by Nomi Prins
China’s inclusion into the IMF’s SDR reserve basket is a game-changer, as much for China as for the IMF. The global financial crisis brought about a shift in power dynamics from West to East, from highly developed to developing countries. In the wake of the Fed’s collusive monetary policy, this phenomenon has accelerated and will continue to accelerate given the US national agenda of protectionism and nationalism under the Trump administration.
Non-G7 leaders see themselves as crusaders against the manipulation of money. Policies of sustainability and autonomy are now more important to emerging economies than simply falling into the good graces of the Fed.
Developing nations will continue to seek alternatives to Western-dominated monetary, trade, and financial policy. The Regional Comprehensive Economic Partnership (RCEP), an alliance that includes China and excludes the United States, highlights this intention.
Elite central bankers will attempt to hold onto their immense power even in the face of these shifts. Yet, ongoing cash infusions will eventually provoke major disruptions and volatility if they were to stop or slow down.
That is why noncash instruments, such as crypto currencies and hard assets like gold, will become increasingly attractive. They will continue to be relevant based on the fear that, in another major downturn, central and private banks will collude to freeze cash and retract liquidity from their customers. Protecting themselves will always come first.
The emergence of Bitcoin and alternative money measures is a glimpse into such peer-to-peer substitutes to the prevailing monetary system.4 So is the resurgence of interest in gold. In response, central and private bankers have sought to curtail or capture the reach of these replacements, eager to maintain their lock on the flow of all “money.”5 But not all of them agree on the evolution of money alternatives. Some see them as the future.
Christine Lagarde expressed as much in one of her many prescient statements at a Bank of England conference on September 30, 2017. There, the managing director of the IMF predicted to the chagrin of the audience:
For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.
But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.6
She concluded,
Today’s central banks typically affect asset prices through primary dealers, or big banks, to which they provide liquidity at fixed prices—so-called open-market operations. But if these banks were to become less relevant in the new financial world, and demand for central bank balances were to diminish, could monetary policy transmission remain as effective?7
Meanwhile, in the absence of a benchmark that is outside central bank influence, such as a modern gold standard or more prevalent use of a currency basket like the SDR, currencies will continue to be objects of speculation, which hurts their value as arbiters of fair trading mechanisms that reflect the actual strength and weakness of national economies. Collusion among the bigger players renders the smaller or “outsider” ones perpetually caught in defense mode. That is why they are forging alternative monetary alliances and considering using non-US-dollar currency alternatives like the renminbi for their transactions.
Because G7 conjured-money policy has produced no tangible results, broken confidence in the financial system will continue to steer elections and multinational alliances.
Ambivalence among investors and voters could ultimately have major negative repercussions. Meanwhile, stock indexes continue to soar to new heights, building a false sense of security on a bed of fabricated capital.
With rates already near zero, or negative in some countries, there is little-to-no room to maneuver in the event of a looming crisis. After the decade-long money-conjuring policy, one with no real end in sight, one thing has become clear: central bank craftsmanship has been ineffective, at best, and has demonstrated gross negligence for the lasting consequences, at worst. The assumption that these central banking policies will anytime soon evoke real growth is as preposterous as it is wrong.
Markets fall and rise now because of the realpolitik undertow from central banks. Central banks remain powerful, their leaders inculpable. When their terms are up, central bankers cycle through other positions in the upper echelons of the world of big finance, but their legacies transcend time and, often, geography.
WHAT SHOULD BE DONE
As Nobel laureate economist Joseph Stiglitz wrote in an op-ed for the LA Times in August 2015, “Quantitative easing was yet another instance of failed trickle-down economics—by giving more to the rich, the Fed hoped that everyone would benefit. But so far, these policies have enriched the few without returning the economy to full employment or broadly shared income growth.”8
With their massive books, core central banks should have and could have financed investment instead of speculation, could have worked with development banks and public projects rather than funding private ones. That would have been truly unconventional and measurably more effective for the common person. They did not.
Meanwhile, countries amassed historically high debt burdens relative to GDP. As long as central banks kept rates low, the cost of servicing debt remained low as well. That situation enabled governments to issue more debt at a cheaper cost. Yet, if these strategies reversed or rates do rise, so does the cost of servicing this debt, for governments and corporations. That could lead to significant defaults on debts around the world. Even former Fed chairman Alan Greenspan—who stoked the derivatives market and favored bank mergers and deregulation—in August 2017 warned of the dangerous bubble “abnormally low rates” inflate.9
With global debt equal to three times global GDP as a result of conjured-money policies, to avoid a devastating crash, we need a debt reset. Without a debt overhaul or relief program, we are headed for another epic credit crisis. If that reoccurs, banks will again turn to governments and central banks to save them at the expense of fortifying broader populations and the foundational economy. Central bankers might not be able to exert the same false market confidence the second time around. That’s why they cling to policies they adopted a decade ago.
