10 November 2009. For all the growing confidence that markets and leaders are expressing, the world is still a fragile place economically. Having covered the fastest growing economies 2010, we thought it would be timely to look at the worst economies in the coming year.
Many people were surprised at the top growth performers in the world economy, with less well-known countries like Qatar, Botswana, Azerbaijan, Republic of Congo and Angola leading the pack.
We are looking a different situation when looking at contracting countries. With one exception, all of the 12 worst countries in 2010 are in Europe, and the reason is pretty simple: the Financial Crisis - or Credit Crunch as it is known to some in the old world. We have gone from calling countries the Sick Man of Europe to callingEurope the Sick Continent of the World, just as Asia and Africa rise to the ascendancy.
It seems a bit harsh, since the crisis started in the subprime mortgage sector in the US, and then spread around the world. However, the scale of credit-related problems was larger for many European countries when compared to the size of their economy. America encouraged the world to follow its free-wheeling approach to debt leverage (going as far as to use Economic Hit Men).
This is a case of caveat emptor, or buyer beware. The US is far and away the largest economy in the world, has plenty of customers for its debt, and controls the US dollar which is still the world's main reserve currency, and will be for many years to come. Follow its advice at your peril, you don't have the security it has when things go wrong.
Here is the full table of the worst economic crashes in 2010:
Country Growth Rate
1. Ireland -3.0%
2. Lithuania -3.0%
3. Equatorial Guinea -2.828%
4. Latvia -2.035%
5. Montenegro -1.952%
6. Finland -1.238%
7. Estonia -1.045%
8. Bulgaria -1%
9. Germany -1%
10. Spain -0.714%
11. Netherlands -0.66%
12. Greece -0.6%
Source: GDP Growth Forecast 2010, EconomyWatch.com Economic Statistics Database
Take what is expected to be the worst economy in the world in 2010: Ireland. The former 'Celtic Tiger', expected to contract 3 per cent in 2010 and 8 percent in 2009, is now suffering in the way that the US should be, according to the Huffington Post.
In many ways, Ireland seems to be a microcosm of the United States, only with a Gaelic accent. However, sheer size and the status of the U.S. dollar as the world's reserve currency has delayed the full replication of what Ireland is currently experiencing. For that reason,what is occurring to the Irish economy in the present may be a window of what might soon lie ahead for the United States.
With a well-educated, English speaking and lower cost workforce plugged directly into the European Union, Ireland became a center for many industries, in particular tech. The new jobs reversed the centuries-old migration of Irish workers out of the country, and it became a net-importer of talent. As people and money flowed in, property prices boomed spectacularly. Irish Banks got rich financing this growth, became the dominant force in the economy, and in the relentless pursuit of profit gorged themselves on securities, including toxic assets from the US.
Now the economy is being hit both sides. The banks have come undone and have now been nationalised or have the government as major owners. As the world economy collapsed, exports plummeted, businesses have shut down and unemployment has rocketed. 12.5 percent of the population is out of work, and that number is expected to rise to 15 per cent in 2010. Whole areas of this once vibrant country have come ghost towns - and the people are angry. Yet another bailout is in the works, stoking more anger.
If approved by Parliament, which appears increasingly likely, NAMA would spend some $81 billion of taxpayer money to buy loans worth an estimated $70.5 billion at current market value. The so-called bad bank, as NAMA is sometimes called, will then manage the loans on behalf of the state for the next decade, by which time, the governmentassumes, the country's property market will have recovered. This assumption also explains the $10.5 billion markup in the sum to be paid for the toxic assets — a difference the government says reflects the long-term economic value of the loans.
Lenihan says housing prices need only appreciate 10% over the next 10 years for NAMA to return a profit on its initial expenditure. But predicting what's around the corner is never easy — as Irelandknows only too well. According to NAMA's draft business plan, a "prolonged property market depression" or "sluggish economic growth" could result in the failure of the scheme. Despite the risks, proponents say it's the only way to ensure that Ireland's banks start lending again. But for residents bearing the brunt of the country's economic slump, NAMA is little more than an inflated bailout for the gambling debts of developers and the banks that fueled their folly.
Government debt has grown alarmingly. The budget deficit had been running at 14% of GDP. A second emergency budget was recently created, with a mix of tax increases and spending cuts aimed at bringing the deficit down to 10.75%. But even these austerity measures as the ratings agencies (desparately trying to save their own tarnished reputations) have downgraded the sovereign debt of Ireland. Standard & Poors have cut its AAA credit rating to AA+.
What does this mean?
Firstly, it means that the rating agencies believe that Ireland has underestimated the size of its problems - it now has the second highest level of household debt in the world, running at 190 percent. Secondly, it means that they believe the chance ofIreland defaulting on its debt has increased. Thirdly - and most importantly - it means that the borrowing costs for the Irish government will go up, since lending rates are closely tied to credit rates. This of course will only increase the deficit. And so the cycle of financial doom and destruction spins ever downward.
Challenging Ireland for the questionable honour of worst economy is Lithuania. It does not have the complexity of the securitisation markets to deal with, but in many ways its story parallels that of Ireland. It has built an export-oriented economy with a currency pegged to the Euro. Following record growth of 8.9 per cent in 2007, it slowed in 2008 and then plunged this year, with the economy falling 9.5 percent in Q1 2009, and a full year drop of 10 percent expected, similar to the other two 'Baltic Tigers' of Latvia and Estonia, who have similarly dismal forecasts for 2010.
The 12 worst crashes feature similar stories of property busts (such as that in Spain) and export plunges (Germany).
The only exception to the European domination of the top 12 is Equatorial Guinea. Most people have never heard of it and would have a problem finding it on a map (a tiny dot on the west coast of Africa in case you are interested). It's story is a sad one of greed and corruption.
The few hundred thousand inhabitants of this country are subsistance farmers. Nothing much happened there until the mid nineties, when oil was discovered. In theory now it has the fourth highest GDP per capita in the world, but in practice the inhabitants are still extremely poor while the President Obiang Nguema and his friends and family enjoy lavish lifestyles.
Once again, the US is complicit. There are direct flights between the capital Malabo to Houston Texas, center of the us oil industry. In 2004, a US senate report found that Riggs Bank was guilty of helping officials embezzle hundreds of millions of dollars. And then there was the coup attempt, where plotters including Sir Mark Thatcher, son of the former British Prime Minister Margaret Thatcher, were found guilty and in many cases sent to prison for an attempted coup. They claimed it was to spread the wealth, but it was much more likely that they wanted to replace Nguema and take over his palaces, planes and plantations for themselves.
Meanwhile, what should be a wealthy nation struggles with gross misuse of power andthe economy suffers.
And although the means and methods vary considerably, that means that the story of Equatorial Guinea is not as different as it first seems from Europe, the Sick Continent of the World ...
Saturday, December 19, 2009
The Boom and Bust Cycle: A Financier's Best Friend
23 November 2009. In our last few articles, we have analyzed how the Fed is a private bank, how the Fed and other banks literally create money out of thin air, and how the system is designed to keep the banks intact over and above protecting the government or economy, with a heads-I-win tails-you-the-taxpayer-pay philosophy.
Today we are going to take a deeper look into the boom and bust cycle, as this is a key part of how financiers increase their control and wealth.
We accept booms and busts as simple facts of life. As consumers and as business people we can understand as the Law of Supply and Demand, we think of it as being systemic. This quasi-religious orthodoxy has led us to believe that booms and busts are an essential part of efficient markets, when in fact they contain many man-made (ie banker-made) elements.
Take for example a craze that was popular for a while in Taiwan, Singapore and a few other Asian countries, and eventually spread to Canada and parts of the US:Bubble Tea.
Someone invents Bubble Tea. It becomes popular, maybe because a celebrity starts drinking it, or some kids get into it and a journalist notices it, or nowadays it starts to get Tweeted or posted on Facebook.
Suddenly everyone wants Bubble Tea. Queues form, supplies start to run out, the demand is rampant.
Thinking that Bubble Tea is the next big thing, the current providers get financing to expand, budding entrepreneurs think ‘this is it!’ and open new outlets (with variable quality and price levels), and suppliers ramp up production of raw materials, packaging and other services.
