“A policeman tries to extinguish a fire on a man after he set himself ablaze outside a bank branch in Thessaloniki in northern Greece September 16, 2011. The 55-year old man had entered the bank and asked for a renegotiation of his overdue loan payments on his home and business, according to police, which he could not pay, but was refused by the bank.”
The austerity programmes administered by western governments in the wake of the 2008 global financial crisis were, of course, intended as a remedy, a tough but necessary course of treatment to relieve the symptoms of debts and deficits and to cure recession. But if, David Stuckler says, austerity had been run like a clinical trial, “It would have been discontinued. The evidence of its deadly side-effects – of the profound effects of economic choices on health – is overwhelming.” Stuckler speaks softly, in the measured tones and carefully weighed terms of the academic, which is what he is: a leading expert on the economics of health, masters in public health degree from Yale, PhD from Cambridge, senior research leader at Oxford, 100-odd peer-reviewed papers to his name. But his message – especially here, as even the IMF starts to question chancellor George Osborne’s enthusiasm for ever-deeper budget cuts – is explosive, backed by a decade of research, and based on reams of publicly available data: “Recessions,” Stuckler says bluntly, “can hurt. But austerity kills.”
In a powerful new book, The Body Economic, Stuckler and his colleague Sanjay Basu, an assistant professor of medicine and epidemiologist at Stanford University, show that austerity is now having a “devastating effect” on public health in Europe and North America. The mass of data they have mined reveals that more than 10,000 additional suicides and up to a million extra cases of depression have been recorded across the two continents since governments started introducing austerity programmes in the aftermath of the crisis. In the United States, more than five million Americans have lost access to healthcare since the recession began, essentially because when they lost their jobs, they also lost their health insurance. And in the UK, the authors say, 10,000 families have been pushed into homelessness following housing benefit cuts. The most extreme case, says Stuckler, reeling off numbers he knows now by heart, is Greece. “There, austerity to meet targets set by the troika is leading to a public-health disaster,” he says. “Greece has cut its health system by more than 40%. As the health minister said: ‘These aren’t cuts with a scalpel, they’re cuts with a butcher’s knife.’” Worse, those cuts have been decided “not by doctors and healthcare professionals, but by economists and financial managers. The plan was simply to get health spending down to 6% of GDP. Where did that number come from? It’s less than the UK, less than Germany, way less than the US.”
The consequences have been dramatic. Cuts in HIV-prevention budgets have coincided with a 200% increase in the virus in Greece, driven by a sharp rise in intravenous drug use against the background of a youth unemployment rate now running at more than 50% and a spike in homelessness of around a quarter. The World Health Organisation, Stuckler says, recommends a supply of 200 clean needles a year for each intravenous drug user; groups that work with users in Athens estimate the current number available is about three. In terms of “economic” suicides, “Greece has gone from one extreme to the other. It used to have one of Europe’s lowest suicide rates; it has seen a more than 60% rise.” In general, each suicide corresponds to around 10 suicide attempts and – it varies from country to country – between 100 and 1,000 new cases of depression. In Greece, says Stuckler, “that’s reflected in surveys that show a doubling in cases of depression; in psychiatry services saying they’re overwhelmed; in charity helplines reporting huge increases in calls”. The country’s healthcare system itself has also “signally failed to manage or cope with the threats it’s facing”, Stuckler notes. “There have been heavy cuts to many hospital sectors. Places lack surgical gloves, the most basic equipment. More than 200 medicines have been destocked by pharmacies who can’t pay for them. When you cut with the butcher’s knife, you cut both fat and lean. Ultimately, it’s the patient who loses out.” Such phenomena, he says, “are just a few of many effects we’re seeing. And with all this accumulation of across-the-board, eye-watering statistics, there’s a cause-and-effect relationship with austerity measures. These issues became apparent not when the recession hit Greece, but with austerity.” But public health disasters such as Greece’s are not inevitable, even in the very worst economic downturns. Stuckler and Basu began to look at this before the crisis hit, studying how large personal economic shocks – unemployment, loss of your home, unpayable debt – “literally could get under people’s skin, and cause serious health problems”.
The pair examined data from major economic upsets in the past: the Great Depression in the US; post-communist Russia’s brutal transition to a market economy; Sweden’s banking crisis in the early 1990s; the East-Asian debacle later that decade; Germany’s painful labour market reforms early this century. “We were looking,” Stuckler says, “at how rises in unemployment, which is one indicator of recession, affected people’s health. We found that suicides tended to rise. We wanted to see if there was a way these suicides could be prevented.” It rapidly became clear “there was enormous variation across countries”, he says. “In some countries, politicians managed the consequences of recession well, preventing rising suicides and depression. In others, there was a very close relationship between ups and downs in the economy and peaks and valleys in suicides.” Investment in intensive programmes to help people return to work – so-called Active Labour Market Programmes, well developed in Sweden (where suicides actually fell during the banking crisis) but also effective in Germany – were a factor that seemed to make a big difference. Maintaining spending on broader social protection and welfare programmes helped, too: analysis of data from the 1930s Great Depression in the US showed that every extra $100 per capita of relief in states that adopted the American New Deal led to about 20 fewer deaths per 1,000 births, four fewer suicides per 100,000 people and 18 fewer pneumonia deaths per 100,000 people. ”When this recession started, we began to see history repeat itself,” says Stuckler. “In Spain, for example, where there was little investment in labour programmes, we saw a spike in suicides. In Finland, Iceland, countries that took steps to protect their people in hard times, there was no noticeable impact on suicide rates or other health problems. ”So I think we really noticed these harms aren’t inevitable back in 2008 or 2009, early in the recession. We realised that what ultimately happens in recessions depends, essentially, on how politicians respond to them.” Poorer public health, in other words, is not an inevitable consequence of economic downturns, it amounts to a political choice – by the government of the country concerned or, in the case of the southern part of the eurozone, by the EU, European Central Bank and IMF troika.
Stuckler seizes on Iceland as an example of “an alternative. It suffered the worst banking crisis in history; all three of its biggest banks failed, its total debt jumped to 800% of GDP – far worse than what any European country faces today, relative to the size of its economy. And under pressure from public protests, its president put how to deal with the crisis to a vote. Some 93% of the population voted against paying for the bankers’ recklessness with large cuts to their health and social-protection systems.” And what happened? Under Iceland’s universal healthcare system, “no one lost access to care. In fact more money went into the system. We saw no rise in suicides or depressive disorders – and we looked very hard. People consumed more locally sourced fish, so diets have improved. And by 2011, Iceland, which was previously ranked the happiest society in the world, was top of that list again.” What also bugs Stuckler – an economist as well as a public-health expert – is that neither Iceland nor any other country that “protected its people when they needed it most” did so at the cost of economic recovery. “It didn’t break them to invest in programmes to help people get back to work,” he says, “or to save people from homelessness. Iceland now is booming; unemployment fell back to below 5% and GDP growth is above 4% – far exceeding any of other European countries that suffered major recessions.” Countries such as those in Scandinavia that took what Stuckler terms “wise, cost-effective and affordable steps that can make a difference” have seen the impact reflected not just in improved health statistics, but also in their economies. Which is why, occasionally, the austerity argument angers him. ”If there actually was a fundamental trade-off between the health of the economy and public health, maybe there would be a real debate to be had,” he says. “But there isn’t. Investing in programmes that protect the nation’s health is not only the right thing to do, it can help spur economic recovery. We show that. The data shows that.” Drilling into the data shows the fiscal multiplier – the economic bang, if you like, per government buck spent, or cost per buck cut – for spending on healthcare, education and social protection is many times greater than that for money ploughed into, for example, bank bailouts or defence spending. ”That,” says Stuckler, “seems to me essential knowledge if you want to minimise the economic damage, to understand which cuts will be the least harmful to the economy. But if you look at the pattern of the cuts that have happened, it’s been the exact opposite.” So in this current economic crisis, there are countries – Iceland, Sweden, Finland – that are showing positive health trends, and there are countries that are not: Greece, Spain, now maybe Italy. Teetering between the two extremes, Stuckler reckons, is Britain. The UK, he says, is “one of the clearest expressions of how austerity kills”. Suicides were falling in this country before the recession, he notes. Then, coinciding with a surge in unemployment, they spiked in 2008 and 2009. As unemployment dipped again in 2009 and 2010, so too did suicides. But since the election and the coalition government’s introduction of austerity measures – and particularly cuts in public sector jobs across the country – suicides are back.
Ministers seem unwilling to address the increase in suicides, arguing it is too early to conclude anything from the data. Stuckler points out that this is because the Department of Health prefers to use three-year rolling averages that even out annual fluctuations. But based on the actual data, he is in no doubt. “We’ve seen a second wave – of austerity suicides,” he says. “And they’ve been concentrated in the north and north-east, places like Yorkshire and Humber, with large rises in unemployment. Whereas London … We’re now seeing polarisation across the UK in mental-health issues.” He cites, also, the dire impact on homelessness – falling in Britain until 2010 – of government cuts to social housing budgets, and the human tragedies triggered by the fitness-for-work evaluations, designed to weed out disability benefit fraud. ”What’s so particularly tragic about those,” he says, “is that the government’s own estimates of fraud by persons with disabilities is less than the sum of the contract awarded to the company carrying out the tests.” At least, though, no one in the UK has been denied access to healthcare – yet. Stuckler confesses to being “heartbroken” as what he sees happening to the NHS. “Britain stood out as the great protector of its people’s health in this recession,” he says. “By all measures – public satisfaction, quality, access – the UK was at or near the top, and at very low relative cost.” But that, he says, is now changing. “I don’t know if people quite realise how fundamental this government’s transformation of the NHS is,” he says. “And once it’s in place, it will be difficult, if not impossible, to reverse. We haven’t yet seen here what can happen when people are denied access to healthcare, but the US system gives us a pretty clear warning.” He finds this all in stark and depressing contrast to the post-second world war period, when Britain’s debt was more than 200% of GDP (far higher than any European country’s today, bar Iceland) and the country’s leaders responded not by cutting spending but by founding the welfare state – “paving the way, incidentally, for decades of prosperity. And within 10 years, debt had halved.”
The Body Economic should come as a broadside, morally armour-plated and data-reinforced. The austerity debate, Stuckler says, is “a public discussion that needs to be held. Politicians talk endlessly about debts and deficits, but without regard to the human cost of their decisions.” What its authors hope is that politicians will take the message they have uncovered in the data seriously, and start basing policy on evidence rather than ideology. (Some already do. When Stuckler and Basu presented some of their findings in the Swedish parliament, the MPs’ response was: “Why are you telling us this? We know it. It’s why we set up these programmes.” Others, notably in Greece, have sought to divert responsibility.) ”Our book,” says Stuckler, “shows that the cost of austerity can be calculated in human lives. It articulates how austerity kills. It shows austerity and health is always a false economy – no matter how positively some people view it, because for them it shrinks the role of the state, or reduces payments into a system they never use anyway.” When times are hard, governments need to invest more – or, at the very least, cut where it does least harm. It is dangerous and economically damaging to cut vital supports at a time when people need them most. ”So there is an opportunity here,” Stuckler concludes, “to make a lasting difference. To set our economies on track for a happier, healthier future, as we did in the postwar period. To get our priorities as a society right. It’s not yet too late. Almost, but not quite.”
Early last month, a triple suicide was reported in the seaside town of Civitanova Marche, Italy. A married couple, Anna Maria Sopranzi, 68, and Romeo Dionisi, 62, had been struggling to live on her monthly pension of around 500 euros (about $650), and had fallen behind on rent. Because the Italian government’s austerity budget had raised the retirement age, Mr. Dionisi, a former construction worker, became one of Italy’s esodati (exiled ones) — older workers plunged into poverty without a safety net. On April 5, he and his wife left a note on a neighbor’s car asking for forgiveness, then hanged themselves in a storage closet at home. When Ms. Sopranzi’s brother, Giuseppe Sopranzi, 73, heard the news, he drowned himself in the Adriatic. The correlation between unemployment and suicide has been observed since the 19th century. People looking for work are about twice as likely to end their lives as those who have jobs. In the United States, the suicide rate, which had slowly risen since 2000, jumped during and after the 2007-9 recession. In a new book, we estimate that 4,750 “excess” suicides — that is, deaths above what pre-existing trends would predict — occurred from 2007 to 2010. Rates of such suicides were significantly greater in the states that experienced the greatest job losses. Deaths from suicide overtook deaths from car crashes in 2009. If suicides were an unavoidable consequence of economic downturns, this would just be another story about the human toll of the Great Recession. But it isn’t so. Countries that slashed health and social protection budgets, like Greece, Italy and Spain, have seen starkly worse health outcomes than nations like Germany, Iceland and Sweden, which maintained their social safety nets and opted for stimulus over austerity. (Germany preaches the virtues of austerity — for others.) As scholars of public health and political economy, we have watched aghast as politicians endlessly debate debts and deficits with little regard for the human costs of their decisions. Over the past decade, we mined huge data sets from across the globe to understand how economic shocks — from the Great Depression to the end of the Soviet Union to the Asian financial crisis to the Great Recession — affect our health. What we’ve found is that people do not inevitably get sick or die because the economy has faltered. Fiscal policy, it turns out, can be a matter of life or death. At one extreme is Greece, which is in the middle of a public health disaster. The national health budget has been cut by 40 percent since 2008, partly to meet deficit-reduction targets set by the so-called troika — the International Monetary Fund, the European Commission and the European Central Bank — as part of a 2010 austerity package. Some 35,000 doctors, nurses and other health workers have lost their jobs. Hospital admissions have soared after Greeks avoided getting routine and preventive treatment because of long wait times and rising drug costs. Infant mortality rose by 40 percent. New H.I.V. infections more than doubled, a result of rising intravenous drug use — as the budget for needle-exchange programs was cut. After mosquito-spraying programs were slashed in southern Greece, malaria cases were reported in significant numbers for the first time since the early 1970s.
In contrast, Iceland avoided a public health disaster even though it experienced, in 2008, the largest banking crisis in history, relative to the size of its economy. After three main commercial banks failed, total debt soared, unemployment increased ninefold, and the value of its currency, the krona, collapsed. Iceland became the first European country to seek an I.M.F. bailout since 1976. But instead of bailing out the banks and slashing budgets, as the I.M.F. demanded, Iceland’s politicians took a radical step: they put austerity to a vote. In two referendums, in 2010 and 2011, Icelanders voted overwhelmingly to pay off foreign creditors gradually, rather than all at once through austerity. Iceland’s economy has largely recovered, while Greece’s teeters on collapse. No one lost health care coverage or access to medication, even as the price of imported drugs rose. There was no significant increase in suicide. Last year, the first U.N. World Happiness Report ranked Iceland as one of the world’s happiest nations. Skeptics will point to structural differences between Greece and Iceland. Greece’s membership in the euro zone made currency devaluation impossible, and it had less political room to reject I.M.F. calls for austerity. But the contrast supports our thesis that an economic crisis does not necessarily have to involve a public health crisis. Somewhere between these extremes is the United States. Initially, the 2009 stimulus package shored up the safety net. But there are warning signs — beyond the higher suicide rate — that health trends are worsening. Prescriptions for antidepressants have soared. Three-quarters of a million people (particularly out-of-work young men) have turned to binge drinking. Over five million Americans lost access to health care in the recession because they lost their jobs (and either could not afford to extend their insurance under the Cobra law or exhausted their eligibility). Preventive medical visits dropped as people delayed medical care and ended up in emergency rooms. (President Obama’s health care law expands coverage, but only gradually.) The $85 billion “sequester” that began on March 1 will cut nutrition subsidies for approximately 600,000 pregnant women, newborns and infants by year’s end. Public housing budgets will be cut by nearly $2 billion this year, even while 1.4 million homes are in foreclosure. Even the budget of the Centers for Disease Control and Prevention, the nation’s main defense against epidemics like last year’s fungal meningitis outbreak, is being cut, by at least $18 million. To test our hypothesis that austerity is deadly, we’ve analyzed data from other regions and eras. After the Soviet Union dissolved, in 1991, Russia’s economy collapsed. Poverty soared and life expectancy dropped, particularly among young, working-age men. But this did not occur everywhere in the former Soviet sphere. Russia, Kazakhstan and the Baltic States (Estonia, Latvia and Lithuania) — which adopted economic “shock therapy” programs advocated by economists like Jeffrey D. Sachs and Lawrence H. Summers — experienced the worst rises in suicides, heart attacks and alcohol-related deaths.
Police protect bank from graffiti artists
Countries like Belarus, Poland and Slovenia took a different, gradualist approach, advocated by economists like Joseph E. Stiglitz and the former Soviet leader Mikhail S. Gorbachev. These countries privatized their state-controlled economies in stages and saw much better health outcomes than nearby countries that opted for mass privatizations and layoffs, which caused severe economic and social disruptions. Like the fall of the Soviet Union, the 1997 Asian financial crisis offers case studies — in effect, a natural experiment — worth examining. Thailand and Indonesia, which submitted to harsh austerity plans imposed by the I.M.F., experienced mass hunger and sharp increases in deaths from infectious disease, while Malaysia, which resisted the I.M.F.’s advice, maintained the health of its citizens. In 2012, the I.M.F. formally apologized for its handling of the crisis, estimating that the damage from its recommendations may have been three times greater than previously assumed. America’s experience of the Depression is also instructive. During the Depression, mortality rates in the United States fell by about 10 percent. The suicide rate actually soared between 1929, when the stock market crashed, and 1932, when Franklin D. Roosevelt was elected president. But the increase in suicides was more than offset by the “epidemiological transition” — improvements in hygiene that reduced deaths from infectious diseases like tuberculosis, pneumonia and influenza — and by a sharp drop in fatal traffic accidents, as Americans could not afford to drive. Comparing historical data across states, we estimate that every $100 in New Deal spending per capita was associated with a decline in pneumonia deaths of 18 per 100,000 people; a reduction in infant deaths of 18 per 1,000 live births; and a drop in suicides of 4 per 100,000 people. Our research suggests that investing $1 in public health programs can yield as much as $3 in economic growth. Public health investment not only saves lives in a recession, but can help spur economic recovery. These findings suggest that three principles should guide responses to economic crises. First, do no harm: if austerity were tested like a medication in a clinical trial, it would have been stopped long ago, given its deadly side effects. Each nation should establish a nonpartisan, independent Office of Health Responsibility, staffed by epidemiologists and economists, to evaluate the health effects of fiscal and monetary policies. Second, treat joblessness like the pandemic it is. Unemployment is a leading cause of depression, anxiety, alcoholism and suicidal thinking. Politicians in Finland and Sweden helped prevent depression and suicides during recessions by investing in “active labor-market programs” that targeted the newly unemployed and helped them find jobs quickly, with net economic benefits. Finally, expand investments in public health when times are bad. The cliché that an ounce of prevention is worth a pound of cure happens to be true. It is far more expensive to control an epidemic than to prevent one. New York City spent $1 billion in the mid-1990s to control an outbreak of drug-resistant tuberculosis. The drug-resistant strain resulted from the city’s failure to ensure that low-income tuberculosis patients completed their regimen of inexpensive generic medications. One need not be an economic ideologue — we certainly aren’t — to recognize that the price of austerity can be calculated in human lives. We are not exonerating poor policy decisions of the past or calling for universal debt forgiveness. It’s up to policy makers in America and Europe to figure out the right mix of fiscal and monetary policy. What we have found is that austerity — severe, immediate, indiscriminate cuts to social and health spending — is not only self-defeating, but fatal.
Austerians have had their worst week since the last time GDP numbers came out for a country that’s tried austerity. But this time is, well, different. It’s not “just” that southern Europe is stuck in a depression and Britain is stuck in a no-growth trap. It’s that the very intellectual foundations of austerity are unraveling. In other words, economists are finding out that austerity doesn’t work in practice or in theory. What a difference an Excel coding error makes. Austerity has been a policy in search of a justification ever since it began in 2010. Back then, policymakers decided it was time for policy to go back to “normal” even though the economy hadn’t, because deficits just felt too big. The only thing they needed was a theory telling them why what they were doing made sense. Of course, this wasn’t easy when unemployment was still high, and interest rates couldn’t go any lower. Alberto Alesina and Silvia Ardagna took the first stab at it, arguing that reducing deficits would increase confidence and growth in the short-run. But this had the defect of being demonstrably untrue (in addition to being based off a naïve reading of the data). Countries that tried to aggressively cut their deficits amidst their slumps didn’t recover; they fell into even deeper slumps.
Enter Carmen Reinhart and Ken Rogoff. They gave austerity a new raison d’être by shifting the debate from the short-to-the-long-run. Reinhart and Rogoff acknowledged austerity would hurt today, but said it would help tomorrow — if it keeps governments from racking up debt of 90 percent of GDP, at which point growth supposedly slows dramatically. Now, this result was never more than just a correlation — slow growth more likely causes high debt than the reverse — but that didn’t stop policymakers from imputing totemic significance to it. That is, it became a “fact” that everybody who mattered knew was true. Except it wasn’t. Reinhart and Rogoff goofed. They accidentally excluded some data in one case, and used some wrong data in another; the former because of an Excel snafu. If you correct for these very basic errors, their correlation gets even weaker, and the growth tipping point at 90 percent of GDP disappears. In other words, there’s no there there anymore. Austerity is back to being a policy without a justification. Not only that, but, as Paul Krugman points out, Reinhart and Rogoff’s spreadsheet misadventure has been a kind of the-austerians-have-no-clothes moment. It’s been enough that even some rather unusual suspects have turned against cutting deficits now. For one, Stanford professor John Taylor claims L’affaire Excel is why the G20, the birthplace of the global austerity movement in 2010, was more muted on fiscal targets recently.
The discovery of errors in the Reinhart-Rogoff paper on the growth-debt nexus is already impacting policy. A participant in last Friday’s G20 meetings told me that the error was a factor in the decision to omit specific deficit or debt-to-GDP targets in the G20 communique.
