Alas, the mess created ever since the US decided to pay for the Vietnam War with funny money, our financial situation is now collapsing, totally. The US struggles to restart the carry trade business and run our entire system on ZIRP. We visit Fekete for some sane words about interest rates, bond markets and the US deflation trap and how it will spring into an inflation trap. I wish things were going better but I don’t teach at Harvard. Bah.
Further evidences of the onset of Great Depression II
Antal E. Fekete
Professor of Money and Banking
San Francisco School of Economics
I maintain that the Federal Reserve banks are not creating money out of the thin air. In fact, they must first post collateral with the Federal Reserve Agent (who is not under the jurisdiction of the Fed but under that of the government). Only after the collateral has been posted can they create a commensurate amount of Federal Reserve notes and deposits. Typically, the collateral is U.S. Treasury bills, notes, or bonds, purchased in the open market on behalf of the Fed’s Open Market Committee.
Because open market purchases of Treasury paper have consequences, we must examine them before passing a judgment on the validity of the QTM. Such an examination is always side-stepped by the devotees of the QTM. What are those consequences? They are the effect of open market operations on the rate of interest. Since open market purchases of the Fed involve bidding up the price of government obligations which varies inversely with the rate of interest, we can say that they will make interest rates fall. (To be sure, on occasion, the Fed may be a seller of Treasury paper but, on a net basis, it has been a buyer every single year.)
This means that the regime of irredeemable currency, depending as it is on the open market operations of the Fed for its existence, imparts a definite bias to the interest rate structure establishing a falling trend, whereas interest rates would be stable in the absence of that regime. This in itself is a condemnation of irredeemable currencies as they introduce an unwarranted bias into the economy favoring debtors and spenders while punishing creditors and savers. In addition, it favors the financial sector at the expense of the producing sector. Falling interest rates, as opposed to low but stable ones, are detrimental to productive capital.
This is a very long article by Professor Fekete. It is also a fine read if we want to understand the ZIRP regime. One thing does puzzle me, though. Not too many people use the ‘Zero Interest Rate Policy’ when they talk about the present banking system. And tying it all to the now-nearly 20 year depression/zero system in Japan, seems beyond most economist’s ken.
We are in a ‘falling trend’ and the cure, as far as everyone running this show is concerned, is to make things very inflated. This being the childish belief that if we have inflation, we won’t have a depression since this is ‘all about money making’ and not due to profound changes in the industrial and political landscape.
History isn’t all about the markets, they are considered a sideshow. But this is one sideshow that creates the main events: the rise and fall of great global empires. The main function of an empire is to use its military to expand markets. The US is simply one of the better examples of this. But thanks to the Tea Party demonstrators who mix up the business of our Founding Fathers protesting a monopoly trading arrangement that undermined domestic business via taxing the competition so the royal monopoly could have bigger profits on lower prices.
The American colonies immediately saw their domestic markets dry up. On top of that, a stamp tax was imposed to pay for the British military. The plan was for the colonies to pay their own way so they were not costing London, forcing them to run government deficits. This all sounds rather familiar! We invaded Iraq and now, expect Iraq to pay for its occupation even though we don’t bring them much in the way of benefits. The only way the Iraqis can pay us for our gold-plated occupation is for them to sell us oil at as high a price as possible only we want them to sell us the oil, cheap.
So we are spending over a trillion government dollars, which we do not have, fighting and occupying a country that we don’t want to pay for things, via selling us very expensive oil. We want an expensive occupation paid for with cheap oil. It is worse: the oil corporations are not American at all except, some of them, in name only. They are international cartels who use the US military as their strong man to put down any pests trying to control national oil resources via various government means.
Running all of this on the cheap is now collapsing. The US can only run its global military operation if we get basically free loans in exchange for TRADE PRIVILEGES. This means, foreign traders who buy US debts and lend money to the US at zero interest rates will be REWARDED with a government grant to flood our domestic markets with foreign trade goods, thus, driving out domestic business and putting the entire US economic AND government systems into hock to global merchant consortiums headquartered overseas. Whew!
