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by Al Martin

The Bernanke Fed: Following the ‘Economic Collapse’ Script

(9-24-07) This is the long and broad view of what Bernanke is doing with the Fed. He is simply inheriting and following the script, as it were, from the Greenspan Fed. The Greenspan Fed has been roundly criticized for reducing interest rates, thus creating a lot of cheap money, which has fueled speculative bubbles worldwide. Then there are the reasons why nobody applauds him because it’s an area that no one dares talk about…

      To defend himself, Greenspan says that he was simply lowering rates to prevent the onset of a recession in 2001 and 2002. On the surface, it makes sense to say that, because clearly the economy was headed to recession by the end of 2001.

      The recession was being driven by two factors. One of those factors gets overlooked because it’s not politically convenient – the collapse in the speculative bubble in equities beginning in March of 2000, which was a long unwinding process into the autumn of 2002, wherein equity prices fell consistently, combined with the installation of a fiscally reckless regime – i.e., a Bush Cheney Regime – and the reinstitution of Bushonomics, which we refer to as Bushonomics II, which had the effect of depleting all of the $158-billion fiscal surplus that the Bush Cheney Regime inherited from its fiscally prudent predecessor.

      On the day the Bush Cheney Regime came to power (January 20, 2001), it inherited from its successor a $158-billion federal surplus. It had all of that surplus diminished, and indeed generated a deficit, by the end of its first year in power, which is part and parcel, as we’ve pointed out before, of Bushonomics.

      So what are the differences between the terms referred to as recession and inflation? Inflation and inflationary periods invariably precede recessions.

      The economic boom/bust cycle – that the United States has always had and will always have as long as it follows Smithsonian capitalism – has effectively been turned on its ear by the Bush Cheney Regime. How? Through cheap money and easy liquidity -- by creating a series of speculative bubbles in asset prices whose intent is more political than economic, from the regime’s point of view.

      The political reason behind it is because nothing consolidates wealth like the creation of speculative bubbles in all asset classes. This is in fact a version of what has been called crony capitalism in emerging nations also called third world countries. That’s what Bushonomics is all about.

      Everyone has to remember the bottom line here. What is Bushonomics’ prime mandate? It is the continuous consolidation of power and wealth into ever higher, tighter and righter hands, to quote George Bush Sir’s famous diatribe.

      Now, if we start out with that premise, then the economic policies of the Bush Cheney Regime make perfect sense because they have acted to concentrate wealth.

      Reaganomics was often accused by its detractors of being a trickle-up wealth effect because of what Larry Stockton always said; he called it “trickle-down economics.” In fact, it wasn’t; it was “trickle-up economics.”

      Now it’s not even that. It’s more like a downpour upward. Or to coin a phrase an “economic up-pour.”

      What Bushonomics II has done is not “trickle-up economics,” it is “torrent-up economics.” That’s the new word that should be used from now on -- “torrent-up economics.”

      The wealth-dispersion statistics that have occurred under the Bush Cheney Regime are startling, and they have never occurred before.

      When the regime came to power, the top 1% of the nation owned 61% of the private wealth in the nation. Today, the same top 1% owns more than 70%. This is a fraction never before reached by any nation state on the planet. To repeat, never before has there been such a concentration of wealth in such a short period of time. Even in medieval England.

      This has never occurred in any organized nation state in the past 2,000 years. Never before has the top 1% owned 70% of all of the private wealth in any nation-state. This is specifically what the early 19th-century English social economist Thomas Malthus warned against when he talked about the magic 70% fraction.

      In his historical treatise, he pointed out that every nation state in the past 2,000 years that had gotten close to that number of wealth consolidation subsequently collapsed in political revolution and economic turmoil. He gave examples starting with ancient Greece. His historical analogy started with ancient Greece and ended with the French Revolution.

