is what most Icelandic people do today – that the collapse of Iceland’s financial system came from the fact that it was disproportionate to the size of the country’s economy.


Inflation in Iceland - 2003-2008 - Source Central Bank of Iceland

Financially speaking, Iceland thought of itself as UK [1], in the same way as, financially speaking, UK thought of itself as the US and the US thought of themselves as the entire world. It is therefore quite useful to study the case of Iceland [2] in order to understand the course of events that London and Washington will follow in the next 12 months [3].

What we see today is a double historical phenomenon:

. on the one hand, since September 2008 (as anticipated in the February 2008 edition of the GEAB - N°22), the whole planet has become aware that a global systemic crisis is unfolding, characterised by the collapse of the US financial system and its contagion to the rest of the world.

. on the other hand, a growing number of global players are beginning to act on their own, in reaction to the ineffectiveness of the measures advocated or implemented by the US though they are the centre of this global financial system. What happened with this first Euroland (or Eurozone) summit which took place on Sunday, October 12, 2008, and whose decisions, by their scope (close to 1,700-billion EUR) and their nature [4], resulted in a regain of confidence on financial markets from all over the world, is typical of the « post-September 2008 world ».


Map of deposit insurances in the EU - Source AFP - 10/09/2008

Indeed there is such a thing as a « post-September 2008 world ». According to our team, it is now clear that this past month will remain in the history books of the whole planet as the month when the global systemic crisis started; even if what is really at play is its decanting phase, the last of a series of four phases of the crisis described by LEAP/E2020 as early as June 2006 [5]. As always when it comes to large human groups, the perception of change among the general public only occurs when change is already far on its way.

As a matter of fact, September 2008 is the month when the « financial detonator » of the global systemic crisis exploded. According to LEAP/E2020 indeed, this second semester 2008 is the time when « the world dives into the heart of the impact phase of the global systemic crisis » [6]; which means for our researchers that, at the end of this semester, the world enters the « decanting phase » of the crisis, i.e. a phase when the outcome of the shock settles down. This phase is the longest (from 3 to 10 years, according to the country) and the one affecting the largest number of people and countries. It is also the phase when the components of new global equilibriums will start to appear, two of them being already described by LEAP/E2020 in this 28th edition of the GEAB in the graphic illustrations below [7].

Therefore, as we repeated it on and on since 2006, this crisis is far more important, in terms of impact and outcome, than the 1929 crisis. Historically, we are the very first players, witnesses and/or victims of a crisis affecting the whole planet, in a situation of unprecedented interdependence of countries (resulting from twenty years of globalisation) and people (the level of urbanization - and related dependence for all the basic needs – water, food, energy… - is also unprecedented). However, the 1929 experience and all its dreadful outcome, is still vivid enough in our collective memories to hope, if citizens are vigilant and leaders clear-sighted, that we will be spared from a « remake » leading to major conflagration(s).

Europe, Russia, China, Japan,... are certainly the collective players who can make sure that the unfolding implosion of today’s world power, i.e. the United States, does not drive the planet into a disaster. Indeed, except for Gorbachev’s USSR, empires have a tendency to strive in vain to reverse the course of History when they realize their might is escaping them. It then belongs to partner-powers to channel the process peacefully, as well as it belongs to the citizens and rulers of the concerned country to be clear-sighted and face the difficult times they are about to cross.


Total borrowings of US Depository Institutions from the US Federal Reserve (01/08/1986 – 10/09/2008) - Source Federal Reserve Bank of St Louis

The « emergency repair » of international financial channels, achieved by the countries of the Eurozone at the beginning of this month of October 2008 [8], should not hide three fundamental facts:

• The “repair” was necessary to curb the panic that threatened to squander the entire global financial system in just a few weeks, but what it heals temporarily is merely a symptom. It has just bought a bit of time, two to three months maximum, as the global recession and the collapse of the US economy (the table above shows the staggering increase of US banks’ borrowings from the Fed) will speed up and create new tensions in the economic, social and political fields, that must be anticipated and coped with as soon as next month (as soon as the “financial packages” have been implemented)

• The huge financial means allocated worldwide for « emergency rescues » of the global financial system, though they were necessary to put back in order the system of credit, are lost for the real economy when it is on the verge of facing a global recession

