As the US and Israel tightens the screws on the first world economies, the racket from Europe rises as the EU struggles to create ZIRP lending from their main central bank, aping the US and Japan. Wars create inflation and the US is wracked with inflation in a ZIRP lending situation. This leads to more wars. And the ZIRP lending is also screwing up the floating fiat currency system, too. The gambling games playing FOREX markets and derivative interest rate swap games are making the creation of money more and more wild, more and more detached from economic reality.
The flight to fancy is all being done to avoid bankruptcy. The first bankruptcies came before 2007: the immense US housing bubble burst when the price of property outstripped any ability to pay off loans due to declining incomes plus the fact that the #1 industry in the US was building speculative housing meant when the value of housing could no longer rise even with phony lending (no income verification, no identity verification floating interest loans), the entire edifice came crashing down.
Building houses nearly ceased. The value of existing housing plummeted by over 50% in the most active real estate areas such as Nevada, Florida, California and Arizona. AIG went bankrupt because their promises to pay for losses was a con job. And so the next thing to fall was big Wall Street bankers who played the derivatives markets. The only reason any of them still exist is because they moved their bad real estate deals into the Federal Reserve and Federal government.
The slew of bad loans that poured into Fannie Mae caused it to go bankrupt, too. One by one, the institutions that supported and enabled the housing bubble imploded. The only thing that saved the US and EU from this mighty downward suction was the Federal Reserve printing up trillions in loans and handing them out like candy while sucking down bad deals and pretending this was all ‘collateral’ for basically ZIRP loans in the trillions of dollars.
This, in turn, played havoc with all our trading partners. For generations, the US ran trade deficits with allies. This was paid for by printing up US dollars by over $4 trillion and the trade partners, in turn, would stash this loot in FOREX accounts at their central banks in order to make their currencies weaker against the dollar. No other nation can do what we did for years and years because no other country can suck down as much foreign imports as the huge US economy.
The US trade deficit, combined with our government deficits, is a negative entity that can exist only for a short while. It is doomed to eventual bankruptcy. The EU has FOREX accounts for parking US trade dollars but these are scattered central banks especially the German central bank, and their FOREX holdings couldn’t stop the euro from shooting up in value in world FOREX trades. This killed EU exports to the US.
Japan, which used to have the world’s biggest FOREX US dollar holdings, kept the yen cheap for 20 years due mainly to the ‘Japanese carry trade’ which was created by the Japanese ZIRP central bank lending program: Japanese would park their savings in dollars bought cheaply or bonds valued in dollars that paid a much higher interest rate. The differential between the Japanese interest and US interest rates was huge and a certain, easy money maker for both Japanese and American speculators.
THIS is what killed the US real estate market: when the Federal Reserve began lowering rates to Japanese rates while Japan was slowly raising their rates above zero! Today, the US is still at zero and the yen is strong since the mass of Japanese elderly and middle aged savers are no longer playing the carry trade game. Now, all savers are seeing life savings eaten up by ferocious energy inflation costs and high food prices and in most countries, high taxes as governments tax the ‘peasants’ heavily to pay for the bailing out of all banks and major manufacturers.
One to today’s news as the many smaller real estate bubble/retirement community nations go bankrupt: ECB suspends use of Greek bonds as collateral – Telegraph
The ECB said national central banks could provide liquidity using so-called “emergency liquidity assistance” (ELA) until the €35bn collateral enhancement scheme is activated, at which point Greek bonds would again be eligible in principle.
…The issue is vital because Greek and Cypriot banks would almost certainly go bust if their central bank funding was withdrawn. Other banks in countries like France also own large chunks of Greek debt, meaning they too would face major financing issues if their Greek assets suddenly become unusable at the ECB.
“Via ELA, the Greek central bank is allowed to accept collateral that is not eligible in normal ECB operations,” said Commerzbank economist Michael Schubert.
What this really means is, Greece is now bankrupt. By artificially separating the bonds held by the central EU bank and all others is a ruse, a fake, a scam. They can say a pig’s snout is worth a gold coin, if they so wish. But it remains a pig’s snuffler no matter what they say it is. What this means is, Greece still has to pay back the central bank but no one else, pretty much.
Since other banks hold bonds as ‘collateral’ for creating loans, this means their capital base is now significantly smaller and if Spain and Italy follow suit, it will shrink the capital base of many banks which means even less lending. Savings are deficits to banks but bonds are assets. Many people don’t understand this basic rule of capitalization. Banks DO benefit from savings a la the Bank of Japan if it is running at ZIRP rates.
