The Stimulation of More Future Debt Bill has passed a second time in the House with the DNC re-adding many things the Senate removed. All attempts at getting any of the GOP aboard is now being ditched. Why the rancor? I wonder what is going through heads here? Both parties work hard to appeal to the Big Money guys. No one can get elected unless they have the backing of the Big Money gnomes. The gnomes always put money on the winning horses. Traditionally, the Democratic Party has been ‘pro-labor’ while the Republicans are ‘pro-business’ but this faded away in the last 35 years. Now, both parties seek ways of appealing to working classes while shafting them as much as possible, when it comes to economic matters. The biggest shaft, of course, is to transfer government spending from taxes to debts. This strengthens banks and empowers the Big Money gnomes. Once they got this power, they immediately threw a huge beer keg party and destroyed their own banking systems!Now, it is time for Joe the Plumber and Jane the Shopaholic to pay for this mess. The mechanism for translation the gnome’s losses to pluses is to move all the mess over to the public sector and then get immense loans to cover the mess like one huge TARP made in China.
China Needs U.S. Guarantees for Treasuries, Yu Says
The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.
This is the voice of our creditors, the people who are our bankers. The Chinese wanted to be our bankers so they could choose when to say, ‘No.’ This is called ‘leverage.’ Some very foolish people think that getting loans gives one ‘leverage.’ This is an illusion. Always, the borrowers using loans for leverage, need more loans so they don’t tip over into the Pit of Hell. A constant stream of loans for leverage is the lifeblood of these people. But the controllers of all this are not the borrowers but the savers.
If a bank doesn’t have capital, it can’t lend. The basis of capital for lending is extremely flexible. Bankers like to keep it as low as humanly possible, the closer to zero, the more leverage they have and the more lending they can do and thus, the more interest-based profits return to the bankers. But since they must have some capital before launching their banks, they need to get capitalized. To do this, they offer an interest rate return on savings. Then, charge more for loans against these savings the bank must pay the savers.
China is the one who has been saving and the US has been the one who has been borrowing. The Chinese need money for themselves now. They can’t turn around and lend us lots of money if this might lead to the US being tempted into defaulting and thus, harming China, the bankers. Bankers have to be cranky and suspicious. The only reason they ceased to be this in the last decade was due to the Derivatives Beast: it was supposed to be insurance against debtors defaulting.
This turned out to be one of history’s grander delusions. Bigger than the Tulip Mania-madness of the crowds type of madness. At least, tulips are very real and quite pretty. So even if you go bankrupt, buying and trading bulbs, you still have a lovely flower to console you in your new poverty. But the Derivatives Beast has nothing, it was nothing, it will become nothing but for ten years, it grew from nothing to nearly infinity. This paradoxical monster is still looming over everything and is making any bank rescue literally impossible. Only by transferring it to the US taxpayers, can the banking gnomes slip the noose.
To do this, they must get the Chinese to lend us up to $12 trillion or even maybe $60 trillion dollars. No one understands how much loot will be required to stop the Derivatives Beast’s rampage. This year, we are begging for only $2 trillion but I am guessing, this will expand tremendously. I still remember Hurricane Katrina.
Rebuild New Orleans, Rebuild America, and Rebuild the World
While no other city has suffered the devastation of New Orleans, every US metropolitan area is in dire need of massive reconstruction, both to meet the needs of our existing population and to prevent future disasters. The infrastructure of the US is literally falling apart. According to the American Society of Civil Engineers, over a quarter of all bridges are in urgent need of repairs, flood control projects are needed in almost every region and the lack of maintenance of the highways accounts for 30% of all highway fatalities—over 15,000 deaths a year. Schools are inadequate and overcrowded, and a housing deficit of at least 10 million units drives immigrants and native-born poor to double up, while all workers suffer from soaring housing costs.
To overcome these huge deficits, some $2.5 trillion in new construction is needed, or about $250 billion a year for ten years. Such construction nationally, as in New Orleans, could only be carried out by a nationwide Civil Works Administration, with direct government planning and employment. Directly and indirectly such a project would produce at least 2.5 million good high-paying jobs in construction and manufacturing.
