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)

 

I would love to find some good data/news somewhere that actually made sense – but there simply isn’t any.  Most recent mainstream media articles touting economic ‘good news’ are either using flawed assumptions, bad/manipulated data or completely disregard data that would contradict their positive spin.

 

I wrote a couple of months ago that we were in a relatively calm period before things really started to head south.  I think we’re nearing the end of anything resembling calm. 

 

Declining Federal tax revenues will translate into bigger deficits – which will require additional Treasury debt – which will flood the debt market with even more Treasury bills/notes.  At some point, the world will say ‘enough’ – and all sorts of unpleasant things will start happening.

 

John

_______________________________________

Nathan's Economic Edge

http://economicedge.blogspot.com/

Tuesday, August 4, 2009

Federal Tax Revenues – Cliff Diving and Data Hiding…

Remember what Chris Martensen called good economic data? You know, data that “is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.”

 

Good Data
• Sales tax data
• Income tax data
• Truck tonnage moved
• Port shipping container traffic
• Air transport
• UPS, FedEx, and other major shippers' volume
• Corporate Revenues (just added to list)

Well, here’s the data from the top of the list, the only data the government releases that meets Chris’s “good” criteria.

And how’s it looking? Is it down the .7 or even 5% that comes out of the massaged and adjusted data? NO! It’s down, wait for it, 22% year over year for Federal individual tax receipts and it’s down a horrific 57% for Corporate Income Taxes!

Now that’s a crash of revenue, just when our government is RAMPING spending all while simultaneously spending trillions of your dollars to bail out the central banks and pay bonuses on Wall Street!

What will that mean for our deficits? GAME OVER! The math is simply so far from working that there is NO WAY to keep the game going very much longer. You can ignore it, call it looney Tunes, whatever, the math simply tells the truth and cannot lie.

Federal tax revenues plummeting

AP ENTERPRISE: Plummeting tax revenues starve government just as Obama embarks on big plans

By Stephen Ohlemacher, Associated Press Writer
On Monday August 3, 2009, 8:51 pm EDT

WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem."

While much of Washington is focused on how to pay for new programs such as overhauling health care -- at a cost of $1 trillion over the next decade -- existing programs are feeling the pinch, too.

Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.

The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.

For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.

Is there a way out of the financial mess?

A key factor is the economy's health. The future of current programs -- not to mention the new ones Obama is proposing -- will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.

"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers.

"If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."

A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.

Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated.

"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.

The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.

The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.

"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."

The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.

"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.

President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.

Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.

Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.

Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.

Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.

Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."

BUT WAIT! That’s actually an improvement in Corporate tax receipts… then a funny thing happened on the way to look at the St. Louis Fed’s charts. It seems that this chart series, (FCTAX), the only one that presents federal tax data on the Fed’s site, has stopped reporting data! Below is the same series chart that I posted on April 10th of this year:

That’s right, you can see that corporate tax receipts were down well over 70% at that time!

Now, when that same data series is pulled up, you will find that the data begins in 1996 and ENDS in 2008!

In fact, do a search at the Fed’s site and you will find that all aggregate tax receipt information is suddenly only reported to the beginning of 2008!

Fred Search, Gov't Receipts, Expenditures & Investment

Why would they do that? Oh, go ahead and ask. I can already guess their response… “That data is no longer relevant.” Or, “It was an error and will be corrected [when the recession is over].” LOL, seriously, when they were playing games with the “excess reserves” charts, they came up with all types of excuses and now it’s impossible to know exactly how it’s calculated.

One more time:

The BEA, the BLS, in fact ALL government reports are suspect. All reporting of government statistics should be scrapped. The Fed should be abolished, The central banks and bankers should be removed – as in gone, a new money system should be put in place, there should be a Constitutional Amendment dictating the SEPARATION OF CORPORATIONS AND THEIR MONEY FROM STATE, and finally, there should be a new government agency responsible for collecting and reporting economic statistics and that agency should have a mandate to develop data collection methods that cannot be changed over time and there should also be a mandate to release RAW DATA with every report, there should be absolute transparency in that all the calculations and all collection methods should be easily viewable by anyone. Oh, and NO ONE, not even the President should haveaccess to the information before the public!  access to the information before the public.

 

Posted byNathan A. Martin at9:29 AM 0 comments

 

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
•  
• ·               The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
•  
• ·               The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.

 

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

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

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

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

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

 

Replacing private credit with public credit

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

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

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

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

How are they doing?

The debt gap

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

Here's what caught my eye in the most recent one

 

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

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

Here's where the story gets interesting.

Treasury International Capital (TIC) flows

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

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

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

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

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.

Great investigative work here by Chris Martenson.  Chris shows us how the Federal Reserve is deceptively purchasing Treasury securities from the U.S. Government.  This is a very big deal.  It means that the world’s investors (domestic and foreign investors, etc.) are no longer willing to purchase all of our debt – which means that we cannot get the financing we need to sustain our enormous budget deficits.  As I’ve mentioned before – if we can’t sell our debt – we will start down a path that will end with the bankruptcy of the United States (cash flow insolvency).

The Fed is stepping in (secretly) to purchase a significant amount of our debt to delay Treasury auction failures.  They can’t purchase our debt forever, at some point the world is going to figure out what is going on.  I suppose they are doing this so that when this is known – it will appear as though they were trying their best to help us.

It took about an hour for this information from Chris Martenson to spread to many of the popular economic blogs on the internet.  It won’t take long before this becomes the #1 discussion topic on the internet – and then someone will break this news to the world.

Once the world figures this out – the value of the dollar will plummet and interest rates will sky-rocket.  It’s going to be painful to watch our leaders in Washington try to manage through the worst financial crisis in our history.  If you think the past year has been tough – you haven’t seen anything yet.  Think about the problems California has been dealing with over the past year (significant tax revenue declines coupled with out of control government spending) – and then think about the fact that our Federal budget is approximately 40 times larger.  I can only think of one word to describe what we’re going to see – chaos. 

As I’ve mentioned before, the Fed doesn’t use existing money – it creates money.  Therefore, when the Fed purchases our debt – it is increasing our money supply – by a significant amount. Add this to all of the other Fed ‘actions’ that have ballooned its balance sheet – and it’s not hard to see what is propping up our money supply.

Who bails out our Federal Government?  It would be easy to say – no one.  The truth is that we will be offered a way out by the world – but it will come with a very steep price.

This is the beginning of the end of the financial dominance of the United States.

jg – August 6, 2009

The Fed Buys Last Week's Treasury Notes

Thursday, August 6, 2009, 12:21 pm, by cmartenson

 

In concert with the claims I made in the prior post, The Fed bought $7 billion in Treasuries today and even more yesterday.

This is at the upper end of their recent range of already exceptional purchasing activity.

If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?

This $14-billion-plus buying activity by the Fed represents fresh money created out of thin air that was exchanged for the sovereign debt of the US.  However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs"), we can consider these additions of money as good as permanent themselves.

Pomo - Treasury

POMO_2b

Looking at the maturity range, we can see that these are all long-dated bonds, with the one today specifically offering us a tantalizing clue as to how the shell game is being played.

Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday).  Please note the specific CUSIP number circled.  Every bond in this auction carries this specific identifying number.

Treasury Auction Results - July 30, 2009

And now let's look at the detail for this most recent POMO:

POMO_4

Good grief!  Just last week, when the auction results were announced, it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand," and all the rest

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn't even wait a full week!  A more honest and open approach would have been for the Fed to simply buy them outright at the auction, but this way, using "primary dealers" and "POMOs" and all these other extra steps, the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public. 

The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers.  They'll have to do something with all that freshly minted  cash.....

 

You’ve probably wondered – if there is so much negative economic data out there – why does the stock market continue to rise?  With the Dow Jones Industrial Average and S&P 500 index up by significant percentages this year – it would seem that stock investors know something we don’t.  Is this true or is something else happening?

