“Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them:  we view them as time bombs, both for the parties that deal in them and the economic system.”

“…The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear…”

“…In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Warren Buffet, February 21, 2003

Positions in OTC derivatives grew at an even more rapid pace than turnover.  Notional amounts outstanding went up by 135% to $516 trillion at the end of June 2007 (Table C.5).  This corresponds to an annualized compound rate of growth of 33%, which is higher than the approximately 25% average annual rate of increase since the current format of the triennial survey was established in 1998.

Growth accelerated in all risk categories.  The highest rate of increase was reported in the credit segment of the OTC derivatives market, where positions expanded to $51 trillion, from under $5 trillion in the 2004 survey.  Notional amounts outstanding of commodity derivatives rose more than sixfold to $8 trillion…Open positions in interest rate contracts increased by 119% to $389 trillion, and those in equity contracts by 111% to $11 trillion.  Growth in notional amounts outstanding of OTC foreign exchange derivatives was less brisk at 83%, taking the volume of open positions in such contracts to $58 trillion. (emphasis added)

                                                                        Bank for International Settlements

Triennial Central Bank Survey, December 2007

                                                                        “Foreign exchange and derivatives market activity in 2007”

“The fact that the mid-March, 2008 financial markets crisis, capped by the demise of Bear Stearns, was accompanied by substantial drops in Gold and Silver prices is quite significant.  After examining the evidence, how can a rational observer conclude anything other than that the price of Gold, Silver, other key commodities and equities markets are manipulated?”

Deepcaster, June 25, 2008

This July, 2008 Report is the seventh in a series of Deepcaster's work originally entitled "Juiced Numbers" regarding Market Intervention and Data Manipulation.  The primary topics of this Report are:  1) An updated Overview of the Market Intervention and Data Manipulation Regime based on, inter alia, including the recent Releases from the BIS, BLS and The U.S. Federal Reserve reflecting that Market Intervention and Manipulation; 2) Highlights of recent Interventions culminating in the mid-March 2008 financial crisis and accompanying Takedown of Gold and Silver and the Cartel’s “Validity Fog” surrounding the early June, 2008 Intervention; 3) Cartel Intervention as the key feature of the aforementioned and other Takedowns; 4) Data Massaging; and 5) The Cartel “End Game.”

 __________

IMPORTANT NOTE:  Deepcaster has spent considerable time reviewing important recent data releases from the BIS (Bank of International Settlements - - The Central Bankers’ Bank), the U.S. Bureau of Labor Statistics, and the U.S. Federal Reserve.  They are quite astounding.  They reflect a considerable acceleration of Market Intervention and ongoing Data Manipulation.  They also reflect dramatic increases in OTC (Over-the-Counter) Derivatives (Dark Liquidity), and in Exchange-Traded Derivatives, and an apparent intensification of Data Manipulation.  The total notional value of all Derivatives Outstanding now exceeds One Quadrillion U.S. Dollars!  As we demonstrate, these facts reflect dramatically increased Systemic Risk and also reflect the significance of The Cartel’s creating (and/or having available) more OTC Derivatives in order to affect market outcomes.  This Report is based on publicly available sources believed to be reliable, but their reliability is not guaranteed.  In sum, this Report provides even more evidence of Increased Risk of Systemic Collapse, and of the beginning of the attempted implementation of The Cartel’s Nefarious “End Game outlined below.”

________

In order to put the Interventional Takedowns in context, the discussion is interwoven with significant excerpts from the "Juiced Numbers” Series 1, 2, 3, 4, 5 and 6, Deepcaster's initial essays describing "How the Government Gets the Statistics it wants, Markets get manipulated, Citizens get Deluded, and Worse."

By describing the aforementioned Interventional Episodes, we provide evidence to the skeptical of the pervasive influence of Market Intervention and Data Manipulation.

The Interventional Context - - Overview

Deepcaster is periodically asked to explain, and provide evidence for, our view that a U.S. Federal Reserve-led Cartel (apparently composed of the U.S. Federal Reserve, the Bank for International Settlements ("BIS") - - The Central Bankers’ Bank - - and key Primary Dealers, acting with the cooperation of major Central Bankers) manipulates a wide variety of markets.  [Apparently one “Operational Vehicle” through which The Cartel works is called “The Working Group on Financial Markets” established after the 1987 crash, and which is often informally and widely referred to as “The Plunge Protection Team” or PPT.]

So it is important to explain what we mean by our claim of Cartel Intervention, and to indicate how studying “The Interventionals” has facilitated  Deepcaster’s profitable recommendations displayed at www.deepcaster.com.  [It is important to note that virtually all of the evidence we cite is from publicly available sources as indicated below.  For example, the Gold AntiTrust Action Committee has amassed substantial evidence regarding the Cartel’s manipulation of the Gold and Silver Markets at www.gata.org.]

First, we do not (usually) mean that the Cartel totally controls prices in any particular market, at all times. Various markets are affected in varying degrees, at varying times, by Cartel manipulation efforts.  Cartel actions can substantially affect, but often do not totally control, prices in many markets - - though they certainly have that capacity much of the time.  The price of Crude Oil is relatively difficult to manipulate, for example, but there has been substantial manipulation (as we shall show) for several years.

It is important to note that evidence that the degree of manipulation, and, therefore, control, varies from time to time and market to market.

In markets such as the (relatively) Small Cap markets for Gold and Silver securities, Cartel manipulation attempts can have much more impact and are, at times, and for certain time periods, tantamount to control.

To answer the exceedingly important question regarding how the wide variety of markets are manipulated one must recognize that there are two main methods of manipulation, Direct and Indirect.

I.  DIRECT INTERVENTION

Direct Intervention to manipulate a variety of markets appears to be accomplished primarily via two vehicles:  “Repo” Injections from The Fed, and via the Over The Counter (OTC) Derivatives reported by The Bank for International Settlements (see www.bis.org, and details below).  The Fed makes injections of Repos (Repurchase Agreements - - usually TOMOs - - Temporary Open Market Operations typically expiring in 1 to 30 days) into the market nearly every business day.

Repurchase agreements are loans (at Fed Fund rates) issued daily by the Federal Reserve to Primary Dealers, the proceeds of which can be used to buy, for example, Dow index futures, if the Fed seeks to boost the Dow.  The total amount of un-expired Repos on any given day constitutes the “Repo Pool.”  Monitoring daily changes in Repo Poll levels (which is publicly available information) is crucial to determining how the Interventions will likely affect the markets.

Thus, the several Primary Dealers (e.g. Goldman Sachs, J.P. Morgan Chase. Citibank), who apparently work under the Fed's direction, are able to use these loaned funds to buy or sell various securities and futures to affect the markets.  [Note:  One species of Repos, POMOS (Permanent Open Market Operations), never has to be repaid, but explaining the significance of that (beyond the obvious) is beyond the scope of this article.]  The fact that the loaned funds can be used to purchase Derivatives (as well as plain equities) gives the manipulators the tremendous leverage which derivatives afford.

But along with that tremendous leverage comes tremendous and tremendously increasing (as the recent data releases described below indicate) systemic risk.

Daily Repo additions are made in amounts typically ranging from U.S. $1 to U.S. $20 billion.

The Challenge:  Determining the Impact of The Interventionals

The challenge for investors and forecasters is to determine where (i.e. in what Sector/s) and how (immediately, in increments, etc.) the Repo-backed funds (or other Derivatives) will be employed.  Deepcaster and those very few others, who monitor the daily Repo injections (and related Cartel and their Allies’ Actions), make educated Forecasts of where and how such funds are likely to be used based on patterns, tendencies, and judgments.  But no outsider can know for sure (So where is the transparency, Ben?).

Those who doubt whether the Cartel has the capacity to manipulate the markets (and especially the larger markets like the multi-trillion dollar currency and bond markets) are invited to inform themselves about the $91 trillion Derivatives Colossus at Fed Primary Dealer J.P. Morgan Chase, or the $34 trillion derivatives colossus at Fed Primary Dealer Citibank (see Appendix A), or the U.S. $393 trillion in December 2007 (up from U.S. $291 trillion in Dec. 2006) Derivatives position at the Bank for International Settlements (the Central Banker's Bank) devoted to “Interest Rate Contracts” (see www.bis.org.  Then follow the path: Statistics>Derivatives>Table 19).  Note that that OTC Derivatives total has increased by over U.S. $100 trillion in just one year!

Attitudes of The Fed/Treasury/BIS Toward Intervention

Regarding the awareness and intentions of the leaders of the U.S. Treasury and the U.S. Federal Reserve concerning market manipulation and public perceptions, it is instructive to review what their leadership has said.

Former Secretary of the Treasury, Larry Summers, for example, in his own treatise "Gibsons Paradox and the Gold Standard," indicates "determination of the general price level then amounts to the micro economic problem of determining the relative price of gold," Journal of Political Economy, page 529, 1989.

This much publicized conclusion indicates that our monetary and financial leadership know that in order to manage the general price level and interest rates it is necessary to determine the relative price of Gold.  Therefore, of course, it follows that capping the price of gold (and, by necessity, the price of that other “Monetary Metal” Silver) would be extremely important.

Regarding allegations of "news management" (which some have indelicately called "news manufacturing") we refer you to the words of the Fed Chairman B.S. Bernanke himself, in his September, 2004 Treatise on "Zero Bound Rate Systems."  Note Deepcaster's underlines which call attention to the use of "communications policies" to "shape public expectations," and to the use of the Central Bank's balance sheet and the “targeted purchase” of Treasury Securities (yes, The Fed purchases the U.S. Treasury’s own paper and) to achieve Fed goals:

"Monetary Policy Alternatives at the Zero Bound:

An Empirical Assessment (non-technical summary page i)

In this paper, we apply the tools of modern empirical finance to the recent

Experiences of the United States and Japan to provide evidence on the potential Effectiveness of various nonstandard policies.  Following Bernanke and Reinhart (2004), we group these policy alternatives into three classes:  (1) using communications policies to shape public expectations about the future course of interest rates; (2) increasing the size of the central bank's balance sheet, or "quantitative easing"; and (3) changing the composition of the central bank's balance sheet through, for example, the targeted purchases of long-term bonds as a means of reducing the long-term interest rate." (emphasis added)

http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf

To Deepcaster all this indicates that the Fed-led Cartel will go to significant lengths necessary to control long-term interest rates (in addition to short term rates, which, it is widely acknowledged, they also control), cap the price of Gold and otherwise achieve Central Bank ends (see evidence for Fed control of long-term rates below).

