The Global Casino, Currency Devaluation and Giant Fire Sales

The World According to Derivatives: Part 3 of 7

No one knows how long “bad assets” will continue to send shock waves through international markets, nor can anyone say just what the specific fallout may be. One thing that is certain is that taxpayers across the globe will increasingly be called upon to support the financial system. This is pretty much a done deal, having already been discussed in IMF position papers and elsewhere. It’s also the elephant in the room, an unpleasant reality that will become increasingly troublesome as time marches on.

Of course, obligatory lip service and mostly illusory assistance will be offered to a select assortment of hapless homeowners, struggling businesses and vociferous taxpayers. But despite the ballyhoo, deal sweeteners and leftover crumbs tossed around by politicians, the bulk of support, financed largely if not wholly by taxpayers, will be directed toward shoring up selected banking institutions and blocks of international bondholders who, through the global casino, have speculated heavily in sophisticated derivatives instruments made up of bundled debt, or “debt on debt”.

Moreover, it is through these types of “assets” that foreign countries and sectors with large blocks of bondholders are able to influence, if not dictate, governmental policies. So it was that “the U.S. government’s decision to take control of foundering mortgage giants Fannie Mae and Freddie Mac was driven not by worries about the fading U.S. housing market, but by concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds.”Foreign Bondholders – and Not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout, William Patalon III

History is replete with speculative bubbles so we are not without insight into how they occur, and what the results are — even if we stubbornly refuse to learn from them. The difference this time is the extent to which these extremely risky, highly profitable, highly leveraged “bad assets” have become embedded in economies around the globe. The current crisis was an accident waiting to happen and we — or at least our policy-makers and financial elite — were duly warned about the cause, extent and potentially lethal outcome of the problem.

Red flags have been going up everywhere for years. For example, and about the time that Warren Buffet was laying out his concerns about derivatives in his famous 2002 Berkshire Hathaway report, attorney Frank Partnoy was testifying before Congress that “OTC derivatives markets, which for the most part did not exist twenty (or, in some cases, even ten) years ago, now comprise about 90 percent of the aggregate derivatives market, with trillions of dollars at risk every day. By those measures, OTC derivatives markets are bigger than the markets for U.S. Stocks.”Testimony of Frank Partnoy Professor of Law, University of San Diego School of Law, Hearings before the United States Senate Committee on Governmental Affairs, January 24, 2002.

At the time of Mr. Partnoy’s 2002 testimony the total derivatives market was $100 trillion. Five years later, by June of 2007, it had reached an astonishing $516 trillion, with some $400 trillion of that in the exceptionally risky OTC market. This explosive growth, driven as it is by the insatiable quest for “fast money”, has led many analysts to conclude that derivatives speculation is what is now driving the markets — and the value of our money. More so today than ever before, it is the speculative phenomenon that has long existed in international markets which prompted former central banker Bernard Lietaer to declare in his book The Future of Money that “Your money’s value is determined by a global casino of unprecedented proportions.”

Too often overlooked is the manner in which the value of our money — whatever form it may take — has long been influenced, manipulated and controlled through the global casino. Ominously, the sheer volume of modern day derivatives take this influence to a whole new level and represents yet another step away from the true function of money as a stable medium of exchange.

Money — as a stable medium of exchange and therefore a stable measure of value — is of course the best means by which to facilitate a fair and equitable exchange of goods and services within an economy. Whether this money takes the form of gold, paper, sea shells or any other form in many ways misses the point as to what the true function of money is, and how that function might best be met. Briefly stated and in order to function properly as a stable medium of exchange, money must be a stable measure of value — and it must be supplied in amounts commensurate to the needs of the economy and the people.

Neither gold, nor any other single commodity or small group of commodities, is sufficient to meet the true productive capacity of the people. This in fact may have been at least part of the reason that the gold changers in ancient Babylonia first developed an early version of the fractional reserve system when they began to loan out more in gold receipts than the gold they actually had in their vaults.

