The Money Bubble - Turk, James

7/23/2019 The Money Bubble - Turk, James

1/128

THE MONEY BUBBLEWhat ToDo Before It Pops

byJames Tur a!" Joh! #ub$!o


2/128

Pub%$she" by Do%%ar&o%%apse Press '(((+"o%%ar,o%%apse+,om

/0rt$,%es by James Tur ,a! be fou!" o! h$s ,ompa!y1s (ebs$te2

(((+3o%"mo!ey+,om0rt$,%es by Joh! #ub$!o ,a! be fou!" at

(((+"o%%ar,o%%apse+,om

e $!format$o! ,o!ta$!e" here$! has bee! ,omp$%e" from sour,es be%$e4e" to be re%$ab%e5 but !o represe!tat$o!(arra!ty5 e6press or $mp%$e"5 $s ma"e by the authors5 the$r aff$%$ates5 represe!tat$4es or a!y other perso! as toa,,ura,y5 ,omp%ete!ess or ,orre,t!ess+op$!$o!s a!" est$mates ref%e,t the (r$ters1 7u"3me!t at the t$me of (r$t$!35 are sub7e,t to ,ha!3e ($thout$,e a!" are pro4$"e" $! 3oo" fa$th but ($thout %e3a% respo!s$b$%$ty+ To the fu%% e6te!t perm$tte" by %a( !e$therauthors !or a!y of the$r aff$%$ates5 represe!tat$4es5 !or a!y other perso!5 a,,epts a!y %$ab$%$ty (hatsoe4er for

y "$re,t5 $!"$re,t or ,o!se8ue!t$a% %oss ar$s$!3 from a!y use of the $!format$o! ,o!ta$!e" here$!+ Before$!3 a! $!4estme!t "e,$s$o!5 p%ease ,o!s$"er (hether th$s $!format$o! $s appropr$ate to your ob7e,t$4es a!"

!su%t a truste" a"4$sor+s boo may !ot be repro"u,e"5 "$str$bute" or pub%$she" ($thout the pr$or ,o!se!t of the authors+

&opyr$3ht 9 :;BN ?@$!"%eA2 C


3/128

The se,ret of free"om %$es $! e"u,at$!3 peop%e5(hereas the se,ret of tyra!!y $s $! eep$!3

them $3!ora!t+ #obesp$erre


4/128

T0BLE O &ONTENT>t of $3ures

Note rom the 0uthorso"u,t$o!2 The Lo!3 Wa4e Qersus the Pr$!t$!3 Press#T I2 Ho( We Zot Hereapter ame #espo!se to E4ery &r$s$sapter =2 Batt%$!3 the Zreat #e,ess$o!2 More Po(erfu% Weapo!s5 Mu,h B$33er M$staesapter 2 Ba!rupt Zo4er!me!tsapter [2 O4erLe4era3e" Ba!s a!" the Der$4at$4es T$meBomb

#T II2 &o!se8ue!,es a!" >,e!ar$osapter G2 U!sou!" Mo!ey \ 0 &orrupt >o,$etyapter C2 Perpetua% War a!" the Emer3$!3 Po%$,e >tateapter 2 Ma!$pu%ate" Maretsapter 2 >hr$!$!3 Trust Hor$]o! a!" the &ra,Up Boomapter ,ary#T III2 Th$!3s You >hou%" U!"ersta!"

apter


5/128

T0BLE O IZU#E>ure :+ Debt5


6/128

0 NOTE #OM THE 0UTHO#>:;; (e ,o(rote a boo ,a%%e" The &om$!3 &o%%apse of the Do%%ar a!" Ho( to Prof$t rom It5a!" at thee our b$33est (orry (as that the 3%oba% f$!a!,$a% system %e" by the U> "o%%ar (ou%" $mp%o"e before (e

u%" 3et the boo to maret+0s $t tur!e" out (e (ere r$3ht about ma!y part$,u%ars2 Wa%% >treet !ear%y ,o%%apse" $! :;; ($th the burst$!3

he hous$!3 bubb%e ba!s5 mort3a3e ,ompa!$es a!" home bu$%"ers (ere terr$f$, short sa%e ,a!"$"ates a!"" a!" s$%4er rose for the !e6t e$3ht years+ But the "o%%ar $tse%f a!" the 3%oba% f$!a!,$a% system (h$,h $tm$!ates ha4e sur4$4e"+ I! fa,t5 by "ep%oy$!3 a set of pre4$ous%yo!%ytheoret$,a% mo!etary po%$,$es5ro($!3 u!pre,e"e!te" amou!ts of mo!ey a!"5 to put $t b%u!t%y5 %y$!3 about the true state of the$r e,o!om$es

" f$!a!,$a% ,omm$tme!ts5 the U>5 Europe5 a!" Japa! ha4e ma!a3e" to !ot o!%y a4o$" a mo!etary ,o%%apse

to pro%o!3 the Mo!ey Bubb%e that has bee! $!f%at$!3 for the past four "e,a"es+Th$! of $t as a metabubb%e5 a frame(or ($th$! (h$,h other5 sma%%er f$!a!,$a% bubb%es ?7u! bo!"s5 te,h,s5 hous$!3A ha4e emer3e" a!" the! burst+ Its e6traor"$!ary a!" 4ery "a!3erous !ature ($%% be ,o4ere"some "eta$% $! %ater ,hapters5 so for !o( suff$,e $t to say that by a"opt$!3 ,urre!,$es that ,$r,u%ate by4er!me!t "e,ree5 or f$at ?he!,e f$at ,urre!,$esA5 ($thout the ba,$!3 of ta!3$b%e forms of mo!ey %$e 3o%" a!"er5 the "e4e%ope" (or%" has ma!a3e" to amass "ebts that mae a per$o" of ,haos 4$rtua%%y ,erta$!+ 0!"

,ause the Mo!ey Bubb%e $!4o%4es the (or%"1s ma7or ,urre!,$es rather tha! 7ust a "$s,rete asset ,%ass %$euses or te,h sto,s5 $ts burst$!3 ($%% be both far more "e4astat$!3 for the u!prepare" a!" far more prof$tab%ethose ab%e to u!"ersta!" $t a!" a,t a,,or"$!3%y+ Our 3oa% $s to usher you $!to that sma%% but happy se,o!"up+

But f$rst5 a fe( !otes about th$s boo2

u%% of Ne( Mater$a%e 3e!era% stru,ture $s s$m$%ar to that ofThe &om$!3 &o%%apse of the Do%%ar^but tha!s to the e4e!tfu%!esshe past "e,a"e5 the ,o!te!t $s most%y !e(+ We14e re,e!t%y bee! (r$t$!3 a!" spea$!3 about 8ua!t$tat$4e

s$!35 $!terest rate s(aps5 3o4er!me!t 3o%" pr$,e ma!$pu%at$o!5 the euro1s fata% f%a(s5 the h$""e! "ebts of the7or e,o!om$es5 the state of the 3o%"cs$%4er m$!$!3 bus$!ess a!" mu,h e%se5 a!" are happy to be ab%e tose!t these top$,s ea,h fas,$!at$!3 $! $ts o(! r$3ht $! o!e 4o%ume+

The sma%% amou!t of mater$a% that "oes appear $! both boos $s 3e!era%%y ba,3rou!" !e,essary too"u,e !e( rea"ers to ,o!,epts %$e the !ature of mo!ey a!" to put to"ay1s (or%" $!to h$stor$,a% ,o!te6t+ We]] throu3h these se,t$o!s5 ho(e4er5 a!" e!,oura3e those (ho ,ra4e a "eeper u!"ersta!"$!3 of ho( there!t mess (as ma"e to ,he, out some of the e6,e%%e!t boos o! mo!etary h$story a!" theory that are

a$%ab%e $! most boostores a!" the hu3e o!%$!e %$brary at

M$ses+or3+

rese!ts a #a!3e of Poss$b%e >,e!ar$ose e!" 3ame the "estru,t$o! of the ma7or f$at ,urre!,$es $s $!e4$tab%e+ But ho( the (or%" 3ets from here tore $s $!here!t%y u!!o(ab%e+ >o rather tha! pre"$,t a s$!3%e path5 (e out%$!e a !umber of poss$b$%$t$es ($th

mes %$e ,ra,up boom5 ,urre!,y (ar5 ,atastroph$, fa$%ure5 a!" e4e! ,yber(ar a!" "ebt 7ub$%ee+,h $s a fas,$!at$!35 p%aus$b%e !arrat$4e $! $ts o(! r$3ht5 but !o!e are sure th$!3s+ Th$! of them as "$ffere!tses throu3h (h$,h to 4$e( the u!fo%"$!3 ,r$s$s5 ea,h offer$!3 a u!$8ue perspe,t$4e (h$,h a""s to o!e1s"ersta!"$!3 ($thout ,%a$m$!3 to pre"$,t e6a,t%y ho( the ,om$!3 mo!etary e4e!ts ($%% u!fo%"+#epeats Itse%f O,,as$o!a%%y,ause (e1re te%%$!3 the same story from a !umber of "$ffere!t perspe,t$4es5 there $s o,,as$o!a% o4er%ap thatu$res the same e4e!ts to be re,ou!te" se4era% t$mes+ &e!tra% ba! rea,t$o! to the ,rash of :;;5 forta!,e5 $s a ,ru,$a% part of ma!y "$ffere!t s,e!ar$os a!" reappears fre8ue!t%y+ D$tto for the story of (hat the,ommer,$a% ba!s "$" ($th a%% the mo!ey they re,e$4e" from the$r ,e!tra% ba!s5 as (e%% as our a"m$rat$o! for0ustr$a! >,hoo% of e,o!om$,s+ Be,ause the ,o!te6t $s "$ffere!t for ea,h repet$t$o! (e1re hop$!3 that rea"ers

!1t f$!" th$s too a!!oy$!3+s >e%fPub%$she"r years5 James has bee! po$!t$!3 out that te,h!o%o3y has 3$4e! authors the ab$%$ty to ,reate a!" pub%$shfess$o!a%8ua%$ty boos $! a fra,t$o! of the t$me pre4$ous%y re8u$re" ($th$! the tra"$t$o!a% a3e!tpub%$sher

ostore mo"e%+ No !ee" to !e3ot$ate o4er fore$3! r$3hts5 (ra!3%e ($th $!e6per$e!,e" e"$tors5 (ater "o(!!tro4ers$a% stateme!ts to sat$sfy ,orporate se!s$b$%$t$es5 or ste( for mo!ths (h$%e the pub%$sher ,o!4erts e"$te"

!us,r$pt $!to phys$,a% boos a!" f$!a%%y sh$ps them to stores+ The (r$ter $s !o( $! ,o!tro%+It too Joh! a (h$%e to 3rasp th$s !e( rea%$ty5 but e4e!tua%%y he ,ame arou!"+ The Mo!ey Bubb%e (astte! $! M$,rosoft Wor" a!" ($th $!4a%uab%e he%p from our fr$e!"s at pub%$sh$!3 ,o!su%ta!,y Wa4e&%ou" !e" $!to paperba, a!" eboos $! a tota% of f$4e mo!ths rather tha! the e$3ht or more $t (ou%" ha4e tae! 4$a

tra"$t$o!a% route+ 0s a resu%t5 (e14e bee! a %ot %ess a!6$ous about th$s bubb%e burst$!3 before (e f$!$sht$!3 about $t thou3h (e st$%% e6pe,t $t to burst soo!+s a! I!4estme!t Boo!1t be put off by a%% the refere!,es to mo!etary po%$,y a!" h$stor$,a% tre!"s a!" ,ata,%ysm$, ,rashes+ That1s
http://mises.org/http://mises.org/


7/128

t us sett$!3 the tab%e for the a,tua% mea%5 (h$,h ,o!s$sts of a broa" %oo at portfo%$o ma!a3eme!t fo%%o(e" byer$es of $!4estme!t strate3$es that ($%%5 $f th$!3s p%ay out as (e e6pe,t5 offer a ,ha!,e at mass$4e5 %$fe

a!3$!3 prof$ts or5 "epe!"$!3 o! your ob7e,t$4es a!" temperame!t5 the pea,e of m$!" that ,omes from"ersta!"$!3 (hat1s happe!$!3 a!" be$!3 ab%e to prote,t yourse%f a!" your fam$%y+mphas$]es Zo%",ause (e 4$e( f$at ?$+e+5 3o4er!me!t ,reate" a!" ,o!tro%%e"A ,urre!,$es as the root ,ause of the f$!a!,$a%r%"1s ma!y prob%ems5 (e see the fa$%ure of these ,urre!,$es a!" the$r rep%a,eme!t ($th someth$!3 better ash $!e4$tab%e a!" $mm$!e!t+ Be,ause 3o%" (as huma!$ty1s mo!ey of ,ho$,e for the =5;;; years pr$or to o e4ery,e $! a (h$%e our frustrat$o! pees throu3h $! our (r$t$!3+s U%t$mate%y Opt$m$st$,reme%y har"5 ,haot$, t$mes are ,om$!3+ But they ($%% pass+ 0!" the per$o" that fo%%o(s ($%% be ama]$!35 as ae ra!3e of breathrou3h te,h!o%o3$es ,oa%es,e to 3$4e our 3ra!"$"s a r$,h5 free5 ,%ea! (or%"+ I! thea!t$me5 as the o%" say$!3 3oes5 ,r$s$s e8ua%s opportu!$ty+e &h$!ese symbo% for ,r$s$s^$s a,tua%%y a ,omb$!at$o! of t(o symbo%s2 the symbo% for "a!3er a!" the symboopportu!$ty+ The "a!3er $s (hat e4erybo"y sees the opportu!$ty $s !e4er 8u$te so ob4$ous as the "a!3er5 but


8/128

a%(ays there+ Dou3 &asey


9/128

INT#ODU&TIONTHE LONZ W0QE QE#>U> THE P#INTINZ P#E>>

"ay1s (or%" of r$s$!3 "ebt a!" e4er3reater f$!a!,$a% $!stab$%$ty ,erta$!%y fee%s %$e u!,harte" terr$tory+ But that1sy be,ause (e huma!s ha4e su,h short %$fe spa!s+ rom a h$stor$,a% perspe,t$4e5 (hat1s happe!$!3 $s

press$!3%y fam$%$ar+ O4er the ,e!tur$es "o]e!s $f !ot hu!"re"s of so,$et$es ha4e borro(e" too mu,h a!" the!5t$!3%y or !ot5 "estroye" the ,urre!,y $! (h$,h the$r "ebts (ere "e!om$!ate"+ I! most ,ases th$s p%ay has!s$ste" of three a,ts2 e6,ess$4e borro($!35 b%o(off $!f%at$o!ary bubb%e5 a!" ,atastroph$, e,o!om$, ,rash+" e4ery fe( 3e!erat$o!s5 most ma7or ,ou!tr$es sta3e a !e( 4ers$o!5 ($th "$ffere!t a,tors but the same!era% story %$!e+

>e4era% Lo!3 Wa4e theor$es ,%a$m to a,,ou!t for these re,urr$!3 ,y,%es5 a!" (h$%e ea,h has $ts o(!

