"History doesn't repeat itself but it does rhyme"
"You can have the best product or service in the world, but if people don't buy - it's worthless. So in reality it doesn't matter how wonderful your new product or service is. The real question is - will they buy it?" ~ Noel Peebles
"What really decides consumers to buy or not to buy is the content of your advertising, not its form." ~ David Ogilvy
"When you're accustomed to privilege, equality feels like oppression"
"The Second Wave Society is industrial and based on mass production, mass distribution, mass consumption, mass education, mass media, mass recreation, mass entertainment, and weapons of mass destruction. You combine those things with standardization, centralization, concentration, and synchronization, and you wind up with a style of organization we call bureaucracy." ~ Alvin Toffler
Over the years, the ideological basis of Maoism has got diluted. It has two versions now: one based on ideology and the other on extortion which can be called levy-based Maoism.
Rich people who help powerful people get rich, and powerful people who make rich people powerful.
How can elected officials rage about deficits when we propose to spend money on pre-school for kids, but not when we’re cutting taxes for corporations? Without action, our children won’t have time to debate the existence of climate change. They’ll be busy dealing with its effects. More environmental disasters, more economic disruptions, waves of climate refugees seeking sanctuary.
A shrinking world, growing inequality, demographic change, and the specter of terrorism. These forces haven’t just tested our security and our prosperity, but are testing our democracy as well. In the rise of naked partisanship and increasing economic and regional stratification, the splintering of our media, all this makes this great sorting seem natural, even inevitable. Increasingly we become so secure in our bubbles that we start accepting only information, whether it’s true or not, that fits our opinions, instead of basing our opinions on the evidence that is out there. This trend of talking past each other represents a third threat to our democracy. There’re no quick fixes to this long-term trend. ~ U.S. President Barack Hussein Obama II.
Money was invented by administrators of large state to efficiently pay their professional standing armies, as an exchange, without involving trust or gratitude/favour. Unfortunately, for states to have more money they had to also conquer more resources from others using their armies.
The issue is with the tribal idea of 'us versus them' that continue to rule us. There has always been a divide between the 'haves' (rich) and 'have nots' (poor), the two class divide. After the end of the feudal system, religious war, and with industrialization, a new class, the 'working class' or the 'middle class' emerged (and later after the IT revolution, the blue & white collars). They are in people in transition, who are trying to be rich and avoiding from being poor again. The bourgeois, the 'town people' with new money. This is the ever expanding class that has the potential to change the world order.
During (nationalistic, again tribal mentality) colonialism, imperialist nations had to expand and conquered new land (virgin markets as the paternal society called it) and exploited them. The Promissory Notes Act 1704 was, for better or worse, the foundation of the commercial and military British Empire, financing not just war but also ownership of foreign assets. The conquest of the Americas by the Spaniards and Portuguese in the 16th century, then by the French and the British, was the first modern form of imperialism and colonization. The Black & Red Indian slaves did not have rights and worked for the benefit of their victors. This was accepted like the spoils of a loot or war.
Capitalism fundamentally began to transform the victorious colonial societies into a market economy. This commercialization of society began to liberate the society from the feudalism. Out of the old slogan, Liberté, égalité, fraternité, French for "Liberty, equality, fraternity (brotherhood)" were new cries for Capitalist Democracy & Socialist Communalism. With World wars, the common man realised their strength in numbers and the unfair social order, this was the beginning of the end of imperialist & (later what filled the void ) dictatorial regimes the world over (except the Arab World).
Karl Marx explains that materials or objects have meanings that are invisible or hidden from the users and this is the charm or artificial desires (fetish) of the materials. The man-made product gains desirable attributes associated to it (that are different from its function or properties) when, the producers and their efforts spent on the process, is not apparent. The user's experience with the product excludes the producer because the producer gets separated from the products in the world of trade and combined labour. To Karl Marx, this was Capitalist system which thrived on exploitation. The rich were using the producers because over time the profits they created, made the rich get richer but that was invested into better technologies (aimed to reduce prices, remove competition) which in turn reduced the need for labour. So in fact the producers were working to reduce the demand for labour (affecting their own wages).
The real necessity or the actual properties of a product and the real value of human labour had become invisible. The producers and the process were hidden. The value of the product had systematically been delinked from the labour spent to create them. When there is inflation and high prices for essential products, a society grew jealous of the rich individuals. With the rise of trade, the quality of life seems to have become worse and man was under bondage to acquired wealth and products. The more control you gain over the money supply the more concentrated the power to exploit.
This is comparable to our tribal history where people believed that objects were Gods or that it had powers which governed them. According to Karl Mark, it's absurd that the value of a material is given through a common believe of certain attribute that the material doesn't possess. He said that its absurd for society to believe that products are more than its functions and to allow it have an emotional or imagined properties (a fetish) e.g. money and gold. In the real world, nations creates new money which is lends out to the banks and they in turn lend it to the public. Interest rates thus creates value (profits) out of nothing. Debt becomes money. When a borrower repays a debt, the debt no longer exists: it simply disappears. The creation and destruction of value is a powerful of conversion of wealth. Even to this day, profits are kept secret. The state considers transactions as private matter. The lender and borrower both believe they will make a profit. (So, its a myth that banks are service businesses.)
With development in psychology, there was a new understanding of human behaviour. Communist ideas were no longer realistic, however capitalism had to undergo reform and accept socialism. But the balance between socialism & capitalism is still being fine-tuned. As long as there are the poor, the bent, the broken, (the marginalized, the weak) there will be exploitation by someone who has the power. The weak will be exploited by the strong be it man, woman or child. This is the dark side of our animal-like nature to look of an opportunity, exploit the weakest members. But as humans we keep accumulating more than we need. It's the illusion of the every moving horizon that we try to reach. This is because of our 'fetish', because we choose not to think or understand the wider context. The banks from the rich countries work like money-lenders, who lend me money but also seeks high interest and a mortgage on everything; and is ever ready to confiscate them if you fail to pay.
Many infrastructural projects financed by the World Bank Group have social and environmental implications for the populations in the affected areas and criticism has centered around the ethical issues of funding such projects. They pushed for installing ''terminator genes'' in crops so that poor farmers cannot save seed from year to year, jeopardizing monarch butterflies in an effort to grow pest-resistant corn. The Philippines provides a grim example of how neo-liberal economic restructuring transforms a country from a net food exporter to a net food importer.
"No matter how many times they fail,'' the IMF and the World Bank can make policy in poor nations ''because they are the only game in town''. The “search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one.”
An International Trade Organisation, meanwhile, serves as the primary means of creating and enforcing global free trade agreements. When it was Venezuelan oil interests versus the U.S. Environmental Protection Agency's air quality standards for imported gasoline, the oil interests won. When it was U.S. cattle producers against the European Union's ban on hormone-treated beef, European consumers lost.
The U.S. has a history of major inflation followed by massive deflation for the past 200 years. These inflationary periods were accompanied by increasing debt and rising inflation while the deflationary periods were associated with decreasing debt and interest rates.
The basic idea isn't hard to follow. You take a coin and borrow nine; then you take that 10 coins and borrow 90 coins into a fund (under an alias company); then you take your 100 coins and, so long as the public is still lending (and you do that, each time turning it into a bigger fund and under a different alias company). Assume that you have borrowed and invest 900 coins. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and the investors lose their money. All the money lost has to go somewhere. In between the inflation and deflation we experienced periods of disinflation, which just happened to coincide with all the gains in the stock market over the past 100 years. (Very few asset types, e.g. gold, work well in both the cases). The trick is to invest in one class of assets as it is rising, and sell before the market crashes. As a result of this process of debt becoming money, wealth accumulates in a golden triangle of banks, governments, and financial predators. And, like in feudal times, laws are enacted to ensure support for today’s oligarchies so that they carry on being the main profiteers while taking less risk.
If the banks itself lost their own funds, which means the banks have lost all the investors money; then people are layoffs and the banks get to make their money back through government's (regulatory agencies) virtually free bailouts cash at zero rate of interest. The government's monetary agency does this by creating a new cash by forming new fund (paper or digital 'bonds' or 'securities') which are sold to the public through the banks.
But this government creation of new money, raises another type of tax on public (called inflation i.e. the value of your cash drops; and this process can be understood by a mathematical formula! relating to the variable 'speed at which money is spent'). Every product you buy has that tax included in it so if you buy things then you are paying tax into the government's main tax collections. Making new cash also raises the deficit in the nation's balance sheet. And rising costs means, your cash value has evaporated, hence you have effectively paid higher tax. So again effectively, government has used public tax money to bail out the bankrupt banks.
If the inflation is high then consumers do not wanting to borrow money and banks do not want to lend or spend money (make loans i.e turning debit into cash). Bank lending is dismal, instead working its way reserves and into asset prices, which is why the total money supply has not increased as much as anticipated. In this context liquidity refers to the ease with which money can be used. The important thing to understand is that money that is not liquid cannot easily be lent, and it cannot easily be spent - the two critical pillars to driving economic growth. That money is effectively "tied up."
When there is less loans (i.e turning debit into cash), it changes the variable: 'speed at which money is spent'; in other words, there is less liquidity. It starts a vicious cycle of government having to pump new money, raising deficit and inflation. To reverse it, you need to significantly raise the national economic output; which reduces the inflation and deficit and creates a lot of liquidity without government intervention. A popular example is to use military industrial production which acts as a proven economic stimulant. So, defense spending is domestic manufacturing. But the entire production effort becomes cost-prohibitive if defence manufacturing is without any revenue-earning commercial solutions, hence, a secondary effect, is the use of the armaments in the name of global humanitarian endeavors in proxy wars.