Other problems with using a commodity such as gold as the basis for money include the fact that commodities are subject to monopoly control. In addition and just as importantly is the fact that the value of commodities — as we all know — are subject to the whims of the global and local marketplace, which means they cannot serve as a stable measure of value.

Derivatives can even more seriously undermine the ability of our money to serve as a stable measure of value because not only are they subject to monopoly control, but they carry with them the almost irresistible allure of “fast money” for those select few who are both willing and able to accept heavy risk. Thus derivatives can and do result in wild windfall profits or stupendous overnight losses through highly leveraged bets made on the potential for future profits or fluctuations in the value of a commodity such as gold, housing, or any other type of tangible asset. This fact alone dramatically increases financial instability — as has been made most apparent by recent and still unfolding events. Additionally, non-transparent leveraging provides a way of creating virtually unlimited amounts of “off-balance sheet” money, which further erodes the value of our money and the stability of our money supply.

Last but not least, and inasmuch as they are the domain of a small, select group of traders and dealers, derivatives have become the fast-track method of shifting assets and wealth to the financial markets at the expense of the real economy — which is where the goods and services, including commodities, are actually being produced. It is in this real economy where the global race to the economic bottom is always the most acutely felt.

Unfortunately for you and me, America’s real economy has joined the global race to the economic bottom. Seemingly overnight this real economy has been transformed into a giant fire sale for our “new financial colonial masters” and derivatives have played a crucial role. Here is how one blogger starkly described the transformation process:

The blowback that I repeatedly warned about from the monetary loosening and crony capitalist interventions has succeeded in transforming the United States into the world’s biggest Blue Light Special [BLS]. The crackpot theories that got us here should be spelled out for the record: 1) Lack of transparency (causing total breakdown in trust) 2) Systemic faulty evaluation of credit (the credit rating process) 3) Credit insurance (underwriting with little/no reserves) 4) Tremendous leverage (consumer/business/financial debt) 5) Massive US dependence on foreign capital 6) Deliberate heavy handed attempts to manipulate and massage both economic data and markets …

The lethal add-on effects of a trashed currency, Mad Max inflation eCONomics in addition to the housing/credit rout has created a busted United States and left it open for a Blue Light Special liquidation. Meet your new financial colonial masters, America. We should see this BLS primarily conducted by foreign corporate and elitist interests, sovereign wealth funds (SWFs), and private equity firms. The criminals on Wall Street will also play a role accelerating the process, as there are fees and commissions to be collected. These will mostly be cash on the barrel head purchases paid for with US Dollars, which will be exchanged for American owned economic units and assets. For me it just don’t hold that USDs will just be continually dumped another 30-50% in a Panic or into non-income producing CUB assets like gold and oil. When prices for American held assets are cheap enough (already happened in many cases), your new masters will convert their to the moon piles of USDs into economic and financial assets. This is one of the greatest colonial opportunities in centuries.The U.S.: The World’s Biggest Blue Light Special. The Wall Street Examiner, July 20, 2008.

What nearly everyone fails to understand — or in some cases understand sufficiently well — is that the real root of the problem lies with our money creation system. Presently we have bank credit serving as money. It is a money of accounts, rather than a money of exchange. Put another way and as former Senator Robert Owen, original co-sponsor of the 1913 Federal Reserve Act, later complained, some last minute back-door tweaking of the Fed Act gave us a currency with debt-creating power instead of a currency with debt-paying power.

As a result our money is essentially being created by the Federal Reserve and other banks through the making of loans or providing of credit. Up until now, this has been done primarily through the fractional reserve system, which allows the banking system, as a whole, to create many times more “money” as loans than what the initial reserves amount to. In point of fact the initial reserves are not themselves “money” but actually loans — or perhaps more accurately, credit — provided by the privately-owned Federal Reserve to our government.

Thus, it is the privately-owned banking system that controls our money supply because it is through this system that our money gets created. Today, a shadow banking system is also creating our money through the highly leveraged “off balance sheet” activities of the derivatives market.

Some refer to this type of money as false money or substitute money because money is in effect created when banks make loans to a borrower. These loans always have interest attached and yet no money is created to pay the interest charges due on this debt. The only way to pay these interest charges is by creating more debt as “money” — and this then serves to increase the “money” supply.

