Putin & Petro-Dollar Revolt

November 26, 2004

The following article is available at the authors site,, and goldeagle. I put it up here because I feel it is very worth debating. We've touched on these issues for the past few years. We've written and posted articles about the demise of the Petro-Dollar, and the prospect of a Euro-Dollar, we've also stated over time that Iraq was moving to payment in Euro's before the second war. So this information is not surprising, but it is very well put together and definitely germane to current blogs on D2.

So here it is:

Putin & Petro-Dollar Revolt
by Jim Willie CB

Subtle changes are in the wind on the energy front. As much as some people want to regard Russia as a strong American ally, their behavior on several fronts testifies to the contrary. Some truly staggering developments are underway, not adequately reported. Behind the scenes, covered little by the intrepid US press & media, a meeting was convened two weeks ago in the Urals of Russia. European leaders, and OPEC representatives, and Putin quietly are plotting to establish stronger ties between Europe and Russia in their basis for financial transactions. Putin is adroitly offering to install euro pricing of crude oil, which would surely favor Germany and other large EU nations. He strives to obtain geopolitical concessions from EU leaders, namely a more powerful voice for Russia in world politics.

OPEC appears to be willing and eager to join in new alliances to undermine the US domination from owning the world reserve currency. Enormous consequences follow, which lie completely in US blind spots. A strange contrasting parallel might exist between the United States and Russia, regarding relationships with large energy companies. The USA has evolved into a cooperative collusion with big companies like Halliburton. Russia has broken down into a confrontational situation steeped in confiscation with big companies like Yukos. The USA seems to work constructively with large firms, with governmental support. This is seen in sponsored foreign grain sales, in development of petro-chemical plants, in defense contracts for the military complex, in permissiveness toward software monopolies, in protection of the steel industry, and elsewhere. Russia seems to work in adversarial roles to steal back and forth with their big firms.

Russian legal treachery embodies a big insult to free enterprise and rights to property. One might say Yukos Oil began as a company with stolen property, or cozy deals to gather in several purchases from state-owned regions, or tax scoffs at Russian authorities enabled growth. Fine, whatever. My attention is trained on current methods, which can be aptly labeled as legal warfare, and trends which betray private property. The Yukos tax & fine bill submitted was revealed to be $18.5 billion, which exceeds the company's annual revenue, and goes far beyond the level where embarrassment is profoundly clear. The Russian government has established a modus operandi, i.e. method of operation. A company is targeted for seizure. It is charged with tax evasion. Their assets are then frozen, pending investigations and legal outcomes. Cash flow is interrupted, only to put debt service repayments in jeopardy. The courts declare debt default, a fresh new problem for the targeted company, whose stock declines in value, and possibly sharply. Under financial duress, a deal is cut, as taxes are paid as a fraction of the original demand in return for a sale of large tracts of the company's properties to the Russian govt. Charges are reduced or negotiated along with the distress sale of their property. Such a pattern has shown itself clearly with the Yukos case.

Moreover on the front tied to cooperative agreements, Russia's treachery is wholly evident in its dealings with western firms. Pan Am Silver was severely victimized, via dissolution of a partner firm and reconstitution of a new corporate entity Polimetall with those mining rights, leaving the US firm out in the cold Siberian winter. PanAm Silver appears not to be in line to share profits where silver production is forthcoming. The original company was dissolved, and along with it, all contracts with PanAm. Czarist gamesmanship with western energy companies is now in focus. British Petroleum is at risk with older contracts, while others like Conoco Philips are at risk with newer contracts. British Petroleum could be in the midst of a bold double-cross, for the craziest of sounding reasons. They exceeded licensed production amounts!

To the casual non-discerning observer, Putin appears to offer much needed support to President Bush, as seen in bilateral meetings in Texas that included a horseback ride photo opp. A closer examination reveals more ominous overtones in recent geopolitical events and high-level discussions. The summertime tragedy at the children schoolhouse in Chechnya triggered an international outcry of criticism. The US State Dept issued public statements to the effect that the Russian govt might have acted with too much force, a vivid reminder of their action taken in the Moscow theatre taken hostage a year ago. Each incident, the theater and the school, resulted in over 200 fatal victims. Putin was rankled by the criticism. Last month, after a visit by a leading US legal team to Russia, and upon urgent pleas made to the US State Dept once again, our prestigious ministry issued more criticism of Putin for their harsh legal approach to Yukos and denial of property rights, not to mention due process travesties. Several US firms have longstanding contracts with Yukos, which are now in confusion or jeopardy. Once more Putin has been angered.

Putin is in the midst of taking steps very harmful to the petro-dollar foundation of international commerce. In late October, the Moscow Times reported that President Vladimir Putin might order Russia to switch its trade in oil from denomination in USDollars to the currency flowing in the European Union, the euro. Such a move could have far-reaching repercussions for the global monetary system and its balance of power. Few US-based analysts even discuss the stability of the petro-dollar, which is assumed a fixture never to be tampered with. Not here. Few again discuss the impact of changes in basis to link the USDollar to crude oil. Implications would add fresh momentum and force to the three-year bear market in the USDollar. What harms the USA would enhance the European Union and its economy.

Putin's words and actions are telling, a key revelation of his awareness of how important the stakes are, and how Russia holds a strong poker hand with respect to the United States. At a joint news conference with German Chancellor Schroeder in Yekaterinburg, Putin strongly suggested that Russia could switch its trade in oil from dollars to euros. He said "We do not rule out that it is possible. That would be interesting for our European partners. But this does not depend solely on us. We do not want to hurt prices on the market." The importance of the event was not lost on strategic energy agencies, but hardly made a sound bite within the US financial circles.

The European Union has long objected to the financial hegemony of the United States in its dominance of global commerce and money supply. Nowhere is the battle more bitter than in reaction to the chronic abuse of the USGovt in irresponsible spending disconnected from accountability. Europe has complained for many years about the realized exploitation by the USA in expanding federal spending, domestic tax rate cuts, advocated consumer spending, mortgage finance support, and wartime expeditions. Behind these trends and excesses is the petro-dollar system, whose US$ status as world reserve currency basically means "anything goes." We have taken advantage of the situation, much like an undisciplined teenager who with impunity wrecks cars, collects traffic violation fines, goes on drunken benders, destroys property, assaults people, and expects the world's savings account to pay for all the bills and cleanup costs. The analogy might seem off the mark, but not really. Most foreign trade surpluses find their way quickly into the US Treasury market, the Fanny Mae & Freddy Mac mortgage market, and US corporate bonds which finance their retail credit operations. Resentment has grown perhaps to a critical level, where reaction is to be soon expected.

