Archive for the ‘Debt’ Category

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Rolling Stone
Matt Taibbi
October 8, 2010

It’s amazing, given the attention the Tea Party allegedly is paying to government waste and government spending, that there hasn’t been more controversy about the now-seemingly-inevitable arrival of “QE2” – a second massive round of money-printing cooked up by the Fed to prop up both the government and certain sectors of the economy. A more overtly anticapitalist and oligarchical pattern of behavior than the Fed’s “Quantitative Easing” program could not possibly be imagined, but the country is strangely silent on the issue.

What is “QE”? The first round of “quantitative easing” was a program announced by Ben Bernanke last March in response to the financial crisis, ending in March of this year. In what will soon be known as “QE1”(i.e. once QE2 is announced), Bernanke printed over a trillion dollars out of thin air, then used that money to buy, among other things, mortgage-backed securities (MBS) and Treasury Bonds. In other words, the government was printing money to a) lend to itself and b) prop up the housing market, with Wall Street stepping in to take a big cut.

That was QE1. There has long been speculation that another trillion-plus money-printing program called QE2 is coming, but only recently have there been concrete hints from the Fed along those lines. Among other things, New York Fed Vice President Brian Sack just this week squeaked out a comment about how, “In terms of the benefits, balance-sheet expansion appears to push financial conditions in the right direction.” Translating into English, “balance-sheet expansion” means the Fed adding to its balance sheet, i.e. printing money to buy stuff – i.e. QE2.

Thanks to that and other hints, most everyone now expects the Fed to announce a new QE program in November. The big banks have now openly begun to predict this, with JP Morgan Chase among others raising its odds of the Fed buying mortgages in the next 6 months from 10% to 50%. Another effect we’re seeing is that mortgage originators are hiring again, in anticipation of being able to fork out QE-funded mortgages.

QE is difficult to understand and the average person could listen to a Fed official talk about it for two hours right to his face and not understand even the basic gist of his speech. The ostensible justification for QE is to use a kind of financial shock-and-awe approach to jump-starting the economy, but its effects for ordinary people are hard to calculate. Theoretically the entire country has some sort of stake in this program, as (among other things) U the Homeowner may see your home value stay stable or fall less than it would have thanks to this artificial stimulus. You also may be able to buy a house when you wouldn’t before, thanks to declining mortgage rates.

And jobs, I suppose, may theoretically be created by all this dollar meth being injected into the financial bloodstream – although the inflationary effect of printing trillions upon trillions of new dollars would probably wipe out the value of the money you make at that job. When it comes to calculating what QE actually does for you, or how much it harms you, that question is just very hard to answer.

But one thing we know for sure is that big banks and Wall Street speculators are real, immediate beneficiaries of the program, as they suddenly have trillions of printed dollars flowing through the financial system, with endless ways to profit on the new chips entering the casino.

And by an amazing coincidence, many of the biggest players in the financial services industry have a habit of buying up MBS or Treasuries just before these magical money-printing programs of the Fed send their respective values soaring. If you own a big fund, for instance, and you know that the Fed is about to buy a trillion dollars of mortgage-backed-securities through a new Quantitative Easing program, buying a buttload of MBS a few weeks early is a pretty easy way to make a risk-free fortune. One of the worst-kept secrets on Wall Street is that the big bankers and fund managers get signals about the Fed’s intentions about things like QE well before they are announced to the rest of us losers in the public.

A hilarious example of this cozy insiderism popped up just a few weeks ago, when PIMCO bond fund chief Bill Gross let it slip on a live CNBC interview that he was getting inside info from the Fed. The interview is with former Goldman analyst and (now) CNBC anchor Erin Burnett, as well as my slimeball former colleague from the Moscow Times and (now) CNBC bobblehead Steve Liesman, who slobber typically over the bond king in the segment.

Gross at one point says this:

“What is important going into November is the staff forecast for economic growth for the next 12-18 months. Our understanding is that the Fed is about to downgrade their forecast from 3% down to 2%. Which in turn would suggest that unemployment won’t be coming down… and so that would be the trigger to my way of thinking for Quantitative Easing in November.”

