Did The Fed Quietly Bail Out A Bank On Tuesday?

Tyler Durden's picture

Over the past month we have been closely documenting a major funding squeeze in the all important shadow economy - the "synthetic liquidity" conduit which far more than traditional sources of cash, has become all important for proper bank functioning over the past decade. Courtesy of adverse development in Europe, one by one various components of this unregulated funding scheme have become frozen necessitating the first of many central bank interventions on November 30 to provide liquidity to global banks, primarily to offset such shadow conduits as locked up commercial paper, repo and money markets. Logically, as noted over a week ago, European banks scrambled to obtain cheap dollars by borrowing over $50 billion from the Fed, and plug dollar shortfalls. Yet as all band aid measures designed to offset a broken liquidity equilibrium fail eventually, it was only a matter of time before we saw a direct bail out by the Fed of one or more banks in the aftermath of the November 30 global "bail out." Sure enough, we have our first clue that "something" happened in the week ending Wednesday December 14 that involved an upgrade of the Fed's indirect (and thus untargeted) bailout of global banks, to a focused, and very much targeted rescue of one (or more) banks. And with some additional diligence, it may be possible to narrow down the date of an actual bank bailout: Tuesday, December 13.

Exhibit A - Reserve Bank Credit

Two years ago, when discussing the transition of the world to one coordinated, centrally-planned regime we said that the only financial statement of any importance, updated weekly, is the Fed's H.4.1, or the "Factors Affecting Reserve Balances" which traces that flow of "last resort" cash from the Fed to the various organization that make up the reserve bank, primary dealer, and various other financial entities under the Fed's Lender of Last Resort umbrella. Simply said, anything abnormal in this weekly report of "flow and stock" (a simplistic distinction where the Fed is far more focused on what the absolute level of reserve numbers is, whereas Zero Hedge and the market believe it is the "flow", or marginal change, that determines, artificially, asset prices) would confirm our speculations that the Fed has stepped into into its now traditional role of bailing out the world.

The first thing that caught our attention was the all important total reserve bank credit - the most important big picture metric announced by the Fed on a weekly basis. As the chart below shows, after having plateaued with the End of QE2, and remaining stable during the duration of the "sterilized" Operation Twist (as it should), in the week ended December 14, total reserve credit soared by a whopping $81 billion or the most since May 27, 2009 when the Fed was actively undergoing the early stages of QE1 damage control.

So what was the reason for this huge jump in reserve credit? Two things - on one hand we had the already long-ago telegraphed increase in Fed liquidity swap lines by over $50 billion, or from $2.3 to $54.3 billion to be exact. However that does not explain the remainder. So where did the other $30 billion in credit expansion come from?

Exhibit B - The Plot Thickens: First Net MBS Bulk Purchase Since QE1

It appears that in addition to reverting to such an "old school" QE1 global bailout mechanism as FX swap lines, the Fed also did something it had not done in a long time, or since QE1 to be exact: it bought a boatload of Mortgage Backed Securities, an act it last engaged in on a net basis back on August 11, 2010, which in turn was a delayed settlement of an earlier purchase. As a reminder, the Fed's balance sheet settles any MBS purchases on the mid-month update so while the big spikes in the chart below between January and July 2010 are indicative of broad MBS purchases by the Fed under the auspices of QE1, when it was out purchasing a total of $1.25 trillion in MBS in hopes of lowering mortgage rates and stimulating housing, and thus employment (something it failed at miserably), in the mid-month week just ended, the Fed bought, and settled concurrently, an unprecedented $31 billion in MBS.

Obviously $31 billion jump in settled MBS purchases is notable considering the pattern of previous MBS net flows since August 2010. But under what auspices did the Fed go ahead and buy this whopping amount of Mortgage debt? And why?

As New York Fed itself tells us:

Agency MBS Tentative Purchase Amounts and Historical Operational Results

 

The Desk’s tentative agency MBS purchase amounts associated with the reinvestment of principal payments from agency debt and agency MBS in agency MBS are shown in the table below. The numbers listed are subject to change, should the Federal Open Market Committee (FOMC) choose to alter its guidance to the Open Market Trading Desk (the Desk) at the New York Fed during the monthly period or if market conditions warrant. The amounts listed are approximately equal to the amount of principal payments from agency debt and agency MBS expected to be received over the monthly period, adjusted for any variations from prior periods, as described more fully in the FAQs.