Pretty soon there are Bubble Tea outlets everywhere. For a while, everyone in Bubble Tea Land feels rich, or is working hard to become rich within the next months or years.But then, oh dear, there is a problem.
People start to grumble that the good places have queues, and the bad places are, well, bad.
Even worse, uncool people are now drinking Bubble Tea (after all, who wants to friend their parents on Facebook?).
So the cool people get out of BubbleTeaonia, and start to hang out in cooler places, like dry docks and airline repair hubs, and start drinking engine cleaning fuel.
Then the celebs and journos notice. One of two things happens now. Either the new things becomes a boring mainstream business (such as BreadTalk did with its pork floss bun craze in the same region), or the whole fad dies, as Bubble Tea did.
All those paper Bubble Tea millionaires who dreamt of their first yacht now either have to scramble to create a new business, or they are toast. Many such entrepreneurs get crushed by debt, or thrown onto the refuse dump of the bankruptcy process. If you have been there or are going there – since we are in thebust cycle – you have our sympathy. Remember that this is not the end, you can restructure yourself out of that place - that is what you must focus on now.
You probably think of boom and bust in this way. I know I normally do. Economy is good, we all go out and shop. Economy is bad, we all stop spending. Good = jobs and price rises. Bad = redundancies and price drops.
Now let’s flip the board game around, and sit in the bankers seat. What does it look like when you are the financier?
In the boom times, things are great. You loan money out to government, businesses, investors and consumers, and they pay you various rates of interest. When times are good, the Fed (whom the taxpayers mistakenly believe to be a government regulator, when in actual fact it is a private bank of which you, a named banker, are a shareholder) and other central banks (some government controlled, some private) raise interest rates, so you make good returns.
But what happens during a bust?
When your debtors can no longer pay back the interest you demand – that is, when they default on a debt – you have recourse to their assets. That’s right, what was theirs becomes yours.
Depending on how tight the squeeze is that is placed on the economy and how long the bust cycle lasts for – many years for the current depression in the US and Europe – you need to be able to stay in the game while assets lose value before they come back up, or while they are illiquid – meaning there is no-one who will buy them. If you can do that, you will have loaded up on assets that cost you pennies in the pound. Once the economy recovers and markets become liquid again, you can make a killing either selling those assets or renting them out through mortgages or other secured loans to a whole new round of suckers. Or even better, you can create fancy structured products like Collateralized Debt Obligations (CDOs), earning vast fees while shifting risk onto
The key to this high finance party trick is being able to stay in the game through the crunch. That way, as banker, you are untroubled by recessions. In fact, you positively relish them.
The Fed, and central banks in general, were created specifically to support the private banking system (and not to support citizens or the economy as we had thought), which means helping them to survive through downturns.
If behind-the-scenes actions are not enough, you are likely to get a government bailout or other government support or guarantees to keep you solvent. That is, unless you upset, threaten or just plain annoy some entrenched interests, as Dick Fuld of Lehman Brothers did – but that is another story for another day.
You will get public support, at least grudgingly, because everyone’s jobs, pensions and houses are tied up in the system, so everyone wants to get back to boom as quickly as possible. Which means, of course, helping the banker.
That is why boom and bust is the long-sighted banker’s best friend. The beauty of it is that it is based on supply and demand, and the inherent ambition, greed and fear of the human species. Financiers don’t need to create those things – they just need to amplify them, and then sit back and build their financial fortresses.
Astute observers will have noticed that billions of dollars of bailouts and other government aid have not led to a significant reduction in the rate of foreclosures. Banks are collecting vast swathes of assets on the cheap.
There are ever more ingenious ways for smart money-men to profit from this seeming catastrophe.
The New York Times has reported on a remarkable new scheme where Funds Profit by Reducing Mortgages.
That’s right, the funds are reducing the principal involved, the core loan amount that a homebuyer has taken out, and making a killing. How does this work?
The funds are buying billions of dollars worth of mortgages that have been discounted from their original values. They reduce the size of the mortgages – in order that they can qualify for refinancing by government agencies such as the Federal Housing Administration, who are trying to keep in homes.
All well and good – but then the funds resell these new, government-insured loans to other agencies, such as Freddie Mac and Fannie Mae, pocketing handsome fees in the process.
And the real big win? The risk is now all borne by the taxpayer.
Howard Glaser, a financial industry consultant, is quoted as saying,
From the systemic point of view, there is something disturbing about investors that had substantial short term profit in backing toxic loans now swooping down to make another profit cleaning up the mess.
Cleaning up the mess, we might add, by creating an even bigger taxpayer liability.
Now you may be thinking hold on a minute, it is unfair to blame the bankers. After all, regional banks don’t always have the muscle to push through, and they are being closed down in record numbers.
But this is not about regional banks. They are suckers like the rest of us. They can bow-tied and delivered to larger banks with federal guarantees, just like the mortgages. The weak stutter, the strong hoover up the remains.
This about the top bankers who wield more power than Prime Ministers and Presidents. And even more so, this is about the major hereditary bondholders behind them, who are more important than Kings and Queens.
After all, they have financed both sides of the war when Kings, Presidents and Prime Ministers fight each other.
Like Nathan Meyer Rothschild, the banker funded the British War effort, and who knew in 1815 that Napoleon had fallen at Waterloo 20 hours before the British court did. He spread the rumour that Napoleon had won, watched stocks fall by up to 90%, bought half of England, then watched them rocket once it was realised that the British had beaten France and won dominion over the seas.
By 1825, he had grown so rich that he could supply enough gold bullion to the Bank of England to avert a Financial Crisis. Of course he was the major shareholder in the Bank of England. All across Europe, and later in the US, his brothers and agents performed similar tricks.
That is what caused Abraham Lincoln to say during the American Civil War
The money powers prey upon the Nation in times of peace, and conspire against it in times of adversity. I have two great enemies, the Southern army in front, and the bankers in the rear, of the two the one at the rear is my greatest foe, if they win the Republic is finished.
Today, as assets will plummet in value, remember they will eventually regain and surpass their previous boom time valuations. Ask yourself, who will be minting it when that happens?
Today we are going to take a deeper look into the boom and bust cycle, as this is a key part of how financiers increase their control and wealth.
We accept booms and busts as simple facts of life. As consumers and as business people we can understand as the Law of Supply and Demand, we think of it as being systemic. This quasi-religious orthodoxy has led us to believe that booms and busts are an essential part of efficient markets, when in fact they contain many man-made (ie banker-made) elements.
Take for example a craze that was popular for a while in Taiwan, Singapore and a few other Asian countries, and eventually spread to Canada and parts of the US:Bubble Tea.
Someone invents Bubble Tea. It becomes popular, maybe because a celebrity starts drinking it, or some kids get into it and a journalist notices it, or nowadays it starts to get Tweeted or posted on Facebook.
Suddenly everyone wants Bubble Tea. Queues form, supplies start to run out, the demand is rampant.
Thinking that Bubble Tea is the next big thing, the current providers get financing to expand, budding entrepreneurs think ‘this is it!’ and open new outlets (with variable quality and price levels), and suppliers ramp up production of raw materials, packaging and other services.
Pretty soon there are Bubble Tea outlets everywhere. For a while, everyone in Bubble Tea Land feels rich, or is working hard to become rich within the next months or years.But then, oh dear, there is a problem.
People start to grumble that the good places have queues, and the bad places are, well, bad.
Even worse, uncool people are now drinking Bubble Tea (after all, who wants to friend their parents on Facebook?).
So the cool people get out of BubbleTeaonia, and start to hang out in cooler places, like dry docks and airline repair hubs, and start drinking engine cleaning fuel.
Then the celebs and journos notice. One of two things happens now. Either the new things becomes a boring mainstream business (such as BreadTalk did with its pork floss bun craze in the same region), or the whole fad dies, as Bubble Tea did.
