Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame

Tyler Durden's picture

Recently the debate over when QE2 will occur has taken a back seat over the question of what the implications of the Fed's latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation. Whether or not the Fed will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty. And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the Fed's balance sheet, and how the change in composition in Fed assets will impact all marketable asset classes. We have conducted a rough analysis on how QE2 will reshape the Fed's balance sheet. We were stunned to realize that over the next 6 months the Fed may be the net buyer of nearly $3 trillion in Treasurys, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.

A Question of Size

One of the main open questions on QE2, is how large the Fed's next monetization episode will be. This year's most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke's next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a Fed that is known for "forceful" action. Others, such as Bank of America's Priya Misra, have loftier expectations: "We expect the size of QE2 to be at least as much as QE1 in terms of duration demand." As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities. It is thus safe to assume that the Fed's QE2 will likely amount to roughly $1.5 trillion in outright security purchases. However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.

A Question of Composition

Probably the most important fact that economists and investors are ignoring is that QE2 will be accompanied by the prerogatives of QE Lite, namely the constant rebalancing the Fed's balance sheet for ongoing and accelerating prepayments of the MBS/Agency portfolio. This is a critical fact, because once it becomes clear that the Fed is indeed commencing on another round of monetization, rates will collapse even more beyond recent all time records (and if we are correct, could plunge all the way to zero). What is very important to note, is that as Bank of America's Jeffrey Rosenberg highlights, a material drop in rates, which is now practically inevitable, is certain to cause a surge in mortgage prepayments of agency securities: "Our mortgage team highlights a 100 basis point decline in rates would raise the agency universe of mortgages refinanciability from currently about half to over 90%." (full report link)

The fact that declining rates creates a feedback loop on prepayments, which in turn results in more security purchases and even lower rates, is most certainly not lost on the Fed, and is the primary reason for the formulation of QE Lite as it currently exists. Indeed, those who follow the Fed's balance sheet, are aware that the MBS/Agency book has declined from a peak of $1.3 trillion on June 23, to $1.246 trillion most recently, a decline of $53 billion, which has been accompanied by $25 billion in Bond purchases, resulting in such direct FRBNY market involvements as $10 billion weekly POMOs. These, in turn, are nothing less than a daily pump of liquidity into the Primary Dealers (who exchange bonds boughts at auction for outright cash) by the Fed's Open Market Desk, which then liquidity is used to the PD community to bid up risk assets.

If we are correct in our assumption that on November 3, the Fed will announce a $1.5 trillion new asset purchase program, the implications of the previous observation will be dramatic. We additionally believe, that unlike QE1, the Fed will be far less specific as to the composition of purchases this time around, specifically for the aforementioned resion. As the Fed adds an additional $1.5 trillion in total assets, and as 10 Year rates, and thus 30 year cash mortgage rates, drop, the prepayment frequency of the Fed's existing MBS/agency book will surge, until it approaches and surpasses BofA's estimated 90% in a very short period of time. And courtesy of its QE Lite mandate, the Fed will purchase not only $1.5 trillion of US Treasurys as part of its new QE2 mandate, but will actively be rolling those MBS and Agencies put to it by the general public. As a result, it is our belief that over the six months beginning on November 3, the Fed will end up purchasing almost $3 trillion in US Treasurys in total. This can be summarized visually as follows:

As the chart shows, while the Fed's balance sheet grows from its current level of $2.3 trillion to $3.8 trillion, it is what happens to the Treasurys held outright by the Fed that is most disturbing: from $800 billion, we expect this number to surge to nearly $3.6 trillion in just over half a year, a massive increase of almost $3 trillion. The implications of this asset "transformation" on the Fed's balance sheet, not to mention those of US retail and foreign investors, and capital markets in general, will be dramatic.

Offerless Bonds?