 

In addition, in order to ensure the transparency of its agency MBS transactions, the Desk will publish historical operational results, including information on the transaction prices in individual operations, at the end of each monthly period.

Specifically, in the period between December 13 and January 12, the Fed had permission to buy, wait for it, $30 billion.

And yet, there is a discrepancy as in a subpage detailing gross and net purchases the Fed reveals only $7.550 billion in net MBS purchases for the week ended December 14.

So obviously while the temporal matching is still not precisely clear, what is clear is that in the week ended Wednesday, The Fed provided a whopping $81 billion in additional reserve credit between FX swaps and MBS purchases, the latter having no other purpose than to release even more liquidity to banks which have simply converted one illiquid security, into another: cash. This answers the important question of "why" the Fed did what it did. It is also unclear whether this outlier transaction was demand driven or forced by the Fed. All that will be confirmed once we get the official breakdown of MBS POMO on January 13. Incidentally, here is what typical MBS purchases and sales look like on a monthly basis (excel table).

While these two balance sheet outliers would have in themselves made for curious observations, if insufficient to draw any particular conclusions, it is Exhibit C that puts things into perspective.

Exhibit C - Average Discount Window Borrowings

When the Fed updates its H.4.1 every Thursday at 4:30 pm, it provides two sets of data: an average over the period, and a period end number. And if one was looking to find a flashing red light within Bernanke's book, which has always without fail been a big change in Discount Window borrowings (either Primary, Secondary or Seasonal Facility), looking at the period end number would have shown nothing out of the ordinary: there was a modest $42 million borrowed from the Primary Credit Discount Window facility on the day ending December 14, Wednesday, far less than previous 2011 outliers. However, things rapidly change when one observes the average usage of the Discount Window for the past week.

The result is as follows: a $393 million surge in average borrowings:

And since we know that of the 7 days that make up the average period, one can be eliminated (as there was no borrowings on Wednesday), the implication is that on one day in the week ended December 14, the Fed lent out up to a whopping $2.5 billion (as the $393mm is an average 6 day number) to a bank in the form of last recourse cash via the Discount Window.

Confirming just this speculation is Barclays' Joseph Abate:

After months of virtually no use of the Fed’s discount window, borrowing jumped to an average of $400m/day in the week through Wednesday. The Fed reports only the weekly average of daily borrowing and the daily amount outstanding on Wednesday. From these figures, we estimate that on one day last week, total discount window borrowing reached $2.5bn. Of course, the same $400m/day weekly average could have been achieved with a bank borrowing $900mn on Friday. It is unclear what prompted this pick-up in borrowing from the Fed. There was neither a spike in the fed funds rate nor any disruption in the repo market, so we are a bit puzzled. Of course, under Dodd-Frank, the borrowing bank’s name will be released – after two years.

Yes, the name of the bank that received what amounts to a Fed bailout will be released in two years, but no, we disagree that there was no disruption in the Repo Market. Perhaps Joseph forgets that the Fed lends out Discount Window cash to "eligible" entities out of Europe... where the repo market is in total collapse and wholesale disarray.

Furthermore, the borrowing was from the Primary Credit facility, or that reserved for stable banks, not Secondary Facility eligible names which have to pay an addition 50 bps in punitive interest. And since the bulk of Primary Credit eligible banks domestically already are swimming in $1.6 trillion in fungible excess reserves (which is the reason why discount window borrowings have been so modest ever since QE1 unleashed a liquidity tsunami for the bank, which serves no other reason than to plug capital shortfalls - it certainly is not being lent out) it is obvious that the Fed is now back to its old job of bailing out banks. And not just any banks - European banks.

Some appropriate reminders from the Fed on the "lender of last resort" discount window use:

Terms & Features
To access the Discount Window, eligible depository institutions first must execute the necessary documentation and pledge collateral to the Federal Reserve.

