WASHINGTON DC �� By deciding to ante up $38 billion for a
hopeless bailout of predatory Wall Street hedge funds and the banks that stand
behind them, Federal Reserve Chairman Helicopter Ben Bernanke has placed the
bankrupt US dollar on a direct course towards the precipice of hyperinflation.
In so doing, he has given new momentum to the backers and controllers of Dick
Cheney, who favor an insane flight forward into general war with Iran, deluding
themselves that they can thus escape from both military defeat in Iraq and
Afghanistan, and from the death agony of the dollar.
On August 9-10, the European Central Bank, the Bank of
Japan, the Federal Reserve, plus the central banks of Australia, Norway,
Switzerland, and other countries �injected� the equivalent about a third of a
trillion dollars ($325 billion) into the money systems of the world. The Bank
of Japan handed out a dramatic �1 trillion, about $8.5 billion. The European
Central Bank showed signs of panic, or of realism, by spewing out about �160
billion over two days. Their goal was to stave off a spreading panic at bond
trading desks and in the capital markets of the world about junk bonds,
collateralized debt obligations (CDOS), mortgage backed securities, and other
paper debt instruments.
At about 9 AM on Friday August 10, the Chicago futures
markets suggested that the Dow Jones Industrial average would open down about
190 points. That meant the potential for spreading stock market panic, with the
DJIA closing down 1,000 to 2,000 points or more by the end of the day, quite
possibly pitching more banks and hedge funds into bankruptcy. Such an event
would also tend to awaken the US middle class to the fact that their 401 (K)
and IRA pension plans were being liquidated. This would make the financial
crisis a political crisis as well, and perhaps stoke the fires of impeachment.
Helicopter Ben therefore followed his predecessor, Bubbles Greenspan, on the
path of bailout, although on a larger scale than what Greenspan had ever
attempted in public. Bernanke and the New York Fed bought up $38 billion of
toxic mortgage-backed securities from the principal hyenas of Wall Street --
led, we can be sure, by Goldman Sachs, Bear Stearns, Lehman Brothers, J.P.
Morgan Chase, Merrill Lynch, and Citibank. For bailout purposes, the banks were
given a sweetheart interest rate, just 4 percent, less than the 5.25 percent
target Fed funds rate used for interbank lending, and much less than the 6.25
percent the Fed requires from banks coming to its own discount window under
normal circumstances. The $38 billion, injected in three doses during the
course of the day, in addition to other Fed measures, was almost enough to prop
the market up for eight hours -- the Dow closed with a loss of 31 points. So
the central banks will need to provide more fixes, sooner rather than later.
As Alan Greenspan instructed Bill Clinton when the latter
took office, the bond market, also referred to as the capital or credit market,
is much more important than the stock market in the current US-UK financial
system. Right now not just dubious junk bonds and mortgage-backed securities,
but even the classic triple A investment grade corporate bonds, are in great
distress. Indeed, the bond market has partially shut down in response to the
crisis. This is far more serious than a mere stock market crash, such as the
one of October 1987.
The Bank of England has said nothing about injections, and
is poised to raise its interest rates once again, putting additional pressure
on the dollar by tempting hot money to flee out of Wall Street to London. The British
may well figure that when the battered US greenback goes under, the British
pound sterling will remain afloat, and benefit from the US shipwreck. London
has in any case already replaced New York as the real financial capital of the
world; this has been a strategic priority for Gordon Brown for some years.
Wall Street derivatives monsters -- too big to
It would take more than $38 billion to bail out Goldman,
Bear, Merrill, and the rest. The bonds of the firms just mentioned are already
rated as high-risk junk. The Wall Street banks and investment banks represent a
black hole into which literally trillions of dollars could disappear without a
trace -- it is enough to cite the derivatives holdings of JP Morgan Chase and
Citibank, who are listed in the spring 2007 report of the Controller of the
Currency as having $105 trillion in derivatives between them, and the reality
is a multiple of that. In addition, there is fear of the unknown. This past
week traders from Rick Santelli in Chicago to London stock touts have reported
that a large financial entity -- something probably bigger than Goldman Sachs
-- has been selling off a portfolio of some $10 to $15 billion in value. No one
has said publicly what this entity is, or what this �unprecedented event� might
represent. A few days ago, oil hit an all-time high of $78 per barrel. It then
fell back 10 percent, because so much of the price of oil -- at least $30 at
present levels -- is pure hedge fund speculation. And these hedge funds, as
they near bankruptcy, massively sell off oil futures. Gold has taken some nasty
dips for the same reason.
Dow 36,000 in sight, thanks to hyperinflation
In 1998, neocon economic commentator James Glassman got some
attention by predicting a steady rise in the Dow to 36,000. Now, Glassman may
get his wish -- THANKS TO hyperinflation. If the central banks continue to
�inject� tens of billions of dollars every day, while secretly buying masses of
worthless kited paper from banks and investment banks, we may soon experience a
fool�s paradise interlude which to some will look like recovery -- after all,
the stock market may appear to be rising. But watch the prices for milk, other
food items, gasoline, and other staples. If they begin to levitate upward, we
will know that the fan and bellows of hyperinflation are indeed at work.