This isn’t a problem of mere money but rather, the granting of sweetheart trade deals with aliens or sweetheart debt deals with foreign powers or financiers of various dubious sorts and then, spending money like a fiend on useless projects, most of which are designed to keep a restive public at bay or conquering other nations with national resources we covet on behalf of international cartels who have no interest in preserving our incomes or our futures! Ta-da!
Now, try telling your friends all this information and watch them scratch their heads in dismay. We do see many scary stories these days online. It is true, the ruling elites are very scared and very restive and are very, very anxious to MOVE THE IMPERIAL POWER OUT OF THE US. And into some other hands. They fear the Chinese. Very much, they fear the Chinese who have a 50 year plan to displace the US as the world’s top empire.
They hope, if they create an international empire based mostly on PIRATE ISLANDS, or places like Dubai, they can then be our creditors and constrict or grow our money supply or credit with us having no voice in the matter. This is BANKING WITHOUT REPRESENTATION. All the cures being peddled by the people at the top like Geithner, Summers and all the Bilderberg cronies and the Bank of England, etc, are all aimed at removing the last national controls of our own banking system and handing it over, once and forever, to an INTERNATIONAL CARTEL OF FINANCIERS who will then seize our military and using it only for their own invasive purposes, especially, putting down riots and insurrections against the ruling elites who can’t meet anywhere, not even in Bangkok, anymore! They are SCARED TO DEATH of these riots against ‘free trade’.
Treasuries were little changed as the Federal Reserve prepared to buy U.S. government securities today and tomorrow in an effort to cut borrowing costs….
This is Ouroboros, the snake eating itself. The government can’t be honest with all of us and tell us, ‘The Federal Reserve is OWNED by a bunch of foreigners and Americans who use pirate tax havens to evade taxes and regulation. And we are PAYING THEM money to create money OUT OF THING AIR. They use a pile of BAD LOANS to lend to us and this will collapse in a horrible mess like in Germany, 1923. We must take back our ability to create money, NOW!’
U.S. bonds may still fall, the survey showed. An index measuring investors’ outlook for Treasuries through the end of June declined to 43 for the seven days ended April 9 from 44 in the previous week. A reading below 50 means investors expect prices to drop. Ried Thunberg surveyed 25 fund managers controlling $1.35 trillion.
HAHAHA. And who are these fund managers?
China, the largest holder of U.S. debt outside the nation, should buy more short-maturity U.S. Treasuries than long-term notes, the Oriental Morning Post reported today, citing a former adviser to the People’s Bank of China.
Hu will do whatever he thinks the Grand Project needs done. Hu is very conscious of the 50 Year Plan. He knows the US has blown things to smithereens by falling apart too fast. Namely, China hasn’t surpassed JAPAN yet. And the US collapse is screwing up the timeline.
The government should “adjust the maturity structure, and keep asset and currency structures basically unchanged,” Li Yang said in Beijing, the Chinese-language newspaper reported.
Foreign holdings of Treasury bills surged to a record $486.9 billion in January from $207.1 billion a year earlier, according to the Treasury Department. Shorter-maturity bills tend to follow central bank interest rates while bonds are influenced more by inflation.
So, the T bills more than doubled? And the US obliged everyone by going very steeply into debt. Adding double trillions a year is very dangerous. The sale of our debts to foreigners will end like Czarist Russia’s many bonds sold to foreigners: a bunch of crazy revolutionaries burning the whole lot and telling bond holders to drop dead.
Immediately, the British and Americans ran a small invasion that was more along the lines of the Bay of Pigs. But then, Germany, who lost a lot of money with this bond burning and who also owed lots of debts to the US and Britain, solved it by trying to destroy Britain and utterly destroy Russia! These things have ugly consequences and the US leadership knows this which is why Obama has morphed into bomb, bomb, Obama.
