Global Usury Threatens Planet
February 6, 2012 by Keith Gardner
The Intergovernmental Panel on Economic Racketeering announced today that global economic rent and usury threatens the planet. “Even the Eskimos are drowning in debt”, reports one scientist, Dr. Blood N. Gore, studying the cause of poverty. “Soon, they’ll all be unemployed, their igloos will be melted and foreclosed, and they’ll be homeless in Alaska where there is more than enough land and natural resources for every citizen to own thousands of homes and eat like kings. The pace of foreclosures and poverty in the land of plenty is frightening.”
If the pace of economic rent and usury as a percentage of GDP continues, California would be completely bankrupt and under water if the cost of insurance, debt, and rent continues, driving everyone out of their homes and shutting down businesses everywhere. Gore warns, “While it seems that the rent is becoming cheaper, one has to remember that high levels of debt are still making the rent expensive, especially for 99% of population who are becoming poorer, unemployed, foreclosed, and either homeless or living in their parent’s home on their parent’s pension, while the top 1% are grabbing all real assets for pennies on the dollar.” This confusion leads many experts to call it “wealth change,” “socialism for the rich,” or “wealth redistribution to the rich,” where government enables the wealthy to steal wealth from the working masses.
Usury and economic rent threatens the whole planet. No nation is unaffected by global usury and economic rent. The Federal Reserve can print more money than it sells as treasury bonds, but the Federal Reserve still collects a small percentage for having the unsold debt on the books. Most nations are under the strict control of the IMF and World Bank, enforcing the harmful credit-based monetary and banking systems threatening the planet and enslaving smaller nations into banana republics where the people are handed debt and giant corporations are handed land and natural resources. The only nations not under control of the usurious IMF and World Bank cartel are rogue dictatorships where the government collects all wealth and where the people do not benefit from their own production.
What is worse, is that the pro-liberty movement has been co-opted by big gold and bankers, people like Ron Paul and Alex Jones, who want to put us on another gold standard, eliminate taxation on unearned wealth, and implement hyper-austerity measures, so that they can steal wealth through usury and economic rent without any kind of economic justice or regulation to stop the theft, which would surely throw us into a new Dark Age. The banks have been working hard to remove barriers the classical liberals gave us to stop theft through economic rent. The banks put people under huge tax obligations for entitlements. Now they want to completely dismantle those barriers and take those entitlements away from the people who funded them without even addressing the biggest parasites on economies, economic rent and usury. They want to make the cost of economic rent and usury even more expensive.
The world has not always had usurious monetary systems. The Roman empire was built with bronze and copper coins. The British empire was built with Tally Sticks. Iceland and Canada had public banking after the Great Depression, but they became engulfed by the IMF after the stagflation of the 1970s. George Washington financed the American Revolution with the Continental though it was plagued by massive counterfeiting by the British military. Lincoln financed the Civil War with the Greenback. Local scrip was also used in the early American colonies and the Great Depression. Various other barter currencies have also been used not tied to debt or expensive commodities like gold.
Gore passionately explains, “It is an inconvenient truth that the cost of interest is destroying the planet. We are paying taxes on our earnings just to pay interest on public debts. Then, we have to turn around and pay the cost of interest and economic rent on everything else. The interest on homes and business even exceeds the cost of the land and development. We pay more on the interest on our home than we pay for the land and the builders who built us a home.”
Gore continues, “The financial, insurance, and real estate industries are 40% of the GDP. If you add national debt and all the other hidden costs of economic rent and financial interest, the numbers are horrifying. The value of usury and economic rent exceeds our GDP. We are worse off than the tenant farmers who paid rent to the land barons and serfs who made tribute payments to the monarchs during the Dark Age. If you want to know who is stealing your wealth and destroying your jobs, you can point your finger at the big banks and the governments and big corporations they control, including the news the television tries to sell you as truth and the candidates they try to get you to elect. It should make you angry. Even Jesus lost his temper at the banks.”
Gore suggests that we move towards a public sovereign currency free of usury and economic rent. “If the government actually printed money rather borrowed it, we would not even need income taxation to pay interest on national debt. Any inflation not corrected by economic growth would be an ideal progressive tax, which would encourage investment and job creation, without government forms. Even the Libertarians should like getting rid of the national debt and IRS.”
The legal tender of a nation should fund the government. Government should not have to pay interest on their own legal tender. For government to borrow it’s own legal tender is crony capitalism. It is a corruption of free markets. People are working on solutions which would not corrupt free markets and free us of usury. The American Monetary Institute and many others are working towards real solutions which would not corrupt free markets, but the media owned and controlled by big banks and big gold are ignoring the real solutions.
Thomas Edison made this suggestion clear in a newspaper where he wrote, “It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.”
Gore warns against a return to the gold standard since a gold standard would not be free of usury and economic rent. “We have not seen such high levels of economic rent and usury since the fall of the Roman Empire, when the Roman Empire went onto a gold standard and threw the world into a Dark Age.”
It is suggested by most experts to tax unearned income and end taxation on earned income. Taxing labor makes labor more expensive. It leads to off-shoring and outsourcing. Taxation of labor makes the poor more poor. The income tax destroys jobs.
You do not have to tax labor if you tax economic rent through a land value tax. Land value tax is not only a more fair way to fund government. It makes land more affordable and encourages productive and efficient use of land. It prevents the creation of slums and homelessness. It prevents land being monopolized. Land monopolization forces citizens into sweat shops and modern slavery, which is more stark in small and undeveloped banana republics. The rich become richer in their sleep just because they own land. The poor become poorer because they must accept whatever wages are offered. For developed nations, land value taxation prevents boom/bust cycles in real estate since homes are valued according to the value of the development rather than the supply and demand of the land.
Taxation on undeveloped land value can be made progressive with a citizen dividend, to make sure every citizen has the right to land. America’s best-selling and self-published economist, Henry George, made the statement, “How can a man be said to have a country when he has not right of a square inch of it.” Thomas Paine, who crossed the Potomac with George Washington, suggested such a solution in his essay, “Agrarian Justice.”
It is noted by some experts that the classical liberals and even the Bible supports such an economic policy. They also note that the income tax was originally a tax on unearned wealth in America.
Gore also suggests providing public options in banking and insurance. The state of North Dakota has a state bank. The profits of the bank are used to fund government and make public finance less expensive. This is a positive step towards using the unearned wealth of usury to fund government rather than the usurer. Citizens everywhere can use a credit union, to make sure the profits of banking are used to help the people finance their needs and are encouraged to use small commercial banks who finance small business. It is critical to avoid the larger commercial banks since they have the power to corrupt governments.
Gore explains, “We have to do everything we can to take power from the big banks as they try to fix their balance sheets. Everyone has to take action to stop the credit contraction. Everyone needs to do everything they can to guarantee we have enough credit to pay our debts. The government should have let the banks fail. What does Bank of America do anyway? Nobody likes them. The buildings and buttons to push to expand credit already exists. All they have to do is put a new name on the door.”
Insurance is a form of finance and usury. Non-profit options in insurance are advised since the insurance corporation have a history of corruption, even delivering the very unpopular legislation, ObamaCare. The family doctor and their patients have been turned into corporate slaves. A public option in health insurance is the only hope in reversing this trend by removing the profit motive of big insurance corporations to lobby and corrupt government. Healthcare is too important to allow institutions of usury to make healthcare more expensive.
Dr. Blood N. Gore ends his dire warnings by poking fun at a major television ad, “When the prime rate is near zero and your Capital One credit card in your wallet is charging 23% interest, you have a shark swimming in your wallet.”
Over at the Washington Note, Steve Clemons linked to a 2003 article titled “The Debtors Empire.” What I find incredible about this article written almost four and a half years ago is how prescient its observations are today.
Isn’t it just a little twisted that the United States, the world’s richest country, is on track to borrow more than $500 billion from abroad this year? Isn’t it even stranger that this borrowing includes sizable chunks from countries such as India and China, many of whose 2.3 billion people live on less than a dollar or two a day?
Sure, I know there are reasons why money flows the way it does. For one thing, the United States has a long history of treating foreign investors pretty decently, going back to the 1780s, when the first Treasury secretary, Alexander Hamilton, decided to honor pre-Revolutionary War debt. And the United States is growing decently (roughly 4 percent next year), albeit less than India (6 percent) or China (8 percent).
But whatever the reasons, and they are admittedly complex, isn’t it still a bit nutty that the world’s richest country has become by far the world’s biggest borrower, with a net debt to the rest of the world (assets minus liabilities) of more than $2 trillion? The Romans would be jealous: They went to a lot of trouble to extract taxes from their empire; the world just gives money to the United States.
Even with the morality of it all set aside, pure self-interest ought to dictate that the United States be a net lender to the rest of the world rather than a borrower. We are an aging population that ought to be saving for retirement in real assets abroad. Unfortunately, you’d never know it from the consumption frenzy of recent years. We Americans may have coined the phrase “a penny saved is a penny earned,” but these days it’s “I’ll gladly pay you Tuesday for a genetically modified hamburger today.”
State governments are bleeding red. California alone is still running a deficit that by many measures is bigger than those of many countries. As for the federal government — well, Washington is on track to achieve deficit records that could take a generation to break. And the American consumer? We save less of our income than any other rich economy. China’s citizens save more than 40 percent of their income; the United States would be lucky if its citizens ever decided to save at half that rate. No matter how rich you are, if you continually spend more than you earn, you are eventually going to run into problems.
These are the exact same sentiments expressed by former Federal Reserve Chairman Paul Volcker on April 10, 2005 in an article titled “An Economy on Thin Ice“:
It’s all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It’s surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.
And it’s comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.
The difficulty is that this seemingly comfortable pattern can’t go on indefinitely. I don’t know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.
I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.
The central problem is the US is addicted to consumption that our pocketbooks cannot pay for. So we borrow. Consider the following charts:
Gross Federal Debt now stands over $9 trillion dollars.
In the last 7 years, we have doubled the amount of debt we we borrow from abroad to a little over $2 trillion.
The central problems started when the Republicans began their “supply-side revolution.” Notice in the chart above that starting in 1980 government expenditures continually outpaced expenditures by a wide margin. Hence the massive build-up in debt. Under Reagan’s tenure, total federal debt outstanding increased from a little over 30% of GDP to over 60% of GDP. While Bush inherited a surplus, he again increase total debt outstanding from about 57% to 64%. In short, we have Republican economic policy to thank for this problem at the national level.
But it’s not just the national government. US consumers are massively indebted as well. Consider the following charts:
All of that debt has to go somewhere. And it has — it is currently on the balance sheets of literally every financial player in the market. And that’s a large part of why Bear Stearns failed — it owned a ton of loans that weren’t any good.
And the end result of this policy is foreigners don’t have any confidence in our economy. How do I know this? Take a look at a chart of the dollar.
It’s dropping like a stone.
The policy of borrowing instead of growing is finally catching up with the great debtor that is the US. And the cost isn’t pretty.
The American government recently played Russian roulette with its economy by threatening to default on its debt. Of course, nobody actually thought that the Americans would truly default at this time. After all, the Americans can quite literally print dollars to pay their debt. But it is also possible that the USA has entered a state of decline: massive public and private debts without growth quickly leads to collapse.
While it is a cliché, I am fascinated by the analogy between the American superpower and the fall of the Roman Empire. The economics of the Roman Empire during its decline bear some similarity to our current situation.
Rome partially moved away from a gold-based currency some time during its decline. It started to mint coins with less gold content. Similarly, the Americans switched to a fiat currency in the seventies under Nixon. The American government no longer guarantees a gold equivalent for the American dollar. In both cases, the currency became backed by the great economical and military power of the government. Unfortunately, this type of backing loses its efficiency when a decline is hinted. Your dollars are only valuable if you think that the USA will keep growing stronger. If you think that the American economy might suffer on the long term, then American dollars are much less interesting. Thus, predictions of decline become self-fulfilling.
During the fall of the Roman Empire, many citizens were enticed to borrow from the super wealthy. Eventually, the peasant class was wiped out: they became serfs. Serfs live in conditions where they cannot possibly expect to improve their conditions. They constantly owe more than they earn. They are, effectively, slaves.
The Catholic Church, which emerged at the time, correspondingly considered usury to be a sin. While it seems that the stance of the Catholic Church on usury is quite a bit more flexible today, religions like Islam still forbid usury. Judaism only allows usury toward non-Jews.
What is usury? Lending money knowing that it will make people poorer. Correspondingly, most consumer debt is usury. It is a transfer of wealth from the poor to the rich which makes us, overall, poorer. Lending money to Greece at this time is also usury.
Could the religious stance against usury be wise?
Economists who expect people to be rational won’t believe in usury. Surely, people borrow money to be better off. Yet the average credit card debt per household is over $15,000 in the USA (and it grows all the time, of course). Does anyone believe that these $15,000 are invested in highly profitable ventures? (They would need to be highly profitable since credit cards often charge over 15% for loans.)
Conclusion: This is meant to be a lighthearted commentary. I am an amateur economist. But can anyone convince me that credit card companies produce wealth by charging exorbitant interests to people who use the money to buy beer and chips? When more and more of our economy is based on such usury, is it not a sign of decline? Won’t the American peasants become serfs at this rate?
Note: 45 million of Americans are dependent on government food stamps. According to Business Insider, credit card debt is growing much faster than the median household income. Despite massive defaults on mortgages between 2007 and 2010, consumer debt has remained stable.
Norman Jones, Utah State University
The question of when and if money can be lent at interest for a guaranteed return is one of the oldest moral and economic problems in Western Civilization. The Greeks argued about usury, Hebrews denounced it, Roman law controlled it, and Christians began pondering it in the late Roman Empire. Medieval canon lawyers adapted Greek and Roman ideas about usury to Christian theology, creating a body of Church law designed to control the sin of usury. By the early modern period the concept began to be secularized, but the issue of what usury is and when it occurs is still causing disputes in modern legal and theological systems.
The Greek philosophers wrestled with the question of whether money can be lent at interest. Most notably, Aristotle concluded that it could not. Aristotle defined money as a good that was consumed by use. Unlike houses and fields, which are not destroyed by use, money must be spent to be used. Therefore, as we cannot rent food, so we cannot rent money. Moreover, money does not reproduce. A house or a flock can produce new value by use, so it is not unreasonable to ask for a return on their use. Money, being barren, should not, therefore, be expected to produce excess value. Thus, interest is unnatural.
Roman lawyers were more subtle in their treatment of the problem. They recognized the right to lend and borrow for a specified return, the mutuum. A strict contract in which money, oil, or other fungible good could be lent on the expectation of an equal return in kind and quality of the substance loaned. Interest was not recognized in this obligation unless it was agreed upon by the parties ahead of time. Foenus was an illegal contract for interest without risk, with one exception. The foenus nauticum allowed lenders to contract for certain return on money lent for large projects, such as voyages. It was the Latin foenus that was used interchangeably with usuram in Latin biblical translations. Nonetheless, Roman law did, in the Lex Unicaria of 88 B.C., recognize an interest rate of up to 12%. Made the maximum rate in 50 B.C. by a decree of the Senate, the centesima usura stood until Justinian lowered the rates in 533 A.D., creating a sliding scale with 12% only applying to the foenus nauticum, 8% to business loans, 6% to those not in business, and 4% to distinguished persons and farmers.
The Christians of the late Empire were not so flexible. There is a steady condemnation of lending at interest running through the patristic literature. St. Jerome declared usury to be the same as murder, echoing Cato and Seneca, since it consumed the life of the borrower. Christians, however, seemed required by God to condemn it. Exodus 22:25 forbad oppressing one’s neighbor with usury. Deuteronomy 23:20-21 said you could not charge your brother usury. Ezekiel 18:7-8; 13 makes it clear that the righteous do not lend at usury; and that usurers “shall not live.” Leviticus 25:35-36 says if your brother is poor do not charge him usury. The final Old Testament word on the issue came from the Psalmist, who charged the godly to aid their neighbors, not lending to them at interest. The strongest rejection of loans at interest came from Christ in Luke 6:35, where He says “Lend, hoping for nothing in return.”
Given God’s hostility to usury, it is hardly surprising that Christian theologians from the fourth century on defined lending for gain as a sin. Aquinas and his fellow scholastics amplified authors like St. Jerome on the subject, and Gratian built it into the code of Canon Law. Aquinas must have been gratified to find that Aristotle shared his hostility toward usury. By the late Middle Ages there was a consensus that lending at interest for guaranteed return was illegal and damnable. However, they also agreed that if the lender shared in the risk of the venture, the loan was legal. Consequently, laws against usury seldom interfered with merchant capitalism. Businessmen could always get loans if their contracts made them partners in risk. Extrinsic titles of the canon law, for instance, made it legal to charge for damnum emergens and lucrum cessans, losses sustained because someone else was using one’s money. The difference between the amount lent and the profit it might have made was paid as interesse. However, one had to prove the loss to charge interesse. It was also possible to write contracts which specified poena conventionalis, a penalty for late payment that did not demand proof of loss. Merchant bankers like the Medici did not charge interest per se, but they often received gifts from grateful clients.
Canon law and secular law held usury to be malum in se, an evil in itself that must be outlawed because God condemned it. Nonetheless, there were many legal ruses that allowed invisible illegal interest to be charged. A contract for a false sale, in which an inflated price was paid for a good, might be constructed. Or the appearance of risk might be incorporated in a contract by conditioning the payment on some eventuality such as the length of someone’s life. Only the poor, lacking personal credit, were forced to pledge collateral to get money.
Poor Men’s Banks
The oppression of the poor by usurers offended many good Christians. As an anti-Semitic counter measure against the Jews who were outside the canon law’s prohibitions, the papal governor of Perugia, Hermolaus Barbarus, invented the mons pietatis, “poor men’s bank” in 1461. Publicly-run pawn shops approved by Paul II in 1467, these nonprofit banks lent to the deserving poor at very low rates of interest and, by the late fifteenth century, they began to accept deposits. By the sixteenth century these banks were spread by the Franciscans all over Europe, though not in England, where Parliament refused to legalize them.
Changing Interpretations in the Fifteenth Century
As the demand for capital grew theologians became increasingly aware that lending at interest was not always theft. In the fifteenth century, Paris’s Jean Gerson and Tubingen’s Conrad Summenhardt, Gabriel Biel and John Eck argued that usury occurred only when the lender intended to oppress the borrower. Eck, supported by the Fugger banking family, became famous for his book Tractates contractu quinque de centum (1515), defending five percent as a harmless and therefore legal rate of interest as long as the loan was for a bona fide business opportunity. For these nominalists the proper measure of usury was the intent of the borrower and lender. If they were in charity with one another the loan was licit.
Eck’s position horrified more conservative people, who continued to see usury as an antisocial crime. Not surprisingly, Eck’s great enemy, Luther, refused to accept the idea that intention was a proper test for usury. Luther refused even to accept the extrinsic titles, insisting that anyone who charged interest was a thief and murderer and should not be buried in consecrated ground. He allowed only one exception to his anathema. If money was lent at interest to support orphans, widows, students and ministers it was good. Melanchthon was less conservative than Luther, admitting the extrinsic titles.
Bourgeois reformers like Martin Bucer and John Calvin were much more sympathetic to Eck’s argument. John Calvin’s letter on usury of 1545 made it clear that when Christ said “lend hoping for nothing in return,” He meant that we should help the poor freely. Following the rule of equity, we should judge people by their circumstances, not by legal definitions. Humanist that he was, Calvin knew there were two Hebrew words translated as “usury.” One, neshek, meant “to bite”; the other, tarbit, meant “to take legitimate increase.” Based on these distinctions, Calvin argued that only “biting” loans were forbidden. Thus, one could lend at interest to business people who would make a profit using the money. To the working poor one could lend without interest, but expect the loan to be repaid. To the impoverished one should give without expecting repayment.
The arguments in Calvin’s letter on usury are amplified in Charles du Moulin’s Tractatus commerciorum et usurarum, redituumque pecunia constitutorum et monetarum, written in 1542 and published in Paris in 1546. Du Moulin (“Molinaeus”) developed a utility theory of value for money, rejecting Aquinas’ belief that money could not be rented because it was consumed.
