Oil closed at 66.86 dollars
a barrel on Friday, up 7.3% from what was already
a record weekly close of $62.31 a week earlier.
The Euro closed at 1.2436 dollars, virtually unchanged
from the previous week's close of 1.2437. Oil in
euros would be 53.76 euros a barrel, up 7.3% from
50.10 euros a week earlier. The dollar, then, fell
from 0.8099 euros to 0.8041 for the week. Gold
closed at 451.60 dollars an ounce, up 2% from $442.90
on last Friday's close. Gold in euros would be
363.14 euros an ounce, up 2% from last week's 356.11.
The Gold/Oil ratio closed at 6.75 barrels of oil
per ounce of gold, down 5.3% compared to 7.11 on
the previous Friday. In the U.S. stock market,
the Dow closed at 10,600.31, up 0.4% from 10,561.14
a week earlier. The NASDAQ closed at 2,156.90 down
1% from 2,178.92 on the previous Friday. The yield
on the ten-year U.S. Treasury note closed at 4.25%
down 14 basis points from 4.39% at the previous
Friday's close.
Again, the big story last week was the rise
of the price of oil to record levels. I think
we need to be sceptical about this rise. Sure,
the supply of oil is finite, but is it any more
finite than it was five or six years ago? Do
we really know how much oil there is? And, even
if oil is limited, is energy in general limited?
Currently it would seem very much so - but we
really don't know. People point to the growth
of the Chinese economy as reasons for the rise,
but the growth of China has been in the works
for a long time and it is proceeding at rates
that could have been and were predicted years
ago. Remember that analysts are saying there
is plenty of oil at the moment, but what is lacking
is enough refineries in the United States. We
should ask who high oil prices benefit and then
ask why haven't enough refineries been built
in the United States. The invasion of Iraq and
the consequent chaos has taken much of that country's
production offline. Could that have been intended?
Could the oil interests behind the Bush regime
have intended this chaos and these high prices?
They are getting ultimate possession of Iraqi
oil (or at least they think they are) without
the disadvantage of putting it on the market
and depressing prices.
We make a mistake if we
assume that the markets for various commodities
act as markets do in economic textbooks. Here
is an excellent account by Robert Bell of how,
by whom and for whom markets can be rigged,
worth quoting at length but too long to quote
in full. The article helps explain why those
of us who thought the dollar would have collapsed
by now were wrong. A major reason for this
was the consequence of the law passed by Bush
in the fall of 2004 allowing U.S. corporations
to "repatriate" profits parked overseas
and to have that money taxed at a much lower
rate. According to Bell, that had the effect
of propping up the dollar.
The
Invisible Hand (of the U.S. Government)
in Financial Markets
Robert Bell
Summary: The
U.S. government is manipulating all major
U.S. financial markets - stocks, treasuries,
currencies. This article shows how it is
possible and how it is done, why it is done,
who specifically is doing it, when they do
it, and where they get the money to do it.
Most people probably believe that the major
capital markets in the U.S. are basically true
markets with, occasionally, maybe very occasionally,
a little bit of rigging here and there. But
evidence shows that the opposite is the case
- the rigging is fundamental with a little
bit of true markets here and there. I have
discussed how this works concerning U.S. and
some other stock markets in an earlier article.
Here I will primarily discuss the rigging of
currency and U.S. Treasury markets.
Perhaps the main reason for the urban legend
that major markets are not generally rigged
is that they are assumed to be too big; the
millions of independent buyers and sellers,
worldwide because of globalization, make effective
and sustained coordination impossible. The
implicit assumption is that any market could
be systematically rigged if it were small enough,
or at least small enough at some critical choke
point.
Little Markets
In the case of the market for U.S. Treasuries,
the Financial Times summed up exactly how small
it really is in two major stories, one just
under the masthead on page one, on 24 January
2005. One story began, "During the past
few years the US has become dependent, not
so much on millions of investors around the
globe but on a few individuals in a few of
the world's central banks." In 2003 these
central bankers bought enough treasuries to
cover 83% of the U.S. current account deficit,
and 86% of those purchases came from Asian
central banks.
The two main sources of money for U.S. Treasuries
are the central banks of Japan and China. Japan
held about $715 billion in U.S. Treasuries,
as of November 2004, and China held about $191
billion. All the other nations' central banks
hold altogether, about the same amount again,
roughly another trillion.
As the total of all obligations is about $4
trillion, two central banks obviously hold
about one quarter of the total. They are in
the position to pump or dump the Treasury market
all by themselves. They can sell what they
have or simply stop buying when the Treasury
sells.
