Petrodollar Warfare & Collapse of U.S. Dollar Imperialism Report

Petrodollar Warfare & Collapse of U.S. Dollar Imperialism Report



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IDP CONSULTING GROUP, INC SPECIAL REPORT, AUGUST 1, 2007
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PETRODOLLAR WARFARE & COLLAPSE OF US

DOLLAR IMPERIALISM IN THE 21ST CENTURY

BY CHARLES H. COPPES, AUTHOR OF AMERICA’S FINANCIAL RECKONING DAY



“If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. The people cannot be safe without information.”

– Thomas Jefferson

Introduction

The term “petrodollar” is a macroeconomic term that is little understood and even less discussed in the major news media today. Exactly how a petrodollar exchange system has helped maintain the US dollar as the world’s reserve currency is a general theme in my book and will be the focus of this special report. As William Clark suggests in his book Petrodollar Warfare, the current “war on terror” has been exploited by the neocons in an effort to establish permanent US military bases in the Persian Gulf and also “dissuade” other nations from switching their crude oil contracts into an emerging euro currency. In what is now being called the first oil currency war of the 21st century, the Iraqi War in 2003 was more about protecting US dollar imperialism and preventing a “petroeuro exchange system” than the alleged threat of WMDs or terrorist links to Osama bin Laden and his al-Qaeda network. As William Clark is careful to point out, Saddam Hussein had begun to price Iraqi oil contracts in euros starting in November 2000 and the US government was determined to put a stop to this crude/euro currency peg, which they successfully did in the summer of 2003. As Clark mentions:

Not surprisingly, the US corporate media has not run a single news story on the reconversion of Iraq’s oil exports from petroeuros to petrodollars….This hidden fact [has] helped illuminate one of the crucial, yet over-looked macroeconomic rationales for the 2003 Iraqi War. Another goal of the neoconservatives was to use the “war on terror” as the publicly expressed premise in an attempt to dissolve OPEC’s decision-making process, thus ultimately frustrating the cartel’s inevitable switch to pricing oil in euros (emphasis added).[1]

As indicated here, the threat of a “petroeuro” pricing structure among OPEC members is noteworthy and will be addressed in a later section. The fact that only the foreign press carried this “reconversion” from petroeuros to petrodollars is both revealing and disconcerting. Since 1980 the US media industry has been deregulated and now consists of five corporate conglomerates which control about 90% of the information flow in America. There is NBC (General Electric), ABC (Disney Co.), CBS (Viacom), FOX (News Corp.), and CNN (AOL Time Warner). Is it possible that all five major networks could have missed the geostrategic importance of invoicing Iraq’s vast oil reserves back into US dollars? Or was former CIA Director William Colby right when he commented that “the CIA owns everyone of any significance in the major media?”



In this special intelligence report we will examine the hidden forces and facts behind the War in Iraq and how the politics of oil and big finance will impact the future of our nation. As Daniel Yergin notes in his monumental 900-page book The Prize, the history and quest for oil “concerns itself with the powerful, impersonal forces of economics and technology and with the strategies and cunning of businessmen and politicians.”[2] Concerning the latter observation, there can be little doubt that America’s corporate-military-industrial-petroleum executives and their political operatives have benefited greatly from the lucrative petrodollar exchange system that has influenced our fiscal and foreign policy since 1974. What is currently at stake is the literal survival of US dollar hegemony in world markets and the majority of Americans still have no idea that an epic currency war is currently being waged on two continents. As Thomas Jefferson once warned we cannot expect to remain ignorant about macroeconomic and geopolitical trends of this magnitude and expect to preserve our basic liberties and way of life. “While the economic advantages accruing to American elites from US dollar hegemony have been mostly hidden from view,” remarks Richard Heinberg, author of The Party’s Over: Oil, War and the Fate of Industrial Societies, “the impending end of dollar supremacy will affect everyone in obvious, painful ways.”[3]
I want to stress that what you are about to read is true and imminently serious. We now know that our political leaders and the corporate media have lied and obfuscated about the real reasons for our involvement in the Middle East. They have appealed to our sense of patriotism and the need to protect our “freedoms” and “national security,” but this has proven to be a deceptive cover. The real threat to our national security is the stability of our monetary system. Our ideological enemies know that we are vulnerable on this point and they intend to do us financial harm. This is the truth that you need to know and how it will affect you and your loved ones. As George Orwell once said, “In an age of universal deceit, telling the truth is a revolutionary act.” I urge you to familiarize yourself with this important topic and share this information with others. You are free to distribute this special report or you can contact our office for additional copies of this 20-page report. I also encourage you to consider some contingency planning and hedge strategies which I have included at the end of this report.

Defining the Petrodollar Exchange System

So what is the petrodollar exchange system? This is basically a complicated monetary arrangement that was developed in the early 1970s to effectively recycle our trade deficits back into US capital markets and major banks. For reasons that I will discuss in the next section, the US dollar was established as the world’s reserve currency following WWII with a nominal guarantee that foreigners could exchange these dollars for gold specie. By 1970 the US had reached peak oil production and began importing oil from OPEC.[4] In addition to exporting dollars for oil we also had mounting trade deficits due to the Vietnam War and an expansionist Welfare State that was contributing to our escalating national debt being monetized by the Federal Reserve. By 1971 foreigners began to bring pressure upon the US to exchange their huge US currency reserves for gold at the Federal Reserve Bank of New York (our defacto central bank). In August of that same year President Nixon suspended gold payment on these foreign accounts and created a truly fiat currency on global markets. This had the net effect of contributing to a steady loose fiscal policy in the US, and every financial chart that documents our nation’s annual budget and trade account deficits can be traced back to this general period.

Although the US managed to maintain the US dollar as the unofficial reserve currency for world trade our US dollar imperialism has created an excessive amount of US currency held in offshore banks. These large exchange reserves are formally known as “eurodollars” and represent US dollars that are held in foreign banks, or foreign branches of US banks. This term is not to be confused with the EU “euro currency unit” now being used exclusively within the Eurozone. This term first originated in the London financial district in the postwar period to represent US dollar deposits not converted to local currency units throughout Europe which were being used to purchase oil in the US and repay US loans, thus avoiding a double currency conversion and not pushing up their local currencies. Today, eurodollars refer to all US dollar deposits held by foreign banks or central banks in order to service dollar-denominated debt to US banks, help sustain the exchange value of their own currencies and purchase commodities on world markets – particularly crude oil in the Middle East.



By 1973 the CIA and US monetary authorities were getting concerned about the “one-way flow” of eurodollars being held by offshore banks to purchase crude oil from the OPEC cartel. Since the US dollar was used as a worldwide currency OPEC members preferred to invoice their crude oil contracts in dollars as a practical exigency. This economic distortion, however, was causing enormous exchange currency reserves to accumulate in member bank accounts. These currency reserves came to be known as “petrodollars,” a term that was coined by economics professor Ibrahim Oweiss at Georgetown University. In October of 1973 the world experienced its first “oil price shock” when war broke out between Israel and Arab states. The Yom Kippur War lasted 20 days and resulted in a 70% increase in the price of crude oil from $2.90 to $5.12 a barrel. Because of US support for Israel OPEC members imposed an oil embargo upon the US and further raised crude oil to $11.65 a barrel by December 1973, a full 400% increase! According to analysts this period netted the single largest profit margin for oil refineries in US history and there is considerable evidence to suggest that this conflict and outcome was not only anticipated but actually planned. We now know that the annual Bilderberg meeting held from May 11-13, 1973 in Saltsjobaden, Switzerland was hosted by Henry Kissinger and attended by select politicians, oil executives and bankers from the US and London financial districts. According to official documents obtained, “the balance of payments of [oil] consuming countries” was a major concern because “the financial resources of the oil producing countries could completely disorganize and undermine the world monetary system.”[5] It was proposed at this clandestine meeting that a way should be devised to “recycle” petrodollars back into capital and financial markets in the US to help support the US dollar.



Following the OPEC oil embargo in March 1974, US Treasury Secretary William E. Simon, along with Assistant Secretary Jack F. Bennett, signed a secret accord in Riyadh with the royal Saudi Arabian Monetary Authority (SAMA) to lay the framework for a new petrodollar exchange system. Bennett had been partly responsible for Nixon’s earlier decision to “close the gold window” and would later become a director of Exxon. On June 8, 1974 the US-Saudi Arabian Joint Commission on Economic Cooperation was established by US Secretary of State Henry Kissinger in cooperation with the US Treasury and the New York Fed (Congress was never informed about this). The creation of this commission was to promote “industrialization” in the Saudi kingdom, but “the real reason for its creation was to cement long-term ties between the two countries and to ensure that Saudi Arabia would spend its newfound wealth in the United States,” notes Steven Emerson in his book The American House of Saud: The Secret Petrodollar Connection.[6] The official mandate from this commission cited the need for “cooperation in the field of finance” and the further need “to establish a new relationship through the Federal Reserve Bank of New York.” In summary, Saudi Arabia agreed to accept only US dollars for crude oil on commodity exchanges and then use a portion of these petrodollars to purchase US Treasury securities through the NY Fed. In exchange for this cooperation the US agreed to provide military protection and secret arms sales along with massive economic development in the kingdom.
An interesting provision of this agreement was the fact that the Saudi government insisted that the US suppress any disclosure of their investments in America. To accommodate the royal family, US Treasury Secretary Simon created the Office of Saudi Arabian Affairs within the Treasury Department – the only such office ever created for any foreign country. By February 1975 the entire exchange system was agreed upon by both parties and the Saudi king had even convinced all member states of OPEC to invoice all of their crude oil contracts in a strict dollar peg instead of higher yielding currencies like the German mark and Japanese yen. To assure that things worked smoothly a young Wall Street investment banker from the London-based Eurobond firm of White, Weld & Co. had been chosen to oversee this profitable recycling enterprise. David Mulford “was sent to Saudi Arabia to become the principal ‘investment advisor’ to SAMA,” writes energy consultant Bill Engdahl, “he was to guide the Saudi petrodollar investments to the correct banks, naturally in London and New York. The Bilderberg scheme was operating just as planned.”[7] Mulford held this post until 1983 and is currently the US ambassador to India (as seen in this photo) and is actively involved in guiding Indian assets into the New York-London financial nexus.



So how profitable was this recycling enterprise you ask? Beginning in 1974 the Saudis sank billions into the US bond market and fully 70% of all OPEC revenues were invested abroad in stocks, bonds, real estate and other capital markets. Approximately $35 billion was deposited in prime New York and London banks with ties to the Arabian American Oil Company (Aramco) which was then fully owned and operated by Exxon, Mobile, Chevron and Texaco. These banks included David Rockefeller’s Chase Manhattan, Morgan Stanley, Citibank, Bank of America, Manufacturers Hanover and Lloyds of London, Barclays and Midland Bank (now a wholly owned subsidiary of HSBC Holdings). It is generally understood that the Group of Six (G-6) nations were formed in 1975 to help support this new petrodollar exchange system. These six nations included the US, Britain, Japan, Germany, France and Italy (this was later enlarged to the G-7 to include Canada in 1976 and now the G-8 in 1998 to include Russia). Within months these huge oil profits to multinational banks had become so obvious that Congress formed the Senate Subcommittee on Multinational Corporations chaired by Senator Frank Church (D-ID). On April 17, 1975 this subcommittee sent a detailed questionnaire to 36 banks in the US to determine if their concentration of petrodollar revenues was putting “undue pressure” on American foreign policy. As Steven Emerson reports “…the banks for proprietary reasons and because they were fearful of antagonizing their Arab customers, refused to comply.” I think it is safe to say that the participants in this secret petrodollar connection wished to keep their relationships private and this kind of subterfuge is what they call “realpolitik” in the political sciences (or good old-fashioned greed).

Some have also referred to this US-Saudi connection as a kind of syndicate or protection/extortion racket. In other words, there is a contract between the US and Saudi Arabia in which the royal family (and other royals within OPEC) subsidize the US dollar and prop up the New York-London banking nexus which enables the Arabian sheiks and emirs to exploit their national treasuries in exchange for military protection, arms sales, economic development and untold luxuries for their personal pleasure (the largest yacht in the world, the al-Salamah, is owned by the royal family and has 8 decks and 82 rooms). As statistical analyst and economist Jim Willy states, “The US government runs the largest protection and extortion racket in modern history, perhaps ever.” In addition to the US pledge to patrol the Persian Gulf and protect the Saudi royal family the US defense industry has also enjoyed considerable profits. “With the money it earns from oil sales,” recounts ex-CIA officer Bob Baer in his book Sleeping With the Devil, “the Saudi royal family purchases arms from us to protect itself from within and without, but mostly from within [a veiled reference to the Muslim Brotherhood].”[8] From 1973 to 1978 the Saudi defense budget grew from $2.8 billion to $10.3 billion and today this figure is close to $26 billion (8th largest in the world). Saudi billions serve as a conduit for US defense contractors which rank in this order: Lockheed-Martin, Boeing, Northrup-Grumman, Raytheon, General Dynamics, L-3 Communications and Halliburton. These corporate contracts (along with all trade in the kingdom) are underwritten by the Export-Import Bank to protect against default, but this is hardly a problem since the petrodollar exchange system is constantly recycling oil-backed petrodollars. William Clark explains how this works:

For the past 30 years the US Federal Reserve has printed hundreds of billions of oil-backed petrodollars, which US consumers provide to other nations by purchasing imported goods. Then those nations use these dollars to purchase oil/energy from OPEC producers. These billions of surplus petrodollars are recycled from OPEC and invested back into the US via Treasury bills or other dollar-denominated assets, such as US stocks, bonds, and real estate.[9]

It is very important to note that our US trade deficit (sending dollars offshore) is sustaining this system. In his book Super Imperialism Michael Hudson marvels at the “perverse genius” of this Bilderberg scheme to recycle US paper debt and concludes that our perpetual account deficit is actually not a problem but a “solution” to the creation of dollar debt since 1971. But can this be sustained? Most certainly not. Our trading partners are holding and recycling our dollars out of fear – fear that a dollar collapse will affect their own export markets. This is also why foreign direct investment (FDI) in America is in the trillions. Additionally, our capital markets are also inflated through petrodollar recycling and this can be demonstrated with the DJIA Stock Index. In 1971 the Dow was at 1,003.16 and the most recent record high was on June 19, 2007 at 14,001.25. Monetary inflation by the Fed has obviously contributed to this figure but so has debt recycling. In fact, as fuel prices go up at the pump we might also expect to see the stock market achieve new “record” highs. In recent years the Chinese have also been recycling US trade deficits and this kind of dollar repatriation has caused economic distortions, asset bubbles (stocks and real estate) and the illusion of prosperity and a booming US economy.



The largest corporate beneficiary of the petrodollar exchange system has been the multinational banking industry in New York and London, and this was by design. I have already mentioned the large sums that Saudi Arabia and OPEC members have deposited in the US and UK banks. This figure is now in the trillions with the Saudi royal family accounting for more than a trillion in US banks alone. Following the first oil price shock of the early 1970s, and the permanent increase in crude oil prices, Third World nations were struggling to meet their domestic energy needs. Sensing an opportunity, multinational banks, with large petrodollar deposits, were structuring loans to desperate nations that needed eurodollars (unconverted US dollars) to purchase crude oil contracts on the New York Mercantile Exchange (NYMEX) and the London International Petroleum Exchange (IPE). Manufacturers Hanover Trust was the first New York bank to pioneer these eurodollar loans using the London Inter-Bank Offered Rate (LIBOR), which is a floating interest rate that can rise and fall. These rates, with a small premium added, were more attractive to developing nations than the conditions required by the International Monetary Fund (IMF). Throughout the 1970s these rates remained constant but the decision by the Fed to raise interest rates in late 1979 caused the London eurobond/dollar market to rise from 7% to 20%. These usurious interest rates led to the Third World debt crisis in the 1980s with Mexico, Argentina and Brazil hardest hit. According to the World Bank between 1980 and 1986 a total of 109 debtor nations owed the New York and London banks the staggering sum of $882 billion dollars! Prime lenders like Hanover, Citicorp, Chase, Morgan, Lloyds and others were all paying huge dividends to stockholders. As Bill Engdahl observed, “They had the full weight of the US government and the IMF to police their debt collection. What could be more secure?”[10] Today a similar situation is developing in the US “sub-prime” real estate lending crisis as Fed interest rate hikes cause adjustable mortgages to reset, with JP Morgan Chase as one of the major underwriters.

Needless to say, Fortune 500 companies have also benefited by US dollar imperialism in the postwar period and the need to recycle petrodollars. Not only must nations acquire vast eurodollar reserves through trade or borrowing, the IMF only accepts US dollars for debt repayment. Obviously, US firms have a favored position in foreign contract awards and some have accused the IMF and World Bank for serving as “fronts’ for securing these contracts – particularly in oil exporting countries. In his latest book The Secret History of the American Empire John Perkins documents how US multinationals capitalize on this special status. Emerson refers to the “petro-class corporations” with their interlocking board directorates within the corporate-military-industrial-petroleum complex. These are firms like GE, Bechtel, Hughes, Dresser, Halliburton, KBR, Dow, DuPont, Bendix, Ingersoll-Rand, GM, Westinghouse, Caterpillar, Cummins and John Deere. Bechtel Group is the 9th largest corporation in the US with 40,000 employees working on engineering projects in 50 countries. Bechtel’s first contract in Saudi Arabia was building the 1,000-mile Trans Arabian Pipeline in 1947. Bechtel Group has had enduring connections within the Saudi kingdom and the US government. “In the opinion of some long time observers,” writes Emerson, “close links between the CIA, State Department, and Bechtel officers in the 1950s and 1960s made the company a de facto arm of the American government in the Middle East.” In 1974 Bechtel landed the $3.4 billion project to build the King Khalid International Airport in Riyadh and also the $40 billion Jabail refinery compound in 1975. It was during this period that George P. Shultz served US Secretary of the Treasury and then later became the president of Bechtel Group from 1974 to 1982. [11]
Of course the Big Oil companies have all profited handsomely along side their sultans, kings and princes in the Middle East. This relationship has not always been amicable and a brief review of this history is worth our consideration. Following WWI, Anglo-American oil companies drew up territories in the Middle East and effectively created an oil-pricing cartel between 1927 and 1932. In 1908, the Anglo-Persian/Iranian Oil Co. struck oil in Iran (now BP). In 1927, oil was discovered by Royal Dutch Shell in Iraq and Gulf Oil struck oil in Bahrain in 1932. In 1936, exploration by US firms began in Saudi Arabia and oil crews hit their first gusher in 1938, which proved to be 150 times more productive than US wells! Within the next several years almost 1,000 wells would be drilled in Saudi Arabia’s 14 oil fields. By 1943 the US partnership with the Saudi kingdom had become so strategic during WWII that President Franklin D. Roosevelt affirmed, “the defense of Saudi Arabia is vital to the defense of the United States.” Needless to say, this strategic “partnership” has deepened ever since and the Saudi royal family (numbering almost 30,000) is not particularly loved by their Muslims brothers.



As noted earlier the principal US oil companies involved with the Arabian American Oil Company were Exxon, Mobile, Chevron and Texaco. By 1950 these four oil companies, joined by Gulf Oil, represented “Big Oil” in the US. Along with Royal Dutch Shell and British Petroleum (BP changed its name from Anglo-Iranian Oil Company in 1954) this petroleum conglomerate came to be known as the “Seven Oil Sisters.” As Bill Engdahl relates, “By the 1950s, the position of the Anglo-American oil companies appeared unassailable. They controlled incredibly cheap Middle Eastern supplies and captive markets in Europe, Asia, Latin America and North America.”[12] Today this Anglo-American conglomerate has been merged into five major oil companies and they are ranked in this order according to www.platts.com: ExxonMobile (1999), Royal Dutch Shell, BP Amoco-Arco (1998, 2000), ConocoPhillips (1997), and Chevron Corp. (Gulf, 1984; Texaco, 2001; Unocal, 2005). Together, these oil sisters have caused a considerable amount of tension in the Middle East that I will share in the next section. ExxonMobile is now the largest privately held company in the world (replacing Wal-Mart). In 2006 they had record revenues of $377 billion (or $75,000 per minute). Saudi Aramco is the largest state-owned company in the world and they account for the majority of OPEC’s annual revenues. How all of these crude oil revenues are recycled on world markets can best be illustrated in the following flow chart:




The US trade deficit in 2006 was $763 billion. Nearly one half of this amount, or $382 billion, was for crude oil. The US imports 60% of its oil needs from Canada, Mexico and OPEC nations, or nearly 22 million barrels per day. This amount is equivalent to 780 million gallons of gasoline (or lined up in one-gallon cans they would circle the equator 6 times, or 147,000 miles). The balance of our trade deficit is mainly with China, Japan and Germany and other G-7 nations. Because the dollar serves as the exchange reserve currency for global trade, approximately 70% of our broad money supply (M3) is held offshore. As indicated earlier, these eurodollars represent all US dollar deposits in foreign banks and central banks for debt repayment and trade settlement. Because crude oil is traded only in US dollars foreign nations are literally forced to pursue aggressive trade with the US in order to maintain large dollar reserves. In this way the US has the unique privilege of merely printing money for goods and services and can even subsidize its own energy needs. Economists refer to this as a form of “seigniorage”[13] and the entire global trade dynamic is built around this pecuniary model. For this reason many have observed that our number one US export product is the US dollar itself! Foreign nations are also obligated to support the US bond market in order to maintain liquid dollar-denominated assets.



In order to purchase crude oil contracts with oil exporting countries, all of the nations of the world must currently go through the US-based NYMEX or the London-based IPE. And it should come as no surprise that these Anglo-American exchanges require a strict dollar peg. Perhaps more revealing is the fact that both of these exchanges are owned by Goldman Sachs (the primary bond dealer in the US Treasury securities market), Morgan Stanley, and BP Amoco-Arco, and both exchanges are operated by the Atlanta-based Intercontinental Exchange, Inc. (an electronic 24/7 trading platform for futures and OTC energy contracts – NYSE:ICE). It is here that buyers (oil importers) and sellers (oil exporters) enter into multi-million dollar deals. A standard over-the-counter (OTC) contract consists of 1,000 barrels of crude, which equals 42,000 US gallons or 19,000 gallons of refined gasoline (the US has 150 of the world’s 700 oil refineries). On these commodity exchanges buyers and sellers negotiate term, spot market, forward, futures and swap agreements based on prevailing crude oil prices determined by the world’s 3 major oil markers, or oil bourses (a French term for purse). There is the West Texas Intermediate Crude (US sector), North Sea Brent Crude (EU sector), and the UAE Dubai Crude (Asian sector). In a recent development that has received virtually no news coverage, the Dubai Mercantile Exchange (DME) was officially launched on June 1, 2007. DME clearing members include Goldman Sachs, Morgan Stanley, CitiGroup, Lehman Brothers, Barclays, HSBC and others (www.dubaimerc.com). This represents the first commodity exchange located in the Middle East and will largely serve the Asian sector including China, Japan, Korea and Singapore. As we will discover our final section, Iran is ready to launch the Iranian Oil Bourse (IOB) with a strict euro currency peg and this crude oil marker along with the new DME could represent the first real threat to the petrodollar exchange system with a US dollar monopoly.



As noted in the petrodollar recycling chart crude oil profits are accumulated by OPEC states which include Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC accounts for 40% of the world’s oil production and their petrodollars are recycled on world markets with a significant amount also being channeled into Islamic front organizations like the Union of Good and the International Islamic Relief Organization (which has links to al-Qaeda). According to ex-CIA agent Bob Baer, Saudi Arabia has been a strong contributor, but a majority of their petrodollar fortune has been used to help benefit the US according to our agreement with SAMA, the Saudi central bank formed in 1952. In addition to underwriting US Treasury securities, GSEs, and capital markets the petrodollar connection has also influenced our body politic. “There’s hardly a living former assistant secretary of state for the Near East; CIA director; White House staffer; or member of Congress who hasn’t ended up on the Saudi payroll in one way or another, or so it seems,” writes Baer.[14] In his documentary book Steven Emerson concluded with his own observation, “The Saudis have discovered that one quintessential American weakness, the love of money, and the petrodollar connection has become diffused throughout the United States.”[15]

The petrodollar exchange monopoly is causing a structural imbalance for the US economy and world financial system. This macroeconomic model can only be sustained if the dollar remains the world’s premier currency and international crude oil markers remain denominated in dollars. There is considerable evidence mounting, however, that a petroeuro exchange system is not only emerging but even desirable as the Eurozone commands a larger role in world trade. William Clark has repeatedly warned that this is America’s “Achilles’ Heel” and it could have broadside geopolitical implications in the near future.

Postwar Dollar Imperialism and Middle-Near East Foreign Policy

US dollar imperialism has its historical roots in the post-World War II era. In July of 1944 a group of Establishment insiders, politicians and financiers attended a global conference held at the Mt. Washington Hotel in Bretton Woods, New Hampshire. Officially known as the UN Monetary and Financial Conference, this gathering was hosted by John Maynard Keynes who argued that major currencies be pegged to the US dollar and the IMF be established to maintain fixed exchanged rates. In this scheme the US dollar effectively replaced the British pound sterling as the world’s premier currency. As economist Murray Rothbard remarks:

Just as the United States was to use World War II to replace British imperialism with its own far-flung empire, so in the monetary sphere, the United States was now to move in and take over, with the pound no less subordinate than all the other major currencies. It was truly a triumphant “dollar imperialism” to parallel the imperial American thrust in the political sphere (emphasis added).[16]

The US was triumphant in the monetary sphere because the New York Fed had accumulated tons of gold from foreigners as payment for war debts and the US had the strongest economy. For this reason the Bretton Woods agreement established the US dollar standard with the guarantee that foreigners could redeem dollars at the official rate of $35 per ounce. At this conference the International Bank for Reconstruction and Development (World Bank) was also created and worked with the European Recovery Program (ERP), better known as the Marshall Plan. During this recovery period US banks invested heavily in Europe and eurodollars began to accrue (as I mentioned earlier). In the 1960s, LBJ’s warfare/welfare policies contributed to this large pool of eurodollars abroad, and by 1970 it was estimated that our trade liabilities totaled $36 billion against $18 billion in gold reserves. It is precisely at this time that foreigners started liquidating dollars for gold payment and by August 15, 1971 President Nixon took the advice of his key advisors and decoupled the dollar from the IMF gold exchange standard and created a floating exchange rate for currencies. By December a meeting was held at the Smithsonian Institute in Washington, DC and the industrial nations agreed to exchange their currencies within a narrow band, but the Smithsonian agreement was met with overall disappointment.



Historians have noted that the “fatal flaw” of the Bretton Woods agreement was the fact that currencies were fixed to the dollar, which was supposed to serve as a gold standard, and not to gold itself. Instead of nations being able to calibrate their long-term economic affairs by a secure standard the world’s financial system was sent adrift, and few people realize the significance of this historical period. But Dr. Krassimir Petrov, Professor of Macroeconomics, International Finance, and Econometrics at the American University in Bulgaria was correct when he stated that the US has been technically bankrupt since 1971, and we have been on borrowed time ever since. As the late Milton Friedman liked to put it – all fiat currencies must eventually fail. The Smithsonian agreement merely bought some time. “The August 1971 demonetization of the dollar was used by the London-New York financial establishment to buy precious time,” says Bill Engdahl, “while policy insiders prepared a bold new monetarist design, a ‘paradigm shift’ as some preferred to term it.”[17] And what was this bold new monetarist design? As we have just reviewed, it was the petrodollar exchange system established 30 years after the 1944 Bretton Woods meeting. And it is this “paradigm shift” that is currently propping up the US dollar, banking system and Fed operations – and very few understand its implications says Jim Willy:

The petrodollar basis for banking is not well understood nor publicized. That is because its vulnerability is so huge, and US institutions take it for granted. Foreign nations discuss the concept, while US circles do not. If the petrodollar prop were to be removed, entire national banking systems like the Japanese or Korean or German would shift [out of US assets], which would come as a delivered shock wave to the US Treasury bond complex (emphasis added).[18]


The “fatal flaw” in the petrodollar exchange system is the fact that our US monetary system depends on foreign nations accepting dollars to exchange with cooperative OPEC nations who in turn support the US economy. In 1974 the gold exchange standard for the dollar was replaced with the petrodollar standard. Or as some have said the dollar is no longer backed by gold, instead it is backed with black gold – crude oil. An essential component of the Bilderberg scheme was to assure that crude oil contracts must always be invoiced in US dollars within the OPEC pricing structure. Over the years, the US Treasury, State Department and CIA have closely monitored this compliance. In 1978, Kuwait had to be pressured to drop its currency basket with the mark and yen. In 1979, the Fed raised interest rates to strengthen the dollar as a gesture towards OPEC. In more recent years the US has employed “shock and awe” in parts of the Middle and Near East to maintain this petrodollar standard and minimize any “shock waves” to the US Treasury bond complex. This kind of foreign policy is becoming increasingly more tense and belligerent in this part of the world and it reflects a new strategy being implemented by unelected neoconservatives in our nation’s capitol. Exactly who these people are and how they are controlling our foreign policy agenda needs to be clearly understood by all Americans.

It is basically understood that the term “neoconservative” is a reference to political moderates/liberals who merely appear as conservatives to the electorate. As Pat Buchanan remarked in his 2004 book Where the Right went Wrong: How Neoconservatives Subverted the Reagan Revolution and Hijacked the Bush Presidency, neocons are “liberals in sheep’s clothing.” Neocons can trace their intellectual roots back to journalist/activists Irving Kristol and Norman Podhoretz in the early 1950s. As fellow Socialists and Trotskyists, they both rejected the hard Left and articulated a more “centrist” position. Irving Kristol is still a senior fellow at the American Enterprise Institute, which dates back to 1943 with generous funding from the Rockefeller Brothers Fund and ExxonMobile (www.aei.org). After serving as chief of staff for William Bennett and Vice President Dan Quayle in the 1980s, William T. Kristol (son of Irving) founded The Weekly Standard when his fellow Bilderberg Group member Newt Gingrich won the GOP victory in 1995. The Weekly Standard is owned by News Corp. (FOX) with Bill Kristol as editor and Fred W. Barnes as executive editor along with Brit Hume and John Podhoretz (son of Norman) as contributors and others. In 1997, Rupert Murdoch helped Kristol launch the Project for a New American Century (PNAC) with a $10 million dollar grant. Kristol (seen below) serves as chairman along with co-founder Robert Kagan who is a member of the Council on Foreign Relations (CFR),[19] and former speechwriter for George P. Schultz. Kristol is a regular guest on the Fox News Channel, which was bankrolled by Rupert Murdoch in 1996 after he hired Roger Ailes as his new CEO. Roger Ailes was the former producer of Rush Limbaugh’s TV program in 1991, president of CNBC in 1992, and America’s Talking program at MSNBC in 1994 (now known as Hardball with Chris Matthews – a former aid to Tip O’Neill).



The Project for a New American Century is the premier think tank for neoconservative thought and foreign policy studies (www.newamericancentury.org). Practically all of its membership and supporters are also members of the CFR (like Irving Kristol and Norman Podohertz) and include Dick and Lynn Cheney, Donald Rumsfeld, Donald Kagan (Robert Kagan’s father), Norman Podohertz and his wife Midge Decter and their son-in-law Elliot Abrams, Bill Bennett, Dan Quayle, Steve Forbes, Jeb Bush, Paula Dobriansky, Fred Ikle, Gary J. Schmitt, I. Lewis “Scooter” Libby and Paul D.Wolfowitz. Scooter Libby sat under Professor Wolfowitz at Yale in 1970 and later followed Wolfowitz when he served as Director of Policy Planning at the State Dept.; as under Secretary of State with George Schultz; and as under Secretary of Defense with Defense Secretary Dick Cheney (1989-1993). Paul Wolfowitz is considered to be the architect of the Iraq War in 2003 and earned his PhD at the University of Chicago under political science professor Leo Strauss. Strauss taught that religion was “a pious fraud” and that only the “wise elite” were capable of governing. “There is only one natural right,” said Strauss, “the right of the superior to rule over the inferior….The people are told what they need to know and no more.” Today, this Straussian philosophy is all-pervasive among the neocon class. Notable supporters of this PNAC doctrine include Colin Powell, James A. Baker III, George Schultz, Henry Kissinger, Paul Bremer, Condoleezza Rice, Zbigniew Brzezinski, Richard Perle, Newt Gingrich, John Bolton, Robert Zoellick, James Woolsey (ex-CIA), Jeane Kirkpatrick, Richard Armitage, Zalmay Khalilzad, Karl Rove, Vin Weber, Ellen Bork, Michael Novak, Charles Krauthammer, Mort Kondracke, Brent Scowcroft, Lawrence Eagleburger and others.

The stated goals of the PNAC is to assert “American global leadership” and promote “a strategic vision of America’s role in the world.” American leaders “need to accept responsibility for America’s unique role in preserving and extending an international order friendly to our security, our prosperity, and our principles” and “challenge regimes hostile to our interests and values.” In order to maintain this international order “we need to increase defense spending significantly…and modernize our armed forces for the future.”[20] We might want to ask whose principles, interests and values we are talking about here? Certainly not the principles of a “limited government” and a“humble” foreign policy. This idea of unilaterally challenging regimes in a preemptive manner and policing the world with our military to establish a new international order sounds more like the old Roman Empire than a Constitutional Republic. In the 1990s this interventionist foreign policy was carried out in the Gulf War and the Balkans, and mostly in the interest of oil. British and US oil companies were both expressing interest in vast oil reserves believed to lie under the Caspian Sea off Baku near Kazakhstan in central Asia. In his book The Grand Chessboard, Zbig Brzezinski noted the geostrategic importance of this region and was joined by Halliburton CEO Dick Cheney who said, “I cannot think of a time when we had a region emerge as suddenly to become as strategically significant as the Caspian.” At issue was the Albanian-Macedonian-Bulgarian Oil Pipeline (AMBO) which had financing from the US and BP and needed further development. At this time Serbian (Yugoslav) president Slobodan Milosevic (a former banker) had become an “obstacle” to this progress. Through the influence of Zbig Brzezinski (a paid lobbyist by BP and director of the CFR) and James Baker (former Secretary of State and legal counsel for the Baku interests of BP Amoco-Arco) the US exploited the ethnic strife in the Balkans and started bombing Serbian “civilian” targets in 1999 which led to 200,000 casualties and the removal of Milosevic. In June 1999, the US government funded a feasibility study that was then handled by Dick Cheney’s firm. By 2001, the Pentagon finished construction of Camp Bond Steel in Kosovo (one of our largest military bases), and the US had complete control of the Balkans. The oil riches of the Caspian area was the primary reason for the US involvement in the Kosovo War. US Deputy Secretary of State Richard Armitage would later comment that the “bombing dividend” was well worth it.



This kind of hawkish US foreign policy is a good example of how the neocons employ America's military assets to serve “the principles, interests and values” of the corporate-military-industrial-petroleum lobby in order to secure a new international order friendly to the goals of US hegemony. In late 2000, the PNAC issued a major policy study entitled “Rebuilding America’s Defense” that recognized that the US is the only superpower in the world and that “ America’s grand strategy should aim to preserve and extend this advantageous position as far into the future as possible.” This 90-page manifesto went on to suggest that America’s idealistic youth must be able “to fight and decisively win multiple, simultaneous major-theatre wars” in order to preserve the “American peace.”[21] Of course, to accomplish this “military imperialism” the US must increase military spending “significantly” and modernize our armed forces. But how much is enough? In my own research I was literally stunned when I learned that the US has not only monopolized 70% of the world’s defense industry, we annually spend more on military defense (i.e., offense) than the next 42 nations combined (including China, Russia, Japan and the EU). How much is this you ask? The FY2008 Pentagon budget comes in at $502 billion and an additional $142 for the “war on terror,” which totals a whopping $644 billion! My friends, this is way beyond the legitimate needs for a normal defense budget. The US currently has 800 military bases in 65 countries and it is clear from this 2000 PNAC report that neocon strategists have been plotting for some time on a way to establish the ultimate military outpost in the Persian Gulf. The report states:

The United States has for decades sought to play a more permanent role in Gulf regional security. While the unresolved conflict with Iraq provides the immediate justification, the need for a substantial American force presence in the Gulf transcends the issue of the regime of Saddam Hussein (emphasis added).[22]

Iraq has been a target for occupation ever since the Gulf War in 1991, and this foreign policy agenda would soon become the top priority in the new Bush administration. This report goes on to identify Iraq, Iran and North Korea as special problem areas in the New American Century – long before President Bush singled them out as the “Axis of Evil” in his State of the Union address January 29, 2002. Iraq takes on significance because of its strategic location in the Gulf and, of course, its vast oil reserves. As Paul Wolfowitz would later tell the foreign press in 2003, “The most important difference between North Korea and Iraq is that economically, we just had no choice in Iraq. The country swims on a sea of oil.” The unresolved conflict with Iraq was never the issue of harboring WMD or terrorists, but how to conquer the 12th member of OPEC.
In the summer of 1998, George Bush, Sr. started putting together a foreign policy team to help advise his son as he was being groomed for the presidency. Bush, Sr. was introduced to Condoleezza Rice by Brent Scowcroft and was so impressed he made her a principal member of what came to be known as “The Vulcans” (named after a huge Vulcan statue in her hometown of Birmingham). According to James Mann in his book Rise of the Vulcans: The History of Bush’s War Cabinet key members included Condi Rice, Dick Cheney, Colin Powell, George Schultz, Paul Wolfowitz, Robert Zoellick, Richard Perle and Richard Armitage. This group held its first meeting in 1999 in Texas and continued to instruct Bush, Jr. (who was admittedly weak on the neocon grand strategy for the 21st century) until the Bush-Cheney ticket won the presidency. Once in the oval office Dick Cheney and James Baker handed out top cabinet positions to Rumsfeld, Powell, Rice and the rest of the Vulcans. The Bush presidency was never “hijacked” by the neocons; it was methodically engineered from the very beginning and carefully packaged as the conservative choice for naïve voters in 2000.



