Brown Web of Debt The Shocking Truth about our Money System (3rd ed)

Chapter 32 - In the Eye of the Cyclone

A commentator going by the name of Captain Hook observed:

[T]his is as big a deal as Nixon closing the “gold window” back in ’71, and we all know what happened after that. . . . [I]t almost looks like the boys are getting ready to unleash Weimar Republic II on the world. . . . Can you say welcome to the “People’s Republic of the United States of What Used to Be America”?. . .

[W]e just got another very “big signal” from U.S. monetary authorities that the rules of the game are about to change fundamentally, once again.11

When Nixon closed the gold window internationally in 1971 and when Roosevelt did it domestically before that, the rules were changed to keep a bankrupt private banking system afloat. The change in the Fed’s reporting habits in 2006 appears to have been designed for the same purpose. The Fed was soon rumored to be madly printing up $2 trillion in new Federal Reserve Notes.12 Why? Some analysts pointed to the festering derivatives crisis, while others said it was the housing crisis; but there were also rumors of a third cyclone on the horizon. Iran announced that it would be opening an oil market (or “bourse”) in Euros in March 2006, sidestepping the 1974 agreement with OPEC to trade oil only in U.S. dollars. An article in the Arab online magazine Al-Jazeerah warned that the Iranian bourse “could lead to a collapse in value for the American currency, potentially putting the U.S. economy in its greatest crisis since the depression era of the 1930s.”13 Rob Kirby wrote:

[I]f countries like Japan and China (and other Asian countries) with their trillions of U.S. dollars no longer need them (or require a great deal less of them) to buy oil . . . [and] begin wholesale liquidation of U.S. debt obligations, there is no doubt in my mind that the Fed will print the dollars necessary to redeem them – this would necessarily imply an absolutely enormous (can you say hyperinflation) bloating of the money supply – which would undoubtedly be captured statistically in M3 or its related reporting. It would appear that we’re all going to be “flying blind” as to how much money the Fed is truly going to pump into the system . . . .14

For the Federal Reserve to “monetize” the government’s debt with newly-issued dollars is actually nothing new. When no one else buys U.S. securities, the Fed routinely steps in and buys them with money created for the occasion. What is new, and what has analysts alarmed, is that the whole process is now occurring behind a heavy curtain of

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Total M3 Money Stock at Calendar Year End 1901 (10 billion) - 2--5 (10 trillion) and Part Year 2006

billion

www.babylontoday.com

secrecy. Richard Daughty, an entertaining commentator who writes in The Daily Reckoning as the Mogambu Guru, commented in April 2006:

There was . . . a flurry of excitement last week when there was a rumor that the Federal Reserve had printed up, suddenly, $2 trillion in cash. My initial reaction was, of course, “Hahahaha!” and my reasoning is thus: why would they go through the hassle? They can make electronic money with the wave of a finger, so why go through the messy rigamarole of dealing with ink and paper and all the problems of transporting it and counting it and storing it and blah blah blah?

But . . . this whole “two trillion in cash” scenario has some, um, merit, especially if you are thinking that foreigners dumping American securities . . . would instantly be reflected in instantaneous losses in bonds and meteoric rises in interest rates and the entire global economic machine would melt down. Bummer.

So maybe this could explain the “two trill in cash” plan: With this amount of cash, see, the American government can pretty much buy all the government securities that any foreigners want to sell, but the inflationary effects of creating so much money won’t be felt in prices for awhile! Hahaha! They think this is clever!15

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It might be clever, if it really were the American government buying back its own securities; but it isn’t. It is the private Federal Reserve and private banks. If dollars are to be printed wholesale and federal securities are to be redeemed with them, why not let Congress do the job itself and avoid a massive unnecessary debt to financial middlemen? Arguably, as we’ll see later, if the government were to buy back its own bonds and take them out of circulation, it could not only escape a massive federal debt but could do this without producing inflation. Government securities are already traded around the world just as if they were money. They would just be turned into cash, leaving the overall money supply unchanged. When the Federal Reserve buys up government bonds with newly-issued money, on the other hand, the bonds aren’t taken out of circulation. Instead, they become the basis for generating many times their value in new loans; and that result is highly inflationary. But that is getting ahead of our story . . . .