Brief Anatomy of the “U.S.” Federal Reserve

An excellent analysis of the defects of the “U.S.” Federal Reserve - - so far as the United States’ National Interest is concerned - - is well documented in G. Edward Griffin’s superb book, The Creature From Jekyll Island:  A Second Look at the Federal Reserve).

Indeed, the Profit Motive lies behind Fed Actions.  Even the most causal student of Economic History knows that the United States’ Federal Reserve system, or “The Fed” as it is called, is not a U.S. government owned or controlled entity, but a privately owned, for profit, entity.

Various international private banks, several of which are headquartered in Europe, own “shares” in the “United States” Fed. Moreover, this “United States” Fed leads a Cartel of Central and Private Banks* who collectively intervene in a wide variety of markets, as Deepcaster demonstrates here. All this is obviously quite financially incestuous.

These International Bankers, acting through their “U.S.” Fed, profit both by creating money out of “thin air” and by collecting “interest” from U.S. Taxpayers on the Treasury Securities it has bought with U.S. Dollars (Federal Reserve Notes) it has created out of thin air. This is all eloquently described by the Dean of the Newsletter Writers, Richard Russell:

            “I still can’t get over the whole Federal Reserve racket.

Consider the following - - let’s take a situation where the U.S. government needs money.     The U.S. doesn’t just issue United States Notes, which, of course it could. These notes would be dollars backed by the full faith and credit of the United States. No, the U.S. doesn’t issue dollars straight out of the U.S. Treasury.

This is what the U.S. does - - it issues Treasury Bonds. The U.S. then sells these bonds to the Fed. The Fed buys the bonds. Wait, how does the Fed pay for the bonds? The Fed simply creates money “out of thin air” (book-keeping entry) with which it buys the bonds. The money that the Fed creates from nowhere then goes to the U.S. The Fed holds the U.S. bonds, and the unbelievable irony is that the U.S. then pays interest on the very bonds that the U.S. itself issued. (With great profit to the private owners of The Fed - - Ed. Note) The mind boggles.

The damnable result is that the Fed effectively controls the U.S. money supply. The Fed is …not even a branch of the U.S. government. The Fed is not mentioned in the Constitution of the United States. No Constitutional amendment was ever created or voted on to accept the Fed. The Constitutionality of the Federal Reserve has never come before the Supreme Court. The Fed is a private bank that keeps the U.S. forever in debt        - - or I should say in increasing debt along with ever rising interest payments.

How did the Fed get away with this outrage? A tiny secretive group of bankers sneaked through a bill in 1913 at a time when many in Congress were absent. Those who were there and voted for the bill didn’t realize (as so often happens) what they were voting for (shades of the shameful 2002 vote to hand over to President Bush the power to decide on war with Iraq).”

                                    Richard Russell, “Richards Remarks,” dowtheoryletters.com, March 27 2007

After President Wilson signed the Federal Reserve Act into law in 1913, he reportedly said, “I am a most unhappy man, I have unwittingly ruined my country…a great industrial nation is now controlled by its system of credit…the growth of the nation, therefore, and all of our activities are in the hands of a few men…”

Insightful economic forecaster Ian Gordon notes several negative consequences of the nearly 100-year reign of The Fed, consequences with which we cope today.

            “Since its inception in 1913, the Federal Reserve Board has been responsible for almost  95% devaluation of the U.S. Dollar. All this has been achieved through its ability to continually inflate the money supply.

            And, between 1985 and 2005, the Federal Reserve Board has increased the money supply by five times. This extraordinary money creation is merely the catalyst for debt creation. In a fiat money system, money is debt…there is absolutely no way this money can ever be repaid except by continued inflation. But, now that the credit bubble is blown  up, inflation is no longer an option; bankruptcy looms.” “The Federal Reserve…What Has It Done For You Lately?”

 Ian Gordon, December 29, 2007 (www.axisoflogic.com)

The one conclusion that one can make from the foregoing is that the failure to take account of the power, force and pervasiveness of Fed-led Cartel Manipulations (i.e. The Interventionals) is an invitation to financial and investment suicide.

Gold and Silver Market Manipulation

The profound impact of these manipulation efforts has been most well documented regarding the price capping of the Gold market.  For those who have any doubts whatsoever about the fact and extent of government (Central Banks) manipulation, we have (thanks to Bill Murphy, Chris Powell, and other leaders of the Gold Antitrust Action Committee) the following June, 2005 blatant admission of manipulation by the Head of the BIS (Bank for International Settlements - - i.e. the Central Bankers' Bank) Monetary and Economic Department, W.R. White:

"…It is perhaps worth spending a minute on what is meant by Central Bank cooperation…{it includes]…last, the provision of international credits and joint

efforts to influence asset prices (especially gold and foreign exchange) in

circumstances where this might be thought useful…"

Among the many items of evidence cited by GATA Secretary Chris Powell in his superb article “There Are No Markets Anymore, Just Interventions,” all of which are matters of public record, are:

It was a matter of public record in January 1995, when the Federal Reserve’s general counsel, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee’s minutes, that the U.S. Treasury Department’s Exchange Stabilization Fund has undertaken “gold swaps.”  Those minutes are still posted at the Fed’s Internet site: http://www.federalreserve.gov/fomc/transcripts/1995/950201Meeting.pdf

It was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress:  “Central banks stand ready to lease gold in increasing quantities should the price rise.”  That is, Greenspan himself contradicted the usual central bank explanation for leasing gold – supposedly to earn a little interest on a dead asset – and admitted that gold leasing was all about suppressing the price.  Greenspan’s admission is still posted at the Fed’s Internet site: http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm

Incidentally, while we gold bugs love to cite Greenspan’s testimony from July 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important today.  For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.

The Washington Agreement on Gold, made by the European central banks in 1999, was another admission – no, a proclamation that central banks were working together to control the gold price.  The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard.  But even if you believed that explanation, it was still collusive intervention in the gold market.  You can find the Washington Agreement at the World Gold Council’s Internet site: http://www.reserveasset.gold.org/central_bank_agreements/cbga1/

Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003.  On that date Barrick filed a motion to dismiss Blanchard & Co.’s anti-trust lawsuit against Barrick and its bullion banker, JP Morgan Chase, for rigging the gold market.

Barrick’s motion said that in borrowing gold from central banks and selling it, the company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit.  Barrick’s confession to the gold price suppression scheme is posted here:  http://www.rba.gov.au/PublicationsAndResearch/RBAAnnualReports/2003/Pdf/…

For skeptics, Deepcaster asks:  What could be clearer than all this?

Interest Rate Manipulation

Clearly the fact that the intervention occurs is amply documented.

In addition, the aforementioned Bernanke statement in his academic paper "Zero Rate Bound Economies" can reasonably be taken as a justification for the Fed purchasing its own paper, otherwise known as monetizing the debt.  Specifically, regarding long bond purchases, the purpose of this would be to boost the 10 and 30-year bonds, and, therefore, reduce long-term interest rates.

But in light of increasing Real Inflation (see “Indirect Manipulation” below) one can reasonably ask:  So why haven’t the storied “Bond Vigilantes” pushed interest rates (and especially long-term interest rates) up to account for the massively expansionary monetary inflation of recent years?

That is because the Fed-led Cartel of Central Bankers and Allies has been using “interest rate swaps” and other Derivatives (via their Chosen Primary Dealers) to suppress what would otherwise be dramatically rising interest rates, both short and long term, according to Rob Kirby.  Consider that there were $393 trillion in Outstanding OTC Interest Rate Contracts as of December, 2007 according to the BIS.

 Kirby’s excellent paper, “The Elephant in the Room,” demonstrating how interest rates (which would, if there were no suppression, be dramatically rising) have been suppressed by The Cartel, was presented at the Spring 2008 Washington, D.C., GATA (Gold Anti-Trust Action Committee, www.gata.org) Conference.  Kirby concluded:

“Monetary authorities have long been pursuing expansionary monetary policies while attempting to cloak their actions by suppressing rising interest rates and other natural market reactions.

This has completely perverted our whole banking and monetary system.

This is why false values have been assigned to a host of financial instruments.

This explains why the gold price has been suppressed.  It’s another canary in the coal mine that was vigorously and nefariously silenced.

If you’re wondering why J.P. Morgan never seems to get caught up in any sort of hideous market-to-market losses concerning their derivatives or hedge book – consider that back in the spring of 2006, Business Week’s Dawn Kopecki reported, “President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual  accounting and securities-disclosure obligations.  Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained  eye.”

Thus, what would otherwise be the markets’ “normal” reaction to the ongoing and worsening credit, subprime, and other financial crises - - dramatically rising interest rates, especially on the long end - - has been suppressed by The Cartel’s Interventional Regime

The Interventional Regime – Motives, Causes, and Consequences

But The Interventional Regime is showing increasing signs of stress which are reflected in accelerating Derivatives Creation, and thus in Increasing Systemic Risk.  The nearly $600 trillion OTC Derivatives Colossus (see www.bis.org, path:  statistics-derivatives-Table19 and following) on which the Interventional Regime is built is increasingly subject to counterparty defaults and to Darkly Liquid OTC Derivatives turning illiquid (resulting, inter alia, in the ongoing credit freeze-up) among many symptoms.

Clearly, The Cartel has created a Financial System subject to ever-greater Systemic Risk.  Why?

Harry Schultz, one of the Eminence Grises of the Financial Newsletter writing fraternity, puts the question in this way - - what is the reason for this “seemingly random monetary mess that multiplies its momentum every day?  The answer, in one word, control.  The elite/insiders already have control of the financial system, but they wanted more, much more…and it was is not random, it is planned.”

