Meeting of the

Exchange Stabilization Fund

September 2, 2006

[Unauthorized, Unredacted and Apocryphal]



A meeting of the principals of the Exchange Stabilization Fund was held at Camp David, Maryland, on Saturday, September 2, 2006, at 11:00 a.m.





Mr. Bernanke, Federal Reserve
Mr. Gonzalez, Department of Justice

Mr. Hazmat, Goldman Sachs International
Mr. Shortz, Goldman Sachs London
Mr. Jetski, JP Morgan
Mr. Fu, HSBC
Mr. Apnea, Citibank

Staff and Aides, Working Group on Financial Markets

Ms. Miers, Secretary



THE PRESIDENT. I appreciate you all being here for this special meeting of the Gold Stomping Fund, or whatever you want to call it. I understand we got a lot to go over. I’m going to turn things over to Hanky Panky directly. We start talking about this financial stuff and I’m out like an odd man. But first, Dickie has something.

THE VICE PRESIDENT. Unauthorized disclosure of the existence or content of these proceedings will be deemed to be an act hostile to the vital interests of the United States. Violators will be tortured and shot.

SPEAKER. (?) Surely the Vice President is speaking figuratively. Such -- uh, extreme -- penalties for a simple leak would raise serious issues under the Constitution.

THE PRESIDENT. I got all the Constitution I need right here, son. It’s called the Bible. Albertini?

MR. GONZALEZ. Sir. Under our reading of the relevant provisions of the Constitution and the enabling legislation promulgated thereunder, the President, in his capacity as Commander in Chief, has very broad powers in certain narrowly defined circumstances. Such powers include, without limitation, classifying certain individuals as enemies of the state, and administering such extrajudicial remedies as he may deem useful in his sole discretion, including, without limitation, corporal and capital punishment. Qualifying circumstances include, without limitation, preemptive war initiated by the CIC. Accordingly, it is our position that it is currently within the CIC’s prerogative to cause those persons suspected of breaching applicable confidentiality stipulations to be tortured and shot.

THE PRESIDENT. Like he says. I’m the Decider. Well, all right then. Hanky?

MR. PAULSON. Thank you, Mr. President, ladies and gentlemen. I’ll get right to the point. As I expect you are all well aware, the financial condition of the United States is best described as catastrophic.

The St. Louis Fed has recently confirmed that we are staring at a fiscal gap of 66 trillion dollars.

This assessment is based on our -- the Treasury’s -- numbers. It is conservative.

You all know how we got here. Over a period of many years, many of us in positions of public and private power have betrayed our trust, looting the system and creating third world wealth disparities in the United States. We have abused our stewardship of the global reserve currency, and sequentially engineered the most dangerous and irresponsible series of credit expansions in history. The superficial effects of these credit expansions have, until now, masked the underlying rot. But a reckoning is upon us.

Today, the country is hemorrhaging from a ruinously expensive series of mismanaged foreign military commitments and runaway domestic entitlement programs. We have made trillions of dollars’ worth of promises we cannot -- and will not -- keep. By all standard measures, by any rational calculation, we are in a state of national bankruptcy.

THE VICE PRESIDENT. Deficits don’t matter.

THE PRESIDENT. To me, the question comes down to this: Is our seniors saving?

MR. PAULSON. The situation is dire. It is widely held in financial circles that we have no exit strategy. Indeed, I hold my present office at the insistence of certain important interests with a major exposure. They are increasingly alarmed at our drift. My charge is to oversee the development and implementation of a viable end game. Now, our only realistic policy option is painfully obvious: we must repudiate our debt through radical devaluation of the dollar. But I am here to see that we do so in a way that will enable our favored creditors to salvage something from the process.

THE PRESIDENT. I met some radicals once. In college. Don’t know whatever happened to them.

MR. PAULSON. The outlines of the strategy have now been drawn. It has four key phases.

Phase One extends from the date of my confirmation through the November elections. Our objective is to continue to preserve the apparent stability of critical financial indicators. To achieve this goal, we will continue, and intensify as warranted, our ongoing program of market intervention. On the one hand, we will support the dollar, the domestic equity markets, and the fixed-income markets. On the other, we will keep the prices of certain precious metals, notably gold and silver, in check. We will do this in collaboration with certain friendly central banks and finance ministries. Phase One will create a window within which our favored creditors may exchange a substantial portion of their dollar holdings for alternative currencies and other assets, including precious metals, of their choice.

