Statism and Myth as a Tool of Survival and Perpetuation Part VI: Engineering Economic Outcomes Through Monetary Policy, Price and Wage Controls, Financial Devices, and Regulatory Malfeasance
"From now on, depressions will be scientifically created."
— Congressman Charles A. Lindbergh Sr. , 1913, reacting the passage of the Federal Reserve Act.
"When you or I write a check there must be sufficient funds in out account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money."
— Putting It Simply, Boston Federal Reserve Bank
"Whoever controls the volume of money in any country is absolute master of all industry and commerce."
— President James A. Garfield
"Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the fraud can no longer be concealed."
— John Maynard Keynes, Consequences of Peace
"People who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest ...But here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold. Interest is the invention of Satan."
— Thomas Alva Edison (emphasis added).
"The Federal Reserve banks, while not part of the government..."
— United States budget for 1991 and 1992 part 7, page 10
"The regional Federal Reserve banks are not government agencies. ...but are independent, privately owned and locally controlled corporations."
— Lewis vs. United States, 680 F. 2d 1239 9th Circuit 1982
“A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the Nation, therefore, and all our activities are in the hands of a few men... We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world—no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.”
— President Woodrow Wilson, Senate Doc. 23, 76th Congress, 1st Session, pg. 100
“I am for the separation of state and economics.”
— Ayn Rand, in an interview with Mike Wallace
“Government is no the solution to our problem. Government is the problem.”
— Ronald Reagan
“Greenspan was a believer in Ayn Rand, a believer in free market. A little bit curious for a central banker, because what is central banking? It’s a massive intervention in the market, setting interest rates.”
— Nobel Prize winner Joseph Stiglitz in the Frontline documentary The Warning
“I knew that I would have to swear not only to uphold the Constitution but also the laws of the land, many of which I thought were wrong.”
— Alan Greenspan
“He said something to the effect of, ‘Well, Brooksley, we’re never going to agree on fraud!’ And she said, ‘Well, what do you mean?’ And he said, ‘Well, you probably think there should be laws against it!’”
— Frontline documentary The Warning, recounting the initial encounter between newly sworn in CFTC head Brooksley Born and Federal Reserve Chairman Alan Greenspan.
Much of what we supposedly know as a free market approach to economics is in fact anything but. The laissez-faire crowd, both on Wall Street and the various regulatory agencies which oversee Wall Street, are for a hands-off approach when it comes to profits and the often criminal behavior which produces such profits, but when their behavior goes too far, and near economic collapse threatens to ensue, these same individuals clamor for the efficacy of government intervention. The intervention comes in several ways:
- Regulators approach banks under the regulatory authority and encourage (or coerce, depending on how you view it) those banks to fund a bailout of a hedge fund or bank on the verge of collapse from its own failures, many of which involve fraudulent accounting, phantom profits which never existed legitimately and could not have been realized without fraud, and a failure of hubristic models which were supposed to minimize risk but instead only minimized the the ability of those who placed their faith in the models to perceive real risk. The failure of Long Term Capital Management and the subsequent bailout was an example of this sort of approach. The problem is that liability, rather than being confined to the company under threat of collapse and its various partners, is spread further across the market, which increases investor exposure to potential risk. Due to the discreet manner in which such bailouts occur, and the limited information made available to the wider market of the specifics of such a bailout, investors cannot make an informed decision about what to invest in and what to short. Such a market is not free at all, as a blind man is in bondage to his lack of sight and the subsequent limits upon his life which occur as a result of his disability.