And what is the effect of all of this on the average investor?  In the inimitable words of Harry Schultz, “How will all the above manifest itself in your life?  The answer:  “All you own will shrink...your income, assets, net worth, will shrink year after year in real terms inflation adjusted and possibly also nominally.”

Harry concludes by advocating that we all try to shrink less “relative to the herd” so that we hold our position.  Part of the strategy for shrinking less, according to Harry, is “it will, over 10 years, involve moving in and out of investments as price action will be very dramatic.  Buy and hold will not work in any area, including gold.”  HS Letter, April 27, 2008.

Indeed, Deepcaster has been sounding the theme that the “Buy and Hold Strategy Increasingly Fails” since the inception of Deepcaster’s newsletter.

But Deepcaster is not satisfied with a strategy which merely accepts “shrinking less” as a goal.

Thus, Deepcaster has developed a strategy for coping with and profiting from the “Shrinking Assets” problem.  That strategy can best be employed in the Precious Metals Sector, with Gold and Silver bullion and shares.  It is entitled “Defeating The Cartel…With Profit” and was published on 3/28/08 and can be found in the Alerts Cache at www.deepcaster.com.

From the Fed's point of view, the aforementioned Interest Rate Takedowns would presumably reflect a national policy to support the housing market by lowering interest rates, thus encouraging continuing robust consumer spending mainly through the vehicle of the Home-ATM.  In addition, it is very much in the Fed's interest to focus investors' funds on purchase of their paper (and, especially, their 10-year Note) and to buoy their fiat currency.  In this way, the Fed maintains and enhances its power.  But, we reiterate, the “U.S.” Federal Reserve is owned by private international banks and is not a U.S. government entity.

[As an historical note, recall that President Kennedy was unhappy with Fed policy and therefore caused U.S. Notes to be printed as a substitute for Federal Reserve Notes.  The issuance of these Notes ceased shortly after President Kennedy's assassination.]

Deepcaster must issue a Word of Caution here: The paper-based edifice of increasing Fiat Currencies, OTC Derivatives and the Repo Intervention is not indefinitely sustainable. It will collapse, and that is why The Cartel has begun to plan and implement its ominous ‘End Game’ referenced below, and fully described in Deepcaster’s June, 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” available in the Letter Archives at www.deepcaster.com.

Cautions for Investors and Traders

Finally, we issue a word of caution to our readers.  So long as The Cartel is in a very active Interventional Mode (e.g. as in taking down the price of Gold and Silver) do not be lured into thinking that the periodic up spikes in the prices of Gold and Silver necessarily present a "breakout" or a buying opportunity.  As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper Takedown.

Nonetheless, it is essential to study the Fundamentals and Technicals even though the Interventionals can override the Fundamentals and Technicals.  One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.

Similarly, one should study the Technicals for all the usual reasons and, in addition, because it is in The Cartel’s interest to make its actions seem technically plausible in order to continue to “run mainly under the radar.”  It is not in The Cartel’s interest to make its Interventions any more visible than they already are.  Indeed, there is powerful evidence that The Cartel often uses and/or helps create technical patterns (i.e. “painting the charts”)which lure certain investors (such as hard asset investors) into getting “off sides” before Cartel actions such as taking down the price of Gold or Silver.

 Thus a primary Deepcaster goal is to identify interim bottoms of Gold, Silver, Oil and other sectors, through the use of Fundamentals, Technicals, and Interventionals, and thus to help readers profit from their inevitable resurgence and ascendance to new heights. For example, Deepcaster’s profitable recommendations displayed at www.deepcaster.com were facilitated by attention to the Interventionals, as well as Fundamentals and Technicals.

Significant and Increasing Systemic Threats via Derivatives

Dramatic increases in two major species of Derivatives emphasize the increasing magnitude of Systemic Risks.

Exchange-Traded Derivatives:  Exchange-Traded Derivatives soared 27% to an all-time-high $681 trillion in the third quarter 2007, according to BIS figures.

The largest single category - - Exchange-Traded Interest Rate Derivatives - - increased 31% to $594 trillion, during the third quarter, 2007.

These increases reflect a remarkable increase in risk, for many reasons, including the increased aggregate magnitude of the leverage they reflect, and the concomitant increased opportunities for counterparty default.

However, being exchange-traded, they are, to a degree visible.  Yet that other main category of derivatives-over the counter (OTC) are not visible, except for the BIS and other reporting agencies disclosures.  Yet the inherent risks are, if anything, greater.

Over The Counter (OTC) Derivatives:  Consider the import of the data from the BIS' own website - - Review Table 19 at www.bis.org.  Follow the path:  Statistics>Derivatives>Table19.  Note that as of December, 2006 there were:

• $6.475 trillion Commodities Contracts (excluding gold) Outstanding
• $40.271 trillion foreign exchange contracts outstanding
• $291.582 trillion interest rate market contracts outstanding

But consider the stunning increases in OTC Derivatives in just the twelve months between December, 2006 and December, 2007.  As of December, 2007 there were:

·        $8.405 trillion in Commodities (excluding gold) Contracts Outstanding,

      a $1.930 billion (approx.30%) increase in only twelve months

·        $56.238 trillion in Foreign Exchange Contracts,

      a $15.967 trillion (approx. 40%) increase in only twelve months

·        $393.138 trillion in Interest Rate Market Contracts,

       a $101.556 trillion (approx. 35%) increase in only twelve months

What is also obvious from a comparison invited by Table 19 - - comparing December, 2005 figures with December, 2007 figures - - is the increasing Systemic Threat this interventional regime imposes.  Note also the dramatic jump in most categories of derivatives from December 2005 to December 2007.

Gold Derivatives

Increases in the amounts of OTC derivatives outstanding for the Gold Market are perhaps the most stunning:

From the $359 billion outstanding at end-June 2004 they nearly tripled to $1,051 trillion at end-June 2007, an increase of approx. 290% (source:  BIS “Table A OTC derivatives market, Triennial Central Bank Survey of Foreign Exchange and Derivatives market Activity”).

Note:  While BIS Table 19 shows a modest drop in OTC Derivatives Contracts for Gold in the 12 months from the end-December, 2006 figure of $640 billion to the end-December, 2007 figure of $595 billion, it should be noted that the end-June 2007 number ($1.051 trillion) from the BIS Triennial Survey is a more comprehensive number, generically akin to the “upward revisions” which the U.S. BLS regularly makes.  Doubtless some substantial portion of the foregoing OTC derivatives contracts are for entirely commercial purposes, but with publicly visible exchange-traded derivatives also available for commercial purposes (and considering publicly traded companies take incur considerable risk by engaging in “dark liquidity” OTC transactions) it strains credulity to claim that most or all OTC contracts are for purely commercial, i.e. non-interventional, purposes.

Liquidity Injections Increase Systemic Risk

For an analysis of why the kind of liquidity injections The Fed has been making (e.g. the $40 billion “fund” made available to banks on December 12, 2007 and the March 11, 2008 establishment of the new Term Securities Lending Facility TSLF) increase the Systemic (and other) Threat(s), see “The Fed Cure Worsens the Disease” later in this document.  The March, 2008 establishment of the TSLF occurred during the crisis which resulted in the (de facto taxpayer guaranteed) takeover of Bear Stearns.

The December 12, 2007 $40 billion commitment was presumably occasioned by the credit markets continuing “seize-ups” which began in August, 2007.

That crisis was manifested by the asset-backed U.S. commercial paper market shrinking 17 weeks in a row and widening U.S. Dollar, Sterling Libor, and Euribor spreads.  For example, “the spread between the rate of interest on 3-month U.S. Treasury Bills and AA-rated asset-backed commercial paper has widened to 270 basis points from a mere 30 basis points earlier this year…”  Financial Times, London, M. Wolf, December 12, 2007

In our view, it is doubtful whether such commitments will solve the banks liquidity challenges over the long term (precipitated, we might add, mainly by Fed policies and the banks own careless lending practices), but one outcome is clear.

The banks will get their money, anonymously, (read “More Dark Liquidity”) and at below market interest rates, which should be highly profitable to them.  But, of course, this action gives no help to struggling homeowners facing ARM resets, or to retirees on fixed incomes, or to those losing jobs to (often international-banker financed) outsourcing, or to all of the “little guys and gals” suffering from rises in the cost of living and a substantial loss of purchasing power of their U.S. Dollars.

So now let us take a brief look back to see how all this "Interventional Firepower" is manifested in the Markets.

The Spring 2006 Interventional Takedown and

The August through October, 2006 Interventions

 For a full discussion of the Spring, 2006 and the August – October, 2006 Interventions see Deepcaster’s July, 2008 Letter posted at www.deepcaster.com.

The August and September, 2007 Market Interventions

A late 2007 example of such a Fed-led Central Bankers Cartel takedown was the stunning October 2, 2007 $18-in-a-day takedown of Gold Bullion.  Consider seriously the fact that this takedown was accomplished in the face of extremely bullish Fundamentals and Technicals for Gold.

Considering the motivation for such a takedown, Deepcaster reiterates that Gold & Silver, the monetary metals (as well as the Strategic Tangible Assets such as Crude Oil) are the “Mortal Enemies” of the Central Bankers’ Fiat Currencies and Treasury Securities.  The Cartel simply cannot afford for investors to long regard Gold & Silver as the ultimate (or even alternate) Stores and Measures of Value as that would decrease the legitimacy of their Treasury Securities and Fiat Currencies.

Indeed, a measure of the historical effectiveness of the Central Banker Cartel in suppressing Gold & Silver prices is that, in inflation-adjusted terms, Gold would have to exceed U.S. $2,200 an ounce today to top its all-time high of $850 in 1980.

An example of the apparent use of the Repo Pool to boost the Markets occurred in September, 2007.  The Fed allowed the Repo Pool to drop slightly on Friday, September 14, 2007, continuing its modest downtrend bearish for the Equities, at that time.  But they increased the Repo Pool on Monday, September 17, 2007 as they typically do when they expect/intend to create major moves (or respond to events) and they want to have sufficient Repo “ammo” to control the markets.