Again, accumulating interest charges are in effect unpayable — unless more debt is incurred — due to the manner in which out money is created. You can use yourself as a way to understand this concept. If you take out a loan for $1000 and then spend your newly created “money” (in the form of bank notes or promises to pay back the debt), you will have placed your loan “money” into circulation where others can use it. To keep things simple, let’s say no one else is able to secure a loan, so $1000 is all the “money” in circulation. At the end of the year you owe your lender $1000 plus interest. Since only $1000 was created as “money”, how can you pay both the principal and interest, even assuming you have been able to earn back all the loan/money you spent? Answer: You must take out an additional loan. OR, you can negotiate to defer payment, which only compounds the interest you owe.

Even worse — and because the exponential function of compounding interest comes into play, unpayable interest charges must accumulate exponentially over time. The phenomenon created by the need to create ever more debt as “money” in order to meet the demands of accumulating, unpayable interest becomes integrated into the value of false money — decreasing its value over time and simultaneously increasing the demand for ever more “money” as credit or debt just to pay growing debt.

This is the real reason why we have an economy built on debt. And because the money supply is never adequate enough to pay accumulating interest, unbridled greed and the attendant pursuit of “fast money” become increasingly difficult to control. Rampant corruption soon follows and must grow ever more problematic as unpayable interest accumulates.

Greed and corruption aside, what this money creation system means for you and me is that the purchasing power of the dollar is eroded over the long term due to the demands of accumulating interest — and this then increases the cost of doing business and the overall general cost of living. These increasing costs are then reflected in overall, long term increases of prices for goods and services.

In other words, inflation within our current debt-based money system is actually due to debt-induced currency devaluation, caused by accumulating, unpayable interest. The problem has grown so huge that some researchers say that some eighty-five cents of every dollar are now going to satisfy the needs of this accumulating interest, rather than the real economy.

Bottom line is that the whole system is governed by mathematical law and as it stands now, it is a mathematical impossibility. Once the debt load becomes unsupportable the system will crash. Meanwhile and as the debt burden grows ever larger the economy will go through increasing periods of instability and volatility, despite the best efforts of the Fed to tweak interest rates and the money supply — or for that matter the government’s willingness to increase the debt ceiling on the backs of taxpayers.

Ours is not the only country facing these issues and so today, in response to the fallout generated by the shadow banking system that arose within the derivatives market, we are in the midst of redesigning the global credit system, according to bond fund king Bill Gross and many others. What we all need to understand is that any redesign of the global credit system will require continually increasing government reliance on taxpayer dollars — so long as we continue with the current money creation system.

Essentially and due to the exponential function for calculating compounding interest, taxpayer debt must explode as we are forced to pay ever more interest on outstanding interest. This will continue until the labor and assets of the people can no longer be mortgaged. We are in other words essentially being destroyed by the tyranny of unpayable interest — not the tyranny of paper money.

  • Read Part 1 and Part 2.
  • Geraldine Perry is the co-author of The Two Faces of Money and author of Climate Change, Land Use and Monetary Policy: The New Trifecta. Read other articles by Geraldine, or visit Geraldine's website.

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    1. Poilu said on October 4th, 2008 at 12:49am #

      Well, it’s all over now except for the complete plundering of the Treasury and the inevitable gouging of American taxpayers who AREN’T in any way beneficiaries of this audacious scam. At least, a few admirable Representatives held their ground tenaciously — albeit in vain — against this pork-barreled Pillage Proposal:

      “We Had Alternatives”
      by Dennis Kucinich

      ‘ [The following statement was presented on the floor of The House of Representatives after Congressman Kucinich voted against the Wall Street bail out plan, H.R. 1424, the Emergency Economic Stabilization Act of 2008]:

      ‘ The public is being led to believe that Congress has reconsidered its position because we have before us a better bill than we had a few days ago. It is the same bill plus hundreds of new pages for hundreds of millions of tax breaks. What does this have to do with the troubles of Wall Street?

