The Long Bond Mystery
Hans Schicht
November 22, 2002
Life is change. Life means constant vying for growth, expansion,
assertion and survival by constant re-positioning, and in-direct
or direct aggression. What counts in nature, that counts for
human history, for the individual, enterprises, finance and the
State. There is never respite for long. Life is fluid and all
events are interrelated. And although temporary stagnation or
imbalances do occur, they are bound to correct in time. The longer
stagnation or the imbalance lasts, the more violent the corrections
to be.
To come to grasp with what is going on in the world today, it
is necessary to understand that at present we are living through
exactly such period of stagnation and imbalances. Since the second
world war, the overhanging threat of nuclear war has created
an unusual prolongation of the peace period generally experienced
between wars.
The extended absence of war and the nuclear supremacy of the
United States have had global implications. Under their umbrella,
not threatened by upheavals, the New York Financial Grandees
were granted all the time to push their dollar imperialism and
build and impose a global credit empire by stealth. Flooding
the globe with fiat dollars and fiat credit created out of thin
air. Ruthlessly smiting competing currencies. Negating gold and
silver. Enslaving once free people, overseas like at home, to
their perpetual credit chains. Creating a global financial unbalanced
situation, ripe for upheaval.
War and upheaval regularly tend to shake up society in its very
foundations, rejuvenating on the one side and on the other side
cleaning up festering, cancerous growths, degenerations and abnormalities.
War and upheaval take people back to the fundamentals and the
realities of life. Prolonged status-quo on the other hand leads
to erosion of standards, values, morality and discipline, replacing
them with complacency, decadence and corruption.
Society as a whole behaves just like a kid. At regular times
it needs a thorough spanking to correct. And that is exactly
what has been lacking of late in our Dr Spock Society.
Here we are sitting with all the consequences of a time void
of corrections. Youngsters astray. Yuppies running wild. Business
and finance without scruples. The American dream turned into
a nightmare and a once democratic government corrupted and hi-jacked
by the New York Grandees of Finance. However, this exceptionally
long period of relative peace is drawing to an end. The September
11th events have shown that the American homeland has become
just as vulnerable to nuclear, or what-ever attack, as has every
other nation in the world. "Small" has become strong
and all the overdeveloped and oversized, highly sophisticated
weapons and weapon systems, which the Pentagon has burdened onto
the American taxpayer, do not fit any longer the requirements
of the present, where terrorism and mischievous small nations
have become the threat. The present Pentagon arsenal would only
be appropriate in case of all out war against another super state.
And where the latter scenario is not yet on the horizon, the
way to go is to be prepared for nasty little stings, delivered
out from nowhere.
Under the changed conditions of the nuclear umbrella wearing
off and the long peace period being brought to an end by war
of another kind, by proxy terrorism, New York's financial paper
tiger empire is finding itself wanting, far over-stretched and
vulnerable. And lacking effective military might to defend its
borders and interests, no empire has ever survived for long.
The way out for the New York Grandees to save their financial
empire seems to them to pull their strings in Washington to herd
the American people into military action against the threat of
terrorism but with the ulterior motive to take direct control
of the world's main oil resources.
Would the dollar still have had some kind of intrinsic value
in the form of gold or silver to back it up, the Grandees might
have managed. Dressed in gold, King Dollar might not have been
found naked. Official statements in the order that King Dollar's
golden clothes are all kept in a cupboard in Fort Knox, where
nobody as allowed access to, do not suffice. With the Treasury
dragging its feet already for over half a century and not allowing
an independent audit of Fort Knox, we cannot assume else than
that Fort Knox must be empty, till proved otherwise.
Not only is trust in Wall Street evaporating, but so is all trust
in Washington. Serious doubts are rising about the reliability
and trustworthiness of all government releases, their inflation
figures, job statistics, CPI and PPI etc., inclusive the straightforwardness
of official statements. We are wondering what else is still to
come.