Sure enough, the September 17^th, Monday, Repo Pool boost was a harbinger of the Big Fed Discount and Fed Funds rates cuts on Tuesday, September 18, 2007, and partial cause of the Equities Market launch upward that day.

The March 2008 Crisis-Induced Takedown of Gold & Silver, and Its Context

On March 14, 2008, Deepcaster stated that the risk to the U.S. Economy…

…Is the greatest since The Great Depression. The Credit Default Swap Market agrees. March 11, 2008 was the first time ever that the risk of losses on U.S. Treasury Notes exceeded that of German Bonds according to the “judgment” of that market. U.S. Treasury Contracts traded at 16 basis points compared with German Bonds which traded at 15.

We need not elaborate further than just to reiterate the litany of Crises: Municipal Bond Market Crisis, Subprime Crisis, Housing Slump Crisis, Bursting Credit and Mortgage Market Bubbles, ongoing Credit Market Freeze-Up, record levels of Monetary Inflation with M3 increasing at over 16% annualized (shadowstats.com), increasing Financial Institution Insolvency and Illliquidity, record high Budget Deficits and Multi-Trillion Dollar Downstream Unfunded Liabilities for the U.S. Government, increasing levels of Unemployment, and CPI increasing at nearly 12% annualized according to shadowstats.com…. the list goes on and on.

The U.S. Fed is lowering rates and providing great dollops of liquidity with apparently no enduring positive effect. And that is not surprising because little enduring positive benefit is to be expected from the recent Fed actions because their actions amount to “pushing on a string.”

Indeed, adding more borrowed liquidity only worsens the fundamental structural problems, as we show in our January, 2008 Letter posted at www.deepcaster.com.

Significantly, the Fed’s actions do help the constituency that, de facto, means the most to them - - the big banks and international financial and related institutions.

The average U.S. Taxpayer, Middle Class and Working Poor are left to “Go Hang” with a measly $150 billion tax rebate plan.

Indeed, the Fed’s March 11, 2008 announcement establishing a new Term Securities Lending Facility (TSLP) is merely a short-term Band-Aid for what is a structural systemic crisis. The TLSP allows Federal Agency and non-Agency (i.e. private entity) AAA/Aaa Residential Mortgage backed (and otherwise illiquid) securities (some of which is irretrievably illiquid “bad debt”) to be used for collateral.  Allowing these securities (containing bad debt) as collateral makes it possible for banks to liquidate or transfer previously illiquid securities in their portfolios.

Let’s be candid here - - “previously illiquid” is a euphemism for “without any market value” (i.e. zero market value - ZMV).

That which is illiquid is illiquid because it has no market. That which has no market has no market value. Quod erat demonstrandum.

Looking a bit more deeply, the reason for the zero-value character of these illiquid securities is that these bundles of mortgage-backed and other securities contain (in the case of mortgages) mortgages that either were in default or about to go into default.  Thus to save the big institutions from having to fully recognize losses (Heaven Forefend!) The Fed will allow this junk to be used as collateral for cash (!) and, we predict, will allow the debt to be “rolled” indefinitely, if it cannot be repaid.

Bill Murphy, in his inimitable style, rightly characterizes this latest Fed Action as “Cash for Trash” and Jim Sinclair also, quite rightly, characterizes it as “The Monetization of Bankruptcy.”

Among realists, it is generally agreed that the effect of this most recent Fed action will be yet another increase in inflation and an even lower U.S. Dollar. Of course, these actions hurt the Middle Class and Working Poor most. Meanwhile, they provide some (albeit temporary) “Salvation” for financial institutions which should not have been engaged in the risky lending that resulted in these high default rates to begin with.

Of course, the ultimate primary cause of this crisis is the Federal Reserve itself which has been creating far too much monetary liquidity and allowing far too lax lending standards, and creating far too much credit, since at least 2001.

We must not forget another fundamental factor which demonstrates that The Fed Actions are neither a long-term, nor an adequate, remedy.

“This Fed injection does nothing for households. And it is households that will determine if we avert depression or not. Consumer spending is 70 percent of GDP. Households need the money, and they can’t get it. Credit card companies are cutting lines. Banks are raising lending standards. House values are dropping below outstanding mortgage and home equity debts. Incomes can’t keep up. Jobs are shrinking. Trickle down won’t work. We need trickle up this time. The Fed’s    announced plan today is to monetize bad debt from Wall Street banks, to accept their securities baked by bad loans in exchange for cash.  This in lieu of a drastic further drop in interest rates. Once again, save Wall Street and to blazes with households. Because they are not doing a thing here for households, this plan will fail. Households get more inflation and that is it. Wall Street gets a free ride.  Somebody ought to be arrested. What a heist. Of course Spitzer can’t do anything. He’s preoccupied.” (emphasis added)

Robert McHugh, Tuesday, March 11, 2008 Briefing

And there is yet another structural problem which is a fundamental cause of The Crisis and which will cause The Crisis to continue for months at least. At the urging of those pushing a misunderstood “free market” ideology, the Glass-Stegall Act (which separated the commercial banking from the securities business) was repealed in 1999. That Act was passed in 1933 in the midst of The Great Depression to prevent securities speculation from further destroying bank capital and shrinking deposits.

Since 1999, the Banking and Securities businesses have become increasingly merged,     with today’s disastrous results being quite apparent. [Note: truly “free” markets mean markets that have better regulations, not “no regulation” - - Freedom of choice requires a structure which provides meaningful alternatives. To enhance freedom one needs to improve a structure, not abolish it. A basic philosophical point, thanks for which we owe to the philosopher Immanuel Kant.]

Let’s be even more candid: allowing questionable “illiquid” i.e. bad debt to be used as collateral amounts to a quasi-nationalization of that debt in that it further weakens the security and legitimacy of U.S. Treasury Securities and, ultimately, the U.S. Dollar.  And this helps the big banks, while further diminishing the purchasing power of the middle class and working poor.

A key point is that the recent Fed Action is not a long-term fix. The reason this is not a long-term fix is that it “fixes” a liquidity problem in a way that allows insolvent or nearly insolvent financial institutions to have liquidity that would allow certain normal but often deleterious operations (i.e. the continuation of even more lending based on borrowed   liquidity).  Deepcaster has previously demonstrated the perils inherent in an economy relying on “borrowed liquidity” (i.e. debt) rather than “earned liquidity” (i.e. savings) – see January, 2008 Letter.

Once again, the “borrowed liquidity “cure” is worse than the disease. Thus, what The Fed has given us is a Financial Band-Aid, and only a Band-Aid for the Big Boys at that.

In sum, today the Big Financial Institutions are reaping the whirlwind for their Reckless Securities and Derivatives Speculation. Result: we are in the midst of a crisis.

But The Fed clearly wants to make the markets think that they can achieve a Great Fix.        To achieve this effect, on the week ending Friday, March 14, 2008, they injected $10 billion in POMOs which dramatically (in addition to the TOMOs) increased the Interventional Power of The Fed.

The Fed’s POMO injection is understandable considering that the Equities Market Technicals were looking quite ominous before the next day’s (March 11, 2008) Fed Action which propelled the Dow up over 400 points. The Dow Jones Industrials, just the preceding Friday March 7, 2008, had broken below the bottom boundary of a 26-year rising Trend Channel from 1982.

Moreover, a very bearish Equities Head and Shoulders Pattern had completed its right shoulder and fallen decisively below its neckline. Before the March 11th Fed Action, the downside targets for the Equity Indices were 20-25% below where we stand now. Gold, that legitimate Safe Haven from all manner of catastrophes had been hitting record highs. Moreover, the HUI AMEX Gold Bugs Index is on a bullish breakout from its 15-month consolidation pattern, though the Monday, March 10, 2008 shares action put the        HUI on a short-term sell signal.

And, in the Energy Markets, Crude Oil has hit $110-$111 range as the first technical target for a seemingly continuing upward ascent.

So the result of the TOMO and POMO “juice” injections was to create the interventionally generated 400-point rally (of Tuesday, March 11, 2008). That Fed Action has turned many of the Equities Markets Technicals from down to up. But on the next two days, Wednesday & Thursday, there was no significant follow-through “bounce” - - an ominous       sign indeed! Couple that fact with the consideration that The Fed Action “provides a long-term solution for none of the aforementioned ongoing problems, one must reasonably     ask how long such a rally can last. The answer is it probably cannot last.

In sum, if one had only the Fundamentals and Technicals to consider, one would be assured of ever-higher Gold and Silver prices, increasing Crude Oil prices, and continuing weakness in the Equities Markets.

However, one must also consider the Interventionals. We reiterate that The Fed, as leader of The Cartel*, pumped in successively on March 10 & 11, 2008, $15 billion and $9 billion in Temporary Open Market Operations (TOMOs) Repo Injections into the markets.

And, more significant (because many times more potent), on March 10, 2008, it added another $10 billion in POMOs (Permanent Open Market Operations) which have several times the effect of TOMOs (we now see this was priming the “pump” to generate the March 11, 2008 “market rally”).

All this occurred against the backdrop of Gold’s hitting $1000. If Gold were to break out conclusively over $1000 that would generate even more interest in it and with Crude Oil and Silver also at record highs, the Fed-led Cartel would truly be at a crisis point in terms of their legitimacy as financial market and monetary managers.

Conclusion: Thus we can expect The Cartel to combat soaring Precious Metals and Strategic Commodities prices vigorously and the increasing magnitude of the ongoing crisis suggests they will try to do just that, and very soon.

It is not hard to see to see what their specific targets will be. As we have said on several occasions, the power of the Fed-led Cartel of Central Banks and allied Major Financial Institutions depends on continuing legitimacy of their “paper” including first and foremost their Treasury Securities and Fiat Currencies.