The Putin statements in the Urals Summit highlight the drawn out campaign by European Union leaders to encourage increased commerce and banking operations in the euro currency. This is a natural response to the USDollar decline. European exports have been forced to endure price hikes from currency exchange impact alone, only to stress their economies. European bank reserves have suffered a decline in value from that same currency exchange impact, only to stress their banking systems. EU leaders obviously seek two changes: more commerce priced in euros, more reserves held in eurobonds. Many regard Russia to be in the enviable position to extract concessions, to demand more prominent geopolitical stature, in return for agreements to broaden ties to Europe. In doing so, they would break links or weaken links to the USA.

It is my analysis that the USA-Russian relationship will degrade into open hostility, but in stages of deterioration. Yesterday a story was reported on a new advanced weapon system to be deployed by Russia. Its targets are uncertain, while the risks are clear. As the world's #1 oil producer, ahead of Saudi Arabia, Russia holds much new clout. An agreement by them to embrace European currency aspirations could provoke a chain reaction among other oil producers, thus stabilizing the crude oil price IN THEIR WORLD. My analytic forecast in May 2003 for crude oil to become priced in euro denomination is slowly taking root, with broad implications. As the eurobonds grow in held reserves, the euro will gradually unseat the USDollar and claim exalted status as the world reserve currency, first in de-facto action then in actual deed. US financial markets seem asleep on the issue and its frightening risk to the US Economy.

In the grand chess game of global clout, Russia wants to become a stronger player on the European continent and in the Middle East. These guys know chess and craft. USA knows force and muscle. At a Helsinki meeting in 1999, Putin showed his original intention to switch oil pricing to euros as part of a grand package which included security issues. According to Alexander Rahr, an expert on Russia at the German Council on Foreign Relations, "Putin is very much interested in changing the structure of OPEC and he cannot do that without the United States… And, he wants to get contracts for the Russian oil industry in Iraq -- for this, too, he needs the United States." We Americans tend to forget the growing commercial ties between Russia and the 300 million people who occupy the European Union plus Eastern Europe. That entire region is slowly being embraced by the EU. Yevgeny Gavrilenkov, chief economic advisor to Putin, said debate is growing on a move to the euro as Russia mulls siding with the EU. "Such an idea is really possible. Why not? More than half of Russia's oil trade is with Europe. But there will be great opposition to this from the United States." The impact to Russia would be much less than to Europe, which now feels the sting of a rising euro. Putin is playing a huge bargaining chip, or else he is bluffing in order to gain inroads into Iraqi oil production contracts. A sure benefit to Europe from a wider acceptance of the new petro-euro would be lower EU interest rates, like what the USA enjoys now (temporarily).

How about a word from Russian big oil? The opinion of Lukoil vice president Leonid Fedun is worthy of note. Three or four giant energy companies dominate in Russia, including Gazprom and Lukoil, rivals of Yukos. Fedun acknowledges that any switch to euro payments would mean only a minor difference in actual transactions and cost changes. For observers it is important to focus not on the small value differences in the commerce, but on the large tectonic shift in the system which links that commerce to the monetary system itself. The political price tag and shift of financial power matter much more. Fedun is quoted by Interfax as saying "We are ready to move to the euro if the country will be included in a visa-free regime with Europe. It's a bargaining chip." By "visa" he means passports, not credit cards. Talk is rampant that Putin is playing his chess pieces in the tradition of smart Russian masters, vying for EU concessions and World Trade Org inclusion.

Bank of Japan Governor Fukui said if a strong rival to the USDollar as a key global currency were to emerge, a stabilizing effect on the global financial system would result. Fukui referred to the dangers associated with allowing any single currency to dominate global commerce, mentioned its disruptive influence, and indirectly criticized the US financial management. Fukui told a recent conference "In such a situation, the economy of the key currency is easily tempted to focus its economic policy on domestic considerations… In today's globalized economy, this could lead to undesirable ripple effects on the rest of the world, through the fluctuations of the external value of the key currency." The message is clear. We have been warned, but our bond market seems in total indifference.

Asians, with their collective $1900 billion in foreign exchange reserves, stand to lose significant capital in their banking systems, since the majority of these reserves are in US$-based securities. Asians, most notably Japan and China, find themselves in an awkward position. If they extend deeper support to the US$, their risk rises. If they diversify or withdraw with more conviction, their capital losses could be staggering. For certain, rhetoric both in Asia and Europe is bubbling over. A severe backlash is coming for the USDollar for its profligate abuse and irresponsible management. We have used the world currency US$ as an agent for bubble generation and Ponzi Economics. This topic receives sparse coverage in the US press & media, with little or no appreciation of importance.

Youssef Ibrahim is the managing director of the Strategic Energy Investment Group in Dubai and a member of the US Council on Foreign Relations. His words included the word "catastrophe" in recent quotes. His voice carries great influence, perhaps as much in the European-Arab petro world as Alan Greenspan in our world. Ibrahim speaks from the world of the petro system and its root in tangible world of trade, while Greenspan speaks from the world of the monetary system and its roots in inflationary financial engineering.

Between 60% and 70% of world currency reserves, from trade surplus and oil export, are kept in the form of USDollars and US$-denominated securities such as USTBonds. Since surpluses are stored in the US$ system, the US Economy enjoys a risk-free benefit, and sidesteps all market mechanisms in response to imbalances. The USA should have interest rates prevail to 3% to 5% above the rest of the world, from a current account deficit basis alone. Instead, Asia and the Persian Gulf emirates keep our rates artificially low. The USA should have a currency exchange rate 20% to 35% lower than current rates, from a current account deficit basis alone.