If the liquidity is too much, the variable changes for the worse and its creates similar problem. To prevent the unbalancing, nation's have financial regulatory agency. Incidentally, the U.S. government's regulatory agency (oversees of fair rules and practices) and other key government offices are help by alumni from the big banks. They've been pulling this same stunt over a nd over since the the end of WW1. The Goldman Sachs bank was founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. Around 1900, Goldman imported and exported gold across the Atlantic. In the 1950s, it took the Ford Motor Co. public. It has recently invested in Spotify and Uber.
It had as Treasury secretary Robert Rubin (1995–1999), who previously spent 26 years at Goldman & chairman of Citigroup. Treasury secretary Henry Paulson (2006–2009), previously a Goldman CEO, was the architect of the 2008 financial bailout for the banks. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York. Some of Goldman alumni are:
- At the top of the New York Fed (President William Dudley).
- In the studios of CNN (anchor Erin Burnett).
- Married to once and future presidential candidates (Heidi Cruz).
- Running entire nations (Australian Prime Minister Malcolm Turnbull).
- Weinberg’s Business Advisory Council include Goldman CEO Lloyd Blankfein, ExxonMobil CEO Rex Tillerson (Trump’s nominee for secretary of state) & Steven Mnuchin (nominee for Head of Treasury).
- nominee for the director of the National Economic Council: Gary Cohn (the president of Goldman Sachs)
Every company is a fund with money borrowed from investors. If a company makes popular products, more people want to invest in the fund and the cost of the stock will rise. Banks are similarly companies and one who's products are other company's funds bundled up. A bank creates two equal-and-opposite debts, which add up to zero. The huge banks are the nation's economic heart and they must never stop running the wealth of society. This also means it directly creates profits for a few privileged ‘money-men’ - a new class of aristocrats. These Shylock individuals have been allowed to claim a pound of 'flesh'. These profits accumulated are taken out of the market and hidden in off-shore accounts (under 7 to 14 or more trust-asset aliases).
Instead there are free speech cracked downs on in the name of free trade. With the rise of globalization in a nuclear era, the world shrinking into a global village, ideas are being spread & everything is related or inter-dependent. Once again the lessons of World wars are being remembered. Everyone is part of the same world and not in some distant alien world. The neighbour has become a member of your family and this new realignment will take time to be resolved. There is no false hope of turning back to an idealised time, (although many have tried to create islands or pockets 'perfect' world). The Third World War is already on, it's the class war for equality that's shadowed by an environmental crisis, and there is mass 'invisible' violence.
Industrialization & globalization has brought us numerous advances and inventions like the ability to travel, the wider distribution of educational resources, the use of Internet and other technologies and international sporting competitions just to name a few. But monopoly over markets by multinational corporate, indirectly still continue economic colonialism (policy of divide and conquer) what is commonly referred to as, neo-colonialism. Like the imperialist era, this is again because of the lifestyles of the "haves". Eventually, majority of citizens are not going to spending enough to keep production profitable. Inequality in money and debt brings problems for rich as well as poor. Producers need consumers to buy their products, or their profits will dry up. The result is ‘business cycles’ – economies lurching in and out of booms and busts. Inequality would not be bad in small doses. Extreme inequality is good for no one. And the most significant inequality is not income but in assets: in ‘what you are worth’.
Marketing moved to the art of hiding the real value, to sell at higher prices. A commodity real secret is that it stands for the real absence of the labour used to produce it. The worker presence is in its emptiness or vacuum left in the product's character or identity. But the truth of the material is exposed when the (labour and technology) process that went into making the product is exposed.
This is where Democratic National & International institutions, unions & agencies step in to stop the exploitation cycle, to protect the weak, the vulnerable; so that there is a competitive private enterprise and voluntary exchange. It's possible to make the producer answerable to the worker. That layoffs are kept as not as an easy tool of frequent use. That multinational companies can't exploit the poor and voiceless. A product can use labour and time but not the worker's 'flesh'. Sadly, corruption (using bribes or coercion) is a reality today so the system still remains exploitative with many loopholes. The loopholes are being fixed by some dedicated people themselves, working from different capacities, but much more is needed.
If the people cannot be protected, one can imagine how much our ecological pools can being protected. The narrow minded exploitation and degradation of the environment is not different from Mutual Assured Destruction (M.A.D.) of Nuclear War.
Slowly some producers and consumers are giving back to the community they are in. It is now not simply about a cheap product but of a guilt-free exchange is the new 'added-value'. Today Corporate Social Responsibility is more about behavioural change, then anything else. Its sometimes just a lip service with PR campaigns are not used to spin the truth or make it murky. But we know every idea that changed the world, first began, with accepting the problem. Today the problem has been accepted globally.
A bond is actually an IOU, an acknowledgment by the issuer that money has been borrowed and is to be paid to the holder of the bond at a specified rate over a predetermined period of time. The price paid (or, the amount loaned) for a new bond is called the face value or principal; this amount is paid back at the end of the time period, also known as the maturity date. The interest that the bond pays is called the bond yield; it’s expressed as a percentage of the bond’s face value. Because bonds promise to pay back an investor’s principal plus a fixed rate of interest, they are generally considered to be less risky than stocks, which could either grow at unpredictable rates or lose value. all it takes is a bear market to remind investors of the virtues of a bond's safety and stability. In fact, for many investors it makes sense to have at least part of their portfolio invested in bonds. However, bonds are not totally risk-free, because the issuer could default on the loan if it is not able to make the payment at maturity. A bond is debt instrument that a government or a company issues to raise money. Basically it is a contract between a government or a company---who is acting as the borrower---and investors like you---who are acting as the lender.
A stock is a share of ownership, or equity, in a company. An investor who owns stock in a company is a part-owner of that company, along with all the other stockholders. As such, they have a claim on the company’s assets, as well as voting rights in company matters. Unlike bonds, stocks do not guarantee a certain amount of return on investment; in fact, they guarantee no return at all. In other words, it’s possible to lose all or part of the investment. A stock’s return-on-investment (ROI) must therefore perform better in order to compensate for this greater risk to the investor’s money. Stock ROIs come in two forms: dividends and capital gains. Dividends are payouts to stockholders from company profits. Capital gains accrue when the value of the stock increases above its purchase price, thereby increasing the value of the investment. Historically, stocks have outperformed bonds and all other investment vehicles over the long term.)
An increase in interest rates encourages traders to invest within that market and causes the demand for the currency to rise. As demand rises, the currency becomes scarcer and consequently more valuable. Investors are drawn to the currency, causing it to appreciate, because they will gain a higher yield on their investments.
The earlier you are able to invest money, the better because it will have more time to grow (with interest). If you don't save for retirement, you won't really have much of anything for retirement.
Interest rate swap?
Compounding refers to situations where a current value is being converted to its equivalent
future value for comparison to another future value. Discounting involves moving back through time,
or the conversion of a cash flow to be received in the future into its equivalent current value.
A Derivative is a financial instrument where rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. In headging mutually reduces risk as one party is the insurer (risk taker) for one type of risk, and the counterparty is the insurer (risk taker) for another type of risk. Derivatives are usually broadly categorised by:
- The relationship between the underlying and the derivative (e.g. forward, option, swap)
- The type of underlying (e.g. Equity derivatives, FX derivatives, credit derivatives)
- The market in which they trade (e.g. exchange traded or over-the-counter)
"Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not the faces which he himself finds the prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view."
"It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree when we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees."
Hindu-Arabic numeral system
The word mynet is related to the Latin moneta through an old Indo-European word which is now lost to us. The word mint was developed from the Old English mynet which meant “coin”. A mint is the place where an authorised government office coins a given nation’s money. To mint is to make coins by stamping metals. It is from this that we get the idiom to “mint money”, meaning to engage in a lucrative business.
Usury laws are mentioned in the Bible and the Koran. In India, during the Buddhist period, it was recommended that interest be limited to 15 percent per year on secured loans and to 60 percent per year on unsecured loans. In traditional China the maximum rate was 3 percent per month, and the penalty for charging more was 40 to 100 blows with the light cane.
French derived its moneie and monnaie from the Latin moneta, which referred to a mint. (For “money”, in general, the French now use the word argent, which is related to the Old Testament and among “the arc words” that Robert Temple (in his book The Sirius Mystery) traces to Ar qur, the ancient Nilo-Coptic word for silver.) Moneie still exists in French as monnaie. But this now refers only to “loose money” or “change”.
English adopted it from the Old French moneie, probably from William the Conqueror’s activities after his famous defeat of King Harold at Hastings in 1066. The moneta (mint) is what has given us the adjective monetary, which relates to money or the currency. To monetise is to give a legal value to a coin, to establish it as the legal tender. Usage e.g. International Monetary Fund (IMF)
Since the Middle Ages, each epoch has participated in the debate over the conditions in which lending should be prohibited as usury. Usury laws, moreover, have been the subject of classic works of literature, such as “The Merchant of Venice.” While disagreements over the definition of usury remain, the debate came to its modern climax on the eve of the industrial revolution, in a well-known interchange between Jeremy Bentham and Adam Smith in the late 1780s. Smith, for all his faith in a system of natural liberty, proved unwilling to let the interest rate float.
Adam Smith, in The Wealth of Nations, advocated usury laws (limits on interest rates) because they would promote lending to prudent borrowers and productive projects, which was better for society as a whole. Gilbert K. Chesterton identified Bentham's essay on usury as the very beginning of the “modern world.” Bentham acknowledged in the Defence that all he knew of political economy originated in Smith's works.)
During the colonial era the United States, like Britain, had a strict set of usury laws. Part of the explanation for the liberalization is the rise of faith in Laissez Faire, and more particularly in Bentham’s case against the usury laws. it seems plausible that Bentham had won the theoretical argument must have had an impact. As one dogged supporter of usury laws in Wisconsin was forced to admit he “did not believe in the principle of free trade in money – not because he could reply to the arguments of those who were in favor of it – they had all the arguments in their favor” but because “experience has taught us that it is unjust.”