He has to show enough suicidal tendencies to scare our bond holders into not interfering while we play the Ouroboros game with selling our debts to our Fed Reserve masters who are nasty little gnomes living high off the hog, on our debt interest payments. Back to the always-interesting Professor Fekete:
We have to take into account bond speculation, a permanent fixture on the monetary firmament since 1971 when the U.S. government defaulted on its gold obligations to foreign governments and central banks. (There was no bond speculation before, for reasons having to do with the lack of sufficient variation in the rate of interest, making such speculation unprofitable.) Analysts and financial writers hardly ever consider bond speculation as a factor in the money-creating process. For this reason alone, their predictions are practically always worthless.
A lot of markets that make financiers very rich didn’t exist back then. The way to make the most profit is very simple: find some time/space/regulatory flaw or weakness and then make a huge hole with it that taps directly into the flow of business and funding of economies and then drive it to infinity! This always ends up destroying the systems but gnomes don’t care. They wont the loot. They need immense bonuses. Their skanky females will cease having sex with them if the money dries up.
The fact goes virtually unrecognized that open market operations render bond speculation risk free. All the speculators have to do is to second-guess the Fed. They know that the Fed must be a net buyer. They know the identity of the agents the Fed is using to execute its purchase orders, and stalk them. Speculators study the same monetary statistics which the Fed itself is using to determine the timing of its open market purchases. Can the Fed outsmart speculators? Hardly. The Fed is run by bureaucrats and their trading losses are ‘on the house’. By contrast, the speculators risk their own fortune. They are certainly smart enough to detect false-carding on the part of the Fed. Even if we assume that they have no inside information (which is a rather naïve assumption), the speculators can easily front-run the Fed’s open market purchases.
They hate risk. They pretend, they are risky but they are NEVER risky at all. They rig up incredible games to move risk off of their own backs and onto someone else’s back. We see this very, very clearly now with them dumping everything onto the taxpayers.
The presence of risk-free bullish bond speculation imparts a huge additional bias to the economy, virtually guaranteeing a falling interest-rate structure, as demonstrated by the past quarter of a century, during which interest rates have been driven down from the high teens to close to zero.
They love ZIRP. They want free funny money…FOR THEMSELVES. I got an offer to go into debt in the mail this week. If I screw up even slightly like, running over the limit of the stupid credit card [they have NO WARNING SYSTEMS now] I get hammered at a 30% rate which is pure usury! And they have capitalized themselves via super-cheap loans from….US! The US public! Isn’t this grand? Now for some amazing graphs from the Federal Reserve:
Vault cash is the money or currency (paper bills and metal coins) in the possession of banks. This vault cash is used as reserves to back up deposits, especially to meet any demands that customers have to withdraw cash from their accounts. Although the common notion is that banks have vaults full of cash, vault cash is generally less than one percent of a bank’s total assets and perhaps only one-third of total bank reserves….
Vault cash is NOT part of the M1 money supply or any of the other monetary aggregates. The reason is quite simple. M1 includes the currency that is in circulation. It is that money that can be used to make purchases or complete exchanges.
Vault cash, in contrast, is part of the economy’s stock of currency that is out of circulation and stored by the banking system. Much like retail stores keep inventories of consumer goods awaiting purchase by the public, banks keep inventories of cash awaiting withdrawal by the public.
We can see that this graph moves in increasingly huge jerks. These jerks in the money system are Xmas finances. Xmas also rules our trade statistics. Our trade deficit always worsens in August-September as stores stock up. Note how, during the Clinton era, the money held in banks fell! The Fed deigns to not tell us what was going on here. This whole thing is rather puzzling, it coincides with the entry of ZIRP lending from Japan…? I wonder what it means. After all, when the ZIRP trade collapsed suddenly, the cash held in banks surged…?