If you invest in stocks, then you are familiar with the stock price to earnings ratio.  This is a good metric to determine if a stock price is considered expensive – and therefore, a good metric to determine whether or not to buy a particular stock (P/E trends).  If we take this a step further and look at the P/E ratio for the entire S&P 500 index – we can get a good idea if it’s a good time to buy into the stock market. 

So - there are two, very big questions we should answer when it comes to future stock prices: 

1.      Is the economy rebounding to the point that company earnings will increase significantly in coming quarters?

2.      Are stock prices considered high compared to corporate earnings? 

As I’ve said before – I see no indication (based on good, quantitative economic data) that the economy is rebounding.  As we’ve seen – the economy continues to deteriorate – continuing job losses, growing residential and commercial loan defaults, home prices continue to decline, wages and income declining, etc.  Therefore, I would not bet my financial future on a quick economic turnaround that will increase corporate earnings - based on the economic data that I trust. 

Also remember, companies have been able to beat recent earnings estimates due to significant cost reductions – not due to sales/revenue increases.  How much more can they cut if revenues continue to decline?  Bottom line – I would not expect to see a significant turnaround in corporate earnings any time soon. 

This is not exactly good news considering current S&P 500 earnings.  Over the past 20 months we’ve watched the biggest earnings drop in the history of the S&P 500.  Again, you’re probably wondering – with such a big drop in earnings – why is the S&P 500 up approximately 35% since March?  Good question.  We’ll answer it after we look at the current S&P 500 P/E ratio.

 

S&P 500 Earnings

With earnings plunging, we would expect to see a high P/E ratio if prices haven’t also plummeted.  As I mentioned above, since S&P 500 stock prices have increased significantly since March – the S&P 500 P/E ratio is through the roof. 

From Nathan’s Economic Edge (http://economicedge.blogspot.com):

“The higher stocks go without real earnings and without clearing the debts from consumers, the higher price to earnings ratios will go. It is ultimately earnings that underpin the equity markets and the price of stocks has NEVER been so high compared to earnings.

S&P 500 PE

It would take one heck of a lot of growth to pull P/E’s back into a normal historic range, and the only reason they look as “good” as they do is because the financial industry was allowed to go back and mark their assets to fantasy – otherwise the large banks are still insolvent and would not have earned a nickel.”

The answer to question #2 is – stock prices are at historic highs compared to earnings – and not by a small margin. We see the same situation with the DJIA.

Bottom line – we see no real economic turnaround and P/E ratios are at historic highs.  What does this tell you?  It tells you that it’s a very bad time to invest in the stock market.  If you’re not in the market – stay out.  If you’re in – get out.  The whole house of cards could collapse at any time.

So – the final question to answer is – why are stocks increasing if the economy and earnings are plummeting? It’s not because the economy is rebounding (regardless of what the media tells us) and it’s not because stocks are cheap.  As Chris Martenson shows us below – the culprit is – once again - the Federal Reserve.

If you’ve seen the movie ‘The Sting’ (1973), you have some knowledge of how a confidence (con) scheme works.  In the movie, Robert Redford and Paul Newman’s characters ‘con’ a big time bad guy (the ‘mark’) out of some serious money.  The ‘con’ was broken down into the following acts:

1.      ‘The Set Up’ – devise a plan to deceive and then steal a significant amount of money from the ‘mark’

2.      ‘The Hook’ – create a situation that ‘hooks’ your ‘mark’ – meaning that the ‘mark’ becomes very interested in what your scheme can do for him

3.      ‘The Tale’ – tell a good story that the ‘mark’ believes will make him lots of money.  A good tale preys upon the weaknesses of the ‘mark’.

4.      ‘The Sting’ – just when the ‘mark’ thinks he’s going to make a killing – pull the rug out from under him and steal his money

What was the most important lesson from this movie?  The ‘mark’ can never know that he’s been taken. 

The people of the United States have been the victim of the biggest confidence scheme in the history of the world. 

By creating bank panics in the late 19^th/early 20^th centuries, the bankers behind the Federal Reserve set the stage for the Federal Reserve Act of 1913.

We’ve been told a grand tale – that our current banking system is stable, reliable and benefits everyone.

We’re about to experience the ‘Sting’ – when the international bankers behind the Federal Reserve try to take everything from us.  This will most likely begin in earnest with a significant stock market crash.

With high stock prices, low corporate earnings and a deteriorating economy – our stock markets have been setup for an historic fall.

Fed POMO activity and the Stock Market

 

Friday, August 7, 2009, 11:38 am, by cmartenson

 

Today, again, we receive news that Fed is continuing to pour more and more POMO money into the banking system, this time with a 'mere' ~$2 billion addition.

August 7 - New York Fed purchases $1.937 billion in agency coupons

As long-time readers here know, I have been tracking the Permanent Open Market Operations (or "POMO") activity of the Fed for a long time.

As I wrote in The Five Horsemen  ( May 31 2009, enrollment required $):

The beginning of the end for nearly every debt-ridden country has always been the attempt to pay for past expenditures with newly-minted money. It always starts innocently enough and seems like the right thing to do, but soon the programs grow and grow, and eventually the currency of the country is destroyed.

Now the Fed is openly and actively buying dodgy debt from the government as well as from the private sector. I covered on this in May (2009) in an "In Session" posting, where I charted the amount of US Treasury debt that was being purchased by the Federal Reserve on a daily basis. 

 

This chart reflects only the Treasury purchases. When we add in agency debt, mortgage-backed securities, and various other corporate debt programs, we find that the Federal Reserve is printing up roughly $15 to $30 billion dollars a day just to keep things limping along.

As for the opening quote by Mises, which I think most accurately reflects how things will turn out, I think it is safe to say this: Any country that is printing up to $30 billion a day just to keep things moving along is not voluntarily abandoning credit expansion.  

This means that we are risking a final catastrophe of the currency system involved. Unfortunately, the currency in question also happens to be the world's reserve currency, so this has enormous, far-reaching implications. 

Today I want to update that chart above and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity that is being expressed as "billions of dollars per day." No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.

 

What we might wonder here are three things:

1.                         1.     How would the stock markets have behaved without the massive daily additions of billions of dollars?

2.                         2.     When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?

3.                         3.      If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?

 

Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.

Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do.  One of those things, it seems, is to goose the stock market, especially late in the day. 

The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States'.  If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.

The only question here is "what does this mean to me?" We'll be exploring that in some detail later on…

[email to friends and family August 2009]

 

Hello everyone,

 

As most of you know, I've been actively following the current economic crisis for the past 2 years.  Since we're entering the time of year when we've historically seen high market volatility (Sept/Oct) - now is a good time to evaluate what is happening with regards to our economy - and what you can do now to protect yourself in the event things get interesting.  If you only listen to most of the mainstream media outlets (CNN, CNBC, Fox News, Wall St. Journal, etc.) - it would seem that things are turning around.  If you are someone who studies the data yourself and forms your own opinions - like myself - you see something else. 

 

I have written many articles over the past 2 years on what is happening with regards to the economy and why - but I felt that since we're again heading into September with deteriorating economic data/activity - now would be a good time to summarize the greatest threats to our economy and what you can do now to help protect your finances.

 

If you are like most people in our nation today - then you accept what you hear from many of our financial and political leaders and you hope things turn out ok.  What I've found is that many of the people we listen to everyday are manipulating economic information and 'spinning' things to sound more positive than reality. If my conclusion is correct, then we are heading toward a significant economic decline - something that you and I have never seen before.  It's important to understand what's happening - and more importantly - why it's happening.

 

I have attached an article that reviews the most significant current threats to our economy.  I hope you find it informative.