As late as the American Civil War there was a nearly successful attempt to incorporate a maximum lending rate that would have been applicable nationwide in the National Banking system despite the free market consensus among economists. in the early days of settlement when uncertainty produced high interest rates and potential farmers needed mortgage money to buy land, the fear that capital would leave a state that maintained tough usury laws was a powerful argument in the hands of those who favored an unfettered capital market. The usury laws in England were repealed in 1854 (although legislation protecting borrowers was reinstated at the turn of the century), but in the United States they were continued in many states down to the present day.
During the 16th century the spice trade was dominated by the Portuguese who used Lisbon as a staple port. Before the Dutch Revolt Antwerp had played an important role as a distribution center in northern Europe, but after 1591 the Portuguese used an international syndicate of the German Fuggers and Welsers, and Spanish and Italian firms that used Hamburg as its northern staple, to distribute their goods, thereby cutting out Dutch merchants. Portugal had been "united" with the Spanish crown, with which the Dutch Republic was at war, in 1580, the Portuguese Empire became an appropriate target for military incursions. These three factors formed motive for Dutch merchants to enter the intercontinental spice trade themselves at this time. Finally, a number of Dutchmen like Jan Huyghen van Linschoten and Cornelis de Houtman obtained first hand knowledge of the "secret" Portuguese trade routes and practices, thereby providing opportunity.
Around 1670, two events caused the growth of VOC trade to stall. In the first place, the highly profitable trade with Japan started to decline. The loss of the outpost on Formosa to Koxinga and related internal turmoil in China (where the Ming dynasty was being replaced with the Qing dynasty) brought an end to the silk trade after 1666. Though the VOC substituted Bengali for Chinese silk other forces affected the supply of Japanese silver and gold. the importance of these traditional commodities in the Asian-European trade was diminishing rapidly at the time. The military outlays that the VOC needed to make to enhance its monopoly were not justified by the increased profits of this declining trade. this lesson was slow to sink in and at first the VOC made the strategic decision to improve its military position on the Malabar Coast (hoping thereby to curtail English influence in the area, and end the drain on its resources from the cost of the Malabar garrisons) by using force to compel the Zamorin of Calicut to submit to Dutch domination. in they decided in 1721 that it was no longer worth the trouble to try and dominate the Malabar pepper and spice trade.
The way the company was organized in Asia (centralized on its hub in Batavia) that initially had offered advantages in gathering market information, began to cause disadvantages in the 18th century, because of the inefficiency of first shipping everything to this central point. The defeat in the Travancore-Dutch War is considered the earliest example of an organized Asian power overcoming European military technology and tactics; and it signaled the decline of Dutch power in India. the Fourth Anglo-Dutch War intervened. British attacks in Europe and Asia reduced the VOC fleet by half; removed valuable cargo from its control; and devastated its remaining power in Asia.
The Dutch East India Company remained an important trading concern for almost two centuries, paying an 18% annual dividend for almost 200 years. In its declining years in the late 18th century it was referred to as Vergaan Onder Corruptie (referring to the acronym VOC) which translates as 'Perished By Corruption'. The VOC became bankrupt and was formally dissolved in 1800, its possessions and the debt being taken over by the government of the Dutch Batavian Republic.
Mississippi Scheme, plan formulated by John Law for the colonization and commercial exploitation of the French colonies in North America, which included much of the Mississippi River drainage basin, and the French colony of Louisiana. The bubble created instant millionaires before it collapsed, leaving John Law in poverty and disgrace. Indeed, the very word 'millionaire' was coined during the heady years of the Mississippi bubble. it led to royal bankruptcy to the French revolution.
Its shares first depreciated in value but rose rapidly when Law, director of the new royal bank, promised to take over the stock at par at an early date. In 1719 the company absorbed several other organizations for the development of the Indies, China, and Africa, and Law thus controlled French colonial trade. The consolidated company, renamed the Compagnie des Indes (but commonly known as the Mississippi Company), was given, among other privileges, the right of farming the taxes. It then assumed the state debt and finally was officially amalgamated (1720) with the royal bank. Public confidence was such that a wild orgy of speculation in its shares had set in. The speculation received a strong impetus from Law's advertising, which described Louisiana as a land full of mountains of gold and silver. One story told of a fabulous emerald rock on the Arkansas River, and an expedition promptly set out to find it. Overexpansion of the company's activities, the almost complete lack of any real assets in the colonial areas, and the haste with which Law proceeded soon brought an end to his scheme. A few speculators sold their shares in time to make huge profits, but most were ruined when the “Mississippi Bubble” burst in Oct., 1720. In the governmental crisis that followed, Law's financial system was abolished, and he fled the country (Dec., 1720). Although a failure in its financial aspects, the Mississippi Scheme was responsible for the largest influx of settlers into Louisiana up to that time.
John Law's Mississippi Scheme, despite its eventual failure, is an important event in economic history since it represented an attempt to introduce paper money on a large scale. The Banque Générale was primarily a deposit bank and not a lending bank, and it proved to be a great success for a while. With a limited note issue (backed by gold) and branches in the provinces, it spread means of payment away from the financial centres of Paris and Lyons and therefore had a beneficial effect on trade and industry. The problem occurred when the regent took over the bank (it became the Banque Royal) and began to issue notes with no limit to their quantity. We see, therefore, that a financial system based on paper money depends almost entirely on the confidence of the public in the currency that is issued by the monetary authorities, and that once confidence in a currency is badly shaken, painful consequences are inevitable.
Richard Cantillon was an Irishman of Norman origins and Jacobite connections who spent much of his life in France. He took over the bankrupt banking business of an uncle of the same name in Paris and made a fortune from the collapse of John Law’s Mississippi Scheme. his lone surviving publication, Essai sur la Nature du Commerce en General,a copy of which was with Carl Menger in his library prior to the publication of The Principles of Economics.
Since his rediscovery during the marginalist revolution, a substantial body of literature has grown up in appreciation of Cantillon and a number of mysteries surrounding him and the Essai have been solved. Most importantly, the Scottish philosopher and tax collector Adam Smith should no longer be considered the father of economics. That title now belongs to the Irish entrepreneur and Austrian economist, Richard Cantillon who wrote the first treatise on economics more than four decades before the publication of the Wealth of Nations.
American Koch was related to Ilse’s family. Karl Otto Koch (or Köhler) and his second wife Ilse Koch were arrested, before the war ended, by Gestapo for embezzlement of SS funds and the murder of certain inmates in an attempt to cover up these crimes. Karl was tried and sentenced to death by the SS in Nazi Germany. After the war, Ilse was arrested in 1947 in the German American Zone, tried and sentenced, but was quickly pardoned. Owing to international condemnation, Koch was re-arrested in 1949 and tried before a West German court for instigation to murder in 135 cases. She was sentenced to life imprisonment in 1951and committed suicide in prison in 1967.
Fred Chase Koch Born in 1900 the son of a Dutch immigrant and newspaper publisher from a tiny town, Quanah, north Texas. Fred Koch was so rebellious as a child that he once ran away from home to live with Indians. An inveterate tinker, he often fell asleep at his drafting table rather than leave what he was doing. The historical record is not clear about the family’s wealth, but it appears that great-granddaddy Koch was not hurting for cash, because Fred Koch turned out to be a smart kid and was able to study at MIT and graduate in 1922 with a chemical engineering degree. He was first employed by the Texas Company in Port Arthur, Texas, and then by the Medway Oil and Storage Company in Kent, England, where he was chief engineer. Only three years after graduation from college, Koch rejoined an MIT classmate at Keith-Winkler Engineering, a petrochemical engineering concern in Wichita, Kansas. Later in 1925, the firm was renamed the Winkler-Koch Engineering Company. He partnered with a former Universal Oil Products engineer named Lewis Winkler and quickly developed and patented a novel process to refine gasoline from crude oil that had a higher-yield than anything on the market.
Cracking was first invented by a Russian engineer, Vladimir Shukhov, in the late 19th century. By the 1920s, the petroleum industry was fully fledged, in no small measure in response to the needs of the burgeoning automobile industry. Then as now, the petroleum industry was dominated by a few mega-corporations that did not scruple to enlist the power of the state to enforce their near-monopolistic dominance of the industry at the expense of smaller would-be competitors.
Fred was living through the Roaring Twenties, a time of big business, heavy speculation and zero government regulation. Much like today, cartels were free to form and free to fix—and so they did. Koch’s new royalty-free thermal cracking process, by producing higher yields of refined gasoline from crude oil and reducing down time, helped smaller companies to better compete with their larger, more entrenched, and better-capitalized rivals. Relying on family connections, Fred soon landed his first client – an Oklahoma refinery owned by his maternal uncle L.B. Simmons. Sensing a threat to their royalty-revenue stream from Winkler-Koch’s superior refining technology, the reigning oil cartel moved in to teach the young Koch how the laissez-faire business model worked in the real world.
When he tried to market his invention, Universal Oil Products sued him for patent infringement. Koch eventually won all the 44 lawsuits but one (and that verdict was later overturned when it was discovered that the judge had been bribed), but the 15 year legal controversy made it tough to attract many US customers — as the Big Oil oligarchs intended. Just like that, Winkler-Koch Engineering found itself squeezed out of the American market. They had a superior product at a cheaper price, but no one to sell it to. Fred Koch must have begun to understand that the modern American business sector was not nearly as free-market as it was cracked up to be.
Luckily, there was one market where opportunity beckoned—and innovation was rewarded: the Soviet Union. Stalin’s first Five Year Plan was just kicking into action a nation-wide industrialization effort, and the Soviet planners needed smart, industrious college grads like Fred Koch. The Soviet Union was desperately trying to increase its oil refining capacity, so oil engineers were especially in high demand—and well paid, too.