A world euro foundation would enable development of its poorer eastern provinces such as Hungary, Czech Republic, Poland, Romania, perhaps even the Ukraine and western Russia. In the last several years, the US$ standard has encouraged mindless US consumer spending, oversized home construction, housing speculation, stock & bond speculation, and more. Those days will see a sunset. They represent the legacy of US indulgence, greed, and corruption of the system. Ibrahim warns that "There are already a number of countries within OPEC that would prefer to trade in euros." He speaks of a growing fallout from the Iraqi War, that traditional ally Saudi Arabia might switch also, though its government has not come down firmly on one side. First come the hint from rumblings, then comes the denial. After backroom preparation for change, finally we see the reality of change in action.

What follows must be heard closely, as it carries extreme significance regardless of your political position. Iraq has changed the geopolitical stage and its alignment. "There is a revision going on of its [Saudi] strategic relationship with the United States. Already, they are buying more [French-made] Airbuses," Ibrahim said. "The Saudi Crown Prince [Abdullah Bin Abdul Aziz Al-Saud] visit to Russia was of great significance and the regime is talking about closer cooperation with Lukoil and other Russian companies." One must consider a secondary motive in why the US attacked Iraq, related to preservation of the petro-dollar. Such a view is totally out of the field of vision by American observers and analysts. He went on with"There is a great political dimension to this. Slowly more power and muscle is moving from the United States to the EU, and that is mainly because of what happened in Iraq."

The implications are vast, worthy of discussion. In the last 15 years, the USA has learned through positive reinforcement a bad lesson in economics. The current administration, it appears, operates under the notion that twin deficits are stimulative and positive. SO IS CARDIAC ELECTRICAL SHOCK WITH PADDLE BOARDS STIMULATIVE TO A HEART ATTACK VICTIM FLAT ON HIS BACK. It is not positive. A catastrophe is in the making, as the erosion of the petro-dollar foundation continues inexorably. Such a development will undermined the USDollar in a lost world reserve status. Many inexperienced watchers proclaim SO WHAT ??? False bravado can be the accusation to defiance. To act in isolation with attitude strikes at the heart of the world currency responsibility. To act in isolation with attitude is foolhardy when we are so dependent upon world savings. Well, the answer is that soon, the US Economy will witness the consequences of fiscal and financial irresponsibility in the form of higher interest rates, as well as higher production costs and energy costs !!! No more carte blanche, blank check, free ride, endless freedom, unleashed behavior.

To some degree, a petro-dollar system shields the US Economy from higher prices for crude oil, diesel, heating oil, and gasoline. Foreign nations like Japan, and trading blocks like the European Union must collect large tranches of USDollars in order to conduct transactions for energy supplies. In doing so, they accumulate US$-based reserves. This phenomenon has softened the decline in the USDollar. Removal of the petro-dollar foundation will both push the US$ lower and lift the crude oil priced in US$ higher.

Observers and analysts alike are focused upon terrorist risk. They should pay greater notice to financial retaliation and grand shifts in its foundational structure. The United States owns tremendous superiority on the military battlefield. Our greatest vulnerability is financial, from the foreign dependence on credit supply, from supply chain import of energy and other commodities, and most of all from the continued acceptance of the petro-dollar system which serves as the foundation of the world monetary system. The petro-dollar is showing cracks, decay, and moss. Rivots are loose on the USDollar manhole cover, with chips and rust showing. One can clearly see Russian and Islamic feet attempted to tilt the manhole cover off its rim. Prepare for change.

These topics are fully discussed and analyzed in my private newsletter, and especially in special reports. Two (perhaps three) energy stocks in the portfolio are poised to rise 10-fold. The November issue cites three silver miner stocks which are also set to rise dramatically. In the coming year, look for silver to gain in price far more than gold as investment demand for the white precious metal kicks in. Meanwhile, don't look now but the Canadian Dollar is the strongest currency on earth. The ongoing and future development of its western provinces, the ongoing and future acquisition of their properties by China, these will only serve to gather even more momentum for both the looney currency and commodities.

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Posted by richardlancaster at 08:52 PM | Comments (36)

Memo on the Fed

November 22, 2004


To: SSU Students
From: Jude Wanniski
Re: The Federal Reserve

Everyone talks about “the Fed” and practically everyone in the world knows the chairman of the Federal Reserve Board of Governors is Alan Greenspan. But very, very few people know what it does, what it can do and what it can’t do. Today’s lesson is prompted by the remarks Greenspan made Friday at a banking conference in Frankfurt. Here is the lead of the NYTimes account today:

Alan Greenspan came to the home of the euro on Friday and suggested that the relentless decline of the dollar might well continue, offering little relief to those here who worry that the United States is seeking to gain a competitive advantage for its industries from a weaker currency. In a speech to a banking congress here, Mr. Greenspan, the chairman of the Federal Reserve, said that ballooning foreign borrowing on the part of the United States poses a future risk to the dollar`s value. He said that foreign investors, who help finance the large American trade and budget deficits by buying Treasury securities and other dollar-denominated assets, would eventually resist lending more money to the United States, causing the dollar to fall further.

When this news hit the wires Friday, the Dow Jones Industrials lost 115
points, the dollar fell sharply against the euro and the Japanese yen, the bond market sank, and the price of gold jumped to $448, up $5 an ounce. Nice job, Alan.

What’s going on here? First of all, the Federal Reserve is the only
institution that now has the power to keep the U.S. dollar from losing its purchasing power relative to both foreign exchange and to gold. Popular opinion believes the Fed can “stimulate” the economy by lowering interest rates and that it can slow the economy by raising interest rates. Ask almost any economist and they will say that is so, but that isn’t so. The Fed only has the power to damage the economy by putting more money into the economy than the economy needs or wants or by putting less money into the economy than it needs. When the Fed opens for business on Monday it could keep the price of gold constant at $448, its close on Friday. It would do so by ordering the New York “desk” to sell U.S. bonds from its portfolio to the banks that are authorized to transact with the Fed in this manner, but only if the price of gold trades higher than $448. If gold trades lower than $448, the desk would know enough to buy bonds from the authorized banks, withdrawing “money” from general use and extinguishing it.

If this were Fed policy, there would be no inflation and no deflation, and the dollar would not weaken against foreign currencies (unless foreign governments made the mistake of not creating enough money to keep their currencies stable against gold). Greenspan could go back to Frankfurt and tell the bankers not to worry, the dollar would not weaken further and that it would be safe to buy U.S. government bonds. As it is, he did not do the American economy any favors on Friday. He essentially advised the world NOT to buy U.S. government bonds because they will suffer capital losses when they wish to sell the bonds, getting back dollars that are not worth as much as they are now. Nor did Greenspan do any favors for American taxpayers. If interest rates are going to go up and up, the U.S. national debt, now $7.5 trillion, will have to be refinanced at the higher rates, and the budget deficit will climb accordingly.