Phase Two will start immediately following the midterm elections and extend for an indeterminate period currently estimated at approximately six months. As a practical matter, the length of time will depend on political factors. Our objective will be to trigger a temporary, but wrenching, recession. To achieve this goal, the Fed will stop pushing down the far end of the yield curve, and allow interest rates on dollar-denominated assets to rise well above the actual rate of inflation. Phase Two will create a window within which the dollar will temporarily strengthen against other currencies and assets, and our favored creditors may exchange a substantial portion of their dollar holdings for certain assets adversely affected by the rise in rates.

[Disturbance: Sound of extreme flatulence; groans; laughter.]

THE PRESIDENT. The smeller’s the feller!

MR. PAULSON. Phase Three will commence as we approach what we deem to be the point of no return. We cannot allow the liquidation to gather such momentum that we risk a downward spiral beyond our power to reverse. Our objective will be to devalue the dollar and effectively repudiate dollar-denominated debts. We propose to achieve this by means of adopting what will be popularly perceived as a hyperinflationary monetary policy. We will work closely with the Fed to monetize virtually all assets. Phase Three will leave our less favored creditors with worthless claims, an outcome which is expected to have a commensurately negative effect on their own financial systems and productive economies. Our friends will already have taken advantage of Phases One and Two.

Phase Four is frankly a work in progress. It will commence when we conclude that we have reduced our debt to manageable proportions, and extend indefinitely into the future. Our objective will be to restore confidence in a stable currency unit. We propose to achieve this by introducing a new currency with a nominal -- but not an actual, to the extent we can avoid it -- relationship to precious metals. This should enable us to start over once the brush has been cleared, as it were.

We’re obviously going to need the full cooperation of the Working Group in each phase to make this a success. That’s why I’m delighted to see so many old friends from the Street here this morning, wearing their quasi-official hats. We’ll provide further detail of the program at the staff level over the course of the next few weeks. But I’ll be pleased at this time to entertain any questions with respect to the broad strokes. Yes. Kung.

MR. FU. Hank, what is point of Phase One? Why we not rret rates rip now?

MR. PAULSON. A change in control of either House will introduce an undesirable element of uncertainty, putting at risk the successful execution of Phases Two through Four.

That said, I must caution you that control appears likely to shift irrespective of the outcome of the midterm elections. Bob?

MR. HAZMAT. What the Secretary is alluding to is a decision by the Olmert-Peretz coalition to retain Goldman Sachs to explore a sale of Israel’s controlling interest in Congress. We haven’t announced it yet, but we are enormously proud of this mandate.

THE PRESIDENT. Holy moly. Condi know about this?

SPEAKER. (?) What ingrates! Why would they give up on us now? Because we’re broke? Because that resolution endorsing the destruction of Lebanon was a few votes short of unanimous?

MR. HAZMAT. No, no, nothing like that. The engagement covers only the Legislative branch. The Executive and the Press are expressly excluded. They’re quite happy with their relationship with the United States. Really. No, this deal is driven by economics. They get just $3 billion each year from the United States. They then have to turn around and reinvest a huge slug of that just to maintain the message discipline network in all 435 Congressional districts. But as we all know, the Legislative function is all but irrelevant in today’s America. They’re just not getting a fair return on their investment. Add to that the big turnover expected in November, with old assets going out the door, a slew of new guys to buy: the numbers just don’t work. Plus, there’s that stupid study out there putting a spotlight on the whole thing. Under present circumstances, divestiture is an attractive option.

MR. PAULSON. Thank you, Bob. I’ll defer to the political experts on the broader implications of the pending sale. I bring it to your attention only to underscore the delicacy of the situation as it relates to executing our strategy. Other questions? Yes. Dopey.

SPEAKER. (?) Hank, how can you call back the deflationary process you plan to unleash after the elections? How can you have a little deflation? And what if you get a cascading series of defaults and the system enters an irreversible downward spiral?

MR. BERNANKE. If I may. The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Er, make that $600. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

THE PRESIDENT. That’s deep, Benny. I like it. Nice slacks, by the way.

