http://www.sightings.com/general2/bub.htm
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Rense.com
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Bankers' Central Bank
Warns US Bubble Will Pop
- US Blackout Of Story
By John Hoefle
From Mark Sonnenblick <[EMAIL PROTECTED]>
Executive Intelligence Review
6-13-00
Jeff:
This warning in the attachment was the biggest
story in Europe over the past 3 days, even in the
international editions of the Wall Street Journal,
NY Times and Washington Post (IHT) and was on all
the wires. But there was a total blackout in their
US editions and in all but a few media here. In
Lyndon LaRouche's view, everybody should know about
this. And, Rense.com is the key source of news for
many people here and abroad.
A complimentary copy of the June 16 EIR (which
includes graphics and several other articles on and
quotes from the BIS report) will be sent to any of
your reader who calls 1-888-347-3258 and mentions
you.
---------------------------------------------------------
Mark Sonnenblick
Executive Intelligence Review
Bankers' Central Bank Warns US Bubble
Will Pop - US Blackout Of Story
By John Hoefle
6-13-00
The Bank for International Settlements (BIS), in
a report issued on June 5, and in a major
international press conference accompanying the
release of the report at its headquarters in Basel,
Switzerland the same day, confirmed what Democratic
Presidential candidate Lyndon LaRouche has been
warning about for years: that a global financial
crash is right around the corner. While that
assessment has been given banner headlines
throughout Europe, the warning has been blacked out
of the U.S. press. "One point on which virtually
everyone would agree is that the current rate of
expansion of domestic demand in the United States
is unsustainable and potentially inflationary," the
BIS stated in its 70th Annual Report. The report
goes on to say that "it could be argued that the
sooner the bubble deflates, the better."
In remarks at the BIS Annual Meeting the same day,
BIS President Urban Baeckstroam threw cold water on
the assertions by the U.S. President's Working
Group on Financial Markets (a.k.a. the Plunge
Protection Group) that the U.S. economy was headed
for a "soft landing."
"We have witnessed too many crises in the last
decade not to know that market confidence can shift
suddenly," Baeckstrom said. "A soft landing is by
no means assured."
He also warned of the rising levels of household
and corporate debt in the United States, and the
growing dependence of the United States upon
foreign goods and money-flows. "Household and
corporate balance sheets may look healthy when
asset prices are stable or increasing, but what
will they look like if prices fall?" he asked.
To underscore the BIS's warnings, the German
economic daily Handelsblatt, in a commentary by
Klaus Engelen on June 6 entitled "Dangerous Dynamic
on Financial Markets," noted that while the
International Monetary Fund, the World Bank, and
the Organization for Economic Cooperation and
Development had proven records of not seeing
financial crises in advance, the BIS had warned of
instability in the emerging markets before the
Mexican and Asian crises erupted. However, Engelen
said, "all such earlier warnings from Basel had
been ignored by euphoric markets." Market
participants are still not paying sufficient
attention to the "emphatic warnings of the BIS
concerning ever higher financial asset prices and
the unsustainable foreign trade imbalances, in
particular the U.S. current account deficit which
is running out of control." Engelen said that the
issue was not one of how big the chances were of a
soft landing, but rather whether there is any
chance at all to prevent a hard landing.
The blunt warnings reflect the realization by the
BIS that the current global financial and monetary
system is unsustainable, and that major changes are
required to keep the system together. Such
warnings, as far as they go, are valid, and
represent a better understanding of the state of
the world than anything flowing out of official
Washington, but they still fall far short of
reality.
- Hard Landing, or Mid-Air Explosion? -
The whole debate about "soft landing" versus "hard
landing" is a fraud. The idea behind the soft
landing is that the U.S. economy is growing so
fast, that the pace of growth is unsustainable and
might trigger inflation. Therefore, to slow the
pace of growth and head off potential inflation,
Federal Reserve Chairman Alan Greenspan has been
raising interest rates. By gently putting the
brakes on the economy, to use the aircraft
metaphor, the Fed hopes to bring the economy down
from its lofty heights to a safe and soft landing.
The hard-landing crowd likewise assumes that the
plane will land, but perhaps with significant
damage. What is absent from this controlled
discussion is a third possibility, that of a
mid-air explosion.
In citing "the record U.S. current account
deficit," the BIS pointed squarely to the fact that
the U.S. economy is being subsidized by the rest of
the world. The current account balance ({{Figure
1}}), which hit a record $100 billion deficit for
the fourth quarter of 1999, represents the extent
to which the U.S. economy is dependent upon foreign
goods and investments. The deficit reflects both
the inadequacy of U.S. goods-production to meet the
needs of the nation's population, and the extent to
which foreign funds have flooded into the country
to participate in the U.S. market bubble and
purchase other U.S. assets. Were this inflow to be
interrupted or reversed, by a stock market crash or
a sharp decline in the value of the dollar, the
"soaring" U.S. economy would be lucky to make it to
the ground in one piece.