The wish-list for US spending is long and huge. China just had an epic earthquake. Not to mention, some pretty terrible ice storms and floods as well as a new drought. China has to spend money on Chinese projects, desperately. The recent fire in a poorly-designed skyscraper [I, personally, hate nearly all post-WWII sky scrapers, they are all deathtraps in the long run!] was censored by the communist Chinese-run news service because it was just one too many disasters for the discomfited Chinese leadership.
So instead of seeing increasing savings from a huge trade surplus with the US, China is seeing trade contract tremendously on top of very pressing social needs in China, proper. China had its own New Orleans and the US certainly isn’t bankrolling the massive rebuilding projects needed to fix the Sichuan earthquake disaster area.
Three years ago, I stood in Jackson Square and promised that New Orleans would return. Since then, the American taxpayers have committed more than 126 billion dollars for disaster response and recovery on the Gulf Coast. Most of this money is already in the hands of State and local governments and citizens working to rebuild. Together, we are working to make sure that New Orleans comes back – even stronger, safer, and more vibrant than it was before the storm.
There is still a lot of work to do before this city is fully recovered. And for people who are still hurting and not yet back in their homes, a brighter day might seem impossible. Yet a brighter day is coming and it is heralded by hopeful signs of progress.
The US already is committed to spending almost as much on New Orleans in the next ten years as we spent in one year, last year, on fighting peasants in Iraq and Afghanistan. I smile as I write this because we are going bankrupt, are sending our top officials to China to beg for more loans and we are then turning around and wasting well over half a trillion a year, more likely, if we include the CIA and other ‘dark spending’ amounts, it is around a trillion a year, fighting Muslims, mostly, across the entire planet and building military outposts around Russia’s perimeter.
The other area of concern for China is the value of its Treasuries. Given the US borrowing requirement and its lax monetary policy, Treasury bond yields could well rise sharply, causing a corresponding price decline. If China’s holdings match Treasuries’ average 48-month duration, then a 5% rise in yields, from 1.72% on the 5-year note to 6.72%, would lose China 17.5% of its holdings’ value, or $119 bn.
Foreign buyers have absorbed a little over $200bn of Treasuries annually, a useful contribution to financing the $459bn 2008 deficit, but only a modest help towards the $1.35 trillion minimum average deficit forecast for 2009 and 2010.
Unless that changes substantially, there will be $1 trillion annually to be raised by the Treasury from domestic sources, more than double the previous record from domestic and foreign sources together, plus whatever is needed to bail out the banks.
Even if the US savings rate were to rise from zero to its long-term average of 8% of disposable personal income, that would create only an additional $830 bn of savings — not enough to fund the domestic share of the deficit. Interest rates would probably have to rise substantially to pull in more foreign investors.
General rule of thumb: if you want to make more loans, you need more savings. The US recklessly created debt this last decade because our dire trade rivals, China and Japan, quietly held onto not only our debts but our excess currency. As it sat inert in FOREX reserves, the yen and yuan remained weak against the dollar. This was done for trade advantage.
Both countries wish for this to continue. They want trade advantage and will do nearly anything for it but will not do it if the US is ZIRP. The instant the US went ZIRP, the Japanese carry trade totally collapsed into ruins, the yen went to 82 to the dollar, briefly, way too strong for trade advantage! And now, the Japanese want a much weaker yen and are struggling hard, drawing it down to 91 yen to the dollar today. They love holding our debts and keeping the dollar FOREX holdings strong! But they will not do this for free. If the US is at zero percent interest, there is no trade advantage for holding Treasuries.
The US now is building a ‘carry trade’ position! Yikes! Heh. So China and Japan will force rates up if we want $2 trillion more in loans. China is willing to trade for something of tremendous interest to them. We could sell them Taiwan. Then, they will risk giving us $2 trillion in loans. I know the minds there and they have very carefully calculated this matter and consider even $5 trillion to be good enough if the deal makes them masters of Taiwan and the US withdraws from all countries bordering on the near quarters of China. This includes Japan.
