By Antal Fekete

A Message To American Labor Leaders

The “crime of 1873″

My title is a paraphrase of the 1896 battle-cry of William Jennings Bryan during his presidential bid. He was talking about ‘crucifying mankind on a cross of gold’. Bryan was protesting against the unconstitutional closing of the U.S. Mint to silver. Congress inadvertently suspended the unlimited coinage of the standard silver dollar, which it had no authority to do under the Constitution. Bryan called it “the crime of 1873″.

No battle-cry was issued during this year’s presidential campaign by the finalists in protest against our present unconstitutional paper money system, even though it has started a wave of unprecedented unemployment that would sweep through the land in the wake of the current financial crisis and the official response to it: further serial cuttings of the rate of interest.

Politicians have long ago vacated the field of warning people about the danger caused by violations of the monetary provisions of the Constitution. It is now incumbent on the leadership of American labor to call the workers to rise in protest against the job-destroying policies of the government. Please take a few moments and bear with me as I go through a simple monetary explanation of the job-destruction process that has been going on in America for the past thirty years through serial cuttings of the rate of interest, that will reach fever-pitch next year.

Serial rate-cuts destroy the wage fund

Suppose you are a worker taking home $50,000 a year in wages. When your income-flow is capitalized at the current rate of interest of, say, 5 percent, you arrive at the figure of $1,000,000. The sum of one million dollars or its equivalent in physical capital must exist somewhere, in some form, the yield of which will continue paying your wages. Capital has been accumulated and turned into plant and equipment to support you at work. Part of your employer’s capital is the wage fund that backs your employment. Assuming, of course, that no one is allowed to tamper with the rate of interest.

Suppose for the sake of argument that the rate of interest is cut in half to 2½ percent. Nothing could be clearer than the fact that the $1,000,000 wage fund is no longer adequate to support your payroll, as its annual yield has been reduced to $25,000. This can be described by saying that every time the rate of interest is cut by half, capital is being destroyed, wiping out half of the wage fund. Unless compensation is made by adding more capital, your employment is no longer supported by a full slate of capital as before. Since productivity is nothing but the result of combining labor and capital, the productivity of your job has been impaired. You are in danger of being laid off — or forced to take a wage cut of $25,000.

Lemming-like rush into certain disaster

I have news for you. Employers are not in the habit of compensating for the destruction of capital caused by falling interest rates. Rather, they welcome the cut as manna sent from heaven. They are kissing the hand that is strangling them. They are as badly misinformed about the lethal effects of a falling interest rate structure as the rest of society. They confuse a low interest rate structure with a falling one. No less than employees, employers are hurt by the destruction of capital caused by serial rate cuts. After all, it is their capital, too, that is being destroyed. Nevertheless, they accept at face value the official propaganda line that “falling interest rates are good for you”. Employers are like lemmings running to their own certain disaster.

The “crime of 1971″

In the euphoria of celebrating the advent of the irredeemable dollar in 1971, politicians and economists have ‘forgotten’ to look at the untoward consequences of the New Brave World of synthetic credit. Not only was the dollar destabilized by the ‘crime of 1971′; interest rates were cut adrift as well. The U.S. Treasury was soon forced to print 16 percent coupons on its 30 year bonds which would not otherwise sell.

This did not present much of a problem to the Treasury, since interest on bonds was now payable in irredeemable dollars. The same paper, the same amount of ink, and the same printing press would produce the coupon at the same cost, whether it carried the figure 4 or 16, with which the obligation would be discharged.

However, bringing down the rate of interest from 16 percent to its normal level of 4 percent was a different story altogether. It meant that the rate had to be halved twice from 16 to 8 and from 8 to 4 percent, destroying three quarters of the wage fund. Is there any wonder why so many well-paid American industrial jobs were driven offshore in the intervening years, as production was being outsourced?

Academia and media were silent on the real cause of the de-industrialization of America: the destruction of capital through serial rate-cutting. They are still silent as they expect that the Federal Reserve will do more money magic and pump still more money into the economy, causing rates to fall still more. They are oblivious to the fact that this will destroy still more capital in the process, pulling more rug from underneath employment.