It sounds crazy, doesn’t it? Why does Greenspan do it? And get a round of applause from all the major newspapers?

The fact is, SSU students, is that we live in a demand-side world, and in a demand-side world the Fed can stimulate the economy by lowering interest rates and weaken it by raising them. In a supply-side world, if the Fed does not fix the price of gold at an optimum rate, it can only make mistakes that show up as a higher gold price or a lower price. There are certainly times that feel as if the Fed is stimulating the economy, but that is always because it has been mistakenly starving the economy of money (deflation) and then errs is the other direction by giving it more than it is asking for.

In December 1996, I began warning Greenspan that the decline in the gold price from $380 oz to $360 indicated a deflation was beginning. The economy was asking for more money and it was not being supplied. He did nothing about it and all over the world people who owed money in dollars began going bankrupt at a greater rate, having to pay creditors with more expensive dollars. At first Greenspan was cheered because prices of oil and other commodities were falling. By January 2001, when President Bush took over from President Clinton, the deflation had spread. With the gold price down to $265 oz., businesses that still had to meet payrolls at higher wages and could not raise prices to cover the costs had to live without profits and hope for a quick recovery. Or, they went out of business, with their workers joining the ranks of the unemployed.

With all this bad news showing up, here came Greenspan to the rescue,
lowering interest rates. The Fed hacked away until the federal funds rate (which banks use to lend to each other) dropped to 1% in 2003, the lowest it had been since 1958. Meanwhile, the gold price had begun to climb after 9-11, which caused a decline in the demand for dollars. Because the Fed paid no attention to the rising gold price, it did not realize the deflation was ending. It thus did nothing to keep gold from rising, which was a good thing, although it gave the appearance to demand-siders that the lower fed funds rate was doing the trick. That it was “stimulating” the economy.

* * * * *

Prior to the Great Depression of the 1930s, nobody thought of the Fed as an institution that could or should “stimulate” the national economy, or slow it down. It was only supposed to manage the gold standard, the job it was given upon its creation by Congress in 1913. The price of gold was $20.67 oz., which it had been for the previous century except for the “greenback” years of the Civil War. Prior to 1913, the U.S. Treasury kept the gold price at that rate, issuing new paper dollars when the private banks asked for them in exchange for gold. If dollars became unwanted and in oversupply, they would come back to the banks, which in turn could turn them back to the Treasury for gold. The sole purpose of “monetary policy” was to maintain the dollar at that fixed exchange rate with gold. It was a classical, supply-side world.

The Crash of 1929 and the Great Depression that followed turned that world upside-down. The Crash was caused by the unexpected, anticipated passage of the Smoot-Hawley Tariff Act of 1930 and the worldwide Depression unfolded as countries retaliated with their own higher tariffs, currency devaluations and higher taxes. Because it was not understood at the time why the tariff act had caused the Crash (it was not until 1977 that I made that discovery), conventional wisdom eventually converged on the Fed and its management of the gold standard. The Fed was only doing what it was supposed to do. The demand for dollars collapsed in 1930-32 as the tariff took effect and the Hoover administration raised the income tax to balance the budget. Needing less money as a result of the contraction meant roughly one-third of the money vanished in the bankruptcies. The Fed could not replace it because it was no longer needed, which meant every time it issued dollars, their holders would ask for gold.

This led to the idea that the gold standard was holding back recovery!
President Franklin Roosevelt decided to try the idea that with nominal
interest rates being charged by the banks as low as they could get, the
dollar could be made cheaper by devaluing it against gold. So he simply
announced a change in the exchange rate, pushing gold to $35 from $20.67. Sure enough, there was a little immediate inflation, bringing relief to debtors at the expense of creditors, but the Depression only got worse. The little inflation had made the federal income tax even more onerous than it had become upon the repeated increases by Hoover and Roosevelt in their budget-balancing modes.

It was after WWII the idea took hold that the Fed could stimulate the
economy by printing more money actually adding “liquidity” to their
member banks that could become “money” once it was loaned and became bank deposits. The Employment Act of 1946, passed out of fear that the
Depression would reappear with the end of wartime spending, committed the government to manage the economy as never before during its supply-side history. In this new demand-side world popularized by the British
economist John Maynard Keynes, monetary policy as well as fiscal policy
would be dedicated to keeping the unemployment rate down and economic
growth at the necessary levels. In a sense, all the troubles the U.S. has had with economic growth and unemployment over the last half century can be traced to the Employment Act of 1946.

The fact is, the Federal Government cannot stimulate the economy with
either monetary or fiscal policy. It can only make monetary or fiscal
errors that cause deflations and recessions or the combination of the two known as “stagflation.” Or it can cause the economy to improve by removing barriers that it had put into place in the mistaken belief that it was doing good.

Which brings us back to Chairman Greenspan’s Friday comments in Frankfurt that shook the financial and gold markets. Remember since June 30 that he and his fellow Fed governors have been raising that 1% interest rate “at a measured pace” to where it now stands at 2%, on the theory that it will eventually reach a point where it will strike a balance between inflation and employment, not too much or too little of either. That’s the Employment Act of 1946 you hear in the background. But what has happened during this quest for this rate of “balance”? Instead of holding back an inflation that might occur if too many people went to work, all the signs of inflation are increasing!!! The dollar is getting weaker against foreign currencies, the price of gold is soaring, and employment is lagging. The stock market doesn’t look too bad, having recovered somewhat from earlier trials and tribulations. But that’s only if you count the broad indices in nominal dollars. If you convert them to gold, they are not recovered at all!!

So what is a poor Fed chairman to do, but pass the buck? It is the trade deficit and the budget deficit that are causing all these bad things to happen, not the Fed’s policy. And hold onto your hats, folks. If this is true, then the Fed will have to raise rates much higher than they are now, and hope that mythical interest rate will be found sometime soon. But what if he’s going in the wrong direction? Remember the definition of a fanatic… someone who doubles his speed when he loses sight of his goal?

