A RETURN TO THE 70'S? An Indepth Analysis of Current Economic Events
by Joan M. Veon, CFPINTRODUCTION
For years we have seen fashion's come and go. You can only do so much to a coat, dress, skirt, pair of trousers, etc. In men's fashions, there was the recent trend to have three buttons instead of the usual two on the jacket. Interestingly enough, the new fall fashions are a return to the sixties and seventies. In light of the rising oil prices, the drop in the euro and the change in the stock market, the real question is, "Are we seeing a return to the 70's economically?" The following is presented for your serious consideration. I have spent about forty hours in research in order to present to you the strong similarities which I see between then and now. Because of the economic structural changes and market volatility, it is important to study what happened then and to compare it to now.
REVIEW
For ten years I have been tracking the fall of the dollar against the yen and Deutsche mark (now replaced by the new regional currency, the euro). While I have been cognizant about the fact that at some point there would be a switch from the dollar as the world's reserve currency to the euro, I did not have a clue as to how this would happen. As early as March 1998, I discussed "Economic Regionalism and the Euro and the Dollar" in which I said that the world was being divided up into "economic regions in order to manage it from an international perspective." I discussed the birth of the Free Trade Areas of the Americas (FTAA) in March 1998 which is a free trade zone like that of Europe. The dollar is the regional currency for all of the Americas which includes Canada, the U.S., Mexico, Central and South America. Before the euro was birthed, I wrote, "While no one can predict exactly how the dollar will be impacted, it is a safe bet that there will be a change from its current value. As Europe changes from the use of the dollar to the euro, as central banks exchange their dollar reserve for euros, and as American and foreign corporations switch to the euro to do business in Europe, it is reasonable to say that it will impact the value of the dollar in a considerable way. What this means for you and I is that it will take more dollars to live. The Federal reserve in order to attract and keep foreign investments in U.S. Treasury bills, notes and bonds, will have to raise interest rates higher than other countries in order for the dollar to remain attractive. This will increase our cost of living." Now we will discuss the nuts and bolts of this transfer. Then I would not have projected or even understood how the right situation could have been created, now I do.
No Accountability
In order to put into perspective exactly what is happening with the shift from the dollar to the euro, we must understand how the world's currencies were changed so that they float against one another without any underlying commodity. The best authority is Dr. Carroll Quigley who was Bill Clinton's mentor at Georgetown University. Dr. Quigley wrote an 1100 page account of history called Tragedy and Hope which was published in 1966. This is an incredible book for those who want to know how history has impacted our society today. He wrote, "Valiant efforts were made in the period [between] 1919-1929 to build up an international political order quite different from that which had existed in the 19th century. On the basis of the old order of sovereignty and international law, men attempted, without complete conviction of purpose, to build a new international order of collective security" (Quigley, 315). (emphasis added)
As we read from his book, we will see that the world financial infrastructure before 1910 which was based on gold, had to be changed from a system of accountability (gold) where the amount of money a country had in circulation had to line up with the amount of gold in their vaults in order to maintain a stable currency, to a NEW paper system of no accountability so that the those in charge of the monetary system could print paper money without having to balance the books. In the new paper system, the inability to balance the books is now reflected in the demand for a country's currency which is based on trade deficits, interest rates, and the desirability of its currency.
By converting to paper, the international/merchant/investment bankers (who are the rulers of the world's wealth) were able to completely dominate the financial system of the world and make it work in a manner that would make them money irregardless of interest rates, the value of currency, or the amount of money in the system. This ability can be equated to the "Emperor's New Clothes." They believe they can do anything and make it work, even though there is no real math behind the figures. See Central Banks. What Quigley had to say about capitalism, gold, and paper money is prophetic to what is happening today.
Federal Reserve
If someone wanted to control the monetary system of a country, how would they do it. Answer: By setting up a separate monetary system that would parallel and eventually overpower that of a given country. In addition, the Congress or parliament would have to pass legislation agreeing to a new monetary system (governed by a private corporation called a "central bank"), which citizens would be told is "good for the country and the economy."
The role of central banks should always be kept in mind when trying to understand economic events. As we have noted in a number of previous newsletters, the monetary system of the world is not controlled by individual governments but is in the hands of private corporations which are owned by "international bankers." The private corporation which controls the monetary system in the United States is called "the Federal Reserve." Unfortunately, it is not federal nor does it have reserves. How would you like to go out to your backyard and pick money off of a tree? Wouldn't it be marvelous? You would not have to account to anyone for how you spent the money because you could always go out to your money tree and pick more. If that sound ridiculous, it is not to central bankers because when they need more money, all they do is print it up, sell it to the Treasury in return for IOU's or Treasury bills, notes, and bonds which are debt instruments. In return, they then charge the people of the United States interest on the money they have lent them (government) which was printed out of thin air! If you think I am wrong, then you read Tragedy and Hope, and other books which we will list at the end of this newsletter.
Dollar Devaluated as Gold in Currency Reduced then Eliminated
In 1914-1939, U.S. Federal Reserve Notes were covered by gold certificates to 40% of their value. This was reduced to 25% in 1945 and today is anywhere from 6% to 10%. "Throughout modern history, the influence of the gold standard has been deflationary because of the natural output of gold each year which has not kept pace with the increase in output of goods. Only new supplies of gold, or the suspension of the gold standard in wartime or the development of new kinds of money (like paper notes and checks) which economize the use of gold, have saved our civilization from steady price deflation over the last couple of centuries" (Quigley, 57). This is the reason for paperyou can print and print and inflate values.
As a result of the international/merchant/investment bankers who dominated both business and government through interlocking directorships, holding companies, and lesser banks, they were able to engineer amalgamations and reduce competition until by the early 20th century many activities were so monopolized that they could raise their noncompetitive prices above costs to obtain sufficient profits. "The power of these international bankers reached their peak in 1919-1931 when Montagu Norman [governor of the Bank of England] and J.P. Morgan dominated not only the financial world but international relations and other matters as well. On November 11, 1927, The Wall Street Journal called Mr. Norman 'the currency dictator of Europe'" (Quigley, 62).
