The Fed Has Made the Entire U.S. a Hedge Fund - Get Your Portfolio Ready 13 comments
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No way else to say it: the reality of the bailout is very bad. And we're in a terrible position. (For the solution, read past the next section.)
A "plan" means the government absorbs losses - otherwise it wouldn't be needed. The government only transfers wealth, it does not create it. In effect the government will take from the innocent to pay the guilty, or those - regrettably - that should have been more careful where they put their money.
That bears repeating: all the wealth that is to absorb losses will come from the taxpayer:
- by inflation if the government sells bonds to the Federal Reserve, reducing income
- by selling bonds to foreigners which displaces exports, reducing income
- by selling bonds domestically, causing higher interest rates which reduces income
- by taxation, which reduces income
... or a combination of the above. The income will go to the shareholders and bondholders of the entities that are bailed out.
THE SOLUTION
For those in a hurry: let's get to the bare-bones, essential, no-holds-barred (radical!) solution that will really stop the booms, busts, bailouts, inflations, and deflations and get us back to freedom. Later we'll briefly discuss what you can do to protect yourself (and make a profit) in these tough times, despite the bailout.
- Rescind legal tender laws preventing gold and silver from being money.
- Fix the dollar price of gold. The Federal Reserve is given a directive to maintain the dollar price of gold at historical 3 year average ending today, increasing or decreasing final money (cash and reserves at the Fed) necessary to hold the dollar steady and make it "as good as gold" at the calculated rate. (Note that debt is not money ... money is the item of ultimate settlement: cash and reserves at the Fed.)
- Reduce Leverage. The Federal Reserve is directed to regulate all financial institutions to a 10:1 leverage ratio with all off-balance-sheet and contingent obligations brought onto the balance sheet within six months. That will effectively force the Fed to take onto its balance sheet enough debt to hold the dollar at a fixed rate against gold as the demand for non-debt money (liquidity) increases. If the quality of the assets it buys are low, it will suffer an increase in the dollar price of gold and must buy better debt or extinguish dollars (by selling treasuries). If the quality of assets are high, it will keep the dollar price of gold steady.
- The Fed is simultaneously forced to redeem its gold to the people (the Treasury is directed to coin the gold) at the set price in exchange for bank deposits or cash, while still holding the dollar price of gold steady. The Federal Reserve is (effectively) closed down and replaced with a dollar management board which fixes the dollar price to gold by increasing or decreasing non-debt dollar money. In time the final step can be taken.
- Rescind all constraints on private money. Taxes become payable in gold only. The "dollar system" is therefore dissolved without a depression or financial catastrophe.
(Near the end are suggestions for your portfolio.)
EXPLANATION
A bailout plan weakens our currency (dollars) in the future by putting at greater risk the fiscal solvency of the Federal Government. And if the Federal Government finds itself under financial pressure, we could go into a worldwide depression as the wealth available cannot support additional government confiscation. Remember, most wealth is in entrepreneurship and management execution (smart risk takers creating new markets and sustaining current markets), not in physical things. An industrial plant is nothing without a skilled operator. A policy of bailout can spiral out of control like it did in the '30s, with a collapse in the amount of wealth in society as this "invisible wealth" is destroyed, leading to a severe depression.
The bailout also ignores a critical issue: the dictatorship of financial elite over the government and over the citizens. Why are the elite running the show at this point? It appears they have abrogated their right to lead at all, having messed it up so badly ...
Freedom loving people believe in separating monetary policy from politics (having market money) just like they believe in separating speech from political control (free speech). Government debt-money run by a private group of bankers is specifically designed to steal from Main Street and deliver wealth to Wall Street.
This is done by decreasing the amount of settlement money in the economy and creating more interest-bearing debt, which of course needs 'bailing out' from time to time as things get out of hand (being able to create money substitutes - by debt or otherwise - is a power no centralized agency should hold).
Think that's an exaggeration? Consider this: the items of "ultimate settlement" (actual money) are reserves at the Fed or physical cash. Those things are the only items that a creditor can be forced to accept (by law) in the settlement of an obligation. Every other claim (checks, credit cards, etc.) are a promise to transfer those items. Those items provide clearances for a pyramid of debt of around 50 trillion, not counting the derivatives market, which is another multiple of that 50 trillion. The entire U.S. is a now a hedge fund run by a private group of banks under the private Federal Reserve who is now asking for public bailout after enriching their friends.