All those paper Bubble Tea millionaires who dreamt of their first yacht now either have to scramble to create a new business, or they are toast. Many such entrepreneurs get crushed by debt, or thrown onto the refuse dump of the bankruptcy process. If you have been there or are going there – since we are in thebust cycle – you have our sympathy. Remember that this is not the end, you can restructure yourself out of that place - that is what you must focus on now.
You probably think of boom and bust in this way. I know I normally do. Economy is good, we all go out and shop. Economy is bad, we all stop spending. Good = jobs and price rises. Bad = redundancies and price drops.
Now let’s flip the board game around, and sit in the bankers seat. What does it look like when you are the financier?
In the boom times, things are great. You loan money out to government, businesses, investors and consumers, and they pay you various rates of interest. When times are good, the Fed (whom the taxpayers mistakenly believe to be a government regulator, when in actual fact it is a private bank of which you, a named banker, are a shareholder) and other central banks (some government controlled, some private) raise interest rates, so you make good returns.
But what happens during a bust?
When your debtors can no longer pay back the interest you demand – that is, when they default on a debt – you have recourse to their assets. That’s right, what was theirs becomes yours.
Depending on how tight the squeeze is that is placed on the economy and how long the bust cycle lasts for – many years for the current depression in the US and Europe – you need to be able to stay in the game while assets lose value before they come back up, or while they are illiquid – meaning there is no-one who will buy them. If you can do that, you will have loaded up on assets that cost you pennies in the pound. Once the economy recovers and markets become liquid again, you can make a killing either selling those assets or renting them out through mortgages or other secured loans to a whole new round of suckers. Or even better, you can create fancy structured products like Collateralized Debt Obligations (CDOs), earning vast fees while shifting risk onto
The key to this high finance party trick is being able to stay in the game through the crunch. That way, as banker, you are untroubled by recessions. In fact, you positively relish them.
The Fed, and central banks in general, were created specifically to support the private banking system (and not to support citizens or the economy as we had thought), which means helping them to survive through downturns.
If behind-the-scenes actions are not enough, you are likely to get a government bailout or other government support or guarantees to keep you solvent. That is, unless you upset, threaten or just plain annoy some entrenched interests, as Dick Fuld of Lehman Brothers did – but that is another story for another day.
You will get public support, at least grudgingly, because everyone’s jobs, pensions and houses are tied up in the system, so everyone wants to get back to boom as quickly as possible. Which means, of course, helping the banker.
That is why boom and bust is the long-sighted banker’s best friend. The beauty of it is that it is based on supply and demand, and the inherent ambition, greed and fear of the human species. Financiers don’t need to create those things – they just need to amplify them, and then sit back and build their financial fortresses.
Astute observers will have noticed that billions of dollars of bailouts and other government aid have not led to a significant reduction in the rate of foreclosures. Banks are collecting vast swathes of assets on the cheap.
There are ever more ingenious ways for smart money-men to profit from this seeming catastrophe.
The New York Times has reported on a remarkable new scheme where Funds Profit by Reducing Mortgages.
That’s right, the funds are reducing the principal involved, the core loan amount that a homebuyer has taken out, and making a killing. How does this work?
The funds are buying billions of dollars worth of mortgages that have been discounted from their original values. They reduce the size of the mortgages – in order that they can qualify for refinancing by government agencies such as the Federal Housing Administration, who are trying to keep in homes.
All well and good – but then the funds resell these new, government-insured loans to other agencies, such as Freddie Mac and Fannie Mae, pocketing handsome fees in the process.
And the real big win? The risk is now all borne by the taxpayer.
Howard Glaser, a financial industry consultant, is quoted as saying,
From the systemic point of view, there is something disturbing about investors that had substantial short term profit in backing toxic loans now swooping down to make another profit cleaning up the mess.
Cleaning up the mess, we might add, by creating an even bigger taxpayer liability.
Now you may be thinking hold on a minute, it is unfair to blame the bankers. After all, regional banks don’t always have the muscle to push through, and they are being closed down in record numbers.
But this is not about regional banks. They are suckers like the rest of us. They can bow-tied and delivered to larger banks with federal guarantees, just like the mortgages. The weak stutter, the strong hoover up the remains.
This about the top bankers who wield more power than Prime Ministers and Presidents. And even more so, this is about the major hereditary bondholders behind them, who are more important than Kings and Queens.
After all, they have financed both sides of the war when Kings, Presidents and Prime Ministers fight each other.
Like Nathan Meyer Rothschild, the banker funded the British War effort, and who knew in 1815 that Napoleon had fallen at Waterloo 20 hours before the British court did. He spread the rumour that Napoleon had won, watched stocks fall by up to 90%, bought half of England, then watched them rocket once it was realised that the British had beaten France and won dominion over the seas.
By 1825, he had grown so rich that he could supply enough gold bullion to the Bank of England to avert a Financial Crisis. Of course he was the major shareholder in the Bank of England. All across Europe, and later in the US, his brothers and agents performed similar tricks.
That is what caused Abraham Lincoln to say during the American Civil War
The money powers prey upon the Nation in times of peace, and conspire against it in times of adversity. I have two great enemies, the Southern army in front, and the bankers in the rear, of the two the one at the rear is my greatest foe, if they win the Republic is finished.
Today, as assets will plummet in value, remember they will eventually regain and surpass their previous boom time valuations. Ask yourself, who will be minting it when that happens?
The Federal Reserve is a Private Bank
19 October 2009. I have to admit the fact that the Federal Reserve is a private bank is not news in the sense that it is not new. After all, the Fed was set up as a private institution in 1913, and modelled on the Bank of England, set up as a private entity in 1694 more than 300 years ago.
But it is news, probably, to you and 99% of the people who will read this article. In fact, right now you might be thinking this is a mis-print, a mis-understanding, or some crackpot conspiracy theory. It is none of the above I'm afraid.
It is a simple statement of fact.
Let's get into this. If you are a student of economics, if you are student of politics, if you just want to know what on earth is going on with this seemingly crazy world, then how and why the Fed operates as a seeming government entity, but in reality is a private concern, is possibly the most important thing you need to know.
As I said, the Bank of England was created as a private entity in 1694, although it was nationalised by the British Government in 1946. Its founder, William Paterson, said
The bank hath benefit of interest on all moneys which it creates out of nothing.
That is the core of what a central bank does. It literally creates money and lends it out at an interest rate. The perfect wealth-generating machine, no sweat.
It is really that simple.
But how can it be? Surely if it really were that simple, if private parties were literally creating money and lending it to us at vast profit, there would be a revolution? Indeed, that is exactly what Henry Ford, founder of Ford Motor Company, said.
It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.
And the reason that people don’t understand it is that it has been purposefully made to seem more complex than it really is, as the famous economist John Galbraith, who died earlier this year, said.
The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.
The truth is actually there all around us, all the time, and yet it is hidden by jargon. Expansion of the money supply? That is the creation of money, pure and simple. We shall see later how that is done. Fed funds rate? The rate of interest that the Fed makes out of money that it has created out of thin air.
Once you have the ability to control the creation of money and you can lend it out at an interest rate that you set, you control everything else.
This includes control of politicians, who can be bought off by campaign financing; the media, who are owned or owe vast amounts of money to banks; and the academics, with the Fed funding the most highly paid jobs and programs for economists. Don’t forget that the current Fed Chairman, Ben Bernanke, is a Princeton Professor.
Perhaps the most successful financiers of all time have been - and are - the Rothschilds, with their American agents, the Morgans. The founder of the House of Rothschild, Mayer Amschel Rothschild, who lived from 1744 to 1812, explained it in this way.
Let me issue and control a nation's money and I care not who writes the laws.
His descendants, the Rothschild brothers, who had taken powerful positions in London, wrote to their associates who were busy taking over New York in 1863,
The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.
The arrogance that dripped off the pen of these Money Masters is palpable, but sadly what they said was true. Most of us don't even suspect that the monetary system we live with is designed for our subjugation, so that others can get fabulously, unbelievably, stinking filthy rich.
The common assumption is that the Fed is a government entity. Why do we assume that? Because that is what journalists also assume and report. That is what politicians assume and report. That is what we are taught in schools and colleges. It is normally stated as simple fact.