But in a key symbolic rejection of that bipartisan reach, Rep. Aaron Schock (R-Ill.), a freshman who holds the seat once held by Lincoln, said he would vote no. Schock attended yesterday’s event at Caterpillar’s headquarters in his district, where President Obama pledged that the plan would save jobs at the construction company’s plants. But afterward, Schock said in today’s debate, “Not one employee at that facility approached me asked me to vote for this bill.” He said more than 1,000 employees contacted him to ask that he oppose the bill.
Wrapping up the House debate,(R-Ohio), the minority leader, said Republicans understand that “the American economy needs help” and that Congress must act now. “But a bill that was supposed to be about jobs, jobs, jobs has turned into a bill that’s all about spending, spending, spending,” he said.
Holding up the more than 1,000-page bill, Boehner declared that “not one member of this body has read” the legislation since it was printed last night. Then he theatrically dropped it on the floor, producing a loud thud. Calling the bill “bad policy that will drive up the debt,” he said, “This is the epitome . . . of what I came here to stop.”
HAHAHA. Over and over again, the Republicans passed all sorts of hideous bills with no one reading them. The misnamed ‘Patriot Act’ is a pure 1984-style doublespeak bill that opened the door to domestic spying with no oversight, kidnapping, torture and violations of the Constitution of the United States. I don’t see this bill vanishing, either. The Democrats better get to work on this.
And the Republicans, whining about spending???? Talk about insanity. This is pure partisan politics. If only the GOP was serious about balancing budgets! But we saw in the graph I painstakingly drew up last night, they don’t believe in balancing budgets anymore than a rattlesnake can balance a ball on its nose like a seal.
Social Security pays its own way with a separate tax. This tax also capitalizes everything else to the tune of around $4+ trillion a year. It is a major revenue stream for the government and is an extremely regressive tax. The other three big things are the Pentagon’s eternal military/industrial overspending, healthcare and #3 is interest on our debts. A huge amount of this flows to Asia. All other things are minor in comparison. The easiest and most important thing to cut is the incompetent and over-bloated military sector. Secondly, is single-payer system for medical care. If we include insurance costs to this business, it is immense and it an overburden on our economy.
|Title||Average Interest Rates|
| Treasury Inflation-Protected Securities
|Federal Financing Bank||4.652||4.652|
|Total Marketable||3.116 *||4.573|
|State and Local Government Series||4.120||4.252|
|United States Savings Securities||2.900||5.657|
|United States Savings Inflation Securities||6.762||1.838|
|Government Account Series||4.696||5.004|
|Total Non-marketable||4.615 *||4.982|
|Total Interest-bearing Debt||3.811 *||4.785|
Average Interest Rates are calculated on the total unmatured interest-bearing debt.
* The Average Interest Rates for Total Marketable, Total Nonmarketable, and Total Interest-bearing Debt do not include the Treasury Inflation-Indexed Securities.
Note how ‘total marketable’ rates have dropped by a 1.457% change if the rates in one year while ‘total NON-marketable’ rates changed only by a 0.367% rate drop. US savings securities fell from nearly 6% to below 3% in one year while US savings INFLATION securities rose from less than 2% to nearly 7%! Wow. What is that? Everything else remained fairly close to where they were the year before. Do we have severe inflation in our future? During this ZIRP period, this is important to ask.
So far, gold buyers are asserting this will be the case. Right now, gold is pushing on the $950 an ounce upper limit.
The vast majority of US debt principal is in TIPS and even more of the interest payments are for TIPS. What are these TIPS?
Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.
TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.
You can buy TIPS from us in TreasuryDirect and Legacy Treasury Direct through non-competitive bidding. Starting in January 2007, the 20-year TIPS is no longer sold in Legacy Treasury Direct, but it continues to be available in TreasuryDirect.
NOTE: At this time, only individuals can hold accounts in TreasuryDirect.
We pay a lot for these loans, obviously. Foreign series are the next biggest bite. About the ‘individual’ TIPS, evidently, this has been a parking zone for hedge funds where they can protect money from inflation while waiting to see which tides are flowing in or out.