The Orwellian Solution

The Fed had succeeded in hiding its sleight of hand by concealing the numbers for M3, but inflation was obviously occurring. By the spring of 2006, oil, gold, silver and other commodities were skyrocketing. Then, mysteriously, these inflation indicators too got suppressed. In the British journal Financial News Online in October 2006, Barry Riley wryly observed:

Until the summer, the trends appeared ominous. The Fed was raising short rates and inflation was climbing. The price of crude oil stopped short of $80 a barrel. Sales of new homes were dropping off a cliff. Then, as if by magic, everything changed. The oil price went into reverse, tumbling to under $60 with favourable implications for the Consumer Price Index measure of inflation . . . . Similarly, the gold bullion price – an indicator of the potential fragility of the dollar exchange rate – has crashed from its early summer high. The Dow Jones Average two weeks ago advanced to a high, at last beating the bubble top in January 2000.

. . . [T]he pattern is curious. . . . Perhaps bonds and commodities have been anticipating a recession. But then why has the equity market climbed?

Conspiracy theories have abounded since Hank Paulson, boss of Goldman Sachs, was nominated in May to become treasury

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secretary. He had no political qualifications but a powerful reputation as a market fixer. Was he brought in to shore up the financial and commodities markets ahead of [the November 2006 elections]?

The suspicion arose that the Fed and its banking partners were hiding bad economic news in another way -- by actually manipulating markets. Catherine Austin Fitts, former assistant secretary of HUD, called it “the Orwellian scenario.” In a 2004 interview, she darkly observed:

[W]e’ve reached a point . . . where rather than let financial assets adjust, the powers that be now have [such] control of the economy through the banking system and through the governmental apparatus [that] they can simply steal more money

. . . , whether it’s [by keeping] the stock market pumped up, the derivatives going, or the gold price manipulated down. . . . In other words, you can adjust to your economy not by letting the value of the stock market or financial assets fall, but you can use warfare and organized crime to liquidate and steal whatever it is you need to keep the game going. And that’s the kind of Orwellian scenario whereby you can basically keep this thing going, but in a way that leads to a highly totalitarian government and economy – corporate feudalism.16

Latter-day Paul Reveres warned that domestic security measures were being tightened and civil rights were being stripped. These developments mirrored IMF policies in Third World countries, where the “IMF riot” was actually anticipated and factored in when “austerity measures” were imposed.17 Conspiracy theorists pointed to efforts to get the Constitution suspended under the Emergency Powers Act, martial law imposed under the Patriot and Homeland Security Acts, and the American democratic form of government replaced with a police state.18 They noted the use of the military in 2005 to quell rioting in New Orleans following Hurricane Katrina, in violation of posse comitatus, a statute forbidding U.S. active military participation in domestic law enforcement.19 They observed that fully-armed private mercenaries, some of them foreign, even appeared on the streets. The scene recalled a statement made by former U.S. Secretary of State Henry Kissinger at a 1992 conference of the secretive Bilderbergers, covertly taped by a Swiss delegate in 1992. Kissinger reportedly said:

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Chapter 32 - In the Eye of the Cyclone

Today, America would be outraged if U.N. troops entered Los Angeles to restore order. Tomorrow they will be grateful! . . .

The one thing every man fears is the unknown. When presented with this scenario, individual rights will be willingly relinquished for the guarantee of their well-being granted to them by the World Government.20

Suspicions were voiced concerning the Federal Emergency Management Agency (FEMA), which was in charge of disaster relief. In a November 2005 newsletter, Al Martin wrote:

FEMA is being upgraded as a federal agency, and upon passage of PATRIOT Act III, which contains the amendment to overturn posse comitatus, FEMA will be re-militarized, which will give the agency military police powers. . . . Why is all of this being done? Why is the regime moving to a militarized police state and to a dictatorship? It is because of what Comptroller General David Walker said, that after 2009, the ability of the United States to continue to service its debt becomes questionable. Although the average citizen may not understand what that means, when the United States can no longer service its debt it collapses as an economic entity. We would be an economically collapsed state. The only way government can function and can maintain control in an economically collapsed state is through a military dictatorship.21

