Operation Disclosure | By David Lifschultz, Contributing Writer
Submitted on January 20, 2022
CAN THE 1979 VOLCKER ANTI-INFLATION PLAN WORK TODAY?
Compliments of the Lifschultz Organization founded in 1899
Interest rates in the US have been held artificially low by a massive expansion of Federal Reserve credit.
Here bank credit is started to accelerate which is inflationary.
Because of massive Federal Reserve acquisition of US debt to finance the monumental budget deficit.
Inflation is around 7% but looks to exceed 10% soon.
Let’s look at history:
In 1979 the US national debt was 827 billion dollars and in 2021 28.43 trillion dollars. In 1979 the tax revenue was 439.6 billion dollars with a 60.6 billion dollar deficit and in 2021 an estimated 4.047 trillion in revenue with a 2.770 trillion deficit. The 2020 deficit was 3.132 trillion. The 2020 and 2021 deficits were financed by Federal Reserve purchases of 5 trillion dollars of debt driving interest rates so low that the return on bonds was negative after inflation. Interest rates below were not compensatory.
The federal funds rate, which was about 11% in 1979, rose to 20% by June 1981. The prime interest rate, an important economic measure, eventually reached 21.5% in June 1982. That was a consequence of the Volcker plan to stop inflation that I wrote for him.
In 1977 while the prime remained at 61/4 percent industry-wide—a persistent prime-paper- rate spread of 11/2 percent.
Now, let’s say the interest rates were raised to 20% in 2021 to stop the inflation as Volcker did. About five trillion of the US debt is owed to ourselves or government agencies so the actual debt is about 24 trillion. 24 trillion times 20% per year interest is 4.8 trillion dollars which is more than the tax revenue. In 1979 20% of 827 billion dollar Federal debt was 165 billion against tax revenue of 439.6 billion dollars.
Now all the Federal debt in 1979 or 2021 will not rise to a 20% interest as much of it is a different maturities at different rates which will stay at the lower rate of interest until it matures. But we have to remember that the same principle applied in 1979 but in proportion to 1979 the economy was much healthier in that the tax revenue in relation to the debt was much, much lower as to debt. If the Federal Reserve wants to raise interest rates to stop the inflation it does not have much room before disaster strikes when it starts to impinge on expenses like Social Security.
Now, much of this credit went to Wall Street as in 1929 as stocks soared while bonds were in trouble until the Federal Reserve started its massive buying of bonds. If the Federal Reserve tightens credit, then as bond interest rates rise the hot foreign and domestic money that shifted from bonds to stocks will return to bonds. Stocks will crash as in 1929 and bonds will rise.
The US central bank is trapped in a monstrosity of its own creation much worse than when I wrote the Volcker plan which worked. The so-called reset will instead be like 1929-1933 period when we saw the consequences of such mishandling of central bank credit with the rise of revolutionary forces as no one knows what they are doing today in Washington, D. C. and I am not involved anymore. In the US the revolutionary fervor was channeled into Roosevelt in 1932 but in Germany where the government was not highly regarded, as here in the US today, it tore down the entire philosophical basis of the Weimar Republic that was totally corrupt.
THE US FACES FINANCIAL ARMAGEDDON
Compliments of the Lifschultz Organization founded in 1899
The Fed printed a century’s worth of credit in last year alone to hold the ship together (4 trillion dollars that fractionalizes in the banking system). In fact, if we calculate Federal Reserve Credit to 2008 it was about 900 billion dollars for the first 94 years While the dollar is inflating, the interest rates are held low so the foreign money is flowing out of US bonds and into stocks in the hundreds of billions of dollars. US stocks soar from foreign and domestic purchases while the Fed buys bonds to prevent a total bond collapse from foreign and domestic selling. As inflation mounts, the Fed will not be able to print more money as it would trigger hyperinflation. They will tighten money and bond yields will rise reversing the trend where now there will be massive selling of stock and buying of bonds. Foreign selling of domestic stocks will soar. Stocks will then crash as in 1929 as foreigners sell their stocks for bonds as well local US buyers dump stocks for bonds whose interest rate is rising. This will follow the concept that the trend is your friend.
This stock market crash will trigger an implosion of the 1.5 to 2.5 quadrillion derivative market that did not exist 1929. If you divide the world GDP of 93 trillion into 2.5 quadrillion you have a multiple of 26.88. This derivative margin call would be a 1929 margin call of unimaginable size. If base Federal Reserve Credit for over 100 years is now about 8 trillion dollars which fractionalizes into a total M-2 of over 30 trillion as indicated in the chart below, then its further growth since reserve requirements were eliminated last year is theoretically infinite. If this sounds like 1920-1923 Weimar Germany is because it is. We understand that this elimination of the reserve requirement was motivated by the fear that bank write-offs in the so-called coronavirus crisis based on a manufactured medical illusion, see footnote one interview by a renowned authority, could otherwise force a contraction of bank credit from stock market crash losses precipitating further driving the economy into the ground.
The Fed also eliminated banks’ reserve requirement—the percent of deposits that banks must hold as reserves to meet cash demand.
We are quite aware that most of the 2.5 quadrillion of derivatives are notional but in a financial crisis much of that which is notional moves into the money. We are also quite aware that the Bank for International Settlements (BIS) considers the exposure to be only 582 trillion dollars or 6.25 the world GDP but our Swiss sources say this is highly inaccurate understatement to avoid panic.
BIS: The rise in gross market value in 2020 stands in sharp contrast with the relative stability of the notional amount. Overall, it decreased by 4% to $582 trillion in H2 2020.
The four trillion growth of the Federal Reserve Credit in 2020 is charted here below. You will see that in 2008 the Federal Reserve Credit totaled only 900 billion dollars since the founding of this institution in 1913-1914. That means in about 12 years 7 trillion has been additionally created or 7 times as much as in the first 94 years.
In 1929 all you had to cope with was 10% margin for buying stock. Now, the margin in derivatives is infinitesimal. There is almost nothing there and it could be wiped out in a moment.
After the stock market crash of October 1929, the report by the Senate Committee on Banking and Currency (1934) (the “Pecora Report”) attributed the dramatic plunge in broker loans to forced margin selling during the crash. • After the October 1987 stock market crash, the U.S. Presidential Task Force on Market Mechanisms (1988) (the “Brady Report”) documented quantities of stock index futures contracts and baskets of stocks sold by portfolio insurers during the crash (euphemism for the cash settlement manipulation). • After the futures market dropped by 20% at the open of trading three days after the 1987 crash, the Commodity Futures Trading Commission (1988) documented large sell orders executed at the open of trading; the press identified the seller as George Soros.
The Brady report was conducted under Harvard Professor Robert Glauber who knowingly subpoenaed the wrong data in a cover up to conceal the rigging of the market through cash settlement by the major players which continues. This is the Wall Street cartel consisting of the major firms. The major players were instructed to reverse their market rig to undo the crash that they had created to make money in an offer that they could not refuse.
See footnote three for a study of this fraudulent Brady report. It was demanded in January of this year in communications to the House Judiciary Committee and SEC that Glauber be subpoenaed by the regulatory authorities to reveal his fraud which was totally ignored as expected but he “died” shortly after that demand was made in April. Why did we make this demand? Because the rigging the Glauber covered up continues to this day. What happened during that crash of 1987 was the deep state ordered the major firms to reverse their cash settlement positions or face Stalinist consequences such as billionaire investment bankers finding themselves thrown out of forty story buildings committing “suicide”. Anyone who thinks the US is or has been different from any other police state is a fool. Note the recent prominent liquidations of Jeffrey Epstein and John McAfee in prison. This is just the tip of iceberg of slayings and frame-ups by the US Justice System that are routine for those who give the deep state trouble. If you are part of the system as Brennan and Clapper you are not even asked a question by Durham. A reversal of short derivative positions was also similarly engineered in 2008 to stop that crash.
A 2019 tweet from the antivirus software mogul John McAffee’s verified Twitter account supported the claim by his wife that he was murdered: “If I suicide myself, I didn’t,” the tweet said.
Now a private forensic pathologist hired by Mark Epstein to monitor his brother’s autopsy has offered an opinion that the available evidence does not support the finding that Jeffrey Epstein killed himself. Dr. Michael Baden, one of the world’s leading forensic pathologists, viewed Jeffrey Epstein’s body and was present at the autopsy — held Aug. 11, the day after Epstein was found dead at the notorious Metropolitan Correctional Center in downtown Manhattan.
If we use the Warren Buffett metaphor, the derivative implosion will have the effect of a financial weapon of mass destruction. Build back better may end up as the creation of a Frankenstein monster that goes out of control that Elon Musk likes to talk about relating to the power of artificial intelligence. The US will be end up as Weimar Germany after the collapse of Baron Louis Nathaniel Freiherr von Rothschild’s Creditanstalt Bank of Vienna that triggered the collapse of the entire German banking system precipitating the rise of National Socialism. There is a great irony here that the Rothschild rulers of the whole world self-destructed by their own control mechanism going out of control and created their nemesis Adolf Hitler as the Bible people would say measure for measure or the Proverb 11:6 of King Solomon that the faithless are entrapped in their own crafty devices. The dictator of the world Baron Eduard de Rothschild fled Paris before the advancing German Armies singing songs of hatred against usury as they marched into Paris.
Press your fast forward button as you are in 2021. In other words, events today will be much more rapid as this is the age of instantaneous communication or the internet era. It will have the effect of a mass compression of events of uncontrollable speed.
In footnotes two and three below we were inspired by Johann Wolfgang von Goethe’s “Faust” to analyze the fraudulent basis of the entire world financial system in our essay entitled” “Goethe, Faust and the Euro” that was delivered to the Swiss Bankers in Zurich to acclaim and in Dubai before the financial community of the Middle East including the Saudi Central Bankers who said Saudi Arabia was helpless to adopt Dr. Mahathir bin Mohamad’s gold dinar standard without usury as they would be prevented by the US financial dictatorship of the fiat dollar based on the US concept that political power comes out of the barrel of the gun or gunboat diplomacy. Chairman Mao of China learned this concept that political power barrel of the gun concept from the Anglo-Saxons. Chairman Mao looked back on two heroin wars in the 19th century that humiliated China. If you are weak in the world today as in the last two centuries, you are kicked around like a dog.
A notable example of gunboat diplomacy was the Don Pacifico Incident in 1850, in which the BritishForeign SecretaryLord Palmerston dispatched a squadron of the Royal Navy to blockade the Greek port of Piraeus in retaliation for the assault of a British subject, David Pacifico, in Athens, and the subsequent failure of the government of King Otto to compensate the Gibraltar-born (and therefore British) Pacifico.
Dollar diplomacy means the death sentence for Muamar Gaddafi for wishing to undermine the dollar by the gold standard and the death sentence for Saddam Hussein who switched out of the dollar to euros. Iraq sells oil for dollars now.
Here is a discussion on the change of the dollar by Saddam Hussein that caused the invasion of the country. 9-11 was to be used for this purpose but it was so botched up by Cheney, Bush and a foreign intelligence agency that the CIA demanded for covering it up that the invasion would be for Afghanistan to restart the heroin operation requiring the deposition of Mullah Omar and the Taliban. The US invasion of Afghanistan was a heroin war.
The CIA doctored the boarding tapes to show Arabs boarding the passenger planes and blamed the ailing Osama bin Laden who was a failed asset who was giving us trouble in other areas and had nothing to do with it.
My speech was 20 years ago though somewhat brought up to date below in footnote two. Plus ça change, plus c’est la même chose, or the more things change the more they stay the same.
Footnotes one, two and three sequentially below:
An Introduction to Goethe, Faust and the Euro
Compliments of the Lifschultz Organization founded in 1899
The precipitous and calamitous decline in US power from its undisputed peak as the sole world hegemon in 1991 on the collapse of the Soviet Union has to be marked as one of the greatest turning points in history. We demonstrate this both in the military analysis included in this paper and the study of the dying United States dollar. We follow in this study the classical authorities.
