In my second article on our monetary system (Our Monetary System Part II – Market Volatility), I mentioned that yields on the 3 month Treasury Bill dropped to almost 0% in September as investors moved their money to safer investments.  This was significant because it showed us how the world’s investors are viewing stocks, bonds, derivatives, etc – extremely volatile and unstable.

Treasury yields dropping to 0% is highly unusual – but things got even crazier today.  Today – for the first time in the history of the United States – Treasury yields traded at negative interest rates.  This would tell us that things are definitely getting worse – not better.  Investors were buying T-bills that guaranteed a loss.  Why?  Chris Martenson reviews a couple of reasons below – but I believe that it’s because people in the know – are scared.  We are now living in a financial environment where investors are looking for the safest investments they can find – and those investments are now paying almost nothing or negative returns.  Is it still an investment if you are guaranteed to lose money? 

This is what the world looks like in a debt based monetary system that is collapsing.  Wealth (money) is evaporating at such a rapid pace that people are looking for ways to lose the least amount of money.  Forget about trying to find positive returns – people just want to try to hold onto what they have.  This is why people are clinging to cash and gold – and I believe the value of our currency will very soon begin a freefall with the Fed printing money like crazy to prop up the system.  The grand game will be over when the Fed begins monetizing our debt (think Zimbabwe).

Here’s an update on our money supply growth rate.  It’s not hard to see that money supply growth is slowing considerably.  Unfortunately, as we’ve already discussed, high growth rates are required to keep the system functioning.

Monetary growth - Dec 9, 2008

Does the DJIA stock index look familiar?

DJIA - Dec 9, 2008

How about the S&P 500?

S&P 500 - Dec 9, 2008

Nasdaq Composite?

Nasdaq - Dec 9, 2008

All of our major stock indexes continue to shadow our money supply – only this time – it’s heading in the wrong direction.  I’ve mentioned before – the only way to resurrect money supply growth rates is to create more debt – and as we’ve seen – banks do not want to lend and consumers are reluctant to take on more debt.  The actions of the Fed may provide a brief upswing in stocks – if the money finds its way into consumer’s and investor’s hands – but it will only be a temporary fix. 

Based on recent comments by the Fed and Treasury, on the surface it might appear that Fed actions (lowering interest rates and buying toxic securities) coupled with over $4 trillion in government bailouts are somehow alleviating the credit crisis.   The truth is that banks are not lending, consumers are not spending and corporations continue to layoff workers and delay capital spending in an attempt to survive this ‘downturn’.

Floating on air: Treasury bills go negative

Tuesday, December 9, 2008, 5:30 pm, by cmartenson

Separating truth from fiction, especially when listening to politicians and Fed officials talking about the positive aspects they see in our economy, is never easy.

However, separating words from actions is as easy as pie.

Today, something so unusual happened in the world of bonds, that I have to tell you about it. (All quotes below from this one article).

Treasury Bills Trade at Negative Rates
Dec. 9 (Bloomberg) -- Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.

If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.

At no point ever in our history, not during the worst moment of war nor at the most vicious low-point of the Great Depression, have Treasury bills yielded a negative rate of interest.

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent

What could this mean?

It could mean that there's still no trust in the system.  Think about what would motivate a large financial institution to accept a negative rate of interest.  What could cause a CFO to decide to place their money in an instrument that is guaranteed to lose money?  All I can come up with is that they are unwilling to entrust their money to any of the large banks out there that are offering positive returns on invested money because they don't trust that they'll get that money back.  This means that large companies and financial institutions with deep insider connections and who know the lay of the land far better than you or I do not trust that their money is safe in any of the large banks.  Think about that for a minute.

Or it could mean that the trillions of dollars that the Fed has now pushed out into the banking system have nowhere to go (or some combination of both).  The only economic reason to accept a negative rate of interest is if you are convinced that prices are falling at a faster rate.

We know that more than $600 billion of the newly created Fed money has been parked straight back into the Fed where it is earning interest.  As of today, the rate of interest on the money that the banks can borrow is less than the rate that the Fed is paying them.  This means the Fed is offering a negative interest rate. 

Thus, negative Treasury bill rates are our second example of negative interest rates that we've encountered in the past month. 

To call this "unusual" is to engage in an extreme form of understatement.  Unusual means "not usual". A car driving by with dolls glued all over it is unusual.  A car floating by 6 feet in the air is something else entirely and on a par with negative interest rates in a debt based money system.

So consider the proposition that you are a big bank, you've been handed several hundreds of billions of dollars and you have to put it somewhere. What do you do?

The first thing you do is you take advantage of the Feds extremely generous negative interest rate money bonanza.  But that will come to an end when/if the Fed lowers interest rates to 0.75% or below which will almost certainly happen on December 16th:

Futures contracts on the Chicago Board of Trade show odds of 98 percent the Fed will lower its 1 percent target rate on overnight loans between banks to 0.25 percent on Dec. 16. The probability was 38 percent a week ago.

Given that free money gravy-train is coming to an end, what does a big bank with several hundred billion burning a hole in its pocket do?  Further, suppose that they can't find any qualified borrowers with a sensible use for the money. That money has to go somewhere.

So today's bond action could simply be a reflection of the ending of the Fed negative interest rate policy pushing more of that bank money out into new places.

Of course, it is a stunning stroke of good luck (tongue in cheek) that the Fed's money-spigot largess that is now spilling over into government bonds comes at precisely the right moment for a US government that will shatter all borrowing records over the coming months.

The U.S. is headed toward $1.5 trillion in debt sales as the budget deficit approaches $1 trillion in the 2009 fiscal year according to Bank of America Corp. The deficit this year was $455 billion.

Watching all of this unfold is surreal.  What does it all mean?  To what end?  At the end of it all, what is the value of a dollar when they are being created in greater and greater quantities even as economic activity retreats?

How does government borrowing in these amounts square with the fact that this same government is already hopelessly insolvent with respect to its current promises to future retirees?

Of course there are no answers to these questions because they are being asked by too few people.

Our job is to change that.

Households pay down debts for first time

Thursday, December 11, 2008, 4:03 pm, by cmartenson

Chris Martenson

Mayday! Mayday!

This next story outlines a dire condition for a debt-based monetary system:

WASHINGTON (MarketWatch) - Stung by the loss of $2.81 trillion in their net wealth, U.S. households paid down their debts in the third quarter for the first time since at least 1952, the Federal Reserve reported Thursday.

