Shoot the Moon.

Have you ever played the card game, “Hearts”? The object of the game is to not take in any heart cards – UNLESS – you decide to try to take them all. If you have the right cards and are a good enough player, you can take in ALL the cards in the heart suite and you win the game by “shooting the moon”. But if you mess up and don’t take every single heart card, you lose BIGTIME!

I believe Greenspan may be playing “Shoot the Moon” with our economy – or if he’s not still the cardmaster behind the scenes, then people whom he directed and are taking over for him. Greenspan was a “goldbug” in his younger days, and has declared his intention to stop another depression, as described by Ian Gordon:

“My deceased friend, Teddy
Butler-Henderson, met Alan
Greenspan in the 1960’s. They
apparently discussed the
Kondratieff Cycle. According to
Teddy, Alan Greenspan confided
that he hoped he could
be Federal Reserve Chairman
at the onset of a Kondratieff
winter, because he felt he
could defeat winter by substantially
increasing the money
supply and reducing interest
rates to near zero. He had his
wish and effected those actions
following the 2000 stock
market peak.” (http://www.thelongwaveanalyst.ca/pdf/07_12_04_News.pdf)

The “Kondratieff Winter” (http://www.kwaves.com/kond_overview.htm) refers to the part of a multi-year cycle that has been an economic depression for many years throughout history. These include depressions in 1835, 1875, and 1929 – although the Russian economist Kondratieff’s view of this 50-60 year cycle held from the period of 1789 onward. There are many theories for why this “long wave” cycle occurs, but a simple view is to look at debt levels – after a depression (deflation) clears the debt levels through defaults, the debt levels gradually increase for the next 50-60 years or so, to unsustainable levels, and the system collapses and debt is cleared again.

In Biblical times, this phenomenon was dealt with by declaring a “Jubillee” every 50 years, and forgiving all debt. the Jubilee specified in Leviticus 25:9 that was a special year for the remission of sins and universal pardon where debts are forgiven, slaves and prisoners freed, and the mercies of God would be particularly manifest. (http://en.wikipedia.org/wiki/Jubilee).

In modern times, the debt accumulation is even more burdensome, because we have “interest” added to the principle owed as debt. The world’s three main religions – Muslim, Christianity, and Judaism, all declared interest as unacceptable – it was “usury” which is letting money earn money, without doing any “work”. There are actually a few Muslim banks that don’t charge interest.

So – to get back to Greenspan and the theory of how he may have been (or is still) trying to “beat the K-Wave Winter”.. We see first of all, that what we’re experiencing in global economies now is not “anybody’s fault” – but is the part of a cycle that has been repeating for centuries. Sure, there are human tendencies which may be fundamental contributing factors (greed, for instance..) but once the debt levels have built up again after a “cleansing” (like the one that occurred during the 1930’s) – the debt has to be cleared again. Since we don’t do Jubilee very well these days, we either have to experience the pain of deflationary depression, or somebody has to come up with something ingenious.

So we know that Greenspan encouraged many bubbles through his words and his fiscal policies of lowering interest rates and stimulating the economy. “Irrational exuberance” (http://en.wikipedia.org/wiki/Irrational_exuberance) contributed to a tech bubble, a general stock market bubble, a bond bubble, and a real estate bubble, and even a commodities bubble (although scarce resources and oil contribute to high commodity prices). We also know that Greenspan ENCOURAGED the use of DERIVATIVES (http://www.federalreserve.gov/Boarddocs/Speeches/2005/20050505/default.htm) as a way of shifting risk around.

What are DERIVATIVES? Derivative is a word (used in calculus) that refers to financial instruments that are related to an underlying financial element (like a stock, a bond, etc.)

