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The global casino meets the millennium bug by Scott Champion

Investment finance specialist Champion discusses investor psychology, the roles of government, banking and large global speculators in today's stock markets, and what may happen in the year 2000. (2520 words)

Atlanta, USA Investors are a curious group. Individuals each, they have a strong tendency to adopt the feelings of the group. This herd mentality leads to those rare events known as manias, and their opposite, panics and crashes. As a result of this collective behavior, investors will always be over-invested in stocks at important market high points and under-invested at major lows. Traditional valuation measures, which allow investors to compare different markets over time, indicate that the US stock market is more than twice as overvalued as before the 1929 and 1987 crashes. Not surprisingly, US households have more financial assets committed to the stock market than at any time in the nations history.

Manias result when the normal ebb and flow of the marketplace is interrupted. Such an interruption occurred in October 1987 when the US stock market crashed and the government intervened to save the financial system, thus sowing the seeds of the current mania. The public has little understanding of how close the entire financial system was to a total implosion on that day. Banks quit lending to the stockbrokers on the afternoon of the crash. The financial futures markets were "frozen" due to liquidity problems. Only a commitment by the US Federal Reserve (Fed) to provide the necessary money to all banks that could not settle their transactions at the close of business encouraged the banks to resume lending to Wall Street. This agreement to cover all losses, plus the injection of a tremendous amount of money into the futures markets by a "mysterious" stranger, provided the necessary liquidity to circumvent the financial crisis. Banks no longer had to worry about every other bank in the system being able to balance and settle their transactions at the end of the day, many of whom were known to be in trouble from their Wall Street lending practices.

In domestic and international banking, it is a requirement that every transaction must balance and settle at the end of the day. In order for this to occur, every participant must be able to make good on its commitments. The international payments systems such as CHIPS (Clearinghouse for International Payments), which is the US-based computer system for international money flows, requires that every debtor bank meet its obligations and every creditor bank receive correct payment. This interlocking web of debits and credits is one of the primary features of the international banking system. A bankruptcy by one or more participants would result in what Fed Chairman Alan Greenspan has called "cascading cross-defaults". It was this possibility that motivated Greenspan to cobble together a bail-out of the Long Term Capital Management (LTCM) hedge fund with its hundreds of billions of dollars worth of interlocking bank debts in the second half of 1998. Sixteen US banks were on the edge of default as a result of excessive lending to LTCM.

Hot money

Government intervention establishes in the minds of large global speculators (international banks, brokers, and hedge funds) the belief that the central banks will always step in to save the financial system from collapse. This leads directly to imprudent risks being taken by these market participants in order to earn outsized gains in the global stock, bond, commodity, and currency markets. The larger the participant and the larger its speculation, the more certain that entity can be that the central banks have no choice but to bail out any declining investment which, if allowed to collapse under its own weight, would endanger the financial system.

It is this knowledge that leads the large speculators, seeking the greatest returns, to invest in countries such as Russia, Indonesia, Malaysia, Thailand, and South Korea. (True investment, which is direct investment, occurs when Honda builds an automobile plant anywhere in the world, for example. By contrast, the trading of stocks, bonds, and currencies is speculation.) This so-called hot money flows into the domestic stock, bond, and real-estate markets of various countries. The countries that are on the receiving end of this money-flow enjoy for a time a rapidly expanding economy, rising stock markets, and an appreciating currency. Typically, while the future looks promising, the government will borrow heavily to fund infrastructure improvements needed by the rapidly expanding economy.

The problem with hot money is that it is always searching elsewhere for higher returns. When these speculators move to cash in their gains, a currency crisis is born. As the central bank begins to lose its currency reserves to the withdrawing speculators, the over-inflated stock, bond, and real-estate markets collapse. By this time even marginal global speculators, seeing the countrys weakness, are acting in concert to bring about the collapse of the country in order to make large profits for their trading accounts.

This process is eerily reminiscent of the techniques employed by famous stock manipulators of the 1920s. These rich speculators would pool their money, run up a stock to attract the attention of a public looking for "action", then sell out to the newly created demand, leaving the public holding an empty bag. Today, these global speculators are using the same techniques, only instead of making thousands or millions, the stakes are now tens of billions for a successful manipulation.

The techniques of collusion are as old as trading itself. However, this game is now wrecking the lives of hundreds of millions of human beings. In almost every country this type of behavior is illegal, but in the unregulated international finance industry anything goes.