• The « emergency repair » results in further marginalization, and therefore weakening, for the United States, because it sets up processes that are contrary to those advocated by Washington for the allocation of the Hank Paulson’s and Ben Bernanke’s 700-billion USD TARP: bank recapitalisation by governments (a decision Hank Paulson has now come to follow) and interbank loan guarantees (in fact Euroland governments substitute to credit insurers, a mostly American industry at the centre of global finance since decades). These trends turn more and more decision-making relays and financial flows away from the United-States when because of the explosion of their public [9] and private debt they need them more than ever; not to mention pensions going up in smoke [10].

The last aspect shows how, in the coming months, solutions to the crisis and to its various sequences (financial, economic, social and political) will increasingly diverge: what is good for the rest of the world will not be good for the United States [11], and now, Euroland in the first place, the rest of the world seems determined to make its own choices.

The sudden shock that will result from the US defaulting in summer 2009 is partly due to this decoupling of decision-making processes of the world’s largest economies with regard to the US. It is predictable and can be dampened if global players start to anticipate it. As a matter of fact, it is one of the topics developed in this 28th edition of the GEAB: LEAP/E2020 hopes that the September shock has “educated” the world’s political, economic and financial policy-makers and made them understand that it is easier to act by anticipation than in a panic. It would be a pity if Euroland, Asia and oil-producing countries, as well as US citizens of course, discover one morning of summer 2009 that, after a long-week-end or bank-holiday in the US, their US T-Bonds and Dollars are only worth 10 percent of their value because a « new Dollar » has just been imposed [12].

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Leap 2020 Strategic advice

The decisive six months to avoid a global recession: Five strategic advices for central banks, governments and other regulatory authorities
- Excerpt GEAB N°26 ( June 16, 2008) -



If you were a subscriber to the GEAB, you would have read what will follow as early as June 16, 2008:

As underlined in the anticipation we develop in this 26th edition of the Global Europe Anticipation Bulletin (and of previous editions as well), the coming six months are crucial for the next steps of the global systemic crisis. Despite the fact that the next six months will inevitably plunge into the impact phase of the crisis, central banks, governments and other regulatory authorities still have a possibility to curb part of the most negative implications of the current crisis. Nevertheless, according to our researchers, it is a case of emergency; indeed, if the pre-emptive actions are not initiated by the end of 2009, after that they will no longer enable to reduce the depth of the world’s plunge into the systemic crisis, therefore contributing to extend the length, scope and impact of the crisis. For instance, they will no longer be able to moderate the collective panic overwhelming financial, economic and social players when they are faced, by the end of 2009, to what will be understood as complete impotence on the part of the authorities in curbing the crisis. Global leaders’ capital of confidence is now almost entirely squandered. It is urgent to rebuild it by means of readable and wide-ranging actions likely to impact on both macro- and micro economic levels, otherwise the worst scenario – i.e. the collapse of the global financial system - will become the most certain option. LEAP/E2020 here wishes to highlight five types of actions which appear necessary (and probably sufficient) in order to limit the length and scope of the global systemic crisis, and to rebuild this « capital of confidence » of banks, governments and other policy-making institutions.

These five strategic advices apply to all great regions of the world, even if they should be modulated according to the region. Four of them are true global replies to a global crisis; the fifth is not exactly an advice but more a summary of reactions major world political and economic entities should undertake in case the four previous measures have not be implemented. An « everyman for himself » rule would in this case prevail, as any chance to find collective means to cross over the collapse of the system inherited from 1945 will be out of reach - implying for the United States in particular a formidable aggravation of the outcome.