As of Sept. 30, households' total outstanding debt shrank at an annual rate of 0.8% from $13.94 trillion to $13.91 trillion, the Fed said in its quarterly flow of funds report. It's the first decline in household debt ever recorded in the report.

Consumer debt actually reversed.   This strange behavior has never before been observed in this data series and it goes back to 1952.

Whether we use an "outside-in" empirical approach to observe that debt and money have been created in exponential amounts over the past six decades, or an "inside-out" approach to demonstrate a mathematical requirement for the exponential creation of money/debt, we come to the same conclusion:   We live in an exponential money system.

For this reason, the failure of consumer debt to expand at the required rate is very big news.   What's "the required rate"?  Roughly the aggregate rate of interest on all outstanding debts.

It seems that the hit came from the first ever recorded drop in mortgage debt:

Households paid off more mortgage debt than they took on for the first time on record. Mortgage debt fell at a 2.4% annual rate to $10.54 trillion. Other consumer debts, such as credit cards and auto loans, increased at a 1.2% annual rate in the quarter to $2.6 trillion.

I am not certain if the mortgages were paid down or defaulted upon, but the article implies that they were paid down.  I am less sure of that given the massive foreclosure rates that are plastered all over the news.

Given that consumers are not pulling their weight, how is the system being held together?  Readers of the last two Martenson Reports will not be surprised by the answer:

Total U.S. domestic nonfinancial debt increased at a 7.2% annual rate, boosted by a postwar record 39.2% increase in debt taken on by the federal government.

You can try and understand all the confusing alphabet soup lending facilities offered by the Fed, and try to track details of all the new borrowing by the government, but it is all really very simple to understand if we back up a bit. 

New borrowing and lending is being undertaken by the Fed-government axis at a rate sufficient to equal all the outstanding interest payments on prior debts.  

Without this new money creation defaults by somebody somewhere in the system is guaranteed.

Compounding the difficulties of the monetary and fiscal authorities is the fact that debts are already defaulting at a horrific clip.

All in all this leads me to conclude that when it comes to borrowing and new money creation, we haven't seen anything yet.

And still, even in the face of overwhelming evidence that there is an illness that lurks within the very design of the money system itself, there is precious little commentary on that subject in main stream media or the dominant political parties.

DECEMBER 12, 2008

Debt Shows First Drop as Slump Squeezes Consumers

By PHIL IZZO, BRENDA CRONIN and SUDEEP REDDY

Wall St. Journal

The U.S. economy is deteriorating more rapidly than expected just weeks ago, indicating the recession will be deeper and longer than feared as households and businesses struggle with the most stress they have faced in decades.

New Federal Reserve data revealed that U.S. households paid down debt for the first time since the central bank started collecting the information in 1952. While a positive longer-term trend, the higher savings rate means that consumers are spending less. That is a punishing turn for an economy in which consumer spending accounts for 70% of gross domestic product.

The Commerce Department said exports, which had helped sustain the economy through midyear, fell 2.2% in October from a month earlier as foreign demand for U.S. goods continued to fall. The nation's trade deficit rose in October to $57.2 billion from $56.6 billion in September, despite a considerable drop in oil prices during the month.

Another government report indicated that initial unemployment claims in the first week of December surged 58,000 from a week earlier to 573,000, a 26-year high, as companies slash payrolls before the end of the year. The number of workers continuing to collect jobless benefits jumped 338,000 to 4.43 million in the week ending Nov. 29 from the prior week -- matching the largest weekly increase on record, in November 1974 -- with little relief in sight as businesses brace for a lengthy downturn.

The government data spurred forecasters to update their expectations for the depth of the contraction, which is now expected to continue through the first half of next year. The increasingly grim news is likely to give a push to President-elect Barack Obama's plans for massive government spending to jolt the economy.

Citing the weak trade figures and other signs of a business slowdown, the forecasting firm Macroeconomic Advisers downgraded its estimate of GDP in the current quarter by a full percentage point on Thursday, to a 6.6% annualized decline. If that comes to pass, the quarter would rival the two worst periods in the recessions of the early 1980s. The economy declined by 7.8% in the second quarter of 1980 and 6.4% in the first quarter of 1982.

The final GDP number could turn out to be less dire, of course. Some economic consulting firms continue to estimate a slightly smaller 5% GDP decline this quarter followed by a 4% contraction in the first three months of next year.

Economists in the latest Wall Street Journal forecasting survey projected, on average, that the decline in GDP, which started in July, would continue through the first two quarters of 2009. If those predictions bear out, it would mark the first time GDP has contracted in four consecutive quarters during the postwar period.

On average, economists expect June 2009 to mark the end of the recession, which began in December 2007. That would put the downturn at 18 months, the longest period of decline since the Great Depression. The recessions of 1973-75 and 1981-82 each lasted 16 months.

The 54 economists in the latest Wall Street Journal survey predicted, on average, that GDP would contract at an annual rate of 4.3% in the fourth quarter of 2008, and 2.5% and 0.5% in the first two quarters of 2009. The Commerce Department's preliminary estimate showed a 0.5% decline in quarterly GDP for the third quarter of 2008. The economists were surveyed Dec. 5-8.

The expansion of the U.S. trade gap in October came as the plunging cost of oil imports was more than offset by a surge in the volume of oil that was imported. September's hurricanes, which disrupted activities at the port of Houston, partly caused the October import surge.

Exports of goods and services fell to $151.7 billion in October from $155.1 billion the prior month, as trading partners felt the effects of the worsening slowdown -- and a strengthening U.S. dollar. Total imports edged down to $208.9 billion from $211.6 billion, largely because of the drop in oil prices.

The broad-based decline in exports showed how a key engine of GDP growth earlier this year is sputtering. Trade represented as much as 2.9 percentage points of GDP growth in the second quarter, and 1.1 percentage points of growth in the third.

Through much of the first half of 2008, "the only thing that was keeping the economy from technically showing a reduction in GDP was trade," said IHS Global Insight economist Brian Bethune. "Even though we saw weak growth, it was strong enough to more or less keep factories busy and help absorb the shock of a weak domestic economy."

Now, "there's probably going to be little or no contribution from those exports," Mr. Bethune said.

The financial turmoil over the past year has taken a deep toll on consumers and businesses. The Federal Reserve said Thursday that U.S. household net worth fell 4.7% to $56.5 trillion in the third quarter, marking the fourth-straight quarterly decline, as home values, stocks and other assets lost value. Household net worth was down 11% from a year earlier.