"In the United States, Financial Capitalism was achieved when the structure of the financial controls created by Big Banking and Big Business were built with one corporation being built on top of the other. Quigley cites two financial powerhouses: J. P. Morgan (banking) in New York and the Rockefeller family (big business--Standard Oil) in Ohio. Between 1909 when there was only one billion dollar corporation, U.S. Steel, controlled by J. P. Morgan to 15 in 1930. By 1930, the 200 largest corporations held 49.2% of the assets of all 40,000 corporations in America or 22% of all the wealth in the country (Quigley, 72)!
Their influence was so great that the "Morgan and Rockefeller groups acting together, or even Morgan acting alone, could have wrecked the economic system of the country merely by throwing securities on the stock market for sale and, having precipitated a stock market panic, could have then bought back the securities they sold at a lower price" (Quigley, 72). Eighty years later, this is still more than true.
Has the possibility subsided that any one or two major groups working together or alone who could wreck the economic system of the country? Unfortunately, no. If anything, these very same corporate giants have only gotten bigger and more powerful. How far do we have to look? The mergers and acquisitions which have been going strong in our economy since the beginning of the 1990's provide us with the proof. How many mom and pop hardware stores, gas stations, office supply, five and dime, etc., have gone out of business because they could not compete with the prices of Home Depots, Sams, WalMarts, Staples, etc.? The laws which originally were to guard against monopolies have fallen by the wayside with the merger of Mobil Oil and Exxon in 1999. In 1910, the government felt they were too strong and passed anti-monopoly legislation demanding they be split up. Ninety years later, they are reunited. Also, let us consider the buyout of Amoco by British Petroleum! Could it be that the British have a new weapon--mergers and acquisitions?
In addition, we are now seeing a merger between business and government through "public-private partnerships." These new partnerships, unfortunately, are the new cornerstone for Bill Clinton's "Reinventing Government" program which has been sold to the American people as a way of reducing expenses and saving taxpayers money but no one has explained that through a public-private partnership the representative government, as provided by our Forefathers in our Constitution, is bypassed. Furthermore, in a public-private partnership where corporations have all the money and governments all the debt, the power sharing can be skewed as a result of "who has the deepest pockets."
Roosevelt Begins the Gold Separation
President Franklin Roosevelt was elected on his "New Deal for the American People" program. His first act as president on the day he was inaugurated, March 4, 1933, was to declare a national bank holiday beginning March 4 through March 12 in an effort to stem the tide of banks which had declared bank holidays of their own due to the number of people withdrawing their savings in gold.
On April 20, Roosevelt passed the Emergency Banking Act of 1933 which took Americans off of the gold standard. It ended (1) convertibility of notes into gold was ended for Americans and only applied to countries holding our gold-backed dollar certificates and, (2) private ownership of gold was made illegal but those owning rare or older gold coins were exempt because they were coin collectors. In essence, the American financial system was transferred from a system of accountability based on gold to one in which there is no accountability because it is paper currency which can be manipulated.
It appears, from what we have seen so far that gold gets in the way of complete and absolute monetary control. It also appears that taking the world off of gold between 1914 and 1971 was the first step in instituting complete monetary control as the best mechanism for this control is a system of paper where there is no accountability and where the amount of money in the system creates either inflation or recession/depression.
Dollar Named Reserve Currency
In 1944, under the aegis of the United Nations, 700 delegates from 44 countries met to determine the value of money in the post World War II era, met in New Hampshire where the beginning of an international global monetary system was hammered out. Besides the International Monetary Fund and World Bank being birthed, the dollar, which had the highest amount of gold reserves backing it, was named the international reserve currency of the world. What this meant was that all of world commerce would use dollars to trade and all other currencies would be linked to it at fixed exchange rates. In addition, these countries could convert the dollars they held at any time to gold, if they chose to do so. Because of the reserve currency status, our currency is held by all of the central banks of the world and used to facilitate daily commerce around the world that we have not had the kind of inflation which should accompany our high deficits.
Nixon Finishes Gold Separation
Realizing the inflationary trend as a result of the high cost of the Vietnam War and the fact that America started to print money, it was French president Charles de Galle who decided to ask that the dollars his country held be converted to gold. By this time, due to other countries before him asking for gold, our gold reserves fell from $30B in 1944 to $10.367B by June 12 1968 when he paid President Johnson a visit. France was the last country to be paid in gold before President Nixon severed any ties our currency had to gold on August 13, 1971. The countries which had not converted their dollars to gold ended up with a treasury full of worthless paper now called "eurodollars." As a result of these actions, these dollars are still floating around the world. By 1973 all of the countries of the world, with the exception of Switzerland, went off of the gold standard.
Control of the Central Banks
As we have seen, Quigley points out that it is possible for one or two very powerful groups such as the Morgans and Rockefeller's to completely control our country's monetary system. The follow-up question is, "If they could control the United States, think how easy it would be to control all of the countries of the world?" This system of centralized control in the hands of one mega-bank was realized in 1929 when the Bank for International Settlements was created.
Quigley wrote, "[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations.
"Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world (Quigley, 324).
"In each country the power of the central bank rested largely on its control of credit and money supply. In the world as a whole the power of the central bankers rested very largely on their control of loans and of gold flows. In the final days of the system, these central bankers were able to mobilize resources to assist each other through the B.I.S., where payments between central banks could be made by bookkeeping adjustments between the accounts with the central banks of the world there. The B.I.S. as a private institution was owned by the seven chief central banks and operated by the heads of these, who together formed its governing board. Each of these kept a substantial deposit at the B.I.S. and periodically settled payments among themselves by booking in order to avoid shipments of gold (Quigley, 324).
"The B.I.S. is generally regarded as the apex of the structure of financial capitalism whose remote origins go back to the creation of the Bank of England in 1694 and the Bank of France in 1803. As a matter of fact, its establishment in 1929 was rather an indication that the centralized world financial system of 1914 was in decline. It was intended to be the world cartel of ever-growing national financial powers by assembling the nominal heads of these national financial centers (Quigley, 325).