Erich Koch (a high level die-hard Nazi official in charge of Prussia and son of a synthetic coffee factory worker) invited Fred Koch to sell his oil in Nazi Germany when Fred was banned from doing business in the US. In 1929, after hosting a delegation of Soviet planners in Wichita, Kansas, Winkler and Koch signed a $5 million contract from Stalin for constructing 15 oil refineries in the Soviet Union in the 1930s. He made his fortune by working for the Bolsheviks in the late 1920s and early 1930s, building refineries, training Communist engineers and laying down the foundation of Soviet oil infrastructure. By the time he got out in 1933, Koch earned $500,000, which was a ton of money for a kid fresh out of college. It was 1933, one of the two worst years of the Great Depression— and so he acquired assets that were priced to go at 90% off and spews an array of industrial products, from Dixie cups to Lycra. He was was an American businessman looking for a good deal, and he was looking all over the world to see how he could make some money.
Another venture was a partnership with the American Nazi sympathizer William Rhodes Davis, who, according to Ms. Mayer, hired Mr. Koch to help build the third-largest oil refinery in the Third Reich. In 1933, Adolf Hitler became chancellor of the Third Reich in Germany, so this meant working under the Third Reich. And in order to get permission, they actually had to go to Hitler himself. The facility produced hundreds of thousands of gallons of high-octane fuel for the Luftwaffe, until it was destroyed by Allied bombs in 1944. The episode is not mentioned in an online history published by Koch Industries, the company that Mr. Koch later founded and passed on to his sons. Other US companies like Coca Cola and Ford were also doing business in Germany in the 1930s. (Neither Coke nor Ford or their executives have pledged to spend hundreds of millions influencing US elections this year.)
Fred Koch “wrote admiringly of Benito Mussolini’s suppression of Communists in Italy, and disparagingly of the American civil-rights movement. In 1938, Fred C. Koch wrote that “the only sound countries in the world are Germany, Italy and Japan, simply because they are all working and working hard.” His approach to child-rearing was one of "tough love," according to one longtime Koch employee. To insure that the boys did not turn into country club bums, he put them to work every summer, from the age of 9 on, at the family's west Kansas ranch, driving tractors, digging post holes, and bailing hay. To make sure his children got the right ideas, he hired a German governess. The governess was such a fervent Nazi that when France fell in 1940, she resigned and returned to Germany. After that, Fred became the main disciplinarian, whipping his children with belts and tree branches. Fred loved the outdoors and he made up for his long absences due to business trips by taking his sons, jointly or individually, on trips any boy would love: hunting and riding at his ranches in Kansas and Montana, on big-game expeditions to Africa, and on trips to the Arctic Circle to look at polar bears. Unfortunately, his eldest, Fred or Freddy shared more interests with his artistic and socializing than with his austere, hard-driving father. For murky reasons Fred Koch removed his oldest son, Frederick, from his will, setting off one of the many intense struggles over money that tore the family apart.
After the fall of Nazi Germany, Erich Koch and Fred expand the oil empire to the Soviet Union. A few years later the Soviets took Fred Koch’s oil and prosecuted Erich for war crimes. (Years after the war, Erich Koch stood trial in Poland and was convicted in 1959 of war crimes and sentenced to death but the sentence was commuted to life imprisonment a year later.) During the purges in the late '30s liquidated some of Fred Koch's best Russian friends, Fred Koch returned to the US, and Fred turned into a fervent anti-Communist. One of his original Soviet associates, a Mr. Barinoff, the president of a major Soviet oil concern in Baku, befriended the Koch at a meeting in Wichita. “Mr. Barinoff told me to be sure and come to see him at Baku,” Koch wrote. “When I came to Russia a year and a half later Mr. Barinoff was dead, shot by Stalin.” Another prominent Soviet oil executive at the Wichita meeting, a Mr. Ganshin, was, at the time of Koch’s visit, “on trial for his life, later to be shot.” As for the Soviet engineers that Winkler-Koch trained in the United States: "As far as I could tell most of these men were subsequently shot or sent to Siberia".
Jerome Livshitz, like many elite Russian revolutionaries, was well educated and eager to debate the alleged merits of the Soviet system with his captive American audience. “In the months I traveled with [Livshitz] he gave me a liberal education in Communist techniques and methods,” Koch recalled: He told me how the Communists were going to infiltrate the U.S.A. in the schools, universities, churches, labor unions, government, armed forces". (Livshitz was liquidated by Stalin in 1936). When the United States entered World War II in 1941, Koch tried to enlist in the U.S. military. In 1960, Koch wrote: “The colored man looms large in the Communist plan to take over America.” He warned of a massive Communist conspiracy to take control of America, saying that the Reds were eroding American universities, churches, political parties, the media and every branch of government. He strongly supported the movement to impeach chief justice Earl Warren, after the supreme court voted to desegregate public schools in Brown v Board of Education. Koch declared that the United Nations was a tool of the communists. Fred Koch’s paranoia continued to spiral out of control until his thumper quit in 1967.
Fred met his wife, Mary, the Wellesley-educated daughter of a Kansas City surgeon, on a polo field and soon bought 160 acres across from the Wichita Country Club, where they built a Tudorstyle mansion. He proposed to his girlfriend of five years “over the phone and while paging through his calendar for an opening in his schedule. ”As chronicled in Sons of Wichita, Daniel Schulman's investigation of the Koch dynasty, the compound was quickly bursting with princes: Frederick arrived in 1933, followed by Charles in 1935 and twins David and Bill in 1940.
After their father died, Charles de Ganahl Koch and David (the three brothers had blackmailed the eldest Freddy) bought out their brothers’ shares in the family company, then built it into the second largest privately held corporation in America. Charles, now in command of the family business, renamed it Koch Industries. Another man who studied Charles thought “he was driven by some deeper urge to smash the one thing left in the world that could discipline him: the government”. David Koch ran as the Libertarian party candidate for vice-president in 1980 and says that his dream is to “minimize the role of government, to maximize the role of private economy and to maximize personal freedoms.” In 1980, Koch Industries pleaded guilty to five felonies in federal court, including conspiracy to commit fraud.
Charles followed a charismatic radio personality named Robert LeFevre, founder of the Freedom School, a whites-only libertarian boot camp in the foothills above Colorado Springs, Colorado. LeFevre preached a form of anarchic capitalism in which the individual should be freed from almost all government power. LeFevre's stark influence on Koch's thinking is crystallized in a manifesto Charles wrote for the Libertarian Review in the 1970s, titled "The Business Community: Resisting Regulation." Charles lays out principles that gird today's Tea Party movement. Referring to regulation as "totalitarian," the 41-year-old Charles claimed business leaders had been "hoodwinked" by the notion that regulation is "in the public interest."
“Once, my father ran a business in the ex-Soviet Union, and all engineers who worked with my father were imprisoned by Stalin later. My father, who had experienced this, became an anti-communist and thought the value of economical freedom and prosperity was more important than ever before”
Bill Koch (aka William Ingraham Koch), the third brother who had a falling-out with Charles and David back in the ’80s over Charles’ sociopathic management style, explained that with its extensive oil pipe network, the company role was of an middleman – it buys crude from someone’s well and sells it to a refinery – which makes it easy to steal millions of dollars worth of oil by skimming just a little off the top of each transaction and then falsifying them on the run sheets, or what they call “cheating measurements” in the oil trade. According to William, wells located on federal and Native American lands were the prime targets of the Koch scam. A Senate committee concluded that over the course of three years Koch "pilfered" $31 million in Native oil; in 1988, the value of that stolen oil accounted for nearly a quarter of the company's crude-oil profits.
Bill Koch said it added up. “Well, that was the beauty of the scheme. Because if they’re buying oil from 50,000 different people, and they’re stealing two barrels from each person. What does that add up to? One year, their data showed they stole a million and a half barrels of oil.” One of Koch's gaugers would refer to this as "volume enhancement." But in sworn testimony before a Texas jury, Phillip Dubose, a former Koch pipeline manager, offered a more succinct definition: "stealing." In 1999 it went to court and settled the case two years later by paying $25 million to the federal government. It turned out to be a great deal for Charles and David, considering that in the 1980s their “adjustments” allowed Koch Industries to siphon off 300 million gallons of oil without paying. It was pure profit–free money–to the tune of $230 million.
According to Charles and David, Fred (still called Freddy by the family) is fueled by his art collecting compulsion and his anger at the father who rejected him at an early age for allegedly being gay. William is eccentric and has low self-esteem. He always felt overshadowed by his athletic twin brother David. He both hates and admires Charles and resentment David because Charles is closer to David. David had said: "Billy wanted the big job and the big title faster than he deserved." In 1996, Bill went to court to evict his former girlfriend from the Boston apartment he had set her up in. In 2000, Bill's then-wife Angela, the mother of two of his children, called the police to accuse Bill of punching her in the stomach and threatening "to beat his whole family to death with his belt." Bill was charged with domestic assault and threatening to commit murder. Angela later recanted parts of her account, shortly before receiving a divorce settlement worth $16 million.
William and Fred even sued their own mother to block her from distributing $300,000 a year from a charitable foundation set up by her late husband -small change considering the family's enormous wealth. Charles and David, also named in the suit, jumped to their mother's defense. For William, the suits are not a matter of family, but of principle. "I look at my father," he said in an interview three years ago. "He stood up for principle. If he thought he was right, he'd fight to the death." But even William recognizes that there's more to it than that. "The family instinct in me is so strong," he said. "That's why it's so painful to get the umbilical cord cut." William has never even introduced his mother to his young son. Mary was in tears during the litigation. But apparently she doesn't hold a grudge. "I love all four boys, and I wouldn't cut any out of my will," she says.