This attack on the Thomist understanding of money was taken up by Spanish commentators. Domingo de Soto, concerned about social justice, suggested that Luke 6:35 was not a precept, since it has no relation to the justice of lending at interest. Luis de Molina, writing in the late sixteenth century, agreed. He suggested that there was no biblical text which actually prohibited lending money at interest.
Increasing Tolerance toward the Legal of Charging Interest
By the second half of the sixteenth century Catholics and Protestant alike were increasingly tolerant of the idea that the legality of loans at interest was determined by the intentions of the parties involved. Theologians were often reluctant to admit much latitude for usury, but secular law and commercial practice embraced the idea that loans at interest, made with good intentions, were legitimate. By then most places permitted some form of lending at interest, often relying on Roman Law reified in Civil Law to justify it. In the Dutch Republic and England the issue was relegated to conscience. The state ceased to meddle in usury unless it was antisocial, leaving individuals to decide for themselves whether their actions were sinful. At about the same time the image of the usurer in literature changed from a sinister, grasping sinner to a socially inept fool.
17th-Century Debate Turns to Acceptable Interest Rates
As social good became the proper test of a loan’s propriety, there emerged two distinct debates about usury. By the first third of the seventeenth-century the issue of usury as a sin had been relegated to the conscience of the lender. The state was increasingly concerned only with whether or not the rate of interest was damagingly high. As the Act against Usury passed by the English Parliament in 1624 demonstrates, the rate of interest was important to the national economic well-being, lowering the maximum rate of 10%, established in 1571, to 8%. An amendment to the Act announced that this toleration of usury did not repeal the “law of God in conscience.”
This era saw the emergence of a casuistic debate about usury and an economic debate about credit. Robert Filmer, the English political theorist, wrote a book proclaiming that matters of conscience need not be subjected to state control. His contemporaries in the first generation of economists, Gerard de Malyne and Thomas Mun saw usury as a practical business problem. Malyne thought lending at interest was perfectly admissible if it was commercial credit; oppression of the poor by pawnbrokers was the evil usury condemned by God. Mun argued that there was no connection between usury and patterns of trade, and Edward Misselden saw interest rates as a matter of the money supply, not an oppression of the poor.
Most seventeenth-century Europeans knew usury was condemned by God, but many, while not admitting that usury should be legal, were espousing more radical views. Claudius Salmatius wrote a series of books with titles like De Usuris (1638) and De Modo Usurarum (1639) rejecting the Aristotelian definition of money as a good that was consumed. He insisted it could be rented. In this he was following Du Moulin’s argument from the sixteenth century. By the early eighteenth century Salmatius’ rejection of the traditional idea of usury was widely accepted. John Locke tried a slightly different argument, though to the same end. Lending at interest for productive purposes, he said, was no different from a landlord sharing the profits of a field with his tenant.
1700s: Worries about Usury Diminish, Lending at Interest Becomes Normal
By the eighteenth century the moral issue of usury was no longer of interest to most Protestant thinkers. In practice lending at interest with collateral had become normal, as had deposit banking. It was regulated by states, and this regulation was seen as benefiting business and protecting the poor. Adam Smith thought that since money can by made by money, so its use ought to be paid for. Nonetheless, he defended usury laws as the necessary in order to encourage productive investment and discourage consumptive spending. A cap on interest rates makes money cheaper for productive borrowers, while forcing up the cost of money to those borrowing simply to consume, since they would be getting their money outside the regulated money market. The expense of money borrowed for consumption actually keep many people from borrowing at all.
Debates among Catholics in the 1700s
Among Catholics the practice looked much the same, but in 1744 Scipio Maffei set off a debate with his three-volume defense of lending at interest, in which he suggested usury at moderate rates was not illicit, even if it was not charitable. This assertion was condemned by a papal encyclical, Vix Pervenit, in 1745. The encyclical reasserted the scholastic condemnation of usury, reinvigorating the tension between moral attitudes toward lending at interest and commercial necessity for doing it.
In the early nineteenth century the Roman Congregations issued a series of rulings that took the pressure off. Faithful Catholics engaged in lending were not committing sin as long as they lent at a moderate rate. The moral condemnation of usury as an oppression of the poor did not disappear, however. It was adopted by socialists, whose antagonism toward capitalists convinced them that a market in money was evil. To them, usury was the “new slavery.”
Bentham’s Laissez-Faire Position
However, some economists were arguing that state regulation of credit was a distinctly bad thing. Jeremy Bentham wrote, in 1787, his Defence of Usury, in which he proclaimed a laissez-faire position, and introduced his concept of utility, urging “that no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain, in the way of obtaining money, as he thinks fit: nor, (what is a necessary consequence) any body hindered from supplying him, upon any terms he thinks proper to accede to.” Bentham’s argument, written against proposed legislation in the Irish Parliament, won out in the English Parliament, which abolished the law against usury.
Usury Laws in the United States
In the United State usury was regulated by each state as it saw fit. Clearly basing themselves on English legislation (usually the 1664 Act against Usury), colonies and states generally assumed that lending at “immoral” rates of interest is wrong and must be prevented by regulation. The laws were eased in the early nineteenth century. Many states, but not all, repealed their anti-usury legislation. Hard economic times in the post-Civil War era caused the return of anti-usury measures, but these statutes had little impact on normal commercial operations. Attempts to regulate interest rates were complicated by the competition among states with varying laws. Thus American usury laws tend to vary the admissible rate of interest according to local economic circumstances, with some much more tolerant of high rates than others. In 1999, for instance, the legal rate of simple interest prescribed by state usury laws varied from 5% (Delaware and Wisconsin) to 15% (Washington and South Dakota). However, most state laws have complex definitions of usury that allow various rates for various types of transactions, which is why credit card companies can charge so much more than the legal usury rate. Moreover, during the 1980’s, when interest rates had reached record highs, the U.S. Congress exempted national banks from state usury laws and small loan regulations, tying their rates to the prime interest rate instead.
Islam and Usury
One of the striking developments in the twentieth century is the creation of a system of Islamic banks that do not lend money usuriously. The Qur’an forbids usury, or riba, and the prohibition of lending for interest without risk to the lender is expanded upon by a number of Hadith. Muslim scholars have followed the same Aristotelean path of analysis as did Christian theologians to understand the divine hostility to usury. In particular, they stress the consumable nature of money. This stress on consumption comes naturally, since the Qur’an says “O you who believe! Eat not Ribâ (usury)” (Al Imran 3:130).
One of the Islamic responses to the West in the past fifty years has been the rapid growth of banks serving Muslims that do not contract for a predetermined amount over and above the principal. These banks must share the risk with the borrower, and they must not make money from money.
Most nations continue to regulate usury, which is now, in the West, defined as contracting to charge interest on a loan without risk to the lender at an interest rate greater than that set by the law. However, moral arguments are still being made about whether or not contracting for any interest is permissible. Because both the Bible and the Qur’an can be read as forbidding usury, there will always be moral, as well as social and economic, reasons for arguing about the permissibility of lending at interest.
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Savelli, Rodolfo. “Diritto Romano e Teologia Riformata: du Moulin di Fronte al Problema dell’Interesse del Denaro.” Materialli per una Storia della Cultura Giuridica 23, no. 2 (1993): 291-324.
Thireau, Jean-Louis. Charles du Moulin, 1500-1566: Etude sur les sources, la methode, les idee politiques et economiques d’un juriste de la Renaissance. Geneva: Droz, 1980.
Usury and its Effect on Rome and Early Christianity
Professor Tomislav Sunic is a political scientist, and said to be a mediocre scholar with a halting command of English (http://home.earthlink.net/~karljahn/ENR.htm). As a proponent to the narrow ideological coterie of the European New Right or Nouvelle Droite, he is widely recognized for his anti-Christian views. In Marx, Moses, and the Pagans in the Secular City,” (http://www.watermark.hu/doctorsunic/clio.html), Sunic relies on age-old arguments, which attempt to uplift paganism, while denouncing Christianity. Some of these arguments are so antiquated that they were used during the Roman era against Christians. Other arguments are borrowed from Jewish rabbis expressing their contempt and hatred of Christianity. Little effort is given for appearing balanced and there are few attempts in camouflaging his diatribe of Christianity.
The Romans were the most notable of organizers and preservers of all Western society. The Greeks may have been innovators of thought and philosophy, but it was the Romans who were most fond of rule and order. This is very important in understanding how Rome became Christianized.
Sunic, who is purported to be from Croatia, deceives the reader by blaming the so-called “Christian cult” for Rome’s downfall. The major reason for the decline of pagan Rome can be attributed to the long-term destructive effects of usury. Indeed, usury has fueled the rise and the fall of the great civilizations of Egypt, Persia, Babylon, Greece and Rome. In Will Durant’s History of Civilization, he mentions the major factor in the rise of ancient Rome was its adherence to free-market policies. It is true that commerce was central to Roman life and expansion. The trade policies gave Rome the strongest economy of the ancient world, providing the Roman state with the resources to become the greatest empire of all time. Having only limited products, Rome had to export her gold though. Conquest was a means to replenish the treasury. This worked well for a while, but by the reign of Trajan (98-117 A.D.), the cost of conquest was greater than the riches it supplied. Borrowing money at interest caused the government to raise taxes and led to the inevitable reversal of its earlier commerce policies. High taxes, pervasive regulation and debasement of the currency ultimately undermined the strength of the Roman economy. In the end, the state simply did not have the resources to defend itself against barbarian invasions. Internally, Rome’s own citizens became increasingly alienated, which can be directly attributed to the practice of usury. The lack of Roman will to survive was a slow capitulation that none knew for the wiser. To understand the factors that led to Rome’s demise sheds a great amount of light on other civilizations that perished as well.
The Roman government was far too corrupt already with its politicians bought by moneychangers for any fledgling Christian sect to have an affect on its decline. The moneychanger’s demand was perpetually self-serving, which was disparate to the common good of the populace. Originally, Rome was founded as a republic. The unchecked influence of the moneychangers caused it to change into a democracy. A republic is derived through the election of public officials whose attitude toward property is respected in terms of law for individual rights. A democracy is derived through the election of public officials whose attitude toward property is communistic and respects the “collective good” of the population instead of the individual. This is the resultant system that moneychangers bring to civilization. The subversion of power is a sleight of hand that changes the right of the individual into what is often called the “collective good” of the people (communistic), which is always controlled by an alliance of powerful interests.
There is no reference in the article to the moneychangers and their lawyers sowing the seeds for Roman society to suffocate under its own lethargic weight. Lawyers were indeed a problem to Rome. The Romans were so concerned by lawyers’ opprobrious effect on public morale that they attempted to curb their influence. In 204 BC, the Roman Senate passed a law prohibiting lawyers from plying their trade for money. As the Roman republic declined and became more democratic, it became increasingly difficult to keep lawyers in check and prevent them from accepting fees under the table. Indeed, they were very useful to the moneychangers. The lawyers fed upon corruption and accelerated the downward plunge of Roman civilization. Some wealthy Romans began sending their sons to Greece to finish their schooling, to learn rhetoric (Julius Caesar was one example) — a lawyer’s cleverness in oration. This compounded Rome’s growing woes.
There is no mentioning the effect of moneychangers buying political influence for their own selfish gain, while the vast majority of the population suffered. Diodorus Siculus, a first century Greek historian promulgated:
“This [usury] has for centuries caused great misery and poverty for Gentiles.” He also observed usury was a trade run by Jews who treated other people as enemies and inferiors. “It has brought strong condemnation of the Jews!”
And, yet the Jews had great influence over Rome’s government. The populace hated the Jews. And the Jews, who were already well entrenched as moneylenders, bought more influence to ensure their monopoly over Rome.
Roman Historian Tacitus stated this about the Jews and their peculiar behavior:
Jewry had a great hatred and disdain for Rome. Yet, they lived in the city of Rome itself and profited greatly from the Roman people and its economy. One would ask, how could a culture of people despise another with such enmity and yet desire to interact on a daily basis; to bring up one’s family in the midst of these “reviled” Roman people? Author Josef Kastein, in “History of the Jews,” p. 192 stated:
The moneychangers destroyed Rome from within by first monopolizing usury, monopolizing the precious mineral trade and then disproportionately magnifying the temporal businesses of prostitution (including pedophilia and homosexuality), and slavery. Constantine (306-337 AD) was the first Roman emperor to issue laws, which radically limited the rights of Jews as citizens of the Roman Empire, a privilege conferred upon them by Caracalla in 212 AD. The laws of Constantius (337-361 AD) recognized the Jewish domination of the slave trade and acted to greatly curtail it. A law of Theodosius II (408-410 AD), prohibited Jews from holding any advantageous office of honor in the Roman state. Always the impetus was buying influence concerning their trade. Harry J. Leon of the University of Texas quoted in his book, “Jews of Ancient Rome,” p.3:
Speech of Cicero, which is one of the few revelations of Jewish subversion that survived the burning of libraries. The great consul of Rome, Cicero, had to lower his voice to avoid stirring up the Jews. A Roman aristocrat, Flaccus, was removed from office and dragged back to Rome to face a false charge. Why? Because he had tried to enforce the Roman law banning the Jewish traffic in gold. The outcome of this trial was that Flaccus’ ban on the shipping of gold was removed. Thus the Jews won their objective, and Flaccus was lucky to escape with his life after he had opposed them. To the white gentile, greed has always been the Achilles heel that led to the downfall of his civilizations. Usury has been the opiate that has ruined the ingenuity of many of its civilizations. As this Jewish craft spread, the people increasingly suffered from the burdens of indebtedness. So troubling was the effects of usury that Lex Genucia outlawed usury in 342 BC. Nevertheless, ways of evading such legislation were found and by the last period of the Republic, usury was once again rife. Emperors like Julius Caesar and Justinian tried to limit the interest rate and control its devastating effects (Birnie, 1958). Entertainment was a way to temporarily set aside the burdens of indebtedness. It was a way to festively indulge in all the glory that Rome had to offer. Rome soon became drunk on hedonism. Collectively, entertainment helped disguise the collapsing of a great power. Spectator blood sports, brothels, carnivals, festivals, and parties substituted for everything that was wrong with Rome. Some Senate conservatives were concerned about the new extravagances. In 182 AD, the Senate passed a law regulating the size of parties. Partying continued to grow though. Circuses and public festivals for the poor were already being paid for by politicians to win plebeian approval. The introduction of a new feast in 173 AD; the celebration at Floralia, may have been modeled after the Greek festival of Aphrodite. The chief attraction at this new Roman festival was dances by prostitutes, dances that ended in a strip tease. Many Romans, however, considered this celebration terribly decadent. Today, the Carnival in Rio de Janeiro and Mardi Gras in New Orleans give an eerie resonance to the celebration at Floralia.
Prostitution and thievery flourished. The old legal code of Rome, The Twelve Tables, served the plebs for centuries and was now rendered ineffective. There was no police force. The closest resemblance to a police force was neighbor watching out for his neighbor. The plaintiff could always summon the defendant in front of a magistrate. People from smaller communities, many of whom were poor, migrated to the big cities, especially to Rome. This compounded the level of crime and victimization. In Rome, feuds and bloodshed between families were numerous, with the rivals calling on friends and neighbors for assistance. Few Romans lived past the age of forty. The indigent were buried in common pits in the public cemetery on Esquiline Hill. But most Romans persisted in enjoying what they believed was the glory of Rome’s position in the world.
Blood sports and the coliseum increasingly became a catharsis for the masses. The Christians, political prisoners, prisoners of war, anarchists, and common criminals were increasingly blamed for the ills of Roman society. As the taxes and indebtedness of the people rose, so did the call for blood. The unfortunate many were paraded into the arena before cheering crowds to be slaughtered. Citizen patriots themselves were increasingly at odds with the growing democracy as the moneychangers increasingly influenced the public policy. These condemned citizens were branded “anarchists,” as the aristocrat Faccus nearly was when he challenged the power of the Roman Jews. The plebeian masses were more concerned with blood sports, circuses, and receiving bread than understanding the ominous effects of the moneychangers and lawyers on Roman society.
Rome became a multi-cultural state much like our own in the United States. Indeed, it was truly an international city. Foreigners of every nation resided and worked there. The Romans soon intermarried and had children with the many foreigners. This included concubines from the numerous slaves won through war. Rome had an extraordinary large slave population and was estimated to make up about two-thirds of its population at one time. One such slave from Syria, named Eunus encouraged as many as 60 thousand slaves to revolt in Sicily taking over several towns and defeating the first army sent against them by Rome. Slaves were acquired through failures to complete contracts under Law Merchant (see commercial law) or born to parents acquired by such means. This jurisdiction gave merchants an edge in some of their dealings. Contractors were held as insurance and expected to accept servitude as the price of failure in business.
Generally, Romans viewed slavery as a natural part of life. Defeat and slavery was the fate of an inferior society. Domestic slaves won favor by flattery and sexual favors. For the Romans, there was no law forbidding concubines and intermarriage. Lex Canuleius allowed the intermarriage of plebeians and patricians as early as 445 BC. Canuleius delivered the following speech in defense of his laws and in opposition to the consuls:
In fact, intermarriage was encouraged in Roman society. The premise dates to the origin of Rome where Romulus led the ensuing “rape of the Sabines.” The nuptial cry – “For Talassius” in Roman marriage rites pays tribute to the abductor who carried off a “tall and beautiful” maiden intended for the leading patricians. There it was said there should be no reluctance for men to mingle their blood with their fellowmen. The Roman poet Horace appealed to maintaining the Roman ethnos by writing:
“The pure home is not mongrelized by illicit sexual intercourse / law and custom have driven out forbidden mongrelization / mothers are praised for the resemblance of their offspring / vengeance closely follows guilt.” (Ode 4:5:21).
Besides the traditional patrician and plebeian order, an unspoken caste system developed in Roman society as well. The bloodline of the patrician class remained of fair-skinned Europeans as opposed to the great plebeian society. The Roman term, Allies, was used in describing the conquered people in Italy. They held a treaty with Rome that allowed intermarriage and the right to conduct business but did not have the vote of full Roman citizenship. As the Roman Empire expanded into regions of Asia and Africa, so did the amount of intermarriage. As a result, intermixed and darker skinned races increasingly dominated the plebeian class. The influences of different foreign beliefs and customs had a harmful effect on Rome’s unity. Some patricians worried about the increasing miscegenation of Rome. Tacitus, the first-century Roman historian, provides us a curious written record of the “unmixed” race of Germania that hints at the problem in Rome.
Today, darker-skinned Italians are more predominant in the south of Italy and Sicily than in northern Italy. Latin American countries reflect the same social structure as in other southern European countries do. The most fair-skinned families are found in the patrician class. Many people today have never given thought to whether present-day Italians are the same race of people that lived in tribal Rome. An inquiring mind would ask what happened to the massive slave population Rome once sustained? The same question can be asked about the great civilizations of Greece and Egypt as well. The influence of the moneychangers can be directly connected to the profitable import of slaves from the many conquered regions of the Roman Empire.
Eventually, the Romans lost their tribal cohesion and identity. The population of Rome had changed and so did its character. Increasing demands were made of the ruling patricians. The aristocrats tried to appease the masses, but eventually those demands could not be sustained. Rome had become bankrupt. The effects of usury polarized the patrician class against an increasingly dispossessed and burdened class of citizens.
In 54 B.C., Cicero (Marcus Tullius Cicero), a first century B.C. Roman stateman – writer stated:
An incident recorded by the Jewish philosopher, Philo during the time of Caligula (37-41 A.D.) echoes Cicero’s edict concerning the collection of taxes:
The tale of the usurer’s power is reported during the revolt of several Italian cities in 88 AD. It concluded by the Roman siege of the Italian city of Asculum in the second year of the war. The war was costly and had damaged Italy’s economy. “During the war, debt had become more widespread. Uncertain about the future, financiers had begun refusing more loans and demanding payment. Those Romans angered by the moneylenders had begun a movement against usury. A praetor responded favorably to the movement and invoked an ancient law against usury that had long been ignored. This infuriated financiers, and a gang of men mobbed the praetor and cut his throat, and some who had spoken in favor of the praetor and against usury were lynched,” (“Antiquity conflict, attitude and changing religions,” Frank E. Smitha.)
