Ever since the beginning
of the financial crisis and Quantitative Easing, the question has been
before us: How can the Federal Reserve maintain zero interest
rates for banks and negative real interest rates for savers and bond
holders when the US government is adding $1.5 trillion to the national
debt every year via its budget deficits? Not long ago the Fed
announced that it was going to continue this policy for another 2 or
3 years. Indeed, the Fed is locked into the policy. Without the artificially
low interest rates, the debt service on the national debt would be so
large that it would raise questions about the US Treasury’s credit rating
and the viability of the dollar, and the trillions of dollars in Interest
Rate Swaps and other derivatives would come unglued.
In other words, financial deregulation leading to Wall Street’s gambles,
the US government’s decision to bail out the banks and to keep them
afloat, and the Federal Reserve’s zero interest rate policy have put
the economic future of the US and its currency in an untenable and dangerous
position. It will not be possible to continue to flood the bond
markets with $1.5 trillion in new issues each year when the interest
rate on the bonds is less than the rate of inflation. Everyone who purchases
a Treasury bond is purchasing a depreciating asset. Moreover, the capital
risk of investing in Treasuries is very high. The low interest rate
means that the price paid for the bond is very high. A rise in interest
rates, which must come sooner or later, will collapse the price of the
bonds and inflict capital losses on bond holders, both domestic and
The question is: when is sooner or later? The purpose of this
article is to examine that question.
Let us begin by answering the question: how has such an untenable policy
managed to last this long?
A number of factors are contributing to the stability of the dollar
and the bond market. A very important factor is the situation in Europe.
There are real problems there as well, and the financial press keeps
our focus on Greece, Europe, and the euro. Will Greece exit the European
Union or be kicked out? Will the sovereign debt problem spread
to Spain, Italy, and essentially everywhere except for Germany and the
Will it be the end of the EU and the euro? These are all very
dramatic questions that keep focus off the American situation, which
is probably even worse.
The Treasury bond market is also helped by the fear individual investors
have of the equity market, which has been turned into a gambling casino
by high-frequency trading.
High-frequency trading is electronic trading based on mathematical models
that make the decisions. Investment firms compete on the basis of speed,
capturing gains on a fraction of a penny, and perhaps holding positions
for only a few seconds. These are not long-term investors. Content
with their daily earnings, they close out all positions at the end of
High-frequency trades now account for 70-80% of all equity trades. The
result is major heartburn for traditional investors, who are leaving
the equity market. They end up in Treasuries, because they are unsure
of the solvency of banks who pay next to nothing for deposits, whereas
10-year Treasuries will pay about 2% nominal, which means, using the
official Consumer Price Index, that they are losing 1% of their capital
each year. Using John Williams’ (<http://shadowstats.com/>shadowstats.com)
correct measure of inflation, they are losing far more. Still,
the loss is about 2 percentage points less than being in a bank, and
unlike banks, the Treasury can have the Federal Reserve print the money
to pay off its bonds. Therefore, bond investment at least returns
the nominal amount of the investment, even if its real value is much
lower. ( For a description of High-frequency trading, see:http://en.wikipedia.org/wiki/High_frequency_trading )
The presstitute financial media tells us that flight from European sovereign
debt, from the doomed euro, and from the continuing real estate disaster
into US Treasuries provides funding for Washington’s $1.5 trillion annual
deficits. Investors influenced by the financial press might be responding
in this way. Another explanation for the stability of the Fed’s
untenable policy is collusion between Washington, the Fed, and Wall
Street. We will be looking at this as we progress.
Unlike Japan, whose national debt is the largest of all, Americans do
not own their own public debt. Much of US debt is owned abroad,
especially by China, Japan, and OPEC, the oil exporting countries. This
places the US economy in foreign hands. If China, for example,
were to find itself unduly provoked by Washington, China could dump
up to $2 trillion in US dollar-dominated assets on world markets. All
sorts of prices would collapse, and the Fed would have to rapidly create
the money to buy up the Chinese dumping of dollar-denominated financial
The dollars printed to purchase the dumped Chinese holdings of US dollar
assets would expand the supply of dollars in currency markets
and drive down the dollar exchange rate. The Fed, lacking foreign currencies
with which to buy up the dollars would have to appeal for currency swaps
to sovereign debt troubled Europe for euros, to Russia, surrounded by
the US missile system, for rubles, to Japan, a country over its head
in American commitment, for yen, in order to buy up the dollars with
euros, rubles, and yen.
These currency swaps would be on the books, unredeemable and making
additional use of such swaps problematical. In other words, even
if the US government can pressure its allies and puppets to swap their
harder currencies for a depreciating US currency, it would not be a
repeatable process. The components of the American Empire don’t
want to be in dollars any more than do the BRICS.