- Controlled Burn -
One aspect of the effort to bring the U.S. economy
in for a soft landing, is the attempt to deflate
the overblown U.S. stock market without triggering
an investor panic. Make the change gradually
enough, and the public will stay in the market even
as it declines, a variation of the frog-in-the-pot
theory. (It is said--I've certainly never tested
it--that one can put a frog in a pot of water on a
stove, and that if one heats the water slowly
enough, the frog will stay in the pot until it
boils.)
But a controlled and limited deflation of a bubble
is a tricky operation, one which can easily get out
of hand and trigger the very panic one is trying to
prevent.
An analogy for the danger is the fire set by the
U.S. National Park Service on May 4 in the
Bandelier National Monument in New Mexico. The
fire, intentionally set as a "controlled burn" to
burn brush and dried timber on 1,000 acres in order
to reduce the danger of a wildfire, rapidly went
completely out of control, triggering the very
wildfire it was designed to prevent. The result was
the immolation of some 48,000 acres, the
destruction of more than 200 homes and apartment
buildings in the nearby town of Los Alamos, and the
destruction of parts of the Los Alamos National
Laboratory.
The 33% drop in the Nasdaq from mid-March to
mid-April, including a 25% drop in just the week of
April 10, shows all the hallmarks of a controlled
burn ({{Figure 2}}). The drop was preceded by an
international media propaganda campaign, beginning
in Europe and then spreading to the United States,
about the unsustainable nature of the "Internet
bubble" and the necessity of a "correction." One
key aspect of the propaganda campaign was to
prepare the public psychologically for the sharp
drop, to keep "investors" from panicking and
fleeing the market. That aspect of the campaign was
successful, as no panic occurred; the market
stabilized, at least in the short-term, at a lower
level, without an immediate collapse.
That does not mean, however, that no damage was
done. The sharp drop in tech stocks generated
serious losses for many investors, those not warned
of the central bankers' plans. Hardest hit were
those who had hitched their futures to the
Internet, and those playing with borrowed money.
Some $2.2 trillion in value (albeit virtual, rather
than real) evaporated between March 10, when the
value of all stocks traded on the Nasdaq peaked at
$6.7 trillion, and April 14, when it dropped to
$4.5 trillion. Many of the investors who got wiped
out were playing with borrowed money, as indicated
by the sharp drop in margin debt outstanding, by
clients of the brokers which belong to the New York
Stock Exchange. After rising 55% to $279 billion
from September 1999 through March 2000, margin debt
fell by $27 billion--nearly 10%--during April,
ending the month at $252 billion ({{Figure 3}}).
Most of that reduction was due to investors getting
hit with margin calls, and having to sell
stock--and their most valuable stock at that--in
order to pay their debts.
The impact of such market declines goes well beyond
the markets themselves. Many people working in the
tech sector have taken stock options in lieu of
higher salaries, betting that the money made from
rising stock prices will more than offset the lower
wages. While this gamble has made many millionaires
in a rising market, it will have the reverse effect
in a declining one. Many would-be stock-option
millionaires are under water, the option prices on
their stock higher than the current market prices,
rendering their options worthless. Some of these
have borrowed heavily against that planned
stock-option money; in California's Santa Clara
County, the home of Silicon Valley, for example,
the median price of a single-family home was
$577,820 in April, up 45% in one year; nationally,
the median price for a single-family home was
$136,700, suggesting hard times ahead for the
Silicon Valley real estate market, as well as for
other high-tech centers such as Northern Virginia
and Austin, Texas. The commercial real estate
market will also suffer from the shakeout on the
tech sector, since all the new Internet companies
required lots of office space, the demand sharply
increasing rents in many areas.
The danger is also great in New York City which,
according to a study by the New York Fed, is more
dependent than ever upon Wall Street. The July 1999
study by the bank's Jason Bram and James Orr, shows
that the securities sector generated 19% of the
city's earnings in 1998, nearly double its
contribution in 1987 and more than four times
higher than in 1969. The securities sector itself
employed 4.5% of the city's workforce in 1998, and
given the U.S. Department of Commerce's estimate
that each job on Wall Street generates two
additional jobs in other sectors, Wall Street is
directly or indirectly responsible for roughly 14%
of the total employment in New York City.
In fact, according to economist James Parrott, Wall
Street workers accounted for an astonishing 97% of
the increase in the city's payrolls between 1990
and 1997.
There is an unexpected bright spot in the city's
economy, according to the Fed study, and that is
manufacturing, or rather the lack thereof. The
manufacturing sector accounted for nearly half of
the city's job losses and more than two-thirds of
the decline in real earnings during the city's
slump in the early 1970s, and was "a severe drag"
on the local economy during the 1989-92 recession,
as well. Today, manufacturing accounts for just 6%
of local earnings, compared to 20% in 1969.
