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Click here now for all the details. When Counterfeiting is Legal The Financial Sophistication of Criminal Behavior
Reporting from Laguna Beach, California...Eric Fry
If I told you that I had $1.6 trillion on deposit at a local bank, you’d think I was not merely a member of the “1%,” but a member of the “1%” of the “1%.” (Can’t you just imagine the bitter jealousy the other 99% of the 1% would feel?)
But if I then mentioned that — oh by the way — I also owed $1.6 trillion to a bunch of people, you’d realize that I probably belonged to the lowest cohorts of the 99%, rather than the very highest echelon of the 1%. In other words, you’d realize that I wasn’t über-rich; but über-poor.
But if I then told you, “Hey, don’t pity me. I can print as much money as I want. In fact, all of the $1.6 trillion I have in the bank is money I printed for myself.”
At that point, you wouldn’t know whether I belong to the 1% or the 99%, but you’d be pretty sure that I belonged in jail. And you’d be right...until you realized that even though counterfeiting is always criminal, it is not always illegal.
When the counterfeiters wear pinstriped suits, hold advanced degrees from Ivy League institutions, draw government paychecks and conduct their counterfeiting operations in government-sanctioned facilities like the Philadelphia mint, counterfeiting is not merely legal, it is financially sophisticated...or so we’re told.
The process is called “quantitative easing” (QE)...and it is not new news. Almost every investor on the planet has heard of this process by now and understands — more or less — what it is. It is counterfeiting, more or less. The Federal Reserve prints dollars and uses those dollars to buy mortgage-backed securities and/or Treasury bonds. At last count, the Fed owned more than $1.6 trillion worth of Treasurys.
Since late 2008, the Federal Reserve has been buying mortgage-backed securities and Treasuries with dollars it prints expressly for this purpose. Although the numbers are a bit murky, the Fed admits to having purchased at least $1.2 trillion worth of bonds under its publicly announced QE programs. Somewhat inexplicably, however, the Fed’s balance sheet has expanded by $2.2 trillion during the three- year QE operations, asthis chart from the Cleveland Fed’s website clearly shows.
So is it $1.2 trillion or $2.2 trillion? Who cares? What’s an extra trillion dollars here or there?
Despite this overt and well-publicized counterfeiting operation, the Federal Reserve still manages to retain a semblance of legitimacy. Even more mystifyingly, the US dollar still manages to retain some semblance of strength and respectability.
For example, the dollar has not lost any value relative to the euro during the last three years. But that’s probably only because the dollar and the euro are both losing value at about the same pace. When compared to gold or most other non-governmental forms of money, the dollar has indeed been losing value during the last three years...lots of value.
Nevertheless, there is no palpable “dollar crisis,” like there is a very palpable euro crisis. But give it time, dear reader. The chart below presents a trend that should be worrisome to everyone who expects the dollar to hold its value over the long term.
“Over the past year,” CNSNews.com reports, “as the Federal Reserve massively increased its holdings of US Treasury securities — and entities in China marginally decreased theirs — the Fed surpassed the Chinese as the top owner of publicly held US government debt...”
Thanks to quantitative easing, the Fed’s holdings of Treasury securities have soared to $1.66 trillion, which is well above the $1.15 trillion of Treasurys held by the Chinese.
“At the end of September 2010,” CNSNews explains, “the Chinese owned about $340 billion more in US Treasury securities than the Fed owned at that time. But by the end of September 2011, the Fed owned about $517 billion more in US Treasury securities than the Chinese owned.”
The whole-hog purchases of Treasurys by the Fed do not necessarily portend any impending doom for the US dollar, but they do at least suggest eventual doom. Large-scale counterfeiting does not enhance a currency’s value.
The Fed’s Treasury purchases may look and feel identical to China’s Treasury purchases...just like a counterfeit dollar may look and feel like the real thing. But they could not be more different.
The Chinese buy Treasuries with dollars they earn from commerce. The Fed buys Treasurys with dollars they create from paper and ink. Over the long term, commerce is a much more valuable source of capital than a printing press. Commerce, generally speaking, nurtures wealth creation. A printing press, generally speaking, nurtures wealth destruction.