Vanishing capital

The problem is vanishing capital. During the past thirty years capital was destroyed across the board as the long-term rate was pushed down from 16 to 4 percent, and the short-term rate from 22 to 1 percent. The process is insidious: only one in a million can identify the causal relation between vanishing interest and vanishing capital. As a result the captains of industry are not aware of what is happening to the capital of their enterprise until it is too late and they are forced to fold tent. Even then, they have no idea what has hit them. It would never cross their mind to blame irredeemable currency and the serial cutting of interest rates for the disaster. Hat in hand, they go to Washington to beg for bailout money with which they can shore up their capital structure. They don’t realize that Washington will claw it all back just as soon as the next round of rate cuts are announced.

Make no mistake about it: vanishing capital does not disappear without a trace. It is being siphoned away clandestinely from the capital account of businesses, to benefit the issuers of irredeemable dollars and their cohorts. These honorable gentlemen cut rates with their right hand and grab the obscene profits thus generated on their bond portfolio with their left hand. It is legalized embezzlement. Keynesians say that the government can turn the stone into bread through driving down the rate of interest to zero. It would be more accurate to say that the government, in a vampire-like fashion, sucks the blood of labor through the bleeding of their wage fund.

The fate of the auto industry

As a result of vanishing capital the American auto industry, not so long ago the envy of the world, is tottering at the brink. The statistical likelihood of the three giant auto-makers running out of capital at the same time is nil. The fact that they do is the evidence of outside interference. The capital of the auto industry has been eroded and ultimately destroyed by the serial rate cuts of the Federal Reserve. It is true that the industry has been adding new capital in the form of state-of-the-art technology. But it could not keep up with the relentless serial rate-cutting. The Fed can cut rates faster than the auto industry can build and equip new factories.

The blame for the suffering should be put squarely on the criminal check-kiting conspiracy between the Treasury and the Federal Reserve. They issue and swap liabilities which they are neither willing nor able to meet. It is a charade, pretending to serve the interest of the national economy when, in fact, they are destroying the nation’s capital.

The destruction is not visible to the naked eye. The details are in the book-keeping. That’s why the sabotage is so hard to detect. As the rate of interest is being pushed down, it makes inroads on the wage fund. Employers are unable to meet their payroll because the falling interest-rate structure calls for ever larger capital to fund it. Unemployment is the result, which is becoming widespread and chronic.

Under a stable interest rate structure none of this would happen. The auto industry and its workers would have a bright future, as they did before the ‘crime of 1971′ hit them. Every worker who is being laid off should be reminded of that fact. They should know that they are being sacrificed on the altar of Mammon. They should understand that they are being crucified on the cross of paper money.

Capital destruction at an ever faster rate

Please also note that the rate of capital destruction is accelerating as we are getting closer to the black hole of zero interest. In principle halving the rate can continue indefinitely. In reality, ever smaller absolute cuts will have ever greater destructive effect on the wage fund. While in the 1980’s it took an 8 percent decline to wipe out half of the wage fund, right now a 2 percent, and thereafter a mere 1 percent cut will do the trick, causing the same amount of damage to employment. This means that the level of economic pain increases ever faster, soon reaching the point where it will become unbearable.

The situation is more than desperate. The political process has failed. The president-elect has committed himself to the status-quo. He will not challenge the unlimited power usurped by the Fed, as his nomination of the president of the Federal Reserve Bank of New York to the post of Treasury Secretary indicates. This nomination evoked the comment, echoed in the New York Times on November 25, that “Geithner deserves retirement, not promotion”. (He is 47.) Obama’s utterances during the election campaign seem to suggest that he believes in Keynesian prestidigitation, turning the stone into bread through serial cuts in the rate of interest, and in Friedmanite money magic of the printing press.

Labor’s finest hour

The only remaining hope the country has is that labor will not tolerate the ongoing destruction of capital. It will not take it lying down any more. It will take to the streets and confront the small reactionary elite running our monetary regime, including Geithner. This is the most destructive system ever devised: the regime of irredeemable currency. Every time it has been tried in history it failed miserably. As the current crisis clearly shows, this time is no different. What is different is that this time the entire world is on irredeemable paper money. That has never happened before. Accordingly, the stakes are immeasurably higher as irredeemable currency is getting ready to self-destruct.