Marketable versus Non-marketable
These pie charts show the ‘marketable’ TIPS, the ones the hedgers like to use in emergencies, has had a significant drop in the interest side of the scales, I guess, due to so many hedgers dumping dollars there for protection purposes. The problem I see here with the system we have had this last 20 years is, the Japanese carry trade provided much of the liquidity for the system so borrowing trillions of dollars was easy for the US. Now, with ZIRP, we have to be the ones granting loans to nations with higher interest rates, not receiving these money flows?
So it is a problem: Japan, during ZIRP, still sucked down most savings from thrifty Japanese middle class families. The US sucked down the lending of these exact same people and the Japanese government encouraged this because it caused us to buy lots and lots of Toyotas, etc. from Japan.
President Obama gives a press conference to sell the $800 stimulus package.
“Q: Thank you, Mr. President. Earlier today in Indiana, you said something striking. You said that this nation could end up in a crisis without action that we would be unable to reverse. Can you talk about what you know or what you’re hearing that would lead you to say that our recession might be permanent, when others in our history have not? And do you think that you risk losing some credibility or even talking down the economy by using dire language like that?
THE PRESIDENT: No, no, no, no — I think that what I’ve said is what other economists have said across the political spectrum, which is that if you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the “lost decade” where essentially for the entire ’90s they did not see any significant economic growth.
The urgent need to truly examine Japan’s depression and how they leveraged it into a machine that made Japan the world’s #2 industrial power and #1 export profit power as well as, for years, the #1 FOREX reserves and now, #2 as well as the #1 US debt holder, now, #2 due again, to China overtaking them, this is of uttermost importance!
So long as the US continues to pretend that we are on the same path as Japan, we will be going in the wrong direction. We are not increasing exports, we are crushing world trade when we try to imitate Japan. Note that Obama won’t mention trade here! This is typical of most US officials and elected representatives as well as an army of economists who look only at China and not Cbina’s teacher and role model.
So what I’m trying to underscore is what the people in Elkhart already understand: that this is not your ordinary run-of-the-mill recession. We are going through the worst economic crisis since the Great Depression. We’ve lost now 3.6 million jobs, but what’s perhaps even more disturbing is that almost half of that job loss has taken place over the last three months, which means that the problems are accelerating instead of getting better.
Now, what I said in Elkhart today is what I repeat this evening, which is, I’m absolutely confident that we can solve this problem, but it’s going to require us to take some significant, important steps.
Step number one: We have to pass an economic recovery and reinvestment plan. And we’ve made progress. There was a vote this evening that moved the process forward in the Senate. We already have a House bill that’s passed. I’m hoping over the next several days that the House and the Senate can reconcile their differences and get that bill on my desk.
There have been criticisms from a bunch of different directions about this bill, so let me just address a few of them. Some of the criticisms really are with the basic idea that government should intervene at all in this moment of crisis. Now, you have some people, very sincere, who philosophically just think the government has no business interfering in the marketplace. And in fact there are several who’ve suggested that FDR was wrong to intervene back in the New Deal. They’re fighting battles that I thought were resolved a pretty long time ago.
Most economists, almost unanimously, recognize that even if philosophically you’re wary of government intervening in the economy, when you have the kind of problem we have right now — what started on Wall Street goes to Main Street, suddenly businesses can’t get credit, they start carrying back their investment, they start laying off workers, workers start pulling back in terms of spending — when you have that situation, that government is an important element of introducing some additional demand into the economy. We stand to lose about $1 trillion worth of demand this year and another trillion next year. And what that means is you’ve got this gaping hole in the economy.
This is a loss of a trillion in credit. Our entire system is based on gaining credit and spending it…mostly on imports. This is why savers in Asia gave us loans. This is also why we can’t get $2 trillion so easily from them today: the US won’t pay interest on any loans over here! I guess, what I am saying is, the foreign banks would lend to hedge funds and our government so long as our loans, here, paid good interest. When we pay, here, at zero, they cannot afford to pass savings to us. Note, that Obama mentions the $2 trillion I mentioned earlier, in today’s article.
That’s why the figure that we initially came up with of approximately $800 billion was put forward. That wasn’t just some random number that I plucked out of a hat. That was Republican and Democratic, conservative and liberal economists that I spoke to who indicated that given the magnitude of the crisis and the fact that it’s happening worldwide, it’s important for us to have a bill of sufficient size and scope that we can save or create 4 million jobs. That still means that you’re going to have some net job loss, but at least we can start slowing the trend and moving it in the right direction.