SPEAKER. (?) But how will we maintain domestic order? First deflation, then hyperinflation. Then whatever. No one has a clue this sort of thing is coming. That’s if it works. If it doesn’t work, we’re facing a thing without a name. Hyperdepression? Either way, we’re going to have riots, mutinies, rude behavior everywhere.

THE PRESIDENT. Two words, son: Marshall Dillon.

THE VICE PRESIDENT. Any expression of dissent from this policy will pose a direct threat to our way of life. Therefore at the first hint of opposition this Administration will have no choice but to declare martial law. Important elements will include: internal passports with imbedded transponders, exchange controls, a military draft, civilian detention centers outside the major metropolitan areas, and extensive restrictions on all non-essential travel and communication.

THE PRESIDENT. That includes the Internets.

THE VICE PRESIDENT. With these measures in place, we will have the ability to deter, detect and suppress any domestic opposition. And so preserve our freedoms.

THE PRESIDENT. Hard-core objectors will be sent hunting with Dickie.

SPEAKER. (?) Jesus Christ. Aren’t there any Constitutional impediments?

THE PRESIDENT. I’d appreciate it if you wouldn’t take the Lord’s name in vain, son. And I’m getting pretty sick and tired of hearing the C word every time I turn around: Constitution, Constitution, Constitution. These are important times. We’ve got to stay the course. You’re either with us or against us. Albertini?

MR. GONZALEZ. Sir. Under our reading of the Constitution, in a declared domestic emergency, the CIC assumes divine powers.

MR. PAULSON. Yes. Sleepy.

MR. APNEA. Hank, this seems like a pretty blunt instrument. How do we make sure we stiff our enemies but not our friends? And what’s to stop the bad guys from dumping their Treasuries before we destroy their value?

MR. PAULSON. As to stiffing our friends, we don’t worry so much about this, since we have so few -- most of the world is already dancing on the grave of the American empire, thanks to our maladroit foreign policy -- and they’ll be in the loop anyway, helping smooth the markets. As to our enemies striking first, yes, we do worry about that. But the Chinese authorities, who have the largest exposure by far, are focused on preserving power through promoting China’s industrialization, and, conversely, our deindustrialization. Selling their dollar assets precipitously would put their own development at risk by triggering a global contraction with major blowback into their own economy. So we’re betting this strategic emphasis will lead them to defer dollar sales, to the point where they end up with a total loss on their positions. Worst case, they figure out the game and crash the party, loading up on cheap metal like our friends. We see that as an acceptable risk.

MR. PAULSON. Sneezy.

SPEAKER. (?) I’m a little unclear on how we get people to think things are stable in Phase One when we’re obviously heading over a cliff.

MR. PAULSON. We target two main audiences with our communications policy. One is the public. While we’ve had serious slippage in other policy areas, generally speaking, the American public still believes what we say on financial matters. So when we release economic statistics -- however inconsistent with objective reality --, and when the markets generate averages -- however absurd --, to date, we have found the public receptive or at worst indifferent.

The second target audience is the financial community, a more sophisticated crowd. They know what’s happening. But as long as they make money at it, they’re happy to play our virtual reality game. These people are not in business to defend the principle of free markets or otherwise make trouble. They are in business to make money. We set up a simple incentive system. If they do what we want, we let them make their numbers. If they don’t, we destroy them. It’s an easy call.

THE PRESIDENT. I love this guy. He cracks me up. Hanky Panky Bo Banky....

MR. PAULSON. The wild card is real estate. The big mortgage resets don’t start kicking in until next year. But if housing collapses before November, we have a major problem. The public won’t listen to us on the subject of how much their houses are worth, and we don’t have a price-support mechanism for this market.

SPEAKER. (?) Perhaps in that event we’ll experience some sort of shock that will take people’s minds off their declining house prices. Remind them how lucky they are to have us in charge.


MS. MIERS. Hank, in the markets you do control, how do you do it? Doesn’t this create a rather awkward paper trail?

MR. PAULSON. No, Harriett, it’s a lot more subtle than that. But that’s a very discerning question. You care to amplify on this, Joe?