One of the main problems facing the Fed in indirectly monetizing US Treasurys (keep in mind the proper definition of monetization is the Fed buying bonds directly from the Treasury, as opposed to using Primary Dealer middlemen, which is how it operates currently), is that there simply are not enough bonds in circulation to be bid, under its current regime of operation! Readers will recall that as part of existing SOMA guidelines, the Fed is limited to holding at most 35% of any specific marketable CUSIP. Furthermore, applying the SOMA limit to the $2 trillion in upcoming next twelve month issuance, means that in the interplay of the prepayment feedback loop coupled with collapsing rates, the Fed will need to either change the cap on the SOMA 35% limit, or the Treasury will need to issue far more debt to keep up with the sudden expansion in the Fed's outright, and not just marginal, capacity for incremental debt. Priya Misra summarizes this conundrum facing the Fed best:

We examine the Treasury market to analyze which part of the curve might benefit the most from Fed buying if it embarks on QE2. The constraints will come in term of the 35% SOMA limit as well as current outstandings and issuance profile. Table 5 provides the breakdown of average SOMA holdings and eligible dollar amount outstanding by sector. We estimate that in the nominal coupon universe, there is currently $1.3trillion in outstanding eligible issues for the Fed to buy. We compute eligible number of issues as the amount the Fed can buy without breaching its SOMA limit of owning 35% of the issue size. Considering that the Fed has not purchased 0-2 year securities in either QE1 or the reinvestment program so far, the eligible universe reduces to $935billion. Interestingly, $560bn of this is in the less than 7 year sector.

While the total eligible securities may seem like a low number in the context of QE2, we expect $2.1tn in gross issuance over the next year. Adding 35% of this gross issuance to the total, the Fed will have $1.67tn in eligible nominal outstanding to purchase without breaching the 35% limit. However, depending on the total size of QE2, much of the buying might have to be concentrated in the 2-7 year sector. To the extent that the Fed wants to keep long end rates low, it might have to increase the 35% SOMA limit, or the Treasury could change issuance.

We believe that the resolution to the limited supply question will be found promptly, as the last thing the US government and Treasury need is to be told that they need to issue more debt. We are confident they will obligly handily. From a purely structural perspective, suddenly the entire UST curve, and not just the "belly", will be offerless, as the Fed will now have a mandate of buying up virtually every single bond available in the open market, and then some! What this means is that rates will promptly plunge, and while many have noted the possibility that the 10 Year drops below 1% upon the formal announcement of QE2, we believe there is a very high probability that even the long-end can see rates drop substantially below 1%, while the 10 Year approaches 0%. Keep in mind that this move will not be predicated upon inflation expectations whatsoever (and in fact we believe this is merely the first step to an outright monetary collapse also known in some textbooks as hyperinflation), but merely as a means of frontrunning Ben Bernanke, as the entire bond market goes offerless, knowing full well that the Fed will buy any bond below its theoretical minimum price of 0% implied yield (we leave it to our readers to determine what this means price-wise on the curve). It also means that the Fed will finally cross the boundary into outright monetization, as Bernanke will be forced to directly bid for any new paper emitted by the US Treasury, to maintain the tempo of its purchases.

Asset Implications

As we have noted above, the immediate implication of the vicious (or virtuous if you are Ben Bernanke) feedback loop of collapsing rates, prepayments, and accelerating UST purchases, is that mid-and long-term rates will likely promptly approach zero, as every UST holder realizes they are now the marginal price setter in a market in which there is a bid for any price. The Fed will merely render the traditional supply/demand curve meaningless, and any bonds offered for sale at any price will be bid up by Brian Sack. The implication on stock prices is comparably obvious: to readers who have been confounded by the impact on stocks when there is $10 billion worth of POMOs in a week, we leave to their imagination what the impact on 4x beta stocks will be once the Fed floods the market with $90 billion worth of weekly liquidity, which is what we calculate to be the peak repurchase activity between the months of January and March, as QE2 ramps up to its full potential. In this vein, analysts such as Deutsche's Joe LaVorgna who this Friday came out with a note advising clients not to "Fight the Fed" (link) may take the message to heart. After all, if this last attempt by the Fed to spur asset price inflation, in which Bernanke is effectively telling the consumer that a house can be had for no money down, and for no interest ever, thereby eliminating the risk of price deprecitation, fails, it is game over.

And speaking of game over, we dread to look at a chart of the DXY in early 2011. The dollar will plunge, pure and simple, as the Fed makes it clear that it will not tolerate currency appreciation. Also, don't forget that as a side effect of QE2, another component that will surge in addition to Fed Treasury holdings, will be excess reserves held by the banks. If we are correct in estimating that the Fed's assets will explode to $3.8 trillion, then bank excess reserves will skyrocket by a factor of 150% from the current $1 trillion to well over $2.5 trillion. The immediate casualty of this will be the US Dollar: one needs to look no further than 2009 to see what happened to the DXY when excess reserves increased by $1 trillion, in order to extrapolate what happens when it becomes clear that Bernanke is prepared to put any amount of liabilities on the Fed's balance sheet in its latest reflation attempt. And if anyone had doubts about the Fed being able to successfully absorb $1 trillion in excess reserves accumulated through QE1, all those concerns will be put to rest once the number hits $2.5 trillion, or more.