While many of these claims do cancel out, it is important to realize that at any time an institution is regarded as an entity. If it fails, the claims are locked up for a period of time and so they should be counted separately to understand the true risk of a systemic event.
In other words, there is 1 trillion of "money" and some multiple of 50 trillion in obligations which it must cover (you can verify this on the Federal Reserve's Flow of Funds Report Levels tables for total obligations here: http://www.federalreserve.gov/
At any given day, how much debt comes due plus transactions (buying and selling) are the demand of the system for funds.
Nearly every transaction then, has a cost embedded in it to pay the "money masters" as money has been removed and debt trades as an asset. I'm being sarcastic when I say: Amazingly, that just doesn't seem to work out for us. And people are surprised that Wall Street has millions (collectively trillions!) and Main Street has thousands (if that).
It is no accident that less than 20 years after it was instituted, U.S. gold had been confiscated from citizens for the benefit of the Federal Reserve System in an "emergency" that looked less severe than the 1921 correction if the government left well enough alone (as it did in 1921). The persistent thrust to intervene left us a decade of economic destruction. The thrust to control governments by debt can also put countries into wars (partly to obtain natural resources to collateralize the declining currency) and leads to depressions.
The final card may be played when all governments are rendered insolvent by the pyramids of debt and their citizens unable or unwilling to allow a smaller correction: a new global currency run by a global central bank (the U.S. is nearly the world's central bank right now). Humanity may be forced into global government by people that are, to put it nicely, "non-democratic". Given that bleak outlook, I'm inclined to say I'd like another system.
That is not a prediction (the part about debt pyramids): it is history.
What the Federal Government should be doing is mandating lower leverage across the board and forcing the Fed to provide money (i.e. buy bonds) from the market to accomplish that goal, and then to replace debt-backed money with an indestructible asset: gold. Those actions are non-inflationary if done correctly (the reduction in the use of debt for exchanges is offset by an increase in money). What I've proposed is a way for the Fed to "read" the markets on a moment-by-moment basis and clear up this mess.
Unfortunately, the Federal Government relies on the Federal Reserve to provide a market for treasuries and that gets around their limits to spending (and significantly nullifies the power of your vote). The Federal Reserve does so by coordinating policies of other central banks to buy U.S. debt, creates booms by lowering interest rates (expanding demand for treasuries by banks as deposits increase) and busts (expanding demand for treasuries as private debt is seen less safe). It's a "one way street" with you on the hook to pay for the losses when it goes bad, while the gains go to insiders.
The insiders appear to have played the game well by having connected foreign exporters get rich as their central banks bought agency paper with their dollars. In a stroke, the Federal Government is suddenly collateralizing 5 trillion in mortgage paper for those banks, a lot of it owned by foreign central banks. All that on the U.S. taxpayer's dime. In fairness, the populations of those countries have also paid a huge price, because the debt their central bank has on it's books is unsafe, being paid in dollars. The only thing keeping the U.S. honest is the threat of sale of that debt.
Connected insiders can take wealth from the populations by diluting the earnings of that population using a debt-based money system. Example: If I can create debt-money (and you have to work for it), I can steal from workers any day of the week by diluting their proper share. Example: normally under free markets, there is harmless price deflation which is a riskless yield on savings (those reducing consumption and holding money). But we have price inflation clocking (with correct figures) around 6%. If the economy is producing 3% more goods, the gap between losing 6% and gaining 3% is an astonishing 9%! That's a enormous additional 9% tax on the earnings of each non-insider person, not to mention the interest paid because asset-money (like gold) has been replaced with debt-money (which pays interest).
Unfortunately, real transparency will not occur because it exposes the system. Here are some suggestions for real transparency for this bailout (good luck):
- Post the interbank settlements related to any bailout transaction as a matter of public record on a public website. Let's see where the money is going.
- Force the Federal Reserve to post all entity borrowings at the rates at which they were accepted on the same-day the transaction was completed (including any repos or other methods of lending such as the TSLF). Let's see who is really borrowing and where it is going.
- Rescind legal tender laws and capital gains taxes on alternative monies so that ordinary citizens can protect the value of their savings, labor, and efforts for their families. Joe sixpack shouldn't be paying "capital gains" tax on alternative savings investments (like gold or other currencies) just to protect his savings, which are after-tax in the first place.
- Force the Fed to unwind the massive leverage in the system and provide actual money (decrease leverage and increase money so that the net result isn't price inflationary). As a follow up, force the Federal Reserve to reduce paper or "electronic" money under the control of the Federal Reserve and replace it with gold, outside of the control of the Federal Reserve. Further, allow free market money so if there's a better alternative than gold, it can be used. That's freedom.
