Federal Reserve

Dollar Moves Shake the World: “Federal Reserve Could Start a Currency War”

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by Mac Slavo


There is a war, a currency war, and the war is, ultimately, on us.

In many respects, Americans have fallen far, and hard, from the liberty they once had.

Rather than living under a sound currency, modern Americans live under an economic despotism. There are monopoly men who tightly control the money, and are all the more insidious in their subtlety, and quietness in the shadows.

Today, things are so bad that they face economic enslavement and a rapid theft of their wealth through the debasement of the dollar’s value. Not only is the destruction of the dollar systematic and planned, but it is designed to leave Americans holding the bag. The money passes round and round, but it trickles down from the big banks, who are loaned the money free at zero percent interest by the Federal Reserve under its QE program, created to “fix” the 2008 economic crisis that nearly brought the world to its knees.

Now, literally any action at all – especially including no action – by the Federal Reserve has a direct impact on the value of the U.S. dollar, and greatly determines the course of world events, and especially whether or not average people can pay the bills.

According to The Street, it is an all out currency war that will have direct impact on budgets large and small:

The stock market stays high because the Fed is not going to raise short-term interest rates. The Fed is not going to raise short-term interest rates because the U.S. inflation rate remains low. The inflation rate remains low because the value of the U.S. dollar is high. The dollar is strong because world commodity prices have fallen and have “driven up the dollar and held down U.S. import prices.”

According to the Financial Times, the last three items mentioned are interrelated. Furthermore, it now seems as if momentum is picking up within the Federal Reserve to postpone any increases in it policy rate for an extended period of time. That inaction may not be the best decision in terms of the relative strength of currencies.

According to this argument, the stock market should begin to fall because the Fed is raising interest rates

The key connector here seems to be the relationship between the value of the U.S. dollar and any action that the Federal Reserve might take on raising short-term interest rates.

The Fed is the only thing propping the stock market up – when, or if, it moves, there will be a crash, that will call bad debtors and impoverish entire social security systems. But things aren’t much better if they stay still, either. According to The Street:

[I]f the Fed does not raise its target policy rate, other countries will have to take further action to ease up further on their economic policies. The European Central Bank will extend its quantitative easing. The Bank of England will not raise its policy rates. The Peoples Bank of China will attempt to achieve further ease so that the renminbi will fall against the U.S. dollar.

In effect, this looks like a currency war, and the world cannot afford a currency war at this time.

The Federal Reserve needs to take these things into consideration in making their policy decisions. They are, after all, the global reserve currency and they cannot avoid the responsibilities that go along with this position.


If the Federal Reserve does not raise interest rates, the value of the US dollar will fall and this will have an impact on the commodity prices of emerging nations, causing import prices and U.S. inflation to rise.

How did the Federal Reserve get so much power over the American economy – and that of the world’s? There have been many stages of the theft which are too numerous to list, but which are generally well known to those familiar with its odious origins as a design by the banking cartel.

Started under conspiratorial circumstances back in 1913, the Federal Reserve has established itself as a private central bank for the country, though it is not part of the U.S. government. Since its inception, the Fed has driven the dollar down to just a fraction of its original value.


During the past century of Federal Reserve monetary reign, the wealth of Americans

Since the U.S. went off the gold standard under the shadow presidency of Henry Kissinger in 1971, the dollar has plummeted in status to a worthless piece of paper. Meanwhile, however, the dollar was the world reserve currency, and was the currency that traded for oil during a time of supply crisis, it has retained an accepted – and therefore valued – status so long as America dominated foreign policy (in part by managing more and more wars) and maintained its status.

The banksters operated the monetary and financial system that led the world by trading in petrodollars, and in turn, forced oil rich nations like Saudi Arabia to invest on Wall Street, as well as reluctant powers like Japan, who were forced to open up their markets to foreign investment during the oil crisis.

But now world power is shifting. The dollar is dying, and the Federal Reserve has become a leviathon that is too big to die, and too bloated to be effective. In its enormous capacity, it is facilitating the theft of TRILLIONS and TRILLIONS of dollars from the American people:

Americans face a further decline in their standard of living in all cases, market-wide conditions that the Fed alone can determine. Their wealth is rapidly evaporating.

If the Fed raises rates, the market will crash. On the otherhand, if it doesn’t raise rates, and continues indefinitely on its course of quantative easing, investors, middle class and working families, businesses, as well as pensions, benefit programs and insurance policies will also die a slow painful economic death.

Already things are hovering dangerously on edge, and squeezing in tightly.


Guess How Many Nations In The World Do Not Have A Central Bank?

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The Economic Collapse
by Michael Snyder


Central banking has truly taken over the entire planet.  At this point, the only major nation on the globe that does not have a central bank is North Korea.  Yes, there are some small island countries such as the Federated States of Micronesia that do not have a central bank, but even if you count them, more than 99.9% of the population of the world still lives in a country that has a central bank.  So how has this happened?  How have we gotten the entire planet to agree that central banking is the best system?  Did the people of the world willingly choose this?  Of course not.  To my knowledge, there has never been a single vote where the people of a nation have willingly chosen to establish a central bank.  Instead, what has happened is that central banks have been imposed on all of us.  All over the world, people have been told that monetary issues are “too important” to be subject to politics, and that the only solution is to have a group of unelected, unaccountable bankers control those things for us.

So precisely what does a central bank do?

You would be surprised at how few people can actually answer that question accurately.  The following is how Wikipedia describes what a central bank does…

A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency, which usually serves as the state’s legal tender. Examples include the European Central Bank (ECB), the Bank of England, the Federal Reserve of the United States and the People’s Bank of China.

In the United States, we are told that we have a free market system.  But in a true free market system, market forces would determine what interest rates are.  We wouldn’t need anyone to “set interest rates” for us.

And why have we given a private banking cartel (the Federal Reserve) the authority to create and manage our money supply?  The U.S. Constitution specifically delegates that authority to Congress.

It is not as if we actually need the Federal Reserve.  In fact, the greatest period of economic growth in U.S. history happened during the decades before the Federal Reserve was created.

Unfortunately, a little over 100 years ago our leaders decided that it would be best to turn over our financial future to a newly created private banking cartel that was designed by very powerful Wall Street interests.  Since that time, the value of our currency has diminished by more than 96 percent and our national debt has gotten more than 5000 times larger.

But despite all of the problems, the vast majority of Democrats and the vast majority of Republicans are not even willing to consider slightly curtailing the immense power of the Federal Reserve.  And the idea of getting rid of the Fed altogether is tantamount to blasphemy to most of our politicians.

Of course the same thing is true all over the planet.  Central banks are truly “the untouchables” of the modern world.  Even though everybody can see what they are doing, there has not been a single successful political movement anywhere on the globe (that I know about) to shut a central bank down.

Instead, in recent years we have just seen the reach of central banking just continue to expand.

For example, just look at what has happened to some of the countries that were not considered to be “integrated” into the “global community”…

-In 2001, the United States invaded Afghanistan.  In 2003, Da Afghanistan Bank (who picked that name?) was established by presidential decree.  You can find the official website of the bank right here.  Now Afghanistan has a modern central bank just like the rest of us.