Which brings us to gold. Needless to say, once the full "all in" realization of just what QE2 means for risk assets and capital markets sets in, gold (and other physical commodities) will promptly go from its current price of $1,300 to a number well in the five-digit range. We leave it up to our readers to provide the actual digits.

In summary, David Tepper may well be right that stocks will benefit from QE2, as will Bonds and as will commodities. In fact, every asset class will explode in a supernova of endless liquidity. To be sure, all of this will be very short lived. Very soon, all those assets denominated in fiat paper, will promptly collapse in the great black hole of reserve currency devaluation, as it becomes clear that the Fed will stop at nothing to win the race of global currency debasemenet. And of course, none of this is to be confused for an actual improvement in the economy, as QE2 will result in a dramatic and irreversible deterioration in the US, and thus global, economy, which, once the initial euphoria from QE2 recedes, will promptly progress to isolationism, protectionism, currency wars and exponentially accelerating monetization of each and every asset class, thereby rendering price discovery irrelevant, as central banks around the world stampede into irrelevant capital market, each buying up as much of everything as their printing presses will allow them, until the ink runs dry.

At this point we refuse to pass ethical judgment on the Fed's actions. The Fed will do this action regardless of what happens on that other fateful event scheduled to take place on November 3. If it does not, asset prices will collapse leading America into a deflationary vortex of deleveraging, and Bernanke is fully aware of this. The only reason the market has found some validation to the September risk asset surge, is the "certainty" of QE2. Were this to be taken away, stocks would plunge, as would all other assets. And since the Fed is uncontrollable, and unaccountable to anyone, it is now impossible to prevent this line of action, whose outcome is what some may be tempted to call, appropriately so, hyperinflation. The direct outcome will be an explosion in all asset prices, although we continue to believe that of all assets, gold will continue to outperform both stocks and bonds, as recently demonstrated. Those who are wishing to front-run the Fed in its latest and probably last action, may be wise to establish a portfolio which has a 2:1:1 (or 3:1:1) distribution between gold, stocks and bonds, as all are now very likely to surge. We would emphasize an overweight position in gold, because if hyperinflation does take hold, and the existing currency system is, to put it mildly, put into question, gold will promptly revert to currency status, and assets denominated in fiat, such as stocks and bonds, will become meaningless.

And while Zero Hedge refuses to condemn what is now openly an act of war against the US middle class and the country's holders of dollar-denominated assets, by Ben Bernanke, who is fully aware what the implications of QE2 will be, we were delighted to read a brief note by none other than Bank of America's Jeffrey Rosenberg, who analyzes the costs of QE2, and comes to a politically correct conclusion which recapitulates everything said previously.

The costs of QE 2 in our view however go beyond the cost benefit analysis Chairman Bernanke highlighted in his Jackson Hole speech. There, the Chairman highlighted two key risks to additional purchases of longer-term securities. First, that they do not know with precision the effect of changes in Fed holdings of securities on financial conditions. On this point we have emphasized on numerous occasions that the main consequences of QE1 to date have been financial asset inflation. Further purchases under QE2 hence in our view would likely be limited in impact to furthering this process of asset inflation. However, the costs of even further asset inflation would likely accelerate the risks associated with what we characterize as conditions conducive to the growth of a credit bubble: low global yield levels, tight credit spreads, and an excess of demand for credit relative to supply. While those characteristics create asset inflation and form the backdrop of our near term bullish outlook on risky asset class performance, the risks of sparking future credit bubbles with their attendant systemic risk consequences grows under a scenario of QE2, in our view.

It’s the (lack of) confidence, stupid

The second risk highlighted in Jackson Hole by the Chairman concerns the confidence effects of Fed’s ability to exit accommodative policy and shrink the size of its balance sheet. While we agree with the notion that the key risk is one of confidence, the confidence impact of greater near term importance may lie less with concern over the Fed’s eventual ability to exit and more with what expanding QE2 says about the Fed’s confidence in its ability to utilize monetary policy to address deflationary risks.

