Thursday, June 7, 2012

Moody's cuts German, Austrian banks on euro risks

Jun 6, 2012 by Euronews Moody's has cut the ratings of six German banking groups and Austria's three largest banks.

While noting the relative strength of the German and Austrian economies, the credit rating agency said this was because those banks face risks if the eurozone crisis deepens.

Panetta declaring war on Pakistan?

Jun 6, 2012 by RTAmerica

Drones strike again in Pakistan, this time killing the alleged number two leader of al-Qaeda, Abu Yahya al-Libi. According to government officials, Obama-led drones strikes have executed 15 al-Qaeda leaders, while the George W. Bush administration killed 16 throughout that president's two terms. Many are questioning the effectiveness of these unmanned attacks and are asking: is America safer? Scott Horton, contributing editor for Harper's Magazine, will help us answer this pressing question.

US T-Bonds: Black Hole Dynamics

By: Jim Willie CB,

Man-made financial phenomena imitate nature, but more importantly they are subject to the powerful laws of economic nature. The Wall Street financial engineers have built vast structures, which tragically are crumbling and soon will fall to the ground. Vast illusory wealth will be lost, never truly garnered. The fiat currency system has required tremendous efforts not only to build the financial skyscrapers ever higher each year, but also to provide support structures that prevent their topple. With the aid of the subservient press, an illusion of wealth, prosperity, and stability has been fashioned and defended. It is all being blown away by the powerful storms known as the global financial crisis. The term has even earned an acronym for the popular lexicon GFC. My alternative view is that the global monetary war is in full swing, World War III with the USDollar at the epicenter of the conflict and pecuniary violence. A few years ago in June 2005, the Jackass penned an obscure article entitled "Financial Market Physics" just for amusement. Thanks to Vronsky and his intrepid work, the Gold-Eagle archive still lives (for old article CLICK HERE). In it was described momentum, pendulums, traction, leverage, resistance, support, inertia, coiled springs, meltdowns, high versus low pressure differentials, flow dynamics, imbalances, and the infamous black hole. The final concept is of extreme relevance today.

My objective is to explain how the crumbling USTreasury Bond tower has an effect on the ground. Last article dealt with the inevitable collapse of the tower, since its support buttress in the Interest Rate Swap has begun to rupture. My best source claims a trigger mechanism has been pulled from deep within the USTBond/IRSwap system managed by JPMorgan. The collapse is assured. It cannot be stopped. It will continue until its conclusion. In the wake of the collapse are dynamics on the ground, at the site of the tower. A grand black hole will be formed, complete with tremendous power to suck down all assets. The process has already started, sucking down weak sovereign bonds and junk corporate bonds. My purpose will be to describe the process from the top down, then the bottom up, as lost faith in all things paper gathers like a gigantic storm that covers the entire earth. The great power is seen an the following image, a great piece of Fotoshop work in itself. Money vanishes in the hole. Notice how in the past few years, grand bank aid has come, $trillions tosses at the banking structures. Yet they are still insolvent, in ruins. The money went into the Black Hole, which should include Fannie Mae and AIG in a wider focus.

The tremendous power in nature for similar anomalies can be seen in a gorgeous water hole, whose location could not be verified with a little research. Also the awesome beauty of the inter-stellar black hole has been captured probably by the Hubble telescope. The intense gravitational field traps all matter, all wave elements (such as transmissions), even light itself. Black Holes in nature occur when a star dies, its mass collapses, to produce a gravitational field beyond what can be managed in a stable system. That star is the USDollar core and revolving USTBond system, which are collapsing. Some scientists believe alternative universes lie on the other side of such voyages through the eye. The water that descends into the hole goes into the ecosystem, recycled, maybe purified, only to emerge elsewhere on the other side. If only the Western bankers could be forced to travel through the astronomical eye, suffer the crush, and emerge in another world far enough away not to harm the population. Could the light flashes be dragon breath on each side? The poles could be viewed as producing future Gold demand.


The top has many forces. The impaired higher risk bonds are shed like yesterday's trash with newspaper wrappers (prospectus filings). In the Hat Trick Letter May report, the topic of widening junk bond spreads was exposed. Mistakenly in my view, the Seeking Alpha author describes the junk bonds as offering good value, only because their yields are higher than before. Those yields will go higher still, much higher, corresponding to much lower values. In the process of shedding the high risk bonds, investors will turn to the supposed safe haven of USTreasury Bonds.The author points out that in the last month alone, the situation has worsened. He wrote, "As I mentioned in a recent article, high-yield spreads to Treasuries, as measured by the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread, recently reached a new high for 2012, now at 7.17%, up 123 basis points in the past month alone." It has risen 17 basis points so far in June alone, in only three active trading days. If still rising, the junk bond value continues to fall. He went on to compare to historical levels, without paying much attention to the acute risk of the spread widening considerably further. The junk spread can move fast, as seen in the last crisis chapter. It went from 3.73% in January 2006, to 5.92% in December 2007, to 21.8% in December 2008. It could repeat such exaggerated moves in the current crisis. See the Seeking Alpha article (CLICK HERE). The multi-year chart shows the early stage of another eruption.

