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On The 100th Anniversary Of The Federal Reserve Here Are 100 Reasons To Shut It Down Forever

On The 100th Anniversary Of The Federal Reserve Here Are 100 Reasons To Shut It Down Forever.

The Federal ReserveDecember 23rd, 1913 is a date which will live in infamy.  That was the day when the Federal Reserve Act was pushed through Congress.  Many members of Congress were absent that day, and the general public was distracted with holiday preparations.  Now we have reached the 100th anniversary of the Federal Reserve, and most Americans still don’t know what it actually is or how it functions.  But understanding the Federal Reserve is absolutely critical, because the Fed is at the very heart of our economic problems.  Since the Federal Reserve was created, there have been 18 recessions or depressions, the value of the U.S. dollar has declined by 98 percent, and the U.S. national debt has gotten more than 5000 times larger.  This insidious debt-based financial system has literally made debt slaves out of all of us, and it is systematically destroying the bright future that our children and our grandchildren were supposed to have.  If nothing is done, we are inevitably heading for a massive amount of economic pain as a nation.  So please share this article with as many people as you can.  The following are 100 reasons why the Federal Reserve should be shut down forever…

#1 We like to think that we have a government “of the people, by the people, for the people”, but the truth is that an unelected, unaccountable group of central planners has far more power over our economy than anyone else in our society does.

#2 The Federal Reserve is actually “independent” of the government.  In fact, the Federal Reserve has argued vehemently in federal court that it is “not an agency” of the federal government and therefore not subject to the Freedom of Information Act.

#3 The Federal Reserve openly admits that the 12 regional Federal Reserve banks are organized “much like private corporations“.

#4 The regional Federal Reserve banks issue shares of stock to the “member banks” that own them.

#5 100% of the shareholders of the Federal Reserve are private banks.  The U.S. government owns zero shares.

#6 The Federal Reserve is not an agency of the federal government, but it has been given power to regulate our banks and financial institutions.  This should not be happening.

#7 According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress is the one that is supposed to have the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.  So why is the Federal Reserve doing it?

#8 If you look at a “U.S. dollar”, it actually says “Federal Reserve note” at the top.  In the financial world, a “note” is an instrument of debt.

#9 In 1963, President John F. Kennedy issued Executive Order 11110 which authorized the U.S. Treasury to issue “United States notes” which were created by the U.S. government directly and not by the Federal Reserve.  He was assassinated shortly thereafter.

#10 Many of the debt-free United States notes issued under President Kennedy are still in circulation today.

#11 The Federal Reserve determines what levels some of the most important interest rates in our system are going to be set at.  In a free market system, the free market would determine those interest rates.

#12 The Federal Reserve has become so powerful that it is now known as “the fourth branch of government“.

#13 The greatest period of economic growth in U.S. history was whenthere was no central bank.

#14 The Federal Reserve was designed to be a perpetual debt machine.  The bankers that designed it intended to trap the U.S. government in a perpetual debt spiral from which it could never possibly escape.  Since the Federal Reserve was established 100 years ago, the U.S. national debt has gotten more than 5000 times larger.

#15 A permanent federal income tax was established the exact same year that the Federal Reserve was created.  This was not a coincidence.  In order to pay for all of the government debt that the Federal Reserve would create, a federal income tax was necessary.  The whole idea was to transfer wealth from our pockets to the federal government and from the federal government to the bankers.

#16 The period prior to 1913 (when there was no income tax) was the greatest period of economic growth in U.S. history.

#17 Today, the U.S. tax code is about 13 miles long.

#18 From the time that the Federal Reserve was created until now, the U.S. dollar has lost 98 percent of its value.

#19 From the time that President Nixon took us off the gold standard until now, the U.S. dollar has lost 83 percent of its value.

#20 During the 100 years before the Federal Reserve was created, the U.S. economy rarely had any problems with inflation.  But since the Federal Reserve was established, the U.S. economy has experienced constant and never ending inflation.

#21 In the century before the Federal Reserve was created, the average annual rate of inflation was about half a percent.  In the century since the Federal Reserve was created, the average annual rate of inflation has been about 3.5 percent.

#22 The Federal Reserve has stripped the middle class of trillions of dollars of wealth through the hidden tax of inflation.

#23 The size of M1 has nearly doubled since 2008 thanks to the reckless money printing that the Federal Reserve has been doing.

#24 The Federal Reserve has been starting to behave like the Weimar Republic, and we all remember how that ended.

#25 The Federal Reserve has been consistently lying to us about the level of inflation in our economy.  If the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.

#26 Since the Federal Reserve was created, there have been 18 distinct recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

#27 Within 20 years of the creation of the Federal Reserve, the U.S. economy was plunged into the Great Depression.

#28 The Federal Reserve created the conditions that caused the stock market crash of 1929, and even Ben Bernanke admits that the response by the Fed to that crisis made the Great Depression even worse than it should have been.

#29 The “easy money” policies of former Fed Chairman Alan Greenspan set the stage for the great financial crisis of 2008.

#30 Without the Federal Reserve, the “subprime mortgage meltdown” would probably never have happened.

#31 If you can believe it, there have been 10 different economic recessions since 1950.  The Federal Reserve created the “dotcom bubble”, the Federal Reserve created the “housing bubble” and now it has created the largest bond bubble in the history of the planet.

#32 According to an official government report, the Federal Reserve made 16.1 trillion dollars in secret loans to the big banks during the last financial crisis.  The following is a list of loan recipients that was taken directly from page 131 of the report…

Citigroup – $2.513 trillion
Morgan Stanley – $2.041 trillion
Merrill Lynch – $1.949 trillion
Bank of America – $1.344 trillion
Barclays PLC – $868 billion
Bear Sterns – $853 billion
Goldman Sachs – $814 billion
Royal Bank of Scotland – $541 billion
JP Morgan Chase – $391 billion
Deutsche Bank – $354 billion
UBS – $287 billion
Credit Suisse – $262 billion
Lehman Brothers – $183 billion
Bank of Scotland – $181 billion
BNP Paribas – $175 billion
Wells Fargo – $159 billion
Dexia – $159 billion
Wachovia – $142 billion
Dresdner Bank – $135 billion
Societe Generale – $124 billion
“All Other Borrowers” – $2.639 trillion

#33 The Federal Reserve also paid those big banks $659.4 million in “fees” to help “administer” those secret loans.

#34 During the last financial crisis, big European banks were allowed to borrow an “unlimited” amount of money from the Federal Reserve at ultra-low interest rates.

#35 The “easy money” policies of Federal Reserve Chairman Ben Bernanke have created the largest financial bubble this nation has ever seen, and this has set the stage for the great financial crisis that we are rapidly approaching.

#36 Since late 2008, the size of the Federal Reserve balance sheet has grown from less than a trillion dollars to more than 4 trillion dollars.  This is complete and utter insanity.

#37 During the quantitative easing era, the value of the financial securities that the Fed has accumulated is greater than the total amount of publicly held debt that the U.S. government accumulated from the presidency of George Washington through the end of the presidency of Bill Clinton.

#38 Overall, the Federal Reserve now holds more than 32 percent of all 10 year equivalents, and that percentage is rising by about 0.3 percent each week.

#39 Quantitative easing creates financial bubbles, and when quantitative easing ends those bubbles tend to deflate rapidly.

#40 Most of the new money created by quantitative easing has ended up in the hands of the very wealthy.

#41 According to a prominent Federal Reserve insider, quantitative easing has been one giant “subsidy” for Wall Street banks.

#42 As one CNBC article recently stated, we are seeing absolutely rampant inflation in “stocks and bonds and art and Ferraris“.

#43 Donald Trump once made the following statement about quantitative easing: “People like me will benefit from this.

#44 Most people have never heard about this, but a very interesting study conducted for the Bank of England shows that quantitative easing actually increases the gap between the wealthy and the poor.

#45 The gap between the top one percent and the rest of the country is now the greatest that it has been since the 1920s.

#46 The mainstream media has sold quantitative easing to the American public as an “economic stimulus program”, but the truth is that the percentage of Americans that have a job has actually gone downsince quantitative easing first began.

#47 The Federal Reserve is supposed to be able to guide the nation toward “full employment”, but the reality of the matter is that an all-time record 102 million working age Americans do not have a job right now.  That number has risen by about 27 million since the year 2000.

#48 For years, the projections of economic growth by the Federal Reserve have consistently overstated the strength of the U.S. economy.  But every single time, the mainstream media continues to report that these numbers are “reliable” even though all they actually represent is wishful thinking.

#49 The Federal Reserve system fuels the growth of government, and the growth of government fuels the growth of the Federal Reserve system.  Since 1970, federal spending has grown nearly 12 times as rapidly as median household income has.

#50 The Federal Reserve is supposed to look out for the health of all U.S. banks, but the truth is that they only seem to be concerned about the big ones.  In 1985, there were more than 18,000 banks in the United States.  Today, there are only 6,891 left.

#51 The six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years.

#52 The U.S. banking system has 14.4 trillion dollars in total assets.  The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.

#53 The five largest banks now account for 42 percent of all loans in the United States.

#54 We were told that the purpose of quantitative easing is to help “stimulate the economy”, but today the Federal Reserve is actually paying the big banks not to lend out 1.8 trillion dollars in “excess reserves” that they have parked at the Fed.

#55 The Federal Reserve has allowed an absolutely gigantic derivatives bubble to inflate which could destroy our financial system at any moment.  Right now, four of the “too big to fail” banks each have total exposure to derivatives that is well in excess of 40 trillion dollars.

#56 The total exposure that Goldman Sachs has to derivatives contracts is more than 381 times greater than their total assets.

#57 Federal Reserve Chairman Ben Bernanke has a track record of failure that would make the Chicago Cubs look good.

#58 The secret November 1910 gathering at Jekyll Island, Georgia during which the plan for the Federal Reserve was hatched was attended by U.S. Senator Nelson W. Aldrich, Assistant Secretary of the Treasury Department A.P. Andrews and a whole host of representatives from the upper crust of the Wall Street banking establishment.