Now, the recovery and reinvestment package is not the only thing we have to do — it’s one leg of the stool. We are still going to have to make sure that we are attracting private capital, get the credit markets flowing again, because that’s the lifeblood of the economy.
Ah! Attracting private capital! HAHAHA. And who has that? Asia! And who has been losing capital profits this last 2 quarters especially, the last quarter? Asian exporters! I would suggest, Hillary Clinton will get an earful about that in Beijing and Tokyo.
And so tomorrow my Treasury Secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again. And that means having some transparency and oversight in the system. It means that we correct some of the mistakes with TARP that were made earlier, the lack of consistency, the lack of clarity in terms of how the program was going to move forward. It means that we condition taxpayer dollars that are being provided to banks on them showing some restraint when it comes to executive compensation, not using the money to charter corporate jets when they’re not necessary. It means that we focus on housing and how are we going to help homeowners that are suffering foreclosure or homeowners who are still making their mortgage payments, but are seeing their property values decline.
Congress tried to sneak out of the bill, compensation rules. HAHAHA. And the business of Japan comes again, to mind here: Obama mentions we must learn from the Japanese. But right way, says he wants to keep the real estate bubble values where they were when the bubble burst! This is impossible. Japan couldn’t do it. Neither can we, any more than we can stop the tides at full moon.
So there are going to be a whole range of approaches that we have to take for dealing with the economy. My bottom line is to make sure that we are saving or creating 4 million jobs, we are making sure that the financial system is working again, that homeowners are getting some relief. And I’m happy to get good ideas from across the political spectrum, from Democrats and Republicans. What I won’t do is return to the failed theories of the last eight years that got us into this fix in the first place, because those theories have been tested and they have failed. And that’s part of what the election in November was all about.”
TIME TO GO TO TIME MAGAZINE!
Here is a cover of Time Magazine from the same week Nixon and Burns decided to cut the link between the dollar and gold. In this issue and the next issue, there is virtually no mention of this event. The focus was on jobs, inflation and wage controls.
Oddly enough, the most effective critic of this hypothesis is the man who most controls the money supply: Federal Reserve Chairman Arthur Frank Burns. As the President’s chief economic adviser during the first year of the Nixon Administration, Burns provided much of the free-market philosophy behind the anti-inflation plan. But he now feels that the plan is not working, that much more than money policy is needed. For more than a year, Burns has been calling on the President to adopt an incomes policy (TIME cover, June 1, 1970). The heart of that policy would be a presidential wage-price stabilization board that would be called on when major companies plan price increases or unions demand wage raises. The board would make strong recommendations and depend on voluntary compliance. If a company or union posted an egregious increase, the board would publicly condemn it. In theory, at least, few corporate or labor leaders then would dare to risk the wrath of Government backed by an aroused public.
When he reiterated his plea to the Congress’s Joint Economic Committee two weeks ago, Burns shook up the Administration by declaring that “inflation is proceeding at both an unacceptable and a dangerous rate.” Then he added: “There is little evidence as yet of any material strengthening in consumer or business confidence.”Although the quarrel over economic policy pits Burns against Shultz, the two men have much in common.
Burns, a house painter’s son, was born in Galicia, and at the age of six could translate the Old Testament from Hebrew into German. He was ten when his family emigrated to America. Shultz, a schoolteacher’s son, was also an early scholar; he graduated from Princeton with honors in economics, was a World War II Marine major. Both men rose in the academic world and were tapped for frequent assignments in Government. Economist Burns, 67, and Industrial Relations Expert Shultz, 50, are both close friends of Milton Friedman, the Little Giant of monetary theory. Burns was Friedman’s professor at Rutgers. Shultz was his colleague at the University of Chicago, when Shultz headed the graduate school of business administration. When Burns was chairman of the President’s Council of Economic Advisers in the 1950s, Shultz worked on his staff as an economist. Indeed, it was on Burns’ recommendation that Nixon named Shultz Secretary of Labor in 1968, although lately Burns has been heard to question his own judgment.