However, for China, for example, to dump its dollar holdings all at
once would be costly as the value of the dollar-denominated assets would
decline as they dumped them. Unless China is faced with US military
attack and needs to defang the aggressor, China as a rational economic
actor would prefer to slowly exit the US dollar. Neither do Japan,
Europe, nor OPEC wish to destroy their own accumulated wealth from America’s
trade deficits by dumping dollars, but the indications are that they
all wish to exit their dollar holdings.
Unlike the US financial press, the foreigners who hold dollar assets
look at the annual US budget and trade deficits, look at the sinking
US economy, look at Wall Street’s uncovered gambling bets, look at the
war plans of the delusional hegemon and conclude: “I’ve got to carefully
get out of this.”
US banks also have a strong interest in preserving the status quo. They
are holders of US Treasuries and potentially even larger holders. They
can borrow from the Federal Reserve at zero interest rates and purchase
10-year Treasuries at 2%, thus earning a nominal profit of 2% to offset
derivative losses. The banks can borrow dollars from the Fed for free
and leverage them in derivative transactions. As Nomi Prins puts it,
the US banks don’t want to trade against themselves and their free source
of funding by selling their bond holdings. Moreover, in the event
of foreign flight from dollars, the Fed could boost the foreign demand
for dollars by requiring foreign banks that want to operate in the US
to increase their reserve amounts, which are dollar based.
I could go on, but I believe this is enough to show that even actors
in the process who could terminate it have themselves a big stake in
not rocking the boat and prefer to quietly and slowly sneak out of dollars
before the crisis hits. This is not possible indefinitely as the
process of gradual withdrawal from the dollar would result in continuous
small declines in dollar values that would end in a rush to exit, but
Americans are not the only delusional people.
The very process of slowly getting out can bring the American house
down. The BRICS--Brazil, the largest economy in South America, Russia,
the nuclear armed and energy independent economy on which Western
Europe ( Washington’s NATO puppets) are dependent for energy, India,
nuclear armed and one of Asia’s two rising giants, China, nuclear armed,
Washington’s largest creditor (except for the Fed), supplier of America’s
manufactured and advanced technology products, and the new bogyman for
the military-security complex’s next profitable cold war, and South
Africa, the largest economy in Africa--are in the process of forming
a new bank. The new bank will permit the five large economies to conduct
their trade without use of the US dollar.
In addition, Japan, an American puppet state since WW II, is on the
verge of entering into an agreement with China in which the Japanese
yen and the Chinese yuan will be directly exchanged. The trade
between the two Asian countries would be conducted in their own currencies
without the use of the US dollar. This reduces the cost of foreign trade
between the two countries, because it eliminates payments for foreign
exchange commissions to convert from yen and yuan into dollars and back
into yen and yuan.
Moreover, this official explanation for the new direct relationship
avoiding the US dollar is simply diplomacy speaking. The Japanese
are hoping, like the Chinese, to get out of the practice of accumulating
ever more dollars by having to park their trade surpluses in US Treasuries.
The Japanese US puppet government hopes that the Washington hegemon
does not require the Japanese government to nix the deal with China.
Now we have arrived at the nitty and gritty. The small percentage
of Americans who are aware and informed are puzzled why the banksters
have escaped with their financial crimes without prosecution. The answer
might be that the banks “too big to fail” are adjuncts of Washington
and the Federal Reserve in maintaining the stability of the dollar and
Treasury bond markets in the face of an untenable Fed policy.
Let us first look at how the big banks can keep the interest rates on
Treasuries low, below the rate of inflation, despite the constant increase
in US debt as a percent of GDP--thus preserving the Treasury’s ability
to service the debt.
The imperiled banks too big to fail have a huge stake in low interest
rates and the success of the Fed’s policy. The big banks are positioned
to make the Fed’s policy a success. JPMorganChase and other giant-sized
banks can drive down Treasury interest rates and, thereby, drive up
the prices of bonds, producing a rally, by selling Interest Rate Swaps
A financial company that sells IRSwaps is selling an agreement to pay
floating interest rates for fixed interest rates. The buyer is purchasing
an agreement that requires him to pay a fixed rate of interest in exchange
for receiving a floating rate.