#59 The Federal Reserve was created by the big Wall Street banks and for the benefit of the big Wall Street banks.

#60 In 1913, Congress was promised that if the Federal Reserve Act was passed that it would eliminate the business cycle.

#61 There has never been a true comprehensive audit of the Federal Reserve since it was created back in 1913.

#62 The Federal Reserve system has been described as “the biggest Ponzi scheme in the history of the world“.

#63 The following comes directly from the Fed’s official mission statement: “To provide the nation with a safer, more flexible, and more stable monetary and financial system.”  Without a doubt, the Federal Reserve has failed in those tasks dramatically.

#64 The Fed decides what the target rate of inflation should be, what the target rate of unemployment should be and what the size of the money supply is going to be.  This is quite similar to the “central planning” that goes on in communist nations, but very few people in our government seem upset by this.

#65 A couple of years ago, Federal Reserve officials walked into one bank in Oklahoma and demanded that they take down all the Bible verses and all the Christmas buttons that the bank had been displaying.

#66 The Federal Reserve has taken some other very frightening steps in recent years.  For example, back in 2011 the Federal Reserveannounced plans to identify “key bloggers” and to monitor “billions of conversations” about the Fed on Facebook, Twitter, forums and blogs.  Someone at the Fed will almost certainly end up reading this article.

#67 Thanks to this endless debt spiral that we are trapped in, a massive amount of money is transferred out of our pockets and into the pockets of the ultra-wealthy each year.  Incredibly, the U.S. government spent more than 415 billion dollars just on interest on the national debt in 2013.

#68 In September, the average rate of interest on the government’s marketable debt was 1.981 percent.  In January 2000, the average rate of interest on the government’s marketable debt was 6.620 percent.  If we got back to that level today, we would be paying more than a trillion dollars a year just in interest on the national debt and it would collapse our entire financial system.

#69 The American people are being killed by compound interest but most of them don’t even understand what it is.  Albert Einstein once made the following statement about compound interest…

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

#70 Most Americans have absolutely no idea where money comes from.  The truth is that the Federal Reserve just creates it out of thin air.  The following is how I have previously described how money is normally created by the Fed in our system…

When the U.S. government decides that it wants to spend another billion dollars that it does not have, it does not print up a billion dollars.

Rather, the U.S. government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve.

The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. Treasury bonds.

#71 What does the Federal Reserve do with those U.S. Treasury bonds?  They end up getting auctioned off to the highest bidder.  But this entire process actually creates more debt than it does money…

The U.S. Treasury bonds that the Federal Reserve receives in exchange for the money it has created out of nothing are auctioned off through the Federal Reserve system.

But wait.

There is a problem.

Because the U.S. government must pay interest on the Treasury bonds, the amount of debt that has been created by this transaction is greater than the amount of money that has been created.

So where will the U.S. government get the money to pay that debt?

Well, the theory is that we can get money to circulate through the economy really, really fast and tax it at a high enough rate that the government will be able to collect enough taxes to pay the debt.

But that never actually happens, does it?

And the creators of the Federal Reserve understood this as well.  They understood that the U.S. government would not have enough money to both run the government and service the national debt.  They knew that the U.S. government would have to keep borrowing even more money in an attempt to keep up with the game.

#72 Of course the U.S. government could actually create money and spend it directly into the economy without the Federal Reserve being involved at all.  But then we wouldn’t be 17 trillion dollars in debt and that wouldn’t serve the interests of the bankers at all.

#73 The following is what Thomas Edison once had to say about our absolutely insane debt-based financial system…

That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.

#74 The United States now has the largest national debt in the history of the world, and we are stealing more than 100 million dollars from our children and our grandchildren every single hour of every single day in a desperate attempt to keep the debt spiral going.

#75 Thomas Jefferson once stated that if he could add just one more amendment to the U.S. Constitution it would be a ban on all government borrowing….

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.

#76 At this moment, the U.S. national debt is sitting at$17,251,528,475,994.19.  If we had followed the advice of Thomas Jefferson, it would be sitting at zero.

#77 When the Federal Reserve was first established, the U.S. national debt was sitting at about 2.9 billion dollars.  On average, we have been adding more than that to the national debt every single day since Obama has been in the White House.

#78 We are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in all of U.S. history combined.

#79 If all of the new debt that has been accumulated since John Boehner became Speaker of the House had been given directly to the American people instead, every household in America would have been able to buy a new truck.

#80 Between 2008 and 2012, U.S. government debt grew by 60.7 percent, but U.S. GDP only grew by a total of about 8.5 percentduring that entire time period.

#81 Since 2007, the U.S. debt to GDP ratio has increased from 66.6 percent to 101.6 percent.

#82 According to the U.S. Treasury, foreigners hold approximately 5.6 trillion dollars of our debt.

#83 The amount of U.S. government debt held by foreigners is about 5 times larger than it was just a decade ago.

#84 As I have written about previously, if the U.S. national debt was reduced to a stack of one dollar bills it would circle the earth at the equator 45 times.

#85 If Bill Gates gave every single penny of his entire fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.

#86 Sometimes we forget just how much money a trillion dollars is.  If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.

#87 If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

#88 In addition to all of our debt, the U.S. government has also accumulated more than 200 trillion dollars in unfunded liabilities.  So where in the world will all of that money come from?

#89 The greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.  If the rest of the world stops using our dollars and stops buying our debt, we are going to be in a massive amount of trouble.

#90 Over the past several years, the Federal Reserve has been monetizing a staggering amount of U.S. government debt even though Ben Bernanke once promised that he would never do this.

#91 China recently announced that they are going to quit stockpiling more U.S. dollars.  If the Federal Reserve was not recklessly printing money, this would probably not have happened.

#92 Most Americans have no idea that one of our most famous presidents was absolutely obsessed with getting rid of central banking in the United States.  The following is a February 1834 quote by President Andrew Jackson about the evils of central banking….

I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, (bringing his fist down on the table) I will rout you out.

#93 There are plenty of possible alternative financial systems, but at this point all 187 nations that belong to the IMF have a central bank.  Are we supposed to believe that this is just some sort of a bizarre coincidence?

#94 The capstone of the global central banking system is an organization known as the Bank for International Settlements.  The following is how I described this organization in a previous article

An immensely powerful international organization that most people have never even heard of secretly controls the money supply of the entire globe.  It is called the Bank for International Settlements, and it is the central bank of central banks.  It is located in Basel, Switzerland, but it also has branches in Hong Kong and Mexico City.  It is essentially an unelected, unaccountable central bank of the world that has complete immunity from taxation and from national laws.  Even Wikipedia admits that “it is not accountable to any single national government.”  The Bank for International Settlements was used to launder money for the Nazis during World War II, but these days the main purpose of the BIS is to guide and direct the centrally-planned global financial system.  Today, 58 global central banks belong to the BIS, and it has far more power over how the U.S. economy (or any other economy for that matter) will perform over the course of the next year than any politician does.  Every two months, the central bankers of the world gather in Basel for another “Global Economy Meeting”.  During those meetings, decisions are made which affect every man, woman and child on the planet, and yet none of us have any say in what goes on.  The Bank for International Settlements is an organization that was founded by the global elite and it operates for the benefit of the global elite, and it is intended to be one of the key cornerstones of the emerging one world economic system.

#95 The borrower is the servant of the lender, and the Federal Reserve has turned all of us into debt slaves.

#96 Debt is a form of social control, and the global elite use all of this debt to dominate all the rest of us.  40 years ago, the total amount of debt in our system (all government debt, all business debt, all consumer debt, etc.) was sitting at about 2 trillion dollars.  Today, the grand total exceeds 56 trillion dollars.

#97 Unless something dramatic is done, our children and our grandchildren will be debt slaves for their entire lives as they service our debts and pay for our mistakes.

#98 Now that you know this information, you are responsible for doing something about it.

#99 Congress has the power to shut down the Federal Reserve any time that they would like.  But right now most of our politicians fully endorse the current system, and nothing is ever going to happen until the American people start demanding change.

#100 The design of the Federal Reserve system was flawed from the very beginning.  If something is not done very rapidly, it is inevitable that our entire financial system is going to suffer an absolutely nightmarish collapse.

The truth is that we do not have to have a Federal Reserve.  The greatest period of economic growth in U.S. history was when we did not have a central bank.  If we are ever going to turn this nation around economically, we are going to have to get rid of this debt-based financial system that is centered around the Federal Reserve.  On the path that we are on now, there is no hope.  Please share this article with as many people as you can.  It is imperative that we try to wake the American people up while we still have time.

 

Who Needs the Debt Ceiling? – Russell Lamberti – Mises Daily

Who Needs the Debt Ceiling? – Russell Lamberti – Mises Daily.

US lawmakers reached a budget deal this week that will avert the sequester cuts and shutdowns. These fiscal “roadblocks” supposedly damaged investor confidence in 2013, although clearly no one told equity investors who’ve chased the S&P 500 up 26 percent this year. But even so the budget deal is seen by inflationists as only half the battle won, because it doesn’t deal with the pesky debt ceiling. Unsurprisingly, the old calls for a scrapping of the debt ceiling are being heard afresh.

Last week, The Week ran an opinion piece by John Aziz which argues that America (and all other nations for that matter) should keep borrowing until investors no longer want to lend to it. To this end, it is argued, the US should scrap its debt ceiling because the only debt ceiling it needs is the one imposed by the market. When the market doesn’t want to lend to you anymore, bond yields will rise to such an extent that you can no longer afford to borrow any more money. You will reach yournatural, market-determined debt ceiling. According to this line of reasoning, American bond yields are incredibly low, meaning there is no shortage of people willing to lend to Uncle Sam. So Washington should take advantage of these fantastically easy loans and leverage up.

Here’s part of the key paragraph from Aziz:

Right now interest rates are very low by historical standards, even after adjusting for inflation. This means that the government is not producing sufficient debt to satisfy the market demand. The main reason for that is the debt ceiling.