A closer view was given just a couple weeks ago. Notice the divergence process underway, as the junk bond yield index moves up and up, but the USTBond index moves down and down. In the last couple weeks, my forecast of a 1.5% USTBond yield on the 10-year came true. That was one of the easiest calls in my memory. The trajectory on the junk yield (in blue to the sky) continues to go higher, while the trajectory on the USTreasury yield (in brown like feces) continues to go lower. Next will come the more mainstream corporate bonds, tomorrow's potential junk bonds, which will be sold off in favor of the USTBond for perceived safety. We are already starting to hear the chorus on the favorable performance of USTreasurys, the lone winner in the crowd. The financial press anchors and analysts simply do not comprehend that the USTBond is the final asset bubble, how its rise means the failure of other assets, how the implosion has its epicenter powered by 0% by the USFed itself. The faith shown to the USFed has become a more desperate hope. Ignored has been the 30-year USTBond. If its yield goes from 2.65% currently to 2.0% as is likely, a ripe 15% profit can be gathered. Not bad in today's ugly climate.


An interesting little exchange occurred this week between the Jackass and Tyler Durden, the crack analyst editor at Zero Hedge. My point was that he misses the point of capital destruction from the ZIRP policy of enforced 0% as official rate. He argued two excellent points that did sink into the stubborn Jackass brain stem.Artificially low interest rates enable consumers to spend improperly and unwisely. The setting was prepared by an unusually enlightening debate between Rick Santelli and Gary Kaminsky on CNBC, the official Wall Street public address system wall with loudspeakers. They argued that the now status quo financial repression identified by low interest rate and QE environment are not good for the USEconomy. How true!! But this spout of wisdom occurs in the mainstream. Santelli cannot be suppressed, too smart, too experienced, too outspoken. Durden wrote,"Borrowing and saving are really about whether to consume more now or later (or more later and less now). We agree with Professor Antony Davies that these decisions are best left to individuals, and not the Nanny State Fed. Each person's judgment of what is best for them is replaced by the Federal Reserve's judgment and the free market interest has become a thing of the past (for now). Lower rates don't mean more spending; they mean more spending now and less in the future." See the Zero Hedge article (CLICK HERE).

Low interest rates far below where they belong encourage a new car that should not be bought, a boat that should not be bought, those items of jewelry (or furniture or lawn ornaments) that should not be bought. They even encourage a bigger house that should not be bought. Many such purchases end up in a liquidation sale, a yard sale, a repo sale, or a foreclosure sale much later after the spending high wears off and the bill is due. Great bottom up argument by Durden. The larger point in parallel is that artificially low interest rates bring about a misallocation of capital, far beyond the misjudged consumer spending.

The second excellent point made by Tyler Durden was that inadequate capital investment has led to a decline in corporate profitability, due to a deteriorating capital base. The working capital of big Western firms, perhaps to some extent in Japan also, has resulted in a dilapidated aging asset base that produces a declining cash flow. An absent capital expenditure (CAPEX) reinvestment will lead to amortization and depreciation to the point of no return. See the disaster in Venezuela where Chavez has driven their petroleum business down hard, well over 25% to 30% lower output. Economist David Rosenberg used to be a favorite economist of mine, but he embraces the nonsense about a recovery when the USEconomy has been stuck in a semi-permanent recession of minus 3% to minus 5% for four years running. Despite that errant position, Rosey pointed out earlier that corporations are forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. They must also replenish flagging pension programs subject to lofty forward views. Companies have less to invest in new equipment, new workers, and research & development. In other words, the business sector cannot invest properly in their own main product lines. Ultimately, the corporate profit margins suffer from neglect and age, like an old car. The USFed sponsored 0% rate shifts capital allocation equations, so that ever less cash is going into replenishing asset bases. In many cases the threshold of useful asset life has been crossed. Job cuts and the savings involved cannot breathe renewed life into any business. Besides, most companies are already cutting into the bone. Once the depreciation and amortization cliff is reached, the cash flow will be much worse. See the Zero Hedge article (CLICK HERE) for an excellent survey of capital investment, working capital, debt reduction, R&D, acquisitions, stock buybacks, dividends, and more.