 

Take Care,

 

John

 

Today is August 25, 2009.  There seems to be many positive news articles this week regarding our economy.  Here’s a few I’ve seen over the past couple of days:

 

‘Bernanke, Trichet See End to Global Slump, Caution on Recovery’ – Bloomberg

 

‘We saved the world from disaster, Fed's Bernanke says’ - MarketWatch

 

‘Consumer confidence soars - Sentiment reading increased to 54.1 in August, well above economists' expectations.’ – CNN

 

‘Stocks show confidence - Bernanke appointment, signs of stability in housing market and rise in consumer sentiment report push market higher.’ - CNN

 

“Bernanke: 'We have been bold' - Fed chief defends central bank's response to the economic crisis as Obama says he will nominate him to another 4-year term” – CNN

 

‘Upbeat Data Buoy Stocks’ – Wall St. Journal

‘Bernanke Wins Vote of Confidence’ – Wall St. Journal

‘Housing Lifts Recovery Hopes - Stocks Soar on 7.2% Spurt in Home Resales; Bernanke Optimistic but Foreclosures Loom’ – Wall St. Journal

‘Central Bankers Breathing Easier’ – Wall St. Journal

 

‘Stocks, Oil Hit New 2009 Highs’ – Wall St. Journal

‘European Stocks Post Biggest Gain in Month’ – Wall St. Journal

 

‘Financials Help Stocks Climb’ – Wall St. Journal

 

As I’ve said before – underlying economic data is telling us that our economy continues to deteriorate.  I see nothing that would tell me that things are turning around or anything that would restore my confidence in the system.

 

There is nothing within real economic data (raw data – no ‘adjusting’ or ‘massaging’ or ‘modeling’) that tells me that investing in Stocks, Bonds, Derivatives – would be a good idea at this time (brokerage account, 401(k), etc.).  In fact, by investing in any of these types of investments – you are taking significant risks with your money.  When I say significant – I mean that you could lose everything.

 

Since September and October have historically been the most volatile time of the year for financial markets - in this post, we’re going to take a look at some significant risks to our economy that we’ve discussed previously that could cause our entire system to collapse. Regardless of what we’re told by mainstream media - our economy has now reached a point that any one of the items below - or combination of items – could cause our economy to begin a decline much more severe than what happened last year (September – December 2008).

 

The following is what I (and others who are paying attention) have been watching closely over the past year.  Since things are getting much worse below the surface of what we’re told by the mainstream media – the time for you to act is now.

 

1. Bank failures continue to accelerate – and the FDIC insurance fund is now effectively out of money.  There are various ways for the FDIC to replenish their funds – but these options either require more U.S. Treasury debt or more stress on banks (additional fees assessed to banks).  Based on current financial conditions – it will not be easy to execute either option. Regardless, there is no way for the FDIC to gain access to enough money to insure the bank failure tsunami that is coming.  This means that at some point in the near future – banks will fail – and depositors will not be able to withdraw their money. Contrary to what most people believe – banks only keep a fraction of their deposits (the downside of fractional reserve banking). Banks earn money by lending money at greater interest rates that they pay on deposits – there is no incentive for them to keep deposits.  Without the FDIC insurance fund – there will be no money for depositors.  This could possibly lead to a run on the banking system – followed by a bank holiday (banks are closed for a period of time by the government).

           

     From Saxo Bank Research (Author: Robin Bagger-Sjoback):

 

           “The current Reserve Ratio of 0.014% strongly indicates how bad this crisis has affected U.S. financial institutions.  However, this is not the entire story.  If we take a closer look at the non-current loans and charge-offs from banks, one realizes that the FDIC still has a lot of work to be done.  Combined non-current loans and charge-offs amounted to nearly $100 billion in Q1 2009 compared to $15 billion/quarter pre-crisis.  Moreover, according to analysts at the Royal Bank of Canada, the U.S. still has banking failures in the thousands to face before the crisis is over.”

 

         

 2.  U.S. Treasury debt sales are sky-rocketing due to out of control government spending and recent ‘stimulus’ and ‘bailout’ packages.  Two weeks ago the U.S. Treasury auctioned over $230 billion in bills/notes.  They are auctioning over $200 billion this week.  Just a year ago – weekly auctions were in the $10-$15 billion range. 

           

            From Karl Denninger (www.market-ticker.org):

            [Treasury Auctions this week]:

            “*U.S. TREASURY TO AUCTION $27 BLLION IN 52-WEEK BILLS
            *U.S. TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
            *U.S. TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
            *U.S. TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
            *U.S. TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
            *U.S. TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES

            “This is the price of supporting the grift and fraud in our banking system.

            I count $207 billion, coming two weeks after a $250 billion dollar week.

            Let's annualize - that would be about $5 trillion a year in annualized issuance. 

            My-oh-my how long can this continue?

            Who knows.  What I do know is that this is absolutely unsustainable, it is approaching 40% of GDP annually, and yet this is what is required to keep    all the balls and plates in the air as a direct consequence of our government's decision to sponsor and permit massive financial system fraud to continue.”

Keep in mind that current Treasury auctions do not include any additional FDIC funding for future bank failures.  If we add in the potential costs for ‘universal healthcare’ – the numbers get even more ridiculous.

 

3.  Foreigners are not purchasing our debt or investing huge sums of money in the U.S. any longer.  Based on our current account balance with the world – this is a very bad development.     

 

     

   

           

 

 

      If Foreigners are not purchasing our debt – who is?  This question leads us to item  #4.

 

4.  It appears that the Federal Reserve is now directly purchasing U.S. Debt (commonly referred to as ‘monetizing’ debt). The Fed is now printing money out of thin air and giving it to the U.S. Treasury in exchange for U.S. debt.  If you’re scratching your head and thinking that this is a very bad idea and could lead to some very bad things – you’d be right – which is why it is forbidden by the Federal Reserve Act of 1913. 

 

            We laugh at a country like Zimbabwe where hyperinflation has destroyed the     value of their currency (people of Zimbabwe now use gold as money - rings, necklaces, coins, nuggets, etc – whatever they can find) and we think – wow,    those guys don’t have a clue what they’re doing.  The problem is – if we took    the time to look into our own monetary (central banking) system – we would realize that we are using the exact same fiat currency monetary system as Zimbabwe.

 

            What started Zimbabwe’s final spiral into hyperinflation?  The President of Zimbabwe ordered their central bank to print trillions of Zimbabwe dollars to pay off their debts. What are we doing today? We are printing trillions of U.S. dollars to pay off our debts.

 

            What is one of the first things you learn in Management 101?  If you keep doing the same thing – don’t expect a different result.

 

      So – if we look at the value of the U.S. dollar – what do the trends tell us?  The trends tell us that the recent actions of the Federal Reserve could very easily cause the value of the dollar to decline significantly in the coming months/years.

 

 

    

 

Since the Fed’s activity (direct buying of U.S. Treasury debt) is not lawful, you’re not going to see the Fed do this out in the open and you’re not going to see this activity touted by mainstream media. Instead, they must create a grand illusion. Here’s a brief excerpt from a recent blog article by Chris Martenson that shows us their slight of hand.

 

     “In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday.

      This is at the upper end of their recent range of already exceptional purchasing activity.

      If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?

      This $14 billion plus buying activity by the Fed represents fresh money   created out of this air that was exchanged for the sovereign debt of the US.  However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called             "POMOs") we can consider these additions of money as good as permanent themselves.

     

 

     

 

     

          Looking at the maturity range we can see that these are all long-dated bonds with the one today specifically offering us a tantalizing clue as to how the shell game is being played.

            Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday).  Please note the specific CUSIP number circled.     Every bond in this auction carries this specific identifying number.

 

  

   

 

 

            And now let's look at the detail for this most recent POMO:

 

  

   

 

 

          Good grief!  Just last week, when the auction results were announced it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand" and all the rest.

            And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

            They didn't even wait a full week!  A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is    effectively hidden from a not-too-terribly inquisitive US press and public. 