What this fails to appreciate is that interest rates are a heavily controlled price in all of today’s major economies. This is particularly true in the case of America, where the Federal Reserve controls short-term interest rates using open market operations (i.e., loaning newly printed money to banks) and manipulates long-term interest rates using quantitative easing. By injecting vast amounts of liquidity into the economy, the Fed makes it appear as though there is more savings than there really is. But US bond yields are currently no more a reflection of the market’s demand for US debt than a price ceiling on gasoline is a reflection of its booming supply. Contra the view expressed in The Week, low rates brought about by contrived zero-bound policy rates and trillions of dollars in QE can mislead the federal government into borrowing more while at the same time pushing savers and investors out of US bond markets and into riskier assets like corporate bonds, equities, exotic derivatives, emerging markets, and so on.

Greece once thought that the market was giving it the green light to “produce” more debt. Low borrowing rates for Greece were not a sign of fiscal health, however, but really just layer upon layer of false and contrived signals arising from easy ECB money, allowing Greece to hide behind Germany’s credit status. As it turned out, a legislative debt ceiling in Greece (one that was actually adhered to) would have been a far better idea than pretending this manipulated market was a fair reflection of reality. Investors were happy to absorb Greece’s debt until suddenly they weren’t.

This is the nature of sovereign debt accumulation driven by easy money and credit bubbles. It’s all going swimmingly until it’s not. And there is little reason to think this time the US is different. Except that America might be worse. The very fact of the Fed buying Treasuries with newly printed money proves Washington is producing too much debt. China even stated recently that it saw no more utility accumulating any more dollar debt assets. If the whole point of QE is to monetize impaired assets, then the Fed likely sees Treasury bonds as facing considerable impairment risk. Theory and history are clear about the reasons for and consequences of large-scale and persistent debt monetization.

Finally, it is wrong to assert that the debt ceiling is the main reason for America’s fiscal deficit reduction. The ceiling has never provided a meaningful barrier to America’s borrowing ambitions, hence the dozens of upward adjustments to the ceiling whenever it threatens to crimp the whims of Washington’s profligate classes. America’s rate of new borrowing is falling because all the money it has printed washed into the economic system and found its way back into tax revenues. Corporate profits are soaring to all-time highs on dirt cheap trade financing. Corporate high-grade debt issuance has set a new record in 2013. Companies are rolling their short-term debts, now super-cheap thanks to Bernanke’s money machine, and issuing long, into a bubbly IPO and corporate bond market. The last time corporate profits surged like they’re doing now was during the credit and housing bubble that preceded the unraveling and inevitable bust in 2008/09.

These are money and credit cycle effects. The debt ceiling has had precious little to do with it. Moreover, US debt is neither crimped nor the US Treasury Department austere. Instead, the national debt is soaring, $60,000 higher for every US family since Obama took office and rising. Add to this the fact that the US Treasury’s bond issuance schedule is actually set to rise in 2014 due to huge amounts of maturing debt needing to be rolled over next year, and the fiscal significance of the debt ceiling fades even further.

The singular brilliance of the debt ceiling however, is that it keeps reminding everyone that there is a growing national debt that never seems to shrink. That is a tremendous service to American citizens who live in the dark regarding the borrowing machinations of their political overlords. Yes, politicians keep raising the debt ceiling, but nowadays they have to bend themselves into ever twisty pretzels trying to explain why to their justifiably skeptical and cynical constituents. Most people don’t understand bond yields, quantitative easing, and Keynesian pump-a-thons too well, but they sure understand a debt ceiling.

Conclusion

Those who adhere to the don’t-stop-til-you-get-enough theory of sovereign borrowing, and by extension argue for a scrapping of the debt ceiling, couldn’t be more misguided. In free markets with no Fed money market distortion, interest rates can be a useful guide of the amount of real savings being made available to borrowers. When borrowers want to borrow more, real interest rates will rise, and at some point this crimps the marginal demand for borrowing, acting as a natural “debt ceiling.” But when markets are heavily distorted by central bank money printing and contrived zero-bound rates, interest rates utterly cease to serve this purpose for prolonged periods of time. What takes over is the false signals of the unsustainable business cycle which fools people into thinking there is more savings than there really is. Greece provides a recent real-world case study of this very phenomenon in action. In these cases we are likely to see low rates sustained during the increase in government borrowing, only for them to quickly reset higher and plunge a country into a debt trap which may force default or extreme money printing.

Debt monetization has a proven track record of ending badly. It is after all the implicit admission that no one but your monopoly money printer is willing to lend to you at the margin. The realization that this is unsustainable can take a while to sink in, but when it does, all it takes is an inevitable fat-tail event or crescendo of panic to topple the house of cards. If the market realizes it’s been duped into having too much before the government decides it’s had enough, a debt crisis won’t be far away.

Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.

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Russell Lamberti is head strategist at ETM Analytics, in charge of global and South African macroeconomic, financial market, and policy strategy within the ETM group. Follow him on Twitter. See Russell Lamberti’s article archives.

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The 9 Key Considerations To Protect Deposits From Bail-Ins

The 9 Key Considerations To Protect Deposits From Bail-Ins.

The 9 Key Considerations To Protect Deposits From Bail-Ins

Published in Market Update  Precious Metals  on 13 December 2013

By Mark O’Byrne

Today’s AM fix was USD 1,222.75, EUR 891.22 and GBP 750.89 per ounce.
Yesterday’s AM fix was USD 1,243.50, EUR 902.79 and GBP 758.51 per ounce.

Gold fell $26.40 or 2.11% yesterday, closing at $1,226.50/oz. Silver slid $0.79 or 3.89% closing at $19.52/oz.  Platinum dropped $19.01, or 1.4%, to $1,360.74/oz and palladium fell $20 or 2.7%, to $715.25/oz.

Gold has spiked higher in late morning trade in London and is 0.6% higher on the day and 0.35% higher for the week. A higher weekly close this week will be positive from a technical perspective.


What Should Depositors Do To Protect Against Bail-In? 9 Key Considerations

Gold saw a sharp move lower by over 2% yesterday, despite little market moving data or news and other assets seeing less price movement. The price fall could have been due to heightened speculation of a Fed taper as soon as next week. However, if that was the case, one would have expected stocks to have seen similar price falls. Rather stocks were only marginally lower and remain near record highs.


Gold in U.S. Dollars, 10 Day – (Bloomberg)

Peculiar gold price falls have been common in recent weeks and months and have contributed to the 25% price fall we have seen this year.
Therefore, those who have diversified into gold in order to protect their wealth will welcome the move by the German financial regulator Bafin to widen their investigation into manipulation by banks of benchmark gold and silver prices.

The FT reports on the front page today that German banking regulator Bafin has demanded documents from Germany’s largest bank, Deutsche Bank, as part of a probe into suspected manipulation the gold and silver markets by banks.


Gold Prices / Fixes / Rates / Volumes – (Bloomberg)

Currently, gold fixing happens twice a day by teleconference with five banks: Deutsche Bank, Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc, HSBC Bank USA, NA and Société Générale. The fixings are used to determine prices globally. Deutsche Bank is also one of three banks that take part in the equivalent process for silver.

The German regulator has been interrogating the bank’s staff over the past several months. Since November, when the probe was first mentioned similar audits in the U.S. and UK are also commencing.

Premiums in China and India remained robust overnight and way over western premiums. Gold on the Shanghai Gold Exchange closed at $1,258.38 at 0700 GMT – a premium of $29.18 per ounce over spot.

Bullion premiums in western markets have seen little movement again this week. One ounce gold bars are trading at $1,276.44/oz or premiums of between 3.75% and 4.5%, and larger 1 kilo  gold bars  are trading at $40,832/oz or premiums of between 3% and 3.5%.

Indian demand declined yesterday but remains robust as dealers were not able to source gold.

Premiums remained steady at $120 per ounce over London prices. Last week, Indian premiums hit a record high of $160/oz. Imports into India have dropped off sharply this year after the Indian government raised the import duty to 10% earlier this year and tied imports volumes to exports, in a bid to curb a rising trade gap and the rush to gold by Indians concerned about the continuing devaluation of their rupee.

If the Fed defer a taper, we should see gold bounce from oversold levels which could help it test $1,300/oz again.

We do not believe the Fed will ‘taper’ next week as the U.S. economy remains very fragile and any reduction on bond purchases could lead to turbulence in financial markets, a rise in bond yields and affect the wider economy.

But if the Fed does reduce its massive bond buying programme marginally next week, gold will likely fall to test strong support at $1,200/oz again.

Gold looks likely to bounce back next year and the positive drivers for gold are strong store of wealth physical demand, particularly in China, due to macroeconomic, systemic and monetary risk.

The eurozone debt crisis is far from resolved and sovereign debt issues in Japan, the UK and the U.S. will likely rear their ugly heads again leading to safe haven demand for gold.


U.S. Treasury Amount of Outstanding Debt – Price/Billion – (Bloomberg)

We pointed out yesterday why it is important to remember that the Federal Reserve is printing nearly $20 billion every single week. The U.S. National Debt is now over $17.2 trillion and continuing to rise and the U.S. has unfunded liabilities (Social Security, Medicare and Medicaid) of between $100 trillion and $200 trillion.

Staggering numbers which suggest alas that the U.S. politicians are rearranging chairs on the titanic.

What Should Depositors Do To Protect Against Bail-In?
Depositors in G20 or FSB regulated countries should examine the financial health of their existing bank or banks.

Some issues to watch would include institutions with legacy issues such as a high level of non-performing loans, a possible need for recapitalisation and low credit ratings. These banks should be avoided, as they have a higher chance of needing restructuring and hence a higher chance of a bail-in.

Deposits are insured for up to €100,000, £85,000 and $100,000 per person, per account in the EU, the UK and the U.S. respectively. Although there is no guarantee that an insolvent government will be able to fund its deposit insurance scheme, it is uninsured deposits which are more at risk of a bail-in.