Since the money comes from a handful of foreign
central banks, the possible rigging of the
Treasury market equals the possible rigging
of the foreign exchange markets. These central
banks have to buy dollars before they buy Treasuries.
Even Alan Greenspan has acknowledged that the
two go together, admitting that Asian central
banks "may be supporting the dollar and
U.S. Treasury prices somewhat."
U.S. stock markets are also capable of being
systematically rigged, and for the same reason
- a handful of players can dominate if they
coordinate their actions. The key choke point
is in the number of mutual funds, which themselves
hold about 20% of all the stock in the major
markets. Of the over 8000 all-stock mutual
funds, a mere 497 hold roughly three-fourths
of the stock. This is easily a small enough
number to pump the market, whether through
coordinated buying disguised as programmed
trading, or simply a follow-the-leader mechanism.
All the other thousands of funds and the millions
of individuals around the globe putting their
money into these markets can do little more
than follow the momentum. No major U.S. stock
market writer, advisor or player seems to publicly
acknowledge this, as far as I know. But the
CEO (PDG) of the French insurance giant AXA
has acknowledged it: Claude Bebear wrote in
his 2003 book Ils vont tuer le capitalisme (They
are going to kill capitalism):
"… today, shareholders are relegated
to the role of quasi-spectators. The small
shareholders that are now called 'individual
investors' know that they have little weight.
All together, they only represent a small percent
of capital because the investments of households
are more and more in the form of mutual funds,
pension funds (fonds communs de placement)
or life insurance funds. The shareholders today
are thus the institutional investors."
Bebear, in charge of one of the world's biggest
stock portfolios, adds:
"We are no more, in effect, in a world
that one reads in the economic text books,
with innumerable investors of various characterizations,
choosing each in his own way the stocks that
he'll put in his portfolio; the results of
their millions of decisions generating a sort
of changing market equilibrium, but a stable
one. The truth is that for several years, the
reasoned investment on a stock has almost disappeared
in favor of more and more mechanical behavior."
Plunge Protection
Programmed trading in an utterly concentrated
stock market pretty much guarantees the possibility
of systematic and continual market rigging.
But to accomplish this, and coordinate it with
the currency and Treasury markets, some sort
of orchestrating mechanism would need to exist.
It does; it is known as the President's Working
Group on Financial Markets, occasionally referred
to in the business press as the Plunge Protection
Team. Then President Ronald Reagan signed it
into existence on 18 March 1988, with the specific
intension to avoid another stock market crash
such as that of 19 October 1987. The Working
Group's existence is no mystery. See for yourself.
Go to Google and type in Executive Order 12631.
You will find the Executive Order, and even
a 14 November 2003 statement from Secretary
of the Treasury John Snow giving a brief history
of the Working Group, describing its policy
advisory activities, and concluding with these
words: "It also is a forum used to exchange
information during market turmoil through ad
hoc conference calls and meetings."
Presumably Plunge Protection doesn't hold
these ad hoc conference calls and meetings
just to be passive bystanders. Executive Order
12631 specifically authorizes them to coordinate
buying: "The Working Group shall consult,
as appropriate, with representatives of the
various exchanges, clearinghouses, self-regulatory
bodies, and with major market participants
to determine private sector solutions wherever
possible."
So not only is the fix in,
it is legal.
In a 1989 Wall Street Journal article, then
Federal Reserve board member Robert Heller
even suggested a market intervention strategy: "Instead
of flooding the entire economy with liquidity,
and thereby increasing the danger of inflation,
the Fed could support the stock market directly
by buying market averages in the futures market,
thus stabilizing the market as a whole."
Guess Whose Money is Used
to Buy Stock Market Insurance?
There is even a potentially
unlimited source of money to do this pumping.
Federal government contractors operate under
a special law, CAS, in their defined benefits
pension plans. This gives them stock portfolio
insurance, something which small fry players
would obviously like to get, but can't find
anyone willing to issue. Should the pension
funds of the federal government contractors
lose money in their investments to the degree
that they fall below minimum reserve requirements
imposed by other federal laws, they can simply
make up the difference by adding it on pro-rata
to subsequent items sold to the federal government.
The vast sums of federal tax money devoted
to plugging the holes in the pension fund for
the largest Pentagon contractor, Lockheed Martin,
were discovered by Ken Pedeleose, an analyst
at the Defense Contract Management Agency.