8ue tae o! the pro,ess5 a%% be3$! ($th the assumpt$o! that (e are emot$o!a% ,reatures ($th %$m$te"5 se%e,t$4emor$es+ 0s a resu%t (e are5 as >pa!$sh0mer$,a! ph$%osopher Zeor3e >a!taya!a famous%y obser4e"5!"em!e" to repeat the past be,ause (e "o!1t remember $t+

I! fa,t5 for as %o!3 as there ha4e bee! mo!ey a!" marets5 so,$et$es ha4e bee! pass$!3 throu3h the same8ue!,e of ,u%tura% moo"s5 be3$!!$!3 ($th a!6$ous ,o!ser4at$sm $! the aftermath of har" t$mes5 fo%%o(e" byut$ous opt$m$sm a!" f$!a%%y as the or$3$!a% "epress$o!era 3e!erat$o! $s rep%a,e" by $ts memory$mpa$re"!"$"s %et$ta%%ha!3out f$!a!,$a% e6,ess+ 0 horre!"ous "ebt"r$4e! e,o!om$, ,rash ?or $ts

opo%$t$,a%cm$%$tary e8u$4a%e!tA the! resets the ,y,%e+The fas,$!at$!3 th$!3 about these theor$es $s that (h$%e ea,h emp%oys a u!$8ue set of $!"$,ators to tra,e

,$ety1s pro3ress throu3h these re,urr$!3 ,u%tura%cpsy,ho%o3$,a%cf$!a!,$a% ,y,%es5 they14e a%% rea,he" the same!,%us$o!2 The mo"er! (or%" $s toast+ Or $t shou%" be by !o(+ Q$rtua%%y a%% Lo!3 Wa4e theor$es ,o!,%u"e that

e6pa!s$o! that be3a! after Wor%" War II has e!"e"5 a!" that !ear%y the e!t$re (or%" (h$,h $s !o(er%$!e" to a! u!pre,e"e!te" e6te!t by te,h!o%o3y a!" ,ommo! m$staes shou%" be "eep $! a trauss a!" e,o!om$st Ne$% Ho(e5 $! the$r trauss a!" Ho(e p%a,e to"ay1s (or%" at the e!" of a %o!3 ,y,%e5 (h$,h $s a 4ery ba" p%a,e to

0rou!" the year :;;[ '3$4e or tae a fe( years/5 a su""e! spar ($%% ,ata%y]e a &r$s$s moo"+ #em!a!ts ofo%" so,$a% or"er ($%% "$s$!te3rate+ Po%$t$,a% a!" e,o!om$, trust ($%% $mp%o"e+ #ea% har"sh$p ($%% beset the %a!"5

h se4ere "$stress that ,ou%" $!4o%4e 8uest$o!s of ,%ass5 ra,e5 !at$o! a!" emp$re^>omet$me before the year:[5 0mer$,a ($%% pass throu3h a 3reat 3ate $! h$story5 ,omme!surate ($th the 0mer$,a! #e4o%ut$o!5 &$4$% War5" t($! emer3e!,$es of the Zreat Depress$o! a!" Wor%" War II^The r$s of ,atastrophe ($%% be 4ery h$3h+ The$o! ,ou%" erupt $!to $!surre,t$o! or ,$4$% 4$o%e!,e5 ,ra, up 3eo3raph$,a%%y5 or su,,umb to author$tar$a! ru%e+TE# THE P#INTINZ P#E>>


10/128

s has ($thout "oubt bee! a! $!terest$!3 "e,a"e5 but !oth$!3 %$e the Ma" Ma6 s,e!ar$os o!e m$3ht ,o!7ureafter rea"$!3 the abo4e+ >o has Lo!3 Wa4e a!a%ys$s fa$%e"_ No+ It has5 ho(e4er5 e!,ou!tere" someth$!3

(2 a! u!%$m$te" mo!etary pr$!t$!3 press that a%%o(s 3o4er!me!ts to ma!$pu%ate marets o! a! u!pre,e"e!te"a%e+ Lo!3 Wa4e theor$es are "er$4e" from h$story a!" u!t$% 4ery re,e!t%y5 most mo!ey (as sou!" that $s5se" o! 3o%" a!"cor s$%4er5 ta!3$b%e assets that e6$ste" $! %$m$te" supp%y+ Whe! "ebts rose to "eb$%$tat$!3 %e4e%s5rro(ers (ere u!ab%e to a,8u$re e!ou3h ?s,ar,eA mo!ey to pay off the$r %oa!s a!" "efau%te" e! masse5us$!3 the "epress$o!s that 3e!era%%y fo%%o(e" e6te!"e" booms+ Past 3o4er!me!ts ,ou%"!1t "era$% th$s pro,ess,ause they ,ou%"!1t mae more 3o%"+

They st$%% ,a!1t mae more 3o%"+ But o4er the past ; years they14e ,o!4$!,e" the$r ,$t$]e!s that paper5 u!,e" by a!yth$!3 rea%5 $s the same th$!3+ To"ay1s ,e!tra% ba!s ,a! ,reate as mu,h !e( f$at ,urre!,y

!!otes or $ts e%e,tro!$, e8u$4a%e!tA as they ,hoose5 a!" the 3%oba% e,o!omy ,o!t$!ues to a,,ept $t as!ey+ Th$s ($"esprea" a!" system$, 3u%%$b$%$ty a%%o(e" the U> 3o4er!me!t to more tha! "oub%e $ts a%rea"y,ess$4e !at$o!a% "ebt bet(ee! :;;C a!" :;pa$! a!" Portu3a% o!to Zerma!y1s ba%a!,e sheet ($thout sett$!3 off a f$!a!,$a% pa!$, or re4o%t+ 0!"s e!ab%$!3 the Japa!ese 3o4er!me!t to borro( more5 as a per,e!t of $ts e,o!omy5 tha! a!y other ma7oru!try $! h$story+ No!e of th$s prof%$3a,y (ou%" ha4e bee! poss$b%e $! a sou!"mo!ey e!4$ro!me!t+

But th$s mo!etary or3y has!1t suspe!"e" the e,o!om$, %a(s "es,r$be" by Lo!3 Wa4e theor$es+ O! the!trary5 $t has amp%$f$e" those %a(s+ By "e%ay$!3 the e!" of the ,y,%e5 the f$at ,urre!,y pr$!t$!3 press haso(e" the (or%" to a,,umu%ate a!other `:; or so tr$%%$o! of "ebt ?mu,h more $f you ,ou!t u!fu!"e" pe!s$o!b$%$t$es a!" "er$4at$4es a!" other su,h ob%$3at$o!s see &hapters a!" [A5 (h$,h ($%% mae the ,om$!3$"at$o! that mu,h more pa$!fu%+

>o the 8uest$o! be,omes o!e of t$m$!3+ 0t (hat mome!t a!" u!"er (hat ,$r,umsta!,es ($%% a ,r$t$,a% masspeop%e rea%$]e that more ,urre!,y "oes !ot e8ua% more (ea%th_ That $s u!!o(ab%e5 be,ause a 3%oba%a!,$a% system of th$s ,omp%e6$ty $s $!here!t%y u!stab%e a!" u!pre"$,tab%e+ I!stea" of a ma,h$!e that rea,ts $!!ear fash$o! to $!puts a!" stresses5 a mo"er! f$!a!,$a% system $s %$e a (eather fro!t that ,a! su""e!%yrph from trop$,a% "epress$o! to &ate3ory [ hurr$,a!e5 or a s!o(,o4ere" mou!ta$!s$"e that $s perfe,t%y stab%e$% a s!o(f%ae %a!"s o! 7ust the r$3ht spot to set off a! a4a%a!,he ?more o! the $!stab$%$ty of ,omp%e6 systemsom$!3 $! &hapter pa$! rea%$]e that they ,a!1t %$4e u!"er the same mo!etary$me as Zerma!y+ 0 ma7or ba!1s "er$4at$4es boo ,ou%" b%o( up+ I!terest rates ,ou%" sp$e5 sett$!3 off a

ath sp$ra% $! 3o4er!me!t f$!a!,es a!"cor the $mp%os$o! of the %e4era3e" spe,u%at$!3 ,ommu!$ty+ The %$st 3oes0!" o!+Whate4er the pro6$mate ,ause5 the burst$!3 of th$s %atest5 3reatest bubb%e5 ($%% %ea" to the massrea%$]at$o!

t u!ba,e" f$at ,urre!,y5 ,reate" $! u!%$m$te" 8ua!t$t$es by o4er$!"ebte" 3o4er!me!ts5 $s !ot mo!ey $! thee se!se of that (or"5 a!" 3o4er!me!t bo!"s a!" b$%%s "e!om$!ate" $! f$at ,urre!,y are ,erta$!%y !ot the r$se assets that $!4estors ha4e bee! %e" to be%$e4e+ E4e!tua%%y $!"$4$"ua%s5 bus$!esses a!" ,re"$tor !at$o!s ($%%3$! to ,o!4ert these ,urre!,$es a!" f$!a!,$a% assets $!to rea% assets at (hate4er pr$,e $s pre4a$%$!3+ I!f%at$o!sprea" from $so%ate" !$,hes %$e U> sto,s a!" &h$!ese rea% estate to 4$rtua%%y e4eryth$!3+Lu"($3 4o! M$ses5 a p$o!eer $! the 0ustr$a! >,hoo% of e,o!om$,s5 ,a%%e" th$s su""e! %oss of fa$th $! a f$at

re!,y a ,ra,up boom5 a!" h$stor$,a%%y $t has spe%%e" the e!" of the ,urre!,y $! 8uest$o!+ >$!,e to"ay1s f$atre!,y re3$me $s 3%oba%5 the tra!s$t$o! the ,ra,up boom ($%% be 3%oba% as (e%%+ The %$st of 4$,t$ms ($%%3e from the peop%e ho%"$!3 the ru$!e" f$at ,urre!,y to the ,o!,ept of f$at ,urre!,y $tse%f+ The $"ea that

4er!me!t ,a! be truste" to ,reate ,urre!,y out of ith$! a$r1 a pro,ess that "es,r$bes the esse!,e of f$atre!,y ($%% be %a$" to rest5 a!" the (or%" ($%% retur! to some form of sou!" mo!ey+

Dur$!3 th$s mo!etary phase,ha!3e5 tra"$t$o!a% metho"s of "$4ers$fy$!3 amo!3 f$!a!,$a% assets ($%% !o3er prote,t your (ea%th+ >to,s ($%% 3yrate ($%"%y5 former%ysafe bo!"s ($%% p%u!3e a%o!3 ($th the ,urre!,$es $!,h they1re "e!om$!ate"5 a!" paper ,ash5 (hether u!"er the mattress or $! a ba! a,,ou!t5 ($%% tre!"

(ar"s ]ero as $ts pur,has$!3 po(er e4aporates+O! the other ha!"5 some assets ($%% soar $! pr$,e a!" some strate3$es ($%% (or beaut$fu%%y $! th$s

4$ro!me!t+ The ,hapters that fo%%o( ($%% sho( you ho( to both sur4$4e th$s tra!s$t$o! a!" prof$t 3reat%y from $t+ef D$3ress$o!2 You @!o( It1s a Bubb%e Whe!^

%o!3 as there ha4e bee! marets there ha4e bee! bubb%es+ Dur$!3 the Tu%$p Bu%b Ma!$a $!


11/128

0! asset ,%ass $s $! a bubb%e (he!2


12/128

P0#T I2HOW WE ZOT HE#E


13/128

&H0PTE# o e4e!tua%%y5 $! or"er to smooth the pro,ess of tra!sa,t$!3 a!" sa4$!35 e4ery so,$ety has e!"e" ups$3!at$!3 someth$!3 ($th a! a3ree"upo! 4a%ue to ser4e as mo!ey+ O4er the ,e!tur$es !umerous th$!3s ha4ee! au"$t$o!e" for th$s ro%e5 $!,%u"$!3 %$4esto,5 s%a4es5 ro,s5 seashe%%s a!" tea %ea4es5 to !ame 7ust a fe(+ 0%%" ma7or ?ob4$ous $! retrospe,tA f%a(s5 a!" e4e!tua%%y the ear%y (or%" sett%e" upo! b$ts of meta% that ,ou%" be!e" $!to $"e!t$,a% ,o$!s a!" (ere easy to ,arry arou!"+ By the t$me of the 0!,$e!t Zrees5 3o%"5 s$%4er a!"

met$mes ,opper ,o$!s (ere 3e!era%%y a,,epte" as mo!ey+Meta% ,o$!s performe" e6,ept$o!a%%y (e%%5 e!ab%$!3 peop%e to ,ommu!$,ate a!" tra!sa,t eff$,$e!t%y+ 0!" astore of pur,has$!3 po(er5 3o%" a!" s$%4er e6,e%%e"+ The same ou!,e ?=< 3ramsA of 3o%" that bou3ht a 3oo"a%$ty to3a $! a!,$e!t #ome ($%% buy a !$,e bus$!ess su$t to"ay+ I! more re,e!t t$mes5 the pr$,es of o$% a!"eat a!" most other th$!3s5 (he! e6presse" $! 3o%"5 ha4e bee! remarab%y stab%e+

But th$s storeofpur,has$!3po(er fu!,t$o! "epe!"e!t as $t $s o! a %$m$te" supp%y of mo!etary meta%s $sua%%y a "ra(ba, for 3o4er!me!ts $! !ee" of resour,es to f$3ht (ars a!" ma$!ta$! the support of po(erfu%

!st$tue!ts+ >o e4ery so ofte! a ,ou!try "e,$"es to rep%a,e 3o%" a!" s$%4er ($th a more p%e!t$fu% a!" eas$%y


14/128

!$pu%ate" subst$tute+ I! other (or"s5 they ,hoose po%$t$,a% e6pe"$e!,y o4er stab$%$ty5 a!" a"opt u!sou!"!ey+

The resu%t5 $! e4ery re,or"e" ,ase5 has bee! the same2 #e%ease" from the "$s,$p%$!e of a %$m$te" mo!eypp%y5 3o4er!me!t 3oes a b$t ($%"5 ,reat$!3 so mu,h !e( ,urre!,y that $ts 4a%ue e4aporates+ 0fter a per$o" ofaos5 the traumat$]e" so,$ety has $! e4ery s$!3%e ,ase retur!e" to some form of sou!" mo!ey+

Here are a fe( of h$story1s more $!terest$!3 e6per$me!ts ($th u!sou!" mo!ey2me %oo"s the Emp$re ($th &oppere #oma! Emp$re5 (h$,h t(o m$%%e!!$a a3o ru%e" $ts (or%" $! mu,h the same (ay that the U> re,e!t%y ru%e"s o!e5 use" three meta%s as mo!ey2 ,opper for sma%% ,ha!3e5 a!" re%at$4e%ys,ar,e 3o%" a!" s$%4er for %ar3er!om$!at$o!s+ The "e!ar$us5 the most ,ommo!%y use" ,o$! of the t$me5 (as pure s$%4er $! the f$rst ,e!tury 0D+

t the pressures of ru!!$!3 a farf%u!3 emp$re (h$%e p%a,at$!3 the peop%e %e" to stea"$%yr$s$!3 3o4er!me!te!"$!3+ >u,,ess$4e emperors a""resse" th$s mou!t$!3 bu"3etary pressure the "$sho!est (ay by m$6$!3eap5 p%e!t$fu% ,opper $!to the$r s$%4er ,o$!s+ By arou!" 0D


15/128

tator $! th$s ,ase H$t%er to tae po(er+I0T &U##EN&Y WO#LDst ep$so"es of u!sou!" mo!ey (ere %o,a% affa$rs ,o!"u,te" $! a 3e!era%%y sou!"mo!ey (or%"+ E4e! (he! a!$ty the s$]e of #ome $!f%ate" a(ay $ts ,opper ,o$!a3e5 3o%" a!" s$%4er st$%% ,$r,u%ate" $!ter!a%%y ?ma$!%y $! the!"s of the r$,hA a!" ,o!t$!ue" to fu!,t$o! as mo!ey both ($th$! a!" ($thout the emp$re+ I! other (or"s5 theres st$%% sou!" mo!ey for those (ho ,ou%" affor" $t+

But s$!,e o th$s t$me arou!"5 the e!t$re 3%oba% f$!a!,$a% system f$!"s $tse%f "r$ft$!36orab%y to(ar" the ,haos that has ,%a$me" a%% pre4$ous f$at ,urre!,$es+


16/128

&H0PTE# :THE >0ME #E>PON>E TO EQE#Y I>I>

sa!$ty $s "o$!3 the same th$!3 o4er a!" o4er a3a$! a!" e6pe,t$!3 "$ffere!t resu%ts+ 0%bert E$!ste$!

( %et1s 7ump to the !earprese!t5 ($th a! o4er4$e( of ho( the U> brou3ht the 3%oba% f$!a!,$a% system to the! of "$sso%ut$o! $! :;;+ To state the theme up fro!t2 Whe! arme" ($th a pr$!t$!3 press5 a !at$o! te!"s topo!" to e4ery prob%em $! the same5 po%$t$,a%%ye6pe"$e!t (ay by thro($!3 !e(%y,reate" mo!ey at $t+ But ash a!y other form of a""$,t$o!5 the "osa3e has to eep r$s$!3 to pro"u,e the same resu%t u!t$% the %e4e%,omes fata%+E#ENT LE0DE#>5 >0ME DEBT

most 0mer$,a!s5 the


17/128

(ar"sh$p+ 0!" bus$!esspeop%e are e!er3$]e" by "reams of ,ommer,$a% emp$res bu$%t ($th other peop%es1!ey+

That5 $! a !utshe%%5 (as the o hu!"re"s of b$%%$o!s of "o%%ars (ere borro(e" to %ay f$ber opt$, ,ab%e a!" ,o!so%$"ate me"$a emp$res" fu!" the startup of eBay a!" 0ma]o! a!" ,ou!t%ess other "ot,oms a!" the! to b$" the$r shares $!to theatosphere+ The ta6ab%e $!,ome thus 3e!erate" ba%a!,e" the 3o4er!me!t1s boos5 at %east u!"ersh$!3to!1s 8uest$o!ab%e a,,ou!t$!3 metho"s5 (h$%e se!"$!3 the ,ou!try1s tota% "ebt soar$!3+ But be,ause so!y of the uses to (h$,h these borro(e" fu!"s (ere put tur!e" out to be u!($se or u!prof$tab%e5 "ebt e!"e"3ro($!3 faster tha! pro"u,t$4e assets+ Th$s ma%$!4estme!t %eft the ,ou!try poorer tha! $t (ou%" ha4e bee!

