* Engdahl: Titanic Shift in Global Capital Market Power *


Richard Moore

"The second center that will emerge will be based 
around the huge capital accumulations of dollar 
surplus countries especially since 2001 and the 
record high oil prices. These include the 
so-called Sovereign Wealth Funds, state-owned 
investment funds similar to the Norwegian 
Petroleum Fund, that have billions of dollars 
(and increasingly Euros) in capital that is 
looking to invest around the globe. The largest 
to date is that of the Emirates, including Dubai. 
They are believed to hold more than $800 billion 
in assets today. Saudi Arabia is planning to 
launch a similar wealth fund. China announced its 
$200 billion SWF last summer, and Russia, which 
now holds well over $400 billion in dollar 
reserves, is another major capital source."


Here we have here another amazing analysis from 
William Engdahl. No other serious analyst seems 
to look at things at anywhere near the same depth.

The quote I selected above is very interesting. 
We are seeing regional entities accumulating 
funds at the state level. To the extent this is a 
trend, it is a trend away from capitalism. Yes 
those funds are currently being invested in the 
markets, but the funds are under state control. 
Unlike with private investors, these funds could 
at some future time be invested according to a 
non-market rationale, as we see Chavez doing 

This creates a shift in the balance of power 
between banks and governments. Banks control 
governments by keeping them in debt. When 
governments have large capital funds of their 
own, they are in effect carrying out the banking 
function themselves. They are cutting out the 
middle-man in the investment pipeline. Such a 
trend is toward 'horizontal integration' of 
capital and government; capitalism is precisely 
the opposite trend.

My own thesis is that we have reached "Peak 
Growth", as regards capitalism. That is, 
capitalism is through as a global paradigm, and 
everyone is still in denial about it. In real 
physical terms we know that growth cannot 
continue forever in a finite world. But we 
haven't reached that point yet physically. We're 
merely getting close. The nature of capital 
markets, however, is to anticipate future events, 
to 'discount' them. So it is not surprising that 
the markets have experienced the collision (the 
unstoppable force against the immovable object) 
sooner than the actual physical collision.

In reality capitalism collapsed some time ago. 
That's why they introduced all the derivative 
instruments, creating one last artificial growth 
bubble. That bubble has now burst, and when they 
try to restabilize the markets they'll remember 
why they invented the bubble - capitalism is out 
of fuel.

Chavez, in my opinion, is showing the path of the 
future, the rational response to to the 
dysfunctionality of markets. He's cutting out the 
markets and making direct deals, trading so much 
oil for so much of something else. He's not 
measuring the exchange in monetary terms but in 
mutual benefit terms. He's using the oil wealth 
strategically, seeking to undermine the power of 
finance capital in South America.

All of this fits in with my posting
   * rkm: Has capitalism passed its peak? *

where I said, "In such a more feudal-like game 
environment, we're going to see a major reversal 
in the tides of globalization. We're going to see 
a resurgence of territoriality and regionalism. 
China is already organizing its region in that 
way, with the SCO and related initiatives. China 
has long expressed the desire, nay the natural 
right, to regional hegemony, and it seems sincere 
in wanting only that. Self-containment is a very 
long tradition in Chinese culture. In the 
expansion of the EU into the former Soviet Block, 
we see the creation of another viable regional 
block, even if it might have been created for 
other reasons, under an earlier game plan. Russia 
fits nicely into a game of territories, being so 
vast on its own, and with a wealth of resources 
that its neighboring blocks are eager to buy at 
market price. A reunion with some of the old 
Soviet Block to the south would make a lot of 
sense for both parties."



The article below is an introduction to a series 
of three articles, which I have already posted to 