Therefore, it would be prudent for depositors not to hold bank deposits in excess of these figures in any one financial institution since –
a) they are not insured, and
b) deposits in excess of those arbitrary figures are more likely to be bailed in

There is an assumption that in the event of bail-in, only bank deposits of over these arbitrary figures would be vulnerable. However, there is no guarantee that this would be the case. Should a government be under severe financial pressure, it may opt to only protect deposits over a lower amount (e.g. €50,000, £50,000, $50,000).

Since capital controls have already been imposed on one Eurozone country, Cyprus, it seems quite likely that they will be imposed in other countries in the event of new banking crises or a new global systemic crisis.

Cypriot authorities imposed restrictions on bank money transfers and withdrawals, including a daily cash withdrawal limit of €300 per day. Many banks had to restrict withdrawals to €100 per customer per day in order to prevent them running out of euros. Electronic wire transfers were suspended for a number of days, prior to being allowed but with a low maximum daily limit.

Therefore, having some of one’s savings outside of the banking system makes sense. It should be held in a form that is highly liquid, such as gold, and can be converted back into cash in the event of cash withdrawal restrictions. Cypriots who owned gold were less affected by the deposit confiscation or ‘haircut’ as they could sell their gold in order to get much needed euros.

In the coming years, the role of gold in an investment portfolio will become more important due to its academically and historically proven safe haven qualities. Now, with the risk of bail-ins, savers and corporate treasurers should consider diversifying their savings portfolio and allocate 5% to 10% of the overall savings portfolio to gold.

However, it will not be enough to simply allocate funds to some form of gold investment. In the same way that certain banks are more risky than others, so too are many forms of gold speculation and investment more risky than others.

It is vitally important that those tasked with diversifying deposits do not jump out of the frying pan and into the fire.

An allocation to actual physical gold owned with the safest counterparties in the world will help depositors hedge the not insignificant risk of keeping money on deposit in many banks today.

It is important that one owns physical gold and not paper gold which could be subject to bail-ins.

Physical gold, held in allocated accounts conferring outright legal ownership through bailment
remains the safest way to own gold. Many gold investment vehicles result in the buyers having very significant, unappreciated exposure and very high counterparty risk.

Owning a form of paper gold and derivative gold such as an exchange traded fund (ETF) in which one is an unsecured creditor of a large number of custodians, who are banks which potentially could be bailed in, defeats the purpose of owning gold.

Potentially, many forms of gold investment themselves could be bailed in and the FSB’s inclusion of Financial Market Infrastructures in potential bail-ins including “central counterparties, insurers, and the client assets held by prime brokers, custodians and others” underlines the importance of owning unencumbered assets that are owned directly.

Extensive research shows that owning gold in an investment portfolio enhances returns and reduces the entire portfolio’s volatility over the long term. In the coming years, a diversified savings portfolio with an allocation to gold, will reduce counterparty risk and compensate for very low yields.

The wise old Wall Street adage to always keep 10% of one’s wealth in gold served investors well in recent years. It will serve those attempting to safeguard deposits very well in the coming years.

In general, people should avoid holding euros or other cash outside of their bank accounts, however there is now a case to be made that holding a small amount of cash outside of vulnerable banks would be prudent. Just enough cash to provide for you and your family’s needs for a few weeks.

However, this should never be done unless the cash is held in a very secure way, such as a well hidden safe or safety deposit box. It would be safer not to keep assets in a safety deposit box in a bank.

Overall, diversification of deposits now has to be considered.

This means diversification across financial institutions and across countries or jurisdictions globally.

Safest Banks
Financial institutions should be chosen on the basis of the strength of the institution. Jurisdictions should be chosen on the basis of political and economic stability. A culture and tradition of respecting private property and property rights is also pertinent.

While depositors need to do their own due diligence in which banks globally they may wish to open a bank account, Table 1 (see From Bail-Outs to Bail-Ins: Risks and Ramifications)  illustrates that there are numerous banks globally which are still perceived to be financially strong. The banks in table 1 have been ranked by taking the average long term issuer credit rating applied to the bank by the main global credit rating companies, Moody’s, S&P and Fitch.

A credit rating is an assessment of the solvency or creditworthiness of debtors or bond issuers according to established credit review procedures. These ratings and associated research help investors analyse the credit risks associated with fixed income securities by providing detailed information of the ability of issuers to meet their obligations. A rating is continuously monitored. It enables investors and savers to measure their investment risk.

Long term credit ratings of the major agencies take into account factors such as financial fundamentals, operating environment, regulatory environment, corporate governance, franchise value of the business, and risk management, as well as the potential financial support available to the bank from a parent group, or a local or national government.

While credit ratings express an opinion on a bank’s vulnerability of defaulting, they don’t quantify the probability of default. However, credit ratings are still widely used and are one of the most commonly used ways of ranking the relative financial strength of banks.

The credit rating reflects the credit risk or general paying ability of the issuer, and so reflects the solvency or creditworthiness of the issuer from the point of view of investors who, along with depositors, are the main creditors of the bank. Certain countries host more financially strong banks than others as can be graphically seen in the table.

Notice that many of the safest banks in the world are in Switzerland and Germany.

Indeed, it is interesting to note that despite the Eurozone debt crisis, many of the safest banks in the
world are in the EU or wider Europe. These include banks in the Netherlands, Luxembourg and France – despite many French banks being very vulnerable as is the French sovereign.

Outside of Europe, Singapore has some very strong banks, as does Norway, Australia, Canada and Sweden.

There are only a few UK and U.S. banks on the list of global top banks that should give pause for thought.

There are a number of institutions in jurisdictions such as Hong Kong, Chile, Japan and some Middle Eastern countries. As of yet, banks in the large emerging markets have not made their mark but we would expect banks in China, Russia, Brazil and in India to begin moving up the table in the coming years. The sounder sovereign position and lack of public and private debt in these countries will help in this regard.

There are no banks from problem European economies on the list for good reason. Their banks do not have high enough credit ratings. In fact, banks from Cyprus, Greece, Portugal, Spain, Italy and Ireland consistently had relatively low long term ratings from the ratings agencies. In terms of ratings, they rank nowhere near the top 20 banks in the world and most are ranked between 200 and 400.

Besides considering the relative safety of different banks, with interest rates so low on bank deposits and increasing taxes on interest earned on deposits leading to negative real interest rates – depositors are not being rewarded with adequate yields to compensate for the risk to which they are exposed.

Thus, as is often the case, savers need to consider alternatives to protect their wealth

Without a clearly thought out plan, many will be prey for the financial services sales machine and brokers and their array of more risky investment and savings products – including so called “capital guaranteed” products – many of which are high risk due to significant and unappreciated counterparty risk.

It is vitally important that investors have independent custodians and trustees. This greatly reduces counterparty risk should a broker, financial adviser, insurance company or other financial institution become insolvent.

9 Key Considerations
Depositors internationally should examine the financial health of their existing bank or banks. Overall, diversification of deposits now has to be considered. However, it is vitally important that those tasked with diversifying deposits do not jump out of the frying pan and into the fire. This means diversification across financial institutions and across countries or jurisdictions globally.

Financial institutions should be chosen on the basis of the strength of the institution. Jurisdictions should be chosen on the basis of political and economic stability. A culture and tradition of respecting private property and property rights is also important.

1. Diversify savings across banks and in different countries

2. Consider counterparty risk and the health of the deposit-taking bank

3. Attempt to own assets outright and reduce risk to custodians and trustees

4. Own physical gold in allocated accounts with outright legal ownership

5. Avoid investments where there is significant counterparty risk, such as exchange traded
funds and many structured products

6. Avoid banks with large derivative books and large mortgage books

7. Monitor banks’ and institutions’ financial stability

8. Monitor deposit and savings accounts’ terms and conditions

9. Monitor government policy pertaining to banks and bank deposits

Download Protecting your Savings In The Coming Bail-In Era (11 pages)

Download From Bail-Outs to Bail-Ins: Risks and Ramifications –  Includes 60 Safest Banks In World  (51 pages)

 

 

The Federal Reserve Is Monetizing A Staggering Amount Of U.S. Government Debt

The Federal Reserve Is Monetizing A Staggering Amount Of U.S. Government Debt.

 By Michael Snyder, on November 14th, 2013

The Federal Reserve is creating hundreds of billions of dollars out of thin air and using that money to buy U.S. government debt and mortgage-backed securities and take them out of circulation.  Since the middle of 2008, these purchases have caused the Fed’s balance sheet to balloon from under a trillion dollars to nearly four trillion dollars.  This represents the greatest central bank intervention in the history of the planet, and Janet Yellen says that she does not anticipate that it will end any time soon because “the recovery is still fragile”.  Of course, as I showed the other day, the truth is that quantitative easing has done essentially nothing for the average person on the street.  But what QE has done is that it has sent stocks soaring to record highs.  Unfortunately, this stock market bubble is completely and totally divorced from economic reality, and when the easy money is taken away the bubble will collapse.  Just look at what happened a few months ago when Ben Bernanke suggested that the Fed may begin to “taper” the amount of quantitative easing that it was doing.  The mere suggestion that the flow of easy money would start to slow down a little bit was enough to send the market into deep convulsions.  This is why the Federal Reserve cannot stop monetizing debt.  The moment the Fed stops, it could throw our financial markets into a crisis even worse than what we saw back in 2008.

The problems that plagued our financial system back in 2008 have never been fixed.  They have just been papered over temporarily by trillions of easy dollars from the Federal Reserve.  All of this easy money is keeping stocks artificially high and interest rates artificially low.

Right now, the Federal Reserve is buying approximately 85 billion dollars worth of U.S. government debt and mortgage-backed securities each month.  We are told that the portion going to buy U.S. government debt each month is approximately 45 billion dollars, but who knows what the Fed is actually doing behind the scenes.  In any event, by creating money out of thin air and using it to remove U.S. Treasury securities out of circulation, the Federal Reserve is essentially monetizing U.S. government debt at a staggering rate.

But Federal Reserve officials continue to repeatedly deny that what they are doing is monetizing debt.   For instance, Federal Reserve Bank of Atlanta President Dennis Lockhart strongly denied this back in April: “I object to the view that the Fed is monetizing the debt”.