- Regulators, investors, hedge funds, banks, and the financial lobby as a whole launch a full on assault on Congress to encourage legislators to vote to release public funds for the purpose of backstopping private losses. Congress often goes along with the scheme for a variety of reasons; namely, the desire to keep the economy going along as usual. A failure of the investment markets would lead to lower tax receipts, and very often a devaluation of the underlying products whose worth was artificially inflated during the good times. Examples would include items directly linked to taxation like real estate (which bolsters local and state revenues through property taxes) and commodities like oil (which leads to excise tax revenue). Tax credits for purchasing are offered, and in this way the economy never reconciles itself to any fundamental reality. Simply enough, the economy remains unmoored from reality, valuations of homes remain artificially high, and real demand is papered over by the artificially generated demand of such buyer incentive programs.
- Regulators, investors, hedge funds, banks, and the financial lobby a whole launch a full on effort above and beyond the Congressional effort, which involves independent agencies within the Executive Branch releasing funds in the form of backdoor bailouts and committing to guaranteeing toxic assets. In this manner, a TARP bailout worth under $800 billion initially ballooned into a $23.7 trillion behemoth of a bailout in the form of loans, guarantees, and other assorted programs whereby private losses and liabilities were assumed by the public sector. These sorts of efforts, combined with the efforts outlined in option number two, combine create a ballooning of public debt and liability. What is more, the advertised number of the public debt is very often less than the real number owing to the fact that the U.S. government does not use the very accounting standards it insists upon for private businesses. What is more, the Federal Reserve often vastly increases liquidity, if only in electronic form, to lessen the exposure. The inflation statistics are therefore minimized, because the liquidity only makes into limited circulation among those parties who need to reconcile their books to even. However, the larger reality becomes apparent when the shuffling of currency becomes more widely known, as in the currency swaps executed by the Federal Reserve during the fall of 2008 and exposed by Representative Alan Grayson, one sees that the holding down of inflation (and very often a rise in the dollar, in the case of the aforementioned swaps to the level of some 30% over the time period in question) is entirely artificial. In short, the money valuation is not real. What nominally occurs is a short term spike in the dollar, following by a precipitous decline, which in the case of the aforementioned swaps was some negative 20% net, leading to a loss of $100 billion for the Fed on the swaps and their execution. However, the deeper reason to execute such swaps is to engineer perception where national debt and the bonds underlying such debt are concerned. In short, those foreign investors and entities who receive our currency use it to buy our debt, receiving not only a premium in the form of interest but also the additional profit when the dollar loses value and their currencies gain value when the time comes to settle the accounts on the currency swap. In this way, our government gets to have the mirage of sustainability, albeit at a $100 billion premium plus interest on the bonds. There never was any real demand for our debt, but if you hand someone money to buy that debt, with the understanding of a $100 billion profit up front and interest over time on the debt itself, you can get your Treasury bonds and bills purchased at a feverish rate.
Not one of the options above constitutes a free market or laissez-faire approach. Each of the three is directly contingent upon government intervention, often to the point of government fraud where the currency and debt are concerned. In short, rather than worrying about whether or not the returns of our private corporations and financial institutions are real and legitimate, we ought to be quite concerned as to whether or not the returns and performances advertised by our Treasury Department and the Federal Reserve are real. The answer seems to be yes, but anyone with a rudimentary understanding of valuation and the role artificial stimuli and trades on the order of the aforementioned currency swaps play in such valuation could easily make the argument that the value of the dollar and the demand for Treasury debt are not real. At the very least, the value and the demand are both contingent upon government intervention which includes vast losses for those agencies executing the underlying manipulations. $100 billion, plus the interest over time on the Treasuries.
What is more, through such manipulation our understanding of the real value of the dollar is clouded. Inflation is nothing more than what dishonest and fraudulent regulators and overseers say it is. It has no connection to real market forces. Inflation is instead directly dependent upon the manipulation of the market by regulators and central bankers. To say that this is a free market is to engage in a willful lie, for there is no intellectually honest way to argue that such machinations are part and parcel of free markets.
To insist on reforms abroad in developing countries which would enable such deceit and subterfuge to the be the rule in their markets is to spread the pox to countries who are attempting to climb out of poverty. What is more, because those countries do not comprehend the arrangements being made, we are ensuring their perpetual bondage. We hold out the promise of aid if they agree to slit their own throats by adopting our regulatory and central banking model as their own.