-In 2003, the United States invaded Iraq.  In early 2004, the Central Bank of Iraq was established to manage the Iraqi currency and integrate Iraq into the global financial system.  The following comes from the official website of the Central Bank of Iraq

Following the deposition of Saddam Hussein in the 2003 invasion of Iraq, the Iraqi Governing Council and the Office for Reconstruction and Humanitarian Assistance began printing more Saddam dinar notes as a stopgap measure to maintain the money supply until new currency could be introduced.

The Banking Law was issued September 19, 2003. The law brings Iraq’s legal framework for banking in line with international standards, and seeks to promote confidence in the banking system by establishing a safe, sound, competitive and accessible banking system.

Between October 15, 2003 and January 15, 2004, the Coalition Provisional Authority issued new Iraqi dinar coins and notes, with the notes printed using modern anti-forgery techniques, to “create a single unified currency that is used throughout all of Iraq and will also make money more convenient to use in people’s everyday lives. Old banknotes were exchanged for new at a one-to-one rate, except for the Swiss dinars, which were exchanged at a rate of 150 new dinars for one Swiss dinar.

The Central Bank of Iraq (Arabic: البنك المركزي العراقي) was established as Iraq’s independent central bank by the Central Bank of Iraq Law of March 6, 2004

-In 2011, the United States bombed the living daylights out of Libya.  Before Muammar Gaddafi was even overthrown, the U.S. helped the rebels establish a new Central Bank of Libya and form a new national oil company.

Central banks are specifically designed to trap nations in debt spirals from which they can never possibly escape.  Today, the debt to GDP ratio for the entire planet is up to an all-time high record of 286 percent.  Humanity is being enslaved by a perpetual debt machine, but most people are not even aware that it is happening.

It is time for an awakening.  We need to educate as many people as possible about why we need to get rid of the central banks.  For those living in the United States, my previous article entitled “On The 100th Anniversary Of The Federal Reserve Here Are 100 Reasons To Shut It Down Forever” is a good place to start.  In other countries, we need people to write similar articles about their own central banks in their own languages.

The global elite dominate us because we allow them to dominate us.  Their debt-based system greatly enriches them while it enslaves the remainder of the planet.  We need to expose their evil system and the dark agenda behind it while we still have time.

The Economic Collapse

Anglo-American Money Owners Organized World War II (I)

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Strategic Culture
by Valentin KATASONOV

The war was not unleashed by frenzied Fuhrer who happened to be ruling Germany at the time. WWII is a project created by world oligarchy or Anglo-American “money owners”. Using such instruments as the US Federal Reserve System and the Bank of England they started to prepare for the next world conflict of global scale right after WWI. The USSR was the target.

The Dawes and Young Plans, the creation of Bank of International Settlements (BIS), the Germany’s suspension of reparations payments it had to pay according to Paris Peace Treaty and the acquiescence of Russia’s former allies in this decision, large-scale foreign investments into the economy of Third Reich, the militarization of German economy and the breaches of Paris Treaty provisions – they all were important milestones on the way of preparing the war.

There were key figures behind the plot: the Rockefellers, the Morgans, Lord Montagu Norman (the Governor of the Bank of England), HjalmarSchacht (President of the Reichsbank and Minister of Economics in the Hitler’s government).The strategic plan of Rockefellers and Morgans was to subjugate Europe economically, saturate Germany with foreign investments and credits and make it deliver a crushing blow against the Soviet Russia so that it would be returned into the world capitalist system as a colony.

Montagu Norman (1871 – 1950) played an important role of go-between to keep up a dialogue between American financial circles and Germany’s business leaders. HjalmarSchacht organized the revival of Germany’s defense sector of economy. The operation conducted by “money owners” was covered up by such politicians as Franklin Roosevelt, Neville Chamberlain and Winston Churchill. In Germany the plans were carried out by Hitler and HjalmarSchacht. Some historians say HjalmarSchacht played a more important role than Hitler. Simply Schacht kept away from spotlight.

The Dawes Plan was an attempt following World War I for the Triple Entente to compromise and collect war reparations debt from Germany. The Dawes Plan (as proposed by the Dawes Committee, chaired by Charles G. Dawes) was an attempt in 1924 to solve the reparations problem, which had bedeviled international politics following World War I and the Treaty of Versailles (France was reluctant to accept it got over 50% of reparations). In 1924-1929 Germany got $2, 5 billion from the United States and $ 1, 5 billion from Great Britain, according to Dawes Plan. In today’s prices the sum is huge, it is equal to $1 trillion of US dollars. HjalmarSchacht played an active role in the implementation of Dawes Plan. In 1929 he summed up the results, saying that in 5 years Germany got more foreign loans that the United States in the 40 years preceding WWI. As a result, in 1929 Germany became the world’s second largest industrial nation leaving Great Britain behind.

In the 1930s the process of feeding Germany with investments and credits continued. The Young Plan was a program for settling German reparations debts after World War I written in 1929 and formally adopted in 1930. It was presented by the committee headed (1929–30) by American industrialist Owen D. Young, creator and ex-first chairman of Radio Corporation of America (RCA), who, at the time, concurrently served at board of trustees of Rockefeller Foundation, and also had been one of representatives involved in previous war reparations restructuring arrangement – Dawes Plan of 1924. According to the plan, the Bank of International Settlements (BIS) was created in 1930 to make Germany pay reparations to victors. In reality the money flows went in quite a different direction – from the United States and Great Britain to Germany. The majority of strategically important German companies belonged to American capital or were partly under its control. Some of them belonged to British investors. German oil refinery and coal liquefaction sectors of economy belonged to Standard Oil (the Rockefellers). FarbenindustrieAG chemical industry major wasmoved under the control of the Morgan Group. 40% of telephone network and 30% of Focke Wulf shares belonged to American ITT. Radio and AEG, Siemens, Osram electrical industry majors moved under the control of American General Electric. ITT and General Electric were part of the Morgan’s empire. At least 100% of the Volkswagen shares belonged to American Ford. By the time Hitler came to power the US financial capital practically controlled all strategically important sectors of German industry: oil refining, synthetic fuel production, chemistry, car building, aviation, electrical engineering, radio industry, and a large part of machine-building (totally 278 companies). The leading German banks – Deutsche Bank, Dresdner Bank, Donat Bank and some others – were under US control.


On January 30, 1933 Hitler was named the Chancellor of Germany. Before that his candidacy had been thoroughly studied by American bankers. HjalmarSchacht went to the United States in the autumn of 1930 to discuss the nomination with American colleagues. The Hitler’s appointment was finally approved at a secret meeting of financiers in the United States. He spent the whole 1932 trying to convince the German bankers that Hitler was the right person for the position. He achieved the goal. In mid-November 1932 17 German largest bankers and industrialists sent a letter to President Hindenburg expressing their demand to make Hitler the Chancellor of Germany. The last working meeting of German financiers before the election was held on January 4, 1933 in Kölnat the home of banker Kurt von Schröder. After that the National Socialist Party came to power. As a result, the financial and economic ties of Germany with Anglo-Saxons elevated to a higher level.

