Financial Market Manipulation Is The New Trend: Can It Continue?
By Paul Craig Roberts
December 19, 2014 "ICH"
- A dangerous new trend is the successful manipulation of the financial
markets by the Federal Reserve, other central banks, private banks, and
the US Treasury. The Federal Reserve reduced real interest rates on US
government debt obligations first to zero and then pushed real interest
rates into negative territory. Today the government charges you for the
privilege of purchasing its bonds.
People
pay to park their money in Treasury debt obligations, because they do
not trust the banks and they know that the government can print the
money to pay off the bonds. Today Treasury bond investors pay a fee in
order to guarantee that they will receive the nominal face value (minus
the fee) of their investment in government debt instruments.
The
fee is paid in a premium, which raises the cost of the debt instrument
above its face value and is paid again in accepting a negative rate of
return, as the interest rate is less than the inflation rate.
Think about this for a minute. Allegedly
the US is experiencing economic recovery. Normally with rising economic
activity interest rates rise as consumers and investors bid for credit.
But not in this “recovery.”
Normally
an economic recovery produces rising consumer spending, rising profits,
and more investment. But what we experience is flat and declining
consumer spending as jobs are offshored and retail stores close. Profits
result from labor cost savings from employee layoffs.
The
stock market is high because corporations are the biggest purchases of
stock. Buying back their own stock supports or raises the share price,
enabling executives and boards to sell their shares or cash in their
options at a profitable price. The cash that Quantitative Easing has
given to the mega-banks leaves ample room for speculating in stocks,
thus pushing up the price despite the absence of fundamentals that would
support a rising stock market.
In
other words, in America today there are no free financial markets. The
markets are rigged by the Federal Reserve’s Quantitative Easing, by gold
price manipulation, by the Treasury’s Plunge Protection Team and
Exchange Stabilization Fund, and by the big private banks.
Allegedly,
QE is over, but it is not. The Fed intends to roll over the interest
and principle from its bloated $4.5 trillion bond portfolio into
purchases of more bonds, and the banks intend to fill in the gaps by
using the $2.6 trillion in their cash on deposit with the Fed to
purchase bonds. QE has morphed, not ended. The money the Fed paid the
banks for bonds will now be used by the banks to support the bond price
by purchasing bonds.
Normally
when massive amounts of debt and money are created the currency
collapses, but the dollar has been strengthening. The dollar gains
strength from the rigging of the gold price in the futures market. The
Federal Reserve’s agents, the bullion banks, print paper futures
contracts representing many tonnes of gold and dump them them into the
market during periods of light or nonexistent trading. This drives down
the gold price despite rising demand for the physical metal. This
manipulation is done in order to counteract the effect of the expansion
of money and debt on the dollar’s exchange value. A declining dollar
price of gold makes the dollar look strong.
The
dollar also gains the appearance of strength from debt monetization by
the Bank of Japan and the European Central Bank. The Bank of Japan’s
Quantitative Easing program is even larger than the Fed’s. Even
Switzerland is rigging the price of the Swiss franc. Since all
currencies are inflating, the dollar does not decline in exchange value.
As
Japan is Washington’s vassal, it is conceivable that some of the money
being printed by the Bank of Japan will be used to purchase US
Treasuries, thus taking the place along with purchases by the large US
banks of the Fed’s QE.
The
large private US and UK banks are also manipulating markets hand over
fist. Remember the scandal over the banks fixing the LIBOR rate (the
London Interbank Borrowing Rate) and the opening gold price on the
London exchange. Now the banks have been caught rigging currency markets
with algorithms developed to manipulate foreign exchange markets.
When the banks get caught in felonies, they avoid prosecution by paying a fine. You try doing that.
The
government even manipulates economic statistics in order to paint a
rosy economic picture that sustains economic confidence. GDP growth is
exaggerated by understating inflation. High unemployment is swept under
the table by not counting discouraged workers as unemployed. We are told
we are enjoying economic recovery and have an improving housing market.