Bernanke acknowledged that fiscal policy needs to be part of the policy response and that “Central bankers alone cannot solve the world’s economic problems.” In our assessment, further liquidity injection beyond some additional marginal transmission mechanism into mortgage refinancing or housing affordability would achieve little impact on the real economy. Much of the liquidity benefit of QE1 for the commercial side of the economy already remains on display in the form of very high rates of corporate refinancing activity. Additional rate declines from QE2 would add only marginally to those trends well underway. For smaller corporates or small business, QE1 did little to expand lending, though QE1 likely did prevent even further declines in lending. However, QE alone appears incapable of leading to expanding lending as the problems today shift from one of supply to one of demand. Chart 5 illustrates the stabilization of lending and how most of the Fed’s expanded balance sheet remains in the form of cash, not loans. Chart 6 shows that even as banks have eased underwriting standards, the demand for loans remains low.

Rather than liquidity – and its potential augmentation from expanding QE - the key issue behind the inability to see credit expansion and the weakness of monetary policy more broadly to affect a more positive economic outlook is confidence. And this leads to our final cost analysis on QE2. Where confidence stands as the key issue for the economy, expanding QE2 may end up doing more damage than good as the confidence loss from a Fed indicating its fears of deflation through expansion of QE2 as well as the follow on loss of confidence from the diminishing impact of further QE leads to a loss in confidence whose costs outweigh those of the benefits of further reductions in long term rates.

Perhaps at this point it is prudent to recall what the first definition of credit is:

1. Belief or confidence in the truth of something.

By that defintion, America's "credit" has ran out.

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Alexandre Stavisky's picture

Everlastingly men seek to further their comfort in this world.  Best it is done by barter with their fellow man in strict adherence to regulatory law derived from the most fair law.  The garden of creation is defiled when men seek to obtain by fraud or force.  Rather than farm or manufacture, men try to take by sword and rule of rigour.

There is no component of monetary transaction so necessary as morality.  That one agent may completely exchange with another completely, without subtlety, innuendo, winnowing attainder, or smallest reservation.  That both meet, make durable comparison and equal trade, and part, without any further engagement is the quintessential act of perfect trade.

But small men cannot allow such perfect exactitude.  They must find ways to control not only the unit of account, but also must monitor and exact tax upon each and every capability of man that makes a switch that furthers his material comfort.  Small men must control the most perfect commodity used which SHOULD hold indefinitely the summations of his exchange.  And then they corrupt and make fast half-life degradation of it.  Next, they learn the careful ability of holding their fellow (but infinitely duller) neighbors in annual servitude.  This they do by both condemning their fellow by the law if he does not offer up tribute to the state yearly of whatever paltry gains he may make by sweat and blood, also they do so by by issuing (without the citizen's EVERY consent) new bonds of differing duration which claims upon his futurative labour.  This shall be torn from his economic body whether he is ready or no.

The men who seem most readily able for such a mercenary performance are those who are supposed to espouse the highest of high ideal.  These are the men of high state, supposed of purest motives, without personal thought, whose every purpose and, indeed, devotion should be to the betterment of their fellow men.

Too bad that this is a lie.

They seek office for vanity and riches.  They suborn the idyllic laws to obtain that which is not inherently within them.

They promise far beyond their capacity to deliver.  Their promises, built upon broken backs of the yeomen who (ignorant of their treacherous barter) believe in the gilded guiding lights of a constitution or bill of rights, are subtracted from those who virtuously act to better their lives and those under their husbandry.  The malefactors, by their subterfuge, are enriched (but never satisfied) while the good find their stores raided, their ample labour made suddenly unsatisfactory for durable existence.

Those whose existence is pretenced upon stewarding the storehouses of all, and whose earliest nursings were in the mother's milk of Judeo-Christianity, lately seem to spurn the simplest of black law.  THOU SHALT NOT STEAL.  Thou shalt not debase.  Thou shalt not sneak, nor take without equal exchange.  Thou shalt not make uneasy, the populace who depend upon you to safeguard their stores.  Thou shalt not deprive they neighbor of his substance.  Thou shalt not try to mask the insolvency which long arrogance against the laws of GOD and man have brought you to.  Thou shalt not seek to place the want of idleness upon thy industrious neighbor.  Thou shalt not seek to obtain abundance in excess of the possible.