MR. JETSKI. Sure thing, Hank. We tell the markets what we want in several ways. One way is direct -- we create a trading environment where only those prop desks who position themselves according to our playbook ever make it home. We make things go up when they should go down. We make things go down when they should go up. We’re very easy to read when we’re doing policy trades. The guidance is so obvious a blind squirrel could see it. It’s mostly just computers responding to our algorithms anyway. You’d have to want to lose money in a big way to override your systems and go against that flow.

Another way is indirect -- we goose or pressure assets in one market by trading derivatives in another. We buy or sell in size, futures, say, in market A, creating obvious arbitrage opportunities relative to the underlying assets in market B. The big players that aren’t brain-dead pile in for free money. They go long or short against us in the derivatives market and do the opposite simultaneously in the cash market. They book an instant, risk-free gain in the amount of the differential we just created. They keep doing it as long as we supply the juice. At the end of the day, the cash markets go where we want. The leverage is huge.

Still another way is my personal favorite, “Operation Rolling Plunder.” Every so often, we rain terror from the skies. We bomb the trading pits and exchange posts with massive sell orders. Without letup; all the way down. At the same time we pull all bids, blocking the exits. The refugees get trapped like rats, then panic and dump their holdings. We snarf up their discards and reload, all the while bombing and shorting the stragglers. By the time we finish, the only survivors are a few miserable deadenders and nutcases. All they can do is piss and moan about “market manipulation,” and hatch their kooky conspiracy theories. They call themselves “gold bugs.”

THE PRESIDENT. A-holes is more like it.


SPEAKER. (?) But Hank, how will you have the gold you need as a platform for a new hard currency when you’re selling so much of it now to maintain stable prices?

MR. PAULSON. We don’t actually sell much metal anymore. There are some wash trades among friends - the central banks - from time to time, but for the most part we sell claims to metal. When the time comes, the exchanges and OTC counterparties will declare force majeure and settle out the claims in paper.

THE PRESIDENT. Force majeure?

MR. PAULSON. French for “screw you.” Sir. Besides, we’re gathering up plenty of accessible metal in the ETFs. And Barrick holds a lot of reserves we can monetize if needed.

THE PRESIDENT. American Barrick? Is that the exploration company No. 41 helped Mr. Khashoggi and Phelonious Monk set up a few years back?

MR. PAULSON. The very one. They’re big now, and getting bigger all the time. We -- the government, that is -- are the indirect owners of most of their reserves. By the time we’re finished with Phase Two, we expect Barrick will control most of the known reserves on the planet. Except for all the stuff we -- at Goldman and the other banks, that is -- are picking up in our personal accounts. Throughout Phases One and Two, we’ll be buying gold in the ground at a fraction of its future monetary value.

I would also point out that in any event, we don’t expect to have to use real metal backing for the new currency. Just the promise of metal should be enough, based on historical experience. People will be so exhausted by that time that they’ll clutch at anything. The Rentenmark had no gold backing, for example. So we plan to keep the metal right where it belongs. With us. Broadly speaking.

THE PRESIDENT. The Renten-Who?

MR. SHORTZ. I would be most pleased to address this topic, Excellency. What the Secretary is referring to is the Rentenmark, which was the immediate, interim successor to the German Reichsmark. In the course of the German inflation, the Reichsmark declined in value from an exchange rate of about 12 to the U.S. dollar in 1919 to over a trillion to the dollar in 1923. A very large decline indeed, Highness. The Rentenmark was a cracking good success, and although it was presented to the German public as a currency unit linked to gold, in fact there was not a single gram of gold behind it. It was all a very great spin. Of course, the circumstances then were very different. The hyperinflation of the Germans came before their internal repression and external aggression.

THE PRESIDENT. Who’s the towelhead, Hanky?

MR. PAULSON. This is Mr. Grunji Shortz, sir. He’s our -- Goldman’s -- head trader in London. He quarterbacks a lot of our market management activities.

THE PRESIDENT. Well, this is all very interesting, Hanky. No, I mean it. But I got a bike date. Then I need a nap before the Rangers game. Pablo Escobar’s pitching. So let’s wrap it up. Do I hear a movement?

A motion having been made, seconded and carried unanimously, the meeting then ADJOURNED.


Harriet Miers,