[R-G] [BillTottenWeblog] Red Alert: The Second Wave of The Financial Tsunami
shimogamo at ashisuto.co.jp
Thu Nov 26 03:09:39 MST 2009
The wave is gathering force & could hit between the first & second
quarter of 2010
by Matthias Chang
Future Fast Forward (November 22 2009)
Global Research (November 22 2009)
Many of my friends who have been receiving my e-mail alerts over the
last two years have lamented that in recent weeks I have not commented
on the state of the global economy. I appreciate their anxiety but they
forget that I am not a stock market analyst who is paid to write
articles to lure investors back into the market. My website is free and
I do not sell a financial newsletter so there is no need for me to
churn out daily forecasts or analysis.
However, when the data is compelling and supports an inevitable trend,
it is time for another review. This Red Alert is to enable visitors to
my website to take appropriate actions to safeguard their wealth and
welfare of their families in the coming months.
Since the last quarter of 2008, unrelenting currency warfare has been
waged by the key global economies and while this competition thus far
has been non-antagonistic, it will soon be antagonistic because the
inherent differences are irreconcilable. The consequences to the global
economy will be devastating and for the ordinary people, massive
unemployment and social unrest are assured.
The policy-makers of these countries faced with the total collapse of
the international financial architecture have concluded that the
solution, the only solution is quantitative easing (that is, massive
injection of liquidity) to salvage the "too big to fail" banks and
reflate their depressed economies. This is best reflected in Bernanke's
candid remark that, "the US government has a technology, called the
printing press (or today, its electronic equivalent), that allows it to
produce as many US dollars as it wishes at essentially no cost".
This is the crux of the problem!
The Irreconcilable Differences
Some two decades ago, it was decided by the global financial elites
that the framework for the global economy shall consist of:
(1) A global derivative-based financial system, controlled by the US
Federal Reserve Bank and its associate global banks in the developed
(2) The re-location from the West to the East in the production of
goods, principally to China and India to "feed" the developed economies.
The entire system was built on a simple principle, that of a
Fed-controlled global reserve currency which will be the engine for
growth for the global economy. It is essentially an imperialist
Once we grasp this fundamental truth, Bernanke's boast that the "US can
produce as many US dollars as it wishes at no cost" takes on a
I have talked to so many economists and when asked what is the crux of
the present financial problem, they all respond in unison, "it is the
global imbalances ... the West consumes too much while the East saves
too much and consumes not enough". This is exemplified by the huge US
trade deficits on the one part and China's massive surpluses on the
Incredible wisdom and almost everyone echoes this mantra. The recent
concluded APEC Summit was no different. This mantra was repeated as
well as the call for freer trade between trading nations.
This is a grand hoax. All the current leaders on the world's stage are
corrupted to the rotten core and as such have no interest to call a
spade a spade and expose the inherent contradictions within the
existing financial system.
The call for a multi-polar world is meaningless when the entire global
financial system is based on the unipolar US dollar reserve currency.
This is the inherent contradiction within the present system and the
problems associated with it cannot be resolved by another global
reserve currency based on the IMF's Special Drawing Rights as advocated
by some countries. It was stillborn, the very moment it was conceived!
The leaders of China, Japan and the oil producing countries of the
Middle East are all cursing and pissing about the current situation,
but they don't have the courage of their convictions to spell it out to
their countrymen that they have been conned by the financial spin
masters from the Fed acting on the instructions from Goldman Sachs.
Tell me which leader would dare admit that they have exchanged the
nation's wealth for toilet papers?
The toilet paper currency pantomime continues.
We have now reached a stalemate in the current currency war, not unlike
the situation of the Cold War between the NATO pact countries and the
Warsaw pact countries. Both sides were deterred by the MAD (Mutually
Assured Destruction) doctrine of nuclear wars. The costs to both sides
were horrendous and it was only when the Soviet Union could not
continue with the pace and cost of maintaining a nuclear deterrent and
was forced into bankruptcy that the balance tilted in favour of the
But it was a pyrrhic victory for the US and it allies. What kept the
ability of the US to maintain its military might and outspend the
Soviet Union was the right to print toilet paper currency and the
acceptance of the US dollar by her allies as the world's reserve
But why did the countries allied to the US during the Cold War accept
the status quo?