It may not appear to most observers that this has happened as it did not appear that the greatest army in the world in France that had held back the Germans in World War One would collapse in 1940 in twenty days. Just for the reader’s information, the nations of the EU today, or NATO, would not last two weeks against the Russian shock armies as that is how long it would take them to reach the English Channel as the preponderant US airpower would be nullified in ten minutes by Russian missiles destroying the NATO airfields. Tsar Alexander I accomplished this against Napoleon though it took Alexander I longer.
How did this Russian rearmament come about? This answer will require a short excursion into history. Anglo-Saxons have followed the Roman tradition of balance of power as their schools taught Latin and Roman history. This has nothing to do with morality even though Queen Victoria rightly said that the King James Version of the Bible was the source of all the British power. It is interesting to note that the English abandonment of the Bible is the primary source of their decline of power. Anglo-Saxon foreign policy was rather guided by the balance of power under the ethics of Lord Palmerston when he said:
“We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”
The Anglo-Saxons engineered the war between Russia and Germany in World War One to destroy Russia though Russia was an ally of the Anglo-Saxons (US and England). England was afraid of Russia moving to India which would have been indefensible for England to protect from a million man land army based simply on the problem logistics. England’s other problem was Kaiser Wilhelm who started to build a fleet threatening the English control of the oceans. It was decided to kill two birds with one stone by World War One. The utter defeat of Germany and Russia pleased His Majesty’s government. It was a total victory.
The rise of Stalin’s Russia worried England after World War One and so it was decided again to nullify Russia by building up Germany for another go at it. Stalin was an extraordinarily capable and cagey operative who had been spying on the Bolsheviks as an Okhrana agent under Pyotr Rachovsky and was swept along in the Bolshevik Revolution. He had liquidated by 1938 all the Trotskyites who had massacred the Tsar, his family and the royalists. If the Chief Prosecutor Andrei Vishinsky’s denunciation of the Trotskyites during the Moscow Treason Trials between 1936-1938 are read, it is found to be almost Biblical in their tenor which can be attributed to the studies by Stalin in Seminary until he was twenty. He taught in the public schools the holy Christian concept of marriage of Saint Augustin restricting the marital act only to procreation and all children were to taught to avoid all forms of onanism. You will not find anything of this kind in the writings of the bloodthirsty guttersnipe Trotsky.
When Hitler took over in Germany in 1933 the United States and England following their balance of power doctrine lent Germany one billion gold dollars from the US and two billion gold dollars from England which today is in excess of 300 billion fiat dollars if not more. This was to build Germany up against Russia and at the Munich Conference Stalin was not invited as it was designed to build Germany up and was hardly a form of appeasement. The goal once again was to see Germany and Russia destroy themselves. Stalin clearly saw this and allied with Germany in 1939. England was shocked.
While the truth about the Hess trip to England has not been revealed, the English clandestine overtures to Germany were to encourage them to invade Poland and then Russia. This is why the English and French Armies were idle allowing Germany to concentrate all its forces against Poland leaving a light screen of troops on the border facing the British and French troops. If Britain and France had invaded Germany as they promised, the German Army would have been split in half.
The problem the Anglo-Saxons faced after World War Two was that Stalin’s Russia was not destroyed as the Tsar’s, and Stalin controlled Eastern Europe and by 1949 was allied with China shifting the balance of power against the Anglo-Saxon nations. In essence the Anglo-Saxons has lost World War Two for instead of Germany and Japan controlling the Eurasian land mass it looked to be Russia and China. George Washington’s “Farewell Address” that the US should not get involved in European conflicts was proving true.
This was a total and costly fiasco.
The Anglo-Saxon reaction was to adopt a policy of containment seen in the Korean and Vietnam Wars, and reversing course on their German vilification campaign to bring them in as an ally against Russia to balance the power and the German’s obliged based on the end of their vilification. Hence NATO was formed and the Russians formed the Warsaw Pact on the other side. Russia’s eastern boundary was secured by their ally China. Stalin’s death wrecked Russia as a group of nonentities took over, and Chairman Mao could not stand the buffoon Khrushchev. Sino-Russian relations went from bad to worse after Khrushchev’s denunciation of Stalin in 1956. By 1972 the border conflict almost had led to war and the anti-communist McCarthyite Richard Nixon ran to Beijing to embrace Chairman Mao as an ally against Russia.
Let’s pause for a moment to ponder this. Here was a fervent anti-communist embracing a very pure form of communism in China which tells us that communism or national socialism had nothing to do with World War Two, nor did making the world safe for democracy have anything to do with World War One, but purely balance of power ideas of Halford MacKinder combined with the creed of Lord Palmerston. The gullible masses who were hated as cattle were to be the cannon fodder fed by the propaganda of Edward Bernays manufacturing of consent with the usual lies as in the coronavirus.
Once Nixon had his alliance with China sealed, the strategic significance of Vietnam was over, and we abandoned the place in 1973. Now China was an ally and we tried to strengthen them against Russia. But it was not until Deng Xiaoping took over that China accepted the terms of our massive build up. The US switched from Japan who was allowed to go sideways and built up China. Japan was no longer important to contain China who was now our ally against Russia. Japan was superfluous.
We taught China how to use their central bank to finance only productive investment as Dr. Schacht did for us in Germany when we built them up, and allowed China to take over our US market from Japan. We built up China to be the largest economy in the world. In the meantime, Russia looked with horror at China and had 400,000 troops tied up at the border. They were bleeding when Jimmy Carter took over.
Carter was a quite underestimated President in this sense. He did not initiate any wars for the US. He and Brzezinski decided to give Russia a Vietnam in Afghanistan to destroy Russia and in 1979 this program was launched. It was a Roman war by proxy.. It was clever. Now Russia was draining by the Warsaw Pact for 600,000 troops, and 400,000 on the border of China, and now they were bleeding in Afghanistan. When Reagan takes over Casey was assigned to go to the Gulf States to order them to flood the world with oil driving oil to eight dollars a barrel to destroy half the Russian budget. That combined with the fictitious PYSOP Star Wars campaign, and Russia was going bankrupt. The display of advanced US weaponry in Gulf War One was the last straw for Russia. They lost their nerve and collapsed.
Here the US took the position that they would not accept Russia into the community of nations as the Prodigal Son in Luke as they publicly avowed but tear them apart into 50 countries run by oligarchs whose sole purpose was to supervise the looting of the oil and other natural resources and let the masses be damned as in the Ukraine.
The BND and the CIA fomented the Yugoslavian disorders in the 1990s Sudetenland style to weaken Russia further and bombed Belgrade for 78 days in 1999. Russia woke up from their delirium by this 1999 78 day bombing and moved to rearm. The first eight years were to develop offensive and defensive missiles and the next twelve were to include the modernizing of the army. This has largely taken place. The 2014 Kiev Coup was to draw them into another partisan war in the Ukraine as we did in Afghanistan. This time Russia did not bite only taking back the Crimea and the the coal states of Donbas and Luhansk.
When China saw this Kiev Coup it was quite obvious what the US was doing, and they became quite worried as they were a net importer of natural resources and Russia was the natural place to look for it. They did not want to lose Russia to the Euroland. Also, they were too dependent on the seas patrolled by 11 US carrier task forces and they needed to turn to the Eurasian land mass to divert their trade from the seas to land by high speed trains that could go from China to Europe in 48 hours. Russia could supply all their natural resources and they could supply all the technologies that Russia required. This was part of the vision of the BRI or Belt and Road Initiative. This required a rapprochement with Russia and an alliance. The United States could not accept this alliance out of balance of power fears, and this is the sole cause of the present friction between the US and China. This ends our short historical excursion.
Professor Quigley had two famous students who made their way in the world which were former President Clinton who praised him to the skies in his “Inaugural Address” and HRH Prince Turki al Faisal, the former head of Saudi Intelligence (Al Mukhabarat Al ‘Ammah). In my conversations with Bill regarding Professor Quigley, he said that he followed Quigley’s concept that technological advancement was the basis of the advance of all civilization as outlined in Quigley’s book “The Evolution of Civilization” and this was the foundation of his entire political career. His greatest obstacle to achieving these goals was the institutional bias against change which he resolved by creating the dot.com era that Bill said he did not care if 99% of those companies went bankrupt as long as the 1% drove the United States economy forward. This approach worked amazingly well and Bill left the presidency with such giant budget surpluses there was fear that in no time that entire national debt that is now around 21 trillion dollars would be paid off. Even Arthur Laffer, the inventor of the Laffer Curve, in a recent debate sponsored by the Wall Street Journal, praised the former President as creating such great incentives to growth.
I had gone to school with Prince Turki at the Hun School of Princeton, and had flown to see him when he was Ambassador to London as the US was about to invade Iraq under George Bush II to see if we could work out a plan to stop the invasion, and my colleague held secret talks with Saddam Hussein and his generals offering them incentives and safe passage out of Iraq if they would turn over the country to a leader of our selection. This would have avoided the destabilization of the entire region as the destruction of the Sunni Iraq tilted the balance of power in the favor of Iran. Saddam and the generals agreed but later Saddam reneged. The generals withdrew at the siege of Baghdad which was therefore won relatively without cost and received their reward.
It looked as though President Clinton was establishing what Quigley called a reorganization of western civilization so that its dynamic growth could continue. In essence, Clinton found the US in a form of stagnation as the GDP growth figures were pure fiction based on the falsification of records where inflation was eliminated by removing from the CPI commodities or goods with rapidly rising prices with lower prices for supposedly comparable items. This falsification continues. The switch by George W. Bush to endless Islamic wars as planned far in advance of the 9-11 false flag operation created trillions of dollars of expenses diverting from productive growth to non-productive military appropriations for meaningless brush fire wars. We see this is in the industrial collapse in the rust belt and the debilitation of our infrastructure. All that Clinton created was destroyed. Bill bewailed to me that his work was needlessly being thrown away. And the United States continued on its path of ruin until President Trump began trying to rebuild the destroyed American industry by stopping the rigging of currencies as indicated next.
Quigley in his introduction compares western civilization to others that have declined and fallen before it. In the case of the Canaanite civilization who descended from Noah’s grandson through Ham the core or beginning of that civilization was located in and around Tyre and Sidon. Tyre was famous as a great seafaring power which was similar to later seafaring nations as Venice and England and now the United States. This Canaanite civilization in Tyre planted colonies in areas such as what became Carthage, and interestingly enough, Carthage grew to be a greater power than Tyre. I use that example as that was very similar to what happened with the colonies of England so as England declined as a great power its colony the United States surpassed it as Carthage had surpassed Tyre. Although Quigley does not attribute this to moral decline as he should but rather to the core (Tyre and England) diverting their time to pastimes as pleasure, art, ideas and leisure instead of material work, the non-core Puritanical United States focused only on work or materialism as pleasure was a form of sin to the Puritan founders of the US. Thus peripheral areas became militarily stronger than the original core civilizations.
Western civilization developed from the classical civilization of Greece (Elisha or Hellas) and Rome (Javan as in Ionian Sea) or the descendants of Japheth son of Noah, and the power initially started in Greece but transferred later to Rome (Tiras). The Europeans are descendants of Tiras and the Russians Meshech (Moscow, or Rosh Meshech as Russia-Moscovy as the center of Russia) the descendants of Japheth. This is western civilization. It incorporated the Bible that was transmitted to them by the descendants of Shem.
However, the United States is presently in a state of moral and material decline almost unprecedented in history. 70% of its 17 to 24 year olds are not fit to serve in the military largely based on the diffusion of drugs and vice as in Carthage. The Romans say they destroyed Carthage for moral reasons as it was given over to human sacrifice and sodomy which in a sense is proliferating in the west in the form of abortion and sodomy. These are signs of a massive, moral decline while power is starting to transfer to the Asian nations which are focusing mostly on the material aspects of western civilization. And the House of Representatives and Senate of the United States are acting as the Carthaginian Senate who undermined their greatest general Hannibal and are largely to blame for the irrational form of funding weapon procurement as in the twenty year F-35 whose 400 billion cost blueprints were hacked anyway by an adversary. This was paralleled in some of our history by the removal of General MacArthur from running the Korean War by a Pendergast mob frontman, and since then the calibre of our military leadership has been in a precipitous decline as no one with talent would like the mob telling him what to do as the monetary remuneration is no inducement to stay as it does not compete with industry or Wall Street. If the DIA or CIA or NSA have anyone of great talent, Google offers them a million dollars a year to come to them and off they go.