Nevertheless, the temptation to print money is absolutely irresistible for a government in distress. It is so easy...and so “painless.” Ben Bernanke conjured $1.2 trillion (at least) into existence during the last three years without even breaking a sweat. Contrast that process with the “Super Committee’s” strenuous failure to raise $1.2 trillion of deficit reductions through the difficult, old-fashion processes of spending cuts and tax increases.
Counterfeiting is easier than austerity...just like fraud is easier than punching a time-clock. But since the Chairmen of the Federal Reserve and the other dirigistes of the US economy have little appetite for the austerity and time-clock-punching that builds national wealth, they have embraced expedient short-cuts to “prosperity.”
Elegant, indirect forms of counterfeiting, fraud and theft have become the preferred tools in the US government’s toolbox. A column we published here in The Daily Reckoning nearly one year ago illustrates the point. This column seems even timelier now than when it first appeared. So please enjoy the following Daily Reckoning“Classique.” Secret Photos China Doesn’t Want You To See
A new groundbreaking project is threatening China’s global rare earth monopoly.
This little-known company’s operations are unlike any other in the world.
And could be incredibly lucrative for early movers.
Check out this epic story by clicking here.The Daily Reckoning Presents Privateers in Pinstripes
By Eric Fry During the height of the credit crisis of 2008-9, the Federal Reserve and Treasury launched so many different lending programs and bailout facilities that it was hard to keep track of them all.
Each program or facility used a distinct acronym to represent its particular portion of Bernanke’s Bailout Buffet. Thus, for example, the Commercial Paper Funding Facility became simply the “CPFF.” But the Fed also served up bailout facilities known as the TARP, TOP, TAF, TSLF, TALF, PDCF, AMBSPP, etc.
At the end of the day, this “alphabet soup” of lending programs contained distinctions without a difference. On the receiving side of every acronym you would find a Wall Street banker with a hat in his hand. For ease of accounting, the Fed could have simply merged all the programs together into one giant WSBBF (Wall Street Banker Bailout Facility). But politics prevented that option.
So instead, the Fed created lots of different programs and facilities with essentially identical mandates. And if you’re curious about the volume of lending they conducted, or about any other component of the Fed’s balance sheet, you can find the information right here...or at least most of the information.
A friend of The Daily Reckoning recently discovered a curious error on the Federal Reserve’s own Web site. By way of background, our anonymous source is neither a professional economist nor a professional investor. In fact, he’s not even an amateur economist or investor. He’s just a guy with an eye for detail.
One month ago, our source noticed an apparent error on the website of the Cleveland Fed. Specifically, he observed that the “Detailed View” of the Fed’s balance sheet did not match the “Summary View.”
So he emailed a responsible party at the Fed to gain clarification and/or elucidation. The email stream proceeded as follows [the names have been removed to protect both the innocent and the guilty]:
Dear “Fed Employee,”
I hope you can spare a moment to answer a question. As you probably know, this web page has gotten quite a bit of attention:
http://www.clevelandfed.org/research/data/credit_easing/index.cfm
But it seems to me that the Summary View and the Details View don’t match up. Specifically, I think the Details View omits Long Term Treasury Purchases. Once those are added in, the Details View exactly matches the Summary View.
Am I right? And if so, is the discrepancy inadvertent, or is there a reason for it?
Just trying to understand the context of the recently-announced QE2! Thanks in advance for any light you can shed.
Sincerely,
“Mr. Curious”
The Fed employee promptly replied:
Dear “Mr. Curious,”
You are correct that the Detailed View does omit Long-Term Treasury Purchases. The discrepancy is inadvertent. If you follow the link to the article in the Detailed and the Summary View, you’ll see that we had initially posted these charts in between the announcement of the Agency Debt and Agency MBS purchases and the announcement of the Treasury purchases. It seems as if we just forgot to add those new purchases into the Detailed View. Thank you for pointing out our omission, and we’ll work on getting that fixed.
I’d also like to note that we are currently in the process of reorganizing the web page. Hopefully we’ll have the new page up by the end of November, and that should clear some issues up with recent announcements on reinvestment strategy, QE2 and the AIG exit plan.