For another, Bill Gross, the manager of the world’s largest bond fund, and who, as Joseph Cotterill of FT Alphaville points out, used to be quite the fan of British austerity, made a big about-face in an interview with the Financial Times on Monday:
The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money.Bond investors want growth much like equity investors, and to the extent that too much austerity leads to recession or stagnation then credit spreads widen out — even if a country can print its own currency and write its own checks. In the long term it is important to be fiscal and austere. It is important to have a relatively average or low rate of debt to GDP. The question in terms of the long term and the short term is how quickly to do it.
Growth vigilantes are the new bond vigilantes. Gross thinks the boom, not the slump, is the time for austerity — which sounds an awful lot like you-know-who. The austerity fever has even broken in Europe. At least a bit. Now, eurocrats can’t say that austerity has been anything other than the best of all economic policies, but they can loosen the fiscal noose. And that’s what they might be doing, by giving countries more time and latitude to hit their deficit targets. Here’s how European Commission president José Manuel Barroso framed the issue on Monday:
While [austerity] is fundamentally right, I think it has reached its limits in many aspects. A policy to be successful not only has to be properly designed. It has to have the minimum of political and social support.
That’s not much, but it’s still much better than the growth-through-austerity plan Eurogroup president Jeroen Dijsselbloem was peddling on … Saturday. Now, Reinhart and Rogoff’s Excel imbroglio hasn’t exactly set off a new Keynesian moment. Governments aren’t going to suddenly take advantage of zero interest rates to start spending more to put people back to work. Stimulus is still a four-letter word. Indeed, the euro zone, Britain, and, to a lesser extent, the United States, are still focussed on reducing deficits above all else. But there’s a greater recognition that trying to cut deficits isn’t enough to cut debt burdens. You need growth too. In other words, people are remembering that there’s a denominator in the debt-to-GDP ratio. But austerity doesn’t just have a math problem. It has an image problem too. Just a week ago, Reinhart and Rogoff’s work was the one commandment of austerity: Thou shall not run up debt in excess of 90 percent of GDP. Wisdom didn’t get more conventional. What did this matter? Well, as Keynes famously observed, it’s better for reputation to fail conventionally than to succeed unconventionally. In other words, elites were happy to pursue obviously failed policies as long as they were the right failed policies. But now austerity doesn’t look so conventional. It looks like the punchline of a bad joke about Excel destroying the global economy. Maybe, just maybe, that will be enough to free us from some defunct economics.
The “Hard Times”, strictly speaking, referred to the “recession” of 1837-1838, when 90% of the factories and the United States closed following a banking crisis which was credited to Andrew Jackson. At the heart of this period, these large cent sized tokens became necessary substitutes for the government issued coins, which were to a large extent hoarded. This rich and varied series has achieved a substantial following, with some pieces commanding thousands of dollars. The series includes politically oriented tokens, commercial advertising tokens, and anonymous monetary tokens. Perhaps the most enduring result of this series is emergence of the donkey as the symbol of the Democratic Party.”
“The event that defines this era was the veto of the renewal of the charter of the Bank of the United States by Andrew Jackson in 1832. The BUS was slated to close in 1836, but Jackson didn’t wait. He withdrew Treasury money from the BUS. (Interestingly, the Treasury had an embarrassment of riches. The US was without debt.) However, when the BUS closed, credit collapsed. ”I take the responsibilty”, says Andrew Jackson, standing in an empty treasure chest. Martin Van Buren’s ship of state has tattered sails on the obverse of a coin; the reverse shows Henry Clay’s sails billowing. “I follow in the steps of my illustrious predecessor”, says the jackass on the obverse while the reverse shows a treasure chest being borne off by a turtle. “Good for shinplasters” refers to worthless paper money used as stuffing in boots. Some, to avoid charges of counterfeiting bear the slogan “Millions for defense NOT ONE CENT for tribute.”
These tokens were about the size of a US Large Cent, just under 3 cm across, hefting over 10 grams. They were an east coast phenomenon, since metals, dies, etc., were found near industry. (Twenty five years later, Civil War tokens were issued from Michigan, Indiana, etc.) The fact that they are found today in middle grades around Fine indicates that they actually circulated in trade. America eventually recovered from the Panic of 1837. The debt rose. Finances moved from Chestnut Street in Philadelphia to Wall Street in New York. Hard times tokens retired to dressers and chests as government cents (soon smaller) circulated again.”
“One of the more interesting aspects of American numismatics is the study of those tokens which served in place of coins. The best known of these were made in the late 1830s and today are called Hard Times Tokens because of the economic problems that affected the United States during that era. Prior to 1837 tokens were little used in the American marketplace but a series of events that began in 1834 was to change everything. In that year, after many years of debate, Congress finally reformed the gold coinage by lowering the weights. During the 1820s most coined gold had left the United States, leaving only silver and bank notes to conduct commercial affairs.
The act of June 1834 was meant to bring United States gold coins into line with the international ratio between gold and silver. The law of 1792 had set the ratio at 15 to 1 (i.e. one ounce of gold was worth 15 ounces of silver) but by the 1820s the world markets used ratios closer to 16 to 1. The result of the 1834 law was that gold flowed heavily into the United States because the ratio had been set a little too high, at 16 to 1. During 1835 and 1836 Mint and Treasury officials became concerned that the influx of gold was having the unwanted effect of driving out the silver coinage of the United States; foreign silver still arrived in considerable quantities, however. To solve this latest problem, Mint Director Robert M. Patterson prepared a comprehensive coinage bill that included a provision that slightly lowered the ratio, to about 15.9 to 1. The revised law was passed in January 1837 and proved beneficial. U.S. silver stopped leaving the country while gold continued to arrive.
During early 1837 the United States was perhaps the best supplied with gold and silver coins than had ever been the case in its history up to that time. But all of this would soon end, due to a series of blunders made by the states, as well as the federal government. The early 1830s witnessed a great expansion of business and with this came a call for roads and canals so that goods could be gotten to market and raw materials brought from the interior to the coastal manufacturing plants. All of this initiated massive borrowing by the states for these internal improvements. This spending created inflation and increased issues of paper money. The expansion of the roads and canals played out against another backdrop, the attack by President Andrew Jackson on the Bank of the United States. This bank, which had been chartered in 1816 for 20 years, served the nation well in forcing private banks to honor their paper currency with specie, usually silver but after 1834 in gold if desired.
The strong position of the Bank of the United States, however, inevitably led to political involvement and the bank leadership was openly against the Jackson Administration. This President felt the same about the bank and was determined to destroy it. The early 1830s saw a bitter struggle between the bank and Jackson. The bank lost. One of the strategies used by the President to undermine the bank was the removal of federal deposits (gold and silver coin). Such funds were placed in private banks friendly to the administration, called “pet banks” by Jackson’s enemies. These banks were sometimes poorly managed and the influx of hard money led them to issue loans to politically connected individuals without the proper collateral.
Hard Times Token, 1834
The federal government had also stepped in to make matters worse, much worse. Jackson had long felt that paper money, in particular that was issued by private banks, was holding back the economic expansion of the United States; the President believed that bank notes of less than $20 in value ought not to be issued. The problem with this was that was a large number of notes of less than $5 value in daily use, an unintended result of the monies going to pet banks. The disaster waiting to happen was politely termed the Specie Circular and had been issued by Treasury Secretary Levi Woodbury on July 11, 1836. It required that land purchases on the frontier be made strictly in gold or silver coin. Some exceptions were made for the use of paper money on a temporary basis but the intent was clearly to force paper money out of daily use. At the same time, the massive influx of gold into the United States from 1834 through 1836 caused problems in Europe, especially England. The Bank of England responded to the loss of gold by raising the discount rate to 5 percent in September 1836. This caused a reverse flow of gold to Great Britain although on a limited basis at first. By the spring of 1837 gold was leaving for England at a growing rate. The cumulative effect of the Specie Circular, funds to pet banks, and the English discount rate came crashing down in May 1837. On May 10 the New York banks suspended specie payments for their notes, triggering a run on banks throughout the United States. The financial upheaval forced many businesses to fail and a large number of workmen were laid off. The Panic of 1837, as it came to be known, was a severe recession but not a depression. Gold and silver were now rarely used in commerce, their place being taken by bank notes as well as scrip for values as low as a few cents. The government had meant well but failed to foresee what would happen by acting too quickly.
As in all such situations a number of people saw the opportunity not only to make money, but score political points against their enemies at the same time. It is hard to say which aim was the most important. The token coinage which resulted succeeded very well in both aims, much to the irritation of the supporters of Andrew Jackson and his hand-picked successor, Martin Van Buren. Van Buren had taken the oath of office as President on March 4, 1837, just in time to reap the whirlwind caused by the earlier mistakes. On the eve of the token explosion in 1837 the United States Mint had no idea of what would happen. But it did have a vested interest in seeing to it that the tokens were neither issued nor used in the marketplace. The reason was purely economic in that the Mint derived a considerable profit from issuing copper coins to the public. There was, however, a difficult problem that the Mint had in dealing with the token outbreak. Copper coins were not legal tender and not convertible into gold or silver except at the so-called exchanges, where copper cents could be converted to silver for a fee of several percent. Merchants had to pay their bills in specie (until the banks suspended specie payments) so the accumulation of United States copper coins was not exactly a blessing. (Legal tender status was not given to minor coins until 1864.) Just when the first Hard Times Tokens began to be seen in the marketplace is uncertain, but distribution of these pieces was well under way by the summer of 1837, perhaps as early as mid July. They apparently first appeared in New York City but this is also not quite certain and is based on the fact that more varieties of tokens are known for this area.
Whatever the exact sequence of events, they were unknown to Mint Director Robert M. Patterson until the fall of 1837. He noticed, in a local newspaper, an advertisement offering tokens for sale at a price well under the official value of a cent. Considering that the Mint needed the profit on copper coinage to offset other expenses, he was less than pleased at what he saw. Dr. Patterson sent a Mint employee to purchase a few of the tokens that had been advertised and then visited the United States district attorney, whose name was Reed. Patterson told Mr. Reed that the tokens in question were “spurious” and that the 1825 anti-counterfeiting statute was applicable in this case. Patterson testified before a federal grand jury and that body agreed with him; federal officials now ordered the local merchant to stop selling tokens on pain of prosecution. At first the Mint director believed that the token episode was an isolated one. However, he soon learned that he had witnessed but a small part of the business and that it was widespread throughout New England and New York State. Patterson then began writing letters to friends asking them to investigate the matter and report back to him. By late November Patterson had learned how much of a nuisance the tokens had become, at least in his mind. On Dec. 2, 1837, he wrote Treasury Secretary Woodbury on what he viewed as a worsening situation as the Mint’s profits on copper coinage were being eroded. Patterson began his letter by recounting the incident with the Philadelphia merchant and the grand jury. Patterson noted that similar problems were encountered at Baltimore but that the major problem was in New York City where the tokens were not only manufactured but used widely in ordinary business transactions. One friend of the director’s in New York had picked up 10 different kinds of tokens and sent them to the Mint for examination. The Mint director found that at least three of the tokens had been made at the same private mint because the design was similar. In particular Patterson mentioned the following tokens (or “store cards” as we might term them now): New York Joint Stock Exchange Company, Robinson, Jones & Company, and Ezra Sweet. He went on to note that a newspaper, the New York Observer, was reporting numerous kinds of such pieces in daily use throughout the city. According to the newspaper account, the tokens were sold for about 62 cents per hundred pieces, a nice profit when passed on for a cent.
“In its issue of Nov. 23, 1837, the Emancipator ran an advertisement offering the Female Slave tokens at $1 per hundred. Made of good copper and with a device on reverse similar to legal U.S. cents, they sold well. The ad also said that it was proposed to issue Kneeling Male Slave tokens as well, and this accounts for the few pattern pieces of HT 82, which were never produced for circulation.” http://www.hardtimestokens.com/ht81details.html
According to Patterson, an anti-slavery newspaper, the Emancipator, reported that pieces similar to a cent of a “new emission” were being sold at the offices of the Anti-Slavery League on Nassau Street. The paper described the devices as being anti-slavery in nature. There is one anti-slavery token listed by Lyman Low (No. 54), in his study of Hard Times Tokens, which seems to fit the given conditions except that it is dated 1838. Perhaps the issuers felt that it would be coming out so late in 1837 that it ought to be given the next year’s date. The listing made by Dr. Patterson show another interesting aspect of the Hard Times Tokens in general. The date, if prior to 1837, may well mean nothing more than some important year connected with the business that issued them. The Robinson, Jones, & Company piece, for example, uses an 1833 date to show that it received a medal that year for a button display. Patterson also noted that tokens were well used in Boston though he did not give any names. The Boston tokens, as with most of the others, were lightweight compared to the genuine cent, averaging perhaps 70 percent of the weight. He thought that manufacturing costs were about 50 cents, or a bit more, for a hundred pieces which gave a decent profit when they were later sold at about 62 cents per hundred. The dies were crude and cheaply made, which helped hold costs down. Not only did the merchants get “cents” at a strong discount but most of these tokens had the added advantage of advertising their businesses. As far as they were concerned it was a win-win situation. Dr. Patterson, however, had a slightly different opinion.
In the meantime Treasury Secretary Woodbury had taken Patterson’s letter under consideration. On Dec. 4 he replied, noting that he had just written the federal attorneys at New York and Baltimore; he did not mention Boston but this was probably done as well. The attorneys were instructed to take such steps as to eradicate the problem. December 6 saw Patterson writing Woodbury again, this time to report that he had seen another 11 tokens, primarily from New York. His list included token issuers Henry Anderson, H. Crossman, Maycock & Company, Merchants Exchange, and Abraham Riker. These later tokens were somewhat heavier, though still light by as much as 32 grains below the legal standard of 168 grains. In an 1849 letter discussing these tokens Dr. Patterson mentioned that the legal attacks by federal attorneys had put a stop to the business. It is not clear from the letter, however, if the political tokens were interdicted by the same methods since no names appeared on these as issuers. It is believed that very few merchant tokens were struck after the spring of 1838. At the same time as the merchant pieces were issued, political opportunists saw the chance to not only attack Presidents Jackson and Van Buren but make a tidy profit in the process. Quite a few varieties of the political tokens were issued and are collected today by specialists.
It is of interest to note that the tokens of 1837-1838 are known as Hard Times Tokens, but this is a little less than accurate. The recession that started in May 1837 was essentially over within a year; New York banks resumed specie payments in May 1838. In June 1839, however, matters suddenly got worse and this time it was a full-blown depression with large numbers thrown out of work. The underlying cause of this second round of economic bad news was primarily the English discount rate, as too much gold had again left the island kingdom. This time the problem lasted until 1842, when important discoveries of gold in Russian Siberia provided massive quantities of the yellow metal for world markets. Hard Times Tokens are but a footnote in the numismatic history of the United States yet played a key role in the marketplace for a few months. They deserve to be better known.”
“Hard Times tokens represent an unusual period in the financial history of the United States. President Jackson, in his campaign of 1832, was vehemently opposed to the Second Bank of the United States. This central bank in Philadelphia was said by opponents to control the money supply in favor of the wealthy merchants. Populist Jackson vowed to abolish it. The bank issued its own currency, which quickly became the most stable paper money in the land. It exercised considerable control over credit and interest rates throughout the country. When Jackson was reelected, he tried to abolish the bank. Finally, in 1837 he succeeded in accomplishing his goal. In the meanwhile, the president of the bank, Nicholas Biddle, tightened the money supply, which then lead to a financial panic. Other banks issued paper money with little or no gold or silver backing and quickly folded. By 1837 over 100 banks had gone under. The small change necessary for commerce began to disappear. Tokens were issued to solve the needs of the public. They were frequently political or satirical in nature. The tokens of the period 1832-1844, when Van Buren became president, are classified as the Hard Time issues.”
Mint Drop Token, 1837
“”Bentonian Currency” was hard money as opposed to paper. The crash of 1837 and the Hard Times which followed were by no means solely due as the Wing leaders would have it believed–to the overthrow of their policy and the “mint drops” or hard money of Jackson and Van Buren: they were only the culmination of evils which had long been threatening disaster. The Panic of 1837 resulted in hoarding of coins in circulation. The withdrawal of public funds from the banks led to a contraction of the currency and great changes in apparent values, which were the apparent causes of “Hard Times.” To fill the need for small change in circulation, a wide variety of copper tokens appeared in 1837.”
“Because Van Buren was a supporter of Jackson — going so far as to state his intent to follow in Jackson’s footprints during his inaguration — Van Buren was a solid target for people’s resentment due to the failing economy. The Hard Times tokens were minted in cheap copper and bronze blends by private businesses and infividuals, and enthusiastically decorated with political satire of all kinds. Van Buren’s face didn’t adorn many (if any) of these tokens, although caricatures of Jackson were quite common. Mostly, Van Buren was mentioned as Bad Things To Come, represented by things such as the ship “Experiment” seen to the left, breaking up in stormy seas, representing the attempt to do without banks, despite the lack of previous evidence that it works. Van Buren’s inauguration statement, “I follow in the footsteps of my illustrious predecessor” stuck with him — but were combined with a picture of a jackass to show just what his opponents thought of him. That donkey, originally used as a visual ersatz Andrew Jackson, eventually became the way the public saw the Democrat party, and was revised to be a donkey for today’s Democrat logo. These Hard Times Tokens were some of the first lasting representations of the Democrats as a donkey.
These tokens weren’t exactly currency, although some businesses accepted them in lieu of actual monies, seeing that due to the bank’s actions and Jackson’s opposition to federal currency these Hard Times tokens had just about as much monetary value as the so-called ‘real thing’. Mostly, they were passed around like political buttons today, demonstrating political affiliation and making a statement against the government at the time.”
“I take the responsibility,” says Andrew Jackson, standing in an empty treasure chest. Martin Van Buren’s ship of state has tattered sails on the obverse of a coin; the reverse shows Henry Clay’s sails billowing. “I follow in the steps of my illustrious predecessor,” says the jackass on the obverse while the reverse shows a treasure chest being borne off by a turtle. “Good for shinplasters” refers to worthless paper money used as stuffing in boots. Many, to avoid charges of counterfeiting, bear the slogan “Millions for defense NOT ONE CENT for tribute.” In 1834, an economic downturn on the English stock market brought “hard times” to both Canada and the United States. However, the event that defines the start of this era in the USA was a clash between the Bank of the United States and President Andrew Jackson in 1832.
The BUS was a semi-private institution, the invention of Alexander Hamilton, and precursor to the Federal Reserve. It was slated for renewal in 1836, but Jackson didn’t wait. He withdrew US Treasury money from the BUS and deposited it in local banks. Interestingly, the Treasury had an embarrassment of riches, about $17 million in surplus gold and silver. Also, the US government was without debt. However, when the BUS closed, credit collapsed. Political activists and merchants created these 1-cent tokens to take up the slack. They were an East Coast phenomenon, since metals, dies, etc., required industry. (Twenty five years later, Civil War tokens were issued from Michigan, Illinois and Wisconsin in the West.) The fact that most types of Hard Times Token can be found today in grades from Fine down to Good indicates that they actually circulated in trade.
The standard reference manual for this series is Hard Times Tokens 1832-1834 by Russell Rulau. His work is based on a book from the 1899 by Lyman H. Low. Rulau includes the Low numbers in his catalog. He estimates retail price. He has added many new items over the years with each new addition. The book also approximates the rarity, R1 (common) to R8 (perhaps unique). Some of these coins are objectively rare and highly valued outside the world of numismatics. “Am I not a Woman” is the motto on an Abolitionist token. “Am I not a Man” is its companion piece. Professional Afro-Americans and full- time liberals have bid these up to about $80 in better grade and perhaps over $10,000 in uncirculated. These two are difficult to find in low grade because they have been popular with collectors for over 150 years.
You can find common Hard Times Tokens in almost any dealer’s inventory. You will find them priced all over the range depending on the dealer’s willingness to own them. You will have to use basic numismatic principles to grade them. Although they rate a general entry in The Red Book, not all services will slab them. Commons in low grade are no more than a $5 item, or about $15 below uncirculated. America eventually recovered from the Panic of 1837. The Federal Debt rose. Finances moved from Chestnut Street in Philadelphia to Wall Street in New York. Hard Times Tokens retired to dressers and chests as government cents (soon smaller) circulated again. If you really love American History and really treasure the values that define our nation, you will find a wealth of pride in these artifacts.
“Pomme de Terre, Pomme en l’Air.” Coins by Matthew Hincman
I ran into artist Matthew Hincman last week, who has decided that things have gotten bad enough that it’s time to create your own money. Hincman designed the coin above and had 1,200 minted in copper, which he plans to leave on the ground at random locations for people to pick up and puzzle over. He says he modeled the coins after the Hard Times Tokens that circulated in the 1800′s, many of them satirical. Hincman has no plans to control the money supply at large. In fact, he’s trying to stay out of trouble. For one recent project, he installed an unusual version of the standard park bench — it was impounded by the authorities, though they liked it so much, it’s now back in place. Hincman figures there’s no law against leaving coins around. He says sometimes drops to one knee and pretends to be tying his shoe, then casually deposits one on the sidewalk.
Open Call for Entries: “The ‘producers’ of the International Drink Ticket herein announce a design contest for proposals to replace the current ‘Spanglish’ face of the Ticket, not pictured. The winning designer will get a small share (percentage) of any future known-universe profit. The winning design will be used to create the mold that is used to emboss one side of the IDT (the ‘Chinglish’ side will remain the same). The ‘Spanglish’ side may include a picture, as on a coin, such as Obama or a bird etc, but at minimum must include (English or Spanish) impressions that read “Int’l Drink Ticket” + “Brooklyn Mint” + the current year: “2009″.”