"The commander in chief who controlled the world's banking system was the Governor of the Bank of England, Montagu Norman. In January 1924, Reginald McKenna, who had been chancellor of the Exchequer in 1915-1916 [and who had moved on to become] chairman of the board of the Midland Bank, told its shareholders, 'I am afraid the ordinary citizen will not like to be told that the banks can and do, create money...And they who control the credit of the nation, direct the policy of Governments and hold in the hollow of their hands, the destiny of the people'" (Quigley, 325).
"On September 26, 1921, The Financial Times wrote, 'Half a dozen men at the top of the Big Five Banks could upset the whole fabric of government finance by refraining from renewing Treasury bills'" (Quigley, 325). Quigley called them investment bankers, international bankers or merchant bankers and wrote, they "remain largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful and more secret than that of their agents in the central banks" (Quigley, 326).
As a result of this power, these men had "control over the flows of credit and investment funds in their own countries and throughout the world. They could dominate the financial and industrial systems of their own countries by their influence over the flow of current funds through bank loans, the discount rate, and the re-discounting of commercial debts, they could dominate governments by their control over current government loans and the play of the international exchanges" (Quigley, 327).
Summary
What we have just seen is that a paper monetary system has no accountability and allows those in control to print without balancing the books. Furthermore the United States was weaned from gold in two stages. First in 1933, President Roosevelt outlawed personal gold ownership but allowed foreign countries to continue to hold their gold-backed dollars which could be converted into gold on request. Second, as a result of too many requests and a severe reduction in our supply of gold, President Nixon discontinued the exchange of gold-backed dollars into gold in 1971, thus changing the world's monetary system. For the first time in history, the currency of all the countries of the world, floated instead of being convertible to gold! At the same time an international structure of monetary control began to emerge. In 1944 the International Monetary Fund and the World Bank were birthed which would be used to transfer monetary and financial control from individual countries into one monetary system. Lastly, the central brains of economic and monetary direction would come from the "central banks' bank" which is the Bank for International Settlement located in Basel Switzerland. At the annual BIS meeting in June, they declared, "It's Europe's time to grow."
As we continue to parallel the events of the 1970's with those of the 1990s, you will see that the above is important in order to understand the implications of what is occurring. In June, I attended the annual meeting at the Bank for International Settlements. There the Managing Director, Andrew Crockett, made a most astonishing statement in connection with the fact that the United States has experienced 107 (through May) months of growth. Crockett said, "you cannot discount the possibility of a hard landing. Many previous expansions have ended with a hard landing." He said that "It is Europe's time to grow." Interestingly enough, all of the factors which contributed to the 70's are re-occurring today. When you understand how they are being played out, you will also understand the modus operandi by which "Europe will grow."
THE 1970'S AND TODAY
The topics which we must discuss include: Currency, Gold, Dollar, Interest Rates, Trade Deficit, Israel, Oil, the Stock Market, Treasury Bills, and Defense.
Currency, Gold and Dollar
As already seen, it was Presidents Roosevelt and Nixon, acting 38 years apart who were responsible for changing the monetary system of not only the United States but the world. By taking our currency off of the gold standard, they opened the door for un- accountability, inflation, and a global system of paper which plays one currency against another while wreaking havoc with the lives and fortunes of the citizens of that country. When Nixon severed the dollar from gold in 1971, he threw the world into economic chaos. The dollar which was the recognized "reserve currency" of the world began to lose it value and position in world supremacy. Furthermore, during the seventies and eighties it would be devalued in order to bring it into "parity" or equality with the other major currencies of the world. In 1973 the dollar was worth 3.66 Deutsche marks and 3.57 yen. By 1987, it was worth 2.50 Deutsche marks and 2.64 yen. By 1996, it was worth 1.47 Deutsche marks and 1.05 yen. By early January, 1999, the dollar was worth 1.69 Deutsche marks and 1.11 Japanese yen, a drop of 54% and 69% respectively. However if you use the euro's birth rate of 1.17 to the dollar which replaced the Deutsche Mark, it is a devaluation of 68%
Today, twenty months after its birth, the euro has dropped to .84 on the dollar or a loss of 30% and 25% against the yen, precipitating the first monetary crisis of the 21st century. This crisis has been exacerbated by the increase in the price of oil. We are told that, unlike previous monetary crises, the euro has not dropped in value as a result of financial alchemy conjured up by speculator's like George Soros, but analysts say it is because of the outflow of euros from Europe looking for green pastures. We are told that "As much as $1B a day in foreign investment capital has been flowing into the U.S. in recent months in search of higher returns. Much of the European investment in the U.S. is coming in the form of corporate takeovers of U.S. firms. The weak euro helps hold down U.S. inflation by keeping the prices of European imports low but hurts U.S. exports to Europe by making them more expensive. In 1999 U.S. corporate purchases of European companies fell 29% while deals in the other direction rose 32% to $193.2B" (Financial Times-FT , 9/8/00, E1). Imagine that! In all the year's of American companies buying up foreign companies, I have never read where the value of our dollar dropped because too many were flowing out of our economy!
Some say that if the euro's fall was not reversed, it would have a "sharp and destabilizing correction against the dollar in the future." For this reason, the Group of Seven Finance Ministers, along with the Central Bank Governors, decided on the eve of the IMF/World Bank meeting in Prague to intervene. Their communique said, "We discussed developments in our exchange and financial markets. We have a shared interest in a strong and more stable international monetary system. At the initiative of the European Central Bank (ECB), the monetary authorities of the United Stated, Japan, United Kingdom, and Canada joined with the ECB to intervene in the exchange markets because of the shared concern." The Financial Times reported that the decision to intervene lies with the Treasury Secretary alone in consultation with the Federal Reserve Board and the Federal Reserve Bank of New York.