Simple! They were all conned into believing that without the protection
of Big Brother and its military outreach, they would be swallowed up by
the communist menace. They agreed to march to the tune of the US
The next big question - why did the so-called "liberated" former
communist allies of the Soviet bloc jump on the bandwagon?
Simple! They all believed in the illusion that was fostered by the
global banks, led by Goldman Sachs, that trading and selling their
goods and services for the toilet paper US reserve currency would
ensure untold wealth and prosperity.
But the biggest game in town was the Asia gambit. Japan, after a decade
of recession following the burst of her property bubble, did not have
the means and the capacity to bring the game to the next level as
envisaged by the financial architects in Goldman Sachs.
And China was the biggest beneficiary. The senior management of Goldman
Sachs brokered a secret pact with China's leaders that in exchange for
orchestrating the most massive injection of US dollar capital and
wholesale re-location of manufacturing capacity in the history of the
global economy, China would recycle their hard-earned US toilet paper
reserve currency wealth into US treasuries and other US debt
This was the necessary condition precedent for the global financial
casino to rise to the next level of play.
The New Game
The financial architects at Goldman Sachs had a master plan - to
dominate the global financial system. The means to achieve this
financial power was the Shadow Banking System, the lynchpin being the
derivative market and the securitization of assets, real and synthetic.
The stakes would be huge, in the hundreds of trillions of US dollars
and the way to transform the market was through massive leverage at all
levels of the financial game.
But there was an inherent weakness in the overall scheme - the threat
of inflation, more precisely hyperinflation. Such huge amounts of
liquidity in the system would invariably trigger the depreciation of
the reserve currency and the confidence in the system.
Hence the need for a system to keep in check price inflation and the
illusion that the purchasing power of the toilet paper reserve currency
could be maintained.
This is where China came in. Once China became the world's factory, the
problem would be resolved. When a suit which previously cost US$600
could be had for less than US$100, and a pair of shoes for less than US
$5, the scam masterminds concluded that there would be no foreseeable
threat to the largest casino operation in history.
China agreed to the exchange as it has over a billion mouths to feed
and jobs for hundreds of millions needed to be secured, without which
the system could not be maintained. But China was pragmatic enough to
have two "economic systems" - a Yuan based domestic economy and a US$
based export economy, in the hope that the profits and benefits of the
export economy would enable China to transform and establish a viable
and dynamic domestic market which in time would replace the export
dependent economy. It was a deal made with the devil, but there were no
viable alternative options at the material time, more so after the
collapse of the Soviet Union.
The Next Level of the Game
The next level of the game was reached when the toilet paper reserve
currency literally went virtual - through the simple operation of a
click of the mouse in the computers of the global banks.
The big boys at Goldman Sachs and other global banks were more than
content to leave Las Vegas for the mafia and their miserable billions
in turnover. The profits were considered dimes when compared to the
hundreds of trillions generated by the virtual casino. It was a
financial conquest beyond their wildest dreams. They even called
themselves, "Master of the Universe". Creating massive debts was the
new game, and the big boys could even leverage more than forty times
capital! Asset values soared with so much liquidity chasing so few good
However, the financial wizards failed to appreciate and or
underestimate the amount of financial products that were needed to keep
the game in play. They resorted to financial engineering - the
securitization of assets. And when real assets were insufficient for
securitization, synthetic assets were created. Soon enough, toxic waste
was even considered as legitimate instruments for the game so long as
it could be unloaded to greedy suckers with no recourse to the
originators of these so-called investments.
For a time, it looked as if the financial wizards have solved the
problem of how to feed the global casino monster.
