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Here Is Why The Dollar Is Now Effectively Worthless
A picture is worth a thousand Krugman essays, which is why we present a chart comparing the US Monetary Base (and by subtracting Reserve Balances with Fed Reserve Banks, Currency in Circulation), and the Fed's holdings of MBS and Agency paper (worthless GSE/FHA garbage). In summary: Currency in Circulation: $920 billion; MBS/Agency Holdings: $997 billion. The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidized housing.
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Its okay because the housing market is back! Yeah! Woo hoo!
(lets do the vulture volume dance and ignore that price creep in the corner)
Woo hoo c'mon America! Buy those discount foreclosures! Here's some tax back, don't worry about that old unpaid loan or the guy sleeping in his car, just stick the tab on the Fed.
is this a party or what, where are Timmy, Alan and Bennie, lets get into this punchbowl!
I'd rather not comment on this matter.
(Although, by means of simple arithmetic, I don't see how this economy won't be in a state of total collapse sometime between March of 2010 to August of 2010!)
Nuther data point; that's my date range exactly.
We'll each of us have it figured out by March, or we aren't going to figure it out. After that we get to see what a ride down looks like.
One can't help wonder if naming the current bubble after the Elf "TurboBubble 2010", is advisable at this juncture. Is Bernake not blowing harder and faster (by a large factor) than Geithner ?
God bless Zero Hedge blog! One of the few lone voices of sanity in the economic wilderness!
Turned off CNBC 8 months ago. Glad I did!
Interesting thoughts:
"This is the secret of deflation, and the answer to the much-debated question whether you can have hyperinflation and deflation all at the same time.
The answer is that you can, because hyperinflation refers to electronic money that people reject, and deflation refers to FR notes that people hoard."
http://www.professorfekete.com/articles/AEFFalsifyingBankBalanceSheets.pdf
a good companion article
Money creation and the Fedhttp://www.econbrowser.com/archives/2009/03/money_creation_1.html
Thanks, Anon. I've been looking for an explanation like that since I first started seeing those charts.
In my opinion the root of the problem was when the US government decided to insure most of the mortgages out there using GSEs and other programs. This took moral hazard out of the market and bankers basically played a game of how much can I get paid on the governments dime.
So the govt. owns all the real estate, a tangible income producing asset, where's the problem ? Rather than renting a home from a bank, "homeowners" are renting it from the govt. and paying interest, property taxes and maintenance. That's all your chart is actually reflecting, the transfer of real estate wealth from the private sector to the federal govt.
There it is. And while the Fed has been at it they were able to swap quick air treasuries for agencies. heh
As I've said many times, it's a takeover plain and simple. Most people forget that the banks create loans out of thin air, BUT THEY CAN'T CREATE HOUSES AND LAND OUT OF THIN AIR! Would you trade thin air for homes & land??? They most likely planned this whole scam as they have in the past - give loans to anyone and everyone, have the fed or government backstop all the loans and wait for the inevitable foreclosures where they can pick up real properties (hard assets) for a huge discount. So they created loans with nothing, are not risking going out of business because they are backstopped (so they could care less if the loans default because there is no risk of their own bankruptcy), and will end up owning much of the land and property of the country. As they inflate, they will have HUGE balance sheet gains in the future (if we ever recover while McDonalds employees make $50 an hour).
Only the fed and their banks are not the government.
The houses themselves are not worthless, but the mortgage securities are definitely over valued and deflating quickly. I predict grandparents, parents, and children will move back in together and there will be many empty properties.
"You got yer dead skunk in the middle of the road
Dead skunk in the middle of the road
You got yer dead skunk in the middle of the road
Stinkin' to high heaven"
--Loudon Wainwright III
A site we may soon see, albeit in English?
http://warwitness.e2bn.org/library/1233569835/weimar_billions_note_mediu...
if you are leveraged 1:1 with worthless, you just became 50% poorer.
