Terrorism by Fiat Money System, cycles of inflation & deflation, etc

Terrorism by Fiat Money System, cycles of inflation & deflation, etc

Mr. Ben Bernanke, (‘Helicopter Ben’) of the US Federal Reserve (a private Bank system in control of USA money supply),   gave a speech

Entitled  “Deflation: Making Sure It Doesn’t Happen Here“,

(which is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy)

The speech is best known for one sentence:

The US government has a technology,

called a printing press,

that allows it to produce as many US dollars as it wishes

at essentially no cost.”

Ben Bernanke is known by the nickname ‘Helicopter Ben’ in 2002 when he repeated Milton Freidman’s comment that money could be “dropped from helicopters” if needed, to avert a deflationary depression. As a student of the great depression Bernanke has also been outspoken about his desire to avoid repeating the mistakes of that era, meaning he’d strongly prefer inflation to deflation.


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When I first heard “Helicopter Ben” I thought of those rich high fliers taking off with their helicopters to avoid the economic collapse the helped  precipitate and and to escape the wrath of the masses against them, flying to their secluded refuges of secured privileged wealth, and I envisioned that memorable scene of the last helicopter leaving South Vietnam

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‘The Fed (Enemy #1)’

PRINT!!! PRINT!!! PRINT!!!

Ron Paul on Eliminating the Fed

 

Rep. Ron Paul, (R-Texas), breaks down why he believes the Federal Reserve is turning America into a welfare state.

September 30, 2010

http://lenox8081.wordpress.com/category/the-fed-enemy-1/

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Hmm,,,

 

 

 

 

Mike Luckovich (is that Ben in the Helicopter?) :

Source:
Answering an SOS
Mike Luckovich
The Atlanta Journal-Constitution, Wednesday, April 9, 2008, 07:17 AM
http://www.ajc.com/opinion/content/shared-blogs/ajc/luckovich/entries/2008/04/09/answering_an_so.html

 

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and what are those dollars worth with this kind of inflation

 

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Global Collapse of the Fiat Money System: Too Big To Fail Global Banks Will Collapse Between Now and First Quarter 2011

When Quantitative Easing Has Run Its Course and Fails

by Matthias Chang

// <![CDATA[//
// <![CDATA[// // <![CDATA[// // <![CDATA[//
Global Research, August 31, 2010
13diggsdigg // <![CDATA[// // <![CDATA[// StumbleUpon Submit

Readers of my articles will recall that I have warned as far back as December 2006, that the global banks will collapse when the Financial Tsunami hits the global economy in 2007. And as they say, the rest is history.

Quantitative Easing (QE I) spearheaded by the Chairman of Federal Reserve, Ben Bernanke delayed the inevitable demise of the fiat shadow money banking system slightly over 18 months.

That is why in November of 2009, I was so confident to warn my readers that by the end of the first quarter of 2010 at the earliest or by the second quarter of 2010 at the latest, the global economy will go into a tailspin. The recent alarm that the US economy has slowed down and in the words of Bernanke “the recent pace of growth is less vigorous than we expected” has all but vindicated my analysis. He warned that the outlook is uncertain and the economy “remains vulnerable to unexpected developments”.

Obviously, Bernanke’s words do not reveal the full extent of the fear that has gripped central bankers and the financial elites that assembled at the annual gathering at Jackson Hole, Wyoming. But, you can take it from me that they are very afraid.

Why?

Let me be plain and blunt. The “unexpected developments” Bernanke referred to is the collapse of the global banks. This is FED speak and to those in the loop, this is the dire warning.

So many renowned economists have misdiagnosed the objective and consequences of quantitative easing. Central bankers’ scribes and the global mass media hoodwinked the people by saying that QE will enable the banks to lend monies to cash-starved companies and jump start the economy. The low interest rate regime would encourage all and sundry to borrow, consume and invest.

This was the fairy tale.

Then, there were some economists who were worried that as a result of the FED’s printing press (electronic or otherwise) working overtime, hyper-inflation would set in soon after.

But nothing happened. The multiplier effect of fractional reserve banking did not take off. Bank lending in fact stalled.

Why?

What happened?

Let me explain in simple terms step by step.

1) All the global banks were up to their eye-balls in toxic assets. All the AAA mortgage-backed securities etc. were in fact JUNK. But in the balance sheets of the banks and their special purpose vehicles (SPVs), they were stated to be worth US$ TRILLIONS.

2) The collapse of Lehman Bros and AIG exposed this ugly truth. All the global banks had liabilities in the US$ Trillions. They were all INSOLVENT. The central banks the world over conspired and agreed not to reveal the total liabilities of the global banks as that would cause a run on these banks, as happened in the case of Northern Rock in the U.K.

3) A devious scheme was devised by the FED, led by Bernanke to assist the global banks to unload systematically and in tranches the toxic assets so as to allow the banks to comply with RESERVE REQUIREMENTS under the fractional reserve banking system, and to continue their banking business. This is the essence of the bailout of the global banks by central bankers.

4) This devious scheme was effected by the FED’s quantitative easing (QE) – the purchase of toxic assets from the banks. The FED created “money out of thin air” and used that “money” to buy the toxic assets at face or book value from the banks, notwithstanding they were all junks and at the most, worth maybe ten cents to the dollar. Now, the FED is “loaded” with toxic assets once owned by the global banks. But these banks cannot declare and or admit to this state of affairs. Hence, this financial charade.

5) If we are to follow simple logic, the exercise would result in the global banks flushed with cash to enable them to lend to desperate consumers and cash-starved businesses. But the money did not go out as loans. Where did the money go?

6) It went back to the FED as reserves, and since the FED bought US$ trillions worth of toxic wastes, the “money” (it was merely book entries in the Fed’s books) that these global banks had were treated as “Excess Reserves”. This is a misnomer because it gave the ILLUSION that the banks are cash-rich and under the fractional reserve system would be able to lend out trillions worth of loans. But they did not. Why?

7) Because the global banks still have US$ trillions worth of toxic wastes in their balance sheets. They are still insolvent under the fractional reserve banking laws. The public must not be aware of this as otherwise, it would trigger a massive run on all the global banks!

8) Bernanke, the US Treasury and the global central bankers were all praying and hoping that given time (their estimation was 12 to 18 months) the housing market would recover and asset prices would resume to the levels before the crisis. .

Let me explain: A House was sold for say US$500,000. Borrower has a mortgage of US$450,000 or more. The house is now worth US$200,000 or less. Multiply this by the millions of houses sold between 2000 and 2008 and you will appreciate the extent of the financial black-hole. There is no way that any of the global banks can get out of this gigantic mess. And there is also no way that the FED and the global central bankers through QE can continue to buy such toxic wastes without showing their hands and exposing the lie that these banks are solvent.

It is my estimation that they have to QE up to US$20 trillion at the minimum. The FED and no central banker would dare “create such an amount of money out of thin air” without arousing the suspicions and or panic of sovereign creditors, investors and depositors. It is as good as declaring officially that all the banks are BANKRUPT.

9) But there is no other solution in the short and middle term except another bout of quantitative easing, QE II. Given the above caveat, QE II cannot exceed the amount of the previous QE without opening the proverbial Pandora Box.

10) But it is also a given that the FED will embark on QE II, as under the fractional reserve banking system, if the FED does not purchase additional toxic wastes, the global banks (faced with mounting foreclosures, etc.) will fall short of their reserve requirements.

11) You will also recall that the FED at the height of the crisis announced that interest will be paid on the so-called “excess reserves” of the global banks, thus enabling these banks to “earn” interest. So what we have is a merry-go-round of monies moving from the right pocket to the left pocket at the click of the computer mouse. The FED creates money, uses it to buy toxic assets, and the same money is then returned to the FED by the global banks to earn interest. By this fiction of QE, banks are flushed with cash which enable them to earn interest. Is it any wonder that these banks have declared record profits?

12) The global banks get rid of some of their toxic wastes at full value and at no costs, and get paid for unloading the toxic wastes via interest payments. Additionally, some of the “monies” are used by these banks to purchase US Treasuries (which also pay interests) which in turn allows the US Treasury to continue its deficit spending. THIS IS THE BAILOUT RIP OFF of the century.

Now that you fully understand this SCAM, it is left to be seen how the FED will get away with the next round of quantitative easing – QE II.

Obviously, the FED and the other central banks are hoping that in time, asset prices will recover and resume their previous values before the crisis. This is a fantasy. QE II will fail just as QE I failed to save the banks.

The patient is in intensive care and is for all intent and purposes brain dead, although the heart is still pumping albeit faintly. The Too Big To Fail Banks cannot be rescued and must be allowed to be liquidated. It will be painful, but it is necessary before there is recovery. This is a given.

Warning:

When the ball hits the ceiling fan, sometime early 2011 at the earliest, there will be massive bank runs.

I expect that the FED and other central banks will pre-empt such a run and will do the following:

1) Disallow cash withdrawals from banks beyond a certain amount, say US$1,000 per day; 2) Disallow cash transactions up to a certain amount, say US$10,000 for certain transactions; 3) Transactions (investments) for metals (gold and silver) will be restricted; 4) Worst-case scenario – the confiscation of gold AS HAPPENED IN WORLD WAR II. 5) Imposition of capital controls etc.; 6) Legislations that will compel most daily commercial transactions to be conducted through Debit and or Credit Cards; 7) Legislations to make it a criminal offence for any contraventions of the above.

Solution:

Maintain a bank balance sufficient to enable you to comply with the above potential impositions.

Start diversifying your assets away from dollar assets. Have foreign currencies in sufficient quantities in those jurisdictions where the above anticipated impositions are least likely to be implemented.

CONCLUSION

There will be a financial tsunami (round two) the likes of which the world has never seen.

Global banks will collapse!

Be ready.


NEW BOOK:ORDER DIRECTLY FROM GLOBAL RESEARCH 

The Global
Economic Crisis


Michel Chossudovsky
Andrew G. Marshall (editors)


Matthias Chang is a frequent contributor to Global Research. Global Research Articles by Matthias Chang

http://www.globalresearch.ca/index.php?context=va&aid=20853

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Banks Meltdown Explained Withdraw Now! Sept 13/10

Print Email

Monday, 13 September 2010 12:24

Folks I believe the below info will happen sooner then later I have adviced all who will listen to start pulling all your money out of the banks. cheers Tami

Global Research <http://www.globalresearch.ca/>, August 31, 2010

Global Research, August 31, 2010 Future Fast Forward

Readers of my articles will recall that I have warned as far back as December 2006, that the global banks will collapse when the Financial Tsunami hits the global economy in 2007. And as they say, the rest is history.

Quantitative Easing (QE I) spearheaded by the Chairman of Federal Reserve, Ben Bernanke delayed the inevitable demise of the fiat shadow money banking system slightly over 18 months.

That is why in November of 2009, I was so confident to warn my readers that by the end of the first quarter of 2010 at the earliest or by the second quarter of 2010 at the latest, the global economy will go into a tailspin. The recent alarm that the US economy has slowed down and in the words of Bernanke “the recent pace of growth is less vigorous than we expected” has all but vindicated my analysis. He warned that the outlook is uncertain and the economy “remains vulnerable to unexpected developments”.Obviously, Bernanke’s words do not reveal the full extent of the fear that has gripped central bankers and the financial elites that assembled at the annual gathering at Jackson Hole, Wyoming. But, you can take it from me that they are very afraid.

Why?

Let me be plain and blunt. The “unexpected developments” Bernanke referred to is the collapse of the global banks. This is FED speak and to those in the loop, this is the dire warning. So many renowned economists have misdiagnosed the objective and consequences of quantitative easing. Central bankers’ scribes and the global mass media hoodwinked the people by saying that QE will enable the banks to lend monies to cash-starved companies and jump start the economy. The low interest rate regime would encourage all and sundry to borrow, consume and invest.This was the fairy tale.

Then, there were some economists who were worried that as a result of the FED’s printing press (electronic or otherwise) working overtime, hyper-inflation would set in soon after. But nothing happened. The multiplier effect of fractional reserve banking did not take off. Bank lending in fact stalled.

Why?

What happened?

Let me explain in simple terms step by step.

1) All the global banks were up to their eye-balls in toxic assets. All the AAA mortgage-backed securities etc. were in fact JUNK. But in the balance sheets of the banks and their special purpose vehicles (SPVs), they were stated to be worth US$ TRILLIONS.

2) The collapse of Lehman Bros and AIG exposed this ugly truth. All the global banks had liabilities in the US$ Trillions. They were all INSOLVENT. The central banks the world over conspired and agreed not to reveal the total liabilities of the global banks as that would cause a run on these banks, as happened in the case of Northern Rock in the U.K.

3) A devious scheme was devised by the FED, led by Bernanke to assist the global banks to unload systematically and in tranches the toxic assets so as to allow the banks to comply with RESERVE REQUIREMENTS under the fractional reserve banking system, and to continue their banking business. This is the essence of the bailout of the global banks by central bankers.

4) This devious scheme was effected by the FED’s quantitative easing (QE) – the purchase of toxic assets from the banks. The FED created “money out of thin air” and used that “money” to buy the toxic assets at face or book value from the banks, notwithstanding they were all junks and at the most, worth maybe ten cents to the dollar. Now, the FED is “loaded” with toxic assets once owned by the global banks. But these banks cannot declare and or admit to this state of affairs. Hence, this financial charade.

5) If we are to follow simple logic, the exercise would result in the global banks flushed with cash to enable them to lend to desperate consumers and cash-starved businesses. But the money did not go out as loans. Where did the money go?

6) It went back to the FED as reserves, and since the FED bought US$ trillions worth of toxic wastes, the “money” (it was merely book entries in the Fed’s books) that these global banks had were treated as “Excess Reserves”. This is a misnomer because it gave the ILLUSION that the banks are cash-rich and under the fractional reserve system would be able to lend out trillions worth of loans. But they did not. Why?

7) Because the global banks still have US$ trillions worth of toxic wastes in their balance sheets. They are still insolvent under the fractional reserve banking laws. The public must not be aware of this as otherwise, it would trigger a massive run on all the global banks!

8) Bernanke, the US Treasury and the global central bankers were all praying and hoping that given time (their estimation was 12 to 18 months) the housing market would recover and asset prices would resume to the levels before the crisis. . Let me explain: A House was sold for say US $500,000. Borrower has a mortgage of US $450,000 or more. The house is now worth US $200,000 or less. Multiply this by the millions of houses sold between 2000 and 2008 and you will appreciate the extent of the financial black-hole. There is no way that any of the global banks can get out of this gigantic mess. And there is also no way that the FED and the global central bankers through QE can continue to buy such toxic wastes without showing their hands and exposing the lie that these banks are solvent. It is my estimation that they have to QE up to US $20 trillion at the minimum. The FED and no central banker would dare “create such an amount of money out of thin air” without arousing the suspicions and or panic of sovereign creditors, investors and depositors. It is as good as declaring officially that all the banks are BANKRUPT.

9) But there is no other solution in the short and middle term except another bout of quantitative easing, QE II. Given the above caveat, QE II cannot exceed the amount of the previous QE without opening the proverbial Pandora Box.

10) But it is also a given that the FED will embark on QE II, as under the fractional reserve banking system, if the FED does not purchase additional toxic wastes, the global banks (faced with mounting foreclosures, etc.) will fall short of their reserve requirements.

11) You will also recall that the FED at the height of the crisis announced that interest will be paid on the so-called “excess reserves” of the global banks, thus enabling these banks to “earn” interest. So what we have is a merry-go-round of monies moving from the right pocket to the left pocket at the click of the computer mouse. The FED creates money, uses it to buy toxic assets, and the same money is then returned to the FED by the global banks to earn interest. By this fiction of QE, banks are flushed with cash which enable them to earn interest. Is it any wonder that these banks have declared record profits?

12) The global banks get rid of some of their toxic wastes at full value and at no costs, and get paid for unloading the toxic wastes via interest payments. Additionally, some of the “monies” are used by these banks to purchase US Treasuries (which also pay interests) which in turn allows the US Treasury to continue its deficit spending. THIS IS THE BAILOUT RIP OFF of the century.

Now that you fully understand this SCAM, it is left to be seen how the FED will get away with the next round of quantitative easing – QE II. Obviously, the FED and the other central banks are hoping that in time, asset prices will recover and resume their previous values before the crisis. This is a fantasy. QE II will fail just as QE I failed to save the banks. The patient is in intensive care and is for all intent and purposes brain dead, although the heart is still pumping albeit faintly. The Too Big To Fail Banks cannot be rescued and must be allowed to be liquidated. It will be painful, but it is necessary before there is recovery. This is a given.

Warning:

When the ball hits the ceiling fan, sometime early 2011 at the earliest, there will be massive bank runs. I expect that the FED and other central banks will pre-empt such a run and will do the following:

1) Disallow cash withdrawals from banks beyond a certain amount, say US$1,000 per day;

2) Disallow cash transactions up to a certain amount, say US$10,000 for certain transactions;

3) Transactions (investments) for metals (gold and silver) will be restricted;

4) Worst-case scenario – the confiscation of gold AS HAPPENED IN WORLD WAR II.