As a result of this floating see-saw, every time the dollar is strong, other currencies are weak which means their products are more attractive than U.S. products which puts them at an advantage. With a strong dollar, we end up importing more, and exporting less making our trade deficit fatter, thus adding to our economic imbalance in the world. As a result of being a reserve currency were all countries maintain a healthy stack of dollars to use if their currency devalues or to buy oil and other major commodities, our federal deficits have been "covered" by them. Should countries dump our dollars, not only would our currency devalue further but it would force the Federal Reserve to raise interest rates in order to lure new monies to America or keep foreign monies here in order to cover the shortage between our debt and the amount of money we actually have.
Lastly, I know gold has looked like an absolutely lousy investment over the last ten years or so, but the fact remains that gold is a tangible and has great value. Gold does not depreciate or rust, it is a store of value as it maintains its value. From Biblical days, all of the traders in the world used gold, animals, clothing and jewelry to trade with. In 1999, numerous central banksLondon, Switzerland, and others sold large quantities of gold thus depressing the gold market and dropping its value to 30 year lows. At a 30 year low, it would be extremely cheap for anyone who has a lot of money and who understands the coming shift in world finances to accumulate. I called the World Gold Council to find out who was buying all of the gold which was being sold by central banks and they told me they had no way of finding out because many third parties buy for the real purchasers. When will gold lose its shine? Only when diamonds lose theirs.
Euro
With the birth of the euro on January 1, 1999, it became the first currency of the 21st century to be partially backed by gold! Although it only has a 15% backing, that is more than any other currency. This means that as gold rises in price, the value of the euro will rise. It also means that more countries will want the euro for a reserve currency because it is backed by a tangible whereas the dollar and yen have no backing.
We must ask ourselves if severing the world currencies from gold was done only to rape, rob and pillage the economic valuables of individual countries so that the big boys could then "rearrange" at a later date who has power and who does not. This is a out-right blatant transfer of world domination from the dollar to the euro! It appears that even our own government agrees with this agenda for if they did not, they would have protected the dollar and our financial future from the hands of these international marauders.
In an editorial by Steve Hickel entitled, "Dollar Reserve Currency on the Wane: Can Iraq's Policy affect the U.S. dollar and Euro", he states,
Iraq decided to no longer accept dollars for oil. In my opinion, we will see the dollar having to bid for euro's instead of oil directly. That will reverse the current euro-dollar relationship. It will create a high demand for euro's causing a higher euro valuation; the dollar will significantly devalue against the euro by 30% or more. Since the euro is market-aligned with gold which represents 15% of its current value, the price of gold will also rise in dollars and euros. As gold changes in value, so too will the euro change. Gold will become a proportionately higher percentage of backing for the euro as gold rises (lowers). If the euro, as a result of gold derivatives and because of its market-tie-in with gold prices and low external debt would find itself backed by more gold as a percentage, it would strongly devalue and replace the dollar with the euro as reserve currency, thus devaluing the dollar by 50% or more. It is possible that other oil countries could follow Iraq's lead by allowing payment in dollars or euro's for oil. This dual payment system would be too attractive for European countries to pass up and would therefore open the door to significant dollar holdings being converted [sold] to euro's. Eventually this would lead to the euro as becoming the preferred choice in oil payment currency because the currency value is earmarked to gold's market value and would represent a less inflationary and stronger long-term value to the oil interests.
Is this what Crockett meant when he said, "It is Europe's time to grow?" Only time will tell.
Interest Rates and Trade Deficit
Interest Rates
Interest rates are used to slow an economy or to make it more attractive to foreign investors. In the United States, the Federal Reserve has increased interest rates since June 1999. While they have not raised rates since May, that does not mean that they will not raise them in the future. Should foreigners who hold Treasury Bills decide they can get a higher return elsewhere, the only way to retain their savings would be to increase our interest rates. At some point, however, rising interest rates will impact the stock market.
In October 9 BusinessWeek editorial, they said, "Foreign investors have pumped more than $3.3 trillion into U.S. financial and business assets since 1995. If the country slips into a technology recession, accompanied by inflation and a falling stock market, overseas investors will want to get out, putting further downward pressure on the dollar. The Fed will find itself under great pressure to defend the currency by raising rates. (p.226)." In an interview with William White, BIS Economic Director, he said, "In a situation of rising interest rates, particularly accompanied by lower asset prices, people who had been banking on the stock market to support their pension fund would be forced to retrench."
Trade Deficit
As previously mentioned, our trade deficit started in 1973 when our exports became too expensive overseas and imports became cheaper for us due to the fact that our strong currency would allow foreigners to import more of their product at a lower rate. Back then the deficit ran $20B for the year. Twenty-seven years later, the current trade deficit now comprises 4.5% of our Gross Domestic Product. For the month of July the trade deficit surpassed the old record of $30.4B to a record $31.9B. So far this year, it is expected to reach $353.7B. Off and on we hear about how bad this is for us, yet our Congress does nothing to remedy the situation. Yet BIS Managing Director Andrew Crockett said this past June, "One of the imbalances which we face is on the current account side with the U.S. current account deficit [trade deficit] which has been covered by even larger capital inflows putting upward pressure on the currency and those larger capital inflows have been driven by the perception of profit opportunities in the U.S. either through physical investment or through investment in financial assets. No country goes on indefinitely with a large currency account deficit." Interestingly enough imported oil increases our trade deficit and so does foreign money coming in to buy American corporations! Do we have a noose around our necks?
Noted economist Abby Joseph Cohen at Davos told me in January that with regard to our trade deficit, that we don't count our exports. She said, "This may seem very strange to you but we do a much better job of counting our imports than counting our exports, and that many people believe that we are missing at least 10% of our exports." Why is it if we can send a man to the moon and do very sophisticated maneuvers in space that we don't know how much we export...or who is buying our Treasury bills (See Treasury Bills)?
