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Guest Post: Stealth Monetization in the U.S.A.
Submitted by Gonzalo Lira
Stealth Monetization in the U.S.A.
Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. This is because of the disparate natures of government, on the one hand, and the central bank, on the other.
Governments spend money. They spend money on social programs to keep the people docile and happy, wars to keep up the illusion of safety and security, and—almost as an afterthought—infrastructure. Ordinarily, they get the money for all of these things from taxes and other fees that the government collects.
On the other hand, central banks print money. Most of the world’s economies depend on fiat currency—currency that has value because someone says it has value. The person who says it has value is the central bank. They are the custodians of the currency—they take care that it retains its value.
Tons of people say that a fiat currency is unstable, and doomed to fail, and that we will all rue the day that we accepted that abomination into our lives!—and blah-blah-blah, rant-rant-rant.
But in most cases—all cases, actually, regardless of what the tin-foil hat brigade might rant—fiat currency works like a charm. The proof of this is the last 40 years: All of the world’s major currencies have been fiat since at least 1970. The dollar has been fiat since 1973, and by certain definitions, fiat since 1933, or even 1913—and it’s still around. That’s been because of the Federal Reserve (the U.S.’s name for its central bank).
Central bank independence is key for a successful fiat currency. If the government ever got its hands on the central bank’s printing presses, all hell would break loose. Rather than raise taxes and collect fees—which are politically unpopular—the government could (and would) direct the central bank to print all the money needed to carry out the government’s various programs.
This is monetization.
What would happen once monetization took place is pretty obvious: So much of the currency would be printed by the government that businesses and ordinary people would lose faith in the currency as a stable medium of exchange. Since fiat money depends on people’s faith in it, this would become a self-reinforcing situation: The currency would fall leading to people losing faith in it, leading to the currency falling even more.
This is the mid-stages of hyperinflation. Eventually, the currency would become worthless, wrecking the economy of the currency.
It’s happened more times than one would imagine. But the last time it happened in an advanced economy was Germany in 1922, the so-called Weimar episode. Since then—even during total war in WWII—there has not been an incident of hyperinflation in any advanced economy. (Though as I wrote in Was Stagflation in ‘79 Really Hyperinflation?, there have been bouts of high inflation that had all the traits of incipient hyperinflation.)
A collapse in the currency is why the government and the central bank are kept separate from one another—the fear of monetization, and what could happen, keeps the two apart.
However, now, in the good ol’ U.S. of A., monetization is taking place—and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. Like one of those stealth fighter jets that are visible to the naked eye of a goat herder, but invisible to the radar and infrared and other sophisticated equipment of the professional military? Same thing:
It’s what I call stealth monetization.
What happened in the Fall of 2008? Essentially, banks found themselves holding debts that would never be repaid—which meant the banks could never pay back the money that they in turn owed to depositors and other creditors.
The bad debts the banks owned—the so-called“toxic assets”—were bonds made from the real-estate and commercial real-estate mortgages, as well as other collateralized debt obligations. Since the properties underlying these bonds had fallen in price—because their prices had been a speculative bubble to begin with—the bonds made from these bundles of loans would never be fully paid off.
In other words, they were bad loans. Therefore, the banks which had made the loans—the banks which owned these toxic assets—would lose so much money that they would go bankrupt. If they did go broke, the U.S. and world economies would take a massive hit.
So in order to avert this fate, the Federal Reserve bought these toxic assets from the banks—but the Fed didn’t pay the market value for these toxic assets, which were pennies on the dollar: Instead, the Federal Reserve paid full nominal value for the toxic assets—100¢ on the dollar. The banks the Fed bought these toxic assets from became known as the Too Big To Fail banks—for obvious reasons.
How did the Fed buy these dodgy assets? Simple: In 2008 and ‘09, the Fed “expanded its balance sheet”. That’s fancy-speak for, “The Federal Reserve created about $1.5 trillion out of thin air.” That’s essentially what they did. The Fed just decided, “We’re going to create $1.5 trillion”—and lo and behold, $1.5 trillion came to be.
What did the Fed do with this $1.5 trillion it conjured out of thin air? Why, it used it to buy up all the toxic assets and other dodgy assets from the TBTF banks.
What did the TBTF banks do with all this cash? Why, they turned around and bought U.S. Treasury bonds.
U.S. Treasury bonds are called “assets” by sophisticated finance types—in fact, sophisticated finance types call all bonds “assets”. But they’re really just debt—including Treasuries. U.S. Treasury bonds are certificates of debt that the U.S. Federal government issues, in order to finance its shortfall, the deficit.
The U.S. Federal government has been running monster deficits for a number of years now—but lately, it’s gotten pretty bad. In 2009 as well as 2010, the Federal government shortfall was over $1.4 trillion. This is roughly 10% of total U.S. gross domestic product—both in 2009 and 2010: A staggering sum of money. And it is likely that for 2011, the deficit will be another $1.5 trillion or so.
The Federal government has so much outstanding debt that it is unlikely to ever be able to pay it back.
A lot of people think this. A lot of sensible people think that a day will come when the markets no longer believe in the Federal government’s promise to pay back its debt. A lot of sensible, smart people think that, one day, no one will buy any more Treasuries—
—yet every week, Treasury bonds get sold with numbing regularity. The U.S. Federal government has never put Treasuries up for auction which did not get bid on.
Who are the people who buy these Treasury bonds? The primary dealers—that is, the Too Big To Fail banks.
In other words, the TBTF banks are financing the Federal government’s massive deficits. How are they doing it? With money the Federal Reserve gave them for their toxic assets.
This is one leg of stealth monetization.
Buying up toxic assets following the 2008 Global Financial Crisis was not the only way that the Federal Reserve got money into the hands of the TBTF banks, and thereby the Federal government—the other thing the Fed did was open up “liquidity windows”.
Liquidity windows are simply the mechanism by which the Federal Reserve lends money to the banks. The interest rate the Fed assigns to this money it lends to banks is called the Fed funds rate.
Right now—and for the past several months—the Fed funds rate has been 0.25%. That’s right: One quarter of one per cent. The interest is substantially lower than the inflation rate. This means that the Fed has essentially been giving away free money to the banks.
What are the Too Big To Fail banks doing with this free money? Why, they are buying Treasury bonds: The TBTF banks are borrowing money from the Fed at absurdly low rates, and then turning around and lending it to the Federal government by way of Treasury bond purchases.
This is the other leg of stealth monetization.
In these two ways, the Federal Reserve has been monetizing the Federal government’s debt. The Fed bought up toxic assets from the TBTF banks, which then went and bought Treasuries. And the Fed is lending money for free to the TBTF banks, which are then buying Treasuries.
Take a step back, and you get the picture: The Too Big To Fail banks are the sewer system by which the Federal Reserve supplies money to the Federal government for all its deficit spending.
This is stealth monetization.
It’s not even particularly stealthy, actually—it’s happening right out in the open. It’s just that nobody is pointing it out—or perhaps because it is an obscure, complicated system, nobody has realized what it actually is.
But it’s monetization, pure and simple. The Fed is printing up all the money the Federal government wants and needs.
To put it more bluntly—and disturbingly—the pedophile is in the room with Dakota Fanning.
One of the pernicious effects of this stealth monetization is the dis-incentive it gives banks to lend money to small- and medium-sized businesses. Everyone—including the Fed—is complaining that the banks aren’t lending to businesses. But I don’t know why they’re complaining—it makes perfect sense.
See, the TBTF banks get money for free from the Fed, and then they turn around and lend it to the Federal government by way of buying Treasury bonds. Treasury bonds are paying absurdly low yields, because they’ve been bid up so high by all those freshly minted dollars that the Fed printed up. But to the TBTF banks, it doesn’t matter how low the Treasury yields are—it’s still guaranteed profits. Lending money to the Federal government is totally safe.
But a loan to a small- or medium-sized business? It’s a risk—and a risk for only a slightly higher profit. The business might miss a payment, or even go broke. Plus it’s a hassle, to lend to a busines—all that administrivia! The paperwork, the loan applications, the due dilligence—blah-blah-blah-blah!
