Sunday, March 22, 2009

The Fed Is Now The Official Sugar Daddy

In a never ending effort to "spend our way back to prosperity", the US Federal Reserve this past week finally threw the kitchen sink into the fray. All but admitting complete failure in it's efforts to date to stop the financial sytem from unraveling completely, the Fed announced that they will throw even MORE money at the Fannie Mae and Freedie Mac Black Hole, AND proudly announced [as in confirmed the obvious] that they will commence [as in continue] buying long dated US Treasury notes.

There is no turning back now. The Fed has officially chosen to destroy the US Dollar so that they may continue the charade of propping up this nations insolvent fiancial institutions. The question now becomes, who is going to bail out the Fed?

This lead to a weekend of reading, I encourage you all to peruse the following. I don't believe the answer to our question will be found, but plenty of reason to ask it will be:

From Jim Sinclair:
The Federal Reserve moves to self financing by buying tons of US Treasury instruments in a clear message that:

Inflation = Good
Deflation = Bad

Higher price of Gold = Good
Lower price of Gold = Bad

Which also infers that:

Higher dollar = Bad
Lower dollar = Good.

This simple formula seems to be too complex for the talking heads who seem to have a difficult time making simple adjustments to their broadcasts, such as no smiling when reporting the Dow is down 500 points or now looking incredulous when reporting gold isup $1.

Fed quantitative easing via financing themselves put a floor under gold. When you have a floor under a market it will seek the ceiling.

The first floor temporary ceiling is at $1224. After that look to $1650

Deficit Projected To Swell Beyond Earlier Estimates
President Obama's ambitious plans to cut middle-class taxes, overhaul health care and expand access to college would require massive borrowing over the next decade, leaving the nation mired far deeper in debt than the White House previously estimated, congressional budget analysts said yesterday.

In the first independent analysis of Obama's budget proposal, the nonpartisan Congressional Budget Office concluded that Obama's policies would cause government spending to swell above historic levels even after costly programs to ease the recession and stabilize the nation's financial system have ended.

Tax collections, meanwhile, would lag well behind spending, producing huge annual budget deficits that would force the nation to borrow nearly $9.3 trillion over the next decade -- $2.3 trillion more than the president predicted when he unveiled his budget request just one month ago.

The result, according to the CBO, would be an ever-expanding national debt that would exceed 82 percent of the overall economy by 2019 -- double last year's level -- and threaten the nation's financial stability.

"This clearly creates a scenario where the country's going to go bankrupt. It's almost that simple," said Sen. Judd Gregg (N.H.), the senior Republican on the Senate Budget Committee, who briefly considered joining the Obama administration as commerce secretary. "One would hope these numbers would wake somebody up," Gregg said.

Commodities Jump on Inflation Concerns; Silver, Gold, Oil Surge
March 19 (Bloomberg) -- Commodities surged, led by precious metals and energy, on speculation that the Federal Reserve’s steps to revive the U.S. economy will spur demand for raw materials as a hedge against inflation.

“We’ve got a massive increase in the Fed’s balance sheet, and the markets are taking it to be both inflationary and as devaluing the dollar,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “This reinforces the potential for hyperinflation, which would drive commodity prices higher.”

Gold futures for April delivery surged $66.50, or 7.5 percent, to $955.60 an ounce on the Comex division of the New York Mercantile Exchange. A close at that price would mark the biggest gain since Sept. 17. Before the Fed announcement yesterday, the metal touched $882.70, the lowest since Jan. 29.

Silver futures for May delivery soared $1.555, or 13 percent, to $13.49 an ounce. A close at that price would be the biggest gain for a most-active contract since Dec. 31, 1979.

The dollar fell for the eighth straight session against a weighted basket of six major currencies. Central banks are lowering interest rates and spending trillions of dollars in response to the deepest economic slump since the Great Depression.

“Investors are worried the Fed will print as much money as they need to, and this is going to lead to some insanely hot inflation, so they’re out buying gold,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “The dollar got clobbered. You print more money and it buys you less.”