A. Two measures must be implemented urgently as early as this summer 2008
1. Raising interest rates before the end of 2008 in order to curb soaring «globalflation”
2. Enforcing a transparency plan on CDS and other OTCs

B. Two measures must be launched in the second semester of 2008
3. Launching a political plan of global recovery of 5,000-billion euro over five years of infrastructure construction projects financed by public loan
4. Creating a currency basket to determine the price of energy (oil in particular)

C. A general stampede in case the two first measures are not implemented by the end of summer 2008
5. Emergency rescue of each region that can be rescued when the global financial system collapses

A. Two measures must be implemented urgently as early as this summer 2008
1. Raising interest rates before the end of 2008 in order to curb soaring «globalflation”

If, by the end of 2008 the economic previsions concerning global inflation have not be domesticated, « globalflation » will accelerate in a way that no central bank will no longer be able to handle. In some regions of the world (United States, EU periphery, Asia…), globalflation will combine with the unfolding recession giving birth to a « globalrecessflation », or in other words a major socio-economic depression worldwide with an inflationary trend. For psychological reasons, the role of central banks is key in breaking such inflationary trends, but they need (like in the case of the other measures) the collaboration of political leaders to act efficiently and avoid stimulating inflation.

Today, such a policy can only be organised around the European Central bank (ECB), which has unquestionably (and unintentionally) become the most powerful central bank in the world since the US Federal Reserve is caught between the hammer of the dollar collapse and the anvil of US economic recession. Today’s US authorities’ (Fed included) attempts to save the dollar indicate that the impulse must come from outside. Indeed, fears that China, Japan and oil-exporting countries drop the dollar urge Washington to make announcements about a reversal of the interest-rate policy conducted since last summer. But the pressure thus exerted is still insufficient to counterbalance the domestic oppositions (announcements remain mere declarations of intention). At the instigation of the ECB, the other major central banks (namely Asian ones), and the political leaders of the corresponding countries, must urge their US counterparts to reverse their interest-rate policy and break inflationary previsions (1). In doing so, they will do great service to the Americans, avoiding them to be confronted, all alone, to the collapse of the dollar a few months later and to the resulting surge in the US interest-rates up to two-digit figures in order to rescue what it will be possible to rescue of their currency and credit.
If this collective measure, on a global scale, is not implemented by the end of summer 2008, then each region, apart from the United States, will have to introduce as soon as possible the emergency measures described to the fifth bullet point.


2. Enforcing a transparency plan on CDS and other OTCs

At the end of 2008, in case the unfolding crisis of the CDS (Credit Default Swaps) and other OTC (Over-The-Counter securities) is not channelled, the subprime crisis will appear as a mere « trigger-device ». Indeed, as explained by LEAP/E2020 in previous issues of the GEAB, the amount of money concerned by these CDS – USD 45,000-billion - must be compared to the meagre USD 1,000-billion worth of US subprime mortgage loans (2007 estimation). Besides, far from being concentrated in the US mostly, CDSs are literally scattered all over the global financial system, directly affecting hundreds of thousands of counterparties, i.e. companies from all over the world. It is clear that the CDS crisis expected to surge in the next semester will be far more important than we experienced last summer 2007. By the way, it was as much for the sake of saving JP Morgan Chase from a complete CDS rout in case Bear Stearns failed than for the sake of saving Bear Stearns that the Fed imposed the second’s bailout by the first (2). It is therefore vital that the global financial system supervises as soon as possible the unfolding process of CDS burst, before it becomes too obvious, entailing bankruptcies among large financial institutions and a correlated panic worldwide. Contrary to the first stage of the crisis (the subprime crisis), we are now entering a phase when banks could become “too big to be saved” instead of “too big not to be saved”.


The inverted pyramid of global liquidity - Sources: Bank of International Settlements / Independent Strategy
In order to channel the derivative product crisis, it is urgent to enforce four simple rules:

a. compel financial institutions to identify clearly their exposure on derivative products, and make it public every three months
b. ban, in the next two three years, any possibility to securitize mortgage loans worth more than 50% of the purchase price
c. empower internal and external control organisations in the field of derivative products and risk assessment (concerning risk assessment, it is important to base these studies upon long-term series instead of just a few years (3))
d. train leaders and managers to anticipation processes and the management of unexpected risks.

In case this collective measure, on a global scale and in particular in the United States, is not implemented by the end of this summer 2008, then each region, apart from the US, will have to set up as quickly as possible the emergency measures described in the fifth bullet point.