There are other ways to mitigate a crisis in advance. We could write off all the public debt incurred since 2008 that hasn’t been redirected to the real economy—that is, take a deep breath and cancel it out globally. We also need to implement actual oversight of the conjurers and dedicate effective channels through which to question and curtail their authority and actions. Instead of financing speculative bubbles at the hands of the big private banks, central banks should finance large investment and recovery programs. We should break up the banks à la Glass-Steagall so that they can’t hold people’s deposits hostage during the next crisis. But these are tall orders that require a fundamental power shift, legislative will, and system reboot. If they have any shot of ever happening even in a small dosage, we all need to be better informed about the extent of collusion that has occurred and the ramifications of creating money for no real purpose.
The Fed’s crisis and post-crisis monetary policies, adopted by other major central banks, was supposed to “trickle down” to the masses. That didn’t happen. The global elites knew this then, and they are more aware of it now.
In January 2017, the World Economic Forum admitted that rising inequality threatens the world economy. These colluders provoke inequality because it benefits them and the preservation of their global power hierarchies to the detriment of everything and everyone else.
The Fed and its allies have created a shaky monetary system that will collapse without their manipulation. It’s job security for them, but
hazardous for the rest of us. Central bankers, for all their meetings in posh locales the world over, have no plan B to reverse or alter course without causing massive damage and financial pain to billions of people.
They have shown no propensity to do anything different from a decade of impotent policies. As Sir Isaac Newton said, “A body in motion will remain in motion unless acted upon by an external force.” That law of motion encapsulates the central bankers’ position today. Some will continue advocating conjured-money policy; others will resist inertia and seek an opposing path and relationships—but only if we create an outside force that will change the trajectory of conjured-money policy. If Newton had been a central banker, he would have been better off just eating the apple. There are ostensibly two main types of central bankers: the ones with more legacy power, and the ones with less but rising power, as is the case in China. Thus, there is no objective, truly external force within the prevailing monetary system or around it, except for the continued rise of new players such as China, individually, and the BRICS, collectively, to alter it.
The Fed absolved itself of all responsibility for financial stability in the big bank landscape in June 2017 when it allowed thirty-four of the largest Wall Street banks, including the Big Six, to pass its stress tests. In turn, the banks took this opportunity to buy more of their own shares, elevating their stock prices rather than expanding their loan services for small businesses and Main Street customers.
US banks disclosed plans to buy back $92.8 billion of their own stock as a direct response to the Fed’s blessing. The largest US bank, JPMorgan Chase, announced it would buy back $19.4 billion of its own shares, its most ambitious program since the 2008 crisis.10 Citigroup announced its biggest buyback, at $15.6 billion. “Stock repurchases by financial companies in the S&P 500 rose 10.2 percent in the first quarter [of 2017] and accounted for 22.2 percent of all buybacks.”11 The all-clear was another version of QE for banks courtesy of the Fed, greenlighting legal manipulation of the stock market. The Dow soared.
A decade of money conjuring and collusion helped the same banks take the same risks that spurred that activity and allowed them to reap stock profits to boot. This move was captured by the US Senate Banking Committee in a letter from Thomas Hoenig, vice chairman of the US Federal Deposit Insurance Corporation (FDIC), the government agency in charge of guaranteeing people’s deposits.12 He wrote that US banks in 2017 had used 99 percent of their net earnings for purchases of their own stock and paying dividends to shareholders (including themselves).
The Fed set the precedent of supporting big banks and then dodging criticism as the regulator of those institutions. Similar activities took place around the world, but not to the extent as in the United States where conjured money first took flight. While savers and pensioners are getting close to no interest on their nest eggs and small businesses have to leap through hoops to get loans, grow, and hire workers, big banks game the system repeatedly and central banks abet them.
The threat of a collapse larger than the 2008 financial crisis looms because of the plethora of asset bubbles that central banks have created and fueled—setting the scene for a disastrous fall. That fall could also happen for other reasons given escalating tension in North Korea altering how banks operate in that region, economic sanctions from the United States, a corporate credit meltdown in Latin America, an implosion in the Chinese real estate market, Southern EU countries buckling under the precarious state of their banks and economies, or a big bank bet going wrong.
It only takes one domino to fall to wipe them all out. It will again begin with the banks, cripple the markets, and devastate the global economy.
Yet in the inevitable financial crash—these conjurers will not be blamed. Or monitored. They are simply doing their jobs, even if those jobs have shifting definitions and nebulous goals. They jockey for position among themselves. Their countries jostle for geopolitical hegemony and stronger regional alliances.
The world economy remains imperiled, an opportunistic game to the central banks, a field day for speculators, a hazard for populations.