Actually I think the point was to show one view of our dollar debasement. But, just in case we want to look at the literal meaning I would submit the following:
Now I do not consider myself an expert at Modern Central Bank accounting, but here is what I know:
Modern (Fiat) Central Bank international accounting practices has its own vocabulary and approach. The purposes of accounting and the meaning of terms used for a central bank must be carefully defined in order to understand if common accounting concepts even apply.
For example:
1) The FED balance sheet does not need to hold any assets against the paper currency it issues. The currency is not backed by assets of any kind, except the notion that the US itself, through its ability to sustain a viable economy, can cover this promise through future income. Usually, this is implied to mean income through taxation. Generally, this is also described as "confidence" that historically the currency shows a track record of acceptance.
Notice from the graph that the increase in paper currency is relatively flat. If you want to dig deeper into this subject, convertibility is what is commonly discussed to compare FED balance sheet assets to currency in circulation. But, it usually is just an academic point to consider the vulnerability of the currency. The USD, as the world reserve currency, is not subject to the same currency threats as Sterling or the Yen for example.
Now the FED must hold enough assets to generate income to fund its yearly operations. What income is generated beyond this is sent back to the treasury. So really FED excess interest income never "leaves" the government.
I for one, have several question when the FED holds a maturing treasury. Because this is where the electronic money created optionally could be destroyed. The Treasury exchanged for "electronic cash", which is then subtracted from the electronic pool. However, I see an opportunity for massive abuse on the process of tightening.
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2) A Fiat based Central bank balance sheet is not subject to the same interpretation / rules as a private corp. From a balance sheet standpoint the paper notes are a liability. But, technically, a liability is only a liability when the entity in question can be held accountable for it, in terms that reflect exchange of real value.
I can go to the FED with my FED Dollar and they will gladly give me 4 FED quarters. Its just a medium of exchange, just pick which ever medium you want. The exchange could be in potatoes rather than the FED dollar. Actually, I like potatoes, but they do not fit well in to a wallet. Unless they are au gratin. Yum.
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3) The real problem with the assets now on the FEDs books is how to tighten. Treasuries are one thing, doing reverse repos on Agency and MBS paper is different. Remember the FED wants to be able to control the money supply in relation to credit. The real risk is the FED has no experience on how to effectively control the money supply (velocity and credit) in converting anything other than Treasuries and currency interventions/swaps.
The FED is asset stupid, and they know it. So what did the FED do on their own initiative, move into one of the most risky of investment vehicles, derivatives, based on hard to price real estate, after a real estate price bubble. Dammit who is responsible for this Ben!!!
If you really want to give Ben a hard time on Nov 3rd, just pound away at how moving into these different asset classes is beyond the FEDs mandate and control, and is blatantly irresponsible. The point is, without unhindered easy conversion of FED assets, you have exceeded your ability to carry out your mandate. It could be argued very effectively that Ben has violated his authority granted by the Federal Reserve act, and as a result, should not be confirmed.
Mark Beck
Sorry, Ben's hearing is slated for December 3rd.
He's effectively built a moat around the fed and its to big to abolish and audit. "untouchable"
"Chairman Bernanke, how much on average did you pay versus par for MBS paper during your purchse program this year?"
"How much, sir, would you estimate the market value of those derivative to be today?"
"What do you mean... you can't answer question? Why not? Does this make you unfit to be Federal Reserve Chairman?"
... or something to that effect.
Why do people keep assuming that the Fed will eventually sell their MBSs and not just keep them on the Fed's books forever?
Who will stop them from doing this?
meanwhile, over on TF, dumbasses like Pika-Steff and Douchinger are still insisting that dollars will be so scarce as to be unable to support commerce.
ROTFL, scarcity in something that can be credited electronically. Like what, they won't be able to press the mouse button? FR warehouses contain metric assloads (an industry term) of paper notes. They actually come off of a printer and cost pennies to make.