How in the world can Fed officials possibly deny that they are monetizing the debt?

Well, because the Fed is promising that it is going to eventually sell back all of the securities that it is currently buying.

Since the Fed does not plan to keep all of this government debt on its balance sheet indefinitely, that means that they are not actually monetizing it according to their twisted logic.

Try not to laugh.

And of course that will never, ever happen.  There is no possible way that the Fed will ever be able to stop recklessly creating money and then turn around and sell off 3 trillion dollars worth of government debt and mortgage-backed securities that it has accumulated since 2008.  Just look at the chart posted below.  Does this look like something that the Federal Reserve will ever be able to “unwind”?…

Federal Reserve Balance Sheet

Remember, just the suggestion that the Fed would begin to slow down the pace of this buying spree a little bit was enough to send the financial markets into panic mode a few months ago.

If the Fed does decide to permanently stop quantitative easing at some point, stocks will drop dramatically and interest rates will skyrocket because there will be a lot less demand for U.S. Treasuries.  In fact, interest rates have already risen substantially over the past few months even though quantitative easing is still running.

Right now, the Fed is supplying a tremendous amount of the demand for U.S. debt securities in the marketplace.  According to Zero Hedge, Drew Brick of RBS recently made the following statement about the staggering amount of government debt that is currently being monetized by the Fed…

“On a rolling six-month average, in fact, the Fed is now responsible for monetizing a record 70% of all net supply measured in 10y equivalents. This represents a reliance on the Fed that is greater than ever before in history!

Overall, the Federal Reserve now holds 32.47 percent of all 10 year equivalents, and that percentage is rising by about 0.3 percent each week.

If the Federal Reserve does not keep doing this, the financial markets are going to crash because they are being propped up artificially by all of this funny money.

But if the Federal Reserve keeps doing this, it is going to become increasingly obvious to the rest of the world that the Fed is simply monetizing debt and is starting to behave like the Weimar Republic.

The remainder of the planet is watching what the Federal Reserve is doing very carefully, and they are starting to ask themselves some very hard questions.

Why should they continue to use our dollars to trade with one another when the Fed is wildly creating money out of thin air and rapidly devaluing the existing dollars that they are holding?

And why should they continue to lend us trillions of dollars at ultra-low interest rates that are way below the real rate of inflation when the U.S. government is already drowning in debt and the money that will be used to pay those debts back will be steadily losing value with each passing day?

The Federal Reserve is in very dangerous territory.  If the Fed wants the current system to continue, it is going to have to stop this reckless money printing at some point or else the rest of the world will eventually decide to stop participating in it.

If the Fed wants to go ahead and make quantitative easing a permanent part of our system, then eventually it will need to go all the way and start monetizing all of our debt.

Right now, the Fed is stuck in the middle of a “no man’s land” where it is monetizing a significant amount of U.S. government debt but it is trying to sell everyone else on the idea that it is not really monetizing debt.  This is a state of affairs that cannot go on indefinitely.

At some point, the Fed is going to have to make a decision.  And for now the Fed seems to be married to the idea that eventually things will get back to “normal” and they will stop monetizing debt.

Even Janet Yellen is admitting that quantitative easing “cannot continue forever”.

However, she also said on Thursday that it is important not to end quantitative easing too rapidly, “especially when the recovery is still fragile“.

Well, at this point quantitative easing has been going on in one form or another for about five years now.

Will it ever end?

And when it does, how bad will the financial crash be?

Meanwhile, with each passing day the faith that the rest of the world has in our dollar and in our financial system continues to erode.

If the Fed continues to behave this recklessly, it is inevitable that the rest of the globe will begin to move even more rapidly away from the U.S. dollar and will become much more hesitant to lend us money.

Ultimately, the Federal Reserve is faced with only bad choices.  The status quo is not sustainable, ending quantitative easing will cause the financial markets to crash, and going “all the way” with quantitative easing will just turn us into the Weimar Republic.

But anyone with half a brain should have been able to see that this debt-based financial system that the Federal Reserve is at the heart of was going to end tragically anyway.  The 100 year anniversary of the Federal Reserve is coming up, and the truth is that it should have been abolished long ago.

The consequences of decades of very foolish decisions are catching up with us, and this is all going to end very, very badly.

I hope that you are getting ready.

 

Global Debt, Global Currency » Golem XIV – Thoughts

Global Debt, Global Currency » Golem XIV – Thoughts.

by  on OCTOBER 17, 2013 in LATEST

With the latest installment of the ‘US debt ceiling’ melodrama over, for now, perhaps it’s a good time to ask, what was it all about really?

I know that officially it was supposed to be an edge of your seat, high stakes thriller about how much debt the US government can carry before some disaster strikes, and who has the authority to decide. But I think that behind the lumbering domestic stage show there was actually a different, larger battle, with different stakes, being played out. The debt ceiling debate was, to my mind, something of a proxy war. Real for those caught up in its angry rhetoric, but seen from further away, clearly just a local manifestation of something deeper, and something being directed by different people than those making speaches in the spot-light.

Actually I think the fight over the US debt ceiling is a proxy for who controls the world’s real reserve currency. And that currency is not the dollar. I suggest we would understand events more simply if we recognized that the world’s real reserve currency is debt -pure debt.  We should not be confused by the fact that debt, globally, is denominated in several forms. Much like the dollar comes in bills of ten and twenty,  so the debt currency comes in dollars, euros, Yen and Yuan. But they are not the currency itself they are just the different bills it comes in.

In Britain we have pound notes issued by the Bank of England but also by the Royal Bank of Scotland, Clydesdale and Ulster Bank, but they are not different currencies, they are all pounds no matter whose logo in on the notes. I think globally we are now in the early and perhaps not quite recognized days of a similar situation. It is debt which is globally traded and used to settle and value all deals everywhere. The problem is this global debt system is not yet fully formed. It is still umbillically tied to the old system of national currencies and their issuers. And like mummies everywhere the old issuers like to think they are in charge long after they no longer are.

If you are willing to accept this idea, at least for argument’s sake, then the domestic dramas in different countries over how much of this or that kind of debt backed note, with this or that logo on it, should be permitted, take on a different character. I am not saying that the domestic arguments over how many dollars or euros can be printed up, how much debt should be carried are unimportant. They are important and do have profound real life consequences for people and businesses. But I am saying that the driving logic is not domestic and nor is it controlled or even understood by most of the domestic players.

Think of the Vietnam war. In Vietnam it was North vesus South. But for the wider world North and South were just proxies for a much deeper conflict of Communism versus America. And the politicians of South Vietnam were not really in charge of very much. I think this is increasingly the situation of domestic politicans when it comes to finance, debts and currency. Only they don’t yet know this one vital fact. Thus we have the dis-spiriting spectacle of watching the fag ends of our representative democracy argue about things most of them do not understand. An endless stage show where the actors strut and fret, and deliver their lines with gusto, pulling with all their puffed-up might on the familiar levers of power available to them, expecting applause. Yet all the while their drama and the levers of power they squable over are less and less connected to the actual engines of change.

The Democrats and Republicans think they are arguing over who should control the amount of debt the Fed will take on. Not realizing that neither of them, neither Republican nor Democrat controls the matter over which they are arguing. Neither do they realize – not fully at least – that theirs is no longer a theatre of power, it is mostly just a theatre. Power, fundamental power,  has moved elsewhere.

What the debt-celing debate was about, I suggest, was a fight between those who think they control the Fed and the currency (because once they did) and those who do control it but would prefer we not quite realize this.

I think the real battle going on is between the financial players led by the global banks, assorted funds and Insurers, all of whom are very much addicted to fiat debt-money, and a dwindling cadre of politicians who still think central banks control the currencies and elected officials decide how much debt is enough.

This latter group seemingly cannot understand why they can’t get the Fed or the ECB to do what they both said, ever since 2008, they would do, which is to ‘exit’ or to use the prefered term ‘taper’ the ‘extraordinary’ and ‘temporary’ measures they took in 2007, then took again in 2008 and again in 2009 and again in 2010 and 2011 and 2012 and 2013. Which is, let’s be fair to our puzzled politicans and pundits, a confusingly frequent use of ‘extraordinary’ and a long time for ‘temporary’. Hence their confusion.

What our politicians – most of them but crucially not all of them – seem reluctant to underdstand is that neither the FED nor the ECB nor any other central authority, can limit the amount of debt that is issued into the global markets. The banks issue the debt not governments. But that debt, conjured into existence by extending loans does then, particularly in periods of market uncertainty, ‘need’ – or rather or ‘demand’  – backing from a national currency. This creates a pressure on central banks to ‘issue’ more sovereign debt paper to provide the backing for the ALREADY created debt.

The big banks issue the reserve currency. It is a global reserve currency and replaced the dollar some time ago, only no one noticed becaue they kept the old brand name going. It’s not even as if it is just American financial intitutions which issue dollar debt which the Fed finds itself being forced to cover – foreign banks do it to. And anyone who issues dollar denominated debt has a hand on the strings which move the Fed around. Obviously the same is true for other major currencies and their central banks.

The governments and central banks can try to influence the creation of debt though interest rates or ‘stress tests’ and setting levels of ‘regulatory capital’ that must be held. But all of these can be and are gamed by the banks. And when gaming is not sufficient then a debt crisis can be brought in to play to force the reluctant politicians to do what they ‘must’. And that last ploy is the debt ceiling.

Once private debt has been created the central banks are under-pressure to create public debt with which to back it. They know this is how it works they are on record as saying so. But they are caught in a dilemma. The politicians and the public think the government and central banks are in charge and can tell the markets how much debt is enough. The central banks know they do not really have this power because in reality it is the markets not the central banks who are in charge and  decide how much debt is good for THEM.

What can the central banks do? Nominally they work for the government. The people even think they work for them (ho ho!) Whereas the logic which controls lies in the markets and the levers are in the banks. If the Central banks were to come clean and tell the government and the public who is really in charge, who they really work for, what would happen? So they don’t come clean, at least not in public, leaving the poltiicans to argue fatuously amoung themselves for our entertainment.