U.N. panel says world should ditch dollar
LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

Quant Easing: Central Banks Unleash the 'Nuclear' Option [good read]
Beijing now owns an estimated $1.7-trillion in US-dollar assets, $900-billion of Treasury bonds and short-term bills, $550-billion in agency bonds, $150-billion in corporate bonds, $40-billion in US-equities, and $40-billion in short-term deposits. The State Administration of Foreign Exchange (SAFE), part of the People’s Bank of China, manages the bulk of Beijing’s $2-trillion FX reserves, while, China’s state banks and sovereign wealth fund, oversee $250-billion.

Spelling out China’s dilemma, any effort by Beijing to unload a significant part of its massive Treasury and agency holdings could flood the market and trigger a selling panic, with devastating impact on the value of its foreign currency reserves. If China stops buying them, it needs to worry about the Fed monetizing the debt, which could lead to hyper-inflation and a bond market rout, once the US-economy stabilizes.

Ironically, the US economic slump has already caused a massive drop in American purchases of Chinese goods. Chinese exports plunged 25.7% in February from a year earlier, slashing the country’s trade surplus from a record $40.2-billion in November to $4.8 billion in February. A continuation of this downtrend means Beijing would earn fewer dollars to recycle into US-dollar bonds. Therefore, the Fed felt compelled to fill the void, as the buyer of last resort for the Treasury’s IOU’s.

Inflation: Making Sure "It" Happens Everywhere
SO BEN BERNANKE SAYS the United States has plunged into a deflationary depression.

Really, that's what Wednesday's Fed announcement said, shouting it loud and shouting it proud.

Because Bernanke's deflation-prevention policies have failed. So he's gone to applying the cure instead.

"The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost."

"As I have stressed already," Bernanke explained back in late 2002, "prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."

*****Fed Planning 15-Fold Increase In US Monetary Base***** [must read]
The fed is planning moves that would more than double its balance-sheet assets by September to $4.5 trillion from $1.9 trillion. Whether expressing approval or concern over the fed’s intentions, most commentators fail to understand the real magnitude of the projected expansion of the US monetary base because they don’t take into account the amount of dollars circulating abroad.

At least 70 percent of all US currency is held outside the country, and this means the US monetary base is considerably smaller than the fed’s overall balance sheet. Take, for example, the true US domestic money supply at the beginning of September 2008, before the fed started its quantitative easing. From the Federal Reserve’s website, we know that currency in circulation was 833 Billion. This translates as 583 Billion dollars circulating abroad (70 percent), and 250 Billion dollars circulating domestically (30 percent). Since the bank reserve balances held with Federal Reserve Banks were 12 billion, that gives us a 262 Billion domestic monetary base as of September 2008. Now compare that to the projected US domestic monetary base for September 2009 which is 3,818 billion (4,500 billion – 583 billion (dollars circulating abroad) – 99 billion (other fed liabilities not part of the money supply)). The fed’s planned balance sheet expansion results in a 15-fold increase in the base money supply.

262 Billion = US monetary base as of September 2008 (minus dollars held abroad)

3,818 Billion = projected US monetary base in September 2009 (minus dollars held abroad)

3,818 Billion / 262 Billion = 15-Fold Increase in US monetary base

This is a staggering devaluation of the US currency! It means that for every dollar in America in September 2008, the fed is going to create fourteen more of them!

The Mother of all Bells
By: Peter Schiff, Euro Pacific Capital, Inc.
There is an old adage on Wall Street that no one rings a bell at major market tops or bottoms. That may be true in normal times, but as many have noticed, we are now completely through the looking glass. In this parallel reality, Ben Bernanke has just rung the loudest bell ever heard in the foreign exchange and government debt markets. Investors who ignore the clanging do so at their own peril. The bell's reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine.

While nearly every facet of America's economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S dollar has been the beneficiary of the global economic crises which the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.

This week the Federal Reserve finally made clear what should have been obvious for some time - the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan which it then uses to buy treasurers. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

AIG Larry Summers and the Politics of Deflection [must read]
By: F. William Engdahl
Larry Summers is the man directly responsible for the mess. As Clinton Treasury Secretary from 1999-January 2001 he shaped and pushed the financial deregulation that unleashed the present crisis. He was Treasury Secretary after July 1999 when his boss, Robert Rubin left to become Vice Chairman of Citigroup, where Rubin went on to advance the colossal agenda of deregulated finance directly.