Feature
Primary Credit
Secondary Credit
Rate
Above the FOMC's target for the federal funds rate. Primary credit rate plus 50 basis points

Term
Overnight Short-term, usually overnight. Can be extended for a longer term if such credit would facilitate a timely return to reliance on market funding or an orderly resolution of a failing institution, subject to statutory requirements (FDICIA restrictions).

Eligibility
Depository institutions in generally sound financial condition; same as eligibility for daylight credit. Depository institutions that do not qualify for primary credit.

Use
Generally no restrictions.
May be used to fund sales of federal funds.
As a backup source of funding on a very short-term basis, or to facilitate an orderly resolution of serious financial difficulties.

Administration
Ordinarily no questions asked. Reserve Banks will collect information necessary to confirm that borrowing is consistent with regulatory requirements.


Eligibility
Depository institutions to which the law grants access to the Discount Window and which the Federal Reserve deems generally sound are eligible to obtain primary credit. Reserve Banks determine eligibility on an ongoing basis using supervisory ratings and capitalization data; supplementary information, when available, may also be used.

Examination Rating
(CAMELS or equivalent)
Capital
Designation
Generally
Eligible for
1, 2, or 3
Adequately or well capitalized
Primary credit

4 or 5
Any
Secondary credit

Any
Less than adequately capitalized
Secondary credit

Common Borrowing Situations
The new Discount Window programs offer an enhanced opportunity for eligible depository institutions seeking an efficient solution to meet unexpected, short- term funding needs.

Likely Situations for Borrowing Primary Credit


Generally, there are no restrictions on borrowers’ use of primary credit. Here are some examples of common borrowing situations:

  • Tight money markets or undue market volatility
  • Preventing an overnight overdraft
  • Meeting a need for backup funding, including a short-term liquidity demand that may arise from unexpected deposit withdrawals or a spike in loan demand
  • Arbitrage opportunities

 

Conclusion

We know two things with certainty: In the week ended December 13 (14th excluded) one or more banks, most likely European, borrowed up to $2.5 billion from the Fed's Primary Credit Discount Window. And since US banks are drowning in dollar-based liquidity, any need to approach the Discount Window now, in the context of trillions of Excess Reserves, carries with its exponentially greater stigmata than it ever did during Lehman days. Also, in the week ended December 14, the Fed did a mid-month settlement of $31 billion in MBS purchases - a transaction which allowed a Primary Dealer to source critical liquidity, based on $30 billion in buyback authorization granted for the period beginning December 13. What we do not know for fact is whether the $30 billion in MBS purchases was completed on Tursday or Wednesday, and whether this is a delayed settlement for previous purchases, although due to the mid-month settlement process, it is possible that any transaction could have settled immediately. And for those seeking a specific "bank bailout" date, the 13th looks quite reasonable: it was the first day when an MBS purchase was permitted and it was the last day when a bulk Discount Window loan could have been performed.

But wouldn't the market learn of even a hushed European bailout? And wouldn't there be a massive sell off if it became clear that exactly two weeks after the Fed's coordinated broad bailout of European banks, it had to engage in another, far more politically tenuous bailout, this time via a $2.5 billion free money loan to a cash scrambling bank? Well, if the news was leaked at 2pm on Tuesday it sure would explain the market reaction...

So while much of the presented above is circumstantial, perhaps the next time Congress is debating with Ben Bernanke just how good it is for the US taxpayers to bail out European banks, someone can ask him just who it was that the Fed once again bailed out the week of December 14. Because America obviously does not have enough problems of its own...

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The Big Ching-aso's picture

 

 

If it was Tuesday the Fed must be bailing out Belgium?

Comay Mierda's picture

ZH is amazing.  The fed cant wait for the SOPA bill to pass to censor this website, though.  ZHers, enjoy it while you can

Fish Gone Bad's picture

I could not figure out why banks had stopped failing for the last few weeks (http://www.fdic.gov/bank/individual/failed/banklist.html), maybe the Fed was bailing out banks.

Comay Mierda's picture

bank bailout whack-a-mole until after consumermas is over

lotsoffun's picture

yes - we have to make it to the next year.  at that point, anything is anybodys gues.  anybody want to guess why?