There are only a limited number of end games I think. The issuance of debt will go on despite the increasing drama of the decisions. The question for the banks will be how best to manage it with the minimum of fuss and least chance of the real situation becoming too clear too early.

Debt issuance will go on because the present economic system, fueled as it is by debt, requires growth above the rate of interest they are all charging each other. The Pension companies require more growth than that because they have long term obligations to pay out at a higher rate. In boom times growth takes care of itself. In bad time that growth ‘must’ be provided by ‘stimulus’ AKA public debt. The minimum growth they want for the headlines is 3%. Which seems reasonable till you do the maths and find 3% growth means a doubling every 17 years. Given the frequency of ‘busts’ built into the debt based system and how much they cost the public each time – (and they are built in – I explained one aspect of this in the last part of the Securitization series. (For completeness here are parts 1 and 2.)  This series is my take on the same logic than Minsky had of course already come to before and more fully) – it is clear how much ‘growth’ is going to be based on public debt. So the debt will grow.

But while it does, other parts of the economic system and their political friends will complain about the size of the debt. So there will continue to be a pressure to stop the debt ‘getting out of control’. How to sqaure this idiot’s circle? The answer is already here only in its infant form. Public Debt created to back private debts will be ‘required’ to grow. Public debt for other things will therefore be under pressure to be cut. So far what has been cut has been the easy and the small beer.

The sums ‘saved’ have been tiny in comparison with the sums created in order to ‘help’ the financial system, even though the misery created in cutting them has been huge. But who cares about miserable poor people when you’re a rich happy one? Nevertheless the sums saved through ‘austerity’ are not going to be sufficient over even the medium term of the next decade. The ‘savings’ need to be orders of magnitude greater. For that the only option is to target the long term, ‘unfunded commitments of health, state pension and long term welfare. These are what the bankers will target when people have been softened up and the next bust hits.

The option I think they will go for is complete privatization of health, welfare and state pension.

All these long term ‘unfunded obligations’ as they are called appear in public debt accounts as future liabilities, future debts. But as soon as the same obligations are shifted to the private sector they become future profits rather than future debts. No matter that people might not be able to pay for them – accountants are not paid to worry about such details. To you and me it might seem daft to think that by moving things from one column to another , from public to private that this will suddenly make things better. And of course it won’t. The private sector will argue it will be ‘better’ because they are so much more ‘efficient’. Believe that if you like.  But the main thing is the acounting exercise will make the number in the public debt column go down.

The important thing for any discussion of public debt levels, is that removing these ‘obligations’ from the public account suddenly cuts the future public debt. Freeing up all that now uncommitted future debt to be available for pumping into the private financial sector . Which it would suddenly make ‘good economic sense’ to help, given the now very buoyant future demand for private health, pensions and welfare provision.

Public debt is always seen by the financial world as a drain, an obligation. The same obligations re-cast as serivces are seen as a source of future profit. Thus I think we will see in the next few years an all out attack on every aspect of public service provision.  Libertarians amoung you might cheer at this point. I think you will not cheer when you see what is going to replace what you currently dislike.

I believe the era of the Nation-State is coming to an end not because of attack from outside enemies but because Nation-States are being dismantled from the inside – by the  State itself.  But the State has no itention of losing power. It is simply changing jobs and employer. The big welfare state is being dismantled but in its place is going to come an even bigger and certainly more repressive Corporate State.

But the End of the Nation-State and the emergence of a global system of  Technocratic, Managed rather than democratic Corporate-States is a larger discussion I am still writing.

 

Congress to eliminate the debt by not counting it anymore….

Congress to eliminate the debt by not counting it anymore….. (source)

October 28, 2013
Sovereign Valley Farm, Chile

You know the old rule of thumb about laws–

The more high-sounding the legislation, the more destructive its consequences.

Case in point, HR 3293– the recently introduced Debt Limit Reform Act. Sounds great, right? After all, reforming the debt seems like a terrific idea.

Except that’s not what the bill really does. They’re not reforming anything. HR 3293′s real purpose is to authorize the government to simply stop counting a massive portion of the US national debt.

You see, one of the biggest chunks of the debt is money owed to ‘intragovernmental agencies’.

For example, Medicare and Social Security hold their massive trust funds in US Treasuries. This is the money that’s owed to retirees.

In fact, nearly $5 trillion of the $17 trillion debt (almost 30%) is owed to intragovernmental agencies like Social Security and Medicare.

So now they basically want to stop counting this debt. Poof. Overnight, they’ll make $5 trillion disappear from the debt.

On paper, this looks great. But in reality, they’re setting the stage to default on Social Security beneficiaries without causing a single ripple in the financial system.

Remember, when governments get this deep in debt, someone is going to get screwed.

They may default on their obligations to their creditors, causing a crisis across the entire financial system. Or perhaps to the central bank, causing a currency crisis.

But most likely, and first, they will default on their obligations to their citizens. Whatever promises they made, including Social Security, will be abandoned.

And if you read between the lines, this new bill says it all.

Not to be outdone by the United States Congress, though, the International Monetary Fund recently proposed a continental-wide ‘one off’ wealth tax in Europe.

Buried in an extensive report about Europe’s troubled economies, the IMF stated:

“The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).”

In other words, first they want to implement capital controls to ensure that everyone’s money is trapped. Then they want to make a grab for people’s bank accounts, just like they did in Cyprus.

The warning signs couldn’t be more clear. I’ve been writing about this for years. It’s now happening. This is no longer theory.

Over the last few weeks I’ve been having my staff revise a free report we put together two years ago about globalizing your gold holdings.

In the report I mentioned that capital controls are coming. And that some governments may even ban cash transactions over a certain level.

These things have happened. Cyprus has capital controls, France and Italy have limits on cash transactions. And given this new evidence, it’s clear there’s more on the way.

Every rational, thinking person out there has a decision to make.

You can choose to trust these politicians and central bankers to do the right thing.

Or you can choose to acknowledge the overwhelming evidence and reduce your exposure to these bankrupt western countries that will make every effort to lie, cheat, and steal whatever they can from you… just to keep the party going a little while longer.

It’s time for people to wake up to this reality. You only have yourself to rely on. Not the system. Not the government. And certainly not the bankers.

 

Global Debt, Global Currency » Golem XIV – Thoughts

Global Debt, Global Currency » Golem XIV – Thoughts. (source)

With the latest installment of the ‘US debt ceiling’ melodrama over, for now, perhaps it’s a good time to ask, what was it all about really?

I know that officially it was supposed to be an edge of your seat, high stakes thriller about how much debt the US government can carry before some disaster strikes, and who has the authority to decide. But I think that behind the lumbering domestic stage show there was actually a different, larger battle, with different stakes, being played out. The debt ceiling debate was, to my mind, something of a proxy war. Real for those caught up in its angry rhetoric, but seen from further away, clearly just a local manifestation of something deeper, and something being directed by different people than those making speaches in the spot-light.

Actually I think the fight over the US debt ceiling is a proxy for who controls the world’s real reserve currency. And that currency is not the dollar. I suggest we would understand events more simply if we recognized that the world’s real reserve currency is debt -pure debt.  We should not be confused by the fact that debt, globally, is denominated in several forms. Much like the dollar comes in bills of ten and twenty,  so the debt currency comes in dollars, euros, Yen and Yuan. But they are not the currency itself they are just the different bills it comes in.

In Britain we have pound notes issued by the Bank of England but also by the Royal Bank of Scotland, Clydesdale and Ulster Bank, but they are not different currencies, they are all pounds no matter whose logo in on the notes. I think globally we are now in the early and perhaps not quite recognized days of a similar situation. It is debt which is globally traded and used to settle and value all deals everywhere. The problem is this global debt system is not yet fully formed. It is still umbillically tied to the old system of national currencies and their issuers. And like mummies everywhere the old issuers like to think they are in charge long after they no longer are.

If you are willing to accept this idea, at least for argument’s sake, then the domestic dramas in different countries over how much of this or that kind of debt backed note, with this or that logo on it, should be permitted, take on a different character. I am not saying that the domestic arguments over how many dollars or euros can be printed up, how much debt should be carried are unimportant. They are important and do have profound real life consequences for people and businesses. But I am saying that the driving logic is not domestic and nor is it controlled or even understood by most of the domestic players.

Think of the Vietnam war. In Vietnam it was North vesus South. But for the wider world North and South were just proxies for a much deeper conflict of Communism versus America. And the politicians of South Vietnam were not really in charge of very much. I think this is increasingly the situation of domestic politicans when it comes to finance, debts and currency. Only they don’t yet know this one vital fact. Thus we have the dis-spiriting spectacle of watching the fag ends of our representative democracy argue about things most of them do not understand. An endless stage show where the actors strut and fret, and deliver their lines with gusto, pulling with all their puffed-up might on the familiar levers of power available to them, expecting applause. Yet all the while their drama and the levers of power they squable over are less and less connected to the actual engines of change.

The Democrats and Republicans think they are arguing over who should control the amount of debt the Fed will take on. Not realizing that neither of them, neither Republican nor Democrat controls the matter over which they are arguing. Neither do they realize – not fully at least – that theirs is no longer a theatre of power, it is mostly just a theatre. Power, fundamental power,  has moved elsewhere.

What the debt-celing debate was about, I suggest, was a fight between those who think they control the Fed and the currency (because once they did) and those who do control it but would prefer we not quite realize this.

I think the real battle going on is between the financial players led by the global banks, assorted funds and Insurers, all of whom are very much addicted to fiat debt-money, and a dwindling cadre of politicians who still think central banks control the currencies and elected officials decide how much debt is enough.

This latter group seemingly cannot understand why they can’t get the Fed or the ECB to do what they both said, ever since 2008, they would do, which is to ‘exit’ or to use the prefered term ‘taper’ the ‘extraordinary’ and ‘temporary’ measures they took in 2007, then took again in 2008 and again in 2009 and again in 2010 and 2011 and 2012 and 2013. Which is, let’s be fair to our puzzled politicans and pundits, a confusingly frequent use of ‘extraordinary’ and a long time for ‘temporary’. Hence their confusion.