Tomorrow, they could electronically create enough dollars to pay off every debt AND the entire notional value of every derivative outstanding.
Most of his readers are probably broke by now. Time to get another heloc. LMAO!!
Actually I read both this and KD's board and do extermely well. Anybody who follow's some guy's advice off the internet without sufficient research of there own is an idiot.
I worry more for the people who come here and disparage other people from other boards. Its probably the most spectacularly huge act of cowardice to talk about Pika on another board. I don't agree with that school of thought either, but really, why bother with this silliness of going to another board to talk smack on someone.
The act speaks for itself.
I go around to restaurants and retail establishments, looking to trade that worthless paper for goods and services I want -- and those dumbbells go for it! hehe
Just my way of getting over on the man!
Confidence schemes are highly interesting phenomena
A picture is worth a thousand Krugman essays,...
pure genius! lol
Keynesian's indeed!
Yes, this deserves to become a tagline.
So when the mortgage backed security ballon collapses
Taking many banks with it
We will be left with currency in circulation
or green back dollars
Which are rare but you can buy thing with them
If the fed begins printing geenback dollarsby the traler truck full they too will become worthless
But that is not happening now
And will not happen --- especially if we cancel the Fed
Like Andrew Jackson, Abe Lincoln, and Garfield
(2 out of 3 were assasinated)
Seems to me that the term "fucked" is a quite accurate desciption.
Add the "superdollar", and you got a D.P.
And maybe a "Blow Job", too - that'll make it a fucking orgy....
We have a credit bubble
and a debt bubble
but not a green back dollar bubble
Hoarde greenbacks not gold
Yeah, I've come to the conclusion that efficient market theory isn't just some academic farce when it describes the debt and equities markets on bourses, but very much is a farce when describing the daily transactions of the other 98% of the population not working in the finance industry.
If Obama tells you a dollar is worth a damn dollar, and you will only be able to get paid in dollars, pay taxes in dollars, pay rent/mortgages in dollars, and buy groceries in establishments that pay taxes in dollars, then a dollar will have value.
ADP, Paychex, and the millions of employers out there are not going to start paying their remaining employees and vendors in gold, silver, barter, California IOUs, or company scrip.
Governments, from Home Owners Associations to Federal IRS, are not going to accept payment in anything but US Dollars.
WalMart is only going to accept US Dollars and food stamps denominated in US Dollars.
Foreign vendors and suppliers are going to have to accept US Dollars, or find alternative markets and alternative currency to settle transactions.
I don't see goldbugs making valid arguments on how PM will be introduced in supply chain LoC.
somehow I doubt there will be anything orderly about a dollar collapse.
There are enough historical examples that I am sure your statement will be proven correct.
...until nobody has any faith that "dollars" are worth anything and refuse to accept a Hummer full of them for a loaf of bread.
They probably thought much the same thing in c. 1922 Germany, too. Just saying.
As always - make sure to check your premises.
Here, you assume that the present regime would survive a montary collapse. That is absolutely not a sure thing. If the dollar suffers an outright collapse, this will likely translate into greater political uncertainty, to include a change of government. See Weimar Germany or even Iceland earlier this year for evidence of such. It's possible that it could get messy.
Sure, Haljmar Schacht wrote a book in the 1950's or 1960's that exposed his real opinions for the Rentenmark in the late 1920's.
I've never read it though.
Others have written on the failure of the Rentenmark and the rise of the Nazis.
However the Germans were much closer personally, to the means of production, than the completely disassociated mass of conspicuous consumers in the United States. Not only do Americans not know how to protest, they wouldn't know how to learn of what they should be protesting about if the dollar started a serious nosedive.
