Why is the Economy Not Working? Don’t Just Kick the Tires, Look Under the Hood
Do you get the feeling that things are rattling and shaking, and about to come apart? As if out on a rocky, rutted road in an old, rusty jalopy—and the brakes and almost everything else might have just gone out?
Luckily, there is more than meets the eye. Our economy is coming apart, vibrating ever more wildly, and would appear to be in the process of tearing itself apart. However, we have solutions at hand, if we choose to apply them. We can even delineate the causes, if we open our scientific eyes.
So, let’s look under the hood of this “jalopy,” and see just what else is going wrong!
Coming out of COVID and the lockdowns, you experienced firsthand the lumber shortages, gas prices, housing prices, grain prices, cotton prices, and the rise in the NASDAQ. Inflation has been sending prices up everywhere. Then with the Biden collective’s announcement of sanctions against Russian oil and gas imports, and seizure of Russian foreign exchange reserves, all hell seemed to break loose.
Bear in mind that what we see there has come on top of already inflating prices. In 2021, global food prices climbed 31%. The Biden collective’s deliberate, wild-eyed attempt to shut down investment into oil and gas sent prices up further—with oil reaching a seven year high in November of 2021. Natural gas more than doubled to $6 per million BTU’s in September-October of 2021. In Europe, Liquified Natural Gas (LNG) spot market prices became eight times more expensive than those in the US. That was just in 2021. As President Donald Trump took to saying, “who ever heard of supply chains before?” The physical breakdown of the trans-Atlantic economies was already palpable then, long before the Ukraine crisis was brought to a head by the modern British Empire and their Biden minions in late February of 2022. In fact, the ongoing collapse of the producing side of our economy has been continuous since 1971.
Now, let’s take a peek under the hood, again, at a very significant part of the engine failure.
Commodities and the No-Future Market
We know what then happened when “Biden” suddenly made supplies of basic commodities disappear, and supplies and prices were turned upside down. The prices shot up and gyrated, then drifted, and then have risen again. Meanwhile, under the hood, commodity traders were sent scrambling to cover margin calls as they faced major losses and bankruptcy. Their losses were not from the price of the oil (or grain) at final sale, but from the margin calls they had to cover with their exchange or bank—adding up to millions and even billions of dollars.
What are the unfolding consequences for the real economy of our nation? Commodity traders—with their bank lenders—are pulling back from their “exposure” to commodities trading all together, and it doesn’t matter if it is oil, nickel or wheat. If you are a wheat farmer in Kansas, you may not be able to find a buyer for your wheat futures, even though the price of a bushel of wheat is now at record highs. This has almost never, ever happened.
As discussed in the financial press since March, the exchanges and brokerage arms of banks are demanding big down payments from commodity traders, and making further margin calls. All of this is exacerbating volatility and worsening shortages across the world. The trading companies have also begun unwinding their trades rather than holding their positions—seeking to avoid further multi-million dollar short-term losses. As they do so, the unloading of both futures and hedges send further shock waves through the markets.
US banks’ commodity trading desks had grown in prominence during the pandemic, amid heightened volatility in energy and metal markets. Because of the volatility and the breakdown of “supply chains,” more and more manufacturing companies are turning to financial derivatives “hedges” against threatening cost overruns and shortfalls in needed materials.
At the very same time, Goldman Sachs, Morgan Stanley, Citibank, and JP Morgan are now moving to reduce their “counterparty risk exposure” in commodity trading companies. As Bloomberg recently covered it, “Banks are No lifeline for Floundering Commodities Traders now.” These same lenders are also withdrawing financing from the now economically “fragile” trading and resource companies throughout the global South. Commodity trades and deliveries in the global South are already more costly in terms of shipping and insurance, and take more time to consummate. This occurs, not surprisingly, just as the globalist Malthusians cry crocodile tears over the spreading threat of famine.
The argument, in monetarist Economics 101 terms, is that the futures traders are there to “smooth out” the ups and downs, to minimize the risks to both producer and consumer. Now as sections of the futures market disappear—brokers and shippers, insurance companies and whatnot pull out of now sanctioned markets and likewise wonder who will be sanctioned next—commodity markets are becoming increasingly like one gigantic, global spot market: “You need it? Well, here is the price today, take it or leave it.” Chaos sets in. What, pray tell, is going to become the price of oil, or nickel, wheat, aluminum, palladium, or platinum next month? How much of these commodities are even going to reach the marketplace? This is the volatility we feel—that rattling and shaking—and it doesn’t seem to stop!
Again, this is no accident, no “happening.” And it is originating at an even higher level than the big money-center private banks in places such as New York and the City of London.
