by Krakondack
“Why are you here?” he asked without a hint of a smile.
“So nice to see you too, Ahmed,” said Lyle. “Let me introduce you to my friend Jess. Why don’t you ask her to be seated while you make us some coffee? We’ve been driving all day and we need your help.”
Lyle walked into the tastefully appointed, clean apartment that was a nice contrast to the environment outside. He motioned for Jess to follow, and gestured towards a chair.
“Welcome, Jess. Please make yourself comfortable while I make us some coffee,” said Ahmed. He then turned to Lyle. “Saving me from the Mossad that time was in your interest too, Lyle. I won’t be eternally indebted to you for that one.”
“I helped smuggle you out of Israel because I knew you were innocent of anything worse than forgery, and at that point guilt or innocence mattered not a whit to them. It was simply the right thing to do. But now I’m in a similar situation and I’m asking your help because it’s the right thing for you to do. And I think you might find it in your interests also.”
Ahmed looked him in the eye briefly and evidently decided he was telling the truth. “Tell me the story,” he said as he started the coffee.
Chapter 39: Meeting with Hauerstein
Gerry Levine had arranged a meeting between President Torres and the chairman of the Federal Reserve, Dr. Rudolph Hauerstein. Hauerstein had previously requested the meeting and had been writing alarming memos about bond auction failures. Torres had accommodated him to discuss the issue, but his encounter with the Chinese envoy had raised a lot of questions in his mind that he wanted to pose to the Fed Chairman. The Fed Chairman is nominated by the President at the conclusion of his predecessor’s term, but his term does not coincide with that of the President and in fact, outlasts him. Once in office, he is in theory unanswerable to any elected official.
“Mr. President, are you aware of how the Federal Reserve controls the supply of money?”
“Yes, Dr. Hauerstein. I’ve studied the matter to some degree.”
“Then you know that our balance sheet has two columns. Our assets are government bonds that we hold, and our liabilities are Federal Reserve Notes, or Dollars, that we have issued in exchange for those bonds.”
“Right.”
“When a bond matures, we collect the dollars that are paid to us and just buy a new bond with them. That rollover of funds keeps the money supply constant. Until the tenure of my predecessor, the Federal Reserve only purchased short term T-bills no longer than three months in duration. We would always roll them over, but the point is that we could in theory, without selling anything, shrink the monetary base of the United States simply by allowing our bonds to mature. As a result we had great credibility in safeguarding the value of the dollar and dollar denominated government debt.”
“The Fed is not normally the primary buyer of government debt, is it?” asked Torres.
“Yes and no,” answered Hauerstein. “The asset column of our balance sheet is mostly government debt. We don’t hold much gold or other hard assets anymore. But as I said, in the past it was all short term debt. This is how we keep short term interest rates low.”
“You don’t set long term rates?” asked Torres.
“Not traditionally. The supply of dollars we create to buy short term T-bills influences long term rates, but only indirectly by making more money available. That’s the way it’s been until recently.”
“You’ve moved to buying longer dated bonds in recent years?” asked Torres.
“Yes. The amount of money the government is borrowing has increased so dramatically that the market was flooded by long bonds. The memos I’ve written concern the fact that there is not enough cash in the world to buy the quantities of bonds the government is issuing. We’ve consequently had to step in and buy long term bonds to prevent government bond auctions from failing, which would shatter confidence in government finances.”
“I’ve had a recent visit from a Chinese envoy who saw very clearly that what you’re doing is monetary inflation, and it is devaluing their holdings of dollars and Treasury bonds. Is he wrong?”
“He’s not wrong, Sir. But if we had not stepped in, China’s existing holdings of US debt would lose even more value because we would default. The reason we had to start buying Treasury bonds was to pick up the huge amount of slack in the bond market. That’s the essence of why I needed to see you. My deputy Gil Gonneau has confirmed that China is selling its US government debt, which is consistent with your visit with their envoy.
“So the choice is death by inflation or death by bankruptcy?”
“I’m afraid that’s what it comes to, Sir.”
“Dr. Hauerstein, explain to me how we got here. And spare me the public relations bullshit, please.”
Hauerstein looked visibly insulted, but continued. “In short, the supply of money and credit has expanded continuously since the 1950s, with only occasional pauses. When the recession of 2001 arrived, my predecessor further inflated the money supply because of pressure from your predecessor who was engaging in and had to finance new wars. When commodity price inflation kicked in and we raised rates to combat that, the money supply tightened far faster than any of us could have imagined. Loan defaults made the banks’ reserves evaporate, and their ability to make loans vanished, so credit froze. You know the rest of the story. The resulting crisis created a real danger of reversing the whole monetary expansion of 60 years’ duration. We had no choice but to inflate.”
“So how do you prevent the inflation from getting out of control?”
“By treading carefully. We’re walking a tightrope, and one misstep will, as you said, give us death by inflation or bankruptcy.”