"Because its importance to the city's economy has
diminished significantly, another decline in the
manufacturing sector would likely put far less
pressure on the local economy than was true in
previous downturns," bubbleheads Bram and Orr
concluded, showing that the Fed doesn't have a clue
when it comes to physical economy.
- Reorganization and Manipulation -
Coincident with the newly emerging bear market is a
reorganization of certain financial warfare
operations, particularly the large hedge funds.
Julian Robertson's Tiger Management group of hedge
funds, which once had $23 billion under management
and controlled many times that through leverage,
has closed down, said to be a victim of Robertson's
bet that the Old Economy would prevail over the
New. The impression is given that Robertson was an
old-style investor who just didn't understand the
new era, when in fact Robertson was one of the
bloodiest speculators on the planet. Stanley
Shopkorn, the man who, as head trader at Salomon
Brothers, is credited with doing much to prevent
the Black Monday Crash of 1987 from melting down
the financial system, and is now an investment guru
with the $10 billion Moore Capital hedge fund
group, is taking a sabbatical this summer to cruise
the Mediterranean.
Then there's the case of drug-legalizer George
Soros and his Soros Fund Management, at one time
worth $22 billion. After the March-April slide of
the Nasdaq, Soros announced he was downsizing his
operation into a more conservative style of
investing. With the change came the resignations of
his two top fund managers, Stanley Druckenmiller
and Nicholas Roditi, and the departures of chief
financial officer Peter Streinger and chief
executive Duncan Hennes.
Nominally, the reorganization at Soros Fund
Management comes as a result of sharp losses on the
tech stocks in the wake of the April-May Nasdaq
slide, but there are indications that the truth
runs deeper. Last autumn, with his funds down
slightly for the year, Soros made a sharp push into
technology stocks, buying enough to end the year up
35%. Between mid-October and mid-March the Nasdaq
Composite Index nearly doubled, rising an
unprecedented 88%. Some Wall Street observers have
attributed a significant portion of that rise to
Soros's heavy buying.
The timing between the controlled burn of the
Nasdaq and the announcement of the reorganization
of the Soros funds, suggests the possibility that
Soros also played a role in setting that particular
fire.
The idea of an orchestrated run-up and take-down in
this highly manipulated environment is nothing new.
By running up the Nasdaq at the end of the year,
large profits could be gained to offset
losses--particularly hidden losses--from the spring
and summer turmoil. Once in the new year, the
insiders could sell off into a rising market,
taking one last profit fling while sticking the
suckers with the looming losses. Even investors in
the Soros funds, which were down 22% for the year
as of the end of April, could have covered their
losses with offsetting bets.
- Hyperinflation -
Beginning with the global financial crisis which
broke out in Asia in the summer of 1997, and
continuing through the subsequent "Russian," "Long
Term Capital Management," "Brazilian," "Tiger," and
other, better-hidden events, the central bankers
have responded to each crisis with what Soros
himself called "a wall of money." Throwing money at
problems is nothing new for the bankers, as the
sharp growth in the U.S. money supply since 1992
indicates ({{Figure 4}}). But as the money flows
in, the instability grows and the crises come ever
faster and larger. That is because the increased
money for the bubble comes by further cannibalizing
the physical economy, heaping ever more financial
claims on an economy whose ability to pay those
claims is shrinking.
The result is a self-accelerating, leveraged
turbulence which, according to LaRouche, has
reached the point where the monetary aggregates are
now growing faster than the financial aggregates.
In such a period, the money will begin to lose
value faster than it can plug the holes, leading to
a Weimar-style hyperinflation, where the value of
money itself goes into a free-fall.
Another aspect of this nascent hyperinflation is
the surge in commodity prices in the recent period,
typified by the rise in the price of oil. One of
the factors in this is the accelerating level of
mergers in the economy ({{Figure 5}}). Due to the
extraordinary levels of debt taken on in these
mergers, the companies are forced to raise prices
in order to show a profit. Thus, the attempt to
outpace the collapse via consolidation, actually
brings closer the demise.
While the warnings issued by the BIS have some
validity, the solutions it puts forward do not. The
BIS does not wish to kill this global financial
parasite--which would be tantamount to suicide--but
merely to exert tighter control over its growth, to
avoid killing its host. The BIS is, as its report
shows, in favor of the continued deregulation and
globalization of financial markets, taking ever
more control out of the hands of nation-states and
giving it to the oligarchic forces which control
the financial system and the BIS itself. It is not
the process, but the perceived excess, which the
BIS deplores.
Thus, the BIS, like the speculators it is trying to
curb, is doomed by its inability to break free of
its own failed axioms. They are all actors on a
stage, not controlling the action, but being
controlled by it, in a tragedy of historic
proportion. Only by stepping out of their roles and
joining LaRouche, can they survive.
.
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