A free market would have collapsed our economy completely decades ago. To be quite precise, it is that portion of the market which retains some semblance of freedom which reveals the rot at the core of our private and public enterprises. At some point, someone will bet against what they rightly perceive to be bad investments. They are not wrong to do so, but our regulatory apparatchiks would tell you that such free expressions and independent assessments of our debt and our markets are to be avoided at all costs. If anything, they must only occur under controlled circumstances, where those speculators who are engaged in such practices are doing so with the sanction of banks and hedge funds who are directly connected to the Federal Reserve. As Charles Lindbergh, Sr. noted, “From now on, depressions will be scientifically created.”
And they are. The Federal Reserve has evolved a means of increasing liquidity to fund rises in the markets and decreasing liquidity to hasten decreases in the markets. Every major upturn and downturn of the past three decades corresponds directly to Federal Reserve manipulation of the interest rates. The money isn’t real. It’s manufactured out of thin air, and just as easily vaporized by the fiat of the Federal Reserve. Success is determined by the whimsy of men and women who arbitrarily decide to inflate the currency at one turn, and failure is determined by the whimsy of those same men and women who arbitrarily decide to deflate the currency at another turn.
This manipulation is the sole explanation for how insolvent institutions can survive beyond the point of their natural expiration. The simple reality is that Wachovia, Citigroup, Bank of America, and many of the nation’s largest banks should have been dissolved and would have been dissolved without the Federal Reserve’s intervention. Far from rescuing the system from a collapse, the Federal Reserve merely delayed the collapse and preserved the conditions and attitudes which led to the insolvency so that they could lead to larger overextensions at a later date.
Resurrection occurs only after death. A patient who is clinically dead but is made to twitch as though alive through electrodes which provide shocks to his muscles is not really alive. Should the dead be interred into the ground, their remains will inevitably give rise to new life at a later date as they are reduced to nutrients. As it stands, we have zombies stalking the landscape seeking to strip others of their viability and vitality through the same failed practices of the past. What is more, they are doing so with funds handed to them by public agencies and the Federal Reserve, funds which they could not have raised any other way. Aside from captive regulatory agencies and a corrupt central bank seeking to preserve itself, no one would lend to such banks and financial institutions.
But in the mythical statist version of such items, we have individuals who on the one hand decry government intervention in the markets when it comes to the prevention of fraud through honest financial reporting while simultaneously decreeing government bailouts as a necessary evil. Let’s take a look at Sarah Palin, during her infamous interview with Katie Couric:
Katie Couric: If this doesn't pass, do you think there's a risk of another Great Depression?
Sarah Palin: Unfortunately, that is the road that America may find itself on. Not necessarily this, as it's been proposed, has to pass or we're gonna find ourselves in another Great Depression. But there has to be action taken, bipartisan effort—Congress not pointing fingers at this point at...one another, but finding the solution to this, taking action and being serious about the reforms on Wall Street that are needed.
Note that Sarah Palin carefully hedges against endorsing the TARP bailout as it currently existed, while simultaneously arguing that Congress should act without explicitly saying what Congress should do, apart from “not pointing fingers at this point at...one another.” Ladies and gentlemen, I give you the definition of modern leadership and modern political dissent. You say something without saying anything, and you never once outline what you would do as an alternative to what is currently under proposal. In the case of Sarah Palin, we can fairly say that she didn’t know what to do. She shared that feature with most of Congress, whose members no longer read the bills they vote upon before they pass them through both houses and send them to the President for his signature, so that these unread bills can be the law of the land.