David a longtime bachelor -- known for throwing wild parties with scantily clad women – began seriously dating his future wife six months after his 1991 airplane crash in Los Angeles that killed 22 people aboard his flight, including the couple seated directly across from him in first class. Charles, David and Bill ended their long-running feud in 2001, at a dinner held at Bill’s Palm Beach mansion to sign a final settlement divvying up their father’s property. It was the first time they had shared a meal in almost 20 years.
Through the John Birch Society, Charles pushed fringe economic theories opposing Roosevelt's New Deal economics and policies, and Charles also funded the anarcho-capitalist group the Freedom School of Robert LeFevre. Richard Fink, head of Koch Company's Public Sector and the longtime mastermind of the Koch brothers' political empire, confessed to The Wichita Eagle in 1994 that Koch could not compete if it actually had to pay for the damage it did to the environment: "Our belief is that the tax, over time, may have destroyed our business."
To fight this threat, the Kochs funded a "grassroots" uprising. The effort was run through Citizens for a Sound Economy (a precursor to Americans for Prosperity), to which the brothers had spent a decade giving nearly $8 million to create what David Koch called "a sales force" to communicate the brothers' political agenda through town hall meetings and anti-tax rallies designed to look like spontaneous demonstrations. In 1994, David Koch bragged that CSE's campaign "played a key role in defeating the administration's plans for a huge and cumbersome BTU tax."
Sold to the public as quasi-scholarly organizations, their real function was to legitimize the right to pollute for oil, gas and coal companies, and to argue for ever more tax cuts for the people who created them. As the writer Thomas Frank has pointed out, the genius of this strategy was to “turn corporate self-interest into a movement among people on the streets”. The next step for the radical right was to support the creation of the Tea Party movement, through organizations like Americans for Prosperity, which was funded by the Kochs.
The Heritage Foundation, the Cato Institute and Americans for Prosperity provided speakers, talking points, press releases, transportation, and other logistical support. Richard Scaife, an heir to the Mellon fortune, gave $23m over 23 years to the Heritage Foundation, after having been the largest single donor to AEI. The New York Times hired ex-Nixon speechwriter Bill Safire to “balance” its op-ed page, to the Ford Foundation, which gave $300,000 to the American Enterprise Institute (AEI) in 1972. Koch Industries also plowed hundreds of millions of dollars into right-wing organizations like Institute for Humane Studies, the Cato Institute, the Mercatus Center at George Mason University, the Bill of Rights Institute, the Reason Foundation, Citizens for a Sound Economy and the Federalist Society.
John M Olin founded the Olin Foundation, and spent nearly $200m promoting “free-market ideology and other conservative ideas on the country’s campuses”. It bankrolled a whole new approach to jurisprudence called “law and economics”, Mayer writes, giving $10m to Harvard, $7m to Yale and Chicago, and over $2m to Columbia, Cornell, Georgetown and the University of Virginia.
Through much of the 1990s at its Pine Bend refinery in Minnesota, Koch spilled up to 600,000 gallons of jet fuel into wetlands near the Mississippi River. Koch Petroleum Group eventually pleaded guilty to "negligent discharge of a harmful quantity of oil" and "negligent violation of the Clean Water Act," was ordered to pay a $6 million fine and $2 million in remediation costs, and received three years' probation.
By 1995, the EPA had seen enough. It sued Koch for gross violations of the Clean Water Act. From 1988 through 1996, the company's pipelines spilled 11.6 million gallons of crude and petroleum products. Internal Koch records showed that its pipelines were in such poor condition that it would require $98 million in repairs to bring them up to industry standard. Ultimately, state and federal agencies forced Koch to pay a $30 million civil penalty – then the largest in the history of U.S. environmental law – for 312 spills across six states.
In a sternly worded memo that April, Charles had ordered his top managers to cut expenditures by 10 percent "through the elimination of waste" in order to increase pre-tax earnings by $550 million a year.
In 2000, Koch was hit with a 97-count indictment over claims it violated the Clean Air Act by venting massive quantities of benzene at a refinery in Corpus Christi – and then attempted to cover it up. Koch faced charges on only seven counts. The Justice Department settled in what many perceived to be a sweetheart deal, and Koch pleaded guilty to a single felony. Despite skirting stiffer criminal prosecution, Koch was handed $20 million in fines and reparations – another historic judgment. In 2000, Koch Petroleum Group entered into an agreement with the EPA and the Justice Department to spend $80 million at three refineries to bring them into compliance with the Clean Air Act. After hitting Koch with a $4.5 million penalty, the EPA granted the company a "clean slate" for certain past violations.
In 2000, the Commodity Futures Modernization Act had exempted many of these products from regulation, and Koch Industries was among the key players shaping that law. Koch joined up with Enron, BP, Mobil and J. Aron – a division of Goldman Sachs then run by Lloyd Blankfein – in a collaboration called the Energy Group. This corporate alliance fought to prohibit the federal government from policing oil and gas derivatives. The Enron Loophole became law in December 2000 – pushed along by Texas Sen. Phil Gramm, giving the Energy Group exactly what it wanted. Before its spectacular collapse, Enron would use this loophole in 2001 to help engineer an energy crisis in California, artificially constraining the supply of natural gas and power generation, causing price spikes and rolling blackouts. This blatant and criminal market manipulation has become part of the legend of Enron. But Koch was caught up in the debacle. One of 10 companies punished for such schemes, Entergy-Koch avoided prosecution by paying a $3 million fine as part of a 2004 settlement with the CFTC.
Like a casino that bets at its own craps table, Koch engages in "proprietary trading" – speculating for the company's own bottom line. "We're like a hedge fund and a dealer at the same time," bragged Ilia Bouchouev, head of Koch's derivatives trading in 2004. "We can both make markets and speculate.
For decades, U.S. companies have been forbidden from doing business with the Ayatollahs, but Koch Industries exploited a loophole in 1996 sanctions that made it possible for foreign subsidiaries of U.S. companies to do some business in Iran. The German and Italian arms of Koch-Glitsch, a Koch subsidiary that makes equipment for oil fields and refineries, won lucrative contracts to supply Iran's Zagros plant, the largest methanol plant in the world. And thanks in part to Koch, methanol is now one of Iran's leading non-oil exports. Koch reportedly kept trading with Tehran until 2007 – after the regime was exposed for supplying IEDs to Iraqi insurgents killing U.S. troops.
Koch is also reaping the benefits from Dodd-Frank's impacts on Wall Street. The so-called Volcker Rule, implemented at the end of last year, bans investment banks from "proprietary trading" – investing on their own behalf in securities and derivatives. As a result, many Wall Street banks are unloading their commodities-trading units. But Volcker does not apply to nonbank traders like Koch. They're now able to pick up clients who might previously have traded with JPMorgan. Koch also likely benefits from loopholes that exempt the company from posting collateral for derivatives trades and allow it to continue trading swaps without posting the transactions to a transparent electronic exchange. Though competitors like BP and Cargill have registered with the CFTC as swaps dealers – subjecting their trades to tightened regulation – Koch conspicuously has not.
The last element of this multi-pronged campaign saw the direct investment of hundreds of millions of dollars in political campaigns at every level, from president to city councilor. Because they are considered charities, the philanthropic groups "don't need to disclose the names of their donors. After the disappearance of virtually all restrictions on campaign contributions – another result of right-wing lobbying and the supreme court’s Citizens United decision. When the Supreme Court in the 2010 Citizens United case permitted nonprofits to spend money on political campaigning, the Koch brothers funded their own political machine, which, in size, dollars and sophistication, rivaled that of the two major parties. Their success in the 2010 midterm election was remarkable, and, Ms. Mayer says, took the Democrats by surprise. Republicans picked up seats in the House and the Senate and 675 in state legislatures. “As a consequence of their gains, Republicans now had four times as many districts to gerrymander as the Democrats” and the legislative power to pass a series of laws suppressing the vote of those who might not support their agenda.
David's latest venture, Americans for Prosperity, subsidizes the Tea Party movement. Another David Koch project is the Citizens for a Sound Economy - which launched the effort to repeal Glass-Steagall protections (keeping banks from gambling in securities).
The Kochs, outsize influence is a result not only of their outsize fortune — according to Forbes magazine, the brothers are the fifth and sixth wealthiest Americans, with a combined family income larger than that of Bill Gates — but also of their intellectual prowess and organizational skills. For more than a decade, they have organized donor summits to which they have invited like-minded billionaires, political consultants, media celebrities and elected officials. At these meetings, plans are made, issues chosen, money raised, donations pooled, spending coordinated for the next election cycles. The Koch brothers and their allies insist, and no doubt believe, that their war on big government has been motivated by their commitment to the individual freedoms that government interferes with.
In an interview, Koch Industries executive vice-president Richard Fink said this when asked what he feels when sees people on the streets, he replied “get off your ass and work hard like we did,” that the culture of victimization is the ‘main recruiting ground for totalitarianism, for fascism, for conformism.”
You know what else looks bad? Financing the publication of Holocaust denial literature over the course of several decades. Which is exactly what Charles Koch did between the 1960s and the 1980s.
It began with taking advantage of the outcome of the Battle of Waterloo, which was fought at La-Belle-Alliance, seven miles south of Waterloo, which is a suburb of Brussels, Belgium. Early in the battle, Napoleon appeared to be winning, and the first secret military report to London communicated that fact.
However, upon reinforcements from the Prussians, under Gebhard Blucher, the tide turned in favor of Wellington. On Sunday, June 18, 1815, Rothworth, a courier of Nathan Rothschild, head of the London branch of the family, was on the battlefield, and upon seeing that Napoleon was being beaten, went by horse to Brussels, then to Ostende, and for 2,000 francs, got a sailor to get him to England across stormy seas. When Nathan Rothschild received the news on June 20, he informed the government, who did not believe him. So, with everyone believing Wellington to be defeated, Rothschild immediately began to sell all of his stock on the English Stock Market. Everyone else followed his lead, and also began selling, causing stocks to plummet to practically nothing. At the last minute, his agents secretly began buying up the stocks at rock-bottom prices. On June 21, at 11 PM, Wellington's envoy, Major Henry Percy showed up at the War Office with his report that Napoleon had been crushed in a bitter eight hour battle, losing a third of his men. This gave the Rothschild family complete control of the British economy, and forced England to set up a new Bank of England, which Nathan Rothschild controlled.