Increasing Gold, Silver, Crude Oil and other Tangible Commodities prices threaten this Power because they are alternative stores and measures of value to The Cartel’s paper.  Therefore, we can expect The Cartel to attack Gold, Silver, Crude Oil and the Other Strategic Commodities with a vengeance, and, given the recent POMO Repo adds, and other signs, very soon. The main question is, will they succeed?

Well, that depends on whether one believes that the Fundamentals will overwhelm Cartel attempts at market manipulation.

In this connection consider The Rule that ‘The Biggest Player in the Market makes the Market Price.’

In this regard, Deepcaster’s view is that while The Rule will not hold true forever, it is still true at this time: The Cartel’s multi-trillion dollar derivatives positions make it The Biggest Player in the aforementioned Markets.

Therefore, in spite of the Market Fundamentals and Technicals “arguing otherwise” it is likely that The Fed-led Cartel will be successful in beginning to take down the price of Gold, Silver, Crude Oil and other Strategic Commodities, with a vengeance beginning this week or next!”

Indeed, we were right.  Notwithstanding the economic and financial system crises culminating in the demise of Bear Stearns, Gold and Silver, which should have soared, were dramatically taken down by the Fed-led Cartel the very next week.

June 2008:  The Cartel Catalyzes a Volatility Fog to

 Mask Interventions and Worsening Fundamentals

But it is also certainly not in The Cartel’s interest to have its Interventional Market Rigging “Game” revealed.  That explains why it is increasingly apparent that The Cartel uses a variety of techniques (e.g. “lures”) including catalyzing Volatility “Fogs” to mask its Interventions.

Consider the news and the market action on Thursday, June 5 and Friday, June 6, 2008:  The news on Thursday, June 5^th could not have been worse.  The U.S. Dollar fell 40 ticks on the USDX to about 73.  Crude Oil shot up nearly $6 to $1.27 a barrel.  Moreover, it was announced that mortgage foreclosures rose to unprecedented levels, and the FDIC announced that bank failures may increase, and higher fuel prices sparked more chaos among the airlines including Continental Air Lines layoffs.  To top if off, it was announced that Household Net Worth declined by 1.7 trillion dollars - - and of course all of these households are composed of the same consumers that are supposed to keep the economy going.

Perhaps worst of all, two of the largest bond insurers (MBIA and Ambac) were stripped of their AAA insurer ratings by Standard and Poors.  Two levels cut the ratings to AA.  The Mainstream Financial Media underplayed this (intentionally, we believe).  But this development has potentially catastrophic consequences for cities and states that rely on AAA bond ratings to sell bonds with relatively low interest rates for a variety of infrastructure and other needs.

Consider the implications of these bond insurers being downgraded.  It means that the ratings of trillions of dollars in bonds issued by municipal and state entities will drop.  And that means that the value of the bonds themselves will drop, causing major financial institutions which hold these bonds in their portfolios to have to write them down to lower market values, which, therefore, will cause their regulator-imposed capital levels to drop, thus requiring them to raise more capital and further constrict their lending.  It also means that the bonds in their portfolios are much less liquid then they were heretofore.  In sum, states and cities will find it much harder to raise capital, thus creating an even larger economy-slowing effect.

And in spite of all this, the Dow exploded to over a 200-point gain and the other Equities Markets followed!  Even more absurd, on the same day that all of the aforementioned negativity was publicized (Thursday, June 5th) Gold (which in a non-interventional market would have gone skyrocketing) was taken down over $8!

Yet consider the next day, Friday, June 6^th:  the Official Unemployment Data Release showed a dramatic increase in unemployment to 5.5% - - a 22 year high and truly recessionary.  On this news the Dow and other Equities Markets were “allowed” to do what they should - - tank by over 300 points (as we were writing), thus more than wiping out the previous day’s gains.  Meanwhile, Gold did what it always would do in an un-manipulated market - - shot up by over $20 (as we wrote), with Silver following up over 30 cents.

Just as a Reality Check, we know that Real Unemployment is much higher than 5.5%.   “Adjusted for the discouraged workers” defined away during the Clinton Administration, actual unemployment is estimated by the SGS-Alternate Unemployment Measure, rose to 13.7% in May from 13.1% in April.”  Flash Update, June 6, 2008, shadowstats.com.  (See discussion of shadowstats.com below)

What shadowstats.com noted, but could well have highlighted, was the statistical chicanery that generated the Official Number - - that non-farm payrolls fell 49,000, resulting in the unemployment spike up to 5.5%.

In fact, the Real Numbers were much worse.  The job losses were closer to at least 265,000!  The Labor Department’s highly subjective (to say the least) Birth/Death Job Adjustment was a positive 217,000!  That is, the Labor Department claimed (with no credible justification) that businesses in this recessionary economy created a net increase of 217,000 jobs thus somewhat dampening the Payroll Job Loss figures!  Preposterous!!

It is apparent to us what was happening here.  The Cartel was creating volatility “fog” (helped along by data manipulation) to mask its Interventions.  That is, sometimes they allow markets to take their normal course, and sometimes massively distort market results (particularly when it comes to capping the price of Gold and Silver when they should be launching up) to obscure their Interventions.

II.  INDIRECT MANIPULATION

The other major form of government (including agency) market manipulation can most accurately be called indirect.  It consists of "massaging" or hiding various statistical measures and data to create results that suit the manipulator's (usually, whatever Presidential Administration has power at a given time) preferences, insofar as it’s political, economic, or financial or market goals are concerned.   It is the U.S. Federal Reserve Bank’s (a privately owned “national” bank) and the United States government's generation of "creative statistics" on which we focus here.

Let us consider today’s massaged government and agency data in comparison with today’s data calculated the “old fashioned way” (i.e. sans contemporary statistical gimmickry).

Overview

Mr. Walter J. (John) Williams (see bio below) operates an excellent and revealing website business named shadowstats.com, in which he analyzes the U.S. government's and The Fed’s "manufactured statistics" and develops statistics which have a better correlation to reality (i.e. his shadowstats).

*Walter J. “John” Williams was born in 1949.  He received an A.B. in Economics, cum laude,

 from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth’s Amos Tuck

 School of Business Administration in 1972, where he was named an Edward Tuck Scholar.

 During his career as a consulting economist, John has worked with individuals as well as

Fortune 500 companies.

In order to get a flavor of the statistics which are manipulated, and the effects of that manipulation, we present a partial summary of an excellent interview (conducted by Kate Welling, Editor and Publisher of Welling @ Weeden), which Williams gave in 2006 regarding the subject of government manipulation.

Williams says that regarding “what used to be called the GNP but is now widely followed as the GDP, (and) the CPI, and the employment numbers, all have had biases built into them that result in overstating economic growth and understating inflation - - both of which are admirable political goals."

Williams has analyzed and compared the way in which the unemployment figure was historically calculated versus the way it is calculated today.  He concluded that if it “were calculated (today) the way it was during the Great Depression, it is now (2006) running at about 12%."  As well, he said, "Real CPI is now running at about 8% (2006).  And the real GDP is probably in contraction."  Clearly, the government’s methodologies that generated these bogus numbers are all designed to paint a more favorable picture of the economy and the markets than is the reality.

[Ed. Note:  Real CPI is running at nearly 12% as of June, 2008, according to shadowstats.com.]

Unemployment Figures

He explains why contemporary unemployment numbers are bogus.  Today, the unemployment number does not include those unemployed who have been discouraged and out of work for more than a year.  So they are taken out of the work force completely automatically.  This results in knocking about 5 million unemployed out of the broader measures of unemployment.

[Ed. Note:  Thus, Unemployment (as of June, 2008) is much higher than Official Statistics reflect.  As of June 6, 2008, Unemployment is nearly 14%, according to shadowstats.com.]

Consumer Price Inflation Figures

These distortions have very real, and usually adverse, consequences for citizens.  Consider, Williams says, the methodology developed several years ago by Mike Boskin and Alan Greenspan for generating the Consumer Price Index.  In their (erroneous in Williams' and Deepcaster's) view the CPI was supposedly overstating inflation so they "fixed" it from its prior condition of (allegedly) overstating inflation.

And here is how they did it:

Originally, the whole purpose of the CPI was to "measure the change in the cost of a fixed basket of goods over time."  But Boskin and Greenspan said that we should allow for substitution because people can buy hamburger when the price of steak goes up.

But, of course, "if you allow substitutions you aren't measuring a constant standard of living, you're measuring the cost of survival."  Williams correctly concludes.

But the effect of this statistical chicanery is very real and very adverse to, for example, retirees because the CPI was, and is, being used to adjust Social Security payments to compensate for increases in the cost of living.

Today, as a result of the Boskin-Greenspan "fix," it understates those increases and therefore under-compensates retirees for those costs.

In a similar manipulatory vein, the Bureau of Labor Statistics (BLS) during the Clinton Administration constructed and began to employ a weighting regimen whereby if the price of something went up it automatically got a lower weight in calculating the CPI, but if it went down in price it automatically got a higher weight.  The result, of course, was, and still is, to further shaft those people (like Social Security recipients) whose income was dependent upon the CPI measure.

"If the same CPI were used today as it was used when Jimmy Carter was President, Social Security checks would be 70% higher," Williams dramatically emphasized in the 2006 interview.

Hedonic Pricing

But perhaps the most outrageous aspect of the government's numbers-manufacturing business has to do with its using "hedonic pricing."   ("Hedonics" is the study of how to create pleasurable sensations.)  Hedonic pricing is the practice of creating pleasant (to the government manipulators and to a credulous public) pricing.

Using its hedonic method, the BLS says the price really doesn't go up for a product that has "improved" in quality because the consumer is getting greater benefit or pleasure from it.  Therefore, if computer power increases by a factor of 10, but the sticker price of computers has only increased by a factor of 2, then the hedonically adjusted price would be much lower for CPI calculation purposes even though the computer is actually twice as expensive (in dollars actually paid) as it was years earlier.

Williams also notes that sometimes data manipulation attempts are overt, such as the time during the administration of George Bush I, in which a computer industry official was approached and asked to boost his sales reports to the Bureau of Economic Analysis.  Williams is careful to point out that manipulation is a bipartisan phenomenon.