ACKNOWLEDGMENTS
Collusion has taken me all over the world. And throughout the days, nights, weeks, months, and years I spent in planes, trains, cable cars, buses, cars, towns, villages, cities, hotels, universities, development banks, central banks, and government offices, I have come into contact with the most remarkable people. I have experienced this planet in a manner that has expanded my way of thinking in unimaginable ways.
I am grateful to so many people and places along this journey. To do justice to everyone’s contribution is impossible. Even the folks at the twenty-four-hour passport place that secured my visas to Brazil and China under tight deadlines were helpful and necessary to this project.
Foremost, though, I want to thank the most stellar group of economists and researchers I have ever had the fortune to know. My gratitude to Craig Wilson from the United States, who, having worked with me on All the Presidents’ Bankers, lost many more hours of sleep leading the research effort, with particular focus on the United States, Mexico, and Europe.
Thank you to Roberto Rodolfo Georg Uebel from Brazil, who worked on Latin American–Asian alliances, with particular focus on Japan. Thank you to “the Pedros”: Pedro Perfeito and Pedro Marques, who focused on Brazil and global rate and currency movements, respectively. Thank you to Alberto Sanchez and Octavio Olivares for their work on the ground in Mexico. Thank you to Elaine Yu from Hong Kong for her work on the China chapter, after having been fact checker for All the Presidents’ Bankers. Thank you to Fernando Chafim from Spain for his work on the Europe chapters. They have been outstanding.
Special thanks as always to my awesome agent, Andrew Stuart, without whose coaching and counseling this book wouldn’t have happened. My gratitude to the fabulous and dedicated team at Nation Books/PublicAffairs, especially to my dedicated publisher, Alessandra Bastagli, and my amazing publicity director, Jaime Leifer, who helped me every step along the way.
I am grateful for so many interviews and so much information that people and their organizations have provided me from around the world.
Thank you to all my friends and family for their ongoing understanding and support. My gratitude to Danny McGaw for his song “You and Me,” and to the town of Ojai for their open arms. Thank you to my dog, Homer, for keeping me company through all of those long writing hours. My love to Nigel for this new chapter.
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Nomi Prins is a former Wall Street executive, journalist, speaker, respected TV and radio commentator, and author of six books, including All the Presidents’ Bankers, Other People’s Money, and It Takes a Pillage. Her writing has been featured in the New York Times, Fortune, Forbes, the Guardian, and the Nation, among other publications. She was a member of Senator Bernie Sanders’s (I-VT) Federal Reserve Reform Advisory Council, is listed as one of America’s TopWonks, and is on the advisory board of the whistle-blowing organization ExposeFacts.
Also by Nomi Prins
All the Presidents’ Bankers
It Takes a Pillage
Black Tuesday
Jacked
Other People’s Money
More Advance Praise for Collusion
“Nomi Prins is that rare combination of real-world expertise, scholarly method, and a brilliant writing style. Here, she goes beyond the tired complaints about central bank money printing to show that manipulation of markets by the central bankers is far more complex and pervasive than labels like ‘easy money’ can convey. Collusion is brilliant and timely. It’s a ‘must-read’ for savers, students, journalists, and public officials.”
—James Rickards, bestselling author of Currency Wars and The Death of Money
“Nomi Prins spent years embedded behind enemy lines with the corporate criminals who caused the eco
nomic crisis of 2008 and whose executives continue to reap record profits while gambling with the futures of millions of families. She could have joined in the grand theft and lived the highlife. Instead, she switched sides and has emerged as one of the fiercest critics of crony capitalism and its sustained attacks against poor and working people. This is the book that the financial elites don’t want you to read.”
—Jeremy Scahill, Academy Award nominee, bestselling author of Blackwater, and cofounder of The Intercept
“The US doesn’t have a financial press. It has something better—Nomi Prins. Prins shows that the financial corruption of today exceeds that of the Roaring 1920s, because today the Federal Reserve and US Treasury are leading participants in the corruption. Read this book to understand the central bank conspiracy against the world economy.”
—Paul Craig Roberts, former Wall Street Journal editor and assistant secretary of the US Treasury
“Central Banks, led by the Federal Reserve, are the opioids for private banks addicted to being reckless with other people’s money. Prins, drawing from her previous work in Wall Street firms and her present field research around the world, says, ‘We are headed for another epic fall.’ Taxpayers, workers, and consumers who will suffer from another bailout all better read this clear, concise, compelling book.”
—Ralph Nader, consumer advocate and author of Breaking Through Power: It’s Easier Than We Think
“Scarier than Stephen King horror fiction. Prins, a refugee from Goldman Sachs, tells the truth on her fellow banksters and their abuse of the scary uber-power they wield when they take control of money-printing machinery of the world’s central banks. Astonishingly, she got deep inside these secretive power chambers—and came out alive with truly fascinating tales of the blood diamonds of global finance. I particularly enjoyed, if you can use that word, her exposure of the cruelty and cupidity of the banking potentates who suffocated Greece to please the gods of Markets and Mammon.”