A telling, public example comes to us from Europe. The European Federation of Energy Traders (EFET), including some of the major oil and gas producers and traders such as Shell Plc, Cheniere and BP, issued a desperate plea in March. Tens of billions in cash flows were being diverted to cover hefty oil and gas margin calls. In an open letter they called on the British Empire’s central banks (such as the European Central Bank, Bank of England and US Federal Reserve) to quickly supply liquidity to the banks supporting various commodity trading platforms in Europe.
Their letter reads in part, “Since the end of February 2022, an already challenging situation has worsened and more energy market participants are in a position where their ability to source additional liquidity is severely reduced or, in some cases, exhausted . . . Market participants, clearing members and clearing houses are currently encountering major challenges in managing the impact of the current geopolitical situation. Massive price movements on European energy exchange markets have resulted in massively increased margin requirements for market participants.”
On April 1st, the European Central Bank announced that they declined to intervene to provide liquidity to European oil and gas brokers. As Zoltan Pozsar, Global Head of Short-Term Interest Rate Strategy at Credit Suisse, then wrote, “The ECB’s decision on Friday . . . shows not only an interesting twist of logic where the guarantors of price stability (commodity traders) are deemed peripheral from a financial stability perspective, without regard for what their liquidity problems mean for price stability. It also may show a disregard for financial history.”
To put this in plain English: This is fueling further chaos. It will mean further skyrocketing prices, hoarding, and shortages of energy, food, and metals worldwide. This is a policy coming down through the central banks, from the highest levels of the British Empire’s global central banking system. The command is that the green fascist agenda/Great Reset of Mark Carney et al. will be imposed, no matter what –the energy sector and all of its components will be financially starved to death. War, drought, and disease will—if they have their way—otherwise serve this purpose.
Simultaneously, there is a globalized resource grab. The biggest trading companies, led by Glencore (“an Anglo-Swiss multinational commodity trading and mining company”), Vitol and Mercuria Energy, have already morphed into mining, and are hoarding energy assets. The biggest have also secured multi-billion dollar revolving credit lines with those banks wishing to engage in the most profitable, predatory, speculation. Banks, as reported out of the City of London by the International Financial Review, have stepped up with “innovative financial structures,” including “liquidity swaps.” If a trading company finds itself short of cash to meet the margin call, their derivatives “hedges” can be transformed into over-the-counter credit lines to meet the margin call. Of course, the trading companies’ futures contracts (hard commodities) will then default to the bank if and when the trading company’s bank credit line or loan is exhausted.
Your Neighbor’s Stock Market Investment
The same policy is now to be applied to the stock markets. Former head of the New York Federal Reserve, William Dudley, intoned in a guest column in Bloomberg on April 6th, “. . . The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable.” As Dudley was summarized by Market Watch:
. . . Unlike many other economies, the U.S. doesn’t respond directly to changes in short-term interest rates, Dudley said, partly because most U.S. home buyers have long-term, fixed-rate mortgages. But many U.S. households, also in contrast to other countries, have a significant amount of their wealth in equities, which makes them sensitive to financial conditions.
Dudley’s call for the Fed to inflict losses on investors stands in contrast to the longstanding notion of a figurative Fed put, the idea that the central bank would halt monetary tightening or otherwise ride to the rescue in the event of heavy losses in financial markets . . .
Just to be clear, William Dudley is not some retired Fed bureaucrat. He ran the New York Federal Reserve—the actual policy-making core of the Federal Reserve central bank—from 2009 to 2018, having already served as chief U.S. economist at Goldman Sachs.
Making the same point, Bloomberg just featured a story on Wednesday, April 27th, titled Stock Rout is Fed’s “Best Case Scenario” as Powell-Put Era Ends. The article reads in part, “the now 12% drop in the S&P 500 this year combined with the plunge in speculative high-growth equities can be seen as a validation of hawkish monetary efforts . . . ”
You Cannot Leave Your Family’s Future Hanging on This!
Commodity traders, almost all operating for clients with borrowed money, have been buying and selling millions of barrels of oil, metals, shiploads of grains and other commodities, day-in and day-out, with the total number of futures and options traded on exchanges worldwide reaching 46.77 billion contracts in 2020. The largest own (at least on paper!) their own reserves, storage facilities and carriers, including Liquefied Natural Gas (LNG) tankers and proprietary LNG infrastructure. They are a choke point, valued at over a trillion dollars in annual revenue and purportedly controlling more than half the world's freely traded commodities. They buy and sell in the global futures markets—in the City of London, New York, Chicago, Dubai, the Netherlands—based on pricing projections months out, utilizing software with algorithms which attempt to build-in supply & demand trends, shipping routes and availability, geopolitics, currency gyrations, and the weather.