This nation and many of its inhabitants have unwittingly imbibed from a fouled fountain.  That fountain is the same as Sodom and Gomorrah.  Its art and downfall was in taking riches not earned by setting foottraps and snares for the unaware wayfarer.  Making and innocent sin and defile himself against the law in order that the snaresetter may strip him of his goods--and possibly set him wounded in an infrequented road.  This is their art.  This is their means of attaining a marketbasket.  THIS IS AN ABOMINATION TO HE WHO PUT THEM UPON THIS TINY BLUE STONE.

This is the policy and urgent work that the central bankers about the world enact.


Put the balance sheet right.  Liquidate that which must be.  Let the chips fall where they may.

Usury has always been proscribed in all holy literature.  Kick against the pricks as they try, they cannot remake the old laws.

Bankruptcy must be declared.  The wound must be endured.  The healing begins only when the fullness has been suffered.

Otherwise it is maelstrom, limbo, zombification, a world of never movement.

The earth hates a cheat, a tyrant, a liar, a thief.  Yet this is all the financial world is composed of anymore.  In great and small degree.  It is time that those who hope for a higher plane, turn their back and never look back upon a system that has no future and infects all who touch it.

Bob Sponge's picture

May God bless us all with the ability to live through this and come out the other side with a better world to live in.

Bruce Krasting's picture

Unfortunately there is very little prospect that we will get to the "other side" and the world will be better. It is almost certain it will be worse. The problem is that for many of us it will be "worse" for the rest of our lives.

MichaelG's picture

Even less prospect of God playing a part unless He starts buying USTs in size.

MichaelG's picture

If that was an 'I like God' junk then it is incumbent upon you to elaborate as to how God will help at this juncture.

Sudden Debt's picture

I wonder how many junks you would have got if you said thing like "GODDAMN" or "HOLY FUCK". My bet... more then 2.

Harbourcity's picture

We're screwed.  God has been dead for a long time.


Bananamerican's picture

actually, if you strip out the Nick Cave verbiage, Alexandre pretty much nailed his Jeremiad.

BTW, I junked ya Harbourcity.

Of course there IS a god (sans penis nor beard...). We wouldn't even be here kvetching about the Drama if there wasn't....We're screwed because MAN has been dead for a long time....We're screwed because Man is an amnesiac with "urges"


Hephasteus's picture

This is a "gentle" application of bad behavior. Create a crisis, disrupt everyones dreams and plans to reformat and reforge the way the world will be changed to. Like emptying the bank account and buying a boat without talking to your wife it's a power play. No holds barred comes after it doesn't work.

Of course they don't want this to be a horrible hell on earth. They just want you to go back to school pile up a student loan and work 12 hours a day for next to nothing making their new world. You know how to fix a stator on a 50 foot wind turbine. They want to teach you.

DaveyJones's picture

"Central bankers alone cannot solve the world’s economic problems.”  No, but they sure can create them

Misstrial's picture

CB'ers controlling currency paper are like muons in the Hadron Collider.


alien-IQ's picture

the effect this will have on food and fuel prices combined with the fact that it will almost certainly fail to do any good for the economy may very well take this country to the tipping point of social order.

quite clearly...the enemy has breached the castle walls and is now among us.

this is gonna get ugly.

Bringin It's picture

Among us ... Humungus ... And among us.

cole's picture

After 10 months of your comment I think tienez reason and in Europe beginning to take to the streets in protest of the workers cutting measures. Other countries such as Portugal, Italy and Spain with major problems

Alquiler de pisos - Hipotecas - Fotos de paisajes

Ned Zeppelin's picture

This is an important ZH post. This is the future. This is what is happening.  Few notice, and 98% don't care.

masterinchancery's picture

Which lives, in the event of currency collapse, may well prove nasty, brutish, and shortened.

doolittlegeorge's picture

quite a meltdown "engineered at the top" indeed.  of course name a single government phuck who ever respected a work ethic.  "you come to us" is what i was told.

Bringin It's picture

I think Cheney worked hard.  He did manage to get himself a bum ticker.

anonnn's picture

The Free Market

Contract With America

 Financial Innovation

 Fine Print

Edward Bernays* must be so proud.

*Father of modern Propganda [publ.1932]

nmewn's picture

I have no idea why you were junked twice.