The admission is so untoward that the ex-Goldmanite Burnett immediately races to clean up the problem, saying to Liesman, who is also on the panel, “We don’t have that forecast yet, right, Steve?”

At which point the ever-helpful Liesman replies, “We won’t get that for 3 weeks, Erin. That’s when it comes out with the minutes of this meeting .”

Check out 5:20 of this video (courtesy of Zero Hedge):

There are so many different ways for Wall Street guys to make risk-gazillions off of QE, it’s not even funny. When I was researching the “Wall Street Bailout Hustle” story last year, for instance, I learned about one fund that loaded up on MBS before the first QE announcement, then saw their MBS skyrocket in value after QE – at which point the fund sold off a lot of its MBS holdings and bought Treasuries, effectively taking money from the Fed and lending it right back to the government at interest.

The Dollar Vigilante
Jeff Berwick

“Bond Vigilante” – Definition: “A bond vigilante is a bond market investor who protests monetary or fiscal policies they consider inflationary by selling bonds, thus increasing yields.” – Wikipedia

“Dollar Vigilante” – New Term: ”A dollar vigilante is a free market individual who protests the government monopoly on money and financial policies such as fractional reserve banking and un-backed fiat currencies by selling those same fiat currencies in favor of other assets, often including gold and precious metals.”

Many people today don’t even realize it because anyone alive today has always lived under an artificial, non-free market financial system. No one even questions the fact that every country has a “central bank” and that every country outlaws any use of currency except for the one it produces.

But, in essence, this highly manipulated, centrally planned/communist system of world finance really began with the creation of America’s third central bank (the first two had previously collapsed or were outlawed) called The Federal Reserve on December 23, 1913. To this day many don’t realize it but the Federal Reserve is not a part of the American government. It is a privately owned, secretive banking cartel. We should note, however, that whether it is publicly or privately owned isn’t the crux of the problem. The problem is that ALL attempts to centralize banking are non-free market and will always result in a steady corruption of the system until it finally reaches collapse.

Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930s stated, “Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.”

In fact, the President of the US at the time of enactment of the Federal Reserve, Woodrow Wilson stated the following in regard to the Federal Reserve being created under his watch, “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

The scourge of a central bank was well known even in the days of the creation of the United States as Thomas Jefferson opined, “The central bank is an institution of the most deadly hostility existing against the principles and form of our Constitution. I am an enemy to all banks discounting bills or notes for anything but coin. If the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

And, guess what Mr. Jefferson, the people of the US are now waking up to realize your prophecy has come true. For the first time in US history banks own a greater share of residential housing net worth in the United States than all individual Americans put together!

However, because America used to be such a bastion of free markets and even today still is partially-free it quickly became the most powerful and wealthy country in the world DESPITE having the Federal Reserve at the heart of their financial system.

That is, until August 15, 1971, when the issuing of debt money by the Federal Reserve had effectively bankrupted the US and then President Nixon was forced to announce that even foreign governments and central banks could no longer redeem their US dollars for gold.

And that was the beginning of the end and is, in fact, the reason why we are on the verge of a complete global financial implosion. What was started in 1913 with the creation of the Federal Reserve and the income tax managed to hobble along until it finally collapsed in 1971 with the end of the Bretton Woods system.

With that collapse, in 1971, every country in the world went off the gold exchange standard. This meant that all currencies were backed by nothing. Currencies that used to be directly convertible into gold at the request of the holder, at least at the central bank level, were finally just pieces of paper with pictures of famous dead people drawn on them.

Some may say that this system “worked” because it produced all of the amazing advances of the last century. However, it is much more precise to say that the system managed to work for that long precisely because the 20th century was the most amazing century in the history of human evolution and the countless technological advances enabled this fraudulent system to appear to work for a time.

But that time is nearly running out. After four decades of unbacked fiat currencies nearly every country in the world is now so indebted that it isn’t possible to ever pay back their debts. These debts were all enabled by this fiat currency system which enabled governments to print more and more money, which enabled more and more debt over time. As we said above, it appeared to work, until they all reached a point where even the interest payments on the debt will soon overtake the entire budgets of some countries, even including the United States.