" the mo!ey !e4er bee! borro(e"+Mea!(h$%e5 e6,ess$4e ,urre!,y ,reat$o! by ,e!tra% a!" ,ommer,$a% ba!s ?see &hapter ba!s $!,%u"$!3 Zo%"ma! >a,hs a!" &$t$3roup (ere o(!ers of b$%%$o!s of "o%%ars of Me6$,a!!"s (h$,h (ou%" p%u!3e $! 4a%ue $! the e4e!t of a "efau%t or ma7or "e4a%uat$o!+ >o Pres$"e!t &%$!to! propose"t &o!3ress ba$% Me6$,o out "$re,t%y+ Whe! &o!3ress ba%e"5 U> Treasury >e,retary ?a!" former Zo%"ma!,hs ,o,ha$rma!A #obert #ub$! s$mp%y 3a4e Me6$,o `:; b$%%$o! of ,urre!,y s(aps a!" %oa! 3uara!tees from

E6,ha!3e >tab$%$]at$o! u!"5 a Treasury a,,ou!t that as Treasury >e,retary he ,o!tro%%e"5 $! effe,t ba$%$!3h$s former emp%oyer a!" the other ma7or ba!s+ Me6$,o stab$%$]e" a!" the ,r$s$s subs$"e" but a %esso! (as

r!e"2 Whe! b$3 U> ba!s are threate!e"5 the mo!ey ($%% be fou!" to prote,t them+ef D$3ress$o!2 The Me6$,a! ba$%out (as a sem$!a% mome!t $! 0mer$,a1s "es,e!t $!to f$!a!,$a% "e,a"e!,e,ause $t effe,t$4e%y remo4e" "o(!s$"e r$s from Wa%% >treet1s ,a%,u%us+ &ap$ta%$sm $! theory a!" pre4$ous%ypra,t$,e (as 4ery mu,h a ,arrota!"st$, ph$%osophy+ >u,,ee" ?pr$mar$%y throu3h har" (or a!" ,reat$4$tyA" the resu%t (as e6traor"$!ary (ea%th+ a$% a!" a%% (as %ost+ By e6a33erat$!3 the staes $! th$s (ay5 freerets u!%eash the e!er3$es of a ($"e ra!3e of (ou%"be e!trepre!eurs (ho 3e!erate the ,reat$4estru,t$o! that typ$f$es a "y!am$,5 rap$"%ypro3ress$!3 mo"er! so,$ety+ But e%$m$!ate the "o(!s$"e r$s a!" thestem $s per4erte"+

The Me6$,a! ba$%out tau3ht ma!a3ers of 3%oba% ba!s that they ,ou%"!1t %ose+ I! ta$!3 e6treme r$ss by5 fota!,e5 %e!"$!3 a33ress$4e%y to (ea borro(ers or ,reat$!3 a!" se%%$!3 e6ot$, a!" u!teste" f$!a!,$atrume!ts5 they ,ou%" 3e!erate mass$4e fees $! the short ru!5 (h$,h (ou%" tra!s%ate $!to 3$3a!t$, yeare!"!uses a!" soar$!3 sto, pr$,es+ 0!" $f they fa$%e" the 3o4er!me!t (ou%" ba$% them out ($th ta6payers1 mo!ey5o( them to eep the$r 7obs a!" rema$!5 for the most part5 r$,h a!" po(erfu%+ Th$s 3o4er!me!t 3uara!tee ,amebe !o(! as the Zree!spa! put5 after the e"era% #eser4e ,ha$rma! (ho repeate"%y $!7e,te" %$8u$"$ty $!to

system to support asset pr$,es5 thereby ba$%$!3 out pretty mu,h e4ery ma7or ba! $! s$3ht+ 0!" $t ,reate" astem $! (h$,h5 as Nobe% %aureate e,o!om$st Joseph >t$3%$t] famous%y put $t5 prof$t $s pr$4at$]e" a!" r$s $s,$a%$]e"+C2 0s$a! &o!ta3$o!the m$" a!" $!to the 0s$a! T$3ers5 upa!",om$!3 ,ou!tr$es

@orea a!" Tha$%a!" that (ere rep%$,at$!3 Japa!1s e6port"r$4e! 3ro(th mo"e%+ But too mu,h of a mo!etaryo" th$!3 %ea"s to ba" "e,$s$o!s5 a!" the pro"u,t$4$ty of !e( $!4estme!ts ha" bee! fa%%$!3 for a (h$%e+ The!!a "e4a%ue" $ts ,urre!,y a!" the U> ra$se" $!terest rates $! respo!se to a! $rrat$o!a%%y e6ubera!t sto,ret+ The "o%%ar rose stro!3%y a!" hot mo!ey starte" pour$!3 out of the 0s$a! T$3ers a!" $!to su""e!%yhery$e%"$!3 U> bo!"s+ The T$3ers1 e,o!om$es be3a! to $mp%o"e+

Here a3a$!5 mu,h of the mo!ey at r$s (as o(e" to %ar3e U> ba!s5 a!" the respo!se (as s($ft+ Theer!at$o!a% Mo!etary u!" ?us$!3 most%y 0mer$,a! ,ap$ta%A be3a! a mu%t$b$%%$o! "o%%ar ba$%out of the 0s$a!o!om$es5 (h$%e the U> e"era% #eser4e re4erse" ,ourse a!" ,ut $!terest rates to %o(er the 4a%ue of the "o%%ar


18/128

" re"u,e ba! borro($!3 ,osts+ The pa!$, subs$"e" ($th$! a fe( mo!ths+2 LT&M Imp%o"es!3Term &ap$ta% Ma!a3eme!t ?LT&MA (as a he"3e fu!" ?a! u!re3u%ate" $!4estme!t ,ompa!yA that ha"e! fou!"e" by a star bo!" tra"er a!" sto,e" ($th Nobe% Pr$]e($!!$!3 mathemat$,$a!s a!" e,o!om$sts+!s (ere $! a(e of th$s %$!eup a!" arme" ($th 4ery ,heap5 p%e!t$fu% mo!ey from the e"era% #eser4e mpete" to f$!a!,e LT&M1s strate3$es+ W$thout 3o$!3 $!to e6,ess$4e "eta$%5 suff$,e $t to say that us$!3pre,e"e!te" %e4era3e5 LT&M ma"e a 3%oba% bet o! stab$%$ty $! the bo!" marets+ The! #uss$a "efau%te" o! $tsbt5 pro"u,$!3 e6a,t%y the oppos$te resu%t+ LT&M1s tra"es b%e( up5 a!" s$!,e a ra!3e of %ar3e ba!s ha" %e!t $ter o!e hu!"re" b$%%$o! "o%%ars5 the 3%oba% f$!a!,$a% system (as su""e!%y threate!e"+

The e"era% #eser4e ,o!4e!e" a meet$!3 of Wa%% >treet ba!s5 or3a!$]e" a ba$%out of LT&M5 a!" o!,e

a$! ,ut shortterm $!terest rates+ The ,r$s$s (as a4erte" a!" e" ,ha$r 0%a! Zree!spa! a!" Treasuryeau,rats #obert #ub$! a!" Larry >ummers e!"e" up o! the ,o4er of TIME ma3a]$!e+ By th$s t$me theee!spa! put (as ($"e%y see! as off$,$a% 3o4er!me!t po%$,y+

;;2 The Te,h Bubb%e Burstse t$"a% (a4e of %$8u$"$ty u!%eashe" by Wash$!3to!1s respo!se to the past "e,a"e1s ,r$ses poure" $!to U> te,h,s+ I! o!e f$!a% spasm $! %ate eptember


19/128

The 3o4er!me!t rampe" up spe!"$!35 espe,$a%%y o! the m$%$tary5 a!" the fe"era% "ef$,$t5 so re,e!t%y $! a

at$4e "e,%$!e5 soare" to se4era% hu!"re" b$%%$o! "o%%ars a!!ua%%y+ I! effe,t5 the U> ,omb$!e" strate3$es : a!" =!t$o!e" at the be3$!!$!3 of th$s ,hapter5 ($th the 3o4er!me!t both borro($!3 re,or" amou!ts of mo!ey a!",oura3$!3 the pr$4ate se,tor to "o the same+

It too a (h$%e5 but the mass$4e $!fus$o! of ,re"$t set off yet a!other bubb%e5 th$s o!e $! hous$!3+ Home,es soare"5 ba!s offere" mort3a3es to 4$rtua%%y a!yo!e a!" the! pa,a3e" the $!,reas$!3%y %o(8ua%$ty!s $!to mort3a3e ba,e" bo!"s a!" so%" them a!" "er$4at$4es base" o! them to $!st$tut$o!s arou!" ther%"+ #at$!3s a3e!,$es %$e >ta!"ar" Poor1s a!" Moo"y1s (h$,h $! a tru%y ama]$!3 ,o!f%$,t of $!terest5 3et" by the $ssuers of these bo!"s 3a4e tr$p%e0 rat$!3s to pretty mu,h e4eryth$!3 that ,ame the$r (ay5 ofte!hout e4e! %oo$!3 at the u!"er%y$!3 mort3a3es+ Homeo(!ers be3a! us$!3 the$r houses %$e 0TMs5 e6tra,t$!3sh 4$a home e8u$ty ,re"$t %$!es a!" us$!3 the pro,ee"s to buy ,ars5 4a,at$o!s a!" more houses+ 0!" %ast but

%east the share pr$,es of home bu$%"ers5 b$3 ba!s5 mort3a3e %e!"ers5 a!" 4$rtua%%y e4eryo!e e%se asso,$ate"

h the hous$!3 bus$!ess soare" to re,or" %e4e%s5 ta$!3 the o4era%% sto, maret a%o!3 for the r$"e+ 0! ep$,bb%e ha" bee! b%o(!5 o! the ba, of a! e8ua%%y ep$, $!,rease $! tota% system($"e "ebt+

The! th$s bubb%e burst5 ,reat$!3 a f$!a!,$a% ,r$s$s $! :;; that ,ou%" 4ery (e%% ha4e "e,$mate" the 3%oba%a!,$a% system+ We ,erta$!%y thou3ht that the e!" of the f$at mo!ey era ha" arr$4e"5 a!" fore,ast as mu,h $!e &om$!3 &o%%apse of the Do%%ar+ But (e (ere (ro!3+ 0s $t tur!e" out the e6per$me!t ha" o!e more5 tru%yraor"$!ary surpr$se $! store+


20/128

&H0PTE# =B0TTLINZ THE Z#E0T #E&E>>ION2

MO#E POWE#UL WE0PON>5MU&H BIZZE# MI>T0@E>

e mo!ey rate ,a!5 $!"ee"5 be ept art$f$,$a%%y %o( o!%y by ,o!t$!uous !e( $!7e,t$o!s of ,urre!,y or ba! ,re"$tp%a,e of rea% sa4$!3s+ Th$s ,a! ,reate the $%%us$o! of more ,ap$ta% 7ust as the a""$t$o! of (ater ,a! ,reate thes$o! of more m$%+ But $t $s a po%$,y of ,o!t$!uous $!f%at$o!+ It $s ob4$ous%y a pro,ess $!4o%4$!3 ,umu%at$4e!3er+

He!ry Ha]%$tt:;;C5 the e!t$re U> e,o!omy (as o!e b$3 f$!a!,$a% bubb%e+ Home pr$,es (ere soar$!3 (h$%e some broa"

, maret $!"e6es (ere ba, abo4e the$r "ot,om ma!$a pea5 th$s t$me %e" by the ba!s a!" homebu$%"erst (ere feast$!3 o! postctreet $!4estme!t ba! Bear >tear!s $! ear%y :;;5 the rea%$]at$o! f$!a%%y "a(!e"t the e,o!omy ha" be,ome "epe!"e!t o! f$!a!,e5 a!" the f$!a!,$a% marets (ere se$]$!3 up+ Whe! Lehma!

others fa$%e" 7ust a fe( mo!ths %ater5 the Lo!3 Wa4e (as po$se" to s(amp the U> e,o!omy+O! >eptember INZe! the e,o!omy "$"!1t respo!" to the ba! ba$%out a!" the ba!s rema$!e" hobb%e" by the %oom$!3 "efau%tr$%%$o!s of "o%%ars of ba" %oa!s a!" "er$4at$4es the e"era% #eser4e "uste" off a theoret$,a% $"ea ,a%%e"a!t$tat$4e eas$!35 $! (h$,h the ,e!tra% ba! buys bo!"s o! the ope! maret5 pay$!3 for those se,ur$t$es ($th

(%y,reate" ,urre!,y+ ?ua!t$tat$4e refers to the $!,reas$!3 8ua!t$ty of mo!ey5 (h$%e eas$!3 refers tou,$!3 $!terest rates to mae ,heap ,ap$ta% rea"$%y a4a$%ab%e to ba!s+ Th$s pra,t$,e $s a%so !o(! as "ebt!et$]at$o! be,ause $t tur!s "ebt $!to ,$r,u%at$!3 ,urre!,y+A

The 3oa% (as t(ofo%"2 $rst5 to e!ab%e the U> 3o4er!me!t to borro( u!pre,e"e!te" amou!ts of mo!ey" spe!" $t $! a! attempt to re4$4e the e,o!omy+ >e,o!"5 to re,ap$ta%$]e the ba!s5 eep$!3 them a%$4e a!" pefu%%y ,o!4$!,$!3 them to start %e!"$!3 a3a$!+

The f$rst 8ua!t$tat$4e eas$!35 or E


21/128

:5 The e" Ups the 0!te

No4ember :;o $t pushe" shortterm rates "o(! to 4$rtua%%y ]ero5 a!" $! yet a!other e6per$me!ta%

parture from tra"$t$o! be3a! tar3et$!3 $ts buy$!3 at the %o!3term e!" of the spe,trum $! or"er to for,e "o(!rt3a3e a!" Treasury bo!" rates ?re,a%% that a bo!"1s pr$,e a!" y$e%" mo4e $! oppos$te "$re,t$o!s a h$3her,e e8ua%s a %o(er y$e%"A+ The e" ha" tra"$t$o!a%%y tar3ete" shortterm $!terest rates a!" a%%o(e" the bo!"ret to set %o!3term rates5 so $ts !e( strate3y a !ear,omp%ete 3o4er!me!t taeo4er of the "ebt marets s someth$!3 that ha" !e4er pre4$ous%y bee! attempte"+

Th$s ,omb$!at$o! of ba!s a!" borro(ers ha4$!3 %$tt%e $!terest $! ta$!3 o! !e( %oa!s a!" the e" a,t$4e%y!3 to mae mo!ey ,heaper e6te!"e" the "e,%$!e $! $!terest rates that ha" bee! $! p%a,e s$!,e


22/128

Tae! to3ether5 jI#P5 the Es a!" the e"1s other "epartures from tra"$t$o! a!" h$stor$,a% pre,e"e!t ha4ea!3e" the U> f$!a!,$a% system a%most beyo!" re,o3!$t$o!+ $3ure =+= sho(s the e"1s ba%a!,e sheet soar$!3,ause of the se,ur$t$es $t has pur,hase" from ba!sA from `[; b$%%$o! $! :;;C to !ear%y ` tr$%%$o! by the e!"

:; a!" Zree,e+


23/128

I! ear%y :;


24/128

"3etary pra,t$,es a!" $! the ,ase of Zree,e5 (h$%e fa%se%y report$!3 the state of 3o4er!me!t "ebt a!"$,$ts+ The resu%t (as a ($"e 4ar$ety of "ebt"r$4e! $%%s5 from hous$!3 bubb%es to soar$!3 "ef$,$ts to $!so%4e!t

!s a!" PIIZ> 3o4er!me!ts+ >$!,e the ma7or Zerma! a!" re!,h ba!s ha" %e!t hu!"re"s of b$%%$o!s ofos to the PIIZ>5 the %atter1s ,r$ses threate!e" the e!t$re euro]o!e ba!$!3 system+

Ho( ,ou%" someth$!3 so ob4$ous $! retrospe,t ha4e bee! a%%o(e" to happe!_ O!e e6p%a!at$o! $s that,h of the or$3$!a% "ebt (as esse!t$a%%y 4e!"or f$!a!,$!3 ?a bus$!ess pra,t$,e $! (h$,h o!e ,ompa!y %e!"s!ey to a!other to a%%o( the se,o!" ,ompa!y to buy the f$rst1s pro"u,tsA5 ($th Zerma!y a!" ra!,e

bs$"$]$!3 the per$phera% ,ou!tr$es1 pur,hase of Zerma! a!" re!,h e6ports+ Th$s (as p%easa!t for a%%!,er!e"5 pump$!3 up ,ore ,ou!tr$es1 tra"e surp%uses a!" ta6 re4e!ues (h$%e a%%o($!3 per$phera% ,ou!tr$es toom ($thout $!$t$a%%yappare!t ,o!se8ue!,e+

0!other e6p%a!at$o! $s that u!e%e,te" Europea! U!$o! %ea"ers %et the$r e3os o4erru%e the$r 7u"3me!t+ 0sropea! &omm$ss$o! pres$"e!t Josk Ma!ue% Barroso sa$" $! :;;C5 We are a 4ery spe,$a% ,o!stru,t$o! u!$8uehe h$story of ma!$!"^>omet$mes I %$e to ,ompare the EU as a ,reat$o! to the or3a!$]at$o! of emp$re+ We4e the "$me!s$o! of emp$re+

Th$s hubr$s %e" Europea! author$t$es to e!,oura3e ba!s to $!4est hea4$%y $! euro]o!e 3o4er!me!t "ebt o!assumpt$o! ?!o( see! to be ,atastroph$,a%%y !al4eA that su,h "ebt (as r$s free+ 0s a resu%t5 by :; a!" Japa!5 "ebt mo!et$]at$o! "$" !ot pro"u,e susta$!ab%e e,o!om$, 3ro(th+ I! %ate


25/128

&H0PTE# B0N@#UPT ZOQE#NMENT>

he! !at$o!a% "ebts ha4e o!,e a,,umu%ate" to a ,erta$! "e3ree5 there $s s,ar,e5 I be%$e4e5 a s$!3%e $!sta!,e o$r ha4$!3 bee! fa$r%y a!" ,omp%ete%y pa$"+ The %$berat$o! of the pub%$, re4e!ue $f $t has e4er bee! brou3ht

out at a%%5 has a%(ays bee! brou3ht about by a ba!rupt,y somet$mes by a! a4o(e" o!e but a%(ays by a reae5 thou3h fre8ue!t%y by a prete!"e" payme!t+

0"am >m$th5 The Wea%th of Nat$o!s ?