James Baker’s role here is highly significant. In 1993 he founded the Baker Institute on the campus of Rice University (www.bakerinstitute.org). Key advisors include Colin Powell, Madeleine Albright and others from J.P. Morgan and Goldman Sachs. In the late 1990s this think tank formed an energy group to study the future for oil production and included top executives from BP, Shell, Chevron, and even a Kuwaiti oil minister. This energy study became the basis for Cheney’s National Energy Policy. Matthew Simmons, a Texas energy specialist who has spent 20 years examining Middle East oil fields, concluded that the world is facing “an immense and potentially catastrophic oil shortage.” Known as the “peak oil” phenomenon Simmons informed the Baker think tank that major oil fields throughout the world are all reaching the apex of cheap, affordable oil production – a bell shaped curve that is expected to occur between 2011-2015.[23] Space does not permit to address criticism of the peak oil crisis, and this theorem is not suggesting that we are running out of crude oil. Rather, the focus is on increasingly expensive oil and the impact this will have on the global economy. Unlike a traditional financial metric of Return on Investment (ROI) geophysicists refer to Energy Return on Energy Invested (or EROEI). In other words, instead of light sweet crude oil (which is easy to refine) geologists must spend more energy to extract a barrel of oil than the energy provided by the barrel (like tar sands, oil shale, and sour crude). Amazingly, this geopolitical/macroeconomic issue is developing with virtually no public awareness.
In 2001, the London-based Oil Depletion Analysis Centre (ODAC) sent a report to PM Tony Blair who fully grasped the urgency of this coming oil shock. The chief scientist at the ODAC is Colin J. Campbell who has worked with BP, Royal Dutch Shell, ExxonMobil and ChevronTexaco (www.odac-info.org). This report informed PM Blair that the “global oil supply is currently at political risk” in the Middle East, but “the main exception” was Iraq. Needless to say, this study along with the Baker Institute study, which also identified Iraq as an oil target, helps explain “the drive to unilateral military action in Iraq by the Bush administration, despite the enormous risks,” says Engdahl. “It could also explain much more about U.S. domestic and foreign policy motives under Bush.”[24] Indeed it does. In fact, the elite Baker study noted that 65% of the world’s proven oil reserves are in the Middle East and that “ Iraq remains a destabilizing influence to…the flow of oil to international markets.” The issue of expensive peak oil, and its profound geostrategic importance to the average consumer, never came up in the 2000 election season (as it will not today). But this is why 30,000 American troops have been maimed or killed in Iraq today. In his book The Price of Loyalty, US Treasury Secretary Paul O’Neill recounts his first National Security Council meeting with the new Bush administration on January 30, 2001 and writes, “From the start we were building the case against Hussein and looking at how we could take him out and change Iraq into a new country….It was all about finding a way to do it. That was the tone of it.”[25] As a complete “outsider” Secretary O’Neill was not familiar how ‘realpolitik’ works in the Washington beltway. In November 2002 O’Neill was fired and later told CBS 60 Minutes ( 1/11/04) that Dick Cheney is “not an honest broker” and that he leads “a praetorian guard” around the White House and blocks any “contrary views.” Richard Clarke would later confirm O’Neill’s findings in Against All Enemies, and you view Paul O'Neill's suppressed 7-minute testimony on CBS 60 Minutes by clicking here.



So what are we to conclude from this kind of testimony? Fully 8 months before the events on 9/11/01 the Bush war cabinet was drawing up plans for a more permanent role in the Gulf and the Anglo-American oil companies were focusing on Iraq’s sea of oil. The tragic terrorist attack on lower Manhattan was immediately exploited by the neocons and their think tank theorists to officially launch the “war on terror” and move military troops on the grand geopolitical chessboard. Although there is considerable speculation that 9/11 was an inside job I am not convinced. I think the Bush war cabinet simply allowed an attack to occur (in much the same way that FDR’s war cabinet broke the Japanese cryptographic “purple code” prior to Pearl Harbor). In his tell-all book At the Center of the Storm ex-CIA chief George Tenet reveals that his staff received intelligence on July 10, 2001 that al-Qaeda was planning a “spectacular” attack within a matter of “weeks.” Tenet says he met with Condi Rice and she appeared indifferent to the threat. In his further attempts to work with the White House Tenet says he was “hampered” by Cheney’s praetorian guard. Evidence would suggest that key insiders knew something was coming. For example, just days prior to 9/11 United and American stock was shorted with thousands of put options on the Chicago Board Options Exchange. This was 100 times the normal volume and netted $22 million in profits. There is additional evidence, but the neocons quickly directed the media’s attention to Iraq and Afghanistan as regimes sympathetic to al-Qaeda.

The intelligence community was noticeably puzzled since Saudi Arabia and Pakistan had stronger links to Osama bin Laden’s terrorist network (and still do today). But Cheney and his oil partners had other business to attend to. Just one month after 9/11 the US sent troops to Afghanistan to drive out the Taliban clerics. Although hunting for terrorists was the alleged goal we now have learned that the Taliban regime was blocking the construction of the Central Asia Gas pipeline (CentGas) from Turkmenistad (east of the Caspian Sea) through western Afghanistan. Unocal (now part of Chevron) started this project in 1998 and by early 2001 the Taliban refused to be a business partner. After 3 months of “shock and awe” the neocons installed a new government more friendly to the Bush administration’s GOP (Grand Oil Party). Bush’s national security advisor for Afghanistan was PNAC member Zalmay Khalilzad who was a paid consultant for Unocal. Khalilzad recommended fellow Unocal consultant Hamid Karzai to be the new Afhgan president, and as luck would have it, Dick Cheney’s old firm Halliburton secured the $2 billion dollar deal to finish the CentGas project. Shades of the Balkan/Caspian strategy just 2 years earlier.



The “war on terror” is a useful abstraction for the neocons. It means that US military imperialism can be projected anywhere in the world to advance the Pax Americana and the financial interests of Big Oil. Soon after Operation Enduring Freedom in Kabul the Vulcans started beating the war drums against Saddam Hussein. In early 2002, Rumsfeld and Deputy Secretary of Defense Paul Wolfowitz created the Orwellian-sounding Office of Special Plans (OSP) located on the 3rd floor of the Pentagon. The OSP was charged with creating a link between Iraq, al-Qaeda and weapons of mass destruction (WMD) and providing this fraudulent intelligence data to the subservient media. William Luti, a deputy for Near East policy, and Abram N. Shulsky, an intelligence expert and Leo Strauss scholar, were chosen to head up this top secret office. Luti had received his PhD under Leo Strauss who deftly argued that “deception and manipulation is the normal process in politics” in order to govern the “vulgar masses.”[26] Someone once said that truth is the first casualty in war. Agent Shulsky would agree with this axiom since he stated that “truth is not the goal of intelligence operations, but victory” in his book Silent Warfare written with PNAC contributor Gary J. Schmitt. Straussian ideology also stressed that fear and hatred is a powerful uniting principle to lead and control the vulgar masses. The OSP effectively bypassed the CIA and served as a “vertical intelligence conduit” (called stovepiping) to officials in the Bush administration to help direct this kind of fear and hatred toward Iraq and bin Laden. Newly appointed US Ambassador to the UN John R. Bolton and Permanent US-UN Rep. John Negropante faithfully communicated this incendiary message to the world body. And by late 2002, President Bush insisted, “Facing clear evidence of peril, we cannot wait for the final proof…the smoking gun…that could come in the form of a mushroom cloud.”

With the stage set, the neocons were ready to close in on the regime of Saddam Hussein with a clear sense of urgency. In a cynical manner, most people know that the War in Iraq had something to do with oil despite the obfuscation and official reasons given by the Bush administration in 2003. But very few people understand terms like eurodollars, petrodollars, petroeuros not to mention the geophysics of “peak oil” or maintaining the dollar as the world’s reserve currency. As I mentioned at the beginning of this report, the neocons have exploited this general ignorance (after all, we are just the vulgar masses), but the real casus belli for positioning US troops in Iraq was to secure “a substantial American force presence in the Gulf” to assure the flow of oil to international markets – and even more importantly it was to stop Saddam Hussein from invoicing his oil contracts in the new euro currency. Is this an overstatement? I scarcely think so, and all we have to do is examine the facts. Following the Gulf War in 1991 economic sanctions had been placed on Iraq and by 1996 the UN allowed Iraq to sell crude oil for food. In early 1999 the EU officially launched the euro as a transactional currency. Anxious to avoid the US “enemy currency” Saddam obtained UN permission to start selling oil for euros and converting $10 billion in the UN Oil for Food program currency reserves into euros, which posed a direct threat to the petrodollar exchange system and US properity. As Richard Benson reports:

In the real world…the one factor underpinning American prosperity is keeping the dollar the world reserve currency. This can only be done if the oil producing states keep oil priced in dollars, and all their currency reserves in dollar assets. If anything put the nail in Saddam Hussein’s coffin, it was his move to start selling oil for euros (emphasis added).[27]

On November 6, 2000 the Iraqi government started invoicing all of their oil contracts in euros. It is unclear if EU officials had initially approached Saddam, but arrangements were made that all “petroeuro proceeds” went from a UN account into the French bank BNP Paribas in Paris, the largest bank in the Eurozone. It is a fact that almost 70% of Iraq’s oil exports were sold to US oil conglomerates from 2001 to early 2003, or 2.5 billion barrels, and these transactions were paid in euros not US dollars. Iraq was the first member of OPEC to ever challenge US dollar imperialism and the Bush war cabinet was left with little choice but to go to war. If left unchecked a petroeuro exchange system could very well lead to the collapse of the dollar. As William Clark points out, “The dollar-euro threat is powerful enough that the US risked domestic and international economic backlash in the short-term to stave off the long-term dollar crash that would result from a collective OPEC switch from dollars to euros.”[28] Clark adds that this was the “unspoken component” in neocon strategy to invade Iraq. In early 2000, Iran was also expressing interest in switching to euros but backed off. The Center for Global Energy Studies has noted that “the euro [is] the missing link between the axis of evil.” For Saddam, a secular dictator who had no connection to terrorism and loathed religious zealots like Osama bin Laden, the wheels of fate were slowing turning against him. His final “nail” (or rope) would come on December 30, 2006.



On February 5, 2003 the UN body heard Secretary of State Colin Powell deliver his now famous speech that Saddam did in fact have WMD and the US must act immediately. In keeping with the PNAC doctrine of creating an international order friendly to US security and prosperity (i.e., the petrodollar exchange system and flow of oil), the US launched Operation Iraqi Freedom on March 20, 2003 without a UN mandate and only a weak “authorization” from Congress instead of a formal declaration on war. Presiding over this massive display of “shock and awe” was VP Dick Cheney who served as Secretary of Defense during the invasion of Panama in 1989 and the first Gulf War in 1991 (along side James Baker as Secretary of State). By April 15, 2003 Anglo-American forces had conquered Baghdad and according to Jane’s Defence Weekly troop commanders primarily secured the Iraqi Oil Ministry building and pipeline infrastructure while looters sacked the capital city (this was also caught on video). On May 1, 2003 the president landed on the USS Abraham Lincoln in a Lockheed S-3 Viking jet and declared “mission accomplished” with a huge banner overhead. The true meaning of this banner was lost on the American people, but on May 22nd the UN lifted sanctions and passed Res. 1483 granting the US/UK Coalition Provisional Authority (CPA) complete control of Iraq’s oil revenues – which were promptly switched from euros back to dollars. Ah yes, truth is not the goal, but victory. Even though petroeuros had appreciated almost 30% against the dollar this action was taken and meekly reported in the London Financial Times on June 5, 2003. As noted earlier, the US corporate media never reported on this reconversion.

In May the US appointed Paul Bremer, former managing director for Kissinger & Associates, as head of the Iraqi CPA. Bremer was installed to oversee “ America’s grand strategy” for the region and coordinate US corporate-military-industrial-petroleum interests. While doing business in Iraq has always been difficult, a 1997 document reveals that “Foreign Suitors for Iraqi Oil Field Contracts” included 30 nations, but conspicuously not a single US or UK oil company was listed. Russia had a 23-year contract to develop the West Qurna oil field, China, Japan, Canada, Germany, Italy and France all had lease agreements with Iraq. The fact that the “Seven Oil Sisters” (technically five) were shut out was part of Saddam’s geostrategy and contempt for the New York-London corporate/banking nexus. With the arrival of Kissinger’s protégé all of this was about to change. All concessions and lease agreements were torn up and granted to BP, Shell and Chevron (where Condi Rice was a former director). J. P. Morgan Chase took over the Iraqi central bank and the Bank of Baghdad and started issuing loans against Iraqi oil assets. All construction contracts (through the World Bank) were handed to only US and UK firms. Bechtel received a $680 million dollar contract through the US Agency for International Development, a funding agency under the direction of the Secretary of State and the CIA (www.usaid.gov), to rebuild roads, bridges, buildings, ports, and utilities damaged in the occupation. Additional contracts went to Vinnell, Armor Holdings, Cubic, TRW, DynCorp, DFI and International Charter. Halliburton and KBR were called upon to help in the reconstruction and given $4.5 billion to rapidly build 14 military bases in Iraq. As we are now learning these are permanent bases for the US military and the Pentagon is nearing completion of the largest embassy compound in the world. This $592 million dollar contract was awarded to First Kuwaiti General Trading & Contracting and covers 104 acres with 21 buildings and enough desk space for 1,000 bureaucrats. As John F. McManus informs this means that the US has no intention of leaving Iraq:

Despite the continual claims that the troops will be withdrawn as soon as their mission has been completed, a gargantuan embassy complex the United States is now building in Baghdad makes it painfully obvious that our government intends to keep an American presence deeply mired in Iraq for a long time, and that there must be more to our intervention in Iraq than our government has shared with the American people (emphasis added).[29]

The US government is effectively being run by the neocons and their elitist think tanks. It has never been their intention to share with the American people their Straussian ideology to create a new international order and establish a US Protectorate in the Persian Gulf. In July 2003 neocon proconsul Bremer declared, “We dominate the scene and we will continue to impose our will on this country.” In that same month he fired all 400,000 members of the Iraqi army and the Pentagon quietly shut down our remaining bases in Saudi Arabia and moved personnel to our new military command in Baghdad. Saudi Arabia had reluctantly allowed US bases since Desert Storm in 1991 (with pressure from Kissinger) and this relationship has since deteriorated. In fact, in 2004 the Saudi royal family canceled all US contracts for their gas fields and awarded these to Russia, China, Italy and Spain. We will take a closer look at this shaky relationship in a moment. By late 2003 the Pentagon’s OSP was shut down but the “war on terror” continues as the US finds new enemies to destroy.


According to international polls much of the world community perceives that the US government’s war on terror is a cynical strategy to expand our military imperialism and dominate oil fields and pipelines. Some even point out the fact that al-Qaeda is not a global menace that supposedly operates in 65 countries. The FBI estimates that only about 200 hard-core al-Qaeda members are still at large and Michael Chossudovsky’s book America’s War on Terrorism documents the actual facts (www.globalresearch.ca). Soon after troops secured Baghdad in 2003 Michael Meacher, a UK cabinet member, told the London Guardian, “It seems that the war on terror is being used largely as a bogus cover for achieving wider U.S. strategic geopolitical objectives.” So far we have examined some of these objectives which involves the quest for oil, but the larger issue still remains to protect the US dollar as the world’s reserve currency at all costs! This single fact is consistently being lost on the American people, the US corporate media, and most of the world’s press. Put simply, the neocon’s new world order rests on the twin pillars of US military imperialism and US dollar imperialism. The military pillar is being used to support the dollar pillar, and this is inexorably linked to the petrodollar exchange system. This is why Bush’s war cabinet had to “find a way to do it” in Iraq. To clarify, Bill Engdahl puts it this way:

The status of the dollar as reserve currency depends on the status of the US as the world's unchallenged military superpower. In a sense, since August 1971 the dollar is no longer backed by gold. In stead, it is backed by F-16s and Abrams battle tanks, operating in some [800] US bases around the world, defending liberty and the dollar (emphasis added).[30]

This is a shocking realization and it exposes the Federal Reserve System as a dying financial system that is vulnerable to economic warfare and implosion. As I have noted in my book, “It is exceedingly painful to acknowledge the fact that America’s young military men have been sent to the Middle East primarily to protect U.S. central bank operations and recycling petrodollars on world markets.”[31] As I earlier demonstrated in my flow chart above, this petrodollar pillar can only be supported if the Fed remains the world’s leading central bank and keeps issuing our devalued currency that is absorbed through account deficits in global trade and repatriated back into our capital markets via the strict dollar peg within the NY-London-OPEC monopoly system. I submit that this macroeconomic model cannot be perpetuated for very much longer. And you will not find the origin or history of this model being taught in university textbooks. The collapse of this Bilderberg scheme will literally be the nail in our own coffin – our financial reckoning day if you will – and our neocon Establishment in the US knows exactly what the global stakes are! And I hope you are also beginning to appreciate the desperation and seriousness of this monetary situation. It is now estimated that nearly 30% of central bank reserves have moved into the euro and this trajectory is going to force a “new monetarist design” in the 21st century, and this paradigm shift will affect every US dollar-denominated asset that you own.
Unable to exercise diplomatic pressure upon the OPEC cartel (to honor the dollar peg), the US in now resorting to brute military force in the Gulf. Iraq has been dominated and Iran is the neocon’s next strategic target. As the 2000 PNAC defense report predicted, “Over the long term, Iran may prove as large a threat to US interests in the Gulf as Iraq has.”[32] And what are those interests? The need to prevent any petroeuro accounts from developing in the region – the missing link hidden from the global media. This interventionist foreign policy would astonish President John Quincy Adams who affirmed, “ America does not go abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all.” Unfortunately, this sage wisdom does not hold sway in Washington and America’s “monsters” are gaining enough leverage to do considerable harm.

The Petroeuro Challenge and Collapse of U.S. Dollar Imperialism

As I covered in the beginning of our last section, Professor Murray Rothbard highlighted the postwar fact that the US was triumphant in the military, political, and economic sphere and that this imperial influence continued to grow. In 1961, in his memorable Farewell Address, President Dwight D. Eisenhower issued his warning to the American people about an emerging “military-industrial complex” that could eventually seize an “unwarranted influence” upon our political process and structure of society:

This conjunction of an immense military establishment and a large arms industry is new in the American experience….We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist [and] we must never let the weight of this combination endanger our liberties or democratic processes (emphasis added).[33]

General Ike concluded, “Only an alert and knowledgeable citizenry” can assure that our “security and liberty” prosper together. Despite this prescient forewarning from the president, the coalescing of banking-corporate-military-industrial-petroleum interests has purposely been integrated into the highest levels of our government. This kind of misplaced power has created a sort of “corporate fascism” that has been institutionalized by the neocon’s praetorian guard. These forces have now united to protect the twin pillars of US hegemony, and the world community is becoming increasingly enraged at this nascent PNAC doctrine to rule the world. Unable to directly challenge America’s military pillar they are determined to strike at a weak dollar pillar. The CIA refers to this principle as attacking your foe’s “center of gravity” in order to destroy your enemy’s strength. The US center of gravity is currently balancing on depreciating dollars and the petrodollar recycling syndicate.



In January 2002, the new euro currency was officially launched throughout the Eurozone and its steady appreciation against the dollar has emboldened foreign nations to openly defy the US dollar standard. In late 2002, North Korea (the ‘evil axis’ member) converted all of its dollar reserves into the euro. In 2003, OPEC members Libya, Nigeria, Indonesia, Venezuela, Iran, and the UAE all expressed their desire to convert their trade to the euro and were joined by Bahrain, Malaysia and others. The State Department refers to this scenario as the “rogue state hypothesis” and there is growing concern. In 2005, our old ally Saudi Arabia indicated for the first time that they are seeking a broader pricing band. Hamad Saud al Sayyari, head of SAMA, said that his government wants “price stability” in their crude oil contracts. The major concern is that Saudi Arabia will defect from the petrodollar exchange system if there is all-out war in the Middle East against Israel. This view was also expressed during the Senate hearings in 1975, “In the event of another major outbreak of hostilities in the Middle East…there is no guarantee that the next time they won’t wield the money weapon.”[34] This threat still exists and is outlined in David E. Spiro’s landmark book The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets. The additional threat is that Sunni/Wahhabi extremists will force a regime change in Saudi Arabia and they will divest all US assets and create a monopoly petroeuro system. Either way, the situation in the kingdom does not look good.
In 2002, the National Iranian Oil Co. and the Central Bank of Iran took formal steps to convert their US assets into the euro. In 2003, Iran started accepting only euro for oil payments from its EU and Asian trading partners. Based in Tehran since 1974, the Asian Clearing Union includes India and six other Asian central banks (www.asianclearingunion.org). In 2004, the Iranian government announced plans to open a new crude oil marker on the resort island of Kish in the Persian Gulf. In a bold stroke to avoid the US “enemy currency” the Iranian Oil Bourse would be the first trading platform to price a barrel of oil in euros, currently $75 equals €54. Most OPEC members are linked to the Brent Crude oil marker, and together with the new Dubai Mercantile Exchange the IOB would offer an alternative market for international buyers. It has been suggested that non-OPEC members in the Caspian region would also participate in this network. Originally scheduled to open in early 2006 the IOB has been delayed for various reasons.

In 2004, China signed a $100 billion dollar oil and gas deal with Iran and currently imports 13% of their oil from Iran. China and Venezuela both support a petroeuro price structure and Iran is building momentum to confront the Anglo-American exchange system. In a recent article The International Herald Tribune notes, “more than 50% of Iran’s oil income is paid in other currencies” (3/28/07). With direction from the Bush neocons, the Pentagon has been “war gaming” against Iran since 2004 and is determined to build their case against Tehran. The Iranian leaders hate the US/UK coalition because their oil conglomerates and intelligence agencies literally conspired to topple Premier Mohammed Mossadegh in 1953 by labeling him a Communist (see ‘terrorist’ today) and replaced him with their puppet leader Reza Shah Pahlevi. Known as Operation Ajax the goal was to prevent Dr. Mossadegh from nationalizing their oil industry and boosting their oil profits from 8% to the standard 50% split with BP. US/UK interests later came against the Shah in 1978 for much the same reasons and the resulting “blow-back” was the installation of the radical Shiite cleric Ayatollah Khomeini (Mahmoud Ahmadinejad’s mentor) and the second oil price shock in 1979.



The US and Iran have not had diplomatic relations since 1980 and the latest attempt to meddle in Iran’s internal affairs is principally aimed at Iran’s rogue effort to strike at the US petrodollar pillar. The “war against nukes” is another useful abstraction for the neocons to impose the PNAC doctrine of challenging regimes that are hostile to US interests. On February 4, 2007 the International Atomic Energy Agency (IAEA) passed a US-led resolution for Iran to stop enrichment at its Natanz nuclear site. Venezuela, Cuba and Syria voted against the resolution. Ready to engage in multiple-theatre wars the US has almost 140 naval warships in the region and has moved 3 aircraft carrier groups into the Gulf. According to intelligence analyst Phillip Giraldi, in an article appearing in The American Conservative, the US is preparing to attack Iran in a preemptive manner if there is a major terrorist attack upon American soil. Giraldi reports the following:

The Pentagon, acting under instructions from Vice President Dick Cheney’s office, has tasked the US Strategic Command (STRATCOM) with drawing up a contingency plan to be employed in response to another 9/11-type terrorist attack on the United States. The plan includes a large-scale air assault on Iran employing both conventional and tactical nuclear weapons….As in the case of Iraq, the response is not conditional on Iran actually being involved in the act of terrorism directed against the United States (emphasis added).[35]

In a nearly identical strategy carried out against Saddam Hussein in 2003 the neocon Vulcans are preparing to launch the second oil currency war of the 21st century against Ahmadinejad for plotting economic warfare against the US. This kind of US imperialism is what Pentagon officials have newly identified as “full-spectrum dominance” – the US goal of controlling military, economic and political developments everywhere in the entire world. This reckless foreign policy is certain to have horrific consequences in the near-term.

One of the more predictable outcomes of an attack upon the Iranian infrastructure is that global tensions are going to rise between Washington and Beijing along with Moscow. The US intelligence community is concerned about a new alliance that has been forged between China and Russia. Formed in 2001, the Shanghai Cooperation Organization (SCO) is an outgrowth of the “Shanghai Five” created in 1996 and includes China, Russia, and the former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan Uzbekistan. The SCO is a Chinese initiative to confront the OPEC/petrodollar hegemony and secure their vast energy needs (particularly with Russia). As Jim Willy remarks, the SCO “is a direct answer to the corrupted OPEC cartel, which seems overly influenced by U.S. leaders.” (www.sectsco.org). Observers to this new Sino-Russian pact include India, Pakistan, Brazil, and renegade OPEC members Iran and Venezuela. Representing one half of the world’s population the SCO is seen by Western analysts as a new Warsaw Pact or geopolitical “counterweight” to US imperialism. The US has been denied observer status to annual SCO meetings and China Cable TV refers to the SCO as the new NATO of the Far East. It is clear that China and Russia have struck a cooperative deal to check US military presence in Central Asia or the Pacific region. In 2005, the SCO held a summit meeting in Moscow attended by Hu Jintao and Vladimir Putin. Both leaders issued a bilateral statement entitled “World Order in the 21st Century” that warned against attempts by “outside forces” to dominate global affairs and “impose models of social and political development from outside.” Taking direct aim at USmilitary/political imperialism this statement stressed the need for a “multipolar” world and for the US to get out of Central Asia and the Caspian region. According to intelligence expert Bill Gertz in his latest book Enemies the Red Chinese also want America to back off of any support for Tawain if, and when, they attack the island province.



This geopolitical paradigm is occurring when the US dollar pillar is at its weakest point in history and is rarely being reported outside intelligence circles. America’s ideological enemies are moving into position to inflict a devastating blow at the US economic center of gravity. China and Russia are talking about reducing their US currency reserves and favoring the euro. At a recent Economic Forum in Davos, Switzerland the Chinese indicated they are seeking a “more manageable reference” for their enormous currency reserves. Russia currently exports 81% of its oil to the EU and 65% of its trade is in the Eurozone. In 2003, Putin told the German press that he would “not rule out” invoicing crude oil in the euro. “That would be interesting for our European partners,” Putin slyly added. Interesting? Try apocalyptic or a broadside attack against the US dollar! The largest currency exchange reserves in the world are now held by China ($1.3 trillion), Japan ($914 billion), the EU ($440 billion), and Russia ($411 billion – called petrorubles in 2007). At least 70% of these reserves are in the US dollar, or eurodollars. Add to this fact the largest oil companies in the world are now lining up against the US. According to the Financial Times (3/1//07) the new “Seven Oil Sisters” are Aramco (Saudi Arabia), Gazprom (Russia), CNPC (China), NIOC (Iran), PDVSA (Venezuela), Petrobras (Brazil), and Petronas (Mal-aysia). As you can see, this new political-economic-petroleum axis has enough leverage and motivation to challenge the US dollar and propose a petroeuro exchange system. As Bill Engdahl sees it, “A full challenge to the domination of the US dollar as the world central-bank reserve currency entails a de facto declaration of war on the ‘full-spectrum dominance’ of the United States today.”[36] To be more precise this kind of challenge would be a form of petrodollar warfare since US dollar imperialism is the key to America’s military/political strength. This is the fatal flaw of the petrodollar exchange system and it can deal a fatal blow to America.

Can this scenario really unfold in the near future? It is being analyzed, debated, and probably even anticipated at the highest levels of government. A collective move into the euro as a new reserve currency would deliver a tremendous shock wave to the US. The fact that China-Russia-Iran have formed a hostile troika to US interests in the world is reason enough for serious pause. Some have suggested that a preemptive strike against Iran could galvanize the Islamic world and also draw Iran’s trading partner China into the fray, which might be the tipping point for China to start converting to euros. “The moment China starts selling dollars the rest of the world will crash down the doors of the bank to get rid of theirs as quickly as possible,” says Michael Ruppert. “[And] the run on the dollar will be short, bloody, and catastrophic.”[37] This contagion can spread into the US Treasury bond complex as nations liquidate government assets and OPEC will obligingly adopt a new petroeuro standard for crude oil contracts. A former government analyst describes this nightmare as follows:

The effect of an OPEC switch to the euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina currency crisis, for example). You’d have foreign funds stream out of the US stock markets and dollar-denominated assets, there’d surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. This could result in your basic Third World economic crisis (emphasis added).[38]

This kind of Third World crisis is drawing near to America’s doorstep and it is very real. What is being described here is a hyperinflationary depression and when you add massive bond liquidations the dollar will suffer a complete collapse. I develop this theme more fully in my book. For the unsuspecting American people they will have absolutely no idea why all of this happening and the government will have no way to stop this macroeconomic meltdown. Because of America’s “imperial overstretch,” a term used my military strategists, we are vulnerable to this kind of economic warfare – and our ideological enemies know this. The neocons are miscalculating our interventionist policies on the geopolitical chessboard and its resulting blow-back.

Many are hopeful that there can be an orderly transition to the euro, perhaps even a dual currency standard. But due to mounting hostility toward the US it is likely to be abrupt. The intention will be to destabilize our monetary system, check US military power, and create a multipolar world between China, Russia, and the EU. The euro is growing in capital markets and the euro accounts for almost 50% of all currency transactions on the FOREX exchange. As T. R. Reid predicted in his book The United States of Europe, “the success of Europe’s common currency could bring America’s financial house of cards tumbling down.”[39] Just as the Fed replaced the Bank of England in 1945 the European Central Bank (ECB) is poised to rise in prominence.



From an international perspective the EU economy is much more fiscally balanced than the US. The EU does more trade with OPEC than the US and would certainly welcome a monopoly petroeuro exchange system. This would have the same effect as subsidizing the EU economy and the ECB is already creating monetary debt instruments (Euro bonds) to absorb the coming influx of petroeuros. The EU is now the largest economy in the world (not the US) and China’s largest trading partner is the EU (not the US). When America’s financial house of cards collapse the UK may have little choice but to finally join the Eurozone for survival. European economist Dr. Krassimir Petrov keenly observed that “the British most likely did not adopt the euro [in1999] namely because the Americans must have pressured them not to otherwise the London IPE would have had to switch to euros, thus mortally wounding the dollar and their strategic partner.”[40] The petroeuro challenge will ultimately break the New York-London financial nexus and their strategic partnership to support the US dollar. When the UK joins the Eurozone the Brent Crude oil bourse in Oslo will also be converted to euros. In late 2006, Norway argued that their oil marker should be in the euro anyway, not the NYMEX/IPE dollar peg, since most of their oil contracts are in Europe. As Loyola de Palacio, the former EU Energy Commissioner and director of PNB Paribas Bank, hinted in 2003, “The role of the euro is going to be increased step by step.”

Concluding Thoughts and Contingency Planning
In his important book Petrodollar Warfare the author concludes that the success of the euro would likely result in “the US and the EU switching roles in the global economy.” I totally agree with this assessment. The epic currency war between the euro and the dollar is occurring with almost no public debate or awareness in the media. It is the “unspoken component” driving US foreign policy. Since 1977, the EU Commission has sent an observer to the annual G-7 meetings. In the near future the EU will completely dominate these economic summits as a new superpower. In Part III of my book I refer to this political paradigm as a global realignment of world power and present a prophetic scenario for the 21st century based on predictive Scripture. The geopolitics of oil and the petrodollar/petroeuro dynamic is moving Washington and Beiijing into a confrontation in the Middle East. As noted by the Institute for the Analysis of Global Security, “If each barrel the US needs is also sought after by China, a superpower conflict in the world’s most unstable region can once again become an omnipresent danger.”[41] Add to this our foreign policy over Taiwan and it is easy to see how Red China (along with the Sino-Russian-Iranian SCO) could use economic and even military warfare to take America down. Very little is being said about this issue. In his book America’s Coming War with China: A Collision Course over Taiwan Dr. Ted G. Carpenter suggests a showdown could occur by 2010.



The loss of American leadership in the world is a sobering prospect. In a recent article in the Miami Herald (7/22/07) Richard Haass, president of the CFR in New York, stated that “no country or group of countries has the capacity to replace the United States.” He adds, “The alternative to a US-led global order is disorder.” This is neocon bravado. The EU has the second largest combined army after China (2.2 million) and is prepared to lead a new global order resting on the strength of the euro. America’s “Achilles’ Heel” has always been its fiat currency and the loss of our dual pillars will render us a Third World trading bloc trying to compete with the EU. Impossible you say? General Eisenhower clearly warned us about “the disastrous rise of misplaced power” within “the councils of government” and it would appear that Establishment insiders have been drawing up contingency plans to force the US into tri-national trading bloc with Mexico and Canada known as the North American Union and the adoption of a new basket currency called the “amero” (www.spp.gov). Robert A. Pastor is the main architect for this scheme with a convergence fulfillment by 2010 if not sooner. In a recent comment Pastor tipped his hand when he indicated that a major crisis like another 9/11 would be sufficient enough to force democratic governments to adopt this political merger:

What I am saying is that a crisis is an event which can force democratic governments to make difficult decisions like those that will be required to create a North American Community. It’s not that I want another 9/11, but having a crisis would force decisions that otherwise might not get made. When there’s a crisis, people accept proposals they wouldn’t have otherwise accepted (emphasis added).[42]

It would be hard to find a more authoritative quote than what has been said here. With all the shrewdness and cunning of Professor Strauss himself, the global elitists are preparing to exploit a crisis to advance their hidden agenda to control the ignorant masses. A currency crisis – like the one described in this special report – would certainly fit into Kissinger and Brzezinski’s ideas on “progressive regionalization” and the need for “integration” within the Western Hemisphere. This is a classic example of the Hegelian dialectic of thesis, antithesis, and synthesis in which a problem is allowed to develop, resulting in a panicked response, and then providing a predetermined solution. For more on this general topic I urge you to educate yourself at www.augustreview.com and support the World Research Library and its Executive Director Patrick M. Wood.

Not mentioned by Mr. Pastor and his regional commissars is the fact that a crisis can also lead to a more oppressive government and degradation of civil liberties. As Congressman Ron Paul has been warning people for years, “During a crisis, the rights of individuals…are more easily trampled, which is more likely to condition a nation to become a police state than a military coup.”[43] A police state in America? No wonder the Establishment media relegates Paul as a “third tier” candidate who only appeals to the lunatic fringe. Yet more and more people are waking up to this inherent danger. In 2001, the Patriot Act was rammed through Congress which lays the groundwork for a police state. In 2005, the REAL ID Act (national ID card) was snuck through Congress and will be implemented by 2009. On October 17, 2006 Bush secretly signed the Defense Authorization Act (Public Law 109-364) and the Military Commissions Act (Public Law 109-366) to use the armed forces as domestic police and federalizing local police. These acts violate the Posse Comitatus Act of 1878 which prohibits the military being employed in law enforcement. On May 9, 2007 Bush also signed a President Directive (NSPD-51) that consolidates extraordinary police state powers to the White House and DHS in case of a “catastrophic emergency.” This directive also makes sure that “appropriate support is available to the Vice President” (our acting neocon president). These kind of enabling acts have been adopted to fight the “war on terror” and protect the Homeland. But as William Pitt warned, “Necessity is the argument of tyrants, and the creed of slaves.” Samuel Johnson also chided that “patriotism is the refuge of a scoundrel."