The Federal Reserve is talked about as a ‘government regulator’. In fact the current proposals put forward by Treasury Secretary Geithner and Head of the Presidents Economics Council Summers, will make the Fed a super-regulator.
But if you stop and look at the math you will see that it all doesn’t make sense.
We all know that the US government is in debt. It has massive budget deficits, and they are growing bigger. Right?
Now contrast that with the fact the Fed, so you have been told, is part of the government. If the Fed was really a part of the government, could create money at will, and could then lend it out with interest, how could the government be in debt?
In fact what happens is that it works the other way around. The government raises tax money, which is its income. If the tax is not enough for to cover its expenditures (on roads, schools, hospitals, armies, bureaucrats and so on), then it has to issue US Treasuries or government bonds to raise money.
Treasuries and bonds are more complex ways of describing a debt (remember what Galbraith said). The buyer of the bond lends money to Uncle Sam, who then pays interest to the bondholder, until the bond comes due, when the initial amount loaned, the principal, has to be paid back.
Who buys these bonds? Well we all know that the Chinese have become the biggest foreign buyers of US Treasuries. But did you know the Federal Reserve buys vast amounts of Treasuries too?
Here’s how it works.
When the economy needs a push, such as now, the Federal Reserve ‘expands the money’ supply. In other words, it creates new money out of thin air.
It uses this newly created money to buy US Treasuries. These are called ‘Open Market Operations’. The Fed buys the Treasuries that are for sale by bond dealers, in the open or public market.
So the government needs money. It finds people who can loan it that money, for a rate of interest. One of the main suppliers of loans is the Federal Reserve. The Fed prints (literally creates in a computer program) new money, provides that money as a loan to the government, and gets paid the interest.
Brilliant! If you are the Fed, that is. Terrible if you are the government.
If the government controlled its own money supply, maybe it wouldn’t have a deficit at all? And if it has a deficit, who is growing rich off the back of that? How did this happen?
Our Chief Political Economist, David Caploe PhD, often says that economists need to look less at data charts and more at history to understand economics, and this is a case in point.
The struggle over control of money supply has been a part of the American history since the Revolution. You may have heard a famous quote by the Founding Father, Thomas Jefferson.
I believe that banking institutions are more dangerous to our liberties than standing armies.
He was speaking in particular about the ideas of Alexander Hamilton, another Founding Father and the First US Treasury Secretary, who created the First Bank of the United States, the forerunner of the Fed.
Hamilton was from New York where he was both a lawyer and banker, having established the Bank of New York. He was greatly influenced by both the English and French financial systems, and like JP Morgan many years later, he was the American agent for Rothschild bankers. He was particularly influenced by the structure of the Bank of England.
He established the Bank based on a set of non-negotiable principles.
The first was that the Bank should be private, as it is today.
Other principles, which are restrictive to bankers, have gradually been removed. The Bank was forbidden to buy government bonds (whereas today that is central to its operations), would neither issue notes or incur debts beyond its actual capitalization (again, today, increasing the money supply is key), and the Treasury Secretary would be free to inspect its books at any time, whereas today he has no such rights.
In this First Bank, the US government purchased the first $2m tranche of the $10m capital to be raised, and the other $8m was to be raised from the public, i.e. from bankers. That partial government ownership also fell by the wayside.
It also had a charter that expired after 20 years. In the years that followed, there were fierce debates about whether a private central bank should exist or not, and Second and Third Banks were temporarily created and then left unrenewed.
No less a figure than Abraham Lincoln said
The government should create, issue and circulate all currency and credits ... By the adoption of these principles, the taxpayer will be saved immense sums of interest. Money will cease to be master and become servant of humanity.
Think about that, the next time you see another pointless partisan debate about the deficit.
The current Federal Reserve was set up in 1913 under the Federal Reserve Act. It was designed as alender of last resort, with the purpose of keeping the banking system intact. In other words supporting the bankers, not the government, is its over-riding function.
It has been established as a private bank, with 100% of its shareholders being other private banks. No non-bank entity can be shares in the Fed, and you can’t be considered to be a bank until you buy shares.
The Fed then lends the government money (by buying Treasuries), and collects interest.
Out of that interest revenue stream, it pays for its own expenses, and a guaranteed return of 6% to its shareholders, the private banks.
It then returns any surplus profit to the government. That allows it to proudly boast that it is not for profit, that it does not cost the taxpayer a penny, and indeed that it contributes to the finances of the nation.
Yes it does ... but only after the banks have extracted 6% profit for doing absolutely nothing other than lend money to the government that it (the Fed) just created.
Staggering, isn’t it?
But it goes even further, using a Ponzi-like mechanism called Fractional Reserve Banking.
Using this technique, there is a reserve that the Fed keeps, which are generally the US Treasuries it has bought. It can then loan out many times that amount. For example, if its reserve requirement is 10%, it can loan out ten times the value of the money it keeps. It will normally loan this out to private banks (its shareholders) at lower rates of interest than any other person or company can get access to.
Banks in turn do the same thing. According to the Basel accords, banks need 8% capital in reserves. That means they can multiply whatever money they have by 12.5 times, once again creating money out of thin air.
That is what leverage ratio is all about. And that leverage ratio is modest compared to where investment banks have got to now. Lehmans, for example, was up crazy levels like 44 times leverage at certain points before its collapse, and other banks have been busy de-leveraging from those kinds of highs (or more accurately, lows).
Money is being created and lent out for interest revenue streams at all levels of the economy. The banks profit from that, everyone else pays for it.
So where does it all end?
With Financial Crashes of course. And while the system remains in place, the boom and bust cycle gets bigger and bigger with each round. So the next time, the Crash will be even bigger. That's why we need tofix the banks.
Are there alternatives?
Of course there are. The need for monetary reform is not a left wing or right wing issue. This is an issue that concerns all citizens of the US and indeed the world. It attracts support from independent minded politicians across the spectrum, from Bernie Saunders (Too Big to Fail is Too Big to Exist) to Ron Paul (who has been pushing a bill to audit the Fed, which no longer has government oversight, for 20 years, and who is finally making progress).
The Monetary Reform Act that has been championed by Producer of ‘The Money Masters’, Patrick Carmack, with the support of the economist Milton Friedman, is based on two principles:
1. The US Treasury should issue U.S. Notes directly to support government spending – similar to Lincoln’s Greenbacks
2. Increase the reserve ratio for private banks from 8% or 10% to 100%, terminating their ability to create money, and absorbing the funds created to retire the existing national debt, in its entirety
Congress has the power to authorize these two steps. It would destroy the perfect money making machine of the Fed and private banks, and so would be opposed by the interests of money, and all they control – in politics, in the media, even in academia.
But just imagine how different the world would be if the government controlled the money supply, there was no more national debt, and the inflation and deflation cycle were tamed.
More Background on the Fed
You can watch the excellent ‘Money Masters’ video, a 3.5 hour history of money and how central banks were formed.
You can also read more here, at Who owns the Federal Reserve, and Wikipedia’s entries on the First Bank of the United States and the Federal Reserve Act.
But it is news, probably, to you and 99% of the people who will read this article. In fact, right now you might be thinking this is a mis-print, a mis-understanding, or some crackpot conspiracy theory. It is none of the above I'm afraid.
It is a simple statement of fact.
Let's get into this. If you are a student of economics, if you are student of politics, if you just want to know what on earth is going on with this seemingly crazy world, then how and why the Fed operates as a seeming government entity, but in reality is a private concern, is possibly the most important thing you need to know.
As I said, the Bank of England was created as a private entity in 1694, although it was nationalised by the British Government in 1946. Its founder, William Paterson, said
The bank hath benefit of interest on all moneys which it creates out of nothing.
That is the core of what a central bank does. It literally creates money and lends it out at an interest rate. The perfect wealth-generating machine, no sweat.
It is really that simple.
But how can it be? Surely if it really were that simple, if private parties were literally creating money and lending it to us at vast profit, there would be a revolution? Indeed, that is exactly what Henry Ford, founder of Ford Motor Company, said.
It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.
