"Weapons of Mass Financial Destruction" at the G8 Summit

I was on Al Jazeera live from Doha, Qatar Sunday talking about the G8 meeting, the U.S. dollar and weapons of mass financial destruction (the U.S. dollar).

Al-jazeera: Max Keiser is a financial analyst and commentator. He says there's one likely subject that should be addressed at the G8 summit.

Max Keiser: Inflation is caused by monetary increase -- the increase in money supply. For the past year, money supply around the world has been skyrocketing and this has caused the price of those commodities priced in dollars like oil and food to go up. If you want to solve this problem you have to address the fact that these investment banks and these federal reserve banks are flooding the system with cash, with dollars, with these things -- US dollars. This is a weapon of mass financial destruction as Warren Buffett has called it. The US dollar this is the problem. There are too many of them in the system and they're causing inflation. And, unfortunately, the G8 doesn't have an item on their agenda that is clearly going to address this issue head on.

Comments

[outnow]

Joseph Stiglitz wrote a piece called "The End of Neo-liberalism" that decries the inability of the "grab-bag" of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources effectively, and serve public interest as well. He sees soaring energy prices and food prices as evidence of a "free market rhetoric" which has been "used selectively" to serve special interests and discarded when it doesn't. His analysis applies to monetary policy as well. The loss of confidence in the strength of the American dollar is world-wide. The question is who benefits from the interventions by the Fed to bailout investment banks? Hopefully, we all do. But the concern in the falling dollar cannot be ignored. There are some winners and some losers. Exporters benefit. But falling housing prices, shrinking credit, unemployment, inflation of commodity prices, raise important questions about the structure of financial regulation.

Deflation of the dollar is being used to mitigate the housing crisis and banking losses on derivatives.

At banks and other financial institutions, regulatory changes are necessary with the strengthening of capital and liquidity rules, more disclosure requirements, closer supervision of the measure of firm-wide risks, and steps to increase the transparency and resilience of the financial infrastructure.

With our dollar, our credibility has fallen far enough. Time to put our own house in order. The power of the United States is already lessened by its debtor status.

[StephenBarry]

You make an excellent point in your very well written and thoughtful post:

"Deflation of the dollar is being used to mitigate the housing crisis and banking losses on derivatives."

This is exactly correct and is true on a broader scale as well. It was J.M. Keynes who pointed out that inflation results in a mass transfer of wealth from the debtor classes generally to the rentiers (creditor classes) generally. The Fed and other central banks are all out of conventional options and the last, worst alternative is being pursued by Treasury - cranking up the printing press. It will get worse before it gets better, and you can be sure that Wall Street's "Financial Engineers" who caused this crisis will be best placed to profit from it.

[StephenBarry]

Sorry - I meant to say a transfer from creditors to debtors generally, i.e. bailing out the US as well as the parties you indicated. Apologies for the stupid mistake.

[Henry]

There are only two types of loans: production and consumption. Whenever a loan is made for the purpose of speculation it distorts market prices of assets (bidding asset prices up without economic purpose) and it creates "paper gains" in money that have not produced or "earned" anything. The speculator is lighting off the "efforts" of the rest of society.
Loans "create" money to finance economic activity i.e. production or consumption. Do these "Hedgies" of the world, these extravagant billionaires, really "earn" anything? Do they contribute to the Gross National Pie? How is what they do anything different than picking pockets?
Why would a government (unless it is run by Goldman Sachs) condone this behavior?
and my favorite... how is it that an ipo "creates" wealth. (is it majic? It did not exist until pulled out of the hat?)

[Novista]

Oh! those nasty speculators ... where else would you recommend pension funds invest, these days?

[boogieandjive]

Cash.

Hopefully they are already in commodities.

Or shorting certain segments of the market.

Barclays is warning investors of a much bigger financial storm to come:

http://tinyurl.com/3tjerw

Quote:

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.

[xtown]

I think Buffet was referencing the derivatives market (CDOs-CDSs -etc.) when he made the
weapons of mass destruction comment.

With all the loose dollars, exponential leverage, and a long slide in the markets, where
else are the cash hungry gonna put their money? The Fed and congress ain't gonna do shit.
Just saying.

[joebaggadonuts]

Max, Max! You weren't supposed to tell them!

[Henry]

It is true that all this speculation (manipulation to state it more correctly) is "new money" created by big banks at a mega mega leverage. Speculation requires a leveraged position, say 10 to 1. (I heard Bear was 30-1) You put down $10000 of your own money and the "entity" leverages you into a $100000 position. The $90000 is borrowed money, it is "new" money created out of the loan transaction, and once the position is closed, it all reverts, i.e. the new money is cancelled. (It's really only an accounting entry in the first place). This can all be stopped by a margin requirement of 50%. And the futures positions can be limited to those who can take delivery.
This is a game, an addiction. It is free money for the players. They do not want it stopped. However, it perverts the free economy. Think the mega rich care about the real economy...you know, the type where people work for wages. (It's just so mundane)

[joebhed]

Agreed, Henry.
But why only fifty percent?
Why not 100 percent investor money, and stop creating ANY new debt money to feed their greed?

[satyriasis]

A 3 trillion dollar war combined with a loose credit policy made this happen. Even OPEC has said that high gas prices are partly attributed to mismanagement of the US economy.