Mayer Amschel Rothschild sent some of William's money to his son Nathan in London, and according to the Jewish Encyclopedia: "Nathan invested it in 800,000 pounds of gold from the East India Company, knowing it would be needed for Wellington's peninsula campaign". In 1817, France, in order to get back on their feet again, secured loans from a French banking house in Ouvrard, and from the Baring Brothers in London. The Rothschilds saw their chance to get a firm grip on the French economy, and on October, 1818, Rothschild agents began buying huge amounts of French government bonds, which caused their value to increase. On November 5th, they were dumped on the open market, creating a financial panic as their value declined. Thus, the Rothschilds gained control of France. Mayer Rothschild had established banks in England, France, and Germany. His sons, who were made Barons of the Austrian Empire, were set up to continue and expand his banking empire. Soon the Rothschilds spanned Europe with railroads, invested in coal and ironworks, financed England's purchase of the Suez Canal, paid for oil exploration in Russia and the Sahara Desert, financed the czars of Russia, supported Cecil Rhodes' diamond operations, aided France in creating an empire in Africa, financed the Hapsburg monarchs, and saved the Vatican from bankruptcy.
In this country, through their American and European lobbyist, they helped finance Rockefeller's Standard Oil, Carnegie Steel, and Harriman's Railroad. American and British Intelligence have documented evidence that the House of Rothschild, and other International Bankers, have financed both sides of every war, since the American Revolution.
In 1975, Japan's GNP was double Britain's and 40% of that of the United States – all this despite its welfare. By 1988, near the end of the Cold War, Japan had passed ahead of the US in per capita GDP and had moved further ahead of South Korea. And Japan had gained also on Switzerland, the world leader in per capita GDP in 1988. In 1960 Japan had 27.2% of Switzerland's per capital GDP. In 1988 that figure had risen to 82%.
The work force was paid relatively well – nothing like the subsistence wages in the Soviet Union during the economic growth years of Stalin's five-year plans. Japan had been saving a good percentage of its earnings and a higher percentage of the nation's wealth went into investment rather than into the consumerism pursued in the United States.
During the period of over-investment, bankers, had overestimated growth. Seeking bigger monetary gains, they had made bad and increasingly risky loans. A "bubble" was being created while credit was easily available, interest rates were low and borrowing massive. Speculation created real estate prices that were extremely over-valued. Japan imported more fish than it exported. The result was a banking crisis in the 1990s.
The 1990s became know as Japan's "Lost Decade. The government injected 1.8 trillion yen into Japan’s main banks but it failed to stem the growing crisis. Consumers remained little interested in spending. Japan's Central Bank set interest rates at approximately zero. But public interest in spending remained low. Public creating little demand, prices fell.
By 2003, Japan's government finally forced major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail. Japan's currency had weakened relative to other currencies which helped revive its sales abroad.
An economic plan was prepared in collaboration with the CIA to privatized the state-controlled pension system, state industries, and banks. The government also cut tariff for imports. The first reforms (allowed by the military junta) were implemented in three rounds – 1974–1983, 1985, and 1990. The most important economic reform in Chile was to open trade, primarily through a flat, low tariff on imports. Much of the credit for Chilean economic reforms in the following 30 years should be given to the decision to open our economy to the rest of the world. The wealth created did not "trickle down" to the working class. The initial effects of introducing free market policies in 1975 was a shock-induced depression which resulted in national output falling buy 15%, wages sliding to one-third below their 1970 level and unemployment rising to 20%. Then in 1982, after 7 years of free market capitalism, Chile's second deep economic recession occurred due to the international debt crisis.
Through successful crisis management from the mid-1980s to 1997, Chile's economic growth rose to 7.2% (followed by 3.5% during the Asian economic crisis). The financial sector was nationalized as a way to avoid a major banking crisis. With the help of the International Monetary Fund (IMF) and the World Bank 3 policy areas became critical in the implementation of the program: active macroeconomic policies, consolidation of the market-oriented structural reforms initiated in the 1970s, and debt-management policies geared toward rescheduling debt payments and making an aggressive use of the secondary market.
Though economic and trade liberalization, poverty went from 40% down to 20%. (60% of this reduction can be attributed to GDP growth, with the remaining 40% attributable social policies). Interestingly, this improvement was not because of “free-market” policies but because of active state intervention and strong laws enacted to create a strong labour market (eliminating labour courts, allowing massive dismissal of workers, increasing the daily working hours up to 12 hours etc).
South Africa is still the world's largest producer, by far. It has the world's deepest mine, 3585 m below surface at the East Rand mine. The Freegold mine, owned by Anglo American, was until recently the world's most productive gold mine
De Beers still controls 80% of world diamond trading. De Beers could simply slow production, leaving unwanted diamonds in the ground (just as good as money in the bank), as long as it could control the market to ensure that those unmined diamonds would bring a good price once they were brought to market. Today, the producers (Australia, Botswana, Russia, De Beers, and the Congo) are most unlikely (probably unable) to sacrifice their cash flow from diamond mining, and it is up to De Beers, from its own resources, to do what it can to stabilize diamond prices rather than hold them artificially high.
In 2000, the Congo looks as if it was breaking apart: rebel armies now control the diamond fields, and the supply of Congolese diamonds seems likely to drop into equal chaos. No-one can predict how that will play out, but it is noteworthy that Angolans are among the myriad mercenaries and freelance soldiers of fortune swarming into the country. Countries such as Rwanda and Uganda have begun exporting diamonds, even though they have no diamond mines: this may be due to the fact that both countries have soldiers deep inside the Congo, "assisting" the rebels.
In the far north of Western Australia, the British company Rio Tinto holds 60% of a large diamond field called Argyle. The Argyle field is about ten times as large as the original De Beers pipe, and is now the single largest diamond mine in the world, producing 34 million carats a year; it probably has at least 20 years of production. Because of Argyle, Australia became the world's leading producer of diamonds in the last half of the 1980s.
In the early years of President Yeltsin, De Beers was threatened more by the danger of organized cheating from Russia than by the chaotic operations in Angola and the Congo, which will dry up as soon as the easily worked surface diamonds are picked off.
There have been other dire results from IMF and World Bank programs across Africa and in the former Soviet Union, say critics and developmental economists. In Russia through the 1990’s, political pressures in the G 7 pushed the Bank to make loans, which were never used (but for which Russia had to pay charges), and pushed the IMF to turn a blind eye to failures to meet its targets.
World Bank-funded construction of hydroelectric dams in various countries have resulted in the displacement of indigenous peoples of the area. They pushed for installing ''terminator genes'' in crops so that poor farmers cannot save seed from year to year, jeopardizing monarch butterflies in an effort to grow pest-resistant corn.
The poor nations became deeply indebted to private banks in the rich nations during the Cold War, often the borrowers were authoritarian regimes, supported by the West because of their opposition to communism, and spent the borrowed money on armaments. A high percentage of current borrowing by debtor countries goes to pay off the private banks, he said, ''transferring private debt into public debt'' and shifting the risk to the public, whose taxes underwrite the two agencies.
At the same time, he said, they ''impose costs on the poor who didn't borrow'' by insisting on privatization because people who already are rich are most able to buy when a nation sells off its telephone company or - as in Haiti's case - its cement company and sugar processors.
''No matter how many times they fail,'' the IMF and the World Bank can make policy in poor nations ''because they are the only game in town'' for countries that cannot get credit elsewhere, Jeffrey Sachs, director of Harvard University's Center for International Development, said in a telephone interview yesterday. ''They hold the purse strings. ''
The IMF is responsible for insuring that in periods of economic down-turn, nations would not introduce exchange and trade restrictions, or competitive devaluations of their currencies to protect their domestic industries. To facilitate trade, the IMF would above all ensure that currencies remained liquid and stable (such as exchange rates and international payments). By the late 1970s, the industrial countries no longer needed the Fund: they had graduated to convertibility and flexible exchange rates. Some countries mishandled this inevitable capital account convertibility by having exchange rate rigidity. As Argentina, Korea, Thailand, etc. have demonstrated, central banks trading in currency markets has given spectacular BOP crises. These crises kept the IMF in business for a while. But poor countries are also learning sound monetary economics, and shifting to the consistent framework of floating rates + convertibility. When a country has a floating rate and convertibility, there are no currency crises and hence no role for the IMF.
(Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The experience of the Great Depression was fresh on the minds of public officials. The planners at Bretton Woods hoped to avoid a repeat of the debacle of the 1930s, when intransigent American insistence as a creditor nation on the repayment of Ally war debts, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, the system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement.)
The World Bank, it was originally envisaged, would make loans to war-damaged European nations to pay for investments in large energy and transport infrastructure projects, essential for their re-integration into the global economy. it composed of two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).The IBRD deals with middle income and creditworthy poor countries, while the IDA focuses on the poorest countries. The institutions provide loans and grants to developing countries for education, healthcare, and other services. The World Bank earns a prosperous margin on largescale lending to countries such as India and China, where a huge chunk of the world's poor live. The operating profit from the lending operations of the World Bank is used to employ roughly 10,000 international civil servants. However, the two most important customers of the World Bank - India and China - no longer need loans from the Bank. India and China are perfectly able to access global private capital flows. More importantly, both countries have learned enough modern economics to achieve high growth rates, through which poverty reduction is taking place.