The US government itself, in its official 2009 Financial Report (http://www.gao.gov/financial/fy2009/09frusg.pdf) states, “Absent a change in policy, the interest costs on the growing debt together with spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019.”

You read that correctly, the US government itself has stated that by 2019 almost EVERY penny collected in taxes will go towards paying ONLY the interest on the debt and spending on the major entitlement programs (Social Security, Medicare etc).

And here is the worst part, this is a prediction by the US government who is always wrong and incessantly understates how bad things will get. It is our prediction, at The Dollar Vigilante (TDV), that the US will reach this state by no later than 2015 – even as soon as 2012. Our reasoning is that the US government predicts that tax revenues will continue to stay at the same level or grow over time. However, we believe that as soon as 2011 the US will be in the midst of such a great depression that tax revenues will basically collapse.

In fact, they are already in collapse. After the first big hit to the US economy in 2008, tax receipts in 2009 plunged. On a year-over-year basis, by the summer of 2009, individual tax receipts were down 22% from 2008 and corporate income taxes imploded by 57%.

The government managed to temporarily stave off complete collapse by creating an array of four-letter bailouts and guarantees tallying up to more than $12 trillion to date! But even this gargantuan printing of money, mostly enacted in 2008 and 2009 have provided next-to-no recovery and we will soon be entering the next stage of collapse – at which point the US government will see its income tax receipts not even meet its interest and entitlement obligations.

All this would be bad enough, but here is where it gets worse. Way worse.

Nearly every other western country in the world is at similar levels of debt and are all rocketing towards outright bankruptcy.

Greece was the first big one but nearly every other country in Europe, the UK, the US and Japan are all right behind them. Just look at this table below from the OECD. It shows debt as a percentage of GDP for various OECD countries. The official debts, the ones in red, are in and of themselves massive and unpayable. Yet total debts (the grey bars) which include unfunded liabilities such as pensions and health care dwarf even the official debts.

june 2010

It is already a foregone conclusion that Greece is insolvent yet the US itself is nearly in the same financial situation. As are the rest of the countries listed. And countless others, not even bothering to comment on individual states in the US like California and New York, which are also all insolvent.

So now it is just a matter of time and circumstance for each and every one of these countries to do one of the following: A) Declare bankruptcy and have their currency collapse or B) Hyperinflate their money supply so that all past debts become worth very little in today’s money – also something that will destroy their currency.

Some think this may occur over a decade or two. Here, at TDV, we think this will happen over the next few years.

Which brings us to our purpose and point in writing TDV: to help protect you from the coming world financial collapse with most of your assets in tact because the great majority of people will be wiped out by what is coming.

In coming issues we will go further in depth into what we expect to occur but, at the very least, we expect many western countries to enact currency controls which will make it so you will not be able to move your money out of the country. The governments will then do everything they can to stay afloat including cutting most entitlements including pensions which will leave countless elderly people in poverty – look forward to Granny and Grandpa moving back in with you! As well, any savings in banks will likely be taken over by the governments and forced into “buying” government debt. As this happens there will be a complete collapse of the western economies and will be great social unrest, which has already begun in places such as Greece.

There will be many ways to protect yourself – and this will be the main thrust of this newsletter – but time is running out on all of them. Transferring significant portions of your wealth from cash into precious metals is a high priority. As well, diversifying your wealth outside of your home country and the hands of your ravaging government and into a few different regions is also important. It is even highly recommendable to those who live in the countries in the worst financial condition (US, most of Europe, Japan) and who have the capability to prepare to leave your home country and head for some of the countries which may be least affected by the coming strife.

As well, investing into gold mining companies and even learning how to invest in private placements in these companies – something we will discuss in depth regularly here – will create a lot of wealth for those of you who may not yet have the assets or capability to expatriate and diversify your assets.

We will have thoughts, analysis and ideas on all of these strategies on an ongoing basis at TDV.

In closing, almost invariably, when faced with this information, many people respond with either disbelief or a desire to not think about the repercussions because it hurts too much. However, we don’t necessarily see the financial system collapse as being a bad thing. Not many people realize how many lives this system has destroyed and how much wealth and resources it has wasted. It was an artificial system of theft and deceit and was doomed since its inception but once it is gone we will see a time of rebirth for the world.