In conclusion, it is imperative for us to understand the petrodollar exchange system and the macroeconomic implications that I have outlined in this report. The collapse of this monetarist model will effect us all and is affording an opportunity for government insiders to restructure our beloved country. In their book Power Surge: The Constitutional Record of George W. Bush, Gene Healy and Timothy Lynch charge that, “President Bush’s constitutional vision is, in short, sharply at odds with the text, history, and structure of our Constitution, which authorizes a government of limited powers.” President Bush has wrapped himself in the American flag to deflect public criticism, but Teddy Roosevelt reminds, “To announce that there must be no criticism of the president, or that we are to stand by the president, right or wrong, is not only unpatriotic and servile, but it is morally treasonable to the American public.” Thomas Paine said, “It is the duty of the patriot to protect his country from the government.” Thomas Jefferson further stated, “All tyranny needs to gain a foothold is for people of good conscience to remain silent.” It is time for good people to wake up and realize the internal and external threats that we are all facing as a nation. It is also time to consider some serious contingency planning for the difficult times that lie ahead. As Patrick Henry said back in 1776, “We are apt to close our eyes against a painful truth.” But we must all take personal responsibility for what we know and then we must act accordingly.

US dollar imperialism has caused tremendous economic distortions in the US and abroad and it is going to end badly. “A great empire is to the world of geopolitics what a great bubble is to the world of economics,” writes Bill Bonner in his book Empire of Debt: Rise of an Epic Financial Crisis. “It’s attractive at the outset but a catastrophe eventually.” One of the best ways to protect your dollar-denominated assets from America’s financial reckoning day is to have some sensible diversification and hedge strategies. “Divide your portion to seven, even eight,” wrote King Solomon, “for you do not know what misfortune may occur on the earth” (Eccl. 11:2). In my book (and this website) I have illustrated an “investment triangle” that features precious metals & tangible assets as a core investment at the base. On each side of this triangle I have cash & savings and growth & income.

The precious metals complex represents a necessary component for privacy and asset protection and serves as an excellent hedge against monetary (hyper) inflation. It has been estimated that all the gold ever mined would fit into a 60 foot square cube. With $100 trillion in paper assets worldwide and only $1.7 trillion in above ground inventory it isn’t hard to see how gold will appreciate during a crisis! Silver is more affordable and arguably has more upside potential. Approximately 90% of all the silver mined in history has been used up by modern industrial demand. The historic ratio for gold to silver is around 15:1 and this ratio is currently 50:1, which suggests that silver is undervalued. I recommend an equal amount in gold and silver and can also assist clients with coverting their qualified plans and pension funds into a Precious Metals IRA for safe-keeping and tax-deferred gains. You are strongly advised to place 30-50% of your liquid assets into gold and silver. If I can assist you please contact me through this business website at this link and leave your contact information, or you can also call me at 1-928-793-4269 (12-6 PM PST).



Concerning cash & savings accounts I highly recommend that my clients lower their exposure to the banking system due to massive credit derivatives and dollar volatility. At this link I list several good T-bill money market accounts and bank rating services. I also recommend a World Currency Access Deposit Account in euros available only at www.everbank.com. With regard to growth & income I suggest that you purchase my book for a complete summary. Basically, I focus on the commodity-mining-energy complex in addition to inverse index funds and foreign bonds which have a negative correlation to US stocks. I also have some offshore strategies for sophisticated contrarian investors. You can also click here for my 2007 Update and a 12-minute video clip of GAO Comptroller David Walker's warning of US fiscal bankruptcy on CBS 60 Minutes.
My final recommendation is that my clients have some quality food storage for their families. As my friend Steve Shenk, director of www.efoodsdirect.com, says “Think of food as cheap insurance you can eat.” They have affordable storage systems ranging from $350 to $1,600. You can call them at 1-800-409-5633 (MST). If you would like to purchase an autographed copy of my book you can go to www.chuckcoppes.com or call 1-800-775-6394 (9-5 PM PST). All book orders will include this free 20-page special report to pass along to friends and family. As I have stated in my book Introduction, it is my goal to challenge people’s thinking and move them to make personal and financial decisions. But our most important decision is to trust God. “God is our refuge and strength, a very present help in trouble; therefore we will not fear” (Ps. 46:1). He will see us safely through "this present evil age" if we completely put our trust in Him (Gal. 1:3-5). This is the eternal truth that sets us all free (Jn. 8:31-32).

Charles H. (Chuck) Coppes has been a licensed securities broker and is the founder and president of IDP Consulting Group, which is an independent precious metals and consulting firm. A summa cum laude graduate with a degree in Christian Apologetics he has been a featured guest on national radio programs. For media contact or press kit please call 1-928-369-9923 or email him at CHC@ChuckCoppes.com.



____________________________________________________

[1]William R. Clark, Petrodollar Warfare: Oil, Iraq and the Future of the Dollar ( Canada: New Society Pub., 2005) p. 122.

[2] Daniel Yergin, The Prize: The Epic Quest for Oil, Money & Power (New York, NY: The Free Press, 1991, 1992), p. 15.

[3]Richard Heinberg, The Party’s Over, from online press release commentary contained on www.petrodollarwarfare.com

[4]In 1956 Shell oil geophysicist Marion K. Hubbert predicted our peak by 1970, now known as the Hubbert Peak Theory.

[5] William Engdahl, A Century of War: Anglo-American Oil Politics and the New World Order (London: The Pluto Press, 1992, 2004), p. 132. For a full disclosure of the ‘Bilderbergers’ consult America’s Financial Reckoning Day, pp. 132-139.

[6] Steven Emerson, The American House of Saud: The Secret Petrodollar Connection (NY: Franklin Watts, 1985), p. 46.

[7] Engdahl, A Century of War, p. 137. Mulford is now US Ambassador to India to help direct cash to the “correct” banks.

[8] Bob Baer, Sleeping With the Devil: How Washington Sold Our Soul for Saudi Crude (NY: Crown Pub., 2003), p. 151.

[9] William R. Clark, Petrodollar Warfare, p. 120. I develop this recycling theme in more detail in chapter four of my book.

[10] Engdahl, A Century of War, p. 195. The Washington Consensus adopted in 1989 has institutionalized this exploitation.
[11] Emerson, The American House of Saud, p. 49. George P. Schultz was US Treasury Secretary from 1972-1974 and it is noteworthy that prior to this he was director of the OMB and instrumental in Nixon’s decision to undo the Bretton Woods agreement and float the US dollar in 1971. He also attended the Bilderberg meeting in May 1973, which led to the secret accord in Riyadh with SAMA to create the petrodollar exchange system. He was US Secretary of State from 1982-1989 and now serves as a senior advisor to Bush and chairs the International Advisory Council at JP Morgan Chase in New York. In 2002, the George P. Schultz Foreign Service Training Center was dedicated in Arlington, Virginia to train all U.S. ambassadors, diplomats, and foreign service agents in the proper skills necessary to advance the pro-neocon strategies and objectives outlined at the Project for a New American Century. Http://www.newamericancentury.org.

[12] Engdahl, A Century of War, p. 89. DuPont sold Conoco in 1997 and merged with Phillips 66, named after US Route 66.

[13] Seigniorage is a medieval term that refers to the privilege of feudal lords to mint new coinage in their realm and declare it as money. In this “inflationary” scheme the sovereigns could purchase new goods but all existing coinage was devalued.

[14] Baer, Sleeping With the Devil, p. 167. With so much Saudi money, Baer refers to SAMA as our “lender of last resort”.

[15] Emerson, The American House of Saud, p. 413. “For the love of money is a root of all sorts of evil…” (1 Tim. 6:10).

[16] Murray Rothbard, A History of Money and Banking in the U.S. ( Auburn, AL: Ludwig von Mises Inst., 2002), p. 476.

[17] Engdahl, A Century of War, p. 130. Engdahl notes how London referred to their new eurodollars as “petrocurrency.”

[18] Jim Willy, “PetroDollar & Iran & Iraq,” http://news.goldseek.com/GoldenJackass/1176997781.php, April 19, 2007.

[19] The Shadows of Power: The Council on Foreign Relations and the American Decline by James Perloff is recommended.

[20] PNAC Statement of Principles signed on June 3, 1997. Http://www.newamericancentury.org/statementofprinciples.htm.

[21] Clark, Petrodollar Warfare, p. 41. Shocked at this manifesto, Tam Dalvell, a British Labour MP stated the obvious, “This is a blueprint for US world domination – a new world order of their making….[they] want to control the world.”

[22] Quoted by Engdahl, A Century of War, p. 252. This report was released about the time Iraq started invoicing in the euro.

[23] Matthew R. Simmons, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (NY: Wiley, 2005). For more information on this important topic consult the Association for the Study of Peak Oil & Gas at www.peakoil.net

[24] Engdahl, A Century of War, p. 248. You are encouraged to also consider the documentary at www.oilcrashmovie.com.

[25] David Suskind, The Price of Loyalty (NY: Simon & Schuster, 2004), p. 86. Defense Secretary Rumsfeld warned O’Neill not to write his book and he would later be threatened with prosecution for his comments on www.middleeast.org in 2004.

[26] The Political Ideas of Leo Strauss and Leo Strauss and the Political Right by Shadia Drury provides insightful analysis.

[27] Richard Benson, “Oil, the Dollar, and United States Prosperity’, http://www.prudentbear.com, dated August 11, 2003.

[28] Clark, Petrodollar Warfare, p. 116. Saddam actually turned $10 billion into a €26 billion profit by switching in 2000!
[29] John F. McManus, “The Continuing Iraq War,” The New American, p. 44, July 9, 2007. See also www.thenewamerican.com.

[30] William Engdahl, Asia Times Online, http://www.atimes.com/atimes/Middle_East/HC10Ak01.html, March 10, 2006.

[31] Charles H. Coppes, America’s Financial Reckoning Day (New York-Shanghai: iUniverse Press, Inc., 2007), p. 183.

[32] The full report is available at http://www.newamericancentury.org/RebuildingAmericasDefenses.pdf, September 2000.

[33] Http://en.wikipedia.org/wiki/Military-industrial_complex. Presidential Papers of the Presidents, 1960, pp. 1035-1040.

[34] Emerson, The House of Saud, p. 321. Wm.Clark says that the Saudis are holding “the sword of Damocles” over the US.

[35] William Clark, “Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse,”http://energybulletin.net/ 7707.html, August 8, 2005. VP Dick Cheney and his war cabinet continue to warn about an imminent 9/11-type attack.

[36] William Engdahl, Asia Times Online, http://www.atimes.com/atimes/Middle_East/HC10Ak01.html, March 10, 2006.

[37] Michael C. Ruppert, “As the World Burns,” http://www.fromthewilderness.com/free/ww3/120104_world_burns.shtml.

[38] Clark, Petrodollar Warfare, p. 118. From Clark’s personal correspondence with confidential source in Washington, DC.

[39] T. R. Reid, The United States of Europe: The New Superpower and the End of American Supremacy (NY: 2004), p. 243.

[40] Krassimir Petrov, PhD, “The Proposed Iranian Oil Bourse,” Http://www.energybulletin.net, January 18, 2006. Page 215 in my book.

[41] The IAGS is located at http://www.iags.org. For a geopolitical twist on why the US is taken down see Ch. 6 in my book.

[42] Jerome D. Corsi, The Late Great USA: The Coming Merger with Mexico and Canada (CA: WND Books, 2007), p. 32.

[43] The Congressional Record, June 27, 2002. For numerous videos and information go to http://www.ronpaul2008.com




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The U.S. National Debt is Growing by $1 Million Dollars per Minute.



THE NATIONAL DEBT IS OUT OF CONTROL AND SOMEDAY SOON FOREIGNERS WILL DECIDE TO DUMP THE U.S. DOLLAR.
National debt grows $1 million a minute
By TOM RAUM, Associated Press Writer Mon Dec 3, 6:55 AM ET
WASHINGTON - Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day — or nearly $1 million a minute.
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What's that mean to you?
It means almost $30,000 in debt for each man, woman, child and infant in the United States.
Even if you've escaped the recent housing and credit crunches and are coping with rising fuel prices, you may still be headed for economic misery, along with the rest of the country. That's because the government is fast straining resources needed to meet interest payments on the national debt, which stands at a mind-numbing $9.13 trillion.
And like homeowners who took out adjustable-rate mortgages, the government faces the prospect of seeing this debt — now at relatively low interest rates — rolling over to higher rates, multiplying the financial pain.
So long as somebody is willing to keep loaning the U.S. government money, the debt is largely out of sight, out of mind.
But the interest payments keep compounding, and could in time squeeze out most other government spending — leading to sharply higher taxes or a cut in basic services like Social Security and other government benefit programs. Or all of the above.
A major economic slowdown, as some economists suggest may be looming, could hasten the day of reckoning.
The national debt — the total accumulation of annual budget deficits — is up from $5.7 trillion when President Bush took office in January 2001 and it will top $10 trillion sometime right before or right after he leaves in January 2009.
That's $10,000,000,000,000.00, or one digit more than an odometer-style "national debt clock" near New York's Times Square can handle. When the privately owned automated clock was activated in 1989, the national debt was $2.7 trillion.
It only gets worse.
Over the next 25 years, the number of Americans aged 65 and up is expected to almost double. The work population will shrink and more and more baby boomers will be drawing Social Security and Medicare benefits, putting new demands on the government's resources.
These guaranteed retirement and health benefit programs now make up the largest component of federal spending. Defense is next. And moving up fast in third place is interest on the national debt, which totaled $430 billion last year.
Aggravating the debt picture: the wars in Iraq and Afghanistan, which the nonpartisan Congressional Budget Office estimates could cost $2.4 trillion over the next decade
Despite vows in both parties to restrain federal spending, the national debt as a percentage of the U.S. Gross Domestic Product has grown from about 35 percent in 1975 to around 65 percent today. By historical standards, it's not proportionately as high as during World War II — when it briefly rose to 120 percent of GDP, but it's a big chunk of liability.
"The problem is going forward," said David Wyss, chief economist at Standard and Poors, a major credit-rating agency.
"Our estimate is that the national debt will hit 350 percent of the GDP by 2050 under unchanged policy. Something has to change, because if you look at what's going to happen to expenditures for entitlement programs after us baby boomers start to retire, at the current tax rates, it doesn't work," Wyss said.
With national elections approaching, candidates of both parties are talking about fiscal discipline and reducing the deficit and accusing the other of irresponsible spending. But the national debt itself — a legacy of overspending dating back to the American Revolution — receives only occasional mention.
Who is loaning Washington all this money?
Ordinary investors who buy Treasury bills, notes and U.S. savings bonds, for one. Also it is banks, pension funds, mutual fund companies and state, local and increasingly foreign governments. This accounts for about $5.1 trillion of the total and is called the "publicly held" debt. The remaining $4 trillion is owed to Social Security and other government accounts, according to the Treasury Department, which keeps figures on the national debt down to the penny on its Web site.
Some economists liken the government's plight to consumers who spent like there was no tomorrow — only to find themselves maxed out on credit cards and having a hard time keeping up with rising interest payments.
"The government is in the same predicament as the average homeowner who took out an adjustable mortgage," said Stanley Collender, a former congressional budget analyst and now managing director at Qorvis Communications, a business consulting firm.
Much of the recent borrowing has been accomplished through the selling of shorter-term Treasury bills. If these loans roll over to higher rates, interest payments on the national debt could soar. Furthermore, the decline of the dollar against other major currencies is making Treasury securities less attractive to foreigners — even if they remain one of the world's safest investments.
For now, large U.S. trade deficits with much of the rest of the world work in favor of continued foreign investment in Treasuries and dollar-denominated securities. After all, the vast sums Americans pay — in dollars — for imported goods has to go somewhere. But that dynamic could change.
"The first day the Chinese or the Japanese or the Saudis say, `we've bought enough of your paper,' then the debt — whatever level it is at that point — becomes unmanageable," said Collender.
A recent comment by a Chinese lawmaker suggesting the country should buy more euros instead of dollars helped send the Dow Jones plunging more than 300 points.
The dollar is down about 35 percent since the end of 2001 against a basket of major currencies.
Foreign governments and investors now hold some $2.23 trillion — or about 44 percent — of all publicly held U.S. debt. That's up 9.5 percent from a year earlier.
Japan is first with $586 billion, followed by China ($400 billion) and Britain ($244 billion). Saudi Arabia and other oil-exporting countries account for $123 billion, according to the Treasury.
"Borrowing hundreds of billions of dollars from China and OPECSen. George Voinovich of Ohio, a Republican budget hawk. puts not only our future economy, but also our national security, at risk. It is critical that we ensure that countries that control our debt do not control our future," said
Of all federal budget categories, interest on the national debt is the one the president and Congress have the least control over. Cutting payments would amount to default, something Washington has never done.
Congress must from time to time raise the debt limit — sort of like a credit card maximum — or the government would be unable to borrow any further to keep it operating and to pay additional debt obligations.
The Democratic-led Congress recently did just that, raising the ceiling to $9.82 trillion as the former $8.97 trillion maximum was about to be exceeded. It was the fifth debt-ceiling increase since Bush became president in 2001.
Democrats are blaming the runup in deficit spending on Bush and his Republican allies who controlled Congress for the first six years of his presidency. They criticize him for resisting improvements in health care, education and other vital areas while seeking nearly $200 billion in new Iraq and Afghanistan war spending.
"We pay in interest four times more than we spend on education and four times what it will cost to cover 10 million children with health insurance for five years," said House Speaker Nancy Pelosi, D-Calif. "That's fiscal irresponsibility."
Republicans insist congressional Democrats are the irresponsible ones. Bush has reinforced his call for deficit reduction with vetoes and veto threats and cites a looming "train wreck" if entitlement programs are not reined in.
Yet his efforts two years ago to overhaul Social Security had little support, even among fellow Republicans.
The deficit only reflects the gap between government spending and tax revenues for one year. Not exactly how a family or a business keeps its books.
Even during the four most recent years when there was a budget surplus, 1998-2001, the national debt ranged between $5.5 trillion and $5.8 trillion.
As in trying to pay off a large credit-card balance by only making minimum payments, the overall debt might be next to impossible to chisel down appreciably, regardless of who is in the White House or which party controls Congress, without major spending cuts, tax increases or both.
"The basic facts are a matter of arithmetic, not ideology," said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan group that advocates eliminating federal deficits.
There's little dispute that current fiscal policies are unsustainable, he said. "Yet too few of our elected leaders in Washington are willing to acknowledge the seriousness of the long-term fiscal problem and even fewer are willing to put it on the political agenda."
Polls show people don't like the idea of saddling future generations with debt, but proposing to pay down the national debt itself doesn't move the needle much.
"People have a tendency to put some of these longer term problems out of their minds because they're so pressed with more imminent worries, such as wages and jobs and income inequality," said pollster Andrew Kohut of the nonpartisan Pew Research Center.
Texas billionaire Ross Perot made paying down the national debt a central element of his quixotic third-party presidential bid in 1992. The national debt then stood at $4 trillion and Perot displayed charts showing it would soar to $8 trillion by 2007 if left unchecked. He was about a trillion low.
Not long ago, it actually looked like the national debt could be paid off — in full. In the late 1990s, the bipartisan Congressional Budget Office projected a surplus of a $5.6 trillion over ten years — and calculated the debt would be paid off as early as 2006.
Former Fed chairman Alan Greenspan recently wrote that he was "stunned" and even troubled by such a prospect. Among other things, he worried about where the government would park its surplus if Treasury bonds went out of existence because they were no longer needed.
Not to worry. That surplus quickly evaporated.
Mark Zandi, chief economist at Moody's Economy.com, said he's more concerned that interest on the national debt will become unsustainable than he is that foreign countries will dump their dollar holdings — something that would undermine the value of their own vast holdings. "We're going to have to shell out a lot of resources to make those interest payments. There's a very strong argument as to why it's vital that we address our budget issues before they get measurably worse," Zandi said.
"Of course, that's not going to happen until after the next president is in the White House," he added.
___
On the Net:
Treasury site listing share of national debt held by foreigners: http://www.treasury.gov/tic/mfh.txt.


Summary of Petrodollar Warfare and 45-Minute Video







The following article is from William R. Clark and based on his hard-hitting book Petrodollar Warfare. For a complete appreciation of this topic click here and watch this 45-MINUTE VIDEO DOCUMENTARY which proves that US dollar imperialism is behind our foreign policy to protect the Federal Reserve System.

Petrodollar Warfare & The Euro

"This notion that the United States is getting ready to attack Iran is simply ridiculous...Having said that, all options are on the table."
-- President George W. Bush, February 2005

By William R. Clark, author of Petrodollar Warfare

08/08/05 "MM" -- -- Contemporary warfare has traditionally involved underlying conflicts regarding economics and resources. Today these intertwined conflicts also involve international currencies, and thus increased complexity. Current geopolitical tensions between the United States and Iran extend beyond the publicly stated concerns regarding Iran's nuclear intentions, and likely include a proposed Iranian "petroeuro" system for oil trade. Similar to the Iraq war, military operations against Iran relate to the macroeconomics of 'petrodollar recycling' and the unpublicized but real challenge to U.S. dollar supremacy from the euro as an alternative oil transaction currency.

It is now obvious the invasion of Iraq had less to do with any threat from Saddam's long-gone WMD program and certainly less to do to do with fighting International terrorism than it has to do with gaining strategic control over Iraq's hydrocarbon reserves and in doing so maintain the U.S. dollar as the monopoly currency for the critical international oil market. Throughout 2004 information provided by former administration insiders revealed the Bush/Cheney administration entered into office with the intention of toppling Saddam.[1][2] Candidly stated, 'Operation Iraqi Freedom' was a war designed to install a pro-U.S. government in Iraq, establish multiple U.S military bases before the onset of global Peak Oil, and to reconvert Iraq back to petrodollars while hoping to thwart further OPEC momentum towards the euro as an alternative oil transaction currency ( i.e. "petroeuro").[3] However, subsequent geopolitical events have exposed neoconservative strategy as fundamentally flawed, with Iran moving towards a petroeuro system for international oil trades, while Russia evaluates this option with the European Union.

In 2003 the global community witnessed a combination of petrodollar warfare and oil depletion warfare. The majority of the world's governments – especially the E.U., Russia and China – were not amused – and neither are the U.S. soldiers who are currently stationed inside a hostile Iraq. In 2002 I wrote an award-winning online essay that asserted Saddam Hussein sealed his fate when he announced on September 2000 that Iraq was no longer going to accept dollars for oil being sold under the UN's Oil-for-Food program, and decided to switch to the euro as Iraq's oil export currency.[4] Indeed, my original pre-war hypothesis was validated in a Financial Times article dated June 5, 2003, which confirmed Iraqi oil sales returning to the international markets were once again denominated in U.S. dollars – not euros.

The tender, for which bids are due by June 10, switches the transaction back to dollars -- the international currency of oil sales - despite the greenback's recent fall in value. Saddam Hussein in 2000 insisted Iraq's oil be sold for euros, a political move, but one that improved Iraq's recent earnings thanks to the rise in the value of the euro against the dollar. [5]

The Bush administration implemented this currency transition despite the adverse impact on profits from Iraqi's export oil sales.[6] (In mid-2003 the euro was valued approx. 13% higher than the dollar, and thus significantly impacted the ability of future oil proceeds to rebuild Iraq's infrastructure). Not surprisingly, this detail has never been mentioned in the five U.S. major media conglomerates who control 90% of information flow in the U.S., but confirmation of this vital fact provides insight into one of the crucial – yet overlooked – rationales for 2003 the Iraq war.

Concerning Iran, recent articles have revealed active Pentagon planning for operations against its suspected nuclear facilities. While the publicly stated reasons for any such overt action will be premised as a consequence of Iran's nuclear ambitions, there are again unspoken macroeconomic drivers underlying the second stage of petrodollar warfare – Iran's upcoming oil bourse. (The word bourse refers to a stock exchange for securities trading, and is derived from the French stock exchange in Paris, the Federation Internationale des Bourses de Valeurs.)

In essence, Iran is about to commit a far greater "offense" than Saddam Hussein's conversion to the euro for Iraq's oil exports in the fall of 2000. Beginning in March 2006, the Tehran government has plans to begin competing with New York's NYMEX and London's IPE with respect to international oil trades – using a euro-based international oil-trading mechanism.[7] The proposed Iranian oil bourse signifies that without some sort of US intervention, the euro is going to establish a firm foothold in the international oil trade. Given U.S. debt levels and the stated neoconservative project of U.S. global domination, Tehran's objective constitutes an obvious encroachment on dollar supremacy in the crucial international oil market.

From the autumn of 2004 through August 2005, numerous leaks by concerned Pentagon employees have revealed that the neoconservatives in Washington are quietly – but actively – planning for a possible attack against Iran. In September 2004 Newsweek reported:

Deep in the Pentagon, admirals and generals are updating plans for possible U.S. military action in Syria and Iran. The Defense Department unit responsible for military planning for the two troublesome countries is "busier than ever," an administration official says. Some Bush advisers characterize the work as merely an effort to revise routine plans the Pentagon maintains for all contingencies in light of the Iraq war. More skittish bureaucrats say the updates are accompanied by a revived campaign by administration conservatives and neocons for more hard-line U.S. policies toward the countries…'

…administration hawks are pinning their hopes on regime change in Tehran – by covert means, preferably, but by force of arms if necessary. Papers on the idea have circulated inside the administration, mostly labeled "draft" or "working draft" to evade congressional subpoena powers and the Freedom of Information Act. Informed sources say the memos echo the administration's abortive Iraq strategy: oust the existing regime, swiftly install a pro-U.S. government in its place (extracting the new regime's promise to renounce any nuclear ambitions) and get out. This daredevil scheme horrifies U.S. military leaders, and there's no evidence that it has won any backers at the cabinet level. [8]

Indeed, there are good reasons for U.S. military commanders to be 'horrified' at the prospects of attacking Iran. In the December 2004 issue of the Atlantic Monthly, James Fallows reported that numerous high-level war-gaming sessions had recently been completed by Sam Gardiner, a retired Air Force colonel who has run war games at the National War College for the past two decades.[9] Col. Gardiner summarized the outcome of these war games with this statement, "After all this effort, I am left with two simple sentences for policymakers: You have no military solution for the issues of Iran. And you have to make diplomacy work." Despite Col. Gardiner's warnings, yet another story appeared in early 2005 that reiterated this administration's intentions towards Iran. Investigative reporter Seymour Hersh's article in The New Yorker included interviews with various high-level U.S. intelligence sources. Hersh wrote:

In my interviews [with former high-level intelligence officials], I was repeatedly told that the next strategic target was Iran. Everyone is saying, 'You can't be serious about targeting Iran. Look at Iraq,' the former [CIA] intelligence official told me. But the [Bush administration officials] say, 'We've got some lessons learned – not militarily, but how we did it politically. We're not going to rely on agency pissants.' No loose ends, and that's why the C.I.A. is out of there. [10]

The most recent, and by far the most troubling, was an article in The American Conservative by intelligence analyst Philip Giraldi. His article, "In Case of Emergency, Nuke Iran," suggested the resurrection of active U.S. military planning against Iran – but with the shocking disclosure that in the event of another 9/11-type terrorist attack on U.S. soil, Vice President Dick Cheney's office wants the Pentagon to be prepared to launch a potential tactical nuclear attack on Iran – even if the Iranian government was not involved with any such terrorist attack against the U.S.:

The Pentagon, acting under instructions from Vice President Dick Cheney's office, has tasked the United States Strategic Command (STRATCOM) with drawing up a contingency plan to be employed in response to another 9/11-type terrorist attack on the United States. The plan includes a large-scale air assault on Iran employing both conventional and tactical nuclear weapons. Within Iran there are more than 450 major strategic targets, including numerous suspected nuclear-weapons-program development sites. Many of the targets are hardened or are deep underground and could not be taken out by conventional weapons, hence the nuclear option. As in the case of Iraq, the response is not conditional on Iran actually being involved in the act of terrorism directed against the United States. Several senior Air Force officers involved in the planning are reportedly appalled at the implications of what they are doing – that Iran is being set up for an unprovoked nuclear attack – but no one is prepared to damage his career by posing any objections. [11]

Why would the Vice President instruct the U.S. military to prepare plans for what could likely be an unprovoked nuclear attack against Iran? Setting aside the grave moral implications for a moment, it is remarkable to note that during the same week this "nuke Iran" article appeared, the Washington Post reported that the most recent National Intelligence Estimate (NIE) of Iran's nuclear program revealed that, "Iran is about a decade away from manufacturing the key ingredient for a nuclear weapon, roughly doubling the previous estimate of five years."[12] This article carefully noted this assessment was a "consensus among U.S. intelligence agencies, [and in] contrast with forceful public statements by the White House." The question remains, Why would the Vice President advocate a possible tactical nuclear attack against Iran in the event of another major terrorist attack against the U.S. – even if Tehran was innocent of involvement?

Perhaps one of the answers relates to the same obfuscated reasons why the U.S. launched an unprovoked invasion to topple the Iraq government – macroeconomics and the desperate desire to maintain U.S. economic supremacy. In essence, petrodollar hegemony is eroding, which will ultimately force the U.S. to significantly change its current tax, debt, trade, and energy policies, all of which are severely unbalanced. World oil production is reportedly "flat out," and yet the neoconservatives are apparently willing to undertake huge strategic and tactical risks in the Persian Gulf. Why? Quite simply – their stated goal is U.S. global domination – at any cost.

To date, one of the more difficult technical obstacles concerning a euro-based oil transaction trading system is the lack of a euro-denominated oil pricing standard, or oil 'marker' as it is referred to in the industry. The three current oil markers are U.S. dollar denominated, which include the West Texas Intermediate crude (WTI), Norway Brent crude, and the UAE Dubai crude. However, since the summer of 2003 Iran has required payments in the euro currency for its European and Asian/ACU exports – although the oil pricing these trades was still denominated in the dollar.[13]

Therefore a potentially significant news story was reported in June 2004 announcing Iran's intentions to create of an Iranian oil bourse. This announcement portended competition would arise between the Iranian oil bourse and London's International Petroleum Exchange (IPE), as well as the New York Mercantile Exchange (NYMEX). [Both the IPE and NYMEX are owned by U.S. consortium, and operated by an Atlanta-based corporation, IntercontinentalExchange, Inc.]

The macroeconomic implications of a successful Iranian bourse are noteworthy. Considering that in mid-2003 Iran switched its oil payments from E.U. and ACU customers to the euro, and thus it is logical to assume the proposed Iranian bourse will usher in a fourth crude oil marker – denominated in the euro currency. This event would remove the main technical obstacle for a broad-based petroeuro system for international oil trades. From a purely economic and monetary perspective, a petroeuro system is a logical development given that the European Union imports more oil from OPEC producers than does the U.S., and the E.U. accounted for 45% of exports sold to the Middle East. (Following the May 2004 enlargement, this percentage likely increased).

Despite the complete absence of coverage from the five U.S. corporate media conglomerates, these foreign news stories suggest one of the Federal Reserve's nightmares may begin to unfold in the spring of 2006, when it appears that international buyers will have a choice of buying a barrel of oil for $60 dollars on the NYMEX and IPE - or purchase a barrel of oil for €45 - €50 euros via the Iranian Bourse. This assumes the euro maintains its current 20-25% appreciated value relative to the dollar – and assumes that some sort of US "intervention" is not launched against Iran. The upcoming bourse will introduce petrodollar versus petroeuro currency hedging, and fundamentally new dynamics to the biggest market in the world - global oil and gas trades. In essence, the U.S. will no longer be able to effortlessly expand credit via U.S. Treasury bills, and the dollar's demand/liquidity value will fall.

It is unclear at the time of writing if this project will be successful, or could it prompt overt or covert U.S. interventions – thereby signaling the second phase of petrodollar warfare in the Middle East. Regardless of the potential U.S. response to an Iranian petroeuro system, the emergence of an oil exchange market in the Middle East is not entirely surprising given the domestic peaking and decline of oil exports in the U.S. and U.K, in comparison to the remaining oil reserves in Iran, Iraq and Saudi Arabia. What we are witnessing is a battle for oil currency supremacy. If Iran's oil bourse becomes a successful alternative for international oil trades, it would challenge the hegemony currently enjoyed by the financial centers in both London (IPE) and New York (NYMEX), a factor not overlooked in the following (UK) Guardian article:

Iran is to launch an oil trading market for Middle East and Opec producers that could threaten the supremacy of London's International Petroleum Exchange.

…Some industry experts have warned the Iranians and other OPEC producers that western exchanges are controlled by big financial and oil corporations, which have a vested interest in market volatility. [emphasis added]

The IPE, bought in 2001 by a consortium that includes BP, Goldman Sachs and Morgan Stanley, was unwilling to discuss the Iranian move yesterday. "We would not have any comment to make on it at this stage," said an IPE spokeswoman. [14]

During an important speech in April 2002, Mr. Javad Yarjani, an OPEC executive, described three pivotal events that would facilitate an OPEC transition to euros.[15] He stated this would be based on (1) if and when Norway's Brent crude is re-dominated in euros, (2) if and when the U.K. adopts the euro, and (3) whether or not the euro gains parity valuation relative to the dollar, and the EU's proposed expansion plans were successful. Notably, both of the later two criteria have transpired: the euro's valuation has been above the dollar since late 2002, and the euro-based E.U. enlarged in May 2004 from 12 to 22 countries. Despite recent "no" votes by French and Dutch voters regarding a common E.U. Constitution, from a macroeconomic perspective, these domestic disagreements do no reduce the euro currency's trajectory in the global financial markets – and from Russia and OPEC's perspective – do not adversely impact momentum towards a petroeuro. In the meantime, the U.K. remains uncomfortably juxtaposed between the financial interests of the U.S. banking nexus (New York/Washington) and the E.U. financial centers (Paris/Frankfurt).

The most recent news reports indicate the oil bourse will start trading on March 20, 2006, coinciding with the Iranian New Year.[16] The implementation of the proposed Iranian oil Bourse – if successful in utilizing the euro as its oil transaction currency standard – essentially negates the previous two criteria as described by Mr. Yarjani regarding the solidification of a petroeuro system for international oil trades. It should also be noted that throughout 2003-2004 both Russia and China significantly increased their central bank holdings of the euro, which appears to be a coordinated move to facilitate the anticipated ascendance of the euro as a second World Reserve Currency. [17] [18] China's announcement in July 2005 that is was re-valuing the yuan/RNB was not nearly as important as its decision to divorce itself form a U.S. dollar peg by moving towards a "basket of currencies" – likely to include the yen, euro, and dollar.[19] Additionally, the Chinese re-valuation immediately lowered their monthly imported "oil bill" by 2%, given that oil trades are still priced in dollars, but it is unclear how much longer this monopoly arrangement will last.

Furthermore, the geopolitical stakes for the Bush administration were raised dramatically on October 28, 2004, when Iran and China signed a huge oil and gas trade agreement (valued between $70 - $100 billion dollars.) [20] It should also be noted that China currently receives 13% of its oil imports from Iran. In the aftermath of the Iraq invasion, the U.S.-administered Coalition Provisional Authority (CPA) nullified previous oil lease contracts from 1997-2002 that France, Russia, China and other nations had established under the Saddam regime. The nullification of these contracts worth a reported $1.1 trillion created political tensions between the U.S and the European Union, Russia and China. The Chinese government may fear the same fate awaits their oil investments in Iran if the U.S. were able to attack and topple the Tehran government. Despite U.S. desires to enforce petrodollar hegemony, the geopolitical risks of an attack on Iran's nuclear facilities would surely create a serious crisis between Washington and Beijing.

It is increasingly clear that a confrontation and possible war with Iran may transpire during the second Bush term. Clearly, there are numerous tactical risks regarding neoconservative strategy towards Iran. First, unlike Iraq, Iran has a robust military capability. Secondly, a repeat of any "Shock and Awe" tactics is not advisable given that Iran has installed sophisticated anti-ship missiles on the Island of Abu Musa, and therefore controls the critical Strait of Hormuz – where all of the Persian Gulf bound oil tankers must pass.[22] The immediate question for Americans? Will the neoconservatives attempt to intervene covertly and/or overtly in Iran during 2005 or 2006 in a desperate effort to prevent the initiation of euro-denominated international crude oil sales? Commentators in India are quite correct in their assessment that a U.S. intervention in Iran is likely to prove disastrous for the United States, making matters much worse regarding international terrorism, not to the mention potential effects on the U.S. economy.