What our politicians – most of them but crucially not all of them – seem reluctant to underdstand is that neither the FED nor the ECB nor any other central authority, can limit the amount of debt that is issued into the global markets. The banks issue the debt not governments. But that debt, conjured into existence by extending loans does then, particularly in periods of market uncertainty, ‘need’ – or rather or ‘demand’  – backing from a national currency. This creates a pressure on central banks to ‘issue’ more sovereign debt paper to provide the backing for the ALREADY created debt.

The big banks issue the reserve currency. It is a global reserve currency and replaced the dollar some time ago, only no one noticed becaue they kept the old brand name going. It’s not even as if it is just American financial intitutions which issue dollar debt which the Fed finds itself being forced to cover – foreign banks do it to. And anyone who issues dollar denominated debt has a hand on the strings which move the Fed around. Obviously the same is true for other major currencies and their central banks.

The governments and central banks can try to influence the creation of debt though interest rates or ‘stress tests’ and setting levels of ‘regulatory capital’ that must be held. But all of these can be and are gamed by the banks. And when gaming is not sufficient then a debt crisis can be brought in to play to force the reluctant politicians to do what they ‘must’. And that last ploy is the debt ceiling.

Once private debt has been created the central banks are under-pressure to create public debt with which to back it. They know this is how it works they are on record as saying so. But they are caught in a dilemma. The politicians and the public think the government and central banks are in charge and can tell the markets how much debt is enough. The central banks know they do not really have this power because in reality it is the markets not the central banks who are in charge and  decide how much debt is good for THEM.

What can the central banks do? Nominally they work for the government. The people even think they work for them (ho ho!) Whereas the logic which controls lies in the markets and the levers are in the banks. If the Central banks were to come clean and tell the government and the public who is really in charge, who they really work for, what would happen? So they don’t come clean, at least not in public, leaving the poltiicans to argue fatuously amoung themselves for our entertainment.

There are only a limited number of end games I think. The issuance of debt will go on despite the increasing drama of the decisions. The question for the banks will be how best to manage it with the minimum of fuss and least chance of the real situation becoming too clear too early.

Debt issuance will go on because the present economic system, fueled as it is by debt, requires growth above the rate of interest they are all charging each other. The Pension companies require more growth than that because they have long term obligations to pay out at a higher rate. In boom times growth takes care of itself. In bad time that growth ‘must’ be provided by ‘stimulus’ AKA public debt. The minimum growth they want for the headlines is 3%. Which seems reasonable till you do the maths and find 3% growth means a doubling every 17 years. Given the frequency of ‘busts’ built into the debt based system and how much they cost the public each time – (and they are built in – I explained one aspect of this in the last part of the Securitization series. (For completeness here are parts 1 and 2.)  This series is my take on the same logic than Minsky had of course already come to before and more fully) – it is clear how much ‘growth’ is going to be based on public debt. So the debt will grow.

But while it does, other parts of the economic system and their political friends will complain about the size of the debt. So there will continue to be a pressure to stop the debt ‘getting out of control’. How to sqaure this idiot’s circle? The answer is already here only in its infant form. Public Debt created to back private debts will be ‘required’ to grow. Public debt for other things will therefore be under pressure to be cut. So far what has been cut has been the easy and the small beer.

The sums ‘saved’ have been tiny in comparison with the sums created in order to ‘help’ the financial system, even though the misery created in cutting them has been huge. But who cares about miserable poor people when you’re a rich happy one? Nevertheless the sums saved through ‘austerity’ are not going to be sufficient over even the medium term of the next decade. The ‘savings’ need to be orders of magnitude greater. For that the only option is to target the long term, ‘unfunded commitments of health, state pension and long term welfare. These are what the bankers will target when people have been softened up and the next bust hits.

The option I think they will go for is complete privatization of health, welfare and state pension.

All these long term ‘unfunded obligations’ as they are called appear in public debt accounts as future liabilities, future debts. But as soon as the same obligations are shifted to the private sector they become future profits rather than future debts. No matter that people might not be able to pay for them – accountants are not paid to worry about such details. To you and me it might seem daft to think that by moving things from one column to another , from public to private that this will suddenly make things better. And of course it won’t. The private sector will argue it will be ‘better’ because they are so much more ‘efficient’. Believe that if you like.  But the main thing is the acounting exercise will make the number in the public debt column go down.

The important thing for any discussion of public debt levels, is that removing these ‘obligations’ from the public account suddenly cuts the future public debt. Freeing up all that now uncommitted future debt to be available for pumping into the private financial sector . Which it would suddenly make ‘good economic sense’ to help, given the now very buoyant future demand for private health, pensions and welfare provision.

Public debt is always seen by the financial world as a drain, an obligation. The same obligations re-cast as serivces are seen as a source of future profit. Thus I think we will see in the next few years an all out attack on every aspect of public service provision.  Libertarians amoung you might cheer at this point. I think you will not cheer when you see what is going to replace what you currently dislike.

I believe the era of the Nation-State is coming to an end not because of attack from outside enemies but because Nation-States are being dismantled from the inside – by the  State itself.  But the State has no itention of losing power. It is simply changing jobs and employer. The big welfare state is being dismantled but in its place is going to come an even bigger and certainly more repressive Corporate State.

But the End of the Nation-State and the emergence of a global system of  Technocratic, Managed rather than democratic Corporate-States is a larger discussion I am still writing.

 

Silver vs. Fiat Currencies & The Debt Ceiling Delusion : SRSrocco Report

Silver vs. Fiat Currencies & The Debt Ceiling Delusion : SRSrocco Report. (source)

Silver vs. Fiat Currencies & The Debt Ceiling Delusion

As the U.S. Government continues to waste time debating over the “Debt Ceiling Delusion”, the death of the fiat monetary system grows closer.  Since 2000, the value of gold and silver have increased substantially compared to the world’s fiat currencies.

Silver vs Fiat Currencies

According to GoldSilver.com article, Race to Debase 2000 – 2013 Q3 Fiat Currencies vs. Gold & Silverfiat currency has lost on average of 78.16% of its value compared to silver.

You can check and see which currencies have lost the most of their value compared to silver and gold at the link above.  Below is only part of the table which includes 120 fiat currencies from around the globe:

Table Silver vs Fiat Currencies

If you had purchased silver in South Africa in 2000, it would be worth 563% more today.  We can see also why the Vietnamese have been buying the precious metals as silver is worth 519% more today than it was in 2000.

The world is now in the last stages of the Fiat Monetary System.  The debate on the U.S. Debt Ceiling is masquerading the fact that there is no solution or remedy except a grand collapse of the financial system.

Mike Maloney explains in this brief video how there is always much more debt than available currency in existence to pay back the debt:

 

Video Link Here:  Why The Debt Ceiling is Impossible – It’s a Delusion

This is also a preview of Episode 4 of the series, Hidden Secrets of Money which I highly recommend watching the full version when it is released shortly.

Gold & Silver Will Be Much More than Stores of Value

As I have mentioned in prior articles, many precious metal analysts believe gold and silver are either “Insurance” or “Stores of Value” rather than investments.  They believe that the precious metals should be held as insurance against the collapse of currency or governments, while others believe that it will retain a store of value against inflation and etc.

While I believe these are valid reasons to own gold and silver, they fail to address the energy issues going forward and their impact on the monetary metals.  The Dollar was able to survive for another 3+ decades after gold and silver peaked in 1980, due to a rising global energy supply.

A Fiat Monetary System based on fractional reserve and compound interest needs a growing energy supply to survive.  Peak Oil should have already come and gone several years ago, however massive amounts of new debt allowed non-commercial oil deposits to be extracted.

Even though shale oil production from the Bakken in North Dakota has provided a great deal of oil to the United States, it has come at cost.  According to Rune Likvern of Fractional Flow, his estimated cumulative net cash flow of the Shale Oil producers in the Bakken is now at a Negative $16 billion.

July 2013 Estimated Net Cash Flow Bakken

The Red area of the chart shows the estimated cumulative net cash flow and the black bars represent the monthly net cash flow.  Thus, the shale oil companies in the Bakken had to acquire an estimated $16 billion of additional funding not providing by their operations alone.

Unfortunately, unconventional oil resources such as Shale oil and gas will not be able to allow “Business as Usual” in the world to continue as the costs are greater than what consumers can afford to pay.

This is indeed the reason why we have been witnessing the “Great Shale Energy Hype” by the oil industry and official institutions.  Without shale oil or gas, the Fiat Monetary System would have more than likely died a few years ago.

Gold and silver will become excellent investments as they will be the GO TO ASSETS as most others will become increasingly worthless as the global energy supply peaks and declines.  Furthermore, it may not be prudent to switch out of the majority of ones gold and silver investments and into other asset classes when the GREAT REVALUATION OCCURS.

I will explain why in more detail in the future.  However, most Real Estate values on average will decline substantially in a peak energy environment.  Real Estate in selected areas and regions will do better than others.  Moreover, warehouse and commercial real estate will suffer significantly as the market will deal with decades of overbuilding on top of dwindling demand.

Very few realize just how much a peak energy environment will affect the economy and their investments going forward.  The SRSrocco Report will provide information and updates on how energy will impact the precious metals, mining and overall economy.

 

Another One Trillion Dollars ($1,000,000,000,000) In Debt

Another One Trillion Dollars ($1,000,000,000,000) In Debt. (source)

Did you know that the U.S. national debt has increased by more than a trillion dollars in just over 12 months?  On September 30th, 2012 the U.S. national debt was sitting at$16,066,241,407,385.89.  Today, it is up to $17,075,590,107,963.57.  These numbers come directly from official U.S. government websites and can easily be verified.  For a long time the national debt was stuck at just less than 16.7 trillion dollars because of the debt ceiling fight, but now that the debt ceiling crisis has been delayed for a few months the national debt is soaring once again.  In fact, just one day after the deal in Congress was reached, the U.S. national debt rose by an astounding 328 billion dollars.  In the blink of an eye we shattered the 17 trillion dollar mark with no end in sight.  We are stealing about $100,000,000 from our children and our grandchildren every single hour of every single day.  This goes on 24 hours a day, month after month, year after year without any interruption.