Engdahl: FInancial Tsunami - Part 1

Engdahl: FInancial Tsunami - Part 2

Engdahl: FInancial Tsunami - Part 3


Titanic Shift in Global Capital Market Power
The worst financial crisis in US history is just 
now appearing in its real dimension. It spells 
the end of New York's reign as the globally 
dominant financial power, the heart of the power 
of the American Century. It is a shift whose true 
significance has not yet been appreciated. It 
soon will be.
 By F. William Engdahl, 22 January 2008
 We're in the midst of the most politically 
significant shift in global capital flows since 
1919, when New York emerged out of the ashes of 
the Great War to replace the City of London as 
the dominant global capital center. The 
significance of this shift, being dramatically 
accelerated by the ongoing crises of US banks and 
financial institutions and insurers as a 
consequence of the failed "securitization 
revolution," is that it portends a de facto end 
of the American Century dominance of global 
In its January 15th issue, the senior Financial 
Times financial journalist, Gillian Tett noted, 
"The US looks poised to lose its mantle as the 
world's dominant financial market because of a 
rapid rise in the depth and maturity of markets 
in Europe, a study suggests."
Tett continues, "The change may have occurred 
already, not least because US markets are beset 
by credit woes, according to research by McKinsey 
Global InstituteŠ 'We think the differential 
growth rates are so significant that it is quite 
likely Europe has overtaken the US," said Diana 
Farrell, author of the report. 'They are now neck 
and neck, which means exchange rates are very 
important. It is a real change.'"
The McKinsey assessment is actually downplaying 
the depth of the global shift underway since the 
Enron and related accounting crises and the 
punitive US corporate disclosure laws, especially 
the Sarbanes-Oxley Act made New York unattractive 
for major international companies to raise 
capital through stock listings. Until the 
July-August 2007 crisis in the US sub-prime asset 
securitization markets revealed that major UK 
financial institutions as well had huge exposures 
to the US problems, London was overshadowing New 
York for the first time since before World War I 
as the place companies turned to list their 
stocks. London had for years been the world's 
center for foreign exchange trading in terms of 
volume, far exceeding Frankfurt, Tokyo or New 
Twilight of American financial supremacy
The unfolding crisis in the US is developing with 
such speed and intensity that a panicked 
President Bush was forced to announce his 
proposal for a $140 billion spending stimulus and 
tax cut bill to try to prevent a full-blown 
recession or worse by the November elections.
Historically, the party in power amid an economic 
recession never wins. The Bush proposals, far too 
little and too late, like the proposal of his 
Treasury Secretary Henry Paulson, the former 
Goldman Sachs banker, to postpone the reset the 
adjustments on billions of dollars worth of 
sub-prime and similar home mortgages for "five 
months," i.e. just enough time to slide past 
November but not more, are indicative of the 
deepening mood of gloom around the Bush White 
House and Wall Street.
The problems with the declining role of the 
dollar in world finance, of the power of US banks 
globally in leading capital market trends is 
terminal. In the past several weeks, some of the 
largest US banks, including Citigroup and Merrill 
Lynch have had to go hat-in-hand, literally 
begging various Sovereign Wealth Funds in the 
Middle East and in Asia to inject equity capital 
to prevent the banks from going bankrupt. The 
last time Citigroup was in such dire straits was 
in 1989 when it was technically insolvent and had 
to be bailed out by seriously wealthy Saudi 
investor, Prince Waleed bin Talal. The Prince has 
announced he is back to throw more good money 
after the bad Citigroup, but this may be too late.