Declining U.S. Household Debt

The Fed's quarterly flow-of-funds report, the most comprehensive snapshot of the household sector available, showed that household debt contracted at a 0.8% rate, the first drop on record. Growth in consumer credit slowed to 1.2% at an annual rate in the July-September period, the Fed said, far lower than the 3.9% pace in the prior quarter. Borrowing for home mortgages fell at a 2.4% annual rate, the largest decline since the Fed began keeping the figure.

Consumers are being hit by falling home prices and job losses. The economists in the Journal survey on average said the unemployment rate will peak at 8.4% next year. While that rate was surpassed in both the 1970s and 1980s, it would mark a four-percentage-point increase from the low of 4.4% in March 2007. Only the 1973-75 recession, with a 4.1 percentage-point increase, had a larger jump in the postwar period.

Adding to consumers' pain: The end of the recession isn't likely to mark the end of job losses. In past recessions, labor-market contraction has continued for months after a downturn's official end. The economists surveyed, on average, forecast just an 8.1% rate for December 2009 as job cuts continue into 2010.

"The job market is ugly and is going to stay that way," said Allen Sinai at Decision Economics. "The economy is going through the heart of reductions in the work force now."

Many economists in the Wall Street Journal poll cited a major expected fiscal stimulus package as the key to pulling the U.S. out of recession, even though the structure of the package remains uncertain.

Write to Phil Izzo at philip.izzo@wsj.com, Brenda Cronin at brenda.cronin@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com

Let’s think about a hypothetical situation for a moment.  Let’s say that today it was announced that a privately owned bank – let’s call it the Federal Bank and Trust – was given authority to print the money of the United States Government and charge our government interest on this money for a period of 20 years.  This bank would be given the authority to manage our money supply – by adjusting interest rates and the volume of money in circulation.  It would be loosely regulated – but would exert immense power over not just our economy – but the world’s economy as well.

What if this fictitious bank then began to use it’s authority to wreak all kinds of havoc within our economy?  What if it caused recessions and depressions due to its monetary policy, caused varying degrees of inflation which would systematically devalue the currency of the U.S. Government over time and repeatedly caused asset bubbles that were unsustainable – leading to crashes every few years?  What if its monetary system required us to grow our money and economy exponentially – which would eventually lead us to economic collapse at the end of the 20 year period of time?  What if this system enriched its private owners – while taking away the wealth of the citizens of the United States through foreclosures and loan defaults?  What if this ‘Federal’ bank then began buying U.S. assets by printing money – but would not disclose the assets that were being purchased?

What do you think would happen today if our government made an announcement like this?  I have a very good idea – outrage.  Our political leaders would be inundated with phone calls and letters demanding that this be stopped.  If our political leaders refused to stop it – there would be marches on Washington D.C. demanding the system be changed.  Current political leaders would be replaced with leaders who would do what was in the best interests of the United States – regardless of what it might cost them.  You and I would demand that this monetary system be changed to something else completely – because the U.S. Constitution is clear – government should be ruled by the people of the United States for the people – it should not be ruled by a small group of powerful interests.   

All of the things mentioned above have been happening to us.  One problem is that this new monetary system isn’t being announced today – it was announced in 1913.  The other problem is that this scenario is not playing out over 20 years – it’s playing out over 100 years.  Because this system was created in the U.S. in 1913 before most of us were born and because the owners of this bank have been patiently working behind the scenes for almost 100 years – we are blind to what is happening to us.  We accept this system because – it’s the way it’s always been.  We don’t know anything else. 

The biggest problem of all is that the people behind this monetary system have now gained worldwide control.  They not only control our financial system – they have infiltrated our governments.  The obvious reason is this – banks do not exert this kind of power – unless it is given to them.  Governments around the world gave Central Banks this power.  The U.S. Government could at any time decide to rescind the Federal Reserve Act – kick out the Federal Reserve – and begin printing it’s own money – interest free.  This has been the biggest fear of the powerful international banking cartel behind the world’s central banking system – which is why they have infiltrated our governments.  You can play in the game all you want – just don’t threaten the game itself.  It will take real leaders to overcome and remove this cancer that has grown within us. 

It’s not hard to see what happens when someone in power opposes this beast – JFK was the most  recent example of what happens when you threaten their game.  He tried to do what I proposed above – kick out the Federal Reserve and give the U.S. government the power to print its own money.  This cartel ended that little experiment within 6 months and sent a very loud message to anyone else who might get the same idea.   When was the last time you heard a powerful political leader speak out against the Fed and their fiat currency?  I have heard only one – Ron Paul – and it became clear that the mainstream media tried to reduce his exposure at every turn.  I assure you – the cartel was watching his campaign closely.

If it doesn’t bother you that the Fed isn’t disclosing where it’s spending this money – it should – for a couple of reasons.  The first being that they are not above the law – if they are using government money – the taxpayers have a right to know where it’s being spent and what our potential losses will be.  The second reason is that we’re not talking about a small amount of money - $2 trillion is significant.  A trillion here and a trillion there and pretty soon you’re talking about real money.  The truth is that they do believe they are above the law and can do whatever they want.  This would change if the American people ever stood up and demanded they account for their actions. 

Fed Refuses to Disclose Recipients of $2 Trillion in Lending

Friday, December 12, 2008, 9:50 pm, by cmartenson

In a foxhole there are no atheists. But well before the praying begins, you find out what people are really made of. Perhaps the big, muscled kid who was unstoppable in basic training goes all to pieces while the skinny guy with the thick glasses saves everyone’s bacon. Or vice versa. The point being that prior to a crisis everything rests on appearances. During a crisis it is actions that matter. That’s when we find out what people, and institutions, are really made of.

Today the Federal Reserve effectively freaked out in the foxhole and declared the spirit of democracy, if not the rule of law, to be disposable conveniences of better times.

In response to a freedom of information act request by Bloomberg News for the names of the institutions receiving public money, the Fed invoked an obscure rule to block the release of this information.

Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information.

Trade secrets? A trade secret is something like the formula for Coke. A trade secret is an unpatented business process the release of which would harm the competitive position of the holder. I am really at a complete loss to understand what sort of “trade secrets” might apply to the acquisition of bad debt from poorly managed financial institutions.

If anybody can supply one that might make sense in this situation I am all ears.

The important principle here is that democracy cannot operate under the cover of darkness. If every emergency, no matter how slight, results in the immediate suspension of our right to know, then one might reasonably question whether it is a right at all and whether this is a democracy.

This is not an esoteric debate over some fine point of the law, this is a foundational matter. Either rules and laws matter or they don’t. Either they need to be followed by everybody or they can be ignored by everybody. There is no place in our legal system for each interested party to self-interpret laws in whatever manner fits them best.