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Posted by manystrom at 01:55 PM | Comments (52)

Economic Depression – Precisely Why and Approximately When

November 09, 2004

by Russ Randall

Why Expect an Economic Depression?
Imagine a herd of buffalo that was enticed by a persuasive Mr. “Buffeenspan” to graze in an easily accessible field of sweet weeds that had no food value. Although the activity was enjoyable, the energy they consumed to grasp and chew the weeds was greater than that gained from digesting them. Now thirsty, imagine next that Mr. Buffeenspan seduces the herd with a large sign having a beautiful oasis painted on it to follow him. Of course, the herd follows in an enthusiastic determined fashion having enjoyed the tasty weeds as a result of his initial guidance. After a journey they finally arrive at the destination oasis only to discover a small mud pit. From a weakened dehydrated state of exhaustion, the heard panics and runs away from Mr. Buffeenspan to follow an “Austrian” Buffalo that will lead them to a less convenient grassland near abundant water without the palm trees, knowing some will die along this now much longer journey. For fear of losing the herd Mr. Buffeenspan quickly paints a more beautiful, deeper oasis on a larger billboard asking the herd to stop the panic driven reversal-in-course and continue following him. That did not work, so finally, Mr. Buffeenspan quickly prints millions of dollars and, foregoing the aid of a helicopter at this juncture, spreads the freshly minted bills in a pathway that will encourage the herd to follow him.

Do we have a significant percentage of people employed in companies that would not be profitable under natural interest rate conditions (i.e. grazing in a field of weeds)? Do we have investors with financial and real estate equity assets who believe they are at fair valuations and will return 10-20% annual valuation increases into the future (i.e. the illusion of an oasis)? What should the herd do?

Most economics will argue recessions and depressions are caused by human or negative-shock aberrations (e.g. oil shock), which can be mitigated or prevented by means of “mechanical” monetary and fiscal intervention. The Austrians will argue just the opposite. Significant booms and busts are caused initially by excessive monetary expansion.

I would further suggest there are two clear human perception and behavior conditions that result from the excessive monetary expansion. Once extreme, they cannot be mitigated by monetary or government intervention means. First is aggregate asset overvaluation including equities, bonds (debt), and real estate. The investor’s belief is that his asset or real estate equity represents a perceived real “future stream of goods and services”. Second is that a significant percentage of work activity (behavior) is performed in “Market Unjustified” companies. These are companies that would not be profitable at “natural” interest rate levels. Regardless of asset values, interest rates, treasury spreads, derivative swap spreads, or any other financial instrument or metric, IF THE TWO BEHAVIOR AND PERCEPTION CONDITIONS NOTED ABOVE ARE AT EXTREME ABHORRENT LEVELS, THEY WILL RAPIDLY CORRECT at some point in time. They cannot be quietly diffused through any “mechanical” monetary means of inflation, deflation, or default.

We must search beneath the surface to understand what drives human behavior and fear in our economic world today. If we discover our work activity (behavior) is driven to areas for the wrong reasons on a large scale, and further, if we discover the “future stream of goods and services” that we are expecting to enjoy is largely an illusion, we become fearful and lose confidence in our governing system, our leadership, and ourselves. The more extreme these conditions become, the more severe will be the depression. Currently we exceed any level experienced during the past century in the noted areas.

We know:
· Wealth is created by work; not by artificially suppressing interest rates and increasing bond and real estate perceived valuations, nor by rapidly expanding the money supply enabling Ponzi momentum schemes to inflate equities far beyond real valuations.

· There is financial peace of mind in those who believe they can depend upon a “future stream of goods and services” from financial and equity assets they possess. Equity valuations generally provide a “medium” piece of mind, since we are conditioned to expect volatility. Bond and real estate valuations generally provide “high” piece of mind, since we are conditioned to believe they are stable. Note: An illusion discovery on bonds and real estate would be very unsettling.

· A business enterprise cannot continue indefinitely losing money, unless it is subsidized.

What do we mean by work activity driven for the wrong reasons and what is the result?

Easy monetary policy and cooperative foreign central banks will incentivize people to start up companies or change investment strategies in existing companies such that they may lose money under natural interest rate conditions. Two stories illustrate the point:

Junior and the Boomers; a Misdirected Work Activity
Once upon a time there was an island inhabited by a young Yuppie, “Junior”, and ten older men, the “Boomers,” nearing retirement. Junior wanted a $10,000,000 house, so he asked the Boomers to build it for him. The Boomers were discussing concerns about Junior’s ability to repay when suddenly “Godspan” spoke from the heavens and said interest rates are officially 0.1%. Elated, Junior quickly calculated that he could afford the house by paying an interest-only monthly mortgage of approx. $1,000, which he could readily afford. Concerned, the Boomers asked Godspan who was going to buy the mortgage-backed securities to fund Junior’s mansion. Godspan responded reassuringly not to worry…. “You would purchase the securities”. Once the house was completed they would each have bonds worth $1,000,000, thus they could all retire as millionaires. The Boomers expressed concern about the yield on the bonds. Godspan again reassured them not to worry…. Just look at the past 20 years…you will either gain in asset valuation, if interest rates drop, or gain income from higher yields, if interest rates rise. Either way you’ll be fine, if you just keep thinking long-term. Begrudgingly the Boomers agreed to buy the bonds. Keeping the vision of achieving millionaire status soon and having faith in the omnipotent Godspan motivated them.

A year later the Boomers had toiled and used their last bit of working-life energy to complete Junior’s mansion. Junior was ecstatic at closing. He gained ownership of the dream house that he could afford. The Boomers were giddy because they were all now millionaires…!

The next day one of the Boomers wanted to cash in his bond and spend some of his hard earned money. Much to his surprise there was no one interested in buying his $1,000,000 bond. He quickly learned that the $100 monthly stream of income was all that he was going to receive. Godspan was nowhere to be found. Godspan’s replacement, an Austrian economist, quickly calculated the real valuation of his $1,000,000 bond to be approx. $25,000 at market interest rates, and informed the bewildered Boomer that the difference of $975,000 was an illusion.