Historically, markets of all types have been self-correcting. Booms lead to busts, which lead to recovery, which eventually lead back to booms. Not an ideal system to be sure, but one where economic forces had some natural constraints on their activity. This self-correcting mechanism has been short-circuited by government intervention. The current stock-market mania owes its longevity to this series of bank, hedge fund, and International Monetary Fund bail-outs. The US Government champions free-market economics all over the world, but at the same time it intervenes whenever it becomes necessary to ensure the survival of its economic system.

Intervention and free-market theory are polar opposites. If governments truly believed in free markets, they would do nothing to prevent stock-market crashes and would not provide money to wealthy speculators who took excessive risks. Losses would be allowed, even championed, as playing an important role in maintaining balance, fairness, and the long-term health of the system. The US Goverment believes in a managed economy, but at present it is only managed for the exceedingly well-to-do.

Y2K on the horizon

Because of the enormous amount of leverage (debt) in the US economy, there is little chance the government will suddenly abandon its intervention in markets. It simply cannot afford non-action. Any sizeable decline in the US stock market would be countered by monetary and fiscal stimulus to prevent any such decline from becoming catastrophic. There is ample recent history to support this conclusion. However, on the horizon is an event which the powers-that-be may be unable to affect  the much-publicized Y2K crisis.

There appears to be a concerted effort by US banking regulators to shape public opinion on the Y2K issue. When one understands the nature of fractional reserve banking and the limited amount of currency available to depositors in every country, it is easy to understand why. Fractional reserve banking means that banks keep only a small amount of depositors money in reserve and lend out the remainder. A typical bank, worldwide, holds 15 to 20 per cent in reserve assets but little in the way of actual currency. Theoretically, if all depositors demanded their money simultaneously, the banks could return only this 15 to 20 per cent of total deposits. If every depositor simultaneously demanded cash there would be almost nothing to distribute to depositors.

In the US banking system, cash reserves held by banks total $35,000 million. This amounts to $130 per person. Sparked by Y2K fears, a regional bank run, much less a national bank run, would clean out the banks in a matter of hours. Realizing this, the US Government, as are most of the worlds governments, is printing an extra supply of currency. The US goal is to have $200,000 million on hand if the need arises. Combining these two amounts one finds that the US banking system will have in cash approximately $875 per person (not including currency in circulation which is needed for the smooth functioning of the everyday economy).

This is very little money in the event of a panic or national bank run, and the number assumes that businesses will not withdraw money to protect their interests and that people will not hoard. If either of these situations arises, currency available per person will be reduced by an unknown amount. This potentially critical situation is why I believe the US Government is managing information to the public about this issue, assuring everyone with increasing frequency that the banks are fine and there is no need to worry. In Japan, the Government is printing $350,000 million worth of yen. This is approximately twice as much as the US, but Japan has about half as many people.

Japans largest banks, eight of which are ranked in the top 20 in the world in terms of size, started late on Y2K remediation and have far to go, despite government protestations to the contrary. According to the governments own figures, the entire Japanese banking industry is committed to spending an amount equal to what three major US banks are spending. These US banks have worked on this problem for a considerably longer time, devoted many more resources, are working with US programmers with US-based programming languages and, as of 30 June, were still not compliant (despite government protestations to the contrary). This does not bode well for the Japanese and, since the Japanese are the principal lenders to the world, it does not bode well for the world. The rest of Asia, with its two-year economic crisis, is even further behind. Africa, Latin America and Russia lag as well. Europe is in a position similar to the US, but its technical resources have been diverted to the launch of the Euro.

Fix on failure policies

The Y2K problem is an enormously large and complex issue. Its effects may be anywhere from relatively minor to far-reaching. The interconnected and interdependent nature of life today gives pause for thought, when one imagines the many possible permutations. Anything linked together as a system, such as power companies, telephone companies, water/sewer utilities, energy companies, and banking (the list is almost endless) is vulnerable to some degree.

Imagine a large company such as General Motors with its 60,000-plus suppliers. As do most of the worlds multinational companies, GM uses a just-in-time inventory. A certain percentage of its suppliers will not be Y2K compliant. If this stops the delivery of key components to the assembly line, how long will it be until work must be halted? If GM were to lay off workers, how would this affect the local economy where GM assembles automobiles? How would it affect the national economy? The company itself has indicated that it has over 2,000 million lines of computer code to check and correct if necessary to become compliant with Y2K requirements.

Embedded chips are another problem not often mentioned in the media. These chips are found hard-wired into all sorts of manufacturing, distribution, and control systems such as valves, switches, safety cut-offs, pipelines and well-heads. They cannot be corrected by a software solution as can many of the worlds mainframe computers, and some of them are in places difficult to access. Experts in the field now believe this problem will not be nearly as bad as was first feared. There are an estimated 80,000 million of these chips in use in the world. A very small percentage is expected to fail; however, one-tenth of 1 per cent is still 80 million. Many industries, such as the oil and gas industry, are adopting FOF (fix on failure) policies. There are too many of these chips to do otherwise.