If the Fed can unilaterally decide to follow some rules and not others, then why not anybody else? Would it be unreasonable for an individual to decide that their mortgage does not need to be repaid because they suddenly interpret their contract differently and to their benefit? Are they really “speed limits” or are they more like “speed guidelines?”

I am being quite serious here, the rule of law is not something to be trifled with. Either we are a nation of laws or we are not. It is no small point that our rule of law is one of the most essential components of our social contract and which separates us from other countries where I would not willingly choose to live.

The Freedom of Information Act requires federal agencies to make government documents available to the press and the public. The suit, filed in New York, doesn’t seek money damages.

“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press. “It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed.”

Did you catch those words and phrases? “Requires” and “right to know” are pretty straightforward. Requirements and rights are not really negotiable. They either exist or they don’t.

Predictably, the Fed claimed that this crisis is serious enough to trump our assumed (but rarely tested) right to know.

In its response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” when the “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

But some are starting to catch on and noting that it is really not acceptable that a supposedly public institution is refusing to operate in a manner consistent with their charter.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, who oversees about $14 billion at New York-based ICP Capital LLC.

Congress is demanding more transparency from the Fed and Treasury on the bailout efforts, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had “been bamboozled.”

But now that the Fed has decided, unilaterally, to operate under the cover of secrecy I think they should be allowed to do so.

Of course I would also require that their operating charter be revoked and that a parallel currency be stood up so that we the people could decide for ourselves whether the Fed’s arguments for secrecy were worth risking our entire economic future upon.

Said another way, I am willing to let the Fed take all the primary risks it wants but not with my money. Let the Fed either swim or sink depending on how it plays its hand. Taxpayers should not be forced to shoulder whatever these risks are that the Fed feels are too dangerous to even name.

Otherwise people might begin to wonder about that “requirement” to pay back their credit card bills….

I mentioned a few months ago that we’ll enter a new phase of this crisis if/when the Fed begins buying U.S. Treasury Bonds (monetizing U.S. debt).  That phase started yesterday when the Federal Reserve announced it would begin buying Treasurys and mortgage-backed securities.  What does this mean?  It means that the Fed will begin creating trillions of dollars to buy these securities – essentially flooding the system with dollars.

If there’s one thing we’ve learned over the past few months - when we’re given a number – in this case $1.5 trillion dollars (amount of securities to be bought by the Fed) – the actual number will be much bigger.  $1.5 trillion is an astronomical number – but I believe it’s only the beginning.

What are the real world implications?  If you own Treasurys and know you have a guaranteed buyer (creating artificial demand) – what affect would this have on prices?  You would expect prices to increase – and that’s exactly what is happening.  In the world of bonds – if prices increase (due to demand) – yields fall – since the owner of the bonds doesn’t need to offer as much interest to sell them – and we see yields falling for Treasurys across the board – which in turn, drives down interest rates for you and me.

There are other consequences.  Everyone is anticipating an additional $1.5 trillion dollars in the system over the next few months.  What affect would you expect this to have on the value of the dollar?  Significantly more dollars in the system should result in a drop in the value of the dollar – and that’s exactly what we’re seeing.  If everyone expects the value of their fiat currency to decrease – where does everyone invest to hedge against this loss of value?  Gold.  Gold prices increased 6% yesterday after the Fed announcement and are up another 8% today.

With trillions of additional dollars flooding the system – would you expect inflation to decrease or increase?  You would expect inflation to increase significantly in the coming months with such an increase in dollars.

So – in the coming months, we should expect to see the following things happen:

1. The value of the dollar will decline – and the decline will be significant.
2. The value of gold will increase – and the increase will be significant.
3. There is a very strong possibility that Inflation will increase significantly – leading to a hyper-inflationary spiral – which will eventually destroy the value of the dollar - completely.
4. When the U.S. is unable to finance its growing budget deficits because the world will no longer purchase our debt (possibly leading to short-term Treasury auction purchases by the Fed) – interest rates will rise – and the rise will be significant.
5. The instability of the world’s financial system will continue – leading to a continuing decline in the world’s stock/bond/derivatives markets.
6. The housing market cannot ‘recover’ from this crisis in this environment – housing prices will continue to decline – and the decline will be significant.
7. We should expect more Central Bank ‘actions’ and more ‘stimulus’ packages from governments around the world – but these actions will only delay the inevitable collapse of the world’s debt-based monetary system.
8. Due to these issues – expect world leaders to eventually offer a final ‘solution’ to the crisis – a solution that will involve a new, heavily regulated, global monetary system.

I believe we’re in a relatively calm period (compared to our future) – before things begin to really head downhill.  So – you need to consider the following now:

1. Due to the Fed actions mentioned above – interest rates are temporarily low. If you are in an adjustable rate mortgage of any kind – now is the time to refinance to a 30 year fixed rate – if you can. The current window of low interest rates is going to close very soon.
2. If you believe your home’s value is going to increase at some point in the near future - it’s not going to happen.  Don’t think that your home’s future value is going to solve financial problems – it’s all downhill from here.
3. If you have stocks/bonds/derivatives in any type of portfolio – brokerage, 401(k), etc. – sell them.  Very soon – they will not be worth the paper they’re printed on – and I believe these markets will decline much more rapidly than the value of the dollar.  If you’re worried about penalties – don’t be.  Better to pay a 10% penalty now than to keep letting it ride in the stock market.  Just like Vegas - sooner or later – the house is going to win. 
4. Buy gold if you can – coins, etc. It’s difficult to find at this point. If you can find some – buy it.  As I mentioned above – when the world’s fiat currencies decline significantly – the world will move to gold as its default currency for a period of time – just as it always has.  If you can’t buy physical gold – move your investments into a Gold ETF (Exchange Traded Fund).
5. Imagine a world where prime interest rates are 20+%. With U.S. budget deficits projected in the trillions in coming years - there is a very high probability of this happening – and soon.  If you are considering purchases that require a loan – keep this in mind.
6. Keep more non-perishable food on hand than normal.  Nothing crazy – just shop every few days – instead of once a week.  If something catastrophic happens (stock market crash, etc.) and people begin to panic – you don’t want to be one of the many people who are going to open their pantry and see 2 cans of soup.  You will want to be able to avoid a mad rush to the supermarket.
7. Keep in mind that taking these precautions will only help you short-term.  When the system collapses – all bets are off. We’re going to go through some chaotic times.  Mentally prepare yourself for seeing things in this country that you never expected to see.  More importantly – as I’ve said many times – you must be prepared spiritually.  Faith is required to stand against what’s coming.

