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Stop The Presses: The Fed Can Fund The Treasury With Over Half A Trillion In Emergency Capital
By now some readers may have read ludicrous stories about the Fed coining multi-trillion precious metal coins in a way to loophole the debt ceiling situation. Granted, this plan is so far beyond ridiculous that we have not wasted the time to comment on it. That, however, does not mean that the Fed is powerless to assist the Treasury in a modestly long-term term fix of the debt ceiling fiasco. In fact, as Stone McCarthy's Raymond Stone observes: "The Fed does not want to be a player in this debt ceiling/potential default debate. It didn't want to be a player in the Bear Stearns debacle, or the Lehman situation. But when push comes to shove the Fed will do what it can to avoid a default." In summary there are three avenues that the Fed can pursue in order to help Tim Geithner prolong the cash illusion modestly longer. The three options for Bernanke are to i) book profits; ii) prepay expenses and, yes, iii) sell gold. Combined, these three approaches could squeeze out well over half a trillion dollars, giving the Treasury breathing room not only past August 2, but potentially into 2012! That said, "The Fed would not want to advertise to Congress the possibility of delaying default. It does not want to take Congress off the hook on increasing the debt ceiling." But it will, if it has to, and the end result will be a delay potentially of up to a month. And if it means selling off the Fed's gold, so be it.
The three plans in detail from Stone McCarthy:
Book Profits
The Fed holds roundly $2.6 trln in the System Open Market Account (SOMA). Some of these securities were purchased at a time when market interest rates were substantially above current levels. This subset of SOMA represents securities on which the Fed has unrealised profits. Prior to the onset of the crisis the Fed held roundly $160 bln of Treasuries with maturities in excess of 5 years. These securities have accrued substantial unrealized profits
The Fed could sell some of these securities, book the profits, and then repatriate those profits to the Treasury. If desired, the Fed could reinvest the par value of those securities back into newer Treasuries to maintain the par value of its holdings.
Prepay Expenses
Every week the Fed repatriates its profits to the Treasury. The weekly profits of the Fed largely represent the weekly accrued interest income from the Fed's SOMA, minus interest expense, operating expenses and accrued dividends.
In 2010 the Fed repatriated $79.3 bln of profits to the Treasury. Effectively the accrual of monies to be paid to the Treasury shows up in an expense account (liability) Interest on Federal Reserve Notes (IOFRN). When the payment is actually made to the Treasury each Wednesday, the IOFRN liability on the Fed's balance sheet is reduced and the Treasury deposit account at the Fed is increased by a similar amount.
Over the first 6 months of calendar year 2011 the Fed remitted $46.1 bln to the Treasury, up from $35.3 bln in the comparable period of 2010. In other words, in 2011 the Fed's repatriated profits to the Treasury have been on track to bypass the $79.3 bln of 2010.
Could the Fed prepay IOFRN to the Treasury? In other words, could the Fed pass along profits before the income is actually accrued on the Fed's books? We think the answer is yes, but are not certain. Effectively this would be similar to prepaying any other Fed expense, such as payrolls, rents, etc.
This transaction would effectively reduce the IOFRN liability into negative territory, while increasing the Treasury's deposit by a similar amount. One liability goes down and another goes up.
Gold
The Treasury holds 261,498,899.316 troy ounces of Gold with a book value of $11.041 bln at $42.22/oz. The Treasury has monetarized this gold by issuing to the Federal Reserve gold certificates in an equal amount ($11.041 bln). The monetarization of gold effectively was an accounting entry providing an increase in Fed assets (gold certificates) and an associated increase in the Treasury's cash deposit at the Federal Reserve.
The $42.22/oz official price of gold was last set in 1973. Given that gold is trading above $1,600/oz could the Treasury prevail upon Congress to increase the official price? Would Congress respond under the Gold Reserve Act of 1934? If the official price were reset to $84.44/oz (doubled) the Treasury's deposit at the Fed would rise by $11.041 bln.
The Treasury could elect to de-monetarize gold, taking back the gold certificates from the Fed, and having its cash position reduced by $11.041 bln. After de-monetarizing gold the Treasury could presumably sell gold on the open market. Undoubtedly, such sales would drive the price of gold down from over $1,600/oz, but presumably the Treasury would be able to get a good deal more than the current official rate of $42.22 oz.