On 1 July 1999 US Senator Robert Bennett, in charge of the Senate Special Committee on the Year 2000 Technology Problem, stated on a television interview that 98 per cent of US federally-insured banks were Y2K compliant. I subsequently phoned US banks at random to verify the accuracy of this announcement. My informal poll found no banks that were claiming compliance other than the handful that have officially declared. Many others said that they were "close" or "almost there". They have been saying this for quite some time now. I know this because I have been phoning for quite some time. When a company, especially a bank, achieves compliance, they announce it loud and often. Beyond the banks, as of May 1999 not a single US Fortune 500 company had announced compliance. The US, with the exception of some European countries, is far ahead of the rest of the world in Y2K remediation. Undoubtedly, many companies and government agencies will succeed through Herculean last-minute efforts, but some will not.

In the end, Y2K is likely to be more about the cumulative effects of bad data than about computers shutting down in their entirety as a result of a single bad date. We live in the information age, and anything that interrupts the flow of correct data is bound to have some effect. Whether that effect will be as minor as the Government wants you to believe, or as apocalyptic as the alarmist Y2K doomsday industry wants you to believe, remains to be seen. Both of them have an agenda. The Government wants to avoid a panic and bank runs, and the doomsayers want to sell newsletters and survival supplies. Knowing this, the truth is likely to be somewhere between these opposing viewpoints. There will be some problems, but humanity, ever resourceful, will adapt.

Global trade will likely slow in the year 2000 as a result of Y2K; a global recession is probable. At some point, the worlds stock markets will decline significantly  this year for certain if a panic ensues and bank runs develop anywhere in the world. It will be next year if there is no panic and the problems are severe enough to slow global trade.

Mass psychology runs rampant with investors emotions, and a bank run anywhere in the world will likely lead to runs everywhere. Be aware, however, that stock markets are anticipatory mechanisms and usually turn down when everything still looks good. The market begins to decline, and no one knows why. The news event comes later. The only exception that I know of was 1929, when the market and the economy turned down together. In the US we still enjoy what the financial press refers to as the "goldilocks economy: not too hot, not too cold  just right". Perhaps it will be the millennium bug that gets in the porridge and ends this long and destructive fairytale known as the free-market economy  free if you are rich, but costly if you are poor.

Scott Champion, a Share International co-worker in the US, has a degree in investment finance and 20 years' experience investing in international markets, including derivatives.

This article is from the September 1999 issue of Share International.

-- Helium (Heliumavid@yahoo.com), October 01, 1999

Answers

Very informative article. Hucksters of all types are getting rich off the fear factor which suits them fine. Government, however, may have another, hidden agenda that may account for it's almost total lack of response to the global and national crisis. This administration in particular is highly suspect. There are too many agenda's that have been derailed by observant and alert grassroot committees.

Let me count the ways (in no particular order):

a) national id card b) national health care c) global disamament d) national soveriegnty e) individual privacy f) global government g) ????

Why don't I believe that we are simply faced with a benign and indifferent government that is simply incapable of a coordinated and intelligent response to the global Y2K crisis? Let see.. we can mobilize thousands in only a few months and bring a foreign power to its knees, but we can't coordinate a viable response to Y2K with YEARS of warnings? I think not.

Could it be that these events may provide the catalyst for more government intervention in our daily lives? Watch and see... I think so. I also think this article concentrates on what government wants us to concentrate on while stopping short of examining the truth of why we are being lied to.

A Klassic Klinton Kaper actually. Just like when he tore off the head of that journalist who wanted to know about Chinese campaign contributions, deflecting the line on inquiry... belligerantly and arrogantly demanding that the media should be investigating the FBI and not him... Don't you dare try to uncover the real truth, not yet... Stay tuned folks, it's just getting interesting.

-- Ray (shusters@montanasky.net), October 01, 1999.

The oncoming events are a clear threat to the power and wealth of the international bankers, who really run things around the world, with lieutenants like Clinton acting for them. If things go as badly as they could, these bankers could be out in the woods with the rest of us, and all of their gold will do them no good.

For me to believe that these people would risk their current security by nurturing this Y2K thing so that they could enslave us is ludicrous, as we are already pretty much enslaved.

Additionally, it takes a little stretch of imagination to think that they could neve seen the possibilities when the 80 column card was introduced in the 1940's, and then pushing this scheme along for fifty years to its final success in our enslavement.

