Eco-Economy: The Long Bond Mystery
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The Long Bond Mystery
by Hans Schicht
Life is change. Life means constant vying for growth, expansion, assertion and survival by constant re-positioning, and in-direct or direct aggression. What counts in nature, that counts for human history, for the individual, enterprises, finance and the State. There is never respite for long. Life is fluid and all events are interrelated. And although temporary stagnation or imbalances do occur, they are bound to correct in time. The longer stagnation or the imbalance lasts, the more violent the corrections to be.
To come to grasp with what is going on in the world today, it is necessary to understand that at present we are living through exactly such period of stagnation and imbalances. Since the second world war, the overhanging threat of nuclear war has created an unusual prolongation of the peace period generally experienced between wars.
The extended absence of war and the nuclear supremacy of the United States have had global implications. Under their umbrella, not threatened by upheavals, the New York Financial Grandees were granted all the time to push their dollar imperialism and build and impose a global credit empire by stealth. Flooding the globe with fiat dollars and fiat credit created out of thin air. Ruthlessly smiting competing currencies. Negating gold and silver. Enslaving once free people, overseas like at home, to their perpetual credit chains. Creating a global financial unbalanced situation, ripe for upheaval.
War and upheaval regularly tend to shake up society in its very foundations, rejuvenating on the one side and on the other side cleaning up festering, cancerous growths, degenerations and abnormalities. War and upheaval take people back to the fundamentals and the realities of life. Prolonged status-quo on the other hand leads to erosion of standards, values, morality and discipline, replacing them with complacency, decadence and corruption.
Society as a whole behaves just like a kid. At regular times it needs a thorough spanking to correct. And that is exactly what has been lacking of late in our Dr Spock Society.
Here we are sitting with all the consequences of a time void of corrections. Youngsters astray. Yuppies running wild. Business and finance without scruples. The American dream turned into a nightmare and a once democratic government corrupted and hi-jacked by the New York Grandees of Finance.
However, this exceptionally long period of relative peace is drawing to an end. The September 11th events have shown that the American homeland has become just as vulnerable to nuclear, or what-ever attack, as has every other nation in the world. "Small" has become strong and all the overdeveloped and oversized, highly sophisticated weapons and weapon systems, which the Pentagon has burdened onto the American taxpayer, do not fit any longer the requirements of the present, where terrorism and mischievous small nations have become the threat. The present Pentagon arsenal would only be appropriate in case of all out war against another super state. And where the latter scenario is not yet on the horizon, the way to go is to be prepared for nasty little stings, delivered out from nowhere.
Under the changed conditions of the nuclear umbrella wearing off and the long peace period being brought to an end by war of another kind, by proxy terrorism, New York's financial paper tiger empire is finding itself wanting, far over-stretched and vulnerable. And lacking effective military might to defend its borders and interests, no empire has ever survived for long.
The way out for the New York Grandees to save their financial empire seems to them to pull their strings in Washington to herd the American people into military action against the threat of terrorism but with the ulterior motive to take direct control of the world's main oil resources.
Would the dollar still have had some kind of intrinsic value in the form of gold or silver to back it up, the Grandees might have managed. Dressed in gold, King Dollar might not have been found naked. Official statements in the order that King Dollar's golden clothes are all kept in a cupboard in Fort Knox, where nobody as allowed access to, do not suffice. With the Treasury dragging its feet already for over half a century and not allowing an independent audit of Fort Knox, we cannot assume else than that Fort Knox must be empty, till proved otherwise.
Not only is trust in Wall Street evaporating, but so is all trust in Washington. Serious doubts are rising about the reliability and trustworthiness of all government releases, their inflation figures, job statistics, CPI and PPI etc., inclusive the straightforwardness of official statements. We are wondering what else is still to come.
There are well founded suspicions that the stock markets, the currency markets, as well as the precious metal markets are regularly subject to manipulative intervention accompanied by planted news releases. Not in a haphazard and opportunistic manner, but in ways coordinated between the main financial institutions, the Treasury, and the Federal Reserve.
The public is being lied to and is being mislead. Why, for what reason and to whose benefit? Not to the benefit of the American people who are seeing their industries and jobs being transferred overseas, their savings gone and their debts mounting.
But to the exclusive benefit of a small handful of ruthless Financial Grandees scheming in the background. Through their trusts, endowment and beneficiary funds, they control the major banks, brokerage houses, credit rating companies, and as such indirectly the Federal Reserve, the currency and gold. They have made the Treasury and the Legislature their servants. When interest rates are adjusted it will be done on their instigation and to their advantage, not in the interest of the economy and the people.
As a start, thanks to the Internet and shrewd observers, the revelations about the ongoing manipulations of the stock markets are beginning to gain credibility. GATA for instance has made solid progress in revealing what is going on in the gold market. But how about revelations of misdemeanor in the far bigger and more important government bond market? If there is already proof surfacing of manipulation on the highest level in stocks on Wall Street and in the precious metal markets, how about possible manipulation in the mother of all markets, the giant bond market?