…If it [ U.S.] intervenes again, it is absolutely certain it will not be able to improve the situation…There is a better way, as the constructive engagement of Libya's Colonel Muammar Gaddafi has shown...Iran is obviously a more complex case than Libya, because power resides in the clergy, and Iran has not been entirely transparent about its nuclear programme, but the sensible way is to take it gently, and nudge it to moderation. Regime change will only worsen global Islamist terror, and in any case, Saudi Arabia is a fitter case for democratic intervention, if at all. [21]

A successful Iranian bourse will solidify the petroeuro as an alternative oil transaction currency, and thereby end the petrodollar's hegemonic status as the monopoly oil currency. Therefore, a graduated approach is needed to avoid precipitous U.S. economic dislocations. Multilateral compromise with the EU and OPEC regarding oil currency is certainly preferable to an 'Operation Iranian Freedom,' or perhaps another CIA-backed coup such as operation "Ajax" from 1953. Despite the impressive power of the U.S. military, and the ability of our intelligence agencies to facilitate 'interventions,' it would be perilous and possibly ruinous for the U.S. to intervene in Iran given the dire situation in Iraq. The Monterey Institute of International Studies warned of the possible consequences of a preemptive attack on Iran's nuclear facilities:

An attack on Iranian nuclear facilities…could have various adverse effects on U.S. interests in the Middle East and the world. Most important, in the absence of evidence of an Iranian illegal nuclear program, an attack on Iran's nuclear facilities by the U.S. or Israel would be likely to strengthen Iran's international stature and reduce the threat of international sanctions against Iran. [23]

Synopsis:

It is not yet clear if a U.S. military expedition will occur in a desperate attempt to maintain petrodollar supremacy. Regardless of the recent National Intelligence Estimate that down-played Iran's potential nuclear weapons program, it appears increasingly likely the Bush administration may use the specter of nuclear weapon proliferation as a pretext for an intervention, similar to the fears invoked in the previous WMD campaign regarding Iraq. If recent stories are correct regarding Cheney's plan to possibly use a another 9/11 terrorist attack as the pretext or casus belli for a U.S. aerial attack against Iran, this would confirm the Bush administration is prepared to undertake a desperate military strategy to thwart Iran's nuclear ambitions, while simultaneously attempting to prevent the Iranian oil Bourse from initiating a euro-based system for oil trades.

However, as members of the U.N. Security Council; China, Russia and E.U. nations such as France and Germany would likely veto any U.S.-sponsored U.N. Security Resolution calling the use of force without solid proof of Iranian culpability in a major terrorist attack. A unilateral U.S. military strike on Iran would isolate the U.S. government in the eyes of the world community, and it is conceivable that such an overt action could provoke other industrialized nations to strategically abandon the dollar en masse. Indeed, such an event would create pressure for OPEC or Russia to move towards a petroeuro system in an effort to cripple the U.S. economy and its global military presence. I refer to this in my book as the "rogue nation hypothesis."

While central bankers throughout the world community would be extremely reluctant to 'dump the dollar,' the reasons for any such drastic reaction are likely straightforward from their perspective – the global community is dependent on the oil and gas energy supplies found in the Persian Gulf. Hence, industrialized nations would likely move in tandem on the currency exchange markets in an effort to thwart the neoconservatives from pursuing their desperate strategy of dominating the world's largest hydrocarbon energy supply. Any such efforts that resulted in a dollar currency crisis would be undertaken – not to cripple the U.S. dollar and economy as punishment towards the American people per se – but rather to thwart further unilateral warfare and its potentially destructive effects on the critical oil production and shipping infrastructure in the Persian Gulf. Barring a U.S. attack, it appears imminent that Iran's euro-denominated oil bourse will open in March 2006. Logically, the most appropriate U.S. strategy is compromise with the E.U. and OPEC towards a dual-currency system for international oil trades.

Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes...known instruments for bringing the many under the domination of the few…No nation could preserve its freedom in the midst of continual warfare.
-- James Madison, Political Observations, 1795

Footnotes:

[1]. Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O' Neill, Simon & Schuster publishers (2004)

[2]. Richard A. Clarke, Against All Enemies: Inside America's War on Terror, Free Press (2004)

[3]. William Clark, "Revisited - The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth," January 2003 (updated January 2004)
http://www.ratical.org/ratville/CAH/RRiraqWar.html

[4]. Peter Philips, Censored 2004, The Top 25 Censored News Stories, Seven Stories Press, (2003) General website for Project Censored: http://www.projectcensored.org/
Story #19: U.S. Dollar vs. the Euro: Another Reason for the Invasion of Iraq
http://www.projectcensored.org/publications/2004/19.html

[5]. Carol Hoyos and Kevin Morrison, "Iraq returns to the international oil market," Financial Times, June 5, 2003

[6]. Faisal Islam, "Iraq nets handsome profit by dumping dollar for euro," [UK] Guardian, February 16, 2003
http://observer.guardian.co.uk/iraq/story/0,12239,896344,00.html

[7]. "Oil bourse closer to reality," IranMania.com, December 28, 2004. Also see: "Iran oil bourse wins authorization," Tehran Times, July 26, 2005

[8]. "War-Gaming the Mullahs: The U.S. weighs the price of a pre-emptive strike," Newsweek, September 27 issue, 2004. http://www.msnbc.msn.com/id/6039135/site/newsweek/

[9]. James Fallows, 'Will Iran be Next?,' Atlantic Monthly, December 2004, pgs. 97 – 110

[10]. Seymour Hersh, "The Coming Wars," The New Yorker, January 24th – 31st issue, 2005, pgs. 40-47 Posted online January 17, 2005. Online: http://www.newyorker.com/fact/content/?050124fa_fact

[11]. Philip Giraldi, "In Case of Emergency, Nuke Iran," American Conservative, August 1, 2005

[12]. Dafina Linzer, "Iran Is Judged 10 Years From Nuclear Bomb U.S. Intelligence Review Contrasts With Administration Statements," Washington Post, August 2, 2005; Page A01

[13]. C. Shivkumar, "Iran offers oil to Asian union on easier terms," The Hindu Business Line (June 16, ` 2003). http://www.thehindubusinessline.com/bline/2003/06/17/stories/
2003061702380500.htm

[14]. Terry Macalister, "Iran takes on west's control of oil trading," The [UK] Guardian, June 16, 2004
http://www.guardian.co.uk/business/story/0,3604,1239644,00.html

[15]. "The Choice of Currency for the Denomination of the Oil Bill," Speech given by Javad Yarjani, Head of OPEC's Petroleum Market Analysis Dept, on The International Role of the Euro (Invited by the Spanish Minister of Economic Affairs during Spain's Presidency of the EU) (April 14, 2002, Oviedo, Spain)
http://www.opec.org/NewsInfo/Speeches/sp2002/spAraqueSpainApr14.htm

[16]. "Iran's oil bourse expects to start by early 2006," Reuters, October 5, 2004 http://www.iranoilgas.com

[17]. "Russia shifts to euro as foreign currency reserves soar," AFP, June 9, 2003
http://www.cdi.org/russia/johnson/7214-3.cfm

[18]. "China to diversify foreign exchange reserves," China Business Weekly, May 8, 2004
http://www.chinadaily.com.cn/english/doc/2004-05/08/content_328744.htm

[19]. Richard S. Appel, "The Repercussions from the Yuan's Revaluation," kitco.com, July 27, 2005
http://www.kitco.com/ind/appel/jul272005.html

[20]. China, Iran sign biggest oil & gas deal,' China Daily, October 31, 2004. Online: Online: http://www.chinadaily.com.cn/english/doc/2004-10/31/content_387140.htm

[21]. "Terror & regime change: Any US invasion of Iran will have terrible consequences," News Insight: Public Affairs Magazine, June 11, 2004 http://www.indiareacts.com/archivedebates/nat2.asp?recno=908&ctg=World

[22]. Analysis of Abu Musa Island, www.globalsecurity.org
http://www.globalsecurity.org/wmd/world/iran/abu-musa.htm

[23]. Sammy Salama and Karen Ruster, "A Preemptive Attack on Iran's Nuclear Facilities: Possible Consequences," Monterry Institute of International Studies, August 12, 2004 (updated September 9, 2004) http://cns.miis.edu/pubs/week/040812.htm

by courtesy & © 2005 William R. Clark

Former U.S. Treasury official predicts our "economic catastrophe" is looming.



Paul Craig Roberts, former Assistant Secretary of the Treasury under President Ronald Reagan, issues this serious warning to Americans that our currency and economy is being held hostage by the Red Chinese and other ideological enemies. You can read more about this in chapter four of my new book.
Who Owns the Dollar?
Our currency and our economy are held hostage by Asia.
By Paul Craig Roberts
The American Conservative July 4, 2005
China is the leading scapegoat for America’s economic ills. On May 20, New York Times columnist Paul Krugman blamed China for the U.S. housing bubble. If only China were not lending us so much money, mortgage rates would be higher, forestalling a housing bubble. Krugman says China is a poor country and should be investing its capital at home, not lending it to the U.S.
Krugman could just as well have said, "If only U.S. manufacturers produced in America instead of outsourcing to China, the Chinese would not have any money to lend us. Thus, no housing bubble."
Krugman is correct that if foreign lending to the U.S. slows, interest rates will rise, putting a speculative housing market in trouble. But the interest of the U.S.-China relationship goes far beyond the effect on the U.S. housing market. Economists set in traditional ways of thinking miss the really important aspects of the relationship.
For example, Krugman notes that China is a poor country and is slowing its own development by lending to the U.S. We do think of China as a Third World country with large supplies of underemployed labor. China’s trade relationship with the U.S., however, suggests the opposite. The U.S. trade deficit with China is larger than with any other country, including highly industrialized ones such as Japan and Germany. Think of all those Toyotas, Hondas, Nissans, office machines, and video games that Americans buy from Japan. Yet in the first quarter of this year, the U.S. trade deficit with China is running 50 percent larger than the deficit with Japan. Indeed, the U.S. trade deficit with China is larger than the deficit with all of Europe. It is larger than with Canada and Mexico combined, two countries in which U.S. corporations manufacture cars, appliances, and a variety of big-ticket items for American markets.
What are Americans buying from China? With China a poor country and the U.S. a First World superpower, you would think China would have a trade deficit as a result of selling us cheap goods and importing high value-added manufactured goods. Instead, it is the other way around. The U.S. is dependent on China for manufactured goods, including advanced technology products. In the first quarter of 2005, U.S. imports from China are 5.7 times higher than U.S. exports to China. Last year, U.S. exports to China were $34.7 billion. Imports were $196.7 billion for a U.S. trade deficit with China of $162 billion.
It was not always this way. In 1985, U.S. trade with China was in balance at $3.8 billion. Ten years later, U.S. imports from China were four times U.S. exports to China.
The U.S.-China economic relationship is a highly unusual one between a First World and a Third World country. Moreover, the U.S. trade deficit with China in manufactured goods and advanced technology products is growing rapidly. What explains the U.S. dependence on a poor country for First World products?
The answer, and the key to China’s rapid development, is that corporations in First World countries—American businesses chief among them—use China as an offshore location where they produce for their home markets. More than half of U.S. imports from China, and as much as 70 percent from some of China’s coastal regions, represent offshore production by American firms for U.S. markets.
What economists overlook is that when we speak of the Chinese economy, we are speaking in large part of the relocation of American manufacturing to China. Those millions of lost domestic manufacturing jobs were not lost. They were moved. The jobs still exist, only they are not filled by Americans.
In a world where capital and technology are highly mobile internationally, these critical factors of production flow to countries with the lowest cost of labor. China has attracted manufacturing, and India has attracted professional services. This has left the American work force with job growth only in lower-paid domestic services, which provide no export earnings.
The rapid transformations that have occurred in some Indian cities, which have become high-tech centers, and along the coast of China are unprecedented in economic history. The changes are so rapid because they are driven by the relocation of First World businesses seeking the lowest labor cost.
Economics relies on automatic adjustments to rectify trade imbalances. The trade deficit with China should cause the Chinese currency to appreciate relative to the dollar, raising the dollar cost of Chinese labor. In the long run—in which, J.M. Keynes said, "we are all dead"—adjustments would occur until U.S. and Chinese wage rates and living standards equalized.
Considering the disparity between American and Chinese wage rates and living standards, the adjustment would be extremely painful for Americans. But the adjustment is forestalled by two factors.
China keeps its currency pegged to the dollar, so when the dollar falls, the Chinese currency falls with it and there is no adjustment. China does not permit its currency to be traded, and there is not enough of it in international markets for currency speculators to be able to force the Chinese off the peg.
The other factor is the dollar’s role as world reserve currency. The reserve-currency role means that every country has a demand for dollars in order to pay its oil bills and settle its international accounts. The world demand means that the U.S. can run large deficits for many years before the chickens come home to roost.
In the meantime, Asian countries are accumulating hundreds of billions in dollar assets, making them America’s bankers. Industrially developed countries such as Japan, Taiwan, and South Korea have little need to use the dollars that they earn from their trade surpluses with the U.S. to import American capital goods to fuel their further development. They use the dollars that we pay them for their goods to purchase U.S. government bonds and American companies, real estate, and corporate bonds.
China, which has been growing at about 10 percent annually for a number of years, could conceivably use its export surplus with the U.S. to expand its infrastructure more rapidly in order to develop even more quickly. But a 10 percent annual growth rate is probably the highest rate of change with which China wants to contend. As First World firms are flooding China with their capital and technology, China doesn’t need to use its trade surplus with the U.S. to purchase capital goods.
As a result of many years of persistent trade surpluses with the United States, the Japanese government holds dollar reserves of approximately $1 trillion. China’s accumulation of dollars is approximately $600 billion. South Korea holds about $200 billion.
These sums give these countries enormous leverage over the United States. By dumping some portion of their reserves, these countries could put the dollar under intense pressure and send U.S. interest rates skyrocketing. Washington would really have to anger Japan and Korea to provoke such action, but in a showdown with China—over Taiwan, for example—China holds the cards. China and Japan, and the world at large, have more dollar reserves than they require. They would have no problem teaching a hegemonic superpower a lesson if the need arose.
Last year the U.S. trade deficit with the rest of the world was $617 billion. In the first quarter of this year, our trade deficit is $174 billion—$35 billion higher than in the first quarter of last year. If this figure holds for the remaining three quarters and does not increase, the U.S. trade deficit in 2005 will be $700 billion.
Offshore outsourcing makes it impossible for the U.S. to rectify its trade imbalance through exports. As more and more of the production of goods and services for U.S. markets moves offshore, we have less capability to boost our exports, and the trade deficit automatically widens. Economic catastrophe at some point in the future seems assured.
In the meantime, even a small country could pop the U.S. housing bubble by dumping dollar reserves—which is some fix for a superpower to be in, especially one that is disdainful of the opinion of the rest of the world. Comeuppance can’t be far away.
The hardest blow on Americans will fall when China does revalue its currency. When China’s currency ceases to be undervalued, American shoppers in Wal-Mart, where 70 percent of the goods on the shelves are made in China, will think they are in Neiman Marcus. Price increases will cause a dramatic reduction in American real incomes. If this coincides with rising interest rates and a setback in the housing market, American consumers will experience the hardest times since the Great Depression.
Paul Craig Roberts was Assistant Secretary of the Treasury under President Reagan.

Expert Currency Trader Warns About Coming U.S. Currency Collapse



The Following is from Jack Crooks, Currency Director and Editor of Crooks on Currencies and Crooks Currency Options, in an open letter to Sovereign Society members on April 12, 2007.
A Harsh Reality You Can't Afford to Ignore

No one with U.S. dollars in their pocket wants to think about what would happen if the almighty greenback lost its "prima Donna" status as the world's reserve currency.
After all, the idea of the U.S. dollar plummeting overnight is just too unsettling.
It's much easier to sit back, and think the Federal Reserve will somehow come to the rescue. We want to believe they'll continue to work their magic and keep the U.S. dollar floating right along on a delicate balance of ever rising debt and juggled interest rates.
Also, there seems to be the assumption that since the U.S. is top dog in the world that the U.S. dollar simply won't fall too far or too fast. It's the global reserve currency of choice, after all.
But the truth is there are things happening on the world stage right now that could yank the rug right out from the already lagging U.S. dollar. Any or all of these scenarios could play out faster than you think, and drive the greenback sharply lower. Let me tell you about just a couple of these...
First, Asian central banks hold US$3 trillion worth of foreign reserves. It's suspected that about 70% of those reserves are denominated in U.S. dollars. They accumulate all these bucks by shipping us mountains of cheap exports. Then they hang on to these greenbacks to keep their own currencies undervalued and stop inflation from creeping into their economies.
But lately, Asian central bankers have said that they're interested in diversifying their reserves into stronger currencies. And central bankers in Europe have already announced that they're doing the exact same thing. If this trend accelerates, and everyone dumps the U.S. dollar at once - that would be very bad news for the buck.
Second, most of the world's commodity trading is priced in U.S. dollars - including leading physical assets like oil and gold. But recently there's been a rumble of speculation that these and other commodities may trade in currencies other than the U.S. dollar.
If that happened, the U.S. would suddenly have to start paying a heck of a lot more for the commodities we use. Up until now, we've been able to simply print more dollars for anything we needed.
What if these scenarios play out? Your financial and economic security would be threatened. Think about it. Every investment you have, denominated in U.S. dollars, from your favorite U.S. based mutual funds to your stock and bond portfolio to your real estate holdings could plummet in value.
Learning from Other Countries' Mistakes
This has happened before. Countries like Germany and Mexico have lost almost everything when their currencies suddenly plummeted. When disaster struck their currencies, it thrust their economies right into a recession. People lost their jobs. They lost their portfolios when stock markets crashed. And their economies were thrust into devastating inflation - or in Germany's case - hyperinflation.
It's even happened in Asia. You may know that I like Asia these days, particularly their currencies. But less than a decade ago, Asian countries had their own currency crisis. Investors discovered Asia's economic prosperity was financed by incredible debt (sound familiar?).
Suddenly, foreign investors ran for the exits, and these Asian economies were left holding ridiculously overvalued currencies. That's when their currencies plummeted - practically overnight. The consequences were disastrous. Finance companies collapsed. Banks closed. Asian currencies lost half their value.
And now ten years later, Asian countries have clawed their way back onto the economic stage. In fact, they've made a miraculous comeback. But I doubt the U.S. could rebound as fast, if disaster struck the U.S. dollar.
Why This All Sounds Eerily Familiar
The scary part is the U.S. is being perhaps even more reckless with our currency. Right now, there are many factors just in the U.S. that make the U.S. economy erringly similar to economies in the past just before their currencies fell.
We also have massive trade, budget and national debts - in the billions. That means that we rely on countries like China to buy U.S. Treasuries to finance our debt. We're also constantly financing a war. We've also inflated our money supply over and over to finance various political ambitions. And our money supply isn't backed by anything tangible - except the confidence that the U.S. economy will continue to reign supreme on the economic stage.
But the rest of the world is already losing confidence in the U.S. dollar. You can see that in how the U.S. dollar has already lost its footing against stronger currencies over the last five years. The buck has dropped 33% against the Swiss franc, 39% against the pound and a whopping 57% against the euro.
How You Can Battle This Harsh Reality
Yes, no one likes to think about it. But the harsh reality is - the heyday for the U.S. dollar may have already past. And who knows what the future will bring?
There are ways to protect yourself and your family from a falling dollar.
The absolute best way to start is to "trade up" some of your U.S. dollars for better performing currencies - while those dollars in your pocket are still worth something.
JACK CROOKS, Currency Director

Time Will Run Back by Famed Economist Henry Hazlitt



If capitalism did not exist, it would be necessary to invent it — and its discovery would be rightly regarded as one of the great triumphs of the human mind. This is the theme of Time Will Run Back.
Time Will Run Back

By Henry Hazlitt

Posted on 3/21/2007
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[Henry Hazlitt was uniquely qualified to write the first and only novel in which the problem of economic calculation provides the central plot theme. He was literary editor of the NationTime Will Run Back — which has been out of print for a very long time but which is now available both online (in PDF)from our new print-on-demand store — is unique in other respects. Few people in the 1950s imagined that communism would fall of its own dead weight, but Hazlitt understood what others did not. He also saw that a mixed system would fail of its own internal contradictions. This book thus teaches economics in a special way that is accessible to people of all ages, but to teens in particular because the story is fictional. And yet it is not fictional: what Hazlitt forecasts in this book — the unraveling of a system — actually did take place. So his novel might be seen as a foreshadowing of events in Russia, China, and elsewhere. We hope you enjoy his introduction, which follows.] from 1930 to 1933 and a highly regarded critic. He also understood Mises's argument against socialism and how it went to the very core of the economic problem. and
I
If capitalism did not exist, it would be necessary to invent it — and its discovery would be rightly regarded as one of the great triumphs of the human mind. This is the theme of Time Will Run Back. But as "capitalism" is merely a name for freedom in the economic sphere, the theme of my novel might be stated more broadly: the will to freedom can never be permanently stamped out.
This book was first published in this country in 1951 under the title, The Great Idea. The British publishers, however, were not happy with the title. Of the several alternatives I submitted, they much preferred Time Will Run Back and it was published in England under that title in 1952.
I now prefer this myself, not only because of its Miltonic origin, but because by implication it challenges the present smugly fashionable assumption that every change means progress, and that whatever political or economic trend is latest in time must be best.
In addition to changing the title I have changed the ending. The original novel closed ironically; by that ending I meant to emphasize the insecurity of all human progress. But my ending unfortunately gave at least one or two reviewers the quite mistaken impression that I personally favored Wang's middle-of-the-road notions over Peter Uldanov's forthright libertarianism.
I have changed the fictional ending in the new version to obviate any such impression.
The idea of writing a novel on this theme came to me many years ago. It was touched off, as I recall, by several paragraphs in Ludwig von Mises's Socialism, which I reviewed for the New York Times (January 9, 1938). But more than a decade passed before I felt sufficient sense of urgency to put the idea into effect.
The form I chose for my work made it difficult to assign credit where credit was due. If it had been written as an economic treatise, it would doubtless have been peppered with footnotes.
Not only, however, would footnotes have been out of place in a novel, destroying whatever illusion I might otherwise have succeeded in creating, but by the premise of this particular novel all the economic and political writing of the past, except that of the Marxists, has been completely wiped out. My hero is supposed to perform the truly prodigious feat of recreating out of his own unaided head ideas that it has in fact taken generations of great economists to develop and refine. It would be fatuous to make excessive claims to originality in this field. I should like, therefore, to indicate here some of the principal writers to whom my own thought is indebted.
They include Böhm-Bawerk, John Bates Clark, Frank H. Knight, Ludwig von Mises, Brutzkus, Halm, Pareto, Barone, Jevons, Wicksteed, Carver, and Roepke. There are doubtless still further debts that slip my mind at the moment. Most readers will, of course, recognize the metaphor of "the invisible hand" as Adam Smith's. And some will recall that the aphorism, "Despotism may govern without faith, but liberty cannot," is de Tocqueville's.
"'Capitalism' is merely a name for freedom in the economic sphere."
So much for ideological credits. Now as to structural. Many readers will see, in Part One of my book, striking coincidences with George Orwell's Nineteen Eighty-Four.The Great Idea not until 1951. I did not read Orwell's book until after I had finished the first draft of my own. I was at first disturbed by the number of coincidences, but it then occurred to me that at least the broad outlines if not all the details of the imagined future life were the common property of more than one of the recent writers who have tried to imagine that life (Zamiatin in We and Aldous Huxley in Brave New World, These are, however, in fact coincidences. Orwell's book was published in 1949, for example).
These writers had not been plagiarizing from each other; but all of them had, so to speak, been plagiarizing from the actual nightmare created by Lenin, Hitler, and Stalin (and now prolonged by Communist regimes wherever they get into power).
All that the writer had done was to add a few logical extensions not yet generally foreseen.
While Orwell, moreover, portrayed with unsurpassable power the intellectual paralysis and spiritual depravity that a totalitarian regime imposed, he left the determining economic aspect virtually blank (except for the dreadful end-results for consumers). And his book closed on a note of utter despair. Time Will Run Back, with its promise of material progress and spiritual rebirth, is in a sense an answer to the black pessimism of Nineteen Eighty-Four.
Though my book begins at practically the same point as Orwell's, it ends at a diametrically opposite one. My book is also, in a sense, an answer to Bellamy's Looking Backward of 1888, because it turns the Bellamy situation upside down. But Time Will Run Back was not conceived as an answer either to Bellamy or to Orwell. It was written to state a positive theme of its own. Its fate must rest on the success with which it states that theme.
II
The question may arise in some readers' minds whether as a result of the passage of time in the fifteen years since my mock novel was originally published, parts of it may not have become out of date. But to ask this is to misconceive the nature and purpose of the book. It is true that the people in my story are forced to rely on radio and the airplane, and do not have television and intercontinental thermonuclear missiles. But a central theme of my book is that under complete world totalitarianism (in which there was no free area left from which the totalitarian area could appropriate the fruits of previous or current discovery and invention, or in which its own plans could no longer be parasitic on knowledge of prices and costs as determined by capitalistic free markets) the world would in the long run not only stop progressing but actually go backward technically as well as economically and morally — as the world went backward and remained backward for centuries after the collapse of Roman civilization.




If my book seems out of date in a few other respects it is, ironically, precisely because of the fulfillment of some of its predictions or apparent predictions. Thus the dictator in my story is named Stalenin (an obvious combination of Stalin and Lenin). He is incapacitated by a stroke, and later he is shot. By coincidence it happened that a bare two years after my book appeared Stalin was reported to have had a stroke. And it is still an unanswered question today, because of the mystery and delays surrounding the announcements of his illness and death, and the subsequent puzzling zigzags and reversals in attitudes towards him on the part of Khrushchev and his successors, whether or not he was actually assassinated.
But other events since the original appearance of The Great Idea were not coincidences. Thus my book points out that a centrally directed economy cannot solve the problem of economic calculation, and that without private property, free markets, and freedom of consumer choice, no organizational solution of this problem is possible. If all economic life is directed from a single center, solution of the problem of the exact amounts that should be produced of thousands of different commodities, and of the exact amount of capital goods, raw materials, transport, etc. needed to produce the optimum volume of goods in the proper proportion, and the solution of the problem of the coordination and synchronization of all this diverse production, becomes impossible.
No single person or board can possibly know what is going on everywhere at the same time. It cannot know what real costs are. It has no way of measuring the extent of waste. It has no real way of knowing how inefficient any particular plant is, or how inefficient the whole system is. It has no way of knowing just what goods consumers would want if they were produced and made available at their real costs.
So the system leads to wastes, stoppages, and breakdowns at innumerable points. And some of these become obvious even to the most casual observer. In the summer of 1961, for example, a party of American newspapermen made an 8,000-mile conducted tour of the Soviet Union. They told of visiting collective farms where seventeen men did the work of two; of seeing scores of buildings unfinished "for want of the proverbial nail"; of traveling in a land virtually without roads.
In the same year even Premier Khrushchev complained that as of January 1 there were many millions of square feet of completed factory space that could not be used because the machinery required for them just wasn't available, while at the same time in other parts of the country there were the equivalent of hundreds of millions of dollars worth of machinery of various kinds standing idle because the factories and mines for which this machine was designed were not yet ready.
At about the same time G.I. Voronov, a Communist party Presidium member, said:
"Who does not know that the national economy suffers great difficulties with the supply of metals, that the supply of pipes is inadequate, that insufficient supplies of new machinery and mineral fertilizers for the countryside are produced, that hundreds of thousands of motor vehicles stand idle without tires, and that the production of paper lags?" (See New York Times, Oct. 29, 1961.)
In 1964 Izvestia itself was complaining that the small town of Lide, close to the Polish border, had first been inundated with boots, and then with caramels — both products of state factories. Complaints by local shopkeepers that they were unable to sell all these goods were brushed aside on the ground that the factories' production schedules had to be kept.
Such examples could be cited endlessly, year by year, down to the month that I write this. They are all the result of centralized planning.
The most tragic results have been in agriculture. The outstanding example is the famine of 1921–22 when, directly as a result of collectivization, controls, and the ruthless requisitioning of grain and cattle, millions of peasants and city inhabitants died of disease and starvation. Revolts forced Lenin to adopt the "New Economic Policy." But once more in 1928 more "planning" and enforced collections of all the peasants' "surpluses" led to the famine of 1932–33, when more millions died from hunger and related diseases.
These conditions, in varying degree, come down to the present moment. In 1963 Russia again suffered a disastrous crop failure. And in 1965, this agrarian nation, one of whose chief economic problems in Tsarist days was how to dispose of its grain surplus, was once more forced to buy millions of tons of grains from the western capitalist world.
The industrial disorganization has been less spectacular, or better concealed — at least if we pass over that in the initial phase between 1918 and 1921. But in spite of extravagant claims of unparalleled "economic growth," Russia's problems of industrial production have been chronic. Since factory output goals are either laid down in weight or quota by the planners, a knitwear plant recently ordered to produce 80,000 caps and sweaters produced only caps, because they were smaller and cheaper to make.
"Time Will Run Back, with its promise of material progress and spiritual rebirth, is in a sense an answer to the black pessimism of Nineteen Eighty-Four."
A factory commanded to make lampshades made them all orange, because sticking to one color was quicker and less trouble. Because of the use of tonnage norms, machine builders used eight-inch plates when four-inch plates would easily have done the job. In a chandelier factory, in which the workers were paid bonuses based on the tonnage of chandeliers produced, the chandeliers grew heavier and heavier until they started pulling ceilings down.
The system is marked by conflicting orders and mountains of paperwork. In 1964 a Supreme Soviet Deputy cited the example of the Izhora factory, which received no fewer than 70 different official instructions from nine state committees, four economic councils and two state planning committees — all of them authorized to issue production orders to that plant. The plans for the Novo-Lipetsk steel mill took up 91 volumes comprising 70,000 pages, specifying precisely the location of each nail, lamp, and washstand.
Yet in 1964, in Russia's largest republic alone, deliveries of 257 factories had to be suspended because their goods were not bought. As a result of the consumer's stiffening standards and an increased inclination to complain, $3 billion worth of unsellable junk accumulated in Soviet inventories. (For the foregoing and other examples, see Time, Feb. 12, 1965.)
Such conditions have led to desperate remedial measures. In the last couple of years, not only from Russia but from the Communist satellite countries, we get reports of massive decentralization programs, of flirtations with market mechanisms, or more flexible pricing based on "actual costs of production" or even on "supply and demand." Most startling, we hear that "profits" is no longer a dirty word. The eminent Russian economist Liberman has even argued that profit be made the foremost economic test.
"The higher the profits," he has said, "the greater the incentive" to quality and efficiency. And equally if not more miraculous, the Marxian idea that interest represents mere exploitation is being quietly set aside, and in an effort to produce and consume in accordance with real costs, interest (usually at some conventional rate like 5 percent) is being charged not only on the use of government money by shops and factories, but against the construction costs of plants.
III
On the surface all this looks indeed revolutionary (or "counterrevolutionary"); and naturally I am tempted to hope that the Communist world is on the verge of imitating the optimistic prediction of my novel and rediscovering and adopting a complete capitalism. But several weighty considerations should warn us against setting our hopes too high, at least for the immediate future.
First, there is the historical record. This is not the first time that the Russian Communists have veered toward capitalism. In 1921, when mass starvation threatened Russia and revolt broke out, Lenin was forced to retreat into his "New Economic Policy", or NEP, which allowed the peasants to sell their surplus in the open market, made other concessions to private enterprise, and brought a general reversion to an economy based on money and partly on exchange. The NEP was actually far more "capitalistic," for the most part, than recent reforms. It lasted till 1927. Then a rigidly planned economy was re-imposed for almost forty years. But even within this period, before the recent dramatic change, there were violent zigs and zags of policy.
Khrushchev announced major reorganizations no fewer than six times in ten years, veering from decentralization back to recentralization in the vain hope of finding the magic balance.
He failed, as the present Russian imitation of market mechanisms is likely to fail, because the heart of capitalism is private property, particularly private property in the means of production.
"The heart of capitalism is private property, particularly private property in the means of production."
Without private property, "free" markets, "free" wages, "free" prices are meaningless concepts, and "profits" are artificial. If I am a commissar in charge of an automobile factory, and do not own the money I pay out, and you are a commissar in charge of a steel plant, and do not own the steel you sell or get the money you sell it for, then neither of us really cares about the price of steel except as a bookkeeping fiction. As an automobile commissar I will want the price of the cars I sell to be set high and the price of the steel I buy to be set low so that my own "profit" record will look good or my bonus will be fixed high. As a steel commissar you will want the price of your steel to be fixed high and your cost prices to be fixed low, for the same reason. But with all means of production owned by the state, how can there be anything but artificial competition determining these artificial prices in such "markets"?
In fact, the "price" system in the U.S.S.R. has always been chaotic. The bases on which prices are determined by the planners seem to be both arbitrary and haphazard. Some western experts have told us (e.g., in 1962) that there were no fewer than five different price levels or price-fixing systems in the Soviet Union, while others were putting the number at nine. But if the Soviet planners are forced to fix prices on some purely arbitrary basis, they cannot know what the real "profits" or losses are of any individual enterprise. Where there is no private ownership of the means of production there can be no true economic calculation.
It is no solution to say that prices can be "based on actual costs of production." This overlooks that costs of production are themselves prices — the prices of raw materials, the wages of labor, etc. It also overlooks that it is precisely the differences between prices and costs of production that are constantly, in a free market regime, redirecting and changing the balance of production as among thousands of different commodities and services. In industries where prices are well above marginal costs of production, there will be a great incentive to increase output, as well as increased means to do it. In industries where prices fall below marginal costs of production, output must shrink.
Everywhere supply will keep adjusting itself to demand. But in a system only half free — that is, in a system in which every factory was free to decide how much to produce of what, but in which the basic prices, wages, rents, and interest rates were fixed or guessed at by the sole ultimate owner and producer of the means of production, the state — a decentralized system could quickly become even more chaotic than a centralized one. If finished products M, N, O, P, etc. are made from raw materials A, B, C, D, etc. in various combinations and proportions, how can the individual producers of the raw materials know how much of each to produce, and at what rate, unless they know how much the producers of finished products plan to produce of the latter, how much raw materials they are going to need, and just when they are going to need them? And how can the individual producer of raw material A or of finished product M know how much of it to produce unless he knows how much of that raw material or finished product others in his line are planning to produce, as well as relatively how much ultimate consumers are going to want or demand?
In a communistic system, centralized or decentralized, there will always be unbalanced and unmatched production, shortages of this and unusable surpluses of that, duplications, time lags, inefficiency, and appalling waste.
It is only with private property in the means of production that the problem of production becomes solvable. It is only with private property in the means of production that free markets, with consumer freedom of choice and producer freedom of choice, become meaningful and workable. With a private price system and a private profit-seeking system, private actions and decisions determine prices, and prices determine new actions and decisions; and the problem of efficient, balanced, coordinated, and synchronized production of the goods and services that consumers really want is solved.

$25

"The will to freedom can never be permanently stamped out."
Yet it is precisely private property in the means of production that Communist governments cannot allow. They are aware of this, and that is why all hopes that the Russian Communists and their satellites are about to revert to capitalism are premature.
Only a few months ago the Soviet leader Kosygin told Lord Thomson, the British newspaper publisher: "We have never rejected the great role of profits as a mechanism in economic life…. [But] our underlying principle is inviolate. There are no means of production in private hands." (New York Herald-Tribune, Sept. 27, 1965.)
The Communist rulers cannot permit private ownership of the means of production not merely because this would mean the surrender of the central principle of their system, but because it would mean the restoration of individual liberty and the end of their despotic power. So I confess that the hope that some day an idealistic Peter Uldanov, miraculously finding himself at the pinnacle of power, will voluntarily restore the right of property, is a dream likely to be fulfilled only in fiction.
But it is certainly not altogether idle to hope that, with a growth of economic understanding among their own people, the hands of the Communist dictators may some day be forced, more violently than Lenin's were when the mutiny at Kronstadt, though suppressed, forced him to adopt the New Economic Policy.
Yet any attempt to decentralize planning while retaining centralized ownership or control is doomed to failure. As a recent writer explains it:
"If the state owns or controls the major resources of the economy, to allow for local autonomy in their utilization invites utter chaos. The Soviet planners, then, are caught on the horns of a serious dilemma. They find that their economy is becoming too complex and diverse to control minutely from above; yet they cannot really achieve the tremendous productiveness of a decentralized economy without relinquishing complete ownership or control of the nation's resources." (G. William Trivoli in National Review, March 22, 1966.)
Henry Hazlitt
March, 1966
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A Giant of Liberty

Henry Hazlitt (1894–1993) served as a founding board member of the Mises Institute. He was a libertarian philosopher, economist, and journalist for The Wall Street Journal, The New York Times, Newsweek, and The American Mercury, among other publications. He is best known for Economics in One Lesson

How China Can Economically Destroy the U.S.



In this important article currency expert Jack Crooks explains how the modern U.S.-China "MAD" policy can backfire on the U.S. - a theme that I explain in chapters 4-6 in my new book.
From the Sovereign Society Offshore A Letter, December 15, 2006.