B. Two measures must be launched in the second semester of 2008
3. Launching a political plan of global recovery of 5,000-billion euro over five years of infrastructure construction projects financed by public loan

The now well-established tendency to global recession must be fought against. The US are already in recession; the periphery of the EU is entering into recession; and Asia will soon be thrust into recession before the end of 2008. Latin America and Africa will not avoid being dragged into it as well, or at least to experience a stagnation. However, each of these regions have tremendous needs in collective infrastructures, while other parts of the world (oil-producing countries namely) have no idea what to do with their financial reserves. The whole world is about to stop financing US deficits. The process must be organised and alternative options must be found, otherwise, there again, the global financial and economic system will burst into chaos.

The European Union needs vast trans-European networks of infrastructures to improve the organisation of its territory and service better its 500 million citizens, as well as the connection with its Russian, Turkish and Maghreb neighbours. These projects have already been designed and are in need of funds for an estimated EUR 379-billion (4).

The United States have been suffering from chronic under-investment in infrastructure for more than 30 years. There again the needs are identified and the money only is missing, i.e. USD 1,600 billion over five years according to the American Society of Civil Engineers Moreover, the United States, more than any other country, must get out quickly of the situation of energy inefficiency where they are trapped, and that will require huge collective investments.

Asia countries, China in the first place, suffer from a severe lack of modern infrastructures, with needs easily identifiable but money missing.

Latin America to is suffering from the same problems and has undertaken with USAN (Union of South American Nations, launched in May 2008) to initiate vast programmes of infrastructure construction on a continental scale (500 projects worth USD 68-billion) (5).

Africa too is in great need of investments in this field.

Meanwhile, oil producing countries, the sovereign funds, do not know where to invest their huge reserves in foreign currencies because sovereign funds no longer rely on US dollars, T-Bonds, Wall Street and the City, or any of the financial investments which used to recycle their petrodollars. If they do not find their way to the real economy, these enormous amounts of money will simply end up fueling the “globalflation”.

Central bankers, governments and international organisations must therefore, before the end of the year 2008, prepare for the launching of a vast global programme of infrastructure construction, including of course the improvement of energy efficiency, financed by a public loan in currencies on the rise (Euros, Yuans, yens) and secured on a global scale by the international organisations and the main governments. In the case of the United States, who are financially battered, this plan could take the form of a loan secured by the Europeans and the Asians until the country has finished its « Very Great Depression », some sort of a contra-Marshall Plan so to speak.

Without a similar initiative conducted on a world scale, the global economic slowdown will turn into a global recession in 2009; and inflation will continue to surge.


Trans-European Transport Network - Source: European Commission
4. Creating a currency basket to determine the price of energy (oil in particular)

The time of the Dollar as the unique currency for oil transactions, is already over. As anticipated by our team at the beginning of 2006, from Russia to Iran, Venezuela, and soon the Gulf’s petromonarchies, all oil producing countries are speeding up the pace of diversification out of the dollar for their transactions. The question is no longer whether “the US Dollar will lose its status of single currency for oil transactions”, but whether “this evolution will happen chaotically”, as it is case now, or “organisedly”. According to LEAP/E2020, the answer is clear: the evolution must be organised because current chaotic developments are partly responsible for the sudden hikes in energy prices contributing to the general instability of our planet. It is just as obvious for our researchers that everything must be done to avoid the Euro from being substituted to the US Dollar. Two reasons to this statement:

. on the one hand, being energy’s sole exchange currency is a curse on the long-run, as proved by the United States today, because it carries a country along the way of facility and inadaptability to changes of reality, thus creating the conditions for severe crises to happen in the future for the country and its partners.

. on the other hand, for oil-producers themselves, this apparent simplicity conveys medium-to-long term problems of over-dependence to one country and one economy alone.

Therefore it is in the interest of neither the Europeans nor oil-exporting countries to turn the Euro into the heir of the Dollar.

On the contrary, it seems to our team that it is in everyone’s most obvious interest to base the price of energy, oil in particular, on a basket of currencies reflecting at best the reality of the global economy and energy market. This basket of currencies could consist of currencies representing the main economies of the planet (Euro, Dollar, Yen, Yuan, Real...), and of the main energy producers (Rouble, future Gulf States common currency… ), allowing a balancing process every ten years.

According to LEAP/E2020, if such an initiative is not planned by the beginning of 2009, interweaving of Dollar and oil-price crises will entail a serious aggravation of the global economic crisis, as well as a severe increase in the risk that an armed conflict grows over energy stakes.