In the Clinton Administration, the manipulation resulted from the CPI numbers being re-set using weighting.  "They basically reduced the number of people being surveyed in the inner cities (which had more unemployment (Ed.)) and then claimed they replaced them statistically.  But the effect was immediate.  You saw a drop in all the unemployment measures that would normally be influenced by inner-city surveying.  Thus, of course, the statistical replacement reflected a lot less unemployment than actually existed."

The adverse effect of this "numbers manufacturing" extends far beyond its adverse affects on any particular group such as retirees.  If someone relies on these buggy statistics and invests in the stock market based on happy economic reports, they may well lose the money (and will likely lose purchasing power) because of that reliance.  Williams says "I am…disgusted by both parties at this point, especially because we have no one of substance taking on very severe issues, like the trade deficit and federal deficit that are going to create terrible times for people in this country if they are not addressed."

Williams focuses on what he considers, and what Deepcaster considers, "so dangerous that if it isn't addressed - - and I am afraid maybe that even if it is addressed - - that it has gone past hope of repair; and that is the fiscal condition of the Federal Government."

Budgetary Chicanery

Typical statements of the budgetary condition of the government (by whatever administration is in power) do not include accrued pension and retiree benefit liabilities.  Certainly this is not a small omission - - and usually results in differences between the official numbers and the real numbers.

Williams notes "where the official federal deficit in 2004 was reported at about $412 billion and the GAAP-based deficit was around $616 billion they said that if you added the net present valuing of the under-funding of Social Security and Medicare, the one-year deficit in 2004 was $11.1 trillion."

In fact, the 2005 statement (of the U.S. government) shows that total yet unfunded downstream federal obligations at the end of September (2005) were $51 TRILLION, Williams calculated.

Of course, foreigners are financing most of this deficit spending.  Williams notes that last year (2005) alone, foreign investors bought enough U.S. Federal Debt to cover all the debt issuance of the U.S. Treasury.  But we have no assurance that this will continue.  Indeed, once this foreign buying even begins to slow, U.S. interest rates must rise to finance our debt, the interest costs on which are already running at nearly $3 billion per day.

As Deepcaster has repeatedly noted, this process is leading to a very high rate of inflation, high interest rates, a stagnant economy and a very sharp decline in the dollar, quite possibly followed by a deflationary depression.  Williams notes (consistently with Deepcaster's view):  "Once the selling pressure starts it's going to be massive.  You're going to see a lot of dumping of U.S. securities, particularly Treasuries."

"To absorb them you're going to see a sharp spike in rates or the Fed will step in, provide liquidity in market………..the end result, when it does all come together, will be something akin to hyperinflation.  But at the same time, you'll also have a very depressed economy." …That possibly could evolve into a hyperinflationary depression as much as I hate to use that term."

Williams concluded by saying "so we're talking about a global crisis of unprecedented proportions.  Probably one that could lead to the collapse of the current currency system."…As crazy as it sounds, I think the only thing they will be able to do is go back on some kind of gold standard."

And, indeed, Gold and Silver are the Bedrock Assets so far as Deepcaster is concerned.  And this is why the Fed-led Cartel makes such forceful efforts to cap their prices.  Unfortunately, another alternative is The Cartel’s attempted implementation of its nefarious “End Game” (see below).

Finally, Williams talked about where we are today (i.e. 2006).  Indeed, he indicated even then we are already in a recession.  "What I found is that if you adjust the real GDP numbers that the government releases for the myriad revisions and redefinitions…you'll find that there is a happy overstatement of growth of about 3% on a year-over-year basis."  The problem very simply is this - - the consumer is the primary driving force behind economic activity and the only ways that consumers can fuel consumption growth are through rising income, debt extension, or savings liquidation, that's where he gets his cash.

But the consumer is not really seeing any income growth.  “Now this is where the playing around with numbers really gets good.”  We've already talked about hedonics and all the other manipulations of the CPI.  But they all pale next to the impact of imputations in the GDP that are an outgrowth of the theoretical structure of the national income accounts. 

“Any benefit a person receives has an imputed component…when the government puts all of it's imputations into income, its growth generally remains positive and has very little relation to reality."

How do we know when The End is near?  Deepcaster and Williams agree on the answer.   "If I were looking for one factor to signal the onset of some really serious problems, I would watch the dollar.  If you start to see a sharp sell-off, or if the selling starts to pick up a little steam and begins to look like a panic, or you start to hear talk of an Asian country dumping a little extra in the way of dollars, it will be a sign of really bad times to come."  Ominous!

Deepcaster would add another “sign.”  The Saudis and most major crude producers have agreed to sell oil for U.S. Dollars.  But Venezuela and Iran have taken steps to move away from U.S. Dollar pricing.  Should other major producers join them that would also mean The End was near.

Another ominous sign that the end may be near occurred on June 22, 2008:  The Asian Clearing Union announced that, beginning in January 2009, it would accept either U.S. Dollars or Euros in payments.  This policy threatens the U.S. Dollar’s status as the World’s Reserve Currency.  If that trend continues, The End is quite near.  Why should sovereign nations hold U.S. Dollars if they cannot buy Crude Oil with them?

Key Inflation Statistics

The Fed chose to stop reporting M3 in March 2006, clearly to hide their massive monetary inflation now running, as of June 2008, at about 16% per year (according to shadowstats.com) a doubling time of just over 4 years!

 And as of June, 2008, whereas the official estimate of the Consumer Price Index Inflation for core inflation was estimated to be about 4%.  Shadowstats estimates Real Consumer Price Inflation was nearly 12%.

Gimmicked BLS Statistics - - Examples

 The Bureau of Labor Statistics appears to be using a variety of gimmicks to develop the manipulated figures.  Perhaps the most notorious (for lack of a better word) is the net birth-death adjustment whereby the BLS estimates gains or losses of jobs due to the creation or destruction of businesses.  Noteworthy from the November, 2007 report was an estimated 14,000 new “construction” jobs added and 25,000 new “financial activities” jobs added in October, 2007.

But how could this be?  In October, 2007 Capital Spending was decreasing, the housing market had increasing numbers of unsold homes, the economy was slowing and the Financial Services Industry had been hit hard by the credit freeze-up from August, 2007 from which it has still not recovered.  The BLS expects us to believe that nearly 40,000 jobs were added in these two sectors alone in the month of October?

‘

Another “laugher” is the “Official” Bureau of Economic Analysis GDP figures which put annual GDP growth at just over 2% through the end of the first quarter of 2008.

Real GDP was a negative 2% at that time, according to shadowstats.com!

III SYSTEMIC RISKS

On the Brink of a Cartel-Facilitated Systemic Meltdown

The August, 2007 credit market freeze-up and the Fed’s bailouts of August 17 & September 18, 2007, and mid-March 2008, illustrate just how close to the brink of a Systemic Meltdown we are.

“The Fed’s September 18, 2007 rate cuts temporarily bailed out their buddies on Wall Street, while simultaneously inviting hyperinflation, and sacrificing the U.S. Dollar, the long-term health of the U.S. economy, and the best interests of taxpaying middle-class American citizens and future generations of Americans.”

Deepcaster, September 18, 2007

A major cause of the current iquidity crisis is the period of excessively low interest rates created by the Greenspan Fed after the tech-wreck of 2000.  This encouraged a proliferation of heavily leveraged “commercial” paper as well as excessive borrowing by sub-prime borrowers and others and risky lending by sub-prime lenders, particularly via adjustable rate mortgages (“ARMS”).  This proliferation of ARMS was sure to cause problems when any financial bumps in the road were encountered, and/or when the ARMS interest rates reset to higher levels and the sub-prime borrowers were unable to pay.

As of October, 2007, ARMS were resetting at about $40 billion/month and were projected to continue at this rate deep into 2008 and beyond.  The resulting growing mountain of risky and imploding debt creates not merely increasing default risk in the real estate sector, but also creates greater systemic risk.

In sum, excessive and risky mortgage lenders encouraged by low rates and borrower standards has predictably led to increased defaults which has led to heightened perception of risk in CMOS (see below) resulting in the markets “seizing up” in August, 2007.

And, of course, the Greenspan/Bernanke crew at The Fed surely should have known this - - known in 2001 that, via their rate cuts, that they were setting up a situation which would have resulted in an excessive and risky credit “bubble”, resulting inevitably in large increases in defaults, and that this would result in title to valuable properties passing, dirt cheap, to the Central Banks’ client banks and their other allies, just as they did in the Great Depression of the 1930’s.

The Fed’s “Cure” Worsens the Disease

However, as a “temporary cure” on August 17, 2007, The Fed decreased the discount rate (whereby banks can borrow directly from The Fed) by ½%.  The result was that borrowings (!) by banks (so they could do more lending) jumped from a daily average of $6 million to $1.3 billion in the two weeks ended August 29, 2007.  A staggering 21,600% increase.

The key point is The Fed administered a cure (enabling even more debt) which, in the long run, worsens the “excessive lending disease.”

The Fed’s discount rate cut (i.e. enabling more borrowed liquidity) “cure” is simply creating more of what created the ongoing financial crisis in the first place, which was excessive borrowed liquidity.  Coupled with non-transparency (e.g. hiding M3 – Where is the transparency, Ben?) and excessive monetary printing, the liquidity increases and easy credit have led to, among other things, the moral hazard of lenders lending recklessly to borrowers who should not be borrowing to being with.

Even so, its “Solution” of allowing even larger injections of “borrowed liquidity” as opposed to “earned liquidity” (which is healthy liquidity achieved through savings out of earnings) temporarily calmed the markets.  Yet it is increased “borrowed liquidity” which increases mid and long-term systemic risks.

For this crucial “borrowed vs. earned” liquidity distinction we are indebted to Dr. Kurt Richebacher (R.I.P.) whose sensible prescriptions have been utterly disregarded by the U.S. Federal Reserve and which prescriptions, had they been followed, would have resulted in our not being in today’s liquidity and derivatives crises.  [May the straight-speaking, realistic and erudite Dr. Richebacher Rest In Peace.  He passed away in early August, 2007.]