- Amend the Fed's charter to have gold-as-money or any other free market money trade unrestricted. Get rid of all legal tender laws.
- Have the FDIC require full disclosure by all banks of their loan portfolios, loan-by-loan: MSA geographic region, FICO, debt ratios, documentation type, loan reserves at inception, etc. including the performance of each loan. We'll get over the problems real fast as people find out which banks are good and which are bad (that information is intentionally hidden from the public).
I'm sure you probably can think of a few more.
Unfortunately, we have to work to prevent wealth-confiscation rather than rely on our political leaders to support a free country. This process will continue unless the extreme happens, such as a tax-revolt.
YOUR PORTFOLIO: SUGGESTIONS
That means every investor should be focused on keeping their assets safe: some in short term assets, some in physical cash, some in gold, some out of the country, some in other hard assets, some out of the banking system, some physically hidden and protected. The simplest method is to hold physical cash and physical gold in a safe place, and perhaps in more than one safe place!
You nor anyone else can reliably know the timing of changes to asset values nor what the authorities will do if the costs get too big to be forced onto citizens and onto foreign countries. So you should keep it simple, split your bets appropriately, and buy only great deals which are really solid. Real Estate may offer compelling values sometime in the next 2 years if things hold together. For Real Estate, focus on deals that pay you cash, and where you can raise the rents if inflation increases, but be aware the authorities might regulate you out of your wealth (rent control) and hit you with other costs.
Avoid "layers" in control such as owning stock unless you've high confidence in the control of the organization. In most cases, shareholders (even bondholders) have no real control how the assets of a company are used, making the stock essentially worthless if management puts the company further into debt and cleans out the company's assets. Company after company has issued "stock options" and the CEOs then have the company issue debt to do a share-buy back so they are better assured of a good market for their stock. Many outsiders were buyers of stock in those same organizations!
A prudent approach to saving and investment should defend against inflation, deflation, and other kinds of 'flations as well as protect, as best as is possible, against confiscation.
FINALLY
For the bailout, I'd have to say, sorry, those are less than promises but the wealth you're trying to take from the citizens is real. I'll take my chances, thanks.
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This article has 13 comments:
Utterly stupid idea to go back to a gold standard. The simple fact is (and was proven during the 19th century) is that the constraints on the growth of money supply that a gold standard imposes result in much greater likelihood of severe and prolonged depressions and much slower economic growth. The current situation where gold is effectively an alternative currency that can be held and converted to various fiat currencies as needed is vastly preferable. What would not be acceptable would be making owning gold illegal.
If you are going to the extent of keeping stores of physical money, shouldn't you take delivery of stock certificates too?
Forget the idea that you can beat connected insiders out of their game. Life is unfair, it always has been, and it always will be.
Another argument against gold. You get a bad feedback loop. Japan and others have a few trillion in US currency. The US gopes back to gold standards. They call in their dollars for gold since they are essentially the same except gold is worth more since the supply is pegged (who knows when the US goes off the standard again). Gold prices soar so the fed must make $ dissapear to keep it in line. They raise interest rates. A great depressionary sucking sound is heard in the US. People in the US become very poor very fast except those with no debt at all. Those that do have debt will be paying like 100% interest annually if not more as the supply of gold completely dissapears since people will hoard more gold when they see what's happening.
Also the fed can't really control money supply since they must float the governments ridiculous deficit spending. With Bush Jr.'s profligate spending it's clear we will have inflation. So the fed will not be able to lower dollar production without making the money multiplier drop to offset the government plus what meager gold production the world produces each year. Needless to say, it will be no time until the money multiplier drops to about 1.
You can back your $ by maybe by a composite of goods. Theoretically that's what monetary policy is doing by tracking inflation. They lie about the level, fudge the numbers, and can't stop inflation due to rampant trade and federal deficits. However, aside from Bernake and Paulson, they try.
Let me also point out something regarding govermental economic activities: they are not necessarily negative n terms of economic value additivity. One example among many - the interstate highway system, which in the era of cheap motor fuels was enormously stimulative and a boon to commerce. Larger point, Keynesian stimulus in and of itself is not a mistake, it depends on how well it is conceived and executed, and should be evaluated in the same terms as any financial investment.
Another point to the author and like-minded deficit hawks: the federal deficit must be expressed in terms of percentage of GDP, not as an absolute number, else it will be misleading. The current deficit is neither unprecedented nor catastrophic when seen in these terms, however the bailout being contemplated may make it so.
