Federal Reserve

Thomas Jefferson would have approved ...

Lately there has been some confusion as to who of the Fed's 12 presidents is a hawk and a dove. Luckily, SocGen provides a handy tearsheet to keep track of who, as per recent public appearances, is hawkish, who is bearish, and who is largely irrelevant (everyone) considering that nobody has dissented at an FOMC meeting since Hoenig left the voting spot. Ultimately, the deciding vote is always and only in the Chairsatan's hands.

A hearing that is sure to spark a lot of controversy and debate will be held today at 10 am EDT, by the Domestic Monetary Policy Subcommittee, chaired by presidential candidate Ron Paul. As noted, "The hearing will explore the fundamental role that U.S. government debt
plays in the monetary system; the use of Treasury debt by the Federal
Reserve in conducting monetary policy; and the troubling reliance of
Congress on the Fed to print money to facilitate deficit spending." Alas, there will be no Fed members testifying at the hearing, instead we will hear from Dr. Richard Ebeling, Professor of Economics, Northwood University, Bert Ely, Ely & Company, Inc., and Dr. Matthew J. Slaughter, Associate Dean, Tuck School of Business, Dartmouth College.

From the bears who explained Quantitative Easing, we now get a crash test dummy simplifying the Federal Reserve's current outlook on life, the universe and everything, courtesy of yesterday's press conference. All confusion abandon ye who enter.

A few days ago Jim Rogers prudently warned that silver had entered parabolic mode and the the only case which would not lead to a collapse in silver prices (once silver hit $100 that is) is if the Federal Reserve note, or the liability to all those uber-valuable Fed assets known as Treasury Bonds (and of course Agencies, thank you QE1) became "confetti." Well, confetti is what we have. As of tonight, the dollar has just taken out the 2009 lows, and only the extreme carry trade which sustained the overall market into the biggest market crash ever, back in 2008 is now a lower point in the DXY index. In other words only a complete market wipe out, or an exogenous external event such as war, now that the market does not even blink at such black swans as civil wars, bankrupt European countries, nuclear catastrophes, and record earthquakes, can lead to some restoration in the purchasing power of the US currency. Incidentally, as the long term DXYchart below shows, the current dollar cash is by now means the most pronounced one. A far bigger one occurred in the mid 80s, when the dollar was cut in half from over 160 to 80, in a move that, as everyone who was alive back then and not merely some derivative of gaseous gallium metal and arsenic trichloride, recalls culminated with Black Friday. Oh yes, gold just hit another record high.

Marc Faber was on CNBC earlier, once again discussing things so patently obvious only the Fed can not grasp them. Namely that as long as cheap money floods the system hard assets will continue rising in value, and gold will continue surging. Which is merely part of the bigger picture: nominal prices continue rising as real prices, denominated in paper and linen, continue to decline. But have no fear: Bernanke can fix everything in 15 minutes. Only that's total BS: "One day they will increase it by a quarter percent. But what does it mean when commodity prices are going through the roof, energy prices are going up, health care costs are going up, insurance premiums are going up?" Somehow, Bernanke believes, a hike will immediately undo months and years of downstream costs progressing through the system. And surely subprime is contained... As for the proverbial gold bubble: "If it were a bubble a lot of people would have gold. The whole world would be trading gold 24 hours a day. But I don't think it's really a bubble. I think gold is maybe cheaper today than it was in 1999, when it was $252." Oddly enough nobody mentions that gold is the only market that is now not part of the Fed's central planning "wealth effect" mandate (and the price suppression mandate is failing by the day): surging gold prices are an indication of one thing only: the market's desire to impose its own gold standard at a mark to market price equivalent for dollar destruction. It is this aspect of the metal: to correlate with Fed stupidity, that makes it such an attractive investment. And since Fed stupidity is endless, does it mean gold's fair value is infinite?

When analyzing the Federal Reserve monetary expansions, pundits only assess economic issues like inflation, balance sheets, bubbles or public debt. Significant as they are, it will be very useful that all this smart people were added to the camp of those who want to “save the planet”. Let me to try pin down it.