This is the introduction to the present work. It has been largely revised to cover the Quigley analysis in more detail from a previous work that we presented. Since the next exposition will demonstrate that the dollar is intrinsically worthless, it in necessary also to enter into a discussion of the waning military power of the United States which can no longer intimidate nations to use the dollar. The value in exchange of the dollar and its military power are thus inextricably connected.
Goethe, Faust and the Euro
By David K. Lifschultz
We find Johann Wolfgang von Goethe’s Faust in his library in Germany around the late 18th century in a state of manic depression contemplating his forty years spent in the study of philosophy from the ancient Greeks and Romans to the the Schopenhauers, Hegels, and Kants of his day. He had nearly gone insane reading the Critique of Pure Reason and it suddenly had dawned on him that he had wasted his entire life drowned in books and that all his learning was worthless. Mephistopheles, the Devil, seeing his opportunity to prey on the spiritually weak, approached him to say all was not lost. He could make up for lost time, and offered him the most beautiful woman in the world (Margarete), and a paradise on earth with her at his side, and all that he had to do was sign over his soul on the dotted line contracting to deliver it up to him at the appointed time of his death. Our friend, Faust, tired and exhausted in studying the vain fruit of the tree of the knowledge of good and evil, decided to choose what he thought would be the new route to Paradise.
In this jolly period Dr. Faustus and Mephistopheles alighted on a Kingdom in Germany where the bankers in Frankfort had created a species or gold shortage, and thereby had induced a depression here in Holy Germany for the purpose of dominating or overthrowing this Christian Kingdom. The population was near to rioting in the streets as they were hungry, the country was is disrepair everywhere with buildings looking like they were going to crumble, and there was a distinct possibility of the King being overthrown after a thousand years of the monarchy.
Enter Dr. Faustus (Goethe) and Mephistopheles (Mayer A. Rothschild) into the King’s palace, and there they proposed the John Law remedy of paper money and credit to be created out of nothing to solve the problem of the Frankfurt gold manipulation. The King exclaimed that how could he sign off on a paper and currency that had no gold backing, and not be perceived as a fraud. Mephistopheles answered that they would put the King’s picture on the currency, and they would sign his name to the statement that the currency was backed by all the gold in the kingdom that had not yet been discovered and dug up, and that would solve whatever qualms the population might have had. The King said that it would never work and would not be the first King in his thousand year line of the Holy Roman Empire to have committed such a fraud.
Mephistopheles and Dr. Faustus then proposed a grand ball where all the beauties of the Kingdom would gather, and the liquor would flow profusely, and everyone would have a merry time. The King was plied with drink until he lost his senses, and they then put the paper currency decree into his hand, and he signed it. While the drinking celebrations lasted weeks, Mephistopheles was at work spreading the currency around and the Kingdom became prosperous and happy. Mephistopheles became the finance minister and central bank head, and coordinated with his kinfolk at other central banks. These were the same folks who had induced the depression in the first place so they could take over this kingdom that was holding out.
Nevertheless, finally the King sobered up, and in walking through the streets of his Kingdom he found that all had changed, and it was happy and prosperous. When he asked how it happened, and found it was due to his having signed the paper money and credit decree, he was furious. What a fraud, he cried. His wisest minister warned him that the new power transferred to the finance minister spelled the eventual doom of his throne, and would lead to the diabolical overthrow of the Christianity that he had sworn as monarch to support over all other things, and the total debasement of all womanhood in the Kingdom as was later seen in Holy Germany during the Weimar period. But Mephistopheles countered that it was too late, and that he would certainly be immediately overthrown if he withdrew the paper as the population was so happy and industrious. The King feared the consequences and relented.
Goethe summarized this series of events with the following poetic verse:
“I am fed up with this endless how and when, if there is no money, let us make it then.”
And how this make believe paper works is the next part of this discussion.
“Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778)
The gold value of the dollar in 1920 was $20.67 and today an ounce is worth $1,163.70 or around 56 times more expensive or 1.776% of its earlier value. That is a 98.224% depreciation of the dollar in relation to gold.
Now, let’s look at the CPI Index which is a little more optimistic giving it $3.48 in value:
Decreasing Purchasing Power of the U.S. Dollar: What’s $10,000 in 1900 Worth Today?
If a shopper were magically transported from the year 1900 to 2012, the $100 bill that he had in his wallet in 1900 would now be worth only $3.48! That is, $100 in 2012 would have the purchasing power that $3.48 had in 1900; $10,000 would be worth only $348 today. That’s a 96.4% decrease in buying power. Our shopper would consider current dollars virtually worthless. (Note: the calculations in the post were made using the inflation calculator introduced earlier this month.) This almost parallels the decline in relation to gold and it is worse than it looks as the CPI has been falsified by removing from it products whose price rises so much it starts to be substituted by other products. This skews the inflation rate downward. The dollar is almost all gone. The picture is worsens even more when you look at the gold behind the dollar using the unaudited gold reserves recorded to be Fort Knox and the New York Fed which are 8,133 tons or 260,370,000 ounces. If you divide these ounces into M-3 of 18 trillion you come to $69,132.38 an ounce.
It will be the fate of all paper and fiat credit systems that the monetary unit in such a vehicle will die. History is strewn with American Continentals or the French Assignats but the most curious part of the German hyperinflation which was largely caused by the overproduction of the fiat mark was that in 1923 what was left of it vaporized even though the money supply no longer was increasing. People stopped believing in it. What was even more curious was that Dr. Hjalmar Schacht created a new currency with nothing behind it and it maintained its value and he was consequently called the old wizard. Yet the Saigon currency after the North Vietnamese surrounded the city vaporized to zero. What happened to Milton Friedman’s monetary theory of measured expansion or that of Keynes for that matter who thought digging for gold was as stupid as burying dollars and then digging them up? (See Keynes “General Theory” and Friedman’s “Monetary History.”) In each case the value that was thought to be there was what it was thought at the time to be and not what it was in reality. What this really represents really is a substitution of monetary transubstantiation making according to Karl Marx the jealous god of money in place of the Catholic transubstantiation.
Fiat money and usury are a social control mechanism that are founded on principles that according to Aristotle are against nature (Politica 1258b) in that they cannot create their own children and thus cannot create the interest to pay it back. For example, if I lend to a member of this audience the 176,300 tons of gold which is all that exists in the world, and ask for ten percent interest payable in principle and interest in a year, then the 176,300 tons of gold plus the 17,600 tons of interest cannot be paid in full as there is no gold in the world to pay the interest. In other words, the system based on gold and interest (usury) cannot work as it cannot pay the interest on the fully extended lending base. But even if we used paper, and people believed it was gold, the paper too cannot procreate. So once the money is fully lent out, then no further lending can take place nor can the interest be paid unless you hypothecate out of nothing additional paper or credit. The system would otherwise start an implosion if it were not hypothecated with additional credit or paper money. Such an implosion took place during the time of King Edward the Pious of England as the weaker creditors started to default first and then the stronger ones until the usurer had all the wealth of the kingdom without having done any real work. King Edward simply took all the money back from the usurers and expelled them from England hence he was known as the pious.
Dante placed the usurer in his seventh rung of Hell with the sodomist as the usurer made gold fruitful though it was not, and the sodomist made what was fruitful unfruitful. In other words it was natural to sow in the field to reap but sowing gold cannot produce an increase and the sodomist does not plow in a field where anything will grow. That is why it is against nature. He consigned both to the seventh rung of Hell for the sinners against nature and God as these sins are forbidden in the Bible. Shakespeare understood this in his play “The Merchant of Venice” in that Shylock says he makes gold fruitful like Laban’s flock that bore wages to Jacob of the ring streaked and spotted cattle but this could not make gold fruitful.
And Shylock tells us at the trial that he really wants the life of Signor Antonio because he was interfering with his control mechanism for ruling over the society for his lending without interest would drive his system of control out of business. It was through that control mechanism that Shylock controlled the state. He was offered by Bassanio ten times what was owed and refused for state control was more important than the multiple interest offered by Portia or the multiple principle offered by Bassanio. Therefore, he wanted Signor Antonio’s death though the extraction of the pound of flesh that was already forfeited and not the money.
I would not recommend to the audience that anyone seek to interfere with this control mechanism as he would be striking at the roots of the control of the state of the present masters of the universe and these masters would react no differently than Shylock who wanted his pound of flesh as that would have ended the threat by slaying Signor Antonio the representative of the love your neighbor as thyself state. The Rothschilds and Barings as Lord Byron points out in his poem at the end of this piece replaced the sovereign monarchs of Europe as control shifted to those who controlled the creation and contraction of money (largely fiat) through the banking function usurping the right of kings as sovereigns to issue money (which should have been restricted to gold) and used the sin of usury as a control mechanism.
It was through “the manipulation of the quantity and flow of money which enabled them to influence, if not control, governments on one side and industries on the other. To do this it was necessary to conceal, or even to mislead, both governments and people about the nature of money and its methods of operation. In 1909 Walter Rathenau, who controlled the German General Electric Company, said ‘three hundred men, all of whom know each other (bankers or their agents), direct the economic destiny of Europe and choose their successors from among themselves.’ It must not be felt that these heads of the world’s chief central banks were themselves powers in world finance. They were not. Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down. The substantive financial powers (fiat money) of the world were in the hands of these investment bankers (Rothschild and Baring, etc. also called ‘international’ or ‘merchant bankers’ ) who remained largely behind the scenes in their own private unincorporated banks.
This is the so-called invisible hand of Adam Smith or his masters of the world replacing the royal monarchs. It was thought necessary in order to carry out this control to destroy the entire moral fabric of of Christian society. In this the Rothschilds were preeminent together with their lackey J. P. Morgan until about 1941 when the German Panzer Armies marched into Paris singing songs of hatred against usury.” (Source Carroll Quigley in his ‘Tragedy and Hope’ slightly revised and brought up to date.) Plus ca change, plus c’est la meme chose or the more things change the more they stay the same.
Alfred Marshall, J. M, Keynes teacher at Cambridge, struggled with this Aristotelian fallacy in our monetary system and could not solve it. In other words, the gold or paper money cannot create its own liquidity for the interest to be repaid and requires a fraudulent hypothecation to keep it going. And as the monetary aggregates expand, it becomes more and more difficult to control them until they self-destruct from the inherent contradictions. He was the last one and there are no others who tried to tackle it since.
The control mechanism works like this. If we take the Euro central bank reserve of 1%, and the Euro is not backed by gold, and I have a billion in capital which I invest in my bank, then my bank will create a hundred billion of new money as it expands under a 1% reserve requirement. The equation is .01x equals a billion so x equals 100 billion. So from a billion in gold or fiat money is created a 100 billion. My goal is to make 10% profit on this money as it expands like an accordion through the EU fractional reserve system, and while interest rates vary, we will use this figure as a simple proxy. So I make ten billion a year out of my one billion in capital or ten percent of my now 100 billion. Now let’s say my neighbor is as rich as I am and invests a billion dollars in gold to build an automobile plant as Henry Ford, and makes a thirty percent profit, then he makes three hundred million dollars a year to my ten billion. He is just as capable and intelligent as I am but I have the fractional reserve banking system behind me. And I make absolutely nothing but money out of nothing. I have no inventory to keep. My wealth is a bookkeeping entry that everyone believes in. As I make ten billion a year in profit, I grow richer and richer. How can my Henry Ford neighbor keep up with me? I have to win the game.
And before you know it the Dukes of England with their grand estates are nothing compared to me. I came to England in 1798 and my family took over the whole country as I had all the money. As the Dukes lost their lands to me, I decorated my board with their graces (see Anthony Trollope’s “How We Live Now”). Even the Queen had to come to me when she needed money and I lent it to her (Proverbs 22:7). I became the master of the universe and the Queen became a figurehead (see “Coningsby” by Benjamin Disraeli). I declare on television that I am not accepted as an aristocrat despite my purchased title as I am only in this country five generations but what I don’t say is who cares. I am the ruler and that is all that counts.
Now, my friends, this is why gold cannot work. You cannot mine gold fast enough to cover all of the fiat credit that has been created out of nothing. Nor can the paper money keep up so I just have to make more of it under my system. As our Goethe says in Faust, I am fed up with this endless how and when, if there is no money, let us make it then. And so we have.