5) Imposition of capital controls etc.;

6) Legislations that will compel most daily commercial transactions to be conducted through Debit and or Credit Cards;

7) Legislations to make it a criminal offence for any contraventions of the above.

Solution:

Maintain a bank balance sufficient to enable you to comply with the above potential impositions.

Start diversifying your assets away from dollar assets. Have foreign currencies in sufficient quantities in those jurisdictions where the above anticipated impositions are least likely to be implemented.

CONCLUSION

There will be a financial tsunami (round two) the likes of which the world has never seen.

Global banks will collapse!

Be ready.

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Quantitative easing

From Wikipedia, the free encyclopedia

The term quantitative easing (QE) describes a monetary policy used by central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

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Federal Reserve Will Fail With Quantitative Easing

by Trace Mayer, J.D. on March 18, 2009 · 22 comments

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Quantitative easing; everybody is doing it like the Bank of England, Japan and even Switzerland.  Quantitative easing is a tool of monetary policy.  The effect is an increase in the quantity of currency without regard to maintaining its quality.  Quantitative is relating to, measuring, or measured by the quantity of something rather than its quality.  On 18 March 2009 Bloomberg reported that the Federal Reserve announced the intent to purchase $300B of longer-term Treasuries.  Predictably, the Federal Reserve has decided to exacerbate the quantitative easing party.   This has an effective on quantitative finance.

What is really going on is the great credit contraction.  The system does not collapse but evaporate. As the evaporation has continued and intensified capital, both real and fictitious, has sought safer and more liquid assets by moving down the liquidity pyramid.  A significant, but still miniscule amount, of capital has already evaporated over the past year.  This is basic economic law being asserted.  A predictable consequence has been for Treasury rates to near 0% because they are considered among the safest and most liquid assets.

But the United States Treasury bubble is the biggest of all and there are reasons how and why the Treasury bubble will burst.

At all times and in all circumstances gold remains money. Gold is the ultimate form of payment and is always accepted.  Gold is the safest and most liquid asset.  As I surgically explained, the ETFs GLD and SLV are NOT gold or silver.  The question then becomes:  Will capital move up or down the liquidity pyramid?

How did gold perform in reaction to Bernanke’s announcement?  A monstrous and almost immediate rise of about $60 per ounce.  The gold cartel GATA has shined a light on must of had its hands full today.  This is all the more ominous because gold is not just a commodity or portfolio asset but a currency which, through tools like GoldMoney, can be used in ordinary daily transactions.  Because silver is also money; the chronic silver backwardation is equally if not more ominous.

I have long asserted that the FRN$ will be the last major fiat currency to evaporate in the great credit contraction and that gold will still be there when the next credit expansion begins.  This misguided action by Mr. Bernanke will only hasten the rate of evaporation.  The great credit contraction has just begun and in the aggregate capital will continue moving down, not up, the liquidity pyramid.

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RELATED POSTS:

  1. Global Quantitative Easing
  2. Quantitative Easing By Fed Is Predictably Failing
  3. Bank of England and Quantitative Easing
  4. Quantitative Easing and Gold
  5. Inflation With Gary North Or Deflation With Mish

1,483 views this monthEmail Email Print Print ABOUT THE AUTHOR: Trace Mayer, J.D., author of The Great Credit Contraction holds a degree in Accounting, a law degree from California Western School of Law and studies the Austrian school of economics. He works as an entrepreneur, investor, journalist and monetary scientist. He is a strong advocate of the freedom of speech, a member of the Society of Professional Journalists and the San Diego County Bar Association. He has appeared on ABC, NBC, BNN, radio shows and presented at many investment conferences

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The Return of Helicopter Ben

Evaldo Albuquerque (July 28, 2010)

 

…Your Forex Guide to Big Ben’s Latest “Free Money” Policy

I’m sure you have noticed the big dark cloud that hangs over the U.S. economy. But if not, let me enlighten you.

There are red flags popping up in all corners of the U.S. economy. Just a glance at the recent data proves that.

The latest numbers in employment, retail sales, housing market, and consumer confidence have all been alarming.

Among all the red flags, the housing market is the one that most concerns me. In late 2007 the collapse of the housing market was the main driver of the stock market crash and the recession.

Now the housing market is stalling again.

Housing prices are falling, and unsold homes are piling up. This decline of household asset value does not bode well for consumer sentiment. If housing prices take another dive, consumers won’t feel like spending.

If the housing market doesn’t turn around, we could see another leg of this recession.

Yet Bernanke is still saying it has the tools necessary to support the recovery.

After all, as he stated back in 2002, “the U.S. government has a technology, called a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Gee Thanks Ben, That Makes Me Feel Better

A week ago, Fed Chairman, Bernanke, testified to the Senate Banking Committee. Naturally the senators were growing pessimistic about this economic recovery.

In response, Bernanke gave his plans for the economy in case things continue to deteriorate.

The Fed Chairman said, “We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential.”

He also said that the Fed would reconsider buying more mortgages or other securities if the economy continues to show signs of rolling over.

In plain English, Bernanke is saying he won’t hesitate to put the printing machine back to work if things turn even uglier.

Although it’s still too early to confirm that we will see more quantitative easing (QE), last week’s speech laid the foundation for more printing of money.

The more economic data deteriorates, the greater the chances helicopter Ben will take action once again.

Come August 10th, We’ll Know More

The next time the Fed members will be meeting is on August 10th.

If we see more economic disappointment, especially in the labor market report that will be released four days earlier, there’s a good chance the Fed will give more indications further QE is on the cards.

After the 2008 crisis, the Fed implemented a massive program to buy back assets from private institutions. By doing that, the Fed was essentially printing money that could be reallocated to different sectors of the economy.

In short, they were flooding the market with liquidity.

In 2009, we all saw the effects of this excessive liquidity in the markets. Equities rallied for most of 2009 primarily because of this exceptionally easy monetary policy. If the Fed starts a second round of QE, it’s very likely that we will see a similar rally, but in a smaller scale.

And the consequences of another round of QE won’t remain limited to the equity market…

Using the U.S. Printing Press to Profit in the Forex Market

In 2009, with all the QE in place, the dollar had only one direction for most of the year: south. The most basic economic concept, the law of supply and demand, was driving the dollar down. When you increase the supply of an asset, without an increase in demand, it loses value. That’s exactly what happened in 2009.

Dollar Fell for Most of 2009 after Fed Started its QE Program

So if the Fed implements QE once again, the dollar will most likely fall. That will be a good time to be selling the dollar against high yielding currencies, such as the Aussie and South African rand.

But there’s something that may actually trigger a dollar rally.

Another round of QE will be the last tool Bernanke can use to avoid the next leg down in this recession. If flooding the system with more money fails to lift equity markets, then all hell will break loose in the markets. Stocks will plunge and the dollar and other “safe-haven” currencies, such as the yen, will rally.

So the key is to watch not only the Fed’s actions, but also how the equity market will react to monetary policies. If stocks rally like they did in 2009, get ready to sell the U.S. dollar.

Best Regards,
Evaldo Albuquerque, Editor
Exotic FX Alert

  • July 15th, 2010

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RBS tells clients to prepare for ‘monster’ money-printing by the Federal Reserve

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

By Ambrose Evans-Pritchard, International Business Editor
Published: 5:11PM BST 27 Jun 2010

121 Comments

Entitled “Deflation: Making Sure It Doesn’t Happen Here“, it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: “The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.”

Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).

Investors basking in Wall Street’s V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.

The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on “monster” quantitative easing (QE)”.

“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option “which I personally prefer”.

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank’s “rule of thumb” measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe’s EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale’s uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the “stinking fiscal mess” across the developed world. “The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant,” he said.

Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.

The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.

It is sobering that zero rates, QE a l’outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU’s €750bn rescue “shield” have failed to stabilize Europe’s debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?

Clearly we are nearing the end of the “Phoney War”, that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing “boiling point” in half the world economy.

Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous – and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.

Some say that the Fed’s QE policies have failed. I profoundly disagree. The US property market – and therefore the banks – would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.

The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.

Bernanke warned in that speech eight years ago that “sustained deflation can be highly destructive to a modern economy” because it leads to slow death from a rising real burden of debt.

At the time, the broad money supply war growing at 6pc and the Dallas Fed’s `trimmed mean’ index of core inflation was 2.2pc.

We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the ‘trimmed mean’ index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.

There is no doubt that the Fed has the tools to stop this. “Sufficient injections of money will ultimately always reverse a deflation,” said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationsists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

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Faber: Nations Will Print Money, Go Bust, Go to War…We Are Doomed

by Andrew Mellon

Today the leading Austrian economic think tank, the Ludwig von Mises Institute held a conference at the University Club in Manhattan in which Marc Faber, famed contrarian investor and publisher of the “Gloom, Boom and Doom Report” gave his perspective on the financial crisis and his outlook for the future.

Below are his main points and entertaining quotes:

  • Central banks will never tighten monetary policy again, merely print, print, print
  • Bubbles used to be concentrated in 1 sector or region in the 19th century, but off of the gold standard this concentration has ended
  • “The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything…everywhere.”
  • “Central banks love to see asset prices go up,” and their policy reflects their desperation to perpetuate this
  • US housing bubble that Greenspan could not spot (even though he has recently spotted bubbles in Asia) stands in stark contrast to that of Hong Kong in 1997, where prices fell by 70%, yet none of the major developers went bankrupt; this was a result of a system not built on excessive debt like that of the US
  • “You have to ask what they were smoking at the Federal Reserve,” during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004
  • Over the last couple of years, when the gross increase in public debt has exceeded the gross decrease in private debt, markets have risen, whereas when private debt growth has outpaced public debt growth, markets have tanked
  • The next 3-5 years will be highly volatile
  • Americans must re-think what constitutes a safe asset; in a “traditional” period, one would generally rank from most to least safe assets: cash, Treasuries, corporate bonds, equities, commodities
  • However, last year Economist Gregory Mankiw articulated the position which according to Faber essentially echoes that of Fed #2 Janet Yellen and pervades much of the Fed generally, that “The problem is that people are saving money instead of spending, and we have to get the bastards spending to keep the economy going,” so the key is to inflate the money supply at something like 6% per annum
  • Thus, Faber says “As far as I’m concerned, the Federal Reserve will keep interest rates at 0, precisely 0…in real terms”
  • As such, cash and longterm bonds will be a bad place to hold one’s money; equities are an avenue to preserve wealth (but this is a risky proposition, given the effects of rampant currency depreciation); precious metals are a sound place for wealth preservation
  • As for the US being the most important economy for the world, there is a sea change going on right now; recently car sales in emerging economies (such as Brazil, China) are outpacing those of the US, Europe and Japan; oil consumption in emerging markets is increasing, while in the developed world it is contracting; the whole world does not depend on American consumption anymore – 60% of total exports are now going to the emerging world when one includes E. Europe; the US is still a large economy but it is not growing, while the growth in the emerging world is and will continue to be strong
  • “People still think of emerging market economies as poor cousins, but because 80% of the world’s people are here, in aggregate the consumption is huge.”; these are not saturated markets and they are growing rapidly
  • “Everybody should have 50% of their money in the emerging world, outside the West.”; people should also keep the custody of their assets overseas
  • Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money
  • The drivers of growth in the emerging world will be the urbanization of India and China; stocks won’t necessarily rise in the short term, but there will be significant growth in Asia in the long run
  • The shift in economic power from West to East has been remarkable in speed, largely due to the rapid industrialization of the emerging world and the speed at which information travels today
  • There will be a massive increase in resource-intensive industries and new export markets, met with increased volatility and tension around the world
  • The supply/demand characteristics of oil are great due to the need for oil in China, India, rest of Asia
  • Oil is the top priority for China, as they are now a net importer
  • US has a huge strategic advantage over China given that we have access to our own oil, and that of Mexico, Canada, the Middle East and off the western Coast of Africa, in addition to the ability to travel on the Atlantic or Pacific Ocean; meanwhile, China sources 95% of their oil from the Middle East, and while they are building pipelines throughout Eastern Europe for example, their oil supply points in terms of ports for example are limited, and the US has defense bases surrounding these areas; Chinese subs could sink our boats however; the Russians are also not happy about our forces being in the region, and tensions will grow as the need for natural resources in these nations grows
  • Eventually, there will be war and one will want physical commodities “not paper from UBS or JP Morgan”
  • In war, cities will not offer safety because one can get bombed, water may be poisoned, electricity shut off; instead, one should buy a house in the middle of nowhere/on the countryside
  • The tremendous economic Sophism of the day is that a nation can print its way into prosperity; “If debt and money printing equaled prosperity then Zimbabwe would be the richest country.”
  • “Mugabe is the economic mentor of Ben Bernanke.”
  • Our fiscal situation is much more horrendous than it is made out to be; total debt (public and private) as a percentage of GDP counting unfunded liabilities is an astounding 800% of GDP, more than double that during 1929
  • Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money; US government leaders will try to postpone the hour of truth, pushing the problems off till succeeding Presidents and Congressmen
  • If deficits didn’t matter as many like Economist James Galbraith argue today, why should citizens even pay taxes?  It would make everyone happier if they didn’t
  • Faber is sure that the economists in academia are intelligent and they study the textbooks hard, but they study the wrong textbooks and are totally inconsistent in their philosophy
  • In an environment of money-printing and high volatility that exists in the US and that will be created by future policy, physical gold is the best thing to own
  • Once currency depreciation does take place, stocks may become very cheap, as happened when the Mexican peso depreciated by 95% in the early 80s, as the fund managers invested in Mexican equities completely undervalued them after currency collapse
  • In a nutshell Faber says he is essentially bearish on everything, though he favors commodities (especially physical precious metals and agriculture), owning a house in the countryside, equities in emerging markets tied to resources (especially necessities like water and oil) and healthcare, and most of Asia including especially Japanese stocks
  • There is no means of avoiding a total collapse in the West; at the first train station in 2008, the financial system went bust but didn’t die, at the next station nations will go bust (though this could take 5-10 years or less), but first they will print money as this is the most politically tenable option, and ultimately the world will go to war
  • All of us will be doomed

Bear in mind that Faber said all of this quite matter-of-factly.

Even if you disagree with his points on the trajectory of the West, it cannot hurt to understand and prepare for the worst case scenario while still hoping for the best.

http://biggovernment.com/amellon/2010/05/23/faber-nations-will-print-money-go-bust-go-to-war-we-are-doomed/

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Federal Reserve is printing money like crazy – huge inflation is coming

Just seek and take a look for yourself:

image displayed at 79.37% of its original size; click here for original

Source: http://research.stlouisfed.org/fred2/series/BASE

Jan 24, 2009, 12:36 PM

Here’s an updated chart:

image displayed at 62.5% of its original size; click here for original

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The Shell Game – How the Federal Reserve is Monetizing Debt

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Tuesday, August 25, 2009, 10:44 am, by cmartenson

Below is the first part of a Martenson Report from a few weeks ago, previously available only to enrolled members but now available for free to everyone.

To read the full report, click this link:

The Shell Game – How The Federal Reserve Is Monetizing Debt


Sunday, August 2, 2009

Executive Summary

  • The Federal Reserve and the federal government are attempting to “plug the gap” caused by a slowdown of private credit/debt creation.
  • Non-US demand for the dollar must remain high, or the dollar will fall.
  • Demand for US assets is in negative territory for 2009
  • The TIC report and Federal Reserve Custody Account are reviewed and compared
  • The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
  • The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.

The Federal Reserve is monetizing US Treasury debt and is doing so openly, both through its $300 billion commitment to buy Treasuries and by engaging in a sleight of hand maneuver that would make a street hustler from Brooklyn blush.

This report will wade through some technical details in order to illuminate a complicated issue, but you should take the time to learn about this because it is essential to understanding what the future may hold.

One of the most important questions of the day concerns how the dollar will fare in the coming months and years. If you are working for a wage, it is essential to know whether you should save or spend that money.  If you have assets to protect, where you place those monies is vitally important and could make the difference between a relatively pleasant future and a difficult one.  If you have any interest at all in where interest rates are headed, you’ll want to understand this story.

There are three major tripwires strung across our landscape, any of which could rather suddenly change the game, if triggered.  One is a sudden rush into material goods and commodities, that might occur if (or when) the truly wealthy ever catch on that paper wealth is a doomed concept.  A second would occur if (or when) the largest and most dangerous bubble of them all, government debt, finally bursts.  And the third concerns the dollar itself.

In this report, we will explore the relationship between those last two tripwires, government debt and the dollar.


Replacing private credit with public credit

Our entire monetary system, and by extension our economy, is a Ponzi economy in the sense that it really only operates well when in expansion mode.  Even a slight regression triggers massive panics and disruptions that seem wholly inconsistent with the relative change, unless one understands that expansion is more or less a requirement of our type of monetary and economic system.  Without expansion, the system first labors and then destroys wealth far our of proportion to the decline itself.

