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A 70 Trillion Dollar Counterfeiting Ring (Zeus Y., September 23, 2008)
According to several sources the market for so-called “credit default swaps” last year alone was nearly equal to the total global GDP, around 70 trillion dollars by some estimates. Yet these derivatives have no discernible “origin” or value. People aren’t sure whether they are capital vehicles, insurance vehicles, investment vehicles, all three, or none of the above. However, what is becoming very clear to me is that they, along with many of the other “creative” financial vehicles are nothing more than a bold mass counterfeiting scheme based on a very simple premise and set of conditions that are not at all “complex.” The problem is not that their values are “unknowable,” but that we know what their value is—worthless. Our problem is that we’re not willing to contemplate socially or personally the ramifications of what we know. This is why big lies work-- the bald truth is harder for most to bear.
What if you used cash to pay your groceries, and you found out the money was phony? You provided of labor, goods, etc. and you got worthless paper in return. You offered something that had real value in return for something you thought had value but did not. Either you swallow the rip-off and lose real value or someone covers for you—the government, insurance etc. What happens if this worthless scrip you receive takes the form of digital funny money, concocted out of thin air, without any real assets or capital to back it up? What happens if the global market for this worthless scrip exceeds the world’s GDP? Oops, there is no one who could possibly cover that. No bailout can buy up tens of trillions of dollars of counterfeit currency or phantom assets.
If I promise to ensure you against loss, and I have no actual resources to back it up other than a contract that says I will, I have produced a counterfeit document. My promise has to be backed by an ability to pay, and I don’t have it. What I have is phony assets, “marked to model,” acquired by selling my guarantee off to someone else, who in turn does the same. I take your money and leverage it into risky investments including more exotic vehicles that have no value, but that I think/pretend have value. This is not gambling. This is simple theft. In gambling, money comes and goes, but is essentially conserved somewhere. In this system of massive counterfeiting, I do the equivalent of flooding the monetary system with fraudulent promissory notes, passed off as assets, while skimming off huge fees with each transaction.
Yes, debt has now magically become an asset because it can ostensibly generate interest payment income and fees. So we lower the monthly minimum on credit cards and jack up the interest rate to keep up the charade of huge returns. We allow negative amortization. We promote “balloon payments.” There is no real value there BY DESIGN. There can’t be. No one can possibly pay off a mortgage that is ten times their income with a principal that actually increases over time. But if you can pass off the personal or institutional liability (there is no risk here; risk assumes some possibility of solvency) you may be able to “escape” accountability and profit from this scam. As a system, however, this will inevitably fail, and as we are seeing with both ecological and financial environments that we are all part of a system where even externalized liabilities will return to bite us.
What happens when a country floods its own monetary system with currency or makes money far too cheap through low interest rates. At first rampant inflation in things like stocks or house prices, as demand for goods is driven up. Anyone can buy anything with his or her own credit leverage and a lack of fear of consequences. Then devaluation and deflation emerge as fundamentals catch up, followed by a liquidity crisis due to exposed (fraudulent) leverages— leverages which have an essentially infinite multiplication of pseudo value in exotic financial vehicles. What happens when you flood the global market with toxic debt that far exceeds the ability of any country, and even consortiums of companies or countries to address the issue?
You have a global meltdown, or you try to stave off the inevitable reckoning with 700 billion dollar band-aids that have within their conduct of use no provisions for transparency, because that transparency would expose the far deeper and more widespread fraud under the symptoms. (This is all, of course, to help with an orderly “unwinding” of fraudulent assets.) In the end what you will see, no matter the route, is worthless garbage.
We’ve been here before. We’ve been told that terrorists flying planes into buildings was “unthinkable,” requiring complex planning and massive funding. It was not unthinkable or complex. It was simple, needing only a coordinated plan to destroy, exploited vulnerabilities, flight training, boxcutters, and navigation skills. Regarding Iraq, we were warned of a “mushroom cloud,” bio-weapons and all those other complex threats that would get us if the president was not extended unlimited military powers. It wasn’t true or complex. In fact, we have solid testimony from sources to Pulitzer Prize-winning reporter Ron Suskind, that the government actually forged documents to make that case for war. People lied to gain power, plain and simple, making us all pay again. Now we have counterfeiting to the tune of trillions of dollars, and we’re being asked to give 700 billion dollars to be used without any transparency, oversight, or accountability by Paulson and Bernanke.