The Tea Parties, the Glenn Reynolds Pork Watch, and such, even when rooting for them, it's not like the career bureaucrats and lobbyist brigades in DC will change if the elected politicians are booted.
interesting post via Ritholtz apropos to the dollar discussion
The World According to AmericansWith regard to this statement:
the Fed's holdings of MBS and Agency paper (worthless GSE/FHA garbage)
In the testimony he gave before Congress, Edward Pinto (chief risk officer for Fannie in the late 80's, bearish point of view) projected that FHA's cumulative default rate could ultimately rise to 20% and the severity rate (% loss of mortgage balance on defaults) could be 50%, for a total loss of about 10% of FHA's $725 billion loan book.
Fannie Mae and Freddie Mac portfolios have higher quality loans than FHA; higher credit scores, lower loan to value, etc. 5.78% of Fannie Mae loans were 60 days or more delinquent as of 9/30. If Fannie and Freddie's cumulative default rate goes to 15% and severity is 40%, that's a 6% loss.
I wouldn't call securities that are probably worth $.90 or more on the dollar worthless, though the amount of the loss even at that level is enormous.
In support of your point things are definitely looking UP at Fannie (I recall that at the beginning of the "parabola" they got their first $34b) and of course the rest is history including some very very recent history.
Under any business acumen this looks like a winner,, of course after looking at the data in your links,... You gotta be shitting me....This is the anti solvent.. Fannie needs to be shut downnnnnnn
Theres a reason they call it Fannie!!!
Anyone who believes those assets are worth 90 cents on the dollar is smoking something other than sharts.
Nice sound bite. I presume if you actually knew anything about mortgage backed securities you'd offer a substantive response on what you think they're worth and why.
Historically, the average (non-bubble) home price varies between 2x and 3x of average family income. Please reference the current Case-Shiller index - that's all you need to know.
As soon as the FED stops buying we will find out exactly what the market will pay.
The MBS buy is basically the same mental illness we have seen before with Treasury TARP asset buy program proposal that was eventually rejected.
It is almost unbelievable, to think that once you prop up a market as the strongest buyer, that some how when you exit, demand, at the artificial high price you created, will remain. Even though there are no buyers at that price. If there were, you would not needed to intervene in the first place.
Well next year the first (anytime) home buyer program, as well as the MBS buy program, will end. What if the base asset class is still in the process of debt deleveraging, and price is still too high for average wages, with no easy access to credit? Prices will start to fall again.
Mark Beck
someone please explain to me why americans not already defaulting on their mortgages should not do so immediately, since folks who defaulted are still either living in the same homes.
People are raised to "do the right thing". Traditionally the right thing to do is pay your mortgage on time each month. In this chaotic deflationary scenario however, "the right thing" has changed. It will take time for folks to learn and adapt to the new reality.
What these folks need to do is keep their cash for essentials: food, energy (heat). Pouring cash into a leveraged depreciating asset during a deflationary collapse is a fundamental mistake no one can afford to make going forward.
Just what I've been saying all along. The Fed is creating an asset backed Dollar.
See Rentenmark Weimar Hyperinflation
Inflation will be sparked when interest is charged on reserves held at the fed, unleashing all the locked up cash, and increasing the money multiplier.
See Wörgl, Austria negative interest rates.
Inflation will be sparked when interest is charged on reserves held at the fed, unleashing all the locked up cash, and increasing the money multiplier.
I must say, I am amazed that so few see this simple solution to the deflationists and their "money multiplier" problem. I've called it "poisoning the well", and foresee loan officers standing on street corners with loan apps. Imagine a bank having $100 Billion in excess reserves, which was once an interest earning asset, suddenly moving to the other side of the balance sheet, coupled with the Fed's assurances that they'll cover any loan losses, as they've already clearly demonstrated willingness to do.
Deflationists are such morons.
And all this time I thought our dollar was at least backed by tungsten. (Non-green) light bulb standard anyone?
Housing is backed by LAND and a PHYSICAL ASSET
That. People. Can. Live. In.
Stocks and paper ARE worthless at the end of the day. A home and land are timeless assets.