That is, instead of the banks paying savers for holding and using their capital, banks get this for free. So it is not a deficit on their accounts anymore. But ZIRP systems lead to savers not using banks since it pays nothing. These systems lead to depressions like we see in Japan. Japan’s depression has become terminal now due to the high value of the yen (caused by other countries aping Japan’s ZIRP rate system) and the tsunami/earthquake disasters.
The EU has no nuclear or tsunami disasters, it is all purely political and social. The EU made a major mistake all confederations make: they grew it much too fast when the Soviet Union fell. It is now huge, disorderly, and uncontrollable. The Greek mess is merely the camel’s nose under the German tent. CDS payouts on Greek bond deal on agenda – FT.com
A group of banks and investors in the credit derivatives market will meet on Thursday to determine whether Greece’s planned debt swap deal should trigger payments on its default insurance...The question facing the International Swaps and Derivatives Association is whether the deal constitutes a “credit event” because it creates two classes of bond holders – the European Central Bank, which is spared losses, and private investors, who are being forced to take losses of up to 75 per cent on their Greek bond holdings.
HAHAHAHAHA…after three years of madly bailing out the bozos who created the insane Derivatives Beast, here they are, whining yet again at the central banks, demanding to be saved from the monster THEY created DELIBERATELY. They have to be eaten up and destroyed by this thing. This is the only way to stop this obvious scam.
They NEVER want ANYTHING to trigger payments backwards in derivative swaps!!! EVER. This is due to this entire garbage being capitalized with…nothing. The capital base for paying for losses doesn’t exist any more than it existed with AIG. This is all a fraud, everyone involved including the Sage of Omaha, Buffett, should be arrested for being con artists.
If this isn’t a ‘credit event’ then nothing is a credit event. The collapse of the currency and banks in Weimar Germany wasn’t an ‘event’. The sun going nova won’t be an ‘event’. The end of the Universe won’t be an ‘event’. This sort of monkey-feces flinging speculations about how many bankers can dance on the head of a pin is killing time in hopes that a rush to dump all these bad Greek debts into the EU bank will be forced on Germany.
German voters are already royally pissed off about this impending theft of all their carefully collected sovereign wealth. The Greeks hate the Germans because the Germans refuse to buy Greek debt that the Greeks plan to never pay back. The US media, representing a country that plans to ape Greece, is all for demonizing the Germans while feeling sorry for the Greeks.
Many, many Americans hope to use bankruptcy to evade paying back promises to make good on loans! This is a MAJOR moral battle going on. Do loans have to be repaid or do we get to spend like crazy and then blow up everything and start over again? The ‘blow up everything’ model has some very bad downsides. Over time it leads to a collapse of all trust and all economic systems not using something hard and rare like gold to service all business.
THAT will be a huge depressive force. Now, people who have capital that can be turned into gold will thrive but the average person will be turned into a real life peasant toiling on the land to survive from year to year. The goodies we take for granted today are all credit-related actions. We little understand how quickly things will grind to a halt if we debase the idea of paying off loans.
The Zombie banks are desperate for ZIRP: European Banks Flock to Second Round of Cheap Loans – NYTimes.com
Banks borrowed 529.5 billion euros, or $713 billion, compared to 489 billion euros in December, when the E.C.B. unleashed the first salvo of three-year loans. That was a little above expectations. Most analysts expected demand to be about the same as in December, but estimates ranged as low as 300 billion euros and as high as 1 trillion euros.
Mario Draghi, the president of the E.C.B., said the loans were designed to avert a credit crunch, but there are signs that many banks are hoarding cash rather than lending to businesses and consumers.
They are hoarding cash because many of their bonds are going bad due to more and more nations toying with the idea of going bankrupt. I said this three years ago: the banking bail outs would lead to whole nations including Japan and the US going bankrupt and this would cause huge social and political turmoil. All bubbles are dangerous. Real Estate speculative bubbles are particularly nasty and are devilishly hard to fix once they pop.
Knowing this, central banks have to tighten credit when they detect even the smallest moves towards speculative borrowing for either real estate or stock markets! But instead, thanks to the Ayn Rand beliefs of Greenspan and his spawn, they wanted no regulations. Now, regulations are being reimposed to the fury of Wall Street which longs for bubble money machines.