And the reason that people don’t understand it is that it has been purposefully made to seem more complex than it really is, as the famous economist John Galbraith, who died earlier this year, said.
The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.
The truth is actually there all around us, all the time, and yet it is hidden by jargon. Expansion of the money supply? That is the creation of money, pure and simple. We shall see later how that is done. Fed funds rate? The rate of interest that the Fed makes out of money that it has created out of thin air.
Once you have the ability to control the creation of money and you can lend it out at an interest rate that you set, you control everything else.
This includes control of politicians, who can be bought off by campaign financing; the media, who are owned or owe vast amounts of money to banks; and the academics, with the Fed funding the most highly paid jobs and programs for economists. Don’t forget that the current Fed Chairman, Ben Bernanke, is a Princeton Professor.
Perhaps the most successful financiers of all time have been - and are - the Rothschilds, with their American agents, the Morgans. The founder of the House of Rothschild, Mayer Amschel Rothschild, who lived from 1744 to 1812, explained it in this way.
Let me issue and control a nation's money and I care not who writes the laws.
His descendants, the Rothschild brothers, who had taken powerful positions in London, wrote to their associates who were busy taking over New York in 1863,
The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.
The arrogance that dripped off the pen of these Money Masters is palpable, but sadly what they said was true. Most of us don't even suspect that the monetary system we live with is designed for our subjugation, so that others can get fabulously, unbelievably, stinking filthy rich.
The common assumption is that the Fed is a government entity. Why do we assume that? Because that is what journalists also assume and report. That is what politicians assume and report. That is what we are taught in schools and colleges. It is normally stated as simple fact.
The Federal Reserve is talked about as a ‘government regulator’. In fact the current proposals put forward by Treasury Secretary Geithner and Head of the Presidents Economics Council Summers, will make the Fed a super-regulator.
But if you stop and look at the math you will see that it all doesn’t make sense.
We all know that the US government is in debt. It has massive budget deficits, and they are growing bigger. Right?
Now contrast that with the fact the Fed, so you have been told, is part of the government. If the Fed was really a part of the government, could create money at will, and could then lend it out with interest, how could the government be in debt?
In fact what happens is that it works the other way around. The government raises tax money, which is its income. If the tax is not enough for to cover its expenditures (on roads, schools, hospitals, armies, bureaucrats and so on), then it has to issue US Treasuries or government bonds to raise money.
Treasuries and bonds are more complex ways of describing a debt (remember what Galbraith said). The buyer of the bond lends money to Uncle Sam, who then pays interest to the bondholder, until the bond comes due, when the initial amount loaned, the principal, has to be paid back.
Who buys these bonds? Well we all know that the Chinese have become the biggest foreign buyers of US Treasuries. But did you know the Federal Reserve buys vast amounts of Treasuries too?
Here’s how it works.
When the economy needs a push, such as now, the Federal Reserve ‘expands the money’ supply. In other words, it creates new money out of thin air.
It uses this newly created money to buy US Treasuries. These are called ‘Open Market Operations’. The Fed buys the Treasuries that are for sale by bond dealers, in the open or public market.
So the government needs money. It finds people who can loan it that money, for a rate of interest. One of the main suppliers of loans is the Federal Reserve. The Fed prints (literally creates in a computer program) new money, provides that money as a loan to the government, and gets paid the interest.
Brilliant! If you are the Fed, that is. Terrible if you are the government.
If the government controlled its own money supply, maybe it wouldn’t have a deficit at all? And if it has a deficit, who is growing rich off the back of that? How did this happen?
Our Chief Political Economist, David Caploe PhD, often says that economists need to look less at data charts and more at history to understand economics, and this is a case in point.
The struggle over control of money supply has been a part of the American history since the Revolution. You may have heard a famous quote by the Founding Father, Thomas Jefferson.
I believe that banking institutions are more dangerous to our liberties than standing armies.
He was speaking in particular about the ideas of Alexander Hamilton, another Founding Father and the First US Treasury Secretary, who created the First Bank of the United States, the forerunner of the Fed.
Hamilton was from New York where he was both a lawyer and banker, having established the Bank of New York. He was greatly influenced by both the English and French financial systems, and like JP Morgan many years later, he was the American agent for Rothschild bankers. He was particularly influenced by the structure of the Bank of England.
He established the Bank based on a set of non-negotiable principles.
The first was that the Bank should be private, as it is today.
Other principles, which are restrictive to bankers, have gradually been removed. The Bank was forbidden to buy government bonds (whereas today that is central to its operations), would neither issue notes or incur debts beyond its actual capitalization (again, today, increasing the money supply is key), and the Treasury Secretary would be free to inspect its books at any time, whereas today he has no such rights.
In this First Bank, the US government purchased the first $2m tranche of the $10m capital to be raised, and the other $8m was to be raised from the public, i.e. from bankers. That partial government ownership also fell by the wayside.
It also had a charter that expired after 20 years. In the years that followed, there were fierce debates about whether a private central bank should exist or not, and Second and Third Banks were temporarily created and then left unrenewed.
No less a figure than Abraham Lincoln said
The government should create, issue and circulate all currency and credits ... By the adoption of these principles, the taxpayer will be saved immense sums of interest. Money will cease to be master and become servant of humanity.
Think about that, the next time you see another pointless partisan debate about the deficit.
The current Federal Reserve was set up in 1913 under the Federal Reserve Act. It was designed as alender of last resort, with the purpose of keeping the banking system intact. In other words supporting the bankers, not the government, is its over-riding function.
It has been established as a private bank, with 100% of its shareholders being other private banks. No non-bank entity can be shares in the Fed, and you can’t be considered to be a bank until you buy shares.
The Fed then lends the government money (by buying Treasuries), and collects interest.
Out of that interest revenue stream, it pays for its own expenses, and a guaranteed return of 6% to its shareholders, the private banks.
It then returns any surplus profit to the government. That allows it to proudly boast that it is not for profit, that it does not cost the taxpayer a penny, and indeed that it contributes to the finances of the nation.
Yes it does ... but only after the banks have extracted 6% profit for doing absolutely nothing other than lend money to the government that it (the Fed) just created.
Staggering, isn’t it?
But it goes even further, using a Ponzi-like mechanism called Fractional Reserve Banking.
Using this technique, there is a reserve that the Fed keeps, which are generally the US Treasuries it has bought. It can then loan out many times that amount. For example, if its reserve requirement is 10%, it can loan out ten times the value of the money it keeps. It will normally loan this out to private banks (its shareholders) at lower rates of interest than any other person or company can get access to.
Banks in turn do the same thing. According to the Basel accords, banks need 8% capital in reserves. That means they can multiply whatever money they have by 12.5 times, once again creating money out of thin air.
That is what leverage ratio is all about. And that leverage ratio is modest compared to where investment banks have got to now. Lehmans, for example, was up crazy levels like 44 times leverage at certain points before its collapse, and other banks have been busy de-leveraging from those kinds of highs (or more accurately, lows).
Money is being created and lent out for interest revenue streams at all levels of the economy. The banks profit from that, everyone else pays for it.
So where does it all end?
With Financial Crashes of course. And while the system remains in place, the boom and bust cycle gets bigger and bigger with each round. So the next time, the Crash will be even bigger. That's why we need tofix the banks.
Are there alternatives?
Of course there are. The need for monetary reform is not a left wing or right wing issue. This is an issue that concerns all citizens of the US and indeed the world. It attracts support from independent minded politicians across the spectrum, from Bernie Saunders (Too Big to Fail is Too Big to Exist) to Ron Paul (who has been pushing a bill to audit the Fed, which no longer has government oversight, for 20 years, and who is finally making progress).
The Monetary Reform Act that has been championed by Producer of ‘The Money Masters’, Patrick Carmack, with the support of the economist Milton Friedman, is based on two principles:
1. The US Treasury should issue U.S. Notes directly to support government spending – similar to Lincoln’s Greenbacks
2. Increase the reserve ratio for private banks from 8% or 10% to 100%, terminating their ability to create money, and absorbing the funds created to retire the existing national debt, in its entirety
Congress has the power to authorize these two steps. It would destroy the perfect money making machine of the Fed and private banks, and so would be opposed by the interests of money, and all they control – in politics, in the media, even in academia.