"They seek office for vanity and riches.  They suborn the idyllic laws to obtain that which is not inherently within them.

They promise far beyond their capacity to deliver.  Their promises, built upon broken backs of the yeomen who (ignorant of their treacherous barter) believe in the gilded guiding lights of a constitution or bill of rights, are subtracted from those who virtuously act to better their lives and those under their husbandry.  The malefactors, by their subterfuge, are enriched (but never satisfied) while the good find their stores raided, their ample labour made suddenly unsatisfactory for durable existence."

If there are only two ignorant SOB's left lurking here, all has been done that can be done.

Sabremesh's picture

Comments on a financial blog which make constant reference to absurd iron age religious beliefs are junk, by definition.

If you have a point to make, drop the fire and brimstone mumbo jumbo.

nmewn's picture

First, I did not junk you.

Second, find for me the reference to any religion from the quote I pulled from the post above.

Third, my impression is, your avatar has a distinctly "iron age" feel to it. Why would that be?

gmrpeabody's picture

They obviously are having problems comprehending what they are reading.

fiftybagger's picture

Science and technology advance.  Right and wrong are fixed.  Hence your delusion...

nmewn's picture

"Science and technology advance.  Right and wrong are fixed."


I have always found the vehement protesting of any and all references to a religion (particularly the Christian faith) curious...as the discussion progresses, the protestor will become...well, quite strident and dogmatic. Exactly the thing he say's he opposes.

It's almost as if they were tied down to a bed and holy water is being sprinkled on them...ROTFL.

To think an entire post on the legal, ethical, moral implications of debasing the currency and what that actually does to real people and pointing out the evil that it really is...deserves to be junked because in the discussion of morality the author touches on religion is absurd.

I'm no shrink...but there is something there to be explored by people smarter than I.

JR's picture

Well said, nmewn. There’s a point to be made concerning the discussions here on religion and the junking practice.  This is a financial site and given the financial crisis our nation is now enduring there is one word that some people believe has religious overtones but is a word perhaps more appropriate to the financial crisis and the times we are facing that any other.  And that word is: Usury.  

Yes, it is biblical but it now is current.  There is an avalanche of precious value--realized by everyday Americans working, saving and dreaming of a future--that is sliding into the pockets and estates of financial tyrants.  Their weapon in this transfer is usury-- fashioning laws and regulations and adopting bribery, political blackmail and the lethal force of a superpower to force the transfer.

In addition, in any discussion of economics and markets, there is a definite need to deal with the principles of ethics and morality.  And to suggest that these terms derive from a religious source is to be absolutely correct.  In this country, the source was the Christian beliefs of the Founders who applied in the Constitution the trust that freedom was derived from God and not from man and that freedom created a climate where prosperity and sound money would thrive.  This trust built an American system that prospered on voluntary support by the people of that government and its public officials bound by that Constitution.  Surely, this then forms the basis for operative free markets.

nmewn's picture


Agree and I did want to speak on this now that I have some time.

The thing, the charging of interest (usury) I can find nothing inherently wrong with. It can be dangerous if abused like a lot of things. I look at it like a knife or a baseball bat. Either can be used for good or evil. If we are to be truly free we must be free to make decisions for ourselves and live with the consequences whether they're good or bad.

To charge for the use of excess savings cannot be wrong, I would think, because what you are doing is placing your earned labor in the hands of another. The interest is a form of payment for the amount of time one cannot access ones prior labors (savings) should the need arise. This is all predicated of course on excess savings. I would be interested in your view on this as to it's general morality.

The problem, as I see it, is it's monopoly abuse by the federal government who has the ability (and apparently the will) to devalue the return of your labor plus interest, agreed to by contract between two interested parties, at any given moment, by debasing the currency...the medium of exchange between the two.

And, of course the obvious, there is no savings to be loaning from...LOL.

The attendant problem to all this is the political will to stop spending what they don't have. If a politician knows the fed can just create money out of thin air there is no discipline to not give people what they clamor for...always.

In our real world, if it comes down to food on the table or a new toy for the child most parents opt for food on the table and let the kids scream their heads off...until they get outside ;-)

CrackSmokeRepublican's picture

Hey nmewn,


How many times have the Jews been kicked out of a country for

practicing TALMUDIC Usury which is "Sanctified" in their Babylonian Talmud? 