Labor must take the initiative and demand that Congress put an immediate end to the mindless destruction of capital. Congress should stop the Federal Reserve from pursuing a monetary policy of open-ended deliberate interest-rate cuts. The economy is now like a runaway train with brakes disabled, entering a downhill section of tracks. Crash is certain. At the end of the run the country could be completely denuded of capital, with a large part of its labor force idled.

Labor could be the savior of the country in forcing a return to constitutional money at the eleventh hour, by demanding that the Obama administration open the U.S. Mint to gold and silver. That measure would enable the brakes on the money-train. It would stabilize foreign exchange and interest rates and stop the shredding machine, now spinning out of control, from destroying capital. This would be labor’s finest hour: saving the United States from financial ruin and ignominy.

This country has an intelligent, dedicated, and industrious labor force. The best in the world. It should step into the breach. Time for street action has come, if we want to prevent blood from flowing in the streets later.

by Bill Bonner

This week opened with the wail of fire engines. The Europeans announced a bank rescue, variously reported to cost 1.3 trillion euros (Le Monde)…1.7 trillion (Liberation) or 1.873 trillion (Financial Times). They ought to get their story straight. But who cared…investors had a bid!

As the Great Fire burned through their capital, investors bowed their heads and said their prayers: ‘Please God, spare me…and I will be happy with what I’ve got.” And lo! A host of smoke jumpers came down from the heavens. Investors turned their faces to the sky and thought they saw angels. And there was the archangels Gordon Brown and Henry Paulson leading the flock. Suddenly, the wind died down…and the fiery furnace calmed. ‘Hallelujah,’ they said…and bought some more stocks!

In the last 100 years there have only been two fires similar to that of today. The first inferno was in 1929, centered in New York. The second was in 1989, when Tokyo went up in flames. In both instances, rescuers took extraordinary measures. And in both cases, they not only failed to save the economy, they scorched it even more. Obviously, few economists share this analysis with us. The few who do are probably either insolvent or insane, or perhaps both. So, the burden of proof is on us.

We begin by calling an expert witness; Murray Rothbard, once professor at the University of Las Vegas, now among the forgotten dead. A properly-functioning economy is balanced, he explains in his classic, America’s Great Depression. One industry enjoys an expansion, another suffers a contraction. But sometimes there is a “cluster of errors” which causes a major boom. Whence cometh these errors? Who is responsible for them? Rothbard identifies the culprit: “monetary intervention in the market, specifically bank credit expansion to business.” If Rothbard were still among the quick, he’d probably be pointing his finger at Alan Greenspan - the arsonist who lowered the key U.S. lending rate to an “emergency” level of 1% and held it there long after the emergency was over. With the Fed’s false signal before them, business, investors and consumers racked up the biggest pile of tinder in history. Then, he’d probably point at Ben Bernanke, who continues to add kindling…and to Hank Paulson, who led Goldman Sachs while it created trillions of dollars worth of asset-backed explosives and sold it to financial institutions all over the world.

“The boom…is the time when errors are made…” Rothbard continues. “The ‘depression’ is actually the process by which the economy adjusts to the wastes and errors of the boom… Far from being an evil scourge, [the depression] is the necessary and beneficial return of the economy to normal… Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.”

But here come the rescuers with yet more dry wood! After stoking the flames with easy credit…they bring more. Professor Rothbard, reviewing the record of the post-’29 rescue team came to this conclusion: The authorities “met the challenge of the Great Depression by acting quickly and decisively…[using] every tool, every device of progressive and ‘enlightened’ economics, every facet of government planning to combat the depression.”

Yet, the fire didn’t go out. It intensified. An expected recovery in 1931 went up in smoke, says Rothbard, thanks to government meddling:

“The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of ‘enlightened’ economists. And in any other depression, past or future, the story will be the same.”

Six decades and half a world away, the Japanese proved him right. In January, 1990, a spark touched off the Nikkei Dow. Soon, Japan’s miracle economy was in trouble. Bankruptcies rose. Profits fell. Banks teetered. But the Japanese had their economists too. And soon, they were doing what Hoover and Roosevelt had done before them. As to monetary stimulus, the Bank of Japan’s key lending rate was cut from 5% down to “effectively zero.” And there were plenty of fiscal stimuli too. Japan’s government did just what Keynes recommended - it spent money. It went on a spree of what Alan Booth calls “state sponsored vandalism” in the 1990s, taking the budget deficit to a remarkable 5% of GDP in 2002. Roads to nowhere, concrete shorelines, bridges and dams…Japan, per square mile of available territory, covered 30 times as much surface in concrete as in America. In 1996, the Shumizu Corporation even announced plans to build a hotel on the moon using specially developed techniques for making cement on the lunar surface.