“Screw it,” say the TBTF banks. “Let’s just buy Treasuries.”
That’s how the American government’s massive deficit is sucking up all the available funds. Why bother lending to the private sector, when the Federal government is paying good interest on the Treasury bonds, and the Fed is lending an endless supply of money for free?
This is why private-sector businesses are not getting any loans, no matter how long the Fed keeps interest rates at rock-bottom levels—the Federal government is hoovering up all that money, leaving the private sector with nothing, not even lint.
Ben Bernanke and the Lollipop Gang at the Fed do not seem to understand the disincentive they have created—in fact, they just keep on adding even more liquidity: Backstop Benny has announced that QE2 is on the way—that is, further “expansion of the balance sheet”, so as to create more money to give out to more banks—
—so they can buy more Treasuries from the Federal government.
Other banks which are not TBTF are getting squeezed—everyone acknowledges that the banking industry is really hurting. But the TBTF banks are racking up monster profits, with monster bonuses.
That’s because they’re monsters—or more precisely, they are zombies: The American Zombie banks.
Now this is all good and fine, but is there a simple way to verify that this stealth monetization is indeed what is going on?
Yes—look at the markets:
Over the past few months, we have seen two things occurring simultaneously: Treasury bond prices are rising (and therefore their yields are declining), and the dollar has been falling against all commodities and all other major currencies.
This is a contradiction. This cannot be happening simultaneously for any sustained length of time—unless there is some exterior factor making this contradictory situation happen.
It is a contradiction because, if over a sustained period of time the dollar is losing value against commodities and other major currencies, then it would not make sense for investors to be putting more money into Treasuries and bidding up their prices. Not when their yields are at such absurdly low levels.
Stealth monetization: That’s what’s bidding up Treasuries, even as the markets are losing faith in the dollar.
Poor Dakota Fanning: She’s in the pedophile’s sights—and she has no idea what’s about to happen.
But we do.
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Who the fuck wrote this, another lib arts major?
It's technically true -- you give me dollars, and I give you a promise to pay back, which we call a "bond".
With Treasury Bonds, of course, you have no claim to underlying assets (unlike corporate bonds).
All bonds merely represent a promise to repay.
Where debt is concerned your liability is my asset. So who the fuck are you ?
"my name is poo-poo. this my dog foo-foo. now it's time to screw you."
lol
Ok... thank you for explaining to me the A=L+SH Eq equation. You entirely missed my point.
Re-read the whole post and try and see where the author is coming from. His opinions sway back and forth and are about as concise as the FED.
Not sure I see any inconsistencies - where does he go back and forth?
The only part I thought was off was the fact that .25% interest rates, or the ZIRP, for the TBTFs have been with us since 2008, have they not? Not "several" months. And it is a fundamental plank in the Fed statements that this will continue "for an extended period."
This three card Monte inspired policy causes the accretion of "apparent" wealth to the TBTFs over that period of time and fills the gaping and disguised balance sheet holes the collapse of their asset values created in September, 2008. If you earn a 300 bps+ spread on massive piles of Treasuries over an extended period of time, you'd become really "wealthy" too. But it's all smoke and mirrors.
Where does all this money come from? Well, for starters, it comes from all of the savers in the US who do not achieve any meaningful yield on their savings accounts. In effeect, the interest Mom and Pop would have earned has been diverted to the TBTFs until further notice.
But take heart, the money stolen from you by reason of these policies is keeping a banker employed and his payments on the Mercedes and private schools current. AS that empathetic philanthropist Munger said, we should thank god every day Paulson and Geithner did what they did, because they had "no choice." I mean, any other solution would have meant the destruction of the western civilization as we know it, because if one guy at Goldman went under, well, that's a catastrophe - millions of middle class unemployed? Suck it up.
Ned, your comments are always good ones, and spare us the four letter words that too many feel necessary to shove in our faces.
I urge all to go rent the outstanding series by PBS "The American Experience, history of New York". It is an uncanny eye opener and provides a bit of history on how and why things are the mess they are now ( the series was done in the early 1990's but it applies now). The 'new' slogans that are tossed about by the Tea Party and some ultra conservative types, can find their roots in 1850 with the mega rich on 5th avenue loudly proclaiming " if YOU are poor , it is YOUR fault". "Entitlements!, you are entile to nothing". How the Irish immigrants were litterly slaves and considered to have no value as human beings. Words tossed around with total indifference to the fast mounting and astounding poverty just blocks away. There was a price to pay...temporarily. The rich merchants worked them with little and often no pay, they had no rights with the police, they lived like animals. The new righteous right now call them... Hispanics and Latinos, and the treatment has not changed...has it? The real problems are just as they were in 1850, the rich bankers and merchants create the poverty and grap the last dollar they can find, while they gather ignorant people behind their 'call to arms' that the enemy is those people. Those people are our problems, they take jobs we would not do. Right?
The unholly people have the money to create proaganda to turn us against each other, and they laugh at our ignorance.
These rich bankers and government tyrants have the interest rates this low to force savings into stocks and risk assets, and all at Zero Hedge know how that money will disappear like magic.
I hear from every direction...cut the gov. funding. Great, there goes your police, teachers, firemen, and most of the civil servants, and the military. I don't want to see that, but THEY can certainly take a cut like the rest of us.
I hear from every direction...create jobs is OUR agenda if we get to DC...HOW? HOW? HOW? Not one word on what, how, where, when. NONE of them has ONE clue, one idea on what to do...NOT ONE! Who is kidding who? WAKE up everyone, it is all BS radical screaming.
The mega rich have taken the prosperty overseas, and left us with empty promisses that all of us know full well is BS. They will keep us fighting among ourselves or hanging onto wishfull thinking, while they pack the last steamer trunk and head to Shanghi or Singapore...right JIM ? Don't the66 rich follow the rich to the next port of call?
I agree with some of what you said, but not the "no cursing" part...Fuck THAT...
and certainly not the illegal mexicans section.
The mexi's sneaking in here by the MILLIONS live like Kubla Khan compared to 19th century Irish legal immigrants. The Irish came from a failed state caused by mother nature and the english empire.
The mexicans are fleeing a failed state caused by... other mexicans.
They shouldn't be here. They undercut american wages same as offshoring and Hi-B's.
We need giant catapults in the border states to shoot them and the quisling amerikan "employers" who hire them back across.
the end
Ned,
We have a stepson in-law that, approaching 50, that is a lead technical officer at a chain bank (Not on the list of TBTF). The family lives in a roomy three level house backing on a golf course with marble floors, bath and trim. The kids are in private schools. Last year, they they a "deal" on a vacation house on the Gulf coast Florida panhandle) and this year a "deal" on a relatively new mini motor home. (Repos no doubt).
It is true that the guy works all the time but he expects to be able to retire between 55 and 60.
Ima gonna kick your asset.
The system is so surreal the mind rejects the simple truth of it.
its really simple... just go down any street in NYC and watch the 3 card monte guys running their game. Where do you think Bernanke and Geithner came up with their plan? I'd add that there is another outcome from this monetization.. the TBTF's and several hedge and quant funds are diverting some of that fresh new money into spinning stocks higher via the HFT algos. That money doesn't go directly into the government coffers, but it helps banks make huge profits which repair a small piece of their destroyed balance sheets, pay themselves monstrous bonuses (call it their vig for being the pimp for the FED and Treasury) and a rallying stock market makes everyone mistakenly believe that the economy is recovering just as strongly.. which is supposed to, but is not, getting people optimistic and spending.
Everyone knows the "game"
The only thing that has kept going is the unprecedented co-operation among the countries of the world , thankfully.
I am not sure though how long US can still lead the pack with big muscle china in its way ahead
Enjoy people!These are the good times!
My avatar is coming true! But the picture in the article suggests US$ could be used more pratically as tiolet paper and this is simply not the case. The current US$ is far too scratchy. What benny needs to do with his next round of $ printing is soften them up a bit, a 2 ply tissue paper would be far more comfortable, with a nice fragrance as well just top it off!
Gonzalo journalism
Not bad.