Current account surpluses of oil exporting countries - Source: OECD
C. A general stampede in case the two first measures are not implemented by the end of summer 2008

5. Emergency rescue of each region that can be rescued when the global financial system collapses

LEAP/E2020 is convinced that if the first two measures are not implemented by the end of summer 2008, the entire planet will plunge at the heart of the global systemic crisis in the worst possible conditions. In this case, as a result of a paradoxical game of simultaneous causes and consequences, the global financial system will collapse because each major player of this system will undertake to save himself alone, at the expense of the system altogether. Today already, our team noticed that central banks act less and less together, while large dollar reserve holders observe one another to make sure they are not last to get out of the dollar-trap. If the urgent measures we advise are not implemented before the end of this summer, it will be a general stampede on the part of both public and private operators. So to speak, Summer 2008 is the last opportunity to handle organisedly the collapse of the system we inherited from post-1945.

In this case, the European Union, and Euroland in the first place, will take the necessary moves to reduce to the minimum its exposure to the collapse of US real economy and dollar. The United Kingdom, itself dragged down the American crisis, will no longer be able to stop the Europeans from taking these radical measures, i.e. policies decided by the ECB without any consultation of Washington, the substitution of the Euro to the Dollar for European energy purchases (including a quick strengthening of energy ties with Russia), the implementation of privileged processes of monetary and financial cooperation with China and Japan, the reduction of financial operations and flows with the Dollar-zone in order to curb the consequences of the derivative product crisis, and the enforcement of constraining rules regarding the market of financial derivative products.

Asian countries, which have already began their economic, commercial and financial refocusing on their own region, will contribute to spur this type of evolution as they will suddenly break free from the US Dollar, Treasury bonds and other Dollar-denominated assets.

Gulf countries will give up their Dollar-peg by the end of 2008, contributing in their turn to accelerate the US currency plunge and to increase the US trade deficit (as a result of a subsequent rise of oil-prices in Dollar).


Oil trade flows - Source: British Petroleum, 2007
---------
Notes:

(1) The LEAP/E2020 team is now convinced that it is also necessary to harness in a sustainable manner the risks of inflation, and that central banks must stop letting money supplies explode. But, in the short term, the most important thing is to send a clear signal likely to impact on the psychology of economic players. Interest rates are the most likely to convey this type of message. Action on money supplies must be conducted in the background.

(2) Given that JP Morgan Chase is the world’s largest CDS operator (with USD 8,000-billion of notional exposure), a failing of Bear Stearns (the world’s second largest CDS operator (with USD 2,700-billion of notional exposure) – would have provoked a formidable tempest on the CDS market, dragging JP Morgan into bankruptcy as well. Once again when it comes to Wall Street, appearances are for from reflecting reality: what was rescued (temporarily) is not necessarily what they want us to believe. Source: Stockbuzz/Reuters 06/11/2008

(3) We see it clearly today in the US: the evolution on the housing market is similar to the 1920s/1930s.

(4) Source: European Federation for Transport and Environment 04/16/2008

(5) Source: Le Monde 06/12/2008

Looming Financial Catastrophe: A Real Inconvenient Truth

“Sometimes I wonder whether the world is being run by smart people who are putting us on….or by imbeciles who really mean it.” – Mark Twain

The United States of America is about as far from united as we’ve been since the Civil War. The two major parties agree on virtually no major issues. The only time they agree is when it involves tax rebates and pork projects for their constituents. They have no problem spending our grandchildren’s money to get re-elected in November. No politician is willing to tell the American people the blunt truth that we have an epic financial crisis that must be addressed in the next 10 years. When I watch the Republicans and Democrats respond to these issues by spinning them to make the other side seem evil, it infuriates me. We are wasting precious time. If you take a poll of Americans and ask them if they want make sacrifices for future generations, I can guarantee you that 85% would say no. Our society is dominated by present self interest to the detriment of the best interests of our future generations. We need leaders who are willing to speak the truth and convince the country to change course before it is too late.