What does a commodity trade involve? For example: Source 2 million barrels of crude oil out of West Africa, finance the purchase, find a way to get that crude to a port; charter a tanker, inspect the tanker, pay tariffs, load the crude, insure the cargo, ship it across the ocean, make sure everything goes smoothly, and hedge the cargo properly. Then have a vetted buyer set up—or have confidence that you'll be able to find a buyer—and pay any import tariffs. At the same time, you have to be reasonably assured that the physical market you trade in won't go against you despite the fact that you’re hedged. (Is the spread between Bonny Light crude (Nigeria) and LLS (Louisiana Sweet) going to change while the tanker is enroute?)
So, the entire futures contract is leveraged and pyramided. The paper value of these futures contracts is extremely large, and futures traders don’t pay the nominal value of the contract up-front. Instead, the trader/trading company posts a “margin” of between 2% and 10% of a contract’s total value. This is a kind of ‘performance bond’ that might ensure the trade will meet the contractual obligation, regardless of the final price the trader gets. After the initial margin amount is posted, the value of the trade is then “marked to the market” on a daily basis. If the amount of money in the margin account falls below the minimum maintenance level set by the exchange or clearing house, the trader will be required to post additional margin.
The derivatives hedge is insurance of sorts, in case the price of the commodity turns downward. However, a hedge isn’t insurance, it is a bet, intended to offset potential losses on the futures contract. If the price continues to go up, the counterparty in the hedge makes his own margin call. “You could lose on this hedge big-time, so I want to see money up-front.” However, if the price of oil goes down, the bank that loaned, or otherwise arranged the money for the original futures purchase, will itself make a margin call, as the commodity trading company has apparently paid too much for future oil delivery, and it will not be able to sell it without a loss. Today, this is a kind of Russian roulette. That is, unless your global trading company, based in Singapore or Switzerland, is “front running” the trade—based on inside information.
So what did the modern British Empire do when they went to war against Russia? They blew up their own globally over-extended, broken-down, pasted-together system of speculation—and they did so deliberately! As they knew they could. As the avatar known as “Biden” then mouthed on March 26th in Brussels, Belgium, “It’s going to be real . . . . The price of the sanctions is not just imposed upon Russia. It’s imposed upon an awful lot of countries as well, including European countries and our country as well.” It occurred after the previous effort to impose the Great Reset had failed, particularly in the United States, Russia, China, India and most of the developing sector.
It is a deliberate policy intent on destroying American living standards—and the living standards of the rest of the world! It does not have to be and must not stand. And, as we can already see, in the rejection of the British/Biden war on advanced energy and its Russian sanctions policy, more than half of the world already rejects this path to suicide.
True Value versus Fictitious Monetary Price
The key here is a return to the American System and national banking. This requires an awakened citizenry demanding and enforcing this as the essence of an effective government. As economist and statesman Lyndon LaRouche emphasized, “. . . in a rational economy, prices are not set by anarchic free trade, but by human boundary conditions imposed upon the economic process as a whole. These boundaries, by their nature, must be set chiefly by governments.” The solution is certainly not in new globalized, unelected regulatory bodies and on-high rationing, or in the “magic” of digitalization in commodity trading! Junk the jalopy and re-create the American System of political economy!
We, the People, must deliberate and impose these boundaries, these fitting, moral strictures which will allow our real economy to truly function. Central banks cannot conjure up new productivity, or new resources for our nation. Their speculative financial values, imposed on human lives and commodities both, cannot even begin to touch upon the true value of our most precious and deployable resource—human creativity. This innate creativity is what LaRouche PAC in conjunction with the MAGA movement, seeks to unleash when it calls for a Third American Economic Revolution. Such is the wellspring of LaRouche PAC’s national resolution, “Abolish the Fed, Restore National Banking.”
As Lyndon LaRouche rigorously presented more than twenty years ago,
“These protectionist, regulatory measures have two indispensable benefits for any economy whose government is sane enough to impose them. First, they provide direct or indirect protection to the income-levels, and therefore to the potential productivity expressed by households of operatives; this, combined with rational taxation policies, ensures that the incurred price, by government and the private sector, of maintaining the desired level of potential relative population-density, is secured. Second, in so acting, governments create the market for those medium-to-long-term public and private capital investments, on which improvement in the potential relative population-density depends.
Promotion of the general welfare, which is an integral part of the fundamental constitutional law of the U.S.A. – if recently a flagrantly violated obligation – demands that those measures which are needed to ensure the improvement of the potential relative population-density of the nation, per capita, and per square kilometer, are taken. This includes public works which no private entrepreneur could undertake as a business proposition; clear, on this account, is the responsibility of the sovereign government for the conditions of life and work of all of the people and of all of the territory of the nation.