(hint- hint - the banker bonuses even though they may be limited.  and within that, it will be limited for the little guys, but lloyd, jamie and there closest buddies won't take a penny hit, they will be up).

 

 

redpill's picture

Based on how long it took to find out about the first round of bailouts, I'd say we should know who got bailed out here by 2015.

redpill's picture

 

How does the Gandhi quote go?  "First they ignore you, then they laugh at you, then they fight you, then you win."

Well the Republican establishment candidates and the media are done trying to ignore Ron Paul, they've tried and failed to laugh at him as his support has grown.  Now the long knives are coming out, and in the last days before the Iowa caucus they are trying to fight him.

Please help with the Ron Paul Money Bomb this weekend, www.ronpaul2012.com - they are very close to their goal, even a measly $10 will be a help (which won't be worth $10 for long with the all the Federal Reserve is doing, so hurry!).

The bad news is that the smears and mischaracterizations are likely to continue from here on out.  It's official, Ron Paul is a THREAT.

The good news is the last part of that Gandhi quote.  Here's to Ron Paul's victory on January 3rd in Iowa!

 

wisefool's picture

You cant make this stuff up folks. Newt is the type of guy at the stage of oppulence in his life that he bragged in the last debate about "training 1 and 2 star generals" Ron Paul got drafted. If there are any generals who run around with pantywaist Newt as a mentor I am going to stick my ...

AldousHuxley's picture

Newt family values = upgrade your wife when whe gets old

 

BAC about to hit $5 again for the 3rd time in 3 months.

 

 

 

 

saiybat's picture

Here's what Newt thinks about family values

 

"A new civilization is emerging in our lives, and blind men everywhere are trying to suppress it. This new civilization brings with it new family styles, changed ways...a new economy, new political conflicts, and...altered consciousness... Humanity faces a quantum leap forward. This is the meaning of the Third Wave…

Our argument is based on what we call the “revolutionary premise”... The revolutionary premise liberates our intellect and will.

Nationalism is...First Wave. The globalization of business and finance required by advancing Third Wave economies routinely punctures the national “sovereignty” the nationalists hold so dear...

As economies are transformed by the Third Wave, they are compelled to surrender part of their sovereignty... Poets and intellectuals of Third Wave states sing the virtues of a “borderless” world and “planetary consciousness.”

The Third Wave...demassifies culture, values, and morality... There are more diverse religious belief systems.

The Constitution of the United States needs to be reconsidered and altered...to create a whole new structure of government... Building a Third Wave civilization on the wreckage of Second Wave institutions involves the design of new, more appropriate political structures... The system that served us so well must, in its turn, die and be replaced."

- Newt Gingrich

falak pema's picture

so there is a grand plan called the third wave... I hope its not coming from Fukushima!

Demassifying value systems, making them diffuse, but not polluting them to extinction, would be a blessing in itself.

I wonder what is the beef behind the hype.

aerojet's picture

Even if Mr. Paul manages to beat the odds and get elected, it is 10 years too late to do anything useful about the problem. 

UP Forester's picture

If there's someone that can pull the yoke and keep the 747 from nosing straight into the ground, it's Dr. Paul the elder.

 

Sure would be a lot easier to clean up and rebuild from a belly-landing than a big smoking hole.

AldousHuxley's picture

Ron Paul's weakness as a politician is that he tells the truth....

 

bunch of undereducated Americans can't handle the truth and the elites will use this to stay in power.

 

some reason, short politicians seem to be the smartest because they get voted into power due to policy or brains rather than looks or rhetoric.

 

 

UP Forester's picture

Truth hurts.

But then again, so does getting clubbed in the head and drug off to a FEMA camp.

thegr8whorebabylon's picture

10 years too late?  bullshit.  RP wins we get to live.

Heyoka Bianco's picture

"First they ignore you, then they laugh at you, then they fight you, then you win." That career path also applies to Hitler, you know.

 

Ron Paul is hardly a real threat, and he sure as hell ain't a real answer. He does give a good vewrbal handjob, especially to the young and asocial males, I'll grant him that.