            The speed of the shell game is accelerating.”

      Now you know why the Federal Reserve and many of our political leaders are opposed to an audit of the Federal Reserve.  They would prefer that we didn’t see behind the smoke and mirrors.

 

5.  What is the real reason our government is bailing out banks and corporations - and providing trillions of dollars in economic ‘stimulus’?  We’ve been told that our government needed to do these things or our entire financial system would collapse. Is this true? No. If you’ve read my previous articles on our monetary system – then you know that this system is going to collapse whether or not our government bails out anyone or not.

 

The truth that our leaders will not discuss and the mainstream media will not expose is that our economy is based on a monetary system that requires exponential debt growth (since our money is created by debt).  Our monetary system requires that we create enough new debt each year equal to the aggregate interest on all of our outstanding debt.  This number is now over $4 trillion dollars. The United States must now create over $4 trillion dollars of new debt each year – or the system will begin to fail - resulting in increased foreclosures and bankruptcies – leading to the collapse of the system. 

 

This is exactly what we’re seeing today.  We’re told that things are turning around by financial and political leaders – but if we ignore the rhetoric and study the data – what do we see?  We see increasing numbers of bankruptcies and foreclosures by individuals, businesses and corporations. We see individuals and corporations taking on very little new debt because of the amount of existing debt – which is dramatically reducing the growth of our money supply. Again, the math tells us that this had to happen at some point.  It’s happening now.

 

            So, when we see household/consumer debt graphs that look like this……

 

           

         

  

 

            ……we must see government debt graphs that look like this – or the entire system would have collapsed months ago.

 

 

 

            Since our money is created by debt and debt growth is now slowing considerably – we would expect to see the rate of growth of our money supply to also slow considerably – and that’s exactly what’s happening. 

 

            The blue line below shows our total money supply growth rate.

 

         

  

 

 If you don’t think debt is destroying the system – take a look at this chart by Chris Martenson. 

 

(This chart compares total debt (or “credit”) in the U.S. to GDP (or Gross Domestic Product) on a percentage basis. Current total credit-market debt stands at more than 340 percent of total GDP.)

           

 

 

 If you want to understand the basics of our monetary system – how it works, who created it, why we’re currently in a deep recession, why it is unsustainable and what it means for our future – here’s a link to my article:

 

        http://endtimediscussions.blogspot.com/2006/09/our-monetary-system.html     

 

All of the recent Federal Reserve and government actions are simply delaying the inevitable collapse of this system.  The debt of individuals, corporations and governments is now crushing the system.  As individuals, we don’t want to take on anymore debt because we’re tapped out. The same thing is now happening to corporations and governments around the world.  The problem is that exponential debt creation is required to prevent the system from collapsing.

 

6.  What is the next shoe to drop?  If you’ve read my earlier article on current stock market price to earnings ratios – then you know that P/E ratios are at all time highs.  With the recent stock market run-up and corporate earnings plunging 15-20% this year – this shouldn’t surprise anyone.  What is surprising is how high the P/E ratio is.  Take a look at the chart below.  The S&P 500 PE ratio is approaching 150.  Until recently, it’s never been above 60.  This would tell you that stocks are priced extremely high compared to earnings.  The question you need to ask is - will earnings increase dramatically in coming quarters or will prices decline dramatically?  History tells us that one or the other is going to happen – and happen soon.

 

   

        

 

            However, P/E ratios don’t tell the whole story. 

 

            There are many people who are saying that all of the recent Federal Reserve actions have pumped billions of dollars into the system – and much of this money has found its way into the stock market. 

 

The following is from Nathan’s Economic Edge (www.economicedge.blogspot.com):

 

‘Wondering where the fuel for the recent rocket shot is coming from? Well, as Point put it, “The New York Federal Reserve bought a record $5.6 billion in agency debt today. There's your fuel for the equity fire today.”’

      Fed buys record $5.6 billion in agency debt

      NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York bought $5.605 billion in housing-agency debt on Friday, the biggest   purchase since it began buying debt in the sector in December in the   hopes of capping mortgage rates. It bought about half of the $11.209       billion offered to it by bond dealers, which analysts noted was rather high. The large purchase is a big switch from recent operations, which have slowly gotten smaller. Analysts hypothesized the central bank may       have been trying to stretch out its purchases over a longer timeframe to             improve the effect. "The size of today's purchase will lead many to pay     greater attention to the next pass to see if the Fed is increasing the speed    at which it purchases Agencies," said Dan Greenhaus, chief economic       strategist at Miller Tabak. The Fed has bought $116.6 billion of the         originally-stated $200 billion in debt issued by home-finance agencies.

                       

            From Chris Martenson (www.chrismartenson.com):

 

‘Today [August 7, 2009], again, we receive news that the Fed is continuing to pour more and more POMO money into the banking system, this time with a 'mere' ~$2 billion addition.’

“August 7 - New York Fed purchases $1.937 billion in agency coupons”

 

‘As long-time readers here know, I have been tracking the Permanent Open Market Operations (or "POMO") activity of the Fed for a long time.’

 

 

 

 

‘Today I want to update that chart above [Fed Treasury Purchases] and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity (Treasury + Agency) that is being expressed as "billions of dollars per day." No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.’  

 

  

 

‘What we might wonder here are three things:

1.      How would the stock markets have behaved without the massive daily additions of billions of dollars?

2.      When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?

3.      If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?

 

Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.

Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do.  One of those things, it seems, is to goose the stock market, especially late in the day. 

The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States'.  If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.’ –Chris Martenson

 

I believe that this is certainly true – Fed buying activities are pumping up the market - but there also appears to be a certain level of market manipulation taking place.  I and others have noticed that there seems to be a lot of overnight futures buying in the stock market that is driving stocks higher. 

 

            From Nathan’s Economic Edge on 8/20:

 

            ‘As is this manipulated market’s custom, key areas are often jumped overnight and that occurred again last night in the midnight hours. The release of higher than expected jobless claims, however, sent prices back below that level and they are now very close to even’:

 

  

         

             …and on 8/21:

 

‘Equity futures rose “in the midnight hours” once again, rising non-stop from midnight eastern at 996 on the /ES to this morning at 1,013 – a leap over resistance’:

 

       

    

This is happening over and over again.  These are not people actually buying stocks – these are people placing massive bets that the stock market will rise.  With the stock market being extremely expensive at the moment, it seems like a very strange thing to do.  Regardless, with all of the money being pumped into the system – the system itself is being manipulated on a massive scale.  The question is – what happens when the music stops and the ‘stimulus’ ends?  Nothing good for you and me.

 

If we step back and take an objective look at what is really happening with our economy, we see the following:

 

1.      The banking system is under significant stress (81 banks have failed so far this year) and regulators expect hundreds more to fail in coming months/years.

2.      The FDIC insurance fund is at an all time low reserve ratio.

3.      The U.S. Treasury is auctioning massive amounts of debt – recent auctions are approximately $5 trillion annualized.

4.      Foreign investors and governments are no longer buying massive amounts of our debt.  This is required for us to continue to fund our current deficits.

5.      The Federal Reserve is stepping in and secretly buying billions of dollars of U.S. Treasury debt to make up for the lack of foreign purchases.

6.      Stocks are priced at historic highs compared to earnings.

7.      Unemployment continues to deteriorate with hundreds of thousands of jobs lost each month.  This continues to adversely affect housing sales/housing prices, etc.

 

There are a number of possible scenarios that could happen at any time that will result in the beginning of a collapse of our monetary/economic system.  The following are the greatest threats to the stability of the system:

 

1.      The #1 threat right now to our economy is a stock market collapse.  It’s at historic highs compared to earnings, underlying economic fundamentals are deteriorating, it is highly volatile, Americans have placed their faith in the fact that the market will always rise and it has been manipulated higher due to all of the Fed/Government actions.  While the stock market is a horrible indicator of the overall health of our economy – it does hold immense power over our state of mind.  If it falls significantly – vast amounts of wealth will vanish overnight – possibly leading to a panic and a complete loss of faith in the entire system.