(p.s. can't there be a simple math question, I mean seriously, do I have to have a calculator open)
Housing is backed by LAND and a PHYSICAL ASSET
That. People. Can. Live. In.
Stocks and paper ARE worthless at the end of the day. A home and land are timeless assets.
(p.s. can't there be a simple math question, I mean seriously, do I have to have a calculator open)
problem with housing is it is not an asset at 0% leverage. there are significant costs of ownership, and it is taxed and the argument can be made:: better a worthless asset than a liability!
you can rest assured now the dollar will collapse. banks are acquiring assets and not lending; therefore it is in everyones interest the dollar continues to drop wall street, government, the fed, and asset holders..i.e. people with money. banks can play a manipulation and firm the dollar, but the must inevitable follow the lead of the federal reserve initiative :: trade dollars for assets to whoever is dumb enough to take 'em/
Actually you have it exactly backwards. The correct action in a deflationary collapse is to trade leveraged assets for dollars. To liquidate anything you can if you can find a buyer for it.
...Shhh! Freakin' cheese it, bub!
http://www.youtube.com/watch?v=vuSERHqzKwI&feature=player_embedded
this is the best
"The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidized housing."
Is the plan coming into focus? Are you ready for a Chinese family to move next door into that foreclosed property? Ni hao?
"The Rentenmark (literally, "Security Mark") (RM) was a currency issued on 15 November 1923 to stop the hyperinflation of 1922 and 1923 in Germany. . . Due to the economic crises in Germany after the Great War there was no gold available to back the currency. Therefore the Rentenbank, which issued the Rentenmark, MORTGAGED LAND AND INDUSTRIAL GOODS worth 3.2 billion Rentenmark to back the new currency."
The advantage of being both the world's reserve currency and heavily in debt to foreigners is that its affords the issuer a one time put option on the rest of the world.
What is the current hole in the US banking system? What is the current foreign holding of US debt instruments? The latter is larger. Factoring out nationalization of any US asset within the borders of a US debt holder (backlash), a default on the US' external debt might leave the US ahead in terms of wealth.
The US nuclear arsenal acts as a kind of insurance policy against any aggrieved country taking military action against the US, so while there might be a lot of teeth gnashing and what not, there is little anyone could do to fight back. On top of that, given the history of defaulting nations and their subsequent ability to tap into international debt markets again, the US would remain in the international penalty box for a short time only.
Default, or repudiation, would also play well to the US illiterate electorate (try saying that three times fast if your native language is Japanese), and if done close to votong time would guarantee another term in office.
"Very, very few people understand the full implication of CDS and that these devices alone can force a firm into bankruptcy by widening credit spreads and altering the value of the underlying debt. That is why Warren Buffett and George Soros buy these things hands over fist but don’t sell them, and why they have said they should be outlawed. A CDS is like a 1000 db amplifier of an assets valuation in the hands of pro traders. Only a person with a very profound understanding of the power behind CDS would recognize the extreme danger and ability of these devices to manipulate the underlying asset prices and valuations. Now the price for CDS for UK guilts and UST bonds went up greatly in the last week, and they could be trying to bring on an early default on guilts and UST requiring the IMF/World bank to intervene. So the CDS speculator crowd is moving in for the kill of the English and American economies, based on the orgy of debt Brown and Obama are enabling".
true? ... anyone explain this stuff?
"...requiring the IMF/World bank to intervene."
What happens when the loan sharks (IMF; World Bank) agree to pay off the losses of their masterz? Why make a bet to take losses when you can make bets that are guaranteed to win?
There is a reason why the Fed stopped reporting M3 in 2005 , because debt does not define the value of the dollar in a deflationary spiral: The first order of wealth that gets destroyed in a deflationary spiral is debt. Consider debt dollars to be false dollars.
Granted if the USG can arrest the debt deflationary spiral, dollars may end up worthless.
There is a butt ton more fantasy money in circulation then paper money. Will fantasy finance win out? I sure as hell don't know. But I do know there will not be a complete collapse of Western civilization, and there will not be a complete collapse of the USD.