One thing that everyone can agree on is the need for some false sense of bipartisanship or non-partisan reconciliation, so as to avoid having to acknowledge the shared guilt which goes with any examination of the root causes of an economic crisis. We’ll gloss over the fact that the tendency for financial deregulation began in the early 1980s under Ronald Reagan if we’re Republicans, and if we’re Democrats, we’ll ignore the fact that we avoided a second Great Depression for nearly 70 years with the protections of Glass Steagall, which were systematically dismantled at the close of the Clinton Administration with the Commodities Futures Modernization Act and Gramm Leach Bliley. That’s right, under the Clinton Administration, which gave us Robert Rubin and Larry Summers, both of whom stymied then CFTC chairman Brooksley Born in her efforts to regulate over the counter derivatives.
The problem wasn’t that the government was looking to stifle the market for such instruments; instead, it was that the government knew nothing about such instruments at all. Derivatives were not traded on exchanges, nor were they traded among equal partners who understood the devices. Very often, the bank creating the derivative understood it well enough to fleece their customer, who didn’t understand the derivative at all, as in the case of Proctor & Gamble, which found itself on the receiving end of a “shitty deal” long before Goldman Sachs entered into its now infamous Timberwolf deal.
Proctor & Gamble entered into a derivative contract with Bankers Trust on January 20, 1993 (http://www.businessweek.com/1995/42/b34461.htm). The goal was lower Proctor & Gamble’s finance charges, so that it might borrow money at cheaper rates. Later that same year, on November 2, Proctor & Gamble agreed to enter into a leveraged derivative product in addition to its earlier derivative deal back in January. Additionally, Proctor & Gamble further entered into another leveraged derivative deal on February 14, 1994. By February 22, problems had emerged. Interest rates began to tick upwards on February 4th, which increased Proctor & Gamble’s interest rate payments to Bankers Trust by February 22 to some 4.5 percentage points above the commercial paper-rate on the November 2, 1993 deal. This resulted in a projected cost of $40 million, which Proctor & Gamble asked for a more detailed explanation of from Bankers Trust, who then informed Proctor & Gamble that the cost projections were based on a proprietary model.
Proctor & Gamble claimed that they had not been told that their interest payments would be determined by such a model, which was exclusive to Bankers Trust and stood apart from market rates. Bankers Trust claimed that the model had been explained to Proctor & Gamble in an October 1993 conversation where Proctor & Gamble had been told how to calculate interest on the November 1993 deal. But in a taped conversation between Bankers Trust employees about that November deal, the following was recorded:
Employee 1: ``Do they [P&G] understand that? What they did?''
Employee 2: ``No. They understand what they did but they don't understand the leverage, no.”
Employee 1: ``But I mean...how much do you tell them. What is your obligation to them?''
Employee 2: ``To tell them if it goes wrong, what does it mean in a payout formula...''
As the above conversation continued, the two employees noted that when Proctor & Gamble entered into an options trade as part of one of its derivatives contracts, Bankers Trust paid Proctor & Gamble half of what the trade generated. Essentially, the bank defrauded its customer out of proceeds and capitalized on the fact that their failure to disclose the sum involved would mean that Proctor & Gamble as a client would not know the difference. What is more, the employees indicated that they had formed intent and conspiracy with regards to future actions along the same lines, as one of the employees stated to the other: “This could be a massive future gravy train (ibid).”
Let us review: we have Bankers Trust admitting that they understood Proctor & Gamble’s failure to comprehend the leveraging mechanism in their November 2, 1993 derivative deal, and we have an admission that Bankers Trust had defrauded its customer out of half of the proceeds from an option trade, with intent and conspiracy formed to repeat the same behavior for the future. We further have both active and passive concealment, for as Proctor & Gamble’s banker, Bankers Trust was obligated to reveal both the pricing mechanism and to ensure that its client understood the leveraging mechanism. Bankers Trust was also obligated to disclose the full profits from the options trade, but it willfully failed to do so in order to profit half of the proceeds unbeknownst to Proctor & Gamble. All of this is sufficient to support a conclusion of fraud with intent to commit future fraud as well. Proctor & Gamble was fully entitled to know. The fact that Proctor & Gamble did not know is evidenced by two key pieces of evidence: the admission of the Bankers Trust employees, and the fact that Proctor & Gamble entered into a deal with implications which anyone with a basic understanding of the deal at the outset would have fled. Ignorance of the law is no excuse, but ignorance of a contract due to the concealment, non-disclosure, and misrepresentation of that contract by one party seeking to rip off the other party is an excuse. It’s a tort, and it’s potentially a criminal act.