I have to agree with you ZeroPower. First the author praises the CB through the back door, giving them credence by acknowledging their "independent status" from congress. So fucking what! Independence from congress equivilates to congress isn't responsible for any decisions that the Fed makes over money; its rate of creation, destruction, and price.
Pilot washed his hands at the trial of Jesus, effectively absolving himself of the fate of Jesus. Today, congress washes its hands in the trial of money, using the "independence of the Fed" ploy to absolve them of their responsibility to the Constitution. It dosen't wash. The Fed "OWNS"congress, holding its little black book against them, ...... bought and paid for whores.
(My apologies to all honest street walkers. At least you haven't sold out to treason.)
This author then rails against debt as if it appeared out of nowhere, all by itself. This guy is all over the place. You either support the creation of money via ledger book entry or you support the monetary system that creates money through endeavor.
This crap that the Fed created boundless wealth through debt issuance over the last 40 years, is utter bullshit. They have created debt. Period.
Word.
I didnt take the time to explain it as well as you did, but that is exactly my point. Hence my statement that this guy formed his opinion on the whole system probably reading USA Today and whatever he was taught in poli sci class at his liberal community college.
You can't pretend to have such strong opinions and then sway back and forth like a fucking swing.
Well, I hear you, but I think he was simply saying for the past decades, fiat has worked. But now, its underlying problems are surfacing. I didn't read him as defending central banks - have you read his other posts?
Where has fiat worked? Where in the history of money, ever, has it worked. It's an illusion and a delusion. Its usefulness has been in make work programs (the illusion because that is all that has happened) blaringly announced by politicians so as to promote the appearance of the benevolent benefactor.
Wealth hasn't been created just because there are pretty cars on the road, new homes and shiny new buildings with XYZ Bank emblazoned on them. Not if its predicated on debt.
ALL MONEY under fiat is brought into existence through loans or debt creation. The reality of fiat has been and is once again being exposed for what it is. Hollow shelled debt!
People have been ringing a bell of warning since 1913, when the Fed was created.
The price of their funny money is mirrored in today's gold price. It is a delayed reaction to the malevolent behavior of men with hidden agendas. Their theft is blatant, yet some still forgive them. It's akin to the battered wife syndrome. He hit me but I still love him and I don't want to pursue charges.
They have really worked you over.
I see it as reaching out to a broader audience.
NETFLIX CEO: 'Self absorbed' Americans
won't notice Canadian price discount...
yea,
and self absorbed americans won't notice
monetization either
I couldn't disagree more.
Central banks are an evil thing, and fiat currency is their tool. It's amazing to see someone on Zerohedge praising central banking and fiat currency just as the whole system is coming apart. it's sort of like seeing the BusinessWeek magazine cover praising housing in 2005.
I didn't read it that way -- IMHO, the article's assertion was that previously the central bank was designed to be separate of government spending (e.g., the Fed can print but the Treasury must issue bonds), but that the system is now breaking down and we're merely doing "raw monetization".
I agree with you -- Central banks are evil, and debasing is what they (and governments) do (it's a hidden tax). I don't think the article contradicts that, though.
ZH has discussed monetization of U.S. debt since it started in the Fall of 08. Nothing new here. Bernanke prints worthless paper and funds Blankfein, Blankfein funds Timmy, Timmy gives Blankfein offsetting worthless paper and Blankfein collects the vig. The vig becomes bonuses.
If this was a game that could last, it would have been done before. Unfortunately these guys are gambling with the full faith and credit of the USA. And that my friend means you and your family.
"I didn't read it that way...."
Then read it again.
LOL Lira
Our ancestors fought a revolution to NOT have a king. The Federal Reserve can only expect "independence" when they give up their dependence on the state enforcing that their money alone can be used. I'm waiting for a state to set up a new gold based currency and watch the fireworks fly!
http://en.wikipedia.org/wiki/Liberty_Dollar
They tried to set up a gold currency in a rump Sharia-law corner of Malaysia last month. It flopped. There was a run on coins that was simply unreal (their error was to keep taking the worthless, and unconvertible, paper to buy the coins)....
"Bad money always drives out good"...everyone learns that in econ 101...or, they used to teach that.
A paper currency convertible upon request to gold can only work if the people believe there is enough gold in the banks to cover the paper. Otherwise the paper will be turned in for gold and the gold hoarded.
Works with anything. Just announce you're trading original Mickey Mantle baseball cards for pieces of dryer lint, and you'll get the same effect.
why hasn't ZH or jim turk or ... covered this little gem of information (the failure, that is - they did cover the original announcement...) .
i was under the impression they were the start of an avalanche.
not enough snow yet, i guess.
any references?
100% reserve would work - can't have a run on that, by definition.
interesting thought here. whose face is on the $1000 bill? Now ask yourself "why that guy"? The only democrat elected after Reconstruction up until Wilson who had "the big one" trying to "win the peace" after WWI. I agree--the Fed is very much acting like a King.
Animal spirits, Teen spirits....
i like a little teen spirit. tell me where...
The Fed is trying to monetize, but unfortunately failing to do so. The notional money they are creating and handing out for free to the TBTF banks is mainly going into keeping the stock market artificially inflated and as you mention, buying USTs. There is no real "cash" being printed here, and certainly none making it out into the Main Street economy.
Eventually, the Stock Market will crash, as will the value of USTs, so all the money recently "created" will just as quickly disappear off the face of the Earth, in the Greatest Bonfire of Paper Wealth in All of Recorded History.
You don't get your hyperinflation until you get the Free Money into the hands of the people. As long as the people are starved for Cash (which they are with increasing unemployment), there is no money inthe Main Street economy to drive a hyperinflationary event.
RE
You could not be more wrong. There is real money in play, and it makes its way into the economy via gov. spending - think ARRA, entitlements, etc. Fed creates cash, TBTF gets cash and buys T's, Gov spends said cash on BS programs in the real economy. Further, the trillions already in existence can create hyper-inflation, when/if the T market blows the markets will be flooded with dollars, couple this with a rush into commodities - boom, HI. If I am wrong, riddle me this - what does the gov do with the money it recieves for T's? Answer = spend it.
the art of simplicity is always hard to argue with. all i would ask is are you sure they're all "BS" programs?
well it did get the opium trade roaring back in afghanistan....
If the government is running "it" - whatever "it" may be, rest assured it is BS!
The amount of money Da Goobermint is handing out now in terms of entitlements, military spending et al isn't a whole lot different than it was in 2007. It didn't drive a hyperinflationary event then, it won't now either. Most of the ballooning Fed balance sheet and $Trillions in Funny Money is NOT going into entitlements, its going to shore up the Swiss Cheese balance sheets of the TBTF banks. They in turn invest said funny money in the Stock Market and USTs and look solvent, at least to Mr. Magoo. When both the Stock Market and Treasuries crash, said funny money disappears into the ether and is NOT available for driving hyperinflation.
RE
Hyperinflation doesn't necessarily need a huge increase in the money supply. It can also happen when a previous use of a currency suddenly collapses (sudden bond crash with a flight into commodities, reserve currency replacement with the SDR?, Saudia Arabia starts accepting other currencies for oil and the world dumps it's oil buying dollars, et cetra.). What really defines a hyperinflation though, is when the velocity of money starts climbing toward infinity as more and more people panic and try to foist it off on real goods/assets sellers who need more and more of it to care. Ironically this means that there is an actual shortage of money in a hyperinflation, as the falling value means that there's never enough units of the currency to cover what's needed to keep the economy functioning.
Long story short...All it takes is a hard enough shock to the faith in a fiat currrncy's value to cause a panic out of it (hyperinflation).
It also rolls over old debt, so the "net" is the new money.
Wrong on two accounts:
As to the rest of this article, wow GL, you have really exposed yourself this time. You should have stopped when you were still ahead after essay #2.
First of all, the Weimar hyper-inflation event occurred while the Reichsbank was still private, just like the Fed is today. Secondly, the Reichsbank was actively lending money to shorts who were driving the price of marks down. Ready the full story here:
http://www.monetary.org/
Thirdly, there is a fundamental, core element regarding the theory of money that is separated by two primary schools of though. Is money:
Let us first dispense with point #2: Gold (or any other commodity, PM or otherwise, that holds intrinsic value) as money - is subject to its own supply/demand valuation vis-a-vis a market basket of goods/services being bought/sold.