“The International Drink Ticket, printed in editions, is a currency alternative sincerely offered to replace the collapsed dollar (should the US dollar irrevocably fail). All over the world, even if one abstains, everyone knows someone who drinks: one International Drink Ticket is worth one drink, that is to say, one 4-count pour (using a pour spigot) of bottom shelf liquor (non-well), or a bottled beer. Everything else is negotiable. The IDT also easily gets used as barter coin. Common bartender uses are 2 cans of beer for one IDT, or sometimes two 2-count shots. One IDT currently is worth around USD$5 in NYC but this value fluctuates regionally. Design entries should be big enough to 3-D print, and fully detailed.” [Please post proposal editions below as comments.]
“A collection of 5 books Eric has deemed essential to the understanding of working with the etheric formative forces, the type of electricity that Tesla discovered being one of these lost forces. These books are volumes of lost technology. One is over 1500 pages long and combined these books are almost 400 years old. Eric told me ‘Don’t bother talking to me about this stuff until you have read these’”
“Here are some amazing experiments proving Tesla’s work we did at Borderland labs in the late 1980′s.
* The One-Wire Electrical Transmission System
* The Wireless Power Transmission System
* Transmission of Direct Current through Space
* A novel form of electric light powered by a single wire which attracts material objects but repels a human hand!
Also presented is a longitudinal ground broadcast from our lab to a nearby beach, using the Pacific Ocean as an antenna. These experiments can be reproduced by any competent researcher, there are no secrets here!”
As a fifteen year old he got his first job with Americas biggest Radio corporation RCA, as a 16 year old he graduated high-school as a full fledged engineer and began working for Bell Labs and then went on to conquer every technical challenge the US Navy threw at him. Eric Dollard is without a doubt the Greatest Hacker Alive, much as Tesla was the greatest Hacker who ever lived. Eric Dollard has dedicated his life to discovering scientific truth to better humanity. He succeeded beyond all expectations and even surpassed Nikola Tesla. His reward has been tyranny and poverty. The work of Eric Dollard was the very pinnacle of any available material. As I got closer to his work I began to wonder what he was up to. I was shocked and horrified to learn that he was now homeless. His last lab having been destroyed and all his work stolen. There are active agents of suppression working against people like Eric Dollard and Tesla before him. These agents are shadowy and have great power. They can shatter the best laid plans of the individual. My hope is that we the people working together can triumph over them. Those that don’t believe that such powers exist should look for another worthy campaign to aid. Those looking at this as an investment, look elsewhere as this is not a mere charity campaign but a bold declaration of defiance to the powers that be.
All the funds will go to Eric Dollard. If we do not meet the goal all the funds also go to Eric Dollard. The goal is just my humble estimation of how much the legal proceedings will be for a few months and hopefully to get Eric off the street. The more we get the closer we can get Eric back his lab or setup a new lab. One of the most respected venture capitlists in this field said that “Eric has done more on foodstamps than all my other investments” This is what caught my eye and it is very true. Eric can make do with very little but I estimate it will take around $200,000 to set him up with a functioning bare bones lab again.
Eric Dollard is a scientist of the type found in America around the turn of the century. He is an electrical engineer of the old school relying on experience with equipment rather than acceptance of mathematical considerations. He has studied the works of Nikola Tesla and Charles Proteus Steinmetz extensively and has applied their principles to his research. He has advanced the mathematical works of the early electrical pioneers to the stage of pragmatic industrial engineering. This was only possible by bypassing all modern relativistic theories and concepts of electrons flowing through wires, and instead maintaining the ether theories from which modern electrical equipment originally emerged. Eric’s work is a direct continuation of the works of Tesla, Steinmetz, Oliver Heaviside, Philo Farnsworth II, and other energy pioneers whose work can be reproduced and used.
Eric has written over 30 notebooks of material covering his years of research. Five of these notebooks have been published by Borderland Sciences Research Foundation: Condensed Intro To Tesla Transformers; Dielectric & Magnetic Discharges In Electrical Windings; Symbolic Representation of Alternating Electric Waves; Symbolic Representation of the Generalized Electric Wave (In Time); and The Theory of Wireless Power. These books are all practical and engineering oriented. The Alternating Electric Waves paper, presenting Eric’s Four Quadrant Theory of Electricity, was written after his discovery of how to generate excess magnetizing power in an industrial situation (using synchronous motors in a huge shipyard) and make the KVAR (Kilo Volt Amperes Reactive) meter turn backwards. Eric discovered that these industrial meters are pinned so that they will not turn backwards, but they can be stopped, creating readily realizable savings for the industrialist.
Further development of Eric’s ideas has been presented at the U.S.P.A. Conference in 1987 in his talk, Representations of Electric Induction, which also included a demonstration of the Tesla One-Wire Transmission of Electricity. The One-Wire Electric Transmission has direct commercial applications in the realm of real full spectrum incandescent lighting, which could be used in operating rooms, highway lighting, schoolrooms, offices, etc. In Eric’s talk at the 1988 International Tesla Symposium he presented the engineering mathematics to continue work on Tesla’s oscillating coils while shedding the misconceptions attached by modern physics which have brought real research into Tesla to a dead halt. The engineering mathematics developed by Eric will allow researchers to manufacture coils with practical uses rather than just making sparks.
The broadcasting of electricity, distortion free worldwide radio transmission, and single element full-spectrum incandescent lamps are just a few of the spinoffs taken from the realm of abstraction and brought to the reality of the lab bench by Eric’s work, but perhaps the most commercial of all is what Eric terms, “The Ultimate Sound System”. Eric has developed the principle and the first prototypes of distortion free audio amplification. This discovery, if properly applied, has the potential to revolutionize the entire audio industry, as well as the reality of related spinoffs into the communications and power transmission industries. In Borderland’s videotape, Transverse & Longitudinal Electric Waves, Eric presents practical uses of Tesla’s theories for power transmission, and in the process opens up, through the use of clear, reproducible experiments, aspects of electricity which have only been partially theorized in the past. Extensions of his industrial power work are presented with practical applications for increased power efficiency in industrial situations.
In brief, Eric Dollard has single-handedly carried the works of the early electrical pioneers to a stage where they can be applied to everyday uses. There is no false promise of “free energy” sometime in the future, just a better technology we can use NOW!
Eric made an excellent video about the truth of the Tesla Marconi radio station and why it was shut down. When this video was made Eric still did not know the full extent of the suppression. The books of Gerry Vassilatos, Secrets of Cold war Technology and the Vril Compendium, showed him just how far RCA and the shadowy organizations funded by the central banking cartel went to suppress Tesla’s longitudinal wave technology.
Nikola Tesla single handedly gave us the technology that has created our entire power grid and communications systems. As the pinnacle of the evolution of the Victorian scientists Tesla aspired to create a system that would light up the entire world without wires. In the end a combination of his own wreck less decisions and the agenda of the moneyed elite brought upon his downfall and banishment. Undaunted by this, Eric’s set out to recreate all of Tesla’s technology and to design a system of self powering, faster than light and lossless communication. Eric was successful in rediscovering Tesla’s core work, yet he is now living out in the desert. His laboratory and all of his possessions taken were from him. Eric’s story is the story of all those who fight for truth in defiance of power. How his story ends is up to us.
As a fifteen year old Eric was granted free access to RCA’s great Bolinas Radio Facility. RCA, America’s biggest Radio station at the time was happy to grand the young prodigy complete access to all of their facilities for his research into high frequency alternating current. Eric wasn’t on the payroll for legal reasons but those in the know were aware of how how great a competitive advantage Eric Dollard could give them. Bell Telephone quickly snatched him up right out of High School and also gave him free reign to persue his experiments, while not officially on the payroll. Eric was still only sixteen. Eric left high school with three certifications as a full fledged engineer at the age of sixteen. Bell Labs called him their “Golden boy” and “Angel of Electricity”.
To pursue true science is to pursue truth and all truth seekers are to tested. Eric learned this a hard way at an early age when his parents wrecked his garage laboratory and kicked him out of the house. This was to be the first time his laboratory and work would be deliberately destroyed. In desperation he enlisted in the US Navy. They gladly accepted the young recruit and after aptitude testing referred to him as “God’s gift to the Navy”. He solved their “impossible problems” with ease and later returned to RCA to save their network from the rapidly advancing threat of satellite communications.
Eric was happy to be back at the massive Bolinas station as he was beginning to see just how special it was among radio facilities. The great Bolinas Radio station, also called KPH was one of the oldest in the world and it held a secret that had been covered up for decades. He began to see that much was being hidden about how radio really worked. With his free time he began peering into the forbidden history of radio. Then one day he read a copy of John O’Neill’s book Prodigal Genius. The suppressed history of Nikola Tesla was laid before him. Eric began to see how the radio system as it was now was merely a shadow of what it was intended to be and once was.
Eric began reading all of Tesla’s patents and lectures. What he discovered was that after reinventing alternating current in the 1890′s Tesla then discovered an entirely new kind of electricity that was not electro magnetic in origin, hence completely different from the system we use today. This was confirmed by reading the court transcripts from the patent trial between Tesla and Marconi, where Tesla stated many times that his technology was not electro magnetic, a statement that at the time fell on deaf ears. Eric, however, heard him loud and clear. If Tesla’s discovery did not use electro magnetic waves then what kind of waves where they and how was it different? Eric did not turn to the false path of theorizing with nebulous mathematics as our modern day physics would but to experimentation, as Tesla himself always did. From his lab in California and working the salvage business Eric managed to recreate all of Tesla’s key experiments. What he discovered would come as a surprise to even the most learned Tesla fan.
Most scientists associate Tesla’s work with Frankenstein movies the same way children do. Even the most avid Tesla fans build Telsa Coils for Halloween entertainment and completely miss the point of his invention. * Tesla’s system of wireless transmission of power and communications was not through the sky, but through the earth, as in the actual ground. While it did naturally reach out into the atmosphere, the earth itself was the main conductor. * Tesla discovered a completely new kind of electrical energy, one that was faster than the speed of light and did not lose strength as it was transmitted. hence it was NOT electro magnetic. It has come to be called scalar waves by some but the proper term is longitudinal waves. Eric calls this energy in electrical form “dielectricity” * This new energy could send power through the earth and the earth amplified this energy as it traveled, meaning that one transmitting station could send one million volts through the ground and 5 receiving stations whether around the neighborhood or around the world could each receive one million volts, for a total of five million volts of power! * This energy could be used to send communications as well as power, and this was the case from 1900 to the 1919′s until RCA refitted the landmark Bolinas plant and suppressed the Tesla longitudinal technology.
Tesla’s secret project was about far more than simply transmitting electricity without wires. It was about all communications at faster than light speeds and giving energy away to all humanity for nothing. Tesla figured it all out in theory and tested it at Colorado Springs but did not complete his system at Wardenclyffee. Eric Dollard has figured out how to implement the core of these ideas into a viable system. The first major radio installation in the USA was at Bolinas California. The same station where Eric got his start as a fifteen year old engineer working for RCA. Bolinas was first built by Italian inventor Marconi in California in 1913. Marconi used 17 of Tesla’s patents to build this system and it worked. This station used massive plates in the ground, one buried in the ocean near the fault lines, to transmit radio waves that ALSO carried power, not enough to power homes but certainly enough to power radios. This is why the old crystal radio sets of the 20′s and 30′s had bright clear sound with NO BATTERY or WIRE to the WALL OUTLET! You can still make radio wave powered radios using bottles and wires that work with no batteries our wall outlet. The science is very real.
This old crystal radio set from the 20s used to work LOUD and clear using the radio signals sent in that era, no wall outlet. Those radio stations have long since been taken down…
KPH
The Bolinas Tesla/Marconi radio station is also known as KPH by those old timers who still know of it’s significance. The secret this facility holds is the key to unlocking faster than light radio, wireless power transmission and free energy synthesis. Eric has dedicated 2/3rds of his life trying to save this secret and resurrect it for the benefit of mankind. Thus we can now see that the first radio stations in the USA were leading back to Tesla’s free power transmission system that sent radio waves using Tesla’s method. Marconi did not go all the way and build it as Tesla envisioned which was to broadcast power to a network of such stations worldwide. The Tesla Marconi station sent out radio waves using Tesla’s longitudinal wave technology. These waves provided enough power to amplify the signals it sent without any external electricity, even worse the existence of such technology left the door wide open for others to naturally pursue the transmission of energy via radio. This was far too threatening for the energy industry and they had Marconi’s station shut down and replaced with an inferior system of electro magnetic waves, which is what we use today.
The Alexanderson Antennas MTA’s hold the secret to electrostatic non wave length radio technology. Faster than light, lossless and long suppressed. Ernest Alexanderson was the protege of Charles Steinmetz. His generators based on Tesla tech are extremely advanced even today.
This plant was further augmented with the technology of another brilliant radio engineer by the name of Alexandersson. It became such a prized jewel into crown of the military industrial complex that it’s secret had to be hidden away. The true value of the Bolinas Radio station can now be seen.Not only did RCA bury it;s significance but other shadowy NGO’s such as Commonwael of Bolinas, California made it there prime directive to literally bury the facility under a pile of dirt and garbage. Commonwael poses as a harmless NGO but this belies it’s true purpose as a front of the central banking cartel to suppress forbidden technologies.
the TESLA MYSTIQUE
Tesla is now wrapped within the cloak of a deep mystique as a flawless genius who invented AC current, radio, electricity and pretty much everything else. Tesla was indeed a magnificent genius but he was far from perfect. People blame J.P. Morgan for crushing his dream at Wardenclyffe but they fail to do their research, read the book Empire of Lights, and see that Tesla had received monies from Morgan to develop telegraphic radio and from Astor for the florescent light bulk yet Tesla in his own idealistic way spent the money instead to further his own theoretical research, which lead not to the promised deliverables but to a lack of confidence amongst him and his investors instead. The mystique buries Tesla under a mountain of sugar and keeps his admirers from seeing the true and revolutionary nature of his work.
Eric Dollard claims that the vast majority of Tesla societies are dis-information fronts funded and controlled by the very same interests that suppressed Tesla’s work. Eric gave several long and deep presentations on the truth of Tesla’s work at the San Francisco Tesla Society. To this day these video presentations and even a book that Eric had written are being withheld from the Public by the San Francisco Tesla Society, a now revealed to be a front for the Lawrence Livermore National Labs. Those who wish to know the truth about radio and Tesla’s real work should connect Eric Dollard with an attorney willing to sue the San Francisco Tesla Society in court to retrieve the videos and book.
POLITICS of AETHER
After Eric confirmed and double checked all these findings he was left to accept a very painful political truth. All of Tesla’s work with this new type of electricity and wave form had been actively suppressed. Despite this new type of energy wave being far more cost efficient and effective it was banned from all commercial use and banished from textbooks as well. The scientific community has disavowed any knowledge of it, why? This original form of transmission, called dielectric wave forms, if allowed to proliferate through the industry would have naturally lead to the transmission and synthesis of energy at no cost. The very intellectual admission of the existence of this type of energy was the admission that there was energy all around us. Victorian scientists up until the twentieth century called this energy field that permeated the entire universe, the aether. Tesla believed that his system of longitudinal electricity worked because of the aether. The aether was a dangerous concept to the energy barons such as Rockefeller, Morgan and the central bankers that funded them such as the Rothschilds. It was not enough to destroy Nikola Tesla, and to tear down any trace of such technology such as the Marconi radio plants built with Tesla and Alexandersson dielectric technology. The powers that be had to completely destroy the very idea of the aether and ensure that free energy would never again threaten their monopoly.
Physics was hijacked and turned into a religious cult of personality. Nebulous theories and quirky characters were constructed to misinform all generations afterwards. Eric Dollard has not been shy in his writings and named The Theory of Relativity and Einstein as the main constructs to this end. Many other scientists support him and there is a growing movement to liberate physics from pseudo psychics and the high priests of nebulous pseudoscientific banker funded dogma. Time magazine, The NY Times and many other publications have recently published articles citing the evidence that Einstein was wrong. Einstein was proven wrong the moment he introduced his theory and has been proven wrong countless times since, yet we still hail him as a saint of science. The suppression is inter generational and Einstein was only the first pillar of the deception. Carl Sagan, Stephen Hawking and most recently Michio Kaku have taken up the flag of obfuscated mysticism in a desperate effort to suppress aether theory. All this at the bidding of the same central banking giants which sprang from the Rothchilds and Rockefellers. Knowing this and knowing the fate of Tesla and all those that tried after him to recreate his work was not enough to stop Mr. Dollard. Eric went about his work and peered even more deeply into the past.
BACH & ORGANIC ELECTRICITY
Science and logic alone were not enough to comprehend the aether and how energy flowed through it and from within it. Eric looked to the legendary mathematician Charles P Steinmetz and to Oliver Heaviside for answers. Their censored writings revealed that they too had taken this battle for truth upon themselves and were met with the same resistance. In their mathematics and Tesla’s experiments lie the key to unlocking the aether but there was one element missing to decipher the riddle. Johannes Sebastian Bach and his music held the answer. The multi-dimensional organ music of Bach began to reveal an organic matrix to Eric. He began to see the work of Bach as a culmination of the same thread of natural science exposed by Pythagoras of Samos. The aether and the energy it produced was not some mechanical construct and thus pure mechanics and mathematics alone could not represent it. The aether was an organic energy matrix and it was as responsible for the static electricity in the air as it was for the plants that grow from the ground and the animals that walk the earth. Eric had begun to step out of the world of pure science and into the metaphysical.
Eric noticed in his experiments that when he ran this special electricity of Tesla’s through wood or other organic matter that it would burn tree like etchings into it. They looked like the branches of trees and their dimensions reflected the golden ratio. Going a step further Eric noticed that when this energy was transmitted within vacuum bulbs that galactic formations and cosmic arrangements would form within the bulbs. It was as if he was looking through the Hubble telescope through a light bulb on his lab bench. Further experiments revealed the fractal organic nature of all matter. The aether theory became all the stronger the more one compared the cosmic and organic. Eric would progress even further into the study of the ether. The more he experimented with channeling dielectricty through various enclosed spaces the more he uncovered the truth behind the “Theory of Creation” The Big Bang was a big Hoax and Einstein, Darwin and the whole lot of them were crushed by his experiments. Eric Dollard now became a very dangerous man to the establishment as his scientifically proven and tested research could destroy the web of lies which they had carefully built for over the past three hundred years. The aether was ever present and could project it’s formative powers to any proportions. The deeper he went into true science the more that he saw that science and spirituality were one and the same. He began to see quantum physics as a misinformation campaign for true aetheric science. The mystics of the past knew more of true science than the quantum physics of today.
The shape on the left has been burned into wood by a Tesla coil. The right is the special kind of electricity Tesla discovered in its pure raw form. Notice the organic shape.
GROUND RADIO
A retired aerospace technician named Walter J De-Roche, who would die under suspicious circumstances, left Eric a facility which was once used for Ionospheric and Telluric research. This was the last research laboratory Eric had and was located at Landers California. A wealthy investor in the alternative science scene once commented that “Eric Dollard has done more with food stamps than you all have with millions” This kind of praise was not an understatement as Eric single handedly transformed the long abandoned Landers facility into a radio base to serve the country of San Bernadino and the 29 Palms Marine Corp Base as a civil defense station and earthquake warning system. On a shoestring budget Eric had taken Telluric ,relating to the study of electricity within the earth, research to new heights and his facility could even detect underground nuclear blasts from North Korea. The Landers plant could be scaled to serve the entire country with free, loss less, faster than light radio, save lives via earth quake detection and potentially far more. Upon the completion of this modern day wonder, the powers that be swooped, shut it down and destroyed it. A certain Roy McGee and Olin Bates worked together to cheat Eric out of the property and even confiscated all his notes, gear and work.
After losing this, his last laboratory and being so close to implementing a system that would revolutionize communication for the community, Navy and possibly the entire country Eric has realized that his work shall always be marked for destruction. Eric wants those that truly desire the advancement of science to step forward and support a campaign to sue the guilty parties in court and get back his life’s work. The potential for the advancement of humanity is tremendous.
Eric inherited a radio station in Landers, CA from a friend. He spent years building it up and turned it into the an advanced ground radio station that could detect earthquakes before they occur, transmit faster than light radio with no losses and potentially far more. The “far more” part sent the powers that be scrambling to destroy it and they did.
Eric, now in his sixties has had to endure more hardship than most humans and even rebel scientists can imagine. He has been assaulted many times and suffered serious injuries. He has had his home and lab’s raided repeatedly and been driven to homelessness. All of his friends have betrayed him, all of his possessions taken from him and worse still all of his notes and work burned. In this last scenario they even took his pet dog away from him. While Eric has had to face off with the men in Black many times, it was the women in white that the powers that be choose to send after him this time. An NGO posing as a charitable foundation but in actuality being a front of the energy brokers was what did him in this time. They knew he was close to releasing something monumental and they swooped in and took everything but his life.
Eric has not given up. While he has rebuilt his lab many times and rallied to the finish line alone, this time it is different. Now in his sixties, black listed and without a penny to his name we cannot ask this man to try and bless the human race with the gift of free natural energy yet again, not without our help. There are three things you can do right now to help Eric P Dollard and his mission.
1. Believe in abundance, believe that energy for all humanity at no cost is as natural as a seed in the ground producing fruit. This is the hardest thing but it only takes a second.
2. Send this article to your friends and spread the word about The Mission of Eric P Dollard.
3. Write Eric a letter! Not an email, a real paper letter, in the mail! Eric is old fashioned. analog only and homeless but he does have a PO Box. It would help his spirits immensely to know he had believers. Eric has not given up, he is still trying to pass on his knowledge so that others might recreate his work and Tesla’s work.
“The monophasic dielectric forces developed thru the work of Nikola Tesla nullify relativistic relations. Tesla, thru a unique space-time hysteresis electrically “grounded” to a zero order Galilean coordinate system. It is also the cathode ray projector tubes utilized by Tesla in his atomic studies also nullify relativistic relations. Tesla’s remarks about “radiant matter” indicate the existence of cosmic rays of immense penetrating power moving fifty (50) times faster than the velocity of light (Le Sage particles).”
