Most journalism is a hit-and-run affair. We talk to sources, check facts, agree quotes, wrestle with editors and lawyers; the excitement builds up to the point the story appears…and then we drop the whole thing and move on. When I published my story on Goldman Sachs and Greece in July 2003, the almost-universal reaction was: EU member states were flouting the Maastricht Treaty with the help of investment banks – so what? We now know that what I uncovered eight years ago was a sign of the Eurozone’s rottenness. Over the last month, as Greece approached default, I’ve been lucky to have had a chance to revisit my story and uncover some new facts with the help of the BBC and Bloomberg. You can watch my BBC Newsnight film here;
the ten-minute film was directed by Mark Turner and the broadcast date was 20 February. My Bloomberg feature (co-authored with Elisa Martinuzzi) was published on 6 March and can be read here. It was the most-read story on Bloomberg’s website last week.
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[…] Goldman and Greece revisited | Nick Dunbar. […]
There are a couple of graphs you should all ponder on this site where I post as ‘rehypothecation’ – if you want I’ll email them.
http://www.mindfulmoney.co.uk/wp/peter-j-r-morgan/bad-traders-are-as-responsible-as-governments-for-the-current-sovereign-debt-mess/#comment-588749398
The first shows Fed, BOE, and ECB central bank lending rates over the past decade. The point to consider is this: why did Greek Debt balloon around 2007 after having remained stable for a decade? We all read in the media how Goldman Sachs, and JP Morgan taught the Greeks how to fiddle the books using swaps around 2001 ““ a neat trick involving fake exchange rates. But as you can see in the graph the debt remained the same or thereabouts from 1998 (pre membership) to 2007. By then Greece had joined the EU, and opted into the Eurozone, and the drachma was replaced by the Euro. Others joined the EU, and the Euro strengthened significantly on the back of dollar weakness caused by ballooning debt in the USA.
Now look at the Fed rate, clearly it ‘leads’ the BOE and ECB rates by about 6 months. Around this time, there are repeated jibes from the Fed and Treasury that Europe needs to drop rates and stimulate its’ economy, which in reality was doing just fine and consistent with a greying population and largely socialist region. The real problem for the EU is more subtle. In March 2006 the Federal Reserve stopped reporting ‘M3’ measure of money. Up to the point the Fed reported as follows:
M0: Federal Reserve notes, coins and bank notes.
M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits.
M2: Represents money and “close substitutes” for money. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements..
Mull on this for a moment. The United States Code of Federal Regulation states M3 is superfluous and therefore it’s a waste of money to report it. Clearly an outright lie and intended deception. M3 includes money held in Eurodollar accounts which don’t appear as part of the USA’s monetary base. What’s really going on?
Let’s recap, after the dot.com financial collapse, and from around 2001 the USA and in particular Goldman Sachs and JP Morgan are teaching relatively unsophisticated countries, without major financial centers like The City and Wall Street, how to cook the books. This allows the Greeks (and others) to disguise their debts, which effectively prevents markets from correctly pricing risk in the global markets. Life is good, and bankers are able to claim superstar status and get paid grotesque bonuses ““ all while 99% of America is in decline and paying for its debts using borrowing from China and elsewhere (As of today, 1/3 of all US government spending is debt ““ madness and it seems even idiots can get the Nobel Prize for economics!)
Now back to Greece. A year after the Fed stops reporting M3 there’s another crisis in the making. Subprime. The Fed and US Treasury know the United States is facing financial collapse, and it’s a matter of record that Hank Paulson literally gets on his knees and begs Bush for a Government bailout. And imagine what this situation means for the USAs competitors. Europe would become the worlds strongest economy! At the time of the 2008 crisis more trade was being done in Euros than Dollars, and several countries were starting to switch from trading commodities in dollars to Euros, this would only accelerate the ascendance of Europe whose socialist leanings are more in tune with China and Russia. So much for the far rights (Rove, Cheney et al.) ‘Project for the New American Century’. It was no coincidence that China’s maglev (levitation) train was designed by Germans.
The non-reporting of M3 allowed the USA to start QE programmes which in most countries would have caused rapid inflation. But not the USA, they could dump dollars in Eurodollar accounts with no impact on supply and demand in the USA. But what would that mean? Those dollars would need conversion into Euros before Greece, Portugal and Spain, etc. could spend them ““ this meant more demand for Euros and I suspect led to the rapid increase in the Euro exchange rate starting in 2002 and then kick-started in 2006. This resulted in a relatively rapid and damaging rise in the Euro which reached 1.6 from a base of 0.95. This conjecture is supported by the cartoon showing the exchange rate. Was this planned or an unhappy consequence? I would like to hear your views.