The problem is as diverse as it is perverse. The low mortgage bond yields, coupled with cratering commercial paper, has attacked the corporate sector. It does not produce the cash flow from stored cash anymore. Compare to a human body whose heart pumps much less blood within the circulatory system, and the body slowly starves of oxygen. The artificially low USFed ZIRP policy of zero percent interest rate has resulted in a disaster of mammoth proportions. Corporations and fund managers, including pension funds, have made decisions to accept higher risks since the safe USTBond complex has offered such paltry returns. The risk has backfired since 2007 in a big way. Having lost their core, they direct their remaining assets into USTBonds which earn tiny interest, but are seen finally as safe. The USGovt is not a good business investment, a grandiose money loser. A rally is occurring in bonds for USA Inc, which is losing $1.5 trillion per year, a horrible investment. Again, more misallocation of capital as funds chase the USTBond Tower of Babel. The fund managers have gone from risk ON to risk OFF, as the economic and financial worlds hurtle toward implosion and systemic failure. On the consumer household side, the low 0% rate has hit savers too. They cannot live off savings income. Retirees are the new poverty stricken class, forced to choose between food or medication, sometimes opting for dogfood. The fact of economic life not reported by the financial anchors and supposed expert analysts is that the official 0% acts to suppress economic activity, not to stimulate it. It is a gigantic wet blanket. The collection of savers has twice the volume as consumer loans. The interest income is twice that of interest paid. Therefore the USEconomy grinds slower.

A jet assist will be given to the Black Hole swirl when the USGovt makes its next horrendous decision on treatment of private pension funds. The mass of 401k, IRA, and Keough funds enjoys a tax deduction benefit on much of the incoming investments from the payroll side. That might soon end with a forced directive by the USGovt in all its limitless short-sightedness, if not stupidity, surely desperation. They must find buyers of USTBonds, just like Japan twenty years ago. Japan forced all public pension funds, postal also, into Japanese Govt Bonds, even though they earned squat for interest. The same will happen in the United States. The discussion has been tossed around for months, a very tempting concept indeed. Imagine the $16 trillion in US retirement funds being redirected in part into USTBonds. Just attacking the personal 401k, IRA, and Keough funds would bring a cool $2 trillion at least, maybe more. They would declare the tax benefit as lost on new income entering the private pension funds, unless they purchased USTBonds. A more extreme decision would be to force old money in the funds to exit their stock investments and enter USTBond investments instead. Even if only on the margin of new entering funds, the effect would be huge. A backfire on the stock market would occur, to be sure. If the extreme option were declared law, then the stock market effect could be another 10% sudden decline or worse. My point is that forced personal pension funds into USTreasury Bonds would add considerable new force to the Black Hole that sucks capital from the system, and pushes it into the natural toilet.

For some reason, after considerable observations, the Jackass has been unable to find more than one or two other analysts that pay any attention whatsoever to the very important effect of 0% official rate. The Capital Destruction effect is profound and damaging. Few if any economists or financial analysts seem to comprehend that a sustained 0% rate kills capital. The dynamic is simple, mentioned every third or fourth public article by the stubborn Jackass. As 0% prevails for the return on money, the investment community pursues alternatives to the empty USTBond savings window. The investors seek out investment alternatives like commodities, while others rely upon the commodity sector as a hedge against inflation. Whichever the point of view, the result is that commodity prices rise and the cost structure rises. The brunt is felt in higher industrial feeder system costs, and higher household costs like with food and utilities. The profit margins shrink for businesses, and for the diverse business segments. The final product price cannot keep pace with a rising pattern, not with the intense competition in China, as well as Japan and the entire Pacific Rim. Product prices cannot rise to maintain a constant profit margin. So capital dies in a vicious cycle as the USEconomy weakens further with each passing month.

As the profit margins are reduced, entire businesses along with certain business segments shut down. They take their equipment off line. They retire their capital. In some cases after a period of time, they liquidate their equipment in order to raise needed cash. The result overall is a destruction of capital, a retirement of capital, a shrinking of the economic capital base. This is the biggest blind spot in the collection of American, British, and Western European economists. They believe the ZIRP is a stimulus. It is a stimulus only to speculation, which has turned on its masters to destroy their ill-fated elaborate but flimsy structures. ZIRP has systematically been destroying working capital. The standing permanently declared 0% monetary policy assures an endless recession, and no recovery ever. Worse, the free cost of money distorts all financial markets, all asset pricing, everything. It is an epitaph on monetary rule.