Helicopter Ben earned his name some years ago by giving a
speech in which he said that he could stop a panic from becoming a depression
by dumping bales of dollars out of helicopters to provide stimulus. He has thus
always had a hyperinflationary overtone. On Tuesday, August 7, Bernanke
presided over a Fed meeting that refused to cut interest rates, and also failed
to offer the bankrupt speculators words of assurance that they would be
assisted. This was followed two days later by a panicked selloff, with the DJIA
down 387 points.
Death agony of the US dollar
These events represent a new phase of the death agony of the
US dollar, which has been in decline since about the start of the Iraq war, and
has gone from 80 cents to buy a euro to almost $1.40. Knowing that the dollar
is a wasting asset, and also because of widespread hatred for Bush, everyone in
the world has been attempting to dump the dollar in any way possible. Russia
has set up a ruble-based trading system where oil, gold, and grain can be
bought; they don�t take American Express. Iran tried to set up a
euro-denominated oil market, but has been prevented from starting it because of
US-ordered UN sanctions and related economic warfare. But Iran has asked Japan
to pay for its oil with yen, not with dollars. Brazil and Argentina have
eliminated the dollar in their bilateral trade. Many European oil companies
have eliminated the dollar from their international operations. Every time the
dollar is cut out of a lucrative commodity flow, Wall Street and the London
Eurodollar market lose the ability to skim 5 percent to 10 percent off the top
of these transactions in the form of financing, banking services, and fees.
No more zero interest loans from Tokyo
For the past five years, the dollar has enjoyed massive
support from the Bank of Japan�s zero interest rate policy. This allowed hedge
funds to load up with free money in Tokyo and transform those yen into dollars
to use in speculating in US markets. This created a constant demand for
dollars, and also tempted hot money away from Tokyo into high-risk, high-yield
investments elsewhere, a practice known as the yen carry trade. But this
so-called yen carry trade is ending: the Bank of Japan has now raised its rate
to 0.5 percent, and is set to hike it again this month. This has played havoc
with so-called emerging markets for more than a year. The main advocate for the
weak yen, my college classmate Hiroshi Watanabe, was ousted from the Bank of
Japan some weeks ago. As the yen gets stronger, meaning as it goes from 118 to
117 to 115 to 110 on the television screen, the huge mass of kited loans
becomes harder and harder for the US borrowers to pay back, since the yen has
become more expensive. Therefore any fall in the dollar in relation to the yen
will result in chain reaction bankruptcies among the US firms which went
overboard with yen carry trade loans.
This danger is very real. The dollar has been very weak
against the yen lately. In fact, the dollar has been very weak in general,
falling to an all-time low of almost $1.40 to a euro, and a 26-year low of
about $2.05 to a British pound. There has also been a long-term low against the
Canadian dollar. Given that the US trade deficit is approaching $1 trillion,
this cannot come as a surprise.
All of this represented the background to Helicopter Ben�s
dilemma of the past two weeks. If he kept interest rates and money supply at
their current levels, the subprime mortgage crisis would spread to all non-Treasury
bonds and paper, blowing out the bond market. If he lowers interest rates, the
dollar will fall like a stone, and the yen carry trade hangover will sink the
Wall Street banks. If he raises interest rates to save the dollar, the banks go
bankrupt anyway because of the contagion from the collapsing mortgage bubble.
For a time it seemed as if Fannie Mae and Freddie Mac,
quasi-governmental institutions which deal in mortgage-backed securities, would
be used to bail out bankrupt mortgage-backed paper by buying it up, with the
taxpayer ultimately left holding the bag. (Fannie and Freddie participate to
some extent in the �full faith and credit� guarantee that covers Treasury
bonds.) But Fannie and Freddie are already deeply troubled institutions, as the
early stages of the bubble collapse have already revealed. Using them for a
bailout is being blocked by the Bush White House. That leaves Helicopter Ben
with the option of directly monetizing debt -- taking in Wall Street�s bankrupt
mortgage paper and paying out dollar bills in return. He took the first step
towards doing just that this past Friday morning.
Panic dumping of dollar and hyperinflation loom
The Fed measures taken so far have sharply increased the
money supply, making the dollar even weaker. Wall Street is clamoring for an
emergency rate cut of one half percent or even one full percent as early as
next week. If this is done, the dollar will surely take a spectacular dive. Fed
boss Paul Volcker was always haunted by the fear of a sickening slide of the
dollar which, once begun, would be impossible to stop. Depending on what
Bernanke does, we may now be near such a point. In the present situation, a
dollar panic is always latent.
Scenarios have long circulated about a young MBA manager in
Kuala Lumpur or Taipei who comes into the office one morning and decides that
his central bank is holding just a few too many dollars. He orders that a
hundred million or so be sold. This generates a rumor that the dollar is being
dumped by the country in question. A panicked rush for the exits begins.
Central banks join the stampede. Country after country begins dumping its
dollars and its US Treasury securities. By the time the wave reaches the US,
the dollar is down to 30 percent of its value the previous day, and the
Treasury market is in chaos. Volcker may yet live to see his nightmare become
reality, in a time-lapse sequence.