Here is a thumbnail sketch of the former head of the Fed, Burns, and his good buddy, Milton Friedman:
Born in Stanislawow, Galicia, province of Austrian-Hungarian Empire Arthur Burns soon immigrated with his Austro-Hungarian Jewish parents to New Jersey. He earned his B.A. and Ph.D (1934) from Columbia University, studying under Wesley Clair Mitchell. His career alternated between academia and government. He taught at Columbia and studied business cycles while president of the National Bureau of Economic Research. He also was the chairman of the U.S. Council of Economic Advisors from 1953 to 1956 under Dwight D. Eisenhower‘s presidency. In 1953, he stated the American economy’s “ultimate purpose is to produce more consumer goods.” He served as the Chairman of the Federal Reserve from 1970–1978 and as ambassador to West Germany from 1981–1985.
The academic part of Burns’s career focused on the measurement of business cycles, including questions such as the duration of economic expansions, and what economic variables rise during expansions and fall during recessions. He often collaborated with Wesley Clair Mitchell and set the academic tradition continued by the NBER’s business cycle dating committee, which is generally considered authoritative in dating recessions. Burns’s detailed macroeconomic analysis influenced Milton Friedman and Anna Schwartz‘s classic work A Monetary History of the United States, 1867–1960.
In Friedman’s last email interview in 2006, he said that the greatest threat to the world’s economy is “Islamofascism, with terrorism as its weapon”. In an in-person interview with Friedman and his wife that same month, he said that he opposed the US invasion of Iraq: “What’s really killed the Republican Party isn’t spending, it’s Iraq. As it happens, I was opposed to going into Iraq from the beginning. I think it was a mistake, for the simple reason that I do not believe the United States of America ought to be involved in aggression.” His wife disagreed that it was aggression. However, after a short argument with his wife, he added “But, having said that, once we went in to Iraq, it seems to me very important that we make a success of it.” Milton Friedman died at the age of 94 in San Francisco on November 16, 2006. Friedman’s son is the philosopher and economist David D. Friedman.
Burns died long ago, Friedman, only very recently. Note that due to tribal warfare between the Jews and the Palestinian Muslims, this ‘great economist’ thinks the greatest danger to the world financial system was Muslim fanatics, not Jewish financiers or economists. But history is cruel. The tribal war has knocked a giant hole in the bottom of the US Economic Titanic and it is sinking. And the gnomes were no help at all. They did all the worst possible things in a vain attempt at grabbing as much money as possible for themselves and dumping a mountain of debt onto the American people and all our industries and businesses. Which are now dying due to this.
How can anyone honor this man? He was insane as well as stupid. He did have the wit to see Iraq as a trap. But was utterly unable to see a member of his own tribe, Madoff as a much more dangerous trap. The TIME magazine article here is from the summer of 1971 when the US tried various tricks and games to get away with running huge war debts while also spending domestically, on civilian things. As with all wars, inflation took off. Instead of enforcing savings via selling bonds while rationing goods and services, Nixon did the opposite. And Burns helped him, to a point.
But when inflation got the gnomes too tangled up, Burns had to raise rates. Back then, both Nixon and Burns were not as dishonest as the spawn of Friedman. Instead of stopping inflation, it was cleverly disguised. From Reagan, onwards, the way we calculated inflation was fine-tuned until it ceased to be connected with domestic realities. Then the second tool: allowing businesses to remove jobs from America and then import services and goods, kept inflation in check. But destroyed our economic base and our nation. Here is the July, 1971 testimony of Burns with the Banking Committee of the House:
Arthur F. Burns
Chairman, Board of Governors of the Federal Reserve System
Committee on Banking and Currency
House of Representatives
July 20, 1971
Developments over the past year or so have underscored the
need for standby authority for Government guarantees of loans to
business firms in emergencies where the alternative could be severe
damage to the national economy. We hope that such guarantees
will be needed only rarely, if at all. But in the light of recent experience,
the prudent course is to put in place loan guarantee machinery, to provide
better protection against the risk that a temporary liquidity problem of
one business enterprise may grow into a major national problem.
Our economy was in trouble and the government had to insure loans! Just like today! Did this lead to prosperity or did it lead to waves of inflation in between deep troughs of recessions? Stagflation, in other words?