Romney is running on the Wall Street platform and is winning, by a thin margin, the GOP primaries. His buddies are all Wall Streeters, such as the behemoth governor from New Jersey, a Goldman Sachs executive. The EU central bank’s offer for ZIRP loans was much bigger than expected because everyone wants free loans even though they cannot pass this on to anyone else. They all have to hunker down and keep these trillions in ZIRP loans as a cushion for Spain and Italy’s inevitable bankruptcy.
Italy is totally morally bankrupt. Their leader who was recently deposed by the EU central bank, Berlusconi, skipped merrily out of his corruption trial due to a stupid rule in Italian courts: the statue of limitations runs all the way to the sentencing of a corrupt official ergo, all they have to do is run out the clock! Easy as pie. So none go to prison. No other EU nation has this dumb rule. All clocks of limitations stop running with an inditement. Not sentencing.
Here is an American story of pandering pavlovian panting for money going bad due to the Derivatives Beast munching on gnomes: Pandit Fast Money With Hedge Funds Proves Dead End – Bloomberg
That law, championed by former Federal Reserve Chairman Paul Volcker and made part of the Dodd-Frank Act, says a deposit-taking bank’s proprietary capital can’t account for more than 3 percent of any hedge fund.
In at least four of Citi’s funds, half or more of the assets have come from Citi’s own balance sheet during the past two years, not from investors or clients of its private bank, according to interviews with people familiar with the funds and documents obtained by Bloomberg Markets. That has to change by the time the Volcker rule is fully implemented; it is scheduled to take effect in July and includes a two-year transition period.
If there is a major zombie bank, it is Citibank. This thing exists only because it raids the Federal Reserve for ZIRP money which is not supposed to be used for speculation but…is used for exactly that. And we wonder why oil prices and food prices are so high! What on earth do these damn hedge funds do in the first place?
Speculate in exactly these futures markets! And the politicians are blaming each other for high fuel costs! HAHAHA. Yes, they did, all of Congress did, both parties did vote hard to cut off Iran’s oil from world markets and the State Department used up huge amounts of diplomatic capital and good will strong arming reluctant allies to do this dumb thing…and then the hedge funds merrily exploited constricted oil markets to bid up the price of oil!
DUH!!! Why can’t our media not tell people this plain and simple? HAHAHA again. They want the oil boycott! They don’t want to be blamed for wildly pushing us into a war with Iran that will make our lives here a total hell. No one is willing to point fingers where the blame belongs. Of course. This is cowardice. This is a fraud. 
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The real question is, if a zombie government bails out a zombie central bank which bails out a zombie bank, exactly what has been accomplished?
ΩΩΩΩΩΩΩΩΩΩΩΩΩΩ
ELAINE: A zombie Woodstock. 🙂
Urban, I like your call-out of the tautology in this faux economy.
Micheal Hudson has a great 10 minute video: “Wall Streets Capital Gains Plan”, in which he discusses how during WWII we had a industrial complex that was run by the military which then moved to marketers in the 1960’s to the supply siders of the 1980’s. They then monetized the function of corporations to make the greatest differential for the top echelon.
We have moved very far from the Veblen idea of companies run by those who understood the production of value added economics to this form of leadership that will take advantage of currency differentials, lower work standards overseas which in turn moves employment out of this country.
We are left with a system that no longer works in adding wealth to one that syphons remaining wealth to the top and are dealing with government that no longer prosecute wrong-doing. This has become a global disease.
Dylan Ratigan asks why don’t we forgive the debt in a Marshall plan and avoid war which often results from the economic disaster we are facing globally. Well, guess only the bankers know the answer to that and they say they don’t want to lose a red penny.
Did you ever read “And the Ladies of the Club…” by Helen Hooven Santmyer? It was released about 30 years ago and I read it as a child. But now I’m rereading it. It is filled with loads of cultural, political and economic information about the US and the effects of it on one small, fictional midwestern town.
I was nearly thrown out of my seat when one character railed against the notion of “free trade”. So obviously this isn’t a new ideal or idea.
Nothing like Santmyer’s book will ever be released again. At least in the US. No writers being published today have the knowledge or the wits to write anything like it.
When I see folks “railing” against free trade, it usually turns out that they are really railing against government directed trade. Truly unfettered trade benefits the buyer and the seller or else it doesn’t happen. Government directed trade never benefits the buyer but usually protects some well connected but incompetent seller.