How would our trade deficit be turned around? A weak dollar. A weak dollar would make our products cheaper and we would export more. Sadly enough, our currency has already been depreciated 66%. By weakening our dollar further, it puts us in the category of a third world country! Unfortunately this floating currency system has many "two edged swords." You can't win. If your currency is high then your products are more expensive to export and no one will buy them. If your currency is weak, your products are cheaper to export because other currencies are stronger and they will buy more. Which countries do we have the largest trade deficit with? China #1 at $7.6B and Japan #2 at $7.5B. Why would you want to hang Christmas ornaments made in China on your Christmas tree? Time to buy American.
Israel and Oil
Israel
Israel happens to be as large as the state of New Jersey and yet, it is always in the news! Partly because it is located in the Fertile Crescent and is home to all of the world's major religions: Christianity, Judaism, and Muslim faiths. In 1973 the United States sided with Israel in the Yom Kippur War and endured the wrath of the Muslim countries which happen to control the world's oil supply through the OPEC cartel when they raised oil prices. That created high interest rates and high inflation with a lowermuch lower stock market. In addition, that was the year that the U.S. went from a trade surplus to a trade deficitwe import more than we export. Furthermore when the Shah of Iran fell in 1979, the West went through a second round of very high oil prices with higher interest rates, higher inflation, and a lower stock market. It appears that we have the same kind of combination today. While it may not, as of the writing of this newsletter, involve the U.S., the OPEC countries have been raising oil prices for the last year. Oil has risen from a low of $10 bbl. to a high of over $32 bbl.
Oil
Next to the yellow gold, black gold is also important and key for world growth and expansion. The world at this point cannot operate without oil. All of industry, cars, and homes are dependent on oil and oil products for heating and operations. Several months ago when Bill Clinton was asked what he was going to do about high oil prices, he said, "We will just have to develop alternative energy." This is the answer to the prayers of the environmentalists who have locked up America's oil and gas reserves under large tracks of land called National Parks, National Forests, or National Wildlife Refuges. It is not that America does not have heating resourceswe do, but then again, cheap forms of energy like coal were locked up by the environmentalists who lobbied for Congress to put so many regulations on independent and smaller coal producers that most of them, over a period of time, ended up going out of business. The headache was not worth the pains of regulation coupled with the ups and downs of the coal market.
In the 1970s America did not have a national energy policy and sadly to say, after our experiences then, we still don't have one. Some of the news in 1973 read as follows, "The Saudi Arabian oil minister told Western executives that if the U.S. undertook to resupply Israel's fighting forces, they would cut crude-oil production by 10% at once and by 5% a month thereafter" or in 1980, "Texaco Raises heating Oil price 6 cents." Unfortunately the headlines today resemble those from the 70s: "Profits caught in oil-euro squeeze," "G7 Countries ponders common oil policy, Energy and foreign oil dominate campaign, and Winter fears for US supply of heating fuel."
America did not have enough refineries in the 70's and we don't have enough now. Even with the release of the strategic oil reserves, U.S. refiners say it will not calm the oil markets. "The combination of exceptionally low inventories of distillates
which include home heating oiland low inventories of natural gas, could turn into an explosive situation in the north-east U.S." (FT, 9/20/00, 28).
The Senate has introduced S.2557 to reduce America's dependency on foreign oil sources by 50% by the year 2010.
It states, "in order to meet this goal, this comprehensive energy strategy needs to be multi-faceted and include enhancing the use of renewable energy resources (including hydro, nuclear, solar, wind, and biomass), conserving energy resources (including improving energy efficiencies), and increasing domestic supplies of nonrenewable resources (including oil, natural gas, and coal)." Why is America behind the eight ball when we have been a leader in so many areas? In an article on the Internet dated 9/29/00,
"Intervention will foster higher oil prices," Azteca de Oro writes, "By Gore releasing strategic oil reserves is in direct conflict with normal supply/demand dynamics. It will delay the recovery of the oil market to its normal level which will put off the real correction and solution to the problem. If the government subsidizes oil like a totalitarian state, since subsidies come from tax receipts of the citizen, we pay. Oil companies will face uncertainty in their decisions. By using SPR, the government paved the way for higher oil prices. Next year with our vulnerability unchanged, oil will continue to be used as a weapon to force the price of oil down. This will leave th U.S. vulnerable in the event of any disruption in future production. Why would oil producers want to pump more oil if it is going to fall in price? The international oil industry is trying to recover from the recent state of ruin it was in. Clinton is firing the last shot before winter arrives.
Lastly, when the OPEC ministers met in Venezuela on September 28 for the first time since 1975, they issued the "Caracas Declaration" which is a 20 point manifesto setting out the cartel's goals Interestingly enough they chose to make third world debt one of their issues. "They urged 'industrialized countries to recognize that the biggest environmental tragedy facing the globe is human poverty.' It declared 'economic and social development and the eradication of poverty should be the overriding global priority.' Venezuelan President Hugo Chavezan activist leader who has been carving out a role for himself as a voice of the Third world declared, 'This heavy burden of debt hampers development more than the circumstantial prices of oil'" (Washington Post-WP, 9/29/00, A22). Surprisingly enough, I did not think that we would see the debt reduction of third world countries in an OPEC communique. They, too, have politicized the agenda of the World Bank. This makes us wonder if OPEC is also blackmailing Congress to order to get it to give the World Bank $435M?
In the October 16 BusinessWeek, economist Robert Kuttner says that the $435M for the World Bank has been held up in the Senate by Senator Phil Gramm who wants a few restrictions added to the money. He suggests that the protestors at the IMF/World Bank meeting in Prague pay a visit to Senator Gramm. Is this a replay of 1998? Will we see the Nasdaq rise 1800 points?
Stock Market, Treasury Bills
Stock Market
In 1973, we only had one major stock market, the Dow Jones. As a result of the oil embargos, high interest rates and inflation, stocks tumbled 35 to 45% during that time. The darlings were oil, gas, precious metals, and defense stocks. During those years an 14 point drop was considered major. However, the Dow was under 1,000 for all of the 70's.