The author's suggestion to remove reserves and investments into hidden physical assets, essentially advising to withdraw funds from the bank or brokerage and bury the cash in coffee cans in the back yard, is a prescription for complete economic devastation.
One of the most wrong-headed and ill-conceived articles of economic and financial advice the Simple Accountant has ever read, simply breathtaking in the horrible consequences that would result from its adoption.
Amen, brother.
What we are about to have now is complete economic devastation. It will be the complete economic devastation of the middle class, on whose backs all ills seem destined to be balanced. What you and your cohorts argue for is economic elitism: a managed economy, managed by those who know best (like Keynes).
"Let me also point out something regarding govermental economic activities: they are not necessarily negative n terms of economic value additivity. One example among many - the interstate highway system, which in the era of cheap motor fuels was enormously stimulative and a boon to commerce. Larger point, Keynesian stimulus in and of itself is not a mistake, it depends on how well it is conceived and executed, and should be evaluated in the same terms as any financial investment."
Government activities are enforced by men with guns. You advocate violence, perhaps (I doubt it) without realizing it. Fannie Mae and Freddie Mac are other fine examples of government economic activities; we are virtually certain to realize a "Net Negative" on these two. I suppose you are also going to tell us that the taxpayer will wind up making money on the Paulson Plan? When we get paid back in Monopoly Money? Government by its very nature is a monopoly on the use of force; it must by its very nature be corrupt. I prefer to minimize the influence on my life of corrupt men with guns. Fannie and Freddie are two fine examples of the end result of government corruption: ignoring prudent accounting standards, making ill-advised loans, bribing legislators.
A gold standard protects money by preventing government from infinitely expanding its balance sheet. Fed people are on record as saying "the Fed's balance sheet is infinite!" When the Fed pursues this policy they destroy me, totally. Third world wages, here we come. But first, bailout Goldman. And build some walled communities for investment bankers. Maybe we could have a government program to do that?
And Paulson should step down.
No one could rightly believe we're going back to a gold-standard, so let's talk about the one meaningful idea that was dispensed.
I am a huge fan of public, google-style databases for anything and everything deemed 'public information' (starting with tax revenue).
I can think of a lot of things I'd like the government to take tax-dollars away from, in order to pay for the creation of these databases. There should be an office, run by civil-servants (and therefore subject to what meager protections against poltical hackery that still exist), to maintain and occasionally run random audits of the these public-info databases.
Databases for, say, government spending or the loan-portfolios of publicly traded entities, will give the independent press (you and I) access to the information needed to expose incredibly poor decisions that could threaten the system through which we all must make our livelyhoods. We have the technology to spread the word, we just need access to the info.
What's the argument against getting these set-up? Let me hear it-
Of course like everything else run by the government it will take a long time and cost more than it should (especially if it's put out to a no-bid, no-accountability contract... after-all that's what were here to expose right?). Being familiar with creating and maintaining massive entry, multiple data-point DBs, I can fairly say that in the long-run the IT hours to set it up and maintain it, as well as the cost of a some random requests to verify info, would cost practically nothing in relation the kind of real security it would allow us to give to ourselves.
Considering that one of the biggest beneficiaries of the bailout will be Goldman Sachs isn't this a conflict of interest.
If GS collapses then Paulson would loose his 700 million.
So Paulson's bailout is worth 1% of the total sum of the bailout.
No wonder he got down on one knee.....
Since this event has happened on his watch I would suggest that Paulson should donate 95% of his wealth to support the system that he let fail.
The same should apply to all the grossly high fliers of Wall Street & US Politics starting at the top with George Bush.
Considering that the wealthiest people in the US garnered their money through the markets & bubbles then perhaps they are the ones who should dig deep to support the system that makes them wealthy & keeps the lower classes working.
Considering what Paulson stands to loose I consider his involvement a huge conflict of interest & so should the people of America.
Pulling out money is good advice to people that stand to take losses from being exposed and it also cures the system. The bottom line is the "finance" industry is way too big and has to shrink. That can only happen if a number of weaker players fail. I reject the idea when it's time to shrink, the weaker players in finance get to drain the rest of the economy to keep going. that's the "Japan" solution which is many times worse than a correction. Even worse, if the government backstops this, it may run into making itself financially insolvent and then the mother-of-all-depressi... will occur.
We can survive a 1 year correction. But losing 15 years of your life like happened in Japan? How do you get that back? Let's make the tough choices now and have a brighter future...