What fuels expansion in a debt-based money system?  Why, new debt (or credit), of course!   So one of the things we keep a very close eye on over here at Martenson Central, as they do at the Federal Reserve, is the rate of debt creation.

One of the big themes in the current credit bubble collapse is the extent to which private credit has been collapsing and the corresponding degree to which the Federal Reserve has been purchasing debt and the federal government has stepped up its borrowing.  In essence, public debt purchases and new borrowing has attempted to plug the gap left by a shortfall in private debt purchases and borrowing.

That’s the scheme right now – the Federal Reserve is creating new money out of thin air to buy debt, while the US government is creating new debt at the most fantastic pace ever seen.  The attempt here is to keep aggregate debt growing fast enough to prevent the system from completely seizing up.

How are they doing?

The debt gap

One of the great perks of living in a relatively open society is that we generally get access to pretty good information. The Federal Reserve routinely publishes a document called “Monetary Trends,” where they collapse all their points of interest into a nice, tidy collection, and then make it available for all to see.

Here’s what caught my eye in the most recent one:

What we see here is federal debt (bottom chart) exploding at a nearly 30% yr/yr rate of change in response to a collapse in corporate and consumer borrowing (top charts).

This raises a most interesting question:  “Who is lending the money to accommodate all that federal borrowing?”

Here’s where the story gets interesting.

Treasury International Capital (TIC) flows

Lately, a number of observers have made note of a troubling decline in foreign demand for US paper assets, notably bonds.  Worse, it’s even turned into outright selling which will ultimately translate into dollar weakness.

The relative demand for the dollar “out there” in the international Foreign Exchange (or “Forex”) market directly impacts the dollar’s strength.  If there are more sellers then its value will fall; if there are more buyers, then its value will rise.  One way to assess this delicate balance is to ask, “In total, are foreigners buying or selling US assets and what are they doing with those proceeds?”

Luckily for us, the exact answer to this very question is released in a monthly report put out by the Treasury Department, called the Treasury International Capital Flows report, or TIC report for short.

The recent TIC reports have been quite alarming, because they not only reveal the most sudden deceleration in flows in history, but also that they have been negative for some time now. This chart is from the Federal Reserve:

What we see here is that from the early 1990’s onward until 2007, foreigners bought progressively more and more US assets and did so by bringing their money to the US and leaving it there.  It is only over the past seven months, out of decades, where that process has reversed and become negative.  This is a significant event, to say the least.

On the surface, the above chart hints at a potential disaster for a country that is embarking on the largest-ever federal debt binge in history.

After all, if US assets are being shunned by foreigners, how will we find enough buyers? And what will happen to the dollar?

The answers are:  “We won’t” and “Nothing good.”

Digging in

If we dig into deeper into the detail of the report, we find something even more interesting. While the overall flows have been negative, there is an enormous difference between the behaviors of foreign central banks and private investors.  Fortunately the TIC report distinguishes between these two broad classes of buyers.

Since the start of 2009 and continuing through the month of May, private investors sold $364 billion dollars worth of US assets, while central banks purchased $50 billion dollars worth (source is a .csv file available here from the Treasury).  Added up, some $314 billion dollars of foreign money has left the country since the start of the year.

What this demonstrates is the utter reliance of the entire house of cards upon the continued purchase of US financial assets by foreign central banks. Without the continued cooperation of the foreign central banks in accumulating US assets, suffice it to say that the dollar will fall a lot lower than it already has.

The dollar

Not surprisingly, the dollar recently put in a new closing low for the year (YTD 2009) and is approaching a major area of support and resistance. If it breaks through, we could be looking at a rapid game-changer here.

Of course, I’ve said all this before, and every time we seem to get close, there’s been an upside surprise in store.  The forces aligned to prevent a dollar collapse are numerous.

But the same risk remains, and the fundamental picture concerning the dollar has not changed since I first became wary of its fortunes in 2002.  In fact, it’s grown worse.  Federal deficits are higher than I ever imagined possible (13% of GDP!), and now the TIC flows are negative.  The only somewhat bright(er) spot is that the trade deficit has shrunk quite a bit.  However, it, too, remains solidly in negative territory, meaning it continues to apply pressure to the value of the dollar by increasing the total number of dollars that need to find a quiet resting place outside of the country.

Treasury auctions

During this past business week (July 27th – 31st, 2009), the US Treasury auctioned off more than $243 billion worth of various Treasury bills and bonds. “Indirect bidders,” assumed to be mainly central banks, took an astonishing 39% of the total, or nearly $95 billion worth.

With the exception of the 5-year auction, which mysteriously stank up the joint with a worrisome bid-to-cover ratio well below 2.0 (the bond market behaved poorly upon the release of that news item), the story here is that foreign central banks are buying up vast quantities of Treasury offerings.

Wait a minute, hold on there…I thought we just talked about how the TIC report said that foreign central banks have only bought $50 billion in total US paper assets through May – and now they are said to be buying $95 billion during a single week in July alone?

Something is not adding up here.

To understand what, and to get to the essence of the shell game, we need to visit one more source of information – something called the Federal Reserve Custody Account.

The Federal Reserve Custody Account

It turns out that when China’s central bank (or any other foreign central bank) decides to buy either US agency or Treasury bonds, they do not walk up to some window somewhere, hand over a pile of cash, and then take some nice looking bonds home with them in a suitcase.

Instead, what happens is that the Federal Reserve actually holds the bonds (or rather an electronic entry representing the bonds) in a special account for these various central banks.  This is called the “Custody Account” and it holds US debt ‘in custody’ for various central banks. Think of it as a magnificently vast brokerage/checking account, run by the Federal Reserve for central banks, and you’ll have the right image.

Although the TIC report shows flows of capital into and out of the country, it does not show you what is going on with those funds that are already in the country.  If you look again at the first chart in this report, and behold the vast flows of money that came into the US between 1995 and 2008, you can get a sense of how much money got sent to the US and mostly remains parked there.

The custody account currently stands at $2.787 trillion (with a “t”) dollars.  It has increased by over $430 billion the past 12 months and by more than $275 billion in 2009 alone (through July 29).  These are truly shocking numbers, and they tell us that foreign central banks have been accumulating US debt instruments throughout the crisis.

As we can see in the chart below, there has been absolutely no deflection in the growth of the custody account as a consequence of the financial crisis, bottoming trade, or the local needs of the countries involved.  It’s almost as if the custody account is completely disconnected from the world around it.  If you can spot the credit bubble crisis on this chart, you have sharper eyes than me.

What does such a chart imply?  We might wonder what sorts of distortions are created by having such a massive monetary spigot aimed from several central banks towards a single country.  We also might question just how sustainable such an arrangement really is.  It is a complete mystery how such a chart can display nary a wiggle, despite all that has recently transpired.

This next table showing the yearly changes in the custody account actually surprises me quite a bit.

Despite everything that’s been going on, the custody account is on track to grow by the largest dollar amount on record this year, nearly $500 billion dollars (if the current pace continues).  Where is all this money coming from and for how much longer?

Understanding the gap between the TIC and the Custody numbers

One thing you might have noticed is that the TIC report only shows $50 billion in foreign bank inflows for 2009, while the custody account grew by $277 billion.

How is it possible for the TIC report to show smaller inflows than growth in the custody account?  We can see that clearly in this table, which compares the two.  (Note: These are 12 monthly yr/yr changes, so the numbers will be different than the YTD numbers I just cited):

One explanation is that the custody account, at some $2.7 trillion dollars, is accumulating a lot of interest. If those interest payments are not “sent home” and remain in the account, then the account will grow by enough to more or less explain the difference. For example, the $135 billion difference shown above could be generated by a 5% return to the custody account, which is not an unthinkable rate of interest for that account.

International check kiting

Some people view the custody account as nothing more than an elaborate version of check kiting, played at the central banking level.

Check kiting

An illegal scheme whereby a false line of credit is established by the exchanging of worthless checks between two banks. For instance, a “check kiter” might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the Bank A account and deposits it in the Bank B account. If the kiter has good credit at Bank B, he will be able to draw funds against the deposited check before it clears, i.e., is forwarded to Bank A for payment and paid by Bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days, and then deposit it in the Bank A account before the $50,000 check drawn on that account clears.

In this game, Central Bank A prints up a bunch of money and buys the debt of Country B. Then the central bank of Country B prints up a bunch of money and buys the debt of Country A.

Both enjoy the appearance of strong demand for their debt, both governments get money to use, and nobody is the wiser.  Except that the world’s total stock of central bank reserves keep on growing and growing and growing, as reflected in the custody account, which will someday result in thoroughly unserviceable amounts of debt, an unmanageable flood of money, or both.

If this strikes you as a scam, congratulations; you get it.

If that was all there was to the story, then it would be far less interesting than it actually is. When we dig into the custody account data, we find that the total picture is hiding something quite extraordinary. Even as the total custody account has been growing steadily and faithfully, the composition of that account has been changing dramatically.

Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then.  Treasuries, on the other hand, have increased by over $500 billion over that same span of time.  A half a trillion dollars!  If you were wondering how the US bond auctions have managed to go so smoothly, here’s part of your answer.

What is going on here?  How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?

It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that’s not how the markets work.  First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?

Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.

The shell game

Have you ever seen a sidewalk magician run the shell game, where a pea under a shell is magically shuffled around – now you see it under this shell, now you see it under that shell, now it disappears completely – or does it?  The more it moves around, the more confused you get.  If you can only figure out which shell the pea is hidden under, you win!   But where is the pea?  The point of the game, from the perspective of the street hustler, is to use complexity of motion to confuse the mark.

These are the three critical points to remember as you read further:

  1. The US government has record amounts of Treasuries to sell.
  2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
  3. The Federal Reserve does not want to be seen directly buying US government debt at auctions (and in fact is not permitted to, but many rules have been ‘bent’ worse during this crisis), because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.

For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.

Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:

Shell #1: Foreign central banks sell agency debt out of the custody account.

Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.

Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.

Shuffle, shuffle, shuffle, shuffle, shuffle, SHUFFLE, shuffle! Confused yet?

Don’t be.  If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction.  This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight.  They can scramble the shells all they want, but the pea is still there somewhere – the pea being the fact that the Fed is creating money to fund the purchase of US debt.

At the time, the Federal Reserve program to purchase agency bonds was described like this:

Fed to Pump $1.2 Trillion Into Markets

Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing

The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.

In its statement yesterday, the Fed said it will increase its purchases of mortgage-backed securities by $750 billion, on top of $500 billion previously announced, and double, to $200 billion, its purchases of [Agency] debt in housing-finance firms such as Fannie Mae and Freddie Mac.

While “stimulating borrowing,” “stabilizing the economy,” and “lowering interest rates” are laudable goals, the primary goal of the program seems to have been something else entirely – to assure plentiful funds for the massive US Treasury auctions coming due.  I saw nothing in any article I read about this program that even suggested that one of the goals was to allow foreign central banks to effectively swap their agency debt for US government debt using money printed from thin air.  But that’s clearly one of the outcomes.

The Federal Reserve, for its part, has been quite open about these purchases of Agency debt. It even provides an excellent website with nice graphics, allowing us to track the purchase program.

(Source)

However, this openness only extends to the amounts themselves, not the source(s) of those Agency bonds.  This is, in my mind, yet another reason the Fed desperately wishes to avoid an audit. The results would expose the game for what it is.

As we can see in the above chart, the Fed has purchased more than $640 billion of Agency bonds, and has promised to buy more in the near future.

As we now know, at least some of that money has been recycled into US government debt, where “indirect bidders” have been snapping up an unusually high proportion of the recent offerings.  (Note: The way Indirect bidders  are calculated has recently changed, and I am not entirely clear on how much this influences the numbers we now see….I’m working on it).

A fair question to ask here is, “If there are green shoots everywhere and the stock market is racing off to new yearly highs, why is the Fed continuing to pump money into the system at these mind-boggling rates?”  One answer could be, “Because things might not be as rosy as they seem.”

Conclusion

The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt.  This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.

This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency.  The difference is in the complexity of the game being played, not the substance of the actions themselves.

When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.

One possible result of the abandonment of these efforts is a wholesale flight out of the dollar and into other assets.  To US residents, this will be experienced as rapidly rising import costs and increasing costs for all internationally-traded basic commodities, especially food items.  For the rest of the world, the results will range from discomforting to disastrous, depending on their degree of dollar linkage.

Under these circumstances, “inflation vs. deflation” is not the right frame of reference for understanding the potential impacts.  For example, it would be possible for most of the world to experience falling prices, even as the US experiences rapidly rising prices (and hikes in interest rates) as a consequence of a falling dollar.  Is this inflation or deflation?  Both, or neither?  Instead, we might properly view it as a currency crisis, with prices along for the ride.

Further, all efforts to supplant private debt creation with public debts should be met with skepticism, because gigantic programs are no substitute for the collective decisions of tens of millions of individuals and cannot realistically meet millions of individual needs in a timely or appropriate manner.

The shell game that the Fed is currently playing does not change the basic equation: Money is being printed out of thin air so that it can be used to buy US government debt.

My advice is to keep these potential issues and insights in sharp focus, make what moves you can to diversify out of dollars, and be ready to move rapidly with the rest.  This game is far from over.

http://www.chrismartenson.com/blog/shell-game-how-federal-reserve-monetizing-debt/25806

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China warns Federal Reserve over ‘printing money’

China has warned a top member of the US Federal Reserve that it is increasingly disturbed by the Fed’s direct purchase of US Treasury bonds.

By Ambrose Evans-Pritchard
Published: 7:14PM BST 24 May 2009

109 Comments

Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”

“I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.

His recent trip to the Far East appears to have been a stark reminder that Asia’s “Confucian” culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.

Mr Fisher, the Fed’s leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy – and could all too easily degenerate into Argentine-style financing of uncontrolled spending.

However, he agreed that the Fed was forced to take emergency action after the financial system “literally fell apart”.

Nor, he added was there much risk of inflation taking off yet. The Dallas Fed uses a “trim mean” method based on 180 prices that excludes extreme moves and is widely admired for accuracy.

“You’ve got some mild deflation here,” he said.

The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of “creative destruction”, has been running a fervent campaign to alert Americans to the “very big hole” in unfunded pension and health-care liabilities built up by a careless political class over the years.

“We at the Dallas Fed believe the total is over $99 trillion,” he said in February.

“This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them,” he said.

His warning comes amid growing fears that America could lose its AAA sovereign rating

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5379285/China-warns-Federal-Reserve-over-printing-money.html

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Is it All Just a Ponzi Scheme?

By Damien Hoffman

December 31 2009 // ShareThis // Email <!–2 Comments–>

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By Eric Sprott & David Franklin at Sprott Asset Management.

In our May/June Markets at a Glance, “The Solution…is the Problem”, we discussed how much debt the US government would need to issue in order to balance the budget for fiscal 2009. We calculated they would need to sell $2.041 trillion in new debt – or almost three times the new debt that was issued in fiscal 2008. As a thought experiment, we separated all the various US Treasury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200%. In the end, we surmised that most groups couldn’t, and prepared our readers for the worst.

Almost seven months later, however, nothing particularly bad has happened on the US debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates…not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances.

In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was “Foreign and International Buyers”, who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60% increase year-over-year. This increase appears to be a direct result of theFederal Reserve ’s Quantitative Easing program announced this past March. Most of the other identified buyers in the Treasury Bulletin were either net sellers or small buyers in 2009. While the Q4 data is not yet available, the Q1, Q2 and Q3 data suggests that the State and Local governments and US Savings Bonds groups will be net sellers ofUS Treasury securities in 2009, while pension funds, insurance companies and depository institutions only increased their purchases by a negligible amount.

So who was the third large buyer? Drum roll please,… it was “Other Investors”. After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasurysecurities so far in the first three quarters of fiscal 2009. If you annualize this rate of purchase, they are on pace to buy $680 billion of US treasuries this year – or more than seven times what they purchased in 2008. This is undoubtedly the group that made the US deficit possible this year. But who are they? The Treasury Bulletin identifies “Other Investors” as consisting of Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors. Hmmm. Do you think anyone in that group had almost $700 billion to invest in theUS Treasury market in fiscal 2009? We didn’t either. To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009. Within this grouping, the GSE’s were small buyers of a mere $5 billion this year; Broker and Dealers were sellers of almost $80 billion; Commercial Banking were buyers of approximately $80 billion; Corporate and Non-corporate Businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion. So who really picked up the tab? To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in theFederal Reserve Flow of Funds Report as the “Household Sector”. This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than theFederal Reserve itself.

So to summarize, the majority buyers of Treasury securities in 2009 were:

  1. Foreign and International buyers who purchased $697.5 billion.
  2. The Federal Reserve who bought $286 billion.
  3. The Household Sector who bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal 2009.

These three buying groups represent the lion’s share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.