Securitization Insurance the next crisis
The next wave in the deepening US asset 
securitization crisis began on January 18 when 
Fitch Ratings announced it had stripped the AAA 
rating of the second largest "monoline" insurance 
company, Ambac Financial Group Inc., the 
second-largest US bond insurer. Without its AAA 
rating Ambac may be unable to write the 
top-ranked bond insurance that makes up 74% of 
its revenue. The downgrade throws doubt on the 
ratings of $556 billion in municipal and 
structured finance debt guaranteed by Ambac. One 
market adviser, Matt Fabian of Municipal Market 
Advisors noted, "This makes Ambac insurance 
toxic. The market has no tolerance for a 
ratings-deprived insurer."
The Ambac downgrade is just the start of the next 
wave of the unraveling in US finance. MBIA Inc.'s 
AAA insurance rating may be cut by Moody's. MBIA 
is the largest US monocline insurer. The ratings 
review reflects potential losses from subprime 
mortgage securities including collateralized debt 
obligations, Moody's said. Moody's should know. 
Their ratings created the entire sub-prime fraud 
to begin with as we will detail in a later piece.
At the heart of the game of the past several 
years in which Wall Street banks and financial 
giants made literally hundreds of billions of 
dollars in fees and trading profits was their 
ability to "securitize" low quality home mortgage 
loans, so-called Sub-prime and Alt-A loans, and 
have them rated by Moodys, Fitch and Standard & 
Poors as AAA. The AAA rating was essential in 
order that pension funds would buy the 
securitized bonds issued by the likes of Merrill 
Lynch, Morgan Stanley, Goldman Sachs and the 
other major Wall Street and City of London 
financial players.
The key to how Moody's et al could rate such 
dubious mortgages as AAA lay in the insurance 
guarantee given in event of mortgage default by 
the new group of specialized Wall Street 
financial insurers, hence the name 
"monoline"-they had one line of insurance. With 
the rate of default on sub-prime and Alt-A 
mortgages exploding by the week across America, 
the ability of the Monoline insurers such as 
Ambac and MBIA to be able to meet insurance 
underwriting demands is now in question.
MBIA Inc. and Ambac Financial Group Inc., the two 
biggest bond insurers, have a more than 70% 
chance of going bankrupt, credit-default swaps 
show. Prices for contracts that pay investors if 
MBIA can't meet its debt obligations imply a 71% 
chance the company will default in the next five 
years, according to a J.P. Morgan Chase & Co. 
valuation model. Contracts on Ambac imply 72% 
At least $2.4 trillion worth of securities, that 
is $2,400 billion (¤ 1.64 trillion) are at risk 
to the financial insurance monoline downgrades. 
This is the early phase of the most severe 
financial crisis the United States has faced in 
its entire history, vastly paling 1929. It is now 
inevitable that the US Federal government will 
soon be forced to enter the "financial guarantee" 
business, assuming the obligations of municipal 
bond from the "monolines" and mortgage-backed 
securities insurance.
Fatally flawed models and Greenspan
The fatally-flawed models behind so many 
strategies that have come to permeate 
"contemporary finance" have completely broken 
down. The strategies of thousands of financial 
institutions - big and small - have turned 
Wall Street Risk Intermediation, the Alan 
Greenspan "Securitization Revolution" has 
essentially crashed and the risk markets 
essentially seized up. Across the board, the 
major risk operators are moving aggressively to 
rein in risk-taking.
Hundreds of US financial players - from small 
hedge funds to the major money center banks - 
with complex books of derivative trades, now have 
a very serious problem. Their "hedged books" 
contain supposedly offsetting risk exposures that 
were to have created a reasonable portfolio risk 
profile. The breakdown in Wall Street finance has 
transformed these highly leveraged "books" into 
essentially unmanageable "toxic waste" and 
financial land mines. The heart of the 
securitization process has been to make financial 
exposure less and less transparent. In good 
times, few cared. Now everyone cares. Banks dare 
not to trade with other banks fearing unknown 
New centers to emerge
What is most likely to emerge from the ashes of 
the US securitization crisis? At this point, 
thanks to the colossally inept policies of an 
American Century establishment, grouped around 
the Bush-Cheney regime, trying to deny reality on 
the world stage through exercise of brute force 
politics, we will likely see the emergence of 
 several distinct centers of global financial 
power, rather than one dominant center as had 
been the case first with the City of London after 
the Napoleonic wars, then with Wall Street after 
One center will emerge around the growing size 
and depth of Euro capital markets. Here Britain's 
decision to keep Britain out of the Eurozone 
since the Pound Sterling crisis in 1992 puts the 
City of London at a distinct disadvantage, though 
huge volumes of Euro bonds and stocks are traded 
by London banks. The problem with the Eurozone 
center is that it is geopolitically inadequate to 
replace the US superpower. It desperately needs 
raw materials and for that Russia, the Middle 
East and Africa are essential. China is becoming 
essential for trade outlets to replace the US 
market. Eurozone leaders have but dimly perceived 
their new geopolitical reality. They soon will.
The second center that will emerge will be based 
around the huge capital accumulations of dollar 
surplus countries especially since 2001 and the 
record high oil prices. These include the 
so-called Sovereign Wealth Funds, state-owned 
investment funds similar to the Norwegian 
Petroleum Fund, that have billions of dollars 
(and increasingly Euros) in capital that is 
looking to invest around the globe. The largest 
to date is that of the Emirates, including Dubai. 
They are believed to hold more than $800 billion 
in assets today. Saudi Arabia is planning to 
launch a similar wealth fund. China announced its 
$200 billion SWF last summer, and Russia, which 
now holds well over $400 billion in dollar 
reserves, is another major capital source.
The sharp declines in global stock markets on 
Monday, January 21 is a tiny hint of what will 
unfold. The driver is the US creature called 
financial securitization. It was valued in the 
trillions of dollars, nurtured and fully backed 
by a coalition of interests that included Alan 
Greenspan's Federal Reserve, the US Treasury, the 
rating agencies, the Wall Street monoline 
insurers, hedge funds and the banks behind them. 
I will detail in further installments on this 
site, The Financial Tsunami (see parts I and soon 
II), the history and the scope of what is only 
now becoming obvious to many as the greatest 
financial crisis at least since 1929-31 and in my 
estimation, ever. 

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