The ZIRP will continue forever, or until the USGovt debt default, or until the systemic failure signaled by the JPMorgan major losses. The two major reasons why no Exit Strategy is available to the USFed and USDept Treasury are that 1) USGovt borrowing costs would rise to uncontrollable levels, adding to already unmanageable deficit levels, and 2) the Interest Rate Swap control apparatus would implode, leading to $100 trillion in losses or more. So the Zero Interest Rate Policy will go on forever, until the USTBond Tower of Babel falls, or until the entire financial structure based on the fiat USDollar collapses. Arguments to the contrary are both baseless and have been proved wrong by events of the last four years. No recovery, no remedy, no liquidation, endless war, deficits to the sky. Systemic failure awaits.

The official ZIRP is the calling card of the Gold Bull Market. What commodities are for investments and hedges in the tangible arenas, Gold & Silver are to the financial arena. As long as the Zero Percent Interest Policy is in force, the Gold Bull Market will persist and thrive. The ZIRP assures that the inflation adjusted real interest rate, like with the 10-year bond or 30-year bond, will remain negative. Take the 2.5% yield or 1.5% yield, subtract the actual price inflation of 7% to 9% in order to arrive at a negative 6% interest return in real terms. The negative real rate has persisted for over ten years, and assures an ongoing Gold Bull Market. It requires repeating.The official ZIRP is the calling card of the Gold Bull Market.

The battles on the ground are more full of intrigue. One should never lose sight of the sinister motive to disrupt nations, to enable overthrow of tyrant leaders, with the side benefit to capture their gold as booty. The raid in Libya of 144 tons, the raid in Greece of 112 tons, cannot be dismissed as asterisks when they might have been the primary objective. The Arab Spring saw other gold released from vaulted bases, like in Tunisia, a story long forgotten. The capture of gold bullion in movement from political instability occurs on the periphery of the black hole. Almost no central bank gold remains from any major country, as almost none is left in any central bank vault. The Bank of England attracted attention several months ago by sending into circulation very old gold bars, easily identified by markings. Switzerland has a different problem, caught in their own web of deceit and fraud. They have been ransacking private Allocated accounts for years. Von Greyerz has pointed out how investors wishing to transfer their gold bars find themselves wrestling with bullion bankers who do not any longer have the bars in possession. Proof is the new serial number stamps on bars, whose dates make liars out of the bullion bankers, since those dates are newer than the accounts. The bars held are a few years younger than the initial investment time frames. Only the smaller countries seem to have gold, along with Russia and China and India. These small countries are vulnerable, subject to raids.

The SPDR Gold Trust will be the final gold victim of the black hole forces. It has been dubbed the central bank of gold bullion bankers. It recently saw a reduction in bar volume equal to the amount that was just increased in the Sprott Gold Fund (symbol PHYS). The Sprott Funds are loaded with integrity, as honest as the GLD fund is dishonest and corrupted. As the flight to true safety increases, money (in form of gold bars) will fly out of the GLD corrupt corner caves. The hapless clueless dumbfounded GLD investors will be holding paper certificates in their empty hands. They will pursue legal avenues, replete with lawsuits, seeking clawbacks from emptied vaults. In time, the GLD share price will be 20% to 30% below the gold spot price. The proof lies in its price discount relative to spot. Take the GLD quoted price today at 158.9 per share and compare to the gold spot price of 1637 per ounce. Factor in the 10:1 ratio, and arrive at a hefty 3.0% discount of GLD to spot gold price. The Sprott Funds typically have a notable premium in price since they actually purchase the gold bars. The SPDR Gold Trust relies heavily upon paper certificates, and permits routine and frequent short raids out its back door that drag down the share price.

My position has been laid out clearly in recent weeks. The biggest factor behind the gold price (with corrupted paper futures discovery aspect) is the Eastern Coalition.Their grand raids have resulted in 5000 metric tons pulled out of New York, London, and Swiss banks, and sent East, principally China, but not exclusively China. Their motivated raids are intended to weaken the Anglo bankers to the point that they are rendered toothless to defend their massive naked short positions. My excellent reliable gold trader source has pounded the table for over a year, that the gold cartel is net short over 20 thousand tons from improper illicit illegal usage of Allocated accounts. Their nightmare is only beginning.