We must admit that we were surprised to discover that “Households” had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree? For our more discerning readers, this enormous “Household” investment was made outside of Money Market Funds, Mutual Funds, ETF’s, Life Insurance Companies, Pension and Retirement funds and Closed-End Funds, which are all separate reporting categories. This leaves a very important question – who makes up this Household Sector?

Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can’t be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector. To quote directly from the Flow of Funds Guide, “For example, the amounts of Treasurysecurities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasurysecurities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector.” (Emphasis ours) So to answer the question – who is the Household Sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.

Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3. It serves to remember that the whole point of selling newUS Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.

Perhaps the most striking example of the new demand dynamics for US Treasuries comes from Bill Gross, who is co-chief investment officer at PIMCO and arguably one of the world’s most powerful bond investors. Mr. Gross recently revealed that his bond fund has cut holdings ofUS government debt and boosted cash to the highest levels since 2008. Earlier this year he referred to the US as a “ponzi style economy” and recomended that investors front run Uncle Sam and other world governments into government debt instruments of all forms. The fact that he is now selling US treasuries is a foreboding sign.

Foreign holders are also expressing concern over new Treasury purchases. In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that “The world does not have so much money to buy more US Treasuries.” He went on to say, “The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible.” Judging from these statements, it seems clear that the US cannot expect foreigners to continue to support their debt growth in this new economic environment. As US consumers buy fewer foreign goods, there are less US dollars available for foreigners to purchase future Treasury securities. Foreigners are the largest source of external capital that can be clearly identified in US Treasury data. If their support wanes in 2010, the US will require significant domestic support to fund future debt issuances. Mr. Gross’s recent comments suggest that their domestic support may already be weakening.

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Readers who liked this also enjoyed these posts:

Into the Wild, or TARP Officials Gone Wild?

What Would God Say About Goldman?

More on this topic (What’s this?)

The U.S. Ponzi Scheme (The Mess That Greenspan Made, 1/13/10)

http://wallstcheatsheet.com/breaking-news/is-it-all-just-a-ponzi-scheme/?p=5131/

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Sprott Calls The Fed “A Ponzi Scheme”

As Half A Trillion In Treasury Purchasers

Are Unaccounted For –>>>

Is it all just a Ponzi scheme?

By: Eric Sprott & David Franklin

Get full PDF here

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SMOKING GUNS OF USTREASURY MONETIZATION
Jim Willie CB                        July 22, 2010


home: Golden Jackass website
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Jim Willie CB is the editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

A significant feature of fiat money systems is the privilege for the custodian of the reserve currency to engage in regular practices of ham-fisted monetary management, even permission for fraudulent centers to flourish, surely developing a debt monster that an economy grows dependent upon. Fannie Mae might be the most offensive blight on such privilege. Unfortunately, many shenanigans have matured into grand fraud. They are smoking guns of USTreasury fraud and counterfeit, with strong whiffs of monetization. Much more monetization is to come, fully endorsed and sanctioned. Other clever techniques are being used, given the Quantitative Easing has officially been halted. A close look reveals that Excess Cash Reserves at the USFed are being drawn down, which are thus funding the USGovt deficits in the last couple months. Ironically, such reserves held by big banks at the US Federal Reserve were the only thing preventing vast insolvency. Now that cash is being used, and the USFed insolvency is slowly exposed. Details can be found in the July Hat Trick Letter reports. Evidence is compelling, and grand motive for foreign creditors to reject the USDollar, whose active control strings are traced to Wall Street. When recognized monetization destroys the last vestige of trust and confidence in the USDollar, when more official rounds of sponsored Quantitative Easing arrive, the USDollar will be on a downward spiral. In fact, all major currencies face the same prospect of vast monetary expansion. They will all fall sharply in value, and by counter-effect, the Gold price will rise powerfully.

CHINESE WARNING SHOTS ACROSS THE BOW
This story is a gem. The Chinese Dagong credit agency made an inaugural splash with a debt downgrade of the USTreasury Bonds. They called the US-based trio of debt rating agencies politically biased, an under-statement. The Dagong agency used its first splash into sovereign debt to establish a bold standard of creditworthiness around the world, giving much greater weight to wealth creating capacity and foreign reserves than Fitch, Standard & Poors, or Moodys. Dagong pays more attention to rapidly escalating debt levels. The Chinese Govt has coordinated their strategy, selling off short-term USTreasury Bills, but hangs onto a large raft of long-term USTreasury Bonds. On a net basis, the Chinese purchases have hit a plateau.

Meanwhile, with distracting commentary, China has doubled its gold holdings. At least the Chinese Govt thas promised not to use their foreign reserves as a weapon. What a relief!! And Wall Street promises no more bond misrepresentation, no insider trading, no more fraud, no more drug money laundering (see Wachovia & Wells Fargo). What a relief!! The USGovt strives for clarity about management of China’s $2.5 trillion in FOREX reserves, the world’s largest. It contains $868 billion in USTreasurys at last count. The growing fear is that, in anger over trade friction, or in disgust over reckless USDollar management, or from a response to discovered hidden USTBond monetization, or with ambition to displace the US from its dominant post, China could dump USTreasury Bonds with a vengeance. The credit market analysts justifiably call it the Nuclear Option. The Beijing officials have given veiled warning to reduce the USGovt deficits and to put aside thoughts of another Quantitative Easing. The next QE2.0 comes as sure as night follows day. It comes with a heavy cost. The message is written on the wall, that the United States has forfeited its sovereignty with rampant debt production rather than industrial production.

USTREASURY ISSUANCE EXCEEDS USGOVT DEFICITS
This story is a gem. USTreasury bond issuance exceeds even the gargantuan USGovt deficits. The gap is $1.5 trillion over four years. One could guess that Wall Street is selling bonds and squirreling the money in foreign banks, a basic counterfeit in a syndicate operation. The operation might bring new meaning to monetization. At least a parallel exists. The majority of home mortgages have their income stream used in more than one mortgage bond. That is the real reason why home loan modification is a thin farce. The MERS database conceals the game, but the public has the satisfaction of knowing that MERS has no legal standing. The state courts are declaring no legal standing, and foreclosure procedures are blocked as a result. People cannot be removed from their homes when the database is used in handoffs of notes and titles.

Under Goldman Sachs rule, the USDept Treasury is running some bold kind of racket game, whose purpose is unclear, except it lacks legitimacy. The USGovt borrowing through debt issuance was $142 billion more than the June USGovt federal deficit, which means they are doing more than financing the deficit. The extra proceed funds are not accounted for. In chronic fashion, excess issuance has been the pattern, as the USGovt has issued $1.5 trillion more in debt securities than its budget deficit in the past four years. During the past 45 months, the USGovt has accumulated an incremental $4.7 trillion in new debt, but the federal budget deficit has grown by $3.2 trillion, much less but still a mammoth amount. Nobody asked why so, and nobody asks where the resulting funds from the bond sales go. One is left to speculate that a vast bold new syndicate technique is simply selling bonds beyond newly formed debt, seizing the funds in foreign locations for syndicate usage. The June USGovt official budget deficit was logged at $68.4 billion. During the same month, the USGovt borrowed a staggering total of $210.9 billion. These are not refinances of USTreasury debt in rollover. On a consistent basis, the USGovt has borrowed much more in each deficit month than was required to close the deficit and finance the debt accrued. The differential of excess debt issuance for the first six months of 2010 comes to a hefty $290 billion, a pattern in continuance.

Perhaps the Wall Street firms in control figure that with large numbers, nobody will notice, or given the hidden monetization, they might as well put the bond presses in hyper-drive. The cumulative data, as well as the mindboggling differential (dotted line) between the two series is shown on the attached chart. Perhaps it is for war funding far in excess of the stated costs, to save embarrassment and questions. Perhaps it is for enormous vertically integrated business investment in Afghanistan of clandestine type. Perhaps it is for the heavily rumored underground cities under construction for elite resident purposes. Perhaps it is extra costs for additional new military bases scattered across the globe. Perhaps the answer is simpler, in that it is just being counterfeited and stolen by the financial syndicate with impunity. This is a smoking gun.

ENGLAND BUYS $170B USTBONDS FROM SAVINGS ???
This story is a gem. The Chinese dump USTreasurys and England accumulates them. Or more accurately, the USFed hides its vast monetization efforts in the United Kingdom account ledger item. No way to the reasonable man can Britain purchase $170 billion in USTreasurys in five months from legitimate sources of savings!! In May 2010, China reduced their USTreasury holdings by $32.5 billion, now the lowest level since June 2009. China shed $35.4 billion in short-term USTBills, offset by a mere $2.9 billion in purchased USTBonds. Furthermore, Japan reduced holdings in USTBonds, as did the OPEC nations. However, buyers could be found, all Anglo descent, at least on the surface. The total foreign USTreasury holdings rose from $3957 billion to $3964 billion. Attribute the good tiding news to gigantic ongoing accumulation by England, just like the last several years. The UK-based buying is highly suspicious, like a group of homeless men walking out of a haberdasher shop wearing Brooks Brothers suits with bad hair and mismatched shoes, but arouses no attention except by intrepid analysis divorced from Wall Street or the USGovt. Generally, the United States financial system suffered a dramatic decline in May as foreign purchases of US assets hit a wall, falling from $110.3 billion to just $33 billion. See the graph of steady Chinese unloading of USTreasurys in the last several months.

As of end May, China still holds a gaggle of USTreasurys, but their USTBill holdings are down to a trifling $7 billion, as China sells into the confusion, especially at high principal prices tied to near 0% yields. China is selling the bubble. Without any question whatsoever, the USFed and USDept Treasury are using the United Kingdom as a ledger item for their mammoth USTreasury monetization, all barely hidden, with the TIC data used as a tiny fig leaf that offers inadequate coverage. The story receives no mainstream attention. The United Kingdom has wrecked banks, staggering deficits, no trade surplus, yet managed to buy a whopping $28 billion of USTBonds in just the month of May. Seems like Printing Pre$$ operations and London serving as the Hidey Hole. At end 2009, as of the December tally, the UK owned $180.3B in USTBonds, yet somehow managed to accumulate in the new year, up to the current $350.0B. THE UK SUPPOSEDLY HAS ALMOST DOUBLED THEIR HOLDINGS IN A MERE FIVE MONTHS!!

Bear witness to the shadow USFed debt monetization operation, operating out of the United Kingdom, or at least its accounting. The hidden USTreasury Bonds reside in England, home of the master to US bankers. Anyone who accepts the following graph on its face is foolish, compromised, or politically motivated to the extreme.

Bear in mind that we are talking about crippled England here, or the United Kingdom more generally. The UKGovt just announced spending cuts to reach 40% of budget, not the previous 20%. Britain could not cope with an extended episode in the credit crisis, according to the Bank For Intl Settlements. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly. The Bank For Intl Settlements has warned that sovereign debt under siege cannot adequate be relied upon as the coupon for broad national financial rescue and stimulus, not again, not in the next round. The UKGovt is admitting openly that the situation is worse than they said before. Newly ordained Prime Minster David Cameron ordered the officials to draw up 40% cuts, the biggest in history. He has ordered cabinet ministers to draw up a Doomsday budget whose essential service spending cuts could see tens of thousands given pink slips. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly. This is a smoking gun.

In the summer 2008 leading up the the Wall Street death experience, the British suffered their own shameful episode with Northern Rock, Royal Bank of Scotland, even the venerable Lloyds of London each succumbing, no longer breathing life in a solvent sense. They are equally broken and insolvent as the biggest US banks. Billions of pounds were spent in nationalizing the Royal Bank of Scotland (partial), Lloyds Banking Group (partial), and Northern Rock (total) in an attempt to prevent their collapse. Neither the UK nor the US is on any path of reform or restructure. London redeemed failure from a real estate bust, which is the absolute opposite of investment or stimulus. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly. This is a smoking gun.

USGOVT HIDEY HOLE IN “HOUSEHOLD” CATCH-ALL
This story is a gem. Eric Sprott of Sprott Asset Mgmt casts a suspicious eye at the USTreasurys for the so-called Household category in their accounting. It is a blatant ledger item for illicit monetization, a veritable crime scene without the cordoned zone and yellow tape. Sprott directs his accusations like a skilled prosecutor. He reinforces the claim of Ponzi Scheme cited by Bill Gross of PIMCO. Sprott calls the solution to finance the mammoth USGovt deficits to be the actual problem, namely hidden monetization. The Hat Trick Letter is in perfect synch with his line of reasoning and accusation, as the “Household” accounting ledger item is the culprit. This item has been the topic of past Jackass focus and analysis. Data in gory detail is offered in his indictment. Sprott points out that in order to balance the budget for fiscal 2009, the USGovt needed to sell $2041 billion in new debt, equal to three times the new debt that was issued in fiscal 2008. Witness the grand rampup without identified sources of buyers, mythical buyers in official USTreasury auctions, fraudulent accounting on the official books. No purchasing groups could could afford to increase their 2009 USTreasury purchases by 200%, a simple conclusion. So by process of elimination, the monetization source arises most visibly, but he shows where it appears in the accounting.

In the latest USDept Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. That much is clear. According to this report, there were three distinct groups that increased their purchases from 2008 levels. The first was “Foreign & International Buyers” which purchased $697.5 billion worth of USTreasury securities in fiscal 2009, a 23% rise from fiscal 2008. The second group was the US Federal Reserve itself. Their published balance sheet reveals an increase in its USTreasury holdings by $286 billion in 2009, a 60% annual rise. Consider that jump to be a direct result of the official USFed Quantitative Easing program announced in March 2009. Quick summaries cover the other groups. Q1, Q2, and Q3 data from 2009 suggests that the State & Local Govts and US Savings Bonds groups were net sellers of USTreasurys in 2009. Then the pension funds, insurance companies, and depository institutions increased their purchases by only a paltry amount. The remainder was purchased by a category called loosely “Other Investors” as a catch-all. This other group purchased $90 billion in 2008, but then turned up into hyper-drive its purchases to $510.1 billion of freshly minted USTreasury securities so far in the first three quarters of fiscal 2009. On an annualized rate of purchase, the catch-all category is on pace to buy $680 billion of USTreasurys this year, over seven times the 2008 level. So the murky vague “Other Investors” saved the day and financed a gargantuan amount of the USGovt deficit.

Go to the source. The USDept Treasury Bulletin identifies “Other Investors” as consisting of Individuals, Government Sponsored Enterprises (GSE, as in Fannie Mae & Freddie Mac et al), Brokers & Dealers (who sell as intermediaries), Bank Personal Trusts & Estates, Corporate & Non-Corporate Businesses, Individuals, and Other Investors. It is far-fetched to believe parties in these groups had $700 spare billion to invest in the USTreasury market in fiscal 2009. Sprott dug deeper, and found the source in the data. The Federal Reserve Board of Governors Flow of Funds Data provides a detailed breakdown of the owners of USTreasury securities to 3Q2009. Within these parties, the GSE group acted as small buyers of a mere $5 billion this year. Brokers & Dealers were sellers of $80 billion. Commercial Banks were buyers of $80 billion. Corporate & Non-Corporate Businesses collectively were buyers of $11.6 billion. Add these cited parties to arrive at a net purchase of only $16.6 billion. The huge increase of purchases in 2009 came solely from one source within the “Other Investors” group.

The Federal Reserve Flow of Funds Report defines the infamous “Household Sector” which is a grab bag catch-all miscellaneous ledger item. The Hat Trick Letter has honed in on this corrupted ledger item in past reports. This category supposedly purchased $15 billion worth of USTreasurys in 2008, then jumped with ink jet assist (printing press) in 3Q2009 to a staggering $528.7 billion in purchases, a 35-fold increase. The Household is on track to buy $704 billion worth in all fiscal 2009. The bottom line is a shocker! What is the Household Sector? It is a combination of miscellaneous, ledger adjustments, and blatant monetization. Sprott calls it a PHANTOM that does not exist, but serves the purpose to balance the ledger in the US Federal Reserve Flow of Funds report. In the past, this ledger item was calculated as residuals, securities on loan across groups, even inclusive of rounding error. The monetization is no longer hidden. He concludes that USTreasurys have become one giant Ponzi scheme, just like Bill Gross of PIMCO quipped. This is a smoking gun.

BY THE END OCTOBER 2009, THE “HOUSEHOLD” ACCOUNTING CATEGORY OWNED MORE USTREASURYS THAN THE US FEDERAL RESERVE ITSELF. THAT IS CORRECT. MONETIZED USTREASURY BONDS ACCOUNT FOR MORE THAN WHAT THE USFED HOLDS. THE USTBONDS ARE HIDING IN ENGLAND.

Sprott summarized the bulk buyers of the $1885 billion in USTreasurys through Q3 of 2009:

  • Foreign & International buyers which purchased $697.5 billion
  • The US Federal Reserve which bought $286 billion
  • The Household Sector which bought $528 billion (think printing press).