26/128

Mea!(h$%e5 mu,h of the rest of the (or%" (as borro($!3 as a33ress$4e%y as the U>+ The fo%%o($!3 tab%e

o(s the $!,rease of $!"ebte"!ess for se4era% %ar3e ,ou!tr$es2

D TH0T1> JU>T THE TIP O THE I&EBE#Zse" o! off$,$a%%yreporte" "ebt5 the (or%" $s o4er%e4era3e" a!" be,om$!3 more so+ But $t tur!s out that,$a%%yreporte" "ebt $s 7ust part a!" !ot the b$33est part of the ob%$3at$o!s that the mo"er! f$!a!,$a%tem $s ,reat$!3+ E!t$t%eme!t pro3rams %$e >o,$a% >e,ur$ty a!" Me"$,are are a,,ru$!3 future be!ef$t %$ab$%$t$est5 a,,or"$!3 to pru"e!t bus$!ess pra,t$,es5 shou%" be a""resse" by putt$!3 as$"e e!ou3h mo!ey to ,o4er theprese!t 4a%ue of those future ob%$3at$o!s+ The! those ob%$3at$o!s shou%" be re,or"e" a,,or"$!3 to 3e!era%%y

,epte" a,,ou!t$!3 pr$!,$p%es ?Z00PA+ 0 pr$4ate se,tor ,ompa!y ($th a pe!s$o! p%a! $s %e3a%%y re8u$re" to "os5 a!" has to report a!y u!"erfu!"$!3 to re3u%ators+ But 3o4er!me!ts e6empt themse%4es from th$su$reme!t a!" s$mp%y a%%o( the future ob%$3at$o!s to bu$%" up ($th %$tt%e $f a!y report$!3 o! the$r true s$]e+


27/128

I! the U>5 be!ef$ts prom$se" to future re,$p$e!ts of >o,$a% >e,ur$ty a!" Me"$,are are 4ery rea% ob%$3at$o!s

a3$!e ,utt$!3 ret$rees1 hea%th ,are a!" the! ru!!$!3 for ree%e,t$o!A5 ar3uab%y more rea% tha! bo!" $!tereste" to &h$!a or >au"$ 0rab$a+ >o $t maes se!se to 4$e( them as a form of "ebt+ Whe! these u!fu!"e"

b$%$t$es are fo%"e" $!to the U> fe"era% "ef$,$t ,a%,u%at$o!5 the a!!ua% f$3ure soars from the `T0TE>5 jOMBIE &ITIE>pare!t%y ta$!3 the$r ,ue from Wash$!3to!5 U> states a!" %o,a%$t$es ha4e spe!t the past fe( "e,a"es offer$!3ermore3e!erous pe!s$o!s a!" ret$ree hea%th be!ef$ts to pub%$, se,tor (orers5 fre8ue!t%y ($thout putt$!3

ay e!ou3h mo!ey to ,o4er the resu%t$!3 ob%$3at$o!s+ No( yester"ay1s (orers are be,om$!3 to"ay1s ret$rees5" $! ma!y ,ases the prom$se" mo!ey $s !ot there+ But $!stea" of ,utt$!3 be!ef$ts a!"cor ra$s$!3 ta6es5 ma!y!s$o! p%a!s are us$!3 a,,ou!t$!3 tr$,s to h$"e the$r prob%ems+

O!e popu%ar tr$, $s the o4er%ya33ress$4e retur! assumpt$o!+ 0ssume5 for e6amp%e5 that you1re ru!!$!3 ate tea,hers1 ret$reme!t fu!"+ You ha4e a ,erta$! amou!t of mo!ey o! ha!" a!" more ,om$!3 $! ea,h year+ur $!4este" ,ap$ta% ($%% probab%y ear! about per,e!t a!!ua%%y o4er the !e6t t(e!ty years5 but that (o!1t4e you ($th !ear%y e!ou3h to ,o4er the %$e%y be!ef$t ,osts+ I! other (or"s5 you1re mass$4e%y u!"erfu!"e"+t ra$se the retur! assumpt$o! to per,e!t a!" the ma3$, of ,ompou!" $!terest 3$4es you t($,e as mu,hpothet$,a% future $!,ome5 (h$,h m$3ht spe%% the "$ffere!,e bet(ee! be$!3 ; per,e!t fu!"e"5 (h$,h $se8uate5 a!" o!%y ; per,e!t fu!"e"5 (h$,h $s ,atastroph$,+


28/128

Th$s p%oy $s ,ommo! e!ou3h to be thou3ht of as sta!"ar" operat$!3 pro,e"ure+ 0t the state %e4e%5 retur!sumpt$o!s are ,o!,e!trate" arou!" C+[ per,e!t per,e!t5 (h$,h $s ($%"%y u!rea%$st$, $! a! e!4$ro!me!t

ere to,s5 mea!(h$%e5 ha4e ha" a hu3e ru! $! re,e!t years a!" (ere5 $! %ate :;


29/128

Where the fe"era% 3o4er!me!t has a pr$!t$!3 press a!" ?for a t$meA effe,t$4e%y u!%$m$te" borro($!3 ,apa,$ty5

roub%e" state or ,$ty re8u$res a "e,e!t bo!" rat$!3 to be ab%e to borro(+ 0s the$r a,,ou!t$!3 tr$,s arepose" a!" the$r bo!" rat$!3s s%$p to(ar"s 7u!5 I%%$!o$s5 &h$,a3o a!" the$r m$sma!a3e" peers ($%%reas$!3%y ha4e to %$4e ($th$! the$r mea!s+ 0!" short of "efau%t5 th$s ,a! be "o!e o!%y throu3h somemb$!at$o! of h$3her ta6es a!" re"u,t$o! $! ser4$,es5 both of (h$,h s,are a(ay the ta6 base ?&h$,a3o %ostre tha! :;;5;;; res$"e!ts $! the :;;;sA5 ma$!3 the f$!a!,$a% ho%e e4e! "eeper+

Numerous other states a!" ,$t$es f$!" themse%4es $! s$m$%ar stra$ts5 7ust o!e 3ar"e!4ar$ety sto, maretre,t$o! a(ay from a f$s,a% ,r$s$s $! (h$,h ta6payers su""e!%y f$!" themse%4es o! the hoo for b$%%$o!s more $!!s$o! ob%$3at$o!s5 (h$%e suppose"%y r$sfree mu!$,$pa% bo!"s start tra"$!3 %$e 7u! bo!"s+ The! (hat_ E$ther

aforeme!t$o!e" Zreesty%e auster$ty5 "efau%t ($th a %ot of broe! prom$ses or a fe"era% ba$%out $! (h$,hsh$!3to! effe,t$4e%y ,o!4erts pe!s$o! ob%$3at$o!s to Treasury bo!"s5 at ta6payer e6pe!se+ Z$4e! that "efau%the %east attra,t$4e opt$o! for e%e,te" off$,$a%s5 re,$p$e!ts of 3o4er!me!t ser4$,es5 a!" mu!$,$pa% bo!"ho%"ers

e5 $t seems probab%e that attempts ($%% be ma"e to f$6 the u!"erfu!"$!3 a!" o4erspe!"$!3 ($th borro(e"!ey+ >o tota% 3o4er!me!t "ebt $! the U>5 rather tha! stab$%$]$!3 at ,urre!t %e4e%s5 $s o! the 4er3e of a!othere+


30/128

&H0PTE# [OQE#LEQE#0ZED B0N@>

0ND THE DE#IQ0TIQE> TIMEBOMB! u!re3u%ate" "er$4at$4es maret esse!t$a%%y 3$4es Wa%% >treet a (ay to p%a,e h$""e! ta6es o! e4eryth$!3 $!

(or%"+ Matt Ta$bb$5 #o%%$!3 >to!e

a]$!3%y5 the %$ab$%$t$es "es,r$be" $! the pre4$ous ,hapter are!1t the s,ar$est $ssue fa,$!3 to"ay1s f$!a!,$a%r%"+ That "$st$!,t$o! be%o!3s to o4erthe,ou!ter "er$4at$4es5 u!re3u%ate" ,o!tra,ts bet(ee! f$!a!,$a%t$tut$o!s $! (h$,h ea,h ,ou!terparty taes o!e s$"e of a bet o! $!terest rates5 ,urre!,y mo4eme!ts5 bo!"au%t or pretty mu,h a!yth$!3 e%se that mo4es+ Be,ause there $s !o %$m$t o! ho( ma!y ,o!tra,ts ,a! be (r$tte!

a 3$4e! bo!" $ssue or ,urre!,y pos$t$o! or (hate4er5 the amou!t of "er$4at$4es that ,a! be ,reate" $se,t$4e%y $!f$!$te+ 0s a resu%t5 ba!s a!" he"3e fu!"s !o( treat th$s maret as a ,as$!o5 ma$!3 bets a!"e,t$!3 fees $! e4er$!,reas$!3 amou!ts+ The fa,e 4a%ue of a%% "er$4at$4es outsta!"$!3 $! :;oreporte" amou!t of r$s to the e6te!t that su,h th$!3s are reporte" at a%% %oos 8u$te mo"est+ Th$s

,t$,e e6p%a$!s ho( the !ot$o!a%5 or fa,e 4a%ue of o4erthe,ou!ter "er$4at$4es ,a! r$se from `+C tr$%%$o! $!;< to `G= tr$%%$o! $! :;tear!s a!" 0IZ+ Whe! those f$rms $mp%o"e"5 o!e s$"e of tr$%%$o!s of%ars of "er$4at$4es "efau%te"5 %ea4$!3 the rema$!$!3 ,ou!terpart$es su""e!%y u!he"3e"5 that $s5 %$ab%e forer ,o!tra,ts ($thout the e6pe,te" prote,t$o! from the !o("efau%te" ,o!tra,ts+ The !et "er$4at$4es

posure be,ame $rre%e4a!t (h$%e the 3ross !umber be,ame rea%5 ($th !ear,atastroph$, ,o!se8ue!,es for theba% f$!a!,$a% system+No(5 after ,om$!3 ($th$! "ays of ,omp%ete ,orporate e4aporat$o! a!" o!%y sur4$4$!3 be,ause of a!

so%ute%y u!pre,e"e!te" 3o4er!me!t ba$%out5 o!e m$3ht th$! the b$3 ba!s (ou%" re,o3!$]e that "er$4at$4esre ba" a!" "$a% ba, the$r e6posure by5 say5 per,e!t or so+ I!stea"5 the %ure of those b$3 fees f%o($!3ou3h to the a!!ua% bo!us poo% appare!t%y pro4e" stro!3er tha! the %$!3er$!3 memor$es of :;;5 %ea"$!3 the!ey ,e!ter ba!s to eep o! (r$t$!3 "er$4at$4es at a !earre,or" pa,e+

The fo%%o($!3 tab%e ,ompares the assets a!" "er$4at$4es boos of some ma7or ba!s+


31/128

To 3$4e some se!se of the ma3!$tu"e of these "er$4at$4es !umbers5 Deuts,he Ba!1s !ot$o!a% "er$4at$4eso $s :< t$mes the s$]e of the Zerma! e,o!omy+

Zra"ua%%y5 a! u!"ersta!"$!3 of the r$ss pose" by "er$4at$4es "oes seem to be ,reep$!3 $!to the$!stream+ 0s e,o!om$st >her$ Marose e6p%a$!e" $! a re,e!t I!ter!at$o!a% Mo!etary u!" report2

The 3%oba% "er$4at$4es marets $! the postLehma! per$o"5 "esp$te ,o!s$"erab%e ,ompress$o! of b$%atera%s$t$o!s5 are u!stab%e5 a!" they ,a! br$!3 about ,atastroph$, fa$%ure+ u$te s$mp%y5 a threat of fa$%ure to a!y of

'ma7or ba!s/ $s a! $mme"$ate threat to the others+ The !et(or topo%o3y (here the 4ery h$3h per,e!ta3e ofposures $s ,o!,e!trate" amo!3 a fe( h$3h%y $!ter,o!!e,te" ba!s $mp%$es that they ($%% sta!" a!" fa%%ether+ Th$s topo%o3$,a% fra3$%$ty of the "er$4at$4es marets as r$sshar$!3 $!st$tut$o!s has a! $mp%$,$t mora%

]ar" prob%em that u!"erm$!es the$r so,$a% usefu%!ess+


32/128

P0#T II2&ON>EUEN&E> 0ND >&EN0#IO>


33/128

&H0PTE# GUN>OUND MONEY \ 0 &O##UPT >O&IETY

e 0mer$,a! #epub%$, ($%% e!"ure u!t$% the "ay &o!3ress "$s,o4ers that $t ,a! br$be the pub%$, ($th the pub%$,1s!ey+

0%e6$s "e To,8ue4$%% s$!3%e 8uote ,a! "ef$!e a boo5 the fo%%o($!35 from e,o!om$st Joh! May!ar" @ey!es5 ,omes ,%ose to$!$!3 th$s o!e2ere $s !o subt%er5 !o surer mea!s of o4ertur!$!3 the e6$st$!3 bas$s of so,$ety tha! to "ebau,h the ,urre!,y+

e pro,ess e!3a3es a%% the h$""e! for,es of e,o!om$, %a( o! the s$"e of "estru,t$o!5 a!" "oes $t $! a ma!!e$,h !ot o!e ma! $! a m$%%$o! $s ab%e to "$a3!ose+

Th$s ,hapter ($%% u!,o4er some of those h$""e! for,es of e,o!om$, %a( a!" sho( ho( they14e bee!stemat$,a%%y tur!$!3 a so,$ety base" o! thr$ft5 $!"ustry a!" tra!spare!,y $!to o!e base" o! "ebt5 frau" a!"+

The story be3$!s $! fou!" $tse%f $!ssess$o! of a seem$!3%y u!%$m$te" ,re"$t ,ar"5 (h$,h $t pro,ee"e" to ma6 out+ 0mo!3 other th$!3s5 $t bu$%t aba% m$%$tary emp$re5 a ,ra"%eto3ra4e e!t$t%eme!ts system5 a!" a ,o!sumer so,$ety that e!,oura3e"4$"ua%s to buy (hate4er they (a!te" o! ,re"$t+ Debt soare"5 too mu,h !e( ,urre!,y (as ,reate"5 a!" theue of the "o%%ar be3a! to "e,%$!e+0t th$s po$!t the 3o4er!me!t ha" a prob%em5 be,ause a "epre,$at$!3 ,urre!,y maes %$fe har" for 4oters by

s$!3 the ,ost of %$4$!3 a!" %o(er$!3 rea% $!4estme!t retur!s5 (h$%e stra$!$!3 the fe"era% bu"3et by $!,reas$!3,ost of $!f%at$o!$!"e6e" pro3rams %$e >o,$a% >e,ur$ty+ Be,ause the 4$,t$ms of su,h po%$,$es te!"5 r$3ht%y5 to

me e%e,te" off$,$a%s for the$r suffer$!35 the fe"era% 3o4er!me!t !o( ha" a! $!,e!t$4e to %$e about the 4a%ue of,urre!,y+

Pr$or to ubst$tut$o!5 $! (h$,h $!"e6 ,ompo!e!ts that are r$s$!3 too 8u$,%y are rep%a,e" ($th th$!3s that are !ot+ I!er (or"s5 $f stea $s r$s$!35 3o4er!me!t stat$st$,$a!s rep%a,e $t ($th ,h$,e! o! the assumpt$o! that th$s $s ho(

!sumers operate $! the rea% (or%"+Zeometr$, We$3ht$!35 $! (h$,h r$s$!3 ,ompo!e!ts are 3$4e! %ess re%at$4e (e$3ht+Homeo(!ers1 E8u$4a%e!t #e!t5 (h$,h rep%a,es (hat $t a,tua%%y ,osts to buy a house ($th a! est$mate ofat homeo(!ers (ou%" ha4e to pay to re!t the$r homes a"7uste" he"o!$,a%%y for 8ua%$ty $mpro4eme!ts+ Whe!me pr$,es are r$s$!3 faster tha! re!ts5 as they ha4e bee! for the past ,oup%e of "e,a"es5 th$s ,ha!3e %o(ers$mpa,t of hous$!3 o! $!f%at$o!+To"ay5 after three "e,a"es of stat$st$,a% massa3$!35 the &o!sumer Pr$,e I!"e6 ?&PIA !o %o!3er measures