In just a few hours you can make a completely batteryless AM radio receiver with a range of around 25 miles. Built with a small assortment of components, some scrap wood, and a beverage bottle tightly wound with magnet wire, we call this project Bottle Radio. Similar to other “crystal radio” projects, the crystal in this build is contained inside a germanium diode, which rectifies incoming audio signal. The radio operates on the power from radio waves, and receives signal from a long wire antenna. When this signal enters the diode, it contains positive and negative peaks, however the diode, only allowing signal to pass in the forward direction, converts the alternating current of the signal into direct current. That current then vibrates a diaphragm inside a crystal earphone, allowing you to hear the radio without any visible power source!
If it sounds difficult, it’s not. In fact once you have your parts in hand, this project will only take a couple hours to assemble. Watch the video below to see how the entire circuit works, and we also provide some tips on the project page for extending the range of your receiver using a loop antenna and RF amplifier.
When the people of Greece saw their democratically elected Prime Minister George Papandreou forced out of office in November of 2011 and replaced by an unelected Conservative technocrat, Lucas Papademos, most were unaware of the bigger picture of what was happening all around them. Similarly, most of us in the United States were equally as ignorant when, in 2008, despite the switchboards at the US Capitol collapsing under the volume of phone calls from constituents urging a “no” vote, our elected representatives voted “yes” at the behest of Bush’s Treasury Secretary Henry Paulsen and jammed through the biggest bailout of Wall Street in our nation’s history. But now, as the Bank of England, a key player in the ongoing Eurozone crisis,announces that former investment banker Mark Carney will be its new chief, we can’t afford to ignore what’s happening around the world. Steadily – and stealthily – Goldman Sachs is carrying out a global coup d’etat.
There’s one tie that binds Lucas Papademos in Greece, Henry Paulsen in the United States, and Mark Carney in the U.K., and that’s Goldman Sachs. All were former bankers and executives at the Wall Street giant, all assumed prominent positions of power, and all played a hand after the global financial meltdown of 2007-08, thus making sure Goldman Sachs weathered the storm and made significant profits in the process. But that’s just scratching the surface. As Europe descends into an austerity-induced economic crisis, Goldman Sachs’s people are managing the demise of the continent. As the British newspaper The Independent reported earlier this year, the Conservative technocrats currently steering or who have steered post-crash fiscal policy in Greece, Germany, Italy, Belgium, France, and now the UK, all hail from Goldman Sachs. In fact, the head of the European Central Bank itself, Mario Draghi, was the former managing director of Goldman Sachs International.
And here in the United States, after Treasury Secretary and former Goldman CEO Henry Paulsen did his job in 2008 securing Goldman’s multi-billion dollar bailout, he was replaced in the new Obama administration with Tim Geithner who worked very closely with Goldman Sachs as head of the New York Fed and made sure Goldman received more than $14 billion from the bailout of failed insurance giant AIG.
What’s happening here goes back more than a decade. In 2001, Goldman Sachs secretly helped Greece hide billions of dollars through the use of complex financial instruments like credit default swaps. This allowed Greece to meet the baseline requirements to enter the Eurozone in the first place. But it also created a debt bubble that would later explode and bring about the current economic crisis that’s drowning the entire continent. But, always looking ahead, Goldman protected itself from this debt bubble by betting against Greek bonds, expecting that they would eventually fail. Ironically, the man who headed up the Central Bank of Greece while this deal was being arranged with Goldman was – drumroll please – Lucas Papademos.
Goldman made similar deals here in the United States, masking the true value of investments, then selling those worthless investments to customers while placing bets that those same investments would eventually fail. The most notorious example was the “Timberwolf” deal, which brought down an Australian hedge fund, and which Goldman Sachs banksters emailed each other about, bragging, “Boy, that Timberwolf was one shitty deal.” This sort of behavior by Goldman helped inflate, and then eventually pop, the housing bubble in the United States. The shockwave then ran across the Atlantic, hitting Europe and turning Goldman’s debt-masking deal with Greece years earlier sour, thus deepening the crisis.
All of these antics should have brought about the demise of Goldman as well, but with their alumni in key policy positions on both sides of the Atlantic, Goldman not only survived, it flourished. As the DailyKos sums up, “The normal scenario usually involves helping a nation hide a problem and sell its debt until the problem blows up into a bubble that bursts in a spectacular way…Goldman Sachs then puts their ‘man’ into a position of power to direct the bailouts so that Goldman gets all its money back and more, while the nation’s economy gets gutted.”
For years, tinfoil hat crazies who’ve bookmarked Glenn Beck’s websites and often appear as “experts” on Fox so-called News have warned us about a one-world government (here, here, and here). The latest threat, according to them, is Agenda 21and the creation of a Soviet-style world authority that will confiscate private party everywhere, redistribute wealth to developing nations, and force us all to live by new global laws that sacrifice our national sovereignty. It’s totalitarian governments and not transnational corporations that we should be afraid of, they warn. But when the tinfoil hat is removed, you can see that a sort of one-world government has already been established in a far more subtle form, through the rise of Goldman Sachs and their colleagues in the Wall Street elite. A million questions arise when looking at what’s happening around the world. But many of these questions can be answered, once it’s acknowledged that Goldman Sachs alumni have executed a global coup d’etat.
Why are the working people of Greece, Portugal, Spain, and Italy suffering under austerity and being asked to sacrifice their pensions, their wages, and their jobs when, after five years, it’s clear these policies are only making these nations’ debts even harder to pay off? It’s because Goldman Sachs is sucking the last remaining wealth out of those nations to recoup whatever failed investments they made before the Crash. Why have thousands of homeowners in the United States turned to suicide, domestic violence, and even mass murder when faced with home foreclosure, when a simple solution like re-writing mortgages, which FDR did successfully during the Great Depression, could put an end to the bloodshed and misery?
It’s because re-writing mortgages would force banks like Goldman Sachs to take a hit. And thanks to the game they’ve created, they actually make more money when a home they own is foreclosed on. Why, despite mountains of evidence, have banksters at Goldman Sachs and other Wall Street institutions not been thrown in jail for defrauding customers, manipulating LIBOR interest rates, and throwing thousands of Americans out of their homes illegally in a massive robo-signing scandal? It’s because we have a two-tiered justice system in which those in power, like Goldman Sachs executives, get a slap on the wrist when they steal $50 billion, but people like you and me go to jail for stealing a 7-11 Slurpee. Now does it make sense why Wall Street was bailed out and Main Street was sold out?
In this post-crash world, where agents of Goldman Sachs have infiltrated key positions of power all around the world, we must all fundamentally re-understand how we view the global economy and just how much effect our democratic institutions have on this economy. We no longer have an economy geared to benefit working people around the world; we have an economy that’s geared to exploit working people for Goldman Sachs’ profits. Trader Alessio Rastani told the BBC in September before Goldman’s Lucas Papademos was installed as Greece’s Prime Minister, “We don’t really care about having a fixed economy, having a fixed situation, our job is to make money from it…Personally, I’ve been dreaming of this moment for three years. I go to bed every night and I dream of another recession.” Rastani continued, “When the market crashes… if you know what to do, if you have the right plan set up, you can make a lot of money from this.” And as we’ve seen over the last decade, Goldman Sachs knows exactly what to do. They’ve had the right plan set-up, and it’s nothing short of a global coup d’etat. As Rastani bluntly told the BBC, “This is not a time right now for wishful thinking that governments are going to sort things out. The governments don’t rule the world, Goldman Sachs rules the world.”
“Far more importantly, Carney was a 13 year veteran of Goldman Sachs, most recently and very appropriately co-head of sovereign risk, which is ironic considering that Goldman had a grand rehearsal for the Greek currency swaps fiasco precisely with Carney at the helm in 1998, when Goldman got into hot water for the first time because while the company was advising Russia it was simultaneously betting against the country‘s ability to repay its debt.”
The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic. This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.
It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank’s alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund’s European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons. Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as “the Vampire Squid”, and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman’s interests are intricately tied up with the answer to that question.
Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren’t “bought and paid for” by corporations, as in the US, he says. “Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions.”
This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.
Mr Monti is one of Italy’s most eminent economists, and he spent most of his career in academia and thinktankery, but it was when Mr Berlusconi appointed him to the European Commission in 1995 that Goldman Sachs started to get interested in him. First as commissioner for the internal market, and then especially as commissioner for competition, he has made decisions that could make or break the takeover and merger deals that Goldman’s bankers were working on or providing the funding for. Mr Monti also later chaired the Italian Treasury’s committee on the banking and financial system, which set the country’s financial policies. With these connections, it was natural for Goldman to invite him to join its board of international advisers. The bank’s two dozen-strong international advisers act as informal lobbyists for its interests with the politicians that regulate its work. Other advisers include Otmar Issing who, as a board member of the German Bundesbank and then the European Central Bank, was one of the architects of the euro. Perhaps the most prominent ex-politician inside the bank is Peter Sutherland, Attorney General of Ireland in the 1980s and another former EU Competition Commissioner. He is now non-executive chairman of Goldman’s UK-based broker-dealer arm, Goldman Sachs International, and until its collapse and nationalisation he was also a non-executive director of Royal Bank of Scotland. He has been a prominent voice within Ireland on its bailout by the EU, arguing that the terms of emergency loans should be eased, so as not to exacerbate the country’s financial woes. The EU agreed to cut Ireland’s interest rate this summer.
Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman. He was a member of the World Bank and managing director of the Italian Treasury before spending three years as managing director of Goldman Sachs International between 2002 and 2005 – only to return to government as president of the Italian central bank. Mr Draghi has been dogged by controversy over the accounting tricks conducted by Italy and other nations on the eurozone periphery as they tried to squeeze into the single currency a decade ago. By using complex derivatives, Italy and Greece were able to slim down the apparent size of their government debt, which euro rules mandated shouldn’t be above 60 per cent of the size of the economy. And the brains behind several of those derivatives were the men and women of Goldman Sachs.
The bank’s traders created a number of financial deals that allowed Greece to raise money to cut its budget deficit immediately, in return for repayments over time. In one deal, Goldman channelled $1bn of funding to the Greek government in 2002 in a transaction called a cross-currency swap. On the other side of the deal, working in the National Bank of Greece, was Petros Christodoulou, who had begun his career at Goldman, and who has been promoted now to head the office managing government Greek debt. Lucas Papademos, now installed as Prime Minister in Greece’s unity government, was a technocrat running the Central Bank of Greece at the time. Goldman says that the debt reduction achieved by the swaps was negligible in relation to euro rules, but it expressed some regrets over the deals. Gerald Corrigan, a Goldman partner who came to the bank after running the New York branch of the US Federal Reserve, told a UK parliamentary hearing last year: “It is clear with hindsight that the standards of transparency could have been and probably should have been higher.” When the issue was raised at confirmation hearings in the European Parliament for his job at the ECB, Mr Draghi says he wasn’t involved in the swaps deals either at the Treasury or at Goldman.
It has proved impossible to hold the line on Greece, which under the latest EU proposals is effectively going to default on its debt by asking creditors to take a “voluntary” haircut of 50 per cent on its bonds, but the current consensus in the eurozone is that the creditors of bigger nations like Italy and Spain must be paid in full. These creditors, of course, are the continent’s big banks, and it is their health that is the primary concern of policymakers. The combination of austerity measures imposed by the new technocratic governments in Athens and Rome and the leaders of other eurozone countries, such as Ireland, and rescue funds from the IMF and the largely German-backed European Financial Stability Facility, can all be traced to this consensus. “My former colleagues at the IMF are running around trying to justify bailouts of €1.5trn-€4trn, but what does that mean?” says Simon Johnson. “It means bailing out the creditors 100 per cent. It is another bank bailout, like in 2008: The mechanism is different, in that this is happening at the sovereign level not the bank level, but the rationale is the same.” So certain is the financial elite that the banks will be bailed out, that some are placing bet-the-company wagers on just such an outcome. Jon Corzine, a former chief executive of Goldman Sachs, returned to Wall Street last year after almost a decade in politics and took control of a historic firm called MF Global. He placed a $6bn bet with the firm’s money that Italian government bonds will not default. When the bet was revealed last month, clients and trading partners decided it was too risky to do business with MF Global and the firm collapsed within days. It was one of the ten biggest bankruptcies in US history.
The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent. Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries’ debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under. No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse. Shared illusions, perhaps? Who would dare test it?
Mario Monti, Lucas Papademos and Mario Draghi have something in common: they have all worked for the American investment bank. This is not a coincidence, but evidence of a strategy to exert influence that has perhaps already reached its limits.
Serious and competent, they weigh up the pros and cons and study all of the documents before giving an opinion. They have a fondness for economics, but these luminaries who enter into the temple only after a long and meticulous recruitment process prefer to remain discreet. Collectively they form an entity that is part pressure group, part fraternal association for the collection of information, and part mutual aid network. They are the craftsmen, masters and grandmasters whose mission is “to spread the truth acquired in the lodge to the rest of the world.” According to its detractors, the European network of influence woven by American bank Goldman Sachs (GS) functions like a freemasonry. To diverse degrees, the new European Central Bank President, Mario Draghi, the newly designated Prime Minister of Italy, Mario Monti, and the freshly appointed Greek Prime Minister Lucas Papademos are totemic figures in this carefully constructed web.
Heavyweight members figure large in the euro crisis
Draghi was Goldman Sachs International’s vice-chairman for Europe between 2002 and 2005, a position that put him in charge of the the “companies and sovereign” department, which shortly before his arrival, helped Greece to disguise the real nature of its books with a swap on its sovereign debt. Monti was an international adviser to Goldman Sachs from 2005 until his nomination to lead the Italian government. According to the bank, his mission was to provide advice “on European business and major public policy initiatives worldwide”. As such, he was a “door opener” with a brief to defend Goldman’s interest in the corridors of power in Europe. The third man, Lucas Papademos, was the governor of the Greek central bank from 1994 to 2002. In this capacity, he played a role that has yet to be elucidated in the operation to mask debt on his country’s books, perpetrated with assistance from Goldman Sachs. And perhaps more importantly, the current chairman of Greece’s Public Debt Management Agency, Petros Christodoulos, also worked as a trader for the bank in London. Two other heavyweight members of Goldman’s European network have also figured large in the euro crisis: Otmar Issing, a former member of the Bundesbank board of directors and a one-time chief economist of the European Central Bank, and Ireland’s Peter Sutherland, an administrator for Goldman Sachs International, who played a behind the scenes role in the Irish bailout.
Relay exclusive information to the bank’s trading rooms
How was this loyal network of intermediaries created? The US version of this magic circle is composed of former highly placed executives of the bank who effortlessly enter the highest level of the civil service. In Europe, on the other hand, Goldman Sachs has worked to accumulate a capital of relationships. But unlike its competitors, the bank has no interest in retired diplomats, highly placed national and international civil servants, or even former prime ministers and ministers of finance. Goldman’s priority has been to target central bankers and former European commissioners. Its main goal is to legally collect information on initiatives in the near future and on the interest rates set by central banks. At the same time, Goldman likes its agents to remain discreet. That is why its loyal subjects prefer not to mention their filiation in interviews or in the course of official missions. These well-connected former employees simply have to talk about this and that secure in the knowledge that their prestige will inevitably be rewarded with outspoken frankness on the part of those in powerful positions. Put simply they are there to see “which way the wind is blowing,” and thereafter to relay exclusive information to the bank’s trading rooms.
Bid for global dominance
Now that it has a former director at the head of the ECB, a former intermediary leading the Italian government, and another in charge in Greece, the bank’s antagonists are eager to highlight the extraordinary power of its network in in Frankfurt, Rome and Athens, which could prove extremely useful in these turbulent times. But looking beyond these details, the power of Goldman’s European government before and during the financial ordeal of 2008 may well prove to be an obstacle. The relationships maintained by experienced former central bankers are less likely to be useful now that politicians are aware of the unpopularity of finance professionals who are seen to be responsible for the present crisis. Where Goldman Sachs used to be able to exercise its talents, it now has to contend with opposition from public authorities raising questions about a series of scandals. A well stocked address book is no longer sufficient in a complex and highly technical financial world, where a new generation of industry leaders are less likely to be imbued with an unquestioning respect for the establishment. In their bid for global dominance, they no longer need to rely on high finance crusaders in the Goldman mould, while the quest to protect shareholder’s rights, demands for more transparency and active opposition from the media, NGOs, and institutional investors continue to erode the potency of “the network effect.”
{Translated from the French by Mark McGovern}
The giant American investment bank which is accused of helping the Greek state to conceal the real nature of its financial situation while speculating on its debts can count on a remarkable network of advisers with very close links to European leaders, reports Le Monde.
Petros Christodoulou affects not to care about compliments or their source. Ever since he was a teenager, this top-of-the-class student has grown used to hearing his praises sung. Appointed on 19 February to the head of the organization for the management of Greek public debt, he has arrived at the top of the tree. However, the trouble is that the former manager of global markets at the National Bank of Greece (NBG) is at the centre of an inquiry, announced on 25 February by the United States Federal Reserve, on contracts relating to Greek national debt, which link Goldman Sachs and other companies to the government in Athens. The New York based investment bank was paid as a banking advisor to the Greek government while speculating on the Hellenic nation’s sovereign debt. In particular, the American regulator is interested in the role played by Petros Christodoulou, who, in collaboration with Goldman, supervised the creation of the London company Titlos to transfer debt from Greece’s national accounts to the NBG. Before joining the NBG in 1998, Mr Christodoulou had worked as a banker for – you guessed it – Goldman Sachs.
“Government Sachs”
The affair has highlighted the powerful network of influence that Goldman Sachs has maintained in Europe since 1985 – a tightly woven group of underground and high-profile go-betweens and loyal supporters, whose address books open the doors of ministries of finance. These carefully recruited and extraordinarily well-paid advisors understand all the subtleties of the corridors of power within the European Union, and have a direct line to decision makers that they can call during moments of crisis. But who are the members of the European arm of the institution which is so powerful in Washington that it is referred to as “government Sachs”? The key figure is Peter Sutherland, chairman of Goldman Sachs International, the bank’s London-based European subsidiary. The former European commissioner for competition and ex-chairman of BP, is an essential link between the investment bank and the 27 EU member states and Russia. In France, Goldman Sachs benefits from the support of Charles de Croisset, a former chairman of Crédit Commercial de France (CCF), who took over from Jacques Mayoux, a government inspector of finances and former chairman of Société Générale. In the United Kingdom, it can count on Lord Griffiths, who advised former prime minister Margaret Thatcher, and in Germany, on Otmar Issing, a one-time board member of the Bundesbank and ex-chief economist of the European Central Bank (ECB).
Discreetly advances its interests
And that is not to mention the many Goldman alumni who go onto hold positions of power, which the bank can count on to advance its position. The best known of these is Mario Draghi, Goldman’s vice-president for Europe between 2001 and 2006, who is the current governor of the Bank of Italy and Chairman of international regulator, the Financial Stability Board. But do not expect to come across former diplomats in the austere corridors of Goldman Sachs International. As an institution with real world interests, the bank prefers to recruit financiers, economists, central bankers, and former highly placed civil servants from international economic organizations, but considers retired ambassadors to be jovial status symbols without any real high-level contacts or business sense. For Goldman Sachs, this network has the advantage of enabling it to discreetly advance its interests. In the Financial Times of 15 February, Otmar Issing published an article voicing his hostility to any attempt by the European Union to rescue Greece. However, he omitted to mention the fact that he has been an international advisor to Goldman Sachs since 2006. Nor did he say that the bank’s traders, who have been speculating against the single European currency, might well lose their shirts if the EU does intervene.
Max Keiser & Catherine Austin Fitts on Goldman Sachs (2009)
Imagine you walked into a bank, applied for a personal line of credit, and filled out all the paperwork claiming to have no debts and an income of $200,000 per year. The bank, based on these representations, extended you the line of credit. Then, three years later, after fighting disclosure all the way, you were forced by a court to tell the truth: At the time you made the statements to the bank, you actually were unemployed, you had a $1 million mortgage on your house on which you had failed to make payments for six months, and you hadn’t paid even the minimum on your credit-card bills for three months. Do you think the bank would just say: Never mind, don’t worry about it? Of course not. Whether or not you had paid back the personal line of credit, three FBI agents would be at your door within hours. Yet this is exactly what the major American banks have done to the public. During the deepest, darkest period of the financial cataclysm, the CEOs of major banks maintained in statements to the public, to the market at large, and to their own shareholders that the banks were in good financial shape, didn’t want to take TARP funds, and that the regulatory framework governing our banking system should not be altered. Trust us, they said. Yet, unknown to the public and the Congress, these same banks had been borrowing massive amounts from the government to remain afloat. The total numbers are staggering: $7.7 trillion of credit—one-half of the GDP of the entire nation. $460 billion was lent to J.P. Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley alone—without anybody other than a few select officials at the Fed and the Treasury knowing. This was perhaps the single most massive allocation of capital from public to private hands in our history, and nobody was told. This was not TARP: This was secret Fed lending. And although it has since been repaid, it is clear why the banks didn’t want us to know about it: They didn’t want to admit the magnitude of their financial distress.
The banks’ claims of financial stability and solvency appear at a minimum to have been misleading—and may have been worse. Misleading statements and deception of this sort would ordinarily put a small-market player or borrower on the wrong end of a criminal investigation. So where are the inquiries into the false statements made by the bank CEOs? And where are the inquiries about the Fed and Treasury officials who stood by silently as bank representatives made claims that were false, misleading, or worse? Only now, because of superb analysis done by Bloomberg reporters—who litigated against the Fed and the banks for years to get the information—are we getting a full picture of the Fed and Treasury lending. The reporters also calculated that recipient banks and other borrowers benefited by approximately $13 billion simply by taking advantage of the “spread” between their cost of capital in these almost interest-free loans and their ability to lend the capital.