Rome was bankrupt and was collapsing. The parasitic nature of usury and its effect on government was too complex for the uneducated plebeians to understand (see Addendum for an illustration of usury’s power). Indeed, it was the moneychangers with the use of their lawyers that destroyed pagan Rome. The Jewish interests did not control all usury. However, they were a people well recognized as being extremely loyal to each other and adept in the black craft of usury. To all others (gentiles) they showed hate and enmity. Throughout history the weapon of usury is used again and again to destroy nations. The French author and historian, Georges Batault, is quoted in his book, “Le Probläme Juic,” (1921) stating:
A first-century Roman philosopher named Seneca (Lucius Annaeus Seneca) further stated:
The Jews were known to have migrated to Rome at different times through history. For instance, in 161 BC the ambassadors of Judah Maccabi came to seek the protection of Rome against Antiocus IV. Those messengers were soon followed by others who moved to the capital of the empire, and because its power and location, made it the most favorable center for trading. (Sacerdoti, A., Fiorentino, L. Guida all’Italia Ebraica, 1986, Comunita Ebraica di Roma, Johson, P.: A History of the Jews. 1987, Oddoux, C. et. al.: Mendelian Diseases among Roman Jews, 1999). Still other Jews came to Rome as slaves after the destruction of the Second Temple in 70 AD by Titus and again in 135 AD, after the final subjugation of their homeland by Hadrian.
Many historians blame Christianity for Rome’s demise. These same forces blame the Romans for persecuting the Christians. Although, the Romans carried out the acts of persecuting Christians, it was the Jews who cried most for their blood. Jews enjoyed a widespread influence in Roman society. The well-known influential statesman, Cicero knew the power of the Jews and said:
Cicero was serving as defense counsel at the trial of Flaccus, a Roman official, who interfered with Jewish gold shipments to their international headquarters (then, as now) in Jerusalem. Cicero himself certainly was not an insignificant person, and for one of this stature to have to “speak softly” shows that he was in the presence of a dangerously powerful sphere of influence. And on another occasion Cicero wrote:
Fortunately, the writings of Cicero survived the burning of libraries. In the case against Faccus, we can see the crafts of the Jews are the same today. The Jews clearly held great influence in politics as a result of their professions and profited immensely at the expense of Rome. We can further deduce by the case of Faccus that the Jews were not concerned with the interests of Rome, but rather for their own interests. The Jewish gold was being shipped from Rome and its provinces throughout the empire to Jerusalem. Why? We also know that the Jews had utter contempt and hatred of the Romans. This contempt is demonstrated by their breaking of Roman law, which Faccus tried to uphold. If we look closer, we see that gold has a very special meaning to all Jewry unlike any other people. The 16th century German religious reformer, Martin Luther recognized this and promulgated:
The Jewish Talmud agrees with Martin Luther’s assertion. In Baba Kamma 37b., we find:
The Talmud further teaches great hatred toward Christians and recommends harming and killing them. This is the saying of Rabbi Simon ben Yohai recorded in Minor Tractates. Soferim 15, Rule 10:
Israelis have nationally immortalized Simon ben Yohai by annually partaking in a pilgrimage to his gravesite. This they do to honor this rabbi who advocated the extermination of non-Jews. (Jewish Press, June 9, 1989, p. 56B).
The Chief Rabbi in France, Rabbi Reichorn, in 1859 frankly revealed:
Now, if we look back at Rome, we will find that Romans and Christians alike verified what the Rabbis later revealed. The martyr, St. Justin, stated in 116 AD:
The testimony of Quintas Spetimus Florens Tertullian, Latin Church Father (160 – 230 AD), verifies the edict of St. Justin by promulgating:
There are enough records for us to piece together what actually occurred in Rome that led to its downfall. Rome fell as a result of corruption and the lack of cohesion of its own people. But, it was the instrument of usury that brought about this corruption and allowed its gold and silver to be controlled by Jewish interests.
Out of the vestiges of the Roman Empire arose Christianity. Christianity served to unite what already became moribund and corrupt. The sacred ethos of Rome, which past politicians tried to preserve by quixotic laws, were unenforceable because the culture of their plebeians had changed. What was once a unified and homogeneous society became diverse. Diversity was a menacing detriment to all of Rome and its culture. Influences from those conquered foreign lands permeated the ethos of all of Rome. The foreigners who lived in Rome brought with them their alien pagan cults and traditions. Attempt after attempt to halt these alien beliefs failed. And, at the same time Christianity was growing throughout the empire and become a national movement. At first, the Roman government resisted and reacted to Christianity as yet another alien cult. Rome was truly in a state of no return. Essentially two ultimatums of policies were left to pursue. Either allow and tolerate the various national movements, or to stand on the Roman foundation of antiquity, to revive old Roman principles, the ancient military rigor and discipline, and the patriotism of Old Rome. Several emperors unsuccessfully pursued the latter course, but in vain. Realistically, it was just as impossible to bring the plebeians back to the old simplicity as to make them return to the old pagan beliefs and to the national form of worship. Military leaders in the field reported they had good luck with Christian soldiers in battle. They came to represent the ideal of Rome and became more recognized and deserving than the Praetorian Guard itself. Christianity came to Rome as a liberating force that provided the Roman Empire with its salvation. Usury would soon be recognized and eliminated from Roman society for over six hundred years. The prohibition of usury didn’t occur right away though. The Roman emperor Constantine (306-337 AD) wisely avoided taking on the powerful moneychangers of his time. But, he did make other decrees concerning the Jews in their power and limiting their corruption. By the fourth century AD, the Church prohibited the taking of interest by the clergy. This was a rule that was extended in the fifth century to the laity as well. Under Charlemagne in the eighth century, the Church took bolder steps and declared usury to be a general criminal offence. The anti-usury movement continued to gain momentum and perhaps reached its zenith in 1311 when Pope Clement V made the ban on usury absolute and declared all secular legislation in its favour, null and void (Birnie, 1952). As it was with Lex Genucia, who outlawed usury in 342 BC, soon afterward loopholes were found in the law, in addition to contradictions in the Church’s growing legalism, usury was once again rife. The Jews, who lived apart from the Christians, continued acting as the primary moneylenders in Europe (i.e., until around 1300). The resulting stereotype of Jews was immortalized in Shakespeare’s play “The Merchant of Venice.” Anti-Semitism during this period was rampant and England’s King Edward I forbade Jews to exact usury. A unified European recognized the deceit of the Jews and how their usury was directed against them.
In 1592, Pope Clement VIII acknowledged the corrupt influence of usury and charged the benefactors by proclaiming:
It was Christianity that put an end to the destructive nature of usury on its people (see addendum for usury example). Rome’s treasury became barren as a result of the moneychangers. It weakened the Roman Empire immeasurably, and thrust untold millions in poverty, debt, and in prison. It was Christianity that halted the influence of the Jews and their destructive trades and practices. And, the Christian faith spread throughout the former Roman Empire. All of the European people eventually became Christianity’s vanguard and champion. Without the strict adherence to the moral ethos, any civilization will devolve into the religion of Nimrod.
Sunic suggests that our natural inclination; our true selves, is the pagan religion that preceded Christianity. This echoes Rabbi Lewis Browne’s book: “This Believing World,” in which he asserts that Christian holidays are really pagan festive days. The implication is Christianity is really a pagan religion. Sunic has gotten it all wrong and so have those Christian hating rabbis. Sunic has not done his homework. Otherwise, he would know that Talmudism is Judaismº. Christianity is not related to Talmudism in the least. To imply otherwise, is reckless and irresponsible. Christianity is said to be [by Christians] the “straight and narrow path” while paganism holds to no similar moral value and tends to be the spiritual default for all societies. Out of the ruins of paganism Christianity was built, in which there was the renewed promise of rule and order. Indeed, the Romans were the most notable of organizers and preservers of Western civilization. This has been revealed through Christianity. Sunic’s diatribe is intended to make Christians feel guilty and to stumble in their faith. Paganism never stopped usury for any prolonged period of time. Christianity did however. Usury is the vise for instigating paganism, which asserts the temporal and lecherous trades that Christians find decadent. Christianity is the absolute antipode of paganism.
Our dilemma today is the same that occurred in Rome. Our country and people will suffer the same fate if usury continues as it has. From the onset of history, it has been the moneychangers, who have exploited mankind for pure profit. Usury is an abomination against God’s statutes, which manipulates and destroys people, families, and nations. It is by the profits made from usury used to attack Christianity. One needs only to ask- who is in control of usury worldwide? Didn’t Rome suffer from these same people? Usury brings forth an insidious side to all people. The temptation to borrow is powerful, and it always polarizes lender against borrower where the former becomes the master and the later, the slave. As a vice, neighbor is pitted against his neighbor, and nation against nation. Lastly, it is befitting that I end with the following quote:
º As a religion, Judaism is over 90 percent Talmudism.
To illustrate the devastating effect of usury and how compound interest works, a standard text example is provided below.
If one penny had been borrowed at 6 percent compound interest in the year of Christ Jesus was born and no payments were made, how much would be owed today in year 2002?
Using the formula for annual compound interest; FV = PV(1 + i)n where PV is the present value $0.01, i is the interest of 6% and n is the number of years- 2002. FV is the future value of the debt owed in the year 2002.
We substitute the amounts in the equation thus:
(.01) x (1.06)2002 = 4.60 x 1048 dollars (4 followed by 48 zeroes)
How much money is that?
If we think of it in terms of gold, divide the amount by the current price of gold ($300/oz) we get:
1.53 x 1046 troy ounces of gold
How much gold is that?
There are 14.6 troy ounces in a pound and 1,205.6 pounds in a cubic foot of gold, we get:
8.69 x 1041 cubic feet of gold
To imagine that much gold, we need to think in terms of astronomy. The sun has a diameter of 865,000 miles. Its volume is therefore 4.99 x 1028 cubic feet. Dividing into the above figure gives us:
1.74 x 1013 solid gold suns
If we assume that an average galaxy like the Milky Way contains one billion stars like the sun, we get:
17,440 galaxies of a billion solid gold suns!!!
All this from a single penny borrowed in the time of Christ. It’s no wonder Albert Einstein referred to compound interest as the most powerful thing in the universe. (Example from Chris C.)
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The Financial Collapse
Venice in 1345
Tell a friend:
History has a habit of repeating itself. The global financial collapse of AD 1345 had many similarities to what is happening now.
How did “Free Enterprise Finance” with no government able to control it, collapse all the economies of the Eurasian continent? How could banks concentrated in one part of Europe, tiny on the scale of modern banks, work such a global catastrophe?
Following the collapse and de-population of the Roman Empire from AD 300 – 600, the eleventh, twelfth and into the thirteenth century saw an acceleration in the growth and development of population in Europe and particularly in China.
From 700 AD rural technologies – using the plough, seed, animal power, wind power, etc. – leapt forward. Classical education of youth in monastery schools increased. These advances were spread particularly rapidly owing to the impetus of Charlemagne and English and Italian allies from 760 to 900 and then again from 1100 to 1250, the period of the Hohenstaufsen Holy Roman Emperors in Germany, Italy and Sicily.
From 1150 onwards the Venetian and Florentine bankers began to intervene with large amounts of credit and bank vouchers and with luxury goods from the east in the famous Champagne Fairs which had been the hub of trading for all Europe.
In the late 1330s, the beginning of the Hundred Years War between England and France led to the clothing industry of Flanders, the main clothing production region of Europe, being boycotted and completely shut off from wool.
The production of wool in England began to decline from 1310, the Bardi and Peruzzi banks of Florence having acquired a monopoly of the procuring and export of wool.
By the late 1340s this industry was in complete decline and moved out of towns and cities into tiny cottage industries.
From the 1320s onwards there was a massive flight of silver to Venice’s maritime empire in the Middle East and Byzantium, which upset the equilibrium of Europe in the mid-fourteenth century.
Venetian exports of silver from Europe from 1325 to 1350 equalled perhaps 25% of all the silver mined in Europe at that time. Standard silver coin had been the stable currency of the Holy Roman Empire in EUrope, since Charlemagne’s time. This massive export from Venice to the east created chronic balance of payment problems as far away as England and Flanders.
Thus production of the most vital commodities in Europe were severely reduced and the trade and circulation of its money completely disrupted over the decades before the 1340s crash by Italian banks which appeared to be making usurious rates of profits. The Florentine super Companies ressembled very closely in their operations the huge international grain companies of to-day such as Cargill and Archer Daniels Midland. They used loans to monarchs to dominate and control trade in certain vital commodities especially grain and later wool and cloth whilst their dominance and speculation progressively reduced the production of these commodities.
Like the International Monetary Fund to-day the bankers of Florence did not simply loan money to monarchs and expect repayment with interest. In fact interest was “officially” not charged on the loans since usury was considered a sin and a crime amongst Christians. In the same way as the IMF today, the banks imposed “conditionalities” on the loans. The primary conditionality was the pledging of royal revenues to the bankers and as with the curious arithmetic of the IMF to Third World debtors today, the original debt became a small fraction of what they eventually owed.
In l4th century Europe, important commodities like food, wool, clothing, salt, iron etc., were produced only under royal licence and taxation, banks’ control of royal revenue led to the first private monopolisation of these commodities and the banks’ “privatisation” and control of the royal government itself.
However the story of the Florentine bankers, the fourteenth century crash and the Black Death that followed is itself a cover-up. The Florentine bankers were operating on an international scale limited to western Europe and some Mediterranean islands. It was the maritime financial empire of Venice which was speculating on the scale of all the Eurasian land mass and on this evidence alone it had to be the merchants of Venice who rigged the devastation and depopulation of the majority of the human race in the fourteenth century.
Frederic C. Lane’s book “Money and Banking in Mediaevel and Renaissance Venice” shows that it was Venetian finance which, by dominating and controlling a huge international “bubble” of currency speculation from 1275 to 1350, rigged the great collapse of the 1340s. Rather than sharing with their “allies”, the bankers of Florence, the merchants of Venice bankrupted them and the economies of Europe and the Mediterranean with them.
In the 1950s one historian, Fernand Braudel, showed that Venice leading the Italian bankers of Florence, Genoa, Siena, etc., wilfully intervened from the beginning of the thirteenth century to destroy the potential emergence of national governments foreshadowed by the achievements of Frederick II Hohenstauffen, the Holy Roman Emperor in the first half of the thirteenth century, and a successor of Charlemagne’s earlier achievements in spreading education, agricultural progress, population growth and strong government. The great Dante Aligheri wrote “De Monarchia” in a vain attempt to revive the potential of imperial government based on Divine and natural law.
“Venice had deliberately ensnared all the surrounding subject economies, including the German economies, for her own profit… The fourteenth century saw the creation of such a powerful monopoly to the advantage of city states of Italy that the embryo territorial states like England, France and Spain necessarily suffered the consequences.”
In addition Braudel shows Venice intervened to stop the accession of Spain’s Alphonso the Wise as successor to Emperor Frederick II. This triumph of “Free Trade” over the potential for national government rigged the fourteenth century global human catastrophe, the worst onslaught of death and de-population in history.
Venice was manipulating Florentine bankers, kings and emperors alike by a tightknit financial conspiracy and complete dominance of the markets by which money was minted and created.
Charlemagne, five hundred years earlier, had already recognised Venice as a threat equal to the marauding Vikings and had organised a boycott to try to bring Venice to terms with his empire.
The Venetians however seemed to enjoy an effective exemption from the Pope’s injunctions against usury and also from the ban on trading with the Infidel, i.e. the Mamluk regimes of Egypt and Syria.
A century earlier in the 1180s the Doge Ziani of Venice had provoked hostilities between the two leaders of Christendom, the Pope and the Holy Roman Emperor Frederic Barbarossa, the grandfather of Frederick II. The Doge then personally mediated the Peace of Constance, between the Pope and Emperor and got his enemy, the Emperor Frederick, to agree to withdraw his standard silver coinage from Italy and allow the Italian cities to mint their own coins.
Over the century from the 1193, Peace of Constance, to the 1290s, Venice established the extraordinary near total dominance of trading in gold and silver coins and bullion throughout Europe and Asia. Venice broke and replaced the European silver coinage of the Holy Roman Emperors, immediately leading into the 1340s’ financial blow-out, which blew-out all the financiers except the Venetians.
Venice was the greatest commercial success of the Middle Ages, a city without industry except for naval, military construction, which came to bestride the Mediterranean world and to control an empire through mere trading enterprise. In the fourteenth century she was in the ascendant in her greatest period of success and power.
Venice’s rulers were less concerned with profits from industries than with profits from trade between regions that valued gold and silver differently. Between 1250 and 1350 Venetian financiers built up a world-wide financial speculation in currencies and gold and silver bullion, similar to the huge speculative cancer of Derivative Contracts today.
It took all control of coinage and currency from the monarchs of the time. The banks of Venice were deceptively smaller and less conspicuous than the Florentine banks, but in fact had much greater resources for speculation at their disposal. The Venetian financial oligarchy as a whole ruled a maritime empire through small executive committees under the guise of a Republic that centralised and supported its own speculative activities as a whole. The “Republic” built ships and auctioned them to the merchants, escorted them with large well-armed naval convoys of their empire with naval commanders responsible to the ruling “Council of Ten” and the magistrates for the convoys’ safety. This same oligarchy contained several public mints and did everything possible to foster the centralisation of gold and silver trading and coinage in Venice.
This was the dominant trade of Venice by no later than 1310. Like today’s mega-speculators in currencies and derivatives such as the Morgan- and Rothschild-backed George Soros and Marc Rich. Venetian banks and bullion dealers were backed by large pools of capital and protection. The size of the Venetian bullion trade was huge. Twice a year a bullion fleet of up to twenty or thirty ships under heavy naval convoys sailed from Venice to the Eastern Mediterranean coast or to Egypt, bearing primarily silver, and sailed back to Venice bearing mainly gold, including all kinds of coinage, bars, etc.
The profits of this trade put usury in the shade although the merchants of Venice were also unbridled in that practice.
In one astonishing speech to the Council of Ten Doge Tomasso Mocenigo said: “In peacetime this city puts a capital of ten million ducats into trade throughout the world with ships and galleys so that the profit of export is two million, the profit of import is two million, export and import together four million.” How was this possible? Not by private enterprise but by imperial Venetian state usury.
The gold from the east was being looted out of China until then the world’s richest economy and India by the Mongol empire or being mined in eastern Sudan and Mali and sold to Venetian merchants in exchange for greatly over-valued European silver.
The silver in the west was being mined in Germany, Bohemia and Hungary and sold more and more exclusively to Venetians with bottomless supplies of gold at their disposal. Coinages not of Venetian origin were disappearing. First in the Byzantine empire in the 12th century, then in the Mongols’ domain and finally in Europe in the 14th century.
The so-called “Christian” crusades, the first in 1099, the seventh and last major one in 1291 had had one strategic effect – expanding and strengthening the maritime commercial empire of Venice to the east.
Venice provided the ships to take the crusaders to the Middle East. Venice loaned them money and Venetian Doges even told them what cities to try to capture or sack. Through the Crusades Venice obtained effective control of the cities of Tyre, Sidon and Acre in Lebanon and Lajazzo in Turkey and strengthened its domination of commerce through Constantinople. These were the coastal entry points for the Silk Routes, Black Sea and Caspian Sea regions to China and India.
The strategic alliance between Venice and the Mongol Khan up to and through the final collapse of the 1340s has been treated as an historical curiosity of the adventures of Marco Polo’s family. It gave Venice final control of the trade to the east and along with it the trade through Egypt for the gold mined in the Sudan and Mali. It gave them huge amounts of gold with which to dominate world currency trading in the decades leading to the financial disintegration of the 14th century.
The Crusades also consolidated the alliance of Venice and its allied ruled cities and the Norman and Anjou kings against the Holy Roman Empire centered in Germany which Dante and his allies were struggling to restore to its potential.