The gold price can be viewed apart from the background wartime battles, which have left plenty of blood on the fields, offices, and delivery ramps alike. The JPMorgan troubles have underscored the vulnerability of the USTBond complex, and exposed the Interest Rate Swap as a reinforcement device. The truth is slowly emerging. The declared JPMorgan losses are soon to exceed $20 billion. CEO Dimon has admitted the Delta Hedge strategy that manages the Interest Rate Swaps has gone somewhat out of control. His tormented elite financial engineer staff cannot even estimate the losses. During the lifting of the curtain to show the world the vast machinery at work creating a facade of safety and security in the USTreasury Bonds themselves, money moves into Gold. During the last few weeks, anyone with an IQ greater than the Bush family can notice the USEconomy is hurtling into a recession. All indicators scream recession. With strained facial expressions and almost apologetic tone for reporting a more truthful picture, the financial news networks cannot avoid the reality of a recession. They report the dire stream of economic news with sheepish regret.

The USTBonds will benefit from the recession outlook, but talk has already begun in two important messages. First, that the strong performance of the USTBonds signals a recession and widespread damage to the USEconomy, along with even greater USGovt deficits. Second, that the USTBonds might be the only successful investment in town. The latter speaks directly to my point of the USTreasury Bond sucking all capital, inducing sales of all asset classes, and purchasing the US sovereign bond since it is the supposed safe haven, the only asset that is not losing value. The USTBonds will fail from their own success, as instability enters the base while the Tower of Babel goes higher. Again, the biggest question in my mind is whether the 10-year USTBond yield (the TNX) will reach the next important target of 1.0% before the systemic breakdown. My intermediate target of 1.25% will be achieved, but only after the USEconomy is recognized by the dumbest people in the room, the USGovt stat rats. As the USTBonds continue to rally, the Gold price will rally alongside it. Eventually, the USTBonds will be regarded as toxic paper, the cause of a Black Hole, subject to severe default writedowns in a debt restructure. Then Gold will rise without competition, unimpeded by a phony USTreasury safe haven.

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 22 years. He aspires to one day join the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Financial Collapse At Hand: When is "Sooner or Later"?

By Dr. Paul Craig Roberts

Original Source

Ever since the beginning of the financial crisis and Quantitative Easing, the question has been before us: How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits? Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury’s credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.

In other words, financial deregulation leading to Wall Street’s gambles, the US government’s decision to bail out the banks and to keep them afloat, and the Federal Reserve’s zero interest rate policy have put the economic future of the US and its currency in an untenable and dangerous position. It will not be possible to continue to flood the bond markets with $1.5 trillion in new issues each year when the interest rate on the bonds is less than the rate of inflation. Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign.

The question is: when is sooner or later? The purpose of this article is to examine that question.

Let us begin by answering the question: how has such an untenable policy managed to last this long?

A number of factors are contributing to the stability of the dollar and the bond market. A very important factor is the situation in Europe. There are real problems there as well, and the financial press keeps our focus on Greece, Europe, and the euro. Will Greece exit the European Union or be kicked out? Will the sovereign debt problem spread to Spain, Italy, and essentially everywhere except for Germany and the Netherlands?

Will it be the end of the EU and the euro? These are all very dramatic questions that keep focus off the American situation, which is probably even worse.

The Treasury bond market is also helped by the fear individual investors have of the equity market, which has been turned into a gambling casino by high-frequency trading.

High-frequency trading is electronic trading based on mathematical models that make the decisions. Investment firms compete on the basis of speed, capturing gains on a fraction of a penny, and perhaps holding positions for only a few seconds. These are not long-term investors. Content with their daily earnings, they close out all positions at the end of each day.

High-frequency trades now account for 70-80% of all equity trades. The result is major heartburn for traditional investors, who are leaving the equity market. They end up in Treasuries, because they are unsure of the solvency of banks who pay next to nothing for deposits, whereas 10-year Treasuries will pay about 2% nominal, which means, using the official Consumer Price Index, that they are losing 1% of their capital each year. Using John Williams’ ( correct measure of inflation, they are losing far more. Still, the loss is about 2 percentage points less than being in a bank, and unlike banks, the Treasury can have the Federal Reserve print the money to pay off its bonds. Therefore, bond investment at least returns the nominal amount of the investment, even if its real value is much lower. ( For a description of High-frequency trading, see: )

The presstitute financial media tells us that flight from European sovereign debt, from the doomed euro, and from the continuing real estate disaster into US Treasuries provides funding for Washington’s $1.5 trillion annual deficits. Investors influenced by the financial press might be responding in this way. Another explanation for the stability of the Fed’s untenable policy is collusion between Washington, the Fed, and Wall Street. We will be looking at this as we progress.

Unlike Japan, whose national debt is the largest of all, Americans do not own their own public debt. Much of US debt is owned abroad, especially by China, Japan, and OPEC, the oil exporting countries. This places the US economy in foreign hands. If China, for example, were to find itself unduly provoked by Washington, China could dump up to $2 trillion in US dollar-dominated assets on world markets. All sorts of prices would collapse, and the Fed would have to rapidly create the money to buy up the Chinese dumping of dollar-denominated financial instruments.