The Parasite’s Challenge:

How to Feed on the Host Without Destroying It

Critics charge that warfare, terrorism, and natural disasters on an unprecedented scale are being used to justify massive federal borrowing, while diverting attention from the fact that the economy is drowning in a sea of governmental and consumer debt.22 And that may be true; but policymakers are only doing what they have to do under the current monetary scheme. In an upside-down world in which debt is money and money is debt, somebody has to go into debt just to keep money in the system so the economy won’t collapse. The old productive virtues – hard work, productivity and creativity – have gone out the window. The new producers of economic “growth” are borrowers and speculators. Henry C K Liu draws an analogy from physics:

[W]henever credit is issued, money is created. The issuing of credit creates debt on the part of the counterparty, but debt is

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not money; credit is. If anything, debt is negative money, a form of financial antimatter. Physicists understand the relationship between matter and antimatter. . . . The collision of matter and antimatter produces annihilation that returns matter and antimatter to pure energy. The same is true with credit and debt, which are related but opposite. . . . The collision of credit and debt will produce an annihilation and return the resultant union to pure financial energy unharnessed for human benefit.23

Credit and debt cancel each other out and merge back into the great zero-point field from whence they came. To avoid that result and keep “money” in the economy, new debt must continually be created. When commercial borrowers aren’t creating enough money by borrowing it into existence, the government must take over that function by spending money it doesn’t have, justifying its loans in any way it can. Keeping the economy alive means continually finding ways to pump newly-created loan money into the system, while concealing the fact that this “money” has been spun out of thin air. These new loans don’t necessarily have to be paid back. New money just has to be circulated, providing a source of funds to pay the extra interest that wasn’t lent into existence by the original loans. A variety of alternatives for pumping liquidity into the system have been resorted to by governments and central banks, including:

1.Drastically lowering interest rates, encouraging borrowers to expand the money supply by going further and further into debt.

2.Instituting tax cuts and rebates that put money into people’s pockets. The resulting budget shortfall is made up later with new issues of U.S. bonds, which are “bought” by the Federal Reserve with dollars printed up for the occasion.

3.Authorizing public works, space exploration, military research, and other projects that will justify massive government borrowing that never gets paid back.

4.Engaging in war as a pretext for borrowing, preferably a war that will drag on. People are willing in times of emergency to allow the government to engage heavily in deficit spending to defend the homeland.

5.Lending to Third World countries. If necessary, some of these impossible-to-repay loans can be quietly forgiven later without repayment.

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Chapter 32 - In the Eye of the Cyclone

6.Periodic foreclosures on the loan collateral, transferring the collateral back to the banks, which can then be resold to new borrowers, creating new debt-money. The result is the “business cycle” – periodic waves of depression that flush away debt with massive defaults and foreclosures, causing the progressive transfer of wealth from debtors to the banks.

7.Manipulation (or “rigging”) of financial markets, including the stock market, in order to keep investor confidence high and encourage further borrowing, until savings are heavily invested and real estate is heavily mortgaged, when the default phase of the business cycle can begin again.24

Rigging the stock market? At one time, writes New York Post columnist John Crudele, just mentioning that possibility got a person branded as a “conspiracy nut”:

This country, the critics would say, never interferes with its free capital markets. Sure, there’s intervention in the currencies markets. And, yes, the Federal Reserve does manipulate the bond market and interest rates through word and deed. But never, ever would such action be taken at the core of capitalism

– the equity markets, which for better or worse must operate without interference. That’s the way the standoff stayed until 1997 when – at the height of the Last of the Great Bubbles – someone in government decided it wanted the world to know that there was someone actually paying attention in case Wall Street could not handle its own problems. The Working Group on Financial Markets – affectionately known as the Plunge Protection Team – suddenly came out of the closet.25

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Chapter 33

MAINTAINING THE ILLUSION: RIGGING FINANCIAL MARKETS

The Dow is a dead banana republic dictator in full military uniform propped up in the castle window with a mechanical lever moving the cadaver’s arm, waving to the Wall Street crowd.