2.      U.S. Treasury auctions begin failing.  If the Fed allows auctions to begin failing (bid to cover ratios consistently drop below 2), then the U.S. Treasury will be required to offer much higher interest rates to get the money it needs to fund our deficits.  If this happens, interest rates for us will sky-rocket.  This, in turn, will have a significant negative impact on the stock and bond markets.

3.      The banking system fails.  If bank failures accelerate to the point the FDIC cannot back deposits – expect a national bank holiday for a period of time without access to your funds while the government ‘decides’ what to do.  Again, all financial markets will be negatively impacted.

4.      Federal Reserve actions cause the value of the dollar to plunge.  If this happens – all kinds of bad things happen to us.  Prices for imported goods (most of what we buy) will sky-rocket.  Interest rates for us will sky-rocket.  The dollar will quickly be replaced as the world’s reserve currency (there is already a global movement to replace the dollar).  Other nations will require payment from us in other currencies – which will be very difficult for us to do.

 

All of these things will obviously cause a global crisis – not simply a crisis within the U.S.

 

Here’s what you need to do today:

 

1. Check on the financial stability of your bank.  How is the stock price?  Do they own large amounts of illiquid securities and assets? Have they purchased high risk derivatives?  Does their loan portfolio contain large real estate holdings that are not marked to market?  Are they on the FDIC list of problem banks?  Here’s the link: http://www.calculatedriskblog.com/2009/08/problem-bank-list-unofficial-aug-14.html.
2. Diversify your brokerage account, 401(k), retirement funds, etc.  For now – shift funds out of stocks and riskier investments.  If you can – move to a gold ETF fund or buy physical gold (coins) if you can.  At the least – move investments to cash. If you can, stay away from paper assets – stocks, bonds, derivatives, etc.  If the crisis does get worse – these types of holdings will rapidly decrease in value.
3. If possible, keep enough cash in your home (out of the bank) for a couple of month’s worth of expenses.
4. Stock your pantry more often.
5. Pay close attention to what is happening and check everything you’re told.  Do not blindly accept what our political and financial leaders tell you through mainstream media.  Think for yourself.

 

What we’re witnessing is a perfect financial storm that has enveloped our entire financial system.  It’s like we’ve passed into the eye of the hurricane, so things seem somewhat calm – and we’re forgetting that the other side awaits us. 

 

Once things begin to deteriorate – think about all of the positive mainstream media articles you’ve read and all of the positive speeches from our financial and political leaders you’ve listened to and ask yourself – were these people that clueless or was there another agenda at work here?

 

jg

I’ve spent a lot of time on this blog reviewing the different aspects of the Federal Reserve – how it was deceptively formed, how it is a private corporation with private shareholders, how it essentially reports to no one, how it is destroying our economy, etc. After doing some reading today, I realized that I haven’t really shown the details behind the Fed’s ownership.  This short article by Victor Thorn tells you what you need to know.

 

It’s probably a shocking revelation to most Americans that the Federal Reserve – the one entity in America that has absolute control over our economy (controlling interest rates and money supply volume) – is majority controlled by banking families of Europe.  It’s probably just as shocking for most Americans to learn that JPMorgan-Chase and Citibank control the New York Federal Reserve Bank.  Who controls JP Morgan and Citibank? The same people who own the Federal Reserve.  It’s an amazing game of smoke and mirrors.  On the surface – it seems that the Federal Reserve (by its very name) is government controlled and our largest banking institutions are owned by many different, independent shareholders.  The truth is that all of these banking institutions are majority controlled by the same families. 

 

All of the recent banking bailouts make a little more sense (trillions of dollars thrown away into a failing system) when you know the facts behind what is going on.  Who benefited from the banking bailouts?  The very large banking conglomerates (including Citibank and JPMorgan) were the beneficiaries – while smaller regional banks continue to fail every week.  Now we know why.  If you’re Citibank and you’re in trouble – why not have the Federal Reserve Bank of New York (which you control) – bail you out.  Of course, this truth never ends up in our newspaper headlines.

 

The fact that our central bank is controlled by private banks – and that ownership/control of the world’s central banking system ultimately resides in Europe – is what really got me looking into the details behind our monetary/economic system.  As with any investigation into a crime – a good detective will initially look for an answer to one overriding question – what is the motive behind the crime?

 

These are the questions that started me on the path to learning the truth:

 

1.  What is the motive behind this system?

 

2. Why would anyone create a monetary system that requires exponential debt creation/growth?

 

3. Why would anyone create a monetary system that is unsustainable – that will eventually collapse at some point in the future?

 

4.  What do the people behind this system stand to gain from the failure of the system?

 

If you want to understand what is happening to the world’s economy – you must be able to answer these questions.  If you spend the time to research the answers – like I have – you won’t like what you find.  I think that most people – if they were honest with themselves – know something is amiss.  The problem is that they don’t want to face the truth – so they never try to find the answers.  Unfortunately, in the very near future – ignorance is not going to be bliss.

 

There are many very intelligent people in the world today trying to explain what is happening to our economy.  They fail to arrive at the right conclusions because they only focus on what they’re told – and they ignore the glaring problems right in front of them.  They assume that they’re being told the truth by the Fed and our government – and they never search for ulterior motives.  As you’ve seen me say before – I don’t see much truth emanating from Washington D.C. these days – so many people are being led astray.

 

What is truly amazing to me about all of this - is that approximately 2,000 years ago the Apostle John wrote down a Divine Revelation. God inspired John to write the ‘Revelation of Jesus Christ’ on the island of Patmos.  In it – God gave us serious warnings about the end of this age.  Around 95 A.D. God gives us a description of a ‘beast’ (worldly entity/organization) that would deceptively gain control over the world’s governments and the world’s financial system. 

 

It’s almost as if John has transcended time and handed me the message personally.  It’s as though the Lord has handed me the Revelation and said “Interpret this message for My people – warn them about what is to come.”  Why do I say this?  Because for hundreds of years an evil, deceptive worldly organization has infiltrated the world’s governments and the world’s financial system.  The very same people who have infiltrated the world’s political system (including U.S. Presidents, Senators, Congressmen, British Prime Ministers, Heads of State around the world, etc. etc.) – also control the world’s central banking system.  This is not a coincidence.  Significant prophecies are being fulfilled right before our eyes – and we’re all staring at our blackberries, watching American Idol and playing fantasy football.  We have been lulled to sleep – as the beast gains control of the world.  I’ll say it again – we have vastly underestimated our spiritual enemy.

 

There have been countless interpretations of the prophecies of Revelation over the years (some popular and some not) – but there has been no way to confirm many of them until the last 15 years.  Now that there are many ways to research who is behind the New World Order and our central banking system (through many people researching independently) – it is becoming clear what is happening and who is behind it.

 

I have warned people for 4 years about the coming economic collapse – and I don’t think many people have taken the warnings seriously. Even after I have explained the reasons for a collapse from the world’s viewpoint (math doesn’t lie). Maybe after markets collapse and we have nothing – maybe then we will all wake up to reality.  We’re going to find out very soon.

 

 

Who Controls The Federal Reserve System?
By Victor Thorn

Now that we know the Federal Reserve is a privately owned, for-profit corporation, a natural question would be: who OWNS this company? Peter Kershaw provides the answer in "Economic Solutions" where he lists the ten primary shareholders in the Federal Reserve banking system.