Ok, now for point #1 - point number one of course is fiat. Now, if we are to have fiat, should the people, via their collective association aka government control its creation and license/regulate private credit, or should it be outsourced to a private party?
Many who believe in #1 (I for the record stand for #2) make a reasonable case that it should be treated as a 4th branch of government. Using this logic, it is way, way too important to be outsourced, for all the obvious reasons that we see manifesting themselves today.
If you're going to advocate or defend fiat in any way, it's hard to defend our current circumstances of fraud, corruption and national decay as in any way preferable to government controlling issuance in the first place, with all the attendant problems that would bring.
From a free market/libertarian point of view, it is best to avoid discussion of fiat altogether and focus on money floating subject to its own demand/valuation as the only true mechanism for promoting liberty and freedom from government interference.
#1-Monetization is the process of converting or establishing something intolegal tender. They must instead pay with currency already in circulation, or else finance deficits by issuing new bonds, and selling them to the public or to their central bank so as to acquire the necessary money. For the bonds to end up in the central bank it must conduct anopen market purchase. This action increases the monetary base through the money creation process. This process of financing government spending is called monetizing the debt.
#2 Since the mbs are market to 90% plus...& hidden from view, this is not that big of issue, accounting, basel II sidestep, uncle sam is spending for us & all is it takes is a big old tax cut to inject life into joe six pack, but at this time helping joe with a big old tax cut is off the table, until they want to induce a bit of inflation.
#3 Credit contracting like crazy, banks have no interest in extending credit to joe six-pack, borrowing dropped at an annual rate of $3.6 billion in July, the Federal Reserve reported Wednesday. That marked the 17th drop in credit in the past 18 months. If joe six-pack could kick the can he would, he has no interest in drinking his med's...
#4 Uncle Ben Sholom knows very well that the buyers for mortgage backed secuities are long gone, and joe six pack is underwater, he would love to refi but he would have to come up with another 20,000 & going back to (#3) Would he not go to the well one more time if he could? The credit window has been shut.
i miss your old picture but this one did cause me read your entire piece which was quite good. you tell me which is better.
spalding,
"#3 Credit contracting like crazy, banks have no interest in extending credit to joe six-pack, borrowing dropped at an annual rate of $3.6 billion in July, the Federal Reserve reported Wednesday. That marked the 17th drop in credit in the past 18 months. If joe six-pack could kick the can he would, he has no interest in drinking his med's..."
I am surprised some have not figured this out, as it's talked about daily.
No one want's to borrow money, only people who are running up CC's to max, and walking are using credit.
The BIG users of credit, are not playing this game.They cannot see their way clear to MOVE ahead with their futures,and their businesses.
Their are no clear rules, and the ones they can see they do not like.
Headline today, "OBamaCare Worse than Expected".
The devils in the details.............no one is going hire, expand, or try and grow a business in a climate of uncertainty.
The lone exception is Exporters. Small/Med businesses are the prime engines of growth for this country, always have been, always will be.
Until there is some semblance of STABILITY, they are simply not going to risk their fortunes, and livlihoods on a whim.
Bank it.
Couple of points:
1. Also think about the notion that Lira talks about that the money system "must" be controlled by an "independent" central bank. Let's get serious - it's not "independent" - this is a cover story for permitting control by elites. In effect - people, you're too stupid to be trusted with "our" money. I submit the same problem - currency debasement - that is the "excuse" for "independence," will occur, and they know it. It's just that when it occurs, the timing and manner is controlled to serve the elites. Follow the money.
2. Another point I have been pondering is that while we point to the bad debt, we forget the enormous pile of derivatives that are failed that were built on top of that failed debt (Originally designed, like CDOs, to multiply profits from the same transactions). The actual losses are much, much bigger than we know.
this is pure speculation. should the Fed wish it they can simply hide monetization by following their only mandate which is to shut their pie hole whatever they do.
This quote from the article is not speculation but bull shit... "Ben Bernanke and the Lollipop Gang at the Fed do not seem to understand the disincentive they have created—in fact, they just keep on adding even more liquidity: Backstop Benny has announced that QE2 is on the way—that is, further “expansion of the balance sheet”, so as to create more money to give out to more banks—"
Ben and the lollipop gang understand exactly what they are doing regarding the TBTF banks. Anyone that believes otherwise is delusional.
Of course, some of Ben's options that are untried are not fully understood...or, the outcome of them is not fully understood. That is why I say we are in a petri dish and are living through a lab experiment...and we don't know what the outcome will be precisely...my hunch is that it is going to end very badly.
The slow movement of fiat into PMs tells the tale. People are uncertain and feel fear.
well said...long live "united states notes"
Judas Priest- i have been reading this site for a long time and I vote you - 'The best cookie in the Jar" - B9 K9 love dogs and is ahead of the Pack for it. One very smart Cookie indeed.
A lot of electronic money has been created, but no where near enough real money has been put into the economy to make a difference.
If you blow trillions of dollar bills through an unbreakable transparent tube so everyone can see them does that help out the economy any? That's basically what's happening with the POMO/market pump that the Fed and Treasury have been doing.
Apparently he hasn't been reading all the other articles on this site about the very same thing...sad...only a poster but not a reader...
This article was written for the layman.
You're right, readers of ZH know this from donkey's ears. But the average person does not—and doesn't even understand the mechanisms that are in place to make this happen. So that's why I wrote it.
GL
GL, as a regular ZH reader, your post is a great summary/articulation of what Tyler and folks have been describing for the last few years in real-time.
i can actually send this link to a few folks who can digest your summary and perhaps we can now argue about it at lunchtime...
thanks for your efforts. it's all a blur, and this sort of effort starts to create a common frame-of-reference.
cheers
well, GL, I've read all your posts here, and for the most part have liked them.
but, if you are indeed writing this for readers here to forward to their friends, you might want to re-consider using sexual abuse of a specific, named young girl, giving your audience a visual, as bookends to your commentary.
cheapens any point you think you're making, and I wouldn't pass it on.
heh
i hadn't really considered that as a side-effect.
i guess i'm getting jaded to the bantor in here :^)
tnx for the reminder...
Gonzalo Lira going the Mish route...
So 40 years is prove of something? There have been hundreds of paper currencies all over human history, starting in China in the middle ages. All of them failed. All of them.
So saying that this 40 years experiment that is already weakening is prove of something makes no sense.
Central bank independence is an utopia.
no. Utopia is BEING the central banker. Just ask JP Morgan. Man did Teddy want to kill him more times. He used to just walk in the White House like he owned the place. Some said "he did."
Yah, with my acute eye for detail and strick focus on the serious issues, I was going to say: Dakota Fanning is nowhere near pedophile material. She's ripe marryin' age for most of the world.
i was gonna add a line from my days working construction but it's been said a million times.
the good part when America falls... third worlders will return to using tea leaves to wipe their ass'.
More trash economics from Lira.
Volker doesnt seem to be concerned about deflation...are you
Am I missing something here? This is very old news, and unless the money leaves the circle jerk of big banks/government it monetizes nothing except a few bonuses for the banksters. There is no retail participation in the market, because no one is fooled by this happy horse shit. Painting fraudulent numbers on the tape is not allowing them to move new IPOs, so what's the point?
The surprise, if any, is how little they have accomplished with a big pile of our money.
This information has been posted on ZH dozens of times, albeit without the unseemly references to Dakota Fanning.
better than a sheisakopf are you? we have no idea what the Fed has accomplished. what we do know is the Congress hasn't done a damn thing with a big pile of REAL money.
You speak only for yourself.
Hi Kaiser,
It took me a bit to realize that the rest of the world holds an incredible amount of our treasuries and dollars, and that our bar tab with them is starting to look large, ugly, and "deadbeatish".
Not to mention that we've just wrote our banks a check to cover their losses in a crash that also hit our foreign investors in RE. So the message is that they have to play against the house, which won't ever be allowed to lose.
The USD has not value because somebody says it does. It has value because it buys stuff. Mainly commodities.