By the late thirteenth century the Mongols were a conspicuous part of this Venetian-led alliance. Pope John XXII granted Venice the sole licence to trade with the Infidel Mamluk sultans of Egypt in the 1330s.
Thus in the late thirteenth and fourteenth century Venice provided all the coinage and currency exchange for the Mongol empire, the largest empire in history, which was looting and destroying the populations under its rule.
Venice had taken over the currency trading and coining of what remained of the Byzantine Empire and also of Mamluk Sultanate in North Africa. Venice in this period took the east off the gold standard and put it on a silver standard. It was the richer region of the world and being more intensively looted. It took Byzantium and Europe off a 500-year old silver standard and put them on the gold standard.
From 1275 to 1375 the ratio of the average gold price to the average silver price steadily rose. In this period Europe’s large production of silver was looted through Venice’s command of Mongol and African gold. Venice had the central position as the world’s bullion market and attracted to the Rialto – Venice’s Wall Street – the buying and selling stimulated by the changing prices of the two precious metals. In this process of quickening speculation Venice ensnared all the surrounding economies, including the German.
Venetian bankers on the Rialto and Venetian bankers alone in the world at this time made cashless bank transfers among merchants’ accounts, allowed overdrafts, gave credit on the spot, created bank money and speculated with it. They did this not out of cleverness but out of simple control of currency speculation world wide.
In fact the famous Bills of Exchange of the Florentine bankers were really a crude form of the Derivatives Contracts of the 1990s speculative cancer.
Venice switched Europe to gold by force by looting silver. Florentine bankers with their famous gold florin enjoyed great speculative profits in this process. However from 1335 to 1345 the process was reversed . The ratio of gold price to silver dominated by Venetian manipulation now fell. and the price of silver started rising in the 13th century.
There was an unusually large supply of silver in Venice. The Florentine bankers were caught, having loans and investments all over Europe in gold whose price was falling.
Venetian super-profit in global currency speculation continued right through the bank crash and financial market disintegration of 1345 -7 which they had rigged, and beyond.
In the period 1330 – 50 the Black Death started to spread through from China, probably brought by the Mongol cavalry to towns in the Crimea and thence entered Europe.
After the financial crash and the Plague Europe’s population fell for a hundred years from perhaps 90 million to roughly 60 Million.
After 1400 in the years which led to the Renaissance political forces turned against the methods of the Italian “free enterprise” bankers. In 1409 King Martin I of Aragon expelled them. In 1403 King Henry IV prohibited them from taking profits in any way in his kingdom. In 1409 Flanders imprisoned and then expelled Genoese bankers. In 1410 all Italian merchants were expelled from Paris. When Louis XI became King of France in 1461 he organised national forces to make it the first strong sovereign nation-state and insisted upon a single standard national currency created and controlled by the crown.
The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (Agora Series) [Hardcover]
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An updated look at the United States’ precarious position given the recent financial turmoil
In The New Empire of Debt, financial writers Bill Bonner and Addison Wiggin return to reveal how the financial crisis that has plagued the United States will soon bring an end to this once great empire.
Throughout the book, the authors offer an updated look at the United States’ precarious position given the recent financial turmoil, and discuss how government control of the economy and financial system-combined with unfettered deficit spending and gluttonous consumption-has ravaged the business environment, devastated consumer confidence, and pushed the global economy to the brink. Along the way, Bonner and Wiggin cast a wide angle lens that looks back in history and ahead to the coming century: showing how dramatic changes in the economic power of the United States will inevitably impact every American.
- Reveals the financial realities the United States currently faces and what the ultimate outcome may be
- Weaves together the worlds of politics, economics, and personal finance in a way that underscores the severity of the situation
- Addresses the events leading up to the implosion of the U.S. financial system
- Looks ahead to help you avoid the pitfalls presented by a weaker United States
- Other titles by Bonner: Empire of Debt, Financial Reckoning Day, and Mobs, Messiahs, and Markets
- Other titles by Wiggin: I.O.U.S.A., Demise of the Dollar, and Financial Reckoning Day
The United States is heading down a difficult path. The New Empire of Debt clearly shows how this has happened and discusses what you can do to overcome the financial challenges that will arise as the situation deteriorates.
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— The Economist“This is a powerful book. In addition to its depth, it is well written, well documented, and vastly readable. I had the feeling of seeing an X-ray of economic reality with the crust removed. It should be made mandatory reading in most circles. Read it, and your views of the world around you will no longer be the same.”
—Nassim Nicholas Taleb, author of The Black Swan and Fooled by Randomness”Now perhaps someone will finally listen!”
—Jim Rogers, author of Investment Biker, Adventure Capitalist, and Hot Commodities”Instead of trade and work, imperialism breeds militarism, inflation, and debt, as Bonner and Wiggin show. Yet there is a golden hope in freedom and honest money.”
—Llewellyn H. Rockwell Jr., President, Ludwig von Mises Institute”[Empire of Debt] is a fantastic book. It’s thoughtful, erudite, witty, well written, practical . . . and spot-on. If you value your financial health, you’ll read it from cover to cover. Now!”
—Doug Casey, Chairman, Casey Research, LLC, and author of Crisis Investing”I laughed, I cried, I renewed my passport. . . . Bonner and Wiggin deliver a steady diet of insight and wit that terrifies the reader, even as it amuses. Empire of Debt is not for everyone, only for those of us who hope to enjoy continuing prosperity amidst difficult conditions.”
—Eric Fry, Editor, The Rude Awakening
From the Inside Flap
“The Golden Age of American capitalism is over. . . . In the space of half a century it passed from gold, to silver, to paper, and is now somewhere between plastic and navel lint.”
—From The New Empire of Debt
In the last half of 2008, the Empire of Debt received the margin call from Hell. Now, all of its citizens are asked to pay up as the U.S. economy stumbles down a dangerous path of financial turmoil. What exactly went wrong?
When things are good, people tend to believe the most outrageous things—that the financial sector could get rich by lending money to people who couldn’t pay it back, and that a whole economy could flourish by luring consumers to spend more than they could afford. These hallucinations created an immense worldwide bubble of debt and dollars. And now—with the U.S. government inflating the biggest bubble in public debt the world has ever seen—a financial whirlpool has formed and threatens to drag the entire country down the drain.
In The New Empire of Debt, the internationally acclaimed author team of William Bonner and Addison Wiggin return to reveal how the epic financial bubble that is plaguing the United States will soon bring an end to this once-great empire. Throughout the book, they offer a frightening look at¿the United States’ precarious position and discuss how government control of the economy and financial system—combined with unfettered deficit spending and gluttonous consumption—has ravaged the business environment, devastated consumer confidence, and pushed the global economy to the brink.
Along the way, Bonner and Wiggin warn of the dangers that lie ahead and offer practical advice to protect your financial well-being as the American empire collapses upon itself. You’ll discover that you don’t have to tie your own fate to the inevitable destruction of America’s system of imperial finance. Instead, you can take some simple steps to weather the crisis.
Bonner and Wiggin have been studying the financial landscape for more than twenty years. With The New Empire of Debt, they not only show you how we got into this mess, but how to get yourself out of it.
Empire of Debt
We couldn’t have said it any better ourselves.
On the day that we rushed 537 copies of this book to Washington, USA Today ran a staggering cover story quoting David Walker, the nation’s comptroller general:
“The United States can be likened to Rome before the fall of the empire. Its financial condition is ‘worse than advertised,’ [Walker] says. “It has a ‘broken business model’. It faces deficits in its budgets, its balance of payments, its savings — and its leadership.”
Welcome to the Empire of Debt, folks.
“Now maybe someone will finally listen,” says Jim Rogers, author of the best seller Adventure Capitalist, about the book we’re rushing to Washington.
We sent a copy to every senator and representative in Congress — all 535 of them. And one more each to the White House and the Federal Reserve. Why? The government’s massive debt — and delusions — are about to change your life forever… and soon.
That’s why the prestigeous Economist Magazine named it one of the top 10 must-read books of 2005–2006. Will it make a difference if we send the book to Washington? We can only hope so… But at the personal level, this book is a wake-up call — as well as a call to arms to every American.
“Although the authors don’t claim to have a crystal ball,” writes Doug Casey, author of the best selling Crisis Investor, “as far as I’m concerned, they offer as clear and likely accurate a view of the future as you’re going to find.”
Empire of Debt is filled with the latest economic research from two internationally famous authors, Bill Bonner and Addison Wiggin. And what it finally uncovers is the whole secret story of how and why America has put itself into the worst financial crisis since 1929. And more importantly, how you can protect yourself and your assets from this crisis.
“If you value your financial health,” says Casey, “you’ll read it from cover to cover. Now!”
“I strongly advise you not to miss the stunning truths exposed in this remarkable work,” says Robert Ringer, author of Action! Nothing Happens Until Something Moves.
Every hour of every single day, the United States racks up another $80 million of debt. The renowned Levy Institute estimates that the United States will owe foreigners $8 trillion by 2008 — a breathtaking 60% of our gross domestic product.
Just think about it: $6 out of every $10 that you and I earn in America will go to pay off a loan in China or Japan or South Korea or the rest of Asia. That’s the kind of mortgage nobody can afford, including you, me, the U.S. government and our kids.
A year ago, the annual deficits already hit $7 trillion, according to the U.S. comptroller. That’s roughly $24,000 the government owes for every American man, woman and child.
It’s money that’s coming out of your pocket, and I’m not just talking taxes…but also from higher gas prices, food bills, even college tuition. And be assured, Uncle Sam has no intention of paying you back.
Worse yet, the man in the striped suit and tall hat is already asking for more…
Up until now, there’s been little you could do to protect your wealth, your retirements and your way of life…
Inside Empire of Debt, you’ll discover the specific steps you can take to protect yourself from the massive debt buildup and the secret funneling away of your funds.
Don’t be caught off guard. Empire of Debt shares the five things you must do now to protect yourself — including buying the one investment you cannot live without. (If it’s not already in your portfolio… you need to get it right away.)
Empire of Debt may well be the most important reading you’ll do in the next five years during this period of unrelenting crises.
Many Americans have no idea what’s coming. They’ve been blinded by “The 10 Delusions of Empire” that Bonner and Wiggin reveal… it’s those deceptions that the government has promulgated that have created the destructive, imperial attitudes that so many have come to believe. You see, there’s a cadre of “imperial citizens” that can’t imagine this Empire of Debt will ever end.
They’re about to learn how wrong they are…
“Whether you’re an investor, businessperson or just someone who is sincerely concerned about the fate of both your money and your country,” says Robert Ringer, “I strongly advise you not to miss the stunning truths exposed in this remarkable work.”
Don’t get me wrong. As Eric Fry, editor of The Rude Awakening says, “Empire of Debt is not for everyone, only for those of us who hope to enjoy continuing prosperity amidst difficult conditions.”
“Americans believe they can get rich by spending someone else’s money”, say the authors of the book. “They believe they can run up debt forever, and that their debt-laden houses are as good as money in the bank. That is what makes the study of contemporary economics so entertaining. We sit at our telescopes and laugh like a divorce lawyer looking at photos of a rich man in flagrante delicto; we know there’s money to be made.”
Bonner and Wiggin wrote Empire of Debt to warn you of the danger and give you a clear path to profits. They give you the knowledge you need to protect yourself — and prosper — as the American empire flails upon itself.
Empire of Debt details how the government’s irresponsibility has bled into society. Following the government’s lead, Americans have felt free to spend, spend, spend — putting themselves in deeper and deeper debt.
Today, the average American household has $8,000 in credit card debt. And for every $19 Americans earn, they spend $20. For the first time in history, in July and September of this year, the savings rate of Americans dipped into negative numbers. Compare that to China’s 25% savings rate, and you can see the looming danger as China buys up your future with cash to burn.
As CNN reported, “The American consumer has become deeply addicted to spending, running up ever higher levels of debt in order to live in a fashion that is beyond his means. And the world has become equally addicted to the consumer continuing to burn through cash.”
By mid-2005, nearly 50% of homes were purchased with interest-only mortgages — compared to 5% in 2001. “Empire of Debt is a wake-up call for all investors,” says Dow Jones MarketWatch.com columnist Kevin Kerr. “Bonner and Wiggin masterfully illustrate why we should all take a much closer look at what our future holds…”
“Instead of trade and work,” says Llewellyn H. Rockwell Jr., president, Ludwig von Misses Institute, “ Imperialism breeds militarism, inflation and debt, as Bonner and Wiggin show. Yet there is a golden hope in freedom and honest money.”
Even if you’ve been smart and responsible and kept yourself out of debt, you could still be burned by other people’s extravagant spending. Empire of Debt shows you how and why this can happen to your estate. And it details the steps you can take to get out of harm’s way, lest your neighbor trample your capital.
Bonner and Wiggin have been calling it like it is for some 20 years. As president of Agora, Bonner oversees The Daily Reckoning, a financial commentary with over 500,000 readers worldwide. Wiggin, editorial director and publisher of The Daily Reckoning, is a regular on hundreds of radio and television programs.
Their penetrating insights on the economy shot their first book, Financial Reckoning Day, to No. 1 on the New York Times best-seller list. As Jim Davidson, author of The Sovereign Individual, said “Financial Reckoning Day…is something to be savored and enjoyed — before it’s too late.” Martin Weiss, author of the best-selling Crash Profits, called it “a powerful and insightful vision.” Wiggin is also the author of Demise of the Dollar — a New York Times best-seller. New York Times Magazine says, “Wiggin offeres up his analysis with a confident and steady aplomb. And for good reason.”
In fact, those who read the advice in this book will learn how to sidestep four critical pitfalls destined to undermine many less-savvy Americans. You’ll learn what to do when:
Housing prices lose their value, sucking away your assets…
Domestic savings and capital investments hit all-time lows early in 2006…
The U.S. can no longer export its manufactured goods…
We’re stuck with the bill for out-of-control spending.
Throughout history, every empire has found a way to pay for its expansion. Yet today, politicians have a different mantra: Instead of “we came, we saw, we conquered,” it’s “we came, we saw, we borrowed.”
We believe it’s imperative for the bigwigs in Washington to read Empire of Debt.
Will they read it? Maybe. Will they change? Probably not. History shows that government is much better at creating problems than solving them. But by sending 535 copies to every member of the Senate and the House of Representatives — and one each to the White House and Fed— we’re pursuing our cause to make the facts known and the solutions abundant.
Empire of Debt may well be the most important book you, your friends and your family are likely to read this year…
With just a few simple steps, you can prepare your portfolio to weather the coming crisis. Empire of Debt will show you everything you need to know. And if you act now, you can get your own copy of Empire of Debt for just $11.53 in paperback. That’s a full 36% off the cover price, click below to order today.
It’s the best way to prepare yourself, your family and friends, for what could be a prolonged period of financial crisis… one that’s on path to make the 1929 crash look mild by comparison.
We believe Empire of Debt, for less than $18, is the most important financial purchase you can make this year, more important than any stocks or index funds you can find.
After reading it, I’m sure you’ll agree.
Publisher, Agora Books
P.S. Will members of Congress read it? Maybe. They might even agree with these readers who say…
“A true tour de force and an engaging read. Well worth the money for not only your personal enrichment, but to encourage the authors to write again!!” — M. Kelly (Albuquerque, NM)
“Empire of Debt is probably the most important history book you will ever read. It puts the two great world wars, the Vietnam war, the Cold war, and the war in Iraq in a historical perspective that I’ve never seen anywhere else.” — Dan Brown (Madison, AL)
“If you only read one chapter… turn to page 261 and read the section titled ‘Something Wicked This Way Comes’. It will be the most eye-opening 11 pages you read all year.” — J. Boric (Bloomington, IN)
Empire of Debt shows the one investment right now that’s the ultimate “debt hedge,” which can save you thousands in the coming months. Don’t miss out on this important investing advice most others will regret missing out on.
Continuing the Discussion
An Empire in Decline. The Debt Crisis is Just a “Prelude to War”
by K. Selim
Global Research, August 20, 2011
Le Quotidien d’Oran, Algeria translated from French
“How can an empire in decline impose its views? The U.S. not only shows obvious signs of economic collapse, but also of genuine regression: the American dream no longer exists. The U.S. establishment, Democratic or Republican, is not prepared to cash in its last major comparative advantage – military supremacy.” Translated By Mary KenneyAugust 10, 2011Carl Philipp Gottfried von Clausewitz (1780-1831), the German military strategist once said that ‘War is the continuation of politics by other means.’ Given the political dead-end the West seems to be on, his maxim may once again prove all too true.Western governments appear powerless to confront the current crisis and the looming threat of a depression, with all of the serious consequences that implies. The colossal debt of nations and bleak prospects for growth are creating a panic situation on financial markets around the world. A crash is not a figment of the imagination. The one in 1929 paved the way for the rise of fascism and the Second World War.It is futile to expect a paradigm shift from the established order. Since the sub-prime crisis in 2008, there has been much talk of market regulation. The noble ideas that accompanied the latest international joint financial agreement have been quickly abandoned. The leaders of Western states, starting with the president of the United States, have failed to develop a clear and convincing way to discuss economic policy options, let alone take strong measures. Markets are stronger than states. It is they that are ultimately the masters – and they impose their own logic.With the sub-prime crisis in 2008, the markets forced taxpayers to foot the bill. The “banksters”- an-oh-so-eloquent neologism combining banker with gangster – reminds us once again of where the real power lies. Today they continue to demonstrate this by attacking public debt incurred in part to save the day. The big banks were never going to go bankrupt; the states were!Contrary to what one would like to admit, isn’t economics more than just a set of mathematical formulas and theories? It is politics. And policy now sits in the hands of people that have no real accountability. The state of the political elite is such that it seems inconceivable that governments could engage in the kind of reorientation of economic policy characterized by the New Deal.What we should fear is that war may become – as history attests – the last recourse of capitalism in crisis. “Common sense” might call for a significant reduction in the U.S. military budget as a path toward effective treatment of America’s gigantic debt. But the cynicism of short-term interests is little concerned with common sense.How can an empire in decline impose its views? The U.S. not only shows obvious signs of economic collapse, but also of genuine regression: the American dream no longer exists. The U.S. establishment, Democratic or Republican, is not prepared to cash in its last major comparative advantage – military supremacy.Given the impasse among ultra-liberals [i.e.: pro-capitalists] and a recession that further widens already intolerable social divisions, a war would allow them to revive the machine. But it would have to be a war of the “first order,” because the low-intensity wars in Iraq and Afghanistan have only served to deepen deficits and have had no impact on a system of industrial production quite ill-suited to asymmetrical conflict. Crises of capitalism, which are paid for by the most vulnerable, are settled permanently only in blood. It is certainly not out of solidarity with speculators that we so closely follow stock market anguish, and which may well be relieved in other theaters.Clausewitz, the nineteenth-century military theoretician, said: “War is the continuation of politics by other means.” The ultra-liberalism of banksters and neoconservatives makes war a common tool of economic policy. The debt crisis and recession are then only a prelude.
Thanks to http://worldmeets.us/
|Global Research Articles by K. Selim|
Niall Ferguson: U.S. Empire in Decline, on Collision Course with China
Here’s Niall Ferguson’s Complete And Definitive Guide To The Sovereign Debt Crisis
Source: Niall Ferguson via the Peterson Institute for International Economics
Why war on usury ? Secrets of banking and global empire
Illuminati Bankers Instigated World War One. Check these links.
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When we left off, we were exploring the proposition that the New World Order is the British Empire repackaged, and this empire was literally a marriage of effete British aristocracy and virile (or virulent) Jewish finance.
Webster Tarpley is a gifted historian who generally eschews mention of Jewish bankers in favor of euphemisms like “Venetians.” Therefore it is unusual for him to state bluntly that King Edward VII was in the pay of the Rothschilds and was responsible for World War One.
Edward VII didn’t become king until 1901 when he was 60 years old. As Prince of Wales, he was estranged from his mother, kept on an allowance and deeply in debt. He allowed a “series of Jewish bankers to manage his personal finances.” These included Baron von Hirsch and Sir Ernest Cassell. “Edward also cultivated the Rothschild and Sassoon families. In short, Edward’s personal household finance agency was identical with the leading lights of turn-of-the-century Zionism.”