As I show in Surviving
the Cataclysm, the German hyperinflation of 1923 peaked at a rate of 4.2
trillion paper marks to a US dollar. The main cause of this hyperinflation was
the British and French policy of driving down the mark to create economic chaos
and prevent Walter Rathenau�s German-Russian Rapallo alliance. But the main
point for our present purposes is that the mark was ruined first and foremost
by its international exchange rate.
We too may be headed into an era when shoppers take their
dollars to the supermarket in a shopping cart, and bring their purchases home
in their pockets. This is especially so since today everything in the US except
for certain food items is imported from low wage sweatshops abroad. If the
dollar collapses, hyperinflation will result all the more readily, since such a
large part of the consumer�s market basket is composed of imports.
If Bernanke had been intelligent, he would have silently
bailed out the two Bear Stearns hedge funds back in June, effectively
suppressing the issue, and steering clear of a much larger crisis. He is
reviled in Wall Street for not doing this. Given this track record of weakness
and incompetence, Bernanke now appears likely to try to quiet the clamor of
Wall Street for easy money. His nickname will truly be an omen of
Another wrinkle in the scenario is that Bush and the
Democratic Congress are already on a collision course over spending, with Bush
demanding draconian spending cuts which never occurred to him while the GOP
ruled Capitol Hill; the goal is to weaken the Democrats with their own key
constituencies, who are demanding some largesse from the new majority. Senator
Schumer has signaled that he wants to bail out mortgage paper, meaning that he
wants to save Bear Stearns and Goldman Sachs. Bush is adamant that there will
be no bailout. An irrepressible conflict is therefore more than likely. We have
seen how Bush dealt with Iraq, and then with Katrina. Now we are seeing how he
deals with a financial breakdown crisis.
The Paulson-Bernanke Plunge Protection Team in action
The $38 billion is outrageous, but it is not all that the
Fed was doing for the wealthy parasites of Wall Street. Since about 1989, the
Fed has funded a shadowy organism called the President�s Working Group on
Financial Markets, more popularly known as the plunge protection team or PPT.
This entity intervenes every day to prop up Wall Street�s speculative house of
cards. The PPT buys stock futures in Chicago with the goal of up drafting stock
prices in New York. As long as the PPT can keep the price of the Chicago future
above the price of the underlying stock on the NYSE, speculators and program
traders will sell the future and buy the stock, accomplishing the PPT�s goal of
generating totally fictitious demand and preventing gaping market breaks where
there is simply no bid for stocks offered.
A few billion of futures buying in Chicago can generate tens
of billions of buying in New York -- especially when the operation is signaled
by Wall Street figures known to be de facto spokespersons for the PPT, such as
Abby Joseph Cohen of Goldman Sachs. Once speculators know the PPT is moving in,
they can pile on the bandwagon, and realize nifty short-term gains before
selling to the suckers before the next dip. Hundreds of billions of dollars of
Fed money have been committed in this way. Whenever you see a sharp rise of the
DJIA right before the close based on no news, you can be sure that the PPT is
in action. The PPT is basically illegal, but it may have been authorized by
secret presidential executive orders, starting under Bush senior and Clinton.
Today, Bush would justify it as a war measure to maintain orderly markets.
One of the first published descriptions of what is now
called the PPT appeared in my George
Bush: The Unauthorized Biography (1992). In the wake of 9/11, accounts in
the corporate press boasted of the protection that the PPT was giving small
investors. Since then, discussion of the PPT has largely been banished to the
Yahoo Finance message boards of stocks like JPM, C, GS, BSC, WM, LEH, MS, and
other financial institutions. Journalists beholden to the financier oligarchy
never mention the PPT. On CNBC, ham-handed interventions by the PPT are
nervously explained away as �bargain hunters� or �small investors making a
stand.� Most recently, Gary Dorsch has contributed a detailed study of the PPT
entitled �The �Plunge Protection Team� Working Overtime,� Global Money Trends Magazine, August 9, 2007.
The panic had started in mid-June, when two hedge funds
controlled by Bear Stearns, the sleazy sixth-ranked investment bank in Wall
Street, had disintegrated. First it was announced that the hedge fund investors
would get 50 cents on the dollar. Then they were told they would get nothing.
In spite of this, the DJIA hit an all-time record at 14,000 and a fraction on
July 20, although only with a big push from the PPT. �The entire capital structure from equity all the
way to AAA can go to nothing,� Steve Eisman, a portfolio manager at Front Point
Partners, told a July 19 conference call on the subprime mortgage debacle,
according to the New York Times. By July 26-27, triple digit
dives of the DJIA had become the order of the day, as rumors swirled about Bear
and Goldman. Soon it became known that investors in a third Bear hedge fund
were being told that they could not withdraw their money.
Next, Part 2: Systemic breakdown crisis
Webster G. Tarpley is a journalist. Among
other works, he has published an investigation on the manipulation of the Red
Brigades by the Vatican�s P2 Suite and the assassination of Aldo Moro, a non-authorized biography of George
H. Bush, and more recently an analysis of the methods used to perpetrate the
September 11, 2001 attacks.