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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