Foreign USTBond holders share their worry openly. Zhu Min is deputy governor of the Peoples Bank of China. In a recent discussion on the global role of the USDollar, he told an academic audience that “The world does not have so much money to buy more USTreasurys. The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible.” With foreign sources unwilling or unable to support USGovt debt, the monetization card will be used repeatedly and powerfully inside the desperate US-UK quarters. When the process is more widely recognized and publicized, the USDollar will be denigrated further, and rejected as quickly as any reasonable alternative can be produced by consensus. It is that simple. Worse, a viable alternative might be put forward with powerful force, enough to break any resistance from inertia or threadbare obstructions.

IMPLICATIONS TO THE USDOLLAR & GOLD
No creditor nation whose leaders are in their right mind would continue to support the USDollar as the global reserve currency when its debt securities are the object of such open fraud and high volume monetization. The USFed Chairman Bernanke before the USCongress testified that the USTreasury is not buying its own debt with printed money. His denial was a lie. He cannot identify the USTBond buyers. The evidence is compelling, and all around us. One does not have to be an advanced financial engineer to detect the trails of the monetized debt, its accounting location at the Household slot within the USGovt and within the United Kingdom in the Treasury Investment Capital (TIC) Report. The USGovt is racking up gigantic deficits, which will run in the neighborhood of $1.5 trillion annually for some time. The second half recovery claim is for the simple-minded. Austerity measures are a pipedream. Reform is nowhere. Confusion is everywhere. Economic recovery is a mirage.

Recent condescension from Kartik Athreya of the Richmond Fed toward economist critique was particularly offensive and disgusting. One does not need advanced economics degrees to detect grand malfeasance like described in this article, and utter failure of policy directions. Trained and decorated economists in the United States have very little to show for their erudite prose, abstruse doctrinaire, and affluent effluence. They have given wreckage to the USEconomy and insolvency to its financial foundation, as the cancerous outcome to their arrogant financial engineering and complex money & banking charts. An advanced statistics degree totally overwhems an advanced economics degree any day of the week. We make tools to fine tune a business, as our resumes overflow with successful stories.

Blown opportunities, wasted bailouts, and lack of solutions like reform & restructure assure a much high gold price. Actually, they assure much lower currency valuations. With the redemption of Wall Street bond failure in October 2008 (see TARP Funds), and the nationalization of failed firms (see Fannie Mae, AIG), and the vacant economic stimulus that served little more than state budget shortfall plugs, the potential for a $2000 gold price was provided. Over $2 trillion was wasted. Debt across the debt-plagued landscape will be monetized. That is a fanciful way of saying newly printed money will be used to buy the wrecked debt, so that it can be shoved under the carpet. The growing lump under the carpet is not a piece of furniture, but rather a fashion cancer. With the redemption of British bond failure in 2008, and the nationalization of failed firms, the potential for a $2000 gold price was reinforced from the Anglo flank. Over one trillion British Pounds were wasted. Debt across the debt-plagued landscape will be monetized. With the redemption of European sovereign debt in May 2010, and the absence of stimulus in the European Economy, the potential for $3000 gold price was provided. Almost $800 billion was wasted. Debt across the debt-plagued landscape will be monetized. Gold thrives when the major currencies are debased, debauched, and destroyed.

The winds are showing strong signals of another powerful round of Quantitative Easing, the so-called QE2. When announced formally, or incontrovertibly detected, the potential for a $5000 gold price will be provided. The USEconomy is moribund, and the EU Economy is moribund. Economic stimulus and monetary accommodations have ended in the United States. The deceptive cry of a second half recovery is met by the arrival of a second half deep swoon. November elections are coming in the United States, when liberal policy, free spending, and reckless decisions are normally made. Numerous smart analysts like Eric Sprott, Jim Grant, Jim Rickards, and Porter Stansberry expect the QE2.0 to set sail soon, a second shameful voyage, maybe announced this calendar year. Some analysts believe another financial market crisis episode will be permitted first, in order to permit an easy political path for the next round of Quantitative Easing. The QE2.0 is assured, not even worthy of a forecast. My forecast is for QE3.0 to be announced by early 2012, and for QE4.0 to be announced in 2013. The reason is simple. Absolutely no effort is being made to fix anything. Vast sums of newly printed money are being thrown at a problem without much thought or planning, while many new rules actually freeze businesses. The prevailing objective is to preserve power, but at a cost of devaluating all major currencies with a flood of money supply.

Banks still hold tons of toxic debt, as mortgage debt has been written down by $270 billion but residential housing alone has come down $7 trillion in value. Even the SEC head Shapiro admitted that a slew of bank failures is coming soon. Restructure of the USEconomy is not even a topic, as consumption is desired, not seen, as job growth is desired, not seen. Capital formation and job creation are no longer an understood concept within the tarnished marble halls of US economist offices. Return of the US industrial base is not even discussed, a lost bastion. Instead, the priority of banking and political leadership is preservation of power, in order to control the coveted USDollar Printing Pre$$.

The entire world is working overtime behind conference doors to fashion a new global reserve currency. The IMF Special Drawing Rights vehicle is openly discussed, more like a Straw Man. The New Nordic Euro is a promising initiative conducted in secrecy, to be constructed with a gold component. By design, it is to enable a return to monetary system stability. However, by design it is also a USDollar killer. Its arrival will come without any doubt. When it does, the talk will not be about a skein of distracting topics. Talk will be about hyper-inflation and the United States facing a Third World prospect. Talk will be about $5000 gold. Talk will be about nothing fixed by the stewards in charge. Let’s hope by then, that some form of justice is introduced into the unfolding chapters of an American Tragedy.

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.

From subscribers and readers:
At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com

http://www.gold-eagle.com/editorials_08/willie072210.html

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The Biggest Ponzi Scheme of Them All

by Tim O’Reilly@timoreillyComments: 81 |  6 January 2009

Since Bernie Madoff has put Ponzi schemes back onto the front pages, it’s worth considering whether we are all complicit in the biggest Ponzi scheme of them all, the idea that the global economy can grow indefinitely.

I grew up on the idea that humanity would grow out into space, and that resources were for all practical purposes infinite. It may well be that in some possible worlds, that could still be true, but it’s increasingly looking like we’re going to be stuck here with only one world’s resources to draw on. And while most reasonable people are aware that we’re using up much of our children’s inheritance, and handing them debt in exchange, I don’t think as a society we’ve really come to grips with the consequence of that knowledge.

We’re rather like the investors who were complicit in Madoff’s scheme, playing along while the getting is good. At least some of us know that the game is rigged, but we’re not going to be the first to blow the whistle.

Former World Bank economist Herman Daly wrote a vivid piece on the subject of the Ponzi economy back in October, entitled The Disconnection Between Financial Assets and Real Asssets:

The current financial debacle is really not a “liquidity” crisis as it is often euphemistically called. It is a crisis of overgrowth of financial assets relative to growth of real wealth—pretty much the opposite of too little liquidity. Financial assets have grown by a large multiple of the real economy—paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities. It should be no surprise that the relative value of the vastly more abundant financial assets has fallen in terms of real assets. Real wealth is concrete; financial assets are abstractions—existing real wealth carries a lien on it in the amount of future debt. The value of present real wealth is no longer sufficient to serve as a lien to guarantee the exploding debt. Consequently the debt is being devalued in terms of existing wealth. No one any longer is eager to trade real present wealth for debt even at high interest rates. This is because the debt is worth much less, not because there is not enough money or credit, or because “banks are not lending to each other” as commentators often say.Can the economy grow fast enough in real terms to redeem the massive increase in debt? In a word, no. As Frederick Soddy (1926 Nobel Laureate chemist and underground economist) pointed out long ago, “you cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest] against the natural law of the spontaneous decrement of wealth [entropy]”. The population of “negative pigs” (debt) can grow without limit since it is merely a number; the population of “positive pigs” (real wealth) faces severe physical constraints. The dawning realization that Soddy’s common sense was right, even though no one publicly admits it, is what underlies the crisis. The problem is not too little liquidity, but too many negative pigs growing too fast relative to the limited number of positive pigs whose growth is constrained by their digestive tracts, their gestation period, and places to put pigpens. Also there are too many two‐legged Wall Street pigs, but that is another matter.

Growth in US real wealth is restrained by increasing scarcity of natural resources, both at the source end (oil depletion), and the sink end (absorptive capacity of the atmosphere for CO2). Further, spatial displacement of old stuff to make room for new stuff is increasingly costly as the world becomes more full, and increasing inequality of distribution of income prevents most people from buying much of the new stuff—except on credit (more debt). Marginal costs of growth now likely exceed marginal benefits, so that real physical growth makes us poorer, not richer (the cost of feeding and caring for the extra pigs is greater than the extra benefit). To keep up the illusion that growth is making us richer we deferred costs by issuing financial assets almost without limit, conveniently forgetting that these so‐called assets are, for society as a whole, debts to be paid back out of future real growth. That future real growth is very doubtful and consequently claims on it are devalued, regardless of liquidity.

This is economic heresy, something that goes so contrary to our every assumption that we’re convinced it must be wrong. Surely we can go on somehow, and get back to the way it was before the crash! If we can’t, we imagine a dreary world without possibilities, in which there is no motivation, no improvement, and no opportunity.There is an alternative that Daly, in another piece, calls A Steady State Economy, and that others call “ecological economics“. Here’s Daly:

A failed growth economy and a steady-state economy are not the same thing; they are the very different alternatives we face. The Earth as a whole is approximately a steady state. Neither the surface nor the mass of the earth is growing or shrinking; the inflow of radiant energy to the Earth is equal to the outflow; and material imports from space are roughly equal to exports (both negligible). None of this means that the earth is static—a great deal of qualitative change can happen inside a steady state, and certainly has happened on Earth. The most important change in recent times has been the enormous growth of one subsystem of the Earth, namely the economy, relative to the total system, the ecosphere. This huge shift from an “empty” to a “full” world is truly “something new under the sun” as historian J. R. McNeil calls it in his book of that title. The closer the economy approaches the scale of the whole Earth the more it will have to conform to the physical behavior mode of the Earth. That behavior mode is a steady state—a system that permits qualitative development but not aggregate quantitative growth. Growth is more of the same stuff; development is the same amount of better stuff (or at least different stuff). The remaining natural world no longer is able to provide the sources and sinks for the metabolic throughput necessary to sustain the existing oversized economy—much less a growing one.

I like Daly’s distinction between qualitative development and quantitative growth. The consumption of electronic media perhaps gives a foretaste of an economy in which qualitative complexity might replace quantitative addition as the raw material of exchange. Obviously, we’re not there yet, as we’re still consuming lots of resources to build the substrate for our increasingly intellectual economy, but I love that he’s broken the naive assumption that if we don’t have growth, the only alternative is stasis.It’s clear that getting to a steady-state economy will be hard, perhaps even impossible (although it’s worth noting that living systems have accomplished that feat.) But what a challenge! How do we keep the dynamism of modern capitalist economies without borrowing from the future? What does it mean to keep the real costs of what we consume on the balance sheet? Will the economy of the future be built on aesthetic value exchange (the whuffie of Cory Doctorow’s imagination), with renewable energy in harness and physical materials seamlessly recycled. Great questions, great opportunities for us to invent the answers!

http://radar.oreilly.com/2009/01/the-biggest-ponzi-scheme-of-all.html

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Ponzi Scheme:

The Federal Reserve Bought

Approximately 80 Percent

Of U.S. Treasury Securities Issued In 2009

The Federal Reserve Bought Approximately 80 Percent Of U.S. Treasury Securities Issued In 2009No, the headline is not a misprint.  According to CNBC, the Federal Reserve bought approximately 80 percent of the U.S. Treasury securities issued in 2009.  In other words, the Federal Reserve has been gobbling up the massive tsunami of U.S. government debt that has been created over the past year.  This is absolutely unprecedented, and it is yet another clear indication that the U.S. financial system is on the verge of a major economic collapse.

You see, the Federal Reserve is not part of the federal government.  In fact, the Federal Reserve is about as “federal” as Federal Express is.

The Federal Reserve is a private bank owned and operated for profit by a very powerful group of elite international bankers.

It is this private central bank that controls the money supply and the issuance of currency in the United States.

When the U.S. government needs to borrow more money (which happens a lot) they go over to the Federal Reserve and they ask them for some more green pieces of paper called Federal Reserve Notes.

The Federal Reserve swaps these green pieces of paper for pink pieces of paper called U.S. Treasury bonds.

Now normally the Federal Reserve takes these U.S. Treasury bonds and they sell them all to other buyers.

But in 2009 there were not nearly enough buyers.

So in 2009 the Federal Reserve sold itself about 80 percent of this debt.

This is even being admitted on CNBC.  The video below is from January 8th, and at the 1:45 mark CNBC anchor Erin Burnett drops this bombshell along with a comment about how it is a Ponzi scheme….

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see

Federal Reserve buys 80% of US Treasury Debt!

http://www.youtube.com/watch?v=VmTXxsn7g1Y

So why is it a Ponzi scheme?

Well, basically the Federal Reserve is creating money out of nothing, loaning it to the U.S. government and then collecting interest on the loan.

That is nice work if you can get it.

But also, this intervention by the Federal Reserve is keeping interest rates on U.S. Treasury bonds artificially low.

In a true “free market” situation, the interest rates on U.S. treasuries would rise to reflect the rapidly declining economic situation in this nation.

Due to the massive explosion in the size of the U.S. government debt and due to the very weak U.S. economy, interest rates on U.S. treasuries should have shot through the roof by now.  Rational investors would normally require an increased return for the increased risk that U.S. treasuries now represent.

But that is not happening.

Instead when there are no buyers for U.S. treasuries at current interest rates, the Federal Reserve just steps in and buys up all the excess bonds that need to be purchased.

But in a normal free market situation, interest rates would rise on U.S. treasuries until they would be attractive enough for investors to buy them all.

However, that would create some huge problems.

If the U.S. government was not able to borrow all of the money it wanted to at artificially low interest rates, the results would be absolutely disastrous.

Much higher interest rates on U.S. government debt would cause the U.S. federal budget deficit to absolutely explode.  Interest rates on everything else throughout the economy would also skyrocket.  As mortgage rates climbed dramatically, the housing market would completely collapse.  The U.S. economy would be totally in flames.

But for now (and this situation cannot last forever) the Federal Reserve is keeping interest rates artificially low by lending the U.S. government as much money as it wants at extremely low interest rates.  Of course the Federal Reserve is making an insane amount of money out of the arrangement, so it is working out quite nicely for them as well.

But by essentially “printing” a flood of cheap money for the U.S. government to borrow, the Federal Reserve is ultimately going to end up destroying the value of the U.S. dollar.

Every fiat currency throughout history has always ended up losing its value, and that is exactly what is going to happen this time too.  The only way to protect the buying power of your money is to put it into something that will hold value (like gold or silver).  Your dollars are never going to be worth more than they are today.

The actions taken by the U.S. government and the Federal Reserve have guaranteed the demise of the U.S. dollar.  At this point it is unavoidable.  It is only a matter of how soon it will happen and how bad it will be as things play out.

You better get ready.

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Spitzer: Federal Reserve is ‘a Ponzi scheme, an inside job’

By Daniel Tencer

Published: July 25, 2009
Updated 1 year ago

The Federal Reserve — the quasi-autonomous body that controls the US’s money supply — is a “Ponzi scheme” that created “bubble after bubble” in the US economy and needs to be held accountable for its actions, says Eliot Spitzer, the former governor and attorney-general of New York.

In a wide-ranging discussion of the bank bailouts on MSNBC’s Morning Meeting, host Dylan Ratigan described the process by which the Federal Reserve exchanged $13.9 trillion of bad bank debt for cash that it gave to the struggling banks.

Spitzer — who built a reputation as “the Sheriff of Wall Street” for his zealous prosecutions of corporate crime as New York’s attorney-general and then resigned as the state’s governor over revelations he had paid for prostitutes — seemed to agree with Ratigan that the bank bailout amounts to “America’s greatest theft and cover-up ever.”

Advocating in favor of a House bill to audit the Federal Reserve, Spitzer said: “The Federal Reserve has benefited for decades from the notion that it is quasi-autonomous, it’s supposed to be independent. Let me tell you a dirty secret: The Fed has done an absolutely disastrous job since [former Fed Chairman] Paul Volcker left.

“The reality is the Fed has blown it. Time and time again, they blew it. Bubble after bubble, they failed to understand what they were doing to the economy.

“The most poignant example for me is the AIG bailout, where they gave tens of billions of dollars that went right through — conduit payments — to the investment banks that are now solvent. We [taxpayers] didn’t get stock in those banks, they didn’t ask what was going on — this begs and cries out for hard, tough examination.

“You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.

“The Fed needs to be examined carefully.”

Spitzer resigned as governor of New York in March, 2008, after news reports stated he had paid for a $1,000-an-hour New York City call girl.

At the time, Spitzer had been raising the alarm about sub-prime mortgages. In the wake of the economic meltdown triggered last fall by sub-prime loans, some observers have suggested that Spitzer may have been targeted by law enforcement because of his high-profile opposition to Wall Street financial policies.