Can you count that high and let us know here...?

Is the number higher than 70?


Like Bernanke or Soros... Jews at the end of the day are not that smart and should not be left to practice their religion on unsuspecting "Goyim" (Cattle)...

Someday, the boot will find your Jew Scamming ass... ;)  ... won't it.


Too bad ZeroHedge doesn't have a "Jew Wise" flag on their board... lol...




Parallels between Talmudic and New York Usury Laws
Bernard J. Meislina
Member of the New York Bar
meislin bj

The two jurisdictions with the greatest volume and complexity of laws dealing with usury are the United States and Israel. England, the wellspring of our common law, and one of present-day Israel's legal fonts, did away with all regulation of interest over a century ago. All of continental Europe contains only two or three jurisdictions which apply legal limits to interest on loans. The communist countries present a special situation since private loans at interest have no official place in the economic system. Islamic countries, like Pakistan, constitutionally frown on interest but it is present in practice, thereby embarrassing the secular authorities. However, the extent of legal experience with loans at interest in all other jurisdictions combined does not rival that wealth of elaborate study which is to be found in judicial decisions and legislative documents in American and Jewish law. It is, therefore, of interest to examine from a comparative standpoint the approach to usury taken by United States' courts and by Jewish legal authorities to see in which respects they differ and are similar.

JR's picture

I agree with everything you say, nmewn; it was very well put.  Still, I think the traditional concept of interest paid on money loaned doesn’t mean anything in an age of fiat money with excessive Fed printing and where one side is lying about inflation.  It’s no longer a good deal, dealing with the banks.

Interest on a borrower’s use of a saver’s stored value, i.e., his money, should be worth more than a negative inflation rate. When the banks pay less on your deposited savings than the rate of inflation, I consider that usury.  Under special arrangement with the Fed, the bankers can now bypass your deposited earned savings because they don’t need your money to lend any longer. The Fed is giving them unbacked free money created out of thin air.  Thus, saved earnings backed by value have been pushed out of the picture by counterfeit money bereft of support.  

The end result of a monetary unit that is not backed by a commodity of honest weight is the destruction of a sound monetary system, IMO.

This is not only unfair; it is thievery, i.e., legal plunder, i.e., usury. If I store my money at Bank of America for 1% with inflation running at 8.5% (calculated per SGS 1980 method) as it currently is, and BofA loans that money out on credit for 29.85%, that’s usury; they are taking advantage of me and the borrower.  When the Bible was written, there was no fiat money; it’s a new invention and it’s time, IMO, to redefine usury taking into account the illegal creation of money out of thin air.

As Greenspan once said, the “shabby secret” of paper money is that it is nothing more than a “scheme for the hidden confiscation of wealth.”  Our Founders warned against the temptation to seek wealth and fortune without the work and savings that real prosperity requires.

If there is no free lunch, why should JPM and BofA be able to eat ours...?

nmewn's picture

I guess you've convinced me.

Not that it's immoral conceptually, but because of the intervention between the two party's (the loan giver/taker) by an alliance between the state & the fed as was warned about by many at our founding as a nation.

I had been of the opinion that (theoretically) there should be no limit one can charge on interest as the market would quickly weed out those who charge excessive interest or fees, provided there is competition...that is, no monopoly.

With this state/private alliance in place there can't be a free market. It is simply Guido or Vito...LOL.

Thanks for your thoughts JR.

I see you and Seer are having an exchange around this topic as well...freedom of religion does not mean freedom from religion.

One wonder's what the words Divine Providence mean to him? ;-)


Seer's picture

"In this country, the source was the Christian beliefs of the Founders who applied in the Constitution the trust that freedom was derived from God and not from man and that freedom created a climate where prosperity and sound money would thrive.  This trust built an American system that prospered on voluntary support by the people of that government and its public officials bound by that Constitution.  Surely, this then forms the basis for operative free markets."

Freedom was derived from "God?"  False. That was not stated that way: it's NOT in any official document.  Feel free to point out your reference.  Further, to speak as though the "founders" were somehow on the same page is, well, wrong.

The "success" of the American Experiment is nearly ALL attributable to the fact that there were untold, untapped riches, "free" for the taking.  This country was built pretty much the way EVERY country was built: through genocide and slavery.  I have to laugh that somehow, after the the thousands of years of mankind's civic-oriented march that somehow, magically, everything "clicked" upon setting foot on the North American continent, that mankind all of a sudden became more civil.