Now what is the real value of gold. If the United States has 8,133 tons of gold in Fort Knox (unaudited) which comes to 16,267,000 pounds. The pounds translate to 260,270,000 ounces. If I divide that by M-3 money supply, which is to divide the ounces into about 15 trillion dollars, then the gold backing for the dollar is $57,630.00 for each ounce. The quoted ounce today is around $1,174.40. Twenty dollars in 1920 used to be convertible into one ounce of gold. Now, what does this mean? It means that the fiat money and credit that has no value has supplanted the gold that has intrinsic value until at some future time the jig is up, and reality dawns on the masses as during the German hyperinflation or during the Saigon siege. It is then, and only then, that they will escape from their collective insanity.
I used this literary excursion, taking some liberties with the text, to introduce the discussion of the Euro for reasons which will be soon apparent. The goal of consolidating Europe into one state goes back in modern times to Napoleon Bonaparte’s Continental System whose goal was to create a system of Empire that was self-sufficient and would preserve within it its industrial capacity against the exports of Britain. Here we see a substitution of the Christian consolidating principles of the Holy Roman Empire being replaced by purely materialistic considerations. Napoleon was not the only one to see that you must preserve your own industries if you wish to have power, but Friedrich List wrote about it later in Germany and Alexander Hamilton about this time set up the United States with tariffs so that its industries would not be destroyed. Napoleon used his military genius to foster this system but was confounded in Russia as Germany over hundred years later in the early 1940s. Germany had sought to create a Eurasian Empire from France to Japan using Japan as a partner. Again, Britain in its traditional classical balance of power role, found allies in the United States and Russia to stymie this German project that would have shifted the balance of power against the Anglo-Saxon nations.
The Euro is a new effort led by Germany to achieve a new Continental System. It was Germany that pressed the Euroland nations to extend the Nato Alliance to Poland to protect its industrial investment in eastern Europe in direct violation of the agreements with the drunken Yeltsin. Germany’s foremost goal was to create this 16 trillion Euro common market and Euro currency as a direct competitor of the United States where it would finally have a similar market to scale its products. Then, combined with their currency rigging, they would invade the United States wrecking what was left of their domestic industries that they and Japan had not already destroyed. It is for this reason we do not see Germany giving up on this dream just because a Portugal at 1.4% of Euroland in GDP, or Greece at 1.8% are having problems. (I have to revise my opinion on the longevity of the EU and Euro based on their present conflict with Russia for if it is not settled soon it may lead to the breakdown of the EU and the Euro.) These problems benefit Germany though it cries with crocodile tears of distress over the thought of subsidizing the weaker nations while its exports soar as the Euro falls while within the EU their manufacturing destroys their southern neighbors. These German export profits more than offset some lending to the states as Greece and Portugal that are in IMF tribulation.
If there are any problems here it is between the bank exposure of the main Euro nations in lending to the banks of Portugal and Greece, and they would be concerned with triggering another derivative crisis that happened when Lehman went down. The pulling of the plug at Lehman detonated parts of the quadrillion derivatives which represent 17.5 times the world GDP of 65 trillion (This talk was delivered several years ago and I have not revised some the figures.) The currency component of this derivative structure is 58 trillion alone, or nearly the GDP of the entire world. I hold up before this august audience the June 23 article in the Financial Times on quantitative easing of the United States. There is a gigantic fact here that few really understand. It is the 2.9 trillion dollars of Federal Reserve Credit (now over 4.434 trillion). At the time of the fall of Lehman there was only 900 billion of this credit built up from 1914, and in the three months following the Lehman catastrophe the Fed created one trillion in new credit, or a hundred years worth, to save the system, and another trillion over the past few years to keep the United States from falling back into crisis and to try to grow it out of its problems. Would Germany want to pull the plug on Greece or Portugal to face another Lehman as they could not be sure how much effect a Grecian collapse could have on the derivative structure?
It is important to note that about 2.3 trillion dollars of the Federal Reserve credit is held by the banks as excess reserves. The banks that hold these excess reserves lend them back to the Federal Reserve at interest rates above market for two reasons. The first is to allow the banks to generate profits so that they could very gradually write off the bad debts that overwhelmed their balance sheets from the 2008 crash. If they had showed these losses all at once, it might have caused a banking panic. It took eight years to reestablish the balance sheets of the banks on a sound footing. The second reason was by paying higher than market rates this money was noninflationary as it did not expand the money supply by fractionalizing in the banking system by a mechanism explained earlier.
I might add in passing that these quadrillion of derivatives have been described by Warren Buffett as a potential financial weapon of mass destruction, and whose description was confirmed by the historical events of October, 2008, have not served as a deterrent for their continued utilization as the derivative aggregates continue to mushroom into larger proportions. The problem of the derivative exposure continues to the present day.
As we said in the introduction, we have to discuss in our talk about the US dollar the declining power of the United States military which will demonstrate that the power of the dollar that is one side of 88% of the international currency trades cannot continue as the most powerful financial control mechanism. Its role was only enforced by its predominant military power which is now inferior to that of Russia and therefore such a dollar hegemony cannot last. present As the dollar is intrinsically worthless, its doom is sealed without that global military power.
The S-500 anti-missile missile system is capable of sealing Russian of from ICBM and Cruise missiles. It travels at a speed of 15,480 miles an hour rising as high as 115 miles traveling horizontally over 2,174 miles. It ends MAD or mutually assured destruction as it seals Russian air space and is being superseded by the S-600 that is a massive improvement.
In a sense the US is no longer a global power according to Brzezinski if this is true which it is. The ability of the United States to continue to intimidate the world by threats of sanctions ultimately reaching the point that the US blocks an Iran or Russia from using CHIPS and SWIFT interbank clearing ending its ability to trade with the world in an efficient manner is gradually eroding in concert with the US military decline.
It is important to note that this financial tool of sanctions has hanging over it a 1.5 quadrillion of derivatives that nearly brought the world down in 2008 being triggered by the fraudulent subprime and credit default swap mechanisms which required four hundred years of credit creation in the aftermath to save the world system but if Iran were to be placed in this squeeze again by the new sanctions, or Russia for that matter, the al-Houthis have threatened to destroy all the Middle East oil. A cutoff by tactical nuclear missiles by the al-Houthis obtained on the Black Market could destroy in the Middle East over 20% of the world oil supply or twenty million barrels a day, and trigger a detonation of the quadrillion of derivatives that could not be papered over as in 2008 creating a depression worse than the 50% unemployment in 1933 that brought down the Weimar Republic in a national revolution as outlined in the article below. This is not to speak of the anti-ship missiles lining the shores of Iran that can block the Straits of Hormuz’s 22 million barrels of oil that travel through it, or 22% of the world oil supply, that can well be another source of the destruction of the 1.5 quadrillion derivative market on top of the 88 trillion world GDP. Ask for our Straits of Hormuz study. for further details.
These exposures that lie beneath the surface of the world financial system are not widely understood. And let’s go on with further analysis of the system. It is also important to realize that the credit system of these banks is a closed loop and no money leaks from it except when it is converted to cash, and no money leaks overseas unless it is converted to cash and carried overseas. The latter is not easy to do with western nations watching like hawks these cash transfers via the terrorist laws, or really enemy of the people statutes a la Soviet Russia or East Germany. Essentially, this credit dollar based on deposits at banks floats against the credit yuan or credit yen in a similar manner. The problem with this floating system is that it is not clean. There are dirty floats all over. And instead of the dollar floating by supply and demand against the yen, the Japanese erect a currency tariff against our goods by buying our currency to raise its value so they can dump their goods on us. If currencies truly float, the deficit countries based on excess say dollar credits would fall making it harder for them to buy imports, and it would serve as a self-correcting mechanism. This mechanism is interfered with by these dirty floats. This is discussed in the letters exchanged between myself and the US Secretary of the Treasury at that time Robert Rubin.
When we talk about hot money in the United States of about 11.7 trillion we refer to deposits or Treasury instruments that can be immediately sold and converted to foreign credits. If this hot money were to be converted all at once into foreign credits, the currency would crash as it would constitute a dollar exposure and not a dollar turnover as the 5 trillion that turns over on the foreign exchange market each day. (The following figures have not been updated through to the next paragraph.) The only reserves the United States has against this potential run on the dollar is about 300 billion plus of gold at market and currencies at market. This is far too small to tackle the problem and if the gold were sold on the spot it would crash its price causing it to yield much less an amount than the nominal reserve value.
Now, I just looked up at the Federal Reserve balance sheet to find 24 billion in foreign currencies. So our nation’s liquidity is 307.47 billion at today’s gold price plus 24 billion in foreign exchange plus IMF SDR quota of 83 billion. The US can draw up to its quota of 83 billion. The demand on the US in hot money is 11.7 trillion. Generally, a sound company likes to operate on a two to one ratio of current assets over current liabilities or 2 to 1. The US current assets over current liabilities comes to a ratio of current assets to liabilities of the US of 379.47 billion over 11.7 trillion or a ratio of about 1 to 31 using 58% of the dollar value for SDRs.
What this means is if there was a run on the dollar whereby Japanese holders of over a trillion dollars in US dollar assets sold all of their dollars on the open market, the US could only buy up of this debt of 379.47 billion dollars. Then, it would have no reserves and go bankrupt. The dollar would keep falling unless the US could persuade some other country to buy up the dollars. Then, the issue is whether the US was just illiquid or insolvent. An illiquid company would have been General Electric in 2008 which could not turn over its commercial paper, and in a default, would have had to declare for bankruptcy protection while it liquidated its other assets. All of its assets then exceeded its liabilities. But in a collapsing market, the other assets of GE other than cash would be falling in value as we saw in the concomitant crash of the 2008 stock market. So if GE had huge amounts of commercial real estate, that real estate could have been suffering a rapid erosion in value, and theoretically all of the Triple A assets of GE could have been collapsing at the same time.
In the case of the United States, if it were to be treated as a company and not a sovereign, then if it had a deficit net worth or net deficit position of around 10 trillion dollars which is around the figure it would mean in a liquidation its creditors could not be paid off. The response to this observation is that the entire wealth of the US would be at the disposal of the US and it could issue an asset tax on all its citizens sufficient to pay off its debts. The national debt in relation to the GDP of the US is about 107 to 108 per cent but this does not reflect the total wealth. Its total wealth after debt is estimated at 93.5 trillion in 2017. If we say that the US government has access if not control of all the wealth of the United States which verges on socialism, then the US could tax 8 trillion of that wealth to pay its foreign debt obligation provided the foreigners would take assets in other forms than dollar credits. However, in the world crisis triggered by the collapse of the dollar, the asset values in the United States could fall as much as 90%. This may sound far fetched, but in 1933 at the heart of the depression with unemployment about 25% real estate prices fell over 90% in New York City as the stock market. If all assets similarly fell 90%, there would be nothing left of the US.
If truth be told, if the creditor nations were to try to remove overnight many trillions of their foreign investment from the United States, it would be regarded as an act of war and the assets frozen. The same action would be taken against Japan of freezing their dollar assets in the United States. The issue of turnover against exposure discussed above can be easily explained by the following comparison. If you have a billion dollars to trade with which is hypothetically all my net worth, and I buy and sell bonds all day to the tune of 300 billion dollars, then it would be foolhardy to say that what is my billion of reserves against my trading prowess of 300 billion dollars a day in bonds. But the exposure I have is a billion, and against that exposure the turnover means nothing except as to whether I lose or gain money each transaction. If I lose two billion dollars, I am broke, and minus one billion dollars as happened to Long Term Capital Management whose derivative position was over a trillion dollars. That demonstrates that when the president of the New York Federal Reserve, William McDonough, told me what is 11.7 trillion (it was less then but I am using the current figure to avoid confusion) in hot money exposure when less than half that amount trades each day, either he did not know himself or he was purposely trying to mislead me as to the significance of this exposure that can be ruinous.
