- Those who share the "crash" mentality have
often derided the notion of sustainability in this fiat, or unbacked monetary
system. They insist that both doom and gloom are imminent. They cite the
fact that every experiment with fiat money has failed and that empires
crumbled in each instance. I suggest that none of the prior systems had
the technology in use today. Even the very notion of money is radically
different. Today over 92% of everything we call money is electronic. When
the Roman Empire debased its money, the masses who controlled the actual
debased coins alternately aggregated and dumped them, creating an ebb
and flow similar to rocking a boat. As each wave occurred, the swings
were wider until the water came over the side. Alas, if only the Romans
had the Plunge Protection Team. They could have stopped the rocking with
appropriate counter measures.
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- The science of monetary policy has created a system of
chattel slavery unlike any ever witnessed. Those in charge of this wildly
profitable system have found a way to effectively harness the efforts
of the populace with what we have dubbed the electronic chain. By converting
the bulk of money to electronic form, they have eliminated the element
of surprise that often caused the widespread panic inherent in a rocking
boat. Prior to the Federal Reserve Act of 1913 http://tinyurl.com/3b8fom
, pools were formed by prominent capitalists.
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- The Government was rarely involved, not withstanding
the 1869 Gold panic http://tinyurl.com/2uaucv offset by Treasury selling.
J.P. Morgan himself organized a private pool to stem the Bank Panic of
1907 http://tinyurl.com/34kc43 . In 1929, Richard Whitney, acting head
of the New York Stock Exchange, created demand by buying large blocks
of stock for a pool which bolstered prices and restored confidence. Like
the Morgan pool of 1907, both lacked the subs tance to be successful.
The modern survivor to Morgan's famous pool is the "Working Group
on Financial Markets." http://tinyurl.com/28gy65 Created by Executive
Order 12631 http://tinyurl.com/a8lrv , this action was largely the result
of the crash of 1987 where a total collapse of the markets was narrowly
averted with concerted action. This formal government entity is charged
with "enhancing the orderliness of our Nation's financial markets
and maintaining investor confidence." The first reference to this
faction appeared in an article printed in the Washington Post, by Brett
Fromson. Many stories have circulated of massive buying at precise moments
to revive an otherwise sagging market.
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- Unlike informal arrangements cobbled together at the
onset of a panic, these efforts were massive by standards of reason. In
the private pools it often took more money than the participants were
willing to commit. These efforts necessarily failed. Many prominent economists
cited this "lack of resour ces" as the only reason for failure.
The problems of limited resources are now gone. The Secretary of the Treasury,
the Chairman of the Federal Reserve, the Chairman of the Securities and
Exchange Commission, and the Chairman of the Commodity Futures Trading
Commission, have all picked a designee to act in concert with government
and private parties, to prevent investor panics.
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- The order also directs that, "The heads of Executive
departments, agencies, and independent instrumentalities shall, to the
extent permitted by law, provide the Working Group all such information
as it may require for the purpose of carrying out this Order." And
further, it says, "To the extent permitted by law and subject to
the availability of funds thereof, the Department of the Treasury shall
provide the Working Group with such administrative and support services
as may be necessary for the performance of its functions". With this
one order, the entire financial system has been placed in the hands of
six people, six people with a practically unlimited supply of money. By
law, only the President can authorize a shutdown of U.S. financial markets.
No doubt such an event would shake investor confidence. So this team sees
to it that this is unnecessary. Have they had an effect? There have been
many instances since 1988, when the Major Market Index futures contracts
were heavily bought, at just the right moment by a few major firms. This
unusual buying boosted the Dow and rallied the markets. The heavy buying
of this one MMI contract, raised the price. The underlying securities
were then at a discount to the index.
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- This prompted regular market traders to buy up the individual
stocks that made up the index. These folks are not members of the "Working
Group". I doubt if they ever even knew that they were part of a larger
effort. These traders simply earn a living on the difference between the
cash and futures prices in stocks, gold, silver, currencies, oil and bonds.
They are just doing what comes naturally, and in the process they contribute
to the solution.
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- This indirect action shields the Plunge Protection Team
from direct intervention. If the Fed were directly buying futures contracts,
there would be a record of the transactions. However, when the PPT causes
regular market participants to act for a profit, official fingerprints
are obscured. The resources of these traders are bolstered by the money
the Fed creates and loans to them. The money enters the markets through
the New York Federal Open Market Committee, or FOMC. In the past, these
increases were very visible in the M-3 numbers. This past year, the Fed
announced that it would no longer report the M-3 number after March 2006!
Without M-3, it is impossible to see the extra funds that enter the money
markets. This makes it nearly impossible to follow their actions.
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- The biggest apparent worries facing the Plunge Protection
Team right now seems to be the twin behemoths: the Hedge Funds and the
Derivative ma rkets. Recent activity by the team resulted in the bailout
of two giant hedge funds, Amaranth Advisers and Vega Asset Management.
Our new secretary of the U.S. Treasury, Henry Paulson, is no stranger
to a market meltdown. Many technical indicators are warning of a significant
potential decline. Paulson, who built a $700 million fortune at Goldman
Sachs, is reinvigorating the Plunge Protection Team. He suggests that
the group has lost cohesion during the banner years being enjoyed by Wall
Street. Under his watch, the PPT will amass new powers and a renewed sense
of purpose. It will have a high tech command post at the U.S. Treasury
building that will track global events and act as a base of operations
in the next crisis.
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- The members will resume meeting every six weeks to compare
strategies and outline objectives. Mr. Paulson has recently asked the
team to examine and explore "systemic risk posed by hedge funds and
derivatives, and the government's ability to respond to a financial crisis."
"We need to be vigilant and make sure we are thinking through all
of the various risks and that we are being very careful here. Do we have
enough liquidity in the system?" asked Paulson. I am certain he will
see to it that we do. The SEC, CFTC and the U.S. Treasury, monitor the
cash positions of all the major stock and commodity brokerages and large
traders. Most certainly, the Treasury Secretary is privy to those numbers.
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- However, Mr. Paulson is not the only one preparing for
trouble. The SEC has proposed a reduction in margin requirements for institutions
and hedge funds on stocks, options, and futures to as low as 15%. That
means that a hedge fund or institutional trader need only put up 15 cents
for every dollar in assets that they buy. Currently the level is between
25 and 50%. A great many hedge funds moved to the London exchanges and
the SEC wants to lure them back by making lending operations easier here.
It strikes us as odd that they would actually allow this extr a leverage
just as the stock indexes hit an all-time high. With daily derivatives
transactions of $3 trillion in currency alone, and over 9,000 hedge funds
in operation, the PPT certainly has its game plan laid out.
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- http://www.andygause.com/index.php? option=com_content&task=view&id=457&Itemid=150
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