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