In fact, the Austrian economist explained to the Boomer that all he might physically receive is his 1/10th share of the future stream of Goods and Services that Junior was willing to pay to his creditors. If Junior becomes ill or loses interest in repaying his debt, then the repossessed house could certainly accommodate the shelter needs for the ten Boomers, but they were wondering who was going to maintain the home, grow and serve food, care for them in times of illness, pump the gas, feed the dog, and change tires on their motor homes…

Further, the Austrian explained, if they had not experienced Godspan’s monetary distortion of low interest rates and an abundance of liquidity, they might have actually calculated in advance the investment in a $10,000,000 home for Junior would have been unsound. Further yet, had they invested their time into building a sophisticated robot company that Junior could have run by himself to provide all the needed Goods and Services in the Boomers retirement, the story would be quite different. Now, instead of having a Goods and Service producing enterprise that could serve their needs, they have a massive depreciating home that produces nothing and needs significant maintenance to keep up.

The Boomers soon perished because they could not physically help themselves. Junior reclaimed the home because the owners were gone, and spent the rest of his life as a slave to his castle attempting to maintain and heat it…

Godspan preserved his legacy because he left a note reminding all that had Martha Stewart been more forthright in disclosing her insider trading source, the economy would not have collapsed, and he would not have been compelled to intervene with a flood of liquidity that encouraged the malinvestment and fatal misallocation of resources…

Blunter, Bow, and Arrow; a “Market-Unjustified Enterprise”
During the early years of man’s existence, there existed a small community surviving by individual means.

One day Blunter, an entrepreneur in the community, approached Mr. Bow and Miss Arrow with a wonderful new idea. He knew Mr. Bow had the skill set to fabricate a fine bow that could be utilized for more effective hunting. He also knew Miss Arrow had the unique skill set to fabricate straight and true arrows with precision crafted tips and feathers. Blunter, in his charismatic and persuasive way, convinced Mr. Bow and Miss Arrow to produce the necessary tools that would empower him to become a much more effective hunter. In fact, so much better that he was certain the rewards from his hunting ventures would significantly exceed the group’s total potential individual spoils of chasing field mice and rabbits with sticks.

They all agreed to the plan. Bow and Arrow completed their parts brilliantly with excitement, and in the process expended nearly all of their energy. Blunter then took the fine bow and arrows on his first hunting venture. The next day Blunter returned with nothing; no bow, no arrows, and no game. Surprised, Miss Arrow asked Blunter what happened. Blunter said he shot all of the arrows (expenses) and wore the bow out (capital depreciation), but was not able to see the game well enough to hit any. Miss Arrow exclaimed, “You’re blind?” Blunter said, yes, he could not see very well so that explains his name.

The rest of the community sympathized with Blunter, Bow, and Arrow and subsidized them until they could re-hone their stick skills chasing field mice and rabbits. What course of action could the community now take?

A. Encourage Blunter, Bow, and Arrow to continue with the same process hoping Blunter will get lucky? In the interim they recognize a subsidy(or a “nothing down; “0” interest loan) will be required to keep them alive.

B. Inspired with the concept, encourage Blunter and his team to keep trying as well as encourage Blunter’s identical twin brother, Blunter II, to organize another team and hope for better luck?

C. Encourage Hunter, a clear-sighted hunter, to work as a team with Bow and Arrow to improve the likelihood of success (a “Market-Justified Enterprise”). Blunter would be encouraged to work in some other capacity and generate another idea that might have a successful outcome.

Clearly, market-unjustified enterprises (businesses that do not make a profit under “natural interest rate” conditions) exact a toll on the community. Our hearts and spirits go out to them. However, the guide for their survival should be based upon the successful return of more goods and services than would be generated if the enterprise did not exist. By the way, “C” is the best course of action.

In our two stories the Boomers, Mr. Bow, and Miss Arrow were incentivized to perform the wrong activities. The Boomers trusted Godspan, and Bow and Arrow trusted Blunter. The Boomers’ construction company and Blunter’s hunting company were Market Unjustified. Neither company, each for different reasons, will survive long term.

1. They must stop the work activity they are doing and redirect to a Market Justified enterprise (i.e. profitable at "natural" interest rates). The Austrian economists refer to this as malinvestment and misallocation of resources. When easy monetary policy is in force long enough to become systemically imbedded into our financial infrastructure (e.g. GSE's), then extraordinary numbers of companies spring up or change to become dependent upon artificially low interest rates. The transition return to economic health will be a long and painful process as all economy metrics overshoot their averages in negative directions before returning to normalcy


2. The balance of the community must agree to permanently subsidize them. A critical point here is that during the formation stage of these companies a future subsidy by the community is not anticipated, thus there is no structural support planned in the community budget. An eventual tax increase must pass. Of course, another alternate is to subsidize them via inflation, such that all holders of dollars and dollar-based assets indirectly fund the subsidy.

Why Did Such an Extreme Bubble Form?

· Political survival. The collapse of a bubble would be devastating to a party in power; so all efforts are directed to avoid such.

· Federal Reserve Bank directives. Their directive is to adjust monetary policy to achieve stable employment and prices. Unfortunately, the money supply expansion has channeled into financial and real estate equity assets globally, and has not become visible in our CPI indexes due to competitive pricing pressures.

· The inherent optimism of people. Our natural tendency is to believe asset valuations will only increase in the future, even if we are in extreme bubble conditions.

Graphically, What Does the Illusion Look Like?

Note: There are two key issues: One is asset overvaluation, and second is the overly optimistic expectation of annual asset value growth. The conditions combine to create a “double whammy” expectation of future wealth.


“Expected” by the Average Investor:
· An expected “real” asset valuation growth of 5% annually; excluding inflation.

“Reality Based upon History”:· A -21% current asset base adjustment to reflect historical asset-to-GDP ratios.
· A real productivity increase of 1.7% annually going forward
· An annual employment increase of 0.57% (1.0% increase in population less a 0.43% dependency ratio adjustment).
· An annual repayment of foreign investment and debt beginning in 2009 @ 2.0% of today’s outstanding net direct investment and debt.


What Conditions Were Necessary for Our Bubble?
There are three key conditions that were critical to be in place for the upcoming depression, which enabled our asset valuation illusion, and our extreme work activity misallocation into Market Unjustified businesses:

· Fiat money. It would be virtually impossible for a significant bubble to form, if money was based upon a commodity of value (e.g. gold, silver, etc.) without a fractional reserve system.