,ost of ma$!ta$!$!3 a ,o!sta!t sta!"ar" of %$4$!3+ I!stea"5 $t measures the ,ost of a "e,%$!$!3 sta!"ar" of!3 $! (h$,h ,o!sumers are ,o!sta!t%y assume" to s($t,h from the$r f$rst ,ho$,e to the$r se,o!" or th$r"o$,es amo!3 %$fe1s !e,ess$t$es+ Mea!(h$%e5 be,ause >o,$a% >e,ur$ty payme!ts a!" ma!y other pe!s$o!s a!"3e a3reeme!ts are t$e" to the &PI5 th$s "e%$berate u!"erstateme!t of off$,$a% $!f%at$o! %o(ers the rea% $!,omespart$,$pa!ts $! these pro3rams $! most ,ases ($thout the$r !o(%e"3e or u!"ersta!"$!3+


34/128

$3ure G+< $%%ustrates the ($"e!$!3 3ap bet(ee! tra"$t$o!a% a!" mo"er! $!f%at$o! measures+ The mo"er!at$o! rate5 represe!te" by the so%$" %$!e5 $s mo"est5 pa$!t$!3 a p$,ture of a (e%%ru! mo!etary system $! (h$,h,ost of %$4$!3 $s r$s$!3 o!%y s%$3ht%y+ Ho(e4er5 a,,or"$!3 to ,a%,u%at$o!s performe" by Joh! W$%%$ams of

a"o(>tats5 $f the U> ha" ,o!t$!ue" to ,a%,u%ate $!f%at$o! the o%" (ay ?broe! %$!eA5 the ,ost of %$4$!3 (ou%" be!3 at a !ear"oub%e"$3$t rate+0!" the 3ap $s about to ($"e! ($th the a"opt$o! of a &ha$!e"&PI (h$,h $!,reases the subst$tut$o! effe,t5

s %o(er$!3 the reporte" rate of $!f%at$o! by a!other ;+= per,e!ta3e po$!ts a!!ua%%y+ I! yeare!" :;o,$a% >e,ur$ty payme!ts e4e! (h$%e they $!,rease $! !om$!a% "o%%ar terms+P a!" Perso!a% I!,omeat$o! $s a ,ru,$a% part of the ,a%,u%at$o! of other e,o!om$, stat$st$,s+ Zross Domest$, Pro"u,t5 for $!sta!,e5 $s

measure of the s$]e of the e,o!omy5 a!" to ,a%,u%ate $t the 3o4er!me!t ,omp$%es ra( "ata from 4ar$ous,tors a!" the! "ef%ates the resu%t by $ts measure of the past year1s "epre,$at$o! of the "o%%ar5 to arr$4e at aa% $!f%at$o!a"7uste" ZDP !umber+ If $!f%at$o! $s h$3h5 the! the "ef%ator $s %ar3e a!" ZDP $s ,orrespo!"$!3%ya%%er5 a!" 4$,e 4ersa+

By systemat$,a%%y u!"erstat$!3 $!f%at$o!5 the 3o4er!me!t systemat$,a%%y o4erstates ZDP+ $3ure G+: sho(s"$ffere!,e bet(ee! ZDP as ,urre!t%y reporte" a!" ZDP as $t (ou%" ha4e bee! reporte" $f $t ha" bee!

%ate" by a more a,,urate measure of $!f%at$o!+ #eporte" ZDP ?so%$" %$!eA sho(s a sharp "e,%$!e $! :;;;5 fo%%o(e" by a "e,e!t re,o4ery+ But the other 4ers$o! ?broe! %$!eA5 us$!3 $!f%at$o! ,a%,u%ate" the pre


35/128

0!other stat$st$, that $s affe,te" by $!f%at$o! $s Me"$a! Househo%" I!,ome5 a measure of the a4era3e

m$%y1s f$!a!,$a% (e%fare+ Here a3a$!5 the reporte" !umbers ?so%$" %$!eA5 a"7uste" for the 3o4er!me!t1s,ept$4e%y %o( $!f%at$o! rate5 sho( u!spe,ta,u%ar but !ot$,eab%e 3a$!s s$!,e the ha"o(>tats !umber5


36/128

a!(h$%e5 a""s %o!3term "$s,oura3e" (orers to arr$4e at the most rea%$st$, measure5 o!e that sho(s Zreatpress$o!%e4e% u!emp%oyme!t a!"5 $mporta!t%y5 $s !ot "e,%$!$!3+

Wh$%e (e1re o! the sub7e,t of emp%oyme!t stat$st$,s5 $! :;; the Wash$!3to! Postreporte" that Pres$"e!tama has "e,$"e" to ha4e the "$re,tor of the U+>+ &e!sus Bureau (or "$re,t%y ($th the Wh$te House5 toe poss$b%e o4ers$3ht of the "$re,tor by se!$or Wh$te House a$"es+ 0!" $! No4ember :;te(art $! It1s a Wo!"erfu% L$fe+ The 3o4er!me!t $s ,reat$!3 %ots of !e( "o%%ars a!" ma$!3 thema$%ab%e to you5 so you ha4e p%e!ty of ,ap$ta% ($th (h$,h to mae %oa!s+ But you14e a%rea"y 3$4e! %oa!s to pretty,h e4ery ,re"$t(orthy ,ustomer you ,a! f$!"+ Be,ause you1re re%u,ta!t to %e!" to peop%e (ho probab%y ,a!1ty ba, a %oa!5 your $mpu%se $s to s%o( "o(!5 s,a%e ba, %e!"$!3 a!" (a$t u!t$% the e,o!omy starts 3e!erat$!3re ,re"$t(orthy borro(ers+

But that mea!s 3$4$!3 up the fees 3e!erate" by !e( %oa!s (h$,h %ess s,rupu%ous ,ompet$tors are more

! ($%%$!3 to (r$te+ Those ,ompet$!3 ba!s be,ome more prof$tab%e tha! yours5 a!" your boar" of "$re,tors3$!s to 8uest$o! your ,ompete!,e+ They mae $t ,%ear that $f your resu%ts "o!1t $mpro4e they ($%% tea3a%%the aftermath of the Zreat Depress$o!5 the Z%ass>tea3a%% 0,t of


37/128

mmer,$a% ba!s5 (h$,h (ere ba!!e" from r$sy $!4estme!ts $! retur! for the 3o4er!me!t 3uara!tee$!3 the$rpos$tors1 mo!ey5 a!" $!4estme!t ba!s that (ere free to mae b$3 bets o! pretty mu,h a!yth$!3 (h$%e putt$!3$r part!ers1 a!" $!4estors1 mo!ey at r$s+ Th$s "$4$s$o! ept the ba!$!3 system from beha4$!3 too ,ra]$%y for

4era% "e,a"es+ But the restr$,t$o!s bothere" $!,reas$!3%ypo(erfu% ba!ers (ho e!4$s$o!e" f$!a!,$a%permarets offer$!3 e4eryth$!3 to e4eryo!e+ O4er t$me they (ere ab%e to ,ar4e out %e3a% %oopho%es thatab%e" them to ,o!"u,t $!4estme!t ba!$!35 mo!ey ma!a3eme!t a!" spe,u%at$4e tra"$!3 throu3h separatebs$"$ar$es+ 0!" $! tea3a%%+ W$th theoe of a pe!5 the f$!a% "$st$!,t$o!s bet(ee! ,ommer,$a% ba!5 $!4estme!t ba!5 a!" he"3e fu!" %ar3e%yappeare"+re3u%at$o! of O4erthe&ou!ter Der$4at$4es

,a%% from &hapter [ that o4erthe,ou!ter "er$4at$4es are ,o!tra,ts bet(ee! t(o ,o!se!t$!3 f$!a!,$a%t$tut$o!s !o(! as ,ou!terpart$es that bet o! ,ha!3es $! $!terest rates5 ,urre!,y e6,ha!3e rates a!" thebab$%$ty of bo!" "efau%ts5 amo!3 other th$!3s+ 0s they be,ame e4ermoreprof$tab%e5 the ba!s (ere ab%e to

!4$!,e &o!3ress to e6empt them from o4ers$3ht by the &ommo"$ty utures Tra"$!3 &omm$ss$o!5 theu%atory bo"y respo!s$b%e for other $!"s of "er$4at$4es+ The maret the! e6p%o"e" to ha%fa8ua"r$%%$o! "o%%ars

!ot$o!a% 4a%ue+ ?I! a! $!terest$!3 e6amp%e of (hat happe!s $! u!re3u%ate" f$!a!,$a% marets5 ba!s (ere ab%e4a%ue the$r "er$4at$4es ho(e4er they %$e"5 mea!$!3 that $t (as poss$b%e for both part$es of a 3$4e! "er$4at$4eeport $t as prof$tab%e+A The mu%t$tr$%%$o! "o%%ar ba$%outs of the :;; f$!a!,$a% ,r$s$s (ere a "$re,t resu%t of these

!tra,ts b%o($!3 up (he! ,ou!terpart$es fa$%e"+e #$3ht to O(! Warehouses a!" #ef$!er$es:;a,hs 8u$,%y bou3ht Metropo%$ta! I!ter!at$o!a% Tra"e >er4$,es5 a str$!3 of Detro$tarea a%um$!umrehouses+ It the!5 a,,or"$!3 to !umerous %a(su$ts outsta!"$!3 $! %ate :;a4$!3s Loa! ,r$s$s of the ear%y treet %a( f$rm Debe4o$se P%$mpto! (here she "efe!"e" ba!s from ,har3es ofrupt$o!+ The &T& (as ru! by Zary Ze!s%er5 a former part!er at Zo%"ma! >a,hs5 (here he ser4e" as &oa" of $!a!,e+ 0!" Treasury >e,retary Ja, Le( (as a former &$t$3roup ba!er (hose ,o!tra,t ha" a ,%auset pa$" h$m a `;5;;; bo!us $f he %eft the ba! for a h$3h%e4e% 3o4er!me!t or re3u%atory pos$t$o!+

Just for fu!5 here1s a! $!,omp%ete but represe!tat$4e %$st of hea"%$!es "eta$%$!3 the $!"s of she!a!$3a!s the!s ha4e bee! up to %ate%y2!" Dea% Dra(s $!e for UB>Mor3a! >ett%es E%e,tr$,$ty Ma!$pu%at$o! &ase for `ues Ba! of 0mer$,a O4er Mort3a3e >e,ur$t$es

!ate Ope!s Probe of Ba!s1 &ommo"$t$es Bus$!esses #e3u%ators $!" E4$"e!,e of Ba!s $6$!3 Der$4at$4es #ates%"ma! >a,hs >ue" for 0%%e3e"%y I!f%at$!3 0%um$!um Pr$,esQE#> BE&OME BO##OWE#>

s$"es ,orrupt$!3 ba!ers5 systemat$, $!f%at$o! "$s,oura3es thr$ft a!" sa4$!3s a!" e!,oura3es borro($!3 a!"f%$3a,y+ To $%%ustrate the pro,ess5 $ma3$!e t(o !e$3hbors5 Bob a!" Martha+ Bob sa4es a b$3 part of e4eryy,he, ?(h$,h $! the !o!$!f%at$o!ary past (as ,o!s$"ere" ($se beha4$orA a!" puts the pro,ee"s $!to a"$t$o!a% ba! sa4$!3s a,,ou!t o! the assumpt$o! that $t ($%% be safe a!" a4a$%ab%e (he! !ee"e"5 (h$%e ear!$!3easo!ab%e retur!5 %et1s say = per,e!t5 ea,h year+

No( assume that the 3o4er!me!t5 $! or"er to f$!a!,e $ts "ef$,$ts a!" ,reate %ots of spe,u%at$4e opportu!$t$es%ar3e ba!s5 ,hooses to "epre,$ate the "o%%ar by per,e!t a year ?(h$%e report$!3 $!f%at$o! of o!%y : per,e!tA+


38/128

e pur,has$!3 po(er of the "o%%ars $! Bobthesa4er1s ba! a,,ou!t a,tua%%y fa%%s $! rea% terms by G per,e!t aar5 so that at the e!" of a %$fet$me of sa4$!35 h$s !est e33 has far %ess pur,has$!3 po(er tha! he e6pe,te"+

Bob1s !e$3hbor Martha5 mea!(h$%e5 sees that $!terest rates are %o( a!" that e4eryth$!3 seems to ,ost a %otre e4ery year5 so she "oes!1t bother to sa4e5 $!stea" ta$!3 out the b$33est poss$b%e mort3a3e o! her housea 3o4er!me!tsubs$"$]e" rate of per,e!t+ W$th rea% $!f%at$o! ru!!$!3 at per,e!t5 her mort3a3e be,omess o!erous e4ery year5 u!t$% $ts mo!th%y payme!ts ha4e bee! re"u,e" to a p$tta!,e $! rea% terms+ >he spe!"sfe "eep%y $! "ebt5 but e!"s up r$,her tha! Bob be,ause the 3o4er!me!t1s po%$,y of ,urre!,y $!f%at$o!!$f$,a!t%y %esse!e" the bur"e! of her "ebts+

>ee$!3 s$m$%ar th$!3s happe!$!3 a%% arou!" them5 Bob a!" Martha1s fr$e!"s a!" !e$3hbors mae theo!a% "e,$s$o! to emu%ate Martha5 pro"u,$!3 a so,$ety $! (h$,h e4eryo!e borro(s a!" !o o!e sa4es+ Wh$,h $s

a,t%y (hat the U> has be,ome+ 0s $3ure G+[ $%%ustrates5 the !at$o!a% sa4$!3s rate fe%% from a! a4era3e of TED B#0ND> BE&OME UNT#U>TWO#THY( %et1s say you1re ru!!$!3 a ,erea% ,ompa!y or fast foo" restaura!t ,ha$!+ Your ,osts are r$s$!3 at the rea%at$o! rate of about per,e!t+ But e4eryo!e th$!s $!f%at$o! $s : per,e!t5 so you ,a!1t ra$se pr$,es $! %$!e ($thsts ($thout a%$e!at$!3 your ,ustomers+ Ne$ther ,a! you eat the ,ost $!,reases ($thout see$!3 your a%rea"y

orth$! prof$t mar3$!s e4aporate+ >o (hat "o you "o_ Perhaps you 3$4e ,ustomers a %$tt%e %ess for the$r!ey5 but se,ret%y+ You put %ess ,erea% $! ea,h bo65 or you m$6 a b$t of soy f$%%er or p$! s%$me $!to yourmer%y a%%beef patt$es5 a!" hope !o o!e !ot$,es+

I! :;


39/128

!trast ($th a >ou!" Mo!ey E!4$ro!me!te! a ,urre!,y ho%"s $ts 4a%ue5 3o4er!me!t has %ess $!,e!t$4e to %$e about $ts performa!,e+ It ,a! ho!est%yte that $ts mo!ey $s sou!" a!" that $ts ,$t$]e!s1 sa4$!3s are be,om$!3 a %$tt%e more 4a%uab%e ea,h year+ >a4ersre(ar"e" for the$r thr$ft (h$%e borro(ers are pu!$she" for the$r prof%$3a,y ?the a!t1s pru"e!t strate3y $s

ore" o4er the 3rasshopper1s %a, of ,o!,er! about the futureA+ Ba!s5 !o %o!3er the "$str$butors of a torre!t of(%ypr$!te" ,urre!,y5 are far %ess po(erfu%5 ha4e %ess $!,e!t$4e to mae u!($se %oa!s for $mme"$ate feeome5 a!" ,o!tro% fe(er resour,es ($th (h$,h to buy 3o4er!me!t fa4or+ I!"ustr$a% ,ompa!$es5 (h$,h mae rea%!3s rather tha! shuff%$!3 paper5 be,ome re%at$4e%y more po(erfu%+ Ma!ufa,tur$!35 or more 3e!era%%y"u,t$o! of a%% sorts5 be,omes the ,ore of the e,o!omy5 ($th f$!a!,e a support fu!,t$o! rather tha! the sour,e

most po(er a!" (ea%th+

&ompa!$es $! a sou!" mo!ey system5 mea!(h$%e5 see the$r $!put ,osts fa%% or rema$! stab%e5 so $!stea" of3ra"$!3 the$r pro"u,ts a!" %y$!3 about $t5 they are $!,e!te" to 3$4e ,ustomers more for the$r mo!ey a!" to3 about $t+ The resu%t2 h$3her8ua%$ty $!3re"$e!ts5 %ar3er pa,a3es5 better pro"u,ts a!" a"4ert$s$!3 that te%%s

!sumers that they1re 3ett$!3 more for the$r mo!ey+ Trust $! bus$!ess 3ro(s rather tha! ero"es+Th$s (as the (ay of the (or%" for t(o ,e!tur$es u!"er the &%ass$,a% Zo%" >ta!"ar" ?(h$,h $s e6p%a$!e" a

up%e of ,hapters he!,eA5 (he! !at$o!a% ,urre!,$es a,tua%%y be,ame a %$tt%e more 4a%uab%e ea,h year+ To"ay1sr%"5 a%as5 $s 4ery "$ffere!t+