In addition to the secrecy, what is appalling is that these loans were made with no strings attached, no conditions, and no negotiation to achieve any broader public purpose. Even if one accepts the notion that the stability of the financial system could not be sacrificed, those who dispensed trillions of dollars to private parties made no apparent effort to impose even minimal obligations to condition the loans on the structural reforms needed to prevent another crisis, made no effort to require that those responsible for creating the crisis be relieved of their jobs, took zero steps towards the genuine mortgage-reform that is so necessary to begin a process of economic renewal. The dollars lent were simply a free bridge loan so the banks could push onto others the responsibility for the banks’ own risk-taking. If ever there was an event to justify the darkest, most conspiratorial view held by many that the alliance of big money on Wall Street and big government produces nothing but secret deals that profit insiders—this is it.
So what to do? The revelations of the secret loan program may provide the opportunity for Occupy Wall Street to suggest a few concrete steps that would be difficult to oppose.
First: Demand a hearing where the bank executives have to answer questions—under oath—about the actual negotiations, or lack thereof, that led to these loans; about the actual condition of each of the borrowing banks and whether that condition differed from the public statements made by the banks at the time.
Second: Require the recipient banks to use this previously undisclosed gift—the profit they made by investing this almost interest-free money—to write down the value of mortgages of those who are underwater. The loans to the banks were meant to solve a short-term liquidity problem, not be a source of profits to fund bonuses. Take back the profits and put them to apublic use.
Third: Require the government officials responsible for authorizing these loans to explain why there was no effort made to condition these loans on changes in policy that would protect the public going forward.
Fourth: Ask congress to examine every filing and statement made to Congress by the banks about their financial condition and their indebtedness to see if any misrepresentations were made in an effort to hide these trillions of dollars of loans. Misleading Congress can be a felony, and willful deception of the Congress to hide the magnitude of the public bailouts should not go unprosecuted.
Finally: Demand that politicians return all contributions made by the institutions that got hidden loans. Pressure the politicians who continue to feed from the trough of Wall Street, even as they know all too well how the banks and others have gamed the system and the public.
In the wake of chopping its Central Bank swap rates today, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right. The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball. Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks). Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks. Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert – a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street’s staunchest ally, and Tim Geithner’s old stomping ground, the New York Fed.
The dollar swap lines give foreign central banks the ability to borrow dollars against their currency, use them for whatever they want – like to shore up bets made by European banks that went wrong, and at a later date, return them. A ‘temporary dollar liquidity swap arrangement” with 14 foreign central banks was available between December 12, 2007 (several months before Bear Stearn’s collapse and 9 months before the Lehman Brothers’ bankruptcy that scared Goldman Sachs and Morgan Stanley into getting the Fed’s instant permission to become bank holding companies, and thus gain access to any Feds subsidies.) Those dollar-swap lines ended on February 1, 2010. BUT – three months later, they were back on, but this time the FOMC re-authorized dollar liquidity swap lines with only 5 central banks through January 2011. BUT – on December 21, 2010 – the FOMC extended the lines through August 1, 2011. THEN– on June 29th, 2011, these lines were extended through August 1, 2012. AND NOW – though already available, they were announced with save-the-day fanfare as if they were just considered.
Then, there are the sneakily-dubbed “foreign currency liquidity swap” lines, which, as per the Fed’s own words, provide “foreign currency-denominated liquidity to US banks.” (Italics mine.) In other words, let US banks play with foreign bonds. These were originally used with 4 foreign banks on April, 2009 and expired on February 1, 2010. Until they were resurrected today, November 30, 2011, with foreign currency swap arrangements between the Fed, Bank of Canada, Bank of England, Bank of Japan. Swiss National Bank and the European Central Bank. They are to remain in place until February 1, 2013, longer than the original time period for which they were available during phase one of the global bank-led meltdown, the US phase. (For those following my work, we are in phase two of four, the European phase.) That’s a lot of jargon, but keep these two things in mind: 1) these lines, by the Fed’s own words, are to provide help to US banks. and 2) they are open ended.
There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing. The Fed didn’t step in when it was just Greece –or Ireland - or when there were rampant ‘contagion’ fears, and Italian bonds started trading above 7%, rising unabated despite the trick of former Goldman Sachs International advisor Mario Monti replacing former Prime Minister, Silvio Berlusconi’s with his promises of fiscally conservative actions (read: austerity measures) to come. Perhaps at that point, Goldman thought they had it all under control, but Germany’s bailout-resistence was still a thorn, which is why its bonds got hammered in the last auction, proving that big Finance will get what it wants, no matter how dirty it needs to play. Nothing from the Fed, except a small increase in funding to the IMF. Rating agency Moody’s announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman ,making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.
Breaking that down: JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don’t – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government. The next highest ratio belongs to Citibank with $1.2 trillion in assets and $56 trillion in derivative exposure, or 46 to 1. JPM Chase’s ratio is 44 to 1. Bank of America’s ratio is 36 to 1. Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed’s timing have something to do with its star bank? We don’t really know for sure.
Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly. But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity’ or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.
Often, when I troll around websites of entities like the ECB and IMF, I uncover little of startling note. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies. That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic – an interactive Inflation Game (I kid you not) where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens. What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it’ll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then…..you see where I’m going with this.
We’re doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries. It’s not about inflation – it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It’s not the ‘inherent’ weakness of national economies that a few years ago were doing fine, that’s hurting the euro. It’s the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.
Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri, entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not ‘necessarily represent the views of the IMF or IMF policy’.) The paper is full of mathematical formulas and statistical jargon, which may be why the media didn’t pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out. And it’s fascinating stuff. Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.
The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.
Greek banks bought US-minted AAA assets and leveraged them. Norway did too (through the course of working on a Norwegian documentary, I discovered that 8 tiny towns in Norway bought $200 million of junk assets from Citigroup, borrowed money from local banks to pay for them, and pledged 10 years of power receipts from hydroelectric plants in return. The AAA assets are now worth zero, the power has been curtailed for residents, and the Norwegian banks want their money back–blood from a stone.) The same kind of thing happend in Italy, Spain, Portugal, Ireland, Holland, France, and even Germany – in different degrees and with specific national issues mixed in. Problem is – when you’ve already used worthless collateral to borrow tons of money you won’t ever be able to repay, and international capital slams you in other ways, and your funding costs rise, and your internal development and lending seize up, you’re screwed – or rather the people in your country are screwed.
In the IMF paper, the authors convincingly make the case that it wasn’t just the US subprime asset meltdown itself that initiated Europe’s implosion, but the fact that our Federal Reserve and Treasury Department adopted a reckless don’t-let-em-fail doctrine. Even though Bear Stearns and Lehman Brothers failed, their investors, the huge ones anyway, were protected. The Fed subsidized, and still subsidizes, $29 billion of risk for JPM Chase’s acquisition of Bear. The philosophy of saving banks and their practices poisoned Europe, as those same financial firms played euro-roulette in the global derivatives markets, once the subprime betting train slowed down.
The first fatal stop of the US bailout mentaility was the ECB’s 2010 bailout of Anglo Irish bank, which got the lion’s share of the ECB’s Irish-bailout: $51 billion euro of ELA (Emergency Loan Assistance) and $100 billion euro of regular lending at the time. After the international financial community saw the pace and volume of Irish bank bailouts, the game of euro-roulette went turbo, country by country. More ‘fiscally conservative’ governments are replacing any semblance of population-supportive ones. The practice of extracting ‘fiscal prudency’ from people and providing bank subsidies for bets gone wrong has infected all of Europe. It will continue to do so, because anything less will threathen the entire Euro experiement, plus otherwise, the US banks might be on the hook again for losses, and the Fed and Treasury won’t let that happen. They’ve already demonstrated that. It’d be just sooo catastrophic.
In the wings, the smugness of Treasury Secretary Tim Geithner and Fed Chairman, Ben Bernanke is palpable – ‘hey, we acted heroically and “decisively” to provide a multi-trillion dollar smorgasbord of subsidies for our biggest banks and look how great we (er, they) are doing now? Seriously, Europe – get your act together already, don’t do the trickle-bailout game – just dump a boatload of money into the same banks – and a few of your own before they go under – do it for the sake of global economic stability. It’ll really work. Trust us.’ Most of the media goes along with the notion that US banks exposed to the ‘euro-contagion’ will hurt our (nonexistent) recovery. US Banks assure us, they don’t have much exposure – it’s all hedged. (Like it was all AAA.) The press doesn’t tend to question the global harm caused by never having smacked US banks into place, cutting off their money supply, splitting them into commercial and speculative parts ala Glass-Steagall and letting the speculative parts that should have died, die, rather than enjoy public subsidization and the ability to go globe-hopping for more destructive opportunity, alongside some of the mega-global bank partners.
Today, the stock prices of the largest US banks are about as low as they were in the early part of 2009, not because of euro-contagion or Super-committee super-incompetence (a useless distraction anyway) but because of the ongoing transparency void surrouding the biggest banks amidst their central-bank-covered risks, and the political hot potato of how many emergency loans are required to keep them afloat at any given moment. Because investors don’t know their true exposures, any more than in early 2009. Because US banks catalyzed the global crisis that is currently manifesting itself in Europe. Because there never was a separate US housing crisis and European debt crisis. Instead, there is a worldwide, systemic, unregulated, uncontained, rapacious need for the most powerful banks and financial institutions to leverage whatever could be leveraged in whatever forms it could be leveraged in. So, now we’re just barely in the second quarter of the game of thrones, where the big banks are the kings, the ECB, IMF and the Fed are the money supply, and the populations are the powerless serfs. Yeah, let’s play the ECB inflation game, while the world crumbles.
The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing. The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse. A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.
‘Change Their Votes’
“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.” The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open. The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort — and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.
$7.77 Trillion
The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year. “TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.” Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.
‘Motivate Others’
JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation. Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment. The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.
‘Core Function’
“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.” The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland. The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view. The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.
Big Six
The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment. The six — JPMorgan, Bank of America, Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley — accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.
Bank Supervision
While the emergency response prevented financial collapse, the Fed shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001. The Fed, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the “supervision of the banks prior to the crisis was far worse than we had imagined,” Rosner says. Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.” On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds. The document was released in early 2011 by the Financial Crisis Inquiry Commission, a panel empowered by Congress to probe the causes of the crisis.
‘Need Transparency’
Andrea Priest, a spokeswoman for the New York Fed, declined to comment, as did Jon Diat, a spokesman for Citigroup. “I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability,” says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee. Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark. “We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs. “We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”
Disclose Lending
Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival. It would have been “totally appropriate” to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank. “The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy,” Jones says. “Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.” The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.
Protecting TARP
TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says. “Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says. Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.
No Clue
Lawmakers knew none of this. They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible. Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs. Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.
Moral Hazard
Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers. If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks. Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking. “Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.
Getting Bigger
Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble. Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data. For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down.” Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.
‘Wanted to Pretend’
“The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.” Bank of America took over Merrill Lynch & Co. at the urging of then-Treasury Secretary Paulson after buying the biggest U.S. home lender, Countrywide Financial Corp. When the Merrill Lynch purchase was announced on Sept. 15, 2008, Bank of America had $14.4 billion in emergency Fed loans and Merrill Lynch had $8.1 billion. By the end of the month, Bank of America’s loans had reached $25 billion and Merrill Lynch’s had exceeded $60 billion, helping both firms keep the deal on track.
Prevent Collapse
Wells Fargo bought Wachovia Corp., the fourth-largest U.S. bank by deposits before the 2008 acquisition. Because depositors were pulling their money from Wachovia, the Fed channeled $50 billion in secret loans to the Charlotte, North Carolina-based bank through two emergency-financing programs to prevent collapse before Wells Fargo could complete the purchase. “These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty,” says Ancel Martinez, a spokesman for Wells Fargo. JPMorgan absorbed the country’s largest savings and loan, Seattle-based Washington Mutual Inc., and investment bank Bear Stearns Cos. The New York Fed, then headed by Timothy F. Geithner, who’s now Treasury secretary, helped JPMorgan complete the Bear Stearns deal by providing $29 billion of financing, which was disclosed at the time. The Fed also supplied Bear Stearns with $30 billion of secret loans to keep the company from failing before the acquisition closed, central bank data show. The loans were made through a program set up to provide emergency funding to brokerage firms.
‘Regulatory Discretion’
“Some might claim that the Fed was picking winners and losers, but what the Fed was doing was exercising its professional regulatory discretion,” says John Dearie, a former speechwriter at the New York Fed who’s now executive vice president for policy at the Financial Services Forum, a Washington-based group consisting of the CEOs of 20 of the world’s biggest financial firms. “The Fed clearly felt it had what it needed within the requirements of the law to continue to lend to Bear and Wachovia.” The bill introduced by Brown and Kaufman in April 2010 would have mandated shrinking the six largest firms. “When a few banks have advantages, the little guys get squeezed,” Brown says. “That, to me, is not what capitalism should be.” Kaufman says he’s passionate about curbing too-big-to-fail banks because he fears another crisis.
‘Can We Survive?’
“The amount of pain that people, through no fault of their own, had to endure — and the prospect of putting them through it again — is appalling,” Kaufman says. “The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?” Lobbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up — a gain of 33 percent, according to OpenSecrets.org, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, OpenSecrets.org reported. Lobbyists argued the virtues of bigger banks. They’re more stable, better able to serve large companies and more competitive internationally, and breaking them up would cost jobs and cause “long-term damage to the U.S. economy,” according to a Nov. 13, 2009, letter to members of Congress from the FSF. The group’s website cites Nobel Prize-winning economist Oliver E. Williamson, a professor emeritus at the University of California, Berkeley, for demonstrating the greater efficiency of large companies.
‘Serious Burden’
In an interview, Williamson says that the organization took his research out of context and that efficiency is only one factor in deciding whether to preserve too-big-to-fail banks. “The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process,” Williamson says. “The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy.” Dearie says his group didn’t mean to imply that Williamson endorsed big banks. Top officials in President Barack Obama’s administration sided with the FSF in arguing against legislative curbs on the size of banks.
Geithner, Kaufman
On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission. At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman. Anthony Coley, a spokesman for Geithner, declined to comment.
‘Punishing Success’
Lobbyists for the big banks made the winning case that forcing them to break up was “punishing success,” Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says. The Fed supported curbing too-big-to-fail banks, including giving regulators the power to close large financial firms and implementing tougher supervision for big banks, says Fed General Counsel Scott G. Alvarez. The Fed didn’t take a position on whether large banks should be dismantled before they get into trouble. Dodd-Frank does provide a mechanism for regulators to break up the biggest banks. It established the Financial Stability Oversight Council that could order teetering banks to shut down in an orderly way. The council is headed by Geithner. “Dodd-Frank does not solve the problem of too big to fail,” says Shelby, the Alabama Republican. “Moral hazard and taxpayer exposure still very much exist.”
Below Market
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter — getting loans at below-market rates during a financial crisis — is quite a gift.” The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg. The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest. Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.
Added Income
The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show. The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23 percent of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion. “The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed,” says Gerald A. Hanweck, a former Fed economist who’s now a finance professor at George Mason University in Fairfax, Virginia. While the method isn’t perfect, it’s impossible to state the banks’ exact profits or savings from their Fed loans because the numbers aren’t disclosed and there isn’t enough publicly available data to figure it out. Opinsky, the JPMorgan spokesman, says he doesn’t think the calculation is fair because “in all likelihood, such funds were likely invested in very short-term investments,” which typically bring lower returns.
Standing Access
Even without tapping the Fed, the banks get a subsidy by having standing access to the central bank’s money, says Viral Acharya, a New York University economics professor who has worked as an academic adviser to the New York Fed. “Banks don’t give lines of credit to corporations for free,” he says. “Why should all these government guarantees and liquidity facilities be for free?” In the September 2008 meeting at which Paulson and Bernanke briefed lawmakers on the need for TARP, Bernanke said that if nothing was done, “unemployment would rise — to 8 or 9 percent from the prevailing 6.1 percent,” Paulson wrote in “On the Brink” (Business Plus, 2010).
Occupy Wall Street
The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California. The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor. “The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”
In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries. They take full effect in 2019. Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”
It is one thing for tungsten-filled gold bars to appear in the UK, or inGermany: after all out of sight, and across the Atlantic, certainly must mean out of mind, and out of the safe. However, when a 10 ounce 999.9 gold bar bearing the stamp of the reputable Swiss Produits Artistiques Métaux Précieux (PAMP, with owner MTP) and a serial number (serial#038892, likely rehypothecated in at least 10 gold ETFs across the world but that’s a different story), mysteriously emerges in the heart of the world’s jewerly district located on 47th street in Manhattan, things get real quick. Moments ago, Myfoxny reported that a 10-ounce gold bar costing nearly $18,000 turned out to be a counterfeit. The discovery was made by the dealer Ibrahim Fadl, who bought the PAMP bar in question from a merchant who has sold him real gold before. “But he heard counterfeit gold bars were going around, so he drilled into several of his gold bars worth $100,000 and saw gray tungsten — not gold. The bar was filled with tungsten, which weighs nearly the same as gold but costs just over a dollar an ounce.”
What makes so devious is a real gold bar is purchased with the serial numbers and papers, then it is hollowed out, the gold is sold, the tungsten is put in, then the bar is closed up. That is a sophisticated operation. MTB, the Swiss manufacturer of the gold bars, said customers should only buy from a reputable merchant. The problem, he admits, is Ibrahim Fadl is a very reputable merchant. Raymond Nessim, CEO Manfra, Tordell & Brookes, said he has reported the situation to the FBI and Secret Service. The Secret Service, which deals with counterfeits, said it is investigating.
And cue panic on the realization that virtually any gold bar in the world, not just those in Europe and Australia, which have already had close encounters with Tungsten substitutes, but also New York may be hollowed out and have a real worth of a few dollars max. Which, sadly, is fitting considering our main story from last night was the realization that an unknown amount of Chinese iron ore had either never existed or had simply vaporized, and was no longer serving as the secured collateral to various liabilities circulating in the electronic ether. After all, only the most naive out there could conceive of gold being sacrosanct when every other asset class is being diluted to infinity by a regime that has long since run out of money. As for gold-based transactions on West 47th street: look for that market to grind to a halt at least for as long as it takes for this scandal to be forgotten too. The only open question remaining will be how much of the gold located 90 feet below Liberty 33 is in the same Tungstenized format. For what it’s worth: it is unlikely we will ever find out.
This is what glaring gold counterfeiting looks like.
The last time a story of Tungsten-filled gold appeared on the scene was just two years ago, and involved a 500 gram bar of gold full of tungsten, at the W.C. Heraeus foundry, the world’s largest metal refiner and fabricator. It also became known that said “gold” bar originated from an unnamed bank. It is now time to rekindle the Tungsten Spirits with a report from ABC Bullion of Australia, which provides photographic evidence of a new gold bar that has been drilled out and filled with tungsten rods, this time not in Germany but in an unnamed city in the UK, where it was intercepted by a scrap metals dealer, and was supplied with its original certificate. The reason the bar attracted attention is that it was 2 grams underweight. Upon cropping it was uncovered that about 30-40% of the bar weight was tungsten. So two documented incidents in two years: isolated? Or indication of the same phenomonenon of precious metal debasement that marked the declining phase of the Roman empire. Only then it was relatively public for anyone who cared to find out on their own. Now, with the bulk of popular physical gold held in top secret, private warehouses around the world, where it allegedly backs the balance sheets of the world’s central banks, yet nobody can confirm its existence, nor audit the actual gold content, it is understandable why increasingly more are wondering: just how much gold is there? And alongside that – while gold, (or is it GLD?), can be rehypothecated, can one do the same with tungsten?
ABC Bullion received the following email from one of our trusted suppliers this week. Attached are photographs of a legitimate Metalor 1000gm Au bar that has been drilled out and filled with Tungsten (W). This bar was purchased by staff of a scrap dealer in xxxxx, UK yesterday. The bar appeared to be perfect other than the fact that it was 2gms underweight. It was checked by hand-held xrf and showed 99.98% Au. Being Tungsten, it would not be ferro-magnetic. The bar was supplied with the original certificate. The owner of the business that purchased the bar only became suspicious when he realized the weight discrepancy and had the bar cropped. He estimates between 30-40% of the weight of the bar to be Tungsten. This is very worrying and reinforces the lengths that people are willing to go to profit from the current high metal prices. Please be careful.
Photos of the cropped bars: 1000g Gold bar cut showing inserted tungsten rods
Chris Powell, Secretary and Treasurer of the Gold Anti-Trust Action Committee told Bernie Lo on CNBC Asia overnight that central banks are continuing to manipulate the gold market as they are interested in supporting government bonds and the dollar and keeping interest rates low. Powell warns about “paper gold” and says that we “try to persuade investors that if they are purchasing gold, they had better get real gold – metal. They should not get “paper gold” and keep it within the banking system.” He says that “there is huge naked short position in gold” and estimates that perhaps “75% to 80% of the gold that the world thinks it owns does not exist and is just a claim on a bullion bank that is underwritten basically by the central banks.”
Bernie Lo asks what is the “end result”? With regard to price Powell said that he does not make predictions but he wonders “what the value or the price of gold will be if the world ever discovers that 80% of the gold that it thinks it owns – does not exist. There may not be enough zeros in the world to put behind the gold price then.” Powell said that buyers should own gold in “your hand”or in allocated format outside of the banking system. He concluded by saying that surreptitious intervention in the gold market can continue as long as gold buyers do not own real physical bullion. We do not endorse GATA’s opinions however some of their evidence and many of their arguments are persuasive. We have yet to see any analyst or commentator address the substantive issues they have raised and debunk or refute their allegations. Free markets need freedom of speech and a plurality of opinion. Group think and cosy consensus got us into today’s the financial and economic mess. Therefore, open, frank and rational debate about all aspects of the precious metal and other markets and our current monetary system is important. Being fully informed of all of the facts and fundamentals driving markets are essential in order to protect and grow wealth.