      ‘ Driven by fear we are moving quickly to pass a bill, which may produce a temporary uptick for the market, but nothing for millions of homeowners whose misfortunes are at the center of our economic woes. People do not have money to pay their mortgages. After this passes, they will still not have money to pay their mortgages. People will still lose their homes while Wall Street is bailed out.

      ‘ The central flaw of this bill is that there are NO stronger protections for homeowners and NO changes in the language to ensure that the secretary has the authority to compel mortgage servicers to modify the terms of mortgages. And there are NO stronger regulatory changes to fix the circumstances that allowed this to happen. …’

      Alas, the House has now capitulated too. As Al Pacino’s character quipped in “Dog Day Afternoon”, “Kiss me! … I like to be kissed when I’m being fucked.”

    2. ALGERNON SOWFRIKA said on October 4th, 2008 at 7:10am #


    3. cg said on October 4th, 2008 at 8:51am #

      Speaking of plundering… .. Oh the joys of dual citizenship, dual passports, dual loyalty.

      TBR News October 3, 2008
      “I am speaking most specifically of American business frantically sending, electronically, huge amounts of money to banks in Israel. The three banks that are getting most of the stolen money are: Hapoalim group, Bank Leumi group, Discount Bank group. It is not necessary to mention that the senders are all Jewish and it should be noted that Israeli banking concerns practice strict banking security (see their Protection of Privacy Law, 1981 [PPL]) Under the PPL, “an infringement of privacy is, inter alia, a violation of an obligation to maintain secrecy regarding a person’s private affairs, established by explicit or implicit agreement.” The bank’s obligation of secrecy extends not only to the details of the client’s account but also to all transactions related to the account In other words, if the US authorities want to know about this, they can bend over while the Israeli bankers drive them home. And if the sticky-fingered ones decide to make a quick flight to Israel ahead of FBI investigators, like their new accounts, they are entirely safe. Note here that Israel does not extradite its citizens.

    4. Al said on October 4th, 2008 at 8:15pm #

      It’s high time the American sheeple woke up to the fact that America’s real enemy is not the Communists, or Islamofacists, or illegal aliens; THE REAL ENEMY ARE THE ZIONIST SCUM!

    5. Calm said on October 5th, 2008 at 2:05pm #

      I would think that if Israel was going to attack Iran, they would know that Europe would be at the U.N. the next day and demanding sanctions at the very least.

      Depending on activities following the initial strikes against Iran, and with half the world freezing in the dark …. I don’t believe that the U.S. could manage a veto against any moves which the U.N. may wish to take against Israel. Israel can expect their assets in Europe to be seized. Expecially if the attack is unprovoked as what America did with Iraq. The war would be illegal because Iran has the right to pursue nuclear power because it signed the NPT agreement. (Israel has not signed the NPT and refuses to allow any IAEA inspections.)

      Perhaps a part of the “Run On The Banks” is actually Israel moving assets out of the world banking systems and repatriating it to Israeli owned banks inside Israel itself.

      The Israeli’s would know that every asset they have would be up for grabs following any attack against Iran.

      I don’t think it would be safe for any Israeli supporter to be seen on the streets within any country on the globe if they attack Iran. People will be spitting on them as they pass by, to state the very least.

      Just recently, the IAEA has unanimously agreed to put the issue of Israel’s nuclear capabilities on the agenda of its annual meeting. The move was initially met with protests by the US and Canada but the two countries had to back down from their position after they realized that other member states of the IAEA meeting’s presidential board would not support their stance.

      The IAEA member states have called for a nuclear free Middle East to send a strong message to Israel, the only nuclear country in the region.

      During the annual meting of the International Atomic Energy Agency (IAEA) in Vienna, the members of the UN nuclear watchdog adopted a resolution, calling on all Middle Eastern countries, including the Israeli regime, to allow the inspection of their nuclear activities.

      The resolution also urges the countries in the region to adhere to the Nuclear Non- Proliferation Treaty (NPT) and not to “develop, produce, test or acquire nuclear weapons.”

      Israel would want to strike Iran now and before they become embarassed upon the world stage at the U.N..