“And if you’re perfect and no accidents happen that are beyond your control, then all you’ve done is walk on that tightrope for a while longer. But you’re still high up in the air and you still face the same dangers as before. If anything, the dangers may be worse for the extra money you’ve created.”
“They’ve managed it pretty well in Japan. I think we can do the same,” replied Hauerstein.
“25 years of recession with no end in sight isn’t my idea of success, Dr. Hauerstein. Here’s a quote the Chinese envoy alluded to that summarizes what he was saying. ‘There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency involved.’”
“That’s Mises,” said Hauerstein. “It’s not exactly a mainstream view.”
“The mainstream is what got us into this crisis,” retorted Torres. “And the students of Mises (16) saw it coming all along. They claim your tightrope predicament has no safe solution. They claim that you can’t avoid disaster, but can only prolong and increase the misery before the final disaster.”
“Okay, Mr. President, since you’re asking for the naked truth, here it is,” said Hauerstein. “The fact is, we know Mises is basically right. But what are we supposed to do about it? If we followed his advice, we would freeze the money supply, interest rates would rocket upwards, the government would have to cut out two thirds of its current cost, and we would have a very deep depression. That’s what Mises’ students want. They think it would be brief. But are you aware of what it would do? It would wipe out most of the wealthy people and corporations in this country and probably the world. Think about that carefully. It means all your backers, all your friends and enemies, all wiped out. These are people with influence throughout the government, in the military and the intelligence community. And I don’t just mean in the United States. Most foreign governments are also on their speed-dial lists. If you think you have problems now, imagine the media they own holding you personally responsible for a complete collapse of the economy. I’m talking unemployment of 50% or more, riots in the cities and severe shortages of food and gas. And what emerges on the other side when the re
covery comes won’t resemble today’s order. There will be new elites, and they won’t owe you anything. In fact, they may put you and me and the rest of the government on trial. The world we live in will be lost, and the institutions we’ve built will disappear. My public comments are designed to keep the bond market stable, without which we risk the scenarios I just described.”
“That’s the honesty I wanted. So the people will continue to suffer so we can spare the elites from being wiped out.”
“I’m afraid so, Sir.”
“And the Chinese have a valid point, don’t they? We are going to rip them off on the value of our bonds.”
“Yes, Sir, they do.”
“And you’re stuck buying our debt, and will continue to be. There’s no real exit strategy.”
“No, there’s no exit strategy. As soon as we stop, the economy will collapse.”
“So the collapse of the dollar is inevitable, and your memos to me are only attempts to deflect the blame.”
“The Federal Reserve may have provided the champagne Mr. President, but the politicians drank it at one sitting. If I can’t close the bar, I at least want the record to show I did not condone this binge.”
“You can go now, Dr. Hauerstein. The truth is every bit as bad as I feared.”
Chapter 40: A Forger
Lyle and Jess sat in Ahmed’s Montreal apartment, sipping coffee and telling him their story. By the time they finished, he was willing not only to help out but to participate if they needed him. And he was more than willing to create new identities for them. Ahmed was too proud to use his forging skills to defraud anybody financially. He was always careful to establish that this was not going to be the objective if he was to render his services. He specialized in concealing people, or to facilitate their travel without the complications that might arise were their true identities to be known. And with the advent of computerized travel databases, it was not possible to simply invent identities. A successful forger of documents had to have a reliable contact inside the government who could furnish computerized codes that would identify people who already existed in the databases. He would then choose a plausible identity and alter the biometrics to match the recipient of the documents. By the time they left, Ahmoudi had photographed the couple, taken essential measurements of height and weight and promised to find them appropriate identities that would not attract undue attention.
Lyle and Jess checked into a motel on the south shore of the St. Lawrence River, then crossed the Victoria Bridge back to the old port of Montreal. With some time on their hands, they decided to explore the area, and walked for some time among the old stone buildings and cobblestone streets that contained some of the few architectural flavors of old Europe in North America. As it was an uncommonly warm fall day, they settled on a restaurant with an outdoor terrace, from where they could watch the action on the Place Jacques Cartier in front of them. Caricaturists were drawing faces, while street performers put on various shows. “So what were you doing in Israel, smuggling Palestinians out of the country?” asked Jess, finally getting her opportunity to ask the obvious question.
“I was a civilian contractor for the Tranche Corporation, having joined them right out of law school. We were hired to do an economic analysis of what Western investment could do for the Palestinians in the West Bank. Our projections were hugely exaggerated, of course. We used a computer program designed to produce exaggerated numbers. Our objective was to persuade them to take on big loans to buy a lot of stuff from major corporations. Having a nation in your debt can be very useful in subsequent negotiations. We never did the lending. We only sold them the concept of development, while simultaneously working with the World Bank, who would step in and fund it.”
“While we were in the West Bank, our group lived among the Palestinians for a while, and we got to know a group of them. Ahmed was one, and he was already an expert forger back then. You have to understand that for him, living in a society like that where you can never take your personal safety entirely for granted, it’s very important to do little favors for anybody powerful who asks. This keeps you in good standing with the powers that be, and that can sometimes literally be a question of life-and-death.”