This may sound strange, but there’s simply too much gold. That is, there shouldn’t be gold here at the Earth’s crust – it all should have been sucked deep into the core long ago. For that, we can thank asteroids. Gold is one of the precious metals, along with platinum, silver, palladium, iridium, and a bunch of others. While these metals do have a few industrial uses, they’re mostly valuable simply because they’re rare and they happen to make for pretty jewelry. (That may be a slight oversimplification.) The strange thing isn’t that these metals are rare, but that there are any of these metals at all. The reason for this is that the precious metals tend to be attracted to iron. Over the lifetime of our planet, the naturally occurring precious metals should have been sucked towards places with high concentrations of iron. That means all the way down to the planet’s molten iron core. And while it isn’t exactly impossible that some of these metals would simply be left behind, that could only account for about a ten-thousandth of all the existing precious metals.
Now researchers at the University of Bristol might have found a solution. They ran some high-precision tests on rocks found in Greenland. These rocks date back about four billion years and are the remnants of asteroids. The nature of the tungsten isotopes found within these rocks support the idea that asteroids carried a second round of precious metals to Earth billions of years ago, long after the original metals had been subsumed into the core. So then, it wasn’t just gold that people spent lifetimes chasing after – it was space gold. It’s also an interesting reminder of how Earth is never truly isolated from the rest of the universe. Of course, that idea is hardly in dispute – it’s looking increasingly likely that asteroids also brought water and the building blocks of life to Earth – but this is a unique case in which ancient asteroids helped shape our recent history. After all, without this space gold, what the hell would be the point of playing Yukon Trail? I’m sure there are other historical factors to consider, but really, that strikes me as the most important.
“On Wednesday, the BBC reported that millions of dollars in gold at the central bank of Ethiopia has turned out to be fake: What were supposed to be bars of solid gold turned out to be nothing more than gold-plated steel. They tried to sell the stuff to South Africa and it was sent back when the South Africans noticed this little problem. This is an amazing story for two reasons. First, that an institution like a central bank could get ripped off this way, and second that the people responsible used such a lousy excuse for fake gold. I consider myself something of an expert on fake gold (I’m not really, I just think I am) ever since I was asked to give advice on the subject to the author Damien Lewis for his recent thriller, Cobra Gold. I worked out in detail for him how you could make really convincing fake gold, and ended up as a minor character in the novel, where I am known as “Goldfinger Gus”.
The problem with making good-quality fake gold is that gold is remarkably dense. It’s almost twice the density of lead, and two-and-a-half times more dense than steel. You don’t usually notice this because small gold rings and the like don’t weigh enough to make it obvious, but if you’ve ever held a larger bar of gold, it’s absolutely unmistakable: The stuff is very, very heavy. The standard gold bar for bank-to-bank trade, known as a “London good delivery bar” weighs 400 troy ounces (over thirty-three pounds), yet is no bigger than a paperback novel. A bar of steel the same size would weigh only thirteen and a half pounds. According to the news, the authorities have arrested pretty much everyone involved, from the people who sold the bank the gold, to bank officials, to the chemists responsible for testing and approving it on receipt.
The problem is, anyone who so much as picked up one of these bars should have known immediately that they were fake, no fancy test required. The weight alone is an instant dead giveaway. Even a forklift operator lifting a palette full of them should have noticed that his machine wasn’t working hard enough. I think they must have been swapped out while in storage: Someone walked in each day with a new fake gold bar and walked out with a real one. If they were fake on arrival then everyone who handled them in any way must have either had no experience with gold or been in on the scam. Now, for me the more interesting question is, how do you make a fake gold bar that at least passes the pick-it-up test? The problem is that there are very few metals that are as dense as gold, and with only two exceptions they all cost as much or more than gold. The first exception is depleted uranium, which is cheap if you’re a government, but hard for individuals to get. It’s also radioactive, which could be a bit of an issue.
The second exception is a real winner: tungsten. Tungsten is vastly cheaper than gold (maybe $30 dollars a pound compared to $12,000 a pound for gold right now). And remarkably, it has exactly the same density as gold, to three decimal places. The main differences are that it’s the wrong color, and that it’s much, much harder than gold. (Very pure gold is quite soft, you can dent it with a fingernail.) A top-of-the-line fake gold bar should match the color, surface hardness, density, chemical, and nuclear properties of gold perfectly. To do this, you could could start with a tungsten slug about 1/8-inch smaller in each dimension than the gold bar you want, then cast a 1/16-inch layer of real pure gold all around it. This bar would feel right in the hand, it would have a dead ring when knocked as gold should, it would test right chemically, it would weigh *exactly* the right amount, and though I don’t know this for sure, I think it would also pass an x-ray fluorescence scan, the 1/16″ layer of pure gold being enough to stop the x-rays from reaching any tungsten. You’d pretty much have to drill it to find out it’s fake. (Unless, of course, central bank gold inspectors are wise to this trick and have developed a test for it: Something involving speed of sound say, or more powerful x-rays, or perhaps neutron activation analysis. If bars like this are actually a common problem, you certainly could devise a quick, non-destructive test for them, and for all I know, they have. Except, apparently, in Ethiopia.)
Such a top-quality fake London good delivery bar would cost about $50,000 to produce because it’s got a lot of real gold in it, but you’d still make a nice profit considering that a real one is worth closer to $400,000. A lower budget version could be made by using the same under-sized tungsten slug but casting lead-antimony alloy around it (to match the hardness, sound, and feel of gold), then electroplating on a heavy coating of gold. Such a bar would still feel and sound right and be only very slightly underweight, while costing less than $500 to produce in quantity. It would not pass x-ray fluorescence, and whether it passes a chemical test would depend on how thick the electroplating is. This is the solution I recommended for Cobra Gold, because they only needed their fake gold to pass a field inspection, which is to say, someone picking it up and knowing what gold should feel like when you lift it. You may quibble for other aspects of the plot if you like, but I think the fake gold would have worked. And let me tell you, it’s a sad day for criminal masterminds when my fictional fake gold, designed only to trick a terrorist cell, is so much better than the real fake gold used to rip off a real government bank for millions of real dollars.”
Malleable things can be hammered thinner without breaking; ductile things can be stretched thinner without snapping. Every material has its limit, but with gold, that limit is just a few hundred atoms thick. Gold is the most malleable and the most ductile of all metals. A cube of it about 21/2 inches on edge could be beaten out to cover an entire football field (at a cost of roughly $68,000, plus beating fees). Gold this thin is called gold leaf, and the ancient art of applying it for decoration is called gilding.
How thin is gold leaf? Using my steel rolling mill, I can make gold foil about one thousandth of an inch thick, similar to aluminum foil. Thin, sure, but gold leaf is nearly 500 times as thin as that. Only then does it become affordable enough and flexible enough to be used almost like paint to cover finely detailed carvings or anything else you want to be shiny for years to come. To make gold leaf, start with gold foil, interleave a few dozen squares of it with layers of special vellum (so the foil sheets don´t stick to one another), and beat the heck out of the stack with a 16-pound hammer for many hours, turning the squares into larger squares of thinner foil. Then cut the sheets in quarters, restack them, and pound them out again. The malleability of gold is what allows the sheets to just keep getting thinner and thinner without splitting. (OK, I admit, I tried and failed at this. Just haven´t got the arm for it. Or the proper vellum, or the family secrets handed down over generations. Making gold leaf is, like other ancient arts, not quite the garage project it might seem.)
Gilding, on the other hand, is not a particularly difficult skill. To gild a home-run baseball, I used commercially prepared gold leaf from an art-supply store. The process is simple: Paint the object with a sticky liquid called gold size, lay the sheets of gold leaf on, and rub them in. The catch is the part where you try to pick up the leaf. Don´t even think about using your fingers-this stuff is more like a soap bubble than a sheet of metal and will start wrapping around your fingers and then tear the instant you try to unwrap it. Brushes known as gilders´ tips, made of red-squirrel hair (none of that gray-squirrel crap, mind you) are used to pick up the sheets by static electricity. It takes a delicate touch, but at $2 per four-inch-by-four-inch sheet, you´re motivated to learn fast.
Gold leaf instantly welds to itself. Overlapping layers fuse together invisibly when rubbed in, so even if you´re sloppy, the end result will look smooth. It´s OK to touch it with your fingers at this point because the gold size will hold it in place. Gilded objects survive from 5,000 years ago (think King Tut´s mask), proving that gold is impervious to air, water, alkalis and most acids, no matter how thin it is.
1. Mini rolling mill squeezes one gram of gold into foil, which is still about 500 times as thick as gold leaf.
2. Gold leaf held to a squirrel-hair brush by static electricity, ready to be applied.
Ethiopia’s national bank has been told to inspect all the gold in its vaults to determine its authenticity. It follows the discovery that some of the “gold” it had bought for millions of dollars was gold-plated steel. The first hint that something was wrong reportedly came when the Ethiopian central bank exported a consignment of gold bars to South Africa. The South Africans sent them back, complaining that they had been sold gilded steel. An investigation revealed that the bank had bought a consignment of fake gold from a supplier, who is now under
arrest.
Other arrests followed, including business associates of the main accused; national bank officials; and chemists from the Geological Survey of Ethiopia, whose job it is to assay the bank’s purchases of gold and certify that they are real. But what has clearly now got the government even more worried is that another different batch of gold in the bank’s vaults has also been found to be fake, and this time it was gold which had been there for several years, after being seized from smugglers trying to take it to Djibouti.
Mining
The Ethiopian parliament’s budget and finance committee ordered the inspection of all gold in the national bank’s vaults. A report from the auditor-general on the affair is expected to be presented to parliament during its current session. Gold is mined in Ethiopia in considerable quantities, and a trader selling gold to the central bank has to have it tested and certified by the Geological Survey. Whether the bank bought fake gold in the first place, or whether real gold from the vaults has been swapped for gilded steel, the fraud has cost the bank many millions of dollars, and it must have involved collusion on a considerable scale.
It was one of the most secretive missions at a factory that was all about secrecy: Nuclear warheads, retired from service and destined for the junkyard, were trucked at night to the Paducah Gaseous Diffusion Plant to be dismantled, hacked into unrecognizable pieces and buried. Workers used hammers and acetylene torches to strip away bits of gold and other metals from the warheads’ corrosion-proof plating and circuitry. Useless parts were dumped into trenches. But the gold – some of it still radioactive – was tossed into a smelter and molded into shiny ingots.
Exactly what happened next is one of the most intriguing questions to arise from a workers’ lawsuit against the former operators of the U.S.-owned uranium plant in western Kentucky. Three employees contend that the plant failed for years to properly screen gold and other metals for radioactivity. Some metals, they say, may have been highly radioactive when they left Paducah, bound perhaps for private markets.
The claim – based partly on circumstantial evidence – is now being investigated by Department of Energy officials who are also probing the workers’ accounts of plutonium contamination and alleged illegal dumping of radioactive waste at the uranium plant. “It is my belief that these recycled metals were injected into commerce in a contaminated form,” Ronald Fowler, a radiation safety technician at the plant, states in court documents that were unsealed this week by the Justice Department.
The investigation comes amid heightened scrutiny of government efforts to recycle valuable metals piling up at more than 16 factories that are part of the U.S. nuclear weapons complex. In the past week, congressional leaders, industry officials and scores of environmental groups have called on the Clinton administration to reconsider a controversial Department of Energy program to recycle scrap metal from nuclear weapons facilities into products that could end up in household goods or even children’s braces.
Opponents’ concerns soared this week with revelations, first reported in The Washington Post, that plutonium and other highly radioactive metals slipped into the Paducah plant over a 23-year period in shipments of contaminated uranium. The plutonium accumulated over decades in nickel-plated pipes where uranium was processed into fuel for bombs, government documents show. Smaller amounts of tainted uranium went to sister plants at Oak Ridge, Tenn., and Portsmouth, Ohio, the records show.
Scrap nickel from those plants is now the primary target of the Energy Department’s metal recycling program, which would be run jointly by the federal government, the state of Tennessee and a private contractor, British Nuclear Fuels Ltd. (BNFL). “If DOE denied or didn’t know plutonium was present at Paducah, why should we trust them to release waste from identical production plants into products ranging from intrauterine devices to hip replacements?” asked Wenonah Hauter of the watchdog group Public Citizen, one of 185 organizations to sign a letter to Vice President Gore Thursday demanding a halt to the program.
Recovering gold and other valuable metals from retired nuclear weapons had been a little-known mission of the government’s uranium enrichment plants over the past five decades. At Paducah, the process began in the 1950s and was conducted under extraordinary security, with heavily armed guards escorting warheads into the plant under cover of darkness. Garland “Bud” Jenkins, one of three Paducah workers involved in the lawsuit filed under seal in June, says he worked for several years in Paducah’s metals program recovering gold, lead, aluminum and nickel from nuclear weapons and production equipment. “We melted the gold flakes in a furnace to create gold bars,” Jenkins said in court documents. “The gold was never surveyed radiologically prior to its release, to my knowledge.”
Jenkins also says he never saw tests performed on nickel and aluminum ingots that were hauled out of the plant in trucks. In later years, when plant managers did begin screening the metals, many were found to be contaminated, he said. Hundreds of nickel ingots are still stored at the plant, too tainted to go anywhere, he said. A plant report included in the lawsuit filings may shed light on the degree of contamination in the gold. In a radiological survey of the plant last year, technicians discovered gold flakes inside an old ingot mold used for gold recovery. The fish scale-sized flakes were tested and found to emit radiation at a rate of 500 millirems an hour, the report said. By comparison, the average person receives between 200 and 300 millirems each year from all sources, including X-rays, radon gas and cosmic radiation from space. “If you had a wedding ring made out of those flakes you’d be getting twice as much radiation in an hour as most people get in a year,” said Joseph R. Egan, a lawyer representing the employees.
Fowler, the radiation safety technician, said he filed a report on the discovery of the radioactive gold in December but received no response from the plant’s management. Nothing further was done to investigate “the possibility that [the plant] may have contaminated the nation’s gold supply” at Fort Knox, he said. Plant officials shed little light on the process. U.S. Enrichment Corp., the plant’s current operator, says gold recovery at Paducah was the responsibility of the Energy Department. Department officials, in a response to written questions from The Post, acknowledged that gold was recovered from nuclear weapons at Paducah. But, “since these actions occurred many years ago, information regarding their past dispositions is not readily available,” the statement said.
In a letter to Rep. John D. Dingell (D-Mich.)., department officials strongly defended their efforts to salvage nickel and other valuable metals that have been piling up at nuclear complex sites for years. “Let me assure you that the safety of the public and workers and compliance with state and federal regulations are of paramount importance,” said Undersecretary of Energy T.J. Glauthier. Glauthier said BNFL’s license requires that “any metals released for unrestricted use will not pose a risk to human health or the environment.”
The recycling program, announced in 1996 by Gore as part of his “reinventing government” initiative, was touted at the time as a “win-win” deal for the environment, industry and taxpayers. BNFL, which was awarded the recycling contract in a noncompetitive bid, has already begun recycling some of the 100,000 tons of radioactively contaminated metal that were once part of the defunct K-25 complex at Oak Ridge, the world’s first full-scale uranium enrichment plant. Eventually the program expanded to Paducah and other facilities.
Purifying nickel is technically difficult because the radioactive contamination extends below the surface of the metal. According to department officials, BNFL was awarded the contract because it has developed a unique technology that can safely remove nearly all of the contaminants. But opponents say the technology has never been proven on such a large scale. Moreover, they note, there are no federal standards for releasing contaminated metal into the marketplace. Previous attempts to set such standards in the early 1990s were abandoned because of public opposition.
And, opponents add, the lack of restrictions on the recycled metal leaves the public in the dark about which products may have come from contaminated scrap. Even if radioactivity levels are low, consumers are entitled to an informed choice when buying materials that might be used by children, activists said. “The DOE has admitted they can’t protect the safety of their workers and misled them,” said Robert Wages, executive vice president of the Paper, Allied-Industrial, Chemical & Energy Workers International Union. “Now DOE wants to dump radioactive metals into everything from baby rattles to zippers . . . and tell us not to worry.”
Because there are no federal standards, the Energy Department’s recycling program relies on the state of Tennessee to set guidelines and regulate the process. In June, a federal judge sharply criticized the arrangement, saying the DOE had effectively thwarted public debate of an issue in which “the potential for environmental harm is great.” But U.S. District Judge Gladys Kessler rejected an attempt by labor and environmental groups to halt the recycling program, citing a law that prohibits courts from delaying federal cleanup of contaminated sites. Still, in unusually blunt language, the judge accused the Energy Department of “startling and worrisome” behavior in its alleged attempts to avoid federal oversight and public review. “There has been no opportunity at all for public scrutiny or input on such a matter of such grave importance,” Kessler wrote in her opinion. “The lack of public scrutiny is only compounded by the fact that the recycling process which BNFL intends to use is entirely experimental at this stage.”
Let’s consider the run-up to Rome’s hyperinflation. I think this comment from jaysromanhistory.com “Good Money, Bad Money, and Runaway Inflation” resonates with what’s happening in the US today:
“Severus Alexander (AD 222-235) tried to reform by going back to the denarius but, once started, this path of runaway inflation and financial irresponsibility on the part of the imperial government proved impossible to control.”
It also seems that the hyperinflation was preceded by some kind of banking crisis, which is an interesting parallel. From “Demise and Fall of the Augustan Monetary System” by Koenraad Verboven:
“Papyri show it was common for private individuals to deposit money at a bank and to make and accept payments through bankers.Bankers in the west disappear from view around the middle of the 3rd c… A famous papyrus from Oxyrhynchus from 260 CE shows exchange bankers closing in order to avoid having to change the ‘imperial money’. The strategos ordered the exchange bankers to reopen and accept all genuine coins and warned businessmen to do the same. In 266 CE we find for the first time transactions being expressed in ‘ptolemaeic’ or ‘old silver’ as opposed to ‘new silver’.”
The chart shows how inflation remained relatively subdued until a tipping point was reached in the late- 260s A.D Monetary systems can absorb substantial abuse before there is a dramatic impact on the price level. For example, the debasement of the coinage was already accelerating in the early part of the third century A.D., before plunging in the latter part. Indeed, the chart below (apologies for the quality) only shows the trend up to 253 AD. By around 290 AD, the coins were only dipped in silver to give them a coating (<0.5%).
and STILL ONE of the BEST CONSPIRACY THEORIES EVER :
“A popular and recurring conspiracy theory, as alleged by Edward Durrell, Norman Dodd, Tom Valentine, Peter Beter and others, claims that the vault is mostly empty and that most of the gold in Fort Knox was removed to London in the late 1960s by President Lyndon Johnson. [3] In response, on September 23, 1974, Senator Walter Huddleston of Kentucky, twelve congressmen, and about 100 members of the news media toured the vault and opened various cells and doors, each filled with gold. Radio reporter Bill Evans, when asked if it seemed like the gold might have been moved in just for the visit, replied that “all I can say is that I saw gold there” and that it seemed like it was always there.[4] Additionally, audits of the gold by the General Accounting Office (in cooperation with the United States Mint and the United States Customs Service in 1974 and the Treasury Department) from 1975-1981 found no discrepancies between the reported and actual amounts of gold at the Depository.[5] However, the audit has been described as a peculiar process because it was only a partial audit done over an extended period of time.[6] The report states only 21 percent of the gold bars were audited as of 1981 (the audit report’s issue date) and that the audit has “covered more than 212.7 million fine troy ounces of gold” which “represents over 80 percent of the total amount of United States-owned gold of 264.1 million fine troy ounces.”[5] A small amount of gold is removed for regularly scheduled audits to ensure the purity matches official records.[1] The theory continues to persist, however. Of this alleged scandal, the ex-general counsel of the Export-Import Bank of the United States, Peter Beter, commented: “The Watergate scandal was child’s play compared with the covered-up Fort Knox Gold Scandal”.[7]”
“This is the Dr. Beter AUDIO LETTER, 1629 K St. NW, Washington, D.C. 20006 Hello, my friends, this is Dr. Beter. Today is July 30, 1980, and this is my AUDIO LETTER No. 56.
IAN FLEMING and the FT. KNOX GOLD SCANDAL
In writing his stories, Ian Fleming was drawing upon his own secret weapon. That weapon was knowledge. Fleming had been a high-ranking officer of Britain’s crack Intelligence agency called MI-5. It was the British who practically invented and perfected the modern concept of Intelligence, and to this day British Intelligence remains the equal of any in the world.
When Fleming left Her Majesty’s Secret Service to become a writer, he was severely limited in what he could publish. He was bound by the restrictions of the British “Official Secrets Act.” Under that Act, Fleming would have been liable for punishment for revealing any official secret without authorization. And so Ian Fleming, the former British Intelligence officer, became what is known as a “fictionalizer”–that is, he started with factual knowledge but rearranged and modified it in order to create startling stories of fiction. He was always extremely careful about how he did this. He always knew that he was skirting the fringes of the Official Secrets Act. He could not afford to make a mistake, because it would have meant prison for him and possible forfeiture of pension rights; and so he always altered every situation, every secret technology, and every personality enough to avoid revealing actual secrets. It was a long and meticulous process both to protect himself and to make each final story readable. For that reason Fleming completed a new James Bond novel only about once a year. If it had all been imagination, as many people believe, he would have been capable of producing a new book every few months, making himself far richer. But because his stories were all rooted in fact, secret fact, he did not dare speed up and run the risk of making a mistake.
Ian Fleming had two purposes in writing his famous series of spy novels. One purpose, of course, was to earn a very comfortable living; but beyond that he was also trying to subtly open the eyes of the reading public by the medium of fiction. Because of the Official Secrets Act he could not publish the facts that he knew as fact without modification, so he did what he felt was the next best thing, and that was to use his stories to open our minds to at least think in terms which were otherwise hidden from us. Fleming truly believed that this was something which somehow had to be done, because knowing what he knew he was not an optimistic man.