By definition: Inflation = credit + money supply
The collapse of the credit bubble is the economic mechanism that wrings excessive debt from the system. This is deflation by definition, the deflation of the credit bubble.
This is where the gold trade has it wrong. The collapse of credit is orders of magnitude greater than the expansion of the currency. The deflation of the credit bubble is a black hole and still has years to complete the process of eliminating excessive debt from the system. The Fed has tried to cut the corner by transferring "toxic" debt to their balance sheet. The debt is still there, its just being hidden under acorn shells. Eventually all of this leveraged debt will be written off, the act of which is highly deflationary. The day of reconing (or reconciliation) will come.
Gold traders are looking at the Fed balance sheet (stop gap) and ignoring the much larger credit contraction part of the equation. Gold is in a momentum driven, temporary, short squeeze which will collapse soon enough. Bond traders understand the bigger picture and will continue to drive the 10 year yield down to 1 % in response.
Of course it's not worhtless. Take a comparsion against the other "world currencies" and you'll see that they have also expanded in a similiar fashion. You need to compare apples with apples.
Everyone, please feel free to unload your "effectively worthless" dollars on me so that i can trade them for a new mansion and Lamborghini.
My USD indicator has been giving BULLISH warnings for some time and I'm still expecting a USD rally when the DOW resumes it's downtrend and the bear market rally ends.
http://www.zerohedge.com/forum/market-outlook-0
Geithner to Bernanke....you mofo..
http://www.youtube.com/watch?v=EFrLcvGkhMc&feature=player_embedded
Happy Holidays to ZH..You guys Rule.
CD, GG, Cheeky, Lizzy, MsCreant, Miles, DOD. and everybody else who makes me LOL everyday.
everybody is buying dollars to devaluate their currencies.
That is actually the reason why Odumbo went to Asia, to tell them to stop weakening their currency, as it is spiraling the dollar drop. It will only be noticeable when they reverse (or try to) that strategy and sell their dollars for gold and oil and other commodeties.
"The US nuclear arsenal acts as a kind of insurance policy against any aggrieved country taking military action against the US"
It would take at least a month for the US to rebuild and enable one nuclear weapon. They aren't armed and at the ready like the good old days.
With a huge portion of the US military 1000's of miles away, it would be no sweat for the Chinese and another country to invade. They are simply waiting for the economic conditions to deteriorate a bit more.
Now I am really depressed, Fuck it! it don't mean nothing!! Im going surfing.
Like Kent Brockman would say:
"And I, for one, welcome our new insect overlords".
The commander in chief has taken 6 weeks to "deliberate" on the simple decision to send a few troops as reinforcement for troops in the field of battle in Afghanistan. He has 5 or 6 different battle plans sitting on his desk collecting dust and he is unable to chose one and move forward. Instead, to buy himself more time, he waits 4 weeks and then sends the plans back to the Generals for rework. Your talking about the decision to launch a nuclear counter-strike to a nuclear attack on the CONUS. The order of magnitude difference these two levels of military decisions is off the chart. This reality is not lost on the Putin's of the world.
so...essentially you've made a mashup of garbage data, subtracted what you feel, subjectively, is "worthless" and then come to the conclusion that you're right... this is quite an interesting analysis... This is almost scary ignorant.
I believe we are getting closer to a dollar reversal.
admin
http://invetrics.com
All your gold belongs to us :-)
And yet the ponzi continues...remarkable.
I have to admit that I have never heard about this information I have noticed many new facts for me. Thanks a lot for sharing this useful and attractive information and I will be waiting for other interesting posts from you in the nearest future.keep it up. car insurance
I have to admit that I have never heard about this information I have noticed many new facts for me. Thanks a lot for sharing this useful and attractive information and I will be waiting for other interesting posts from you in the nearest future.keep it up. car insurance