But “over the counter” (OTC) derivatives (http://en.wikipedia.org/wiki/Derivative_(finance) are contracts that are traded and negotiated between private parties – not like “exchange-traded” derivatives such as stock options, etc. OTC derivatives are like “insurance policies” – such that if the underlying bond changes in value, the insurance policy pays off. So instead of buying insurance for the possibility of you having an accident and needing medical expenses paid, insurance was sold to compensate a bank for a mortage that lost value, or a corporate bond that lost value. The seller of these kinds of insurance pollicies would receive a premium – just like health insurance premiums are collected regardless of whether you need to go to the hospital or not. Both the holder of the insurance policy and the seller of the insurance policy could buy and sell these contracts – just as if the contracts themselves were themselves stocks or bonds. Banks made a lot of money on these OTC derivatives – buying and selling them and putting together very complex combinations of contracts to “hedge” their bets no matter which way an underlying bond would move in value.. They essentially shifted from being functional insurance policies to highly speculative and leveraged investments. Leveraged means that for a small amount of money invested in an OTC derivative, a large amount of money could be made if the “bet” paid off. Like many instruments in finance that began as creative ways to accomplish functional purposes (such as a farmer borrowing money to pay for planting his crops – that gave way to speculating on highly leveraged grain futures) – the human tendency to gamble and take risks became manifest in the OTC derivative markets.

These were “over the counter” because it was easier to do whatever the players (banks and hedge funds, primarily) wanted, without any kind of regulation. The kicker on this is the fact that due to the leveraged nature of these instruments, the cost required to pay for all these is estimated to be potentially much higher than $500 TRILLION. (http://en.wikipedia.org/wiki/Derivatives_market) .

I personally do not understand these complex instruments well enough to comprehend what it means to say such a high figure for the price tag on the derivatives. But suffice it to say that it is an unbelievable number – and Greenspan encouraged it by saying that that derivatives were a good way to create stability in a risky market environment.

So when the “sub-prime” debaucle first hit the news, we strained to understand how mortgages were made to have higher interest rate returns for more risky homeowners, and that the mortgages were packaged and sold and re-sold without understanding the true (lack of) value of these bundles in a falling housing market. The popular press used the term “sub-prime” to describe any kind of scary behavior that was resulting in bank stocks crashing.

But the sub-primes were mere “Billions” – the tip of the iceberg. The derivatives were the hidden part of the iceberg – and they involve “Trillions” of dollars. Only in the last week is the media beginning to speak the truth, and begin talking about derivatives as being a dominant cause of our financial woes.

When the $700Billion bailout was discussed, they just acted as if it was only about sub-prime debts, and implied that this mortgage paper could be bought up by the goverment and re-sold later – maybe even at a profit for the taxpayers! I don’t think so.. Not when we’re talking about trillions of dollars of complex and “explosive” derivatives. As Warren Buffet said ” Derivatives are weapons of mass destruction” (http://news.bbc.co.uk/2/hi/business/2817995.stm ) – although the word used was “billions” and not “trillions” in the same article.

In my humble (??) opinion, getting congressional approval for the $700 Billion Bailout, was a way of getting the people to give their blessing on the Federal Reserve doing whatever was needed in the way of printing money to pay for any costs required to “fix” the system. Just as declaring war in Iraq was estimated by Lawrence Lindsay to require $100-200 Billion, but has cost us almost $600 Billion (http://zfacts.com/p/447.html) , I don’t doubt that the Bailout is going to be many TRILLION dollars.

There is NO WAY (IMHO) that we could ever pay off that kind of debt. It requires printing (electronically issuing debt money) , which is HIGHLY inflationary. Imagine not just giving a little jolt to the economy by lowering interest rates (as occurred prior to the tech bubble), but turning on the firehose of money full force like we have been over the past month (yes, the Feds were pouring money into the system before the Bailout as well as afterwards..) Such an influx of dollars into the system is akin to the printing of money that occurred in the Weimar Repulic in the 1920’s, as Germany’s attempt to pay off their WWI repatriation debt which resulted in a loaf of bread costing a wheelbarrow of Deutschemarks.. (http://www.buyandhold.com/bh/en/education/history/2003/germany.html)

So then why would Greenspan have wanted to encourage many different bubbles, and derivatives?