In 1999, the Nasdaq became a major player competing with the Dow Jones when it achieved a one year return of 86.5%. Up until that time, it was important but not major. I remember a Wall Street commentator on CNN saying on January 3, 2000 that its spectacular rise caught "everyone by surprise." Less than four weeks later I was in Davos Switzerland to report on the powerful World Economic Forum. In the March newsletter I wrote about the polarization between the CEO's from the brick and mortar corporationsthe blue chips and those from the internet companies. The blue chips have been around a lot longer than the New Economy and they were not amused by the brashness of the "Internet buck-a-roos" who said, "You ain't seen nothing yet." When the Nasdaq took a hard fall of 1800 points after reaching 5000 one month after it had reached 4000, I was upsetnothing structurally or fundamentally had changed. I questioned the wisdom of deciding when a stock was overvalued if you had a willing buyer and a willing seller. Yes, I know all about price-earnings which had been thrown out the dooruntil they decided they should bring it back into use.
I also questioned the real reason for the drop. In 1998, the Dow suffered a similar drop. After doing extensive research, I wrote a very in-depth newsletter in which I connected the drop to threats by Rubin, Greenspan and Clinton to the Congress to give the International Monetary Fund a $18B bailout. Sure enough, when the 1998 Omnibus Budget Bill was passed, it contained the $18B. Within two weeks the stock market gained back most of its losses. I basically said that this time the World Bank needed a bailout of $435M to help third world highly indebted poor countries. That still may be an underlying reason for all of the volatility in the Nasdaq. The ease and tranquility of the horse and buggy days is completely gone.
The Nasdaq has recovered three times since the April drop. Each time it has hit or passed 4000. The last time was a 12% increase to end the third quarter. However, the Nasdaq is down 20% since the end of August. These peaks and valleys have wreaked havoc with investor's nerves. With the drop in the euro and rise in oil prices, the big concern now is corporate earnings. (Joe from CNN when announcing Xerox was expecting lower profits declared, "This is TOTALLY UNACCEPTABLE." Wonder what his cash flow is like?) Obviously they are down. This has played a major part in the new round of market losses. Are we on a downward spiral? In an article taken from the Internet and published in the International Herald Tribune on October 1, Conrad de Aenell writes
The Nasdaq is the world's largest market with volume 10 times what it was a decade ago and far higher than the NYSE. On Friday a worldwide tech sell off followed Intel's warning of slower than expected sales in Europe. When the Nasdaq peaked in March the price-earning ratio was at 260 which is 8 times the index's average PE from 1986-1997. Even if the stocks fall another 80%, it would still trade at its average price/earnings ratio of the last 14 years. The average growth earnings in the tech sectors for the last five years has been 5%. The notion that technology is a perennial growth industry is drawing skepticism.
Given the above volatility, I had honestly thought that when the Senate passed the Permanent Most Favored Nations Trading Status for China that the Nasdaq would have a strong rally of 200 plus points. It went up 130 points that day which was wiped out in two trading sessions. When you sell your soul you expect to see some immediate benefits.
Lastly, how do you get Europe to grow? Andrew Crockett suggested: "(1) Greater opportunities in Europe, (2) a change in investor expectations in the U.S., and (3) the U.S. economy slows to a more moderate pace." It appears, given the above, that all three have been incorporated into the U.S. stock market. There is no doubt in my opinion that Europe is one of the places to invest. In order to protect ourselves, we will be forced to invest in it.
Treasury Bills
For those looking for safety, Treasury Bills, notes, and bonds have been a safe place. Back in the 1970s the only people who owned our treasuries were Americans. Did you know that the Chinese are the #3 purchasers of our debt and may be in the second spot but the New York Federal Reserve reports that they have no way of knowing who is buying our Treasuries through American banks domiciled overseas. Back in 1990 as a result of the Desert Storm, the Saudi Arabians were in the number one position. Wonder who is there now?
Defense
In the 1970's we were coming out of the Vietnam War and we were supplying Israel with fighter jets. Defense stocks did extremely well. Today, America finds herself with insufficient defense. Since Desert Storm, Clinton has committed the United States to fight two dozen UN peacekeeping operations including Kosovo. As a result, our troops, weapons, and equipment are worn out. In addition, the U.S. has been downsizing the military in accordance with United Nations goals for demilitarization of the world. With regard to our depletion, the following is only partial.
In the 1940s America had 97 Aircraft carriers, 18 battleships, 3 battle cruisers, 79 light and heavy cruisers, 367 destroyers, 200 submarines, and 998 amphibious attack pieces, totaling 1803. Today it is less than 226 as two of our ten aircraft carriers are not operational. NAVY TIMES says that only 40% of the non-deployed squadron's F-14 fighters are flyable because pieces have been removed and sent to squadrons at see. The Army has 743 Apache attack helicopters. It was reported in March 2000 that as of December 1999, we only had 177 which were combat ready. In comparison, when the U.S. Navy hit the Japanese in the Marianna Islands in June 1944, they used 535 ships including 156 carriers, including six big Essex class carriers (Source: Early Warning Report).
In July I had a tour of Polk Air Force Base and talked to an Air Force mechanic who specializes in the C130 transport. He told me that they do not have enough of these transports and that the Air Force has to ship him around the world to fix them since they are short of specialized mechanics.
Most recently in a letter to the Editor in the September 7 Washington Post, the writer wrote, "To carry out the 78 day air war [Kosovo], the Pentagon needed to mobilize two wars' worth of equipment, intelligence, surveillance and reconnaissance critical for the bombing campaign. For example, the Pentagon had to pull together all of its instructor personnel for Joint STARS surveillance aircraft, disrupting its training pipeline for years. Kosovo also had an important effect on real-world mission. With key assets such as tankers and jammers rushed to Kosovo, the Air Force had to temporarily shut down its no-fly operation over Northern Iraq, a constant drain on our forces, but hardly a major regional war."