As Treasury Secretary in 1999 Summers played a decisive role in pushing through the repeal of the Glass Steagall Act of 1933 that was instituted to guard against just the kind of banking abuses taxpayers now are having to bail out. Not only Glass-Steagall repeal. In 2000 Summers backed the Commodity Futures Modernization Act that incredibly mandated that financial derivatives, including in energy, could be traded between financial institutions completely without government oversight, 'Over-the-Counter' as in where the taxpayer is now being dragged. Credit default Swaps, at the center of the current storm, would not have been possible without Larry Summers and the Commodity Modernization Act of 2000. He is now the White House Economic Council chairman, mandated to find a solution to the crisis he helped make along with Tim Geithner, his friend who is Treasury chief. Foxes should never be asked to guard the henhouse.

This all makes great food for tabloid headlines and popular outrage. They can write that elected politicians are finally acting in taxpayer interests. Until we look a bit more closely. Paying $165 million in employee bonuses or any amount for a company that is in the middle of a multi-trillion dollar fraud that is bringing the world economy down with it is 'outrageous.'

The problem is the tax bailout haemmorrhage will go on. The reason is the Obama Administration like its predecessor refuses to take consequent action with AIG, despite the fact today the US Government owns at least 80% of AIG stock, bought for $180 billion of, yes, taxpayer dollars. To demand AIG 'pay back the government' is absurd as the government is in effect demanding it pay itself back with its own money. The latest claim that the Treasury will subtract the $165 million bonus money from the next $30 billion tranche it will give AIG says it all.

Fortunately there is a simple way out of the AIG debacle. The US Government can step in and fully nationalize AIG, 100%, kick out responsible management, declare AIG's CDS contracts null and void and let holders sue the US government to regain value for what were in reality lottery gambles not loans to the real economy. They own 80% so the step is small to 100%. Doing that would end the global market in CDS and open the door for countless legal challenges. But AIG's counterparties, as we begin to learn, were exactly the big Wall Street players like Goldman Sachs, Citigroup, even Deutsche Bank. They have gotten enough taxpayer bailouts to cover their risk in CDS. Let them recognize risk is the heart of banking, not the opposite.

Myron Scholes, the 'father' of financial derivatives, who won a Nobel Prize in economics in 1997 for inventing the stock options model that led to financial derivatives back in the 1970's, has declared that derivatives and Credit Default Swaps have gotten so dangerously out of hand that authorities must 'blow up' the market.

Scholes says derivatives traded over the counter should be shut down completely. Speaking at York University Stern School of Business recently, he said the "solution is really to blow up or burn" the over-the-counter market and start over. He included derivatives on stocks, interest rate swaps and credit default swaps that should be then moved into regulated markets.

The idea is simple and not that radical. A US law banning OTC derivatives and moving them to regulated exchanges would end a colossal 'shadow banking' fraud. Banks would not lose much more than already, but the world financial system would get back to 'normal.' OTC derivatives are unregulated precisely to hide risk and enable fraud by the banks. It is past time to end that. That is where the US Treasury and other Governments must focus, not on meaningless 'transparency' calls or trading bonus 'justice.'

Obama's toxic assets plan greeted with skepticism
The Obama administration's latest plan to help banks get credit flowing again is drawing a tepid reaction from investors and academics, who say the proposal comes with too many strings attached and is unlikely to stimulate lending industrywide.

The plan Treasury Secretary Timothy Geithner intends to announce Monday aims to create a new government entity -- the Public Investment Corp. -- to help buy up to $1 trillion in toxic assets on banks' books.

The initiative will seek to entice private investors, including big hedge funds, to participate. It will do so by offering billions of dollars in low-interest loans to finance the purchases and by sharing risks if assets fall further in value.

Analysts agree that stabilizing the banking system is crucial. But some wonder whether the proposal will create more problems.

"It's quite possible we could make bad banks out of good banks," Sung Won Sohn, professor of economic and finance at the Smith School at California State University, said Sunday.

Sohn wonders whether the sale of assets at bargain prices, to remove them from banks' balance sheets, would then force other banks to have to write down the value of similar assets they might not want to sell. He suggests it might be better if the government offered insurance that banks could buy to protect the toxic assets or offered some sort of loan guarantees.


  1. Tiny Tim Geithner and Helicopter Ben Bernanke are going to ruin this country. They both need to GO!

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