U.S.-China Economics: It's MAD!
Today's comment is by Jack Crooks, our Currency Director and editor of Crooks on Currencies and The Money Trader.
Remember the acronym MAD, or "Mutually Assured Destruction?" This term was used during the Cold War period to describe the inevitable result if either the U.S. or the Soviet Union launched nukes at each another.
This policy of "mutually assured destruction" reminds me of today's sometimes rocky relationship between the U.S. and China, as both nations vie for economic advantage across the globe.
U.S. policymakers are growing increasingly impatient over the rising trade deficit with China. They want some action. That's why U.S. economic heavyweights broke bread with their counterparts in Bejing this week. The team of U.S. policymakers was led by Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, and U.S. Trade Representative Susan Schwab.
There is lot at stake. And you can bet both parties know that the threat of "MAD" underlines this important economic relationship. Both parties seem to be wielding this threat for bargaining power. A wrong move by either party could have a dramatic effect on all asset markets across the globe.
So What's All the Fuss About?
The fuss is about jobs and "fair trade." And both are intertwined with China's currency policy.
Many in the U.S., especially within the newly Democrat-controlled Congress, blame China for the loss of millions of U.S. manufacturing jobs and rising trade deficits.
Specifically, they say China's policy to suppress its currency, the yuan, places undue restrictions on foreign firms trying to do business in China. And they claim China's disregard for intellectual property rights makes China an unfair trading partner. These charges have lingered for some time, but China has done little to address the issues.
In the eyes of U.S. leaders, the latest trade deficit with China, (swelling to an all-term record of US$24.4 billion in October), just makes resolving these issues more urgent. Already 27 separate trade bills are floating around Washington, to target imported Chinese goods. Any one of these bills could be unleashed if China and U.S. economic officials can't find some way to get along.
Here is how Reuters has summed up the talks so far: "China and the United States agreed to broad steps on Friday to tackle global economic imbalances as two days of talks to ease trade and currency strains ended with good intentions but modest substance." I think the U.S. Congress wants substance.
The most obvious and substantial sign of progress would be China changing its currency policy. Instead of suppressing the value of the yuan, the U.S. is pushing China to let the currency float freely on the basis of supply and demand, like the rest of the world's major currencies.
China Fears a Higher Yuan Will Whack Exports
Many economists believe China's currency is 20-50% undervalued against the U.S. dollar. You can bet Chinese policymakers lay awake at night worrying about the Chinese yuan increasing in value by 50%. China's economic growth is primarily based on its ability to export cheap goods, not domestic consumption. Chinese policymakers are afraid any significant increase in the value of their currency will whack their exports and slow China's overall growth.
U.S. policymakers believe if China's currency were allowed to trade "where it should," they would finally even out the whopping trade imbalance between the two countries. So you can see, interests in the U.S. and China are diametrically opposed. This is why Treasury Secretary Paulson is urging China to move faster on improving its domestic consumer economy.
The U.S. wants China to rev up domestic consumption, so they can let their currency appreciate. And as a bonus for the U.S., increased Chinese domestic demand would increase U.S. exports to China.
Though China's policymakers agree they need to do more on domestic front, they argue that transitioning away from an export growth model will take time. They keep telling U.S. policymakers to be patient. But, as you could probably guess, U.S. policymakers already ran out of patience.
If the U.S. policymakers get their way, China could lose some of its best customers, including 300 million Americans who can't seem to get enough of China's quality goods at discount prices. Losing access to the U.S. consumer would hammer China's growth.
But of course China's policymakers have already launched a couple threats of their own. Recently China's central bank governor mentioned they are considering reallocating some of their estimated US$1 trillion in reserves away from the U.S. dollar. And 70% of those U.S. dollar reserves are held primarily in U.S. government and agency bonds.
The U.S. dollar tanked sharply on that rumor last week. And just imagine what would happen to the price of U.S. bonds if the Chinese really started dumping their reserves. It could get ugly! U.S. interest rates would soar in response. Soaring U.S. rates would in turn hammer U.S. economic growth. And just imagine what would happen to the U.S. corporate profit outlook if China were to retaliate on trade. The U.S. stock market could crash.
Let's hope that cool heads prevail, and no one gets MAD. But in the meantime, it makes a lot of sense to diversify outside the U.S. dollar just in case China does decide to dump the greenback.
JACK CROOKS, Currency Director,
The Sovereign Society

The Great Unraveling of the U.S. Economy by Steven S. Roach



Who is Steven S. Roach? He is chief economist and director of global economic analysis for Wall Street giant Morgan Stanley (www.wikipedia.org). In page 106 of my book I quote his prediction that the U.S. is facing economic Armageddon. Here is his latest installment.
The Great Unraveling
By Stephen S. Roach | from Beijing
March 16, 2007
From bubble to bubble – it’s a painfully familiar saga. First equities, now housing. First denial, then grudging acceptance. It’s the pattern and its repetitive character that is so striking. For the second time in seven years, asset-dependent America has gone to excess. And once again, twin bubbles in a particular asset class and the real economy are in the process of bursting – most likely with greater-than-expected consequences for the US economy, a US-centric global economy, and world financial markets.
Sub-prime is today’s dot-com – the pin that pricks a much larger bubble. Seven years ago, the optimists argued that equities as a broad asset class were in reasonably good shape – that any excesses were concentrated in about 350 of the so-called Internet pure-plays that collectively accounted for only about 6% of the total capitalization of the US equity market at year-end 1999. That view turned out to be dead wrong. The dot-com bubble burst, and over the next two and a half years, the much broader S&P 500 index fell by 49% while the asset-dependent US economy slipped into a mild recession, pulling the rest of the world down with it. Fast-forward seven years, and the actors have changed but the plot is strikingly similar. This time, it’s the US housing bubble that has burst, and the immediate repercussions have been concentrated in a relatively small segment of that market – sub-prime mortgage debt, which makes up around 10% of total securitized home debt outstanding. As was the case seven years ago, I suspect that a powerful dynamic has now been set in motion by a small mispriced portion of a major asset class that will have surprisingly broad macro consequences for the US economy as a whole.
Too much attention is being focused on the narrow story – the extent of any damage to housing and mortgage finance markets. There’s a much bigger story. Yes, the US housing market is currently in a serious recession – even the optimists concede that point. To me, the real debate is about “spillovers” – whether the housing downturn will spread to the rest of the economy. In my view, the lessons of the dot-com shakeout are key in this instance. Seven years ago, the spillover effects played out with a vengeance in the corporate sector, where the dot-com mania had prompted an unsustainable binge in capital spending and hiring. The unwinding of that binge triggered the recession of 2000-01. Today, the spillover effects are likely to be concentrated in the much large consumer sector. And the loss of that pillar of support is perfectly capable of triggering yet another post-bubble recession.
The spillover mechanism is hardly complex. Asset-dependent economies go to excess because they generate a burst of domestic demand that outstrips the underlying support of income generation. In the absence of rapid asset appreciation and the wealth effects they spawn, the demand overhang needs to be marked to market. The spillover is a principal characteristic of such a post-bubble shakeout. Interestingly enough, in the current situation, spillovers have first become evident in business capital spending, as underscored by outright declines in shipments of nondefense capital goods in four of the past five months. The combination of the housing recession and a sharp slowdown in capex has pushed overall GDP growth down to a 2% annual rate over the past three quarters ending 1Q07 – well below the 3.7% average gains over the previous three years. Yet this slowdown has occurred in the face of ongoing resilience in consumer demand; real personal consumption growth is still averaging 3.2% over the three quarters ending 1Q07 – only a modest downshift from the astonishing 3.7% growth trend of the past decade.
Therein lies the risk. To the extent the US economy is now flirting with “growth recession” territory – a sub-2% GDP trajectory – while consumer demand remains brisk, a pullback in personal consumption could well be the proverbial straw that breaks this camel’s back. The case for a consumer spillover is compelling, in my view. A chronic shortfall of labor income generation sets the stage – real private compensation remains over $400 billion below the trajectory of the typical business cycle expansion. At the same time, reflecting the asset-dependent mindset of the American consumer, debt and debt service obligations have surged to all-time highs whereas the income-based saving rate has dipped into negative territory for two years in a row – the first such occurrence since the early 1930s. Equity extraction from rapidly rising residential property values has squared this circle – more than tripling as a share of disposable personal income from 2.5% in 2002 to 8.5% at its peak in 2005. The bursting of the housing bubble has all but eliminated that important prop to US consumer demand. The equity-extraction effect is now going the other way – having already unwound one-third of the run-up of the past four years. In my view, that puts the income-short, saving-short, overly-indebted American consumer now very much at risk – bringing into play the biggest spillover of them all for an asset-dependent US economy. February’s surprisingly weak retail sales report – notwithstanding ever-present weather-related distortions – may well be a hint of what lies ahead.
It didn’t have to be this way. Were it not for a serious policy blunder by America’s central bank, I suspect the US economy could have been much more successful in avoiding the perils of a multi-bubble syndrome. Former Fed Chairman Alan Greenspan crossed the line, in my view, by encouraging reckless behavior in the midst of each of the last two asset bubbles. In early 2000, while NASDAQ was cresting toward 5000, he was unabashed in his enthusiastic endorsement of a once-in-a-generation increase in productivity growth that he argued justified seemingly lofty valuations of equity markets. This was tantamount to a green light for market speculators and legions of individual investors at just the point when the equity bubble was nearing its end. And then only four years later, he did it again – this time directing his counsel at the players of the property bubble. In early 2004, he urged homeowners to shift from fixed to floating rate mortgages, and in early 2005, he extolled the virtues of sub-prime borrowing – the extension of credit to unworthy borrowers. Far from the heartless central banker that is supposed to “take the punchbowl away just when the party is getting good,” Alan Greenspan turned into an unabashed cheerleader for the excesses of an increasingly asset-dependent US economy. I fear history will not judge the Maestro’s legacy kindly. And now he’s reinventing himself as a forecaster. Figure that!
Greenspan or not, downside risks are building in the US economy. The sub-prime carnage is getting all the headlines these days, but in the end, I suspect it will be only a footnote in yet another post-bubble shakeout. America got into this mess by first succumbing to the siren song of an equity bubble (see my 25 April 2005 dispatch, “Original Sin”). Fearful of a Japan-like outcome, the Federal Reserve was quick to ease aggressively in order to contain the downside. The excess liquidity that was then injected into the system after the bursting of the equity bubble set the markets up for a series of other bubbles – especially residential property, emerging markets, high-yield corporate credit, and mortgages. Meanwhile, the yen carry trade added high-octane fuel to the levered play in risky assets, and the income-based saving shortfall of America’s asset-dependent economy resulted in the mother of all current account deficits. No one in their right mind ever though this mess was sustainable – barring, of course, the fringe “new paradigmers” who always seem to show up at bubble time. It was just a question of when, and under what conditions, it would end.
Is the Great Unraveling finally at hand? It’s hard to tell. As bubble begets bubble, the asset-dependent character of the US economy has become more deeply entrenched. A similar self-reinforcing mechanism is at work in driving a still US-centric global economy. Lacking in autonomous support from private consumption, the rest of the world would be lost without the asset-dependent American consumer. All this takes us to a rather disturbing bi-modal endgame – the bursting of the proverbial Big Bubble that brings the whole house of cards down or the inflation of yet another bubble to buy more time.
The exit strategy is painfully simple: Ultimately, it is up to Ben Bernanke – and whether he has both the wisdom and the courage to break the daisy chain of the “Greenspan put.” If he doesn’t, I am convinced that this liquidity-driven era of excesses and imbalances will ultimately go down in history as the outgrowth of a huge failure for modern-day central banking. In the meantime, prepare for the downside – spillover risks are bound to intensify as yet another post-bubble shakeout unfolds.

New Century Financial in Bankruptcy



The second largest sub-prime lender in the U.S. is facing $8.4 billion in default. This is a mere fraction of the potential $225 billion in bad housing loans to sub-prime borrowers. The collapse of the U.S. housing market is courtesy of the Federal Reserve and its low-interest policy from 2000 to 2006. After every boom (easy credit) there is a bust.
US Mortgage Firm New Century Financial Closer to Collapse
www.belfasttelegraph.co.uk
Tuesday, March 13, 2007
By Nic Fildes
New Century Financial has edged closer to collapse after its creditors, including Barclays Bank, threatened to stop funding the company, the second largest sub-prime lender in the US.
Shares in New Century were suspended pending an announcement. The stock has already lost 89 per cent of its value this month and plunged a further 48 per cent in early trading.
The California-based New Century has been hit by increasing numbers of late payments from its customers as house prices have stopped rising while interest rates have increased. The US sub-prime lending sector, which focuses on home buyers with poor credit records, has been affected by soaring default rates.
The company's latest Securities and Exchange Commission filing shows that its cash reserves have fallen below $60m, putting it in breach of its banking covenants.
New Century's creditors, including Barclays, Bank of America, Goldman Sachs, Citigroup, Morgan Stanley and Credit Suisse, have written to the company to state that it is in breach of its borrowing arrangements.
New Century could be forced to repurchase around $8.4bn in loans if its creditors accelerate all of its repayment obligations. According to the filing, it has received two letters from Bank of America regarding $600m worth of debt while its dwindling cash pile has put it in breach of an agreement with Citigroup.
The sub-prime lender's future looks bleak and it could be forced to file for bankruptcy unless a last-ditch financing deal is agreed.
Last week, European banks scrambled to reassure investors over their exposure to the crisis at New Century. Barclays has provided a $1bn line of credit to the company but argued that its loan was "collateralised" against the homes of New Century's clients. It said it does not expect to incur any material losses on the loan.
HSBC has also been suffering as a result of its exposure to the US sub-prime lending sector. Last month, it was forced to issue its first profits warning in its 142-year history after a huge increase in bad loans at Household, now HSBC Finance, that was responsible for a $2bn surge in bad debts.
New Century's struggles are part of a wider meltdown among sub-prime lenders, which has seen the sector struggle. The contagion could spread to investors, such as pension funds, which bought securities backed by suspect home loans, analysts say.
Analysts at Lehman Brothers have warned that mortgage defaults in the US could total $225bn if the housing market remains flat for the next two years.

Three Phases of the Precious Metals Bull Market



As indicated in this article by Richard Russell this bull market will prove to be different than the 1970s because it is seen as a hedge against a fiat currencies - particularly the U.S. dollar.
Richard Russell on bull markets
Richard Russell has been editing his Dow Theory Letters since 1958 and brings great wisdom to the markets. Here are his thoughts on bull markets and the ongoing gold and silver bull market from his March 13, 2007 Remarks, which come with a subscription to Russell’s Dow Theory Letters, $250 a year.
Russell deals primarily with the stock market, but he became a gold bull in 2000, the timing of which illustrates Russell's insight into the precious metals markets. He was also a gold bull in 1970s. For more about Russell’s Dow Theory Letters, visit www.dowtheoryletters.com.
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There are four kinds of gold or non-gold people (1) They know nothing about gold and never even think to ask. (2) They know a little about gold, but can't afford to buy any. (3) They trade small amounts of gold, but as soon as gold moves up or down 5 dollars or more, they sell it or are stopped out. (4) the so-called "gold bugs," the small minority who understand gold and money and adhere to a policy of accumulating gold.
I'm in category number 4. But let me give you my reasons.
The great majority of investors don't understand bull markets or the concept of the primary trend. When the primary trend of an item turns up -- whether it be stocks, commodities, agriculturals, precious metals -- we call that a bull market. There are small, medium and large bull markets. Once the primary trend of a category turns bullish, there's no way of knowing beforehand, how big the coming bull market is fated to be -- nor exactly what path the bull market will take.
We do know that in major bull markets there are psychological or sentiment phases. The first phase of a bull market is the accumulation phase. This is the early phase where informed investors accumulate an item because they know the item is underpriced or that the item is underused or simply not understood.
The second phase of a bull market, usually the longest phase, sees the professionals, the funds, the big money, the smartest of the public, taking positions in the item. The second phase tends to be characterized by many reactions, corrections, adverse news events that cause the public to dump the item.
The third phase of a bull market is the speculative phase, Here we see rising volume, the wholesale entrance of the public, accompanied by news and endless hype by the Wall Street "experts." People who wouldn't touch the item during the first and second phases, are now enthusiastic buyers. The third phase sees systematic distribution by the early first phase buyers. Third phase buying can easily turn to hysteria and madness. Towards the end of the third phase, we see hints of the beginning of the next primary bear market.
Question -- Do all bull markets progress as described above?
Answer -- Almost all major bull markets do. It's a judgment as to whether an ongoing bull market is fated to become a major bull market or not. There's no definitive answer to that question.
Now I want to talk about the current bull market in gold. This is a bull market that began in August 1999 with gold priced at 252 an ounce. Gold is the most emotional of all items -- loved by much of mankind, hated by certain elements including governments and central banks. Because gold is real money, and because gold is collected, traded and accumulated by millions of people the world over, gold bull markets tend to be BIG bull markets.
The gold bull market that started in 1999 has already taken gold up 291% to a high of 734 recorded in May of 2006. But what's so interesting about the ongoing gold bull market is that neither the public nor the funds have entered the picture. In fact, most people really have no idea that gold is in a primary bull market, this despite that fact that since 1999 gold has consistently outperformed the Dow and the S&P.
I believe that the gold bull market is now in its very early second phase. Informed investors have already established healthy positions in gold. I think that a very minor sector of the investing public has now taken some kind of a position either in gold or gold stocks or a gold ETF or a gold fund. Nevertheless, it's still unusual today to find an individual who has any kind of a position in gold.
Gold has been in a corrective phase ever its May high of last year. This backing-and-filling has served to discourage many Johnny-come-lately and in-and-out traders. Meanwhile, gold remains in what I consider its "bargain phase" below 734. But what about the future?
This is important. Almost all BIG bull markets (and I believe gold is in one) ultimately move into a third speculative phase. I believe this phase lies ahead for gold, maybe a year or so, maybe three, four or five years out. It doesn't matter -- in my opinion, the longer the time elapsed prior to the entrance of the third phase, the bigger the third phase for gold is fated to be. But before entering the third phase, we have to complete the second phase. The second phase, from the looks of it, may has quite a while to go before it is completed. Question -- how many of your friends own any gold?
My thinking is that when gold finally moves into its third phase, we may see one of the most speculative third phases in history. I believe we will see gold in the thousands of dollars. I believe we will see one of the most emotional bull market third phases in history. People will look back on the year 2007 and wonder what the world was thinking about with gold selling for $650 US dollars, dollars that were created out of thin air, fiat dollars which could be created by central banks in any quantity in at any time.
At any rate, that's the way I see this sluggish, unexciting, slowly-moving gold bull market here in 2007. I lived through and profited during the gold bull market of the 1970's. That bull market was based on inflation fears. This bull market when it moves into its third phase will be based on fear of the viability of the dollar and all fiat money. This bull market is fated to be much bigger than the bull market of the 1970's.

The Technical Picture for Gold March 14, 2007



The long-term forecast for gold remains bright during the current consolidation phase.
Gold Forecaster - Global Watch - 14th March 2007
- Below is a snippet from the latest weekly issue from www.GoldForecaster.com | www.SilverForecaster.com

The Technical Picture of the Gold Price:
The Gold Bullion Price expressed below is the price defining those of the Futures / Options / and Exchange Traded Funds, representing a portion of an ounce of gold. The $ price of gold is the one all market operators relate to, due to the $’s position as the present global Reserve Currency. Each Producer receives his income from gold in his local currency only as the host government of the mines exchange the income for local currency. Likewise Indian, European, et al, buyers of gold use their own local currencies when buying gold. Gold Forecaster, tracks the gold price in the different currencies.

U.S.DollarGold Price

The Long-Term Technical Picture of Gold: Looking to Target $730+ in 2006


The long-term prognosis remains bright. Gold exceeded $675 resistance and moved to nearly $700 before making a sizeable fall with the general markets recently. With gold exceeding some key technical resistance before the correction, it has moved into a position so as to be ready to move much higher once this consolidation is over. This correction only put a short-term dent on the move up, allowing those to still enter below the $650 gold price before the market makes a move to and past the prior $730 record highs.

Terrific support is seen in the low to $600’s, the market is making higher highs and higher lows since the lows around $250. The next major upside objectives remain $730, then $850 followed by $1,000.

As the market presents this pullback to us, continue to view it is an opportunity. The weekly charts continue to project extreme bullishness and this pullback is a healthy period of consolidation before the next objectives higher!

The Short-Term Technical Picture of Gold: Consolidation



With the breakout past $676 to $692 and the violent fall back to $634, we received the expected bounce. We need to go through a period of consolidation until a firm foundation is made for the move up, drifting higher before we can see a resumption of the rally to $730. $655-660 remains a good area of resistance; a close above this is needed to retarget $675/$676 then $690-700. For now, good support is seen below and any moves below $650 appear to be quite a good risk/reward short-term play.


The U.S. is Insolvent



Comptroller of the U.S. government (GAO) is sounding the alarm that we are facing fiscal bankruptcy. Is anyone listening? Not.
The United States is Insolvent
Chris Martenson
Sunday, December 17th, 2006
Prepare to be shocked.
The US is insolvent. There is simply no way for our national bills to be paid under current levels of taxation and promised benefits. Our combined federal deficits now total more than 400% of GDP.
That is the conclusion of a recent Treasury/OMB report entitled Financial Report of the United States Government that was quietly slipped out on a Friday (12/15/06), deep in the holiday season, with little fanfare. Sometimes I wonder why the Treasury Department doesn't just pay somebody to come in at 4:30 am Christmas morning to release the report. Additionally, I've yet to read a single account of this report in any of the major news media outlets but that is another matter.
But, hey, I understand. A report is this bad requires all the muffling it can get.
In his accompanying statement to the report, David Walker, Comptroller of the US, warmed up his audience by stating that the GAO had found so many significant material deficiencies in the government's accounting systems that the GAO was "unable to express an opinion" on the financial statements. Ha ha! He really knows how to play an audience!
In accounting parlance, that's the same as telling your spouse "Our checkbook is such an out of control mess I can't tell if we're broke or rich!" The next time you have an unexplained rash of checking withdrawals from that fishing trip with your buddies, just tell her that you are "unable to express an opinion" and see how that flies. Let us know how it goes!
Then Walker went on to deliver the really bad news:
Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government's total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation's total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.
As this long-term fiscal imbalance continues to grow, the retirement of the "baby boom" generation is closer to becoming a reality with the first wave of boomers eligible for early retirement under Social Security in 2008.
Given these and other factors, it seems clear that the nation's current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation's large and growing long-term fiscal imbalance.
Wow! I know David Walker's been vocal lately about his concern over our economic future but it seems almost impossible to ignore the implications of his statements above. From $20 trillion in fiscal exposures in 2000 to over $50 trillion in only six years? What shall we do for an encore... shoot for $100 trillion?
And how about the fact that boomers begin retiring in 2008... that always seemed to be waaaay out in the future. However, beginning January 1st we can start referring to 2008 as 'next year' instead of 'some point in the future too distant to get concerned about now'. Our economic problems need to be classified as growing, imminent, and unsustainable.
And let me clarify something. The $53 trillion shortfall is expressed as a 'net present value'. That means that in order to make the shortfall disappear we'd have to have that amount of cash in the bank – today - earning interest (the GAO uses 5.7% & 5.8% as the assumed long-term rate of return). I'll say it again - $53 trillion, in the bank, today. Heck, I don't even know how much a trillion is let alone fifty-three of 'em.
And next year we'd have to put even more into this mythical interest bearing account simply because we didn't collect any interest on money we didn't put in the bank account this year. For the record, 5.7% on $53 trillion is a bit more than $3 trillion dollars so you can see how the math is working against us here. This means the deficit will swell by at least another $3 trillion plus whatever other shortfalls the government can rack up in the meantime. So call it another $4 trillion as an early guess for next year.
Given how studiously our nation is avoiding this topic both in the major media outlets and during our last election cycle, I sometimes feel as if I live in a small mountain town that has decided to ignore an avalanche that has already let loose above in favor of holding the annual kindergarten ski sale.
The Treasury department soft-pedaled the whole unsustainable gigantic deficit thingy in last year's report but they have taken a quite different approach this year. From page 10 of the report:
The net social insurance responsibilities scheduled benefits in excess of estimated revenues) indicate that those programs are on an unsustainable fiscal path and difficult choices will be necessary in order to address their large and growing long-term fiscal imbalance.
Delay is costly and choices will be more difficult as the retirement of the 'baby boom' gets closer to becoming a reality with the first wave of boomers eligible for retirement under Social Security in 2008.
I don't know how that could be any clearer. The US Treasury department has issued a public report warning that we are on an unsustainable path and that we face difficult choices that will only become more costly the longer we delay.
Perhaps the reason US bonds and the dollar have held up so well is that we are far from alone in our predicament. In a recent article detailing why the UK Pound Sterling may fall, we read this dreadful evidence:
Officially, [UK] public sector net debt stands at £486.7bn. That's equal to US$953.9bn and represents a little under 38% of annual GDP. Add the state's "off balance sheet" debt, however – including its pension promises to state-paid employees – and the total shoots nearly three times higher. Research by the Centre for Policy Studies in London says it would put UK government deficits at a staggering 103% of GDP.
If we perform the same calculations for the US, however, we find that the official debt stands at $8.507 trillion or 65% of (nominal) GDP but when we add in our "off balance sheet" items the national debt stands at $53 trillion or 403% of GDP.
Now that's horrifying. Staggering. Whatever you wish to call it. More than four hundred percent of GDP(!). And that's just at the federal level. We could easily make this story a bit more ominous by including state, municipal and corporate shortfalls. But let's not do that.
Here's what the federal shortfall means in the simplest terms.
1) There is no way to 'grow out of this problem'. What really jumps out is that the US financial position has deteriorated by over $22 trillion in only 4 years and $4.5 trillion in the last 12 months (see table below, from page 10 of the report). The problem did not 'get better' as a result of the excellent economic growth over the past 3 years but rather got worse and is apparently accelerating to the downside.

Any economic weakness will only exacerbate the problem. You should be aware that the budgetary assumptions of the US government are for greater than 5% nominal GDP growth through at least 2011. In other words, because no economic weakness is included in any of the deficit projections presented, $53 trillion could be on the low side. Further, none of the long-term costs associated with the Iraq and Afghanistan wars are factored in any of the numbers presented (thought to be upwards of $2 trillion more).
2) The future will be defined by lowered standards of living. As Lawrence Kotlikoff pointed out in his paper titled "Is the US Bankrupt?" posted to the St. Louis Federal Reserve website, the insolvency of the US will minimally require some combination of lowered entitlement payouts and higher taxes. Both of those represent less money in the taxpayer's pockets and, last time I checked, less money meant a lower standard of living.
3) Every government facing this position has opted to "print its way out of trouble". That's an historical fact and our country shows no indications, unfortunately, of possessing the unique brand of political courage required to take a different route. In the simplest terms this means you & I will face a future of uncomfortably high inflation, possibly hyperinflation if the US dollar loses its reserve currency status somewhere along the way.
Of course, it is impossible to print our way out of this particular pickle because printing money is inflationary and therefore a 'hidden tax' on everyone. Consider, what's the difference between having half of your money directly taken (taxed) by the government and having half of its value disappear due to inflation? Nothing. Except that the former is political suicide while the latter is conveniently never discussed by the US financial mainstream press (for some reason) and therefore goes undetected by a majority of people as the thoroughly predictable outcome of deficit spending. All printing can realistically accomplish is the preservation of some DC jobs and the decimation of the middle and lower classes.
In summary, I am wondering how long we can pretend this problem does not exist. How long can we continue to buy stocks and flip houses, forget to save, pile up debt, import Chinese made goods, and export debt? Are these useful activities to perform while there's an economic avalanche bearing down upon us?
Unfortunately, I am not smart enough to know the answer. I only know that hoping a significant and mounting problem will go away is not a winning strategy.
I know that we, as a nation, owe it to ourselves to have the hard conversation about our financial future sooner rather than later. And I suspect that conversation will have to begin right here, between you and me because I cannot detect even the faintest glimmer that our current crop of leaders can distinguish between urgent and expedient.
What we need is a good, old-fashioned grassroots campaign.
In the meantime, I simply do not know of any way to fully protect oneself against the economic ravages resulting from poorly managed monetary and fiscal institutions. For what it's worth, I am heavily invested in gold and silver and will remain that way until the aforementioned institutions choose to confront "what is" rather than "what's expedient". This could be a very long-term investment.
Are you shocked?
All the best.
Chris Martenson

Richard Russell's Thoughts on Gold & Silver



Legendary investor/forecaster Richard Russell provides his recent comments about the yellow metal and the poor man's gold - silver.
Richard Russell's thoughts on Gold & Silver
Today we email Richard Russell's thoughts on gold and silver, taken from his February 1, 2007 Remarks, which come with a subscription to Russell’s Dow Theory Letters, $250 a year.
Russell deals primarily with the stock market, but he became a gold bull in 2000, the timing of which illustrates Russell's insight into the precious metals markets. He was also a gold bull in 1970s. For more about Russell’s Dow Theory Letters, visit www.dowtheoryletters.com.
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February 1, 2007 -- Volatility in almost every area of the markets remains low, yet I feel an undertone of excitement. The excitement comes from the extremes that the world's markets have reached. China's stock market is rocketing higher as are most of the markets of Asia. Hong Kong and Singapore are "to the moon, Alice."
Something is happening, I can feel it. The world of economics and financials is shaking. I can sense the tremors. And I can sense the "excitement vibrations" particularly in the universe of precious metals -- gold, silver, platinum.
The following is mainly for new subscribers, but for you veteran subscribers, I think you'll find today's site of interest. Below we see a weekly chart of the Dow, and what is so interesting is that over the last nine weeks there has been so little actual movement in the Dow. What's going on? Too early to tell, but one thing is clear -- so far, there's very little "give" in the market. Will the Dow blow out of this tight structure, or will this strange action continue?
Money is sloshing around the planet at a frantic rate. Where's it coming from? Is it the central banks? Is it mainly Japan, which is still literally "giving money away"? Is it a case of extreme credit creation? Could it be the derivatives? Is it all of these? Is the fiat money system simply out of control? Questions, questions, and who's to answer?

In the meantime, the action of real, intrinsic money has become increasingly exciting. Below we see a P&F chart of GLD, an ETF proxy for gold. We see the large accumulation pattern that has formed since the May 2006 top. Now note those three Xs or tops which have appeared a the 64 level. Yesterday GLD closed at 64.83, just 17 cents below 65. If GLD hits the 65 box, this would be an important breakout for gold. It would also represent an important "buy signal." Note -- After I wrote this, GLD today did rally to fill the 65 box. The P&F "count" is now 70 or 700 for gold.

None of this action has been lost on silver. The P&F chart below shows SLV, the silver trust, which has also built a powerful base. Silver turned near-term bullish when the latest vertical row of Xs bettered the preceding row of Xs at the 132 box. A second and more powerful bullish signal will come if SLV can rally to the 142 box. That would put silver in line to attack its high at the 152 box.

I see both gold and silver as "buys" here. If you already own both, this is a good time to add to your holdings.
The chart below tracks the ratio of silver to gold. Gold outperformed silver all during 2004 and most of 2005. But in October of 2005 the situation changed. Since October, 2005, silver has been stronger than gold. How long this new trend will last, obviously, no one knows. But it does certainly heighten the attractiveness of silver.

What about gold stocks? If you don't own any gold shares, here's my advice. Below we see a three-year chart of GDX, which is an Exchange Traded Fund, holding a large list of both blue chip plus speculative gold shares. I like GDX, and I have a position in GDX. Currently, GDX is in a massive triangle pattern. In other words, it's still in a consolidation formation. I'd jump the gun and buy GDX here, and add to my position on an upside breakout of the triangle at a price of roughly 41.50.
As subscribers know, holding the actual precious metals is the safest position, but the leverage is in owning the stocks. If you must make a choice between the metals and the stocks, I would pick the metals. But if you are able, I would own both.

Question -- Russell, are you favoring the world of precious metals over common stocks at this time?
Answer -- Yes. In my opinion, stocks are "over-owned" and "over-loved" at this time. Conversely, gold and silver are under-owned and under-valued at this time. As a percentage of the holding in the portfolios of the mutual funds and hedge funds, the precious metals and gold and silver stocks don't even exist. This, gold and silver are under-owned as well.
As of today's close, one share of the Dow will buy 19.12 ounces of gold. That's down from a ratio of 43.8 set in July of 1999 -- a decline of 56%. As this ratio declines, I believe it will draw increasing attention to gold. I expect this ratio to sink to 5 or less in the years ahead. In other words, real intrinsic money, gold, is slowly gaining strength compared with financials, which are valued in terms of fiat money.