Sincerely,
Fed Employee
After receiving this response, our anonymous source observed matter- of-factly, “So the situation [on the Fed’s balance sheet] is actually a little worse than [the Detailed View] graph suggested. Without the long-term Treasurys, the balance sheet appears to have peaked in Dec 08 and since then to have wound down significantly. With the long-term Treasurys — not so much.”
Today, more than a month after this exchange between our source and the Fed employee, the identical error remains on the Cleveland Fed’s website — a situation that seems all the more remarkable in light of the fact that the missing component of the Fed’s “Detailed View” is the exact component that is expanding so conspicuously under Bernanke’s QE2 campaign.
If this little oversight causes a bit of consternation, get over it. “Oversights,” half-truths and story-telling have become as integral to the modern American economy as railroads and assembly lines were to the American economy of the mid-20th century.
In fact, half-truths and story-telling are the staples of our “confidence-based” economy. If Americans are confident, they spend, according to the prevailing economic theory of our day. And if Americans spend, the economy grows. Therefore, any statement or activity that inspires confidence is constructive for economic growth...even if the statements be false and the activities be covert and preferential.
Maybe this characterization of modern American capitalism is cynical. But we beg to differ. We think it is cynical to tolerate deception — especially institutionalized deception — purely for the sake of a short-term economic objective. We think it is destructive to look the other way while the Fed and the Treasury escort a few handpicked corporations past the red velvet ropes of capitalistic competition.
What has now emerged in America is a perverse form of privateering.
Under the 18th and 19th century versions of privateering, governments would license private firms to plunder enemy ships for profit — profits that the privateers and the governments would share.
Today, the privateering continues. But the process has been turned on its ear. Now it is we, the taxpayers, who are plundered by the government — the spoils of which it lavishes upon a select group of privileged corporations. If the “new privateers” fail, the government (i.e. taxpayers) absorbs the loss. But if the privateers succeed, they split the booty with no one but themselves.
“This is called private profits and socialized risk,” observed hedge fund manager, David Einhorn, during a presentation to the Grant’s Investment Conference in April, 2008. “Heads, I win. Tails, you lose. It is a reverse-Robin Hood system.”
But the new privateering does not only rely on socialized risks, it also relies on socialized ignorance.
Two weeks ago, a provision in the new Dodd-Frank financial reform law dragged some of the Fed’s dirty little secrets out into the light of full public disclosure. Thanks to these new revelations, the Fed finally disclosed what many of us had already suspected — that a lot of America’s biggest financial firms repaid small sums of fully disclosed federal assistance during 2009, while simultaneously accessing very large sums of undisclosed federal assistance.
As such, These “secret bailouts” did not merely socialize risks in order to confer rewards to a few; they also socialized ignorance in order to confer valuable inside information to a few. These two processes operated hand-in-hand throughout the crisis. The insider- cognoscenti made billions while the rest of us patsies wrote the checks.
Without mass ignorance, government agencies have a tough time doing “what’s best for us.” In other words, plundering an informed populace is much more difficult than plundering an uninformed one.
Regards,
Eric J. Fry,
for The Daily Reckoning NEWSFLASH: It’s Too Late to “Save America”
It’s too late to “save” America as we know it. But that’s actually good news for you. How?
Watch this urgent new briefing right now — and witness the ONE REASON America’s next big collapse could be great news...for Americans. Bill Bonner Cutting Federal Spending...One Way or Another
Reckoning from Baltimore, Maryland...Bill Bonner
The Dow fell 248 points. Oil dropped to $96. And gold down a whopping $46. Why?
“Deficit Effort Nears Collapse”
Thus did yesterday’s Wall Street Journal describe the latest Congressional failure. To put it into perspective, a group of well- meaning, intelligent members of Congress had been asked to do something very simple. Every head of a household in the nation does it. Every businessman does it. Even some college students do it.
Members of Congress are very good at cashing checks. They are very bad at balancing the national checkbook. They haven’t done it for 10 years. They’re out of practice.