I’m reiterating the points above because things are getting very serious.  If the Federal Reserve feels it necessary to pump $1.5 trillion dollars into the system to keep it going – it’s serious.  If the Federal Government finds it necessary to pump $800 billion dollars into the system – it’s serious. If the Fed and our Government see it necessary to keep ‘bailing out’ large banks and corporations with billions of dollars (AIG, Citigroup, etc.) to prevent a complete collapse of the system – it’s serious.

We’ve been lulled into believing that nothing catastrophic could happen to us because of the recent past. The past 30 years have absolutely no bearing on the next 30.  I realize that I’m telling you to do the opposite of what most of our leaders are telling you – which is why I encourage you to research these things on your own. 

I don’t like to bring bad news to good people – but I’ve studied this monetary system for over 3 ½ years and the things I spoke about in 2005 – are happening today.  There is one and only one end to this system – be prepared for it.

MARCH 19, 2009

Fed in Bond-Buying Binge to Spur Growth

ramatic Plan to Purchase $300 Billion in Treasurys Causes Biggest Drop in Interest Rates Since '87; Perils of Printing Money

Wall St. Journal

By JON HILSENRATH

WASHINGTON -- The Federal Reserve ramped up its effort to revive the economy, declaring it would buy as much as $300 billion of long-term U.S. Treasury securities in the next few months and hundreds of billions of dollars more in mortgage-backed securities.

The Fed had already cut its benchmark interest-rate target to near zero. Unable to go lower, the central bank now is essentially printing money to raise the supply of credit and thus push down the longer-term rates paid by families and companies on mortgages and other key loans. The impact was immediately felt.

Jon Hilsenrath explains the impact of the Federal Reserve's decision to buy treasury bonds.

Prices on Treasury debt soared, pushing the yield on 10-year Treasury notes down to 2.53% from above 3% the day before -- the largest one-day drop since the aftermath of the 1987 market crash. The rate on a 30-year fixed-rate mortgage for credit-worthy borrowers fell to about 4.75%. But the value of the dollar sank, a reminder of the risk the Fed is running by printing money to give the economy a jolt.

The show of force follows months of internal debate. Fed Chairman Ben Bernanke had argued for staying focused on lending to troubled parts of the financial markets instead of buying long-term government bonds, an unorthodox step taken recently by the Bank of England. But Fed officials decided they had to do more as the economy deteriorated.

Wednesday's move highlighted the central bank's ability to move aggressively on the financial crisis without approval from Congress. That flexibility is important at a time of growing political hostility toward devoting more taxpayer money to bailouts.

As expected, the Fed policy-making committee voted unanimously to hold its target for the federal-funds rate, at which banks lend to each other overnight, between zero and 0.25%.

"The Fed is living up to its commitment to do everything in its power to deal with the crisis," said Deutsche Bank economist Peter Hooper. "Monetary policy is not going to get us out of this mess by itself. But this is effective life support....keeping things from getting a lot worse."

All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases. The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion.

MARCH 20, 2009

Secretary of the Fed

Wall St. Journal

In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.

It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending.

It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys.

The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell.

The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed's balance sheet has more than doubled since September -- to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%.

The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn't reassuring on that point. It says, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight "deflation," we ended up with the housing bubble and mortgage mania.

The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit.

The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed's idea "without any prior notification to us." Mr. Bernanke, meet your new partners.

Above all, the Treasury and Congress won't be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous "Accord" of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later.

Please add your comments to the Opinion Journal forum.

In recent days, President Obama has proposed sweeping regulatory changes over the banking and financial system.  Under this new proposal, the Federal Reserve’s power will expand across the entire system.  Remember – what is the Federal Reserve?  It is a private corporation owned by a cartel of international bankers.  What is causing this crisis?  Is it caused by lax regulatory oversight?  As we’ve discussed – while there are many problems accelerating the crisis (oversight, greed, derivatives, sub-prime mortgages, etc.) – none of these things caused the crisis.  This crisis is a direct result of our debt-based monetary system.  Who created this system?  The Federal Reserve.  You can see how deceptive these people truly are – they create a problem and then propose a solution – a solution that expands their power.  Their tentacles are now spreading into the entire system.

Here is a summary of the proposed changes:

·         The Federal Reserve will be able to ‘monitor’ risks across the entire financial system (this is a very broad statement – and essentially means that the Fed will oversee everything)

·         The Federal Reserve will be able to ‘examine’ any firm that could threaten ‘financial stability’ (again – broad powers over all banking/financial firms)

·         Our nations largest banks and financial firms would be subject to ‘heightened oversight’ by the Fed (Sounds like big brother will be watching closely)

·         Our government would be given power to seize large financial companies (just what we need – more government intervention)

My personal belief is that our President is being told what to say and do – to implement these changes.  The following excerpt from the article below says it all.

 “President Obama said the plan would ensure "that lines of responsibility and accountability are clear" by placing authority in the Fed's hands.”

 It shouldn’t surprise anyone that Tim Geithner supports the plan – he’s been nothing more than a mouthpiece for supporting the Fed since moving to Treasury Secretary – from the New York Fed.  Mr. Geithner – there are always alternatives.  There are alternatives that would remove this ridiculous, unsustainable system – but we certainly won’t hear these alternatives from you, our President or from most of our leaders in Congress (Ron Paul is an exception).

"Treasury Secretary Timothy Geithner reiterated the administration's determination to make the Fed the systemic regulator. "I do not believe there is a plausible alternative," he told reporters.”

Does anyone really believe that our President and leaders of Congress are so blind (or ignorant) that they do not understand what the Fed is – or is trying to do?  I don’t.  If this follows their standard operating procedure – then we’ll see some minor opposition to this plan – and then the changes will be passed – and the Fed will gain greater control over – everything.  The only way this will ever be stopped - is if the American people wake up to what is really happening – and decide to do something about it.  Currently – we’re a lot like lemmings being led off a cliff.  I sincerely hope this changes.

jg – June 18, 2009

JUNE 18, 2009

Not Everyone Is Cheering Fed's New Role

By SUDEEP REDDY

Wall St. Journal

WASHINGTON -- The Federal Reserve would become the nation's most powerful financial overseer, an approach that is becoming a flashpoint as lawmakers and consumer groups attack the central bank for its role in creating and handling the financial crisis.