One example of how this could happen came in mid-1970. The
insolvency of the Penn Central Transportation Company, a prominent
borrower in the commercial paper market, was followed by a sharp
contraction of credit in that market. Since commercial paper is
unsecured, investors backed away from other issuers about which
there was any question. Concern spread through other credit markets,
fed by fears that some firms with maturing commercial paper might be
unable to obtain refinancing from alternative sources, and would thus
be forced into bankruptcy. With investors generally becoming more
cautious, companies with credit ratings less than Aaa experienced
increasing difficulty in borrowing through the bond market, as was
evidenced by the sharp widening of spreads in the structure of corporate
bond yields. In short, there appeared to be a risk of bankruptcies
spreading to firms that in other circumstances would be regarded
as perfectly sound.
All bonds are now less than Aaa. Maybe not even Bbb, for that matter! We also saw a sudden ‘widening of the spread in corporate bond yields! Wow! And back then, we needed ‘alternative sources for refinancing’. Today, with the end of the Japanese carry trade and China needing to capitalize their own rebuilding projects, we are again, unable to find financing for our loans.
Confronted with an incipient crisis, the Federal Reserve System
acted promptly to assure the availability of loanable funds to meet the
credit needs of firms that were being squeezed by the contraction of
the commercial paper market. First, the System made it clear to
member banks that the discount window would be available to assist
them in meeting such needs. Second, the Board suspended ceilings
on the rates of interest that member banks could pay on certificates of
deposit of $100, 000 or over. In this way banks were placed in a much
better position to attract funds to lend to their hard-pressed customers.
These two actions helped to restore confidence, and fear of a
liquidity crisis abated. We can all take comfort from the fact that the
money and credit markets met the tests of mid-1970 successfully.
Looking ahead, however, we need better assurance that temporary
liquidity problems of major corporations will not be allowed to damage
the national economy.
The liquidity problem was not temporary. And the fix was for the US to give up all attempts at balancing trade and or our Federal budgets. Instead, we chose to flood the systems with lending by running all important systems, in the red and charging all of this to future tax revenues.
The Board believes there are several guiding principles that
should be followed in designing such assistance. First, assistance
should be reserved for those rare instances where it is needed to enable
a sound enterprise to continue to furnish goods or services to the public,
and where failure to meet that need could have serious consequences for
the nation1 s output, employment, and finances.
Second, since the assistance is designed to protect the public
interest, it follows that it should not be used simply to protect large
firms from failure, or to bail out bad management, or to shield
creditors or shareholders from the consequences of unwise investments.
Guarantees should be a last resort, issued only when there is reasonable
assurance of repayment of the guaranteed loan and when there is no other
way to avoid serious injury to the economy. Since any such guarantee
would be subject to conditions assuring a preferential status for the
government relative to other creditors or shareholders in the event
of insolvency, and since guarantees would be available only in emergencies,
the existence of the authority should not in any real sense erode the
disciplines of the private enterprise system. Rather, it should be
regarded as a kind of insurance policy to protect the general public
against a highly specialized risk.
Third, assistance should be provided through Federal guarantees
of private loans rather than through outright advances of public funds.
Aside from its obvious budget savings, this approach would have the
advantage of assuring that experienced private lending officers will
administer the loans in accordance with Federal guidelines and
So, the Fed would insure private loans but NOT hand out direct money? HAHAHA. That fell apart, fast. Reagan and onwards, the focus was on handing out lots and lots of loot to businesses, directly. And forget the ‘disciplines of private enterprise’! The bogus ‘privatization’ we saw this last 35 years has been mostly the opposite: the government pays more and more for less and less.
Fourth, to assure thorough and well-balanced consideration
of the need for assistance, responsibility for passing on guarantees
should be vested in top Federal officials concerned with overall
economic and financial policy. We suggest that this function be
vested in a board chaired by the Secretary of the Treasury, with the
Secretary of Commerce and the Chairman of the Federal Reserve
Board as members, No permanent staff would be required, since
guarantees would be issued only under exceptional circumstances,
and staff could be assigned as needed from the governmental units
represented on the Board. Thus no bureaucracy would be created
with an interest in expanding the “program.”