In the early days all paper money in circulation was 100% covered by gold kept in custody in the treasury. But the government became tempted and issued more paper than there was gold in the kitty. When they found out, the people did not want their paper money any longer. So the bankers approached the government and said: we will loan you gold against interest, to replenish your treasuries, so the people will have trust again in your currency. Under the condition, that you give us a security, a bond. And that you reserve a percentage of the taxes collected to pay the interest due to us.
That went on for a while, till again the government issued more than there was gold in the treasury. Hence a clever banker came and said: look, forget about your gold and silver problems, I will take care of your currency in circulation. I will print all the money you need and you give me bonded loan certificates in return, on which interest will be due. But for that, your treasury will have to keep some gold in the kitty, as a guarantee for our bank and as a make belief for the public. But the gold in the treasury kept on decreasing, the government's bonded debts growing, the percentage of collected taxes flowing into the bankers' vaults increasing and so the bankers' power.
That is the simplified and shortened story of how step by step fiat paper took over the roll of gold and silver. Today we live in a world where paper supports paper, bonds support currency and nothing supports nothing. Everything floats in thin air: currencies, bonds, interest rates. All held together by only a fragile spider web of a few unwritten conventions, derivatives and make beliefs.
That is how paper, in the form of bonds and bonded currencies, has pushed gold and silver aside. It shows, that the great adversary of gold is the government bond. It is a mistake to see stocks as the counter party to gold. Stocks still represent real value, productive value, and are as such on the side of gold. Government bonds are just hollow bunk. Stocks in a healthy, prosperous economy can even be as good as gold. So do not look at the stock market as a counter signal to what gold might do, look at the bond market! And more so than the stock market, it is the bond market which is behaving very strangely of late.
The bond market has never been in the public eye. It has always been the private domain of the Central Banks and certain private banks. In times when currencies were still linked to gold, bond markets behaved disciplined and predictable. Bond investors looked at earnings and when interest rates went down, the value of the bond certificates in circulation rose in proportion. Bond prices and interest rates are inversely related. Government bonds serve as benchmark for the commercial bonds. And the 30 year bond in turn serves as the benchmark for all treasury paper. Anyhow that is as it should be, but ...
Could it be, that this mother of all markets, which is the near exclusive domain of the financial institutions, which is hardly ever in the lime light, and where the public has only minimal participation, that this bond market could be the very center where all the other ongoing manipulations are turning around? Could it be that the stock market's and gold's abnormal behavior are only a consequent follow-up of a grand scale manipulation of the bond market?
There was a time in the late seventies and eighties after Nixon had closed the gold window, that the ever growing US trade deficits caused the mounting pile of dollars and dollar denominated assets held by foreigners to become unstable when the foreigners began wanting to cash in. It was the time that the globally expanding flow of dollars pushed out into the world by New York's bankers encountered serious resistance. Such resistance had to be overcome before the bankers could again proceed to further the advance of their dollar credit empire.
At the time, regular statements and frequent overseas visits by high placed US officials were made to convince foreigners to keep the supreme dollar in the form of treasury bonds in their reserves or to invest either in Wall Street or in American real estate. It was the time of Japan bashing.
But why was it, that around the mid nineties all jawboning stopped? Was it not necessary any longer to convince the foreigners to hold dollar paper? That, at a time when trade deficits were again on the increase, reaching 400 billion in the year 2001? Why?
The mid-nineties was the time Rubin came in. It was also the time that the suspicion of manipulation in the gold market took hold, the credit bubble ignited, and the stock market started to boom.
Could the same "modern creative and off-balance sheet accounting", which mislead the public, but has done "wonders" for business and banking, has also become fashionable at the Federal Reserve, the Treasury, the ESF, Exchange Stabilization Fund, Social Security and Medicare, Fannie May etc?
And why was it that, out of the blue, in the spring of 2000 the US Treasury announced that the thirty year bond would be retired and as such robbed the world of the bench mark for all bonds? The unexpected action threw foreign investors and Central Banks into great confusion. Why was it done? To cover up on something by throwing the long established bond relationships into disarray, going over to shorter term financing, making the ten year bond the new bench mark, but in all practical sense the two year bond? A private company which changes from long term to short term financing would come under suspicion, but not the honorable US Treasury.
The retirement of the 30 year bond coincided with the widely heralded new age of permanent budget surplus, which in reality never materialized as per the budget data regularly published by the Reserve Bank of St Louis. Could something have been amiss with the thirty year bond and that just the hopeful prospect of future budget surplus was cleverly used to hide what was already going on for some time?
Why is it that the interest spread between commercial bonds and the government bonds has grown out of all proportion? How on earth is it possible that the US government bonds are able to keep their value, while the commercial bonds are tanking and en masse are descending to junk status?
And why is it that the treasury bond does not mirror any longer the usual, well defined, and contrariwise reactions relative to the fluctuations in interest rates, but that strange distortions and discrepancies are appearing in the gyrations of the bond market?