Hitler immediately made an announcement that he refused to pay postwar reparations. It put into doubt the ability of England and France to pay off WWI debts to the United States. Washington did not object to the Hitler’s announcement. In May 1933 HjalmarSchacht paid another visit to the United States. There he met with President Franklin Roosevelt and big bankers to reach a $1 billion credit deal.In June the same year HjalmarSchacht visited London to hold talks with Montagu Norman. It all went down smoothly. The British agreed to grant a $2 billion loan. The British offered no objections related to the Germany’s decision to suspend debt payments.

Some historians say the American and British bankers were pliant because by 1932 the Soviet Union had fulfilled the 5-year economic development plan to make it achieve new heights as an industrial power. A few thousand enterprises were built, especially in the sector of heavy industry. The dependence of USSR on import of engineering production has greatly dwindled. The chances to strangle the Soviet Union economically were practically reduced to zero. They decided to rely on war and launched the runaway militarization of Germany.

It was easy for Germany to get American credits. By and large, Hitler came to power in his country at the same time as Franklin Roosevelt took office in the United States. The very same bankers who supported Hitler in 1931 supported Roosevelt at the presidential election. The newly elect President could not but endorse large credits to Germany. By the way, many noticed that there was a big similarity between the Roosevelt’s “New Deal Policy” and the economic policy of the German Third Reich. No wonder. The very same people worked out and consulted the both governments at the time. They mainly represented US financial circles.

The Roosevelt’s New Deal soon started to stumble on the way. In 1937 America plunged into the quagmire of economic crisis. In 1939 the US economy operated at 33% of its industrial capacity (it was 19% in the heat of the 1929-1933 crisis).

Rexford G. Tugwell, an economist who became part of Franklin Roosevelt’s first “Brain, a group of Columbia University academics who helped develop policy recommendations leading up to Roosevelt’s New Deal,wrote that in 1939 the government failed to reach any success.There was an open seatill the day Hitler invaded Poland.Only the mighty wind of war could dissipate the fog. Any other measures Roosevelt could take were doomed to failure. (1) Only the world war could save the US capitalism. In 1939 the money owners used all leverage at their disposal to put pressure of Hitler and make him unleash a big war in the east.

(To be continued)

(1) P.Tugwell, The Democratic Roosevelt, A Biography of Franklin D. Roosevelt, New York, 1957, p 477.

Strategic Culture

Meet The Secretive Group That Runs The World

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Zero Hedge

Over the centuries there have been many stories, some based on loose facts, others based on hearsay, conjecture, speculation and outright lies, about groups of people who “control the world.” Some of these are partially accurate, others are wildly hyperbolic, but when it comes to the historic record, nothing comes closer to the stereotypical, secretive group determining the fate of over 7 billion people, than the Bank of International Settlements, which hides in such plain sight, that few have ever paid much attention.

This is their story.

First unofficial meeting of the BIS Board of Directors in Basel, April 1930

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The following is an excerpt from TOWER OF BASEL: The Shadowy History of the Secret Bank that Runs the World by Adam LeBor.  Reprinted with permission from PublicAffairs.

The world’s most exclusive club has eighteen members. They gather every other month on a Sunday evening at 7 p.m. in conference room E in a circular tower block whose tinted windows overlook the central Basel railway station. Their discussion lasts for one hour, perhaps an hour and a half. Some of those present bring a colleague with them, but the aides rarely speak during this most confidential of conclaves. The meeting closes, the aides leave, and those remaining retire for dinner in the dining room on the eighteenth floor, rightly confident that the food and the wine will be superb. The meal, which continues until 11 p.m. or midnight, is where the real work is done. The protocol and hospitality, honed for more than eight decades, are faultless. Anything said at the dining table, it is understood, is not to be repeated elsewhere.

Few, if any, of those enjoying their haute cuisine and grand cru wines— some of the best Switzerland can offer—would be recognized by passers-by, but they include a good number of the most powerful people in the world. These men—they are almost all men—are central bankers. They have come to Basel to attend the Economic Consultative Committee (ECC) of the Bank for International Settlements (BIS), which is the bank for central banks. Its current members [ZH: as of 2013] include Ben Bernanke, the chairman of the US Federal Reserve; Sir Mervyn King, the governor of the Bank of England; Mario Draghi, of the European Central Bank; Zhou Xiaochuan of the Bank of China; and the central bank governors of Germany, France, Italy, Sweden, Canada, India, and Brazil. Jaime Caruana, a former governor of the Bank of Spain, the BIS’s general manager, joins them.

In early 2013, when this book went to press, King, who is due to step down as governor of the Bank of England in June 2013, chaired the ECC. The ECC, which used to be known as the G-10 governors’ meeting, is the most influential of the BIS’s numerous gatherings, open only to a small, select group of central bankers from advanced economies. The ECC makes recommendations on the membership and organization of the three BIS committees that deal with the global financial system, payments systems, and international markets. The committee also prepares proposals for the Global Economy Meeting and guides its agenda.

That meeting starts at 9:30 a.m. on Monday morning, in room B and lasts for three hours. There King presides over the central bank governors of the thirty countries judged the most important to the global economy. In addition to those who were present at the Sunday evening dinner, Monday’s meeting will include representatives from, for example, Indonesia, Poland, South Africa, Spain, and Turkey. Governors from fifteen smaller countries, such as Hungary, Israel, and New Zealand are allowed to sit in as observers, but do not usually speak. Governors from the third tier of member banks, such as Macedonia and Slovakia, are not allowed to attend. Instead they must forage for scraps of information at coffee and meal breaks.

The governors of all sixty BIS member banks then enjoy a buffet lunch in the eighteenth-floor dining room. Designed by Herzog & de Meuron, the Swiss architectural firm which built the “Bird’s Nest” Stadium for the Beijing Olympics, the dining room has white walls, a black ceiling and spectacular views over three countries: Switzerland, France, and Germany. At 2 p.m. the central bankers and their aides return to room B for the governors’ meeting to discuss matters of interest, until the gathering ends at 5.

King takes a very different approach than his predecessor, Jean-Claude Trichet, the former president of the European Central Bank, in chairing the Global Economy Meeting. Trichet, according to one former central banker, was notably Gallic in his style: a stickler for protocol who called the central bankers to speak in order of importance, starting with the governors of the Federal Reserve, the Bank of England, and the Bundesbank, and then progressing down the hierarchy. King, in contrast, adopts a more thematic and egalitarian approach: throwing open the meetings for discussion and inviting contributions from all present.

The governors’ conclaves have played a crucial role in determining the world’s response to the global financial crisis. “The BIS has been a very important meeting point for central bankers during the crisis, and the rationale for its existence has expanded,” said King. “We have had to face challenges that we have never seen before. We had to work out what was going on, what instruments do we use when interest rates are close to zero, how do we communicate policy. We discuss this at home with our staff, but it is very valuable for the governors themselves to get together and talk among themselves.”

Those discussions, say central bankers, must be confidential. “When you are at the top in the number one post, it can be pretty lonely at times. It is helpful to be able to meet other number ones and say, ‘This is my problem, how do you deal with it?’King continued. “Being able to talk informally and openly about our experiences has been immensely valuable. We are not speaking in a public forum. We can say what we really think and believe, and we can ask questions and benefit from others.”