40/128

&H0PTE# CPE#PETU0L W0#

0ND THE EME#ZINZ POLI&E >T0TEere (as of ,ourse !o (ay of !o($!3 (hether you (ere be$!3 (at,he" at a!y 3$4e! mome!t+ Ho( ofte!5 o(hat system5 the Thou3ht Po%$,e p%u33e" $! o! a!y $!"$4$"ua% ($re (as 3uess(or+ It (as e4e! ,o!,e$4ab%et they (at,he" e4erybo"y a%% the t$me+ But at a!y rate they ,ou%" p%u3 $! your ($re (he!e4er they (a!te" to+u ha4e to %$4e "$" %$4e5 from hab$t that be,ame $!st$!,t $! the assumpt$o! that e4ery sou!" you ma"e (aserhear"5 a!"5 e6,ept $! "ar!ess5 e4ery mo4eme!t s,rut$!$]e"+

Zeor3e Or(e%%5 3o4er!me!t has tae! the esp$o!a3e a!" ,oer,$o! te,h!$8ues

"$t$o!a%%y emp%oye" $! fore$3! affa$rs5 up"ate" them ($th : to be,ome more $!trus$4e5 se,ret$4e a!" ,oer,$4e+ But 7ust ho( $!trus$4e5 se,ret$4e a!" ,oer,$4e may st$%%

me as a sho,+ What fo%%o(s $s a 4ery br$ef ,hro!$,%e of the U> 3o4er!me!t1s "es,e!t $!to author$tar$a!$sm+r4e$%%a!,e2 B$3 Brother Is Wat,h$!3

er a postWater3ate >e!ate $!4est$3at$o! "o,ume!te" abuses of 3o4er!me!t spy$!35 &o!3ress $! 0 a!" BI a,,ess to user "ata from M$,rosoft5


41/128

p%e5 Zoo3%e a!" se4era% other ma7or te%e,ommu!$,at$o!s ,ompa!$es+ &o!3ress the! 3ra!te" $mmu!$ty toe,om ,ompa!$es for the$r part$,$pat$o! $! (arra!t%ess ($retapp$!3+ It (as subse8ue!t%y re4ea%e" that,eboo shares member $!format$o! ($th the author$t$es+

0!other pro3ram ,a%%e" d@eys,ore maes a4a$%ab%e e4eryth$!3 a tar3et has e4er "o!e o! the I!ter!et n(s$!3 h$story5 sear,hes5 ,o!te!t of ema$%s5 o!%$!e ,hats to e4e! %o(%e4e% N>0 a!a%ysts+ 0%% ($thout a ,ourtue" (arra!t or e4e! a super$or1s s$3!ature+ 0s N>0 (h$st%eb%o(er E"(ar" >!o("e! to%" a reporter $! ear%y!o("e! a%so re4ea%e" that the N>0 ha" ha,e" $!to ,omputers to s!are messa3es before they (ere,rypte" a!" ?3o$!3 beyo!" spy$!3 to be,ome a saboteurA $!tro"u,e" (ea!esses $!to the e!,rypt$o!

!"ar"s fo%%o(e" by har"(are a!" soft(are "e4e%opers arou!" the (or%"+ The resu%t2 %ess se,ur$ty for !ot 7ustror$sts1 ema$%s but a%so ba! tra!sa,t$o!s5 me"$,a% re,or"s a!" ,ommu!$,at$o!s amo!3 ,o(orers a!"!"s+

I! :;+ Be,ause e4e! the ,urre!t 3o4er!me!to3!$]es that th$s $s u!,o!st$tut$o!a%5 the "ata $s be$!3 %au!"ere" 4$a the fa%s$f$,at$o! of e4$"e!,e+ Theo($!3 passa3e from a >a%o! art$,%e "es,r$bes the pro,ess2

0 se,ret bra!,h of the DE0 ,a%%e" the >pe,$a% Operat$o!s D$4$s$o! so se,ret that !ear%y e4eryth$!3 about ,%ass$f$e"5 $!,%u"$!3 the s$]e of $ts bu"3et a!" the %o,at$o! of $ts off$,e has bee! us$!3 the $mme!se poo%s

"ata ,o%%e,te" by the N>05 &I05 BI a!" other $!te%%$3e!,e a3e!,$es to 3o after 0mer$,a! ,$t$]e!s for or"$!ary3 ,r$mes+ La( e!for,eme!t a3e!,$es5 mea!(h$%e5 ha4e bee! ,oa,he" to ,o!,ea% the e6$ste!,e of the

3ram a!" the sour,e of the $!format$o! by ,reat$!3 (hat1s ,a%%e" a ipara%%e% ,o!stru,t$o!51 a fae ors%ea"$!3 tra$% of e4$"e!,e+ >o !o o!e $! the ,ourt system !ot the "efe!"a!t or the "efe!se attor!ey5 !ote! the prose,utor or the 7u"3e ,a! e4er tra,e the ,ase ba, to $ts true or$3$!s+

The amou!t of mo!ey be$!3 "e4ote" to sur4e$%%a!,e5 mea!(h$%e5 $s $mme!se+ I! :; ,ou!ts a%% m$%$tarya3e

%es $! a str$e ]o!e as ,ombata!ts5 thou3h press a,,ou!ts of fu!era%s a!" (e""$!3 part$es be$!3 bombe" are,om$!3 ,ommo!+

Throu3h $t a%%5 "ebate o4er the treatme!t of pr$so!ers has ra3e"+ 0,,or"$!3 to the &o!st$tut$o!1s E$3hthe!"me!t the fe"era% 3o4er!me!t ,a!!ot $mpose ,rue% a!" u!usua% pu!$shme!ts5 (h$,h by %o3$, a!"

!era% a3reeme!t $!,%u"e torture+ But (h$%e the U> (as "e,%ar$!3 that !o torture (as 3o$!3 o!5 pr$so!ers he%"ra8 a!" e%se(here (ere reporte"%y sub7e,te" to amputat$o!s5 beat$!3s5 bur!$!3s a!" %ash$!3s5 a!" $! se4era%ses (ere beate! to "eath+ Whe! su,h stor$es rea,he" the Pe!ta3o!5 off$,$a%s reporte"%y "e,%$!e" to $!ter4e!eo u!$forme" U> so%"$ers (ere $!4o%4e"5 $mp%y$!3 that free re$! (as be$!3 3$4e! to h$re" mer,e!ar$es+ &%oserhome5 the U> (as emp%oy$!3 torture "$re,t%y 4$a e!ha!,e" $!terro3at$o! te,h!$8ues %$e (aterboar"$!35

ep "epr$4at$o! a!" se6ua% hum$%$at$o! at $ts Zua!ta!amo Bay pr$so!5 ($th a,8u$es,e!,e5 $f !ot "$re,t$o!5 fromher ups+0 3ro($!3 !umber of (h$st%eb%o(ers5 appa%%e" by (hat they1re see$!35 ha4e be3u! to %ea ,%ass$f$e"

ormat$o! "eta$%$!3 7ust ho( far the U> has straye" from $ts $"ea%s+ To tae a fe( of the hu!"re"s of "$sturb$!3e!t re4e%at$o!s2E3ypt$a!s a%%e3e"%y 3$4e! huma! r$3hts tra$!$!3 by the BI (ere a,tua%%y tra$!e" to torture+! :; ha" tappe" the pho!es of the %ea"ers of Zerma!y5 Bra]$% a!" ra!,e5 amo!3 others5 a!" $! a3%e mo!th mo!$tore" o4er G; m$%%$o! pho!e ,o!4ersat$o!s $! >pa$!+


42/128

The Just$,e Departme!t sto%e t(o mo!ths of te%epho!e re,or"s of 0sso,$ate" Press reporters a!" e"$tors $!at the !e(s ,ooperat$4e ,a%%e" a mass$4e a!" u!pre,e"e!te" $!trus$o! $!to !e(s or3a!$]at$o!s1 free"om toerate+,a% Po%$,e Be,ome a! O,,upy$!3 0rmy!$,$pa% po%$,e for,es are be$!3 reshape" by the same ,o!f%ue!,e of r$s$!3 threat %e4e% a!" !e( te,h!o%o3y5 $!pro,ess tra!sform$!3 the ,op o! the beat $!to a someth$!3 resemb%$!3 a so%"$er $! a! o,,upy$!3 army+

ests tra"$t$o!a%%y ma"e by a ha!"fu% of u!$forme" off$,ers !o,$!3 o! a "oor are !o( $!,reas$!3%y e6e,ute">W0T teams of a "o]e! or more off$,ers us$!3 spe,$a%for,es ta,t$,s+ >tor$es abou!" of su,h ,omma!"o"s $! (h$,h "oors are $,e" $! a!" o,,upa!ts beate! or shot some of (h$,h tur! out to be ,ases ofstae! $"e!t$ty+ I!,reas$!3 amou!ts of property are be$!3 se$]e" u!"er ,$4$% forfe$ture %a(s5 (h$,h a%%o( po%$,e

se$]e assets of suspe,te" %a(breaers before a tr$a% has fou!" them 3u$%ty+0,,or"$!3 to o!e stu"y5 the !umber of param$%$tary "ru3 ra$"s $! the U> tota%e" a fe( hu!"re" per year $! Departme!t of Defe!se hastr$bute" b$%%$o!s of "o%%ars1 (orth of surp%us Ira8 a!" 0f3ha!$sta! m$%$tary 3ear to %o,a% po%$,e for,es+

Th$s5 a%as5 $s 7ust the be3$!!$!3+ &urre!t%y u!"er "e4e%opme!t by Home%a!" >e,ur$ty $s BO>>5 short formetr$, Opt$,a% >ur4e$%%a!,e >ystem5 (h$,h ,a! s,a! e!t$re ,ro("s a!" use fa,$a% re,o3!$t$o! soft(are to p$,$!"$4$"ua% tar3ets up to 0A has be3u!

!"u,t$!3 ra!"om ba3 sear,hes a!" $!terro3at$o!s at tra$! a!" bus stat$o!s+ The "$4$s$o! respo!s$b%e for thesear,hes $s !ame" Q$s$b%e I!termo"a% Pre4e!t$o! a!" #espo!se ?QIP#A5 pro!ou!,e" 4$per+

r!@ey Tota%$tar$a! >tate" $t a%% up5 a!" the U> ,erta$!%y appears to ha4e shre""e" $ts B$%% of #$3hts+ ree"om of assemb%y a!"ee,h5 a%o!3 ($th proh$b$t$o!s o! u!reaso!ab%e sear,h a!" ,rue% a!" u!usua% pu!$shme!t that 0mer$,a!se" to tae for 3ra!te" are fast "$sappear$!3+

To be fa$r5 (he! 4$e(e" $! the ,o!te6t of to"ay1s asymmetr$,a% batt%ef$e%" $! (h$,h forma% arm$es are%a,e" by terror$st ,e%%s ($th pote!t$a%%y "e4astat$!3 (eapo!s5 some parts of B$3 Brother1s !e( too% $t may

em 7ust$f$e"+ If terror$sts are sh$pp$!3 a su$t,ase!ue to a U> ,$ty5 (e a%% (a!t the po%$,e to f$!" $t before $to!ates5 a!" $f that mea!s rea"$!3 a fe( ema$%s or e4e! tortur$!3 the p%a!s out of perpetrators5 the! maybe $!t mome!t of star ,ho$,e the e!" sa4$!3 m$%%$o!s of %$4es 7ust$f$es the mea!s+ 0!" for the most part5 BIe!ts are !ot yet the @ZB5 a!" %o,a% po%$,e off$,ers are !ot a! o,,upy$!3 army+

But the $!frastru,ture of (h$,h they are a part $s e4o%4$!3 $!to a tur!ey tota%$tar$a! state 7ust (a$t$!3 to be

t,he" o! by some future "esperate5 "era!3e"5 or s$mp%y ,orrupt %ea"er+ 0!" $f h$story tea,hes a!yth$!35 $t $st su,h peop%e are a%(ays $! the p$pe%$!e a!" te!" to appear $! 3reatertha!usua% !umbers (he! f$!a!,$a%apse be3ets po%$t$,a% ,r$s$s+


43/128

&H0PTE# M0NIPUL0TED M0#@ET>

ere are !o marets a!ymore5 7ust $!ter4e!t$o!s+ &hr$s Po(e%%5 Zo%" 0!t$Trust 0,t$o! &omm$ttee

,e upo! a t$me5 a ha!"fu% of ,ou!tr$es somet$mes "es,r$be" as ,ap$ta%$st ,%a$me" to operate o! the pr$!,$pa%t ,o!se!t$!3 a"u%ts shou%" be free to buy5 se%%5 bu$%" a!" ,o!sume (hat they (a!te"5 ($th %$tt%e $!terfere!,e or"a!,e from the author$t$es+ The $"ea5 "er$4e" from 0"am >m$th1s


44/128

ma!y to fu!!e% 3o4er!me!t mo!ey $!to the maret to boost share pr$,es (he! $t per,e$4es the !ee"+ The3$! of th$s $"ea 3oes ba, to A (as estab%$she" $! ,h(art]5 at the t$me at$!3u$she" e%%o( of the 0mer$,a! E,o!om$, 0sso,$at$o! e6p%a$!e" $! a (as

!,e$4e" to operate $! se,re,y u!"er the e6,%us$4e ,o!tro% of the >e,retary of the Treasury5 ($th the appro4a%the Pres$"e!t5 '8uot$!3 here from the


45/128

$e( by a!y other off$,er of the U!$te" >tates1+The E> !o( fu!,t$o!s as a s%ush fu!" a4a$%ab%e to the Treasury Departme!t for ($"era!3$!35 fre8ue!t%y

,ret maret $!ter4e!t$o!s+ It pro4$"es stab$%$]at$o! %oa!s to fore$3! 3o4er!me!ts+ It $!f%ue!,es ,urre!,y,ha!3e rates $!,%u"$!3 that of 3o%"+ It has bee! use" to offer $!sura!,e to mo!ey maret fu!"s a!" to ba$%

Me6$,o+ Most re,e!t%y $t (as "ra$!e" to pro4$"e the 3o4er!me!t some breath$!3 room "ur$!3 the %ate :; $s the rea% or at %east a!other !3e Prote,t$o! Team+

storte" >$3!a%s a!" Lost Trustat happe!s to a so,$ety (he! maret s$3!a%s are "$storte" by the 3o4er!me!t_ I! a (or"5 ma%$!4estme!t+

,tor$es are bu$%t that pro"u,e the (ro!3 th$!3s5 houses are bou3ht that ,ost more tha! the$r o(!ers ,a!

or"5 ba! &Ds are ,ashe" $! to buy sto,s 7ust before a maret ,orre,t$o!5 3o%" a!" other har" assets are!4erte" to paper ,urre!,y (he! they shou%" be a,,umu%ate" a!" he%" for the %o!3 hau%+ The maret5 $! short5ps "$re,t$!3 ,ap$ta% to $ts most pro"u,t$4e uses5 (ea%th ,reat$o! 3r$!"s to a ha%t5 a!" ,haos e4e!tua%%y e!sues+0%o!3 the (ay5 peop%e be3$! to !ot$,e that the marets they thou3ht (ere moreor%ess ho!est are be$!3

,ret%y ma!$pu%ate" for the be!ef$t of others5 a!" trust be3$!s to ero"e+ The !e6t ,hapter e6p%a$!s (hatppe!s the!+


46/128

&H0PTE# >H#IN@INZ T#U>T HO#IjON0ND THE &@UP BOOM

he!e4er "estroyers appear amo!3 me!5 they start by "estroy$!3 mo!ey5 for mo!ey $s me!1s prote,t$o! a!"base of a mora% e6$ste!,e+ Destroyers se$]e 3o%" a!" %ea4e to $ts o(!ers a ,ou!terfe$t p$%e of paper+ Th$s

s a%% ob7e,t$4e sta!"ar"s a!" "e%$4ers me! $!to the arb$trary po(er of a! arb$trary setter of 4a%ues+ 0y! #a!"5 0t%as >hru33e"

the s,ope a!" !ature of the ,orrupt$o! "eta$%e" $! the pre4$ous three ,hapters be,ome ,ommo! !o(%e"3e5er$,a!s are be3$!!$!3 to ,o!,%u"e that2

The e,o!omy $s $! (orse shape tha! the 3o4er!me!t says $t $s+

&o!sumers are 3ett$!3 %ess 4a%ue for the$r mo!ey tha! pre4$ous%y a!" $!stea" of r$s$!35 the$r sta!"ar" of %$4$!3,tua%%y ero"$!3+Marets o!,e thou3ht to be fa$r are be$!3 se,ret%y ma!$pu%ate" by the 3o4er!me!t to the "etr$me!t of theera3e ,$t$]e!+The po%$,e a!" m$%$tary are spy$!3 o! a!" threate!$!3 them $! seem$!3%yu!,o!st$tut$o!a% (ays+Ba!s a!" other ,orporat$o!s are us$!3 the$r "om$!a!,e of the f$!a!,$a% system to ,omm$t $!,reas$!3%yta!t a!" farrea,h$!3 frau"+