Thanks for the insightful article, perhaps one might enjoy mine,First A Global Deflatinary Credit Collapse Then Monetary Anarchy Worldwide, http://tinyurl.com/86wytvn
Great post. And thanks to theyenguy as well for the added dissertation on how the con works: bankrupt countries with cheap credit, then impose draconian terms, declare yourself First Lienholder, and suck out whatever money is in the national Treasury into bankers’ pockets.
Basically, Greece is a trial run for a similar con being run here and elsewhere. Beggar the country, impose austerity, and “privatize” to save money. In the case of the EU, the corporate First Lienholders are under NO obligation to provide services, but any tax dollars collected can pour straight into their pockets. In the US model, corporations get to collect a bigger share of tax dollars while services get cut. Once privatization occurs, prices eventually rise. In Texas, for example, when the “free market” came to utilities, prices per kilowatt hour rose from the 10 cents paid before the deal went thru, to about 13-15 cents — to satisfy the profit objective.
In either type of marketplace, I can’t see any impetus to innovate. Innovation is being stifled right now. Small cap companies are regularly bankrupted by hedge funds who use collusion and short selling frauds to suck out investor capital into their own pockets. On a large scale, this is happening to sovereign countries.
This can only lead to continual war, as resources are sucked out and corporations have to look elsewhere to satisfy insatiable profit growth appetites. They will then have to take it from countries not that are not directly in their snare of monetary control.
The reason bankers bought Greek debt was because it was NOT CHEAP. They had ‘good returns’ on it!!!!
Greece now wants cheap debt to pay off the older more expensive debt. But the problem is, the risky more expensive debt is causing banks to loose capital and thus, they can’t lend to anyone.
Greece ran up these debts in the first place with NO INTENTION OF PAYING them off…ever. This was due to Greece, like Italy, being a tax cheat haven.
The US is also a tax cheat haven which cuts taxes on the rich while piling up mountains of debt which are Himalayan in size compared to Greece and Italy.
We sold these government debts to trade partners and are now preparing to go bankrupt. THIS is the scam!
And of course, people who think debts are a game to cheat the lender will think this is a fantastic trick to pull on people. It is not. Trust me on that. If someone thinks paying back debts is stupid, they can lend me a few thousand dollars and I will be happy to put that belief to a test.
As Elaine says, history is instructive.
When the Black Guelph Bardi and Peruzzi ‘zombie’ banks went under in 1345 (after playing similar games with fictitious credit leveraged to unimaginable heights), production and real trade in goods were first parasitized, then collapsed. Bankers used loans to monarchs to dominate and control trade in certain vital commodities, such as grain, wool and cloth, with rampant speculation, off-shoring and profit-sucking progressively reducing the production of these commodities and collapsing economies. In 14th-century Europe, important commodities like food, wool, clothing, salt, iron, etc., were produced under royal license and taxation. Bank control of royal revenue led to, first, private monopolization of key commodities, and second, the banks’ “privatization” and control of the government itself.
Up to 1335 the bankers expected 8-10 percent annual profit — far above the rate at which the physical economy of Europe was producing real surplus. (In fact, at that time Europe’s physical rate of production was actually falling. Elaine has pointed out that Europe’s Little Ice Age inconveniently occurred just about then, from about 1300 right on to 1800, with a brief warming period in the 1500s).
In 1342, Edward III of England played a role similar to Greece’s today, defaulting on loans made by the Bardi and Peruzzi banks. By that time Edward’s national budget had become a vassal sub-department of the bankers. Further lending to King Edward III was done with brutal “conditionalities”—effectively seizing and looting his revenues. Instead of charging interest (that was a sin!) the banks imposed “conditionalities” on the loans — basically, the pledging of royal revenues directly into the pockets of the bankers.
The Black Guelph bankers used debt schemes and leveraged speculation to seize control of trade. When Edward tried to prevent off-shoring their profits, the bankers converted their profits into wool which they stored on the properties of their political allies, the Knights Hospitalliers. By 1340 after years of market manipulation the only way for the bankers to continue to raise wool prices was to get Edward to impose a wool boycott which then destroyed the entire Flanders textile trade. Edward gained nothing from this — his income flow had all been assigned to the Bardi and Peruzzi for his debts!