– Michael Bolser, Midas (April 2004)1

While people, businesses and local and federal governments are barreling toward bankruptcy, market bulls continue to insist that all is well; and for evidence, they point to the robust stock

market. It’s uncanny really. Even when there is every reason to think the market is about to crash, somehow it doesn’t. Bill Murphy, editor of an informative investment website called Le Metropole Cafe, described this phenomenon in an October 2005 newsletter using an analogy from The Wizard of Oz:

Every time it looks like the stock market is on the verge of collapse, it comes back with a vengeance. In May for example, there were rumors of derivative problems and hedge fund problems, which set up the monster rally into the summer. The London bombings . . . same deal. Now we just saw Katrina and Rita precipitate rallies. There must be some mechanism at work, like the Wizard of Oz behind a curtain, pulling on strings and pushing buttons.2

What sort of mechanism? John Crudele writes that the cat was let out of the bag by George Stephanopoulos, President Clinton’s senior adviser on policy and strategy, in the chaos following the World Trade Center attacks. Stepanopoulos blurted out on “Good Morning America” on September 17, 2001:

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Chapter 33 - Maintaining the Illusion

“[T]he Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there – they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem.

“They have, in the past, acted more formally.

“I don’t know if you remember, but in 1998, there was a crisis called the Long Term Capital crisis. It was a major currency trader and there was a global currency crisis. And they, at the guidance of the Fed, all of the banks got together when that started to collapse and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall.”3

The Plunge Protection Team (PPT) is formally called the Working Group on Financial Markets (WGFM). Created by President Reagan’s Executive Order 12631 in 1988 in response to the October 1987 stock market crash, the WGFM includes the President, the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission. Its stated purpose is to enhance “the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and [maintain] investor confidence.” According to the Order:

To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.4

In plain English, taxpayer money is being used to make the markets look healthier than they are. Treasury funds are made available, but the WGFM is not accountable to Congress and can act from behind closed doors. It not only can but it must, since if investors were to realize what was going on, they would not fall for the bait. “Maintaining investor confidence” means keeping investors in the dark about how shaky the market really is.

Crudele tracked the shady history of the PPT in his June 2006 New York Post series:

Back during a stock market crisis in 1989, a guy named Robert Heller – who had just left the Federal Reserve Board – suggested that the government rig the stock market in times of dire emergency. . . . He didn’t use the word “rig” but that’s what he meant.

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Proposed as an op-ed in the Wall Street Journal, it’s a seminal argument that says when a crisis occurs on Wall Street “instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.”

The stock market was to be the Roman circus of the twenty-first century, distracting the masses with pretensions of prosperity. Instead of fixing the problem in the economy, the PPT would just “fix” the investment casino. Crudele wrote:

Over the next few years . . . whenever the stock market was in trouble someone seemed to ride to the rescue. . . . Often it appeared to be Goldman Sachs, which just happens to be where [newly-appointed Treasury Secretary] Paulson and former Clinton Treasury Secretary Robert Rubin worked.

For obvious reasons, the mechanism by which the PPT has ridden to the rescue isn’t detailed on the Fed’s website; but some analysts think they know. Michael Bolser, who belongs to an antitrust group called GATA (the Gold Anti-Trust Action Committee), says that PPT money is funneled through the Fed’s “primary dealers,” a group of favored Wall Street brokerage firms and investment banks. The device used is a form of loan called a “repurchase agreement” or “repo,” which is a contract for the sale and future repurchase of Treasury securities. Bolser explains:

It may sound odd, but the Fed occasionally gives money [“permanent” repos] to its primary dealers (a list of about thirty financial houses, Merrill Lynch, Morgan Stanley, etc). They never have to pay this free money back; thus the primary dealers will pretty much do whatever the Fed asks if they want to stay in the primary dealers “club.”

The exact mechanism of repo use to support the DOW is simple. The primary dealers get repos in the morning issuance

. . . and then buy DOW index futures (a market that is far smaller than the open DOW trading volume). These futures prices then drive the DOW itself because the larger population of investors think the “insider” futures buyers have access to special information and are “ahead” of the market. Of course they don’t have special information . . . only special money in the form of repos.5

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