Dr. Richebacher explains why credit (i.e. debt) financing, or “borrowed liquidity” as he calls it, is so pernicious:

            “Available liquidity is, of course, most important.  Nevertheless, we find

            it most important to distinguish, first of all, between two different sources

            of liquidity:  borrowed and earned liquidity.  Present excess liquidity

            in the United States and several other countries is of a peculiar kind.

            It does not come, as would be normal, from unspent current income –

            in other words, from saving.  In the absence of any new savings, all

            the liquidity creation occurring in the United States is borrowed

            liquidity.  Generally, borrowing against rising asset prices is in diametric

            contrast to earned liquidity from savings out of current income.  By

            definition, this is liquidity from credit inflation.

            One thing is certain about borrowed liquidity:  it depends on rising

            asset prices.  Once asset prices stop rising (see current U.S. housing

            prices) this liquidity suddenly evaporates.  Moreover, ever larger credit

            injections are needed to keep asset inflation - - like any other inflation - -

            rising.  Nevertheless, there inevitably comes a point in which asset

            prices, for one reason or another, refuse to rise further and then the

            big selling without buyers begins.  Never before in history has there

            been an exception from this disastrous end of asset inflation.”

ARM resets and consequent defaults and foreclosures are far from over.  Indeed, ARM resets will continue at a $4 billion/month pace until deep into 2008.  By correctly anticipating the foregoing, Deepcaster was able to recommend that its subscribers take profit on two “short” positions in August, 2007.

In sum, the August freeze-up will be the of several credit market freeze-ups due to defaulting borrowers and reckless lenders, magnified by the leverage of $20 trillion plus of OTC Derivatives and grossly excessive “borrowed liquidity.”

Ominously, also, on the very day of the September Fed rates decreases were announced, the Treasury International Capital Flows (“TIC”) data for July, 2007 was released.

The bad news was that foreign capital flows into the United States hit their lowest levels since December, 2006, when one considers only the data for long-term securities.  When short-term and long-term securities are considered together, the Treasury Inflows jumped to over $100 billion - - more than enough to cover the $60 plus billion trade gap for July.

The key point is that while foreigners are still willing to support the United States’ overspending and over-indebtedness they are moving to shorter dated securities.  Thereby, the data is not so subtly telling us that the days of foreigners carelessly financing the U.S. debt are limited.  Acute analyst Dan Norcini concluded from the economic and TIC data that “…the Fed will burn the Dollar down, rather than let the U.S. Equity Market collapse.”  Apparently so.

Thus it is important to conduct a reality check on how these Fed policies affect American workers.  Surely they are a primary cause of wage levels continuing to deteriorate.  Real median income of full-time year-round workers fell from $44,600 in 2002 to $42,250 in 2006 (for males) and from $33,800 in 2002 to $32,500 in 2006 (for females)**.

As detailed in the section above “Significant and Increasing Systemic Threats”, the Fed’s December 12, 2007 liquidity injection represents the creation of more unhealthy and destabilizing borrowed liquidity!

A Modest Proposal for Curing Our Systemic Ills

Priest:  O Ruler of my country Oedipus…you yourself have seen our city reeling like a wreck already…

Oedipus:  I, Oedipus, whom all men call The Great…. came myself (to) learn…by what act or word I could “save this city.”

                                                            Oedipus The King

                                                            Sophocles, (R. Lattimore Trans.)

Given the prevailing Hubris at the U.S. Federal Reserve and on Wall Street, the repeated Takedowns of Precious Metals and Strategic Commodities, and a Bear Stearns-type demise both were bound to happen.

Similar Takedowns and Demises are bound to happen again.  But both are reflective of increasing Systemic Risk.

Indeed, many commentators on the Bear Stearns debacle (which we consider first) - - a debacle which saw the shares of Bear Stearns drop from a 52 week high of $159 down to below $3 - - missed The Key Point.

The Key Point is that the Bear Stearns debacle was built on a Fatal Flaw in The Financial System which can be most appropriately characterized as a particular sort of Divorce from Market and Economic Reality of that Financial System.

Understanding this ‘Fatal Flaw’ can help one understand how such debacles could be prevented in the future (but not that they will be).

It can also help investors understand how to profit by taking account of that Flaw.

The Fatal Flaw

The Fundamental Flaw is reflected in the fact that Bear Stearns’ business is essentially a “paper” (or strictly speaking, even more removed from reality, an electronic data) business, only remotely connected to the Tangible Economic Realities of the marketplace in the real world and that key aspects of that “paper business” are ultimately controlled by the private, for-profit U.S Federal Reserve.

In between Bear Stearns and the Tangible Realities of the Marketplace and Economy, were layers of “darkly liquid paper” (mainly OTC derivatives) and intermediaries.

Indeed, the current structure of the financial system “encourages” this Divorce from the Tangible Realities of the marketplace and reliance on, and a “marriage” to, such paper.  A simple, and not too inaccurate, way to conceptualize The Flaw is to say that Bear Stearns and many other similarly situated businesses were (and are) built on “darkly liquid” paper, defined and “regulated” in key aspects by the private-for-profit U.S. Fed..

What exactly is this “paper?” - - (the often overlapping categories of) Securitized Mortgages, Fiat Currencies, SIVs, CDOs, Securities, Commercial Paper, and dark OTC Derivatives (especially dark OTC Derivatives) the list is very long.

Divorce From Underlying Reality…Until…

An important characteristic of this Fatal Flaw is that the Paper Universe is structured so that the ultimate holder of the paper is several intermediaries away from the ultimate economic reality or transaction(s) that the paper represents - - for example, in the case of mortgage-backed securities separated from the ultimate obligor - - the homeowner.

But the Fatal Flaw of such paper is that since its value in the marketplace is remote from underlying tangible realities, its market value must therefore be primarily determined by confidence that the value it ostensibly represents is genuine.

But in the securitized subprime loan universe where the current crises began, confidence began to disappear several months ago.  As defaults increased, this led to a credit freeze-up which ultimately led to the “run” on Bear Stearns, and the ensuing Fed-engineered bailout by JPMorgan Chase.  [The Fatal Flaws in “remote darkly liquid paper” is described in detail in Deepcaster’s February 29, 2008 article on derivatives, dark liquidity and systemic risk entitled “Increasing Systemic Risk Portends Cartel “End Game” Attempt.” available in the Articles Cache at www.deepcaster.com]

Zero Market Value

Another characteristic of that JPM takeover of Bear Stearns was that it was a takeover that essentially valued Bear Stearns assets at approximately zero.  That was probably a correct valuation.

The Hubris of confidence in “Remote Darkly Liquid Paper” finally revealed itself in the essentially Zero Market Value attached to the Bear Stearns shares.

In this case, and several other prospective cases, Bear Stearns’ ultimate problem probably resulted from the Dark Liquidity Syndrome reflected in its illiquid derivatives (see Deepcaster’s January, February and March Letters regarding Derivatives and Dark Liquidity and The Cartel End Game available at www.deepcaster.com).  As Deepcaster has explained in detail in the referenced Letters, to the extent that the securitization business is conducted via non-public OTC derivatives it is vulnerable to the high risks of “dark liquidity.”

A failure of confidence in such derivatives quickly leads to illiquidity, that is, to Zero Market Value.  For example, OTC securitized mortgage bundles (e.g. CMOs) containing mortgages which have defaulted and some which are about to default are a reflection of the fact that no one knows what is in the bundled securities - - often not the counterparties, and certainly not the market at large.  The result is these “darkly liquid” OTC securities are quickly transformed into illiquidity.  Prospective buyers of these securitized bundles understandably do not want to be buying a “pig in a poke.”

Since the securitized derivatives bundles are typically Over-The-Counter, and thus neither Clearinghouse guaranteed nor subject to required full disclosure, “dark” securitized bundles raise suspicion in the eyes of prospective buyers, and thus become illiquid and often completely illiquid.  No one wants them at any price.

Another example of Dark Liquidity with high Zero Market Value potential is Level 3 Assets.  These Assets are valued by the company that owns them because no credible market value can be established.  The claim is that these “Assets” are “Marked to Model.”  Realistically, this means that they are “Marked to Myth” in Deepcaster’s view.  Like some CMOs and SIVs these are at times completely illiquid.

That which is completely illiquid has no market and therefore Zero Market Value.

More Casualties Coming

Moreover, since these dark derivatives are concentrated in the financial services arena, it is predictable that more entities like Bear Stearns will go down.  Indeed, Thornburg Mortgage and Carlyle Capital already have.

More troubling and, unfortunately, since these Derivatives are laced through many sectors, it is likely that entities outside the financial sector will also go down as well.

Indeed, the Darkly Liquid Contagion has and will spread beyond just the Financial Services stocks.  We recently referred to the case of Bristol Myers Squibb (a supposedly Safe Haven Big Pharma Company) which had to take a quarter of a billion dollars write down due to derivatives problems.  So much for Big Pharma as a “Safe Haven.”

In sum, problems which brought down Bear Stearns are widespread and seriously systemically threatening as we point out in our 3/6/08 Alert “Intervention Risk Acceleration Provides a Profit Opportunity.”   Given this brief background, we can now outline a Solution.

The Key To The Solution

The key to The Solution is to note that Bear Stearns’ main surviving genuinely liquid asset - - its building in New York City - - is a Tangible Asset.

That fact provides the clue to a Major Remedy for the larger Systemic Problem.

That larger Systemic Problem reflects The Fatal Flaw “in spades.”  The large systemic problem is that the world’s Reserve Currency, the U.S. Dollar, is susceptible to the same Flaw that afflicted Bear Stearns:  it is a Fiat Currency.  It is backed only by the Full Faith and Credit of the United States Government (that is to say, by confidence alone).  It is not linked to Gold, Silver, or any other tangible asset.  And thus it is subject to manipulation by the private, for-profit U.S. Federal Reserve.

This Reserve Currency by Fiat is unsustainable.  No Fiat Currency Regime in the history of the world has ever survived indefinitely.