Investigative reporter Greg Palast wrote that federal agents’ revealing of Spitzer’s identity as a call-girl customer was no coincidence.

Palast wrote that the principle of “prosecutorial discretion” is often used to keep the names of high-profile persons out of the media when they are tangentially linked to a criminal investigation. In the case of Spitzer, the Justice Department chose not to invoke prosecutorial discretion.

Funny thing, this ‘discretion.’ For example, Senator David Vitter, Republican of Louisiana, paid Washington DC prostitutes to put him in diapers (ewww!), yet the Senator was not exposed by the US prosecutors busting the pimp-ring that pampered him.

Naming and shaming and ruining Spitzer – rarely done in these cases – was made at the ‘discretion’ of Bush’s Justice Department.

Spitzer recently told Bloomberg News that President Obama’s regulatory reforms of the financial sector are “irrelevant” because regulatory agencies have not been enforcing corporate laws to begin with.

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

– Daniel Tencer

The following video was broadcast on MSNBC’s Morning Meeting, Friday, July 24, 2009, and uploaded to YouTube July 25, 2009:

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The Wall Street Ponzi Scheme called Fractional Reserve Banking
Borrowing from Peter to Pay Paul
by Ellen Brown
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// // //
Global Research, January 3, 2009
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Cartoon in the New Yorker: A gun-toting man with large dark glasses, large hat pulled down, stands in front of a bank teller, who is reading a demand note. It says, “Give me all the money in my account.”

Bernie Madoff showed us how it was done: you induce many investors to invest their money, promising steady above-market returns; and you deliver – at least on paper. When your clients check their accounts, they see that their investments have indeed increased by the promised amount. Anyone who opts to pull out of the game is paid promptly and in full. You can afford to pay because most players stay in, and new players are constantly coming in to replace those who drop out. The players who drop out are simply paid with the money coming in from new recruits. The scheme works until the market turns and many players want their money back at once. Then it’s game over: you have to admit that you don’t have the funds, and you are probably looking at jail time.

A Ponzi scheme is a form of pyramid scheme in which earlier investors are paid with the money of later investors rather than from real profits. The perpetuation of the scheme requires an ever-increasing flow of money from investors in order to keep it going. Charles Ponzi was an engaging Boston ex-convict who defrauded investors out of $6 million in the 1920s by promising them a 400 percent return on redeemed postal reply coupons. When he finally could not pay, the scam earned him ten years in jail; and Bernie Madoff is likely to wind up there as well.

Most people are not involved in illegal Ponzi schemes, but we do keep our money in accounts that are tallied on computer screens rather than in stacks of coins or paper bills. How do we know that when we demand our money from our bank or broker that the funds will be there? The fact that banks are subject to “runs” (recall Northern Rock, Indymac and Washington Mutual) suggests that all may not be as it seems on our online screens. Banks themselves are involved in a sort of Ponzi scheme, one that has been perpetuated for hundreds of years. What distinguishes the legal scheme known as “fractional reserve” lending from the illegal schemes of Bernie Madoff and his ilk is that the bankers’ scheme is protected by government charter and backstopped with government funds. At last count, the Federal Reserve and the U.S. Treasury had committed $8.5 trillion to bailing out the banks from their follies.1 By comparison, M2, the largest measure of the money supply now reported by the Federal Reserve, was just under $8 trillion in December 2008.2 The sheer size of the bailout efforts indicates that the banking scheme has reached its mathematical limits and needs to be superseded by something more sustainable.
Penetrating the Bankers’ Ponzi Scheme

What fractional reserve lending is and how it works is summed up in Wikipedia as follows:

“Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other liquid assets) with the choice of lending out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand. This practice is universal in modern banking. . . .The nature of fractional-reserve banking is that there is only a fraction of cash reserves available at the bank needed to repay all of the demand deposits and banknotes issued. . . . When Fractional-reserve banking works, it works because:

“1. Over any typical period of time, redemption demands are largely or wholly offset by new deposits or issues of notes. The bank thus needs only to satisfy the excess amount of redemptions.
“2. Only a minority of people will actually choose to withdraw their demand deposits or present their notes for payment at any given time.
“3. People usually keep their funds in the bank for a prolonged period of time.
“4. There are usually enough cash reserves in the bank to handle net redemptions.

“If the net redemption demands are unusually large, the bank will run low on reserves and will be forced to raise new funds from additional borrowings (e.g. by borrowing from the money market or using lines of credit held with other banks), and/or sell assets, to avoid running out of reserves and defaulting on its obligations. If creditors are afraid that the bank is running out of cash, they have an incentive to redeem their deposits as soon as possible, triggering a bank run.”

Like in other Ponzi schemes, bank runs result because the bank does not actually have the funds necessary to meet all its obligations. Peter’s money has been lent to Paul, with the interest income going to the bank.

As Elgin Groseclose, Director of the Institute for International Monetary Research, wryly observed in 1934:

“A warehouseman, taking goods deposited with him and devoting them to his own profit, either by use or by loan to another, is guilty of a tort, a conversion of goods for which he is liable in civil, if not in criminal, law. By a casuistry which is now elevated into an economic principle, but which has no defenders outside the realm of banking, a warehouseman who deals in money is subject to a diviner law: the banker is free to use for his private interest and profit the money left in trust. . . . He may even go further. He may create fictitious deposits on his books, which shall rank equally and ratably with actual deposits in any division of assets in case of liquidation.”3

How did the perpetrators of this scheme come to acquire government protection for what might otherwise have landed them in jail? A short history of the evolution of modern-day banking may be instructive.

The Evolution of a Government-Sanctioned Ponzi Scheme

What came to be known as fractional reserve lending dates back to the seventeenth century, when trade was conducted primarily in gold and silver coins. How it evolved was described by the Chicago Federal Reserve in a revealing booklet called “Modern Money Mechanics” like this:

“It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their “deposit receipts” whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.

“Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.

“Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could ‘spend’ by writing checks, thereby ‘printing’ their own money.”

If a landlord had rented the same house to five people at one time and pocketed the money, he would quickly have been jailed for fraud. But the bankers had devised a system in which they traded, not things of value, but paper receipts for them. It was called “fractional reserve” lending because the gold held in reserve was a mere fraction of the banknotes it supported. The scheme worked as long as only a few people came for their gold at one time; but investors would periodically get suspicious and all demand their gold back at once. There would then be a run on the bank and it would have to close its doors. This cycle of booms and busts went on throughout the nineteenth century, culminating in a particularly bad bank panic in 1907. The public became convinced that the country needed a central banking system to stop future panics, overcoming strong congressional opposition to any bill allowing the nation’s money to be issued by a private central bank controlled by Wall Street. The Federal Reserve Act creating such a “bankers’ bank” was passed in 1913. Robert Owens, a co-author of the Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to rouse the people to demand “reforms” that served the interests of the financiers.4

Despite this powerful official backstop, however, the greatest bank run in history occurred only twenty years later, in 1933. President Roosevelt then took the dollar off the gold standard domestically, and Federal Reserve officials resolved to prevent further bank runs after that by flooding the banking system with “liquidity” (money created as debt to banks) whenever the banking Ponzi scheme came up short.

“Too Big to Fail”: The Government Provides the Ultimate Backstop

When these steps too proved insufficient to keep the banking scheme going, the government itself stepped up to the plate, providing bailout money directly from the taxpayers. The concept that some banks were “too big to fail” came in at the end of the 1980s, when the Savings and Loans collapsed and Citibank lost 50 percent of its share price. Negotiations were conducted behind closed doors, and “too big to fail” became standard policy. Bank risk was effectively nationalized: banks were now protected by the government from loss regardless of risk-taking or bad management.

There are limits, however, to the amount of support even the government’s deep pocket can provide. In the past two decades, the bankers’ lending scheme has been kept going by an even more speculative scheme known as “derivatives.” This is a complex subject that has been explored in other articles, but the bottom line is that more dollars are now owed in the derivatives casino than exist on the planet. (See Ellen Brown, “It’s the Derivatives, Stupid!” and “Credit Default Swaps: Derivative Disaster Du Jour,” www.webofdebt.com/articles.)

Attempting to fill the derivatives black hole with taxpayer money must inevitably be at the expense of other essential programs, such as Social Security and Medicare. Interestingly, Social Security and Medicare themselves are in some sense Ponzi schemes, since earlier retirees collect their benefits from the contributions of later workers. These programs, too, may soon be facing bankruptcy, in this case because their mathematical models failed to account for a huge wave of Baby Boomers who would linger longer than previous generations and demand expensive drugs and care through their senior years, and because the fund money has have been drawn on by the government for other purposes. The question here is, should the government be backstopping private banks that have mismanaged their investment portfolios at the expense of workers contractually entitled to a decent retirement from a fund they have paid into all their working lives? The answer, of course, is no; but there may be a way that the government could do both. If it were to nationalize the banking system completely – if the government were to assume not just the banks’ losses but their profits, oversight and control – it might have the funds both to maintain Social Security and Medicare and to provide a sustainable credit mechanism for the whole economy.

Replacing Private with Public Credit

Readily available credit has made America “the land of opportunity” ever since the days of the American colonists. What has transformed this credit system into a Ponzi scheme that must continually be propped up with bailout money is that the credit power has been turned over to private parties who always require more money back than they create in the first place. Benjamin Franklin reportedly explained this defect in the eighteenth century. When the directors of the Bank of England asked what was responsible for the booming economy of the young colonies, Franklin explained that the colonial governments issued their own money, which they both lent and spent into the economy:

“In the Colonies, we issue our own paper money. It is called ‘Colonial Scrip.’ We issue it in proper proportion to make the goods pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power and we have no interest to pay to no one. You see, a legitimate government can both spend and lend money into circulation, while banks can only lend significant amounts of their promissory bank notes, for they can neither give away nor spend but a tiny fraction of the money the people need. Thus, when your bankers here in England place money in circulation, there is always a debt principal to be returned and usury to be paid. The result is that you have always too little credit in circulation to give the workers full employment. You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unpayable debt and usury.”

In an article titled “A Monetary System for the New Millennium,” Canadian money reform advocate Roger Langrick explains his concept in contemporary terms. He begins by illustrating the mathematical impossibility inherent in a system of bank-created money lent at interest:

“[I]magine the first bank which prints and lends out $100. For its efforts it asks for the borrower to return $110 in one year; that is it asks for 10% interest. Unwittingly, or maybe wittingly, the bank has created a mathematically impossible situation. The only way in which the borrower can return 110 of the bank’s notes is if the bank prints, and lends, $10 more at 10% interest . . . . The result of creating 100 and demanding 110 in return, is that the collective borrowers of a nation are forever chasing a phantom which can never be caught; the mythical $10 that were never created. The debt in fact is unrepayable. Each time $100 is created for the nation, the nation’s overall indebtedness to the system is increased by $110. The only solution at present is increased borrowing to cover the principal plus the interest of what has been borrowed.”

The better solution, says Langrick, is to allow the government to issue enough new debt-free dollars to cover the interest charges not created by the banks as loans:
“Instead of taxes, government would be empowered to create money for its own expenses up to the balance of the debt shortfall. Thus, if the banking industry created $100 in a year, the government would create $10 which it would use for its own expenses. Abraham Lincoln used this successfully when he created $500 million of ‘greenbacks’ to fight the Civil War.”

National Credit from a Truly National Banking System

In Langrick’s example, a private banking industry pockets the interest, which must be replaced every year by a 10 percent issue of new Greenbacks; but there is another possibility. The loans could be advanced by the government itself. The interest would then return to the government and could be spent back into the economy in a circular flow, without the need to continually issue more money to cover the interest shortfall.

The fractional reserve Ponzi scheme is bankrupt, and the banks engaged in it, rather than being bailed out by its victims, need to be put into a bankruptcy reorganization under the FDIC. The FDIC then has the recognized option of wiping their books clean and taking the banks’ stock in return for getting them up and running again. This would make them truly “national” banks, which could dispense “the full faith and credit of the United States” as a public utility. A truly national banking system could revive the economy with the sort of money only governments can issue – debt-free legal tender. The money would be debt-free to the government, while for the private sector, it would be freely available for borrowing at a modest interest by qualified applicants. A government-owned bank would not need to rob from Peter to advance credit to Paul. “Credit” is just an accounting tool – an advance against future profits, or the “monetization” (turning into cash) of the borrower’s promise to repay. As British commentator Ron Morrison observed in a provocative 2004 article titled “Keynes Without Debt”:

“[Today] bank credit supplies virtually all our everyday means of exchange, and this brings into sharp focus the simple fact that modern money is no longer constrained by outmoded intrinsic values. It is pure fiat [enforced by law] and simply a glorified accounting system. . . . Modern monetary reform is about displacing the current economic paradigm of ‘what can be afforded’ with ‘what we have the capacity to undertake.’”5

The objection to government-issued money has always been that it would be inflationary, but today some “reflating” of the economy could be a good thing. Just in the last year, more than $7 trillion in purchasing power has disappeared from the money supply, including wealth destruction in real estate, stocks, mutual fund shares, life insurance and pension fund reserves.6 Money is evaporating because old loans are defaulting and new loans are not being made to replace them.
Fortunately, as Martin Wolf noted in the December 16 Financial Times, “Curing deflation is child’s play in a ‘fiat money’ – a man-made money – system.” The central banks just need to get money flowing into the economy again. Among other ways they could do this, says Wolf, is that “they might finance the government on any scale they think necessary.”7

Rather than throwing money at a failed private banking system, public credit could be redirected into infrastructure and other projects that would get the wheels of production turning again. The Ponzi scheme in which debt is just shuffled around, borrowing from one player to pay another without actually producing anything of real value, could be replaced by a system in which the national credit card became an engine for true productivity and growth. Increased “demand” (money) would come from earned wages and salaries that would increase “supply” (goods and services) rather than merely servicing a perpetually increasing debt. When supply keeps up with demand, the money supply can be increased without inflating prices. In this way the paradigm of “what we can afford” could indeed be superseded by “what we have the capacity to undertake.”

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are http://www.webofdebt.com and www.ellenbrown.com.

Notes

1. Kathleen Pender, “Government Bailout Hits $8.5 Trillion,” San Francisco Chronicle (November 26, 2008).
2. “Federal Reserve Statistical Release H.6, Money Stock Measures,” http://www.federalreserve.gov (December 18, 2008).
3. Robert de Fremery, “Arguments Are Fallacious for World Central Bank,” The Commercial and Financial Chronicle (September 26, 1963), citing E. Groseclose, Money: The Human Conflict, pages 178-79.4. Robert Owen, The Federal Reserve Act (1919); “Who Was Philander Knox?”, http://www.worldnewsstand.net/history/PhilanderKnox.htm. (1999).
5. Ron Morrison, “Keynes Without Debt,” http://www.prosperityuk.com/prosperity/articles/keynes.html (April 2004).
6. Martin Weiss, “Biggest Sea Change of Our Lifetime,” Money and Markets (December 22, 2008).
7. Martin Wolf, “‘Helicopter Ben’ Confronts the Challenge of a Lifetime,” Financial Times (December 16, 2008).

Ellen Brown is a frequent contributor to Global Research. Global Research Articles by Ellen Brown

http://www.globalresearch.ca/index.php?context=va&aid=11600

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$50 Billion Madoff Swindle is Miniscule Compared to Federal Reserve’s Ponzi Scheme

By Mike Adams, December 13, 2008 | Key concepts: Ponzi scheme, Wall Street and Bernard Madoff

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The world press is ablaze today with news of the arrest of elite Wall Street broker Bernard Madoff. They say he ran an elaborate Ponzi scheme that bilked high-profile investors for more than $50 billion. Even Geneva banks lost more than $4 billion, Reuters is reporting.

http://www.naturalnews.com/News_000613_Ponzi_scheme_Wall_Street_Bernard_Madoff.html

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A Ponzi scheme works like this: The con artist uses money from new investors to pay the apparent gains to previous investors, creating the appearance of dividends. With a solid track record of apparent gains, he attracts a growing base of new investors who funnel even more money into his hands. Behind the scenes, though, he’s burning cash on an opulent lifestyle, using other people’s money to make himself rich, even while cooking the books to make everybody think their money still exists.

In the end, of course, the whole thing collapses. There never was any steady growth. All the money is gone, and investors are left scratching their heads: Where’d my money go?

That Madoff, the former NASDAQ stock chairman, managed to do this with $50 billion without regulators noticing is perhaps the Wall Street story of the century. Somehow he was scamming some of the biggest players in the world while evading all accountability. Everybody was fooled.

But I say there’s a story that’s even bigger… one that’s still evading accountability and will explode into the financial story of the millennium when it finally blows up in our faces. What story is that? The much larger Ponzi scheme being run by the Federal Reserve and the U.S. Treasury.

Consider this: The Fed has created over $7.7 trillion in new money in order to bail out all sorts of incompetent (but wealthy) individuals and companies. In effect, it’s using new money to cover the losses of existing stakeholders, and as the system is nearing collapse, the only way it can keep the whole scam running is to create even more new money and thrust it in to the same money hole.