 

Why don't all you "libertarian" ZHerrs just admit it: you want a king, a star to follow, a "benevolent" dictator to take away that nasty world out there of people who MIGHT HAVE DIFFERENT IDEAS! Extermionete! Exterminate!

OldPhart's picture

Heyoka Bianco member two weeks, two days.

Following the Constitution is not "wishing for a king" nor do we want any sort of dictator...we have one already in the form of Congress and the President.

As to those with different ideas, they are welcome as long as the ideas conform to the Constitutional basis that underlie our country.  If not, fuck off.

There are many in government, as of a few days ago (if not decades earlier) that should be shot on sight as traitors to the american people.  Perhaps that what you mean by "Extermionete! (sic) Exterminate!".  Many of us agree.

Ron Paul IS a real threat to the powers that be and will probably be "exterminate"d by them if he captures the nomination.  Similar to Robert and John Kennedy.  I expect that his nomination, after votes, will be denied by the Republican party and one of the other cookie cutter drones will be named instead.

 

mick_richfield's picture

How does the Gandhi quote go?

It goes like this:

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident

Arthur Schopenhauer

Michael's picture

I'd like to see our overlords reaction knowing the impact of credibility and name recognition this encounter gives Dr Ron Paul.

Dr Ron Paul Joe Rogan Man Love Moment on Jay Leno Dec 16 2011

http://www.youtube.com/watch?v=JuFW264OKag

 

Careless Whisper's picture

The Joe Rogan endorsement is huge because it will get alot of men to take a look at Ron Paul's policies.

dizzyfingers's picture

I might have to vote for Ron Paul as antidote to the Kleptocrats being put foward by the republicans. And maybe move to Texas into the bargain. Eff Illinois.

Raskolnikoff's picture

Both Perry and Gingrich have expressed the idea of holding the Fed accountable. Perry even brought up the word 'Treason' and the Fed in the same sentence. I like Ron Paul, but it seems the political winds are changing, as you can sugar coat the inflation stats, but many voters do the shopping for themselves, you can't fool them with the terms non-cor inflation and the incredibly shrinking boxes and packages of food as well as the lowering of the quality of food..., had a pop tart the other day...with just a splash of sugary icing and the crust tasted like cardboard...poptarts never tasted that good anyway, but they have become laughable shells of their former selves, as you know the company that is making them is skimping on the input ingrediants. The coming events will force many a politician to abandon the status quo and literally run for their political lives.

Teamtc321's picture

A pop tart? Really..........

TruthInSunshine's picture

Perry & especially Romney may talk the talk on opposing The Federal Reserve's destructive policies, but they'd never walk the walk.

While no one can predict the future, Ron Paul is the only one who has significant credibility when he claims that he'd actively oppose The Federal Reserve's ability to distort and break markets, and to debase the currency.

We're at a fundamental point in the history of what is our young nation:  We now have more Americans, even though it's still a very small percentage of the total population, waking up to fact that having a fractional reserve central bank that is literally unrestrained in its ability to create as much fiat as it desires and funnel that fiat to whatever entities it desires, at whatever interest rate it desires, effectively picking winners & losers and subsidizing specific economic actors at the direct harm (as everything is relative) of others, is a prescription for ruin. Americans that are awakening to these facts tend to not like this form of monetary central planning, and tend to believe that it's tainted by cronyism and nepotism (as the financial sector of the economy is given preference in all ways, all the time, over other sectors of the economy, and as their is deep capture of the individuals who set policy at The Federal Reserve by Wall Street).

 

 

 

Joseph Jones's picture

Does anyone need another reason than this to know that Romney is Satanic?  He appointed dual-citizen (Israel) Michael Chertoff as Chief of his foreign policy team.   

AldousHuxley's picture

Perry just doesn't pass the IQ test.

 

Romney is your typical greedy wall streeter

 

Gingerich is your hypocrite....."grand daddy of earmarks" "conservative"

 

Ron Paul....no wall st. high IQ as Dr., real conservative......

 

but republican these days hate real conservatives because they depend on WAR mongering to profit.