Once again, these heroic efforts produced nothing more than farcical consequences. The Japanese economy is still barely on speaking terms with prosperity. And the Nikkei Dow closed at 8,276 last week… a level last seen (except briefly in 2003) a quarter of a century ago.

America’s pyromaniacs still have a ways to go. There are 150 basis points between the Fed’s current key rate and zero…and the US budget deficit is expected to quadruple - reaching $2 trillion in 2009. In the resulting roast, we predict, even the devil will sweat.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

This is a great article explaining the current condition of the Western monetary system. It was written by Thorsten Polleit who is honorary professor at the Frankfurt (Germany) School of Finance and Management.

Why Fannie, Freddie and AIG All Had To Be Bailed Out

By Ellen Brown

“I can calculate the movement of the stars, but not the madness of men.”

– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
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by Bill Holter

To all; we are now entering uncharted territory. The government seizure of FNM and FRE opens up the next and terrifying chapter of the credit crunch. As I have posited many times before, this has NOW ENDED UP IN THE LAP OF THE U.S. TREASURY! The Treasury is now the backstop to all things paper. This will be a real life “Atlas shrugged”. There are huge implications to this step. The Treasury will now have between $5-6 Trillion of mortgage loans added to its balance sheet. The Treasury is in a huge deficit already to the tune of $10 Trillion of funded liabilities and over $70 Trillion of unfunded future liabilities. It is over. The U.S. Treasury is broke. This will take the entire banking system with it. The banking system will need to writedown $36 Billion of Fannie and Freddie preferred stock that is carried as core capital. This means at a 6% reserve ratio, that another $500 Billion of credit must be withdwrawn to keep capital ratios from collapsing. The Treasury stimulus plan was $140 Billion [remember those $600 checks]. Now 3 times that amount will have to be withdrawn from the credit pool unless Treasury doesn’t magically credit these banks with $36 Billion.

There is no telling how much the carried loans are really worth in todays market as even prime loans are only fetching .80 cents on the Dollar. This will cost at least $1 Trillion at a minimum for starters. It will all be printed. The credit rating of the U.S. will be downgraded, the interest rates the Treasury will now have to pay will increase substantially. This is so Dollar negative it goes beyond words to describe it. The borrowing ability of the Treasury is now being hamstrung by the same credit crunch that we were assured last Sept. was “contained”. I’m sorry but the ruse is over. A government running a deficit can only do two things to cover the gap, borrow more or print. They can’t raise taxes because that will implode the economy even worse than it already is. They will find it more and more difficult to borrow the sums needed until the auctions begin to fail. Then the “black helicopters” will be out in full force spreading freshly printed Dollars. The dilutive effect to the Dollar will be astonishing. We are entering the Weimar Republic phase. The Treasury will be crushed under debt and the Dollar [Fed] will be crushed through overissuance of new currency used to buy the Treasury debt.
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by James McShirley

Now we know. The giant black hole of derivatives at JPM is about to become the size of Jupiter. With the utter failure of Fannie and Freddie (a culmination of what I predicted 12 years ago) Fannie and Freddie’s massive derivatives portfolios can now be hidden from public scrutiny. These trillions of derivatives, which in likelihood have already failed, can now be whitewashed with the able assistance of the US taxpayer. Also the true values of their mortgage portfolios gets deep-sixed. This is no doubt the single largest financial failure in the history of the world. The Fed had every reason to previously discontinue M-3 reporting. Can you imagine what is about to happen to the dollar supply once this catastrophe starts getting paid for? Look for wild market gyrations as these derivatives get dealt with by the insiders who will now know both sides of the trade. What a deal, the taxpayer backs you and you know both sides of the trade, how can you lose? The derivatives may now become hidden from view, but the inflationary implications will become VERY evident. Another ominous problem facing FNM and FRE is a collapse in their pension plans and retirement funds. Retirees and current employees holding FNM/FRE stock will get wiped out, however a pension fund collapse would mean open revolt. This is another side-bailout I see coming.