Does that sound like a mammoth Ponzi scheme, or what?

You see, Madoff could have survived his ordeal if he only had his own currency printing press. Just whip up another $50 billion in counterfeit currency and your problems are solved! But Madoff didn’t have a printing press. The Federal Reserve does. And it’s using it to expand the biggest Ponzi scheme the world has ever seen.

It’s doing it all in complete secrecy, of course, refusing to reveal where all this money is going (http://www.bloomberg.com/apps/news?…)

Meanwhile, it’s throwing money in all the wrong places, rewarding the economy’s most incompetent money managers while refusing to let bad companies fail like they’re supposed to. The perception of favoritism is growing to the point where one Senator now warns that bailing out the auto giants could lead to riots in the streets (http://www.businessandmedia.org/art…).

Meanwhile, home prices continue to plummet and foreclosures are still on the rise across America. We’re looking at a new generation of American homeless as everyday families lose their incomes and their homes, ending up living on the streets where they can’t even afford their Starbucks lattes anymore!

Home prices are so depressed that they may not recover in our lifetime after accounting for inflation, warns one investment analyst (http://www.usatoday.com/printeditio…). If that’s true, it means all those people who bought homes at the peak in 2006 or 2007 are going to be holding and waiting until the day they die just to break even.

To keep the national Ponzi scheme going, the Fed is pumping money into the economy more frantically than a one-legged man in an ass-kicking contest. New (counterfeit) money keeps bailing out old money, and the stakes grow larger and more dangerous with each passing week. For every incompetent company that isn’t allowed to just fail like it’s supposed to, there will be an equal or larger wipeout in taxpayer savings when this Ponzi scheme can no longer be sustained.

Money isn’t free. Somebody somewhere pays the piper. And in this case, that’s going to be the U.S. taxpayer, whose future has already been mortgaged beyond all reason. In a contracting economy, with nearly a million new jobless every month and with the national savings rate below zero, how are U.S. taxpayers supposed to foot the bill for $7.7 trillion in rich bankster bailouts?

They’re not. Like any Ponzi scheme, there is no way out other than collapse. The U.S. government has no method by which it can pay back its debt, and that makes the piling on of more debt an accounting scam. It’s like the family living next door realizing they have to declare bankruptcy, so they go on a spending spree and max out all the credit cards right before filing.

Henry Paulson is the next Bernard Madoff.

And when this Federal Reserve Ponzi scheme breaks, it won’t just be a few wealthy investors who are hit by the news… it will be every last one of us who pays taxes in America.

I’ve done the math on this. There are 147 million people employed in the U.S. The national debt will now require each and every U.S. worker to come up with about $68,000 in order to pay off the debt. Most workers don’t even earn that much salary in a year, after taxes. Many are working low-wage jobs that barely keep them scraping by as it is. How is every taxpayer supposed to come up with $68,000 to pay off international creditors?

And on top of that, the Fed’s creation of yet another $7.7 trillion in new money is going to cause accelerating currency inflation starting in 2009 (and growing for many years thereafter). So the money people earn will be worth less and less. Taxes will have to be raised to ridiculous rates, leaving people with smaller and smaller take-home checks.

This Ponzi scheme, you see, is being played out with the taxpayers’ money but without their consent! You’ve all been signed up for the greatest Ponzi scheme in the history of the world, and when this one goes bust, you’ll be lucky to wind up holding ten cents on the dollar.

My financial preparedness audio course offers strategies for protecting yourself: http://www.truthpublishing.com/Heal…

If you don’t take steps to prepare yourself for the collapse of the Federal Reserve’s Ponzi scheme, you might as well go out and buy yourself a tent at Wal-Mart. Why? Because a whole lot of Americans might find themselves living in one.

During the Great Depression, my grandparents lived in a tent at a construction work camp. They considered themselves lucky to have a job at all. I never thought I would see America reverse its prosperity to the point where we would see shanty towns cropping up again, but now it’s clear that they’re coming.

I warned NaturalNews readers so get out of the real estate market in late 2005. You can read a summary of my warnings here:

http://www.naturalnews.com/News_000…

Or read the full warning articles here:

Housing Bubble Crash Part One: http://www.naturalnews.com/016209.html

Housing Bubble Crash Part Two: http://www.naturalnews.com/016241.html

The bottom line? People should have seen this coming, and they should have prepared for it. But the public preferred to remain drunk and blind, living in a fantasy world of easy money and endless gains, believing the days of hard work were being replaced by an era of a universal lottery where everyone wins.

They were wrong before, and they’re going to be even more wrong when the Fed’s Ponzi scheme comes tumbling down. It won’t be pretty, and as I’ve said before, the United States of America as we know it today will not survive its own debt. Are YOU ready for that reality?

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Gerald Celente: “You’re Seeing a Global Meltdown. There’s No Way Out of This”

Author: Mac Slavo

– July 1st, 2010

Trend Researcher Gerald Celente joins Russia Today on July 1, 2010 to discuss the US dollar and the IMF’s proposed solution to replace the world’s sole reserve currency: 

You’re seeing a global meltdown. There’s no way out of this. Everyone knows that Greece isn’t going to be able to pay of its debt. And we just saw today Spain’s bonds being downgraded once again. No, there’s a global financial currency crisis. They’re coming up with another scheme. Just as the Euro didn’t work, now the IMF is going to come to the rescue, put together a basket of currencies for everyone to draw from, and that going to work?

We can see a devaluation of the dollar. That’s what we’re looking for, rather than a high inflation. And we believe it is going to happen whether they call a bank holiday or not. In some way or another we’re going to see a dollar devaluation down the line.

Why replace one printing press with ten?

All fiat currencies are eventually doomed to fail, as they have always done throughout history. The Dollar, the Euro and any proposed IMF currency basket will end the same way, because the person and/or people in charge of the printing presses always lose control.

The dollar is not yet ready to completely fall apart. There is a strong indication currently that as assets around the globe are liquidated, capital is flowing back to the US dollar for, ironically, safety.

That capital, upon realizing the US is rapidly moving towards autocratic policies that restrict free trade (i.e. taxes and government regulation) and that US debt has become unserviceable, will just as quickly depart the dollar. It will be around this time that we may very well see a blanket dollar devaluation, essentially wiping out the purchasing power of anyone left holding Federal Reserve Notes.

Watch the video:

Author: Mac Slavo
Date: July 1st, 2010
Visit the Author’s Website: http://www.SHTFplan.com/

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Hyperinflation Will Start in ‘Six to Nine Months’

Author: Mac Slavo

– September 14th, 2010

Though the debate between inflationists and deflationists continues to persist, well known economist and statistician John Williams of Shadow Stats ignores deflationist warnings and reports to clients that a flight from the user dollar will be triggered in a matter of months: 

Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable. Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years.  Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability.  Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background.  The general outlook is not changed.

source: Shadow Stats via Zero Hedge

In previous articles we have commented on John Williams’ hyperinflation warnings, and if Williams is right, we may soon begin to see Disruptions to Food Supplies and Normal Flow of Commerce, as well as a complete economic Armageddon and hyperinflationary depression.

Perhaps it’s time to finally consider hard asset investments, such as a wheelbarrow, with which you can transport not only your soon-to-be-worthless Federal Reserve Notes to grocery stores when a loaf of bread may cost bundles of dollars, but water and sand bags when the system collapses à la James Rawles’ Patriots.

Like pretty much everyone else, save the upper echelons of the New World Order conspirators, we really can’t say for certain how serious of a threat hyperinflation is, especially considering that the debate on whether or not inflation or deflation will be the flavor of the day is evenly split at 50/50. It’s anyone’s ball game at this point.

What we can suggest, with some level of confidence however, is that the US economy is about to tank yet again, and there is absolutely nothing that our federal government or the Federal Reserve can do about it – though they will assuredly try. This being the case, we are giving serious consideration to the thoughts John Williams puts forth, because if hyperinflation does set it, it will be disastrous for the majority of American families.

One point of interest is that John Williams does not claim that full-out hyperinflation will set in within the next six to nine months – only that we will experience the “onset” of hyperinflation resulting from a loss in confidence in the US government and US dollar. To better illustrate what we mean, consider that from the onset of hyperinflation in Zimbabwe to the out-and-out rampant hyperinflation where currency value was being destroyed by thousands of percent per day, took several years:

year rate of increase in prices
1999 56.9%
2000 55.22%
2001 112.1%
2002 198.93%
2003 598.75%
2004 132.75%
2005 585.84%
2006 1,281%
2007 66,212.3%
2008 231,150,888.87% (July)

source: Hyperinflation by Howard Katz

Thus, while we may experience the onset of hyperinflation, the short-term severity, though painful, may not necessarily lead to a complete breakdown in society.

As self-admitted preppers, however, we cannot simply rule out this possibility.

We’re going to continue to regularly invest a portion of our monthly income into hard commodity assets that include food, self defense, tools (like wheelbarrows), seeds, survival gear, and alternate currencies such as junk silver. We suggest our readers do the same because you never really how far this economic disaster can go.

As the Godfather of Survival James Rawles says in his book How to Survive TEOTWAWKI, “I’d rather be a year early than a day late.” Do you really want to be fighting over Ramen noodles at a grocery store as prices are appreciating exponentially before your eyes?

Related:

What is money when the system collapses?

Total Collapse Between mid-2011 and mid-2012

Author: Mac Slavo
Date: September 14th, 2010
Visit the Author’s Website: http://www.SHTFplan.com/

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THE GLOBAL FINANCIAL BREAKDOWN:

Precipitating Factors and Underlying Causes

Kenneth N. Matziorinis*

Montreal, January 31, 2009

How and Why Did We Get in to this Mess?

What has precipitated the current crisis is the build-up and bursting of the real estate bubble in the USA.

Asset bubbles are not new, they are a recurrent phenomenon in all markets and all countries and all times, e.g. the tulip bubble in Holland in 1637, the South Sea Bubble in England in 1720, the bubble in the shares of Mississiippi Company in France in 1721 the stock market bubble in the USA in the 1920s, the commercial real estate bubble in Canada and the USA in 1989-90 (Reichman Brothers & Donald Trump), the dot.com and technology bubble of 1999-2000 and the stock market bubble in Greece in 1999.

What creates bubbles?

1) easy money (protracted monetary growth and low interest rates);

2) investor psychology (irrational expectations and self-fulfilling prophesies);

3) greed coupled with ignorance

4) the introduction of new technology and innovations which creates the impression that we live in a new paradigm (e.g. the securitization of bank credit, i.e. mortgage backed securities and derivative instruments such as structured products, CDOs) where the old rules no longer apply

5) period of protracted economic growth;

6) lax, insufficient or outdated regulation or supervision

7) underlying systemic and structural imbalances and weaknesses

What makes this bubble different?

1) It took place in the largest economy in the world (USA accounts for 25% of global GDP)

2) USA is the main pillar of the global financial system

3) USA is a capital importing country with huge current account deficits and a growing foreign debt which means it has had to borrow most of this money from the rest of the world, hence the bursting of the bubble is having global impacts, not just limited to the US financial system

4) The US dollar serves as the world’s money, therefore it impacts all other currencies and international capital flows

5) Because of its role as the world’s money, monetary policy in the United States is transmitted to all other countries, thus transmitting its effects as well

6) Because of globalization, all economies of the world have become more interconnected than ever before through trade, investment and capital flows

7) Is the biggest bubble in history, even bigger than that of the 1920s equities bubble which led to the stock market crash of 1929 and in turn the Great Depression

8) Real estate mega bubble was accompanied by a smaller though still sizeable bubble in stocks, at a time when exposure to stocks had reached the highest level in history

9) Real estate bubbles had formed in other countries as well such as Britain, Ireland, Iceland, Spain, Italy, Greece, the Baltic countries, the Gulf countries in the Middle East, Russia and China thus magnifying the global nature of this crisis

What facilitated and enabled the twin bubbles in real estate and stocks to reach the magnitude and extent they did?

1) The stock market meltdown of 2000 threw the US economy into a recession, which the Fed tried to counteract by cutting interest rates and shifting to an expansionary monetary policy stance.

2) The terrorist attacks of 9/11, which shocked the economy and necessitated an even more aggressive easing on the part of the Fed and other central banks in the world.

3) The slow recovery in the US economy in 2002-2003 and the deflationary scare that necessitated a prolongation of the monetary easing.

4) The ill-advised War on Iraq that necessitated the solidarity, cooperation and complicity of monetary policy authorities in the USA and other Western countries and burdened the US government with additional and increasing spending and fiscal borrowing.

5) The growing US current account deficits, which greatly increased the amount of money the US was borrowing from the rest of the world.

6) The reluctance and resistance by exporting countries to adjust exchange rates higher against the US dollar thus contributing to the trade imbalances facing the world.

7) The development of new financial derivative instruments that facilitated the securitization and distribution of mortgage and other debt both nationally and internationally, These instruments are known through a variety of names such as collateralized debt obligations (CDOs), asset-backed securities (ABSs) and sub-prime securities along with credit default swaps (CDSs) which provided insurance on fixed-income instruments such as conventional bonds and structured products.

8) The development of new financial service providers such as Angelo Morillo’s Countrywide Financial Corporation which became efficient and aggressive originators of sub-prime mortgage loans to regional banks, i.e. the development of a “shadow banking” system or “alt”.banking system which was new and largely unsupervised and un-regulated.

9) The unquestioned credibility of the US Federal Reserve under Chairman Alan Greenspan and the credibility of the USA and the US financial system as being the most sophisticated, regulated and powerful in the world, capable of doing no wrong (hubris).

10) The inability of investors including the sophisticated credit rating agencies like Moody’s and S&P to comprehend the new derivative products that had been introduced which led them to underestimate the risks inherent in the new derivatives instruments they were rating.

11) The deregulation of the US financial system by Robert Rubin, Secretary of the Treasury under President Bill Clinton in 1999 when the Glass Steagall Act of 1933 was repealed and allowed banks to sell securities and vice versa along with the introduction of a new business model in the financial industry. With the new model, banks did not have to hold the loans, and carry the risk inherent in these loans but they could sell them to another entity and earn fees instead, thus transferring the risk of default to a third party. The implication of this shift was to reduce their concern and vigilance over the quality of the loans they were granting as long as there was someone else down the line willing to take on this risk.

12) This new business model and new incentive system that came into place meant that you could make money without assuming the risk, so it led to reckless lending. For example, loan brokers would scout the neighborhoods to find people to buy a house and they offered to find them low cost financing to finance the purchase of the house. It did not matter if the borrower had low or no credit rating, or could prove they had income or ability to pay. Loan brokers earned fees from regional banks by bringing those loans to them. Then the regional banks did not need to care too much about the credit-worthiness of the mortgage borrowers since they had their house as collateral and they didn’t plan to hold the loan on their books for too long. Then the regional banks would sell their mortgage loans to the Wall Street firms like Bear Stearns, Lehman Brothers and Citibank and collect fees. Then the large and reputable Wall Street firms would package these loans from all over the country, securitize them and sell them as mortgage-backed securities to the investment public, thus earning fees. Before selling them of course, they would have their new securities rated by credit rating agencies like Moody’s and S&P who would collect fees as well. Finally, the US and foreign investors would purchase these securities on the assumption that a) they are backed by quality mortgage loans to credit-worthy US homeowners, b) that real estate prices could not fall

at the all over the USA at the same time and that since real estate values keep rising over time, they didn’t have much risk to worry about and c) they were issued by Wall Street’s biggest and most reputable financial institutions and they were rated as investment grade by the most reputable credit rating agencies. The implication of this model is that everybody involved in this process earned fees without assuming any risk. The risk was transferred to the investors of the mortgage-backed securities at the end of the line. The implication of this business model was that nobody down the line had an incentive to question the risk or the assumptions upon which this bubble was being built on because nobody bore the risk and wouldn’t face losses if the mortgage loans went bad. Besides, the operant assumption was that although real estate prices could fall in different regions of the United States at any one time, they could not fall in all regions same time! As long as US real estate prices continued to rise or at least not fall, this became a one-way bet where everybody made money. Of course, this scheme was doomed to fail at some point because its very success generated a pricing bubble in the US real estate market, which eventually would have to burst as all bubbles eventually do.

13) The thirst of yield-starved and gullibility of investors in a low interest rate environment both in the US and around the world.

14) The inability of common sense economists, analysts and even regulators to stand up to the power and influence of large Wall Street investment banks and

15) The unwillingness of US government policy makers and regulators to take a more prudential and tough approach to these emerging trends in the context of a free-market euphoria and free-market dogma propagated by a radical right-wing regime in Washington coupled with the government’s preoccupation with the War on Iraq.

The Root of the Problem: Separating Underlying From Precipitating Causes

Although asset bubbles are a natural and recurrent phenomenon in market economies, if the international monetary architecture upon which national economies and the global financial and monetary system rests is sound, they eventually burst and the after-shock and economic consequences are contained within a limited time span and economic space and result in small impacts on surrounding economies and the rest of the world economy.