Po%%sters ha4e bee! !ot$!3 th$s sh$ft $! se!t$me!t for some t$me+ &o!3ress1 appro4a% rat$!35 a%(ays %o(5!3e" to s$!3%e"$3$ts $! :;to,$!3 up o! sur4$4a% rat$o!s+!4est$!3 $! offshore assets+0t f$rst 3%a!,e5 these tre!"s m$3ht seem to be ra!"om a!" u!re%ate" be,ause they ema!ate from "$ffere!t

!ts o! the po%$t$,a%cso,$a% spe,trum+ Home s,hoo%ers a!" %o,a% foo" buyers are fre8ue!t%y mot$4ate" byere!t $"eo%o3$es5 for $!sta!,e5 (h$%e offshore $!4estors a!" 3u! e!thus$asts fre8ue!t%y %ea" 4ery "$ffere!ts+ But a%% of the abo4e beha4$ors share o!e mot$4at$o! that ,uts a,ross po%$t$,a% aff$%$at$o! a!" so,$a% ,%ass2 a($!3 "$strust of the systems a!" $!st$tut$o!s that ru! the ,ou!try a!" the (or%"+0!" there$! %$es the rub+ $at ,urre!,y $! the e!" $s base" o! trust+ Trust $! 3o4er!me!t5 trust $! ba!s5 trust

,urre!,y $ssuers+ 0s that trust ero"es5 so "oes the ,urre!,y1s pur,has$!3 po(er+E &@UP BOOMe ear%y sta3es of a shr$!$!3 trust hor$]o! are a,,ommo"ate" 8u$te !$,e%y by the maret+ Lo,a% ba!s staff upha!"%e a sur3e $! "epos$ts5 %o,a% farmers e6pa!" to meet the !e( "ema!"5 ,ompa!$es are forme" to supp%yme s,hoo%ers ($th mater$a%s or to fa,$%$tate offshore trusts a!" LL&s5 et,+ But as the tre!" pro3resses5 $tmes to be u!"erstoo" that the ,e!tra%5 u!"er%y$!3 system that $s be$!3 ,orrupte" $s the ,urre!,y5 that most ofay1s po%$t$,a% a!" f$!a!,$a% ma%feasa!,e "epe!"s o! easy mo!ey5 a!" that $!f%at$o! $s a! o!3o$!3 po%$,y o

s per4as$4e !e( re3$me+ Whe! th$s rea%$]at$o! be,omes suff$,$e!t%y ($"esprea"5 the tre!"s to(ar"ser!ate mea!s of sa4$!3 mo!ey ?3o%" a!" s$%4erA5 emp%oy$!3 ,ap$ta% ?putt$!3 $t $!to rea% assets %$e farm%a!"A

" tra!sa,t$!3 $! e4ery"ay ,ommer,e ?($th B$t,o$! a!" other !o!!at$o!a% ,urre!,$esA rea,h a t$pp$!3 po$!t+I! the 0ustr$a! >,hoo% of e,o!om$,s ?(h$,h $s5 (e be%$e4e5 the o!%y bra!,h of that profess$o! that a,tua%%yp%a$!s ho( mo"er! f$!a!,$a% systems (orA th$s t$pp$!3 po$!t a!" (hat fo%%o(s $s !o(! as a ,ra,up boom+str$a! e,o!om$st Lu"($3 4o! M$ses e6p%a$!e" $t as fo%%o(s2

Th$s f$rst sta3e of the $!f%at$o!ary pro,ess may %ast for ma!y years+ Wh$%e $t %asts5 the pr$,es of ma!y 3oo"s" ser4$,es are !ot yet a"7uste" to the a%tere" mo!ey re%at$o!+ There are st$%% peop%e $! the ,ou!try (ho ha4e

yet be,ome a(are of the fa,t that they are ,o!fro!te" ($th a pr$,e re4o%ut$o! (h$,h ($%% f$!a%%y resu%t $! a
http://localhost/var/www/apps/conversion/tmp/scratch_4/fn1http://localhost/var/www/apps/conversion/tmp/scratch_4/fn1


47/128

!s$"erab%e r$se of a%% pr$,es5 a%thou3h the e6te!t of th$s r$se ($%% !ot be the same $! the 4ar$ous ,ommo"$t$es" ser4$,es+ These peop%e st$%% be%$e4e that pr$,es o!e "ay ($%% "rop+ Wa$t$!3 for th$s "ay5 they restr$,t the$r,hases a!" ,o!,om$ta!t%y $!,rease the$r ,ash ho%"$!3s+ 0s %o!3 as su,h $"eas are st$%% he%" by pub%$, op$!$o!5!ot yet too %ate for the 3o4er!me!t to aba!"o! $ts $!f%at$o!ary po%$,y+But the!5 f$!a%%y5 the masses (ae up+ They be,ome su""e!%y a(are of the fa,t that $!f%at$o! $s a "e%$berate

$,y a!" ($%% 3o o! e!"%ess%y+ 0 brea"o(! o,,urs+ The ,ra,up boom appears+ E4erybo"y $s a!6$ous toap h$s mo!ey a3a$!st irea%1 3oo"s5 !o matter (hether he !ee"s them or !ot5 !o matter ho( mu,h mo!ey hes to pay for them+ W$th$! a 4ery short t$me5 ($th$! a fe( (ees or e4e! "ays5 the th$!3s (h$,h (ere use" as!ey are !o %o!3er use" as me"$a of e6,ha!3e+ They be,ome s,rap paper+ Nobo"y (a!ts to 3$4e a(ay

yth$!3 a3a$!st them+

It (as th$s that happe!e" ($th the &o!t$!e!ta% ,urre!,y $! 0mer$,a $!


48/128

The! there1s $!f%at$o! $tse%f+ Whe! pr$,e $!,reases ,ease to be ,o!f$!e" to a fe( asset ,%asses %$e e8u$t$es5uses a!" ,o%%e3e tu$t$o! a!" be,ome more broa"base"5 peop%e be3$! to !ot$,e+ 0!" $f those 3e!era% pr$,ereases seem to be a,,e%erat$!35 peop%e rea%%y !ot$,e+ Tab%e +< sho(s the soar$!3 !umber of #e$,hsmarse"e" to buy o!e U> "o%%ar5 (h$,h $!"$,ates the tre!" $! ,o!sumer $!f%at$o! $! We$mar Zerma!y pre,e"$!3 a!"$!3 $ts hyper$!f%at$o!+

Note that the $!,reases (ere ?re%at$4e%yA mo"est at f$rst5 the! s$3!$f$,a!t5 a!" the! $! the spa,e of fe(!ths parabo%$,+ Q$rtua%%y o4er!$3ht5 the Zerma! #e$,hsmar s$mp%y ,ease" to fu!,t$o!+ That1s (hat a ,ra,boom %oos %$e5 a!" $t o,,urre" $! a ,ou!try ($th a 3e!era%%y (e%%e"u,ate" popu%a,e that pre4$ous%y ha"oye" o!e of the best sta!"ar"s of %$4$!3 $! the (or%"+ 0!" the U> $s ,reat$!3 a 4ery hosp$tab%e e!4$ro!me!t

someth$!3 s$m$%ar+

he termshr$!$!3 trust hor$]o! has bee! popu%ar$]e" by N$,o%e oss of the 0utomat$, Earth (ebs$te+

ee &hapter


49/128

&H0PTE# PI#0L

!e of the 3reat m$staes $s to 7u"3e po%$,$es a!" pro3rams by the$r $!te!t$o!s rather tha! the$r resu%ts+ M$%to! r$e"ma!

&hapter G1s %oo at the (ays $! (h$,h f$at ,urre!,y ,orrupts a so,$ety5 (e %eft out the fa,t that to"ay1smb$!at$o! of a "epre,$at$!3 ,urre!,y a!" art$f$,$a%%y%o( $!terest rates %ea"s ma!y to !ot 7ust borro( hea4$%y5

to borro( at 4ar$ab%e rather tha! f$6e" rates+ Th$s form of ,orrupt$o! taes a b$t of e6p%a$!$!35 but $s soporta!t that that $t "eser4es a ,hapter of $ts o(!+

The story $! a !utshe%%2 If 3o4er!me!t po%$,y $s to push $!terest rates a %$tt%e %o(er ea,h year $! or"er toe a r$s$!3 "ebt bur"e! eas$er to ma!a3e5 the! $t maes se!se for $!"$4$"ua%s5 bus$!esses a!" 3o4er!me!ts

mse%4es to e$ther borro( for 4ery short per$o"s a!" ro%% matur$!3 "ebt o4er at e4er%o(er $!terest rates5 or tooose "ebt ($th 4ar$ab%e rates %$e a! a"7ustab%e rate mort3a3e ?0#MA or a bus$!ess %oa! t$e" to a be!,hmar L$bor or the pr$me rate+ 0!" $t e!,oura3es %e4era3e" p%ayers to spe,u%ate o! %o(er rates $! the future5at$!3 a mou!ta$! of h$3h%y4o%at$%e bo!" portfo%$os a!" "er$4at$4es+

The resu%t$!3 4ar$ab%erate (or%" seems stab%e a!" prosperous (h$%e e4er,heaper %oa!s free up ,ash forer uses+ But $!terest rates ,a!1t fa%% fore4er be,ause for,$!3 rates "o(! to ab!orma% %e4e%s re8u$res theat$o! of e6,ess$4e amou!ts of !e( ,urre!,y5 (h$,h pro"u,es 3e!era%$]e" $!f%at$o!5 a fa%%$!3 ,urre!,y

,ha!3e rate5 or booms a!" busts of $!,reas$!3 ma3!$tu"e or a%% of the abo4e e4e!tua%%y "estab$%$]$!3 thea!,$a% system+ >o at some po$!t rates ($%% re4erse ,ourse a!" be3$! r$s$!3 to h$stor$,a%%y!orma% %e4e%s+ Theuous ,y,%e of %o(er $!terest rates %ea"$!3 to %o(er $!terest e6pe!se ($%% sh$ft $!to re4erse5 ($th h$3her $!terestes ra$s$!3 "ebt ser4$,e ,osts to $!to%erab%e %e4e%s a!" pote!t$a%%y ,rash$!3 the (ho%e system+

I! m$":; 3ot a 3%$mpse of $ts future (he! rates be3a! to r$se o! fears that the e" (ou%" soo!a%e ba, ?or taperA $ts E bo!"buy$!3 pro3ram+ Both bo!"s a!" e8u$t$es (e!t $!to ta$%sp$!s5 threate!$!3 to"o $! a fe( mo!ths the ?paperA 3a$!s of the past fe( years1 "ebt mo!et$]at$o!+ The spee" a!" 4$o%e!,e of the,t$o! ,ause" the e" to ba,tra,5 a!" as th$s $s (r$tte! $! %ate :;


50/128

Ju%y5 ($th %osses be3$!!$!3 to appear $! 0u3ust as $!terest rates ,o!t$!ue" to ,%$mb+ 0!" th$s (as 7ust themmer,$a% ba!s+ 0ssume s$m$%ar resu%ts for pe!s$o! fu!"s5 bo!" mutua% fu!"s5 he"3e fu!"s a!" pr$4ate4$"ua% a,,ou!ts5 a!" the ,ar!a3e (as probab%y !orth of `< tr$%%$o!5 or about per,e!t of the e!t$re e,o!omy

! three mo!ths5 o! a mo4e that %eft $!terest rates st$%% far be%o( h$stor$,a% !orms+

4er!me!t Bu"3ets!s a!" pe!s$o! fu!"s %os$!3 tr$%%$o!s of "o%%ars o! the$r bo!" portfo%$os $s ser$ous+ But true system$, r$sers the p$,ture ($th so4ere$3! "ebt+ O!e of the ma!y (ays the U>5 Japa!ese a!" Europea! 3o4er!me!tse the effe,ts of the$r mou!t$!3 %$ab$%$t$es $s by "o$!3 most of the$r borro($!3 for short per$o"s of t$me a fe(!ths to o!e year (here $!terest rates are !o( ,%ose to ]ero a!" mo!ey $s effe,t$4e%y free+ I! pa$" `:G[ b$%%$o! $! $!terest o! `=+: tr$%%$o! of "ebt+ I! the e!su$!3 := years5 $ts "ebt rose more! f$4efo%" to `


51/128

bt $s h$3her as a per,e!t of ZDP tha! that of a!y other ma7or ,ou!try+ It (as ab%e to borro( th$s mu,h,ause $ts ,$t$]e!s (ere a33ress$4e sa4ers ($%%$!3 to par the$r !est e33s $! 3o4er!me!t bo!"s+ Th$s hu3e poo%"omest$, ,ap$ta% soae" up most of the "ebt $ssue" by Japa!1s 3o4er!me!t5 at 4ery fa4orab%e rates+ Bet(ee!;; a!" :; a!" Europe are hea"e" for the same fate+ W$th `


52/128

o!5 u!t$% the e!t$re f$!a!,$a% system free]es up+ Th$s $s !ot mere theory $t a,tua%%y happe!e" ($th ,re"$tau%t s(aps $! :;;5 (he! the fa$%ure of $!sura!,e ,ompa!y 0IZ a!" $!4estme!t ba! Lehma! Brothersu%" ha4e "e4astate" Wa%% >treet a!" mu,h of the rest of the 3%oba% f$!a!,$a% system $f the fe"era% 3o4er!me!t" !ot ba$%e" them out+ 0s %e3e!"ary $!4estor Warre! Buffett famous%y obser4e"5 "er$4at$4es tru%y areeapo!s of f$!a!,$a% mass "estru,t$o!+0t O!,e

e $!terest$!3 ?$f that1s !ot too !eutra% a (or"A th$!3 about r$s$!3 $!terest rates $! a 4ar$ab%erate (or%" $s that a%%e4e!ts me!t$o!e" here ($%% happe! s$mu%ta!eous%y+ Ba! a!" pe!s$o! fu!" bo!" portfo%$os ($%% report

ss$4e %osses 3o4er!me!ts ($%% see the$r $!terest ,osts sp$e5 ma$!3 borro($!3 more e6pe!s$4e a!" r$s$!3 aht from the$r ,%ear%ym$sma!a3e" ,urre!,$es a!" $!terest rate s(aps ($%% be,ome h$3h%y u!stab%e5 poss$b%y

eate!$!3 the house of ,ar"s that $s the 3%oba% ba!$!3 ,ommu!$ty+The (or%"1s 3o4er!me!ts thus f$!" themse%4es $! a! e4ershr$!$!3 bo6+ 0!" a%% $t ($%% tae to tr$33er thes$s $s a retur! to h$stor$,a%%y!orma% %e4e%s of $!terest rates+ 0s re,e!t%y as :;;;5 =;year Treasury bo!"s"e" o4er G per,e!t a!" =;year mort3a3es ,ost C+[ per,e!t+ Let rates retur! to those %e4e%s a!" the 3%oba%

a!,$a% system $mp%o"es+ But ,o!t$!ue to for,e "o(! $!terest rates by ,reat$!3 tr$%%$o!s of !e( "o%%ars5 euros5" ye!5 a!" the !ear,erta$! resu%t $s e4e! b$33er asset bubb%es a!" r$s$!3 $!f%at$o!5 ,u%m$!at$!3 $! a ,ra,upom that ($%% s(eep the (or%"1s f$at ,urre!,$es $!to the "ustb$! of h$story+ 0!" there $s !o th$r" ,ho$,e+ 0s e4ery"$,t e4e!tua%%y "$s,o4ers5 there $s pa$! to"ay or e4e! 3reater pa$! tomorro(5 a!" that1s $t+


53/128

&H0PTE# 0QINZ>2&0PIT0L &ONT#OL>5 WE0LTH T0dE>

0ND B0N@ B0ILIN>there $s a r$s $! a ba!5 our f$rst 8uest$o! shou%" be iOay5 (hat are you $! the ba! 3o$!3 to "o about that_at ,a! you "o to re,ap$ta%$]e yourse%f_1 If the ba! ,a!1t "o $t5 the! (e1%% ta% to the shareho%"ers a!" the

!"ho%"ers5 (e1%% as them to ,o!tr$bute $! re,ap$ta%$]$!3 the ba!5 a!" $f !e,essary the u!$!sure" "epos$t"ers+

Jeroe! D$7sse%b%oem5 Dut,h $!a!,e M$!$ster most Ita%$a!s5 Ju!e C5 :;p0 ?BNIA5 th$!3s a! e4e! "arer tur! (he! they "$s,o4ere" that the troub%e" ba! ha" fro]e! the$r a,,ou!ts5 %ea4$!3 ma!yab%e to pay re!t or buy 3ro,er$es+

I!"$4$"ua% ba!s somet$mes ru! $!to troub%e5 of ,ourse5 so BNI (as easy to "$sm$ss as a! $so%ate" e4e!t $% t(o (ees %ater5 (he! the euro]o!e a!!ou!,e" that $t (as ,o!s$"er$!3 system($"e ,ap$ta% ,o!tro%s5u"$!3 ba! ($th"ra(a% %$m$tat$o!s5 to pre4e!t the ,r$s$s from sprea"$!3+ >u""e!%y5 the %$fe,ha!3$!3 "$ff$,u%t$es