WSJ's Damian Paletta discusses President Barack Obama's new plan to overhaul supervision of financial markets.

The proposal, if passed into law, would represent one of the biggest changes ever in the Fed's role. The central bank would win power to monitor risks across the financial system, and sweeping authority to examine any firm that could threaten financial stability, even if the Fed wouldn't normally supervise the institution. The nation's biggest and most interconnected firms would be subject to heightened oversight by the central bank.

President Obama said the plan would ensure "that lines of responsibility and accountability are clear" by placing authority in the Fed's hands.

Critics who wonder about the wisdom of the move say the Fed failed to use its authority to address loose lending practices and the housing bubble that pushed the U.S. into a recession. The Fed responded aggressively after the crisis began, but some argue those actions were overly secretive.

A movement is spreading in Congress to force the Fed to disclose the identity of institutions that borrow from the bank, a move officials say would discourage firms from seeking needed emergency funds. A large group of House members is pushing to audit the Fed.

"I don't have a lot of faith in the Fed being able to handle that big a universe," said John Taylor, president of the National Community Reinvestment Coalition, a group of 600 community organizations.

Senate Banking Chairman Christopher Dodd (D., Conn.) and House Financial Services Chairman Barney Frank (D., Mass.) both said Wednesday the Fed's role is the biggest potential source of friction in the plan.

Mr. Dodd said there is well-founded concern the Fed's responsibility for monetary policy, including setting interest rates, could conflict with its role monitoring systemic risk. Fed officials have said they can handle multiple responsibilities. "There's not a lot of confidence in the Fed at this point, and I'm stating the obvious," Mr. Dodd said.

Mr. Frank said most of Mr. Obama's proposals reflect a broad consensus on Capitol Hill. But "the interplay between the Fed and the rest of the regulators on systemic risk" will be a thorny issue.

Some lawmakers want an interagency council, another feature of the plan, to have greater responsibility for systemic risk, and the authority to act. Obama administration officials believe a committee approach would allow problems at financial institutions to fester without a clear regulator responsible for addressing them.

Listening to President Barack Obama's speech on Wednesday at the White House, from left, were Rep. Barney Frank, Sens. Dick Durbin and Christopher Dodd, HUD Secretary Shaun Donovan, Treasury Secretary Timothy Geithner and administration economic adviser Lawrence Summers.

"How much power the Fed is going to have is going to be probably one of the most controversial issues about this plan," said Robert Litan, a senior fellow at the Brookings Institution. He said he thinks the Fed's role in the new regulatory framework is likely to be changed by lawmakers.

Treasury Secretary Timothy Geithner reiterated the administration's determination to make the Fed the systemic regulator. "I do not believe there is a plausible alternative," he told reporters.

Fed officials said they took action throughout the financial crisis because the central bank was often the only institution with the power to prevent turmoil. The regulatory overhaul would provide a mechanism for the government to unwind failing nonbank financial institutions, freeing the Fed of the need to act. The central bank has also taken steps to release details about its lending programs.

Despite a major conceptual change in the Fed's role, central bank officials believe perhaps only a handful of additional firms would fall under their supervision. They are also expected to make a case to keep the Fed's consumer-protection responsibility -- with some tweaks -- instead of giving up that role entirely, as envisioned under the plan.

The regulatory overhaul proposed by the Bush administration last year also would have given the Fed responsibility for financial stability. But that plan would have removed its role of supervising banks. Fed officials quietly objected, saying it would be hard to guard against systemic risks without also performing routine bank examinations. The proposal gained little traction amid an escalating financial crisis.

The Obama proposal would require the central bank to seek approval from the Treasury secretary before invoking emergency lending powers. It also calls for the Fed to work with the Treasury and outside experts to review the Fed's structure and governance, including the role of the regional Fed banks. A report due by Oct. 1 would be used to propose changes to the Fed's structure "to improve its accountability and its capacity to achieve its statutory responsibilities."

Regulatory Restructuring

—Jonathan Weisman and Damian Paletta contributed to this article.

Write to Sudeep Reddy at sudeep.reddy@wsj.com

Based on the speed at which these regulatory changes are being made – I have a feeling we’re on the verge of some major economic shocks.  Things appear to be somewhat calm – but there are serious storms approaching.

This is a long article – so I’ll list the important info here:

·        One proposal being pushed by the White House takes aim at industrial loan companies, which are allowed under their state-issued charters to collect federally insured deposits, offer credit cards, make loans and process financial transactions without facing as much scrutiny as traditional banks regulated by the U.S. government.

·        President Barack Obama wants companies with ILC charters to register as bank-holding companies with the Federal Reserve. That would put them in the same regulatory category as Bank of America Corp. and J.P. Morgan Chase & Co., subjecting the non-banks to much greater government oversight.

·        If that happens, most companies with ILC charters likely would close them down, potentially shutting off another source of credit for consumers, industry experts predict. That's because the companies might not be able to satisfy the Fed's capital and other requirements, and thus would be ineligible to become bank-holding companies, or they would balk at heavier regulation.

I’ll keep this short – because it’s obvious what is happening here.  Who would gain regulatory authority over these firms under this proposal?  The Federal Reserve.  Are you beginning to see where these new regulatory proposals are leading? 

Our entire financial system is being consolidated under one authority. This alone should cause us concern. A private bank (a small group of powerful interests) should never be given absolute economic power over the people of the United States.  This is why our founders wrote the Constitution – to prevent this very thing from happening.

The even bigger issue is that this authority is controlled by people who have one, overriding objective – a one world socialist government.   

JUNE 19, 2009

Corporate Lenders Get Hit

Financial-Oversight Bill Snags Loan Arms of Harley, Target; Girding for Battle

By DAVID ENRICH and ROBIN SIDEL

Wall St. Journal

Target Corp., Harley-Davidson Inc., Pitney Bowes Inc. and dozens of other companies that aren't banks but pitch loans and other financial products are being squeezed by the Obama administration's financial-overhaul plan.

One proposal being pushed by the White House takes aim at industrial loan companies, which are allowed under their state-issued charters to collect federally insured deposits, offer credit cards, make loans and process financial transactions without facing as much scrutiny as traditional banks regulated by the U.S. government.

President Barack Obama wants companies with ILC charters to register as bank-holding companies with the Federal Reserve. That would put them in the same regulatory category as Bank of America Corp. and J.P. Morgan Chase & Co., subjecting the non-banks to much greater government oversight.

