382 lines
19 KiB
Plaintext
382 lines
19 KiB
Plaintext
|
||
|
||
Conspiracy Nation -- Vol. 1 Num. 11
|
||
======================================
|
||
("Quid coniuratio est?")
|
||
|
||
|
||
-----------------------------------------------------------------
|
||
|
||
THE MONETARY SYSTEM IS COLLAPSING
|
||
|
||
(The following testimony was submitted on April 13, 1994 to the
|
||
Committee on Banking, Finance and Urban Affairs, of the U.S.
|
||
House of Representatives. It was written by Christopher White,
|
||
contributing editor of Executive Intelligence Review [EIR]
|
||
magazine, and Richard Freeman, of EIR's economics desk.)
|
||
|
||
[From the May 30, 1994, *The New Federalist*.]
|
||
|
||
+ + + + + + + + + + + + + + + + + + + + + +
|
||
|
||
Mr. Chairman,
|
||
|
||
It is now just over one year ago since Lyndon LaRouche, the
|
||
editor of our magazine, put forward a March 9, 1993 proposal to
|
||
levy a 0.1 percent tax on the sale of all the various mutations
|
||
of financial transactions known as "derivatives."
|
||
|
||
The intent of this proposal was to permit constitutionally
|
||
mandated institutional authorities to regain control over
|
||
"runaway" deregulated electronic financial market places. The
|
||
proposal will determine what the magnitude of the threat posed to
|
||
the generality by derivatives is; and, to create the
|
||
circumstances in which the structure of derivatives markets might
|
||
be properly investigated. Moreover, the tax constitutes a precise
|
||
means to surgically lance and dry out the derivatives bubble, to
|
||
eliminate it within weeks.
|
||
|
||
The derivatives market, in which there are $16 trillion in
|
||
derivatives holdings held by commercial banks and financial
|
||
institutions in the United States, with an annual turnover
|
||
trading volume of $300 trillion, is the greatest bubble in
|
||
history. It dwarfs the Mississippi Bubble in France and the South
|
||
Sea Island bubble in England. This bubble, like a cancer, has
|
||
penetrated and taken over the entirety of our banking and credit
|
||
system; there is no major commercial bank, investment bank,
|
||
mutual fund, etc. that is not dependent on derivatives for its
|
||
existence. These derivatives suck the life's blood out of our
|
||
economy. Our farms, our factories, our nation's infrastructure,
|
||
our living standards are being sucked dry to pay off interest
|
||
payments, dividend yields as well as other earnings on the
|
||
bubble.
|
||
|
||
Need for action has long been evident. In testimony by these two
|
||
authors to this committee on October 28, 1993, entitled, "Tax and
|
||
Dry Out the Derivatives Market, Don't Regulate It," we stressed
|
||
the necessity of the 0.1 percent tax. On March 28, 1994, the
|
||
chairman of this committee, Rep. Henry Gonzalez [D-Texas],
|
||
stated, "I think ultimately the only way you could stop, in fact,
|
||
overnight [derivatives trading activity, is] if you imposed a
|
||
1/10th of 1 percent tax on those transactions. You'd see an
|
||
immediate deflation."
|
||
|
||
However, what the violent events over the first three months of
|
||
this year prove, is that while LaRouche's March 9, 1993 proposal
|
||
is still vitally essential, it, by itself, will not be sufficient
|
||
to control the emerging situation. Events have far advanced. *The
|
||
derivatives transactions which are subject to taxation are in the
|
||
process themselves of collapsing. What is needed now is an answer
|
||
to the question: Is there life after the derivatives bubble has
|
||
been and gone?*
|
||
|
||
That which was feared, is in progress. That which the proponents
|
||
of derivatives insisted could not come to pass, because of their
|
||
sophisticated methods of "risk assessment" has come to pass. The
|
||
supposed liquidity of the market, allegedly proved by computer
|
||
simulations, dried up overnight. The mere catalogue of wreckage
|
||
shows losses of the size that even a few years ago would have
|
||
been unthinkable: from the $600 million lost by speculator George
|
||
Soros's Quantum Fund on one day, Feb. 14, 1994; to the $1 billion
|
||
loss of Steinhardt Management's hedge fund; to the early April
|
||
bankruptcy liquidation of the entire market holdings of the $600
|
||
million in assets, exotic mortgage securities derivatives of the
|
||
David J. Askin's Hedge Funds. This same process of mega-losses is
|
||
occurring around the world.