Yet the facts are that almost half of 25 year old Americans have been
forced to return to live with their parents, and 30% of 30 year olds are
back with their parents. Since 2006 the home ownership rate of 30 year
old Americans has collapsed.
.
The repeal of the Glass-Steagall Act during the Clinton regime allowed the big banks to gamble with their depositors’ money. The Dodd-Frank Act tried to stop some of this by requiring the banks-turned-gambling-casinos to carry on their gambling in subsidiaries with no access to deposits in the depository institution. If the banks gamble with depositors money, the banks’ losses are covered by FDIC, and in the case of bank failure, bail-in provisions could give the banks access to depositors’ funds. With the banks still protected by being “too big to fail,” whether Dodd-Frank would succeed in protecting depositors when a subsidiary’s failure pulls down the entire bank is unclear.
The
sharp practices in which banks engage today are risky. Why gamble with
their own money if they can gamble with depositors’ money. The banks led
by Citigroup have lobbied hard to overturn the provision in Dodd-Frank
that puts depositors’ money out of their reach as backup for certain
types of troubled financial instruments, with apparently only Senator
Elizabeth Warren and a few others opposing them. Senator Warren is
outgunned as Citigroup controls the US Treasury and the Federal Reserve..
The repeal of the Glass-Steagall Act during the Clinton regime allowed the big banks to gamble with their depositors’ money. The Dodd-Frank Act tried to stop some of this by requiring the banks-turned-gambling-casinos to carry on their gambling in subsidiaries with no access to deposits in the depository institution. If the banks gamble with depositors money, the banks’ losses are covered by FDIC, and in the case of bank failure, bail-in provisions could give the banks access to depositors’ funds. With the banks still protected by being “too big to fail,” whether Dodd-Frank would succeed in protecting depositors when a subsidiary’s failure pulls down the entire bank is unclear.
The
falling oil price has brought concern that oil derivatives are in
jeopardy. Citigroup has a provision in the omnibus appropriations bill
that shifts the liability for Citigroup’s credit default swaps to
depositors and taxpayers. It was only six years ago that Citigroup was
bailed out to the tune of a half trillion dollars. Already Citigroup is
back for more while nothing whatsoever is done to bail the American
people out of their hardships caused by Citigroup and the other
financial gangsters.
What
we are experiencing is not a repeat of the past. The ability or,
rather, the audacity of the US government itself to manipulate the major
financial markets is new. Can this new trend continue? The government
is supposed to be the enforcer of laws against market manipulation but
is itself manipulating the markets.
Governments
and economists take their hats off to free markets. Yet, the markets
are rigged, not free. How long can stocks stay up in a lackluster or
declining economy? How long can bonds pay negative real interest rates
when debt and money are rising. How long can bullion prices be
manipulated down when the world’s demand for gold exceeds the annual
production?
For as long as governments and banks can rig the markets.
The
manipulations are dangerous. Manipulations blow a bigger bubble
economy, and manipulations are now being used by Washington as an act of
war by driving down the exchange value of the Russian ruble.
If
every time the stock market tries to correct and adjust to the real
economic situation, the plunge protection team or some government
“stabilization” entity stops the correction by purchasing S&P
futures, unrealistic values are perpetuated.
The
price of gold is not determined in the physical market but in the
futures market where contracts are settled in cash. If every time the
demand for gold pushes up the price, the Federal Reserve or its bullion
bank agents dump massive amounts of uncovered futures contracts in the
futures market and drive down the price of gold, the result is to
subsidize the gold purchases of Russia, China, and India. The
artificially low gold price also artificially inflates the value of the
US dollar.
The
Federal Reserve’s manipulation of the bond market has driven bond
prices so high that purchasers receive a zero or negative return on
their investment. At the present time fear of the safety of bank
deposits makes people willing to pay a fee in order to have the
protection of the government’s ability to print money in order to redeem
its bonds. A number of events could end the tolerance of zero or
negative real interest rates. The Federal Reserve’s policy has the bond
market positioned for collapse.