The following is taken from Forecast International 1999. "The conflict in Kosovo will have a significant impact upon the future procurement patterns for fighter/attack aircraft for the U.S. and its NATO allies. Increased used of the F-16s and other aircraft at rates greater than would occur in normal peacetime conditions may well accelerate reductions in the remaining service life of these aircraft. Before the conflict, the U.S. Air Force had indicated that the structure of its Block 40/42 and earlier F-126s will not meet the required 8000 service life. Helicopters have played a minor role in the NATO campaign.
The US Navy's EA-6B electronic jammer is being seriously overburdened by increasing requirements to escort B-2 and F-117 aircraft. Currently the Air Force under-estimated its needs and is in need of 50 additional jamming platforms to perform its expanded operations. Kosovo has underscored the need for additional systems such as the Joint Surveillance and Target Attack Radar System, an airborne electronic wide-area surveillance suite installed in a modified Boeing 707 transport and other pieces. Desert Fox, the December 1998 attacks on Iraq and Kosovo have seriously depleted the U.S. stock of cruise missiles. The Air Force fired more than 90 Air-Launched Cruise Missiles from B052 bombers."
Lastly, one of my clients is in a key position with a testing laboratory. He tells me that the government has asked his firm to test the metal used in air refueling tankers, the last of which were built in the 1960s. The Air Force plans to fly them until 2035 because they can't get the money to design and replace them. The typical air frame is designed for 20 years but now the Air Force is looking at an 80 year life. I think you get the picture. We are dependent on foreign oil, we have a strong currency, the euro is at a historic low, and our defenses are down. In the last six months defense stocks are up an average of 60%.
How will Europe grow? At the expense of the U.S. stock market and dollar. When most of the major corporations are transnational, it makes no difference to them. Are we returning to the 70's? If the above is orchestrated, then words and actions no longer have meaning. The above is summarized in the following chart. For those of you who want suggestions as to where to invest, call 301/432-7511. A COMPARISON BETWEEN 1970 AND 2000
1970'S 2000 CURRENCY August, 1971 - Nixon severs the last tie between gold and the dollar, officially allowing the dollar while other world currencies follow suit, FLOATING against one another on a supply/demand basis for the first time in all of human history. As a result the 70's see two major currency crises prompting world currency markets to be closed on two occasions while central bankers hammer out a new global policy. Because the dollar is three times stronger than the German Deutsche mark and the Japanese yen, it is determined on two occasions during the 70's that it be devalued. In 1973 the dollar was worth 3.66 Deutsche marks and 3.57 yen. By 1987, it was worth 2.50 Deutsche marks and 2.64 yen. By 1996, it was worth 1.47 Deutsche marks and 1.05 yen. By early January, 1999, the dollar was worth 1.69 Deutsche marks and 1.11 Japanese yen, a drop of 54% and 69% respectively. However if you use the euro's birth rate of 1.17 to the dollar which replaced the Deutsche Mark, it is a devaluation of 68%
CURRENCY January, 1999 - The euro was birthed as a result of the merger of 11 individual countries become one politically and economically. Interestingly enough, while the other world currencies are backed by faith and trust in them, the euro is backed by 15% gold, putting it at a real advantage over the other two world currencies. Making Europe one is part of the long-term goal of melding the world into one political and economic unit. Currently there are three currency zones: the dollar for the Americas, the euro for Europe and the yen for Asia. Between January 1999 and September 2000, the euro dropped 30% against the dollar and 25% against the yen. [In the long-term this fits into their goals to change the strength of the U.S. and shift some of its growth to Europe.] As a result of the euro weakness, the dollar is the strongest currency in the world, thus making our imports cheap and our exports expensive, adding to our overall trade deficit. See stock market.
GOLD - As a result of severing currencies from gold, the 1973 oil embargo and the fall of the Shah in 1979, and the currency markets undergoing major structural adjustments, the price of gold rises and becomes the hot investment of the 1970s as people shift to a tangible, for safety and security. The price of gold reached $808 oz. In 1979. GOLD - Because of the Asian crisis and central banks selling gold, the price drops to a 30 year low in 1999 of $230 only to rise to a high of $320 in September before it drops back. So far gold has not risen in response to the high price in oil, however given the fact that the euro is backed with gold and there could be a shift to it by oil producing countries and a major shift out of the dollar. DOLLAR -The dollar starts to lose its supremacy as a strong currency and as a reserve currency when Nixon takes the dollar off of the gold standard . Many countries which kept gold certificate dollars in their vaults as a form of safety to secure the value of their currencies faced the grim prospect that the dollar was nothing but a piece of paper. The dollar has been a "reserve currency" which means it was used as the currency most countries traded in or bought with. If the dollar is no longer the reserve currency, then there is no reason for most countries to keep a supply of dollars. DOLLAR - As a result of the euro being partially backed by gold, the world stage is now set for a "transfer of wealth" from the U.S. to Europe. Iraq has announced that they will buy oil in euros which means the stage being set for other oil producing countries to buy in euros. A downhill slide of the dollar is possible as the world recognizes it is no longer a reserve currency and as they look to reduce their supply of dollars. It would appear that this action would impact our stock market in a major way as America is reduced in strength and in industrial power. INTEREST RATES - In order to protect our stock markets, the Federal Reserve starts to raise interest rates to all time highs. In 1980, prime rate rises to 22% as a result of the 1980 Monetary Deregulation Act being passed. INTEREST RATES - In an effort to shore up the euro, the European Central Bank has increased interest rates in Europe. A weak euro means that transnational corporations have lower earningsand higher interest rates means that it costs more to do business which also impacts their earnings. Since June 1999 Alan Greenspan has tried to the slow the economy has raised interest rates six times but to no avail. TRADE DEFICIT - The U.S. went from trade surpluses to running trade deficits, i.e. we exported more than we imported. In the early 70's, our trade deficit ran $15-20B a year. The dollar and stock markets came under attack because of the deficits. During the 70's and 80's we closed our steel mills and transferred steel manufacturing