 

1) The Rothschild Family - London 2) The Rothschild Family - Berlin 3) The Lazard Brothers - Paris 4) Israel Seiff - Italy 5) Kuhn-Loeb Company - Germany 6) The Warburgs - Amsterdam 7) The Warburgs - Hamburg 8) Lehman Brothers - New York 9) Goldman & Sachs - New York 10) The Rockefeller Family - New York

 

Now I don't know about you, but something is terribly wrong with this situation. Namely, don't we live in AMERICA? If so, why are seven of the top ten stockholders located in FOREIGN countries? That's 70%! To further convey how screwed-up this system is, Jim Marrs provides the following data in his phenomenal book, "Rule By Secrecy." He says that the Federal Reserve Bank of New York, which undeniably controls the other eleven Federal Reserve branches, is essentially controlled by two financial institutions:

 

1) Chase-Manhattan (controlled by the Rockefellers) - 6,389,445 shares - 32.3%
2) Citbank - 4,051,851 shares - 20.5%

 

Thus, these two entities control nearly 53% of the New York Federal Reserve Bank. Doesn't that boggle your mind? Now, considering how many trillions of dollars are involved here, and how the bankers are WAY above our "selected" officials in Washington, D.C., do you think the above-listed banks and families have an inordinate amount of say-so in how our country is being run? The answer is blindingly apparent.

 

Where does the money come from?

 

We all know that the Federal Reserve CORPORATION prints money - then loans it, at interest, to our government. But wait until you see what a total scam this process is. But before we get to the meat of this issue, let's remember one thing about the very essence of banking - primarily that money should have some type of standard upon which its value is based. In the case of America, we operate on what is called a "gold standard" (i.e. our money is backed by gold).

 

So, with that in mind, let's look at how money is actually created, and at what cost. If the Federal Reserve wants to print 1,000 one-hundred ($100) bills, their total cost for ink, paper, plates, labor, etc. would be approximately $23.00 (according to Davvy Kidd in "Why A Bankrupt America"). Now, if you do the math, the total cost of 10,000 bills would be $230.00 ($.023 x 10,000). But, and here's the catch - 10,000 $100 bills equals $1,000,000! So, the Federal Reserve can "create" a million dollars, then LEND it to the U.S. Government (with interest) for a total cost of $230.00! That's not a bad deal, huh!

 

The banking industry calls this process "seignorage." I call it outright THEFT. Why? Well, regardless of the immense profit margin ($1,000,000 for $230), plus the huge interest payments, our government then needs to STEAL the American people's money to payoff their debts via a Mob-like agency called the IRS. So the bankers steal from the government, then the government turns around and steals from the people. I'm no genius, but who do you think is getting screwed in this process? Us - the people at the bottom rung of the ladder.

 

What's worse is that - now catch your breath - there's NO MORE gold left in Fort Knox! It's all gone. In other words, the GOLD STANDARD that our financial system was based upon is now an illusion. We can't convert our money into gold --- only other currency. The entire underlying basis for our money is now a lie - a sham. The Federal Reserve has become so arrogant that they've become a literal MONEY MAKING MACHINE, creating currency out of thin air! So that's where the Fed gets their money - they literally make it, then lend it to us so they can make even MORE money off of it.

 

Money As A Religion

 

The above-detailed process has become so ridiculous that William Grieder, former assistant managing editor of the Washington Post, wrote a book in 1987 entitled, "Secrets of the Temple: How the Federal Reserve Runs the Country" that details how the Controllers have conditioned us to accept this absurd situation.

 

"To modern minds," he writes, "it seemed bizarre to think of the Federal Reserve as a religious institution. Yet the conspiracy theorists, in their own demented way, were on to something real and significant. The Fed did also function in the realm of religion. Its mysterious powers of money creation, inherited from priestly forebears, shielded a complex bundle of social and psychological meanings. With its own form of secret incantation, the Federal Reserve presided over awesome social ritual, transactions so powerful and frightening they seemed to lie beyond common understanding."

 

Mr. Grieder continues, "Above all, money was a function of faith. It required implicit and universal social consent that was indeed mysterious. To create money and use it, each one must believe, and everyone must believe. Only then did worthless pieces of paper take on value."

 

Do you get it? MONEY is an ILLUSION! Why? Because the gold standard upon which our money is supposed to be based has been eliminated. There's no more gold in Fort Knox. It's all GONE! Now, money really IS only paper!!! In the past, money was supposed to represent something of tangible value. Now it's simply paper!

 

Taken one step further, many of us don't even use paper money any more! Why? Well, here's a scenario. Many places of employment directly deposit their employee's paychecks into the bank. Once the money is there, when bill time comes around, the person in question can write out a stack of checks to pay them. Plus, when they need gasoline they use a credit card; and groceries a debit card. If this person goes out for dinner on Friday night, they can charge the tab on their diner's card. But what about the tip? They simply scribble in the amount at the bottom of the check. So far, the person hasn't spent a single dollar bill. Plus, if you bring electronic banking into the picture, we've virtually eliminated the use for money. And, God forbid, what happens when encoded microchips are implanted into the backs of our hand?

 

In essence, money has become nothing more than an illusion - an electronic figure or amount on a computer screen. That's it! As time goes on, we have an increasing tendency toward being sucked into this Wizard of Oz vortex of unreality. Think about it. Americans as a whole are carrying more personal debt than in any other time in history. Plus our government keeps going further and further into the hole, with no hope of ever crawling out. But we have less and less actual MONEY! We're being enslaved by the debt of electronic blips on a computer screen! And 70% of the banks that control this debt via the Federal Reserve exist in foreign countries! What in God's name is going on? As author William Bramley says, "The result of this whole system is MASSIVE debt at every level of society."

 

We're getting screwed in a sickening way, folks, and the people doing it are demented magician-priests that use the ILLUSION of money as their control device. And I hate to say it, but if we allow things to keep going as they are, the situation will only get worse. Our only hope ... ONLY HOPE ... is to immediately take drastic action and remedy this crime.

 

If you’ve been paying attention – you’ve probably noticed that most mainstream media outlets love to belittle gold investors.  I believe the main reason for this is that central banks would prefer that you remain confident in their fiat currency - which is intrinsically worthless.  When the world’s investors drive the price of gold up and then drive the price of fiat currency down (A good example over the past year would be gold vs. the U.S. Dollar) – then investors are telling the world’s central bankers that they are losing confidence in their money. 

Considering that our money is not backed by anything of value – it’s certainly a valid concern.  The value of our money is based solely on people’s acceptance of it as money.  No confidence in the dollar – and the dollar’s value will plummet.

I think it was Ron Paul who said it best.  If you buried a $100 dollar bill and a $100 gold coin for a hundred years – which one is going to retain its value?  Chances are – the $100 bill will be worthless and the gold coin will have increased in value. 

This has held true throughout human history.  Money that is based on gold/silver and is not debased has retained its value and purchasing power (see the Greek Empire).  Money that is debased (reduction in gold/silver content) will always decline in value (see the fall of the Roman Empire).  Greek coins continued to be used as currency throughout Asia long after the fall of the Greek Empire because they did not debase their currency (remained constant at 66 grams of gold per coin).  When the Caesars of Rome began to debase their currency (reducing the amount of gold/silver in each coin) in order to coin more money to finance their increased spending – inflation sky-rocketed and the value of their currency plummeted.

If you were a Roman businessperson - would you want to receive a coin with 66 grams of gold or 30 grams of gold (regardless of a government decree)?  People began to demand a higher number of coins (prices) to pay for the same products/services – so inflation increased significantly and the value of their currency plunged.  Sound familiar?

We hear that gold is a good inflation hedge – but it’s really a hedge against the world’s fiat currency system.  Gold has always been valuable (it’s rare) and is easily made into coins – so it’s a perfect form of money.  On the other hand – current fiat currency is based on nothing of value – it’s either made out of paper, coined from abundant metals (zinc, copper, etc.) or in electronic form (your checking account).  So – a fiat currency is only good – as long as people continue to have confidence in the system.  No confidence = no fiat currency. 