But just imagine how different the world would be if the government controlled the money supply, there was no more national debt, and the inflation and deflation cycle were tamed.
More Background on the Fed
You can watch the excellent ‘Money Masters’ video, a 3.5 hour history of money and how central banks were formed.
You can also read more here, at Who owns the Federal Reserve, and Wikipedia’s entries on the First Bank of the United States and the Federal Reserve Act.
Kremlin Intrigues: Russian Economic Reforms or Clan Purges?
Kremlin Wars: Political Infighting with an Economic Twist. Source:Satbir
12 November 2009. The official press has been aflutter with the news that Russian President Dmitry Medvedev used his ‘State of the State’ speech to call for sweeping economic reforms.
The AFP went so far as to report that Medvedev’s plans would target a key legacy of his Kremlin predecessor, Vladimir Putin.
It implies that under Putin’s direction, a vast army of state-sponsored companies were created, staffed by Putin cronies, and now Medvedev was going in to clean them up. Presumably to make Russia more like a western capitalist economy.
As is increasingly the case these days, the official press have got it all wrong. It makes you wonder sometimes how they survive as a business – and of course many of them won’t, but that is a whole other story.
The idea that our good old chum Medvedev is going to clean up naughty Putin’s mess is a western media fantasy. To get a better understanding of what is really happening, you can do worse than to turn to a series of reports that have been coming out ofStratfor, the open source geopolitical intelligence service.
Stratfor have been talking for weeks about the upcoming clan war in the Kremlin, and yesterday released a video reporting saying that the first shots of the war had been fired.
What is crucial to understand, which the AFP clearly hasn’t, is that Putin stands above it all, supported by Medvedev. Putin is still the real power in Russia. He has led the country by employing a Balance of Power strategy, in which he divides the spoils between the two dominant political factions within the Kremlin. He is far and away the most popular politican in Russia.
Medvedev would not and cannot make a movethis size without Putin’s support. On the surface this move is all about economic reforms, but dig beneath the surface and you will find that it is also – and more so – a power struggle that will shape Russia for years to come.
Russia has long been dominated by intelligence figures. The intelligence services are possibly the only organisations that have been able to survive the cataclysmic changes in Russian and Soviet societies over the centuries.
Although the KGB became the FSB, it kept is structures and allegiances intact. Putinhimself came through its ranks. The first and originally dominant faction in the Kremlin is made up of current and former FSB men and their allies, the sivoliki or strong men. This group is led by Deputy Prime Minister Igor Sechin, whose power has increasingly come from the large state-controlled private organisations that the sivoliki run.
But the FSB is not the only intelligence organisation in Russia. The even more shadowy Russian Military Intelligence Directorate or GRU has its own power base, and a deadly rivalry with the FSB.
One of its own is a fascinating figure who has come to be known as the Grey Cardinal. This is the President’s Deputy Chief of Staff, Vladislav Surkov. Surkov is half Chechen and half Jew, so could never become a leader in his own right. He is therefore positioning himself as the Kingmaker behind the scenes. He is rumoured to have brought down Chechen President Dzhokhar Dudayev and oil oligarch Mikhail Khodorkovsky, the former head of YUKOS who now languishes in jail.
Surkov has set his sites on Sechin and his allies. If he can weaken or remove Sechin from his position of power, he may be able to consolidate his control of the levers of power.
Opportunity presented itself in the form of a group of young thinkers rising up the ranks of the Kremlin. These were economists, lawyers and civil servants who felt that the corruption and inefficiency of the state created and shielded behemoths was hurting Russia itself.
Although many are western educated with western leaning ideas, they have also been influenced by the Chinese, who have transitioned much more successfully into the post-Cold War era. They had long been a part of the Kremlin structure, but were blamed (in some cases rightly) for the disasters of the 1990’s, and so had fallen out of favour.
The kids needed a leader and Surkov needed a plan. They made perfect bedfellows. It was Surkov who coined the term for this faction, the civiliki. It is a play on the word sivoliki, with layers of meaning, referring to the civil service, the civil society that the group would like to foster, and even Medvedev’s civil engineering degree.
For months now, the groundwork has been laid for this assault.
In September, Medvedev went public, attacking the big companies, saying
[quote] Bribery, thievery, mental and spiritual laziness, drunkenness are sins insulting our traditions.
Stratfor is reporting that Medvedev has signed official papers allowing the Prosecutor General, Yuri Chaika, with the support of Finance Minister Alexei Kudrin (both civiliki) to go after the state-supported countries that gorged on both government and foreign debt during the bull years.
Furthermore, they have authority to re-structure any company with processes that are deemed to be inappropriate or ineffective.
Such practices include giving large bonuses to board members and executives, tender and public auction violations, unaddressed but well-known inefficiencies in business operations, outsourcing violations, and illegal spending of state funds. These are all standard business practices in Russia, which means that the prosecutor general’s office will be able to “overhaul” whatever company it wants. Furthermore, the prosecutor general will be allowed to set parameters to test companies’ efficiency.
The actual criminal investigations are likely to begin fairly soon; the initial inquiries had already begun in October ... The companies under investigation will be cleared, fined or shut down and turned into joint stock companies — which may be the first step toward potential privatizations.
In the sights of the prosecutor general are Vnesheconombank, Rosnano, Rosoboronexport, VSMPO-Avisma, AvtoVAZ, the Housing Maintenance Fund and the Housing and Utilities Reform Fund. The last two agencies have huge public funds that Sechin has used to finance his operations.
Two key questions remain.
The first is why Putin has endorsed this move. Clearly it upsets the balance of power he has worked so carefully to create. Our sense is that he recognises the real need for economic reform. Always vastly inefficient, a multitude of sins of the state-linked giants were hidden by high oil prices. Once the tide went out, it was clear who was swimming naked.
This sheer excesses involved probably made Putin personally angry. He needed to show the public that he would put Russia first, that he stood above corruption and beyond reproach.
He also needs a strong economy to support his geopolitical agenda. The domesticeconomy does need to be more efficient as the civiliki argue. Foreign capital and companies need to be brought into Russia, but in order to do that Russian companies must be made stronger so they can compete, and legal and financial systems must be improved to attract that capital.
All of these are very compelling arguments, but it brings us to the second question,whether Putin allow Surkov to consolidate his grip on power. It is at this point that their interests diverge.
Putin more than anyone knows the importance of a strong FSB. The very integrity of Russia depends upon it. It is likely that a quid pro quo is enacted, one that will create a newbalance of power.
Just as the civiliki grow their economic power, it is likely that the GRU will lose military and intelligence power to the FSB.
It is a big gamble for Putin and Medvedev to take, but if they can successfully push this agenda through Russia could come out a reinvigorated force on the world stage - which is what both men passionately want.
12 November 2009. The official press has been aflutter with the news that Russian President Dmitry Medvedev used his ‘State of the State’ speech to call for sweeping economic reforms.
The AFP went so far as to report that Medvedev’s plans would target a key legacy of his Kremlin predecessor, Vladimir Putin.
It implies that under Putin’s direction, a vast army of state-sponsored companies were created, staffed by Putin cronies, and now Medvedev was going in to clean them up. Presumably to make Russia more like a western capitalist economy.
As is increasingly the case these days, the official press have got it all wrong. It makes you wonder sometimes how they survive as a business – and of course many of them won’t, but that is a whole other story.
The idea that our good old chum Medvedev is going to clean up naughty Putin’s mess is a western media fantasy. To get a better understanding of what is really happening, you can do worse than to turn to a series of reports that have been coming out ofStratfor, the open source geopolitical intelligence service.
Stratfor have been talking for weeks about the upcoming clan war in the Kremlin, and yesterday released a video reporting saying that the first shots of the war had been fired.
What is crucial to understand, which the AFP clearly hasn’t, is that Putin stands above it all, supported by Medvedev. Putin is still the real power in Russia. He has led the country by employing a Balance of Power strategy, in which he divides the spoils between the two dominant political factions within the Kremlin. He is far and away the most popular politican in Russia.