(King Edward VII: Evil Demiurge of the Triple Entente & WW1.)
Tarpley is equally forthright in stating that “Edward VII, far more than any other single human being, was the author of the First World War…the most destructive single event in the history of Western civilization” which opened the door to Communism, Fascism, the Great Depression and World War Two. Tarpley falls into the trap of establishment historians by attributing great events to single personalities. These personalities are invariably puppets of the people who pay their bills.
Tarpley goes into some detail about how King Edward and his Foreign Secretary Sir Edward Grey, the son of Edward’s horse master, engineered World War One. Essentially, they deceived Germany into believing that England would remain neutral. To prevent the war, all they had to do was clarify this point. Germany would have backed down and reined in Austria.
In August 1914, Kaiser Wilhelm realized he had been fooled: “England, Russia and France have agreed among themselves … to take the Austro-Serbian conflict as an excuse for waging a war of extermination against us…That is the real naked situation slowly & cleverly set going by Edward VII…The net has been suddenly thrown over our heads, and England sneeringly reaps the most brilliant success of her persistently prosecuted anti-German world policy against which we have proved ourselves helpless, while she twists the noose of our political and economic destruction out of our fidelity to Austria, as we squirm isolated in the net.”
“England’s” animosity against Germany was part of an agenda to use a catastrophic war to undermine Western civilization, and advance the Judeo-Masonic New World Order. Three empires disappeared in that inferno while Communism and Zionism rose like the phoenix.
The decadent British aristocracy is totally complicit in the cabalistic bankers’ plan to degrade and enslave mankind. Who are these “aristocrats?” In an essay, “Breeding Concubines,” Greg Hallett makes some astonishing, some might say ridiculous, claims. I present them here without judgment, to be proven or discredited as evidence emerges.
Edward VII was the mentally deficient product of the marriage between Queen Victoria and her first cousin Albert. He was the oldest male of her nine children. He married in 1863 and had five legitimate children between 1864 and 1869. His eldest son, Clarence, was mentally deranged and the prime suspect in the Jack the Ripper murders.
Edward VII routinely and openly cheated on his wife. He had dozens of mistresses, some as young as age 14. One of these was the Jewish-born Lady Randolph Jennie Jerome Churchill. Hallett believes Edward VII was Winston Churchill’s real father.
Hallett claims that Queen Victoria had children with Lionel de Rothschild and that two of Edward’s sisters, Helena and Beatrice, were Rothschilds. He claims the British Royal family is “a biological, financial and moral subset of the Rothschild international bankers.”
“Interbreeding amongst the British royal family over generations has created concubines, illegitimate children and agents of war. The British Royal family are then shamed by these events and then manipulated into any activity their owners require…This gave [the Rothschilds] consummate power over the British Royal family, and any others they interbred with, which was all the royal families of Europe…” (“Breeding Concubines” in “Stalin’s British Training,” 2007, pp. 1-38.)
These claims seem far fetched yet it is plain to see that something is wrong with the Royals. It is widely acknowledged that Edward VII was dissolute. If Hallet’s claim that “the British Royal family are a subset of the Rothschild family and are utilized as part of the Rothschild business as a money-making venture to create war,” it would explain King Edward VII’s role in starting World War One.
The reports of homosexuality, drugs, pederasty, promiscuity, occultism in the history of the British aristocracy are consistent with what we know about the Illuminati. They are depraved yet somehow able to subvert mankind without serious resistance.
What a tawdry tale is modern history! Instead of grasping greatness within reach, the human race is paralyzed by the morbid spell of a Satanic cult, the Cabalist (Illuminati) bankers.
See Letter from Greg Hallett, Below
Related- “Bankers Extended World War One by Three Years”
—- “A Jewish Defector Warns America”
Sign the Ron Paul 2012 Petition at http://www.RonPaul2012.net Please like, share, subscribe & comment! http 02/08/2011 Ron Paul exposes the Fed’s destructive monetary policy and talks about tomorrow’s hearing entitled “Can Monetary Policy Really Create Jobs?” — Ron Paul is America’s leading voice for limited, constitutional government, low taxes, free markets, a return to sound monetary policies, and a sensible foreign policy that puts America first. For more information visit the following websites: http://www.RonPaul.com http http://www.LibertyPAC.com http http://www.CampaignForLiberty.com http http://www.DailyPaul.com http ronpaul2012.podbean.com
The biggest story of the late 20th century was the collapse of the Soviet Union. After decades of a government controlled, centrally planned economy and outsized military expenditures the Soviet Union just one day ceased to be. Fast forward a few decades and now the biggest story about to happen in the early 21st century will be the collapse of the US empire for the exact same reasons.
The US economy has been centrally planned and manipulated by the communist fashioned central bank, the Federal Reserve, for 99 years now. But it wasn’t until August 15, 1971 that the last linkage of gold from the US dollar was removed and the US Government and the Federal Reserve were allowed to truly run rampant with their anti-capitalist economic system.
A look at US Government debt since the beginning of the 20th century tells the story:
Just like the Soviet Union the US has also bankrupted itself on offense. Sorry, they call it defense even though all they do is attack and occupy other countries. The US spends more than the rest of the world combined on its military and spends $2,374 per capita each year. The next nine closest countries in military spending per capita average $80 per annum.
Yet millions of US citizens will rise to their feet and cheer as military jets streak overhead literally burning their money in front of their eyes. “USA! USA! USA… is bankrupt”.
And, just like the Soviet Union, the US is destined to collapse. It is not an if… it’s only a when.
The collapse of the US sounds very dramatic to many people. That’s because the US has been the most dominant nation on Earth for the last century. It used to be the beacon of freedom and it attracted most of the world’s top talent and became the place to be for almost any endeavor. It was also a leader in free market economics until just a few decades ago.
But, that was then, this is now. Now, after a focused effort to indoctrinate US citizens in public schools and using the media to trick them into believing that socialism is the kindest and best form of government the results can be seen everywhere. Occupy Wall Street kids play bongos and rail against the evils of capitalism – something they have never actually seen in their lifetimes.
Meanwhile, all around the world, billions are waking up to the beauty and empowerment of capitalism. A billion people in China who are almost all of a free-market bent but who were forced down the disastrous communist road for a few decades are building a new future. In the old Soviet Union almost everyone is pro-capitalism after going through the horror of communism in the Soviet Union. Chinese people now rent helicopters to fly over properties in Canada for purchase while Russians are well known the world over for being some of the richest anywhere. In Mexico, tourism was at a record last year despite the US propaganda as Russians streamed into the freest country in North America. And dozens and dozens of other countries in Asia, Latin America and the former Soviet bloc are all on the capitalism bandwagon.
In fact, the only two significant places in the world where capitalism seems to be distinctively out of favor are the US and Western Europe.
And that’s the thing… here’s the news. They don’t matter. The population of the US is 300 million. The population of Western Europe is approximately 400 million for a total of 700 million. Just 10% of the total world’s population. It is simply insignificant.
Doug Casey is well known for having said, “Europe will mainly serve as a source of houseboys and maids for the Chinese”. And, the way the US is going, many US citizens will likely serve much the same role. A lot of the hackey sack playing drum circle Occupy Wall Street denizens will soon be drafted into the military to pay off their tens or hundreds of thousands worth of student debt and will become cannon fodder in the US Government’s next criminal war… perhaps Iran. And those who avoid that fate will likely end up waiting tables or driving taxis in Latin America or Asia as well, muttering their Marxist propaganda under their breath as they facilitate the transit of their much more productive employers.
Some believe that the collapse of the US will be the collapse of “freedom”. But if that’s the case then that war has already been lost. While there are still a few tens of millions of US citizens who have some concept of what freedom is and what free-market capitalism is, there are billions worldwide that also now know this. Freedom and capitalism will not die with the US empire. In fact, as the War on Drugs, the Federal Reserve and the TSA all die with the US empire it will become clearer to everyone that the US Government had become the biggest enemy to freedom and capitalism on Earth and will likely set off an incredible period of liberty and prosperity…once the dust settles.
The key will be to retain your assets during the collapse and that will be the trickiest part. Owning precious metals and getting a significant percentage of your assets outside of the US should be priority number one for US citizens at this time… the same way as it was for USSR citizens twenty years ago. We are releasing a Special Report entitled “Getting Your Gold Out Of Dodge” in the next 24 hours which will go in depth into detail on how to accomplish that. As well, getting a second passport has never been more important for anyone since the Jews in Germany in the late 1930s as it is for Americans today whose government is closing every door to allowing US citizens to open foreign bank and brokerage accounts. Again, TDV is focused on providing options for western citizens who are fast becoming the new Jews. We offer a number of options for acquiring a foreign passport as cheaply and as quickly as possible at TDVPassports.com.
OPPORTUNITY IN COLLAPSE
While we personally have no interest in living in the US for the next few years as the collapse happens we do think there will be once-in-a-generation opportunities there once the dust settles. The key will be keeping your assets safe and secure until then… something that every government and central bank in the world is making increasingly difficult with each passing day.
W.G. Hill of the Invisible Investor stated, “Get your money out of the country, before your country gets the money out of you”. The details of how to do that are not taught by any government registered financial advisor but thanks to the internet you have the ability to do your own research and get access to the independent sources of information that are unattached to the current fascist corporatist system to help guide you. Take advantage of it while you can because governments have realized this and are coming after the internet next.
Subscribe to The Dollar Vigilante to get unique and uncensored news, information and actionable information on surviving the coming collapse of the US Empire and the monetary system and being in a position to profit from the incredible opportunities that will be created in the process.
The Dollar Empire and the ‘Great Moderation’
During the “Great Moderation,” the United States became increasingly dependent on imports to maintain its standard of living. When we talk about the standard of living of a nation, we should always be careful to distinguish between the standards of living of the different classes and strata of the population.
The decaying U.S. industrial base and the consequent absolute decline in the level of factory employment during the Great Moderation devastated the standard of living of factory workers. Those industrial workers who did maintain their jobs often had to accept wage cuts and worsening working conditions. This was particularly true for the young generation of factory workers. The unions often accepted two-tier contracts that protected the wages and benefits of older workers at the expense of those of new young workers.
The younger workers who found factory jobs during the Great Moderation were lucky. Many young workers, especially workers of color in the inner cities often couldn’t find any jobs—let alone factory jobs. If they could, it was usually in low-wage, non-unionized “service” establishments such as MacDonald’s or Walmart. It is significant that the biggest U.S. corporation in terms of revenues is not an industrial giant such as U.S. Steel, as it was early in the 20th century, or General Motors, at mid-century, but rather a trading company, Walmart.
The growing mass of more or less permanently unemployed, or at most marginally employed, youth has encouraged the growth of inner-city street gangs engaged in the drug trade. This has swollen the U.S. prison population. At any given time, there are now considerably more than 2 million people, disproportionality young people of color, in U.S. prisons and jails. Many more people pass through jails or prisons in the course of a year, or are in other respects “in the system,” fighting criminal charges, on parole or on probation.
It remains important, however, for the U.S. ruling class to maintain a large percentage of the population in a relatively comfortable “middle-class” lifestyle. This is a key difference between the United States as the world’s leading imperialist country and an oppressed “third world” country.
This “middle class” is a large and socially motley group. A declining percentage is made up of the traditional “petty bourgeoisie” of independent farmers—now only a few hundred thousand people at most—and small shop owners. A much larger group is made up of franchise owners, doctors, lawyers, accountants, hardware and software engineers, system administrators, corporate managers, government functionaries, university professors, and other professionals.
Unlike the traditional “petty bourgeoisie” of farmers and small shopkeepers, with the exception of the “franchisers” and doctors and lawyers engaged in private practice, most of these people work for salaries. Like classical proletarians, they sell their labor power to a capitalist or the government on a weekly, bi-weekly or monthly basis in exchange for a definite sum of money.
Unlike classical proletarians who have no significant income beyond their wages, they can frequently build up considerable savings in the form of certificates of deposit, mutual and money market funds, IRAs and so on. This gives them a return in the form of dividends and interest income that supplements their salaries.
At the upper end, this “new middle class” shades off into the small money capitalists who can if they wish live entirely off their dividends and interest income. (1) At the lower end, it shades off into the proletariat, who are entirely dependent on their wages.
Most widespread form of small property—home ownership
The most widespread form of small property ownership in the imperialist countries today is home ownership. There are two forms of home ownership that must be distinguished. One form is the home on wheels called a trailer or a mobile home. Mobile home owners generally live in so-called trailer parks, where they have to rent the land on which the trailer or mobile home is located. Rising land prices mean higher rents, and just as is the case with apartment renters, are very harmful for trailer or mobile home owners. In addition, trailers or mobile homes are often death traps for their residents during violent windstorms such as hurricanes and tornadoes, which affect large areas of the United States.
Mobile homes or trailers are simply commodities whose use value is to produce shelter for their owners. They do not entitle their owners to any share of the total surplus value produced by the global working class and have no meaningful chance of appreciation. Indeed, even if repaired they will depreciate just like any other commodity that wears out over time.
In the southern United States especially, those people who own trailers are often referred to as “trailer trash.” (2) That is, they are proletarians who do not own any property that entitles them to a share of surplus value. These people are in no way part of the “middle class” or petty bourgeoisie but rather are classical proletarians who are forced to earn their living by selling the only commodity they have to sell, their labor power. (3) The position of a trailer owner is essentially the same as an apartment renter.
The other type of homeowners own homes built on a definite plot of land. (4) This homeowner not only owns the means of shelter but the land on which the shelter is built. Unlike the house proper, the land can rise in value when the ground rent rises. A homeowner can realize the rent that is yielded by the land on which the home is built in various ways.
The homeowner might, for example, rent out some of the rooms in the home to one or more renters. If a homeowner rents out a room at a rent of $600 a month, the homeowner realizes a rental income of $7,200 a year. Not enough to live on, but a nice supplement to a salary.
If the rent on the land increases, which it often does, the homeowner can realize the increased rental yield by selling the home at a higher price than he or she paid for it. While renters and trailer owners are hurt by rising rents, homeowners benefit from them.
From now on, when I use the term “homeowner,” I mean a person who owns not simply a means of shelter but the land on which the means of shelter is built. The evils of widespread homeownership flow not from the ownership of the means of shelter by those who live in them but in the large-scale petty ownership of land.
Even ownership of a tiny amount of land entitles its owners to a slice—small but real—of the surplus value produced by the global working class, especially the working class located in the oppressed countries. If, for example, U.S. corporations can increase their exploitation of workers in oppressed countries and become more profitable as a result, this will tend to increase the value of the land on which houses are built—in the United States or some other imperialist country—where the corporation maintains its headquarters. The increased exploitation of the workers in oppressed countries will mean higher home prices for U.S. homeowners.
In this way, homeowners—though they are not capitalists by any means—share in the super-exploitation of workers in oppressed countries, even if this share amounts to only a few crumbs. It therefore undermines the solidarity of the U.S. working class or the working class of other imperialist countries with the workers of oppressed countries.
How homeowners benefit from rising land prices
Virtually all homeowners purchase homes through mortgages—on credit. If they are lucky over time, they repay their mortgages and build up “equity” in their homes. The equity is defined as the price of the home, including the land on which it is built, minus the value of the unpaid balance on the mortgage or mortgages.
The home equity can rise for two reasons: One, the homeowner is slowly paying back the mortgage loan. When the mortgage loan (or loans) are fully repaid, the home equity equals the entire price of the home—the means of shelter plus the land on which it is built. Second, the home equity will increase when land prices rise. Unlike trailer owners and renters, homeowners benefit from rising land prices through a rise in their home equity.
Banks and other financial institutions are willing to loan money to homeowners in the form of second and third mortgages, with the home equity as collateral. Such a loan once again reduces the home equity of the homeowner but puts money in their hands that can be used to purchase commodities. Known as home equity loans, before the 2007-09 panic they were the fastest growing category of consumer credit in the United States. This is a form of consumer credit that, unlike credit cards, is denied to both renters and trailer owners.
U.S. government encourages homeownership among workers
Starting in the late 1930s, initially in response the rise of the CIO and to combat the growing radicalization of the American working class, the U.S. government has followed a policy of encouraging widespread homeownership. This has included not only “white collar” workers and small business people, but also the better-paid factory workers and other relatively well paid “blue color” workers.
The government began to redirect to a certain extent the flow of credit into the home mortgage market for the specific purpose of increasing homeownership. The Democratic Party more than the Republican Party has championed homeownership in the United States. Owning a home—and the land under it—is described as the “American dream,” implying that if you don’t own “your home” you are going to be excluded from the American dream—that is, from the benefits of living in the world’s leading imperialist power that exploits the peoples of the entire world.
Starting with the Roosevelt administration, the government created the companies now known as Fanny Mae (Federal National Mortgage Association), Ginny Mae (Government National Mortgage Association) and Freddy Mac (Federal Home Loan Mortgage Corporation). (5)
Later, these companies were privatized, though they were still seen as closely linked—as their names imply—to the government. For example, it was widely assumed that the government would back the securities issued by Ginny Mae, Fanny Mae and Freddie Mac even though they were not formally government obligations.
As a result, they could borrow at lower interest rates than other corporations because it was assumed that the full credit of the federal government stood behind them. During the recent panic, it became clear that they were in fact insolvent, and they are now under de facto government ownership once again. The assumption that the credit of the United States government stands behind their securities proved to be correct.
These outfits do not grant mortgage credit directly. Instead, a banker or other money lender grants a mortgage to either a would-be homeowner or a home equity loan to an existing homeowner. The original lender, instead of collecting monthly mortgage payments, sells the mortgages to another financial institution.
This is where Fanny Mae, Ginny Mae and Freddie Mac come in. They buy up mortgages from the initial lenders. In this way, the quantity of the total credit available for mortgages is artificially increased. This is designed to inflate the numbers of homeowners and keep home prices rising. This benefits existing homeowners but hurts renters and trailer owners by increasing the rents they must pay.
Homeowners—who in their great majority are otherwise workers who depend on their wages or salaries—are encouraged to “build wealth” in their homes. “Building wealth” in the home does not mean increasing the value of the home by improving it through the application of labor—something that many workers like to do. It means the rise in the value of the land on which the home is built. Why, for example, fight for single-payer health care if by the time you reach retirement age, the land under your home will grow into a considerable “nest egg” that will allow you to meet the expenses of old age and then some?
Of course, only homeowners benefit from this wealth, not renters or trailer owners. For the latter, the growing wealth in homes simply means higher rental expenses. Also, since higher land prices depend on a “favorable business climate”—high business profits—homeowners are encouraged to side with the bosses against the trade unions. If strong trade unions are organized in an area, the bosses argue, high wages will cause businesses to flee to lower-wage areas, causing local land prices and with it home equity values to fall. (6)
In this way, the U.S. government detaches the upper level of the working class, including a section of the “blue collar” workers, from the rest of the working class—renters and trailer owners. (7)
The policy of encouraging the ownership of petty plots of land under homes also encourages racism, which further divides the U.S. working class. First, people of color, particularly African Americans, are most likely to be renters, not homeowners. To them, appreciating home equity values simply mean higher monthly rent expenses.
In the United States, even after the end of the legal “Jim Crow” segregation in the South, what is called residential segregation is widespread. This is true in all parts of the United States, not only the former slave-owning and Jim Crow South. Certain neighborhoods are for whites, others for African Americans, and still others for Latinos.
If the “racial character” of a neighborhood changes, homeowners of the departing “race” are under great pressure to sell their homes, putting downward pressure on their prices. Therefore, homeowners—especially white homeowners—have a material interest in defending the “racial” character of their neighborhoods. Even one African American or Latino on the block could be the first step toward the neighborhood changing from a white to an African American or Latino neighborhood.
This further divides the U.S. working class and helps render it politically impotent. With the increasing “non-white” immigration from Muslim countries, a similar situation is developing in Europe.
Homeownership and the dollar
The period of a “strong dollar,” which characterized most of the Great Moderation, led to falling interest rates and rising land prices. (8) As land prices rose, so did home equity values. Banks and other money lenders eagerly made loans to homeowners against the rising equity in their homes.