The reason for a seller to take the short side of the IRSwap, that is,
to pay a floating rate for a fixed rate, is his belief that rates are
going to fall. Short-selling can make the rates fall, and thus drive
up the prices of Treasuries. When this happens, as the charts
at http://www.marketoracle.co.uk/Article34819.html illustrate,
there is a rally in the Treasury bond market that the presstitute financial
media attributes to “flight to the safe haven of the US dollar and Treasury
bonds.” In fact, the circumstantial evidence (see the charts in
the link above) is that the swaps are sold by Wall Street whenever the
Federal Reserve needs to prevent a rise in interest rates in order to
protect its otherwise untenable policy. The swap sales create
the impression of a flight to the dollar, but no actual flight
occurs. As the IRSwaps require no exchange of any principal or real
asset, and are only a bet on interest rate movements, there is no limit
to the volume of IRSwaps.
This apparent collusion suggests to some observers that the reason the
Wall Street banksters have not been prosecuted for their crimes is that
they are an essential part of the Federal Reserve’s policy to preserve
the US dollar as world currency. Possibly the collusion between the
Federal Reserve and the banks is organized, but it doesn’t have to be.
The banks are beneficiaries of the Fed’s zero interest rate policy.
It is in the banks’ interest to support it. Organized collusion
is not required.
Let us now turn to gold and silver bullion. Based on sound analysis,
Gerald Celente and other gifted seers predicted that the price of gold
would be $2000 per ounce by the end of last year. Gold and silver
bullion continued during 2011 their ten-year rise, but in 2012 the price
of gold and silver have been knocked down, with gold being $350 per
ounce off its $1900 high.
In view of the analysis that I have presented, what is the explanation
for the reversal in bullion prices? The answer again is shorting.
Some knowledgeable people within the financial sector believe that the
Federal Reserve (and perhaps also the European Central Bank) places
short sales of bullion through the investment banks, guaranteeing any
losses by pushing a key on the computer keyboard, as central banks can
create money out of thin air.
Insiders inform me that as a tiny percent of those on the buy side of
short sells actually want to take delivery on the gold or silver bullion,
and are content with the financial money settlement, there is no limit
to short selling of gold and silver. Short selling can actually exceed
the known quantity of gold and silver.
Some who have been watching the process for years believe that government-directed
short-selling has been going on for a long time. Even without government
participation, banks can control the volume of paper trading in gold
and profit on the swings that they create. Recently short selling is
so aggressive that it not merely slows the rise in bullion prices but
drives the price down. Is this aggressiveness a sign that
the rigged system is on the verge of becoming unglued?
In other words, “our government,” which allegedly represents us, rather
than the powerful private interests who elect “our government” with
their multi-million dollar campaign contributions, now legitimized by
the Republican Supreme Court, is doing its best to deprive us mere citizens,
slaves, indentured servants, and “domestic extremists” from
protecting ourselves and our remaining wealth from the currency debauchery
policy of the Federal Reserve. Naked short selling prevents the rising
demand for physical bullion from raising bullion’s price.
Jeff Nielson explains another way that banks can sell bullion shorts
when they own no bullion. http://www.gold-eagle.com/editorials_08/nielson102411.html
Nielson says that JP Morgan is the custodian for the largest long silver
fund while being the largest short-seller of silver. Whenever the silver
fund adds to its bullion holdings, JP Morgan shorts an equal amount.
The short selling offsets the rise in price that would result from the
increase in demand for physical silver. Nielson also reports that bullion
prices can be suppressed by raising margin requirements on those who
purchase bullion with leverage. The conclusion is that bullion
markets can be manipulated just as can the Treasury bond market and
How long can the manipulations continue? When will the proverbial
hit the fan?
If we knew precisely the date, we would be the next mega-billionaires.
Here are some of the catalysts waiting to ignite the conflagration that
burns up the Treasury bond market and the US dollar:
A war, demanded by the Israeli government, with Iran, beginning with
Syria, that disrupts the oil flow and thereby the stability of the Western
economies or brings the US and its weak NATO puppets into armed conflict
with Russia and China. The oil spikes would degrade further the US and
EU economies, but Wall Street would make money on the trades.
An unfavorable economic statistic that wakes up investors as to the
true state of the US economy, a statistic that the presstitute media
An affront to China, whose government decides that knocking the US down
a few pegs into third world status is worth a trillion dollars.
More derivate mistakes, such as JPMorganChase’s recent one, that send
the US financial system again reeling and reminds us that nothing has
The list is long. There is a limit to how many stupid mistakes and corrupt
financial policies the rest of the world is willing to accept from the
US. When that limit is reached, it is all over for “the
world’s sole superpower” and for holders of dollar-denominated instruments.