But Bankers Trust disputed such conclusions, arguing that a note from Proctor & Gamble’s CFO Erick Nelson indicated that he felt the terms had been clearly explained (ibid). Of course he did. Bankers Trust explained the terms fully and completely, at least insofar as the explanation conformed to their intent to way-lay Proctor & Gamble at a later date with skyrocketing finance charges. Bankers Trust gave their client a full and complete limited explanation that excluded the truth in order to draw that client into a deal which would result in great losses and penalties should its client decide to withdraw from the deal. Damned if they do, damned if they don’t. You see, as in a casino, the house wins. What’s more, the house in this case was skimming the winnings even before the deals went sour, as the disclosures about the options trade clearly indicated.
What is more, if Proctor & Gamble should have desired access to the pricing model used by Bankers Trust to set the interest rates on their derivatives, they would have been (and ultimately were) denied access to the model on the grounds that it was proprietary. Proctor & Gamble, and for that matter, any client of Bankers Trust with a derivatives contract, had no way of independently verifying Bankers Trust’s valuation of the interest. It is what we say it is, and whatever we say it is is what it is. That’s the banker’s way. It’s their world, and while it’s our money, they control its supply and therefore its valuation both through the direct supply and through their behind the scenes machinations with currency swaps and the like. We have no way of verifying the value of the dollars in our pockets. It stands to reason that when one more than doubles the liquidity in a country, the existing currency ought to be halved in value. But according the Federal Reserve, inflation lies at below an annual rate of 2%. How this is accomplished is of no real importance, because, as I noted above, the valuation is whatever they say it is. That’s the definition of fiat money.
When a central banker effectively says that he opposes laws against fraud and enforcement mechanisms to encourage the observance of those laws, we have no basis to believe in the truth of the market. Every market force becomes subjugated and reined to the fiat determination of those individuals in the know on fraud, who routinely manipulate the market and generate vast profits in the interim which had no connection to reality whatsoever, but where merely the product of a perception manufactured by those engaged in the fraud, who are always smart enough by virtue of their foreknowledge to have a chair when the music stops.
But for those average individuals who have no such vantage point, whose retirements hang in the balance, there is no chair when the music stops. There is only the promise of spending one’s golden years eking out a living after at a lifetime of saving for the eventuality of retirement. Welcome, ladies and gentlemen, not to the free market, but instead to a market of nihilism, where supply and demand are no longer independent forces, where the Invisible Hand is gloved and deployed by central bankers and the interests they contend for. Welcome to nothing but nothingness, where up is down and down is up and sense departs our world.
We engineer economic outcomes, ostensibly to promote the greater good, but judging from the continuing concentration of wealth at the top of the economic latter, it is the narrow good which is cemented and affirmed time and time again. We commit vast sums of money to meet crises which are arguably engineered so that those with foreknowledge can be rescued at the expense of our retirement accounts, our nation’s future fiscal security, and while they are made whole, the rest of us are told that the market has sorted us out. We didn’t deserve what we’d accrued to begin with, because it was all fake and artificial, but our contemporaries in the financial sector get to keep their ill-gotten gains nonetheless and help themselves to our tax dollars to boot. Our government borrows money which we will have to repay, which our children will have to repay, so that these men and women can be restored to their original position and then some.