|
||
|
||
To those who congratulate themselves that they "got through" this
|
||
period, we offer this timely warning: Those whom the gods would
|
||
destroy, they first make mad. *This is a systemic crisis; we are
|
||
now in the midst of an ongoing, snowballing systemic collapse, of
|
||
which the events of the first quarter of 1994 are merely a tiny
|
||
foretaste.*
|
||
|
||
It is time that Congress, through its appropriate committees,
|
||
begins to discuss the question of how our national monetary and
|
||
financial affairs might be reorganized such that national life
|
||
can continue, after the collapse of the biggest financial bubble
|
||
in human history has run its course.
|
||
|
||
For which reason we append to this statement the vitally
|
||
necessary draft legislation intended to reorganize the Federal
|
||
Reserve System, through the re-establishment of a National Bank,
|
||
the Third such National Bank in the history of the Republic. This
|
||
is the first order of business.
|
||
|
||
Such a proposal is consistent with Article 1, Section 8 of the
|
||
Constitution, in which Congress is allotted the power to raise
|
||
taxes and create money and credit.
|
||
|
||
With an ongoing financial collapse, the time has come to
|
||
reappropriate those powers which from the beginning were
|
||
allocated, for cause, to the constitutionally created branches of
|
||
government, that the General Welfare provisions of the
|
||
Constitution might once more inform the laws of the land in
|
||
substance as well as intent.
|
||
|
||
What is now under way can only be efficiently addressed by act of
|
||
government. There is no private agency which can provide the
|
||
volume of credit required to ensure the continued functioning of
|
||
national life. There will shortly be no private agency with
|
||
credit anywhere in any case. Federal government must again become
|
||
the sovereign source of credit, in the form of Treasury note
|
||
issues, providing banking agencies with the means of issue to
|
||
finance the economic activity of the country, thereby eliminating
|
||
the subversive "discounting" practices of the Federal Reserve,
|
||
and the so-called "Keynesian multiplier" methods of money
|
||
creation through manipulation of federal debt.
|
||
|
||
The destruction of inflated financial assets over the first three
|
||
months of the year to date exceeds the havoc wrought by the stock
|
||
market crash of October 1987. The nominal bill for such "losses"
|
||
during the first quarter will, in the not-too-distant future, be
|
||
confirmed to start at about $2 trillion. Such "losses," under
|
||
detailed investigation, will turn out to be about 14-15 percent
|
||
of the notional value of all derivatives contracts traded,
|
||
swapped, or whatever else it is they do with them.
|
||
|
||
If we, as a country, were not so idiotically attuned to the day-
|
||
by-day, minute-by-minute jerking around of the "Down-Jones" Index
|
||
as our basic indicator of the economic health of the universe as
|
||
a whole, this elementary reality would have been grasped already.
|
||
|
||
The initial losses of the first quarter are only the beginning.
|
||
There is the proverbial other shoe left to drop. The "blow off"
|
||
of the remainder of the bubble is going to make clear that this
|
||
country has been living in the equivalent of "loud cuckoo land"
|
||
for about a generation. Over the course of that generation, there
|
||
have been no "recoveries," there has been no "rebuilding of
|
||
competitiveness."
|
||
|
||
There has been looting and asset stripping. There has been
|
||
economic depression. That is shortly to come to the fore in the
|
||
kind of rude way which our accumulated national fantasy life, and
|
||
its televised mirror image, will find impossible to ignore.
|
||
Obviously those who most violently dispute this now will soon
|
||
find themselves among the ranks of the most rudely shocked.