BNI1s Ita%$a! ,ustomers (ere a poss$b%e !e( !orma% for mu,h of the ,o!t$!e!t+0!" Europe $s !ot a%o!e+ The (ho%e (or%" has e!tere" a! era $! (h$,h the ru%es 3o4er!$!3 f$!a!,$a%

,ou!ts a!" ,ap$ta% mo4eme!t are rout$!e%y ,ha!3e" ($th the stroe of a pe!+ To tae 7ust a fe( re,e!tamp%es2,e%a!" respo!"e" to $ts :;; f$!a!,$a% me%t"o(! by re8u$r$!3 that f$rms see$!3 to $!4est abroa" 3et

m$ss$o! from the ,e!tra% ba!5 a!" that $!"$4$"ua% I,e%a!"ers 3et 3o4er!me!t author$]at$o! to buy fore$3!re!,y or tra4e% o4erseas+Zree,e pu%%e" fu!"s "$re,t%y from ba! a!" broera3e a,,ou!ts of suspe,te" ta6 e4a"ers5 ($thout pr$or$,e or 7u"$,$a% "ue pro,ess+0r3e!t$!a ba!!e" the pur,hase of U> "o%%ars for perso!a% sa4$!3s a!" re8u$re" ba!s to mae %oa!s $!sos at rates ,o!s$"erab%y be%o( the true $!f%at$o! rate+The U> e"era% #eser4e propose" that mo!ey maret fu!"s be a%%o(e" to %$m$t ($th"ra(a%s of ,ustomer ,ashmes of maret stress+

The I!ter!at$o!a% Mo!etary u!" propose" a ($t]er%a!"5 Ne( jea%a!"" e4e! &a!a"a5 (h$%e the Ba! for I!ter!at$o!a% >ett%eme!ts has pub%$she" a b%uepr$!t sho($!3 otheru!tr$es ho( to use ,re"$tors1 a!" "epos$tors1 mo!ey to re,ap$ta%$]e fa$%e" ba!s+ ?That ba$%$!s $3!ore %e3a%et$es %$e ,re"$tor h$erar,hy a!" the sa!,t$ty of ,o!tra,ts by $!f%$,t$!3 %osses o! bo!"ho%"ers beforeareho%"ers ha4e bee! fu%%y ($pe" out $s yet a!other reaso! for a shr$!$!3 trust hor$]o!+Ast the Be3$!!$!3% more ,ou!tr$es $!tro"u,e ,ap$ta% ,o!tro%s or asset ,o!f$s,at$o!s $! the !e6t fe( years_ 0%most ,erta$!%y+ The


54/128

"$,ame!t $! (h$,h most ,e!tra% ba!s f$!" themse%4es has o!%y t(o e6$ts2 ,o!t$!ue" mo!et$]at$o! ofer3reater amou!ts of "ebt at the ,ost of e4er3reater hot mo!ey f%o(s a!" asset bubb%es (h$,h ($%%stab$%$]e "e4e%op$!3 ,ou!tr$es a!" %ea" them to $mpose ,ap$ta% ,o!tro%s5 ba$%$!s a!" other forms of asset!f$s,at$o!s+ Or the s,a%eba, of "ebt mo!et$]at$o! at the ,ost of r$s$!3 $!terest rates5 (h$,h ($%% "estab$%$]e

4ar$ab%erate (or%" a3a$! %ea"$!3 to 4ar$ous $!"s of asset ,o!f$s,at$o! as mo!eyhu!3ry 3o4er!me!ts5u,ta!t to ,ut spe!"$!3 $! a ,r$s$s5 %oo for !e( sour,es of (ea%th to tap+

>o re,e!t ,ap$ta% ,o!tro%s a!" ba! ba$%$!s are5 a%as5 7ust the be3$!!$!35 a!" (hat fo%%o(s ($%% mae them tame by ,ompar$so!+ I! the U>5 ba! ,he,$!3 a!" sa4$!3s a,,ou!ts5 (h$%e ,o!ta$!$!3 a %ot of mo!ey5 area!uts ,ompare" to ta6a"4a!ta3e" a,,ou!ts %$e I#0s5 ;


55/128

Dur$!3 the U> &$4$% War5 &o!3ress passe" %a(s ,o!f$s,at$!3 property use" for $!surre,t$o!ary purposes" of ,$t$]e!s 3e!era%%y e!3a3e" $! rebe%%$o!+I! arreste" a!" mo4e" Japa!ese ,$t$]e!s to ,o!,e!trat$o! ,amps5

h se4ere %$m$ts o! (hat they ,ou%" tae ($th them5 ,aus$!3 for,e" se%%$!3 at a 3reat f$!a!,$a% %oss+ The$rma$!$!3 property (as se$]e" a!" so%"+ The "eta$!ees (ere re%ease" $!


56/128

&H0PTE# @INZ DOLL0#mer$,a!s/ are %$4$!3 beyo!" the$r mea!s a!" sh$ft$!3 a part of the (e$3ht of the$r prob%ems to the (or%"o!omy+ They are %$4$!3 %$e paras$tes off the 3%oba% e,o!omy a!" the$r mo!opo%y of the "o%%ar+ If '$! 0mer$,are $s a system$, ma%fu!,t$o!5 th$s ($%% affe,t e4eryo!e+ &ou!tr$es %$e #uss$a a!" &h$!a ho%" a s$3!$f$,a!t parthe$r reser4es $! 0mer$,a! se,ur$t$es+ There shou%" be other reser4e ,urre!,$es+

Q%a"$m$r Put$!5 #uss$a! Pres$"e!te! a ,ou!try borro(s too mu,h a!" be3$!s to suffer for $ts s$!s5 $t fre8ue!t%y ,o!,%u"es that the o!%y 4$ab%ey out $s to "e4a%ue $ts ,urre!,y $! or"er to 3e!erate r$s$!3 e6ports a!" faster 3ro(th+ To $%%ustrate ho( th$s

rs5 prete!" that you1re $! ,har3e of Japa! a!" (ou%" %$e to pump up the "omest$, e,o!omy5 $"ea%%y by$!3 more ,ars to the U>+ You ,ut ta6es5 $!,rease 3o4er!me!t spe!"$!35 a!" ,reate more ye!5 (h$,h tae!ether %o(er your ,urre!,y1s 4a%ue 4ersus the "o%%ar5 thus ma$!3 Toyotas a!" Ho!"as ,heaper (he! the$r

! pr$,e $s ,o!4erte" to "o%%ars+ 0mer$,a!s buy more Japa!ese ,ars5 the$r maers boo h$3her prof$ts a!" h$rere (orers5 a!" the Japa!ese 3o4er!me!t re,e$4es more ta6 re4e!ue+ 0!" you5 the ar,h$te,t of the strate3y5ha$%e" as a 3e!$us a!" ree%e,te" $! a %a!"s%$"e+But the 4$e( from the U> $s %ess rosy+ or e4ery Toyota that $ts ,$t$]e!s buy5 o!e fe(er or" or &he4y $s

"u,e"5 (h$,h %ea"s U> automaers to %ay off (orers a!" boo %o(er prof$ts+ The 0mer$,a! e,o!omyfers5 a!" $ts %ea"ers 3et the b%ame+

>o (hat "o they "o_ They emu%ate the$r su,,essfu% Japa!ese ,ou!terparts by ru!!$!3 h$3her "ef$,$ts5(er$!3 ta6es a!" pressur$!3 the e" to %o(er $!terest rates $! or"er to mae the "o%%ar %ess 4a%uab%e o! fore$3!

,ha!3e marets+ Th$s a%so (ors+ 0 ,heaper "o%%ar %o(ers the effe,t$4e pr$,e of 0mer$,a! e6ports5 (h$,h"s to more sa%es a!" faster 3ro(th5 a!" $!,umbe!t po%$t$,$a!s see the$r po%% !umbers ra%%y+0!" so $t 3oes5 as Europe5 &h$!a a!" the "e4e%op$!3 (or%" respo!" $! tur! by %o(er$!3 the 4a%ue of the$

re!,$es+ Th$s ser$es of ,ompet$t$4e "e4a%uat$o!s ,o!tr$butes to a!" e6a,erbates the mess ,ause" by the4$ous "e,a"e1s o4erborro($!3+0,,or"$!3 to he"3e fu!" ma!a3er James #$,ar"s5 (hose boo &urre!,y Wars $s re8u$re" rea"$!3 for

yo!e (ho (a!ts to u!"ersta!" th$s pro,ess5 there ha4e bee! t(o pre4$ous ,urre!,y (ars $! mo"er! t$mes+e f$rst (as "ur$!3 the a!" the ma7or Europea! ,ou!tr$es5 suffer$!3 from the "ebaseme!t,urre!,y ,reate" to pay for Wor%" War I a!" the ,o%%apse of the e,o!"5 e4eryo!e $s st$%% borro($!3+bt5 e4e! (he! measure" $! rea% terms by a"7ust$!3 for $!f%at$o!5 ,o!t$!ues to r$se $! the U>5 Europe5 a!"pa! a!" thou3h !o o!e rea%%y !o(s (hat1s 3o$!3 o! $! &h$!a5 $t seems to be o! a s$m$%ar path+ Th$r"5 theu!ta$! of "er$4at$4es that has a,,umu%ate" $s5 as (e may ha4e me!t$o!e" o!,e or t($,e a%rea"y5 a h$3h%ystab$%$]$!3 ($%",ar"+ >o to a4o$" a


57/128

u!tr$es %$e Bra]$%5 Tha$%a!"5 a!" #uss$a offer bo!"s y$e%"$!3 far more tha! U> Treasur$es+ >o spe,u%ators a 4ast s,a%e ha4e fou!" $t prof$tab%e to borro( "o%%ars or ye!5 use them to buy5 say5 Bra]$%$a! bo!"s5 a!"p a ($"e5 %u,rat$4e sprea"5 (h$,h $s fre8ue!t%y ma"e e4e! ($"er (he! ,ap$ta% $!f%o(s stre!3the! the

4e%op$!3 ,ou!try ,urre!,y+Th$s ,arry tra"e $s 3reat for the "e4e%ope" (or%" $! 3e!era% a!" he"3e fu!"s $! part$,u%ar5 but !ot so mu,h

"e4e%op$!3 ,ou!tr$es5 (here a%ter!at$!3 $!a!"out torre!ts of hot mo!ey ,a! "estab$%$]e sma%%er5 more fra3$%eo!om$es5 %ea"$!3 the %atter to resort to the $!"s of ,e!tra%$]e" p%a!!$!3 that fre8ue!t%y "o more harm tha!o"+ Bra]$%5 for $!sta!,e5 rea,te" to soar$!3 rea% estate pr$,es a!" ,o!sumer $!"ebte"!ess $! :; $!terest rates soare"5

" hot mo!ey poure" out of emer3$!3 marets a!" ba, $!to "o%%ar"e!om$!ate" "ebt+ >e4era% "e4e%op$!3u!tr$es !ear%y $mp%o"e"5 ($th the I!"$a! rupee a!" Bra]$%$a! rea% h$tt$!3 mu%t$year %o(s5 for,$!3 the$r4er!me!ts $!to yet a!other rou!" of e6treme a!" poss$b%y ,ou!terpro"u,t$4e ,ap$ta% ,o!tro%s a!" mo!etaryer4e!t$o!s+ Throu3hout th$s sa3a the$r %ea"ers 4o,a%%y ,omp%a$!e" about be$!3 4$,t$ms of a ,urre!,y (ar5u3h !o o!e rea%%y %$ste!e"+e Q$,t$ms #eta%$atee ,omb$!at$o! of the "o%%ar1s reser4e ,urre!,y status a!" 0mer$,a1s ($%%$!3!ess to b%ata!t%y abuse theu%t$!3 a"4a!ta3es $s a hu3e prob%em for mu,h of the rest of the (or%"+ &o!s$"er the s$tuat$o! from the

ss$a! or &h$!ese po$!t of 4$e(2 You !ot o!%y fa,e torre!ts of hot mo!ey pour$!3 $! a!" out5 se4ere%y "$stort$!3ur e,o!omy+ But your "es$re to be a 3reat po(er5 at %east $! your o(! !e$3hborhoo"5 $s ,o!t$!ua%%y stym$e" by

om!$pote!t U> m$%$tary (h$,h $s pa$" for ($th !e(%y,reate" reser4e ,urre!,y+ The "o%%ar1s "om$!a!,e5 $!er (or"s5 $s a ey to 0mer$,a1s ab$%$ty to bu%%y other ,ou!tr$es !ot 7ust e,o!om$,a%%y5 but m$%$tar$%y+

Dur$!3 the &o%" War5 U> "om$!a!,e (as to%erate" be,ause $ts a%%$es a!" tra"$!3 part!ers 4a%ue" thete,t$o! affor"e" by the U> !u,%ear umbre%%a+ But ($th the ,o%%apse of the >o4$et U!$o!5 e6ter!a% threats ha4e

m$!$she" (h$%e U> arro3a!,e has5 from the$r po$!t of 4$e(5 o!%y $!,rease"+>o the "e4e%op$!3 (or%"1s r$s$!3 po(ers are !o( attempt$!3 to ,ha!3e the ba%a!,e of po(er+ I! re,e!t

ars5 &h$!a has a3ree" to ,urre!,y s(aps ?$! (h$,h t(o ,ou!tr$es e6,ha!3e ,urre!,$es to be use" $! b$%atera%"eA ($th ra!,e5 Br$ta$!5 Japa!5 0ustra%$a5 #uss$a5 a!" Ira!+ Ira! ,ut s$m$%ar "ea%s ($th I!"$a a!" #uss$a5 (h$%epa! a!" I!"$a ha4e be3u! tra"$!3 $! the$r o(! ,urre!,$es+ I! %ate :;


58/128

T(o h$!ts that a reser4e,urre!,y yua! $s be$!3 ,o!temp%ate" ,ame "ur$!3 :;o the tra!s$t$o! to a (or%" $! (h$,h the "o%%ar (as 7uste ma7or ,urre!,y amo!3 ma!y (ou%" re8u$re the sa%e of tr$%%$o!s of "o%%ars by the (or%"1s ,e!tra% ba!s5 a!"pur,hase of ,omme!surate amou!ts of yua! a!" 3o%"+ >u,h a mass$4e sa%e of "o%%ars (ou%"5 other th$!3s

!3 e8ua%5 %o(er the ,urre!,y1s e6,ha!3e rate a!" ra$se U> $!terest rates+ No %o!3er $! possess$o! of ther%"1s reser4e ,urre!,y5 the U> (ou%" %ose the ab$%$ty to borro( e!ormous amou!ts of mo!ey5 for,$!3 $t to %$4e%$st$,a%%y a!" !o "oubt pa$!fu%%y ($th mu,h h$3her borro($!3 ,osts5 mu,h %o(er 3o4er!me!t spe!"$!3 or a

mb$!at$o! thereof+>$!,e the "$ffere!,e bet(ee! U> ta6 re4e!ue a!" $ts prese!t spe!"$!3 a!" future ,omm$tme!ts5 (he!

,u%ate" ho!est%y5 $s a%rea"y about `G tr$%%$o! a year5 or rou3h%y o!eth$r" of U> ZDP5 the su""e! !ee" to"3e that 3ap ($thout borro(e" mo!ey a!" the u!8uest$o!e" a,,epta!,e of future prom$ses (ou%" %ea4e o!%yo opt$o!s2 Zreesty%e auster$ty $!4o%4$!3 a ro%%ba, of the 3%oba% m$%$tary emp$re a!" the e!t$t%eme!ts state5

h mass$4e %ayoffs of 3o4er!me!t (orers a!" the %$e%y ba!rupt,y of !umerous ,$t$es ($th u!ma!a3eab%e!s$o! fu!"s+ Or the ,%ass$, ,urre!,y (ar s,e!ar$o a33ress$4e "e4a%uat$o! $! a! attempt to ma$!ta$!o!om$, 3ro(th by sa,r$f$,$!3 the "o%%ar1s 4a%ue for as %o!3 as they ,a! 3et a(ay ($th $t+ E$ther (ay5 the postre!,y(ar (or%" $s a 4ery "$ffere!t5 mu,h "arer p%a,e for a!yo!e "epe!"e!t o! the "o%%ar+


59/128

&H0PTE# T#OPHI& 0ILU#E

fe $s rea%%y s$mp%e5 but (e $!s$st o! ma$!3 $t ,omp%$,ate"+ &o!fu,$us

oup%e of &hr$stmas 4a,at$o!s a3o Joh! a!" h$s fam$%y tempte" fate by boo$!3 a mu%t$sta3e o4erseas p%a!e+++a!" e!"e" up ($th ,a!,e%%e" f%$3hts5 m$sse" ,o!!e,t$o!s5 a!" b%a!fa,e" a$r%$!e emp%oyees (ho s$!,ere%y!1t ,are $f Joh! a!" fam$%y spe!t a !$3ht or a

The Money Bubble - Turk, James

Documents

Transcript of The Money Bubble - Turk, James