Look at this graph! OUCH. It shot to the moon, fell fast and now is shooting up again! What’s up here? Well, look at the Fed:
The U.S. government entered into an agreement today with Bank of America to provide a package of guarantees, liquidity access, and capital as part of its commitment to support financial market stability.
Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value. The large majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch. The assets will remain on Bank of America’s balance sheet. As a fee for this arrangement, Bank of America will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.
In addition, Treasury will invest $20 billion in Bank of America from the Troubled Asset Relief Program in exchange for preferred stock with an 8 percent dividend to the Treasury. Bank of America will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program.
This is just ONE EXAMPLE! $140 billion was forked over to the clowns at Bank of America! Because of all their stupid NINJA loans and the collapse of the speculative real estate markets in California and Florida, etc.
What Does Net Interest Margin Mean?
A performance metric that examines how successful a firm’s investment decisions are compared to its debt situations. A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returns generated by investments.
Again, note how this graph runs! The decline in the ratio has been very sharp. And it starts right when the Japanese ZIRP system began. It would be quite different today if the US didn’t also join Japan in the ZIRP business. I wonder if this will now rapidly collapse into the 1.0 ratio level or even lower, like in Japan? Back to Feteke:
The only enterprise prospering in this deflationary environment is bond speculation. Speculators corner every dollar made available by the Fed, and use it to expand their activities further in bidding up bond prices. They have been told in advance that the Fed is going to move its operations from the short to the long end of the yield curve. It will buy $300 billion worth of longer dated Treasury issues during the next six months. It is likely that it will have to buy much more after that. Speculation on falling interest rates becomes self-fulfilling, thanks to the insane idea of open market operations making, as it does, bullish bond speculation risk-free and bearish bond speculation suicidal. Deflation is made self-sustaining.
And to think, all of these manipulations are designed for one purpose only: to increase US government and consumer spending despite the US running immense budget and trade deficits! And the irony here is awful: the entire world economy wants us to do this suicidal financial thing!
Investors are urged by the Treasury and the Fed to invest in the toxic assets of the failing banking system. They are offered incentives if they do, making it appear that speculating in toxic assets has been made risk free as well. So the choice before the investors is either investing in toxic assets for which there is no market, or invest in Treasury paper which bond speculators and foreigners are scrambling to get. Naturally, they will choose the latter. They don’t want to be taken for a ride by the Treasury and the Fed. The idea to offer incentives to investors to make them buy toxic assets is preposterous.
Yes, that is right: this is suicidal. Which is why Goldman Sachs is pulling out of the system and going right back to being a full-time pirate, damn the torpedos. And we are supposed to be scared of Somali pirates? More Fed Reserve fun:
Damn, I want the M3 stats back! The first thing the bastard, Bernanke, did, was hide that vital information from us. And he is in the news this week with the press fawning over him because he wants more openness! HAHAHA. In a rat’s ass. The M1 numbers are insane. But then, all the graphs show a total collapse in our entire financial universe, one that we are NOT escaping at all. Goldman Sachs is sailing off, but not the US people.
Just one year ago, this graph went from $0 to only $60 billion. This is our official ‘reserve’. Suddenly, IN ONE MONTH, it shot to nearly $1 trillion! And did Bernanke and his gang gasp and run around, yelling? Or fake coolness? I want to shake them all, hard, like a terrier shakes a rat. It gets worse.
I have several bills from Weimar Germany, circa 1923. They are a sad testament to the futility of adding lots and lots of zero to the monetary base. Here, we see the zeros being added up at a MAD rate! ARRRGHHH. That fool, Bernanke, must have been a reincarnation of the fool who thought, ‘Ach, null is gut!’
Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.
HAHAHA. Horrors. He should be arrested.
If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.
I have chatted with some of the Carnegie Mellon economists in the past. A wonderful group. They are outside of the Harvard/Yale/Princeton gang.