The Gold Price-Fixing Conspiracy



Is there a long-term conspiracy to fix the price of gold by the central banks of the world? Go to www.goldrush21.com for the full story.
The Gold Price-Fixing Conspiracy
By Doug Hornig
25 Jan 2007 at 01:49 PM EST
STOWE, Vt. -- For many years now, a number of people in the financial arena have been alleging that there is an active conspiracy to suppress the price of gold. Some see it as a sinister backroom affair. Others claim that it’s just the way the world works, and that it happens right out in the open, if only you know where to look.
Among the latter is the Gold Anti-Trust Action Committee (GATA), the source of much of the material that has been written on the subject in recent years. In order to get their take, we interviewed Chris Powell, co-founder and secretary/treasurer of GATA.
GATA’s interest, Chris said, is in “public policy with regard to the rigging - or ‘regulation,’ if you prefer to be polite - of the currency markets, and specifically gold, by the central banks.
“And we don’t have to speculate on what they’re doing, because they’ve confessed in several ways. Of course, it’s not like they’ve gone out of their way to let people know what they’re up to. They don’t go around to the major news organizations and ask them to understand it. But if you look reasonably carefully, you can find these confessions in the public record in various places.”
We asked Chris to define specifically who they are.
“The central banks and their agents, the bullion banks,” he replied. “The central banks include the ECB [European Central Bank], as well as those of virtually all the European countries, including Britain, along with the Federal Reserve and Treasury Department in this country. Any of the big Western holders of gold. All of whom communicate directly with each other and also through the BIS, the Bank for International Settlements.
The world of international money movement can sometimes be confusing, even for those of us who follow it on a regular basis, so we wondered if the central banks are bullion banks, as well. Chris notes that they can be, but the definition is broader than that.
“A bullion bank is any investment house that deals in the gold market, buys or sells, borrows or lends gold. It need not be a ‘bank’ per se. It could be a big brokerage house like Goldman Sachs.”
That addressed who might be manipulating the market. But it raised more questions than it answered: What are they doing? How are they doing it? And why do they bother? Chris took the first one first.
“There’s a general currency market regulation scheme among the central banks, coordinated to some extent by the BIS, in which all the central banks are represented. They’ve pretty much acknowledged this.
“I first got onto this around 1998, when I began reading the writings of Bill Murphy [a futures trader and the co-founder of GATA]. He was ranting about what he saw as collusion to restrain the gold and silver price, which always seemed to involve the same suspects, Goldman Sachs and Morgan Chase and Citibank and institutions like that. After he went on like this for a few months, I emailed him saying there seemed to be a lot of circumstantial evidence supporting what he was saying, but if what he was saying was true, it would be against U.S. anti-trust law, against the Sherman Act and the Clayton Act and various others.
“Those laws prohibit any collusion to interfere with the free market price of any good. Which is exactly what the banks are doing with regard to gold.”
Chris and Bill created GATA in order to try to raise public awareness of what was happening and, if they could, to prod government regulators into doing something about it. A tough job, considering that a major government agency, the Treasury Department, was up to its eyeballs in the whole thing.
As the two men got to work, and began posting on the Internet, others who had been looking into the matter surfaced and contributed their own research and evidence to GATA.
“It’s embarrassing to admit,” Chris said, “that it took us a few years to figure out that the bullion banks are just fronting for the central banks, providing cover for them in the gold market. What we were complaining about was indeed happening, but it wasn’t an ordinary anti-trust violation, it was simply the cover being lent by nominally private entities to international central bank and treasury department policies.” That is, the central banks decide what they wish the gold price to be, the bullion banks carry out those wishes.
GATA believes that the cover under which central banks have been acting has now been blown so totally that only the willfully ignorant can fail to see it. And they point to the public record to bolster their claim.
For instance, there were a few key words uttered by former Fed Chairman Alan Greenspan when he appeared before Congress in July of 1998. Greenspan was testifying as to why the Commodity Futures Trading Commission (CFTC) should not concern itself with regulation of derivatives traded in the over-the-counter market.
Greenspan argued that, “There is no reason to believe either equity swaps or credit derivatives can influence the price of the underlying assets any more than conventional securities trading does.”
One might think the chairman guilty of a surprising naïveté, or perhaps something a bit more sinister, but that’s a topic for another day. The relevance here is that gold, in addition to being a fundamental currency, is also a commodity, and as such the CFTC is responsible for oversight of its market.
Greenspan waved off the necessity for the CFTC to regulate gold derivatives, telling Congress to fear not, that the “central banks stand ready to lease gold in increasing quantities should the price rise.”
Oops. Bet he wishes he hadn’t let that slip. As Chris points out, “Greenspan was telling Congress that the purpose of gold leasing was not what the central banks had been telling the world - to earn a little money on a dead asset. The real purpose of gold leasing was to suppress the gold price. His remarks are still posted on the Federal Reserve’s Internet site.” [they are - we checked]
Other confirmations of the central bank price rigging scheme include a rather blatant admission from William R. White, head of the Monetary and Economic Department of the BIS. In late June of 2005, White delivered the opening remarks to the Fourth Annual BIS Conference on the “Past and Future of Central Bank Cooperation,” an elite gathering of “central bankers and academics.” Among the latter were “economists and economic historians,” as well as, for the first time, “political scientists interested in political and other processes, and the development of institutions to support such processes.”
White’s speech enumerated five “intermediate objectives of central bank cooperation.” The fifth, and last, of these was “the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.” [emphasis added]
Useful to whom? Well, probably not to the average investor.
Then there is the Washington Agreement - signed in September of 1999 by representatives of the ECB and the central banks of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, and England - which spelled out how the banks would cooperate in the regulation of the gold market. (The U.S., while not a signatory, hosted the announcement of the agreement, and may be assumed to be supportive of it, if not a direct participant.) It placed a limit on how much they could collectively sell in any given year.
The alleged reason for the Washington Agreement was to control the amount of gold being sold by central banks, in order to keep the price high and protect the value of those banks’ holdings. That makes sense. It would, additionally, serve as a self-checking mechanism for the signatories, should any of them be tempted to sell off too much of their reserves.
But Chris isn’t buying.
“I think the reasons they gave were very disingenuous,” he said, “and in fact the opposite of what they were in there for. They said they were going to regulate the gold market by coordinating their sales and leasing in order to support the price. I would argue that they were in there to control the price and see that it didn’t get out of hand, and to protect their agents, the bullion banks, and the short positions the bullion banks had undertaken in gold at the behest of the central banks.”
In other words, to keep the gold price lower than it should be.
Chris sees the agreement as a smokescreen, a way of deceiving all but the insiders as to what’s actually going on. It allows the central banks to say that they’re taking the initiative to limit gold sales, which is true of physical gold. But while they do that with one hand, with the other they ramp up the action in the derivatives markets - forward sales, options, swaps and shorts - thereby maintaining the artificially low price of gold.
That argument is bolstered by BIS statistics showing that gold derivative transactions ballooned from $234 to $354 billion, an all-time high, in the first six months of 2006. Conversely, though, it has been a very uneven progression. For all of 2005, derivatives activity actually fell. So a firm conclusion is difficult to draw.
Nevertheless, the argument that the central banks have worked hard to suppress gold has merit. To understand why the banks would do that, rather than acting in what on the surface would appear to be their own best interests, one has to understand what was going on behind the scenes during gold’s long bear market.
Chris explains: “I’m convinced that the gold price suppression scheme wasn’t really aimed at gold itself. Gold was the tail on the dog. It was aimed at boosting the government bond market, keeping interest rates down and making the dollar look strong.”
In order to accomplish that, the central banks had to give bullion banks some incentive to cooperate. Which they did.
“By the bullion banks shorting gold,” Chris said, “they deceived the world about the level of inflation and money supply growth, and basically they shorted gold to buy U.S. government bonds and collect the difference. If you’ve been assured that the gold price is going down, you short the metal and use the proceeds to buy government bonds. You’re getting 5% on government bonds and the gold price is going down 5% a year, enabling you to close the short profitably, so you have a risk-free trade. You’re getting 10%, as long as the central banks are willing to back you with more gold sales to keep the gold price going down. And I think everybody was happy with that. Financial houses, recruited as the banks’ agents, were happy with their easy profits. The Treasury Department was happy because it boosted bond prices and kept interest rates down. And the whole world was deceived about the vast growth that was going on in the money supply. It worked for a while. Until they started worrying that they were running out of gold reserves.”
Are they? we asked.
“That’s the zillion-dollar question,” Chris said. “The trouble is, Fort Knox hasn’t been audited since the Eisenhower Administration. Now, the central banks claim to have more than thirty thousand tons of gold in their vaults, but our research has found a lot of double counting, and in fact the IMF issued its own paper some months ago admitting that its rules were allowing the double counting of gold by member banks.”
By double counting, we assumed he meant that they’re counting both physical and leased gold. That’s correct, he said, and jokes that “the actual disposition of Western central bank gold reserves is a more closely guarded secret than the plans for the construction of nuclear weapons, which are posted on the Internet today. You’ll never find out exactly where all the gold is and who really owns it.”
The question of ownership is an important one, and it really muddies the waters. Who owns what, and where, is complicated by the use of gold swaps. We asked Chris to explain what a gold swap is.
“Basically an exchange. Say the Bundesbank and the U.S. Treasury Department get on the phone and Treasury says to the Bundesbank, ‘hey, the gold price is getting a little high, we’d like to sell twenty tons over the next month to tamp it down, or at least lease twenty tons, could you do it from over there to keep our fingerprints off it?’ In return, they say, ‘we’ll give you title to twenty tons in the depository at West Point.’ The Bundesbank says, ‘no problem.’ They dispose of twenty tons in Europe through the London Bullion Market Association, and they get a note from the Treasury Department saying ‘ok, you now have title to these bars in the vault at West Point.’ And hopefully for the sake of the Bundesbank, they’re numbered bars and they can come visit them every once in a while.”
We had to say that it all sounded very convoluted. It must be difficult to coordinate.
"Not really," Chris said. "The central banks are constantly talking to each other and they're all members of the BIS, which compiles extensive data on gold reserves, as well as derivatives and leasing.
“They need to talk, because they have to know whose gold is going out into the futures pit today. And most Western central bank gold, or a lot of it anyway, is held in trust by the U.S., whether it’s in Fort Knox or the basement of the Treasury Building in New York, or in the vault up in West Point.
“The West Point gold, by the way, was quietly reclassified a couple of years ago from ‘gold bullion reserve’ to ‘custodial gold bullion.’ No reason given by the Mint, no indication of who we were acting as custodian for. Then in July of 2001, the Mint redesignated 94% of the U.S. gold reserve as ‘deep storage.’ Go figure.”
Thinking about all this, it seems to us that the Treasury Department, the Fed, and the European central banks were engaging in some mighty risky behavior. Chris agrees and says that, in fact, the house of cards almost came tumbling down when gold spiked in late 1999, in the aftermath of the Washington Agreement, and created a short squeeze.
With the Long Term Capital Management meltdown fresh in people’s memories (it had happened only a year earlier), the central banks feared that the gold squeeze could be even worse, taking down several major trading houses and possibly setting a whole row of dominoes falling.
In the words of former World Bank consultant Frank Veneroso, it was “an explosive gold derivatives crisis” and “the official sector intervened to prevent [it].”
The intervention worked. Gold retreated back under $300 and stayed there for two years. Traders were able to unwind their short positions without massive losses. Since then, of course, steadily rising demand has driven the gold price ever higher. Ongoing market rigging has been unable to suppress it, but has served to prevent the metal from finding its true equilibrium point, in Chris’ opinion. He believes that a day of reckoning will come. And what will that look like?
“Well, I don’t want to make any hard predictions about what will happen, or when,” he said. “But what I think is that we’re going to wake up someday and find out that the Western central banks have met - along with, maybe, some of the Asian central banks - and there are going to be new currency arrangements. Maybe in the name of helping the poor countries, the central banks are going to be buying gold at $1,500 an ounce or something like that. It’ll probably happen overnight, because I don’t think the central banks can withstand a steady escape from the paper currencies into the monetary metals. If they do it overnight, everybody’s locked into the fiat system, there’s no getting out. Either you’ve got your gold and silver or you don’t, and there’s no incentive to get out of the whole central bank system.”
That sounded to us like a sudden and massive devaluation of the buck.
“Yeah,” Chris said, “I tend to expect that. In fact, that’s what the whole Plaza Agreement was about, back in the ‘80s under Reagan. It was a devaluation of the dollar. They don’t tell you these things are going to happen, they tell you they’ve already happened.”
Since up to that point, we’d been talking about the central banks and the executive branch of the federal government, we asked if Congress knows about all this, too.
“The leadership in Congress does,” Chris said. “We told them. A friend of a friend got GATA a private meeting with Dennis Hastert, speaker of the House. The GATA delegation met with Speaker Hastert in his office at the Capitol on May 10, 2000 and we laid it all out for him. Also for Spencer Bachus, the Alabama Congressman who chaired the subcommittee with jurisdiction over gold and silver. Not that we really needed to. A couple of months later, I was able to deduce that we’d been given that meeting not because the speaker wanted to hear what we had to say, but rather wanted to know how much of this was leaking out, how much was known, how much of the whole thing was compromised. I can’t explain exactly how I know that, because it would put my source at risk, but trust me, I do.
“Look, right now the Comptroller General of the U.S. is going around saying that we’re bankrupt and we’ve got to do something about it immediately. So everyone in government knows what’s happening. As I said earlier, my request to the world is not to look at GATA as some conspiracy nuts. We just want to point out the public record and ask people to pursue it and draw their conclusions. We’re not issuing wild charges or anything. We’re just trying to call attention to the admissions that have been made. And to get people to look at those admissions in a new light. Or in any light at all, as far as I’m concerned.”
Forewarned is forearmed. In Chris’ words, either you’ve got your gold and silver or you don’t.

Collapse of the Housing Market Due to Federal Reserve Policy



The implosion of the credit derivatives market.
Bernanke the Dove
By Axel Merk
21 Feb 2007 at 02:06 PM GMT-05:00
PALO ALTO, Calif. (ResourceInvestor.com) -- In his recent testimony to Congress, Federal Reserve (Fed) Chairman Ben Bernanke painted a rosy picture of the U.S. economy. If the Fed were satisfied with the economy, it could afford to be blunt about challenges ahead; instead, the Fed is working very hard to appease the markets. What is Bernanke worried about? Why is he so dovish?
Our economy is hooked on access to easy money. Until about a year ago, consumers were able to print their own money by extracting equity out of their homes. Since then, record low volatility across most asset classes has encouraged speculators to increase the leverage in their bets on investments; increasing leverage, directly or through derivatives, increases money supply. As a result of these forces, control of money supply has shifted from the Fed to the marketplace.
There have been ominous signs that the credit bubble is bursting. In the mortgage industry, we have seen an implosion of sub-prime lenders. Sub-prime lenders had been churning out mortgages to anyone who they could reach with their aggressive advertising campaigns, no matter how bad their credit rating was. Originators of mortgages sell off their loan portfolios to intermediaries; they in turn sell mortgages tranches or derivatives to the marketplace. Everyone was happy: aggressive lending practices increased the demand for homes, pushing up home prices; some investment banks loved the business so much that they started buying sub-prime lenders for billions of dollars, so that they could be ‘closer to the source’.
This game is ending, and it is ending fast. Now, few investors want to touch these once prized mortgages as it has become apparent that many borrowers cannot even make their second payment (they have to make the first payment when they sign the mortgage). As intermediaries cry foul, mortgages are returned to the originators. In the meantime, sub-prime lenders are better at selling than at managing mortgages; they lack the capitalization to hold any significant inventory of bad debt and have to declare bankruptcy.
We are talking about big numbers: HSBC announced this month it is increasing to $10.6 billion the allocation to cover losses in the sub-prime lending market. Both Morgan Stanley and Merrill Lynch were amongst the premier investment banks that have spent billions in recent years acquiring sub-prime lenders.
As this weakest link of the credit market is imploding, the fear is that any fallout may spread. While many investors are cheery about the “soft-landing” and are under the illusion that we have seen the worst from the housing market fallout, we believe Bernanke is gravely concerned that we might just be at the beginning of a treacherous unwinding that is long overdue. Any credit contraction might spill over to the debt-laden and thus interest-rate sensitive consumer.
Trouble in housing and with it in the mortgage industry are symptoms of a much broader credit debacle: the risk of an implosion in the credit derivatives market. A popular segment of this market is credit default swaps (CDS); with a CDS, a periodic fee is paid in return for a contingent payment upon a credit event, such as a default.
What may sound like an obscure market is huge: easy credit has allowed this market to mushroom to $26,000 billion. In this market, you can insure against the risk of a security defaulting without entering into an agreement with the issuer of the security. The problem is that if the security vanishes, the derivatives may become worthless. As an example, two global steel conglomerates, Tata Steel & Corus, are in currently in merger discussion. Corus currently has over $1.5 billion in bonds, but CDS contracts written by unaffiliated parties linked to Corus debt are estimated to be between five and 10 times as large. If the merger does take place, Tata Steel has made it clear that they might retire the existing debt; that may render the credit derivatives worthless.
Optimists say that any trouble in the credit markets will be confined to hedge funds who are on the wrong side of a bet. But even if that was the case, imploding hedge funds must liquidate other holdings as they receive margin calls. In a best case scenario, we believe volatility will pick up in most asset classes; this would induce speculators to pare down their bets; such monetary contraction would likely weigh on asset prices.
Does this imply the Fed may bail out a failing hedge fund? As long as the financial system as a whole is not in jeopardy, the Fed will unlikely jump to the rescue of an imploding hedge fund. However, the reason why the Fed is trying to be pre-emptive is to mitigate the spillover effect trouble in the credit markets could have to the consumer. The U.S. consumer is far more interest rate sensitive now that in the past; with over two thirds of the U.S. economy driven by consumption, it may prove to be simply too important an area to collapse.
In our assessment, Bernanke’s benign outlook is a message to banks not to cut the lifeline to sub-prime lenders, to keep the party going. Bernanke working hard to increase money supply just as market forces demand a contraction may have very negative implications for the U.S. dollar.
Investors interested in taking some chips off the table to prepare for potential turbulence in the financial markets may want to evaluate whether gold or a basket of hard currencies are suitable ways to add diversification to their portfolios.
© 2007 Merk Investments LLC.
Axel Merk is Portfolio Manager of the Merk Hard Currency Fund, a fund that seeks to profit from a potential decline in the dollar.

The Coming Entitlement Meltdown



Warning from the Comptroller General of the GAO who appeared on CBS 60 Minutes on March 4, 2007. Watch this shocking 12 minute interview at my web site links.


The Coming Entitlement Meltdown
March 6, 2007
Ron Paul
David Walker, Comptroller General at the Government Accountability Office, appeared on the show “60 Minutes” last evening to discuss the federal budget outlook. If you saw the show, you know that he painted a very sobering picture regarding the federal government’s ability to meet its future obligations.
If you didn’t see the show, Mr. Walker’s theme was simple: government entitlement spending is like a runaway freight train headed straight at American taxpayers. He singled out the Medicare prescription drug bill, passed by Congress at the end of 2003, as “probably the most fiscally irresponsible piece of legislation since the 1960s.”
When it comes to Social Security and Medicare, the federal government simply won’t be able to keep its promises in the future. That is the reality every American should get used to, despite the grand promises of Washington reformers. Our entitlement system can’t be reformed – it’s too late. And the Medicare prescription drug bill is the final nail in the coffin.
The financial impact of the drug bill cannot be overstated. Government projections that the program would cost $400 billion over the next decade were a joke, as everyone in Congress knew even as they voted for the bill. The real cost will be at least $1 trillion in the first decade alone, and much more in following decades as the American population grows older.
The Medicare “trust fund” is already badly in the red, and the only solution will be a dramatic increase in payroll taxes for younger workers. The National Taxpayers Union reports that Medicare will consume nearly 40% of the nation’s GDP after several decades because of the new drug benefit. That’s not 40% of federal revenues, or 40% of federal spending, but rather 40% of the nation’s entire private sector output!
The politicians who get reelected by passing such incredibly shortsighted legislation will never have to answer to future generations saddled with huge federal deficits. Those generations are the real victims, as they cannot object to the debts being incurred today in their names.
The official national debt figure, now approaching $9 trillion, reflects only what the federal government owes in current debts on money already borrowed. It does not reflect what the federal government has promised to pay millions of Americans in entitlement benefits down the road. Those future obligations put our real debt figure at roughly fifty trillion dollars – a staggering sum that is about as large as the total household net worth of the entire United States. Your share of this fifty trillion amounts to about $175,000.

Don’t believe for a second that we can grow our way out of the problem through a prosperous economy that yields higher future tax revenues. If present trends continue, by 2040 the entire federal budget will be consumed by Social Security and Medicare alone. The only options for balancing the budget would be cutting total federal spending by about 60%, or doubling federal taxes. To close the long-term entitlement gap, the U.S. economy would have to grow by double digits every year for the next 75 years.
The answer to these critical financial realities is simple, but not easy: We must rethink the very role of government in our society. Anything less, any tinkering or “reform,” won’t cut it. A good start would be for Congress to repeal the Medicare prescription drug bill.
March 6, 2007
Dr. Ron Paul is a Republican member of Congress from Texas (who has formed a presidential exploratory committee and may become a candidate for the Republican nomination for the 2008 presidential election.)

The Deception of Fiat Currency



Centra bank currency reserves now $5 trillion!
A fairy tale world
Hugo Salinas Price
February 28, 2007
The World is exchanging goods and services by various national means of exchange. We are using those same means of exchange as a vehicle for savings. We are denominating credit contracts in any one of various national means of exchange. The predominant means of exchange is the US dollar.
However, a means of exchange voluntarily accepted as such, by those who participate in exchanging goods and services, by those who use it as a vehicle for savings and by those who denominate credit contracts in it, is not per se money.
Money must, sine qua non, function not only as a means of exchange, but also as a means of payment.
The world, as of February 2007, does not possess a means of payment. In economic terms, payment is the exchange of something for something. In today's world, when units of what is called money are tendered in payment of a purchase, or in settlement of a balance after an exchange, or in settlement of debt, there has been in reality and economically no such payment. We are in these cases using the term "payment" merely as a legal convention and a leftover from a previous era, when payment did in fact exist and govern all economic activities.
Money, properly speaking, must be definable! The dollar cannot be defined: so said Alan Greenspan himself, the Pope of Central Bankers, in reference to the dollar, which is the reserve currency of the world and which "backs" all other currencies. When something is not definable, it has no physical existence. A thing that has no physical existence is imaginary. An imaginary thing such as money is today, is as different from real, actual money, as an imaginary loaf of bread is different from a loaf of bread in one's hand.
A money payment must involve a tendering of tangible money, gold or silver, or of a credit instrument which is recognized as entitling the owner to the undoubted right to immediate redemption of that instrument, in gold or silver.
Humanity is unaware of the stupendously important fact that it lives in a world without money. This lack of awareness is perhaps the most singular feature of our contemporary world, upon which historians - if the world does survive this episode and produce historians at some future date - will remark with amazement: "How was it possible that billions of humans could delude themselves into acting as if what they used for payments, credit contracts and savings, was actually money?"
About 1997 I began to look for data concerning the amount of "reserves", excluding gold, held by the world's Central Banks. In other words, the amount of imaginary money they were holding, otherwise called "paper money". In 1997, those "reserves" totaled $1,300,000,000,000 ($1.3 Trillion) dollars. Not all those "reserves" are dollars, but most of them are.
Back then, not many people were paying attention to that datum. Since then, it has received increasing attention, which is not surprising, for the "reserves" are piling up and showing numbers that are clearly "going ballistic". As of January 2007, world Central Bank "reserves" were hitting $5 trillion dollars, an increase of 385% in ten years. The last increase of $1 Trillion only took five months, from August 2006 to January 2007. ("Bloomberg")
Before 1971, Central Bank reserves were mainly gold, plus component of foreign exchange redeemable in gold. Reserves could only grow very slowly. Imbalances in trade were shunned because the settlement of deficits had to be made in gold or dollars exchangeable for gold. International trade was stable. Imports could not affect the economies of importing countries as much as they do today, with "globalization". Therefore, local productive activities were stable. Jobs were generated through reinvestment in productive activities.
The present situation is chaotic, because the creation of reserves of fictitious, imaginary "money" originates mainly in Dollars which are spewed forth by the out-of-control US economy, plus other fictitious moneys like the Euro born in the European Union, the Yen born in Japan, the Pound born in the UK, all of which are held by other countries as "reserves".
Since today "money" is imaginary, fictitious, imports no longer have any limit, for it actually costs nothing to "pay" when "money" is imaginary. Thus, "globalization" based on the unlimited creation of fictitious money is a totally false globalization unsupported by economic facts.
The more important Central Banks are becoming skittish about the enormous amounts of "reserves" which they are accumulating. The Central Bankers are bureaucrats, but they are sensing that these enormous holdings are rather worrisome; however they do not know what to do about them. The fact is, they have been had. Their "reserves" are simply numerical and lack any substance. They are imaginary and as useless as castles in the air, unless they can manage to get rid of them by passing them on to some unsuspecting seller of tangible goods.
China is now going around the world - especially Africa - looking for opportunities to buy raw materials (a Chinese delegation will be present at the First International Mining Forum in Mexico, the middle of March). For the same reason, the Central Banks that subscribed the Washington Agreement (to sell no more than a certain amount of gold each year) have since 2006 lost their former appetite for gold sales and they are not covering their allotted sales quotas. It appears that they have finally realized that the reserves that are actually worth something are the gold reserves, and not the "foreign currency" bond holdings which they were so eager to hold because they "provided earnings".
However, if they start to unload their imaginary holdings, the exchange value of the holdings will begin to fall. So they are in a dilemma, a choice between two distasteful alternatives: "Shall we hold on to the imaginary money and wait and see what happens, or shall we begin to unload it and risk collapsing the value of the larger part remaining with us?"
Up till now, the Central Bankers have been doing what bureaucrats usually do when they are faced with a difficult choice: nothing. They are waiting to see what happens.
More than half of the world's Central Bank "reserves" are held by the Central Banks of China, Japan, South Korea and Southeast Asia. These Central Banks ended up with these huge "reserves" because they accepted a means of exchange - which was no more than imaginary money, digits on computer discs - as if it was payment. In other words, they believed a fairy tale, like the one where Jack trades his cow for a handful of colored beans.
So, we are living in a fairy tale world, where money is not money at all. Alas, reality cannot be fooled by means of fairy tales. How we shall fare, when the dream has vanished into thin air and the last fool has had to recognize the difference between a payment and a fairy tale?
Hugo Salinas Price, President
Asociación Cívica Mexicana Pro Plata, A.C.
Mexico City
http://www.plata.com.mx


America's Financial Reckoning Day and a Geostrategic Outlook for the Future



THE FOLLOWING REPORT IS NOW AVAILABLE TO DOWNLOAD IN PDF FORMAT IF YOU GO TO OUR HOME PAGE ON THIS SITE. YOU CAN ALSO ORDER HARD COPIES OF THIS 20-PAGE SPECIAL REPORT WHICH IS AVAILABLE AT WWW.CHUCKCOPPES.COM. YOU CAN ALSO FORWARD THIS IDP SPECIAL REPORT TO YOUR FRIENDS BY CLICKING THE SMALL ENVELOPE IN THE UPPER RIGHT HAND CORNER ON THIS PAGE. YOUR SUBJECT LINE IS LIMITED TO A VERY BRIEF SENTENCE AND YOUR LINK WILL APPEAR FROM IDP CONSULTING GROUP WEBSITE.
IDP CONSULTING GROUP SPECIAL REPORT, JUNE 1, 2009
________________________________________________________________________
AMERICA’S FINANCIAL RECKONING DAY
AND A GEOSTRATEGIC OUTLOOK
FOR THE FUTURE

BY CHARLES H. COPPES, AUTHOR OF AMERICA’S FINANCIAL RECKONING DAY
“I am willing to know the whole truth; to know the worst, and to provide for it”
- Patrick Henry

Introduction

As we are all aware, our nation and financial institutions have been experiencing tremendous challenges in recent months and this contagion has spread around the globe. According to economist Henry Liu the equity market capitalization of all publicly-traded companies in the world lost half of their value in the final quarter of 2008 for a staggering loss of $30.9 trillion dollars! During this same period the U.S. experienced 6% negative growth and the NY stock exchange finished with a 40% decline wiping out all previous gains. How did all this happen? Pundits and politicians insist it was a lack of regulation or “just old-fashioned greed.” In his new book Meltdown author Thomas E. Woods, Jr. contends, “blaming the crisis on ‘greed’ is like blaming plane crashes on gravity.” He adds, “The current crisis was caused not by the free market but by the government’s intervention in the market.”[1] In this special report we will examine the root causes of our financial crisis and how government bailouts will only make things worse. This will include an overview of the Wall Street meltdown, the call for a global currency, a look at the new administration, civil unrest, and a geostrategic outlook for America as it relates to China, Russia, the Middle East and the future of the European Union and the Eurozone. This report will also serve as a companion to my own book mentioned above (AFRD) and will include frequent references along with various websites for your own research. This information is extremely urgent and you are free to make copies or download copies. I have also concluded with some ideas for contingency planning that you will want to share with your family and friends. Our day of reckoning is drawing near and you need to provide for it.
.
An Overview of America’s Financial Crisis

Almost 100 years ago Spanish philosopher George Santayana made the famous observation that “those who cannot remember the past are condemned to repeat it.” These same words are carved into the wall of the National Archives Building in Washington, DC. Unfortunately, they have not been inscribed on our hearts and we are apt to repeat the same folly, failures and blunders in successive generations. So to better appreciate our current situation it is necessary to consult the past and draw upon historical events. Our financial problems today are essentially rooted in a money problem, or the very nature of fractional reserve banking. In my book I have traced the origin of money and the development of modern banking, similar to British historian Niall Ferguson’s latest book The Ascent of Money. Today, parallels are being made to the Great Depression, but a more accurate comparison should be noted in the bank panics of 1873, 1884, 1893 and 1907 (AFRD, pp. 3-24). These bank panics were the result of over-leveraged loans and deposits to bank reserves, and in each case Wall Street bankers like J.P. Morgan attempted to consolidate more power into their financial empires.

The Bank Panic of 1907 is better known as the “Banker’s Panic” which lasted only a few weeks but its affects remain to this very day. In October of that year, Augustus Heinze, president of the Mercantile National Bank in New York, and his brother Otto attempted to corner the U.S. copper market. The Heinze brothers had a majority stake in United Copper and their scheme was to purchase the remaining shares to bid up the price and force short sellers of their stock to sell directly to them. Due to insufficient capital their bonanza of cheap stocks failed to materialize. Within a few days shares of United Copper skyrocketed and then collapsed, thus ruining the Heinze brothers. Otto’s brokerage firm, Gross & Kleeberg, went bankrupt and Augustus was promptly fired by his board of directors. Depositors at the Mercantile National Bank were uncertain of their exposure to this stock collapse and they rushed to withdraw their money. Other bankers with close ties to the Heinze brothers were Charles W. Morse, president of the National Bank of North America and New Amsterdam Bank, and Charles T. Barney, president of the Knickerbocker Trust Company. Both were forced to resign and soon their banks also suffered bank runs and the ensuing panic quickly spread to other banks in the New York area.
Important to note is that this panic was preceded by the great earthquake that devastated San Francisco in April 1906. This natural disaster had caused market volatility and sharp declines in the Dow Jones in addition to a flood of money that had left New York banks to aid in reconstruction. In this environment many banks and trust companies were vulnerable including the established Trust Company of America that was nearing total collapse. Coming to the rescue was J.P. Morgan & Company who persuaded other bankers including John D. Rockefeller to provide needed capital for the Trust Company of America. J.P. Morgan also persuaded the U.S. Secretary of the Treasury George Cortelyou to issue $150 million in low-interest bonds which the banks could use as collateral to create new money on the books. Finally, in an effort to avert a stock market crash Morgan arranged for several banks to provide the enormous sum of $23 million dollars to allow the New York Stock Exchange to continue operating. During this same period the bankers also worked hard to convince clergymen to assure their congregations that there was no reason for further panic (the equivalent of today’s mass media). Within a short period the financial crisis subsided but the mood remained tense on Wall Street.

Similar to previous bank panics, the Banker’s Panic of 1907 exposed the institutional weakness of fractional reserve banking even as it does today. When banks take in deposits for safekeeping they treat them as both a bank asset (to be loaned out with interest) and a liability (which is owed to the depositor). This form of double book entry creates a “dual claim” that dates back to the goldsmiths in Europe and is the pattern for our banking system today. With a typical reserve ratio of only 10% all banks are subject to a bank run if depositors start demanding their money. This little secret can be unsettling and it can cause embarrassment to bankers who are looked up to as pillars of high society. Instead of seeking genuine banking reform to promote sound fiduciary policies back in 1907 the bankers in New York sought to create a central bank similar to the Bank of England that was chartered in 1694. As Professor Murray Rothbard points out, “Very quickly after the panic [of 1907], banker and business opinion consolidated on behalf of a central bank, an institution that could regulate the economy and serve as a lender of last resort to bail banks out of trouble.”[2] This idea of a central bank that could serve as “the lender of last resort” is precisely what the bankers wanted.
In 1908, Congress took up the cause for banking reform under the leadership of Senator Nelson W. Aldrich (R-RI), head of the Senate Finance Committee and father-in-law of John D. Rockefeller, Jr. (who married his daughter Abby). In June of 1908, Congress passed the Aldrich-Vreeland Act, which authorized national banks to issue emergency “script” currency in the event of a bank run. Another provision of this Act that received very little attention was the creation of the National Monetary Commission (NMC) that was given two years to study and make proposals for comprehensive banking reform. Senator Aldrich was a close business associate of J.P. Morgan and he was determined that the NMC would represent the interests of the Morgan, Rockefeller, Kuhn, Loeb banking cartel on Wall Street that was collectively known as the “money trust.” These were the same forces that President Andrew Jackson had fought in his two terms and Abraham Lincoln later referred to as money powers that “…prey upon the nation in times of peace and conspires against it in times of adversity.” J.P. Morgan had come from his father’s banking firm J.S. Morgan & Company in London in 1864 and he was well acquainted with central bank operations in England. He had been instrumental during the bank panic of 1893 and was also an enthusiastic and powerful supporter for a central bank in America.

In late 1910 select members from the NMC staff conducted an ultra-secret meeting in order to work on the commission’s report and draft the Aldrich Bill that would later become the Federal Reserve Act. This meeting was held at the Jekyll Island Club on Jekyll Island, Georgia, which was an exclusive club for the wealthy co-owned by J.P. Morgan. Historians all agree that Paul M. Warburg (Kuhn, Loeb, Schiff) was the leading expert on the NMC staff. Warburg’s brother Max Warburg was the financial advisor to the German Kaiser and director of Germany’s own central bank known as the Reichsbank. “Because of this knowledge, Paul Warburg became the dominant and guiding mind throughout all the discussions,” writes G. Edward Griffin in his monumental book The Creature from Jekyll Island.[3] The primary goals of the Wall Street money trust were to assure their control of the new central bank, create an “elastic” currency through debt monetization and shift bank losses to the taxpayers. From 1911 to 1913 Congress conducted the infamous “Money Trust hearings” and the conspirators finally prevailed when the Federal Reserve Act was signed into law December 22, 1913. The new Governor of the Federal Reserve Bank of New York (our defacto central bank today) was Benjamin Strong from J.P. Morgan’s Bankers Trust Company and Paul Warburg was named as Vice-Governor (see above photos).
This bit of history is necessary to assign the proper blame for America’s financial reckoning day where it belongs (AFRD, pp. 25-52). There is no provision in the U.S. Constitution for a private banking cartel to act as the fiscal agent for the U.S. government. The Fed is made to sound “federal” but only Congress has authority “to coin money, regulate the value thereof…and fix the standard of weights and measures” (Art. 1, Sec. 8), and this authority lies with the U.S. Treasury. What we have is a form of modern “seigniorage” that was practiced by English lords [4]. By the late 18th Century the Bank of England had so bankrupted the British Empire that it led to excessive taxation of the colonies and this led to our American Revolution. By allowing the Fed to control our money supply and fund the expansion of the American Empire we are now assuring our own bankruptcy in the 21st Century! Thomas Jefferson foresaw this inherent danger and left us with these prophetic words:

If the American people ever allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that grow up around them will deprive the people of all property, until their children wake up homeless on the continent their fathers conquered….I sincerely believe the banking institutions having the issuing power of money, are more dangerous to liberty than standing armies.[5]

One of the promises made by the Fed in 1913 was the ability to eliminate bank panics, or boom and bust cycles. However, from 1921 to 1929 the Fed eased the discount rate and expanded the money supply by 62%. This, of course, ignited “The Roaring 20s” and led to an orgy of speculation on Wall Street (securities dealers grew from only 250 to 6,500!). Suddenly in October 1929 the Fed raised the discount rate and The Crash wiped out $40 billion in market capitalization and caused the Great Depression. This process of creating inflation and deflation is exactly what Jefferson warned about and what we have been witnessing for the past century.

In 1932, Pres. Herbert Hoover lost his reelection to Franklin D. Roosevelt. Soon after taking office FDR forced our currency off the gold standard and signed the Glass-Steagall Act (Banking Act of 1933). This legislation was aimed at separating commercial and investment banking activity to prevent fraud, conflicts of interest and excessive risk-taking (as we will see in a moment this Act was repealed in 1999 and has greatly contributed to our present crisis). This Act also created the FDIC to prevent further bank failures. From 1929 to 1933 almost 10,000 banks went out of business. Although the FDIC is really not “deposit insurance” but a mere confidence game it did help bring bank panics to an end. As historian William Greider relates, once the FDIC was in place “the phenomenon of panic and collapse virtually disappeared from American economic life.” As critics have pointed out the FDIC actually encourages moral hazard or reckless lending practices and only the largest banks that are considered “too big to fail” gain assistance. Nevertheless, had this same action been taken by the U.S. Treasury after the bank panic of 1907 it is highly probable that the Fed may have never been created at all.
The FDR administration introduced a string of progressive socialist programs including the Public Works Administration, the National Industrial Recovery Act (1933), the Social Security Act (1935), the Federal National Mortgage Association (1938) and many more. The notion of “industrial armies” and “a national bank with State capital and an exclusive monopoly” were ideas taken directly from The Communist Manifesto by Karl Marx (circa 1843). America’s national bank helped finance “the New Deal” and later it would increase the national debt from $48 billion to $280 billion during World War II (AFRD, pp. 55-67). Prior to the end of the war the allied powers met at the Bretton Woods Conference and they established the U.S. dollar as the world’s reserve currency along with the IMF and the World Bank. The postwar period saw the rise of the military-industrial-complex and the indigenous warfare/welfare state of the 1960s and 1970s. In 1968, the old Federal National Mortgage Association (or Fannie Mae) was converted to a Government Sponsored Enterprise (GSE) to purchase home mortgages and sell them as “securitized” investments to the public. Consequently, Fannie Mae ceased to be the guarantor of government-issued mortgages like FHA, HUD and VA and that responsibility was transferred to the new Government National Mortgage Association (or Ginnie Mae). In 1970, the government also created the Federal Home Loan Mortgage Corporation (or Freddie Mac) to compete with Fannie Mae and, thus, facilitate a more robust secondary mortgage market. Although these GSEs were publicly-traded entities they invited moral hazard since the perception by lenders was that they were government-backed and certainly “too big to fail.” We will take a closer look below at how these GSEs eventually did fail in 2008.

In 1971, a critical event occurred during the Nixon administration that will have a direct bearing on our financial future as a nation. As indicated, the U.S. dollar was recognized as the world’s settlement currency for international trade with a nominal guarantee that foreigners could exchange dollars for gold specie. During WW II, the U.S. Treasury had accumulated vast gold reserves from nations as repayment for war debts. By the late 1960s economies in Europe began to recover as America exported its inflation abroad to finance U.S. war and welfare policies. Concerned about our fiscal debts and holding excess dollars, both OPEC and several nations started exchanging dollars for gold. It is estimated that our trade liabilities totaled $36 billion against only $18 billion in gold reserves and soon it could be depleted. On August 15, 1971, President Nixon signed an executive order that decoupled the dollar from the IMF gold exchange standard and created a floating exchange rate for currencies. In reaction to this violation of the Bretton Woods agreement OPEC raised the price of crude oil by 400% to compensate for the dollar’s loss of purchasing power. In 1974 the U.S. Treasury entered into a secret arrangement with the Saudi royal family and OPEC members to recycle their petrodollars back into U.S. capital markets in exchange for protection in the Persian Gulf as seen below (AFRD, pp. 95-110).[6] In more recent years this macroeconomic model of exporting our monetary inflation and recycling our annual trade deficits has been sustained by the Chinese who are growing increasingly hostile to U.S. interests, which I will cover in the next section.