The market is neither free nor fair, and it wears the patina of legitimacy only by its association with ideologues who appear to be one thing by their professions but betray their true beliefs by their actions. No libertarian, free market, economist would ever have taken the chairmanship of the Federal Reserve. Alan Greenspan is not, nor has he ever been, a free market libertarian capitalist. He speaks in tongues of gobbledygook obfuscation, and he did not understand what it was he was doing in any real substantive sense. To the extent that he did understand, he was guilty of perpetuating the very antithesis of a free market in the form of intervention which he directed by his own hands. He was, like so many of his allies and peers, a total charlatan and we were all revealed to be ignorant for having believed his nonsensical spoutings. This man spent four decades advocating for non-interventionism in markets while spending his entire career intervening in the markets!
Let’s review Alan Greenspan’s quotes for a moment: “An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense... that gold and economic freedom are inseparable.” Here you have the extraordinary specter of a central banker acknowledging that statists oppose a gold standard because of their sense that “gold and economic freedom are inseparable.” Yet Greenspan made his career at the Federal Reserve as a champion of fiat money and its role in bolstering the state! He readily engaged and contended for the very system he decried!
No matter, for as Greenspan said in another exchange: “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” That’s right, if the above cited quotes seem particularly clear, we have misunderstood what Greenspan said. Then again, consider this bit of clear optimism: “The Fact that our economical models at The Fed, the best in the world, have been wrong for fourteen straight quarters, does not mean they will not be right in the fifteenth quarter.” Of course not. What qualifies those models as the best in the world? Their ability to rebound to correctness in the fifteenth quarter after fourteen straight quarters of error?
Now consider that the two previous quotes were part of the same remarks. The former came after the latter. It is then that you understand that Greenspan’s peculiar genius was due not to his competency in matters of economics, but rather due to his genius with language, in spouting the incomprehensible, abstruse, and muddied remarks which were so often his trademark way of addressing Congress. The fact that the economy grew under Greenspan was not a testament to his genius, for the growth was never real. It was instead manufactured from fiat monetary supply.
Over the course of some 30 years, our GDP grew from $5.2 trillion to an astonishing $15 trillion. Of course, the metric used to measure that growth, the dollar, was devalued by some 64% in official inflation. What this means is that our real growth over that thirty year period in real dollars was just $650 billion. We went from $5.2 trillion to $5.85 trillion in real, constant, 1980 dollars. Still think Keynesian economics is wonderful, that fiat money is anything other than charlatanism? We didn’t triple our GDP. Real wealth gains came not from central banking activity, but in spite of it. Were it not for productivity gains, we would be in the poorhouse today precisely because of the ruinous inflationary based policies of our central bank. Only by the counteracting force of increased productivity were we saved from the hell reserved for us by the incompetence of our central bankers and financiers.
We didn’t need bailouts. We needed a government with the courage and intellectual honesty to allow banks and corporations to fail. The truth of derivatives, and of all the various financial innovations which often emanate from the financial sector, is that they represent not wealth but phantasms. In truth, we have at last count some $1.14 quadrillion dollars in derivatives in circulation according the Bank of International Settlements. The structure of these devices varies, from the OTC derivatives like the ones structured by Bankers Trust for its client Proctor & Gamble to the Structured Investment Vehicles, or SIVs, first pioneered by Citibank in the late 80s. The net purpose of these devices is quite simple: to provide accounting and financing flexibility apart from reality, both in the market and where balance sheets are concerned.
Companies utilize OTC derivatives to lower the cost of borrowing by trading on the value of some underlying commodity or asset, but in truth, if one cannot achieve a favorable rate of interest, perhaps one should be taking a long hard look at one’s fiscal practices and one’s ratio of debt to assets. The more likely view of a country or a corporation which seeks to enter into a derivative contract is this: due to its profligacy or its financial mismanagement, it has achieved a state where outside sources of finance look upon it with some concern and desire to charge it a greater rate of interest commensurate with the greater risk involved in extending credit. A derivative is a way around this, as it can be structured to provide an immediate reduction in interest, at least initially; or as it can be structured to defer debt to some later date, as in the case of Greece and its derivatives contracts with Goldman Sachs.