The dollars printed to purchase the dumped Chinese holdings of US dollar assets would expand the supply of dollars in currency markets and drive down the dollar exchange rate. The Fed, lacking foreign currencies with which to buy up the dollars would have to appeal for currency swaps to sovereign debt troubled Europe for euros, to Russia, surrounded by the US missile system, for rubles, to Japan, a country over its head in American commitment, for yen, in order to buy up the dollars with euros, rubles, and yen.

These currency swaps would be on the books, unredeemable and making additional use of such swaps problematical. In other words, even if the US government can pressure its allies and puppets to swap their harder currencies for a depreciating US currency, it would not be a repeatable process. The components of the American Empire don’t want to be in dollars any more than do the BRICS.

However, for China, for example, to dump its dollar holdings all at once would be costly as the value of the dollar-denominated assets would decline as they dumped them. Unless China is faced with US military attack and needs to defang the aggressor, China as a rational economic actor would prefer to slowly exit the US dollar. Neither do Japan, Europe, nor OPEC wish to destroy their own accumulated wealth from America’s trade deficits by dumping dollars, but the indications are that they all wish to exit their dollar holdings.

Unlike the US financial press, the foreigners who hold dollar assets look at the annual US budget and trade deficits, look at the sinking US economy, look at Wall Street’s uncovered gambling bets, look at the war plans of the delusional hegemon and conclude: “I’ve got to carefully get out of this.”

US banks also have a strong interest in preserving the status quo. They are holders of US Treasuries and potentially even larger holders. They can borrow from the Federal Reserve at zero interest rates and purchase 10-year Treasuries at 2%, thus earning a nominal profit of 2% to offset derivative losses. The banks can borrow dollars from the Fed for free and leverage them in derivative transactions. As Nomi Prins puts it, the US banks don’t want to trade against themselves and their free source of funding by selling their bond holdings. Moreover, in the event of foreign flight from dollars, the Fed could boost the foreign demand for dollars by requiring foreign banks that want to operate in the US to increase their reserve amounts, which are dollar based.

I could go on, but I believe this is enough to show that even actors in the process who could terminate it have themselves a big stake in not rocking the boat and prefer to quietly and slowly sneak out of dollars before the crisis hits. This is not possible indefinitely as the process of gradual withdrawal from the dollar would result in continuous small declines in dollar values that would end in a rush to exit, but Americans are not the only delusional people.

The very process of slowly getting out can bring the American house down. The BRICS--Brazil, the largest economy in South America, Russia, the nuclear armed and energy independent economy on which Western Europe ( Washington’s NATO puppets) are dependent for energy, India, nuclear armed and one of Asia’s two rising giants, China, nuclear armed, Washington’s largest creditor (except for the Fed), supplier of America’s manufactured and advanced technology products, and the new bogyman for the military-security complex’s next profitable cold war, and South Africa, the largest economy in Africa--are in the process of forming a new bank. The new bank will permit the five large economies to conduct their trade without use of the US dollar.

In addition, Japan, an American puppet state since WW II, is on the verge of entering into an agreement with China in which the Japanese yen and the Chinese yuan will be directly exchanged. The trade between the two Asian countries would be conducted in their own currencies without the use of the US dollar. This reduces the cost of foreign trade between the two countries, because it eliminates payments for foreign exchange commissions to convert from yen and yuan into dollars and back into yen and yuan.

Moreover, this official explanation for the new direct relationship avoiding the US dollar is simply diplomacy speaking. The Japanese are hoping, like the Chinese, to get out of the practice of accumulating ever more dollars by having to park their trade surpluses in US Treasuries. The Japanese US puppet government hopes that the Washington hegemon does not require the Japanese government to nix the deal with China.

Now we have arrived at the nitty and gritty. The small percentage of Americans who are aware and informed are puzzled why the banksters have escaped with their financial crimes without prosecution. The answer might be that the banks “too big to fail” are adjuncts of Washington and the Federal Reserve in maintaining the stability of the dollar and Treasury bond markets in the face of an untenable Fed policy.

Let us first look at how the big banks can keep the interest rates on Treasuries low, below the rate of inflation, despite the constant increase in US debt as a percent of GDP--thus preserving the Treasury’s ability to service the debt.

The imperiled banks too big to fail have a huge stake in low interest rates and the success of the Fed’s policy. The big banks are positioned to make the Fed’s policy a success. JPMorganChase and other giant-sized banks can drive down Treasury interest rates and, thereby, drive up the prices of bonds, producing a rally, by selling Interest Rate Swaps (IRSwaps).