An equally important development that occurred during the 1970s was the introduction of derivatives on the Chicago Board Options Exchange. What are derivatives you ask? These are complex financial contracts that are used by corporations, banks and hedge funds to maximize profits and share risk in various credit and equity markets. Derivatives “are contracts that derive (hence their name) their value from something else,” says James Turk, “and are designed to divide the risk associated with an underlying asset into pieces, allowing them to be sold to different people.” [7] To demonstrate the extreme volatility associated with derivatives we only need a few examples. On October 19, 1987, a day known as Black Monday, global stock markets collapsed because equity and derivatives markets did not work in sync causing the Dow to crash by 23%. By 1994, the notional value of global derivatives went from $1 trillion to $10 trillion. In that same year Orange County, CA faced bankruptcy when derivative trades went bad. In 1995, London’s oldest merchant bank, Barings Bank (1762), went bankrupt when a single rouge trader made a wrong bet. Derivative-based credit default swap contracts (CDS) caused the 1997 Asian currency crisis. In 1998, the Fed and 14 banks came to the rescue of the infamous hedge fund Long-Term Capital Management to prevent a complete meltdown of U.S. financial markets. In the year 2000, these contracts exceeded $100 trillion and were deregulated to allow over-the-counter (OTC) trading with enormous counter-party risk causing the collapse of energy giant Enron. Finally, in 2003, Fannie Mae lost $8.4 billion in its derivatives interest rate swaps portfolio causing its stock to plummet (FNM).

The introduction and use of derivatives contracts by banks, corporations and hedge funds has proved to be very destructive, or as Warren Buffett observes they are like “weapons of mass financial destruction.” In late1999, the seeds of our own destruction were sown when key provisions of the Glass-Steagall Act were repealed with passage of the Gramm-Leach-Bliley Act. Co-sponsors of this bill were Sen. Philip Gramm (R-TX), James Leach (R-IA) and Thomas Bliley (R-VA) who were under intense pressure from the banking industry. Banks wanted to remove the barrier from banking and investing so they could retain people’s money during both good times (financial services) and bad times (traditional deposits). This Act also allowed credit default swaps and other exotic instruments to be traded. A CDS is basically an insurance contract but it is called a “swap” so as to avoid being regulated as insurance. Invented by a team at J.P. Morgan Chase in 1997, a CDS allows a bank to make periodic payments to a hedge fund who will finance loss if the underlying instrument defaults. In 1990 the number of hedge funds was only 600 and by 2007 they totaled 9,800 with 90% of them located in the Cayman Islands. In 2000, Sen. Gramm was again instrumental in the growth of the derivatives market by supporting the Commodity Futures Modernization Act, which allowed derivative contracts to be sold OTC instead of just on major exchanges. As chairman of the Senate Banking Committee he was sympathetic to requests by Enron in his home state to pass this bill and to allow Enron to expand its offerings online without regulation (now known as the Enron Loophole). Critics have noted the gross conflict of interest by Sen. Gramm whose wife Wendy Lee Gramm was the former chairman of the CFTC and who was then sitting on the board of directors for Enron.
With passage of the above legislation in Congress the stage was set for the largest speculative bubble in modern history. Key to gaining support for the Gramm-Leach-Bliley Act in Congress was the Republican compromise with Democrats to allow for increased enforcement of the Community Reinvestment Act of 1977. The CRA was promoted by Jimmy Carter to encourage lending institutions to grant mortgages to families with low credit scores, or “sub-prime” loans. As an additional incentive, the CRA allowed for tax credits for Fannie Mae and Freddie Mac for purchasing these loans. This kind of government intervention and social engineering in the free market is what helped fuel the recent housing boom. From 1995 to 2001, the Fed had raised interest rates six times to 6.5%. Following the “dot-com” bubble that wiped out 50% of Internet-based companies and the 9/11 attacks in 2001, the Fed lowered interest rates from 6.5% down to 1% in 2003. During this period the nation’s banks and mortgage companies went on a lending spree with various kinds of adjustable rate mortgages and other forms of creative financing. These sub-prime loans, sometimes called “liar loans,” were sold off to Fannie Mae and Freddie Mac, who in turn bundled them as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) and then sold them to investment banks like Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley, who in turn sold them to investors. Moral hazard was implicit as each participant passed along risk in this chain. In addition, ratings agencies like Standard & Poor’s, Moody’s and Fitch competed with each other to assign AAA ratings to these toxic MBS and CDOs.

In 2003, President Bush signed the American Dream Down Payment Act, which further encouraged low income and minority families to become homeowners (www.hud.gov). Due to this action and low interest rates sub-prime loans surged 292% from 2003 to 2007 and almost 30% of all real estate activity was from speculators who were “flipping” their properties. William Greider recounts how, “speculative bubbles all derive from one conviction: the buyers are convinced that in a few days or weeks or months they will become sellers and unload their purchase at a profit.” [8] This “wealth effect” was felt from main street to Wall Street as investment banks sold MBS and CDO “tranches” to unwary institutional investors and foreigners. In 2004, the Fed intervened in the market place and started raising its Fed Funds rate from 1% to 5.25% by 2007. By 2006, adjustable rate mortgages started taking their toll on consumers as “teaser rates” began to reset to higher rates, and this spike continued into 2007 and 2008. By early 2007, the jig was up. Fannie and Freddie Mac began to limit their exposure to sub-prime loans and Moody’s downgraded over 100 MBS bonds. In April of 2007, New Century Financial, the nation’s second largest sub-prime mortgage lender, filed for bankruptcy in California and 7,000 employees were let go. This bankruptcy was followed by a cascade of failures in the industry and home values dropped by 10% or more. By late 2007, the Fed launched the Term Auction Facility (TAF) program to provide short-term lending (84 days) for banks and financial service companies, with over $500 billion used to date.
In November 2007, prior to announcement of the TAF program, regulations were imposed on investment banks to more accurately account for their balance sheets. This principle known as “mark-to-market” dates back to the Enron scandal and tries to determine current value of assets as opposed to “mark-to-model” which is uses financial models or predictions. [9] Because of the illiquidity of mortgage-backed securities many institutions were slow to write down these assets. Under this enforcement firms, assumed to be well capitalized, were suddenly faced with insolvency. On the weekend of March 14-16 2008, Bear Stearns was the first to be over exposed to MBS and CDO deficiencies. Considered “too big to fail” the NY Fed rushed to provide emergency lending before the markets opened on Monday. The company could not be saved, however, and officials from the Fed and Treasury arranged for J.P. Morgan Chase to acquire the distressed bank. A merger agreement was signed by Bear Stearns for a stock swap of $10 a share (formerly $172) and J.P. Morgan Chase was awarded a $29 billion dollar non-recourse loan by the Fed (on behalf of the taxpayers). This type of loan means that the bad assets of Bear Stearns are used as collateral and even if they are insufficient to repay the loan J.P. Morgan Chase is not held liable. Not a bad deal for only putting up $1.1 billion to acquire a company that once had total assets over $350 billion! On a side note, one of the lesser reasons for bailing out Bear Stearns has come to light in recent months. According to the CFTC, Bear Stearns had the largest concentrated short position in COMEX silver futures at the time of its forced merger. With no legitimate backing for this short position spot silver could have been pushed to almost $100 an ounce. I will have more to say about this report in my final section.

The collapse of Bear Stearns was the beginning of the end for the sub-prime pyramid, over-leveraged banks, under-funded hedge funds, inflated stocks, GSE obsolescence and fiscal sanity. In July of 2008, Countrywide Financial, the nation’s largest mortgage lender (20% of all mortgages) was merged with the Bank of America for $4.1 billion. That same month, IndyMac Federal Bank, a spin off of Countrywide in 1997, saw its stock drop to 31 cents when its MBS portfolio was downgraded by Moody’s. With assets of $32 billion the bank suffered a bank run and was taken over by the FDIC. This marked the largest bank failure in twenty years. On July 30th, the Congress passed The American Housing Rescue and Foreclosure Prevention Act of 2008 to reform Fannie and Freddie Mac. Unfortunately, reform could not come soon enough with 90% stock losses and $5.5 trillion in securitized mortgage debt on the books representing half of all mortgages in the U.S.! Both were effectively nationalized within weeks and turned over to the Federal Housing Finance Agency (FHFA) with a $200 billion dollar bailout package from the Fed. This bailout was soon followed by $300 billion in federal loan guarantees to FHA. Next to fall was Wall Street icon Merrill Lynch with a total of $52 billion in toxic MBS and CDO debt instruments. In early September, merger talks began with the Bank of America and a deal was finalized in December to acquire $1.3 trillion in assets for $50 billion, which has now made BOA the largest financial services company in the world with total assets of almost $3 trillion.

Continuing the slide on Wall Street was the shocking bankruptcy of Lehman Brothers on September 15, 2008 when its stock lost 90% in one day and the Dow dropped a record 500 points. Forced to mark almost $800 billion in liabilities to market (half in credit default swaps), Timothy Geithner, then NY Fed president, called for J.P. Morgan Chase to provide a $138 billion loan which was later repaid by the NY Fed. The following day Barclays PLC purchased the North American operations for $1.35 billion and the rest was split up. The Primary Reserve Fund, the nation’s oldest money market fund, lost $785 million when bonds issued by Lehman went to zero causing panic withdrawals. In just three days the fund went from $62 billion to $32 billion prompting the U.S. Treasury to offer a new program to insure $3.5 trillion in money market accounts since they are not backed by FDIC. On September 16, insurance giant American International Group suffered a liquidity crisis after its company had been downgraded by Standard & Poor’s and Moody’s and its stock dropped by 97%. With assets of $860 billion AIG needed to post more collateral for $441 billion in CDS contracts on collateralized securities including CDOs ($57 billion). Instead of allowing AIG to fail with only its counter-party risk the Fed provided up to $180 billion for AIG stock warrants, which represented the largest bailout of any private company. Now embroiled in countless lawsuits, the media has sensationalized AIG bonuses instead of the federal government “nationalizing” the 18th largest company in the world. In late September, Goldmans Sachs and Morgan Stanley were also downgraded and both have been converted from investment banks to bank holding companies.

As these events unfolded on Wall Street, U.S. Treasury Secretary Henry Paulson proposed a new plan under which the U.S. Treasury would acquire up to $700 billion in illiquid mortgage-backed securities which he entitled the Troubled Asset Relief Program (TARP). This proposal was quickly introduced in Congress as the Emergency Economic Stabilization Act of 2008 amidst a chorus of opposition and protests and the bill failed on September 29. Unwilling to accept defeat the bill was reintroduced with warnings of a financial meltdown and passed on October 3, 2008. Section 132 of the Act allowed for suspension of the mark-to-market ruling, which was finally lifted on April 2, 2009. When Forbes later asked Treasury officials how they came up with $700 billion they said it was not based on a particular data point, “We just wanted to choose a really large number.” Investor Carl Icahn described the bailout as “inflationary hell.” Commentator Jim Rogers added that the plan was “devastating, and very harmful for America.” On the Senate floor James Bunning (R-KY) flatly declared, “It is financial socialism and it’s un-American.” Critics also noted the fact that Paulson was the former CEO of Goldman Sachs and appointed Neel KashKari, a former VP of Goldman Sachs, to oversee the $700 billion over at the Office of Financial Stability created by the Act. He also appointed Goldman Sachs board member Edward M. Liddy to be the new CEO for AIG, and helped direct $20 billion in TARP money to bailout Goldman Sachs’ losses with AIG derivatives contracts – a clear conflict of interest. Ousted CEO at AIG, Robert B. Willumstad, refused a $22 million dollar severance package (after only being on the job for three months) and later told CNBC that AIG would have been much better off if the government had just let it fail and rebuild.
As it soon became clear, most of the TARP money was going to bailout Wall Street and not main street. In addition to the big banks, funds were also handed out to GM, GMAC Financial, Chrysler, American Express and others. TARP money was also used to cover counter-party risk with various foreign banks that engaged in America’s speculative boom and bust. As the profligate spending in Washington continued economic conditions worsened. On September 25, 2008, the Office of Thrift Supervision seized Washington Mutual Bank (WaMu) and placed it in receivership with the FDIC. WaMu had suffered a massive bank run after it was downgraded on September 15, resulting in almost $20 billion in panic withdrawals. With combined assets of $327 billion the bank had $248 billion in risky real estate loans. As records now reveal, the FDIC was already hit hard with the IndyMac bailout and was too thinly capitalized to rescue WaMu. Within 24 hours, the FDIC conducted a secret auction of the bank and awarded the bid to J.P. Morgan Chase for only $1.9 billion (similar to the acquisition of Bear Stearns). Angry shareholders received nothing for their stock and immediately filed a lawsuit against the FDIC for $40 billion for selling too cheap (www.wamustory.com). WaMu was the largest bank failure in U.S. history and its slogan was “Simpler banking, More smiles.” Today, it’s J.P. Morgan Chase who is doing all of the smiling. ☺

The collapse and FDIC scandal at WaMu caused bank depositors around the nation to reduce their bank holdings to $100,000 or less (called a “silent run”). Wachovia, the 4th largest bank holding company with assets of $700 billion had $1 billion withdrawn in a single day, and its stock lost 30%. Wachovia was already in talks with Citigroup and Wells Fargo for a possible bank merger. With warnings of “systemic risk” the Fed and FDIC literally ordered Wachovia to accept an offer from CitiGroup for $2.2 billion. Shareholders blocked the sale of their bank and a few days later accepted $15 billion from Wells Fargo, creating the largest bank branch network in the U.S. Citigroup soon filed a $60 billion dollar motion against both Wachovia and Wells Fargo for alleged violations. Within a few more weeks news broke that Citigroup had to be bailed out with $45 billion in TARP money due to poor risk management and overexposure to the sub-prime meltdown and defaults on credit cards. Through a deal struck with the Fed, Treasury and FDIC the government would guarantee $306 billion in loans and receive a 36% equity stake in Citigroup. The bailout of Citigroup, however, was rather suspect since they have close business ties to the Fed. Even the liberal New York Times called it “an undisguised gift” without any real crisis to merit the monies, which brings us to a very important observation regarding our nation's banking cartel.

The FDIC insures 8,437 banks in the U.S. with combined assets of $8.6 trillion dollars. Among these banks, 3,190 (or 37%) are members of the Federal Reserve System, which represents a banking cartel (see photo above). Among these, only 22 banks have assets of $50 billion or more and almost half are exclusive primary dealers with the Federal Reserve Bank of New York. A primary dealer is a bank or securities firm that actively purchases U.S. Treasury securities (bills, notes, bonds) on the Federal Open Market Operations and resells them to the public (AFRD, pp. 37-41). In 2008 the Fed had 20 primary dealers including J.P. Morgan, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Cantor Fitzgerald, Merrill Lynch, Lehman Brothers, Countrywide and Bear Stearns. It is easy to see from this list that these “banks and corporations” represent a modern “money trust” that have a special relationship with our central bank. [10] We are reminded by Thomas Jefferson that the banks and corporations “that grow up around” a central bank are more dangerous to liberty than standing armies and can deprive people of their property. It is this kind of plutocracy that helped create the Fed back in 1913 and the Fed is the root of our money problems today. In a letter to John Adams, Jefferson once wrote, “All the perplexities, confusions and distresses in America arise not from defects in the Constitution or confederation…as much from downright ignorance of the nature of coin, credit, and circulation.” A fractional reserve banking system is prone to over-leveraged risk, moral hazard, boom and bust cycles, bank panics, inflation, debt and the destruction of wealth. These bank failures and mergers have merely concentrated their power and risk to the world economy.

According to the Office of the Comptroller of the Currency latest report (4Q-2008), the notional value of global derivatives is a mind-numbing $685 trillion dollars with 30% of this exposure in the U.S., or $205 trillion. Of this amount just five U.S. banks hold $193 trillion on their books. J.P. Morgan Chase ($88 trillion), the Bank of America ($38 trillion), Citigroup ($32 trillion), Goldman Sachs ($30 trillion), and Wells Fargo-Wachovia ($5 trillion). In addition, this report indicates that 82% of all U.S. banks use interest rate derivatives and are losing billions each quarter. Can the FDIC actually protect depositors in this environment? Hardly. The FDIC recently raised its “deposit insurance” to $250,000, but the system is technically insolvent and depends on the Treasury for bailouts. In early 2009, the FDIC identified 252 “troubled banks” with assets of $159 billion. According to Weiss Research (www.moneyandmarkets.com), the actual figure is closer to 1,816 banks and thrifts with total assets of $4.67 trillion, and this figure is expected to go higher as this crisis continues.

To summarize America’s financial crisis there is plenty of blame to go around, but the real fault has to be with the interventionist policies of the Fed and political meddling. Nobel Laureate Paul Krugman identifies former Fed chairman Alan Greenspan and Sen. Phil Gramm as the two main culprits. Attempts to micromanage the economy and influence the marketplace is financial socialism and will produce inflationary hell. As lender of last resort the Fed is underwriting trillions in taxpayer debt and the economy is sinking into a second Great Depression. According to the S&P-Schiller Index real estate values have fallen nonstop for 28 months, 41% of all foreclosures are in California and Florida, and mortgage resets for Alt-A and option ARMs will peak higher in 2009-2011 than former sub-prime levels. Total consumer debt is $2.6 trillion, or $23,600 per household, and the unemployment figure is nearing 20% (www.shadowstats.com). Consumer spending used to account for 70% of the U.S. economy and this sudden drop in 2008-2009 has hurt state and municipal budgets. According to the Center on Budget and Policy Priorities (CBPP) at least 45 states are having fiscal difficulties and deficits could reach $145 billion this year and $350 billion by 2011. Unlike municipalities, states are required to balance their budgets and are forbidden by law to allow deficits. The CBPP notes that cities across America are facing $100 billion in deficits and bond issues are going unsold due to institutions like Citigroup, Lehman and AIG dumping their muni bonds and loss of tax receipts. On April 8, 2009, Moody’s issued its first negative outlook ever for the entire $2.6 trillion U.S. municipal bond sector, and defaults could be on the horizon. In the next section we will consider the negative outlook for our nation’s looming fiscal deficits and our own risk of default.

The Collapse of U.S. Dollar Imperialism

As we enter into 2009 and a new administration the spending and bailouts are continuing at an alarming rate and this should concern all of us. During the previous Bush administration the national debt soared from $5 trillion to $11 trillion, and during Alan Greenspan’s tenure (1987-2006) the Fed increased the money supply from $3.6 trillion to $10 trillion. In Bush’s final year, the fiscal budget was $2.9 trillion resulting in a deficit of $435 billion (a new record). The 2009 fiscal budget is $3.9 trillion and already the new administration has projected the deficit to be $1.84 trillion – a 400% increase! This figure does not include implicit loan guarantees, collateralized loans, bailouts and additional pork that some estimate to be around $9 trillion dollars. In February the Congress passed the $787 billion stimulus package known as the American Recovery and Reinvestment Act aimed at creating 4.1 million new jobs, rebuilding the infrastructure and promoting green technology. As critics have pointed out, this amount would be equivalent to $187,800 for each new job created, and it is the height of bureaucratic conceit to think that the government can create jobs better than the free market. In March, the fiscal 2010 budget of $3.59 trillion was released by the White House and inaccurately entitled A New Era of Responsibility. This budget, as all previous budgets, does not account for the $56 trillion in unfunded liabilities for Social Security and Medicare (www.pgpf.org). As I have indicated in my book, this entitlement time bomb is always kept “off budget” and will likely be monetized by the Fed (AFRD, pp. 79-89).

The level of spending and waste coming out of Washington represents a new era of irresponsibility that is unprecedented and incomprehensible. Total expenditures for 2009 could amount to $12.9 trillion, and this amount is equivalent to 90% of our annul GDP of $14.3 trillion! Already the Fed has spent billions in bailing out the private sector including the newly created Term Asset-Backed-Securities Loan Facility (TALF) that is designed to securitize student loans, car loans, credit card loans, etc., and then loan to small businesses. Despite these efforts there is evidence that this bailout money made available to Wall Street and commercial banks is not being turned over, a term known as “velocity” in the monetary sciences. Why is this? The first, and obvious, reason is that consumers are tapped out and unwilling to take on new debt to “stimulate” the economy. Another reason, reported in the Financial Times, is that banks and lending institutions are “hoarding” the money to cover potential losses on their credit default swaps on collateralized securities that are still on the books. Banks and lenders utilized these derivative contracts to mitigate counter-party risk imposed by government mandates that compelled institutions to lend to sub-prime customers. Nevertheless, with all of this new debt and money creation there is going to be an inflationary storm and steady devaluation of the U.S. dollar, and this is beginning to worry economists, central bankers and foreigners who hold a significant amount of U.S. debt.
According to the latest Federal Reserve Statistical Release on cumulative debt holdings (4/26/09), the total assets held by the Fed were $883.5 billion in 2007. Of this amount, fully 90% were in AAA U.S. Treasury securities (bills, notes, bonds). The current balance sheet has now exploded to $2.19 trillion in total assets and the amount of AAA securities has been reduced to only 24%. In other words, the Fed has added $1.3 trillion in toxic debt that includes residential and commercial mortgage-backed securities, corporate loans, GSE bonds and contingent debt obligations from TAF, TARP, TALF and so on. What this means is that the quality of debt held by our central bank is deteriorating and it may be the next “troubled” bank. Evidence of this is the fact that the premium for credit default swaps on U.S. Treasuries has increased by fourteen-fold from its 2007 level! Further evidence is a warning last year (1/7/08) and recently renewed by Moody’s that they will downgrade our nation’s credit rating on U.S. Treasuries unless we address our fiscal liabilities. In addition to these dire circumstances, on March 18, 2009, the Fed suddenly embarked on a policy known as “quantitative easing” in order to provide liquidity and stimulate the economy. [11] This is a process where the Fed goes directly to its primary dealers and purchases U.S. debt to create money out of thin air. This is a desperate policy and can eventually lead to hyperinflation if not contained. Foreign creditors are nervously watching and assessing their own counter-party risk with the U.S. As Richard Russell, financial editor of the Dow Theory Letters, predicted five years ago:

Somewhere ahead these same foreign creditors will look at the declining dollar [and U.S. Treasuries] and decide that they have taken in enough. At that point, the whole picture changes. Our foreign creditors will either halt taking in dollars or they will halt their process of buying U.S. Treasuries. [12]

Among the foreigners who hold U.S. Treasuries, China has 24%, or $739 billion; Japan has $634 billion; OPEC has $186 billion; the Carribean Centers have $176 billion; Brazil has $133; Britain has $124 billion, and Russia has $120 billion. In 2008, China became the largest holder of U.S. Treasuries and they have become the most vocal in their opposition to their declining assets. China has $1.9 trillion in foreign currency reserves and most of this is in the dollar. Qu Hongbin, chief China economist for HSBC remarks, “There is a clear sign that China, as the largest holder of U.S. dollar financial assets, is concerned about the potential inflationary risk of the U.S. Federal Reserve printing money.” Chinese Premier Wen Jiabao, speaking to the press, said, “We have lent a huge amount of money to the U.S., so of course, we are concerned about the safety of our assets. Frankly speaking, I do have some worries.” Commenting in the Communist Party newspaper the People’s Daily, Professor Shi Jianxun of Tonji University criticized ‘U.S. dollar hegemony’. “The U.S. dollar is losing people’s confidence,” says Shi, “The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance.” The Red Chinese, along with Russia and other nations, would like to see a move away from the U.S. dollar and they hold considerable leverage to threaten the U.S. – a geostrategic issue that I will address in a later section. Prior to the G-20 meeting held in London, Zhou Xiaochuan, governor of the People’s Bank of China, stated, “The outbreak of the [current] crisis and its spillover to the entire world reflects the inherent vulnerabilities and systemic risks in the existing international system.” Zhou said the world needs to create a new reserve currency “disconnected from individual nations” and he suggested an expanded role for the Special Drawing Rights (SDR) currency unit established and used by the IMF since 1969.

On April 2, 2009, the IMF hosted the G-20 meeting in London to discuss the global financial crisis and the adoption of a global currency. At the original Bretton Woods Conference after WWII, there were proposals to create a global currency called the “bancor” or “unitas” but they settled for the U.S. dollar tied to gold. The dollar and gold proved inadequate for supporting trade expansion and the SDR was introduced in 1969. After Nixon decoupled the dollar in 1971 the SDR’s role became less important and is now used as a unit of account for IMF members and also the Bank of International Settlements (BIS). The BIS was founded in 1930 to better settle war reparations after WWI and they replaced the Swiss gold franc for the SDR in 2003. Known as the “central bank for the central banks,” the BIS embraces the idea of a global currency and is supported by a financial network of central banks and sympathetic governments proposing regional currencies for world trade. These are the perennial money powers that Lincoln talked about and they are represented in every generation. In 1966, historian and dedicated insider Professor Carroll Quigley of Georgetown University published his book entitled Tragedy and Hope, which documented the ultimate goal of these globalist elites:

[The network’s objective is] nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret meetings and conferences. The apex of the system was to be the BIS in Basel, Switzerland.[13]

The BIS is privately owned by the central banks and it is not accountable to anyone. It operates in total secrecy and its exclusive board members meet six times a year. The call for a change in the existing monetary system fits very well into the overall framework of the BIS and IMF. Following the G-20 confab in London the delegates issued a communiqué for increased support of the SDR (Point #19). The U.N. Commission of Experts on International Financial Reform also enthused, “It is a good time to move to a shared reserve currency.” The current SDR is a basket of four key currencies consisting of the U.S. dollar, the British sterling, the Japanese yen and the EU euro. The BIS decision to adopt the SDR in 2003 is seen by some as an important step to create a global Federal Reserve System with a defacto world settlement currency, or a revised SDR.

A closer look at the SDR mix represents the trilateral regions of Europe, Asia and the U.S., the three largest economies of the world based on GDP. The euro is already established in Europe; the “amero” is being proposed to serve the NAFTA region in North America (BIS Papers #17); and a third multinational currency is being proposed in Asia. In an article entitled “The End of National Currency,” in the Foreign Affairs magazine (May/June 2007), Sr. Fellow of the Council on Foreign Relations (CFR) Benn Steil instructs, “Governments should replace national currencies with the dollar, or the euro, or in the case of Asia, collaborate to produce a new multinational currency over a comparably large and economically diversified area.” Since its creation in 1973, the goal of the Trilateral Commission has been the development of a New International Economic Order that embodies this idea of three regional currencies (www.trilateral.org). The fact that Paul Volker, the former North American chairman of the Trilateral Commission, is now the chairman of the Obama Economic Recovery Advisory Board should be an indication that these goals are intact. Equally important to note is Richard Haass who is the current president of the CFR and a senior foreign policy advisor for Barack Obama.
According to the IMF, the SDR’s currency composition is subject to a review every five years, and the next review is due in 2010 (www.imf.org). The promotion of the SDR comes at a rather interesting time in the world of macroeconomics and the financial crisis that had its beginning in the U.S. A major theme in my book is that America will be subject to a “reckoning day” that could be triggered by a default on its sovereign debt, foreigners dumping our assets, and a U.S. currency devaluation/collapse resulting in a hyperinflationary depression (AFRD, p. 113). In this scenario the IMF currency equation could result in a diminished role for the U.S. dollar (forced into a regional amero currency), the British sterling would be forced to join the Eurozone enhancing the euro, and the Japanese yen could participate in the ASEAN+3 Forum (10 East Asian nations with China, Japan and S. Korea). At the very least, the end is near for U.S. dollar imperialism, and this will have huge geopolitical implications. As Alex Wallenwein, publisher of The Euro vs Dollar Currency War Monitor has stated, “Whatever the ultimate fate of the dollar will be, it already lies in the hands of foreigners….It is no longer in the power of the Federal Reserve or the U.S. government to reverse the fall of the dollar.” Economic conditions are suggesting that America’s foreign creditors could create a real panic – a central bank panic – and collectivist policy makers in the new Barack Obama administration are preparing us for just such a crisis.

Team Obama & The New World Order

The arrival of Barack Hussein Obama II, and his meteoric rise to power on the national scene, is truly a remarkable phenomenon in modern politics. Having served a mere 143 days in the U.S. Senate prior to forming his exploratory committee in 2007 he has come from virtual obscurity to celebrity status. Exactly who is Obama and where did he come from? A biographical study of his life is a labyrinth of complexity and ideological con-troversy. Beginning with his birth, he is alleged to be born in both Hawaii and Kenya. His mother, Stanley Ann Dunham, was a white student attending the University of Hawaii when she met Barack Hussein Obama, Sr., a foreign student from Kenya, in 1960. Known as a beatnik and progressive liberal, Anna was drawn to Barack’s pro-Soviet Marxism and bohemian lifestyle and became pregnant within a few months. Fortunately for Barack, Jr., society frowned on abortion even more than interracial marriage and they married on February 2, 1961. She would later learn that the father was already married and they separated in 1963. Barack, Jr. was born on August 4, 1961 and the senator claims that he was born in Hawaii as a natural born citizen (and eligible to be president). His paternal grandmother (Sarah Obama) says she witnessed his birth in Mobasa, Kenya and she has witnesses. Even if this is not true his father was also a British citizen of Zanzibar making his son a dual citizen, and Article II, Sec. 1, Clause 5 of the U.S. Constitution reads that a presidential candidate must be “a natural born” citizen, not just a “naturalized” citizen. To this day Barack Obama will not produce an official birth certificate. [14]

In 1967, Anna married Lolo Soetoro, a Malaysian oil man, and moved from Hawaii to Indonesia. Young Obama was enrolled in pre-school in Jakarta under the name “Barry Soetoro” and was registered as a citizen of Indonesia and his religion as Islam (serial #203-see above). Barry’s step-father was a Muslim and Indonesia law requires all children to be citizens (or renounce prior citizenship) to attend school. Presently, there are 16 lawsuits and a couple Supreme Court cases challenging Barry/Barack’s citizenship (notably Phillip J. Berg v. Barack Obama). If Barack is a usurper he could be arrested and deported to Indonesia or Kenya, donors face a class action law-suit and the DNC could be brought up on RICO statutes. Such is the sorry state of political affairs in our nation. As far as Barack being a Muslim this is not likely. While attending Besuki Primary School in Jakarta he had to recite the Quran (known as mengaji), but he is a “secular humanist” like his mother who later separated from Lolo in 1974; and he was also raised by his maternal grandparents, Stanley and Madelyn Dunham, who were Unitarians. Barack’s family members in Indonesia and Kenya are all Muslims and he has a shared empathy for Muslims as demonstrated by his official foreign visits, comments and actions. According to his biographers Barack replaced Muhammad for Marxism and this occurred when he returned to Hawaii to live with his grand-parents and finish high school. His mother Anna left him and he never saw her again after 1979.
From 1970 to 1979 Barack attended Punahou – the largest private school in Hawaii. During these years Barack was influenced by Stanley’s drinking buddy known as Frank Marshall Davis (1905-1987). Davis wrote for the Honolulu Record (a Communist newspaper) and was a black member of the Communist Party USA and singled out by the House Un-American Activities Committee as a subversive. Davis would become Barack’s mentor and advisor during his formative years (www.discoverthenetworks.org). In his book Dreams of my Father, Barack refers to “Frank” as a poet and influential friend. In 1979, he attended Occidental College in Los Angeles and Barack says, “I chose my friends carefully.” These included fellow foreign students, black activists, feminists and Marxist professors. He was also mentored by a gay professor and was a member of the radical socialist organization Students for Economic Democracy until he transferred to Columbia University in 1981. At Columbia he majored in political science and after graduation in 1983 moved to Chicago where he became Director of the Developing Communities Project where he honed his community organizing skills. In his book, The Case Against Barack Obama, David Freddoso writes that his solution to every problem was “a distribution of government funds,” and the call for “a more just and democratic society” that was firmly rooted in the Alinsky method. Saul Alinsky is considered the founder of community activism and stressed that radicals must “infiltrate the system within” for real change. [15] In his book Rules for Radicals: A Pragmatic Primer for Realistic Radicals (dedicated to ‘Lucifer’), Alinsky says, “Any revolutionary change must be preceded by a…non-challenging attitude toward change among the mass of our people” (prologue). He chided the Sixties Left and said that radicals should instead cut their hair, put on suits and “don’t scare off” the middle class (p. 195). This is the kind of pragmatic strategy that Obama used in his “Change We Can Believe In” campaign.

In the mid-1980s Obama was the attorney for the Association of Community Organizations for Reform Now (ACORN) and was also a trainer at their annual conferences. ACORN promotes an array of Leftist social issues and was instrumental in enforcing the CRA that compelled loans to risky low-income families. In 1988, Obama went back east to attend Harvard Law School and evidence suggests that his tuition was funded by a wealthy Saudi prince. He became the first black president of the Harvard Law Review and returned to Chicago to intern at Sidley & Austin law firm in 1989 where he met his wife Michelle Robinson. Following graduation he and Michelle were married in 1992 by Rev. Jeremiah Wright at the Trinity United Church of Christ. Wright embraces the tenets of black liberation theology and preaches the gospel of “Matthew, Marx, Luke and John” to incite class warfare and the politics of greed and envy. After incendiary remarks and critical media attention the White House has since distanced itself from comrade Wright. From 1993 to 1996 Obama joined the civil rights law firm of Davis, Miner, Barnhill & Galland. During this period he was active with ACORN’s black voter- registration project and law partner Judson Miner introduced him to Bill Ayers and Bernardine Dohrn, and other members of the Leftist New Party movement. Ayers and Dohrn are former Weatherman Underground terrorists from the Sixties Left and they encouraged Obama to run for Illinois state senator as a New Party member.[16]
In 1995, Obama became a candidate and he won the Illinois 13th District which represented mostly poor black voters. In 2004, Obama gained the support of Rev. Jesse Jackson’s Rainbow Coalition to run for the U.S. Senate. He also got endorsement from the Chicago Tribune that exposed his rival’s sex scandal to clear the way for his victory in the polls. In 2007, Senator Obama voted the liberal position on 65 of 66 key votes and he was ranked as “the most liberal Senator of 2007” by the National Journal. The Americans for Democratic Action (ADA) also assigned him a lifetime liberal rating of 90% for his progressive politics. On February 10, 2007 the young Senator announced his presidential candidacy by acknowledging, “I know that I have not spent a long time learning the ways of Washington, but I have been there long enough to know that the ways of Washington have to change.” Unfortunately, the kind of “change” Barack and Michelle Obama are talking about has its ideological roots in neo-Marxist economic theories, hate-filled sermons and contempt for American values. In a speech delivered on February 18, 2008 in Milwaukee Michelle admitted, “For the first time in my adult lifetime, I am really proud of my country.” Prior to his own election, Barack was asked on Meet the Press (10/26/08) his views on the American flag, “My wife disrespects the flag for many personal reasons. Together she and I have attended several flag burning ceremonies in the past, many years ago. She has her views and I have mine. Of course, I have found myself about to become President…and I have to put aside my hatred (my emphasis).”