He was concerned about staggering cost increases
for the C-130J transport but a chart he made
public showed the mind boggling per plane cost
increases for a number of Lockheed Martin airplanes.
The chart amounted to a Rosetta Stone for the
military-industrial complex. It showed, essentially,
how the military-industrial complex linked
to the stock market through the Lockheed Martin
pension fund, and by extension through all
the others covered by the same law.
No doubt a lot of government money has been
flowing through Lockheed-Martin and others in
the last four or five years!
Is there a corresponding source of tax money
to pump the currency and Treasury markets?
There is an official one for currency, the
Exchange Stabilization Fund. It was established
in 1934 to prop up the dollar in foreign exchange
markets. But it can be used for any purpose
determined by the Secretary of the Treasury.
In mid-1995, the fund contained $42 billion.
The actual amount varies depending on how well
the Treasury does on its currency transactions.
The money originally came from the sale of
U.S. government gold, but the Treasury kept
the money as a private fund, not under Congressional
control. Since it is a finite amount of money,
not appropriated by Congress, it probably is
not often used to pump the stock market or
even the market for Treasuries.
The markets for Treasuries, and also currency,
are being pumped using the tax code and pension
fund laws. But to understand this we have to
first look at why pumping might be necessary.
Treasuries Exchanged for
Jobs
The U.S. Treasury holdings of Japan and China
are essentially a consequence of a trade imbalance
between the U.S. and these two countries, with
the balance heavily tilted to the latter. To
maintain the imbalance, which they both clearly
want to do, both countries must keep their
currency pegged against the dollar at a lower
rate than it might otherwise be. If they did
not do that, the Toshiba computers, Toyota
cars and other quality items made in Japan
would be more expensive, and so Japan wouldn't
sell as many of them in the U.S. A similar
case holds for vast numbers of Chinese manufactured
items sold pretty much everywhere, but notoriously
at Wal-Mart. To keep the items relatively cheap,
the central banks of those countries keep their
currencies cheap by buying a corresponding
amount of dollars, thus supporting the dollar
against their currencies. The dollar may essentially
collapse against the euro, but not against
the yen and the yuan.
With the dollars the Japanese and Chinese
central banks have bought, they can buy something
denominated in U.S. dollars; the item of choice
is U.S. Treasuries since it is like holding
dollars that pay interest. So this has the
effect of pumping the price of Treasuries too.
Because the items made in China and Japan are
cheaper than those of corresponding quality
made in the U.S. (in the case of many Japanese
items, there may not be U.S. items of similar
quality), the effect
is to create manufacturing jobs in those countries
while simultaneously losing them in the U.S.
In effect the jobs are exported and foreign
currency is imported to buy dollars and then
Treasuries.
This has an advantage for
the Bush administration, which has the ruinously
ridiculous policies of simultaneously cutting
taxes and waging wars or building up for them.
In effect, the basic racket is: the Bush administration
exports jobs to these countries, and in turn
they finance Bush's fiscal deficit so he can
continue his wars and cut taxes for his friends.
The deficit for 2005 will be at least $400
billion, according to the Congressional Budget
Office. The Pentagon budget for 2005 was about
$400 billion. Add in two supplemental requests
for the costs of his Iraq war and the Pentagon
figure is roughly $500 billion. "It is
interesting to note that the military budget
is about the same order of magnitude as the
fiscal deficit," said veteran Pentagon
waste fighter Ernest Fitzgerald.
…But won't the Japanese and Chinese
central banks ultimately get burned by holding
vast quantities of dollar denominated assets?
Sure, if the dollar ever collapses against
their currencies too. The dollar having fallen
roughly 30% against the euro since the beginning
of the war in Iraq, the same fate or worse
could await these Asian currencies. With currently
issued Treasuries paying a coupon rate of no
more than 4%, they would be materially shafted
on their investments in U.S. Treasuries. Then
why don't they bail out?
The Emperors' Revenge
For the Chinese, the
basic racket is too delicious and too ironical.
They industrialize their country at the expense
of the de-industrialization of the U.S. Not
only is it sweet revenge for more than a
hundred years of humiliation at the hands
of Europeans and Americans, but also at the
end they are relatively strong and the U.S.
is relatively not. What do they care
if the deal isn't quite as good as it would
be in a perfect world and they lose a third,
half, two-thirds of their savings in U.S.
