The Irreconcilable Differences
Some two decades ago, it was decided by the global
financial elites that the framework for the global economy shall consist
1) A global derivative-based financial system,
controlled by the US Federal Reserve Bank and its associate global banks
in the developed countries.
2) The re-location from the West to the East in the
production of goods, principally to China and India to “feed” the
The entire system was built on a simple principle, that
of a FED-controlled global reserve currency which will be the engine for
growth for the global economy. It is essentially an imperialist economic
Once we grasp this fundamental truth, Bernanke’s boast
that the “US can produce as many US dollars as it wishes at no cost” takes
on a different dimension.
I have talked to so many economists and when asked what
is the crux of the present financial problem, they all respond in unison,
“it is the global imbalances... the West consumes too much while the East
saves too much and consumes not enough”. This is exemplified by the huge
US trade deficits on the one part and China’s massive surpluses on the
Incredible wisdom and almost everyone echoes this
mantra. The recent concluded APEC Summit was no different. This mantra was
repeated as well as the call for freer trade between trading nations.
This is a grand hoax. All the current leaders on the
world’s stage are corrupted to the rotten core and as such have no
interest to call a spade a spade and expose the inherent contradictions
within the existing financial system.
The call for a multi-polar world is meaningless when
the entire global financial system is based on the unipolar US dollar
reserve currency. This is the inherent contradiction within the present
system and the problems associated with it cannot be resolved by another
global reserve currency based on the IMF’s Special Drawing Rights as
advocated by some countries. It was stillborn, the very moment it was
The leaders of China, Japan and the oil producing
countries of the Middle East are all cursing and pissing about the current
situation, but they don’t have the courage of their convictions to spell
it out to their countrymen that they have been conned by the financial
spin masters from the Fed acting on the instructions from Goldman Sachs.
Tell me which leader would dare admit that they have
exchanged the nation’s wealth for toilet papers?
The toilet paper currency pantomime continues.
We have now reached a stalemate in the current currency
war, not unlike the situation of the Cold War between the NATO pact
countries and the Warsaw pact countries. Both sides were deterred by the
MAD (Mutually Assured Destruction) doctrine of nuclear wars. The costs to
both sides were horrendous and it was only when the Soviet Union could not
continue with the pace and cost of maintaining a nuclear deterrent and was
forced into bankruptcy that the balance tilted in favour of the NATO
But it was a pyrrhic victory for the US and it allies.
What kept the ability of the US to maintain its military might and
outspend the Soviet Union was the right to print toilet paper currency and
the acceptance of the US dollar by her allies as the world’s reserve
But why did the countries allied to the US during the
Cold War accepted the status quo?
Simple! They were all conned into believing that
without the protection of Big Brother and its military outreach, they
would be swallowed up by the communist menace. They agreed to march to the
tune of the US Pied-Piper.
The next big question – why did the so-called
“liberated” former communist allies of the Soviet bloc jump on the
Simple! They all believed in the illusion that was
fostered by the global banks, led by Goldman Sachs that trading and
selling their goods and services for the toilet paper US reserve currency
would ensure untold wealth and prosperity.
But the biggest game in town was the Asia gambit.
Japan, after a decade of recession following the burst of her property
bubble did not have the means and the capacity to bring the game to the
next level as envisaged by the financial architects in Goldman Sachs.
And China was the biggest beneficiary. The senior
management of Goldman Sachs brokered a secret pact with China’s leaders
that in exchange for orchestrating the most massive injection of US dollar
capital and wholesale re-location of manufacturing capacity in the history
of the global economy, China would recycle their hard-earned US toilet
paper reserve currency wealth into US treasuries and other US debt
This was the necessary condition precedent for the
global financial casino to rise to the next level of play.
The New Game
The financial architects at Goldman Sachs had a master
plan – to dominate the global financial system. The means to achieve this
financial power was the Shadow Banking System, the lynchpin being the
derivative market and the securitization of assets, real and synthetic.
The stakes would be huge, in the hundreds of US$ trillions and the way to
transform the market was through massive leverage at all levels of the
But there was an inherent weakness in the overall
scheme – the threat of inflation, more precisely hyperinflation. Such huge
amounts of liquidity in the system would invariably trigger the
depreciation of the reserve currency and the confidence in the system.
Hence the need for a system to keep in check price
inflation and the illusion that the purchasing power of the toilet paper
reserve currency could be maintained.
This is where China came in. Once China became the
world’s factory, the problem would be resolved. When a suit which
previously cost US$600 could be had for less than US$100, and a pair of
shoes for less than US$5, the scam masterminds concluded that there would
be no foreseeable threat to the largest casino operation in history.