The three trillion exposure to China due to their surpluses is therefore potentially very dangerous for the United States and other deficit countries as if they converted these dollar credits into yuan credits as the Middle Eastern countries could to their currencies, the dollar would collapse on the foreign exchange markets. It is not likely to lead to a short-term catastrophe as China is not prepared to cease exporting to us and others, and nor they would benefit from a world depression as it would deter their march into becoming the dominant world power. In any event, China’s dollar credits would also be frozen if the effort were initiated as those of the Gulf States of Arabia.
Another example of exposure versus turnover is the high frequency turnover in the stock and Forex markets. The average holding or turnover of stock in the United States is twenty seconds. In the Forex markets, which is 70% electronically based on preset algorithmic trading, the roundtrip trades or turnover are completed in under a second on average, and the Big Five players are in and out in under 1/10 of a second. This is also called systemic trading responsible for about half the trades on the New York City stock exchanges and they are tied into the cash settlement manipulations. Ask for our studies on cash settlement if you are interested. This is truly an unproductive use of capital as it produces nothing of value to the society, as well as most of the quadrillion of derivatives. The Tobin transactional tax to discourage this wasteful expenditure of national resources is one way to redirect bank credit. Also, another Glass-Steagall Act should be passed which would include removing these derivative exposures from their balance sheets. In addition, taxes should be raised on short-term profits to 90% to discourage parasitic trading and reduced on long term gain over five years to 5% to encourage productive investment wiping out most hedge fund and investment bank trading especially utilizing cash settlement for manipulation by those that control trillions of investment capital. That was behind the crash of 1987 where we reversed the crash by ordering the major Wall St. players to reverse their position short positions.
As John D. Rockefeller laid out for his Standard Oil combine that is best reflected in one of its former components, EXXON, whose Rockefeller principles they still follow, derivatives for decreasing risk are an authentic business purpose but not to gain speculative profit. As John D. wrote in his “Random Reminiscences”, “Standard Oil is not concerned in speculative interests as the oil business itself is speculative enough, and its successful administration requires a firm hand and a cool head.” And this principle was carried forward in a recent Annual Report of EXXON that stipulated that derivatives are only used to protect investment but not speculation. An example would be farmers selling their futures in corn to Kellogg to pay for seed, and supplies, so that Kellogg can be able to plan on a stable price for their corn flakes but not otherwise for the purpose of gambling using bank credit. Or in the case of EXXON, their selling in the future their refinery production of products to be sure they reaped the money necessary to pay for the building of the refinery while it gives the buyer an assured supply of product at a fixed price they can plan on and guarantees EXXON a sale. In a sense, the Shell future sales of natural gas at their 22 billion dollar Sakhalin project was done to protect their balance sheet accords with this principle.
There is a misconception that the creation of bank credit, or the M-3 money supply, is solely the concern of the banks and should remain within the confines of the free market. But the creation of money out of nothing in our fractionally reserved banking system is essentially a conversion of the wealth of one part of the population to another, and at the very least should be guided by the government as Dr. Hjalmar Horace Greeley Schacht did as Reichbank President in 1933 where no bank credit was allowed to be used for unproductive purposes such as speculation and where he turned around the catastrophic unemployment situation relatively quickly in that 50% of the German unemployment was wiped out in six months and the rest by 1938. John Maynard Keynes in his introduction to the 1938 German edition of his “General Theory of Employment, Interest and Money” declared that Dr. Schacht was the greatest exemplar of this theories. (This approach was replicated after World War Two by the Schacht Reichbank protege, Dr. Wilhelm Vocke, who created the German postwar economic miracle, and my friend, George Champion, who was then head of Chase Manhattan Bank, invited him over in the 1950s to explain this to the American Banking Association).
It was Schacht in 1923 who stopped the German hyperinflation by ceasing to supply credit to the currency speculators who were shorting the Mark, and this created a surge in the Mark ending the hyperinflation. The speculators could no longer go to the central bank for credit to cover their short but had to buy it in on the open market. Similarly, the Chinese authorities blocked the speculators and insulated their economy from the so-called Asian currency contagion of 1997 by buying both the Hang Sang Index and their own currency which the speculators had shorted thereby creating a bloodbath among the speculators–who promptly called in Milton Friedman to call foul as government intervention against manipulation was not regarded by him a part of the functioning of a free market.
Creation of money was always historically under the rule of the sovereign whether it was a monarchy or Congress and not to be held in private hands for their use according to their sole discretion. This does not even cover the lender of last resort role. Even Goldman Sachs had to flee to for cover in the Lehman debacle under the Federal Reserve tent despite almost all of their positions being in the right direction–that is short, as well as General Electric, who could not turn over their commercial paper liabilities created under the so-called genius of management, Jack Welsh, to save interest expenses against the higher interest expenses for the more conservative long-term bond issuances, which is another reason for the right of the government to exercise control over this sector that they have to bail out or face the destruction of their economy. The thought of this Jack Welsh must cause the great Thomas Edison to turn over in his grave.
We can look at total central bank gold reserves of 30,562.5 tons or 977,984,000 ounces, and divide these ounces into the world M-3 estimated to be 60 trillion, and come out $63,000.00 per ounce. This relates to the earlier value of the dollar as $20.00 an ounce in 1920. This expansion validates Aristotle’s contention in Politica 1:3:23 that the interest rate system is contrary to nature in that the gold, paper or credit cannot produce its own children, or the liquidity to cover the interest without either hypothecating the gold or issuing more paper money or credit. What this means in ordinary lingo is that if I own a house, and it is worth ten million dollars, and I sell ten five million first mortgages on it, then I have hypothecated the asset gaining fifty million in credit on a ten million dollar asset. Doesn’t that sound familiar in the various alphabet soup derivatives involved in the last Lehman crisis? So when England in 1900 had a 3% gold base against its Pound credits, it had hypothecated its gold over 33 times with similar Pound issuances. It was an untenable gold interest rate system as the dwindling ratio of gold ounces could not sustain a run on the central bank because of the inverse credit pyramid, and the Pound failed in 1931 with the English going off the gold standard. That spelled the death knell of British power as it iid for the US when it went off the gold standard under Nixon. We have already treated the lunacy of a fiat money representing nothing redeemable by another IOU nothing piece of paper representing nothing.
There is the question of whether gold is in sufficient quantities to allow for expansion of an economy but the liquidity for the economy can be achieved by the gold rising in value if there is a proliferation of other commodities far in excess of the gold base, and in that sense gold should float as a money in the form of a commodity against other commodities. Therefore, in a system under Sharia law gold savings would be rewarded as the production of the system expanded, and it would create a much more valuable gold and a certainly honest currency. The rising value of gold in such a situation would also furnish the additional liquidity for the financing of the growth of the economy. Even a currency separated from gold, whose value constitutes a form of secular transubstantiation, follows the same laws of the interest rate system as it must continuously create the credit or liquidity to pay the interest until it starts to disintegrate in currency crises based on the aggregates becoming unmanageable. This is why historically all currencies so divorced from a metallic metal, and based on the interest rate system, die. The British economist Alfred Marshall was the last one to struggle with this paradox and could not solve it. He could not figure out how to circumvent the fact that the interest rate system cannot create its own liquidity except through diluting the currency, credit or gold until it expires.
Lord Byron addressed the same issues as Johann Wolfgang von Goethe in his “Don Juan”, but spent more time on the issue of the fiat credit and paper system with interest as a control mechanism as the quote below indicates:
“Who hold the balance of the world?
Who reign O’er congress, whether royalist or liberal?
Who rouse the shirtless patriots of Spain?
(that make old Europe’s journals squeak and gibber all).
Who keep the world, both old and new, in pain or pleasure?
Who makes politics run glibber all?
The shade of Bonaparte”s noble daring?
Jew Rothschild and his fellow Christian Baring.
And Percy Shelly regarded the fiat system as more oppressive to the lower classes which it is than the medieval use of gold itself as the only money with silver. While the Wall Streeters aggrandize the wealth to themselves as the .1%, the lower classes can hardly afford to raise children as under the the House of Medici utilizing usury.
Tis to let the Ghost of Gold
Take from Toil a thousand fold
More than e’er its substance could
in the tyrannies of old.
Paper Coin-that forgery
Of the title-deeds which ye
Hold to something of the worth
Of the inheritance of the Earth.
(from the poem “Mask of Anarchy”)
THE STRAITS OF HORUZ AS A TRIGGER TO WORLD DEPRESSION
July 1, 2018
Secretary Of State Michael Pompeo
U. S. Department of State
2200 C. Street Northwest
Washington, D. C. 20520
There is a grave national interest that is threatened by the derivative and financial structure outlined below in the report on the use of Stochastic Control Theory which I have explained in simple English below. According to Warren Buffett, the 1.2 quadrillion derivative market constitutes a weapon of financial mass destruction. In the discussions outlined below, these derivatives are used to drain a trillion dollars a year out of the market in manipulated profits. Aside from this being parasitic and illegal, it is dangerous to the national security of the United States as the shutting of the Straits of Hormuz by Iran can trigger a world depression as these 1.2 trillion of derivatives implode.
Since 2015, the notional amount of outstanding OTC derivatives contracts has fluctuated in a range between about $480 trillion and $550 trillion. Notional amounts remained in this range in the second half of 2017, ending the year at $532 trillion according to the Bank for International Settlements (BIS) but our Swiss sources say it is much, much higher as not all of these transactions are reported. We have used 1.2 quadrillion though some estimates are even higher. Though the BIS will argue that most of these are notional, and that is true if you estimate volatility at average levels, a rise on the price of oil to a thousand dollars a barrel will drive those derivatives of notional value into a real exposure that cannot be handled according to Warren Buffett who characterizes these derivatives as financial weapons of mass destruction as there will be a chain reaction as a kind of nuclear explosion as the notional trillions of dollars turn into real, unmanageable exposures.
The 1987 stock market crash was engineered by the manipulation of the stock market by the cash settlement derivative by a giant cartel on Wall St. as explained in the Stochastic piece below. (See our “Goethe, Faust and the Euro” study for an analysis of the 2008 crash). The 1987 crash was resolved by forcing all the major players in the cartel to use their massive profits from their manipulation to reverse the crash using the same technique that they crashed it with and this was successful. In other words, they placed their cash settlement positions above the market, and then drove the market upward as they had done in reverse to crash it. They were protected in 1987 as in 2008 by the Attorney General Eric Holder’s too big to prosecute doctrine. In the 2008 crash such efforts were not sufficient and we created about 400 years of credit to make sure the monetary aggregates such as M-3 did not implode. 2.7 trillion dollars of which were used as excess reserves to repair the balance sheets of the bankrupt banks by paying them interest above market so that they would not fractionalize for ten years. In other words, between 1914 at the creation of the Federal Reserve until 2008 900 billion dollars of Federal Reserve Credit was created and in the 2008 crash this total was raised over a short time period to 4.6 trillion. This does not count fractionalized reserves in the banking system which fractionalize from this base. These excess reserves are now being unwound with a much more limited effect than if they had been fractionalized. This can be offset by lowering reserve requirements as the Chinese are doing. We had to make up for the destruction of credit and it could be handled by papering it over.
If the Straits of Hormuz are closed by the Iranians the shortage of 22% of the world oil supply could not be similarly papered over and it would detonate a collapse of the 1.2 quadrillion derivative market causing a market crash worse than 1933 Weimar Germany. General Barry McCaffrey explained to me below at a lunch at the Harvard Club that the US fleet cannot keep the Straits of Hormuz open as it cannot project sufficient military power to do so and the fleet must leave immediately the entire area in the event of a war with Iran or face total annihilation.
“The United States does not have the military power to keep the Straits of Hormuz open and its carrier task forces must flee if they are within range of Russian and Chinese anti-ship missiles lining the coast of Iran which are the most advanced in the world.” General Barry McCaffrey, former Assistant to the Chairman, Joint Chiefs of Staff (JCS); and Director of Strategic Plans and Policy, Joint Chiefs of Staff, in a conversation with David Lifschultz at lunch at the Harvard Club.”
“If the Straits of Hormuz are closed, the price of oil will rise to a thousand dollars a barrel representing over 45% of the World GDP crashing the 1.2 quadrillion derivative market against a 80 trillion world GDP creating a world depression of unprecedented proportions.” Goldman Sachs oil derivative specialist in response to my question at a BCA Conference based on internal stress tests.