      In part of this theorem of wealth consolidation versus collapse, as he called it, or the French Revolution index, he also noted that in the previous 2,000 years in all nation states, wherein the total income of the top 10% of that nation state exceeded the total income of the bottom 10% of said nation state by a factor of 263, the nation state in question collapsed in political chaos and economic ruin.

      By the way, the Malthusian fraction that was inherited on the day the Bush Cheney Regime came to power in the United States was 78 X. This meant that the total income of the top 10% of the nation was 78 times that of the bottom 10% of the nation. Today that fraction stands at 324.

      Therefore the Bush Cheney Regime makes history once again. In no other nation state in the past 2,000 years has such an income dispersion existed and been able to be maintained. As long-thinkers have pointed out, hence the urgency or the need for the PATRIOT Acts to control and to give the regime the power to control what will be an increasingly restive population, driven by purposeful economic policy designed to concentrate wealth prior to the occurrence of a natural collapse cycle.

      But to get back to Bernanke following the collapse script… Upon avoiding what would have been an exceptionally deep recession in 2001 to 2003, before the equity markets began to trough out in March-April of 2003 and move higher again – Greenspan did so -- too aggressively. By that, his critics are right when they say he reduced interest rates too far too fast.

      The cumulative effect was the immediate creation of speculative bubbles coming out of a recessionary economy. When an economy exits a recession, GDP is supposed to expand slowly. It’s supposed to take a number of years for GDP to expand back to where it was before the previous recession. In this case, it didn’t happen.

      So much cheap money had been pumped into the economy by Fed action, along with changes in regulation that brought a loosening of credit standards, which was directly responsible, as we have pointed out before, for the dramatic credit quality deterioration in both corporate and individual America that has occurred under the Bush Cheney Regime.

      It should have taken a period of 3 to 4 years for GDP to reach the levels it had been prior to the onset of the 2001-03 recession. It didn’t. By 2004, GDP was now larger than it had been in 1999.

      Is GDP that significant? Yes. The reason why it’s significant is because it is the one measure that is used to proffer, and consequently politically justify, all economic policy of state. That’s why it’s important. It is not particularly important in itself as a measure of a nation state’s economy, but it becomes important because of its moniker within the world of economic policy makers. It is the end-all and be-all of economic statistics.

      GDP numbers are then abused because they have been consistently used by the Bush Cheney Regime as some sort of a tripwire, as it were.

      Remember, Bushonian policy loves tripwires. Whether it is economic, political or military policy, Bushonian regimes love tripwires.

      When GDP falls to a certain level, it gives the regime the political excuse to put the arm on the Fed to reduce interest rates more quickly than it really should be reduced.

      Bernanke then is simply following the script of collapse. Alan Greenspan knew that the Bush Cheney Regime would accelerate the consolidation of wealth. The reason why he knew that is that he knew that the natural collapse cycle – planetary, worldwide, economic collapse cycle, which began by a combination of geopolitical economic and military policy-making in the immediate post-war environment –the end of this could be seen. He knew that the Bush Cheney Regime would accelerate wealth consolidation pre-collapse, in order to funnel what remaining wealth could be had into the hands of the top 20% of the nation, which are effectively the ruling elite now and will become the absolute ruling elite in the next decade. That is necessary.

      In the past, Kissinger justified it the same way. Kissinger justified the concentration of wealth the same way -- that it is necessary to create an iron-fisted, ruling elite in an economically collapsed environment.

      Kissinger was talking more from a political than an economic standpoint. In other words, to maintain the political stability of post-economically collapsed nation states, it was necessary to create a ruling elite that had the ability to rule with an iron hand. And that’s part of the whole devolution of America. It has been, particularly in the post-war environment, where a cabal of about 300 individuals, commonly referred to as the great and all-powerful Bushonian Cabal, since they are all aligned to interlocking Bushonian interests have been able to seize the US economy and political infrastructure. Never before, under one regime, has so much wealth flowed into the hands of the same 300 people.