 

 

Michael's picture

Yeah, but do they have anything like this working for them except Dr Paul?

http://www.youtube.com/user/Girls4RonPaul

Michael's picture

A complete and total economic collapse of 1/3rd of the world economy, Europe, is currently underway. The Eurozone is finished. It won't be long till the economic fallout engulfs the entire planet Including the USA that is already bankrupt. If you don't read Zero Hedge you probably didn't know this bit of current events trivia that's concerning more and more people. Current economic events is why people are flocking to the? Ron Paul camp. The bank buildings will survive and be recycled.

Michael's picture

Here's the Christmas card your government sent you this year.

Merry fucking Christmas!

Bradley Manning Defense Reveals Alter Ego Named ‘Breanna Manning’

http://abcnews.go.com/blogs/politics/2011/12/bradley-manning-defense-reveals-alter-ego-named-brianna-manning/

delacroix's picture

It's part of the conditioning program, to get people to  accept mediocrity, in all areas of life.

Calmyourself's picture

I have seen many examples i nthe last 3 years it has been very noticeable i nthe last six months.  All corporations are doing it from food ingredients to poor service..

The Big Ching-aso's picture

 

 

I can tell you have an acute sense of smell for these sorts of things.

Quinvarius's picture

They are printing so much money.  This PM pullback is laughable.  There are tons of dollars out there, but the banks will always need more and more of them.  This is so Weimar, it is ridiculous.

nope-1004's picture

They are printing SOOOO much money and currency debauchery is SOOOOO prevalent, manipulation of precious metals is REQUIRED.  Otherwise, reserve currency is done.

Anyone that thinks PM's are not manipulated is clueless.  Or, as Dave in Denver says, "Anyone who looks at this data and does not admit that the big market corrections we experience in gold and silver are the product of illegal manipulation is an idiot."  A must read:  http://truthingold.blogspot.com

 

Popo's picture

Which is why you should buy oil. They can smash gold... But oil is what scares the hell out of them.

dizzyfingers's picture

don't think it scares them. http://www.globalresearch.ca/index.php?context=va&aid=25080 It's all one big happy family grinning and giving you the finger now matter which way the market or any commodity moves.

el Gallinazo's picture

You going physical oil?

Raymond Reason's picture

Anyone have any idea why the price of gasoline has dropped, but deisel hasn't changed much?

Prairie Fire's picture

Where are you? I'm in Alberta and it's the same here.

On the news it's a local disruption. I was in Saskatchewan 2 weeks ago and same thing.

Doesn't make sense.

thegr8whorebabylon's picture

if deisel drops, heating oil falls, so wait for spring.

rocker's picture

JPMorgan has rented or bought a new vault this year for a reason.  Surely it is not stashing cash notes. Hmmmm.

TruthInSunshine's picture

CONfidence Ponzi will run as long as until a certain % of the population becomes even the slightest bit awakened to how fiat currency is created, where it comes from and how it ultimately adversely impacts them and their standard of living and opportunity costs. This % doesn't necessarily need to be very high; if 10% or even 5% or so of the population essentially chose to opt out of the fractional reserve fiat currency game (see below as to how), this could be more than enough to cause critical problems for the fractional reserve banking scam & govermental confiscation schemes (U.S. citizens are really taxed at levels exceeding 90% when all fees, levels of taxations and inflation are taken into consideration). Moreover, if 5% became aware to the point that they chose to opt out, this would indicate a trend was underway whereby that % would soon be 15%, and 25%, and so forth (as the government tried to dig fire breaks, in what would then be a destined to fail bid to keep the Ponzi alive).