In Italy, the bankers loaned aggressively to farmers and other landowners, causing a bubble leading to “perpetual rents,” whereby farmers calculated the lifetime rent-value of their land and sold it to a bank to get cash for expenses. (This virtually guaranteed that they would lose the land to that bank). Eventually the Peruzzi bank owned all of the revenues of the Kingdom of Naples (the entire southern half of Italy, the most productive grain belt of the entire Mediterranean area); they d privatized, recruited and ran King Robert of Naples’ army, collected his duties and taxes, appointed the officials of his government, and sold all the grain from his kingdom — controlling the food supply. They egged him into ruinous wars with Sicily to monopolize its grain production.
With winters suddenly getting harsh (making production fall) — and profit from industry going to the 0.001% who imposed even harsher conditions, there was little incentive for anyone to produce or innovate. Infrastructure had deteriorated — in Florence, for example, all the city’s bridges had been built in the 13th century, none in the 14th — private interests have no interest to invest in infrastructure when there’s profits to be made. When Black Death arrived (its germs carried through “free trade” with the East) the population collapsed and prices went wild — vital skill sets had vanished, and basic commodities were dear.
By the mid-1300s the defaults had started. First Edward III … then the city of Florence (which the bankers effectively controlled). Financial collapse went on for decades. Finally in 1401, Spain’s King Martin I of Aragon expelled the bankers; In 1403, Henry IV of England prohibited them from taking profits in any way. In 1409, Flanders imprisoned and then expelled Genoese bankers. In 1410, all Italian merchants were expelled from Paris.
What will it take this time around to stop the financial sector’s beggaring of the real economy? We already have endless wars over oil and religion. We have trade wars and currency games for private gain that have sucked skilled jobs out of our economy. We have governments captured by financial interests, and Treasuries looted for private gain while people riot in the streets. We have food riots and grain shortages.
What have we learned in 600 years?
This is depressing. Just seems that in the history of Man, there is never “enough.”
Keep on posting, Elaine. This story needs to be told … and re-told. Until we learn.
Sorry for multiple posts … seems the best way to prevent governments being captured by the financial interests is to nip it in the bud — have confiscatory top rates … 90% or more … like in the Eisenhower years. Forestalls their being able to buy politicians.
And enforcement! Strict regulation. Steep marginal taxation. Especially on money earned through speculation, like those funny computer-run trading programs designed to manipulate markets and in the blink of an eye tilt all the proceeds into just a few pockets. Those things should be taxed to hell … on each and every trade.
I don’t like paying taxes any more than the next guy, but strict controls and seems the only way to curb the outright capture of public Treasury for private gain.
Which “They” keep trying to do.
Key ingredient: a population who is educated, aware, and activist.
The game is rigged, openly so. Everyone knows it. A confidence game requires just that — public confidence.
How long until the final collapse?
How long until the final collapse?
That’s what we all keep wondering. How many times can this game be played?
We shall see, but I know it’s within the next few years. Something will have to happen whether its a great war or countries realizing they can’t afford to do this anymore.
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Very interesting posts Claire Voyant 🙂
When the ‘privatization’ became in vogue here in Norway the Norwegians ‘privatized’ the telecom business. In reality they retained the majority share in the largest Telecom company (Telenor). They own 55% of Telenor (a global player) but the ownership is hidden in the sense that the 55% is owned through state owned/controlled companies, not directly by the state itself.
I think that if the State owned 55 % of these huge financial houses/banks, and left the rest of the field open but heavily regulated for the ‘inventors’ to play with it would help support the public benefit while reducing the corruption overhead and obscene profits for the insiders (as in the Eisenhower days as you pointed out).
Post-industrial countries are not doing well because the economic theory of “free-trade” and rampant privatization of all things in the public domain is moving all value into the hands of a few.
First of all this ideology goes way beyond Adam Smith. Even if you believe in this theory, the idea of having no barrier to entry and no regulations creates huge monopolies, so instead of having redundancies of employment in many companies, you keep losing jobs with company take-overs, then the monopolies create wealth on top, no longer wanting to spend money to do business, they want the greatest differential, and use the big monetary gains to make more in the casino, instead of re-investing their money.
They also use the money to buy political influence…
Someone mentioned earlier that we don’t like free trade because, it’s anything but–but I say it isn’t possible if you have no rule of law. It will always end up just as it has, since the more rich and powerful you get the more advantages you take.
It’s just human nature..That’s why the rule of law must go for everyone.
Wow, Claire Voyent, that is an amazing bit of information. Where did you find that? It is amazing that bankers were behind the scenes to such a huge extent back then, but not surprising — unfortunately.