Here’s our problem – every nation throughout history with a monetary system based on a fiat currency that is not on a gold/silver standard - has always printed/coined its way to ruin.  Every one.  It may only take a few years (Zimbabwe) or it may take decades (us) – but the result has always been the same.  Debase your currency and you will eventually destroy your economy over time.

In 1971, President Nixon removed the gold standard from our currency. 

What happened?  Should we be concerned?  History tells us – yes.

From a government spending perspective – all restraints were removed.  You’ll notice on the following chart showing the growth of our Federal debt – that we turned the corner soon after 1971. 

Federal Debt

No need to worry about having enough gold to back your currency (and hold your spending in check) – print all you want.  Total money supply growth (M3) also turned the corner soon after 1971.

Same situation with the currency component of our money supply.

U.S. Currency Component

We would then expect inflation to ‘turn the corner’ around the same time – and that’s exactly what we see.

CPI

Most people believe that inflation is simply a rise in prices – but a rise in prices is a result of an increase in money supply and available credit.  Inflation is strictly a monetary phenomenon.  Increase the supply of fiat currency – and you are going to increase prices while devaluing your currency.

Definition of inflation from Webster’s Dictionary:

-a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

From Wikipedia:

When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

This is a very important point – inflation erodes the purchasing power of your money.  In a monetary system that requires exponential debt and money supply growth (that’s our system) - prices are always increasing and the purchasing power of your money is always eroding – not a good thing if you want a stable and sustainable economy. 

What are the real world effects of this?  As more and more money is added to the system - the general population will find it harder to get enough money to pay for the things it needs/wants (bills, consumer goods, etc). 

Let’s look at what has happened to the purchasing power of the U.S. dollar since 1971.

U.S. Purchasing Power vs Currency in Circulation

Here we see the definition of inflation put into practice.  As our currency in circulation has grown – the purchasing power of the dollar has declined significantly.  As of 2009, the purchasing power of the dollar has declined over 90% since 1971.  This is another deceptive slight of hand that the Federal Reserve will not discuss and does not want known.

The standard of living of Americans has steadily declined in recent decades due to our monetary system.  Don’t believe me?  We only need to look at the U.S. median income to see the devastating effects of inflation.

When it comes to income – we typically see charts like this:

US Median Income

(Source: Censusbureau.gov)

Based only on this chart – it would seem that everything is A-OK.  Prices are going up – but our income is also going up – so what’s the problem? 

It takes some additional digging to see what’s really happening to us. 

Let’s look at our income adjusted for inflation:

US Middle Class - Median Income_CPI Adjusted

(Source: Censusbureau.gov)

What does this show you?  It shows you that our real income (adjusting for inflation) has barely moved at all since 1973.  Now you know why so many households have dual incomes today.  We need to make more money to try and keep pace with prices.  Another ugly side effect of this is that we’ve taken on enormous debt over the past couple of decades to help make up for the income shortfall.  This is why we see household debt charts like this.

Household Credit Market Debt Outstanding

Total U.S. household credit market debt is now approximately $15 trillion dollars. When did we turn the corner on this exponential curve?  Again – around the same time that we removed the gold standard.

If you really want to see the truth regarding what is happening to our income – take a look at our income compared to gold.

US Middle Class - Median Income per Ounces of Gold

(Source: Censusbureau.gov)

In 1970 – our median income would have purchased 240 ounces of gold.  Remove the gold standard and introduce high inflation rates – and it’s easy to see the affect on our income during the 1970’s – leading to a significant drop in our income compared to gold (median income would have purchased 29 ounces of gold in 1980).  You’ll also notice that today’s trend is not good – the value of the dollar is declining and the value of gold is increasing – so the amount of gold we can purchase today with our median income – is declining. 

Also keep in mind that this system does not reward saving money.  A constant inflation rate caused by the system – destroys the value of your money over time.  Couple this with very low interest rates (dictated by the Federal Reserve) and you’ve got a system that in no way – rewards you for saving money.

We should expect the value of the U.S. dollar to continue declining due to our current fiscal condition (massive budget deficits, negative account balances, etc.) and we should expect to see the value of gold continue to rise over time as investors continue to hedge against a rapid decline of the world’s monetary system (fiat currencies). 

The bottom line is that the people behind the world’s monetary system know how this ends and they are very aware that a high degree of confidence is required in their fiat currencies to keep the system running.  Without confidence in the world’s fiat currencies – we all turn into Zimbabwe – looking for whatever we can find to use for money.  This is why there are many people today telling you to buy physical gold that you can store in your home.  This is also why we see so many mainstream media articles bashing gold investors (in order to pump up our fiat currency and slam gold).

Here’s the 1 year gold trend:

Gold - 1 Year

Silver is up even more (%) than gold since November:

Silver - 1 year

…and the one year dollar index:

Dollar index - 1 year

I will say that mainstream media does get it right sometimes.  Here’s a quote from yesterday’s Wall St. Journal.

"That gold has broken through $1,000 shows people are still very concerned about paper currencies," said Howard Ward, chief investment officer for growth equities at Gamco Investors. "Those commodities denominated in dollars will go up as the dollar keeps going down."

I would say that people will be very concerned about paper currencies until the world’s economy collapses.  Then it will be a brand new ball game.

I have attached a mainstream media article about gold investing (today’s paper) after Chris Martenson’s blog post.

Gold Bashing 101: A Mainstream Press Primer  

Friday, September 4, 2009, 11:07 pm, by cmartenson

It is pretty clear that gold has its detractors in the mainstream press, and this next article is so over the top as to be a hilarious object lesson in the art of gold bashing.

It all starts with the title itself and gets funnier quickly.

US gold ends down $1, fails to break above $1,000

First of all, gold ended UP on the day by $2.80, not down. Second of all, you'd never see a similarly worded headline for, say, a favored stock which had just finished the week up 35 bucks.  Can you imagine if Google went from $400 to $414 for the week reading the headline "Google fails to break above $415?"  I can't either.

Here's the rest:

Opening paragraph (all emphasis mine):

NEW YORK, Sept 4 (Reuters) - New York gold futures ended $1 lower on Friday as strong investment demand failed to push prices over the psychological mark of $1,000 an ounce, and traders said the metal could be vulnerable to near-term profit-taking following a sudden rally.

 

As I already mentioned, gold ended the day up, not down.  There's a difference.   And then we might note that gold is characterized as "vulnerable," and that it failed to push over a psychologically important level.  That's not news; that's barely even opinion.

 

Gold_Blog_post

* Concerns about equities market, as well as inflation worries after massive government spending to jolt the economy out of recession fueled a highly speculative gold rally - Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

Highly speculative? Compared to, say, the 220,000,000 shares of FNM, a company with deeply negative equity (i.e. bankrupt), that traded today?  You mean that kind of "high speculation," or is the purchase of gold worse somehow? 

* Gold prices will correct eventually after the fast-paced rally - Dunn.

I guess we should get out now, while the getting is still good!

* Gold futures initially extended losses after the U.S. nonfarm payrolls data in August showed the smallest decline in a year, but unemployment rate jumped to a 26-year high of 9.7 percent.

"Initially extended losses" is just a fantastic use of spin.  Unbeatable!  Right there in three simple words, we find out that gold had already been on a losing streak and that it extended those losses.  And the use of the word "initially" smoothly hides the fact that it quickly recovered those loses.  The casual reader is left with the impression that gold was under the gun and in retreat all day.  Who would want to buy a ruinous asset like that?

Gold_Blog_post_b

* Demand from jittery investors to diversify assets into gold amid shaky equities markets propelled gold's sudden rally this week - analysts.

Note that what finally propelled gold today was "jittery investors."  If you bought gold today, you are the jittery sort, prone to turning tail amid shaky markets and running for safety.  Clearly, when you hate gold as much as Reuters, there can be no room for the possibility that strong investors might be in the game.  Who wants to be in the jittery camp?  Not me!  This paragraph also featured one of my favorites - unnamed analysts.