The BIS management works hard to ensure that the atmosphere is friendly and clubbable throughout the weekend, and it seems they succeed. The bank arranges a fleet of limousines to pick up the governors at Zürich airport and bring them to Basel. Separate breakfasts, lunches, and dinners are organized for the governors of national banks who oversee different types and sizes of national economies, so no one feels excluded. “The central bankers were more at home and relaxed with their fellow central bankers than with their own governments,” recalled Paul Volcker, the former chairman of the US Federal Reserve, who at- tended the Basel weekends. The superb quality of the food and wine made for an easy camaraderie, said Peter Akos Bod, a former governor of the National Bank of Hungary. “The main topics of discussion were the quality of the wine and the stupidity of finance ministers. If you had no knowledge of wine you could not join in the conversation.”

And the conversation is usually stimulating and enjoyable, say central bankers. The contrast between the Federal Open Markets Committee at  the US Federal Reserve, and the Sunday evening G-10 governors’ dinners was notable, recalled Laurence Meyer, who served as a member of the Board of Governors of the Federal Reserve from 1996 until 2002. The chairman of the Federal Reserve did not always represent the bank at the Basel meetings, so Meyer occasionally attended. The BIS discussions were always lively, focused and thought provoking. “At FMOC meetings, while I was at the Fed, almost all the Committee members read statements which had been prepared in advance. They very rarely referred to statements by other Committee members and there was almost never an exchange between two members or an ongoing discussion about the outlook or policy options. At BIS dinners people actually talk to each other and the discussions are always stimulating and interactive focused on the serious issues facing the global economy.”

All the governors present at the two-day gathering are assured of total confidentiality, discretion, and the highest levels of security. The meetings take place on several floors that are usually used only when the governors are in attendance. The governors are provided with a dedicated office and the necessary support and secretarial staff. The Swiss authorities have no juridisdiction over the BIS premises. Founded by an international treaty, and further protected by the 1987 Headquarters Agreement with the Swiss government, the BIS enjoys similar protections to those granted to the headquarters of the United Nations, the International Monetary Fund (IMF) and diplomatic embassies. The Swiss authorities need the permission of the BIS management to enter the bank’s buildings, which are described as “inviolable.”

The BIS has the right to communicate in code and to send and receive correspondence in bags covered by the same protection as embassies, meaning they cannot be opened. The BIS is exempt from Swiss taxes. Its employees do not have to pay income tax on their salaries, which are usually generous, designed to compete with the private sector. The general man- ager’s salary in 2011 was 763,930 Swiss francs, while head of departments were paid 587,640 per annum, plus generous allowances. The bank’s extraordinary legal privileges also extend to its staff and directors. Senior managers enjoy a special status, similar to that of diplomats, while carrying out their duties in Switzerland, which means their bags cannot be searched (unless there is evidence of a blatant criminal act), and their papers are inviolable. The central bank governors traveling to Basel for the bimonthly meetings enjoy the same status while in Switzerland. All bank officials are immune under Swiss law, for life, for all the acts carried out during the discharge of their duties. The bank is a popular place to work and not just because of the salaries. Around six hundred staff come from over fifty countries. The atmosphere is multi-national and cosmopolitan, albeit very Swiss, emphasizing the bank’s hierarchy. Like many of those working for the UN or the IMF, some of the staff of the BIS, especially senior management, are driven by a sense of mission, that they are working for a higher, even celestial purpose and so are immune from normal considerations of accountability and transparency.

The bank’s management has tried to plan for every eventuality so that the Swiss police need never be called. The BIS headquarters has high-tech sprinkler systems with multiple back-ups, in-house medical facilities, and its own bomb shelter in the event of a terrorist attack or armed conflagration. The BIS’s assets are not subject to civil claims under Swiss law and can never be seized.

The BIS strictly guards the bankers’ secrecy. The minutes, agenda, and actual attendance list of the Global Economy Meeting or the ECC are not released in any form. This is because no official minutes are taken, although the bankers sometimes scribble their own notes. Sometimes there will be a brief press conference or bland statement afterwards but never anything detailed. This tradition of privileged confidentiality reaches back to the bank’s foundation.

“The quietness of Basel and its absolutely nonpolitical character provide a perfect setting for those equally quiet and nonpolitical gatherings,” wrote one American official in 1935. “The regularity of the meetings and their al- most unbroken attendance by practically every member of the Board make them such they rarely attract any but the most meager notice in the press.”8 Forty years on, little had changed. Charles Coombs, a former foreign exchange chief of the New York Federal Reserve, attended governors’ meetings from 1960 to 1975. The bankers who were allowed inside the inner sanctum of the governors’ meetings trusted each other absolutely, he recalled in his memoirs. “However much money was involved, no agreements were ever signed nor memoranda of understanding ever initialized. The word of each official was sufficient, and there were never any disappointments.”

What, then, does this matter to the rest of us? Bankers have been gathering confidentially since money was first invented. Central bankers like to view themselves as the high priests of finance, as technocrats overseeing arcane monetary rituals and a financial liturgy understood only by a small, self-selecting elite.

But the governors who meet in Basel every other month are public servants. Their salaries, airplane tickets, hotel bills, and lucrative pensions when they retire are paid out of the public purse. The national reserves held by central banks are public money, the wealth of nations. The central bankers’ discussions at the BIS, the information that they share, the policies that are evaluated, the opinions that are exchanged, and the subsequent decisions that are taken, are profoundly political. Central bankers, whose independence is constitutionally protected, control monetary policy in the developed world. They manage the supply of money to national economies. They set interest rates, thus deciding the value of our savings and investments. They decide whether to focus on austerity or growth. Their decisions shape our lives.

The BIS’s tradition of secrecy reaches back through the decades. During the 1960s, for example, the bank hosted the London Gold Pool. Eight countries pledged to manipulate the gold market to keep the price at around thirty-five dollars per ounce, in line with the provisions of the Bretton Woods Accord that governed the post–World War II international financial system. Although the London Gold Pool no longer exists, its successor is the BIS Markets Committee, which meets every other month on the occasion of the governors’ meetings to discuss trends in the financial markets. Officials from twenty-one central banks attend. The committee releases occasional papers, but its agenda and discussions remain secret.

Nowadays the countries represented at the Global Economy Meetings together account for around four-fifths of global gross domestic product (GDP)— most of the produced wealth of the world—according to the BIS’s own statistics. Central bankers now “seem more powerful than politicians,” wrote The Economist newspaper, “holding the destiny of the global economy in their hands.” How did this happen? The BIS, the world’s most secretive global financial institution, can claim much of the credit. From its first day of existence, the BIS has dedicated itself to furthering the interests of central banks and building the new architecture of transnational finance. In doing so, it has spawned a new class of close-knit global technocrats whose members glide between highly-paid positions at the BIS, the IMF, and central and commercial banks.

The founder of the technocrats’ cabal was Per Jacobssen, the Swedish economist who served as the BIS’s economic adviser from 1931 to 1956. The bland title belied his power and reach. Enormously influential, well connected, and highly regarded by his peers, Jacobssen wrote the first BIS annual reports, which were—and remain—essential reading throughout the world’s treasuries. Jacobssen was an early supporter of European federalism. He argued relentlessly against inflation, excessive government spending, and state intervention in the economy. Jacobssen left the BIS in 1956 to take over the IMF. His legacy still shapes our world. The consequences of his mix of economic liberalism, price obsession, and dismantling of national sovereignty play out nightly in the European news bulletins on our television screens.