It is important to note that our new F-35C strike fighter for our aircraft carriers has a maximum combat radius 1,100 kilometers which is about the same as the older F/A 18 EF. Even when armed with standoff missiles, these combat radii won’t be adequate to keep the aircraft carriers out of range of Iranian land-based anti-ship missiles whose range is over 2,000 kilometers enabling them to wipe out all of our ships within that radius. That means our ships cannot fire a shot. We recently watched the Tomahawk missiles strike Syria but their range is only 1,600 kilometers which are carried by our cruisers and destroyers which makes them worthless against a land opponent with longer distance missile capacity as Iran presently has lining their shore.
The United States has tested successfully in 2013 the X-47B experimental unmanned aircraft though the trouble with them is that its range is only 1,900 kilometers versus about 1,100 for manned jets, but that greater range is insufficient to operate outside even the 2,000 kilometer missile defensive wall of Iran.
The Russians have delivered large quantities of Sunburn missiles to Iran designed to fly as low as nine feet at 1,500 miles an hour with dodging capacity. They can be fired from a flatbed truck which makes them mobile. It is perfect for flying into the Straits of Hormuz which is no more than forty miles wide while the actual transit space is about two miles at points. This missile fired from the Iranian shores will punch a hole the size of a room in any ship in the Straits in a fraction of a second. The SS-N-22 sunburn supersonic anti-ship missile has been described as the most lethal missile in the world today designed to defeat the Aegis radar defense system of the United States and subsequent renditions. The Russian SS-NX-26 Yakhont missile (speed Mach 2.9) line the Iranian northern shore. No declassified studies of the ability of these missile to penetrate an aircraft carrier defense have been issued, but it would appear that a large barrage of these missiles cannot be defended against by any known method but jamming equipment.
However, we have the example of the Russian missile (falsely attributed to China) designed with anti-jamming equipment hitting an Israeli frigate (INS Hanit, July 14, 2006) off the shore of Lebanon during the Israeli attack on the Hezbollah. It sailed through the most advanced US and Israeli jamming equipment. While the Israelis denied that they even had turned on their jamming equipment, this did not make any sense to have the INS Hanit jamming equipment turned off when that ship off Lebanon was in a war zone and that they were turned on was confirmed to me by the highest Israel authorities (Mossad) who said they issued this denial at the request of the Americans so that it might not be known that the system on American warships was worthless.”
Many more advanced missiles than this have been acquired since that conversation by the Iranians such as well as advanced anti-missile missiles to to deny access to their airspace from enemy aircraft. In the face of a threat of a nuclear strike by the US or Israel on Iran, the Iranians have acquired on the black market nuclear missiles with which they have armed their kilo class submarines that can reach North America. This ends the thought of the US or Israel using nuclear weapons against Iran as they can knock out New York City. While this is not mutually assured destruction, it would be too high a price for the US to pay losing New York City or Israel Tel Aviv thereby creating an adequate nuclear deterrence against a super power. It also makes an invasion of Iran impossible. The Saudis also have spread all over their desert silos nuclear missiles developed for them by Pakistan which development they subsidized. And it is said Israel has over two hundred nuclear missiles (source Martin van Cravald in a 2003 interview with the Dutch weekly Elsever). The Near East is thus armed to the teeth.
If the Iranians shut down the Straits of Hormuz, 22% of the world oil supply will be cut off. The consequences will be that the oil price will rise to over $500.00 to $1000.00 a barrel and the world economy will start to implode with all the financial markets crashing as in 1929 as the 1.2 quadrillion of derivatives start a chain reaction of destruction as a financial weapon of mass destruction. In this case, the shortage of oil unlike the shortage of credit in 2008 destroyed as it was cannot be made up by a fiat instruments. The oil is not there. Therefore, this derivative market is a national security issue. The manipulations of markets is also a serious issue as it is illegal but no one seems to care about it. Half the shares traded in the New York City markets are part of the manipulation there being half the trades in the form of systemic trading which is a euphemism. Until these derivatives are wound down, Iran controls the entire world whether the US Carthaginian Congress wants to recognize it or not.
I had proposed a solution to this problem to the then Secretary of Energy Samuel Bodman that the company named Genoil can tap the 900 billion barrels of world heavy oil reserves creating a 25 million barrel a day reserve production capacity at a cost of 165 billion dollars as an insurance policy for the now 88 trillion dollar world GDP and Sam thought it was a great idea. However, it was blocked by the major oil companies as the Genoil technology is highly disruptive to the value of their light oil reserves whose value would collapse as Genoil can convert heavy, high sulfured oil to light unsulfured oil at a much cheaper price that WTI and Brent which make up their reserves.
We recommend that the Department of State together with the Department of Defense and Treasury Departments move to unwind the 2.5 trillion derivative market for national security reasons on an emergency basis and adopt the Genoil technology.
Stochastic Control Theory, Dynamic Programming and Numerical Analysis of PDE’s Stopping Theory Used in the Market Rigging By Cash Settlement: In 1987 and Today
David K. Lifschultz
Today these cash settlement manipulations are much more coordinated by the many trillions of dollars of managed money by the remaining Wall Street firms and their private equity fund cousins in a form of a cartel than in 1987. The key to draining a trillion dollars a year out of the market is to manipulate the direction of the market. The power of these manipulations are described by Lord Bertrand Russell as follows quoted from page 144 from his “ABC of Relativity”:
“Abstraction, difficult at it is, is the source of practical power. A financier, whose dealings with the world are more abstract than any other practical man, is also more powerful than any other practical man. He can deal in wheat or cotton without needing ever to have seen either: all he needs to know is whether they will go up or down.”
The Lord Russell book is otherwise irrational when he describes in an early part that the Fitzgerald Contraction or Lorentz Transformation was arbitrary and then characterizes this George Francis Fitzgerald interpretation of the Michaelson-Morley interferometer experiment as the only foundation of the Einstein theory of relativity which was, of course, incoherent in logic. How could an arbitrary concept of the Fitzgerald Contraction support by itself “The Theory of Relativity” when it was arbitrary. In other words, this genius was making fun of relativity as he was in pointing out how abstractions rule the world aided by manipulation. We point out in our piece below entitled “Goethe, Faust and the Euro” how these hypothecated abstractions have been used to take over the whole world over two and fifty hundred years ago through the the financial use of currency hypothecations, or abstractions, as Goethe showed in his “Faust” in the early part of Part Two. Mephistopheles represented Mayer Amshel Rothschild. This is what Lord Russell was telling us in his otherwise rather meaningless book.
Now see this Barron’s ad appearing a short time before the 1987 rigged cash settlement crash should have intrigued our regulators if they had any ability at all which they don’t and see how it corresponds with Lord Russell’s comments:
Securities firm employing sophisticated arbitrage strategies and proprietary valuation models for the investment of private funds in the convertible securities and options markets seeks Ph D. level mathematician to join its research staff. EXPERIENCE IN SECURITIES ANALYSIS IS NOT NECESSARY. Academic specializations of interest are stochastic control theory, dynamic programming, numerical analysis of PDE’s stopping theory.
Box S-687, BARRON’S
The key here is to know which way the market will go. The private equity funds and the Wall Street Houses manage their investment accounts with complete autonomy from their clients and will not accept funds on any other basis. What they do with these funds in association with their other members of the cartel is to directionally move the Standard And Poor Index using their trillions to do that while having earlier laid out their “abstract” cash settlement positions that will settle for cash so that when they move the market down their cash settlement short settles for cash eliminating the self-correcting mechanism of having to buy back their position and vice versa. That is the basic principle which is quite easy to understand and we show below for our Wall Street friends how they do it.
The Role of Cash Settlement in Market Manipulation and in the Panic of 1987
I personally was involved in supervising the rescue of the United States from this cash settlement manipulation discussed below in October, 1987. A significant number of participants called here a cartel coordinated among themselves the raising of the market prices through the manipulation of the Standard and Poor’s Index via cash settlement earlier, and then lowering it laying out their positions below the market. It was not their intention to destroy the whole market in a massive crash but it did happen. They were reluctant to risk their own capital much of it made through these manipulations to save the system that they had crashed and we, of course, ordered them to do so making them an offer that they could not refuse. Therefore, though this essay is written as a form of request for an investigation, none was really required as the we knew what happened when it was written. When it was written we could not have written otherwise but such a distance has now ensued that now the truth can be told. The crash was a rig gone wrong. There was a whitewash later by Professor Glauber who headed the Brady Commission subpoenaed the wrong data and knew better.
Today these manipulations are much more coordinated by the many trillions of dollars of managed money by the remaining Wall Street firms and their private equity fund cousins. The key to draining a trillion dollars a year out of the market is to manipulate the the direction of the market. The power of these manipulations are described by Lord Bertrand Russell as follows quoted from page 144 from his “ABC of Relativity”:
“Abstraction, difficult at it is, is the source of practical power. A financier, whose dealings with the world are more abstract than any other practical man, is also more powerful than any other practical man. He can deal in wheat or cotton without needing ever to have seen either: all he needs to know is whether they will go up or down.”
Now see this Barron’s ad appearing a short time before the 1987 rigged cash settlement crash should have intrigued our regulators and see how it corresponds with Lord Russell’s comments:
Securities firm employing sophisticated arbitrage strategies and proprietary valuation models for the investment of private funds in the convertible securities and options markets seeks Ph D. level mathematician to join its research staff. EXPERIENCE IN SECURITIES ANALYSIS IS NOT NECESSARY. Academic specializations of interest are stochastic control theory, dynamic programming, numerical analysis of PDE’s stopping theory.
Box S-687, BARRON’S
The key here is to know which way the market will go. The private equity funds and the Wall Street Houses manage their investment accounts with complete autonomy from their clients. What they do with these funds in association with their other members of the cartel is to directionally move the Standard And Poor Index using their trillions to do that while laying out their “abstract” cash settlement positions that will settle for cash so that when they move the market down their cash settlement short settles for cash eliminating the self-correcting mechanism of having to buy back their position and vice versa.
We have been alarmed by the recent behavior of our financial markets. Our concern is not so much with market volatility but rather with market combustibility. It is not random wildness that troubles us but the markets susceptibility to specific stimuli which are controlling the short and intermediate pricing of equities, futures and options.
We are concerned that the regulators have allowed the development of a market mechanism that they neither understand nor can control. More, we contend that the US equity markets are now sullied by an extensive on-going manipulation of unprecedented proportion.
Our securities industry takes space travel and genetic engineering for granted yet continually succumbs to the rhetoric of “random walk” and “no one is bigger than the market.”
In the wake of the 1987 market break, regulators and scholars have been asking the “right” wrong questions. Leading us astray they raise the classic moot issues, like margin requirements and market limits, which evoke fervent debate simply because those elements, though debatably irrelevant, are easy to understand. Moreover, the brute-force actions of trembling margins and imposing 50 point limits are sure to have some noticeable impact.
Many of the academics/ rhetoricians consulted following the October ‘87 crash are or have been in the paid service of interested parties. They have massaged data to show that what we see is just illusion and that our markets are not being controlled.
At the root of the current confusion is an often ignored, little-understood feature of the new derivative instruments. It is called “cash settlement,” and it functions to undermine fair markets.
What is “cash settlement”? It is the feature of certain options and futures which specify that they be settled only in cash at (or sometimes before) maturity at the existing price of the underlying security.
“Cash settlement” instruments are synthetic devices. They have no other purpose than to transfer cash from one entity to another by manipulating an underlying index number from one moment to the next, one month to the next.
Nothing REAL is produced, created or even traded. On expiration, money is just transferred automatically into or out of accounts of those who have placed their bets. No more, no less.
While the mechanics of “cash settlement” index options and futures are simplicity itself (a bookkeeper’s dream), these insidious instruments impact the market with great complexity.
To begin with, disposal of these instruments exerts no buying or selling pressure on the market.
It is difficult to imagine any legitimate product on security where buying and selling in massive quantity doesn’t impact price. With “cash settlement” that is what we have. There is no balancing mechanism as there is with any normal product, commodity, stock, bond or standard option and future.
In normal markets, unwinding positions will stabilize rather than destabilize by precisely counteracting the initiating transactions and returning the market to external supply- demand equilibrium.