The homeowners used the money they got in loans to purchase commodities that were increasingly produced abroad. As long as the dollar remained “strong” and money poured into the United States, the home equity loans could always be repaid by new home equity loans as land prices and home equities continued to climb. The whole system of widespread U.S. homeownership by “middle-class working people” turned into a giant Ponzi scheme.
This process gained momentum during the 1997 “Asian crisis” as money capital fleeing the oppressed countries poured into the United States. As U.S. interest rates plunged, land prices soared and mortgage credit ballooned. Bill Clinton boasted of the “record levels of homeownership—the growing Ponzi scheme—as one the greatest “achievements” of his administration. The process continued into the Bush administration. But like all Ponzi schemes, it was doomed to collapse sooner or later. (9)
During most of the 20th century, the political stability of capitalist rule in the United States depended on the productivity of the vast American industrial machine. An hour of concrete labor of the average American worker counted for considerably more than an hour of abstract human labor on the world market. (10) This was not because American workers were more skilled but because they on average worked with much more powerful machinery than the workers of other countries.
As a result, the U.S. industrial capitalists could afford to pay considerably higher wages than the industrial capitalists in other countries and still realize a super-profit. The result was a very large but relatively well paid and consequently privileged and politically conservative strata of factory workers. The political conservatism of the U.S. factory—and other—workers was the biggest obstacle the struggle for socialism faced during the 20th century. (11)
But by the beginning of the 21st century, the stability of the rule of the U.S. capitalist class depended increasingly on maintaining the growing Ponzi scheme in land prices and the consequent rise in home equity values. If the large home-owning “middle class” lost their homes and their access to home equity loans, the U.S. social structure would come to resemble that of a “third world” country.
On the top, there would be a small class of very rich capitalists who would still have a standard of living far exceeding that of the ruling class of any former epoch. There would be only a “small middle class” and a huge mass of impoverished working people. This huge mass could potentially find a leader in the remaining strata of factory workers who, unlike their 20th-century predecessors, would have nothing to lose.
Consequently, the U.S. government, as the executive committee of the U.S. capitalist ruling class—whether led by the Bush administration yesterday, the Obama administration today, or Obama’s successor tomorrow—is working night and day to somehow keep the dollar system afloat. Since it is on the front line in this struggle, this has increased the importance of the Federal Reserve System within the U.S. government.
All governments of all nations engaged in world trade tied to the dollar system and to U.S. imperialism
Under the dollar system, governments of countries that run large trade surpluses with the United States—and most countries run trade surpluses with the United States to some extent—such as China are obliged to maintain the large dollar reserves they accumulate in the form of U.S. Treasury securities. Just before the panic began in 2007, the Chinese and other governments were moving to invest some of their reserves in mortgage-backed securities in order to increase the low yields they earned on the U.S. Treasuries. In this way, they supported the value of the dollar and maintained the U.S. market, which is a vital outlet for the increasing volume of commodities their growing industries produce.
If the gold value of the dollar were to violently collapse, they would not only lose much of their markets in the United States, but they would see their foreign reserves go up in smoke. This would, in turn, undermine their domestic currency and credit systems, and thus their home markets.
After the “Volcker shock,” the United States did everything in its power to encourage other countries to sell off their gold reserves in favor of dollar reserves. The United States put great pressure on the emerging trading nations such as China to put their reserves in U.S. dollars as opposed to building up their gold reserves—the traditional form of central bank reserve assets.
In this way, the currency and credit systems of the emerging trading nations are held hostage to the U.S. dollar. The result is that today only the United States and some of the Western European countries maintain significant gold reserves. Both Japan and China have very small gold reserves, though there is some indication that China—but not U.S.-occupied Japan—has been attempting to increase its still very modest gold reserves. The United States is doing everything it can to discourage this trend.
The logic of the dollar system is that the United States needs to keep the dollar system going in order to prevent a major social crisis at home, while other countries need to keep the dollar system going in order to maintain their foreign markets and prevent their own foreign currency reserves and domestic currency and credit systems from going up in smoke. This ties all governments of all nations engaged in world trade to the dollar system and thus to U.S. imperialism.
This is true of not only U.S.-occupied imperialist satellites like Japan, but even the government of the People’s Republic of China. A violent collapse of the gold value of the dollar would immediately produce a crisis in China’s drive for industrialization and modernization, which has been making such giant strides over the last several decades. This is why the Chinese central bank has felt compelled to continue to purchase dollars, even though this helps finance the U.S. wars in the Middle East that threaten China’s access to oil. China wants the dollar system to end, but it wants it to be phased out gradually without an acute crisis.
Along these lines, the Chinese central bank has proposed that the dollar standard be gradually phased out in favor of a new international reserve currency that would be collectively administrated by the world’s trading nations. Ironically, this is somewhat similar to the proposal of John Maynard Keynes at the Bretton Woods Conference of 1944. The U.S. turned down Keynes then, and it shows no more enthusiasm for China’s somewhat similar proposal today.
If such a democratically administrated reserve currency existed, China might say to the United States: We will vote to give you the loans in the new international reserve currency you need if you agree to allow Taiwan to be peacefully reunited with China, withdraw the Seventh Fleet from the western Pacific, remove your troops from South Korea and Japan, and end your special “security treaty” with Japan.
Needless to say, the United States has no intention of agreeing to a reform in the international monetary system that would permit anything like this. Instead, it is doing everything it can to save the existing dollar system. It is doing so even at the risk of a sudden violent collapse of the dollar system that could cause a global economic crisis not only worse than the crisis we have been passing through but even worse than the super-crisis of 1929-33. (12)
The evolution of Bretton Woods II
The evolution of Bretton Woods II can be traced in the history of the dollar price of gold from the end of the Volcker shock in 1983 through the panic of 2007-09 and its aftermath.
In February 1983, as the United States and the world were just emerging from the Volcker shock, the dollar price of gold briefly closed above $500 an ounce. As Bretton Woods II took effect, a downward trend in the dollar price of gold set in. By December 1983, the dollar price of gold dipped below $380 an ounce. In March 1985, as the “super-dollar” was peaking, the price of gold briefly dipped below $290. At this point, however, the flood of imports into the United States was reaching such a level that the Reagan administration took fright and along with the satellite imperialisms engineered a kind of controlled devaluation of the dollar.
In December 1987, the the dollar price of gold rose briefly above $490 an ounce. At this level, Bretton Woods II was clearly coming under strain. If the dollar had continued its downward trend, not only would the stagflation of the 1970s have returned but the entire dollar system would be brought into question. As it was, Reagan’s dollar devaluation, limited and temporary as it was led to a crisis in the U.S. mortgage, real estate and home construction industries that was a kind of dress rehearsal for the much more serious crisis in this sector that began in 2006-07.
The reality is that any move to devalue the U.S. dollar to any significant extent soon shakes the whole homeownership mortgage credit pyramid, which is now the backbone of the stability of capitalist rule in the United States.
Even before Ronald Reagan finished his second and final term in the White House, the administration was forced to back off from its dollar devaluation policy. By early 1989, the dollar price of gold had again fallen below $400 an ounce. During the early and mid-1990s, the dollar gold price quickly fell back whenever it reached $400.
The liquidation of the Soviet Union in 1990-91 had a financial side, in the form of the dumping of Soviet gold reserves, as well as a political and economic side. By holding down the dollar price of gold, the dumping of Soviet gold helped finance the 1991 Gulf war against Iraq. Six years later came the “Asian crisis.” This crisis ripped through the oppressed nations that now included the former Soviet Union and the Eastern European countries. These events drove the dollar price gold further downward.
In 1998, Russia was forced to declare state bankruptcy. The crisis quickly spread to the U.S. credit markets when Long Term Capital Management faced collapse in 1998 threatening to trigger a violent worldwide economic crisis. But in late 1998, the dollar was a “strong currency.” The flight of capital from the “third world”—including now Russia—further strengthened the dollar. Shortly after the Asian crisis began, the dollar price of gold fell below $300 an ounce and stayed for the most part below $300 an ounce for about five years.
The “strong dollar” enabled the Fed to bail out Long-Term Capital Management in September 1998 in a way that allowed an orderly liquidation the following year without a prolonged credit market crisis. The Fed was able to create the large amounts of dollar token money necessary to do this without the dollar depreciating. The ability of the central banks of the United States and its satellite imperialist countries to sharply lower interest rates delayed the spread of the recession to the imperialist countries for several years and enabled them to contain the crisis without a really deep recession in the imperialist countries.
Recession finally reaches the United States
In August 1999, the dollar price of gold fell below $253 an ounce, the lowest dollar gold price of the entire post-Volcker shock era. However, at the end of that year the dollar began to weaken as some of the money capital that had fled to the safety of the imperialist countries at the peak of the crisis returned to the “third world.” By late 1999, the dollar price of gold rose briefly back above $300 an ounce before falling back. This set the stage for the recession—in greatly moderated form—to finally spread to the imperialist countries the following year.
However, since the weakening of the dollar at the end of 1999 was very slight, the boom in mortgage credit and housing construction continued with no interruption right through the recession that followed. While factory workers were losing jobs at an accelerated rate as a result of the recession, mortgage credit remained abundant, and land prices and with them home equity values kept rising.
The dollar price of gold remained generally below $300 an ounce well into 2002. However, after that it began to rise again hitting $400 by 2003. From then through the summer of 2008, with some fluctuations, the trend of the dollar price of gold was upward. In December 2005, the dollar price of gold rose above $500 an ounce. Not since the days of the Volcker shock had the dollar price of gold been so high. The implicit promise of Bretton Woods II to keep the gold value of the dollar—the dollar price of gold—within a certain range was broken. For the first time in many years, the dollar system suddenly looked shaky.
The situation worsened further during 2006 as the dollar price of gold rose above $600, and the boom in mortgage credit, home prices, and residential construction began to show signs of peaking. The worldwide industrial cycle was once again approaching its peak.
In early August 2007, the dollar price of gold was above $660 an ounce. As the dollar price of gold rose, so did the price of oil and other primary commodity prices. In September 2004, the price of oil was around $40 barrel. By the eve of the initial credit market crisis in August 2007, the price of oil had risen above $70.
As had been the case in the 1970s, a fall in the dollar against gold duly led to offsetting rises in the prices of internationally traded primary commodities. Despite pious wishes and claims to the contrary, gold had in no sense lost its role as the measure of the value of commodities during the Great Moderation. The rising prices of raw materials was pointing to a major wave of inflation, rising interest rates, and contracting credit including mortgage credit.
Unlike during the 1970s, the United States was now a debtor and not a creditor nation. In the 1970s, the mighty U.S. industrial machine, though under pressure, was still intact. Another important difference was that during the 1970s the main holders of U.S. dollar reserves were the two main defeated axis powers, Japan and West Germany, both occupied countries. But in 2007, while U.S.-occupied Japan was the second largest holder of U.S. dollar reserves, the largest holder was the Peoples Republic of China.
As I explained above, the Peoples Republic of China has no desire to see the dollar system violently collapse. Indeed, it has suggested that the dollar system be replaced gradually in a way that would not disrupt the world economy. However, China would be expected to defend its national interests much more strongly if the dollar system did begin to collapse than would U.S.-occupied Japan or Germany.
Why did the dollar price of gold start to rise again?
By the beginning of the 21st century, the long rise in world gold production that marked the last two decades of the 20th century came to an end. A gradual but persistent decline in world gold production then set in. The main reason for this decline—besides the gradual rise of commodity prices in terms of gold—was a virtual collapse of gold production in South Africa.
The South African mines that had long dominated world gold production are nearing exhaustion. It is possible that if the prices of commodities in terms of gold declines sharply in the coming years, it might become possible for the capitalist mining companies to dig deeper and revive South African gold production. But even as it is, South African gold miners have to work facing hellishly high temperatures as they dig out the gold located miles underground. Virtually all the gold located nearer to the surface is gone. Given these unfavorable changes in the natural conditions of production, gold production in South Africa became increasingly unprofitable in the final years of the 20th century.
Rising value of gold
While there have been gold discoveries in other parts of the world—and the possibility of re-opening old gold mines—they were not sufficient to fully offset the growing collapse of the South African gold mining industry at prevailing commodity prices. Real money—gold—was therefore undergoing a significant upward revaluation. On the scale of the entire world market, the amount of abstract human labor necessary to produce a troy ounce of gold was rising relative to the amount of human labor necessary to produce a given quantity of almost any other commodity.
If the world was still on the gold standard, an era of falling living costs would be setting in. But the central bankers such as the Federal Reserve System’s Ben Bernanke believed—and still believe—that it was their duty to prevent a fall in prices of commodities measured in terms of the paper currency they issue, come what may.
Instead, they promise to keep prices rising at an annual rate of between 1 percent and 3 percent. They can’t prevent prices measured in terms of gold from falling, however.
If the value of gold rises relative to most other commodities, it means the cost of mining gold also rises. This causes a fall in the rate of profit in the gold producing industry relative to that in other industries. Capital then flows out of the gold producing industry causing the production of gold to decline.
Declining gold production will tend to raise interest rates, raise the currency price of gold—devalue the currency—and contract effective monetary demand, lowering the prices of commodities in terms of gold. In this way commodity prices in terms of gold—real money—will be brought back into line with the underlying labor values expressed in terms of weights of gold—prices.
With the value of gold rising and its production declining at the existing price levels, the only way that a fall in the general price level could be avoided was through a major new devaluation of the dollar and the other paper currencies linked to it under the dollar system.
The money capitalists, therefore, had every reason to expect a new massive devaluation of the dollar and other paper currencies. They reacted by increasing their demand for gold, sending the dollar price of gold upward. In moving to protect themselves against the devaluation of the dollar and the other paper currencies, the money capitalist were bringing about the very devaluation they feared. That is exactly how the market works.
However, the leaders of the Federal Reserve System knew that if they allowed the dollar to plunge like it did in the 1970s, what was left of Bretton Woods II would not only be shattered, inflation would soar and credit, especially mortgage credit, would contract within the United States and indeed worldwide. This would lead to rising home foreclosures, falling home equity values—at least home equity values after inflation—growing impoverishment, and even homelessness among former “middle-class American homeowners.” This would destroy the internal political equilibrium of the United States.
So the Fed felt that it could neither pursue an old-fashioned pre-Keynesian policy of deflation—the traditional way of dealing with declining gold production—or a 1970s-style strategy of attempting to “stimulate the economy” by “running the printing presses.” Those kinds of policies had backfired big time back in the 1970s, as I have explained in earlier posts, discrediting the then-dominant school of Keynesian economics.
The Federal Reserve’s strategy
In the years preceding the outbreak of the crisis in August 2007, the Federal Reserve Board had been gradually slowing the rate of growth of the quantity of dollar token money it created. Instead, the Federal Reserve System, first under Alan Greenspan and then his successor, Ben Bernanke, a former Yale professor of economics, relied on “de-regulation” and “financial innovation” to find ways of continuing to inflate the total supply of credit—particularly mortgage credit—on top of an increasingly stagnant quantity of dollar token money.
At least in public, both Greenspan and then Bernanke denied that there was a housing bubble and claimed that the housing boom instead reflected the “amazing strength” of the information-based “post-industrial” U.S. economy. In contrast, however, Greenspan’s predecessor as Federal Reserve chief, Paul Volcker, had been for some years expressing growing alarm about the unfolding situation.
In August 2007 as it became clear that a colossal amount of “sub-prime” and other mortgages had been granted by swindling money lenders to would-be homeowners that could not possibly be repaid, the U.S. credit markets and then world credit markets began to seize up. Many secondary securities—called derivatives—that were based on these largely un-payable mortgages had been sold to leading Wall Street investment banks such as Bear Stearns, Merrill Lynch and Lehman Brothers. These banks, in turn, issued “innovative securities” based on their portfolios of increasingly un-payable mortgages that were sold to large investors such as insurance companies.
Like is the case with any chain, the chain of credit broke at its weakest link—the sub-prime mortgages. In public, Bernanke claimed that the Fed was successfully “containing the crisis” much as the credit market crisis that had followed the Long Term Capital Management near collapse in September 1998 had been contained. But this time, the Fed did not have the weapon of a “strong dollar” that had made it possible for it to stave off a general panic in the credit markets in 1998.
Remember, during the 1998 crisis the dollar price of gold bullion was below $300 an ounce. In August 2007, it was above $660 a troy ounce. And while the United States was already a debtor nation in 1998, it was now much deeper in debt both absolutely and relative to its GDP than it was in 1998. And while in 1998 gold production had been strongly rising for almost 20 years, in 2007 it had been drifting lower for the better part of a decade.
Under these conditions, if the Fed had simply flooded the banking system with freshly created dollar token money—its traditional reaction to threatened panics—the dollar would have entered a free fall sending commodity prices in terms of dollars soaring. The dollar system would have been brought to the very brink of collapse—and possibly over the brink. Interest rates would have soared, and the mortgage credit market with all the consequences I examined above would have been left in shambles.
However, if the Fed did not flood the banking system with reserves, the dollar system would be saved but at the price of an old-time panic and deep depression. The entire Ponzi scheme that the “great American middle class” now rested on would more or less deflate. The United States would face a social crisis far worse than that of the Depression decade when its mighty industrial base, though temporarily paralyzed by the super-crisis, remained fully intact.
This was all the more true true because the entire modern credit system was based on the expectation that the Fed would always intervene to prevent any collapse in the general price level. Bernanke himself had promised at the beginning of the decade he would do just that. (13)
The money capitalists took Bernanke at his word and acted accordingly. As soon as the credit-market seized up in August 2007, they began to dump the dollar big time. This sent the dollar price of gold, and oil as well as other primary commodities, soaring.
But the Bernanke Fed tried to outsmart the market. As expected, the Fed soon announced that it would drive down the federal funds rate. But instead of flooding the banking system with newly created dollar token money reserves by purchasing short-term government securities, the Federal Reserve System turned to a method it had not used on a large scale since the super-crisis days of 1929-33—discounting.
But the kind of discounting that the Bernanke Fed carried out would have outraged old-time central bankers. The Fed began to buy up “mortgage-backed securities” from the investment banks on a large scale. When the Bears Stearns investment bank faced collapse in March 2008, the Fed exchanged government securities in its portfolio for Bear Stearns’ “toxic mortgages” in order to facilitate the forced merger of the “venerable” Wall Street investment bank into the giant J.P. Morgan-Chase universal bank. (14)
But at the same time, the Fed was largely offsetting the increase in the dollar token money that it was creating through its discounts by selling off its portfolio of U.S. Treasuries. Contrary to the expectations of the market, the Fed did not balloon the supply of dollar token money after the initial panic in August 2007.
Between August 1, 2007, and August 1, 2008, the dollar monetary base grew by a little more 2 percent. This was in sharp contrast to the 10 percent rate of growth of the monetary base that the Fed had maintained during most of the much milder turn-of-the-century economic crisis when the dollar price of gold had been below $300 an ounce.
During the first 11 months of the crisis, the Fed resembled a person trying to lift both feet off the ground at the same time. It was forcing down the federal funds rate in an attempt to prevent an old-style deflationary banking panic while on the other hand it was holding the rate of growth of the token money it was creating to a snail’s pace in order to prevent a new inflationary panicky flight from the dollar into gold and commodities.
Prices react to the Fed moves
The result was a sharp rise in the dollar price of gold and a startling leap in primary commodity prices and in producer prices in general. After the Fed’s arranged merger of the investment bank Bears Stearns with J.P. Morgan-Chase in March 2008, the price of gold bullion spiked briefly for the first time above $1,000 an ounce. During the month of July 2008, dollar gold bullion prices were often above $950 an ounce. This depreciation of the dollar occurred despite the low rate of growth of the quantity of token money. It was the worst of both worlds. The dollar was depreciating, but its quantity was barely increasing.
Primary commodity prices such as but not only oil quickly reacted to the plunge in the dollar’s gold value—and not the lack of growth of the quantity of dollars. The market was making a mockery of the teachings of Milton Friedman. Instead, it was obeying quite different laws, the economic laws explored by Karl Marx.