“Ahmed forged the odd document for the Israelis, which they plainly didn’t need, since they had plenty of in-house expertise. Most likely, those jobs were given to him so that if the papers were tracked back to their source, they would point to some poor Arab, rather than to the Mossad. Of course he also forged for the Palestinians, and they kept him a little busier than the Israelis.”
“As part of our job with Tranche, we traveled between Israel, the West Bank and Jordan quite often, and our security status was such that we were rarely questioned at any of those borders. That could pose certain problems for us when using our IDs to check into hotels in Jordan. If word ever came back what an easy time we had crossing the border, the locals might assume we were Mossad, or CIA. To be honest I’m not sure which would be worse. So we had Ahmed get us documents making it seem we were UN observers of human rights compliance, and that was good enough for the Jordanian hotels, though we regularly got an earful about the practices of the Israelis.”
“One morning, Ahmed came knocking on our door in a panic. The Mossad was looking for him, or so he believed. In his mind, he was a dead man if they found him. It looks as though one of his customers had crossed a big line, maybe arms smuggling or planning terrorism. I never learned what it was, but it was obviously something big enough that top politicians heard about it and ordered everyone connected to be rounded up. If they’d asked their own intelligence people, they would have learned Ahmed was harmless and just trying to survive. But when politics gets involved reason goes out the window, and I think he was in real danger. So I hid Ahmed for a few days, then I hid him in the back of the vehicle on our regularly scheduled trip into Jordan and got him out. He’s convinced I saved his life, and he may be right.”
“As for me, I quickly soured on the mission we were tasked with at Tranche, despite a financial package you simply would not believe. I decided to come back home to rejoin dad’s law practice. I’m paid far less, but I made a small fortune at Tranche, so I have enough money to last a lifetime. Most importantly, I can go home at the end of the day knowing I haven’t hurt anyone. On some days, I even think I’ve helped out.”
“Wow, I never thought becoming a lawyer could be a step up morally,” quipped Jess.
“There’s no shortage of scumbags in law,” replied Lyle. “But not many of the scumbags are running small town law offices, doing real estate transactions, wills and speeding tickets. Yet our reputation is made by the ones in New York high-rises.”
“I was only kidding, Lyle,” replied a slightly chastened Jess. “I respect and admire what you did, putting morality first and money second. Those guys at Morningstar, I don’t think you have anything in common with them. Contrast how they made the key decisions in their lives.”
Lyle looked seriously at Jess. “They represent the extreme of the system I couldn’t take. ‘Security’ is not a defensive word to them, except insofar as how to keep their murderous plots secure, as in secret. What Tranche couldn’t achieve with promises and bribery, Morningstar would come in and finish in their dirty way.”
Despite the unpleasant subject matter, Jess couldn’t help her excited curiosity. “You mean overthrowing governments, like Kermit Roosevelt’s takedown of Mosaddegh in Iran?”(17)
“That’s how things started, but it was too messy,” replied Lyle. “Mosaddegh was unfortunately a democratically elected leader. The Shah was too obvious as an American plant, with a brutal human rights history. The fact it’s still talked about shows how sloppy it was. It also led directly to the relationship we have with Iran today. Even before Khomeini overthrew the Shah, it was obvious things had to be done in a cleaner way. So now, when a company like Tranche fails, you sometimes see a mysterious plane crash. Other times mysterious organ failure. ‘There must be 50
ways to lose the leader,’ to paraphrase Paul Simon.”
Jess ate her appetizer and sat silently for some time, thinking. She finally spoke up. “So I get it. They work for the government and do stuff the government wants done but doesn’t want known. But how do they go to suddenly working against the government?”
“Money. It simply means someone else made them a better offer. Knowing what kind of money gets thrown around in Washington, it had to be one hell of an offer.”
“Perhaps from someone with a lot of extra money and some outstanding issues with the US government,” observed Jess.
“China?” asked Lyle. “That’s possible I guess, but it’s not how I imagine China acting.”
They finished up and both being exhausted, retreated to the motel for some sleep. Lyle had booked them separate rooms, and they exchanged awkward glances as they retired for the night. In the morning they would see what identities Ahmed had fixed for them.
…
“Josh and Rachel Feldstein? Where’d you get those names?” asked Lyle. Ahmed handed them their new passports and drivers’ licenses.
“Neither one of you speaks French, but you live in Montreal. We have a sizable Jewish community here who mostly don’t speak French. It was the only thing that would work.”
Lyle looked over the documents and was clearly impressed. “The only thing missing is a set of credit cards.”
Ahmed shook his head: “These are real people, and they haven’t harmed me. No way will I destroy their credit ratings. Besides, when you fake passports and driver’s licenses some bureaucrat will fill out a form. But if you fake credit cards, the FBI will scour the earth until they find you. They prioritize crimes against money pretty high.”
“Don’t sweat it,” replied Lyle. “I still have contacts in the banking sector who I think can help us.”