Here’s the theory (which I first read from a poster named “Goldrunner” on the Gold-Eagle discussion forum (http://www.gold-eagle.com/cgi-bin/gn/get/forum.html):

Greenspan creates bubbles. He makes sure that nobody believes there is much inflation by doing tricks with the Consumer Price Index (http://findarticles.com/p/articles/mi_qn4188/is_/ai_n25352815). The “canary in the mine” – the Price of Gold – is kept artificially suppressed to make sure that inflation isn’t a concern. The M3 values (a measure of the money supply) is no longer published by the government on March 23rd of 2006 – using the excuse that it “isn’t data that is used by policy makers”. (http://bigpicture.typepad.com/comments/2005/11/money_supply_an.html) So we could no longer see the tremendous increase in money being pumped into the system for war spending and bailouts.

He makes sure that his successor – young Ben Bernanke – is truly fitted for the role of a Fed Reserve Chairman that can print money. Dubbed “Helicopter Ben”, because of his statement that if necessary they could dump money from helicopters to keep from going into a depression again (http://www.guardian.co.uk/business/2008/mar/19/useconomy.interestrates), Bernanke was the man for the job.

And the derivatives? Well the Fed has effectively created a blank check (who is going to really care how much they spend now that we’re seeing the stock market fall 5 days in a row – 500 points today?) for purchasing junk paper AND DERIVATIVES. Finally, we have a way for getting rid of those stinking derivatives without making the private sector “eat it”.. The Feds can buy up these “weapons of mass economic destruction” and let them go “bang”, without hurting anybody.

But.. they have to do something about all that inflation that they are causing by printing so much money.. It’s great to say you’re going to stop deflation by using inflation – but how do we stop from having an “inflationary spiral” that goes into “hyperinflation” – like the Weimar Republic? Iceland just had their krona crash today (http://www.marketoracle.co.uk/Article6650.html) because of a hyperinflationary spiral. We don’t want to have the dollar crash to zero as well, do we?

So instead, if we are very good heart players, then maybe, just maybe.. we can do the hyperinflationary spiral for JUST the RIGHT amount of time – before the dollar crashes to zero, and then – quick like a fox – we come back with the gold standard and rescue the dollar to keep it forever at a newly fixed value of gold. This is called “the gold cover clause”, described by Jim Sinclair (http://www.silverbearcafe.com/private/coverclause.html). Perhaps the value of gold would be $2000 or $3000 or $10,000? But whatever it is at that time, it would be a way of rebuilding trust in the currency. For after all, MONEY IS A TRUST AGREEMENT. That’s all money is.. Trust is pretty much gone from many areas in our economy now, although we still trust in the dollar at this point in time (perhaps you got some dollars to hold at home during these troubled financial times, just in case the credit cards are frozen and/or the banks go on holiday).. But by the time that we are allowed to see the true inflationary environment that we actually have been in for years (come on, now – even though they say we have little inflation, you know a hamburger costs a lot more now than it did 2 years ago..) – gold will be rapidly increasing in value (as will silver and other commodities), and we will then shift to what has always been accepted as a currency. That “barbaric relic” – gold.. (or poorman’s gold – “silver”).

If we (Greenspan?) are/is successful in pulling off this maneuver, then the massive debt levels would have been shifted from the private sector to the public sector in the form of derivatives, which would get “eaten” through the loss in purchasing power of our currency, and we could get back to “go” and start the whole K-Wave cycle again.. (God forbid!)..

What does this mean for us?

I believe it means that we are going to either have a financial collapse (globally, of course), or we’re going to have to go through some horrible times enroute to a “soft landing” at the other end. We can’t just have everything be just fine one day, and then shift into “hyper-space” and jump to a new gold-standard level of the dollar and have everything be just hunky-dory. We have to go through a very rocky time in order to pull off this “shooting of the moon” correctly. And if we don’t do it right, we may end up holding a hand of ALMOST all the hearts, but not make it fully. That would be a bummer – as much as just taking our medicine and letting the depression hit us.

The good news is: we have an opportunity to do it better next time. Instead of living in a world that is based on unsustainable growth, with the accompanying unsustainable debt (and global climate change and resource depletion) – we could base our world on principles of abundance, rather than principles of scarcity (as our current money system is based on). We could take Permaculture’s Third Ethic to heart: SHARE THE SURPLUS (after the first two Ethics – CARE FOR THE EARTH and CARE FOR THE PEOPLE). That could be the subject of a future blog.

I would appreciate any comments/feedback/discussion..

thank you for reading this lengthy explanation.

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