There are well founded suspicions that the stock markets, the
currency markets, as well as the precious metal markets are regularly
subject to manipulative intervention accompanied by planted news
releases. Not in a haphazard and opportunistic manner, but in
ways coordinated between the main financial institutions, the
Treasury, and the Federal Reserve.
The public is being lied to and is being mislead. Why, for what
reason and to whose benefit? Not to the benefit of the American
people who are seeing their industries and jobs being transferred
overseas, their savings gone and their debts mounting.
But to the exclusive benefit of a small handful of ruthless Financial
Grandees scheming in the background. Through their trusts, endowment
and beneficiary funds, they control the major banks, brokerage
houses, credit rating companies, and as such indirectly the Federal
Reserve, the currency and gold. They have made the Treasury and
the Legislature their servants. When interest rates are adjusted
it will be done on their instigation and to their advantage,
not in the interest of the economy and the people.
As a start, thanks to the Internet and shrewd observers, the
revelations about the ongoing manipulations of the stock markets
are beginning to gain credibility. GATA for instance has made
solid progress in revealing what is going on in the gold market.
But how about revelations of misdemeanor in the far bigger and
more important government bond market? If there is already proof
surfacing of manipulation on the highest level in stocks on Wall
Street and in the precious metal markets, how about possible
manipulation in the mother of all markets, the giant bond market?
In the early days all paper money in circulation was 100% covered
by gold kept in custody in the treasury. But the government became
tempted and issued more paper than there was gold in the kitty.
When they found out, the people did not want their paper money
any longer. So the bankers approached the government and said:
we will loan you gold against interest, to replenish your treasuries,
so the people will have trust again in your currency. Under the
condition, that you give us a security, a bond. And that you
reserve a percentage of the taxes collected to pay the interest
due to us.
That went on for a while, till again the government issued more
than there was gold in the treasury. Hence a clever banker came
and said: look, forget about your gold and silver problems, I
will take care of your currency in circulation. I will print
all the money you need and you give me bonded loan certificates
in return, on which interest will be due. But for that, your
treasury will have to keep some gold in the kitty, as a guarantee
for our bank and as a make belief for the public. But the gold
in the treasury kept on decreasing, the government's bonded debts
growing, the percentage of collected taxes flowing into the bankers'
vaults increasing and so the bankers' power.
That is the simplified and shortened story of how step by step
fiat paper took over the roll of gold and silver. Today we live
in a world where paper supports paper, bonds support currency
and nothing supports nothing. Everything floats in thin air:
currencies, bonds, interest rates. All held together by only
a fragile spider web of a few unwritten conventions, derivatives
and make beliefs.
That is how paper, in the form of bonds and bonded currencies,
has pushed gold and silver aside. It shows, that the great adversary
of gold is the government bond. It is a mistake to see stocks
as the counter party to gold. Stocks still represent real value,
productive value, and are as such on the side of gold. Government
bonds are just hollow bunk. Stocks in a healthy, prosperous economy
can even be as good as gold. So do not look at the stock market
as a counter signal to what gold might do, look at the bond market!
And more so than the stock market, it is the bond market which
is behaving very strangely of late.
The bond market has never been in the public eye. It has always
been the private domain of the Central Banks and certain private
banks. In times when currencies were still linked to gold, bond
markets behaved disciplined and predictable. Bond investors looked
at earnings and when interest rates went down, the value of the
bond certificates in circulation rose in proportion. Bond prices
and interest rates are inversely related. Government bonds serve
as benchmark for the commercial bonds. And the 30 year bond in
turn serves as the benchmark for all treasury paper. Anyhow that
is as it should be, but ...
Could it be, that this mother of all markets, which is the near
exclusive domain of the financial institutions, which is hardly
ever in the lime light, and where the public has only minimal
participation, that this bond market could be the very center
where all the other ongoing manipulations are turning around?
Could it be that the stock market's and gold's abnormal behavior
are only a consequent follow-up of a grand scale manipulation
of the bond market?