China agreed to the exchange as it has over a billion
mouths to feed and jobs for hundreds of millions needed to be secured,
without which the system could not be maintained. But China was pragmatic
enough to have two “economic systems” – a Yuan based domestic economy and
a US$ based export economy, in the hope that the profits and benefits of
the export economy would enable China to transform and establish a viable
and dynamic domestic market which in time would replace the export
dependent economy. It was a deal made with the devil, but there were no
viable alternative options at the material time, more so after the
collapse of the Soviet Union.
The Next Level of the Game
The next level of the game was reached when the toilet
paper reserve currency literally went virtual – through the simple
operation of a click of the mouse in the computers of the global banks.
The big boys at Goldman Sachs and other global banks
were more than content to leave Las Vegas for the mafia and their
miserable billions in turnover. The profits were considered dimes when
compared to the hundreds of trillions generated by the virtual casino. It
was a financial conquest beyond their wildest dreams. They even called
themselves, “Master of the Universe”. Creating massive debts was the new
game, and the big boys could even leverage more than 40 times capital!
Asset values soared with so much liquidity chasing so few good assets.
However, the financial wizards failed to appreciate and
or underestimate the amount of financial products that were needed to keep
the game in play. They resorted to financial engineering – the
securitization of assets. And when real assets were insufficient for
securitization, synthetic assets were created. Soon enough, toxic waste
was even considered as legitimate instruments for the game so long as it
could be unloaded to greedy suckers with no recourse to the originators of
these so-called investments.
For a time, it looked as if the financial wizards have
solved the problem of how to feed the global casino monster.
Unfortunately, the music stopped and the bubble burst!
And as they say the rest is history.
The Goldman Sachs Remedy
When losses are in the US$ trillions and whatever
assets / capital remaining are in the US$ billions, we have a huge problem
– a financial black-hole.
The preferred remedy by the financial masterminds at
Goldman Sachs was to create another hoax – that if the big global banks
were to fail triggering a systemic collapse, there would be Armageddon.
These “too big to fail” banks must be injected with massive amount of
virtual monies to recapitalize and get rid of the toxic assets on their
balance sheet. The major central banks in the developed countries in
cahoots with Goldman Sachs sang the same tune. All sorts of schemes were
conjured to legitimize this bailout.
In essence, what transpired was the mere transfer of
monies from the left pocket to the right pocket, with the twist that the
banks were in fact helping the Government to overcome the financial
The Fed and key central banks agreed to lend “virtual
monies” to the “too big to fail” global banks at zero or near zero
interest rate and these banks in turn would “deposit” these monies with
the Fed and other central banks at agreed interest rates. These
transactions are all mere book entries. Other “loans” from the Fed and
central banks (again at zero or near zero interest rates) are used to
purchase government debts, these debts being the stimulus monies needed to
revive the real economy and create jobs for the growing unemployed. So in
essence, these banks are given “free money” to lend to the government at
prior agreed interest rates with no risks at all. It is a hoax!
These “monies” are not even the dollar bills, but mere
book entries created out of thin air.
So when the Fed injects US$ trillions into the banking
system, it merely credits the amount in the accounts of the “too big to
fail” banks at the Fed.
When the system is applied to international trade, the
same modus operandi is used to pay for the goods imported from China,
For the rest of world, when buying goods denominated in
US$, these countries must produce goods and services, sell them for
dollars in order to purchase goods needed in their country. Simply put,
they have to earn an income to purchase whatever goods and services
needed. In contrast, all that the US needs to do is to create monies out
of thin air and use them to pay for their imports!
The US can get away with this scam because it has the
military muscle to compel and enforce this hoax. As stated earlier, this
status quo was accepted especially during the Cold War and with some
reluctance post the collapse of the Soviet Union, but with a proviso –
that the US agrees to be the consumer of last resort. This arrangement
provided some comfort because countries which have sold their goods to the
US, can now use the dollars to buy goods from other countries as more than
80 per cent of world trade is denominated in dollars especially crude oil,
the lifeline of the global economy.
But with the US in full bankruptcy and its citizens
(the largest consumers in the world) being unable to borrow further monies
to buy fancy goods from China, Japan and the rest of the world, the demand
for dollar has evaporated. The dollar status as a reserve currency and its
usefulness is being questioned more vocally.
The End Game
The present fallout can be summarized in simple terms:
Should a bankrupt country (the US) be allowed to use
money created out of thin air to pay for goods produced with the sweat and
tears of hardworking citizens of exporting countries? Adding insult to
injury, the same dollars are now purchasing a lot less than before. So
what is the use of being paid in a currency that is losing rapidly its
On the other hand, the US is telling the whole world,
especially the Chinese that if they are not happy with the status quo,
there is nothing to stop them from selling to the other countries and
accepting their currencies. But if they want to sell to the mighty USA,
they must accept US toilet paper reserve currency and its right to create
monies out of thin air!