The
US government, perhaps surprised at the ease at which all financial
markets can be rigged, is now rigging, or permitting large hedge funds
and perhaps George Soros, to drive down the exchange value of the
Russian ruble by massive short-selling in the currency market. On
December 15 the ruble was driven down 19%.
Just
as there is no economic reason for the price of gold to decline in the
futures market when the demand for physical gold is rising, there is no
economic reason for the ruble to suddenly loose much of its exchange
value. Unlike the US, which has a massive trade deficit, Russia has a
trade surplus. Unlike the US economy, the Russian economy has not been
offshored. Russia has just completed large energy and trade deals with
China, Turkey, and India.
If economic forces were determining outcomes, it would be the dollar that is losing exchange value, not the ruble.
The
illegal economic sanctions that Washington has decreed on Russia appear
to be doing more harm to Europe and US energy companies than to Russia.
The impact on Russia of the American attack on the ruble is unclear, as
the suppression of the ruble’s value is artificial.
There
is a difference between economic factors causing foreign investors to
withdraw their capital from a country, thereby causing the currency to
lose value, and manipulation of a currency’s value by heavy
short-selling in the currency market. The latter can cause the former
also to occur. But the outcome for Russia can be positive.
No
country dependent on foreign capital is sovereign. A country dependent
on foreign capital, especially from enemies seeking to subvert the
economy, is subject to destabilizing currency and economic swings.
Russia should self-finance. If Russia needs foreign capital, Russia
should turn to its ally China. China has a stake in Russia’s strength as
part of China’s protection from US aggression, whether economic or
military.
The
American attack on the ruble is also teaching sovereign governments
that are not US vassals the extreme cost of allowing their currencies to
trade in currency markets dominated by the US. China should think twice
before it allows full convertibility of its currency. Of course, the
Chinese have a lot of dollar assets with which to defend their currency
from attack, and the sale of the assets and use of the dollar proceeds
to support the yuan could knock down the dollar’s exchange value and US
bond prices and cause US interest rates and inflation to rise. Still,
considering the gangster nature of financial markets in which the US is
the heavy player, a country that permits free trading of its currency
sets itself up for trouble.
The
greatest harm that is being done to the Russian economy is not due to
sanctions and the US attack on the ruble. The greatest harm is being
done by Russia’s neoliberal economists.
Neoliberal
economics is not merely incorrect. It is an ideology that fosters US
economic imperialism. By following neoliberal prescriptions, Russian
economists are helping Washington’s attack on the Russian economy.
Apparently,
Putin has been sold, along with his internal enemies, the Atlanticist
integrationists, on “free trade globalism.” Globalism destroys the
sovereignty of every country except the world reserve currency country
that controls the system.
As
Michael Hudson has shown, neoliberal economics is “junk economics.” But
it is also a tool of American financial imperialism, and this makes
neoliberal Russian economists tools of American imperialism.The remaining sovereign countries, which excludes all of Europe, are slowly learning that Western economic institutions are deceptive and that placing trust in them is a threat to national sovereignty.
Washington
intends to subvert Russia and to turn Russia into a vassal state like
Germany, France, Japan, Canada, Australia, the UK and Ukraine. If Russia
is to survive, Putin must protect Russia from Western economic
institutions and Western trained economists.
It
is too risky for the US to take on Russia militarily. Instead,
Washington is using its unique symbiotic relationship with Western
financial institutions to attack an incautious Russia that foolishly
opened herself to Western financial predation.
Note: The winter issue of Gerald Celente’s Trends Journal identifies financial market manipulation as a Top Trend for 2015.
Dr. Paul Craig Roberts was
Assistant Secretary of the Treasury for Economic Policy and associate
editor of the Wall Street Journal. He was columnist for Business Week,
Scripps Howard News Service, and Creators Syndicate. He has had many
university appointments. His internet columns have attracted a worldwide
following. Roberts' latest books are The Failure of Laissez Faire Capitalism and Economic Dissolution of the West and How America Was Lost.
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