All of this is to point out (again) that a good chunk of the mainstream press has an agenda when it comes to gold, but fortunately they are quite heavy-handed, and their clumsy efforts are easily spotted.

I merely raise this to point out that it is really best not to let one's impressions of markets be shaped by the mainstream media.   If the journalists were any good at finance, they wouldn't be writing for a living.

I often wonder about such articles…do they spring from a legitimate disgust with gold that developed previously for the writers, or are they merely attempting to shape opinion for some other set of reasons (perhaps the publisher's parent company has a relationship with a trading company that just happens to be short a few tons of gold and supplies some nice quotes)?  Who knows? 

SEPTEMBER 10, 2009

Golden Eggs: Danger in the Yellow-Metal Stocks

Wall St. Journal

 

By DONNA KARDOS YESALAVICH and GEOFFREY ROGOW

NEW YORK -- The recent surge in gold futures has been a boon for gold stocks, but all that is gold doesn't glitter, and a correction is likely near.

Tuesday, a number of gold stocks hit new 52-week highs as gold futures jumped above $1,000 an ounce. The excitement spread quickly, as the psychologically important $1,000 mark hadn't been hit since February. Gold fell slightly Wednesday, though it remained near that level.

However, now is not the time to jump on the gold bandwagon. A technical analysis of gold stocks, which are up some 12% this month alone, shows that although they are exhibiting positive momentum, they are likely due for a pullback.

"I probably wouldn't be a buyer at these levels," said Cleve Rueckert, a research analyst with Birinyi Associates. "It's gotten very overbought very quickly, and sometimes these things have a tendency to come back down just as fast."

Gold's ascent has two primary drivers. On one hand, those figuring the dollar is due for even more of a pullback are wise to place cash in gold. At the same time, gold benefits from global growth and consumption trends.

The climb this week has largely been because of concerns about the dollar, which helped gold stocks push the trend on their 50-day and 200-day averages higher. That is a sign of positive momentum, something that would make gold stocks attractive once again if they correct from their overbought levels.

Measuring gold miners, the Market Vectors Gold Miners ETF closed Wednesday at 44.12, and hit a 52-week high during Tuesday's session at 47.45. Mr. Rueckert expects the ETF to come back down to "at least 42," which he sees as a more reasonable place to enter.

The ETF wouldn't be considered oversold until it got down around 37, but Mr. Rueckert warned that pullbacks don't always go all the way to their oversold level. "If you wait for it to get oversold, you may miss an opportunity," he said.

One of the more prominent names in the gold sector is Newmont Mining. The stock closed Wednesday at $44.88, up 12% on the month.

"Newmont had been a laggard, but people look to it first when they want gold exposure in stocks. This is typical," said Howard Ward, chief investment officer for growth equities at Gamco Investors.

But Mr. Rueckert said Newmont doesn't exhibit the same kind of positive momentum that some other gold stocks and the Gold Miners ETF do, and has been volatile between $37.50 and $50.

It's not hard to predict the future when you know what's coming.  Let's take a look at a couple of Greenspan's quotes - and once again - compare them to reality.

"The crisis will happen again but it will be different," the former Fed chief told the BBC.

You've got to ask yourself - why is he making this statement?  What is the reason?  All we've heard from the Federal Reserve lately is how they've saved the world and that there are 'green shoots' everywhere - and lots of positive mainstream media articles.  What is the basis for his comments?  Why will it be different?  As the journalist below says - we need details.  Of course - there are none. 

The only thing we get is this ambiguous quote:

"the unquenchable capability of human beings when confronted with long periods of prosperity to presume that that will continue."

Greenspan is working from the same playbook as many of our politicians. What he's saying is that a financial disaster is coming - and he's not going to tell you why.

What is the truth?  The truth is that Greenspan knows a financial disaster is coming - because he knows the Federal Reserve (and the other central banks around the world) is causing it.  It's going to be different because the next 'crisis' will be the collapse of the world's economy. He's very aware of how this monetary system works and he knows it's going to fail.  Of course, at some point in the future he'll probably look like a genius to most of the world - when he should be locked up for the rest of his life for playing an important role in this disaster.

This is typical of our financial and political leaders - lies upon lies - vague statements upon vague statements.  Everyone is saying they're helping - while the system continues to collapse.

It seems that Bush, Bernanke, Paulson, Greenspan, Obama and many other of our leaders like to tell us lies - and then experience collective amnesia when their lies are exposed.

Let's look at a Greenspan quote from a previous article.

Lawmakers read back quotations from recent years in which Mr. Greenspan said there's "no evidence" home prices would collapse and "the worst may well be over".

So - Greenspan has gone from saying that the worst is over - to telling us that financial disaster is right around the corner.  Honestly, I don't know how these guys sleep at night.  Amazing.

jg - September 11, 2009

_________________________________

Greenspan predicts another crisis

Alan Greenspan had a little trouble predicting the current global financial crisis. But he's not going to whiff that ball again. No. He's putting the message out now: The world is headed for another financial meltdown.

"The crisis will happen again but it will be different," the former Fed chief told the BBC. The next time, he said, the financial implosion will happen in response to a long period of prosperity. That's because people always assume that the good times will continue to roll forever.

The source of financial crisis, he said, is "the unquenchable capability of human beings when confronted with long periods of prosperity to presume that that will continue."

Bing: Can we blame Alan Greenspan?

OK, what? That's like predicting that another hurricane will hit us, sometime, somewhere. We need details here. Any idea when this crisis is coming, or what's causing it, or how we can avoid it? Not really.

Greenspan also says the current downturn was set off by the sub-prime mortgage fiasco in the U.S. But really, anything could have triggered it, he added. And the world's banks should have seen it coming.

"The bankers knew that they were involved in an under-pricing of risk and that at some point a correction would be made," he said.

And is Greenspan turning any of the blame on himself? Ahem. He has admitted to being "partially wrong," but he still isn't saying sorry.

As usual – stock markets rise on Bernanke’s positive comments.

 

Remember these comments. I wonder what he’ll say when things begin to fall apart.  I’m willing to bet that the fault will not lie with the Federal Reserve.

 

I’m sure we’ll see ‘comprehensive reform’ – but it will be preceded by a comprehensive economic collapse.

 

We (Americans) are being setup for an historic fall.

 

SEPTEMBER 15, 2009, 11:44 A.M. ET

 

Bernanke Sees Recovery, Defends Fed Actions

By MAYA JACKSON RANDALL

Wall St. Journal

 

WASHINGTON -- U.S. Federal Reserve Chairman Ben Bernanke Tuesday said it's likely the recession has come to an end, but he reiterated that tight credit conditions and a soft labor market will prove to be a challenge.

Fed Chairman Ben Bernanke answers a question at a Brookings Institution forum.

From a technical point, the "recession is very likely over at this point," Mr. Bernanke said in a question-and-answer session at the Brookings Institution.

But he added that even if recovery is underway, it's still going to feel like a very weak economy because credit conditions remain tight and any decline in the unemployment rate will probably only happen gradually. He noted that one risk is that the economy will grow in the second half of 2009, but not enough to trigger a rapid recovery.

If there is only moderate economic growth, "employment will be slow to come down," he said. "It will come down, but it will take some time."

Meanwhile, Mr. Bernanke expressed confidence that policymakers will move forward on plans to overhaul the nation's finance rules.

"I remain pretty optimistic that a comprehensive reform will be coming," he said.

In response to a question about the securitization market, Mr. Bernanke said he expects the market "will come back." But he said he's seen "very encouraging" signs that the market is improving. Still, the market will be "simpler, smaller, less opaque" and subject to more oversight by regulators, all things that could constrain its growth for a period of time, said Mr. Bernanke.

The market probably "will not return to the size it was before," he said.

Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com