There was a time in the late seventies and eighties after Nixon
had closed the gold window, that the ever growing US trade deficits
caused the mounting pile of dollars and dollar denominated assets
held by foreigners to become unstable when the foreigners began
wanting to cash in. It was the time that the globally expanding
flow of dollars pushed out into the world by New York's bankers
encountered serious resistance. Such resistance had to be overcome
before the bankers could again proceed to further the advance
of their dollar credit empire.
At the time, regular statements and frequent overseas visits
by high placed US officials were made to convince foreigners
to keep the supreme dollar in the form of treasury bonds in their
reserves or to invest either in Wall Street or in American real
estate. It was the time of Japan bashing.
But why was it, that around the mid nineties all jawboning stopped?
Was it not necessary any longer to convince the foreigners to
hold dollar paper? That, at a time when trade deficits were again
on the increase, reaching 400 billion in the year 2001? Why?
The mid-nineties was the time Rubin came in. It was also the
time that the suspicion of manipulation in the gold market took
hold, the credit bubble ignited, and the stock market started
to boom. Could the same "modern creative and off-balance
sheet accounting," which mislead the public, but has done
"wonders" for business and banking, has also become
fashionable at the Federal Reserve, the Treasury, the ESF, Exchange
Stabilization Fund, Social Security and Medicare, Fannie May
etc?
And why was it that, out of the blue, in the spring of 2000 the
US Treasury announced that the thirty year bond would be retired
and as such robbed the world of the bench mark for all bonds?
The unexpected action threw foreign investors and Central Banks
into great confusion. Why was it done? To cover up on something
by throwing the long established bond relationships into disarray,
going over to shorter term financing, making the ten year bond
the new bench mark, but in all practical sense the two year bond?
A private company which changes from long term to short term
financing would come under suspicion, but not the honorable US
Treasury.
The retirement of the 30 year bond coincided with the widely
heralded new age of permanent budget surplus, which in reality
never materialized as per the budget data regularly published
by the Reserve Bank of St Louis. Could something have been amiss
with the thirty year bond and that just the hopeful prospect
of future budget surplus was cleverly used to hide what was already
going on for some time?
Why is it that the interest spread between commercial bonds and
the government bonds has grown out of all proportion? How on
earth is it possible that the US government bonds are able to
keep their value, while the commercial bonds are tanking and
en masse are descending to junk status?
And why is it that the treasury bond does not mirror any longer
the usual, well defined, and contrariwise reactions relative
to the fluctuations in interest rates, but that strange distortions
and discrepancies are appearing in the gyrations of the bond
market?
In May 2001 a well-known Chicago bond trader remarked:
"Last week's price action seems indicative of a "big
market move to come" - and it is not good for lower rates,
the fact that the bond market has merely drifted lower in a extreme
over-sold condition while stocks have consolidated higher, lends
strongly to the possibility that the market is setting up to
take back the year 2000 stock flush bond-rush." However,
contrary to history, the reversal did not come to fruition. The
treasury bonds stayed up and the interest rates down.
And last but not least, why is it that the mother bubble of all
credit bubbles has not yet collapsed? The M1, 2, 3 injections
of late look like falling far short of what must be needed to
replenish the zillions of dollars swiped off the balance sheets
through business failures, retrenchments and stock market losses.
Even when taking into consideration the subsequent increase in
available bank credits. Is there more liquidity being created
than officially published?
Four years ago I wrote in "The United Weimar Republics"
about the similarities of the present financial situation in
the United States compared to what happened in Germany in the
early twenties.
In 1922 Weimar Germany began monetizing, read redeeming, its
burdening government debt of over 53 billion mark against an
ever increasing emission of currency. It lead to the worst hyper-inflation
the world has ever seen.
The spring 2000 announcement by the treasury that the US intended
to redeem the thirty year bond might have been a sign, that the
US treasury was thinking or even acting along the same lines
as Germany was in the early twenties.
A simple, personal interpretation of the events might help to
see today's discrepancies in the bond market in perspective.