Treasuries? Besides, in an even mildly less
imperfect world, the U.S. President would
not make such a blatantly corrupt bargain
against the people of the U.S. Billionaire
investor Warren Buffett calls this system
of indebting U.S. citizens to foreign governments "a
sharecropper's society," to distinguish
it from Bush's supposed "ownership society."
…The overwhelming consensus
of financial writers was that both the dollar
and Treasuries would really hit the skids in
the new year, 2005. The consensus was global.
For example, the French financial paper, Les
Echos wrote in its edition of 21-22 January: "Until
now, it was a question of the great bet adopted
nearly unanimously by foreign exchange traders
- the dollar will fall in 2005."
Of course, as implied by
the quote, the dollar did not fall. Nor, of
course, did its fat twin, U.S. Treasuries,
which are little more than interest paying
dollars. Is this because the trade deficit
improved? Not really, although it showed a
slight gain in early February, long after the
dollar and Treasuries had materially improved.
The dollar had gone up 3.6% from 1 January
2005 until 22 February 2005. Why? Did Bush
raise taxes, thereby erasing some of the fiscal
deficit? Not at all. On the contrary, he cut
taxes - as usual for a select group - and that's
why the dollar rebounded.
Plunge Protection's New Cash
In late October 2004, the U.S. public was
looking the other way when the tax cut was
passed. Most people were obsessing over who
would win the presidential election. Few were
paying much attention to what the Republicans
in Congress were doing, which was giving billions
in tax cuts to U.S. corporations which had
profits parked in tax havens around the world,
such as in Ireland or Singapore. Bush signed
the law enabling this tax giveaway on 22 October
2004…
The law Bush signed in late October 2004 goes
by the obscenely false name, the American Jobs
Creation Act. If there is one thing it will
not do, it is to create jobs. It will instead
create takeovers, which nearly always produce
losses in jobs - in the name of synergy. Takeovers
are on the limited menu of activities companies
are permitted to do with the money they can "repatriate" under
this law. Not that the limited menu makes much
difference, since the money brought in does
not have to be fenced off in any way. So if
$10 billion were spent by a company on takeovers,
that frees up another $10 billion to do whatever
was prohibited under the law, such as paying
dividends, buying back stock, or filling the
pockets of executives with extra bonuses. Normally
such profits earned in foreign subsidiaries
of U.S. companies would be subject to a tax
rate of 35% if they were brought home, which
is why the money had stayed parked in the tax
havens. But the law
gives companies a one-year window for the "repatriation" of
this cash at a tax rate of only 5.25%. Nobody
knows how much will be brought in. When the
law was passed in October, the general expectation
reportedly was that the figure would be about
$135 billion. But one player has estimated
it at $319 billion. "This has some investment
bankers salivating," wrote David Wells
in the Financial Times. But how much
would be converted into dollars from other
currencies? According to two different investment
banks, the figure is somewhere around $100
billion. That would be the minimum available
from this source to pump the dollar for one
year. Recall that the Exchange Stabilization
Fund has less than half that for eternity.
The Bush administration's
use of repatriated foreign profits to pump
domestic markets shows that they are not going
to let "thin ice" signs stifle their
version of the economy, at least not without
a fight. However, the underlying weakness of
the economy because of the twin deficits remains,
so basically all that Bush and his Plunge Protection
team are doing is moving the "thin ice" sign
out onto thinner and thinner ice. The weight
of the Bush team will eventually crash through
that ice into exceedingly cold water…
Panic Buying
One short-term thing the money has already
done is to pump the dollar. The mechanism by
which this is accomplished is quite simple
and is signature Plunge Protection. It is the
device of the short covering rally. This is
what happens when speculators sell an asset
- stocks, Treasuries or dollars - short. With
stocks, this means that they sell the asset
without actually owning it. They borrow the
shares they sell, betting the stock will fall.
They then buy it at the reduced price and return
those shares. Another way to accomplish essentially
the same thing is through options. The risk
in a short sale is that the stock will not
go down but instead go up. The short seller
literally is exposed to unlimited losses in
this case. This is the basis for a short covering
rally. Non-shorters buy in sufficient volume
to force up the price. The price rise scares
the shorters into buying right away before
the price goes too high and they lose too much.
This results in panic buying as large numbers
of short sellers feel compelled to buy to limit
their losses. Often when the stock market suddenly
blasts up out of a long slide for little or
no reason, we are watching a short covering
rally. There have been several such rallies
in the currency and Treasuries markets so far
this year, and there will probably be quite
a few more.
