Peter James for Congress

Derivatives, Fascism and the

Almighty Dollar

By Dene McGriff

There is a monetary time bomb ticking out there – that could go off any day now, blowing up the world economy. The shaky dollar, a fascist government and a house of cards brings us to the brink of apocalypse!

The Money Casino

You may not realize it but there is a money casino where the stakes are in the trillions! The world GDP is somewhere around 38 trillion dollars, but there are some high rollers out there gambling with our future. These are known as derivatives--a $248 trillion-dollar market! Warren Buffett, the second richest man in the world believes that "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

What are derivatives? A derivative is like a bet. A derivative “derives its value” from another asset. It is like covering a $1000 bet with only $10! If you lose, you have to come up with the collateral to cover the bet. Or better yet, you put up a few thousand dollars to make a billion dollar wager. This is a high stakes game and during the 1990’s there were some notable losses from derivatives.

Barings Bank was a stuffy old British Bank founded in 1762. In 1995, a 27 year old trader named Nick Leeson, speculated in derivatives and ended up losing $1.3 trillion, the entire asset base of the bank, bankrupting Barings. A few years later, a hedge fund named Long Term Capital Management nearly went broke but was bailed out by the Federal Reserve. The fund had $4.8 billion in assets but managed a portfolio of over $200 billion and derivatives with a “notional” value of one and a quarter trillion dollars with total derivatives of 4 trillion. It was run by two Nobel prize winning scientists but they lost control by making some bad bets. Orange County in California lost two trillion in a derivatives Scandal – this is still small compared to what could happen.

Bailouts are not without precedent as you may recall the $32 billion Savings and Loan bailout in the 80’s. But the derivative market is nearly 250 trillion – seven times the world GDP and many times greater than all the “money” in the world. There isn’t enough money in the world to bail out a big player.

Thirty percent of those derivatives are held by just three banks: JP Morgan Chase, Citibank and Bank of America. The number one bank, JP Morgan Chase Bank has 43 trillion dollars in derivative exposure – more than the entire GDP of the entire world economy! Chase is in a precarious position. It lost billions in bad loans to companies like Enron, Tyco, Global Crossing and countries like Argentina. This sets up a spiral. The bank’s Standard & Poor’s rating keeps dropping. As Chase’s fortunes keep falling, the rating drops, it has to put up more cash which makes matters worse and causes a liquidity crisis. Banks are interlinked by various derivative positions so if one falls, it will bring the others down like dominoes. If you happen to be a bank and your credit rating drops, the bank has to put up more cash collateral to increase the marker (in book making parlance).

The chart shows American bank derivative exposure and almost 60 percent is Morgan Chase! Their exposure which was only 26 trillion in 2001 and has grown to 43 trillion today! It is not being alarmist to say that this is a time bomb waiting to go off – enough to bring down the global economy. If Morgan Chase were to fail, a chain of interlocking commitments would break down and other major banks would topple. This would bring down not only banks, but your house, retirement, investments, and possibly even your job. A failure of this size would dwarf any smaller failures that have gone before.   LTMC only had a little over a trillion in derivatives. Banks the size of Chase, Citibank or Bank of America would be too big to bail out.

The housing market is also tied in. It is well known that real estate loan giants Fannie Mae and Freddie Mac are heavily into derivatives. Fannie Mae is the second largest corporation in America in terms of assets and the largest source of home mortgages. Freddie Mac buys mortgages and securities and passes them through as securities and debt instruments to the capital markets. For every $1 they have on their books, they have a $1.70 in derivatives. The danger comes if the market moves against them.

Easy money and foreign investment have kept corporate America, including Freddie Mac and Fannie Mae liquid. In Japan, where the interest rate has been zero for many years, investors borrow for nothing and invest in long term equities which has kept the real estate market booming. Japan is beginning to raise rates at the same time interest rates are rising in Europe and America as a reaction to the inflation caused by the increase of the money supply (printing money out of thin air). Other countries take their trade surplus dollars and buy treasury bonds and dollars (to buy oil with). This comes to about $3 billion a day flowing into the U.S., keeping the 30 year mortgage at record low levels even as the Fed continued to raise rates. But Japan is beginning to raise rates. Iran is switching oil to the Euro. Asian countries which have historically supported the dollar are beginning to diversify their portfolios (meaning they are buying less dollars).   Nearly everyone agrees that it is not a sustainable trend for America to absorb over 80 percent of the world’s savings to pay for our trade and government deficits, now amounting to over a trillion dollars a year!

Lies, Damned Lies and Statistics

As we pointed out in a previous article, the government has manipulated the figures to such an extent that the economy appears to be robust and growing instead of being in the precarious house of cards it is. If we used the same reporting standards as we did years ago, unemployment would be 12 percent rather than 4.8. The real consumer price index (CPI) which measures inflation would be at least 8 percent instead of the 1 to 2 percent “core” inflation the government reports. The GDP growth would be negative instead of the 3 to 4 percent claimed by the government and the true deficit would be in the trillions rather than the anemic $319 billion reported. Federal obligations would be measured at 51 trillion dollars instead of the $9 trillion reported (as the national debt). The on and “off the books” expenditures for wars in Afghanistan and Iraq would have cost in excess of a trillion dollars instead of the $450 billion claimed.

While the wages of the average American have fallen in the past four years straight, the wealth of American billionaires grew to $2.6 trillion, up 18 percent. Ten percent of Americans control 70 percent of the wealth. Hearings are going on regarding tax reform again. The talk is that 3% of salary would go into stock market funds, going up to 6%. Just like Seymore, the man-eating plant, in the musical “The Little Shop of Horrors” that would be enough to keep the Stock Market and Corporate America pumped up for years to come as real take home pay continues to dwindle. It should be obvious to Americans that decisions regarding energy, taxes, education, health and war are made for the benefit of corporate America – not the average American! It is probably no accident that many Science Fiction movies of the past have the world being run by a few powerful corporations. (e.g. The President’s Analyst, the Running Man, Max Headroom, Soylent Green, Logan’s Run, Blade Runner, the Matrix, the Terminator, Farenheit 451, not to mention Brave New World and 1984, etc.).

Another word for corporations running a nation is “corporatism” – better known as “fascism”.    What’s good for big business (Exxon, Shell, Bechtel, Halliburton, etc.) is now seen as good for America. It doesn’t matter if jobs are outsourced to other countries. Corporate America makes more than ever with the cheap labor. They like using Chinese factory labor and Indian help desks, accounts and engineers. We are talking about greedy global economic elites who don’t care a bit about the American worker. Who benefits from the wars? Who benefits from the oil shortage? (last year the oil companies made a record $150 billion in profits!!!) What programs are being funded (military) and what programs are being cut (social safety net entitlement programs, health, education, retirements, even veteran’s benefits)? All you have to do is follow the money to see where the priorities lie – with the individual or the corporate state.