Over the past five years, the U.S. government has been on the greatest debt binge in history.  Unfortunately, most Americans don’t realize just how bad things have gotten because the true budget deficit numbers are not reported on the news.  The following is where the U.S. national debt has been on September 30th during the five years previous to this one…

09/30/2012: $16,066,241,407,385.89

09/30/2011: $14,790,340,328,557.15

09/30/2010: $13,561,623,030,891.79

09/30/2009: $ 11,909,829,003,511.75

09/30/2008: $10,024,724,896,912.49

The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.

Of course all of the blame can’t be placed at the feet of Obama.  During the last two elections the American people have given the Republicans a solid majority in the U.S. House of Representatives, and the government cannot spent a single penny without their approval.

Unfortunately, House Speaker John Boehner and the Republicans that are allied with him have repeatedly turned their backs on the people that gave the Republicans the majority and they have authorized trillions of dollars of new debt which will be passed on to future generations of Americans…

Since John Boehner became speaker of the U.S. House of Representatives on Jan. 5, 2011, the debt of the federal government has increased by $3,064,063,380,067.72. That is more than the total federal debt accumulated in the first 200 years of the U.S. Congress–during the terms of the first 48 speakers of the House.

In fact, if all of that debt had been given directly to the American people, every household in America would have been able to buy a new truck

The $26,722 in new debt per household accumulated under Speaker Boehner would have been more than enough to buy every household in the United States a minivan or pickup truck–or to pay three years of in-state tuition (not counting room and board) at the typical state college.

Sometimes we forget just how much money a trillion dollars is.  In aprevious article, I included some illustrations that I believe are helpful…

-If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.

-If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

We are doing the exact same thing that Greece did, only on a much larger scale.  What we are doing is not even close to sustainable, and it will inevitably end very, very badly.  The following is what Michael Pento, the president of Pento Portfolio Strategies, told RT the other day…

“That $17 trillion everybody says its 107 percent of GDP, that’s true. But who really cares about the percentage of GDP? It’s the percentage of the debt as a percentage of the revenue – its 700 percent of our revenue. Deficits are growing at 30 percent of our revenue every year added to the deficits we have already. So it’s unsustainable. What is going to happen eventually – a currency and bond market collapse! And it’s not going out 20 years, as I also heard someone mention. In 2016 we’ll probably be spending 40 percent of all of our revenue just to service our debt. That is what the interest payments will equal.”

The U.S. debt situation is so bad that even the Prime Minister of Cyprus is scolding us…

“The U.S. has been fortunate in the sense that it’s like a bank, it prints the money that other people accept. So you can live beyond your means over an extended period of time without being punished by the market.”

Unfortunately, we will not be able to live way beyond our means forever.  Reality is going to catch up with us at some point.

Right now, the rest of the world is lending us giant mountains of money at interest rates that are far below the real rate of inflation.  This is extremely irrational behavior, and this state of affairs will probably not last too much longer.

But if interest rates go up, it will absolutely cripple the U.S. economy.  For much more on this, please see this article.

And what would make things much, much worse is if the rest of the globe starts moving away from using the U.S. dollar.  At the moment, the U.S. dollar is the de facto reserve currency of the planet and this creates a tremendous demand for U.S. dollars and U.S. debt.

If that changes, it will be absolutely catastrophic for the United States, and unfortunately there are already lots of signs that this is already starting to happen.  I wrote about this in my recent article entitled “9 Signs That China Is Making A Move Against The U.S. Dollar“.

But don’t just take my word for it.  Just a couple of days ago a major U.K. newspaper came to the same conclusions…

China has overtaken the US as the world’s largest oil importer and goods trading nation. Over the next five years, it will surpass the rest of the world combined in its consumption of base metals.

Given the scale of the country’s consumption of fossil fuels and raw materials, it is only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources such as crude oil and iron ore.

The debt ceiling farce in Washington and China’sgrowing reluctance to continue underwriting the US economy by buying up its bonds and adding to America’s near $17 trillion (£10.5 trillion) debt mountain suggests that this tectonic shift in the global trade system could be just around the corner.

So what will happen when the rest of the world decides that they don’t need to use our dollars or buy our debt any longer?

At that point the consequences of decades of incredibly foolish decisions will result in an avalanche of economic pain that the American people are not prepared for.

Earlier today, I came across a photograph that perfectly captures what America is heading for.  The following photo of Mt. Rushmore crying has not been photoshopped.  It was taken by Megan Ahrens and it was posted on the Tea Party Command Center.  If George Washington was alive today, this is probably exactly how he would feel about the nation that he helped establish…

Mt. Rushmore Crying

 

China’s Wake-Up Call from Washington by Stephen S. Roach – Project Syndicate

China’s Wake-Up Call from Washington by Stephen S. Roach – Project Syndicate. (source)

Yes, the United States dodged another bullet with a last-minute deal on the debt ceiling. But, with 90 days left to bridge the ideological and partisan divide before another crisis erupts, the fuse on America’s debt bomb is getting shorter and shorter. As a dysfunctional US government peers into the abyss, China – America’s largest foreign creditor – has much at stake.

This illustration is by Paul Lachine and comes from <a href="http://www.newsart.com">NewsArt.com</a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.
Illustration by Paul Lachine

It began so innocently. As recently as 2000, China owned only about $60 billion in US Treasuries, or roughly 2% of the outstanding US debt of $3.3 trillion held by the public. But then both countries upped the ante on America’s fiscal profligacy. US debt exploded to nearly $12 trillion ($16.7 trillion if intragovernmental holdings are included). And China’s share of America’s publicly-held debt overhang increased more than five-fold, to nearly 11% ($1.3 trillion) by July 2013. Along with roughly $700 billion in Chinese holdings of US agency debt (Fannie Mae and Freddie Mac), China’s total $2 trillion exposure to US government and quasi-government securities is massive by any standard.

China’s seemingly open-ended purchases of US government debt are at the heart of a web of codependency that binds the two economies. China does not buy Treasuries out of benevolence, or because it looks to America as a shining example of wealth and prosperity. It certainly is not attracted by the return and seemingly riskless security of US government paper – both of which are much in play in an era of zero interest rates and mounting concerns about default. Nor is sympathy at work; China does not buy Treasuries because it wants to temper the pain of America’s fiscal brinkmanship.

China buys Treasuries because they suit its currency policy and the export-led growth that it has relied on over the past 33 years. As a surplus saver, China has run large current-account surpluses since 1994, accumulating a massive portfolio of foreign-exchange reserves that now stands at almost $3.7 trillion.

China has recycled about 60% of these reserves back into dollar-denominated US government securities, because it wants to limit any appreciation of the renminbi against the world’s benchmark currency. If China bought fewer dollars, the renminbi’s exchange rate – up 35% against the dollar since mid-2005 – would strengthen more sharply than it already has, jeopardizing competiveness and export-led growth.

This arrangement fits America’s needs like a glove. Given its extraordinary shortfall of domestic saving, the US runs chronic current-account deficits and relies on foreign investors to fill the funding void. US politicians take this for granted as a special privilege bestowed by the dollar’s position as the world’s major reserve currency. When queried about America’s dependence on foreign lenders, they often smugly retort, “Where else would they go?” I have heard that line many times when I have testified before the US Congress.

Of course, America benefits from China’s outward-facing growth model in many other ways, as well. China’s purchases of Treasuries help hold down US interest rates – possibly by as much as one percentage point – which provides broad support to other asset markets, such as equities and real estate, whose valuation depends to some extent on Chinese-subsidized US interest rates. And, of course, hard-pressed middle-class American consumers benefit hugely from low-cost Chinese imports – the Walmart effect – that enable them to stretch their budgets in an era of unrelenting pressure on jobs and real incomes.

For more than 20 years, this mutually beneficial codependency has served both countries well in compensating for their inherent saving imbalances while satisfying their respective growth agendas. But here the past should not be viewed as prologue. A seismic shift is at hand, and America’s recent fiscal follies may well be the tipping point.

China has made a conscious strategic decision to alter its growth strategy. Its 12th Five-Year Plan, enacted in March 2011, lays out a broad framework for a more balanced growth model that relies increasingly on domestic private consumption. These plans are about to be put into action.  An important meeting in November – the Third Plenum of the Central Committee of the 18th Chinese Communist Party Congress – will provide a major test of the new leadership team’s commitment to a detailed agenda of reforms and policies that will be required to achieve this shift.

The debt-ceiling debacle has sent a clear message to China – and comes in conjunction with other warning signs. Post-crisis sluggishness in US aggregate demand – especially consumer demand – is likely to persist, denying Chinese exporters the support they need from their largest foreign market. US-led China bashing – a bipartisan blame game that reached new heights in the 2012 political cycle – remains a real threat. And now the safety and security of US debt are at risk. Economic alarms rarely ring so loudly. The time has come for China to respond with equal clarity.

Rebalancing is China’s only option. Several internal factors – excess resource consumption, environmental degradation, and mounting income inequalities – are calling the old model into question, while a broad constellation of US-centric external forces also attests to the urgent need for realignment.

With rebalancing will come a decline in China’s surplus saving, much slower accumulation of foreign-exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar-denominated assets. Curtailing purchases of US Treasuries is a perfectly logical outgrowth of this process. Long dependent on China to finesse its fiscal problems, America may now have to pay a much steeper price to secure external capital.

Recently, Chinese commentators have provocatively referred to the inevitability of a “de-Americanized world.” For China, this is not a power race. It should be seen as more of a conscious strategy to do what is right for China as it confronts its own daunting growth and development imperatives in the coming years.

The US will find it equally urgent to come to grips with a very different China. Codependency was never a sustainable strategy for either side. China just happens to have understood this first. The days of its open-ended buying of Treasuries will soon come to an end.

 

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