A perfect example of all of this took place with a book Fleming published 21 years ago in 1959. It was titled “GOLD FINGER.” The starting point for the book was knowledge about certain secrets. Fleming knew that there was a long-range plan to create monetary chaos for private gain and power. He also knew that a central feature of the plan was to be the secret disappearance of America’s monetary gold hoard at Fort Knox, and he knew that the kingpin of this international plot was a man with legendary greed for gold. His name: DAVID ROCKEFELLER. It was a plan that was totally unsuspected by the public. It was still the Eisenhower era, the heyday of the so-called “almighty dollar.” The dollar was good as gold, because it was backed by the world’s largest monetary gold hoard. Fort Knox was thought to be impregnable; and in those days, my friends, no one dared speak ill of the Four Rockefeller Brothers.
Ian Fleming decided to write a book that would begin to alert people to what was afoot. He could not tell the whole story, nor tell it as fact because of the Official Secrets Act; but by fictionalizing he was able to cause people to think of possibilities which would never have occurred to them otherwise. For example, in the 50′s it was a rare American who considered even the possibility of monetary turmoil. The dollar was good as gold, and that was that. Why even think about gold? Individual citizens could not own it except in jewelry. Wasn’t all the rest of it thought to be sealed up in Fort Knox? Everyone knew no one could get in there, and so we didn’t even think about it. But in his book GOLD FINGER, Fleming brought several key thoughts to our minds. He devised a fictional scheme to show that Fort Knox might not be impregnable after all. He raised the question: “What would happen to the dollar and other currencies if the Fort Knox gold were no longer available?” And he proposed the unthinkable thought that someone, if they were rich enough and greedy enough, might want to get their hands on America’s gold.
The actual GOLD FINGER story, of course, was fiction; but the basic points which I have just mentioned were fact. GOLD FINGER was published in 1959; and barely two years later in 1961, the hemorrhaging of America’s monetary gold supply began. Agents of David Rockefeller within the United States Government provided a cloak of authority called the “London Gold Pool Agreement”; and then for seven years until 1968, big Army trucks loaded with gold bullion rolled out of Fort Knox constantly–and all without a word to the public!
Some of the gold shipments during those seven years were recorded on a list kept by the United States Mint. Almost without exception the shipments listed went to the New York Assay Office, where they disappeared without any further accounting. As you may recall, the New York Assay Office was the focus of a scandal in December 1978 involving missing gold. Over 5,000 ounces had simply disappeared; but that, my friends, was a very small tip of a very large iceberg, and so the controversy over the missing millions in gold at the New York Assay Office was quickly smoothed over and covered up. They could not afford to allow any real investigation which might let the public know the truth. According to the official list of shipments I mentioned earlier, a large fraction of America’s monetary gold went to the New York Assay Office in the 60′s. There it disappeared, never to be seen again.
But, my friends, the real situation was even worse. Long ago my sources gave me hard evidence of many large gold shipments from Fort Knox which were not even listed. Five years ago this month in AUDIO LETTER No. 2 I revealed a specific example of this. It was a shipment on January 20, 1965, in which four (4) tractor-trailers loaded up at Fort Knox and then headed for railroad tracks across the river at Jeffersonville, Indiana. My sources provided me with details, including photographs, of the operation. But the shipment was one of many which did not show on any official Government list of shipments.
In June 1975, Mr. Edward Durell and my other associates were able to confront officials of the United States Mint with this example of missing shipments, and for once the confrontation took place under circumstances in which the Mint was under great pressure to respond. In the most specific terms the Bureau of the Mint was asked what was shipped out of Fort Knox in the four tractor-trailers on January 20, 1965. The written answer dated June 19, 1975 came from the then Director of the United States Mint, Mrs. Mary Brooks. She confirmed that this unlisted shipment amounted to more than one and three-quarter (1-3/4) million ounces of gold–and, my friends, it was not junk gold melted down from old coins which were confiscated from Americans in 1934. The shipment was part of America’s true monetary gold, good delivery gold which is .995 fine or better. After this admission in writing about an enormous secret shipment of gold out of Fort Knox, one would have thought that there would be fireworks, but not so!
My friend Mr. Durell showered the appropriate officials throughout the Government with this evidence of massive fraud at Fort Knox, and he notified the major media and all of the appropriate leaders in Congress about this evidence. For reasons which I will explain later in this message, I believe it’s time to call attention to one of these people. He is Senator William Proxmire of Wisconsin, Chairman of the Senate Banking Committee.
Proxmire loves to parade as a great defender of our financial interests in Washington. He’s famous for his so-called “Golden Fleece Award.” Proxmire searches through the Federal Budget with a fine-tooth comb, and he’s always able to find some project or contract which rightly or wrongly will look ridiculous to the public. He then trots it out, announces how much it costs, and with a great flourish gives it his Golden Fleece Award. By this and other means Proxmire is a master at maintaining his image as a protector of the American economy.
But if ever a situation deserved the Proxmire Golden Fleece Award, it is the FORT KNOX GOLD SCANDAL. The petty examples usually chosen by Proxmire fleece the American public out of perhaps hundreds of thousands or a few million dollars. It makes good publicity for Proxmire, but it’s insignificant. By contrast, the Fort Knox Gold Scandal is fleecing every one of us out of the shirt on our back. It has undermined the dollar itself, which is on its way to destruction. It has set off ever-worsening inflation even while our economy is stagnating. The Gold Scandal is fleecing us all, but what has Senator William Proxmire done about that??
Let me tell you what he has, and has not, done. For more than five years Proxmire has been among the top American leaders who have been kept informed about major developments and evidence in the Gold Scandal. He has been given the evidence I mentioned earlier about the missing shipment from Fort Knox, as well as other evidence of major discrepancies; but up to now, Proxmire has kept his lips sealed about discrepancies about America’s gold supply–with one exception. That exception took place in December 1978. Word had leaked out about the 5,000-or so missing ounces of gold at the New York Assay Office worth over $3,000,000 at today’s prices. As Chairman of the Senate Banking Committee, Proxmire immediately jumped on the story. Frowning in disapproval, he proclaimed that this would have to be looked into. Hearing those words from the champion of the Golden Fleece Award, the public relaxed and quickly forgot about it. And almost as quickly, Senator William Proxmire made sure he forgot about it too. To this day, no real investigation has ever taken place over the missing gold at the New York Assay Office.
Proxmire’s failure to follow up that $3,000,000 gold discrepancy was bad enough, but it’s nothing compared to his apparent disinterest in investigating the truth about the Fort Knox Gold Scandal. The case of the missing Fort Knox shipment is a case in point. At today’s prices, that one shipment alone was worth more than one billion dollars ($1,000,000,000)–not a mere million but 1000 times a million! And that, in truth, was only one example. There were many unreported shipments like that. That is why the Treasury figures, which show a huge remaining American gold hoard, are a fraud–a total fraud. And that’s why the United States could auction off only a small amount of junk gold over a period of time and then had to stop. And that’s why the United States dollar is no longer “as good as gold”; instead, it’s fast becoming worth less than the paper it’s printed on.
Senator William Proxmire, like many others trusted by the American public, has been given massive evidence about all of this; but his actions so far have helped only those who have taken our own gold in order to fleece us of everything we own. Later in this message I will have more to say about Senator William Proxmire and the Fort Knox Gold Scandal. But for now I want to finish the story of Ian Fleming’s aborted efforts to alert the public about things like these. As I already explained, his principle was “Fictionalize to open eyes”; but after his untimely death in 1964 his stories were seized upon and warped, especially in movies, for the opposite purpose. The new purpose became “Fictionalize to CLOSE eyes.” Nothing could be done to alter and neutralize Fleming’s books once they had been published, so instead attention was drawn away from the books to the James Bond movies; and as the movies were in preparation, disinformation agents were planted on the scene to guide the process. As a result, the James Bond who emerged on film was a very different character from the one in Fleming’s novels. The basic story lines remained the same, but in many subtle ways the psychology was radically changed. The movies retained the adventure, fast action, dazzling secret technologies, and bold plots which Fleming had pioneered; but by clever use of satirical humor, every James Bond movie ended up by laughing at itself. Secret weapons were exaggerated or twisted so as to make them entertaining but also ridiculous; and by filling the movies with strange characters and never-ending gimmicks, viewers were distracted from the underlying warnings of the basic plot.
The GOLD FINGER story was a perfect example of all this. Fleming’s original novel called attention to something which most readers would never have thought about otherwise. That was the potential relationship between Fort Knox gold and international monetary chaos, and through his fictional plot he also planted the idea that the legendary Fort Knox bullion depository might not be invulnerable after all. But these lessons were rarely, if ever, realized by those who saw only the movie; instead, the typical viewer walked out of the movie laughing. It was obviousthat what he had seen could happen only in fiction, and from that point onward he was programmed to react with disbelief if he should ever hear of tampering with Fort Knox gold. Such a thing could only be fiction–it was just too ridiculous ever to really happen.
This is the attitude I encountered more than seven years ago when I began giving public warnings about deliberate plans for economic chaos. I myself was first alerted to the Fort Knox Gold Scandal by none other than British Intelligence in London after completing a secret mission for Queen Elizabeth in Zaire; and in my book THE CONSPIRACY AGAINST THE DOLLAR, I outlined the overall plan, including the unseen role of America’s gold. I had one major advantage which Ian Fleming did not have. The United States does not yet have an Official Secrets Act like that of Britain, and so I was not forced to fictionalize. Instead I was able to give the real plans and real names of those responsible for things to come.
The prototype for Ian Fleming’s GOLD FINGER of two decades ago was none other than David Rockefeller, and in my book I showed in detail how he played his kingpin role in the plan to destroy our economy. I described how this was leading to a collapsing dollar, skyrocketing gold prices, a stagnating economy, spiraling financial problems for State and local governments, urban unrest, and eventually NUCLEAR WAR. But when David Rockefeller himself was interviewed about my book, even he resorted to the technique “Fictionalize to close eyes.” His comment about THE CONSPIRACY AGAINST THE DOLLAR was: “Interesting science fiction.”
It was 1993, during congressional debate over the North American Free Trade Agreement. I was having lunch with a staffer for one of the rare Republican congressmen who opposed the policy of so-called free trade. To this day, I remember something my colleague said: “The rich elites of this country have far more in common with their counterparts in London, Paris, and Tokyo than with their fellow American citizens.” That was only the beginning of the period when the realities of outsourced manufacturing, financialization of the economy, and growing income disparity started to seep into the public consciousness, so at the time it seemed like a striking and novel statement.
At the end of the Cold War many writers predicted the decline of the traditional nation-state. Some looked at the demise of the Soviet Union and foresaw the territorial state breaking up into statelets of different ethnic, religious, or economic compositions. This happened in the Balkans, the former Czechoslovakia, and Sudan. Others predicted a weakening of the state due to the rise of Fourth Generation warfare and the inability of national armies to adapt to it. The quagmires of Iraq and Afghanistan lend credence to that theory. There have been numerous books about globalization and how it would eliminate borders. But I am unaware of a well-developed theory from that time about how the super-rich and the corporations they run would secede from the nation state. I do not mean secession by physical withdrawal from the territory of the state, although that happens from time to time—for example, Erik Prince, who was born into a fortune, is related to the even bigger Amway fortune, and made yet another fortune as CEO of the mercenary-for-hire firm Blackwater, moved his company (renamed Xe) to the United Arab Emirates in 2011. What I mean by secession is a withdrawal into enclaves, an internal immigration, whereby the rich disconnect themselves from the civic life of the nation and from any concern about its well being except as a place to extract loot.
Our plutocracy now lives like the British in colonial India: in the place and ruling it, but not of it. If one can afford private security, public safety is of no concern; if one owns a Gulfstream jet, crumbling bridges cause less apprehension—and viable public transportation doesn’t even show up on the radar screen. With private doctors on call and a chartered plane to get to the Mayo Clinic, why worry about Medicare? Being in the country but not of it is what gives the contemporary American super-rich their quality of being abstracted and clueless. Perhaps that explains why Mitt Romney’s regular-guy anecdotes always seem a bit strained. I discussed this with a radio host who recounted a story about Robert Rubin, former secretary of the Treasury as well as an executive at Goldman Sachs and CitiGroup. Rubin was being chauffeured through Manhattan to reach some event whose attendees consisted of the Great and the Good such as himself. Along the way he encountered a traffic jam, and on arriving to his event—late—he complained to a city functionary with the power to look into it. “Where was the jam?” asked the functionary. Rubin, who had lived most of his life in Manhattan, a place of east-west numbered streets and north-south avenues, couldn’t tell him. The super-rich who determine our political arrangements apparently inhabit another, more refined dimension. To some degree the rich have always secluded themselves from the gaze of the common herd; their habit for centuries has been to send their offspring to private schools. But now this habit is exacerbated by the plutocracy’s palpable animosity towards public education and public educators, as Michael Bloomberg has demonstrated. To the extent public education “reform” is popular among billionaires and their tax-exempt foundations, one suspects it is as a lever to divert the more than $500 billion dollars in annual federal, state, and local education funding into private hands—meaning themselves and their friends. What Halliburton did for U.S. Army logistics, school privatizers will do for public education. A century ago, at least we got some attractive public libraries out of Andrew Carnegie. Noblesse oblige like Carnegie’s is presently lacking among our seceding plutocracy. In both world wars, even a Harvard man or a New York socialite might know the weight of an army pack. Now the military is for suckers from the laboring classes whose subprime mortgages you just sliced into CDOs and sold to gullible investors in order to buy your second Bentley or rustle up the cash to get Rod Stewart to perform at your birthday party. The sentiment among the super-rich towards the rest of America is often one of contempt rather than noblesse.
Stephen Schwarzman, the hedge fund billionaire CEO of the Blackstone Group who hired Rod Stewart for his $5-million birthday party, believes it is the rabble who are socially irresponsible. Speaking about low-income citizens who pay no income tax, he says: “You have to have skin in the game. I’m not saying how much people should do. But we should all be part of the system.” But millions of Americans who do not pay federal income taxes do pay federal payroll taxes. These taxes are regressive, and the dirty little secret is that over the last several decades they have made up a greater and greater share of federal revenues. In 1950, payroll and other federal retirement contributions constituted 10.9 percent of all federal revenues. By 2007, the last “normal” economic year before federal revenues began falling, they made up 33.9 percent. By contrast, corporate income taxes were 26.4 percent of federal revenues in 1950. By 2007 they had fallen to 14.4 percent. So who has skin in the game? While there is plenty to criticize the incumbent president for, notably his broadening and deepening of President George W. Bush’s extra-constitutional surveillance state, under President Obama the overall federal tax burden has not been raised, it has been lowered. Approximately half the deficit impact of the stimulus bill was the result of tax-cut provisions. The temporary payroll-tax cut and other miscellaneous tax-cut provisions make up the rest of the cuts we have seen in the last three and a half years. Yet for the president’s heresy of advocating that billionaires who receive the bulk of their income from capital gains should pay taxes at the same rate as the rest of us, Schwarzman said this about Obama: “It’s a war. It’s like when Hitler invaded Poland in 1939.” For a hedge-fund billionaire to defend his extraordinary tax privileges vis-à-vis the rest of the citizenry in such a manner shows an extraordinary capacity to be out-of-touch. He lives in a world apart, psychologically as well as in the flesh.
Schwarzman benefits from the so-called “carried interest rule” loophole: financial sharks typically take their compensation in the form of capital gains rather than salaries, thus knocking down their income-tax rate from 35 percent to 15 percent. But that’s not the only way Mr. Skin-in-the-Game benefits: the 6.2 percent Social Security tax and the 1.45 percent Medicare tax apply only to wages and salaries, not capital gains distributions. Accordingly, Schwarzman is stiffing the system in two ways: not only is his income-tax rate less than half the top marginal rate, he is shorting the Social Security system that others of his billionaire colleagues like Pete Peterson say is unsustainable and needs to be cut. This lack of skin in the game may explain why Romney has been so coy about releasing his income-tax returns. It would make sense for someone with $264 million in net worth to joke that he is “unemployed”—as if he were some jobless sheet metal worker in Youngstown—if he were really saying in code that his income stream is not a salary subject to payroll deduction. His effective rate for federal taxes, at 14 percent, is lower than that of many a wage slave. After the biggest financial meltdown in 80 years and a consequent long, steep drop in the American standard of living, who is the nominee for one of the only two parties allowed to be competitive in American politics? None other than Mitt Romney, the man who says corporations are people. Opposing him will be the incumbent president, who will raise up to a billion dollars to compete. Much of that loot will come from the same corporations, hedge-fund managers, merger-and-acquisition specialists, and leveraged-buyout artists the president will denounce in pro forma fashion.
The super-rich have seceded from America even as their grip on its control mechanisms has tightened. But how did this evolve historically, what does it mean for the rest of us, and where is it likely to be going? That wealth-worship—and a consequent special status for the wealthy as a kind of clerisy—should have arisen in the United States is hardly surprising, given the peculiar sort of Protestantism that was planted here from the British Isles. Starting with the Puritanism of New England, there has been a long and intimate connection between the sanctification of wealth and America’s economic and social relationships. The rich are a class apart because they are the elect. Most present-day Americans, if they think about the historical roots of our wealth-worship at all, will say something about free markets, rugged individualism, and the Horatio Alger myth—all in a purely secular context. But perhaps the most notable 19th-century exponent of wealth as virtue and poverty as the mark of Cain was Russell Herman Conwell, a canny Baptist minister, founder of perhaps the first tabernacle large enough that it could later be called a megachurch, and author of the immensely famous “Acres of Diamonds” speech of 1890 that would make him a rich man. This is what he said:
I say that you ought to get rich, and it is your duty to get rich. … The men who get rich may be the most honest men you find in the community. Let me say here clearly … ninety-eight out of one hundred of the rich men of America are honest. That is why they are rich. That is why they are trusted with money. … I sympathize with the poor, but the number of poor who are to be sympathized with is very small. To sympathize with a man whom God has punished for his sins … is to do wrong … let us remember there is not a poor person in the United States who was not made poor by his own shortcomings.
Evidently Conwell was made of sterner stuff than the sob-sister moralizing in the Sermon on the Mount. Somewhat discordantly, though, Conwell had been drummed out of the military during the Civil War for deserting his post. For Conwell, as for the modern tax-avoiding expat billionaire, the dollar sign tends to trump Old Glory. The conjoining of wealth, Christian morality, and the American way of life reached an apotheosis in Bruce Barton’s 1925 book The Man Nobody Knows. The son of a Congregationalist minister, Barton, who was an advertising executive, depicted Jesus as a successful salesman, publicist, and the very role model of the modern businessman.
But this peculiarly American creed took a severe hit after the crash of 1929, and wealth ceased to be equated with godliness. While the number of Wall Street suicides has been exaggerated in national memory, Jesse Livermore, perhaps the most famous of the Wall Street speculators, shot himself, and so did several others of his profession. There was then still a lingering old-fashioned sense of shame now generally absent from the über-rich. While many of the elites hated Franklin Roosevelt—consider the famous New Yorker cartoon wherein the rich socialite tells her companions, “Come along. We’re going to the Trans-Lux to hiss Roosevelt”—most had the wit to make a calculated bet that they would have to give a little of their wealth, power, and prestige to retain the rest, particularly with the collapsing parliamentary systems of contemporary Europe in mind. Even a bootlegging brigand like Joe Kennedy Sr. reconciled himself to the New Deal. And so it lasted for a generation: the wealthy could get more wealth—fabulous fortunes were made in World War II; think of Henry J. Kaiser—but they were subject to a windfall-profits tax. And tycoons like Kaiser constructed the Hoover Dam and liberty ships rather than the synthetic CDOs that precipitated the latest economic collapse. In the 1950s, many Republicans pressed Eisenhower to lower the prevailing 91 percent top marginal income tax rate, but citing his concerns about the deficit, he refused. In view of our present $15 trillion gross national debt, Ike was right. Characteristic of the era was the widely misquoted and misunderstood statement of General Motors CEO and Secretary of Defense Charles E. “Engine Charlie” Wilson, who said he believed “what was good for the country was good for General Motors, and vice versa.” He expressed, however clumsily, the view that the fates of corporations and the citizenry were conjoined. It is a view a world away from the present regime of downsizing, offshoring, profits without production, and financialization. The now-prevailing Milton Friedmanite economic dogma holds that a corporation that acts responsibly to the community is irresponsible. Yet somehow in the 1950s the country eked out higher average GDP growth rates than those we have experienced in the last dozen years.
After the 2008 collapse, the worst since the Great Depression, the rich, rather than having the modesty to temper their demands, this time have made the calculated bet that they are politically invulnerable—Wall Street moguls angrily and successfully rejected executive-compensation limits even for banks that had been bailed out by taxpayer funds. And what I saw in Congress after the 2008 crash confirms what economist Simon Johnson has said: that Wall Street, and behind it the commanding heights of power that control Wall Street, has seized the policy-making apparatus in Washington. Both parties are in thrall to what our great-grandparents would have called the Money Power. One party is furtive and hypocritical in its money chase; the other enthusiastically embraces it as the embodiment of the American Way. The Citizens United Supreme Court decision of two years ago would certainly elicit a response from the 19th-century populists similar to their 1892 Omaha platform. It called out the highest court, along with the rest of the political apparatus, as rotted by money.
We meet in the midst of a nation brought to the verge of moral, political, and material ruin. Corruption dominates the ballot-box, the Legislatures, the Congress, and touches even the ermine of the bench. The people are demoralized. … The newspapers are largely subsidized or muzzled, public opinion silenced, business prostrated, homes covered with mortgages, labor impoverished, and the land concentrating in the hands of capitalists. The urban workmen are denied the right to organize for self-protection, imported pauperized labor beats down their wages. … The fruits of the toil of millions are boldly stolen to build up colossal fortunes for a few, unprecedented in the history of mankind, and the possessors of these, in turn, despise the Republic and endanger liberty. From the same prolific womb of governmental injustice we breed the two great classes—tramps and millionaires.