For example, the dollar price of oil rose from just over $70 a barrel in August 2007 to over $145 11 months later in July 2008. Unlike in 1973-74, there was no oil embargo, nor was there anything like the revolution in Iran in 1979 to blame this time. True, the Bush administration and Israel were making threats to attack Iran, but the U.S. government only had itself to blame for that.
Nor was it only the oil price that was rising. Between August 2007 and July 2008, U.S. producer prices rose by more than 19 percent over an 11-month period. This exceeded the rates of inflation registered by this index during the worst of the inflationary crises of either 1973-74 or 1979-80. True, consumer prices didn’t rise as much as they did during the 1970s, but they soon would have soared if the dollar depreciation and with it these producer price increases had continued.
The market and the Fed were in effect engaged in a game of Double Dare. The market was saying to the Fed, we know that you will soon print tons of new paper dollars. Hasn’t your “helicopter Ben” promised you will never allow the general price level to decline! So we are anticipating your inflationary move in advance.
The Fed, for its part, was trying to hold firm and hold down the rate of growth of the quantity of dollar token money. It knew that if it didn’t provide the fuel for inflation in the form of a great increase in the quantity of dollar token money, inflation would be starved. Either the market or the Fed would have to blink.
The bourgeois journalists whose job it is to “explain” economic and financial developments to the “lay public” were confused. One day it seemed that the deflationary 1930s were returning. The next day it was the inflationary 1970s all over again. But weren’t the deflationary 1930s and the inflationary 1970s opposite states of the economy? How could the economy be in one state on one day and the opposite state the next?
If the economic journalists referred back to their old college economic text books, they would find no answers there. This was the case whether the textbooks reflected Keynesian or Friedmanite economics. Nor did they receive much enlightenment if they called up the bourgeois “economic experts” in person. The “experts” were just as confused as the journalists and the lay public.
The second panic
With the dramatic rise in dollar commodity prices, the quantity of dollar token money both in terms of gold and in terms of the dollar’s real purchasing power was shrinking rapidly. Something had to give and give it did. Starting in August 2008, both the price of oil and the producer price level began to plunge. An old-fashioned panic was on.
Just like in the days of old, panic-stricken capitalists began to dump commodities such as oil that they had purchased on credit on the expectation that their prices would continue to soar. In an attempt to stave off bankruptcy, they were forced to sell commodities at almost any price to raise cash to meet their debts and stave off bankruptcy—often unsuccessfully. From August 2008 onward, prices in terms of dollars reversed direction and started to plunge.
Some numbers tell the story
Between July 2008 and March 2009, the U.S. producer price index fell more than 18 percent. The price of oil, which was as high as $147 in July 2008, plunged to below $35 a barrel in December, just five months later! These swings of dollar-denominated commodity prices were beyond wild.
The dollar is again king
As panic engulfed the world market in the fall of 2008, the dollar was again king, much as it had been during the milder and far more limited panic that started in 1997. When the dollar suddenly became a “strong currency” in the fall of 2008, some Marxists were surprised. Why did the dollar suddenly become a strong currency when it had seemed so weak just weeks before?
But this is no mystery for those who know the history of crises. Though the dollar system had been shaken, especially during the 11 months between the initial panic in August 2007 and July 2008, the dollar system had not collapsed. Since everywhere there was a demand for payment in cash and cash still meant—and means—dollars, the demand for dollars, which had been plunging, suddenly reversed course and soared. Many speculators who had bought gold on credit now had to dump it as the dollar price of gold suddenly—and for many speculators unexpectedly—began to decline.
At the height of the panic on November 13, 2008, the dollar price of gold dropped to $713.50. This drop, however, was far more modest than the drop of the dollar price of oil, for example, underlying the monetary nature of the commodity gold as opposed to the non-monetary nature of the commodity oil.
This showed that the “strong” gold speculators, those who held the bullion outright rather than on credit, were not selling gold. The panic was pushing the dollar up against gold due to the dollar’s role as the main means of payment on the world market. However, looking beyond the immediate panic, its long-term prospects still seemed—and seems—dismal. Why is this?
The Fed blinks
In the “double dare” game between the market and the Fed, it was the Fed that now blinked. It used the extraordinary demand for dollars caused by the panic to flood the market with dollar token money. Within a couple of months, the quantity of dollar token money almost doubled. With the demand for dollars as a means of payments so high, the Fed could now meet this demand without precipitating the massive flight out of the dollar into gold that would bring down the dollar system. If, in contrast, the Fed had attempted to flood the market with dollar token in order to stave off the full-scale panic before it hit in the fall of 2008, the dollar system might not have survived.
This panic had a disastrous effect in the form of plunging industrial production and employment, not only in industry but in many “service industries” as well, along with the contraction of world trade. The crisis soon spread throughout the world. Home prices, which had been falling since 2006 despite the threatened inflation, now plunged faster, and foreclosure rates soared. Many “middle-class homeowners” were indeed losing their homes, and in some cases were—and are—faced with unemployment and homelessness at the same time.
But as bad as this panic was, it was for U.S. imperialism in particular and for the world economy in general the only way to avoid a much worse panic. That would be a panicky flight out of the dollar and into gold that would bring down the entire U.S. dollar-based world empire. For the moment the autumn 2008 panic had saved the dollar system.
After the panic
A combination of an extraordinary rise in the demand for dollars as a result of the panic, a sudden sharp fall in the dollar prices of commodities—leading to a fall in the general price level—a contraction in the quantity of real capital, both commodity capital and productive capital, as factories were shut down and inventories sold off, reduced the ratio of real capital to gold. This enabled the rate of interest, especially short-term interest rates, but briefly long-term interest on U.S. government bonds, to fall to levels not seen since the days of the late Depression and its aftermath.
At the same time there was a doubling of the quantity of dollar token money. During the first 11 months of the crisis—August 2007 to July 2008—the real—in terms of purchasing power—quantity of dollar token money was contracting rapidly. Now the quantity of dollar token money in real terms was soaring.
Because the Fed succeeded in preventing a general run on the banks, unlike in 1931-33, the banks did not have to dump their portfolios of government bonds on the market. Government bonds were considered as “good as dollars” and the dollar was king. The result was that the rate of interest on 10-year government bonds fell to 2.08 percent on December 18, 2008, even lower than during the Depression and its aftermath.
If these long-term interest rates could only last, there would be every prospect of a huge rise in the profit of enterprise, once economic recovery—which could be years and years in the future—finally arrived. However, to achieve this the Fed would have had to allow the deflationary process to continue, limiting itself to at most trying to keep it “orderly.”
But by doubling the monetary base in a period of a few months, the Fed had no intention of allowing this. It had not been able to prevent a brief fall in the general price level, but it was determined, just as Bernanke had promised, to print whatever amount of money was necessary to prevent the fall in prices from continuing.
By June 8, 2009, as the panic ebbed the rate of interest on 10-year government bonds was back up to 3.91 percent. (15) The Federal Reserve System, determined to halt the decline in the cost of living and prevent a prolonged depression, has been trying very hard to drive the long-term rate of interest back down again. It even announced a program to directly purchase long-term government bonds for its own portfolio, a program that is now being wound up. In recent weeks, the rate on 10-year government bonds has fallen as low as 3.2 percent
An examination of the quantity of dollar token money—the so-called monetary base figures provided by the Federal Reserve Bank of St. Louis—shows that the total quantity of dollar token money has begun rising sharply once again in recent weeks. While this has momentarily held down long-term interest rates, it has done so at the price of allowing gold bullion to soar above $1,050. As former Cuban President Fidel Castro has again pointed out, never has a “dollar” represented less gold—real money—than it does today.
Over the last few weeks, the rate of interest on 10-year government bonds, which largely governs mortgage interest rates, has climbed back to over 3.4 percent. The professional economists who sit on the Federal Reserve Board and the Open Market Committee seem to have a tough time learning the lesson that an increase in the quantity of token money does not have the same effect as an increase in the quantity of metallic money when it comes to the rate of interest.
As the aftershocks of the panic, though still considerable, gradually fade—assuming that they continue to do so—the extraordinary demand for dollars fades with it, causing the dollar to once again weaken against gold and commodities. The price of oil has already risen above $80 a barrel once again.
Will the coming Northern Hemisphere winter find the price of oil above $100 a barrel before winter turns into spring? How will the unemployed—still waiting for the capitalists to stop eliminating jobs and resume hiring—in the United States now officially at 15.1 million and rising—be able to heat their homes?
And as the experience of all the years since 1971 demonstrate, if the once again “weak dollar” continues, it won’t be long before the still huge and only partially deflated Ponzi scheme that is the U.S. mortgage, real-estate, and residential construction market—and the economy in general—is hit by a new crisis.
The U.S. dollar empire—at least in the financial sense—has never been shakier than it is today. And if the dollar should strengthen—without the help of a renewed panic? In that case, the crisis would be postponed. But a crisis postponed is not a crisis averted. Indeed, the postponement of the crisis would make the crisis all the worse when it finally arrives.
And so I get to the present, that magical point at which the past where we know what happened turns into the future where we don’t know what will happen. The present is also that point in time that divides what we cannot change into the future where we can—though to paraphrase Marx, not under the circumstances of our own choosing—affect what is yet to be.
This is the point where the study of history turns into the making of history. Or as Marx put it in the famous eleventh of his “Theses on Feuerbach”: The point is not to explain the world—in our specific case understanding the laws that govern periodic crises of overproduction that periodically affect the capitalist mode of production—but to change the laws. In our case, to abolish the very subject of our inquiry, the crises themselves by abolishing the capitalist system that breeds them.
In the last series of posts, I have been exploring whether capitalist production in addition to being subject to the 10-year—give or take a year or so—industrial cycle, and the shorter so-called “Kitchen inventory cycle,” is also subject to a “long cycle” consisting of several 10-year cycles.
I have examined the concrete history of the capitalist economy from the panic that broke out in London in the fall of 1847 all the way to the panic that hit New York—and the rest of the world—in the fall of 2008. This comes to exactly 161 years of concrete capitalist history. The time has come to finally draw some conclusions about the existence or absence of a “long cycle” in capitalist production. That will be the subject of the next post, the final post in the “long cycle” series.
After that will come the final series of posts, the posts on the so-called “breakdown” theory. This is the part of Marxist theory that examines the ultimate limits and fate of the capitalist mode of production.
1 Imperialism has a tendency to convert the entire population of the imperialist countries into money capitalists. Today, it seems you cannot drive a block or check out a web page without seeing the latest stock market quotes being flashed at you! This tendency can never reach its logical conclusion. If it did, there would be nobody to work in those areas of the economy that cannot be shifted abroad. There would be no one to work in malls, no mechanics to service automobiles, nobody to flip burgers at the local MacDonald’s, no construction workers to build the new houses and malls, and so on.
2 The use of the word “trash” reflects the contempt in which those who have no property whatsoever in either land or capital, and are therefore entirely dependent on wages, are held in the property-minded United States.
4 Homes in this sense need not only be buildings used for the residences of single families. They include apartments in large multi-family buildings that are sold rather than rented. The owners of these “condos” are comparable to other homeowners rather than renters or trailer owners. When land prices rise, the values of “condos” rise with them, just like the values of single-family homes do.
5 Fanny Mae, Ginny Mae and Freddie Mac are organized as three corporations rather than one to emphasize their supposed private nature. They are supposed to be three privately owned corporations in the same line of business that are competing with one another, though in reality they are closely linked to the U.S. government. The widespread perception in the financial markets that their debts would be treated as though they were debts of the U.S. government proved to be correct. The lower the rate that Fanny, Freddie and Ginny Mae can borrow, the more they can inflate the level of homeownership.
6 An example of the disastrous political consequences of widespread homeownership is the case of Proposition 13 in California. California once had one of the finest public university and educations systems outside of the Soviet bloc. In 1978, however, large landowning real-estate interests succeeded in getting Proposition 13 passed. Its aim was to slash the state taxes paid by the large landowning interests—called property taxes—that were used in part to finance California’s excellent educational system.
These large landowners posed as champions of California’s large mass of of homeowners, who owned only tiny amounts of land but who did stand to benefit in the short run from the lower property taxes that would result from passage of Proposition 13. The result is that today California is near the bottom in the United States in the amount of money spent per pupil. Skyrocketing tuition costs have put a college education out of reach for increasing numbers of working-class families. Far less is spent on educating Californians than in locking them up in the state’s huge overcrowded prison system.
7 The Republican Party is historically the party of the industrial and commercial capitalists, both large and small. Today the smaller industrial and commercial capitalists still form an important part of the base of the Republican party. Since homeownership reduces the mobility of the working class and puts upward pressure on money wages—wages must be higher to cover the costs of homeownership—the smaller industrial and commercial capitalists tend to oppose government programs that encourage homeownership. Unlike the large industrial corporations, they cannot shift their operations abroad in search of “cheap labor.” As a result, the Republican Party gives less support in words to government programs that encourage homeownership, though the Republican Party when it is in office has maintained the Democratic Party’s policies that encourage widespread homeownership.
In reality, homeowners are far more likely to vote for Republican candidates than renters or trailer owners and to support Republican-backed causes such as Proposition 13 than renters or trailer owners. In practice, despite somewhat different rhetoric by politicians of the two parties, the policy of encouraging widespread homeownership is in effect a bipartisan one.
8 Unimproved land that is not created by human labor is not a commodity in the strict sense, and has no value. However, rent-bearing land does provide its owner a flow of income when rented out. Assuming rents remain unchanged, the price of land will vary inversely with the rate of interest.
Let’s assumes that a given plot of land yields its owner $100 a year when it is rented out. If the rate of interest is 5 percent, the price of the plot of land will be ($100/.05) = $2,000. If the rate of interest falls from 5 percent to 2.5 percent, all else remaining unchanged, the price of our plot of land will rise to ($100/.025) = $4,000. The falling rate of interest that characterized the “strong dollar” of the Great Moderation put strong upward pressure on land prices, and therefore home equity values. This in turn encouraged mortgage loans and homeownership. The rising interest rates associated with a “weak dollar” has the opposite effect.
12 The central bank of the People’s Republic of China proposed that the IMF issue more Special Drawing Rights, which would gradually replace the dollar as the main international reserve currency. This implies that internationally traded commodities such as oil and consequently international debts would be priced in SDRs—a form of credit money created by the International Monetary Fund for use by governments only—which are valued in terms of a market basket of currencies rather than in U.S. dollars alone. If primary commodities and foreign debts were denominated in a market basket of currencies as opposed to U.S. dollars, the ability of United States to pay its debts in the “currency it issues itself” would be considerably reduced.
Under the dollar system, the U.S. Federal Reserve System functions in effect as the world’s central bank. It is the sole bank of issue of the currency that functions as world money—the U.S. dollar. Though all countries are affected by monetary policies adopted by the U.S. Federal Reserve Board, they have absolutely no voice in determining the Fed’s policies.
The logic of China’s proposal would be to shift the function of world central bank from the Federal Reserve Board to the International Monetary Fund, which in the future would be run democratically by all the trading nations. It goes without saying that Washington has given its thumbs down to China’s proposal. It is very much determined to safeguard the role of the Fed as the world’s sole de facto central bank.
13 During the “strong dollar recession” episode at the turn of the century, there were fears that the U.S. general price level in terms of dollars might actually decline. This is what happened in Japan starting in the late 1990s, when the general price level in terms of yen began a gradual but prolonged decline amidst Japan’s prolonged economic stagnation. What would happen, some financial journalists asked, if the federal funds rate fell to almost zero?
No problem, Bernanke explained, the Fed would use its “printing press” to print as much money as necessary to prevent prices from falling. Paraphrasing John Maynard Keynes, Bernanke explained that if necessary the Fed could drop newly printed paper money from helicopters. This earned Bernanke the nickname “helicopter Ben” among “hard money” right-wing “gold bugs.” When the August 2007 panic began, most market speculators did not believe that the Bernanke-led Fed would allow the general price level to decline. Instead, it was widely assumed that the Fed would flood the banking system with whatever quantity of newly created dollar token money was necessary to halt the panic and keep commodity prices rising.
14 Traditionally in Britain and the United States, investment banking—underwriting new securities issues—and commercial banking have been separate, as opposed to the “German model,” in which the same corporations engage in both investment and commercial banking. Banks that carry out both investment and commercial banking operations are known as “universal banks.” For years, the U.S. financial press boasted of the alleged superiority of the U.S. system of separate investment and commercial banking. In the wake of the crisis of 2007-09 in the United States, both investment and commercial banking are now throughly unified in the hands of gigantic universal banks. This became legally possible thanks to the Depression-era Glass-Steagall Act being overturned in 1999 under Democratic President Bill Clinton.
15 While the real supply of dollar token money contracted sharply between the outbreak of the initial crisis in August 2007 and July 2008, it exploded dramatically from the fall of 2008 onward due to the Fed moves to flood the U.S. banking system with newly created token money on a scale never before seen in
the history of the United States. Not only did the absolute quantity of dollar token money double, the prices of many commodities plunged further expanding the real quantity of dollar token money. The result was a collapse in interest rates and the gradual fading away of the panic during the course of 2009.
However, unlike in the days of Marx, when giving the Bank of England the mere authority to increase the amount of banknotes beyond the amount of gold that the bank had in its vaults was sufficient to break panics, the Fed in 2008-09 actually had to more than double the quantity of the token money it issues in order to break the panic.
a few charts to see magnitude
click on image to enlarge
and for more info see
Hedge Hogs; Gold Man’s Sacks; “financial terrorist attacks;” and the Obama sellout: > HERE
SUPER COMMITTEE BIG BANK ROBBERY and “this sucker” going down > HERE
Terrorism by Economic Collapse, debt bondage, money as debt on interest, etc > HERE
Derivatives ‘Mother of All Bubbles’ exploding > HERE
Super rich 1% vs 99 %; Terrorism Cycle: Guillotines: Occupy “ALL” streets > HERE
and so many more on those websites (under development with limited resources)
Great derivatives crash
“Mother of All Bubbles” Exploding,
Political Earthquakes Under Way
A Secretive Banking Elite Rules Trading in Derivatives
By LOUISE STORY
Published: December 11, 2010
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
Fred R. Conrad/The New York Times
PROTECTING THE CUSTOMER Daniel Singer runs a heating oil company in Elmsford, N.Y., and is a derivatives customer. In order to offer homeowners fixed-rate oil plans, he buys derivatives contracts. But since the trading system is not transparent, he can’t tell whether the prices he gets are fair or not.
Yuri Gripas/Agence France-Presse — Getty Images
A COST TO EVERYONE Gary Gensler of the Commodity Futures Trading Commission says the current system “adds up to higher costs to all Americans.”
Readers shared their thoughts on this article.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.
In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.
The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.
Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.
This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.
But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.
“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.
Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.
Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.
The marketplace as it functions now “adds up to higher costs to all Americans,” said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.
But big banks influence the rules governing derivatives through a variety of industry groups. The banks’ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.
Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.
The Department of Justice is looking into derivatives, too. The department’s antitrust unit is actively investigating “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,” according to a department spokeswoman.
Indeed, the derivatives market today reminds some experts of the Nasdaq stock market in the 1990s. Back then, the Justice Department discovered that Nasdaq market makers were secretly colluding to protect their own profits. Following that scandal, reforms and electronic trading systems cut Nasdaq stock trading costs to 1/20th of their former level — an enormous savings for investors.
“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”
Representatives from the nine banks that dominate the market declined to comment on the Department of Justice investigation.
Clearing involves keeping track of trades and providing a central repository for money backing those wagers. A spokeswoman for Deutsche Bank, which is among the most influential of the group, said this system will reduce the risks in the market. She said that Deutsche is focused on ensuring this process is put in place without disrupting the marketplace.
The Deutsche spokeswoman also said the banks’ role in this process has been a success, saying in a statement that the effort “is one of the best examples of public-private partnerships.”
Established, But Can’t Get In
Recently, the bank has been seeking to enter the inner circle of the derivatives market, but so far, it has been rebuffed.
Bank of New York officials say they have been thwarted by competitors who control important committees at the new clearinghouses, which were set up in the wake of the financial crisis.
Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market.
The bank dismisses that explanation as absurd. “We are not a nobody,” said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business. “But we don’t qualify. We certainly think that’s kind of crazy.”
The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules.
Mr. Kannambadi said Bank of New York’s clients asked it to enter the derivatives business because they believe they are being charged too much by big banks. Its entry could lower fees. Others that have yet to gain full entry to the derivatives trading club are the State Street Corporation, and small brokerage firms like MF Global and Newedge.
The criteria seem arbitrary, said Marcus Katz, a senior vice president at Newedge, which is owned by two big French banks.
“It appears that the membership criteria were set so that a certain group of market participants could meet that, and everyone else would have to jump through hoops,” Mr. Katz said.
The one new derivatives clearinghouse that has welcomed Newedge, Bank of New York and the others — Nasdaq — has been avoided by the big derivatives banks.
Only the Insiders Know
How did big banks come to have such influence that they can decide who can compete with them?
Ironically, this development grew in part out of worries during the height of the financial crisis in 2008. A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds. The panic led to the need to bail out the American International Group, for instance, which had C.D.S. contracts with many large banks.
In the midst of the turmoil, regulators ordered banks to speed up plans — long in the making — to set up a clearinghouse to handle derivatives trading. The intent was to reduce risk and increase stability in the market.
Two established exchanges that trade commodities and futures, the InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange, set up clearinghouses, and, so did Nasdaq.
Each of these new clearinghouses had to persuade big banks to join their efforts, and they doled out membership on their risk committees, which is where trading rules are written, as an incentive.
None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.
Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.
Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market.
Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily.
“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”
Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.
The precise amount that banks make trading derivatives isn’t known, but there is anecdotal evidence of their profitability. Former bank traders who spoke on condition of anonymity because of confidentiality agreements with their former employers said their banks typically earned $25,000 for providing $25 million of insurance against the risk that a corporation might default on its debt via the swaps market. These traders turn over millions of dollars in these trades every day, and credit default swaps are just one of many kinds of derivatives.
The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits.
If an investor trades shares of Google or Coca-Cola or any other company on a stock exchange, the price — and the commission, or fee — are known. Electronic trading has made this information available to anyone with a computer, while also increasing competition — and sharply lowering the cost of trading. Even corporate bonds have become more transparent recently. Trading costs dropped there almost immediately after prices became more visible in 2002.
Not so with derivatives. For many, there is no central exchange, like the New York Stock Exchange or Nasdaq, where the prices of derivatives are listed. Instead, when a company or an investor wants to buy a derivative contract for, say, oil or wheat or securitized mortgages, an order is placed with a trader at a bank. The trader matches that order with someone selling the same type of derivative.
Banks explain that many derivatives trades have to work this way because they are often customized, unlike shares of stock. One share of Google is the same as any other. But the terms of an oil derivatives contract can vary greatly.
And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.
It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.
An Electronic Exchange?
Two years ago, Kenneth C. Griffin, owner of the giant hedge fund Citadel Group, which is based in Chicago, proposed open pricing for commonly traded derivatives, by quoting their prices electronically. Citadel oversees $11 billion in assets, so saving even a few percentage points in costs on each trade could add up to tens or even hundreds of millions of dollars a year.
But Mr. Griffin’s proposal for an electronic exchange quickly ran into opposition, and what happened is a window into how banks have fiercely fought competition and open pricing. To get a transparent exchange going, Citadel offered the use of its technological prowess for a joint venture with the Chicago Mercantile Exchange, which is best-known as a trading outpost for contracts on commodities like coffee and cotton. The goal was to set up a clearinghouse as well as an electronic trading system that would display prices for credit default swaps.
Big banks that handle most derivatives trades, including Citadel’s, didn’t like Citadel’s idea. Electronic trading might connect customers directly with each other, cutting out the banks as middlemen.
So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse. The banks attached a number of conditions on that partnership, which came in the form of a merger between ICE’s clearinghouse and a nascent clearinghouse that the banks were establishing. These conditions gave the banks significant power at ICE’s clearinghouse, according to two people with knowledge of the deal. For instance, the banks insisted that ICE install the chief executive of their effort as the head of the joint effort. That executive, Dirk Pruis, left after about a year and now works at Goldman Sachs. Through a spokesman, he declined to comment.
The banks also refused to allow the deal with ICE to close until the clearinghouse’s rulebook was established, with provisions in the banks’ favor. Key among those were the membership rules, which required members to hold large amounts of capital in derivatives units, a condition that was prohibitive even for some large banks like the Bank of New York.
The banks also required ICE to provide market data exclusively to Markit, a little-known company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices.
Kevin Gould, who is the president of Markit and was involved in the clearinghouse merger, said the banks were simply being prudent and wanted rules that protected the market and themselves.
“The one thing I know the banks are concerned about is their risk capital,” he said. “You really are going to get some comfort that the way the entity operates isn’t going to put you at undue risk.”
Even though the banks were working with ICE, Citadel and the C.M.E. continued to move forward with their exchange. They, too, needed to work with Markit, because it owns the rights to certain derivatives indexes. But Markit put them in a tough spot by basically insisting that every trade involve at least one bank, since the banks are the main parties that have licenses with Markit.
This demand from Markit effectively secured a permanent role for the big derivatives banks since Citadel and the C.M.E. could not move forward without Markit’s agreement. And so, essentially boxed in, they agreed to the terms, according to the two people with knowledge of the matter. (A spokesman for C.M.E. said last week that the exchange did not cave to Markit’s terms.)
Still, even after that deal was complete, the Chicago Mercantile Exchange soon had second thoughts about working with Citadel and about introducing electronic screens at all. The C.M.E. backed out of the deal in mid-2009, ending Mr. Griffin’s dream of a new, electronic trading system.
With Citadel out of the picture, the banks agreed to join the Chicago Mercantile Exchange’s clearinghouse effort. The exchange set up a risk committee that, like ICE’s committee, was mainly populated by bankers.
It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.
Kim Taylor, the president of Chicago Mercantile Exchange’s clearing division, said “the market” simply wasn’t interested in Mr. Griffin’s idea.
Critics now say the banks have an edge because they have had early control of the new clearinghouses’ risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks’ role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies.
“It’s not like the sort of representation where if I’m elected to be the representative from the state of Illinois, I go there to represent the state of Illinois,” Ms. Taylor said in an interview.
Officials at ICE, meantime, said they solicit views from customers through a committee that is separate from the bank-dominated risk committee.
“We spent and we still continue to spend a lot of time on thinking about governance,” said Peter Barsoom, the chief operating officer of ICE Trust. “We want to be sure that we have all the right stakeholders appropriately represented.”
Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”
“It’s a stunning amount of money,” Mr. Griffin said. “The key players today in the derivatives market are very apprehensive about whether or not they will be winners or losers as we move towards more transparent, fairer markets, and since they’re not sure if they’ll be winners or losers, their basic instinct is to resist change.”
In, Out and Around Henhouse
The result of the maneuvering of the past couple years is that big banks dominate the risk committees of not one, but two of the most prominent new clearinghouses in the United States.
That puts them in a pivotal position to determine how derivatives are traded.
Under the Dodd-Frank bill, the clearinghouses were given broad authority. The risk committees there will help decide what prices will be charged for clearing trades, on top of fees banks collect for matching buyers and sellers, and how much money customers must put up as collateral to cover potential losses.
Perhaps more important, the risk committees will recommend which derivatives should be handled through clearinghouses, and which should be exempt.
Regulators will have the final say. But banks, which lobbied heavily to limit derivatives regulation in the Dodd-Frank bill, are likely to argue that few types of derivatives should have to go through clearinghouses. Critics contend that the bankers will try to keep many types of derivatives away from the clearinghouses, since clearinghouses represent a step towards broad electronic trading that could decimate profits.
The banks already have a head start. Even a newly proposed rule to limit the banks’ influence over clearing allows them to retain majorities on risk committees. It remains unclear whether regulators creating the new rules — on topics like transparency and possible electronic trading — will drastically change derivatives trading, or leave the bankers with great control.
One former regulator warned against deferring to the banks. Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of New York, said banks do not always think of the market as a whole as they help write rules.
A version of this article appeared in print on December 12, 2010, on page A1 of the New York edition with the headline: HOUSE ADVANTAGE; A Secretive Banking Elite Rules Derivatives Trading.
Derivatives: The Quadrillion Dollar Financial Casino Completely Dominated By The Big International Banks
If you took an opinion poll and asked Americans what they considered the biggest threat to the world economy to be, how many of them do you think would give “derivatives” as an answer? But the truth is that derivatives were at the heart of the financial crisis of 2007 and 2008, and whenever the next financial crisis happens derivatives will undoubtedly play a huge role once again. So exactly what are “derivatives”? Well, derivatives are basically financial instruments whose value depends upon or is derived from the price of something else. A derivative has no underlying value of its own. It is essentially a side bet. Today, the world financial system has been turned into a giant casino where bets are made on just about anything you can possibly imagine, and the major Wall Street banks make a ton of money from it. The system is largely unregulated (the new “Wall Street reform” law will only change this slightly) and it is totally dominated by the big international banks.
Nobody knows for certain how large the worldwide derivatives market is, but most estimates usually put the notional value of the worldwide derivatives market somewhere over a quadrillion dollars. If that is accurate, that means that the worldwide derivatives market is 20 times larger than the GDP of the entire world. It is hard to even conceive of 1,000,000,000,000,000 dollars.
Counting at one dollar per second, it would take you 32 million years to count to one quadrillion.
So who controls this unbelievably gigantic financial casino?
Would it surprise you to learn that it is the big international banks that control it?
The New York Times has just published an article entitled “A Secretive Banking Elite Rules Trading in Derivatives“. Shockingly, the most important newspaper in the United States has exposed the steel-fisted control that the big Wall Street banks exert over the trading of derivatives. Just consider the following excerpt from the article….
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
Does that sound shady or what?
In fact, it wouldn’t be stretching things to say that these meetings sound very much like a “conspiracy”.
The New York Times even named several of the Wall Street banks involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.
Why does it seem like all financial roads eventually lead back to these monolithic financial institutions?
The highly touted “Wall Street reform” law that was recently passed will implement some very small changes in how derivatives are traded, but these giant Wall Street banks are pushing back hard against even those very small changes as the article in The New York Times noted….
“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”
So why should we be so concerned about all of this?
Well, because the truth is that derivatives could end up crashing the entire global financial system.
In fact, the danger that we face from derivatives is so great that Warren Buffet once referred to them as “financial weapons of mass destruction”.
In a previous article, I described how derivatives played a central role in almost collapsing insurance giant AIG during the recent financial crisis….
Most Americans don’t realize it, but derivatives played a major role in the financial crisis of 2007 and 2008.
Do you remember how AIG was constantly in the news for a while there?
Well, they weren’t in financial trouble because they had written a bunch of bad insurance policies.
What had happened is that a subsidiary of AIG had lost more than $18 billion on Credit Default Swaps (derivatives) it had written, and additional losses from derivatives were on the way which could have caused the complete collapse of the insurance giant.
So the U.S. government stepped in and bailed them out – all at U.S. taxpayer expense of course.
As the recent debate over Wall Street reform demonstrated, the sad reality is that the U.S. Congress is never going to step in and seriously regulate derivatives.
That means that a quadrillion dollar derivatives bubble is going to perpetually hang over the U.S. economy until the day that it inevitably bursts.
Once it does, there will not be enough money in the entire world to fix it.
Meanwhile, the big international banks will continue to run the largest casino that the world has ever seen. Trillions of dollars will continue to spin around at an increasingly dizzying pace until the day when a disruption to the global economy comes along that is serious enough to crash the entire thing.
The worldwide derivatives market is based primarily on credit and it is approximately ten times larger than it was back in the late 90s. There has never been anything quite like it in the history of the world.
So what in the world is going to happen when this thing implodes? Are U.S. taxpayers going to be expected to pick up the pieces once again? Is the Federal Reserve just going to zap tens of trillions or hundreds of trillions of dollars into existence to bail everyone out?
If you want one sign to watch for that will indicate when an economic collapse is really starting to happen, then watch the derivatives market. When derivatives implode it will be time to duck and cover. A really bad derivatives crash would essentially be similar to dropping a nuke on the entire global financial system. Let us hope that it does not happen any time soon, but let us also be ready for when it does.
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The Size of Derivatives Bubble = $190K Per Person on Planet
Posted by Tom Foremski – October 16, 2008
More must read financial analysis from DK Matai, Chairman of the ACTA Open.
The Invisible One Quadrillion Dollar Equation — Asymmetric Leverage and Systemic Risk
According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.
Quadrillion? That is a number only super computing engineers and astronomers used to use, not economists and bankers! For example, the North star is “just” a couple of quadrillion miles away, ie, a few thousand trillion miles. The new “Roadrunner” supercomputer built by IBM for the US Department of Energy’s Los Alamos National Laboratory has achieved a peak performance of 1.026 Peta Flop per second — becoming the first supercomputer ever to reach this milestone. One Quadrillion Floating Point Operations (Flops) per second is 1 Peta Flop/s, ie, 1,000 Trillion Flops per second. It is estimated that all the data found on all the websites and stored on computers across the world totals more than One Exa byte of memory, ie, 1,000 Quadrillion bytes of data.
Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent. This is normally a lower figure unless many variables plot a locus in the wrong direction simultaneously. This could be because of catastrophic unpredictable events, ie, “Black Swans”, such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously. Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. This means that no large OTC derivative house can be allowed to go broke without falling into the arms of another. Whatever funds within reason are required to rescue failing international investment banks, deposit banks and financial entities ought to be provided on a case by case basis. This is the asymmetric nature of derivatives and here lies the potential for systemic risk to the global economic system and financial markets if nothing is done.
Let us think about the invisible USD 1.144 quadrillion equation with black swan variables — ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or “Black Swans”. What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all ‘collapsed’ because of complex securities and derivatives exposures in September.
8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.
The Impact of Derivatives
1. Derivatives are securities whose value depends on the underlying value of other basic securities and associated risks. Derivatives have exploded in use over the past two decades. We cannot even properly define many classes of derivatives because they are highly complex instruments and come in many shapes, sizes, colours and flavours and display different characteristics under different market conditions.
2. Derivatives are unregulated, not traded on any public exchange, without universal standards, dealt with by private agreement, not transparent, have no open bid/ask market, are unguaranteed, have no central clearing house, and are just not really tangible.
3. Derivatives include such well known instruments as futures and options which are actively traded on numerous exchanges as well as numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity instruments.
4. Everyone from the large financial institutions, governments, corporations, mutual and pension funds, to hedge funds, and large and small speculators, uses derivatives. However, they have never existed in history with the overarching, exorbitant scale that they now do.
5. Derivatives are unravelling at a fast rate with the start of the “Great Unwind” of the global credit markets which began in July 2007 and particularly after the collapse of Freddie Mac and Fannie Mae in September this year.
6. When derivatives unravel significantly the entire world economy would be at peril, given the relatively smaller scale of the world economy by comparison.
7. The derivatives market collapse could make the housing and stock market collapses look incidental.
Three Historical Examples
1. The so-called rogue trader Nick Leeson who made a huge derivatives bet on the direction of the Japanese Nikkei index brought on the collapse of Barings Bank in 1995.
2. The collapse of Long Term Capital Management (LTCM), a hedge fund that had a former derivatives and bond dealer from Salomon Brothers and two Nobel Prize winners in Economics as principals, collapsed because of huge leveraged bets in currencies and bonds in 1998.
3. Finally, a lot of the problems of Enron in 2000 were brought on by leveraged derivatives and using derivatives to hide problems on the balance sheet.
The single conceptual pitfall at the basis of the disorderly growth of the global derivatives market is the postulate of hedging and netting, which lies at the basis of each model and of the whole regulatory environment hyper structure. Perfect hedges and perfect netting require functioning markets. When one or more markets become dysfunctional, the whole deck of cards could collapse swiftly. To hope, as US Treasury Secretary Mr Henry Paulson does, that an accounting ruse such as transferring liabilities, however priced, from a private to a public agent will restore the functionality of markets implies a drastic jump in logic. Markets function only when:
1. There is a price level at which demand meets supply; and more importantly when
2. Both sides believe in each other’s capacity to deliver.
Satisfying criterion 1. without satisfying criterion 2. which is essentially about trust, gets one nowhere in the long term, although in the short term, the markets may demonstrate momentary relief and euphoria.
In the context of the USD 700 billion rescue plan — still being finalised in Washington, DC — the following is worth considering step by step. Decision makers are rightly concerned about alleviating immediate pressure points in the global financial system, such as, the mortgage crisis, decline in consumer spending and the looming loss of confidence in financial institutions. However, whilst these problems are grave, they are acting as a catalyst to another more massive challenge which may have to be tackled across many nation states simultaneously. As money flows slow down sharply, confidence levels would decline across the globe, and trust would be broken asymmetrically, ie, the time taken to repair it would be much longer. Unless there is government action in concert, this could ignite a chain-reaction which would swiftly purge trillions and trillions of dollars in over-leveraged risky bets. Within the context of over-leverage, the biggest problem of all is to do with “Derivatives”, of which CDSs are a minor subset. Warren Buffett has said the derivatives neutron bomb has the potential to destroy the entire world economy, and is a “disaster waiting to happen.” He has also referred to derivatives as Weapons of Mass Destruction (WMD). Counting one dollar per second, it would take 32 million years to count to one Quadrillion. The numbers we are dealing with are absolutely astronomical and from the realms of super computing we have stepped into global economics. There is a sense of no sustainability and lack of longevity in the “Invisible One Quadrillion Dollar Equation” of the derivatives market especially with attendant Black Swan variables causing multiple implosions amongst financial institutions and counterparties! The only way out, albeit painful, is via discretionary case-by-case government intervention on an unprecedented scale. Securing the savings and assets of ordinary citizens ought to be the number one concern in directing such policy.
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We welcome your thoughts, observations and views. Thank you.
Chairman, ATCA Open
– ATCA, The Philanthropia, mi2g, HQR –
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The original ATCA — Asymmetric Threats Contingency Alliance — is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies — bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of the original ATCA network is by invitation only and has over 5,000 distinguished members from over 120 countries: including 1,000 Parliamentarians; 1,500 Chairmen and CEOs of corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media.
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A billion dollars…
A hundred billion dollars…
Eight hundred billion dollars…
One TRILLION dollars…
What does that look like ?I mean, these various numbers are tossed around like so many doggie treats, so I thought I’d take Google Sketchup out for a test drive and try to get a sense of what exactly a trillion dollars looks like.
We’ll start with a $100 dollar bill. Currently the largest U.S. denomination in general circulation. Most everyone has seen them, slighty fewer have owned them. Guaranteed to make friends wherever they go.
A packet of one hundred $100 bills is less than 1/2″ thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.
Believe it or not, this next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a grocery bag and walk around with it.
$1,000,000 (one million dollars)
While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet…
$100 million dollars
And $1 BILLION dollars… now we’re really getting somewhere…
Next we’ll look at ONE TRILLION dollars. This is that number we’ve been hearing so much about. What is a trillion dollars ?Well, it’s a million million. It’s a thousand billion. It’s a one followed by 12 zeros. You ready for this? It’s pretty surprising.
$1,000000000000 : A TRILLION dollars
RHS1: OK…This is were Page Tutor terminates its graphic representation at a trillion dollars it is also the maximum in the human scale.
Below is an image of the tallest man made structure in the world.
Burj Dubai in Dubai, United Arab Emirates
is currently the world’s tallest man-made structure.
It was topped-out at 818 m (2,684 ft) on 17 January 2009..
$1,000000000000000000 : A QUADRILLION dollars.
- The Red object (bottom left) is the building in the photograph above.
- The scale is approx; correct “near enough”.
- There are 20 layers in this pile
- Each layer is 100 pallets high.
- Estimating a pallet is 3 feet high (see $100 million dollars; above.)
- One trillion is 2 pallets high.
- We have a stack 6000 feet high.
on and on in searching and seeking salvation, and the mercy of God Almighty Most Merciful