Our fiscal crisis is complex, multi-faceted and dangerous to our long-term future. The major issues that we need to confront include the current fiscal situation, the colossal amount of unfunded liabilities that our politicians have obligated us to pay, our dependence on foreign oil, our education system, and a dearth of leadership and political courage. These issues are intertwined and cannot be addressed individually. To successfully solve these issues we need to ignore political affiliations and choose the best solutions. It seems strange to me that the best ideas for dealing with our crisis come mostly from billionaires. The people that we should believe in my opinion are: David Walker, Pete Peterson, Warren Buffett, Ross Perot, T. Boone Pickens, Matt Simmons, Bill Gates, and Ron Paul.

These men have put aside partisan politics and name calling to work together to save our country. They have an extremely difficult task. There are different challenges they must overcome. The largest hurdle is getting the attention of the majority of Americans who are apathetic towards the entire political process. These are the 71 million voting age citizens who decided not to vote in the last presidential election. If they don’t care enough to vote in the presidential election, they certainly won’t care about future unfunded liabilities. I think the only thing that will get the attention of this group is a major recession that negatively impacts their quality of life. There are millions of Americans living lives of silent desperation. They are living on the edge and the debt contraction that is underway is pushing many over that edge. The anger that is building will hopefully eliminate the apathy.

“The punishment of wise men who refuse to take part in the affairs of government is to live under the government of unwise men.” - Plato

The next obstacle is what I call the Great Deniers. They deny that there are any problems in America. They ignore the hard facts and spout rhetoric like: “We are the greatest country in the history of the world; There is nothing that's going to occur to our economy except a continuance of the great economic success our great nation has always enjoyed; The sun is not setting on our great nation, it is rising!; It is morning in America.” It is difficult to have a logical discussion with these shills. They are disciples of the Ben Stein School of ignoring facts and figures. They are cheerleaders for America, when what we need are wide eyed realists. Many of these people have secure well paying comfortable positions in our society and fear a change in the status quo.

Using a baseball analogy is the best way I can describe our current situation. When I hear the denial gang speak, I see America as a baseball team on par with the NY Yankees dynasty. They have been the dominant team in baseball for decades, with 26 World Series championships in 39 World Series appearances. Their payroll is bigger than any other team. They start to read their press clippings, rely on their reputation and allow their minor league system to deteriorate. Their star players are getting long in the tooth, no longer in their prime. Changing managers (Presidents) hasn’t worked. They are still good, but the competition is younger, talented, and has greater desire to succeed. The upstart Devil Rays (Emerging Market Countries) and the reviled Red Sox (China) have moved past them. It is late August and they are 10 games out of 1st place. It is time to trade the aging veterans for young minor leaguers and begin the rebuilding process. This is where America stands today. We are at a crossroads. We can continue on our current course and be in the middle of the pack in the future, or we can completely retool to compete in this 21st Century world.

By far, the greatest challenge that our selfless patriots must overcome is the entrenched ruling elite that run this country. The ruling elite includes the crooked politicians in Washington, the lifetime bureaucrats who run the various governmental agencies, the paid lobbyists who write the laws for Congress, obscenely overpaid short-term profit driven corporate CEOs, media conglomerates, and the privileged Wall Street aristocracy. These privileged few are surrounded by leeches and parasites (media consultants, pollsters, spin artists, and PR agencies) that attack anyone who threatens their position of power. The only way to overturn their comfortable world is an uprising among the masses. An educated population would not allow them to herd us like the sheep they think we are.

Congress consists of 100 Senators and 435 Representatives. Based on the data below there are 32 lobbyists for every member in Congress. They spend $5.3 million per member of Congress every year. Lobbyists will spend $3 billion this year to persuade our noble politician leaders. PACs and 527 Plans will spend hundreds of millions of dollars pushing their agendas. Who is looking out for my senior citizen parents? Certainly not their Congressman or Senator. They are earning a pitiful 2% on their IRA money market fund because JP Morgan, General Electric and Fannie Mae have lobbyists to fight for their rights. When our government has to use your tax dollars in the next few months to take over Fannie Mae and Freddie Mac, it should warm your heart knowing that these two quasi-governmental entities have spent $175 million in the last 10 years lobbying Congress. Not much has really changed in the last hundred years. Will Rogers pegged politicians back in the 1920’s.