This is the ultimate poker game and whosoever blinks
first loses and will suffer irreparable financial consequences. But who
has the winning hand?
The US does not have the winning hand. Neither has
China the winning hand.
This state of affairs cannot continue for long, for
whatever cards the US or China may be contemplating to throw at the table
to gain strategic advantage, any short term gains will be pyrrhic, for it
will not be able to address the underlying antagonistic contradictions.
When the survival of the system is dependent on the
availability of credit (i.e. accumulating more debts) it is only a matter
of time before both the debtor and creditor come to the inevitable
conclusion that the debt will never be paid. And unless the creditor is
willing to write off the debt, resorting to drastic means to collect the
outstanding debt is inevitable.
It would be naïve to think that the US would quietly
allow itself to be foreclosed! When we reach that stage, war will be
inevitable. It will be the US-UK-Israel Axis against the rest of the
The Prelude to the End Game
The US economy will be spiraling out of control in the
coming months and will reach critical point by the end of the 1st quarter
2010 and implode by the 2nd quarter.
The massive US$ trillions of dollars stimulus has
failed to turn the economy around. The massive blood transfusion may have
kept the patient alive, but there are numerous signs of multi-organ
There will be another wave of foreclosures of
residential and more importantly commercial properties by end December and
early 2010. And the foreclosed properties in 2009 will lead to depressed
prices once they come through the pipeline. Home and commercial property
values will plunge. Banks’ balance sheets will turn ugly and whatever
“record profits” in the last two quarters of 2009 will not cover the
additional red ink.
Given the above situation, will the Fed continue to buy
mortgage-backed securities to prop up the markets? The Fed has already
spent trillions buying Fannie Mae and Freddie Mac mortgages with no
potential substitute buyer in sight. Therefore, the Fed’s balance sheet is
as toxic as the “too big to fail” banks that it rescued.
In the circumstances, it makes no sense for anyone to
assert that the worst is over and that the global economy is on the road
And the surest sign that all is not well with the big
banks is the recent speech by the President of the Federal Reserve Bank of
New York, William Dudley at Princeton, New Jersey when he said that the
Fed would curtail the risk of future liquidity crisis by providing a
“backstop” to solvent firms with sufficient collateral.
This warning and assurance deserves further
consideration. Firstly, it is a contradiction to state that a solvent firm
with sufficient collateral would in fact encounter a liquidity crisis to
warrant the need for a fall back on the Fed. It is in fact an admission
that banks are not sufficiently capitalized and when the second wave of
the tsunami hits them again, confidence will be sorely lacking.
Dudley actually said that, “the central bank could
commit to being the lender of last resort... [and this would reduce] the
risk of panics sparked by uncertainty among lenders about what other
To put it bluntly what he is saying is that the Fed
will endeavor to avoid the repeat of the collapse of Bear Stearns, Lehman
Bros and AIG. It is also an indication that the remaining big banks are in
It is interesting to note that a Bloomberg report in
early November revealed that Citigroup Inc and JP Morgan Chase have been
hoarding cash. The former has almost doubled its cash holdings to US$244.2
billion. In the case of the latter, the cash hoard amounted to US$453.6
billion. Yet, given this hoarding by the leading banks, the New York
Federal Reserve Bank had to reassure the financial community that it is
ready to inject massive liquidity to prop up the system.
It should come as no surprise that the value of the
dollar is heading south.
When currencies are being debased, volatility in the
stock market increases. But the gains are not worth the risks and if
anyone is still in the market, they will be wiped out by the 1st quarter
of 2010. The S&P may have shot up since the beginning of the year by over
25 per cent but it has been out-performed by gold. The gains have also
lagged behind the official US inflation rate. It has in fact delivered a
total return after inflation of approximately minus 25 per cent. When
Meredith Whitney remarked that, “I don’t know what’s going on in the
market right now, because it makes no sense to me”, it is time to get out
of the market fast.
In a report to its clients, Société Générale warned
that public debt would be massive in the next two years – 105 per cent of
GDP in the UK, 125 per cent in the US and in Europe and 270 per cent in
Japan. Global debt would reach US$45 trillion.
At some point in time, all these debts must be repaid.
How will these debts be repaid?
If we go by what Bernanke has been preaching and
practicing, it means more toilet paper currency will be created to repay
As a result, debasement of currencies will continue and
this will further aggravate existing tensions between the competing
economies. And when creditors have enough of this toilet paper scam,
expect violent reactions!