Medvedev would not and cannot make a movethis size without Putin’s support. On the surface this move is all about economic reforms, but dig beneath the surface and you will find that it is also – and more so – a power struggle that will shape Russia for years to come.
Russia has long been dominated by intelligence figures. The intelligence services are possibly the only organisations that have been able to survive the cataclysmic changes in Russian and Soviet societies over the centuries.
Although the KGB became the FSB, it kept is structures and allegiances intact. Putinhimself came through its ranks. The first and originally dominant faction in the Kremlin is made up of current and former FSB men and their allies, the sivoliki or strong men. This group is led by Deputy Prime Minister Igor Sechin, whose power has increasingly come from the large state-controlled private organisations that the sivoliki run.
But the FSB is not the only intelligence organisation in Russia. The even more shadowy Russian Military Intelligence Directorate or GRU has its own power base, and a deadly rivalry with the FSB.
One of its own is a fascinating figure who has come to be known as the Grey Cardinal. This is the President’s Deputy Chief of Staff, Vladislav Surkov. Surkov is half Chechen and half Jew, so could never become a leader in his own right. He is therefore positioning himself as the Kingmaker behind the scenes. He is rumoured to have brought down Chechen President Dzhokhar Dudayev and oil oligarch Mikhail Khodorkovsky, the former head of YUKOS who now languishes in jail.
Surkov has set his sites on Sechin and his allies. If he can weaken or remove Sechin from his position of power, he may be able to consolidate his control of the levers of power.
Opportunity presented itself in the form of a group of young thinkers rising up the ranks of the Kremlin. These were economists, lawyers and civil servants who felt that the corruption and inefficiency of the state created and shielded behemoths was hurting Russia itself.
Although many are western educated with western leaning ideas, they have also been influenced by the Chinese, who have transitioned much more successfully into the post-Cold War era. They had long been a part of the Kremlin structure, but were blamed (in some cases rightly) for the disasters of the 1990’s, and so had fallen out of favour.
The kids needed a leader and Surkov needed a plan. They made perfect bedfellows. It was Surkov who coined the term for this faction, the civiliki. It is a play on the word sivoliki, with layers of meaning, referring to the civil service, the civil society that the group would like to foster, and even Medvedev’s civil engineering degree.
For months now, the groundwork has been laid for this assault.
In September, Medvedev went public, attacking the big companies, saying
[quote] Bribery, thievery, mental and spiritual laziness, drunkenness are sins insulting our traditions.
Stratfor is reporting that Medvedev has signed official papers allowing the Prosecutor General, Yuri Chaika, with the support of Finance Minister Alexei Kudrin (both civiliki) to go after the state-supported countries that gorged on both government and foreign debt during the bull years.
Furthermore, they have authority to re-structure any company with processes that are deemed to be inappropriate or ineffective.
Such practices include giving large bonuses to board members and executives, tender and public auction violations, unaddressed but well-known inefficiencies in business operations, outsourcing violations, and illegal spending of state funds. These are all standard business practices in Russia, which means that the prosecutor general’s office will be able to “overhaul” whatever company it wants. Furthermore, the prosecutor general will be allowed to set parameters to test companies’ efficiency.
The actual criminal investigations are likely to begin fairly soon; the initial inquiries had already begun in October ... The companies under investigation will be cleared, fined or shut down and turned into joint stock companies — which may be the first step toward potential privatizations.
In the sights of the prosecutor general are Vnesheconombank, Rosnano, Rosoboronexport, VSMPO-Avisma, AvtoVAZ, the Housing Maintenance Fund and the Housing and Utilities Reform Fund. The last two agencies have huge public funds that Sechin has used to finance his operations.
Two key questions remain.
The first is why Putin has endorsed this move. Clearly it upsets the balance of power he has worked so carefully to create. Our sense is that he recognises the real need for economic reform. Always vastly inefficient, a multitude of sins of the state-linked giants were hidden by high oil prices. Once the tide went out, it was clear who was swimming naked.
This sheer excesses involved probably made Putin personally angry. He needed to show the public that he would put Russia first, that he stood above corruption and beyond reproach.
He also needs a strong economy to support his geopolitical agenda. The domesticeconomy does need to be more efficient as the civiliki argue. Foreign capital and companies need to be brought into Russia, but in order to do that Russian companies must be made stronger so they can compete, and legal and financial systems must be improved to attract that capital.
All of these are very compelling arguments, but it brings us to the second question,whether Putin allow Surkov to consolidate his grip on power. It is at this point that their interests diverge.
Putin more than anyone knows the importance of a strong FSB. The very integrity of Russia depends upon it. It is likely that a quid pro quo is enacted, one that will create a newbalance of power.
Just as the civiliki grow their economic power, it is likely that the GRU will lose military and intelligence power to the FSB.
It is a big gamble for Putin and Medvedev to take, but if they can successfully push this agenda through Russia could come out a reinvigorated force on the world stage - which is what both men passionately want.
The Panic Button's Been Hit Again" - Dubai World Defaults on Debt
Dubai's Palm Island - Drowning in Debt?
27 November 2009. Is this the trigger for the next round of the financial crisis?
Dubai has just announced that it will ask for a six months 'standstill' in debt repayments for stated-owned holding company Dubai World, "as a first step towards restructuring". Dubai World has $59 billion in outstanding debt, a large portion of the estimated $80 billion - $100 billion of debt that Dubai carries (148% - 200% of 2007 GDP), off the back of a real estate boom and building binge that the Middle East Capital of Bling carried out over the last decade.
This included the building of the recently opened Burj Dubai, the tallest tower in the world, and three man-made palm-shaped islands off the emirate's coast. The latter was constructed by Nakheel which is owned by Dubai World, and which is at the center of the storm.
Nakheel has $3.52 billion in bonds that were due to be paid up on the 14 Dec 2009. That repayment will be put on hold, as will interest on all other debts. The leaders of Dubai World, Nakheel and other subsidiaries were sacked and replaced a week ago.
The Emirate is trying to shore up confidence by moving to signal support for profitable ports operator DP World. Although DP World is majority owend by Dubai World, it is also listed on NASDAQ. It has $3.25 billion in outstanding bonds, but Dubai World said DP World would not be involved in the restructuring.
RGE Monitor, the economics group started by Professor 'Dr.Doom' Roubini, says that the market views this technically as a default.
So far in 2009, all the maturing government-linked debt of Dubai has been paid off in full, with government funds making up any shortfall in private funds. Yet, given the vulnerabilities of the property sector and challenges of the economic model,Nakheel could be a different story given the government's desire to support only viable companies. Yet, the costs in raising future funds may thus be even more costly. The lack of transparency about corporate and national finances and which debt might be honored, is adding to uncertainty and credit risk.
It is seems that the Dubai Sheikhs are moving to pick and choose which government entities they support - indeed, with property prices having fallen a staggering 50% since their peak, they may have no choice. That means that Nakheel's debts may not be honoured.
The Financial Times Lex column said
The consequences of the standstill, and possible eventual default, are far-ranging.The repayment of Dubai World's US$4 billion Nakheel bond was seen as a litmus test for the emirate's ability to deal with the US$80 billion owed by the sovereign and its state-controlled companies. The emirate's willingness to do this is now in doubt, especially as only an hour earlier it raised $5bn from two state-controlled banks in Abu Dhabi. This was only half what had been expected, but followed $10bn of earlier support from the kingdom's richer neighbor. Foreign creditors are muttering darkly about taking legal action.
There are so many - to borrow a Lex word - darkly fascinating aspects to this story.
Creditors may mutter darkly about taking legal action, but in the UAE the word of the Sheikh's is the law, so if they say it will be re-structured then it will be.
The fact that $5 billion was raised from banks in Abu Dhabimoments before the announcement is instructive on many levels. Abu Dhabi, the vastly richer and less flashy brother Emirate, will provide support to Dubai, as will Saudi Arabia and other Gulf GCC states. However they too will limit their exposure. This $5bn was only half of the $10bn that was expected. The message might have been 'we will supportthe healthy core, but you must trim the toxic excess'.