This was all one big, fat failure. Price controls failed. Any attempt at rationing was greeted with horror and rage and the US decided to cheat fate and instead of building a new energy system and travel system, we chose to dump the costs on the far future and we motored off into the sunset, happy as birds before a blizzard.
We repudiated a sober assessment of the implications of the Hubbert Oil Peak. We were consuming more and more oil and the oil ceased to increase at the same speed. We outran our oil pumping speed. And have only increased this over the years. Inflation was defeated by surrendering to foreign trade and trading our jobs for cheap goods while driving like fiends and buying immense amounts of foreign energy. And paying for this in dollars which were used to buy up many of our industrial and trade systems. We no longer own many things like our ports, our shipping, our highways, our water systems, our energy supply systems! All, so we could drive our cars.
Here is the first Fed Reserve press release after we cut the gold standard:
For immediate release September 16, 1971
The Federal Open Market Committee of the Federal Reserve
System announced today that it has authorized outright purchase and
sale transactions in securities of Federal agencies. At present,
the System’s open market operations involve mainly transactions in
U.S. Treasury issues. The transactions in Federal agency securities
will be initiated in the near future.
This bulletin introduces the notion, the Fed will now begin buying “Federal Agency Securities”.
The volume of securities issued by Federal agencies has
been growing rapidly in recent years. These securities are marketed
to raise funds for a variety of governmental lending activities in
such fields as housing, agriculture, and export financing.
These were sold to the American people. But no longer!
System open market operations are conducted to carry out the
objectives of monetary policy by affecting the volume of bank reserves,
money, bank credit, and conditions in credit markets. The purpose of
the new authorization is to widen the base of System open market
operations and at the same time to add breadth to the market for agency
securities. Up to now, open market operations in Federal agency issues
have been confined to repurchase agreements with securities dealers.
The Federal Reserve could and can buy whatever it wants! And when it does this, it drives interest rates lower! Banks and others don’t need to hold out enticing rates to attract buyers! BUT THIS ALSO CAUSES INFLATION! Shortly after doing this, the faux interest rates that are low, spawn inflation.
INITIAL GUIDELINES FOR THE CONDUCT
OF SYSTEM OPERATIONS IN FEDERAL AGENCY ISSUES
1. System open market operations in Federal agency issues are
an integral part of total System open market operations
designed to influence bank reserves, money market condi-
tions, and monetary aggregates.
2. System open market operations in Federal agency issues are
not designed to support individual sectors of the market
or to channel funds into issues of particular agencies.
3. As an initial objective, the System would aim at building
up a modest portfolio of agency issues, with the amount and
timing dependent on the ability to make net acquisitions
without undue market effects.
This ‘modest portfolio’ has grown from less than a trillion dollars to the present $11 trillion and counting.
4. System holdings of maturing agency issues will be allowed
to run off at maturity, at least initially.
‘Initially’ has become ‘forever.’
5. Purchases will be limited to fully taxable issues for which
there is an active secondary market. Purchases will also
be limited to issues outstanding in amounts of $300 million
or over in cases where the obligations have a maturity of
five years or less at the time of purchase, and to issues
outstanding in amounts of $200 million or over in cases
where the securities have a maturity of more than five years
at the time of purchase.
6. System holdings of any one issue at any one time will not
exceed 10 per cent of the amount of the issue outstanding.
There will be no specific limit on aggregate holdings of
the issues of any one agency.
Debtor nations always start out trying to keep to the 10% rule. Then it declines to 0.01% over time. Look at our biggest bankers today!
7. No new issue will be purchased in the secondary market until
at least two weeks after the issue date.
8. All outright purchases, sales and holdings of agency issues
will be for the System Open Market Account.
I am sorry this is another long posting. I had to leave the house all day today because of computer problems. Apple fixed these pretty good and all is well, I hope. I really use my computer very wildly and pile up tons of stuff on the screen and have been crashing it. Heh. I write about market crashes and then do it to my computer. Punishment! HAHAHA. Well, good night, all, and may you all fare well! And may we find some sanity at the bottom of this barrel of monkeys.
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