The BIS’s defenders deny that the organization is secretive. The bank’s archives are open and researchers may consult most documents that are more than thirty years old. The BIS archivists are indeed cordial, helpful, and professional. The bank’s website includes all its annual reports, which are downloadable, as well as numerous policy papers produced by the bank’s highly regarded research department. The BIS publishes detailed accounts of the securities and derivatives markets, and international banking statistics. But these are largely compilations and analyses of information already in the public domain. The details of the bank’s own core activities, including much of its banking operations for its customers, central banks, and international organizations, remain secret. The Global Economy Meetings and the other crucial financial gatherings that take place at Basel, such as the Markets Committee, remain closed to outsiders. Private individuals may not hold an account at BIS, unless they work for the bank. The bank’s opacity, lack of accountability, and ever-increasing influence raises profound questions— not just about monetary policy but transparency, accountability, and how power is exercised in our democracies.

* * *

WHEN I EXPLAINED to friends and acquaintances that I was writing a book about the Bank for International Settlements, the usual response was a puzzled look, followed by a question: “The bank for what?” My interlocutors were intelligent people, who follow current affairs. Many had some interest in and understanding of the global economy and financial crisis. Yet only a handful had heard of the BIS. This was strange, as the BIS is the most important bank in the world and predates both the IMF and the World Bank. For decades it has stood at the center of a global network of money, power, and covert global influence.

The BIS was founded in 1930. It was ostensibly set up as part of the Young Plan to administer German reparations payments for the First World War. The bank’s key architects were Montagu Norman, who was the governor of the Bank of England, and Hjalmar Schacht, the president of the Reichsbank who described the BIS as “my” bank. The BIS’s founding members were the central banks of Britain, France, Germany, Italy, Belgium, and a consortium of Japanese banks. Shares were also offered to the Federal Reserve, but the United States, suspicious of anything that might infringe on its national sovereignty, refused its allocation. Instead a consortium of commercial banks took up the shares: J. P. Morgan, the First National Bank of New York, and the First National Bank of Chicago.

The real purpose of the BIS was detailed in its statutes: to “promote the cooperation of central banks and to provide additional facilities for international financial operations.” It was the culmination of the central bankers’ decades-old dream, to have their own bank—powerful, independent, and free from interfering politicians and nosy reporters. Most felicitous of all, the BIS was self-financing and would be in perpetuity. Its clients were its own founders and shareholders— the central banks. During the 1930s, the BIS was the central meeting place for a cabal of central bankers, dominated by Norman and Schacht. This group helped rebuild Germany. The New York Times described Schacht, widely acknowledged as the genius behind the resurgent German economy, as “The Iron-Willed Pilot of Nazi Finance.” During the war, the BIS became a de-facto arm of the Reichsbank, accepting looted Nazi gold and carrying out foreign exchange deals for Nazi Germany.

The bank’s alliance with Berlin was known in Washington, DC, and London. But the need for the BIS to keep functioning, to keep the new channels of transnational finance open, was about the only thing all sides agreed on. Basel was the perfect location, as it is perched on the northern edge of Switzerland and sits al- most on the French and German borders. A few miles away, Nazi and Allied soldiers were fighting and dying. None of that mattered at the BIS. Board meetings were suspended, but relations between the BIS staff of the belligerent nations remained cordial, professional, and productive. Nationalities were irrelevant. The overriding loyalty was to international finance. The president, Thomas McKittrick, was an American. Roger Auboin, the general manager, was French. Paul Hechler, the assistant general manager, was a member of the Nazi party and signed his correspondence “Heil Hitler.” Rafaelle Pilotti, the secretary general, was Italian. Per Jacobssen, the bank’s influential economic adviser, was Swedish. His and Pilotti’s deputies were British.

After 1945, five BIS directors, including Hjalmar Schacht, were charged with war crimes. Germany lost the war but won the economic peace, in large part thanks to the BIS. The international stage, contacts, banking networks, and legitimacy the BIS provided, first to the Reichsbank and then to its successor banks, has helped ensure the continuity of immensely powerful financial and economic interests from the Nazi era to the present day.

* * *

FOR THE FIRST forty-seven years of its existence, from 1930 to 1977, the BIS was based in a former hotel, near the Basel central railway station. The bank’s entrance was tucked away by a chocolate shop, and only a small notice confirmed that the narrow doorway opened into the BIS. The bank’s managers believed that those who needed to know where the BIS was would find it, and the rest of the world certainly did not need to know. The inside of the building changed little over the decades, recalled Charles Coombs. The BIS provided the “the spartan accommodations of a former Victorian-style hotel whose single and double bedrooms had been transformed into offices simply by removing the beds and installing desks.”

The bank moved into its current headquarters, at 2, Centralbahnplatz, in 1977. It did not go far and now overlooks the Basel central station. Nowadays the BIS’s main mission, in its own words, is threefold: “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in these areas, and to act as a bank for central banks.” The BIS also hosts much of the practical and technical infrastructure that the global network of central banks and their commercial counterparts need to function smoothly. It has two linked trading rooms: at the Basel headquarters and Hong Kong regional office. The BIS buys and sells gold and foreign exchange for its clients. It provides asset management and arranges short-term credit to central banks when needed.

The BIS is a unique institution: an international organization, an extremely profitable bank and a research institute founded, and protected, by international treaties. The BIS is accountable to its customers and shareholdersthe central banks—but also guides their operations. The main tasks of a central bank, the BIS argues, are to control the flow of credit and the volume of currency in circulation, which will ensure a stable business climate, and to keep exchange rates within manageable bands to ensure the value of a currency and so smooth international trade and capital movements. This is crucial, especially in a globalized economy, where markets react in microseconds and perceptions of economic stability and value are almost as important as reality itself.

The BIS also helps to supervise commercial banks, although it has no legal powers over them. The Basel Committee on Banking Supervision, based at the BIS, regulates commercial banks’ capital and liquidity requirements. It requires banks to have a minimum capital of eight percent of risk-weighted assets when lending, meaning that if a bank has risk-weighted assets of $100 million it must maintain at least $8 million capital. The committee has no powers of enforcement, but it does have enormous moral authority. “This regulation is so powerful that the eight percent principle has been set into national laws,” said Peter Akos Bod. “It’s like voltage. Voltage has been set at 220. You may decide on ninety-five volts, but it would not work.” In theory, sensible housekeeping and mutual cooperation, overseen by the BIS, will keep the global financial system functioning smoothly. In theory.

The reality is that we have moved beyond recession into a deep structural crisis, one fueled by the banks’ greed and rapacity, which threatens all of our financial security. Just as in the 1930s, parts of Europe face economic collapse. The Bundesbank and the European Central Bank, two of the most powerful members of the BIS, have driven the mania for austerity that has already forced one European country, Greece, to the edge, aided by the venality and corruption of the country’s ruling class. Others may soon follow. The old order is creaking, its political and financial institutions corroding from within. From Oslo to Athens, the far right is resurgent, fed in part by soaring poverty and unemployment. Anger and cynicism are corroding citizens’ faith in democracy and the rule of law. Once again, the value of property and assets is vaporizing before their owners’ eyes. The European currency is threatened with breakdown, while those with money seek safe haven in Swiss francs or gold. The young, the talented, and the mobile are again fleeing their home countries for new lives abroad. The powerful forces of international capital that brought the BIS into being, and which granted the bank its power and influence, are again triumphant.