So there you have it: combined across all there alternatives, the Fed could probably generate over half a trillion in emergency cash, which would last the country well into next year! So perhaps everyone should immediately forget the relentless lies and fearmongering from Tim Geithner (who could not possible see a US downgrade from AAA as recently as three months ago, which is now imminent) and force the Fed to actually help the one entity that it is supposed to help: the United States, instead of the likes of Goldman Sachs or JP Morgan.
Yes, in the process the Fed's barbarous relic "tradition" will be sold off and the market price will plunge, only to subsequently explode to record highs (although we expect that gold would be then be confiscated from the broader population), but at least in the process this will allow the politicians to finally resolve the long-term problems of this country in whole, instead of the proposed partial resolutions that do nothing but at best slow the rate of debt accumulation.
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You mean an Americathon
http://youtu.be/yFyVs_766S4
Didn't the fed just say a few months ago that they don't own ANY gold anymore?
Fed has no gold...only certificates issued by treasury and valued at (memory fails me) $33 something an oz...thank FDR
here's the link...
fed owns no gold
That is correct, the Fed does not own the gold, the Treasury does...
very interesting article.
Ok. To speak to this idiocy of coining a trillion coin and depositing it at the Fed... So the fuck what. For the Treasury to raise cash (you know that thing they can't legally do via the debt market), they'd need to SELL the coins to the Fed. Where does the Fed come up with $2trillion? They imagineer it and deposit ones and zeroes in the treasury's account. It's an outright increase in money supply.
Why don't they "legally" do this? Because who gives a rats fuck if it's legal. It's outright money printing to fund the government. Then why are you paying any taxes to begin with? At that point, it's time to go long jet fuel.
out right money printing? do you mean QE1, QE lite, QE2? no one care, really...
You pay taxes because they have a bigger gun.
You work for the corp so you pay the corp store.
$500 billion gets you less than a year in real time expenditure on the US military1
OOPS. I mentioned that elephant in the room again.
p.s. This does not include non-foreign military expenditure. Please remember that DoD is all external expenditure, by constitution.
And if no gold, what them? Confiscate gold from the etfs?
There will be no need to confiscate gold from ETFs. All that is needed is for them to raise margins enough and 'make it rain' paper on the crimex. The plebs will willingly hand over their ETF holdings in order to "save" themselves from "deflation". IOTW, bring down the price enough, and you have a selling panic on your hands. And, suddenly all of JPM's silver shorts are way in the money.
Interesting how US Presidents have been lying to us for ages about our money/finances. Here's an exact quote by Lyndon Johnson about hoarding silver coins from July, 1965:
“If anybody has any idea of hoarding our silver coins, let me say this. The Treasury has a lot of silver on hand. It can and will be used to keep the price of silver in line with value in our present silver coins. There will be no profit in holding them out of circulation for the value of their silver content.”
http://news.google.com/newspapers?id=3P1OAAAAIBAJ&sjid=XgEEAAAAIBAJ&pg=4613,3314165&dq=don-t+hoard+your+silver&hl=en
Two words "currency swap ". Only hope for the fiscal world.
In hell the damned sit at a table wailing in agony. ..their hands are twisted into 10foot spoons. ... try as they might they cannot feed themselves. ...so they pay for their gluttony eternally starving.
In. Heaven the same situation. ... except they eat their fill. ...they feed each other.
I joined this website only to express this because many of you are good people. ...I. will be exiting this site now. Tyler thankyou for allowing me to make this one statement. Feel free to close my account. Be good.
You don't even have to wait for the afterlife. Big city, dog eat dog. Far boonies - friend helps friend.
But thanks for the reminder.
Barn raising, bitches.
The most perfect example of a high trust community.
Wouldn't it be interesting if they do announce they will sell the gold for this purpose? Then why wouldn't they use the sell off to buy in what they need and game on once again...
So Treasury would sell it gold BEFORE the USD devaluation? i don't think so.
What?? How is buying for time using various tricks (in order to create better long term solutions) BETTER THAN buying for time by just raising the damn ceiling?
Watch out for this- Trreasury sells gold. Price drops to $800/ozt. Then Obama makes holding gold illegal and forces all to sell at $800 ozt. GO to gold backed currency.
Sounds like another civil war to me.
They could sell Germany's gold. Isn't possession 9/10 of the law?
So there you have it: combined across all there alternatives, the Fed could probably generate over half a trillion in emergency cash, which would last the country well into next year!
O boy thats great. I was worried for a while. Now it seems if they hock everything they can scrape up they can stave off default for six months. I was worried there for a while.