Unfortunately, the music stopped and the bubble burst! And as they say
the rest is history.
The Goldman Sachs Remedy
When losses are in the trillions of US dollars and whatever assets /
capital remaining are in the billions of US dollars, we have a huge
problem - a financial black-hole.
The preferred remedy by the financial masterminds at Goldman Sachs was
to create another hoax - that if the big global banks were to fail
triggering a systemic collapse, there would be Armageddon. These "too
big to fail" banks must be injected with massive amount of virtual
monies to recapitalize and get rid of the toxic assets on their balance
sheet. The major central banks in the developed countries in cahoots
with Goldman Sachs sang the same tune. All sorts of schemes were
conjured to legitimize this bailout.
In essence, what transpired was the mere transfer of monies from the
left pocket to the right pocket, with the twist that the banks were in
fact helping the Government to overcome the financial crisis.
The Fed and key central banks agreed to lend "virtual monies" to the
"too big to fail" global banks at zero or near zero interest rate and
these banks in turn would "deposit" these monies with the Fed and other
central banks at agreed interest rates. These transactions are all mere
book entries. Other "loans" from the Fed and central banks (again at
zero or near zero interest rates) are used to purchase government
debts, these debts being the stimulus monies needed to revive the real
economy and create jobs for the growing unemployed. So in essence,
these banks are given "free money" to lend to the government at prior
agreed interest rates with no risks at all. It is a hoax!
These "monies" are not even the dollar bills, but mere book entries
created out of thin air.
So when the Fed injects trillions of US dollars into the banking
system, it merely credits the amount in the accounts of the "too big to
fail" banks at the Fed.
When the system is applied to international trade, the same modus
operandi is used to pay for the goods imported from China, Japan et al.
For the rest of world, when buying goods denominated in US dollars,
these countries must produce goods and services, sell them for dollars
in order to purchase goods needed in their country. Simply put, they
have to earn an income to purchase whatever goods and services needed.
In contrast, all that the US needs to do is to create monies out of
thin air and use them to pay for their imports!
The US can get away with this scam because it has the military muscle
to compel and enforce this hoax. As stated earlier, this status quo was
accepted especially during the Cold War and with some reluctance after
the collapse of the Soviet Union, but with a proviso - that the US
agrees to be the consumer of last resort. This arrangement provided
some comfort because countries which have sold their goods to the US,
can now use the dollars to buy goods from other countries as more than
eighty per cent of world trade is denominated in dollars - especially
crude oil, the lifeline of the global economy.
But with the US in full bankruptcy and its citizens (the largest
consumers in the world) being unable to borrow further monies to buy
fancy goods from China, Japan and the rest of the world, the demand for
dollars has evaporated. The dollar status as a reserve currency and its
usefulness is being questioned more vocally.
The End Game
The present fallout can be summarized in simple terms:
Should a bankrupt country (the US) be allowed to use money created out
of thin air to pay for goods produced with the sweat and tears of
hardworking citizens of exporting countries? Adding insult to injury,
the same dollars are now purchasing a lot less than before. So what is
the use of being paid in a currency that is losing rapidly its value?
On the other hand, the US is telling the whole world, especially the
Chinese, that if they are not happy with the status quo, there is
nothing to stop them from selling to the other countries and accepting
their currencies. But if they want to sell to the mighty USA, they must
accept US toilet paper reserve currency and its right to create monies
out of thin air!
This is the ultimate poker game and whosoever blinks first loses and
will suffer irreparable financial consequences. But who has the winning
The US does not have the winning hand. Neither has China the winning
This state of affairs cannot continue for long, for whatever cards the
US or China may be contemplating to throw at the table to gain
strategic advantage, any short term gains will be pyrrhic, for it will
not be able to address the underlying antagonistic contradictions.
When the survival of the system is dependent on the availability of
credit (that is, accumulating more debts) it is only a matter of time
before both the debtor and creditor come to the inevitable conclusion
that the debt will never be paid. And unless the creditor is willing to
write off the debt, resorting to drastic means to collect the
outstanding debt is inevitable.