In May 2001 a well-known Chicago bond trader remarked:
"Last week's price action seems indicative of a "big market move to come" - and it is not good for lower rates, the fact that the bond market has merely drifted lower in a extreme over-sold condition while stocks have consolidated higher, lends strongly to the possibility that the market is setting up to take back the year 2000 stock flush bond-rush". However, contrary to history, the reversal did not come to fruition. The treasury bonds stayed up and the interest rates down.
And last but not least, why is it that the mother bubble of all credit bubbles has not yet collapsed? The M1, 2, 3 injections of late look like falling far short of what must be needed to replenish the zillions of dollars swiped off the balance sheets through business failures, retrenchments and stock market losses. Even when taking into consideration the subsequent increase in available bank credits.
Is there more liquidity being created than officially published?
Four years ago I wrote in "The United Weimar Republics" about the similarities of the present financial situation in the United States compared to what happened in Germany in the early twenties.
In 1922 Weimar Germany began monetizing, read redeeming, its burdening government debt of over 53 billion mark against an ever increasing emission of currency. It lead to the worst hyper-inflation the world has ever seen.
The spring 2000 announcement by the treasury that the US intended to redeem the thirty year bond might have been a sign, that the US treasury was thinking or even acting along the same lines as Germany was in the early twenties.
A simple, personal interpretation of the events might help to see today's discrepancies in the bond market in perspective. Understand why jaw boning is not being practiced any more. Why the dollars is staying strong against all odds. And how the treasury bonds are able to keep their value.
The volume of US long bonds outstanding is mind-boggling and its liquidation will be a major undertaking. I wondered how it was all planned, as the FED and the Treasury have not been too forthcoming in informing the public. I also wondered about the amounts of liquidity appearing lately from nowhere and being injected into the markets and the economy as a whole.
I have a deep rooted suspicion, that in the mid nineties, a mechanism was established, probably on advice of Rubin, with the aim to underpin the value of the US government bonds by interfering directly in the bond market and which action would simultaneously create unlimited liquidity.
At the same time as there must have been a secret mechanism put into place by the ESF, the Treasury and the FED to depress the gold price in the mid nineties, a special off-balance sheet fund looks likely to have been created by the FED, with the purpose to stabilize and to control fluctuations of the treasury bonds, through a gradual monetization of the long bond, on the home market.
It should be remembered that bond trading on the home market does not have direct influence on the exchange rate. Whereas bond trading outside the US borders, yes, will affect the rate.
Regarding foreign exchange, all dollars circulating outside the borders of the United States and all the dollar bonds held by foreigners should be seen as one and the same package of claims outstanding against the United States. And as the bonds in the package represent the bulk of the package, they do carry a greater weight by far in the valuation of the dollar rate of exchange, than the total amount of current accounts in dollars and cash held by foreigners.
Under normal, free market, conditions, the fluctuations in the dollar interest rates are the ones, which determine the market value of the US bonds. However, if my suspicions turn out to be justified, then the FED, in addition to its published official bond dealings inclusive the repos, has turned the market upside down by having begun buying back the long bond directly through such secret off-balance sheet fund. Upside down, because not any longer would the interest rates be setting the bond prices, but the bonds would now set the interest rates!
Such account or fund would underpin the long bond on the sly, simply by reducing the amount of bonds in circulation. Under the condition that all buy-backs would be executed on the home market, so as not to endanger the dollar exchange rates.
Foreigners will always be happy to hold dollars and dollar bonds, as long as they keep up their value and there is no alternative like gold or silver. But not to worry, in a world of free flowing capital, a stronger bond at home is bound to reflect automatically on overseas markets.
No suspicions would arise, as long as the FED would keep the bonds bought back in their unpublished special account and, at the same time, would still count them as existing. The same trick as seems to be the case with the IMF gold accounts!
Armed with such fund, the FED would be able to keep up, and a strong dollar, and a strong bond and still have plenty of liquidity left for other manipulations like the stock market or the gold market, till the time would come, that either people would realize what is happening, or the FED on the home market would run out of bonds to redeem, or the political pressure for a weaker dollar would become so strong that the FED would have to abandon the undercover action.
The amazing derivative positions held by JP Morgan and the Citigroup could thus be explained by that these banks must have been informed about such a secret bond stabilization fund, if existent. They might even have initiated the scheme themselves. And they would not have needed any assurances from the FED to embark on their trillion dollar derivative adventures with their knowledge of the fund!
In all probability they might even work in tight cooperation with the FED and have spun their extensive web of interest and exchange rate derivatives around the very bond stabilization fund as an additional outer defense line to protect the US bond and dollar.
The world now finds itself in a most precarious situation, where the finances of nearly all nations are anchored to the American dollar through their reserves, which for the greater part are held in US government bonds.
But in reality, this anchor, assembled from packages of paper bonds, is nothing more but a fragile, drifting raft which is only able to stay afloat by regularly throwing packages of the same bonds over board it consists of, each time a next wave of financial instability is building, threatening to sink the paper raft.
The whole world depending on just one fragile floating anchor? Where have the gold and the silver, the solid anchors of old times gone?
- Hans Schicht, November 21, 2002, All copyright waved as long as author will be mentioned.