Other Emirates and GCC members have become increasingly jealous of the attention that Dubai has garnered, but their economic health are intertwined. This support probably comes with strings, and is a may to cutDubai back down to size while attempting to stop the spread of contagion.
The relative calm in the financial marketplaces during the last six months has been entirely dependent on the support of governments, who have been shoring up, bailing out and guaranteeing left right and center. Some governments are simply unable to continue doing that, as their own - sovereign - finances are being stretched to the limit. And some support will need to be wound down to reduce the size and riskiness of sovereign debts that have ballooned across the world.
That calm has been shattered, leading Francis Lun of Fulbright Securities to say "the panic button's been hit again".
Because of Thanksgiving in the US and Eid in Asia and the Middle East, many markets have been closed. However open markets and futures have been taking a battering. Not surprisingly, financial firms and construction compananies have borne the brunt of the bloodshed.
HSBC and Standard Chartered banks, both exposed to Dubai World, are down 5% and 10% respectively on Thursday, as European stocks took their biggest dives since the March rebound, dropping 3% overall.
Dubai's sovereign debt ratings, predictably enough, have been cut, with many state-owned companies now at junk bond levels. Overall, this means that borrowing costs will be about 50% higher. The cost ofCredit Default Swaps (CDSs) for Dubai, insurance against a default, jumped 228 basis points. That means that Dubai is now considered more risky than Iceland, the basketcase of 2008.
CDS prices - and therefore the perceived risk of default - also jumped for Bahrain, Qatar, Turkey, Russia, Greece and Ireland. Lars Christensen of Danske explained that
The contagion spreading from Dubai to the CEE, Turkey and South Africa is more natural than one might think. The worries concerning Dubai focus on potential banking losses and given the fact that the banks with the largest exposure toDubai are also big players in, for example, South Africa, it is only natural that the rand has come under pressure.
Big banks and emerging market currencies are all taking a hit, while the US dollar is rebounding.
Goldman Sachs analysts believe that HSBC could lose $611 million and Stan Chart could be short $177m, Sumitomo Mitsui could lose $225m and Mizuho may be down $100m. DBS Bank in Singapore is also thought to be exposed. When it comes to money, Goldman Sachs are normally all over it, so this is probably a pretty good guess. A lot of banks already have very shaky finances, and they will be hit next year by increasing losses in areas such as commercial real estate and credit card debt. With borrowing costs increasing again, more sovereign debts may be deferred or cancelled.
Can the banks, many of which are only surviving thanks to government largesse, make it through? RGE Monitor's Arnab Das says
The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear.
27 November 2009. Is this the trigger for the next round of the financial crisis?
Dubai has just announced that it will ask for a six months 'standstill' in debt repayments for stated-owned holding company Dubai World, "as a first step towards restructuring". Dubai World has $59 billion in outstanding debt, a large portion of the estimated $80 billion - $100 billion of debt that Dubai carries (148% - 200% of 2007 GDP), off the back of a real estate boom and building binge that the Middle East Capital of Bling carried out over the last decade.
This included the building of the recently opened Burj Dubai, the tallest tower in the world, and three man-made palm-shaped islands off the emirate's coast. The latter was constructed by Nakheel which is owned by Dubai World, and which is at the center of the storm.
Nakheel has $3.52 billion in bonds that were due to be paid up on the 14 Dec 2009. That repayment will be put on hold, as will interest on all other debts. The leaders of Dubai World, Nakheel and other subsidiaries were sacked and replaced a week ago.
The Emirate is trying to shore up confidence by moving to signal support for profitable ports operator DP World. Although DP World is majority owend by Dubai World, it is also listed on NASDAQ. It has $3.25 billion in outstanding bonds, but Dubai World said DP World would not be involved in the restructuring.
RGE Monitor, the economics group started by Professor 'Dr.Doom' Roubini, says that the market views this technically as a default.
So far in 2009, all the maturing government-linked debt of Dubai has been paid off in full, with government funds making up any shortfall in private funds. Yet, given the vulnerabilities of the property sector and challenges of the economic model,Nakheel could be a different story given the government's desire to support only viable companies. Yet, the costs in raising future funds may thus be even more costly. The lack of transparency about corporate and national finances and which debt might be honored, is adding to uncertainty and credit risk.
It is seems that the Dubai Sheikhs are moving to pick and choose which government entities they support - indeed, with property prices having fallen a staggering 50% since their peak, they may have no choice. That means that Nakheel's debts may not be honoured.
The Financial Times Lex column said
The consequences of the standstill, and possible eventual default, are far-ranging.The repayment of Dubai World's US$4 billion Nakheel bond was seen as a litmus test for the emirate's ability to deal with the US$80 billion owed by the sovereign and its state-controlled companies. The emirate's willingness to do this is now in doubt, especially as only an hour earlier it raised $5bn from two state-controlled banks in Abu Dhabi. This was only half what had been expected, but followed $10bn of earlier support from the kingdom's richer neighbor. Foreign creditors are muttering darkly about taking legal action.
There are so many - to borrow a Lex word - darkly fascinating aspects to this story.
Creditors may mutter darkly about taking legal action, but in the UAE the word of the Sheikh's is the law, so if they say it will be re-structured then it will be.
The fact that $5 billion was raised from banks in Abu Dhabimoments before the announcement is instructive on many levels. Abu Dhabi, the vastly richer and less flashy brother Emirate, will provide support to Dubai, as will Saudi Arabia and other Gulf GCC states. However they too will limit their exposure. This $5bn was only half of the $10bn that was expected. The message might have been 'we will supportthe healthy core, but you must trim the toxic excess'.
Other Emirates and GCC members have become increasingly jealous of the attention that Dubai has garnered, but their economic health are intertwined. This support probably comes with strings, and is a may to cutDubai back down to size while attempting to stop the spread of contagion.
The relative calm in the financial marketplaces during the last six months has been entirely dependent on the support of governments, who have been shoring up, bailing out and guaranteeing left right and center. Some governments are simply unable to continue doing that, as their own - sovereign - finances are being stretched to the limit. And some support will need to be wound down to reduce the size and riskiness of sovereign debts that have ballooned across the world.
That calm has been shattered, leading Francis Lun of Fulbright Securities to say "the panic button's been hit again".
Because of Thanksgiving in the US and Eid in Asia and the Middle East, many markets have been closed. However open markets and futures have been taking a battering. Not surprisingly, financial firms and construction compananies have borne the brunt of the bloodshed.
HSBC and Standard Chartered banks, both exposed to Dubai World, are down 5% and 10% respectively on Thursday, as European stocks took their biggest dives since the March rebound, dropping 3% overall.
Dubai's sovereign debt ratings, predictably enough, have been cut, with many state-owned companies now at junk bond levels. Overall, this means that borrowing costs will be about 50% higher. The cost ofCredit Default Swaps (CDSs) for Dubai, insurance against a default, jumped 228 basis points. That means that Dubai is now considered more risky than Iceland, the basketcase of 2008.
CDS prices - and therefore the perceived risk of default - also jumped for Bahrain, Qatar, Turkey, Russia, Greece and Ireland. Lars Christensen of Danske explained that
The contagion spreading from Dubai to the CEE, Turkey and South Africa is more natural than one might think. The worries concerning Dubai focus on potential banking losses and given the fact that the banks with the largest exposure toDubai are also big players in, for example, South Africa, it is only natural that the rand has come under pressure.
Big banks and emerging market currencies are all taking a hit, while the US dollar is rebounding.
Goldman Sachs analysts believe that HSBC could lose $611 million and Stan Chart could be short $177m, Sumitomo Mitsui could lose $225m and Mizuho may be down $100m. DBS Bank in Singapore is also thought to be exposed. When it comes to money, Goldman Sachs are normally all over it, so this is probably a pretty good guess. A lot of banks already have very shaky finances, and they will be hit next year by increasing losses in areas such as commercial real estate and credit card debt. With borrowing costs increasing again, more sovereign debts may be deferred or cancelled.
Can the banks, many of which are only surviving thanks to government largesse, make it through? RGE Monitor's Arnab Das says
The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear.
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