A financial company that sells IRSwaps is selling an agreement to pay floating interest rates for fixed interest rates. The buyer is purchasing an agreement that requires him to pay a fixed rate of interest in exchange for receiving a floating rate.

The reason for a seller to take the short side of the IRSwap, that is, to pay a floating rate for a fixed rate, is his belief that rates are going to fall. Short-selling can make the rates fall, and thus drive up the prices of Treasuries. When this happens, as the charts at illustrate, there is a rally in the Treasury bond market that the presstitute financial media attributes to “flight to the safe haven of the US dollar and Treasury bonds.” In fact, the circumstantial evidence (see the charts in the link above) is that the swaps are sold by Wall Street whenever the Federal Reserve needs to prevent a rise in interest rates in order to protect its otherwise untenable policy. The swap sales create the impression of a flight to the dollar, but no actual flight occurs. As the IRSwaps require no exchange of any principal or real asset, and are only a bet on interest rate movements, there is no limit to the volume of IRSwaps.

This apparent collusion suggests to some observers that the reason the Wall Street banksters have not been prosecuted for their crimes is that they are an essential part of the Federal Reserve’s policy to preserve the US dollar as world currency. Possibly the collusion between the Federal Reserve and the banks is organized, but it doesn’t have to be. The banks are beneficiaries of the Fed’s zero interest rate policy. It is in the banks’ interest to support it. Organized collusion is not required.

Let us now turn to gold and silver bullion. Based on sound analysis, Gerald Celente and other gifted seers predicted that the price of gold would be $2000 per ounce by the end of last year. Gold and silver bullion continued during 2011 their ten-year rise, but in 2012 the price of gold and silver have been knocked down, with gold being $350 per ounce off its $1900 high.

In view of the analysis that I have presented, what is the explanation for the reversal in bullion prices? The answer again is shorting. Some knowledgeable people within the financial sector believe that the Federal Reserve (and perhaps also the European Central Bank) places short sales of bullion through the investment banks, guaranteeing any losses by pushing a key on the computer keyboard, as central banks can create money out of thin air.

Insiders inform me that as a tiny percent of those on the buy side of short sells actually want to take delivery on the gold or silver bullion, and are content with the financial money settlement, there is no limit to short selling of gold and silver. Short selling can actually exceed the known quantity of gold and silver.

Some who have been watching the process for years believe that government-directed short-selling has been going on for a long time. Even without government participation, banks can control the volume of paper trading in gold and profit on the swings that they create. Recently short selling is so aggressive that it not merely slows the rise in bullion prices but drives the price down. Is this aggressiveness a sign that the rigged system is on the verge of becoming unglued?

In other words, “our government,” which allegedly represents us, rather than the powerful private interests who elect “our government” with their multi-million dollar campaign contributions, now legitimized by the Republican Supreme Court, is doing its best to deprive us mere citizens, slaves, indentured servants, and “domestic extremists” from protecting ourselves and our remaining wealth from the currency debauchery policy of the Federal Reserve. Naked short selling prevents the rising demand for physical bullion from raising bullion’s price.

Jeff Nielson explains another way that banks can sell bullion shorts when they own no bullion. Nielson says that JP Morgan is the custodian for the largest long silver fund while being the largest short-seller of silver. Whenever the silver fund adds to its bullion holdings, JP Morgan shorts an equal amount. The short selling offsets the rise in price that would result from the increase in demand for physical silver. Nielson also reports that bullion prices can be suppressed by raising margin requirements on those who purchase bullion with leverage. The conclusion is that bullion markets can be manipulated just as can the Treasury bond market and interest rates.

How long can the manipulations continue? When will the proverbial hit the fan?

If we knew precisely the date, we would be the next mega-billionaires.

Here are some of the catalysts waiting to ignite the conflagration that burns up the Treasury bond market and the US dollar:

A war, demanded by the Israeli government, with Iran, beginning with Syria, that disrupts the oil flow and thereby the stability of the Western economies or brings the US and its weak NATO puppets into armed conflict with Russia and China. The oil spikes would degrade further the US and EU economies, but Wall Street would make money on the trades.

An unfavorable economic statistic that wakes up investors as to the true state of the US economy, a statistic that the presstitute media cannot deflect.

An affront to China, whose government decides that knocking the US down a few pegs into third world status is worth a trillion dollars.

More derivate mistakes, such as JPMorganChase’s recent one, that send the US financial system again reeling and reminds us that nothing has changed.