According to a J.P. Morgan
survey, the year 2005 began with most U.S.
and international speculators holding short
positions on U.S. bond markets. Obviously this
is because they had foolishly looked at the
underlying economic reality, and failed to
understand the profound import of the American
Jobs Creation Act.
…How big are these chunks of cash? Johnson & Johnson
announced in February that they would bring
in $11 billion. Pfizer put its planned figure
at $37.6 billion. But are these figures big
enough to pump the dollar? You bet. An ABN
Amro currency strategist, Aziz McMahon, has
been quoted as saying, "The sums are so
large that if even a small proportion is transferred
from other currencies, the positive impact
on the dollar could be substantial." According
to that bank's calculations, each $20 billion
pumped in from other currencies pumps the dollar
against a broad index of currencies about 1%.
So the announced amounts would be sufficient
to trigger both momentum trading in the dollar
and trigger short covering rallies which themselves
would trigger further momentum trading.
Even the announcements of the currency repatriations
can trigger short covering rallies. ABN's McMahon
added, "The psychological impact a wave
of announcements could have on structural short-dollar
positions should also not be underestimated."
…All who imagine that
the mythical market forces will prevail seem
to deliberately avoid actually looking at what
the so called markets really are, including
their concentrations, Plunge Protection mechanisms,
and Plunge Protection's extensive access to
a variety of pools of other people's money.
The mechanisms and the market concentrations
permit the Bush administration to systematically
sell off U.S. assets to pay for its more wars/less
taxes policies. The Bush administration is
comparable to a group of corrupt trustees for
the family fortune of a lazy and incompetent
heir. They siphon the money out by selling
off the inheritance while the heir is too stupid
or drunk to notice. He still has his mansion,
his fleet of big cars and his monthly check,
and he doesn't notice that the assets are shrinking.
He may not for a while. This family's fortune
is big and there are a lot of assets still
to sell off.
Reading between the lines
about the role of the military-industrial complex
in "managing" the markets, it's not
too hard to see why some in the Bush administration
might be tempted to see this Global War on Terrorism
(and Iraqi civilians) as successful. The Deconsumption
blogger, Steven
Lavagulin, wonders why, with the preeminence
in brand marketing that the United States holds,
that it has done such a poor job lately in generating
good feeling world-wide for the "America" brand.
He concludes that it was no accident:
I don't think the ball was
dropped...I think the marketing campaign is
in effect. In fact, it's a raging success.
It's just that it was decided that "anger" and "resentment" were
a better brand to market. The campaign was
rolled-out, a campaign entitled: War on Terror™
Think about it...War on Terror™ It says "War.
War with no boundaries. War with no goals.
War with no rules. The enemy is anyone, anywhere.
Live in fear. The enemy might be you... Don't
get out of line."
If you'll allow me to draw water from the
[William] Kotke [in Final Empire] well once
again:
"Although industrial
investment in the colonies generally returns
large profits (25% per year being the standard),
super-profits since World War II have come
from guns and drugs. The U.S. has
been the largest armaments producer, with
other countries now catching up rapidly.
Alliances and militarization have been encouraged
all over the world and this has seen the
militaries take power (overt or covert) in
most societies. The petroleum industry is
the largest planetary industry but it is
closely followed by the armaments industry
in size and production. The armaments industry
mushrooms as all forms of colonial exploitation
grow. A modern example is the [1989] Iran-Iraq
war, where 42 arms-exporting countries sold
weapons to the combatants and 36 sold to
both sides.
"…The quest
for power (military and other) through science
has become the central focus of the industrial
empire. In the broad view, science is the
means to power whereby the empire culture
more efficiently extorts the life force of
the planet. (Scientific agriculture
does not concentrate on building the life
of the soil; it concentrates on producing
heavier tonnages for market). The reality
that science is an integral component of
the imperial social system is shown by the
fact that more than
half of the working scientists of the U.S.
are employed in the military-industrial sector. This
is hardly a dispassionate search for truth,
as the propagandists would have it. The scientific
establishment is deeply implicated in the
social apparatus of coercion and death as
a means of political control."
Keep in mind this was was written in the early
1990's, so Kotke is not merely striking an
indictment against the neo-con agenda. He identifies "coercion
and death" as the "product" in
the general system of empire. So is it reasonable
to conclude that marketing in America might
consist of selling "goodness and light" on
every scale and level save the very pinnacle
one, Brand America!™ itself? Strangely,
that may be precisely the case.
Clearly, economic analysis alone will not enable
anyone to predict the markets. It may make more
sense to observe where the power is flowing.
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