Anything, everything, all to avoid having to reconcile oneself, one’s company, and one’s country to the idea that a fundamental reordering of fiscal priorities is in order to correct the obvious systemic flaws which a higher interest rate would indicate are real and present. Higher interest rates indicate higher risk, and higher risk is associated directly with an undesirable and unwise level of indebtedness or fiscal profligacy. The fact that Proctor and Gamble had $5 billion in long term debt outstanding at the time it entered into the derivatives contracts with Bankers Trust would seem to bear this idea out (http://www.businessweek.com/1995/42/b34461.htm).
This runs counter to the fiduciary obligation companies have to their shareholders, in that it enables executive teams with clear cut records of non-performance and bad fiscal policy and debt accrual to delay the day of reckoning into the future; while ensuring that the day of reckoning will be much more severe and punitive when it does arrive, owing to the unique quality derivatives possess in the form of proprietary pricing models which almost always guarantee a higher finance charge when the bill does come due.
Simply put, any company which enters into a derivatives contract with a bank where the pricing models are proprietary and therefore protected from independent examination and verification is abdicating its responsibility to shareholders and going against their interest. A company which does this exposes its shareholders to higher costs in the long run to avoid having to confess to its true financial indebtedness in the short term. It’s a bad deal for shareholders, in that their dividends and the overall capitalization of the company they’ve invested in are placed at risk; while their executives continue to claim greater bonuses based on the mirage they construct with the help of derivatives where profitability is concerned.
The only ones who benefit, truthfully speaking, are the executives who maintain the appearance of profitability simply by deferring the bill to a later date, and the reality is this: by doing so with a derivative contract, those executives guarantee that their shareholders will face a far higher rate of interest with implications for the share price and capitalization of the company.
Where countries are concerned, their failure to maintain a sustainable fiscal policy by running deficits well above redlines and accruing debt at a suicidal pace decrees that they will face the political implications of their actions when their citizens realize that their elected government has driven the country off of a cliff. Politicians and the bureaucrats entrusted with a country’s fiscal policies and debt management seek at all turns to defer and delay the bill of today to the future. Derivatives offer them a means to do just that, albeit with a very real and likely risk of vastly higher rates of interest at a later date which will paralyze their ability to budget for items like pension obligations, social programs, defense budgets, and the provision of police and fire services. In short, the state will be unable to deliver on those guarantees and promises made to pensioners and citizens who look to the state to provide police services and utilities infrastructure.
There is some argument to be made that by offering derivatives to states in such circumstances, banks and the interests they represent are guaranteeing the day will arrive when a debt crisis will make it all too necessary for citizens to consent to privatization and reforms which in normal times they would have never agreed to implement. Make no mistake, the banks and the interests they represent will be positioned to take full advantage of such eventualities. This is how democratic states are undermined, and eventually forced into the role of the debtor as defined by Proverbs 22:7: “The rich rules over the poor, and the borrower is the slave of the lender.”
The state exists to acknowledge the wishes of its people, to defend their rights and contend for their prerogatives. When it fails to do so, or when its fiscal management has become so detrimental to the interests of its citizens that it is no longer able to fulfill the purpose for which the state was established, the state has lost its reason to exist.
States inevitably address the threat of inflationary monetary policies which arise when they try to inflate their way out of a debt crisis in one of two ways: by imposing price controls, or by engaging in complicated financial transactions which enable the central bank to misstate an official rate of inflation which denies the market based rate of inflation. The latter means is how our own Federal Reserve could double the monetary supply without halving the value of the dollar. The former means entails shortages, as price controls only serve to effect the price of a good while virtually ensuring that no one will supply that good at a rate of return which entails their going into the red on the arrangement. You may only have to pay a certain amount for a food item, but what is the use if it cannot be procured?