      So Greenspan saw the necessity, and, I think aided in the creation of speculative bubbles for the purposes of furthering wealth concentration by keeping monetary policy too cheap too long, knowing what the inevitable results would be.

      It was one way to pick up the economy quickly from a recession. You create speculative bubbles through protracted cheap and easy money policy, meaning increased GDP quickly coming out of a recession, which is, in fact, what happened in this case. Look at the enormous expansion in GDP that has occurred from 2004 to date.

      By the way, these are numbers that no economy has ever been able to sustain. How is it that GDP in the largest economy was able to expand so much in only a 3-year period? It’s because of debt-driven spending by government, by all three legs of the national stool – government, business and industry, and the people.

      If you strip debt out, the GDP of the United States now, -- one way to look at this is the total federal budget, you see that the percentage of the federal budget that is deficit spending increases every year under Bushonomics. It’s one way to increase the GDP of the nation, by a dramatic increase in government spending and, by creating a monetary environment that encourages business and industry and the people to accumulate ever larger amounts of debt, and to use that debt accumulation to increase consumption.

      The very essence of Bushonomics is negative debt-financed consumption.

      Simply put, negative debt-financed consumption is the mechanism and the means that makes Bushonomics possible. It makes it work. Negative debt-financed consumption means that the debt of a nation state, comprised of the aggregate debt of government, business and industry, and the people, rises more quickly than does the underlying consumptive value of the accumulation of that debt.

      So, if you are going to drive a debt-driven consumption policy, i.e., Bushonomics, how is it maintained? There’s two ways to maintain it. One, through increased wages or increased income among the bottom 60% of the population. But that defeats wealth consolidation. Hence, we are in a regime, true to its nature, wherein total income of those in the bottom 60% of the nation state, real income, i.e., income after inflation, has actually fallen under the Bush Cheney Regime.

      What is the other way you maintain negative debt-financed consumption? Through reducing interest rates to abnormally, to historically low levels, keeping them there longer than they should be, in order to increase the value of assets of the principal liquidatable asset owned by the bottom 60% of the nation, which is their home. Then you change regulations to allow easy capability for a homeowner to draw out unrealized equity from his home without selling it, in the form of all sorts of home equity loans and lines of credit and easy mortgage availability.

      Indeed, by 2005, 14% of the entire consumption of the United States was being driven through individuals withdrawing equity from their homes, via home equity loans or mortgages, etc.

      In order to sustain that, you have to keep the speculative bubble that you have created through cheap and easy monetary policy, from collapsing. If you collapse that speculative bubble, there’ll be a sharp contraction in GDP and there is nowhere else to make up for that consumption.

      Therefore, the mandate becomes to prevent the collapse of speculative bubbles at all costs.

      Will Bernanke be able to keep the bubbles from collapsing? He will be able to re-inflate. You hear this word re-inflate, which sounds odd because inflation is not particularly low, only marginally within the Fed’s 1-2% target range. His mandate then will be to keep the bubble afloat by creating a new round of inflation.

      What is dangerous about this, however, and an interesting historical aside about this type of economic policy is that he is attempting to reflate an economy wherein commodity prices are already at or near record highs, thus ensuring that commodity prices will go higher, and also ensuring greater wealth consolidation through higher commodity prices.

      Remember what Henry Kissinger used to say, and he was right, “Nothing consolidates wealth like higher commodity prices.” And he’s absolutely right.

      Oil could back off due to natural forces, back down to $65. But I don’t think $50 is in the near term as long as GDP can be maintained through reflation of the re-introduction of cheaper money.

      But the GDP is a magic bullet for everybody. It’s a magic benchmark that all economic policy is planned and justified around.

      And here is the great conundrum that Bernanke is forced into. He must, at all cost, prevent speculative bubbles, which have been built by the economic policies of this regime and his predecessor, from collapsing. Why? In a normal economic cycle, where speculative bubbles are created, they collapse, as they have always done.