On a typical option expiration, those who exercise the usual 150,000 (plus or minus) in-the-money “cash settlement” index options do not dispose of the $ 5 billion worth of stocks which ostensibly underlies these options. NOTHING really underlies these options; only cash changes hands; the game is repeated the following month.
The buyer of a “cash settlement” index future is NOT buying an underlying basket of stocks for future delivery, no matter what the “efficient market” rhetoricians claim. The “cash settlement” future is mathematically different from every other future in that it is really a hybrid OPTION, not a future.
At expiration, the so-called index future affords the holder no ownership, but an OPTION to take or not to take delivery of the underlying stock basket. This fundamental aspect of “cash settlement”, and how it impacts the market, is little understood.
To illustrate, consider the holder of 10,000 standard futures contracts on silver at maturity. If this holder does not choose to own the metal, the equivalent of 50 million ounces must be sold into the open market. This order to sell, taken by itself, is likely to depress the market price for the metal. The seller has an incentive to sell as carefully as possible as the more the price is depressed, the less the proceeds will be. Such a seller is likely to begin the process of liquidation well before maturity; he has a disincentive to disrupt market price.
In contrast, the holder of 10,000 S&P futures owns contracts which settle for cash. Disposing of these contracts puts no downward pressure on the market whatever. They just turn to cash. Where the holder of these contracts chooses to take delivery of the underlying stock baskets, it may be done without market risk, as follows: At expiration, stock baskets are purchased “at the market.” Any higher cost which results from this buying pressure is exactly offset by the higher “cash settlement” proceeds from the expiring futures.
This “cash settlement” futures holder has no incentive to tread carefully on the market.
Quite the contrary; there is an incentive to cause as much disruption as possible.
Consider the operator who is long the futures and short stock baskets against them. Knowing in advance that he and his associates will cover short stocks aggressively at predetermined moments (and thus drive the market upwards), they all buy “cash settlement” call options (and/or sell puts) in advance to profit from upward movement that they THEMSELVES will generate. Note that the simple act of covering short stocks at or near expiration is all that is necessary to create the profit and close ALL positions. Various labels, including “front-running,” have been applied to this strategy.
The key to a successful “cash settlement” manipulation is power and organization. The market must be overwhelmed at distinct points in time. Profit without risk can be achieved so long as domination can be achieved. If no greater opposing force appears or, if none exists, the market can be controlled.
We must recall the Hunt Brothers’ failed attempt to corner the silver market in 1980. What doomed that organized scheme from the out-set was that the Hunts actually OWNED something that they themselves would not consume, a physical commodity, which would have to be sold to complete the transaction to create the profit.
Thus, as in all fair markets, the simple round-trip action of one non-consuming group counteracted itself. As the Hunts were unable to convince or coerce others to take them out of their positions in the physical silver, the futures or options, the price of silver wound up where it started.
Now, consider the logical outcome had the Hunts been holders of “cash settlement” calls and futures on silver (which did not exist at the time). If they would have timed their buying of the physical to achieve the desired price rise through hypothetical “cash settlement” expiration dates (or “triple witching hours” as the press calls it), they would have been cashed out of option and futures positions automatically, for cash, without selling silver and depressing its price. They may have become masters of the financial world, using the EXACT mechanism which others are currently using to dominate today’s equity markets.
In theory, “cash settlement” was created to facilitate operations and to allow participants of any size to move easily in and out of the marketplace. As October, 1987 demonstrated, precious few were able to find liquidity when it was needed most.
We believe that a PROPER analysis of the existing marketplace will demonstrate that a group, a Cartel, now exists and that it has been using the “cash settlement” mechanism to profit from its ongoing manipulation of the New York Stock Exchange. We likewise believe that there is no other group substantial enough to oppose this Cartel and unless it is dismantled, fair capital markets will cease to exist altogether in this country.
It is folly that regulators who do not fully understand or appreciate the key and subtle features of “cash settlement” futures and options are judging the viability of a marketplace driven and controlled by this instruments.
In our discussions of “cash settlement” with various regulators, we have yet to encounter a single one who begins to understand the mathematics of the mechanism which now dominates our markets.
Our regulators must first acknowledge that they require the input of impartial scholars who can explain that the owner of a “cash settlement” index option or future holds a highly complex instrument the market impact of which they have yet to determine.
Advertisements, such as the following, five years old, from BARRON’S, should also intrigue our regulators:
Securities firm employing sophisticated arbitrage strategies and proprietary valuation models for the investment of private funds in the convertible securities and options markets seeks Ph D. level mathematician to join its research staff.
Experience in securities analysis is not necessary.
Academic specializations of interest are stochastic control theory, dynamic programming, numerical analysis of PDE’s stopping theory.
Box S-687, BARRON’S
This ad says a lot. What it doesn’t say is that stochastic control theory, optimal stopping theory, superb organization and a few $ Billion may be sufficient to corner our “cash settlement” markets. Operators have transformed the US equity markets into a well-oiled machine. Push a button for a specific, predetermined response; stop the market in its track, turn it on a dime once option positions are established, then race it the other way.
Our deregulating SEC and CFTC have allowed the complexities of “cash settlement” to be foisted on an unsuspecting public. It is remarkable that in the wake of a global market panic precipitated by the “cash settlement” mechanism, the Commissions do not appreciate what has happened, and do not know where to look.
Despite all rhetoric, there is no evidence that the existing market is any more efficient now than ever before. Much of the heavy volume does not reflect any genuine change of ownership. Baskets of stock traded back and forth without risk against futures and options add nothing to the economy or to the equity markets. Such positions are established and subsequently unwound strategically to EXCITE the market to profit of “cash settlement” options. The premise that derivative instruments add liquidity is a myth.
The formal studies of the October crash, notably that of The Brady Commission which was a coverup that purposely subpoenaed the wrong documents, contend that market volatility has not increased. To quote that prejudiced report: “recent volatility is not particularly high when viewed in a broad historical context.” For calendar year 1987, that analysis fails the sanity test and the flaw is obvious: only day-to-day closing prices were used. The wild INTRA-day swings, so characteristic of the pre-crash environment, were ignored. DAYS where the market traveled THREE HUNDRED Dow Jones points, in violent fifty point swings, to close up or down only ten points just don’t show up. The Brady analysis concerns itself only with NET daily price changes.
Curiously, the Brady Commission did not acknowledge what every professional trader knows: the venerable New York Stock Exchange is being dragged around daily by a new mysterious force.
While 60% of those polled by the Brady Commission agreed that the three “cash settlement” trading strategies (portfolio insurance, index arbitrage and program trading) were “principal factors” contributing to the October, 1987 world market panic, Brady doesn’t follow its own nose to explore how these strategies INTERACT as a mechanism to manage markets.
We have not seen a single published analysis of the crash which has broached even the POSSIBILITY that a market control mechanism exists. Market studies which have received attention have been directly or indirectly sponsored and we cannot ignore the singularity of interest between those who are manipulating and those who have been called on to “analyze” it.
With key data available to the regulators and with scholarly effort, the market control mechanism can be laid bare. It will be possible to demonstrate how the “cash settlement” index option is utilized as the primary profit generator in a rigged marketplace driven by highly managed tape painting. Institutional money is used to move the markets to achieve portfolio managers’ specific personal short-term trading objectives in the form of “cash settlement” index option profits.
Today’s investors must navigate within a marketplace which includes an odd array of players, some of whom are familiar while others are new, unusual and confusing:
A) THE NAIVE GAMBLER: Speculators who try to profit on short-term market moves. Known collectively as “the public”, then often buy “cash settlement” OEX puts and calls. These players and their brokers are substantial net losers but are drawn back to the market repeatedly by the lure of quick “unlimited profit with limited risk”.
As public players become increasingly experienced they realize, much the way casino gamblers do, that the game is not “fair”. Unlike roulette, blackjack and craps however, the OEX game odds are not yet regulated and the house is still unknown.
B) THE NAIVE HEDGER: Institutions and individuals with large portfolios which try to use futures and options to hedge volatile markets and even participate in “index arbitrage.” If they do not rely on “pros” to manage their hedging programs, they do not succeed. The “pro” is given total control over the short-term trading of these portfolios (with which to help move markets) in exchange for a share of incremental performance. As an example, Wells Fargo Bank handles the daily index trading for such august entities as the Rockefeller Foundation and the General Motors Pension Fund (source: Futures Magazine, WSJ).
While Wells Fargo clients were major sellers during the panic of 1987, we have seen no analysis which lays to rest the burning possibility that Wells Fargo or key personnel held short positions in “cash settlement” instruments in personal accounts and were using institutional money to drive the market down.
We have seen no attempt to analyze personal trading patterns of fiduciaries who surrender control of institutional portfolios used to create specific market combustibility.
C) MAJOR TRADING FIRMS: Experts who handle the enormous wave of stock “buy and sell programs” which rock the market. These players act both as agent and as principal and enter into quasi-legal profit sharing agreements with institutional clients (source: WSJ) to orchestrate buy and sell orders.
While there is little evidence to indicate that all of these major firms act independently, regulators have sufficient data to determine the level at which they DO act in concert. To date, apparently, the regulators have chosen not to perform this analysis although some interesting tidbits are emerging. It seems that at least Salomon Brothers and Morgan Stanley (two key contributors to the Brady Commission, no less) were subsequently identified by the SEC as illegal short-sellers into the 1987 panic. Initially, the trading firms used program trading to manipulate the market only in the moments immediately preceding option expirations.
The level of short-term market control has since developed extensively as the Cartel has reaped $ Billions of profits both on and offshore. Program trading is now the single dominant market mover on a day-to- day basis and is understood only as a system where “the computers make the buy and sell decisions.”
Regulators, by their inaction, are entrenching this mysterious system and are forcing the public to compete against informed traders who “run ahead” with stock, futures and option orders just prior to their own organized prearranged short-term market moves. Buried away (Appendix 3, figure 12) in its report, without any cross- reference, the Brady Report discloses that the twenty largest trading firms’ principal accounts were net SHORT $200 million of stocks coming into the crash.
This is simply the tip of the iceberg as it does NOT include the short futures and long put positions of either the firms OR their partners’ and principals’ personal accounts, onshore and offshore. Too, nowhere does Brady mention that the normal long “core” investment positions for these firms is many $ billions. This is to say that during the weeks prior to the October crash, the 20 major firms were indeed very heavy sellers of stocks for their own accounts. We know that certain trading firms helped orchestrate the crash and profited handsomely from it. This is not the impression one gets from either the industry or these sponsored studies.
D) PORTFOLIO INSURANCE OPERATORS: These groups decided when participating institutions would buy or sell $ Billions in waves. Again we are told that the “computers” made the decisions. We are told to believe this handful of portfolio managers had no personal short positions in derivative instruments prior to pulling the plug on the market, selling stocks, as fiduciaries, mindlessly at ANY price.
E) LOCALS AND MARKETMAKERS: These participants make money by watching “body language” of brokers filling large orders for savvy institutional and upstairs accounts. They go WITH the smart money, not counter to it and are the distributors for the Cartel. The Cartel buys options and futures, in prearranged trades, from key locals and market makers who then hedge against the public in smaller transactions. When all participants are properly positioned, and only then, the market is moved.
The Chicago Merc (CME), through its leadership and paid academicians, has done much to create public confusion and misinformation about how derivative instruments markets function. While the CME Report claims the locals added liquidity and absorbed selling pressure during the October market panic, The Brady Commission specifically refutes that contention and shows that locals actually contributed to market instability. It is very important to realize that as the market crash began, key locals and the Cartel members were short and got shorter as they all sold- not bought- the falling market. Savvy traders with short positions do not try to stabilize a panicky market, and this was not to be their finest patriotic moment as the nation shuddered.
F) INDEX ARBITRAGEURS: These are so-called “messengers” who everyone knows are to blame yet don’t know why; these are the darlings of the “efficient market” rhetoricians. There really is nothing wrong with index arbitrage per se. However, there is usually very little real arbitrage going on here. “Arbitrage” STRICTLY means simultaneous equal positioning. Where a side (or “leg”) is lifted OR where there is a concurrent option position, there is no longer arbitrage.