|
||
|
||
The turmoil of the last three months is not a "market
|
||
correction," despite all the analysts and investment strategists
|
||
who proclaim about their proverbial 10-15 percent decline blowing
|
||
the froth off an over-heated "bull-run." Nor is it merely a
|
||
matter internal to the market. What is going on is without
|
||
precedent in human history.
|
||
|
||
There is a global financial collapse in progress -- a global
|
||
financial collapse which was already in progress before the
|
||
beginning of the year. From 1993 onward, from Chile, and the case
|
||
of the Codelco raw materials company; to Argentina, and its bond
|
||
and stock market; to Venezuela and the case of Banco Latino; to
|
||
Spain and the multi-hundreds of millions loss of that country's
|
||
fourth-largest bank, Banesto; to the United Kingdom and the Hong
|
||
Kong and Shanghai Bank-owned Midland Bank; to France and the case
|
||
of the multi-billion dollar loss at Credit Lyonnais; to Germany
|
||
and the $1 billion plus loss at Metallgesellschaft; to the
|
||
reputed several billion dollar losses at Malaysia's central bank,
|
||
and the banks of Indonesia.
|
||
|
||
What is developing is global in scope. The losses are all related
|
||
to derivatives trading. Sound companies and industrial concerns
|
||
are being sacrificed to the vagaries of derivatives. Germany's
|
||
Metallgesellschaft, the country's 14th largest industrial
|
||
concern, will now lay off one-fifth of its work force, and asset-
|
||
strip its operations to pay for the loss.
|
||
|
||
This committee is correct to highlight the activities of the
|
||
hedge funds. They engage in the most wildly speculative behavior.
|
||
Hedge funds are, for the most part, offshore, unregulated
|
||
gambling casinos, relying on mountains of leverage. They are
|
||
specifically constituted, by having 99 or fewer U.S. investor
|
||
partners, to circumvent the Investment Company Act of 1940, which
|
||
would otherwise regulate them. Hedge funds work on anywhere from
|
||
5 to 1, up to 50 to 1 leverage. That means for every $1 billion
|
||
of the hedge fund's own money which it has under management, it
|
||
borrows from $5 to $50 billion. The over-300 hedge fund's have
|
||
$75 billion in assets under management, meaning they could
|
||
control an astounding amount of publicly traded bonds and stocks
|
||
of anywhere from $375 billion to $3.75 trillion in value. By
|
||
comparison, the average trading volume on the New York stock
|
||
exchange is but $11 billion daily.
|
||
|
||
But every congressman should ask the obvious question: If for
|
||
every $1 billion the hedge fund puts up, the hedge fund is
|
||
getting from $5 to $50 billion from someone else, isn't that
|
||
other party, lending the $5 to $50 billion, far more important?
|
||
The answer is, of course. The committee must note the dominant
|
||
role of the commercial banks, especially the Morgan banking
|
||
group, and the investment banks, who lend the money to the hedge
|
||
funds, and use the hedge funds as their "bird dogs," having the
|
||
hedge funds make the speculations that the commercial and
|
||
investment banks would be too embarrassed to make on their own.
|
||
Not only that, but every congressman should know that the
|
||
commercial banks put money from their own accounts into these
|
||
hedge funds, and it is claimed, put money from the banks' trust
|
||
departments into these hedge funds.
|
||
|
||
The largest derivatives trading banks are: Chemical, Citicorp,
|
||
J.P. Morgan, Bankers Trust, Bank of America, Chase Manhattan,
|
||
First Chicago, and Republic National Bank of Edmund Safra. Morgan
|
||
Bank, and the Bankers Trust which it set up in the 1903-07
|
||
period, and controls to this day, control together 31 percent of
|
||
the $12 trillion of derivatives holdings of the major commercial
|
||
banks. Morgan dominates derivatives trading. Among the investment
|
||
banks, the largest derivatives traders are: Morgan Stanley;
|
||
Goldman Sachs; Salomon Brothers; Lehman Brothers and Merrill
|
||
Lynch. These are the institutions that control the hedge funds.
|
||
These are the institutions whose activities, above all, must be
|
||
investigated and controlled.