And people use the dollar to buy commodities because the USA has the biggest army. So ultimately the dollar only has value because the USA government is able to use thread of violence or violence directly to impose it.
The day the USA army is not able to mantain this is good bye for the dollar.
I've said it a few times and here it goes again: There is no commodity more valuable than a soldier's boot up one's ass.
The US dollar can buy commodities because most people think it has value. When people stop thinking/believing it has value, it will not be able to buy commodities.
How is this stealth monetization if we can all see it coming? ZH readers have been onto them from the start.
Actually, Treasury securities are assets and liabilities. In accounting parlance, they're a wash.
For example, when the Treasury borrows from the Social Security Trust Fund, it is an asset to the SSTF and a liability to the Treasury.
What's great about this asset-liability is that the Treasury gets to spend the asset part, immediately, on general government expenses.
The liability part has principle and interest.
Well, the interest is paid, not in cash, but by issuing additional debt.
And, the principal - well, it is rolled over and will not get paid back until the trust fund outgo exceeds its income, including interest.
The interest gets paid back when the SSTF fund outgo exceeds the income, not including interest.
Don Levit
so when the Treasury Department stiffs us does Social Security get to attack? That would be one hell of smack down--Secret Service vs. Grandma Moses. And if Grandma wins does that leave the President unprotected?
I don't see the logic in saying it's better to have a completely privately owned corporation issuing the currency and magically giving itself what everybody else has to exchange for effort, instead of the government. How the hell is that fair? Was this from the same guy who said Pinochet was good? Dictatorships are cool if you're the dictator or his friends, otherwise, not so much. Welcome to the soccer stadium folks, just line up over there...
At least you vote for the government. Right now the audit of the Fed aint happening because it's privately owned. If the problem is that government is crooked, then it's representing too large an electorate. The country is TBTF! The excesses are now because of that whole "reserve currency status" the don's brought in in the 70s.
Er, the reserve currency status of the almighty $ was confirmed at the Bretton Woods Conference right after WWiI, the reason being that every other economy in the developed world was not only broke but literally destroyed, i.e., all of their infrastructure, and most of their adult males (the Swiss, of course, excepted, but writing about the Swiss during the war would run to many volumes). Despite our losses in manpower in WWII, they were negligible in comparison, and our manufacturing base was never touched (the politicians took care of that later).
What happened in the 70's? Richard Nixon (I feel an upchuck coming) and Charles de Gaulle (double upchuck coming). The almighty $ was still convertible to gold for non-US actors (FDR took care of US citizens really well). De Gaulle pushed on the string a bit too far. The French economy was riding high, and the US was buying its goods. The old General, who was no fool, wanted to convert his gains into real money. Nixon, advised by VOLCKER, no less, declared the almighty $ non-convertible to gold, period. New FRNs were printed, which no longer carried any kind of convertibility motif (they were silver certificates in 1971, if I recall correctly; FDR banished the gold certificates for good).
Check out the average costs in 1971 vs. those of today, e.g.: one year at a highfalutin' college in the Northeast (I went to one) was around $4,000, for room, board, and tuition. By the time I graduated in 1975, it had risen to $5,500. You do the damned math, I'm too tired. Yes, we had the Arab oil crisis as well. But ask yourself this: had Nixon not acted thus, would we even have had the Arab oil crisis then? They understood full well what was going on, by 1973. The Arabs have long based much of their holdings in gold.
Peak oil would have eventually caught up with this, of course, but the ultimate damage done in 1971 was performed at home, by one elected creep (not to be confused with the Committee to Re-Elect the President), and one unelected one. Volcker somewhat redeemed himself in the early 80's, but that's another story. Nighty-night.
(sorry, I just accidentally junked you when I meant to press reply).
When it was convertible to gold then in reality, gold was the reserve currency. The going off the gold standard with the so called reserve currency was the problem. Without the convertibility, it became a toy for the Federal Reserve to play with. (Thanks though for the more precise post).
we have had a gold standard. and a single guy as your central banker. he built a great library and the President who gave him his gold standard is on the $1000 bill. That President had an aunt from Holland Patent, NY a town near and dear to my heart. perhaps the public school next to her house was built in her honor, memories being what they are.
Be careful of your phrases. In 1971--indeed, throughout the postwar period, currency (and which one?) was rarely "convertible to gold in reality." The war vanquished the primary potential gold redeemers, Germany and Japan, who were the ex-US remaining manufacturing engines prior to the war. Britain was, even before the war, far too occupied with attempting to maintain, and then abruptly (in the mid-50s) exit, her colonies. Both of these activities, along with her war debt, eventually bankrupted her.
France's gold had been expropriated by the Nazis, and to my knowledge has never been repatriated--and I am choosing my words very carefully here. France had just exited both the experiences of Dien Bien Phu (where she cleverly stuck Vietnam onto us), and the Algerian War, as well as several attempts at coups and de Gaulle's life. By 1971, as part of the postwar economic miracle, France had finally begun to share in excess Eurodollar wealth, and de Gaulle was not a fool. So he tried to put Nixon's FRNs to him
double comment
So, what's your point? The government/Fed will eventually not be able to exchange paper with fancy emblems on it with green pieces of paper with dead presidents? Of course it can. There's an endless supply of both kinds of paper. And as has been shown, an endless supply of suckas too.
debt vs currency--currency vs debt. whheeeeeeeee.
The Fed knows what it is doing. Stealth monetization helps corporate America, which is able to outsource its labor. The corporate business model is also nimble, recall once a few years ago Alcoa made money by closing an aluminum smelter and selling the electricity back to the utility company. Corporate America is in direct competition with Small Businesses. Every time a mom and pop store closes, Walmart picks up a few more customers.
It's not primarily greed on Wall Street, which leads corporate America to destroy their competitors, its also big government. Big government needs lots of stuff, and small businesses can't supply enough, or guarantee product uniformity. Big Gov needs Corporate America.
Corporate America is also highly vulnerable, which is why Big Gov, and its Fed henchmen try to smooth out the business cycles, to keep profits growing on a smooth upgrade. Corporations have long supply lines, big fortress buildings, lots of employees, all them require overhead. They stretch their profit margins thin, and they have no fat for winter. No matter the Corporate model of business is dying. Lots of reasons for that, but a dying beast will attack anything that comes near.
And Big Gov will go down with them for obvious reasons. The days of power grids, national highways, and central government is over. And fiat currency, should continue to devolve along with it. If you thought about it properly you would realize that every dollar in your pocket represents a debt or an obligation and you would run wildly about throwing their money away. I call it their money, some people like to think of it as theirs, but no way in hell, you would hope.
The fiat currency system represents the uniform system of exchange the corporate model requires. When that ends, the money goes with it.
The author needs to see this video:
http://www.youtube.com/watch?v=D22TlYA8F2E
Which is about how the people of this country are being fuc*ed again by the international banking cartel that curently controls the "quantity of money" in our debt based system. We need to go back to the original, government contolled system WITHOUT fractional reserve lending and do away with the current (privately controled) "Federal" Reserve sytem that is creating and forcing the US (and world) into another depression
Seconded. I thought Still's take was very interesting. I also recommend the author take a look at G. Edward Griffin's lecture here: http://www.youtube.com/watch?v=lu_VqX6J93k before extolling the virtues of handing over control of the nation's money supply to a private banking cartel.
Illusions of grandeur the banksters have of running ponzi FIAT schemes the rest of their lives. The last 150 years of successful takeover of all sovereign nations by corporate entities could not have happened without oil. FIAT stood no chance before then. It was a waiting game, and after getting its ass handed to it time and time again over the course of our existence, finally paper IOUs circulated; this due to a World Police made possible thanks to two world wars.
This last period of FIAT exposure (for gold still reigns true but more on that later), started in '70 by Tricky Nix, was that of blundering operation. For very little wealth has been created where it wasn't before, and most of it was hoarded by figures of grandiose wealth.
Central banks independence? It is for and by the nation to issue its own! And this be gold and silver, or there will surely be no buyer when another opportunity arises.
The real question is under what condition would the current circle jerk be interupted?