Consider an arb who owns “cash settlement” calls and is short a stock basket which is offset by long “cash settlement” futures. If this short stock position is covered aggressively on expiration to enhance the value of the “cash settled” long call and long futures, this unwinding may be manipulation but it is certainly NOT arbitrage. This powerful industry segment INCLUDES the major trading firms and, as such, has many friends in the press and in government. It is shrouded in mystery, lauded for financial artistry and granted significant trading and positioning exemptions.
Index arbs would have us believe that they are in business to make a few percentage points over the riskless rate. They claim marginal profitability from hedging and unwinding stock vs. futures positions. Nothing is further from the truth. Careful analysis of trading patterns will tell another story. The major source of profit for the dominant index arbs is the tandem “cash settlement” index put and call option positions. Profits from these options are not mentioned when the arb explains market behavior or gives a raison d’etre to the press, This group also thrives on public confusion and seems to have been a primary formulator and organizer of the Brady Commission Report presentation strategy.
How did an organization, this Cartel, gain the ability to manipulate the New York Stock Exchange? As an overview, we believe that individual Cartel members have had a long history of cooperation and information-sharing throughout their investment banking research, arbitrage and other trading activities. More specifically, the origination of the Cartel’s present form apparently began in 1981 when the SEC and the CTFC were somehow motivated to introduce “cash settlement” in the “Accord.” This sham (which later emerged in the Futures Trading Act of 1982) included three criteria that a securities index future or option needed to satisfy to be eligible for trading.
The first criterion was that it be “cash settled”. Amazingly, the second criterion was that “it must not be READILY susceptible to manipulation.” What exactly does this mean and what is the intent? It appears that the Commissions, aware of the susceptibility of “cash settlement” instruments to manipulation, were nonetheless motivated to let the scheme slip through. How, one wonders? Taking control over the market did not then happen overnight. The first visible action occurred on the April, 1984 option expiration closing bell when small market-to-buy-on-close orders were entered on over 500 stocks, reportedly by a little known firm, Miller Tabak. The OEX index moved two points (equal to about 15 Dow Jones points), a very dramatic run-off move for the 1984 market. Those lucky or smart enough to own index call options profited by $75 for each $6.25 of market value existing only moments earlier. The unregulated OEX casino had made its debut.
The SEC announced an investigation of that manipulation but found nothing wrong with what had occurred thus giving its formal go-ahead to the high-jinks that have plagued the markets ever since. Perhaps it is telling that in a subsequent 1986 “round-table” hosted by the SEC and convened to discuss the impact of program trading, Miller Tabak was one of ONLY four firms invited to participate. The other three were Goldman Sachs, Salomon Brothers and Harvard Management, all aggressive program traders. One thing is certain; the SEC had hardly selected a representative sample from the investment community for its “round-table.”
Allowed to run the market at will at each subsequent expiration, the Cartel has grown richer, more powerful, creative and confident with each successful monthly manipulation. The SEC has continued to display unusually benign behavior towards major cartel members, even in the face of overwhelming evidence of wrong-doing. One must ask, who is pulling the strings at the SEC?
In its simplest form, a meaningful upward market movement begins in Chicago where the Cartel establishes a large long “cash settlement” index call position. The S&P futures and selected visible NYSE issues are then simultaneously overwhelmed with large coordinated buy orders, much of which is self-dealing (i.e. tape painting among several cooperating entities who, by pooling, are avoiding real market risk). Where are the real sellers during this hypothetical rally? Many are either on or urged to the sidelines by Cartel advisors. It is important to recognize that, for the most part institutional-sized orders to buy and sell must be routed through the major firms. Thus Cartel block trading desks are aware of supply and demands vacuums before the markets react to them.
The Cartel’s major profit does not come from stock vs. futures but rather from large concurrent “cash settlement” option positions. These positions are established at the beginning of and during major market moves and are often later settled for cash. This mechanism, or one very much like it, fueled the bulk of the rally of 1987. With cash constantly flowing into the institutions’ coffers, their prosperity to “index”, and a limited supply of blue chips, there were few meaningful sellers of the big capitalization stocks prior to the crash. In the frenzied takeover environment, the Cartel’s tape painting moved the markets to their outer limits.
The Cartel established a larger short position in index options and futures, hedged core investments, and the market was ready for the very rapid and effectively orchestrated descent. Led by the major trading firms and a handful of participating institutions, the market was crashed.
There has been and continues to be an attempt to mask and downplay the key role played by the “cash settlement” option in the existing complex market mechanism. The Brady Commission Report and The CME Report do not even broach the potential for abuse from option front-running. THE OPTION MARKET ACTIVITY AND PRE-CRASH OPEN-INTEREST WERE NOT ANALYZED. It is there where information can easily be found to identify manipulating operators and provide needed insight into the art of “cash settlement” abuse.
It is no surprise that so little about the market mechanism is understood with this key piece of the puzzle intentionally shrouded. We have a better understanding when the true motive behind program trading and portfolio insurance becomes clear:
PROGRAM TRADING AND PORTFOLIO INSURANCE ARE TWO SCHEMES USED BY OPERATORS TO MANIPULATE THE MARKET TO PROFIT FROM CONCURRENT POSITIONS IN INDEX OPTIONS.
Certain aspects of market manipulation should be addressed and included in any thorough analysis:
A) Is there a consensus by regulators that front-running coupled with market manipulation is undesirable?
B) Can we assume that a fair zero-sum market does not allow for consistent material winning by the same group of major participants?
C) Is it fair to presume that entities which have held essentially identical options and futures positions repeatedly throughout a wide variety of major market condition are “acting in concert”? Why haven’t the Exchanges enforced position limits?
D) Should operators who are actively involved in buying or selling stocks and futures in massive market-moving waves have strictly enforced guidelines with respect to their transacting in the related “cash settlement” index options market?
E) Do front-running and manipulation usually occur together? Who were the major owners of puts when the market crashed? Were they coincidentally also involved as major sellers of stocks?
Brady hasn’t asked. Neither have the SEC and CFTC. The data is certainly available and the analysis is straightforward.
Why haven’t tandem analyses of index option trading patterns of major market operators been performed? Why not analyze how independently the major program trading firms (coincidentally important contributors to the Brady Report) were positioned in index puts and futures just prior to the crash and how they behaved during the debacle?
F) How much of the daily stock and index futures trading is to simply “paint the tape” and move the market in desired directions without any legitimate change of ownership? How are the program trading volume numbers determined and have strict enough guidelines been established to monitor the markets?
G) How much credibility should be given to market studies prepared by employees of interested parties? Academicians, like other professionals, are for hire. To blindly rely upon them is folly.
How much have Professors Miller, Malkiel and Scholes been paid by the CME in the past 5 years? Their report is hardly the objective study which their credentials merit. Rather, it is a stunning example of omission and obfuscation. It is no more than a marketing effort to absolve the CME and index futures.
The Brady Commission report is a description of selected details of the crash. That study was most careful not to implicate the Wall Street firms and generally avoided pointing fingers altogether. They treat the crash as a natural phenomenon rather than an intentional, profit- motivated act of organized manipulators.
The Brady Commission relies largely on input from the very firms and individuals who might otherwise be targeted for examination themselves. The director of the commission, Robert Glauber of the Harvard Business School, now an Assistant Secretary of the Treasury, has special expertise in mathematical models for portfolio management. He has had some involvement with the management of Harvard’s endowment, itself identified (by the SEC) as the sixth largest seller during the crash. Glauber has apparently also had a long standing consulting affiliation with Morgan Stanley and possibly other major trading firms which may be actively involved in program trading.
H) How do “cash settlement” instruments impact the market? Just as standard listed options and conventional futures do increase liquidity and reduce volatility, their “cash settlement” counterparts do the opposite. Yet the same arguments which support the legitimate options and futures markets are used incorrectly to promote the scheme.
Our regulators must arm themselves with unbiased mathematical analysis capable of understanding the new market instruments sufficiently to debunk the rhetoric.
I) How do index options originate and how are they distributed? To what extent is pre-arranged trading involved? We believe that any serious attempt to understand the manipulative market mechanism cannot ignore that the Cartel has developed techniques to originate as well as distinct arms with which to distribute “cash settlement” options into the market and with which to take them back.
J) If nothing underlies the “cash-settlement” derivative instruments, aren’t they simply a gambling vehicle utilized to promote volatility and control market behavior? What is their real as opposed to their alleged value or purpose? Specifically, who has benefited from them?
K) Why are “cash settlement” futures treated as futures when they are mathematically options?
L) Why should institutions, especially those with tax-free status, be encouraged to transact in a zero-sum market game that probably has no redeeming value and is clearly destabilizing? Why were funds, earmarked for long-term investment, used to actively trade the markets?
M) What of the world’s other “cash settlement” markets? To date we count 26 exchanges around the world which have begun experimenting with the new instruments. There is evidence that every one beyond the initial developmental stage is experiencing unusual behavior (see, for example, reports on the Sydney Financial Exchange’s 10-year T-Bond Contract).
Our regulators should be monitoring the development of aboriginal cartels with their U.S. international investment banker/arbitrageur partners.
N) What kind of numbers are involved? Our preliminary estimates indicate that more that $20 Billion has been reaped by the Cartel in illicit trading since 1984. We believe this money is traceable and recoverable and can be used to fund needed legitimate regulation of the capital markets through the next decade.
O) But have any laws been broken? Yes, many. The markets have been manipulated continuously since 1984 (with a brief respite during 1988 while the enormous profits of the 1987 crash were digested and invested). The Cartel has exceeded position limits and relied upon pre- arranged trading on an on-going basis to defraud public investors.
P) What is the long-term impact of surrendering control of the nation’s capital markets to a Cartel which has probably become the most powerful financial entity in the world?
The capital markets are under the control of a Cartel which has upwards of $ 50 Billion of trading capital with which to move markets. The markets will be subject to this control so long as the key “cash settlement” instruments (index futures and options) exist. The casino volatility aura will prevail until our regulators understand, then put an end to what is a rigged zero-sum game. There are two approaches to dismantling the control mechanism. “Cash settlement” instruments can be abolished altogether or “baskets” of real securities can be used to settle all positions IN EXCESS of some preset threshold.
Those studies prepared by the Brady Commission, The Chicago Merc and the SEC to address the true issues:
The regulators and the general public do not understand “cash settlement”. “Cash settlement” instruments are being used effectively to manipulate the major equity markets on a day-to-day basis. Major portfolio operators profited personally from index put positions when they pulled the plug on the market in 1987. This same group owned the index calls when they wildly bought stocks at dizzying levels with institutional money throughout pre-crash 1987. We are seeing a repeat performance in 1989. The same groups which lobbied to introduce “cash settlement” options and futures are also actively protecting them from meaningful regulation by obscuring their central role in market manipulation and control. Regulators are not mathematicians and, unlike traders in the financial industry, don’t know where to find them. The one-to-one correlation “cash settlement” and manipulation has yet to be made but it will be. The well-being of our capital markets depend on it. Before you discount this analysis, ask yourself if you truly understand program trading, portfolio insurance and index arbitrage. Ask yourself if you know anyone who does or who has benefited from the new “cash settlement” instruments. Do you truly believe the market has become a fairer one over the past few years since their introduction or is there a reasonable chance that they are being used for manipulative purposes? Are you comfortable with the trend toward deregulation of the securities industry?
If truth be told, the 1987 crash was a cash settlement rigging affair just like its previous preposterous rise. The Brady Commission headed up by Professor Glauber covered it up by subpoenaing the wrong documents which was overlooked by the high authorities because the perpetrators under orders risked their own capital to reverse the crash which was part of the deal. The the American population was used and regarded by them as Gadarene Swine by the Devils who drove them into the river to be drowned. And the riggers were protected as in 2008 under the Eric Holder too big to prosecute doctrine.
THE GAMESTOP SHORT EXPOSED
Compliments of the Lifschultz Organization founded in 1899
This study is an extraordinary revelation of the massive corruption on Wall Street which parallels my own analysis that has been presented to our readers.
Our study on shorting by cash settlement is more comprehensive below.
In this oil study in footnote 3 for above article it seems we left out the Israeli Intelligence Authority who says the US cannot keep open the Straits of Hormuz as we cannot invade Iran.
THE LIFSCHULTZ ORGANIZATION
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