The last thing the fractional reserve central banks want is to have to fight alternate currencies, whether they're being used openly or underground, as this threatens their very existence, and also neuters their ability to affect the economy (if even only marginally) via monetary policy; this is why the Federal Reserve was given a monopoly on the creation and distribution of what is the only legal 'tender' for the payments of all debt, both public & private, via the use of Federal Reserve Notes (not dollars or greenbacks) having no inherent value other than a claim that the face value of the note will be honored by way of the full faith and credit clause; this is why barter is highly discouraged, why the wider spread the use of alternate (and real) money such as silver and gold coins is punished (and if the practice broadens enough, is always and inevitably made illegal, with confiscation likely); this is why the banking system as we now know it, with banks networked with the Federal Reserve, would completely collapse if Federal Reserve Notes had any significant competition, as no one would choose the DOZENS of layers of taxable events and transactional costs associated with using the monopoly fiat that is Federal Reserve Notes if they had any viable alternative; this is why Alan Greenspan wrote (prior to his time as an official and ultimately a Chairman of The non-Federal Reserve non-Bank) that gold was the ultimate enemy of the fractional reserve banking system, as its widespread use as currency would completely lay bare the confiscatory system of wealth robbing schemes, on many layers, that is a fractional reserve banking system, and why fractional reserve central bankers viewed gold with hostility, and would go to any lengths to ensure that it (or any other inherently valuable asset that could be used as alternate currency) would never be allowed to be supplant the use of Federal Reserve Notes; this is why central bankers do not highlight and grimace at open discussion of and attention paid to historical events whereby fiat was depegged from the gold standard, or events where any constraint on the ability of the  central bank to conjure fiat from thin air at no cost to it was done away with (events such as Bretton Woods, or, even more fundamentally, the 1910 meeting on Jekyll Island, Georgia, whereby the Money Masters revived a central bank that had been killed three times prior).

Given a choice, if it were legal, rational people would choose to trade their skills, physical goods, etc. in exchange for those of others, as the transactional costs in doing so are de minimus, and the transactions yield far more efficient gains, free of fractional reserve parasitism and governmental 'middle man cuts.'

Think of this one example:

Mr. Smith is self-employed, and a very successful businessman. Let's say that he is a real estate developer. For every dollar of revenue that Mr. Smith generates, he will keep a mere 20 cents up until the time of his death, and after that time, every dollar he earned and saved will be reduced by well over 95%.

He pays a corporate and/or personal tax rate of at least 28% and as high as 36%, for starters. He then pays a tax to the state he lives in which could be ashigh as 12%. Every time he purchases something with each dollar, there is a general sales tax, with additional taxes on many purchases, such as gasoline, alcohol, etc. He pays tax on each piece of real estate, whether vacant, or with a structure of any kind on it. He pays a personal property tax. He pays a tax on his employees. He pays taxes and fees for licenses, permits, and other red tape schemes.

At just this point, he has had the federal, state and local authorities take in excess of 50% of each and every dollar he has generated through his work, ingenuity and industry.

After the 50%+ is put into a bank or other saving instrument, inflation of about 2.2% to 4% annually erodes his savings, and any interest or dividends are taxed by both the federal and state, again.

So, depending on for how long Mr. Smith lives, he will see another 15% to 30% loss on the money he has saved, on top of what was taken prior.

Then, at the time of his death, the government will take another massive amount from whatever he has managed to save, and that amount could be as high as 55% under current federal estate tax rates.

A NON-FRACTIONAL RESERVE FIAT system wouldn't allow the banks and the government to essentially swipe this insane amount of savings that was produced from individual effort in such an eggregious and punitive manner.

http://www.constitution.org/mon/greenspan_gold.htm

 

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

--Alan Greenspan, Gold & Economic Freedom (1966)

JoeSexPack's picture

Very well-wrritten.

 

ZH is great for quality analysis of of fiat money & fractional-reserve banking.

dizzyfingers's picture

Once 50% of voters are young, watch how fast Medicare and Social Security disappear. When young folks are allowedinto the drivers seat, Boomers and elders are effed. Not that they aren't already; can't sell their homes, can't retire, can't kick out their kids and grandkids who'd like them to die and will their jobs and estates to them.

And later the Ruling Class can bilk the youngers too!!

An endless ride for the lords.

But maybe the sheeple will wake up.

Nah! Too much to hope for.

Joseph Jones's picture

Senior voters economically pistol whip the young.  Do the young protest?  No.  They're too busy watching reality shows, listening to hip hop with ear buds, and texting to care.  It's quite remarkable.   

Ima anal sphincter's picture

TruthInSunshine......always a good read. Always correct.