The underlying problem which has allowed the U.S. real estate bubble to topple the U.S. financial system and transform itself into a global financial disaster is the current structure and architecture of the international monetary system, which is the bedrock upon which the global financial system and international economy rests.

Very few people realize this, and those who do are constrained by political or occupational interests to admit so publicly, that the international monetary system rests on a major structural fault line. A shift in this fault line is capable of bringing down all the financial house of cards that have been so carefully stalked upon it. This is an accident that has been waiting to happen. It is not a matter of “if it happens” but a matter of “when and how it will happen”. Right now we are in the opening stages of this process where the underlying shake-out has just begun. How long it will take and how it will play out is hard to tell, but one thing is certain, it will end up in the collapse of the current international monetary system which I will call the “Bretton Woods I +” and will be replaced by a new international monetary system, the “Bretton Woods II”. What form the new system will take will depend on the willingness and ability of the participating nations to see the bigger picture, to see the longer view and to sacrifice narrow self and short-term economic and political interests for the greater good that awaits and will benefit all nations if this is done right. The basic principles upon which the new international monetary system should be built are not hard to see. In fact, the basic outline for this new international monetary architecture was proposed by John Maynard Keynes back in 1944, at the Bretton Woods Conference which set up the current architecture in the closing days of the Second World War.

What was the Problem with the Bretton Woods System?

The structural fault line I am referring to is a basic design fault in the gold exchange standard that was agreed upon in 1944, which finally replaced the gold standard that had served the world economy in the late 19th century until the break-out of the First World War in 1914. What is this design fault that was built-in the current international monetary system?

The root of the problem is that the world allowed a single country’s currency -no matter if that country represented at the time 55% of the global GDP and had become the most powerful nation on earth- to become the world’s money, i.e. the world’s medium of exchange, store of value and unit of account. The issue is that you cannot build a sound, stable and viable international monetary system on the back of a single country’s currency. Rather, the currency that is used as a) the principal reserve asset of central banks where nations store their savings and b) to price and settle all global trade and monetary transactions, should be a truly international currency, wholly third and independent financial instrument, which is made up of the currencies of all countries that compose the world economy and belongs to all countries, so no country should be dependent on an other country’s currency, so every country should share in the responsibility and accountability of maintaining the global monetary system, and so that this currency be viewed as a legitimate and impartial standard of monetary value.

The currency that served the world economy so well during its heyday in the closing decades of the 19th century and the beginning of the 20th was not a paper or fiat currency and did not belong to any particular nation, country or person, but was a public good. It was a precious metal, gold and was supplemented by another metal, silver. Gold had served as a means of exchange, store of value and unit of account for many centuries before, starting with the ancient Lydians of Asia Minor who were the first to introduce gold coins around 600 B.C.E. and immediately following with the Greeks and the ascent of the Athenian drachma as the principal currency of the Classical and Hellenistic era. The reason why the drachma and two thousand years later the British pound sterling served so well the world economy of their time, was that the coins were never debased, they contained a constant amount of precious metal. Then when the British issued paper money, the amount of paper money that one could exchange for gold remained fixed and was fully convertible into gold by simply presenting the paper notes to a bank. The reason why the world enjoyed a stable monetary system until the outbreak of the First World War was that British authorities never tampered with the value of their currency, so the world felt comfortable in using the British pound as a gold substitute. This system of full and faithful convertibility of paper money to gold is what is known as the “gold standard”. What put an end to the gold standard was the Great War, which forced countries to print paper money well in excess of the amount of gold they held in reserve and made convertibility to gold impossible at the original rate of exchange. Despite this, the then British Chancellor of the Exchequer Winston Churchill made a valiant attempt to restore the convertibility of the British pound to gold and bring the gold standard back in 1925. In 1931 the effort failed, and Great Britain was forced to abandon the gold standard as the world economy plunged into the Great Depression. The breakdown of the gold standard was both a casualty as well as a contributing cause to the Great Depression and by extension to the Second World War as well.

Mindful of the disastrous consequences that a break down in the international financial system, in this case the gold standard, had for the world economy and for world peace, the allied powers decided in the closing days of the War to convene an international conference to decide on what to do and how to replace the old international monetary system based on gold, so that another world depression and another world war will never happen again. They met at the Mount Washington Hotel at the resort town of Bretton Woods, New Hampshire, in the USA in the autumn of 1944. Forty four countries participated in this conference and it was here that the global financial architecture of the post-War period was agreed upon. The agreements that were reached at this meeting are what are known collectively as the Bretton Woods system.

What was decided was to return to the gold standard but in a modified form. Gold was made an official reserve instrument for central banks to store their reserves, but the role of gold was also to be supplemented by the U.S. dollar which would be fixed at a price of U.S. $35 dollars per troy ounce (1 US

dollar = 1/35th of a troy ounce) and only be partially convertible to gold, not for the average person but amongst central banks for official state-to-state transactions only. As Athenian rulers would pledge to preserve and protect the exchange value of their currency and as British authorities had so faithfully done centuries later, the United States pledged to maintain and preserve the convertibility of the US dollar to gold at the agreed upon exchange rate. Since most gold reserves had fallen in the hands of the U.S. government during the war, the US possessed roughly two thirds of the word’s supply of gold. There was not enough gold to go around to serve the needs of other countries. Since Europe and Asia’s war-torn economies had collapsed and the US dollar had emerged as the most powerful currency in the world and had supplanted the British pound that was now practically worthless following the huge debts that Britain had amassed during the war, the free world had no other choice but to rely on the US dollar for its liquidity, payments and reserve needs. This new international monetary order that came into effect, along with its supporting institutions like the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank, is what is known as the “gold-exchange” standard or the Bretton Woods system.

The challenge of the new system was how to provide the liquidity that the free world needed to finance and operate the growing world economy in the post-war period. First of all, the amount of gold was not sufficient to meet the world’s growing needs for money and secondly, the United States government was reluctant to share its ample but limited supply of gold with the rest of the world. The only way for the world’s war-torn nations to recover and re-build their economies was by exporting more goods than they imported, i.e. run balance of payments surpluses and the only major free standing and prosperous economy that they could do this against was the U.S. economy. This implied that if the new monetary system was to work, the U.S. had to supply the liquidity the world needed, either by transferring gold to the rest of the world or by transferring dollars. Since buying goods and services from other countries was cheaper than building them at home, it became convenient for the US to import more goods than it exported, thus the US quickly settled in the position of running large trade deficits, which it paid by issuing dollars. This turned out to be a mutually beneficial and symbiotic relationship for all parties. For the world economy it was desirable because US deficits provided the liquidity and the dollars they needed to rebuild their war-torn economies. For Europeans, Japanese and South Koreans it meant that they had to work more and consume less and export the rest to reconstruct their economies and accumulate wealth. For Americans it meant that they could buy goods from the rest of the world without having to pay for them, because the rest of the world needed the US dollars to serve as central bank monetary reserves -in lieu of gold- to support their currencies, what is known as the precautionary need served by the store of value function of money, as well as a means of payment to finance the growing volume of international trade and payments, what is known as the transactions need served by the medium of exchange function of money. The implication of this state of affairs

was that as long as the rest of the world economy needed more dollars to serve as a means of exchange and store of value the USA could enjoy a free ride by issuing paper currency and expanding the money supply without suffering the costs of higher inflation and the concomitant rise in interest rates that normally set a limit on how much money a country can print. In effect, Americans could afford to consume more goods than they produced and that since the global demand for dollars kept rising they could also expand the supply of dollars without having to depreciate their currency or raise interest rates, either of which would impose a real cost on the people and force the US to live within its means. As long as this situation lasted the world’s economies got what they needed and confidence in the US dollar was maintained. The system served its purpose and every body gained.

This situation could only last as long as the rest of the world needed US dollars to serve as a substitute for gold. Once the needs of the world economy for US dollars dried up, either the US would have to transfer its gold holdings to countries experiencing a surplus in their balance of trade against the US or if it wanted to hold on to its gold holdings it would have to reduce the rate of monetary expansion and balance its payments by increasing exports and reducing imports. In effect, if the integrity of the Bretton Woods system was to be maintained, the US would have to go back to living within its means and earn its way to prosperity the good old fashioned way of working hard, innovating and competing more.

On the other hand, if the USA moved to balance its international payments it would cut off the increasing supply of US dollars the world economy needed to finance its growing economic activity and this would result in a shortage of liquidity, rising interest rates, intensified competition and a slowdown in world growth that would also affect the US at home. There was a built-in contradiction in the way the Bretton Woods system was designed, a serious design flaw. If the US dollar was to serve the growing transactions demand of the world economy as a an international means of payment and medium of exchange, the US was obliged to keep its balance of payments in a perpetual state of current account deficit, in effect, the US was prevented from ever balancing its payments. At the same time, if the US dollar was also to serve as an international and credible store of value or reserve currency it meant that the supply of dollars issued by the US could not expand indefinitely against the limited amount of gold holdings it possessed in its gold reserves. By fixing the price of the US dollar at $35.0 per ounce and undertaking to convert US dollars to gold at that price there would not be enough gold left in reserve to be exchanged for all the dollars it had issued. To maintain confidence in the US dollar the US government would have to maintain the peg with gold, to maintain the peg with gold at the pre-set US 35.00 per ounce value, the US government was obliged to limit the growth in the supply of dollars. Thus, there was a built-in contradiction, either the US must increase the supply of dollars to meet its obligations to provide the liquidity the world economy needs to grow and prosper or reduce the growth in the supply of dollars

to the world in order to defend the value of the US dollar and preserve confidence in the dollar as a reserve instrument. This contradiction, inherent in the design of the gold-exchange standard was first pointed out by a Belgian-American economist, Robert Triffin in 1960 and is known as the “Triffin dilemma”.

Overdependence on the US Dollar and US Monetary Policy

There is another defect that was built in to the Bretton Woods system. Since the US undertook to make the US dollar a substitute for gold and the primary means of international trade and payment activity, in effect the de facto international currency of the free world, the Federal Reserve Board and the U.S. Treasury became the de facto central bank of the free world as well. This means that when the US moves to an expansionary monetary policy, the same policy spills over to the rest of the world economy resulting in lower interest rates, economic expansion and perhaps higher inflation. When the US moves to a contractionary monetary policy, interest rates rise all over the world, economic activity slows down and inflation comes down. In a world of fixed exchange rates, which was the case before President Richard Nixon severed the peg between the US dollar and gold in August of 1971, this was a direct and immediate relationship. To preserve fixed currency parities countries were obliged to follow the monetary policy of the US. Since the tumultuous period of exchange rate instability in the early 1970s, the world shifted to a system of floating currencies, where the value of a country’s exchange rate was determined by supply and demand in foreign exchange markets. Even though the new system of flexible exchange rates gave governments more power to control monetary policy and activity within their borders and provided them with a modest degree of short to medium term monetary independence, governments are still mindful of the value of their currency in relation to other countries and especially in relation to the US dollar. Thus to prevent their currencies from deviating too far from that of the US dollar and undermining the international competitiveness of their exports, governments cannot afford to stray too far away from US monetary policy not even today. Add to this the increasing role of short-term capital flows which were not such a big factor in the 1950s and early 1960s but have become an exceedingly important feature of the current global financial system, especially so since the ascent of South East Asian economies, including China, the collapse of communism and the globalization of the international economy the last 20 years.

The problem with this picture is that when the US economy is doing well, so is the rest of the world’s economy, but when the US economy is doing bad, the rest of the world economy suffers with it as well. Likewise financial innovations coming out of the US economy quickly spread and benefit the rest of the world economy while financial problems or crises of the one we are experiencing today emanating from the US financial system quickly spread to the rest of the world economy as well. In the current environment not only was the financial crisis transmitted to other countries in a lightning speed, their central banks have had to follow the federal reserve in cutting interest rates and even

worse, the contraction has been more severe outside the US especially in those countries that are more export dependent on the US market like Japan and South East Asia.

Dollar Overhang and Excess Liquidity

Although one of the structural defects of the original Bretton Woods system was eventually resolved through the abrogation by the US of their pledge to convert US dollars to gold at the original parity of $US 35.0 dollars (later adjusted to $42 per ounce) and the shifting of the world to a regime of flexible exchange rates, the other defect still remains. The US has been running continuous current account deficits against the rest of the world and financing them by borrowing money. Increasingly, the funds have come from public sources such as the central banks of Japan, China, the South-East Asian Tigers and the oil rich Gulf countries of the Middle East. US dollars held outside the United States now exceed the amount held inside its borders and an overhang of US dollars has resulted. Since many countries want to keep their exports competitive they have been buying the US dollars to prevent the value of the US dollar from depreciating (or prevent the value of their own currencies from appreciating). This build-up of an overhang of US dollars in the world economy has had a number of consequences, both positive and negative.

On the positive side, they have provided the liquidity to finance the growth of the world economy at an unprecedented rate and scale. On the negative side, they have had two malicious unintended effects. The first effect was to create a savings glut that has kept interest rates low and prevented long-term interest rates from rising. Low interest rates frustrated the efforts of the Greenspan Fed to raise interest rates in the 2004-06 period that could have cooled down the housing bubble and help enforce more fiscal discipline in the US.

The second effect was that this overhang of dollars has found its way to asset inflation as opposed to product inflation. Ever since Paul Volker’s successful attack on inflation in 1980-81 which taught producers a hard lesson -not to raise their product prices and unions not to demand higher wages- the excessive build-up of US dollar liquidity has been channeled into assets such as real estate, equities, bonds and increasingly derivative and exotic financial instruments. This has increased the frequency of asset bubbles in the world economy, creating the largest bull market in history (1981-2008) as well as the largest housing bubble in history. In addition, since producers knew that product price increases were constrained by inflation-control policies of central banks, they switched to off-shoring production to emerging economies to keep costs low but profits high. This has led to low inflation, falling wages and increased profits, which pushed the profit share of national incomes in developed countries to the highest point in recorded history (18%-20% of national income) and made the rich richer and the poor poorer in developed economies. In short, the second structural defect of our international monetary system has led to the creation of

global trade and financial imbalances that have led to current financial and economic upheaval. Clearly, in the long-run the US cannot afford to run massive current account deficits and other countries run massive current account surpluses without putting the world economy at risk.

Towards a New International Monetary System: Bretton Woods II

The long-term solution, the only equitable, legitimate and lasting solution is for the world to move to a new reserve currency. The new reserve currency that the world needs is a composite currency that serves as a store of value, though not as a medium of exchange. It is a currency similar to the E.C.U. before its conversion to a full-fledged currency, the euro, in the eurozone, and is similar to the special drawing rights (S.D.Rs), the accounting currency used by the IMF and similar to the bancor, the currency proposed by John Maynard Keynes in 1944. This new currency can be made up by the principal convertible currencies of the world today. For example, 25% of the new currency can be composed by the US dollar, 25% by the euro, 25% by the Chinese Renminbi and the Japanese Yen and the balance by the currencies of other leading nations who have freely floating and convertible currencies whose value is determined by supply and demand in foreign exchange markets. The new currency needs to be accompanied with a new world central bank, similar to Keynes’s proposed International Clearing Union (ICU) that will determine the global supply of money and ensure that countries cannot build massive trade imbalances which can destabilize the world economic order. In turn, each country can go back to fixed exchange rates and fix the value of their domestic currencies that will serve as the medium of exchange, store of value and unit of account within their national jurisdictions. Such a system will relieve the US of its onerous responsibility of carrying the global financial system on its shoulders. It can more evenly redistribute the weight of the international monetary system among the world’s national economies and it will diversify the risks of financial breakdowns and can result in a more stable, sound and lasting international monetary system.

I realize that such a proposal is too ambitious given the geo-political reality of our time and is likely to be dismissed as too utopian to receive serious consideration by policy makers. On the other hand, the current near-breakdown in our international monetary order provides a rare opportunity to re-examine and re-evaluate the present system and to re-build the international monetary system from the ground up on a more solid foundation instead of searching for patch-up and band aid solutions that will treat the symptoms but fail to address the roots of the problem. Moreover, should the current responses prove inadequate and conditions do spin out of control resulting in a complete collapse of the present system, we need to have thought out alternatives to the present system that can provide a basis and direction for rebuilding a new system better suited to the new global realities of our geopolitical and economic world order of the 21st century.

© Kenneth N. Matziorinis, 2009. All rights reserved. No part of this document may be reproduced or distributed without the express permission of the author.

Comments, feedback and discussion on this paper are welcomed and would be much appreciated by the author.

* Dr. Kenneth Matziorinis

Professor of Economics,

Department of History, Economics & Political Science

John Abbott College, and

Adjunct Professor of Economics

Centre for Continuing Education

McGill University

Montreal, QC, Canada

E-Mail: ken.matziorinis@mcgill.ca

www.canbekeconomics.com

E-Mail: ken.matziorinis@mcgill.ca

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