The list is long. There is a limit to how many stupid mistakes and corrupt financial policies the rest of the world is willing to accept from the US. When that limit is reached, it is all over for “the world’s sole superpower” and for holders of dollar-denominated instruments.

Financial deregulation converted the financial system, which formerly served businesses and consumers, into a gambling casino where bets are not covered. These uncovered bets, together with the Fed’s zero interest rate policy, have exposed Americans’ living standard and wealth to large declines. Retired people living on their savings and investments, IRAs and 401(k)s can earn nothing on their money and are forced to consume their capital, thereby depriving heirs of inheritance. Accumulated wealth is consumed.

As a result of jobs offshoring, the US has become an import-dependent country, dependent on foreign made manufactured goods, clothing, and shoes. When the dollar exchange rate falls, domestic US prices will rise, and US real consumption will take a big hit. Americans will consume less, and their standard of living will fall dramatically.

The serious consequences of the enormous mistakes made in Washington, on Wall Street, and in corporate offices are being held at bay by an untenable policy of low interest rates and a corrupt financial press, while debt rapidly builds. The Fed has been through this experience once before. During WW II the Federal Reserve kept interest rates low in order to aid the Treasury’s war finance by minimizing the interest burden of the war debt. The Fed kept the interest rates low by buying the debt issues. The postwar inflation that resulted led to the Federal Reserve-Treasury Accord in 1951, in which agreement was reached that the Federal Reserve would cease monetizing the debt and permit interest rates to rise.

Fed chairman Bernanke has spoken of an “exit strategy” and said that when inflation threatens, he can prevent the inflation by taking the money back out of the banking system. However, he can do that only by selling Treasury bonds, which means interest rates would rise. A rise in interest rates would threaten the derivative structure, cause bond losses, and raise the cost of both private and public debt service. In other words, to prevent inflation from debt monetization would bring on more immediate problems than inflation. Rather than collapse the system, wouldn’t the Fed be more likely to inflate away the massive debts?

Eventually, inflation would erode the dollar’s purchasing power and use as the reserve currency, and the US government’s credit worthiness would waste away. However, the Fed, the politicians, and the financial gangsters would prefer a crisis later rather than sooner. Passing the sinking ship on to the next watch is preferable to going down with the ship oneself. As long as interest rate swaps can be used to boost Treasury bond prices, and as long as naked shorts of bullion can be used to keep silver and gold from rising in price, the false image of the US as a safe haven for investors can be perpetuated.

However, the $230,000,000,000,000 in derivative bets by US banks might bring its own surprises. JPMorganChase has had to admit that its recently announced derivative loss of $2 billion is more than that. How much more remains to be seen. According to the Comptroller of the Currency the five largest banks hold 95.7% of all derivatives. The five banks holding $226 trillion in derivative bets are highly leveraged gamblers. For example, JPMorganChase has total assets of $1.8 trillion but holds $70 trillion in derivative bets, a ratio of $39 in derivative bets for every dollar of assets. Such a bank doesn’t have to lose very many bets before it is busted.

Assets, of course, are not risk-based capital. According to the Comptroller of the Currency report, as of December 31, 2011, JPMorganChase held $70.2 trillion in derivatives and only $136 billion in risk-based capital. In other words, the bank’s derivative bets are 516 times larger than the capital that covers the bets.

It is difficult to imagine a more reckless and unstable position for a bank to place itself in, but Goldman Sachs takes the cake. That bank’s $44 trillion in derivative bets is covered by only $19 billion in risk-based capital, resulting in bets 2,295 times larger than the capital that covers them.

Bets on interest rates comprise 81% of all derivatives. These are the derivatives that support high US Treasury bond prices despite massive increases in US debt and its monetization.

US banks’ derivative bets of $230 trillion, concentrated in five banks, are 15.3 times larger than the US GDP. A failed political system that allows unregulated banks to place uncovered bets 15 times larger than the US economy is a system that is headed for catastrophic failure. As the word spreads of the fantastic lack of judgment in the American political and financial systems, the catastrophe in waiting will become a reality.

Everyone wants a solution, so I will provide one. The US government should simply cancel the $230 trillion in derivative bets, declaring them null and void. As no real assets are involved, merely gambling on notional values, the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system. The financial gangsters who want to continue enjoying betting gains while the public underwrites their losses would scream and yell about the sanctity of contracts. However, a government that can murder its own citizens or throw them into dungeons without due process can abolish all the contracts it wants in the name of national security. And most certainly, unlike the war on terror, purging the financial system of the gambling derivatives would vastly improve national security.

Dr. Roberts was Assistant Secretary of the US Treasury, Associate Editor of the Wall Street Journal, columnist for Business Week, and professor of economics.

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