What is more, while inflationary monetary policies entail more attractive exports, the reality is this: there is a point at which manufacturers and growers of those exports cannot yield a meaningful rate of return in their own domestic currency. They are thereby paralyzed. They cannot generate a profit, and whatever wages they pay to their workers are, like the profits generated in the domestic currency, not worth the paper and ink used to print the money.
As always, myth is the means by which the state attempts to perpetuate itself, and the state has traditionally been quite successful at framing the way in which its actions have been portrayed. The asinine way in which economics has been enlisted to provide some patina of academic and intellectual legitimacy to the state’s actions is evident when one simply reads an economic treatise, say, that of John Maynard Keynes, whose approach to economics has come to dominate our era: "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is (pg. 116 Keynes, General Theory of Employment, Interest, and Money http://bit.ly/bIag62)."
Let us review: the most influential economist of the 20th century is advocating a state filling old bottles with banknotes, burying them in defunct coal mines, and only then leaving it to private enterprise to dig the notes up by hiring people to labor with shovels. Why not merely give the people the money, which, since the state is funded directly with their taxes, would be more efficient? I know, we could give the people their money back in the form of a tax break which would cut out the government entirely and enable them to spend and invest as they saw fit according to their own demands and needs, as opposed to the folly of expending money and resources to bury the money at a suitable debt in a coal mine (whatever a suitable depth is...) only to then turn around sell businesses and shareholders the lease which would grant them the privilege of digging their own money up! And since the capital wealth of the community is the same at the beginning-that is, the money buried does not increase upon its excavation-one might readily argue that by investing it in an enterprise where it might multiply through profit, which then generates further investment, is a vastly superior idea to that of Keynesian economics and its approaches.
At the heart of Keynes’s error is the idea that labor and capital theories of wealth could somehow be synthesized into one cogent theory. Labor does not constitute wealth. See India before outside capital investment, or China before the same for proof of this basic economic reality. Capital investment would suffice to achieve everything Keynes advocates, only without the involvement of a government and the wasteful expenditure of capital involved in burying money.
The fact that this illustration is not the sum total of Keynesian approaches does not change the reality that it is a direct quote from Keynes which he himself advocated as a way of increasing employment. The folly of such an approach is obvious to anyone with a brain and a pulse. The folly of a central bank manufacturing money out of thin air and then charging a Treasury for the privilege of circulating that manufactured money, when only the Treasury’s guarantee renders the money worth anything to begin with, ought to be obvious as well. It’s all absurd.
States would have us believe that by giving us our money back, or by giving us money which the state does not have to give without borrowing owing to its overspending, the state and its officials are doing us a real favor instead of piling up indebtedness for us to repay at a later date. The state essentially would have us believe that it is doing the population a real service by taking from the rich to pay the poor. But since the poor buy the products and services provided by the rich, so how are accounts changed in the long run? You’re simply taking a shovel to the deep end of the pool to hurl water over your shoulder in the hopes that the shallow end will somehow become deeper. It’s a fool’s errand. Anyone who believes in Keynesian approaches to economics or in the current economic model so in vogue today throughout the world is not qualified to hold any office where their opinions might have bearing on the economic futures of other people.
Let’s review the reality of Keynesian approaches and the Federal Reserve: both ostensibly exist to promote stability and full employment. In nearly a century since the Federal Reserve’s founding, we have had 21 economic downturns in 105 years. That’s stability? Exactly when did we achieve full employment over that same time span?
As for the myth that we achieved something great by employing Keynesian approaches during the Great Depression, let us review: at the onset of U.S. entry into World War II, we were at 15% official unemployment. At the outset, we were at 15% official unemployment. We had the same rate of unemployment at the end of World War II that we had at the beginning of World War II. What was so great about Franklin Delano Roosevelt’s economic management? According to Franklin Lane, Roosevelt’s friend and Woodrow Wilson’s secretary of interior, “Rooseve