The situation is simple. The feds are spending too much. Every half- wit and democrat can see that they can’t go on like this.
But they couldn’t agree on how to cut back. So, they ducked. They put the matter to a “super-committee.” If the committee couldn’t do it, then some “automatic” cuts would come into play:The deficit-reduction super committee, stuck in a partisan deadlock, faces an almost certain collapse — raising the threat of disruptive military spending cuts and a resurgent public anger at Congress, as it struggles with the basic tasks of governance.
Well, so far...so good. We don’t care if the cuts are automatic or manual... But if they don’t make some kind of cuts the country will go broke... Heck, the country’s already broke.
Barring an unlikely, last-second breakthrough, the committee is expected to announce that it failed to reach its mandated goal of writing a bipartisan bill to reduce deficits over the next 10 years by at least $1.2 trillion.
“You are very negative and pessimistic,” said Elizabeth this weekend. “You’re cynical. You may be right, of course. But you should at least give them a chance. There are good people in Congress. They are trying to get control of spending. You can’t fault them for that. And they may succeed.”
But what’s this? Surprise, surprise! Senators McCain and Lindsay announced that they weren’t going to allow no stinkin’ automatic cuts to “devastate” the Pentagon.
The zombies are in control now. And after the next election they’ll still be in control.
Newt Gingrich is now leading the Republican pack. The man’s think tank got $35 million from the health industry. You’d think that $35 million would pay for a lot of thinking. But what kind of thinking? About ways to reduce the power, influence and profits of the health industry? Not likely. Instead, they were hoping the former Speaker of the House could help them gain more power, more influence and higher profits.
Mr. Gingrich also got $2 million consulting for Freddie Mac. Nice work if you can get it. And what do you think? Did the folks who run Freddie want the ex-Speaker’s sage advice on how to get the US government out of the mortgage finance business? Of course, Mr. Gingrich could have given that advice for free. But corporate executives do not pay $2 million for advice that would make them more vulnerable to the creative destruction of the free market. They pay politicians to protect them from creative destruction.
They pay money to stay on the right side of the political establishment. And they know they can trust Mr. Gingrich to do his job. He’s an honest politician. Once bought, he stay’s bought.
And more thoughts:
How China will defeat America.
Don’t expect spending on the pentagon to decrease. Not with our nation’s security at stake. And not with China posing an ever- greater threat.
An article by Yan Xuetong, translated from mandarin, tells “How China can defeat America.” The gist of Mr. Xuetong’s thought is that rising hegemons are a lot nicer than declining ones. Besides that, history is on the side of the rising power.
The US has become a tyrannical power, he insinuates, throwing its weight around wherever it can. China, on the other hand, is a helpful hegemon...a “humane authority.” While the US has military alliances all over the world...China has none. While the US has fought numerous wars over the last two decades, China’s military hasn’t been involved in conflict since 1984.
China has been preoccupied with her own internal issues...mostly related to employment and growth. But China’s economy grew 71 times faster than the US over the last 4 years. At that rate, it won’t be long before US output is actually lower than China’s.
Mr. Xuetong believes China should do as it did during the Tang dynasty, when it brought in foreigners as high ranking officials to help it take its place on the world stage.
No doubt there are other Chinese who are more hardnosed about it. Rarely does one empire give way to a successor peacefully. There are bound to be Chinese thinkers, whose works aren’t translated, who are speculating about how the Chinese can defeat the US in a real war. They’re surely devising a strategy...and developing new technologies...right at this very moment.
How could China defeat the US? Easy, it could spook US lawmakers into spending more money...wasting more military resources...and driving the nation into bankruptcy. In short, it could just wait.
Regards,
Bill Bonner,
for The Daily Reckoning
Joel’s Note: What IS America, anyway? Is China going to defeat a country...a government...a band of citizens...an army? What exactly is it that China is going to surpass? An economy...an ideology...a flag?
The Idea of America: What It Was and How It Was Lost is a stunning anthology of essays penned by some of the great poets of history. Edited by Bill Bonner and Pierre Lemieux, it is essential reading for anyone seeking to better understand the foundations and applications of freedom.
Tuesday 22 November 2011
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