· Cooperative foreign central banks. As long as their countries are motivated to produce goods and services to satisfy an endless US demand for their products, and their citizenry is content to accept US "paper investments" with higher perceived yields and valuation increases than alternatives, then they will remain invested in US dollar based assets

· A baby boomer population profile. A substantial support base of working people supplying those not working enables a condition where a financial asset bubble may form without being tasked or tested for value. Once the ratio of dependency shifts, and the real goods and service production capability diminishes, then there will be a more realistic valuation placed upon assets based upon the actual profit increment of the stream of goods and services they produce.

When Will the Depression Start?
Why will the illusion discovery happen in 2008?
As long as the ratio of those not working to those working is decreasing or stable, then it is possible to have an ever-expanding bubble. The stream of goods and services may continue unfettered transferring at modest CPI increases as long as most excess money created expands financial asset and international reserve asset bubbles instead. When the dependency ratio begins to increase in 2008 as the Boomers start to retire, the attempt to cash in on the illusory assets will bring the bubble to light. The actual profitable stream of goods and services yielded from an asset will be surprisingly low, thus the recognition of a lower valuation will become apparent.

What will be the expectation of foreigners holding US assets?
They will begin their attempts to cash in the "fruits of their labor" beginning in 2008 as well because of their own "Boomer" population profiles. They will expect to receive the same real value in return for goods that they have shipped to the US, plus a reasonable return.

Will the “X” and “Y” “Gen’s” be able to repay the foreign obligations or expectations in real terms?
No. Since we are operating at a current deficit rate of nearly 6%, the US dollar is at least 100% overvalued based upon empirical experience from the Plaza accord where the dollar exchange value dropped 50% (I.e. 100% overvalued) from 1985 to 1988. As a result, the current account trade deficit reduced from 2.8% (in 1985) to 0% (in 1991). Additionally, the US equity, bond, and real estate markets are approx. 35% overvalued. Combining both factors, the foreign investors will only receive 20-30% of their investment in real terms, and will become extremely upset.

What Can We Do?
Can the asset illusion be diffused over the next 26 years when the last Boomer retires?
Not likely. Once it is discovered, people will tend to "run for the gold" or tangible assets in place of fiat currency or "paper assets" depleting in value. Bubble formations can be gradual, because the conditions that create them are very popular, and resistance to their formation is easily suppressed. However, upon discovery it is a natural human reaction to act quickly and liquidate the paper assets before value drops significantly.

“To Do” List:
· Consider elimination of the Federal Reserve Bank.
· Recognize we have approx. 30% of our employees working in Market Unjustified enterprises, thus….
· The noted employees will have to either stop what they are doing and go work for a Market Justified enterprise, or reduce their wages to become a Market Justified enterprise. As with any bust, there will be a devastating impact on nearly all companies. Unfortunately, the economic chart trends will swing far below the historic median for most metrics before legitimate recovery begins.
· Get out of the business of interest rate manipulation by letting the free market set rates.
· Return to a gold and/or silver based monetary system with no fractional reserve. This will have a devastating impact on the dollar exchange rate, but must be done.
· Above all, do not continue with the traditional Keynesian government intervention means that created the bubble we now have to diffuse, and the fatal misallocation of resources that must be corrected.
· “Fasten your seatbelts” and support a rapid malinvestment and resource misallocation cleansing that will get us back on track as quickly as possible without deteriorating to a permanent socialistic, tyrannical, or chaotic state. Hopefully, a renewed respect for capitalism, property rights, rule of law, free markets, and a cooperative spirit of pursuing a common purpose will flourish…!

By by Russ Randall

Posted by manystrom at 03:06 PM | Comments (52)

Skull & Bones Win Election!

November 03, 2004

Well Even I Predicted The Outcome Of This Election Correctly!!

I've been "Following the Money" now for quite a few years, tracking the heritage of the elites and their affiliations, looking in to the workings of think-tanks, family foundations, institutions, secret societies, freemasonry, interlocking corporate directorships, public to private career moves, and little talked about organizations like the CFR, Tri-lats, Bilderbergs & Skulls. It's all fascinating stuff, shrouded in a thick mist of conspiracy theory, LaRouchian machinations, UFO's and devil-worship!! It's almost laughable but there are too many serious overtones to it all to just write it off as irrelevent. Indeed it may be THE most relevent topic, but it's too hard to get underneath to know!

The job of US President should be transparent. An incoming President should have to swear allegiance to the people and the Constitution, and remove himself from membership in, or affiliation with, ANY secret organization. This is basic, obvious and fundamental for a FREE society. Hidden special interests are the death of freedom over time.

Here's some further information on what I'm talking about here:

Election a 'win-win situation' for secretive Bonesmen
By Kris Millegan

Both major presidential candidates are members of a small secret society at Yale University - the Order of Skull & Bones. On different Sunday mornings, "Meet the Press" anchor Tim Russert asked George Walker Bush and John Forbes Kerry if they could talk about their memberships in this 172-year-old clandestine club.

Tossed off with nervous laughter, their answers were, "It's so secret that I can't talk about it," and, "Not much, because it's a secret."

Should citizens be concerned about this unwillingness to discuss an elite organization? Is it relevant? Don't we all have the freedom to fraternize with whom we please? Aren't Lions, Kiwanis, Elks and similar organizations used by many in pursuit of business and political connections? So what?

William Huntington Russell founded the Order of Skull & Bones in 1832 after he returned from studies in Germany. The Russell family's business - Russell & Co. - was the premier American opium shipper and the third largest in the world. In the 1830s, opium became the world's largest commercial commodity, and the maneuverability and speed of the American clipper ships laid foundations of great wealth with the smuggling of opium into China. Many of the fortunate sons of Russell & Co. families were sent to Yale and were "tapped" into the Order of Skull & Bones.

Fifteen new members are chosen each year from the junior class at Yale. After initiation rites that include simulated murder, the kissing of a skull and chants about the devil and death, they are known as Knights during their senior year. Reportedly, members hold weekly sessions in which they talk about their sex lives, which some say helps forge a strong fraternal bond. The initiates have privileges beyond those enjoyed by fellow students - including a near million-dollar clubhouse, a private island and access to a distinguished and powerful cadre of fellow Bonesmen.

Three Bonesmen have occupied the Oval Office: William Howard Taft (who also served as chief justice of the Supreme Court), George Herbert Walker Bush, and his son. Members have included more than 20 U.S. senators, three U.S. Supreme Court justices and myriad lesser officials.