The BIS sits at the apex of an international financial system that is falling apart at the seams, but its officials argue that it does not have the power to act as an international financial regulator. Yet the BIS cannot escape its responsibility for the Euro-zone crisis. From the first agreements in the late 1940s on multilateral payments to the establishment of the Europe Central Bank in 1998, the BIS has been at the heart of the European integration project, providing technical expertise and the financial mechanisms for currency harmonization. During the 1950s, it managed the European Payments Union, which internationalized the continent’s payment system. The BIS hosted the Governors’ Committee of European Economic Community central bankers, set up in 1964, which coordinated trans-European monetary policy. During the 1970s, the BIS ran the “Snake,” the mechanism by which European currencies were held in exchange rate bands. During the 1980s the BIS hosted the Delors Committee, whose report in 1988 laid out the path to European Monetary Union and the adoption of a single currency. The BIS midwifed the European Monetary Institute (EMI), the precursor of the European Central Bank. The EMI’s president was Alexandre Lamfalussy, one of the world’s most influential economists, known as the “Father of the euro.” Before joining the EMI in 1994, Lamfalussy had worked at the BIS for seventeen years, first as economic adviser, then as the bank’s general manager.

For a staid, secretive organization, the BIS has proved surprisingly nimble. It survived the first global depression, the end of reparations payments and the gold standard (two of its main reasons for existence), the rise of Nazism, the Second World War, the Bretton Woods Accord, the Cold War, the financial crises of the 1980s and 1990s, the birth of the IMF and World Bank, and the end of Communism. As Malcolm Knight, manager from 2003–2008, noted, “It is encouraging to see that—by remaining small, flexible, and free from political interference—the Bank has, throughout its history, succeeded remarkably well in adapting itself to evolving circumstances.”

The bank has made itself a central pillar of the global financial system. As well as the Global Economy Meetings, the BIS hosts four of the most important international committees dealing with global banking: the Basel Committee on Banking Supervision, the Committee on the Global Financial System, the Committee on Payment and Settlement Systems, and the Irving Fisher Committee, which deals with central banking statistics. The bank also hosts three independent organizations: two groups dealing with insurance and the Financial Stability Board (FSB). The FSB, which coordinates national financial authorities and regulatory policies, is already being spoken of as the fourth pillar of the global financial system, after the BIS, the IMF and the commercial banks.

The BIS is now the world’s thirtieth-largest holder of gold reserves, with 119 metric tons—more than Qatar, Brazil, or Canada. Membership of the BIS remains a privilege rather than a right. The board of directors is responsible for admitting central banks judged to “make a substantial contribution to international monetary cooperation and to the Bank’s activities.” China, India, Russia, and Saudi Arabia joined only in 1996. The bank has opened offices in Mexico City and Hong Kong but remains very Eurocentric. Estonia, Latvia, Lithuania, Macedonia, Slovenia, and Slovakia (total population 16.2 million) have been admitted, while Pakistan (population 169 million) has not. Nor has Kazakhstan, which is a powerhouse of Central Asia. In Africa only Algeria and South Africa are members—Nigeria, which has the continent’s second-largest economy, has not been admitted. (The BIS’s defenders say that it demands high governance standards from new members and when the national banks of countries such as Nigeria and Pakistan reach those standards, they will be considered for membership.)

Considering the BIS’s pivotal role in the transnational economy, its low profile is remarkable. Back in 1930 a New York Times reporter noted that the culture of secrecy at the BIS was so strong that he was not permitted to look inside the boardroom, even after the directors had left. Little has changed. Journalists are not allowed inside the headquarters while the Global Economy Meeting is underway. BIS officials speak rarely on the record, and reluctantly, to members of the press. The strategy seems to work. The Occupy Wall Street movement, the anti-globalizers, the social network protesters have ignored the BIS. Centralbahnplatz 2, Basel, is quiet and tranquil. There are no demonstrators gathered outside the BIS’s headquarters, no protestors camped out in the nearby park, no lively reception committees for the world’s central bankers.

As the world’s economy lurches from crisis to crisis, financial institutions are scrutinized as never before. Legions of reporters, bloggers, and investigative journalists scour the banks’ every move. Yet somehow, apart from brief mentions on the financial pages, the BIS has largely managed to avoid critical scrutiny. Until now.

Zero Hedge

Dollar’s Direction Falters On Fed Worries

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by Roger Blitz

Andy Warhol painting
A visitor to Mexico City’s Bellas Artes Museum walks between two Andy Warhol “Dollar Sign” paintings August 24. The two paintings are part of the first ever Andy Warhol exhibition in Latin America. Warhol’s art is back in fashion, according to museum director Agustin Arteaga, as similar retrospective exhibitions are being held this year in several cities around the world.

Four words in this week’s US Federal Reserve policy statement triggered a remarkable 24-hour rollercoaster for the dollar.

“Export growth has weakened,” said the central bank, in a veiled reference to how the sustained appreciation of the currency since last summer has weighed on the economy.

Although the Fed rarely chooses to discuss the currency, Janet Yellen, chairwoman, also referred to dollar strength during her press conference after the statement was published.

That one-two punch drove the dollar sharply lower on Wednesday, with the euro, which has depreciated 13 per cent since the start of the year, on track for its best weekly gain since October 2011.

A 25 per cent rise in the dollar over the past year may well give way to a period of far choppier trading that challenges investors, especially those betting on further gains for the greenback. With the US central bank voicing its worries about a strong dollar and signalling that this could delay monetary tightening, investors are likely to face a tougher trading environment in the currency market.

The strength of the dollar and ramifications for Fed policy have been bubbling away for a while. When ex-Fed chairman Ben Bernanke was guest of honour at a recent private investment forum hosted at Pimco, the bond fund management firm’s staff peppered him with questions about the central bank’s likely approach to the strengthening dollar.

Surging dollar appreciation globally has triggered growing unease among US equity investors as numerous multinational companies have revealed lower profits from their foreign operations.

That became apparent during this week’s Fed press conference. In addition to worries about exports, Ms Yellen said import prices had restrained inflation, and “in light of the recent appreciation of the dollar, will likely continue to do so in the months ahead”.

Rich Clarida, global strategic adviser at Pimco, says: “Until now, with markets romancing the idea of quantitative easing in Europe and Japan, you have had a one-way move in the dollar. The new element is that this is the first time the Fed, through its jawboning, has signalled that the currency move is on its radar.”

While the Fed statement and Ms Yellen played down the prospect of a rate rise in June, dollar bulls quickly capitalised on a knee-jerk bout of weakness.

After falling 2.5 per cent against the euro on Wednesday, the dollar roared back 24 hours later, reversing those losses. This whipsaw trading between the dollar and euro highlights how volatility is picking up across the currency market.