There will certainly be some interesting times between now and a rebuilding of the world’s financial system and TDV hopes to stay with you through the collapse, chaos and then into the brave new world that will soon be forged.

telegraph.co.uk
Ambrose Evans-Pritchard
July 15, 2010

great depression
The US workforce has shrunk by a 1m over the past two
months as discouraged jobless give up the hunt    Photo: AP

The euro rocketed to a two-month high of $1.29 and sterling jumped two cents to almost $1.54 after the Fed confessed that the US economy may not recover for five or six years. Far from winding down emergency stimulus, the bank may need a fresh blast of bond purchases or quantitative easing.

Usually the dollar serves as a safe haven whenever the world takes fright, and there was plenty of sobering news from China and other quarters on Thursday. Not this time. The US itself has become the problem.

“The worm is turning,” said David Bloom, currency chief at HSBC. “We’re in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we’re moving into a new phase because we’re hearing alarm bells of a US double dip.”

Mr Bloom said a deep change is under way in investor psychology as funds and central banks respond to the blizzard of shocking US data and again focus on the fragility of an economy where public debt is surging towards 100pc of GDP, not helped by the malaise enveloping the Obama White House. “The Europeans have aired their dirty debt in public and taken some measures to address it, whilst the US has not,” he said.

The Fed minutes warned of “significant downside risks” and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

“The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” it said. The economy might not regain its “longer-run path” until 2016.

“The Fed is throwing in the towel,” said Gabriel Stein, of Lombard Street Research. “They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months.”

The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

Goldman Sachs said it expects the euro to rise to $1.35 by the end of the year. The yen will appreciate to ¥83, through the pain barrier for most of Japan’s big exporters. The new twist is that SAFE, China’s $2.4 trillion fund, has begun buying record amounts of Japanese bonds, a shift in reserve allocation away from the dollar.

The signs of a deep and sudden slowdown in the US are becoming ever clearer as the “sugar rush” from the Obama fiscal stimulus wears off and the inventory boost fades. California, Illinois and other states are cutting spending, tightening US fiscal policy by 0.8pc of GDP.

Thursday’s plunge in the Philadelphia Fed’s July index of new manufacturing orders to –4.3 suggests that the economy may have buckled abruptly, as it did in mid-2008. The Economic Cycle Research Institute’s ECRI leading indicator has tumbled, reaching –8.3pc last week. This points to a sharp slowdown or recession within three months.

While US port data looked buoyant in June, the details were troubling. Outbound traffic from Long Beach fell from 139,000 containers in May to 116,000 in June. Shipments from Los Angeles fell from 161,000 to 155,000. This drop in exports is worsening the US trade deficit, eroding the dollar.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt. Retail sales have fallen for the past two months. New homes sales crashed to 300,000 in May after tax credits ran out, the lowest since records began in 1963. Mortgage applications have fallen by 42pc to 13-year low since April. Paul Dales at Capital Economics said the “shadow inventory” of unsold properties has risen to 7.8m. “The double dip in housing has begun,” he said.

Alcoa, CSX, Intel, and JP Morgan have reported good earnings, but they mostly did so in July 2008 just before their shares collapsed. Such earnings rarely catch turning points and can be a lagging indicator. Profits have been boosted in this cycle by cost-cutting, which is self-defeating for the economy as a whole.

The minutes confirm the Fed is split down the middle over QE. Fed watchers say the Board in Washington wants to be ready to launch another round of bond purchases if necessary, pushing the banks balance sheet from $2.4 trillion towards $5 trillion, but hawks at the regional banks are highly sceptical.

A study by the San Francisco Fed said the interest rates need to be –4.5pc to stabilise the economy under the Fed’s “rule of thumb”. Since this is impossible, massive QE needs to make up the difference.

Tim Congdon from International Monetary Research said the US authorities have botched policy response. “They are forcing banks to contract lending by raising their capital asset ratios. They have let M3 shrink by 1pc a month, as in the early 1930s. The solution is simple. The Fed must raise the level of deposits by purchasing bonds from the non-banking system as the Bank of England has done. They refuse to do it,” he said.