Well we know one thing it will be used to do-- shroud the underlying core financial and moral crises until past the election and the January 2009 changing of the presidential guard. This is again a very simple move to pay off the world’s financial elite, and help them retain power while avoiding accountability.
If you know someone is going to break up with you, do you want them to let you down easy, sweet talk you, “still be your friend,” screw around on you behind your back while keeping the relationship going, or simply make a clean honest break. I prefer the clean honest break. I like my pain straight up, so I can deal with the reality, assess the damage, and make a new start as more informed person. Apparently too many like to be led along.=
Remember in math, when they gave you a very complex looking figure and told you to find the area. The grunts in class would try to figure out all the many angles and tally up the area inside the figure. This almost always leads to careless errors or too little time to solve the problem given a limited test-taking time. The implicit lesson was to draw a regular figure (most often a rectangle) around the complex figure, calculate its easy-to-compute area, and subtract the areas that constituted the difference between the two figures. Voila... easy, fast, elegant and accurate.
I think the same lesson can be applied to credit default swaps. Instead of asking the obvious, complex, and obscuring question, "What value DO they have?", one should ask the elegant and simple question, "What value COULD they have?" Even a cursory examination would seem to indicate that the answer is either zero or less-than-zero. This comes from the interaction between debts and fees. In practice the greater the debt serviced (again concocted as if it had value), the greater the fee that would accrue in real terms to servicers. (Again this debt is curiously cast as an asset, often in ways that were supported by nothing other than increasing ostensible future returns that assumed unlimited resources and continuing ability to pay. One would have hoped that the dot.com bubble would have laid to rest the notion of hyped future returns as a good basis to assign value. )
Now we go to the 70 trillion dollar credit default swap market of last year. If only 1 to 2 percent "service fee" were charged in these transactions (which are based on illusory assets), we're talking nearly three-quarters to one-and-a-half trillion dollars in real term fees being siphoned off (i.e. hijacked from) the global economy for no productive, but merely parasitic, purpose. If these fees are attached to phony assets, as I have propounded, than that means a net loss of, say, a trillion dollars of capital taken right out of the system. No wonder we have a liquidity crisis.
Here is how the scam seems to work. Insure credit default with inadequate capital, assuming the market will always go up. I've heard actual figures quoted in articles I've read that fly-by-night operations were insuring billions of dollars of debt in major banks with only millions of dollars of collateral. So we're talking a tenth of a percent reserve, not ten percent, and the more exotic instruments apparently had no reserve or used the reserve to leverage other risky investments. As the market goes up, everybody's happy. Everybody appears to be making a killing, much like a pyramid scheme... as long as you can get the next person to pay. So now someone defaults in real terms, make that several million people. There aren't anything but IOUs in the system that have been treated as assets and capital. There is no money.
This is why I say that toxic assets may be toxic, but they are not assets, and that they have zero value and likely actually less-than-zero value. If I have insured against loss with only a tenth-of-a-percent reserve, and yet I am charging a percent or two per year for my services, I'm actually charging ten times more than I can actually pay out in case of a default. I guarantee you that those fees were not going into the reserve but into the pockets of the servicers.
This recent Paulson posturing is nothing more than an attempt to cover up the scam through January, 2009, allowing Bush to duck out, temporarily saving his banking pals, and saving his own skin until he leaves in five months. It follows a CEO pattern that has been going on since Reagan's deregulatory days. We saw it in Enron. Don't get left holding the bag. Let it blow up on someone else's watch. This time it may not work. Five months is seeming awfully long in the present environment. One thing of which I am convinced, we have just been ripped off trillions of dollars and 700 billion of even real money won't fix the problem (never mind that the this 700 million is simply more debt added to the global system on America's behalf).
As "Devilstower" commented in an excellent diary post on Kos, "Is it altogether
a good idea to run up debts exceeding all assets it's even possible to own?"
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