“You have to go back a long time to get to anything like that level of volatility,” says Simon Derrick, strategist at BNY Mellon. “To go from $1.06 to $1.10 [in one session] — that was ‘wow’.”

Marc Chandler, global currency strategist at Brown Brothers Harriman and a long-time dollar bull, says it was an opportunity that long-dollar advocates could not pass up.

“Long and medium-term dollar investors are still very dollar bullish,” he says. “Whether the Fed raises [rates] in June or September is not such a big deal.”

But some long-dollar traders have begun shifting their strategy and on Friday the euro was rising fast. Ugo Lancioni of asset manager Neuberger Berman says the group has been long on the dollar since last year but has become more neutral.

One reason, he says, is that divergence is now priced into the greenback. “Investors jumped on the dollar story on the back of expecting divergence, which is a powerful story, but which has played out,” he says.

“Given that the dollar is doing some of the tightening for the Fed, will that momentum of the divergence story continue?”

That view is shared by longstanding dollar-bull proponents at HSBC who say the dollar rally is nearing its end.

“Tell me something I don’t know,” says Daragh Maher of HSBC about the divergence argument. “There’s no one out there who isn’t aware the Fed wants to raise rates. We are in the autopilot phase.”

There are other reasons to believe that the dollar bull case has run its course, says HSBC.

The dollar has already moved a long way, more than in other historical dollar rallies; the dollar is the world’s second most overvalued currency (behind the Swiss franc); the markets are ignoring both disappointing US economic data and surprisingly good numbers from eurozone economies; positioning is so stretched that there appears no resistance to dollar bulls; and historically the dollar tends to fall after the US raises interest rates.

Mr Chandler disagrees. In dollar rallies of the 1980s and 1990s, the euro or its equivalent halved, he says.

History will repeat itself, he says. “It peaked at $1.60 back in 2008 and ever since that peak my technical models and fundamental views became much more dollar-bullish.

“It has been a long slog since then . . . but I’m convinced that the euro is going back down to test those historic lows at about half the value of its peak.”


Dollar Demand = Global Economy Has Skidded Over The Cliff

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by Charles Hugh-Smith

Borrowing in USD was risk-on; buying USD is risk-off.

There is a lively debate about the global demand for U.S. dollars:

Correspondent Mark G. went through the BIS report and offered these insightful comments:
“Unless you enjoy multivariate regression analysis I suggest skimming the BIS working paper. Major points I got were:
1. Almost all of the dollar denominated debt and bond growth since 2009 was generated by the global shadow banking system. Banks per se were smaller players in issuing this debt, and US-based banks (i.e. the ones in reach of Federal Reserve life preservers) were minor. Sovereign wealth funds are large players in this. When we think of huge sovereign wealth funds held by major hydrocarbon exporters then the pucker factor rises.
One implied result of the BIS paper is that it will be extremely difficult or impossible for Federal Reserve emergency liquidity operations to stem a panic, even if the Fed is inclined to do so. AEP in the Telegraph article stated this more directly. The real problem is that modern bailout operations have large fiscal components as well as monetary components. Looking at the Bundestag’s chronic heartburn with Greece and the EFSF is educational. Alternatively, consider how well proposals for a larger TARP type program aimed primarily at foreign entities would be received by the US Congress. And especially in 2016.
2. A major revelation was that $1 trillion of the dollarized lending went into Chinese companies. However the authors claim most of this lending was through Chinese banks.
3. “Emerging Markets” again account for 1/2 of the total offshore dollarized loans and bonds. This is $4.5 trillion and mainly centered in Brazil, Russia, India, China, etc.
4. From page 20:
“Fourth, since the crisis, the Federal Reserve’s compression of term premia via its bond buying has led to a surge in US dollar borrowing through bond markets. Time-varying regressions and VARanalysis also indicate that inflows into bond mutual funds played a significant role in transmitting monetary ease, giving evidence of the portfolio rebalancing channel of the Federal Reserve large-scale bond purchases. In particular, given the low expected returns of holding US Treasury bonds (in relation to expected short-term rates), investors have sought out and found dollar bond issuers outside the US, many rated BBB and thus offering a welcome credit spread.”
These dollarized bond funds were the “conservative” play for those players unwilling to also assume exchange rate risk.
“BBB…” This is already the S&P/Fitch ground floor of “investment grade.” And that was the rating assigned to these foreign issuers during a time of free money and bubble expansion. We already know the bulk of bond mutual fund buyers are institutions. And many are required to flush any paper that falls below investment grade. And being ‘smart money’ they will have tried to hedge their risks against such a ‘Credit Event’ with credit default swaps (CDS).
We also know that CDS contracts typically require the CDS writer to begin posting progressively higher amounts of cash collateral as the credit outlook darkens for the underlying instrument. For instance, even if S&P/Fitch merely change the outlook from ‘positive’ to ‘neutral’ the required posted collateral percentage rises. And again from neutral to negative and so forth.
In the case of dollar loans and bonds the collateral needs to be in dollars. Therefore even if the CDS writer manages to borrow Euros with wet ink they still have to exchange these for dollars. See USD/Euro FX trend for the result.”

Thank you, Mark, for the detailed analysis. Here are my initial thoughts:

1. Currencies respond to supply and demand like any other commodity. As such, it’s instructive to to look at the supply of U.S. dollars and see how it’s changed since 2008:money supply (Wikipedia)
2. However you measure money supply, the supply of dollars hasn’t risen by much: MZM Money Stock has risen $2 trillion since 2010, Adjusted Monetary Base rose from $1 trillion to $3 trillion, and M2 Money Stock from around $8 trillion to around $10 trillion.
To put that roughly $2 trillion increase in money supply in context:
The GDP of the U.S. is about $17 trillion.
Global GDP is around $72 trillion.
Global debt rose $57 trillion from 2007 to 2014:
3. If there is demand for $9 trillion USD, that dwarfs the increase in US money supply. It also dwarfs the expansion in the Federal Reserve’s balance sheet, roughly $3.5 trillion since 2008.
4. Borrowing in U.S. dollars was the easy, profitable trade as long as the dollar was declining. Traders being traders, everybody jumped into the easy, profitable trade with all four feet. Now that the dollar has reversed, everyone who is holding debt in dollars is losing money every time the USD ticks higher.
5. Much of the shadow banking system is opaque, and assumptions made about the outstanding debt in USD are likely to be not just wrong but grossly under-estimated. See #2 above.
If you wanted a trade that was guaranteed to blow up, you couldn’t do much better than “dollar bond issuers outside the US, many rated BBB.” As Mark noted, once this gunwales-at-sea-level debt gets downgraded a notch, institutional owners will be obligated to sell, regardless of any other conditions. Selling will beget selling.
6. U.S. Treasuries are essentially the only super-liquid safe haven offering a yield above 1%. And what do you need to buy Treasuries? U.S. dollars. The point here is the demand for USD is not limited to those scrambling for USD to pay off dollar-denominated debt–it’s a global consequence of the global economy skidding off the cliff into recession.
Borrowing in USD was risk-on; buying USD is risk-off. As the real global economy slips into recession, risk-on trades in USD-denominated debt are blowing up and those seeking risk-off liquidity and safe yields are scrambling for USD-denominated assets.
It’s important to recall that buyers of U.S. Treasuries are getting not just the 2+% yield– they’re getting the capital appreciation from the USD rising against their home currency. Depending on the home currency, those who dumped their home currency and bought USD last summer have gained 17% to 25%, even if they received 0% yield.
Add all this up and we have to conclude that, in terms of demand for USD–you ain’t seen nuthin’ yet.