Is it possible that Barack and Michelle Obama have “put aside” their core political beliefs and their own personal convictions? How is it that we have elevated a flag-burning Marxist demagogue into the highest office in the land? Among the various reasons, Obama was able to inspire the themes of hope and change as he wrote in his book The Audacity of Hope (2006). Using his past organizational skills as a community activist in South Chicago he employed the Alinsky method of working “within the system” to gain power, and in so doing he created a personality cult, as Dr. Jerome Corsi documents in his book The Obama Nation: Leftist Politics and the Cult of Personality. Put simply, Barack Obama has tried to clean up his radical past, he has exploited white guilt, appealed to race, and promises his followers a great future with him as the Great Leader. According to Dr. Samuel Vaknin, an authority on Narcissistic Personality Disorder (NPD), Obama projects a grandiose but false image of himself. Somewhat impressed at first, Dr. Vaknin says, “I was put off soon, not just because of his shallowness but also because there was an air of haughtiness in his demeanor that was unsettling.” [17] Noting his dysfunctional youth and his crowd appeal, Vaknin has compared Obama to Rev. Jim Jones with his charismatic appeal to provide social justice, unity and equality for his co-dependent cult members. In February 2008, Nation of Islam leader Louis Farrakhan declared that Obama is “a herald of the Messiah.” This kind of quasi-religious appeal is disconcerting. Vaknin concludes that the one thing that all narcissists strive for is – power. The fact that Obama has assumed authority during a “national crisis” is reason for concern since NPD has historically been associated with the abuse of power. For more background you can visit www.theobamafile.com.
On January 20, 2009, Barack Hussein Obama II was sworn in as our 44th president. The San Francisco Lesbian Gay Freedom Band celebrated in the inaugural parade and prayers were offered by Dr. Ingrid Mattson, radical leader of the Islamic Society of North America, and fellow CFR member Rev. Rick Warren. Among his top donors were Goldman Sachs, J.P. Morgan Chase, Citigroup, Harvard University, Time Warner/CNN, and his old law firm of Sidley & Austin. As I have indicated already, the new administration has been expanding the role of government and is raising our national debt to new levels. Following his first 100 days, Obama reassured the press that “We’ve begun the work of remaking America.” Helping Obama to “remake” America is a team of Establishment figures from both political parties who are members of the Council on Foreign Relations (CFR) and the Trilateral Commission (TC). The CFR represents the ruling Establishment in the U.S. and was created in 1919 by the same Wall Street conspirators who created the Fed (AFRD, pp. 125-127). [18] As Professor Quigley has also pointed out it is the goal of the globalist elites “to dominate the political system of each country and the economy of the world as a whole” in private hands. Quigley said it is important that both political parties in America should be “almost identical” so that there are not any “profound or extensive shifts in policy.” If one party is voted out, the new party “will still pursue, with new vigor, approximately the same basic policies.” [19]

In 2008, the presidential race was never in doubt. CFR members were well represented with McCain, Romney, Giuliani, Thompson, Clinton, Edwards, Dodd, and their man Obama. Membership in the CFR is by invitation only and its 4,338 members are spread between business, government and “others” (www.cfr.org). We can be sure that almost 500 CFR members are in the Obama administration because that is how many were in the Bush administration. Membership in the Trilateral Commission is limited to 424 from Europe, Japan and the U.S. and their focus is on their “shared leadership responsibilities” and “the dramatic transformation of the international system.” In other words, how the global elite can secure their place in the New World Order. Both the CFR and the TC share a collectivist worldview that stresses “progressive regionalization” towards a world government, a term frequently used by Zbigniew Brzezinski co-founder of the TC (www.augustreview.com). Part of this plan is the creation of a Superstate between the U.S., Canada and Mexico known as the North American Union that I will address in a moment. Brzezinski is a real heavyweight in the globalist fraternity and he is serving as senior policy advisor for Barack, who was only 12 years old when Zbig was using Rockefeller money to launch the TC and mentor Jimmy Carter. Presidents may come and go but the CFR/TC lock continues into every administration. As a newcomer to Washington the president is surrounded by veteran insiders to help guide his domestic and foreign policies “with new vigor.” Senator Joe Biden is former chairman of the U.S. Senate Committee on Foreign Relations and a long time-member of the CFR who was added to the 2008 Obama ticket.

As we should expect, a majority of Obama’s closest advisors and cabinet are from the CFR and the TC (10% of the U.S. membership), these include Robert Rubin, director at Goldman Sachs/Citigroup and co-chair of the CFR in New York. [20] National Security Advisor Thomas Donilon along with Gen. James L. Jones, Director of National Intelligence Adm. Dennis C. Blair, Madeleine Albright, Brent Scowcroft, James Baker and Henry Kissinger. The White House cabinet includes Secretary of State Hillary Clinton (not a CFR member but married to CFR member Bill Clinton whose professor at Georgetown was Carroll Quigley), Deputy Secretary of State James Steinberg, Assistant Secretary of State Kurt Campbell, State Department Special Envoys Richard Haass, Dennis Ross, George Mitchell and Richard Holbrooke, Secretary of Defense Robert M. Gates, our U.N. Ambassador Susan Rice, Department of Homeland Security (DHS) Janet Napolitano and Timothy F. Geithner, Secretary of Treasury. Geithner’s advisors include Peter G. Peterson (former CFR chairman), Paul Volker, Alan Greenspan and Hank Paulson, E. Gerald Corrigan and John Thain, all from Goldman Sachs.
Obama is chairman of the National Economic Council formed in 1993 by Robert Rubin. Rubin was the personal mentor of Larry Summers (CFR/TC) who is the current director of the NEC. Summers is the former chief economist for the World Bank/IMF and past president of Obama’s alma mater Harvard University. He is a former Secretary of Treasury under Bill Clinton (1999-2001), and he is best remembered for his support of the Gramm, Leach, Bliley Act that repealed the Glass-Steagall Act, “This historic legislation will better enable U.S. companies to compete in the new economy.” Within ten years this “historic legislation” contributed to the worst economic meltdown in modern history with massive bailouts on Wall Street by the Fed and U.S. Treasury! Also joining the NEC is Tim Geithner who was Under Secretary of the Treasury at the same time and later helped with the bailouts as president of the NY Fed. Other members of the NEC include Christina Romer, chairman of the Council of Economic Advisors in Obama’s cabinet, Joe Biden and Hillary Clinton, whose only knowledge of economics is tax and spend. With this kind of economic leadership our nation is in big trouble! In early 2009, Obama created the Economic Recovery Advisory Board and named Paul Volker as the new chairman. This Board is an eclectic mix from the private sector (AIG, GE, UBS, Caterpiller, Oracle) as well as academia, the SEC and AFL-CIO. Paul Volker is also chairman of the Group of Thirty (G30), which he helped found in 1978 as trustee for the Rockefeller family. The G30 consists of 30 ultra-elite international financiers including central banks around the world (who also share membership with the BIS), and U.S. representatives Timothy Geithner, Larry Summers, E. Gerald Corrigan and former Fed chairman Alan Greenspan (www.group30.org).

With his economic team, cabinet and advisors in place, Obama has set out to remake America with a presumed “mandate” from the American people (which he does not). Upon entering office Obama has resumed the practice of signing “executive orders” and appointing “czars” to oversee autos, borders, climate and so on. [21] Increasingly, the executive branch has become more like an Imperial Presidency with paternalistic qualities, and this is not good. As David Theroux, founder of the Independent Institute, comments, “For most Americans, the Presidency has become their sovereign king and father figure who stands above and beyond us mere citizens in order to oversee our lives and our well-being.” Seizing his own likeness to FDR, the president has assumed this kingly image and is proposing broad reforms like passing the American Recovery and Reinvestment Act with the Economic Recovery Advisory Board to create jobs and economic growth. Similar to the National Industrial Recovery Act and National Recovery Administration created in June 16, 1933, FDR also promised economic growth and new jobs. The accepted mythology is that FDR rescued the “failed free market” in 1932 and that his New Deal put America back to work and ended the Great Depression. Historians note that unemployment stood at 23% in 1933, and was still 15% in 1939. It was WWII that lowered unemployment down to a mere 1% by 1945, not the government (AFRD, pp. 57-67). It was government intervention that made the Great Depression great! In 1939, Secretary of the Treasury Henry Morgenthau later confessed before a congressional committee, “We are spending more money than we have ever spent before and it does not work….We have never made good on our promises….I say after eight years of this administration we have just a much unemployment as when we started…and an enormous debt to boot.” [22] Read this line again. For this is where we are heading.
In 1932, the Hoover administration created the Reconstruction Finance Corporation (RFC) to make government loans to banks in order to stimulate the economy. With $500 million, the RFC was also authorized to lend directly to the railroads that were considered too big to fail. Within a year the RFC was an abysmal failure writes one historian. “Hundreds of millions of dollars poured down various RFC rat-holes were lost forever.” Similarly $700 billion dollars in TARP money is being poured down more rat-holes today and this too will prove to be an abysmal failure. Again, we are reminded of Santayana’s words “that those who cannot remember the past are condemned to repeat it.” In 1935, the Supreme Court unanimously ruled against FDR’s National Industrial Recovery Act passed in 1933. In Schechter Poultry Corporation. v. United States the court ruled that the Act “infringed upon states’ authority, unreasonably stretched the Commerce Clause, and gave legislative powers to the executive branch in violation of the Constitution,” and further stated that “extraordinary conditions do not create or enlarge constitutional powers.” [23] Note here that extraordinary conditions do not give the government any authority to become social engineers or enlarge the government. As Jefferson also warned, “To take a single step beyond the boundaries thus specially drawn around the powers of Congress is to take pos-session of a boundless field of power.” Today the Imperial Presidency is supported by an enormous bureaucracy with a boundless field of power. As some have stated, the administrative staff of the executive branch has now become a de facto “fourth branch” of government. The U.S. Government Manual devotes hundreds of pages for the executive branch and the Federal Register regularly compiles more than 70,000 pages each year.

So who is to blame for the exponential growth of the federal government? Critics are quick to point out that we all are. Citizens have asked too much from their government and the states have been too eager to receive federal grants and funding. But this is changing. On April 15, 2009 thousands of people gathered in 800 cities to protest the Bush/Obama bailouts and big government with tea parties. At the same time several states have entered legislation asserting state’s rights based on the Tenth Amendment, which reads, “The powers not delegated to the U.S. by the Constitution…are reserved to the States respectively, or to the people.” This is not an effort for states to secede from the union, but merely an attempt to persuade the federal government to abide by the Constitution. Oklahoma is the first state to pass this legislation that affirms that the states should not be treated as “agents” of the federal government. “[This] Resolution serves as notice and demand to the federal government, as our agent, to cease and desist, effective immediately, mandates that are beyond the scope of these constitutionally delegated powers.” [24] States have a legitimate right to be concerned about the size of the federal government, but there is a real risk that this economic crisis could lead to an even greater crisis on the horizon.

A Serious Crisis Should Never Go To Waste

Writing in The New American (11/10/08), Charles Scalinger says, “Few events, save possibly war, are as susceptible to political manipulation and fear-mongering as an economic crisis.” As financial events unfolded in 2008 people started to fear an economic collapse. Speaking on the House floor in July 18, 2008, Congressman Ron Paul addressed this issue by cautioning, “In the post- 9/11 atmosphere, too many Americans are seeking safety over freedom. Real fear of economic collapse could prompt central planners to act to such a degree that the New Deal of the 1930s might look like Jefferson’s Declaration of Independence.” By late 2008, luminaries from the Establishment elite started weighing in on the crisis at hand. Speaking at a Seattle fundraiser Joe Biden said, “Mark my words, it will not be six months before the world tests Barack Obama.” The senator mentioned the “current economic crisis” and said it could be “international.” Soon after, Madeleine Albright was joined by Colin Powell in repeating their certainty that a larger crisis is in the making. Following his election victory the new president acknowledged to the press, “Painful crisis also provides us with an opportunity to transform our economy” (Manchester Union Leader, 12/28/08). Obama’s new Chief of Staff Rahm Emanuel was a little more direct about the opportunity to transform the economy when he added, “You never want a serious crisis to go to waste.” Speaking before the House Armed Services Committee on March 11, 2009, CFR Chairman Richard N. Haass was clear, “[The] current account deficit and national debt make it all but certain that down the road the U.S. will confront not just renewed inflation but quite possibly a dollar crisis as well (my emphasis).”
The financial difficulties that are crippling national economies is part of a larger concern that the U.S. is facing a dollar crisis, as recent talks at the G-20 meeting suggest. As I mentioned at the beginning of this report, our financial and economic problems are essentially rooted in a money problem, or the very nature of fiat currency and fractional reserve banking. The fact that central planners from the ruling Establishment are both aware of and anticipating a currency crisis is reason for pause since this is the kind of opportunity that should never go to waste. In a recent interview on CNBC, Henry Kissinger was asked about Obama and our financial uncertainties, “I think that his task will be to develop an overall strategy for America in this period, when really a New World Order can be created. It’s a great opportunity. It isn’t such a crisis.”

And just what is this New World Order? This is short for the New International Economic Order defined by the TC as a trilateral concept for world government. As David Rothkopf, former managing director for Kissinger & Associates has said in his new book Superclass the world needs “real global government” because “it is no longer possible for a nation-state acting alone to fulfill its portion of the social contract.” [25] Speaking at the 1995 State of the World Forum, Brzezinski laid out the strategy, “We cannot leap into world government in one quick step, the precondition for eventual globalization – genuine globalization – is progressive regionalization.” The blueprint for this goal is to create trading blocs like the EU. Here in the U.S., the North American Free Trade Agreement (NAFTA) has laid the foundation for the North American Union. Kissinger predicted in 1993 that “NAFTA will represent the most creative step toward a New World Order by any group of countries since the end of the Cold War,” and is “the architecture of a new international system” (LA Times, 7/18/93). In 1994, David Rockefeller said in a U.N. speech, “All we need is the right major crisis and the nations will accept the New World Order.” This idea of a crisis is exactly what the globalist elites need to integrate the NAU and create the new amero currency. In 2002, Dr. Robert A. Pastor (CFR), director for North American Studies at American University, wrote a paper for the TC entitled A North American Community promoting this scheme. In 2005, the CFR released a study for a convergence fulfillment by 2010. Recently, Dr. Pastor tipped his hand when he indicated that a major crisis, like another 9/11, would be sufficient to create a North American Community with Canada and Mexico:

What I am saying is that a crisis is an event which can force democratic governments to make difficult decisions like those that will be required to create a North American Community. It’s not that I want an-other 9/11, but having a crisis would force decisions that otherwise might not get made. When there’s a crisis, people accept proposals they wouldn’t have otherwise accepted (my emphasis). [26]

It would be hard to find a more authoritative quote than what has been said here. The NAU is part of a government-sponsored effort to create a NAFTA perimeter (www.spp.gov), and you can read more about this in my book (AFRD, pp. 123-141) or go to www.stopthenorthamericanunion.com. The Establishment planners may not be able to leap into world government, but they like the idea of “one quick step” to force a regional government! After all, this isn’t such a crisis right? No, this is treason. “A nation can survive its fools, and even the ambitious,” wrote Cicero, “But it cannot survive treason from within.” This plot to exploit an economic crisis is insidious. Obama’s senior advisors are operating like “the Matrix” to midwife our nation into their New World Order, and some of the American people are starting to wise up. As I have outlined in this report, the U.S. has created massive structural imbalances in the economy, huge deficits and bailouts are mounting and our Treasury bonds are about to be downgraded. According to the Bureau of Public Debt, the U.S. has started auctioning off 30-year bonds every month (and there are rumors of 50-year bonds!), and net borrowing is up 27-fold from $13 billion last year to $361 in the last quarter! In May 2009, Rep. Mark Kirk (R-IL) said he was shocked “at how much debt was being bought by the Federal Reserve due to the absence of foreign investors.” The Fed has now become not only the lender of last resort – but the buyer of last resort! In October 2008, a highly-classified document was leaked by the foreign press simply known as the “C & R Document” (www.google.com) and it is serious stuff. The report states that if the U.S. defaults and unilaterally cancels its debt obligations from China, Russia and Japan, it can expect “Conflict” and this will lead to “Revolution” in America. Managing Director of the IMF, Dominique Strauss-Kahn has recently warned that “advanced economies” could see violent protests.

The “C & R Document” has reportedly been distributed to the highest levels of government and the ruling superclass are preparing for the worst. Following the financial meltdown that began in late 2008 the U.S. Army War College’s Strategic Studies Institute ran an article in Parameters magazine by Prof. Nathan Freier in which he states that the U.S. military must prepare for a “violent, strategic dislocation inside the U.S.” which could be provoked by an “unforeseen economic collapse” or “loss of functioning political and legal order.” This report goes on to say that “the DoD would be an essential enabling hub for the continuity of political authority” to control “widespread civil violence inside the U.S.” [27] The “continuity of government” (COG) strategy dates back to the civil Readiness Exercise in 1984 known as Rex84 under FEMA that would use Continental military forces (CONUS) to fight civil disturbance (Operation Garden Plot, U.S. Army Manual 19-15). After the events of 9/11, the government moved quickly to enact the so-called USA PATRIOT Act in 2001, and this was followed by the DHS in 2002 that consolidated 22 agencies, including FEMA, and CONUS was converted to a permanent North American command known as NORTHCOM. In October 17, 2006, Bush secretly signed the Defense Authorization Act and the Military Commissions Act (Public Law 109-364/366) to use the military as domestic police and federalizing local police, which violates the Posse Comitatus Act of 1878 that prohibits the military from being used as law enforcement. In 2007, Bush also signed a Presidential Directive (NSPD-51) that created a new COG coordinator under the DHS without seeking or consulting Congress. [28] In October 2008, the DoD ordered a recall of the 3rd Infantry’s 1st Brigade Combat Team from Iraq to help local authorities in case of terror or “other domestic catastrophe.” According to the Washington Post, the first 4,700 troops are stationed at Fort Stewart, Georgia and another 20,000 troops will be attached to NORTHCOM.

The “war on terror” is a useful abstraction being used to prepare the U.S. for a military police state, and civil libertarians are taking note of this fundamental shift in national priorities (AFRD, pp. 117-123). After two days in office, Obama and the 111th Congress introduced the National Emergency Center Establishment Act (HR645) to create six emergency centers at existing military installations to work with the DHS. HR645 bears a direct relationship to the economic crisis and there has been no press coverage of this bill. In 2006, Halliburton subsidiary KBR was awarded a $385 million dollar contract with DHS to build internment facilities in the U.S. and some estimate that there are as many as 800 such camps being prepared for civil unrest (www.prisonplanet.com). According to the DHS website there are 58 “fusion centers” gathering information on “subversives” and other extremists and this likely includes the kind of people who attend tea parties and gun shows. Ron Paul and his followers have been targeted, and Paul warns that our civil liberties are being eviscerated. Retired CENTCOM Gen. Tommy Franks also predicted that our Constitution could be “discarded” in favor of some form of military government if a major crisis hits (Time, 11/21/03). Elitist within the government-military-industrial-complex are sensing the end game is near and they are appealing to our sense of patriotism and the necessity for degrading our liberties. But as William Pitt declared, “Necessity is the argument of tyrants, and the creed of slaves.”

Geostrategic Trends in a Global Network

As we look into our near future I will provide you with a brief analysis of some significant trends to be aware of and I will conclude with some suggestions for your own contingency planning. Gerald Celente is the director of the Trends Research Institute and he is a legendary forecaster. In his latest predictions he is also forewarning of America’s financial reckoning day and a hyperinflationary depression that will be followed by widespread violence, food riots, job marches, tax rebellion and the possible breakup of the U.S. as states join in secession (www.trendsresearch.com). Celente says that revolution and riots could start happening sometime in 2009-2010 and mercenary troops will be used to incarcerate people. Already there have been riots and protests in Iceland, Greece, France, Britain, Ireland, Spain, Latvia, Bulgaria, Russia and elsewhere. For 2009, the World Future Society has predicted food and water scarcity in the world along with commodity shortages and renewed tensions between the U.S. and Russia with their ally China (www.wfs.org). This is similar to the Global Trends 2025 report from the National Intelligence Council that sees conflicts arising over food, energy and particularly water as documented in the new book, Water: The Final Resource (2008). This government report also sees the U.S. dollar’s role being diminished with both Russia and China asserting the need for a “multipolar” world and the threat of a new “Cold War.” Considered an “arc of instability,” the Middle East will see a nuclear arms race if Iran acquires nuclear weapons, and there could be a proliferation after the 1991Strategic Arms Reduction Treaty between the U.S. and Russia expires in December 2009.
Andrew Krepinevich, director of the Center for Strategic and Budgetary Assessments (a government think tank), is a military futurist and he proposes several geopolitical threats in his new book Seven Deadly Scenarios. He mentions a global pandemic forcing a Mexican invasion (the DoD is also predicting financial collapse in Mexico) and an early withdraw from Iraq will result in chaos in the region. He, along with the DoD, is predicting the collapse of the Pakistani government and nuclear weapons falling into rogue states that can be used against U.S. cities. He also sees a cyberattack against the U.S. and according to NSA intelligence China already has the capability to shut down our Pacific naval fleet. Finally, in another scenario, Islamic fundamentalists shut down the Persian Gulf and the Strait of Malacca forcing an oil shock, and China, sensing America’s internal strife and nuked cites, launches an all-out attack against Taiwan to reclaim it as their 23rd province. [29] China has threatened to force reunification with Taiwan across the 100-mile Taiwan Strait since 1949 when Chiang Kai-shek and his anti-Communist forces fled the mainland.

In 1979, the U.S. established diplomatic relations with mainland China and also passed the Taiwan Relations Act, which pledges U.S. support for Taiwan and allows the sale of defensive arms. Since the 1990s, China has increased its military spending and currently has 1,500 Dong Feng II ballistic missiles aimed at Taiwan, and the DoD estimates that the PRC will have five Hans-class submarines equipped with JL-2 long-range nuclear missiles operational by 2010. [30] In 2005, the PRC passed an anti-seccession law that gives them a legal basis to attack Taiwan. Soon after, General Zhu Chenghu, dean of China’s National Defense University, declared, “If the Americans draw their missiles, I think we will have to respond with nuclear weapons.” Since then U.S. naval ships have been harassed and denied port calls by the Chinese. In late 2008, the U.S. announced a $6.5 billion arms package to Taiwan and Maj. Gen. Qian Lihua ordered the U.S. to “cancel its plans” and China has now “suspended all military exchanges with the Pentagon” (The Washington Times, 11/20/08). With things getting tense, the Pentagon sponsored a first-of-its-kind war game at Ft. Meade, Maryland in March 2009 that simulated economic warfare and concluded that China would be a decisive winner if they were to dump their U.S. financial assets. Will China do this? In 1956, during the Suez Canal crisis the U.S. ordered Britain to with-draw forces and threatened to dump Sterling bond holdings that would have devalued their currency – in three weeks the Brits conceded and the prime minister resigned. Yes, China has this geostrategic advantage and they know it (AFRD, pp. 159-169). Interestingly, China’s army literature describes their 600 merchant ships operated by COSCO as zhanjian, or “warships.” U.S. trade with China has always been strategic as noted by our military futurists. As Chairman Deng Xiaoping once confided, “we must hide our capacities and bide our time.”
China and Russia are both being affected by the economic downturn, but their rigid centrally-planned infrastructures are better prepared to control disarmed populations. Russian scholar Igor Panarin is dean of the Russian Foreign Ministry and a former KGB analyst who is predicting that America will descend into civil war in 2009 and will break up into six separate states by 2010. An expert on U.S.-Russian relations, Panarin refers to U.S. foreign debt (bonds) as “a pyramid scheme” that will lead to a financial collapse and says that mass immigration has contributed to our decline, which some see as a deliberate plot (America’s Engineered Decline). Panarin concludes that both Russia and China will emerge stronger and check U.S. hegemony in Central Asia, a geostrategic trend that concerns the U.S. intelligence community. In 2001, the Shanghai Cooperation Organization (SCO) was formed with China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan as a direct answer to a corrupted and pro-western OPEC cartel. Western analysts see this Sino-Russian alliance as a new Warsaw Pact, or geopolitical counterweight to U.S. oil interests around the Caspain Sea. This is a subject that Zbig Brzezinski wrote about in The Grand Cheesboard, and a more recent account by war correspondent Lutz Kleveman in his book The New Great Game: Blood and Oil in Central Asia. Kleveman points out that the “war on terror” was a pretext for sending troops to Iraq (to secure oil) and troops to Afghanistan to rid the Taliban, who were preventing the CentGas pipline project with Chevron-Unocal and Halliburton (Dick Cheney’s old company).

In 2005, the U.S. applied for observer status to the SCO and was flatly denied. In that same year, the U.S. was asked to remove its airbase in Uzbekistan and Russia has influenced Kyrgyzstan to remove more airbases in February 2009. Current SCO observers include India, Pakistan and Iran with Venezuela seeking to join (www.sectsco.org). Iran and Venezuela are rogue members of OPEC, and both have joint oil ventures with China. In 2004, Iran announced plans to open an oil bourse as a trading platform to price crude oil in euros instead of dollars in an effort to strike at the U.S. dollar pillar to collapse the military pillar (the CIA refers to this as attacking your foe’s ‘center of gravity’). In 2008, Iran opened this oil marker for trading and the Obama administration is currently drawing up plans for an attack against Iran (Iraq tried switching to euros in 2000). The Israeli government under Benjamin Netanyahu is also requesting flight codes from the U.S. to fly over Iraq to strike at Iranian nuclear facilities. Washington has criticized Russia for helping Iran to develop their nuclear plants and supplying TOR-M1 anti-aircraft missile systems. The fact that China-Russia-Iran has formed a hostile troika to U.S. interests in the region is a geopolitical paradigm that could be a tipping point for China to initiate economic warfare. The SCO favors a “petroeuro” pricing structure and some members of OPEC are also indicating the same. According to the BIS, the oil cartel is shifting more of their currency reserves into the euro. In early 2009, the Gulf Cooperation Council (GCC) formerly announced that they will break their dollar pegs in favor of a new single currency called the “khaleeji,” which means Gulf in Arabic. The GCC has pegged their currencies to the dollar since 1981 and cites America’s “inappropriate monetary policies” by the Fed as a main reason for their decision. [31] The new currency was planned for 2010, but Saudi Arabia wants it by fall 2009.

This is a major development in the Middle East and it demonstrates how the current economic crisis is producing a macroeconomic paradigm in the world. The declining role of the U.S. dollar, as predicted by futurists, forecasters, foreign analysts and government think tanks, is heightening the need for a more reliable reserve currency as proposed by the G-20 meetings. The current proposal of an SDR comprised of the dollar, euro, yen and pound could eventually result in the euro being the strong anchor as the dollar finally gives way to a revalued dollar/amero in the NAU. According to the McKinsey Global Institute the EU has officially over-taken the US as the world’s largest economy ($18.4 trillion GDP). As T. R. Reid noted in his 2004 book The United States of Europe, “the success of Europe’s common currency could bring America’s financial house of cards tumbling down.” [32] Currently there are 16 Eurozone member nations but some are failing to meet the 1997 Stability and Growth Pact and have more than 60% debt to GDP or 3% inflation (the U.S. has a 100-200% debt ratio!). According to Paul Donavan, a British economist at UBS, the economic crisis will likely cause a breakup of the Eurozone and favor “the strongest economies over the weaker ones,” perhaps resulting in 10 core nations. In late 2008, British politicians were musing, “If we had the euro, we would have been better off.” What the EU desperately needs is “political union” and the goal is to adopt the Lisbon Treaty by late 2009, and this will also create a new President of the EU. “We are building a new world superpower,” says Tony Blair, “The European Union is about the projection of collective power” (AFRD, pp. 148-158). [33] PM Gordon Brown adds that today’s challenges are merely the “birth pangs of a new global order.” Why are these important issues? The globalists are building a New World Order and the Bible predicts that Europe will rise in world power with exactly ten(10) nations and a world leader, and this is a major geostrategic trend to be watching. I write much more about this in my book (AFRD, pp. 198-219), and you are also encouraged to subscribe to my friend Pat Wood's site at www.geostrategictrends.com.

Famed currency analyst Dr. Franz Pick once said, “"The fate of the nation, and the fate of the currency are one and the same." America is in deep trouble and people are beginning to wake up. Just as the government has a color-coded national threat advisory our economic threat advisory is a code red, and it is time to seriously make some preparations for hard times. “A prudent man sees evil and hides himself, the naïve proceed and pay the penalty” (Pro. 27:12). Freeze-dried food storage and fresh water is highly recommended and you can contact these people at www.alpineairefoods.com, www.freezedryguy.com, www.nitro-pak.com, www.efoodsdirect.com and also check out www.freshwatersystems.com. The largest supplier of garden seeds is www.burpee.com, or 1-800-888-1447 for a catalog. For survival gear contact Emergency Essentials (www.beprepared.com), or call 1-800-999-1863 for a catalog. A good source for lighting, stoves and home goods is www.lehmans.com, or 1-888-438-5346.

Thomas Jefferson said, “When the people fear their government there is tyranny; when the government fears the people there is liberty.” Immediately following the election of Obama, gun and ammo sales rose 49%, and it is getting nearly impossible to find certain ammo. Why is this? In addition to people fearing their government, the Feds want to restrict private gun sales (HR45), ban so-called assault weapons (HR1022), and add a new 500% federal excise tax on firearms (www.gunowners.org). Our 2nd Amendment rights are in grave danger and history proves that gun registration usually precedes confiscation, as it did in the USSR (1929), China (1935), and Germany (1938). In this current environment and the potential for financial meltdown, riots and martial law you are urged to get armed and buy ammo (try www.ammoman.com, www.georgia-arms.com). In 2001, Argentina defaulted to the IMF and suffered massive bank runs and a collapse of the social order. For a sobering first-hand account please read “Lessons from Argentina,” by searching this title at www.google.com. If you are concerned about living in large urban centers I suggest Joel Skousen’s book Strategic Relocation or go to www.joelskousen.com, and for group retreats and property you can also check out www.suvivalrealty.com.

In my book I have a final chapter that deals with precious metals, tangible assets, paper investments and cash (AFRD, p. 285-318). Gold and silver have been in a bull market since 2001, and this trend will continue as our financial crisis deepens. Despite heavy demand for metals, spot indexes have been curtailed by bankers to help inspire confidence in their markets. As I noted earlier, Bear Stearns had a huge short silver position in March 2008 and J.P. Morgan Chase helped cover this commitment on COMEX. By July 2008, Countrywide, IndyMac, Fannie and Freddie Mac all imploded and J.P. Morgan along with Goldman Sachs moved to short the gold and silver markets by holding 6,199 silver contracts and 7,787 gold contracts. By August 2008, this figure was increased to 33,805 silver contracts (5-fold) and 86,398 gold contracts (11-fold) – this was 88% more silver and 46% more gold than COMEX had in their vaults – talk about blatant manipulation! During the final quarter of 2008, bankers conspired to sell enough OTC gold/silver derivatives to take gold from $975 to $725 and silver dropped from $19 to $9 an oz., such is the desperation of Wall Street. According to silver analyst Ted Butler, this kind of manipulation should convince investors “to acquire even more metals” (www.butlerresearch.com). For my clients, I recommend they place 30-50% of their liquid assets into metals with an equal amount in pure gold and silver bullion, and I can also assist clients with retirement accounts to rollover into a Precious Metals IRA at Sterling Trust Company (www.sterlingtrustcompany.com). For sophisticated or high net-worth clients I recommend depository accounts for low premiums and safekeeping. If you are interested in learning more go to my website at www.idpconsultinggroup.com and leave your contact information, or call me at 1-928-793-4269 (12-6 MST). As someone once said, “don’t wait to buy precious metals; buy precious metals and wait.”
Concerning cash and savings accounts I have noted elsewhere in this report that FDIC is a confidence game and that commercial money market accounts can fail. In my book and website, I list safer alternatives and also recommend that you have a foreign currency account at www.everbank.com. As far as investing in capital markets there is considerable risk but I have some suggestions for diversification and waive my normal consult-ing fee when you open a precious metals account. As Warren Buffet likes to say, “it wasn’t raining when Noah built the ark.” For some wise counsel listen to www.financialsense.com and go to www.moneyandmarkets.com and sign up for their daily alerts. You can also educate yourself by going to websites that I have mentioned in this special report and books like Thomas Wood’s timely treatise Meltdown (www.mises.org). A resource that I highly recommend is The New American magazine and you can receive a free copy by calling 1-800-727-8783. For a signed copy of my book or reports go to www.chuckcoppes.com, or call 1-208-712-0170 (PST).

In conclusion, this has been a difficult report to produce, but as I often say, I am just the messenger. Abe Lincoln said, “America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.” We seem to be at that place in history. For those who trust in Providence this is not cause to be fearful. “Heaven is My throne, and the earth is My footstool,” says the Lord. “But to this one I will look, to him who is humble and contrite of spirit, and who trembles at My word” (Is. 66:1-2). God has never promised us a smooth flight in this life, just a safe landing. I pray that you will look to Him and trust in His word in these difficult times. “God is our refuge and strength, a very present help in trouble. Therefore we will not fear” (Ps. 46:1). God bless and keep you all. CHC.

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[1] Thomas E Woods, Jr., Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (Washington, DC: Regnery Publishing, Incorporated, 2009). See also www.thomasewoods.com.
[2] Murrary Rothbard, A History of Money and Banking in the United States (Auburn, AL: Von Mises Inst., 2002), p. 240.
[3] G. Edward Griffin, The Creature from Jekyll Island (Westlake Village, CA: American Media, 1994), p. 17. A must read!
[4] Seigniorage - is a medieval term that refers to the privilege of feudal lords to mint new coinage in their realm and declare it as money. In this “inflationary” scheme the sovereigns could purchase new goods but all existing coinage was devalued.
[5] The Writings of Thomas Jefferson (Washington, D.C.: Jefferson Memorial Association, 1903), Volume No. XIII, p. 277.
[6] Petrodollar Warfare and Collapse of U.S. Dollar Imperialism in the 21st Century is available at www.chuckcoppes.com.
[7] James Turk & John Rubino, The Coming Collapse of the Dollar and How to Profit From It (NY: Random, 2004), p. 25.
[8] William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Shuster,Inc.: 1987), p. 104. Sub-prime loans came to be known as “ninja” loans which stands for “no job, no income, and no assets.”
[9] On Nov. 15, 2007, the Bank of International Settlements (www.bis.org) enforced the 2004 Basel II Accord that required banks to adjust their marketable securities based on the Financial Accounting Standards Board (FASB), Statement # 127.
[10] Bear Stearns, Countrywide, Merrill Lynch and Lehman Bros. have since been absorbed by other primary dealers and the total is now 16 including foreign banks and brokerages like HSBC, UBS Securities, BNP Paribas, Barclays, Credit Suisse, Daiwa Securities, Mizuho Securities, Greenwich Capital, Deutsche Bank Securities, and Dresdner Kleinwort Securities.
[11] The Fed becomes “the buyer of last resort” and new money is made available to commercial banks thus easing pressure.
[12] Quoted in The McAlvany Intelligence Advisor, February 2004, p. 14. This is the first warning from Moody’s since 1917.
[13] Carroll Quigley, Tragedy and Hope: A History of the World in our Times (NY: The MacMillan Company, 1966), p.950.
[14] Barack will not release his medical records nor his records from Occidental and Harvard College as well. His name in Swahili means “Blessed of God” and his middle name is from his grandfather Hussein Obama. His father’s cousin Raila Odinga (from the same Luo tribe) is the current Prime Minister of Kenya and is a radical socialist Muslim who wants to suppress all Christians and impose Islamic sharia law. In 2008, Barack supported Odinga with a million dollar donation.
[15] Saul Alinsky (1909-1972) criticized ‘middle class values’ in Reveille for Radicals (1946) and Rules for Radicals (1971).
[16] New Party members mostly come from the Democratic Socialist of America dating back to the 1960s (www.dsausa.org)
[17] Samuel Vaknin, Malignant Self-Love: Narcissism Revisited (2001). Full article at www.truthorfiction.com – “ Vaknin.”
[18] Founding members include Paul Warburg, J.P. Morgan, John D. Rockefeller, Nelson P. Aldrich, Jacob Schiff and more.
[19] Carroll Quigley, Tragedy and Hope, p. 1,256. Quigley mentions how “cooperative politicians” will be rewarded, p. 950.
[20] The Shadows of Power: The Council on Foreign Relations and the American Decline by James Perloff is recommended.
[21] Executive orders are much like a “king’s decree” and have the force of law. EOs were rarely issued prior to 1907. Since WWII there have been approximately 300 issued in each administration. During FRD’s entire presidency he issued 3,728!
[22] Burton Folsom, Jr., New Deal or Raw Deal?: How FDR’s Economic Legacy Has Damaged America (NY: 2008), p. 48.
[23] See www.answers.com. The NIRA created an “industrial cartel” in the same way that the Fed is also a “banking cartel.”
[24] Currently there are almost thirty states that are supporting secession including AZ,AL,AR,GA,ID,IN,IA,KS,KY,MI,MN,MS,MT,NH,NM,OH,OK,OR,PA,SC,SD,TN,TX,VA,WA,WI.
[25] David Rothkopf, Superclass: The Global Power Elite and the World They are Making (NY: Straus, 2009), pp. 315-316.
[26] Jerome D. Corsi, The Late Great USA: The Coming Merger with Mexico and Canada (CA: WND Books, 2007), p. 32.
[27] Known and Unknowns: Unconventional Strategic Shocks in Def. Strategy Development (www.infowars.com/?p=6821).
[28] Also known as HSPD-20, this was not in compliance with the National Emergency Act of 1976 (U.S.C. 50:1601-1651).
[29] Andrew F. Krepinevich, 7 Deadly Scenarios: A Military Futurist Explores War in the 21st Century (NY: Bantam, 2009)
[30] Janes Intelligence Weekly has captured images of a secret submarine base at the tip of Hainan Island that can conceal up to 20 submarines and aircraft carriers to challenge U.S. naval power in the region along with new Russian SU-30MK2 jets
[31] The GCC includes Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain. (Yemen is seeking to join).
[32] T.R. Reid, The United States of Europe: The New Superpower and the End of American Supremacy (NY: 2004), p. 243.
[33] Ibid., p. 4. The annual Bilderberg Group meeting in Vouliagmeni, Greece (May 14, 2009) focused on the Lisbon Treaty.