It's awfully convenient to externalize and mythologize.  This story sure has meant success for the few who control the bulk of the ownership society.

JR's picture

Seer, “ownership society” is a catch phrase of the Marxists.

I consider the Declaration of Independence the most official and authentic document ever produced in the world.  It signifies and separates the colonies from the mother country.  And if that isn’t an authentic document, I don’t know what is.  The Constitution was an understanding that the Founders were there to forge a new country based on freedom, a foundation that was detailed in the Declaration of Independence.

The Declaration of Independence is just as important as the Constitution, IMO.

As far as the premise that the Founders had the approval of God, there are thousands of pieces of correspondence between them that prove this beyond a shadow of doubt.

Jefferson’s preamble said that the reason for the declaration is that man has certain rights, and we claim those rights, and those rights were given by God.  We fought a war for that reason—because we had rights given to us by God.  That was enough; no more was needed.

The Declaration of Independence was the basis for the Revolutionary War and established the independence of the colonies of America.  It was the line in the sand—a declaration of war; it was the establishment of America.

I’m hoping, Seer, that your are not like Elena Kagan and Obama and are going to dismiss the foundation of America as it was established after the Declaration of Independence—and signed by men representing the people in the colonies.

TJ_is_annoyed's picture

"The Declaration of Independence is just as important as the Constitution, IMO."

Completely agree.

"As far as the premise that the Founders had the approval of God, there are thousands of pieces of correspondence between them that prove this beyond a shadow of doubt."

Again, completely agree. In recent years, attempts have been put forth to try to show that the founding fathers had no religious preference (or religious thoughts at all).  These vain attempts fall flat when one reads the writings of the founders.

"Jefferson’s preamble said that the reason for the declaration is that man has certain rights, and we claim those rights, and those rights were given by God."

I posted this last week (as you already know), but it's worthy of being posted every week:

The Declaration of Independence uses the word "unalienable".  Don't read the word as "un-alien-able", rather read it as "un-a-lien-able".  Meaning no one can put a lien on the rights that GOD has given us. 

These men should be celebrated as some of the greatest men of history.  Has there ever been 2 documents that gave so much freedom to so many people?


doolittlegeorge's picture

i know i couldn't say it any better.

doolittlegeorge's picture

sorry to respond so tardily.  i saw sleepy bears yawning and "opened up out of season."  don't worry..."science has protein pills for the rest of ya'."

Azannoth's picture

"It's almost as if they were tied down to a bed and holy water is being sprinkled on them...ROTFL."

Well if you only knew how holy watter burns on youre face, while being tied to a bed with 2 gay penguins stanind over you chanting curses you wouldnt be making a joke about it

nmewn's picture

I thought it was funny too ;-)

Off to work.


Pondmaster's picture

I ,also , see no reason for 2 junks . I think you hit a nerve somewhere. Must be Wall St, Fed, D.C. sympathizers lurking . Junk them to exile please. 

Miramanee's picture

With all due respect, the world doesn't hate cheats and liars and thieves and murderers. All of the research in neuroscience tells us that humans act most often in response to primitive behaviors that preempt the reasoning part of our brain, the pre frontal cortex. QE2 will precipitate another feeding frenzy in equities, even among the self-proclaimed Gandhi's of the world. Why? Because at a most basic neurological level, we are all greedy.

MichaelG's picture

We're not all greedy (we're really not), but whether we hate "cheats and liars and thieves and murderers," or don't, we still vote for them, and so my initial proposition becomes irrelevant. (And, yes, the 'rational' part of our brain is to our actions as the appendix is to our digestion.)

Miramanee's picture

I agree. We are not all greedy, per se. My point is that we are, more often than not, the product of actions borne not of ratioanl thought, but of primitive emotions and defenses.

CrockettAlmanac.com's picture

We're not all greedy (we're really not),

Who do you know who does not wish to fulfill his desires to the fullest extent possible? Even if one desires to live a charitable or ascetic life such desires arise within the self and the motivation to fulfill those desires is selfish.

Greed exists only in the eye of an envious beholder and those whom the envious one would enlist as allies in games of mooching and looting.

Those who condemn greed and selfishness open themselves up to assault by anyone who has less than they do.