An International Trade Organisation, meanwhile, serves as the primary means of creating and enforcing global free trade agreements. The WTO was created in 1995, by the passage of the provisions of the "Uruguay Round" of the General Agreement on Tariffs and Trade (GATT). Prior to the Uruguay Round, GATT focused on promoting world trade by pressuring countries to reduce tariffs. the WTO as a vehicle only moved by corporate profit-seeking logic is borne out from the WTO's history. In every case that has been brought to the organization challenging environmental or public safety legislation on behalf of corporations, the corporations have won. When foreign commercial shrimp fishing interests challenged the protection of giant sea turtles in our endangered species act, the turtles didn't stand a chance. When it was Venezuelan oil interests versus the U.S. Environmental Protection Agency's air quality standards for imported gasoline, the oil interests won. When it was U.S. cattle producers against the European Union's ban on hormone-treated beef, European consumers lost. The list goes on.
A major criticism then has been that in its current form, intellectual property rights regimes like TRIPS serve to stifle competition and protect one’s investments and profits from it in that way. For poor nations it makes developing their own industries independently more costly, if at all possible. Furthermore, as with the genetically engineered food section, indigenous knowledge that has been around for hundreds, if not thousands of years in some developing countries have been patented by large companies, without consent or prior knowledge from indigenous communities. People then find that they have to “buy” back that which they had already known and used freely.
TRIPS aims to prevent imitation of products (which is ironic, given that this would allow further competition and better prices for drugs and other products, which is something that transnational corporations have often sung as being the benefits of free trade and corporate-led capitalism with minimal restrictions). The effect of the 20 year period of a patent protection is to basically deny others (such as developing countries and their corporations) from developing alternatives that would be cheaper. Technology transfer is prevented (again, a direct contradiction to those who support the WTO, free trade in its current forms etc., which includes western multinational pharmaceutical corporations.)
At the end of November 1999, Seattle saw major governments meet at a WTO ministerial meeting to discuss various trading rules. Seattle also saw free speech cracked down on in the name of free trade.
Although their roles evolved, their over-arching purpose remained. As Jose Louis Jamarillo, the former Columbian Ambassador to GATT and President of the Group of 77, declared after the birth of the WTO, what we have created is "an institutional trinity which will dominate all economic relations across the world in the interests of the strongest". The billions of dollars controlled by the IMF and World Bank have helped to create greater allegiance of national elites to the elites of other countries than they have to their own national majorities. The decision-making structures of all three institutions continue to ensure that the major industrialised countries, led by the United States, and influenced by their corporations, set the agenda. The policy prescriptions are usually referred to as "structural adjustment" and they require that debtor governments open their economies up to penetration by foreign corporations, allowing them access to the workers and natural resources of the country at bargain basement prices.
These organization undermines democracy by shrinking the choices available to democratically controlled governments, with violations potentially punished with harsh penalties. They requires that governments make purchases based only on quality and cost considerations. Not only must corporations operate with an open eye regarding profits and a blind eye to everything else, so must governments and thus whole populations.
it promotes global trade even at the expense of efforts to promote local economic development and policies that move communities, countries, and regions in the direction of greater self-reliance. In agriculture, the opening to foreign imports will catalyze a massive social dislocation of many millions of rural people on a scale that only war approximates.
Tighten the money supply to raise internal interest rates to whatever heights are needed to stabilize the value of the local currency. Tight monetary policy and skyrocketing interest rates not only stop productive investment, stampeding savings into short-run financial investment instead of long-term productive investment, it keeps many businesses from getting the kind of month-to-month loans needed to continue even ordinary operations. This fosters unemployment and drops in production and therefore income. Fiscal austerity-raising taxes and reducing government spending-further depresses aggregate demand, also leading to reductions in output and increases in unemployment.
Their rules do not allow countries to treat products differently based on how they were produced-irrespective of whether they were made with brutalized child labor, with workers exposed to toxins or with no regard for species protection
recent example: When tens of thousands of people staged demonstrations in Mexico last year to protest a 60 percent increase in the price of tortillas, many analysts pointed to biofuel as the culprit. Because of US government subsidies, American farmers were devoting more and more acreage to corn for ethanol than for food, which sparked a steep rise in corn prices. The diversion of corn from tortillas to biofuel was certainly one cause of skyrocketing prices, though speculation on biofuel demand by transnational middlemen may have played a bigger role. However, an intriguing question escaped many observers: how on earth did Mexicans, who live in the land where corn was domesticated, become dependent on US imports in the first place?
The Mexican food crisis cannot be fully understood without taking into account the fact that in the years preceding the tortilla crisis, the homeland of corn had been converted to a corn-importing economy by “free market” policies promoted by the International Monetary Fund (IMF), the World Bank and Washington. The process began with the early 1980s debt crisis. One of the two largest developing-country debtors, Mexico was forced to beg for money from the Bank and IMF to service its debt to international commercial banks. The quid pro quo for a multibillion-dollar bailout was what a member of the World Bank executive board described as “unprecedented thoroughgoing interventionism” designed to eliminate high tariffs, state regulations and government support institutions, which neoliberal doctrine identified as barriers to economic efficiency.
Interest payments rose from 19 percent of total government expenditures in 1982 to 57 percent in 1988, while capital expenditures dropped from an already low 19.3 percent to 4.4 percent. The contraction of government spending translated into the dismantling of state credit, government-subsidized agricultural inputs, price supports, state marketing boards and extension services. Unilateral liberalization of agricultural trade pushed by the IMF and World Bank also contributed to the destabilization of peasant producers.
This blow to peasant agriculture was followed by an even larger one in 1994, when the North American Free Trade Agreement went into effect. Although NAFTA had a fifteen-year phaseout of tariff protection for agricultural products, including corn, highly subsidized US corn quickly flooded in, reducing prices by half and plunging the corn sector into chronic crisis. Largely as a result of this agreement, Mexico’s status as a net food importer has now been firmly established.
With the shutting down of the state marketing agency for corn, distribution of US corn imports and Mexican grain has come to be monopolized by a few transnational traders, like US-owned Cargill and partly US-owned Maseca, operating on both sides of the border. This has given them tremendous power to speculate on trade trends, so that movements in biofuel demand can be manipulated and magnified many times over. At the same time, monopoly control of domestic trade has ensured that a rise in international corn prices does not translate into significantly higher prices paid to small producers.
It has become increasingly difficult for Mexican corn farmers to avoid the fate of many of their fellow corn cultivators and other smallholders in sectors such as rice, beef, poultry and pork, who have gone under because of the advantages conferred by NAFTA on subsidized US producers. According to a 2003 Carnegie Endowment report, imports of US agricultural products threw at least 1.3 million farmers out of work–many of whom have since found their way to the United States.
That the global food crisis stems mainly from free-market restructuring of agriculture is clearer in the case of rice. Unlike corn, less than 10 percent of world rice production is traded. Moreover, there has been no diversion of rice from food consumption to biofuels. Yet this year alone, prices nearly tripled, from $380 a ton in January to more than $1,000 in April. Undoubtedly the inflation stems partly from speculation by wholesaler cartels at a time of tightening supplies. However, as with Mexico and corn, the big puzzle is why a number of formerly self-sufficient rice-consuming countries have become severely dependent on imports.
The Philippines provides a grim example of how neoliberal economic restructuring transforms a country from a net food exporter to a net food importer. The Philippines is the world’s largest importer of rice. Manila’s desperate effort to secure supplies at any price has become front-page news, and pictures of soldiers providing security for rice distribution in poor communities have become emblematic of the global crisis.
The broad contours of the Philippines story are similar to those of Mexico. Dictator Ferdinand Marcos was guilty of many crimes and misdeeds, including failure to follow through on land reform, but one thing he cannot be accused of is starving the agricultural sector. To head off peasant discontent, the regime provided farmers with subsidized fertilizer and seeds, launched credit plans and built rural infrastructure. When Marcos fled the country in 1986, there were 900,000 metric tons of rice in government warehouses.
Paradoxically, the next few years under the new democratic dispensation saw the gutting of government investment capacity. As in Mexico the World Bank and IMF, working on behalf of international creditors, pressured the Corazon Aquino administration to make repayment of the $26 billion foreign debt a priority. Aquino acquiesced, though she was warned by the country’s top economists that the “search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one.” Between 1986 and 1993 8 percent to 10 percent of GDP left the Philippines yearly in debt-service payments–roughly the same proportion as in Mexico. Interest payments as a percentage of expenditures rose from 7 percent in 1980 to 28 percent in 1994; capital expenditures plunged from 26 percent to 16 percent. In short, debt servicing became the national budgetary priority.
Spending on agriculture fell by more than half. The World Bank and its local acolytes were not worried, however, since one purpose of the belt-tightening was to get the private sector to energize the countryside. But agricultural capacity quickly eroded. Irrigation stagnated, and by the end of the 1990s only 17 percent of the Philippines’ road network was paved, compared with 82 percent in Thailand and 75 percent in Malaysia. Crop yields were generally anemic, with the average rice yield way below those in China, Vietnam and Thailand, where governments actively promoted rural production. The post-Marcos agrarian reform program shriveled, deprived of funding for support services, which had been the key to successful reforms in Taiwan and South Korea. As in Mexico Filipino peasants were confronted with full-scale retreat of the state as provider of comprehensive support–a role they had come to depend on.
And the cutback in agricultural programs was followed by trade liberalization, with the Philippines’ 1995 entry into the World Trade Organization having the same effect as Mexico’s joining NAFTA. WTO membership required the Philippines to eliminate quotas on all agricultural imports except rice and allow a certain amount of each commodity to enter at low tariff rates. While the country was allowed to maintain a quota on rice imports, it nevertheless had to admit the equivalent of 1 to 4 percent of domestic consumption over the next ten years. In fact, because of gravely weakened production resulting from lack of state support, the government imported much more than that to make up for shortfalls. The massive imports depressed the price of rice, discouraging farmers and keeping growth in production at a rate far below that of the country’s two top suppliers, Thailand and Vietnam.
