Article: Black Monday in Korea (8.2011)

Things Were Bad Then And They’re Worse Now

I wrote this article for Gwangju Magazine about a year ago after the stock market plunge here in South Korea.  The reason you’re reading it today is because the topics here are more relevant than ever with the ongoing world economic crisis.  These days you hear the most about Greece, but we also remember Iceland, Ireland, now Spain… like dominoes nations are falling one by one.  Here you find the how, why and some solutions…

-by Michael Bielawski

And you thought they didn’t have a plan to save the economy… (courtesy Dees Illustrations)


US debt and derivatives are critical to Korean economy…

Seoul – Most people, Koreans and foreigners alike, don’t need to have it explained to them that we live in a global economy, and what happens in one economy effects the rest of the world and so on.  Still many might not understand just how dependent Korea (and the rest of the world) is specifically on the US dollar.  With the recent ‘Black Monday’; when the South Korean stock market plunged on August 8th, people may finally be taking notice.  That is because every major currency in the world is largely backed by US dollar-denominated assets, including roughly 60 percent of South Korea’s reserves.

That means that the recent raise of US debt limit, the unannounced QE3 (quantitative easing or simply the printing of more dollars) and the downgrade of the dollar’s credit rating are all having real implications on the Korean economy.  Also it should be understood that there is a primary cause for the recent financial troubles that is not being discussed in the mainstream media.  Those who remember ‘Minerva’, pen-name for Mr. Park Dae Sung, the famous Korean blogger briefly jailed for his impressively accurate economic forecasts, know that he discussed this little-known destructive force that has been largely bringing down the world economy.

But first let’s establish that the media’s coverage of these recent events versus their real significance should be distinguished.  For example the raise of the US dept limit; this was dramatized in US and foreign media to appear like it was a rare close-call with disaster.  You would never guess that in reality the US dept limit has been raised 78 times in the last 51 years.  Why all the fuss on this occasion?  By dramatizing the event, it creates a sense of panic and confusion, in short people become more willing to sacrifice entitlements (social security, health care, etc) or pay higher taxes if they think it will save the economy.

Another overly dramatized event is the highly expected announcement of QE3.  The truth is the US Federal Reserve, a private bank, is always printing more money, and has been since its creation in 1913.  But by suddenly naming its printing sessions QE1, QE2 etc, it gives people the perception that inflation (the printing and devaluation of money) is somehow a new phenomenon and not something that’s been ongoing for decades.

The third event, the downgrading of the US debt rating, is actually a new event.  What people may forget is this is just an opinion, Standard and Poors doesn’t for example control the interest rates.  What is does is manipulate people’s perspectives, causing for example S. Korea’s recent Black Monday and similar panic worldwide.  The New York Times is reporting that some Wall Street insiders may have had prior knowledge about the downgrade and used put options (bets that the dollar will fall in value) to make billions of dollars from the downgrade.

The common theme presented to the public with each economic event is that we must sacrifice to save the economy.  Koreans probably remember in 1997 they were asked to hand in gold to help pay the government’s debts at that time.  Greece has been forced to sell off some of its most beautiful islands.  Argentina, once considered among the wealthiest nations in the world, is now reduced to third world status.  These events are commonly known as an IMF Crisis, and they can tell us a lot about what is happening today.

And that brings us to the aforementioned destructive force that mainstream media won’t dare speak aloud, or the dreaded “D word” of mainstream media.  If people were to become educated on this forbidden topic they might just learn the real reason why economies around the world are seemingly in endless debt crisis.  The word that I am talking about is derivatives, also once referred to by multibillionaire Warren Buffet as “financial weapons of mass destruction”.

Explaining financial derivatives in any sensible way is like a quagmire, but to oversimplify it, they are junk bonds.  Here’s how market strategist Graham Summers explains: “A derivative is NOT an asset.  It’s, in reality, nothing, just an imaginary security of no tangible value that banks/financial institutions trade as a kind of ‘gentleman’s bet’ on the value of future risk or securities.”

The NY Times said this regarding credit default swaps, the most destructive derivative and its role in the Greek economic crisis; “These contracts … effectively let banks and hedge-funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country.  If Greece reneges on its debts, traders who own these swaps stand to profit.”  Also the aforementioned put options are another derivative.

And what is the total amount of all the derivatives straining the world economy today?  Economist Webster G Tarpley estimates over 1.5 Quadrillion dollars, or to put that into perspective roughly 25 times the world’s total GDP (gross domestic product).  Even the Washington Post admits they total at least 600 trillion.  Regardless, it can never be paid… it’s like a black hole in the world economy.  As journalist Alex Jones on his radio show put it, debating QE3, debt limits, etc in the face of the derivatives black hole is like rearranging the deck chairs on the Titanic… all meaningless until the derivatives are dealt with first.

How do you stop derivatives?  Well for one, they were illegal from 1936 to 1982.  If they aren’t going to be illegal again, they can be taxed.  Even a one percent tax according to Tarpley would be adequate to discourage out of control derivatives.  Also call for the return of the Glass Steagall Act, created during the first Great Depression and repealed in 1999.  This outlawed banks from acting as hedge funds.  A bank can be a commercial bank, investment bank, or an insurance company, but only one.  Otherwise they can bet with derivatives on the fate of an asset they also own, an obvious conflict of interest.

But first we have to educate each other.  Everyone talks about the economy, almost no one knows about derivatives.  Good books to gain a better understanding on derivatives are Tarpley’s book Surviving the Cataclysm and economist John Perkins’ Confessions of an Economic Hit Man.

In 2002 BBC journalist Greg Palast obtained secret United Nations documents that indicated derivatives were being used intentionally to take over sovereign economies.  After the economies collapse resources can be bought up for cheap, as long as the politicians can be bought off to allow it to happen.  However it hasn’t always worked out that way.  Iceland also had an IMF crisis, and they refused to sacrifice.  They didn’t turn in any gold, sell any land or give up their standard of living… they protested and finally it was admitted over 90 percent of the debts were not owed by the public, but rather by private banks that had been dealing with derivatives.  Iceland is the model for success.

And finally take care of yourself and your family.  During inflation, the value of energy, food and commodities will rise.  For example gold is up around 600 percent over the past decade, and silver 700 percent.  Remember the estimated derivatives market is anywhere from 600 trillion to over 1.5 quadrillion depending on who you ask.  Until those are cancelled out (it can never be paid) the inflation will just keep rising.  Regardless of what the governments do or don’t do, you can protect your interests, and even be quite prosperous during extreme inflation.  Just don’t wait.

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