It would be naive to think that the US would quietly allow itself to be
foreclosed! When we reach that stage, war will be inevitable. It will
be the US-UK-Israel Axis against the rest of the world.
The Prelude to the End Game
The US economy will be spiraling out of control in the coming months
and will reach critical point by the end of the first quarter 2010 and
implode by the second quarter.
The massive trillions of US dollars stimulus has failed to turn the
economy around. The massive blood transfusion may have kept the patient
alive, but there are numerous signs of multi-organ failure.
There will be another wave of foreclosures of residential and more
importantly commercial properties by end December and early 2010. And
the foreclosed properties in 2009 will lead to depressed prices once
they come through the pipeline. Home and commercial property values
will plunge. Banks' balance sheets will turn ugly and whatever "record
profits" in the last two quarters of 2009 will not cover the additional
Given the above situation, will the Fed continue to buy mortgage-backed
securities to prop up the markets? The Fed has already spent trillions
buying Fannie Mae and Freddie Mac mortgages with no potential
substitute buyer in sight. Therefore, the Fed's balance sheet is as
toxic as the "too big to fail" banks that it rescued.
In the circumstances, it makes no sense for anyone to assert that the
worst is over and that the global economy is on the road to recovery.
And the surest sign that all is not well with the big banks is the
recent speech by the President of the Federal Reserve Bank of New York,
William Dudley at Princeton, New Jersey when he said that the Fed would
curtail the risk of future liquidity crisis by providing a "backstop"
to solvent firms with sufficient collateral.
This warning and assurance deserves further consideration. Firstly, it
is a contradiction to state that a solvent firm with sufficient
collateral would in fact encounter a liquidity crisis to warrant the
need for a fall back on the Fed. It is in fact an admission that banks
are not sufficiently capitalized and when the second wave of the
tsunami hits them again, confidence will be sorely lacking.
Dudley actually said that, "the central bank could commit to being the
lender of last resort ... [and this would reduce] the risk of panics
sparked by uncertainty among lenders about what other creditors think".
To put it bluntly what he is saying is that the Fed will endeavour to
avoid the repeat of the collapse of Bear Stearns, Lehman Brothers and
AIG. It is also an indication that the remaining big banks are in
It is interesting to note that a Bloomberg report in early November
revealed that Citigroup Inc and JP Morgan Chase have been hoarding
cash. The former has almost doubled its cash holdings to US$244.2
billion. In the case of the latter, the cash hoard amounted to US$453.6
billion. Yet, given this hoarding by the leading banks, the New York
Federal Reserve Bank had to reassure the financial community that it is
ready to inject massive liquidity to prop up the system.
It should come as no surprise that the value of the dollar is heading
When currencies are being debased, volatility in the stock market
increases. But the gains are not worth the risks and if anyone is still
in the market, they will be wiped out by the first quarter of 2010. The
S&P may have shot up since the beginning of the year by over 25 per
cent but it has been out-performed by gold. The gains have also lagged
behind the official US inflation rate. It has in fact delivered a total
return after inflation of approximately minus 25 per cent. When
Meredith Whitney remarked that, "I don't know what's going on in the
market right now, because it makes no sense to me", it is time to get
out of the market fast.
In a report to its clients, Societe Generale warned that public debt
would be massive in the next two years - 105 per cent of GDP in the UK,
125 per cent in the US and in Europe and 270 per cent in Japan. Global
debt would reach US$45 trillion.
At some point in time, all these debts must be repaid. How will these
debts be repaid?
If we go by what Bernanke has been preaching and practising, it means
more toilet paper currency will be created to repay the debts.
As a result, debasement of currencies will continue and this will
further aggravate existing tensions between the competing economies.
And when creditors have enough of this toilet paper scam, expect
Matthias Chang's home page is http://www.futurefastforward.com/
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