Consequently, it is highly unlikely that Y2K is the result of any grand conspiracy.

It is the result of our own stupidity and avarice, and nothing more.

dave

-- dave (wootendave@hotmail.com), October 01, 1999.

Dave, you might have missed my point. We've known about the Y2K problem since the 70's. I knew in the early 80's as a federal programmer. Nobody was willing to listen then. I forget who was doing the work, but someone was trying to tell the government way back in the 70's and 80's that things were going to go south - but nobody listened. The point is, we've had the time and the resources, but they weren't utilized. Why? Benign indifference?

Furthermore, Y2K offers an unprecedented opportunity for those who seek more power and more control. Just look at all the so-called anti- terrorist legislation that gets passed with every new atrocity by some idiot. At every opportunity, this administration flexes it's collective muscles to take away more and more from each and every one of us. Why won't they take advantage of Y2K? The fact is, they will and are, right now. There is no other logical explanation that I can think of for the complete lack of accountability to the people. There is something that stinks in the air and it's starting to pervade everything.

Lastly, nothing is an isolated incident, everything is connected in ways which we don't always perceive at first. By waiting for crisis, Clinton and Company can set the stage for almost anything. The people will demand it all back... and will give up anything and everything to do so.

So far, its been incrementalism for the last umpteen years, with large strides being thwarted by the people. Now we have this historical opportunity, what exactly do you think might happen? Your asking me to trust my government to do the right thing. Isn't the evidence already in? Haven't we already seen enough proof?

-- Ray (shusters@montanasky.net), October 01, 1999.

I didn't miss your point, Ray, but you missed mine. I merely said that the really powerful people (the international bankers) would not think of pushing along a scheme (such as Y2K) that has the possibility of destroying them and all of their wonderful wickedness, and I further suggested that they were probably not clever and consistent enough to bring it all about.

But then in your first paragraph, you restate the point that I made, although unknowingly. To quote "The point is, we've had the time and the resources, but they weren't utilized. Why? Benign indifference."

Exactly. Benign indifference in combination with laziness, stupidity and avarice. No sinister conspirator was standing in the shadows and preventing us from getting on with the work. But is was the profit motive and the consideration of "backwards retrofitable software" that stopped the correction program that should have began long ago. The corporate world in its entirety acted like lemmings. And while I often damn thes people for behaving as they do, I certainly cannot identify the entire population of corporate America as conspirators as you seem to believe.

Sure, Government screwed up plenty, and government leadership on the Y2K issue has been lacking, and there has been some considerale deviousness in Koskinen's position. But I would think that Koskinen's behavior (awful as it appears to be) is a local, low level thing between Clinton and Koskinen, rather than a grand global conspiracy.

Remember, Clinton is but a puppet, as he himself stated in a speech that he made in Ireland about two years ago.

I don't trust the government either, Ray, and I am certainly not asking you to trust them to do the right thing, whatever that is.

At this stage, the government need us more than we need them.

Sure, Strobe Talbott, Albright, Kissinger, and several thousand rotten others make a lot of noise, and produce a lot of evil thoughts, but they would do this in the total absence of lY2K.

-- dave (wootendave@hotmail.com), October 02, 1999.

Dave has stated the INCREDIBLE TRUTH about a Y2K collapse. If the infrastructure fails we're headed for total everybody shooting at everybody else anarchy, rather than martial law under the NWO.

-- Cigarette Smoking Man (csm@smoke.ing), October 02, 1999.

"I didn't miss your point, Ray, but you missed mine. I merely said that the really powerful people (the international bankers) would not think of pushing along a scheme (such as Y2K) that has the possibility of destroying them and all of their wonderful wickedness, and I further suggested that they were probably not clever and consistent enough to bring it all about."

The "really powerful people" won't be destroyed by Y2K, any more than they were by the '29 crash. They see the coming flood and have headed to higher ground. Governments have been induced to sell gold... who is buying? Government's computers may not be ready, but the troops have been getting urban warfare training for months. We are told to prepare for a 3 day storm while the government builds $40 million bunkers. There is a cleverness and consistancy here... but it is not benign.

Oh.. and to Ray's list of "too many agenda's that have been derailed by observant and alert grassroot committees" I would add the attempt to control world food supply by genetic engineering (in particular the Terminator technology). Roundup-ready seeds and Terminator seeds demonstrate that the agenda of seed giants like Monsanto is NOT to feed the world's hungry, but to assure corporate profits at the EXPENSE of the world's hungry. Possibly this agenda has been derailed by consumer pressure... hopefully so. But it is one more indication that the agendas are anything but benign.

-- Linda (lwmb@psln.com), October 02, 1999.