ARE THESE PEOPLE TOTALLY BATSHIT CRAZY. The owner of a corner candy store plans ahead better than that. If it got around that the candy store owner was deep in debt and losing money every day but figured, no problem, I have a cellar full of deposit bottles and a gold watch I can hock HIS CREDIT RATING WOULD DROP TO ZERO AND NO ONE WOULD LOAN HIM A DIME.
So how does the US have a AAA credit rating. Jim Rogers says it doesnt and he couldnt care less what S&P says. Is the rest of the world nuts.
There's a fundamental difference. The corner candy store owner is trying to run a business.
Government is parasitic. It can only suck from its hosts and, like a stupid cancer, it usually ends up sucking so much from its hosts that the hosts die. This is often a painful process in the end days.
We need more morphine here doctor!
Selling the US gold reserves would be suicide.
http://dailyreckoning.com/wp-content/blogs.dir/5/files/2011/07/DRUS07-20...
The graph above shows how American debt is falling since 2001 if measured in gold. If this trends continues around 2030 or 2040 the gold reserves can be used to fully pay the American debt.
That's why they are kicking the can down the road. Problems will happen if the government doesn't manage this controlled fall of the USD value.
But as you can see the USD is being severely devalued.
Wouldn't the big banks profit from a default? And why wouldn't the Fed want a default, i.e., see my first question?
selling off illegally acquired gold to push back a paper default date will not "help the economy"
Sell off our gold to pay off fraudulent debt before the hyperinflation?
Nuts
Glass-Steagall or the banksters continue to #win (now disbursing our gold at cut-rate prices)
Not sure I understand why the Treasury would have to SELL any gold at all. If Congress okayed the MTM of gold from $42 to $1600, wouldn't that simply create between $400-$500 Billion new money on the credit/asset side of the Treasury ledger?
Would they need to recall all the Eagles to change their denomination from $50 to $1,600?
Me thinks not a government this desperate and with few choices. Besides, it doesn't matter what is stamped on the coin, only it's troy weight.
Please learn before you speak. Coin seigniorage is more than legal....
http://www.law.cornell.edu/uscode/31/usc_sec_31_00005112----000-.html
Ron Paul: Explain to the American people why you sold all of our gold!
The Bernank: Well, our gold was booked at about $42oz, and we sold it to Goldman Sachs for $100oz... so we basically doubled our money.
Screw it,nail that 'yard sale' sign to a few telephone pole's and see what you can scrape up (but don't forget that the 'solid wood' furniture you bought is really particle board) That'll keep a roof over your head a few more month's......
This is far too forward thinking for Wall Street to deal with. Into next year is like infinity times three for them.
It would take a big slug of sales off it's balance sheet for the Feds profits to put a significant dent in the Treauries funding needs. Then too srhinking its balance sheet is exactly what it doesn't want to do and would be QEII in reverse. Such would be a very very desperate measure.
My confusion arises from the logic that the FED will be "forced" to help. Suppose the agenda is to collapse the game. Axiomatically I see no reason for Fed intervention, nor politically do I see a need for Fed intervention. The Fed can sit back and let the two branches of government duke it out.
The Fed won't have to sell their treasuries. They will burn them and then the govt has 1.6 trillion of debt space to the ceiling.
http://etfdailynews.com/2011/07/25/investors-the-1-billion-armageddon-tr...
All Indians thank Ben Bernanke, the US Treasury and their cohorts for suppressing the gold price so far and allowing us to accumulate gold at dirt cheap prices. Their manipulation sucks for the gold sellers and is great for the gold buyers. If I were a mining company shareholder, I would be hopping with rage. But this works great for the gold consumer - especially the ones that can't afford the true market determined price. I feel sorry for the Gold ETF investors who are destined to be victims.
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Seems like the Fed could sell its treasuries and remit the cash to the US govt, apparently enough for almost a year's expenditure.
http://www.cnbc.com/id/43879039
Maybe the theatrics are due to the players already knowing this is the outcome.
It would be quite insane though as the Fed could theoretically conduct "Permanent" Open Market Operations (POMO) to buy all privately-held treasuries with electronically-created money, then sell them back to the market for cash, then give the cash to the Treasury - a shameless fig-leaf accounting exercise. There are about $14 trillion in treasuries outstanding, so they could go on like that for a few years, while increasing the base money supply by the same amount, leading to crazy-low interest rates across the entire curve and of course eventually hyperinflation.
Actually it gets worse. They could churn say the same US$1 billion in treasuries every day, POMOing then reselling. Truly QE to infinity.
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