Bernanke’s gamble that the highest jobless rate in 25 years and the most idle factory capacity on record will hold down inflation is straight out of the late British economist Keynes. Should late Nobel-prize-winner Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” prove right, the $1 trillion or more in liquidity Bernanke has pumped into the financial system by expanding the Fed’s balance sheet may leave him to cope with surging consumer prices.
All retirees will get $250.
So far, investors and economic data both back up the Bernanke-Keynes view. The market in Treasury Inflation-Protected Securities as of April 6 indicated long-term inflation expectations of 2.5 percent, below the 2.8 percent average inflation rate of the past 10 years.
History is littered with the corpses of people who thought, they could see into the future. They can’t. And they are NOT buying the long term bonds!!!! They are buying SHORT TERM ones! So they have NO faith in the future! Got that? The Fed is buying the long term bonds.
As is always the case with regulation, the institutions regulated by the FDIC have sought over the years to minimize the cost of FDIC insurance. One example of this occurred in the aftermath of the Savings and Loan Crisis of the 1980s, when the Savings Association Insurance Fund (SAIF) was taken under the umbrella of the FDIC.
They ALL want to run everything on ZIRP while charging us 30% interest.
Insurance Rates for SAIF were much higher than those for commercial banks under the Bank Insurance Fund as a result of their recent history of failures. The result was that banks worked hard to qualify as eligible for the lower-premium BIF.
They all spend a fortune, trying to minimize laws dealing with risk and reserves. They prefer these to be set at zero, too.
Banks also lobbied Congress hard to limit the size of the insurance fund. These were set at 1.25% of insured deposits. It wasn’t until passage of the Federal Deposit Insurance Reform Act in 2005, when some flexibility was introduced into the formula, that insurance rates could be tied to risk assessments of the institutions. Following those reforms, the requirement was that the insurance fund stay between 1.15 % and 1.5 % of all insured deposits.
All acting like children. No sense of history. No fear of what this will do to the entire system. They want no controls, no reserves, no withholding, no principal, no interest. They want free stuff for them and 30% penalties for their victims. For many years, including the recent boom years of ever-increasing profits and risks, the banks paid nothing into the insurance fund. And then came the crisis. Twenty-five banks failed last year, and 23 have failed so far in 2009. Some of the failed institutions–IndyMac, for example–were very large. The reserve ratio as of Dec. 31, 2008, was 0.4%, down from 1.22 % at the end of 2007. It has fallen further since. FDIC Chair Sheila Bair has warned that the fund could quickly be wiped out if more fees are not assessed on the banks….
As I pointed at with the reserve ratio graph: it is heading to zero. These jerks gave us a Japanese ZIRP system, in spades! The FDIC has also been expanding its mission throughout the crisis. In October, it introduced the Temporary Liquidity Guarantee Program to guarantee newly issued senior unsecured debt of banks, thrifts. For a fee of 75 basis points, the same for all regardless of their risk profiles, banks can issue unsecured debt guaranteed by the full faith and credit of the U.S. government.
WE GET ALL THE RISK! Wonderful. Arrest them all and charge them with treason. For bankrupting a nation is treason of the worst, worst sort. Ask the Russians about this. This remarkable intervention was justified by invoking the FDIC’s statutory authority to prevent systemic risk. What is slightly odd here is that by providing essentially free insurance to these institutions, the FDIC could be substantially increasing systemic risk and the risk to taxpayers.
WHAT IS SO FUCKING ‘ODD’ ABOUT THIS???? Our corrupt government always hands out bags of candy to these bribers while giving us a bag of shit.
The FDIC is also part of the plan to insure losses on the Public Private Investment Partnership proposed to help rid banks of their “legacy” assets. Who will pay the premiums for this insurance? Apparently not the investors, and that means the risks will again be shifted to taxpayers.
All the bad bank stuff is being handed off to us while the pirates sail away with their loot. And then, they will join the chorus demanding, we be put into receivership and punished for not being fiscally solvent.
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