The consequences of the Philippines’ joining the WTO barreled through the rest of its agriculture like a super-typhoon. Swamped by cheap corn imports–much of it subsidized US grain–farmers reduced land devoted to corn from 3.1 million hectares in 1993 to 2.5 million in 2000. Massive importation of chicken parts nearly killed that industry, while surges in imports destabilized the poultry, hog and vegetable industries.
During the 1994 campaign to ratify WTO membership, government economists, coached by their World Bank handlers, promised that losses in corn and other traditional crops would be more than compensated for by the new export industry of “high-value-added” crops like cut flowers, asparagus and broccoli. Little of this materialized. Nor did many of the 500,000 agricultural jobs that were supposed to be created yearly by the magic of the market; instead, agricultural employment dropped from 11.2 million in 1994 to 10.8 million in 2001.
The one-two punch of IMF-imposed adjustment and WTO-imposed trade liberalization swiftly transformed a largely self-sufficient agricultural economy into an import-dependent one as it steadily marginalized farmers. It was a wrenching process, the pain of which was captured by a Filipino government negotiator during a WTO session in Geneva. “Our small producers,” he said, “are being slaughtered by the gross unfairness of the international trading environment.”
Unlike the trading of stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based upon credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake. However, this arrangement works exceedingly well in practice: because participants in FX (foreign exchange market) must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.
Before leaving you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size (it trades nearly US$2 trillion each day) and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.
The FX market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor's trade. They do not charge commission; instead, they make their money through the bid-ask spread. In FX, the investor cannot attempt to buy on the bid or sell at the offer like in exchange-based markets. On the other hand, once the price clears the cost of the spread, there are no additional fees or commissions. Every single penny gain is pure profit to the investor.
The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader's account.
The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations who need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity).
However, these day-to-day corporate needs comprise only about 20% of the market volume. Fully 80% of trades in the currency market are speculative in nature, put on by large financial institutions, multi-billion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day. Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, she would, in essence, have exchanged euros for dollars and would now be "short" euro and "long" dollars.
The Paradox of Hedging Risks
Why should a hedge fund that included two Nobel prize-winners among its principal shareholders make staggering losses by trading in financial instruments designed to reduce risk? There was, presumably, nothing wrong with the techniques themselves, just the way in which they were used. It is sometimes argued that measures to improve the safety of car occupants, e.g. seat belts, increase risk by encouraging drivers to go faster than they would without them.
It is possible that the sophisticated models that apparently enable risk to be accurately quantified encourage risk taking by financiers who would otherwise err on the side of caution. However that does not explain other scandals that have involved derivatives, e.g. the collapse of Barings Bank or the illegal trades in Swedish stocks by a member of the Flaming Ferraris.
Mis-priced Derivatives Scandals
Derivatives are sometimes deliberately mispriced in order to conceal losses or to make profits by fraud.
Mispriced options were used by NatWest Capital Markets to conceal losses and the British Securities and Futures Authority concluded its disciplinary action against the firm and two of its employees, Kyriacos Papouis and Neil Dodgson, in May 2000.
In March 2001 a Japanese court fined Credit Suisse First Boston 40 million yen because a subsidiary had used complex derivatives transactions to conceal losses.
In Seeing Tomorrow: rewriting the rules of risk by Ron S. Dembo and Andrew Freeman, a case in which "clever but criminal staff got inside an options pricing model and used tiny changes to skim off a few million dollars of profits for themselves" is described on page 23. The culprits were not prosecuted because the bank feared that the revelation could wipe out hundreds of millions of dollars of its overall value. This case is reminiscent of the plot of Into the Fire.
Another possible case came to light in January 2006 when Anshul Rustagi, a London-based derivatives trader at Deutsche Bank was suspended after allegedly overstating profits on his own trading book by £30 million. He was subsequently dismissed.
Toxic Derivatives and the Credit Crunch
Unlike mutual funds, hedge funds do not trade on exchanges, and are not registered with the Securities and Exchange Commission; their investors are not granted the same consumer-protection benefits extended to mutual funds through the 1940 Investment Company Act. (the Securities and Exchange Board of India [SEBI] recently made a decision to ban investments through participatory notes by unregulated entities. Hedge fund market analysts think such move has other motives, and has nothing to do with regulation of capital markets. The new law according to analysts has more to do with capital account convertibility)
CREDIT DEFAULT SWAPS were widely blamed for exacerbated the global financial crisis by hastening the demise of Lehman Brothers, AIG and other companies in 2008. By that year the derivatives market was worth over $516 trillion or about 10 times the value of the entire world's output. This enormous ticking time bomb threatens to wreck international efforts to solve the world's biggest financial crisis since the 1930s.
Credit default swaps, which were invented by Wall Street in the late 1990's, are financial instruments that are intended to cover losses to banks and bondholders when a particular bond or security goes into default -- that is, when the stream of revenue behind the loan becomes insufficient to meet the payments that were promised. In essence, it is a form of insurance. Its purpose is to make it easier for banks to issue complex debt securities by reducing the risk to purchasers, just like the way the insurance a movie producer takes out on a wayward star makes it easier to raise money for the star's next picture.
Since credit default swaps are privately negotiated contracts between two parties and aren't regulated by the government, there's no central reporting mechanism to determine their value. That has clouded up the markets with billions of dollars' worth of opaque "dark matter," as some economists like to say. Like rogue nukes, they've proliferated around the world and now lie hiding, waiting to blow up the balance sheets of countless other financial institutions.
- Property-owning masses in the global economy & sub-prime mortgage crisis
- The approach to formulating a multivariate distribution using a copula is based on the idea that a simple transformation can be made of each marginal variable in such a way that each transformed marginal variable has a uniform distribution.
Many hopefuls migrate to cities and become part of the vast unorganised sector, and fewer still make it to the industrial sector. Fewer still? That’s because of another alarming statistic. There are very few jobs in the manufacturing sector. Fifteen years ago, 35 percent of India’s industrial growth was the result of wages — or salaries in the manufacturing sector. Today, Sen points out, salaries account for only 10 percent of India’s industrial growth. Sixty percent comes from profit. Decoded, this means that the rich half are getting richer and ploughing back their money into profits and savings and further profits and driving the growth story. And this profit is being made on the back of sharply reduced wages. So while the overall poverty figures — now at 420 million people — is less than it was in the 1970s when it was first mapped, inequality has grown sharply.
Note: In the world's three most recent debt deflations – the U.S. from the 1870s to the 1890s, the U.S. from the 1920s to 1940s, and Japan from the 1980s to the very present – the low in long term interest rates occurred about 15 years after the end of the debt mania. Even 20 years after the end of the debt boom, interest rates were not much above their yearly average lows.
As the experience from U.S. and Japanese history indicates, many "false dawns" will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand. During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase. If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation.
The U.S. has a history of major inflation followed by massive deflation for the past 200 years. These inflationary periods were accompanied by increasing debt and rising inflation while the deflationary periods were associated with decreasing debt and interest rates. In between the inflations and deflations we experienced periods of disinflation, which just happened to coincide with all the gains in the stock market over the past 100 years.
India’s slowdowns have been triggered mainly by supply shocks. In the early years, these were largely due to monsoon failures, which used to lead to large government spending. Since theReserve Bank of India was then obliged to automatically finance government deficits, this spending used to be accommodated. But that would usually be followed by a severe tightening, thereby hitting industry just as input prices tended to rise.
A similar pattern occurred as oil price shocks became important from the 1970s onward. Since the increases in global oil prices were not immediately passed through to consumers, government deficits would rise and be monetised. At the same time, private spending would be squeezed, while the period of monetary tightening that followed would also be used for some pass-through of oil prices. So, costs would rise for industry just when demand would fall.
These types of supply shocks raised costs at all levels of production, even though firms continued to have excess capacity. The supply shocks, in other words, would shift up or to the left on an elastic, rather than an inelastic, supply curve.
Economic liberalisation and reforms stopped automatic monetisation, forcing the government to borrow at market rates. Investment, too, was now largely a private sector activity, and the growing share of retail and housing loans increased the sensitivity of consumption to interest rates. As a result, growth and investment became much more sensitive to these rates.
Interest rates were gradually freed but proved to be volatile. In the late 1990s, as capital flowed out of India after the Asian financial crisis, a liquidity squeeze, aggravated by sharp increases in policy rates, resulted in high and sticky loan rates. The investment cycle collapsed and took five years to recover.
At the same time, overcapacities built up during booms make private investment inherently volatile. In the latest boom phase, loan rate volatility was somewhat reduced because of improved articulation of market segments. Maturing of institutions such as the liquidity adjustment facility also allowed more policy fine-tuning in response to shocks.
But volatility in interest rates still came from large corrections in policy rates due to the unprecedented shocks associated with the 2008 global financial crisis. The same crisis was also preceded by a sharp rise in world food and oil prices — canonical supply shocks in the Indian context.
The Indian government responded to the 2008 crisis by reversing fiscal consolidation to create a fiscal stimulus after global export and domestic private demand fell. But government-supported expenditures also raised the demand for food, whose prices were already high, even as restrictions of various types on farm trade prevented an appropriate supply response.
Increased risk aversion by overseas investors as a result of theeuro crisis also led to foreign exchange outflows, putting pressure on the rupee and raising the price of imports. The cumulative impact of all this was that demand fell for industry as rates rose, just as input costs rose. This, plus the excess capacity built in the previous boom, inhibited new investments. Problems in land acquisition and in the allocation of other natural resources only compounded the situation, affecting investments in infrastructure and adding to the supply bottlenecks in the economy.