Under Scrutiny

If that happens, most companies with ILC charters likely would close them down, potentially shutting off another source of credit for consumers, industry experts predict. That's because the companies might not be able to satisfy the Fed's capital and other requirements, and thus would be ineligible to become bank-holding companies, or they would balk at heavier regulation.

As of last month, there were 45 ILCs with combined assets of $232.3 billion, according to the Federal Deposit Insurance Corp. That is equivalent in size to the 11th-largest U.S. bank, or slightly smaller than regional bank U.S. Bancorp.

Though relatively small players in the financial system, ILCs provide a wide variety of products and services to businesses and consumers. The offerings range from financing purchases of Harley motorcycles to loans that cover corporate medical payments to insurers. Eliminating or sharply curtailing those operations could make it harder or costlier for customers to get credit.

In its "white paper" outlining the reform package, the administration said the existence of ILCs and other non-bank charters have allowed certain institutions "to obtain access to the federal safety net," namely through insured deposits, while avoiding oversight by the Fed. The administration argues that in order for a regulator to be sufficiently powerful, it has to be able to see all the risks, and thus oversee all companies that provide financial services.

ILCs provide a wide variety of products and services, from financing purchases of Harley motorcycles to loans for corporate medical payments

That's setting the stage for a showdown on Capitol Hill. Some lawmakers and banking groups are vowing to fight the ILC provision, which they see as an overzealous attempt to create a level regulatory playing field at the expense of companies that didn't play major roles in the financial crisis.

"There is not a single ILC that contributed to the crisis," said Sen. Robert Bennett, a Utah Republican, at a hearing Thursday with Treasury Secretary Timothy Geithner. "You're going to wipe them out as a source of credit, take them out of the marketplace where they're providing niche credit for people that don't otherwise get it."

Mr. Geithner responded that the change is meant to eliminate "gaps and loopholes" in financial regulation. But he said the administration is open to negotiating the plank with lawmakers. "We're going to have to work to try to persuade you of the merits of these proposals and take your concerns into consideration," Mr. Geithner said.

The brewing fight over the ILC proposal, tucked into a single paragraph in an 88-page document released Wednesday, is an early indicator of the intense scrutiny that the Obama administration's reform plan will encounter as lawmakers and industry groups pore over its details. In addition to policy disputes, lawmakers are looking to protect local industries. Utah, for example, is home to most of the nation's ILCs, although California, Nevada and other states also are popular destinations for the charters. Only a handful of states offer ILC charters, and for those that do, they can be a source of tax revenue.

Howard Headlee, president of the Utah Bankers Association, called the Obama administration proposal "extremely misguided" and said it would force many ILCs to shut down. But he said he's optimistic that lawmakers will kill the provision. "I'm confident that congressmen will see how foolish it is to be destroying sources of credit in this economy."

If the provision becomes law, the implications could be far-reaching. A diverse array of companies -- including Target, Pitney Bowes, UnitedHealth Group Inc., WellPoint Inc. and CMS Energy Corp. -- have Utah-based financing arms with ILC charters.

The companies use the charters to provide financial services that complement their main businesses and can be a source of profits. For example, Target, the Minneapolis-based retailer, uses its Target Bank subsidiary to extend credit to shoppers. UnitedHealth's OptumHealth Bank Inc. administers health-savings accounts and offers loans to cover medical payments, as does WellPoint's Arcus Financial Bank. EnerBank USA, a unit of Jackson, Mich.-based CMS Energy, finances home-improvement and energy loans nationwide. Pitney Bowes Bank Inc. allows businesses to prepay or borrow funds for postage costs.

Most of those companies said they were studying the administration's proposal and that it would be premature to comment. Pitney Bowes, which established its ILC in 1998, said it "will work to educate Congress about their role in providing credit for commercial activity -- something that is even more important during the current recession. We think it is important that these services continue."

The obscure banking charters, originally created in the early 1900s to provide loans to industrial workers, have been a sporadic source of controversy for years.

Federal Reserve officials, including ex-Chairman Alan Greenspan, have warned about the perils of allowing traditional commercial businesses to have banking operations. One concern is that the banking portion of the business could be at risk if, say, the retailing side went under. There are also competitive issues if giant companies use their existing customer base to crowd out traditional banks.

In 2006, ILCs were thrust into an especially bright spotlight after Wal-Mart Stores Inc. applied for a charter to process credit-card transactions. Banks waged an aggressive lobbying campaign to derail the retailing behemoth's application, arguing that it was laying the groundwork for a foray into retail banking.

Amid the mounting furor, the FDIC imposed a moratorium on new applications for ILC charters, to allow Congress time to debate whether to change the law. Wal-Mart withdrew its application.

In May 2007, the U.S. House passed a bill that would subject ILCs to greater federal oversight and bar the charters from being granted to nonfinancial firms. The bill died in the Senate.

—Damian Paletta and Ann Zimmerman contributed to this article.

Write to David Enrich at david.enrich@wsj.com and Robin Sidel at robin.sidel@wsj.com

Printed in The Wall Street Journal, page A1

Wow.  Someone who is on the right track.  I think this may be the first time I’ve seen a mainstream media article that makes the correlation between our money supply and the stock market.

What will happen to our stock market when our government and the Federal Reserve ‘unwind’ all of the programs adding money to this system?  If you’ve read my earlier posts on our monetary system – you know the answer. 

Outstanding credit market debt continues to fall – so when the Fed removes all of the additional sources of money from the system – we’re going to watch a free-fall collapse of our stock market and our economy.  We’ve been setup to fail – and it won’t take much to pull the rug out from under us.

JULY 15, 2009

The Bernanke Market

We won't get real growth until Congress and Treasury get policy right.

Wall St. Journal

By ANDY KESSLER

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

Dow tracks the money supply

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.

Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

As I’ve mentioned before – oppose the Federal Reserve and you should expect all kinds of opposition – from politicians, financial leaders, mainstream media – and apparently a host of economists.  The letter below in the Wall St. Journal is a great example.

Many people now understand the dangers posed by the Fed. The following comments were posted by readers of the WSJ after the ‘petition’ below appeared on the WSJ website.

Liberty_Mike wrote:

Let me list off a few of the organizations some of these buffoons represent, and then I may change the mind of the few people that look at this and even begin to take it a little bit seriously. Of the above organizations, I see Wells Fargo, Morgan Stanley, JP Morgan Chase, JP Morgan, and the Federal Reserve Bank of SF to name a few. Of course people from these organizations would want to keep the Federal Reserve’s activities secret. These are some of the banks and financial institutions that are in collusion with the Fed! How can anyone take a list of people who want to keep the Federal Reserve’s activities secret, when it is being represented by the organizations that benefit from the Fed’s secrecy??