1- Why would TBTF banks decide to no longer take nearly interest free loans from the gov and decist from buying T's (ie, spreads collapsing via yields falling so low as to turn banks back to lending / hoarding or fear that low yields won't keep up w/ inflation and/or that the Fed won't buy back T's if banks want to raise cash)
or
2- Why would the gov decide to stop the program or curtail it via raised interest rates more in line w/ T yields?
This seems to be the question of this period. So many didn't anticipate the gov would be able to finance all activities it can conceive and simultaneously push yields to record lows (like dogs and cats living in harmony). As long as the circle is maintained, not much chance to break the stranglehold.
If the dollar drops to a very low level against other fiat curriencies the US will be at a huge competitive disadvantage vis a vie purchasing commodities with dollars.
Not to mention the fact that a very low dollar will drive up costs of every item to US Citizens, the Gov, US onshore businesses, US agriculture, etc.
So...the dollar can only be allowed to drop so far vs other fiat currencies or the game is over.
Tripe.
I agree on the whole stealth monetization part as that is fairly obvious. I disagree with the notion that fiat currency has been successful. It's been an utter failure. Note: the author mentioned that the rate at which the Fed lends money to banks is called the Fed Funds Rate. It's actually called the discount rate. The Fed Funds rate is the rate banks charge each other for overnight loans on reserves that are held at the Fed.
You're right—me bad. Reason? The drugs I'm taking—what can I say?
GL
Having paid attention to your other articles during the past few weeks (and to the title of this essay), I thought that you intended the initial part of this new essay (that seemed to be praising the status quo) to be understood ironically – that you were saying “Here is what most economists tell us – and we can agree on that, right? (wink, wink, nudge, nudge).
Great post. But FYI, what you were referring to is the Discount Rate, not Fed Funds Rate.
I don't know if this has been posted elsewhere on ZH, but FOFOA's latest article managed to get Mish participating in the comments. Must read, indeed!
http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-...
Pfft, still whining and moaning about fiat currency and debt... I'd like to see what the world would look like today if we didn't kick the gold standard... Hundreds of millions of happy people working in the fields instead of enjoying the fruits of todays technology that will give the world the ability to progress beyond this obsolete monetary system... Ah, but it must feel real swell to live in a world of black and white... Where macroeconomics can be cleanly seperated from geopolitics... Micro from national... Money from energy... Fuck, there is a big picture GL...
still had bankers even when the money wasn't real and the economy TOTAL shit, didn't we. You make me want to kill, kill, kill. I say "here it comes, Europa."
Stupid garbage.
The US entered and led the Industrial Age all on a metals standard, moron.
The biggest lie out there is that this fucking debtmoney and fiat bullshit paper has improved economics or production or growth. It HASN'T. It was ALWAYS ENERGY.
ENERGY is the thing that DOES; debtmoney is just a fucking parasite riding along. The oil supply curve is what drove this thing we call reality, not money.
JFC, read some history books or something. International trade and finance was founded and expanded geometrically on Real Bills. Allowing bankers to screw people did not help
I've always said the currency should be convertible in Joules or kWh.
i've heard that one core goal of the cap&trade and carbon taxes is to establish a standard unit of energy as a global trading reference. who needs SDRs...
i'm interested in a 'average human labor hour' as a correlating unit. pretty hard to pin that one down w/ the sweat vs intellect elements of the variable.
there was a ZH reference to a barrel of oil being worth 40,000 man-hours or some-such. interesting to see where this goes.
in theory, you're probably spot-on.
"The person who says it has value is the central bank."
No, that 'person' is the government. No private bank could endlessly issue debt without being called on it.
"Central bank independence is key for a successful fiat currency". Sure but what would be even better is a central bank that redeemed its debt for a specific weight & fineness of gold. The government does have its hands on the printing presses, that's why all hell is breaking loose!
Ideally fiat could work; pragmatically, not so much.
Actually, the converse is true: Ideally, fiat shouldn't work. Pragmatically, it does.
GL
Fiat works only as long as the government has a gun pointed at the head of anyone that attempts to issue a competeing currency.
As Mao pointed out 'power comes from the barrel of a gun'... and, he was talking about real government power, not some clowns in the street trying to start a revolution.
I'm with Gonzalo on this one -- pragmatically, fiat is used for many reasons in addition to the "force of law" reason.
Gresham's Law (bad money drives out the good) is part of the reason that recent experiments failed when attempting to re-establish PM currencies -- people take the coins, and won't circulate them. Rather, people would rather pass off the little scrip notes (fiats) they get.
That's not just because gold is heavy and hard to carry around. Checks also are "bearer's instruments", which can function as fiat currency (by accepting the check, you are "extending credit", whether you like that idea or not). A Banker's Note is the same thing -- by accepting it, you are extending credit to the bank (it's a claim on the bank, not on the person that gave it to you in exchange for what you "sold").
In theory, fiats seem stupid (I have to trust what!?), but in practice, I'd use them anytime I had them because I wouldn't want to keep them (you are punished every day you hold the hot potato).
It's a rigged roulette wheel ... round 'n round she goes, and where she stops everybody knows. The house and the criminal elite who run it always win.
Article does not go far enough. It fails to mention at least 3 very important factors:
- Monetization via purchases made with swaps extended to foreign central banks (viz. the UK)
- Unexplained wild growth of "household" Treasury purchases (see Sprott article)
- US Treasury issuance exceeding the deficit by some 50% (unexplained use of funds)
Well, Uncle Ben, expert that he is in the Great Depression, has let it be known he is not in favor of contraction. he thinks that was the great mistake of the big one.
i think he understands very well the issues involved with governments who can no longer borrow. whether Mr. Leisman knows it or not that man's "russian bent" is very informative for this chairman.
I keep saying there's more to this game than meets the eye. Its like wrestling, (the real kind). The guys that are good at this are making moves one at a time but they are thinking 8-10-12 moves ahead. Do one thing now to get your opponent set up for the kill move down the road. The winners, all other things being equal, are always the ones that are capable of thinking the furthest ahead and that's what this ruling class is doing to us. We just don't know what there end game is, but you can be sure they have one and its not the apparent, suicidal stupidity they appear to be displaying. When its all said and done we are all going to be scratching our heads wondering what the fuck happened.
the PTB elites are NOT monotlithic, there are factions vying for control and dominance, so the outcome is not set.
Generally though I agree with your post, we all need to brainstorm what those moves and outcomes might be, crowdstorming should defeat their paid thinkers pretty easily.
Faith, baby. It's all about faith. A global belief system that the paper in the pocket, the numbers on the bank statement, the plastic in the wallet and the stocks and bonds and all that jazz are worth something. And they are. And it all works like Rothchild's wettest of wet dreams. So you get food when you go to the grocery store and a new iphone #4 and a sports car and everything else in life including Oprah and Dancing With the Stars.
Call it whatever you want. At the end of the day, the fiat currency is convenient and that's why it works. All the Fed has to do is to make a bookeeping entry and poof, the US Treasury has money and the tax payers are willing to absorb the hit and pay interest to Goldman Sachs and the other owners of the Fed, whomever they are.
Insane. Oh, yes. Quite. But it works.
Unfortunately, it ain't physics. It's religion.
(with apologies to Mr. Don McLean)
*Clap* *Clap* *Clap*
Well done.
i only know this as rumors but i would be surprised if BB doesn't know it as historical fact. it's nice to think of Republicans as "forever the gold standard, hard money set" but truth be told "they monetized pretty much everything during the Great Depression." That includes a thing called "World War II" i might add. was their inflation? a little. we also had "50,000 sherman tanks, 50,000 fighter aircraft, 15,000 bombers, infantry divisions, aircraft carrier battle groups, the Missouri Battleship and Marines." not bad for the mother of all monetizations. thank God for the private sector!
Its an attempt to protect the legitimacy of fiat as separate to the failure of the system.
Generally a pretty good introductory article for people without finance backgrounds, who have never read ZH, and who arent quite ready to put on the tin-foil armor, but essentially a trojan horse meme package.
i.e. 'Hey the TBTF were scammers who had to be nationalised peon debt-slaves, but fiat is ok, so make your payments!' - due in 2011-12?