|
||
|
||
Moreover, there is an equally huge scandal. It is open knowledge
|
||
that the entire financial market structure of the United States
|
||
has been artificially rigged for the last three and a half years.
|
||
Short-term interest rates were set at 3 percent and long term
|
||
rates at 6.5 to 7 percent, the largest spread in post-World War
|
||
II history, to benefit and enrich the commercial and investment
|
||
banks who made derivatives plays on this spread. The losers on
|
||
this operation were the American population, which paid dearly to
|
||
"bail out" the banks. [CN Editor -- This sweet deal for bankers
|
||
was also covered on the Saturday, June 11, 1994 "News From
|
||
Neptune" show. I will try to feature excerpts in an upcoming
|
||
"Conspiracy Nation".]
|
||
|
||
Oversight on the markets must begin with how the Federal Reserve
|
||
Board of Governors, and the Federal Reserve Bank of New York,
|
||
working with the Treasury Department, starting in the Bush
|
||
administration, rigged this hideous operation.
|
||
|
||
Thus, the danger of derivatives trading and its damage is not
|
||
limited to headline catching speculative excesses, and failures,
|
||
of some outfits like the now notorious, U.S. legal-code-evading
|
||
"hedge funds." There may be the financial, or electronic,
|
||
equivalent of dead bodies left by the side of the financial
|
||
version of the electronic superhighway. But they are the result
|
||
of a pile-up, not its cause.
|
||
|
||
The cited cases all involve the use of financial derivatives.
|
||
|
||
Our estimate of losses sustained during the first quarter of 1994
|
||
is not, however, based on adding up reports of losses sustained
|
||
by individual banks, corporations or funds. The whole so-called
|
||
asset base on which the derivative bubble depends has been
|
||
devalued. The ongoing devaluation of assets has set in motion a
|
||
collapse which proceeds as the so-called leverage, or pyramiding,
|
||
of the derivatives transactions unwinds. In this it is not only
|
||
the most egregious which are affected, but all, for all financial
|
||
assets are being devalued.
|
||
|
||
The ongoing financial collapse is characterized by the
|
||
application of "reverse leverage" against those institutions and
|
||
banks which had resorted to the use of leverage or pyramiding to
|
||
inflate their so-called gains, or nominal so-called assets.
|
||
|
||
The increase of interest rates, long-term as well as short-term,
|
||
has been the trigger for the process by which the bubbled assets
|
||
have been deflated, and the effects of reverse leverage,
|
||
unleashed.
|
||
|
||
For example, there are over $3 trillion of U.S. government
|
||
securities held by what the Treasury and the Office of Management
|
||
and the Budget are accustomed to call the "public." Bond yields
|
||
have risen by almost 20 percent since the beginning of the year,
|
||
25 percent since October 1993. Since prices and yields move
|
||
inversely, it is merely conservative to assume that the face
|
||
value of the bonds has shrunk by as much as the yields have
|
||
increased -- $600 billion on that account alone. This would be
|
||
100 times what George Soros's Quantum Fund reported its losses to
|
||
be over the days between Feb. 10 and Feb. 12.
|
||
|
||
The same approach can be taken to inspect "collateralized
|
||
mortgage obligations" in their "principal only" and "interest
|
||
only" strip form. Mortgage rates have risen as fast as have the
|
||
yields on the Treasury's debt. Municipal bonds, too, and more
|
||
exotic such instruments as, for example, the secondary market in
|
||
so-called "emerging country" debt.
|
||
|
||
Now, U.S. Treasury bonds, whose world-wide daily trading volume
|
||
was estimated at $300 billion one year ago, increasing by 100
|
||
percent and more in the twelve months to February and March in
|
||
exchanges in Chicago, London and Paris, are the core of the
|
||
"hedging" operations undertaken by derivatives dealers. Borrow,
|
||
against bonds, borrowed or held, to finance positions for or
|
||
against various currencies, "hedged" back into something else,
|
||
and so on.