HR 1207 wrote:

175 Signatures? Give me a break!
I received more signatures on my petition in support of HR 1207 to Audit the Fed in just one voting precinct.

Ryan - Middle Class wrote:

What does the Fed have to hide?

Indeed – what does the Fed have to hide?  The Fed deceptively disguises its opposition to an audit by saying that it should remain ‘independent’ and that any intrusion by our government could have serious monetary consequences.

Again – according to the Constitution of the United States – who has legal authority to manage our monetary system?  The United States Congress (and therefore, the people of the United States) – not a private cartel of international bankers. 

If we cut through the rhetoric – the Federal Reserve is saying that the people of the United States have no right to audit the institution that controls their economy.  Does this really make any sense?  Of course not.  The private bankers behind the Fed (the same bankers who control the world’s largest private banks - JP Morgan Chase, Citibank, Goldman Sachs, Morgan Stanley, etc.) are very deceptively attempting to put an end to any opposition.

July 15, 2009, 1:00 PM ET

Petition for Fed Independence

Wall St. Journal

By WSJ Staff

The following is a petition calling for a commitment to Fed independence:

Open Letter to Congress and the Executive Branch

Amidst the debate over systemic regulation, the independence of U.S. monetary policy is at risk. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability. There are three specific risks that must be contained.

First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference. Second, lender of last resort decisions should not be politicized.

Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

If the Federal Reserve is given new responsibilities every effort must be made to avoid compromising its ability to manage monetary policy as it sees fit.

Federal Reserve Chairman Ben Bernanke is testifying before Congress again today about the current recession and Fed monetary policy. Once again, he reiterated his stance that the recession will end sometime in the second half of 2009. 

I have no idea why he would say this – considering the current state of the economy.  If I didn’t know better – I would say he’s just guessing.  The truth – as we’ve learned – is that he is certainly aware that this ‘recession’ is not going to end this year.

Regardless, it’s amazing to me that so many intelligent people could be deceived by someone who has not been telling the truth for a couple of years now.  Ben speaks and everyone seems to feel a little better.  The question is - should we feel better?

Let’s take a look at some of Ben’s past comments and you tell me if we should believe anything he tells us.

jg – July 22, 2009

__________________________________

June 4, 2009 - Federal Reserve Bank Chairman Ben Bernanke has told a budget committee in the US that the recession should see the beginning of the end later this year.

May 5, 2009 -- "We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke told lawmakers, sounding more confident about the prospects for a recovery later in 2009.

April 14, 2009 -- "Recently we have seen tentative signs that the sharp decline in economic activity may be slowing," Bernanke said in a speech at Morehouse College in Atlanta. "To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets."

April 3, 2009 -- He said he expects a "gradual resumption of sustainable economic growth." However, he didn't say when - in remarks to a Fed conference in Charlotte, N.C.

March 15, 2009 -- "We'll see the recession coming to an end probably this year," if the government succeeds in bolstering the banking system, Bernanke said in an interview with CBS TV program "60 Minutes."

March 10, 2009 -- The recession was more severe than the Fed had expected, Bernanke acknowledged after a speech to the Council on Foreign Relations. Still, he added there's a "good chance" the recession could end this year if the government managed to get financial markets to operate more normally again.

March 3, 2009 -- Testifying to the Senate Budget Committee on the bailout of American International Group Inc., Bernanke didn't repeat remarks he had made a week earlier that the recession could end this year if the government succeeded in turning around wobbly financial markets.

Feb. 24, 2009 -- Bernanke said he hoped the recession will end this year, but that there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again. "

Jan. 13, 2009 -- "Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit," Bernanke said at the London School of Economics.

"Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, 'largely reflect strong economic fundamentals,' such as strong growth in jobs, incomes and the number of new households."

-Washington Post, October, 2005

"A leveling out or a modest softening of housing activity seems more likely than a sharp contraction"

-in testimony to a House Financial Services Committee, Thursday, February 16, 2006, (source: Washington Times, February 16, 2006)

"We think that, by the spring, early next year, that as these credit problems resolve and as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy which we are seeing in other areas outside of housing will take control and will help the economy recover to a more reasonable growth pace."

-in testimony to the Joint Economic Committee on Thursday, November 8, 2007 (source: "Nightly Business Report," Thursday, November 8, 2007)

"The Federal Reserve is not currently forecasting a recession."

-after a speech given in Washington, D.C., on Wednesday, January 9, 2008 (source: AFP, Thursday, January 10, 2008)

"My baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of (Fed) and fiscal stimulus begin to be felt."

-in testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs on February 14, 2008 (source: FederalReserve.gov)

If you’ve been paying attention to recent U.S. Treasury bond/note auctions, you’ve probably noticed that the amount of debt offered at these auctions is growing significantly. This is a direct result of our Federal Government’s spending on the numerous stimulus and bailout packages.  To put the amount of debt in perspective – a year ago the U.S. would auction anywhere from $5 to $15 billion a week (on average).  Last week the U.S. auctioned over $230 billion in Treasury bonds/notes. 

Although our leaders in Washington act as though they have a blank check – it’s easy to see the repercussions of what they’re doing.  The growing deficits are requiring the Treasury to auction more and more debt.  The question becomes – at what point do we hold an auction where no one shows up to buy?  As you’ve seen me say before – I (and others) believe this is already happening to some degree. 

Personally, I believe the Federal Reserve has been supporting Treasury auctions for some time – but I could not figure out how they were doing it.  Chris Martenson explains how they’re doing it in the article below. 

You have to ask yourself – why all the secrecy?  Why do they need to support our Treasury auctions?  What happens if they stop supporting Treasury auctions?

The answers will lead you to one unpleasant conclusion – U.S. debt creation is unsustainable. 

The Shell Game - How the Federal Reserve is Monetizing Debt 

Sunday, August 2, 2009, 10:02 pm, by cmartenson

by: Chris Martenson 

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
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• ·               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

Nonfinancial_commercial_paper

Domestic_NonFinancial_Debt

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:

TIC_Flows

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.

USD_new_closing_low

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 27^th - 31^st, 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.

Treasury_Auction_results

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.

Federal Reserve Custody Account

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.

Custody_account_table

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):

TIC_-_Cust_difference_table

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. 

Custody_Account_components_and_total

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 pebble 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 pebble is hidden under, you win!   But where is the pebble?  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, 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 pebble is still there somewhere - the pebble 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.

Federal_Agency_Debt

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.