I reckon this might be someone putting up a balloon to see how the ZH crowd react to this spin, likely we will see something similar in Newsweek in the next 18 months. Think of it as a draft, which will be refined based on comments here.
Really they need a different strategy to stand a chance (I'll tell you what it is for 10,000oz physical .9999 AU).
Place your bets.
Bingo.
http://en.wikipedia.org/wiki/David_Rockefeller
Keep working your day job GL as I will also. Your peers may have another opinion...
The interest rate the Fed assigns to this money it lends to banks is called the Fed funds rate.
No it's not, it's called the discount rate. How can you be opining on US monetary policy and not know this?
Discount rate has been deprecated in favor of the overnight rate, and FOMC has been foolin' around with discount rate to adjust their rate structure. I used to listen to Rukeyser and pay attention to discount rate, until it didn't matter any more.
But your basic point is spot-on: knowing how money is "created" is a black art. Looking for ZH to help explain with posts (so I can pass them on) to others.
- Ned
Nice job, GL.
Ignore the swine.
hey!
LOL
Thanks.
GL
Ben Bernanke and the Lollipop Gang at the Fed do not seem to understand the disincentive they have created.
They know exactly what they have done. They don't care. That is the beauty of being a sociopath. No conscience. No empathy.
Gonzalo, as much as I enjoyed your pedophile/DF comparison, the zh crowd is much more sophisticated than not understanding the mechanics of monetization.
The essence of fiat is to get something for nothing. The question is who is getting that "something". Sure, we can talk about the "jew bankster conspiracy" including the concept of kehilla, shtadlan, hofjuden, etc. It may appear, to some, that the hofjuden are about to take over the world since they are the perpetrators of fiat; however, that is (they are) still part of the puppet show. There are, whether you wish to accept that concept or not, puppeteers and puppet masters pulling the strings behind the scenes. Do you know who these parties are? That's what I want to know.
Lira talks about the smaller banks not loaning money, but they are being forced to not loan money by the FDIC. A banker friend of mine in a small town says they are literally breathing down his neck on every loan he makes, ready to shut him down. His bank has not loaned ANY money for at least 6 months.
For the life of me, I can't understand why this would help the Fed. What good is it going to do if they save the TBTF banks, but want all the smaller ones to go under?
did you consider the possibility that the name of the game is consolidation and monopolistic control over the banking/financial sector concentrated in "few hands"? That's what I want to know.
Bingo. It does appear that what is going on is intentional not by chance or just bad decision making.
Follow the money - that is what that tells you - control of the financial sector in as few hands as possible.
Monetization is the process of establishing legal tender. Debt monetization is the conversion of government debt into money. The government sells bonds to its nation's central bank, which pays for the bonds by increasing a bank balance.
The interest rate the Fed assigns to this money it lends to banks is the discount rate not the the Fed funds rate.
The mini-series Taken is my favorite Dakota film.
There cannot be any meaningful global growth without growth in the monetary base of the global reserve currency. The entire debt of the US represents reserve liquidity coursing through the system somewhere. It is literally the blood that keeps the system alive. The 'national debt' isn't debt in the sense that a household has debt. It's just not. It doesn't get paid back until the balance of trade shifts. Until that happens, the US will supply the world with dollars, and the rest of the world will supply the US with raw materials, and manufactured goods. The day there is no one to buy US Treasury Debt is the day there is no surplus economy anywhere in the world. And so long as one economy runs a trade deficit, this is impossible.
Does this mean the dollar cannot lose purchasing power? No. Does this mean the US can't experience episodes of high inflation? No. Does this mean the dollar will collapse? Not on your life. The dollar is the world's reserve currency and the rest of the world will *make absolutely sure* the dollar stays viable. They will make sure of this until the US is no longer a global military threat.
This is just how it works, whether you like it or not.
Full disclosure: I am long gold and gold miners. There's no reason not to play the gold bubble despite the above.
Russia and China have the Manpower and the resources to give the US a very hard time. The US will not bomb and kill everyone should the world unanimously cease to purchase treasuries. There is hope for a return to gold as the reserve currency. And the dollar bubble cannot last without capital controls expanding and the 1984 state emerging in full blown Orwellian horror.
Good insights and good article (except for a few technical errors). Bernanke and Company apparently think they are smarter than the average Joe and can design a clever scheme to "save the world". The reality is that the world is a lot more complicated than they think. Many unintended consequences will eventually ruin their "toy experiment" and the "world" that they are trying to save.
I usually like Lira, but he gets docked 2 stars for the asinine statement that fiat money works because we've been a fiat regime for 40 years?? I thought nations were supposed to last longer than syndicated reruns of the Honeymooners.
The American Fiat Regime was a fraud from the beginning. It was, from the first, a criminal enterprise designed to appropriate all the wealth of the people. Debt based money is fraud in its quintessence.
There is a book out today, the author was plugging it on Bloomberg, something about France caused the depression.
The author stated, that in the 20's the worth of a country was based on it's gold reserves.
France was hoarding all the gold and the other economies suffered. Fiat currency system can be gamed, just like the gold system, or communism, or any other system, you will always have the people on the inside (the ones who have ) and then there is the people on the outside, the have nots. We need Volcker or Professor Black to take wall street to task for their waywardness. We need a justice department undercover investigation of the tbtf's. Something like a sting operation.
We need a hero to kick some chronnie ass!
I can't take anyone seriously that says fiat currency works like a charm.
Just look at the list of failures.
http://en.wikipedia.org/wiki/Hyperinflation
The US is soon the join the list - again.
Greenbacks exploded, Continentals exploded, and soon FRN's will explode as well.
Not exactly the case. The previous were issued directly by the government, not a central bank.
It would require a whole volume to fully describe this, but the day we do away with the FED is the day nobody else will accept whatever is electronically created/printed. This may happen anyway, but it was a choice to inflate. When President Jackson "killed the bank" he could still get away with it. You can't "kill the bank" today. The "return to the gold standard people are stuck in a mid-summer's dream" and the kill the FED people are so deep asleep they will probably never wake up.
Besides, where do you think the idea of fractional reserve originated from? Do you think it was a FED invention or perhaps something that applies only to paper money? Fractional reserve banking originated with gold. An earlier version of what's going on with COMEX today.
Anyway, not here to start writing a book describing the finer points. Suffice it to say that with the global system you simply cannot just "get out". It has progressed too far.
The only question I have is what's the outcome?
How about the publicly announced monetization that is occurring? The fed takes principal paydowns from the toxic assets they bought off of the banks and openly buys treasuries with it. Those paydowns are our money, and they could have been used to offset the printed money that was given to banks.
A £1.00 coin in the UK 100 years ago is a sovereign, This old coin will cost £200 in todays deflated pounds, A 99.5% devaluation of sterling over a century, The US isnt much better at about a 98% devaluation.
For me this is a disgusting state of conduct but hasnt resulted in hyperinflation because the boyz are smart and the 1979 blog and events regarding Paul Volker show this,
The 1979 debacle, Hyperinflation was in its early stages and was stopped, In 2008 a severe deflation depression was in the mix and now we have ZIRP or stealth monitisation, For me both events are the same type of outcomes a collapse in the currency if they are allowed to continue, The boyz are doing whatever it takes and when ZIRP goes too far It will stop, Food looks like hyperinflation is taking hold and if it continues oil will follow now lets say oil goes over $150 next year which it will if ZIRP stays in place then hyperinflation is real but the boyz will tighten and this is why I think we will muddle through things without hyperinflation.
Lets hope the boyz dont go too far.
This stealth monetization/inflation has been going on for decades. People are so focused on growth and GDP. They have watched thier lifestyle slip away while the money grows.
My grandfather raised 3 kids, bought toys and had a vacation home on one normal salary.
Now friend and his wife who both have Ivy League MBAs and associated incomes are stretched with a jumbo mortgage, child care and other inflated costs.
I think managed deflation would be a good thing....get the FED and banks to systematically liquidate assets at market. Duh....it will push markets down short term, but longer term there will be more consumer free cash flow.
Maybe my friends could actually live off one income or buy that house by the lake like my grandpa could.