The order is legendary in its promotion of its members above all others. As a Yale alumnus noted in 1905 about the senior secret society system at Yale, "the best man doesn't always win."

George W. Bush has appointed 11 fellow Bonesmen to government jobs: Evan Griffith Galbraith, adviser to the U.S. mission to NATO; William Henry Donaldson, chairman of the Securities and Exchange Commission; George Herbert Walker III, U.S. ambassador to Hungary; Jack Edwin McGregor, member of the advisory board of the St. Lawrence Seaway Development Corp.; Victor Henderson Ashe, member of the board of directors of the Federal National Mortgage Association; Roy Leslie Austin, U.S. ambassador to Trinidad and Tobago; Robert Davis McCallum Jr., associate attorney general; Rex Cowdry, associate director of the White House's National Economic Council; Edward McNally Sr., associate counsel to the president and general counsel to the Office of Homeland Security; David Batshaw Wiseman, an attorney in the Justice Department's Civil Division; and James Emanuel Boasberg, an associate judge on the Superior Court of the District of Columbia.

Taft and George H. W. Bush were both one-term presidents. George W's secret name in the order is reported to be "Temporary." Will he be the first member of the Order of Skull & Bones to serve two terms, in spite of his secret name, or will he hand the reins of government to his rival Bonesman, John Kerry?

This is the first time that both major candidates are members of Skull & Bones. There has been little discussion of the order in Democratic and Republican circles. The Washington Post assigned Bonesman Dana Milbank to cover the election, and he hasn't brought the question up. Even Ralph Nader has been quiet. Is this because Nader's sometimes lawyer and long-standing associate, Donald Etra, is Skull & Bones 1968, and a good friend of George W. Bush?

Author Antony Sutton in the 1980s called attention to the order's predilection for trying to politically influence both the left and the right. Is our current presidential election a contest between the two best candidates for the job, or a cynical dialectic ploy for control of our republic and our collective future?

As a Bonesman is reported to have said about Bush vs. Kerry, "It's a win-win situation."

Maybe it is for the order.

But what about the rest of us?

Kris Millegan ( lives in Noti and works as a writer and publisher. His book, "Fleshing Out Skull & Bones," is available from


I'd like to hear an argument for why a US President should be allowed to put his secret society membership BEFORE his commitment to the people of America who he supposedly represents?

Cheers Rich

Posted by rlancaster at 05:18 PM | Comments (297)

It Ain't Over! Count the Votes!

From our friends at the Daily Kos:

Bush is currently leading in Ohio by 136,221

If there are 250,000 provisional ballots outstanding. The highest number I've seen.

And 90% of those ballots are good, as they were in 2000. That leaves 225,000 votes.

If 85% of those ballots prove to be for Kerry, about the number that Gore got in 2000. That leaves us with 191,250, giving us a lead of 55,029.

If there are only 200,000 provisionals, following the same calculation would leave us with a lead of 16,779.

If the provisional ballots are only 175,000 that leaves us with a deficit of -2,346 that will leaves us in a position to get an automatic statewide recount.

Or, to put it another way, an automatic recount is triggered by a margin of 0.25% or between 13,000 and 16,000 votes.

Posted by manystrom at 04:02 PM | Comments (22)

Wake Up America! Bush Playing Right into al Qaeda's Plan

November 02, 2004

Tuesday, November 2, 2004 Posted: 0107 GMT (0907 HKT)
Full Link:

(CNN) -- The Arabic-language network Al-Jazeera released a full transcript Monday of the most recent videotape from Osama bin Laden in which the head of al Qaeda said his group's goal is to force America into bankruptcy.

Al-Jazeera aired portions of the videotape Friday but released the full transcript of the entire tape on its Web site Monday.

"We are continuing this policy in bleeding America to the point of bankruptcy. Allah willing, and nothing is too great for Allah," bin Laden said in the transcript.

He said the mujahedeen fighters did the same thing to the Soviet Union in Afghanistan in the 1980s, "using guerrilla warfare and the war of attrition to fight tyrannical superpowers."

"We, alongside the mujahedeen, bled Russia for 10 years until it went bankrupt and was forced to withdraw in defeat," bin Laden said.

He also said al Qaeda has found it "easy for us to provoke and bait this administration."

"All that we have to do is to send two mujahedeen to the furthest point east to raise a piece of cloth on which is written al Qaeda, in order to make generals race there to cause America to suffer human, economic and political losses without their achieving anything of note other than some benefits for their private corporations," bin Laden said.

Al-Jazeera executives said they decided to post the entire speech because rumors were circulating that the network omitted parts that "had direct threats toward specific states, which was totally untrue."

"We chose the most newsworthy parts of the address and aired them. The rest was used in lower thirds in graphics format," said one official.

U.S. intelligence officials Monday confirmed that the transcript made public Monday by Al-Jazeera was a complete one.

As part of the "bleed-until-bankruptcy plan," bin Laden cited a British estimate that it cost al Qaeda about $500,000 to carry out the attacks of September 11, 2001, an amount that he said paled in comparison with the costs incurred by the United States.

"Every dollar of al Qaeda defeated a million dollars, by the permission of Allah, besides the loss of a huge number of jobs," he said. "As for the economic deficit, it has reached record astronomical numbers estimated to total more than a trillion dollars.

The total U.S. national debt is more than $7 trillion. The U.S. federal deficit was $413 billion in 2004, according to the Treasury Department.

"It is true that this shows that al Qaeda has gained, but on the other hand it shows that the Bush administration has also gained, something that anyone who looks at the size of the contracts acquired by the shady Bush administration-linked mega-corporations, like Halliburton and its kind, will be convinced.

"And it all shows that the real loser is you," he said. "It is the American people and their economy."

As for President Bush's Iraq policy, Bin Laden said, "the darkness of black gold blurred his vision and insight, and he gave priority to private interests over the public interests of America.

"So the war went ahead, the death toll rose, the American economy bled, and Bush became embroiled in the swamps of Iraq that threaten his future," bin Laden said.

U.S. government officials said Friday that the tape appeared to be authentic and recently made. It was the first videotaped message from the al Qaeda leader in nearly three years.

Posted by manystrom at 02:09 AM | Comments (26)
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