Understand why jaw boning is not being practiced any more. Why
the dollars is staying strong against all odds. And how the treasury
bonds are able to keep their value.
The volume of US long bonds outstanding is mind-boggling and
its liquidation will be a major undertaking. I wondered how it
was all planned, as the FED and the Treasury have not been too
forthcoming in informing the public. I also wondered about the
amounts of liquidity appearing lately from nowhere and being
injected into the markets and the economy as a whole.
I have a deep rooted suspicion, that in the mid nineties, a mechanism
was established, probably on advice of Rubin, with the aim to
underpin the value of the US government bonds by interfering
directly in the bond market and which action would simultaneously
create unlimited liquidity.
At the same time as there must have been a secret mechanism put
into place by the ESF, the Treasury and the FED to depress the
gold price in the mid nineties, a special off-balance sheet fund
looks likely to have been created by the FED, with the purpose
to stabilize and to control fluctuations of the treasury bonds,
through a gradual monetization of the long bond, on the home
market.
It should be remembered that bond trading on the home market
does not have direct influence on the exchange rate. Whereas
bond trading outside the US borders, yes, will affect the rate.
Regarding foreign exchange, all dollars circulating outside the
borders of the United States and all the dollar bonds held by
foreigners should be seen as one and the same package of claims
outstanding against the United States. And as the bonds in the
package represent the bulk of the package, they do carry a greater
weight by far in the valuation of the dollar rate of exchange,
than the total amount of current accounts in dollars and cash
held by foreigners.
Under normal, free market, conditions, the fluctuations in the
dollar interest rates are the ones, which determine the market
value of the US bonds. However, if my suspicions turn out to
be justified, then the FED, in addition to its published official
bond dealings inclusive the repos, has turned the market upside
down by having begun buying back the long bond directly through
such secret off-balance sheet fund. Upside down, because not
any longer would the interest rates be setting the bond prices,
but the bonds would now set the interest rates! Such account
or fund would underpin the long bond on the sly, simply by reducing
the amount of bonds in circulation. Under the condition that
all buy-backs would be executed on the home market, so as not
to endanger the dollar exchange rates.
Foreigners will always be happy to hold dollars and dollar bonds,
as long as they keep up their value and there is no alternative
like gold or silver. But not to worry, in a world of free flowing
capital, a stronger bond at home is bound to reflect automatically
on overseas markets.
No suspicions would arise, as long as the FED would keep the
bonds bought back in their unpublished special account and, at
the same time, would still count them as existing. The same trick
as seems to be the case with the IMF gold accounts!
Armed with such fund, the FED would be able to keep up, and a
strong dollar, and a strong bond and still have plenty of liquidity
left for other manipulations like the stock market or the gold
market, till the time would come, that either people would realize
what is happening, or the FED on the home market would run out
of bonds to redeem, or the political pressure for a weaker dollar
would become so strong that the FED would have to abandon the
undercover action.
The amazing derivative positions held by JP Morgan and the Citigroup
could thus be explained by that these banks must have been informed
about such a secret bond stabilization fund, if existent. They
might even have initiated the scheme themselves. And they would
not have needed any assurances from the FED to embark on their
trillion dollar derivative adventures with their knowledge of
the fund!
In all probability they might even work in tight cooperation
with the FED and have spun their extensive web of interest and
exchange rate derivatives around the very bond stabilization
fund as an additional outer defense line to protect the US bond
and dollar.
The world now finds itself in a most precarious situation, where
the finances of nearly all nations are anchored to the American
dollar through their reserves, which for the greater part are
held in US government bonds.
But in reality, this anchor, assembled from packages of paper
bonds, is nothing but a fragile, drifting raft which is only
able to stay afloat by regularly throwing packages of the same
bonds over board... and each time the next wave of financial
instability is building, threatening to sink the paper raft.
The whole world depending on just one fragile floating anchor?
Where have the gold and the silver, the solid anchors of old
times gone?
Hans Schicht
November 22, 2002
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321gold Inc
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