So The Solution is apparent.  We outline it as follows:

1)     Re-link the world’s Reserve Currency (the U.S. Dollar) to Gold and Silver, the Monetary Metals which are both stores and measures of value, tangible value.

Failure to re-link currencies to Gold and Silver will allow a continuing massive and unsustainable inflation of the money supply by the Fed-led Cartel of Central Bankers.  The U.S. Federal Reserve is currently inflating the money supply (M3) by over 16% per year - - less than a 5-year doubling time (shadowstats.com).  Unless such re-linking to Gold and Silver is accomplished, the U.S. Dollar is likely doomed, with severely negative consequences.

Money supply inflation ultimately leads to price inflation and the continuing extraordinary rate of increase in the money supply, (as a number of commentators have pointed out) is leading us down the path to a Hyperinflationary Depression.  (c.f. shadowstats.com).  And, more ominously, it is leading us to an attempt to implement The Cartel “End Game” (see June 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” at www.deepcaster.com.).

But the private for-profit U.S. Federal Reserve and its Cartel Allies are not likely to give up its Fiat Currency and “un-backed” Treasury Securities that easily - - they are the source of its power.  The Fed and associated International Financial Allies will strenuously resist.  Thus,

2)     Legendary investor Jim Rogers recently neatly expressed The Solution to the problem of The Fed:  “The Fed should be abolished and Chairman Bernanke should resign.”  (March, 2008, CNBC)

An excellent idea.  Indeed, The Fed is, we reiterate, a private for-profit group of International Banks, whose main motivation is in providing profits for, and protecting the interests of, The International Bankers Cartel and related institutions and parasites, not in serving the needs of U.S. citizens (or most citizens of other countries for that matter).  Just consider two Spring, 2008 Fed actions.  At the beginning of the week of March 11, 2008, the Federal Reserve agreed to accept $200 billion of illiquid mortgage-backed securities as collateral to prevent the implosion of the mortgage finance industry - - “Cash for Trash,” as Le Metropole Café’s Bill Murphy put it.

Yet the Economic Stimulus Package that The Fed recommended for all the households in the United States was only $150 billion - - peanuts compared to what the Fed is doing, repeatedly, for the Big Money Center Financial Institutions.

3)     To replace The Fed, and in order to protect ordinary citizens interests, the U.S. Congress should create a genuinely National Bank under the auspices of the U.S. Treasury Department as authorized by the U.S. Constitution.  That truly National Bank should be the money issuer for the United States, not the private for-profit Cartel of International Bankers known as The Fed.

This is not such a radical idea.  President Kennedy caused U.S. Notes to be issued late in his presidency as a replacement for Federal Reserve Notes.  [He was killed a few months after the issuance was started and the U.S. Notes disappeared from the market.]

4)     If the U.S. Federal Reserve were acting in the interest of the American people it would act first to bail out households.  Households are 70% of GDP.  If households cannot pay their mortgages and cannot purchase the essentials and pay their bills, then households are not economically viable.  If 70% of the economy is severely stressed, the economy cannot be healthy.  In the long run, no amount of support The Fed provides to International Financial Institutions will suffice to save the economy because the very basis of the economy, the households (which operate, we emphasize, mainly in the world of tangible assets, not darkly liquid paper), will be increasingly at great risk.

Of course the problem is that none of these above prescriptions is likely to be followed any month soon.  Therefore, we will continue to see more darkly liquid paper-based businesses collapse and increasing Systemic Threat.  Some will be “rescued” like Bear Stearns and others (like Thornburg Mortgage Co. and Carlyle Capital both of which de facto went bankrupt) will not.  The list of casualties and The Systemic Threat will grow.

Deepcaster’s and Williams' analyses raise a further question which Williams does not address, but which Deepcaster shall address.  When the resulting (and now nearly inevitable) crash appears near, what "cover" or "incident" might the government and/or Fed leaders then in power, create via their “communications policy” to deflect the public’s justifiable rage away from the Numbers Manufacturers and Market Manipulators themselves, who caused the crisis in the first place?

The Cartel “End Game”

Deepcaster agrees with Williams that we are facing at an international crisis of unprecedented proportion.  It is also clear to Deepcaster that those who run the Fed-led Cartel cannot be so stupid as to not know where their hyperinflation of the money supply (according to shadowstats.com M3, as of June, 2008, was increasing at an annual rate of 16% which is nearly a four year doubling time!), and other bubble-crisis-creating policies are leading us.

Thus if The Cartel leaders know what they are doing, what is their “End Game?”

The only rational conclusion to draw is that they expect (and are likely even pushing) the U.S. Dollar to go into further and further decline, and to continue their other policies, until there is a Systemic Crisis.  (Very short-term, Deepcaster Forecasts the U.S. Dollar to “bounce” soon into the 3rd Quarter of 2008, but that does not affect the fact that the primary trend for the U.S. Dollar is down.)

And we expect that Systemic Crisis will likely, as Deepcaster pointed out in his June, 2007 Letter, and elsewhere, provide the catalyst to force implementation of this Nefarious End Game Plan.  One of several key components of this Plan would be the forced adoption of the “Amero” as a replacement for the U.S. Dollar.  For more details of this Ominous Plan, see Deepcaster’s Alert of 8/13/06 “Massive Financial-Geopolitical Scheme Not Reported By Big Media” and June, 2007 Letter “Profiting From The Push to Denationalize Currencies and Deconstruct Nations” in the Alerts and Letters Archives at www.deepcaster.com.

Fortunately, there is a Resolution in Congress (H.Con.Res.40) sponsored by Reps. Goode, Paul, Tancredo and Jones which would express Congress’ view that this plan should be stopped cold in its tracks.  But it is clear to us that The Cartel wants its Plan implemented with the Amero as its currency and that is where their monetary policy appears to be heading. 

The Key “Real Numbers” and Prospects as of June, 2008

That the U.S. economy (and thus the economies of many nations) is headed in the direction of Deepening Stagflation is pretty clear from the shadowstats.com June, 2008 statistics.  We reiterate, Real Consumer Price Inflation is running at nearly 12% a year and, as we commented above, the money supply figure (M3) is increasing at 16% per year, or a doubling time of just over 4 years.  Moreover, GDP growth is a negative number -- a minus 2% annualized according to shadowstats.com.  It would appear that The Cartel-charted-course toward a Hyperinflationary Recession/Depression is on course.

To be sure, this course involving a continuing explosion of the money supply (“money from helicopters” to use the phrase associated with Chairman Bernanke) and the massive and increasing use of Derivatives to intervene in a wide variety of markets is fraught with danger.  Deepcaster, Warren Buffet, Jim Rogers, and Jim Sinclair have all pointed out the dangers.  Indeed, Sinclair has aptly described the financial system as sitting on a “$20 trillion trembling mountain of derivatives…think Weimar Republic.”  Unfortunately Deepcaster, Jim Sinclair, Jim Rogers, and Warren Buffet are correct.

In sum, all of the aforementioned factors, coupled with The Cartel’s increasing use of Derivatives create an increasing risk of a Financial Meltdown.  We had such Harbingers of one with the credit market freeze up of August, 2007 and the mid-March, 2008 crises culminating in the demise of Bear Stearns, but The Cartel was able to rescue its major International Bank and Wall Street clients from this one.

So far The Cartel has staved off a Systemic Meltdown.  But, it will likely not always be so.

It is still not too late to reform the system, and thus preserve one’s freedom, wealth and country, but it is very late indeed.

Deepcaster

June 27, 2008

APPENDIX A

“Are You Banking At One of These Casinos?”

The Derivatives Time Bomb

The Sovereign Individual, Spring 2008

Derivatives were designed to help banks, corporations and countries hedge against risk.  But banks found they could make a killing by concocting more exotic derivatives that effectively bet on the future direction of interest rates, foreign exchange, commodities, stock indexes and sub-prime mortgages.  And since banks aren’t making money from traditional lending any more, derivatives are a fantastic new way to net huge gains.  And why not take some big risks when the Fed will “supposedly” back you – and the transactions can stay off the books – far away from the prying eyes of investors and analysts.  As we see it, America’s banks have turned into giant casinos.  And now this Giant Casino Economy has begun to splinter.  Are you banking with one of them?

     RANK                               BANK NAME                                                DERIVATIVES

                                                                                                                        (in U.S. Billions) as of 9/30/07

            1                                  JP Morgan Chase Bank                                                  $ 91,734.5

            2                                  CitiGroup                                                                       $ 34,004.1

            3                                  Bank of America                                                            $ 32,074.5

            4                                  Wachovia Bank                                                              $ 5,165.6

            5                                  HSBC Bank                                                                   $ 4,439.7

            6                                  Wells Fargo Bank                                                          $ 991.5

            7                                  Bank of New York                                                          $ 953.6

            8                                  State Street Bank & Trust Co.                                         $ 799.6

            9                                  SunTrust Bank                                                               $ 264.5

            10                                 PNC Bank                                                                     $ 260.3

            11                                 Mellon Bank                                                                  $ 181.8

            12                                 Northern Trust                                                                $ 153.0

            13                                 Key Bank                                                                      $ 116.1

            14                                 National City Bank                                                         $ 114.7

            15                                 U.S. Bank                                                                     $ 85.8

            16                                 LaSalle Bank                                                                 $ 60.6

            17                                 Merrill Lynch Bank                                                         $ 58.9

            18                                 Regions Bank                                                                $ 51.6

            19                                 RBS Citizens                                                                 $ 49.8

            20                                 Fifth Third Bank                                                             $ 47.1

            21                                 Branch Banking & Trust Co.                                            $ 46.5

            22                                 First Tennessee Bank                                                    $ 33.3

            23                                 Lehman Brothers Commercial Bank                                 $ 30.0

            24                                 Union Bank of California                                                  $ 28.4

            25                                 Deutsche Bank Trust Co.                                                $ 26.3

DEEPCASTER LLC

www.deepcaster.com

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-- Posted Sunday, 29 June 2008 | Digg This Article