Since FNM/FRE’s gigantic derivatives allegedly hedged against rising interest rates I think it’s safe to say you won’t be seeing any Fed interest rate hikes coming soon. This government takeover of the largest financial entity in America has in one fell swoop put into question ANY guarantee of debt, sovereign or otherwise. With this news gold should be up hundreds, maybe a thousand dollars if free markets were allowed. They will need to throw the kitchen sink at paper gold to prevent it from revealing the truth of what just happened. US Treasury bond prices now look egregiously high. This time it might not work. Next up for the weekend-only government news release program? Bailouts for GM, Ford, the entire banking industry, and who knows, if I’m hearing Bill Gross correctly maybe even PIMCO.

by Richard Russell

Consider the following - - let’s take a situation where the U.S. government needs money. The U.S. doesn’t just issue United States Notes, which, of course it could. These notes would be dollars backed by the full faith and credit of the United States. No, the U.S. doesn’t issue dollars straight out of the U.S. Treasury.

This is what the U.S. does - - it issues Treasury Bonds. The U.S. then sells these bonds to the Fed. The Fed buys the bonds. Wait, how does the Fed pay for the bonds? The Fed simply creates money “out of thin air” (book-keeping entry) with which it buys the bonds. The money that the Fed creates from nowhere then goes to the U.S. The Fed holds the U.S. bonds, and the unbelievable irony is that the U.S. then pays interest on the very bonds that the U.S. itself issued. (With great profit to the private owners of The Fed - - Ed. Note) The mind boggles.

The damnable result is that the Fed effectively controls the U.S. money supply. The Fed is …not even a branch of the U.S. government. The Fed is not mentioned in the Constitution of the United States. No Constitutional amendment was ever created or voted on to accept the Fed. The Constitutionality of the Federal Reserve has never come before the Supreme Court. The Fed is a private bank that keeps the U.S. forever in debt - - or I should say in increasing debt along with ever rising interest payments.

How did the Fed get away with this outrage? A tiny secretive group of bankers sneaked through a bill in 1913 at a time when many in Congress were absent. Those who were there and voted for the bill didn’t realize (as so often happens) what they were voting for (shades of the shameful 2002 vote to hand over to President Bush the power to decide on war with Iraq).”

Richard Russell, “Richards Remarks,” dowtheoryletters.com, March 27 2007

Author: Peter Schiff

Those blindsided by the recent financial meltdown are now loudly blaming the free market for its failure to police its own excesses, and are calling for greater regulation to prevent future disasters. But for those who clearly observed the problems developing (in high definition slow motion) the blame can be directed squarely at the policies of the Greenspan/Bernanke Federal Reserve. As has been the case countless times in history, the free market will now pay the price for government incompetence.

In Senate hearings this week, all parties involved completely ignored the Fed’s own culpability in igniting the speculative fever. It’s as if a senior prom had turned into a wild bacchanalia, and angry parents now question why the chaperones failed to notice the disrobing or why the DJ played provocative music, all the while ignoring the bearded gentleman pouring grain alcohol into the punch bowl.

A perfect illustration of the Fed’s failure to take responsibility can be found in Bernanke’s explanations regarding inflation, which he solely attributes to the effects of the rapid increase in global commodity prices. He failed to mention that commodity prices are rising as a direct consequence of his monetary policy, which is debasing not just the U.S. dollar, but currencies around the world. Rather than accepting the blame for creating inflation, Bernanke is shifting the blame to the free market. The Senators are happy to let him get away with it as it provides more evidence to support the “need “ for more government to save the economy from the disastrous effects of unbridled capitalism.

When asked how we got into this mess, Bernanke replied that our problems resulted from an excessive credit bubble characterized by aggressive leverage, reckless lending, and extreme risk taking. Absent from his explanation was the Fed’s role in irresponsibly setting interest rates below market levels, which mispriced risk, got the party started and kept it raging into the wee hours of the morning. The expressed goal of the Fed for much of this decade was, and is, to encourage and facilitate borrowing and lending.
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