The Rise and the Fall of the US Dollar? Fiat Currencies are “Terminal”

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Global Research
By Bill Holter


We have watched, even marveled at how the U.S. dollar has strengthened since last September.  All sorts of theories have been put forth as to “why”.  Some have proffered the dollar is the cleanest dirty shirt of the bunch.  Others believe the interest rate differential is kicking in where dollars at least have a positive interest rate versus negative rates elsewhere. 

Another theory and one which I have written about in the past and believe to be the main reason for dollar strength is the “margin call” aspect.  In other words, the “carry trade” which was used to leverage all sorts of trades is unwinding and dollars are needed to pay back the loans.  A synthetic dollar short being covered in other words.

 Looking back to my writing yesterday regarding the impossibility in my mind of the Fed actually raising rates, the strong dollar also supports this argument.  If the Fed were to raise rates, wouldn’t this exacerbate an already immense currency cross problem with (for) the rest of the world?  Wouldn’t higher U.S. rates explode the dollar higher (short term) versus foreign currencies?  The answer of course is yes, but with a stronger dollar comes other obvious problems.

The two biggest problems are

A.  we still have a trade deficit of close to $500 billion per year, a stronger dollar will only exacerbate this AND destroy what little manufacturing we have left.

B.  the very problems we just saw with a soaring Swiss franc will be seen in many multiples throughout the dollar lending market.

I might add, as the dollar moves higher and foreign currencies drop, more and much stronger inflation gets exported to foreign soil.  High and rising inflation and its effects on living standards and the human psyche will create massive unrest across Europe and elsewhere.

  This last point is an important one, foreigners who have borrowed in dollars have already seen their “loan balance” expand because the dollars cost more to pay back.  Higher U.S. interest rates will only make matters worse.  The strong dollar has had the effect of slowing the global economy as companies (and individuals) are cutting back (employment and consumption) to make ends meet.

The above is only half of the equation, the other half is described by Alan Greenspan himself.  I personally watched Mr. Greenspan speak in New Orleans last October.  He used the word “tinder” http://www.zerohedge.com/news/2015-03-09/alan-greenspan-warns-explosive-inflation-tinderbox-looking-spark  for a coming inflation several times and spoke of the money supply and reserves of dollars that have been created and parked away on bank balance sheets.  I could only think back to the Texas wildfire as he spoke of “tinder”.  The amount of dollars created is like some nutcase piling dry leaves, branches and dead trees in a huge pile, then pouring gasoline on it …and thinking to himself, “this will keep me warm in winter”.  In other words, the “fuel” is there and has already been created for a bonfire of inflation and the financial system blowing up on itself.  But don’t worry, it will never catch fire?

  Tying these two phenomena together, not enough dollars, yet too many, here is the likely scenario I can see unfolding.

The stronger dollar is putting pressure on the financial system all over the world, something (someone), somewhere is going to “fail”.  Our financial system is so interconnected and over levered, it will only take one strategic institution’s failure to break the derivatives daisy chain.

Let’s call this the “spark”.  This spark causes further failures which I am convinced will circle the globe in less than two days.  The forest (economy and financial system) is very dry (weak, fragile), any spark (failure) will create an out of control forest fire which will not be put out until all the fuel is burned and blackened.

 Please remember this, the dollar (and Treasuries) are now “backed” by the full faith and credit of the United States.  This was not the case back in the 1930′s, dollars were backed by gold.  The Treasury did not have enough gold to back all of the dollars but for a very large percentage of those outstanding.  This is not even close to the case today.  It remains to be seen if there is any gold at all left but, assuming the gold is left untouched, gold would need to be priced at $100,000+ per ounce to cover our debt and money supply.  I bring this up because ”gold will still be gold” no matter what happens financially.   Hold this thought, it ties in with the final logic.

The stronger dollar is beginning to cause stress both financially and economically.  It is not “official” yet but even with bogus reporting, the West is already in  recession while the East is markedly slowing down.  This brings up a few questions.  With a slowing or declining economy, will the Treasury have the tax revenues to pay total interest and support all of the other largesse?

Of course not, we will just borrow whatever is necessary to keep going on down the road.

 What about higher interest rates, will this exacerbate the problem?

Of course.  Tax revenues will drop, “benefits” or spending will rise as will the deficit…and now the federal debt is almost double what it was last time around in 2008.  Do you see where this leads?  Is the “issuer” of dollars stronger, or weaker than it was in 2008?  It’s OK, you can admit it.  Weaker.  In this scenario where a higher dollar (the spark) puts so much pressure on financial counterparties who are short the dollar, what will be the Feds reaction to derivatives or other sovereign currency crises?  Does the Fed have to quintuple their balance sheet again?  Or the federal debt double again?  Or will another secret $16 trillion or a multiple thereof be lent out all over the world by necessity?

 Looking at this in the real world, there have already been many markets thrown into upheaval.  The two most important being the FOREX crosses and the oil market.  Oil without a doubt is the largest and most all encompassing market on the planet with the exception of dollars themselves.  Oil has crashed well over 50% in less than 6 months, dollars have risen 25% over this time frame.

Do you think that these percentages when applied to $10′s of trillions might add up to a tad more than a tidy sum?  Remember, derivatives is a zero sum game so anything “won” is also “lost”.  I believe the spark has already created a fire behind the scenes and some have already been consumed and are dead, but hidden.  Can I know this for sure?  No, but common sense and the amounts involved tell me this is 100% dead on! And there you have it folks, there are too may dollars outstanding …which were created by too much borrowing of dollars …  This pushed asset values higher until the world reached debt saturation and led to assets being sold to pay back the debt, asset prices dropped which is causing a global margin call…this synthetic short has created dollar demand to pay these dollars back.  In essence creating a dollar shortage.  Are you still with me after that long and horrible string of sentences?

If you are, then here we are …facing the global margin call which can ONLY be met by central banks printing more dollars, euros, yen etc. because liquidity is again drying up.  The alternative of course is to let the margin call run its course and take all banks, brokers and insurance companies down.  Oh yes, don’t forget the sovereign treasuries and central banks themselves.  It is the solvency of these institution that will ultimately be challenged.

And no, I didn’t forget I told you to “hold that thought” for the end.   What I have described to you is the world running around and fetching as much wood and pouring as much gasoline on the pile as possible.  The thought is this, without a spark this is harmless right?   Without going into static electricity, spontaneous combustion, a “gun” or even a BIC lighter for that matter, is it even sane?  Gold and silver do not and will not burn.

Whether it be a wildfire, a derivatives core meltdown, or even a central bank (like the Fed) or a sovereign treasury going upside down, gold will remain money and remain the benchmark against which currencies are measured.  Fiat currencies by definition are “terminal” at their inception.  The “deflation/inflation” debate is a moot point unless argued in terms of real money.

Global Research