It is no coincidence that as the Supreme Court has been removing the last constraints on the legalized corruption of politicians, the American standard of living has been falling at the fastest rate in decades. According to the Federal Reserve Board’s report of June 2012, the median net worth of families plummeted almost 40 percent between 2007 and 2010. This is not only a decline when measured against our own past economic performance; it also represents a decline relative to other countries, a far cry from the post-World War II era, when the United States had by any measure the highest living standard in the world. A study by the Bertelsmann Foundation concluded that in measures of economic equality, social mobility, and poverty prevention, the United States ranks 27th out of the 31 advanced industrial nations belonging to the Organization for Economic Cooperation and Development. Thank God we are still ahead of Turkey, Chile, and Mexico!
This raises disturbing questions for those who call themselves conservatives. Almost all conservatives who care to vote congregate in the Republican Party. But Republican ideology celebrates outsourcing, globalization, and takeovers as the glorious fruits of capitalism’s “creative destruction.” As a former Republican congressional staff member, I saw for myself how GOP proponents of globalized vulture capitalism, such as Grover Norquist, Dick Armey, Phil Gramm, and Lawrence Kudlow, extolled the offshoring and financialization process as an unalloyed benefit. They were quick to denounce as socialism any attempt to mitigate its impact on society. Yet their ideology is nothing more than an upside-down utopianism, an absolutist twin of Marxism. If millions of people’s interests get damaged in the process of implementing their ideology, it is a necessary outcome of scientific laws of economics that must never be tampered with, just as Lenin believed that his version of materialist laws were final and inexorable. If a morally acceptable American conservatism is ever to extricate itself from a pseudo-scientific inverted Marxist economic theory, it must grasp that order, tradition, and stability are not coterminous with an uncritical worship of the Almighty Dollar, nor with obeisance to the demands of the wealthy. Conservatives need to think about the world they want: do they really desire a social Darwinist dystopia? The objective of the predatory super-rich and their political handmaidens is to discredit and destroy the traditional nation state and auction its resources to themselves. Those super-rich, in turn, aim to create a “tollbooth” economy, whereby more and more of our highways, bridges, libraries, parks, and beaches are possessed by private oligarchs who will extract a toll from the rest of us. Was this the vision of the Founders? Was this why they believed governments were instituted among men—that the very sinews of the state should be possessed by the wealthy in the same manner that kingdoms of the Old World were the personal property of the monarch? Since the first ziggurats rose in ancient Babylonia, the so-called forces of order, stability, and tradition have feared a revolt from below. Beginning with Edmund Burke and Joseph de Maistre after the French Revolution, a whole genre of political writings—some classical liberal, some conservative, some reactionary—has propounded this theme. The title of Ortega y Gasset’s most famous work, The Revolt of the Masses, tells us something about the mental atmosphere of this literature. But in globalized postmodern America, what if this whole vision about where order, stability, and a tolerable framework for governance come from, and who threatens those values, is inverted? What if Christopher Lasch came closer to the truth in The Revolt of the Elites, wherein he wrote, “In our time, the chief threat seems to come from those at the top of the social hierarchy, not the masses”? Lasch held that the elites—by which he meant not just the super-wealthy but also their managerial coat holders and professional apologists—were undermining the country’s promise as a constitutional republic with their prehensile greed, their asocial cultural values, and their absence of civic responsibility. Lasch wrote that in 1995. Now, almost two decades later, the super-rich have achieved escape velocity from the gravitational pull of the very society they rule over. They have seceded from America.
Plutonomy: The Memo Citigroup Doesn’t Want You to See – Bill Black White collar criminologist William Black dissects a 2005 Citigroup memo intended for its wealthist clients that describes the US, UK, and Canada as plutonomies — countries where rule by an ultra-rich managerial class has replaced democracy. Black is former federal regulator and author of “The Best Way to Rob a Bank is to Own One.”
“Are they real?” That’s the question people usually ask when they hear for the first time of the “Citigroup Plutonomy Memos.” The sad truth is: Yes, they are real, and instead of being discussed on mainstream media outlets all over America and beyond, Citigroup was surprisingly successful so far in suppressing these memos, using their lawyers to issue takedown-notices whenever these memos were being made available for download on the internet. So what are we talking about? In 2005 and 2006, several analysts at Citigroup took a very, very close look at the economic inequalities within the USA and other countries and wrote two memos which were addressed to their very wealthy customers. If there is one group of people who need to know the truth about what is really going on within the society and the economy, minus the propaganda, then it’s businesspeople who have a lot of money to invest, and who want to invest wisely. So Citigroup did their duty and published two explosive memos, which should have become mainstream news, but eventually did not. The first memo is dated October 16, 2005 (35 pages) and is titled:“Plutonomy: Buying Luxury, Explaining Global Imbalances.” The second memo is dated March 5, 2006 (18 pages) and is titled: “Revisiting Plutonomy: The Rich Getting Richer”
A few years ago, two copies of these memos were leaked and were published on the internet. Usually one should think that once such important documents are in the “public domain”, nothing should stop them any more from being distributed and being openly discussed. However, the lawyers of Citigroup, Kilpatrick Townsend & Stockton LLC, work hard to prevent exactly that from happening. Examples of their activities can be found all over the internet. It is apparent that Citigroup is paranoid that these memos by their analysts are being widely distributed. It is not necessary to include a download link in this post, as the memos are pretty easy to find with a simple google search. However, Citigroup seems to have been successful in preventing a wider discussion about the memos, due to their legal actions. This needs to stop, as every American and every citizen in the western world needs to know what people like the analysts of Citigroup really think about the inequalities which exist within the societies, how the rich should preserve their domination, and what possible “backlash” can be expected – and what the consequences are of living in a “plutonomy.” At the beginning of the first memo “Plutonomy: Buying Luxury, Explaining Global Imbalances”, the analysts introduce the subject:
Little of this note should tally with conventional thinking. Indeed, traditional thinking is likely to have issues with most of it. We will posit that:
1) the world is dividing into two blocs – the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest. Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S. What are the common drivers of Plutonomy? Disruptive technology-driven productivity gains, creative financial innovation, capitalist- friendly cooperative governments, an international dimension of immigrants and overseas conquests invigorating wealth creation, the rule of law, and patenting inventions. Often these wealth waves involve great complexity, exploited best by the rich and educated of the time.
2) We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization.
Citigroup explains how the “non-rich” consumers become increasingly irrelevant within the “plutonomies”:
4) In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie. Consensus analyses that do not tease out the profound impact of the plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts etc, i.e., focus on the “average”consumer are flawed from the start. It is easy to drown in a lake with an average depth of 4 feet, if one steps into its deeper extremes. Since consumption accounts for 65% of the world economy, and consumer staples and discretionary sectors for 19.8% of the MSCI AC World Index, understanding how the plutonomy impacts consumption is key for equity market participants.
USA Sources of Income, Top 1% (Source: Citigroup Investment Research)
The analysts of Citigroup then invent a new term - “The New Managerial Aristocracy”:
THE UNITED STATES PLUTONOMY – THE GILDED AGE, THE ROARING TWENTIES, AND THE NEW MANAGERIAL ARISTOCRACY
Let’s dive into some of the details. As Figure 1 shows the top 1% of households in the U.S., (about 1 million households) accounted for about 20% of overall U.S. income in 2000, slightly smaller than the share of income of the bottom 60% of households put together. That’s about 1 million households compared with 60 million households, both with similar slices of the income pie!
Clearly, the analysis of the top 1% of U.S. households is paramount. The usual analysis of the “average” U.S. consumer is flawed from the start. To continue with the U.S., the top 1% of households also account for 33% of net worth, greater than the bottom 90% of households put together. It gets better(or worse, depending on your political stripe) – the top 1% of households account for 40% of financial net worth, more than the bottom 95% of households put together.
This is data for 2000, from the Survey of Consumer Finances (and adjusted by academic Edward Wolff). Since 2000 was the peak year in equities, and the top 1% of households have a lot more equities in their net worth than the rest of the population who tend to have more real estate, these data might exaggerate the U.S. plutonomy a wee bit. Was the U.S. always a plutonomy – powered by the wealthy, who aggrandized larger chunks of the economy to themselves? Not really.
Citigroup also makes clear what the CEO’s of the world need: More money. Quote:
Society and governments need to be amenable to disproportionately allow/encourage the few to retain that fatter profit share. The Managerial Aristocracy, like in the Gilded Age, the Roaring Twenties, and the thriving nineties, needs to commandeer a vast chunk of that rising profit share, either through capital income, or simply paying itself a lot. We think that despite the post-bubble angst against celebrity CEOs, the trend of cost-cutting balance sheet-improving CEOs might just give way to risk-seeking CEOs, re-leveraging, going for growth and expecting disproportionate compensation for it. It sounds quite unlikely, but that’s why we think it is quite possible. Meanwhile Private Equity and LBO funds are filling the risk-seeking and re-leveraging void, expecting and realizing disproportionate remuneration for their skills.
But does placing so much money in so few hands also pose risks? Maybe the 99% of the population, or let it be 90-95%, it does not matter, will be unhappy about being ruled by the super rich? Fortunately for the investors, the analysts at Citigroup also considered these points and started to think about the plebs who, as history shows, have a tendency to be unruly, if poor. So the analysts started to think about “losers”, as they call them, or the people who could need a bath, as Newt Gingrich would call it. The Citigroup analysts basically predicted the OWS-movement. In considering these aspects, the analysts also discovered that there is a terrifying factor to consider – that the poor don’t have much economic power, but that they “have equal voting power with the rich.” Quote:
IS THERE A BACKLASH BUILDING?
Plutonomy, we suspect is elastic. Concentration of wealth and spending in the hands of a few, probably has its limits. What might cause the elastic to snap back? We can see a number of potential challenges to plutonomy.
The first, and probably most potent, is through a labor backlash. Outsourcing, offshoring or insourcing of cheap labor is done to undercut current labor costs. Those being undercut are losers in the short term. While there is evidence that this is positive for the average worker (for example Ottaviano and Peri) it is also clear that high-cost substitutable labor loses. Low-end developed market labor might not have much economic power, but it does have equal voting power with the rich. We see plenty of examples of the outsourcing or offshoring of labor being attacked as “unpatriotic” or plain unfair. This tends to lead to calls for protectionism to save the low-skilled domestic jobs being lost. This is a cause championed, generally, by left-wing politicians. At the other extreme, insourcing, or allowing mass immigration, which might price domestic workers out of jobs, leads to calls for anti-immigration policies, at worst championed by those on the far right. To this end, the rise of the far right in a number of European countries, or calls (from the right) to slow down the accession of Turkey into the EU, and calls from the left to rebuild trade barriers and protect workers (the far left of Mr. Lafontaine, garnered 8.5% of the vote in the German election, fighting predominantly on this issue), are concerning signals. This is not something restricted to Europe. Sufficient numbers of politicians in other countries have championed slowing immigration or free trade (Ross Perot, Pauline Hanson etc.).
Then comes a key-part of the first “Plutonomy” memo: Plutonomy only works if the members of a society have the impression that they can still participate, despite the harsh inequalities, that they “can join it.”The analysts use the term ”robber-baron economies” and conclude that a “potential social backlash” is possible. Becoming a “Pluto-participant” is the “embodiement of the ‘American Dream’” -and this dream should not die, otherwise the Plutocrats could be in real trouble. Quote:
A third threat comes from the potential social backlash. To use Rawls-ian analysis, the invisible hand stops working. Perhaps one reason that societies allow plutonomy, is because enough of the electorate believe they have a chance of becoming a Pluto-participant. Why kill it off, if you can join it? In a sense this is the embodiment of the “American dream”. But if voters feel they cannot participate, they are more likely to divide up the wealth pie, rather than aspire to being truly rich.
Could the plutonomies die because the dream is dead, because enough of society does not believe they can participate? The answer is of course yes. But we suspect this is a threat more clearly felt during recessions, and periods of falling wealth, than when average citizens feel that they are better off. There are signs around the world that society is unhappy with plutonomy – judging by how tight electoral races are. But as yet, there seems little political fight being born out on this battleground.
A related threat comes from the backlash to “Robber-barron” economies. The population at large might still endorse the concept of plutonomy but feel they have lost out to unfair rules. In a sense, this backlash has been epitomized by the media coverage and actual prosecution of high-profile ex-CEOs who presided over financial misappropriation. This “backlash” seems to be something that comes with bull markets and their subsequent collapse. To this end, the cleaning up of business practice, by high-profile champions of fair play, might actually prolong plutonomy.
The second memo, titled “Revisiting Plutonomy: The Rich Getting Richer” deals mainly with the consequences for investments which follow the analysis in the first memo. Quote:
There are, in our opinion, two issues for equity investors to consider. Firstly, if we are right, that plutonomy is to blame for many of the apparent conundrums that exist around the world, such as negative savings, current account deficits, no consumer recession despite high oil prices or weak consumer sentiment, then so long as the rich continue to get richer, the likelihood of these conundrums resolving themselves through traditionally disruptive means (currency collapses, consumer recessions etc) looks low. The first consequence for equity investors who worry about these issues, is that the risk premia they ascribe to equities to reflect these conundrums/worries, may be too high. Secondly, if the rich are to keep getting richer, as we think they will do, then this has ongoing positive implications for the businesses selling to the rich. We have called these businesses “Plutonomy stocks”. We see three reasons to take another look at those plutonomy stocks.
Citigroup seems to be perfectly happy with the rule of the rich. They are also perfectly happy to suppress these explosive memos. What if Americans don’t believe into the American Dream any more? What if the thoughts of OWS-protesters slip into the mainstream? (Fortunately, this is already happening). The rule of the 1% is not a conspiracy theory, it’s a fact, as the Citigroup analysts explain in great detail. The citizens in the “Plutonomies” are expected to swallow this bitter pill. The Koch Brothers and others can buy politicians and make sure that they get their way, also thanks to the Koch-friend Clarence Thomas and his colleagues in the Supreme Court who made the “Citizens United” decision possible. But don’t forget: You “have equal voting power with the rich.” To me, free elections do not seem to be compatible with a plutonomy. But the 1% seem to try to take care of this problem, as the USA has witnessed sophisticated examples of election fraud since 2000, and the country is at the same time drowning in propaganda, for example by the Koch-Brothers propaganda machine, who are gearing up for 2012, the “the mother of all wars”, because “we have Saddam Hussein”, as Charles Koch casually remarked at their secret summer seminar in 2011:
While I researched the subject, I discovered that there also exists an additional third, shorter Citigroup memo, dated September 29, 2006, which is being mentioned here.The summary on the first page of this memo, which another report for their super-wealthy investors, boldly presents “Plutonomy” not only as a fact, but a business great business opportunity:
The Plutonomy Symposium — Rising Tides Lifting Yachts
➤ Time to re-commit to plutonomy stocks – Binge on Bling.
Equity multiples appear too low, the profit share of GDP is high and likely going higher, stocks look likely to beat housing, and we are bullish on equities. The Uber-rich, the plutonomists, are likely to see net worth-income ratios surge, driving luxury consumption. Buy plutonomy stocks (list inside). ➤ Plutonomy stocks at a premium, but relative pricing power is key. ➤ Our Plutonomy Symposium take-aways.
The key challenge for corporates in this space is to maintain the mystique of prestige while trying to grow revenue and hit the mass-affluent market. Finding pure-plays on the plutonomy theme, however, is tricky. ➤ Plutonomy and the Great Conundrums of our age.
We think the balance sheets of the rich are in great shape, and are likely to continue to improve. Don’t be shocked if the savings rate worsens as equities do well. ➤ What could go wrong?
Beyond war, inflation, the end of the technology/productivity wave, and financial collapse, we think the most potent and short-term threat would be societies demanding a more ‘equitable’ share of wealth.
Yes, what could possibly “go wrong?” The “threat” exists that societies would be “demanding a more ‘equitable’ share of wealth.” Thank God that we have such splendid police forces whose members seem to be very happy to quash any unrest with batons, tear gas, pepper spray and a high degree of rough behaviour in order to keep the plutonomists happy! Despite not having received widespread mainstream coverage, the Citigroup memos have been discussed in a handful TV-clips or documentaries. When Bill Moyers “signed off” with his last broadcast in 2010, he extensively quoted from the Citigroup memos and explicitly warned that Plutocracy and Democracy “do not mix”:
Finally, a note for you-know-who:
17 U.S.C. § 107
Notwithstanding the provisions of sections 17 U.S.C. § 106 and 17 U.S.C. § 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include:
the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; the nature of the copyrighted work; the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.
Ram Singh, 17, earns just one dollar from the 100 cups of tea he makes every day outside Delhi railway station, but each evening, after packing up, he goes to the bank and deposits nearly half of it. Singh holds an account at a special bank, run for – and mostly by – Indian street children, that keeps what little money they have safe and seeks to instil the idea that savings, however meagre, are important. Just one among millions of street children who rely on menial jobs for survival, Singh is determined to make his work pay some sort of future dividend. “I’m smart, but that alone isn’t enough to start a business. I save money everyday, hoping to start something of my own. Someday soon,” he said as he served glasses of India’s ubiquitous, spicy milk tea in sweltering heat at a stall near the teeming train station.
The Children’s Development Khazana (treasure chest) opened its first office in New Delhi 2001 and has since spread across the country and overseas with 300 affiliated branches in India, Nepal, Bangladesh, Afghanistan, Sri Lanka and Kyrgyzstan. Delhi counts 12 branches with around 1000 child clients aged between nine and 17. The brightly painted metal cubicles which serve as teller counters are located in shelters that provide children with free meals and sleeping mats, as well as school classes.
The branches are run almost entirely by and for the children, with account holders electing two volunteer managers from the group every six months. “Children who make money by begging or selling drugs are not allowed to open an account. This bank is only for children who believe in hard work,” said Karan, a 14-year-old “manager”. During the day, Karan earns a pittance washing up at wedding banquets or other events. In the evening, he sits at his desk to collect money from his friends, update their pass books and close the bank. “Some account holders want to withdraw their money. I ask them why and give it to them if other children approve. Everyone earns five per cent interest on their savings.”
An adult staff member is always present to collect the takings at the end of each day, depositing the cash in a nationalised bank to earn the interest component. Sharon Jacob, who works for the rights group Butterflies that set up the bank, said it aimed to give the children a genuine stake in their own future. “They work in shops as hawkers or porters but they never had a safe place to keep their money. They were always cheated of it or somebody also stole their money,”Ms Jacob said. “So this is a place where they could keep their money safely and they are also taught life skills, how to manage their finances. They are taught budgeting, they are taught democratic participation,” Ms Jacob said.
Child labour is officially illegal in India but millions of boys and girls have no choice but to earn a living to support themselves or help their families. Many move to the cities from rural areas, seeking an escape from grinding poverty or abusive homes. “I ran away from home at the age of 11 after my father beat me for stealing a kitchen appliance,” said Samir who works in a sweatshop. “For days I slept on a railway platform. I was beaten by the police and even harassed by the drug peddlers. I wanted to go back home but was ashamed of myself.” Now 14, Samir lives in the children’s shelter and holds an account in the bank. “I have saved 4000 rupees ($70.68) in the last seven months. It’s a good feeling to have some money. I will buy a shirt and a watch for my father and send it to him to seek his apology.” “He might forgive me and ask me to be with him at home.”
A group of kids in a shelter for homeless children in New Delhi have a few lessons for the world’s international bankers. They have invented a financial system of their own to save for a brighter future. In a shelter for homeless runaway teens in New Delhi, a tiny, self-starting democracy has sprung up. The residents have created an unlikely society where everything from healthcare to banking has been initiated, implemented and executed by the kids themselves. “There are children who have a job and they deposit their money in our bank and even the children who go to school save their money,” explained bank manager Satish Kumar. Satish Kumar’s peers elected him to be bank manager of this branch of the children’s development ‘khazana’ (Indian for ‘treasure’) that serves around 9,000 street children across South Asia and has 77 branches in the region.
Many of the runaway teens now have a place to safely keep their money, save for the future and take out development or welfare advances to invest in starting businesses or buying books for school. Mohammad Shah, a 12-year-old bank client, told RT that he has taken an advance three times. “The first time I took 500 rupees to buy the school uniform and other things, the second time I took the advance because my mother was sick. I took 1000 rupees and got the necessary check up done for my mother. The third time I took the advance was because I had to repay some money I had borrowed to help my father open a shop,” he said.
The kids have a monthly meeting where they review applications for those who wish an advance and then, based on their track record of saving and earning, they decide who to grant the advances to and how quickly they need to pay it back.
In a time when many people would argue that the global financial system is on the brink of collapse and that the system itself might be fundamentally flawed, it seems like these teenagers from the streets of New Delhi have the whole thing figured out. They hold everyone from the account managers to the clients accountable for their financial decisions.
Through meetings and discussions over lunch the children have taught each other how to save and invest in their future: “I think that if we don’t put the money in the bank then we tend to spend it on unnecessary things and waste the money. So when we save the money it can be used to do important things that may come up in the future like buying new clothes,” Sameer, a bank client, shared. It’s a sense of responsibility and survival that has shocked the supervisors of the shelters themselves and one that they say leaders around the world might want to take a look at. “They can be the super models in this whole thing because they know how to save money. They know how to utilize money for the best because they learn how to prioritize their needs, which we as adults actually don’t know,” Sharon Jacob from “Butterflies” child rights non-profit organization said.
Mohammad Shah is hoping that he can save the money he makes selling bottles of water at night to put towards his education so he can one day accomplish his goal of becoming a policeman. “I am thinking for the future as I want to save the money and do some thing useful with it when the time comes,” he says.