to Japan and China. We now import it back. Everything which comes into the U.S. adds to our trade deficit. If an American corporation manufactures something in Europe or Asia and imports it, that counts. If foreign money comes in to buy T-bills or stocks, it increases our trade deficit. TRADE DEFICIT - Our trade deficit is now running at $25 - 30B a MONTH. Our total trade deficit is $353.7B or 4.5% of Gross Domestic Product, more than what we spend on defense. The two countries in which we import more than we export are China (#1) and Japan (#2). On occasion, when Wall Street feels like it, they use the trade deficit to spook the markets. It usually works. ISRAEL - The United States decides to support Israel in 1973 at the time of the surprise attack during the Yom Kippur War. As a result the Arab oil countries which are known as OPEC, protest by raising the price of oil to new historic highs. The price of oil soars to new highs, over $50 bbl. ISRAEL - Israel is at the center of the news again. This time it is over the most sacred religious places revered by all of the world's major religionsthe Temple Mount. At this point, we cannot tell if it will involve the U.S. in any kind of military action. The 10 year oil high is unrelated to the Temple Mount situation. OIL - For the first time in modern history, the OPEC countries decided to use oil as a weapon. They were effective as the price rose from $2.50 bbl. In 1973 to $11 bbl., inflation rose to 11%, interest rate to 12% and the federal deficit to $70B. In 1979 oil went from $13 bbl. To $35 bbl., inflation rose to 16%, and interest rates to 22%. OIL - As a result of lows reached in 1999 as a result of the Asian Crisis which also accounted for new lows in gold since demand dropped. OPEC has been raising prices for a while. This puts the U.S. in a awkward position. Home heating oil is in the process of reaching all time highs. Gore has recently tapped the Strategic Petroleum Reserve to reduce the impact of higher prices during the winter. The problem is that this oil is crude and needs to be refined. During the last 12 years the environmentalists have not allowed another refinery to be built. We find ourselves, again in the SAME position as the 1970s: VULNERABLE, short on energy, not enough refineries, and with no National Strategic Oil Defense plan. CORPORATIONS - During the 1970s, the multinational corporation was in its infancy and the transnational corporation had not been birthed. In its place was the prototype: the conglomerate. While there has always been trade overseas, we were king. We had superior products which the Japanese and others, after they imported sufficient American products, said they could improve and duplicate. Our first real global competition was with Japan whose product was cheaper and in many cases better. NASDAQ was an embryo. CORPORATIONS - As a result of the floating currency and the advantages it has presented to U.S. corporations, may have chosen to build plants outside of the U.S. The tearing down of borders economically, financially, through trade, and commerce, has helped corporations to become TRANSNATIONAL (TNC) they are above sovereignty and allegiance to any one country. Their allegiance is to profit and power instead. Internet companies derive 30% of their sales and revenues overseas. The low euro has cut into their profits and those of the TNCs. In addition, higher energy prices and interest rates will all contribute to the drop in profits which will and is contributing to a lower stock market. STOCK MARKET- During the 70's, a 8 - 12 point drop in the Dow was considered pretty substantial. Only a very small number of American households owned stock. Mutual funds were just beginning. As a result of the price of oil, a flight to gold, and high interest rates, the stock market dropped 35% to 45%. Gold, defense stocks, natural gas and energy stocks were king. STOCK MARKET - Today most people are married to the stock market. Their mood depends on if the market is up or down. 44% of Americans own stock. It has become an American preoccupation. Corporations are now involved in public-private partnerships and are basically helping to run services which the government use to run. We have two markets: brick and mortar or the Dow Jones stocks and the internet/technology stocks as represented by NASDAQ. We are told that the reason for the low euro is that European companies are busy buying American corporations since their currency will buy more dollars. As more foreign dollars come in, the deficit gets bigger and the dollar stronger. TREASURY BILLS - Only Americans owned U.S. government debt. Viewed as the ultimate source of safety, United States treasury bills have always been considered the perfect place for safety. TREASURY BILLS - As a result of the 1980 Monetary Deregulation Act, foreign governments can buy our treasury bills. During the Kuwait-Iraq war, Saudi Arabia purchased large quantities of our debt. Today China could possibly be the #2 purchaser of our treasury bills, having moved from the #3 position they occupied after Hong Kong was transferred to China. If they get mad at us, the question is will they devastate us by selling their T-bills? The next question is, "Is the drop in the stock market a way to get investors back into t-bills to protect in case China should sell? DEFENSE - The U.S. had a stronger defense in the 70's. We were in the middle of the Viet Nam War. Defense stocks did well. The last of our air refueling tankers were built in the 1960s. The typical air frame was designed for use in Viet Nam and now is old and outdated. B52s, designed in the 1950s and 60s, were old when used in Vietnam and today are all we have. DEFENSE - America finds herself with the smallest armed forces in history, with old, out of date equipment, and with no weapons. In the 1940s we had 1803 aircraft carriers, battleships, cruisers light/heavy, destroyers, frigates, amphibious attack and submarines. Today we have 226 with two aircraft carriers not operational. After sending our military to fight two dozen UN conflicts, our equipment is completely worn out. Since the NASDAQ dropped in April, defense stocks up on average 60%. Sources:
Tragedy and Hope by Carroll Quigley - available through Veon Financial Services, Inc. for $40.00 which includes shipping and handling.
The Coming Battle by M.W. Walbert - available through Walthaiz Research, 1-800-955-0116
The Most Secret Science - Col. Archibald E. Roberts - available through The Committee to Restore the Constitution , 970-484-2575
Newsletter subscriptions are available for a yearly cost of $36.00 for 2001 subscriptions. This entitles the subscriber to a minium of three and a maximum of four newsletters. All information is fresh, gleaned from current domestic and international newspapers and magazines by Joan Veon, CFP or from personal interviews or those printed. All rights reserved. Copyright September 2000. Send $36.00 to Veon Financial Services, Inc., P. O. Box 77, Middletown, MD 21769-0077. VEON FINANCIAL SERVICES, INC.
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"A RETURN OF THE 70's?" September 2000 Newsletter
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