      The only reason the value of real estate and collectibles has started to soften is because of a tangential effect of Greenspan’s credit easiness, which is the creation of a credit crunch.

      The credit crunch is a tangential effect of too much cheap and easy money and falling credit quality standards, fostered as part of an economic policy of government. The credit crunch, however, can be worked out. And Bernanke knows that.

      If the Fed moves its lending through the discount rate window lower, eases regulatory policy so that the Fed can accept mortgage-backed collateral from banks and investment houses, for borrowed money, i.e. for everybody who holds subprime-cum-junk debt, the nation’s commercial and investment banks, brokerage firms, insurance companies, pension funds, etc. – he’s buying them time to gradually mark them down, mark to market, so that the impact of marking them down, mark to market, overnight, won’t be as severe.

      What people don’t understand, I think, by and large, is that, they believe that if enough time can be bought, the value of these securities will come back. They won’t. The losses have already occurred. The subprime paper that was originally sold at 100 cents on the dollar, and is still being carried by many firms around the world, is now worth, let’s say, 40 cents on the dollar.

      It ain’t ever gonna be worth 100 cents on the dollar again because the underlying asset is being diminished every time there’s a foreclosure.

      Every time there’s a foreclosure, every time there’s a bankruptcy filing, the underlying asset is diminishing in value. These securities aren’t coming back. What everybody who holds these securities needs is time, a 3 or 4-year window wherein they can write down the paper gradually in a way that won’t shock the markets.

      The greatest risk to the global economy at this very moment would be a forced sale, a large collapse. Not only the Fed, but the Bank of England, the ECB, the Bank of Japan. Why do you think they’re injecting cheap money into the system every day? It’s to keep the whole system afloat. To try to maintain cheaper liquidity so firms holding subprime which has become illiquid can borrow against it. Because the greatest threat to both U.S. and the global economy, would be a cascading collapse of banks or brokerage firms or investment houses that would shock the markets,

      In conclusion, although you are seeing one major bank on this planet every week, going down the tubes, there won’t be an overall global shock. The week before last, Northern Rock bank in the UK. Last week, the Russian Standard Bank, the fourth largest bank in Russia. Every week you will see a major bank on the planet collapse. Every day you will see another hedge fund collapse. Every 3 weeks or so, you see a money market fund collapse. Yes, there’s going to be pain, but it’s not going to be enough at any one time to create panic in the economic marketplaces. If you’re looking at it in terms of an investor, we are in a whole new era of dramatically increased volatility in the planet’s equity, debt and commodity marketplaces. But as long as the Fed can ease off interest rates and increase liquidity by changing regulations, it is likely that they can jam enough money into the system, and flood the system with cheap money. All central banks are now acting together to do the same thing -- to prevent the collapse of a major banking house or a quick series of collapses within brokerage firms, etc.

      I don’t think the collapse is going to come this way because it hasn’t been planned this way. It’s too early for the collapse.

      People ask me, “Aren’t all the ingredients for the collapse there now?” And I say, “Yes, the ingredients are there. But the reason why I think it will be avoided is because I think the central banks, combined with ever looser government regulatory standards regarding equities and debt markets, will combine to prevent any cascading collapse because it’s too soon.

      The great global economic collapse has not been planned until the next decade.

      In other words, economic collapse of the planet is going to occur, and it was meant to occur and must occur.

      This does not change what is going to happen in the next decade. What will happen in the next decade is the fruition of policy started in the immediate post-war environment, which made economic collapse inevitable. What is happening now does not change that.

      The only thing it does is it forces central banks, globally, to scramble, and to forestall the collapse until it was meant to happen.

      You don’t have the top 20% fully prepared for it yet. Also you don’t have governments fully prepared for economic collapse yet. There’s got to be more Patriot Acts. There’s got to be a Patriot Act III, then a Patriot Act IV. And then the deluge...

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.



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