Financial deregulation converted the financial system, which formerly
served businesses and consumers, into a gambling casino where bets are
not covered. These uncovered bets, together with the Fed’s zero interest
rate policy, have exposed Americans’ living standard and wealth to large
declines. Retired people living on their savings and investments,
IRAs and 401(k)s can earn nothing on their money and are forced to consume
their capital, thereby depriving heirs of inheritance. Accumulated wealth
As a result of jobs offshoring, the US has become an import-dependent
country, dependent on foreign made manufactured goods, clothing, and
shoes. When the dollar exchange rate falls, domestic US prices will
rise, and US real consumption will take a big hit. Americans will consume
less, and their standard of living will fall dramatically.
The serious consequences of the enormous mistakes made in Washington,
on Wall Street, and in corporate offices are being held at bay by an
untenable policy of low interest rates and a corrupt financial press,
while debt rapidly builds. The Fed has been through this experience
once before. During WW II the Federal Reserve kept interest rates low
in order to aid the Treasury’s war finance by minimizing the interest
burden of the war debt. The Fed kept the interest rates low by buying
the debt issues. The postwar inflation that resulted led to the Federal
Reserve-Treasury Accord in 1951, in which agreement was reached that
the Federal Reserve would cease monetizing the debt and permit interest
rates to rise.
Fed chairman Bernanke has spoken of an “exit strategy” and said that
when inflation threatens, he can prevent the inflation by taking the
money back out of the banking system. However, he can do that
only by selling Treasury bonds, which means interest rates would rise.
A rise in interest rates would threaten the derivative structure, cause
bond losses, and raise the cost of both private and public debt service.
In other words, to prevent inflation from debt monetization would bring
on more immediate problems than inflation. Rather than collapse the
system, wouldn’t the Fed be more likely to inflate away the massive
Eventually, inflation would erode the dollar’s purchasing power and
use as the reserve currency, and the US government’s credit worthiness
would waste away. However, the Fed, the politicians, and
the financial gangsters would prefer a crisis later rather than sooner.
Passing the sinking ship on to the next watch is preferable to going
down with the ship oneself. As long as interest rate swaps can be used
to boost Treasury bond prices, and as long as naked shorts of bullion
can be used to keep silver and gold from rising in price, the false
image of the US as a safe haven for investors can be perpetuated.
However, the $230,000,000,000,000 in derivative bets by US banks might
bring its own surprises. JPMorganChase has had to admit that its recently
announced derivative loss of $2 billion is more than that. How
much more remains to be seen. According
to the Comptroller of the Currency the five largest banks hold 95.7%
of all derivatives. The five banks holding $226 trillion in derivative
bets are highly leveraged gamblers. For example, JPMorganChase
has total assets of $1.8 trillion but holds $70 trillion in derivative
bets, a ratio of $39 in derivative bets for every dollar of assets.
Such a bank doesn’t have to lose very many bets before it is busted.
Assets, of course, are not risk-based capital. According to the Comptroller
of the Currency report, as of December 31, 2011, JPMorganChase held
$70.2 trillion in derivatives and only $136 billion in risk-based capital.
In other words, the bank’s derivative bets are 516 times larger than
the capital that covers the bets.
It is difficult to imagine a more reckless and unstable position for
a bank to place itself in, but Goldman Sachs takes the cake. That bank’s
$44 trillion in derivative bets is covered by only $19 billion in risk-based
capital, resulting in bets 2,295 times larger than the capital
that covers them.
Bets on interest rates comprise 81% of all derivatives. These are the
derivatives that support high US Treasury bond prices despite massive
increases in US debt and its monetization.
US banks’ derivative bets of $230 trillion, concentrated in five banks,
are 15.3 times larger than the US GDP. A failed political system
that allows unregulated banks to place uncovered bets 15 times larger
than the US economy is a system that is headed for catastrophic failure.
As the word spreads of the fantastic lack of judgment in the American
political and financial systems, the catastrophe in waiting will become
Everyone wants a solution, so I will provide one. The US government
should simply cancel the $230 trillion in derivative bets, declaring
them null and void. As no real assets are involved, merely
gambling on notional values, the only major effect of closing out or
netting all the swaps (mostly over-the-counter contracts between counter-parties)
would be to take $230 trillion of leveraged risk out of the financial
system. The financial gangsters who want to continue enjoying
betting gains while the public underwrites their losses would scream
and yell about the sanctity of contracts. However, a government that
can murder its own citizens or throw them into dungeons without due
process can abolish all the contracts it wants in the name of national
security. And most certainly, unlike the war on terror, purging
the financial system of the gambling derivatives would vastly improve
Dr. Roberts was Assistant Secretary of the US Treasury, Associate
Editor of the Wall Street Journal, columnist for Business Week, and
professor of economics. His book, Economies In Collapse,
is being published in Germany this month.