|
||
|
||
It was less than one year ago that the International Swap
|
||
Dealers' Association began to insist that "notional value" was
|
||
not a useful way of looking at derivative exposure. Better, they
|
||
insisted then would be "replacement" cost. This because, even a
|
||
year ago, the notional sums that had been generated out of
|
||
whatever electronic device they employ had grown to mind-boggling
|
||
proportions. "Replacement cost" shrank the numbers back to more
|
||
manageable proportions.
|
||
|
||
The difference between the two was a measure of the leverage, or
|
||
pyramiding, applied from original "position," at cost, borrowed
|
||
or not, to notional value.
|
||
|
||
The 20 percent increase in bond yields [CN Editor -- Apparently
|
||
this means, in other words, the decreasing of the actual value of
|
||
the bonds.] has undone a lot of the accumulated leverage that has
|
||
been built into the world monetary system. For example, "hedge
|
||
funds" can be leveraged up to 100 times, in which case, a 1
|
||
percent movement is sufficient to wipe out the collateral or
|
||
"margin" position. "Hedge funds" disposing, according to "Mar-
|
||
Hedge" and others, of around $100 billion in total assets, are
|
||
typically leveraged 10 to 15 times. A movement against them of
|
||
6.6 percent to 10 percent on the notional values at stake, wipes
|
||
out all their margin or collateral.
|
||
|
||
The matter is not the unwinding of leverage against hedge funds
|
||
alone, but the whole accumulated mass of some $16 trillion
|
||
notional so-called value in the United States -- and $25 trillion
|
||
worldwide -- unwinding against everything else.
|
||
|
||
The bubble has been premised on a perpetuated fraud about the
|
||
growth of the earnings of the U.S. economy. There has been no
|
||
growth in the earnings of the U.S. economy. There has been no
|
||
growth, not in the U.S. economy, not in the world economy, since
|
||
the period 1967-70.
|
||
|
||
The country needs a reorganized, constitutional credit system. It
|
||
needs such, so that we can begin to do the things which most
|
||
living Americans are too young to remember their country ever
|
||
having done. We need to create qualified employment for our
|
||
people, through rebuilding our basic economic infrastructure in
|
||
transportation, power generation, and water supply, and in our
|
||
attenuated capabilities for capital goods production.
|
||
|
||
Credits issued for such purposes will generate more wealth than
|
||
their original cost. We can create 6 million productive and
|
||
decent-paying jobs in infrastructure and manufacturing and
|
||
agriculture. The world economy must likewise be reorganized
|
||
around development programs, which Mr. LaRouche has specified.
|
||
This includes the "Productive Triangle" for the development of
|
||
the Eurasian land mass, and the "Oasis Plan" for the development
|
||
of the Middle East. This latter plan, which includes irrigation,
|
||
and cheap abundant nuclear power, would provide the rock-solid
|
||
basis for the praiseworthy Israeli-PLO peace process to succeed.
|
||
|
||
The collapse of the biggest financial bubble in history requires
|
||
urgent action; it also provides the opportunity to put the
|
||
country back on its feet, and under its own law.
|
||
|
||
+ + + + + + + + + + + + + + + + + + + + + +
|
||
|
||
"The New Federalist" is published weekly. Subscriptions are
|
||
available at $20 for 50 issues, $35 for 100 issues. Make checks
|
||
payable to "New Federalist" at Circulation Department, The New
|
||
Federalist, PO Box 889, Leesburg, VA 22075.
|
||
|
||
-----------------------------------------------------------------
|
||
I encourage distribution of "Conspiracy Nation."
|
||
-----------------------------------------------------------------
|
||
If you would like "Conspiracy Nation" sent to your e-mail
|
||
address, send a message in the form "subscribe my-email@address"
|
||
to bigxc@prairienet.org -- To cancel, send a message in the form
|
||
"cancel my-email@address." && Articles sent in are considered.
|
||
-----------------------------------------------------------------
|
||
Aperi os tuum muto, et causis omnium filiorum qui pertranseunt.
|
||
Aperi os tuum, decerne quod justum est, et judica inopem et
|
||
pauperem. -- Liber Proverbiorum XXXI: 8-9
|
||
|
||
|