"What did the TBTF banks do with all this cash? Why, they turned around and bought U.S. Treasury bonds."
But how do we know, for a fact, that this is exactly what is happening?
Interesting that the author failed to mention something that's been mentioned on a nearly basis here on Zerohedge, namely, that buying stocks is the other part of the monetization. This is the part that keeps the large private corps in the game. As long as the large private corps, banks, and government are getting what they want, there will be no hyperinflationary event.
More generally, it's hard to have a crisis of confidence in your government when you have a TV and a bucket of delicious fried chicken. People are relatively simple and cheap to maintain. Seen any populist uprising from the multigenerational permanent underclass on the dole? Yeah, me neither.
The way we do reach a hyperinflationary point is if we have a failed bond auction. That is literally the only practical way for it to happen. Given that this is a mechanical impossibility given the structure he described, ergo no hyperinflation. High inflation in commodities, I can totally buy that and it's already happening (though that's fairly easy to tackle with subsidies/tax breaks/direct market manipulation). Hyperinflation? Not going to happen.
Why? What makes you so sure that as Ben continues his mass counterfeit operation, that investors will not simply refuse to hold dollars, no matter what the circumstances? I can't be the only person keeping as little of my portfolio in cash as possible. Under those circumstances, how many dollars is an ounce of gold or silver worth? You can't sell them for $5,000, because people view this (correctly) as the dollar's descent into oblivion. In such a situation, only strictly enforced tender laws can keep the public from moving to real currency.
GL Fact Check:
Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning.
Where exactly in the US Constitution does it authorize or allow a private central bank?
http://www.usconstitution.net/const.html
We have at least 8 Presidents who went to their graves fighting Central Banks.
http://www.hardassetsofhouston.com/blog/eight-presidents-who-opposed-a-c...
We had at least 235 Congressmen who supported thorough audits of the Fed or US Gold Reserves in 2010.
http://www.ronpaul.com/legislation/audit-the-federal-reserve-hr-1207/
Per the Constitution declaring only gold and silver are legal tender, this was on the agenda of Congress since the last thorough audit 20 January 1953 when Ike was inaugurated.
http://www.thenewamerican.com/index.php/economy/economics-mainmenu-44/44...
On the other hand, central banks print money.
Actually, the Bureau of Engraving and Printing is part of the Treasury. The Mint, part of the Department of State until 1981, is now Treasury with the IRS. West Point and Fort Knox (4167 tonnes) bullion depositories hold gold not held by NY Fed (5000 tonnes) in trust.
http://en.wikipedia.org/wiki/Bureau_of_Engraving_and_Printing
http://en.wikipedia.org/wiki/United_States_Mint
http://en.wikipedia.org/wiki/United_States_Bullion_Depository
Central bank independence is key for a successful fiat currency.
The Federal Reserve, neither Federal nor Reserve, was independent of government since 1913, and the dollar fell from 20 an ounce of gold to 1301.60 an ounce of gold, a fail of -98%.
So much of the currency would be printed by the government that businesses and ordinary people would lose faith in the currency as a stable medium of exchange.
Versus -98%? Not even Franklin's Continental, Lincoln's Greenback and JFK's Silver Certificates directly issued by the Treasury lost that much value, and all were redeemed at par or better in the case of silver dollars.
http://www.monetary.org/briefusmonetaryhistory.htm
http://www.coinnews.net/2010/08/02/continental-currency-featured-in-heri...
http://www.analysis-news.com/allfolder/Understanding-VI.htm
http://query.nytimes.com/mem/archive-free/pdf?res=F3091EFD385A137B93C2AB...
But the last time it [hyperinflation] happened in an advanced economy was Germany in 1922, the so-called Weimar episode.
Guess Brazil, China, India, Italy, Japan, Mexico, Russia and South Korea don't count, even if they are among the world's 15 largest economies?
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29
However, now, in the good ol’ U.S. of A., monetization is taking place—and it is happening right before our eyes, even though no one is realizing it.
So 1301.60 gold is just a random unrealized event?
So in order to avert this fate [bankruptcy], the Federal Reserve bought these toxic assets from the banks [with $1.5 Trillion].
US mortgage markets are at least $11 Trillion, described as a broken market by Paul Volcker, with 95% of mortgages involving Government Agencies that require another half a trillion bailout, another $200 Trillion of unfunded Government obligations including other agencies and entitlements and $614 Trillion in unsecured global derivatives according to the Central Bankers' Central Bank, the Bank for International Settlements in family hometown of Basel. $1.5 or even $23 Trillion, the Special Inspector General of TARP's estimate of actual bailout obligations, is a drop in the bucket, particularly as defaults continue to rise.
http://www.bis.org/statistics/otcder/dt1920a.pdf
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY0tX8UysIaM
U.S. Treasury bonds are called “assets” by sophisticated finance types
They are bank assets and Treasury Taxpayer Liabilities.
It’s not even particularly stealthy, actually—it’s happening right out in the open. It’s just that nobody is pointing it out—or perhaps because it is an obscure, complicated system, nobody has realized what it actually is.
Nobody? So why was gold 1301.60 this AM?
Lending money to the Federal government is totally safe.
Really?
“Screw it,” say the TBTF banks. “Let’s just buy Treasuries.”
Someone's buying all those BRK, GE, GM, JNJ, MRK, MSFT, NSC, ORCL, WMT et al corporate bonds, some of them 100-year maturities.
http://www.bloomberg.com/news/2010-08-29/high-grade-bonds-whip-junk-gm-s...
http://www.businessweek.com/news/2010-08-23/norfolk-southern-plans-first...
Ben Bernanke and the Lollipop Gang at the Fed do not seem to understand the disincentive they have created
Benny's SATs, GMATs, grades and economic experience easily appear to dwarf GL's. We can be sure $1301.60 gold has BSB attention re killing QE II. Playing a poker hand of bad cards saying we need increased inflation when we already have it in the real CPI may fool some of the people some of the time, but not all the people all of the time.
http://en.wikipedia.org/wiki/Ben_Bernanke
We had 13% 1980 methodology CPI in 2008, 10% this year, and now we are falling off the second cliff, so BSB can hypothecate more inflation all he wants, but $1301.60 gold says it ain't happening because real interest rates will choke it and the real economy, not rigged virtual markets that can no longer be confused as economic reality.
http://www.shadowstats.com/alternate_data/inflation-charts
Over the past few months, we have seen two things occurring simultaneously: Treasury bond prices are rising (and therefore their yields are declining), and the dollar has been falling against all commodities and all other major currencies....This is a contradiction. This cannot be happening simultaneously for any sustained length of time—unless there is some exterior factor making this contradictory situation happen.
There is no contradiction, only a lack of understanding by a ZH poseur who rivals Leo and MHFT for financial farce.
The Ockham's Razor explanation is we are in de facto depression, where falling assets not reflected in a financial service GDP jiggered by Fed Wall Street alchemy are falling faster than the Fed can manufacture money, disconnecting Main Street further from the Money Trust fighting the last war.
http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1910...
Gold in 1910 and 2010 reflected the real rate of interest, currently towering at -40% real estate deflation plus 4% nominal i rates, or 44%. Commodity and CPI inflation reflect past Fed liquidity and government theft, not productivity.
All the monetary bases are contracting or slowing with a recent bounce, from 4% M1 to 2% M2 to -6% M3, with falling money multiplier and velocity, suggesting the Fed is pushing on a string and the Treasury insolvent as the scramble for cash liqudity grows.
http://www.shadowstats.com/alternate_data/money-supply-charts
Corporations trading their sole soul 10 to 100 years for quick liquidity from the bond markets and financial engineering gearing because they have declining revenues and want to buy back stock and pay higher dividends, may regret it as equity markets decline and economic decline grows and they become insolvent.
Anyone who does not understand this may become ground-up financial garden-burger ere long. Coporate insiders selling large suggest the next big move may be down, not up.
Maybe ZH can stop cheapening itself featuring repetitive guest posts of financial folly.
The deepest purse decides the fate of nations as often as the longest sword...
http://www.jubileeprosperity.com/
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