There are two key datapoints to present in this week's Fed balance sheet update: the surge in excess reserves, and the comparative Treasury holdings between the Fed and other foreign countries. But first the basics: the total Fed balance sheet hit a new all time record of $2.5 trillion. The increase was primarily driven by a $23 billion increase in Treasury holdings as of the week ended February 23 (so add another $5 billion for yesterday's POMO) to $1.214 trillion. With rates surging, QE Lite has been put on hibernation and there were no mortgage buybacks by the Fed in the past week: total MBS were $958 billion and Agency debt was also unchanged at $144 billion. The higher rates go, the less the QE Lite mandate of monetization meaning that the Fed will be continuously behind schedule in its combined QE2 expectation to buy up to $900 billion by the end of June. Yet most notably, as we touched upon yesterday, the Fed's reserves with banks surged by $73 billion in the past week, as more capital was reallocated from the unwinding SFP program. As noted previously, we expect the total bank reserves held with the Fed to jump from the current record $1.29 trillion to at least $1.7 trillion by June.

The steady climb in Fed assets continues, with the left side of Bernanke's balance sheet swelling to just under $2.5 trillion, as US Treasury holdings hit $1.13 trillion, implying that the Fed's DV01 continues to increase on a daily basis with every single POMO, as we have been pointing out since last summer, and which the Fed decided to address last week by changing its "accounting" rules and guaranteeing its assets can never decline. The differential between the US and China is now $233 billion and rising. We expect our now second-largest creditor to realize the game theory balance of leverage (no pun intended) is shifting away from its favor (and to the Fed), and to respond accordingly. Alternatively, maybe someone will finally readjust the UK's holdings to properly reflect what could very likely be simply Chinese debt accumulation.

A must have Wall Chart for Super Dole 2011...

The steady climb in Fed assets continues, with the left side of Bernanke's balance sheet swelling to just under $2.5 trillion, as US Treasury holdings hit $1.07 trillion, implying that the Fed's DV01 continues to increase on a daily basis with every single POMO. The differential between the US and China is now $163 billion and rising. We expect our now second-largest creditor to realize the game theory balance of leverage (no pun intended) is shifting away from its favor (and to the Fed), and to respond accordingly.

The vast majority of Americans, including many of those who believe that they are "educated" about the Federal Reserve, do not really understand how the Federal Reserve really makes money for the international banking elite. Many of those opposed to the Federal Reserve will point to the record $80.9 billion in profits that the Federal Reserve made last year as evidence that they are robbing the American people blind. But then those defending the Federal Reserve will point out that the Fed returned $78.4 billion to the U.S. Treasury. As a result, the Fed only made a couple billion dollars last year. Pretty harmless, eh? Well, actually no. You see, the money that the Federal Reserve directly makes is not the issue. Rather, the "magic" of the Federal Reserve system is that it took the power of money creation away from the U.S. government and gave it to the bankers. Now, the only way that the U.S. government can inject more money into the economy is by going into more debt. But when new government debt is created, the amount of money to pay the interest on that debt is not also created. In this way, it was intended by the international bankers that U.S. government debt would expand indefinitely and the U.S. money supply would also expand indefinitely. In the process, the international bankers would become insanely wealthy by lending money to the U.S. government.

At this point the weekly updates of the Fed's balance sheet are becoming more or less an autopilot issue: each week the Fed will add between $25 and $30 billion of Treasuries, with the only real question becoming how much mortgages are being prepaid, and what is the incremental liquidity boost due to the weekly change in excess reserves. But before getting into those, here is a broad look at how the Fed's balance sheet looked as of close today (including today's $6.8 billion POMO).

I bet that either you, or someone that you may know, weren't privvy to the TARP 2.0 tax payer funded bailout right under your noses, and the government released the evidence buried in one of over a dozen spreadsheets featuring over 70,000 transactions, with the incriminating one featuring over 340,000 cells and over 10,000 transactions. We at BoomBustBlog suppose they thought no one would be good enough at Excel to ferret it out, or maybe they believed we were all just numb over hearing a trillion here, a trillion there. You know, after a while it starts to add up to real money.